AICPA

Question 1

Which of the following common characteristics of derivative financial instruments distinguishes
them from other types of financial instruments?
A. They impose a contractual obligation by one entity to deliver cash to a second entity to
convey a contractual right.
B. They are financial investments in stocks, bonds, or other securities that are marketable.
C. They have a notional amount or payment provision that is based on the changes in one
or more underlying variables.
D. Most financial instruments are valued on the balance sheet at fair value, but derivatives
are valued on the balance sheet at cost.

Answer 1

C
Financial instruments include the following:
• Cash
• Ownership interests in an entity (eg, stock)
• Contracts that create both (1) an obligation to transfer one or more financial instruments
by one entity and (2) a right to receive one or more financial instruments by another
entity (eg, derivatives, debt securities, accounts receivable/payable, loans, etc.)

Derivatives have the following three characteristics (NUNS):
• No net investment – To be considered a derivative, there must either be no initial net
investment or an initial net investment that is smaller than would normally be required for an
instrument that would respond similarly in the market.
• An Underlying and a Notional amount – The notional amount is basically the number of units
(units, bushels, pounds) and the underlying is the factor that affects the derivative’s value
(specified price, interest rate, exchange rate). In a forward exchange contract, for example, the
notional amount would be the number of FCUs (foreign currency units) and the underlying
would be the future exchange rate.
• Net Settlement – The derivative can be settled in a net amount. In the case of a forward
exchange contract, for example, the entity does not actually buy or sell the FCUs but, instead,
receives or pays the difference between the agreed upon exchange rate and the market rate.

Question 2

An investment company’s portfolio of private placement securities is recorded at fair value and
valued using a matrix pricing model. The matrix pricing model uses current pricing spreads on
similar securities to determine the fair value of the private placement securities. Which of the
following valuation techniques is being used?
A. The cost approach.
B. The market approach.
C. The exchange approach.
D. The income approach.

Answer 2

B
There are three valuation techniques that can be used to estimate fair value:
• The cost approach involves measuring the replacement cost that would be incurred to
create an equivalent benefit derived from an asset.
• The market approach involves using information generated by market transactions (ie,
current prices) that involve identical or comparable/similar assets or liabilities.
• The income approach involves analyzing future amounts in the form of revenues, cost
savings, earnings, or some other item.

Question 3

Tiger Rags is evaluating its financial statement disclosures relating to gain contingencies. When
should Tiger Rags recognize the gain on the contingency?
A. When realized.
B. When clearly defined.
C. When reasonably possible and the amount can be estimated.
D. When probable and the amount can be estimated.

Answer 3

A
A gain contingency is never accrued, but only recognized on the final statements when the
amount is realized. If reasonably possible or probably both the nature and amount of the
contingency can be disclosed.

Question 4

Changes to existing authoritative GAAP for nonissuer, nongovernmental entities are
communicated by the Financial Accounting Standards Board through the issuance of
A. Exposure Drafts.
B. Concept Statements.
C. Accounting Standards Updates.
D. Statements of Financial Accounting Standards.

Answer 4

C
The sole source of authoritative GAAP (other than SEC rules and regulations) is the FASB
Accounting Standards Codification (FASB Codification).

The FASB issues an Accounting
Standards Update (ASU) to communicate changes to the FASB Codification, including changes
to non-authoritative SEC content.

ASUs typically explain why the FASB decided to change GAAP and background information
related to the change, how GAAP was changed, and when the changes will be effective
(including the transition method).

Exposure drafts are issued by the FASB to solicit public opinion and comments on proposed new
ASUs.

FASB Concept Statements are designed to establish the objectives, qualitative characteristics
and other concepts that provide guidance over information to be recognized and measured for
financial reporting purposes.

Statements of Financial Accounting Standards (SFAS) are released by the FASB and provide
detailed guidance on specific accounting issues (eg, leases). SFAS are incorporated into the
FASB Codification.

Question 5

On January 1, year 1, the general fund of a state government made a capital acquisition of
$50,000. The asset’s useful life is 10 years, and the government uses the straight-line basis of
depreciation. What is the complete journal entry that should be recorded on December 31,
year 1, when reconciling the fund financial statements to the government-wide financial
statements?
A. Debit capital asset $45,000; credit capital acquisition $45,000.
B. Debit capital asset $50,000; credit expenditures $45,000; credit accumulated
depreciation $5,000.
C. Debit capital asset $50,000; credit capital acquisition $45,000; credit accumulated
depreciation $5,000.
D. Debit capital asset $50,000; credit expenditures $50,000; debit depreciation expense
$5,000; credit accumulated depreciation $5,000.

Answer 5

D
Capital assets are reported only in the government-wide financial statements. They are
classified as expenditures in the general fund. Therefore, when reconciling the fund financial
statement to the government-wide financial statement, all relevant information on capital
assets must be recorded in a journal entry, including acquisition costs of $50,000 and annual
depreciation expense of $5,000 ($50,000 / 10 years).

Here, the journal entry is as follows:
Capital asset 50,000
Depreciation expense 5,000
Expenditures 50,000
Accumulated depreciation 5,000

Question 6

Under which of the following circumstances does substantial doubt exist about an entity’s
ability to continue as a going concern?
A. The entity is not in compliance with statutory capital requirements.
B. The entity’s CFO has retired, and there is no definitive succession plan in place.
C. The entity projects that it will have negative cash flows from operating activities over
the next 12 months.
D. It is probable that the entity will be unable to meet its obligations coming due within 12
months of financial statement issuance

Answer 6

D
Substantial doubt exists if events and conditions indicate that it is probable that the entity will
be unable to meet its obligations when they come due sometime within a one year period.
The period begins on the date on which the financial statements are issued, or on the date on
which they are available to be issued, whichever is earlier.

