Unit 3 questions

Question 1

An asset or disposal group is classified as held for sale when six conditions are met:

Answer 1

(1) A level of management with authority to approve the action has committed to a plan to sell,
(2) the asset is available for immediate sale in its current condition on usual and customary terms,
(3) actions (such as actively seeking a buyer) have begun to complete the plan,
(4) completion of sale within 1 year is probable,
(5) the asset is actively marketed at a price reasonably related to current fair value, and
(6) there is little likelihood of significant change in the plan.

Question 2

What is the earliest point that a company should report something as a discontinued operation?

Answer 2

As soon as it is classified as held for sale.

Question 3

If you expect a gain on a disposal, can you recognize it as soon as possible?

Answer 3

No, the gain on the disoposal will be recognized when it occurs.

Question 4

Are discontinued operations classified as net of tax or before tax?

Answer 4

net of tax

Question 5

Where are discontinued operations reported?

Answer 5

On the income statemennt after income from continuing operations.

Question 6

A discontinued operation includes a component of an entity that meets two criteria:

Answer 6

(1) It has been disposed of or is classified as held for sale.
(2) Its disposal is a strategic shift that has a major effect on the entity’s operations and financial results.

Question 7

If an operating segment is classified as held for sale in the middle of the year and will be disposed of next year, how much of the operating losses should be inlucded in the loss on discontinued operations reported this year?

Answer 7

Operating results reported in discontinued operations inlcude any income earned or loss incurred during the entire reporting period (before and after the component was classified as held for sale)

Question 8

How should the effect of a change in accounting estimate be accounted for?

Answer 8

By prospectively applying the change to current and future periods.

Question 9

A change from cash basis to accrual basis is what kind of change and how is it restated?

Answer 9

Prior period adjustment resulting from the correction of an error. Restatement requires retrospective application.

Question 10

How should a company report its decision to change from a cash-basis of accounting to accrual-basis of accounting?

Answer 10

As a prior-period adjustment (net of tax), by adjusting the beginning balance of retained earnings.

Question 11

what changes are restated retrospectively?

Answer 11

Change in Accounting Principle

Change in the Reporting Entity

Question 12

The effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate should be reported

Answer 12

In the period of change and future periods if the change affects both.

Question 13

The concept of consistency is sacrificed in the accounting for what kind of item item?

Answer 13

Change in accounting principle when the cumulative effect on any prior period is not known.

Changes in accounting principles ordinarily are accounted for by retrospective application. However, if it is impracticable to determine the cumulative effect of applying the change to any prior period, the change is applied prospectively. Thus, similar events are not accounted for in the same way in succeeding accounting periods.

Question 14

On July 1, Year 1, Rey Corp. purchased computer equipment at a cost of $360,000. This equipment was estimated to have a 6-year life with no residual value and was depreciated by the straight-line method. On January 3, Year 4, Rey determined that this equipment could no longer process data efficiently, that its value had been permanently impaired, and that $70,000 could be recovered over the remaining useful life of the equipment. What carrying amount should Rey report on its December 31, Year 4, balance sheet for this equipment?

A.$0

B.$50,000

C.$70,000

D.$150,000

Answer 14

Answer (B) is correct.
At 1/3/Year 4, the carrying amount of the computer equipment should be written down to $70,000. This $70,000 is expected to be recovered over the 3.5-year remaining useful life of the equipment. Under the straight-line method, the depreciation expense for the year ending 12/31/Year 4 is $20,000 [($70,000 ÷ 42 months) × 12 months]. Thus, the carrying amount in the year-end balance sheet should be $50,000 ($70,000 – $20,000).

Question 15

Althouse Co. discovered that equipment purchased on January 2 for $150,000 was incorrectly expensed at the time. The equipment should have been depreciated over 5 years with no salvage value. What amount, if any, should be adjusted to Althouse’s depreciation expense at January 2, the beginning of the third year, when the error was discovered?

