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Wiley CPA Exam Review Problems And Solutions Vol 2 2011-2012 38th Edition O. Ray Whittington, Patrick R. Delaney - Solutions
When a component of a business has been discontinued during the year, this component’s operating losses of the current period should be included in thea. Income statement as part of revenues and expenses.b. Income statement as part of the loss on disposal of the discontinued component.c. Income
A component of Ace, Inc. was discontinued during 2011. Ace’s loss on disposal shoulda. Exclude the associated employee relocation costs.b. Exclude operating losses for the period.c. Include associated employee termination costs.d. Exclude associated lease cancellation costs.
On December 1, 2010, Greer Co. committed to a plan to dispose of its Hart business component’s assets. The disposal meets the requirements to be classified as discontinued operations. On that date, Greer estimated that the loss from the disposition of the assets would be $700,000 and Hart’s
On November 1, 2010, management of Herron Corporation committed to a plan to dispose of Timms Company, a major subsidiary. The disposal meets the requirements for classification as discontinued operations. The carrying value of Timms Company was $8,000,000 and management estimated the fair value
Which of the following criteria is not required for a component’s results to be classified as discontinued operations?a. Management must have entered into a sales agreement.b. The component is available for immediate sale.c. The operations and cash flows of the component will be eliminated from
On January 1, 2010, Deer Corp. met the criteria for discontinuance of a business component. For the period January 1 through October 15, 2010, the component had revenues of $500,000 and expenses of $800,000. The assets of the component were sold on October 15, 2010, at a loss for which no tax
Service Corp. incurred costs associated with relocating employees in a restructuring of its operations. How should the company account for these costs?a. Measured at fair value and recognized over the next two years.b. Measured at fair value and recognized when the liability is incurred.c.
Under ASC 220, Comprehensive Income, corrections of errors are reported ina. Other comprehensive income.b. Other income/(expense).c. Retained earnings.d. Stockholders’ equity.
In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions. Gold’s gain on the purchase of its own bonds exceeded its loss on the sale of the Iron
In 2010, Teller Co. incurred losses arising from its guilty plea in its first antitrust action, and from a substantial increase in production costs caused when a major supplier’s workers went on strike. Which of these losses should be reported as an extraordinary item?Antitrust action Production
A transaction that is unusual in nature and infrequent in occurrence should be reported separately as a component of incomea. After cumulative effect of accounting changes and before discontinued operations.b. After cumulative effect of accounting changes and after discontinued operations.c. Before
In 2010, hail damaged several of Toncan Co.’s vans.Hailstorms had frequently inflicted similar damage to Toncan’s vans. Over the years, Toncan had saved money by not buying hail insurance and either paying for repairs, or selling damaged vans and then replacing them. In 2010, the damaged vans
An extraordinary item should be reported separately on the income statement as a component of income Net of income taxes Before discontinued operations of a component of a businessa. Yes Yesb. Yes Noc. No Nod. No Yes
During 2010, Peg Construction Co. recognized substantial gains from• An increase in value of a foreign customer’s remittance caused by a major foreign currency revaluation.• A court-ordered increase in a completed long-term construction contract’s price due to design changes.Should these
A material loss should be presented separately as a component of income from continuing operations when it isa. An extraordinary item.b. A discontinued component of the business.c. Unusual in nature and infrequent in occurrence.d. Not unusual in nature but infrequent in occurrence.
