area II H. Debt financial liabilities

Question 1

FAR2E010n

If cash dividends are paid from a company’s earnings, how will an investor’s investment account be affected by the dividends under the fair value method vs the equity method?

A. Increase the investment account under the fair value method and decrease the investment account under the equity method.
B. No effect under the fair value method and decrease the investment account under the equity method.
C. Decrease the investment account under the fair value method and decrease the investment account under the equity method.
D. Increase the investment account under both methods.

Answer 1

B. No effect under the fair value method and decrease the investment account under the equity method.

Under the fair value method, dividends are income to the investor and does not affect the investment account.

Under the equity method, dividends paid from current earnings will reduce the investor’s investment account in the company.

Question 2

FAR1D10007
Which of the following is NOT a requirement for Form 10-Q?
A. Detailed information about any legal proceedings the company is involved in.
B. Unaudited financial statements.
C. Management’s discussion and analysis of financial condition.
D. Comprehensive review of the company’s business strategy.

Answer 2

D. Comprehensive review of the company’s business strategy.

Question 3

FAR2G10034
Which of the following best describes the process of reconciling accrued liabilities?
A) Matching the total accrued liabilities in the subledger with the cash payments made.
B) Ensuring that the accrued liabilities in the general ledger match the subledger total.
C) Reconciling the accrued liabilities with the related revenue accounts.
D) Comparing accrued liabilities with the corresponding asset accounts.

Answer 3

B) Ensuring that the accrued liabilities in the general ledger match the subledger total.

Reconciling accrued liabilities involves ensuring that the total amount recorded in the subledger matches the amount reported in the general ledger. This confirms the accuracy of recorded accruals.

Question 4

FAR2D10001
What is included in the gross property, plant, and equipment (PPE) balance of a company?
A. Original cost of PPE only
B. Original cost of PPE plus subsequent capital expenditures
C. Net book value of PPE
D. Original cost of PPE minus accumulated depreciation

Answer 4

B. Original cost of PPE plus subsequent capital expenditures

The gross PPE balance includes the original purchase cost of the assets plus any subsequent capital expenditures that extend the asset’s useful life, improve its efficiency, or enhance its capacity.

Option A is incorrect because it considers only the original cost, omitting subsequent expenditures. Option C is incorrect as net book value represents the original cost minus accumulated depreciation. Option D is similar to Option C and does not represent the gross balance.

Question 5

FAR2C10014
An inventory item’s cost is $400, its market value is $420, and its net realizable value is $390. Using the LCM approach, what is the carrying amount of this inventory?
A. $390
B. $400
C. $420
D. $410

Answer 5

B. $400

Under the LCM approach, inventory is reported at the lower of cost or market value. Here, the cost is $400, which is lower than the market value ($420), so the carrying amount is $400.

Question 6

FAR2D10026
What is the impact on cash flows when an impairment loss is recognized?
A. Immediate cash outflow
B. Immediate cash inflow
C. No immediate impact on cash flows
D. Variable impact depending on the asset’s nature

Answer 6

C. No immediate impact on cash flows

Recognizing an impairment loss does not have an immediate impact on cash flows, as it is a non-cash expense.

Question 7

FAR2H004n
Which of the following is correct regarding the effective interest method?
A. Interest expense is directly determined based on book value x market interest rate.
B. Interest expense is directly determined based on book value x stated interest rate.
C. Interest expense is calculated based on amortization + face value.
D. None of the above are correct.

Answer 7

A. Interest expense is directly determined based on book value x market interest rate.

Under the effective interest method, interest expense is directly determined based on the market rate x book value of the instrument. This amount might be more or less than the stated yield, depending on whether the debt was issued at a premium or discount.

Question 8

FAR1F10051
Which formula correctly calculates the Total Variance for a budgeted item?
A. Actual Results - Budgeted Amount
B. Budgeted Amount - Actual Results
C. (Actual Quantity x Actual Price) - (Budgeted Quantity x Budgeted Price)
D. (Budgeted Quantity x Budgeted Price) - (Actual Quantity x Actual Price)

Answer 8

A. Actual Results - Budgeted Amount

The Total Variance is calculated by subtracting the Budgeted Amount from the Actual Results. This indicates whether the actual results are over or under the budget. Option B is the inverse and would yield a negative variance when actuals exceed budget, while C and D are specific calculations for quantity and price variances, not total variance.

Question 9

FAR1C008n
If a pharmaceutical company donates medications to a non-profit healthcare organization that are essential to the organization’s operations, the donation would be classified as:
A. No entry is required
B. Operating revenue
C. Operating expenses
D. None of the above

Answer 9

B. Operating revenue

If the medications are essential to the operations of the organization, then the donation is classified as operating revenue.

There would be a debit to medication inventory, and a credit to other operating revenue.

