cpa questions

During 2018, Leucothea Co. became involved in a legal dispute with a supplier. At December 31, 2018, Leucothea’s legal advisor believed that an unfavorable outcome was probable. A reasonable estimate of resulting monetary damages is $100,000 but could be as much as $200,000. Leucothea has legal liability insurance coverage that limits their loss to $80,000. After the 2018 financial statements were issued, Leucothea agreed to settle the case for $125,000. What amount of accrued liability should Leucothea have reported in its December 31, 2018 balance sheet?

• $0

• $80,000

• $100,000

• $125,000

Which of the following statements is true regarding the financial statement presentation of long-term debt?

• Both the investor and the issuer of long-term debt report the associated interest received or paid as an operating activity in the statement of cash flows.

• A company with outstanding bonds must disclose the names of significant bondholders in the notes to the financial statements.

• Both the investor and the issuer of bonds report bond proceeds or bond cash purchase amounts as financing activities in the statement of cash flows.

• Aggregate amounts payable for each of the next seven years is a required disclosure for all long-term borrowings.

With a lease commencement date of January 1, 2019, Emgrand Company leases equipment with a fair value of $625,000 to Bolero Company under the following terms:

Lease term 3 years

Annual rental payable at beginning of each year $200,000

Useful life of equipment 5 years

Bolero’s incremental borrowing rate 6%

Implicit interest rate in lease (known by Bolero) 8%

Present value of annuity of $1 in advance for 3 periods at

6% 2.8334

8% 2.7833

Emgrand routinely leases equipment of this nature. Bolero has no other leased equipment. Neither entity considers the 3-year term to be a major part of the asset’s 5-year life. Nor do they consider the present value of the lease payments to be substantially all of the fair value of the asset.

• $200,000

• $188,893

• $400,000

• $185,553

When a customer pays far enough in advance to require the seller to record interest expense and accrued interest payable based on the advance collection amount, the amount of revenue recognized by the seller when all performance obligations have been met and delivery is complete will

• Exceed the amount of deferred revenue initially recorded.

• Be lower than the amount of deferred revenue initially recorded.

• Be the same as the amount of deferred revenue initially recorded.

• Be either the same or higher than the amount of deferred revenue initially recorded.

Crick Co. purchased bonds at a premium on the open market as an investment and intends to hold these bonds to maturity. Crick should account for these bonds at

• Lower of cost or market

• Cost

• Fair value

• Amortized cost

Management can estimate the amount of loss that will occur if the company does not prevail in a currently contested lawsuit. If losing the suit is reasonably possible, which of the following describes how the entity may report the loss contingency in the financial statements?

Balance Sheet

Notes to Financial

Statements

a.

Accrued as liability

Disclosed

b.

Not accrued

Disclosed

c.

Not accrued

Not disclosed

d.

Accrued as liability

Not disclosed

• Option a

• Option b

• Option c

• Option d

Canterbury Co. issues a discounted, non-interest-bearing note in exchange for borrowed funds. Choose whether the cash received will be higher or lower than the face value of the note, and whether the effective annual interest rate will be higher or lower than the discount rate:

Cash Received vs. Face Value of Note

Effective Rate vs. Discount Rate

a.

Higher / Lower

b.

Lower / Higher

c.

Lower / Lower

d.

Higher / Higher

• Option a

• Option b

• Option c

• Option d

Zeta, Ltd., a company that prepares its financial statements in accordance with IFRS, has the following pending items at December 31, 2018.

The company is the defendant in a product liability lawsuit as a result of injuries incurred by purchasers of its products. Legal counsel has indicated that an unfavorable verdict in the amount of $650,000 is probable. The company is involved in another lawsuit and their legal counsel believes it is reasonably possible that the lawsuit will result in a loss of $175,000. The entity sells a product that is subject to a warranty. The estimated warranty liability is $150,000.

In its financial statements for the period ended December 31, 2018, how much will be reported either on the balance sheet or in the footnotes for contingencies and how much for provisions?

• A contingency of $650,000 will be accrued, a contingency of $175,000 will be disclosed, and a provision of $150,000 will be accrued as a liability.

• A contingency of $175,000 will be disclosed and provisions of $800,000 will be accrued as liabilities.

• Contingencies of $825,000 will be accrued and a provision of $150,000 will be accrued as a liability.

• Contingencies of $800,000 will be accrued and a provision of $175,000 will be disclosed.

Martius Company, a maker of high-tech gadgets, routinely leases equipment made by competitors in order to reverse-engineer design features Martius may want to incorporate in its own products. The reverse-engineering process is part of Martius’s 9-month product development cycle and involves disassembling then later reassembling the equipment. LeaseCo. leases such equipment to Martius under a 12-month lease term. According to the terms of the lease, at the end of the lease term Martius will have the option to purchase the equipment for less than its expected fair value at that time. Martius Company is located in an area where commercial space is at a premium, there is no internal use for the competitor equipment at the end of Martius’s product development cycle, and Martius’s management wishes to focus solely on the manufacture and sale of its own equipment. Management also wishes to minimize liabilities reported on the balance sheet. In light of the above, as which type of lease is Martius most likely to record, correctly, its arrangement with LeaseCo.?

• As a finance lease.

• As a short-term lease.

• As an operating lease.

• Not enough information to decide.

Clio Co. issued 5-year $500,000 debenture bonds on January 2. The bonds pay interest semiannually. Clio uses the effective interest method to amortize bond premiums and discounts. The carrying value of the bonds on January 2 was $337,806. A journal entry was recorded for the first interest payment on June 30, debiting interest expense for $13,512 and crediting cash for $15,000. What is the annual stated interest rate for the debenture bonds?

• 3%

• 6%

• 4%

• 8%