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NEW QUESTION # 47
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with
Quo's president and outside accountants, made changes in accounting policies, corrected several errors
dating from 1992 and before, and instituted new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these
transactions as: a change in accounting principle, a change in accounting estimate, a correction of an
error in previously presented financial statements, or neither an accounting change nor an accounting
error.
Item to Be Answered
The equipment that Quo manufactures is sold with a five-year warranty. Because of a production
breakthrough, Quo reduced its computation of warranty costs from 3% of sales to 1% of sales.
List A (Select one)
- A. Correction of an error in previously presented financial statements.
- B. Change in accounting estimate.
- C. Neither an accounting change nor an accounting error.
- D. Change in accounting principal.
Answer: B
Explanation:
Choice "b" is correct. Change in the computation of warranty costs from 3% of sales to 1% of sales is a
change in accounting estimate.
NEW QUESTION # 48
Taft Corp. discloses supplemental industry segment information. The following information is available for
1 992:
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. $2,600
- B. $5,000
- C. $2,000
- D. $3,200
Answer: B
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."
NEW QUESTION # 49
Which of the following is true regarding the comparison of managerial to financial accounting?
- A. Managerial accounting is generally more precise.
- B. Managerial accounting has a past focus and financial accounting has a future focus.
- C. Managerial accounting need not follow generally accepted accounting principles (GAAP) while
financial accounting must follow them. - D. The emphasis on managerial accounting is relevance and the emphasis on financial accounting is
timeliness.
Answer: C
Explanation:
Choice "d" is correct. Public companies must follow GAAP for (external) financial reporting purposes.
GAAP need not be followed for (internal) managerial accounting purposes.
Choice "a" is incorrect. Financial accounting is generally more precise.
Choice "b" is incorrect. Managerial accounting has a future focus, while financial accounting focuses on
reporting past results.
Choice "c" is incorrect. The emphasis of financial accounting is providing useful information to financial
statement users (including the characteristic of relevance), while the emphasis of managerial accounting
is providing timely information to management decision makers.
NEW QUESTION # 50
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. $360,000
- B. $450,000
- C. $170,000
- D. $100,000
Answer: C
Explanation:
Infrequent net gains not considered extraordinary include:
Choice "b" is correct. $170,000.
NEW QUESTION # 51
Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during 1994. The
cumulative effect of this change should be reported in Lore's 1994 financial statements as a:
- A. Component of income before extraordinary item.
- B. Prior period adjustment resulting from the correction of an error.
- C. Component of income after extraordinary item.
- D. Prior period adjustment resulting from the change in accounting principle.
Answer: B
Explanation:
Choice "a" is correct. The cash basis for financial reporting is not a generally accepted accounting basis of
accounting (GAAP); therefore, it is an error. Correction of an error from a prior period is a reported as prior
period adjustment to retained earnings. Choice "b" is incorrect. Cash basis reporting is not an accounting
principle under accrual accounting principles. Thus, the change from cash basis is not reported as a
change in accounting principle. In addition, changes in accounting principle are not prior period
adjustments; instead, they are treated retrospectively. Choices "c" and "d" are incorrect. Correction of
prior period errors has no effect on the current year's income statement.
NEW QUESTION # 52
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 expected average hail damage loss in continuing operations, with separate disclosure.
- B. The actual 1992 hail damage loss as an extraordinary loss, net of income taxes.
- C. The expected average hail damage loss in continuing operations, with no separate disclosure.
- D. The actual 1992 hail damage loss in continuing operations, with no separate disclosure.
Answer: D
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.
NEW QUESTION # 53
At December 31, 1998, Off-Line Co. changed its method of accounting for demo costs from writing off the
costs over two years to expensing the costs immediately. Off-Line made the change in recognition of an
increasing number of demos placed with customers that did not result in sales. Off-Line had deferred
demo costs of $500,000 at December 31, 1997, $300,000 of which were to be written off in 1998 and the
remainder in 1999. Off-Line's income tax rate is 30%. In its 1998 financial statements, what amount
should Off-Line report as cumulative effect of change in accounting principle?
- A. $350,000
- B. $500,000
- C. $0
- D. $200,000
Answer: C
Explanation:
Choice "a" is correct. When a change in accounting principle is considered inseparable from a change in
estimate, the change is handled as a change in estimate - prospectively. No cumulative effect adjustment
is made.
Choices "b", "c", and "d" are incorrect since no cumulative effect adjustment is made.
NEW QUESTION # 54
In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds
and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions.
Gold's gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Assume the
transaction to purchase its own outstanding bonds is unusual in nature and has occurred infrequently.
