CPA FAR 2

Question 1

The provisions of FASB ASC 718-10-25-2, “Recognition Principle for Share-Based Payment Transactions,” apply to all of the following transactions except those related to:

A. common stock granted to employees.

B. employee stock ownership plan instruments.

C. stock options awarded to employees.

D. transfer of other equity instruments to employees.

Answer 1

B. employee stock ownership plan instruments.

FASB ASC 718-10-25-2 applies to all transactions in which an entity grants shares of its common stock, stock options, or other equity instruments to its employees, except for equity instruments held by an employee stock ownership plan (as per FASB ASC 718-10-15-7).

Question 2

Which of the following is an objective of a rabbi trust?

A. To provide a current cash bonus for an employee

B. To provide nontaxable compensation for an employee

C. To provide a benefit that is not taxable to the recipients until some later date when they actually receive compensation

D. None of the answer choices are objectives of a rabbi trust.

Answer 2

C. To provide a benefit that is not taxable to the recipients until some later date when they actually receive compensation

Companies arrange various types of deferred compensation. The most common is referred to as a rabbi trust. A grantor trust is set up to fund compensation for a group of managers or executives. The goal is to provide a benefit that is not taxable to the recipients until some later date when they actually receive compensation. To qualify for no current taxation, the trust agreement must explicitly state that the assets of the trust are available to satisfy the claims of general creditors in the event of bankruptcy of the employer.

Question 3

Which of the following statements is correct concerning disclosure of reverse repurchase and fixed coupon reverse repurchase agreements?

A. Related assets and liabilities should be netted.

B. Related interest cost and interest earned should be netted.

C. Credit risk related to the agreements need not be disclosed.

D. Underlying securities owned should be reported as “Investments.”

Answer 3

D. Underlying securities owned should be reported as “Investments.”

GASB I55.115 states: “The assets and liabilities arising from reverse repurchase and fixed coupon reverse repurchase agreements should not be netted on the balance sheet. These agreements should be reported as a fund liability captioned ‘Obligations under reverse repurchase agreements,’ and the underlying securities should be reported as ‘investments.’” GASB I55.116 further indicates that interest cost should not be netted with interest earned on related investments. GASB I55.111 states that credit risk needs to be disclosed.

Question 4

Under U.S. GAAP, an exception is allowed for the “impracticality” of calculating the impact of changes in accounting principles. For which category does IFRS allow an exception of “impracticality”?

Answer 4

Changes in accounting principles and correction of errors

IFRS allows an exception of reporting the impact of both changes in accounting principles and correction of errors. Unless an individual standard specifies otherwise, a change in accounting principle or an accounting error is applied retrospectively, except to the extent that it is impracticable to determine the effects of the change. In that case, the principle or error change is applied from the earliest date practicable.

Question 5

An entity should recognize the fair value of an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The entry to record the initial liability would include:

A. a debit to the carrying value of the related asset.

B. a credit to the carrying value of the related asset.

C. a debit to asset retirement expense.

D. a debit to asset retirement obligation.

Answer 5

A. a debit to the carrying value of the related asset.

While a company records the legal liability (a credit), it also records the same amount as an increase (a debit) in the carrying value of the related asset.

Question 6

Valley Town’s public school system is administered by a separately elected board of education. The board of education is not organized as a separate legal entity and does not have the power to levy taxes or issue bonds. Valley’s city council approves the school system’s budget. How should Valley report the public school system’s annual financial results?

A. Discrete presentation, yes; Blended, yes

B. Discrete presentation, yes; Blended, no

C. Discrete presentation, no; Blended, yes

D. Discrete presentation, no; Blended, no

Answer 6

C. Discrete presentation, no; Blended, yes

Blending of financial results is allowed as the public school system and the city are not separate legal entities. The city is responsible for the finances of the school system (the school board has no authority to levy taxes or issue bonds).

Discrete presentation is for affiliated entities whose resources are entirely for the benefit of the primary government. The school system does not operate for the sole benefit of the town.

Question 7

When is discrete presentation used? (Governmental)

Answer 7

Discrete presentation is for affiliated entities whose resources are entirely for the benefit of the primary government. The school system does not operate for the sole benefit of the town.

Question 8

Tott City’s serial bonds are serviced through a debt service fund with cash provided by the general fund. In a debt service fund’s statements, how are cash receipts and cash payments reported?

A. Cash receipts: Revenues; Cash payments: Expenditures

B. Cash receipts: Revenues; Cash payments: Operating transfers

C. Cash receipts: Operating transfers; Cash payments: Expenditures

D. Cash receipts: Operating transfers; Cash payments: Operating transfers

Answer 8

C. Cash receipts: Operating transfers; Cash payments: Expenditures

A transfer between funds does not carry a stipulation for repayment between the funds and does not meet the definition of revenue. Therefore, any answer with “revenue” would never be correct. The purpose of a debt service fund is to make the required payments on the debt and would be a classic example of an expenditure.