Question 10

Blythe Corp. is a defendant in a lawsuit. Blythe’s attorneys believe it is reasonably possible that the suit will require Blythe to pay a substantial amount. What is the proper financial statement treatment for this contingency?

A. Accrued and disclosed
B. Accrued but not disclosed
C. Disclosed but not accrued
D. No disclosure or accrual

Answer 10

C. Disclosed but not accrued

The standard for accruing a contingent liability is “probable” and the amount is measurable. Reasonably possible is more like 50/50, and as such Blythe would disclose the lawsuit, but nothing would be accrued.

Question 11

FAR1A40005
Which document is essential for preparing the statement of changes in equity, besides the trial balance?
A) Cash flow statement.
B) Income statement.
C) Previous year’s balance sheet.
D) Bank reconciliation statement.

Answer 11

B) Income statement.

The income statement is essential because it provides information about the profit or loss, which is a key component in determining the change in retained earnings, a significant part of the equity.

The cash flow statement (Option A) and bank reconciliation statement (Option D) are not directly related to equity changes. The previous year’s balance sheet (Option C) may provide context but is not essential for the current period’s changes in equity.

Question 12

FAR2E014nsim
Adell Corp. is a manufacturer of paper products with a December 31 year end. Adell has not elected the fair value option.
For the transaction below, provide the correct classification and how should it be reported in the company’s balance sheet.
$100,000 government bond was purchased on July 1, year 1, due two years from the balance sheet date; when the cash will be used for expansion. The company paid face value for the 8% coupon bond and interest is payable annually on December 31.

A. Available-for-sale security
B. Trading Security
C. Held-to-maturity security
D. Treasury stock

Answer 12

C. Held-to-maturity security

A held-to-maturity security is purchased with the intention of holding the investment to maturity. This type of security is reported at amortized cost on a company’s financial statements and is usually in the form of a debt security with a specific maturity date.
Since the maturity is 2 years from the balance sheet date, it is considered a noncurrent asset.

Question 13

when a debt instrument’s terms are changed, it’s essential to determine whether the change constitutes a modification of the existing terms or an extinguishment of the original debt and the creation of a new one

Answer 13

because it affects how the change is accounted for in the financial statements under GAAP

Question 14

Modification of Terms

A modification of terms occurs when the terms of the debt instrument are changed, but the alteration is not substantial enough to be considered a new debt arrangement. The criteria for a modification typically include:

less than 10% of the carrying amount of the original debt), it would likely be considered a modification

Answer 14

● Minor Changes in Terms: Changes in the interest rate, payment schedule, or other terms that do not significantly alter the present value of future cash flows of the debt.
● No Substantial Gain or Loss: The difference between the present value of the cash flows under the original terms and
the modified terms is not substantial.
● Continuation of the Original Debt: The debtor continues to recognize the original debt instrument on its balance sheet,
adjusting the carrying amount for any fees paid or received and amortizing any gain or loss over the remaining life of the modified debt

Question 15

Extinguishment of Debt
Debt extinguishment occurs when the terms of a debt instrument are changed substantially enough that the new terms constitute a new borrowing arrangement. The criteria for extinguishment include:

If the change is significant (e.g., greater than 10%), leading to a substantial gain or loss, it could be considered an extinguishment

Answer 15

● Substantial Change in Terms: A significant change in the interest rate, maturity, collateral, covenants, or other terms that substantially alter the present value of the future cash flows of the debt.
● Substantial Gain or Loss: A significant gain or loss is recognized based on the difference between the reacquisition price of the old debt and the carrying amount of
the new debt.
● Recognition of New Debt: The original debt instrument is removed from the balance sheet, and the new debt instrument is recognized in its place

Question 16

FAR2G10029
When a company revises its estimated future cash flows for an ARO, how is the asset retirement cost (ARC) affected?
A) The ARC is adjusted to reflect the revised estimate.
B) The ARC remains unchanged; only the ARO liability is adjusted.
C) The ARC is depreciated over the revised remaining useful life of the asset.
D) The ARC and corresponding depreciation are both written off.

Answer 16

B) The ARC remains unchanged; only the ARO liability is adjusted.

The ARC, once recorded, remains unchanged. Only the ARO liability is adjusted to reflect changes in estimated future cash flows.

Question 17

FAR1F004n
Jack Inc is converting their cash basis financial statements to the accrual basis. Jack Inc had the following transactions:

$500 of wages earned by employees but unpaid
$300 in office supplies received but not yet paid for
$200 in cash paid for employee bonuses from the prior year
$1,000 paid in rent for the following year
$500 that has been billed to customers but not yet received
$800 cash received for goods delivered in the prior year
$600 cash received from customers that paid in advance for their order
Which of the following is correct for the conversion to the accrual basis?
A. Add back $500 for accrued expenses
B. Add back $800 for accrued expenses
C. Subtract $300 for accrued expenses
D. Subtract $800 for accrued expenses

Answer 17

B. Add back $800 for accrued expenses

Under the cash basis, the $500 of wages and $300 of office supplies received wouldn’t be accounted for yet. Under the accrual basis these would need to be added to the accrued expenses account.

