Solo Corp Accounting Help With Solution

Solo Corp Accounting Help With Solution

 
MULTIPLE CHOICE
 
1. According to U.S. GAAP, which of the following provides the most reliable measure for fair value measurement?

a. Observable market data serving as inputs into estimates into present value-based measurements such as foreign exchange rates.

b. Quoted market prices of identical assets or liabilities in inactive markets

c. Observable quoted market prices in active markets for identical assets or liabilities

d. Unobservable inputs used by the reporting entity when modeling how the market would determine the fair value of the asset or liability in question

 
2. Graham Corporation accounts for its investment in the common stock of Luke Company under the equity method. Graham Corporation should ordinarily record
a cash dividend received from Luke as

a. a reduction of the carrying value of the investment.
b. additional paid-in capital.
c. an addition to the carrying value of the investment.
d. dividend income.
 
3. An analyst can estimate the average total life of depreciable assets by
a. dividing average depreciable assets by depreciation expense for the year.
b. dividing depreciation expense for the year by average depreciable assets.
c. dividing average gross depreciable assets by accumulated depreciation.
d. Subtracting depreciation expense from accumulated depreciation.
 
4. Using the information below calculate the average total depreciable life of the assets: Information from the Balance Sheet:

2014 2013
Depreciable Assets $475,000 $385,000
Accumulated Depreciation (150,000) (95,000)
Depreciable Assets (Net) $325,000 $290,000
From the Income Statement 2014
Depreciation Expense

a. 6.54 years
b. 10.10 years
c. 6.91 years
d. 9.15 years $47,000
 
5. GAAP stipulates that firms should do what with expenditures that increase the service potential of an asset beyond that originally anticipated?
a. Expense the expenditure immediately.
b. Capitalize the expenditure and depreciate it over the remaining service life of the asset.
c. Capitalize the expenditure, but do not depreciate the asset.
d. Charge it off to shareholders’ equity.

 
6. All of the following statements are true regarding accounting for software development costs except:

a. Firms must expense as incurred all costs incurred internally in developing computer software until such development achieves the technological feasibility of a product.
b. Firms must capitalize as incurred all costs incurred internally in developing computer software.
c. Researchers have found a significant association between costs and future earnings which support capitalizing and amortizing product development costs permitted by U.S. GAAP and IFRS.
d. The interpretation of the meaning of technological feasibility has created diversity in the practice of accounting for software development costs.

 
7. When a firm sells a trading security, it recognizes
a. the average of the selling price and the book value as a gain or loss in measuring net income.
b. the difference between the selling price and the book value as a gain or loss in measuring net income.
c. amortizes any difference between the acquisition cost and maturity value as interest revenue over the life of the debt.
d. the difference between the selling price and the acquisition cost of the security as a realized gain or loss on the income statement.

 
8. For U.S. GAAP, software development costs are capitalized as intangible assets
a. after a copyright is obtained.
b. once the technological feasibility of the product is established.
c. from the beginning of development.
d. once the product is introduced into the marketplace.

 
9. The method used to account for oil and gas exploration costs that capitalizes the exploration costs of productive wells is the
a. reserve recognition accounting.
b. successful efforts approach.
c. soft asset approach.
d. full-cost approach.

 
10. Solo Corp. purchased $500,000 of bonds for $515,000 as an investment. If Solo expects to hold the bonds until they mature the initial investment should be recorded at
a. Investment in Bonds – $500,000, Additional Investment Expense – $15,000
b. Investment in Bonds – $515,000
c. Investment in Bonds – $500,000, Prepaid Interest Revenue – $15,000
d. Accumulated Other Comprehensive Investment – $500,000

 
11. Goodwill represents
a. the synergies that will be achieved through the acquisition of another company.
b. the difference between the acquisition cost and the market value of the identifiable assets and liabilities of a acquired company.
c. the difference between the acquisition cost and the book value of the identifiable assets and liabilities of a acquired company.
d. the merger premium paid to an investment bank in an acquisition of another company.

The next four questions refer to the information below for the Ashley Company:

Ashley Company purchased 1,000 of the 10,000 outstanding shares of Judd, Inc.’s common stock for $30,000 on January 1, 2014 with the intent of keeping the stock for some years. During 2014, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2014 the market value of a share of Judd, Inc. stock has increased to $32 per share. 1,000 shares does not constitute significant influence, 2,000 shares does.
 