Question 7

A company is performing an impairment test of one of its long-lived assets. IFRS, but not U.S.
GAAP, requires the company to compare the carrying amount of the asset with its
A. Fair value.
B. Purchase price.
C. Recoverable amount.
D. Undiscounted future cash flows.

Answer 7

C
Under IAS Impairment of Assets, an impairment loss is recognized when the carrying amount
exceeds the recoverable amount. The recoverable amount is defined as the lesser of net
selling price or value in use (ie, discounted amount expected to be generated from the asset).
IFRS allows for the recognition of impairment recoveries.

GAAP recognizes an impairment loss when the carrying amount of the asset is not recoverable.
In other words, the carrying amount is greater than the undiscounted cash flows expected to be
generated from the asset. The impairment loss is the excess of the carrying amount over its fair
value.

Question 8

On January 1, year 1, a company purchased for $10,000 an at-the-money call option on 1,200
barrels of crude oil, which the company intends to purchase in five years. The company elected
to exclude the time value of the option from the assessment of effectiveness, classified the
option as a cash flow hedge, and applied a straight-line amortization to the initial option
premium. On December 31, year 1, the time value of the option decreased by $1,200, and the
change in intrinsic value increased by $1,800. The journal entry that the company should make
on December 31, year 1, to record the change in value of the derivative should include which of
the following as a credit?
A. Derivative asset, $600.
B. Derivative asset, $1,400.
C. Other comprehensive income, $600.
D. Other comprehensive income, $1,400.

Answer 8

C
In many cases, the fair value of a derivative is readily determinable. When it is not, the intrinsic
value of the instrument is often used. For example, an option to purchase a share of stock for
$30 when its market value is $30 has no intrinsic value because it provides no benefit to the
holder. An option to purchase a share at $30 when its market value is $35, however, has an
intrinsic value of $5.

In addition, depending on the length of the exercise period remaining, there may be a time
value, which would be added to the intrinsic value in determining the value of the option.
Here, the time value of the option decreased by $1,200 while the intrinsic value increased by
$1,800, for a net increase of $600. This amount is reflected as a credit to Other Comprehensive
Income.

Question 9

Light Co. had the following bank reconciliation at March 31:

Balance per bank statement, 3/31 $23,250
Add: Deposit in transit 5,150
28,400
Less: Outstanding checks 6,300
Balance per books, 3/31 $22,100

Additional information from Light’s bank statement for the month of April is as follows:
Deposits $29,200
Disbursements 24,800

All reconciling items at March 31 cleared through the bank in April. Outstanding checks at April
30 totaled $3,200.

What is the amount of cash disbursements per books in April?

Answer 9

A
Bank reconciliations are used to reconcile differences between cash balances per bank and per
books. Most reconciling items are due to either errors or timing differences.

The $6,300 of outstanding checks on the March bank reconciliation represents checks that had
reduced the book cash balance but had not yet reduced the bank cash balance (ie, a timing
difference). Since all March reconciling items cleared the bank in April, the $6,300 is included in
the $24,800.

The outstanding checks for April of $3,200 again represents checks that had reduced the book
cash balance but had not yet reduced the bank cash balance.

Therefore, the amount of cash
disbursements per books for April is $21,700 ($24,800 – $6,300 from March + $3,200 from
April).

Question 10

How should a local government's internal service fund report depreciation expense in its fund
financial statements?
A. Not reported.
B. Operating expense.
C. Nonoperating expense.
D. Separate from revenues and expense

Answer 10

B
Government activities that closely resemble the activities of private businesses use accrual
accounting. A self-balancing set of accounts, known as a fund, is established for each category
of activity.

Proprietary funds resemble businesses and use accrual accounting. There are two types of
proprietary funds – enterprise funds and internal service funds (ISF).

ISF render services or provide goods to other funds within the government entity, charging the
other funds directly for those services. Examples include a maintenance department, IT
department, or motor pool.

Because ISF financial statements are prepared on the accrual basis of accounting, capital assets
are reported and depreciated in the asset section of the Statement of Net Position (ie, balance
sheet).

Depreciation expense is reported in operating expenses on the Statement of Revenues,
Expenses, and Changes in Fund Net Position (ie, income statement).

Question 11

Main Co. began its manufacturing business last year. Main uses the dollar-value LIFO method to
determine the value of its inventory. Main’s inventory was valued at $100,000 at the end of last
year, and, using current costs, $132,000 at the end of the current year. The prices for Main’s
inventory during the current year were 20% higher than last year’s prices. What amount should
Main report as inventory on its balance sheet at the end of the current year?
A. $110,000
B. $112,000
C. $122,000
D. $132,000

Answer 11

B
Since inventory in the current year is 20% higher, the price index for the second year is 1.20.

The first step is to
determine if inventory rose or fell after eliminating the effects of price changes. Divide the
current cost by the price index to get a base cost of $110,000.
Inventory increased in real terms by $10,000; the remaining $22,000 increase ($132,000 –
$110,000) was the result of inflation. Once the increase in base cost is computed (ie, $10,000),
it must be adjusted back to current prices, since the increase occurred in the current year. This
yields the second layer of $12,000. Added to the first layer of $100,000, DV LIFO is $112,000

CurrentC PI BaseC Layer PI LIFO
$100,000 1.0 $100,000 $100,000 1.0 $100,000 (PY)
132,000 1.2 110,000 10,000 1.20 12,000 (CY)
112,000

Question 12

A city’s water division generated $1.5 million in revenue. It reported expenses of $1 million,
which included $200,000 paid to an internal service fund. The water division also transferred
$50,000 to the general fund. What amount is the water division’s change in net position on the
statement of revenues, expenses, and changes in fund net position?
A. $250,000
B. $300,000
C. $450,000
D. $500,000

Answer 12

C
Interfund transfers are treated as
revenues or expenses, as appropriate.

