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Financial Accounting & Reporting Updating Supplement Version 41.
2

Copyright @ 2012 by Bisk Education, Inc. All rights reserved. Page 1 of 35

FINANCIAL ACCOUNTING & REPORTING
CPA2901US2-41
TABLE OF CONTENTS
About Updating Supplement Version 41.2 .................................................................................................... 2
Study Options Available to Candidates ......................................................................................................... 2
HotSpot: IFRS & SEC Reporting ................................................................................................................ 2
Other Sources of Information for Candidates ............................................................................................... 2
Recent FASB Pronouncements .................................................................................................................... 3
Recent GASB Pronouncements ................................................................................................................... 6
Errata ............................................................................................................................................................. 8
Recently Released AICPA Questions ......................................................................................................... 10

We wish to thank the American Institute of Certified Public Accountants and the Financial Accounting Standards Board for
permission to reprint the following copyright materials:
1. Uniform CPA Examination Questions and Unofficial Answers, Copyright American Institute of Certified Public Accountants, Inc.,
Harborside Financial Center, 201 Plaza Three, Jersey City, NJ 07311-3881
2. Accounting Research Bulletins, APB Opinions, APB Statements, and Code of Professional Conduct.
3. FASB Statements, Interpretations, and Statements of Financial Accounting Concepts (SFAC), Copyright Financial Accounting
Standards Board, 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856, U.S.A. Reprinted with permission. Copies of the complete
documents are available from the FASB.
4. GASB Statements, Interpretations, and Technical Bulletins, Copyright Governmental Accounting Standards Board, 401 Merritt
7, P.O. Box 5116, Norwalk CT 06856-5116.
5. Statements on Auditing Standards (SAS), Statements on Standards for Accounting and Review Services (SSARS), Statements
on Standards for Accountants Services on Prospective Financial Information, Statements on Standards for Attestation
Engagements (SSAE), and Statements on Quality Control Standards (SQCS).
6. ISB Standards, Copyright Independence Standards Board, 6th Floor, 1211 Avenue of the Americas, New York, NY 10036-
8775
Copyright 2012 by Bisk Education, Inc. Tampa, FL 33631-3028
All rights reserved. Reproduction in any form is expressly prohibited.
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other expert assistance is required, the services of a competent professional person should be sought.From a Declaration of
Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers and Associations.
Financial Accounting & Reporting Updating Supplement Version 41.2


About Updating Supplement Version 41.2
Information that is only six months old is eligible to be tested on the CPA exam. Updating Supplement
Version 41.2 is designed to bring the latest release of material to candidates using our products to pre-
pare for the CPA exam in the Jul-Aug 2012 window. Candidates with the 41st edition and corresponding
software (versions 14.3, 14.4, 14.5, and 14.6) will find the information in this supplement more than
adequate for these exam windows.
When new information first becomes available, the examiners tend to test new or changed portions of
concepts lightly. Coverage of information after that point may increase, if it is in a heavily tested area. Do
not fall into the trap of attaching undue significance to new information merely because it is new.
Remember, with the information and techniques in our material, passing the exam is an attainable goal.
Adhere to a reasonable study planand pass the first time!
__________________
Study Options Available to Candidates
As every candidates needs are different, Bisk Education offers a variety of CPA Review formats and
packages that are guaranteed* to help you pass the CPA exam on your next sitting. Options include: our
Online CPA Review with structured Internet classes and our self-study CPA Review utilizing multimedia
CD-ROM software, video lectures, and textbooks.
*Purchase of software required. Call for complete details.
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HotSpot: IFRS & SEC Reporting
Bisk CPA Review offers targeted HotSpot DVDs, each analyzing, simplifying and explaining important
CPA exam concepts. Each comprehensive program is packed with valuable tips and comes with a viewers
guide.
The latest HotSpot covers IFRS & SEC Reporting. In this program, Robert Monette provides extensive
coverage of IFRS accounting standards versus U.S. GAAP for: required financial statements, intangibles,
investments, fixed assets, leases, pensions, bonds, deferred taxes, and consolidations. Bob also dis-
cusses important aspects of SEC reporting requirements in this program. Bob illustrates these concepts
with numerous examples and over 30 multiple-choice questions.
Please contact a sales representative at 1-800-404-7231 or info@cpaexam.com for further information
about this or any other Bisk program.
__________________
Other Sources of Information for Candidates
Candidates with the 40
th
edition and corresponding software (versions 14.0, 14.1, and 14.2) also will need
Updating Supplement Version 40.3. Updating Supplement Version 40.3 contains summaries of tax
changes and inflation-adjusted amounts. (Material in the version 40.3 updating supplement is incorpo-
rated within the 41
st
edition, as appropriate.)
Due to significant changes to the exam, candidates with the 39
th
and earlier editions and corresponding
software (version 13.3 and lower) are strongly encouraged to purchase new materials. Candidates choos-
ing to use previous editions of our books must accept responsibility for adequately updating their materials.
Candidates should consider the strain that this will add to the already time-consuming process of studying
for the exam. Material in the related updating supplements may be reviewed to determine the nature and
quantity of information that has changed from one edition to another.
__________________


Recent FASB Pronouncements
ASU No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible
Assets for ImpairmentAn Amendment of the FASB Accounting Standards Codification (Issued
7/12)
The amendments in this Update provide that an entity will have the option not to calculate annually the
fair value of an indefinite-lived intangible asset if the entity determines (by assessing qualitative factors)
that it is not more likely than not (defined as having a likelihood of more than 50 percent) that the asset is
impaired. This new guidance improves consistency in impairment testing among long-lived asset
categories.
The amendments are effective for annual and interim impairment tests performed for fiscal years begin-
ning after September 15, 2012. Early adoption is permitted. The material in this update is eligible to be
tested beginning in the April-May 2013 exam window.
__________________
ASU No. 2012-01, Health Care Entities (Topic 954): Continuing Care Retirement Communities
Refundable Advance Fees (Issued 7/12)
The amendments in this Update clarify that an entity should classify an advance fee as deferred
revenue when a continuing care retirement community has a resident contract that provides for pay-
ment of the refundable advance fee upon reoccupancy by a subsequent resident, which is limited to
the proceeds of reoccupancy. Refundable advance fees that are contingent upon reoccupancy by a
subsequent resident but are not limited to the proceeds of reoccupancy should be accounted for and
reported as a liability.
For public entities (including conduit bond obligors), the amendments in this Update are effective for fiscal
periods beginning after December 15, 2012. For nonpublic entities, the amendments in this Update are
effective for fiscal periods beginning after December 15, 2013. Early adoption is permitted. The material
in this update is eligible to be tested beginning in the July-August 2013 exam window.
__________________
ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amend-
ments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive
Income in ASU Update No. 2011-05An Amendment of the FASB Accounting Standards
Codification (Issued 12/11)
Stakeholders raised concerns that the new presentation requirements about reclassifications of items out
of accumulated other comprehensive income would be difficult for preparers and may add unnecessary
complexity to financial statements. In addition it is difficult for some stakeholders to change systems in
time to gather the information for the new presentation requirements by the effective date of Update
2011-05.
In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification
adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05.
The amendments are being made to allow the Board time to redeliberate whether to present on the face
of the financial statements the effects of reclassifications out of accumulated other comprehensive
income on the components of net income and other comprehensive income for all periods presented.
While the Board is considering, entities should continue to report reclassifications out of accumulated
other comprehensive income consistent with the presentation requirements in effect before Update
2011-05.


All other requirements in Update 2011-05 are not affected by this Update, including the requirement to
report comprehensive income either in a single continuous financial statement or in two separate but
consecutive financial statements. Public entities should apply these requirements for fiscal years, and
interim periods within those years, beginning after December 15, 2011. Nonpublic entities should begin
applying these requirements for fiscal years ending after December 15, 2012, and interim and annual
periods thereafter. The material in this update is eligible to be tested beginning in the July-August 2012
exam window
__________________
ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities
An Amendment of the FASB Accounting Standards Codification (Issued 12/11)
An entity is required to apply the amendments for annual reporting periods beginning on or after January 1,
2013, and interim periods within those annual periods. An entity should provide the disclosures required
by those amendments retrospectively for all comparative periods presented. The material in this update
is eligible to be tested beginning in the July-August 2013 exam window.
The differences in the offsetting requirements in U.S. GAAP and IFRS account for a significant difference
in the amounts presented in statements of financial position prepared in accordance with U.S. GAAP and
in the amounts presented in those statements prepared in accordance with IFRS for certain institutions.
This Update is the result of a joint project conducted by the FASB and the IASB to enhance disclosures
and provide converged disclosures about financial instruments and derivative instruments that are either
offset on the statement of financial position or subject to an enforceable master netting arrangement or
similar agreement, irrespective of whether they are offset on the statement of financial position. Entities
are required to provide both net and gross information for these assets and liabilities in order to enhance
comparability between those entities that prepare their financial statements on the basis of U.S. GAAP
and those entities that prepare their financial statements on the basis of IFRS.
__________________
ASU No. 2011-10, Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real
EstateA Scope ClarificationAn Amendment of the FASB Accounting Standards Codification
(Issued 12/11)
For public entities, the amendments in this Update are effective for fiscal years, and interim periods within
those years, beginning on or after June 15, 2012. For nonpublic entities, the amendments are effective
for fiscal years ending after December 15, 2013, and interim and annual periods thereafter. Early adop-
tion is permitted. The material in this update is eligible to be tested beginning in the July-August 2012
exam window.
Under the amendments in this Update, when a parent (reporting entity) ceases to have a controlling finan-
cial interest in a subsidiary that is in substance real estate as a result of default on the subsidiarys nonre-
course debt, the reporting entity should apply the guidance in Subtopic 360-20 to determine whether it
should derecognize the in substance real estate. Generally, a reporting entity would not satisfy the
requirements to derecognize the in substance real estate before the legal transfer of the real estate to the
lender and the extinguishment of the related nonrecourse indebtedness.
The amendments in this Update do not eliminate the existing differences in accounting and reporting
between U.S. GAAP and IFRS. IFRS guidance on accounting for decreases in ownership of subsidiaries
may apply to all subsidiaries, even those that involve in substance real estate.
__________________



