Homework answers / question archive / Jose Rizal Memorial State University - Dipolog City Campus CBA AECC3 Recognition and measurement in interim periods 1)QUIRK ACCIDENT Co

Jose Rizal Memorial State University - Dipolog City Campus CBA AECC3 Recognition and measurement in interim periods 1)QUIRK ACCIDENT Co

Accounting

Share With

---

Jose Rizal Memorial State University - Dipolog City Campus

CBA AECC3

Recognition and measurement in interim periods

1)QUIRK ACCIDENT Co. reports profit before tax of ?1,500,000 in its 2nd quarter interim financial statements before consideration for the following:

 

a.            Inventory with a carrying amount ?200,000 has a net realizable value of ?120,000. It is expected that the decline in value will reverse in the 3rd quarter.

 

b.            An investment property measured under the cost model has a carrying amount of ?350,000 but its recoverable amount is ?210,000.

 

c.             An investment in FVPL measured at acquisition cost of ?200,000 has a fair value of ?250,000 as at the end of 2nd the quarter. However, the increase in fair value is expected to be only temporary.

 

d.            No depreciation is recognized during the 2nd quarter. The annual straight-line depreciation of items of PPE is ?600,000.

 

e.            ABC Co. has a policy of providing 12 days paid vacation leaves for its employees. The vacation leaves are vesting and accumulating. Total paid vacation leaves eligibility of employees for the full year is

?440,000. However, only ?100,000 worth of paid vacation leaves have been availed of during the quarter.

 

f.             It was discovered that depreciation in the previous year was overstated by ?20,000.

 

 

 

How much is the adjusted profit before taxes for the current quarter?

 

a. 3,180,000        b. 1,590,000        c. 1,070,000         d. 1,090,000

 

 

 

Costs incurred unevenly

 

2.            HIRSUTE HAIRY Co. is preparing its interim financial statements for the period ended March 31, 20x1. The following relate to the transactions during the first quarter:

 

a.            Total sales for the interim period was ?4,000,000.

 

b.            Cost of sales was ?1,800,000.

 

c.             HIRSUTE is liable for 5% commission on its sales to its sales representatives and agents. No commission has yet been paid as of March 31, 20x1.

 

d.            The allowance for doubtful accounts has a balance of ?20,000 as of January 1, 20x1. The required balance as of March 31, 20x1 is ?60,000. There were no write-offs or recoveries during the period.

 

e.            A building with historical cost of ?4,800,000 is being depreciated over 5 years using straight line method.

 

f.             HIRSUTE prepaid a one-year insurance on its assets for ?160,000 on January 1, 20x1.

 

g.            Property taxes for 20x1 amounting to ?104,000 was paid in January.

 

h.            Advertising costs of ?200,000 were incurred in February on promotional activities held on Valentine’s Day.

 

i.              Year-end staff bonuses are expected to be around ?368,000. Employees become entitled to the bonuses as they provide services to HIRSUTE during the year.

 

j.             HIRSUTE’s president is entitled to a 10% bonus on profit before bonus and taxes.

 

k.            Loss on sale of a used equipment on March 2, 20x1 was ?120,000.

 

l.              HIRSUTE incurred ?48,000 on unanticipated repairs on its factory equipment on March 16, 20x1.

 

m.           Due to the unexpected breakdown of the factory equipment on March 16, 20x1, HIRSUTE has planned a major periodic overhaul of its other equipment to be held annually starting on December 31, 20x1. The cost of the major planned periodic overhaul is estimated at ?192,000.

 

n.            HIRSUTE leases one of its retail stores. Monthly rentals are ?20,000, however, the lease contracts provide for a contingent rent equal to 2% of the excess of sales over ?3,600,000.

 

o.            HIRSUTE’s budget for 20x1 included charitable contributions of ?96,000 and employee training costs of ?52,000. None of those costs were incurred as of March 31, 20x1.

 

p.            Other operating expenses incurred during the first quarter totaled ?480,000.

 

 

 

How much is the profit (loss) for the first quarter ended March 31, 20x1?