The water division’s change in net position on the statement of revenues, expenses, and
changes in fund net position was $450,000, calculated as follows:
Revenue $1,500,000
Less Expenses (1,000,000)
Less Transfer to General Fund (50,000)
Change in net position $450,000

Question 13

A customer is considering buying a television set with a retail price of $2,000. The customer
asks the store manager if the store will consider paying the sales tax so that the total cash
payment is $2,000. The sales tax is 8%. The store manager agrees to accept $2,000 cash. What
should the accountant credit in this transaction?
Sales Sales tax payable
A. $2,000 $0
B. $1,840 $160
C. $2,000 $148
D. $1,852 $148

Answer 13

D
The accountant should record sales of $1,852 and sales tax payable of $148, calculated as
follows:
Sales + 8%(Sales) = $2,000
1.08(Sales) = $2,000
Sales = $1,852 (rounded)

Question 14

McClave Enterprises used quoted prices for similar assets as the basis for determining the fair value of its investments. McClave’s inputs for determining the fair values of the investments
would be classified as which level in the fair value hierarchy?
A. Level 1.
B. Level 2.
C. Level 3.
D. Level 4.

Answer 14

B
The FASB established a fair value hierarchy that describes the inputs used to measure certain financial items (eg, trading securities). The hierarchy has three levels that are ordered from highest to lowest in preference and reliability. The hierarchy’s goal is to enhance quality and comparability in fair value reporting.

Level 1 inputs are the most reliable because they are based on observable data such as quoted stock prices in active markets for IDENTICAL assets or liabilities. For example, an investment in a stock that is actively traded on the New York Stock Exchange can be valued based on the price at which it is currently trading.

Level 2 inputs are also based on observable inputs; however, these inputs are quoted prices for SIMILAR (not identical) assets or liabilities in active or inactive markets. For instance, a house in a residential community can be valued based on similar properties that were recently sold on the same street. McClave’s inputs are classified as Level 2.

Level 3 prices are based on UNOBSERVABLE inputs that reflect an entity’s assumptions about
market participants, not on actual transactions. For example, some complex financial instruments are not actively traded on markets.

Question 15

A publicly-traded corporation reported a $10,000 deduction in its current-year tax return for an
item it expects to be disallowed. The tax rate is 40%. How should the corporation report this tax
position in the financial statements?
A. As a temporary difference disclosed in the notes to the financial statements that is not
recognized.
B. As a $10,000 deferred tax asset.
C. As a $4,000 income tax expense and a $4,000 liability for an unrecognized tax benefit.
D. As a $4,000 deferred tax asset and a $4,000 income tax benefit.

Answer 15

C

BI > TI = DTL

Question 16

A U.S. public company with a worldwide public float of $800 million at the end of the second
quarter of the fiscal year is required to file its annual report with the U.S. SEC on
A. Form 10-Q within 40 days after the end of the reporting period.
B. Form 10-Q within 45 days after the end of the reporting period.
C. Form 10-K within 60 days after the end of the reporting period.
D. Form 10-K within 75 days after the end of the reporting period.

Answer 16

C
Unless exempt by regulation, companies with $10+ million of assets, 500+ shareholders, and securities that trade on a national securities exchange or an over-the-counter market must have their securities registered.
Regulation S-X establishes requirements for the financial data that registered companies must file with the SEC and also requires SEC registrants file an annual report (Form 10-K).

The deadline for filing the Form 10-K is within 75 days after the close of the company’s fiscal year for accelerated filers (companies with a market value of at least $75 million in equity held by nonaffiliates).

Large accelerated filers (companies with a market value of at least $700 million in equity held by nonaffiliates) must file within 60 days.

Small reporting companies (less than $75 million in market value of equity) must file within 90 days.

Quarterly reports (Form 10-Q) are required within 40 days of the end of each of the first three quarters for accelerated and large accelerated filers and within 45 days for all other entities (small reporting companies) that report to the SEC.

Question 17

A company operates a defined-contribution plan for its employees. At the end of the year, the
plan had investments with a cost of $5 million and a fair value of $10.25 million. Loans made to
employees had a balance of $1 million. After year end, one of the stocks in its portfolio, a
pharmaceutical stock valued at $150,000 at year end, lost half its value after a new drug was
denied regulatory approval. What amount should the defined-contribution plan financial
statements report as investments as of year-end?
A. $5,000,000
B. $10,175,000
C. $10,250,000
D. $11,250,000

Answer 17

C
For a defined contribution plan (DCP), the employer sets aside specific amounts during the time of service, and the retired employee receives whatever sum these contributions and earnings produce.

Accounting for a DCP is straightforward. The company accrues the required
contributions at the time services are rendered by employees, and reports pension expense.

DCPs only require two financial statements: a statement of net assets available for benefits of the plan and a statement of changes in net assets available for benefits.

The statement of net
assets available for benefits is required to present total assets, total liabilities, and net assets
available for benefits, reflecting all investments at fair value.

Participant loans are classified as notes receivable from participants, which are segregated
from plan investments and measured at their unpaid principal balance plus any accrued but
unpaid interest.

Type II subsequent events represent conditions that did not exist at year-end. These events
(such as the pharmaceutical stock that dropped in value) are disclosed but not accrued.
Therefore, the plan should report investments of $10.25 million as of year-end.

Question 18

Azim Services, a nongovernmental not-for-profit organization, received dues of $100 from its
members. Azim provided its members with a newsletter that had a $25 value. All other services
were valued at $10 per member. What is the amount of contribution made to Azim by each
member?
A. $10
B. $25
C. $65
D. $100

Answer 18

C
When a not-for-profit receives contributions and provides goods or services in exchange, the
amount received in excess of the fair value of the goods or services is recognized as
contributions. Of the $100 received, $25 is considered fair value for the newsletter and $10 is
for member services. Therefore, only the amount of the contribution is $65.

