MCQ Review 10

Question 1

For a troubled debt restructuring involving only a modification of terms, what kind of new terms would be compared with the carrying amount of the debt to determine whether the debtor should report a gain on restructuring?

Answer 1

• GAAP require that the carrying amount of the debt be compared with the total future undiscounted cash flows to determine a gain on restructuring.
• When a troubled debt restructuring includes a modification of terms that results in future undiscounted cash flows less than the carrying amount of the debt, the debtor recognizes a gain equal to the difference.
• If the future undiscounted cash flows are greater than the carrying amount of the debt, the difference is recognized as interest using a new effective interest rate that equates the future cash payments with the carrying amount.

Question 2

According to the conceptual framework, what is the the most basic objective of financial reporting is to convey information?

Answer 2

• That enables users to make decisions about a company.
• Financial reporting should provide information that is useful to current and potential investors and creditors and other users in making rational investment, credit, and other similar decisions. This objective has the broadest focus.

Question 3

How is the lease payment recorded in a statement of cash flow

Answer 3

• Financing activity: Out flow equal to principal payment

- Operating activity: Out flow equal to interest payment

Question 4

When should company begin recognize rent expense under operating lease?

Answer 4

• The full lease term begin when the company received control of the property.
• Rent expense must be recognized over the full lease term on a straight-line basis.

Question 5

According to the FASB’s conceptual framework, what are the elements describing transactions, events, and circumstances during intervals of time?

Answer 5

• Several elements describe transactions, events, and circumstances during intervals of time, including investments by owners, distributions to owners, comprehensive income, revenues, expenses, gains, and losses.
• Rational allocation procedures are used in accrual accounting not in the description above

Question 6

According to the FASB’s conceptual framework, what is the best description of the distinction between expenses and losses?

Answer 6

• Losses result from peripheral or incidental transactions, and expenses result from ongoing major or central operations of the entity.
• According to the FASB’s conceptual framework, expenses are outflows or other uses of assets or incurrences of liabilities (or both) from (1) delivering or producing goods, (2) providing services, or (3) other activities that qualify as ongoing major or central operations.
• Losses are decreases in equity (net assets) other than expenses or distributions to owners.

Question 7

The appropriate attribute for measuring plant assets is

Answer 7

• Historical cost
• Plant assets should be measured at historical cost. Property, plant, and equipment and most inventories are reported at historical cost.

Question 8

Conceptually, interim financial statements can be described as emphasizing

Answer 8

• Timeliness over reliability
• Interim financial statements cover periods of less than 1 year. Because of (1) the seasonality of some businesses, (2) the need for increased use of estimates, (3) the need for allocations of costs and expenses among interim periods, and (4) other factors, the usefulness of the information provided by interim financial statements may be limited.

Question 9

What items should be disclosed in a summary of significant accounting policies?

Answer 9

• Basis of profit recognition on long-term construction contracts.
• Basis of consolidation
• Depreciation methods,
• Amortization of intangibles,
• Inventory pricing
• Recognition of profit on long-term construction-type contracts
• Recognition of revenue from franchising and leasing operations.

Question 10

Under IFRS, an entire class of property, plant, and equipment may be accounted for according to the

Answer 10

• Under IFRS, an entity may choose either (1) the cost model or (2) the revaluation model as its accounting policy to account for PPE.
• It must apply that policy to an entire class of PPE.
• Under the cost model, an asset is carried at historical cost minus accumulated depreciation and impairment losses.
• Under the revaluation model, an asset is carried at a revalued amount equal to fair value at the revaluation date minus any subsequent accumulated depreciation and impairment losses.