1.Lincoln Corporation and Continental Incorporated are identical companies except that Lincoln complies with U.S. Generally Accepted Accounting Principles and Continental complies with International Financial Reporting Standards. Assuming an inflationary environment and stable inventory quantities, which permissible cost flow assumption will minimize each firm’s pre-tax financial income?

A)       Last-in, first-out                    Last-in, first-out

B)       First-in, first-out                    Average cost

C)       First-in, first-out                    First-in, first-out

D)       Last-in, first-out                    Average cost

2.At the beginning of 2007, Thunderbird Company started a 3-year construction project. The following data relates to the project:

Because of cost overruns, Thunderbird cannot reliably estimate the total cost of the project. However, Thunderbird expects that its costs incurred so far are recoverable. What amount of revenue should Thunderbird recognize for the year ended 2007 under U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS)?

A)            $0                             $50 million

B)            $0                                 $0

C)            $37 million                 $40 million

D)           $40 million                  $37 million

3.Are changes in accounting principles and extraordinary items treated similarly in accordance with U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards?

A)            Yes                                     Yes

B)             No                                       No

C)             No                                       Yes

D)            Yes                                     No

答案和详解如下：

1.Lincoln Corporation and Continental Incorporated are identical companies except that Lincoln complies with U.S. Generally Accepted Accounting Principles and Continental complies with International Financial Reporting Standards. Assuming an inflationary environment and stable inventory quantities, which permissible cost flow assumption will minimize each firm’s pre-tax financial income?

Lincoln Corporation

Continental Incorporated

A)       Last-in, first-out                    Last-in, first-out

B)       First-in, first-out                    Average cost

C)       First-in, first-out                    First-in, first-out

D)       Last-in, first-out                    Average cost

The correct answer was D)

LIFO will result in the lowest pre-tax financial income and FIFO will result in the highest pre-tax income. Average cost pre-tax financial income will fall in the middle. LIFO is allowed under U.S. GAAP but is not allowed under IFRS. Thus, Lincoln should choose LIFO and Continental should choose average cost in order to minimize pre-tax financial income.

2.At the beginning of 2007, Thunderbird Company started a 3-year construction project. The following data relates to the project:

Contract price	$100 million
Costs incurred in 2007	$50 million
Progress billings	$40 million
Collection of progress billings	$37 million

Because of cost overruns, Thunderbird cannot reliably estimate the total cost of the project. However, Thunderbird expects that its costs incurred so far are recoverable. What amount of revenue should Thunderbird recognize for the year ended 2007 under U.S. Generally Accepted Accounting Principles (U.S. GAAP) and International Financial Reporting Standards (IFRS)?

U.S. GAAP

IFRS

A)            $0                          $50 million

B)            $0                                 $0

C)             $37 million             $40 million

D)             $40 million             $37 million

The correct answer was A)

The completed-contract method must be used under U.S. GAAP since Thunderbird cannot reliably estimate the project’s cost. Under the completed-contract method, no revenue is recognized until the project is complete. Under IFRS, when total cost cannot be reliably estimated, revenue is recognized to the extent that recovering contract costs is probable. Since Thunderbird incurred $50 million of cost in 2007, $50 million of revenue is recognized.

3.Are changes in accounting principles and extraordinary items treated similarly in accordance with U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards?

Accounting principles

Extraordinary items

A)             Yes                                     Yes

B)              No                                       No

C)             No                                       Yes

D)             Yes                                     No

The correct answer was D)

Treatment of a change in an accounting principle is similar under U.S. GAAP and IFRS. Under both standards, a change in accounting principle is made retrospectively. The treatment of extraordinary items differs between U.S. GAAP and IFRS. Under U.S. GAAP, extraordinary items are reported net of tax below income from continuing operations. IFRS does not permit firms to treat transactions as extraordinary in the income statement.