Intermediate Gleim Quiz #3

With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure?

Common stock, preferred stock, and debt outstanding.

Ali Co. bought a machine on January 1, Year 1, for $24,000, at which time it had an estimated useful life of 8 years, with no residual value. Straight-line depreciation is used for all of Ali's depreciable assets. On January 1, Year 3, the machine's estimated useful life was determined to be only 6 years from the acquisition date. Accordingly, the appropriate accounting change was made in Year 3. The direct effects of this change were limited to the effect on depreciation and the related provision for income tax. Ali's income tax rate was 40% in all the affected years. In Ali's Year 3 financial statements, how much should be reported as the cumulative effect on prior years because of the change in the estimated useful life of the machine?

$0

On May 1, Year 1, Carty Corp. properly classified as held for sale an asset group that qualified as a component of the entity. Furthermore, the transaction met the criteria for reporting the results of operations of the component in discontinued operations. The component's operating loss was $100,000 for the period from May 1, Year 1, to the September 1, Year 1, disposal date, without regard to a $480,000 loss on disposal and a $300,000 writedown to fair value minus cost to sell of the assets to be sold. A $120,000 operating loss was incurred from January 1, Year 1, through April 30, Year 1. Before income taxes, what amount should be reported in Carty's income statement for the year ended December 31, Year 1, as the loss from discontinued operations?

$1,000,000

A company reported net income available to common stockholders of $2,000,000 for the year ended December 31, Year 2. The company had 1,500,000 shares of common stock outstanding as of January 1, Year 2, and issued 500,000 additional shares of common stock on May 1, Year 2. What amount is the company's basic earnings per share for the year ended December 31, Year 2?

$1.09

On January 2, Year 4, Raft Corp. discovered that it had incorrectly expensed a $210,000 machine purchased on January 2, Year 1. Raft estimated the machine's original useful life to be 10 years and its salvage value at $10,000. Raft uses the straight-line method of depreciation and is subject to a 30% tax rate. In its December 31, Year 4, financial statements, what amount should Raft report as a prior period adjustment?

$105,000

On January 1, Year 4, Dart, Inc., entered into an agreement to sell the assets and product line of its Jay Division, which met the criteria for classification as an operating segment. The sale was consummated on December 31, Year 4, and resulted in a gain on disposal of $400,000. The division's operations resulted in losses before income tax of $225,000 in Year 4 and $125,000 in Year 3. For both years, Dart's income tax rate is 30%, and the criteria for reporting a discontinued operation have been met. In a comparative statement of income for Year 4 and Year 3, under the caption discontinued operations, Dart should report a gain (loss) of

$122,500 $(87,500)

A company decided to sell an unprofitable major line of its business. The company can sell the entire operation for $800,000, and the buyer will assume all assets and liabilities of the operations. The tax rate is 30%. The assets and liabilities of the discontinued operation are as follows: Buildings $5,000,000 Accumulated depreciation 3,000,000 Mortgage on buildings 1,100,000 Inventory 500,000 Accounts payable 600,000 Accounts receivable 200,000 What is the after-tax net loss on the disposal of the division?

$140,000

Fact Pattern: Loire Co. has used the FIFO method since it began operations in Year 3. Loire changed to the weighted-average method for inventory measurement at the beginning of Year 6. This change was justified. In its Year 6 financial statements, Loire included comparative statements for Year 5 and Year 4. The following shows year-end inventory balances under the FIFO and weighted-average methods: Year FIFO Weighted-Average 3 $ 90,000 $108,000 4 156,000 142,000 5 166,000 150,000 What adjustment, before taxes, should Loire make retrospectively to the balance reported for retained earnings at the beginning of Year 4?

$18,000 increase.

Collins Company reported net income of $350,000 for the year. The company had 10,000 shares of $100 par value, noncumulative, 6% preferred stock and 100,000 shares of $10 par value common stock outstanding. Also, 5,000 shares of common stock were in treasury during the year. Collins declared and paid all preferred dividends as well as a $1 per share dividend on common stock. Collins Company's basic earnings per share of common stock for the year was

$2.90

On April 30, Deer Corp. committed to a plan to sell a component of the entity. This sale represents a strategic shift that has a major effect on Deer's operations and financial results. For the period January 1 through April 30, the component had revenues of $500,000 and expenses of $800,000. The assets of the component were sold on October 15 at a loss for which no tax benefit is available. In its income statement for the year ended December 31, how should Deer report the component's operations from January 1 to April 30?

$300,000 should be included in the determination of income or loss from operations of a discontinued component.

