Interim Financial Reporting
Wilson Corp. experienced a $50,000 decline in the market value of its inventory in the first quarter of its fiscal year. Wilson had expected this decline to reverse in the third quarter, and in fact, the third quarter recovery exceeded the previous decline by $10,000. Wilson's inventory did not experience any other declines in market value during the fiscal year. What amounts of loss and/or gain should Wilson report in its interim financial statements for the first and third quarters? First quarter-Third quarter $0-$0 $0-$10,000 gain $50,000 loss-$50,000 gain $50,000 loss-$60,000 gain
$0-$0 Temporary declines in inventory market values are not recognized.
On June 30, 20X5, Mill Corp. incurred a $100,000 net loss from disposal of a business segment. Also, on June 30, 20X5, Mill paid $40,000 for property taxes assessed for the calendar year 20X5. What amount of the foregoing items should be included in the determination of Mill's net income or loss for the six-month interim period ended June 30, 20X5? $140,000 $120,000 $90,000 $70,000
$120,000 The property tax is allocated to interim periods based on time expired. The $40,000 tax relates to the entire year of 20X5. With half of the year elapsed at June 30, half of the tax should be recognized in expense. The sum of the amounts to be recognized at June 30 is $120,000 ($100,000 + $20,000).
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 expects that its effective annual income tax rate for the current year will be 25%. The statutory tax rate for the current year is 35%. In its first quarter interim income statement, what amount of income tax expense should Worth report? $15,000 $25,000 $30,000 $35,000
$25,000 The year-to-date income is multiplied by the effective annual income tax rate of the current year (25%) to calculate income tax expense on the interim income statement. Worth should report income tax expense of $25,000 ($100,000 × 25%).
An inventory loss from a permanent market decline of $360,000 occurred in May Year 1. Cox Co. appropriately recorded this loss in May Year 1 after its March 31, Year 1, quarterly report was issued. What amount of inventory loss should be reported in Cox's quarterly income statement for the three months ended June 30, Year 1? $0 $90,000 $180,000 $360,000
$360,000 Unless temporary, declines in the market value of inventory should be recognized in full in the interim period in which they occur. They should not be deferred to a later period. In this way, the quarterly financial statement reports a significant event for that quarter.
During the first quarter of year 2, Tech Co. had income before taxes of $200,000, and its effective income tax rate was 15%. Tech's year 1 effective annual income tax rate was 30%, but Tech expects its year 2 effective annual income tax rate to be 25%. In its first quarter interim income statement, what amount of income tax expense should Tech report? $0 $30,000 $50,000 $60,000
$50,000 The tax expense is $50,000 ($200,000 × 25%). The tax provision for an interim period is the tax for the year to date (estimated effective rate for the year times year-to-date income) less the total tax provisions reported for previous interim periods
Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 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 rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter? $3,500 $5,000 $6,000 $7,500
$6,000 For the second quarter, income tax expense therefore is computed as ($10,000 + $20,000)(.25) − $1,500 = $6,000. The tax expense for the second quarter is calculated as $6,000 [($30,000 × 25%) - $1,500]
Harper Co. incurred an apparently permanent inventory loss from market decline of $840,000 during June year 1. What amount of the inventory loss should be recognized in Harper's quarterly income statement for the 3 months ended June 30, year 1? $210,000 $280,000 $420,000 $840,000
$840,000 ASC Topic 270 states that provisions for write-downs of inventory to market should be made at interim dates on the same basis as is used at annual reporting dates. Therefore, the full $840,000 loss should be recognized when incurred in the quarter ending 6/30/Y1. Note that if this loss had been considered temporary in nature, it need not be recognized at an interim date (ASC Topic 270).
