ACC618 EXAM 2 (CH.5,7,8)

Which of the following is not necessarily true for an operating segment? A. The chief operating decision maker regularly reviews an operating segment to assess performance and make resource allocation decisions. B. Discrete financial information generated by the internal accounting system is available for an operating segment. C. An operating segment regularly generates a profit from its normal ongoing operations. D. An operating segment earns revenues and incurs expenses.

C. An operating segment regularly generates a profit from its normal ongoing operations.

For interim financial reporting, a gain from the sale of land occurring in the second quarter should be A. Disclosed by footnote only in the second quarter. B. Recognized ratably over all four quarters, with the first quarter being restated. C. Recognized in the second quarter. D. Recognized ratably over the last three quarters.

C. Recognized in the second quarter.

Plume Company has a paper products operating segment. Which of the following items does it not have to report for this segment? A. Interest income. B. Interest expense. C. Research and development expense. D. Depreciation and amortization expense.

C. Research and development expense.

For a U.S.-based company, which of the following would be an acceptable presentation of countries for providing information by geographic area? A. Europe, Asia, Africa B. United States, Mexico, Japan, Spain, All Other Countries C. Canada, Germany, France, All Other Countries D. United States, Canada and Mexico, Germany, Italy

B. United States, Mexico, Japan, Spain, All Other Countries

In determining whether a particular operating segment is of significant size to warrant disclosure, which of the following is true? A. Four tests are applied, and all four must be met. B. Three tests are applied, and only one must be met. C. Three tests are applied, and all three must be met. D. Four tests are applied, and only one must be met.

B. Three tests are applied, and only one must be met.

In a father-son-grandson business combination, which of the following is true? A. The father company always must have its total accrual-based income computed first. B. The computation of a company's accrual-based net income has no effect on the accrual-based net income of other companies within a business combination. C. A father-son-grandson configuration does not require consolidation unless one company owns shares in all of the other companies. D. All companies solely in subsidiary positions must have their accrual-based net income computed first within the consolidation process.

D. All companies solely in subsidiary positions must have their accrual-based net income computed first within the consolidation process.

know how revenues and inventory and cost of sales should be presented at interim reporting

- companies should recognize revenues in interim periods the same way they recognize revenues on an annual basis. - interim period accounting for inventory and cost of goods sold requires several modifications to procedures used on an annual basis. The modifications relate to (1) LIFO liquidation and (2) application of the lower-of-cost-or-net realizable value, and (3) standard costing.

Evanston Co. owned 60% of Montgomery Corp. Montgomery owned 75% of Noir Inc., and Noir owned 15% of Montgomery. This pattern of ownership would be called... A. Mutual ownership. B. Direct control. C. Indirect control. D. An affiliated group. E. A connecting affiliation.

A. Mutual ownership.

Be familiar the criteria management looks at to consider whether operations would fall into the same operating segment

Management must consider these aggregation criteria to determine whether to combine operating segments: - the nature of the products or services provided by each operating segment - the nature of the production process - the type or class of customer - the distribution methods - the nature of the regulatory environment

Be familiar with the three tests of reportable segments and how they are applied

A segment is considered reportable if it satisfies only one of these tests: 1. revenue test - its revenues are 10% or more of the combined revenue of all reported operating segments 2. profit or loss test - its profit or loss is 10% or more of the combined profit (or combined loss if larger) of all segments reporting a profit. 3. asset test - its assets are 10% or more of the combined assets of all operating segments.

On January 1, Balanger Company buys 10 percent of the outstanding shares of its parent, Altgeld, Inc. Although the total book and fair values of Altgeld's net assets equaled $3.2 million, the price paid for these shares was $340,000. During the year, Altgeld reported $415,000 of separate operating income (no subsidiary income was included) and declared dividends of $35,000. How are the shares of the parent owned by the subsidiary reported at December 31? A. Consolidated stockholders' equity is reduced by $340,000. B. An investment balance of $358,000 is eliminated for consolidation purposes. C. Consolidated stockholders' equity is reduced by $378,000. D. An investment balance of $378,000 is eliminated for consolidation purposes.

A. Consolidated stockholders' equity is reduced by $340,000. While preparing consolidated FS, the stockholders' equity does not include the amount paid by the subsidiary as it includes payments received by outside parties only.

