Certified Public Accountant CPA Questions + Answers Part 4
Posted: Tue Feb 22, 2022 6:07 pm
QUESTION 15
Foy Corp. failed to accrue warranty costs of $50,000 in its December 31, 1992, financial statements. In addition, a $30,000 change from straight-line to accelerated depreciation was made at the beginning of 1993. Both the $50,000 and the $30,000 are net of related income taxes. What amount should Foy report as prior period adjustments in 1993?
A. $0
B. $30,000 C. $50,000 D. $80,000
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. $50,000.
The cumulative effect of a change in accounting principle is now shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, assuming that the cumulative effect can be calculated.
An exception is made however, for a change in depreciation method, since a change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in method and a change in estimate. These changes should now be accounted for as a change 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.
The correction of the failure to accrue warranty costs is treated as a correction of an error and thus as a prior period adjustment.
Choices "a", "b", and "d" are incorrect, per the above Explanation: .
QUESTION 16
The following question is based on the following:
Vane Co.'s trial balance of income statement accounts for the year ended December 31, 2002, included the following:
Vane's income tax rate is 30%.
In Vane's 2002 multiple-step income statement, what amount should Vane report as income from continuing operations?
A. $126,000 B. $129,500 C. $140,000 D. $147,000
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct, $140,000.
QUESTION 17
The effect of a material transaction that is infrequent in occurrence but not unusual in nature should be presented separately as a component of income from continuing operations when the transaction results in a:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct, Yes - Yes. A material transaction that is "infrequent in occurrence" but not "unusual in nature" should be presented separately as a component of "income from continuing operations" when the transaction results in a gain or loss.
QUESTION 18
An extraordinary item should be reported separately on the income statement as a component of income:
A. Option A B. OptionB C. Option C D. Option D
Explanation:
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Choice "b" is correct, Yes - No. An extraordinary item should be reported separately on the income statement as a component of income: Yes - net of income taxes.
No - after (not before) "discontinued operations of a segment of a business."
QUESTION 19
On January 2, 20X5, to better reflect the variable use of its only machine, Holly, Inc. elected to change its method of depreciation from the straight-line method to the units of production method. The original cost of the machine on January 2, 20X3, was $50,000, and its estimated life was 10 years. Holly estimates that the machine's total life is 50,000 machine hours. Machine hours usage was 8,500 during 20X4 and 3,500 during 20X3.
Holly's income tax rate is 30%. Holly should report the accounting change in its 20X5 financial statements as a(n):
A. Cumulativeeffectofachangeinaccountingprincipleof$2,000initsincomestatement. B. Adjustmenttobeginningretainedearningsof$2,000.
C. Cumulative effect of a change in accounting principle of $1,400 in its income statement. D. None of the above.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
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. The cumulative effect treatment on the income statement was the treatment of most changes in accounting principle prior to SFAS No. 154. The adjustment to beginning retained earnings is the treatment now given to changes in accounting principle by SFAS No. 154. However a change in depreciation method is no longer accounted for as a change in accounting principle. Choices "a", "b", and "c" are incorrect, per the above Explanation: .
QUESTION 20
On November 1, 20X2, Smith Co. contracted to dispose of an industry segment. Throughout 20X2 the segment had operating losses. These losses were expected to continue until the segment's disposition. If a loss is projected on final disposition, how much of the operating losses should be included in the loss from discontinued operations reported in Smith's 20X2 income statement?
A. OperatinglossesfortheperiodJanuary1toOctober31,20X2.
II. Operating losses for the period November 1 to December 31, 20X2.
III. Estimated operating losses for the period January 1 to February 28, 20X3.
B. IIonly.
C. II and III only.
D. I and III only.
E. IandIIonly.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Projected operating losses are not anticipated and accrued.
Choice "a" is incorrect. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Choice "b" is incorrect. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Choice "c" is incorrect. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses.
QUESTION 21
If a company is not presenting comparative financial statements, the correction of an error in the financial statements of a prior period should be reported, net of applicable income taxes, in the current:
A. Retainedearningsstatementafternetincomebutbeforedividends.
B. Retainedearningsstatementasanadjustmentoftheopeningbalance.
C. Income statement after income from continuing operations and before extraordinary items. D. Income statement after income from continuing operations and after extraordinary items.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The correction of an error in the financial statements of a prior period should be reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance.
Choice "a" is incorrect. The adjustment is before net income, not after net income. Choices "c" and "d" are incorrect. Corrections of errors of prior periods go to retained earnings and do not affect the income statement.
QUESTION 22
The cumulative effect of a change in accounting estimate should be shown separately:
A. Ontheincomestatementaboveincomefromcontinuingoperations.
B. Ontheincomestatementafterincomefromcontinuingoperationsandbeforeextraordinaryitems. C. On the retained earnings statement as an adjustment to the beginning balance.
D. It should not be recorded separately on any financial statement.
Correct Answer: D
Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A change in estimate is handled prospectively. No cumulative effect adjustment is made and no separate line item presentation is made on any financial statement. If a material change is being made, appropriate footnote disclosure is necessary. Choices "a", "b", and "c" are incorrect, per the above Explanation: .
QUESTION 23
The following costs were incurred by Griff Co., a manufacturer, during 1992:
What amount of these costs should be reported as general and administrative expenses for 1992?
A. $260,000 B. $550,000 C. $635,000 D. $810,000
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. General and administrative expenses include:
Freight-in is part of cost of sales; freight-out is a selling expense; and sales salaries are selling expenses.
Choice "b" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales salaries are selling expenses. Choice "c" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales salaries are selling expenses. Choice "d" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales salaries are selling expenses.
QUESTION 24
On January 2, 1989, Union Co. purchased a machine for $264,000 and depreciated it by the straight- line method using an estimated useful life of eight years with no salvage value. On January 2, 1992, Union determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $24,000. An accounting change was made in 1992 to reflect the additional data. The accumulated depreciation for this machine should have a balance at December 31, 1992, of:
A. $176,000 B. $160,000 C. $154,000 D. $146,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct, $146,000 accumulated depreciation balance at DeC. 31, 1992.
QUESTION 25
During 1992, Krey Co. increased the estimated quantity of copper recoverable from its mine. Krey uses the units of production depletion method. As a result of the change, which of the following should be reported in Krey's 1992 financial statements?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct, No - No. This is a change in "accounting estimate," which affects only the current and subsequent periods (not prior periods and not retained earnings). "Cumulative effect of a change in accounting principle" is only used for changes in "accounting principle."
QUESTION 26
On August 31, 1992, Harvey Co. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. Harvey is on a calendar year basis. The cumulative effect of the change is determined:
A. AsofJanuary1,1992.
B. AsofAugust31,1992.
C. During the eight months ending August 31, 1992, by a weighted average of the purchases. D. During 1992 by a weighted average of the purchases.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct, as of January 1, 1992, 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. If comparative statements are presented, then beginning retained earnings of the earliest year presented is adjusted for the cumulative effect of the change. We are assuming, based on the answer options given, that Harvey is not presenting comparative financial statements. Choice "b" is incorrect. The cumulative effect of the change is not determined as of the date the decision is made.
Choices "c" and "d" are incorrect. The cumulative effect of the change is not determined by a weighted average.