Kell Corp. reported $111,000 of net income for the quarter ended September 30, 20X5. Additional information for the quarter: A $60,000 gain from discontinued operation, realized on April 30, 20X5, was allocated equally to the second, third, and fourth quarters of 20X5. A $16,000 cumulative-effect adjustment (dr.) resulting from a change in inventory valuation method was recognized on August 2, 20X5. The new method was used for the quarter ended September 30. The $111,000 earnings amount does not reflect the cumulative effect. In addition, Kell paid $48,000 on February 1, 20X5, for 20X5 calendar-year property taxes. Of this amount, $12,000 was allocated to the third quarter of 20X5. For the quarter ended September 30, 20X5, Kell should report net income of: $91,000 $75,000 $111,000 $95,000
$91,000 Third quarter net income $111,000 − $60,000/3 = $91,000 The firm's treatment of the property tax cost is correct. The cost relates to the entire year. Therefore, each quarter should bear 1/4 of the cost.
On January 16, Tree Co. paid $60,000 in property taxes on its factory for the current calendar year. On April 2, Tree paid $240,000 for unanticipated major repairs to its factory equipment. The repairs will benefit operations for the remainder of the calendar year. What amount of these expenses should Tree include in its third quarter interim financial statements for the three months ended September 30? $0 $15,000 $75,000 $95,000
$95,000 The property taxes benefit all four quarters; therefore, $15,000 ($60,000/4) is recognized each quarter. The repair benefits three quarters; therefore, $80,000 ($240,000/3) is recognized each quarter. The sum of the two amounts is $95,000 to be recognized in quarter three.
For interim financial reporting, a company's income tax provision for the second quarter of 20X4 should be determined using the: Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the first quarter of 20X4. Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the second quarter of 20X4. Effective tax rate expected to be applicable for the second quarter of 20X4. Statutory tax rate for 20X4.
Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the second quarter of 20X4. To ensure the most current information, an estimate of the applicable tax rate for the entire year is made at the end of each quarter (the tax rate estimate includes federal, local, state and foreign taxes)
Which of the following describes IFRS's requirements regarding interim financial statements? Interim financial statements are required. If interim financial statements are presented, four basic financial statements are required. If interim financial statements are presented, at least a balance sheet and profit and loss are required. Interim financial statements must be presented with the most recent annual financial statements.
If interim financial statements are presented, four basic financial statements are required. IFRS has no requirement for the presentation of interim financial statements, but if they are presented, four basic financial statements are required.
Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year, the decline had not reversed. When should the loss be reported in Petal's interim income statements? Ratably over the second, third, and fourth quarters. Ratably over the third and fourth quarters. In the second quarter only. In the fourth quarter only.
In the fourth quarter only. Temporary declines in inventory value are not recognized in the interim period in which they occur. This decline was expected to be temporary, i.e. it was expected to reverse. Therefore, it is not recorded until the fourth quarter, at which time the normal annual LCM valuation is applied because the decline had not reversed. Had the decline in the second quarter been deemed permanent, it would have been recognized in the second quarter.
How are discontinued operations that occur at midyear initially reported? Disclosed only in the notes to the year-end financial statements. Included in net income and disclosed in the notes to the year-end financial statements. Included in net income and disclosed in the notes to interim financial statements. Disclosed only in the notes to interim financial statements.
Included in net income and disclosed in the notes to interim financial statements.
On March 15, 20X4, Krol Co. paid property taxes of $90,000 on its office building for the calendar year 20X4. On April 1, 20X4, Krol paid $150,000 for unanticipated repairs to its office equipment. The repairs will benefit operations for the remainder of 20X4. What is the total amount of these expenses that Krol should include in its quarterly income statement for the three months ended June 30, 20X4? $172,500 $97,500 $72,500 $37,500
One-fourth of the property taxes should be recognized for the second quarter income statement: $22,500 = $90,000/4. Therefore, 1/3 of the cost, or $50,000, should be reported in the income statement for the second quarter. Thus, the total expense to be recognized in the second quarter is $72,500 ($22,500 + $50,000).
