Questions in Financial Acc Answers Part 5

CPA-00198 Type1 M/C A-D Corr Ans: D PM#11 F 1-99 92. CPA-00198 May 91 I #3 (Adapted) Page 17 In Baer Food Co.'s 1990 single-step income statement, the section titled "Revenues" consisted of the following: Net sales revenue Results from discontinued operations: Loss from operations of component (net of $1,200 tax effect) Gain on disposal of component (net of $7,200 tax effect) Interest revenue Gain on sale of equipment Total revenues $187,000 $(2,400) 14,400 12,000 10,200 4,700 $213,900 In the revenues section of its 1990 income statement, Baer Food should have reported total revenues of: a. b. c. d. $216,300 $215,400 $203,700 $201,900 CPA-00198 Explanation Choice "d" is correct. $201,900. Revenues (in a single step income statement) include: Net sales revenue (of goods & services) Interest revenue (and dividends earned) Gain on sale of equipment Total revenues $187,000 10,200 4,700 201,900 The various amounts from discontinued operations should be included in discontinued operations, not in revenues. CPA-00199 Type1 M/C 93. CPA-00199 May 92 #1 A-D Corr Ans: D PM#12 F 1-99 Page 4 FASB Interpretations of Statements of Financial Accounting Standards have the same authority as the FASB: a. b. c. d. Statements of Financial Accounting Concepts. Emerging Issues Task Force Consensus. Technical Bulletins. Statements of Financial Accounting Standards. CPA-00199 Explanation Choice "d" is correct. FASB interpretations of the "statements of financial accounting standards" (SFAS) have the same authority as the FASB statements of financial accounting standards (SFAS), which by themselves determine GAAP. Choice "a" is incorrect. Statements of financial accounting concepts (FAC's) have much less authority (fifth floor) and do not by themselves determine GAAP as is the case with SFASs and interpretations of SFASs. Choice "b" is incorrect. Emerging issues task force (EITF) consensus is in the nature of a "third floor" authority. The EITF was established in 1984 to aid the FASB in identifying and implementing emerging issues before they become widespread and ultimately require action by the FASB. After discussing the issues and the relevant accounting pronouncements, the group can sometimes reach a consensus on an issue, in which case no action by the FASB is usually needed. Choice "c" is incorrect. Technical bulletins of the FASB (second floor) do not by themselves determine GAAP. CPA-00200 Type1 M/C 94. CPA-00200 May 92 #17 A-D Corr Ans: B PM#13 F 1-99 Page 18 On January 1, 1991, Brecon Co. installed cabinets to display its merchandise in customers' stores. Brecon expects to use these cabinets for five years. Brecon's 1991 multi-step income statement should include: a. b. c. d. One-fifth of the cabinet costs in cost of goods sold. One-fifth of the cabinet costs in selling, general, and administrative expenses. All of the cabinet costs in cost of goods sold. All of the cabinet costs in selling, general, and administrative expenses. CPA-00200 Explanation Choice "b" is correct. One-fifth of the cabinet costs (depreciation expense) should be included in selling, general, and administrative expenses for 1991. Choice "a" is incorrect. Merchandise display cabinets in stores relate to selling activities, not to the purchase cost of goods sold. Choices "c" and "d" are incorrect. Merchandise display cabinets are fixed assets whose cost should be allocated systematically over their five-year useful life. CPA-00201 Type1 M/C 95. CPA-00201 Nov 92 #1 A-D Corr Ans: C PM#14 F 1-99 Page 4 Which of the following accounting pronouncements is the most authoritative? a. b. c. d. FASB Statement of Financial Accounting Concepts. FASB Technical Bulletin. AICPA Accounting Principles Board Opinion. AICPA Statement of Position. CPA-00201 Explanation Choice "c" is correct. The AICPA accounting principal board opinion (APBO) is a first floor (category A) of established accounting principle pronouncements. Choice "a" is incorrect. FASB statement of financial accounting concepts (SFAC or FACs) is a fifth floor (other accounting literature) category. Choice "b" is incorrect. FASB technical bulletins are a second floor (category B) accounting pronouncement. Choice "d" is incorrect. AICPA statement of position is a second floor (category B) accounting pronouncement. CPA-00202 Type1 M/C A-D Corr Ans: C PM#15 F 1-99 96. CPA-00202 Nov 92 #37 Page 37 Which of the following should be disclosed in a summary of significant accounting policies? I. Management's intention to maintain or vary the dividend payout ratio. II. Criteria for determining which investments are treated as cash equivalents. III. Composition of the sales