D105 Intermediate Accounting III
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Free D105 Intermediate Accounting III Questions
1. Consigned goods are recognized as revenues by the
- a) consignor when a sale to a third party has occurred
- b) consignor when the merchandise has been shipped to a consignee
- c) consignee when a sale to a third party has occurred
- d) consignor when it received notification and payment from consignee for goods sold
Explanation
In consignment arrangements, the consignor retains ownership of the goods until they are sold to a third party. Revenue is only recognized by the consignor when a sale to the final customer has occurred because this is when the risks and rewards of ownership transfer. Simply shipping merchandise to the consignee or receiving notification does not qualify for revenue recognition under the revenue recognition principle.
2. Which type of dividends is characterized by the issuance of additional shares to existing shareholders?
- Cash dividends
- Liquidating dividends
- Stock dividends
- Property dividends
Explanation
Stock dividends involve the issuance of additional shares of a company’s stock to existing shareholders, proportionate to their current holdings. This type of dividend increases the number of shares outstanding but does not change the total equity of the company. It differs from cash or property dividends, which distribute assets rather than additional stock, and from liquidating dividends, which return capital to shareholders.
3. Which of the following disclosures is required for a change from LIFO to FIFO?
- a) the cumulative effect on prior years, net of tax, in the current retained earnings statement
- b) the justification for the change in note disclosures
- c) restated prior year comparative income statements
- d) all of these are required
Explanation
A change from LIFO to FIFO is a change in accounting principle and requires extensive disclosures. Companies must disclose the cumulative effect on prior years’ income, net of tax, as an adjustment to retained earnings. Additionally, they must provide the justification for the change in the notes and present restated prior-year comparative financial statements to maintain consistency and comparability for users of the financial statements. Therefore, all of these disclosures are required.
4. On which date are entries for cash dividends required?
- Declaration date, record date, and payment date
- Declaration date and the record date
- Record date and the payment date
- Declaration date and the payment date
Explanation
Accounting entries for cash dividends are required on the declaration date and the payment date. On the declaration date, the company records a liability for the dividend and reduces retained earnings. On the payment date, the liability is settled with a cash outflow. No journal entry is made on the record date, as it only determines which shareholders are entitled to receive the dividend.
5. Scott Corp. received cash of $20,000 that was included in revenues in its Year 1 financial statements, of which $12,000 will not be taxable until Year 2. Scott's enacted tax rate is 30% for Year 1, and 25% for Year 2. What amount should Scott report in its Year 1 balance sheet for deferred income tax liability?
- $3,000
- $2,400
- $2,000
- $3,600
Explanation
The deferred income tax liability arises from the $12,000 of revenue that is included in accounting income in Year 1 but will be taxable in Year 2. The liability is calculated using the tax rate expected to apply when the temporary difference reverses, which is 25% for Year 2. Therefore, the deferred tax liability = $12,000 × 25% = $3,000. This represents the future tax that Scott Corp. will owe when the revenue becomes taxable.
6. If Raymond Corporation had a different temporary difference of $500,000 scheduled to reverse in 2015, how would the change in tax rate affect the deferred tax liability recorded for this difference?
- The deferred tax liability would remain unchanged at $150,000.
- The deferred tax liability would increase by $30,000 due to the new tax rate.
- The deferred tax liability would decrease by $50,000 due to the new tax rate.
- The deferred tax liability would increase by $50,000 due to the new tax rate.
Explanation
Deferred tax liabilities are calculated based on the temporary difference multiplied by the enacted tax rate expected to be in effect when the difference reverses. If the temporary difference is $500,000 and the tax rate increases from 30% to 40%, the deferred tax liability would increase from $150,000 (500,000 × 30%) to $200,000 (500,000 × 40%). The increase due to the rate change is $50,000.
7. 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.
8. 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.
9. The full disclosure principle, as adopted by the accounting profession, is best described by which of the following?
- a) all information related to an entity's business and operating objectives is required to be disclosed in the financial statements
- b) information about each account balance appearing in the financial statements is to be included in the notes to the financial statements
- c) enough information should be disclosed in the financial statements so a person wishing to invest in the stock of the company can make a profitable decision
- d) disclosure of any financial facts significant enough to influence the judgement of an informed reader
Explanation
The full disclosure principle requires that all financial facts significant enough to influence the judgment of an informed reader be disclosed in the financial statements or accompanying notes. This principle ensures that users of financial statements have access to relevant information that could affect their decisions, without necessarily providing every detail about the company’s operations or guaranteeing profitability for investors.
10. When it is more likely ______% that all or some of a deferred income tax asset will not be realized, a valuation allowance is necessary
- 60
- 75
- 50
- 90
Explanation
Accounting standards require that a valuation allowance be recorded if it is more likely than not (greater than 50% probability) that some or all of a deferred tax asset will not be realized. This ensures that deferred tax assets are not overstated on the balance sheet when future taxable income may not be sufficient to utilize them.
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