Multiple Choice
Identify the choice that best completes the
statement or answers the question.
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1.
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In order to be classified as an extraordinary item in the income statement, an
event or transaction should be
a. | Infrequent and material; but it need not be unusual in nature. | b. | Unusual in nature
and material; but it need not be infrequent. | c. | Unusual in nature, infrequent, and
material. | d. | Unusual in nature and infrequent; but it need not be
material. |
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2.
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An event or transaction of a type that occurs frequently in the environment in
which the entity operates
a. | could be considered as extraordinary if the financial effect is
material. | b. | could be considered as extraordinary, depending on the industry in which the entity
operates. | c. | is always considered extraordinary. | d. | cannot ever be considered as extraordinary,
regardless of the financial effect. |
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| In 20X5, Key incurred the
following losses | Losses | Gains | | Foreign exchange loss because of major devaluation of foreign currency | $ 17,000 | | | Effects of a strike against Key's major supplier | 120,000 | | | Also during 20X5, the following gains were
recognized: | | | | Income tax benefit arising from the
utilization of an operating loss carryforward of an acquired subsidiary
company | | $ 80,000 | | Gain on
sale of real estate used in operations | | 300,000 | | | |
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3.
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Refer to the Key data: For the year ended December 31, 20X5, the
extraordinary gains, before income tax considerations, amounted to
a. | $0 | b. | $ 80,000 | c. | $300,000 | d. | $380,000 |
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4.
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Refer to the Key data: For the year ended December 31, 20X5, the prior
period adjustments, before income tax considerations, amounted to
a. | $0 | b. | $ 80,000 | c. | $300,000 | d. | $380,000 |
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5.
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Thorpe Co.'s income statement for the year ended December 31, 20X0,
reported net income of $74,100. The auditor raised questions about the following amounts
that had been included in net income: | * | Unrealized loss on decline in market value of stock
investments considered trading | $(
5,400) | | * | Gain
on early retirement of bonds payable (net of $11,000 tax effect) | 22,000 | | * | Adjustment to profits of prior years for
errors in depreciation (net of $3,750 tax effect) | ( 7,500) | | * | Loss from fire (net of $7,000 tax effect) | (14,000) | | | |
The loss from the fire was
an infrequent but not unusual occurrence in Thorpe's line of business. Thorpe's
December 31, 20X0, income statement should report net income of a. | $65,000 | b. | $66,100 | c. | $81,600 | d. | $87,000 |
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During 20X0, Fuqua Steel Co. had the following unusual financial events occur:
*Bonds payable were retired five years before their scheduled maturity, resulting in a
$260,000 gain. Fuqua has frequently retired bonds early when interest rates declined
significantly.
*A steel forming segment suffered $255,000 in losses due to hurricane damage.
This was the fourth similar loss sustained in a 5-year period at that location.
*A segment of
Fuqua's operations, steel transportation, was disposed of. The assets of the segment will
be sold in 20X1 sold at a net loss of $350,000. The steel transportation segment generated a
loss from operations for 20X0 of $100,000.This was Fuqua's first divestiture of one of its
operating segments.
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6.
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Before income taxes, what amount of gain (loss) should be reported separately as
a component of income from continuing operations in 20X0?
a. | $260,000 | b. | $ 5,000 | c. | $(255,000) | d. | $(350,000) |
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7.
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Which of the following statements is false?
a. | a specific transaction of one entity might be infrequent in occurrence and a similar
transaction of another entity might not. | b. | infrequency of occurrence of a particular event
or transaction does not alone imply that its effects should be classified as
extraordinary. | c. | An event or transaction may be unusual in nature for one entity but not for
another | d. | unusual nature is established by the fact that an event or transaction is beyond the
control of management. |
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8.
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Popson Inc. incurred a material loss which was not unusual in character, but was
clearly an infrequent occurrence. This loss should be reported as:
a. | An extraordinary loss. | b. | A separate line item between income from
continuing operations and income from discontinued operations. | c. | A separate line item
within income from continuing operations. | d. | A separate line item in the retained earnings
statement |
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9.
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An extraordinary item should be reported separately on the income statement as a
component of
income
Before discontinued
Net
of
operations of a
Income taxes segment
of a business
a. | Yes
Yes | b. | Yes
No | c. | No
No | d. | No
Yes |
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10.
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Under which of the following conditions would flood damage be considered an
extraordinary item for financial reporting purposes?
a. | Only if floods in the geographical area are unusual in nature and occur
infrequently. | b. | Only if floods are normal in the geographical are but do not occur
frequently. | c. | Only if floods occur frequently in the geographical area but have been insured
against. | d. | Under no circumstance should flood damage be classified as an extraordinary
item. |
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