On January 1, 2010, Brecon Co. installed cabinets to display its merchandise in customers’ stores. Brecon expects to use these cabinets for five years. Brecon’s 2010 multi-step income statement should includea. One-fifth of the cabinet costs in cost of goods sold.b. One-fifth of the cabinet
Thorpe Co.’s income statement for the year ended December 31, 2011, reported net income of $74,100. The auditor raised questions about the following amounts that had been included in net income:Unrealized loss on decline in market value of noncurrent investments in stock classified as
Purl Corporation’s income statement for the year ended December 31, 2010, shows the following:Income before income tax and extraordinary item $900,000 Gain on life insurance coverage—included in the above $900,000 income amount 100,000 Extraordinary item—loss due to earthquake damage 300,000
Ocean Corp.’s comprehensive insurance policy allows its assets to be replaced at current value. The policy has a$50,000 deductible clause. One of Ocean’s waterfront warehouses was destroyed in a winter storm. Such storms occur approximately every four years. Ocean incurred$20,000 of costs in
Midway Co. had the following transactions during 2010:• $1,200,000 pretax loss on foreign currency exchange due to a major unexpected devaluation by the foreign government.• $500,000 pretax loss from discontinued operations of a division.• $800,000 pretax loss on equipment damaged by a
Kent Co. incurred the following infrequent losses during 2010:• A $300,000 loss was incurred on disposal of one of four dissimilar factories.• A major currency devaluation caused a $120,000 exchange loss on an amount remitted by a foreign customer.• Inventory valued at $190,000 was made
Witt Co. incurred the following infrequent losses during 2010:• $175,000 from a major strike by employees.• $150,000 from an earthquake (unusual).• $125,000 from the abandonment of equipment used in the business.In Witt’s 2010 income statement, the total amount of infrequent losses not
During 2010 both Raim Co. and Cane Co. suffered losses due to the flooding of the Mississippi River. Raim is located two miles from the river and sustains flood losses every two to three years. Cane, which has been located fifty miles from the river for the past twenty years, has never before had
In Yew Co.’s 2010 annual report, Yew described its social awareness expenditures during the year as follows:The Company contributed $250,000 in cash to youth and educational programs. The Company also gave $140,000 to health and human service organizations, of which $80,000 was contributed by
Which of the following should be included in general and administrative expenses?Interest Advertisinga. Yes Yesb. Yes Noc. No Yesd. No No
The following costs were incurred by Griff Co., a manufacturer, during 2010:Accounting and legal fees $ 25,000 Freight-in 175,000 Freight-out 160,000 Officers salaries 150,000 Insurance 85,000 Sales representatives salaries 215,000 What amount of these costs should be reported as general and
Brock Corp. reports operating expenses in two categories:(1) selling, and (2) general and administrative. The adjusted trial balance at December 31, 2010, included the following expense and loss accounts:Accounting and legal fees $120,000 Advertising 150,000 Freight-out 80,000 Interest 70,000 Loss
What amount should Vane report as income after income taxes from continuing operations?a. $126,000b. $129,500c. $140,000d. $147,000
What amount should Vane report as the cost of goods manufactured?a. $200,000b. $215,000c. $280,000d. $295,000
In Baer Food Co.’s 2010 single-step income statement, the section titled “Revenues” consisted of the following:Net sales revenue $187,000 Results from discontinued operations:Loss from discontinued component Z including loss on disposal of $1,200 $ 16,400 Less tax benefit 4,000
Under IFRS, a voluntary change in accounting method may only be made by a company ifa. A new standard mandates the change in method.b. Management prefers the new method.c. The new method provides reliable and more relevant information.d. There is no prohibition of the method in the standards.
Under IFRS, changes in accounting policies area. Permitted if the change will result in a more reliable and more relevant presentation of the financial statements.b. Permitted if the entity encounters new transactions, events, or conditions that are substantively different from existing or previous
IFRS requires changes in accounting principles to be reporteda. On a prospective basis.b. On a retrospective basis.c. By restating the financial statements.d. By a cumulative adjustment on the income statement.
Which of the following statements is correct regarding accounting changes that result in financial statements that are, in effect, the statements of a different reporting entity?a. Cumulative-effect adjustments should be reported as separate items on the financial statements pertaining to the year
A company has included in its consolidated financial statements this year a subsidiary acquired several years ago that was appropriately excluded from consolidation last year.This should be reported asa. An accounting change that should be reported prospectively.b. An accounting change that should
For 2009, Pac Co. estimated its two-year equipment warranty costs based on $100 per unit sold in 2009. Experience during 2010 indicated that the estimate should have been based on $110 per unit. The effect of this $10 difference from the estimate is reporteda. In 2010 income from continuing
Oak Co. offers a three-year warranty on its products.Oak previously estimated warranty costs to be 2% of sales.Due to a technological advance in production at the beginning of 2010, Oak now believes 1% of sales to be a better estimate of warranty costs. Warranty costs of $80,000 and$96,000 were
During 2010, Krey Co. increased the estimated quantity of copper recoverable from its mine. Krey uses the units of production depletion method. As a result of the change, which of the following should be reported in Krey’s 2010 financial statements?Cumulative effect of a change in accounting
How should the effect of a change in accounting estimate be accounted for?a. By restating amounts reported in financial statements of prior periods.b. By reporting pro forma amounts for prior periods.c. As a prior period adjustment to beginning retained earnings.d. In the period of change and
On January 1, 2007, Flax Co. purchased a machine for$528,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 1, 2010, Flax determined that the machine had a useful life of six years from the date of acquisition and will
On January 1, 2007, Taft Co. purchased a patent for$714,000. The patent is being amortized over its remaining legal life of fifteen years expiring on January 1, 2019. During 2010, Taft determined that the economic benefits of the patent would not last longer than ten years from the date of
If the cumulative effect of applying an accounting change can be determined but the period-specific effects on all periods cannot be determined, the cumulative effect of the change should be applied toa. The end balance of retained earnings of the earliest period presented.b. Net income of the
If it is impracticable to determine the cumulative effect of an accounting change to any of the prior periods, the accounting change should be accounted fora. As a prior period adjustment.b. On a prospective basis.c. As a cumulative effect change on the income statement.d. As an adjustment to
Indirect effects from a change in accounting principle should be reporteda. Retrospectively to the earliest period presented.b. As a cumulative change in accounting principle in the current period.c. In the period in which the accounting change occurs.d. As a prior period adjustment.
