Question 1

Earnings per share data are required for each of the following: (a) income from continuing operations, (b) income before extraordinary items, and (c) net income.

Accepted Answer

Earnings per share (EPS) data are indeed required for each of these categories: income from continuing operations, income before extraordinary items, and net income, as they provide a comprehensive view of a company's profitability from different aspects.

Question 2

A company should report per share amounts for income before extraordinary items, but not for income from continuing operations.

Accepted Answer

A company should report per share amounts for both income from continuing operations and income before extraordinary items, as both provide useful information to investors and are typically required by accounting standards.

Question 3

A change in accounting principle is evidenced by
A) a change from the historical cost principle to current value accounting.
B) adopting the allowance method in estimating bad debts expense when a credit sales policy is instituted.
C) changing the basis of inventory pricing from weighted-average cost to LIFO.
D) a change from current value accounting to the historical cost principle.

Accepted Answer

A change in accounting principle involves changing from one generally accepted accounting principle to another, such as changing the basis of inventory pricing from weighted-average cost to LIFO.

Question 4

A company that reports changes retrospectively would
A) report the cumulative effect in the current year's income statement as an irregular item.
B) not change any prior-year financial statements.
C) make changes prospectively.
D) show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented.

Accepted Answer

Retrospective application involves adjusting the financial statements of prior periods as if the new accounting policy had always been in use. This means that the cumulative effect of the change is adjusted against the beginning retained earnings of the earliest year presented, not reported in the current year's income statement.

Question 5

According to the FASB, which approach is required for reporting changes in an accounting principle?
A) Currently
B) Retrospectively
C) Prospectively
D) Futuristically

Accepted Answer

The Financial Accounting Standards Board (FASB) requires that changes in accounting principle be reported retrospectively. This means that prior period financial statements are adjusted to reflect the change as if the new accounting principle had always been used.

Question 6

Which of the following is not considered a direct effect of a change in accounting principle?
A) An employee profit-sharing plan based on net income when a company uses the percentage-of-completion method.
B) The inventory balance as a result of a change in the inventory valuation method.
C) An impairment adjustment resulting from applying the lower-of-cost-or-market-test to the adjusted inventory balance.
D) Deferred income tax effects of an impairment adjustment resulting from applying the lower-of-cost-or-market test to the adjusted inventory balance.

Accepted Answer

An employee profit-sharing plan based on net income is not a direct effect of a change in accounting principle; it is an indirect effect because it results from the change in reported net income.

Question 7

Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent?
A) A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
B) A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be presented as previously reported.
C) A change in accounting estimate for which the financial statements for prior periods included for comparative purposes should be restated.
D) A change in accounting principle for which the financial statements for prior periods included for comparative purposes should be restated.

Accepted Answer

Changing from FIFO to LIFO is a change in accounting principle, and prior period financial statements should be presented as previously reported, not restated.

Question 8

Which of the following is a condition in which retrospective application is not impracticable?
A) The company cannot determine the effects of retrospective application.
B) Retrospective application requires assumptions about management's intent in a prior period.
C) The company has changed auditors.
D) Retrospective application requires significant estimates for a prior period, and the company cannot objectively verify the necessary information to develop these estimates.

Accepted Answer

Changing auditors does not inherently make retrospective application impracticable, as it does not affect the ability to apply accounting changes to prior periods.

Question 9

Which of the following is not a part of applying the current and prospective approach in accounting for a change in an estimate?
A) Report current and future financial statements on a new basis.
B) Restate prior period financial statements.
C) Disclose in the year of change the effect on net income and earnings per share data for that period only.
D) Make no adjustments to current period opening balances for purposes of catch-up.

Accepted Answer

Restating prior period financial statements is not part of applying the current and prospective approach for a change in estimate. This approach only affects financial statements from the point of change forward, without altering previously issued financial statements.

Question 10

The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should
A) continue to depreciate the building over the original 50-year life.
B) depreciate the remaining book value over the remaining life of the asset.
C) adjust accumulated depreciation to its appropriate balance, through net income, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.
D) adjust accumulated depreciation to its appropriate balance through retained earnings, based on a 40-year life, and then depreciate the adjusted book value as though the estimated life had always been 40 years.

Accepted Answer

When the estimated life of an asset is revised, the remaining book value (cost minus accumulated depreciation) should be depreciated over the new remaining life. In this case, since the building's remaining life is now 10 years, the remaining book value should be depreciated over these 10 years.

Question 11

Which of the following statements is correct?
A) Changes in accounting principle are always handled in the current or prospective period.
B) Prior statements should be restated for changes in accounting estimates.
C) A change from expensing certain costs to capitalizing these costs due to a change in the period benefited, should be handled as a change in accounting estimate.
D) Correction of an error related to a prior period should be considered as an adjustment to current year net income.

Accepted Answer

Changes in accounting estimates are accounted for prospectively, not by restating prior periods. A change from expensing to capitalizing costs due to a change in the period benefited is considered a change in accounting estimate, which is handled prospectively.

Question 12

In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?
A) Annual preferred dividend
B) Annual preferred dividend times (one minus the income tax rate)
C) Annual preferred dividend times the income tax rate
D) Annual preferred dividend divided by the income tax rate

Accepted Answer

The annual preferred dividend should be added as an adjustment to the numerator (net earnings) when calculating earnings per share for cumulative preferred stock. This is because these dividends must be paid out before any dividends can be distributed to common shareholders, affecting the earnings available to them.

Question 13

In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation would
A) fairly present diluted earnings per share on a prospective basis.
B) fairly present the maximum potential dilution of diluted earnings per share on a prospective basis.
C) reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share.
D) be antidilutive.

