area II A. cash and cash equivalents

Question 1

FAR3C10020
How should a not-for-profit entity account for discounts and allowances on promises to give?
A. As a reduction in revenue
B. As an expense
C. As a deferred revenue
D. As a reduction in the value of the receivable

Answer 1

D. As a reduction in the value of the receivable

Discounts and allowances on promises to give should be accounted for as a reduction in the value of the receivable, reflecting the amount the entity expects to collect.

Question 2

FAR3C10054
What is the journal entry for a not-for-profit entity when it receives free advertising services that meet the recognition criteria?
A. Debit Advertising Expense; Credit Contributed Services Revenue
B. Debit Contributed Services Revenue; Credit Advertising Expense
C. Debit Cash; Credit Contributed Services Revenue
D. Debit Contributed Services Expense; Credit Cash

Answer 2

A. Debit Advertising Expense; Credit Contributed Services Revenue

When receiving free advertising services that meet recognition criteria, the entry is Debit Advertising Expense (reflecting the value of the service received) and Credit Contributed Services Revenue.

Question 3

FAR1B20019
When adjusting the trial balance to prepare the statement of activities, how should ‘Depreciation Expense’ be treated?
A) Added back to net assets
B) Deducted from revenue
C) Recognized as an expense
D) Classified as a liability

Answer 3

C) Recognized as an expense

‘Depreciation Expense’ should be recognized as an expense in the statement of activities, reflecting the allocation of the cost of fixed assets over their useful life.

Question 4

FAR3D10014
How should changes in a valuation allowance for a deferred tax asset be reflected in the financial statements?
A. As an adjustment to retained earnings.
B. In the statement of comprehensive income.
C. In the income statement as part of tax expense or benefit.
D. Directly in the equity section.

Answer 4

C. In the income statement as part of tax expense or benefit.

Changes in a valuation allowance for a deferred tax asset should be reflected in the income statement as part of the tax expense or benefit. This reflects the impact of changes in the assessment of the company’s ability to realize the deferred tax asset in future periods.

Question 5

FAR4A001n

Which of the following would not be accrued as revenue by the General Fund of Raccoon City?

A. Sales tax collected by merchants in Raccoon City
B. State-held sales taxes that will soon be remitted to Raccoon City
C. Property taxes levied
D. Interest and penalties on delinquent taxes

Answer 5

A. Sales tax collected by merchants in Raccoon City

Sales tax collected and then remitted back to Raccoon City wouldn’t be accrued, they would be recognized as revenue when the funds are received. Sales tax doesn’t fit the “measurable” requirement to be recognized on the accrual basis.
Under modified accrual accounting, revenue needs to be measurable and legally due prior to the receipt of cash. Items that fit this description are things like property taxes, interest and penalties on delinquent taxes, investment revenue, and taxes collected by other government entities but not yet remitted, such as the state collecting sales tax that will be remitted to Raccoon City.

There’s also the 60 day rule: a government entity can recognize revenue received in the first 60 days of the new fiscal year as revenue for the prior year.

Question 6

FAR2H005nsim
On January 1, year 1, Stopaz Co. Issued 8% fiver-year bonds with a face value of $200,000. The bonds pay interest semiannually on June 30 and December 31 of each year. The bonds were issued when the market interest rate was 4% and the bond proceeds were $235,931.
Stopaz uses the effective interest method for amortizing bond premiums/discounts and maintains separate general ledger accounts for each.
Calculate the amount of Premium to be amortized over the life of the bond.
A. $16,000
B. $40,000
C. $35,931
D. $20,000

Answer 6

C. $35,931

The coupon rate on the bonds were 8% when the market rate is 4%. Investors are willing to pay a premium for bonds that yield higher than the market. Also, The total proceeds of the bond is $235,931 which is greater than the face value of the bond $200,000. Hence these help us conclude that the bonds were issued at a premium of $35,931 ($235,931 – $200,000)
The premium on issue of bonds has to be separately recognized and should be amortized over the life of the bond.
This is recorded in the books as:
Cash to be debited for the receipt of proceeds $235,931
Liability of Bonds payable to be credited for the face value of bonds $200,000
Premium received on the bonds to be credited to the amount of $35,931 to be amortized over the life of the bond.

Question 7

FAR3F10008
When should a lessee reassess lease liabilities for a lease with variable payments based on an index or rate?
A. At each reporting period.
B. Only when there is a change in the index or rate.
C. Annually.
D. Never, once initially recognized.

