CPA 2 Flashcards
Question 20: TREPA-0104 Need a hint?See Reference... Kelly Corp. barters with Ace Corporation for goods that are similar in nature and value. The value of the goods was $1,000. The cost of the goods was $400. If Kelly uses IFRS to prepare financial statements, what amount should Kelly recognize as income? $1,000. $0. $400. $600.
0; This answer is correct. If the goods are similar in nature and value, then no income or expense is recognized.
While preparing its year 3 financial statements, Dek Corp. discovered computational errors in its year 2 and year 1 depreciation expense. These errors resulted in overstatement of each year’s income by $25,000, net of income taxes. The following amounts were reported in the previously issued financial statements:
Year 2 Year 1
Retained earnings, 1/1 $700,000 $500,000
Net income 150,000 200,000
Retained earnings, 12/31 $850,000 $700,000
Dek’s year 3 income is correctly reported at $180,000. Which of the following amounts should be adjusted to retained earnings and presented for net income in Dek’s year 3 and year 2 comparative financial statements?
Year
Retained earnings
Net income
year 2
year 3
--
($50,000)
150,000
180,000
year 2
year 3
($50,000)
--
$150,000
180,000
year 2
year 3
($50,000)
--
$125,000
180,000
year 2
year 3
--
--
$125,000
180,000
This answer is incorrect. ASC Topic 250 requires that items of profit or loss related to the correction of an error in the financial statements of a prior period be accounted for and reported as prior period adjustments and excluded from the determination of net income for the current period. When comparative financial statements are prepared, it is necessary to adjust net income, its components, retained earnings balances, and other affected balances for all of the periods presented to reflect retroactive application of prior period adjustments. Hence, the amounts for each period must be stated in the comparative statements as if the errors had not occurred. Thus, both year 1 and year 2 net income and retained earnings would be retroactively reduced by $25,000 to reflect the correct amounts for each period. After these adjustments are made, the amounts for year 3 will be correctly stated. Note that this retroactive treatment is only used for presentation purposes in the comparative financial statements. The actual journal entry made to correct retained earnings at 1/1/Y3 is
Retained earnings 50,000
Accumulated depreciation 50,000
Question 10: TREPB-0009 Need a hint?See Reference... On January 2, year 4, Raft Corp. discovered that it had incorrectly expensed a $210,000 machine purchased on January 2, year 1. Raft estimated the machine’s original useful life to be 10 years and its salvage value at $10,000. Raft uses the straight-line method of depreciation and is subject to a 30% tax rate. In its December 31, year 4 financial statements, what amount should Raft report as a prior period adjustment? $102,900 $105,000 $165,900 $168,000
This answer is incorrect. ASC Topic 250 provides that an error in the financial statements requires restatement of the financial statements with an adjusting entry to retained earnings for the earliest period presented. When Raft incorrectly expensed the machine in year 1, earnings before tax was understated by $210,000. Had Raft properly capitalized this asset, it would have recorded $20,000 depreciation expense per year in year 1, year 2, and year 3. Depreciation expense is calculated on a straight-line basis as $20,000 [($210,000 − $10,000)/10 years] per year. Over the three years, Raft would have recorded a total of $60,000 of depreciation expense. Therefore, as of January 2, year 4, expenses have been overstated by $150,000 ($210,000 − $60,000), and the tax effect of the adjustment is 30% × $150,000, or $45,000. Therefore, the prior period adjustment to retained earnings net of taxes is $105,000 ($150,000 − $45,000).
Which of the following characteristics does not relate to prior period adjustments?
They can be specifically identified with business activity of a prior period.
They have a material effect on income from continuing operations of the current year.
They could not have been reasonably estimated in a prior period.
They are attributable to economic events occurring subsequent to prior period financial statements.
