area II G. payables and accrued liabilities

Question 1

FAR3G10006
If a company discovers that its building was significantly overvalued in the financial statements due to an appraisal error, and this discovery occurs after the balance sheet date but before the issuance of financial statements, how should this be treated?
A) As a Type I subsequent event, requiring adjustment.
B) As a Type II subsequent event, requiring disclosure only.
C) Ignore the event since it relates to a past period.
D) Treat it as a prior period error and reissue the previous year’s financial statements.

Answer 1

A) As a Type I subsequent event, requiring adjustment.

This situation is a Type I subsequent event as it provides additional evidence about conditions that existed at the balance sheet date (the overvaluation of the building). Therefore, it requires an adjustment to the financial statements.

Question 2

FAR1B10005
In the statement of financial position, how are liabilities generally treated in a nongovernmental, not-for-profit entity?
A) They are not reported since not-for-profits primarily deal with donations.
B) They are reported as the entity’s obligations at the statement date.
C) They are mixed with net assets for a combined total.
D) Liabilities are only reported if they exceed a certain amount.

Answer 2

B) They are reported as the entity’s obligations at the statement date.

Liabilities in the statement of financial position represent the entity’s obligations at the time the statement is prepared. They include amounts owed to creditors, outstanding expenses, etc.

Question 3

FAR3F001aicpa
What are the components of the lease receivable for a lessor involved in a direct-financing lease?
A. The present value of the minimum lease payments plus any executory costs.
B. The present value of the minimum lease payments, plus residual value.
C. The present value of the minimum lease payments less residual value.
D. The present value of the minimum lease payments less initial direct costs.

Answer 3

B. The present value of the minimum lease payments, plus residual value.

In a direct-financing lease, the lessor records the lease receivable that is equal to the minimum lease payments plus any residual value, which is usually equal to the fair value of the asset.
A direct-financing lease results when a lease doesn’t meet any of the 5 requirements to be classified as a sales-type lease, and a third party guarantees a residual value.

Question 4

FAR1B20021
If a donation was incorrectly recorded as unrestricted when it was actually temporarily restricted, how should this error be corrected in the statement of activities?
A) Reclassify it from expenses to revenue
B) Adjust the amount from unrestricted to temporarily restricted net assets
C) Transfer it from liabilities to assets
D) Record it as a deferred revenue

Answer 4

B) Adjust the amount from unrestricted to temporarily restricted net assets

The correct way to address this error is by reclassifying the donation from unrestricted to temporarily restricted net assets, reflecting the donor’s intended restrictions.

Question 5

FAR1B20021
If a donation was incorrectly recorded as unrestricted when it was actually temporarily restricted, how should this error be corrected in the statement of activities?
A) Reclassify it from expenses to revenue
B) Adjust the amount from unrestricted to temporarily restricted net assets
C) Transfer it from liabilities to assets
D) Record it as a deferred revenue

Answer 5

B) Adjust the amount from unrestricted to temporarily restricted net assets

The correct way to address this error is by reclassifying the donation from unrestricted to temporarily restricted net assets, reflecting the donor’s intended restrictions.

Question 6

FAR2D002n
Kendra Inc. purchased land an office building for $60,000 cash and an existing mortgage of $40,000. For tax purposes the property is assessed at $125,000 with $75,000 being allocated to the building.

What amount should Kendra record the building for on its books?
A. $36,000
B. $40,000
C. $60,000
D. $75,000

Answer 6

C. $60,000

PPE is recorded at historical cost, and in this case the total cost to acquire the land and building is $60,000 + assuming the $40,000 mortgage for a total of $100,000. The total cost must be allocated to the two assets, and the tax records allocate 60% (75,000 / 125,000) to the building.

So, Kendra will record the building at $60,000, and the land at $40,000.

