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NEW QUESTION 83
According to the FASB conceptual framework, which of the following statements conforms to the
realization concept?
- A. Depreciated equipment was sold in exchange for a note receivable.
- B. Product unit costs were assigned to cost of goods sold when the units were sold.
- C. Equipment depreciation was assigned to a production department and then to product unit costs.
- D. Cash was collected on accounts receivable.
Answer: A
Explanation:
Choice "b" is correct. Revenues and gains are realized when assets are exchanged for cash or claims to
cash. SFAC 5 para. 83.
Choice "a" is incorrect. Assigning depreciation in a production department is an example of allocating
overhead. There is no realization associated with the assignment.
Choice "c" is incorrect. The realization concept is integral to accounting for revenues and expenses and is
not connected to collection of receivables.
Choice "d" is incorrect. Assignment of overhead costs to products and thus to cost of goods sold is an
example of matching. There is no realization associated with this assignment.
NEW QUESTION 84
What information should a public company present about revenues from its reporting segments?
- A. Disclose separately the amount of sales to unaffiliated customers and the amount of intracompany
sales. - B. No disclosure of revenues from foreign operations need be reported.
- C. Disclose as a combined amount sales to unaffiliated customers and intracompany sales between
geographic areas. - D. Disclose separately the amount of sales to unaffiliated customers but not the amount of intracompany
sales between geographic areas.
Answer: A
Explanation:
Choice "a" is correct. Unaffiliated customers sales and intracompany sales must be disclosed separately.
NEW QUESTION 85
Tack, Inc. reported a retained earnings balance of $150,000 at December 31,1990. In June 1991, Tack
discovered that merchandise costing $40,000 had not been included in inventory in its 1990 financial
statements. Tack has a 30% tax rate. What amount should Tack report as adjusted beginning retained
earnings in its statement of retained earnings at December 31, 1991?
- A. $190,000
- B. $178,000
- C. $150,000
- D. $122,000
Answer: B
Explanation:
Choice "b" is correct. $178,000.
NEW QUESTION 86
Chester Corp. was a development stage enterprise from its inception on September 1, 1987 to December
3 1, 1988. The following information was taken from Chester's accounting records for the above period:
For the period September 1, 1987 to December 31, 1988, what amount should Chester report as net
loss?
- A. $150,000
- B. $ 50,000
- C. $450,000
- D. $350,000
Answer: C
Explanation:
Choice "d" is correct. $450,000 net loss for the period Sept. 1, 1987 to DeC. 31, 1988.
Rule: "Development stage enterprises" present their FS in accordance with GAAP and make additional
disclosures such as: cumulative net losses, cumulative deficit, cumulative sales and expenses.
NEW QUESTION 87
There are multiple active markets for a financial asset with different observable market prices:
There is no principal market for the financial asset. What is the fair value of the asset?
- A. $76
- B. $72
- C. $71
- D. $74
Answer: D
Explanation:
Choice "c" is correct. When there is no principal market, the price in the most advantageous market is the
fair value measurement. Although transaction costs are not included in the fair value measurement, they
are used to determine the most advantageous market, as follows:
Market A: Net Price = Quoted Price - Transaction Costs = $76 - 5 = $71 Market B: Net Price = Quoted
Price - Transaction Costs = $74 - 2 = $72
Because the net price in Market B is higher than the net price in Market A, Market B is the most
advantageous market and the quoted price in Market B ($74) is the fair value of the asset. Choice "a" is incorrect.
This is the net price in Market A.
Fair value does not include transaction costs. Choice "b" is incorrect. This is the net price in Market B.
This net price indicates that Market B is the most
advantageous market, but the net price is not the fair value because fair value does not include
transaction costs. Choice "d" is incorrect. If Market A were the principal market for the asset, then this
would be the fair value of the asset. However, because there is no principal market, the price in the most
advantageous market (Market B) is the price of the asset.
NEW QUESTION 88
According to the FASB conceptual framework, comprehensive income includes which of the following?
- A. Option B
- B. Option D
- C. Option C
- D. Option A
Answer: A
Explanation:
Choice "b" is correct. Comprehensive income is the change in equity of a business during a period from
transactions and other events and circumstances from non-owner sources. It includes all changes in
equity except those resulting from investments by owners and distributions to owners. SFAC 6 para 70.
