301 Chapter 4

Prior period adjustment

A company is not required to report a per share amount on the face of the income statement for which of the following items? a. Net income b. Prior period adjustment c. Extraordinary item d. Discontinued operations

In the income statement- no; Net of tax- yes

A correction of an error in prior periods' income will be reported a. In the income statement- yes; Net of tax- no b. In the income statement- no; Net of tax- no c. In the income statement- yes; Net of tax- no d. In the income statement- no; Net of tax- yes

$1,335,000

An income statement shows "income before income taxes and extraordinary items" in the amount of $2,055,000. The income taxes payable for the year are $1,080,000, including $360,000 that is applicable to an extraordinary gain. Thus, the "income before extraordinary items" is a. $1,335,000. b. $615,000. c. $1,395,000. d. $675,000.

Gains from a company selling the only investment it has ever owned

An item that should be classified as an extraordinary item is a. write-off of goodwill. b. gains from transactions involving foreign currencies. c. losses from moving a plant to another city. d. gains from a company selling the only investment it has ever owned.

$4.40

Benedict Corporation reports the following information: Net income 500,000 Dividends on common stock 140,000 Dividends on preferred stock 60,000 Weighted average common shares outstanding 100,000 Benedict should report earnings per share of a. $3.00. b. $3.60 c. $4.40. d. $5.00.

None of these (gain or loss on disposal of a component of the business, substantial write-off of obsolete inventories, loss from a strike)

Classification as an extraordinary item on the income statement would be appropriate for the a. gain or loss on disposal of a component of the business. b. substantial write-off of obsolete inventories. c. loss from a strike. d. none of these.

$10,800

Lantos Company had a 40 percent tax rate. Given the following pre-tax amounts, what would be the income tax expense reported on the face of the income statement? Sales $ 100,000 Cost of goods sold 60,000 Salary expense 8,000 Depreciation expense 11,000 Dividend revenue 9,000 Utilities expense 1,000 Extraordinary loss 10,000 Interest expense 2,000 a. $10,800 b. $ 6,800 c. $ 7,200 d. $ 3,200

$115,800

Palomo Corp has a tax rate of 30 percent and income before non-operating items of $357,000. It also has the following items (gross amounts). Unusual gain $ 23,000 Loss from discontinued operations 183,000 Dividend revenue 6,000 Income increasing prior period adjustment 74,000 What is the amount of income tax expense Palomo would report on its income statement? a. $115,800 b. $ 60,900 c. $ 83,100 d. $108,900

Extraordinary Loss Unusual Gain (30,000) 35,000

Sandstrom Corporation has an extraordinary loss of $50,000, an unusual gain of $35,000, and a tax rate of 40%. At what amount should Sandstrom report each item? Extraordinary Loss Unusual Gain a. (50,000) 35,000 b. (50,000) 21,000 c. (30,000) 35,000 d. (30,000) 21,000

Only in the cost of goods sold section of the income statement

The accountant for the Lintz Sales Company is preparing the income statement for 2010 and the balance sheet at December 31, 2010. The January 1, 2010 merchandise inventory balance will appear a. only as an asset on the balance sheet. b. only in the cost of goods sold section of the income statement. c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the balance sheet. d. as an addition in the cost of goods sold section of the income statement and as a current asset on the balance sheet.

A prior period adjustment

Watts Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the next year should be treated as a. an increase in depreciation expense for the year in which the error is discovered. b. a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements. c. an extraordinary item for the year in which the error was made. d. a prior period adjustment.

An amount after continuing operations and before extraordinary items

When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the income statement as a gain or loss on disposal reported as a. a prior period adjustment. b. an extraordinary item. c. an amount after continuing operations and before extraordinary items. d. a bulk sale of plant assets included in income from continuing operations.

On the face of the income statement

Where must earnings per share be disclosed in the financial statements to satisfy generally accepted accounting principles? a. On the face of the statement of retained earnings (or, statement of stockholders' equity.) b. In the footnotes to the financial statements. c. On the face of the income statement. d. Either (a) or (c).

As part of the statement of stockholders' equity

Which disclosure method do most companies use to display the components of other comprehensive income? a. Combined statement of retained earnings b. Second income statement c. Combined statement of comprehensive income d. As part of the statement of stockholders' equity

A change from FIFO to LIFO and a change from straight-line to double-declining balance

Which of the following is a change in accounting principle? a. A change in the estimated service life of machinery b. A change from FIFO to LIFO c. A change from straight-line to double-declining-balance d. A change from FIFO to LIFO and a change from straight-line to double-declining- balance

Its purpose is to relate the income tax expense to the items which affect the amount of tax

Which of the following is true about intraperiod tax allocation? a. It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return. b. It is required for extraordinary items and cumulative effect of accounting changes but not for prior period adjustments. c. Its purpose is to allocate income tax expense evenly over a number of accounting periods. d. Its purpose is to relate the income tax expense to the items which affect the amount of tax.

