MCQs 2 Flashcards
Wilson Corp. experienced a $50,000 decline in the market value of its inventory in the first quarter of its fiscal year. Wilson had expected this decline to reverse in the third quarter, and in fact, the third quarter recovery exceeded the previous decline by $10,000. Wilson’s inventory did not experience any other declines in market value during the fiscal year. What amounts of loss and/or gain should Wilson report in its interim financial statements for the first and third quarters?
- First quarter: $0; Third quarter: $0
- First quarter: $0; Third quarter: $10,000 gain
- First quarter: $50,000 loss; Third quarter: $50,000 gain
- First quarter: $50,000 loss; Third quarter: $60,000 gain
First quarter: $0; Third quarter: $0
Companies should view interim periods as an integral part of the annual reporting period. Therefore, declines in inventory that are temporary need not be reported in interim periods.
Note that Wilson expected the first-quarter decline to reverse later in the same year. However, if it expected the loss to be of an other-than-temporary nature, Wilson should have recognized the loss in the first quarter.
How are discontinued operations that occur at midyear initially reported?
- Disclosed only in the notes to the year-end financial statements
- Included in net income and disclosed in the notes to the year-end financial statements
- Included in net income and disclosed in the notes to interim financial statements
- Disclosed only in the notes to interim financial statements
Included in net income and disclosed in the notes to interim financial statements
Discontinued operations should be reported separately, net-of-tax, on the income statement for the interim period. Disclosure in the notes to the interim statements is required.
On January 16, Tree Co. paid $60,000 in property taxes on its factory for the current calendar year. On April 2, Tree paid $240,000 for unanticipated major repairs to its factory equipment. The repairs will benefit operations for the remainder of the calendar year. What amount of these expenses should Tree include in its third-quarter interim financial statements for the three months ended September 30?
- $0
- $15,000
- $75,000
- $95,000
$95,000
Property taxes ($60,000 x 3/12) $15,000
Major repairs ($240,000 x 3/9) 80,000
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Total $95,000
The Securities and Exchange Commission was created under which of the following acts?
- The 1933 Securities Act
- The 1934 Securities Exchange Act
- The Tax Equity and Fiscal Responsibility Act
- Both the 1933 Securities Act and 1934 Securities Exchange Act
The 1934 Securities Exchange Act
According to the FASB conceptual framework, comprehensive income includes which of the following?
- Loss on discontinued operations
- Investment by owners
- Both loss on discontinued operations and investment by owners
- Neither loss on discontinued operations nor investment by owners
Loss on discontinued operations
Which of the following is a component of other comprehensive income?
- Minimum accrual of vacation pay
- Foreign currency-translation adjustments
- Changes in market value of inventory
- Unrealized gain or loss on investment in equity securities
Foreign currency-translation adjustments
A company reported the following information for Year 1:
Net income $34,000
Owner contribution 9,000
Deferred gain on an effective cash-
flow hedge 8,000
Foreign currency translation gain 2,000
Prior service cost not recognized in
net periodic pension cost 5,000
What is the amount of other comprehensive income for Year 1?
- $5,000
- $14,000
- $15,000
- $43,000
$5,000
Other comprehensive income includes items such as gains and losses on foreign currency transactions designated as hedges, gains and losses on derivative instruments, and gains or losses associated with pension or other postretirement benefits. Therefore, for this question the correct answer is $5,000:
Deferred gain on an effective cash-flow hedge ($8,000) + Foreign currency translation gain ($2,000) − Prior service cost not recognized in net periodic pension cost ($5,000) = $5,000
Which of the following statements regarding the going concern assumption is correct?
- Continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent.
- Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events indicate that it is possible the entity will be unable to meet its obligations as they become due.
- Management is responsible for predicting future conditions or events in assessing the likelihood that the entity will continue as a going concern.
- Financial statements should be prepared under the liquidation basis of accounting as soon as substantial doubt is raised.
Continuation of a reporting entity as a going concern is presumed as the basis for preparing financial statements unless and until the entity’s liquidation becomes imminent.
Parker Co. amended its pension plan on January 2 of the current year. It also granted $600,000 of unrecognized prior service costs to its employees. The employees are all active and expect to provide 2,000 service years in the future, with 350 service years this year. What is Parker’s unrecognized prior service cost amortization for the year?