Answer 7

B. Only when there is a change in the index or rate.

A lessee should reassess lease liabilities for a lease with variable payments based on an index or rate only when there is a change in the index or rate that affects the lease payments.

Question 8

FAR2I10003
What is the journal entry for a 2-for-1 stock split?
A) Debit Common Stock, Credit Retained Earnings
B) Debit Retained Earnings, Credit Common Stock
C) No journal entry is required
D) Debit Cash, Credit Common Stock

Answer 8

C) No journal entry is required

A stock split does not change the total value of the stock or the overall balance sheet, it merely increases the number of shares and decreases the par value per share proportionately. Therefore, no journal entry is required.

Question 9

FAR1B004aicpa
In year 1, a company reported in other comprehensive income(OCI) an unrealized holding loss on an investment in available-for-sale debt securities. During year 2, these securities were sold at a loss equal to the unrealized loss previously recognized. The reclassification adjustment should include which of the following?
A. The unrealized loss should be credited to the investment account.
B. The unrealized loss should be credited to the other comprehensive income account.
C. The unrealized loss should be debited to the other comprehensive income account.
D. The unrealized loss should be credited to beginning retained earnings.

Answer 9

B. The unrealized loss should be credited to the other comprehensive income account.

This is the difference in an unrealized loss and a realized loss. In year 1, the investment went down in value so the loss was ‘unrealized’, and is recorded in other comprehensive income (OCI) by debiting OCI. Then, when the investment was actually sold, at the same lower amount, that means the loss is now ‘realized’, and the previous debit to OCI is credited – to take it out- and the loss will be recognized in current income for the period.

Question 10

Titan’s monthly bank statement shows a balance of $12,000. Reconciliation of the statement with company books reveals the following information:
Bank service charge: $30

Insufficient funds check: $500

Checks outstanding: $1,000

Deposits in transit: $300

Check deposited by Titan and cleared by the bank for $200, but improperly recorded by Titan as $100
What is the net cash balance after the reconciliation?

A. $11,300
B. $11,570
C. $10,770
D. $10,500

Answer 10

A. $11,300

The bank service charge and the insufficient funds check are already reflected in the bank balance of $12,000. Also, the $100 mistake by Titan is on Titan’s books, but the bank recorded it properly so it doesn’t need to be adjusted.
The only two things that need to be adjusted are the checks outstanding and the deposits in transit.
12,000 – 1,000 checks outstanding = 11,000 + 300 of deposits in transit equal $11,300.

Question 11

FAR2D10035
Which of the following assets cannot be classified as held for sale?
A. Assets under construction that the company intends to sell
B. Assets that are leased out under an operating lease
C. Assets that are going to be abandoned
D. Assets that are temporarily idle

Answer 11

C. Assets that are going to be abandoned

Assets intended to be abandoned rather than sold cannot be classified as held for sale.

Question 12

A government makes a contribution to its pension plan in the amount of $10,000 for year 1. The actuarially-determined annual required contribution for year 1 was $13,500. The pension plan paid benefits of $8,200 and refunded employee contributions of $800 for year 1. What is the pension expenditure for the general fund for year 1?
A. $8,200
B. $9,000
C. $10,000
D. $13,500

Answer 12

C. $10,000
This is a tricky question. The actual question asks what the pension expenditure is for the GENERAL FUND. The pension trust fund(the fund that actually operates the pension plan for the government) would receive the $10,000 as an addition, and the pension expense for the general fund for year 1 would be the $10,000.

Question 13

FAR2C10022
When preparing a rollforward analysis, how is inventory that has been sold and delivered to customers typically classified?
A. As an addition to inventory
B. As a reduction of inventory
C. As an inventory valuation adjustment
D. As an accrued liability

Answer 13

B. As a reduction of inventory

Inventory that has been sold and delivered to customers is considered a reduction in the inventory account, as it represents the outflow of inventory from the company.

