Page 1 of 13
Gleim CPA Review
Updates to Financial Accounting and Reporting
2016 Edition, 1st Printing
November 2016
NOTE: Text that should be deleted is displayed with a line through it. New text is shown with a blue
background.
If you are still studying for the CPA 2016 testing window that closes December 10, these updates do not
apply to you. These edits update topics as they will be covered on the 2017 Q1 version of the CPA
exam (beginning after January 1, 2017), for example, edits to address new ASU topics becoming
testable. We have included edits in this 2017 Q1 update for the following:
Study Unit 1 – The Financial Reporting Environment
Study Unit 2 – Financial Statements
Study Unit 4 – Financial Statement Disclosure
Study Unit 5 – Cash and Investments
Study Unit 7 – Inventories
Study Unit 10 – Payables and Taxes
Appendix A – IFRS Differences
Changes for the 2017 Q2 version of the exam will be in our upcoming 2017 edition materials.
Study Unit 1 – The Financial Reporting Environment
Page 38, Subunit 1.5, Question 12:
12. Which of the following is a generally accepted
accounting principle that illustrates the practice of
conservatism during a particular reporting period?
A. Capitalization of research and development
costs.
B. Accrual of a contingency deemed to be
reasonably possible.
C. Reporting investments with appreciated market
values at market value.
D. Reporting LIFO inventory at the lower of cost or
market value.
Answer (D) is correct.
REQUIRED: The generally accepted accounting principle
that illustrates conservatism.
DISCUSSION: Under the conservatism constraint, when
alternative accounting methods are appropriate, the one
having the less favorable effect on net income and total assets
is preferable. An understatement of assets is to be avoided so
that earnings are not overstated when the assets are realized.
Accordingly, the market measurement under the LCM rule for
LIFO is subject to a ceiling of net realizable value and a floor of
NRV minus a normal profit. Reporting inventory above NRV will
result in a loss on sale. Reporting inventory below NRV minus
a normal profit will result in an overstatement of profit. Thus,
the LCM rule results in a conservative balance sheet without
an unduly conservative measurement that will overstate
earnings and retained earnings.
Answer (A) is incorrect. R&D costs normally are expensed
as incurred. Answer (B) is incorrect. Most contingent losses are
recognized only if probable and capable of being reasonably
estimated. However, the fair value of a guarantee is accrued
even if the payment is not probable. Answer (C) is incorrect.
Recognizing unrealized holding gains on investments, e.g.,
trading securities, does not result in a conservative balance
sheet or earnings amount.
Page 48, Unofficial Answers, 4. Measurement Attributes, 2.:
2.
D) Replacement cost (current cost) is used to measure certain inventories, e.g., LIFO and retail method inventories
measured at market when it is lower than historical cost. It is the cash or equivalent that would be paid for a current
acquisition of the same or an equivalent asset.
Page 49, Unofficial Answers, 4. Measurement Attributes, 4.:
4.
B) Net realizable value is used to measure short-term receivables and some inventories measured at (1) the lower of
cost or NRV or (2) LCM (LIFO and retail) if market is lower than cost and equals NRV. It is the cash or equivalent
expected to be received for an asset in the due course of business minus the costs of completion and sale.
Copyright © 2016 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].
Page 2 of 13
Study Unit 2 – Financial Statements
Page 66, Subunit 2.1, Question 5:
5. Brite Corp. had the following liabilities at
December 31, Year 6:
Accounts payable
Unsecured notes, 8%, due 7/1/Year 7
Accrued expenses
Contingent liability
Deferred income tax liability
Senior bonds, 7%, due 3/31/Year 7
$
55,000
400,000
35,000
450,000
25,000
1,000,000
The contingent liability is an accrual for possible
losses on a $1 million lawsuit filed against Brite.
Brite’s legal counsel expects the suit to be settled in
Year 8 and has estimated that Brite will be liable for
damages in the range of $450,000 to $750,000. The
deferred income tax liability is not related to an asset
for financial reporting and is expected to reverse in
Year 8. What amount should Brite report in its
December 31, Year 6, balance sheet for current
liabilities?
A. $515,000
B. $940,000
C. $1,490,000
D. $1,515,000
Answer (C) is correct.
REQUIRED: The amount reported for current liabilities.