- $0
- $2,000
- $105,000
- $600,000
$105,000
Prior service costs $600,000
Expected service years / 2,000
Cost per service year $ 300
Service years completed this year x 350
Unrecognized prior service cost amortization $105,000
A company with a June 30 fiscal year-end entered into a $3,000,000 construction project on April 1 to be completed on September 30. The cumulative construction-in-progress balances at April 30, May 31, and June 30 were $500,000, $800,000, and $1,500,000, respectively. The interest rate on company debt used to finance the construction project was 5% from April 1 through June 30 and 6% from July 1 through September 30. Assuming that the asset is placed into service on October 1, what amount of interest should be capitalized to the project on June 30?
- $11,666
- $18,750
- $75,000
- $90,000
$11,666
Cumulative CWIP # of Months Capitalized
Balance Interest Rate Outstanding Interest
$ 500,000 5% 1/12 $ 2,083
800,000 5% 1/12 3,333
1,500,000 5% 1/12 6,250
TOTAL $11,666
During the year, Lake Co. issued 3,000 of its 9%, $1,000 face value bonds at 101½. In connection with the sale of these bonds, Lake paid the following expenses:
Promotion costs $ 20,000
Engraving and printing 25,000
Underwriters’ commissions 200,000
What amount should Lake record as bond issue costs?
- $0
- $220,000
- $225,000
- $245,000
$245,000
Debt issuance costs must be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts.
The items listed (promotion costs, engraving and printing, and underwriters’ commissions) would all qualify as bond issuance costs:
$20,000 + $25,000 + $200,000 = $245,000
Orleans Co., a cash-basis taxpayer, prepares accrual-basis financial statements. In its current-year balance sheet, Orleans’ deferred income tax liabilities increased compared to the previous year. Which of the following changes would cause this increase in deferred income tax liabilities?
I. An increase in prepaid insurance
II. An increase in rent receivable
III. An increase in warranty obligations
- I only
- I and II
- II and III
- III only
I and II
Deferred income tax liabilities are caused by items that defer payment of taxes, which cause more taxes to be paid in later years than the income tax expense taken currently. An increase in prepaid insurance can lower taxes now by adding to the expenses deductible, and cause deferral of taxes to the future, so it would qualify a change that would increase deferred tax liabilities.
An increase in rent receivable, a pushing forward of the receipt of the rent in cash (when it will be taxed), can also defer taxes to the future and add to later taxes due, so it would also increase deferred tax liabilities.
An increase in warranty obligations means one is pushing forward the paying of the expense in cash (which allows the deduction), and this would lower taxes in the future, not add to the future liabilities.
Which of the following statements is not correct?
- Performance obligations identified in a contract with a customer are limited to the goods or services explicitly stated in that contract.
- Promises implied by an entity’s customary business practices can create a valid expectation by the customer that the entity will transfer goods or services to the customer.
- Transaction price does not include estimates of consideration from the future exercise of options for additional goods or services.
- When determining the transaction price, an entity should consider the effects of variable consideration.
Performance obligations identified in a contract with a customer are limited to the goods or services explicitly stated in that contract.
Impaired long-lived assets to be disposed of by sale that are subject to the reporting requirements of FASB ASC 360-10-35 are measured at:
- fair value.
- lower of the fair value less costs to sell or carrying amount.
- carrying amount.
- historical cost.
lower of the fair value less costs to sell or carrying amount.
Band Co. uses the equity method to account for its investment in Guard, Inc., common stock. How should Band record a 2% stock dividend received from Guard?
- As a dividend revenue at Guard’s carrying value of the stock
- As dividend revenue at the market value of the stock
- As a reduction in the total cost of Guard stock owned
- As a memorandum entry reducing the unit cost of all Guard stock owned
As a memorandum entry reducing the unit cost of all Guard stock owned
A company using the equity method to account for an investment does not recognize dividends received as revenue. When a cash dividend is received, the receipt of cash is treated as a liquidation of the investment and the carrying amount of the investment is reduced by the amount of the dividend. However, when additional stock shares are received in lieu of cash, no liquidation of the investment has occurred. Instead, the investment carrying value now applies to a larger number of shares held by the investor. Therefore, the investor needs only to note that the value per share of its investment has decreased and the number of shares has increased.
On which of the following dates is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the fair market value of the award?
