FAR 54 - Misc Transactions, Events and Disclosures 1 Flashcards Preview

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Flashcards in FAR 54 - Misc Transactions, Events and Disclosures 1 Deck (20):
1

On April 30, 2005, Carty Corp. approved a plan to dispose of a segment of its business. The disposal loss is $480,000, including severance pay of $55,000 and employee relocation costs of $25,000, both of which are directly associated with the decision to dispose of the segment. The firm is a calendar-fiscal year firm, and the segment's operating loss for the entire year (2005) through the date of disposal was $120,000.
Before income taxes, what amount should be reported in Carty's income statement for the year ended December 31, 2005, as the total income effect (loss) from discontinued operations?

$600,000
The $600,000 total loss from discontinued operations is the sum of the operating loss ($120,000) and the loss on disposal ($480,000). The two amounts, $120,000 and $480,000, are disclosed separately but together comprise the total loss on the discontinued operation.

2

Which of the following transactions qualify as a discontinued operation?
A. Disposal of a group of assets that are fully depreciated and have no remaining useful life.
B. Approved sale of a segment that represents a strategic shift in the entities operations.
C. Phasing out of a production line.
D. Changes related to technological improvements.

B. To qualify for a discountinued operation, the component to be disposed of must be approved as a sale and represents a strategic shift in the entity's operations.

3

On May 15, 2003, Munn, Inc. approved a plan to dispose of a segment of its business. It is expected that the sale will occur on February 1, 2004, at a selling price of $500,000. The segment reported $195,000 in operating losses for 2003. The segment is expected to lose $30,000 from operations in 2004. The carrying amount of the segment at the date of sale was expected to be $850,000. Before income taxes, what amount should Munn report as a loss from discontinued operations in its 2003 income statement?

$545,000
There are two components for discontinued operations: (1) the operating income or loss for the period in which the decision is made to dispose, and (2) the disposal loss. Only actual operating income (or loss) is recognized, but estimated as well as actual disposal losses are recognized. The $350,000 estimated disposal loss is the difference between the $850,000 carrying value of the segment, and its $500,000 estimated selling price. The operating loss for the period ($195,000) plus the estimated disposal loss ($350,000) equals the $545,000 total loss to be recognized for discontinued operations for 2003.

4

During 20x8, a firm discontinued a component qualifying for separate disclosure within the income statement. The disposal was completed before the end of 20x8 and resulted in a $300 disposal gain. The component earned $400 in 20x7 but lost $100 (negative income) in 20x8. The 20x7 income statement reported income from continuing operations (IFCO) of $6,000. The 20x8 income statement reported $7,000 of net income. Determine the following two amounts:
IFCO for 20x7 as it is reported comparatively in the 20x8 statements
IFCO for 20x8

$5,600 ; $6,800
The discontinued operations section of the income statement for prior periods shown comparatively separates the operating income of discontinued components from IFCO even though the decision had not yet been made in those earlier periods. This reporting results in improved comparability because each year reports IFCO on the same basis. (1) IFCO for 20x7, as it is reported comparatively in the 20x8 statements, reflects the removal of the $400 operating income for the segment and thus equals $6,000 - $400, or $5,600. (2) IFCO for 20x8 is computed by removing the effect of the disposal gain and operating loss from income. IFCO for 20x8 equals $7,000 net income - $300 disposal gain + $100 operating loss, or $6,800.

5

T/F: The estimated future operating loss of a discontinued component is included in the discontinued operations section of the income statement.

False.
Once the disposal takes place, then it is reported as such, but not before.

6

T/F: The book value of the net assets of a component qualifying for separate discontinued operations disclosure is $300,000. The fair value of the component is estimated to be $200,000, and the firm estimates that $20,000 will be expended to effect the sale of the component.
Ignoring income tax, the estimated disposal loss of $120,000 and the operating income or loss from the component will be reported in the discontinued operations section of the income statement.