ASU No. 2011-09, CompensationRetirement BenefitsMultiemployer Plans (Topic 715-80):
Disclosures about an Employers Participation in a Multiemployer PlanAn Amendment of the
FASB Accounting Standards Codification (Issued 09/11)
For public entities, the amendments in this Update are effective for annual periods for fiscal years ending
after December 15, 2011, with early adoption permitted. For nonpublic entities, the amendments are
effective for annual periods for fiscal years ending after December 15, 2012, with early adoption permit-
ted. The amendments should be applied retrospectively for all prior periods presented. The material in
this update is eligible to be tested beginning in the April-May 2012 exam window.
The amendments create greater transparency in financial reporting by requiring additional disclosures
about an employers participation in a multiemployer pension plan. The additional disclosures will increase
awareness about the commitments that an employer has made to a multiemployer pension plan and the
potential future cash flow implications of an employers participation in the plan.
Currently, U.S. GAAP differs from IFRS in the recognition and measurement guidance for an employers
participation in multiemployer plans for both plans that provide pension benefits and plans that provide
other postretirement benefits. The IASB issued amendments to IAS 19, Employee Benefits, on June 16,
2011, which should be retrospectively applied in annual periods beginning on or after January 1, 2013.
Among other provisions, the IASBs amendments enhance the disclosures about an employers participa-
tion in a multiemployer plan. The FASBs amendments in this Update are similar, but not identical, to the
IASBs disclosure guidance. The differences primarily relate to the use of information and terminology
that is common in U.S. plans (for example, the certified zone status) and the greater level of specificity in
the FASBs disclosure requirements.
__________________
ASU No. 2011-08, IntangiblesGoodwill and Other (Topic 350)Testing Goodwill for Impairment
An Amendment of the FASB Accounting Standards Codification (Issued 09/11)
The amendments in this Update are effective for annual and interim goodwill impairment tests performed
for fiscal years beginning after December 15, 2011. Early adoption is permitted. The material in this
update is eligible to be tested beginning in the April-May 2012 exam window.
The objective of this Update is to simplify how entities, both public and nonpublic, test goodwill for impair-
ment. The amendments permit an entity to first assess qualitative factors to determine whether it is more
likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for deter-
mining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350.
The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. An entity is
not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely
than not that its fair value is less than its carrying amount.
Previous guidance under Topic 350 required an entity to test goodwill for impairment, on at least an annual
basis, by comparing the fair value of a reporting unit with its carrying amount, including goodwill (step one).
International Accounting Standard 36, Impairment of Assets, requires an entity to test goodwill for impair-
ment using a single-step quantitative test performed at the level of a cash-generating unit or group of
cash-generating units. The test must be performed at least annually and between annual tests whenever
there is an indication of impairment. The Board recognizes that this Update does not advance the con-
vergence of Topic 350 and IAS 36. The Board concluded that such an effort is beyond the scope of this
Update and should be done more broadly, by comprehensively addressing these and other differences in
impairment guidance between U.S. GAAP and IFRS.
__________________



Recent GASB Pronouncements
GASB 68, Accounting and Financial Reporting for Pensions (Issued 06/12)
The provisions of this Statement are effective for financial statements for periods beginning after June 15,
2014. Earlier application is encouraged. The material in this Update is eligible to be tested beginning in
the January-February 2013 exam window.
Statement 68 replaces the requirements of Statement No. 27, Accounting for Pensions by State and Local
Governmental Employers and Statement No. 50, Pension Disclosures, as they relate to governments that
provide pensions through pension plans administered as trusts or similar arrangements that meet certain
criteria. Statement 68 requires governments providing defined benefit pensions to recognize their long-
term obligation for pension benefits as a liability for the first time, and to more comprehensively and com-
parably measure the annual costs of pension benefits. The Statement also enhances accountability and
transparency through revised and new note disclosures and required supplementary information (RSI).
__________________
GASB 67, Financial Reporting for Pension Plans (Issued 03/12)
The provisions of this Statement are effective for financial statements for periods beginning after June 15,
2013. Earlier application is encouraged. The material in this Update is eligible to be tested beginning in
the January-February 2013 exam window.
Statement 67replaces the requirements of Statement No. 25, Financial Reporting for Defined Benefit
Pension Plans and Note Disclosures for Defined Contribution Plans and Statement 50 as they relate to
pension plans that are administered through trusts or similar arrangements meeting certain criteria. The
Statement builds upon the existing framework for financial reports of defined benefit pension plans, which
includes a statement of fiduciary net position (the amount held in a trust for paying retirement benefits) and
a statement of changes in fiduciary net position. Statement 67 enhances note disclosures and RSI for
both defined benefit and defined contribution pension plans. Statement 67 also requires the presentation
of new information about annual money-weighted rates of return in the notes to the financial statements
and in 10-year RSI schedules.
__________________
GASB 66, Technical Corrections-2012-an amendment of GASB Statements No. 10 and No. 62
(Issued 03/12)
The provisions of this Statement are effective for financial statements for periods beginning after Decem-
ber 15, 2012. Earlier application is encouraged. The material in this Update is eligible to be tested
beginning in the October-November 2012 exam window.
This Statement amends Statement No. 10, Accounting and Financial Reporting for Risk Financing and
Related Insurance Issues, by removing the provision that limits fund-based reporting of an entitys risk
financing activities to the general fund and the internal service fund type. As a result, governments should
base their decisions about fund type classification on the nature of the activity to be reported, as required
in Statement No. 54 and Statement No. 34. This Statement also amends Statement No. 62 by modifying
the specific guidance on accounting for (1) operating lease payments that vary from a straight-line basis,
(2) the difference between the initial investment (purchase price) and the principal amount of a purchased
loan or group of loans, and (3) servicing fees related to mortgage loans that are sold when the stated
service fee rate differs significantly from a current (normal) servicing fee rate. These changes clarify how
to apply Statement No. 13, and result in guidance that is consistent with the requirements in Statement
No. 48, respectively.
__________________


GASB 65, Items Previously Reported as Assets and Liabilities (Issued 03/12)
The provisions of this Statement are effective for financial statements for periods beginning after Decem-
ber 15, 2012. Earlier application is encouraged. The material in this Update is eligible to be tested begin-
ning in the October-November 2012 exam window.
This Statement establishes accounting and financial reporting standards that reclassify, as deferred
outflows of resources or deferred inflows of resources, certain items that were previously reported as
assets and liabilities and recognizes, as outflows of resources or inflows of resources, certain items that
were previously reported as assets and liabilities. This Statement amends the financial statement element
classification of certain items previously reported as assets and liabilities to be consistent with the defi-
nitions in Concepts Statement 4. This Statement also provides other financial reporting guidance related
to the impact of the financial statement elements deferred outflows of resources and deferred inflows of
resources, such as changes in the determination of the major fund calculations and limiting the use of the
term deferred in financial statement presentations.
__________________



Errata
The following items are in the textbook only, unless otherwise noted. If you find other items that you believe
are ambiguous or in error, please contact the Bisk Education editors (editor@cpaexam.com) with details.
Chapter 4: Simulation 4-4, Page 4-27 (QID 8524). Response table 1 is missing from the simulation.
It should follow the Accounting Treatment table. The solution is correct as is.
1. Peabody Inc. had the following property, plant and equipment transactions during the year. For each
transaction, choose the correct accounting treatment from the selection list. Each accounting treat-
ment may be used once, more than once, or not at all.
Asset Cost Accounting
treatment
20 new desk-top computers for support personnel $ 24,000
Cost of parking lot for new warehouse $ 10,000
New process costing softwarethis software will need to be
replaced in 6 years
$ 18,000

Painting all of the ceiling tiles in the hallways and common areas of
the property
$ 9,000

Replacing office windows cracked as a result of an explosion at a
neighboring manufacturing plant
$ 13,000

Replace the cooling system in the companys current facility with a
more modern and fuel efficient model
$ 35,000

Chapter 6: Simulation 6-3 solution, Page 6-40, Rows 7 and 8 (QID 9111). The last two rows of the
amortization table do not show correct responses. Below is the correct table:
A B C D E F

1

Date

Interest
Payment

Interest
Expense
Increase (Decrease) in
Carrying Amount of
Bonds
Unamortized
(Discount)
or Premium
Carrying
Amount
of Bonds
2 01/01/01 152,270 3,152,270
3 06/30/01 180,000 157,613 (22,387) 129,883 3,129,883
4 12/31/01 180,000 156,494 (23,506) 106,377 3,106,377
5 06/30/02 180,000 155,319 (24,681) 81,696 3,081,696
6 12/31/02 180,000 154,085 (25,915) 55,781 3,055,781
7 06/30/03 180,000 152,789 (27,211) 28,570 3,028,570
8 12/31/03 180,000 151,429 (28,570) 0 3,000,000



Chapter 7: Simulation 7-3 solution, Page 7-49, Item 2. (QID 6192). The entire deferred tax liability
should be $27,000 and is classified as noncurrent as the underlying asset generating the
temporary difference is also noncurrent. [$25,000 + $30,000 + $35,0000) .30]. Note
that for year 2, there would have been a noncurrent deferred tax asset of $5,000 ($20,000 *
25%) in addition to the noncurrent deferred tax liability of $27,000 [$25,000 + $30,000 +
$35,0000) .30].
Chapter 8: Simulation 8-2, Page 8-47, Question 1 (QID 9118) should be for Gutter Company, not
Smiley.
Simulation 8-4, Page 8-62, Explanation 5 (QID 4100). The explanation should be as
follows:
[5] The minimum amortization of pension gain included in accumulated OCI that
Athena should include in the calculation of net pension cost is determined, as of the begin-
ning of the year, as the amount by which the unrecognized pension gain exceeds 10% of
the greater of the projected benefit obligation or the market-related value of plan assets,
divided by the average remaining service period of active employees expected to receive
benefits under the plan.
Accumulated pension gain in OCI, 1/1 $108,000
Less: 10% of fair value of plan assets (i.e., the market-related
value of plan assets), 1/1 ($960,000* 10%)

