Gleim questions-exam II
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Gleim questions-exam II

Course Number: ACCT 7605, Spring 2007

College/University: UGA

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ACCT 7605 Exam II-Practice Questions Gleim's Exam Questions Test Prep Financial Accounting [Fact Pattern #1]Parma Corp. and Seville Corp. condensed balance sheets on January 1, year 1 are presented below. On January 2, year 1, Parma borrowed $60,000 and used the proceeds to purchase 90% of the outstanding common shares of Seville. Ten equal principal and interest payments begin December 30, year 1. The excess cost...

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7605 ACCT Exam II-Practice Questions Gleim's Exam Questions Test Prep Financial Accounting [Fact Pattern #1]Parma Corp. and Seville Corp. condensed balance sheets on January 1, year 1 are presented below. On January 2, year 1, Parma borrowed $60,000 and used the proceeds to purchase 90% of the outstanding common shares of Seville. Ten equal principal and interest payments begin December 30, year 1. The excess cost of the investment over Sevilles carrying amount of acquired net assets should be allocated 60% to inventory and 40% to goodwill. Parma Seville Current assets $ 70,000 $20,000 Noncurrent assets 90,000 40,000 Total assets $160,000 $60,000 Current liabilities $ 30,000 $10,000 Long-term debt 50,000 -Equity 80,000 50,000 Total liabilities and equity $160,000 $60,000 [1] Gleim #: 25.3.36 -- Source: CPA 1188 I-2 (Refers to Fact Pattern #1) On Parma's January 2, year 1 consolidated balance sheet, current assets should be A. B. C. D. $99,000 $96,000 $90,000 $79,000 [2] Gleim #: 25.3.37 -- Source: CPA 1188 I-3 (Refers to Fact Pattern #1) On Parma's January 2, year 1 consolidated balance sheet, noncurrent assets should be A. B. C. D. $130,000 $134,000 $136,000 $140,000 [3] Gleim #: 25.3.38 -- Source: CPA 1188 I-4 (Refers to Fact Pattern #1) On Parma's January 2, year 1 consolidated balance sheet, current liabilities should be A. B. C. D. $50,000 $46,000 $40,000 $30,000 [4] Gleim #: 25.3.39 -- Source: CPA 1188 I-5 (Refers to Fact Pattern #1) On Parma's January 2, year 1 consolidated balance sheet, noncurrent liabilities, including the minority interest, should be A. B. C. D. $115,000 $109,000 $104,000 $55,000 [5] Gleim #: 25.3.40 -- Source: CPA 1188 I-6 (Refers to Fact Pattern #2) On Parma's January 2, year 1 consolidated balance sheet, equity should be A. B. C. D. $80,000 $85,000 $90,000 $130,000 [6] Gleim #: 25.4.61 -- Source: CPA 593 I-14 Wright Corp. has several subsidiaries that are included in its consolidated financial statements. In its December 31, year 1 trial balance, Wright had the following intercompany balances before eliminations: Debit Credit Current receivable due from Main Co. $ 32,000 Noncurrent receivable from Main 114,000 Cash advance to Corn Corp. 6,000 Cash advance from King Co. $ 15,000 Intercompany payable to King 101,000 In its December 31, year 1 consolidated balance sheet, what amount should Wright report as intercompany receivables? $152,000 $146,000 $36,000 $0 [7] Gleim #: 25.4.65 -- Source: CPA 1193 T-11 Perez, Inc. owns 80% of Senior, Inc. During year 1, Perez sold goods with a 40% gross profit to Senior. Senior sold all of these goods in year 1. In its year 1 consolidated financial statements, how should the summation of Perez and Senior income statement items be adjusted? A. Sales and cost of goods sold should be reduced by the intercompany sales. B. Sales and cost of goods sold should be reduced by 80% of the intercompany sales. C. Net income should be reduced by 80% of the gross profit on intercompany sales. D. No adjustment is necessary. [8] Gleim #: 25.4.66 -- Source: CPA 592 I-11 Parker Corp. owns 80% of Smith, Inc.'s common stock. During year 1, Parker sold Smith $250,000 of inventory on the same terms as sales made to third parties. Smith sold all of the inventory purchased from Parker in year 1. The following information pertains to Smith and Parker's sales for year 1: Parker Smith Sales $1,000,000 $700,000 Cost of sales 400,000 350,000 $ 600,000 $350,000 What amount should Parker report as cost of sales in its year 1 consolidated income statement? A. B. C. D. $750,000 $680,000 $500,000 $430,000 [Fact Pattern #2] Scroll, Inc., a wholly owned subsidiary of Pirn, Inc., began operations on January 1, year 1. The following information is from the condensed year 1 income statements of Pirn and Scroll: Pirn Scroll Sales to Scroll Sales to others $100,000 400,000 $ -300,000 500,000 Cost of goods sold: Acquired from Pirn Acquired from others Gross profit Depreciation Other expenses -350,000 300,000 80,000 190,000 150,000 40,000 60,000 30,000 10,000 15,000 Income from operations Gain on sale of equipment to Scroll Income before income taxes 50,000 12,000 5,000 - $ 38,000 $ 5,000 Additional Information Sales by Pirn to Scroll are made on the same terms as those made to third parties. Equipment purchased by Scroll from Pirn for $36,000 on January 1, year 1 is depreciated using the straight-line method over 4 years. [9] Gleim #: 25.4.67 -- Source: CPA 592 I-8 (Refers to Fact Pattern #2) In Pirn's December 31, year 1 consolidating worksheet, how much intercompany profit should be eliminated from Scroll's inventory? A. B. C. D. $30,000 $20,000 $10,000 $6,000 [10] Gleim #: 25.4.68 -- Source: CPA 592 I-9 (Refers to Fact Pattern #2) What amount should be reported as depreciation expense in Pirn's year 1 consolidated income statement? A. B. C. D. $50,000 $47,000 $44,000 $41,000 [11] Gleim #: 25.4.69 -- Source: CPA 593 I-9 Clark Co. had the following transactions with affiliated parties during year 1: Sales of $50,000 to Dean, Inc., with $20,000 gross profit. Dean had $15,000 of this inventory on hand at year-end. Clark owns a 15% interest in Dean and does not exert significant influence. Purchases of raw materials totaling $240,000 from Kent Corp., a wholly owned subsidiary. Kent's gross profit on the sale was $48,000. Clark had $60,000 of this inventory remaining on December 31, year 1. Before eliminating entries, Clark had consolidated current assets of $320,000. What amount should Clark