DISCUSSION: The following are current liabilities:
(1) Obligations that, by their terms, are or will be due on
demand within 1 year (or the operating cycle if longer) and
(2) obligations that are or will be callable by the creditor within
1 year because of a violation of a debt covenant. Deferred tax
assets and liabilities are classified as noncurrent. Thus, current
liabilities are calculated as
Accounts payable
Unsecured notes, 8%, due 7/1/Year 7
Accrued expenses
Senior bonds, 7%, due 3/31/Year 7
Current liabilities
$
55,000
400,000
35,000
1,000,000
$1,490,000
Answer (A) is incorrect. The amount of $515,000 excludes
the senior bonds due within 1 year and includes the deferred
income tax liability that will not reverse within 1 year. Whether
a deferred tax asset or liability is current depends on the
classification of the related asset or liability. If it is not related to
an asset or liability, the expected reversal date of the
temporary difference determines the classification. Deferred
tax assets and liabilities are classified as noncurrent amounts.
Answer (B) is incorrect. The amount of $940,000 includes the
contingent liability not expected to be settled until Year 8 and
excludes the senior bonds. Answer (D) is incorrect. The
amount of $1,515,000 includes the deferred income tax liability
not expected to reverse until Year 8 that should be classified as
noncurrent.
Study Unit 4 – Financial Statement Disclosure
Page 129, Subunit 4.3, item b.3)a):
a) But inventory losses from nontemporary market declines below cost must be
recognized at the interim date. If the loss is recovered during the year (in
another quarter), it is treated as a change in estimate. The amount recovered
is limited to the losses previously recognized. (Study Unit 7, Subunit 6,
contains the relevant outlines.)
Page 142, Subunit 4.3, Question 13:
13. Because of a decline in market price in the second
quarter, Petal Co. incurred an inventory loss, but the
market price was expected to return to previous levels
by the end of the year. At the end of the year, the
decline had not reversed. Petal accounts for its
inventory using the LIFO method. When should the
loss be reported in Petal’s interim income statements?
A. Ratably over the second, third, and fourth
quarters.
B. Ratably over the third and fourth quarters.
Answer (D) is correct.
REQUIRED: The true statement about reporting inventory
at interim dates when a market decline is expected to reverse
by year end but does not.
DISCUSSION: A market decline below cost reasonably
expected to be restored within the fiscal year may be deferred
at an interim reporting date because no loss is anticipated for
the year. (Inventory losses from nontemporary market declines
must be recognized at the interim reporting date.)
Consequently, Petal would not have reported the market
decline until it determined at the end of the fourth quarter that
the expected reversal would not occur.
C. In the second quarter only.
D. In the fourth quarter only.
Copyright © 2016 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].
Page 3 of 13
Page 143, Subunit 4.3, Question 17:
17. An inventory loss from a market price decline on
inventory accounted for under the LIFO method
occurred in the first quarter. The loss was not expected
to be restored in the fiscal year. However, in the third
quarter the inventory had a market price recovery that
exceeded the market decline that occurred in the first
quarter. For interim financial reporting, the dollar
amount of net inventory should
A. Decrease in the first quarter by the amount of
the market price decline and increase in the
third quarter by the amount of the market
price recovery.
B. Decrease in the first quarter by the amount of
the market price decline and increase in the
third quarter by the amount of decrease in
the first quarter.
C. Decrease in the first quarter by the amount of
the market price decline and not be affected
in the third quarter.
D. Not be affected in either the first quarter or
the third quarter.
Answer (B) is correct.
REQUIRED: The proper interim financial reporting of a
market decline and a market price recovery.
DISCUSSION: A market price decline in inventory must be
recognized in the interim period in which it occurs unless it is
expected to be temporary, i.e., unless the decline is expected
to be restored by the end of the fiscal year. This loss was not
expected to be restored in the fiscal year, and the company
should report the dollar amount of the market price decline as
a loss in the first quarter. Inventory may never be written up to
an amount above its original cost. Accordingly, the market price
recovery recognized in the third quarter is limited to the extent
of losses previously recognized in a prior interim period.
Answer (A) is incorrect. The recovery recognized in the
third quarter is limited to the amount of the losses previously
recognized. Answer (C) is incorrect. Assuming no market price
decline had been recognized prior to the current year, the first
quarter loss and the third quarter recovery would be offsetting.
The recognized third quarter gain is limited to the amount of
the first quarter loss, and the year-end results would not be
affected. Answer (D) is incorrect. The inventory amount is
affected in both the first and third quarters.
