area II C. Inventory

Question 1

FAR2E10004
Which of the following best describes when an investment in a real estate property should be reported at fair value?
A) When the property is intended for immediate resale.
B) When the property is used for manufacturing processes.
C) When the property is leased out under an operating lease.
D) When the property is held for historical purposes.

Answer 1

A) When the property is intended for immediate resale.

Real estate investments intended for immediate resale are often reported at fair value, as this reflects their current market value in the context of their intended use.

B) Property used for manufacturing is considered a fixed asset and valued at cost less depreciation. C) Properties under operating leases are usually valued at cost less depreciation unless they are part of an investment property portfolio that is measured at fair value. D) Properties held for historical purposes are not typically reported at fair value.

Question 2

FAR1C004n
What is the main purpose of the statement of activities for a not-for-profit organization?
A. To report the change in cash for the period
B. To report on functional expenses for the period
C. To report the change in net assets for the period
D. To report on the nature of expenses for the period

Answer 2

C. To report the change in net assets for the period

The main purpose of the statement of activities for an NFP is to show the changes in net assets for the period. It does this by showing the operating revenues and gains, less the operating expenses, which results in the “change in net assets”.

Question 3

FAR2E10029
A trading security’s fair value increased from $100,000 to $105,000. How should this be reflected in the financial statements?
A) As an increase in equity.
B) As an increase in liabilities.
C) As an increase in assets.
D) As an increase in expenses.

Answer 3

C) As an increase in assets.

The increase in fair value of a trading security is reflected as an increase in assets (and income) in the financial statements.

Question 4

FAR2A10022
What is the first step in investigating unreconciled cash balances?
A. Adjusting the general ledger balance
B. Comparing the general ledger balance to the bank statement balance
C. Identifying outstanding checks
D. Calculating interest earned

Answer 4

B. Comparing the general ledger balance to the bank statement balance

The first step is to compare the general ledger balance to the bank statement balance to identify any discrepancies. Adjusting the general ledger balance (A) comes later, after identifying the reasons for the differences. Identifying outstanding checks (C) and calculating interest earned (D) are part of the reconciliation process but are not the initial steps.

Question 5

FAR1B006aicpa
Which of the following resources increases the net assets with donor restrictions of a nongovernmental, not-for-profit voluntary health and welfare organization?
A. Refundable advances for purchasing playground equipment.
B. Donor contributions to fund a resident camp program.
C. Membership fees to fund general operations.
D. Participants’ deposits for an entity-sponsored trip.

Answer 5

B. Donor contributions to fund a resident camp program.
Donor contributions can be restricted by either 1) how the funds are to be used, or 2) time: when the funds can be used. Contributions to be used for a camp would be classified as contributions with donor restrictions, which increases the net assets with donor restrictions.

The other responses would all qualify as contributions without donor restriction.

Question 6

FAR1B20002
In the statement of activities, how are expenses typically classified?
A) By nature
B) By function
C) By duration
D) By funding source

Answer 6

B) By function

Expenses in the statement of activities for not-for-profit entities are typically classified by function, such as program services, management, and fundraising. This helps in understanding how resources are used for different activities.

Question 7

inventory valuation under GAAP involves

Answer 7

the “lower of cost or market” (LCM) rule, which serves as a conservative measure to
ensure that inventory is not overstated on the balance sheet. This rule is applied after determining the cost of inventory using one of the costing methods (FIFO, LIFO, or Average Cost)

Question 8

Lower of Cost or Market Rule

Answer 8

● Cost: As calculated using FIFO, LIFO, or Average Cost.
● Market Value: The current replacement cost of the inventory, but not exceeding the net realizable value (NRV) or below the NRV minus a normal profit margin

If Cost > Market Value: Write down the inventory to its market value.
If Cost ≤ Market Value: No adjustment is needed

The write-down amount is $100 ($1,300 FIFO cost - $1,200 market value).
This entry reflects a loss in the income statement and reduces the inventory value on the balance sheet