report in its December 31, year 1 consolidated balance sheet for current assets? A. B. C. D. $320,000 $314,000 $308,000 $302,000 [12] Gleim #: 27.2.22 -- Source: CPA 593 T-34 On October 1, 2003, Velec Co., a U.S. company, contracted to purchase foreign goods requiring payment in local currency units (LCUs) 1 month after the receipt of the goods at Velec's factory. Title to the goods passed on December 15, 2003. The goods were still in transit on December 31, 2003. Exchange rates were one dollar to 22 LCUs, 20 LCUs, and 21 LCUs on October 1, December 15, and December 31, 2003, respectively. Velec should account for the exchange rate fluctuation in 2003 as A. B. C. D. A loss included in net income before extraordinary items. A gain included in net income before extraordinary items. An extraordinary gain. An extraordinary loss. [13] Gleim #: 27.2.23 -- Source: CPA 1193 T-35 On October 1, 2003, Mild Co., a U.S. company, purchased machinery from Grund, a German company, with payment due on April 1, 2004. If Mild's 2003 operating income included no foreign currency transaction gain or loss, the transaction could have A. Resulted in an extraordinary gain. B. Been denominated in U.S. dollars. C. Caused a foreign currency transaction gain to be reported as a contra account against machinery. D. Caused a foreign currency translation gain to be reported in OCI. [14] Gleim #: 27.2.24 -- Source: CMA 1291 2-5 SFAS 52 states that transaction gains and losses have direct cash flow effects when foreign- denominated monetary assets are settled in amounts greater or less than the functional currency equivalent of the original transactions. These transaction gains and losses should be reflected in income A. B. C. D. At the date the transaction originated. On a retroactive basis. In the period the exchange rate changes. Only at the year-end balance sheet date. [15] Gleim #: 27.2.25 -- Source: CPA 1191 T-18 Shore Co. records its transactions in U.S. dollars. A sale of goods resulted in a receivable denominated in Japanese yen, and a purchase of goods resulted in a payable denominated in euros. Shore recorded a foreign currency transaction gain on collection of the receivable and a transaction loss on settlement of the payable. The exchange rates are expressed as so many units of foreign currency to one dollar. Did the number of foreign currency units exchangeable for a dollar increase or decrease between the contract and settlement dates? Yen Exchangeable for $1 A. B. C. D. Increase Decrease Decrease Increase Euros Exchangeable for $1 Increase Decrease Increase Decrease [16] Gleim #: 27.2.27 -- Source: CPA 1191 I-46 On September 1, 2002, Cano & Co., a U.S. corporation, sold merchandise to a foreign firm for 250,000 local currency units (LCUs). Terms of the sale require payment in LCUs on February 1, 2003. On September 1, 2002, the spot exchange rate was $0.20 per LCU. On December 31, 2002, Cano's year-end, the spot rate was $0.19, but the rate increased to $0.22 by February 1, 2003, when payment was received. How much should Cano report as foreign currency transaction gain or loss in its 2003 income statement? A. B. C. D. $0 $2,500 loss. $5,000 gain. $7,500 gain. [17] Gleim #: 27.2.28 -- Source: CPA, adapted On November 2, 2002, Platt Co. entered into a 90-day futures contract to purchase 50,000 Swiss francs when the contract quote was $.70. The pur- chase was for speculation in price movement. The following exchange rates existed during the contract period: 30-day Futures Spot Rate November 2, 2002 December 31, 2002 January 30, 2003 $.62 .65 .65 $.63 .64 .68 What amount should Platt report as foreign currency transaction loss in its income statement for the year ended December 31, 2002? A. B. C. D. $2,500 $3,000 $3,500 $4,000 [18] Gleim #: 27.3.30 -- Source: Publisher According to SFAS 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, the effective portion of a loss associated with a change in fair value of a derivative instrument must be reported as a component of other comprehensive income (OCI) only if the derivative is appropriately designated as a A. Cash flow hedge of the foreign currency exposure of a forecasted transaction. B. Fair value hedge of the foreign currency exposure of an unrecognized firm commitment. C. Fair value hedge of the foreign currency exposure of a recognized asset or liability for which a foreign currency transaction gain or loss is recognized in earnings. D. Speculation in a foreign currency. [19] Gleim #: 27.3.35 -- Source: Publisher On October 1, 2003, Weeks Co., a calendar- year-end U.S. company, forecasts that, near the end of March 2004, Sullivan Corp., a foreign entity, will purchase 50,000 gallons of Weeks's primary product for FC500,000. Sullivan has not firmly committed to the purchase. However, based on Sullivan's purchasing pattern, Weeks believes that the sale is probable. Weeks's risk-management policy includes avoiding foreign currency exposure through the use of foreign currency forward contracts. Thus, on October 1, 2003, Weeks enters into a 6-month foreign currency forward contract to sell FC500,000 to a dealer on March 31, 2004. Weeks designates the contract as a hedge and determines that hedge effectiveness will be based on changes in forward rates. The following information is available: Incremental Discounted Value of Changes in Value of FC500,000 Value of Forward FC500,000 Based on Contract Based Based on Forward Rates on Changes in Spot Rates for 03/31/04 Forward Rates 10/02/03 12/31/03 03/31/04 $570,000 $540,000 $475,000 $500,000 $490,000 $475,000 $ 0 $ 9,800 $15,200 At what amounts should Weeks record the forward contract on December 31, 2003 and March 31, 2004? 