Page 150, Subunit 4.8, Interim Reporting:
Situation
Answer
1. On September 30, Year 3, the company determined that inventory with a cost of $80,000 has a market net realizable
value of $74,000. The company estimates that the inventory’s market net realizable value at the end of Year 3 will be at
least $82,000. The company accounts for its inventory using the moving-average cost method.
2. On March 31, Year 3, the company recognized a $40,000 write-down due to market decline in inventory. During the
third quarter, the inventory’s market value unexpectedly increased by $46,000. The company accounts for its inventory
using the LIFO method.
Study Unit 5 – Cash and Investments
Page 169, Subunit 5.4, item 4.b. and IFRS Difference:
b. When significant influence is achieved in stages (step-by-step), the investor must
retroactively adjust (1) the carrying amount of the investment, (2) results of
operations for current and prior periods presented, and (3) retained earnings. The
adjustments are made as if the equity method had been in effect during all of the
previous periods in which any percentage was held applies the equity method
prospectively from the moment significant influence is achieved.
1) The retroactive adjustment is based on the percentage of ownership held prior to
obtaining significant influence. On the date the investment becomes qualified for
the equity method, the equity method investment equals (a) the cost of acquiring
the additional equity interest in the investee plus (b) the current basis of the
previously held equity interest in the investee.
2) If the investment was previously accounted for as an available-for-sale security, the
entity must recognize in earnings the unrealized holding gain or loss from
accumulated other comprehensive income on the date the investment qualifies for
the equity method.
Copyright © 2016 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].
Page 4 of 13
IFRS Difference
When significant influence is achieved in stages (step-by-step), the investor
applies the equity method prospectively from the moment significant influence
is achieved.
Page 177, Subunit 5.3, Question 9:
9. Kale Co. purchased bonds at a discount on the
open market as an investment and has the intent and
ability to hold these bonds to maturity. Absent an
election of the fair value option, Kale should account
for these bonds at
A. Cost.
B. Amortized cost.
C. Fair value.
D. Lower of cost or market.
Answer (B) is correct.
REQUIRED: The recording of held-to-maturity securities.
DISCUSSION: Without an election of the fair value option,
investments in debt securities must be classified as held-to
maturity and measured at amortized cost. But this treatment
requires the reporting entity to have the positive intent and
ability to hold them to maturity.
Answer (A) is incorrect. The discount is amortized over the
term of the bonds. Answer (C) is incorrect. Trading and
available-for-sale securities are accounted for at fair value.
Answer (D) is incorrect. Inventory LIFO or retail inventory is
measured at lower of cost or market.
Study Unit 7 – Inventories
Page 233, Subunit 7.4, item 2.a.:
a. An advantage of FIFO is that ending inventory approximates current replacement cost
the market value.
Pages 236-239, Subunit 7.6:
7.6 LOWER OF COST OR MARKET (LCM) MEASUREMENT OF INVENTORY SUBSEQUENT
TO INITIAL RECOGNITION
1. Statement of Rule
a. Inventory is measured at the lower of cost or market (LCM). The subsequent
measurement of inventory depends on the cost method used.
1) Inventory accounted for using LIFO or the retail inventory method is measured at
the lower of cost or market (LCM).
2) Inventory accounted for using any other cost method (e.g., FIFO or average cost)
is measured at the lower of cost or net realizable value.
b. Inventory must be written down to market subsequent to acquisition if its utility is no
longer as great as its cost. The difference (a write-down) should be recognized as a
loss of the current period. The loss on write-down of inventory to market or net
realizable value (NRV) generally is presented as a component of cost of goods sold.
However, if the amount of loss is material, it should be presented as a separate line
item in the current-period income statement.
1) Thus, a loss should be recognized whenever the utility of goods is impaired by A
write-down of inventory below its cost may result from damage, deterioration,
obsolescence, changes in price levels, changes in demand, style changes, or
other causes etc.
2) This loss is generally presented as a component of cost of goods sold. However, if
the amount of loss is material, it should be presented as a separate line item in the
current-period income statement.
Copyright © 2016 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].
Page 5 of 13
3) c. A reversals of a write-downs of inventory are recognized in the annual financial
statements is prohibited in subsequent periods.
1) Once inventory is written down below cost, the reduced amount is the new cost
basis.
d. Depending on the nature of the inventory, the rules for write-down below cost may be
applied either directly to each item or to the total of the inventory (or in some cases, to
the total of each major category). The method should be the one that most clearly
reflects periodic income.
