Financial Accounting Exam 2 - TF/MC

Which of the following items will not appear in the retained earnings statement?

Discontinued operations

Which of the following items would be reported net of tax on the face of the income statement?

Discontinued operations

Norton, Inc. purchased equipment in 2019 at a cost of $900,000. Two years later it became apparent to Norton, Inc. that this equipment had suffered an impairment of value. In early 2021, the book value of the asset is $585,000 and it is estimated that the fair value is now only $360,000. The entry to record the impairment is

Dr. Loss on Impairment of Equipment 225,000 Cr. Accumulated Depreciation—Equipment 225,000

Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business?

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

T/F An accelerated depreciation method is appropriate when the asset's economic usefulness is the same each year.

False

T/F An impairment loss is the amount by which the carrying amount of the asset exceeds the sum of the expected future net cash flows from the use of that asset.

False

T/F Comprehensive income includes all changes in equity during a period except those resulting from distributions to owners.

False

T/F Depreciation is based on the decline in the fair market value of the asset.

False

T/F Discontinued operations, and unusual gains and losses are both reported net of tax in the income statement.

False

T/F The three factors involved in the depreciation process are the depreciation base, the useful life, and the risk of obsolescence.

False

T/F The units-of-production approach to depreciation is appropriate when depreciation is a function of time instead of activity.

False

A change in accounting principle requires that the cumulative effect of the change for prior periods be shown as an adjustment to:

beginning retained earnings of the earliest period presented.

On January 3, 2019, Salazar Co. purchased machinery. The machinery has an estimated useful life of eight years and an estimated salvage value of $120,000. The depreciation applicable to this machinery was $260,000 for 2021, computed by the sum-of-the-years'-digits method. The acquisition cost of the machinery was

$1,680,000 ((AC - $120,000) × 6/36 = $260.000) (AC = $1,680,000)

On January 1, 2014, Forrest Company purchased equipment at a cost of $390,000. The equipment was estimated to have a salvage value of $12,000 and it is being depreciated over eight years under the sum-of-the-years'-digits method. What should be the charge for depreciation of this equipment for the year ended December 31, 2021?

$10,500 (($390,000 - $12,000) × 1/36 = $10,500)

Falcon Company purchased a depreciable asset for $175,000. The estimated salvage value is $14,000, and the estimated useful life is 10 years. The straight-line method will be used for depreciation. What is the depreciation base of this asset?

$161,000 ($175,000 - $14,000 = $161,000)

Moorman Corporation reports the following information: Correction of understatement of depreciation expense in prior years, net of tax $1,290,000 Dividends declared 960,000 Net income 3,000,000 Retained earnings, 1/1/20, as reported 6,000,000 Moorman should report retained earnings, 12/31/20, at

$2,025,000 ($4,800,000 - $2,400,000 - $600,000 + $225,000 = $2,025,000)

On January 1, 2020, Garden Company purchased a new machine for $4,200,000. The new machine has an estimated useful life of nine years and the salvage value was estimated to be $150,000. Depreciation was computed using the sum-of-the-years'- digits method. What amount should be shown in Garden's balance sheet at December 31, 2021, net of accumulated depreciation, for this machine?

$2,670,000 ($4,200,000 - [($4,200,000 - $150,000) × (9/45 + 8/45)] = $2,670,000)

Arreaga Corp. has a tax rate of 20 percent and income before non-operating items of $1,392,000. It also has the following items (gross amounts). Unusual loss $222,000 Discontinued operations loss 606,000 Gain on disposal of equipment 48,000 Change in accounting principle increasing prior year's income 318,000 What is the amount of income tax expense Arreaga would report on its income statement?