Question 19

A company acquired an item of property, plant and equipment that consists of individual
components with costs that are both significant and insignificant in relation to the total cost of
the item. Which of the following statements represents the methodology that should be used
to measure and record depreciation expense under IFRS?
A. The individual components may be combined and depreciated using a weighted-average
useful life computed for the asset as a whole.
B. The individual components may be combined and depreciated over the useful life of the
asset based on the company’s established policy for that asset category.
C. Each component with a cost that is significant in relation to the total cost of the item
should be depreciated separately; approximation techniques may be used to depreciate
the cost of the remaining items that are individually insignificant.
D. Each component with a cost that is significant in relation to the total cost of the item
should be depreciated separately, and the company may elect to immediately expense
the cost of the remaining items that are individually insignificant

Answer 19

C
IAS 16, Property, Plant and Equipment, is the IFRS accounting standard for fixed assets and
depreciation. IAS 16 requires the use of component depreciation. Each significant component
of an item of plant, property or equipment must be depreciated separately.
The basis for IAS 16 is the concern that individual parts of a very large asset may have different
useful lives and salvage values. Applying only one depreciation rate could provide
inappropriate cost allocations to operating periods (ie, violate the matching principle).
For any individually insignificant components, an approximation technique may be used to
calculate depreciation expense

Question 20

Which of the following statements would most likely be included among a set of financial
statements prepared in conformity with a special purpose framework?
A. The statement of comprehensive income.
B. The statement of operations.
C. The statement of cash receipts and disbursements.
D. The statement of financial position.

Answer 20

C
Financial statements (F/S) may be prepared in conformity with a comprehensive basis of
accounting other than GAAP, referred to as a special purpose framework (SPF). SPF
statements are designed to meet the needs of a specific F/S user and have a limited use for
anyone other than the intended user.
Some examples include:
• Cash basis
• Income tax basis
• Contractual basis
• Regulatory basis
In addition to normal disclosures, a description of the basis being used and its major differences
from U.S. generally accepted accounting principles should be provided in the notes to the
financial statements.
The cash basis only requires one financial statement – the statement of cash receipts and
disbursements. Therefore, this statement would most likely be prepared under a SPF.

Question 21

On January 1, year 1, a company appropriately capitalized $40,000 of software development
costs for computer software to be sold. The company estimated an economic life of two years
for the software and believes that it will generate $500,000 in total software sales. It had
software sales of $300,000 in year 1. What amount of software amortization expense, if any,
should the company report in its financial statements for the year ended December 31, year 1?
A. $0
B. $20,000
C. $24,000
D. $40,000

Answer 21

C
Amortization of capitalized software costs is calculated using the more conservative of
straight-line (SL) or relative sales value (RSV) approach; that is, the larger of the two amounts
will be recognized as amortization expense

• The SL amount is calculated by dividing the remaining carrying value by the remaining
useful life, as of the beginning of the period. The SL method would yield amortization
expense of $20,000 ($40,000 / 2 years).
• The RSV amount is calculated by establishing a ratio with the current period’s sales in
the numerator and the total estimated sales for the remaining life of the software,
including the current period’s sales, in the denominator. Amortization is equal to the
ratio multiplied by the carrying value of the software as of the beginning of the period.
This method yields amortization expense of $24,000

Note: the new carrying valurbafter amortization is compared to NRV of SW. If NRV is greater, the excess is added to the amortization expense for that period

Question 22

A holder of a variable interest that is not the primary beneficiary acquired additional variable
interests in the variable interest entity (VIE). What action, if any, should follow?
A. The holder of the variable interest should reconsider whether it is now the primary
beneficiary.
B. The holder of the variable interest should use the voting-interest model to determine
whether the VIE should be consolidated.
C. The primary beneficiary should discontinue consolidation of the VIE because the
election to consolidate is no longer allowed.
D. No action is necessary because the primary beneficiary of a VIE does not change
subsequent to the initial assessmen

Answer 22

A
If an entity has a controlling financial interest in another entity without owning any equity in
the other entity, the controlled entity is referred to as a variable interest entity (VIE). The
reporting entity with a controlling financial interest is referred to as the primary beneficiary and
is required to prepare consolidated financial statements that include the VIE.
A primary beneficiary has both:
• The power and authority to direct the operations and activities of the VIE that are most
significant to its economic performance
• Participates in the VIE’s profits and losses to an extent that is potentially significant to
the VIE.
If the holder of a VIE whose is currently not the primary beneficiary acquires additional variable
interests in the VIE, the reporting entity must re-evaluate whether it is now the primary
beneficiary

Question 23

On a nongovernmental, not-for-profit entity’s statements of activities, which of the following
amounts should not be netted together under any circumstances?
A. Revenues and expenditures from the sale of used equipment.
B. Revenues and expenditures from an annual fundraising campaign.
C. Investment income, custodial fees, and other advisory expenditures.
D. Gains and losses from exchange rates or other foreign currency translations

Answer 23

B
Reporting revenue and expenses for ongoing major activities such as the annual fundraiser
must be reported gross. The Statement of Activities reports revenues, net assets released
from restriction, and expenses.
The Statement of Functional Expenses categorizes expenses by function such as program
expenses and support services. Supporting activities include management and general
expenses, fundraising costs, and membership development.
Fundraising costs include printing and mailing pledge cards, maintaining donor list, preparing
and distributing fund raising materials, merchandise sent to potential contributors, salaries of
fundraisers, and conducting other activities designed to solicit contributions.
Revenues and expenditures from an annual fundraising campaign cannot be netted together
under any circumstances

Question 24

After speaking to the company’s sales manager, a customer placed a large order. The customer
has no immediate need for the products, so the customer asked the company to wait 60 days
before delivering the products. In this case, the company should recognize revenue for the sale
when the order is
A. Placed by the customer.
B. Delivered to the customer.
C. Packed and ready for shipment.
D. Verified as in-stock by the company

Answer 24

B
Revenues are recognized by applying a five-step process:
1. Identify contracts with customers. Determine when an arrangement is considered a
contract with customers and determine when multiple contacts with the same customer
should be combined and accounted for as a single contract.
2. Identify all separate performance obligations within each contract.
3. Determine the total consideration for the contact.
4. Allocate the total consideration among the separate performance obligations.
5. Recognize revenue, either:
a. When the entity has satisfied its performance obligations, which is generally
associated with revenues resulting from delivering products; or
b. While the entity is satisfying its performance obligations, which is generally
associated with revenues resulting from providing services.