2. Measurement of Inventory at the Lower of Cost or Market (LCM)
a. Inventory accounted for using the LIFO or retail inventory method must be written
down to market if its utility is no longer as great as its cost.
1) The excess of cost over market is recognized as a loss on write-down in the income
statement.
a b. Market is the current cost to replace inventory, subject to certain limitations. Market
should not (1) exceed a ceiling equal to net realizable value (NRV) or (2) be less than
a floor equal to NRV reduced by an allowance for an approximately normal profit
margin.
1) NRV is the estimated selling price in the ordinary course of business minus
reasonably predictable costs of completion, and disposal, and transportation.
2) Thus, current replacement cost (CRC) is not to be greater than NRV or less than
NRV minus a normal profit (NRV – P).
[***]
3. Applying LCM
a. Depending on the nature of the inventory, the LCM rule may be applied either directly to
each item or to the total of the inventory (or, in some cases, to the total of each major
category). The method should be the one that most clearly reflects periodic income.
1) Once inventory is written down, the reduced amount is the new cost basis.
b c. LCM by item always will be equal to or less than the other LCM measurements, and
LCM in total always will be equal to or greater than the other LCM measurements.
1) Most entities use LCM by item. This method is required for tax purposes.
a) If dollar-value LIFO is used, LCM should be applied to pools of items.
b) An entity may not use LCM with LIFO for tax purposes.
EXAMPLE
Allotrope Co. has the following information about its inventory Lala Co. accounts for its inventory using the LIFO cost
method. The following is its inventory information at the end of the fiscal year:
Historical cost
Current replacement cost
Net realizable value (NRV)
Normal profit margin
$100,000
82,000
90,000
5,000
Under the LIFO method, inventory is measured at the lower of cost or market (current replacement cost subject to certain
limitations). Market cannot be higher than NRV ($90,000) or lower than NRV reduced by a normal profit margin ($90,000 –
$5,000 = $85,000). Thus, market is $85,000. (The current replacement cost of $82,000 is below the floor.) Because market
is lower than cost, the inventory is reported in the balance sheet at market of $85,000. The write-down of inventory of
$15,000 ($100,000 – $85,000) is recognized as a loss in the income statement. The journal entry is as follows:
Loss from inventory write-down
Inventory
$15,000
$15,000
Copyright © 2016 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].
Page 6 of 13
IFRS Difference
Inventories are measured at the lower of cost or net realizable value (NRV)
regardless of the cost method used. NRV is the estimated selling price less the
estimated costs of completion and disposal. NRV is assessed each period.
Accordingly, a write-down may be reversed but not above original cost. The
write-down and reversal are recognized in profit or loss.
Using the data from the example above, NRV ($90,000) is lower than cost
($100,000). Thus, the inventory is reported in the statement of financial position
at its NRV ($90,000). The write-down of inventory of $10,000 ($100,000 –
$90,000) is recognized in profit or loss. The journal entry is as follows:
Loss from inventory write-down
Inventory
$10,000
$10,000
3. Measurement of Inventory at the Lower of Cost or NRV
a. Inventory measured using any method other than LIFO or retail (e.g., FIFO or average
cost), must be measured at the lower of cost or net realizable value.
1) Net realizable value (NRV) is the estimated selling price in the ordinary course of
business minus reasonably predictable costs of completion, disposal, and
transportation.
2) The excess of cost over NRV is recognized as a loss on write-down in the income
statement.
EXAMPLE
Using the data from the previous example, assume that Lala Co. accounts for its inventory using the FIFO cost method.
Under the FIFO method (or any other method except for LIFO or retail), inventory is measured at the lower of cost or
net realizable value. NRV of $90,000 is lower than cost of $100,000. Thus, a loss on write-down to NRV of $10,000 is
recognized. The journal entry is as follows:
Loss from inventory write-down
Inventory
$10,000
$10,000
NOTE: The same loss on write-down is recognized under IFRS.
4. LCM Inventory Measurement at Interim Dates
a. An inventory loss from a market decline A write-down of inventory below cost (to market
for LIFO and retail and to NRV for all other methods) may be deferred in the interim
financial statements if no loss is reasonably anticipated for the year.
1) But inventory losses from a nontemporary market decline below cost, however,
must be recognized at the interim date.
