QUESTION: 1805

Quasar, Inc., currently shows assets worth 5,000 and a debt of 1,500. During the year, it capitalized interest expense worth 300, of which 60 was amortized. Quasar's tax rate is 50%. If it had expensed the interest paid, which of the following would be true?

Its operating cash flow would be lower by 150.
Its tax expense would be lower by 150.
Its equity would be higher by 300.
Its operating cash flow would be lower by 300.

Answer(s): A

Explanation:

If Quasar had expensed the interest, its tax savings would have been 300*50% = 150. By capitalizing, it amortized 60, leading to a tax savings of 60*50%=30. Thus, if it had expensed the interest, the tax expense would have been lower by 150-30=120 (What would the effect on net income be? The net income would be lower by (300 - 60 - 120 = 120). When capitalizing, all the expense gets charged to investing cash flow while expensing charges the entire cash flow to operating cash flow. After tax, this results in an operating cash flow of -300*(1-0.5) = -150. Thus, expensing would have resulted in an operating cash flow lower by 150.

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QUESTION: 1806

On January 1, 1992, Carter Inc. purchased equipment having an estimated salvage value equal to 20% of its original cost at the end of a 10 year life. The equipment was sold December 31, 1996 for 50% of itsoriginal cost. If the equipment's disposition resulted in a reported loss, which of the following depreciation methods did Carter use?

Straight-line.
Double-declining-balance.
Composite.
Sum-of-the-years'-digits
Accelerated.

Answer(s): A

Explanation:

The straight-line method yields the lowest amount of depreciation for the early part of the depreciable life of the asset. Because only 50% of the original cost was received and straight-line accumulated depreciation equaled 40% of cost ((100%-20%) / 10 years X 5 years( at time of sale, a 10% loss (50%-(100%-40%)) occurs.

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QUESTION: 1807

The accounting equation reads:

Revenue minus expenses equals profit
Assets equal Liabilities plus Stockholders' Equity
Assets plus Liabilities is equal to Stockholders' Equity
None of these answers is correct

Answer(s): B

Explanation:

The accounting equation shows us that the Assets (Own) are equal to the Liabilities (obligations) plus the Stockholders' Equity.

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QUESTION: 1808

Which of the following is NOT an objective of the conceptual framework devised by FASB?

Establish a logical and coherent system of accounting thought.
Establish objectives of financial reporting by businesses.
Identify the characteristics of accounting information that make its disclosure useful.
Enforce a single standard of accounting disclosures across the various industries.

Answer(s): D

Explanation:

The conceptual framework devised by FASB is not concerned with enforcing any rigid standards of accounting disclosures. Rather, it is a system of laying out the goals and objectives of accounting disclosure and formulating standards which could best serve the needs of the industry. In such a framework, a fair amount of flexibility is built-in so that the differing characteristics of various industries can be accommodated. The various SFACs which comprise the conceptual framework are the foundation on which the detailed principles and pronouncements of the FASB are based.

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QUESTION: 1805

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QUESTION: 1808

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