$330,000

Dole Company, with an applicable income tax rate of 30%, reported net income of $210,000. Included in income for the period was an extraordinary loss from flood damage of $30,000 before deducting the related tax effect. The company's income before income taxes and extraordinary items was a. $240,000. b. $300,000. c. $330,000. d. $231,000.

Income from Results of Continuing Operations Discontinued Operations 0 200,000 loss

During 2010, Lopez Corporation disposed of Pine Division, a major component of its business. Lopez realized a gain of $1,200,000, net of taxes, on the sale of Pine's assets. Pine's operating losses, net of taxes, were $1,400,000 in 2010. How should these facts be reported in Lopez's income statement for 2010? Income from Results of Continuing Operations Discontinued Operations a. $1,400,000 loss $1,200,000 gain b. 200,000 loss 0 c. 0 200,000 loss d 1,200,000 gain 1,400,000 loss

Income Statement

EPS data are required on the face of which of the following financial statements? a. Statement of retained earnings b. Statement of stockholders' equity c. Income statement d. Balance sheet

Only if floods in the geographical area are unusual in nature and occur infrequently

Under which of the following conditions would material flood damage be considered an extraordinary item for financial reporting purposes? a. Only if floods in the geographical area are unusual in nature and occur infrequently. b. Only if the flood damage is material in amount and could have been reduced by prudent management. c. Under any circumstances as an extraordinary item. d. Flood damage should never be classified as an extraordinary item.

All of these (extraordinary items, discontinued operations, prior period adjustments)

Income taxes are allocated to a. extraordinary items. b. discontinued operations. c. prior period adjustments. d. all of these.

Net of tax- no; Disclosed separately- yes

A material item which is unusual in nature or infrequent in occurrence, but not both should be shown in the income statement a. Net of Tax- No; Disclosed Separately- No b. Net of Tax- Yes; Disclosed Separately- Yes c. Net of Tax- No; Disclosed Separately- Yes d. Net of Tax- Yes; Disclosed Separately- No

$250,000

A review of the December 31, 2010, financial statements of Somer Corporation revealed that under the caption "extraordinary losses," Somer reported a total of $515,000. Further analysis revealed that the $515,000 in losses was comprised of the following items: (1) Somer recorded a loss of $150,000 incurred in the abandonment of equipment formerly used in the business. (2) In an unusual and infrequent occurrence, a loss of $250,000 was sustained as a result of hurricane damage to a warehouse. (3) During 2010, several factories were shut down during a major strike by employees, resulting in a loss of $85,000. (4) Uncollectible accounts receivable of $30,000 were written off as uncollectible. Ignoring income taxes, what amount of loss should Somer report as extraordinary on its 2010 income statement? a. $150,000. b. $250,000. c. $400,000. d. $515,000.

$81,200

Arreaga Corp. has a tax rate of 40 percent and income before non-operating items of $232,000. It also has the following items (gross amounts). Unusual loss $ 37,000 Extraordinary loss 101,000 Gain on disposal of equipment 8,000 Change in accounting principle increasing prior year's income 53,000 What is the amount of income tax expense Arreaga would report on its income statement? a. $92,800 b. $81,200 c. $99,200 d. $62,000

$17,500

At Ruth Company, events and transactions during 2010 included the following. The tax rate for all items is 30%. (1) Depreciation for 2008 was found to be understated by $30,000. (2) A strike by the employees of a supplier resulted in a loss of $25,000. (3) The inventory at December 31, 2008 was overstated by $40,000. (4) A flood destroyed a building that had a book value of $500,000. Floods are very uncommon in that area. The effect of these events and transactions on 2010 income from continuing operations net of tax would be a. $17,500. b. $38,500. c. $66,500. d. $416,500.

$367,500

At Ruth Company, events and transactions during 2010 included the following. The tax rate for all items is 30%. (1) Depreciation for 2008 was found to be understated by $30,000. (2) A strike by the employees of a supplier resulted in a loss of $25,000. (3) The inventory at December 31, 2008 was overstated by $40,000. (4) A flood destroyed a building that had a book value of $500,000. Floods are very uncommon in that area. The effect of these events and transactions on 2010 net income net of tax would be a. $17,500. b. $367,500. c. $388,500. d. $416,500.

