‘CPA-00780 On May 4, Year 1, Marno County issued property tax assessments for the fiscal year ended June 30, Year 2. The first of two equal installments was due on November 1, Year 1. On September 1, Year 1, Dyur Co. purchased a 4-year old factory in Marno subject to an allowance for accrued taxes. Dyur did not record the entire year's property tax obligation, but instead records tax expenses at the end of each month by adjusting prepaid property taxes or property taxes payable, as appropriate. The recording of the November 1, Year 1, payment by Dyur should have been allocated between an increase in prepaid property taxes and a decrease in property taxes payable in whit of the following percentages? A. 66 2/3% 33 1/3% B. 0% 100% Cc. 50% 50% D. 331/3% 66 2/3% Explanation Choice "D" is correct. 33 1/3% increase in prepaid.‘CPA-00780 Aneen's Video Mart sells 1 and 2-year mail order subscriptions for its video-of-the-month business. Subscriptions are collected in advance and credited to sales. An analysis of the recorded sales activity revealed the following: Yeart Year2 Sales $ 420,000 $ 500,000 Less cancellations 20,000 30,000 Net sales $ 400,000 $ 470,000 Subscription expirations: Year 1 $120,000 Year2 155,000 $130,000 Year3 125,000 200,000 Year 4 140,000, $400,000 $470,000 In Aneen's December 31, Year 2, balance sheet, the balance for unearned subscription revenue should be: A. $495,000 B. $470,000 C. $465,000 D. $340,000 Explanation Choice "C" is correct. $465,000 unearned subscription revenue. Net Sales Subscription Revenue Subscription Expirations Year 1 Year 2 Earned UnearnedYear 1 Earned Year 2 Earned Year 3 Unearned Year 4 Unearned 120 155 400 130 200 470 120 405 325 140 485 18.12 © Becwe Proessonsl Eduestion Corporation. Al igh reserved(CPA-00777 On July 1, Year 1, Roxy Co. obtained fire insurance for a 3-year period at an annual premium of $72,000 payable on July 1 of each year. The first premium payment was made July 1, Year 1. On October 1, Year 1, Roxy paid $24,000 for real estate taxes to cover the period ending September 30, Year 2. This prepayment was made to obtain a discount. In its December 31, Year 1, balance sheet, Roxy should report prepaid expenses of: A. $60,000 B. $54,000 c. $48,000 D. $36,000 Explanation Choice "B" is correct. $54,000 prepaid expenses in 12/34/Year 1 BS. (All figures in thousands.) verage Peri Prepaid Expenses Date Action From To Insur Taxes Total 7MIYear1 Payment 7/1/Year1 6/30/Year2 72 72 10/1/Year1 Payment 10/1/Year1 9/30/Year 2 24 24 12/31/Year 1 Amortize 7/1/Year1 12/31/Year 1 (36) (38) 12/31/Year 1 Amortize 10/1/Year 1 12/31/Year 1 @) 12/31/Year 1 Balances soe tS 4 10.12 © Beowar Prfessonal Education Corporation, Al ght eservesCPA-04680 UVW Broadcast Co. entered into a contract to exchange unsold advertising time for travel and lodging services with Hotel Co. As of June 30, advertising commercials of $10,000 were used. However, travel and lodging services were not provided. How should UVW account for advertising in its June 30 financial statements? ‘A. Revenue and expense is recognized when the agreement is complete. B. An asset and revenue for $10,000 is recognized. C. Both the revenue and expense of $10,000 are recognized. D. Not reported Explanation Choice "B" is correct. Revenues should be recognized in the period in which they were earned and realized or realizable. Expenses are recognized when an entity's economic benefits are used up in delivering or producing goods, rendering services, or other activities that constitute its ongoing major or central operations. UVW provided advertising services but did not yet benefit from the travel or lodging. Choices " , and "D" are incorrect, per the above.‘CPA-00623 Fay Corp. pays its outside salespersons fixed monthly salaries and commissions on net sales. Sales commissions are computed and paid on a monthly basis (in the month following the month of sale), and the fixed salaries are treated as advances against commissions. However, if the fixed salaries for salespersons exceed their sales commissions earned for a month, such excess is not charged back to them. Pertinent data for the month of March for the three salespersons are as follows: Fixed Net Commission Salesperson Salary Sales Rate A $10,000 $ 200,000 4% B 14,000 400,000 6% c 18,000 600,000 6% Totals $ 42,000 $ 1,200,000 What amount should Fay accrue for sales commissions payable at March 31? A. $70,000 B. $68,000 c. $28,000 D. $26,000 Explanation Choice "C" is correct. $28,000 sales commissions payable at March 31 Sales Persons c Total Net Sales $ 200,000 $ 400,000 $ 600,000 Label x 4% x 6% x 6% Commissions earned 8,000 24,000 36,000 Adjust "A" to fixed salary minimum 2,000 0 0 Commission accrual 10,000 24,000 36,000 $ 70,000Less fixed Salary advances (10,000) (14,000) (18,000) (42,000) Sales commissions payable $ 0 $ 10,000 $ 18,000 $28,000 18.12 © Becker Professional Education Corporation. Al ight eservesCPA-08238 On October 31, Year 1, a company with a calendar year-end paid $90,000 for services that will be performed evenly over a six-month period from November 1, Year 1, through April 30, Year 2. The company expensed the $90,000 cash payment in October, Year 1, to its services expense general ledger account. The company did not record any addi nal journal entries in Year 1 related to the payment. What is the adjusting journal entry that the company should record to properly report the prepayment in its Year 1 financial statements? A. Debit prepaid services and credit services expense for $30,000. B. _ Debit prepaid services and credit services expense for $60,000. C. Debit services expense and credit prepaid services for $30,000. D. Debit services expense and credit prepaid services for $60,000. Explanation Choice "B" is correct. When the cash payment was made, the company debited services expense for $90,000. The amount that will be expensed each month over the six-month period is $15,000. Therefore, at the end of Year 1, the total correct expense for November ($15,000) and December ($15,000) would be $30,000. The expense for the next year is $60,000 (4 months x $15,000). The adjusting journal entry to ensure the expense account and prepaid accounts are stated correctly is the following: Debit (Dr) Credit (Cr) Prepaid services $ 60,000 Services expense $ 60,000 Choice "A" is incorrect. Debiting prepaid services for $30,000 and crediting services expense for $30,000 would result in an overstatement of the services expense and understatement of prepaid services for Year 1. Choices "C" and "D" are incorrect. The adjusting journal entry must include a debit to prepaid services and credit to services expense to correctly adjust the services expense account and reflect the prepaid services asset for Year 2. 