12/31/03 A. B. C. D. 03/31/04 $25,000 $25,000 $475,000 $475,000 $9,800 $10,000 $540,000 $490,000 [20] Gleim #: 28.1.1 -- Source: CPA 591 T-51 What body primarily determines the measurement focus and basis of accounting standards for governmental financial statements? A. B. C. D. Governmental Accounting Standards Board. National Council on Governmental Accounting. Governmental Accounting and Auditing Committee of the AICPA. Financial Accounting Standards Board. [21] Gleim #: 28.1.2 -- Source: CPA 595 TMG-52 Governmental financial reporting should provide information to assist users in which situation(s)? I. II. A. B. C. D. Making social and political decisions Assessing whether current-year citizens received services but shifted part of the payment burden to future-year citizens I only. II only. Both I and II. Neither I nor II. [22] Gleim #: 28.1.4 -- Source: Publisher Governmental accounting systems of state and local governmental entities (SLGs) should be organized and operated on which of the following bases? A. B. C. D. Proprietary fund. Fiduciary fund. Governmental fund. Fund. [23] Gleim #: 28.2.5 -- Source: CPA 1187 T-59 A local governmental unit may use which of the following types of funds? Fiduciary A. B. C. D. Proprietary Yes Yes No No No Yes Yes No [24] Gleim #: 28.2.8 -- Source: CPA 1194 TMG-18 In the current year, New City issued purchase orders and contracts of $850,000 that were chargeable against the current year budgeted appropriations of $1,000,000. The journal entry to record the issuance of the purchase orders and contracts should include a A. B. C. D. Credit to vouchers payable of $1,000,000. Credit to reserve for encumbrances of $850,000. Debit to expenditures of $1,000,000. Debit to appropriations of $850,000. [25] Gleim #: 28.2.9 -- Source: CPA 1194 TMG-9 When a snowplow purchased by a governmental unit is received, it should be recorded in the general fund as a(n) A. B. C. D. Encumbrance. Expenditure. General capital asset. Appropriation. [26] Gleim #: 28.2.10 -- Source: CPA 591 T-53 Which of the following amounts are included in a general fund's encumbrances account? I. II. III. A. B. C. D. Outstanding vouchers payable amounts Outstanding purchase order amounts Excess of the amount of a purchase order over the actual expenditure for that order I only. I and III. II only. II and III. [27] Gleim #: 28.2.11 -- Source: CPA 1191 T-53 Gold County received goods that had been approved for purchase but for which payment had not yet been made. Should the accounts listed below be increased? Encumbrances A. B. C. D. No No Yes Yes Expenditures No Yes No Yes [28] Gleim #: 28.2.12 -- Source: CPA 1193 II-4 During its fiscal year ended June 30, year 1, Cliff City issued purchase orders totaling $5,000,000, which were properly charged to encumbrances at that time. Cliff received goods and related invoices at the encumbered amounts totaling $4,500,000 before year-end. The remaining goods of $500,000 were not received until after year-end. Cliff paid $4,200,000 of the invoices received during the year. What amount of Cliff's encumbrances were outstanding at June 30, year 1? A. B. C. D. $0 $300,000 $500,000 $800,000 [29] Gleim #: 28.2.13 -- Source: CPA 1193 II-5 Elm City issued a purchase order for supplies with an estimated cost of $5,000. When the supplies were received, the accompanying invoice indicated an actual price of $4,950. What amount should Elm have debited (credited) to the reserve for encumbrances after the supplies and invoice were received? A. B. C. D. $(50) $50 $4,950 $5,000 [30] Gleim #: 28.2.16 -- Source: CPA 1193 T-52 A budgetary fund balance reserved for encumbrances in excess of a balance of encumbrances indicates A. B. C. D. An excess of vouchers payable over encumbrances. An excess of purchase orders over invoices received. An excess of appropriations over encumbrances. A recording error. [31] Gleim #: 28.2.20 -- Source: CPA 593 T-55 Which of the following funds of a governmental unit recognizes revenues in the accounting period in which they become available and measurable? General Fund A. B. C. D. Yes No Yes No Enterprise Fund No Yes Yes No [32] Gleim #: 28.2.28 -- Source: CPA 1190 II-47 Kew City received a $15,000,000 federal grant to finance the construction of a center for rehabilitation of drug addicts. The proceeds of this grant should be accounted for in the A. B. C. D. Special revenue funds. General fund. Capital projects funds. Trust funds. [33] Gleim #: 28.2.32 -- Source: CPA 593 T-56 A public school district should recognize revenue from property taxes levied for its debt service fund when A. B. C. D. Bonds to be retired by the levy are due and payable. Assessed valuations of property subject to the levy are known. Funds from the levy are measurable and available to the district. Proceeds from collection of the levy are deposited in the district's bank account. [34] Gleim #: 28.2.34 -- Source: CPA 1191 T-54 In which of the following fund types of a city government are revenues and expenditures recognized on the same basis of accounting as the general fund? A. B. C. D. Private-purpose trust. Internal service. Enterprise. Debt service. [35] Gleim #: 28.2.40 -- Source: CPA 1193 T-56 The debt service transactions of a special assessment bond issue for which the government is not obligated in any manner should be reported in the A. B. C. D. Agency fund. Enterprise fund. Special revenue fund. Debt service fund. [36] Gleim #: 28.2.41 -- Source: CPA 1193 II-12 The following equity balances are among those maintained by Cole City: Enterprise funds $1,000,000 Internal service funds 400,000 Cole's proprietary equity balances amount to A. B. C. D. $1,400,000 $1,000,000 $400,000 $0 Gleim's EQE Test Prep Financial Accounting Answer Explanations [1] Gleim #: 25.3.36 -- Source: CPA 1188 I-2 Register to View Answeris correct. Parma's 90% interest in the carrying amount of the net assets of Seville equals $45,000 [($60,000 assets $10,000 liabilities) 90%]. The excess cost of the investment over the carrying amount of the acquired net assets is $15,000 ($60,000 price $45,000). Of this amount, $9,000 ($15,000 60%) should be allocated to inventory, presumably because it is the only asset whose fair value differs from its carrying amount. The remaining $6,000 ($15,000 40%) is goodwill (excess of acquisition cost over the fair value of the acquired net assets). ARB 51 requires that 100% of the net assets of a subsidiary be included in the consolidated financial statements. Thus, the amount of current assets to be reported in the consolidated balance sheet should be $99,000 ($70,000 current assets of Parma + $20,000 current assets of Seville + $9,000 allocation