Chapter 4 - Intermediate Accounting I

Crimson Corp. has a component that is a discontinued operation. The revenues and expenses of the component were $200,000 and $240,000, respectively. The component was sold with a resulting loss of $160,000. The tax rate is 30%. What is the total gain or loss on discontinued operations (net-of-tax effects) that will be reported on the income statement?

$140,000 loss (-$40,000 - $160,000) x (1 - 0.30) = $140,000 loss net-of-tax.

Regal Corporation has a component that is a discontinued operation. The revenues and expenses of the component were $120,000 and $100,000 respectively. The component was sold with a resulting loss of $80,000. The tax rate is 40%. What is the total gain or loss on discontinued operations (net of tax effects) that will be reported on the income statement?

$36,000 loss ($20,000 - 80,000) x (1-.40) = $36,000 loss.

Which of the following activities would constitute discontinued operations?

- A U.S. cereal manufacturer commits to a plan to dispose of its operations in the EU. - A retail company, like Target, sells its financial services (credit card) business.

Which of the following are acceptable ways of implementing a FASB mandated change in accounting principle?

- Apply the new standard in the current period and all future periods with no change to prior financial statements. - Apply the new standard to the current and future periods with an adjustment to the beginning balance of retained earnings in the year of adoption. - Apply the new standard to all periods presented in the financial statements.

If a discontinued operation is held for sale and there is an impairment loss, what are the acceptable methods for disclosing the impairment loss?

- As a disclosure note in the notes to the financial statements. - Parenthetically on the face of the income statement in discontinued operations.

How are discontinued operations reported?

- As a separate line item on the income statement. - With separate reporting of the tax effect on the item of discontinued operations. - Below income from continuing operations.

Which of the following are changes in accounting estimates?

- Changing the useful life of an asset. - Changing the bad debt estimate. - Changing the estimate for future warranty expenses.

When a component that qualifies as a discontinued operation is held for sale, what are the two elements that may be reported in discontinued operations?

- Estimated impairment loss expected from the sale of the component. - Operating income or loss of the component during the reporting period.

Which of the following are accounting errors?

- Forgetting to accrue salary expense. - Making a mistake in calculating depreciation expense.

When a component has been sold and qualifies for treatment as a discontinued operation, the reported income effects disclosed will include which of the following items?

- Gain or loss on disposal of the component's assets. - Operating income or loss of the component from the beginning of the reporting period to the disposal date.

Which of the following would most likely affect earnings quality?

- Losing a major customer. - Accelerating revenue recognition.

Gains and losses are increases or decreases in equity from which type of transactions?

- Peripheral - Incidental

If a causal relationship cannot be established between revenues and expenses, which of the following occurs?

- Relate the expense to a particular period. - Record the expense as incurred. - Allocate the expense over several periods.

What items must be removed from continuing operations and reported separately for a discontinued operation?

- Revenues - gains - tax expense - expenses

Which of the following information must be included in the notes to the financial statements regarding discontinued operations?

- The reason for the discontinuance. - The major classes of assets and liabilities of the component. - The identity of the component.

If a component of the business qualifies for discontinued operations treatment, which of the following statements are true?

- The tax expense effect is removed from continuing operations. - All related revenues, expenses, gains, and losses must be removed from continuing operations.

Which of the following is a category of accounting change?

- accounting principle - - reporting entity

The primary purpose of the FASB/IASB convergence project on discontinued operations was to

- develop a common set of disclosures - develop a common definition of discontinued operations

Which of the following items are included in calculating operating income?

- expenses related to primary revenue-generating activities - revenues related to primary revenue-generating activities

An income statement prepared in accordance with IFRS allows expenses to be classified by

- function - nature

Which of the following items may be included in nonoperating income for a company that manufactures televisions?

- gain from sale of land - interest income

The guidance on discontinued operations defines a discontinued operation as a component that either/or

- has been sold - is classified as held for sale

The income tax expense or benefit associated with discontinued operations

- is reported separately from the tax computation for continuing operations. - is included in the computation of net income.

The advantages of a multiple-step income statement is

- it reports expenses by function. - it provides more information than a single-step income statement. - it reports the relationships between various items.

Identify which items on an income statement are included in calculating income from continuing operations.

- revenue - loss - income tax

Which of the following items are reported as components of operating income for most manufacturing and merchandising companies?

- revenues - administrative expenses - selling expenses

Which of the following financial statement elements are measured and reported as a result of providing goods and services to customers?

