A.2. Revenue Recognition and Income Measurement

IER Corp.
sells outdoor recreational supplies and equipment to wholesale and retail

customers. Products sold to the wholesale customers are shipped free on board
destination. Products sold to the retail customers are sold in IER’s stores. IER also sells
store memberships that are 100 percent cancellable and refundable within the first 15
days. IER had the following transactions for the year ended 12/31/X1.
Wholesale products shipped 11/20/X1 - received 12/31/X1 $40,000

Wholesale products shipped 12/31/X1 - received 1/3/X2 75,000
Wholesale products shipped 1/1/X2 500
Wholesale products on consignment 10,000
In-store sales 65,000
Membership fees - signed up 12/16/X1 or earlier 3,000
Membership fees - signed up 12/17/X1 or later 200
How much should IER recognize as revenue this year?
CalculatorTime Value Tables

A. $68,000
B. $108,000
C. $183,000
D. $193,700
Explanation
Choice “B” is correct. Revenue recognition occurs when an entity satisfies a

performance obligation by transferring either a good or a service to a customer.
Revenue should be recognized at an amount that reflects the expected consideration
the entity is entitled to receive in exchange for the good or service provided.
In this scenario, the performance obligation is satisfied, and revenue should be

recognized, for the following transactions:
 wholesale products shipped FOB destination and received prior to year-end;

 in-store sales; and
 membership fees after the cancellation privileges have lapsed. (Revenue should
only be recognized for the membership fees for which the cancellation period has
lapsed because that is the point in time at which the revenue collection is
considered probable; before that date, it is quite possible for the customer to
cancel the membership and receive a full refund.)
$40,000 + $65,000 + $3,000 = 108,000 Revenue recognized for the year ended
12/31/X1
After a successful drive aimed at members of a specific national association, Gorham
Publishing Company received a total of $90,000 for three-year subscriptions beginning
April 1, Year 1, and recorded this amount in the Unearned Revenue account. Assuming
Gorham only records adjustments at the end of the calendar year, the adjusting entry
required to reflect the proper balances in the accounts at December 31, Year 1, would
be to:

A. Debit Subscription Revenue for $67,500 and credit Unearned Revenue for $67,500.
B. Debit Unearned Revenue for $67,500 and credit Subscription Revenue for $67,500.
C. Debit Subscription Revenue for $22,500 and credit Unearned Revenue for $22,500.
D. Debit Unearned Revenue for $22,500 and credit Subscription Revenue for $22,500.
Explanation
Choice "D" is correct. The accrual basis of accounting requires revenue recognition
whenever services are rendered. When cash is collected in advance, the amount is
recognized as unearned revenue (liability) that will be recognized in the future as
revenue as services are rendered.
The original entry to recognize the collection of cash:
DR Cash $90,000
CR Unearned revenue (liability) $90,000
Services will be provided over the coming 36 months (three years) at a rate of $2,500
($90,000 ÷ 36) per month. By December of Year 1, nine months have passed. The
resulting revenue ($2,500 × 9 + $22,500) must be recognized, reducing unearned
revenue, with the following journal entry:
DR Unearned revenue (liability) $22,500

CR Subscription revenue $22,500
Choice "A" is incorrect. If originally the amount collected was credited to subscription
revenue instead of unearned revenue (which is not the case), the adjusting entry at the
end of the accounting period Year 1 would have been:
DR Subscription revenue $67,500

CR Unearned revenue (liability) $67,500
Allan Construction signed a $48-million contract on September 1, Year 1, with the City
of Springfield to construct a tunnel under the Maple River. On that date the estimated
cost to complete the tunnel, which was to be completed by June Year 4, was $36
million. Allan's fiscal year ends November 30, and the company recognizes revenue
over time. Data regarding the contract on the tunnel, on which construction began
December 1, Year 1, are given below.
November 30 (in thousands)

Fiscal year ended November 30 Year 2 Year 3
Actual costs to date $12,000 $30,000
Estimated costs to complete $24,000 $10,000
Progress billings to date $10,000 $28,000
Cash collected to date $8,000 $24,000
Assume that the estimated costs to complete at November 30, Year 3, were $20 million
rather than the $10 million shown in the schedule above. The loss recognized on the
contract for the fiscal year ending November 30, Year 3, is (answers in thousands):

A. $1,200.
B. $2,000.
C. $6,000.
D. $12,000.
Explanation
Choice “C” is correct. Using the percentage-of-completion method to recognize profits at

the end of each accounting period requires the calculation of the cumulative percentage
of completion as of the end of the year. Applying the cumulative percentage of
completion to the estimated profit will result in the cumulative gross profit estimated for
the period since the beginning of construction. Deducting previously recognized gross
profits will result in gross profit to be recognized in the current period.
For the year ended November 30, Year 2

Contract price (given) = $48,000
Estimated total cost = $12,000 (cost to date) + $24,000 (Estimated cost to complete) =
$36,000
Estimated total gross profit = $48,000 – $36,000 = $12,000
Percentage of completion = Cost to date ÷ Estimated total cost = $12,000 ÷ $36,000 =
33.33%
Gross profit recognized in the year ended November 30, Year 1 = 33.33% × $12,000 =
$4,000
Revenue recognition over time allows revenue to be recognized over the period during
which either the service is provided or the product is constructed. This method is in
accordance with GAAP. The circumstances that justify revenue recognition over time
include which criteria:
I. The customer consumes the benefits of the seller's work as the work is performed.
II. The customer controls the asset as the asset is created.
III The seller is creating an asset that has an alternative use to the seller, and the seller can
. receive payment for creating the asset even if the customer cancels the contract.

A. I and II
B. II and III
C. I and III
D. I, II, and III
Explanation
Choice “A” is correct. When accounting for products or services in which revenue is
eligible to be recognized over time, at least one of the following criteria must be met:
 Customer consumes the benefit of the seller's work as the work is performed;
 Customer controls the asset as the asset is created; or
 Seller is creating an asset that has no alternative future use to the seller, and the
seller has the legal right to receive payment for progress to date.
Both I and II are criteria that make revenue recognition over time appropriate.
Choice “B” is incorrect. Although statement II is correct, the fact that the seller is
creating an asset that has an alternative use to the seller would not meet the criterion
for revenue recognition over time.
Choice “C” is incorrect. Although statement I is correct, the fact that the seller is creating
an asset that does have an alternative use to the seller would not meet the criterion for
revenue recognition over time.
Choice “D” is incorrect. Although statements I and II are correct, the fact that the seller
is creating an asset that does have an alternative use to the seller would not meet the
criteria for revenue recognition over time.
Franklin Corp. sells, installs, and services telephone systems to businesses. Franklin
includes two years of customer training and support as part of its sales contract. In a
contract with a new customer who pays in full at the time of equipment installation,
when would Franklin recognize revenue for the work under U.S. GAAP?