Changes in accounting estimates

Companies used intraperiod tax allocation for all of the following items except a. Discontinued operations. b. Extraordinary items. c. Changes in accounting estimates. d. Income from continuing operations.

Investments by owners

Comprehensive income includes all of the following except a. dividend revenue. b. losses on disposal of assets. c. investments by owners. d. unrealized holding gains.

Income before extraordinary items

EPS should always be shown separately for a. net income and gross margin b. net income and pretax income c. income before extraordinary items d. extraordinary items and prior period adjustments

Should be reported at $40,000

For Mortenson Company, the following information is available: COGS $ 60,000 Dividend Revenue 2,500 Income Tax Expense 6,000 Operating Expenses 23,000 Sales 100,000 In Mortenson's multiple-step income statement, gross profit a. should not be reported b. should be reported at $13,500 c. should be reported at $40,000 d. should be reported at $42,500

Should be reported at $60,000

For Rondelli Company, the following information is available: COGS $ 90,000 Dividend Revenue 4,000 Income Tax Expense 9,000 Operating Expenses 35,000 Sales 150,000 In Rondelli's multiple-step income statement, gross profit a. should not be reported b. should be reported at $20,000. c. should be reported at $60,000. d. should be reported at $64,000.

$4,000

For the year ended December 31, 2010, Transformers Inc. reported the following: Net income 60,000 Preferred dividends declared 10,000 Common dividend declared 2,000 Unrealized holding loss, net of tax 1,000 Retained earnings 80,000 Common stock 40,000 Accumulated Other Comprehensive Income, Beginning Balance 5,000 What would Transformers report as its ending balance of Accumulated Other Comprehensive Income? a. $6,000 b. $5,000 c. $4,000 d. $1,000

$128,000

For the year ended December 31, 2010, Transformers Inc. reported the following: Net income 60,000 Preferred dividends declared 10,000 Common dividend declared 2,000 Unrealized holding loss, net of tax 1,000 Retained earnings 80,000 Common stock 40,000 Accumulated Other Comprehensive Income, Beginning Balance 5,000 What would Transformers report as the ending balance of Retained Earnings? a. $139,000 b. $133,000 c. $128,000 d. $127,000

$172,000

For the year ended December 31, 2010, Transformers Inc. reported the following: Net income 60,000 Preferred dividends declared 10,000 Common dividend declared 2,000 Unrealized holding loss, net of tax 1,000 Retained earnings 80,000 Common stock 40,000 Accumulated Other Comprehensive Income, Beginning Balance 5,000 What would Transformers report as total stockholders' equity? a. $172,000 b. $168,000 c. $128,000 d. $120,000

$226,000

Garwood Company has the following items: write-down of inventories, $240,000; loss on disposal of Sports Division, $370,000; and loss due to an expropriation, $226,000. Ignoring income taxes, what total amount should Garwood Company report as extraordinary losses? a. $226,000 b. $370,000. c. $466,000. d. $596,000.

$15,175,000

Gross billings for merchandise sold by Lang Company to its customers last year amounted to $15,720,000; sales returns and allowances were $370,000, sales discounts were $175,000, and freight-out was $140,000. Net sales last year for Lang Company were a. $15,720,000. b. $15,350,000. c. $15,175,000. d. $15,035,000.

Shown as a separate item in operating revenues or expenses if material and supplemented by a footnote if deemed appropriate

How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements? a. Shown as a separate item in operating revenues or expenses if material and supple- mented by a footnote if deemed appropriate. b. Shown in operating revenues or expenses if material but not shown as a separate item. c. Shown net of income tax after ordinary net earnings but before extraordinary items. d. Shown net of income tax after extraordinary items but before net earnings.

A gain of $820,000 and an increase in income tax expense of $250,000

If plant assets of a manufacturing company are sold at a gain of $820,000 less related taxes of $250,000, and the gain is not considered unusual or infrequent, the income statement for the period would disclose these effects as a. a gain of $820,000 and an increase in income tax expense of $250,000. b. operating income net of applicable taxes, $570,000. c. a prior period adjustment net of applicable taxes, $570,000. d. an extraordinary item net of applicable taxes, $570,000.

