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Financial Accounting, 11th edition
Test Bank and Video Questions
By Pratt and Peters
Chapter 13: The Complete Income Statement
Copyright © 2021 John Wiley & Sons, Inc. or the author, all rights reserved.
Table of Contents
Multiple Choice Questions
1) Which one of the following events is an operating transaction?
A) Purchase of equipment
B) Payment for equipment rental
C) Purchase of land
D) Issuing bonds for cash
Diff: Easy
Learning Objective: 13.2
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 1 / None
2) Which one of the following events is an operating transaction?
A) Payment of utilities
B) Debt refinancing
C) Purchase of another company for stock
D) Property dividend
Diff: Easy
Learning Objective: 13.2
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 2 / None
3) The result of making a discretionary change from FIFO to average cost is:
A) included in operating revenues and expenses.
B) included in other revenues or expenses.
C) handled retrospectively.
D) ignored.
Diff: Medium
Learning Objective: 13.4
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 3 / None
4) Financing transactions include:
A) exchanges with shareholders.
B) revenues.
C) expenses.
D) most transactions that impact the income statement.
Diff: Easy
Learning Objective: 13.2
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 4 / None
5) On the income statement, the loss of equipment caused by the eruption of a volcano in the northeastern United States is found in:
A) operating revenues and expenses.
B) cost of goods sold.
C) disposal of a business segment.
D) other revenues or expenses.
Diff: Easy
Learning Objective: 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 5 / None
6) Which one of the following events is not an operating transaction?
A) Disposal of a business segment
B) Purchase of equipment
C) Payment for equipment maintenance
D) Purchase of inventory
Diff: Medium
Learning Objective: 13.2
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 6 / None
7) All of the following are considered to be operating revenues or expenses that are persistent except:
A) the sale of furniture by a furniture company.
B) interest expense related to financing with bonds.
C) depreciation expense on machinery.
D) cost of delivering goods.
Diff: Medium
Learning Objective: 13.2
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 7 / None
8) Which one of the following is a nonoperating event that must be reported on the income statement?
A) Acquisition of a plant asset to be used in operations
B) Interest revenue
C) Recognition of cost of inventory sold
D) Consumption of office supplies
Diff: Medium
Learning Objective: 13.2; 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 8 / None
9) Non-operating expenses are found in the:
A) asset section of the balance sheet.
B) liability section of the balance sheet.
C) cash flows from financing section of the cash flow statement.
D) income statement.
Diff: Medium
Learning Objective: 13.2; 13.3
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 9 / None
10) A summary of operating events is found:
A) only in the asset section of the balance sheet.
B) only in the cash flows from operations section of the cash flow statement.
C) only in the income statement.
D) in the cash flows from operations section of the cash flow statement, and in the income statement.
Diff: Medium
Learning Objective: 13.3
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 10 / None
11) Operating events include:
A) the payment of dividends and accounting principle changes.
B) inflows and outflows of assets due to the generation of revenues.
C) purchases, sales, and exchanges of long-term assets.
D) expenses and costs of acquiring plant assets.
Diff: Easy
Learning Objective: 13.2; 13.3
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 11 / None
12) On the income statement, interest revenue is found in:
A) operating revenues and expenses.
B) other revenues or expenses.
C) the disposal of a business segment section.
D) the cost of goods sold section.
Diff: Medium
Learning Objective: 13.3
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 12 / None
13) On the income statement, marketing expenses are reported as:
A) operating revenues and expenses.
B) other revenues or expenses.
C) the disposal of a business segment.
D) part of cost of goods sold.
Diff: Easy
Learning Objective: 13.3
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 13 / None
14) On the income statement, a gain from the sale of a security is reported as:
A) operating revenues and expenses.
B) other revenues or expenses.
C) a disposal of a business segment.
D) a cumulative effect of a change in accounting principle.
Diff: Medium
Learning Objective: 13.3
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 14 / None
15) On the income statement, the loss from selling an independent business component of the company is reported as a(n):
A) operating revenue or expense.
B) other revenue or expense.
C) disposal of a business segment.
D) sales revenue.
Diff: Easy
Learning Objective: 13.3
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 15 / None
16) Which of the following statements is false regarding diluted earnings per share?
A) Reporting diluted earnings per share is required by GAAP when potentially significant dilution of EPS exists.
B) Diluted earnings per share can be used to reflect the extent of potential share dilution.
C) Diluted earnings per share is not reported by some companies.
D) Diluted earnings per share is always the same as basic earnings per share.
Diff: Easy
Learning Objective: 13.5
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 16 / None
17) Recognition of bad debt expense is an event considered to be:
A) transitory.
B) nonoperating
C) persistent.
D) a financing cash flow.
Diff: Medium
Learning Objective: 13.2
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 17 / None
18) On the income statement, the result of selling equipment is reported as a(n):
A) operating revenue or expense.
B) other revenue or expense.
C) disposal of a business segment.
D) cumulative effect of a change in accounting principle.
Diff: Medium
Learning Objective: 13.3
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 18 / None
19) On the income statement, interest expense is reported as a(n):
A) operating revenue or expense.
B) other revenue or expense.
C) disposal of a business segment.
D) cumulative effect of a change in accounting principle.
Diff: Medium
Learning Objective: 13.3
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 19 / None
20) On the income statement, persistent events are found in:
A) operating revenues and expenses.
B) other revenues or expenses.
C) disposal of a business segment.
D) cumulative effects.
Diff: Easy
Learning Objective: 13.2
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 20 / None
21) On the income statement, infrequent expenses are found in:
A) operating revenues and expenses.
B) other revenues or expenses.
C) disposal of a business segment.
D) cumulative effects.
Diff: Easy
Learning Objective: 13.2; 13.3
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 21 / None
22) Which one of the following is true about basic earnings per share?
A) The calculation includes preferred share
B) Must be calculated as earnings per common shares outstanding
C) May be increased or decreased because of outstanding stock options or convertible debt
D) Appears on the face of the balance sheet
Diff: Medium
Learning Objective: 13.5
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 22 / None
23) Below are five categories of different groups of transactions. Generally accepted accounting principles consider which of these as financing transactions?
1. Purchases of assets
2. Sales of assets
3. Revenues and expenses
4. Exchanges involving customers
5. Issuance and payment of debt
A) 5 only
B) 3, 4, and 5
C) 1, 2, and 3
D) 2, 4, and 5
Diff: Easy
Learning Objective: 13.2
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 23 / None
24) Which one of the following should be not reported net of income taxes?
A) Loss on disposal of segment
B) Cumulative adjustments resulting from a change in principle
C) Bad debt expense associated with a bankrupt customer
D) Gains on disposal of segment
Diff: Medium
Learning Objective: 13.4
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 24 / None
25) Mountain Corp. experienced the following events and transactions during 2020:
1 = Dividends declared and paid to Mountain's shareholders
2 = Cost of goods sold
3 = Gain on disposal of a major segment of the business
4 = Depreciation expense
5 = Gain from early debt retirement
Using the numbers of the events and transactions, identify which of the following sequences is the correct order for presenting the items from top to bottom on the income statement.
