AFA 300 Chapter Notes - Chapter 3: Deferred Income, Comprehensive Income, Retained Earnings

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19 Oct 2016

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Chapter 3: statements of income and comprehensive income. Income means all amounts flowing into the entity through operations. Economic income based on events approach to measuring profit or loss. Accounting income based on the transactions approach. Comprehensive income is defined as all changes to owners" equity that are not the result of transactions with the owners in their capacity as owners. To eliminate all direct entries to shareholders" equity except those resulting from transactions with the shareholders. To differentiate between those value changes recognized both in net assets and in profit or loss, and those recognized in net assets but not in the current year"s earnings or net income. Items that are excluded from profit or loss. One item is in retained earnings, other three types are reported in oci. Cumulative changes to retained earnings that are result of (1) changes in accounting policies or (2) corrections of errors in prior periods.

Related Questions

22) Boxer Corporation buysequipment in January of the current year with a 7-year class lifefor $15,000. The corporation expensed the $15,000 under Sec. 179.The deduction in the year of purchase for E&P purposes due tothe acquisition and expensing of the equipment is

	A. $14,000
	B. $15,000
	C. $1,500
	D. $3,000

23) Maxwell Corporation reportsthe following results:

Year	CurrentE&P	Distributions
2005	$6,000	$4,000
2006	5,000	1,000
2007	1,000	-0-

Maxwell's dividends-received deduction is

	A. $5,000
	B. $12,000
	C. $0
	D. $7,000

24) Identify which of thefollowing statements is false.

	A. At formation, acorporation's E&P depends on the amount of capital contributedby the shareholders.
	B. Adjustments totaxable income when computing E&P do not include tax exemptinterest.
	C. For E&Pdividend distribution purposes, property as defined in Sec. 317(a)includes money.
	D. The function ofE&P is to provide a measure of a corporation's economic abilityto pay dividends.

25) Exit Corporation hasaccumulated E&P of $24,000 at the beginning of the current taxyear. Current E&P is $20,000. During the year the corporationmakes the following distributions to its sole shareholder who has a$22,000 basis for her stock.

Date	AmountDistributed
April 1	$20,000
June 1	20,000
August 1	15,000
November 1	5,000

The treatment of the $15,000 August 1 distribution would be

	A. $4,000 is taxableas a dividend from accumulated E&P, and $11,000 is tax-free asa return of capital
	B. $5,000 is taxableas a dividend from current E&P and $10,000 is tax-free as areturn of capital
	C. $15,000 is taxableas a dividend; $5,000 from current E&P and the balance fromaccumulated E&P
	D. $15,000 is taxableas a dividend from accumulated E&P

26) Current E&P does notinclude

	A. tax-exemptinterest income
	B. life insuranceproceeds where the corporation is the beneficiary
	C. federal income taxrefunds from prior years
	D. All of the theseare included

27) Identify which of thefollowing statements is true.

	A. Section 179property must be expensed ratably over a 5-year period whencomputing E&P.
	B. Losses on propertysales to related parties are not deductible when computingE&P.
	C. Distributions madeout of accumulated E&P are allocated ratably between multipledistributions made during the tax year.
	D. All arefalse.

28) Crossroads Corporationdistributes $60,000 to its sole shareholder Harley. Crossroads hasearnings and profits of $55,000 and Harley's basis in her stock is$20,000. After the distribution, Harley's basis is

	A. $20,000
	B. $60,000
	C. $5,000
	D. $15,000

29) Hogg Corporation distributes$30,000 to its sole shareholder, Ima. At the time of thedistribution, Hoggs' E&P is $14,000 and Ima's basis in herstock is $10,000. Ima's gain from this transaction is

	A. $20,000 capitalgain
	B. $30,000 capitalgain
	C. $6,000 capitalgain
	D. $14,000 capitalgain

30) One consequence of aproperty distribution by a corporation to a shareholder is

	A. the amount of thedistribution is increased by any liability assumed by theshareholder
	B. any liabilitiesassumed by the shareholder do not reduce the shareholder'sbasis
	C. the shareholder'sbasis in the distributed property is the same as the distributingcorporation's basis
	D. the holding periodof the distributed property includes the holding period of thedistributing corporation

31) Identify which of thefollowing statements is true.

	A. The distributingcorporation's E&P must be reduced by the FMV of nontaxablestock rights distributed to shareholders.
	B. A stock redemptioncan be used to withdraw some assets from a corporation prior to asale of the business.
	C. A shareholder canredeem part of his stock and recognize a capital gain if thecorporation has only one shareholder.
	D. All arefalse.

