D105 Intermediate Accounting III
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Free D105 Intermediate Accounting III Questions
1. Under the completed contract method for long-term contracts
- revenue and expenses are recognized every year
- income may be recognized before the completion of the contract
- Loss may be recognized before the completion of the contract
- Both income and loss may be recognized only on the completion of the contract
Explanation
The completed contract method recognizes both revenue and expenses only when the contract is finished. This method is used when estimates of costs and progress are not reliable. Income and losses are deferred until the completion of the project, reflecting the uncertainty of interim financial results. Exceptions exist for anticipated losses, which must be recognized immediately to comply with the conservatism principle, but generally, the recognition is reserved for the end of the contract.
2. Which date is known as the date when a company officially declares a dividend?
- date of approval
- date of declaration
- date of record
- date of payment
Explanation
The date of declaration is the date on which a company’s board of directors officially approves and announces a dividend. On this date, the company incurs a legal obligation to pay the dividend, and it is recorded as a liability in the financial statements. Other dates, such as the date of record and date of payment, relate to the timing of shareholder eligibility and actual payment.
3. What method is used to amortize gains and losses related to pension expense?
- the corridor method
- the straight-line method
- the declining balance method
- the immediate recognition method
Explanation
The corridor method is used to amortize unrecognized actuarial gains and losses in pension accounting. Under this approach, only the portion of cumulative gains or losses that exceeds a specified threshold (the “corridor”) is amortized over future periods, reducing volatility in pension expense. This method spreads the impact of large actuarial gains and losses over time, instead of recognizing them immediately, thereby smoothing pension expense reported in the income statement.
4. When a company amends a pension plan, for accounting purposes, prior service costs should be
- treated as a prior period adjustment because no future periods are benefited
- amortized in accordance with procedures used for income tax purposes
- initially recorded in other comprehensive income (PSC) and amortized later
- reported as an expense in the prior year the plan is amended
Explanation
When a pension plan is amended to provide additional benefits for service rendered in prior periods, the cost associated with these prior service benefits is initially recorded in other comprehensive income as prior service cost (PSC). This cost is then systematically amortized to pension expense over the remaining service periods of the affected employees. This approach aligns the recognition of expense with the periods that will benefit from the plan amendment.
5. Interpret the implications of both statements being true regarding taxable income and pretax financial income in accounting.
- If both statements are true, it implies that accounting principles do not affect taxable income.
- If both statements are true, it indicates that taxable income aligns with pretax financial income under the given conditions.
- If both statements are true, it suggests that there are discrepancies between taxable income and pretax financial income.
- If both statements are true, it means that taxable income is always higher than pretax financial income.
Explanation
When both statements about taxable income and pretax financial income are true, it suggests that under the specific conditions described, taxable income matches pretax financial income. This alignment indicates that temporary and permanent differences are either absent or have been accounted for in a way that results in equivalent figures, meaning that the financial accounting measures for income and the tax rules produce the same reported amount.
6. If Shaw Company had an increase in taxable income due to a change in tax law, how might this affect the deferred tax liability reported on the balance sheet?
- The deferred tax liability may increase due to higher taxable income leading to more future tax obligations.
- The deferred tax liability would decrease as taxable income increases.
- The deferred tax liability would be eliminated entirely.
- The deferred tax liability would remain unchanged regardless of taxable income changes.
Explanation
Deferred tax liabilities arise from temporary differences between the financial reporting and tax bases of assets and liabilities. If taxable income increases due to a change in tax law, it can increase the amount of taxes the company expects to pay in the future. Consequently, the deferred tax liability is adjusted upward to reflect the higher future tax obligation that will arise when the temporary differences reverse.
7. Which of the following components should be included in the calculation of net periodic pension cost (NPPC) recognized for a period by an employer sponsoring a defined benefit pension plan? (Interest cost – return on plan assets)
- no – yes
- yes – no
- no – no
- yes – yes
Explanation
Net periodic pension cost (NPPC) for a defined benefit plan includes several components: service cost, interest cost, expected return on plan assets, amortization of prior service cost, and gains or losses. Interest cost increases NPPC, while the expected return on plan assets decreases NPPC. Therefore, interest cost is included as an addition, and the return on plan assets is included as a deduction in the NPPC calculation.
8. What is the definition of a temporary difference in accounting?
- A temporary difference is a difference that does not affect taxable income.
- A temporary difference occurs only with cash transactions.
- A temporary difference is a permanent change in tax liabilities.
- A temporary difference is a difference between the tax base of an asset or liability and its carrying amount in the financial statements.
Explanation
A temporary difference arises when the carrying amount of an asset or liability in the financial statements differs from its tax base, leading to differences between accounting income and taxable income in specific periods. These differences are temporary because they will reverse in future periods, resulting in deferred tax assets or liabilities. This concept is fundamental to recognizing and measuring deferred taxes under accounting standards.
9. Describe the implications of carrying forward a Net Operating Loss (NOL) for a company like C.J. Company in terms of deferred tax assets.
- Carrying forward a Net Operating Loss allows C.J. Company to recognize a deferred tax asset, which can reduce future taxable income.
- Carrying forward a Net Operating Loss has no impact on deferred tax assets or liabilities.
- Carrying forward a Net Operating Loss only affects cash flow, not tax reporting.
- Carrying forward a Net Operating Loss increases the company's current tax liability.
Explanation
When a company experiences a Net Operating Loss (NOL), it can carry the loss forward to offset taxable income in future periods. This creates a deferred tax asset because the company expects to reduce future taxes payable as the NOL is applied. The deferred tax asset represents the future tax benefit associated with the NOL, which will reduce taxable income and tax payments when realized.
10. Which of the following correctly describes retained earnings?
- It is the cumulative net income of a company less dividend declarations.
- Is the cumulative correctly describing retained earnings?
- It represents the investments by stockholders in a company.
- It equals total assets minus total liabilities.
Explanation
Retained earnings represent the cumulative net income that a company has earned over time, minus any dividends distributed to shareholders. It reflects the portion of profits that is retained in the business for reinvestment in operations, expansion, or debt repayment. Retained earnings are an important measure of a company's financial health and ability to fund future growth internally.
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