56 SURGENT MCQ 2112 Flashcards
A company decided to sell an unprofitable division of its business. The company can sell the entire operation for $800,000, and the buyer will assume all assets and liabilities of the operations. The tax rate is 30%. The assets and liabilities of the discontinued operation are as follows:
Buildings $5,000,000
Accumulated depreciation 3,000,000
Mortgage on buildings 1,100,000
Inventory 500,000
Accounts payable 600,000
Accounts receivable 200,000
What is the after-tax net loss on the disposal of the division?
$1,540,000
$2,200,000
$200,000
$140,000
$140,000
A company has the following items on its year-end trial balance:
Net sales $500,000
Common stock 100,000
Insurance expense 75,000
Wages 50,000
Cost of goods sold 100,000
Cash 40,000
Accounts payable 25,000
Interest payable 20,000
What is the company’s gross profit?
$275,000
$500,000
$230,000
$400,000
Make sure to find the key word and figure out what the question is askin
Question #300095
$400,000
As presented on a multiple-step income statement, gross profit (or gross margin) is net sales less cost of goods sold. In this problem, gross profit is:
Net sales $500,000
Cost of goods sold (100,000)
Gross profit $400,000
Reference
2112.01
2112.07
Authorities
FASB Glossary
A company’s activities for Year 2 included the following:
Gross sales $2,850,000
Cost of goods sold 1,970,000
Selling and administrative expense 489,000
Adjustment for a prior-year understatement of amortization expense
36,000
Sales discounts 47,000
Loss on sale of equipment 21,000
Loss on disposal of a discontinued business segment 12,000
The company has a 40% effective income tax rate.
What is the company’s net income for Year 2?
$153,000
$145,80
$181,800
$186,600
Make sure to find the key word
$186,600
Gross sales
(Sales Discounts)
NET SALES
(Cost of goods sold)
GROSS PROFIT
(Selling and administrative expenses)
OPERATING INCOME
Other income:
(Loss on sale of equipment)
INCOME BEFORE TAXES
(Provision for income taxes {x * 0.40})
INCOME FROM CONTINUING OPERATIONS
Discontinued operations:
(Loss from disposal of discontinued business segment, net of applicable tax savings {x * [1-0.40]})
NET INCOME
A company’s activities for Year 2 included the following:
Gross sales $3,600,000
Cost of goods sold 1,200,000
Selling and administrative expense 500,000
Adjustment for a prior-year understatement of
amortization expense 59,000
Sales returns 34,000
Gain on sale of investment in equity securities 8,000
Gain on disposal of a discontinued business segment 4,000
The company has a 30% effective income tax rate. What is the company’s net income for Year 2?
$1,316,000
$1,273,300
$1,267,700
$1,314,600
$1,314,600
** Prior-period adjustments are made to beginning retained earnings, not net income.**
===========
A partial listing of a company’s accounts is presented below:
Revenues $325,000
Operating expenses 253,000
Unrealized holding loss on available-for- sale debt securities, net of tax 7,500
Income tax expense 24,000
Based on this information, how much should be reported as net income?
$40,500
$55,500
$72,000
$48,000
Question #302275
$48,000
The company should report $48,000 as net income:
Revenues $325,000
Less: Operating expenses (253,000)
Less: Income tax expense (24,000)
Net income $ 48,000
Net income or loss for an accounting period is determined by matching realized revenues with those expenses and expired costs necessary to generate the related revenue. Revenues are inflows of assets or settlements of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations. Expenses are outflows of assets or incurrences of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations, and include operating expenses and income tax expense.
Net income is $48,000 ($325,000 – $253,000 – $24,000).
Unrealized holding gains and losses on available-for-sale debt securities are not reported on the income statement. They are reported as Other Comprehensive Income and in Accumulated Other Comprehensive Income in Shareholders’ Equity.
Relevant Terms
Expense
Net Income
Other Comprehensive Income
Reference
2112.05
2113.03
A partial listing of a company’s accounts is presented below:
Revenues $80,000
Operating expenses 50,000
Foreign currency translation adjustment gain,
net of tax 4,000
Income tax expense 10,000
What amount should the company report as net income?