A) 5, 1, 3, 2
B) 2, 4, 5, 3
C) 4, 5, 2, 3
D) 2, 4, 3, 5, 1
Diff: Medium
Learning Objective: 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 25 / None
26) If a loss is unusual in nature but not infrequent in occurrence, the loss should be disclosed:
A) net of taxes.
B) only in the footnotes.
C) as a separate component of income from continuing operations.
D) as a separate item after disposal of segment, net of taxes.
Diff: Medium
Learning Objective: 13.3
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 26 / None
27) Carman, Inc. properly reported a discretionary change in accounting principle during 2020. This company must:
A) have violated GAAP by not applying accounting principles consistently.
B) have convinced its auditors that the environment in which it operates has changed and another method is more appropriate.
C) be trying to cover up accounting errors.
D) have initially used the wrong method.
Diff: Medium
Learning Objective: 13.3
Bloom's: Application
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 27 / None
28) Publicly held companies must disclose earnings per share for all of the following except for:
A) income from continuing operations.
B) losses from discontinued segments of a business.
C) other revenue and expense items.
D) cumulative effects resulting from changes in accounting principles.
Diff: Medium
Learning Objective: 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 28 / None
29) Comprehensive income:
A) may be reported on a separate statement or on the face of the income statement.
B) is the same as net income.
C) does not include any revenue and expense items that are part of continuing operations.
D) can be presented instead of the shareholders' equity section of the balance sheet.
Diff: Medium
Learning Objective: 13.2
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 29 / None
30) Paulson, Inc. reported net income of $60,000 during 2020. Throughout 2020, 20,000 shares of common stock and 5,000 shares of preferred stock were outstanding. The preferred stock has no dividend preference. Paulson reported earnings only for continuing operations items. How much is earnings per share for 2020?
A) $3.00
B) $12.00
C) $2.00
D) Not enough information is provided.
Explanation: $60,000 ÷ 20,000 = $3.00
Diff: Medium
Learning Objective: 13.5
Bloom's: Application
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 30 / None
31) Intraperiod tax allocation:
A) is applied to each income statement item to provide creditors and investors a better indication of the company's true revenues and expenses.
B) is a method of allocating income taxes over multiple accounting periods.
C) is applied only to revenues since expenses are not taxed.
D) is applied to net income from continuing operations.
Diff: Medium
Learning Objective: 13.4
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 31 / None
32) Which one of the following items is considered part of comprehensive income but not reported as part of net income?
A) Accounting principle changes
B) Foreign currency translation adjustments
C) Gain on sale of land
D) Dividend revenue
Diff: Medium
Learning Objective: 13.2
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 32 / None
33) Why is income so important to both investors and stock analysts?
A) It is strongly correlated to the market price of stock and bond prices.
B) It is equal to the amount that shareholders will receive as dividends.
C) Income is tied directly to revenue, i.e., a company that reports a large amount of revenue will always report a large amount of income.
D) It identifies if the company will be able to pay its current debts when they become due.
Diff: Medium
Learning Objective: 13.1
Bloom's: Application
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 33 / None
34) Which one of the following is true concerning discontinued operations?
A) It relates primarily to product changes in a company.
B) The gain or loss associated with the disposal is shown separately as a component of continuing operations on the income statement.
C) It is reported with 'other revenues and losses' on the company's income statement.
D) One of two separate disclosures required is income or loss from the segment's operations from the beginning of the current accounting period to the date of disposal.
Diff: Medium
Learning Objective: 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 34 / None
35) An income statement prepared with separate components:
A) enables users to distinguish transactions that are due to operations from those that are less useful as predictors of future performance.
B) is prepared only for income items that are frequent and usual.
C) is used primarily by companies involved with complex financing transactions.
D) may replace a statement of cash flows.
Diff: Medium
Learning Objective: 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 35 / None
36) Diluted earnings per share:
A) is required for companies that have the potential for liquidation.
B) is a financing and investing activity.
C) shows the effects on earnings per share of possible increases in the number of outstanding common shares.
D) is reported for the 'other revenues and expenses' category on the income statement.
Diff: Medium
Learning Objective: 13.5
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 36 / None
37) A company should report on the income statement the cumulative effect of an accounting principle change when:
A) consistency has been violated.
B) errors are made and subsequently corrected.
C) FASB mandates a change from one method to another.
D) international reporting standards differ from GAAP methods.
Diff: Medium
Learning Objective: 13.3
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 37 / None
38) One objective of financial reporting is to provide information that is:
A) helpful in assessing the amounts, timing, and uncertainty of future cash flows.
B) useful for competitors who need to assess economic activities.
C) a forecast of future operations.
D) unavailable to management.
Diff: Medium
Learning Objective: 13.1
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 38 / None
39) Mandated changes in accounting methods must be disclosed in three prominent places. These are:
A) the auditor's report, financial statement notes, and the balance sheet.
B) financial statement notes, the income statement, and the auditor's report.
C) the balance sheet, the income statement, and the statement of cash flows.
D) notes to financial statements, the management letter, and the income statement.
Diff: Medium
Learning Objective: 13.3
Bloom's: Knowledge
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 39 / None
40) Damron Inc. has the following transactions reported in the financial statements:
1. Recognized a loss when the government expropriated land to build a bridge.
2. Declared a dividend valued at $100,000.
3. A lender covenant required the company to appropriate a portion of retained earnings.
4. Received dividends on stocks held as short-term investments. The dividends were declared and paid on the same day.
5. Recognized the cost of inventory sold during the year under the periodic method.
6. The company paid rent for the current year.
Which of the above transactions would be considered as "usual and frequent" for income statement purposes?
A) Transactions 2, 4, 5, & 6
B) Transactions 2 through 6
C) Transactions 4, 5, & 6
D) Transactions 5 & 6
Diff: Medium
Learning Objective: 13.2
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Multiple Choice Question 40 / None
41) Damron Inc. has the following transactions reported in the financial statements:
1. Recognized a loss when the government expropriated land to build a bridge.
2. Declared a dividend valued at $100,000.
3. A lender covenant required the company to appropriate a portion of retained earnings.
4. Received dividends on stocks held as short-term investments. The dividends were declared and paid on the same day.
5. Recognized the cost of inventory sold during the year under the periodic method.
6. The company paid rent for the current year.
Which of the above transactions would be considered as "unusual or infrequent" for income statement purposes?