A.$60,000

B.$150,000

C.$0

D.$30,000

Answer 15

Answer (C) is correct.
Any error related to a prior period discovered after the statements are, or are available to be, used must be reported as an error correction by restating the prior-period statements. The carrying amounts of (1) assets, (2) liabilities, and (3) retained earnings at the beginning of the first period reported are adjusted for the cumulative effect of the error on the prior periods. Corrections of prior-period errors must not be included in net income. Thus, no adjustment to depreciation expense should be made for the prior-period errors. The adjustment would be reflected through a restatement of the prior-period statements and/or an adjusting entry to beginning retained earnings.

Question 16

Change in measure of inventory- for example LIFO to FIFO, FIFO to WA is accounted how?

Answer 16

Change is an accounting principle.

Question 17

When the SBW Co. began business, it included such indirect costs of manufacturing as janitorial expenses, depreciation of machinery, and insurance on the factory building as inventory costs. At the beginning of the current year, SBW began expensing all insurance costs when they are incurred. SBW must justify and disclose the reason for the change. The most appropriate reason is that the new principle

A.Is easier to apply because no assumptions about allocation must be made.

B.Has been and continues to be the treatment used for tax purposes.

C.Is one used by the entity for insurance costs other than those on factory-related activities.

D.Constitutes an improvement in financial reporting.

Answer 17

Answer (D) is correct.
The presumption is that, once adopted, an accounting principle should not be changed in accounting for events and transactions of a similar type. This presumption in favor of continuity may be overcome if the entity justifies the use of an alternative acceptable principle. The new principle should be preferable because it constitutes an improvement in financial reporting.

Question 18

Retrospective application requires that carrying amounts of:

Answer 18

(1) assets,
(2) liabilities, and
(3) retained earnings at the beginning of the first period reported be adjusted for the cumulative effect of the new principle on all periods not reported. All periods reported must be individually adjusted for the period-specific effects of applying the new principle.

Question 19

The correction of an error in the financial statements of a prior period should be reported, net of applicable income taxes, in the current

Answer 19

Retained earnings statement as an adjustment of the opening balance.

Prior-period adjustments of single-period statements must be reflected net of applicable income taxes as changes in the opening balance in the statement of retained earnings of the current period. In comparative financial statements, all prior periods affected by the prior-period adjustment should be restated to reflect the adjustment.

Question 20

When it is impracticable to determine the cumulative effect of applying a new accounting principle to any prior period:

Answer 20

it should be applied prospectively at the earliest date practicable.

Question 21

Under IFRS, changes in accounting policies are

Answer 21

Permitted if the change will result in a more reliable and more relevant presentation of the financial statements.

Answer (D) is correct.
Under IAS 8, a change in policy must be made only if it (1) is required by a new standard or Interpretation or (2) results in reliable and more relevant information about transactions, financial condition, financial performance, and cash flows.

Question 22

On December 1, Clay Co. declared and issued a 6% stock dividend on its 100,000 shares of outstanding common stock. There was no other common stock activity during the year. What number of shares should Clay use in determining basic earnings per share (BEPS) for the year?

Answer 22

106,000

Basic earnings per share (BEPS) is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding. The 6% stock dividend will increase the number of shares of common stock outstanding by 6,000 shares (100,000 × 6%) because it is deemed to have occurred at the beginning of the earliest period presented. Thus, the number of shares used to calculate BEPS is 106,000 shares.

Question 23

Earnings per share disclosures are required for

Answer 23

Public and private entities.

Private entities need not present EPS data.

Question 24

When calculating weighted average what is calculated as if it occured at teh beginning of the year?

Answer 24

Stock dividends and stock splits (even if it’s not a percentage)

Question 25

In computing the loss per share of common stock, cumulative preferred dividends not earned should be

Answer 25

Added to the loss for the year.