- Date of grant
- Date of restriction lapse
- Date of vesting
- Date of exercise
Date of grant
Both the intrinsic value method and the fair market value method use the grant date to measure the cost for stock issued to employees.
Turtle Co. purchased equipment on January 2, 20X0, for $50,000. The equipment had an estimated 5-year service life. Turtle’s policy for 5-year assets is to use the 200% double-declining depreciation method for the first two years of the asset’s life, and then switch to the straight-line depreciation method. On its December 31, 20X2, balance sheet, what amount should Turtle report as accumulated depreciation for equipment?
- $30,000
- $38,000
- $39,200
- $42,000
$38,000
Double-declining balance depreciation for the year is figured as twice the straight-line amount (of the beginning book value of the asset for the year). For the last three years, the remaining depreciable value of the asset will be equally divided into three parts.
SL rate for 5-year life = 1/5
= 20%
200% DD rate = 200% x SL rate
= 2.00 x 20% = 40%
20X0 depr (40% x $50,000) $20,000 20X1 depr (40% x ($50,000 - $20,000)) 12,000 20X2 depr (1/3 x ($50,000 - $20,000 - $12,000)) 6,000
Total accum depr on December 31, 20X2 $38,000
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Bensol Co. and Sable Co. exchanged similar trucks with fair values in excess of carrying amounts. In addition, Bensol paid Sable to compensate for the difference in truck values. As a consequence of the exchange, Sable recognizes:
- a gain equal to the difference between the fair value and carrying amount of the truck given up.
- a gain determined by the proportion of cash received to the total consideration.
- a loss determined by the proportion of cash received to the total consideration.
- neither a gain nor a loss.
a gain determined by the proportion of cash received to the total consideration.
Sable will recognize a gain determined by the proportion of cash received to the total consideration. Similar trucks were exchanged in the transaction; therefore, there would be no gain. Very similar trucks would not significantly change cash flows—so the transaction would lack commercial substance.
Now, add in the fact that Bensol paid Sable money. Since Sable received money, Sable now has to record a gain.
Newt Co. 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 reduction of the cost of the new warehouse.
- a gain from discontinued operations, net of income taxes.
- a part of continuing operations.
- a component of other comprehensive income.
a part of continuing operations.
The sale and purchase should be recorded separately. The gain on the sale is reported as other income and is a component of income from continuing operations.
On incorporation, Dee, Inc., issued common stock at a price in excess of its par value. No other stock transactions occurred, except treasury stock was acquired for an amount exceeding this issue price. If Dee uses the par value method of accounting for treasury stock appropriate for retired stock, what is the effect of the acquisition on the following?
- Net common stock: No effect; Additional paid-in capital: Decrease; Retained earnings: No effect
- Net common stock: Decrease; Additional paid-in capital: Decrease; Retained earnings: Decrease
- Net common stock: Decrease; Additional paid-in capital: No effect; Retained earnings: Decrease
- Net common stock: No effect; Additional paid-in capital: Decrease; Retained earnings: Decrease
Net common stock: Decrease; Additional paid-in capital: Decrease; Retained earnings: Decrease
Journal entry for acquisition of treasury stock using par value method:
Treasury stock (common stock) XXX
Additional paid-in capital XX
Retained earnings X
Cash XXXX
The debit to Retained Earnings is for the excess of reacquisition cost over original issue price.
On January 2, 20X1, Lava, Inc., purchased a patent for a new consumer product for $90,000. At the time of purchase, the patent was valid for 15 years; however, the patent’s useful life was estimated to be only 10 years due to the competitive nature of the product. On December 31, 20X4, the product was permanently withdrawn from sale under governmental order because of a potential health hazard in the product. What amount should Lava charge against income during 20X4, assuming that amortization is recorded at the end of each year?
- $9,000
- $54,000
- $63,000
- $72,000
$63,000
The remaining unamortized cost of any asset that is totally impaired is a loss.
Cost of patent $90,000
Patent amortization for 20X1 through 20X3
(($90,000 / 10 years) x 3 years) 27,000
Carrying value of patent on 01/01/X4
(amount written off in 20X4) $63,000
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Remember: Since amortization is recorded at the end of each year, no amortization for 20X4 has been recorded before 12/31/X4. The objective at the end of 20X4 is to write off all remaining investment since the product was withdrawn from sale.