James corporation owns 80 percent of Carl Corporation's Common Stock. During October, Carl sold merchandise to James for $250,000. At December 31, 40 percent of this merchandise remains in James's inventory. Gross profit percentages were 20 percent for James and 30 percent for Carl. The amount of unrealized intra-entity profit in ending inventory at December 31 that should be eliminated in the consolidation process is... A. $24,000 B. $30,000 C. $20,000 D. $75,000

B. $30,000 Explanation: here in this question, the subsidiary is transferring inventory to the parent company at the gross profit rate of 30% and the inventory remaining at the year end with the parent is 40% of the inventory transferred. Therefore ending inventory with the parent = 40% * 250,000 = $100,000 Amount of gross profit component in the ending inventory = 30% * 100,000 = $30,000.

Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned 35% of Tayle. What is this pattern of ownership called? A. Pyramid ownership. B. A connecting affiliation. C. Mutual ownership. D. An indirect affiliation. E. An affiliated group.

B. A connecting affiliation.

What information about revenues by geographic area should a company present? A. No disclosure of revenues from foreign operations need be reported. B. Disclose separately the amount of sales to unaffiliated customers but not the amount of intra-entity sales between geographic areas. C. Disclose separately the amount of sales to unaffiliated customers and the amount of intra-entity sales between geographic areas. D. Disclose as a combined amount sales to unaffiliated customers and intra-entity sales between geographic areas.

B. Disclose separately the amount of sales to unaffiliated customers but not the amount of intra-entity sales between geographic areas.

Which of the following does U.S. GAAP not consider to be an objective of segment reporting? A. It helps users better understand the enterprise's performance. B. It helps users make comparisons between a segment of one enterprise and a similar segment of another enterprise. C. It helps users better assess the enterprise's prospects for future cash flows. D. It helps users make more informed judgments about the enterprise as a whole.

B. It helps users make comparisons between a segment of one enterprise and a similar segment of another enterprise.

How should material seasonal variations in revenue be reflected in interim financial statements? A. No attempt should be made to reflect seasonality in interim financial statements. B. The seasonal nature should be disclosed, and the interim report should be supplemented with a report on the 12-month period ended at the interim date for both the current and preceding years. C. The seasonal nature should be disclosed, but no attempt should be made to reflect the effect of past seasonality on financial statements. D. The seasonal nature should be reflected by providing pro forma financial statements for the current interim period.

B. The seasonal nature should be disclosed, and the interim report should be supplemented with a report on the 12-month period ended at the interim date for both the current and preceding years.

Which of the following statements is true for a company that has managers responsible for product and service lines of business and managers responsible for geographic areas (matrix form of organization)? A. Under U.S. GAAP, the company must base operating segments on geographic areas. B. Under IFRS, the company must refer to the core principle of IFRS 8 to determine operating segments. C. Under IFRS, the company must base operating segments on product and service lines of business. D. Under U.S. GAAP, the company may choose to define operating segments on the basis of either products and services or geographic areas.

B. Under IFRS, the company must refer to the core principle of IFRS 8 to determine operating segments.

Niceville Company pays property taxes of $100,000 in the second quarter of the year. Which of the following statements is true with respect to the recognition of property tax expense in interim financial statements? A. Under U.S. GAAP, the company would report property tax expense of $33,333 in each of the second, third, and fourth quarters of the year. B. Under IFRS, the company would report property tax expense of $100,000 in the second quarter of the year. C. Under U.S. GAAP, the company would report property tax expense of $100,000 in the second quarter of the year. D. Under IFRS, the company would report property tax expense of $25,000 in the first quarter of the year.