Question 7

FAR3F10029
If a lease includes a variable payment based on usage, how should this cost be recognized in the income statement?
A. Capitalized as part of the right-of-use asset.
B. Recognized in the income statement in the period incurred.
C. Added to the lease liability and amortized.
D. Recognized as a deferred expense.

Answer 7

B. Recognized in the income statement in the period incurred.

Variable lease payments based on usage are recognized as an expense in the income statement in the period in which they are incurred, rather than being capitalized or added to the lease liability.

Question 8

FAR2H008nsim
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 Premium amortized for the six months ended June 30, year 1.

A. $4,100
B. $336
C. $100
D. $4,500

Answer 8

B. $336

The coupon rate on the bonds was 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 are $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 a 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 in 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 9

FAR2E10028
A company’s equity investment was purchased for $60,000 and its year-end fair value is $63,000. What is the correct journal entry for the investment income?
A) Debit Investment Income $3,000; Credit Equity Investment $3,000
B) Debit Equity Investment $60,000; Credit Investment Income $60,000
C) Debit Equity Investment $3,000; Credit Investment Income $3,000
D) Debit Investment Income $63,000; Credit Equity Investment $63,000

Answer 9

C) Debit Equity Investment $3,000; Credit Investment Income $3,000

The $3,000 increase in fair value is recognized as income with a debit to Equity Investment and a credit to Investment Income.

Question 10

FAR2D10056
When performing a rollforward analysis, how should capital expenditures be treated?
A. As a reduction in accumulated depreciation
B. As a separate addition to the PPE balance
C. As an operational expense
D. As an adjustment to the salvage value

Answer 10

B. As a separate addition to the PPE balance

Capital expenditures should be treated as separate additions to the PPE balance in a rollforward analysis, reflecting the investment in new or improved assets.

Question 11

Asset Retirement Obligations (AROs) represent a legal or contractual obligation associated with the retirement of a long-lived asset, typically when

Answer 11

an asset is taken out of service, sold, or abandoned.

Question 12

An ARO should be recognized when it meets both of these criteria:

Answer 12

● Obligation is Incurred: This generally occurs when the asset is installed or acquired, and a legal or contractual obligation to retire the asset arises.
● Fair Value Can Be Reasonably Estimated: The cost of settling the obligation can be reasonably estimated.

Question 13

Measurement of AROs

Answer 13

● Fair Value Measurement: The ARO is initially measured at fair value, which is the estimated cost to settle the obligation.
● Discounting: The ARO is discounted to present value, using a credit-adjusted risk-free rate. The choice of the discount rate is critical and should reflect the credit risk associated with fulfilling the obligation.
● Capitalization of AROs: The liability for an ARO is capitalized as part of the carrying amount of the long-lived asset. This is then typically amortized over the asset’s useful
life.

Subsequent Measurement
● Accretion Expense: Over time, the carrying amount of the ARO increases due to the passage of time. This increase, known as the accretion of the discount, is recognized as an expense in each period.
● Revisions to the ARO: If the estimate of the ARO changes, the carrying amount of the ARO should be adjusted. An increase in the ARO leads to an increase in the associated asset retirement cost, whereas a decrease reduces it

Question 14

payables and accrued liabilities represent obligations that a company

Answer 14

owes to others and are recognized in the financial statements when incurred, even if the payment has not yet been made

Question 15

Accounts Payable:
A company receives an invoice for inventory purchased on credit for $5,000, payable within 30 days.

Answer 15

Journal Entry upon Receiving Invoice:
Debit ($) Inventory 5,000
Credit ($) Accounts Payable 5,000
The carrying amount of the accounts payable is $5,000.

Entry when the company pays the invoice:
Debit ($) Accounts Payable 5,000
Credit ($) Cash 5,000

Question 16

Dividends Payable:
A company declares a dividend of $1 per share on its 10,000 outstanding shares.

Answer 16

Journal Entry on Declaration Date:
Debit ($) Retained Earnings 10,000
Credit ($) Dividends Payable 10,000
The carrying amount of the dividends payable is $10,000.