Karl Corp.'s trial balance of income statement accounts for the year ended December 31, Year 1, included the following: Debit Credit Sales $150,000 Cost of sales $ 60,000 Administrative expenses 15,000 Loss on sale of equipment 9,000 Commissions to salespersons 10,000 Interest revenue 5,000 Freight-out 3,000 Loss on disposal of Karl's major operating segment 10,000 Bad debt expense 3,000 Totals $110,000 $155,000 Other Information: Karl's income tax rate is 30%. On Karl's income statement for Year 1, income from continuing operations is

$38,500

Fuqua Steel Co. had the following financial events occur during the current year: A foreign government expropriated property held as an investment by Fuqua. This unusual event resulted in a $260,000 gain. A steel-forming operating segment suffered $255,000 in losses from hurricane damage. This unusual event was the fourth similar loss sustained in a 5-year period at that location. A material operating segment, steel transportation, was sold at a net loss of $350,000. This was Fuqua's first divestiture of one of its operating segments. Before income taxes, what amount of gain or loss should Fuqua report separately as a component of income from continuing operations?

$5,000

Karl Corp.'s trial balance of income statement accounts for the year ended December 31, Year 1, included the following: Debit Credit Sales $80,000 Cost of sales $ 60,000 Administrative expenses 15,000 Loss on sale of equipment 9,000 Commissions to salespersons 10,000 Interest revenue 5,000 Freight-out 3,000 Loss on disposal of a major operating segment 10,000 Bad debt expense 3,000 Totals $110,000 $85,000 Other Information: Karl's income tax rate is 30%. On Karl's income statement for Year 1, the loss on discontinued operations is

$7,000

During January of Year 6, Doe Corp. agreed to sell the assets and product line of its Hart division. The sale was completed on January 15, Year 7, and resulted in a gain on disposal of $900,000. Hart's operating losses were $600,000 for Year 6 and $50,000 for the period January 1 through January 15, Year 7. Disregarding income taxes and assuming that the criteria for reporting a discontinued operation are met, what amount of net gain/(loss) should be reported in Doe's comparative Year 7 and Year 6 income statements? Year 7 Year 6

$850,000 $(600,000)

How should the effect of a change in accounting estimate be accounted for?

By prospectively applying the change to current and future periods.

Volga Co. included a foreign subsidiary in its Year 6 consolidated financial statements. The subsidiary was acquired in Year 4 and was excluded from previous consolidations. The change was caused by the elimination of foreign currency controls. Including the subsidiary in the Year 6 consolidated financial statements results in an accounting change that should be reported

By retrospective application to the financial statements of all prior periods presented.

For Year 1, Pac Co. has a standard assurance-type warranty on its equipment. It estimated its 2-year equipment warranty costs based on $100 per unit sold in Year 1. Experience during Year 2 indicated that the estimate should have been based on $110 per unit. The effect of this $10 difference from the estimate is reported

In Year 2 income from continuing operations.

The effect of a change in accounting principle that is inseparable from the effect of a change in accounting estimate should be reported

In the period of change and future periods if the change affects both.

The per-share amount must be reported on the face of a public company's income statement for which of the following items?

Income from continuing operations.

When an entity changes the expected service life of a depreciable asset because new information has been obtained, how should the change be reported? By By Disclosure of Retrospective Pro Forma Effects Application on Prior Periods

No No

Which of the following should be reported as a prior-period adjustment? Change in Change from Estimated Lives of Unaccepted Principle Depreciable Assets to Accepted Principle

No Yes

A company's convertible debt securities are both a potential common stock and dilutive in determining earnings per share. What would be the effect of these securities on the calculation of basic earnings per share (BEPS) and dilutive earnings per share (DEPS)? BEPS DEPS

No effect Decrease

A change in the estimated useful life of a depreciable asset should be reported

Prospectively.

Which one of the following would most likely cause basic earnings per share to increase?

Purchasing treasury stock.

The correction of an error in the financial statements of a prior period should be reported, net of applicable income taxes, in the current

Retained earnings statement as an adjustment of the opening balance.

Cuthbert Industrials, Inc., prepares 3-year comparative financial statements. In Year 3, Cuthbert discovered an error in the previously issued financial statements for Year 1. The error affects the financial statements that were issued in Years 1 and 2. How should the company report the error?

The financial statements for Years 1 and 2 should be restated; the cumulative effect of the error on Years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of Year 3.

Envoy Co. manufactures and sells household products. Envoy experienced losses associated with its small appliance group. The small appliance group represents a major line of Envoy's business. Envoy plans to sell the small appliance group with its operations. What is the earliest point at which Envoy should report the small appliance group as a discontinued operation?

When Envoy classifies it as held for sale.

Which of the following statements is correct as it relates to changes in accounting estimates?

Whenever it is impossible to determine whether a change in accounting estimate or a change in accounting principle has occurred, the change should be considered a change in estimate.

Earnings-per-share data must be reported on the face of the income statement for Cumulative Effect Income from of a Change in Continuing Operations Accounting Principle

Yes No

When there is a change in the reporting entity, how should the change be reported in the financial statements?

aRetrospectively, including note disclosures and application to all prior period financial statements presented.