Question

Hi, I had the corrected answers; however, I did not understand their principle.

Please help to explain.

Thanks

35. The occurrence which most likely would have no effect on 2014 net income (assuming that all amounts involved are material) is the

a.   sale in 2014 of an office building contributed by a stockholder in 1983.

b.   collection in 2014 of a receivable from a customer whose account was written off in 2013 by a charge to the allowance account.

c.   settlement based on litigation in 2014 of previously unrecognized damages from a serious accident that occurred in 2012.

d.   worthlessness determined in 2014 of stock purchased on a speculative basis in 2010.

^S36.     The occurrence that most likely would have no effect on 2014 net income is the

a.   sale in 2014 of an office building contributed by a stockholder in 1961.

b.   collection in 2014 of a dividend from an investment.

c.   correction of an error in the financial statements of a prior period discovered subsequent to their issuance.

d.   stock purchased in 1996 deemed worthless in 2014.

40.   Which of the following is true of accounting for changes in estimates?
a.   A company recognizes a change in estimate by making a retrospective adjustment to the financial statements
b.   A company accounts for changes in estimates only in the period of change, even though it affects the future periods
c.   Changes in estimates are not carried back to adjust prior years
d.   Changes in estimates are considered as errors or extraordinary items

46. Which of the following is never classified as an extraordinary item?

a.   Losses from a major casualty.

b.   Losses from an expropriation of assets.

c.   Gain on a sale of the only security investment a company has ever owned.

d.   Losses from exchange or translation of foreign currencies.

Answer 1

35. Answer: b.

Explanation: The collection in 2014 of a receivable written off in 2013 to the allowance account will be recorded by first re-instating the receivable for which the Accounts Receivable account will be debited and Allowance account will be credited. The collection will then be recorded by debiting Cash account and crediting Accounts Receivable account. Thus, there would be no effect on the 2014 net income.

36. Answer: c.

Explanation: The correction of an error in the financial statements of a prior period which is discovered subsequent to the issuance of the financial statements will be recorded in 2014 by adjusting it to the Retained Earnings account and hence will have no effect on the 2014 net income.

40. Answer: c.

Explanation: Changes in estimates are not carried back to adjust prior years but the effect of the change in estimates is recorded prospectively and affects the subsequent years.

46. Answer: d.

Explanation: Gains or losses that are reported on the income statement which are of an unusual nature and infrequent are known as extraordinary items. Losses from exchange or translation of foreign currencies are neither unusual nor infrequent and hence are never classified as an extraordinary item.