Income Statement Other Items

Easy Test

Easy Test

Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.

1. Which of the following is reported as other comprehensive income?

a. dividends paid to owners
b. purchase of treasury stock
c. gain or loss on foreign currency
d. gain on sale of equipment

Answer
C. Comprehensive income items general include items that management cannot control. Dividends are a reduction to retained earnings. Treasury stock is reported as part of owner’s equity. A gain or loss on sale of equipment is reported as part of other revenue and expense. 
2. A transaction that is not part of day to day business with customers is reported

a. as other revenue and expenses
b. as part of gross profit
c. as income tax expense
d. as an operating expense

Answer
A. Operating income includes all day to day business with customers. Other revenue and expenses include peripheral activities that are not related to day to day business with customers. Other revenues and expenses are reported below operating expenses. Income tax expense is a separate line below income before income tax.
3. Costs associated with laying off employees should be recorded in the period

a. it is identified
b. it is incurred
c. it is paid
d. the sale occurs

Answer
B. This is a restructuring expense that must be recorded in the period incurred.
4. A correction of an error is reported

a. on a separate line item under income from continuing operations
b. by restating all accounts impacted for all prior years
c. the same as a change in an estimate
d. as a separate item only on the statement of stockholder’s equity

Answer
B. A correction of an error is reported retroactively. Prior year financial statements are restated for all accounts impacted when the error is significant.
5. Which shares are used in the earnings per share computation?

a. the total common shares outstanding at the end of the period
b. the total average common shares outstanding during the period
c. the total average of preferred and common shares during the period
d. the average total common shares issued during the period

Answer
B. The weighted average common shares outstanding during the period is used to compute earnings per share. 
6. Which of the following statements is not true?

a. earnings per share is computed after deducting preferred dividends paid
b. only earnings per share for net income is required
c. the weighted average common shares outstanding during the period is used
d. all of the above all true

Answer
B. Earnings per share must be reported for all items after tax expense; income from continuing operations, discontinued operations, extraordinary items, and net income.
7. A component of an entity can be a discontinued operation when the component

a. operates with no interaction with the other parts of the company
b. that will only be sold in the current period
c. is held as a separate legal entity
d. has separate and distinguishable cash flows

Answer
D. A component of an entity has separate and distinguishable cash flows. The other items stated do not have to occur to be a component of an entity. To be reported separately as discontinued operations, the operation must quality as a component of an entity.
8. Which of the following would not be considered a component of an entity?

a. operations in Asia
b. a major product line with many products
c. a manufacturing plant producing part of a product line
d. all of the above is considered a component of an entity

Answer
C. A manufacturing plant producing part of a product line would be considered part of a component of an entity. All the plants together would be considered the component.
9. The information reported for discontinued operations for the current period consist of

a. cumulative income or loss from operations through the date of sale
b. the gain on impairment of assets held for sale
c. income or loss from operations during the current period
d. the gain or loss on the anticipated sale of assets

Answer
C. There are two pieces of information reported for discontinued operations: income from operations during the current period and either impairment on assets held for sale or the gain or loss on the sale of the discontinued operation (if sold in the current period). Items that are expected to occur in future periods is not recorded in the current period.
10. Items reported after income from continuing operations must be reported

a. before tax
b. after tax
c. gross
d. none of the above

Answer
B. Items reported after income from continuing operations (D.O. and E.I.) are reported after tax because the tax expense was previously computed.
11. Identify the location on the income statement the following items will be reported:

A Not reported on the income statement
B Restate the affected accounts for all periods presented
C Part of continuing operations
D Discontinued Operations

a._______ Correction of a prior period error discovered in the current period

b._______ Change in an estimate

c._______ Income generated from a component of an entity that is held for sale

d._______ Restructuring expenses expected to be incurred next period

e._______ An impairment gain on assets that are held for sale

f. _______ A transaction that is infrequent

g. _______ The amount received above book value for an asset sold

Answer
a. B Accounts impacted by the error are restated for all current and prior periods
b. C Changes in estimates are reported in the current period by adjusting the accounts that are impacted in the current period
c. D A component of an entity held for sale qualifies as a discontinued operation
d. A Only restructuring expenses that are incurred in the current period are reported
e. A Impairment gains are never recorded. An impairment is always a loss
f. C A transaction that is infrequent only will be reported as part of other revenues and expenses which is part of income from continuing operations
g. C This is a gain that does not qualify as discontinued operations since it is not the sale of a component of an entity. It is reported as other revenues
12. The company changed the estimate of total accounts that were uncollectible from $100,000 to $200,000. How would this be reported on financial statements showing the current year and past two years?
Answer
This is a change in an estimate. Prior year income statements are not restated. The change is all recorded in the current year and the impacted current year account balances are changed. Bad debt expense is increased by $100,000 and the allowance for uncollectible accounts balance is increased by $100,000. Net accounts receivable is decreased by $100,000. A footnote disclosure is required when the amount of the change is material.
13. On June 1st, the company decided to sell a portion of the business that qualifies as an operating component. Information, stated in before tax dollars, related to the operating component to be sold follows:

Income earned from January 1 to May 31 $250,000
Loss earned from June 1 to December 31 $100,000
The book value of assets were greater than fair market on December 31 by $160,000
The expected gain from the sale that did not occur this period $400,000
The tax rate is 30%

Prepare the discontinued operations section of the income statement

Answer
Income from continuing operations: $ X,XXX
Discontinued Operations:
    Income from discontinued operations, net of tax $45,000 $ 105,000
    Impairment Loss, net of tax of $48,000 benefit $(112,000)
         Total Discontinued Operations: $ (7,000)
         Net Income $ X,XXX

Income from discontinued operations includes the period from the beginning of the year to the end of the year:

$250,000 income - $100,000 loss = $150,000 income
				                  x .70 (1-tax rate)
						  =  105,000 net of tax

An impairment loss occurs when book value is greater than fair market value:
                         $160,000 x (1 – .30 = .70) = 112,000 net of tax

The gain that is expected to occur when the assets are sold is not reported until the sale occurs and the gain is realized. Expected losses on the sale are normally recorded as part of an impairment loss in the current period.