A. When the equipment is installed, if subsequent training and support are included in the
contracted sales price.
B. At the end of two years, when all services have been completed.
C. Proportionately as separate contract elements are performed.
D. When the price becomes fixed and collection is reasonably assured.
Explanation
Choice "C" is correct. When a sales contract includes multiple products or services, the
fair value of the contract must be allocated to the separate contract elements. Revenue
is recognized as each element is completed.
Choice "A" is incorrect. The fair value of training and support after the sale of the
system must be determined and revenue is allocated to all components of the contract.
The inclusion of these items in the contract price is not relevant.
Choice "B" is incorrect. Revenue is recognized as the components of the contract are
satisfied. It is not appropriate to defer the recognition of all revenue until the end of all
service commitments.
Choice "D" is incorrect. A fixed price and reasonable assurance of collection are two
criteria that must be present for the recognition of revenue. In this problem, both of
those criteria have been met. Revenue is recognized as the separate contract elements
are performed.
On November 1, Year 1, Lizzo signed a one-year contract to provide cleaning services
on an as-needed basis to Swift Associates, with the contract beginning on the same
day. Swift agreed to pay Lizzo $9,600 for the one-year period. Lizzo is confident that
Swift will pay the amount indicated in the contract, but payment is not scheduled to
begin until Year 2. Lizzo should recognize revenue in Year 1 in the amount of:

A. $9,600.
B. $4,800.
C. $1,600.
D. $0.
Explanation
Choice “C” is correct. When goods or services are transferred to customers, the seller
can recognize revenue for the amount the seller expects to receive in exchange for
those goods or services. When accounting for products or services for which revenue is
eligible to be recognized over time, one of the following criteria must apply:
If a contract does not qualify for revenue over the time, the revenue is recognized at the
completion of the contract.
The arrangement between Lizzo and Swift qualifies for revenue recognition over time
because the customer (Swift) consumes the benefit of the seller's (Lizzo's) service as
the seller provides the service. At the end of the Year 1 calendar year, two months of
service are eligible for revenue recognition: $9,600 fee for 12 months of service × 2/12
of the total services provided by December 31, Year 1 = $1,600 revenue recognized in
the Year 1 calendar year.
Choice “A” is incorrect. The revenue should be recognized over the period of time of the
contract, not all at once on the date of the execution of the agreement.
Choice “B” is incorrect. Fifty percent of the revenue is being recognized in Year 1 when
only 2/12ths of the $9,600 revenue should be recognized in Year 1.
Choice “D” is incorrect. This contract meets the criteria for revenue recognition over
time as the customer consumes the benefit of the seller's work as it is performed. So,
2/12ths of the $9,600 revenues should be recognized in Year 1.
Many long-term contracts qualify for revenue recognition over time. Revenue can be
recognized using input-based or output-based measures. Typically, progress is
measured either as a percentage of the actual costs to date to the estimated total costs
(cost-to-cost ratio), or by some other method that reasonably estimates actual
completion.
A rationale for recognizing revenue over the life of a contract rather than at a single
point in time is that:

A. The results are more conservative.
B. The results provide a better measure of periodic accomplishment.
C. The results lower income tax due.
D. The results are a better match with legal ownership.
Explanation
Choice “B” is correct. When goods or services are transferred to customers, the seller
can recognize revenue for the amount the seller expects to receive in exchange for
those goods or services. When accounting for products or services in which revenue is
eligible to be recognized over time, one of the following criteria must apply:
If a contract does not qualify for revenue over time, the revenue is recognized at the
completion of the contract. Construction of long-term assets can span a period of a few
months to a few years. Delayed recognition of revenue would poorly communicate to
users of financial information the performance of the company if no revenue were
recognized until completion of long-term projects. Therefore, recognition of revenue
over the life of the contract rather than at a single point in time provides a better
measure of periodic accomplishment.
Choice “A” is incorrect. Recognizing revenue over time is not a more conservative
approach to recognizing revenue. Recognizing revenue over time allows for better
reporting of performance by a company engaged in contracts that extend over several
years.
Choice “C” is incorrect. Tax implications are not a factor in determining whether revenue
should be recognized over time versus at a point in time. Revenue recognized over time
will result in higher taxable income on the financial statements each period, whereas
revenue recognized at a single point in time would delay taxes until completion of the
contract.
A contract contains multiple service-related performance obligations. All of the following
criteria below will lead to the treatment of each service as a distinct obligation except:

A. The buyer is able to benefit from each service independently.
B. The services are all similar in nature and provided in the same manner.
C. The promise to deliver each service is separately identifiable from the other services.
D. The buyer can benefit from each service when combined with her other available resources.
Explanation
Choice "B" is correct. When the services are all very similar in nature and can be
provided to the buyer in a similar manner, this would indicate that the services can be
combined into a single performance obligation. When the buyer can benefit from each
service independently or in conjunction with her own available resources and when the
promise to deliver each service is separately identifiable from the other services, then
the performance obligation overall can be split apart into distinct components.
Jones and Hill Consulting enters into a contract for consulting with BGSE Inc. The
contract indicates payments of $2,000 per month for one year of consulting services
with approximately eight hours per month spent with BGSE Inc. Included in the contract
is a $5,000 bonus depending on specified objectives. Jones and Hill estimates that
there is an 80 percent probability that the company will receive the bonus.
Assume that Jones and Hill uses the expected value to determine variable
consideration in the contract. What amount of revenue will Jones and Hill recognize in
the first six months of the contract?

A. $12,000
B. $14,000
C. $14,500
D. $28,000
Explanation
Choice "B" is correct. The amount of variable consideration is estimated by taking a

range of possible amounts and using either the expected value (which sums probability-
weighted amounts) or the most likely amount—whichever is assumed to be the better
predictor. Variable consideration is included in the price only if it is probable that a
significant revenue reversal will not be required once any uncertainty tied to the
consideration is resolved.
The expected value is utilized by Jones and Hill, resulting in a total expected value of
the contract at inception of $28,000:
Possible Amounts Probabilities Expected Amounts

$29,000 (includes the $5,000 bonus) × 80% = $23,200
$24,000 (excludes the $5,000 bonus) × 20% = $ 4,800
Expected value of contract at inception $28,000
Each month Jones and Hill will recognize $2,333.33 of revenue: $28,000 expected
value ÷ 12-month service period = $2,333.33 per month.
After six months, Jones and Hill will have recognized revenue of $14,000: $2,333.33
monthly revenue × 6 months' passage of time.
Choice "A" is incorrect. The $12,000 amount is computed as $24,000 total revenue
without the bonus ÷ 12-month service period × 6 months' passage of time. However, the
$12,000 amount does not consider the potential $5,000 bonus. Under the expected
value method, the probability of potential payouts under the contract are considered in
the computation of revenue to be recorded over the duration of the contract.
A consulting company won a $20.8 million three-year contract. The contract requires
software development, hosting, and maintenance over three years. The total estimated
cost of the project is $17 million, with $10 million expected in Year 1, $5 million in Year
2, and $2 million in Year 3. The billing schedule shows that $5 million will be billed upon
start of the work, and then $5 million at each year-end. At the end of the first year, the
actual cost incurred is $9 million, and total estimated costs are unchanged at $17
million. If the consulting company recognizes revenue over time, how much revenue
should be recognized at the end of the first year?