(96,000)
Excess of pension gain $ 12,000
Divide by: Average service life 10
Minimum amortization of pension gain $ 1,200
* At 1/1, the fair value of plan assets exceeds the projected benefit obligation (i.e., $960,000 >
$800,000).
Chapter 9: Simulation 9-2, Page 9-45 and 9-63 (QID 6502). On page 9-45, beginning Common Stock
should be $900,000, not $1,250,000. On page 9-63, line item 9 should be 6,000 shares
of treasury stock, not 5,000 shares. On page 9-63, explanation 2 should be: Additional
paid-in-capital: $1,500,000 + $345,000 $45,000 = $1,800,000; not $1,845,000. Stock
Options Outstanding is included in APIC for financial reporting purposes. Line item 8
should be $4,995,000, and line item 10 should be $4,941,000.
Simulation 9-4 Solution, Page 9-65 (QID 9024). Line 6 in Table 2 (Common Stock in
Treasury) correctly shows 100,000 treasury shares at $5 cost. However, this is due to
the 2-for-1 stock split, where 50,000 shares became 100,000, and cost was adjusted from
$10 to $5. It is not a function of adding back retired shares.
Chapter 10: Solution 63, Page 10-41 (QID 3276). Explanation should read: permitting the recog-
nition of $2,000 profit above the year 1 cost of sales of $8,000 The word cost was
omitted in the text.
Simulation 10-3 Solution, Page 10-46, Explanation B3 should read as follows: [$450,000
/ ($450,000 + $50,000)] * $750,000 = $675,000. (The multiplication sign preceding
$750,000 was omitted.)
Chapter 19: Simulation 19-2, Items 4 and 6, Page 19-62, (QID 6214). The answer choice for items 4
and 6 should be Other Financing Uses, not Other Financing Sources.
__________________



Recently Released AICPA Questions
In April, 2012, the AICPA released fifty multiple-choice questions, two nonresearch simulations, and one
research simulation relating to the FAR section of the CPA examination. These questions and their
unofficial answers are reproduced here, along with the exclusive Bisk Education explanations. The refer-
ence to the Content Specification Outline (CSO) at the end of each answer explanation pertains to the
CSO in effect as of January 1, 2012.
The multiple-choice questions in Problems 1 and 2 were labeled medium or hard, respectively, by the
AICPA examiners. The AICPA did not state if these questions ever appeared on any exam, whether they
were assigned points or merely being pre-tested and earned no points if they did appear on an exam, or if
they were now obsolete for some reason.
These questions are intended only as a study aid and should not be used to predict the content of future
exams. It is extremely unlikely that released questions will ever appear on future examinations. These
questions have been reproduced as received from the AICPA examiners. If candidates encounter what
they believe are errors or ambiguities in questions during their actual exams, they should bring them to the
attention of the examiners in accordance with the procedures outlined on the AICPAs web site.
Problem 1 MULTIPLE-CHOICE QUESTIONS (medium)
1. A company has the following items on its year-end trial balance:
Net sales $500,000
Common stock 100,000
Insurance expense 75,000
Wages 50,000
Cost of goods sold 100,000
Cash 40,000
Accounts payable 25,000
Interest payable 20,000
What is the companys gross profit?
a. $230,000
b. $275,000
c. $400,000
d. $500,000 (R/12, FAR, #1, 89701)
2. Burns Corp. had the following items:
Sales revenue $45,000
Loss on early extinguishment of bonds 36,000
Realized gain on sale of available-for-sale securities 28,000
Unrealized holding loss on available-for-sale securities 17,000
Loss on write-down of inventory 3,100
Which of the following amounts would the statement of comprehensive income report as other com-
prehensive income or loss?
a. $11,000 other comprehensive income
b. $16,900 other comprehensive income
c. $17,000 other comprehensive loss
d. $28,100 other comprehensive loss (R/12, FAR, #2, 89702)



3. Baler Co. prepared its statement of cash flows at year-end using the direct method. The following
amounts were used in the computation of cash flows from operating activities:
Beginning inventory $200,000
Ending inventory 150,000
Cost of goods sold 1,200,000
Beginning accounts payable 300,000
Ending accounts payable 200,000
What amount should Baler report as cash paid to suppliers for inventory purchases?
a. $1,200,000
b. $1,250,000
c. $1,300,000
d. $1,350,000 (R/12, FAR, #3, 89703)
4. Which of the following transactions is included in the operating activities section of a cash flow
statement prepared using the indirect method?
a. Gain on sale of plant asset
b. Sale of property, plant and equipment
c. Payment of cash dividend to the shareholders
d. Issuance of common stock to the shareholders (R/12, FAR, #4, 89704)
5. Tinsel Co.s balances in allowance for uncollectible accounts were $70,000 at the beginning of the
current year and $55,000 at year end. During the year, receivables of $35,000 were written off as
uncollectible. What amount should Tinsel report as uncollectible accounts expense at year end?
a. $15,000
b. $20,000
c. $35,000
d. $50,000 (R/12, FAR, #5, 89705)
6. Alta Co. spent $400,000 during the current year developing a new idea for a product that was
patented during the year. The legal cost of applying for a patent license was $40,000. Also,
$50,000 was spent to successfully defend the rights of the patent against a competitor. The patent
has a life of 20 years. What amount should Alta capitalize related to the patent?
a. $ 40,000
b. $ 50,000
c. $ 90,000
d. $ 490,000 (R/12, FAR, #6, 89706)
7. A retail store sold gift certificates that are redeemable in merchandise. The gift certificates lapse
one year after they are issued. How would the deferred revenue account be affected by each of
the following?
Redemption of certificates Lapse of certificates
a. Decrease Decrease
b. Decrease No effect
c. No effect Decrease
d. No effect No effect (R/12, FAR, #7, 89707)



8. On January 2, Vole Co. issued bonds with a face value of $480,000 at a discount to yield 10%.
The bonds pay interest semiannually. On June 30, Vole paid bond interest of $14,400. After Vole
recorded amortization of the bond discount of $3,600, the bonds had a carrying amount of
$363,600. What amount did Vole receive upon issuing the bonds?
a. $360,000
b. $367,200
c. $476,400
d. $480,000 (R/12, FAR, #8, 89708)
9. What type of bonds mature in installments?
a. Debenture
b. Term
c. Variable rate
d. Serial (R/12, FAR, #9, 89709)
10. Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following events
occurred during the year:
4/1 Issued 30,000 shares of common stock
6/1 Issued 36,000 shares of common stock
7/1 Declared a 5% stock dividend
9/1 Purchased as treasury stock 35,000 shares of its common stock. Balm used the cost
method to account for the treasury stock
What is Balms weighted average of common stock outstanding at December 31?
a. 131,000
b. 139,008
c. 150,675
d. 162,342 (R/12, FAR, #10, 89710)
11. The stockholders of Meadow Corp. approved a stock-option plan that grants the companys top
three executives options to purchase a maximum of 1,000 shares each of Meadows $2 par common
stock for $19 per share. The options were granted on January 1 when the fair value of the stock
was $20 per share. Meadow determined that the fair value of the compensation is $300,000 and
the vesting period is three years. What amount of compensation expense from the options should
Meadow record in the year the options were granted?
a. $ 20,000
b. $ 60,000
c. $ 100,000
d. $ 300,000 (R/12, FAR, #11, 89711)
12. At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remain-
ing life. The fair value of the liability for the asset retirement obligation was $100,000. At year end,
the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-
adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year
related to the asset retirement obligation?
a. $ 10,000
b. $ 50,000
c. $ 95,000
d. $ 100,000 (R/12, FAR, #12, 89712)



13. Blythe Corp. is a defendant in a lawsuit. Blythes attorneys believe it is reasonably possible that
the suit will require Blythe to pay a substantial amount. What is the proper financial statement treat-
ment for this contingency?
a. Accrued and disclosed
b. Accrued but not disclosed
c. Disclosed but not accrued
d. No disclosure or accrual (R/12, FAR, #13, 89713)
14. Jones Co. had 50,000 shares of $5 par value common stock outstanding at January 1. On August 1,
Jones declared a 5% stock dividend followed by a two-for-one stock split on September 1. What
amount should Jones report as common shares outstanding at December 31?
a. 105,000
b. 100,000
c. 52,500
d. 50,000 (R/12, FAR, #14, 89714)
15. A transaction that is unusual in nature or infrequent in occurrence should be reported as a(an)
a. Component of income from continuing operations, net of applicable income taxes
b. Extraordinary item, net of applicable income taxes
c. Component of income from continuing operations, but not net of applicable income taxes
d. Extraordinary item, but not net of applicable income taxes (R/12, FAR, #15, 89715)
16. Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash
flows of the asset. Which of the following terms best describes this fair value measurement
approach?
a. Market
b. Income
c. Cost
d. Observable inputs (R/12, FAR, #16, 89716)
17. A company owns a financial asset that is actively traded on two different exchanges (market A and
market B). There is no principal market for the financial asset. The information on the two
exchanges is as follows:
Quoted price of asset Transaction costs
Market A $1,000 $ 75
Market B 1,050 150
What is the fair value of the financial asset?
a. $ 900
b. $ 925
c. $ 1,000
d. $ 1,050 (R/12, FAR, #17, 89717)