QUESTION 27
In 1992, 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 1992, the damaged vans were sold for less than their carrying amount. How should the hail damage cost be reported in Toncan's 1992 financial statements?
A. Theactual1992haildamagelossasanextraordinaryloss,netofincometaxes.
B. Theactual1992haildamagelossincontinuingoperations,withnoseparatedisclosure.
C. The expected average hail damage loss in continuing operations, with no separate disclosure. D. The expected average hail damage loss in continuing operations, with separate disclosure.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
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 would be shown in continuing operations. No separate disclosure is necessary since hail damage is a common occurrence. Choice "a" is incorrect. Hailstorms are not unusual and infrequent so the loss could not be classified as extraordinary. APB 30 para. 20
Choice "c" is incorrect. Actual hail damage must be reported. Estimated hail damage may be probable but is not estimable; so it should not be included in income calculations. Choice "d" is incorrect. Estimated hail damage may be probable but is not estimable; so it should not be included in income calculations.
QUESTION 28
In which of the following situations should a company report a prior-period adjustment?
A. Achangeintheestimatedusefullivesoffixedassetspurchasedinprioryears.
B. Thecorrectionofamathematicalerrorinthecalculationofprioryears'depreciation. C. A switch from the straight-line to double-declining balance method of depreciation. D. The scrapping of an asset prior to the end of its expected useful life.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Prior period adjustments consist of: corrections of errors in the financial statements of prior periods, retroactive restatements required by new GAAP pronouncements, and changes from a non-GAAP method of accounting to a GAAP method of accounting (which are corrections of errors).
Choice "a" is incorrect. This change is a change in accounting estimate. Choice "c" is incorrect. This change is a change for one GAAP method of depreciation to another GAAP method of depreciation. Under SFAS No. 154, it is treated as a change in accounting estimate effected by a change in accounting principle and is handled prospectively, and not as a prior-period adjustment.
Choice "d" is incorrect. This is a business activity ordinary in nature.
QUESTION 29
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. $600 B. $900 C. $1,500 D. $2,400
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Over 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 is accounting estimate are accounted for in the current year and future years if the change affects both.
Choice "b" is incorrect. This answer is the annual difference between the depreciation expense IF depreciation expense had been retroactively restated ($24,000 / 8 = $1,500) and the correct depreciation expense. Retroactive restatement is not appropriate for changes in accounting estimate. Choice "c" is incorrect. This answer is the depreciation expense IF depreciation had been retroactively restated ($24,000 / 8 = $1,500). Retroactive restatement is not appropriate for changes in accounting estimate.
Choice "d" is incorrect. This answer is the undepreciated amount at the beginning of the fifth year or the amount of the annual depreciation expense for each of the first 4 years. Either way, it certainly is not going to be the depreciation expense for that year because the remaining cost will depreciated over the remaining period.
QUESTION 30
Envoy Co. manufactures and sells household products. Envoy experienced losses associated with its small appliance group. Operations and cash flows 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. WhenEnvoyclassifiesitasheldforsale.
B. WhenEnvoyreceivesanofferforthesegment.
C. When Envoy first sells any of the assets of the segment.
D. When Envoy sells the majority of the assets of the segment.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
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:
1. 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. Choices "b", "c", and "d" are incorrect, per the Explanation: above.
QUESTION 31
Belle Co. determined after four years that the estimated useful life of its labeling machine should be 10 years rather than 12 years. The machine originally cost $46,000 and had an estimated salvage value of $1,000. Belle uses straight-line depreciation. What amount should Belle report as depreciation expense for the current year?
A. $3,200 B. $3,750 C. $4,500 D. $5,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A change in estimated useful life is a change in accounting estimate, and is therefore accounted for prospectively. The revised useful life should be used as of the beginning of the year of the change and should be applied to the current book value of the fixed asset. The first step in determining the depreciation expense in the year of the change in estimate is to determine the book value of the labeling machine at the time of the change:
Original cost $46,000
- Accumulated depreciation 15,000 = [(46,000 - 1,000) / 12] *4 Current book value $31,000
This book value is then depreciated over the remaining life of the fixed asset based on the new estimated life. In this problem, the new estimated life is 10 years, four of which have already passed, so the asset must be depreciated over the remaining 6 years:
($31,000 - 1,000) / 6 = $5,000
Choice "a" is incorrect. This answer is incorrectly calculated by adding the salvage value to the current book value, and by using the entire 10 year revised estimated life. Salvage value should always be subtracted and the asset should only be depreciated over the remaining life of the asset. Choice "b" is incorrect. This is the annual depreciation before the change in estimated life ($46,000 - $1,000) / 12 = $3,750]. The depreciation after the change in estimate should be calculated as described above.
Choice "c" is incorrect. This would have been the annual straight-line depreciation if the original useful life of the asset had been 10 years rather than 12 years. The change in estimated life is applied prospectively, as described above, not retrospectively.
Comprehensive Income
QUESTION 32
According to the FASB conceptual framework, comprehensive income includes which of the following?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Comprehensive income is the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity except those resulting from investments by owners and distributions to owners. SFAC 6 para 70.
QUESTION 33
Which of the following describes how comprehensive income should be reported?
A. Mustbereportedinaseparatestatement,aspartofacompletesetoffinancialstatements.
B. Shouldnotbereportedinthefinancialstatementsbutshouldonlybedisclosedinthefootnotes.
C. May be reported in a separate statement, in a combined statement of income and comprehensive income, or within a statement of stockholders' equity.
D. May be reported in a combined statement of income and comprehensive income or disclosed within a statement of stockholders' equity; separate statements of comprehensive income are not permitted.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct.
Comprehensive income must be presented in one of three formats:
1. In a combined statement of income and comprehensive income;
2. In a separate statement of comprehensive income that begins with net income; or 3. In a statement of changes in equity.
Choices "a", "b", and "d" are incorrect, per the above.
Balance Sheet and Disclosures Overview
QUESTION 34
Which of the following should be disclosed in a summary of significant accounting policies?
A. Basisofprofitrecognitiononlong-termconstructioncontracts.
B. Futureminimumleasepaymentsintheaggregateandforeachofthefivesucceedingfiscalyears. C. Depreciation expense.
D. Composition of sales by segment.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The summary of significant accounting policies should disclose policies. The only policy in this question is the "basis" of profit recognition on long-term construction contracts. The other disclosures are accounting details and would be disclosed in other footnotes, but not in the summary of significant accounting policies.
Choice "b" is incorrect. The future minimum lease payments should be disclosed, but not in the summary of significant accounting policies.
Choice "c" is incorrect. Depreciation expense should certainly be disclosed, but not in the summary of significant accounting policies.
Choice "d" is incorrect. The composition of sales by segment should be disclosed, but not in the summary of significant accounting policies.
QUESTION 35
Which of the following must be included in a company's summary of significant accounting policies in the notes to the financial statements?
A. Descriptionofcurrentyearequitytransactions. B. Summaryoflong-termdebtoutstanding.
C. Schedule of fixed assets.
D. Revenue recognition policies.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The summary of significant accounting policies should include "policies." The only policy in the choices listed is the revenue recognition policies. Choice "a" is incorrect. A description of current year equity transactions is not a policy. It should be disclosed somewhere in the footnotes but not in the summary of significant accounting policies. Choice "b" is incorrect. A summary of long-term debt outstanding is not a policy. It should be disclosed somewhere in the footnotes but not in the summary of significant accounting policies. Choice "c" is incorrect. A schedule of fixed assets is not a policy. It should be disclosed somewhere in the footnotes but not in the summary of significant accounting policies.
