area II F. intangible assets

Question 1

FAR3F10014
How does the present value of lease payments affect lease classification for a lessee?
A. If it’s less than 40% of the asset’s fair value, it’s a finance lease.
B. If it’s equal to or more than substantially all (usually 90% or more) of the fair value of the asset, it’s a finance lease.
C. If it’s equal to 50% of the asset’s fair value, it’s an operating lease.
D. It has no impact on lease classification.

Answer 1

B. If it’s equal to or more than substantially all (usually 90% or more) of the fair value of the asset, it’s a finance lease.

The lease classification as a finance lease is indicated if the present value of the lease payments equals or exceeds substantially all (typically 90% or more) of the fair value of the leased asset. This suggests the lessee effectively gains control over the asset.

Question 2

FAR1F10056
A negative Direct Material Price Variance indicates:
A. Materials were more expensive than budgeted.
B. Materials were less expensive than budgeted.
C. Less material was used than budgeted.
D. More material was used than budgeted.

Answer 2

A. Materials were more expensive than budgeted.

A negative Direct Material Price Variance occurs when the actual price of materials is higher than the budgeted price, resulting in additional costs. Option B would result in a positive variance, while C and D relate to quantity, not price.

Question 3

FAR3C10048
How should a loss be recognized if the expected cost to fulfill a contract exceeds the expected revenue?
A. Debit Loss on Contract; Credit Contract Costs
B. Debit Contract Costs; Credit Loss on Contract
C. Debit Loss on Contract; Credit Revenue
D. Debit Expense; Credit Contract Costs

Answer 3

A. Debit Loss on Contract; Credit Contract Costs

A loss is recognized when expected contract costs exceed expected revenue by debiting Loss on Contract and crediting Contract Costs.

Question 4

FAR2B008n

Drogon Corp factored $100,000 of its receivables without recourse to Viserion. Viserion retained 10% of the receivables as an allowance for returns and charged an 8% commission on the gross amount. What amount did Drogon receive from the arrangement?
A. $82,000
B. $90,000
C. $100,000
D. $102,000

Answer 4

A. $82,000

Drogon received $82,000: $100,000 – the $10,000 allowance – the $8,000 commission.
Note that the commission was on the gross amount of $100,000, not on the $90,000 after the allowance.

Question 5

FAR2C10031

If the inventory subledger shows a balance of $50,000 and the general ledger shows $48,000 for the same period, what could be a likely reason for this discrepancy?
A. Overstated sales in the general ledger
B. Unrecorded inventory purchases in the general ledger
C. Understated cost of goods sold in the subledger
D. Overstated inventory returns in the subledger

Answer 5

B. Unrecorded inventory purchases in the general ledger

A higher balance in the subledger suggests that certain transactions, such as inventory purchases, may not have been recorded in the general ledger.

Question 6

FAR2E30003
Under the equity method, how is an investment initially recorded?
A. At fair value.
B. At the investee’s book value.
C. At cost.
D. At market value on the reporting date.

Answer 6

C. At cost.
An investment is initially recorded at cost under the equity method. Fair value (A) and market value on the reporting date (D) are not used for initial recording under this method. The investee’s book value (B) is also not relevant for the investor’s initial recording of the investment.

Question 7

FAR2B005nsim
At the end of the year, Cain Co. had the following balances:

Accounts receivable: $100,000
Allowance for uncollectible accounts: $10,000 debit balance
Cain uses 5% of accounts receivable to estimate the allowance for uncollectible accounts. What is the entry Cain will make to adjust the allowance account?

A. $5,000 debit to allowance for doubtful accounts and a $5,000 credit to bad debt expense
B. $10,000 debit to bad debt expense and a $10,000 credit to allowance for doubtful accounts
C. $15,000 debit to bad debt expense and $15,000 credit to allowance for doubtful accounts
D. $15,000 debit to allowance for doubtful accounts and a $15,000 credit to bad debt expense

Answer 7

C. $15,000 debit to bad debt expense and $15,000 credit to allowance for doubtful accounts

If Cain uses 5% of AR, then the allowance balance needs to be $5,000, and remember that the allowance for doubtful accounts should be a credit balance. So the adjustment amount to get to a $5,000 credit balance from a $10,000 debit balance will be $15,000.

Question 8

FAR3F10031
What happens to the lease cost recognized in the income statement if the discount rate decreases?
A. It increases due to higher interest expense.
B. It decreases due to lower interest expense.
C. It remains unchanged.
D. It varies based on the lease payment amount.