18. Brand Co. incurred the following research and development project costs at the beginning of the
current year:
Equipment purchased for current and future projects $100,000
Equipment purchased for current projects only 200,000
Research and development salaries for current project 400,000
Equipment has a five-year life and is depreciated using the straight-line method. What amount
should Brand record as depreciation for research and development projects at December 31?
a. $0
b. $ 20,000
c. $ 60,000
d. $ 140,000 (R/12, FAR, #18, 89718)
19. How should NSB, Inc. report significant research and development costs incurred?
a. Expense all costs in the year incurred
b. Capitalize the costs and amortize over a five-year period
c. Capitalize the costs and amortize over a 40-year period
d. Expense all costs two years before and five years after the year incurred(R/12, FAR, #19, 89719)
20. Kenn City obtained a municipal landfill and passed a local ordinance that required the city to
operate the landfill so that the costs of operating the landfill, as well as the capital costs, are to be
recovered with charges to customers. Which of the following funds should Kenn City use to report
the activities of the landfill?
a. Enterprise
b. Permanent
c. Special revenue
d. Internal service (R/12, FAR, #20, 89720)
21. At the beginning of the current year, Paxx Countys enterprise fund had a $125,000 balance for
accrued compensated absences. At the end of the year, the balance was $150,000. During the
year, Paxx paid $400,000 for compensated absences. What amount of compensated absences
expense should Paxx Countys enterprise fund report for the year?
a. $375,000
b. $400,000
c. $425,000
d. $550,000 (R/12, FAR, #21, 89721)
22. Which of the following funds would be reported as a fiduciary fund in Pine Citys financial state-
ments?
a. Special revenue
b. Permanent
c. Private-purpose trust
d. Internal service (R/12, FAR, #22, 89722)
23. Belle, a nongovernmental not-for-profit organization, received funds during its annual campaign that
were specifically pledged by the donor to another nongovernmental not-for-profit health organization.
How should Belle record these funds?
a. Increase in assets and increase in liabilities
b. Increase in assets and increase in revenue
c. Increase in assets and increase in deferred revenue
d. Decrease in assets and decrease in fund balance (R/12, FAR, #23, 89723)



24. Ragg Coalition, a nongovernmental not-for-profit organization, received a gift of treasury bills. The
cost to the donor was $20,000, with an additional $500 for brokerage fees that were paid by the
donor prior to the transfer of the treasury bills. The treasury bills had a fair value of $15,000 at the
time of the transfer. At what amount should Ragg report the treasury bills in its statement of
financial position?
a. $15,000
b. $15,500
c. $20,000
d. $20,500 (R/12, FAR, #24, 89724)
25. In year 2, the Nord Association, a nongovernmental not-for-profit organization, received a $100,000
contribution to fund scholarships for medical students. The donor stipulated that only the interest
earned on the contribution be used for the scholarships. Interest earned in year 2 of $15,000 was
used to award scholarships in year 3. What amount should Nord report as temporarily restricted
net assets at the end of year 2?
a. $115,000
b. $100,000
c. $ 15,000
d. $0 (R/12, FAR, #25, 89725)
__________________
Problem 2 MULTIPLE-CHOICE QUESTIONS (hard)
26. Which of the following characteristics of accounting information primarily allows users of financial
statements to generate predictions about an organization?
a. Reliability
b. Timeliness
c. Neutrality
d. Relevance (R/12, FAR, #26, 89726)
27. Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require Polk to pay $3,000
down and finance the remaining $27,000. On March 1, year 1, Polk pays the $3,000 down and
accepted delivery of the forklift. Polk signed a note that requires Polk to pay principal payments of
$1,000 per month for 27 months beginning July 1, year 1. What amount should Polk report as an
investing activity in the statement of cash flows for the year ended December 31, year 1?
a. $ 3,000
b. $ 9,000
c. $ 12,000
d. $ 30,000 (R/12, FAR, #27, 89727)
28. A company that is a large accelerated filer must file its Form 10-Q with the United States Securities
and Exchange Commission within how many days after the end of the period?
a. 30 days
b. 40 days
c. 45 days
d. 60 days (R/12, FAR, #28, 89728)
29. Each of the following is a component of the changes in the net assets available for benefits of a
defined benefit pension plan trust, except
a. The net change in fair value of each significant class of investments
b. The net change in the actuarial present value of accumulated plan benefits
c. Contributions from the employer and participants
d. Benefits paid to participants (R/12, FAR, #29, 89729)


30. During the year, Hauser Co. wrote off a customers account receivable. Hauser used the allow-
ance method for uncollectable accounts. What impact would the write-off have on net income and
total assets?
Net income Total assets
a. Decrease Decrease
b. Decrease No effect
c. No effect Decrease
d. No effect No effect (R/12, FAR, #30, 89730)
31. The original cost of an inventory item is above the replacement cost. The inventory items replace-
ment cost is above the net realizable value. Under the lower of cost or market method, the inventory
item should be valued at
a. Original cost
b. Replacement cost
c. Net realizable value
d. Net realizable value less normal profit margin (R/12, FAR, #31, 89731)
32. Kauf Co. had the following amounts related to the sale of consignment inventory:
Cost of merchandise shipped to consignee $72,000
Sales value for two-thirds of inventory sold by consignee 80,000
Freight cost for merchandise shipped 7,500
Advertising paid for by consignee, to be reimbursed 4,500
10% commission due the consignee for the sale 8,000
What amount should Kauf report as net profit(loss) from this transaction for the year?
a. $ (12,000)
b. $ 8,000
c. $ 14,500
d. $ 32,000 (R/12, FAR, #32, 89732)
33. A manufacturer has the following per-unit costs and values for its sole product:
Cost $10.00
Current replacement cost 5.50
Net realizable value 6.00
Net realizable value less normal profit margin 5.20
In accordance with IFRS, what is the per-unit carrying value of inventory in the manufacturers state-
ment of financial position?
a. $ 5.20
b. $ 5.50
c. $ 6.00
d. $10.00 (R/12, FAR, #33, 89733)
34. At the beginning of the year, Cann Co. started construction on a new $2 million addition to its plant.
Total construction expenditures made during the year were $200,000 on January 2, $600,000 on
May 1, and $300,000 on December 1. On January 2, the company borrowed $500,000 for the con-
struction at 12%. The only other outstanding debt the company had was a 10% interest rate, long-
term mortgage of $800,000, which had been outstanding the entire year. What amount of interest
should Cann capitalize as part of the cost of the plant addition?
a. $ 140,000
b. $ 132,000
c. $ 72,500
d. $ 60,000 (R/12, FAR, #34, 89734)


35. Bondholders of Balm Co. converted their bonds into 90,000 shares of $5 par value common stock.
In Balms accounting records, the bonds had a par value of $775,000 and unamortized discount of
$23,000 at the time of conversion. What amount of additional paid-in capital from the conversion
should Balm record?
a. $302,000
b. $325,000
c. $348,000
d. $798,000 (R/12, FAR, #35, 89735)
36. On January 1 of the current year, Barton Co. paid $900,000 to purchase two-year, 8%, $1,000,000
face value bonds that were issued by another publicly traded corporation. Barton plans to sell the
bonds in the first quarter of the following year. The fair value of the bonds at the end of the current
year was $1,020,000. At what amount should Barton report the bonds in its balance sheet at the
end of the current year?
a. $ 900,000
b. $ 950,000
c. $ 1,000,000
d. $ 1,020,000 (R/12, FAR, #36, 89736)
37. The funded status of a defined benefit pension plan for a company should be reported in
a. The income statement
b. The statement of cash flows
c. The statement of financial position
d. The notes to the financial statements only (R/12, FAR, #37, 89737)
38. Martin Pharmaceutical Co. is currently involved in two lawsuits. One is a class-action suit in which
consumers claim that one of Martins best selling drugs caused severe health problems. It is
reasonably possible that Martin will lose the suit and have to pay $20 million in damages. Martin is
suing another company for false advertising and false claims against Martin. It is probable that
Martin will win the suit and be awarded $5 million in damages. What amount should Martin report
on its financial statements as a result of these two lawsuits?
a. $0
b. $ 5 million income
c. $15 million expense
d. $20 million expense (R/12, FAR, #38, 89738)
39. Wood Co.s dividends on noncumulative preferred stock have been declared but not paid. Wood
has not declared or paid dividends on its cumulative preferred stock in the current or the prior year
and has reported a net loss in the current year. For the purpose of computing basic earnings per
share, how should the income available to common stockholders be calculated?
a. The current-year dividends and the dividends in arrears on the cumulative preferred stock should
be added to the net loss, but the dividends on the noncumulative preferred stock should not be
included in the calculation.
b. The dividends on the noncumulative preferred stock should be added to the net loss, but the
current-year dividends and the dividends in arrears on the cumulative preferred stock should
not be included in the calculation.
c. The dividends on the noncumulative preferred stock and the current-year dividends on the
cumulative preferred stock should be added to the net loss.
d. Neither the dividends on the noncumulative preferred stock nor the current-year dividends and
the dividends in arrears on cumulative preferred stock should be included in the calculation.
(R/12, FAR, #39, 89739)


40. The fair value for an asset or liability is measured as
a. The appraised value of the asset or liability
b. The price that would be paid to acquire the asset or received to assume the liability in an orderly
transaction between market participants
c. The price that would be received when selling an asset or paid when transferring a liability in an
orderly transaction between market participants
d. The cost of the asset less any accumulated depreciation or the carrying value of the liability on
the date of the sale (R/12, FAR, #40, 89740)
41. Hudson Corp. operates several factories that manufacture medical equipment. The factories have
a historical cost of $200 million. Near the end of the companys fiscal year, a change in business
climate related to a competitors innovative products indicated to Hudsons management that the
$170 million carrying amount of the assets of one of Hudsons factories may not be recoverable.
Management identified cash flows from this factory and estimated that the undiscounted future
cash flows over the remaining useful life of the factory would be $150 million. The fair value of the
factorys assets is reliably estimated to be $135 million. The change in business climate requires
investigation of possible impairment. Which of the following amounts is the impairment loss?
a. $15 million
b. $20 million
c. $35 million
d. $65 million (R/12, FAR, #41, 89741)
42. On January 1, year 1, Peabody Co. purchased an investment for $400,000 that represented 30%
of Newman Corp.s outstanding voting stock. For year 1, Newman reported net income of $60,000
and paid dividends of $20,000. At year end, the fair value of Peabodys investment in Newman
was $410,000. Peabody elected the fair value option for this investment. What amount should
Peabody recognize in net income for year 1 attributable to the investment?
a. $ 6,000
b. $ 10,000
c. $ 16,000
d. $ 18,000 (R/12, FAR, #42, 89742)
43. On June 19, Don Co., a U.S. company, sold and delivered merchandise on a 30-day account to
Cologne GmbH, a German corporation, for 200,000 euros. On July 19, Cologne paid Don in full.
Relevant currency exchange rates were:
June 19 July 19
Spot rate $988 $ 995
30-day forward rate 990 1,000
What amount should Don record on June 19 as an account receivable for its sale to Cologne?
a. $197,600
b. $198,000
c. $199,000
d. $200,000 (R/12, FAR, #43, 89743)