order backlog by segment. a. I only. b. I and III. c. II only. d. II and III. CPA-00202 Explanation Choice "c" is correct. Il only. The criteria for determining which investments are treated as "cash equivalents" is a method of accounting policies that needs to be disclosed in the summary of significant accounting policies. Choice "a" is incorrect. Management's intention to maintain or vary the "dividend payout ratio" is not an "accounting policy." Choices "b" and "d" are incorrect. Composition of the sales order backlog by segment is not an "accounting policy." CPA-00203 Type1 M/C A-D Corr Ans: D PM#16 F 1-99 97. CPA-00203 May 93 T #31 Page 35 The summary of significant accounting policies should disclose the: a. b. c. d. Maturity dates of noncurrent debts. Terms for convertible debt to be exchanged for common stock. Concentration of credit risk of all financial instruments by geographical region. Criteria for determining which investments are treated as cash equivalents. CPA-00203 Explanation Choice "d" is correct. The criteria for determining which investments are treated as cash equivalents would be part of the summary of significant accounting policies. Choice "a" is incorrect. The maturity dates of noncurrent debts are required disclosures, but are not a part of the summary of significant accounting policies. Choice "b" is incorrect. The terms for convertible debt to be exchanged for common stock are not accounting policies; they would be disclosed separately. Choice "c" is incorrect. The concentration of credit risk of all financial instruments by geographic region may be a required segment disclosure, especially for financial institutions. However, it would not be a part of the summary of significant accounting policies. CPA-00204 Type1 M/C A-D Corr Ans: A PM#17 F 1-99 98. CPA-00204 Nov 93 I #52 Page 18 The following costs were incurred by Griff Co., a manufacturer, during 1992: Accounting and legal fees Freight-in Freight-out Officers salaries Insurance Sales representatives salaries $25,000 175,000 160,000 150,000 85,000 215,000 What amount of these costs should be reported as general and administrative expenses for 1992? a. b. c. d. $260,000 $550,000 $635,000 $810,000 CPA-00204 Explanation Choice "a" is correct. $260,000. General and administrative Accounting and legal fees Officers salaries Insurance $ 25,000 150,000 85,000 Total "general and admin" expenses $260,000 A "Freight-in" is part of "cost of goods sold." "Freight-out" is a "selling" expense. Sales representative salaries is a selling expense. CPA-00205 Type1 M/C A-D Corr Ans: A PM#18 F 1-99 99. CPA-00205 Nov 93 T #19 (Adapted) Page 38 Which of the following information should be included in Melay, Inc.'s 1992 summary of significant accounting policies? a. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line method. b. During 1992, the Delay component was sold. c. Business segment 1992 sales are Alay $1M, Belay $2M, and Celay $3M. d. Future common share dividends are expected to approximate 60% of earnings. CPA-00205 Explanation Choice "a" is correct. Computing depreciation principally by the straight-line method is a GAAP method of depreciation that should be described in the "summary of significant accounting policies." Choice "b" is incorrect. Disclosing the sale of a component of a business is required (and is covered in the lecture on "discontinued operations" in the F1 class) but is not a "significant accounting policy." Choice "c" is incorrect. Disclosing "sales" of segments is required, but is not a "significant accounting policy." Choice "d" is incorrect. "Estimates of future common share dividends" are not appropriate disclosures for the financial statements. They might be appropriate for the "presidents letter to shareholders." CPA-00206 Type1 M/C A-D Corr Ans: A PM#19 F 1-99 100. CPA-00206 Nov 93 A #52 Page 4 Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting principle. Which of the following should the auditor consider the most authoritative? a. FASB Technical Bulletins. b. AICPA Accounting Interpretations. c. FASB Statements of Financial Accounting Concepts. d. AICPA Technical Practice Aids. CPA-00206 Explanation Choice "a" is correct. The most authoritative pronouncements (first floor) are FASB Statements, FASB Staff Positions, FASB Statement 133 Implementation Issues, FASB Interpretations, AICPA APB opinions, and AICPA Accounting Research Bulletins. When these pronouncements do not provide appropriate guidance, the next level of pronouncements (second floor) are AICPA Industry Audit and Accounting Guides, AICPA Statements of Position, and FASB Technical Bulletins. Choice "b" is incorrect. AICPA Accounting