20-B: Interim Reporting
18. Noble Corporation prepares its financial statements in accordance with IFRS. If Noble prepares interim financial statements, which statements are required? I. Statement of financial position II. Statement of income III. Statement of comprehensive income IV. Statement of changes in equity V. Statement of cash flows a. I, II, and III b. I, II, IV, and V c. II, III, and IV d. I, III, IV, and V
Correct Answer: D) I, III, IV, and V Notes (d) IFRS does not mandate interim reporting. However, when interim reports are required by regulation, four financial statements are required: (1) the statement of financial position, (2) the statement of comprehensive income, (3) the statement of changes in equity, and (4) the statement of cash flows. For consistency purposes, the entity must use the same accounting policies as used in year-end financial statements.
5. During the first quarter of year 2, Tech Co. had income before taxes of $200,000, and its effective income tax rate was 15%. Tech's year 1 effective annual income tax rate was 30%, but Tech expects its year 2 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) $50,000 Notes (c) The tax provision for an interim period is the tax for the year to date (estimated effective rate for the year times year-to-date income) less the total tax provisions reported for previous interim periods. In this case, the requirement is to calculate the tax provision for the first quarter interim income statement. The tax expense is $50,000 ($200,000 × 25%).
8. 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 I. Favorable II. Unfavorable a. I only b. II only c. Neither I nor II d. Both I and II
Correct Answer: D) Both I and II Notes (d) A planned volume variance that is expected to be absorbed by the end of the fiscal year should be deferred at interim reporting dates.
2. Kell Corp.'s $95,000 net income for the quarter ended September 30, year 1, included the following after-tax items: -A $60,000 extraordinary gain, realized on April 30, year 1, was allocated equally to the second, third, and fourth quarters of year 1. -A $16,000 cumulative-effect loss resulting from a change in inventory valuation method was recognized on August 2, year 1. In addition, Kell paid $48,000 on February 1, year 1, for year 1 calendar-year property taxes. Of this amount, $12,000 was allocated to the third quarter of year 1. For the quarter ended September 30, year 1, Kell should report net income of a. $91,000 b. $103,000 c. $111,000 d. $115,000
Correct Answer: A) $91,000 Notes (a) Extraordinary items, gains or losses from disposal of a segment of a business, and unusual or infrequently occurring items should not be prorated over the balance of the fiscal year. Thus, the $20,000 ($60,000 ÷ 3) extraordinary gain that was allocated to the third quarter should be subtracted from net income as it actually occurred in the second quarter. Consistent with the view that all accounting changes should be made effective as of the beginning of the fiscal period, the cumulative effect of the accounting change on retained earnings is computed at the beginning of the fiscal year and reported in the first interim period's income statement. If a cumulative-effect type change is made during an interim period subsequent to the first one, the prior interim reports must be restated as if the changes had been effective as of the first day of the fiscal year. Thus, the $16,000 cumulative-effect loss should not be recognized in the third quarter. The prior interim reports should be restated and the $16,000 loss should be added back to income of the third quarter to correct the income to be reported for the quarter. Property taxes should be allocated among the applicable quarters. As Kell Corp. properly allocated their property taxes, no adjustment to income is needed. Kell should report $91,000 ($95,000 - $20,000 + $16,000) as net income for the quarter ended September 30, year 1.
16. 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? I. First quarter II. Third quarter a. I. $0 ; II. $0 b. I. $0 ; II. $10,000 gain c. I. $50,000 loss ; II. $50,000 gain d. I. $50,000 loss ; II. $60,000 gain
Correct Answer: A) I. $0 ; II. $0 Notes (a) Temporary declines in inventory market values are not recognized. Only declines that are apparently permanent or other than temporary need to be recognized. In this case, Wilson expected the decline to reverse in the third quarter; therefore, the decline is temporary and no loss would be recorded in the first quarter. Because no loss was recorded for the decline, no gain will be recognized in the third quarter for the recovery of the $50,000 decline. Also, assuming that the inventory was valued at cost at the beginning of the fiscal year, no gain will be recorded for the recovery excess of $10,000 since inventory may not be valued at an amount in excess of cost.
15. Conceptually, interim financial statements can be described as emphasizing a. Timeliness over reliability. b. Reliability over relevance. c. Relevance over comparability. d. Comparability over neutrality.