A. $11 million
B. $10 million
C. $5 million
D. No revenue
Explanation
Choice "A" is correct. The revenue recognition standards require that revenue be
recognized as the entity satisfies the performance obligation. This can take place over
time or at a point in time. Revenue recognized over time is appropriate in the following
circumstances:
 The customer consumes the benefit of the seller's work as it is performed (e.g., a
company provides cleaning services to a customer for a period of time)
 The customer controls the asset as it is created (e.g., a contractor builds an
extension onto a customer's existing building)
 The seller is creating an asset that has no alternative use to the seller, and the
seller has the legal right to receive payment for progress to date (e.g., a company
manufactures customized product for a customer)
The two methods available for measuring progress to recognize revenue consists of the
input and output methods. Output methods recognize revenue based on the value to
the customer. Input methods recognize revenue based on the entity's efforts or inputs.
This question utilizes inputs to recognize revenue because the fact pattern provides the
consulting firm's efforts and estimated total efforts.
Costs incurred through Year 1 of $9 million are 52.9 percent of estimated total costs ($9
million costs incurred through Year 1 divided by $17 million estimated total costs). If
total revenues are forecasted at $20.8 million, then 52.9 percent of $20.8 million is a
little more than $11 million.
Choice "B" is incorrect. The $10 million relates to the expected costs for Year 1, not the
actual costs for Year 1. The amount of revenue recognized is based on total costs to
date divided by total expected costs to determine the percentage complete. Revenues
are recorded based on the total earned to date.
At the beginning of the year, a company entered into a long-term contract to build a
facility for $40 million. Half of the construction would be completed each year for the
next two years. At the beginning of the following year, the company received a second
contract to construct a second facility for $80 million. This project will last four years with
30 percent, 25 percent, 25 percent, and 20 percent of the facility completed during the
four years, respectively. If the company recognized revenue of $40 million in the second
year, the method it used to account for long-term contracts was the:

A. Completed contract method under IFRS.
B. Point in time method under U.S. GAAP.
C. Over time method under IFRS.
D. Over time method under U.S. GAAP.
Explanation
Choice "B" is correct. The revenue recognition standards in U.S. GAAP require that
revenue be recognized as the entity satisfies the performance obligation. This can take
place over time or at a point in time. Revenue recognized over time is appropriate in the
following circumstances:
 The customer consumes the benefit of the seller's work as it is performed (e.g., a
company provides cleaning services to a customer for a period of time)
 The customer controls the asset as it is created (e.g., a contractor builds an
extension onto a customer's existing building)
 The seller is creating an asset that has no alternative use to the seller, and the
seller has the legal right to receive payment for progress to date (e.g., a company
manufactures customized product for a customer)
The two methods available for measuring progress to recognize revenue consists of the
input and output methods. Output methods recognize revenue based on the value to the
customer. Input methods recognize revenue based on the entity's efforts or inputs.
The $40 million recognized at the end of the second year relates entirely to the first
contract, which was completed after two years. The total amount of revenue of $40
million consists only of the first contract and, therefore, no revenues from the second
contract are included in revenues earned during the year. The company is recognizing
revenue at a point in time under U.S. GAAP.
Choice "A" is incorrect. This answer choice is incorrect because the IFRS does not have
a completed contract method.
Choice "C" is incorrect. This answer choice is incorrect as no revenues associated with
the second contract are included in the Year 2 revenues of $40 million despite being
provided the percentage complete on that contract for each year of construction in the
Katie has signed up and paid $960 for a three-month introduction to cake decorating
class at Bakers R Us. The class begins August 1. Bakers R Us has a September 30
year-end. Indicate the amounts reflected in Bakers' financial statements associated with
the class.

A. $960 of service revenue, $960 cash
B. $640 service revenue, $320 deferred revenue
C. $320 of service revenue, $960 cash, and $640 deferred revenue
D. $0 service revenue, $960 deferred revenue
Explanation
Choice "B" is correct. Bakers R Us must recognize revenue over time if one of the
following conditions is met:
 The customer controls an asset being created or enhanced by the seller; or

 The customer receives and consumes the benefits of the entity's performance as
the entity performs; or
 The entity's performance does not create an asset with an alternative use to the
entity, and the entity has the enforceable right to receive payment for
performance completed to date.
When revenue is recognized over time, the seller must be able to reasonably measure
progress toward completion.
At the end of the fiscal year, the cake decorating class has been underway for two out
of three months. The company has earned $640 in service revenue for classes held,
and there is still one month of classes remaining for students who enrolled in classes
that began August 1. As such, the deferred revenue (a liability account) is $320: $940
received prior to the end of the fiscal year in which the business received the payment
times one third of the classes to be presented after the last day of the fiscal year in
which the business received the payment.
Choice "A" is incorrect. Revenue associated with the arrangement should be recognized
over time, not all at once. The class duration is three months, and only two months have
passed at the end of the business' fiscal year. Revenue eligible to be recognized
associated with the baking class is $960 × 2/3 = $640.
Choice "C" is incorrect. Revenue associated with the arrangement should be

recognized over time. The class duration is three months, and only two months have
passed at the end of the business' fiscal year. Revenue eligible to be recognized
associated with the baking class is $960 × 2/3 = $640. The deferred revenue (a liability
account) at September 30 is equal to one month's revenue, $320.
On April 15, Year 3, Landon Co. signed a contract that entailed providing a piece of
scientific equipment for $215,000 to Jacobs Inc., with delivery expected to occur on
August 31, Year 3. Per the terms of the contract, Jacobs will pay Landon for the full
amount on July 31, Year 3. Landon's cost to produce the equipment is $175,000.
Assuming delivery occurs as expected, the August 31 journal entry for Landon will
involve which of the following debits/credits?

A. Credit to cash of $215,000.
B. Debit to inventory of $175,000.
C. Credit to cost of goods sold of $175,000.
D. Debit to unearned sales revenue of $215,000.
Explanation
Choice "D" is correct. The journal entries for this transaction for Landon are as follows:
April 15, Year 3: No entry.
July 31, Year 3:
Debit (Dr) Credit (Cr)

Cash 215,000
Unearned sales revenue 215,000
August 31, Year 3:
Debit (Dr) Credit (Cr)

Unearned sales revenue 215,000
Sales revenue 215,000
Cost of goods sold 175,000
Inventory 175,000
BCA Tech, a new company, produces webcams and other computer-related software
products. The company recently received a contract to produce and deliver over
500,000 webcams to be distributed evenly over the next 20 months. If the company
would like to use an output method to recognize revenue during the first year of the
contract, which of the following methods would be most appropriate?

A. Milestones achieved.
B. Resources consumed.
C. Labors hours expended.
D. Costs incurred to total expected costs.
Explanation
Choice "A" is correct. Milestones achieved (whether production or distribution related)

are an example of an output method used to recognize revenue. Resource
consumption, labor hours expended, and costs incurred relative to total expected costs
are all examples of input methods.
Ricky's Auto Shop purchased a piece of equipment for the shop at a cost of $50,000 on
January 1, Year 1. The equipment had an estimated five-year life and an estimated
salvage value of $5,000. Ricky uses the straight-line method of depreciation. On
December 31, Year 3, Ricky sold the equipment for $19,000. The loss that Ricky will
record on the sale is closest to:

A. $1,000.
B. $4,000.
C. $26,000.
D. $31,000.
Explanation
Choice "B" is correct. The gain or loss that a company will record on the sale of a fixed
asset is equal to the difference between the sale price and the carrying value of the
asset.
The carrying value is based on the original cost of the asset less accumulated
depreciation at the time of the sale. With the straight-line method of depreciation, an
equivalent amount of depreciation expense is recorded each year equal to the
difference between the original cost and the salvage value, divided by the estimated
useful life.
$50,000 – $5,000
Annual depreciation = = $9,000
5
By the end of Year 3, Ricky will have recorded $27,000 in total depreciation ($9,000 per
year × 3 years). The carrying value will therefore be $23,000 ($50,000 cost – $27,000 in
During the month of October, a company purchased 1,000 units of inventory for $500
per unit and sold 900 of these units, which represented 10 percent of the company's
annual sales budget in units. The company also incurred administrative costs of
$300,000 during October. By applying the expense recognition principle, the total
amount of the company's expenses on its October income statement is:

A. $750,000.
B. $800,000.
C. $810,000.
D. $860,000.
Explanation
Choice "A" is correct. The expense recognition principle, also known as the matching
principle, states that, whenever possible, revenues and the expenses incurred to
generate those revenues should be recorded in the same period. The revenues
generated from selling inventory should be aligned with the costs incurred related to the
specific inventory sold. These costs are known as cost of goods sold, or COGS.
Expenses for the month of October will include the 900 units sold at a cost of $500 each
or $450,000 COGS. Administrative costs during the month were $300,000. Total
expenses for the month of October will be $750,000, calculated as $450,000 COGS +
$300,000 administrative costs.
Choice "B" is incorrect. This answer choice incorrectly includes the 1,000 units acquired
during the month as an expense. Only the units sold during the month would be
factored into the calculation of cost of goods sold during the month. The 100 units
remaining would be reported as inventory on the balance sheet.
Choice "C" is incorrect. This answer choice incorrectly includes the 1,000 units acquired
during the month as an expense and uses the selling price of $510 per unit to calculate
cost of goods sold. Cost of goods sold would be calculated using the units sold times
the cost of those units, or 900 units × $500 per unit, resulting in cost of goods sold of
450,000, not $510,000.
Choice "D" is incorrect. This answer choice is a distractor in the problem as no

combination of costs included in the fact pattern result in an expense of $860,000.
When a fixed asset is sold for less than book value, which one of the following will
decrease?

A. Total current assets
B. Current ratio
C. Net profit
D. Net working capital
Explanation
Choice "C" is correct. When fixed assets are sold, the selling price is compared with the
book value (Historical cost – Accumulated depreciation) to determine any gain/loss on
sale of fixed assets. This gain or loss is reported on the income statement. For
accounting purposes, cash or receivables will increase, while the net fixed assets will
decrease with the difference reported as gain or loss.
The sale of a fixed asset for less than book value results in a loss reported on the
income statements. This means that profits for the period decrease as a result of this
sale. Assume that a company sold an asset with a book value of $20,000 (historical cost
of $50,000 and accumulated depreciation of $30,000) for $16,000. The resulting loss is
recorded as follows:
DR Cash $16,000
DR Accumulated depreciation 30,000
DR Loss on sale of assets 4,000
CR Fixed asset $50,000
Choice "A" is incorrect. The sale of the fixed assets will lead to an increase in cash or
receivables for the selling price. This means that total current assets will increase, not
decrease, as a result of this transaction.
Choice "B" is incorrect. The sale of the fixed assets will result in an increase in cash or
receivables with no effect on current liabilities. Since the current ratio is calculated as
current assets divided by current liabilities, the current ratio will increase as a result of
this transaction, not decrease.
Choice "D" is incorrect. The sale of the fixed assets will result in an increase in cash or
receivables with no effect on current liabilities. Because the working capital is equal to
total current assets minus total current liabilities, the working capital will increase as a
result of this transaction, not vice versa.
During a demonstration of one of Baron Inc.'s computers, a customer asked if a carrying
case was available. When the salesclerk went to check the stock, the customer walked
out of the store with the computer. The computer, which cost $4,400, was not
recovered, and Baron received $4,675 from its insurance company. The computer was
replaced at a cost of $4,730, and the replacement computer has a fair value of $4,900.
The gain (loss) that Baron should recognize with respect to the theft followed by the
receipt of the insurance proceeds is:

A. ($55).
B. ($225).
C. $275.
D. $500.
Explanation
Choice “C” is correct. A gain or loss should be recognized when a nonmonetary asset is
involuntarily converted to a monetary asset (insurance proceeds), even though the
entity reinvests, or is obligated to reinvest, those proceeds to replace an asset
involuntarily converted.
Baron Inc. would record a gain of $275: $4,675 insurance proceeds received minus the
$4,400 cost of the computer that was stolen.
Choice “A” is incorrect. This answer incorrectly calculates the gain/(loss) as the
difference between the $4,730 cost to replace the stolen computer and the $4,675
insurance proceeds received.
Choice “B” is incorrect. This answer incorrectly calculates the gain/(loss) as the
difference between the $4,900 fair value of the replacement computer and the $4,675
insurance proceeds received.
Choice “D” is incorrect. This answer incorrectly calculates the gain/(loss) as the
difference between the $4,900 fair value of the replacement computer and the $4,400
book value of the stolen computer.
On July 1, Year 1, Tracy Co. sold a machine to Chester Co. for a non-interest bearing
note. The note requires ten annual payments of $10,000. Chester made the first
payment on June 30, Year 2. The market interest rate for similar notes was determined
to be 8%. Information on present value factors is as follows:
Present value
of ordinary
Present value annuity of
Period of $1 at 8% $1 at 8%
9 0.50 6.25
10 0.46 6.71
Assume that the machine had a carrying value of $45,000 on Tracy's books on July 1,
Year 1.
In Tracy's Year 1 income statement, what amount should be reported as gain on sale of
machinery?

A. $22,100
B. $17,500
C. $1,000
D. $55,000
Explanation
Choice "A" is correct.
Present value of payments $10,000 × 6.71 = 67,100

Less: Carrying value (45,000)
Gain on sale 22,100
Choice "B" is incorrect. $17,500 is calculated by using the 9-period present value factor
of 6.25 instead of the 10-period present value factor of 6.71. The present value of the
payments would have been $62,500 instead of $67,100 and the gain $17,500 instead of
$22,100. Since at the date of sale, there were 10 payments remaining, the 10-period
present value factor must be used.
Choice "C" is incorrect. $1,000 gain is determined by multiplying the total payments of
$100,000 by the 10-period present value factor of .46 and then by subtracting the
carrying value of $45,000.
ASC Topic 710 Compensation establishes the requirements for employers to accrue a
liability for employees' compensation for future absences. The item that would require
accrual under the provisions of this statement is:

A. Long-term disability pay.
B. Severance pay.
C. Postretirement benefits.
D. Vacation pay based on past service.
Explanation
Choice "D" is correct. To accrue the cost of compensation for future absences, the cost
must be attributable to services already rendered, the employee's rights must
accumulate and vest, and payment is probable and estimable. All of these conditions
must be present to record an estimated expense and an estimated liability in the books
of an entity.
Vacation pay based on past service must be accrued under ASC Topic
710 Compensation.
Choice "A" is incorrect. Long-term disability pay does not meet the criteria of recognition
under ASC Topic 710 Compensation. Disability pay is not payment for compensated
absences.
Choice "B" is incorrect. Severance pay does not meet the criteria of recognition under
ASC Topic 710 Compensation. Severance pay is not payment for compensated
absences. It is compensation for employment termination.
Choice "C" is incorrect. Postretirement benefits do not meet the criteria of recognition
under ASC Topic 710 Compensation. Other standards deal with all postretirement
benefits with a specific standard discussing pensions. Postretirement benefits payment
is not payment for compensated absences.
A stock option plan may or may not be intended to compensate employees for their
work. The compensation expense for compensatory stock option plans should be
recognized:

A. In the periods the employees perform services.
B. In the periods the stock is issued.
C. In the periods the options are granted.
D. Not as an expense but as a component of shareholders' equity.
Explanation
Choice "A" is correct. Stock options give employees the option to purchase a specified
number of shares of a firm's stock at a specified price during a specified period. Total
compensation is reported as compensation expense over the period of service.
Typically, employees are not allowed to exercise options for several years. In this
manner, the company provides an incentive to the employee not only to remain with the
company, but also to provide the employee with a compelling interest in future stock
price increases.
Under U.S. GAAP, compensation expense is recorded over the period during which the
employee is required to perform services in order to earn the right to exercise the option
(the vesting period).
Choice "B" is incorrect. Compensation expense is not recorded in the period the stock is
issued, but over the period during which the employee is required to perform services in
order to earn the right to exercise the option (the vesting period).
Choice "C" is incorrect. Compensation expense is not recorded in the period the options
are granted, but during which the employee is required to perform services in order to
earn the right to exercise the option (the vesting period).
Choice "D" is incorrect. Using the fair value of the options at the grant date, there is a
compensation expense recorded over the service period, during which the employee is
required to perform services in order to earn the right to exercise the option (the vesting
period).
Non-compensatory stock option plans have all the following characteristics except:

A. Substantially all full-time employees who meet limited employment qualifications can
participate.
B. Equal offers of stock to all eligible employees.
C. A provision related to the achievement of certain performance criteria.
D. A discount from the market price of the stock no greater than would be reasonable in an offer
of stock to shareholders or to others.
Explanation
Choice "C" is correct. Under U.S. GAAP, a non-compensatory stock option has all
the following characteristics: (i) substantially all full-time employees can participate;
(ii) stock is offered to eligible employees equally; (iii) the exercise period is reasonable;
(iv) any discounts from market price are not greater than a reasonable offer of stock to
shareholders or others; and (v) no performance criteria are attached to the stock option
plans.
If a stock option plan meets all the indicated requirements, the stock option plan is a
non-compensatory plan, and no compensation expense is recorded by the sponsoring
company.
Choice "A" is incorrect. The ability to participate by substantially all full-time employees
who meet limited employment qualifications is a characteristic of a non-compensatory
plan.
Choice "B" is incorrect. Equal offers of stock to all eligible employees is a characteristic
of a non-compensatory plan.
Choice "D" is incorrect. Discount from the market price of the stock no greater than
would be reasonable in an offer of stock to shareholders or others is a characteristic of
a non-compensatory plan.
A company is preparing its financial statements in accordance with U.S. GAAP. Listed
below are select financial data for the company.
Net income $950,000

Depreciation 40,000
Investment by owners 60,000
Unrealized gain on available-for-sale securities 90,000
Foreign currency translation loss 20,000
What is the amount that would be reported as comprehensive income?

A. $970,000
B. $1,020,000
C. $1,060,000
D. $1,120,000
Explanation
Choice "B" is correct. Comprehensive income is the change in equity 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.
Comprehensive income is also equal to net income plus other comprehensive income
(OCI). OCI includes items such as pension adjustments, unrealized gains/losses on
available-for-sale securities, foreign currency translation gains/losses, the effective
portion of cash flow hedges, the revaluation of a surplus (for IFRS), and instrument-
specific credit risk.
Comprehensive income for this company will be: Net income ($950,000) + Unrealized
gains on available-for-sale securities ($90,000) – Foreign currency translation loss
($20,000) = $1,020,000.
Choice "A" is incorrect. This answer choice adds the foreign currency loss to net income
but does not account for the unrealized gains in the calculation of comprehensive
income.
Choice "C" is incorrect. This answer choice incorrectly includes the $40,000 of
depreciation expense in the determination of comprehensive income. Depreciation
expense is included in the calculation of net income and can, therefore, be ignored in
the calculation of comprehensive income.
Which of the following is true regarding the presentation of comprehensive income.

Must be shown on Related tax effects
the face of the for components
income statement must be disclosed
A. Yes Yes
B. Yes No
C. No Yes
D. No No
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.
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 available-for-sale debt securities.
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.
Rock Co.'s U.S. GAAP financial statements had the following balances at December 31:
Gain that is both unusual and infrequent $50,000

Foreign currency translation gain, net of tax 100,000
Net income 400,000
Unrealized gain on available-for-sale debt securities, net of tax 20,000
What amount should Rock report as comprehensive income for the year ended
December 31?

A. $400,000
B. $420,000
C. $520,000
D. $570,000
Explanation
Choice "C" is correct. Comprehensive income includes all items included in "net
income" plus "other comprehensive income" items. Because the $50,000 unusual and
infrequent gain is already included in net income, comprehensive income is:
Net Income $400,000

"PUFI" adjustments:
Foreign currency translation adjustment 100,000
Unrealized gain on available-for-sale debt securities 20,000
$520,000
Choice "A" is incorrect. Comprehensive income includes both the net income of
$400,000 and the other comprehensive income items (foreign currency translation gain
of $100,000 and unrealized gain on available-for-sale debt securities of $20,000).
Choice "B" is incorrect. The foreign currency translation gain is another comprehensive
income item and should be included in total comprehensive income.
Choice "D" is incorrect. The unusual and infrequent gain is a component of the net
income of $400,000 and does not need to be added to compute total comprehensive
income.
How is accumulated other comprehensive income presented in a company's balance
sheet?

A. As an item of equity following retained earnings.
B. As an asset or equity, depending on whether the account balance is a debit or a credit.
C. As part of the company's retained earnings.
D. As an item of deferred revenue.
Explanation
Choice "A" is correct. Total accumulated other comprehensive income is included in the
balance sheet as an item of equity. The balance is presented after retained earnings
and before treasury stock.
Choice "B" is incorrect. Total accumulated other comprehensive income is included in

the balance sheet as an item of equity regardless of whether the account balance is
debit or a credit.
Choice "C" is incorrect. Accumulated other comprehensive is separately stated in the

equity section of the balance sheet and is not combined with retained earnings
generated from the income statement.
Choice "D" is incorrect. Accumulated other comprehensive income is an item of equity.

It is not shown as a liability or deferred item.
When translating a foreign financial statement, where would the gains and losses from
remeasurement and translation be reported?

Remeasurement Translation
A. Net income Other comprehensive income
B. Net income Net income
C. Other comprehensive income Other comprehensive income
D. Other comprehensive income Net income

Explanation
Choice "A" is correct. Under the remeasurement method, currency gain or loss is
included in the net income of the company. Under the translation method, the gain or
loss is included as a part of other comprehensive income. In both cases, the amount of
the gain or loss is calculated as a "plug" amount necessary to make the financial
statements balance.
Choices "B", "C", and "D" are incorrect based on the explanation above.
Which of the following statements is true regarding the calculation of comprehensive
income?