Answer 8

A. It increases due to higher interest expense.

A decrease in the discount rate increases the present value of lease payments, leading to a higher lease liability and subsequently higher interest expense, increasing the total lease cost recognized in the income statement.

Question 9

FAR1E10006
For an organization following a special purpose framework for financial reporting, what would be an appropriate title for a statement that displays changes in equity?

A) Statement of Changes in Equity - Special Purpose Framework
B) Statement of Owner’s Equity
C) Equity Movement Statement
D) Report on Changes in Equity

Answer 9

A) Statement of Changes in Equity - Special Purpose Framework

This title clearly communicates that the statement is prepared under a special purpose framework and relates to changes in equity. The other titles are either too generic or not specific to a special purpose framework.

Question 10

FAR1D10018
What is the main content of Item 1 in Part I of Form 10-K?
A. Business Description
B. Risk Factors
C. Legal Proceedings
D. Properties

Answer 10

A. Business Description

Item 1 in Part I of Form 10-K is dedicated to providing a Business Description of the company. This section gives a detailed overview of the company’s main operations, products, services, and business strategy.

Question 11

At the beginning of the year, Cann Co. started construction on a new $2 million addition to its plant. Total construction expenditures made during the year were $200,000 on January 1, $600,000 on July 1, and $1,200,000 on December 1. On January 1, the company borrowed $500,000 for the construction at 10%. The only other outstanding debt the company had was a 8% interest rate, long-term mortgage of $1,000,000, which had been outstanding the entire year. What amount of interest should Cann capitalize as part of the cost of the plant addition?

A. $68,000
B. $60,000
C. $58,000
D. $130,000

Answer 11

C. $58,000

For these problems, the first step is to calculate the average accumulated expenditures(AAE), which means the weighted average of the expenditures so that you can calculate avoidable interest. Just multiply each “batch” of expenditures by the portion of the year to get the AAE:

$200,000 expenditure x 12/12 of the year = $200,000 AAE

$600,000 expenditure x 6/12 of the year = $300,000 AAE

$1,200,000 expenditure x 1/12 of the year = $100,000 AAE

Then you calculate the avoidable interest (interest that the firm would avoid by not doing the project). So with $600,000 AAE, the $500,000 loan was specifically for this construction, so $500,000 x 10% = $50,000. Then you have $100,000 of AAE remaining, and on this the only other interest being paid was on the long-term mortgage at 8% interest, so 100,000 x 8% = $8,000. So to reiterate, once you have the AAE, you find the avoidable interest by first using the interest rate of any specific borrowing for the project, and with any amount of AAE left over you use the interest rate from other borrowings.
The amount of interest to be capitalized is the LESSER of the avoidable interest or the actual interest. The avoidable interest is $58,000, and the actual interest would have been $50,000 + $80,000 = $130,000, so the interest Cann will capitalize will be the $58,000 of avoidable interest.

Question 12

FAR2A10007
How should a company report a bank overdraft in its financial statements?
A. As a deduction from cash
B. As a separate line item under liabilities
C. By offsetting it against cash in another account
D. As an addition to cash equivalents

Answer 12

C. By offsetting it against cash in another account

A bank overdraft, if the company has the right to offset it against another cash account, is typically reported by offsetting against cash in another account (C). It is not reported as a deduction from cash (A) or as a separate line item under liabilities (B) unless there is no right of offset. It should not be added to cash equivalents (D) as it represents a liability.

Question 13

FAR2H10030
How does the amortization of a bond discount affect the bond’s carrying value and interest expense over time?
A. Increases carrying value, increases interest expense
B. Decreases carrying value, decreases interest expense
C. Increases carrying value, decreases interest expense
D. Decreases carrying value, increases interest expense

Answer 13

A. Increases carrying value, increases interest expense

The amortization of a bond discount increases the bond’s carrying value over time as the discount is gradually expensed. This also results in an increase in the interest expense reported each period.

Question 14

FAR2C10029
If the opening inventory is $30,000, purchases are $20,000, sales (at cost) are $15,000, and inventory is written down by $2,000, what is the closing inventory in a rollforward analysis?
A. $33,000
B. $35,000
C. $37,000
D. $32,000

Answer 14

A. $33,000

The closing inventory is calculated as:

Opening inventory + Purchases – Sales at cost – Write-downs

= $30,000 + $20,000 – $15,000 – $2,000

= $33,000

Question 15

FAR2C10012
If the market value of an inventory item is $300, the original cost is $350, and the net realizable value is $320, what is the carrying amount of the inventory using the LCM approach?
A. $300
B. $320
C. $350
D. $330

Answer 15

A. $300

Under the LCM approach, inventory is valued at the lower of cost or market value. Here, the cost is $350, and the market value is $300 (lower than the net realizable value of $320), so the carrying amount is $300.