Question 25

What are the two required financial statements of a defined contribution retirement plan?
A.A statement of financial position and a statement of activities.
B.A statement of fiduciary net assets and a statement of changes in fiduciary net assets.
C.A statement of net assets available for benefits of the plan and a statement of changes in fiduciary
net assets.
D.A statement of net assets available for benefits of the plan and a statement of changes in net assets
available for benefits.

Answer 25

D.A statement of net assets available for benefits of the plan and a statement of changes in net assets
available for benefits.

Question 26

A city government levies a tax on its citizens for improvements to roads. How should the city report the
tax in its statement of activities?
A.By type of tax in general revenues.
B.By type of tax in program revenues.
C.As program-specific contributions in program revenues.
D.In special items reported separately from general revenue.

Answer 26

A.By type of tax in general revenues.

Question 27

Which of the following is a minimum required report for the basic financial statements of a government
entity?
A.Fund financial statements.
B.Management's discussion and analysis.
C.Required supplementary information.
D.Budgetary comparison schedules

Answer 27

A.Fund financial statements.

Question 28

The objectives of financial reporting stem from which of the following sources?
A.The need for conservatism.
B.The needs of the external users of the information.
C.Reporting on management’s consistency.
D.Reporting on management’s stewardship.

Answer 28

B.The needs of the external users of the information.

Question 29

Andro Co. has a $10 million note payable that is due three months after year end. The note payable was
refinanced when long-term bonds were issued one month after year end for $11 million. The December
31 financial statements were issued two months after year end.
How should Andro classify and disclose the note?
Classification of
liability Note disclosure required
A.Current No
B.Current Yes
C.Noncurrent No
D.Noncurrent Yes

Answer 29

D.
Liability :Noncurrent
Disclosure: Yes

Question 30

Which of the following conditions or events would least likely raise substantial doubt about an entity’s
ability to continue as a going concern?
A.Default on a loan agreement.
B.Flood damage to an insured warehouse.
C.Loss of a significant customer or supplier.
D.Negative cash flows from operating activities.

Answer 30

B.Flood damage to an INSURED warehouse.

Question 31

On December 15, a U.S. company bought inventory from a European supplier. Payment is required in
euros in 30 days. What exchange rate should be used to value the payable for this transaction at year
end?
A.Exchange rate at settlement date.
B.Exchange rate at purchase date.
C.Exchange rate at year end.
D.Weighted-average exchange rate for the year

Answer 31

C.Exchange rate at year end

Question 32

A not-for-profit organization is exempt from reporting which of the following contributed services as
revenue?
A.A CPA prepares the organization’s tax return.
B.A special education teacher tutors children with learning disabilities.
C.A carpenter builds shelves for the office.
D.An attorney solicits contributions on behalf of the organization

Answer 32

D. Correct! ASC 958-605-25-16 requires that contributed services requiring specialized skills, when
provided by individuals possessing those specialized skills, must be recognized as revenue by the
organization. Here, because the lawyer is not providing a service related to his or her specialized skills,
the not-for-profit organization is exempt from reporting the contributed services as revenue.

Question 33

What is a primary purpose and focus of the statement of activities for a nongovernmental, not-for-profit
organization?
A.To demonstrate the ability of the organization to meet donor-imposed restrictions on resources.
B.To demonstrate how the organization’s resources are used in providing various programs and
services.
C.To provide relevant information about the cash receipts and cash payments of the organization during
a period.
D.To provide a cost-benefit analysis of the use of the organization’s resources.

Answer 33

B. Correct! The primary purpose and focus of the statement of activities for a nongovernmental, not-forprofit organization is to demonstrate how the organization’s resources are used in providing various
programs and services.

Question 34

Each of the following statements is correct regarding the Financial Accounting Standards Board, except:
A.It develops principles and attributes that allow organizations to understand the necessary elements to
ensure a robust system of internal control.
B.It is recognized as authoritative by the United States Securities and Exchange Commission and the
American Institute of Certified Public Accountants.
C.It establishes accounting concepts and standards for financial accounting and reporting, and provides
guidance on implementation of standards.
D.It provides a conceptual framework that helps to increase understanding of, and confidence in,
financial information on the part of users of financial reports.

Answer 34

A. Correct! It is COSO—the Committee of Sponsoring Organizations of the Treadway Commission—that
develops principles and attributes that allow organizations to understand the necessary elements to
ensure a robust system of internal control.

Question 35

A company from the United Kingdom uses British pounds in its normal operations, reports in the
European Union in euros, and reports in the United States in U.S. dollars. The company is owned by a
private equity firm in Japan. What is the company’s functional currency?
A.The euro.
B.The British pound.
C.The U.S. dollar.
D.The Japanese yen.

Answer 35

B. Correct! A company’s functional currency is the currency it uses in the primary economic environment
in which it operates, i.e., the currency it uses in its normal operations. See also ASC 830-10-45-2.

Question 36

At the end of the fiscal year, a state government reported capital assets of $20 million, accumulated
depreciation of $5 million, restricted assets of $3 million, and liabilities of $7 million. What amount should
the government report as the total net position in its government-wide financial statements?
A.$8 million.
B.$11 million.
C.$15 million.
D.$18 million.

