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41. Under U.S.GAAP, compared to the completed contract method of revenue recognition, the percentage-of-completion  method most likely result in higher:

A. total asset.

B. total liabilities.

C. both total asset and total liabilities.
  Ans: A.

Compared to the completed-contract method, the percentage-of-completion method will most likely result in higher total assets, reflecting the accrual of gross profit during the contract period and lower liabilities, as the higher level of construction-in-progress provides a larger offset to advance billings.

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42. Which of the following items affects owners’ equity but is not included as a component of net income?

A. Depreciation.

B. Dividends received on shares of another company classified as available for sale.

C. Foreign currency translation gains and losses.
  Ans: C.

Foreign currency translation gains and losses are nor reported on the income statement as a component of net income, but affect owners’ equity because they are included as other comprehensive income. The other items are included on the income statement so they affect both net income and owners’ equity.

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43. IFRS and U.S.GAAP are most similar in their requirements for:

A. extraordinary items.

B. discontinued operations.

C. valuation of fixed assets.
  Ans: B.

IFRS and U.S.GAAP both require discontinued operations to be reported on the income statement separately from continuing operations and net of tax.

  

A is incorrect. U.S.GAAP permits unusual and infrequent items to be treated as extraordinary items. But IFRS does not permit extraordinary items.

  

C is incorrect. Fixed assets can be revalued upward under IFRS but not under U.S.GAAP.

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44. An analyst gathered the following data about a company:

·         1,000,000 shares of common are outstanding at the beginning of the year.

·         10,000 6% convertible bonds (conversion ratio is 20 to 1) were issued at par June 30 of this year.

·         The company has 100,000 warrants outstanding all year with an exercise price $25 per share.

·         The average stock price for the period is $20, and the ending stock price is $30.

If the convertible bonds are considered dilutive, the number of shares of common stock that the analyst should use to calculate diluted earnings per share is:

A.    1,000,000.

B.     1,100,000.

C.     1,266,667.

  
  Ans: B.

When the capital structure contains options or warrants, the treasury stock method uses the average price. In this situation, the warrants are antidilutive because the exercise price of the warrant ($25) is higher than the market price of the stock ($20). Thus, warrants are excluded. Otherwise, common shares would be reduced.

Original shares of common stock = 1,000,000x(12/12)

The add the impact of the bond conversion:

(10,000)(20) x (6/12)=100,000.

Thus, the adjusted denominator for gully diluted EPS is:

1,000,000+100,000=1,100,000

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45. Which of the following statements about the approaches for calculating EPS in simple versus complex capital structure is least accurate?

A. If convertible bonds are dilutive, the numerator in the diluted EPS calculation is increased by the interest expense on the bonds.

B. If convertible preferred stock is dilutive, the convertible preferred dividends must be added back to the numerator to calculate diluted EPS.

C. The denominator in the basic EPS equation contains the number of shares of common stock issued, weighed by the days that the shares have been outstanding.
  Ans: A.

If convertible bonds are dilutive, interest expense multiplied by (1- tax rate) must be added back to the numerator to calculate diluted EPS.

cityboy

46. Bao Corp. has a permanently impaired asset. The difference between its carrying value and the present value of its expected cash flows should be written down immediately and:

A. reported as an operating loss.

B. charged directly against retained earnings.

C. reported as a non-operating loss in other comprehensive income.
  Ans: A.

Impairment writedowns are reported losses “above the line” and are included in income from continuing operations.

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47. At the end of its last fiscal year, Bao Corp. reported retained earnings of $215,000. This year, Bao reported year-end retained earnings of $250,000 and net income of $20,000, paid received dividends of $5,000, paid interest expense of $5,000, and received dividends of $5,000. Bao’s other comprehensive income for this year is closest to:

A. $15,000.

B. $20,000.

C. $25,000.

  
  Ans: B.

Since retained earnings increased by 250,000 – 215,000 = 35,000 and net income less dividends paid was 20,000 – 5,000 = 15,000, the difference, 35,000 – 15,000 = 20,000, must have been other comprehensive income. Dividends received and interest paid are both included in net income.

cityboy

48. In actual accounting, the matching principle states that:

A. an entity should recognize revenue only when received and expenses only when they are paid.

B. transactions and events producing cash flows are allocated only to time periods in which the cash flows occur.

C. expenses incurred to generate revenue are recognized in the same time period as the revenue.

  
  Ans: C.

The matching principle holds that expenses should be accounted for in the same performance measurement period as the revenue they generate.

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49. Which of the following statements about revenue recognition methods is most accurate?

A. The completed contract method under U.S.GAAP recognizes long-term contract revenue only as each phase of production is complete.

B. The percentage of completion method recognizes profit corresponding to the costs incurred as a proportion of estimated total costs.

C. The installment method recognizes sales when cash is received, but no profit is recognized until cash collected exceeds cost.

  
  Ans: B.

The description of the percentage-of-completion method is accurate. The completed contract method under U.S.GAAP recognizes revenue only when the entire project is complete. The installment method recognizes profit in proportion to cash collected. he entire projuect is complete. the s the revenue regerat

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50. A company changes from an incorrect method of accounting to an acceptable one. Which of the following statements about his change is most accurate?

A. It is treated retrospectively and requires restatement of all prior period results that are presented in the current financial statements.

B. If the change is voluntary, it is a change in accounting principle and is reported below the line net of taxes.

C. If the change is mandated by a new accounting standard, it is an unusual or infrequent item and is reported as a separate line item in net income for continuing operating.

  
  Ans: A.

This is the correct treatment of this change. The company must disclosure the nature of the error and its effect on net income and restate any prior period results that are presented in the current financial statements.