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1
Q

On March 15, Year 2, a calendar-year company issued its Year 1 financial statements. On March 1, Year 2, a fire destroyed the company’s only manufacturing plant. Which of the following statements is correct regarding the treatment of the loss in the December 31, Year 1, financial statements?

A

The loss should be disclosed and not recognized in the Year 1 financial statements.

Subsequent events are events or transactions that occur after the balance sheet date and prior to the issuance of the financial statements. A recognized subsequent event provides additional evidence about conditions that existed on the balance sheet date. A subsequent event that provides evidence about conditions that did not exist on the balance sheet date does not require recognition, but it may require disclosure. A fire that destroyed the company’s only manufacturing plant on March 1, Year 2, is an event that provides evidence about conditions that did not exist on December 31, Year 1. Thus, the loss should be disclosed, not recognized, in the Year 1 financial statements.

2
Q

Giaconda, Inc., acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best describes this fair value measurement approach?

A

Income.

The income approach uses valuation methods based on current market expectations about future amounts, e.g., earnings or cash flows. It converts future amounts to one present discounted amount. Examples are present value methods and option-pricing models.

3
Q

Which of the following factors determines whether an identified segment of an entity should be reported in the entity’s financial statements?

I. The segment’s assets constitute at least 10% of the combined assets of all operating segments.
II. The segment’s liabilities constitute at least 10% of the combined liabilities of all operating segments.

A

I only.

A reportable segment is an operating segment that meets one of the following tests: (1) Reported revenue, including sales to external customers and intersegment sales or transfers, is at least 10% of the combined revenue of all operating segments; (2) assets are at least 10% of the combined assets of all operating segments; and (3) the absolute amount of reported profit or loss is at least 10% of the greater, in absolute amount, of either the combined reported profit of all operating segments that did not report a loss or the combined reported loss of all operating segments that did report a loss. A liabilities test is not stated.

4
Q

The entity’s manufacturing division, whose assets constituted 75% of its total assets at September 30, Year 5 (end of year), was sold on November 1, Year 5. The new owner assumed the bonded indebtedness associated with this property. How should this event be presented in the financial statements?

A

Disclosure by means of supplemental, pro forma financial data.

The sale of a major division in the subsequent events period provides evidence of conditions not existing at the balance sheet date and thus does not require adjustment of the statements. Disclosure must be made, however, because the event is of such a nature that nondisclosure causes the statements not to be fairly presented. The form of the disclosure depends upon the significance of the event. In this case, many accounts are affected, and pro forma financial statements are the best method.

5
Q

How are discontinued operations and material unusual or infrequently occurring items that occur at midyear initially reported?

A

Included in net income and disclosed in the notes to interim financial statements.

Material unusual or infrequent items, and gains or losses from disposal of a component of an entity are (1) separately disclosed in the interim statements, (2) included in interim-period net income, and (3) not prorated over the year.

6
Q

A company that issues quarterly financial statements incurs a material unusual loss in one of the first three quarters. In which of the following ways would the company report this loss?

A

Entirely in the quarter that the loss occurs.

Unusual or infrequently occurring items should be separately disclosed, included in interim-period net income, and not prorated over the year.

7
Q

Crossroads Co. chooses to report a financial asset at its fair value. The asset trades in two different markets; however, neither market is the principal market for the financial asset. In the first market, sales proceeds are $76, which is net of transaction costs of $6. In the second market, the sales proceeds are $80, which is net of transaction costs of $1. What amount should Crossroads report as the fair value of the asset?

A

$81.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The transaction is assumed to occur in the reporting entity’s principal market for the asset or liability. In the absence of such a market, it is assumed to occur in the most advantageous market. This market is the one in which the specific reporting entity can maximize the amount received for selling the asset. However, given a principal (or most advantageous) market, the FMV is the price in that market without adjustment for transaction costs. Here, there is not a principal market; instead, there are two non-principal markets. The second market is the most advantageous because Crossroads would maximize the net proceeds from selling the asset ($80 compared to $76 in the first market). Therefore, fair value should be measured using the second market. Crossroads should report $81 as the fair value of the asset because the FMV is the price without adjustments for transaction costs.

8
Q

Which of the following is true regarding interim financial reporting?

A

Each interim period is viewed as a discrete reporting period under IFRS and as an integral part of an annual period under U.S. GAAP.

Under U.S. GAAP, each interim period is viewed as an integral part of an annual period to which it relates. Thus, an inventory loss from a market decline may be deferred if no loss for the year is reasonably anticipated. Under IFRS, each interim period is viewed as a discrete reporting period. Accordingly, an inventory loss from a market decline must be recognized in the interim period even if no loss for the year is reasonably anticipated.

9
Q

A company owns a financial asset that is actively traded on two different exchanges (market A and market B). There is no principal market for the financial asset. The information on the two exchanges is as follows:

Market A
Quoted price of asset: $1,000
Transaction costs: $75

Market B
Quoted price of asset: $1,050
Transaction costs: $150

What is the fair value of the financial asset?

A

$1,000.