$5.00

In 2010, Benfer Corporation reported net income of $350,000. It declared and paid common stock dividends of $40,000 and had a weighted average of 70,000 common shares outstanding. Compute the earnings per share to the nearest cent. a. $4.43 b. $3.50 c. $4.50 d. $5.00

$3.75

In 2010, Esther Corporation reported net income of $1,000,000. It declared and paid preferred stock dividends of $250,000 and common stock dividends of $100,000. During 2010, Esther had a weighted average of 200,000 common shares outstanding. Compute Esther's 2010 earnings per share. a. $3.25 b. $3.75 c. $5.00 d. $6.25

$5.00

In 2010, Linz Corporation reported an extraordinary loss of $1,000,000, net of tax. It declared and paid preferred stock dividends of $100,000 and common stock dividends of $300,000. During 2010, Linz had a weighted average of 200,000 common shares outstanding. Compute the effect of the extraordinary loss, net of tax, on earnings per share. a. $3.00 b. $3.50 c. $4.50 d. $5.00

Unusual in nature, infrequent, and material in amount

In order to be classified as an extraordinary item in the income statement, an event or transaction should be a. unusual in nature, infrequent, and material in amount. b. unusual in nature and infrequent, but it need not be material. c. infrequent and material in amount, but it need not be unusual in nature. d. unusual in nature and material, but it need not be infrequent.

$117,000

Korte Company reported the following information for 2010: Sales revenue 500,000 Cost of goods sold 350,000 Operating expenses 55,000 Unrealized holding gain on available-for-sale securities 20,000 Cash dividends received on the securities 2,000 For 2010, Korte would report comprehensive income of a. $117,000. b. $115,000. c. $97,000. d. $20,000.

$1,215,000

Leonard Corporation reports the following information: Correction of overstatement of depreciation expense in prior years, net of tax $ 215,000 Dividends declared 160,000 Net income 500,000 Retained earnings, 1/1/10, as reported 1,000,000 Leonard should report retained earnings, 1/1/10, as adjusted at a. $785,000. b. $1,000,000. c. $1,215,000. d. $1,555,000.

$1,555,000

Leonard Corporation reports the following information: Correction of overstatement of depreciation expense in prior years, net of tax $ 215,000 Dividends declared 160,000 Net income 500,000 Retained earnings, 1/1/10, as reported 1,000,000 Leonard should report retained earnings, 12/31/10, at a. 785,000 b. 1,125,000 c. 1,340,000 d. 1,555,000

$40,000

Madsen Company reported the following information for 2010: Sales revenue 510,000 Cost of goods sold 350,000 Operating expenses 55,000 Unrealized holding gain on available-for-sale securities 40,000 Cash dividends received on the securities 2,000 For 2010, Madsen would report other comprehensive income of a. $137,000. b. $135,000. c. $42,000. d. $40,000.

$-0-

Manning Company has the following items: write-down of inventories, $120,000; loss on disposal of Sports Division, $185,000; and loss due to strike, $113,000. Ignoring income taxes, what total amount should Manning Company report as extraordinary losses? a. $ -0-. b. $185,000. c. $233,000. d. $298,000.

$1,570,000

Moorman Corporation reports the following information: Correction of understatement of depreciation expense in prior years, net of tax $ 430,000 Dividends declared 320,000 Net income 1,000,000 Retained earnings, 1/1/10, as reported 2,000,000 Moorman should report retained earnings, 1/1/10, as adjusted at a. $1,570,000. b. $2,000,000. c. $2,430,000. d. $3,110,000.

$2,250,000

Moorman Corporation reports the following information: Correction of understatement of depreciation expense in prior years, net of tax $ 430,000 Dividends declared 320,000 Net income 1,000,000 Retained earnings, 1/1/10, as reported 2,000,000 Moorman should report retained earnings, 12/31/10, as adjusted at a. $1,570,000. b. $2,250,000. c. $2,680,000. d. $3,110,000.

$2.20

Norling Corporation reports the following information: Net income 500,000 Dividends on common stock 140,000 Dividends on preferred stock 60,000 Weighted average common shares outstanding 200,000 Norling should report earnings per share of a. $1.50. b. $1.80 c. $2.20. d. $2.50.

Extraordinary Loss Unusual Gain (120,000) 140,000

Prophet Corporation has an extraordinary loss of $200,000, an unusual gain of $140,000, and a tax rate of 40%. At what amount should Prophet report each item? Extraordinary Loss Unusual Gain a. (200,000) 140,000 b. (200,000) 84,000 c. (120,000) 140,000 d. (120,000) 84,000

Separate column in the statement of changes in stockholders' equity

The approach most companies use to provide information related to the components of other comprehensive income is a a. second separate income statement. b. combined income statement of comprehensive income. c. separate column in the statement of changes in stockholders' equity. d. footnote disclosure.