A) Transactions 1 and 4
B) Transaction 1
C) Transactions 3 and 4
D) None of these transactions
Diff: Medium
Learning Objective: 13.2
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Multiple Choice Question 41 / None
42) Sunrise Designs maintains a credit line with Ohio River Bank that allows the company to borrow up to $1 million. A covenant associated with the loan contract limits the company's dividends in any one year. The 2020 income statement data for the company is as follows:
Net sales $840,000
Less: Cost of goods sold 500,000
Gross profit 340,000
Selling and administrative expenses 120,000
Net operating income 220,000
Gain on sale of securities 24,000
Interest expense (4,000)
Net income from continuing operations before tax 240,000
Less: Income tax 51,200
Net income from continuing operations 188,800
Disposal of segment (net of tax) 22,000
Net income before change in accounting principle 210,800
Income effect due to change in accounting principle 52,000
Net income $262,800
What is the maximum amount of dividends Sunrise can pay if the covenant associated with the credit line is expressed as 20 percent of net income?
A) $55,000
B) $60,000
C) $52,560
D) $53,700
Explanation:
Net income
Maximum Dividend = 20% × $262,800
= $52,560
Diff: Medium
Learning Objective: 13.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 42 / None
43) Sunrise Designs maintains a credit line with Ohio River Bank that allows the company to borrow up to $1 million. A covenant associated with the loan contract limits the company's dividends in any one year. The 2020 income statement data for the company is as follows:
Net sales $840,000
Less: Cost of goods sold 500,000
Gross profit 340,000
Selling and administrative expenses 120,000
Net operating income 220,000
Gain on sale of securities 24,000
Interest expense (4,000)
Net income from continuing operations before tax 240,000
Less: Income tax 51,200
Net income from continuing operations 188,800
Disposal of segment (net of tax) 22,000
Net income before change in accounting principle 210,800
Income effect due to change in accounting principle 52,000
Net income $262,800
What is the maximum amount of dividends Sunrise can pay if the covenant is expressed as 20 percent of income before change in accounting principle?
A) $55,000
B) $60,000
C) $65,700
D) $42,160
Explanation:
Income before change in accounting method
Maximum Dividend = 20% × $210,800
= $42,160
Diff: Medium
Learning Objective: 13.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 43 / None
44) Sunrise Designs maintains a credit line with Ohio River Bank that allows the company to borrow up to $1 million. A covenant associated with the loan contract limits the company's dividends in any one year. The 2020 income statement data for the company is as follows:
Net sales $840,000
Less: Cost of goods sold 500,000
Gross profit 340,000
Selling and administrative expenses 120,000
Net operating income 220,000
Gain on sale of securities 24,000
Interest expense (4,000)
Net income from continuing operations before tax 240,000
Less: Income tax 51,200
Net income from continuing operations 188,800
Disposal of segment (net of tax) 22,000
Net income before change in accounting principle 210,800
Income effect due to change in accounting principle 52,000
Net income $262,800
What is the maximum amount of dividends Sunrise can pay if the covenant is expressed as 20 percent of income before disposal of segment and change in accounting principle?
A) $37,760
B) $60,000
C) $65,700
D) $52,700
Explanation:
Income before extraordinary items
Maximum Dividend = 20% × $188,800
= $37,760
Diff: Medium
Learning Objective: 13.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 44 / None
45) Sunrise Designs maintains a credit line with Ohio River Bank that allows the company to borrow up to $1 million. A covenant associated with the loan contract limits the company's dividends in any one year. The 2020 income statement data for the company is as follows:
Net sales $840,000
Less: Cost of goods sold 500,000
Gross profit 340,000
Selling and administrative expenses 120,000
Net operating income 220,000
Gain on sale of securities 24,000
Interest expense (4,000)
Net income from continuing operations before tax 240,000
Less: Income tax 51,200
Net income from continuing operations 188,800
Disposal of segment (net of tax) 22,000
Net income before change in accounting principle 210,800
Income effect due to change in accounting principle 52,000
Net income $262,800
What is the maximum amount of dividends Sunrise can pay if the covenant is expressed as 20 percent of net operating income?
A) $44,000
B) $60,000
C) $47,200
D) $52,700
Explanation:
Net operating income
Maximum Dividend = 20% × $220,000
= $44,000
Diff: Medium
Learning Objective: 13.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 45 / None
46) Gleeson Industries consists of four separate divisions: compressed wood products, chemicals, stone products, and plastics. On March 15, 2020, Gleeson sold the chemicals division for $625,000 cash. Financial information related to the chemicals division follows:
Period from 1/1/20 to 3/15/20
Sales $ 175,000
Operating expenses 160,000
Net operating income (loss) $ 15,000
As of 3/15/20
Assets $ 1,850,000
Liabilities 1,400,000
The journal entry to record the sale of the chemicals division will include:
A) a debit to Loss on Disposal of Segment for $175,000.
B) a debit to Net Assets of Chemicals Division for $450,000.
C) a debit to Unusual Gain for $175,000.
D) a credit to Gain on Disposal of Segment for $175,000.
Explanation:
Cash 625,000
Net Assets of Chemicals Division 450,000
Gain on Disposal of Segment 175,000
Diff: Medium
Learning Objective: 13.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 46 / None
47) Gleeson Industries consists of four separate divisions: compressed wood products, chemicals, stone products, and plastics. On March 15, 2020, Gleeson sold the chemicals division for $625,000 cash. Financial information related to the chemicals division follows:
Period from 1/1/20 to 3/15/20
Sales $ 175,000
Operating expenses 160,000
Net operating income (loss) $ 15,000
As of 3/15/20
Assets $ 1,850,000
Liabilities 1,400,000
If the income tax rate for the company is 35%, what amount of income tax liability on the disposal of the business segment will be recognized?
A) $218,750
B) $61,250
C) $5,250
D) $157,500
Explanation:
Cash 625,000
Net Assets of Chemicals Division 450,000
Gain on Disposal of Segment 175,000
Sold business segment.
Gain on Disposal of Segment 61,250*
Income Tax Liability (+L) 61,250
Recognized income tax liability on disposal of business segment.
$61,250 = Gain on disposal of $175,000 × Tax rate of 35%
Diff: Medium
Learning Objective: 13.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 47 / None
48) The management of Hammer Enterprises shares in a bonus that is determined and paid at the end of each year. The amount of the bonus is based on 12% of income from continuing operations after tax. The bonus is not used in the calculation of income from continuing operations. During 2020, Hammer was sued and was ordered to pay $480,000 over and above the amount covered by insurance. The loss is tax deductible and the company's tax rate is 35%. The company was last involved in a lawsuit five years ago. Income from continuing operations before tax for 2020, excluding the lawsuit loss, was $750,000.
What would management's 2020 bonus be if the lawsuit is considered unusual but not infrequent?
A) $175,500
B) $ 32,400
C) $ 21,060
D) $ 20,160
Explanation: The loss from the lawsuit would be used to compute net income from continuing operations.