$34,000
$24,000
$30,000
$20,000
Question #301723
$20,000
Revenues $80,000
Less: Operating expenses (50,000)
Less: Income tax expense (10,000)
Net income $20,000
Net income or loss for an accounting period is determined by matching realized revenues with those expenses and expired costs necessary to generate the related revenue. Revenues are inflows of assets or settlements of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations. Expenses are outflows of assets or incurrences of liabilities, during a period, from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations, and include Operating Expenses and Income Tax Expense. Net income is $20,000 ($80,000 − $50,000 − $10,000).
Foreign currency translation adjustment gain is an item of Other Comprehensive Income (OCI), and is included in comprehensive income but not net income; OCI is reported as a direct charge or credit to equity.
Clear Co.’s trial balance has the following selected accounts:
Cash (includes $10,000 in bond-sinking
fund for long-term bond payable) $50,000
Accounts receivable 20,000
Allowance for doubtful accounts 5,000
Deposits received from customers 3,000
Merchandise inventory 7,000
Unearned rent 1,000
Prepaid expenses 2,000
What amount should Clear report as total current assets in its balance sheet?
$67,000
$72,000
$74,000
$64,000
Question #301691
$64,000
A current asset is any asset expected to be sold, consumed, or exhausted through normal operations within one fiscal year or one operating cycle (whichever is greater). Current assets typically include cash and cash equivalents, receivables, inventory, and prepaid expenses. The allowance for doubtful accounts is a contra-current asset. Deposits received from customers and unearned rent are both liabilities; Clear should report the remaining $64,000 as total current assets.
Cash (net of $10,000 in bond-sinking
fund classified as Other Asset) $40,000
Accounts receivable 20,000
Allowance for doubtful accounts (5,000)
Merchandise inventory 7,000
Prepaid expenses 2,000
TOTAL $64,000
Relevant Terms
Accounts Receivable
Balance Sheet
Cash Equivalents
Contra
Current Assets
Inventory
Operating Cycle
Reference
2111.01
2111.02
2111.03
2111.04
Authorities
FASB ASC 210-10-45
During January of the previous year, Doe Corp. agreed to sell the assets and product line of its Hart division. The sale on January 15 of the current year resulted in a gain on disposal of $900,000. Not considering any impairment losses, Hart’s operating losses were $600,000 for the previous year and $50,000 for the current-year period January 1 through January 15.
Disregarding income taxes, what amount of net gain (loss) should be reported in Doe’s comparative current and previous years’ income statements?
Current year, $250,000; Previous year, $0
Current year, $900,000; Previous year, $(650,000)
Current year, $0; Previous year, $250,000
Current year, $850,000; Previous year, $(600,000)
Question #301590
Current year, $850,000; Previous year, $(600,000)
The sale of a division would be a discontinued operation since its disposition represents a strategic shift. The discontinued operation would be recorded in the year the sale occurred.
Previous Current
Net loss from continuing operations $(600,000) $(50,000)
Gain on sale of discontinued operations 900,000
Net income
$(600,000) $850,000
Reference
2112.08
Authorities
FASB ASC 205-20-45
Envoy Co. manufactures and sells household products. Envoy experienced losses associated with its small appliance group. Operations and cash flows for this group can be clearly distinguished from the rest of Envoy’s operations. In a strategic shift, Envoy plans to sell the small appliance group with its operations.
What is the earliest point at which Envoy should report the small appliance group as a discontinued operation?
When Envoy first sells any of the assets of the segment
When Envoy receives an offer for the segment
When Envoy sells the majority of the assets of the segment
When Envoy classifies it as held for sale
Question #300820
When Envoy classifies it as held for sale
Discontinued operations are presented in a separate section of the income statement after income from continuing operations. The discontinued operations section reflects the results of operations of an entity that is classified for sale or has actually been disposed of.
Relevant Terms
Discontinued Operations
Reference
2112.08
Authorities
FASB ASC 205-20-45-1
**
For the 8 months ended August 31, year 5, the carpet division of a flooring company, which is considered a major line of business, had an operating loss of $115,000 from operations. On September 1, year 5, the board of directors voted to discontinue the division’s operations. On December 31, year 5, the division was sold for a pretax loss of $135,000. The division’s operating loss for year 5 was $240,000. The company’s income tax rate is 30%. What amount of loss should the company report as **discontinued operations **in the December 31, year 5, income statement?
$168,000
$260,000
$182,000
$262,500
Question #302625
$262,500
Discontinued operations include all previously unrecognized gains or losses from the sale of the discontinued component and the results of operations for the discontinued component during the period, among other gains and losses.