Interpretations are not as authoritative as FASB Technical Bulletins, since they are on the fourth floor. Choices "c" and "d" are incorrect. FASB Concepts Statements and AICPA Technical Practice Aids are among the least authoritative of accounting literature (fifth floor). CPA-00207 Type1 M/C 101. CPA-00207 A-D Corr Ans: D PM#20 F 1-99 Nov 89 I #1 (Adapted) Page 18 Coffey Corp.'s trial balance of Income Statement Accounts for the year ended December 31, 1988 as follows: Debit Net sales Cost of goods sold Selling expenses Administrative expenses Interest expense Gain on debt extinguishment Totals Credit $1,600,000 $ 960,000 235,000 150,000 25,000 10,000 $1,610,000 $1,370,000 Coffey's income tax rate is 30%. The gain on debt extinguishment is considered a usual and recurring part of Coffey's operations. Coffey prepares a multiple-step income statement for 1988. Income from operations before income tax is: a. b. c. d. $190,000 $200,000 $230,000 $240,000 CPA-00207 Explanation Choice "d" is correct. $240,000 The gain on debt extinguishment does not meet the unusual and infrequent criteria of APB 30 to be treated as an extraordinary item (per SFAS No. 145, extinguishments of debt are no longer automatically extraordinary), so it is included as part of income from continuing operations. CPA-00208 Type1 M/C 102. CPA-00208 A-D Corr Ans: A PM#21 F 1-99 Nov 89 I #2 (Adapted) Page 18 Coffey Corp.'s trial balance of Income Statement Accounts for the year ended December 31, 1988 as follows: Debit Net sales Cost of goods sold Selling expenses Administrative expenses Interest expense Hurricane damage Gain on debt extinguishment Totals Credit $1,600,000 $960,000 235,000 150,000 25,000 40,000 $1,410,000 10,000 $1,610,000 Coffey's income tax rate is 30%. The gain on debt extinguishment is considered a usual and recurring part of Coffey's operations. The hurricane is considered an unusual and infrequent event. Coffey prepares a multiple-step income statement for 1988. Net income is: a. b. c. d. $140,000 $161,000 $168,000 $200,000 CPA-00208 Explanation Choice "a" is correct. $140,000. Net income is the "bottom line" amount after all has been considered on the income statement. Without showing all the line items as required for the income statement, the "bottom line" amount of $140,000 is derived as follows: Income from continuing operations Less: Income taxes (30%) Extraordinary item - Hurricane damage (net of tax) Net Income CPA-00209 $240,000 (72,000) (28,000) $140,000 Type1 M/C 103. CPA-00209 A-D Nov 90 #37 Corr Ans: B PM#22 F 1-99 Page 15 Gown, Inc. 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(an): a. b. c. d. Extraordinary gain, net of income taxes. Part of continuing operations. Gain from discontinued operations, net of income taxes. Reduction of the cost of the new warehouse. CPA-00209 Explanation Choice "b" is correct. Part of continuing operations. Rule: When a fixed asset is sold, gain or loss is recognized as part of income from continuing operations. The amount of the gain or loss is equal to the difference between the proceeds from the sale and the carrying amount (FMV) of the fixed asset sold. Choice "a" is incorrect. The gain is not extraordinary and is shown gross - not net of tax. Choice "c" is incorrect. The gain is part of continuing operations - not discontinued operations. Choice "d" is incorrect. The gain is not reported as a reduction of the cost of the new warehouse. CPA-00210 Type1 M/C A-D Corr Ans: B PM#23 F 1-99 104. CPA-00210 Nov 90 I #39 (Adapted) Page 22 Adam Corp. had the following infrequent transactions during 1989: • A $190,000 gain on reacquisition and retirement of bonds. This 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 1989 income statement, what amount should Adam report as total infrequent net gains that are not considered extraordinary? a. $100,000 b. $170,000 c. $360,000 d. $450,000 CPA-00210 Explanation Infrequent net gains not considered extraordinary include: Gain on disposal of a component of a business Loss on abandonment of equipment Total $260,000 (90,000) $170,000 Choice "b" is correct. $170,000. CPA-00211 Type1 M/C 105. CPA-00211 A-D May 91 I #5 Corr Ans: D PM#24 F 1-99 Page 15 Thorpe Co.'s income statement for the year ended December 31, 1990, reported net income of $74,100. The auditor raised questions about the following amounts that had been included in net income: Unrealized loss on decline in market value of available-for-sale investments in stock Gain on early retirement of bonds payable (net of $11,000 tax effect) Adjustment to profits of prior years for errors in depreciation (net of $3,750 tax effect) Loss from fire (net of $7,000 tax effect) $(5,400) 22,000 (7,500) (14,000) The loss from the fire was an infrequent but not unusual occurrence in Thorpe's line of business. Thorpe's December 31, 1990, income statement should report net income of: a. b. c. d. $65,000 $66,100 $81,600 $87,000 CPA-00211 Explanation Net income before adjustments Add: Unrealized loss in market value of available-for-sale investments in stock which should not have affected net income Add: Correction of error of prior period which should not have affected net income Net income after adjustments $74,100 5,400 7,500 $87,000 Rule: Unrealized losses (or gains) resulting from changes in market value of available-for-sale investments should be reported as a component of other comprehensive income in shareholders' equity. Unrealized gains and losses on investments held for trading would be included in net income. Correction of errors of prior periods should be reported as an adjustment to beginning retained earnings, not as an item of net income. Choice "d" is correct. $87,000. CPA-00212 Type1 M/C 106. CPA-00212 A-D May 91 #25 Corr Ans: D PM#25 F 1-99 Page 15 A transaction that is unusual, but not infrequent, should be reported separately as a(an): a. b. c. d. Extraordinary item, net of applicable income taxes. Extraordinary item, but not net of applicable income taxes. Component of income from continuing operations, net of applicable income taxes. Component of income from continuing operations, but not net of applicable income taxes. CPA-00212 Explanation Choice "d" is correct. A transaction that is unusual, but not "infrequent" should be reported separately as a component of continuing operations, (gross) but not net of applicable income taxes. Choices "a" and "b" are incorrect. An extraordinary item has to be both "unusual" and "infrequent." Choice "c" is incorrect, per "d" above. CPA-00213 Type1 M/C 107. CPA-00213 A-D Corr Ans: B PM#26 F 1-99 Nov 91 I #50 (Adapted) Page 22 During 1990, Fuqua Steel Co. had the following unusual financial events occur: • Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain. Fuqua has frequently retired bonds early when interest rates declined significantly. • A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location. • A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000. This was Fuqua's first divestiture of one of its operating segments. Before income taxes, what amount of gain (loss) should be reported separately as a component of income from continuing operations in 1990? a. b. c. d. $260,000 $5,000 $(255,000) $(350,000) CPA-00213 Explanation Choice "b" is correct. $5,000. The steel forming segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature" and does not occur infrequently, therefore, it is not an "extraordinary item," and should be reported separately as a component of "income from continuing operations." The retirement of debt, although unusual, is not infrequent for the company; therefore, the gain does not qualify for classification as an extraordinary item per APBO No. 30 (and SFAS No. 145). CPA-00214 Type1 M/C 108. CPA-00214 A-D Corr Ans: A PM#27 F 1-99 Nov 91 I #51 (Adapted) Page 22 During 1990, Fuqua Steel Co. had the following unusual financial events occur: • Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain. Fuqua has frequently retired bonds early when interest rates declined significantly. • A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location. • A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000. This was Fuqua's first divestiture of one of its operating segments. Before income taxes, what amount should be disclosed as the gain (loss) from extraordinary items in 1990? a. b. c. d. $0 $5,000 $(90,000) $(350,000) CPA-00214 Explanation Choice "a" is correct. $0. Note: The sale of the steel transportation component resulted in a loss from discontinued operations and is reported after "income from continuing operations." The steel forming segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature" and does not occur infrequently, therefore, it is not an "extraordinary item," and should be reported separately as a component of "income from continuing operations." The retirement of debt, although unusual, is not infrequent for the company; therefore, the gain does not qualify for classification as an extraordinary item per APBO No. 30 (and SFAS No. 145). CPA-00215 Type1 M/C 109. CPA-00215 A-D Corr Ans: C PM#28 Nov 91 #23 F 1-99 Page 22 In 1990, Teller Co. incurred losses arising from its guilty plea in its first antitrust action, and from a substantial increase in production costs caused when a major supplier's workers went on strike. Which of these losses should be reported as an extraordinary