This answer is correct. There are three criteria for a prior period adjustment. These criteria are as follows: (1) the effect of the adjustment is material to income from continuing operations, (2) the adjustment can be identified with a prior period, and (3) the amount of the adjustment could not be estimated in prior periods. ASC Topic 250 does not require that a prior period adjustment be attributable to economic events occurring subsequent to the prior period financial statements
Question 2:
TREPC-0015
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A change in the salvage value of an asset depreciated on a straight-line basis, arising because additional information has been obtained, is
An accounting change that should be reflected in the period of change and future periods if the change affects both.
An accounting change that should be reported by restating the financial statements of all prior periods presented.
A correction of an error.
Not an accounting change.
An accounting change that should be reflected in the period of change and future periods if the change affects both
This answer is correct according to ASC Topic 250. A change in the salvage value of an asset is a change in accounting estimate. ASC 250-10-45-17 states that a change in accounting estimate should be accounted for in the period of change and future periods if the change affects both.
Question 3:
TREPC-0017
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Cory Company acquired some machinery on January 2, year 2. Cory was using straight-line depreciation with an estimated life of 15 years with no salvage value for this machinery. On January 2, year 6, Cory estimated that the remaining life of this machinery was 6 years with no salvage value. How should this change be accounted for by Cory?
Making a prior period adjustment and changing to an accelerated depreciation method that will compensate for under-depreciation in prior years.
Estimating the effect of the change on each year’s net earnings, but maintaining the method of depreciation as originally determined.
Revising future depreciation per year to equal the book value on January 2, year 6, divided by 6.
Revising future depreciation per year to equal the original cost divided by 6.
Revising future depreciation per year to equal the book value on January 2, year 6, divided by 6.
This answer is correct. Cory Company’s change of depreciation is considered a change in estimate. A change in estimate is treated prospectively by revising the remaining years’ depreciation expense. Book value of the asset at the time of change should be divided by 6, the estimated remaining life.
Which of the following describes a change in reporting entity?
A company presents consolidated financial statements in place of individual company financial statements.
A manufacturing company expands its market from regional to nationwide.
A company acquires additional shares of an investee and changes to the equity method of accounting.
A company discontinues a product line in one of their factories.
A company presents consolidated financial statements in place of individual company financial statements.
Under IFRS, a voluntary change in accounting method is applied: Retrospectively. Prospectively. Currently. Currently and prospectively.
Retrospectively
This answer is correct. A voluntary change in accounting method is given retrospective application by applying the policy as if the new policy had always been applied.
On January 1, year 1, Miller Company purchased for $275,000 a machine with an estimated useful life of 10 years and no salvage value. The machine was depreciated using the sum-of-the-years’ digits method. On January 1, year 2, Miller changed to the straight-line method of depreciation. The estimated useful life has not changed. Miller can justify the change. What should be the depreciation expense on this machine for the year ended December 31, year 2? $18,000 $22,500 $25,000 $27,500
This answer is correct. To calculate depreciation expense for year 2, find the book value as of January 1, year 2.
Year 1 depreciation = $275,000 × 10 = $50,000
(10)(11) ÷ 2
Book value at beginning of year 2 is $275,000 – $50,000 = $225,000. Per ASC 250-10-45-18, a change in depreciation method is treated as a change in estimate on a prospective basis. Therefore, year 2 depreciation is $225,000 ÷ 9 years = $25,000.
On January 1, year 2, an intangible asset with a 35-year estimated useful life was acquired. On January 1, year 6, a review was made of the estimated useful life, and it was determined that the intangible asset had an estimated useful life of 45 more years. As a result of the review
The original cost at January 1, year 2, should be amortized over a 50-year life.
The original cost at January 1, year 2, should be amortized over the remaining 30-year life.
The unamortized cost at January 1, year 6, should be amortized over a 40-year life.
The unamortized cost at January 1, year 6, should be amortized over a 45-year life.
The unamortized cost at January 1, year 6, should be amortized over a 45-year life.
This answer is correct because if the estimated useful life of an intangible asset is revised, the unamortized cost should be allocated over the remaining periods of the new useful life.
