AICPA CPA-Financial Exam - Topic 1 Question 69 Discussion

Actual exam question for AICPA's CPA-Financial exam

Question #: 69
Topic #: 1

In September 1996, Koff Co.'s operating plant was destroyed by an earthquake. Earthquakes are rare in the area in which the plant was located. The portion of the resultant loss not covered by insurance was $700,000. Koff's income tax rate for 1996 was 40%. In its 1996 income statement, what amount should Koff report as extraordinary loss?

A$0

B$280,000

C$420,000

D$700,000

Show Suggested Answer

Suggested Answer: D

Choice 'd' is correct. The concept of reliability in financial reporting includes; neutrality, representational faithfulness and verifiability.

Choices 'a', 'b', and 'c' are incorrect, per the above.

by Tresa at Apr 23, 2023, 01:34 PM

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Aliza

4 months ago

Yeah, I agree with Jody on this one!

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Arthur

4 months ago

Wait, are we sure about the tax rate? Seems off.

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Freeman

4 months ago

Definitely $280,000, right? That's the net loss.

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Jody

4 months ago

I think it should be $420,000 after taxes.

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Layla

4 months ago

The loss is $700,000, but tax affects it.

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Reena

5 months ago

If I recall correctly, the extraordinary loss should be the full amount of the loss, but I’m confused about how taxes factor into this.

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Gianna

5 months ago

I feel like there was a similar practice question about a natural disaster, and I think the extraordinary loss was calculated differently.

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Mi

5 months ago

I think we might need to calculate the after-tax loss, which would be $700,000 minus the tax benefit.

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Rolf

5 months ago

I remember we discussed extraordinary losses in class, but I'm not sure if we include the tax effect in the amount reported.

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Marsha

5 months ago

Okay, I think I've got this. I'll start by finding the annual depreciation expense, then calculate the incremental revenues and expenses, and finally apply the tax rate to get the after-tax cash flow.

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Louisa

5 months ago

Hmm, I'm not 100% sure about this one. I think it might be B, "application-hosting", but I'll have to double-check the Cisco documentation to be certain.

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Mireya

5 months ago

I've got this! The correct answer is C - the inability to control access to company data if the device is stolen or lost. That's the biggest security risk with BYOD.

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Theodora

5 months ago

Okay, this seems straightforward. I think I can handle replacing the nonbreaking spaces in the document.

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Bobbie

5 months ago

I remember we discussed that working overtime typically increases utilization, not decreases it. So maybe I need to think about the other options.

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Andra

10 months ago

Woah, an earthquake taking out a plant? That's straight out of a disaster movie! But I digress, I'm going with C on this one. The tax effect needs to be factored in.

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Rory

8 months ago

I agree with you, C seems like the right choice considering the tax implications.

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Johnson

9 months ago

I'm leaning towards B, $280,000 seems like a reasonable amount for an extraordinary loss.

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Lashandra

9 months ago

I think it's D, the full $700,000. It was a rare event after all.

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Serita

10 months ago

C'mon, this is basic accounting! The extraordinary loss is the $700,000 reduced by the 40% tax rate, which gives us $420,000. Easy peasy!

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Freeman

9 months ago

Oh, I see now. Thanks for the explanation!

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Keneth

9 months ago

That's correct! It's the $700,000 reduced by the 40% tax rate.

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Thaddeus

10 months ago

I think the answer is C) $420,000.

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Loreen

10 months ago

Hmm, I'm not sure. The wording of the question is a bit confusing. Does 'extraordinary loss' mean the full $700,000, or just the amount after tax implications? I'll have to think this one through a bit more.

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Albina

8 months ago

I'm not sure, but I think it might be B because the tax rate would only apply to the portion not covered by insurance.

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Bulah

8 months ago

B) $280,000

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Dorian

8 months ago

I think it's A because the tax rate would reduce the amount reported as extraordinary loss.

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Alethea

8 months ago

A) $0

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Christiane

8 months ago

Hmm, that's a good point. I'm not entirely sure now.

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Carissa

8 months ago

But wouldn't the extraordinary loss be the full $700,000 before tax?

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Markus

9 months ago

I believe it's C) $420,000 because that would be the full amount before tax.

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Nida

9 months ago

C) $420,000

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Amie

10 months ago

I think it's B) $280,000 because that would be the amount after tax implications.

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Mira

10 months ago

I think it's A) $0 because the tax rate is 40% so the extraordinary loss would be after tax.

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Scarlet

10 months ago

A) $280,000

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Reuben

10 months ago

A) $0

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Demetra

11 months ago

I think the answer is D. The entire $700,000 portion of the loss not covered by insurance should be reported as an extraordinary loss, since earthquakes are rare in that area.

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