 

a. 584,100            b. 635,400            c. 646,000            d. 581,400

 

Costs incurred unevenly

 

Use the following information for the next two questions: PLUVIOUS RAINY Co.’s profits before tax for the 1st and 2nd quarters of 20x1 were ?3,520,000 and ?3,680,000 before any necessary adjustments for the items listed below.

 

•             Total unfavorable manufacturing cost variances amounted to ?96,000 in the 1st Quarter. PLUVIOUS expects that the manufacturing cost variances will be absorbed by year-end. There were no work-in- process inventories as of the end of the 1st and 2nd quarters.

 

•             Newspaper advertisement costs of ?360,000 were paid on April 1, 20x1. The advertisement shall appear in the weekly newspaper publications over the remaining months of the year.

 

•             PLUVIOUS’ held for trading securities acquired on February 4, 20x1 for ?800,000 had a fair value of

?400,000 on March 31, 20x1. PLUVIOUS had expected that the fair value decline was only temporary. In fact, on June 30, 20x1, the recovery exceeded the previous write-down in investment by ?80,000.

 

•             Research and development costs incurred during the 1st and 2nd quarters totaled ?40,000 and

?48,000, respectively. In July 20x1, technical feasibility has been established and, therefore, development costs of ?20,000 and ?28,000 expensed in the 1st and 2nd quarters would have qualified for capitalization.

 

•             On January 20x1, PLUVIOUS recognized an account receivable denominated in US dollars amounting to

$4,000. The exchange rate on that date was ?40:$1. On March 31, 20x1, the exchange rate was ?30:$1. PLUVIOUS had expected that the change in the exchange rate was only temporary. In fact, on June 30, 20x1, the exchange rate was ?45:$1. The receivable is collectible on September 2, 20x1.

 

•             A land with a carrying amount of ?800,000 had a recoverable amount of ?768,000 on March 31, 20x1.

 

 

 

3.            How much is the adjusted profit before tax for the 1st quarter?

 

a. 2,921,000        b. 2,982,000        c. 2,884,000         d. 2,912,000

 

 

 

4.            How much is the adjusted profit before tax for the 2nd quarters?

 

a. 4,052,000        b. 4,205,000        c. 4,000,000         d. 4,025,000

 

 

 

Provisions – Changes in estimates

 

Use the following information for the next two questions: Among the transactions of EFFACE WIPEOUT Co. for the first two quarters of 20x1 were the following:

 

•             EFFACE recognized a ?400,000 write-down in its inventory during the first quarter. EFFACE had expected that the write-down will reverse in the second quarter, and in fact, in the second quarter, the recovery exceeded the previous write-down by ?80,000.

 

•             EFFACE provides warranty for its sales. In the first quarter, EFFACE estimated a 5% warranty obligation on its first quarter sales of ?4,000,000. In the second quarter, a change in accounting estimate was made. It was estimated that the cost of warranty should be 10% of total sales. The second quarter sales amounted to ?4,800,000.

 

•             EFFACE has been estimating its bad debt expense as 2% of credit sales. However, in the second quarter, a change was made to the percentage of ending receivable. Under this method, the required balance of the allowance for doubtful accounts as of June 30, 20x1 is computed at ?120,000. The allowance has a balance of ?20,000 at the beginning of the year. Total write-offs during the first six months of 20x1 amounted to ?48,000; recoveries totaled ?12,000. Credit sales for the 1st and 2nd quarters amounted to

?4,000,000 and ?8,000,000, respectively.

 

 

 

5.            What is the net effect of the transactions listed above on profit or loss before tax in the first quarter interim financial statements?

 

a. 680,000            b. (680,000)        c. 280,000            d. (280,000)

 

 

 

6.            What is the net effect of the transactions listed above on profit or loss before tax in the second quarter interim financial statements?

 

a. (336,000)         b. 336,000            c. (256,000)         d. 256,000

 

 

 

Measurement of interim income tax expense

 

Use the following information for the next three questions: BLASé BORED Co. expects to earn ?400,000 pre-tax profit each quarter. BLASE has tax rates of 20% on the first ?800,000 of annual earnings and 30% on all additional earnings. Actual earnings match expectations.