12. On the Ashley Company’s December 31, 2014 balance sheet, what amount will be reported as the investment in Judd?
a. $30,000
b. $32,500
c. $32,000
d. $37,500
 
13. If Ashley Company had purchased 2,000 shares, the investment would appear in the December 31, 2014 balance sheet at what amount?
a. $60,000
b. $65,000
c. $64,000
d. $75,000
 
14. If Ashley Company had purchased 1,000 shares of Judd, Ashley would recognize what amount of 2014 income from the investment?
a. $2,000
b. $5,000
c. $12,500
d. $7,500
 
15. If Ashley Company had purchased 2,000 shares of Judd, Ashley would recognize what amount of 2014 income from the investment?
a. $4,000
b. $10,000
c. $25,000
d. $15,000

 
TRUE/FALSE

 
1. An impairment loss occurs when the carrying amount of an asset exceeds its fair value and is deemed not
recoverable.

 
2. Financial reporting requires firms to immediately expense all R&D costs incurred internally.

 
3. A copyright is an example of an intangible asset.

 
4. Most publicly traded firms in the United States use an accelerated method of depreciation for financial reporting purposes.

 
5. When the purchase price of another entity exceeds the value of the entity’s net assets the purchaser allocates the excess to identifiable assets and liabilities in order to revalue them to market value and any additional excess is allocated to minority interest.

 
6. Available for sale securities are purchased in order to take advantage of short-term changes in market value.

 
7. Unrealized gains and losses that appear in accumulated other comprehensive income are from securities classified as available-for-sale securities.

 
8. Held-to-maturity securities are accounted for on the balance sheet at fair value.

 
9. Ownership of 50% or more of the voting stock of another company implies an ability to control.

 
10. Unrealized holding gains and losses from investments classified as trading are reported in the other comprehensive income.

 
11. Held-to-maturity securities are equity securities that management intends and has the ability to hold to maturity.

 
12. Held-to-maturity securities are always classified as non-current assets.

 
13. All intercompany transactions are not reported with consolidated financial statements.

14. The FASB allows companies to selectively report held-to-maturity securities at fair value.

 
15. If a company chooses the fair value option for an asset or liability, all changes in the fair value of the asset (or liability), including unrealized gain and losses, will be included in net income.

 
16. Software costs may be capitalized once a company can show that the product is technologically feasible.

 
SHORT ESSAY

 
1. U.S. GAAP requires firms to expense immediately all internal expenditures for R&D costs. Alternatively, U.S. GAAP could require firms to capitalize and subsequently amortize all internal expenditures on R&D that have future potential. Why have standard setters chosen not to allow the capitalization alternative? How would analysts be better served if U.S. GAAP required capitalization of R&D costs?

 
2. For some transactions U.S. GAAP requires that value changes are recognized on the balance sheet and the income statement when they occur, even if they are not realized. Discuss what types of transactions get this type of treatment and the logic behind this accounting method.

 
3. Frequently when a company buys controlling interest in another company, their next balance sheet shows an increase in intangible assets. Why does that happen? How should an analyst deal with the resulting changes in the balance sheet?

 
SHORT PROBLEMS

 
1. Wilde Corporation owns 30% of the outstanding stock of Bernie Inc. Bernie recorded net income of $10M and paid dividends of $3M in 2006. For each of the following ratios, state the effect (higher, lower or no effect) that the use of the equity method would have on Wilde’s financial ratios compared to the use of the cost method in 2006. Explain your answers.
i. Gross margin
ii. Total Asset turnover
iii. Cash flow from operations to current liabilities
iv. Debt to Equity

 
2. Stock Trader, Inc. began operations in 2014. Stock Trader has acquired a number of equity investments during 2014. None have been sold. Stock Trader exerts no influence over any of its investments each of which represents a small percentage of the investee. An analysis of Stock Trader’s investment portfolios shows the following totals at December 31, 2014:

 
Trading Securities Available-for-SaleSecurities
Aggregate Cost $49,000 $65,000
Aggregate Fair Value $39,000 $90,000
Dividends received from investments $ 5,000 $ 9,000
Based on the information provided, describe how Stock Trader would present this information in its financial statements (they use the indirect method on their statement of cash flow). You should discuss what amounts would appear and where they would appear in each of the following financial statements:

 
a. Balance Sheet
b. Income Statement
c. Statement of Comprehensive Income
d. Statement of Cash Flows

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