Which of the following is considered a direct effect of a change in accounting principle?a. Deferred taxes.b. Profit sharing.c. Royalty payments.d. None of the above.
The effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate should be reporteda. By restating the financial statements of all prior periods presented.b. As a correction of an error.c. As a component of income from continuing operations, in
On January 1, 2011, Poe Construction, Inc. changed to the percentage-of-completion method of income recognition for financial statement reporting but not for income tax reporting.Poe can justify this change in accounting principle.As of December 31, 2010, Poe compiled data showing that income under
In 2011, Brighton Co. changed from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories. The change should be reported in Brighton’s financial statements as aa. Change in estimate on a prospective basis.b. Cumulative effect of change
On August 31, 2011, Harvey Co. decided to change from the FIFO periodic inventory system to the weightedaverage periodic inventory system. Harvey is on a calendar year basis. The cumulative effect of the change is determineda. As of January 1, 2011.b. As of August 31, 2011.c. During the eight
Which of the following would receive treatment as a cumulative effect on an accounting change on the income statement?LIFO to weighted-average FIFO to weighted-averagea. Yes Yesb. Yes Noc. No Nod. No Yes
On January 1, 2011, Roem Corp. changed its inventory method to FIFO from LIFO for both financial and income tax reporting purposes. The change resulted in a $500,000 increase in the January 1, 2011 inventory, which is the only change that could be calculated from the accounting records.Assume that
In accordance with the Codification, Orca should report the effect of this accounting change as a(n)a. Prior period adjustment.b. Component of income from continuing operations.c. Retrospective application to previous year’s financial statements.d. Component of income after extraordinary items.
In its 2011 financial statements, what amount should Orca report as the gain or loss on the cumulative effect of this accounting change?a. $2,800b. $4,000c. $4,200d. $0
When a company changes from the straight-line method of depreciation for previously recorded assets to the doubledeclining balance method, which of the following should be used?Cumulative effects of change in accounting principle Retrospective applicationa. No Nob. No Yesc. Yes Yesd. Yes No
The effects of a change in accounting principle should be recorded on a prospective basis when the change is from thea. Cash basis of accounting for vacation pay to the accrual basis.b. Straight-line method of depreciation for previously recorded assets to the double-declining balance method.c.
On January 2, 2011, to better reflect the variable use of its only machine, Holly, 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, 2009, was $50,000, and its estimated life was ten
On January 1, 2011, what amount should Warren report as deferred income tax liability as a result of the change?a. $120,000b. $ 72,000c. $ 36,000d. $0
In its 2011 income statement, what amount should Warren report as the cumulative effect of this change?a. $120,000b. $ 84,000c. $ 36,000d. $0
On January 1, 2009, Bray Company purchased for$240,000 a machine with a useful life of ten years and no salvage value. The machine was depreciated by the doubledeclining balance method and the carrying amount of the machine was $153,600 on December 31, 2010. Bray changed to the straight-line method
Jackson Company uses IFRS to report its financial results. During the current year, the company discovered it had overstated sales in the prior year. How should the company handle this issue?a. Adjust sales for the current period.b. Spread the adjustment over the current and future periods.c.