Question 14

FAR1A60038

In addressing discrepancies in revenue recognition between the consolidated financial statements and supporting documentation, the primary focus should be on:

A. Increasing the consolidated revenue to match the supporting documentation
B. Decreasing the revenue in the next financial period
C. Investigating the timing and basis of revenue recognition
D. Adjusting the revenue figures of subsidiary companies only

Answer 14

C. Investigating the timing and basis of revenue recognition

The primary focus when addressing discrepancies in revenue recognition should be on investigating the timing and basis of revenue recognition. This helps in ensuring that revenue is recognized accurately in accordance with accounting standards and reflects the true economic events.
A. is incorrect because increasing revenue without proper basis can lead to inaccurate reporting.
B. is incorrect as adjustments should be made in the period of the discrepancy.
D. is incorrect because the focus should be on the consolidated level, not just the subsidiaries.

Question 15

Jack Inc is converting their cash basis financial statements to the accrual basis. Jack Inc had the following transactions:
$500 of wages earned by employees but unpaid
$300 in office supplies received but not yet paid for
$200 in cash paid for employee bonuses from the prior year
$1,000 paid in rent for the following year
$500 that has been billed to customers but not yet received
$800 cash received for goods delivered in the prior year
$600 cash received from customers that paid in advance for their order

Which of the following is correct for the conversion to the accrual basis?
A. Subtract $200 for the employee bonuses
B. Add back the $200 for the employee bonuses
C. Subtract $1,000 for the rent paid
D. Add back $500 for accrued expenses

Answer 15

A. Subtract $200 for the employee bonuses

Under the cash basis, the $200 paid for employee bonuses in the prior year would be counted as an expense in the current year. Under the accrual basis this would need to subtracted from expenses and the beginning retained earnings would be reduced by $200.

Question 16

FAR2D10004
What is the impact on the net PPE balance when an asset is fully depreciated?
A. Increase in net PPE balance
B. Decrease in net PPE balance
C. No change in net PPE balance
D. Net PPE balance becomes zero

Answer 16

C. No change in net PPE balance

When an asset is fully depreciated, its accumulated depreciation equals its original cost, resulting in a net book value of zero for that asset. However, this does not change the net PPE balance as the decrease in the asset’s value is offset by the increase in accumulated depreciation.

Question 17

FAR1E10013
A company paid $6,000 for a 6-month advertising campaign. After three months, how should this be reported on an accrual basis?
A) Record Advertising Expense of $6,000
B) Record Prepaid Advertising of $3,000
C) Record Advertising Expense of $3,000
D) Record Prepaid Advertising of $6,000

Answer 17

B) Record Prepaid Advertising of $3,000

Half of the service period has elapsed, so half the cost ($3,000) remains as a prepaid expense, an asset on the balance sheet.

Question 18

FAR2C009n
Hank Inc. purchased two used mineral-polishing machines for a lump sum of $90,000. Hank also paid another $10,000 to restore the machines to working condition. An appraisal once the machines were working returned the following values:
Machine A: $80,000
Machine B: $120,000
How should Hank allocate the costs to the two machines?
A. Machine A: $80,000. Machine B: $120,000
B. Machine A: $36,000. Machine B: $54,000
C. Machine A: $40,000. Machine B: $60,000
D. Machine A: $40,000. Machine B: $85,000

Answer 18

C. Machine A: $40,000. Machine B: $60,000

The total cost to acquire and prepare the machines for use was $100,000. Then use the proportionate values of the machines to allocate the cost: Machine A is worth $80,000 of $200,000 total value, which is 40%. That means machine B is 60%. Machine A = 40% of $100,000 or $40,000, and Machine B = $60,000.

Question 19

FAR1B30001
What is the primary purpose of the statement of cash flows in a nongovernmental, not-for-profit entity?
A. To show the profitability of the entity over a period.
B. To display the cash inflows and outflows during a specific period.
C. To present the entity’s financial position at a point in time.
D. To detail the entity’s future investment plans.

Answer 19

B. To display the cash inflows and outflows during a specific period.

The statement of cash flows is designed to provide information about an entity’s cash inflows (receipts) and outflows (payments) during a specific period. This is crucial for not-for-profit entities to manage their liquidity and ensure they have enough cash to meet obligations.

Question 20

FAR1F10046
The Price-to-Earnings Growth (PEG) Ratio is calculated by dividing the P/E ratio by:
A. The growth rate of dividends.
B. The company’s debt growth rate.
C. The earnings growth rate.
D. The revenue growth rate.

Answer 20

C. The earnings growth rate.

The PEG Ratio is calculated by dividing the P/E ratio by the earnings growth rate. It adjusts the P/E ratio for the expected growth of earnings.

