2008 financial released MC questions wit

This company’s current assets include cash, accounts receivable and inventory, so total current assets is: Choice "b" is incorrect.. This answer incorrectly excludes inventory from curre

Following are multiple choice questions recently released by the AICPA These questions were released by the AICPA with letter answers only Our editorial board has provided the accompanying explanations

Please note that the AICPA generally releases questions that it does NOT intend to use again These questions and content may or may not be representative of questions you may see on any upcoming exams

1

According to the FASB conceptual framework, certain assets are reported in financial statements at the amount of cash or its equivalent that would have to be paid if the same or equivalent assets were acquired currently What is the name of the reporting concept?

3

Which of the following items is not classified as "other comprehensive income?"

a Extraordinary gains from extinguishment of debt

b Foreign currency translation adjustments

c Minimum pension liability equity adjustment for a defined-benefit pension plan

d Unrealized gains for the year on available-for-sale marketable securities

ANSWER:

Choice "a" is correct Extraordinary gains from extinguishment of debt are a component of net income, not a component of other comprehensive income Comprehensive income is the sum of net income plus other comprehensive income Other comprehensive income include changes in the funded status of a pension plan, unrealized gains and losses on available-for-sale securities, foreign currency items and the effective portion of cash flow hedges

Choice "b" is incorrect Foreign currency translation adjustments are a component of other

comprehensive income

Choice "c" is incorrect Before SFAS No 158, the minimum pension liability adjustment was a component

of other comprehensive income SFAS No 158 eliminated the need for the minimum pension liability adjustment Under SFAS No 158, changes in the funded status of a pension plan due to net pension gains/losses and prior service costs are recorded as components of other comprehensive income

Choice "d" is incorrect Unrealized gains (and losses) on available-for-sale securities are included in other comprehensive income

4

A company's year-end balance sheet is shown below:

Liabilities and

Accounts receivable 350,000 Long-term liabilities 600,000

Property, plant and equipment (net) 2,000,000 Retained earnings 1,150,000

Choice "a" is correct The current ratio is equal to current assets divided by current liabilities This

company’s current assets include cash, accounts receivable and inventory, so total current assets is:

Choice "b" is incorrect This answer incorrectly excludes inventory from current assets,

Choice "c" is incorrect This answer incorrectly includes retained earnings in current liabilities

Choice "d" is incorrect This answer incorrectly excludes accounts receivable and inventory from current

assets

Choice "c" is incorrect This answer incorrectly uses the January 1, year 1 accounts receivable balance

of $120,000, rather than the average accounts receivable balance of $110,000

Choice "d" is incorrect This answer incorrectly uses the December 31, year 1 inventory balance of

$160,000, rather than the average accounts receivable balance of $110,000

Choice "b" is incorrect Under all LIFO methods, the last costs inventoried are the first costs transferred

to cost of goods sold In a period of rising prices, LIFO results in the highest cost of goods sold and the lowest net income

Choice "c" is incorrect In a periodic inventory system, the weighted average method results in net income that is lower than FIFO net income and higher than LIFO net income

Choice "d" is incorrect In a perpetual inventory system, the moving average method results in net income that is lower than FIFO net income and higher than LIFO net income

7

At the end of the year, Ian Co determined its inventory to be $258,000 on a FIFO (first in, first out) basis The current replacement cost of this inventory was $230,000 Ian estimates that it could sell the inventory for $275,000 at a disposal cost of $14,000 If Ian's normal profit margin for its inventory was $10,000, what would be its net carrying value?

Choice "b" is correct Under the lower of cost or market, the net carrying value of inventory is the lesser

of the cost of the inventory determined using one of the inventory costing methods (LIFO, FIFO, etc.) and the market value of the inventory Market value is the middle value of replacement cost, net realizable value (the market ceiling) and net realizable value less costs to complete and dispose (the market floor) The cost of Ian Co.'s inventory is $258,000 Market value is $251,000, determined as follows:

Replacement cost = $230,000

Market ceiling = $275,000 - $14,000 = $261,000

Market floor = $261,000 – $10,000 = $251,000

The market floor of $251,000 is the middle value and therefore market value Because the market value

of $251,000 is less than the cost of $258,000, the inventory will be reported at $251,000

8

The following costs pertain to Den Co.'s purchase of inventory:

Cost of materials and labor incurred to bring product A to saleable condition 900

Insurance cost during transit of purchased goods 100

9

A manufacturing firm purchased used equipment for $135,000 The original owners estimated that the residual value of the equipment was $10,000 The carrying amount of the equipment was $120,000 when ownership transferred The new owners estimate that the expected remaining useful life of the equipment was 10 years, with a salvage value of $15,000 What amount represents the depreciable base used by the new owners?