Question 18

FAR1B20030
In correcting an error where a long-term grant was recorded as immediate revenue, what is the correct adjustment?

A) Decrease expenses and increase liabilities
B) Record as deferred revenue
C) Transfer from unrestricted to restricted net assets
D) Reclassify from capital to operating revenue

Answer 18

B) Record as deferred revenue

The correct adjustment for a long-term grant prematurely recognized as revenue is to record it as deferred revenue until the conditions for recognizing it as revenue are met.

Question 19

FAR2D006n
Bill Inc. purchased a new piece of equipment. Bill paid freight charges for delivery of the new equipment to its factory, and took out a loan to finance the purchase of the equipment.
How should Bill account for the freight charges and the interest from the loan?

A. The freight charges and the first interest payment will be capitalized as part of the equipment’s initial cost.
B. Both the freight charges and interest charges will be expensed.
C. The freight charges will be capitalized as part of the equipment’s initial cost, and the interest will be expensed as incurred.
D. The interest portion of the first year of payments on the loan will be capitalized.

Answer 19

C. The freight charges will be capitalized as part of the equipment’s initial cost, and the interest will be expensed as incurred.

Any costs necessary to put the asset into use will be capitalized as part of the equipment’s historical cost. So the freight charges and the purchase price will be added together to get the initial cost of the equipment. The interest from the loan will be expensed as incurred.

Question 20

FAR1D007n

Ted Inc. had 100,000 shares of common stock and 10,000 shares of 10%, $100 par value cumulative preferred stock. Ted also had 1,000 bonds that are $1,000 par and 10% convertible. There were no common stock dividends declared during the year. Ron’s had net income of $500,000. What was Teds’s basic earning per share?

A. $3.50 EPS
B. $4 EPS
C. $5 EPS
D. $5.50 EPS

Answer 20

B. $4 EPS

First of all the bonds don’t enter into the calculation because we are calculating basic earnings per share and therefore don’t assume conversion of the bonds.

Basic earnings per share is calculated as: (Net Income – Preferred Dividends) / Common Shares

Since the preferred dividends are cumulative, $100,000 is paid out on them: (10% of $100) x 10,000 shares = $10 x 10,000 = $100,000

So basic EPS = ($500,000 – $100,000) / 100,000 shares

Which is $400,000 / 100,000 = $4 EPS

Question 21

FAR2C008n

Saul Inc. reported the following:

Sales $100,000
Beg. Inventory: $10,000
End. Inventory: $5,000
Saul’s gross margin is 25%. What would be the amount of Saul’s purchases for the year?

A. $65,000
B. $70,000
C. $75,000
D. $80,000

Answer 21

B. $70,000

The first step is to calculate cost of goods sold: If gross margin is 25%, then COGS is equal to 75% of $100,000, which is $75,000.

Purchases will equal COGS + Ending inventory – Beginning inventory: $75,000 + $5,000 – $10,000 = $70,000

Question 22

Bonds issued at discount

Answer 22

A $1,000,000 bond is issued at a discount, sold for $980,000. The stated interest rate is 5%, and the bond has a 5-year term. Assume the effective interest rate is 6%.
Calculation:
● Initial Book Value: $980,000
● Year 1 Interest Expense: 6% of $980,000 = $58,800
● Year 1 Cash Interest Payment: 5% of $1,000,000 = $50,000
● Year 1 Amortization of Discount: $58,800 - $50,000 = $8,800
● End of Year 1 Book Value: $980,000 + $8,800 = $988,800

Question 23

bonds issued at premium

Answer 23

A $1,000,000 bond is issued at a premium, sold for $1,020,000. The stated interest rate is 5%, and the bond has a 5-year term. Assume the effective interest rate is 4%.
Calculation:
● Initial Book Value: $1,020,000
● Year 1 Interest Expense: 4% of $1,020,000 = $40,800
● Year 1 Cash Interest Payment: 5% of $1,000,000 = $50,000
● Year 1 Amortization of Premium: $50,000 - $40,800 = $9,200
● End of Year 1 Book Value: $1,020,000 - $9,200 = $1,010,800

Question 24

Debt covenants are

Answer 24

terms set by lenders that the borrower must adhere to as conditions of the loan. Common covenants include financial ratios that the borrower must maintain like debt to equity ratio, interest coverage ratio, and current ratio.

calculations for debt covenant compliance do not directly lead to journal entries. However, if a covenant is breached, it may trigger the need for reclassification of long-term debt to current debt.
Example of Journal Entry on Covenant Breach If the company breaches a covenant and the long-term debt becomes payable within the next year:

Debit ($) Long-Term Debt XX
Credit ($) Current Portion of Long-Term Debt XX

Question 25

FAR1B30018
Which section of the cash flow statement would include dividends paid in the case of a nongovernmental, not-for-profit entity using the direct method?
A. Operating activities.
B. Investing activities.
C. Financing activities.
D. Dividends are not included in the cash flow statement.

