FAR - F1M1 Flashcards
Scott Corporation sold a fixed asset used for operations for greater than its carrying amount. Scott should report the transaction in the income statement using the:
A. Gross concept, showing the proceeds as part of revenues and the carrying amount as part of expenses in the continuing operations section.
B. Net concept, showing the total amount as a component of other comprehensive income, net of income taxes.
C. Net concept, showing the total gain as part of continuing operations, not net of income taxes.
D. Net concept, showing the total gain as part of discontinued operations, net of income taxes.
- Choice “C” is correct. The transaction resulted in a gain, which should be reported using the net concept (i.e., proceeds less carrying amount). This gain resulted in the recognition of an asset not in the ordinary course of business, but it did not qualify as part of discontinued operations.
- Choice “A” is incorrect. Gains (and losses) are reported using the net concept.
- Choice “B” is incorrect. Gains and losses from fixed asset sales are reported using the net concept, but are not included in other comprehensive income.
- Choice “D” is incorrect. Gains and losses from fixed asset sales are reported using the net concept, but are not included in discontinued operations because a fixed asset is not considered a component of an entity. Discontinued operations are only reported for the disposal of a component of an entity.
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, what amount should Dart report as total revenues?
A. $250,000
B. $253,000
C. $263,000
D. $260,000
- Choice “A” is correct. The single-step income statement will include in total revenues all sales of goods, services, and rentals. Purchase discounts are not included in revenue, but instead reduce cost of goods sold. The recovery of accounts written off does not hit the revenue account.
- Choice “B” is incorrect. Sales are appropriately included, but purchase discounts are not.
- Choice “C” is incorrect. Purchase discounts are not included in revenue and the recovery of accounts written off does not hit the revenue account.
- Choice “D” is incorrect. Revenues are not impacted by the recovery of accounts written off. When accounts written off are recovered, the first entry is to debit accounts receivable and credit the allowance for doubtful accounts. Then, to record the collection of the cash, the debit is to cash and the credit is to accounts receivable.
During January Year 3, Doe Corp. agreed to sell the assets and product line of its Hart division. The decision represents a major strategic shift for Doe and will have a significant effect on its operations and financial results. The sale was completed on January 15, Year 4, and resulted in a gain on disposal of $900,000. Hart’s operating losses were $600,000 for Year 3 and $50,000 for the period January 1 through January 15, Year 4. Disregarding income taxes, what amount of net gain (loss) should be reported in Doe’s comparative Year 3 and Year 4 income statements respectively?
A. $0, $250,000
B. $250,000, $0
C. $(650,000), $900,000
D. $(600,000), $850,000
- Choice “D” is correct. The Year 3 operating losses would be reported in the Year 3 income statement. The Year 4 operating losses and the gain on disposal would be netted and reported in the Year 4 income statement. Each amount would be reported in the period it occurred.
- Choice “A” is incorrect. It reports the total projected gains and losses in Year 4 and nothing in Year 3. Each amount should be reported in the period it occurred.
- Choice “B” is incorrect. It reports the total projected gains and losses in Year 3 and nothing in Year 4. Each amount should be reported in the period it occurred.
- Choice “C” is incorrect. It reports the total projected losses in Year 3 and the gain in Year 4. Each amount should be reported in the period it occurred.
One of the elements of a financial statement is comprehensive income. Comprehensive income excludes changes in equity resulting from which of the following?
A. Loss from discontinued operations.
B. Prior period error correction.
C. Unrealized loss on investments in non-current marketable equity securities.
D. Dividends paid to stockholders.
- Choice “D” is correct. Comprehensive income includes all changes in equity during a period except those resulting from owner investments and distributions to owners.
- Choice “A” is incorrect. Loss from discontinued operations is included in net income, which is a component of comprehensive income.
- Choice “B” is incorrect. Prior period error correction is a change in stockholders’ equity not resulting from owner investments and distributions to owners and so is included in comprehensive income.
- Choice “C” is incorrect. Unrealized loss on investments in non-current marketable equity securities is a change in stockholders’ equity not resulting from owner investments and distributions to owners and so is included in comprehensive income.
On September 22, Year 4, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company’s local currency. On that date, the spot rate was $0.55. Yumi paid the bill in full on March 20, Year 5, when the spot rate was $0.65. The spot rate was $0.70 on December 31, Year 4. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, Year 4?
A. $0
B. $500
C. $1,500
D. $1,000
- Choice “C” is correct. On September 22, the liability denominated in dollars equals $5,500 (10,000 units x $0.55 spot rate). On December 31, the liability denominated in dollars equals $7,000 (10,000 units x $0.70 spot rate). At year-end, the foreign currency transaction loss equals $1,500 ($7,000 − $5,500).