44. On June 1 of the current year, a company entered into a real estate lease agreement for a new
building. The lease is an operating lease and is fully executed on that day. According to the terms
of the lease, payments of $28,900 per month are scheduled to begin on October 1 of the current
year and to continue each month thereafter for 56 months. The lease term spans five years. The
company has a calendar year end. What amount is the companys lease expense for the current
calendar year?
a. $ 86,700
b. $ 161,838
c. $ 188,813
d. $ 202,300 (R/12, FAR, #44, 89744)
45. On March 21, year 2, a company with a calendar year end issued its year 1 financial statements.
On February 28, year 2, the companys only manufacturing plant was severely damaged by a storm
and had to be shut down. Total property losses were $10 million and determined to be material.
The amount of business disruption losses is unknown. How should the impact of the storm be
reflected in the companys year 1 financial statements?
a. Provide no information related to the storm losses in the financial statements until losses and
expenses become fully known
b. Accrue and disclose the property loss with no accrual or disclosure of the business disruption
loss
c. Do not accrue the property loss or the business disruption loss, but disclose them in the notes
to the financial statements
d. Accrue and disclose the property loss and additional business disruption losses in the financial
statements (R/12, FAR, #45, 89745)
46. On January 1, Fonk City approved the following general fund resources for the new fiscal period:
Property taxes $5,000,000
Licenses and permits 400,000
Intergovernmental revenues 150,000
Transfers in from other funds 350,000
What amount should Fonk record as estimated revenues for the new fiscal year?
a. $5,400,000
b. $5,550,000
c. $5,750,000
d. $5,900,000 (R/12, FAR, #46, 89746)
47. Which of the following is one of the three standard sections of a governmental comprehensive
annual financial report?
a. Investment
b. Actuarial
c. Statistical
d. Single audit (R/12, FAR, #47, 89747)
48. A government makes a contribution to its pension plan in the amount of $10,000 for year 1. The
actuarially determined annual required contribution for year 1 was $13,500. The pension plan paid
benefits of $8,200 and refunded employee contributions of $800 for year 1. What is the pension
expenditure for the general fund for year 1?
a. $ 8,200
b. $ 9,000
c. $ 10,000
d. $ 13,500 (R/12, FAR, #48, 89748)


49. On January 1, Read, a nongovernmental not-for-profit organization, received $20,000 and an
unconditional pledge of $20,000 for each of the next four calendar years to be paid on the first day
of each year. The present value of an ordinary annuity for four years at a constant interest rate of
8% is 3.312. What amount of restricted net assets is reported in the year the pledge was received?
a. $ 66,240
b. $ 80,000
c. $ 86,240
d. $ 100,000 (R/12, FAR, #49, 89749)
50. Which of the following financial categories are used in a nongovernmental not-for-profit organiza-
tions statement of financial position?
a. Net assets, income, and expenses
b. Income, expenses, and unrestricted net assets
c. Assets, liabilities, and net assets
d. Changes in unrestricted, temporarily restricted, and permanently restricted net assets
(R/12, FAR, #50, 89750)
__________________
Problem 3 Simulation 1
JRM Co. is in the process of closing its books for the year ended December 31, year 2.
The following business events are not properly reflected in JRMs December 31, year 2, unadjusted trial
balance:
1. The controller determined that half of the recorded rent expense is attributable to year 3.
2. JRM depreciates its property, plant and equipment using the straight-line method over 10 years. The
property, plant and equipment had an original cost of $20,000 and a salvage value of $5,000.
3. JRM uses the percentage-of-sales method to determine the addition to bad debt expense. Uncol-
lectible accounts receivable for year 2 was estimated to be 0.25%.
4. On December 31, year 2, a customer declared bankruptcy and its account receivable of $855 is
uncollectible.
5. Life insurance premiums for the period ended December 31, year 2, of $650 for key members of man-
agement are included in prepaid expense.
6. Interest of $300 was earned and outstanding on notes receivable during year 2. The note receivable
is due at the end of year 5.
7. Income taxes for year 2 are estimated to be $3,000.
Based on the business events above, calculate the adjustments necessary to JRMs unadjusted trial bal-
ance by entering the appropriate debit and credit amounts in columns D and E, respectively. Enter the
debit adjustments as positive values and credit adjustments as negative values.



A B C D E F
1 Account name
Trial balance
debit
Trial balance
(credit)
Adjustment
debit
Adjustment
(credit)
Adjusted
trial balance
debit/(credit)
balance
2 Cash 1,000 0
3 Interest receivable 0 0
4 Accounts receivable 25,000 0
5 Allowance for doubtful
accounts

0

(2,500)

6 Prepaid expenses 1,000 0
7 Property, plant and
equipment

20,000

0

8 Accumulated depreciation
property, plant and
equipment

0

(10,000)

9 Notes receivable 20,000 0
10 Accounts payable 0 (33,000)
11 Taxes payable 0 (1,000)
12 Equity
0 (1,500)
13 Sales 0 (300,000)
14 Cost of goods sold 195,000 0
15 Salaries, office, and
general expenses

75,000

0

16 Rent expense 10,000 0
17 Tax expense 1,000 0
18 Bad debt expense 0 0
19 Depreciation expense 0 0
20 Insurance expense 0 0
21 Interest income 0 0
22 348,000 (348,000)

(R/12, FAR, 9088)



Problem 3 SIMULATION 2
For each situation below, record the appropriate journal entry for Richter Corp.
Assume the company uses the straight-line method for amortization and depreciation and that all amorti-
zation and depreciation is recorded on December 31 of each year. Richter uses separate general ledger
accounts to record accumulated amortization for each intangible asset.
To prepare each entry:
Select from the list provided the appropriate account name. If no entry is needed, select No entry
required. An account may be used once or not at all for each entry.
Enter the corresponding debit or credit amount in the appropriate column.
Round all amounts to the nearest dollar.
All rows may not be required to complete each entry.
Account Title Choices
Accumulated amortization-patent Investment
Accumulated depreciation Legal expense
Amortization expense Patents
Cash Prepaid patent expense
Depreciation expense Research & Development expense
Equipment Trademark
Goodwill No entry required
Goodwill impairment loss

A B C
1 April 1, year 1:
Richter purchased a patent with a 10-year life for $50,000 from DD Co. DD incurred costs of $35,000
developing the patent. Prepare the journal entry, if any, to record the patent.
2 Account name Debit Credit
3
4
5
6

7 July 1, year 1:
Richter purchased scientific equipment used in product development studies having potential alter-
native uses for future products. The equipment cost $75,000 and the company paid an additional
$4,000 for delivery. The equipment has an estimated useful life of 5 years. Prepare the journal
entry, if any, to record the purchase of the equipment.
9
10
11
12


13 October 1, year 1:
Richter received an unfavorable judgment in defense of a trademark and paid $25,000 in fees to
their law firm. Prepare the journal entry, if any, to record the legal fees.
15
16
17
18

19 December 31, year 1:
Prepare the journal entry, if any, to account for the patent purchased on April 1, year 1.
21
22
23
24

Prepare the journal entry, if any, to account for the scientific equipment purchased on July 1, year 1.
27
28
29
30

Richter had previously recorded $300,000 of goodwill related to an acquisition. At December 31,
year 1, the carrying value of the identifiable net assets acquired exceeded their fair value by
$50,000. The implied fair value of the goodwill was $310,000. Prepare the journal entry, if any, to
adjust the carrying value of goodwill.
33
34
35
36

(R/12, FAR, 9089)



Problem 3 SIMULATION 3: RESEARCH
ABC Corp., an issuer, is planning to implement an employee share purchase plan. Substantially all
employees that meet the limited employment qualifications may participate on an equitable basis. Which
section of the authoritative guidance best outlines the criteria that allow a company to provide a share
purchase plan that does not require compensation cost to be recognized?
Enter your response in the answer fields below. Unless specifically requested, your response should not
cite implementation guidance. Guidance on correctly structuring your response appears above and below
the answer fields.
FASB ASC:
- - -
(R/12, FAR, 9090)
__________________
Solution 1 MULTIPLE-CHOICE ANSWERS (medium)
1. (c) Gross profit is the excess of sales over cost of goods sold. It does not consider all operating
expenses. ($500,000 $100,000 = $400,000) (Chapter 1-3-3, CSO: 1.3.2)
2. (c) Items that previously were included in the equity section as a separate component of owners
equity are required to be reported in other comprehensive income. OCI must be classified by their nature,
in one of these categories: foreign currency items, pension adjustments, unrealized gains and losses on
certain investments in debt and equity securities, and gains and losses on cash flow hedging derivative
instruments. Only the unrealized holding loss on AFS securities of $17,000 qualifies as an item of OCI.
(Chapter 11-3-2, CSO: 1.3.3)
3. (b) Accounts Payable decreased by $100,000 (from $300,000 to $200,000). That means Baler
paid $100,000 more for goods than it actually purchased. Since Baler purchased $1,150,000 ($150,000 +
$1,200,000 $200,000), total cash paid to suppliers for inventory purchases must have been $1,250,000
($1,150,000 + $100,000). (Chapter 14-1-3, CSO: 1.3.5)
4. (a) Cash flows from operating activities include the cash effects of transactions and other events
that enter into the determination of net income, including the gain on sale of plant assets. The sale of fixed
assets is an investing activity. The payment of dividends and the issuance of common stock are financ-
ing activities. (Chapter 14-2-1, CSO: 1.3.5)
5. (b) The allowance account has an ending balance of $55,000. Prior to the bad debt adjustment,
the allowance balance is $35,000 [$70,000 $35,000 in write offs], so an adjustment to bad debt expense
and the allowance account for $20,000 is required. (Chapter 2-2-2, CSO: 2.2.0)
6. (c) Future economic benefits deriving from R&D activities are uncertain in their amount and timing;
therefore, most R&D costs are expensed in the year incurred. Legal fees for both the license application
and successful defense of the patent are capitalized because they offer probable future benefits. They
are amortized over the remaining useful life of the patent. Atla should capitalize $90,000 ($40,000 +
$50,000). (Chapter 5-1-2, CSO: 2.6.0)
7. (a) When the redeemable gift certificates are sold, the sales price collected represents unearned
revenue and an unearned revenue account is credited (i.e., increased). As the certificates are redeemed,
the earned revenue is recognized, decreasing the unearned portion. Lapsed certificates would also
decrease unearned revenue, but would increase Gain on Lapsed Certificates rather than Revenue
account. In either case, the Deferred Revenue account is decreased. (Chapter 7-1-6, CSO: 2.8.0)
8. (a) The effect of the amortization entry is to increase the carrying value of the bonds. Since the
carrying amount is $363,600, the amount that Vole received upon issuing the bonds would be less the
amortized discount of $3,600, or $360,000. (Chapter 6-2-3, CSO: 2.9.2)