Question 16

FAR1A60010
Why is the consolidation of a parent company and its subsidiary more complex when the subsidiary is located in a different country?
A. Due to the need for currency translation
B. Because of differing tax laws
C. Due to variations in market capitalization
D. Because of differing corporate governance standards

Answer 16

A. Due to the need for currency translation

The consolidation of a parent company and its foreign subsidiary is more complex due to the need for currency translation. This involves converting the subsidiary’s financial statements into the parent company’s reporting currency, which can be complicated by fluctuations in exchange rates.

Question 17

FAR3B10017
If a contingent liability becomes probable and can be estimated, what is the journal entry?
A. Debit Loss, Credit Contingent Liability.
B. Debit Expense, Credit Liability.
C. Debit Contingent Liability, Credit Cash.
D. No entry is required.

Answer 17

B. Debit Expense, Credit Liability.

When a contingent liability becomes probable and estimable, it should be recorded as a liability, with a corresponding expense.

Question 18

FAR1B005n
Heisenberg Corp had the following balances in its Dec 31st trial balance, before adjusting for income taxes:

Cash $200,000
Accounts Receivable (net) $500,000
Prepaid taxes $200,000
During the year, Heisenberg made estimated tax payments of $200,000 that were paid and debited to prepaid taxes. There were no differences between financial statement income and taxable income for the year.

Included in A/R is $100,000 from a loyal customer who was given special terms to make 2 payments of $50,000 on July 1st of the two following years.

What would be reported on Heisenberg’s final Dec 31st balance sheet for current assets?

A. $700,000
B. $650,000
C. $600,000
D. $900,000

Answer 18

B. $650,000

The prepaid taxes wouldn’t end up on the final balance sheet because in recording income tax expense the prepaid tax account would be credited and end up at zero. Half of the loyal customer’s balance would need to be reclassified out of A/R because it’s more than a year away, so the current assets would be:
Cash of $200,000 + A/R of $450,000 = Total Current Assets of $650,000

Question 19

FAR1B30023
In adjusting the cash flow statement, how should an understated depreciation expense be addressed?
A. Increase net income in the operating activities.
B. Decrease net income in the operating activities.
C. Adjust the figure in investing activities.
D. No adjustment needed as depreciation does not affect cash flow.

Answer 19

D. No adjustment needed as depreciation does not affect cash flow.

Depreciation is a non-cash expense and does not directly affect the cash flow statement. Therefore, even if it is understated in the income statement, it does not require an adjustment in the statement of cash flows.

Question 20

FAR2D001aicpa

Which of the following statements correctly describes the proper accounting for nonmonetary exchanges that are deemed to have commercial substance?

A. Any gains or losses are deferred.
B. Losses are deferred to the extent of any gains.
C. Gains or losses are recognized immediately.
D. Gains or losses are unrealized.

Answer 20

C. Gains or losses are recognized immediately.

When there is commercial substance, gains and losses are recognized immediately.
This applies unless:

1. The fair value of neither asset can be determined
2. The exchange was made solely to facilitate sales to customers
3. If the exchange lacks commercial substance

Question 21

FAR1E10031
Under the income tax basis of accounting, how is revenue typically recognized?
A) When it is earned, regardless of when it is received.
B) When it is received, regardless of when it is earned.
C) When it is taxable under the tax regulations.
D) At the end of the fiscal year.

Answer 21

C) When it is taxable under the tax regulations.

The income tax basis of accounting recognizes revenues when they are taxable under the relevant tax regulations. This might differ from when the revenue is actually earned or received.

Question 22

FAR2E10008
In which of the following cases would a company not use fair value accounting for a long-term investment in common stock?
A) The company has significant influence over the investee.
B) The stock is traded on a major stock exchange.
C) The company plans to hold the stock for an indefinite period.
D) The stock is part of a diversified portfolio of investments.

Answer 22

A) The company has significant influence over the investee.

When a company has significant influence over an investee, the investment is typically accounted for using the equity method, not at fair value.

Question 23

FAR2C10009
Using the weighted average cost method, a company had a beginning inventory of 100 units at $5 each. It purchased 200 units at $10 during the year and sold 150 units. What is the value of the ending inventory?
A. $1,250
B. $1,500
C. $750
D. $1,000

Answer 23

A. $1,250

Weighted average cost = [(100 units x $5) + (200 units x $10)] / (100 + 200) = $8.33. The ending inventory is 150 units valued at $8.33 each, totaling $1,250.