10.12 © Becker Prolessona Education Corporation. Al ght reserved‘CPA-00620 At December 31, Year 1, a $1,200,000 note payable was included in Cobb Corp.'s liability account balances. The note is dated October 1, Year 1, bears interest at 15%, and is payable in three equal annual payments of $400,000. The first interest and principal payment was made on October 1, Year 2. In its December 31, Year 2 balance sheet, what amount should Cobb report as accrued interest payable for this note? A. $135,000 B. $90,000 Cc. $45,000 D. $30,000 Explanation Choice "D" is correct. $30,000 accrued interest payable at Dec. 31, Year 2 Note Payable Note payable balance at Dec. 31, Year 1 $ 1,200,000 Less: First payment made Oct. 1, Year 2 (400,000) Note payable balance at Oct. 1, Year 2 800,000 Annual interest rate 15% Annual interest 120,000 ‘Adjustment factor for 3 mos. From 10-1-Year 2 to 12-31-Year 2 x32 Accrued interest payable at Dec. 31, Year 2 $ 30,000 18.12 © Beowe Proeesonal Edueston Corporation. Al ight reservedCPA-00619 Rice Co. salaried employees are paid biweekly. Advances made to employees are paid back by payroll deductions. Information relating to salaries follows: 12/31/Year 1 12/31/Year 2 Employee Advances $ 24,000 $ 36,000 Accrued Salaries Payable 40,000 ? Salaries Expense During the Year 420,000 Salaries Paid During the Year (Gross) 390,000 In Rice's December 31, Year 2, balance sheet, accrued salaries payable was: A. $94,000 B. $82,000 c. $70,000 D. $30,000 Explanation Choice "C" is correct. $70,000 accrued salaries payable at Dec 31, Year 2. Accrued lari Payable. Beginning balance 12/31/Year 1 $ 40,000 ‘Add: Salaries expense during the year 420,000 Sub Total 460,000 Less: Salaries paid during the year (gross) (390,000) Ending balance 12/31/Year 2 $ 70,000 18.12 © Becwer Professional Edueaton Corporation, Al gh reservedCPA-00618 On December 31, special insurance costs, incurred but unpaid, were not recorded. If these insurance costs were related to work-in-process, what is the effect of the omission on accrued liabilities and retained earnings in the December 31 balance sheet? A. Noeffect No effect B. Noeffect Overstated C. Understated ~—No effect D. Understated Overstated Explanation Choice “C" is correct. Understated. No effect. Since the unrecorded liability affects work-in- process inventory (rather than cost of sales/retained earnings), there is no effect on retained earnings, but accrued liabilities (and inventory) are understated. 18.12 © Becker Prlesconal Education Corporation. Al ght eservesCPA-00613 Kemp Co. must determine the December 31, Year 1, year-end accruals for advertising and rent expenses. A $500 advertising bill was received January 7, Year 2, comprising costs of $375 for advertisements in December Year 1 issues, and $125 for advertisements in January Year 2 issues of the newspaper. Astore lease, effective December 16, Year 0, calls for fixed rent of $1,200 per month, Payable one month from the effective date and monthly thereafter. In addition, rent equal to 5% of net sales over $300,000 per calendar year is payable on January 31 of the following year. Net sales for Year 1 were $550,000. In its December 31, Year 1, balance sheet, Kemp should report accrued liabilities of: A $12,875 B. $13,000 c. $13,100 D. $13,475 Explanation Choice "D" is correct. $13,475 accrued liabilities at 12/31/ Year 1. Accrued Liabilities 12831/Year1 ‘Advertising for December Year 1 issues 375 ($125 for Jan. Year 2 issues pertain to Year 2) Store lease fixed rent ($1,200 x 1/2 month) 600 Actual net sales $550,000 Less base sales (300,000) Excess 250,000 Percentage x5% Percentage rent 12,500 Total $13,47518.12 © Becker Prtessonal Education Corporation. Al ght reserved‘CPA-00601 Cap Corp. reported accrued investment interest receivable of $38,000 and $46,500 at January 1 and December 31, respectively. During the year, cash collections from the investments included the following: Capital gains distributions $ 145,000 Interest 152,000 What amount should Cap report as interest revenue from investments? A. $160,500 B. $153,500 Cc. $152,000 D. $143,500 Explanation Choice "A" is correct. $160,500 interest revenue from investments. Begin balance (1-1) $ 38,000 ‘Add: Accrued interest revenue 160,500 Sub Total 198,500 Less collections of interest (152,000) Ending balance (12-31) $ 46,500 Note: Capital gains distributions of $145,000 is a distractor. 18.12 © Becker Prteasonal Education Corporation. Al ght eserves‘CPA-00600 On the first day of each month, Bell Mortgage Co. receives from Kent Corp. an escrow deposit of $2,500 for real estate taxes. Bell records the $2,500 in an escrow account. Kent's Year 2 real estate tax is $28,000, payable in equal installments on the first day of each calendar quarter. On December 31, Year 1, the balance in the escrow account was $3,000. On September 30, Year 2, what amount should Bell show as an escrow liability to Kent? A. $1,500 B. $4,500 c. $8,500 D. $11,500 Explanation Choice "B" is correct. $4,500 escrow liability at September 30, Year 2. Escrow Liability Begin balance 12/31/ Year 1 $ 3,000 ‘Add deposits ($2,500 x 9 months) 22,500 Sub Total 25,500 Deduct payments ($28,000/4 qtrs x 3 payments) (21,000) Ending balance 9/30/ Year 2 $ 4,500 18.12 © Becker Prfesslonal Education Corporation, Al ght reservedCPA-00599 Pak Co.'s professional fees expense account had a balance of $82,000 at December 31, Year 1, before considering year-end adjustments relating to the following: + Consultants were hired for a special project at a total fee not to exceed $65,000. Pak has recorded $55,000 of this fee based on billings for work performed in Year 1. + The attorney's letter requested by the auditors dated January 28, Year 2, indicated that legal fees of $6,000 were billed on January 15, Year 2, for work performed in November Year 1, and unbilled fees for December Year 1 were $7,000. What amount should Pak report for professional fees expense for the year ended December 31, Year 17 A. $105,000 B. $95,000 Cc. $88,000 D. $82,000 Explanation Choice "B" is correct. $95,000 professional fees expense for Year 1 Professional Fees Expense Unadjusted balance at Dec. 31, Year 1 $82,000 Special project fee of $55,000 billed and recorded for work performed 0 in Year 1 requires no adjustment in Year 1. Additional $10,000 will be billed and recorded next year (Year 2) for completion of project. Legal fees billed on Jan. 15, Year 2 for work performed in Nov. Year 4 6,000 should be accrued. Unbilled fees for Dec. Year 1 should be accrued. 7.000 Professional fees expense for Year 1 $95,000 1.12 © Beoser Profesional Eciomton Corporon Al rights reserve.‘CPA-00597 Dana Co.'s officers’ compensation expense account had a balance of $224,000 at December 31, Year 1, before any appropriate year-end adjustment relating to the following: + No salary accrual was made for December 30-31, Year 1. Salaries for the two-day period totaled $3,500. + Year 1 officers’ bonuses of $62,500 were paid on January 31, Year 2. In its Year 1 income statement, what amount should Dana report as officers' compensation expense? A. $290,000 B. $286,500 C. $227,500 D. $224,000 Explanation Choice "A" is correct. $290,000 compensation expense for Year 1: Compensation Expense Compensation exp. before year-end adjustments $ 224,000 ‘Add: Salary accrual for Dec. 30-31, Year 1 3,500 ‘Add: Year 1 bonuses not paid until Jan. 31, Year 2 62,500 Compensation exp. after year-end adjustments $ 290,000‘CPA-00596 On February 12, VIP Publishing, Inc. purchased the copyright to a book for $15,000 and agreed to pay royalties equal to 10% of book sales, with a guaranteed minimum royalty of $60,000. VIP had book sales of $800,000 during the year. In its year-end income statement, what amount should VIP report as royalty expense? A. — $60,000 B. $75,000 Cc. $80,000 D. $95,000 Explanation Choice "C" is correct. Royalty expense is the larger of minimum royalties of $60,000, or 10% of $800,000 sales, $80,000. Choice "A" is incorrect. The minimum royalty would be the expense if actual royalties were less than $60,000. Choice "B" is incorrect. The minimum royalty would be the expense if actual royalties were less than $60,000. The copyright should be recorded as an intangible asset, not royalty expense. Choice "D" is incorrect. The copyright should be recorded as an intangible asset, not as royalty expense. 