Questions 6 Flashcards
On August 3 1 , Year 1 , Harvey Co. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. Harvey uses U.S. GAAP, is on a calendar year basis, and does not present comparative financial statements. The cumulative effect of the change is determined: ………………. a. As of January 1 , Year 1 ……………………. b. During Year 1 by a weighted average of the purchases. ………………… c. As of August 31 , Year 1 …………………… d. During the eight months ending August 31, Year 1, by a weighted average of the purchases.
Choice “a” is correct, as of January 1 , Year 1 , the beginning of the year.
Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods, assuming comparative financial statements are not presented. Beginning retained earnings of the earliest year presented is adjusted for the cumulative effect of the change.
. 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 statements under U.S. GAAP? ………….. a. The expected average hail damage loss in continuing operations, with no separate disclosure …………………. b. The actual Year 1 hail damage loss in continuing operations, with no separate disclosure ……………………. c. The expected average hail damage loss in continuing operations, with separate disclosure …………….. d. The actual Year 1 hail damage loss as an extraordinary loss, net of income taxes
Choice “b” is correct. Actual hail damage must be reported. Since the hailstorms are frequent, the damage is not considered an extraordinary gain/loss. Thus, the damages must be shown in continuing operations. No separate disclosure is necessary since hail damage is a common occurrence.
A segment of Ace Inc. was discontinued during Year 1 . Ace’s loss from discontinued operations should not: …………….. a. Include employee relocation costs associated with the decision to dispose …………. b. Include additional pension costs associated with the decision to dispose …………… c. Exclude operating losses from the date the decision to dispose of the segment was made until the end of Year 1 ……………… d. Include operating losses of the current period up to the date the decision to dispose of the segment was made.
Choice “c” is correct. Ace’s loss on discontinued operations should not exclude operating losses from the date the decision to dispose of the segment was made until the end of Year 1 . All Year 1 operating losses should be
included.
A segment of Ace Inc. was discontinued during Year 1 . Ace’s loss from discontinued operations should not: ……………. a. Include employee relocation costs associated with the decision to dispose …….. b. Include additional pension costs associated with the decision to dispose …………… c. Exclude operating losses from the date the decision to dispose of the segment was made until the end of Year 1 ………………………… d. Include operating losses of the current period up to the date the decision to dispose of the segment was made.
Choice “c” is correct. Ace’s loss on discontinued operations should not exclude operating losses from the date the decision to dispose of the segment was made until the end of Year 1 . All Year 1 operating losses should be included.
.On December 3 1 , Year 1 , the Board of Directors of Maxy Manufacturing, Inc. committed to a plan to discontinue the operations of its Alpha division. 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. Alpha’s Year 1 operating loss was $1,400,000, and the division was actually sold for $400,000 less than its carrying amount in Year 2. Maxy’s effective tax rate is 30%. In its Year 1 income statement, what amount should Maxy report as loss from discontinued operations? ……….. a. $1,400,000 …………. b. $980,000 ……………… c. $1,700,000 ………………… d. $ 1,190,000
Choice “d” is correct. Since the fair \Glue of Alpha’s facilities was $300,000 less than its carrying value there has been an impairment loss, and that loss should be recognized in Year 1 . That $300,000 impairment loss plus the $1,400,000 Year 1 operating loss would be recognized in Year 1 net of tax. The total loss would be $1,700,000 x 70% (100% - 30%) or $ 1,190,000
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. 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. $420,000 ……………… d. $600,000
Choice “c” is correct. The Year 2 loss from discontinued operations would include both the Year 2 operating loss of $500,000 which turned out to be a correct estimate) and the “additional” loss (on disposal) of $100,000, net of tax, for a total of $600,000 x 0.70 or $420,000.
. In Which of the following situations should a company report a prior-period adjustment? ……………… a. A change in the estimated useful lives of fixed assets purchased in prior years …………….. b. The scrapping of an asset prior to the end of its expected useful life ……………… c. A switch from the straight-line to double-declining balance method of depreciation …………………… d. The correction of a mathematical error in the calculation of prior years’ depreciation.
Choice “d” is correct. An error correction is accounted for by adjusting prior period financial statements to correct the error.