Question 24

FAR2E30007
Which of the following is a sign that an investor might have significant influence over an investee?
A. The investor has veto power over the operating and financial policies of the investee.
B. The investor regularly sells products to the investee.
C. The investor is located in the same country as the investee.
D. The investor holds 10% of the voting stock and has no board representation.

Answer 24

A. The investor has veto power over the operating and financial policies of the investee.

Veto power over policies (A) indicates significant influence. Regular business transactions (B) or geographical proximity (C) do not necessarily imply significant influence. Holding only 10% of voting stock without board representation (D) is generally not enough to suggest significant influence.

Question 25

FAR2G10015
A company incurs costs for terminating a lease as part of a restructuring. How should these costs be accounted for?
A) As a provision when the lease termination is probable and can be estimated.
B) Immediately expensed in the income statement.
C) Capitalized as a part of property, plant, and equipment.
D) Deferred and recognized over the remaining lease term.

Answer 25

A) As a provision when the lease termination is probable and can be estimated.

Costs for terminating a lease are accounted for as a provision when it is probable and the amount can be reasonably estimated.

Question 26

FAR3B10027
How should a company report a contingent gain from a lawsuit where it is likely to receive a settlement of $300,000?
A. Recognize the gain immediately.
B. Recognize a receivable for $300,000.
C. Disclose the contingent gain in the financial notes.
D. No disclosure or recognition is required.

Answer 26

C. Disclose the contingent gain in the financial notes.

Contingent gains are not recognized until they are realized; therefore, the company should disclose the potential gain in the notes.

Question 27

FAR2D007nsim
Richter Corp uses the straight-line method for amortization and depreciation and that all amortization and depreciation is recorded on December 31 of each year. Richter uses separate general ledger accounts to record accumulated amortization for each intangible asset.
July 1, year 1 Richter purchased scientific equipment used in product development studies having potential alternative uses for future products. The equipment cost $75,000 and the company paid an additional $4,000 for delivery. The equipment has an estimated useful life of 5 years.

Calculate the amount of depreciation of the scientific equipment purchased on July 1, year 1, to be recorded on December 31, year 1.

A. $7,900
B. $7,500
C. $15,000
D. $15,800

Answer 27

A. $7,900

ASC 730-10-25-2 provides guidance on elements of costs relating to materials, equipment, and facilities that are to be identified with Research and Development Activities.

The costs of materials (whether from the entity’s normal inventory or acquired specially for research and development activities) and equipment or facilities that are acquired or constructed for research and development activities and that have alternative future uses (in research and development projects or otherwise) shall be capitalized as tangible assets when acquired or constructed. The cost of such materials consumed in research and development activities and the depreciation of such equipment or facilities used in those activities are research and development costs.

However, the costs of materials, equipment, or facilities that are acquired or constructed for a particular R&D project and that have no alternative future uses (in other research and development projects or otherwise) and therefore no separate economic values are research and development costs at the time the costs are incurred.

The scientific equipment purchased by Richter for product development has alternate future uses, and hence can be classified as a tangible asset.

In general, the costs to assign to a fixed asset are its purchase cost and any costs incurred to bring the asset to the location and condition needed for it to operate in the manner intended by management.

Hence the value of the scientific equipment to be capitalized = purchase cost + delivery cost = $75,000+$4,000 = $79,000

The asset is depreciated on a straight-line basis over the period of its useful life, in this case, 5 years. Therefore, the amount of depreciation to be calculated is ($79,000/ 5 years) x 6/12 months (meaning 0.5) = $7,900

The depreciation expenses of the scientific equipment related to Research and Development project. Hence the expense should be classified as Research and development expense instead of depreciation expense. Journal entry to record the transaction is :

Research and development expense account debit $7,900

Accumulated depreciation – Equipment account credit $7,900

Question 28

FAR2B10039
If the general ledger has a higher trade receivables balance than the subledger, which of the following could explain the discrepancy?
A) A duplicate entry in the general ledger
B) A lower than actual bad debt expense
C) Inaccurate inventory valuation
D) Understated sales discounts

Answer 28

A) A duplicate entry in the general ledger

A higher balance in the general ledger may be due to a duplicate entry in that ledger. Inaccurate bad debt expense, inventory valuation issues, or understated sales discounts are less likely to cause this specific discrepancy.