When preferred stock is cumulative, the dividend, whether earned or not, is deducted from income from continuing operations and net income, or added to any loss for the year, in computing earnings or loss, per share of common stock. When preferred stock is noncumulative, an adjustment is made for dividends declared. If the dividend is cumulative only if earned, no adjustment is necessary except to the extent of available income; that is, the preferred dividends accumulate only to the extent of net income.

Question 26

The if-converted method of computing diluted earnings per share (DEPS) amounts assumes conversion of convertible securities at the

Answer 26

Beginning of the earliest period reported (or at time of issuance, if later).

Answer (A) is correct.
The if-converted method of computing DEPS assumes that convertible securities are included in the determination of DEPS if dilutive. Conversion is assumed to have occurred at the beginning of the earliest period reported or, if the security was issued at a later time, at the date of issuance.

Question 27

The per-share amount must be reported on the face of a public company’s income statement for which item?

Answer 27

Income from continuing operations.

Earnings per share (EPS) is the amount of current-period earnings that can be associated with a single share of a corporation’s common stock. All corporations must report per-share amounts for income from continuing operations and net income on the face of the income statement. If an entity has no discontinued operations, income from continuing operations equals net income. Thus, one or two amounts of EPS (basic EPS) for net income available to common shareholders must be presented on the face of the income statement if the entity has only common stock outstanding. All other entities must present basic EPS and dilutive EPS for income from continuing operations and net income. The entity also must report a per-share amount or amounts for a discontinued operation on the face of the income statement or in the notes.

Question 28

In determining diluted earnings per share for a complex capital structure, which of the following is a potential common stock?

Nonconvertible Stock Option

Preferred Stock

A.Yes No

B.No Yes

C.Yes Yes

D.No No

Answer 28

Answer (B) is correct.
Potential common stock is a security or other contract that may entitle its holder to obtain common stock during either the reporting period or some future accounting period. Potential common stocks include options, warrants, convertible preferred stock, convertible debt, and contingent stock agreements.

Question 29

In determining earnings per share, interest expense, net of applicable income taxes, on dilutive convertible debt should be

Answer 29

Added back to net income for diluted earnings per share.

In accordance with the if-converted method, the diluted earnings per share calculation assumes that dilutive convertible debt is converted into common stock at the beginning of the period or at the time of issuance, if later. Given the assumed conversion, no debt would exist upon which interest could have been paid. Interest is a deduction in arriving at net income. Accordingly, that interest savings, net of tax effect, should be added back to net income in the diluted earnings per share computation.

Question 30

With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure?

A.Common stock, preferred stock, and debt outstanding.

B.Common stock, preferred stock, and convertible debt outstanding.

C.Common stock, preferred stock, and stock options outstanding.

D.Common stock, convertible preferred stock, and debt outstanding.

Answer 30

Answer (A) is correct.
A simple capital structure has only common stock outstanding. A complex capital structure contains potential common stock. Potential common stock includes options, warrants, convertible securities, contingent stock requirements, and any other security or contract that may entitle the holder to obtain common stock.

Question 31

When computing diluted earnings per share (DEPS), convertible securities that are potential common stock are recognized when?

Answer 31

Recognized only if they are dilutive.

The objective of DEPS is to measure the performance of an entity during an accounting period while giving effect to all dilutive potential common shares that were outstanding during the period. Convertible securities are potential common stock.

Question 32

A company uses the percentage-of-completion method to account for a 4-year construction contract. What should be used in the calculation of the gorss profit recognized in the first year?

Answer 32

Under GAAP, revenue should be recognized when it is realized or realizable and earned. For long-term construction contracts, these criteria are met in accordance with either the percentage-of-completion or the completed-contract method. Neither the issuance of a progress billing (debit accounts receivable, credit progress billings) nor the collection of cash (debit cash, credit accounts receivable) results in recognition of gross profit.

Question 33

Under the completed contract method, when should you recognize gross profit?

Answer 33

Revenue and gross profit are recognized only upon completion.