TRUE

7

T/F: Management has free choice when deciding what parts of an organization warrant separate disclosure for discontinued operations.

False.

8

T/F: The only requirement of a component for separate disclosure of discontinued operations is that the component has operations distinguishable from the firm.

False.
Also includes the operating and investing cash flows for the periods for which the discontinued operations results of operations are reported in the IS. Depreciation and amort, capital expenditures, and significant operating and investing noncash items for the periods for which the discontinued operations results of operations are reported in the IS.

9

T/F: Only operating segments as defined by GAAP for segmental disclosure qualify for discontinued operations reporting.

False.
A company may voluntarialy sell, dispose, or abandon plant assets...

10

T/F: It is possible for a net negative amount to be shown in the income statement for discontinued operations.

TRUE

11

T/F: The decision to dispose of a segment was made on the disposal date, the first day of the year. Therefore, the only amount disclosed for discontinued operations is the gain or loss on disposal of segment assets.

TRUE

12

A transaction that is unusual in nature and infrequent in occurrence should be reported separately as a component of income:
A. After income from continuing operations and before discontinued operations of a segment of a business.
B. Before discontinued operations of a segment of a business and after income from continuing operations.
C. Before income from continuing operations.
D. After income from continuing operations and after discontinued operations of a segment of a business.

D. The order of the items appearing at the bottom of the income statement is:

Income from continuing operations,
Discontinued operations,
Extraordinary items,
Net income.

13

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.

Gold should report the:
A. Net effect of the two transactions as an extraordinary gain.
B. Net effect of the two transactions in income before extraordinary items.
C. Effect of its own bond transaction gain in income before extraordinary items, and report the Iron bond transaction as an extraordinary loss.
D. Effect of its own bond transaction as an extraordinary gain, and report the Iron bond transaction loss in income before extraordinary items.

B. Neither the gain nor loss is extraordinary and thus could be reported net above income from continuing operations.

14

In 2005, Teller Co. incurred losses arising from its guilty plea in its first antitrust action, and from a substantial increase in production costs caused when a major supplier's workers went on strike.

Which of these losses should be reported as an extraordinary item?

Neither one. Neither loss qualifies for extraordinary classification because neither are unusual and infrequent. Anti-trust actions regularly occur in business and just because it is the first time for this company to pay does not cause the item qualify for extraordinary treatment. Costs associated with a strike occur in business on a regular basis and are specifically excluded from qualifying as an extraordinary item (ASC 225-20-45-4).

15

T/F: An extraordinary item should be reported separately on the income statement as a component of income: net of income taxes and before discontinued operations of a segment of a business.

False.
Extraordinary items are disclosed net of tax, but AFTER discontinued operations, not before, in the income statement.

16

Adam Corp. had the following infrequent transactions during 2005:

A $190,000 gain on reacquisition and retirement of bonds.
A $260,000 gain on the disposal of a segment of a business.
A $90,000 loss on the abandonment of equipment.

In its 2005 income statement, what amount should Adam report as total infrequent net gains that are not considered extraordinary?

$100,000
The gain on bonds and loss on abandonment of equipment are infrequent but not extraordinary. The segment gain is a discontinued operation, not extraordinary but also not "infrequent," a specified category above income from continuing operations.

17

Casey Corp. entered into a troubled debt restructuring agreement with First State Bank.

Prior to this agreement, Casey has never had troubled debt and does not expect to have troubled debt in the future.
Under the agreement, First State agreed to accept land with a carrying amount of $85,000 and a fair value of $120,000 in exchange for a note with a carrying amount of $185,000.

Disregarding income taxes, what amount should Casey report as extraordinary gain in its income statement?

$0
Troubled debt restructuring is not considered an extraordinary gain.

18

T/F: Unusual and infrequent items are disclosed net of tax and below income from continuing operations.

True

19

T/F: A large and unexpected investment loss is extraordinary.

False.

20

T/F: The loss from expropriation of assets by a foreign government is extraordinary.

True

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