AICPA AICPA Certifications CPA-TEST Questions & Answers

• Question 171:

  In 1992, hail damaged several of ABC Co.'s vans. Hailstorms had frequently inflicted similar damage to ABC's vans. Over the years, ABC 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 ABC's 1992 financial statements?

  A. The actual 1992 hail damage loss as an extraordinary loss, net of income taxes.

  B. The actual 1992 hail damage loss in continuing operations, with no separate disclosure.

  C. The expected average hail damage loss in continuing operations, with no separate disclosure.

  D. The expected average hail damage loss in continuing operations, with separate disclosure.

  Correct Answer: B

  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.

• Question 172:

  On August 31, 1992, ABC Co. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. ABC is on a calendar year basis. The cumulative effect of the change is determined:

  A. As of January 1, 1992.

  B. As of August 31, 1992.

  C. During the eight months ending August 31, 1992, by a weighted average of the purchases.

  D. During 1992 by a weighted average of the purchases.

  Correct Answer: A

  Explanation: Choice "a" is correct, as of January 1, 1992, the beginning of the year. Rule: The cumulative effect of a change in accounting principle equals the difference between retained earnings at the beginning of period of the change and what retained earnings would have been if the change was applied to all affected prior periods, assuming comparative financial statements are not presented. If comparative statements are presented, then beginning retained earnings of the earliest year presented is adjusted for the cumulative effect of the change. We are assuming, based on the answer options given, that Harvey is not presenting comparative financial statements. Choice "b" is incorrect. The cumulative effect of the change is not determined as of the date the decision is made. Choices "c" and "d" are incorrect. The cumulative effect of the change is not determined by a weighted average.

• Question 173:

  During 1992, ABC Co. increased the estimated quantity of copper recoverable from its mine. ABC uses the units of production depletion method. As a result of the change, which of the following should be reported in ABC's 1992 financial statements?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: C

  Explanation:

  Choice "c" is correct, No - No. This is a change in "accounting estimate," which affects only the current and

  subsequent periods (not prior periods and not retained earnings). "Cumulative effect of a change in

  accounting principle" is only used for changes in "accounting principle."

• Question 174:

  On January 2, 1989, ABC 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, ABC 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. $154,000

  D. $146,000

  Correct Answer: D

  Explanation:

  Choice "d" is correct, $146,000 accumulated depreciation balance at Dec. 31, 1992.

  

• Question 175:

  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. General and administrative expenses include:

  

  Freight-in is part of cost of sales; freight-out is a selling expense; and sales salaries are selling expenses. Choice "b" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales

  salaries are selling expenses.

  Choice "c" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales

  salaries are selling expenses.

  Choice "d" is incorrect. Freight-in is part of cost of inventory; freight-out is a selling expense; and sales

  salaries are selling expenses.

• Question 176:

  The cumulative effect of a change in accounting estimate should be shown separately:

  A. On the income statement above income from continuing operations.

  B. On the income statement after income from continuing operations and before extraordinary items.

  C. On the retained earnings statement as an adjustment to the beginning balance.

  D. It should not be recorded separately on any financial statement.

  Correct Answer: D

  Explanation:

  Choice "d" is correct. A change in estimate is handled prospectively. No cumulative effect adjustment is

  made and no separate line item presentation is made on any financial statement. If a material change is

  being made, appropriate footnote disclosure is necessary.

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

• Question 177:

  If a company is not presenting comparative financial statements, the correction of an error in the financial statements of a prior period should be reported, net of applicable income taxes, in the current:

  A. Retained earnings statement after net income but before dividends.

  B. Retained earnings statement as an adjustment of the opening balance.

  C. Income statement after income from continuing operations and before extraordinary items.

  D. Income statement after income from continuing operations and after extraordinary items.

  Correct Answer: B

  Explanation:

  Choice "b" is correct. The correction of an error in the financial statements of a prior period should be

  reported, net of tax, in the current statement of retained earnings as an adjustment of the opening balance.

  Choice "a" is incorrect. The adjustment is before net income, not after net income.

  Choices "c" and "d" are incorrect. Corrections of errors of prior periods go to retained earnings and do not

  affect the income statement.

• Question 178:

  On November 1, 20X2, ABC Co. contracted to dispose of an industry segment. Throughout 20X2 the segment had operating losses. These losses were expected to continue until the segment's disposition. If a loss is projected on final disposition, how much of the operating losses should be included in the loss from discontinued operations reported in ABC's 20X2 income statement?

  I. Operating losses for the period January 1 to October 31, 20X2.

  II. Operating losses for the period November 1 to December 31, 20X2.

  III.

  Estimated operating losses for the period January 1 to February 28, 20X3.

  A.

  II only.

  B.

  II and III only.

  C.

  I and III only.

  D.

  I and II only.

  Correct Answer: D

  Explanation: Choice "d" is correct. The operating losses to be included in ABC's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Projected operating losses are not anticipated and accrued. Choice "a" is incorrect. The operating losses to be included in ABC's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Choice "b" is incorrect. The operating losses to be included in ABC's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses. Choice "c" is incorrect. The operating losses to be included in ABC's 20X2 income statement would be the total 20X2 operating losses, regardless of whether those losses occurred before or after the date the decision to dispose of the component was made, and not any 20X3 operating losses.

• Question 179:

  On January 2, 20X5, to better reflect the variable use of its only machine, ABC, 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. ABC 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. ABC's income tax rate is 30%. ABC 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. Adjustment to beginning retained earnings of $2,000.

  C. Cumulative effect of a change in accounting principle of $1,400 in its income statement.

  D. None of the above.

  Correct Answer: D

  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.

• Question 180:

  An extraordinary item should be reported separately on the income statement as a component of income:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: B

  Explanation:

  Choice "b" is correct, Yes - No. An extraordinary item should be reported separately on the income

  statement as a component of income:

  Yes - net of income taxes.

  No - after (not before) "discontinued operations of a segment of a business."