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AICPA CPA-Financial Exam
CPA Financial Accounting and Reporting (Page 3 )

Updated On: 26-Jan-2026
Page 3 of 34
PDF with 163 Questions

In 1990, Teller Co. incurred losses arising from its guilty plea in its first antitrust action, and from a substantial increase in production costs caused when a major supplier's workers went on strike. Which of these losses should be reported as an extraordinary item?

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): C

Explanation:

Choice "c" is correct. Yes - No.
Rule: Losses arising from a company's first (and probably "last") "anti-trust" action are unusual and extraordinary and should be reported as an extraordinary item. Losses resulting from additional costs caused by a strike at a major supplier or even at one's own company are not extraordinary and should be disclosed as a separate component of "income from continuing operations."



Ocean Corp.'s comprehensive insurance policy allows its assets to be replaced at current value. The policy has a $50,000 deductible clause. One of Ocean's waterfront warehouses was destroyed in a winter storm. Such storms occur approximately every four years. Ocean incurred $20,000 of costs in dismantling the warehouse and plans to replace it. The tax rate is 30%. The following data relate to
the warehouse:
Current carrying amount $ 300,000
Replacement cost 1,100,000
What amount of gain should Ocean report as a separate component of income before extraordinary items?

  1. $1,030,000
  2. $780,000
  3. $730,000
  4. $0

Answer(s): C

Explanation:

Choice "c" is correct. $730,000 gain reported as a separate component of income before extraordinary items.



Which of the following should be reported as a prior period adjustment?

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): B

Explanation:

Choice "b" is correct. No - Yes
Change in estimated lives of depreciable assets is a "change in estimate." They affect only current and future periods (not "prior periods," not retained earnings).

Change from unaccepted principle to accepted principle is an example of an error of a prior period that should be reported as a "prior period adjustment."



Adam Corp. had the following infrequent transactions during 1989:
· A $190,000 gain on reacquisition and retirement of bonds. This material event is also considered unusual for Adam Corp.
· A $260,000 gain on the disposal of a component of a business. Adam continues similar operations at another location.
· A $90,000 loss on the abandonment of equipment.
In its 1989 income statement, what amount should Adam report as total infrequent net gains that are not considered extraordinary?

  1. $100,000
  2. $170,000
  3. $360,000
  4. $450,000

Answer(s): B

Explanation:

Infrequent net gains not considered extraordinary include:



Choice "b" is correct. $170,000.



On January 1, 20X1, Pell Corp. purchased a machine having an estimated useful life of 10 years and no salvage. The machine was depreciated by the double declining balance method for both financial statement and income tax reporting. On January 1, 20X6, Pell changed to the straight-line method for financial statement reporting but not for income tax reporting. Accumulated depreciation at December 31, 20X5, was $560,000. If the straight-line method had been used, the accumulated depreciation at December 31, 20X5, would have been $420,000. Pell's enacted income tax rate for 20X6 and thereafter is 30%. The amount shown in the 20X6 income statement for the cumulative effect of changing to the straight-line method should be:

  1. $98,000 debit.
  2. $98,000 credit.
  3. $140,000 credit.
  4. $0.

Answer(s): D

Explanation:

Choice "d" is correct. A change in the method of depreciation is now considered to be both a change in method and a change in estimate. These changes should be accounted for as changes in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings.
And, certainly, the cumulative effect should not be reflected on the income statement any more. Choices "a", "b", and "c" are incorrect, per the above .



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