$775,000

The following information was extracted from the accounts of Essex Corporation at December 31, 2010: CR(DR) Total reported income since incorporation 1,700,000 Total cash dividends paid (800,000) Unrealized holding loss (120,000) Total stock dividends distributed (200,000) Prior period adjustment, recorded 1/1/2010 75,000 What should be the balance of retained earning at December 31, 2010? a. 655,000 b. 700,000 c. 580,000 d. 775,000

Correction of an error in the financial statements of a prior period discovered subsequent to their issuance

The occurrence that most likely would have no effect on 2010 net income is the a. sale in 2010 of an office building contributed by a stockholder in 1961. b. collection in 2010 of a dividend from an investment. c. correction of an error in the financial statements of a prior period discovered subsequent to their issuance. d. stock purchased in 1996 deemed worthless in 2010.

Collection in 2010 of a receivable from a customer whose account was written off in 2009 by a charge to the allowance account

The occurrence which most likely would have no effect on 2010 net income (assuming that all amounts involved are material) is the a. sale in 2010 of an office building contributed by a stockholder in 1983. b. collection in 2010 of a receivable from a customer whose account was written off in 2009 by a charge to the allowance account. c. settlement based on litigation in 2010 of previously unrecognized damages from a serious accident which occurred in 2008. d. worthlessness determined in 2010 of stock purchased on a speculative basis in 2006.

EPS for income from continuing operations

Which of the following EPS figures must be disclosed on the face of the income statement? a. EPS for income before taxes. b. The effect on EPS from unusual items. c. EPS for gross profit. d. EPS for income from continuing operations.

All of the above

Which of the following EPS figures must be disclosed on the face of the income statement? a. EPS on income from continuing operations. b. The effect on EPS from operations of a discontinued division, net of taxes. c. The effect on EPS from an extraordinary item, net of taxes. d. All of the above.

Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement

Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business? a. The gain or loss on disposal should be reported as an extraordinary item. b. Results of operations of a discontinued component should be disclosed immediately below extraordinary items. c. Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement. d. The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations.

All of these (a single-step income statement, a multi-step income statement, a consolidated statement of income)

Which of the following is an acceptable method of presenting the income statement? a. A single-step income statement b. A multiple-step income statement c. A consolidated statement of income d. All of these

Unrealized gains on available-for-sale securities

Which of the following is included in comprehensive income? a. Investments by owners. b. Unrealized gains on available-for-sale securities. c. Distributions to owners. d. Changes in accounting principles.

Losses from exchange or translation of foreign currencies

Which of the following is never classified as an extraordinary item? a. Losses from a major casualty. b. Losses from an expropriation of assets. c. Gain on a sale of the only security investment a company has ever owned. d. Losses from exchange or translation of foreign currencies.

Office salaries expense

Which of the following is not a selling expense a. Advertising expense b. Office salaries expense c. Freight-out d. Store supplies consumed

Combined statement of retained earnings

Which of the following is not an acceptable way of displaying the components of other comprehensive income? a. Combined statement of retained earnings b. Second income statement c. Combined statement of comprehensive income d. As part of the statement of stockholders' equity

Discontinued operations

Which of the following items will not appear in the retained earnings statement? a. Net loss b. Prior period adjustment c. Discontinued operations d. Dividends

Unusual gain

Which of the following items would be reported as its gross amount on the face of the income statement? a. Extraordinary loss b. Prior period adjustment c. Cumulative effect of a change in an accounting principle d. Unusual gain

Discontinued operations

Which of the following items would be reported net of tax on the face of the income statement? a. Prior period adjustment b. Unusual gain c. Cumulative effect of a change in an accounting principle d. Discontinued operations

Gain resulting from the state exercising its right of eminent domain on a piece of land used as a parking lot

Which of these is generally an example of an extraordinary item? a. Loss incurred because of a strike by employees. b. Write-off of deferred marketing costs believed to have no future benefit. c. Gain resulting from the devaluation of the U.S. dollar. d. Gain resulting from the state exercising its right of eminent domain on a piece of land used as a parking lot.

Material losses resulting from correction of errors related to prior periods

Which one of the following types of losses is excluded from the determination of net income in income statements? a. Material losses resulting from transactions in the company's investments account. b. Material losses resulting from unusual sales of assets not acquired for resale. c. Material losses resulting from the write-off of intangibles. d. Material losses resulting from correction of errors related to prior periods.