to inventory). Register to View Answeris incorrect because $96,000 assumes an allocation of $6,000 to inventory. Register to View Answeris incorrect because $90,000 ignores the excess cost of the investment. Register to View Answeris incorrect because $79,000 excludes Seville's current assets. [2] Gleim #: 25.3.37 -- Source: CPA 1188 I-3 Register to View Answeris incorrect because $130,000 ignores goodwill. Register to View Answeris incorrect because $134,000 assumes that a 100% interest was acquired and that goodwill was therefore $4,000 [($60,000 $50,000) 40%]. Register to View Answeris correct. The noncurrent assets should be recorded at $136,000 ($90,000 noncurrent assets of Parma + $40,000 noncurrent assets of Seville + $6,000 allocation to goodwill). Register to View Answeris incorrect because $140,000 assumes that a 100% interest was acquired and that goodwill was $10,000. [3] Gleim #: 25.3.38 -- Source: CPA 1188 I-4 Register to View Answeris incorrect because $50,000 is the preexisting long-term debt. Register to View Answeris correct. The total current liabilities include the $30,000 of current liabilities on Parma's books, the $10,000 on Seville's books, and the $6,000 ($60,000 debt 10 equal annual principal payments) that will be due and payable on December 30, year 1. Thus, current liabilities should be recorded at $46,000. Register to View Answeris incorrect because $40,000 ignores the new borrowing. Register to View Answeris incorrect because $30,000 is the amount of Parma's preexisting current liabilities. [4] Gleim #: 25.3.39 -- Source: CPA 1188 I-5 Register to View Answeris incorrect because $115,000 assumes the entire new borrowing is a noncurrent liability. Register to View Answeris correct. The noncurrent liabilities include the $50,000 in long-term debt on Parma's books on January 1, year 1, the $54,000 ($60,000 total debt $6,000 current portion) noncurrent portion of the debt used to effect the business combination, and the minority interest. The minority interest is equal to $5,000 ($50,000 equity of the acquired entity 10% minority interest). Accordingly, the noncurrent liabilities, including the minority interest, total $109,000. Register to View Answeris incorrect because $104,000 omits the minority interest. Register to View Answeris incorrect because $55,000 ignores the new borrowing. [5] Gleim #: 25.3.40 -- Source: CPA 1188 I-6 Register to View Answeris correct. The minority interest was treated as part of noncurrent liabilities. Thus, the equity section of the current parent company balance sheet is the same as the equity section of the consolidated balance sheet. Consequently, equity is $80,000. Register to View Answeris incorrect because $85,000 equals Parma's equity plus the minority interest. Register to View Answeris incorrect because $90,000 equals the total liabilities of the two companies at 1/1/X1. Register to View Answeris incorrect because $130,000 is the sum of the equity amounts for Parma and Seville at 1/1/X1. [6] Gleim #: 25.4.61 -- Source: CPA 593 I-14 Register to View Answeris incorrect because the effects of intercompany transactions should be completely eliminated in consolidated financial statements. Register to View Answeris incorrect because the effects of intercompany transactions should be completely eliminated in consolidated financial statements. Register to View Answeris incorrect because the effects of intercompany transactions should be completely eliminated in consolidated financial statements. Register to View Answeris correct. In a consolidated balance sheet, reciprocal balances, such as receivables and payables, between a parent and a consolidated subsidiary should be eliminated in their entirety regardless of the portion of the subsidiary's stock held by the parent. Thus, Wright should report $0 as intercompany receivables. [7] Gleim #: 25.4.65 -- Source: CPA 1193 T-11 Register to View Answeris correct. Given that all of the goods were sold, no adjustment is necessary for intercompany profit in ending inventory. Accordingly, the parent's cost should be included in consolidated cost of goods sold, and the price received by the subsidiary should be included in consolidated sales. The required adjustment is to eliminate the sale recorded by the parent and the cost of goods sold recorded by the subsidiary. Register to View Answeris incorrect because the elimination is made without regard to the minority interest. Register to View Answeris incorrect because no profit should be eliminated. All of the goods sold to Senior have been resold. Register to View Answeris incorrect because sales and cost of sales should be reduced. [8] Gleim #: 25.4.66 -- Source: CPA 592 I-11 Register to View Answeris incorrect because $750,000 is the total of the amounts reported separately by Parker and Smith. Register to View Answeris incorrect because $680,000 equals Parker's CGS plus 80% of Smith's. Register to View Answeris correct. Given that Smith purchased inventory from Parker for $250,000 and sold all of it during the year, $250,000 must be eliminated from consolidated cost of goods sold. Hence, the cost of sales in the consolidated income statement is $500,000 [($400,000 + $350,000) $250,000]. Register to View Answeris incorrect because $430,000 equals Parker's CGS plus 80% of Smith's, minus $250,000. [9] Gleim #: 25.4.67 -- Source: CPA 592 I-8 Register to View Answeris incorrect because $30,000 is Scroll's total gross profit. Register to View Answeris incorrect because $20,000 is the intercompany inventory. Register to View Answeris incorrect because $10,000 equals the total gross profit minus the inventory obtained from Pirn. Register to View Answeris correct. Sales by Pirn to Scroll totaled $100,000, and Scroll reported related CGS of $80,000. Thus, the remaining inventory of these items must have been $20,000. Because Pirn's gross profit rate was 30% ($150,000 gross profit $500,000 sales), the intercompany profit eliminated from Scroll's inventory should be $6,000 (30% $20,000). [10] Gleim #: 25.4.68 -- Source: CPA 592 I-9 Register to View Answeris incorrect because does $50,000 not eliminate the effect of the gain. Register to View Answeris