Question 61
For a firm that continues to invest in new assets in a rising price environment, which of the following combinations of accounting practices will lead to the highest reported earnings?
Depreciation Method Inventory Method
A) straight-line FIFO
B) double declining balance FIFO
C) straight-line LIFO
D) double declining balance LIFO
Question 62
Goldrush Inc. reported the following information on its income statement and balance sheet:
Sales | $3,500,000 |
Net income | $500,000 |
Total assets | $2,500,000 |
Total equity | $1,500,000 |
Goldrush’s footnotes indicate that the firm has a take-or-pay obligation with payments totaling $800,000 that have a present value of $500,000. What are Goldrush’s ROA and debt-to-total capital ratios after adjustment for this obligation?
ROA Debt-to-Total Capital
A) 16.67% 30.30%
B) 16.67% 50.00%
C) 20.00% 30.30%
D) 20.00% 50.00%
Question 63
Which of the following statements is correct regarding the capitalization of interest for a constructed asset (that will take several years to complete) and the treatment of discontinued operation, respectively, under U.S. GAAP?
Construction interest Discontinued operations
A) Required to capitalize Different treatment than under IFRS
B) Optional to capitalize Same treatment as under IFRS
C) Required to capitalize Same treatment as under IFRS
D) Optional to capitalize Different treatment than under IFRS
Question 64
Three years ago, Regal Corporation issued $1,000,000, 8% bonds at par. The bonds pay interest semi-annually and mature in 7 years. The bonds do not contain a call provision. Interest rates have recently decreased to 7.5% and the 8% bonds are now trading at $1,055,000. Regal is considering refinancing the bonds, issuing new bonds in the amount reaquired to repurchase the 8% issue, in order to lower its interest expense. Calculate the accounting gain or loss and determine whether the repurchase will decrease the firm’s interest expense.
Accounting gain or loss Decrease interest expense
A) $55,000 loss No
B) $55,000 loss Yes
C) $55,000 gain No
D) $55,000 gain Yes
Question 65
Which of the following items is used in the numerator to calculate the reported effective tax rate on a firm’s financial statements?
A) Taxes payable.
B) Cash taxes paid.
C) Income tax expense.
D) Statutory tax.
答案和详解如下:
Answer 61
The correct answer was A) straight-line FIFO
With rising prices, FIFO will result in higher reported earnings than LIFO. Straight-line depreciation will result in higher reported earnings than accelerated depreciation as long as the firm continues to invest in new assets.
This question tested from Session 9,
Answer 62
The correct answer was B) 16.67% 50.00%
Take-or-pay arrangements represent off-balance-sheet financing and need to be included in the analysis. The adjustment is made by adding the present value of the obligation to the long-term assets and liabilities of the firm. Therefore, for analysis purposes the total assets are $3,000,000 (= $2,500,000 + $500,000), the total liabilities are $1,500,000 [= ($2,500,000 − $1,500,000) + $500,000], and total capital is $3,000,000 (= $1,500,000 + $1,500,000). The ROA is 16.67% ($500,000 / $3,000,000) and the debt-to-total capital ratio is 50.00% ($1,500,000 / $3,000,000).
This question tested from Session 9, Reading 40, LOS c
Answer 63
The correct answer was C) Required to capitalize Same treatment as under IFRS
Firms that follow U.S. GAAP must capitalize construction interest whereas firms that follow IFRS can choose to capitalize such interest. Over the past several years, there has been convergence between U.S. GAAP and IFRS in reporting discontinued operations.
This question tested from Session 10, Reading 43, LOS b
Answer 64
The correct answer was B) $55,000 loss Yes
Reacquiring the bonds for more than the carrying amount will result in a loss of $55,000 ($1,055,000 reacquisition price − $1,000,000 carrying value). Current interest expense is 8% of $1 million or $80,000. Interest expense on $1,055,000 of new debt at 7.5% will be (0.075)(1,055,000) = $79,125. Note that overall the refinancing will not increase the value of the firm as the loss on the repurchase and the issuance costs of new debt will more than offset the savings in interest.
This question tested from Session 9, Reading 39, LOS g
Answer 65
The correct answer was C) Income tax expense.
The reported effective tax rate is calculated as income tax expense divided by pretax income. There are two alternatives to the reported effective tax rate measure. They include using taxes payable (from the tax return) and income tax paid (from the tax return). These measures may be more useful for analysis because they are less affected by management’s choices of accounting methods.
This question tested from Session 9, Reading 38, LOS h
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