CPA review

1 On December 31, 2008, Flow, Inc reported $200,000 as a retained earnings balance In July of 2009, Flow, Inc discovers that merchandise that cost $50,000 was wrongly not included as inventory in its financial statements for 2008 How much should Flow, Inc report as adjusted beginning retained earnings in its statement of retained earnings at the end of 2009 (December 31, 2009)? Flow's tax rate is 30% a $50,000 b $200,000 c $235,000 d $250,000 The Sea Protection Alliance is a private, not-for-profit oceanographic organization In 2007, they received a total of $25,000 in donations restricted for research They didn't use the funds in 2007, but did use $10,000 of them for research in 2008 Which of the following statements are true? I The $25,000 in contributions should be reported on the 2007 statement of activities as an increase in temporarily restricted net assets II A reclassification of net assets should be reported on the 2008 statement of activities III The 2008 statement of activities should show a $10,000 decrease in temporarily restricted net assets IV The 2008 statement of activities should show a $10,000 increase in unrestricted net assets a I and II only b I, II, and III only c I, II, and IV only d I, II, III, and IV Convergence Corp changed its method of inventory valuation during 2008 from FIFO to LIFO The inventory balances under both methods were as follows: Date January 1, 2008 FIFO Inventory Balance LIFO Inventory Balance $65,000 $69,000 December 31, 2008 $71,000 $73,000 What cumulative effect-as either a gain or loss-should Convergence Corp report on its 2008 financial statements as a result of this change? Their tax rate is 30% a $0 b $600 c $1,200 d None of the above In 2008, LeTarte Company made the following payments for their building: Payment New plumbing Total $45,000 Routine, recurring maintenance $5,000 Pressure washing $500 How much should LeTarte Company charge to repair and maintenance expense in 2008? a $50,500 b $50,000 c $45,000 d $5,500 Industry Co must determine its income tax expense for its 2008 second quarter interim income statement Their effective income tax rate for 2007 was 20%, their effective income tax rate for the 2008 first quarter was 30%, their effective income tax rate for the 2008 second quarter was 20%, and they expect their 2008 effective annual tax rate to be 25% If Industry's 2008 second quarter income was $1,000,000, what should they record as the interim tax expense on the 2008 second quarter interim income statement? a $200,000 b $250,000 c $300,000 d None of the above Apex, Inc takes a $300,000 loan from a bank The interest rate is 6% and Apex must make monthly payments of $3,300 The bank incurred $7,500 in direct loan origination costs What is Apex's carrying amount? a $292,500 b $295,000 c $297,500 d $303,300 Smack Corporation's pretax income for 2008 is $2,200 For the same year, temporary differences total ($1,000), taxable income totals $1,200, and the enacted tax rate is 30% There were no prior deferred tax balances What should Smack Corporation report as current income tax expense on its 2008 income statement? a $300 b $333 c $360 d $400 Spartan Co has an outstanding ten-year, $120,000, 8% face-value bond The bond was originally sold to yield 5% interest annually, and on June 30, 2008 its carrying amount was $134,000 Spartan Co does not elect the fair value option for reporting financial liabilities, but does use the effective interest rate method for amortizing bond premiums What amount should Spartan Co report as unamortized premium on the bond on its June 30, 2008 balance sheet? a $4,720 b $9,280 c $11,167.00 d $14,000 Blue Wing Corp newly formed as a company on June 1, 2008 On that date, Blue Wing issued 25,000 shares of common stock at $40 per share with no par and a stated value of $2 On the same date, Blue Wing issued 5,000 shares of preferred stock at $60 per share with a par value of $10 Which of the following should be included on Blue Wing's June 1, 2008 statement of stockholder equity report? I $50,000 for common stock II $300,000 for preferred stock III No additional amount paid in capital a I only b II only c III only d I, II, and III 10 Which items should an auditor include in the cost of inventory when using the net method? I Direct expenses required to bring inventory to location II Indirect expenses required to bring inventory to location a I only b II only c I and II d Neither I nor II 11 The data for Docent Company's marketable equity securities is as follows Trading securities had a market value of $235,000 on December 31, 2008; a market value of $200,000 on December 31, 2007; and a cost of $220,000 Available-for-sale securities had a market value of $170,000 on December 31, 2007; a market value of $150,000 on December 31, 2008; and a cost of $180,000 Assuming that Docent uses SFAS 115 to report