Question 9

The LCM rule is important for

Answer 9

ensuring that inventory is reported at a value that is not higher than what it can realistically bring in. This aligns with the conservatism principle in accounting, which states that one should not overstate assets or income. Applying LCM after choosing a costing method ensures that inventory valuation reflects current market conditions and reduces the risk of overstating assets and earnings

Question 10

The concepts of “Lower of Cost and Net Realizable Value” and “Lower of Cost or Market”

Answer 10

are conservative approaches in accounting for inventory valuation. Both methods ensure that inventory is not reported at an amount greater than the benefits it can provide

Question 11

Lower of Cost and Net Realizable Value (LCNRV)

Answer 11

● Used In: This approach is primarily used in International Financial Reporting Standards (IFRS).
● Cost: The amount paid to purchase or produce the inventory.
● Net Realizable Value (NRV): The estimated selling price in the ordinary course of business minus estimated costs of completion, disposal, and transportation.
● Approach: Compare the cost of each inventory item (or group of items) to its NRV. If the cost exceeds the NRV, write down the inventory to its NRV.

Example Calculation
● Cost of Inventory: $1,000
● Estimated Selling Price: $1,200
● Estimated Completion and Disposal Costs: $250
● NRV: $1,200 - $250 = $950
● Carrying Amount: Lower of $1,000 (Cost) and $950 (NRV) = $950

Question 12

Lower of Cost or Market (LCM)

Answer 12

● Used In: This method is used under GAAP in the United States.
● Cost: As determined by FIFO, LIFO, or Average Cost methods.
● Market Value: Typically the replacement cost of the inventory, but not higher than the net realizable value (NRV) or lower than NRV minus a normal profit margin.
● Approach: Compare the cost of the inventory to its market value. If the cost exceeds the market value, write down the
inventory to the market value.

Example Calculation
● Cost of Inventory (using FIFO): $1,000
● Replacement Cost: $900
● Estimated Selling Price: $1,200
● Estimated Completion and Disposal Costs: $250
● NRV: $1,200 - $250 = $950
● Market Value for LCM: Lower of Replacement Cost ($900) and NRV ($950) = $900
● Carrying Amount: Lower of $1,000 (Cost) and $900 (Market Value) = $900

Question 13

FAR1C20009
Where would a government report resources provided by federal grants designated for a specific welfare program?
A. Enterprise Fund
B. Permanent Fund
C. Special Revenue Fund
D. General Fund

Answer 13

C. Special Revenue Fund

Special Revenue Funds are used to account for and report proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes. Federal grants for a welfare program fit this description.

Question 14

FAR2F10010
What is the impact of amortizing an intangible asset on a company’s financial statements?
A. It increases net income in the income statement.
B. It decreases the carrying value of the asset on the balance sheet.
C. It increases the asset’s residual value.
D. It has no impact on the income statement or balance sheet.

Answer 14

B. It decreases the carrying value of the asset on the balance sheet.

Amortizing an intangible asset decreases its carrying value on the balance sheet over time, as the cost of the asset is allocated over its useful life. This process reflects the consumption of the asset’s economic benefits.

Question 15

FAR2A10017
If a company records a deposit of $1,000 in its general ledger but the bank records it as $100 due to a clerical error, how should this be treated in the bank reconciliation?
A. Deduct $900 from the bank statement balance
B. Add $900 to the bank statement balance
C. Deduct $900 from the general ledger balance
D. No adjustment is needed

Answer 15

B. Add $900 to the bank statement balance

In this case, the bank has underreported the deposit by $900. To reconcile, add $900 to the bank statement balance to correct the error.
Deducting $900 from either balance (options A and C) would further exacerbate the discrepancy. No adjustment (D) is incorrect as the bank and general ledger balances do not match.

Question 16

FAR2B10026
If a company factors its receivables with recourse, how would this be reflected in a rollforward of trade receivables?
A) As an addition to the receivables balance
B) As a deduction from the receivables balance
C) As a change in the allowance for doubtful accounts
D) No adjustment is required for factoring

Answer 16

B) As a deduction from the receivables balance

Factoring receivables, even with recourse, results in their removal from the balance sheet, and thus would be treated as a deduction in a rollforward analysis.