A. It will include losses on discontinued operations.
B. It will exclude losses on discontinued operations.
C. It will exclude cash dividends paid and include stock dividends paid to shareholders.
D. It will include cash dividends paid and exclude stock dividends paid to shareholders.
Explanation
Choice "A" is correct. Comprehensive income includes net income and other
comprehensive income (OCI). Net income will include gains and losses on discontinued
operations, which means that comprehensive income will include this item as well.
Choice "B" is incorrect. Comprehensive income will include discontinued operations.
Choice "C" is incorrect. All transactions with owners (cash and stock dividends) are
excluded from comprehensive income.
Choice "D" is incorrect. All transactions with owners (cash and stock dividends) are
excluded from comprehensive income.
Last year, Scotland Co. had a net loss of $1.5 million and other comprehensive income
of $2.2 million. Comprehensive income for Scotland last year totaled:

A. $2.2 million.
B. $0.7 million.
C. -$1.5 million.
D. -$3.7 million.
Explanation
Choice "B" is correct. Comprehensive income is equal to net income plus other
comprehensive income (OCI). Since net income is actually a loss of $1.5 million, and
OCI is $2.2 million, comprehensive income must equal $0.7 million (-$1.5 million + $2.2
million = $0.7 million).
Choice "A" is incorrect. The net loss of $1.5 million must be factored into the calculation.
Choice "C" is incorrect. This answer choice only takes into account the net loss of $1.5
million.
Choice "D" is incorrect. This answer choice treats the other comprehensive income
amount as a loss of $2.2 million and adds it to the net loss of $1.5 million.
Smithson Inc. reports the following amounts in its IFRS-based financial statement drafts
in Year 2:
Foreign currency translation gain: 15,000

Realized loss on trading securities: 4,000
Effective portion of cash flow hedge: 3,000
Revaluation surplus: 9,500
Service costs for company pension plan: 6,500
Smithson's other comprehensive income for Year 2 will be:

A. $17,000
B. $21,000
C. $23,500
D. $27,500
Explanation
Choice "D" is correct. Of the five amounts shown in the question, only three of them (the
foreign currency translation gain, the effective portion of the cash flow hedge, and the
revaluation surplus) should be included in other comprehensive income (OCI). The total
is then: $15,000 + $3,000 + $9,500 = $27,500. The realized loss on trading securities is
included in the income statement (not in OCI) and the service costs for the company's
pension plan are a part of the defined benefit liability and pension expense associated
with the pension (not a part of OCI).
Choice "A" is incorrect. This choice incorrectly includes the $4,000 loss on trading
securities and the $6,500 for service costs. Both should be excluded from the
calculation.
Choice "B" is incorrect. This choice incorrectly includes the $6,500 for pension service
costs.
Choice "C" is incorrect. This choice incorrectly includes the $4,000 loss on trading
securities.
Ignoring taxes, which of the following situations will cause comprehensive income to
decrease?

A. An unrealized loss on a trading security.
B. A dividend payout to company shareholders.
C. The amortization of an actuarial pension loss.
D. An unrealized gain on an available-for-sale security.
Explanation
Choice "A" is correct. Comprehensive income is calculated as net income plus other
comprehensive income. An unrealized loss on a trading security will be recorded as a
loss on the income statement, which will reduce net income and therefore
comprehensive income.
Choice "B" is incorrect. Other comprehensive income does not include transactions
between a company and its shareholders, which includes dividend payouts. In addition,
a dividend payout does not impact net income. So there is no comprehensive income
impact from this transaction.
Choice "C" is incorrect. The amortization of an actuarial loss will cause other
comprehensive income to increase, while also increasing pension expense and causing
net income to decrease. So there will be no net impact to comprehensive income.
Choice "D" is incorrect. An unrealized gain on an available-for-sale debt security will

cause other comprehensive income to increase, which will increase comprehensive
income.
Which of the following statements regarding comprehensive income is correct?

A. Comprehensive income must always equal or exceed net income.
B. The relationship between net income and retained earnings is analogous to the relationship
between other comprehensive income and accumulated other comprehensive income.
C. Other comprehensive income is a permanent account, which never gets closed, thus it carries
its balance over from one year to the next.
D. Discontinued operations are the last items recorded in comprehensive income.
Explanation
Choice "B" is correct. Net income is closed to retained earnings in the same way that
other comprehensive income is closed to accumulated other comprehensive income.
Retained earnings and accumulated other comprehensive income both serve to sum up
the undistributed earnings of a corporation over its operating life.
Choice "A" is incorrect. Comprehensive income may include a net loss that was not
included in net income, thus comprehensive income may in some cases be less than
net income.
Choice "C" is incorrect. Other comprehensive income itself is not an account, but rather
is composed of temporary accounts that do not carry a balance from period to period.
Accumulated other comprehensive income is a permanent account and does retain a
balance.
Choice "D" is incorrect. Discontinued operations are a component of net income, and
not other comprehensive income.
Which of the following items would not normally be included in comprehensive income?

A. Dividends received related to ownership of stock in another company.
B. Foreign currency translation adjustments.
C. Unrealized holding gains and losses on available-for-sale securities.
D. Dividends paid to stockholders of the company.
Explanation
Choice "D" is correct. Comprehensive income is defined as the change in equity of a

business related to transactions from non-owner sources. Dividends paid out to
stockholders of the company are a transaction with the owners of the reporting
company, thus are excluded from comprehensive income.
Choice "A" is incorrect. Dividends received from ownership of stock of another company
are included in net income as revenue, thus they are also a component of
comprehensive income, although not "other" comprehensive income.
Choice "B" is incorrect. Foreign currency translation adjustments are a component of

"other comprehensive income," which is part of comprehensive income overall.
Choice "C" is incorrect. Unrealized holding gains and losses on available for sale
securities are a component of "other comprehensive income," which is part of
comprehensive income overall.
Which of the following is not used in the calculation of comprehensive income?

A. Unrealized gain on available-for-sale debt securities held at year-end.
B. Realized losses on trading debt securities sold during the year.
C. Gain on reissuance of treasury stock under the cost method.
D. Losses from foreign currency translations.
Explanation
Choice "C" is correct. Comprehensive income includes all changes in equity during a
period except those resulting from investments by owners or distributions to owners.
Treasury stock transactions are owner transactions and are not part of comprehensive
income.
Choice "A" is incorrect. Unrealized gains and losses on available-for debt sale securities
are an item of other comprehensive income.
Choice "B" is incorrect. Realized gains and losses on any type of security are
recognized in the income statement. Comprehensive income is net income plus other
comprehensive income "PUFI" items.
Choice "D" is incorrect. Losses from foreign currency translations are an item of other
Which of the following would not be included in the calculation of other comprehensive
income under U.S. GAAP?

A. Gain or loss related to a fair value hedge.
B. A change in the company's pension plan funding status due to a current change in prior
service costs.
C. Unrealized gains or losses on available-for-sale debt securities.
D. Foreign currency translation adjustments.
Explanation
Choice "A" is correct. A gain or loss related to a fair value hedge is recognized in the
current year's earnings (and not in other comprehensive income).
Choice "B" is incorrect. A current change in prior service costs would be included in
other comprehensive income until it is later recognized as a component of net periodic
benefit cost.
Choice "C" is incorrect. Unrealized gains or losses on available-for-sale debt securities

caused by marked-to-market activity are classified in other comprehensive income until
sold.
Choice "D" is incorrect. Foreign currency translation adjustments are classified in other
comprehensive income and remain there until sold or the foreign entity investment is
liquidated.
Which of the following statements is true in respect to the reporting of comprehensive
income?