Vilo Corp. has estimated that total depreciation expense for the year ending December 31, year 1, will amount to $60,000, and that year 1 year-end bonuses to employees will total $120,000. In Vilo's interim income statement for the six months ended June 30, year 1, what is the total amount of expense relating to these two items that should be reported? $0 $ 30,000 $ 90,000 $180,000
The expense for the six month interim statement should be ($60,000 + $120,000) ÷ 2 = $90,000. $ 90,000 Both yearly bonuses and the use of an asset (depreciation expense) benefit the entire year.
In general, an enterprise preparing interim financial statements should Defer recognition of seasonal revenue. Disregard permanent decreases in the market value of its inventory. Allocate revenues and expenses evenly over the quarters, regardless of when they actually occurred. Use the same accounting principles followed in preparing its latest annual financial statements.
Use the same accounting principles followed in preparing its latest annual financial statements.
For external reporting purposes, it is appropriate to use estimated gross profit rates to determine the cost of goods sold for Interimfinancial reporting Year-endfinancial reporting Yes-Yes Yes-No No-Yes No-No
Yes-No Per ASC Topic 270, determining the cost of goods sold by using estimated gross profit rates is only appropriate for interim periods and is not appropriate for year-end external reporting. For year-end reporting, the actual cost of goods sold must be determined by using the inventory flow method which most clearly reflects income.
For interim financial reporting, which of the following may be accrued or deferred to provide an appropriate cost in each period? Interest-Rent Yes-No Yes-Yes No-Yes No-No
Yes-Yes Per ASC Topic 270, costs and expenses other than product costs (i.e., interest and rent) should be charged to income as incurred or allocated among interim periods if they benefit more than one interim period. Therefore, interest and rent expenses may be accrued or deferred.
A planned volume variance in the first quarter, which is expected to be absorbed by the end of the fiscal period, ordinarily should be deferred at the end of the first quarter if it is: Favorable-Unfavorable Yes-No No-Yes No-No Yes-Yes
Yes-Yes Purchase price variances or volume or capacity cost variances that are planned and expected to be absorbed by the end of the annual period, should ordinarily be deferred at interim reporting dates."
For 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. This effective tax rate should reflect anticipated Capital gains-Foreign tax rates No-No No-Yes Yes-No Yes-Yes
Yes-Yes ASC 270 specifies that foreign tax rates and capital gains should be considered in estimating the effective tax rate for interim reporting.
an inventory loss from a market price decline 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 the market price recovery. -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. -Not be affected in the first quarter and increase in the third quarter by the amount of the market price recovery that exceeded the amount of the market price decline. -Not be affected in either the first quarter or the third quarter.
-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. Per ASC Topic 270, a decline in inventory market price that is expected to be other than temporary should be recognized in the period of decline. A subsequent recovery of market value should be recognized as a cost recovery in the period of increase, but never above original cost.
A corporation issues quarterly interim financial statements and uses the lower of cost or market method to value its inventory in its annual financial statements. Which of the following statements is correct regarding how the corporation should value its inventory in its interim financial statements? -Inventory losses generally should be recognized in the interim statements. -Temporary market declines should be recognized in the interim statements. -Only the cost method of valuation should be used. -Gains from valuations in previous interim periods should be fully recognized.
-Inventory losses generally should be recognized in the interim statements. ASC Topic 270 provides that inventory losses from market declines should be recognized in the interim statements when the decline in value occurs. A temporary market decline need not be recognized in the financial statements since no loss is expected to be incurred in the fiscal year.
Which of the following is an inherent difficulty in the determination of the results of operations on an interim basis? Cost of sales reflects only the amount of product expense allocable to revenue recognized as of the interim date. Depreciation on an interim basis is a partial estimate of the actual annual amount. Costs expensed in one interim period may benefit other periods. Revenues from long-term construction contracts accounted for by the percentage of completion method are based on annual completion and interim estimates may be incorrect.
Costs expensed in one interim period may benefit other periods. The most serious problem specified is dealing with costs that are expensed in one interim period but may provide benefits to other interim periods. Per ASC Topic 270, such expenses may be allocated to the interim periods benefited.