9. (d) Serial bonds are bonds issued at the same time but having different maturity dates. These
are also called installment bonds because they provide a series of installments for repayment of principal.
Debenture bonds are unsecured bonds; they are not supported by a lien or mortgage on specific assets,
but they mature at the same time. Term bonds all mature on a specified date. Variable rate bonds have
a fluctuating interest rate, but mature at the same time. (Chapter 6-4-1, CSO: 2.9.2)
10. (b) For basic EPS, weighted average common stock outstanding includes shares outstanding the
entire period, shares issued during the period, and shares where all of the conditions of issuance have
been met. Issuance of stock and reacquisition of stock during the period are prorated for the period
outstanding. Stock dividends, stock splits, and reverse stock splits change the total number of shares
outstanding but not the proportionate shares outstanding. Therefore, stock dividends, stock splits, and
reverse stock splits are reflected retroactively for all periods presented. (Chapter 16-3-2, CSO: 3.6.0)
Total Shares
Outstanding

Months
Outstanding

Stock
Dividend

Weighted
Average
100,000 3/12 1.05 = 26,250
130,000 2/12 1.05 = 22,750
166,000 1/12 1.05 = 14,525
174,300 2/12 = 29,050
139,300 4/12 = 46,433
139,008

11. (c) The cost of services received from employees in exchange for awards of share-based com-
pensation generally shall be measured based on the grant-date fair value of the options. The account
Stock Options Outstanding is increased on the grant date. The subsequent exercising, forfeiture, or laps-
ing of the stock options reduces this account. (Chapter 9-5-3 CSO: 2.13.5)
January 1, Year 1
Deferred Compensation Cost (option/compensation value at grant date) 300,000
Stock Options Outstanding 300,000

December 31, Year 1, 2, 3
Wages and Compensation Expense 100,000
Deferred Compensation Cost 100,000

12. (a) An asset retirement obligations (ARO) must be recorded at fair value in the accounting period
in which it occurs and in which its amount can be reasonably measured. AROs incur depreciation and
accretion expenses each year. Accretion expense is offset with an increase to the liability account, and,
at the end of the assets life, the liability account will have a balance equal to the amount needed to settle
the retirement obligation. Accretion expense is calculated by multiplying the balance of the recorded
liability by the companys credit-adjusted discount rate each year, so the amount of accretion expense for
the year is $10,000 ($100,000 15%). (Chapter 7-2-5, CSO: 3.2.0)
13. (c) Where the loss is considered reasonably possible, no charge should be made to income but
the nature of the contingency should be disclosed. This treatment also applies to probable losses that
cannot be reasonably estimated. (Chapter 7-1-5, CSO: 3.5.0)
14. (a) Jones should report 105,000 shares outstanding (50,000 shares 1.05 2). (Chapter 9-4-6,
CSO: 2.10.0)
15. (c) A transaction that is unusual in nature or infrequent in occurrence, but not both, is reported as
a component of income from continuing operations. A transaction must be both unusual in nature and
infrequent in occurrence to be classified as an extraordinary item. The nature and financial effects of an
unusual item or an infrequently occurring item should be disclosed on the face of the income statement,
or alternatively, in the notes to the financial statements. (Chapter 11-2-2, CSO: 3.8.0)


16. (b) The income approach uses valuation techniques to convert/discount future amounts to a
single present amount. The measurement is based on the value indicated by current market expectations
about those future amounts. The market approach uses prices and other relevant information generated
by market transactions involving identical or comparable assets or liabilities. The cost approach is based
on the amount that currently would be required to replace the service capacity of an asset, often referred
to as the current replacement cost. Observable inputs are inputs for the valuation technique; they are not
a technique in and of themselves. (Chapter 1-2-4, CSO: 3.9.0)
17. (c) Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. It is assumed that the transac-
tion would occur in the principle market for the asset or liability, or in the absence of such, the most
advantageous market for the asset or liability. The most advantageous market is the market with the price
that maximizes the amount that would be received for the asset or minimizes the amount that would be
paid to transfer the liability. In determining the most advantageous market, transaction costs must be netted
against the price of the asset. The fair value price is not adjusted for incremental direct transaction costs.
Market A would yield a net $925 ($1,000-$75) while Market B would yield $900 ($1,050-$150), so Market A
is the most advantageous, and the fair value of the asset would be $1,000. (Chapter 1-2-4, CSO: 3.9.0)
18. (b) Materials, equipment, facilities, or intangibles that are acquired for a current R&D project and
have no alternative future use in other R&D projects should be expensed in the period in which acquired.
If alternative future uses are expected, whether in other R&D activities or in normal operations, these
items should be recorded as assets and the cost should be amortized over their useful lives by periodic
charges to R&D expense. If, at any point, these assets are no longer deemed to have alternative future
uses, the remaining unamortized cost is charged to R&D expense for the period. Depreciation expense
would be $20,000 ($100,000 / 5 years). (Chapter 5-2-2, CSO: 3.18.0)
19. (a) Research activities are those aimed at the discovery of knowledge that will be useful in devel-
oping or significantly improving products or processes. Development activities are those concerned with
translating research findings and other knowledge into plans or designs for new or significantly improved
products or processes. Since future economic benefits deriving from R&D activities are uncertain in their
amount and timing, most R&D costs are required to be charged to expense the year in which incurred.
(Chapter 5-2-3, CSO: 3.18.0)
20. (a) Enterprise funds are used to account for a governments business-type operations that are
financed and operated like private businesseswhere the governments intent is that all costs of provid-
ing goods or services to the general public are to be recovered primarily through user charges (operating
revenue). Permanent funds are used to account for and report resources that are restricted to the extent
that only earnings, and not principal, may be used for purposes that support the reporting governments
programs. Internal service funds are used to account for in-house business enterprise activities; that is,
to account for the financing of goods or services provided by one government department or agency to
other departments or agencies of the government. Special revenue funds are used to account for and
report the proceeds of specific revenue sources that are restricted or committed to expenditure for speci-
fied purposes other than debt service or capital projects. (Chapter 19-3-3, CSO: 4.1.2)
21. (c) Enterprise funds must be used to account for a governments business-type operations that
are financed and operated like private businesseswhere the governments intent is that all costs of pro-
viding goods or services to the general public on a continuing basis are to be recovered primarily through
user charges (operating revenue). Enterprise funds use normal accrual accounting. Compensated
absence expense is $425,000 ($400,000 + $150,000 $125,000). (Chapter 18-3-3, CSO: 4.2.3)
22. (c) Fiduciary funds are used to account for a governments fiduciary or stewardship responsibili-
ties as an agent (agency funds) or trustee (trust funds) for other governments, funds, organizations, and/
or individuals. Fiduciary funds cannot be used for any general programs of the primary government.
Fiduciary funds are included in fund financial statements but not in the government-wide statements, and
include: pension trust funds; investment trust funds; private purpose trust funds; and agency funds.
Special revenue and permanent funds are governmental funds. Internal service funds are proprietary
funds. (Chapter 18-4-4, CSO: 4.2.4)