During year 5, the division lost $240,000 and was sold for a loss of $135,000, creating a total gross loss of $375,000 ($240,000 + $135,000). On the income statement the total loss is reduced by the tax benefit associated with the loss of $112,500 ($375,000 × 30%) for a net loss of $262,500 ($375,000 − $112,500).
The $115,000 loss from the first 8 months of the year is already included in the $240,000 operating loss and is not needed to solve this problem.
Relevant Terms
Discontinued Operations
Losses
Reference
2112.08
Host Co. has adopted FASB ASC 205-20 (Presentation of Financial Statements—Discontinued Operations). On October 1, 20X1, in a strategic shift, Host Co. approved a plan to dispose of a segment of its business. Host expected that the sale would occur on April 1, 20X2, at an estimated gain of $350,000. The segment had actual and estimated operating losses as follows:
01/01/X1 to 09/30/X1 $(300,000)
10/01/X1 to 12/31/X1 (200,000)
01/01/X2 to 03/31/X2 (400,000)
Assuming that the segment qualified as a component under FASB ASC 205-20-45, in its 20X1 income statement, what should Host report as a loss from operation of a discontinued segment?
$250,000
$200,000
$600,000
$500,000
Question #300819
$500,000
Reference
2112.08
Authorities
FASB ASC 205-20-45-3
In Baer Food Co.’s 20X2 single-step income statement (statement of profit or loss), the section titled “Revenues” consisted of the following:
SEE PHOTO
In the revenues section of the 20X2 income statement, Baer Food should have reported total revenues of:
$216,300.
$215,400.
$203,700.
$201,900.
Question #300084
$201,900.
Items to be included in the revenue section of the 20X2 income statement:
Net sales revenue $187,000
Interest revenue 10,200
Gain on sale of equipment 4,700
Total revenues $201,900
========
Note: Generally accepted accounting principles require that the other items listed appear in other sections of the income statement or in another financial statement.
Reference
2112.07
Authorities
FASB ASC 225-10
In Dart Co.’s Year 2 single-step income statement, as prepared by Dart’s controller, the section titled “Revenues” consisted of the following:
Sales $250,000
Purchase discounts 3,000
Recovery of accounts written off 10,000
Total revenues $263,000
In its Year 2 single-step income statement (statement of profit or loss), what amount should Dart report as total revenues?
$263,000
$253,000
$260,000
$250,000
Question #300092
$250,000
The single-step income statement presents all revenue and gains in the upper part of the statement. Purchase discounts are shown as deductions in the expense section. Recovery of accounts written off has no effect on the income statement since cash is increased and allowance for doubtful accounts is decreased.
Reference: 2112.07
The income statement may be presented in either of two formats—single step or multiple step.
Single step: The single-step income statement is a simple and relatively straightforward presentation whereby all revenues and gains are combined at the top of the statement. From this subtotal, a total amount of all expenses and losses is deducted to render a net income figure. A popular variation of the single-step income statement is the separation of income taxes from the other expenses, resulting in an income figure before taxes (when revenues and gains are reduced by all other expenses and losses). Income tax is then deducted as a separate item, resulting in a net income figure.
Multiple step: Under the multiple-step income statement, a distinction is made between operating and nonoperating items. The typical format is that illustrated previously in the example of Tiger Co. (section 2112.01), wherein cost of goods sold is deducted from revenues to yield gross profit; selling and administrative expenses are then deducted to yield operating income; other income and expense items are then added and deducted to yield net income.
Term: Single-Step
A single-step income statement has all of the expenses subtracted from all of the revenues for income from continuing operations. It does not show gross margin (profit) and does not classify revenues, expenses, gains, and losses into various categories. This income statement does not separate operating results from other nonoperating activities—other revenues and gains and other expense and losses. This income statement may classify expenses by function—manufacturing, selling, and administrative. The alternative is a multiple-step income statement.
Reference
2112.07
Authorities
FASB ASC 225-10
FASB ASC Glossary
On April 30, Deer approved a plan to dispose of a segment of its business. For the period January 1 through April 30, the segment had revenues of $500,000 and expenses of $800,000. The assets of the segment were sold on October 15, at a loss for which no tax benefit is available. In its income statement for the calendar year, how should Deer report the segment’s operations from January 1 to April 30?