$243,600

On July 1, 2020, Mendes Corporation purchased factory equipment for $300,000. Salvage value was estimated to be $8,000. The equipment will be depreciated over five years using the double-declining balance method. Counting the year of acquisition as one-half year, Mendes should record depreciation expense for 2021 on this equipment of

$96,000 ([$300,000 - ($300,000 × 0.2)] × 0.4 = $96,000)

Orton Corporation, which has a calendar year accounting period, purchased a new machine for $80,000 on April 1, 2016. At that time Orton expected to use the machine for nine years and then sell it for $8,000. The machine was sold for $44,000 on Sept. 30, 2021. Assuming straight-line depreciation, no depreciation in the year of acquisition, and a full year of depreciation in the year of retirement, the gain to be recognized at the time of sale would be

$4,000.00 ($80,000 - [($80,000 - $8,000) ÷ 9 × 5] = $40,000 (BV) $44,000 - $40,000 = $4,000 (gain))

Moorman Corp reports the following information: Correction of understatement of depreciation expense in prior years, net of tax $1,290,000 Dividends declared 960,000 Net income 3,000,000 Retained earnings, 1/1/20, as reported 6,000,000 Moorman should report retained earnings, 1/1/20, as adjusted at

$4,710,000 ($6,000,000 - $1,290,000 = $4,710,000)

Madsen Company reported the following information for 2020: Sales revenue Cost of goods sold Operating expenses Unrealized holding gain on available-for-sale debt securities Cash dividends received on the securities For 2020, Madsen would report other comprehensive income of

$420,000 (Amounts were not given to make a calculation.)

On July 1, 2020, Nowton Co. purchased machinery for $240,000. Salvage value was estimated to be $10,000. The machinery will be depreciated over ten years using the double-declining balance method. If depreciation is computed on the basis of the nearest full month, Nowton should record depreciation expense for 2021 on this machinery of

$43,200 ([$240,000 - ($240,000 × 0.2 × 0.50)] × 0.2 = $43,200)

For the year ended December 31, 2020, Transformers Inc. reported the following: Net income $300,000 Preferred dividends declared 50,000 Common dividend declared 10,000 Unrealized holding loss, net of tax 5,000 Retained earnings, beginning balance 400,000 Common stock 200,000 Accumulated Other Comprehensive Income, Beginning Balance 25,000 What would Transformers report as the ending balance of Retained Earnings?

$640,000 ($400,000 + $300,000 - $50,000 - $10,000 = $640,000)

Slotkin Products purchased a machine for $65,000 on July 1, 2020. The company intends to depreciate it over 8 years using the double-declining balance method. Salvage value is $5,000. Depreciation for 2020 is

$8,125 (($65,000 - 0) × 0.25 × 6/12 = $8,125)

Chase Corp. had the following unusual transactions during 2020: A $450,000 gain from selling the only investment Chase has ever owned. A $630,000 gain on the sale of equipment. A $210,000 loss on the write-down of inventories. In its 2020 income statement, what amount should Chase report as total unusual net gains?

$870,000 ($450,000 + $630,000 - $210,000 = $870,000)

At Ruth Company, events and transactions during 2020 included the following. The tax rate for all items is 20%. 1. Depreciation for 2018 was found to be understated by $120,000. 2. A strike by the employees of a supplier resulted in a loss of $100,000. 3. The inventory at December 31, 2018 was overstated by $160,000. 4. A disposal of a component of the business resulted in a $2,000,000 loss. The effect of these events and transactions on 2020 net income net of tax would be

($1,680,000) (($100,000 x 0.80) + (2,000,000 x 0.80) = $1,680,000)

At Ruth Company, events and transactions during 2020 included the following. The tax rate for all items is 20%. 1. Depreciation for 2018 was found to be understated by $150,000. 2. A strike by the employees of a supplier resulted in a loss of $125,000. 3. The inventory of December 31, 2018 was overstated by $200,000. The effect of these events and transactions on 2020 income from consulting operations net of tax would be

($100,000) ($125,000 - ($125,000 x 0.20) = $100,000)

Which of the following is true of depreciation accounting? a. It is not a matter of valuation. b. It is part of the matching of revenues and expenses. c. It is the process of cost allocation. d. All of these answers are correct.