2) If the loss is recovered in another quarter, it is recognized as a gain and treated as
a change in estimate. The amount recovered is limited to the losses previously
recognized.
Copyright © 2016 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].
Page 7 of 13
EXAMPLE
A company has accounts for its inventory using the LIFO cost method. tThe following is its inventory information about its
inventory at the end of for the interim period ending March 31, Year 1:
Historical cost
Current replacement cost
Net realizable value (NRV)
Normal profit margin
$93,000
87,000
90,000
5,000
Under LIFO, inventory is measured at LCM. Additional information: (1) This inventory was sold on January 5, Year 2.
(2) On March 31, Year 1, the company expects no changes during the year regarding inventory information determined.
(3) On June 30, Year 1, as a result of an increase in the demand for company’s products, the company determines the
following data:
Current replacement cost
Net realizable value (NRV)
Normal profit margin
$95,000
99,000
5,000
March 31, Year 1
The current replacement cost ($87,000) is below the ceiling / of NRV ($90,000) and above the floor / of NRV less minus
normal profit margin ($85,000). Thus, market is equal to the current replacement cost of $87,000. Because market is
lower than cost, the inventory is reported in the balance sheet at market of $87,000. Since tThe loss is not expected to be
restored in the fiscal year, and the write-down of inventory of $6,000 ($93,000 – $87,000) is recognized as a loss in
income statement. The journal entry is as follows:
Loss from inventory write-down
Inventory
$6,000
$6,000
June 30, Year 1
The current replacement cost ($95,000) is below the ceiling / of NRV ($99,000) and above the floor / of NRV less minus
normal profit margin ($94,000). Thus, market is equal to current replacement cost of $95,000. The loss is recovered in
the second quarter ($95,000 > $87,000). The amount of reversal of the write-down recognized in the first quarter is limited
to the losses previously recognized. (tThe inventory must not be reported above its cost). The journal entry is as follows:
Inventory
Loss from inventory write-down
$6,000
$6,000
EXAMPLE
Tal Co. has accounts for its inventory using the LIFO cost method. tThe following is its inventory information about its
inventory at the end of the interim period on March 31, Year 1:
Historical cost
Current replacement cost
Net realizable value (NRV)
Normal profit margin
$100,000
82,000
90,000
5,000
Tal expects that on December 31, Year 1, the inventory’s NRV reduced by a normal profit margin will be at least
$100,000. No write-down of inventory is recognized in the interim financial statements on March 31, Year 1, because no
loss is reasonably anticipated for the year.
IFRS Difference
Under IFRS, each interim period is viewed as a discrete (individually separate)
reporting period. Accordingly, the accounting treatment for inventory
measurement in the interim statements is the same as in the annual statements.
For an interim period, an inventory loss from a market decline write-down to NRV
must be recognized even if no loss is reasonably expected for the year.
Using the data from the example on the previous page, in its interim financial
statements on March 31, Year 1, Tal will recognize a loss of $10,000 ($100,000
historical cost – $90,000 NRV). Under IFRS, an inventory is measured at the
lower of cost or NRV regardless of its expected NRV at year end.
Copyright © 2016 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].
Page 8 of 13
Pages 251-252, Subunit 7.6, Title and Questions 21-22:
7.6 Lower of Cost or Market (LCM) Measurement of Inventory Subsequent to Initial Recognition
21. The lower-of-cost-or-market rule for inventories
may be applied to total inventory, to groups of similar
items, or to each item. Which application generally
results in the lowest inventory amount?
A. All applications result in the same amount.
B. Total inventory.
C. Groups of similar items.
D. Separately to each item.
21. Lialia Co. has determined the cost of its fiscal
year-end unfinished FIFO inventory to be $300,000.
Information pertaining to that inventory at year-end is
as follows:
Estimated selling price
Estimated cost of disposal
Normal profit margin
Current replacement cost
Estimated completion costs
$330,000
20,000
15%
280,000
15,000
What amount should Lialia report as inventory on its
year-end balance sheet?
A. $295,000
B. $280,000
C. $300,000
D. $330,000
22. Based on a physical inventory taken on
December 31, Chewy Co. determined its chocolate
inventory on a FLIFO basis at $26,000 with a
replacement cost of $20,000. Chewy estimated that,
after further processing costs of $12,000, the
chocolate could be sold as finished candy bars for
$40,000. Chewy’s normal profit margin is 10% of
sales. Under the lower-of-cost-or-market rule, what
amount should Chewy report as chocolate inventory in
its December 31 balance sheet?
