ACC 406 AFTER EXAM 2 15 || Errorless Answers 100%.
What can affect the inherent risk for inventory correct answers the type of product sold by the
entity, inventory is difficult to audit. auditor should be alert to related-party transactions for
acquiring raw materials.
Steps for setting the control risk following this strategy correct answers understand and
document internal control process based on a reliance strategy
Plan and perform tests of controls on inventory transactions
set and document the control risk for the inventory management process
Capitalize expenditures that correct answers produce future benefits.
Expense expenditures that produce benefits only in the correct answers current period.
The initial cost of PPE and intangible assets includes the correct answers purchase price and all
acquisition expenditures necessary to bring the asset to its desired condition and location for use
(includes asset retirement obligations)
asset retirement obligation (ARO) correct answers Obligation assotiated with the disposition of
PPE its discounted present value is considered a cost of acquiring the asset.
An existing legal obligation, whose amount can be reasonably estimated, associated with the
retirement of a long-lived asset. Companies should record the ARO at fair value.
Journal entry to record the purchase of contaminated land correct answers Debit Land, Credit
cash, Credit ARO
,expected cash flow approach correct answers Way to estimate the fair value of the ARO.
1. management determines the possible cash outflows associated with the clean up and how
likely each is to occur.
2. Multiply each outcome by likelihood of occurring and sum to obtain the adjusted value.
3. The adjusted value is discounted to the present value using the credit-adjusted risk-free rate.
The present value is the fair value of the ARO, which will be added to the value of the acquired
asset.
Accretion expense correct answers the increase in an asset retirement obligation that accrues as
an operating expense.
ARO fair value will eventually equal correct answers ARO future value. Until it is written off the
books.
Accretion expense formula correct answers = ARO * the discount rate
Exchange of nonmonetary assets correct answers Occurs when companies exchange assets like
PPE. Ordinarily companies account for the exchange on the basis of the fair value of the assets
received.
General form of the J/E for exchange of nonmonetary assets correct answers Debit New asset
(for fair value), debit old asset accumulated depreciation, credit old asset cost, credit realized
gain.
Used if the transaction has commercial substance, then gains/losses are recognized in entirety
Commercial substance correct answers A characteristic of a transaction that causes a change in
future cash flows.
, Exchange of nonmonetary assets when the transaction has no commercial substance correct
answers Depending upon the circumstances of the exchange, we may not recognize all of an
implied gain.
We always recognize implied losses in their entirety.
3 Types of exchanges with no commercial substance correct answers 1. No cash received = no
gain recognized (reduces the value of the new PPE to balance).
2. Cash received > 25% of the fair value of assets received (cash and new asset). Recognize
100% of the IMPLIED gain (which often changes fair value of the received asset).
3. Cash received < 25% of the fair value of assets received (cash and new asset) = recognize
partial gain.
Recognized partial gain when cash received < 25% of the fair value of assets received. correct
answers (Cash received/fair value of PPE and cash) * implied gain
Implied gain correct answers Fair value of assets received (cash and asset) - book value of assets
given up
So if the implied gain is 1000, but you only received 16.7% cash of fair value of assets, you'd
recognize a partial gain of correct answers 167.
Assets acquired by issuing common stock are valued at the fair value of the securities or correct
answers the fair value of the assets, whichever is more clearly evident.
contingent liability correct answers is an existing condition or set of circumstances involving
uncertainty about a possible loss that will ultimately be resolved when some future event occurs
or fails to occur.
"For example, if an oil refining company experiences an explosion and some of its workers are
hurt or killed, lawsuits will likely result. Until the lawsuits are settled or resolved in court, there
What can affect the inherent risk for inventory correct answers the type of product sold by the
entity, inventory is difficult to audit. auditor should be alert to related-party transactions for
acquiring raw materials.
Steps for setting the control risk following this strategy correct answers understand and
document internal control process based on a reliance strategy
Plan and perform tests of controls on inventory transactions
set and document the control risk for the inventory management process
Capitalize expenditures that correct answers produce future benefits.
Expense expenditures that produce benefits only in the correct answers current period.
The initial cost of PPE and intangible assets includes the correct answers purchase price and all
acquisition expenditures necessary to bring the asset to its desired condition and location for use
(includes asset retirement obligations)
asset retirement obligation (ARO) correct answers Obligation assotiated with the disposition of
PPE its discounted present value is considered a cost of acquiring the asset.
An existing legal obligation, whose amount can be reasonably estimated, associated with the
retirement of a long-lived asset. Companies should record the ARO at fair value.
Journal entry to record the purchase of contaminated land correct answers Debit Land, Credit
cash, Credit ARO
,expected cash flow approach correct answers Way to estimate the fair value of the ARO.
1. management determines the possible cash outflows associated with the clean up and how
likely each is to occur.
2. Multiply each outcome by likelihood of occurring and sum to obtain the adjusted value.
3. The adjusted value is discounted to the present value using the credit-adjusted risk-free rate.
The present value is the fair value of the ARO, which will be added to the value of the acquired
asset.
Accretion expense correct answers the increase in an asset retirement obligation that accrues as
an operating expense.
ARO fair value will eventually equal correct answers ARO future value. Until it is written off the
books.
Accretion expense formula correct answers = ARO * the discount rate
Exchange of nonmonetary assets correct answers Occurs when companies exchange assets like
PPE. Ordinarily companies account for the exchange on the basis of the fair value of the assets
received.
General form of the J/E for exchange of nonmonetary assets correct answers Debit New asset
(for fair value), debit old asset accumulated depreciation, credit old asset cost, credit realized
gain.
Used if the transaction has commercial substance, then gains/losses are recognized in entirety
Commercial substance correct answers A characteristic of a transaction that causes a change in
future cash flows.
, Exchange of nonmonetary assets when the transaction has no commercial substance correct
answers Depending upon the circumstances of the exchange, we may not recognize all of an
implied gain.
We always recognize implied losses in their entirety.
3 Types of exchanges with no commercial substance correct answers 1. No cash received = no
gain recognized (reduces the value of the new PPE to balance).
2. Cash received > 25% of the fair value of assets received (cash and new asset). Recognize
100% of the IMPLIED gain (which often changes fair value of the received asset).
3. Cash received < 25% of the fair value of assets received (cash and new asset) = recognize
partial gain.
Recognized partial gain when cash received < 25% of the fair value of assets received. correct
answers (Cash received/fair value of PPE and cash) * implied gain
Implied gain correct answers Fair value of assets received (cash and asset) - book value of assets
given up
So if the implied gain is 1000, but you only received 16.7% cash of fair value of assets, you'd
recognize a partial gain of correct answers 167.
Assets acquired by issuing common stock are valued at the fair value of the securities or correct
answers the fair value of the assets, whichever is more clearly evident.
contingent liability correct answers is an existing condition or set of circumstances involving
uncertainty about a possible loss that will ultimately be resolved when some future event occurs
or fails to occur.
"For example, if an oil refining company experiences an explosion and some of its workers are
hurt or killed, lawsuits will likely result. Until the lawsuits are settled or resolved in court, there
