Questions 7 Flashcards
Which of the following describes the appropriate reporting treatment for a change in accounting estimate? a. By restating amounts reported in financial statements of prior periods ……………… b. By reporting pro fonna amounts for prior periods. ……………. c. In the period of change and future periods if the change affects both. ……. d. In the period of change with no future consideration.
Choice “c” is correct. A change in accounting estimate is accounted for prospectively, in current and future
periods.
Which of the following is a cost associated with exit and disposal activities? ……………. a. Costs to relocate employees. ………….. b. Costs associated with the retirement of a fixed asset. …………. c. Benefits related to voluntary employee termination. ………… d. Costs to terminate a capital lease. …
Choice “a” is correct. Costs to relocate employees are costs associated with exit and disposal activities.
Which of the following is not a criteria for recognizing a liability associated with exit or disposal activities? …………… a. A commitment to an exit plan. ………….. b. The entity has no discretion to avoid the future transfer of assets. ……… c. The occurrence of an obligating event …… d. The existence of a present obligation to transfer assets in the future.
Choice “a” is correct. An entity’s commitment to an exit or disposal plan, by itself, is not enough to result in
liability recognition. A liability is only recognized when all of the following criteria are met: 1. An obligating event has occurred. …….. 2. The event results in a present obligation to transfer assets or to provide services in the future. 3. The entity has little or no discretion to avoid the future transfer of assets or providing of services.
On March 1 of the current year, the board of directors of Lockwood Inc. voted to discontinue the operations of its
fresh produce division, a reportable segment of the entity’s operations. The sale of the division, which was finalized on December 15, resulted in a gain of $150,000. The division had operating losses of $500,000 during the current year and also paid employee termination benefits of $200,000 and $20,000 to terminate an operating lease. Ignoring income taxes, what is the loss from discontinued operations that Lockwood should recognize on its current year income statement? …….. a. $570,000. …………… b. $550,000. ………….. C. $350,000.
d. $720,000.
Choice “a” is correct. The net loss from discontinued operations will include the gain from the sale of the division,
the operating loss, the employee termination benefits and the cost to terminate the operating lease. Exit and
disposal costs related to discontinued operations are reported in discontinued operations on the income
statement:
Gain o nsale $ 150,000
Operating loss (500,000)
Termination benefits (200,000)
Cost to terminate the lease (20,000)
Loss on discontinued operations $ (570,000)
Adam Corp. uses IFRS and had the following infrequent transactions during Year 1:
• A $190,000 gain on reacquisition and retirement of bonds. The material event is also considered unusual
for Adam Corp.
• A $260,000 gain on the disposal of a component of a business. Adam continues similar operations at
another location.
• A $90,000 loss on the abandonment of equipment.
In its Year 1 income statement, what amount should Adam report as total infrequent net gains that arenot
considered extraordinary?
a. $100,000.
b. $360,000.
C. $450,000.
d. $170,000.
Choice “b” is correct. IFRS prohibits the reporting of gains/losses as extraordinary. Therefore, none of the
infrequent items are extraordinary under IFRS:
Gain on reacquisition and retirement of bonds $ 190,000
Gain on disposal of component 260,000
Loss on abandonment of equipment (90,000)
Total $ 360,000
On June 15 of the current year, Solid Co. decided to change from moving average inventory system to the FIFO
inventory system. Solid uses IFRS, is on a calendar year basis, and complies with IFRS minimum comparative
reporting requirements. The cumulative effect of the change is shown as an adjustment to beginning retained
earnings on the balance sheet for:
a. June 15 of the current year.
b. January 1 of the current year.
c. January 1 of the prior year.
d. December 31 of the current year.
Choice “c” is correct. Under IFRS, when an entity records a change in accounting principle, the entity must (at a
minimum) present three balance sheets (end of current period, end of prior period, and beginning of prior period)
and two of each other financial statement (current period and prior period). The cumulative effect adjustment is
shown as an adjustment to beginning retained earnings on the balance sheet for the beginning of the prior period,
which would be January 1 of the prior year.
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.
Which of the following transactions qualify as a discontinued operation?
a. Phasing out of a production line.
b. Changes related to technological improvements.
c. Planned and approved sale of a segment.
d. Disposal of part of a line of business.
Choice “c” is correct. The planned and approved sale of a segment qualifies as a discontinued operation. Because
a segment is a component of the entity. Segments may be functional in nature, like a major product category or
service division, or they can be geographical as well.