Bonus = 12% × [($750,000 - $480,000) × (1 - Tax Rate)]
= 12% × [$270,000 × (1 - 35%)]
= $21,060
Diff: Medium
Learning Objective: 13.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 48 / None
49) The following income statement was reported by Snappy Seacraft Company for the year ending December 31, 2020:
Sales $85,000
Rent revenue 23,000
Interest income 7,000
Total revenues $115,000
Cost of goods sold 52,000
Operating expenses 24,000
Interest expense 12,000
Loss on sale of fixed asset 6,000
Total expenses 94,000
Income from continuing operations (before tax) 21,000
Less: Income tax 10,000
Income from continuing operations 11,000
Income from disposed segment (net of tax) 3,000
Gain on sale of disposed segment (net of tax) 2,000
Net income $16,000
Assume Snappy has an average of 15,000 shares of common stock outstanding during 2020. Based on this information, what amount of earnings per share would be reported on the income statement for the disposal of the business segment?
A) $0.33
B) $0.20
C) $1.00
D) $0.73
Explanation: $5,000* / 15,000 = $.33
* The EPS disclosure for the disposal of the business segment includes both the income from the disposed segment and the gain on the sale of the disposed segment.
Diff: Medium
Learning Objective: 13.5
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 49 / None
50) The following income statement was reported by Snappy Seacraft Company for the year ending December 31, 2020:
Sales $85,000
Rent revenue 23,000
Interest income 7,000
Total revenues $115,000
Cost of goods sold 52,000
Operating expenses 24,000
Interest expense 12,000
Loss on sale of fixed asset 6,000
Total expenses 94,000
Income from continuing operations (before tax) 21,000
Less: Income tax 10,000
Income from continuing operations 11,000
Income from disposed segment (net of tax) 3,000
Gain on sale of disposed segment (net of tax) 2,000
Net income $16,000
Assume Snappy has an average of 25,000 shares of common stock outstanding during 2020. Based on this information, what amount of earnings per share would be reported on the income statement for the disposal of the business segment?
A) $0.12
B) $0.20
C) $0.08
D) $0.60
Explanation: $5,000* / 25,000 = $.20
* The EPS disclosure for the disposal of the business segment includes both the income from the disposed segment and the gain on the sale of the disposed segment.
Diff: Medium
Learning Objective: 13.5
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 2 min.
Title/Media Ref.: Multiple Choice Question 50 / None
51) The measurement of income does not affect:
A) stock prices.
B) bond prices.
C) management contracts.
D) estimate of uncollectibles.
Diff: Easy
Learning Objective: 13.1
Bloom's: Knowledge
AACSB/AICPA: None / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 51 / None
52) Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events are:
A) assets.
B) investments by owners.
C) revenues.
D) gains.
Diff: Easy
Learning Objective: 13.2
Bloom's: Knowledge
AACSB/AICPA: None / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 52 / None
53) The matching process measures net income by comparing:
A) the fair market value of net assets at two points in time.
B) assets and liabilities.
C) revenues and expenses.
D) gains and losses.
Diff: Easy
Learning Objective: 13.2
Bloom's: Knowledge
AACSB/AICPA: None / BB: Critical Thinking; FC: Reporting
TOT: 1 min.
Title/Media Ref.: Multiple Choice Question 53 / None
Matching Questions
54) Indicate whether each event listed below in 1 through 6 is reported as a discontinued operation (D), a change in accounting principle (A), or a component of continuing operations (C), by placing the letter of your choice in the space provided.
If an item does not fall into one of these categories, place an 'X' in the blank.
_______ 1. Gain on disposal of one of the company's four corporate office buildings
_______ 2. Retired bonds early and incurred a loss
_______ 3. Received dividends on stock investments
_______ 4. Mandated change in the method of accounting for a pension plan
_______ 5. Disposal of a business segment
_______ 6. Estimated uncollectible accounts at year-end
1. C
2. C
3. C
4. A
5. D
6. C
Diff: Medium
Learning Objective: 13.2; 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Matching Question 1 / None
55) Given below are several items (1 through 4) that will be reported on a company's financial statements. Select the letter of the proper financial statement reporting section listed as a through e. You may use each letter more than once or not at all.
Financial Statement Reporting Sections
a. Income from continuing operations section of the income statement
b. Discontinued operations section of the income statement
c. Cumulative effect of a change in accounting principle section of the income statement
d. A separate comprehensive income item
e. Not reported on the income statement or comprehensive income statement
_______ 1. A loss incurred by Maranda Corporation due to a strike by employees of the company
_______ 2. A large loss of inventory incurred by a meat-packing factory due to a government FDA inspection which found dangerously high levels of bacteria; no previous situations in the company's history
_______ 3. Manufacturing circuits were determined obsolete and had to be written down to a nominal scrap value due to an improved manufacturing process
_______ 4. A loss due to a decline in market value on an available-for-sale investment
_______ 5. Increase in value of goodwill
_______ 6. Financial impacts of the adoption of a new FASB standard on goodwill.
_______ 7. The financial effects of selling the company's industrial product division
1. a
2. a
3. a
4. d
5. e
6. c
7. b
Diff: Medium
Learning Objective: 13.2; 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Matching Question 2 / None
56) Given below are several items (1 through 4) that will be reported on a company's financial statements. Select the letter of the proper financial statement reporting section listed as a through e. You may use each letter more than once or not at all.
Financial Statement Reporting Sections
a. Income from continuing operations section of the income statement
b. Discontinued operations section of the income statement
c. Cumulative effect of a change in accounting principle section of the income statement
d. A separate comprehensive income item
e. Not reported on the income statement or comprehensive income statement
_______ 1. A gain due to an early payoff of debt that had a high interest rate
_______ 2. A loss of plant assets incurred by a company whose distribution warehouse is located on an island that has experienced severe flooding three times in the past 5 years
_______ 3. Earnings reported for a partial year by a division prior to its sale
_______ 4. A foreign currency translation gain at year end
1. a
2. a
3. b
4. d
Diff: Medium
Learning Objective: 13.2; 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Matching Question 3 / None
57) Select the financial statement section (a through e) in which each of the items listed in 1 through 6 would be reported by writing the letter of the best answer in the space provided.
Financial Statement Sections
a. Income from continuing operations section of the income statement
b. Discontinued operations section of the income statement
c. Cumulative effect of a change in accounting principle section of the income statement
d. Balance sheet
e. Not necessary to report on a financial statement
_______ 1. Loss due to government expropriation of plant location in Venezuela
_______ 2. Financial effects of the adoption of a new FASB standard regarding post-retirement benefits
_______ 3. Financial effects of dropping a company's domestic product division
_______ 4. Unusual and infrequent gain from a plant explosion
_______ 5. Unrealized gain/loss from trading securities
_______ 6. Interest revenue
1. a
2. c
3. b
4. a
5. a
6. a
Diff: Medium
Learning Objective: 13.2; 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Matching Question 4 / None
58) Select the financial statement section (a through e) in which each of the items listed in 1 through 5 below would properly be reported by writing the letter of the best answer in the space provided.