QUESTION 36
Which of the following is correct concerning financial statement disclosure of accounting policies?
A. Disclosuresshouldbelimitedtoprinciplesandmethodspeculiartotheindustryinwhichthecompanyoperates. B. Disclosureofaccountingpoliciesisanintegralpartofthefinancialstatements.
C. The format and location of accounting policy disclosures are fixed by generally accepted accounting principles. D. Disclosures should duplicate details disclosed elsewhere in the financial statements.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Disclosure of accounting policies (and all other disclosure also) is an integral part of the financial statements.
Choice "a" is incorrect. For disclosure of accounting policies, disclosure should not be limited to principles and methods peculiar to the industry in which the
company operates. All material accounting policies should be disclosed.
Choice "c" is incorrect. For disclosure of accounting policies, the format and location of accounting policies are not fixed by GAAP. Accounting policy disclosures are normally Note 1, but that is a (reasonable and very general) practice and not a "rule." It does make sense to disclose the "why" before the "what."
Choice "d" is incorrect. Disclosure of accounting policies should not duplicate details disclosed elsewhere in the financial statements.
Interim Financial Reporting
QUESTION 37
Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in Petal's interim income statements?
A. Ratablyoverthesecond,third,andforth[sic]quarters. B. Ratablyoverthethirdandfourthquarters.
C. In the second quarter only.
D. In the fourth quarter only.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When the loss is probable and estimable, the expected loss must be recorded in full. This loss becomes such at the end of the fourth quarter. Therefore, the inventory must be valued on the year-end at the lower of cost or market, recognizing the loss at that time. Choice "a" is incorrect. Expected losses must be recorded in full when the loss is probable and estimable and not ratably over several quarters.
Choice "b" is incorrect. Expected losses must be recorded in full when the loss is probable and estimable and not ratably over several quarters.
Choice "c" is incorrect. Since the loss is not probable at the end of the second quarter, no amount should be recognized at that time.
QUESTION 38
In general, an enterprise preparing interim financial statements should:
A. Deferrecognitionofseasonalrevenue.
B. Disregardpermanentdecreasesinthemarketvalueofitsinventory.
C. Allocaterevenuesandexpensesevenlyoverthequarters,regardlessofwhentheyactuallyoccurred. D. Use the same accounting principles followed in preparing its latest annual financial statements.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Generally accepted accounting principles that were used in the most recent annual report of an enterprise should be applied to interim financial statements of the current year, unless a change in accounting principle is adopted in the current year.
Choices "a", "b", and "c" are incorrect, per above.
QUESTION 39
During the first quarter of the calendar year, Worth Co. had income before taxes of $100,000, and its effective income tax rate was 15%. Worth's effective annual income tax rate for the previous year was 30%. Worth expects that its effective annual income tax rate for the current year will be 25%. The statutory tax rate for the current year is 35%. In its first quarter interim income statement, what amount of income tax expense should Worth report?
A. $15,000 B. $25,000 C. $30,000 D. $35,000
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When preparing interim financial statements, income tax expense is estimated each quarter using the effective tax rate expected to apply to the entire year. Choice "a" is incorrect. Worth should use the effective annual tax rate, not the effective tax rate for the quarter only.
Choice "c" is incorrect. Worth should use the effective annual tax rate expected to apply to the current year, not the prior year's effective tax rate.
Choice "d" is incorrect. Worth should use the effective annual tax rate, not the statutory tax rate.
Segment Reporting
QUESTION 40
Taft Corp. discloses supplemental industry segment information. The following information is available for 1992:
Additional 1992 expenses, not included above, are as follows:
Indirect operating expenses $7,200 General corporate expenses 4,800
Segment C's 1992 operating profit was:
A. $5,000 B. $3,200 C. $2,600 D. $2,000
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. $5,000 operating profit for Segment C. Rule: Operating profit by segments is based on the measure of profit reported to the "Chief Operating Decision Maker."
Interest expense, income taxes, and general corporate expenses are not allocated to the divisions solely for the purposes of segment disclosures; they may be allocated if that is how the segments report to the "Chief Operating Decision Maker."
QUESTION 41
In financial reporting of segment data, which of the following items is always used in determining a segment's operating income?
A. Incometaxexpense.
B. Salestoothersegments.
C. General corporate expense.
D. Gain or loss on discontinued operations.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Sales to other segments would be used in determining a segment's operating income.
Rule: Equity in net income of another company, general corporate expenses, interest, income tax expense, and gains or losses on discontinued operations are all not included in segment profit unless they are included in the determination of segment profit reported to the "Chief Operating Decision Maker."
QUESTION 42
Opto Co. is a publicly-traded, consolidated enterprise reporting segment information. Which of the following items is a required enterprise-wide disclosure regarding external customers?
A. Thefactthattransactionswithaparticularexternalcustomerconstitutemorethan10%ofthetotalenterpriserevenues. B. Theidentityofanyexternalcustomerproviding10%ormoreofaparticularoperatingsegment'srevenue.
C. The identity of any external customer considered to be "major" by management.
D. Information on major customers is not required in segment reporting.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. In order to conform to GAAP, financial statements for public business enterprises must report segment information about a company's major customers if that customer provides 10% or more of the combined revenue, internal and external, of all operating segments. Choice "b" is incorrect. Revenue is 10% of ALL operating segments not "a particular" segment. Choice "c" is incorrect. Disclosure is not at management's discretion.
Choice "d" is incorrect. Disclosure is required.
QUESTION 43
Which of the following qualifies as an operating segment?
A. Corporateheadquarters,whichoversees$1billioninsalesfortheentirecompany.
B. NorthAmericansegment,whoseassetsare12%ofthecompany'sassetsofallsegments,andmanagementreportstothechiefoperatingofficer.
C. South American segment, whose results of operations are reported directly to the chief operating officer, and has 5% of the company's assets, 9% of revenues, and 8% of the profits.
D. Eastern Europe segment, which reports its results directly to the manager of the European division, and has 20% of the company's assets, 12% of revenues, and 11% of profits.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Assets of the North American segment exceed 10% combined assets of all operating segments.
Choice "a" is incorrect. Corporate headquarters in not considered a segment. Choice "c" is incorrect. The South American segment does not meet any of the 10% minimums (Revenue, P&L or Assets).
Choice "d" is incorrect. Eastern Europe segment does not report to the chief operating officer.
QUESTION 44
Which of the following should be disclosed for each reportable operating segment of an enterprise?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. For each reportable segment of an enterprise, both profit or loss and total assets should be disclosed. In disclosure questions, if you are not sure, disclose the most rather than the least. Choice "b" is incorrect. For each reportable segment of an enterprise, both profit or loss and total assets should be disclosed.
Choice "c" is incorrect. For each reportable segment of an enterprise, both profit or loss and total assets should be disclosed.
Choice "d" is incorrect. For each reportable segment of an enterprise, both profit or loss and total assets should be disclosed.