23. (a) A recipient that accepts assets from a donor on behalf of a specified beneficiary recognizes
the fair value of those assets as a liability concurrent with the recognition of the assets. Therefore, both
assets and liabilities will increase as a result of the pledged funds. (Chapter 20-1-4, CSO: 5-2-1)
24. (a) Generally, contributions received are measured at their fair values and recognized as reve-
nues or gains in the period received and as assets, decreases of liabilities, or expenses depending on the
form of the benefits received. They shall be reported as restricted support or unrestricted support. Ragg
should report $15,000 in its statement of financial position. (Chapter 20-1-5, CSO: 5-2-1)
25. (c) Entities are required to classify net assets based upon the existence or absence of donor-
imposed restrictions. Net assets are classified into three categories: permanently restricted, temporarily
restricted, and unrestricted. Contributions with donor-imposed restrictions are reported as restricted
support. Restricted support increases permanently restricted net assets or temporarily restricted net
assets. Since the restrictions will be met in year 3, the $15,000 is considered temporarily restricted.
(Chapter 20-1-3, CSO: 5-2-2)
__________________
Solution 2 MULTIPLE-CHOICE ANSWERS (hard)
26. (d) Fundamental qualitative characteristics of information are relevance and faithful representa-
tion. Information is relevant if it is capable of making a difference in a decision by helping users to form
predictions about the outcomes of past, present, and future events or to confirm or correct prior expecta-
tions. Components of relevance are predictive value, confirmatory value, or both. Information is faithfully
represented if it represents what it purports to represent. Components of faithful representation are that it
is complete, neutral, and free from error. Reliability exists when information represents what it purports to
represent, coupled with an assurance for the user that it has representational faithfulness. Timeliness is
an enhancing qualitative characteristic. Neutrality is free from bias. (Chapter 1-6-5, CSO: 1.2.1)
27. (a) Cash flows from investing activities include (1) making and collecting loans (excluding those
acquired specifically for resale), (2) acquiring and disposing of property, plant and equipment, and other
productive assets, and (3) purchases, sales, and maturities of debt and equity securities (excluding those
acquired specifically for resale. Borrowing money and repaying amounts borrowed, or otherwise settling
the obligation represents cash flows from financing activities. Polk should report $3,000 in investing
activities, and $27,000 in financing activities. (Chapter 14-2-2, CSO: 1.3.5)
28. (b) There are three categories of filers: (1) non-accelerated filers, (2) accelerated filers, and
(3) large accelerated filers. Non-accelerated filers are issuers that have a public float of less than $75
million. Accelerated filers are issuers that have a public float of at least $75 million but less than $700
million. Large accelerated filers must file the Form 10-Q with the SEC within 40 days after the end of the
companys fiscal year. Large accelerated filers are issuers that have a public float of $700 million or
more. (Chapter 17-7-4, CSO: 1.4.0)
29. (b) Net plan assets include amounts contributed by the employer (and by employees for a con-
tributory plan) and amounts earned from investing the contributions, less benefits paid. The net change
in the actuarial present value of accumulated plan benefits is not part of net plan assets. (Chapter 8-8-1,
CSO: 1.5.5)
30. (d) The journal entry to record the write-off of an account is as follows:
Allowance for Uncollectible Accounts XX
Accounts ReceivableJoe Doe XX

This entry would decrease both accounts receivable and allowance for uncollectible accounts; however, it
would have no impact on net income or total assets. (Chapter 2-2-2, CSO: 2.2.0)



31. (c) Valuation of inventory items is required at the lower of cost or replacement cost (commonly
referred to as market). Market cannot exceed the net realizable value (ceiling) of the good (i.e., selling
price less expected costs to sell), and market should not be less than this net realizable value reduced by
an allowance for a normal profit margin (floor). In this problem, the replacement cost exceeds net realiz-
able value, so market is defined as NRV. Since the original cost is greater than defined market, the item
will be carried at the lower of market/NRV amount. (Chapter 3-2-4, CSO: 2.3.0)
32. (c) Cost of goods sold will be two-thirds of the goods shipped (including two-thirds of the freight),
but all of the advertising and commission will be deducted from gross profit to determine net profit.
(Chapter 3-2-2, CSO: 2.3.0)
Revenue $ 80,000
Less: Cost of consigned goods $ 72,000
Plus Freight for consigned goods 7,500
Total cost of consigned goods $ 79,500
Percentage sold 67%
Cost of Goods Sold (rounded) (53,000)
Gross Profit $ 27,000
Less advertising (4,500)
Less commission (8,000)
Net Profit $ 14,500

33. (c) Under IFRS, inventory is carried at the lower of cost or net realizable value (best estimate of
the net amounts inventories are expected to realize). This amount may or may not equal fair value. The
net realizable value of $6.00 is lower than the historical cost of $10.00. (Chapter 17-3-6, CSO: 2.3.0)
34. (c) The cost of assets constructed for the use of the business should include all directly related
costs; cost of direct materials, cost of direct labor, additional overhead incurred, and interest costs incurred
during the construction period. If the average accumulated expenditures of an asset exceed the amount
of any specific borrowings associated with the asset, the excess should be capitalized at the weighted
average of interest rates applicable to other borrowings of the business. (Chapter 4-2-1, CSO: 2.4.0)
Average expenditure during year)
$200,000 2/12 $200,000
600,000 8/12 400,000
300,000 1/12 25,000
Average expenditures $625,000

Specific borrowings 500,000 12% $60,000
Excess expenditures 125,000 10% 12,500
Total capitalized interest $72,500

35. (a) Convertible bonds provide the bondholder the option of converting the bond to capital stock,
typically common stock. Using the book value method, the conversion of the bonds into common stock is
generally recorded by crediting the paid-in capital accounts for the carrying amount of the debt at the date
of the conversion, less any cost associated with the conversion. The carrying amount of the bonds on the
date of conversion is the $775,000 face value less the $23,000 unamortized discount. The journal entry
would be: (Chapter 6-4-3, CSO: 2.9.3)
Bonds Payable 775,000
Bond Discount 23,000
Common Stock (90,000 $5 par) 450,000
APIC (to balance) 302,000

36. (d) Trading securities are debt and equity securities that are bought and held principally for the
purpose of selling them in the near term to generate profits on short-term differences in price. They are
reported at fair value. Unrealized holding gains and losses are included in current earnings for trading
securities. Barton should report the investment at the fair value of $1,020,000. (Chapter 2-5-3, CSO: 2.5.1)


37. (c) The funded-status amount is measured as the difference between the fair value of plan assets
and the benefit obligation, with the benefit obligation including all actuarial gains and losses, prior service
cost, and any remaining transition amounts. If the benefit obligation is larger than the fair value of plan
assets, the plan is underfunded, and a net liability is reported. Conversely, if the fair value of the plan
assets is larger, the plan is overfunded, and a net asset is reported on the statement of financial position
(i.e., balance sheet). (Chapter 8-8-2, CSO: 2.13.4)
38. (a) Reasonably possible means more than remote, but less than probable. Where the loss is
considered reasonably possible, no charge should be made to income but the nature of the contingency
should be disclosed. This treatment also applies to probable losses that cannot be reasonably estimated.
Gain contingencies should be disclosed but not recognized as income. Care should be taken to avoid
misleading implications as to the likelihood of realization. Therefore, Martin should report $0 on its finan-
cial statements, but disclose both events in the notes. (Chapter 7-1-5, CSO: 3.5.0)
39. (c) The numerator for basic EPS is fairly simple to determine. The income number used for basic
EPS is income from continuing operations adjusted for the claims by senior securities. Senior security
claims generally refer to preferred stock and are adjusted in the period earned. All preferred stock divi-
dends declared reduce income to arrive at IAC. Cumulative preferred stock dividends of the current
period, even though not declared, also reduce income to arrive at IAC. Both the dividends on the noncu-
mulative preferred stock and the current-year dividends on the cumulative preferred stock should be
added to the net loss. (Chapter 16-3-2, CSO: 3.6.0)
40. (c) Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date, conceptually an exit price.
(Chapter 5-2-4, CSO: 3.9.0)
41. (c) A long-lived asset shall be tested for recoverability whenever events or changes in circum-
stances indicate that its carrying amount may not be recoverable. Impairment is the condition that exists
when the carrying amount of a long-lived asset, or asset group, exceeds its fair value. An impairment
loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds
its fair value. The carrying amount (book value) is not recoverable if it exceeds the sum of the undis-
counted cash flows expected to result from the use and eventual disposition of the asset. The amount of
an impairment loss is the difference between an assets book and fair value. The new book value is used
as a basis for depreciation. Since the carrying amount of $170,000 exceeds the undiscounted cash flows
of $150,000 an impairment loss must be recognized. The $35,000 impairment loss is the difference
between the book value of $170,000 and the fair value of $135,000. (Chapter 4-4-1, CSO 3.12.0)
42. (c) Entities may choose to measure eligible items at fair value (the fair value option) that are not
currently required to be measured at fair value. The decision to elect the fair value option is applied instru-
ment by instrument, is irrevocable, and is applied only to an entire instrument. A business entity shall
report unrealized gains and losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. The Investment in Newman would be increased by 30% of the net
income and decreased by 30% of the dividends, resulting in a year end carrying amount of $412,000
($400,000 + 18,000 6,000). Since the fair value was $410,000, Peabody had an unrealized loss of
$2,000. This loss is netted against the investment income previously recognized of $18,000 for a $16,000
net income impact. Dividends do not affect net income (they reduce the Investment account). (Chapter
1-2-5, CSO: 3.9.0)
43. (a) At the date a transaction is recognized, each asset, liability, revenue, expense, gain, or loss
arising from a foreign currency transaction should be measured and recorded in the functional currency of
the recording entity by use of the exchange rate (i.e., spot rate) in effect at that date. Don Co should
record an account receivable of $197,600 on June 19 (200,000 .988). (Chapter 12-5-4, CSO: 3.11.0)
44. (c) Under operating leases, lessees recognize rent as expense over the lease term in a systematic
and rational. The lease term is five years, or 60 months. Total lease payments are $1,618,400 ($28,900
56 months). This expense is allocated on a straight line basis over the 60-month term. Seven months
expense should be recognized, or $188,813 ($26,973.33 7). (Chapter 8-3-2, CSO: 3.14.0)