A company decided to sell an unprofitable division of its business. The company can sell the entire operation for
$800,000, and the buyer will assume all assets and liabilities of the operations. The tax rate is 30%. The assets
and liabilities of the discontinued operation are as follows:
Buildings $5,000,000
Accumulated depreciation 3,000,000
Mortgage on buildings 1, 100,000
Inventory 500,000
Accounts payable 600,000
Accounts receivable 200,000
What is the after-tax net loss on the disposal of the division?
a. $140,000
b. $2,200,000
C. $200,000
d. $1,540,000
Choice “a” is correct. The value of the assets is $2,000,000 building+ 500,000 inventory + 200,000 AR, or
$2, 700,000. The value of the liabilities, which are to be assumed by the buyer, is $1, 100,000 mortgage+ 600,000
AP, or$1,700,000. So the value of the net assets, or assets less liabilities, is $1,000,000. The before tax loss
from the sale is $200,000 ($800,000 sales price - $1,000,000 book value of division), and the after-tax loss is
$140,000 [$200,000 x (1 - 30%)].
On January 1, year 1, Newport Corp. purchased a machine for $100,000. The machine was depreciated using the
straight-line method over a 10-year period with no residual value. Because of a bookkeeping error, no depreciation
was recognized in Newport’s year 1 financial statements, resulting in a $10,000 overstatement of the book value of
the machine on December 31, year 1. The oversight was discovered during the preparation of Newport’s year 2
financial statements. What amount should Newport report for depreciation expense on the machine in the year 2
financial statements?
a. $11,000
b. $10,000
C. $20,000
d. $9,000
Choice “b” is correct. This error should be corrected by restating the opening balance of retained earnings by
$10,000 for Year 2, if only Year 2 financial statements are being presented. If Year 1 financial statements are
being presented, then they should be corrected to reflect the proper Year 1 depreciation expense. In either case,
this would have NO effect on the Year 2 depreciation expense, which is $10,000.
Under IFRS, which of the following would be included in income from continuing operations on the income
statement?
I. A large loss from a foreign currency transaction.
II. A union strike that shuts down operations for three months.
Ill. A foreign government takes possession of a company’s only plant.
IV. Damage to a factory due to an earthquake in an area that had not previously experienced earthquakes.
a. I, II, IV.
b. I, II.
c. I, II, Ill, IV.
d. Ill, IV.
Choice “c” is correct. Under IFRS, all of these items would be included in income from continuing operations.
Note that under U.S. GAAP, items Ill. and IV. would be classified as extraordinary items. IFRS does not permit
the reporting of extraordinary items.
A transaction that is unusual in nature or infrequent in occurrence should be reported as a(an):
a. Component of income from continuing operations, net of applicable income taxes.
b. Component of income from continuing operations, but not net of applicable income taxes.
c. Extraordinary item, but not net of applicable income taxes.
d. Extraordinary item, net of applicable income taxes.
Choice “b” is correct. Items of income or loss that are either unusual OR infrequent are not extraordinary. These
items should be reported as part of income from continuing operations and not net of tax.
Cuthbert Industrials, Inc. prepares three-year comparative financial statements. In Year 3, Cuthbert discovered an
error in the previously issued financial statements for Year 1. The error affects the financial statements that were
issued in Years 1 and 2. How should the company report the error?
a. The financial statements for Years 1 and 2 should not be restated; the cumulative effect of the error on Years
1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of Year 3.
b. The financial statements for Years 1 and 2 should be restated; an offsetting adjustment to the cumulative
effect of the error should be made to the comprehensive income in the Year 3 financial statements.
c. The financial statements for Years 1 and 2 should not be restated; financial statements for Year 3 should
disclose the fact that the error was made in prior years.
d. The financial statements for Years 1 and 2 should be restated; the cumulative effect of the error on Years 1
and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of Year 3.
Choice “d” is correct. Financial statements for Years 1 and 2 should be restated. The carrying amounts of the
assets and liabilities for these years will be corrected in each year’s financial statements and shown as restated
in the three year comparative financial statements. As of the beginning of Year 3, the cumulative effect of the error
will have been corrected and reflected in the carrying amounts of the affected assets and liabilities.
Which of the following statements is correct as it relates to changes in accounting estimates?
a. Most changes in accounting estimates are accounted for retrospectively.
b. Whenever it is impossible to determine whether a change in an estimate or a change in accounting principle
occurred, the change should be considered a change in principle.
c. It is easier to differentiate between a change in accounting estimate and a change in accounting principle than
it is to differentiate between a change in accounting estimate and a correction of an error.
d. Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting
principle has occurred, the change should be considered a change in estimate.
Choice “d” is correct. If a change in accounting estimate cannot be distinguished from a change in accounting
principle, the change is considered a change in accounting estimate treated as a change in accounting principle
and is accounted for prospectively.