Answer 36

B. Correct! Total net position in the government-wide financial statements consists of:
• Net investment in capital assets—Capital assets net of accumulated depreciation and obligations.
• Restricted net position—Restricted assets net of liabilities and deferred inflows of resources
related to restricted assets.
• Unrestricted net position—Any residual amount after considering net capital assets and net
restricted assets.
Here, capital assets of $20 million and restricted assets of $3 million are netted against depreciation of $5
million and liabilities of $7 million, for a total net position of ($20M + $3M) – ($5M + $7M), or $11 million.

Question 37

Lyon Co. estimated its ending inventory using a method based on the financial statements of prior periods
in order to prepare its quarterly interim financial statements. What type of inventory system and method of
estimating ending inventory is Lyon using?

Inventory Method Ending inventory
A.Perpetual Retail method
B.Perpetual Gross profit method
C.Periodic Sales method
D.Periodic Gross profit method

Answer 37

D. Correct! A periodic inventory system determines an inventory count at a specific point in time while a
perpetual system tracks inventory on an ongoing basis. The retail method uses current cost of goods sold
and revenue to determine an estimate of inventory while the gross profit method uses current cost of
goods sold and gross profit to determine an estimate of inventory. If Lyon Co. was using a perpetual
system, an estimate would not be necessary; therefore, the system is periodic. Since the scenario states
the financial statements of prior periods were used to estimate ending inventory, we know that the gross
profit method is more likely being used since gross profit margins generally remain the same from year to
year, and you wouldn’t need prior period statements when using the retail method.

Question 38

Several Bay City employees accepted a voluntary termination plan during year 1. The city will pay a set
amount to the terminated employees as follows:
During year 1 $20,000
End of year 2 30,000
End of year 3 15,000
The discounted present value of the payment for year 2 and year 3 is $42,000. What amount of
expenditures should be reported in the governmental fund-level financial statements in year 1?

Answer 38

A. Correct! Because governmental fund-level financial statements use the current financial resources
approach, only the $20,000 due from current financial resources will be included.

Question 39

Which of the following transactions should be reported as a liability in the general fund financial
statements?
A.An amount that is due within one year of the balance sheet date.
B.An amount to be paid from current financial resources.
C.An amount set aside to pay for an unfilled contract.
D.Principal on long-term debt due 90 days after the balance sheet date.

Answer 39

B. Correct! General fund financial statements are prepared using the current financial resource
measurement approach, which entails reporting liabilities for items expected to be paid from current
financial resources.

Question 40

A company completes construction of a $400 million offshore oil platform and places it into service on
January 1. State law requires that the platform be dismantled and removed at the end of its useful life,
which is estimated to be 10 years. The company estimates that the cost of dismantling the platform will be
$20 million. The discounted value of the liability is $9 million using the company’s credit-adjusted, risk-free
rate. The company has already capitalized the $400 million construction cost of the platform. What
amounts should the company record as liability and expense when the asset is placed into service?
A.Liability, $0; expense, $0.
B.Liability, $9,000,000; expense, $0.
C.Liability, $9,000,000; expense, $9,000,000.
D.Liability, $20,000,000; expense, $20,000,000

Answer 40

B. Correct! An Asset Retirement Obligation (ARO) liability must be recorded when the asset is placed
into service. Accretion expense (i.e., a periodic expense recognized as the present value of a balance
sheet liability increases) will be recognized at the end of each period, gradually increasing the ARO to its
full $20 million amount when due in 10 years

Question 41

When valuing certain financial instruments, a company that has elected the fair value measurement
option must apply the accounting measurement based on which of the following criteria?
A.A portion of an asset or liability.
B.Instrument-by-instrument basis.
C.Type-by-type basis.
D.At the entity level.

Answer 41

B. Correct! ASC 825-10-25-2 states the fair value measurement option is irrevocable, must be applied on
an instrument-by-instrument basis, and must be applied to the entire instrument.

Question 42

A company has multiple defined benefit pension plans. A pension asset reported in the statement of
financial position represents the amount by which the
A.Total fair value of plan assets exceeds the total projected benefit obligation for all overfunded and
underfunded plans.
B.Total fair value of all plans exceeds the total accumulated benefit obligation for all overfunded and
underfunded plans.
C.Fair value of plan assets exceeds the projected benefit obligation for the company’s overfunded
plans.
D.Fair value of plan assets exceeds the accumulated benefit obligation for the overfunded plans

Answer 42

C. Correct! The company will report a pension asset representing the amount by which the fair value of
plan assets exceeds the projected benefit obligation for the company’s overfunded plans. A pension
liability would be reported separately for any underfunded plans.

Question 43

The definition of a smaller reporting company with respect to market value, as established by the U.S.
Securities and Exchange Commission, includes companies with less than exactly what amount in public
equity float?
A.$75 million
B.$100 million
C.$125 million
D.$150 million

Answer 43

A. Correct! “Public equity float” refers to the amount of equity available to investors for trading. In
general, companies with less than $75 million in public equity float meet the SEC’s definition of a “smaller
reporting company.”

Question 44

Each of the following transactions will cause a decrease in stockholders’ equity, except
A.The sale of treasury stock at less than cost.
B.The declaration of a cash dividend.
C.A loss on the sale of a discontinued segment.
D.A loss from a foreign currency translation adjustment.