Entry when the company pays out the dividends:
Debit ($) Dividends Payable 10,000
Credit ($) Cash 10,000

Question 17

Accrued Wages:
Employees earned $8,000 in wages for the last week of the month, to be paid in the following month.

Answer 17

Journal Entry at Month-End:
Debit ($) Wages Expense 8,000
Credit ($) Wages Payable 8,000
The carrying amount of the accrued wages is $8,000

Entry when the wages are paid:
Debit ($) Wages Payable 8,000
Credit ($) Cash 8,000

Question 18

Accrued Vacation:
An employee earns $100 in vacation pay each day and has accrued 5 days of vacation.

Answer 18

Journal Entry to Accrue Vacation Pay:
Debit ($) Vacation Expense 500
Credit ($) Vacation Payable 500
The carrying amount of the accrued vacation is $500.

Entry when the company pays out the vacation pay:

Debit ($) Vacation Payable 500
Credit ($) Cash 500

Question 19

Accrued Bonuses
A company accrues a bonus of $20,000 to be paid to employees next year.

Answer 19

Journal Entry at Year-End:
Debit ($) Bonus Expense 20,000
Credit ($) Bonus Payable 20,000
The carrying amount of the accrued bonuses is $20,000.

Entry when the bonuses are paid:
Debit ($) Bonus Payable 20,000
Credit ($) Cash 20,000

Question 20

Self-Insurance Liabilities:
A company self-insures certain risks and estimates a liability of $15,000 for potential future claims.

Answer 20

Journal Entry to Record Self-Insurance Liability:
Debit ($) Insurance Expense 15,000
Credit ($) Self-Insurance Liability 15,000
The carrying amount of the self-insurance liability is $15,000.

Entry when the company pays for a claim for $5,000:
Debit ($) Self-Insurance Liability 5,000
Credit ($) Cash 5,000

Question 21

FAR1C20004
For a state or local government, where would resources restricted for scholarship programs be reported?
A. Permanent Fund
B. General Fund
C. Special Revenue Fund
D. Private-Purpose Trust Fund

Answer 21

D. Private-Purpose Trust Fund

Private-Purpose Trust Funds are used to report resources that are held in trust for the benefit of individuals, private organizations, or other governments. Scholarships for individuals fit this category.

Question 22

FAR3G10028
A company receives an insurance settlement for a claim related to an event that occurred before the balance sheet date. The settlement amount is received after the balance sheet date but before the financial statements are issued. How should this be accounted for in the financial statements?
A) Record the insurance settlement as a receivable.
B) Recognize the settlement as revenue in the income statement.
C) Adjust the loss expense recognized for the event.
D) Disclose the settlement in the notes without adjusting the financial statements.

Answer 22

A) Record the insurance settlement as a receivable.

The receipt of an insurance settlement for a claim related to an event before the balance sheet date is a Type I subsequent event. It provides additional evidence about conditions that existed at the balance sheet date. The appropriate treatment is to record the insurance settlement as a receivable, reflecting the company’s right to receive payment.

Question 23

FAR2H10018
A creditor’s concession in a troubled debt restructuring typically results in:
A. An increase in the debtor’s credit rating
B. A decrease in the creditor’s interest income
C. A one-time gain for the creditor
D. Enhanced collateral from the debtor

Answer 23

B. A decrease in the creditor’s interest income

In troubled debt restructuring, a creditor’s concession often leads to a decrease in interest income, as the terms become more favorable to the debtor. An increase in the debtor’s credit rating (A) is not a direct result of the concession. A one-time gain for the creditor (C) is unlikely, as concessions usually mean less favorable terms for the creditor. Enhanced collateral (D) is not typical in such restructurings.