Question 17

FAR3D10024
What is a deferred tax liability?
A. A tax payment that is due in the current year.
B. A tax obligation that is expected to be paid in future years due to temporary differences.
C. A reduction in future tax rates.
D. An overpayment of taxes in the current year.

Answer 17

B. A tax obligation that is expected to be paid in future years due to temporary differences.

A deferred tax liability arises when there are temporary differences that will result in taxable amounts in future years, such as accelerated depreciation for tax purposes.

Question 18

FAR2C012n

Dave Inc. determined the following values for its inventory at year-end:

Historical cost: $85,000
Current replacement cost: $70,000
Net realizable value (NRV): $80,000
NRV - profit margin: $75,000
Fair value: $$82,000
Under the lower-of-cost or market rule, what should Dave report as its inventory value on the balance sheet?

A. $70,000
B. $75,000
C. $82,000
D. $85,000

Answer 18

B. $75,000

Cost = $85,000
“Market” = is a range starting with NRV of $80,000 and going down to NRV – profit margin of $75,000. Since replacement cost is less than the lower end of the “market” range, the lowest amount in the range is used: $75,000. Since market is lower than cost, Dave will use $75,000 as the inventory amount.

Question 19

FAR3F10025
What journal entry should a lessee make for the recognition of interest expense on a lease liability?
A. Debit Lease Expense, Credit Cash
B. Debit Interest Expense, Credit Lease Liability
C. Debit Lease Liability, Credit Interest Expense
D. Debit Cash, Credit Interest Expense

Answer 19

B. Debit Interest Expense, Credit Lease Liability

Interest expense increases the lease liability and is recognized as an expense. Therefore, Interest Expense is debited, and Lease Liability is credited.

Question 20

FAR2E009n
Sansa Inc. purchased 20% of Theon Corp’s common stock for $150,000. At the time of the purchase, Theon’s stockholder’s equity was $400,000 and the fair value of its identifiable net assets was $600,000. Under the equity method, what amount of goodwill should Sansa attribute to the acquisition?
A. $25,000
B. $30,000
C. $40,000
D. $120,000

Answer 20

B. $30,000

The first step is to calculate the difference between the purchase price and the actual portion of net assets acquired. Sansa paid $150,000 for 20%, and the fair value of Theon’s assets was $600,000. 20% of $600,000 is $120,000. So Sansa paid $30,000 over the fair value. Sansa would attribute $30,000 to goodwill in this transaction.

Question 21

FAR2B10030
If a company identifies an error in its prior year’s trade receivables balance after conducting a rollforward analysis, what is the appropriate next step?
A) Restate the opening balance of the current year’s trade receivables.
B) Adjust the closing balance of the current year’s trade receivables.
C) Record the error as a bad debt expense in the current year.
D) No adjustment is required as the error pertains to a prior period.

Answer 21

A) Restate the opening balance of the current year’s trade receivables.

When an error in a prior year’s balance is identified, the opening balance of the current year needs to be restated to reflect the corrected amount. Adjusting the current year’s closing balance or recording it as a bad debt expense would not accurately reflect the nature of the error.

Question 22

FAR3C10002
In the five-step model, what does identifying performance obligations in the contract entail?
A. Determining the activities that constitute a single performance obligation
B. Identifying the methods of payment from the customer
C. Calculating the total transaction price of the contract
D. Recognizing revenue for each performance obligation

Answer 22

A. Determining the activities that constitute a single performance obligation

Identifying performance obligations involves determining the activities or goods/services promised in the contract that are distinct. This is the second step in the model. B is incorrect as methods of payment relate to the transaction price, not performance obligations. C is incorrect because it is about determining the transaction price, not about identifying performance obligations. D is incorrect as recognizing revenue is a separate, later step in the process.

Question 23

FAR1A50020
If a company erroneously excludes a decrease in accounts payable in the indirect method cash flow statement, what is the correct adjustment?
A. Increase operating activities.
B. Decrease operating activities.
C. Decrease investing activities.
D. Increase financing activities.

