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Flashcards in Interim Reporting Deck (17):
1

A corporation issues quarterly interim financial statements and uses the lower cost or market method to value its inventory in its annual financial statements. Which of the following statements is correct regarding how the corporation should value its inventory in its interim financial statements?

  1. Inventory losses generally should be recognized in the interim statements.
  2. Temporary market declines should be recognized in the interim statements.
  3. Only the cost method of valuation should be used.
  4. Gains from valuations in previous interim periods should be fully recognized.

Inventory losses generally should be recognized in the interim statements.

Only temporary losses expected to be recovered are not recognized in interim periods. Because most inventory losses are permanent, this is the best answer of the four.

2

For interim financial reporting, a company's income tax provision for the second quarter of 2004 should be determined using the:

  1. Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the first quarter of 2004.
  2. Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the second quarter of 2004.
  3. Effective tax rate expected to be applicable for the second quarter of 2004.
  4. Statutory tax rate for 2004.

Effective tax rate expected to be applicable for the full year of 2004 as estimated at the end of the second quarter of 2004.

To ensure the most current information, an estimate of the applicable tax rate for the entire year is made at the end of each quarter. Also at the end of each quarter, the tax for the entire portion of the year elapsed is computed, including previous quarters of that year. Finally, the previous quarters' tax is subtracted, yielding the income tax for the latest quarter.

3

How are discontinued operations that occur at midyear initially reported?

  1. Disclosed only in the notes to the year-end financial statements.
  2. Included in net income and disclosed in the notes to the year-end financial statements.
  3. Included in net income and disclosed in the notes to interim financial statements.
  4. Disclosed only in the notes to interim financial statements.

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

Discontinued operations are not related to any other interim period. Therefore, it would be erroneous to allocate their financial statement effects to more than one interim period.

4

Due to a decline in market price in the second quarter, Petal Co. incurred an inventory loss. The market price is expected to return to previous levels by the end of the year. At the end of the year, the decline had not reversed. When should the loss be reported in Petal's interim income statements?

  1. Ratably over the second, third, and fourth quarters.
  2. Ratably over the third and fourth quarters.
  3. In the second quarter only.
  4. In the fourth quarter only.

In the fourth quarter only.

Temporary declines in inventory value are not recognized in the interim period in which they occur. This decline was expected to be temporary, i.e. it was expected to reverse. Therefore, it is not recorded until the fourth quarter, at which time the normal annual LCM valuation is applied because the decline had not reversed. Had the decline in the second quarter been deemed permanent, it would have been recognized in the second quarter.

5

An inventory loss from a market price decline occurred in the first quarter, and the decline was not expected to reverse during the fiscal year.However, in the third quarter, the inventory's market price recovery exceeded the market decline that occurred in the first quarter.

For interim financial reporting, the dollar amount of net inventory should:

  1. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the decrease in the first quarter.
  2. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the market price recovery.
  3. Decrease in the first quarter by the amount of the market price decline and not be affected in the third quarter.
  4. Not be affected in either the first quarter or the third quarter.

Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the decrease in the first quarter.

When interim period inventory market value declines are not considered temporary (not expected to reverse), they are recognized in the quarter in which the decline occurs. Later recoveries are recognized as gains to the extent of previous losses only. The inventory may not be marked up above cost.

6

On March 15, 2004, Krol Co. paid property taxes of $90,000 on its office building for the calendar year 2004.

On April 1, 2004, Krol paid $150,000 for unanticipated repairs to its office equipment. The repairs will benefit operations for the remainder of 2004.

What is the total amount of these expenses that Krol should include in its quarterly income statement for the three months ended June 30, 2004?

  1. $172,500
  2. $97,500
  3. $72,500
  4. $37,500

$72,500

One-fourth of the property taxes should be recognized for the second quarter income statement: $22,500 = $90,000/4. Although the entire annual amount was paid in the first quarter, only 1/4 of the total annual amount should be recognized in each quarter. This allocation is based on benefits received (the benefits that flow from payment of property taxes). It is reasonable to assume that each quarter benefits the same amount.

The repair cost benefits three quarters on an equal basis because it was paid at the beginning of the second quarter. Therefore, 1/3 of the cost, or $50,000, should be reported in the income statement for the second quarter.

Thus, the total expense to be recognized in the second quarter is $72,500 ($22,500 + $50,000).

7

An inventory loss from a permanent market decline of $360,000 occurred in May 2006. Cox Co. appropriately recorded this loss in May 2006 after its March 31, 2006, quarterly report was issued.

What amount of inventory loss should be reported in Cox's quarterly income statement for the three months ended June 30, 2006?

  1. $0
  2. $90,000
  3. $180,000
  4. $360,000

$360,000

Unless temporary, declines in the market value of inventory should be recognized in full in the interim period in which they occur. 

They should not be deferred to a later period. In this way, the quarterly financial statement reports a significant event for that quarter.

This is an example of an exception to the overall view adopted by the APB with regard to interim reports: that interim reports should be an integral part of the annual period.

8

Farr Corp. had the following transactions during the quarter ended March 31, 2005:

  • Loss on early extinguishment of debt $70,000
  • Payment of fire insurance premium for calendar year 2005 $100,000

What amount should be included in Farr's income statement for the quarter ended March 31, 2005?

