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The Charlotte Corporation buys a building on January 1, Year 1, for $900,000. The building is expected to have a useful life of 10 years and no salvage value. The double-declining balance method is used for depreciation purposes and the half-year convention is not elected. Early in Year 3, company officials decide to switch to the straight-line method of depreciation. What amount of depreciation expense should the company recognize in its Year 3 income statement?
In Year 1, the company will report depreciation of $180K ($900K x 20%), bringing the year two beginning book value to $720K. In Year 2, the company will record depreciation of $144K ($720K x 20%), bringing the year 3 beginning book value to $576K. In Year 3, the company will amortize this amount evenly over the remaining 8 years of the asset's life.
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Which of the following accounting changes would receive prospective treatment in the income statement?
Changes in depreciation and changes in estimated useful lifes are applied proactively, not retroactively.
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Which of the following would be reported as an adjustment to beginning retained earnings for the earliest period presented?
Both of these choices are presented as prior period adjustments by adjusting retained earnings in the earliest period presented.
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Under IFRS, an entity is required to file the following financial statements initially?
An entity just filing under IFRS needs to file 2 statements of; comprehensive income, income statements, cash flows, changes in equity, notes, and 3 balance sheets.
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Which of the following is not among the criteria that must be met to record a lease as a capital lease?
To record a lease as a capital lease, at least one of the following criteria must be met: ownership of the asset transfers at the end of the lease term; the lease contains a bargain purchase option; the PV of the lease payments is at least 90% of the FV at inception; and the lease term is at least 75% of the asset's useful life.
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The Global Group leases an asset from Earth Co for 8 years. The life of the asset is expected to be 10 years. If the lease does NOT contain a bargain purchase option or a transfer of title, which of the following is correct?
In a lease does not contain a bargain purchase option, the asset will be depreciated over the life of the lease, rather than over the useful life of the asset.
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In Year 3, Meyer Corp sold an asset for $900,000 to Sailer Corp and simultaneously leased it back for 5 years. The assets remaining life was 53 years, and the carrying value on the date of the sale was $640,000. The annual lease payments were $180,000 per year. How much gain should be recognized by Meyer in Year 3?
The gain recognized will be equal to the purchase price of the asset minus the asset's carrying value on the date of the sale. The full gain will be recognized at the time of the sale.
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ABC leased equipment to DEF under a noncancellable lease with a transfer of title. Will ABC record depreciation expense on the leased asset and interest revenue related to the lease?
DEF will capitalize the lease due to the transfer of title and will incur both depreciation and interest expense.
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A firm sold its headquarters building at a gain, and simultaneously leased back the building. The lease was reporting as a finance lease under US GAAP. At the time of sale, the sale-leaseback will be considered:
If the underlying lease in a sale leaseback is a finance lease, it is considered equivalent to a repurchase and will therefore be considered a failed sale.
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During which period of time should a lessee amortize a leased property? The lease is a finance lease and contains a written option to purchase.
When dealing with a financing lease, the lessee should amortized the leased property over the economic life of the asset when there is a written purchase option or at the time the lessee obtains ownership of the asset.
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A company has a defined benefit plan in operation that covers six employees who have an average of 5 years left to work. On January 1, Year 5, the company amends the plan and this amendment results in an increase in the pension benefit obligation of $350,000. Also in Year 5, the plan's actuary updates the plan's assumptions, which increases the pension benefit obligation by $220,000. What amount is reported in accumulated other comprehensive income related to the defined benefit plan at the end of Year 5?
The amount reported in AOCI is the amount of these changes that has not yet been amortized. For the plan amendment, amortization begins in the current year over the 5 years the employees plan to continue working ($350K / 5 years = $70K). Therefore, $280K remains in AOCI. For the changes in assumptions, amortization will not begin until the following year, so $220K remains in AOCI.
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A company starts a defined benefit pension plan on January 1, Year 1. The service cost for the year is $250,000 and plan funding each year is $175,000 (made each January 1). Interest on the projected benefit obligation is 8% while the expected return on plan assets is 10%. How much is pension expense in Year 2?
Pension service cost is recorded at the end of each Year, with the PBO determined at that time. PBO at the end of Year 1 is equal to $250K. Plan assets at the end of Year 1 are equal to the $175K deposited in January plus the assets earnings over Year 1 of $17,500 ($175K x 10%). Pension expense in Year 2 is equal to $250K service cost + $20K ($250K PBO x 8%) - $36,750K ($367,500 x 10%)
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The Capstone Company has a defined benefit pension plan. On January 1, Year 12, the plan is amended, causing the projected benefit obligation to increase by $600,000. At that time, the covered employees are expected to work another 8 years on average. How will this amendment be reported in the Year 12 financial statements?
Changes in pension plans and assumptions are initially reported in AOCI, and then amortized to pension expense. The company will expense $75K of this amendment ($600K / 8 years) and leave the remaining $525K in AOCI.
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Investments must be reported at fair value in the financial statements of pension plans and trusts.
In the financial statements of employee benefit pension plans, the plan investments are reported at which valuation?
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The differences between executive and nonexecutive plans is not a disclosure that is required.
Footnote disclosures in the financial statements for pensions do not require inclusion of which of the following?
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The net periodic pension cost for the year of a defined benefit pension plan would be reported on:
A company would only report the net periodic pension cost on the income statement.
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A company estimates that its bad debt expense each year will be 2% of credit sales. In the current period, one customer balance of $6,000 is determined to be uncollectible. Which of the following is true?
When bad debt expense is based off of an estimate each year, actual accounts written off will reduce the customer balance while also reducing the allowance for doubtful accounts. Actual written off accounts have no impact on bad debt expense and therefore no impact on net income.
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The Wells Corporation ends Year 4 with accounts receivable of $540,000 and credit sales for the year of $1.3 million. The ending balance in allowance for doubtful accounts is a $5,000 debit balance as a result of accounts being written off during the year. The company has a choice between estimating bad debts as 4% of outstanding receivables or 3% of current sales. Which of the following statements is true?
If the company uses the percent of sales method, bad debt expense will be $39K ($1.3M x 3%). If it uses the ending receivables method, bad debt expense will be $26,600 ($540K x 4% + $5K debit balance). Thus under the percent of sales method, bad debt expense will be $12,400 higher and net income will be lower by that amount.
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At the beginning of Year 4, Omar Company had a credit balance of $150,000 in its allowance for doubtful accounts. Based on past experience, Omar expects 2% of its credit sales to become uncollectible. During Year 4, Omar wrote off $75,000 in uncollectible accounts and made credit sales of $2 million. What amount should Omar report in its allowance for doubtful accounts at the end of Year 4?
The ending balance in allowance for doubtful accounts is calculated by taking the beginning balance of $150K + $40K for current year bad debt ($2M in credit sales x 2%) - $75K for accounts written off.
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Which of the following statements correctly describes the proper accounting treatment for nonmonetary exchanges that are deemed to have commercial substance?
For nonmonetary exchanges with commercial substance, gains and losses are recognized immediately.
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