MODULES 1-6 What is a requirement for a security to be classified as held-to-maturity?

The ability to hold security to maturity, positive intent AND the security must be a debt security. When a company holds between 20% and 50% of the outstanding stock of an investee, The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise significant influence over the investee. During 2010, Logic Company purchased 4,000 shares of Midi, Inc. for $30 per share. The investment was classified as a trading security. During the year Logic Company sold 1,000 shares of Midi, Inc. for $35 per share. At December 31, 2010, the market price of Midi, Inc.s stock was $28 per share. What is the total amount of gain (loss) that Logic Company will report in its income statement for the year ended December 31, 2010, related to its investment in Midi, Inc. stock? 4000*30=120,000 120,000-(1000*35)=120,000-35,000=85,000 3000*28=84,000 (1,000) Which of the following is not a debt security? Loans Receivable *Know debt v. equity securities Impairments are evaluated at each reporting date for every investment. Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a cost of $3,000,000. After applying the equity method, the Investment in Club Co. account has a balance of $3,040,000. At December 31, 2011, the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2011? I. $3,000,000 II. $3,040,000 III. $3,120,000 *Equity or fair value method are appropriate, but must stay constant When an investment in a held-to-maturity security is transferred to an available-for-sale security, the carrying value assigned to the available-for-sale security should be: its fair value at date of transfer A reclassification adjustment is reported in the statement of comprehensive income as Other Comprehensive Income. The revenue recognition principle provides that revenue is recognized when it is realizable and it is earned. The following are reasons why revenue is recognized at time of sale: realization has occured, the sale is the critical event, title legally passes from seller to buyer. The principal advantage of the completed-contract method is that reported revenue is based on final results rather than estimates of unperformed work. In selecting an accounting method for a newly contracted long-term construction project, the principal factor(s) to be considered should be the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable. Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. In this case, the entire expected loss should be recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed. Deferred gross profit on installment sales is generally treated as unearned revenue and classified as a current liability. A manufacturer of large equipment sells on an installment basis to customers with questionable credit ratings. Which of the following methods of revenue recognition is least likely to overstate the amount of gross profit reported? cost-recovery method

In 2010, Krause Company accrued, for financial statement reporting, estimated losses on disposal of unused plant facilities of $1,500,000. The facilities were sold in March 2011, and a $1,500,000 loss was recognized for tax purposes. Also in 2010, Krause paid $100,000 in premiums for a two-year life insurance policy in which the company was the beneficiary. Assuming that the enacted tax rate is 30% in both 2010 and 2011, and that Krause paid $780,000 in income taxes in 2010, the amount reported as net deferred income taxes on Krause's balance sheet at December 31, 2010, should be : (1,500,000)-loss on disposal of unused plant facilities; 100,000 premiums for life insurance; TR=30%; 2010 Taxes paid=780,000 life insurance has no effect, so 1,500,000*30%=450,000 deferred tax credit 450,000 asset Machinery was acquired at the beginning of the year. Depreciation recorded during the life of the machinery could result in future taxable amounts AND future deductible amounts Horner Corporation has a deferred tax asset at December 31, 2011 of $80,000 due to the recognition of potential tax benefits of an operating loss carryforward. The enacted tax rates are as follows: 40% for 20082010; 35% for 2011; and 30% for 2012 and thereafter. Assuming that management expects that only 50% of the related benefits will actually be realized, a valuation account should be established in the amount of 40,000 (50% of 80,000, TR not relevant) Taxable income of a corporation differs from accounting income due to differences in interperiod allocation and permanent differences between the two methods of income determination. Recognition of tax benefits in the loss year due to a loss carryforward requires the establishment of a deferred tax asset. Uncertain tax positions: I. are positions for which the tax authorities may disallow a deduction in whole or in part II. include instances in which the tax law is clear and in which the company believes an audit is likely III. give rise to tax expense by increasing payables or increasing a deferred tax liability. Assuming a 40% statutory tax rate applies to all years involved, which of the following situations will give rise to reporting a deferred tax liability on the balance sheet? I. A revenue is deferred for financial reporting purposes but not for tax purposes. II. A revenue is deferred for tax purposes but not for financial reporting purposes. III. An expense is deferred for financial reporting purposes but not for tax purposes. IV. An expense is deferred for tax purposes but not for financial reporting purposes. When a change in the tax rate is enacted into law, its effect on existing deferred income tax accounts should be reported as an adjustment to tax expense in the period of change. At the December 31, 2010 balance sheet date, Unruh Corporation reports an accrued receivable for financial reporting purposes but not for tax purposes. When this asset is recovered in 2011, a future taxable amount will occur and Unruh will record a decrease in deferred tax liability for 2011. MODULES 7-12 The relationship between the amount funded and the amount reported for pension expense is as follows pension expense may be greater than, equal to, or less than the amount funded. In all pension plans, the accounting problems include all the following except: measuring the amount of pension obligation disclosing the status and effects of the plan in the financial statements allocating the cost of the plan to the proper periods determining the level of individual premiums Alternative methods exist for the measurement of the pension obligation (liability). Which measure requires the use of future salaries in its computation? Projected Benefit Obligation A corporation has a defined-benefit plan. A pension liability will result at the end of the year if the: projected benefit obligation exceeds the fair value of the plan assets. In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), the following are considered by the actuary: retirement and mortality rate, interest rates, benefit provisions of plan When a company adopts a pension plan, prior service costs should be charged to other comprehensive income (PSC). A pension liability is reported when the projected benefit obligation exceeds the fair value of pension plan assets.