Question 34

A company used the percentage-of-completion method of accounting for a 4-year construction contract. What should be used to calculate the gross profit recognized in the second year?

Answer 34

Gross profit previously recognized.

The formula is:

Cummulative GP - GP previously recorded= Gross profit of current year.

Question 35

when are losses on LT contracts recorded?

Answer 35

Record loss immediately under either method. The loss should affect the period in which the firm identifies that is has a loss.

Fixed construction contract- Costs incurred-estimated cost to complete=loss

Question 36

A company uses the completed-contract method to account for a long-term construction contract. Revenue and gross profit are recognized when recorded progress billings

Answer 36

Never.

Under the completed-contract method of accounting for long-term construction contracts, recorded progress billings have no effect on the recognition of revenue and gross profit.

Question 37

How should the balances of progress billings and construction in progress be shown at reporting dates prior to the completion of a long-term contract?

Answer 37

Net, as a current asset if debit balance and current liability if credit balance.

The difference between construction in progress (costs and recognized gross profit) and progress billings to date must be reported as a current asset if construction in progress exceeds total billings, and as a current liability if billings exceed construction in progress. Separate recognition is required for each project.

Question 38

A company appropriately uses the completed-contract method to account for a long-term construction contract. Revenue is recognized when progress billings are recorded or collected?

Answer 38

Neither, GAAP require that revenue be recognized when it is realized or realizable and earned. Under the completed-contract method, revenue recognition is appropriate only at the completion of the contract. Neither the recording nor the collection of progress billings affects this recognition.

Question 39

If progress billings exceed construction in progress, the difference should be reported as?

Answer 39

As a current liability.

Cumulative costs incurred+Cumulative gross profit recognized<cumulative>
</cumulative>

Question 40

What are the 3 Levels for measuring the FV of an asset or liability?

Answer 40

Level 1: Unadjusted quoted prices for identical assets or liabilities in active markets.

Level 2: Quoted prices for similar assets or liabilities in active markets.

Level 3: Inputs for the asset or liability based on the reporting entity’s internal data

Question 41

Each of the following would be considered a Level 2 observable input that could be used to determine an asset or liability’s fair value except

A.Interest rates that are observable at commonly quoted intervals.

B.Quoted prices for similar assets and liabilities in markets that are active.

C.Internally generated cash flow projections for a related asset or liability.

D.Quoted prices for identical assets and liabilities in markets that are not active.

Answer 41

Answer (C) is correct.
Internally generated cash flow projections are not observable and would be considered a Level 3 input. Level 3 inputs are unobservable inputs that are used in the absence of observable inputs. They should be based on the best available information in the circumstances.

Question 42

Valuation techniques for fair value measurement (FVM) must use

Answer 42

The pricing assumptions of market participants.

Inputs to valuation techniques are the pricing assumptions of market participants. The assumptions include those about the risk of a given technique or its inputs.

Question 43

The fair value measurement (FVM) of an asset

Answer 43

Reflects the highest and best use by market participants.

The FVM is based on the highest and best use (HBU) by market participants. This use maximizes the value of the asset. The HBU is in-use if the value-maximizing use is in combination with other assets in a group. An example is machinery. The HBU is in-exchange if the value-maximizing use is as a standalone asset. An example is a financial asset.

Question 44

Fair value measurements (FVMs) of assets and liabilities are based on transactions between market participants at the measurement date. Market participants

Answer 44

Are willing and able to engage in transactions involving the asset or liability.

Market participants are not related parties. They are independent of the reporting entity. They also are knowledgeable and willing and able (but not compelled) to engage in transactions involving the asset or liability.

Question 45

For the purpose of a fair value measurement (FVM) of an asset or liability, a transaction is assumed to occur in the

Answer 45

Principal market if one exists.

For FVM purposes, a transaction is assumed to occur in the principal market for an asset or liability if one exists. The principal market has the greatest volume or level of activity. If no such market exists, the transaction is assumed to occur in the most advantageous market.