32) Which of the following isnot a reason for a stock redemption?

	A. desire byremaining shareholders to retain control
	B. No outside marketexists for the stock.
	C. Redemption ofshares is a good corporate investment.
	D. desire byshareholders to reduce the corporate tax liability

33) Elijah owns 20% of ParkCorporation's single class of stock. Elijah's basis in the stock is$8,000. Park's E&P is $28,000. If Park redeems all of Elijah'sstock for $48,000, Elijah must report dividend income of

	A. $0
	B. $48,000
	C. $40,000
	D. $28,000

carminebeaver648

Regulations are

	A. equal in authorityto legislation if statutory
	B. equal in authorityto legislation
	C. presumed to bevalid and to have almost the same weight as the IRC
	D. equal in authorityto legislation if interpretative

2) Which of the followingstatements regarding proposed regulations is not correct?

	A. Practitioners andother interested parties may comment on proposed regulations.
	B. Proposedregulations expire after 3 years.
	C. Proposed andtemporary regulations are generally issued simultaneously.
	D. Proposedregulations do not provide any insight into the IRS'sinterpretation of the tax law.

3) Identify which of thefollowing statements is false.

	A. Members from boththe House and the Senate are on the Conference Committee.
	B. When tax advisorsspeak of the tax law, they usually have in mind just the InternalRevenue Code.
	C. Records ofcommittee hearings are helpful in determining Congressionalintent.
	D. All arefalse.

4) Which of the followingstatements about a partnership is true?

	A. Partners are taxedon distributions from a partnership.
	B. A partnership is ataxpaying entity.
	C. Partners are taxedon their allocable share of income whether it is distributed ornot.
	D. Partners areconsidered employees of the partnership.

5) Which of the followingstatements is incorrect?

	A. The number of Scorporation shareholders is unlimited.
	B. S corporationsmust allocate income and expenses to their shareholders based ontheir proportionate ownership interest.
	C. S corporationincome is taxed to shareholders when earned.
	D. S corporationlosses can offset shareholder income from other sources.

6) Which of the followingstatements is incorrect?

	A. Limited partners'liability for partnership debt is limited to their amount ofinvestment.
	B. In a generalpartnership, all partners have unlimited liability for partnershipdebts.
	C. In a limitedpartnership, all partners participate in managerialdecision-making.
	D. All of thestatements are correct.

7) Three members form an LLC inthe current year. Which of the following statements is incorrect?

	A. The LLC can electto have its default classification ignored.
	B. The LLC's defaultclassification under the check-the-box rules is as apartnership.
	C. The LLC can electto be taxed as a C corporation with no special taxconsequences.
	D. If the LLC electsto use its default classification, it can elect to change itsstatus to being taxed as a C corporation beginning with the thirdtax year after the initial classification.

8) Identify which of thefollowing statements is false.

	A. Under thecheck-the-box regulations, an LLC that has only two members(owners) must be taxed as a partnership.
	B. The check-the-boxregulations permit an LLC to be taxed as a C corporation.
	C. A business neednot be incorporated under state or federal law to be taxed as acorporation.
	D. Once an electionis made to change its classification, an entity cannot change againfor 60 months.

9) Identify which of thefollowing statements is true.

	A. The check-the-boxregulations permit an LLC to be taxed as a C corporation.
	B. Under thecheck-the-box regulations, an LLC that has only two members(owners) default classification is as a partnership.
	C. Once an electionis made to change its classification, an entity cannot change againfor 60 months.
	D. All of thestatements are true.

10) For Sec. 351 purposes theterm property does not include

	A. accountsreceivable
	B. cash
	C. inventory
	D. servicesrendered

11) Identify which of thefollowing statements is true.

	A. The exchange ofstock for services rendered is not a taxable transaction.
	B. The repeal of Sec.351 would result in more existing businesses beingincorporated.
	C. Section 351 wasenacted to allow taxpayers to incorporate without incurring adversetax consequences.
	D. All arefalse.

12) Barry, Dan, and Edithtogether form a new corporation; Barry and Dan each contributeproperty in exchange for stock. Within 2 weeks after the formation,the corporation issues additional stock to Edith in exchange forproperty. Barry and Dan each hold 10,000 shares and Edith willreceive 9,000 shares. Which transactions will qualify fornonrecognition?