correct. The depreciation attributable to the gain on sale of equipment to Scroll should be eliminated. Thus, the depreciation expense in the consolidated income statement should be $47,000 [($40,000 Pirn depreciation + $10,000 Scroll depreciation) ($12,000 4 years)]. Register to View Answeris incorrect because $44,000 equals total depreciation minus the inventory profit. Register to View Answeris incorrect because $41,000 equals total depreciation minus the inventory profit and the effect of the gain. [11] Gleim #: 25.4.69 -- Source: CPA 593 I-9 Register to View Answeris incorrect because $320,000 does not eliminate intercompany transactions. Register to View Answeris incorrect because $314,000 does not eliminate the effect of the transactions with Kent but deducts the gross profit included in the inventory held by Dean. Register to View Answeris correct. When an investor buys inventory from an investee that is neither a consolidated subsidiary nor an equity-method investee, no adjustment for intercompany profit is made. Thus, no adjustment is made to the inventory purchased from Dean. When a parent buys inventory from a subsidiary, the inventory on the consolidated balance sheet must be adjusted to remove any intercompany profit. Hence, the inventory must be reduced by the pro rata share of intercompany profit made on the sale by Kent. The reduction is $12,000 [($60,000 EI $240,000 purchases) $48,000 gross profit]. Thus, current assets equal $308,000 ($320,000 $12,000). Register to View Answeris incorrect because $302,000 treats the sales between Clark and Dean as an intercompany transaction. [12] Gleim #: 27.2.22 -- Source: CPA 593 T-34 Register to View Answeris incorrect because the strengthening of the dollar resulted in a gain. Register to View Answeris correct. SFAS 52 requires that a receivable or payable denominated in a foreign currency be adjusted to its current exchange rate at each balance sheet date. "Denominated in a foreign currency" means that the contract is settled in that currency. The transaction gain or loss arising from this adjustment should ordinarily be reflected in current income. Because title passed on December 15, the liability fixed in LCUs should have been recorded on that date at the 20-LCU exchange rate. The increase to 21 LCUs per dollar at year-end decreases the dollar value of the liability and results in a foreign currency transaction gain. Such a gain is ordinarily treated as a component of income from continuing operations. Register to View Answeris incorrect because an extraordinary item is infrequent and unusual in nature. Exchange rates change frequently. Register to View Answeris incorrect because an extraordinary item is infrequent and unusual in nature. Exchange rates change frequently. [13] Gleim #: 27.2.23 -- Source: CPA 1193 T-35 Register to View Answeris incorrect because foreign currency transaction gains and losses are ordinarily treated as operating items. Register to View Answeris correct. A foreign currency transaction gives rise to a receivable or a payable, fixed in terms of the amount of foreign currency. A change in the exchange rate between the functional currency and the currency in which the transaction is denominated is a gain or loss that ordinarily should be included as a component of income from continuing operations in the period in which the exchange rate changes. If Mild Co.'s functional currency is the U.S. dollar and the transaction was denominated in U.S. dollars, the transaction is a foreign transaction, not a foreign currency transaction. Thus, no foreign currency transaction gain or loss occurred. Register to View Answeris incorrect because foreign currency transaction gains and losses are included in the determination of net income. Register to View Answeris incorrect because foreign currency translation gains and losses result from translating functional currency amounts into the reporting currency. If the transaction was denominated in U.S. dollars, no translation was needed. [14] Gleim #: 27.2.24 -- Source: CMA 1291 2-5 Register to View Answeris incorrect because the extent of any gain or loss cannot be known at the date of the original transaction. Register to View Answeris incorrect because retroactive recognition is not permitted. Register to View Answeris correct. When a foreign currency transaction gives rise to a receivable or a payable that is fixed in terms of the amount of foreign currency to be received or paid, a change in the exchange rate between the functional currency and the currency in which the transaction is denominated results in a gain or loss that ordinarily should be included as a component of income from continuing operations in the period in which the exchange rate changes. Register to View Answeris incorrect because gains and losses are to be recognized in the period of the rate change. [15] Gleim #: 27.2.25 -- Source: CPA 1191 T-18 Register to View Answeris incorrect because a gain on a foreign currency receivable and a loss on a foreign currency payable result when the dollar weakens. Register to View Answeris correct. A gain on a receivable denominated in a foreign currency results when the fixed amount of the foreign currency can be exchanged for a greater number of dollars at the date of collection, that is, when the number of foreign currency units exchangeable for a dollar decreases. A loss on a payable denominated in a foreign currency results when the number of dollars needed to purchase the fixed amount of the foreign currency increases, that is, when the number of foreign currency units exchangeable for a dollar decreases. Register to View Answeris incorrect because a gain on a foreign currency receivable and a loss on a foreign currency payable result when the dollar weakens. Register to View Answeris incorrect because a gain on a foreign currency receivable and a loss on a foreign currency payable result when the dollar weakens. [16] Gleim #: 27.2.27 -- Source: CPA 1191 I-46 Register to View Answeris incorrect because the exchange rate changed between the balance sheet date and the settlement date. Register to View Answeris incorrect because a $2,500 loss was incurred in 