 

 

7.            How much is the weighted average annual income tax rate?

 

a. 20%   b. 25%   c. 30%   d. 33%

 

 

 

8.            How much is the income tax expense recognized in the first quarter interim financial statements?

 

a. 80,000              b. 100,000            c. 120,000            d. 132,000

 

 

 

9.            How much is the income tax expense recognized in the third quarter interim financial statements? a. 80,000                b. 100,000            c. 120,000            d. 132,000

 

 

Measurement of interim income tax expense

 

Use the following information for the next three questions: ASSIDUOUS DILIGENT Company expects to earn ?40,000 pre-tax profit in each of the 1st and 2nd quarters of the year and ?60,000 pre-tax profit in each of the last two quarters. The tax rate as of the beginning of the year is 30%. However, following a newly enacted tax legislation, the tax rate will be increased to 40% which shall take effect beginning on the last quarter of the year. Actual earnings match expectations.

 

 

10.          How much is the weighted average annual income tax rate?

 

a. 20%   b. 25%   c. 30%   d. 33%

 

 

 

11.          How much is the income tax expense recognized in the first quarter interim financial statements?

 

a. 13,200              b. 16,500              c. 19,800               d. 15,400

 

 

 

12.          How much is the income tax expense recognized in the third quarter interim financial statements? a. 13,200                b. 16,500              c. 19,800               d. 15,400

 

 

 

 

 

Income tax benefit

 

Use the following information for the next two questions: AFFRAY ANSWER Company expects to incur losses of ?60,000 in each of the first and second quarters of the year but expects to earn pre-tax profits of ?60,000 in each of the last two quarters (thus having zero profit for the year). AFFRAY estimated a weighted average income tax rate of 30%. Actual earnings match expectations.

 

 

 

13.          How much is the income tax expense recognized in the first quarter interim financial statements?

 

a. (18,000)           b. 18,000              c. 4,500 d. 0

 

 

 

14.          How much is the income tax expense recognized in the third quarter interim financial statements? a. (18,000)                b. 18,000              c. 4,500 d. 0

 

 

Tax year and financial year do not coincide

 

Use the following information for the next two questions: INDEMNIFY PAY Co.’s financial reporting year ends June 30 and reports quarterly. Its taxable year ends December 31. For the financial year that begins July 1, 20x1 and ends June 30, 20x2, INDEMNIFY earns ?80,000 pre-tax profit each quarter. The estimated average annual income tax rate is 30% in 20x1 and 40% in 20x2.

 

 

15.          How much is the income tax expense recognized in the first quarter interim financial statements?

 

a. 24,000              b. (24,000)           c. 32,000               d. 28,000

 

 

 

16.          How much is the income tax expense recognized in the third quarter interim financial statements? a. 24,000                b. (24,000)           c. 32,000               d. 28,000

 

 

Net operating loss carryforward

 

Use the following information for the next two questions: PARSIMONIOUS STINGY Co. reports quarterly and has an operating loss carryforward of ?40,000 for income tax purposes at the start of the current financial year for which a deferred tax asset has not been recognized. PARSIMONIOUS earns ?40,000 in the first quarter of the current year and expects to earn ?40,000 in each of the three remaining quarters. Excluding the carryforward, the estimated average annual income tax rate is expected to be 40%.

 

 

17.          How much is the income tax expense recognized in the first quarter interim financial statements? a. 9,000                b. 12,000              c. 16,000               d. 0

 

 

 

18.          How much is the income tax expense recognized in the third quarter interim financial statements? a. 9,000                b. 12,000              c. 16,000               d. 0

 

 

Net operating loss carryforward

 

Use the following information for the next two questions: STEPWISE GRADUAL Company reported a net operating loss carryforward of ?80,000 in its most recent annual financial statements. During the year, STEPWISE earned ?40,000 in each of the first two quarters and ?60,000 in each of the last two quarters. Excluding the carryforward, the estimated average annual income tax rate is 40%.

 

 

19.          How much is the income tax expense recognized in the first quarter interim financial statements? a. 9,000                b. 9,600 c. 14,400               d. 12,000

 

 

20.          How much is the income tax expense recognized in the third quarter interim financial statements? a. 9,000                b. 9,600 c. 14,400               d. 12,000