Answer 23

B. Decrease operating activities.

A decrease in accounts payable implies less cash is retained within the company as liabilities are paid off. This should be reflected as a deduction in the operating activities (decreasing cash flows) to correct the omission.
A is incorrect because a decrease in accounts payable represents a use of cash, thus reducing operating activities.
C is incorrect as changes in accounts payable relate to operating, not investing, activities.
D is incorrect because accounts payable changes are not part of financing activities.

Question 24

FAR1A70017
What is the main purpose of comparing financial statement notes on leases with the supporting documentation?
A. To confirm the classification between operating and finance leases
B. To evaluate the company’s investment in property
C. To assess the impact on the company’s debt-to-equity ratio
D. To ensure accurate dividend distribution

Answer 24

A. To confirm the classification between operating and finance leases

The key reason for this comparison is to confirm whether leases are correctly classified as either operating or finance leases, which has significant implications for how they are reported in financial statements.

Question 25

FAR1F10022
Which formula correctly calculates the Quick Ratio?
A. (Cash + Marketable Securities + Receivables) / Current Liabilities
B. Current Assets / Current Liabilities
C. Current Liabilities / Quick Assets
D. Inventory / Current Liabilities

Answer 25

A. (Cash + Marketable Securities + Receivables) / Current Liabilities

The Quick Ratio, also known as the acid-test ratio, is calculated using the formula: (Cash + Marketable Securities + Receivables) / Current Liabilities. It measures a company’s ability to meet its short-term obligations with its most liquid assets. B is the Current Ratio, while C and D are not standard formulas for liquidity ratios.

Question 26

FAR2H007nsim

On January 1, year 1, Stopaz Co. Issued 9% five-year bonds with a face value of $100,000. The bonds pay interest semiannually on June 30 and December 31 of each year. The bonds were issued when the market interest rate was 8% and the bond proceeds were $104,100.

Stopaz uses the effective interest method for amortizing bond premiums/discounts and maintains separate general ledger accounts for each.

Calculate the bond interest expense accrual for the six months ended June 30, year 1.

A. $4,164
B. $4,500
C. $4,100
D. $9,000

Answer 26

A. $4,164

The coupon rate on the bonds were 9% when the market rate is 8%. Investors are willing to pay a premium for bonds that yield higher than the market. Also, The total proceeds of the bond is $104,100 which is greater than the face value of the bond $100,000. Hence these help us conclude that the bonds were issued at a premium of $4,100 ($104,100 – $100,000)
The premium on issue of bonds has to be separately recognized and should be amortized over the life of the bond. Interest is calculated as 100,000 x 9% = $9,000 for 1 full year. Since the interests are paid semi-annually, we should calculate the interest only for 6 months. Therefore, $9,000 x 6/12 = $4,500.
The yield to maturity expected by the investors is 8% per annum. Hence to calculate the interest on semi-annual basis on these bonds, we take the carrying amount of the bonds ($104,100) and multiply it by half the annual yield to maturity (8%/2=4%) to get $4,164 in interest expense. The actual cash interest expense remains $4,500. The premium is amortized as a reduction to interest expense. Thus, interest expense is recorded as $4,164 for the first period, while $336 is recorded as premium amortization.
To calculate interest expense for the next semiannual payment, we subtract the amount of amortization from the bond’s carrying value and multiply the new carrying value by half the yield to maturity.

Question 27

Which of the following items would be classified as a research and development cost?

A. Periodic design changes to an existing product.
B. Engineering follow-up in an early phase of commercial production.
C. Testing in search of product or process alternatives.
D. Legal work in connection with a patent application.

Answer 27

C. Testing in search of product or process alternatives.

Testing in search of product alternatives would be an R&D cost. The other responses are specific examples of non-R&D costs.
The idea behind R&D is any research or development moving towards establishing a product, but once commercial production has started, or anything to do with an existing product, it’s no longer R&D. Also, legal work in connection with a patent application is not R&D.