Question 9

In order for an entity to be considered a primary government it must meet all three of the following criteria:

Answer 9

1. It has a separately elected governing body.
2. It is legally separate.
3. It is fiscally independent of other state and local governments.

Question 10

Falltown provides combining financial statements in its comprehensive financial report, detailing fiduciary funds aggregated in the basic financial statements. The combining financial statements for agency funds would include:

A. a combining statement of fiduciary net position—agency funds.

B. a combining statement of changes in fiduciary net position—agency funds.

C. a combining statement of fiduciary net position—fiduciary funds.

D. a combining statement of changes in fiduciary net position—fiduciary funds.

Answer 10

C. a combining statement of fiduciary net position—fiduciary funds.

Fiduciary fund information should cover all fiduciary funds of a government with a separate column for each fiduciary fund type: pension trust funds, investment trust funds, private-purpose trust funds, and agency funds. A combining statement including all fiduciary funds would not be used. Further, the agency fund does not report a statement of changes in fiduciary net position. It consists only of assets and liabilities that are reported on the financial statement date in the statement of fiduciary net position.

Question 11

Chase City uses an internal service fund for its central motor pool. The assets and liabilities account balances for this fund that are not eliminated normally should be reported in the government-wide statement of net position as:

A. governmental activities.

B. business-type activities.

C. fiduciary activities.

D. note disclosures only.

Answer 11

A. governmental activities.

The governmental activity which is the predominant user of the internal service funds absorbs and reports the assets and liabilities of an internal service fund that are not eliminated. In most situations, this will be the governmental activities. (GASB 2200.147–.150)

Question 12

The FASB believes that, as a general policy, there is a maximum number of reportable segments about which information should be provided. What is the number?

Answer 12

10

Question 13

plant fund is established for a specific purpose

Answer 13

to accumulate assets for plant acquisition or capital projects over a longer period of time.

Question 14

The funded status of a defined benefit pension plan for a company should be reported in the:

Answer 14

The Statement of Financial Position

Question 15

In computing gain or loss, assets conveyed in a troubled debt restructuring should be valued at ….

Answer 15

Fair Value

Question 16

Could current cost financial statements report holding gains for goods sold during the period and holding gains on inventory at the end of the period?

Answer 16

Goods sold: Yes; Inventory: Yes

Holding gains may be realized or unrealized. Realized holding gains equal the difference between the current cost and the historical cost of assets sold or consumed during the period. Unrealized holding gains equal the difference between the current cost and the historical cost of assets still on hand at the end of the period.

Holding gains for cost of goods sold are realized. Holding gains for inventory on hand at the end of the period are unrealized.

Question 17

The three internal service funds of a town were presented in a single column in the basic financial statements. The town’s internal service funds supplied goods and services to the various governmental functions of the town. Combining the internal service funds in this way simplified:

A. the preparation and presentation of the combining fund statements.

B. the conversion of the fund-based information to the government-wide financial statement format.

C. the preparation of the notes to the financial statements.

D. the presentation of the budgetary schedules.

Answer 17

B. the conversion of the fund-based information to the government-wide financial statement format.

Although classified as proprietary funds, the internal service funds of this town would be reported in the governmental activities column in the government-wide financial statements. Presenting them in a single column facilitates the preparation of the government-wide statements as the internal service fund operations of the town would be considered governmental activities and the enterprise operations would be considered business-like activities. Internal service funds are exempted from the major funds reporting requirements. All enterprise funds could be shown in a single column in the basic financial statements if none would need to be shown separately as a major fund. This aggregation does not change the notes disclosures required. Budgetary accounting, required for governmental funds, is not required for internal service funds.

Question 18

In Soan County’s general fund statement of revenues, expenditures, and changes in fund balances, which of the following has an effect on the excess of revenues over expenditures?

A. Purchase of fixed assets

B. Payment to a debt service fund

C. Special items

D. Proceeds from the sale of capital assets

Answer 18

A. Purchase of fixed assets

Purchase of fixed assets is an example of an expenditure and reduces the excess of revenues over expenditures.

Transfers between funds are recorded as “other financing sources and uses.”

Proceeds from the sale of capital assets is an example of a special item. Special items are shown on the statement after the excess of revenue over expenditures.

Question 19

A number of the functional areas of Roseburg’s governmental activities, including General Government, Support Services, and Administration, include expenses that actually benefit other functions. For example, the Finance Department not only collects business taxes that benefit governmental activities, it handles the billings of the Water Enterprise Fund. Roseburg has developed a detailed cost allocation scheme that reallocates some of these expenses to the other governmental and business-like functions that benefit. These allocated, indirect expenses should be reported on the statement of activities:

A. combined with the direct operating expenses of benefiting function.

B. separately at the bottom of the statement of activities.

C. as a transfer from function to function.

D. in a column separate from the direct expenses.

Answer 19

D. in a column separate from the direct expenses.

Governments choosing to allocate indirect expenses should report them in a column separate from the direct expenses to enhance comparability with other governments that do not allocate. Therefore, the direct and indirect expenses should not be combined for reporting purposes. Special and extraordinary expenses are reported separately at the bottom of the statement of activities. Transfers are appropriate between governmental funds or to display transactions, not cost allocation, between the governmental activities and business-like activities of a government.

