Accounting Intermediate Krylova Ch3-4

Which of the following statements is correct regarding deferred revenues recorded by a company that provides services to customers? A. Deferred revenue is a liability until the service has been performed. B. Deferred revenues represent revenues recognized but not yet received in cash. C. Deferred revenues result from services that have been performed but have not been billed. D. A deferred revenue on the books of one company is an accrued expense on the books of another company.

The correct answer is A. A. A deposit or other advance (a deferred revenue) is a contract liability. It does not qualify for revenue recognition until the performance obligation is satisfied by transfer of the promised good or service to a customer. B. Accrued revenues, not deferred revenues, represent revenues recognized but not yet received in cash. C. Accrued revenues, not deferred revenues, result from services that have been performed but have not yet been billed. D. A deferred revenue on the books of one company is a prepaid expense on the books of another company, not an accrued expense

A gain or loss from a transaction that is unusual in nature or infrequent in occurrence should be reported separately as a component of income A. Before results of discontinued operations. B. After income from continuing operations and before results of discontinued operations. C. Before cumulative effect of accounting changes and after results of discontinued operations. D. After results of income from continuing operations.

The correct answer is A. A. A material event or transaction that is unusual in nature, infrequent in occurrence, or both must be reported as a separate component of income from continuing operations. Such items must not be reported net of income taxes. The order of presentation in the income statement is 1. Income from continuing operations 2. Discontinued operations B. Items that are unusual in nature, infrequent in occurrence, or both are reported separately in continuing operations. C. A change in accounting principle ordinarily is applied retrospectively. Its cumulative effect on periods prior to the first period reported is reflected in the carrying amounts of the assets and liabilities and the balance of retained earnings (or other component of equity or net assets) at the beginning of that period. Thus, no caption for the cumulative effect of a change in principle is reported on the income statement. D. A gain or loss from a transaction that is unusual in nature or infrequent in occurrence should be reported separately as a component of income from continuing operations.

Fishbait Company reported the following in its Year 3 single-step income statement: Net sales revenue $350,000 Gain resulting from an earthquake (an unusual or infrequent event) 33,000 Dividend revenue 25,000 Gain on sale of machinery 4,000 Cumulative change in Year 1 and Year 2 income due to change in depreciation method (net of $450 tax effect) 1,300 Total revenue $413,300 In the income from continuing operations section of its Year 3 income statement, Fishbait should have reported total revenue of A. $412,000 B. $380,300 C. $379,000 D. $413,300

The correct answer is A. A. A single-step income statement provides one grouping for revenue items (including gains) and one for expense items. Revenue is a component of income from continuing operations. It includes items that are unusual or infrequent or both in the environment in which the entity operates. A change in depreciation method is accounted for as a change in estimate, that is, prospectively. Accordingly, it results in a change in depreciation expense in the current and future periods, not in the recognition of revenue. Thus, total revenue is $412,000 ($350,000 net sales revenue + $33,000 gain resulting from an earthquake $25,000 dividend revenue + $4,000 gain on sale of machinery). B. The amount of $380,300 equals the $379,000 reported total revenue, plus the $1,300 cumulative effect on prior periods of a change in depreciation method. C. The amount of $379,000 excludes the $33,000 gain resulting from an earthquake. D. The amount of $413,300 equals the $1,300 cumulative effect on prior periods of a change in depreciation method.

Closing entries A. Transfer the balances in all of the nominal accounts to equity. B. Must be made after the reversing entries but before the adjusting entries. C. Close out all of the accounts in the general ledger. D. Must be followed by reversing entries.

The correct answer is A. A. Closing entries transfer the balances in all the nominal accounts to the retained earnings account. This process usually involves closing amounts to the income summary account and then to retained earnings. B. Closing entries are made after adjusting entries and before reversing entries. C. Closing entries close only nominal accounts. D. Reversing entries are not required. They merely facilitate accounting for certain transactions in the next accounting period.

What is the purpose of reporting comprehensive income? A. To summarize all changes in equity from nonowner sources. B. To reconcile the difference between net income and cash flows provided from operating activities. C. To provide a consolidation of the income of the firm's segments. D. To provide information for each segment of the business.

The correct answer is A. A. Comprehensive income includes all changes in equity of a business during a period except those from investments by and distributions to owners. It includes all components of (1) net income and (2) other comprehensive income (OCI). B. A statement of cash flows (direct or indirect method) includes a reconciliation of net income to net operating cash flow. C. The income statement presents aggregated information about revenues, gains, expenses, and losses. D. Information about specific segments is presented in the notes

Which of the following is reflected, net of applicable income taxes, in a statement of income presented in accordance with generally accepted accounting principles? A. A discontinued operation. B. Unusual recurring gains. C. Nonoperating expenses. D. Operating revenues.

