Chester Corp. was a development stage enterprise from its inception on September 1, 1987 to December 31, 1988. The following information was taken from Chester's accounting records for the above period:
For the period September 1, 1987 to December 31, 1988, what amount should Chester report as net loss?
Choice 'd' is correct. $450,000 net loss for the period Sept. 1, 1987 to DeC. 31, 1988.
Rule: 'Development stage enterprises' present their FS in accordance with GAAP and make additional disclosures such as: cumulative net losses, cumulative deficit, cumulative sales and expenses.
Foy Corp. failed to accrue warranty costs of $50,000 in its December 31, 1992, financial statements. In addition, a $30,000 change from straight-line to accelerated depreciation was made at the beginning of 1993. Both the $50,000 and the $30,000 are net of related income taxes. What amount should Foy report as prior period adjustments in 1993?
Choice 'c' is correct. $50,000.
The cumulative effect of a change in accounting principle is now shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, assuming that the cumulative effect can be calculated.
An exception is made however, for a change in depreciation method, since a change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in method and a change in estimate. These changes should now be accounted for as a change in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings.
The correction of the failure to accrue warranty costs is treated as a correction of an error and thus as a prior period adjustment.
Choices 'a', 'b', and 'd' are incorrect, per the above Explanation: .
A material loss should be presented separately as a component of income from continuing operations when it is:
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.
YIV, Inc. is a multidivisional corporation, which has both intersegment sales and sales to unaffiliated customers. YIV should report segment financial information for each division meeting which of the following criteria?
Choice 'c' is correct. Segment revenue is 10% or more of combined revenue of all the company segments.
Rule: To be significant enough to report on, a segment must be at least 10% of:
1. Combined revenues (whether intersegment or affiliated customers) or
2. Operating profit (of all segments not having an operating loss), or
3. Identifiable assets.
Choice 'a' is incorrect. Rule is 10% of 'operating profit,' not 'consolidated profit.'
Choice 'b' is incorrect. Segments with 'operating losses' are not combined with those having 'operating profits' in determining a segment.
Choice 'd' is incorrect. 'Consolidated revenue' would not include 'intersegment revenue.' Rule is 'combined revenue,' not 'consolidated revenue.'
In Baer Food Co.'s 1990 single-step income statement, the section titled "Revenues" consisted of the following:
In the revenues section of its 1990 income statement, Baer Food should have reported total revenues of:
Choice 'd' is correct. $201,900.
The various amounts from discontinued operations should be included in discontinued operations, not in revenues.