Correct Answer: A) Timeliness over reliability. Notes (a) The primary purposes of interim reporting are to provide information which is more timely than is available in annual reports and to highlight business turning points which could be "buried" in annual reports. This emphasis on timeliness comes at the expense of reliability. Accounting information pertaining to shorter periods may require more arbitrary allocations, and may not be as verifiable or representationally faithful as information contained in annual reports. Interim reports are generally more relevant and less reliable. Interim financial statements should not be any more or less comparable than annual reports.
4. On June 30, year 1, Mill Corp. incurred a $100,000 net loss from disposal of a business segment. Also, on June 30, year 1, Mill paid $40,000 for property taxes assessed for the calendar year 1. What amount of the foregoing items should be included in the determination of Mill's net income or loss for the six-month interim period ended June 30, year 1? a. $140,000 b. $120,000 c. $90,000 d. $70,000
Correct Answer: B) $120,000 Notes (b) Revenues and gains should be recognized in interim reports on the same basis as used in annual reports. At June 30, year 1, Mill Corp. would report the entire $100,000 loss on the disposal of its business segment since the loss was incurred during the interim period. ASC Topic 270 also states that a cost charged to an expense in an annual period should be allocated among the interim periods that clearly benefit from the expense through the use of accruals and/or deferrals. Since the $40,000 property tax payment relates to the entire year 1 calendar year, $20,000 of the payment would be reported as an expense at June 30, year 1, while the remaining $20,000 would be reported as a prepaid expense.
6. Bailey Company, a calendar-year corporation, has the following income before income tax provision and estimated effective annual income tax rates for the first three quarters of year 1: 1st Quarter: Income before income tax provision: $60,000 Estimated effective annual tax rate at end of quarter: 40% 2nd Quarter: Income before income tax provision: $70,000 Estimated effective annual tax rate at end of quarter: 40% 3rd Quarter: Income before income tax provision: $40,000 Estimated effective annual tax rate at end of quarter: 45% Bailey's income tax provision in its interim income statement for the third quarter should be a. $18,000 b. $24,500 c. $25,500 d. $76,500
Correct Answer: B) $24,500 Notes (b) The requirement is to calculate Bailey's income tax provision (expense) in its interim income statement for the third quarter. The tax provision for an interim period is the tax for the year-to-date (estimated effective rate for the year times year-to-date income) less the total tax provisions reported for previous interim periods. 45% X $170,000 = $76,500 40% X $130,000 = ($52,000) Equals: $24,500
7. Advertising costs may be accrued or deferred to provide an appropriate expense in each period for I. Interim financial reporting II. Year-end financial reporting a. I only b. Both I and II c. Neither I nor II d. II only
Correct Answer: B) Both I and II Notes (b) Advertising costs may be deferred within a fiscal year if the benefits clearly extend beyond the interim period that the expense was paid. Also, advertising costs may be accrued and assigned to interim periods in relation to sales. Year-end accruals and deferrals of costs are also considered appropriate accounting treatment. Note, however, that deferral in year-end reporting is permitted only if the advertising has not been run in the media.
12. For interim financial reporting, the computation of a company's second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. The effective tax rate should reflect anticipated I. Foreign tax rates II. Available tax planning alternatives a. II only b. Neither I nor II c. I only d. Both I and II
Correct Answer: D) Both I and II Notes (d) The effective tax rate should reflect anticipated investment tax credits, foreign tax rates, percentage depletion, capital gains rates, and other available tax planning alternatives.
10. An inventory loss from a market price decline occurred in the first quarter. The loss was not expected to be restored in the fiscal year. However, in the third quarter the inventory had a market price recovery that exceeded the market decline that occurred in the first quarter. For interim financial reporting, the dollar amount of net inventory should a. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the market price recovery. b. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of decrease in the first quarter. c. Not be affected in the first quarter and increase in the third quarter by the amount of the market price recovery that exceeded the amount of the market price decline. d. Not be affected in either the first quarter or the third quarter.
Correct Answer: B) Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of decrease in the first quarter. Notes (b) A decline in inventory market price, expected to be other than temporary, should be recognized in the period of decline. A subsequent recovery of market value should be recognized as a cost recovery in the period of increase, but never above original cost. The decline should be recognized when it occurs in the first quarter. The subsequent recovery should be recognized when it occurs in the third quarter. The subsequent recovery cannot exceed the amount of decline. A nontemporary decline should be shown in the quarter of price decrease.
13. For interim financial reporting, a company's income tax provision for the second quarter of year 1 should be determined using the a. Effective tax rate expected to be applicable for the full year of year 1 as estimated at the end of the first quarter of year 1. b. Effective tax rate expected to be applicable for the full year of year 1 as estimated at the end of the second quarter of year 1. c. Effective tax rate expected to be applicable for second quarter of year 1. d. Statutory tax rate for year 1.
