Test Prep Test Prep Certifications FINANCIAL-ACCOUNTING-AND-REPORTING Questions & Answers

• Question 91:

  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. $95,000

  C. $55,000

  D. $0

  Correct Answer: D

  

  Choice "d" is correct. $0.

  All organizational costs (start-up costs) should be expensed when incurred (per SOP 98-5).

  Fair Value Measurements

• Question 92:

  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 and II

  B.

  I and IV

  C.

  II and III

  D.

  III and IV

  Correct Answer: D

  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: .

• Question 93:

  Which of the following qualifies as an operating segment?

  A. Corporate headquarters, which oversees $1 billion in sales for the entire company.

  B. North American segment, whose assets are 12% of the company's assets of all segments, and management reports to the chief operating officer.

  C. South American segment, whose results of operations are reported directly to the chief operating officer, and has 5% of the company's assets, 9% of revenues, and 8% of the profits.

  D. Eastern Europe segment, which reports its results directly to the manager of the European division, and has 20% of the company's assets, 12% of revenues, and 11% of profits.

  Correct Answer: B

  Choice "b" is correct. Assets of the North American segment exceed 10% combined assets of all operating

  segments.

  Choice "a" is incorrect. Corporate headquarters in not considered a segment.

  Choice "c" is incorrect. The South American segment does not meet any of the 10% minimums (Revenue,

  PandL or Assets).

  Choice "d" is incorrect. Eastern Europe segment does not report to the chief operating officer.

• Question 94:

  Which of the following should be disclosed for each reportable operating segment of an enterprise?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: A

  Choice "a" is correct. For each reportable segment of an enterprise, both profit or loss and total assets should be disclosed. In disclosure questions, if you are not sure, disclose the most rather than the least. Choice "b" is incorrect. For each reportable segment of an enterprise, both profit or loss and total assets should be disclosed. Choice "c" is incorrect. For each reportable segment of an enterprise, both profit or loss and total assets should be disclosed. Choice "d" is incorrect. For each reportable segment of an enterprise, both profit or loss and total assets should be disclosed.

• Question 95:

  Opto Co. is a publicly-traded, consolidated enterprise reporting segment information. Which of the

  following items is a required enterprise-wide disclosure regarding external customers?

  A. The fact that transactions with a particular external customer constitute more than 10% of the total enterprise revenues.

  B. The identity of any external customer providing 10% or more of a particular operating segment's revenue.

  C. The identity of any external customer considered to be "major" by management.

  D. Information on major customers is not required in segment reporting.

  Correct Answer: A

  Choice "a" is correct. In order to conform to GAAP, financial statements for public business enterprises

  must report segment information about a company's major customers if that customer provides 10% or

  more of the combined revenue, internal and external, of all operating segments.

  Choice "b" is incorrect. Revenue is 10% of ALL operating segments not "a particular" segment.

  Choice "c" is incorrect. Disclosure is not at management's discretion.

  Choice "d" is incorrect. Disclosure is required.

• Question 96:

  In financial reporting of segment data, which of the following items is always used in determining a segment's operating income?

  A. Income tax expense.

  B. Sales to other segments.

  C. General corporate expense.

  D. Gain or loss on discontinued operations.

  Correct Answer: B

  Choice "b" is correct. Sales to other segments would be used in determining a segment's operating

  income.

  Rule: Equity in net income of another company, general corporate expenses, interest, income tax expense,

  and gains or losses on discontinued operations are all not included in segment profit unless they are

  included in the determination of segment profit reported to the "Chief Operating Decision Maker."

• Question 97:

  Taft Corp. discloses supplemental industry segment information. The following information is available for 1992: 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. $5,000

  B. $3,200

  C. $2,600

  D. $2,000

  Correct Answer: A

  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."

  

• Question 98:

  What information should a public company present about revenues from its reporting segments?

  A. Disclose separately the amount of sales to unaffiliated customers and the amount of intracompany sales.

  B. Disclose as a combined amount sales to unaffiliated customers and intracompany sales between geographic areas.

  C. Disclose separately the amount of sales to unaffiliated customers but not the amount of intracompany sales between geographic areas.

  D. No disclosure of revenues from foreign operations need be reported.

  Correct Answer: A

  Choice "a" is correct. Unaffiliated customers sales and intracompany sales must be disclosed separately.

• Question 99:

  APB Opinion No. 28, Interim Financial Reporting, concluded that interim financial reporting should be viewed primarily in which of the following ways?

  A. As useful only if activity is spread evenly throughout the year.

  B. As if the interim period were an annual accounting period.

  C. As reporting for an integral part of an annual period.

  D. As reporting under a comprehensive basis of accounting other than GAAP.

  Correct Answer: C

  Choice "c" is correct. Interim financial reporting should be viewed as reporting for an integral part of an

  annual period.

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

• Question 100:

  During the first quarter of 1993, Tech Co. had income before taxes of $200,000, and its effective income tax rate was 15%. Tech's 1992 effective annual income tax rate was 30%, but Tech expects its 1993 effective annual income tax rate to be 25%. In its first quarter interim income statement, what amount of income tax expense should Tech report?

  A. $0

  B. $30,000

  C. $50,000

  D. $60,000

  Correct Answer: C

  Choice "c" is correct. Interim period tax expense is the estimated annual effective tax rate (25% in this case) applied to the year-to-date income before taxes minus the tax expense recognized in previous interim periods. Since this question involves the first quarter, there are no previous interim periods. 25% ?$200,000 = $50,000. FIN 18, para. 16 Choice "a" is incorrect. Income tax expense is reported in interim income statements. Choice "b" is incorrect. The 1993 annual estimated tax rate, not the first quarter effective tax rate, is used to calculate income tax expense for interim statements. Choice "d" is incorrect. The 1993 annual estimated tax rate, not the 1992 annual effective tax rate, is used to calculate income tax expense for interim statements.