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21. ￡millions 2012 2011 Accounts receivables, gross 6,620 4,840 Allowance for doubtful accounts 92 56 Write-offs during the year 84 42 Based on the above information about a company, the bad debt expense (in millions) for 2012 is closest to: A.￡36 B.￡84 C.￡120

Ans: C. The allowance for doubtful accounts increases by the bad debt recognized for the year and decreases by the amount written off during the year. Beginning balance allowance 56 Plus bad debt expense ? Less write-offs (84) Ending balance allowance 92 Therefore bad debt expense = 120

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22. During late Dec. 2012 Popular Publishing Inc. acquired a small competitor, Max’s Magazines. In the evaluation of the acquisition it was determined that the customers lists of Max’s Magazines had a fair value of $50,000. Popular had spent $15,000 during the year updating and maintaining its own customer lists. What is the correct amount and asset account that will be recorded by Popular for the year ended Dec. 2012, related to customer lists? A. $50,000 identifiable intangible asset. B. $65,000 identifiable intangible asset. C. $50,000 unidentifiable intangible asset.

Ans: A. The purchased customer list is an identifiable intangible because it can be sold separately form the company and it would be recorded at its fair market value, the amount paid for it in the acquisition, $50,000. The amount spent by Popular on its own lists, $15,000, would have to be expensed because internally generated intangibles are not capitalized.

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23. Which of the following statements about balance sheets is most accurate? Under: A. U.S.GAAP, intangibles must be valued at historical cost. B. IFRS, a commercial real estate company should use a liquidity based presentation. C. IFRS, a classified balance sheet must present current assets before non-current assets.

Ans: A. Under U.S.GAAP, intangibles must be valued at historical cost, where under IFRS, they can be valued at cost or revaluation. B is incorrect. Under IFRS, firms can choose to use a liquidity-based format if the presentation is more relevant and reliable. Liquidity-based presentations, which are often used in the banking industry, present assets and liquidities in the order of liquidity. C is incorrect. Both IFRS and U.S.GAAP require firms to separately report their current assets and noncurrent assets and current and noncurrent liabilities. The current/noncurrent format is known as a classified balance sheet and is useful in evaluating liquidity. But the current assets are not necessarily presented before non-current assets.

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24. At the beginning of the year, a company had total shareholders’ equity consisting of ￥50,000 in retained earnings. During the year, the following events occurred: ￥ Net income reported 42,000 Dividend paid 7,000 Realized loss on available-for-sale investments 3,000 Foreign currency translation gain on foreign subsidiaries 8,000 Repurchase of company stock, to be held as Treasury stock 6,000 The total shareholders’ equity at the end of the year is closest to: A. ￥268,000 B. ￥284,000 C. ￥287,000

Ans: C. Shareholders’ Equity (￥) Start-of-year share capital 200,000 Less Treasury stock (6,000) Beginning retained earnings 50,000 Plus net income 42,000 Less dividends paid (7,000) Ending retained earnings 85,000 85,000 Accumulated other comprehensive income Foreign currency translation gain 8,000 End-of-year shareholders’ equity 287,000

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25. At the beginning of the year, a company had total shareholders’ equity consisting of ￥200,000 in common share capital and ￥50,000 in retained earnings. During the year, the following events occurred: Net income reported ￥42,000 Dividends paid ￥7,000 Unrealized loss on available-for-sale investments ￥3,000 Repurchase of company stock, to be held as Treasury stock ￥6,000 The total shareholders’ equity at the end of the year is closest to: A. ￥276,000. B. ￥279,000. C. ￥282,000.

Ans: A. Shareholders’ Equity (￥) Start-of-year share capital 200,000 Less Treasury stock (6,000) Beginning retained earnings 50,000 Plus net income 42,000 Less dividends paid (7,000) Ending retained earnings 85,000 85,000 Accumulated other comprehensive income Unrealized loss on available-for-sale investments (3,000) End-of-year shareholders’ equity 276,000

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26. At the start of the year, a company’s capital contributed by owners and retained earnings accounts had balances of $10,000 and $6,000, respectively. During the year, the following events took place: Net income earned $4,000 Interest paid on debt $500 Repayment of long-term debt $1,000 Proceeds from shares issued $1,000 Dividends paid $600 The end-of-year owners’ equity is closest to: A. $19,400 B. $19,900 C. $20,400

Ans: C. Shareholders’ Equity (￥) Start-of-year share capital $10,000 Additional shares issued 1,000 Beginning retained earnings 6,000 Plus net income 4,000 Less dividends paid (600) Ending retained earnings 9,400 9,400 End-of-year shareholders’ equity $20,400

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27. The item “noncontrolling interest” included as a component of equity represents the: A. firm’s ownership of less than 50% of a subsidiary. B. portion of a subsidiary the firm does not own. C. firm’s ownership of less than 30% of a subsidiary.

Ans: B. When a firm has a controlling interest (>50%) in a subsidiary, but less than 100% ownership, it includes (consolidates) the assets and liabilities of that firm on its own balance sheet. Noncontrolling (or minority) interest in the equity section of the balance sheet represents the portion of the subsidiary that is not owned by the reporting firm.

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28. Under U.S.GAAP, land owned by the firm is most likely to be reported on the balance sheet at: A. historical cost. B. fair market value minus selling costs. C. historical cost less accumulated depreciation.

Ans: A. Unless impairment has been recognized, land is reported at historical cost and is not subject to depreciation. Increases in value are not reflected in balance sheet values under U.S.GAAP.

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29.  A company’s investments in marketable securities include a 3-year tax-exempt bond classified as held-to-maturity and a 5-year Treasury not classified as available-for-sale. On its income statement, the company should report the coupon interest received from: A. both of these securities. B. neither of these securities. C. only one of these securities.

Ans: A. Interest and dividends received are reported as income, regardless of the balance sheet classification of marketable securities.

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30. The category of items on the balance sheet that typically offers an analyst the best information on a non-financial firm’s investing activities is: A. current assets. B. current liabilities. C. noncurrent assets.

Ans: C. Noncurrent assets are those that will not be used up during the next year or during the firm’s operating cycle. Firm investment is typically in assets that are longer term in nature. A is incorrect.  Current assets include cash and other assets that will likely be converted into cash or used up within one year or one operating cycle, whichever is greater. B is incorrect. Current liabilities are obligations that will be satisfied within one year or one operating cycle, whichever is greater.