A. Income tax effects of each component of other comprehensive income must be shown on the
face of the statement.
B. Comprehensive income is not required in interim financial statements.
C. If comprehensive income items exist, a separate statement of comprehensive income is
required and may not be combined with the income statement.
D. Accumulated other comprehensive income is shown in the equity section of the balance sheet.
Explanation
Choice "D" is correct. Accumulated other comprehensive income is the total of OCI
items over multiple years and is a balance sheet item accounted for in a manner similar
to retained earnings.
Choice "A" is incorrect. The amount of income tax expense for each component of other
comprehensive income is shown either on the face of the statement or in the notes to
the financial statements.
Choice "B" is incorrect. Comprehensive income is required in interim financial

statements as well as at year end.
Choice "C" is incorrect. Comprehensive income may be presented in a single statement

of comprehensive income, which includes net income as well as other comprehensive
income items, or in a separate statement of comprehensive income that begins with net
income.
Which of the following is a false statement as it pertains to account activity associated
with accumulated other comprehensive income?

A. Net income includes other comprehensive income.
B. Other comprehensive income is closed to the accumulated other comprehensive income
account each accounting period.
C. Accumulated other comprehensive income is a component of stockholders' equity.
D. All current and previous accounting periods' other comprehensive income activity is included
in accumulated other comprehensive income.
Explanation
Choice "A" is correct. This is a false statement as other comprehensive income is not
included in net income. Comprehensive income includes net income and other
Choice "B" is incorrect. This is an accurate statement. At the end of each accounting
period, other comprehensive income is closed out to the accumulated other
comprehensive income account.
Choice "C" is incorrect. This is a correct statement. Accumulated other comprehensive

income is a separate item reported in the stockholders' equity section of the balance
sheet.
Choice "D" is incorrect. This represents an accurate statement. Accumulated other

comprehensive income includes the total of the current period's other comprehensive
income and all prior periods' other comprehensive income.
Lift Inc. has the following four holdings in its portfolio of marketable securities:
 Bond W, classified as an available-for-sale security.

 Bond X, classified as a held-to-maturity security.
 Bond Y, classified as a trading security.
 Stock Z, classified as a trading security.
Which of the following events will impact Lift's other comprehensive income balance?

A. Bond W has an unrealized gain.
B. Bond X is sold prior to maturity for a loss.
C. Bond Y has an unrealized loss for the year.
D. Stock Z is sold for a realized gain in the current year.
Explanation
Choice "A" is correct. Unrealized gains and losses on debt securities classified as
available-for-sale are recorded in other comprehensive income.
Choice "B" is incorrect. Bond X is classified as held-to-maturity, and any sales prior to
maturity will not have an impact on other comprehensive income.
Choice "C" is incorrect. Unrealized gains and losses on trading securities go onto the
income statement, as opposed to going into other comprehensive income.
Choice "D" is incorrect. Realized gains and losses on trading securities go onto the
income statement, as opposed to going into other comprehensive income.
Szuba Corporation reported the following transactions for the current year:
Sales 500,000
Cost of goods sold 300,000
Operating expenses 100,000
Cash dividend 50,000
Unrealized gain on available-for-sale debt security 10,000
Unrealized gain on trading debt security 20,000
Ignoring income taxes, Szuba should report other comprehensive income of:

A. $80,000
B. $10,000
C. $60,000
D. $30,000
Explanation
Choice "B" is correct. Other comprehensive can be remembered by

the PUFI mnemonic.
Pension adjustments
Unrealized gains and losses on available-for-sale debt securities and hedges
Foreign currency items
Instrument-specific credit risk
The only item that fits is the unrealized gain on the available-for-sale debt security. The
unrealized gain on the trading debt security is included in income. Dividends are not
included in income or other comprehensive income (but as an adjustment to retained
earnings). The other items in the list are normal income statement items and thus are
not part of other comprehensive income.
Choices "A", "C", and "D" are incorrect, per the explanation above.
Which of the following would be considered an element of comprehensive income?

Foreign Currency
Operating Translation
Losses Revenues Adjustment
A. No No No
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.
For the fiscal year ended June 30, Year 1, Safety Toys Company reported after-tax
income from continuing operations of $87,500,000 and income from discontinued
operations of $5,650,000 (net of tax). There were no other items impacting the
company's net earnings. Additionally, the company had a foreign currency translation
gain of $1,100,000 (net of tax) and an $800,000 loss (net of tax) from a current
amendment impacting Safety's prior service cost associated with its pension plan's
funded status. Given the above and assuming that a $55,000 loss from a fair value
hedge was included in reported income from continuing operations, what is the
company's comprehensive income for the fiscal year ended June 30, Year 1?

A. $87,800,000
B. $91,300,000
C. $93,450,000
D. $94,195,000
Explanation
Choice "C" is correct. Comprehensive income is derived as follows:
Income from continuing operations 87,500,000

Add:
Income from discontinued operations 5,650,000
Net income 93,150,000
Add other comprehensive income:
Translation gain 1,100,000
Prior service cost loss (800,000)
Total other comprehensive income $300,000
Comprehensive income 93,450,000
Choice "A" is incorrect. While the other comprehensive income components were
correctly determined, the calculation erroneously adds income from continuing
operations to other comprehensive income to derive comprehensive income.
Choice "B" is incorrect. This answer choice incorrectly excludes income from
discontinued operations when calculating comprehensive income.
Choice "D" is incorrect. This answer choice does not include the prior service cost loss
as a component of other comprehensive income and improperly includes the fair
Barnes Inc. prepares its financial statements using IFRS and has the following account
balances at December 31:
Net income 750,000

Dividends declared and paid 100,000
Revaluation surplus on fixed assets 40,000
Unrealized holding loss on trading securities 15,000
What amount should Barnes report as other comprehensive income for the year ended
December 31?

A. $675,000
B. ($60,000)
C. $40,000
D. ($15,000)
Explanation
Choice "C" is correct. Other comprehensive income items are revenues, expenses,
gains and losses that are included in comprehensive income but excluded from net
income under U.S. GAAP or IFRS. Items included as other comprehensive income
under both U.S. GAAP and IFRS are pension adjustments, unrealized gains and losses
on available-for-sale debt securities, foreign currency items, instrument-specific credit
risk, and the effective portion of cash flow hedges. In addition, under IFRS, revaluation
surpluses on fixed and intangible assets are included in other comprehensive income.
In this problem, the only source of OCI is the $40,000 revaluation surplus.
Choice "A" is incorrect. Other comprehensive income includes the revaluation surplus,
but does not include net income, dividends or the unrealized holding loss on the trading
securities. Dividends are not included as part of OCI since they are a distribution to
owners. The unrealized holding loss on trading securities is included in net income.
Choice "B" is incorrect. Other comprehensive income includes the revaluation surplus,
but does not include the dividends because OCI does not include changes in equity
resulting from investments by owners or distributions to owners. Items included as other
comprehensive income under both U.S. GAAP and IFRS are pension adjustments,
unrealized gains and losses on available-for-sale debt securities, foreign currency
items, instrument-specific credit risk, and the effective portion of cash flow hedges. In
addition, under IFRS, revaluation surpluses on fixed and intangible assets are included
in other comprehensive income.
On May 15, Year 1, Moran Inc. approved a plan to dispose of a component of its
business. It is expected that the sale will occur on February 1, Year 2, at a selling price
of $500,000, which was the current fair value of the component. During Year 1, disposal
costs incurred by Moran totaled $15,000. The component had actual or estimated
operating losses as follows:
January 1 - May 14, Year 1 130,000

May 15 - December 31, Year 1 50,000
January 1 - January 31, Year 2 15,000
The carrying amount of the component on May 15, Year 1 was $850,000. Before
income taxes, what amount should Moran report for discontinued operations in its Year
1 Income Statement?