- Choice “A” is incorrect. Because the spot rate at year-end is different from the spot rate at September 22, a foreign currency transaction gain or loss must be recognized.
- Choice “B” is incorrect. Only the loss as of December 31 should be recognized.
- Choice “D” is incorrect. Only the loss as of December 31 should be recognized.
A company’s year-end comparative statement of financial position reflects the following changes from the prior year: cash increased by $40,000, total liabilities increased by $32,000, and all other assets decreased by $65,000. Which of the following statements is correct regarding the current-year change in the company’s stockholders’ equity?
A. It increased by $25,000.
B. It increased by $105,000.
C. It decreased by $57,000.
D. It decreased by $32,000.
- Choice “C” is correct. Assets = Liabilities + Stockholders’ equity. If cash increased by $40,000 and other assets decreased by $65,000, the net change in assets is a decline of $25,000. Liabilities increased $32,000.
Setting up the equation to reflect the changes in each category, −$25,000 = $32,000 + SE. SE = −$57,000. - Choice “A” is incorrect. Stockholders’ equity could not have increased if assets decreased and liabilities increased.
- Choice “B” is incorrect. This answer choice assumes that other assets increased (instead of decreased) by $65,000 and that liabilities were unchanged.
- Choice “D” is incorrect. Equity could only decrease by $32,000 if assets remained constant.
Gar Inc.’s trial balance reflected the following liability account balances at December 31, Year 1:
Accounts payable: $19,000
Bonds payable, due Year 2: 34,000
Deferred income tax payable: 4,000
Discount on bonds payable: 2,000
Dividends payable on 2/15/Year 2: 5,000
Income tax payable: 9,000
Notes payable, due 1/19/Year 3: 6,000
The deferred income tax payable is based on temporary differences that will reverse in Year 3 and Year 4. In Gar’s December 31, Year 1, balance sheet, the current liabilities total was:
A. $71,000
B. $69,000
C. $65,000
D. $67,000
- Choice “C” is correct. $65,000 total current liabilities. The current liabilities consist of all payables due within one year.
Accounts payable : $19,000
Bonds payable, due Year 2: 34,000
Discount on bonds payable: (2,000)
Dividends payable, due 2/15/Year 2: 5,000
Income tax payable: 9,000
Total current liabilities: $65,000
The “deferred income tax payable” of $4,000 is reported as non-current. The “notes payable” due 1/19/Year 3 are due after one year and are considered a long-term liability.
- Choice “A” is incorrect. This choice includes the note payable due in Year 3, which is a long-term liability.
- Choice “B” is incorrect. This choice includes the deferred income tax payable, which is a long-term liability.
- Choice “D” is incorrect. This choice does not account for the discount.
Brock Corp. reports operating expenses in two categories: (1) selling and (2) general and administrative. The adjusted trial balance at December 31 included the following expense and loss accounts:
Accounting and legal fees: 120,000
Advertising: 150,000
Freight out: 80,000
Interest: 70,000
Loss on sale of long-term investment: 30,000
Officers’ salaries: 225,000
Rent for office space: 220,000
Sales salaries and commissions: 140,000
One-half of the rented premises is occupied by the sales department. Brock’s total selling expenses are:
A. $480,000
B. $400,000
C. $360,000
D. $370,000
- Choice “A” is correct. $480,000.
Advertising: 150,000
Freight out: 80,000
Office space: 110,000 (1/2 x $220,000)
Sales salaries and commissions: 140,000
Total selling expenses: 480,000
Note: Only one-half of rent for office space was used for sales office.
- Choice “B” is incorrect. Freight out is a selling expense and must be included in total selling expenses.
- Choice “C” is incorrect. Selling expenses include advertising and freight out, as well as sales salaries, and should only include one half of the rent for office space.
- Choice “D” is incorrect. The sales department rent expense is a selling expense and must be included in total selling expenses.
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 available-for-sale securities: 8,000
Gain on disposal of a discontinued business segment: 4,000
Unrealized gain on available-for-sale debt securities: 2,000
The company has a 30 percent effective income tax rate. What is the company’s net income for Year 2?
A. $1,267,700
B. $1,273,300
C. $1,316,000
D. $1,314,600
- Choice “D” is correct.