During 2012, Kelly Corporation discovered that ending inventory reported in its 2011 financial statements was understated by $10,000. How should Kelly account for this understatement?a. Adjust the beginning inventory balance in 2012 by$10,000.b. Restate the financial statements with corrected
Justin Corporation discovered an error in their 2011 financial statements after the statements were issued. This requires thata. The cumulative effect of the error is reported on the 2012 income statement as a cumulative effect of change in accounting principle.b. The cumulative effect of the error
Galaxy Corporation had the following financial statement information:2011 2010 Revenue $135,000 $100,000 Expenses 98,000 65,000 Net income 37,000 35,000 12/31/11 12/31/10 Total assets $157,000 $105,000 Total liabilities 50,000 35,000 Total owners’ equity 107,000 70,000 Galaxy failed to record
Which of the following errors could result in an overstatement of both current assets and stockholders’ equity?a. An understatement of accrued sales expenses.b. Noncurrent note receivable principal is misclassified as a current asset.c. Annual depreciation on manufacturing machinery is
On December 31, 2011, special insurance costs were incurred and unpaid, but were not recorded. If these insurance costs were related to a particular job order in work in process that was not completed during the period, what is the effect of the omission on accrued liabilities and retained earnings
At the end of 2010, Ritzcar Co. failed to accrue sales commissions earned during 2010 but paid in 2011. The error was not repeated in 2011. What was the effect of this error on 2010 ending working capital and on the 2011 ending retained earnings balance?2010 ending working capital 2011 ending
Net income is understated if, in the first year, estimated salvage value is excluded from the depreciation computation when using the Straight-line method Production or use methoda. Yes Nob. Yes Yesc. No Nod. No Yes
On January 2, 2011, Air, Inc. agreed to pay its former president $300,000 under a deferred compensation arrangement.Air should have recorded this expense in 2010 but did not do so. Air’s reported income tax expense would have been $70,000 lower in 2010 had it properly accrued this deferred
Bren Co.’s beginning inventory at January 1, 2011, was understated by $26,000, and its ending inventory was overstated by $52,000. As a result, Bren’s cost of goods sold for 2011 wasa. Understated by $26,000.b. Overstated by $26,000.c. Understated by $78,000.d. Overstated by $78,000.
Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during 2011. The cumulative effect of this change should be reported in Lore’s 2011 financial statements as aa. Prior period adjustment resulting from the correction of an error.b. Prior period adjustment
Conn Co. reported a retained earnings balance of$400,000 at December 31, 2010. In August 2011, Conn determined that insurance premiums of $60,000 for the three-year period beginning January 1, 2010, had been paid and fully expensed in 2010. Conn has a 30% income tax rate. What amount should Conn
Tack, Inc. reported a retained earnings balance of$150,000 at December 31, 2010. In June 2011, Tack discovered that merchandise costing $40,000 had not been included in inventory in its 2010 financial statements. Tack has a 30% tax rate. What amount should Tack report as adjusted beginning retained
During 2011, Paul Company discovered that the ending inventories reported on its financial statements were incorrect by the following amounts:2009 $60,000 understated 2010 75,000 overstated Paul uses the periodic inventory system to ascertain year-end quantities that are converted to dollar amounts
Loeb Corp. frequently borrows from the bank in order to maintain sufficient operating cash. The following loans were at a 12% interest rate, with interest payable maturity.Loeb repaid each loan on its scheduled maturity date.Date of loan Amount Maturity date Term of loan 11/1/10 $ 5,000 10/31/11 1
How should a first-time adopter of IFRS recognize the adjustments required to present its opening IFRS statement of financial position?a. All of the adjustments should be recognized in profit or loss.b. Adjustments that are capital in nature should be recognized in retained earnings and adjustments
The company will present one year of comparative information. What is the company’s date of transition to IFRS?a. January 1, year 1.b. January 1, year 2.c. July 1, year 2.d. December 31, year 2.
On July 1, year 2, a company decided to adopt IFRS.The company’s first IFRS reporting period is as of and for the year ended December 31, year
Under IFRS, which of the following is the first step within the hierarchy of guidance to which management refers, and whose applicability it considers, when selecting accounting policies?a. Consider the most recent pronouncements of other standard-setting bodies to the extent they do not conflict
Upon first-time adoption of IFRS, an entity may elect to use fair value as deemed cost fora. Biological assets related to agricultural activity for which there is no active market.b. Intangible assets for which there is no active market.c. Any individual item of property, plant, and equipment.d.
Which of the following is not one of the criteria for revenue recognition for sales of goods under IFRS?a. The significant risks and rewards of ownership of goods are transferred.b. Payment has been received.c. The entity does not retain either a continuing managerial involvement or control over
If the outcome of rendering services cannot be estimated reliably, IFRS® requires the use of which revenue recognition method?a. Percentage-of-completion method.b. Completed contract method.c. Cost recovery method.d. Installment method.