Question 28

FAR2F10001
Which of the following best describes the criteria for recognizing an intangible asset on the statement of financial position?
A. An asset that can be sold, transferred, or licensed.
B. An identifiable non-monetary asset without physical substance.
C. An asset that has a physical presence and provides future economic benefits.
D. An expense that will generate economic benefits only in the current period.

Answer 28

B. An identifiable non-monetary asset without physical substance.

An intangible asset is defined as an identifiable non-monetary asset without physical substance. This means it must be distinguishable (either separable or arising from contractual or other legal rights) and lack physical form, yet still provide future economic benefits.

Question 29

FAR2E10011
A company purchased shares in a publicly traded company for $10,000. At the end of the reporting period, the fair value of the shares is $12,000. What is the carrying amount of this investment?
A) $10,000
B) $12,000
C) $2,000
D) $22,000

Answer 29

B) $12,000

The carrying amount of investments measured at fair value is the fair value at the reporting date. Therefore, it’s $12,000

Question 30

FAR3G10025
A lawsuit pending at the balance sheet date is resolved after the balance sheet date, resulting in a settlement significantly higher than the provision previously recognized. How should this be treated in the financial statements?
A) Increase the provision to match the settlement amount.
B) Recognize the excess settlement amount as a contingent liability.
C) Disclose the settlement in the notes without adjusting the provision.
D) Recognize an extraordinary item for the additional settlement amount.

Answer 30

A) Increase the provision to match the settlement amount.

The resolution of a lawsuit with a settlement higher than the provision is a Type I subsequent event, as it provides additional evidence about a condition that existed at the balance sheet date. The company should adjust the provision in the financial statements to match the actual settlement amount.

Question 31

FAR2E20001
Which of the following investments is most commonly reported at amortized cost on financial statements?
A) Common stock
B) Corporate bonds held to maturity
C) Real estate properties
D) Commodities like gold and silver

Answer 31

B) Corporate bonds held to maturity

Corporate bonds held to maturity are typically reported at amortized cost because they represent debt instruments with fixed or determinable payments and a fixed maturity date. Amortized cost accounting is appropriate here because it reflects the gradual reduction of the bond’s principal over its life.

Question 32

FAR3C10047
What happens to capitalized contract costs if a contract is terminated early?
A. They are amortized over the original contract term
B. They are expensed immediately
C. They remain on the balance sheet until fully amortized
D. They are reclassified as a long-term asset

Answer 32

B. They are expensed immediately

If a contract is terminated early, the remaining balance of capitalized contract costs is expensed immediately.

Question 33

FAR3A10015
What is the impact on financial statements when a company changes its inventory valuation method from FIFO to LIFO?
A) It leads to a prospective change in inventory valuation.
B) Only the current period’s inventory valuation is affected.
C) Retrospective restatement of all financial statements presented.
D) No impact, as changes in inventory methods are not allowed.

Answer 33

C) Retrospective restatement of all financial statements presented.

Changing from FIFO to LIFO requires retrospective restatement of all financial statements presented to maintain consistency and comparability.

Question 34

FAR1F10006
When analyzing a company’s efficiency in managing its inventory, which ratio is most pertinent?
A. Inventory Turnover
B. Quick Ratio
C. Debt-to-Equity Ratio
D. Price-to-Earnings Ratio

Answer 34

A. Inventory Turnover

Explanation: Inventory Turnover (A) is the most pertinent ratio for analyzing how efficiently a company manages its inventory, as it indicates how often inventory is sold and replaced over a period. The Quick Ratio (B) relates to short-term liquidity, Debt-to-Equity Ratio (C) to long-term solvency, and Price-to-Earnings Ratio (D) to stock valuation.

Question 35

FAR2A10021
When investigating unreconciled cash balances, which of the following items would typically require an adjustment to the general ledger?
A. Deposits in transit
B. Bank errors in favor of the company
C. Outstanding checks
D. Correctly recorded bank service fees

Answer 35

B. Bank errors in favor of the company

Bank errors in favor of the company (B) would require an adjustment to the general ledger since the company’s records would not initially reflect this unexpected increase in cash.
Deposits in transit (A) and outstanding checks (C) are timing differences and do not require general ledger adjustments as they are already correctly recorded by the company. Correctly recorded bank service fees (D) also do not require adjustments as they are already reflected in the general ledger.