B. Under IFRS, the company would report property tax expense of $100,000 in the second quarter of the year.

Paloma, Inc., owns 85 percent of Blanca Corporation. Both companies have been profitable for many years. During the current year, the parent sold merchandise to the subsidiary at a transfer price of $175,000. In recording the transfer, the parent recognized cost of goods sold of $125,000. At the end of the year, the subsidiary still held 20 percent of this merchandise in its inventory. Assume that the tax rate is 21 percent. What deferred income tax asset amount is created if a consolidated tax return were filed? A. $8,925 B. $1,785 C. $0 D. $2,100

C. $0 Recognition of this gross profit is not required on a consolidated tax return.

Paloma, Inc., owns 85 percent of Blanca Corporation. Both companies have been profitable for many years. During the current year, the parent sold merchandise to the subsidiary at a transfer price of $175,000. In recording the transfer, the parent recognized cost of goods sold of $125,000. At the end of the year, the subsidiary still held 20 percent of this merchandise in its inventory. Assume that the tax rate is 21 percent and that separate tax returns are filed. What deferred income tax asset amount is created? A. $0 B. $1,785 C. $8,925 D. $2,100

D. $2,100 total gross profit of $50,000 * 20% position still held = $10,000 intra-entity GP in inventory $10,000 * 21% tax rate = $2,100 deferred tax asset

In considering interim financial reporting, how does current U.S. GAAP require that such reporting be viewed? A. As a special type of reporting that need not follow generally accepted accounting principles B. As useful only if activity is evenly spread throughout the year, making estimates unnecessary C. As reporting for a basic accounting period D. As reporting for an integral part of an annual period

D. As reporting for an integral part of an annual period

Which of the following items must be disclosed in interim reports? A. Total assets. B. Cash flow from operating activities. C. Total liabilities. D. Gross revenues.

D. Gross revenues.

Which of the following items is required to be disclosed by geographic area? A. Capital expenditures B. Total assets C. Profit or loss D. Revenues from external customers

D. Revenues from external customers

Know what items are required to be disclosed for each operating segment

GAAP requires the following interim disclosure for each reportable operating segment: a) revenues from external customers b) intersegment revenues c) segment profit or loss d) total assets (if there has been a material change from the last annual report)

Which of the following statements concerning FASB ASC 280 is true? A. Does not require segment information to be reported in accordance with generally accepted accounting principles B. Does not require a reconciliation of segment assets to consolidated assets C. Requires geographic area information to be disclosed in interim financial statements D. Requires disclosure of a major customer's identity

A. Does not require segment information to be reported in accordance with generally accepted accounting principles

How does the amortization of tax-deductible goodwill affect the computation of a parent company's income taxes? A. It is a deductible item over a 15-year period. B. It is deductible only as impairments are recognized. C. It is a deductible expense only if the parent owns at least 80 percent of the subsidiary's voting stock. D. It is deductible only if a consolidated tax return is filed.

A. It is a deductible item over a 15-year period.

In computing the noncontrolling interest's share of consolidated net income, how should the subsidiary's net income be adjusted for intra-entity transfers? A. The subsidiary's reported net income is adjusted for the impact of upstream transfers prior to computing the noncontrolling interest's allocation. B. The subsidiary's reported net income is not adjusted for the impact of transfers prior to computing the noncontrolling interest's allocation. C. The subsidiary's reported net income is adjusted for the impact of downstream transfers prior to computing the noncontrolling interest's allocation. D. The subsidiary's reported net income is adjusted for the impact of all transfers prior to computing the noncontrolling interest's allocation.

A. The subsidiary's reported net income is adjusted for the impact of upstream transfers prior to computing the noncontrolling interest's allocation.

Which of the following is a criterion for determining whether an operating segment is separately reportable? A. Segment liabilities are 10 percent or more of consolidated liabilities. B. Segment assets are 10 percent or more of combined segment assets. C. Segment revenues from external sales are 5 percent or more of combined segment revenues from external sales. D. Segment profit or loss is 10 percent or more of consolidated net income.

B. Segment assets are 10 percent or more of combined segment assets.

Which of the following statements is not true under U.S. GAAP? A. Companies must disclose total assets, investment in equity method affiliates, and total expenditures for long-lived assets by operating segment. B. Companies that define their operating segments by product lines must provide revenue and asset information for the domestic country, for all foreign countries in total, and for each material foreign country. C. Companies must combine individual foreign countries into geographic areas to comply with the geographic area disclosure requirements. D. Operating segments can be determined by looking at a company's organization chart.

C. Companies must combine individual foreign countries into geographic areas to comply with the geographic area disclosure requirements.