Question 24

FAR2D10019
A company sells a building for $200,000 that was purchased for $250,000 with accumulated depreciation of $100,000. What is the journal entry to record this transaction?
A. Debit Cash $200,000; Debit Accumulated Depreciation $100,000; Credit Building $250,000; Credit Gain on Sale $50,000
B. Debit Cash $200,000; Credit Building $150,000; Credit Gain on Sale $50,000
C. Debit Cash $200,000; Credit Building $250,000; Credit Loss on Sale $50,000
D. Debit Cash $200,000; Debit Loss on Sale $50,000; Credit Building $250,000

Answer 24

B. Debit Cash $200,000; Credit Building $150,000; Credit Gain on Sale $50,000

The book value of the building is its original cost ($250,000) minus accumulated depreciation ($100,000), equaling $150,000. The sale price is $200,000, so there’s a gain of $200,000 – $150,000 = $50,000. Thus, debit Cash for $200,000, credit Building for $150,000, and credit Gain on Sale for $50,000.

Question 25

FAR2G10031
What is the purpose of reconciling the accounts payable subledger with the general ledger?
A) To ensure that all payments made are recorded in the general ledger.
B) To confirm that the subledger balances match the total in the general ledger.
C) To check the accuracy of sales transactions.
D) To reconcile bank statements with the general ledger.

Answer 25

B) To confirm that the subledger balances match the total in the general ledger.

Reconciling the accounts payable subledger with the general ledger ensures that the total of individual accounts in the subledger matches the consolidated total in the general ledger. This process verifies the accuracy and completeness of recorded transactions.

Question 26

FAR2D10033
Which condition must be met for an asset to be classified as held for sale regarding the completion of the sale?
A. The sale should be expected to complete within one year from the date of classification
B. The sale should be completed within two years from the date of classification
C. The sale can be completed at any time in the future
D. The sale should be completed within six months from the date of classification

Answer 26

A. The sale should be expected to complete within one year from the date of classification

For an asset to qualify as held for sale, the sale should be expected to complete within one year from the date of classification.

Question 27

FAR3C10015
In the context of not-for-profit accounting, which of the following best describes a conditional promise to give?
A. A pledge that is dependent on the occurrence of a specified future and uncertain event
B. An agreement to donate that is legally binding and enforceable
C. A promise that is revocable at any time by the donor
D. A commitment to give that is not contingent upon an additional action

Answer 27

A. A pledge that is dependent on the occurrence of a specified future and uncertain event

A conditional promise to give in not-for-profit accounting is one that is contingent on the occurrence of a specified future and uncertain event.

Question 28

FAR2E10009
A venture capital firm’s investment in a start-up should be reported at fair value except when:
A) The start-up has not yet started commercial operations.
B) The firm holds a minority interest without significant influence.
C) The fair value cannot be estimated reliably.
D) The investment is intended for sale within one year.

Answer 28

C) The fair value cannot be estimated reliably.

Investments by venture capital firms are generally reported at fair value unless their fair value cannot be estimated reliably.

Question 29

FAR3C003nsim
JIS machinery has been fined $900,000 by the government because of clean air violations. JIS has appealed and legal counsel has estimated that it is probable that the fine will be reduced to an amount between $200,000 and $500,000, but no specific amount in this range can be judged as the best estimate.
What amount, if any, should JIS accrue as a contingent liability related to the fine?
A. $900,000
B. $500,000
C. $200,000
D. $0

Answer 29

C. $200,000

ASC 450-20-25-1 provides guidance regarding the recognition of contingencies. It states that when a loss contingency exists, the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability can range from probable to remote. As indicated in the definition of contingency, the term loss is used for convenience to include many charges against income that are commonly referred to as expenses and others that are commonly referred to as losses. The Contingencies Topic uses the terms probable, reasonably possible, and remote to identify three areas within that range.

If the contingent liability is BOTH 1) probable and 2) can be reasonably estimated, then it should be accrued.

If the contingent liability is reasonably possible, then a footnote should be noted, but it doesn’t need to be accrued.

The contingent liability is remotely possible, then no disclosure needs to be made.

