All changes in estimate are accounted for retrospectively.
If the estimate of a transaction price is revised, the price change is allocated entirely to
the remaining performance obligations that are yet to be satisfied.
Earnings quality refers to the ability of reported earnings (income) to predict future
earnings.
Net purchases are reduced for discounts taken whether the net method is used or the
gross method is used.
GAAP requires using intrinsic value accounting for employee stock options.
The funding of the standard-setting bodies that promulgate IFRS is as independent as
that underlying U.S. GAAP.
Sellers should recognize revenue over time for a long term contract in which the seller
is receiving periodic payments for progress to date but may need to refund those
payments in the event the contract is cancelled.
Gains or losses result, respectively, from the disposition of business assets for greater
than, or less than, their book values.
Accrued salaries and wages in a balance sheet represent salaries and wages that have
been earned by employees but not yet paid.
Hans Cars & Trucks sells various types of used vehicles with a one-year warranty that
covers any defects. When customers make a purchase, they also receive a coupon for 10
free engine oil changes and an option to change all of the tires for $50 after 30,000
miles. Typically, customers pay $25 for an oil change and $250 for a new set of tires.
Required:
(a) Given the information above, how many performance obligations exist in the
contract to purchase a vehicle?
(b) Assume the same contract but that it offers customers an option to change all of the
tires for $250 after 30,000 miles. How many performance obligations exist in the
contract to purchase a vehicle?
A statement of comprehensive income does not include:
a. Net income.
b. Losses from the return on assets exceeding expectations.
c. Losses from changes in estimates regarding the PBO.
d. Prior service cost.
Lite Travel Company’s accounting records include the following information:
What is the amount of net cash provided by operating activities indicated by the
amounts provided?
a. $ 50,000.
b. $ 73,000.
c. $ 94,000.
d. $129,000.
Alamo Inc. had $300 million in taxable income for the current year. Alamo also had a
decrease in deferred tax assets of $30 million and an increase in deferred tax liabilities
of $60 million. The company is subject to a tax rate of 40%. The total income tax
expense for the year was:
a. $390 million.
b. $210 million.
c. $150 million.
d. $180 million.
For 2015, P Co. estimated its two-year equipment warranty costs based on $23 per unit
sold in 2015. Experience during 2016 indicated that the estimate should have been
based on $25 per unit. The effect of this $2 difference from the estimate is reported:
a. In 2016 income from continuing operations.
b. As an accounting change, net of tax, below 2016 income from continuing operations.
c. As an accounting change requiring 2015 financial statements to be restated.
d. As a correction of an error requiring 2015 financial statements to be restated.
Bond X and bond Y both are issued by the same company. Each of the bonds has a
maturity value of $100,000 and each matures in 10 years. Bond X pays 8% interest
while bond Y pays 9% interest. The current market rate of interest is 8%. Which of the
following is correct?
a. Both bonds sell for the same amount.
b. Bond X sells for more than bond Y.
c. Bond Y sells for more than bond X.
d. Both bonds sell at a discount.
Montana Mining Co. (MMC) paid $200 million for the right to explore and extract rare
metals from land owned by the state of Montana. To obtain the rights, MMC agreed to
restore the land to a suitable condition for other uses after its exploration and extraction
activities. MMC incurred exploration and development costs of $60 million on the
project. MMC has a credit-adjusted risk free interest rate is 7%. It estimates the possible
cash flows for restoring the land, three years after its extraction activities begin, as
follows:
The asset retirement obligation (rounded) that should be recognized by MMC at the
beginning of the extraction activities is:
a. $ 8.2 million.
b. $14.7 million.
c. $ 18 million.
d. $ 30 million.
The possibility that the capital markets’ focus on periodic profits may tempt a
company’s management to bend or even break accounting rules to inflate reported net
income is an example of:
a. An ethical dilemma.
b. An accounting theory issue.
c. A technical accounting issue.
d. An auditor”s responsibility to inform the SEC.
You borrow $20,000 to buy a boat. The loan is to be paid off in monthly installments
over one year at 18% interest annually. The first payment is due one month from today.
What is the amount of each monthly payment?
a. $1,667.
b. $1,511.
c. $1,834.
d. None of the above.
Peterson Photoshop sold $1,000 in gift cards on a special promotion on October 15,
2016, and sold $1,500 in gift cards on another special promotion on November 15,
2016. Of the cards sold in October, $100 were redeemed in October, $250 in November,
and $300 in December. Of the cards sold in November, $150 were redeemed in
November and $350 were redeemed in December. Peterson views the probability of
redemption of a gift card as remote if the card has not been redeemed within two
months. At 12/31/2016, Peterson would show an deferred revenue account for the gift
cards with a balance of:
a. $0.
b. $1,000.
c. $1,350.
d. $1,500.
Freda’s Florist reported the following before-tax income statement items for the year
ended December 31, 2016:
All income statement items are subject to a 40% income tax rate. In its 2016 income
statement, Freda’s separately stated income tax expense and total income tax expense
would be:
a. $128,000 and $128,000, respectively.
b. $128,000 and $100,000, respectively.
c. $100,000 and $128,000, respectively.
d. $100,000 and $100,000, respectively.