Financial Statement Sections
a. Income from continuing operations section of the income statement
b. Discontinued operations section of the income statement
c. Cumulative effect of a change in accounting principle section of the income statement
d. Statement of shareholders' equity
e. Not necessary to report on a financial statement
_______ 1. Declared cash dividends for the first time in the history of the corporation
_______ 2. Realized a gain on the sale of four Preston franchise stores, but held onto the Little Steps franchise store chain
_______ 3. Incurred a casualty loss
_______ 4. Recorded interest income for the year
_______ 5. Incurred $14,000 to replace the company's office products (letterhead, envelopes, pens, etc.) with a new logo to promote a new product line
1. d
2. b
3. a
4. a
5. a
Diff: Medium
Learning Objective: 13.2; 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Matching Question 5 / None
Short Problems
59) The following information was taken from the 2020 financial records of Hopewell Company.
Debit Credit
Operating revenues 187,000
Operating expenses 132,500
Gain on sale of short-term investments 15,200
Loss on sale of business segment 21,000
Income earned on disposed business segment 3,000
Income due to change in accounting principle 12,500
Retained earnings (beginning balance) 72,000
Dividends declared 18,000
The company's income tax rate is 20 percent, and the items above are treated identically for the financial reporting and tax purposes.
REQUIRED:
Prepare an income statement using this information.
Hopewell Company
Income Statement
For the Year Ended December 31, 2020
Revenue:
Operating revenues $187,000
Total revenue $187,000
Expenses:
Operating expenses 132,500
Net operating income 54,500
Other revenue 15,200
Income from continuing operations (before taxes) 69,700
Income tax expense 13,940
Income from continuing operations 55,760
Discontinued operations:
Income earned by discontinued segment (net of
taxes of $600) $ 2,400
Loss on disposal of discontinued segment (net of
tax benefit of $4,200) (16,800)
Discontinued operations (14,400)
Income before change in accounting principle 41,360
Effect of change in accounting method (net of
taxes of $2,500) 10,000
Net income $ 51,360
Diff: Hard
Learning Objective: 13.3; 13.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 15 min.
Title/Media Ref.: Short Problem 1 / None
60) Canter Company operates a boat rental service in North Carolina. The company was involved in the following transactions and events during 2020:
1. The supplies, gasoline, and other maintenance item costs incurred associated with the rentals are $420,000.
2. Provided rental boats to customers during 2020 for total revenue of $880,000.
3. Sued by a rental customer that got his head caught in the ladder of a rental boat. The customer will probably win the suit that is estimated at $80,000. Lawsuits are common in the rental industry.
4. Chose to switch from FIFO to average cost for inventory sales. Effect was to increase the cost of goods sold account by $58,000.
5. Declared and paid $25,000 in dividends.
For each transaction, state in which section of the income statement it should be reported and give the dollar amount that should be reported. State whether each reporting amount is added or subtracted on the income statement and if the specific line item on the income statement is reported net of taxes. Canter's income tax rate is 30%.
1. Income from continuing operations — operating expenses; $420,000, subtract, not net of tax
2. Income from continuing operations — rent revenue; $880,000, add, not net of tax
3. Income from continuing operations — other expenses; $80,000, subtract, not net of tax
4. Current effect on income statement — Past effects restate past years
5. Not on income statement
Diff: Hard
Learning Objective: 13.3; 13.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 6 min.
Title/Media Ref.: Short Problem 2 / None
61) The following are the revenue and expense accounts for the year ending August 31, 2020, for Hammer Corporation:
Sales revenue $70,000
Interest revenue 3,000
Interest expense 2,000
Gain from sale of land 8,000
Cost of goods sold 45,000
Administrative expense 9,000
Loss on disposal of segment 3,500
Income tax expense 4,200
A. Calculate the amount of gross profit for Hammer Corporation for the year ending August 31, 2020.
B. How much should be reported as 'Other Revenues'?
A. Gross profit = $70,000 - $45,000 = $25,000
B. Other Revenues = $3,000 + $8,000 = $11,000
Diff: Medium
Learning Objective: 13.2; 13.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 3 / None
62) Badger, Inc. is planning a major stock issuance in early 2020. During 2019, the company reported net income from operations of $530,000 before taxes. The items below describe major events that occurred during 2019.
1. A $52,000 gain was recognized on the sale of a subsidiary
2. Inventory was written down by $21,000 due to obsolescence
3. Casualty loss of $320,000
4. A $31,000 gain was recognized due to the adoption of a new mandatory FASB statement
The company's tax rate is 30 percent.
A. Which items should not be reported as a component of income from continuing operations?
B. Suppose management decided to exclude all of the above items from income from continuing operations. What effect might this have on investor and creditor decisions?
A. Exclude items 1 and 4.
B. Income from continuing operations is used as a predictor in determining future performance. Items that are excluded may appear to investors and creditors as one-shot occurrences. It is quite common for inventory to be written down as the result of obsolescence, and for casualty losses to occur. Classifying these as nonrecurring items may cause some investors to disregard them in predicting future profits and losses.
Diff: Medium
Learning Objective: 13.4; 13.5
Bloom's: Analysis
AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 4 / None
63) Hamilton Corp. had the following infrequent income statement items during 2020:
• $45,000 of dividends received from a stock investment
• $20,000 gain on the sale of a plant asset which became outdated because of new technology
• $19,000 loss due to the sale of treasury stock at a price less than its original cost
• $34,000 fair value adjustment increase to market for available-for-sale investments
• $50,000 interest expense for the year of which only $42,000 was actually paid
How much should Hamilton report as part of 'income from continuing operations'?
Diff: Medium
Learning Objective: 13.2; 13.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 5 / None
64) On January 1 and December 31, 2020, retained earnings were $23,000 and $42,000, respectively. During the year, a cash dividend of $11,000 was declared. Calculate net income for 2020.
Beginning retained earnings $ 23,000
Less cash dividends declared (11,000)
Less ending retained earnings (42,000)
Net income $ 30,000
Diff: Medium
Learning Objective: 13.2
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 6 / None
65) Cabell Inc. reported 'income from operations before taxes' in the amount of $402,000 before including the following items for the year ending December 31, 2020:
• On December 31, 2020, borrowed long-term debt of $50,000 that limits dividends to 10 percent of net income from continuing operations
• $21,000 unrealized gain from fair value adjustment related to available-for-sale investments
• $30,000 loss recognized on the sale of a trading security
• $58,000 loss recognized on a lawsuit relating to patent violations
• $11,000 government fine for environmental violation
• $63,000 write-down of obsolete inventory
• $25,000 loss on the disposal of a segment.
The company's income tax rate is 30 percent. No taxes have been considered in any information provided. Prepare a calculation of income from operations starting with income from operations before taxes, as tentatively reported. Omit the heading. Be sure to label correctly.
Income from operations before taxes, as tentatively reported $402,000
Other revenues and expenses:
Write-down of obsolete inventory ($63,000)
Loss on sale of a trading security (30,000)
Loss on a lawsuit relating to patent violations (58,000)
Government fine for environmental violation (11,000) (162,000)
Adjusted income from continuing operations before taxes $240,000
Income taxes expense 72,000
Income from continuing operations $168,000
Diff: Hard
Learning Objective: 13.2; 13.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 10 min.