A. $545,000
B. $365,000
C. $15,000
D. $380,000
Explanation
Choice "A" is correct. There would be an impairment loss on the component during Year
1. The net fair value of the component would be its fair value of $500,000 less the
$15,000 disposal costs, for a total of $485,000. The impairment loss would be the net
fair value of $485,000 minus the $850,000 carrying value of the component, for a total
of $365,000.
The results of operations would be reported for Year 1 as a loss of $180,000 ($130,000
+ $50,000) and for Year 2 as $15,000. The amount that Moran should report for
discontinued operations in its Year 1 income statement would be the loss from
operations for Year 1 of $180,000 and the impairment loss for Year 1 of $365,000, for a
total of $545,000.
Choices "B", "C", and "D" are incorrect, per the explanation above.
Ray Corporation had the following transactions during the current year:
A $100,000 gain on reacquisition and retirement of long-term bonds. Ray frequently acquires
and retires its debt.
A $500,000 loss on the disposal of its entire retail store business. Ray has never abandoned any
of its various businesses previously. It plans to operate only as a wholesaler in the future.
A $100,000 loss on the abandonment of assets that are no longer being used.
In its current year income statement, what would be the total amount to be included in
income from continuing operations under U.S. GAAP?

A. $100,000 gain
B. $600,000 loss
C. $400,000 loss
D. $0
Explanation
Choice "D" is correct.
The $100,000 gain on reacquisition and retirement of long-term bonds is considered a

normal business activity and is reported in income from continuing operations. The
$100,000 loss on the abandonment of assets no longer being used is also a normal
activity and is included in income from continuing operations. The combination of the
gain and the loss results in $0.
Choice "A" is incorrect. The $100,000 gain on the acquisition and retirement of long-
term bonds is reported as an ordinary operating income item, but so is the loss on
abandonment of assets. This answer ignores the loss on abandonment.
Choice "B" is incorrect. The loss of $500,000 on disposal of a component of a business

would normally be reported in discontinued operations (assuming that the portion of the
business was actually a component, which this one seems to be). The $100,000 loss on
abandonment of assets that are no longer being used would be reported in income from
continuing operations.
Choice "C" is incorrect. As explained above, the $500,000 loss on the disposal of the
retail store business is reported in discontinued operations and the $100,000 gain on
the acquisition and retirement of the bonds is reported in income from continuing
operations.
The Thompson Toy Co. manufactures toys and has a division that creates custom doll
houses for clients. As the result of a change in its strategic focus, the company sold the
custom doll house division at year-end. The sale of the division will have a major effect
on the company's operations and financial results. How should Thompson Toy Co.
report the sale in its income statement?

A. Report it as part of other comprehensive income.
B. Report it as a discontinued operation, reported below income from continuing operations.
C. Report the income or loss from operations of the division in discontinued operations below
continuing operations and the gain or loss from disposal in continuing operations.
D. Report as a component of income from continuing operations.
Explanation
Choice "B" is correct. Discontinued operations are reported net of tax on the income
statement separately from continuing operations. A discontinued operation may include
a component of an entity, a group of components of an entity, or a business or nonprofit
activity. Discontinued operations are classified as either disposed of or held for sale.
Thompson Toy Co. will report the custom doll house division as a component of
discontinued operations, net of tax. Discontinued operations are shown below income
from continuing operations in the income statement.
Choice "A" is incorrect. The division will not be included in other comprehensive income.
Because the division qualifies as a component of the entity according to U.S. GAAP, the
division will be reported in the income statement as discontinued operations.
Choice "C" is incorrect. Both the income or loss from operations and the gain or loss
from disposal are categorized as discontinued operations and shown net of tax on the
income statement below income from continuing operations.
Choice "D" is incorrect. The custom doll house division is appropriately classified as a
discontinued operation, as the sale of the doll house division represents a strategic shift
and qualifies as a component of the entity. As such, the financial activity of that division
will not be included as a component of income from continuing operations.
Mission Flowers Company had the following transactions for the year ended December
31:
 Sales revenues of $775,000.

 Operating expenses of $550,000.
 Losses due to employee strike of $200,000. This was the first employee strike in
the history of the company.
 Operating income of $100,000 from a subsidiary sold on November 1. The
decision to dispose was made on February 28. The income was earned evenly
over the ten months ended October 31.
The company's effective tax rate is 35%. What amount should Mission Flowers report
as income from continuing operations for the year ended December 31?

A. $16,250
B. $33,750
C. $81,250
D. $146,250
Explanation
Choice "A" is correct.
Mission Flowers' income from continuing operations is calculated as follows:
Sales revenue 775,000

Operating expenses (550,000)
Loss from strike (200,000)
Income before taxes 25,000
Income tax expense (8,750)
Income from continuing operations 16,250
The loss from the strike is included in income from continuing operations. The operating
income from the subsidiary sold during the year is not included in income from
continuing operations, but is reported net of tax as income from discontinued
operations, along with any gain or loss on the sale of the subsidiary.
Choice "B" is incorrect. This answer incorrectly adds income tax expense to determine
net income.

A.2. Revenue Recognition and Income Measurement

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A.2. Revenue Recognition and Income Measurement

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IER Corp.

sells outdoor recreational supplies and equipment to wholesale and retail

Wholesale products shipped 11/20/X1 - received 12/31/X1 $40,000

How much should IER recognize as revenue this year?

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Choice “B” is correct. Revenue recognition occurs when an entity satisfies a

In this scenario, the performance obligation is satisfied, and revenue should be

 wholesale products shipped FOB destination and received prior to year-end;

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The original entry to recognize the collection of cash:

DR Unearned revenue (liability) $22,500

DR Subscription revenue $67,500

November 30 (in thousands)

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Choice “C” is correct. Using the percentage-of-completion method to recognize profits at

For the year ended November 30, Year 2

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Choice "B" is correct. The amount of variable consideration is estimated by taking a

Possible Amounts Probabilities Expected Amounts

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 The customer controls an asset being created or enhanced by the seller; or

Choice "C" is incorrect. Revenue associated with the arrangement should be

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April 15, Year 3: No entry.

July 31, Year 3:

Debit (Dr) Credit (Cr)

August 31, Year 3:

Debit (Dr) Credit (Cr)

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Choice "A" is correct. Milestones achieved (whether production or distribution related)

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Choice "D" is incorrect. This answer choice is a distractor in the problem as no

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DR Accumulated depreciation 30,000

DR Loss on sale of assets 4,000

CR Fixed asset $50,000

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Choice "A" is correct.

Present value of payments $10,000 × 6.71 = 67,100

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Net income $950,000

What is the amount that would be reported as comprehensive income?

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Choice "B" is correct. Comprehensive income is the change in equity of a business

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Gain that is both unusual and infrequent $50,000

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Net Income $400,000

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Choice "B" is incorrect. Total accumulated other comprehensive income is included in

Choice "C" is incorrect. Accumulated other comprehensive is separately stated in the

Choice "D" is incorrect. Accumulated other comprehensive income is an item of equity.