Question 1

For interim financial reporting, a company's income tax provision for the second quarter of 2004 should be determined using the: A. Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the first quarter of 2004. B. Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the second quarter of 2004. C. Effective tax rate expected to be applicable for the second quarter of 2004. D. Statutory tax rate for 2004.

Accepted Answer

B. Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the second quarter of 2004. To ensure the most current information, an estimate of the applicable tax rate for the entire year is made at the end of each quarter. Also at the end of each quarter, the tax for the entire portion of the year elapsed is computed, including previous quarters of that year. Finally, the previous quarters' tax is subtracted, yielding the income tax for the latest quarter.

Question 2

An inventory loss from a market price decline occurred in the first quarter, and the decline was not expected to reverse during the fiscal year. However, in the third quarter, the inventory's market price recovery exceeded the market decline that occurred in the first quarter. For interim financial reporting, the dollar amount of net inventory should: A. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the decrease in the first quarter. B. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the market price recovery. C. Decrease in the first quarter by the amount of the market price decline and not be affected in the third quarter. D. Not be affected in either the first quarter or the third quarter.

Accepted Answer

A. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the decrease in the first quarter. When interim period inventory market value declines are not considered temporary (not expected to reverse), they are recognized in the quarter in which the decline occurs. Later recoveries are recognized as gains to the extent of previous losses only. The inventory may not be marked up above cost.

Question 3

For interim financial reporting, a company's income tax provision for the second quarter of 2004 should be determined using the: A. Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the first quarter of 2004. B. Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the second quarter of 2004. C. Effective tax rate expected to be applicable for the second quarter of 2004. D. Statutory tax rate for 2004.

Accepted Answer

B. Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the second quarter of 2004. To ensure the most current information, an estimate of the applicable tax rate for the entire year is made at the end of each quarter. Also at the end of each quarter, the tax for the entire portion of the year elapsed is computed, including previous quarters of that year. Finally, the previous quarters' tax is subtracted, yielding the income tax for the latest quarter.

Question 4

How are discontinued operations that occur at midyear initially reported? A. Disclosed only in the notes to the year-end financial statements. B. Included in net income and disclosed in the notes to the year-end financial statements. C. Included in net income and disclosed in the notes to interim financial statements. D. Disclosed only in the notes to interim financial statements.

Accepted Answer

C. Included in net income and disclosed in the notes to interim financial statements. Discontinued operations are not related to any other interim period. Therefore, it would be erroneous to allocate their financial statement effects to more than one interim period.

Question 5

``` Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 and income tax expense of $1,500 in its interim income statement for the first quarter of the year. Bard had income before income tax expense of $20,000 for the second quarter and an estimated effective annual rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter? A. $3,500 B. $5,000 C. $6,000 D. $7,500 ```

Accepted Answer

C. $6,000 Interim income tax expense equals the difference between (1) the total income tax through the end of the interim period at the estimated annual tax rate, and (2) the income tax expense recognized in previous interim periods of the same year. For the second quarter, income tax expense therefore is computed as ($10,000 + $20,000)(.25) - $1,500 = $6,000.

Question 6

``` A planned volume variance in the first quarter, which is expected to be absorbed by the end of the fiscal period, ordinarily should be deferred at the end of the first quarter if it is: Favorable Unfavorable Yes No No Yes No No Yes Yes ```

Accepted Answer

Favorable Unfavorable Yes Yes Paragraph 14.d. of APB Opinion 28 states: "Purchase price variances or volume or capacity cost variances that are planned and expected to be absorbed by the end of the annual period, should ordinarily be deferred at interim reporting dates." The reason for the deferral is that, from the point of view of the entire reporting year, there will be no volume variance. The Opinion requires the integral view of interim reporting for most items - that an interim period is an integral part of the annual period. Recognizing, rather than deferring, the variance in the first quarter would cause the reporting of the first quarter results to be unrepresentative of the annual period of which it is a part.

Question 7

Kell Corp. reported $111,000 of net income for the quarter ended September 30, 2005. Additional information for the quarter: A $60,000 gain from discontinued operation, realized on April 30, 2005, was allocated equally to the second, third, and fourth quarters of 2005. A $16,000 cumulative-effect adjustment (dr.) resulting from a change in inventory valuation method was recognized on August 2, 2005. The new method was used for the quarter ended September 30. The $111,000 earnings amount does not reflect the cumulative effect. In addition, Kell paid $48,000 on February 1, 2005, for 2005 calendar-year property taxes. Of this amount, $12,000 was allocated to the third quarter of 2005. ``` For the quarter ended September 30, 2005, Kell should report net income of: A. $91,000 B. $75,000 C. $111,000 D. $95,000 ```

Accepted Answer

A. $91,000 The gain from discontinued operations should be recognized entirely in the second quarter. There is no meaningful basis on which to allocate the gain. It is a one-time occurrence. The cumulative effect is not recognized in income. The firm's treatment of the property tax cost is correct. The cost relates to the entire year. Therefore, each quarter should bear 1/4 of the cost. Third quarter net income = $91,000 = $111,000 - $60,000/3.

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Specific Transactions, Events: Interim Financial Reporting Flashcards

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