QUESTION 45
Which of the following factors determines whether an identified segment of an enterprise should be reported in the enterprise's financial statements under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information?
A. Thesegment'sassetsconstitutemorethan10%ofthecombinedassetsofalloperatingsegments.
II. The segment's liabilities constitute more than 10% of the combined liabilities of all operating segments.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. For segment reporting, if an identified segment's assets constitute more than 10% of the combined assets of all operating segments, the segment should be reported. The same rule does not apply for the segment's liabilities. The candidate does have to remember the 10% and also the 10% of "what."
Choice "b" is incorrect. For segment reporting, if an identified segment's assets constitute more than 10% of the combined assets of all operating segments, the segment should be reported. The same rule does not apply for the segment's liabilities.
Choice "c" is incorrect. For segment reporting, if an identified segment's assets constitute more than 10% of the combined assets of all operating segments, the segment should be reported. The same rule does not apply for the segment's liabilities, so the correct answer cannot be "Both." Choice "d" is incorrect. For segment reporting, if an identified segment's assets constitute more than 10% of the combined assets of all operating segments, the segment should be reported. The correct answer cannot be "Neither."
QUESTION 46
Which of the following types of entities are required to report on business segments? A. Nonpublicbusinessenterprises.
B. Publicly-tradedenterprises. C. Not-for-profit enterprises. D. Joint ventures.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Only publicly-traded enterprises are required to report on business segments. Choices "a", "c", and "d" are incorrect, per the Explanation: above.
QUESTION 47
In financial reporting of segment data, which of the following must be considered in determining if an industry segment is a reportable segment?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A segment is considered reportable if its reported revenue, including sales to unaffiliated customers and intersegment sales, is 10% or more of the combined revenue (unaffiliated and intersegment) of all operating segments.
Choices "b", "c", and "d" are incorrect, per the above Explanation: .
Development-Stage Enterprises
QUESTION 48
A development stage enterprise should use the same generally accepted accounting principles that apply to established operating enterprises for:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Development stage enterprises must use all the same principles as established enterprises including those of revenue recognition and deferral of expenses. The primary difference is that development stage enterprises must provide additional disclosures not required of established operating enterprises. SFAS #7, para. 10
QUESTION 49
Tanker Oil Co., a development stage enterprise, incurred the following costs during its first year of operations:
Tanker had no revenue during its first year of operation. What amount may Tanker capitalize as organizational costs?
A. $115,000 B. $95,000 C. $55,000 D. $0
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $0.
All organizational costs (start-up costs) should be expensed when incurred (per SOP 98-5). Fair Value Measurements
QUESTION 50
Which of the following statements regarding fair value is/are correct?
A. Thefairvalueofanassetorliabilityisspecifictotheentitymakingthefairvaluemeasurement. II. Fair value is the price to acquire an asset or assume a liability.
III. Fair value includes transportation costs, but not transaction costs.
IV. The price in the principal market for an asset or liability will be the fair value measurement.
B. I&II
C. I&IV
D. II&III
E. III&IV
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Statements III and IV are correct. Statement I is incorrect because fair value is a market-specific measure, not an entity-specific measure. Statement II is incorrect because fair value is an exit price (the price to sell an asset or transfer a liability), not an entrance price. Choices "a", "b" and "c" are incorrect, per the above Explanation: .
QUESTION 51
Which of the following is not a valuation technique that can be used to measure the fair value of an asset or liability?
A. Themarketapproach.
B. Theimpairmentapproach. C. The income approach.
D. The cost approach.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The impairment approach is not used to measure the fair value of an asset or liability. Instead, when an entity is determining whether an asset has been impaired, the entity will use the market approach, the income approach or the cost approach to determine the fair value of the asset. Choice "a" is incorrect. The market approach is an accepted method of fair value measurement in which price and other market information from identical or comparable assets
or liabilities is used to measure fair value.
Choice "c" is incorrect. The income approach is an accepted method of fair value measurement in which future cash flows or earnings are discounted to determine fair value. Choice "d" is incorrect. The cost approach is an accepted method of fair value measurement in which current replacement cost is used to determine the fair value of an asset.
QUESTION 52
Which of the following statements is incorrect regarding the inputs that can be used to measure fair value?
A. LevelIinputsarethemostreliablefairvaluemeasurementsandLevelIIIinputsaretheleastreliable.
II. Level I measurements are quoted prices in active markets for identical or similar assets or liabilities.
III. A fair value measurement based on management assumptions only (no market data) would not be acceptable per GAAP.
IV. The level in the fair value hierarchy of a fair value measurement is determined by the level of the highest level significant input.
B. Ionly.
C. I, II, IV.
D. II, III, IV.
E. I,II,III,IV.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Statement I is correct and statements II, III, and IV are incorrect. Statement II is incorrect because Level I measurements are quoted prices in active markets for identical assets or liabilities only. Quoted prices in active markets for similar assets or liabilities are Level II inputs. Statement III is incorrect because a fair value measurement based on management assumptions only is a
Level III measurement and is acceptable when there are no Level I or Level II inputs or when undo cost or effort is required to obtain Level I or Level II inputs. Statement IV is incorrect because the level in the fair value hierarchy of a fair value measurement is determined by the level of the lowest level significant input.
QUESTION 53
There are multiple active markets for a financial asset with different observable market prices:
There is no principal market for the financial asset. What is the fair value of the asset?
A. $71 B. $72 C. $74 D. $76
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. When there is no principal market, the price in the most advantageous market is the fair value measurement. Although transaction costs are not included in the fair value measurement, they are used to determine the most advantageous market, as follows:
Market A: Net Price = Quoted Price - Transaction Costs = $76 - 5 = $71 Market B: Net Price = Quoted Price - Transaction Costs = $74 - 2 = $72 Because the net price in Market B is higher than the net price in Market A, Market B is the most advantageous market and the quoted price in Market B ($74) is the fair value of the asset. Choice "a" is incorrect. This is the net price in Market A. Fair value does not include transaction costs. Choice "b" is incorrect. This is the net price in Market B. This net price indicates that Market B is the most advantageous market, but the net price is not the fair value because fair value does not include transaction costs.
Choice "d" is incorrect. If Market A were the principal market for the asset, then this would be the fair value of the asset. However, because there is no principal market, the price in the most advantageous market (Market B) is the price of the asset.
QUESTION 54
A change from the cost approach to the market approach of measuring fair value is considered to be what type of accounting change?
A. Changeinaccountingestimate. B. Changeinaccountingprinciple. C. Change in valuation technique. D. Error correction.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A change in the valuation technique used to measure fair value is a change in accounting estimate.
Choice "b" is incorrect. Per SFAS No. 157, a change in valuation technique is a change in accounting estimate, not a change in accounting principal.
Choice "c" is incorrect. Although a change from the cost approach to the market approach is a change in valuation technique, a change in valuation technique is not defined as a type of accounting change, but instead falls into the category of changes in accounting estimate. Choice "d" is incorrect. Both the market approach and the cost approach are acceptable methods of measuring fair value per SFAS No. 157; therefore, switching between these methods is not the correction of an error. Additionally, an error correction is not a type of accounting change.