18.12 © Becker Prlessional Eéueaion Corporation, Al ght eserves‘CPA-00593 Delect Co. provides repair services for the AZ195 TV set. Customers prepay the fee on the standard one-year service contract. The Year 1 and Year 2 contracts were identical, and the number of contracts outstanding was substantially the same at the end of each year. However, Delect's December 31, Year 2, deferred revenues’ balance on unperformed service contracts was significantly less than the balance at December 31, Year 1. Which of the following situations might account for this reduction in the deferred revenue balance? ‘A. Most Year 2 contracts were signed later in the calendar year than were the Year 1 contracts. B. Most Year 2 contracts were signed earlier in the calendar year than were the Year 1 contracts. C. The Year 2 contract contribution margin was greater than the Year 1 contract contribution mar D. The Year 2 contribution margin was less than the Year 1 contract contribution margin. Explanation Choice "B" is correct. If Year 2 contracts were signed earlier in the year than before, more warranty work would have been performed by year-end, thus reducing the deferred revenue balance more than in prior years. Choice "A" is incorrect. Contracts signed later in the year than before would create fewer opportunities for warranty work to be done. Thus, the balance in the deferred revenue account would be greater than before. Choice "C" is incorrect. None of the facts indicate that contribution margin would be any different between the contracts written in two separate years. Choice "D" is incorrect. None of the facts indicate that contribution margin would be any different between the contracts written in two separate years. 18.12 © Beower Professional Education Corporation, Al ght reserved(CPA-00577 Dunne Co. sells equipment service contracts that cover a two-year period. The sales price of each contract is $600. Dunne's past experience is that, of the total dollars spent for repairs on service contracts, 40% is incurred evenly during the first contract year and 60% evenly during the second contract year. Dunne sold 1,000 contracts evenly throughout the current year. In its December 31 balance sheet, what amount should Dunne report as deferred service contract revenue? A. $540,000 B. $480,000 . $360,000 D. $300,000 Explanation Choice “B" is correct. When service contracts are sold, the entire proceeds are reported as deferred revenue. Revenue is recognized, and deferral reduced as the service is performed. Since repairs are made evenly (July 1 is average date), only % of the 40% of repairs will be in the current year. Current year deferral ($600 x 1,000) $ 600,000 Eamed in the current year (600,000 x 40% x 1/2) (120,000) Deferral 12-31 $ 480,000 Choice "A" is incorrect. When service contracts are sold, the entire proceeds are reported as deferred revenue. Revenue is recognized, and deferral reduced as the service is performed. Since repairs are made evenly, (July 1 is average date) only % of the 40% of repairs will be in the current year. Choice "C" is incorrect. Since repairs are incurred evenly during the first year (July 1 is average date) only % of 40% will be earned in the current year. Choice "D" is incorrect. Revenue is recognized, and deferral reduced, as the service is performed 1.12 © Beoser Profesional Eciomton Corporon Al rights reserve.‘CPA-00564 Frame Co. has an 8% note receivable dated June 30, Year 1, in the original amount of $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1, Year 2, Year 3, and Year 4. In its June 30, Year 3, balance sheet, what amount should Frame report as a current asset for interest on the note receivable? A. $0 B. $4,000 c. $8,000 D. $12,000 Explanation Choice "C" is correct. The current asset for interest receivable on June 30, Year 3, is the interest to be received within one year. Interest to be received on July 1, Year 3 is: $100,000 balance of note x 8% Choice "A" is incorrect. The current asset for interest receivable on June 30, Year 3, is the interest to be received within one year. Choice "B" is incorrect. The current asset for interest receivable on June 30, Year 3, is the interest to be received within one year. Choice "D" is incorrect. The current asset for interest receivable on June 30, Year 3, is the interest to be received within one year.CPA-00544 Roro, Inc. paid $7,200 to renew its only insurance policy for three years on March 1, Year 5, the effective date of the policy. At March 31, Year 5, Roro's unadjusted trial balance showed a balance of $300 for prepaid insurance and $7,200 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Roro’s financial statements for the three months ended March 31, Year 5? A. $7,000 $300 B. $7,000 $500 c. $7,200 $300 D. $7,300 $200 Explanation Choice "B" is correct. The prepaid insurance reflected in the unadjusted trial balance would be fully expensed ($300) and one month (March 1 through March 31) of the renewed policy cost would be expensed. Insurance expense equals $500 ($300 plus $7,200/36 months). Prepaid insurance equals $7,000 ($7,200 x 35/36). The $300 was the last remaining amount from a previous policy that needed to be expensed. When the $7,200 was paid, it was recorded as a debit to Insurance Expense. However, it should have been recorded as a debit to Prepaid Insurance, and amortized over the 36 months. Therefore, one month's expense ($200) will remain in the expense account, and the remaining 35 months of expense will be moved to Prepaid Insurance ($7,000) Choice "A" is incorrect. Insurance expense should include a portion of the renewed policy cost. Choice "C" is incorrect. Prepaid insurance should be adjusted for the month that has expired on the renewed policy Choice "D" is incorrect. The previous balance in prepaid insurance should be expensed. 18.12.© Booka Prtessonal Education Corporation. Al ght eserves‘CPA-04463 According to the FASB conceptual framework, which of the following would cause earnings to differ from comprehensive income? ‘A. Dividends declared but not paid B. Realized gain from sale of held-to-maturity debt security. C. Unrealized holding loss from av: ble-for-sale debt secu! D. Unrealized holding gain from trading debt securities. Explanation Choice "C" is correct. Unrealized holding loss from available-for-sale debt securities is a component of other comprehensive income, which is not included in net income and would thus cause earnings to differ from comprehensive income. Choice "A" is incorrect. Dividends declared but not paid are excluded from both earnings and comprehensive income. Choices "B" and "D" are incorrect. Realized gains from the sale of held-to-maturity debt securities and unrealized holding gains from trading debt securities are both components of earnings and of comprehensive income 18.12 © Becker Professional Education Corporation. Al ahs reservedCPA-04472 Which of the following items would not be found in comprehensive income? ‘A. _ Income from continuing operations. B. —Non-monetary exchanges of common stock for productive assets C. Unrealized losses from changes in the value of available for sale securities. D. — Recognition of prior service cost due to pension plan amendment. Explanation Choice "B" is correct. Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. The exchange of common stock for productive assets represents transaction with owners specifically excluded from comprehensive income. Choice "A" is incorrect. Income from continuing operations is included in comprehensive income. Generally comprehensive income is the sum of income from operations and other comprehensive income. Choice "C" is incorrect. Unrealized gains and losses on available-for-sale equity securities are included in net income while unrealized gains and losses on available-for-sale debt securities are specifically included in other comprehensive income. Choice "D" is incorrect. The changes in the funded status of a pension plan due to the recognition of prior service cost from a plan amendment is included in other comprehensive income. 18.12 © Becker Professlona Eduestion Corporation, Al ght reservedCPA-04487 Which of the following would be considered an element of comprehensive income? B. Yes Yes Yes C. Yes No Yes D. No No Yes Explanation Choice "B" is correct. Comprehensive income is the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Comprehensive income is the total of all components of comprehensive income including net income and other comprehensive income. 1012 © Beoeer Profesional Edueaton Corportlon Al rights reserve.CPA-03969 Which of the following items is included in accumulated other comprehensive income or loss? ‘A. Unrealized gains and losses from the ineffective portion of a derivative properly designated as a cash flow hedge. B. Unrealized holding gains or losses on securities classified as trading securities. €. A reduction of shareholders’ equity related to employee stock ownership plans. D. Prior service costs not previously recognized as a component of net periodic pension costs. Explanation Choice "D" is correct. Prior service costs recognized in the year of adjustment should be recorded to PBO and other comprehensive income (or loss), which then becomes part of accumulated other comprehensive income (or loss). The unrecognized prior service cost in accumulated other comprehensive income (or loss) is amortized to pension expense over the plan participant's remaining years of service. Choice " reported in current income. Gains/losses on the effective portion of a cash flow hedge are is incorrect. Gains/losses on the ineffective portion of a cash flow hedge are deferred and reported as a component of other comprehensive income until the hedged transaction impacts earnings. Choice "B" is incorrect. Unrealized holding gains and losses on trading securities and available-for-sale equity securities are recorded directly to net income. Unrealized gains and losses on available for sale debt securities would be included in other comprehensive income (or loss), which then becomes part of accumulated other comprehensive income (or loss). Choice "C" is incorrect. The granting of employees the right to own company stock is recorded directly to compensation expense in net income. 18.12 © Becker Prtessonal Eoueaion Corporation. Al gh eservesCPA-08562 Which of the following items should be shown as a component of comprehensive income? ‘A. Dividend paid to a shareholder. B. — Foreign-currency translation adjustment. €. Additional capital contribution. D. Deferred revenue. Explanation Choice “B" is correct. Comprehensive income includes all components of net income and “other comprehensive income." A foreign currency translation adjustment will be included in other comprehensive income, and therefore comprehensive income. Choice “A” is incorrect. Comprehen: e income includes all changes in equity except those resulting from investments by owners and distributions to owners. A dividend paid to a shareholder is an owner transaction. Choice “C” is incorrect. Additional capital contributions represent investments by owners and are therefore excluded from the calculation of comprehensive income. Choice “D” is incorrect. Deferred revenue represents cash received prior to revenue being “earned.” Because it represents a liability until it qualifies as earned, deferred revenue will have no effect on comprehensive income. 1112 © Beoear Profesional Exionton Gorporton Al rights reserve.CPA-08498 A company reported the following information for Year 1: Net income $34,000 Owner contribution 9,000 Deferred gain on an effective cash-flow hedge 8,000 Foreign currency translation gain 2,000 Prior service cost not recognized in net periodic pension cost 5,000 What is the amount of other comprehensive income for Year 1? A. $5,000 B. $14,000 c. $15,000 D. $43,000 Explanation Choice "A" is correct. Other comprehensive income for Year 1 is $5,000. ($8,000 + $2,000 - $5,000). This includes the $8,000 of deferred gain on an effective cash-flow hedge, plus $2,000 of foreign currency translation gain, less the $5,000 of prior service cost not recognized in net periodic pension cost. The $5,000 of prior service cost would be a positive addition to comprehensive income in the year that it was amortized to net periodic pension cost. In this problem, it is not being recognized in net periodic pension cost. Choice "B" is incorrect. The $14,000 includes $9,000 of owner contribution and $5,000 of prior service cost not recognized in net periodic net pension cost. The $9,000 of owner contribution is not included in other comprehensive income because other comprehensive income represents the change in equity from transactions related to nonowner sources. The $5,000 of prior service cost not recognized in net periodic pension cost would be a subtraction from other comprehensive income in Year 1 rather than an addition. Choice "C" is incorrect. The answer of $15,000 would include $8,000 of deferred gain on an effective cash-flow hedge plus $2,000 of foreign currency translation plus the $5,000 of prior service cost not recognized in net periodic pension cost. The $5,000 of prior service cost would be a positive addition to other comprehensive income in the year that it was amortized to net periodic pension cost, but not in this situation, where the prior service cost is notrecognized in net periodic pension cost. Choice "D" is incorrect. This answer adds net income of $34,000 to $9,000 of owner contribution. This is not the correct answer because other comprehensive income does not include net income or transactions from owners. Comprehensive income does include net income. The formula is: Net income + Other comprehensive income = Comprehensive income. 18.12 © Becker Prlessional Education Corporation. Al gh reservedCPA-08496 Accumulated other comprehensive income is reported in which of the following financial statements? A. The income statement B, The statement of comprehensive income. C. The statement of cash flows. D. The statement of financial position. Explanation Choice "D" is correct. Accumulated other comprehensive income is a balance sheet account and is reported in the statement of financial position. Choice "A" is incorrect. Accumulated other comprehensive income is not reported in the income statement. Choice “B" is incorrect. Other comprehensive income for the current year can be reported in the statement of comprehensive income. Accumulated other comprehensive income is, however, reported in the statement of financial position because it is a component of equity that includes the total of other comprehensive income for the current period and previous periods. Choice "C" is incorrect. Accumulated other comprehensive income is not reported in the statement of cash flows. 