its investments, which of the following statements is true for 2008? I Docent should report an unrealized holding gain of $15,000 on trading securities on its 2008 income statement II The unrealized holding gain of $20,000 on the available-for-sale securities should be reported as other comprehensive income III The unrealized holding gain of $30,000 should be reported on its 2008 income statement a I and II only b II and III only c I and III only d I, II, and III 12 On December 31, 2008, Konch Company has the following accounts at Liberty First Bank, all of which it classifies as cash or cash equivalents Account Total Checking Account $100,000 Certificate of Deposit $10,000 Money Market Account $10,000 In addition, Konch has a second checking account at Liberty First bank with an overdrawn balance of $5,000 on the same date Which of the following statements about the amount that Konch should report as cash and cash equivalent on its December 31, 2008 balance sheet is most accurate? a Konch should report $120,000 as cash and cash equivalents on the balance sheet b Konch should report $115,000 as cash and cash equivalents on the balance sheet c Konch should report $120,000 as cash and cash equivalents and $5,000 as a current liability d None of the above 13 For which of the following is it acceptable to use combined statements to present the results of operations and financial positions? I Companies under common management II Commonly controlled companies III A group of unconsolidated subsidiaries a I only b I and II only c II and III only d I, II, and III 14 Assume a company has a hybrid financial instrument and chooses not to bifurcate the instrument, recording it instead at fair value Which of the following statements are true according to SFAS 155? I The entire hybrid financial instrument is recorded at fair value II As the fair value of that instrument changes yearly, those changes are recognized for the period in earnings a I only b II only c Neither I nor II d Both I and II 15 When recording an asset in a personal financial statement, which of the following statements is true? I An asset is typically recorded at its estimated current value II Estimation of the current value can be done through appraised value, discounted cash flow, fair market value, or net realizable value, depending on the type of asset a I only b II only c I and II d Neither I nor II 16 Which of the following tests must a division satisfy before it qualifies as a reportable segment? I Assets must be at least 10% of the total assets of all segments II Operating profit/loss must be at least 10% of the combined segment profit or loss (whichever is greater in absolute amount) III Revenue must equal at least 10% of total revenue of all segments a I and II b II and III c I, II, and III d Any one of I, II, or III 17 Ethos, Inc implemented a defined benefit pension play for employees on January 2, 2008 and is a nonpublicly traded company What should Ethos, Inc record as its pension liability on December 31, 2008? a The projected benefit obligation (PBO) of $202,000 minus the plan assets at fair value (FV) of $188,000 b The plan assets at fair value (FV) of $188,000 minus the projected benefit obligation (PBO) of $202,000 c The combined total of the projected benefit obligation (PBO) plus the plan assets at fair value (FV) d None of the above 18 On January 1, 2008, Appleton City issues $500,000, 5% revenue bonds at par in order to pay for a new sewer line What should Appleton City report as interest expense on the bonds for the year ended December 31, 2008? a $25,000 b $50,000 c $55,000 d $500,000 19 Which of the following is/are a general overview of the objectives, definitions, and ideas of accounting, and is/are intended to function as an aid in creating standards for financial accounting and reporting? a Generally Accepted Accounting Principles (GAAP) b Generally Accepted Auditing Standards (GAAS) c Statements of Financial Accounting Concepts (SFAC) d Financial Accounting Standards Board (FASB) 20 Sales at Plush, Inc totaled $50,000 in December of 2008 Past trends show that customers will return 10% of those sales for cash within three months and that customers will return an additional 5% of the merchandise for merchandise of the same value or greater What should Plush, Inc report for its net sales for the month of December 2008 in its income statement? a $50,000 b $47,500 c $45,000 d $42,500 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 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 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 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 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 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 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 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