The correct answer is A. A. The operating results of a discontinued operation are reported in a separate component net of tax in the statement in which net income is reported. B. An item that is merely unusual or infrequent in occurrence or both, is reported, not net of tax, as a separate component of continuing operations. C. Nonoperating expenses are a normal part of carrying on business and are therefore components of income from continuing operations. Thus, they are not reported net of tax. D. Operating revenues are generally the first item on a GAAP-based income statement and therefore are not reported separately net of tax.

What is the purpose of nominal accounts? A. To provide temporary accumulations of certain account balances for a meaningful period of time. B. To facilitate accounting for small amounts. C. To correct errors as they are detected. D. To record all transactions initially

The correct answer is A. A. The primary focus of financial reporting is to account for earnings. To facilitate the calculation of earnings, nominal revenue and expense accounts are created to accumulate temporarily the components of earnings during an accounting period. At the end of the period, they are usually aggregated to determine net income. Each nominal account is reduced to a zero balance by closing it to retained earnings, a balance sheet account. B. Small amounts are recorded in real as well as nominal accounts. C. Errors are corrected wherever they are found, e.g., in real accounts, nominal accounts, ledgers, or journals. D. All transactions are initially recorded in the books of original entry called journals.

Closing entries A. Close capital accounts. B. Are made following adjusting entries. C. Involve only nominal accounts. D. Involve only real accounts.

The correct answer is B. A. Closing entries close nominal accounts, not capital accounts. B. Closing entries transfer the balances in nominal accounts to the capital or retained earnings account by closing the accounts to the income summary account and then to the capital account. Adjusting entries are performed prior to closing entries so that the balances that are transferred represent the recognition of revenues and expenses that were earned or incurred and realized or realizable during the current accounting period. C. Although closing entries close nominal accounts, they involve capital accounts. D. Closing entries involve both nominal accounts and real accounts.

An overstatement of reported earnings may result from the failure to record A. Dividends in arrears on preferred stock outstanding. B. An accrued liability. C. Amortization of premium on bonds payable. D. An accrued revenue

The correct answer is B. A. Dividends in arrears are not a liability until declared by the board of directors. Disclosure of the amount of dividends in arrears is required to be made in a note to the balance sheet. Moreover, neither declaration nor distribution of dividends affects earnings. Thus, dividends in arrears have no effect on reported earnings. B. An accrued liability is an expense that has been incurred but not paid. If an entity fails to record an accrued liability at year-end, income will be overstated in that period and understated in the next period. C. Failure to amortize a bond premium results in an increase in interest expense and an understatement of reported earnings. D. Failure to record an accrued revenue results in an understatement of revenue for the period and an understatement of reported earnings.

Dasher Co. received $24,000 on May 1 of the current year for 1 year of rent paid in advance. In the entry to record the receipt, Dasher credited a nominal account. Dasher is a calendar-year company. What is the proper adjusting entry to be made at December 31 of the current year? A. Unearned rental revenue $16,000 Rental revenue $16,000 B. Rental revenue $8,000 Unearned rental revenue $8,000 C. Unearned rental revenue $8,000 Rental revenue $8,000 D. Rental revenue $16,000 Unearned rental revenue $16,000

The correct answer is B. A. The original credit was to rental revenue, not to unearned rental revenue. B. In the current year, Dasher credited a nominal account to record the receipt. A nominal account is a temporary account that is reduced to a zero balance at the end of the accounting period. Thus, Dasher credited the $24,000 to rental revenue. The adjusting entry is made to recognize that $8,000 of the rental revenue is related to the next year. A debit to reduce rental income and a credit to unearned rental income segregate the portion that has not been earned. The calculation to determine the unearned income is as follows: The unearned revenue is for 4 months at $2,000 a month ($24,000 ÷ 12 months) and thus equals $8,000. C. Unearned rental revenue is a liability and is credited, not debited, to increase its balance. D. The amount of $16,000 is the amount of revenue earned for the period.

Which of the following statements about adjusting entries is(are) true? I. Adjusting entries are used to adjust expenses or revenues to year-end amounts. II. Adjusting entries are used to make debits equal credits. III. Adjusting entries are necessary when transactions take place over more than one accounting period. A. I only. B. I and II only. C. I and III only. D. I, II, and III.

