AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 161:

  According to the FASB conceptual framework, comprehensive income includes which of the following?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Comprehensive income is the change in equity of a business during a period from

  transactions and other events and circumstances from non-owner sources. It includes all changes in equity

  except those resulting from investments by owners and distributions to owners. SFAC 6 para 70.

• Question 162:

  Which of the following describes how comprehensive income should be reported?

  A. Must be reported in a separate statement, as part of a complete set of financial statements.

  B. Should not be reported in the financial statements but should only be disclosed in the footnotes.

  C. May be reported in a separate statement, in a combined statement of income and comprehensive income, or within a statement of stockholders' equity.

  D. May be reported in a combined statement of income and comprehensive income or disclosed within a statement of stockholders' equity; separate statements of comprehensive income are not permitted.

  Correct Answer: C

  Explanation:

  Choice "c" is correct.

  Comprehensive income must be presented in one of three formats:

  1.

  In a combined statement of income and comprehensive income;

  2.

  In a separate statement of comprehensive income that begins with net income; or

  3.

  In a statement of changes in equity.

  Choices "a", "b", and "d" are incorrect, per the above.

• Question 163:

  ABC Co.'s financial statements had the following balances at December 31:

  

  What amount should ABC report as comprehensive income for the year ended December 31?

  A. $400,000

  B. $420,000

  C. $520,000

  D. $570,000

  Correct Answer: C

  Explanation:

  Choice "c" is correct. Comprehensive Income includes all items included in "Net Income" plus "Other

  Comprehensive Income" items. Since the $50,000 extraordinary gain is already included in Net Income,

  Comprehensive Income is:

  

• Question 164:

  ABC 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. ABC uses straight-line depreciation. What amount should ABC report as depreciation expense for the current year?

  A. $3,200

  B. $3,750

  C. $4,500

  D. $5,000

  Correct Answer: D

  Explanation:

  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 165:

  ABC Co. manufactures and sells household products. ABC experienced losses associated with its small appliance group. Operations and cash flows for this group can be clearly distinguished from the rest of ABC's operations. ABC plans to sell the small appliance group with its operations. What is the earliest point at which ABC should report the small appliance group as a discontinued operation?

  A. When ABC classifies it as held for sale.

  B. When ABC receives an offer for the segment.

  C. When ABC first sells any of the assets of the segment.

  D. When ABC sells the majority of the assets of the segment.

  Correct Answer: A

  Explanation:

  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 above.

• Question 166:

  ABC 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 ABC report as depreciation expense for year 5?

  A. $600

  B. $900

  C. $1,500

  D. $2,400

  Correct Answer: A

  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.

• Question 167:

  In which of the following situations should a company report a prior-period adjustment?

  A. A change in the estimated useful lives of fixed assets purchased in prior years.

  B. The correction of a mathematical error in the calculation of prior years' depreciation.

  C. A switch from the straight-line to double-declining balance method of depreciation.

  D. The scrapping of an asset prior to the end of its expected useful life.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. Prior period adjustments consist of: corrections of errors in the financial statements of

  prior periods, retroactive restatements required by new GAAP pronouncements, and changes from a non-

  GAAP method of accounting to a GAAP method of accounting (which are corrections of errors).

  Choice "a" is incorrect. This change is a change in accounting estimate.

  Choice "c" is incorrect. This change is a change for one GAAP method of depreciation to another GAAP

  method of depreciation. Under SFAS No. 154, it is treated as a change in accounting estimate effected by

  a change in accounting principle and is handled prospectively, and not as a prior-period adjustment.

  Choice "d" is incorrect. This is a business activity ordinary in nature.

• Question 168:

  On December 31, 20X2, the Board of Directors of ABC Manufacturing, Inc. committed to a plan to discontinue the operations of its Alpha division. ABC 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. ABC's effective tax rate is 30%. In its 20X3 income statement, what amount should ABC report as loss from discontinued operations?

  A. $350,000

  B. $500,000

  C. $420,000

  D. $600,000

  Correct Answer: C

  Explanation: 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.

• Question 169:

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

  discontinue the operations of its Alpha division. ABC 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. ABC's effective tax rate is 30%.

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

  A. $980,000

  B. $1,190,000

  C. $1,400,000

  D. $1,700,000

  Correct Answer: B

  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 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 170:

  A segment of ABC Inc. was discontinued during 1992. ABC'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

  Explanation:

  Choice "b" is correct. ABC'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. ABC'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.