18.12 © Becker Prlessional Eéueaion Corporation, Al ght eservesCPA-08474 Which of the following assets or transactions is an element of comprehensive income? ‘A. Investments by owners. B. Sales revenue. C. _ Distributions to owners. D. Deferred revenue. Explanation Choice "B" is correct. Sales revenue is an element of comprehensive income. Choice "A" is incorrect. Comprehen: e income does not include changes in equity resulting from investments by owners. Choice "C" is incorrect. Comprehensive income includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners. Choice "D" is incorrect. Deferred revenue is not an element of comprehensive income, but is a liability 1112 © Beceer Professional Eavemton Corporatlon Al its reserve.CPA-05079 The reporting of comprehensive income would include or display: A. Net income. B. Proceeds from sale of stock. C. Dividends. D. Comprehensive income per share. Explanation Rule: Comprehensive income is the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Net Income + Other comprehensive income Comprehensive income Choice "A" is correct. Comprehensive income includes net income but excludes transactions with owners such as dividends or stock purchases. Comprehensive income per share should not be displayed. Choices "B", "C", and "D" are incorrect, per the above explanation. 18.12 © Becker Professional Education Corporation. Al ahs reserved‘CPA-07056 Riggs, Co. adopted IFRS two years ago and wants to report the following items on its financial statements: + Pension net gain of $20,000 + Unrealized gain on trading debt securities of $16,000 + Foreign currency translation loss of $17,000 + Gain from the effective portion of a cash flow hedge of $11,000 * Revaluation gain of $5,000 The total for Other Comprehensive Income from the items above will be: A. $36,000 B. $30,000 c. $19,000 D. $14,000 Explanation Choice "C" is correct. Under IFRS, other comprehensive income (OCI) includes all of the items above except for the unrealized gain on trading debt securities. Unrealized gains and losses on available for sale debt securities are included in OCI, but unrealized gains and losses on trading debt securities are part of income from continuing operations. Choice A" is incorrect. This choice incorrectly includes the unrealized gain on trading debt securities. Choice "B" is incorrect. This choice incorrectly includes the unrealized gain on trading debt securities and fails to include the revaluation of the fixed asset. Under IFRS, revaluation gains are reported in other comprehensive income. Choice "D" is incorrect. This choice incorrectly excludes the revaluation of the fixed asset. Under IFRS, revaluation gains are reported in other comprehensive income. 10.12 © BeoterProfesslonal Eduestion Corporation, Al ght eservedCPA-00102 One of the elements of a financial statement is comprehensive income. Comprehensive income excludes changes in equity resulting from which of the following? ‘A. Loss from discontinued operations. B. Prior period error correction. . Dividends paid to stockholders. D. Unrealized loss on investments in non-current marketable equity securities. Explanation Choice "C" is correct. Comprehensive income includes all changes in equity during a period except those resulting from owner investments and distributions to owners. Choice "A" is incorrect. Loss from discont ued operations included in net income, wi h is a component of comprehensive income. Choice “B" is incorrect. Prior period error correction is a change in stockholders’ equity not resulting from owner investments and distributions to owners and so is included in comprehensive income. Choice "D" is incorrect. Unrealized loss on investments in non-current marketable equity securities is a change in stockholders’ equity not resulting from owner investments and distributions to owners and so is included in comprehensive 1112 © Beoear Profesional Exionton Gorporton Al rights reserve.CPA-06962 Which of the following is a component of other comprehensive income? ‘A. Minimum accrual of vacation pay. B. Cumulative currency-translation adjustments. C. Changes in market value of inventory. D. Unrealized gain or loss on trading securities. Explanation Choice "B" is correct. Cumulative currency translation adjustments are reported in other comprehensive income. Choice "A" is incorrect. Vacation pay is a standard operating item that properly affects net income, not OCI. Choice "C" is incorrect. Changes in market value of inventory, in accordance with lower of cost or market (GAAP) or lower of cost or realizable value (IFRS) would also properly affect net income, not OCI Choice "D" is incorrect. Unrealized gains and loss on trading securities go directly to the income statement. It's unrealized gains and losses on available-for-sale debt securities that would affect OCI. 18.12 © Becker Professional Education Corporation. Al gh eserves‘CPA-06961 What is the purpose of reporting comprehensive income? A. To summarize all changes in equity from nonowner sources. B. To reconcile the difference between net income and cash flows provided from operating activities. C. To provide a consolidation of the income of the firm's segments. D. To provide information for each segment of the business. Explanation Choice "A" is correct. Comprehensive income represents all changes in stockholders’ equity that come from nonowner sources. Therefore, comprehensive income includes all net income e income, the PUFER items. However, plus any and all components of other comprehen: comprehensive income would not include investments by stockholders (owners) nor would it include distributions or dividends to stockholders (owners). Choices "B", "C", and "D" are incorrect per the explanation above. 10.12 © becker Professional Education Corporation. Al gh otervedCPA-00233 Reclassification adjustments must be shown in the financial statement that discloses comprehensive income: ‘A. To show what portion of comprehensive income is from the realization of current assets. B. To show the tax effect of items of comprehensive income. . To avoid double counting in comprehensive income items, which are currently displayed in net income. D. To avoid including transactions with shareholders in items of comprehensive income. Explanation Choice "C" is correct. Reclassification entries may be necessary to avoid double counting an item previously reported as comprehensive income (i.e., unrealized gain), which are now reported as part of net income (i.e., realized gain). Choice "A" is incorrect. The classifica’ n of assets as current or non-current has no bea on reporting comprehensive income. Choice "B" is incorrect. All items of comprehensive income must be shown net of the related tax effects, but it is not done with reclassification adjustments Choice "D" is incorrect. Transactions with shareholders such as paying dividends and issuing capital stock are not included in comprehensive income, thus, reclassification adjustments are not necessary to exclude them.‘CPA-00282 Which of the following is true regarding the presentation of comprehensive income. A. Yes Yes B. Yes No C. No Yes Explanation Choice "C" is correct. No - Yes. Comprehensive income may be shown on the face of a combined "statement of income and comprehensive income" a separate section below net income, or in a separate “statement of comprehensive income.” The income tax expense or benefit allocated to components must be disclosed, either on the face of the statement or in notes to the statement. Choices "A", "B", and "D" are incorrect, per the above rules. 