item? a. b. c. d. Antitrust action No No Yes Yes Production costs No Yes No Yes CPA-00215 Explanation Choice "c" is correct. Yes - No. Rule: Losses arising from a company's first (and probably "last") "anti-trust" action are unusual and extraordinary and should be reported as an extraordinary item. Losses resulting from additional costs caused by a strike at a major supplier or even at one's own company are not extraordinary and should be disclosed as a separate component of "income from continuing operations." CPA-00216 Type1 M/C 110. CPA-00216 A-D Corr Ans: C PM#29 F 1-99 May 92 I #46 Page 15 Ocean Corp.'s comprehensive insurance policy allows its assets to be replaced at current value. The policy has a $50,000 deductible clause. One of Ocean's waterfront warehouses was destroyed in a winter storm. Such storms occur approximately every four years. Ocean incurred $20,000 of costs in dismantling the warehouse and plans to replace it. The tax rate is 30%. The following data relate to the warehouse: Current carrying amount Replacement cost $ 300,000 1,100,000 What amount of gain should Ocean report as a separate component of income before extraordinary items? a. b. c. d. $1,030,000 $780,000 $730,000 $0 CPA-00216 Explanation Choice "c" is correct. $730,000 gain reported as a separate component of income before extraordinary items. Replacement cost Less: Deductible clause Subtotal - insurance proceeds Less: Costs to dismantle old warehouse $1,100,000 (50,000) 1,050,000 (20,000) Subtotal Less: Current carrying amount Gain on insurance settlement of casualty 1,030,000 (300,000) $ 730,000 CPA-00217 Type1 M/C 111. CPA-00217 A-D Corr Ans: B PM#30 Nov 90 #36 F 1-99 Page 29 Which of the following should be reported as a prior period adjustment? a. b. c. d. Change in estimated lives of depreciable assets Yes No Yes No Change from unaccepted principle to accepted principle Yes Yes No No CPA-00217 Explanation Choice "b" is correct. No - Yes Change in estimated lives of depreciable assets is a "change in estimate." They affect only current and future periods (not "prior periods," not retained earnings). Change from unaccepted principle to accepted principle is an example of an error of a prior period that should be reported as a "prior period adjustment." CPA-00218 Type1 M/C 112. CPA-00218 A-D Corr Ans: D PM#31 F 1-99 May 91 I #60 Page 26 On January 1, 20X1, Pell Corp. purchased a machine having an estimated useful life of 10 years and no salvage. The machine was depreciated by the double declining balance method for both financial statement and income tax reporting. On January 1, 20X6, Pell changed to the straight-line method for financial statement reporting but not for income tax reporting. Accumulated depreciation at December 31, 20X5, was $560,000. If the straight-line method had been used, the accumulated depreciation at December 31, 20X5, would have been $420,000. Pell's enacted income tax rate for 20X6 and thereafter is 30%. The amount shown in the 20X6 income statement for the cumulative effect of changing to the straight-line method should be: a. b. c. d. $98,000 debit. $98,000 credit. $140,000 credit. $0. CPA-00218 Explanation Choice "d" is correct. A change in the method of depreciation is now considered to be both a change in method and a change in estimate. These changes should be accounted for as changes in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings. And, certainly, the cumulative effect should not be reflected on the income statement any more. Choices "a", "b", and "c" are incorrect, per the above explanation. CPA-00219 Type1 M/C 113. CPA-00219 A-D May 91 #34 Corr Ans: B PM#32 F 1-99 Page 26 Is the cumulative effect of an inventory pricing change on prior years earnings reported on the financial statements for a. b. c. d. LIFO to weighted average? Yes Yes No No Weighed average to LIFO? Yes No No Yes CPA-00219 Explanation Choice "b" is correct. The cumulative effect of a change in accounting principle is now reported as an adjustment to beginning retained earnings when it is considered practicable to calculate the cumulative effect. When making a change to LIFO, it is generally considered impracticable to calculate the cumulative effect of the change (in most cases, data on the historical LIFO layers in not available). In a change to LIFO, the beginning inventory dollar amount becomes the first LIFO layer. No cumulative effect adjustment is made. The change is accounted for prospectively. A change from LIFO to weighted average, there is no such impracticability. The cumulative effect is computed and the change is handled retrospectively. Choices "a", "c", and "d" are incorrect, per the above explanation.