Answer 25

C. Financing activities.

Though not-for-profit entities typically do not pay dividends, if they do, these would be included in the financing activities section, as they relate to financing the organization’s operations.

Question 26

FAR3A10005
A company realizes that it had been underestimating its warranty liabilities for the past two years. The adjustment to correct this error should be:
A) Reflected in the current year’s income statement.
B) Applied prospectively without changing prior years’ financials.
C) Restated in the financial statements of the past two years.
D) Adjusted directly in retained earnings.

Answer 26

C) Restated in the financial statements of the past two years.

Underestimating warranty liabilities is an error in the financial statements. Errors should be corrected by restating the affected prior periods. This restatement ensures that the financial statements provide a true and fair view of the company’s financial position and performance.

Question 27

A deferred tax liability may result from which of the following items?

A. Penalties paid for legal violations.
B. Life insurance proceeds received on the death of key employees.
C. Depreciation of tangible assets.
D. Interest on municipal bonds.

Answer 27

C. Depreciation of tangible assets.

Depreciation creates a temporary difference, which can result in a deferred tax liability. The other choices are permanent differences, and they don’t create a deferred tax asset or liability because they never reverse.

So again, temporary differences result in a deferred tax asset or a deferred tax liability. Permanent differences do not, because they never reverse.

Question 28

FAR1B30013
When preparing the cash flow statement using the direct method, how are cash receipts from customers calculated?
A. Sales revenue minus increase in accounts receivable.
B. Sales revenue plus decrease in accounts receivable.
C. Net income plus accounts receivable decrease.
D. Net income minus accounts receivable increase.

Answer 28

B. Sales revenue plus decrease in accounts receivable.

Cash receipts from customers are calculated by adjusting sales revenue for changes in accounts receivable. If accounts receivable increases, it means that not all sales revenue was collected in cash, hence the deduction.

Question 29

FAR2A10027
A company discovers that a recorded check for $500 was actually a check for $50. What is the correct reconciliation action?
A. Add $450 to the bank statement balance
B. Deduct $450 from the bank statement balance
C. Add $450 to the general ledger balance
D. Deduct $450 from the general ledger balance

Answer 29

D. Deduct $450 from the general ledger balance

The company has overstated its expenses by $450 in the general ledger, so it should deduct $450 from the general ledger balance (D).
Adding or deducting the amount from the bank statement balance (A and B) is incorrect because the bank statement reflects the actual amount of the check. Adding $450 to the general ledger balance (C) would further increase the discrepancy.

Question 30

FAR3D10031
When recording the tax provision, which account should be debited if there is an income tax expense?
A. Deferred Tax Asset
B. Cash
C. Income Tax Expense
D. Income Tax Payable

Answer 30

C. Income Tax Expense

When recording an income tax expense, the Income Tax Expense account is debited, reflecting the expense recognized in the income statement.

Question 31

FAR2D10034
In what circumstances can an asset classified as held for sale be reclassified as held for use?
A. If the asset’s fair value increases significantly after classification
B. If the criteria for held for sale are no longer met
C. If the asset is not sold within one year
D. If the asset undergoes additional depreciation

Answer 31

B. If the criteria for held for sale are no longer met

An asset classified as held for sale can be reclassified as held for use if the criteria for being held for sale are no longer met.

Option A is incorrect as a fair value increase alone is not a criterion. Option C is incorrect as failure to sell within one year does not automatically trigger reclassification. Option D is incorrect as depreciation is not a factor in this context.

Question 32

FAR1B20010
In the context of a not-for-profit entity’s statement of activities, what does the term ‘release from restrictions’ typically refer to?
A) Transferring funds from unrestricted to restricted net assets
B) Recognizing revenue as it becomes available for expenses
C) Using restricted funds in accordance with donor stipulations
D) Converting non-cash donations into cash

Answer 32

C) Using restricted funds in accordance with donor stipulations

‘Release from restrictions’ refers to the process of using restricted funds for their designated purpose, thereby moving them to the unrestricted category.

Question 33

FAR1A30015
Why are changes in the fair value of available-for-sale financial assets included in Other Comprehensive Income?
A. Because they are operational expenses.
B. As they represent realized gains and losses.
C. Due to their speculative nature.
D. Since they are unrealized gains and losses.

Answer 33

D. Since they are unrealized gains and losses.

Changes in the fair value of available-for-sale financial assets are included in Other Comprehensive Income as they are unrealized. They only become realized when the asset is sold.

