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NEW QUESTION 49
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. $2,400
- B. $900
- C. $1,500
- D. $600
Answer: D
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.
NEW QUESTION 50
According to the FASB conceptual framework, which of the following is an essential characteristic of an
asset?
- A. The claims to an asset's benefits are legally enforceable.
- B. An asset is tangible.
- C. An asset is obtained at a cost.
- D. An asset provides future benefits.
Answer: D
Explanation:
Choice "d" is correct. An asset provides future benefits.
Rule: According to the FASB conceptual framework, assets are probable future economic benefits
obtained or controlled by a particular entity as a result of past transactions or events.
NEW QUESTION 51
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 B represents the general accounting treatment
required for these transactions. These treatments are:
. Cumulative effect approach - Include the cumulative effect of the adjustment resulting from the
accounting change or error correction in the 1993 financial statements, and do not restate the 1992
financial statements.
. Retroactive or retrospective restatement approach - Restate the 1992 financial statements and adjust
1 992 beginning retained earnings if the error or change affects a period prior to 1992.
. Prospective approach - Report 1993 and future financial statements on the new basis but do not restate
1 992 financial statements.
Item to Be Answered
Quo manufactures heavy equipment to customer specifications on a contract basis. On the basis that it is
preferable, accounting for these long-term contracts was switched from the completed-contract method to
the percentage-of-completion method.
List B (Select one)
- A. Cumulative effect approach.
- B. Prospective approach.
- C. Retroactive or retrospective restatement approach.
Answer: C
Explanation:
Choice "B" is correct. Changes in accounting principle are handled "retrospectively." Beginning retained
earnings of the earliest year presented is adjusted for the cumulative effect of the change and all prior
year financial statements are restated.
NEW QUESTION 52
During 20X5, Dale Corp. made the following accounting changes:
What amount should be shown in the 20X5 retained earnings statement as an adjustment to the
beginning balance?
- A. $30,000
- B. $98,000
- C. $0
- D. $128,000
Answer: B
Explanation:
Choice "c" is correct. $98,000.
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. A change from LIFO to FIFO for inventory valuation (costing) is a change in
accounting principle.
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 principle 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.
Choices "a", "b", and "d" are incorrect, per the above Explanation: .
NEW QUESTION 53
Ocean Corp.'s comprehensive insurance policy allows its assets to be replaced at current value. The
policy has a $50,000 deductible clause. One of Ocean's waterfront warehouses was destroyed in a winter
storm. Such storms occur approximately every four years. Ocean incurred $20,000 of costs in dismantling
the warehouse and plans to replace it. The tax rate is 30%. The following data relate to the warehouse:
Current carrying amount $ 300,000
Replacement cost 1,100,000
What amount of gain should Ocean report as a separate component of income before extraordinary
items?
- A. $730,000
- B. $1,030,000
- C. $0
- D. $780,000
Answer: A
Explanation:
Choice "c" is correct. $730,000 gain reported as a separate component of income before extraordinary
items.
NEW QUESTION 54
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. $146,000
- D. $154,000
Answer: C
Explanation:
Choice "d" is correct, $146,000 accumulated depreciation balance at DeC. 31, 1992.
NEW QUESTION 55
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. $55,000
- C. $95,000
- D. $0
Answer: D
Explanation:
Choice "d" is correct. $0.
All organizational costs (start-up costs) should be expensed when incurred (per SOP 98-5).
NEW QUESTION 56
According to the FASB conceptual framework, what does the concept of reliability in financial reporting
include?
- A. Precision.
- B. Neutrality.
- C. Certainty.
- D. Effectiveness.
Answer: B
Explanation:
Choice "d" is correct. The concept of reliability in financial reporting includes; neutrality, representational
faithfulness and verifiability.
Choices "a", "b", and "c" are incorrect, per the above.
NEW QUESTION 57
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. $1,700,000
- B. $980,000
- C. $1,400,000
- D. $1,190,000
Answer: D
Explanation:
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
2 0X2 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.
NEW QUESTION 58
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
Quo changed from LIFO to FIFO to account for its finished goods inventory.
List A (Select one)
- A. Neither an accounting change nor an accounting error.
- B. Correction of an error in previously presented financial statements.
- C. Change in accounting principal.
- D. Change in accounting estimate.
Answer: C
Explanation:
Choice "a" is correct. Change from LIFO to FIFO is a change in accounting principle.
NEW QUESTION 59
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. Cumulative effect of a change in accounting principle of $2,000 in its income statement.
- B. None of the above.
- C. Adjustment to beginning retained earnings of $2,000.
- D. Cumulative effect of a change in accounting principle of $1,400 in its income statement.
Answer: B
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: .
NEW QUESTION 60
According to the FASB's conceptual framework, the process of reporting an item in the financial
statements of an entity is:
- A. Allocation.
- B. Matching.
- C. Realization.
- D. Recognition.
Answer: D
Explanation:
Choice "a" is correct. Recognition.
According to the FASB's conceptual framework, the process of reporting an item in the financial
statements of an entity is recognition.
NEW QUESTION 61
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. Effect of its own bond transaction gain in income before extraordinary items, and report the Iron bond
transaction as an extraordinary loss. - B. Net effect of the two transactions as an extraordinary gain.
- C. Effect of its own bond transaction as an extraordinary gain, and report the Iron bond transaction loss in
income before extraordinary items. - D. Net effect of the two transactions in income before extraordinary items.
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 62
During 1990, Fuqua Steel Co. had the following unusual financial events occur:
. Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain.
Fuqua has frequently retired bonds early when interest rates declined significantly.
. A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth
similar loss sustained in a 5-year period at that location.
. A component of Fuqua's operations, steel transportation, was sold at a net loss of $350,000.
This was Fuqua's first divestiture of one of its operating segments.
Before income taxes, what amount of gain (loss) should be reported separately as a component of
income from continuing operations in 1990?
- A. $(255,000)
- B. $(350,000)
- C. $5,000
- D. $260,000
Answer: C
Explanation:
Choice "b" is correct. $5,000.
The steel forming segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature"
and does not occur infrequently, therefore, it is not an "extraordinary item," and should be reported
separately as a component of "income from continuing operations."
The retirement of debt, although unusual, is not infrequent for the company; therefore, the gain does not
qualify for classification as an extraordinary item per APBO No. 30 (and SFAS No. 145).
NEW QUESTION 63
YIV, Inc. is a multidivisional corporation, which has both intersegment sales and sales to unaffiliated
customers. YIV should report segment financial information for each division meeting which of the
following criteria?
- A. Segment operating profit or loss is 10% or more of consolidated profit or loss.
- B. Segment revenue is 10% or more of consolidated revenue.
- C. Segment revenue is 10% or more of combined revenue of all the company segments.
- D. Segment operating profit or loss is 10% or more of combined operating profit or loss of all company
segments.
Answer: C
Explanation:
Choice "c" is correct. Segment revenue is 10% or more of combined revenue of all the company
segments.
Rule: To be significant enough to report on, a segment must be at least 10% of:
1 . Combined revenues (whether intersegment or affiliated customers) or
2 . Operating profit (of all segments not having an operating loss), or
3 . Identifiable assets.
Choice "a" is incorrect. Rule is 10% of "operating profit," not "consolidated profit."
Choice "b" is incorrect. Segments with "operating losses" are not combined with those having "operating
profits" in determining a segment.
Choice "d" is incorrect. "Consolidated revenue" would not include "intersegment revenue." Rule is
"combined revenue," not "consolidated revenue."
NEW QUESTION 64
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