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

• Question 61:

  Gown, Inc. sold a warehouse and used the proceeds to acquire a new warehouse. The excess of the proceeds over the carrying amount of the warehouse sold should be reported as a(an):

  A. Extraordinary gain, net of income taxes.

  B. Part of continuing operations.

  C. Gain from discontinued operations, net of income taxes.

  D. Reduction of the cost of the new warehouse.

  Correct Answer: B

  Choice "b" is correct. Part of continuing operations.

  Rule: When a fixed asset is sold, gain or loss is recognized as part of income from continuing operations.

  The amount of the gain or loss is equal to the difference between the proceeds from the sale and the

  carrying amount (FMV) of the fixed asset sold.

  Choice "a" is incorrect. The gain is not extraordinary and is shown gross - not net of tax.

  Choice "c" is incorrect. The gain is part of continuing operations - not discontinued operations.

  Choice "d" is incorrect. The gain is not reported as a reduction of the cost of the new warehouse.

• Question 62:

  Adam Corp. had the following infrequent transactions during 1989:

  •

  A $190,000 gain on reacquisition and retirement of bonds. This material event is also considered unusual for Adam Corp.

  •

  A $260,000 gain on the disposal of a component of a business. Adam continues similar operations at another location.

  •

  A $90,000 loss on the abandonment of equipment.

  In its 1989 income statement, what amount should Adam report as total infrequent net gains that are not considered extraordinary?

  A. $100,000

  B. $170,000

  C. $360,000

  D. $450,000

  Correct Answer: B

  Infrequent net gains not considered extraordinary include:

  

  Choice "b" is correct. $170,000.

• Question 63:

  Coffey Corp.'s trial balance of Income Statement Accounts for the year ended December 31, 1988 as follows:

  

  Coffey's income tax rate is 30%. The gain on debt extinguishment is considered a usual and recurring part

  of Coffey's operations. Coffey prepares a multiple-step income statement for 1988.

  Income from operations before income tax is:

  A. $190,000

  B. $200,000

  C. $230,000

  D. $240,000

  Correct Answer: D

  Choice "d" is correct. $240,000 The gain on debt extinguishment does not meet the unusual and infrequent criteria of APB 30 to be treated as an extraordinary item (per SFAS No. 145, extinguishments of debt are no longer automatically extraordinary), so it is included as part of income from continuing operations.

• Question 64:

  Several sources of GAAP consulted by an auditor are in conflict as to the application of an accounting principle. Which of the following should the auditor consider the most authoritative?

  A. FASB Technical Bulletins.

  B. AICPA Accounting Interpretations.

  C. FASB Statements of Financial Accounting Concepts.

  D. AICPA Technical Practice Aids.

  Correct Answer: A

  Choice "a" is correct. The most authoritative pronouncements (first floor) are FASB Statements, FASB Staff Positions, FASB Statement 133 Implementation Issues, FASB Interpretations, AICPA APB opinions, and AICPA Accounting Research Bulletins. When these pronouncements do not provide appropriate guidance, the next level of pronouncements (second floor) are AICPA Industry Audit and Accounting Guides, AICPA Statements of Position, and FASB Technical Bulletins.

  Choice "b" is incorrect. AICPA Accounting Interpretations are not as authoritative as FASB Technical Bulletins, since they are on the fourth floor. Choices "c" and "d" are incorrect. FASB Concepts Statements and AICPA Technical Practice Aids are among the least authoritative of accounting literature (fifth floor).

• Question 65:

  Which of the following information should be included in Melay, Inc.'s 1992 summary of significant accounting policies?

  A. Property, plant, and equipment is recorded at cost with depreciation computed principally by the straight-line method.