10

Anchor Co owns 40% of Main Co.'s common stock outstanding and 75% of Main's noncumulative preferred stock outstanding Anchor exercises significant influence over Main's operations During the current period, Main declared dividends of $200,000 on its common stock and $100,000 on its

noncumulative preferred stock What amount of dividend income should Anchor report on its income statement for the current period related to its investment in Main?

Choice "b" is incorrect Anchor's 40% portion of Main's common stock dividend will be reported as a reduction of the investment in Main on the balance sheet and not on the income statement

Choice "c" is incorrect This answer is 40% of the $300,000 total common plus preferred dividends paid

by Main Anchor's 40% portion of the $200,000 common stock dividends must be reported as a reduction

in the investment in Main on the balance sheet, not on the income statement Anchor must report 75% (not 40%) of Main's preferred stock dividend on its income statement

Choice "d" is incorrect This answer is 75% of the $300,000 total common plus preferred dividends paid

by Main This answer incorrectly report 75% of Main's common stock dividend on Anchor's income statement Anchor only owns 40% of Main's common stock and must report this investment using the equity method, which requires that Anchor's 40% potion of Main's common stock dividend be reported as

a reduction in the investment in Main on the balance sheet

11

At the beginning of the current year, Hayworth Co sold equipment with a two-year service contract for a single payment of $20,000 The fair value of the equipment was $18,000 Hayworth recorded this transaction with a debit of $20,000 to cash and a credit of $20,000 to sales revenue Which of the following statements is correct regarding Hayworth's current-year financial statements?

a The financial statements are correct

b Net income will be overstated

c Total assets will be overstated

d Total liabilities will be overstated

ANSWER:

Choice "b" is correct Net income is overstated because Hayworth should not report the entire $20,000

as sales revenue during the current year Under the revenue recognition rule, revenue cannot be

recognized until services have been performed The $20,000 received by Hayworth is for a two-year service contract When the $20,000 was received, it should have been recorded by debiting cash for

$20,000 and crediting deferred revenue (a liability) for $20,000 As services are provided on the contract over the two years, deferred revenue will be debited and sales revenue will be credited

Choice "a" is incorrect The financial statements are not correct because Hayworth should have only recorded sales revenue for services on the contract performed in the current year

Choice "c" is incorrect Total assets are correctly stated as cash of $20,000 was correctly recorded when received

Choice "d" is incorrect Total liabilities are understated, not overstated, because Hayworth should have reported deferred revenue, not sales revenue, when the $20,000 was received

12

On January 1, a company issued a $50,000 face value, 8% five-year bond for $46,139 that will yield 10%

Interest is payable on June 30 and December 31 What is the bond carrying amount on December 31 of

the current year?

Choice "c" is correct The carrying amount of the bond on December 31 will be equal to the $50,000 face

amount of the bond less the unamortized bond discount, determined as follows:

Date Interest payment Interest expense Amortization Carrying amount

6/30 $2,000 $2,307 $307 $46,446 12/31 $2,000 $2,322 $322 $46,768 6/30 $2,000 $2,338 $338 $47,106 Choice "a" is incorrect At year-end a portion of the bond discount will be amortized and the carrying

value of the bond will no longer be equal to the original bond issue price of $46,139

Choice "b" is incorrect This is the carrying amount of the bond on June 30 of the current year, as shown

in the amortization table

Choice "d" is incorrect This is the carrying amount of the bond on June 30 of the next year, as shown in

the amortization table

Choice "b" is correct Serial bonds are bonds that mature in installments

Choice "a" is incorrect Debentures are unsecured corporate bonds

Choice "c" is incorrect Term bonds are bonds that have a single fixed maturity date

Choice "d" is incorrect A bond sinking fund is a fund that a company contributes cash to each period so that it has enough to pay of the bond at maturity

14

In 2002, Spirit, Inc determined that the 12-year estimated useful life of a machine purchased for $48,000

in January 1997 should be extended by three years The machine is being depreciated using the

straight-line method and has no salvage value What amount of depreciation expense should Spirit report

in its financial statements for the year ending December 31, 2002?

Choice "a" is correct A change in the estimated useful life of a fixed asset is accounted for prospectively,

in current and future periods only From 1997 through 2001, annual depreciation of $4,000 ($48,000 / 12 years) was recorded on the machine, for total accumulated depreciation of $20,000 ($4,000 per year x 5 years) On January 1, 2002, the net book value of the machine was $28,000 ($48,000 cost - $20,000 accumulated depreciation) The extension of the machine's useful life by 3 years means that the total useful life of the asset becomes 15 years, with 10 years remaining at the beginning of 2002 As a result, depreciation expense of $2,800 ($28,000 net book value / 10 years) is recorded in 2002

15

On January 2, 2003, Raft Corp discovered that it had incorrectly expensed a $210,000 machine

purchased on January 2, 2000 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, 2003, financial statements, what amount should Raft report as a prior period adjustment?