The correct answer is C. A. Adjusting entries are used to adjust expenses or revenues to year-end amounts and are necessary for transactions taking place over several accounting periods. B. Adjusting entries are not used to make debits equal credits, but adjusting entries are necessary when transactions take place over more than one accounting period. C. Adjusting entries are made as of the balance sheet date to record the effects on periodic revenue and expense of prepayments (prepaid expenses and unearned revenues) and accruals (revenues earned but not yet received in cash and expenses incurred but not yet paid in cash). D. Adjusting entries are used to adjust expenses or revenues to year-end amounts. Moreover, adjusting entries are necessary when transactions take place over more than one accounting period. However, they are not used to make debits equal credits

A transaction that is unusual in nature or infrequent in occurrence should be reported as a(n) A. Component of income from continuing operations, net of applicable income taxes. B. Item of other comprehensive income. C. Component of income from continuing operations, but not net of applicable income taxes. D. Discontinued operations, net of applicable income tax

The correct answer is C. A. Separate components of income from continuing operations should not be reported net of applicable income taxes. B. A material event or transaction that is unusual in nature or infrequent in occurrence must be reported as a separate component of income from continuing operations. Such items must not be reported on the face of the income statement net of income taxes. C. A material event or transaction that is unusual in nature or infrequent in occurrence must be reported as a separate component of income from continuing operations. Such items must not be reported on the face of the income statement net of income taxes. D. A material event or transaction that is unusual in nature or infrequent in occurrence must be reported as a separate component of income from continuing operations. Such items must not be reported on the face of the income statement net of income taxes.

On December 31, Salo Corp.'s balance sheet accounts increased by the following amounts compared with those at the end of the prior year: Assets $178,000 Liabilities 62,000 Capital stock 125,000 Additional paid-in capital 17,000 Salo had no accumulated other comprehensive income (OCI), and the only charge to retained earnings during the year was for a dividend payment of $34,000. Net income for the year was A. $60,000 B. $34,000 C. $8,000 D. $26,000

The correct answer is C. A. The amount of $60,000 equals the dividend payment plus the excess of the sum of the increases in liabilities, capital stock, and additional paid-in capital over the increase in assets. B. The dividend payment is $34,000. C. Assets equal the sum of liabilities and equity (contributed capital, retained earnings, and accumulated other comprehensive income). To calculate net income, the first step is to add the dividend payment ($34,000) to the increase in assets ($178,000). The excess of this sum ($212,000) over the increase in liabilities ($62,000) gives the total increase in equity ($150,000). Given no accumulated OCI, the excess of this amount over the combined increases in the capital accounts ($142,000) equals the increase in retained earnings ($8,000) arising from net income. D. The amount of $26,000 is the excess of the sum of the increases in liabilities, capital stock, and additional paid-in capital over the increase in assets.

An office equipment company sold a computer to a customer for $15,000 on December 31 of the current year. The company also sold the customer a 3-year service contract for the computer for $2,500 on the same date. The company should reflect the $2,500 on its current-year financial statements as A. Income earned. B. Income receivable. C. Unearned income. D. Accrued income.

The correct answer is C. A. The revenue recognition criteria have not been met in the current year regarding the service contract; therefore, the $2,500 does not represent earned income. B. The amount in question was received in cash during the current year; therefore, it is not a receivable on the current year financial statements. C. Revenues are normally recognized when they are realized or realizable and earned. If the revenue recognition criteria are not met, amounts received in advance are treated as unearned (deferred) income. Recognition is deferred until the obligation of the entity is partly or wholly satisfied. In this case, the $2,500 service contract was sold at the time of sale of the $15,000 computer. The obligation of the entity regarding the computer was satisfied; therefore, recognition of this revenue in the current year is appropriate. However, with regard to the service contract, the entity did not fully satisfy its obligation to the customer at the time of sale. Therefore, the revenue recognition criteria were not met, and a credit to unearned income should be made. D. Accrued income relates to revenue earned in a period prior to when the related cash amounts are received. The $2,500 cash for the service contract was received prior to the period in which the revenue was earned

In performing an audit, an auditor encounters an adjusting journal entry recorded at year end that contains a debit to rental revenue and a credit to unearned rental revenue. The purpose of this journal entry is to record A. An accrued revenue. B. An unexpired cost. C. An expired cost. D. A deferred revenue.

The correct answer is D. A. An accrued revenue is reflected as a receivable. B. An unexpired cost is recorded as an asset. C. An expired cost is charged to expense. D. Revenues should be recognized when realized or realizable and earned. If rental fees are collected before the revenue is earned and a credit is made to rental revenue, an adjusting entry may be necessary at year end. The purpose of the journal entry is to adjust both rental revenue and unearned rental revenue to reflect the rental fees collected that had not been earned during this accounting period.

Dunlap Company sublet a portion of its warehouse for 5 years at an annual rental of $15,000, beginning on March 1. The tenant paid 1 year's rent in advance, which Dunlap recorded as a credit to unearned rental income. Dunlap reports on a calendar-year basis. The adjustment on December 31 of the first year should be A. No entry. B. Unearned rental income $2,500 Rental income $2,500 C. Rental income $2,500 Unearned rental income $2,500 D. Unearned rental income $12,500 Rental income $12,500

The correct answer is D. A. An adjusting entry is needed for all deferrals and accruals. B. The rental income to be recognized is for 10 months at $1,250 a month, not for 2 months. C. The debit and credit entries are switched, and the rental income to be recognized should be for 10 months, not 2 months. D. Given that the sublessor originally recorded the $15,000 received as a credit to a liability account, the adjusting entry is to debit the liability account and credit revenue for the revenue earned, which equals $1,250 a month ($12,500) for 10 months.