Foy Corp. failed to accrue warranty costs of $50,000 in its December 31, 1992, financial statements. In addition, a $30,000 change from straight-line to accelerated depreciation was made at the beginning of 1993. Both the $50,000 and the $30,000 are net of related income taxes. What amount should Foy report as prior period adjustments in 1993?
A. $0
B. $30,000 C. $50,000 D. $80,000
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. $50,000.
The cumulative effect of a change in accounting principle is now shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, assuming that the cumulative effect can be calculated.
An exception is made however, for a change in depreciation method, since a change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in method and a change in estimate. These changes should now be accounted for as a change 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.
The correction of the failure to accrue warranty costs is treated as a correction of an error and thus as a prior period adjustment.
Choices "a", "b", and "d" are incorrect, per the above Explanation: .
QUESTION 16
The following question is based on the following:
Vane Co.'s trial balance of income statement accounts for the year ended December 31, 2002, included the following:
Vane's income tax rate is 30%.
In Vane's 2002 multiple-step income statement, what amount should Vane report as income from continuing operations?
A. $126,000 B. $129,500 C. $140,000 D. $147,000
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct, $140,000.
QUESTION 17
The effect of a material transaction that is infrequent in occurrence but not unusual in nature should be presented separately as a component of income from continuing operations when the transaction results in a:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct, Yes - Yes. A material transaction that is "infrequent in occurrence" but not "unusual in nature" should be presented separately as a component of "income from continuing operations" when the transaction results in a gain or loss.
QUESTION 18
An extraordinary item should be reported separately on the income statement as a component of income:
A. Option A B. OptionB C. Option C D. Option D
Explanation:
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Choice "b" is correct, Yes - No. An extraordinary item should be reported separately on the income statement as a component of income: Yes - net of income taxes.
No - after (not before) "discontinued operations of a segment of a business."
QUESTION 19
On January 2, 20X5, to better reflect the variable use of its only machine, Holly, Inc. elected to change its method of depreciation from the straight-line method to the units of production method. The original cost of the machine on January 2, 20X3, was $50,000, and its estimated life was 10 years. Holly estimates that the machine's total life is 50,000 machine hours. Machine hours usage was 8,500 during 20X4 and 3,500 during 20X3.
Holly's income tax rate is 30%. Holly should report the accounting change in its 20X5 financial statements as a(n):
A. Cumulativeeffectofachangeinaccountingprincipleof$2,000initsincomestatement. B. Adjustmenttobeginningretainedearningsof$2,000.
C. Cumulative effect of a change in accounting principle of $1,400 in its income statement. D. None of the above.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
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. The cumulative effect treatment on the income statement was the treatment of most changes in accounting principle prior to SFAS No. 154. The adjustment to beginning retained earnings is the treatment now given to changes in accounting principle by SFAS No. 154. However a change in depreciation method is no longer accounted for as a change in accounting principle. Choices "a", "b", and "c" are incorrect, per the above Explanation: .
QUESTION 20
On November 1, 20X2, Smith Co. contracted to dispose of an industry segment. Throughout 20X2 the segment had operating losses. These losses were expected to continue until the segment's disposition. If a loss is projected on final disposition, how much of the operating losses should be included in the loss from discontinued operations reported in Smith's 20X2 income statement?
A. OperatinglossesfortheperiodJanuary1toOctober31,20X2.
II. Operating losses for the period November 1 to December 31, 20X2.
III. Estimated operating losses for the period January 1 to February 28, 20X3.
B. IIonly.
C. II and III only.
D. I and III only.
E. IandIIonly.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Projected operating losses are not anticipated and accrued.
Choice "a" is incorrect. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Choice "b" is incorrect. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Choice "c" is incorrect. The operating losses to be included in Smith's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses.
QUESTION 21
If a company is not presenting comparative financial statements, the correction of an error in the financial statements of a prior period should be reported, net of applicable income taxes, in the current:
A. Retainedearningsstatementafternetincomebutbeforedividends.
B. Retainedearningsstatementasanadjustmentoftheopeningbalance.
C. Income statement after income from continuing operations and before extraordinary items. D. Income statement after income from continuing operations and after extraordinary items.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The correction of an error in the financial statements of a prior period should be reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance.
Choice "a" is incorrect. The adjustment is before net income, not after net income. Choices "c" and "d" are incorrect. Corrections of errors of prior periods go to retained earnings and do not affect the income statement.
QUESTION 22
The cumulative effect of a change in accounting estimate should be shown separately:
A. Ontheincomestatementaboveincomefromcontinuingoperations.
B. Ontheincomestatementafterincomefromcontinuingoperationsandbeforeextraordinaryitems. C. On the retained earnings statement as an adjustment to the beginning balance.
D. It should not be recorded separately on any financial statement.
Correct Answer: D
Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A change in estimate is handled prospectively. No cumulative effect adjustment is made and no separate line item presentation is made on any financial statement. If a material change is being made, appropriate footnote disclosure is necessary. Choices "a", "b", and "c" are incorrect, per the above Explanation: .
QUESTION 23
The following costs were incurred by Griff Co., a manufacturer, during 1992:
What amount of these costs should be reported as general and administrative expenses for 1992?
A. $260,000 B. $550,000 C. $635,000 D. $810,000
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. General and administrative expenses include:
Freight-in is part of cost of sales; freight-out is a selling expense; and sales salaries are selling expenses.
Choice "b" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales salaries are selling expenses. Choice "c" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales salaries are selling expenses. Choice "d" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales salaries are selling expenses.
QUESTION 24
On January 2, 1989, Union Co. purchased a machine for $264,000 and depreciated it by the straight- line method using an estimated useful life of eight years with no salvage value. On January 2, 1992, Union determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $24,000. An accounting change was made in 1992 to reflect the additional data. The accumulated depreciation for this machine should have a balance at December 31, 1992, of:
A. $176,000 B. $160,000 C. $154,000 D. $146,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct, $146,000 accumulated depreciation balance at DeC. 31, 1992.
QUESTION 25
During 1992, Krey Co. increased the estimated quantity of copper recoverable from its mine. Krey uses the units of production depletion method. As a result of the change, which of the following should be reported in Krey's 1992 financial statements?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct, No - No. This is a change in "accounting estimate," which affects only the current and subsequent periods (not prior periods and not retained earnings). "Cumulative effect of a change in accounting principle" is only used for changes in "accounting principle."
QUESTION 26
On August 31, 1992, Harvey Co. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. Harvey is on a calendar year basis. The cumulative effect of the change is determined:
A. AsofJanuary1,1992.
B. AsofAugust31,1992.
C. During the eight months ending August 31, 1992, by a weighted average of the purchases. D. During 1992 by a weighted average of the purchases.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct, as of January 1, 1992, 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. If comparative statements are presented, then beginning retained earnings of the earliest year presented is adjusted for the cumulative effect of the change. We are assuming, based on the answer options given, that Harvey is not presenting comparative financial statements. Choice "b" is incorrect. The cumulative effect of the change is not determined as of the date the decision is made.
Choices "c" and "d" are incorrect. The cumulative effect of the change is not determined by a weighted average.
QUESTION 27
In 1992, 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 1992, the damaged vans were sold for less than their carrying amount. How should the hail damage cost be reported in Toncan's 1992 financial statements?