ASC 450-20-30-1 provides guidance on initial measurement. If some amount within a range of loss appears at the time to be a better estimate than any other amount within the range, that amount shall be accrued. When no amount within the range is a better estimate than any other amount, however, the minimum amount in the range shall be accrued. Even though the minimum amount in the range is not necessarily the amount of loss that will be ultimately determined, it is not likely that the ultimate loss will be less than the minimum amount.

So in this case, JIS would use the $200,000 estimate to accrue the contingent liability.

Question 30

FAR1B10011
Which of the following is not typically included in the statement of financial position of a non-governmental, not-for-profit entity?
A. Net assets
B. Fixed assets
C. Revenue
D. Liabilities

Answer 30

C. Revenue

The statement of financial position, similar to a balance sheet, includes assets, liabilities, and net assets. Revenue is typically included in the statement of activities, not the statement of financial position. Fixed assets and liabilities are both elements of the financial position statement.

Question 31

FAR1B10027
If a non-profit entity incorrectly classifies a loan as a donation, what is the appropriate adjustment?
A. Decrease liabilities and increase net assets
B. Increase liabilities and decrease revenues
C. Decrease revenues and increase liabilities
D. Increase revenues and decrease expenses

Answer 31

C. Decrease revenues and increase liabilities

A loan is a liability, not revenue. Correcting this error involves decreasing revenues (as it was incorrectly recognized as a donation) and increasing liabilities (to reflect the loan).

Question 32

FAR2B10036
What type of adjustment is necessary if the subledger’s total receivables are less than the general ledger’s total?
A) A debit to the trade receivables account
B) A credit to the trade receivables account
C) An increase in the allowance for doubtful accounts
D) A reduction in sales revenue

Answer 32

A) A debit to the trade receivables account

If the subledger shows a lower total than the general ledger, an adjustment involving a debit to the trade receivables account in the subledger is necessary to align the balances. Credits to trade receivables, adjustments to the allowance for doubtful accounts, or changes to sales revenue are not appropriate for this discrepancy.

Question 33

FAR3A001nsim
B Co. is preparing it’s December 31, year 3, financial statements.
All adjustment amounts are material and the company justified all of the changes. No prior adjustments have been recorded.

B Co. provides credit to its customers. The customer agreement requires the customer to pay $40 penalty for late payments. A year 2 court decision indicated that the penalty was excessive and gave customers reimbursements recourse for this charge. The company recorded a year 2 provision of $1,000,000 for the reimbursements, which constituted the company’s estimated total liability. In the first quarter of year 3, the expected claims increased by 25% over the initial estimate.

Calculate the additional provision for penalty liability to be created.

A. $0
B. $1,250,000
C. $250,000
D. $1,000,000

Answer 33

C. $250,000

FASB’s Statement of Financial Accounting Standards No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections.

According to this standard, a change in accounting estimate is defined as—a change that has the effect of adjusting the carrying amount of an existing asset or liability or altering the subsequent accounting for existing or future assets or liabilities. A change in accounting estimate is a necessary consequence of the assessment, in conjunction with the periodic presentation of financial statements, of the present status and expected future benefits and obligations associated with assets and liabilities. Changes in accounting estimates result from new information. Examples of items for which estimates are necessary are uncollectible receivables, inventory obsolescence, service lives and salvage values of depreciable assets, and warranty obligations.

B Co. has estimated penalty liability charges to be $1,000,000 and had made provision for the same. The estimate has increased by 25%. Therefore, additional provision for liability to be created = $1,000,000 x 0.25 = $250,000

This can be achieved with the journal entry:

Debit Provision expenses $250,000

Credit Penalty charge liability $250,000

Question 34

FAR3C10005
When is revenue recognized under the five-step model?
A. When the contract is signed
B. When the customer pays for the goods or services
C. When or as the entity satisfies a performance obligation
D. After the end of the financial reporting period

Answer 34

C. When or as the entity satisfies a performance obligation

Revenue is recognized when or as a performance obligation is satisfied, either over time or at a point in time, which is the fifth and final step in the model.