18.12 © Becker Professona Eduestion Corporation. Al igh reservedCPA-06592 Which of the following is included in other comprehensive income? ‘A. Unrealized holding gains and losses on trading securities. B. Unrealized holding gains and losses that result from a debt security being transferred into the held-to-maturity category from the available-for-sale category. €. Foreign currency translation adjustments. D. The difference between the accumulated benefit obligation and the fair value of pension plan assets. Explanation Choice "C" is correct. The four main components of other comprehensive income include: + Pension changes in funded status: due to gains/losses, prior service costs, and net transition assets or obligations. + Unrealized gains and losses: unrealized holding gains/losses on available for sale debt securities and unrealized holding gains and losses on debt securities transferred from the held to maturity to available for sale classification. + Foreign currency items, including translation adjustments. + The effective portion of cash flow hedges. Choice "A" is incorrect. Unrealized gains/losses on trading securities go on the income statement. Choice "B" is incorrect. A transfer from the available for sale category to the held to maturity classification would be a move out of other comprehensive income, Choice "D" is incorrect. The difference between the fair value of plan assets and the accumulated benefit obligation is not reported on the financial statements and does not impact other comprehensive income. 18.12 © Becwe Professional Edueston Corporation. Al gh reserved‘CPA-06070 A company that uses IFRS reports the following information as of December 31 Pension gain $ 175,000 Foreign currency translation loss 120,000 Revaluation surplus from revaluation of fixed assets 50,000 Unrealized gain on available-for-sale debt security 32,000 Unrealized loss on trading security 20,000 Revaluation loss from revaluation of intangible assets 18,000 What amount should the company report as other comprehensive income as of December 31? A. $17,000 B. $55,000 c. $99,000 D. $137,000 Explanation Choice "D" is correct. The company's other comprehensive income includes the pension gain, the foreign currency translation loss, the revaluation surplus and the unrealized gain on the available for sale debt security: Pension gain $ 175,000 Foreign currency translation loss (120,000) Revaluation surplus 50,000 Unrealized gain on available-for-sale debt security 32,000 Total other comprehensive income $ 137,000 The unrealized loss on the trading security and the revaluation loss will be reported in net income, not other comprehensive income, as of December 31.18.12 © Becker Prtessonal Education Corporation. Al ght reservedCPA-05929 Which of the following statements is correct regarding reporting comprehensive income? ‘A. Accumulated other comprehensive income is reported in the stockholders’ equity section of the balance sheet. B. A separate statement of comprehensive income is required. C. Comprehensive income must include all changes in stockholders’ equi for the period. D. Comprehensive income is reported in the year-end statements but not in the interim statements. Explanation Choice "A" is correct. Accumulated other comprehensive income is a component of stockholders’ equity on the balance sheet. Choice "B" is incorrect. Comprehensive income can be reported in a separate statement of comprehensive income or in a statement of income and comprehensive income. Choice "C" is incorrect. Comprehensive includes only nonowner changes in equity. Stock transactions and dividends are not included in comprehensive income. Choice "D" is incorrect. Comprehensive income is reported in interim financial statements and year-end financial statements. 18.12 © Becker Prtessona Education Corporation. al ght eserves‘CPA-05908 Which of the following items is not classified as “other comprehensive income?” A. G i$ from extinguishment of debt. B. Foreign currency translation adjustments. C. Minimum pension liability equity adjustment for a defined-benefit pension plan. D. Unrealized gains for the year on available-for-sale debt securities Explanation Choice "A" is correct. Gains from extinguishment of debt are a component of net income, not a component of other comprehensive income. Comprehensive income is the sum of net income plus other comprehensive income. Other comprehensive income include changes in the funded status of a pension plan, unrealized gains and losses on available-for-sale debt securities, foreign currency items and the effective portion of cash flow hedges. Choice "B" is incorrect. Foreign currency translation adjustments are a component of other comprehensive income. Choice "C" is incorrect. The minimum pension liability adjustment is no longer required under U.S. GAAP. Choice "D" is incorrect. Unrealized gains (and losses) on available-for-sale debt securities are included in other comprehensive income. 1112 © Beoear Profesional Exionton Gorporton Al rights reserve.CPA-05649 A company reports the following information as of December 31: Sales revenue ‘$800,000 Cost of goods sold 600,000 Operating expenses 90,000 Unrealized holding gain on available-for-sale debt securities, net of tax 30,000 What amount should the company report as comprehensive income as of December 31? A. — $30,000 B. $110,000 Cc. $140,000 D. $200,000 Explanation Choice "C" is correct. Comprehensive income is equal to current period net income plus current period other comprehensive income. Sales revenue, cost of goods sold and operating expense can be used to calculate net income: Net income = Sales revenue - Cost of goods sold - Operating expenses Net income = $800,000 - $600,000 - $90,000 = $110,000 The unrealized holding gain on available-for-sale debt securities is not a component of net income, but is included in other comprehensive income. Total comprehensive income is calculated as follows: Comprehensive income = Net income + Other comprehensive income Comprehensive income = $110,000 + $30,000 = $140,000 Choice "A" is incorrect. This is the other comprehensive income to be reported for the period. Total comprehensive income includes net income and other comprehensive income items. Choice "B" is incorrect. This is the net income for the period. Total comprehensive income includes net income and other comprehensive income items. The unrealized holding gain onavailable-for-sale debt securities is an other comprehensive income item and must be included in comprehensive income Choice "D" is incorrect. Comprehensive income is not equal to the gross profit of $200,000 ($800,000 sales revenue - $600,000 cost of goods sold). 18.12 © Becker Professional Education Corporation, Al gh eserves‘CPA-00101 According to the FASB conceptual framework, comprehensive income includes which of the following? A. Yes Yes B. Yes No CG. No Yes D. No No Explanation Choice "B" is correct. Comprehensive income is the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity except those resulting from investments by owners and distributions to owners. SFAC 6 para 70. 