Standards & Conceptual Framework
Name the fundamental qualitative characteristics of useful financial information and the three elements of each characteristic.
1. Relevance
-Predictive Value, Confirming Value and Materiality
2. Faithful Representation
-Neutrality, Completeness and Freedom from Error
How does a "multi-step" income statement differ from a "single-step" income statement?
A multi-step income statement reports operating revenues and expenses separately from non-operating revenues and expenses.
On a single-step income statement total expenses are subtracted from total revenues without separation between operating and nonoperating revenues and expenses.
How is a change in accounting estimate reported vs. a change in accounting principle?
- A change in accounting estimate is reported prospectively - financial statements do not need to be restated.
- A change in accounting principle is reported retroactively - financial statements need to be restated.
What are the US GAAP disclosure requirements for risks and uncertainties?
- Nature of operations
- Use of estimates in preparing financial statements
- Significant estimates
- Current vulnerability due to certain concentrations
In liquidating a partnership, what is the order of preference?
1. Creditors
2. Loans and advances to partners
3. Capital accounts of partners
Name the 10 elements of financial statements according to SFAC No. 6
Comprehensive Income
Revenues
Expenses
Gains
Losses
Assets
Liabilities
Equity
Investments by Owners
Distributions to Owners
List the steps associated with the five- step approach to revenue recognition.
Step 1: Identify the contract
Step 2: Identify separate performance obligations
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the separate performance obligations
Step 5: Recognize revenue when or as the entity satisfies each performance obligation.
(ISTAR!!)
What are the special exceptions to the general rule for reporting of changes in an accounting principle and how are they reported?
Change to LIFO from another method of inventory pricing under US GAAP or change in depreciation methods.
Such exceptions are accounted for prospectively, like a change in accounting estimate.Describe the hierarchy of fair value inputs. Which inputs have the highest priority?
1. Level 1 Inputs - Quoted prices in active markets for identical assets or liabilities
2. Level 2 Inputs - Inputs other than quoted market prices that are directly or indirectly observable for an asset or liability.
3. Level 3 Inputs - Unobservable inputs for the asset or liability that reflect the entities' assumptions are based on the best available information.
In creating a new partnership interest with an investment of additional capital, what three methods can be used?
- Exact method: purchase price= book value
-Bonus method: (A+B+C) X C's % ownership
Excess of new partner's contribution over capital interest received in a bonus to the old partners. Excess of capital interest received over new partner's contribution is a bonus to new partner.
-Goodwill method: Goodwill is recognized based on the total value of the partnership implied by the new partner's contribution.
Which of the following is true regarding the comparison of managerial to financial accounting?
A. Managerial accounting need NOT follow GAAP while financial accounting must follow them.
B. Managerial accounting is generally more precise.
C. Managerial accounting has a past focus and financial accounting has a future focus.
D. The emphasis on managerial accounting is relevance and the emphasis on financial accounting is timeliness.
A. Managerial accounting need not follow GAAP while financial accounting must follow them.
GAAP is required for external financial reporting. GAAP is not required for internal accounting purposes.
Which of the following costs should be reported as general and administrative expenses?
A. Professional fees
B. Freight in
C. Freight out
D. Officer salaries
E. Insurance
(There could be more than one answer)
A: Professional Fees, D: Officer Salaries and E: Insurance
Lore Co changed from the cash basis of accounting to the accrual basis of accounting during the current year. The cumulative effect of this change should be reported in Lore's current year financial statements as a:
A. Component of income from continuing operations, net of tax.
B. Prior period adjustment resulting from the change in accounting principle.
C. Prior period adjustment resulting from the correction of an error.
D. Component of income from continuing operations.
C. Prior period adjustment resulting from the correction of an error.
Cash basis of accounting is not GAAP and therefore is considered an error.
Which of the following should be disclosed in a summary of significant accounting policies?
A. Adequacy of pension plan assets in relation to vested benefits
B. Basis of consolidation
C. Composition of plant assets
D. Concentration of credit risk of financial instruments
B. Basis of consolidation
The summary of significant accounting policies is typically the first note provided after the financial statements and will include components such as: measurement bases, accounting principles and methods, criteria, and policies such as basis of consolidation, depreciation methods, revenue recognition etc
Eagle and Falk are partners with capital balances of $45,000 and $25,000 respectively. They agree to admit Robb as a partner. After the assets of the partnership are revalued, Robb will have 25 percent interest in capital and profits, for an investment of $30,000. What amount should be recorded as a bonus to the original partners?
A. $5,000
B. $0
C. $20,000
D. $7,500
A. $5,000
Eagle: 45,000
Falk: $25,000
Robb: $30,000
Total: $100,000
Since Robb is received a 25% interest, his capital account will be credited with 25% of the equity (25,000). The difference between his contribution and his capital account balance is credited to the other partners as a bonus.
On December 31, Brooks Co decided to end operations and dispose of its assets within three months. At December 31, the net realizable value of the equipment was below historical cost. What is the appropriate measurement basis for equipment included in Brooks' December 31 balance sheet?