A. $28,000
B. $26,000
C. $24,000
D. $20,000
Answer (D) is correct.
REQUIRED: The application of the LCM rule that usually
results in the lowest amount.
DISCUSSION: Applying the LCM rule to each item of
inventory produces the lowest amount for each item and
therefore the lowest and most conservative measurement for
the total inventory. The reason is that aggregating items results
in the inclusion of some items at amounts greater than LCM.
For example, if item A (cost $2, market $1) and item B (cost $3,
market $4) are aggregated for LCM purposes, the inventory
measurement is $5. If the rule is applied separately to A and B,
the LCM measurement is $4.
Answer (A) is correct.
REQUIRED: The ending balance of inventory measured
using FIFO.
DISCUSSION: Inventory accounted for using the FIFO
method (or any cost method other than LIFO or retail) is
measured at the lower of cost or net realizable value (NRV).
NRV is the estimated selling price in the ordinary course of
business, minus reasonably predictable costs of completion,
disposal, and transportation. At year-end, the NRV of the
inventory of $295,000 ($330,000 estimated selling price –
$15,000 estimated completion costs – $20,000 estimated costs
of disposal) is lower than its cost of $300,000. Thus, the
inventory is reported at its NRV of $295,000.
Answer (B) is incorrect. If the inventory were accounted for
under the LIFO or the retail inventory method, it would have
been reported at its current replacement cost of $280,000.
Answer (C) is incorrect. Inventory accounted for using the
FIFO method is measured at the lower of cost or net realizable
value (NRV). The NRV is lower than cost, so the inventory
must be reported at its NRV. Answer (D) is incorrect. Inventory
should not be reported at an amount greater than its historical
cost.
Answer (A) is correct.
REQUIRED: The LCM value of inventory.
DISCUSSION: Under LIFO, inventory is measured at the
lower of cost or market (LCM). Market equals current
replacement cost subject to maximum and minimum values.
The maximum is NRV, and the minimum is NRV minus normal
profit. When replacement cost is within this range, it is used as
market. Cost is given as $26,000. NRV is $28,000 ($40,000
selling price – $12,000 additional processing costs), and NRV
minus a normal profit equals $24,000 [$28,000 – ($40,000 ×
10%)]. Because the lowest amount in the range ($24,000)
exceeds replacement cost ($20,000), it is used as market.
Because market value ($24,000) is less than cost ($26,000), it
is also the inventory amount.
Answer (A) is incorrect. The NRV is $28,000. Answer (B) is
incorrect. The cost is $26,000. Answer (D) is incorrect. The
replacement cost is $20,000.
Copyright © 2016 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].
Page 9 of 13
Study Unit 10 – Payables and Taxes
Pages 354-355, Subunit 10.11, item 2.:
2. Financial Statement Presentation of Deferred Tax Amounts
a. In the statement of financial position, deferred tax amounts must be liabilities and assets
are classified as current or noncurrent based on the classification of the related asset
or liability amounts.
1) If a deferred tax item is not related to an asset or liability for financial reporting, it is
classified based on the expected reversal date of the TD.
a) An example of an item not related to a particular asset or liability for financial
reporting is a net operating loss carryforward.
2) A valuation allowance for a particular tax jurisdiction is allocated pro rata between
current and noncurrent deferred tax assets.
3) b. Current Deferred tax amounts liabilities and assets and any related valuation
allowance are netted and presented as a single amount. Noncurrent deferred tax
amounts also are offset (netted) and presented as a single amount.
1) However, deferred tax amounts attributable to different tax jurisdictions must not be
netted.
EXAMPLE
Rook Co. is preparing its financial statements for the year just ended and has the following deferred tax balances:
Deferred tax liabilities:
Deferred tax assets:
$320,000 installment sales
15,600 excess depreciation
$16,000 subscription revenue
28,000 warranty costs
The company prepares the following analysis:
●
●
●
●
The installment sales are related to accounts receivable, a current asset.
The excess depreciation is related to property, plant, and equipment, a noncurrent asset.
The subscription revenue is related to unearned revenue, a current liability.
The warranty costs are related accrued expenses, a current liability.
DTL -- Installment sales
DTL -- Excess depreciation
DTA -- Subscription revenue
DTA -- Warranty costs
Totals
Current
$320,000 cr.
Noncurrent
$15,600 cr.
