Brighton Co. changed from the individual item approach to the aggregate approach in applying the lower of FIFO cost or market to inventories. The cumulative effect of this change should be reported in Brighton's financial statements as:
The cumulative effect should be reported as a Retrospective adjustment on the retained earnings statement, with separate disclosure
A change in the composition of the elements of cost such as changing from individual item approach to the aggregate approach in applying the loser of FIFO cost or market to inventories is an example of a change in accounting principle. The cumulative effect of the change in accounting principle should now be shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, in what is called retrospective application.
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. The effective tax rate should reflect anticipated:
The effective income tax rates for operations for the full year should reflect anticipated foreign tax rates and available tax planning alternatives.
In addition, the effect of other anticipated tax credits, capital gains rates, and foreign tax credits should be included
What does estimated income taxes equal on a personal statement of financial position?
On a personal statement of financial position, estimated income taxes equals the difference between fair value and tax bases of assets and liabilities.
What is the proper treatment when an investor goes from control to non-control?
When an investor sells shares and goes from control to non-control, the investor must recognize a gain or loss from the sale of the stock and then remeasure the remaining non-consolidating interest to fair value. The fair value adjustment is recognized as an additional gain or loss on the income statement.
What is the consolidation rule in a vertical chain, where parent company owns more than 50% of subsidiary company, and subsidiary owns more than 50% of a third company?
The rule is to consolidate:
Third company into subsidiary company
Subsidiary company (now consolidated with third company) into parent company
What is the rule for temporary losses on AFS (where aggregate cost exceeds aggregate market value)
Temporary losses on available-for-sale securities (where aggregate cost exceeds aggregate market) should be Credited to an asset valuation account and Debited to Other Comprehensive Income
What is the proper treatment of registration and issuance costs and direct out-of-pocket costs such as legal and consulting fees in an acquisition method business combination?
In an acquisition method business combination, registration and issuance costs are recorded as a direct reduction to the value of the stock issued by reducing APIC and direct out-of-pocket costs such as legal and consultingfees are expensed.
What is the proper treatment of loans and advances in consolidation?
All intercompany transactions, including loans and advances, should be eliminated upon consolidation.
How should a Lessee handle Leashold improvements?
Leasehold improvements are capitalized and then amortized (expensed later) over the lesser of the life of the improvements or the remaining term of the lease.
This rule makes sense because the party making the leasehold improvements will benefit from the improvements for either the life of the improvements or the term of the lease if the term of the lease is shorter than the life of the improvements (in which case, somebody else will benefit from the improvements for the remaining life of the improvements.)
How should a liability requiring periodic payment of interest be classified? What about a liability that is secured by collateral?
A liability that requires the periodic payment of interest should be classified as an accrued liability or debt
A liability that is secured by collateral should be classified as a loan payable.
What is the result of the change on ending inventory and net income in the year of change from FIFO to LIFO inventory valuation in a period of rising prices?
Both ending inventory and net income decrease when going from FIFO to LIFO in a period of rising prices (inflation).
The reason for this is that under LIFO, ending inventory has a lower valuation than under FIFO since older, lower costs are assigned to ending inventory.
Similarly, under LIFO, cost of goods sold has a higher valuation than under FIFO since recent, higher costs are assigned to goods sold. This higher cost of goods sold means that net income under LIFO decreases.
What are some revaluation rules under IFRS?
If an individual fixed asset is revalued, then the entire class of fixed assets to which that asset belongs must be revalued. Individual fixed assets cannot be revalued alone
Revaluation gains are reported in OCI as revaluation surplus
Revaluation losses are reported on the income statement
IFRS requires that revaluations be made with sufficient regularity to ensure that carrying amount does not differ material from fair value.
Bonds with detachable stock warrants were issued by Flack Co. Immediately after issue the aggregate market value of the bonds and the warrants exceeds the proceeds. Is the portion of the proceeds allocated to the warrants less than their market value, and is that amount recorded as contributed capital?
Yes, the portion of the proceeds allocated to the warrants is recorded as contributed capital, and the amount will be less than their market value because the total proceeds were less than the combined market values of the bonds and the warrants.
Rule: Allocate amounts separately to debt and detachable warrants according to their relative FMV's at the date of issuance. The amount allocated to detachable warrants is recorded as contributed (additional paid-in) capital.
How is a sinking fund for the retirement of bonds affected by revenue earned on investments in the sinking fund, and when the cash in the sinking fund is used to retire bonds?