  • Extinguishment loss    
  • Insurance expense

  • Extinguishment loss $70,000    
  • Insurance expense $25,000

In large measure, accounting principles for interim periods are the same as for annual periods. The extinguishment loss is a one-time event and is recognized entirely in the first quarter. The insurance payment covers an annual period. Thus, only 1/4 of the payment, or $25,000 ($100,000 x .25), is allocated to the first quarter.

9

Bard Co., a calendar-year corporation, reported income before income tax expense of $10,000 and income tax expense of $1,500 in its interim income statement for the first quarter of the year. Bard had income before income tax expense of $20,000 for the second quarter and an estimated effective annual rate of 25%. What amount should Bard report as income tax expense in its interim income statement for the second quarter?

  1. $3,500
  2. $5,000
  3. $6,000
  4. $7,500

$6,000

Interim income tax expense equals the difference between (1) the total income tax through the end of the interim period at the estimated annual tax rate, and (2) the income tax expense recognized in previous interim periods of the same year. For the second quarter, income tax expense therefore is computed as ($10,000 + $20,000)(.25) - $1,500 = $6,000.

10

Harper Co. incurred an apparently permanent inventory loss from market decline of $840,000 during June year 1. What amount of the inventory loss should be recognized in Harper’s quarterly income statement for the 3 months ended June 30, year 1?

  1. $210,000
  2. $280,000
  3. $420,000
  4. $840,000

$840,000

ASC Topic 270 states that provisions for write-downs of inventory to market should be made at interim dates on the same basis as is used at annual reporting dates. Therefore, the full $840,000 loss should be recognized when incurred in the quarter ending 6/30/Y1. Note that if this loss had been considered temporary in nature, it need not be recognized at an interim date (ASC Topic 270).

11

For interim financial reporting, which of the following may be accrued or deferred to provide an appropriate cost in each period?

  • Interest
  • Rent

BOTH.

Per ASC Topic 270, costs and expenses other than product costs (i.e., interest and rent) should be charged to income as incurred or allocated among interim periods if they benefit more than one interim period. Therefore, interest and rent expenses may be accrued or deferred.

12

For external reporting purposes, it is appropriate to use estimated gross profit rates to determine the cost of goods sold for

  • Interim financial reporting
  • Year-end financial reporting

  • Interim financial reporting - YES
  • Year-end financial reporting - NO

Per ASC Topic 270, determining the cost of goods sold by using estimated gross profit rates is only appropriate for interim periods and is not appropriate for year-end external reporting. For year-end reporting, the actual cost of goods sold must be determined by using the inventory flow method which most clearly reflects income.

13

Which of the following statements is true?

  1. US GAAP does not allow interim financial reporting.
  2. IFRS does not mandate interim reporting.
  3. IFRS mandates interim reporting.
  4. Both US GAAP and IFRS mandate interim reporting.

IFRS does not mandate interim reporting.

IFRS does not mandate interim reporting.  However, when interim reports are required, four financial statements are required: the statement of financial position, the statement of comprehensive income, the statement of changes in equity, and the statement of cash flows.  For consistency purposes, the entity must use the same accounting policies as used in year-end financial statements.

14

In January year 1 Horner Company paid $80,000 in property taxes on its plant for calendar year 1. Also in January year 1 Horner estimated that its year-end bonus to executives for year 1 would be $320,000. What is the amount of the expenses related to these two items that should be reflected in Horner’s quarterly income statement for the 3 months ended June 30, year 1 (second quarter)?

  1. $0
  2. $ 20,000
  3. $ 80,000
  4. $100,000

$100,000

According to ASC Topic 270, costs should be charged to income in interim periods as they are incurred or allocated among the periods based upon estimated benefits received. Since both the property taxes and executive bonus benefit the entire calendar year, the $400,000 ($80,000 property taxes + $320,000 bonus) total expense should be allocated evenly among the four quarters.

15

For interim financial reporting, the computation of a company’s second quarter provision for income taxes uses an effective tax rate expected to be applicable for the full fiscal year. This effective tax rate should reflect anticipated

  • Capital gains
  • Foreign tax rates

BOTH.

ASC 270 specifies that foreign tax rates and capital gains should be considered in estimating the effective tax rate for interim reporting.

16

Which of the following is an inherent difficulty in the determination of the results of operations on an interim basis?

  1. Cost of sales reflects only the amount of product expense allocable to revenue recognized as of the interim date.
  2. Depreciation on an interim basis is a partial estimate of the actual annual amount.
  3. Costs expensed in one interim period may benefit other periods.
  4. Revenues from long-term construction contracts accounted for by the percentage of completion method are based on annual completion and interim estimates may be incorrect.

Costs expensed in one interim period may benefit other periods.

The most serious problem specified is dealing with costs that are expensed in one interim period but may provide benefits to other interim periods. Per ASC Topic 270, such expenses may be allocated to the interim periods benefited.

17

During the first quarter of the calendar year, Worth Co. had income before taxes of $100,000, and its effective income tax rate was 15%. Worth’s effective annual income tax rate for the previous year was 30%. Worth expects that its effective annual income tax rate for the current year will be 25%. The statutory tax rate for the current year is 35%.  In its first quarter interim income statement, what amount of income tax expense should Worth report?

  1. $15,000
  2. $25,000
  3. $30,000
  4. $35,000

$25,000

The year-to-date income is multiplied by the effective annual income tax rate of the current year (25%) to calculate income tax expense on the interim income statement. Worth should report income tax expense of $25,000 ($100,000 × 25%).