A. Theactual1992haildamagelossasanextraordinaryloss,netofincometaxes.
B. Theactual1992haildamagelossincontinuingoperations,withnoseparatedisclosure.
C. The expected average hail damage loss in continuing operations, with no separate disclosure. D. The expected average hail damage loss in continuing operations, with separate disclosure.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
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 would be shown in continuing operations. No separate disclosure is necessary since hail damage is a common occurrence. Choice "a" is incorrect. Hailstorms are not unusual and infrequent so the loss could not be classified as extraordinary. APB 30 para. 20
Choice "c" is incorrect. Actual hail damage must be reported. Estimated hail damage may be probable but is not estimable; so it should not be included in income calculations. Choice "d" is incorrect. Estimated hail damage may be probable but is not estimable; so it should not be included in income calculations.
QUESTION 28
In which of the following situations should a company report a prior-period adjustment?
A. Achangeintheestimatedusefullivesoffixedassetspurchasedinprioryears.
B. Thecorrectionofamathematicalerrorinthecalculationofprioryears'depreciation. C. A switch from the straight-line to double-declining balance method of depreciation. D. The scrapping of an asset prior to the end of its expected useful life.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Prior period adjustments consist of: corrections of errors in the financial statements of prior periods, retroactive restatements required by new GAAP pronouncements, and changes from a non-GAAP method of accounting to a GAAP method of accounting (which are corrections of errors).
Choice "a" is incorrect. This change is a change in accounting estimate. Choice "c" is incorrect. This change is a change for one GAAP method of depreciation to another GAAP method of depreciation. Under SFAS No. 154, it is treated as a change in accounting estimate effected by a change in accounting principle and is handled prospectively, and not as a prior-period adjustment.
Choice "d" is incorrect. This is a business activity ordinary in nature.
QUESTION 29
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. $600 B. $900 C. $1,500 D. $2,400
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Over 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 is accounting estimate are accounted for in the current year and future years if the change affects both.
Choice "b" is incorrect. This answer is the annual difference between the depreciation expense IF depreciation expense had been retroactively restated ($24,000 / 8 = $1,500) and the correct depreciation expense. Retroactive restatement is not appropriate for changes in accounting estimate. Choice "c" is incorrect. This answer is the depreciation expense IF depreciation had been retroactively restated ($24,000 / 8 = $1,500). Retroactive restatement is not appropriate for changes in accounting estimate.
Choice "d" is incorrect. This answer is the undepreciated amount at the beginning of the fifth year or the amount of the annual depreciation expense for each of the first 4 years. Either way, it certainly is not going to be the depreciation expense for that year because the remaining cost will depreciated over the remaining period.
QUESTION 30
Envoy Co. manufactures and sells household products. Envoy experienced losses associated with its small appliance group. Operations and cash flows 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. WhenEnvoyclassifiesitasheldforsale.
B. WhenEnvoyreceivesanofferforthesegment.
C. When Envoy first sells any of the assets of the segment.
D. When Envoy sells the majority of the assets of the segment.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
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:
1. 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. Choices "b", "c", and "d" are incorrect, per the Explanation: above.
QUESTION 31
Belle Co. determined after four years that the estimated useful life of its labeling machine should be 10 years rather than 12 years. The machine originally cost $46,000 and had an estimated salvage value of $1,000. Belle uses straight-line depreciation. What amount should Belle report as depreciation expense for the current year?
A. $3,200 B. $3,750 C. $4,500 D. $5,000
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. A change in estimated useful life is a change in accounting estimate, and is therefore accounted for prospectively. The revised useful life should be used as of the beginning of the year of the change and should be applied to the current book value of the fixed asset. The first step in determining the depreciation expense in the year of the change in estimate is to determine the book value of the labeling machine at the time of the change:
Original cost $46,000
- Accumulated depreciation 15,000 = [(46,000 - 1,000) / 12] *4 Current book value $31,000
This book value is then depreciated over the remaining life of the fixed asset based on the new estimated life. In this problem, the new estimated life is 10 years, four of which have already passed, so the asset must be depreciated over the remaining 6 years:
($31,000 - 1,000) / 6 = $5,000
Choice "a" is incorrect. This answer is incorrectly calculated by adding the salvage value to the current book value, and by using the entire 10 year revised estimated life. Salvage value should always be subtracted and the asset should only be depreciated over the remaining life of the asset. Choice "b" is incorrect. This is the annual depreciation before the change in estimated life ($46,000 - $1,000) / 12 = $3,750]. The depreciation after the change in estimate should be calculated as described above.
Choice "c" is incorrect. This would have been the annual straight-line depreciation if the original useful life of the asset had been 10 years rather than 12 years. The change in estimated life is applied prospectively, as described above, not retrospectively.
Comprehensive Income
QUESTION 32
According to the FASB conceptual framework, comprehensive income includes which of the following?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Comprehensive income is the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity except those resulting from investments by owners and distributions to owners. SFAC 6 para 70.
QUESTION 33
Which of the following describes how comprehensive income should be reported?
A. Mustbereportedinaseparatestatement,aspartofacompletesetoffinancialstatements.
B. Shouldnotbereportedinthefinancialstatementsbutshouldonlybedisclosedinthefootnotes.
C. May be reported in a separate statement, in a combined statement of income and comprehensive income, or within a statement of stockholders' equity.
D. May be reported in a combined statement of income and comprehensive income or disclosed within a statement of stockholders' equity; separate statements of comprehensive income are not permitted.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct.
Comprehensive income must be presented in one of three formats:
1. In a combined statement of income and comprehensive income;
2. In a separate statement of comprehensive income that begins with net income; or 3. In a statement of changes in equity.
Choices "a", "b", and "d" are incorrect, per the above.
Balance Sheet and Disclosures Overview
QUESTION 34
Which of the following should be disclosed in a summary of significant accounting policies?
A. Basisofprofitrecognitiononlong-termconstructioncontracts.
B. Futureminimumleasepaymentsintheaggregateandforeachofthefivesucceedingfiscalyears. C. Depreciation expense.
D. Composition of sales by segment.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. The summary of significant accounting policies should disclose policies. The only policy in this question is the "basis" of profit recognition on long-term construction contracts. The other disclosures are accounting details and would be disclosed in other footnotes, but not in the summary of significant accounting policies.
Choice "b" is incorrect. The future minimum lease payments should be disclosed, but not in the summary of significant accounting policies.
Choice "c" is incorrect. Depreciation expense should certainly be disclosed, but not in the summary of significant accounting policies.
Choice "d" is incorrect. The composition of sales by segment should be disclosed, but not in the summary of significant accounting policies.
QUESTION 35
Which of the following must be included in a company's summary of significant accounting policies in the notes to the financial statements?
A. Descriptionofcurrentyearequitytransactions. B. Summaryoflong-termdebtoutstanding.
C. Schedule of fixed assets.
D. Revenue recognition policies.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. The summary of significant accounting policies should include "policies." The only policy in the choices listed is the revenue recognition policies. Choice "a" is incorrect. A description of current year equity transactions is not a policy. It should be disclosed somewhere in the footnotes but not in the summary of significant accounting policies. Choice "b" is incorrect. A summary of long-term debt outstanding is not a policy. It should be disclosed somewhere in the footnotes but not in the summary of significant accounting policies. Choice "c" is incorrect. A schedule of fixed assets is not a policy. It should be disclosed somewhere in the footnotes but not in the summary of significant accounting policies.