Question 21

FAR3B003nsim
Peterson Co. owns 100% of the outstanding common stock of Silver Corp. On January 1, year 2, Peterson sold equipment to Silver for $120,000, which was originally purchased on January 1, year 1 for $100,000. Peterson was depreciating the equipment over 5 years using straight-line depreciation. There was no salvage value. Silver decides to depreciate the equipment over four years, also using straight-line depreciation with no salvage value. Assume all other appropriate year-end and income tax journal entries have been made.

Calculate the amount of depreciation expenses to be considered in the eliminating journal entries required for consolidation purposes for the year ended December 31, year 2.

A. $10,000
B. $30,000
C. $20,000
D. $50,000

Answer 21

A. $10,000

Elimination entries are made for removing the effects of intercompany transactions.

There are, basically, three types of intercompany eliminations as follows:

1. Intercompany debt: Eliminates any loans made from one entity to another within the group, since these only result in offsetting notes payable and receivable, as well as offsetting interest expense and interest income. These issues most commonly arise when funds are being moved between entities by a centralized treasury department.
2. Intercompany revenue and expenses: Eliminates the sale of goods or services from one entity to another within the group. This means that the related revenues, cost of goods sold, and profits are all eliminated. The reason for these eliminations is that a company cannot recognize revenue from sales to itself; all sales must be to external entities. These issues most commonly arise when a company is vertically integrated.
3. Intercompany stock ownership: Eliminates the ownership interest of the parent company in its subsidiaries

The original cost of equipment for Peterson = $100,000. Accumulated depreciation as of January 1, year 2 = $20,000 [($100,000/5)x1]. Hence the value of the equipment in the books of Peterson as on January 1, Year 2 = Cost – accumulated depreciation = $100,000 – $20,000 = $80,000

Cost of the equipment in the books of Silver on purchase of the asset = $120,000. Silver has decided to depreciate the equipment over four years, also using straight-line depreciation with no salvage value.

Depreciation expenses accounted in the books of Silver for Year 2 = $120,000/4 = 30,000

Value of the asset for consolidation purposes = $80,000 to be depreciated over 4 years. Hence depreciation required for year 2 = $80,000/4 = $20,000

Excess depreciation provided in the books of Silver, to be considered for elimination purpose = $30,000 – $20,000 = $10,000

Question 22

FAR1D10022
When calculating diluted EPS, how should stock options be treated?
A. They are ignored as they do not impact the number of shares outstanding.
B. They are considered only if they are in-the-money.
C. They are always included in the calculation regardless of their exercise price.
D. They are subtracted from the net income before calculating EPS.

Answer 22

B. They are considered only if they are in-the-money.

In diluted EPS calculations, only in-the-money stock options (where the exercise price is below the market price) are considered. They potentially increase the number of shares outstanding, which can dilute EPS. A is incorrect because options can impact diluted EPS. C is incorrect as out-of-the-money options (where the exercise price is above the market price) do not impact the calculation. D is incorrect because stock options are not subtracted from net income but are used to adjust the share count.

Question 23

FAR2J002nsim
Kolby Inc entered into an agreement with Kory Inc to sell Kory a product for $100,000. Kory paid the $100,000 in advance to Kolby. The product costs Kolby $70,000 to produce.
On the day that Kolby receives the upfront payment from Kory, account will Kolby credit?
A. Cash
B. Contract liability
C. Accounts payable
D. Revenue

Answer 23

B. Contract liability

The entry would be a debit to cash for $100,000 and a credit to “contract liability” or “unearned revenue” for $100,000.

Question 24

FAR1A40021
What is the correct approach to rectify an overstatement of income in the previous year’s statement of changes in equity?
A) Increase the current year’s net income.
B) Decrease the current year’s retained earnings.
C) Adjust the previous year’s retained earnings balance.
D) Increase the current year’s total liabilities.

Answer 24

C) Adjust the previous year’s retained earnings balance.

To rectify an overstatement of income from the previous year, the opening balance of retained earnings in the current year’s statement should be adjusted. It does not involve increasing the current year’s net income (Option A) or increasing total liabilities (Option D). Decreasing the current year’s retained earnings (Option B) is a part of the effect, but the specific action is adjusting the opening balance from the previous year.