Question 35

FAR2H1000
When a change in terms of a debt instrument leads to a substantial gain or loss, it is usually classified as:
A. A modification of terms
B. An extinguishment of debt
C. A restructuring of debt
D. A continuation of existing debt

Answer 35

B. An extinguishment of debt

A substantial gain or loss indicates a significant change in the present value of future cash flows of the debt, which is a key indicator of debt extinguishment. This suggests that the new terms are substantially different from the original terms, warranting the classification as an extinguishment of debt.

Question 36

FAR1B005aicpa
Pann, a nongovernmental not-for-profit organization, provides food and shelter to the homeless. Pann received a $15,000 gift with the stipulation that the funds be used to buy beds. In which net asset class should Pann report the contribution?
A. Endowment
B. Temporarily restricted
C. Permanently restricted
D. Unrestricted

Answer 36

B. Temporarily restricted

The gift is restricted for a specific purpose, but isn’t a permanent investment. Therefore it is classified as net assets with donor restrictions.
It is possible for a non-profit to have a policy where they can classify donor-restricted funds as contributions without donor restrictions if 1) the policy exists and 2) if the stipulations of the donor-imposed restrictions are met within the same period. But in this question no such policy is mentioned, so it would be classified as net assets with donor restrictions.

Question 37

FAR1C20008
In which fund would a local government record the acquisition of police vehicles?
A. Special Revenue Fund
B. Capital Projects Fund
C. General Fund
D. Internal Service Fund

Answer 37

C. General Fund

The General Fund is likely to be used for the acquisition of police vehicles, as it accounts for general government activities including public safety.

Question 38

Liabilities arising from exit or disposal activities, such as one-time termination benefits and severance arrangements,

Answer 38

are obligations that a company incurs when it decides to terminate employment contracts, close down operations, or relocate its business

Question 39

A liability for costs associated with an exit or disposal activity is recognized

Answer 39

when the liability is incurred, which generally occurs when the company commits to a plan of termination, either through a formal plan or otherwise making a detailed plan and raising a valid expectation to those affected

Question 40

liability should be measured at

Answer 40

fair value, which is typically the amount that the company would reasonably expect to pay to settle the obligation

Question 41

One-Time Termination Benefits:

Answer 41

Recognized when the company communicates the termination plan to the
affected employees and the plan meets certain criteria (detailed plan, no realistic possibility of withdrawal). recognized immediately as a liability and expense when the company commits to a termination plan and communicates it to the affected employees, reflecting a present obligation

Example 1: One-Time Termination Benefits
● Scenario: A company decides to close one of its divisions and terminates 50 employees, offering each a one-time termination benefit of $10,000.
● Recognition: The liability is recognized when the plan is communicated to the employees, and it is evident that the plan will be carried out.
● Total Liability: 50 employees x $10,000 = $500,000.

Journal Entry upon Recognition:
Debit ($) Restructuring Expense 500,000
Credit ($) Restructuring Liability 500,000

Question 42

Ongoing Benefits:

Answer 42

If the termination benefits are contingent upon the employee providing future services, they are recognized over the period of service like severance arrangements. Severance arrangements contingent on employees providing future services are recognized gradually over the
service period. For these, the liability and corresponding expense are accrued each month as the service is rendered, aligning the cost recognition with the period during which the company benefits from the employees’ services

Example 2: Severance Arrangements
● Scenario: A company offers a severance arrangement to a group of employees, under which it agrees to pay a total of $300,000 in severance if the employees continue to work for six more months.
● Recognition: The liability is recognized over the six-month service period as the employees render service.
● Monthly Expense Recognition: $300,000 / 6 months = $50,000 per month.

