Quarry Company enters into a contract with Eclipse Manufacturing to purchase a large piece of machinery. The contract includes both the machine and installation for a single total contract sales price.

 Question 11

Quarry Company enters into a contract with Eclipse Manufacturing to purchase a large piece of machinery. The contract includes both the machine and installation for a single total contract sales price. Quarry does not have the specialized expertise to install the machine, and Eclipse commonly includes installation as part of the single contract price it quotes its customers. How should Eclipse allocate the contract price to the performance obligation(s)?
    The contract price should be allocated based on the proportion of the total standalone prices represented by the machine and installation as two separate performance obligations.
    The entire sales price for the contract should be allocated to a single performance obligation.  Correct
    The sales price for the contract should be split between the machine and the installation based on the proportion of service hours represented by each.
    The contract price should be allocated to the installation and the machine should be capitalized. 

You Answered Correctly!
Correct! The contract includes a single performance obligation. The machine and the installation are not distinct because the installation requires special expertise that Eclipse commonly provides to its customers. The entire contract price is allocated to a single performance obligation.

 
Question 12

Jordan Co. had the following gains during the current period:


Gain on disposal of business segment    $500,000
Foreign currency translation gain    100,000


What amount should be presented as extraordinary items on Jordan’s income statement for the current period?
    $0 Correct
    $100,000
    $500,000
    $600,000

You Answered Correctly!
This answer is correct. A gain on disposal of a business segment should be included on the income statement in the calculation of the gain or loss from discontinued operations. A foreign currency translation gain is recorded in other comprehensive income for the period. Neither item is reported separately as an extraordinary item on the income statement. Also, extraordinary gains are no longer allowed or reported under GAAP.
Question 13

Vane Co.'s trial balance of income statement accounts for the year ended December 31, year 2, included the following:
    Debit    Credit
Sales        $575,000
Cost of sales    $240,000    
Administrative expenses    70,000    
Loss on sale of equipment    10,000    
Sales commissions    50,000    
Interest revenue        25,000
Freight out    15,000    
Loss on early retirement of long-term debt    20,000    
Uncollectible accounts expense     15,000                
Totals    $420,000    $600,000
Other information:         
Finished goods inventory:        
January 1, year 2    $400,000    
December 31, year 2    360,000    
Vane's income tax rate is 30%. In Vane's year 2 multiple-step income statement,
What amount should Vane report as income after income taxes from continuing operations?
    $126,000 Correct
    $129,500
    $140,000
    $147,000

You Answered correctly.
All of the revenues, gains, expenses, and losses given in this problem are components of income from continuing operations. Income before income taxes is $180,000, as computed below.
Revenues ($575,000 + $25,000)    $600,000
Expenses and losses ($240,000 + $70,000 + $10,000 + $50,000 + $15,000 + $15,000 + $20,000)     420,000
Income before income taxes    $180,000
To compute income from continuing operations (after taxes), income taxes ($180,000 × 30% = $54,000) must also be deducted ($180,000 − $54,000 = $126,000). 

 
Question 14

The following information is available for Bart Company for year 1:

Disbursements for purchases    $580,000
Increase in trade accounts payable    50,000
Decrease in merchandise inventory    20,000

Cost of goods sold for year 1 was
    $650,000 Correct
    $610,000
    $550,000
    $510,000

You Answered Correctly!
This answer is correct. The basic cost of goods sold formula is

Beg. inv. + Net Purchases – End. inv.  = CGS

To compute cost of goods sold from the information given, cash paid for purchases must be adjusted for increases (decreases) in both accounts payable and merchandise inventory.  Cash payments for purchases during year 1 were $580,000. In addition, accounts payable increased by $50,000, indicating that total purchases exceeded cash payments for purchases by $50,000.  Merchandise inventory decreased by $20,000, which means beginning inventory exceeded ending inventory by $20,000.  This decrease in inventory must be added to cash payments for purchases to compute the cost of goods sold of $650,000.


Cash paid for purchases    $580,000
+ Increase in AP    50,000
+ Decrease in inv    20,000
Cost of goods sold    $650,000 

 
Question 15

Which of the following should be included in general and administrative expenses?
    Interest     Advertising
    Yes    Yes
    Yes    No
    No    Yes
    No    No Correct

You Answered Correctly!
Interest expense is generally considered to be a nonoperating item and is therefore included in other expenses and losses. Operating expenses are usually divided into two categories, selling expenses and general and administrative expenses. Since advertising expense is directly related to the sale of the company's products, it is included in selling expenses. Therefore, neither of the expenses given are general and administrative expenses.