On January 1, year 1, Brecon Co. installed cabinets to display its merchandise in customers’ stores. Brecon expects to use these cabinets for 5 years. Brecon’s year 1, multi-step income statement should include

 Which of the following is true?
    Separate EPS amounts must be presented for both other comprehensive income and comprehensive income.
    Separate EPS amounts must be presented for other comprehensive income but not for comprehensive income.
    Separate EPS amounts must be presented for comprehensive income but not for other comprehensive income.
    Separate EPS amounts are not required to be presented for either other comprehensive income or comprehensive income. Correct

You Answered Correctly!
Separate EPS calculations are not required for other comprehensive income or comprehensive income.
 

Question 17

On January 1, year 1, Brecon Co. installed cabinets to display its merchandise in customers’ stores. Brecon expects to use these cabinets for 5 years.  Brecon’s year 1, multi-step income statement should include
    One-fifth of the cabinet costs in cost of goods sold.
    One-fifth of the cabinet costs in selling, general, and administrative expenses. Correct
    All of the cabinet costs in cost of goods sold.
    All of the cabinet costs in selling, general, and administrative expenses.

You Answered Correctly!
This answer is correct. One-fifth of the cabinet costs would be reported as depreciation expense in selling, general, and administrative expenses. Four-fifths of the cabinet cost would remain capitalized as fixed assets at the end of year 1.
Question 18

The following changes in Vel Corp.'s account balances occurred during year 1:
    Increase
Assets    $89,000
Liabilities    27,000
Capital stock    60,000
Additional paid-in capital    6,000
Except for a $13,000 dividend payment and the year's earnings, there were no changes in retained earnings for year 1. What was Vel's net income for year 1?
    $ 4,000
    $ 9,000 Correct
    $13,000
    $17,000

You Answered Correctly!
The requirement is to determine the net income for year 1 by analyzing changes in the balance sheet. Recall the accounting equation: Assets − Liabilities = Stockholders' equity. By inserting the changes given into this formula, we find an increase of $62,000 exists in the entire stockholders' equity section ($89,000 − $27,000 = $62,000). Stockholders' equity is composed of capital stock, additional paid-in capital and retained earnings. Because increases in the other two balances are given that total $66,000 ($60,000 + $6,000), the retained earnings balance must have decreased by $4,000 ($66,000 − $62,000). When dividends are paid, this reduces retained earnings, while Vel Corp. net income increases the balance of retained earnings. For the equation to balance, the changes in retained earnings account must reduce total stockholders' equity by $4,000. Therefore, if $13,000 in dividends are paid, which reduce retained earnings, and total retained earnings are to be reduced by $4,000, then net income, which increases retained earnings, must be $9,000. This creates the $4,000 difference needed to make the equation balance ($89,000 − $27,000 = $66,000 − $4,000). The following shows the analysis of the retained earnings account:
Retained earnings (beg.)    $     xxx
Net income (plug)    9,000
Dividends    (13,000)
Retained earnings (decrease)    $ (4,000)

 
Question 19

In November and December Year 1, Dorr Co., a newly organized magazine publisher, received $72,000 for 1,000 3-¬year subscriptions at $24 per year, starting with the January Year 2 issue. Dorr elected to include the entire $72,000 in its Year 1 income tax return. What amount should Dorr report in its Year 1 income statement for subscriptions revenue?
    $0 Correct
    $ 4,000
    $24,000
    $72,000

You Answered Correctly!
This answer is correct. SFAC 5 states that revenues are to be recognized when realized or realizable, and earned. At 12/31/Y1, none of the subscription revenue has been earned, since magazine delivery will not begin until Year 2. Therefore, unearned subscriptions revenue in the 12/31/Y1 balance sheet is $72,000 and subscriptions revenue in the Year 1 income statement is $0. Note that the treatment of the $72,000 collection for tax purposes does not determine its treatment for financial accounting purposes. 

 
Question 20

In Yew Co.'s year 1 annual report, Yew described its social awareness expenditures during the year as follows:
The Company contributed $250,000 in cash to youth and educational programs. The Company also gave $140,000 to health and human service organizations, of which $80,000 was contributed by employees through payroll deductions. In addition, consistent with the Company's commitment to the environment, the Company spent $100,000 to redesign product packaging.
What amount of the above should be included in Yew's income statement as charitable contributions expense?
    $310,000 Correct
    $390,000
    $410,000
    $490,000

You Answered Correctly!
Charitable contributions expense should include all expenses incurred in year 1 by Yew Co. which involve charitable contributions to other entities. The total charitable contributions expense is $310,000, consisting of the $250,000 donated to youth and educational programs and the $60,000 ($140,000 − $80,000) donated to health and human service organizations. The other $80,000 was given to these organizations by the employees, with the company merely acting as an agent collecting that amount through payroll deductions and forwarding it on to the organizations. The expenditure for redesigning product packaging ($100,000) would be properly classified as research and development expense.