Timber Co., was evaluating the likelihood of collecting various accounts receivable currently on its books. This evaluation resulted in the decision to change from the direct recognition method to the installment method for recognizing receivables. The accounting treatment for this change is best characterized as: ………………. a. Prospective ……………….. b. Cumulative ……………. c. Retroactive ………………. d. Restatement.
Choice “a” is correct. A change from direct recognition to the installment method is a change in accounting principle inseparable from a change in accounting estimate that is treated like a change in accounting estimate, prospectively.
Mellow Co. depreciated a $12,000 asset over five years, using the straight-line method with no salvage value. At the beginning of the fifth year, it was determined that the asset will last another four years. What amount should Mellow report as depreciation expense for year 5? …………. a. $1 ,500 ……………. b. $900 …………….. c. $600 ………….. d. $2,400
Choice “c” is correct. O\€r the first 4 years, the asset would be depreciated down to $2,400. Once it was determined that the asset would last for another 4 years, $600 would be depreciated each year of that 4-year period. This change is a change in accounting estimate (the estimate being the life of the asset). Changes in accounting estimate are accounted for in the current year and future years if the change affects both.
. Envoy Co. manufactures and sells household products. Envoy experienced losses associated with its small appliance group. Operations and cash flow 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 first sells any of the assets of the segment.
c. When Envoy sells the majority of the assets of the segment.
d. When Envoy receivables an offer for 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:
What are the “Held for Sale” criteria.
- Management commits to a plan to sell the component …….. 2. The component is available for immediate sale in its present condition ……………… 3. An active program to locate a buyer has been initiated …………… 4. The sale of the component is probable and the sale is expected to be completed within one year …………… 5. The sale of the component is being actively marketed ……………. 6. It is unlikely that significant change to the plan to sell will be made or that the plan will be withdrawn
Under U.S. GAAP, an extraordinary gain should be reported as a direct increase to which of the following? ……………….. a. Net income ………………… b. Comprehensive income ……………. c. Income from continuing operations, net of tax ………………………. d. Income from discontinued operations, net of tax
Choice “a” is correct. Under U.S. GAAP, extraordinary items are reported as a component of net income, after income from continuing operations and discontinued operations. The reporting of gains/losses as extraordinary is prohibited under IFRS.
Jordan Co. had the following gains during the current period: ……… Gain on disposal of business segment $500,000 ……………… Foreign currency translation gain 100,000 ………………. Under U.S. GAAP, what amount of extraordinary gain should be presented on Jordan’s income statement for the current period? ……………………. a. $0 ………………… b. $1 00,000 ………………….. c. $600,000 …………………… d. $500,000
Choice “a” is correct. Based on this information, Jordan Company will not report an extraordinary gain for the current period. The $500,000 gain on the disposal of the business segment will be reported as discontinued operations. The $1 00,000 foreign currency translation gain will be reported as a component of income from continuing operations. Foreign currency-related gains and losses are never considered to be extraordinary.
How should a company report its decision to change from a cash-basis of accounting to accrual-basis of accounting? ……………… a. As an extraordinary item (net of tax) …………………….. b. As an error correction (net of tax), by adjusting the beginning balance of retained earnings ………………………. c. Prospectively, with no amounts restated and no cumulative adjustment ……………. d. As a change in accounting principle, requiring the cumulative effect of the change (net of tax) to be reported in
the income statement.
Choice “b” is correct. A change from a non-GAAP/IFRS method to a GAAPIIFRS method is an error correction that is accounted for by adjusting beginning retained earnings.
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? …… a. $102,900 …………………. b. $168,000 ……….. C. $105,000 …………… d. $165,900
Choice “c” is correct. If the machine had been correctly capitalized in Year 1, Raft would have recorded annual
depreciation of $20,000 [($210,000 cost - $10,000 salvage)/10 year life] in Year 1, Year 2 and Year 3, for total accumulated depreciation of $60,000. The prior period adjustment is the difference between the $60,000 in total expense that should have been reflected in retained earnings on January 1, Year4 and the $210,000 that was incorrectly recorded:
Correct accounting - Depreciation expense Year 1 - Year 3 $ 60,000 Incorrect accounting - Asset purchased expense in Year 1 -210,000 …. Prior period adjustment, before tax $ 150,000 The prior period adjustment must be reported net of tax $150,000 x (1 - 30%) = $105,000
