FAR SET 3

Question 1

Which of the following statements best describes an operating procedure for issuing FASB Accounting Standards Update?

Answer 1

An Accounting Standards Update is issued only after a majority vote by the members of the FASB.

Question 2

According to the FASB and IASB conceptual frameworks, to be relevant, information should have which of the following?

Answer 2

To be relevant, information should have predictive value and/or confirming value, and must be material.

Question 3

Materiality and relevance are both defined by:

Answer 3

What influences or makes a difference to a decision maker.

Question 4

According to the FASB conceptual framework, an entity’s revenue may arise from:

Answer 4

A decrease in a liability from primary operations.

Question 5

The FASB amends the Accounting Standards Codification through the issuance of:

Answer 5

Accounting Standards Updates.

Question 6

Under U.S GAAP, the effect of a material transaction that is infrequent in occurrence but not unusual in nature should be presented separately as a component of income from continuing operations when the transaction results in a:

Answer 6

Gain or loss.

Question 7

Under U.S. GAAP, a gain that is both unusual and infrequent should be reported as:

Answer 7

Income from continuing operations.

Question 8

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?

Answer 8

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 COGS. The recovery of accounts written off does not hit the revenue account.

Question 9

A company’s activities for Year 2 included the following:

Gross Sales $3,600,000
COGS $1,200,000
SG&A $500,000
Adjustment for prior year expense $59,000
Sales Returns $34,000
Gain on Sale of AFS securities $8,000
Gain on disposal of a discounted business segment $4,000
Unrealized gain on AFS debt securities $2,000

The company has a 30% effective income tax rate. What is the company’s net income for Year 2?

Answer 9

Net Sales (Gross Sales - sales returns)
- COGS
= Gross Profit
- SG&A
= Operating income
\+ Other Income (gain on sale)
= Income from continuing operations
- Income Tax Expense 
= Income before discontinued operations 
\+ Gain from discontinued segment (after tax)
= Net Income

Question 10

In year 1, hail damaged several of Toncan Co.’s vans. Hailstorms had frequently inflicted similar damage to Toncan’s vans. over the years, Toncan had saved money by not buying hail insurance and either paying for repairs, or selling damaged vans and then replacing them. In Year 1, the damaged vans were sold for less than their carrying amount. How should the hail damage cost be reported in Toncan’s Year 1 financial statement’s under U.S. GAAP?

Answer 10

Actual hail damage must be reported. Because the hailstorms are frequent, the damage is not considered unusual. Thus, the damages would be shown in continuing operations. No separate disclosure is necessary since hail damage is a common occurrence.

Question 11

Selling expenses include:

Answer 11

Advertising, Freight out (selling expense), Rent, and Salaries and commissions

Question 12

General and administrative expenses include:

Answer 12

Rent, Legal, and Audit fees

Question 13

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:

Answer 13

Net concept, showing the total gain as part of continuing operations, not net of income taxes.

Question 14

On January 1, Year 1, Brecon Co. installed cabinets to display its merchandise in customers’ stores. Brecon expects to use these cabinets for five years. Brecon’s Year 1 multi-step income statement should include:

Answer 14

1/5 of the cabinet costs (depreciation expense) should be included in selling, general, and administrative expenses in Year 1.

Question 15

Coffey Corp.’s trial balance of Income Statement Accounts for the year ended December 31 as follows:

Net Sales $1,600,000
COGS $960,000
Selling Expense $150,000
Interest Expense $25,000
Gain on debt extinguishment $10,000

Coffey uses U.S. GAAP and has an income tax of 30%. The gain on debt extinguishment is considered an usual and recurring part of Coffey’s operations. Coffey prepares a multiple-step income statement.

Income from continuing operations before income tax is:

Answer 15

Net sales
- COGS
- Selling expenses
- Administrative expenses
-Interest expense
\+ Gain on debt extinguishment

Question 16

Coffey Corp.’s trial balance of Income Statement Accounts for the year ended December 31 as follows:

Net Sales $1,600,000
COGS $960,000
Selling Expense $150,000
Interest Expense $25,000
Hurricane Damage $40,000
Gain on debt extinguishment $10,000

Coffey uses U.S. GAAP and has an income tax of 30%. The gain on debt extinguishment is considered an usual and recurring part of Coffey’s operations. The hurricane is considered an unusual and infrequent event. Coffey prepares a multiple-step income statement.

Net Income is:

Answer 16

Net income includes everything

- taxes

Question 17

Gown, Inc. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as a(n):

Answer 17

Part of continuing operations.

Question 18

Adam Corp. uses U.S. GAAP and had the following infrequent transactions during Year 1:

$190,000 gain on reacquisition and retirement of bonds, considered unusual for Adam Corp
$260,000 gain on the disposal of a component of a business
$90,000 loss on the abandonment of equipment

In its Year 1 income statement, what amount should Adam report in income from continuing operations?

Answer 18

The $260,000 gain on the disposal of a component of a business would be considered discountinued.

The other two items would be continued.

Question 19

Ocean Corp.’s comprehensive insurance policy allows its asset to be replaced at current value. The policy has a $50,000 deductible clause. One of Ocean’s waterfront warehouses was destroyed in a winter storm. Such storms occur approximately every four years. Ocean incurred $20,000 of costs in dismantling the warehouse and plans to replace it. The tax rate is 30%. The following data related to the warehouse:

Current carrying amount $300,000
Replacement cost $1,100,000

Under U.S. GAAP, what amount of gain should Ocean report as a separate component of income from continuing operations?

Answer 19

Replacement cost
- Deductible clause
= Insurance proceeds
- Costs to dismantle old warehouse
-Current carrying amount
= Gain on insurance settlement of casualty

Question 20

The premium on a three-year insurance policy expiring on December 31, Year 3 was paid in total on January 2, Year 1. If the company has a six-month operating cycle, then on December 31, Year 1, the prepaid insurance reported as a current asset would be for:

Answer 20

The minimum operating cycle for purposes of reporting a “prepaid” current asset is one year (or 12 months).