- revenues - expenses

_____ long-lived assets should have their balance reduced if there has been a significant impairment of value.

Both tangible and intangible

Which type of change requires a justification in the notes to the financial statements?

Change in depreciation method

Expenses reported on an income statement can be classified by nature or by function under these accounting standards.

IFRS

Which standards require certain minimum information to be reported on the face of the income statement?

IFRS

________ requires certain minimum information be reported on the face of the income statement, while _____ does not have minimum requirements.

IFRS; US GAAP

Where on the income statement is income tax expense reported?

In a separate line.

When are restructuring costs recognized on the income statement?

In the period the exit or disposal obligation is incurred.

Revenues, expenses, gains, and losses that will likely continue in future periods make up what?

Income from continuing operations

Carol Corp. has a component that is a discontinued operations. The component suffered a loss of $60,000. The component was sold for a gain of $200,000. The tax rate is 40%. What is the total income tax effect of the discontinued operations?

Income tax expense of $56,000 ($200,000 - 60,000) x 40%

_____ from discontinued operations will result in additional income tax expense; _____ from discontinued operations will result in a tax benefit.

Income; loss

GAAP requires that restructuring costs are recognized when?

Only in the period incurred.

A component is qualified as a discontinued operation. What are the two elements that may be reported in discontinued operations on the income statement if the component is not sold by the end of the reporting period?

Operating income or loss from the component and an impairment loss both reported on a net of tax basis.

The _____________-___________ Act established a requirement that a if a company includes non-GAAP earnings in any report filed with the SEC or any public disclosure or press release, it must also provide a ___________________ with earnings determined according to GAAP.

Sarbanes-Oxley; reconciliation

Crimson Corp. has a component that is a discontinued operation. The component incurred a loss from operations of $40,000. The component was sold with an additional loss of $160,000. The tax rate is 30%. What is the income tax effect for the discontinued operation?

Tax benefit of $60,000 ($40,000 + 160,000) x 30%

Which of the following best describes why losing a major customer at the end of the fiscal year can affect earnings quality?

The current year's revenue number may not be predictive of next year's revenue.

Which of the following is true regarding interim reporting requirements for a discontinued operation?

The income effects of the discontinued component must be separately reported in the quarterly income statement.

At what amount are the assets of a discontinued operation held for sale reported on the balance sheet?

The lower of the book value or fair value less costs to sell.

At what amount are the liabilities of a discontinued operation held for sale reported in the balance sheet?

The lower of the book value or fair value less costs to sell.

Non-GAAP earnings are calculated

based on management's assumptions of permanent earnings.

A discontinued operation is reported when a __________________ of an entity either (a) has been disposed of or (b) is classified as held for sale.

component

Companies have considerable flexibility in reporting income from __________________ operations, but the reporting of income from ___________________ operations is strictly mandated.

continuing; discontinued

Changes in accounting estimates are reflected in the financial statements of the _______________ period and _______________ periods.

current; future

Any long-lived asset, whether tangible or intangible, should have its balance reduced if there has been a significant ______________ of value.

decrease

Any long-lived asset, whether tangible or intangible, should have its balance reduced if there has been a significant ___________________ of value.

decrease

As part of convergence efforts, the FASB and IASB have developed a common definition and common set of financial statement _____________________ for discontinued operations.

disclosures

If a company owns multiple lines of business in different areas such as cable TV, film entertainment, networks, and publishing, and decides to sell a specific unit, the resulting gain or loss would most likely be classified as a(n)______ on the income statement.

discontinued operation

Revenues, expenses, gains, losses, and income tax related to a(n) ___________________ __________________must be removed from continuing operations and reported separately on the income statement.

discontinued operation

The evidence that a financial statement user or analyst might use as evidence to suggest that earnings have been smoothed is

earnings have a steady stream over time.

A change in the residual value of a depreciable asset is treated as a change in accounting _________________.

estimate

A change in depreciation method is treated as a change in accounting ________________ that is achieved by a change in accounting _________________.

estimate; principle

The three types of accounting changes are a change in accounting principle, a change in accounting _____________ , and a change in reporting ___________.

estimates; entity

A gain from discontinued operations will result in an income tax _______________ whereas a loss from discontinued operations will result in an income tax _________________.

expense; benefit

The outflows of resources incurred while generating revenue are referred to as __________________.

expenses

What basis is used for estimated restructuring costs?

fair value

True or false: Income tax expense may be disclosed either on the income statement or in the notes to the financial statements.

false Income tax expense must be disclosed as a separate line item on the income statement.

True or false: Under both U.S. GAAP and IFRS, the "bottom line" of the income statement is typically referred to as net income or net loss.

false Under IFRS, the bottom line is either profit or loss.