Title/Media Ref.: Short Problem 7 / None
66) Hubbell Service showed the following information for 2020: Net sales revenue, $410,000; interest revenue, $11,000; cost of goods sold, $220,000; operating expense, $15,000, gain on disposal of segment, $30,000; and dividends declared, $14,000. Calculate operating income for 2020.
Diff: Medium
Learning Objective: 13.2; 13.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 8 / None
67) The following are some accounts for Marvell Corp. for 2020:
Sales revenue $102,000
Cost of goods sold 85,000
Administrative expense 34,000
Interest expense 3,000
Loss from disposal of segment 21,000
Gain from sale of land 4,000
Cash dividends declared 9,000
Loss due to permanent value decline of plant asset 6,000
Unrealized gain from trading securities 5,000
Interest revenue 1,000
All amounts are before income taxes. Marvell has a 30% tax rate. Determine the amount of Marvell's 'other revenue' and 'other expenses' for 2020. List all non-income statement items and indicate on which financial statement they are reported.
Other expenses = $3,000 + $6,000 = $9,000
Non-income statement items = Cash dividends declared of $9,000 must be reported on the statement of shareholders' equity.
Diff: Medium
Learning Objective: 13.2; 13.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 9 / None
68) Hilton Corporation's income statement for the year ending December 31, 2020, appears below.
Net sales $810,000
Cost of goods sold (610,000)
Gross profit 200,000
Selling and administrative expenses (90,000)
Net operating income 110,000
Gain on sale of land 112,000
Interest expense (5,000)
Income from continuing operations before tax 217,000
Income tax expense (48,900)
Net income $168,100
Compute the maximum amount of dividends Hilton can pay if it has a debt covenant expressed as 20 percent of net income, and as 20 percent of net operating income. Which amount would a creditor more likely use as the restriction on dividends? Explain.
Net operating income: 20% × $110,000 = $22,000
A creditor would probably select net operating income, not because it is more conservative, but because it is a better indicator of amounts that are likely to continue into the future.
Diff: Medium
Learning Objective: 13.1; 13.2; 13.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 10 / None
69) Jarvis Company provided the following information for the year ending December 31, 2020:
Cost of goods sold $400,000
Gain on sale of business segment 20,000
Income tax rate 30%
Interest income 5,000
Interest expense 7,000
Loss from operation of discontinued business segment 12,000
Operating expenses 23,000
Revenue from sales 730,000
Number of shares of common stock outstanding 100,000
Prepare an income statement in good form. You may omit the heading. Include all earnings per share amounts required for the year ending December 31, 2020.
Revenue from sales $730,000
Cost of goods sold (400,000)
Gross profit 330,000
Operating expenses (23,000)
Net operating income
Other revenues(expenses): 307,000
Interest income 5,000
Interest expense (7,000)
Income from operations before taxes 305,000
Income taxes expense (91,500)
Income from continuing operations 213,500
Discontinued operations:
Loss from operations of discontinued
business segment, net ($12,000 - $3,600) ($8,400)
Gain on sale of business segment, net
($20,000 - $6,000) 14,000 5,600
Net income $219,100
Earnings per share:
Income from continuing operations $2.13
Discontinued operations per share 0.06
Net income per share $2.19
Diff: Hard
Learning Objective: 13.3
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 15 min.
Title/Media Ref.: Short Problem 11 / None
70) Nichol Corp. has 20,000 shares of common stock outstanding. For the year ending December 31, 2020, the company tentatively reported income from continuing operations before taxes of $320,000. Nichol Corp. has a 30 percent tax rate. The additional information given below has not been recorded in the accounts unless specifically stated.
• The company is located in Cheyenne, Wyoming. During the year, an earthquake destroyed some of Nichol's assets amounting to a loss of $120,000.
• The company's employees went on strike for six weeks in March of 2020. Revenues would have been about $23,000 more had the strike not occurred. No adjustment was recorded.
• During 2020, the company changed its method of accounting for inventories from FIFO to weighted average. Cost of goods sold related to prior years would have been $39,000 greater.
• The company's accounts include $47,000 as Unrealized Holding Gain from Trading Investments at December 31, 2020.
Calculate how much should be reported on Nichol's income statement as 'Income from Continuing Operations' for the period ended December 31, 2020.
($320,000 - $120,000 + $47,000) $247,000
Income taxes at 30% (74,100)
Income from continuing operations $172,900
Diff: Medium
Learning Objective: 13.4
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 6 min.
Title/Media Ref.: Short Problem 12 / None
71) On January 1 and December 31, retained earnings were $40,000 and $53,000, respectively. During the year, $21,000 of dividends were declared. Calculate net income during the year.
$19,000 + X = $53,000
X = $34,000
Diff: Medium
Learning Objective: 13.2
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 13 / None
72) The following information was taken from the accounting records of ABCO Corporation for the year ending December 31, 2020.
Cost of sales $342,000
Loss on sale of business segment 23,000
Profit from operations of discontinued business segment 19,000
Operating expenses 176,000
Revenue from sales 690,000
Number of shares of common stock outstanding 100,000
Income tax rate 30%
Appropriated retained earnings for plant expansion 176,000
Dividends 130,000
Gain on sale of plant asset 24,000
A. In good form, prepare the section of the income statement that begins immediately under 'income from continuing operations'. Do not be concerned with calculating the amount reported as 'income from continuing operations.'
B. List all the items that would appear in the 'Other Revenue/Other Expenses' section of the income statement.
C. How is the number of shares of common stock outstanding used on the income statement?
A. Income from continuing operations $ xxxx
Income from disc. segment net, ($19,000 - $5,700) $13,300
Loss on sale of business segment, net, (16,100) (2,800)
($23,000 - $6,900)
Net income $ xxxx
B. Gain on sale of plant asset, $24,000
C. The calculation of the earnings per share amounts uses the number of common shares outstanding as its denominator. Earnings per share is required on the income statement.
Diff: Medium
Learning Objective: 13.3; 13.4; 13.5
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Problem 14 / None
73) The following are the revenue and expense accounts of the current year for ABCO Corporation:
Sales revenue $200,000
Interest revenue 3,000
Interest expense 6,000
Gain from sale of land 2,700
Cost of goods sold 120,000
Administrative expense 39,000
Loss on disposal of segment 45,000
All items are before income taxes. The income tax rate is 20%. Calculate the gross profit that should be disclosed on the income statement.
Diff: Easy
Learning Objective: 13.2
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 3 min.
Title/Media Ref.: Short Problem 15 / None
74) Balance sheet information of Digital Solutions, Inc. at December 31, 2019, is provided below.
