AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 111:

  ABC Co.'s income statement for the year ended December 31, 1990, reported net income of $74,100. The auditor raised questions about the following amounts that had been included in net income:

  

  The loss from the fire was an infrequent but not unusual occurrence in ABC's line of business. ABC's December 31, 1990, income statement should report net income of:

  A. $65,000

  B. $66,100

  C. $81,600

  D. $87,000

  Correct Answer: D

  Explanation:

  Net income before adjustments

  

  Rule: Unrealized losses (or gains) resulting from changes in market value of available-for-sale investments

  should be reported as a component of other comprehensive income in shareholders' equity.

  Unrealized gains and losses on investments held for trading would be included in net income.

  Correction of errors of prior periods should be reported as an adjustment to beginning retained earnings,

  not as an item of net income.

  Choice "d" is correct. $87,000.

• Question 112:

  ABC 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 ABC Corp.

  •

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

  •

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

  In its 1989 income statement, what amount should ABC 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

  Explanation:

  Infrequent net gains not considered extraordinary include:

  

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

• Question 113:

  ABC, 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

  Explanation:

  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 114:

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

  

  ABC's income tax rate is 30%. The gain on debt extinguishment is considered a usual and recurring part of ABC's operations. The hurricane is considered an unusual and infrequent event. ABC prepares a multiple-step income statement for 1988.

  Net income is:

  A. $140,000

  B. $161,000

  C. $168,000

  D. $200,000

  Correct Answer: A

  Explanation:

  Choice "a" is correct. $140,000.

  Net income is the "bottom line" amount after all has been considered on the income statement. Without

  showing all the line items as required for the income statement, the "bottom line" amount of $140,000 is

  derived as follows:

  

• Question 115:

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

  

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

  ABC's operations. ABC 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

  Explanation: 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 116:

  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

  Explanation:

  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 117:

  Which of the following information should be included in ABC, 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

  Explanation:

  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 118:

  The following costs were incurred by ABC 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

  Explanation:

  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 119:

  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

  Explanation:

  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 120:

  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

  Explanation:

  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."