According to the IASB Framework, the two criteria required for incorporating items into the income statement or statement of financial position are thata. It meets the definition of relevance and faithful representation.b. It meets the definition of an element and can be measured reliably.c. It
According to the IASB Framework, the financial statement element that is defined as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions
According to the IASB Framework for the Preparation and Presentation of Financial Statements, the fundamental qualitative characteristic of relevance includesa. Predictive value and feedback value.b. Verifiability, neutrality, and representational faithfulness.c. Predictive value and confirmatory
Which of the following organizations is responsible for setting International Financial Reporting Standards?a. Financial Accounting Standards Board.b. International Accounting Standards Committee.c. Financial Accounting Committee.d. International Accounting Standards Board.
The milestone method of revenue recognition provides that if a substantive milestone is achieved, what amount of revenue is recognized?a. Revenue is recognized up to the amount of cash collected.b. A provisions rata share of revenue based upon the percentage delivered to date.c. Contingent revenue
The milestone method of accounting may be used to recognize revenue fora. Multiple-deliverable products or services.b. Research and development arrangements.c. Long-term construction contracts.d. Franchise arrangements.
Which of the following is one of the conditions that must exist for a company to recognize revenue on separate units under a multiple-deliverables arrangement?a. The delivered item has value on a stand-alone basis and can be sold separately.b. The delivered item is not returnable.c. Collection has
Esker Inc. specializes in real estate transactions other than retail land sales. On January 1, 2011, Esker consummated a sale of property to Kame Ltd. The amount of profit on the sale is determinable and Esker is not obligated to perform any additional activities to earn the profit. Kame’s
In which of the following examples of real estate transactions would the seller not transfer the usual risks and rewards of ownership?I. The buyer can compel the seller to repurchase the property.II. The seller guarantees the return of the buyer’s investment.III. The seller is required to support
Each of Potter Pie Co.’s twenty-one new franchisees contracted to pay an initial franchise fee of $30,000. By December 31, 2010, each franchisee had paid a nonrefundable$10,000 fee and signed a note to pay $10,000 principal plus the market rate of interest on December 31, 2011, and December 31,
On December 31, 2010, Rice, Inc. authorized Graf to operate as a franchisee for an initial franchise fee of$150,000. Of this amount, $60,000 was received upon signing the agreement and the balance, represented by a note, is due in three annual payments of $30,000 each beginning December 31, 2011.
According to the cost recovery method of accounting, gross profit on an installment sale is recognized in incomea. After cash collections equal to the cost of sales have been received.b. In proportion to the cash collections.c. On the date the final cash collection is received.d. On the date of
Wren Co. sells equipment on installment contracts.Which of the following statements best justifies Wren’s use of the cost recovery method of revenue recognition to account for these installment sales?a. The sales contract provides that title to the equipment only passes to the purchaser when all
The following information pertains to a sale of real estate by Ryan Co. to Sud Co. on December 31, 2010:Carrying amount $2,000,000 Sales price:Cash $ 300,000 Purchase money mortgage 2,700,000 3,000,000 The mortgage is payable in nine annual installments of$300,000 beginning December 31, 2011, plus
It is proper to recognize revenue prior to the sale of merchandise when I. The revenue will be reported as an installment sale.II. The revenue will be reported under the cost recovery method.a. I only.b. II only.c. Both I and II.d. Neither I nor II.
Income recognized using the installment method of accounting generally equals cash collected multiplied by thea. Net operating profit percentage.b. Net operating profit percentage adjusted for expected uncollectible accounts.c. Gross profit percentage.d. Gross profit percentage adjusted for
According to the installment method of accounting, gross profit on an installment sale is recognized in incomea. On the date of sale.b. On the date the final cash collection is received.c. In proportion to the cash collection.d. After cash collections equal to the cost of sales have been received.
For financial statement purposes, the installment method of accounting may be used if thea. Collection period extends over more than twelve months.b. Installments are due in different years.c. Ultimate amount collectible is indeterminate.d. Percentage-of-completion method is inappropriate.
On January 2, 2010, Blake Co. sold a used machine to Cooper, Inc. for $900,000, resulting in a gain of $270,000.On that date, Cooper paid $150,000 cash and signed a$750,000 note bearing interest at 10%. The note was payable in three annual installments of $250,000 beginning January 2, 2011. Blake
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