Assets $100,000
Liabilities 34,000
Shareholders' equity 66,000
During 2020, the company entered into the following transactions:
1. Common stock was issued for $12,000 cash.
2. Services were performed for $45,000 cash.
3. Cash expenses of $31,000 were incurred.
4. Long-term liabilities of $18,000 were paid.
5. The market value of an available-for-sale investment owned at year-end exceeded its cost by $6,000.
6. Dividends of $9,000 were declared and paid.
A. Which transactions are operating?
B. Compute net income for the year ending December 31, 2020.
C. Compute comprehensive income for the year ending December 31, 2020.
A. Transactions 2 and 3 are operating.
B. $45,000 - $31,000 = $14,000
C. $14,000 + $6,000 = $20,000
Diff: Medium
Learning Objective: 13.4; 13.5
Bloom's: Analysis
AACSB/AICPA: Analytic / BB: Critical Thinking; FC: Reporting
TOT: 6 min.
Title/Media Ref.: Short Problem 16 / None
Short Essay Questions
75) Identify types of transactions that are considered exchanges of liabilities and shareholders' equity. Why are these transactions considered 'financing'?
Diff: Medium
Learning Objective: 13.2
Bloom's: Comprehension
AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 1 / None
76) How do items at the top of the income statement differ from items at the bottom of the income statement?
Diff: Medium
Learning Objective: 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 2 / None
77) How are transactions that are not part of the normal operations of a company reported on the financial statements?
Diff: Medium
Learning Objective: 13.2; 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 3 / None
78) Identify the GAAP requirements of comprehensive income.
Diff: Medium
Learning Objective: 13.2
Bloom's: Comprehension
AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 4 / None
79) What is the definition of a business segment and what special reporting is required for discontinued segments?
Diff: Medium
Learning Objective: 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 5 / None
80) Is consistency violated when a company changes accounting principles?
Diff: Medium
Learning Objective: 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 6 / None
81) Why are losses resulting from employee layoffs and write-downs such as inventory and receivables reported as 'other expenses and losses'?
Diff: Medium
Learning Objective: 13.2; 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 7 / None
82) Discuss the reasons for and the financial statement effects of intraperiod tax allocation.
Diff: Medium
Learning Objective: 13.4
Bloom's: Comprehension
AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 8 / None
83) What is 'pro forma' as it relates to the income statement?
Diff: Medium
Learning Objective: 13.3
Bloom's: Comprehension
AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 9 / None
84) How does diluted earnings per share differ from the traditional basic earnings per share?
Diff: Medium
Learning Objective: 13.5
Bloom's: Comprehension
AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 10 / None
85) What is earnings persistence?
Diff: Easy
Learning Objective: 13.2
Bloom's: Knowledge
AACSB/AICPA: Analytic; Communication / BB: Critical Thinking; FC: Measurement
TOT: 4 min.
Title/Media Ref.: Short Essay Question 11 / None
86) How has the movement toward internationalization of many businesses increased reporting of the number of special gains and losses on the income statement?
Diff: Medium
Learning Objective: 13.5
Bloom's: Comprehension
AACSB/AICPA: Analytic; Communication; Diversity / BB: Critical Thinking; FC: Reporting
TOT: 4 min.
Title/Media Ref.: Short Essay Question 12 / None
IFRS Questions
87) Which of the following statements is true?
A) IFRS relies less heavily on fair market value accounting than does US GAAP.
B) IFRS relies more heavily on fair market value accounting than does US GAAP.
C) Neither IFRS nor US GAAP will use fair market value accounting in the near future.
D) Only US GAAP uses fair value market accounting.
Diff: Easy
Learning Objective: 13.3
Bloom's: Comprehension
AACSB/AICPA: Diversity / BB: Global; FC: Reporting
TOT: 1 min.
Title/Media Ref.: IFRS Question 1 / None
Data Analytic Questions
Important Note to Instructor: All of the real world data included in the data analytic test bank questions was taken from the company information data base used for the data analytic concept practice exercises in the text located at www.wiley.com/go/pratt/financialaccounting11e. These questions can be used in at least two different ways to test two levels of data analytic skills. To test only the basic analysis required simply provide the student with the financial information followed by the questions just as they are illustrated in the test bank. Alternatively, to test both their ability to access and navigate the data base as well as their analysis skills, you can provide for the students only the questions and require them to access and navigate the data base, organize the data, and perform the analysis.
Key ratios for oil and gas producer, Suncor Energy, for 2017, 2018 and 2019, organized into the ROE framework, are provided below. Review the ratios and answer the questions that follow.
Key: ROE = Return on equity; ROA = Return on assets; CSL = Capital structure leverage; PM = Profit margin; AT = Asset turnover; LTD/TA = Long-term debt/total assets; COGS/S = COGS/sales; A/R Turn = Accounts receivable turnover; CR = Current ratio; OpEx/S = Operating expenses/sales; Inv Turn = Inventory turnover; QR = Quick ratio; Int/S = Interest expense/sales; LTA Turn = Long-term asset turnover; Int Cov = Interest coverage; Tax/S = Federal income tax expense/sales; A/P Turn= Accounts payable turnover; UG/NI = Unusual gains/net income; UL/NI = Unusual losses/net income
88) The change in ROE from 2017 to 2018 as driven by:
A) the change in Suncor's leverage.
B) the change in Suncor's profit margin.
C) the change in Suncor's ability to collect its outstanding receivables.
D) the change in Suncor's ability to control operating expenses.
Diff: Hard
Learning Objective: 13.6
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Data Analytic Question 1 / None
89) Most important to the change in profit margin from 2018 to 2019 was:
A) the change in Suncor's ability to control cost of goods sold.
B) the change in Suncor's ability to control its operating expenses.
C) the change in Suncor's inventory turnover.
D) the change in Suncor's reliance on long-term financing.
Diff: Hard
Learning Objective: 13.6
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Data Analytic Question 2 / None
90) Choose the best answer for the period 2018 to 2019.
A) Suncor's asset turnover played more of a role in explaining the change in capital structure leverage than profit margin.
B) Suncor's asset turnover played less of a role in explaining the change in capital structure leverage than profit margin.
C) Suncor's asset turnover played more of a role in explaining the change in ROA than profit margin.
D) Suncor's asset turnover played less of a role in explaining the change in ROA than profit margin.
Diff: Hard
Learning Objective: 13.6
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Data Analytic Question 3 / None
91) Which of the following statements is false?
A) The primary reason why Suncor's ROA dropped off from 2018 to 2019 was because it lost some control over its operating expenses.
B) During 2019 Suncor improved its gross margin, but inventory turnover slowed.
C) Across the 3-year period Suncor became increasingly able to cover its debt payments with operating funds.
D) Across the 3-year period Suncor's ability to create a return on its asset investments dropped off while its reliance on debt financing increased.
Diff: Hard
Learning Objective: 13.6
Bloom's: Application
AACSB/AICPA: Analytic / BB: None; FC: Measurement
TOT: 3 min.
Title/Media Ref.: Data Analytic Question 4 / None
Video Questions
92) The items on the income statement are the result of the accrual concept. Which of the following statements accurately identifies what the accrual concept means?
A) Revenues are recorded when cash is received and expenses are recorded when cash payments are made.
B) Revenues on the income statement are recognized when the earnings process is complete and expenses are recognized when the costs incurred to generate the revenues are used up, not necessarily when cash is received or paid.