Net sales: 3,566,000 = $3,600,000 gross sales − $34,000 sales returns
Cost of goods sold: (1,200,000)
Gross profit: 2,366,000
Selling and administrative: (500,000)
Operating income: 1,866,000
Other income (gain on sale): 8,000
Income from continuing operations: 1,874,000
Income tax expense: (562,200) = $1,874,000 × 30%
Income before discontinued operations: 1,311,800
Gain from discontinued segment (after tax): 2,800 = $4,000 × (1 – 30%)
Net income: 1,314,600
The adjustment for the prior year understatement of amortization expense is a prior period adjustment that will be reflected in beginning retained earnings, not on the income statement. The unrealized gain on the available-for-sale debt security will be reported in other comprehensive income.
A company’s draft income statement for the year ended December 31, Year 5, reported $370,000 of income from continuing operations before taxes. The following items were excluded:
Loss on sale of property: $160,000
Income from discontinued operations: 90,000
The discontinued operation is expected to be sold within six months. If the company’s income tax rate is 20%, which of the following amounts should be reported as net income for the year ended December 31, Year 5?
A. $168,000
B. $240,000
C. $368,000
D. $296,000
- Choice “B” is correct. Net income includes income from continuing operations and income from discontinued operations. Both amounts listed as excluded should be included in the calculation of net income, which is an after-tax number and incorporates the 20% tax rate on all amounts.
Income from continuing operations, as provided: $370,000
Loss on sale of property: (160,000)
Adjusted income from continuing operations: 210,000
Income tax expense ($210,000 × 20%): (42,000)
Income from continuing operations, after tax: 168,000
Income from discontinued operations, net of tax [$90,000 × (1 – 20%)]: 72,000
Net income: $240,000
- Choice “A” is incorrect. Net income includes both income from continuing operations and income from discontinued operations, all presented net of tax. This choice only considers income from continuing operations after tax as calculated in the correct answer.
- Choice “C” is incorrect. Net income includes both income from continuing operations and income from discontinued operations, all presented net of tax. This choice improperly excludes the $160,000 loss on the sale of property in income from continuing operations, but it does properly include the income from discontinued operations and appropriately makes these two amounts net of tax [($370,000 + $90,000) × (1 – 0.20) = $368,000].
- Choice “D” is incorrect. Net income includes both income from continuing operations and income from discontinued operations, all presented net of tax. This choice only includes the pre-adjusted income from continuing operations of $370,000 presented net of tax [$370,000 × (1 – 0.20) = $296,000] and leaves out the loss on the sale of property as well as the income from discontinued operations.
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. 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?
A. When Envoy classifies it as held for sale.
B. When Envoy receives an offer for the segment.
C. When Envoy sells the majority of the assets of the segment.
D. When Envoy first sells any of the assets of the segment.
- Choice “A” is correct. The earliest period that a component of an entity can be reported in discontinued operations is when the component meets the following “held for sale” criteria:
- Management commits to a plan to sell the component.
- The component is available for immediate sale in its present condition.
- An active program to locate a buyer has been initiated.
- The sale of the component is probable and the sale is expected to be completed within one year.
- The sale of the component is being actively marketed.
- It is unlikely that significant change to the plan to sell will be made or that the plan will be withdrawn.
On December 31, Year 1, the Board of Directors of Maxy Manufacturing, Inc. committed to a plan to discontinue the operations of its Alpha division. The decision represents a major strategic shift and will have a significant effect on its operations and financial results. Maxy estimated that Alpha’s Year 2 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 Year 2 turned out to be correct. Alpha’s Year 1 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 Year 2 income statement, what amount should Maxy report as loss from discontinued operations?
A. $350,000
B. $500,000
C. $600,000
D. $420,000
- Choice “D” is correct. An impairment loss of $300,000 occurred in Year 1. Additional losses of $500,000 from operations and $100,000 from disposal occur in Year 2.
With discontinued operations, everything (including losses and gains) is presented after the income tax expense line item on the income statement, and therefore are presented net of taxes.
In Year 1 the fair value of the facilities was $300,000 less than the carrying amount. That means the assets have a fair market value that is $300,000 less than their book value. To illustrate the concept, assume the book value is $2,000,000, which would make the fair value $1,700,000 ($2,000,000 – $300,000 = $1,700,000).
The entry to record the impairment loss is:
DR - Loss from Impairment of discontinued operations: 300,000
CR - Assets: 300,000
In Year 2 the division was sold for $400,000 less than the original carrying amount ($2,000,000 – $400,000 = $1,600,000). Therefore, in Year 2, there is an additional loss on disposal of $100,000.