Revenue earned on the investments purchased increase the sinking fund.
When the cash is used to retire the bonds (purchase the investments) the sinking fund is decreased
Would dilutive stock options be used in the calculation of Basic EPS or Diluted EPS?
Dilutive stock options would be used in the calculation of diluted EPS.
A corporation declared a dividend, a portion of which was liquidating. How would this declaration affect APIC and Retained Earnings?
APIC and Retained Earnings would both be decreased.
RULE: A "liquidating dividend" is a return of capital (which decreases APIC) and a distribution of earnings (which decreases retained earnings)
Assume 80% distribution of earnings and 20% liquidating with as $100,000 dividend:
Retained earnings (80%) 80,000
APIC (20%) 20,000
Cash (dividend payable) 100,000
On July 1 of the current year, Dewey Co. signed a 20-year building lease that it reported as a capital lease. Dewey paid the monthly lease payments when due. How should Dewey report the effect of the lease payments in the financing activities section of its Statement of Cash Flows?
The lease payments should be reported as an Outflow equal the the current year principal payments only.
Cash payments made to reduce the principal are properly reported as financing activity. Cash interest payments would be reported as a component oc cash from operating activities.
Should financial statements report an amount of cash flow per share?
Financial statements should not report an amount of cash flow per share.
Neither cash flow nor any component of it is an alternative to net income as an indicator of an enterprise's performance, as reporting per share amounts might imply.
Which stock options and contingent shares, if dilutive and if other conditions are met, enter into the determination of the weighted average shares outstanding to be used in the basic earnings per share (basic EPS) calculation?
Only contingent shares (that are dilutive) are included in the calculation of basic EPS if (and as of the date) all conditions for issuance are met. Stock options do not enter into the calculation of basic EPS.
Stock options do not enter into the calculation of basic EPS, but will enter into the calculation of dilutive EPS if dilutive (i.e., the average market price of the common stock during the period exceeds the exercise price of the option.)
Payne Co. prepares its statement of cash flows using the Indirect method. Payne's unamortized bond discount account decreased by $25,000 during the year. How should Payne report the change in unamortized bond discount in its statement of cash flows?
Under the Indirect Method, The company should report the unamortized bond discount in its statement of cash flows as an Addition to net income in the operatin activities section.
Amortization of bond discount is an income-related item; thus, it is almost automatically an operating activity, not a financing activity.
Because the amortization of the discount was originally subtracted to get to net income in the first place, it is added back to net income for an Indirect method statement of cash flows.
On January 15, Year 1, Rico co. declared its annual cash dividend on common stock for the year ended January 31, Year 1. The dividend was paid on February 9, year 1, to stockholders of record as of January 28, Year 1. On what date should Rico decrease retained earnings by the amount of the dividend.
Retained earnings is reduced on January 15, Year 1, the date of declaration, which is when the board of directors formally approves a dividend.
A liability is created (dividends payable), and retained earnings is reduced (debited).
On the dividend payment date, the liability (dividends payable) is reduced (debited) and the cash payment is recorded (credit to cash).
During the current year, Onal Co. purchased 10,000 shares of its own stock at $7 per share. The stock was originally issued at $6. The firm sold 5,000 of the treasury shares for $10 per share. The firm uses the cost method to account for treasury stock. What amount should Onal report in its income statement for these transactions?
Onal should not report anything ($0) on its income statement.
Gains and losses on treasury stock transactions are never recorded on the income statement.
Gains are recorded by increasing APIC - Treasury stock.
Losses are recorded by first eliminating any balance in APIC-Treasury stock and then decreasing retained earnings.
In its first four years of operations ending December 31, Year 4, Alder Inc.'s depreciation for income tax purposes exceeded its depreciation for financial statement purposes. This temporary difference was expected to reverse in Year 5, Year 6, and Year 7. Alder had no other temporary differences. Under U.S. GAAP, Alder's Year 4 balance sheet should include:
The Year 4 balance sheet should include a noncurrent deferred tax liability only.
Future taxable income will be greater than future accounting income since future taxable expenses will be less than future accounting expenses. Under U.S. GAAP, the related deferred tax liability is classified according to the related asset which is a noncurrent asset.
Visor Co. maintains a defined benefit pension plan for its employees. Under U.S. GAAP, the service cost component of Visor's net periodic pension cost is measured using the:
Under U.S. GAAP component of net periodic pension cost is measured using the Projected Benefit Obligation
Service cost represents the increase in the projected benefit obligation resulting from the employee's services rendered during the year.
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