C) Net income measures the change in the shareholders' investment.
D) Net income less dividends represents the increase to the retained earnings account.
Diff: Medium
Learning Objective: 13.2; 13.3; 13.4; 13.5
Bloom's: Knowledge
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: A complete income statement Video: Question 1 / Video: A complete income statement. www.wiley.com/go/pratt/financialaccounting11e
93) Which of the four descriptions below describes the income statement?
A) This statement provides a measure of the operating performance of a company during the year.
B) This statement provides a measure of the financial condition of a company at a given point in time.
C) This statement summarizes the effects of the operating, investing and financing activities of a company during a year.
D) This statement tracks the investments made by the shareholders' during a year.
Diff: Easy
Learning Objective: 13.2; 13.3; 13.4; 13.5
Bloom's: Knowledge
AACSB/AICPA: Knowledge / None
Title/Media Ref.: A complete income statement Video: Question 2 / Video: A complete income statement. www.wiley.com/go/pratt/financialaccounting11e
94) What is the difference between service revenue and sales revenue?
A) Service revenue reflects situations when the completion of the earning process coincides with the receipt of cash, while sales revenue reflects situations when the completion of the earning process is before or after the receipt of cash.
B) Service revenue is booked more quickly and is usually larger than sales revenue.
C) Service revenue on the income statement is always connected to unearned revenue on the balance sheet, while sales revenue on the income statement is always connected to accounts receivable on the balance sheet.
D) Service revenue is recorded when a service is completed for a customer or client and sales revenue is recorded when goods are delivered to a customer or client.
Diff: Easy
Learning Objective: 13.2; 13.3; 13.4; 13.5
Bloom's: Knowledge
AACSB/AICPA: Knowledge / None
Title/Media Ref.: A complete income statement Video: Question 3 / Video: A complete income statement. www.wiley.com/go/pratt/financialaccounting11e
95) Which of the following statements is not true about entries recorded in the financial statement when goods are delivered to a customer or client?
A) Sales revenue is recorded in the amount of the selling price, and the cost of the goods (inventory) is removed from the inventory account and transferred to the cost of goods sold account.
B) The dollar value of the difference between the sales price of the sold good and its cost is called the gross margin on the sale.
C) Sales revenue is recorded in the amount of the selling price, and the cost of the sold inventory is removed from the balance sheet when it is paid for.
D) The cost of the sold inventory (cost of goods sold) is matched against the selling price of the good (sales revenue) on the income statement in the measurement of net income.
Diff: Medium
Learning Objective: 13.2; 13.3; 13.4; 13.5
Bloom's: Knowledge; Comprehension
AACSB/AICPA: Knowledge / None
Title/Media Ref.: A complete income statement Video: Question 4 / Video: A complete income statement. www.wiley.com/go/pratt/financialaccounting11e
96) The income statement is normally divided into two categories — operating and non-operating. Which statement below is not true about the differences between the two?
A) Operating items are more likely than non-operating items to recur in the future, so investors tend to place a heavier weight on operating items.
B) Operating items tend to be more closely related to the core activities of the business than non-operating items.
C) Operating items are the result of accrual accounting, while non-operating activities are more likely to be linked to cash flows.
D) Operating items are normally disclosed near the top of the income statement, while non-operating items tend to be disclosed farther down the statement.
Diff: Medium
Learning Objective: 13.2; 13.3; 13.4; 13.5
Bloom's: Knowledge; Comprehension
AACSB/AICPA: None / FC: Disclosure Question
Title/Media Ref.: A complete income statement Video: Question 5 / Video: A complete income statement. www.wiley.com/go/pratt/financialaccounting11e
97) Cost of goods sold, depreciation expense and amortization have which one of the following in common?
A) All three have to do with the costs associated non-current assets.
B) All three represent a case where an asset has been placed on the balance sheet at a prior time and the cost of the asset is now being matched on the income statement against revenues generated by the use of that asset.
C) All three represent expenses connected to a concurrent outflow of cash.
D) The dollar values of all three are normally accumulated over time in a contra asset account.
Diff: Medium
Learning Objective: 13.2; 13.3; 13.4; 13.5
Bloom's: Knowledge; Comprehension
AACSB/AICPA: Knowledge / None
Title/Media Ref.: A complete income statement Video: Question 6 / Video: A complete income statement. www.wiley.com/go/pratt/financialaccounting11e
98) Which of the following statements is not true about an accrued expense?
A) An accrued expense is recognized on the income statement at the same time that an accrued liability is recognized on the balance sheet.
B) Accrued expenses reflect costs incurred in an effort to generate revenues.
C) A common example of an accrued expense is wages and salaries, when obligations to pay these expenses exist as of the end of the accounting period.
D) Accrued expenses represent expenses where the cash payment has already been made prior to the end of the accounting period.
Diff: Medium
Learning Objective: 13.2; 13.3; 13.4; 13.5
Bloom's: Knowledge; Comprehension
AACSB/AICPA: Knowledge / None
Title/Media Ref.: A complete income statement Video: Question 7 / Video: A complete income statement. www.wiley.com/go/pratt/financialaccounting11e
99) Which of the following statements is not true about net income?
A) The dollar value of net income is normally the same as the dollar value of taxable income.
B) Net income is the result of the applying the principles of accrual accounting.
C) Net income is normally not a very accurate measure of the amount of cash created from a company's operating activities.
D) Net income is reflected in the retained earnings balance on the balance sheet.
Diff: Medium
Learning Objective: 13.2; 13.3; 13.4; 13.5
Bloom's: Knowledge; Comprehension
AACSB/AICPA: Knowledge / None
Title/Media Ref.: A complete income statement Video: Question 8 / Video: A complete income statement. www.wiley.com/go/pratt/financialaccounting11e
100) Which of the statements below accurately describes the computation of earnings per share?
A) Operating income divided by the number of common shares outstanding.
B) Net income divided by the number of treasury shares held by the company.
C) Net income before tax divided by the number of common shares outstanding.
D) Net income divided by the number of common shares outstanding.
Diff: Easy
Learning Objective: 13.2; 13.3; 13.4; 13.5
Bloom's: Knowledge
AACSB/AICPA: None / FC: Measurement
Title/Media Ref.: A complete income statement Video: Question 9 / Video: A complete income statement. www.wiley.com/go/pratt/financialaccounting11e
101) What is true about earnings per share as of the end of the year if a company delays accruing an expense until the following year?
A) Earnings per share is unaffected.
B) Earnings per share is overstated.
C) Earnings per share is understated.
D) It is impossible to tell from the given information.
Diff: Medium
Learning Objective: 13.2; 13.3; 13.4; 13.5
Bloom's: Knowledge; Analysis
AACSB/AICPA: Knowledge / None
Title/Media Ref.: A complete income statement Video: Question 10 / Video: A complete income statement. www.wiley.com/go/pratt/financialaccounting11e
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Test Bank | Financial Accounting Enhanced eText 11e by Pratt Peters
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