Answer 44

A. Correct! Under the Cost Method, which is indicated here because it is generally used when there are
plans to resell the treasury stock, the sale of treasury stock at less than cost will result in debits to Cash
and Additional Paid-In Capital–Treasury Stock (APIC-TS) and a credit to Treasury Stock (see the
example below). While APIC-TS is a stockholder equity account that will decrease, the increase in the
Treasury Stock account will exceed such decrease, thus, the net effect is still an increase in stockholder’s
equity. For example, if treasury stock is sold for $80, which is $20 below cost, the following entry results.
The net affect here is an $80 increase in stockholders’ equity.
Cash $80
APIC-TS $20
Treasury Stock $100

Question 45

How are amendments incorporated into the FASB Accounting Standards Codification?
A.By issuing an exposure draft.
B.By releasing an accounting standards update.
C.By producing a discussion paper.
D.By publishing a statement of financial accounting standards.

Answer 45

B. Correct! The release of an Accounting Standards Update marks the incorporation of amendments into
the FASB Accounting Standards Codification.

Question 46

A corporation issued debt to purchase 10 acres of land for development purposes. Expenditures related
to this purchase are as follows:
Description Amount
Purchase price $1,000,000
Real estate taxes in arrears 15,000
Debt issuance costs 2,000
Attorney fee - title search on land 5,000
The company should record its acquisition of the land in its financial statements at a value of
A.$1,000,000
B.$1,015,000
C.$1,020,000
D.$1,022,000

Answer 46

C. Correct! All costs necessary to acquire an asset and prepare it for its intended use may be included in
the cost of the asset. The purchase price, real estate taxes in arrears, and attorney fees were all
necessary expenditures for acquiring the land.

Finance costs, such as debt issuance costs, are GENERALLY NOT CAPITALIZABLE into the purchase price of an asset, except for interest costs for some self-constructed
assets.

Question 47

Parent Co. owns 90% of the 10,000 outstanding shares of Subsidiary Co.’s common stock on December
31, year 1. On that date, the stockholders’ equity of Subsidiary was $150,000, consisting of $100,000 of
no-par common stock and $50,000 of retained earnings. On January 2, year 2, Subsidiary issued 2,000
previously unissued shares for $24,000 to various outside investors. As a consequence of this
transaction, Parent’s ownership share was reduced to 75%. Which of the following correctly reports this
transaction?
A.Parent’s investment in Subsidiary is reduced by $4,500.
B.Parent’s investment in Subsidiary is increased by $3,000.
C.The consolidated income statement reports a loss of $7,500.
D.The consolidated income statement reports a gain of $4,000

Answer 47

A. Correct! Parent’s investment in Subsidiary is reduced by $4,500 because Parent went from being a
90% owner of $150,000 total in stockholders’ equity ($135,000) to a 75% owner of $174,000 total in
stockholders’ equity ($130,500). $135,000 old investment value – $130,500 new investment value =
$4,500 reduction.

Question 48

On June 30, 20X13, Adonis Co. had outstanding 4%, $4,000,000 face value bonds, originally issued at 98, maturing on June 30, 20X18. Interest was payable semiannually every June 30 and December 31. Adonis did not elect the fair value option for reporting its financial liabilities. On June 30, 20X13, after amortization was recorded for the period, the unamortized bond discount and bond issue costs were $40,000 and $30,000 respectively. On that date, Adonis acquired all its outstanding bonds on the open market at 97 and retired them. At June 30, 20X13, what amount should Adonis recognize as gain before income taxes on redemption of bonds?

A. $10,000
B. $50,000
C. $110,000
D. $130,000

Answer 48

Choice B (Correct): The cost of redeeming the bonds at 97 is 97% of the face value of $4,000,000 or $3,880,000. For purposes of recording a gain or loss on sale on the date of redemption, the bonds had a carrying value equal to their face value of $4,000,000, minus the unamortized discount of $40,000, reduced by unamortized bond issue costs of $30,000 to give a net amount of $3,930,000 (see journal entry below). Compared to the amount paid of $3,880,000, there is a gain on retirement, before tax, of $50,000.

Summarizing J/E for the retirement transaction*
Bond payable 4,000,000

            Cash                                   3,880,000
            Discount + BIC                        70,000

            Gain on Retirement            50,000 (plug) *Unamortized BIC of $30,000 is an addition to the unamortized Discount of $40,000, and reported as part of the discount.

Question 49

Which of the following information should be disclosed as supplemental information in the statement of cash flows?

I. Cash flow per share

II. Conversion of debt to equity

Answer 49

II only
Cash flow per share should not be disclosed as it may imply that this is the amount that will be paid in dividends.

Conversion of debt to equity is reported as supplemental information as it represents a financing activity that does not involve cash.

Question 50

When computing purchasing power gain or loss on net monetary items, which of the following accounts is classified as non-monetary?

A. Advances to unconsolidated subsidiaries
B. Allowance for credit losses.
C. Unamortized premium on bonds payable.
D. Accumulated depreciation of equipment

Answer 50

Choice D (Correct): Monetary assets and liabilities are financial instruments that are fixed in amount and do not vary in dollar amount as a result of inflation. As prices increase or decrease, the dollar value of equipment would change and, since it is based on the amount reported as equipment, accumulated depreciation would as well. As a result, it is nonmonetary.

Question 51

North Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. At December 31, 20X2, North’s unadjusted balance of liability for compensated absences was $21,000. North estimated that there were 150 vacation days and 75 sick days available at December 31, 20X2. North’s employees earn an average of $100 per day. In its December 31, 20X2, balance sheet, what amount of liability for compensated absences is North required to report?

Answer 51

A company accrues a liability for compensated absences when it is relatively certain that it will be paid. Vacation pay is required to be accrued if it either vests or accumulates. If it vests, the employee will be entitled to payment whether vacation is taken or not. If it accumulates, an employee would likely use the vacation prior to giving notice, rather than forfeit it.

Sick pay, on the other hand, is only required to be accrued if it vests, because employees will be entitled to payment whether used or not. If sick pay accumulates, but does not vest, there is no guarantee that the employee will get sick and qualify to use it in anticipation of giving notice and it may not be paid. As a result, North will accrue vacation pay of 150 days at $100 per day, or $15,000, but will not accrue sick pay.

