2011 AICPA Newly Released Questions Financial

AICPA Newly Released FAR Simulations Task 543_01

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2011 AICPA Newly Released Questions Financial

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2011 AICPA Newly Released Questions Financial

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2011 AICPA Newly Released Questions Financial

Explanation: SITUATION 1 The gain or loss on the intercompany sale of a depreciable asset is unrealized from a consolidated financial statement perspective until the asset is sold to an outsider. An elimination entry in the period of the sale eliminates the intercompany gain/loss and adjusts the asset and accumulated depreciation to their original balance on the date of sale: DR CR CR CR Gain on sale Accumulated depreciation Depreciation expense Equipment 40,000 15,000 5,000 20,000

Gain on Sale, $40,000 Debit Since Peterson sold the equipment to Silver, a 100% subsidiary, the gain of $40,000 is eliminated. It was originally entered in the books of Peterson as a credit and is calculated as the sales price of the asset of $120,000, less the net book value of $80,00 ($100,000 cost less accumulated depreciation on 1/1/Y3 of $20,000). Accumulated Depreciation, $15,000 Credit The accumulated depreciation for the consolidated group at December 31, Yr 3 is based on the original cost of $100,000. Three years of accumulated straight line depreciation is $30,000. The accumulated depreciation shown by the separate companies is as follows: $0 for Peterson since the accumulated depreciation was removed as part of the journal entry recorded at the time of the sale. $15,000 for Silver Corp., based on one year of straight-line depreciation ($120,000/8 years). The eliminating journal entry raises the accumulated depreciation from $15,000 to the correct amount of $30,000. Depreciation Expense, $5,000 Credit The correct amount of depreciation expense for Year 3 is $10,000 based on the original purchase of the asset by Peterson ($100,000 cost to Peterson / 10 years = $10,000). Silver Corp. recorded depreciation of $15,000 based on their purchase of the asset at the beginning of Year3 ($120,000 cost to Silva / 8 years = $15,000). The eliminating journal entry reduces the depreciation from $15,000 to the correct amount of $10,000. Equipment, $20,000 Credit The original cost of the equipment to Peterson is $100,000. The $120,000 cost of the asset to Silva must be reduced to the original amount paid by Peterson.

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2011 AICPA Newly Released Questions Financial

SITUATION 2 When affiliated companies sell inventory to one another, the total amount of the intercompany sale and cost of goods sold is eliminated when preparing consolidated financial statements. In addition, the intercompany profit must be eliminated from the ending inventory and cost of goods sold of the group. DR CR CR Sales Inventory Cost of goods sold 50,000 8,000 42,000

Sales, $50,000 Debit The gross sale amount of Petersons sale to Silver is eliminated. Inventory, $8,000 Credit 40% of the goods sold by Peterson are still in the ending inventory of Silver. The original cost of this inventory on Peterson's books was $12,000 ($30,000 x 40%). The inventory is on Silvers books at the cost to Silva of $20,000 ($50,000 x 40%). The reduction of inventory adjusts the $20,000 inventory on the books of Silver to the correct amount of $12,000, the original cost to Peterson. Cost of Goods Sold, $42,000 Credit The entire amount of Petersons cost of goods sold is eliminated. This amount is $30,000. In addition, Silvers cost of sales is based on the price paid to Peterson for the inventory. The additional cost Silver paid is $20,000 ($50,000 intercompany sales price - $30,000 cost of goods sold). The amount that was sold represents 60% of $20,000, so that another $12,000 needs to be eliminated to show the cost of goods sold based on the original cost to Peterson.

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2011 AICPA Newly Released Questions Financial

Task 618_01

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2011 AICPA Newly Released Questions Financial

Explanation: Construction period interest should be capitalized (based on the weighted average of accumulated expenditures) as part of the cost of producing fixed assets. Weighted average of accumulated expenditures for year 2: $360,000 The weighted average amount of accumulated expenditures (WAAE) for year 2 is calculated as follows: $130,000 $370,000 $570,000 $ 390,000 2,220,000 1,710,000 $4,320,000/12 months Weighted average of accumulated expenditures $360,000 1/1-3/31/Y2 3 months 4/1-9/30/Y2 6 10/1-12/31/Y2 3

Interest incurred for all borrowings for year 2: $67,000 The interest expense is calculated as follows: $300,000 Loan $100,000 $300,000 12% 10% 7% $36,000 10,000 21,000 $67,000

Total interest for the year

All loans were payable throughout Year 2. Avoidable interest for year 2, $40,650 The amount of avoidable interest is the interest that would not have been incurred if the construction project had not taken place: Interest on construction note borrowings: $300,000 construction note x 12% = $36,000 Interest on other borrowings used for construction: Total WAAE $360,000 Less: Construction note funds (300,000) Other borrowings used for construction 60,000 Weighted-average interest rate on other borrowings: ($10,000 + $21,000)/($100,000 + $300,000) = 8% Interest on other borrowings used for construction = $60,000 x 8% = $4,650 Avoidable interest = $36,000 + $4,650 = $40,650 Interest capitalized for Year 2, $40,650 Capitalized interest cannot exceed the actual interest incurred for the period. The capitalized interest for year 2 is $40,650 because the avoidable interest of $40,650 is less than the interest incurred of $67,000. Interest expense for Year 2, $26,350 The interest expense is the amount to be shown on the income statement and is the difference between the total interest of $67,000 and the capitalized interest of $40,650.

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2011 AICPA Newly Released Questions Financial

Task 4466_01

Keywords: Cash flow per share

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