	A. Only the secondtransaction will qualify for nonrecognition.
	B. Only the firsttransaction will qualify for nonrecognition.
	C. Because of thestep transaction doctrine neither transaction will qualify.
	D. Both transactionswill qualify under Sec. 351 if they are part of the same plan ofincorporation.

peararmadillo631

Read the 2015 annual report of Air France â KLM and answer the 20 questions asked regarding the accounting issues. Link is provided below:

http://www.airfranceklm.com/sites/default/files/publications/afkl_registration_doc_2015.pdf

1. Air France-KLM reports âConsolidated statement of recognized income and expensesâ for the year ended December 31, 2015. If this statement was a U.S. GAAP statement, what would be the title of this statement?

a. Consolidated statement of total net income

b. Consolidated statement of other comprehensive income

c. Consolidated statement of comprehensive income

d. Consolidated statement of recognized net income

2. What method does Air France-KLM use for the Statement of Cash Flows?

a. Indirect method

b. Direct method

c. Gross method

d. Net method

3. The basic and diluted earnings per share for the year ended December 31, 2015, indicates that Air France-KLM has:

a. no convertible debts.

b. some dilutive securities.

c. no preferred stocks.

d. some treasury stocks.

4. What method is used to account for investments in companies over which Air France-KLM can âexercise significant influence on financial and operating policy decisions?â

a. Cost method

b. Liability method

c. Equity method

d. Fair value method

5. Sale of passenger tickets is accounted for at the time of ticket sale as:

a. Sales revenue

b. Deferred revenue

c. Contingent asset

d. No recognition

6. How does Air France account for business combination costs other than those related to the issuance of debt or equity securities?

a. Expensed as incurred

b. Capitalized as incurred

c. Included in goodwill

d. Used to offset fair value of the acquisition

7. Which of the following is not an âaccumulated other comprehensive incomeâ item among those reported in the âreserves and retained earningsâ in the 2015 consolidated balance sheet of Air France-KLM?

a. Available for sale securities reserves.

b. Derivatives reserves.

c. Legal reserves.

d. Pension defined benefits reserves.

8. What is the carrying amount of investments in debt and equity securities that are classified as available-for-sale?

a. Fair value Cost

b. Amortized cost

c. Lower of cost or market

9. Inventories are carried at:

a. The lower of the first-in-first-out cost or net realizable value.

b. The first-in-first-out cost.

c. The lower of the weighted-average cost or net realizable value.

d. The weighted-average cost.

10. Air France-KLM classifies its frequent flyer programs as:

a. Noncurrent liability

b. Current liability

c. Current asset

d. Other debt

11. The followings are included in Air France-KLMâs intangible assets, except for:

a. Trademarks

b. Leased aircraft

c. Customer relationships

d. Slots for takeoff and landing

12. Air France-KLM reports bank overdrafts as:

a. A contra account to cash and cash equivalents.

b. A current liability.

c. An expense.

d. A bank deposits in transit.

13. Which method does Air France-KLM use to record depreciation expense for its flight equipment?

a. The activity-based method.

b. The sum-of-yearsâ-digit method.

c. The straight-line method.

d. The group method.

14. Which accounting standards does Air France-KLM use?

a. U.S. GAAP

b. French GAAP

c. Netherlands GAAP

d. International Financial Reporting Standards

15. As of December 31, 2015, what assets are held for sale?

a. Land

b. Aircraft

c. Equipment

d. Buildings

16. Which of the following is included in âincome from operating activitiesâ but not in âincome from current operations?

a. Sale of aircraft equipment

b. Research and development costs

c. Bad debt expense

d. Interest revenue

17. Which of the following is not true about accounting treatment for the overhaul cost of major airframe and engine?

a. The cost is treated as separate asset component.

b. The cost is capitalized.

c. The cost is depreciated over the remaining useful life.

d. The cost is expensed as incurred.

18. How are financial assets accounted for if the Air France-KLM intends to sell them in the near future to realize capital gains?

a. At fair value with fair value changes recognized in the current period profit and loss

b. At fair value with fair value changes recognized as other comprehensive income

c. At cost with no recognition of fair value changes

d. At amortized cost with no recognition of fair value changes

19. Which of the following is not true about impairment test?

a. Tangible fixed assets, intangible assets, goodwill, and other assets with indefinite useful life are subject to an impairment test.

b. The impairment test is done at least once a year.

c. Recoverable value is the lower of the net realizable value and value in use.

d. The value in use is determined according to the discounted future cash flow method.

20. Which of the following is not an âother non-current income and expensesâ item?

a. Restructuring costs

b. Gains and losses on disposal of shares available for sale

c. Gains and losses on disposal of subsidiaries and affiliates

d. Gains and losses on sale of trading securities

AFA 300 Chapter Notes - Chapter 3: Deferred Income, Comprehensive Income, Retained Earnings

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