$60,000 in total expense that should have been reflected in retained earnings on January 1, 2003 and the

$210,000 that was incorrectly recorded:

Correct accounting – Depreciation expense 2000-2002 $ 60,000

Incorrect accounting – Asset purchased expense in 2000 210,000

Prior period adjustment, before tax $150,000

The prior period adjustment must be reported net of tax:

$150,000 x (1 – 30%) = $105,000

16

Which of the following describes the appropriate reporting treatment for a change in accounting estimate?

a In the period of change with no future consideration

b By reporting pro forma amounts for prior periods

c By restating amounts reported in financial statements of prior periods

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

ANSWER:

Choice "d" is correct A change in accounting estimate is accounted for prospectively, in current and future periods

of $15,000 during the current year What amount will Peace report as dividends declared and paid in its current year's consolidated statement of retained earnings?

18

A corporation issues quarterly interim financial statements and uses the lower 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?

a Inventory losses generally should be recognized in the interim statements

b Temporary market declines should be recognized in the interim statements

c Only the cost method of valuation should be used

d Gains from valuations in previous interim periods should be fully recognized

ANSWER:

Choice "a" is correct Permanent declines in inventory market value should be reflected in interim

financial statements in the period incurred

Choice "b" is incorrect Temporary declines in market value that are expected to reverse by the end of the annual period are not recognized in the interim statements Only permanent declines are recognized Choice "c" is incorrect The lower of cost or market method should be applied to interim periods

Choice "d" is incorrect Temporary declines in market value, and subsequent reversals of those declines, are not recognized in interim statements

19

Steam Co acquired equipment under a capital lease for six years Minimum lease payments were

$60,000 payable annually at year-end The interest rate was 5% with an annuity factor for six years of 5.0757 The present value of the payments was equal to the fair market value of the equipment What amount should Steam report as interest expense at the end of the first year of the lease?

Choice "a" is incorrect Interest expense must be reported each period on the capital lease obligation Choice "b" is incorrect Interest expense is calculated as the capitalize lease obligation times the interest rate, not the annual payment times the interest rate

Choice "d" is incorrect The capital lease obligation is calculated as the minimum lease payment times the annuity factor, not the minimum lease payment times the number of years

20

Which of the following expenditures qualifies for asset capitalization?

a Cost of materials used in prototype testing

b Costs of testing a prototype and modifying its design

c Salaries of engineering staff developing a new product

d Legal costs associated with obtaining a patent on a new product

ANSWER:

Choice "d" is correct Legal costs associated with obtaining a patent on a new product are capitalized Reseach and development costs related to developing a new product, including prototype testing, design modification and engineering salaries, must be expensed

21

What is the measurement focus and the basis of accounting for the government-wide financial statements?

Measurement focus Basis of accounting

a Current financial resources Modified accrual

b Economic resources Modified accrual

c Current financial resources Accrual

d Economic resources Accrual

ANSWER:

Choice "d" is correct The government-wide financial statements used the economic resources measurement focus and the accrual basis of accounting

22

Powell City purchased a piece of equipment to be used by a department financed by the general fund How should Powell report the acquisition in the general fund?

a As an expenditure

b Capitalize, depreciation is optional

c Capitalize, depreciation is required

d Capitalize, depreciation is not permitted

ANSWER:

Choice "a" is correct The general fund is a governmental fund that uses the current financial resources measurement focus and the modified accrual basis of accounting Under modified accrual accounting, all fixed asset acquisitions are recorded as expenditures

23

Hann School, a nongovernmental not-for-profit organization, spent $1 million of temporarily restricted cash to acquire land and building How should this be reported in the statement of activities?

a Increase in unrestricted net assets

b Increase in temporarily restricted net assets

c Increase in permanently restricted net assets

d Decrease in permanently restricted net assets

ANSWER:

Choice "a" is correct When a temporary restriction is satisfied, a reclassification is shown on the statement of activities by decreasing temporarily restricted net assets and increasing unrestricted net assets

Choice "b" is incorrect When a temporary restriction is satisfied, temporarily restricted net assets are decreased, not increased

Choices "c" and "d" are incorrect The satisfaction of a temporary restriction has no impact on permanently restricted net assets

24

Which of the following comprise functional expense categories for a nongovernmental not-for-profit organization?

a Program services, management and general, and fund-raising

b Membership dues, fund-raising, and management and general

c Grant expenses, program services, and membership development

d Membership development, professional fees, and program services

ANSWER:

Choice "a" is correct The most common functional classifications for a nongovernmental not-for-profit are program services, fund-raising and management and general