Question 29

FAR2E20006
Which of the following best describes the amortized cost method of accounting for investments?
A) Recording investments at their market value at each reporting date.
B) Recording investments at their historical cost with periodic impairment tests.
C) Amortizing the premium or discount on the acquisition cost over the life of the investment.
D) Revaluing investments at each reporting date to reflect current interest rates.

Answer 29

C) Amortizing the premium or discount on the acquisition cost over the life of the investment.

The amortized cost method involves amortizing the premium or discount on the acquisition cost of a debt investment over its life. This method reflects the gradual reduction in the principal amount of the debt and the accumulation of interest income.

Question 30

FAR2B10003
Which method estimates bad debt expense based on a percentage of each period’s net credit sales?
A) Aging method
B) Direct write-off method
C) Percentage of sales method
D) Percentage of receivables method

Answer 30

C) Percentage of sales method

The percentage of sales method calculates bad debt expense as a fixed percentage of the company’s credit sales for the period. This method emphasizes income statement relationships rather than the balance in the receivables account.

Question 31

Intangible assets are

Answer 31

non-monetary assets without physical substance that provide economic benefits to a business

Question 32

recognizing intangible assets in the statement of financial position (balance sheet) involves specific criteria

Answer 32

Identifiable: meaning it can be separated or divided from the entity and sold, transferred,
licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset, or liability.
● Control: The entity has control over the future economic benefits flowing from the asset. This usually arises from legal rights, regardless of whether those rights are transferable or separable from the entity or other rights and obligations.
● Future Economic Benefits: The asset is expected to produce future economic benefits for the entity. This could be in the form of revenue generation, cost savings, or other benefits resulting from the use of the asset by the entity.
● Measurable Cost: The cost of the asset can be measured reliably. This includes the purchase price, any directly attributable costs of preparing the asset for its intended use

Question 33

The fair value for an asset or liability is measured as:

A. The appraised value of the asset or liability.
B. The price that would be paid to acquire the asset or received to assume the liability in an orderly transaction between market participants.
C. The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.
D. The cost of the asset less any accumulated depreciation or the carrying value of the liability on the date of the sale.

Answer 33

C. The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market participants.

This is the definition of fair value.

Question 34

FAR2B10032
When a discrepancy is found between the subledger and general ledger for trade receivables, which of the following is the most likely reason?
A) Incorrect recording of cash sales
B) An error in posting to the general ledger
C) Misclassification of a long-term liability
D) Overstated inventory levels

Answer 34

B) An error in posting to the general ledger

Discrepancies between the subledger and general ledger often arise from errors in posting transactions to the general ledger. Incorrect recording of cash sales, misclassification of long-term liabilities, or overstated inventory levels are less likely to directly affect the reconciliation of receivables.

Question 35

FAR1B10019
When preparing a statement of financial position, how should a non-profit organization report a piece of artwork that it intends to hold indefinitely?
A. As an expense
B. As a current asset
C. As a fixed asset
D. Not reported on the statement

Answer 35

C. As a fixed asset

An artwork held indefinitely by a non-profit, especially if it contributes to the organization’s mission, is considered a fixed asset. It represents a long-term economic benefit for the organization.

Question 36

FAR1C10005
In the context of fund accounting for state and local governments, which of the following best describes the modified accrual basis of accounting?
A. Records revenues when received in cash and expenses when paid in cash
B. Records revenues when they are measurable and available, and expenses when incurred
C. Utilizes full accrual for revenues and expenses
D. Records revenues based on tax regulations

Answer 36

B. Records revenues when they are measurable and available, and expenses when incurred

The modified accrual basis of accounting, used in fund accounting, records revenues when they are measurable and available for use, typically within 60 days of year-end. Expenses are recorded when the related liability is incurred.

Question 37

FAR2H10009
In financial accounting, a change in debt terms that is considered a modification will typically result in:
A. Recognition of a new debt instrument
B. Continuation of the existing debt instrument with adjusted terms
C. Immediate repayment of the existing debt
D. Transfer of debt to a new creditor

Answer 37

B. Continuation of the existing debt instrument with adjusted terms

In a modification, the existing debt instrument continues, albeit with adjusted terms. This reflects the fact that the modification does not substantively alter the nature of the original debt.

Question 38

FAR3C10024
How should a not-for-profit entity report assets received with the obligation to transfer them to a specified beneficiary?
A. As a contribution
B. As a liability
C. As an asset with a corresponding increase in net assets
D. As deferred revenue

Answer 38

B. As a liability

Assets received with an obligation to transfer them to a specified beneficiary should be reported as a liability, as the not-for-profit acts as an agent.