Question 36

Wood Co.’s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated?

A. The current-year dividends and the dividends in arrears on the cumulative preferred stock should be added to the net loss, but the dividends on the noncumulative preferred stock should not be included in the calculation.
B. The dividends on the noncumulative preferred stock should be added to the net loss, but the current-year dividends and the dividends in arrears on the cumulative preferred stock should not be included in the calculation.
C. The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.
D. Neither the dividends on the noncumulative preferred stock nor the current-year dividends and the dividends in arrears on cumulative preferred stock should be included in the calculation.

Answer 36

C. The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.

Declared dividends on noncumulative preferred stock and the current-year dividends on the cumulative preferred stock would be included in the calculation, which would make the net loss greater when calculating basic EPS.

Dividends in arrears are NOT included because they were included in previous years’ calculations of EPS.

Question 37

FAR2C007n
On December 31 of year 1, Kim Co. adopted dollar value LIFO. All of Kim’s inventories are in a single pool and have a year-end value of $50,000. At the end of year 2, Kim’s inventory balance at current year prices is $100,000, with a price index of 1.25.
Under dollar-value LIFO, Kim’s inventory balance at the end of year 2 would be?
A. $77,500
B. $80,000
C. $82,500
D. $87,500

Answer 37

D. $87,500

The first step is to convert the year 2 balance back to base-year prices using the 1.25 index: $100,000 / 1.25 = $80,000.
That means the ending inventory of $100,000 consists of a base year layer of $50,000 (the year-1 ending balance), and an incremental layer of $30,000 ($80,000 - $50,000).
Then, the incremental layer needs to be adjusted to current-year prices, using the price index of 1.25: $30,000 x 1.25 = $37,500.
So the year-2 ending inventory using dollar-value LIFO is $50,000 + $37,500 = $87,500.

Question 38

FAR2D005n
Dallin Inc. replaced its old commercial mixer with a new mixer. The transaction included the following information:
Cost of the new mixer: $50,000
Carrying value of the old mixer: $3,000
Fair value of the old mixer: $1,000
Installation costs of the new mixer: $2,000
Delivery costs of the new mixer: $3,000
Dallin sold the old mixer for $2,000. What amount will Dallin record for the new mixer?
A. $47,000
B. $49,000
C. $52,000
D. $55,000

Answer 38

D. $55,000

The values of the old mixer are irrelevant in calculating the book value of the new mixer.
All costs to get the new mixer ready to use will be included in its cost: The $50,000 purchase price, the $2,000 installation and the $3,000 delivery for a total of $55,000.
As a sidenote Dallin would recognize a $1,000 loss on the sale of the old mixer.

Question 39

FAR2G10016
In a restructuring process, a company decides to relocate its headquarters. The relocation costs should be:
A) Recognized as a provision when the decision is officially made and announced.
B) Capitalized as part of the cost of the new headquarters.
C) Expensed as incurred during the relocation process.
D) Deferred and amortized over the life of the new headquarters.

Answer 39

C) Expensed as incurred during the relocation process.

Relocation costs are generally expensed as incurred and are not capitalized or treated as a provision.

Question 40

FAR3E10017
When valuing an asset using the market approach, what is a crucial factor to ensure accuracy?
A. The asset’s historical cost.
B. Availability of active market data for identical or similar assets.
C. The asset’s replacement cost.
D. The projected future income of the asset.

Answer 40

B. Availability of active market data for identical or similar assets.

For the market approach to be effective in fair value measurement, there needs to be active market data available for identical or similar assets. This data provides a basis for comparison and valuation.

Question 41

FAR2E003n
During year 1, Pete Inc. purchased 100 shares of Dragon Corp’s stock for $10 per share. By the end of year 1, Dragon’s stock price was $14 per share, and Dragon had paid a dividend of $2 per share. What amount will Pete report as income at the end of year 1 related to its Dragon stock investment?
A. $200
B. $400
C. $450
D. $600

Answer 41

D. $600

The increase in stock price was $4 per share: $4 x 100 shares = $400.