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? A. $500,000 and $800,000 should be included with revenues and expenses, respectively, as part of continuing operations. B. $300,000 should be reported as part of the loss on disposal of a component. C. $300,000 should be reported as an item of other comprehensive income. D. $300,000 should be included in the determination of income or loss from operations of a discontinued component.

The correct answer is D. A. Discontinued operations should not be reported as part of continuing operations. B. Discontinued operations should be presented in two categories: income or loss from operations of the discontinued component and the applicable income taxes (benefit). The loss on disposal is included in the determination of income or loss from the discontinued component. C. Income or loss from discontinued operations should be reported separately as a component of income after the results of continuing operations. Discontinued operations are not an item of other comprehensive income. D. The results of operations of a component that meets the definition of a discontinued operation and any loss on a writedown to fair value minus cost to sell, net of applicable income taxes (benefit), should be reported separately as a component of income (discontinued operations) after the results of continuing operations. These results should be reported in the period(s) when they occur. Thus, the operating results of the component from January 1 through October 15 and the loss on disposal are included in the determination of income or loss from operations of the discontinued component.

As commonly used, the term "net assets" of a business enterprise represents A. Retained earnings of a corporation. B. Current assets minus current liabilities. C. Total paid-in (contributed) capital of a corporation. D. Total assets minus total liabilities.

The correct answer is D. A. Retained earnings is the cumulative income earned by a corporation minus amounts declared as dividends. B. Current assets minus current liabilities is working capital. C. Total paid-in (contributed) capital of a corporation is the sum of all money and property received from investors. In addition to total paid-in (contributed) capital, net assets includes retained earnings and accumulated other comprehensive income. D. Net assets of a business enterprise is equal to total assets minus total liabilities. It is synonymous with the net worth of an entity as expressed in the balance sheet equation: assets - liabilities = equity.

Carlisle Co.'s income statement for the year ended December 31 reported net income of $148,200. The auditor raised questions about the following amounts that had been included in net income: Unrealized holding loss on available-for-sale securities $(10,800) Gain on early retirement of bonds payable (net of $22,000 tax effect) 44,000 Adjustment to profits of prior years for errors in depreciation (net of $7,500 tax effect) (15,000) Loss from fire (net of $14,000 tax effect) (28,000) The loss from the fire was an infrequent but not unusual occurrence in Carlisle's line of business. Carlisle's December 31 income statement should report net income of A. $130,000 B. $132,200 C. $163,200 D. $174,000

The correct answer is D. A. The amount of $130,000 improperly excludes the gain on early retirement of bonds. B. The amount of $132,200 results from subtracting the gain on early retirement of bonds and adding back the fire loss. C. The amount of $163,200 fails to adjust for improper recognition of the unrealized holding loss on the available-for-sale securities. D. The unrealized holding loss on available-for-sale securities should have been debited to other comprehensive income (an equity account), not included in net income. The gain on early retirement of bonds payable was properly included as a gain and reported in income from continuing operations. It is reported as an ordinary gain in the absence of evidence that it is unusual, infrequent, or both. The fire loss also was properly included as a loss. But it is not an ordinary item because it is infrequent. Thus, it is reported as a separate component of income from continuing operations. The correction for depreciation errors should have been reported in single-period statements as an adjustment of the opening balance of retained earnings. Thus, reported net income should have been $174,000 ($148,200 + $10,800 + $15,000)

Select the best order for the following items in income statements: 1. Income from continuing operations 2. Discontinued operations 3. Prior-period adjustments 4. Taxes on income from continuing operations 5. Dividends 6. Net income 7. Revenues 8. Expenses 9. Income from continuing operations before income tax A. 8 - 9 - 7 - 6 - 5 - 1 - 3 B. 7 - 5 - 6 - 1 - 4 C. 8 - 9 - 7 - 5 - 2 - 1 - 3 D. 7 - 8 - 9 - 4 - 1 - 2 - 6

The correct answer is D. A. The list begins with expenses, which cannot be the first item on a GAAP-based income statement. B. Although the first item (revenues) is correct, the other items are not in the right order. C. Among other things, prior-period adjustments and dividends affect retained earnings directly. They are not components of net income. D. The order of appearance in income statements of the items is 7. Revenues 8. Expenses 9. Income from continuing operations before income tax 4. Taxes on income from continuing operations 1. Income from continuing operations 2. Discontinued operations 6. Net income Prior-period adjustments (4) and dividends (6) appear only in retained earnings statements