$500,000 and $800,000 included with revenues and expenses, respectively, as part of continuing operations
$300,000 reported as a net loss, as part of continuing operations
$300,000 reported as an extraordinary loss
$300,000 reported as a loss from discontinued operations
Question #301591
$300,000 reported as a loss from discontinued operations
The operating loss and the loss on the sale must be reported as the loss for the discontinued operation. (Note: The concept of “extraordinary” items has been eliminated from GAAP and is therefore not a valid response.)
Revenues $ 500,000
Expenses (800,000)
Loss from discontinued operations $(300,000)
Relevant Terms
Discontinued Operations
Segment
Reference
2112.08
Authorities
FASB ASC 205-20-45
Munn Corp.’s income statements for the years ended December 31, 20X2 and 20X1, included the following, before adjustments:
20X2 20X1
Operating income
$ 800,000 $600,000
Gain on sale of division
450,000 -0-
1,250,000 600,000
Provision for income taxes
375,000 180,000
Net income
$ 875,000 $420,000
========== ========
On January 1, 20X2, in a strategic shift, Munn agreed to sell the assets and product line of one its operating divisions for $1,600,000. The sale was consummated on December 31, 20X2, and resulted in a gain on disposition of $450,000. This division’s pretax losses were $320,000 in 20X2 and $250,000 in 20X1. The income tax rate for both years was 30%. In preparing revised comparative income statements, assuming that the division qualified as a component, Munn should report which of the following amounts of gain (loss) from discontinued operations?
20X2: $130,000; 20X1: $0
20X2: $91,000; 20X1: $0
20X2: $130,000; 20X1: $(250,000)
20X2: $91,000; 20X1: $(175,000)
Question #300817
20X2: $91,000; 20X1: $(175,000)
Reference
2112.08
Authorities
FASB ASC 205-20-45-3
On December 31, 20X1, in a strategic shift, Greer Co. entered into an agreement to sell its Hart segment’s assets. On that date, Greer estimated the gain from the disposition of the assets in 20X2 would be $700,000 and Hart’s 20X2 operating losses would be $200,000. Hart’s actual operating losses were $300,000 in both 20X1 and 20X2, and the actual gain on disposition of Hart’s assets in 20X2 was $650,000. Disregarding income taxes, what net gain (loss) should be reported for discontinued operations in Greer’s comparative 20X2 and 20X1 income statements?
20X2: $(150,000) ; 20X1: $200,000
20X2: $0; 20X1: $50,000
20X2: $50,000; 20X1: $(300,000)
20X2: $350,000; 20X1: $(300,000)
Question #300818
20X2: $350,000; 20X1: $(300,000)
Reference
2112.08
Authorities
FASB ASC 205-20-45-3
On February 2, in a strategic shift, Flint Corporation’s board of directors voted to discontinue operations of its frozen food division and to sell the division’s assets on the open market as soon as possible. The division, which qualifies as a component under FASB ASC 205-20, reported net operating losses of $20,000 in January and $30,000 in February. On February 26, sale of the division’s assets resulted in a gain of $90,000. What amount of gain from disposal of a component should Flint recognize in its income statement for the three months ended March 31?
$0
$60,000
$90,000
$40,000
$40,000
On July 4, 20X1, ABC, Inc., adopted a plan to terminate 100 employees effective September 1, 20X1. Each employee received a one-time termination benefit of $10,000 on September 4, 20X1. The termination was communicated to the employees on July 20, 20X1. Employees were not required to render service after August 1, 20X1, in order to receive the termination benefit. On what date should ABC record the cost of the termination benefit?
September 4, 20X1
August 1, 20X1
July 4, 20X1
July 20, 20X1
Question #300821
July 20, 20X1
FASB ASC 420-10-25-4 provides that the costs of one-time termination benefits be recognized and measured at its fair value on the communication date.
“One-time” employee termination benefits
Reference
2272.10
Authorities
FASB ASC 420-10-25-4
“Contractual” termination benefits
Vane’s income tax rate is 30%. In Vane’s year-end multiple-step income statement, what amount should Vane report as income after income taxes from continuing operations?