A. Current replacement cost
B. Historical Cost
C. Current reproduction cost
D. Net realizable value
D. Net Realizable Value because of the decision to end operations and quickly (3 months) dispose of assets
On April 15, Year 3, Landon Co signed a contract that entailed providing a specialized piece of equipment for $215,000 to Jacobs Inc with delivery expected to occur on August 31, Year 3. Landon's cost to produce the equipment is $175,000. Assuming delivery occurs as expected, the August 31 journal entry for Landon will involve which of the following debits/credits?
A. Credit to COGS of $175,000
B. Debit to unearned sales revenue of $215,000
C. Debit to inventory of $175,000
D. Credit to cash of $215,000
B. Debit to unearned sales revenue of $215,000
Mellow Co depreciated a $12,000 asset over five years, using the straight line method with no salvage value. At the beginning of the fifth year, it was determined that the asset will last another four years. What amount should Mellow report as depreciation expense for Year 5?
A. $600
B. $900
C. $1,500
D. $2,400
A. $600
Over the first 4 years, the asset would be depreciated down to $2,400. Once it was determined that the asset would last for another 4 years, $600 would be depreciated each year of that 4-year period. The change is a change in accounting estimate.There are multiple active markets for a financial asset with different observable market prices:
Market A: Quoted Price $76, Transaction Costs $5
Market B: Quoted Price $74, Transaction Costs $2
There is no principal market for the financial asset. What is the fair value of the asset?
A. $72 B. $76 C. $71 D. $74
D. $74
When there is no principal market, the price in the most advantageous market is the fair value measurement. Transaction costs are not included in FMV, but they are used to determine the most advantageous market.
Market A: Net Price= $76-$5= $71
Market B: Net Price= $74-$2= $72Dunn and Grey are partners with capital account balances of $60,000 and $90,000 respectively. They agree to admit Zorn as a partner with a one-third interest in capital and profits, for an investment of $100,000, after revaluing the assets of Dunn and Grey. Goodwill to the original partners should be:
A. $50,000
B. $66,667
C. $0
D. $33,333
A. $50,000
Since Zorn is receiving a 1/3 interest for $100,000, the implied total capital of the partnership is $300,000. With Zorn's $100,000 investment, the actual total capital of the partnership would be $250,000 ($100,000+$60,000+$90,000). The $50,000 difference ($300,000-$250,000) is recorded as goodwill to the original partners in accordance with their profit and loss sharing ratio.
A. The consistency in the application of methods over time.
B. The perceived benefits to be denied that exceed the perceived costs associated with it.
C. Quantitative criteria set by the FASBD. What influences or makes a difference to the decision maker.
D. What influences or makes a difference to the decision maker.
The accountants determination of materiality and relevance is based on professional judgement and is affected by the needs of those who will be suing the financial statements to make decisions.
Mill Construction Co uses the percentage-of-completion method of accounting. During Year 1, Mill contracted to build and apartment complex for Drew for $20 million. Mill estimated total costs would be $16 million over the period of construction. In connection with this contract, Mill incurred $2 million of construction costs during Year 1. Mill billed and collected $3 million from Drew in Year 1. What amount should Mill recognize as gross profit for Year 1?
A. $600,000
B. $500,000
C. $375,000
D. $250,000
B. $500,000
Construction incurred to date/ Total estimated cost of contract multiplied by Total Gross Profit.
Tack, Inc. reported a retained earnings balance of $150,000 at December 31, Year 1. In June Year 2, Tack discovered that merchandise costing $40,000 had not been included in inventory in its Year 1 financial statements. Tack has a 30% tax rate. What amount should Tack report as adjusted beginning retained earnings in its statement of retained earnings at December 31, Year 2?
A. $150,000
B. $178,000
C. $190,000
D. $122,000
B. $178,000
Retained earnings previously reported: 150,000 plus (40,000 x (1-0.3)= $28,000) = $178,000
Farmer Joe owns farmland along a busy highway. Farmer Joe originally paid $500,000 for this land. The land sat on top of a reservoir of oil, which when pumped out resulted in total depletion expenses to Farmer Joe of $125,000. The farmland currently has a value of $600,000 if it is used as farmland; however, a developer who wants to build a shopping plaza on the farmland has offered Farmer Joe $850,000 for the farmland. What is the fair value of the farmland?
A. 375,000B. 850,000
C. 600,000
D. 500,000
B. $850,000
The fair value of a nonfinancial asset is the value at its highest and best use. In this case, the highest and best use of the farmland is as a shopping plaza.
During the current year, Young and Zinc maintained average capital balances in their partnership of $160,000 and $100,000 respectively. The partners receive 10% interest on average capital balances, and residual profit or loss is divided equally. Partnership profit before interest was $4,000. By what amount should Zinc's capital account change for the year?
A. $1,000 decrease.
B. $11,000 decrease.
C. $12,000 increase.
D. $2,000 increase.
A. $1,000 decrease.
$100,000 beginning capital account balance
+$10,000 interest = $110,000
$110,000 less allocation (50% of 4,000 profit less $26,000 interest= ($11,000))= $99,000 ending capital account balance. = $1,000 decrease.