2002. Register to View Answeris incorrect because $5,000 is the net transaction gain. Register to View Answeris correct. A receivable or payable denominated in a foreign currency should be recorded at the current exchange rate and then adjusted to the current exchange rate at each balance sheet date. That adjustment is a foreign currency transaction gain or loss that is ordinarily included in the determination of net income for the period of change. Furthermore, a gain or loss measured from the transaction date or the most recent intervening balance sheet date is recognized when the transaction is settled. Accordingly, Cano should recognize a foreign currency transaction gain of $7,500 [($0.22 $0.19) 250,000 LCUs receivable] in 2003. [17] Gleim #: 27.2.28 -- Source: CPA, adapted Register to View Answeris correct. Under SFAS 52, foreign currency transaction gains and losses from fluctuations in the exchange rate are ordinarily reflected in income when the rates change. The foreign currency transaction loss is the difference between the contract price on the date the transaction originates and the futures rate at the balance sheet date. Hence, the foreign currency transaction loss for Platt Co. is $2,500 [($.70 $.65) 50,000 Swiss francs]. Register to View Answeris incorrect because $3,000 is the result of using the spot rate on 12/31/02. Register to View Answeris incorrect because $3,500 results from using the spot rate on 11/02/02. Register to View Answeris incorrect because $4,000 is the result of using the 30-day rate on 11/02/02. [18] Gleim #: 27.3.30 -- Source: Publisher Register to View Answeris correct. The hedge of the foreign currency exposure of a forecasted transaction is designated as a cash flow hedge. The effective portion of gains and losses associated with changes in fair value of a derivative instrument designated and qualifying as a cash flow hedge is reported in OCI. Register to View Answeris incorrect because a hedge of the foreign currency exposure of either an unrecognized firm commitment or a recognized asset or liability for which a foreign currency transaction gain or loss is recognized in earnings may be a fair value hedge or a cash flow hedge. The effective portion of gains and losses arising from changes in fair value of a derivative classified as a fair value hedge is included in earnings of the period of change. It is offset by losses and gains on the hedged item that are attributable to the risk being hedged. Register to View Answeris incorrect because a hedge of the foreign currency exposure of either an unrecognized firm commitment or a recognized asset or liability for which a foreign currency transaction gain or loss is recognized in earnings may be a fair value hedge or a cash flow hedge. The effective portion of gains and losses arising from changes in fair value of a derivative classified as a fair value hedge is included in earnings of the period of change. It is offset by losses and gains on the hedged item that are attributable to the risk being hedged. Register to View Answeris incorrect because gains and losses associated with changes in fair value of a derivative used as a speculation in a foreign currency are included in earnings of the period of change. [19] Gleim #: 27.3.35 -- Source: Publisher Register to View Answeris correct. Weeks should record the forward contract as a receivable at fair value. Fair value is based on changes in forward rates discounted on a net present value basis. Thus, the receivable should be recorded at $9,800 on December 31, 2003 and $25,000 ($9,800 + $15,200) on March 31, 2004. Because a hedge of the foreign currency exposure of a forecasted transaction is a cash flow hedge, Weeks should also credit these amounts to OCI. On March 31, the sale should be recorded at $500,000 ($475,000 value based on the spot rate at March 31 + $25,000 balance in OCI). The amount of cash received also is equal to $500,000 ($475,000 + $25,000 balance in the forward contract receivable). Register to View Answeris incorrect because the change in forward rates should be adjusted for the time value of money. Register to View Answeris incorrect because $540,000 and $475,000 reflect the value of FC500,000 at spot rates. Register to View Answeris incorrect because $490,000 and $475,000 reflect the value of FC500,000 at forward rates. [20] Gleim #: 28.1.1 -- Source: CPA 591 T-51 Register to View Answeris correct. The GASB is currently the primary standardsetting body for state and local governments. Register to View Answeris incorrect because the NCGA was a predecessor of the GASB. Register to View Answeris incorrect because the GAAC is not currently an active and functioning committee of the AICPA. Register to View Answeris incorrect because the FASB is the primary authoritative standard-setting board for private sector accounting. [21] Gleim #: 28.1.2 -- Source: CPA 595 TMG-52 Register to View Answeris incorrect because governmental financial reporting provides information for both purposes. Register to View Answeris incorrect because governmental financial reporting provides information for both purposes. Register to View Answeris correct. GASB Concepts Statement 1 states, "Financial reporting by state and local governments is used in making economic, social, and political decisions and in assessing accountability." It also states that "interperiod equity is a significant part of accountability and is fundamental to public administration." Thus, "financial reporting should help users assess whether current-year revenues are sufficient to pay for the services provided that year and whether future taxpayers will be required to assume burdens for services previously provided." Register to View Answeris incorrect because governmental financial reporting provides information for both purposes. [22] Gleim #: 28.1.4 -- Source: Publisher Register to View Answeris incorrect because the three categories of funds used by SLGs are governmental, proprietary, and fiduciary. Register to View Answeris incorrect because the three categories of funds used by SLGs are governmental, proprietary, and fiduciary. Register to View Answeris incorrect because the three categories