Question 16:
TREPC-0005
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On January 1, year 2, Belmont Company changed its inventory cost flow method to the FIFO cost method from the LIFO cost method. Belmont can justify the change, which was made for both financial statement and income tax reporting purposes. Belmont’s inventories aggregated $4,000,000 on the LIFO basis at December 31, year 1. Supplementary records maintained by Belmont showed that the inventories would have totaled $4,800,000 at December 31, year 1, on the FIFO basis. Belmont does not have sufficient information to calculate the effect of the change in inventories for years prior to year 1. Ignoring income taxes, the adjustment for the effect of changing to the FIFO method from the LIFO method should be reported by Belmont
In the year 2 income statement as an $800,000 loss from cumulative effect of change in accounting principle.
In the year 1 retained earnings statement as an $800,000 debit adjustment to the beginning balance.
As an adjustment to the balances of inventory, and a retrospective application to cost of goods sold, net income, and retained earnings in the year 1 comparative financial statements.
In the year 2 retained earnings statement as an $800,000 credit adjustment to the beginning balance.
As an adjustment to the balances of inventory, and a retrospective application to cost of goods sold, net income, and retained earnings in the year 1 comparative financial statements.
This answer is correct. Per ASC Topic 250, retrospective application requires the changes to be reflected in the carrying amounts of assets and liabilities of the first period presented. The financial statements for each individual prior period are adjusted to reflect the period-specific effects of applying the new accounting principle if it can be determined.
A company changes from an accounting principle that is not generally accepted to one that is generally accepted. The effect of the change should be reported, net of applicable income taxes, in the current
Income statement after income from continuing operations and before extraordinary items.
Income statement after extraordinary items.
Retained earnings statement as an adjustment of the opening balance.
Retained earnings statement after net income but before dividends.
This answer is correct. ASC Topic 250 states that a change from an accounting principle that is not generally accepted to one that is generally accepted should be treated in the same manner as a correction of an error. A correction of an error should be reported as a prior period adjustment. This means that the cumulative effect at the beginning of the period of change is entered directly as an adjustment to the opening balance of retained earnings. When comparative statements are presented, prior years’ statements are retroactively restated.
Question 18: TREPC-0012 Need a hint?See Reference... On December 31, year 2, Foster, Inc. appropriately changed to the FIFO cost method from the weighted-average cost method for financial statement and income tax purposes. The change will result in a $150,000 increase in the beginning inventory at January 1, year 3. Assuming a 30% income tax rate, the period-specific effect of this accounting change for the year ended December 31, year 2, is $0 $45,000 $105,000 $150,000
This answer is correct. The change results in a $150,000 increase in the inventory valuation for ending inventory at December 31, year 2, which means the before-tax effect on income in year 2 is also $150,000. Since the period-specific effects must be reported net of year 2 effects, the tax effect is $45,000 (30% × $150,000) and must be subtracted to leave a period-specific effect of $105,000 ($150,000 – $45,000). The $150,000 increase in inventory should be added to the balance in inventory on the year 2 comparative balance sheet, $105,000 is the increase in net income, and the income tax payable account will increase by $45,000.
Gaffney uses IFRS to prepare its financial statements. During year 4, Gaffney voluntarily changes its accounting method because the new method will provide more reliable and relevant information. Gaffney can estimate the effects of the change. How should Gaffney treat the change in accounting principle?
On a prospective basis.
On a retrospective basis.
By restating the financial statements.
By a cumulative adjustment on the income statement.
On a retrospective basis.
This answer is correct because IFRS requires changes in accounting principles to be reported by giving retrospective application to the earliest period presented
Question 22:
TREPC-0007
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Presenting consolidated financial statements this year when statements of individual companies were presented last year is
A correction of an error.
An accounting change that should be reported prospectively.
An accounting change that should be reported by restating the financial statements of all prior periods presented.
Not an accounting change.
An accounting change that should be reported by restating the financial statements of all prior periods presented.
This answer is correct because per ASC Topic 250, accounting changes that result from a change in the business entity should be reflected in financial statements that are restated.