If a company frequently uses restructuring charges in its income statement, an analyst should

include them in the company's permanent earnings stream.

Categorizing operating expenses as nonoperating expenses is an example of

income statement classification shifting.

When a company uses a special charge such as restructuring costs and shows a loss on the income statement, income may be manipulated through

income statement classification shifting.

When a discontinued operation is sold before the end of the reporting period, the ________________ or __________________ from operations and the gain or loss on the disposal of assets is included in the reported income.

income; loss

Janex Company manufactures refrigerators. Which of the following items would likely be included in the determination of nonoperating income on Janex's income statement?

interest expense

The process of associating income tax effects with the income statement components that create those effects is referred to as ________________ tax allocation.

intraperiod

Which of the following is a decrease in equity due to an incidental transaction?

loss

Income smoothing describes the concept that

managers manipulate the pattern of income to not vary much between years.

If discontinued operations have a _____ effect on the income statement, they must be reported separately.

minimal

Which implementation of a mandated change in accounting principle applies to the adoption period and future periods with an adjustment to the beginning balance of retained earnings?

modified retrospective approach

An income statement that classifies items and uses subtotals for gross profit, operating income, and income from continuing operations is called a(n) ____________________ -step income statement.

multiple

Discontinued operations should be reported on the income statement

net of tax below income from continuing operations.

Additional details about discontinued operations, whether sold or held for sale, are provided in the _______ to the financial statements.

notes

The more frequently a company incurs restructuring costs, the more appropriate it is for financial statement users to include those costs in estimates of ________________ earnings when forecasting future performance.

permanent

The initial measurement of restructuring liabilities is at fair value, which often is estimated as the __________________ _________________ of estimated future cash outflows.

present; value

The initial measurement of restructuring liabilities is at fair value, which often is estimated as the ___________________ _____________________of estimated future cash outflows.

present; value

When a company changes from one acceptable accounting method to another, this is treated as a change in accounting

principle

Although U.S. GAAP uses the term net income on the income statement, IFRS uses the terms ________________ and __________________.

profit; loss

A change in depreciation method is accounted for by

prospectively applying the new method

The ability of reported earnings to predict a company's future earnings is referred to as earnings ________________.

quality

Costs that are planned and controlled by management that materially change the scope of the business undertaken or the manner in which the business is conducted are called ______________ costs

restructuring

_____ costs include costs associated with shutdown or relocation of facilities.

restructuring

If a company reorganizes its operation to gain efficiency, the cost associated with this reorganization is classified as

restructuring costs

When a company voluntarily changes its inventory method from LIFO to FIFO, GAAP typically requires that this change be accounted for ______________.

retrospectively

The inflow of resources resulting from providing goods or services to customers is referred to as _____________.

revenue

Analyzing earnings quality requires an analyst to

separate a company's temporary and permanent earnings.

Operating and nonoperating items are not separately classified in a ___________________-step income statement.

single

A company prepares its income statement by listing all sources of revenues and gains at the top, followed by a list of all expenses and losses. Which income statement approach does this describe?

single-step

The two approaches most commonly used to prepare an income statement are

single-step and multiple-step

Nonoperating items that are not expected to continue into the future are considered a ______ component of earnings and should be __________ when forecasting future performance.

temporary; excluded

Net income using the multiple-step income statement presentation is ____ net income using the single-step income statement presentation.

the same as

Gains and losses from the sale of investments can affect earnings quality because

they are often nonrecurring

True or false: If a component of an entity is considered held for sale at the end of a quarter, the income effects of that component must be separately reported as discontinued operations.

true

True or false: If a causal relationship can be established, expenses are reported in the same period that the related revenue is recognized.

true When a causal relationship exists, expenses should be matched with the related revenue.

Carol Corp. has a component that is a discontinued operation. The revenues and expenses of the component were $100,000 and $160,000, respectively. The component was sold with a resulting gain of $200,000. The tax rate is 40%. What is the total gain or loss on discontinued operations (net-of-tax effects) that will be reported on the income statement?

84,000 gain The loss from operating the component is $100,000 - 160,000 = -$60,000. The loss from operating the discontinued operation is then netted against the gain on sale of the discontinued operations -$60,000 + $200,000 = $140,000. The gain net of tax is $140,000 x (1 - 0.40) = $84,000.

What is one difference in the reporting requirements between most changes in accounting estimates and a change in depreciation method?

A change in depreciation method requires a disclosure of why the new method is preferred, and the others do not.