The inventory method that will always produce the same amount for cost of goods sold
in a periodic inventory system as in a perpetual inventory system would be:
a. FIFO.
b. LIFO.
c. Weighted average.
d. None of these answer choices is correct.
Excerpts from Hulkster Company’s December 31, 2016 and 2015, financial statements
are presented below:
Under IFRS, which of the following is not a condition for recognizing revenue?
a) The amount of revenue and costs associated with the transaction can be measured
reliably.
b) It is reasonably possible that the economic benefits associated with the transaction
will flow to the seller.
c) For sales of goods, the seller has transferred to the buyer the risks and rewards of
ownership and doesn’t effectively manage or control the goods.
d) For sales of services, the stage of completion can be measured reliably.
If Ziggy Company concluded that an investment originally classified as held to maturity
would now more appropriately be classified as available for sale, Ziggy would:
a. Not reclassify the investment, as original classifications are irrevocable.
b. rReclassify the investment as available for sale and immediately recognize in net
income any unrealized gain or loss on the reclassification date.
c. Reclassify the investment as available for sale and immediately recognize in
accumulated other comprehensive income any unrealized gain or loss on the
reclassification date.
d. Need to restate earnings, as the original classification was in error.
() $3 x 15 shares = $45
On December 1, 2016, LCD Distributing Company (“LCD or “Company”) issued a
press release announcing its financial results for the fiscal year ended November 30,
2016. Included was the following information regarding a change in inventory method
(in part):
In the fourth quarter of fiscal 2016, the Company changed its inventory valuation
method from the Last-In First-Out (LIFO) method to the First-In First-Out (FIFO)
method. The change is preferable as it provides a more meaningful presentation of the
Company’s financial position as it values inventory in a manner which more closely
approximates current cost; better represents the underlying commercial substance of
selling the oldest products first; and more accurately reflects the Company’s realized
periodic income.
As required by U.S. generally accepted accounting principles, this change in accounting
principle has been reflected in the consolidated statements of financial position,
consolidated statements of operations, and consolidated statements of cash flows
through retroactive application of the FIFO method. Previously reported net income
(loss) available to common shareholders’ for the fiscal years 2016 and 2015 were
increased by $0.4 million and $2 million after income taxes, respectively.
Required:
1) Why does GAAP require LCD to retrospectively adjust prior years’ financial
statements for this type of accounting change?
2) Assuming that the quantity of inventory remained stable during 2015, did the cost of
LCD’s inventory move up or down during that period?
Which of the following is true about the initial journal entry used to record
quality-assurance warranties?
A new CEO was hired to revive the floundering Heirloom Watch Corporation. The
company had endured operating losses for several years, but confidence was emerging
that better times were ahead. The board of directors and shareholders approved a
quasi-reorganization for the corporation. The reorganization included devaluing
inventory for obsolescence by $210 million and increasing land by $10 million.
Immediately before the restatement, at December 31, 2016, Heirloom Watch
Corporation”s balance sheet appeared as follows (in condensed form):
Heirloom Watch Corporation
balance sheet
At December 31, 2016 ($ in millions)
Cash $ 40
Receivables 80
Inventory 460
Land 80
Buildings and equipment (net) 180
$840
Liabilities $480
Common stock (640 million shares at $1 par) 640
Additional paid-in capital 120
Retained earnings (deficit) (400)
$840
Identify the three common forms of business organization and the primary difference in
the way we account for them.
Listed below are 10 terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the number for the correct term.
Define a loss contingency and give two examples that almost always are accrued.
Sunnyvale Computer Company sells a line of computers that carry a six-month
warranty. Customers are offered the opportunity to buy a two-year extended warranty
for an additional charge. During 2016, Sunnyvale received $320,000 from customers
for these extended warranties. All sales are on credit, and funds are received evenly
throughout the year and the warranties go into effect immediately after purchase.
Required:
Prepare a summary journal entry to record sales of the extended warranties. Also
prepare any other entries associated with the warranties that should be recorded during
2016.
Silicon Chip Company’s fiscal year-end is December 31. At the end of 2016, it owed
employees $22,000 in salaries and wages that will be paid on January 7, 2017.
Required:
1> Prepare an adjusting entry to record accrued salaries and wages, a reversing entry on
January 1, 2017, and an entry to record the payment of salaries and wages on January 7,
2017.
2> Prepare journal entries to record the accrued salaries and wages on December 31 and
the payment of salaries and wages on January 7, assuming a reversing entry is not
recorded.
DON Corp. is contemplating the purchase of a machine that will produce net after-tax
cash savings of $20,000 per year for five years. At the end of five years, the machine
can be sold to realize after-tax cash flows of $5,000. Interest is 12%. Assume the cash
flows occur at the end of each year.
Required: Calculate the total present value of the cash savings.