$129,500
$140,000
$147,000
$126,000
$126,000
Vane should report $126,000, calculated as follows:
Net income before taxes ($600,000 – $420,000) $180,000
Income taxes ($180,000 x 0.30) 54,000
Net income from continuing operations $126,000
Wand, Inc., has adopted FASB ASC 205-20 (Presentation of Financial Statements—Discontinued Operations). On October 1, 20X1, in a strategic shift, Wand, Inc., committed itself to a formal plan to sell its Kam division’s assets. On that date, Wand estimated that the loss from the disposal of assets in February 20X2 would be $25,000. Wand also estimated that Kam would incur operating losses of $100,000 for the period of October 1, 20X1, through December 31, 20X1, and $50,000 for the period January 1, 20X2, through February 28, 20X2. These estimates were materially correct. Assuming that the Kam division qualifies as a component, disregarding income taxes, what should Wand report as loss from discontinued operations in its comparative 20X1 and 20X2 income statements?
20X1: $175,000; 20X2: $0
20X1: $100,000; 20X2: $75,000
20X1: $0; 20X2: $175,000
20X1: $125,000; 20X2: $50,000
Question #300815
20X1: $125,000; 20X2: $50,000
FASB ASC 360-10-35-40 provides that when an entity is classified as held for sale, the unit must be written down to the fair value, so “a loss shall be recognized for any initial or subsequent write-down to fair value less cost to sell.”
Wand’s 20X1 loss from operations is $100,000 and the write-down to FMV is $25,000 and is reported in 20X1. The operating loss in 20X2 is $50,000, so Wand would report a $50,000 loss from discontinued operations before income taxes in 20X2.
FASB ASC 205-20-45-3 states: “In a period in which a component of an entity either has been disposed of or is classified as held for sale, the income statement of a business entity or statement of activities of a not-for-profit entity (NFP) for current and prior periods shall report the results of operations of the component, including any gain or loss recognized in accordance with paragraphs 360-10-35-40 and 360-10-40-5, in discontinued operations. The results of operations of a component classified as held for sale shall be reported in discontinued operations in the period(s) in which they occur. The results of discontinued operations, less applicable income taxes (benefit), shall be reported as a separate component of income. For example, the results of discontinued operations may be reported in the income statement of a business entity as follows:
SEE PHOTO
“A gain or loss recognized on the disposal shall be disclosed either on the face of the income statement or in the notes to financial statements.”
Term: Discontinued Operations
Discontinued operations are the gains (losses) and the operating results from discontinuing a business segment. The business segment must be a separate line of business or class of customers.
To be reported as discontinued operations, a disposal must represent a strategic shift—which has a major effect on the entity’s operations and financial results.
Example: Disposal of the manufacturing assets for shoes in Maine, but continuing to manufacture shoes in Italy is a discontinued segment only if the sale represents a substantial portion (20% or more) of the entity’s assets. Discontinuing the manufacture of shoes and continuing to manufacture mobile homes is the discontinuance of a separate line of business. Discontinuing sales to customers in Europe and continuing sales in the United States is not a discontinued operation, but discontinuing selling products retail throughout the world and continuing to sell products wholesale is a discontinuance of a separate class of customers.
To qualify as a discontinued operation, the assets, results of operations, and activities of the business segment must be clearly distinguishable from the other business activities.
The results of discontinued operations are reported separately net of the related income tax expense following operating income. The reporting varies depending on when management commits itself to dispose of the segment (the measurement date) and when the actual disposal occurs (disposal date):
- The operating results (revenues and expenses) from the beginning of the period included in the income statement to the measurement date are reported as the gain (loss) from operation of a discontinued segment net of income taxes. This includes not only the current year, but all the prior years included in the income statement with each in the year realized.
- If the measurement date and the disposal date are either the same date or are within the same year, the segment’s operating results from the measurement date to the disposal date and the gain (loss) from the disposal of the net assets of the segment are summed and reported as either the gain or loss on disposal net of income taxes. The amount of operating results and the amount of gain (loss), however, are disclosed in the description of the disposal.
If a time lag (phaseout period) exists between the measurement date and the disposal date, two types of phaseout periods can occur in the same accounting period and extending over two or more accounting periods (extended phaseout period). If an extended phaseout period occurs, FASB ASC 205-20 applies conservatism to the reporting of the sum of the realized and estimated unrealized operating results and realized and estimated unrealized gains and losses on disposal of the net assets. During the phaseout period, if the sum of all the realized and unrealized amounts is a gain, the net gain is recognized when realized net of income taxes.
Realized operating results and realized gains and losses are therefore recognized in the year they occur.
Relevant Terms
Accounting Change
Component of an Entity
Discontinued Operations
Fair Value
Impairment
Not-for-Profit Entity
Reference
2112.08
Authorities
FASB ASC 205-20-45-3
