Financial Accounting and Reporting Answer Key

1. Correct: c

Explanation: The net-of-tax effect is {$50,000 - ($50,000 x 30%)}, or $35,000. To find the adjusted beginning retained earnings, add the $35,000 net-of-tax effect to the original $200,000 retained earnings for a total of $235,000.

2. Correct: d

Explanation: According to SFAS 116, contributions from outside donors intended for use in research must be reported as temporarily restricted net assets. When all or part of those funds are used for research (even in a future year), the amount used is reclassified on the statement of activities as a decrease in temporarily restricted net assets and also as an increase in unrestricted net assets.

3. Correct: a

Explanation: Although a change in inventory method once required cumulative effect treatment on the income statement, this is no longer true as a result of SFAS 154. Currently, the accounting change is retroactively applied to the earliest period presented, and so therefore the answer is $0.

4. Correct: d

Explanation: In general, repair and maintenance costs should be expensed if they maintain the asset at its existing level and capitalized if they improve the asset. In this case, the $5,000 for routine, recurring maintenance and the $500 for pressure washing should be expensed for a total of $5,500, while the $45,000 for new plumbing should be capitalized.

5. Correct: b

Explanation: According to APB 28, the tax for an interim period is found by multiplying the income by the estimated effective rate for the year. In this case, that means $1,000,000 x 25%, or $250,000.

6. Correct: a

Explanation: When determining the carrying amount, the loan origination fees are subtracted from the principal. In this case, then, subtract $7,500 from the principal of $300,000 to determine the carrying amount of $292,500.

7. Correct: c

Explanation: According to SFAS 109, current income tax expense (the amount currently payable) is determined by multiplying taxable income by the current enacted tax rate. In this case, that's $2,200 x 30%, or $360.

8. Correct: b

Explanation: When using the effective interest method, determine interest expense as follows. First, use this equation: Carrying amount of bonds X yield rate X time period = Interest expense In this case, that's $134,000 x 8% x 12/12 = Interest expense = $10,720 Next, use this equation: Face value of bonds x stated rate x time period = Cash interest In this case, that's $120,000 x 5% x 12/12 = Cash interest = $6,000 The bond premium amortization is the difference between interest expense and cash interest. In this case, that's $10,720 - $6,000 = $4,720. Finally, the unamortized premium is found using this equation: Carrying amount - face value of bond - bond premium amortization In this case, that's $134,000 - $120,000 - $4,720 = $9,280.

9. Correct: a

Explanation: When the common stock was issued, Blue Wing should have recorded it at the stated value of $50,000 (25,000 shares x $2 a share) and should have recorded the excess as additional paid-in capital. When the preferred stock was issued, Blue Wing should have recoded it at the par value of $50,000 (5,000 shares x $10 par value) and should have recorded the excess as additional paid-in capital.

10. Correct: c

Explanation: According to ARB 43, the cost of inventory should include all expenditures necessary to bring an item to its location and condition. This includes indirect and direct expenditures.

11. Correct: a

Explanation: Docent can determine its unrealized holding gain on trading securities by taking the market value of the securities and subtracting their cost ($235,000 - $220,000 = $15,000). The unrealized holding of the available-for-sale securities can be determined by starting with the market value on December 31, 2007 and subtracting the market value on December 31, 2008 ($170,000 - $150,000 = $20,000).

12. Correct: b

Explanation: Ordinarily, a bank overdraft is reported as a current liability, but not if the entity has cash in another account in the same bank. In that case, the two totals are offset instead. In this instance, then, the accounts at Konch are totaled ($100,000 + $10,000 + $10,000 = $120,000), and then the $5,000 overdraft is subtracted, making a total of $115,000.

13. Correct: d

Explanation: According to ARB 51, combined statements can be used to present the results of operations and financial positions of companies under common management, commonly controlled companies, and a group of unconsolidated subsidiaries.

14. Correct: d

According to SFAS 155, if a company chooses not to bifurcate the hybrid financial instrument, the instrument is to be recorded at fair value, and as the fair value of that instrument changes yearly, those changes are recognized in earnings for that period.

15. Correct: c

According to SOP 82-1, an asset is usually presented in a personal statement of financial condition at its estimated current value, and the current value of the asset can be estimated through appraised value, discounted cash flow, fair market value, or net realizable value, depending on the type of asset.

16. Correct: d

Explanation: According to the 10% tests, a division is a reportable segment if it meets any of the following standards: assets equal at least 10% of the total assets; operating profit or loss is at least 10% of the combined segment profit or loss (whichever is greater in the absolute amount); or revenue must be at least 10% of total revenue of all segments.

17. Correct: a

Explanation: SFAS 158 states that the pension liability must be recognized if the PBO is greater than the FV of the plan assets. In this case, the PBO exceeds the FV ($202,000 - $188,000 = $14,000) and that amount must be recognized.

18. Correct: a

Explanation: According to GASB 34, paragraph 92, proprietary funds, including enterprise funds, should use accrual accounting. Because of that, in this case interest revenue is $500,000 x .05 x 12/12 = $25,000.

19. Correct: c

Explanation: The Statements of Financial Accounting Concepts are a general overview of the objectives, definitions, and ideas of accounting, and are intended to function as an aid in creating standards for financial accounting and reporting.

20. Correct: c

Explanation: According to SFAS 48, when revenue is recognized from sales, and it is recognized that those sales may be returned, sales revenue should be reduced to reflect the rate of expected return. In this case, the $50,000 in sales should be reduced by 10%, creating a total of $45,000. It is not necessary to make an adjustment for the additional 5% that will be returned for merchandise.