If a company records cash received for services to be provided in the future with a debit to Cash and a credit to Service Revenue, how will this error affect net income for the current period?
Multiple Choice
Net income will be too high.
Net income will be correct.
Not possible to determine.
Net income will be too low.
Answer
Net income will be too high.
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A subsequent event for an entity with a December 31, 2021, year-end would not include:
Multiple Choice
An issuance of bonds in January 2022.
An acquisition of another company in January 2022.
A major uncertainty at December 31, resolved in January 2022.
A change in the estimated useful lives of equipment in January 2022.
Answer
A change in the estimated useful lives of equipment in January 2022.
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The distinction between operating and nonoperating income relates to:
Multiple Choice
primary activities of the reporting entity.
consistency of income stream.
continuity of income.
reliability of measurements.
Answer
primary activities of the reporting entity
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Janson Corporation Co.'s trial balance included the following account balances at December 31, 2021:
Investments consist of treasury bills that were purchased in November, 2021, and mature in January, 2022. The balance of prepaid insurance represents coverage over the next two years. What amount should be included in the current assets section of Janson’s December 31, 2021, balance sheet?
Multiple Choice
$139,700.
$88,600.
$91,800.
$57,900.
Answer
$88,600.
Explanation
$12,700 + $42,000 + $30,700 + $3,200 (1/2 of prepaid insurance) = $88,600.
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Consider the following two separate events for a company during the year:
1. Loss on sale of investments = $30.
2. Unrealized gain on investment from increase in fair value = $20.
The company reports the unrealized gain as a component of other comprehensive income. By how much would these two events affect net income and comprehensive income, ignoring tax effects?
Multiple Choice
Net income = $(30); Comprehensive income = $20.
Net income = $(30); Comprehensive income = $(10).
Net income = $0; Comprehensive income = $(10).
Net income = $(10); Comprehensive income = $20.
Answer
Net income = $(30); Comprehensive income = $(10).
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Accrued liabilities:
Multiple Choice
Are generally paid in services rather than cash.
Are deferred charges to expense.
Result from services received before payment is made.
Result from payment before services are received.
Answer
Result from services received before payment is made.
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On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80 million. The sale was completed on December 31, 2021.
The following additional facts pertain to the transaction:
The Footwear Division qualifies as a component of the entity according to GAAP regarding discontinued operations.
The book value of Footwear's assets totaled $48 million on the date of the sale.
Footwear's operating income was a pre-tax loss of $10 million in 2021.
Foxtrot's income tax rate is 25%.
In the income statement for the year ended December 31, 2021, Foxtrot Co. would report income from discontinued operations of:
Multiple Choice
$24.5 million.
$16.5 million.
$14.0 million.
$22.0 million.
Answer
$16.5 million
Explanation
75% (i.e., 1 – tax rate) × $22 million ($32 million gain on asset sale – $10 million operating loss)
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Arrow Printers paid $2,000 interest on short-term notes payable, $10,000 interest on long-term bonds, and $6,000 in dividends on its common stock. Arrow would report cash outflows from activities, as follows:
Operating, $2,000; financing, $16,000.
Operating, $18,000; financing, $0.
Operating, $12,000; financing, $6,000.
Operating, $0; financing, $18,000.
Answer
Operating, $12,000; financing, $6,000.
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A company reports the following amounts at the end of the current year:
Under normal circumstances (ignoring tax effects), permanent earnings would be computed as:
Answer
80,000
Explanation
$860,000 − $520,000 − $250,000 − $10,000 = $80,000
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The following information is provided for a company. All liabilities are due to be satisfied within one year unless stated otherwise.
Answer
$28,000
Explanation
Total current liabilities: $6,000 + $15,000 + $7,000 = $28,000
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The following information is provided for Sacks Company before closing entries.
What is the amount of total shareholders’ equity?
Answer
$78,500
Explanation
Total shareholders' equity includes common stock plus (ending) retained earnings. Common stock is $68,000. Ending retained earnings = beginning retained earnings ($8,000) plus revenues ($30,000) less expenses ($24,500) less dividends ($3,000) = $10,500.
Total shareholders' equity = $68,000 + $10,500 = $78,500. Alternatively, total stockholders’ equity = total assets ($83,500) – total liabilities ($5,000).
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Misty Company reported the following before-tax items during the current year:
| Sales revenue | $ | 750 | |
| Selling and administrative expenses | 350 | ||
| Restructuring charges | 20 | ||
| Loss on discontinued operations | 40 | ||
Misty's effective tax rate is 25%.
What is Misty's net income for the current year?
Answer
255
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