Correct Answer: B) Effective tax rate expected to be applicable for the full year of year 1 as estimated at the end of the second quarter of year 1. Notes (b) The requirement is to determine what tax rate should be used to calculate the income tax provision for interim reporting. Each interim period is considered to be an integral part of the annual period. Therefore, expectations for the annual period must be reflected in the interim report. The income tax expense should be calculated using the estimated annual effective tax rate. The estimated tax rate should be updated as of the end of each interim period (here, as of the second quarter). The statutory tax rate is only a part of the effective tax. The effective tax rate includes the statutory tax rate and a variety of other items.
11. For external reporting purposes, it is appropriate to use estimated gross profit rates to determine the cost of goods sold for I. Interim financial reporting II. Year-end financial reporting a. Both I and II b. I only c. II only d. Neither I nor II
Correct Answer: B) I only Notes (b) The requirement is to determine the appropriateness of estimated gross profit rates in determining cost of goods sold for interim and year-end external financial reporting purposes. The use of estimated gross profit rates to determine the cost of goods sold for an interim period is appropriate. The method of estimation used and any significant adjustments that result from reconciliations with the annual physical inventory should be disclosed. An estimation of cost of goods sold is not allowable for year-end financial reporting. (The actual cost of the goods sold must be determined by the use of a cost flow assumption that most clearly reflects periodic income.) Thus, an estimated cost of goods sold figure may be used for interim but not year-end statements.
19. Which of the following describes IFRS's requirements regarding interim financial statements? a. Interim financial statements are required. b. If interim financial statements are presented, four basic financial statements are required. c. If interim financial statements are presented, at least a balance sheet and profit and loss are required. d. Interim financial statements must be presented with the most recent annual financial statements.
Correct Answer: B) If interim financial statements are presented, four basic financial statements are required. Notes (b) The requirement is to identify the statement that is correct about IFRS requirements regarding interim financial statements. Answer (b) is correct because IFRS has no requirement for the presentation of interim financial statements, but if they are presented, four basic financial statements are required.
3. Vilo Corp. has estimated that total depreciation expense for the year ending December 31, year 1, will amount to $60,000, and that year 1 year-end bonuses to employees will total $120,000. In Vilo's interim income statement for the six months ended June 30, year 1, what is the total amount of expense relating to these two items that should be reported? a. $0 b. $30,000 c. $90,000 d. $180,000
Correct Answer: C) $90,000 Notes (c) A cost charged to expense in an annual period should be allocated among the interim periods which clearly benefit from the expense through the use of accruals and/or deferrals. Both yearly bonuses and the use of an asset (depreciation expense) benefit the entire year. The expense for the six month interim statement should be ($60,000 + $120,000) ÷ 2 = $90,000.
14. ASC Topic 270, Interim Reporting, states 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) As reporting for an integral part of an annual period. Notes (c) The integral view, used for interim reporting, holds that each interim period is an integral part of an annual period, must reflect expectations for the annual period, and must utilize special accruals, deferrals, and allocations.
17. Which of the following statements is true regarding interim reporting for companies that prepare their financial statements in accordance with IFRS? a. The discrete view is required for interim financial statements. b. Interim reports are required on a quarterly basis. c. Interim reports are not required for IFRS reporting. d. Interim reports require the preparation of only a statement of earnings and a statement of financial position.
Correct Answer: C) Interim reports are not required for IFRS reporting. Notes (c) Interim reports are not required for companies who prepare statements in accordance with IFRS.
9. Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year the decline had not reversed. When should the loss be reported in Petal's interim income statements? a. Ratably over the second, third, and fourth quarters. b. Ratably over the third and fourth quarters. c. In the second quarter only. d. In the fourth quarter only.
Correct Answer: D) In the fourth quarter only. Notes (d) The requirement is to determine when the inventory loss should be reported. Inventory losses from market declines should not be deferred beyond the interim period in which the loss occurs. However, if the market decline is considered to be temporary and will be recovered by year-end, no loss needs to be recognized. A loss will be recognized in the fourth quarter only. In the second quarter the loss is considered temporary, therefore no loss is recognized. However, in the fourth quarter, when the decline does not reverse, it is deemed permanent and recognized in the fourth quarter. Losses are recognized in the period in which they occur, not ratably over several periods. Only expenses that benefit several periods (i.e., repairs and maintenance) are recognized ratably. The loss is not recorded in a period of temporary decline, only when the decline is considered to be permanent.