Question 25

Cash

Answer 25

includes physical currency, bank account balances, and undeposited checks

Question 26

Cash Equivalents

Answer 26

are short-term, highly liquid investments that are readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value due to changes in interest rates.
Examples include:
● Treasury bills
● Money market funds
● Commercial paper
● Short-term government bonds (typically with a maturity of 3 months or less from date of purchase)

Question 27

Reconciling the cash balance per the bank statement to the general ledger involves ensuring

Answer 27

that the balance shown in the company’s general ledger (the book balance) matches the balance shown on the bank statement (the bank balance). Discrepancies can arise due to timing differences in recording transactions and potential errors

Question 28

Steps to Reconcile Cash Balance

Answer 28

● Start with the Ending Balances:
○ Obtain the ending balance from the bank statement and ending balance from the company’s general ledger.
● Adjust the Bank Statement Balance:
○ Add Deposits in Transit: Deposits made and recorded by the company but not yet reflected on the bank statement.
○ Subtract Outstanding Checks: Checks issued by the company not yet cleared and deducted from the bank statement.
● Adjust the General Ledger Balance:
○ Add Bank Credits: Items credited by the bank like interest earned, notes receivable collected by the bank, etc.
○ Subtract Bank Debits: Bank charges, automatic payments, NSF (non-sufficient funds) checks, etc.
○ Correct Errors: Adjust for any errors in the company’s books.
● Compare Adjusted Balances:
○ After adjustments, the adjusted bank statement balance should equal the adjusted book balance.

Question 29

cash balance

Answer 29

ending bank statement balance + deposit in transit - outstanding checks

ending general ledger balance + bank credits (interest earned, notes receivable collected by bank) - bank debits (bank charges, automatic payment, NSF checks)

Question 30

FAR1F10037
To assess the percentage of a company’s assets financed by debt, which ratio would you use?
A. Debt-to-Equity Ratio
B. Total Debt Ratio
C. Times Interest Earned
D. Current Ratio

Answer 30

B. Total Debt Ratio

The Total Debt Ratio is used to assess the percentage of a company’s assets that are financed by debt. It provides insight into the company’s leverage. The Debt-to-Equity Ratio (A) compares debt to equity, Times Interest Earned (C) focuses on interest coverage, and the Current Ratio (D) measures short-term liquidity.

Question 31

FAR2E015nsim

Adell Corp. is a manufacturer of paper products with a December 31 year end.

For the transaction below, provide the correct classification, value as on December 31, year 1 and how should it be reported in the company’s balance sheet.

On October 31, year 1, the company purchased 1,000 shares of ABC common stock at $50 per share. Adell does not have significant influence over the ABC. The fair value of the securities at December 31, year 1 was $75 per share. Management will hold these securities until such time as proceeds from the sale are needed for operations, which is not expected to be in the near future.

A. Carried at fair value as a non-current asset.
B. Held-to-maturity security
C. Carried at fair value as a current asset.
D. None of the above

Answer 31

A. Carried at fair value as a non-current asset.

Equity securities held as investments are carried at fair value, unless 1) the investment is carried using the equity method, 2) the equity securities will be consolidated and therefore eliminated, or 3) the fair value can not be readily determined (if #3 is the case, then the investment is carried at cost and adjusted for any impairment).

Since the sale of the securities is not expected in the near future, it is classified as a non-current asset.

Debt securities held as investments can be classified as trading, available-for-sale (AFS), or held-to-maturity (HTM).

Question 32

FAR2G10013
When a company announces a severance package that employees can accept within 30 days, when should the related liability be recognized?
A) Immediately upon announcement.
B) After the 30-day period ends.
C) When each employee accepts the package.
D) At the time of actual payment to employees.

Answer 32

B) After the 30-day period ends.

The liability for a severance package that requires employee acceptance should be recognized after the acceptance period ends and the number of employees accepting the package is known.

Question 33

FAR1F10036
In the context of solvency ratios, what is the significance of a high Debt-to-Equity Ratio?
A. It indicates a strong liquidity position.
B. It suggests heavy reliance on equity financing.
C. It implies a greater risk due to high leverage.
D. It reflects high operational efficiency.

Answer 33

C. It implies a greater risk due to high leverage.

A high Debt-to-Equity Ratio implies that a company has a greater risk due to high leverage. It indicates that the company is more heavily financed through debt than equity. It does not indicate strong liquidity (A), reliance on equity financing (B), or operational efficiency (D).