Shaw Company engages Maya Company to produce a large machine, install the machine, and train their employees on the machine. The machine, installation, and training are distinct, and Maya determines that the contract includes three separate performance obligations.

 Question 1

Which of the following is reported as interest expense?
    Pension cost interest.
    Amortization of discount of a note. Correct
    Deferred compensation plan interest.
    Software development interest incurred when software development for internal use is capitalized.
You Answered Correctly!
This answer is correct because amortization of a discount on a note payable is recognized as additional interest expense.

When a company discontinues an operation and disposes of the discontinued operation (component), the transaction should be included in the earnings statement as a gain or loss on disposal reported as
    A prior period adjustment.
    An extraordinary item.
    An amount after continuing operations. Correct
    A bulk sale of fixed assets included in earnings from continuing operations.
You Answered Correctly!
This answer is correct because both the gain or loss from discontinued operations and the gain or loss on sale of the segment should be shown after income from continuing operations.
 

Question 3

The following expenses were among those incurred by Sayre Company during year 1.


Accounting and legal fees    $160,000
Interest    60,000
Loss on sale of office equipment    25,000
Rent for office space    200,000


One-quarter of the rented premises is occupied by the sales department.  How much of the expenses listed above should be included in Sayre’s general and administrative expenses for year 1?
    $310,000 Correct
    $335,000
    $360,000
    $370,000
You Answered Correctly!
This answer is correct. The accounting and legal fees ($160,000) and the portion of office rent not allocable to sales (3/4 × $200,000 = $150,000) are all considered general and administrative expenses. Therefore, general and administrative expense should be $310,000 ($160,000 + $150,000). In addition, the interest expense ($60,000) would be included with financial expense or other expenses. The $25,000 loss on the sale of office equipment should be included in other expenses and losses. The office rent for the sales department (1/4 × $200,000 = $50,000) is an operating expense and included in selling expenses rather than general and administrative expenses.
 

Question 4

The correction of an error in the financial statements of a prior period should be reflected, net of applicable income taxes, in the current
    Income statement after income from continuing operations and before discontinued operations.
    Income statement after income from continuing operations and after discontinued operations.
    Retained earnings statement as an adjustment of the opening balance. Correct
    Retained earnings statement after net income but before dividends.
You Answered Correctly!
This answer is correct because the correction of an error in the financial statements of a prior period is a prior period adjustment which is to be shown net of tax as an adjustment to the beginning balance of retained earnings. 

 
Question 5

Shaw Company engages Maya Company to produce a large machine, install the machine, and train their employees on the machine. The machine, installation, and training are distinct, and Maya determines that the contract includes three separate performance obligations. The machine, installation, and training typically cost $800,000, $100,000, and $100,000 respectively when each is provided in a separate contract. Shaw and Maya agree to a total contract price of $920,000. How much of the contract price should Maya allocate to the machine, installation, and training, respectively?
    $736,000; $92,000; $92,000 Correct
    $800,000; $100,000; $100,000
    $732,000; $94,000; $94,000
    $736,000; $184,000
You Answered Correctly!
Correct! Maya should allocate the total contract price based on the proportion of total standalone prices that each performance obligation represents. The machine is assigned $736,000 (920,000 × 800,000 / 1,000,000); the installation is assigned $92,000 (920,000 × 100,000 / 1,000,000); the training is assigned $92,000 (920,000 × 100,000 / 1,000,000).