The transaction is assumed to occur in the principal market for the asset or liability. In the absence of such a market, it is assumed to occur in the most advantageous market. The most advantageous market is the market in which the specific reporting entity can maximize the amount received for selling the asset or minimize the amount paid for transferring the liability, after considering transaction and transportation costs. The fair value is the price in that market without adjustment for transaction costs. The entity receives $925 if the asset is sold in Market A, but only $900 in Market B. Thus, Market A is the advantageous market, and the fair value is $1,000.

10
Q

Fair value measurements (FVMs) of assets and liabilities are based on transactions between market participants at the measurement date. Market participants

A

Are willing and able to engage in transactions involving the asset or liability.

Market participants are not related parties. They are independent of the reporting entity. They also are knowledgeable and willing and able (but not compelled) to engage in transactions involving the asset or liability.

11
Q

On January 15, Year 2, before the Mapleview Co. released its financial statements for the year ended December 31, Year 1, it settled a long-standing lawsuit. A material loss resulted and no prior liability had been recorded. How should this loss be disclosed or recognized in the Year 1 financial statements?

A

The loss must be recognized in the financial statements.

Subsequent events that provide additional evidence with the respect to conditions that existed at the balance sheet date, including the estimates inherent in preparing the financial statements, must be recognized in the financial statements of the year affected by the subsequent event. Settlement of a lawsuit is indicative of conditions existing at year end and calls for recognition in the statements.

12
Q

In financial reporting for operating segments of a public business entity, which of the following must be included in the reported amount of a reportable operating segment’s assets?

Accumulated depreciation:
Marketable securities valuation allowance:

A

No
No

The amount of a reported segment item, such as assets, is the measure reported to the chief operating decision maker for purposes of making resource allocation and performance evaluation decisions regarding the segment. Thus, if accumulated depreciation and a marketable securities valuation allowance are not included in that measure, they need not be included in the reported amount of the operating segment’s assets.

13
Q

Which of the following statements is correct regarding fair value measurement?

A

Fair value is a market-based measurement.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Thus, fair value is a market-based measurement.

14
Q

For interim financial reporting, a gain on disposal of property occurring in the second quarter should be

A

Recognized in the second quarter.

Gains and losses similar to those that would not be deferred at year end should not be deferred to later interim periods of the same year. Accordingly, a gain on disposal of an asset should not be prorated. It is recognized in full in the quarter in which it occurs.

15
Q

For interim financial reporting, a company’s income tax provision for the second quarter should be determined using the

A

Effective tax rate expected to be applicable for the full year as estimated at the end of the second quarter.

At the end of each interim period, the entity should estimate the annual effective tax rate. This rate is used in providing for income taxes on a current year-to-date basis.

16
Q

Which of the following items would most likely require an adjustment to the financial statements for the year ended December 31, Year 1?

A

Loss on an uncollectible trade receivable recorded in Year 1 from a customer that declared bankruptcy in Year 2.

This event provides additional evidence about conditions that existed at the balance sheet date and that affect the financial statements.

17
Q

In financial reporting for operating segments of a public business entity, the revenue of a reportable segment must include

A

Revenue from intersegment transactions.

GAAP do not specifically define the reported revenue of an operating segment. However, the information reported includes (1) revenues from external customers, (2) revenues from transactions with other operating segments of the same entity, and (3) interest revenue. The amount of a reported segment item, such as revenue, is the measure reported to the chief operating decision maker for purposes of making resource allocation and performance evaluation decisions regarding the segment. Disclosures are required about measurements of segment profit or loss (including revenue) and segment assets, but GAAP do not stipulate how those measurements are to be made.

18
Q

A public entity sells steel for use in construction. One of its customers accounts for 43% of sales, and another customer accounts for 40% of sales. What should the entity disclose in its annual financial statements about these two customers?

A

The amount of the entity’s revenue from each of the two customers.

When 10% or more of revenue is derived from sales to any single customer, (1) that fact, (2) the amount of revenue from each such customer, and (3) the segment(s) reporting the revenues must be disclosed by the public entity in its financial statements.

19
Q

An enterprise must separately report information about an operating segment when the segment’s revenue meets what minimum percentage of the combined revenue of all reported operating segments?

A

10%.

Reportable segments are operating segments that must be separately disclosed if (1) reported revenue is at least 10% of the combined revenue of all operating segments, (2) assets are at least 10% of the combined assets of all operating segments, and (3) the absolute amount of reported profit or loss is at least 10% of the greater (in absolute amount) of either (a) the combined profit of all profitable operating segments or (b) the combined loss of all operating segments that reported a loss.

20
Q

Which of the following material events occurring after the December 31, Year 6, end of the reporting period does not ordinarily result in adjustment of the financial statements before they are issued on February 28, Year 7?

A

A major business combination completed on January 20, Year 7. Negotiations had begun in December of Year 6.

An entity recognizes in the financial statements adjusting events after the reporting period. These provide evidence about conditions existing at the end of the reporting period. However, the business combination did not occur until after year end. Hence, it required only disclosure, not recognition in the statements.