16,000 dr.
28,000 dr.
$276,000 cr.
$15,600 cr.
Rook presents the following items on its balance sheet for the year just ended:
Current liabilities:
Deferred tax liability
$276,000
Noncurrent liabilities:
Deferred tax liability
$15,600
IFRS Difference
All deferred tax amounts are noncurrent.
Copyright © 2016 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].
Page 10 of 13
Page 365, Subunit 10.11, Questions 28 and 29:
28. At the end of Year 4, the tax effects of Thorn Co.’s
temporary differences were as follows:
Deferred Tax
Assets
(Liabilities)
Related Asset
Classification
$(75,000)
Noncurrent asset
25,000
$(50,000)
Current asset
Accelerated tax
depreciation
Additional costs in
inventory for tax
purposes
A valuation allowance was not considered necessary.
Thorn anticipates that $10,000 of the deferred tax
liability will reverse in Year 5. In Thorn’s December 31,
Year 4, balance sheet, what amount should Thorn
report as noncurrent deferred tax liability?
A. $40,000
B. $50,000
C. $65,000
D. $75,000
29. Because Jab Co. uses different methods to
depreciate equipment for financial statement and
income tax purposes, Jab has temporary differences
that will reverse during the next year and add to
taxable income. Deferred income taxes that are based
on these temporary differences should be classified in
Jab’s balance sheet as a
A. Contra account to current assets.
B. Contra account to noncurrent assets.
C. Current liability.
D. Noncurrent liability.
Answer (D) is correct.
REQUIRED: The noncurrent deferred tax liability.
DISCUSSION: In a classified balance sheet, deferred tax
assets and liabilities are separated into current and noncurrent
amounts. Classification as current or noncurrent is based on
the classification of the related asset or liability. Because the
$75,000 deferred tax liability is related to a noncurrent asset, it
should be classified as noncurrent.
Answer (A) is incorrect. The amount of $40,000 equals the
$50,000 net deferred tax liability minus the $10,000 expected
to reverse in Year 5. Answer (B) is incorrect. The amount of
$50,000 equals the net deferred tax liability. Answer (C) is
incorrect. The amount of $65,000 equals the $75,000
noncurrent deferred tax liability minus the $10,000 expected to
reverse in Year 5.
Answer (B) is correct.
REQUIRED: The classification of deferred taxes on the
balance sheet.
DISCUSSION: In the statement of financial position,
deferred tax liabilities and assets are classified as noncurrent
amounts. In addition, deferred tax liabilities and assets and any
related valuation allowance are netted and presented as a
single noncurrent amount. Thus, in Thorn’s balance sheet, the
deferred tax liability of $50,000 ($75,000 – $25,000) must be
classified as noncurrent.
Answer (A) is incorrect. Deferred tax liabilities and assets
and any related valuation allowance are netted and presented
as a single noncurrent amount. Answer (C) is incorrect.
Deferred tax liabilities and assets and any related valuation
allowance are netted and presented as a single noncurrent
amount. Answer (D) is incorrect. Deferred tax liabilities and
assets and any related valuation allowance are netted and
presented as a single noncurrent amount.
Answer (D) is correct.
REQUIRED: The classification of deferred income taxes
based on temporary differences.
DISCUSSION: These temporary differences arise from
use of an accelerated depreciation method for tax purposes.
Future taxable amounts reflecting the difference between the
tax basis and the reported amount of the asset will result when
the reported amount is recovered. Accordingly, Jab must
recognize a deferred tax liability to record the tax
consequences of these temporary differences. This liability is
noncurrent because the related asset (equipment) is
noncurrent. Deferred taxes are classified as noncurrent
amounts.
Answer (A) is incorrect. A liability is not shown as an offset
to assets and it is not current. Answer (B) is incorrect. A liability
is not shown as an offset to assets. Answer (C) is incorrect.
The classification of a deferred tax liability should not be
determined by the reversal date of the temporary differences
unless it is not related to an asset or liability for financial
reporting. Deferred tax liabilities and assets are classified as
noncurrent amounts.
Copyright © 2016 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].
Page 11 of 13
Page 371, Subunit 10.12, Simulation tab 6:
Select from the list provided the best match(es) for each issue below. More than one item may be selected for each
issue.
Issue
Answer(s)
Choices
1. Entity changes to nontaxable status.
A) Interperiod tax allocation
2. Classification of deferred tax amount arising from
accelerated tax depreciation.