Journal Entry Each Month for Six Months:

Debit ($) Severance Expense 50,000
Credit ($) Accrued Severance Liability 50,000

Question 43

distinction in liability recognition timing ensures that the financial statements

Answer 43

accurately reflect the company’s obligations and expenses in accordance with the matching principle of accrual accounting.

Question 44

FAR3A002nsim

B Co. is preparing it’s December 31, year 3, financial statements.
All adjustment amounts are material and the company justified all of the changes. No prior adjustments have been recorded.
B Co. determined that it recorded duplicate sales invoices in year 1 for $100,000 and for $135,000 in year 2. B Co.’s effective tax rate for years 1 through 3 was 30%
Calculate the accounts receivable to be credited in Year 3 with respect to the sales related to the year 1 and year 2.

A. $0
B. $235,000
C. $164,500
D. $70,500

Answer 44

B. $235,000

FASB’s Statement of Financial Accounting Standards No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections.
According to this standard, the correction of an error in previously issued financial statements is not an accounting change. Error in previously issued financial statements is defined as—an error in recognition, measurement, presentation, or disclosure in financial statements resulting from mathematical mistakes, mistakes in the application of GAAP, or oversight or misuse of facts that existed at the time the financial statements were prepared. A change from an accounting principle that is not generally accepted to one that is generally accepted is a correction of an error.
Duplicating recording of sales invoices is an example of mathematical mistake and oversight of facts that existed at the time the financial statements were prepared. Thus it should be treated as a correction of an error in previously issued financial statements.
The sales invoice recorded twice will still reflect in the books as Accounts receivable. [Even if the customer has paid for original invoice, the duplicate invoice would remain open. If the customer has not yet paid, both invoices would remain open and show in accounts receivable, of which payment can be collected against only one open invoice]. Thus Accounts receivable should be reduced by the value of the duplicate invoices.
Since the changes/ rectification of error relate to the prior period financial statement the effect of reduction in revenue should be accounted in the retained earnings. Since the tax rate is given, the change in tax liability is also calculated.

The accounting entry for rectification of error is made as :

Debit: Retained earnings $164,500

Debit : Income taxes payable/receivable $70,500

Credit : Accounts receivable $235,000

Question 45

FAR3B10024
If a company guarantees the debt of another entity, under what condition should this be recognized in its financial statements?
A. Always recognize as a liability.
B. Only if it is probable that the company will have to fulfill the guarantee.
C. Recognize as an asset.
D. Never recognize; only disclose.

Answer 45

B. Only if it is probable that the company will have to fulfill the guarantee.

A guarantee should be recognized as a liability only if it is probable that the company will need to fulfill the guarantee.

Question 46

FAR3E10009
In the fair value hierarchy, which level would be appropriate for an asset that has no observable market data and requires significant unobservable inputs for valuation?
A. Level 1
B. Level 2
C. Level 3
D. Level 4

Answer 46

C. Level 3

Level 3 in the fair value hierarchy is used when an asset or liability’s valuation is based on inputs that are unobservable and significant to the overall fair value measurement. These inputs require significant judgment or estimation, often involving assumptions about what market participants would use in pricing the asset or liability.
Level 1 involves quoted prices in active markets for identical assets or liabilities, and Level 2 includes inputs other than quoted prices that are observable for the asset or liability. There is no Level 4 in the fair value hierarchy.

Question 47

FAR1A10040
When a balance discrepancy is identified and traced back to a data entry error, what is the next appropriate action?
A) Implement stricter data entry protocols
B) Correct the specific error and reevaluate related financial statements
C) Dismiss the discrepancy as a one-time issue
D) Reduce the frequency of reconciliation processes

Answer 47

B) Correct the specific error and reevaluate related financial statements

The immediate action is to correct the error and then reevaluate related financial statements to assess any further impact.
Implementing stricter protocols (A) might be a long-term response but is not the immediate next step. Dismissing the error (C) or reducing reconciliation frequency (D) would not address the issue or prevent future discrepancies.