  B. During 1992, the Delay component was sold.

  C. Business segment 1992 sales are Alay $1M, Belay $2M, and Celay $3M.

  D. Future common share dividends are expected to approximate 60% of earnings.

  Correct Answer: A

  Choice "a" is correct. Computing depreciation principally by the straight-line method is a GAAP method of depreciation that should be described in the "summary of significant accounting policies." Choice "b" is incorrect. Disclosing the sale of a component of a business is required (and is covered in the lecture on "discontinued operations" in the F1 class) but is not a "significant accounting policy." Choice "c" is incorrect. Disclosing "sales" of segments is required, but is not a "significant accounting policy." Choice "d" is incorrect. "Estimates of future common share dividends" are not appropriate disclosures for the financial statements. They might be appropriate for the "presidents letter to shareholders."

• Question 66:

  The summary of significant accounting policies should disclose the:

  A. Maturity dates of noncurrent debts.

  B. Terms for convertible debt to be exchanged for common stock.

  C. Concentration of credit risk of all financial instruments by geographical region.

  D. Criteria for determining which investments are treated as cash equivalents.

  Correct Answer: D

  Choice "d" is correct. The criteria for determining which investments are treated as cash equivalents would be part of the summary of significant accounting policies. Choice "a" is incorrect. The maturity dates of noncurrent debts are required disclosures, but are not a part of the summary of significant accounting policies. Choice "b" is incorrect. The terms for convertible debt to be exchanged for common stock are not accounting policies; they would be disclosed separately. Choice "c" is incorrect. The concentration of credit risk of all financial instruments by geographic region may be a required segment disclosure, especially for financial institutions. However, it would not be a part of the summary of significant accounting policies.

• Question 67:

  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

  Choice "a" is correct. $260,000. General and administrative

  

  "Freight-in" is part of "cost of goods sold."

  "Freight-out" is a "selling" expense.

  Sales representative salaries is a selling expense.

• Question 68:

  Which of the following accounting pronouncements is the most authoritative?

  A. FASB Statement of Financial Accounting Concepts.

  B. FASB Technical Bulletin.

  C. AICPA Accounting Principles Board Opinion.

  D. AICPA Statement of Position.

  Correct Answer: C

  Choice "c" is correct. The AICPA accounting principal board opinion (APBO) is a first floor (category A) of established accounting principle pronouncements. Choice "a" is incorrect. FASB statement of financial accounting concepts (SFAC or FACs) is a fifth floor (other accounting literature) category. Choice "b" is incorrect. FASB technical bulletins are a second floor (category B) accounting pronouncement. Choice "d" is incorrect. AICPA statement of position is a second floor (category B) accounting pronouncement.

• Question 69:

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

  I. Management's intention to maintain or vary the dividend payout ratio.

  II. Criteria for determining which investments are treated as cash equivalents.

  III.

  Composition of the sales order backlog by segment.

  A.

  I only.

  B.

  I and III.

  C.

  II only.

  D.

  II and III.

  Correct Answer: C

  Choice "c" is correct. Il only. The criteria for determining which investments are treated as "cash equivalents" is a method of accounting policies that needs to be disclosed in the summary of significant accounting policies. Choice "a" is incorrect. Management's intention to maintain or vary the "dividend payout ratio" is not an "accounting policy." Choices "b" and "d" are incorrect. Composition of the sales order backlog by segment is not an "accounting policy."

• Question 70:

  On January 1, 1991, Brecon Co. installed cabinets to display its merchandise in customers' stores. Brecon expects to use these cabinets for five years. Brecon's 1991 multi-step income statement should include:

  A. One-fifth of the cabinet costs in cost of goods sold.

  B. One-fifth of the cabinet costs in selling, general, and administrative expenses.

  C. All of the cabinet costs in cost of goods sold.

  D. All of the cabinet costs in selling, general, and administrative expenses.

  Correct Answer: B

  Choice "b" is correct. One-fifth of the cabinet costs (depreciation expense) should be included in selling, general, and administrative expenses for 1991. Choice "a" is incorrect. Merchandise display cabinets in stores relate to selling activities, not to the purchase cost of goods sold. Choices "c" and "d" are incorrect. Merchandise display cabinets are fixed assets whose cost should be allocated systematically over their five-year useful life.