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AICPA CPA Financial Accounting and Reporting Sample Questions (Q23-Q28):

NEW QUESTION # 23
On December 31, 20X2, the Board of Directors of Maxy Manufacturing, Inc. committed to a plan to
discontinue the operations of its Alpha division. Maxy estimated that Alpha's 20X3 operating loss would
be $500,000 and that the fair value of Alpha's facilities was $300,000 less than their carrying amounts.
The estimate for 20X3 turned out to be correct. Alpha's 20X2 operating loss was $1,400,000, and the
division was actually sold for $400,000 less than its carrying amount. Maxy's effective tax rate is 30%.
In its 20X3 income statement, what amount should Maxy report as loss from discontinued operations?

A. $420,000
B. $600,000
C. $500,000
D. $350,000

Answer: A

Explanation:
Choice "c" is correct. The 20X3 loss from discontinued operations would include both the 20X3 operating
loss of $500,000 (which turned out to be a correct estimate) and the "additional" loss (on disposal) of
$ 100,000, net of tax, for a total of $600,000 x .70 or $420,000. Choice "a" is incorrect. It includes the 20X3
operating loss of $500,000 but not the $300,000 impairment loss but does report the 20X3 operating loss
net of tax. Choice "b" is incorrect. It includes the 20X3 operating loss of $500,000, but not the $100,000
loss on disposal, and reports the 20X3 operating loss gross of tax and not net of tax. Choice "d" is
incorrect. It reports the 20X3 loss from discontinued operations gross of tax and not net of tax. The 20X3
loss from discontinued operations should include both the 20X3 operating loss of $500,000 and the loss
on disposal of $100,000, net of tax, for a total of $600,000 x .70 or $420,000.

NEW QUESTION # 24
Advertising costs may be accrued or deferred to provide an appropriate expense in each period for:

A. Option A
B. Option C
C. Option B
D. Option D

Answer: C

Explanation:
Choice "b" is correct. Yes - Yes.
Advertising costs may be accrued or deferred to provide an appropriate expense in each period for both
"interim" and "year-end" financial reporting.

NEW QUESTION # 25
In single period statements, which of the following should not be reflected as an adjustment to the
opening balance of retained earnings?

A. Effect of a failure to provide for uncollectible accounts in the previous period.
B. Cumulative effect of a change from LIFO to FIFO in valuing merchandise inventory.
C. Cumulative effect of a change from the percentage of completion to the completed contract method of
accounting for long-term construction projects.
D. Effect of a decrease in the estimated useful life of depreciable equipment.

Answer: D

Explanation:
Choice "b" is correct. A change in the estimated useful life of a depreciable asset is a change in estimate
handled prospectively. No adjustment to retained earnings is necessary. Choice "a" is incorrect. The
correction of a failure to provide for uncollectible accounts is considered to be a correction of an error. The
opening balance of retained earnings would be adjusted to correct the error. Choice "c" is incorrect. This
change is a change in accounting principle and is handled retrospectively. With retrospective application,
the opening balance of retained earnings would be adjusted to reflect the cumulative effect of the changes.
Choice "d" is incorrect. This change is a change in accounting principle and is handled retrospectively.
With retrospective application, the opening balance of retained earnings would be adjusted to reflect the
cumulative effect of the changes.

NEW QUESTION # 26
Which of the following should be disclosed in a summary of significant accounting policies?

A. Composition of sales by segment.
B. Future minimum lease payments in the aggregate and for each of the five succeeding fiscal years.
C. Basis of profit recognition on long-term construction contracts.
D. Depreciation expense.

Answer: C

Explanation:
Choice "a" is correct. The summary of significant accounting policies should disclose policies. The only
policy in this question is the "basis" of profit recognition on long-term construction contracts.
The other disclosures are accounting details and would be disclosed in other footnotes, but not in the
summary of significant accounting policies.
Choice "b" is incorrect. The future minimum lease payments should be disclosed, but not in the summary
of significant accounting policies.
Choice "c" is incorrect. Depreciation expense should certainly be disclosed, but not in the summary of
significant accounting policies.
Choice "d" is incorrect. The composition of sales by segment should be disclosed, but not in the summary
of significant accounting policies.

NEW QUESTION # 27
Ocean Corp.'s comprehensive insurance policy allows its assets to be replaced at current value. The
policy has a $50,000 deductible clause. One of Ocean's waterfront warehouses was destroyed in a winter
storm. Such storms occur approximately every four years. Ocean incurred $20,000 of costs in dismantling
the warehouse and plans to replace it. The tax rate is 30%. The following data relate to the warehouse:
Current carrying amount $ 300,000
Replacement cost 1,100,000
What amount of gain should Ocean report as a separate component of income before extraordinary
items?

A. $730,000
B. $780,000
C. $1,030,000
D. $0

Answer: A

Explanation:
Choice "c" is correct. $730,000 gain reported as a separate component of income before extraordinary
items.

NEW QUESTION # 28
......

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