NEW QUESTION 89
In financial reporting of segment data, which of the following items is always used in determining a
segment's operating income?
- A. Income tax expense.
- B. Sales to other segments.
- C. Gain or loss on discontinued operations.
- D. General corporate expense.
Answer: B
Explanation:
Choice "b" is correct. Sales to other segments would be used in determining a segment's operating
income. Rule: Equity in net income of another company, general corporate expenses, interest, income tax
expense, and gains or losses on discontinued operations are all not included in segment profit unless they
are included in the determination of segment profit reported to the "Chief Operating Decision Maker."
NEW QUESTION 90
Grum Corp., a publicly-owned corporation, is subject to the requirements for segment reporting. In its
income statement for the year ended December 31, 1991, Grum reported revenues of $50,000,000,
operating expenses of $47,000,000, and net income of $3,000,000. Operating expenses include payroll
costs of $ 15,000,000. Grum's combined identifiable assets of all industry segments at December 31,
1 991, were $40,000,000.
Cott Co.'s four business segments have revenues and identifiable assets expressed as percentages of
Cott's total revenues and total assets as follows:
Which of these business segments are deemed to be reportable segments?
- A. Ebon, Fair, Gel, and Hak.
- B. Ebon, Fair, and Gel only.
- C. Ebon only.
- D. Ebon and Fair only.
Answer: A
Explanation:
Rule: A segment must be at least 10% of:
1 . Combined revenues (whether intersegment or unaffiliated customers), or
2 . Operating income (of all segments not having an operating loss), or
3 . Identifiable assets.
Choice "d" is correct. Ebon, Fair, Gel, and Hak, since all four companies meet at least one of the criteria.
NEW QUESTION 91
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with
Quo's president and outside accountants, made changes in accounting policies, corrected several errors
dating from 1992 and before, and instituted new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these
transactions as: a change in accounting principle, a change in accounting estimate, a correction of an
error in previously presented financial statements, or neither an accounting change nor an accounting
error.
Item to Be Answered
Quo changed from LIFO to FIFO to account for its finished goods inventory.
List A (Select one)
- A. Change in accounting principal.
- B. Correction of an error in previously presented financial statements.
- C. Neither an accounting change nor an accounting error.
- D. Change in accounting estimate.
Answer: A
Explanation:
Choice "a" is correct. Change from LIFO to FIFO is a change in accounting principle.
NEW QUESTION 92
Which of the following is a generally accepted accounting principle that illustrates the practice of
conservatism during a particular reporting period?
- A. Reporting inventory at the lower of cost or market value.
- B. Accrual of a contingency deemed to be reasonably possible.
- C. Capitalization of research and development costs.
- D. Reporting investments with appreciated market values at market value.
Answer: A
Explanation:
Choice "d" is correct. The rule of conservatism states that revenues and gains should be recognized when
the earnings process is complete, but that expenses and losses should be expensed immediately.
Reporting inventory at the lower of cost or market requires the recording of a loss on inventory when
market is lower than cost in the period the loss is sustained, rather than when the inventory is sold,
consistent with the rule of conservatism. Choice "a" is incorrect. Because the future benefits of R&D costs
are questionable, these cost should be expensed immediately, consistent with the rule of conservatism
and the matching principle. Choice "b" is incorrect. The rule of conservatism only requires the accrual of
"probable" losses. The accrual of a reasonably possible loss is not required and the accrual of any
contingent gain, whether probable, reasonably possible, or remote, is prohibited. Choice "c" is incorrect.
The reporting of marketable securities with appreciated values at market value requires the recording of a
gain on the asset before the gain is realized. This contradicts the rule of conservatism, but is allowed
because fair value is a more relevant measure of the value of marketable securities.
NEW QUESTION 93
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with
Quo's president and outside accountants, made changes in accounting policies, corrected several errors
dating from 1992 and before, and instituted new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List B represents the general accounting treatment
required for these transactions. These treatments are:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the
accounting change or error correction in the 1993 financial statements, and do not restate the 1992
financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust
1 992 beginning retained earnings if the error or change affects a period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but do not restate
1 992 financial statements.