A is incorrect as they are not expenses. B is incorrect as they are not realized at the time of valuation. C is incorrect although they might be speculative, the main reason for their inclusion is their unrealized status.

Question 34

FAR2C10013
A company’s inventory has a historical cost of $200, a replacement cost of $180, a net realizable value of $190, and a normal profit margin of $20. What is the carrying amount using the LCNRV method?
A. $170
B. $180
C. $190
D. $200

Answer 34

C. $190

Using LCNRV, inventory is reported at the lower of cost ($200) or net realizable value ($190). The replacement cost and normal profit margin are not considered in this method.

Question 35

FAR3E10010
What does the ‘highest and best use’ assumption imply in fair value measurement?
A. The asset should be valued based on its most profitable use.
B. The asset is valued based on its current use.
C. The valuation should reflect the maximum value under any possible use.
D. The asset should be valued as if it were new.

Answer 35

A. The asset should be valued based on its most profitable use.

The ‘highest and best use’ assumption states that an asset should be valued based on its most profitable use, considering its potential utility, legal permissibility, and physical possibility. This may not always be its current use.

Question 36

FAR1A60036
How should a discrepancy in the valuation of inventory in the consolidated financial statements, discovered through variance analysis, be addressed?
A. By adjusting the valuation in the next financial period
B. By conducting a detailed review of inventory records and correcting any errors
C. By immediately writing down the inventory to its market value
D. By reporting the discrepancy to shareholders without correction

Answer 36

B. By conducting a detailed review of inventory records and correcting any errors

Discrepancies in inventory valuation discovered through variance analysis should be addressed by conducting a detailed review of inventory records and correcting any identified errors. This ensures that the inventory valuation in the consolidated financial statements is accurate.

A is incorrect because the adjustment should be made in the current period, not postponed.

C is incorrect as the immediate write-down is not warranted without understanding the discrepancy’s nature.

D is incorrect because reporting to shareholders is not a substitute for correcting the error.

Question 37

FAR1B20015
In the context of a statement of activities, how should ‘Program Service Expenses’ from a trial balance be classified?
A) As a revenue
B) As an asset
C) As a liability
D) As an expense

Answer 37

D) As an expense

‘Program Service Expenses’ should be classified as an expense in the statement of activities, reflecting the costs associated with running specific programs.

Question 38

FAR2C005n
Charlie Inc imports kitten mittens and ships them all over the world. Which of the following is correct regarding Charlie’s shipping costs?
A. Shipping costs to import the mittens are a product cost and included in inventory while shipping costs to ship the mittens to customers are a period cost.
B. Shipping costs to both import the mittens and send them to customers are inventoriable costs.
C. Shipping costs to import the mittens are a period cost and excluded from inventory while shipping costs to ship the mittens to customers are a product cost.
D. Neither the shipping cost to import the mittens nor the shipping costs to customers are included in inventory.

Answer 38

A. Shipping costs to import the mittens are a product cost and included in inventory while shipping costs to ship the mittens to customers are a period cost.

Shipping costs to import the mittens are a product cost and included in inventory. This is a cost necessary to bring the item to a saleable condition. Shipping costs to ship the mittens to customers are a period cost, and are not included in inventory.

Question 39

FAR2H10006
The change in the present value of the future cash flows of a debt, required for it to be considered an extinguishment, is generally:
A. More than 5%
B. Less than 5%
C. Exactly 10%
D. Variable depending on the original amount of the debt

Answer 39

A. More than 5%

A change in the present value of the future cash flows of more than 5% is often used as a benchmark for classifying a debt change as an extinguishment. This indicates a significant alteration in terms.

Less than 5% (option B) is too minor to be considered an extinguishment, and while 10% (option C) is significant, it is not a universally applied threshold. The variability (option D) is less about the original amount of the debt and more about the percentage change in the present value.

Question 40

FAR1E10038
In income tax basis accounting, how is interest income on a receivable recorded?
A) When the interest is earned.
B) When the interest is received.
C) When the interest is declared.
D) In the period it is taxable.

Answer 40

D) In the period it is taxable.

Interest income is recognized in the period it is taxable under tax laws in income tax basis accounting.

Question 41

FAR2B10022
When preparing a rollforward for trade receivables, which of the following would typically be deducted from the opening balance?
A) New credit sales
B) Cash collections from customers
C) Bad debt expense
D) Increase in allowance for doubtful accounts

Answer 41

B) Cash collections from customers

In a rollforward, cash collections reduce the receivables balance. New credit sales would increase it, while bad debt expense and changes in the allowance account affect the net realizable value but not the gross receivables balance.

