Test Prep Test Prep Certifications FINANCIAL-ACCOUNTING-AND-REPORTING Questions & Answers

• Question 111:

  Which of the following should be disclosed in a summary of significant accounting policies?

  A. Basis of profit recognition on long-term construction contracts.

  B. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.

  C. Depreciation expense.

  D. Composition of sales by segment.

  Correct Answer: A

  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 112:

  Which of the following must be included in a company's summary of significant accounting policies in the notes to the financial statements?

  A. Description of current year equity transactions.

  B. Summary of long-term debt outstanding.

  C. Schedule of fixed assets.

  D. Revenue recognition policies.

  Correct Answer: D

  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 113:

  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. When Envoy classifies it as held for sale.

  B. When Envoy receives an offer for the segment.

  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

  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 114:

  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

  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.

• Question 115:

  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

  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 116:

  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. As of January 1, 1992.

  B. As of August 31, 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

  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 117:

  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. The actual 1992 hail damage loss as an extraordinary loss, net of income taxes.

  B. The actual 1992 hail damage loss in continuing operations, with no separate disclosure.

  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

  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 118:

  A segment of Ace Inc. was discontinued during 1992. Ace's loss from discontinued operations should not:

  A. Include employee relocation costs associated with the decision to dispose.

  B. Exclude operating losses from the date the decision to dispose of the segment was made until the end of 1992.

  C. Include additional pension costs associated with the decision to dispose.

  D. Include operating losses of the current period up to the date the decision to dispose of the segment was made.

  Correct Answer: B

  Choice "b" is correct. Ace's loss on discontinued operations should not exclude operating losses from the date the decision to dispose of the segment was made until the end of 1992. All 1992 operating losses should be included. Choice "a" is incorrect. Employee relocation costs associated with the decision to dispose should be included in the loss from discontinued operations. Choice "c" is incorrect. Additional pension costs associated with the decision to dispose should be included in the loss from discontinued operations. Choice "d" is incorrect. Ace's loss on discontinued operations should include operating losses of the current period up to the date the decision to dispose of the segment was made and also after that date. All 1992 operating losses should be included.

• Question 119:

  On December 31, 20X2, the Board of Directors of Maxy Manufacturing, Inc. committed to a plan to

  discontinue the operations of its Alpha division. Maxy estimated that Alpha's 20X3 operating loss would be

  $500,000 and that the fair value of Alpha's facilities was $300,000 less than their carrying amounts.

  Alpha's 20X2 operating loss was $1,400,000, and the division was actually sold for $400,000 less than its

  carrying amount in 20X3. Maxy's effective tax rate is 30%.

  In its 20X2 income statement, what amount should Maxy report as loss from discontinued operations?

  A. $980,000

  B. $1,190,000

  C. $1,400,000

  D. $1,700,000

  Correct Answer: B

  Choice "b" is correct. Since the fair value of Alpha's facilities was $300,000 less than its carrying value, there has been an impairment loss, and that loss should be recognized in 20X2. That $300,000 impairment loss plus the $1,400,000 20X2 operating loss would be recognized in 20X2 net of tax. The total loss would be $1,700,000 ?70% (100% - 30%) or $1,190,000. Choice "a" is incorrect. It includes the 20X2 operating loss of $1,400,000 but not the $300,000 impairment loss but does report the 20X2 operating loss net of tax. Choice "c" is incorrect. It includes the 20X2 operating loss of $1,400,000, but not the $300,000 impairment loss, and reports the 20X2 operating loss gross of tax and not net of tax. Choice "d" is incorrect. It reports the 20X2 loss from discontinued operations gross of tax and not net of tax.

• Question 120:

  On December 31, 20X2, the Board of Directors of Maxy Manufacturing, Inc. committed to a plan to discontinue the operations of its Alpha division. Maxy estimated that Alpha's 20X3 operating loss would be $500,000 and that the fair value of Alpha's facilities was $300,000 less than their carrying amounts. The estimate for 20X3 turned out to be correct. Alpha's 20X2 operating loss was $1,400,000, and the division was actually sold for $400,000 less than its carrying amount. Maxy's effective tax rate is 30%. In its 20X3 income statement, what amount should Maxy report as loss from discontinued operations?

  A. $350,000

  B. $500,000

  C. $420,000

  D. $600,000

  Correct Answer: C

  Choice "c" is correct. The 20X3 loss from discontinued operations would include both the 20X3 operating loss of $500,000 (which turned out to be a correct estimate) and the "additional" loss (on disposal) of $100,000, net of tax, for a total of $600,000 x .70 or $420,000. Choice "a" is incorrect. It includes the 20X3 operating loss of $500,000 but not the $300,000 impairment loss but does report the 20X3 operating loss net of tax. Choice "b" is incorrect. It includes the 20X3 operating loss of $500,000, but not the $100,000 loss on disposal, and reports the 20X3 operating loss gross of tax and not net of tax. Choice "d" is incorrect. It reports the 20X3 loss from discontinued operations gross of tax and not net of tax. The 20X3 loss from discontinued operations should include both the 20X3 operating loss of $500,000 and the loss on disposal of $100,000, net of tax, for a total of $600,000 x .70 or $420,000.