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

• Question 31:

  An inventory loss from a permanent market decline of $360,000 occurred in May 1989. Cox Co. appropriately recorded this loss in May 1989 after its March 31, 1989 quarterly report was issued. What amount of inventory loss should be reported in Cox's quarterly income statement for the three months ended June 30, 1989?

  A. $0

  B. $90,000

  C. $180,000

  D. $360,000

  Correct Answer: D

  Choice "d" is correct. $360,000 inventory loss reported for the quarter ended 6-30-89. Rule: Inventory losses from "permanent market declines" are recognized in the interim period, incurred and later, if they "turn-around," are recognized as gains in a subsequent interim period only to the extent of previously reported losses. Rule: "Temporary" market declines need not be recognized at interim when a "turn-around" can reasonably be expected to occur before the end of the fiscal year. Facts: This $360,000 inventory decline is permanent and the entire loss would be recognized in the quarter interim period incurred (6-30-89).

• Question 32:

  Advertising costs may be accrued or deferred to provide an appropriate expense in each period for: A. Option A

  

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: B

  Choice "b" is correct. Yes - Yes.

  Advertising costs may be accrued or deferred to provide an appropriate expense in each period for both

  "interim" and "year-end" financial reporting.

• Question 33:

  A planned volume variance in the first quarter, which is expected to be absorbed by the end of the fiscal period, ordinarily should be deferred at the end of the first quarter if it is:

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: D

  Choice "d" is correct. Yes - Yes.

  Rule: Volume variances that are planned or expected to be absorbed by the end of the year should be

  deferred at interim whether favorable or unfavorable.

• Question 34:

  Kell Corp.'s $95,000 net income for the quarter ended September 30, 1990, included the following aftertax items:

  •

  A $60,000 extraordinary gain, realized on April 30, 1990, was allocated equally to the second, third, and fourth quarters of 1990.

  •

  A $16,000 cumulative-effect loss resulting from a change in inventory valuation method was recognized on August 2, 1990.

  In addition, Kell paid $48,000 on February 1, 1990, for 1990 calendar-year property taxes. Of this amount,

  $12,000 was allocated to the third quarter of 1990.

  For the quarter ended September 30, 1990, Kell should report net income of:

  A. $91,000

  B. $103,000

  C. $111,000

  D. $115,000

  Correct Answer: A

  Choice "a" is correct. $91,000 net income for the third quarter ended 9-30-90.

  Rules: The entire amount of an "extraordinary" item should be reported during the period incurred.

  A "cumulative effect" type accounting change is not included in the net income of the period of change;

  instead, the beginning of the year retained earnings is restated.

  Expenses, which benefit more than one interim period, such as property taxes, are allocated among the

  periods benefited.

  

• Question 35:

  During the second quarter of 1988, Buzz Company sold a piece of equipment at a $12,000 gain. What portion of the gain should Buzz report in its income statement for the second quarter of 1988?

  A. $12,000

  B. $6,000

  C. $4,000

  D. $0

  Correct Answer: A

  Choice "a" is correct. $12,000.

  Rule: The entire amount of an "extraordinary gain or loss" or an "unusual or infrequently occurring item,"

  e.g., a gain or loss from sale of fixed assets, should be reported during the period (quarter) incurred.

  Choices "b", "c", and "d" are incorrect. The full gain should be reported in the second quarter when it

  occurred.

• Question 36:

  Wilson Corp. experienced a $50,000 decline in the market value of its inventory in the first quarter of its fiscal year. Wilson had expected this decline to reverse in the third quarter, and in fact, the third quarter recovery exceeded the previous decline by $10,000. Wilson's inventory did not experience any other declines in market value during the fiscal year. What amounts of loss and/or gain should Wilson report in its interim financial statements for the first and third quarters?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: A

  Choice "a" is correct. Temporary market declines in inventory need not be recognized at interim when a turn-around can reasonably be expected to occur before the end of the fiscal year.

• Question 37:

  Dean Co. acquired 100% of Morey Corp. prior to 1989. During 1989, the individual companies included in their financial statements the following:

  

  What amount should be reported as related party disclosures in the notes to Dean's 1989 consolidated financial statements?

  A. $150,000

  B. $155,000

  C. $175,000

  D. $330,000

  Correct Answer: C

  Choice "c" is correct. The only related party transaction that would require disclosure (assuming that all amounts are material to the financial statements) would be the loans to officers since they are outside of the ordinary course of business. Choices "a", "b", and "d" are incorrect. Officers' salaries, officers' expenses and intercompany sales (between entities included in a consolidated set of financial statements) are all transactions in the ordinary course of business and generally would not require disclosure.

• Question 38:

  Tack, Inc. reported a retained earnings balance of $150,000 at December 31,1990. In June 1991, Tack discovered that merchandise costing $40,000 had not been included in inventory in its 1990 financial statements. Tack has a 30% tax rate. What amount should Tack report as adjusted beginning retained earnings in its statement of retained earnings at December 31, 1991?

  A. $190,000

  B. $178,000

  C. $150,000

  D. $122,000

  Correct Answer: B

  

  Choice "b" is correct. $178,000.

• Question 39:

  On January 2, 1991, Air, Inc. agreed to pay its former president $300,000 under a deferred compensation arrangement. Air should have recorded this expense in 1990 but did not do so. Air's reported income tax expense would have been $70,000 lower in 1990 had it properly accrued this deferred compensation in its December 31,1991, financial statements, Air should adjust the beginning balance of its retained earnings by a:

  A. $230,000 credit.

  B. $230,000 debit.

  C. $300,000 credit.

  D. $370,000 debit.

  Correct Answer: B

  

  Choice "b" is correct. $230,000 debit.

• Question 40:

  On August 31, 1992, Harvey Co. decided to change from the FIFO periodic inventory system to the weighted average periodic inventory system. Harvey 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

  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. Choice "a" is correct. As of January 1, 1992, the beginning of the year. This assumes that the company is not presenting comparative financial statements. If comparative financial statements are presented, then the adjustment is made to the beginning retained earnings of the earliest year presented. 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. (A far out distractor.)