Question 42

FAR2I10008
When a company issues common stock above par value, how is the excess recorded?
A) Debit Cash, Credit Common Stock, Credit Additional Paid-in Capital
B) Debit Additional Paid-in Capital, Credit Cash, Credit Common Stock
C) Debit Cash, Credit Retained Earnings, Credit Common Stock
D) Debit Retained Earnings, Credit Common Stock, Credit Additional Paid-in Capital

Answer 42

A) Debit Cash, Credit Common Stock, Credit Additional Paid-in Capital

When common stock is issued above its par value, Cash is debited for the total amount received, Common Stock is credited for the par value, and Additional Paid-in Capital is credited for the excess over par value.

Question 43

FAR2B10033
What is the first step in reconciling trade receivables between the subledger and general ledger?
A) Reviewing individual customer balances
B) Comparing total balances of both ledgers
C) Checking the accuracy of cash receipts
D) Analyzing sales returns and allowances

Answer 43

B) Comparing total balances of both ledgers

The first step is to compare the total balances of the subledger and general ledger. This step identifies whether a discrepancy exists before investigating individual transactions or customer balances.

Question 44

A company sponsors two defined benefit pension plans. The following information relates to the plans at year end:
Plan A: Fair value of plan assets $800,000, PBO $1,000,000
Plan B: Fair value of plan assets $1,000,000, PBO $700,000
What amount(s) should the company report in its balance sheet related to the plans?
A. Liability of $200,000; asset of $300,000
B. Asset of $100,000
C. Asset of $1,800,000; liability of $1,700,000
D. Liability of $100,000

Answer 44

A. Liability of $200,000; asset of $300,000

To simplify a pension, you have the projected amount of what all the payouts will equal (project benefit obligation), and that’s the liability. Then, you start investing in assets with the hopes of having enough to meet those obligations in the future (fair value of plan assets). The difference in the two and any given point in time is the “funded status”, and is either an asset or a liability.

In this case, Plan A is a liability of $200,000, and Plan B is an asset of $300,000.

Question 45

On January 1, Fonk City approved the following general fund resources for the new fiscal period:

Property taxes: $5,000,000
Licenses and permits: $400,000
Intergovernmental revenues: $150,000
Transfers in from other funds: $350,000

What amount should Fonk record as estimated revenues for the new fiscal year?
A. $5,400,000
B. $5,550,000
C. $5,750,000
D. $5,900,000

Answer 45

B. $5,550,000

Everything listed would be revenue except for the transfers in from other funds.

Question 46

FAR1A30020
How do revaluation surpluses of intangible assets affect Other Comprehensive Income?
A. They decrease it as they are operational losses.
B. They are included as they represent cash inflows.
C. They are excluded as they pertain to tangible assets.
D. They increase it as they are unrealized gains.

Answer 46

D. They increase it as they are unrealized gains.

Revaluation surpluses of intangible assets are included in Other Comprehensive Income as they represent unrealized gains. These surpluses increase the overall comprehensive income until realized.

A is incorrect as they are not operational losses. B is incorrect as they do not represent immediate cash inflows. C is incorrect as they pertain to intangible, not tangible, assets.

Question 47

FAR2H10002
Which of the following is NOT a criterion for classifying a change in a debt instrument as a modification of terms?
A. Changes in the timing of cash flows
B. Minor changes in interest rates
C. Introduction of a new lender
D. Extension of maturity date

Answer 47

C. Introduction of a new lender

The introduction of a new lender is generally considered an extinguishment of debt, as it often implies the replacement of the original creditor with a new one. Changes in the timing of cash flows, minor changes in interest rates, and extensions of maturity dates are typically seen as modifications, as they alter the existing terms without fundamentally changing the nature of the original debt agreement.

Question 48

FAR2D10062
How should a material discrepancy between the subledger and general ledger for PPE be addressed?
A. By adjusting the subledger to match the general ledger
B. By adjusting the general ledger to match the subledger
C. Through a thorough investigation and necessary adjustments in the appropriate ledger
D. By revaluing all the PPE assets to current market values

Answer 48

C. Through a thorough investigation and necessary adjustments in the appropriate ledger

Material discrepancies should be addressed by investigating the cause of the difference and making the necessary adjustments in either the subledger or general ledger, whichever is incorrect.

Question 49

FAR2E006n
Thomas Inc made a 30% investment in Jefferson Company. The investment gave Thomas the ability to exercise significant influence over Jefferson. If Jefferson reports net income and pays dividends during the year, how would Thomas’s accounting for the investment differ under the equity method vs making the fair value election?

A. If Thomas elects to use the fair value option, any dividends received from Jefferson would decrease the investment account on Thomas’s books.
B. If Thomas uses the equity method, its portion of Jefferson’s net income will increase the investment account on its books.
C. If Thomas elects to use the fair value option, Thomas’s portion of Jefferson’s net income would decrease the investment account on Thomas’s books.
D. If Thomas elects to use the fair value option, Thomas’s portion of Jefferson’s net income would increase the investment account on Thomas’s books.