B) Intraperiod tax allocation
3. Presentation of current deferred tax amounts for a
specific jurisdiction.
C) Valuation allowance
4. Classification of deferred tax amount arising from
recognition of organization costs.
D) Elimination of a deferred
tax amount
5. Allocation of tax expense to continuing operations
and discontinued operations.
E) Effect included in income
from continuing operations.
6. Enactment of a change in tax rates.
F) Determined by related asset
or liability
G) Determined by expected
reversal date
H) Reported as one amount
I) Reported as separate
amounts
Page 374, Unofficial Answers:
6. Income Tax Issues (6 Gradable Items)
1.
D) Elimination of a deferred tax amount, E) Effect included in income from continuing operations. When an entity
changes to nontaxable status, any existing deferred tax amount is ordinarily eliminated at the date of the change. The
effect of eliminating the deferred tax amount is included in the income tax expense.
2.
F) Determined by related asset or liability. Deferred tax amounts should be separated into current and noncurrent
components based on the classification of the related asset or liability.
3.
H) Reported as one amount. Current deferred tax amounts are netted within a specific jurisdiction.
4.
G) Determined by expected reversal date. If a deferred tax item is not related to an asset or liability for financial
reporting, it is classified based on the expected reversal date of the deferred taxes.
5.
B) Intraperiod tax allocation. Intraperiod tax allocation is required. Income tax expense (benefit) is allocated to
continuing operations, discontinued operations, other comprehensive income, and items debited or credited directly
to equity.
6.
E) Effect included in income from continuing operations. Enacted changes in law or rates require an adjustment of a
deferred tax amount in the period of the enactment. The effect is included in the amount of income tax expense or
benefit allocated to continuing operations.
Copyright © 2016 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].
Page 12 of 13
Gleim Simulation Grading
Task
Correct
Responses
Gradable
Items
Score
per Task
1
÷
6
=
2 (Research)
÷
1
=
3
÷
5
=
4
÷
7
=
5
÷
9
=
6
÷
6
=
Total of Scores per Task
÷
Total Number of Tasks
Total Score
65
%
Appendix A – IFRS Differences
Page 753, Appendix A:
● Significant influence
is achieved in stages
The investor applies the equity
method prospectively from the
moment significant influence is
achieved.
The investor must retroactively adjust
(1) the carrying amount of the
investment, (2) results of operations
for current and prior periods
presented, and (3) retained earnings.
The adjustments are made as if the
equity method had been in effect
during all of the previous periods in
which any percentage was held.
169
Inventory is measured at the
lower of cost or net realizable
value (NRV). NRV is the
estimated selling price minus
estimated costs of completion
and disposal.
Inventory is measured at the lower of
cost or market. Market is the current
cost to replace inventory, subject to
certain limitations. Market should not
(1) exceed a ceiling equal to net
realizable value (NRV) or (2) be less
than a floor equal to NRV reduced by
an allowance for an approximately
normal profit margin.
Measurement of inventory depends
on the cost method used.
(1) Inventory accounted for using
LIFO or the retail inventory method is
measured at the lower of cost or
market. (2) Inventory accounted for
using any other cost method (e.g.,
FIFO or average cost) is measured
at the lower of cost or net realizable
value.
237
[***]
● Measurement
Copyright © 2016 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].
Page 13 of 13
Page 754, Appendix A:
● Measurement at
interim periods
An inventory loss from a market
decline below cost must be
recognized in the interim period
in which it occurred even if no
loss is reasonably expected for
the year.
An inventory loss from a market
decline below cost may be deferred
in the interim period if no loss is
reasonably anticipated for the year.
All deferred tax amounts are
classified as noncurrent.
Deferred tax amounts must be
classified as current or noncurrent
based on the classification of the
related asset or liability. If a deferred
tax item is not related to an asset or
liability for financial reporting, it is
classified based on the expected
reversal date of the temporary
differences.
239
Nontemporary inventory losses from
a market decline below cost must be
recognized at the interim date. If the
loss is recovered in another quarter,
it is recognized as a gain and treated
as a change in estimate. The amount
recovered is limited to the losses
previously recognized.
Page 757, Appendix A:
● Deferred tax amounts
– Classification in the
balance sheet
355
Copyright © 2016 Gleim Publications, Inc. All rights reserved. Duplication prohibited. Reward for information exposing violators. Contact [email protected].