Expanded explanation: In this question, the sick pay does not vest. That is what is meant by, “no payment is given for sick days not taken.”

Question 52

Which of the following assumptions means that money is the common denominator of economic activity and provides an appropriate basis for accounting measurement and analysis?

A.
Going concern

B.
Periodicity

C.
Monetary unit

D.
Economic entity

Answer 52

Choice C (Correct): The monetary unit assumption recognizes that, in order to be useful, financial information should be described in both qualitative and quantitative terms. Under the monetary unit assumption, events and transactions are quantitatively measured in terms of the equivalent amount of money they represent or the equivalent amount of money that has been exchanged.

Question 53

According to the FASB conceptual framework, an entity’s revenue may result from

A.
A decrease in an asset from primary operations.

B.
An increase in an asset from incidental transactions.

C.
An increase in a liability from incidental transactions.

D.
A decrease in a liability from primary operations.

Answer 53

D
Revenues and expenses result from providing goods or services to customers through an entity’s primary operations (eg, a bakery selling desserts). Gains and losses result from incidental transactions that are peripheral to an entity’s primary operations. For instance, if a bakery sells investment land for more than it originally paid, a gain (not revenue) is recognized because selling land is outside a bakery’s normal course of business.

All income activities involve at least one balance sheet account. Revenues result from increases in assets or decreases in liabilities. For example, the bakery may receive cash before providing goods to a customer. This unearned revenue is a liability because the entity has an obligation to perform future services. Once the services have been provided, the unearned revenue liability is reduced while revenue is recognized.

Things to remember:
Revenues and expenses result from an entity’s primary operations, whereas gains and losses result from an entity’s incidental transactions. Revenues and gains result from increases in assets or decreases in liabilities, whereas expenses and losses result from decreases in assets or increases in liabilities.

Question 54

Arden, Inc., a company that prepares its financial statements in accordance with IFRS, has a $5,000,000 note payable that comes due on October 1, 20X2. The company has both the ability and the intent to refinance the obligation on a long-term basis. As of December 31, 20X1, it has entered into an agreement with a financial institution that allows it to refinance $2,000,000 for a 24-month period. In addition, it intends to issue a new 20 year $3,500,000 bond in May, 20X2 and knows that it will be able to because it has excellent credit and the bond market is very strong. How will Arden report this on their balance sheet at December 31, 20X1?

A.
The entire $5,000,000 will be reported as a noncurrent liability.

B.
$3,500,000 will be reported as a noncurrent liability and the remaining $1,500,000 will be reported as a current liability.

C.
The entire $5,000,000 will be reported as a current liability.

D.
$2,000,000 will be reported as a noncurrent liability and the remaining $3,000,000 will be reported as a current liability.

Answer 54

Choice D (Correct) and Choices A, B, C (Incorrect): Under IFRS, a short-term obligation may be reported as noncurrent only if, as of the balance sheet date, it has entered into an agreement as of the balance sheet date to refinance the obligation for a period of at least 12 months. The intent and ability to issue a bond does not qualify. As a result, Arden would report $2,000,000 as noncurrent based on the agreement with the financial institution and the remainder would be reported as current.

Question 55

In analyzing a company’s financial statements, which financial statement would a potential investor primarily use to assess the company’s liquidity and financial flexibility?

A.
Balance sheet.

B.
Income statement.

C.
Statement of retained earnings.

D.
Statement of cash flows.

Answer 55

Choice A (Correct): Analyzing a company’s balance sheet provides information about the company’s liquidity since it provides information about assets that are in the form of cash and cash equivalents and assets that can be readily converted into cash or cash equivalents. It also provides information about its flexibility since it provides information about the make up of assets and liabilities and whether the company has the resources to acquire additional assets and whether the existing assets can be easily disposed of.

Question 56

During 20X2, Lake Co. issued 3,000 of its 9%, $1,000 face value bonds at 101 1/2. In connection with the sale of these bonds, Lake paid the following expenses:

Promotion costs $20,000
Engraving and printing $25,000
Underwriters’ commissions $200,000
What amount should Lake record as bond issue costs to be amortized over the term of the bonds?

Answer 56

Bond issue costs include those costs a company incurs in order to be able to issue bonds. Promotion costs, engraving and printing, and underwriters’ commissions would all be included for a total of $245,000.

Question 57

Hebrides Corp. has an employee benefit plan for compensated absences that gives employees 10 paid vacation days and 10 paid sick days. Both vacation and sick days can be carried over indefinitely. Employees can elect to receive payment in lieu of vacation days; however, no payment is given for sick days not taken. Hebrides allows the use of sick days without objective evidence of sickness. At December 31, 2014, Hebrides’s unadjusted balance of liability for compensated absences was $10,000. Hebrides estimated that there were 250 vacation days and 100 sick days available at December 31, 2014. Hebrides’s employees earn an average of $100 per day but will receive raises such that the average daily pay in 2015 will be $110. In its December 31, 2014, balance sheet, what amount of liability for compensated absences is Hebrides required to report?

A.
$25,000

B.
$38,500

C.
$35,000

D.
$27,500

Answer 57

B
Vacation pay is required to be accrued if it vests or accumulates because it is assumed that employees will ultimately take or take payment for all vacation days to which they are entitled before leaving the entity’s employ. Sick pay may be accrued if it accumulates but is only required to be accrued if it vests because it is assumed that sick pay will only be given when an employee is sick, which may or may not occur. Only the 250 vacation days would normally be required to be accrued.

NOTE: When sick days can be used by employees regardless of whether or not they are actually sick they are treated similar to vacation days and are also required to be accrued if they vest or accumulate, or both. As a result, the accrual will be 350 days, which will be recognized at the $110 per day rate at which they are expected to be paid. The amount that will be reported as a liability is 350 x $110 or $38,500.