Pete will also include the dividend income of $200, for a total of $600 income from the Dragon investment.

Question 42

FAR1A50027
How should an error be corrected if cash expenses for repair and maintenance are classified under capital expenditures in the cash flow statement?
A. Increase cash flow from operating activities and decrease from investing activities.
B. Increase cash flow from investing activities and decrease from operating activities.
C. Adjust the accumulated depreciation account accordingly.
D. Reclassify as a financing activity.

Answer 42

B. Increase cash flow from investing activities and decrease from operating activities.

If repair and maintenance expenses were incorrectly classified under capital expenditures, they wrongly reduced cash flows from investing activities. Since repair and maintenance are actually operating expenses, they should reduce the cash flows from operating activities.

To correct this error, you would increase the cash flow from investing activities because you’re removing an incorrectly classified outflow (the repair and maintenance expenses should not have been deducted there). Simultaneously, you would decrease the cash flow from operating activities to reflect the expense correctly.

Question 43

FAR2E30005
Which statement is true about the equity method of accounting?
A. It’s used when the investor has control over the investee.
B. It recognizes dividends received as revenue.
C. It requires adjusting the carrying amount of the investment for the investor’s share of the investee’s profits and losses.
D. It is mandatory for investments where the investor holds less than 20% of the voting stock.

Answer 43

C. It requires adjusting the carrying amount of the investment for the investor’s share of the investee’s profits and losses.

Under the equity method, the carrying amount of the investment is adjusted for the investor’s share of the investee’s profits and losses. Control over the investee (A) implies consolidation, not the equity method. Dividends are not recognized as revenue (B) but instead reduce the carrying value of the investment. Holding less than 20% of voting stock (D) typically does not justify the equity method unless significant influence is proven.

Question 44

FAR1B30029
If the acquisition of a new building was financed through a new loan but only the loan was recorded in the cash flow statement, what adjustment is needed?
A. Add the building acquisition to investing activities.
B. Add the building acquisition to financing activities.
C. Decrease financing activities.
D. No adjustment is necessary since the loan covers it.

Answer 44

A. Add the building acquisition to investing activities.

The acquisition of a building is an investing activity and should be recorded as such. The correction involves adding this transaction to investing activities.

Question 45

FAR2E10001
Which of the following investments is most likely to be reported at fair value on a company’s balance sheet?
A) A long-term investment in a subsidiary where the investor has significant influence.
B) A building used for the company’s operations.
C) Shares of a publicly-traded company held for trading purposes.
D) Equipment used in the production process.

Answer 45

C) Shares of a publicly-traded company held for trading purposes.

Investments held for trading purposes are typically reported at fair value, as they are frequently bought and sold and their fair value can be reliably determined.
A) A long-term investment in a subsidiary where the investor has significant influence is usually accounted for using the equity method. B) A building used for operations is considered a fixed asset and is usually reported at historical cost less depreciation. D) Equipment used in production is also a fixed asset and reported at historical cost less depreciation and impairment.

Question 46

FAR2H508
On February 1, Year 3, Bara Co. issued $1,000,000 10% bonds at 98 plus accrued interest. The bonds are dated November 1 Year 2, and mature on November 1, Year 6. Interest is payable annually on November 1. What is the carrying amount of the bonds payable on February 1, Year 3?

A. $1,005,000
B. $1,000,000
C. $980,000
D. $955,000

Answer 46

C. $980,000

The carrying amount of the bonds payable is the face amount plus any premium or minus any discount. In this case, the question is asking what the carrying amount is on the day they were issued, so there has been no amortization of the discount.
When an investor purchases a bond with accrued interest, it means they will pay the bond price plus the accrued interest, but, the accrued interest is either credited to interest payable or interest expense and not bonds payable, so the carrying amount of the bonds payable on February 1, Year 3 is just the $980,000: $1,000,000 x 98%