Question 39

FAR3C10039
Under the five-step model, when is a discount on a sale recognized in the journal entries?
A. At the time of payment receipt
B. When the goods or services are provided
C. When the contract is signed
D. At the end of the fiscal year

Answer 39

B. When the goods or services are provided

A discount is recognized at the time the goods or services are provided, affecting the transaction price and revenue recognized.

Question 40

FAR2H10026
If a company issues a 10-year bond with a face value of $1,000,000 and incurs $20,000 in issuance costs, how are these costs accounted for in the interest expense calculation?
A. They are expensed in the first year
B. They have no effect on the interest expense
C. They are spread evenly over the 10-year period
D. They are deducted from the face value of the bond

Answer 40

C. They are spread evenly over the 10-year period

Bond issuance costs are amortized over the life of the bond, which in this case is 10 years. This means the costs add $2,000 ($20,000 / 10 years) to the interest expense each year.

Question 41

FAR2H20008
Which of the following is not a typical use of debt covenants?
A. Restricting further borrowing
B. Dictating operational decisions
C. Maintaining certain financial ratios
D. Ensuring asset maintenance

Answer 41

B. Dictating operational decisions

Debt covenants typically do not dictate day-to-day operational decisions of a company. They are more focused on restricting further borrowing (A), maintaining certain financial ratios (C), and ensuring asset maintenance (D).

Question 42

In year 3, a company incurred $500,000 of legal costs defending several patents. Included in that amount was $400,000 of legal costs associated with successful outcomes and $100,000 of legal costs associated with unsuccessful outcomes. What amount of legal costs, if any, should the company expense for year 3?

A. $500,000
B. $400,000
C. $100,000
D. $0

Answer 42

C. $100,000

For legal costs in defense of a patent, if the defense is successful, then those costs are capitalized, not expensed. The idea is that those costs become part of the cost of the patent itself. This means that only the $100,000 of costs would be expensed.

Question 43

A company has a 22% investment in another company that it accounts for using the equity method. Which of the following disclosures should be included in the company’s annual financial statements?

A. The names and ownership percentages of the other stockholders in the investee company.
B. The reason for the company’s decision to invest in the investee company.
C. The company’s accounting policy for the investment.
D. Whether the investee company is involved in any litigation.

Answer 43

C. The company’s accounting policy for the investment.

How the company is accounting for the investment is the only required disclosure among the responses listed. The company could be accounting for the investment through either the equity method, or the fair value method, and this could impact how users make decisions with the information.

Question 44

Cuthbert Industrials, Inc. prepares three-year comparative financial statements. In year 3, Cuthbert discovered an error in the previously issued financial statements for year 1. The error affects the financial statements that were issued in years 1 and 2. How should the company report the error?

A. The financial statements for years 1 and 2 should be restated; an offsetting adjustment to the cumulative effect of the error should be made to the comprehensive income in the year 3 financial statements.
B. The financial statements for years 1 and 2 should not be restated; financial statements for year 3 should disclose the fact that the error was made in prior years.
C. The financial statements for years 1 and 2 should not be restated; the cumulative effect of the error on years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of year 3.
D. The financial statements for years 1 and 2 should be restated; the cumulative effect of the error on years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of year 3.

Answer 44

D. The financial statements for years 1 and 2 should be restated; the cumulative effect of the error on years 1 and 2 should be reflected in the carrying amounts of assets and liabilities as of the beginning of year 3.

Since Cuthbert prepares three-year financials, the error needs to be corrected in years 1 and 2, and the beginning balances of year 3 should reflect the correction so that all 3 years of the financials are comparable. Also, the year 1 and 2 financials should be restated.

Question 45

An overfunded single-employer defined benefit postretirement plan should be recognized in a classified statement of financial position as a

A. Noncurrent liability
B. Current liability
C. Noncurrent asset
D. Current asset

Answer 45

C. Noncurrent asset

It is a noncurrent asset, because in general, plan assets wouldn’t be liquidated within one year.

Question 46

FAR3C10046
When can costs incurred to fulfill a contract be recognized as an expense immediately?
A. When the costs provide no future economic benefits
B. When the costs are material
C. When the contract has a duration of more than one year
D. When the costs are recoverable from the customer

Answer 46

A. When the costs provide no future economic benefits

Costs incurred to fulfill a contract are recognized as an expense immediately when they do not provide any future economic benefits.