18.12 © Becker Prlesconal Education Corporation. Al ght eservesCPA-03948 A partial listing of a company's accounts is presented below: Revenues $ 80,000 Operating expenses 50,000 Foreign currency translation adjustment gain, net of tax 4,000 Income tax expense 10,000 What amount should the company report as net income? A. — $20,000 B. $24,000 c. $30,000 D. $34,000 Explanation Choice "A" is correct. Net income totals $20,000 and includes the revenues, operating expenses and income tax expense [80,000 - 50,000 - 10,000]. Net income includes income from continuing operations (operating, non-operating and income tax expense if using the multiple-step format) and discontinued operations, but excludes other comprehensive income items. Choice "B" is incorrect. The $4,000 foreign currency translation adjustment gain is an "other comprehensive income" item and therefore does not affect net income, but rather comprehensive income. It should be excluded from the net income calculation. Choice "C" is incorrect. Only revenues and operating expenses are included in the $30,000 answer. Income tax expense is a component of net income and must be included in the calculation. Choice "D" is incorrect. The $34,000 erroneously excludes the income tax expense and erroneously includes the foreign currency translation gain. 10.12 © Beowe Professonal Eduestion Corporation, Al ghts reserved(CPA-08723 On January 1, Year 3, a company changed its inventory costing method from LIFO to FIFO. The company’s Year 3 financial statements contain comparative information for Year 2. How should the company present the Year 1 effect of the change in accounting principle in its Year 3 comparative financial statements? ‘A. _ As an adjustment to the beginning Year 2 inventory balance with an offsetting adjustment to beginning Year 2 retained earnings. B. As part of income from continuing operations in the Year 2 income statement. C. As an extraordinary item in the Year 2 income statement. D. As anote disclosure only. Explanation Choice “A” is correct. If comparative financial statements are presented, the cumulative effect of a change in accounting principle is presented net of tax as an adjustment to beginning retained earnings in the statement of stockholders’ equity. Choice “B" is incorrect. The cumulative effect of the change from Year 1 should not be reported in the Year 2 income statement, as it does not relate to Year 2. Choice “C” is incorrect. Extraordinary items are no longer recognized according to U.S. GAAP. The cumulative effect of a change in principle for periods not reported in the comparative financial statements are accounted for within retained earnings. Choice “D" is incorrect. Information about a change in principle will be disclosed in the financial statements, but will also be recognized in the financial statements. 18.12 © Becker Proteasonal Education Corporation. Al ght eserves(CPA-07208 Which of the following is the minimum reporting requirement for a company that is preparing its first IFRS financial statements? A. Three statements of financial position. B. Two statements of financial position. C. One statement of comprehensive income. D. One statement of cash flows. Explanation Choice "A" is correct. Per IFRS 1 (First-Time Adoption of International Financial Reporting Standards), an entity's first financial statements should include at least: + Three balance sheets (statements of financial position), + Two statements of comprehensive income, + Two separate income statements, » Two statements of cash flows, + Two statements of changes in equity, and » Related notes, including comparative information.‘PA-00071 Per U.S. GAAP, which of the following statements is correct regarding accounting changes that result in financial statements that are, in effect, the statements of a different reporting entity? A. Cumulative-effect adjustments should be reported as separate items on the income statement in the year of change. B. No restatements or adjustments are requit dif the changes involve consolidated methods of accounting for subsidiaries. C. No restatements or adjustments are required if the changes involve the cost or equity methods of accounting for investments. D. The financial statements of all prior periods presented should be restated. Explanation Choice "D" is correct. Financial statements of all prior periods presented should be restated when there is a "change in entity" such as resulting from: 1. Changing companies in consolidated financial statements. 2. Consolidated financial statements versus previous individual financial statements. Choice "A" is incorrect. Cumulative-effect adjustments are reported in the retained earnings statement in the year of change Choice "B" is incorrect. Restatements are required for changes in entity (of subsidiaries). Choice "C" is incorrect. Per GAAP, changes involving the cost and equity methods of accounting for investments are not considered to be changes in accounting principle. A change from the cost method to the equity method requires restatement; however, a change from the equity method to the cost method does not require restatement and is accounted for prospectively. Note: IFRS does not discuss the accounting for changes in reporting entity. 18.12 © Becker Professional Education Corporation. Al oh reserved‘CPA-00230 Conn Co. reported a retained earnings balance of $400,000 at December 31, Year 1. In August, Year 2, Conn determined that insurance premiums of $60,000 for the three-year period beginning January 1, Year 1, had been paid and fully expensed in Year 1. Conn has a 30% income tax rate. What amount should Conn report as adjusted be: ing retained earnings in its Year 2 statement of retained earnings? ‘A. $420,000 B. $428,000 c. $440,000 D. $442,000 Explanation Choice “B" is correct. $428,000 net of tax. Beginning balance - RE 12-31-Year 1 $400,000 ‘Add: Prior period adjustment, Net of tax: 28,000 ‘$60,000 3-year insurance policy 1-1- Year 1 to 1-1- Year 4 Expensed in Year 1, 2/3 prepaid at 1-4- Year 2 ($60,000 x 2/3 = $40,000 x 70% net of tax) Adjusted balance - RE 1-1- Year 2 $428,000 Choice "A" is incorrect. Beginning retained earnings should be adjusted for the two remaining years of the insurance policy, net of tax, not for the $20,000 portion of the insurance policy related to Year 1. This $20,000 was correctly expensed in Year 1 Choice "C" is incorrect. The adjustment to beginning retained earnings should be recorded after-tax. Choice "D" is incorrect. Beginning retained earnings should only be adjusted for the unused portion of the insurance policy, not for the entire amount paid. Of the $60,000 paid, $20,000 (1/3) relates to Year 1 and was correctly expensed in Year 1, while $40,000 (2/3) will benefit Year 2; Year 3 and should not have been expensed in Year 1. 18.12 © Becker Prlessona Education Corporation. Al gh reserves‘CPA-00228 On January 2, Year 2, Air, Inc. agreed to pay its former president $300,000 under a deferred compensation arrangement. Air should have recorded this expense in Year 1 but did not do so. Air's reported income tax expense would have been $70,000 lower in Year 1 had it nin its December 31, Year 2, financial properly accrued this deferred compensa statements, Air should adjust the beginning balance of its retained earnings by a: A. $230,000 credit. B. $230,000 debit. €. $300,000 credit. D. $370,000 debit. Explanation Choice "B" is correct. $230,000 debit. A prior period adjustment for the correction of an error should be reported as an after-tax adjustment to beginning retained earnings. The $230,000 will be recorded as a debit to beginning retained earnings because compensation expense reduces retained earnings. Less adjustments (shown "net of tax"): Deferred compensation $ 300,000 Less: Applicable tax (70,000) Debit to subtract —$ 230,000 Choice "A" is incorrect. The $230,000 adjustment is recorded as a debit to beginning retained earnings because compensation expense reduces retained earnings Choice “C" is incorrect. The adjustment to retained earnings is a debit because compensation expense reduces retained earnings. Also, the adjustment must be recorded after-tax. Choice "D" is incorrect. When reporting prior period adjustments net of tax, the tax impact is subtracted from, not added to the prior period adjustment. 