All of these answers are correct.

McDonald Company acquired machinery on January 1, 2015 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2020, McDonald estimated that the remaining life of this machinery was six years with no salvage value. How should this change be accounted for by McDonald?

By setting future annual depreciation equal to one-sixth of the book value on 1-Jan-20

Which of the following is true of accounting for changes in estimates?

Changes in estimates are not carried back to adjust prior years.

Which of the following is not an acceptable way of displaying the components of other comprehensive income?

Combined statement of retained earnings

Which of the following disclosures is not required in the financial statements regarding depreciation?

Details demonstrating how depreciation was calculated.

Which one of the following types of losses is excluded from the determination of net income in income statements?

Material losses resulting from correction of errors related to prior periods.

A correction of an error in prior periods' income will be reported In the Income Statement -- Net of tax

No -- Yes

Which of the following principles best describes the conceptual rationale for the methods of matching depreciation expense with revenues?

Systematic and rational allocation

A change in estimate should

be handled in current and future periods.

T/F A company that reports a discontinued operation item must report per share amounts for this item.

True

T/F Changes in estimates are handled prospectively by dividing the asset's book value less any salvage value by the remaining estimated life.

True

T/F Companies often restrict retained earnings to comply with contractual requirements or current necessity.

True

T/F Companies report the results of operations of a component of a business that will be disposed of separately from consulting operations.

True

T/F Depreciation is a means of cost allocation, not a matter of valuation.

True

T/F Impaired assets held for disposal should be reported at the lower of cost or net realizable value.

True

T/F Noncontrolling interest is the portion of equity (net assets) interest in a subsidiary not attributable to the parent company.

True

T/F Prior period adjustments can either be added or subtracted in the Retained Earnings Statement.

True

T/F The components of other comprehensive income can be reported in the statement of comprehensive income.

True

T/F The declining-balance method does not deduct the salvage value in computing the depreciation base.

True

T/F The first step in determining whether an impairment has occurred is to estimate the future net cash flows expected from the use of that asset and its eventual disposition.

True

T/F The major objection to the straight-line method is that it assumes the asset's economic usefulness and maintenance repair expense are the same each year.

True

T/F The phrase "income from continuing operations" is used only when gains or losses on discontinued operations occur.

True

Which of the following is included in comprehensive income?

Unrealized gains on available-for-sale debt securities.

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 prior period adjustment.

Economic factors that shorten the service life of an asset include: a. obsolescence. b. supersession. c. inadequacy. d. all of these answers are correct.

all of these answers are correct

Use of the double-declining method a. results in a decreasing charge to depreciation expense each year. b. requires that salvage value is not deducted in computing the depreciation base. c. requires that the book value not be reduced below salvage value. d. all of these answers are correct. e. units-of-production method.

all of these answers are correct

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

an amount after continuing operations.

Income taxes are allocated to each of the following except

balance sheet adjustments.

The occurrence which most likely would have no effect on 2020 net income (assuming that all amounts involved are material) is the

collection in 2020 of a receivable from a customer whose account was written off in 2019 by a charge to the allowance account.

The occurrence that most likely would have no effect on 2020 net income is the

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

Lamar Printing Company determines that a printing press used in its operations has suffered a permanent impairment in value because of technological changes. An entry to record the impairment should

include a credit to the equipment accumulated depreciation account.

Comprehensive income includes all of the following except

investments by owners.

Use of the sum-of-the-years'-digits method

means the book value should not be reduced below salvage value.

Each of the following are physical factors affecting depreciation except

obsolescence

The book value of a plant asset is

the asset's acquisition cost less the total related depreciation recorded to date.

The term "depreciable base," or "depreciation base," as it is used in accounting, refers to

the total amount to be charged (debited) to expense over an asset's useful life.

Gains and losses identified as other comprehensive income have the same status as traditional gains and losses under

the two statement approach.

Usually, companies compute depletion for accounting purposes using a

units-of-production method.