of funds used by SLGs are governmental, proprietary, and fiduciary. Register to View Answeris correct. The accounting and reporting requirements of SLGs require an accounting system that makes it possible to (1) present fairly and with full disclosure the funds and activities of SLGs in conformity with GAAP and (2) determine and demonstrate compliance with finance-related legal and contractual provisions. To satisfy these objectives, SLG accounting systems should be organized on a fund basis. A fund is defined as "a fiscal and accounting entity with a self-balancing set of accounts recording cash and other financial resources, together with all related liabilities and residual equities or balances, and changes therein, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restrictions, or limitations" (SGAS 1). [23] Gleim #: 28.2.5 -- Source: CPA 1187 T-59 Register to View Answeris incorrect because a local governmental unit may use both fiduciary and proprietary funds. Register to View Answeris correct. Three broad categories of funds may be used by a state or local governmental unit for general purpose financial statements. 1. Governmental - general, special revenue, debt service, capital projects, and permanent funds 2. Proprietary - internal service and enterprise funds 3. Fiduciary - trust and agency funds Register to View Answeris incorrect because a local governmental unit may use both fiduciary and proprietary funds. Register to View Answeris incorrect because a local governmental unit may use both fiduciary and proprietary funds. [24] Gleim #: 28.2.8 -- Source: CPA 1194 TMG-18 Register to View Answeris incorrect because expenditures will be debited and vouchers payable credited for $850,000 when the liability has been incurred. Register to View Answeris correct. When a purchase order is approved or a contract is signed, an estimated liability is recorded in the encumbrances account for the amount of the purchase order. The entry is a debit to encumbrances and a credit to reserve for encumbrances. Register to View Answeris incorrect because expenditures will be debited and vouchers payable credited for $850,000 when the liability has been incurred. Register to View Answeris incorrect because appropriations is debited when the budgetary accounts are closed. [25] Gleim #: 28.2.9 -- Source: CPA 1194 TMG-9 Register to View Answeris incorrect because an encumbrance is recorded to account for the purchase commitment. Register to View Answeris correct. When previously ordered goods are received, the entry includes a debit to expenditures for the actual amount to be paid. An expenditure is recognized when a liability is incurred, that is, when an executory contract is complete or virtually complete. Register to View Answeris incorrect because general capital assets are reported only in the government-wide statement of net assets. Register to View Answeris incorrect because appropriations are accounted for when recording the budget. [26] Gleim #: 28.2.10 -- Source: CPA 591 T-53 Register to View Answeris incorrect because the encumbrances account does not include vouchers payable amounts, only outstanding purchase order amounts. Register to View Answeris incorrect because the encumbrances account does not include vouchers payable amounts, only outstanding purchase order amounts. Register to View Answeris correct. The encumbrances account is debited when goods are approved to be purchased, and a purchase order is prepared. When the goods are actually received, the encumbrances account is credited. Thus, the encumbrances account includes only those amounts that represent outstanding purchase orders. Register to View Answeris incorrect because excesses of the actual expenditure over the purchase order are recorded in the expenditures control account. [27] Gleim #: 28.2.11 -- Source: CPA 1191 T-53 Register to View Answeris incorrect because the expenditures control account is increased upon receipt of goods previously ordered. Register to View Answeris correct. The encumbrances account will be decreased when previously ordered goods have been received. Expenditures and vouchers payable will be increased for the actual amount to be paid for the goods. Register to View Answeris incorrect because the encumbrances account is decreased and the expenditures account is increased at the time goods are received. Register to View Answeris incorrect because the encumbrances account is decreased when the goods are received. [28] Gleim #: 28.2.12 -- Source: CPA 1193 II-4 Register to View Answeris incorrect because not all of the goods related to the encumbrance amounts were received during the year. Register to View Answeris incorrect because $300,000 is the excess of goods received over amount actually paid on the invoices during the year. Register to View Answeris correct. In fund accounting, when a commitment is made to expend monies, the encumbrances account is debited and reserve for encumbrances is credited. When the goods are received, this entry is reversed. Because goods totaling $500,000 were not received at year-end, encumbrances outstanding total $500,000 ($5,000,000 $4,500,000). Register to View Answeris incorrect because $800,000 is the excess of total encumbrances over the amount paid on the invoices. [29] Gleim #: 28.2.13 -- Source: CPA 1193 II-5 Register to View Answeris incorrect because reserve for encumbrances is debited, not credited, for the original estimated cost. Register to View Answeris incorrect because $50 is the difference between the estimated and actual price. Register to View Answeris incorrect because $4,950 is the actual, not the estimated price. Register to View Answeris correct. Expenditures are actual decreases in net financial resources. They are recognized in the governmental funds when fund liabilities are incurred, if measurable. When goods are received by, or services are rendered to, a governmental unit, a journal entry is made to debit expenditures control and to credit vouchers payable. In addition, a previously recorded encumbrance must be reversed by debiting the fund balance reserved for encumbrances and crediting encumbrances control. Because the original