18.12 © Becker Professlonal Edueston Corporation, Al ghs reservedCPA-00227 Tack, Inc. reported a retained earnings balance of $150,000 at December 31, Year 1. In June Year 2, Tack discovered that merchandise costing $40,000 had not been included in inventory in its Year 1 financial statements. Tack has a 30% tax rate. What amount should Tack report as adjusted beginning retained earnings in its statement of retained earnings at December 31, Year 2? A. $190,000 B. $178,000 Cc. $150,000 D. $122,000 Explanation Choice “B" is correct. $178,000. Retained earings as previously reported 12-31-Year 1 $150,000 ‘Add: Adjustment for inventory not recorded $40,000 Less applicable tax (30% x 40,000) (12,000) 28,000 As restated $178,000 Choice "A" is incorrect. The adjustment to beginning retained earnings must include an adjustment for income taxes. Choice " is incorrect. The exclusion of merchandise from inventory is an accounting error that requires an adjustment to beginning retained earnings (prior period adjustment). Choice "D" is incorrect. An understatement of ending inventory results in an overstatement of cost of goods sold and an understatement of net income. To correct the understatement of prior period net income, beginning retained earnings must be increased on an after-tax basis for the amount of the ending inventory understatement.CPA-00226 While preparing its Year 3 financial statements, Dek Corp. discovered computational errors in its Year 2 and Year 1 depreciation expense. These errors resulted in overstatement of each year's income by $25,000, net of income taxes. The following amounts were reported in the previously issued financial statements: Retained earings, 1/1 Net income Retained earnings, 12/31 Year2 Year1 $ 700,000 $ 500,000 150,000 200,000 $ 850,000 $ 700,000 Dek's Year 3 net income is correctly reported at $180,000. Which of the following amounts should be reported as prior period adjustments and net income in Dek's Year 3 and Year 2 comparative financial statements? A. Year2 Year 3 B. Year 2 Year 3 c. Year 2 Year 3 D. Year2 Year 3 Explanation ($50,000) ($50,000) ($25,000) $150,000 $180,000 $150,000 $180,000 $125,000 $180,000 $125,000 $180,000 Choice "C" is correct. Because these are comparative financial statements, prior period adjustments require retroactive treatment for the years presented. Because Year 1 is not presented, the Year 1 correction is shown as a prior period adjustment of $25,000 to retained earnings statement of Year 2. The Year 2 net income is decreased by $25,000 to correct the overstatement of net income in that period 11112 © Beceer Protessonal Eavemton Corporatlon. Al rights reserve.CPA-00224 In single period statements, which of the following should not be reflected as an adjustment to the opening balance of retained earnings? ‘A. _ Effect of a failure to provide for uncollectible accounts in the previous period. B. _ Effect of a decrease in the estimated useful life of depreciable equipment. C. Cumulative effect of a change from the percentage of completion to the completed contract method of accounting for long-term construction projects. D. Cumulative effect of a change from LIFO to FIFO in valuing merchandise inventory under U.S. GAAP. Explanation Choice "B" is correct. A change in the estimated useful life of a depreciable asset is a change in estimate handled prospectively. No adjustment to retained earnings is necessary. Choice "A" is incorrect. The correction of a failure to provide for uncollectible accounts is considered to be a correction of an error. The opening balance of retained earnings would be adjusted to correct the error. Choice "C" is incorrect. This change is a change in accounting principle and is handled retrospectively. With retrospective application, the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes. Choice "D" is incorrect. This change is a change in accounting principle and is handled retrospectively. With retrospective application, the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.CPA-00221 During Year 2, Dale Corp. made the following U.S. GAAP accounting changes: Method used in Year1 Method used in Year 2 After-tax effect ‘Sum-of-the-years' digits Straight-line $30,000 depreciation depreciation Last-in, first-out First-in, first-out 98,000 for inventory valuation _for inventory valuation What amount should be shown in the Year 2 retained earnings statement as an adjustment to the beginning balance? A. $0 B. $30,000 Cc. $98,000 D. $128,000 Explanation Choice "C" is correct. $98,000. The cumulative effect of a change in accounting principle is shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, assuming that the cumulative effect can be calculated. A change from LIFO to FIFO for inventory valuation (costing) is a change in accounting principle. An exception is made however, for a change in depreciation method, since a change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in principle and a change in estimate. These changes should now be accounted for as a change in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings. Choices "A" and "D" are incorrect, per the above explanation. 1.12 © Beoser Profesional Eciomton Corporon Al rights reserve.‘@PA-00220 Goddard has used the FIFO method of inventory valuation since it began operations in Year 14. Goddard decided to change to the weighted-average method for determining inventory costs at the beginning of Year 4. The following schedule shows year-end inventory balances under the FIFO and weighted-average methods: Year FIFO Weighted-average Year 1 $45,000 $54,000 Year2 78,000 71,000 Year3 83,000 78,000 What amount, before income taxes, should be reported in the Year 4 retained earnings statement as the cumulative effect of the change in accounting principle? ‘A. $5,000 decrease. B. $3,000 decrease. . $2,000 increase. D. $0. Explanation Choice "A" is correct. $5,000 decrease The cumulative effect of change in accounting principle is determined as of the beginning of the year of change if comparative financial statements are not presented. In this case, the year of change is Year 4, so the cumulative effect is the difference in inventory as of the end of Year 3. [Note that inventory is a balance sheet item, so the change is based on the balances at the end of the last year the prior method was used. Had this question shown annual income statement amounts of cost of goods sold, we would have had to look at all the past years in the aggregate.] This will allow us to arrive at the adjustment to obtain the amount of retained earnings that would have been reported at the beginning of the period of change if the new accounting principle had been used for all prior periods. Year 3 FIFO (current method) $ 83,000 Weighted average (new method) (78,000)