Question 46

According to the FASB, fair value is

Answer 46

An exit price.

“Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” Thus, fair value is an exit price.

Question 47

The fair value for an asset or liability is measured as

Answer 47

The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.

The fair value of an asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

Question 48

A company owns a financial asset that is actively traded on two different exchanges (market A and market B). There is no principal market for the financial asset. The information on the two exchanges is as follows:

Quoted Price of Asset Transaction Costs

Market A $1,000 $ 75

Market B 1,050 150

What is the fair value of the financial asset?

Answer 48

$1,000

The transaction is assumed to occur in the principal market for the asset or liability. In the absence of such a market, it is assumed to occur in the most advantageous market. The most advantageous market is the market in which the specific reporting entity can maximize the amount received for selling the asset or minimize the amount paid for transferring the liability, after considering transaction and transportation costs. The fair value is the price in that market without adjustment for transaction costs. The entity receives $925 if the asset is sold in Market A, but only $900 in Market B. Thus, Market A is the advantageous market, and the fair value is $1,000.

Question 49

Giaconda, Inc., acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach?

A.Income.

B.Observable inputs.

C.Cost.

D.Market.

Answer 49

Answer (A) is correct.
The income approach uses valuation methods based on current market expectations about future amounts, e.g., earnings or cash flows. It converts future amounts to one present discounted amount. Examples are present value methods and option-pricing models.

Question 50

Crossroads Co. chooses to report a financial asset at its fair value. The asset trades in two different markets; however, neither market is the principal market for the financial asset. In the first market, sales proceeds are $76, which is net of transaction costs of $6. In the second market, the sales proceeds are $80, which is net of transaction costs of $1. What amount should Crossroads report as the fair value of the asset?

A.$80

B.$82

C.$76

D.$81

Answer 50

$81

Question 51

Under the cost recovery method, when do we start to recognize profit?

Answer 51

Under the cost recovery method, no profit is recognized until collections exceed the cost of goods sold.

Question 52

Revenue recognition prior to sale is inappropriate when:

Answer 52

when the installment or cost-recovery method is used.

Question 53

According to the installment method of accounting, gross profit on an installment sale is recognized in income

Answer 53

In proportion to the cash collection.

When receivables are collected over an extended period and no reasonable basis exists for estimating the degree of collectibility, the installment method may be used. Under the installment method, gross profit recognized during each period of the term of an installment receivable is equal to the gross profit ratio on the installment sales for the period in which the receivable was recognized, multiplied by the cash collected on that receivable during the period. Hence, gross profit is recognized in proportion to the cash collections received.

Question 54

Under installement sales, what is the formula for realized Gross Profit?

Answer 54

Cash Collected x GP rate= realized GP

Question 55

Under installment sales, what is the formula to calculated deferred GP balance?

Answer 55

AR balances x GP rate= deferred GP balance

Question 56

For financial statement purposes, the installment method of accounting may be used if the

Answer 56

Ultimate amount collectible is indeterminate.

Profits from sales in the ordinary course of business usually should be recognized at the time of sale unless collection of the sales price is not reasonably assured. When receivables are collected over an extended period and, because of the terms of the transaction or other conditions, no reasonable basis exists for estimating the degree of collectibility, the installment method or the cost-recovery method of accounting may be used.

Question 57

Pie Co. uses the installment sales method to recognize revenue. Customers pay the installment notes in 24 equal monthly amounts, which include 12% interest. What is an installment note’s receivable balance 6 months after the sale?

Answer 57

The present value of the remaining monthly payments discounted at 12%.

The amount of the periodic payment equals the cash price (the present value) divided by the interest factor for the present value of an annuity for the stated discount rate and number of periods. Each payment consists of principal and interest. The principal of a note diminishes as its balance is reduced. Thus, the balance at any given moment is the present value of the remaining payments based on the given discount rate. That is, the balance always equals the sum of the principal components of the remaining payments.