Answer 49

B. If Thomas uses the equity method, its portion of Jefferson’s net income will increase the investment account on its books.

Under the equity method, Thomas’s portion of Jefferson’s income would increase the investment account on Thomas’s books, and dividends from Jefferson would decrease this same investment account and are not considered income.

Under the fair value method, changes in the fair value of the investment (stock price) will be reflected in income for the period, and any dividends received are included in income for the period. Thomas would not report any changes on the investment based on the results of Jefferson’s operations, like it would under the equity method.

Question 50

FAR2H509

ABC corp issued $100,000 of 8% serial bonds on Jan 1, Year 1. $10,000 of the bonds will be repaid each year, and interest is paid on Dec 31st of each year. The bonds were issued to yield 10%, and the proceeds were $90,000 based on the fair values on Jan 1, Year 1.

If ABC amortizes the discount using the effective interest method, what would the carrying amount of the bonds be on Jan 1, Year 2?

A. $80,000
B. $81,000
C. $90,000
D. $91,000

Answer 50

B. $81,000

The carrying value of the bond equals the bond payable amount, minus the unamortized discount.

In year 1, part of the bond payable was paid back ($10,000), and part of the discount was amortized.

We know that the actual interest paid in Year 1 is the $100,000 x 8%, so $8,000. Interest expense on the other hand is the PV amount of $90,000 x the 10% market rate, giving us $9,000. The difference between the $9,000 interest expense and the $8,000 interest paid is amount of the discount amortized in Year 1, which is $1,000. This means the remaining unamortized discount is now $9,000 ($10,000 original discount – the $1,000 amortized).

Also, we know that on Dec 31 of Year 1, $10,000 of the bonds were repaid.

So the carrying value of the bonds on Jan 1, Year 2 is: $100,000 original face value – $10,000 repayment – $9,000 unamortized discount = $81,000

Question 51

FAR2B10008

A company’s beginning balance in Allowance for Doubtful Accounts is a $2,000 credit. During the year, it writes off $1,500 in bad debts and recovers $500 previously written off. What is the ending balance in the Allowance for Doubtful Accounts?

A) $1,000 credit
B) $2,000 credit
C) $1,000 debit
D) $3,000 credit

Answer 51

A) $1,000 credit

The ending balance is calculated as Beginning Balance – Write-offs + Recoveries. Here, $2,000 – $1,500 + $500 = $1,000 credit.

Question 52

FAR1B30011
What is the key difference between the direct and indirect methods of preparing a statement of cash flows?
A. The direct method includes non-cash transactions, while the indirect method does not.
B. The direct method shows cash flows from operating activities, while the indirect method does not.
C. The indirect method starts with net income, while the direct method starts with cash receipts from customers.
D. The indirect method is used for financial reporting, while the direct method is for internal management.

Answer 52

C. The indirect method starts with net income, while the direct method starts with cash receipts from customers.

The indirect method begins with net income and makes adjustments for non-cash transactions to arrive at cash provided by operating activities. In contrast, the direct method lists all major operating cash receipts and payments, starting with cash received from customers.

Question 53

FAR1A30018
Why are unrealized gains and losses on foreign currency translation reported in Other Comprehensive Income?
A. Because they reflect daily operational cash flows.
B. As they are immediately realized and affect net income.
C. Due to their potential reversibility and non-operational nature.
D. Because they are part of regular sales revenue.

Answer 53

C. Due to their potential reversibility and non-operational nature.

Unrealized gains and losses on foreign currency translation are reported in Other Comprehensive Income due to their potential to reverse in the future and because they are not related to the core operations of the business.

A and D are incorrect as they do not reflect operational cash flows or sales revenue. B is incorrect as they are not immediately realized.

Question 54

FAR3B006nsim

Peterson Co. owns 100% of the outstanding common stock of Silver Corp. Assume all other appropriate year-end and income tax journal entries have been made.

Throughout year 3, Peterson sold merchandise costing $30,000 to Silver at a price of $60,000. Silver sold 50% of the inventory by December 31, year 3. Silver remitted payment to Peterson before year-end.

Calculate the cost of goods sold to be considered for eliminating entries for consolidation purposes.

A. $5,000
B. $30,000
C. $15,000
D. $45,000

Answer 54

D. $45,000

In this business combination, we are trying to eliminate any transactions between the parent and the subsidiary so that we only have transactions with 3rd parties left after the consolidating entries.

Cost of goods sold to Silver during year 3 = $30,000

Sale price of goods sold to Silver during year 3 = $60,000

Profit on sale of goods accounted in the books of Peterson for the sales made to Silver = $30,000

Gross profit ratio = 50% [$30,000/$60,000]

To record the sale, Peterson would record the following entries:

Debit: Intercompany AR $60,000

Credit: Intercompany sales $60,000

Debit: Intercompany COGS $30,000

Credit: Inventory $30,000

This set of entries records the sale and the receivable at the sales amount of $60,000 and reduces the inventory at the cost amount of $30,000.

