AICPA Exam CPA-Financial 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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Andra

1 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

3 days ago

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

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Johnson

29 days ago

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

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Lashandra

1 months ago

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

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Serita

2 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

13 days ago

Oh, I see now. Thanks for the explanation!

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Keneth

19 days ago

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

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Thaddeus

1 months ago

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

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Loreen

2 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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Carissa

2 days ago

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

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Markus

1 months ago

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

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Nida

1 months ago

C) $420,000

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Amie

1 months ago

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

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Mira

1 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

1 months ago

A) $280,000

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Reuben

1 months ago

A) $0

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Demetra

2 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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