budgetary entry is reversed, reserve for encumbrances must be debited for the previously recognized estimated cost of $5,000. [30] Gleim #: 28.2.16 -- Source: CPA 1193 T-52 Register to View Answeris incorrect because reserve for encumbrances should never exceed encumbrances. Register to View Answeris incorrect because reserve for encumbrances should never exceed encumbrances. Register to View Answeris incorrect because reserve for encumbrances should never exceed encumbrances. Register to View Answeris correct. The entry to record an encumbrance is a debit to encumbrances and a credit to reserve for encumbrances. Thus, reserve for encumbrances should never exceed encumbrances. If it does, a recording error must exist. [31] Gleim #: 28.2.20 -- Source: CPA 593 T-55 Register to View Answeris correct. The general fund is accounted for on a modified accrual basis. This basis of accounting recognizes revenues in the period in which they are measurable and available. The enterprise fund, a proprietary fund-type, is accounted for under the accrual basis. This basis of accounting recognizes revenues in the accounting period in which the exchange occurs. Revenues from nonexchange transactions are recognized in accordance with SGAS 33. Register to View Answeris incorrect because the opposite situation is true. Register to View Answeris incorrect because the enterprise fund recognizes revenues when the exchange occurs. Revenues from nonexchange transactions are recognized in accordance with SGAS 33. Register to View Answeris incorrect because the general fund recognizes revenues when they are available and measurable. [32] Gleim #: 28.2.28 -- Source: CPA 1190 II-47 Register to View Answeris incorrect because this fund does not record resources to be used for major capital facilities. Register to View Answeris incorrect because this fund does not record resources to be used for major capital facilities. Register to View Answeris correct. The capital projects fund is used to account for the receipt and disbursement of resources restricted to acquisition of major capital facilities (other than those financed by proprietary and trust funds) through purchase or construction. Register to View Answeris incorrect because a grant for a drug rehabilitation center is not accounted for in a trust fund. A trust fund accounts for assets held by a governmental entity in the capacity of a trustee for individuals, private organizations, or other governments. [33] Gleim #: 28.2.32 -- Source: CPA 593 T-56 Register to View Answeris incorrect because revenues are recognized when property taxes are levied. Register to View Answeris incorrect because the assessed valuations are necessary for calculating the amount of tax but do not make the tax revenue available. Register to View Answeris correct. Debt service funds apply the modified accrual basis of accounting. Thus, revenues are recognized when they are measurable and available. Moreover, under SGAS 33, assets from imposed nonexchange revenue transactions, such as property tax levies, should be recognized when an enforceable legal claim arises or the resources are received, whichever is earlier. If the legal claim arises in the period after that for which the property taxes are levied, a receivable is recognized when revenues are recognized. Revenues are recognized in the period for which the taxes are levied if the availability criterion is met. For property taxes, this criterion is met if the taxes are collected within the current period or soon enough afterward (not exceeding 60 days) to pay current liabilities. Register to View Answeris incorrect because revenue recognition is not on the cash basis. [34] Gleim #: 28.2.34 -- Source: CPA 1191 T-54 Register to View Answeris incorrect because a private-purpose trust fund is a fiduciary fund. It is accounted for in a manner similar to that of proprietary funds. Register to View Answeris incorrect because the internal service fund is a proprietary fund, which uses the accrual basis of accounting. Register to View Answeris incorrect because the enterprise fund is a proprietary fund, which uses the accrual basis of accounting. Register to View Answeris correct. The debt service fund is the only fund listed that is classified as a governmental fund. The other funds are proprietary or fiduciary. Governmental funds use the modified accrual basis, and proprietary and fiduciary funds use the accrual basis. [35] Gleim #: 28.2.40 -- Source: CPA 1193 T-56 Register to View Answeris correct. The debt service transactions of a special assessment issue for which the government is not obligated in any manner should be reported in an agency fund rather than a debt service fund. This treatment reflects the limitation of the government's duty to act as an agent for the assessed property owners and the bondholders. Register to View Answeris incorrect because an enterprise fund is a proprietary fund used to account for for-profit operations. Register to View Answeris incorrect because a special revenue fund is a governmental fund used to account for the proceeds of specific revenue sources that are legally restricted and expended for a specific purpose. Register to View Answeris incorrect because the government is not obligated for this special assessment bond issue. [36] Gleim #: 28.2.41 -- Source: CPA 1193 II-12 Register to View Answeris correct. Proprietary funds include enterprise funds and internal service funds. Thus, the proprietary equity balances equal $1,400,000 ($1,000,000 + $400,000). Register to View Answeris incorrect because $1,000,000 excludes the equity balance of the internal service funds. Register to View Answeris incorrect because $400,000 excludes the equity balance of the enterprise funds. Register to View Answeris incorrect because $0 excludes the equity balances of the enterprise funds and the internal service funds. Gleims Test Prep- Financial Accounting Answer Key 1) A 2) C 3) B 4) B 5) A 6)D 7) A 8) C 9) D 10) B 11) C 12) B 13) B 14) C 15) B 16) D 17) A 18) A 19) A 20) A 21) C 22) D 23) B 24) B 25) B 26) C 27) B 28) C 29) D 30) D 31) A 32) C 33) C 34) D 35) A 36) A
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