QUESTION: 25

In April 30, 20X4, Deer Corp. approved a plan to dispose of a component of its business. For the period January 1 through April 30, 20X4, the component had revenues of $500,000 and expenses of $800,000.
The assets of the component were sold on October 15, 20X4 at a loss. In its income statement for the year ended December 31, 20X4, how should Deer report the component's operations from January 1 to April 30, 20X4?

$500,000 and $800,000 should be included with revenues and expenses, respectively, as part of continuing operations.
$300,000 should be reported as part of the loss on disposal of a component and included as part of continuing operations.
$300,000 should be reported as an extraordinary loss.
$300,000 should be reported as a loss from operations of a component and included in loss from discontinued operations.

Answer(s): D

Explanation:

Choice "d" is correct. Once the decision has been made to dispose of a component of a business and that component meets the criteria to be classified as held for sale, the operating results of the component for the period reported on, and any gain or loss from the disposal, should be reported separately from continuing operations, net of tax. In this question, the component was classified as held for sale and was sold in the same year.
Thus, in 20X4, the results of operations, the $300,000 ($500,000-$800,000) loss, are reported as a loss from discontinued operations. The loss on disposal would be reported as part of that loss from discontinued operations also.
Choice "a" is incorrect. The results of operations prior to the decision date, and also after the decision date, are reported separately from the results of continuing operations as a part of discontinued operations.
Choice "b" is incorrect. The results of operations prior to the decision date, and also after the
decision date, are reported separately from the results of continuing operations as a loss from operations of a component and included in loss from discontinued operations. Choice "c" is incorrect. The results of discontinued operations are not reported as an extraordinary item.

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QUESTION: 26

In open market transactions, Gold Corp. simultaneously sold its long-term investment in Iron Corp. bonds and purchased its own outstanding bonds. The broker remitted the net cash from the two transactions.
Gold's gain on the purchase of its own bonds exceeded its loss on the sale of the Iron bonds. Assume the transaction to purchase its own outstanding bonds is unusual in nature and has occurred infrequently.
Gold should report the:

Net effect of the two transactions as an extraordinary gain.
Net effect of the two transactions in income before extraordinary items.
Effect of its own bond transaction gain in income before extraordinary items, and report the Iron bond transaction as an extraordinary loss.
Effect of its own bond transaction as an extraordinary gain, and report the Iron bond transaction loss in income before extraordinary items.

Answer(s): D

Explanation:

Choice "d" is correct, these are two separate transactions because Gold Corp. (1) sold Iron Corp. bonds (an investment) for a loss, and, (2) bought back its own (Gold) Corp. bonds (a debt) for a gain. This is not a "refinancing" (where one would sell new bond debt to buy back old bond debt outstanding).
The gain from the purchase of its own bonds is an "extraordinary gain" because it is both unusual in nature and infrequently occurring (per APB Opinion No. 30 and SFAS No. 145). The Iron Corp. transaction is a loss in "income before extraordinary items." Choices "a" and "b" are incorrect. The two transactions are separate and cannot be netted. Choice "c" is incorrect. Just the opposite. The sale of the investment is a loss in "income before extraordinary items," while the purchase of its bond debt is an "extraordinary gain" according to the provisions of APB Opinion No. 30.

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QUESTION: 27

Lore Co. changed from the cash basis of accounting to the accrual basis of accounting during 1994. The cumulative effect of this change should be reported in Lore's 1994 financial statements as a:

Prior period adjustment resulting from the correction of an error.
Prior period adjustment resulting from the change in accounting principle.
Component of income before extraordinary item.
Component of income after extraordinary item.

Answer(s): A

Explanation:

Choice "a" is correct. The cash basis for financial reporting is not a generally accepted accounting basis of accounting (GAAP); therefore, it is an error. Correction of an error from a prior period is a reported as prior period adjustment to retained earnings. Choice "b" is incorrect. Cash basis reporting is not an accounting principle under accrual accounting principles. Thus, the change from cash basis is not reported as a change in accounting principle. In addition, changes in accounting principle are not prior period adjustments; instead, they are treated retrospectively.
Choices "c" and "d" are incorrect. Correction of prior period errors has no effect on the current year's income statement.

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QUESTION: 28

A material loss should be presented separately as a component of income from continuing operations when it is:

An extraordinary item.
A cumulative effect type change in accounting principle.
Unusual in nature and infrequent in occurrence.
Not unusual in nature but infrequent in occurrence.

Answer(s): D

Explanation:

Choice "d" is correct. Gains or losses that are unusual in nature or occur infrequently but not both, are presented as a component of income from continuing operations. Choice "a" is incorrect. Extraordinary items are shown net of tax in a separate section of the income statement after income from continuing operations.
Choice "b" is incorrect. Cumulative effects of changes in accounting principle are now shown net of tax as an adjustment to the opening balance of retained earnings in the retained earnings statement. This treatment is called retrospective application. There really are no longer any cumulative effect types of changes in accounting principle. The cumulative effect is merely how the amount of the change is measured.
Choice "c" is incorrect. This is the definition of an extraordinary item.

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CPA Financial Accounting and Reporting CPA-Financial Exam

QUESTION: 25

Explanation:

QUESTION: 26

Explanation:

QUESTION: 27

Explanation:

QUESTION: 28

Explanation:

CPA Financial Accounting and Reporting
CPA-Financial Exam