Item to Be Answered
Quo changed from FIFO to average cost to account for its raw materials and work in process inventories.
List B (Select one)
- A. Retroactive or retrospective restatement approach.
- B. Cumulative effect approach.
- C. Prospective approach.
Answer: A
Explanation:
Choice "B" is correct. A change in accounting principle should be shown in the retained earnings
statement of the earliest year presented as an adjustment of the beginning balance. All prior year financial
statements are recast.
NEW QUESTION 94
Which of the following types of entities are required to report on business segments?
- A. Publicly-traded enterprises.
- B. Not-for-profit enterprises.
- C. Joint ventures.
- D. Nonpublic business enterprises.
Answer: D
Explanation:
Choice "b" is correct. Only publicly-traded enterprises are required to report on business segments.
Choices "a", "c", and "d" are incorrect, per the Explanation: above.
NEW QUESTION 95
Which of the following is true regarding the presentation of "comprehensive income."
- A. Option C
- B. Option D
- C. Option B
- D. Option A
Answer: A
Explanation:
Choice "c" is correct. No - Yes.
Comprehensive income may be shown on the face of a combined "statement of income and
comprehensive income" a separate section below net income, or in:
1 . Separate "statement of comprehensive income," or as a
2 . Component of the "statement of changes of owners' equity."
The income tax expense or benefit allocated to components must be disclosed, either on the face of the
statement or in notes to the statement.
Choices "a", "b", and "d" are incorrect, per the above rules.
NEW QUESTION 96
In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds
and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions.
Gold's gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Assume the
transaction to purchase its own outstanding bonds is unusual in nature and has occurred infrequently.
Gold should report the:
- A. Effect of its own bond transaction gain in income before extraordinary items, and report the Iron bond
transaction as an extraordinary loss. - B. Net effect of the two transactions in income before extraordinary items.
- C. Effect of its own bond transaction as an extraordinary gain, and report the Iron bond transaction loss in
income before extraordinary items. - D. Net effect of the two transactions as an extraordinary gain.
Answer: C
Explanation:
Choice "d" is correct, these are two separate transactions because Gold Corp. (1) sold Iron Corp. bonds
(an investment) for a loss, and, (2) bought back its own (Gold) Corp. bonds (a debt) for a gain. This is not
a "refinancing" (where one would sell new bond debt to buy back old bond debt outstanding).
The gain from the purchase of its own bonds is an "extraordinary gain" because it is both unusual in
nature and infrequently occurring (per APB Opinion No. 30 and SFAS No. 145). The Iron Corp.
transaction is a loss in "income before extraordinary items."
Choices "a" and "b" are incorrect. The two transactions are separate and cannot be netted.
Choice "c" is incorrect. Just the opposite. The sale of the investment is a loss in "income before
extraordinary items," while the purchase of its bond debt is an "extraordinary gain" according to the
provisions of APB Opinion No. 30.
NEW QUESTION 97
During 1990, Fuqua Steel Co. had the following unusual financial events occur:
. Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain.
Fuqua has frequently retired bonds early when interest rates declined significantly.
. A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth
similar loss sustained in a 5-year period at that location.
. A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000.
This was Fuqua's first divestiture of one of its operating segments.
Before income taxes, what amount should be disclosed as the gain (loss) from extraordinary items in
1 990?
- A. $5,000
- B. $0
- C. $(90,000)
- D. $(350,000)
Answer: B
Explanation:
Choice "a" is correct. $0. Note: The sale of the steel transportation component resulted in a loss from
discontinued operations and is reported after "income from continuing operations." The steel forming
segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature" and does not occur
infrequently, therefore, it is not an "extraordinary item," and should be reported separately as a
component of "income from continuing operations." The retirement of debt, although unusual, is not
infrequent for the company; therefore, the gain does not qualify for classification as an extraordinary item
per APBO No. 30 (and SFAS No. 145).
NEW QUESTION 98
Which of the following statements regarding fair value is/are correct?