Gold should report the:
- A. Net effect of the two transactions as an extraordinary gain.
- B. Net effect of the two transactions in income before extraordinary items.
- C. Effect of its own bond transaction as an extraordinary gain, and report the Iron bond transaction loss in
income before extraordinary items. - D. Effect of its own bond transaction gain in income before extraordinary items, and report the Iron bond
transaction as an extraordinary loss.
Answer: C
Explanation:
Choice "d" is correct, these are two separate transactions because Gold Corp. (1) sold Iron Corp. bonds
(an investment) for a loss, and, (2) bought back its own (Gold) Corp. bonds (a debt) for a gain. This is not
a "refinancing" (where one would sell new bond debt to buy back old bond debt outstanding).
The gain from the purchase of its own bonds is an "extraordinary gain" because it is both unusual in
nature and infrequently occurring (per APB Opinion No. 30 and SFAS No. 145). The Iron Corp.
transaction is a loss in "income before extraordinary items."
Choices "a" and "b" are incorrect. The two transactions are separate and cannot be netted.
Choice "c" is incorrect. Just the opposite. The sale of the investment is a loss in "income before
extraordinary items," while the purchase of its bond debt is an "extraordinary gain" according to the
provisions of APB Opinion No. 30.
NEW QUESTION # 55
A planned volume variance in the first quarter, which is expected to be absorbed by the end of the fiscal
period, ordinarily should be deferred at the end of the first quarter if it is:
- A. Option B
- B. Option A
- C. Option C
- D. Option D
Answer: D
Explanation:
Choice "d" is correct. Yes - Yes.
Rule: Volume variances that are planned or expected to be absorbed by the end of the year should be
deferred at interim whether favorable or unfavorable.
NEW QUESTION # 56
A statement of cash flows for a development stage enterprise:
- A. Is the same as that of an established operating enterprise and, in addition, shows cumulative amounts
from the enterprise's inception. - B. Is not presented.
- C. Is the same as that of an established operating enterprise, but does not show cumulative amounts from
the enterprise's inception. - D. Shows only cumulative amounts from the enterprise's inception.
Answer: A
Explanation:
Rule: Development stage enterprises should present financial statements in accordance with
GAAP and make additional disclosures such as cumulative amounts from inception for: net losses,
deficits, sales, expenses, and cash flows and supplementary data.
Choice "a" is correct, per the rule shown above.
Choice "b" is incorrect. Current amounts are shown as well as cumulative amounts.
Choice "c" is incorrect. Cumulative amounts from inception are shown.
Choice "d" is incorrect. A statement of cash flows is required.
NEW QUESTION # 57
Which of the following statements regarding fair value is/are correct?
I. The fair value of an asset or liability is specific to the entity making the fair value measurement.
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.
- A. I & IV
- B. III & IV
- C. II & III
- D. I & II
Answer: B
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: .
NEW QUESTION # 58
Grum Corp., a publicly-owned corporation, is subject to the requirements for segment reporting. In its
income statement for the year ended December 31, 1991, Grum reported revenues of $50,000,000,
operating expenses of $47,000,000, and net income of $3,000,000. Operating expenses include payroll
costs of $ 15,000,000. Grum's combined identifiable assets of all industry segments at December 31,
1 991, were $40,000,000.
Cott Co.'s four business segments have revenues and identifiable assets expressed as percentages of
Cott's total revenues and total assets as follows:
Which of these business segments are deemed to be reportable segments?
- A. Ebon only.
- B. Ebon, Fair, and Gel only.
- C. Ebon and Fair only.
- D. Ebon, Fair, Gel, and Hak.
Answer: D
Explanation:
Rule: A segment must be at least 10% of:
1 . Combined revenues (whether intersegment or unaffiliated customers), or
2 . Operating income (of all segments not having an operating loss), or
3 . Identifiable assets.
Choice "d" is correct. Ebon, Fair, Gel, and Hak, since all four companies meet at least one of the criteria.
NEW QUESTION # 59
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. $95,000
- B. $55,000
- C. $0
- D. $115,000
Answer: C
Explanation:
Choice "d" is correct. $0.
All organizational costs (start-up costs) should be expensed when incurred (per SOP 98-5).
NEW QUESTION # 60
During the second quarter of 1988, Buzz Company sold a piece of equipment at a $12,000 gain. What
portion of the gain should Buzz report in its income statement for the second quarter of 1988?
- A. $0
- B. $12,000
- C. $4,000
- D. $6,000
Answer: B
Explanation:
Choice "a" is correct. $12,000.