QUESTION 36
Which of the following is correct concerning financial statement disclosure of accounting policies?
A. Disclosuresshouldbelimitedtoprinciplesandmethodspeculiartotheindustryinwhichthecompanyoperates. B. Disclosureofaccountingpoliciesisanintegralpartofthefinancialstatements.
C. The format and location of accounting policy disclosures are fixed by generally accepted accounting principles. D. Disclosures should duplicate details disclosed elsewhere in the financial statements.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Disclosure of accounting policies (and all other disclosure also) is an integral part of the financial statements.
Choice "a" is incorrect. For disclosure of accounting policies, disclosure should not be limited to principles and methods peculiar to the industry in which the
company operates. All material accounting policies should be disclosed.
Choice "c" is incorrect. For disclosure of accounting policies, the format and location of accounting policies are not fixed by GAAP. Accounting policy disclosures are normally Note 1, but that is a (reasonable and very general) practice and not a "rule." It does make sense to disclose the "why" before the "what."
Choice "d" is incorrect. Disclosure of accounting policies should not duplicate details disclosed elsewhere in the financial statements.
Interim Financial Reporting
QUESTION 37
Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in Petal's interim income statements?
A. Ratablyoverthesecond,third,andforth[sic]quarters. B. Ratablyoverthethirdandfourthquarters.
C. In the second quarter only.
D. In the fourth quarter only.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. When the loss is probable and estimable, the expected loss must be recorded in full. This loss becomes such at the end of the fourth quarter. Therefore, the inventory must be valued on the year-end at the lower of cost or market, recognizing the loss at that time. Choice "a" is incorrect. Expected losses must be recorded in full when the loss is probable and estimable and not ratably over several quarters.
Choice "b" is incorrect. Expected losses must be recorded in full when the loss is probable and estimable and not ratably over several quarters.
Choice "c" is incorrect. Since the loss is not probable at the end of the second quarter, no amount should be recognized at that time.
QUESTION 38
In general, an enterprise preparing interim financial statements should:
A. Deferrecognitionofseasonalrevenue.
B. Disregardpermanentdecreasesinthemarketvalueofitsinventory.
C. Allocaterevenuesandexpensesevenlyoverthequarters,regardlessofwhentheyactuallyoccurred. D. Use the same accounting principles followed in preparing its latest annual financial statements.
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Generally accepted accounting principles that were used in the most recent annual report of an enterprise should be applied to interim financial statements of the current year, unless a change in accounting principle is adopted in the current year.
Choices "a", "b", and "c" are incorrect, per above.
QUESTION 39
During the first quarter of the calendar year, Worth Co. had income before taxes of $100,000, and its effective income tax rate was 15%. Worth's effective annual income tax rate for the previous year was 30%. Worth expects that its effective annual income tax rate for the current year will be 25%. The statutory tax rate for the current year is 35%. In its first quarter interim income statement, what amount of income tax expense should Worth report?
A. $15,000 B. $25,000 C. $30,000 D. $35,000
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. When preparing interim financial statements, income tax expense is estimated each quarter using the effective tax rate expected to apply to the entire year. Choice "a" is incorrect. Worth should use the effective annual tax rate, not the effective tax rate for the quarter only.
Choice "c" is incorrect. Worth should use the effective annual tax rate expected to apply to the current year, not the prior year's effective tax rate.
Choice "d" is incorrect. Worth should use the effective annual tax rate, not the statutory tax rate.
Segment Reporting
QUESTION 40
Taft Corp. discloses supplemental industry segment information. The following information is available for 1992:
Additional 1992 expenses, not included above, are as follows:
Indirect operating expenses $7,200 General corporate expenses 4,800
Segment C's 1992 operating profit was:
A. $5,000 B. $3,200 C. $2,600 D. $2,000
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. $5,000 operating profit for Segment C. Rule: Operating profit by segments is based on the measure of profit reported to the "Chief Operating Decision Maker."
Interest expense, income taxes, and general corporate expenses are not allocated to the divisions solely for the purposes of segment disclosures; they may be allocated if that is how the segments report to the "Chief Operating Decision Maker."
QUESTION 41
In financial reporting of segment data, which of the following items is always used in determining a segment's operating income?
A. Incometaxexpense.
B. Salestoothersegments.
C. General corporate expense.
D. Gain or loss on discontinued operations.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Sales to other segments would be used in determining a segment's operating income.
Rule: Equity in net income of another company, general corporate expenses, interest, income tax expense, and gains or losses on discontinued operations are all not included in segment profit unless they are included in the determination of segment profit reported to the "Chief Operating Decision Maker."
QUESTION 42
Opto Co. is a publicly-traded, consolidated enterprise reporting segment information. Which of the following items is a required enterprise-wide disclosure regarding external customers?
A. Thefactthattransactionswithaparticularexternalcustomerconstitutemorethan10%ofthetotalenterpriserevenues. B. Theidentityofanyexternalcustomerproviding10%ormoreofaparticularoperatingsegment'srevenue.
C. The identity of any external customer considered to be "major" by management.
D. Information on major customers is not required in segment reporting.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. In order to conform to GAAP, financial statements for public business enterprises must report segment information about a company's major customers if that customer provides 10% or more of the combined revenue, internal and external, of all operating segments. Choice "b" is incorrect. Revenue is 10% of ALL operating segments not "a particular" segment. Choice "c" is incorrect. Disclosure is not at management's discretion.
Choice "d" is incorrect. Disclosure is required.
QUESTION 43
Which of the following qualifies as an operating segment?
A. Corporateheadquarters,whichoversees$1billioninsalesfortheentirecompany.
B. NorthAmericansegment,whoseassetsare12%ofthecompany'sassetsofallsegments,andmanagementreportstothechiefoperatingofficer.
C. South American segment, whose results of operations are reported directly to the chief operating officer, and has 5% of the company's assets, 9% of revenues, and 8% of the profits.
D. Eastern Europe segment, which reports its results directly to the manager of the European division, and has 20% of the company's assets, 12% of revenues, and 11% of profits.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Assets of the North American segment exceed 10% combined assets of all operating segments.
Choice "a" is incorrect. Corporate headquarters in not considered a segment. Choice "c" is incorrect. The South American segment does not meet any of the 10% minimums (Revenue, P&L or Assets).
Choice "d" is incorrect. Eastern Europe segment does not report to the chief operating officer.
QUESTION 44
Which of the following should be disclosed for each reportable operating segment of an enterprise?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. For each reportable segment of an enterprise, both profit or loss and total assets should be disclosed. In disclosure questions, if you are not sure, disclose the most rather than the least. Choice "b" is incorrect. For each reportable segment of an enterprise, both profit or loss and total assets should be disclosed.
Choice "c" is incorrect. For each reportable segment of an enterprise, both profit or loss and total assets should be disclosed.
Choice "d" is incorrect. For each reportable segment of an enterprise, both profit or loss and total assets should be disclosed.
QUESTION 45
Which of the following factors determines whether an identified segment of an enterprise should be reported in the enterprise's financial statements under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information?