I. The fair value of an asset or liability is specific to the entity making the fair value measurement.
II. Fair value is the price to acquire an asset or assume a liability.
III. Fair value includes transportation costs, but not transaction costs.
IV. The price in the principal market for an asset or liability will be the fair value measurement.
- A. I & IV
- B. II & III
- C. III & IV
- D. I & II
Answer: C
Explanation:
Choice "d" is correct. Statements III and IV are correct. Statement I is incorrect because fair value is a
market-specific measure, not an entity-specific measure. Statement II is incorrect because fair value is an
exit price (the price to sell an asset or transfer a liability), not an entrance price. Choices "a", "b" and "c"
are incorrect, per the above Explanation: .
NEW QUESTION 99
In which of the following situations should a company report a prior-period adjustment?
- A. The scrapping of an asset prior to the end of its expected useful life.
- B. The correction of a mathematical error in the calculation of prior years' depreciation.
- C. A switch from the straight-line to double-declining balance method of depreciation.
- D. A change in the estimated useful lives of fixed assets purchased in prior years.
Answer: B
Explanation:
Choice "b" is correct. Prior period adjustments consist of: corrections of errors in the financial statements
of prior periods, retroactive restatements required by new GAAP pronouncements, and changes from a
non-GAAP method of accounting to a GAAP method of accounting (which are corrections of errors).
Choice "a" is incorrect. This change is a change in accounting estimate. Choice "c" is incorrect. This
change is a change for one GAAP method of depreciation to another GAAP method of depreciation.
Under SFAS No. 154, it is treated as a change in accounting estimate effected by a change in accounting
principle and is handled prospectively, and not as a prior-period adjustment. Choice "d" is incorrect. This
is a business activity ordinary in nature.
NEW QUESTION 100
Which of the following should be reported as a prior period adjustment?
- A. Option B
- B. Option D
- C. Option C
- D. Option A
Answer: A
Explanation:
Choice "b" is correct. No - Yes Change in estimated lives of depreciable assets is a "change in estimate."
They affect only current and future periods (not "prior periods," not retained earnings). Change from
unaccepted principle to accepted principle is an example of an error of a prior period that should be
reported as a "prior period adjustment."
NEW QUESTION 101
On December 31, 20X2, the Board of Directors of Maxy Manufacturing, Inc. committed to a plan to
discontinue the operations of its Alpha division. Maxy estimated that Alpha's 20X3 operating loss would
be $500,000 and that the fair value of Alpha's facilities was $300,000 less than their carrying amounts.
The estimate for 20X3 turned out to be correct. Alpha's 20X2 operating loss was $1,400,000, and the
division was actually sold for $400,000 less than its carrying amount. Maxy's effective tax rate is 30%.
In its 20X3 income statement, what amount should Maxy report as loss from discontinued operations?
- A. $600,000
- B. $350,000
- C. $420,000
- D. $500,000
Answer: C
Explanation:
Choice "c" is correct. The 20X3 loss from discontinued operations would include both the 20X3 operating
loss of $500,000 (which turned out to be a correct estimate) and the "additional" loss (on disposal) of
$ 100,000, net of tax, for a total of $600,000 x .70 or $420,000. Choice "a" is incorrect. It includes the 20X3
operating loss of $500,000 but not the $300,000 impairment loss but does report the 20X3 operating loss
net of tax. Choice "b" is incorrect. It includes the 20X3 operating loss of $500,000, but not the $100,000
loss on disposal, and reports the 20X3 operating loss gross of tax and not net of tax. Choice "d" is
incorrect. It reports the 20X3 loss from discontinued operations gross of tax and not net of tax. The 20X3
loss from discontinued operations should include both the 20X3 operating loss of $500,000 and the loss
on disposal of $100,000, net of tax, for a total of $600,000 x .70 or $420,000.
NEW QUESTION 102
A planned volume variance in the first quarter, which is expected to be absorbed by the end of the fiscal
period, ordinarily should be deferred at the end of the first quarter if it is:
- A. Option C
- B. Option B
- C. Option A
- D. Option D
Answer: D
Explanation:
Choice "d" is correct. Yes - Yes.
Rule: Volume variances that are planned or expected to be absorbed by the end of the year should be
deferred at interim whether favorable or unfavorable.