Which of the following is NOT a reason for two companies to file separate tax returns? A. The parent owns 68% of the subsidiary. B. They have no intra-entity transactions. C. Intra-entity dividends are tax-free only on separate returns. D. Neither company historically has had an operating tax loss.

C. Intra-entity dividends are tax-free only on separate returns. Intra-entity dividends are only nontaxable when filing a consolidated tax return. (A) is incorrect because if the parent company owns < 80% of the subsidiary company, they must file separate tax returns. (B) is incorrect because there are intra-entity transactions even if they file separate tax returns. (D) is incorrect because operating tax loss is not a factor.

Which of the following operating segment disclosures is not required under current U.S. accounting guidelines? A. Interest expense. B. Unusual items. C. Liabilities. D. Intersegment sales.

C. Liabilities.

Which of the following is correct for two companies that want to file a consolidated tax return as an affiliated group? A. One company must hold at least 65 percent of the other company's voting stock. B. One company must hold at least 51 percent of the other company's voting stock. C. One company must hold at least 80 percent of the other company's voting stock. D. They cannot file one unless one company owns 100 percent of the other's voting stock.

C. One company must hold at least 80 percent of the other company's voting stock.

Under current U.S. accounting guidelines, which of the following items of information is a company NOT required to disclose, even if it were material in amount? A. Revenues generated from sales of its consumer products line of goods B. Revenues generated by its Japanese subsidiary C. Revenues generated from export sales D. Revenues generated from sales to Walmart

C. Revenues generated from export sales

What is the minimum number of operating segments that must be separately reported? A. At least 75 percent of the segments must be separately reported. B. Segments with at least 75 percent of revenues as measured by the revenue test. C. Segments with at least 75 percent of the revenues generated from outside parties. D. Ten.

C. Segments with at least 75 percent of the revenues generated from outside parties.

A subsidiary owns shares of its parent company. Which of the following is true concerning the treasury stock approach? A. It is one of several options to account for mutual holdings available under current accounting standards. B. The treasury stock approach eliminates these shares entirely within the consolidation process. C. The original cost of the subsidiary's investment is a reduction in consolidated stockholders' equity. D. The subsidiary accrues income on its investment by using the equity method.

C. The original cost of the subsidiary's investment is a reduction in consolidated stockholders' equity.

What is the primary reason we defer financial statement recognition of gross profits on intra-entity sales for goods that remain within the consolidated entity at year-end? A. Intra-entity sales result in gross profit overstatements regardless of amounts remaining in ending inventory. B. Revenues and COGS must be recognized for all intra-entity sales regardless of whether the sales are upstream or downstream. C. When intra-entity sales remain in inventory, control of the goods has not changed. D. Gross profits must be deferred indefinitely because sales among affiliates always remain in the consolidated group.

C. When intra-entity sales remain in inventory, control of the goods has not changed.

Which of the following items is NOT required to be reported in interim financial statements for each material operating segment? A. Segment profit or loss. B. Revenues from external customers. C. Intersegment revenues. D. Segment assets.

D. Segment assets. If there have been a material change from the last annual report, total assets, but not individual assets, for each operating segment must be disclosed.

Which of the following information items with regard to a major customer must be disclosed? A. The geographic area in which sales to the major customer are made B. The percentage of total sales derived from the major customer C. The identity of the major customer D. The operating segment making sales to the major customer

D. The operating segment making sales to the major customer Explanation: With regard to major customers, U.S. GAAP (FASB ASC 280) only requires disclosure of the total amount of revenues from each such customer and the identity of the operating segment or segments reporting the revenues.

Be aware of how changes in accounting principles are applied and reflected in the Income statement and disclosures

When an accounting change is made in other than the first interim period, information for the prechange interim periods should be reported based on retrospective application of the new accounting principle to those periods. An accounting change may be made only at the beginning of a fiscal year if retrospective application of the new accounting principle to prechange interim periods is not practicable. FASB ASC 250-10-45-5 requires: 1. The cumulative effect of the change to the new accounting principle on periods prior to those presented is reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented. 2. An offsetting adjustment, if any, is made to the opening balance of retained earnings (or other appropriate accounts) for that period. 3. Financial statements for each individual prior period are adjusted to reflect the period-specific effects of applying the new accounting principle. *must be disclosed