The key thing to remember at this point is that Silver’s cost is the same as Peterson’s sales price. Silver will book the following entry to record the inventory purchase:

Debit: Inventory $60,000

Credit: Intercompany AP $60,000

Recording of this sale transaction led Peterson have $30,000 of intercompany profit in them. Eliminating the effect of this sale is important because including it misstates the results to users of the financial statements.

We also need to eliminate some or all of the cost of sales. In this case, 50% of the inventory is remaining in Silver’s inventory at the end of the year. Silver sold 50% of the inventory to 3rd parties. This means Silver would record cost of goods sold of $30,000 ($60,000 cost on Silver’s books multiplied by 50% of inventory sold).

Sales to these 3rd parties is recorded in the books of Silver with the following entry:

Debit: COGS $30,000

Credit: Inventory $30,000

Consolidating the books, the total cost of goods sold accounted for with this sale transaction is $60,000 ($30,000 original cost to Peterson plus the $30,000 recorded by Silver). This means that Cost of goods sold is overstated and needs to be corrected.

Original cost of goods was $30,000 and 50% of inventory is sold to outside customers, our cost of sales = $15,000 [$30,000×50%]. Comparing the actual cost of inventory sold ($15,000) with that recorded in the books ($60,000), The cost of goods sold is overstated by $45,000 which needs to be rectified through the elimination entry.

Question 55

FAR1B10028

When correcting an understatement of accrued salaries, what adjustment is needed?

A. Increase expenses and decrease net assets
B. Decrease expenses and increase liabilities
C. Increase liabilities and decrease net assets
D. Decrease liabilities and increase net assets

Answer 55

C. Increase liabilities and decrease net assets

Understated accrued salaries mean that liabilities (salaries payable) are lower than they should be. The correction involves increasing liabilities (to record the accrued salaries) and decreasing net assets (as this increases expenses).

Question 56

FAR1A50038
If a company writes off bad debt, how does this impact the statement of cash flows?
A. Increases cash flows from operating activities.
B. Decreases cash flows from operating activities.
C. No impact on the statement of cash flows.
D. Decreases cash flows from investing activities.

Answer 56

C. No impact on the statement of cash flows.

Writing off bad debt is a non-cash transaction and does not directly impact the cash flows.

Question 57

FAR2F10003
What distinguishes an indefinite-lived intangible asset from a finite-lived intangible asset?
A. Indefinite-lived intangible assets have a predictable and certain useful life.
B. Indefinite-lived intangible assets are not amortized.
C. Indefinite-lived intangible assets are always related to technological assets.
D. Indefinite-lived intangible assets are always fully expensed in the year of acquisition.

Answer 57

B. Indefinite-lived intangible assets are not amortized.

Indefinite-lived intangible assets do not have a foreseeable limit to the period over which they are expected to generate net cash inflows and are therefore not amortized. They are subject to impairment testing.

Question 58

FAR2B10033
What is the first step in reconciling trade receivables between the subledger and general ledger?
A) Reviewing individual customer balances
B) Comparing total balances of both ledgers
C) Checking the accuracy of cash receipts
D) Analyzing sales returns and allowances

Answer 58

B) Comparing total balances of both ledgers

The first step is to compare the total balances of the subledger and general ledger. This step identifies whether a discrepancy exists before investigating individual transactions or customer balances.

Question 59

FAR3F10019
In what scenario would a lease likely be classified as an operating lease?
A. The lessee can purchase the asset at a bargain price at the end of the lease.
B. The lease term covers a minor part of the asset’s economic life.
C. The asset is of a specialized nature that only the lessee can use.
D. The present value of lease payments is 90% of the asset’s fair value.

Answer 59

B. The lease term covers a minor part of the asset’s economic life.

A lease is likely classified as an operating lease if the lease term covers only a minor part of the asset’s economic life, indicating that the lessee does not obtain significant economic benefits or risks of ownership.

Question 60

FAR3D10007
When measuring the amount of tax benefit to recognize for an uncertain tax position, what should be considered?
A. The largest amount of benefit that is cumulatively greater than 50% likely to be realized.
B. The smallest amount of benefit that is cumulatively greater than 50% likely to be realized.
C. The average amount of benefit based on possible outcomes.
D. The amount of benefit that is 100% certain to be realized.

Answer 60

A. The largest amount of benefit that is cumulatively greater than 50% likely to be realized.

When measuring the amount of tax benefit to recognize for an uncertain tax position, the largest amount of benefit that is more likely than not to be realized (i.e., cumulatively greater than 50% likely) should be considered. This approach balances the need to recognize benefits with the need for reliability in financial reporting.