45. (c) An entity shall not recognize subsequent events that provide evidence about conditions that
did not exist at the date of the balance sheet but arose after the balance sheet date but before financial
statements are issued or are available to be issued. Some nonrecognized subsequent events may be of
such a nature that they must be disclosed to keep the financial statements from being misleading. Since
property losses were of a material nature, the entity should disclose the nature of the event and an esti-
mate of its financial effect or a statement that such an estimate cannot be made. (Chapter 12-1-3, CSO:
3.22.0).
46. (b) Revenues are recorded as received in cash except for revenues susceptible to accrual and
revenues of a material amount that have not been received at the normal time of receipt. Revenues are
considered susceptible to accrual at the time they become measurable and available for use (e.g., when
the tax is levied). Available means collected or collectible within the current period or early enough in the
next period (e.g., within 60 days or so) to be used to pay for expenditures incurred in the current period
(for example, property taxes). General fund revenues primarily consist of taxes (property, sales, income,
and excise), licenses, fines, and interest. Transfers are nonreciprocal shifts of resources among funds
and are not intended to be repaid. Transfers are reported after revenues and expenditures, as they affect
operating results, but they are recorded separately and are not part of estimated revenues. Therefore,
Fonk should record estimated revenues of $5,550,00 ($5,000,000 + 400,000 + 150,000). (Chapter 18-2-1,
CSO: 4.1.3)
47. (c) The comprehensive annual financial report contains the following sections: Introduction
Section; Financial Section; and the Statistical Section. (Chapter 19-2-9, CSO: 4.2.8)
48. (c) The annual pension cost differs from the pension expenditure/expense reported in the financial
statements. The annual pension cost is the period cost of an employers participation in a defined benefit
pension plan. The pension expenditure/expense is the amount recognized by an employer in each
accounting period for contributions to a pension plan. Therefore, the $10,000 contribution represents the
pension expenditure for year 1.
49. (a) Contributions received are measured at their fair values and recognized as revenues or gains
in the period received. Receipts of unconditional promises to give, or pledges, are reported as a receiv-
able at their present value in the period in which they are made, net of an allowance for uncollectible
amounts. If part of the pledge is to be applied during some future period, that part is reported as restricted
revenue. Therefore, Read should report $66,240 (3.312 $20,000) of restricted net assets. (Chapter 20-
1-3, CSO: 5.2.1)
50. (c) Entities report assets, liabilities, and net assets in the statement of financial position. Entities
are required to classify net assets based upon the existence or absence of donor-imposed restrictions.
Thus, net assets are classified into at least three categories: permanently restricted, temporarily restricted,
and unrestricted. (Chapter 20-2-2, CSO: 5.1.1)
__________________



Solution 3 SIMULATION 1 ANSWER
A B C D E F
1 Account name
Trial balance
debit
Trial balance
(credit)
Adjustment
debit
Adjustment
(credit)
Adjusted
trial balance
debit/(credit)
balance
2 Cash 1,000 0 1,000
3 Interest receivable 0 0 300 300
4 Accounts receivable 25,000 0 (855) 24,145
5 Allowance for doubtful
accounts

0

(2,500)

855

(750)

(24,145)
6 Prepaid expenses 1,000 0 5,000 (650) 5,350
7 Property, plant and
equipment

20,000

0

20,000
8 Accumulated depreciation
property, plant and
equipment

0

(10,000)

(1,500)

(11,500)
9 Notes receivable 20,000 0 20,000
10 Accounts payable 0 (33,000) (33,000)
11 Taxes payable 0 (1,000) (2,000) (3,000)
12 Equity 0 (1,500) (1,500)
13 Sales 0 (300,000) (300,000)
14 Cost of goods sold 195,000 0 195,000
15 Salaries, office, and
general expenses

75,000

0

75,000
16 Rent expense 10,000 0 (5,000) 5,000
17 Tax expense 1,000 0 2,000 3,000
18 Bad debt expense 0 0 750 750
19 Depreciation expense 0 0 1,500 1,500
20 Insurance expense 0 0 650 650
21 Interest income 0 0 (300) (300)
22 348,000 (348,000) 11,055 (11,055) 0

Explanations:
1. Half the rent expense is attributable to next year. Therefore, $5,000 ($10,000 50%) prepaid rent
should be recorded.
Prepaid Expenses 5,000
Rent Expense 5,000

2. Straight line depreciation is cost less salvage value, if any. Depreciation expense of $1,500
[($20,000 5,000) / 10 years] should be posted to the trial balance:
Depreciation Expense 1,500
Accumulated Depreciation-PPE 1,500



3. Under the percentage-of-sales method, bad debt expense is computed as a percentage of net
credit Sales, regardless of any balance in Allowance for Doubtful Accounts. Bad debt expense of $750
($300,000 .0025) should be recognized.
Bad Debt Expense 750
Allowance for Doubtful Accounts 750

4. Regardless of the allowance method used to estimate uncollectible receivables, the following journal
entry should be made to record accounts written off during the period. This entry has no effect on net
income, net accounts receivable, current assets, or working capital.
Allowance for Uncollectible Accounts 855
Accounts Receivable 855

5. Companies frequently insure the lives of key executives. The amount to be reported as life insurance
expense for a year is the annual premium paid, less (1) the increase in cash surrender value (CSV) and
(2) any dividends received. Since no information was provided regarding CSV or dividends, life insurance
expense is $650.
Insurance Expense 650
Prepaid Expenses 650

6. Interest receivable is recognized in the year earned.
Interest Receivable 300
Interest Income 300

7. Ending tax expense is $1,000 prior to any adjustments. Since total tax expense for the period should
be $3,000, an additional $2,000 in expense should be recognized.
Tax Expense 2,000
Taxes Payable 2,000

Editors Note: The AICPAs released solutions do not enter the phrase No entry required into unused
rows as required by the AICPA directions. Therefore, these rows, if any, have been left blank as well.
A B C
1 April 1, year 1:
Richter purchased a patent with a 10-year life for $50,000 from DD Co. DD incurred costs of
$35,000 developing the patent. Prepare the journal entry, if any, to record the patent.
3 Patents 50,000
4 Cash 50,000
5
6
Explanation:
A patent represents a special right to a particular product or process that has value to the holder of the
right. Only the external acquisition costs, including items such as legal costs associated with obtaining a
patent on a new product, are capitalized. DD would expense any development costs on their books, not
on Richters books.


7 July 1, year 1:
Richter purchased scientific equipment used in product development studies having potential alter-
native uses for future products. The equipment cost $75,000 and the company paid an additional
$4,000 for delivery. The equipment has an estimated useful life of 5 years. Prepare the journal
entry, if any, to record the purchase of the equipment.
9 Equipment 79,000
10 Cash 79,000
11
12

Explanation:
Materials, equipment, facilities, or intangibles purchased from others that are acquired for a particular R&D
project and have no alternative use in other R&D projects or in normal operations should be expensed in
the period in which acquired. However, these items should be recorded as assets if alternative future
uses are expected, whether in other R&D activities or in normal operations. Acquisition cost is defined as
the cash price, plus all other costs reasonably necessary to bring it to the location and to make it ready for
its intended use. Machinery and equipment charges typically include: transportation, insurance while in
transit, special foundations, installation, and test runs.
13 October 1, year 1:
Richter received an unfavorable judgment in defense of a trademark and paid $25,000 in fees to
their law firm. Prepare the journal entry, if any, to record the legal fees.
15 Legal expense 25,000
16 Cash 25,000
17
18

Explanation:
The cost of a successful legal defense of a trade mark is capitalized. The cost of an unsuccessful defense
is expensed in the period in which an unfavorable court decision is rendered.
Prepare the journal entry, if any, to account for the patent purchased on April 1, year 1.
21 Amortization expense 3,750
22 Accumulated amortization-patent 3,750
23
24

Explanation:
An intangible asset with a finite useful life is amortized; an intangible with an indefinite useful life is not
amortized. The useful life of an intangible asset to an entity is the period over which the asset is expected
to contribute directly or indirectly to the future cash flows of that entity. Amortization expense would be
prorated over the first year: $50,000 / 10 years 9/12 = $3,750.


Prepare the journal entry, if any, to account for the scientific equipment purchased on July 1, year 1.
27 Research and development
expense
7,900
28 Accumulated depreciation 7,900
29
30

Explanation:
Depreciation is the process of allocating the depreciable cost of fixed assets over their estimated useful
lives in a systematic and rational manner. This process matches the depreciable cost of the asset with
revenues generated from its use. Depreciable cost is the capitalized cost less its estimated residual
(salvage) value, if any. Depreciation is prorated over the first year: $79,000 / 5 years 6/12 = $7,900.
Richter had previously recorded $300,000 of goodwill related to an acquisition. At December 31,
year 1, the carrying value of the identifiable net assets acquired exceeded their fair value by
$50,000. The implied fair value of the goodwill was $310,000. Prepare the journal entry, if any, to
adjust the carrying value of goodwill.
33 No entry required
34
35
36

Explanation:
Goodwill impairment testing consists of two steps. The first step used to identify potential goodwill impair-
ment compares a reporting units fair value with its carrying amount, including goodwill. If the carrying
amount exceeds its fair value, as it does in the above item, the second step is performed. The second step
compares the implied fair value of reporting units goodwill (i.e., $310,000) with its carrying amount (i.e.,
$300,000). Since the implied fair value exceeds the carrying amount, no impairment loss is recognized, and
no journal entry is required.
__________________



FASB ASC: 718 - 50 - 25 - 1

Explanation:
25-1 An employee share purchase plan that satisfies all of the following criteria does not give rise to
recognizable compensation cost (that is, the plan is noncompensatory):
a. The plan satisfies either of the following conditions:
1. The terms of the plan are no more favorable than those available to all holders of the same
class of shares. Note that a transaction subject to an employee share purchase plan that
involves a class of equity shares designed exclusively for and held only by current or
former employees or their beneficiaries may be compensatory depending on the terms of
the arrangement.
2. Any purchase discount from the market price does not exceed the per-share amount of
share issuance costs that would have been incurred to raise a significant amount of cap-
ital by a public offering. A purchase discount of 5 percent or less from the market price
shall be considered to comply with this condition without further justification. A purchase
discount greater than 5 percent that cannot be justified under this condition results in
compensation cost for the entire amount of the discount. Note that an entity that justifies
a purchase discount in excess of 5 percent shall reassess at least annually, and no later
than the first share purchase offer during the fiscal year, whether it can continue to justify
that discount pursuant to this paragraph.
b. Substantially all employees that meet limited employment qualifications may participate on an
equitable basis.
c. The plan incorporates no option features, other than the following:
1. Employees are permitted a short period of timenot exceeding 31 daysafter the pur-
chase price has been fixed to enroll in the plan.
2. The purchase price is based solely on the market price of the shares at the date of pur-
chase, and employees are permitted to cancel participation before the purchase date and
obtain a refund of amounts previously paid (such as those paid by payroll withholdings).
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Financial Accounting & Reporting Updating Supplement Version 41.

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