Accepted Answer

If the exercise price of the options or warrants exceeds the average market price, their effect would be antidilutive, meaning they would increase rather than decrease earnings per share if exercised. Therefore, they are not included in the diluted earnings per share calculation.

Question 14

In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants
A) are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share.
B) are added, net of tax, to the numerator of the calculation for diluted earnings per share.
C) are disregarded in the computation of earnings per share if the exercise price of the options and warrants is less than the ending market price of common stock.
D) none of these.

Accepted Answer

The treasury stock method assumes that the proceeds from the exercise of stock options and warrants are used to repurchase common shares at the average market price. This is done to calculate the dilutive effect of these options and warrants on earnings per share.

Question 15

When applying the treasury stock method for diluted earnings per share, the market price of the common stock used for the repurchase is the
A) price at the end of the year.
B) average market price.
C) price at the beginning of the year.
D) none of these.

Accepted Answer

The treasury stock method for calculating diluted earnings per share uses the average market price of the common stock for the period when determining how many shares could be bought back with the proceeds from the exercise of options or warrants. This method assumes that the funds received from the exercise of options or warrants are used to buy back shares at the average market price, thus minimizing the impact on the EPS calculation.

Question 16

On January 1, 2006, Lynn Corporation acquired equipment at a cost of $600,000. Lynn adopted the double-declining balance method of depreciation for this equipment and had been recording depreciation over an estimated life of eight years, with no residual value. At the beginning of 2009, a decision was made to change to the straight-line method of depreciation for this equipment. Assuming a 30% tax rate, the cumulative effect of this accounting change on beginning retained earnings, net of tax, is
A) $121,875.
B) $0.
C) $78,750.
D) $77,109.

Accepted Answer

$0, No cumulative effect; handle prospectively.

Question 17

On January 1, 2006, Foley Corporation acquired machinery at a cost of $250,000. Foley adopted the double-declining balance method of depreciation for this machinery and had been recording depreciation over an estimated useful life of ten years, with no residual value. At the beginning of 2009, a decision was made to change to the straight-line method of depreciation for the machinery. The depreciation expense to be recorded for the machinery in 2009 is (round to the nearest dollar)
A) $25,600.
B) $18,286.
C) $22,857.
D) $25,000.

Accepted Answer

$250,000 - [($250,000 × .2) + ($200,000 × .2) + ($160,000 × .2)] = $128,000 $128,000 ÷ 7 = $18,286.

Question 18

On January 1, 2006, Baden Co., purchased a machine (its only depreciable asset) for $300,000. The machine has a five-year life, and no salvage value. Sum-of-the-years'-digits depreciation has been used for financial statement reporting and the elective straight-line method for income tax reporting. Effective January 1, 2009, for financial statement reporting, Baden decided to change to the straight-line method for depreciation of the machine. Assume that Baden can justify the change.
Baden's income before depreciation, before income taxes, and before the cumulative effect of the accounting change (if any), for the year ended December 31, 2009, is $250,000. The income tax rate for 2009, as well as for the years 2006-2008, is 30%. What amount should Baden report as net income for the year ended December 31, 2009?
A) $60,000
B) $91,000
C) $154,000
D) $175,000

Accepted Answer

[(5/15 + 4/15 + 3/15) × $300,000] = $240,000 (AD)
($300,000 - $240,000) = $60,000 (BV)
[$250,000 - ($60,000 ÷ 2)] × (1 - .3) = $154,000.

Question 19

During 2008, a construction company changed from the completed-contract method to the percentage-of-completion method for accounting purposes but not for tax purposes. Gross profit figures under both methods for the past three years appear below:
 Assuming an income tax rate of 40% for all years, the affect of this accounting change on prior periods should be reported by a credit of
A) $600,000 on the 2008 income statement.
B) $390,000 on the 2008 income statement.
C) $600,000 on the 2008 retained earnings statement.
D) $390,000 on the 2008 retained earnings statement.

Accepted Answer

[($800,000 + $950,000) - ($475,000 + $625,000)] × (1 - .40) = $390,000.

Question 20

Weaver Company changes from the LIFO method to the FIFO method in 2009. The increase in pre-tax income as a result of the difference in the two methods prior to 2007 is $100,000, for the year 2007 is $40,000, and for the year 2008 is $30,000. The estimated tax effect is 40%. The entry to record the change at the beginning of 2008 should include
A) debit to Deferred Tax Liability of $68,000.
B) credit to Deferred Tax Liability of $68,000.
C) debit to Deferred Tax Liability of $56,000.
D) credit to Deferred Tax Liability of $56,000.

Accepted Answer

($100,000 + $40,000) × .40 = $56,000.

Quiz 18: Additional Reporting Issues

Earnings per share data are required for each of the following: (a) income from continuing operations, (b) income before extraordinary items, and (c) net income.

A company should report per share amounts for income before extraordinary items, but not for income from continuing operations.

A change in accounting principle is evidenced by

A company that reports changes retrospectively would

According to the FASB, which approach is required for reporting changes in an accounting principle?

Which of the following is not considered a direct effect of a change in accounting principle?

Stone Company changed its method of pricing inventories from FIFO to LIFO. What type of accounting change does this represent?

Which of the following is a condition in which retrospective application is not impracticable?

Which of the following is not a part of applying the current and prospective approach in accounting for a change in an estimate?

The estimated life of a building that has been depreciated 30 years of an originally estimated life of 50 years has been revised to a remaining life of 10 years. Based on this information, the accountant should

Which of the following statements is correct?

In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding) . If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings) ?

In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants

When applying the treasury stock method for diluted earnings per share, the market price of the common stock used for the repurchase is the