Gains and losses that relate to the computation of pension expense should be recorded currently and in the future by applying the corridor method which provides the amount to be amortized. The actuarial gains or losses that result from changes in the projected benefit obligation are called Liability Gains & Losses BUT NOT Asset Gains & Losses. In the earlier years of a lease, from the lessee's perspective, the use of the capital method will cause debt to increase, compared to the operating method. What impact does a bargain purchase option have on the present value of the minimum lease payments computed by the lessee? The lessee must increase the present value of the minimum lease payments by the present value of the option price. Major reasons why a company may become involved in leasing to other companies is (are): interest revenue ,high residual values, tax incentives Guaranteed residual value, unguaranteed residual value, and a bargain purchase option are all included in the lease receivable account. In a lease that is appropriately recorded as a direct-financing lease by the lessor, unearned income should be amortized over the period of the lease using the effective interest method. If the residual value of a leased asset is guaranteed by a third party it is treated by the lessee as an additional payment and by the lessor as realized at the end of the lease term. Mays Company has a machine with a cost of $400,000 which also is its fair market value on the date the machine is leased to Park Company. The lease is for 6 years, and the machine is estimated to have an unguaranteed residual value of $40,000. If the lessor's interest rate implicit in the lease is 12%, the six beginning-of-theyear lease payments would be: $82,465 The initial direct costs of leasing are expensed in the period of the sale under a sales-type lease. The Lease Liability account should be disclosed as current portions in current liabilities and the remainder in noncurrent liabilities. Which of the following is not treated as a change in accounting principle? a change to a different method of depreciation for plant assets Which of the following disclosures is required for a change from sum-of-the-years-digits to straight-line? recomputation of current and future years depreciation Which type of accounting change should always be accounted for in current and future periods? change in accounting estimate Accounting changes are often made, and the monetary impact is reflected in the financial statements of a company even though, in theory, this may be a violation of the accounting concept of consistency. A company changes from percentage-of-completion to completed-contract, which is the method used for tax purposes. The entry to record this change should include a debit to Retained Earnings in the amount of the difference on prior years, net of tax. Which of the following describes a change in reporting entity? statements changing the companies included in combined financial

Counterbalancing errors do not include errors that correct themselves in three years. Accrued salaries payable of $51,000 were not recorded at December 31, 2010. Office supplies on hand of $24,000 at December 31, 2011 were erroneously treated as expense instead of supplies inventory. Neither of these errors was discovered nor corrected. The effect of these two errors would cause 2011 net income to be understated $75,000 and December 31, 2011 retained earnings to be understated $24,000 An example of a correction of an error in previously issued financial statements is a change from the cash basis of accounting to the accrual basis of accounting MODULES 13-16

To arrive at net cash provided by operating activities, it is necessary to report revenues and expenses on a cash basis. This is done by eliminating the effects of income statement transactions that did not result in a corresponding increase or decrease in cash. The first step in the preparation of the statement of cash flows requires the use of information included in which comparative financial statements? balance sheets One objective of the statement of cash flows is to provide information about the operating, investing and financing activities of an entity during a period. An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a deduction from net income arriving at net cash flow from operating activities. Dolan Company reports its income from investments under the equity method and recognized income of $25,000 from its investment in Moss Co. during the current year, even though no dividends were declared or paid by Moss during the year. On Dolan's statement of cash flows (indirect method), the $25,000 should be shown as a deduction from net income in the cash flows from operating activities section In a statement of cash flows, the cash flows from investing activities section should report a major repair to machinery charged to accumulated depreciation When preparing a statement of cash flows (indirect method), an increase in ending inventory over beginning inventory will result in an adjustment to reported net earnings because cost of goods sold on an accrual basis is lower than on a cash basis Which of the following should be disclosed in a Summary of Significant Accounting Policies? depreciation method followed The focus of APB Opinion No. 22 is on the disclosure of accounting policies. This information is important to financial statement readers in determining whether accounting policies are consistently applied from year to year. Revenue of a segment includes sales to unaffiliated customers and intersegment sales. APB Opinion No. 28 indicates that the same accounting principles used for the annual report should be used for interim reports. Which of the following best characterizes the difference between a financial forecast and a financial projection? A forecast attempts to provide information on what is expected to happen, whereas a projection may provide information on what is not necessarily expected to happen. The MD&A section of a company's annual report is to cover the following three items: liquidity, capital resources, and results of operations. If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, the opinion is said to be qualified. Fraudulent financial reporting is intentional or reckless conduct, whether act or omission, that results in materially misleading financial statements.