The Year 2 journal entry is:
DR - Cash: 1,600,000
DR - Loss from sale (disposal) of discontinued operations: 100,000
CR - Assets: 1,700,000
Because the $300,000 estimated impairment loss was recorded in Year 1, only the additional $100,000 loss is recorded ($400,000 – $300,000) as well as the $500,000 operating loss for a total of $600,000 in Year 2 losses, less the 30% tax rate. The total net loss for Year 2 is $600,000 × (1 – 0.30) = $420,000.
- Choice “A” is incorrect. It includes the Year 2 operating loss of $500,000 and does report the Year 2 operating loss net of tax, but does not include the $300,000 impairment loss.
- Choice “B” is incorrect. It includes the Year 2 operating loss of $500,000, but not the $100,000 loss on disposal, and reports the Year 2 operating loss gross of tax and not net of tax.
- Choice “C” is incorrect. It reports the Year 2 loss from discontinued operations gross of tax and not net of tax. The Year 2 loss from discontinued operations should include both the Year 2 operating loss of $500,000 and the loss on disposal of $100,000, net of tax, for a total of $600,000 x 0.70 or $420,000.
The current exchange rate is 1.59 U.S. dollars per British pound. If a retailer in Great Britain were to quote the exchange rate using the direct method, he would say:
A. 1 British pound is equal to 1.59 U.S. dollars.
B. 1 U.S. dollar is equal to 1.59 British pounds.
C. 0.63 U.S. dollars are equal to 1 British pound
D. 0.63 British pounds are equal to 1 U.S. dollar.
- Choice “D” is correct. Quoting the exchange rate using the direct method involves quoting the domestic price of one unit of another currency. From the perspective of a retailer in Great Britain, the domestic currency is the British pound. So the appropriate quote will be 0.63 British pounds cost 1 U.S. dollar.
- Choice “A” is incorrect. This is a quote under the direct method from the perspective of someone in the U.S., not in Great Britain.
- Choice “B” is incorrect. This is an incorrect relationship, as it takes 1.59 U.S. dollars to purchase 1 British pound.
- Choice “C” is incorrect. This is an incorrect relationship, as 0.63 British pounds are needed to purchase 1 U.S. dollar.
Noshima, a Japanese company, exports goods to Jacobs, a U.S. company. If the transaction is to be settled in yen, which of the following statements is correct?
A. Jacobs will book a gain if the U.S. dollar appreciates versus the Japanese yen.
B. Jacobs will book a gain if the Japanese yen appreciates versus the U.S. dollar.
C. Noshima will book a gain if the U.S. dollar appreciates versus the Japanese yen
D. Noshima will book a gain if the Japanese yen depreciates versus the U.S. dollar.
- Choice “A” is correct. If the U.S. dollar appreciates versus the Japanese yen, this implies that it will take fewer dollars to purchase one yen. As a result, when the transaction is ultimately settled, Jacobs will need fewer dollars to convert into yen to pay Noshima. This will therefore result in a gain.
- Choice “B” is incorrect. The Japanese yen appreciating versus the U.S. dollar is the same as the U.S. dollar depreciating versus the Japanese yen. And if the dollar depreciates, this implies that Jacobs will need more dollars to convert into yen, which will result in the company booking a loss.
- Choice “C” is incorrect. An appreciation of the U.S. dollar is the same as a depreciation of the Japanese yen, which will result in a loss to Noshima.
- Choice “D” is incorrect. The Japanese yen depreciating versus the U.S. dollar is the same thing as the dollar appreciating versus the yen. If this happens, Jacobs will book a gain and Noshima will book a loss.
Which of the following statements regarding comprehensive income is correct?
A. Comprehensive income must always equal or exceed net income.
B. The relationship between net income and retained earnings is analogous to the relationship between other comprehensive income and accumulated other comprehensive income.
C. Discontinued operations are the last items recorded in comprehensive income.
D. Other comprehensive income is a permanent account, which never gets closed, thus it carries its balance over from one year to the next.
- Choice “B” is correct. Net income is closed to retained earnings in the same way that other comprehensive income is closed to accumulated other comprehensive income. Retained earnings and accumulated other comprehensive income both serve to sum up the undistributed earnings of a corporation over its operating life.
- Choice “A” is incorrect. Comprehensive income may include a net loss that was not included in net income, thus comprehensive income may in some cases be less than net income.
- Choice “C” is incorrect. Discontinued operations are a component of net income, and not other comprehensive income.
- Choice “D” is incorrect. Other comprehensive income itself is not an account, but rather is composed of temporary accounts that do not carry a balance from period to period. Accumulated other comprehensive income is a permanent account and does retain a balance.