Rule: The entire amount of an "extraordinary gain or loss" or an "unusual or infrequently occurring item,"
e.g., a gain or loss from sale of fixed assets, should be reported during the period (quarter) incurred.
Choices "b", "c", and "d" are incorrect. The full gain should be reported in the second quarter when it
occurred.
NEW QUESTION # 61
An inventory loss from a permanent market decline of $360,000 occurred in May 1989. Cox Co.
appropriately recorded this loss in May 1989 after its March 31, 1989 quarterly report was issued. What
amount of inventory loss should be reported in Cox's quarterly income statement for the three months
ended June 30, 1989?
- A. $90,000
- B. $0
- C. $360,000
- D. $180,000
Answer: C
Explanation:
Choice "d" is correct. $360,000 inventory loss reported for the quarter ended 6-30-89.
Rule: Inventory losses from "permanent market declines" are recognized in the interim period, incurred
and later, if they "turn-around," are recognized as gains in a subsequent interim period only to the extent
of previously reported losses.
Rule: "Temporary" market declines need not be recognized at interim when a "turn-around" can
reasonably be expected to occur before the end of the fiscal year.
Facts: This $360,000 inventory decline is permanent and the entire loss would be recognized in the
quarter interim period incurred (6-30-89).
NEW QUESTION # 62
How should the effect of a change in accounting estimate be accounted for?
- A. In the period of change and future periods if the change affects both.
- B. As a prior period adjustment to beginning retained earnings.
- C. By reporting pro forma amounts for prior periods.
- D. By restating amounts reported in financial statements of prior periods.
Answer: A
Explanation:
Choice "d" is correct, a "change in accounting estimate" affects only the current and subsequent (future)
periods, if the change affects both. It does not affect "prior periods," nor "retained earnings." Choice "a" is
incorrect. Restating prior years' financial statements is required when comparative financial statements
are shown for prior period adjustments of "corrections of errors," "changes in entities," and changes in
accounting principle. Choices "b" and "c" are incorrect. A "change in accounting estimate" does not affect
prior periods.
NEW QUESTION # 63
On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with
Quo's president and outside accountants, made changes in accounting policies, corrected several errors
dating from 1992 and before, and instituted new accounting policies.
Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.
This question represents one of Quo's transactions. List A represents possible clarifications of these
transactions as: a change in accounting principle, a change in accounting estimate, a correction of an
error in previously presented financial statements, or neither an accounting change nor an accounting
error.
Item to Be Answered
During 1993, Quo determined that an insurance premium paid and entirely expensed in 1992 was for the
period January 1, 1992, through January 1, 1994.
List A (Select one)
- A. Change in accounting estimate.
- B. Neither an accounting change nor an accounting error.
- C. Correction of an error in previously presented financial statements.
- D. Change in accounting principal.
Answer: C
Explanation:
Choice "c" is correct. Expensing insurance premiums when paid (rather than allocating them to the
periods benefited) is a correction of an error in previously presented financial statements.
NEW QUESTION # 64
What is the underlying concept that supports the immediate recognition of a contingent loss?
- A. Conservatism.
- B. Consistency.
- C. Matching.
- D. Substance over form.
Answer: A
Explanation:
Choice "d" is correct. Conservatism is a prudent reaction to uncertainty to try to ensure that uncertainty
and risks inherent in business situations are adequately considereD. Recognition of a contingent loss is
the recording of an amount representing uncertainty and risk in a business situation. SFAC 2, SFAS 5
para. 82 Choice "a" is incorrect. The substance over form concept presumes that the transaction form
may not dictate the accounting treatment. Choice "b" is incorrect. Consistency is conformity from period to
period with unchanging policies and procedures. SFAC 2 Choice "c" is incorrect. The matching principle
dictates that expenses be matched with the related revenues generated or the time period in which the
expense is incurred and known. SFAS #5 cites matching as the one concept supporting the immediate
recognition of a contingent loss, but it is not the primary underlying concept. SFAS 5 para. 76
NEW QUESTION # 65
Wilson Corp. experienced a $50,000 decline in the market value of its inventory in the first quarter of its
fiscal year. Wilson had expected this decline to reverse in the third quarter, and in fact, the third quarter
recovery exceeded the previous decline by $10,000. Wilson's inventory did not experience any other
declines in market value during the fiscal year. What amounts of loss and/or gain should Wilson report in
its interim financial statements for the first and third quarters?
- A. Option A
- B. Option B
- C. Option D
- D. Option C
Answer: A
Explanation:
Choice "a" is correct. Temporary market declines in inventory need not be recognized at interim when a
turn-around can reasonably be expected to occur before the end of the fiscal year.
NEW QUESTION # 66
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