A. Thesegment'sassetsconstitutemorethan10%ofthecombinedassetsofalloperatingsegments.
II. The segment's liabilities constitute more than 10% of the combined liabilities of all operating segments.
B. Ionly.
C. II only.
D. Both I and II.
E. NeitherInorII.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. For segment reporting, if an identified segment's assets constitute more than 10% of the combined assets of all operating segments, the segment should be reported. The same rule does not apply for the segment's liabilities. The candidate does have to remember the 10% and also the 10% of "what."
Choice "b" is incorrect. For segment reporting, if an identified segment's assets constitute more than 10% of the combined assets of all operating segments, the segment should be reported. The same rule does not apply for the segment's liabilities.
Choice "c" is incorrect. For segment reporting, if an identified segment's assets constitute more than 10% of the combined assets of all operating segments, the segment should be reported. The same rule does not apply for the segment's liabilities, so the correct answer cannot be "Both." Choice "d" is incorrect. For segment reporting, if an identified segment's assets constitute more than 10% of the combined assets of all operating segments, the segment should be reported. The correct answer cannot be "Neither."
QUESTION 46
Which of the following types of entities are required to report on business segments? A. Nonpublicbusinessenterprises.
B. Publicly-tradedenterprises. C. Not-for-profit enterprises. D. Joint ventures.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. Only publicly-traded enterprises are required to report on business segments. Choices "a", "c", and "d" are incorrect, per the Explanation: above.
QUESTION 47
In financial reporting of segment data, which of the following must be considered in determining if an industry segment is a reportable segment?
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A segment is considered reportable if its reported revenue, including sales to unaffiliated customers and intersegment sales, is 10% or more of the combined revenue (unaffiliated and intersegment) of all operating segments.
Choices "b", "c", and "d" are incorrect, per the above Explanation: .
Development-Stage Enterprises
QUESTION 48
A development stage enterprise should use the same generally accepted accounting principles that apply to established operating enterprises for:
A. Option A B. OptionB C. Option C D. Option D
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. Development stage enterprises must use all the same principles as established enterprises including those of revenue recognition and deferral of expenses. The primary difference is that development stage enterprises must provide additional disclosures not required of established operating enterprises. SFAS #7, para. 10
QUESTION 49
Tanker Oil Co., a development stage enterprise, incurred the following costs during its first year of operations:
Tanker had no revenue during its first year of operation. What amount may Tanker capitalize as organizational costs?
A. $115,000 B. $95,000 C. $55,000 D. $0
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. $0.
All organizational costs (start-up costs) should be expensed when incurred (per SOP 98-5). Fair Value Measurements
QUESTION 50
Which of the following statements regarding fair value is/are correct?
A. Thefairvalueofanassetorliabilityisspecifictotheentitymakingthefairvaluemeasurement. II. Fair value is the price to acquire an asset or assume a liability.
III. Fair value includes transportation costs, but not transaction costs.
IV. The price in the principal market for an asset or liability will be the fair value measurement.
B. I&II
C. I&IV
D. II&III
E. III&IV
Correct Answer: D Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "d" is correct. Statements III and IV are correct. Statement I is incorrect because fair value is a market-specific measure, not an entity-specific measure. Statement II is incorrect because fair value is an exit price (the price to sell an asset or transfer a liability), not an entrance price. Choices "a", "b" and "c" are incorrect, per the above Explanation: .
QUESTION 51
Which of the following is not a valuation technique that can be used to measure the fair value of an asset or liability?
A. Themarketapproach.
B. Theimpairmentapproach. C. The income approach.
D. The cost approach.
Correct Answer: B Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "b" is correct. The impairment approach is not used to measure the fair value of an asset or liability. Instead, when an entity is determining whether an asset has been impaired, the entity will use the market approach, the income approach or the cost approach to determine the fair value of the asset. Choice "a" is incorrect. The market approach is an accepted method of fair value measurement in which price and other market information from identical or comparable assets
or liabilities is used to measure fair value.
Choice "c" is incorrect. The income approach is an accepted method of fair value measurement in which future cash flows or earnings are discounted to determine fair value. Choice "d" is incorrect. The cost approach is an accepted method of fair value measurement in which current replacement cost is used to determine the fair value of an asset.
QUESTION 52
Which of the following statements is incorrect regarding the inputs that can be used to measure fair value?
A. LevelIinputsarethemostreliablefairvaluemeasurementsandLevelIIIinputsaretheleastreliable.
II. Level I measurements are quoted prices in active markets for identical or similar assets or liabilities.
III. A fair value measurement based on management assumptions only (no market data) would not be acceptable per GAAP.
IV. The level in the fair value hierarchy of a fair value measurement is determined by the level of the highest level significant input.
B. Ionly.
C. I, II, IV.
D. II, III, IV.
E. I,II,III,IV.
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. Statement I is correct and statements II, III, and IV are incorrect. Statement II is incorrect because Level I measurements are quoted prices in active markets for identical assets or liabilities only. Quoted prices in active markets for similar assets or liabilities are Level II inputs. Statement III is incorrect because a fair value measurement based on management assumptions only is a
Level III measurement and is acceptable when there are no Level I or Level II inputs or when undo cost or effort is required to obtain Level I or Level II inputs. Statement IV is incorrect because the level in the fair value hierarchy of a fair value measurement is determined by the level of the lowest level significant input.
QUESTION 53
There are multiple active markets for a financial asset with different observable market prices:
There is no principal market for the financial asset. What is the fair value of the asset?
A. $71 B. $72 C. $74 D. $76
Correct Answer: C Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "c" is correct. When there is no principal market, the price in the most advantageous market is the fair value measurement. Although transaction costs are not included in the fair value measurement, they are used to determine the most advantageous market, as follows:
Market A: Net Price = Quoted Price - Transaction Costs = $76 - 5 = $71 Market B: Net Price = Quoted Price - Transaction Costs = $74 - 2 = $72 Because the net price in Market B is higher than the net price in Market A, Market B is the most advantageous market and the quoted price in Market B ($74) is the fair value of the asset. Choice "a" is incorrect. This is the net price in Market A. Fair value does not include transaction costs. Choice "b" is incorrect. This is the net price in Market B. This net price indicates that Market B is the most advantageous market, but the net price is not the fair value because fair value does not include transaction costs.
Choice "d" is incorrect. If Market A were the principal market for the asset, then this would be the fair value of the asset. However, because there is no principal market, the price in the most advantageous market (Market B) is the price of the asset.
QUESTION 54
A change from the cost approach to the market approach of measuring fair value is considered to be what type of accounting change?
A. Changeinaccountingestimate. B. Changeinaccountingprinciple. C. Change in valuation technique. D. Error correction.
Correct Answer: A Section: (none) Explanation
Explanation/Reference:
Explanation:
Choice "a" is correct. A change in the valuation technique used to measure fair value is a change in accounting estimate.
Choice "b" is incorrect. Per SFAS No. 157, a change in valuation technique is a change in accounting estimate, not a change in accounting principal.
Choice "c" is incorrect. Although a change from the cost approach to the market approach is a change in valuation technique, a change in valuation technique is not defined as a type of accounting change, but instead falls into the category of changes in accounting estimate. Choice "d" is incorrect. Both the market approach and the cost approach are acceptable methods of measuring fair value per SFAS No. 157; therefore, switching between these methods is not the correction of an error. Additionally, an error correction is not a type of accounting change.