Question 48

FAR2E20008
How does the amortized cost of a debt security change over time?
A) It increases due to the accumulation of interest income.
B) It decreases as the principal amount is paid down.
C) It remains constant over the life of the security.
D) It fluctuates with changes in market interest rates.

Answer 48

B) It decreases as the principal amount is paid down.

The amortized cost of a debt security decreases over time as the principal amount is paid down. This process is reflected in the gradual amortization of any discount or premium paid over the life of the security.

Question 49

FAR3D10030
What is the impact of a change in tax rates on existing deferred tax liabilities?
A. No impact, as deferred taxes are calculated based on historical rates.
B. An increase in deferred tax liabilities if tax rates increase.
C. A decrease in deferred tax liabilities if tax rates decrease.
D. Both B and C are correct.

Answer 49

D. Both B and C are correct.

A change in tax rates impacts existing deferred tax liabilities. If tax rates increase, deferred tax liabilities increase, and if tax rates decrease, deferred tax liabilities decrease. This is because deferred taxes are calculated based on the rates expected to be in effect when the temporary differences reverse.

Question 50

FAR2D003n
Ronald Inc. purchased a coal mine for $900,000. Ronald spent $100,000 preparing the mine for extraction. Ronald plans to sell the property for $250,000 at the end of its useful life. It’s estimated that 100,000 tons of coal will be extracted from the mine during its useful life.
What is the depletion amount per ton of coal?
A. $7 per ton
B. $7.50 per ton
C. $9 per ton
D. $9.50 per ton

Answer 50

B. $7.50 per ton

Add the $100,000 cost of preparing the mine to the purchase price for a total of $1,000,000. Then, subtract the amount the property will be sold for at the end of its useful life: $1,000,000 – $250,000 = $750,000.
Divide the $750,000 by the estimated number of tons of coal: $750,000 / 100,000 = $7.50 per ton

Question 51

FAR3C10014
How should a not-for-profit entity classify an unconditional promise to give that is expected to be collected in more than one year?
A. As a current asset
B. As a long-term liability
C. As a deferred revenue
D. As a long-term receivable

Answer 51

D. As a long-term receivable

An unconditional promise to give expected to be collected in more than one year is classified as a long-term receivable in the entity’s financial statements.

Question 52

FAR2H002n
Debbie Inc. issued bonds at a discount. The interest expense Debbie pays over the term of the bond is equal to the cash interest paid:
A. Plus the discount.
B. Minus the discount.
C. Less any admin expenses.
D. Less origination fees.

Answer 52

A. Plus the discount.

When bonds are issued at a discount, Debbie receives less than the face value of the bonds. If the bonds had a face value of $10,000, Debbie would receive something less, such as $9,500. So Debbie sets up a “bond discount” account, and that $500 discount is amortized through (added to) interest expense over the term of the bonds. So Debbie is making the actual cash interest payment each period, which is fixed, based on the stated rate, but the actual interest expense Debbie records is the cash payment PLUS the bond discount amount being amortized each period.

Question 53

FAR1B10014
How are long-term investments typically reported in a non-profit’s statement of financial position?
A. As current assets
B. As fixed assets
C. As liabilities
D. As part of net assets

Answer 53

B. As fixed assets

Long-term investments are considered fixed assets as they are intended to be held for more than one year. They are not current assets (which are expected to be liquidated within a year), nor are they liabilities or a part of net assets directly.

Question 54

FAR2I10004
When treasury stock is purchased, what is the correct journal entry?
A) Debit Treasury Stock, Credit Cash
B) Debit Cash, Credit Treasury Stock
C) Debit Retained Earnings, Credit Treasury Stock
D) Debit Common Stock, Credit Cash

Answer 54

A) Debit Treasury Stock, Credit Cash

When treasury stock is purchased, the company is using cash to buy back its own shares. Therefore, Cash is credited (decreased), and Treasury Stock (a contra-equity account) is debited (increased).