Advanced: Chapter 25 Questions

March 15 of the current year, Chen Company paid property taxes of $120,000 on its factory building for the current calendar year. On April 1, Chen made $240,000 in unanticipated repairs to its plan equipment. The repairs will benefit operations for the remainder of the calendar year. What total amount of these expenses should be included in Chen's quarterly income statement for the 3 months ended June 30?

$110,000

Napier Corp, has estimated that total depreciation expense for the year ending December 31 will amount to $120,000 and that year-end bonuses to employees will total $240,000. In Napier's interim income statement for the 6 months ended June 30, what is the total amount of expense relating to these two items that should be reported?

$180,000

Andrews Corp.'s $190,000 net income for the quarter ended September 30, Year 6, included the following after-tax items: - A $120,000 gain on disposal of a material operating segment, realized on April 30, Year 6, was allocated equally to the second, third, and fourth quarters of Year 6. - A $32,000 loss (a period-specific effect of a change in accounting principle during the quarter) was recognized on September 30, Year 6. While the cumulative effect of the change at July 1, Year 6, could be determined, it was not practicable to determine the period-specific effects of the change on first and second quarter net income of Year 6. In addition, Andrews paid $96,000 on February 1, Year 6, for Year 6 calendar-year property taxes. Of this amount, $24,000 was allocated to the third quarter of Year 6. For the quarter ended September 30, Year 6, Andrews should report net income of

$182,000 - (90,000 - [120,000/3] + 32,000)

On June 30, Tun Corp. incurred a $200,000 net loss from disposal of a component. Also on June 30, Tun paid $80,000 for property taxes assessed for the calendar year. What amount of the foregoing items should be included in the determination of Tun's net income or loss for the 6-month interim period ended June 30?

$240,000

During the first quarter of the calendar year, Worth Co. had income before taxes of $100,000, and its effective income tax rate was 15%. Worth's effective annual income tax rate for the previous year was 30%. Worth expected that its effective annual income tax rate for the current year will be 25%. The statutory rate for the current year is 35%. In its first quarter interim income statement, what amount of income tax expense should Worth report?

$25,000 (100,000 * 25%)

In October Year 3, Snow Company spent $300,000 on an advertising campaign for subscriptions to the magazine it publishes concerning preparing for the winter sports season. The only two issues appear in October and in November. The magazine is sold only on a subscription basis, and the subscriptions started in October Year 3. Assuming Snow's fiscal year ends on March 31, Year 4, what amount of expense should be included in Snow's quarterly income statement for the 3 months ended December 31, Year 3, as a result of this expenditure?

$300,000

On June 1, Year 5, the Adipose Corporation, a calendar-year company, settled a patent infringement lawsuit. The court awarded Adipose $3,000,000 in damages. Of this amount, $1,000,000 related to each of Year 3 and Year 4, and $500,000 related to each of the first 2 quarters in Year 5. The applicable tax rate id 40%. What effect does the settlement have on the net income of the second quarter of Year 5?

$300,000 (500,000 * 60%)

During the first quarter of Year 4, Tech Co. had income before taxes of $200,000, and its effective income tax rate was 15%. Tech's Year 3 effective annual income tax rate was 30%, but Tech expected its Year 4 effective annual income tax rate to be 25%. In its first quarter interim income statement, what amount of income tax expense should Tech report?

$50,000 (200,000 * 25%)

Bard C0., a calendar-year corporation, reported income before income tax expense of $10000 and income tax expense of $1,500 in its interim income statement for the first quarter of the year. Bard had income before income tax expense of $20,000 for the second quarter and an estimated effective annual tax rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter?

$6,000 [(30,000 *25%) - 1,500]

During the third quarter of Year 10, the accountant at the Laurie Company discovered that a machine purchased January 2, Year 8, for $120,000 had been erroneously charges against first quarter quarter net income in Year 8. The machine should have been depreciated at a rate of $2,000 per month. If Laurie issues interim statements, the correction of this error should include

An adjustment of $6,000 to the previously declared income before taxes of the first quarter of Year 10.

In considering interim financial reporting, how should such reporting be viewed?

As reporting for an integral part of an annual period.

Which of the following is not a required disclosure when a publicly traded company elects to issue a financial summary of interim operations?

Changes in investment policy

On September 30, Year 3, the Cantata Corporation, a calendar-year company, reached an agreement with the IRS. The company agreed to pay additional income taxes of $2,000,000 that directly related to a loss claimed in the third quarter of Year 1. In accordance with current authoritative guidance, this transaction should be recorded as a

Component of the net income reported for teh third quarter of Year 3.

A loss from a market price decline on inventory accounted for under the LIFO method 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

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.

For interim financial reporting, a company's income tax provision for the second quarter should be determined using the

Effective tax rate expected to be applicable for the full year as estimated at the end of the second quarter.

The Hoity-Toity Country Club offers membership privileges for a 3-year period under the following arrangements: 1. The applicant pays the entire $200,000 membership fee in eight quarterly installments during the first 2 years of the contract period. 2. The applicant is entitled to unlimited use of the facilities during the 3-year contract period. Based on experience, Hoity-Toity is able to reasonably estimate uncollectible receivables. It prepares quarterly financial statements. In which accounting period(s) should Hoity-Toity recognize the membership fee as revenue for financial statements reporting?

Evenly over the 12-quarter membership period.

For the 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

Foreign tax rates AND available tax planning alternatives

How are discontinued operations and material unusual or infrequently occurring items that occur at midyear intially reported?

Included in net income and disclosed in the notes to interim financial statements.

For the interim financial reporting, a gain on disposal of property occurring in the second quarter should be

Recognized in the second quarter

In the third quarter of calendar Year 6, Li Co. documented justification for a change in accounting principle. Li also determined the cumulative effects of applying the new principle at January 1, Year 3, and the period-specific effects of applying it to the current quarter and the previously reported quarterly interim periods of the current and previous 3 fiscal years. If Li makes this change in the third quarter, the cumulative effect of applying the change to periods prior to the periods presented should be

Reflected in the balance sheet at the beginning of the first period presented.

On June 15, Year 6, a court of law found the Panther Corporation, a calendar-year company, guilty of patent infringement and awarded damages of $5,000,000 to the plaintiff. Of this amount, $2,000,000 related to Year 4 and $2,000,000 to Year 5, and $500,000 related to each of the first 2 quarters of Year 6. No provision for loss had been recorded previously. If the applicable tax rate is 40%, this event should result in a

Restatement of the previously reported net income for the first quarter of Year 6 to include a charge of $2,700,000 (4,500,000 - 1,800,000).

How should material seasonal variations in revenue be reflected in interim financial statements?

The seasonal nature should be disclosed. Revenue information for 12-month periods ended at the interim date may be disclosed.

The computation of a company's third quarter provision for income taxes should be based upon "ordinary" income (loss)

To date at an expected annual effective income tax rate, minus prior quarters' provisions

When a standard cost system of accounting is used to determine costs for measurement of inventory in interim financial statements,

Unplanned variances should be recognized in the interim period in which they are incurred.

Which of the following reporting practices is permissable for interim financial reporting?

Use of the gross profit method for interim inventory pricing.