NEW QUESTION 103
In September 1996, Koff Co.'s operating plant was destroyed by an earthquake. Earthquakes are rare in
the area in which the plant was located. The portion of the resultant loss not covered by insurance was
$ 700,000. Koff's income tax rate for 1996 was 40%. In its 1996 income statement, what amount should
Koff report as extraordinary loss?
- A. $0
- B. $280,000
- C. $420,000
- D. $700,000
Answer: C
Explanation:
Choice "c" is correct. For a loss to be reported as an extraordinary loss, the event causing the loss must
be both unusual in nature and infrequent in occurrence. The earthquake in this case does meet these
criteria so the loss is reported net of income tax effect as an extraordinary loss of
$ 420,000 (60% of the total $700,000 loss). APB 30.11, .19-.26
Choice "a" is incorrect. Review the criteria for reporting an extraordinary loss.
Choice "b" is incorrect. This is the tax effect of the loss. Review your calculations.
Choice "d" is incorrect. It is not appropriate to report the full loss as an extraordinary loss.
NEW QUESTION 104
In single period statements, which of the following should not be reflected as an adjustment to the
opening balance of retained earnings?
- A. Cumulative effect of a change from LIFO to FIFO in valuing merchandise inventory.
- B. Effect of a failure to provide for uncollectible accounts in the previous period.
- C. Cumulative effect of a change from the percentage of completion to the completed contract method of
accounting for long-term construction projects. - D. Effect of a decrease in the estimated useful life of depreciable equipment.
Answer: D
Explanation:
Choice "b" is correct. A change in the estimated useful life of a depreciable asset is a change in estimate
handled prospectively. No adjustment to retained earnings is necessary. Choice "a" is incorrect. The
correction of a failure to provide for uncollectible accounts is considered to be a correction of an error. The
opening balance of retained earnings would be adjusted to correct the error. Choice "c" is incorrect. This
change is a change in accounting principle and is handled retrospectively. With retrospective application,
the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.
Choice "d" is incorrect. This change is a change in accounting principle and is handled retrospectively.
With retrospective application, the opening balance of retained earnings would be adjusted to reflect the
cumulative effect of the changes.
NEW QUESTION 105
During the first quarter of 1993, Tech Co. had income before taxes of $200,000, and its effective income
tax rate was 15%. Tech's 1992 effective annual income tax rate was 30%, but Tech expects its 1993
effective annual income tax rate to be 25%. In its first quarter interim income statement, what amount of
income tax expense should Tech report?
- A. $0
- B. $50,000
- C. $60,000
- D. $30,000
Answer: B
Explanation:
Choice "c" is correct. Interim period tax expense is the estimated annual effective tax rate (25% in this
case) applied to the year-to-date income before taxes minus the tax expense recognized in previous
interim periods. Since this question involves the first quarter, there are no previous interim periods. 25% *
$ 200,000 = $50,000. FIN 18, para. 16
Choice "a" is incorrect. Income tax expense is reported in interim income statements.
Choice "b" is incorrect. The 1993 annual estimated tax rate, not the first quarter effective tax rate, is used
to calculate income tax expense for interim statements.
Choice "d" is incorrect. The 1993 annual estimated tax rate, not the 1992 annual effective tax rate, is used
to calculate income tax expense for interim statements.
NEW QUESTION 106
Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market
price is expected to return to previous levels by the end of the year. At the end of the year the decline had
not reversed. When should the loss be reported in Petal's interim income statements?
- A. Ratably over the third and fourth quarters.
- B. In the second quarter only.
- C. In the fourth quarter only.
- D. Ratably over the second, third, and forth [sic] quarters.
Answer: C
Explanation:
Choice "d" is correct. When the loss is probable and estimable, the expected loss must be recorded in full.
This loss becomes such at the end of the fourth quarter. Therefore, the inventory must be valued on the
year-end at the lower of cost or market, recognizing the loss at that time. Choice "a" is incorrect. Expected
losses must be recorded in full when the loss is probable and estimable and not ratably over several
quarters. Choice "b" is incorrect. Expected losses must be recorded in full when the loss is probable and
estimable and not ratably over several quarters. Choice "c" is incorrect. Since the loss is not probable at
the end of the second quarter, no amount should be recognized at that time.
NEW QUESTION 107
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