Test Prep FINANCIAL-ACCOUNTING-AND-REPORTING Online Practice Questions and Exam Preparation

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

• Question 81:

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

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  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 82:

  Mellow 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 Mellow report as depreciation expense for year 5?

  A. $600
  B. $900
  C. $1,500
  D. $2,400
  A. $600

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  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 83:

  On January 2, 1993, Quo, Inc. hired Reed to be its controller. During the year, Reed, working closely with Quo's president and outside accountants, made changes in accounting policies, corrected several errors dating from 1992 and before,

  and instituted new accounting policies.

  Quo's 1993 financial statements will be presented in comparative form with its 1992 financial statements.

  This question represents one of Quo's transactions. List A represents possible clarifications of these transactions as: a change in accounting principle, a change in accounting estimate, a correction of an error in previously presented financial

  statements, or neither an accounting change nor an accounting error.

  During 1993, Quo increased its investment in Worth, Inc. from a 10% interest, purchased in 1992, to 30%, and acquired a seat on Worth's board of directors. As a result of its increased investment, Quo changed its method of accounting for

  investment in Worth, Inc. from the cost method to the equity method.

  List A

  A. Change in accounting principle.
  B. Change in accounting estimate.
  C. Correction of an error in previously presented financial statements.
  D. Neither an accounting change nor an accounting error.
  D. Neither an accounting change nor an accounting error.

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  Choice "d" is correct. A change from the cost method (less than 20% ownership) to the equity method (20% or more ownership or a Board seat or other significant influence) of accounting for investment in an investee is neither an accounting change nor an accounting error. If it is not an accounting change, it cannot be a change in accounting principle or a change in accounting estimate since those two types of changes are both accounting changes.

  There is a considerable amount of controversy on this particular answer. Some people think that this change is a change in accounting principle (something certainly changed, but was it the accounting principle?), and others think it is a change in accounting entity (which is not one of the available answers; anyway, did the accounting entity actually change or is it the same entity accounted for differently?). Under SFAS No. 154, a change in accounting principle is treated retrospectively and a change in accounting entity is treated retrospectively.

  This kind of change (cost to equity) has never been specifically identified in any accounting literature as either a change in accounting principle or a change in accounting entity. The words "cost method" were never mentioned in APB 20 (other than the full cost method for oil and gas companies, which is an entirely different subject), nor was it mentioned in SFAS No. 154. It was, however, discussed in APB 18 (the pronouncement for the equity method) in Paragraph 19m (bold added): "An investment in common stock of an investee that was previously accounted for on other than the equity method may become qualified for use of the equity method by an increase in the level of ownership described in paragraph 17 (i.e., acquisition of additional voting stock by the investor, acquisition or retirement of voting stock by the investee, or other transactions). When an investment qualifies for use of the equity method, the investor should adopt the equity method of accounting. The investment, results of operations (current and prior periods presented), and retained earnings of the investor should be adjusted retroactively in a manner consistent with the accounting for a step-by-step acquisition of a subsidiary."

  What does all this mean? It means that, when there is a change in the percentage of ownership that changes accounting from the cost method to the equity method, the change is treated retroactively (just like changes in accounting entity used to be treated, although they are now treated retrospectively). It does not say that the change is a change in accounting principle or anything else. Nothing in SFAS No.154 changed this treatment. So all this still makes Choice "d" correct. This whole issue might easily be considered to be splitting hairs, at the very least. Some questions on the CPA exam are just that way. Most are not.

• Question 84:

  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.
  A. FASB Technical Bulletins.

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  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 85:

  A change from the cost approach to the market approach of measuring fair value is considered to be what type of accounting change?

  A. Change in accounting estimate.
  B. Change in accounting principle.
  C. Change in valuation technique.
  D. Error correction.
  A. Change in accounting estimate.

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  Choice "a" is correct. A change in the valuation technique used to measure fair value is a change in accounting estimate.

  Choice "b" is incorrect. Per SFAS No. 157, a change in valuation technique is a change in accounting estimate, not a change in accounting principal. Choice "c" is incorrect. Although a change from the cost approach to the market approach is

  a change in valuation technique, a change in valuation technique is not defined as a type of accounting change, but instead falls into the category of changes in accounting estimate.

  Choice "d" is incorrect. Both the market approach and the cost approach are acceptable methods of measuring fair value per SFAS No. 157; therefore, switching between these methods is not the correction of an error. Additionally, an error

  correction is not a type of accounting change.

• Question 86:

  In single period statements, which of the following should not be reflected as an adjustment to the opening balance of retained earnings?

  A. Effect of a failure to provide for uncollectible accounts in the previous period.
  B. Effect of a decrease in the estimated useful life of depreciable equipment.
  C. Cumulative effect of a change from the percentage of completion to the completed contract method of accounting for long-term construction projects.
  D. Cumulative effect of a change from LIFO to FIFO in valuing merchandise inventory.
  B. Effect of a decrease in the estimated useful life of depreciable equipment.

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  Choice "b" is correct. A change in the estimated useful life of a depreciable asset is a change in estimate handled prospectively. No adjustment to retained earnings is necessary. Choice "a" is incorrect. The correction of a failure to provide for

  uncollectible accounts is considered to be a correction of an error. The opening balance of retained earnings would be adjusted to correct the error.

  Choice "c" is incorrect. This change is a change in accounting principle and is handled retrospectively.

  With retrospective application, the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.

  Choice "d" is incorrect. This change is a change in accounting principle and is handled retrospectively.

  With retrospective application, the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.

• Question 87:

  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
  B. Option B

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  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."

• Question 88:

  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
  C. $50,000

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  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.

• Question 89:

  Under FASB Statement of Financial Accounting Concepts #5, which of the following items would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles?

  A. Unrealized loss on investments in noncurrent marketable equity securities available for sale.
  B. Unrealized loss on investments in current marketable equity securities held for trading.
  C. Loss on exchange of nonmonetary assets without commercial substance.
  D. Loss on exchange of nonmonetary assets with commercial substance.
  A. Unrealized loss on investments in noncurrent marketable equity securities available for sale.

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  Choice "a" is correct. Unrealized loss on investments in marketable equity securities available for sale would cause earnings to differ from comprehensive income for an enterprise in an industry not having specialized accounting principles. Rule: FAC 5 defines "earnings" for a period to exclude certain cumulative accounting adjustments and other non-owner changes in equity (such as changes in market value of marketable securities available for sale) that are included in comprehensive income for a period.

• Question 90:

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

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  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.