Question 20

SEC Regulation S-X provides guidance for the issuer regarding:

Answer 20

format and content of financial information submitted to the SEC.

Regulation S-X contains information regarding the financial statements that must be submitted to the SEC.

Regulation S-K contains the instructions for filing the nonfinancial statement forms required by the SEC. Regulation S-T contains instructions for the electronic filing of required SEC forms. Both Regulation S-K and S-T should be read together, as some parts of Regulation S-X may supersede the instructions in Regulation S-K.

Question 21

SEC Regulation S-X, S-K, S-T

Answer 21

Regulation S-K contains the instructions for filing the nonfinancial statement forms required by the SEC. Regulation S-T contains instructions for the electronic filing of required SEC forms. Both Regulation S-K and S-T should be read together, as some parts of Regulation S-X may supersede the instructions in Regulation S-K.

Question 22

Which of the following statements is correct regarding valuation allowances in accounting for income taxes?

A. The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.

B. Both deferred tax assets and deferred tax liabilities can be reduced by a valuation allowance.

C. Only negative evidence, not positive evidence, should be considered when determining whether a valuation allowance is needed.

D. A valuation allowance is necessary when the realistic probability standard of evidence is satisfied.

Answer 22

A. The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.

GAAP provides that only deferred tax assets (not deferred tax liabilities) be reduced by a valuation allowance, but only if it is more likely than not (i.e., a likelihood of more than 50%) that some or all of the deferred tax assets will not be realized. The valuation allowance should reduce the deferred tax asset to the amount that is more likely than not to be realized, considering both positive and negative evidence.

The effect of a change in the opening balance of a valuation allowance that results from a change of circumstances ordinarily is included in income from operations.

Question 23

Quasi Reorganization

Answer 23

• Retained Earnings deficit is eliminated
• Amount reported to CS is reduced to recognized the new par value, if the reduction amount > RE then an APIC increase is recognized

Question 24

In a compensatory stock option plan for which the grant, vesting, and exercise dates are all different, the additional paid-in capital—stock options account should be reduced at the:

A. date of grant.

B. vesting date.

C. beginning of the service period.

D. exercise date.

Answer 24

D. exercise date.

Total compensation cost is determined at the date of grant, based on the fair value of the award at that date. This total compensation cost is recognized over the service period by recording the following type of entry (ignoring, for simplicity, the income tax effect):

Question 25

Estimates of price-level changes for specific inventories are required for which of the following inventory methods?

A. Conventional retail

B. Dollar-value LIFO

C. Weighted-average cost

D. Average cost retail

Answer 25

B. Dollar-value LIFO

Dollar-value LIFO starts with a base-year layer valued at base-year prices. As subsequent year layers are added, these inventory layers are valued using the specific inventory prices in effect for the year in which the layer is added. Thus, estimates of price-level changes (price indexes) for specific inventories are required in applying dollar-value LIFO.

Question 26

The provisions of FASB ASC 718-10-25-2, “Recognition Principle for Share-Based Payment Transactions,” apply to all of the following transactions except those related to:

A. common stock granted to employees.

B. employee stock ownership plan instruments.

C. stock options awarded to employees.

D. transfer of other equity instruments to employees.

Answer 26

B. employee stock ownership plan instruments.

FASB ASC 718-10-25-2 applies to all transactions in which an entity grants shares of its common stock, stock options, or other equity instruments to its employees, except for equity instruments held by an employee stock ownership plan (as per FASB ASC 718-10-15-7).

Question 27

In accounting for a long-term construction contract using the percentage-of-completion method, the pro­gress billings on contracts account is a:

A. contra current asset account.

B. contra noncurrent asset account.

C. noncurrent liability account.

D. revenue account.

Answer 27

A. contra current asset account.

The current asset account maintaining an inventory value for the costs and profits recognized so far on the contract has a contra account of progress billings, lowering its carrying value. If the billings exceed the construction in process, then a current liability can exist instead.

Question 28

Deficits accumulated during the development stage of a company should be:

Answer 28

reported as a part of stockholders’ equity.

The same basic financial statements are issued for both an established company and a company in the development stage. Deficits are reported as part of stockholders’ equity.

Question 29

The Private Company Decision-Making Framework has been developed by the:

Answer 29

FASB

Question 30

Which of the following would be reported in the income statement of a proprietorship?

A. Proprietor’s draw

B. Depreciation

C. Both proprietor’s draw and depreciation

D. Neither proprietor’s draw nor depreciation

Answer 30

B. Depreciation

Depreciation is an expense incurred in generating income and is reported in the income statement. A proprietor’s draw is a distribution of owner’s equity to an owner, not an expense incurred to generate income. A proprietor’s draw does not affect income, just as a proprietor’s contribution of additional resources into the company would not affect income.

Question 31

State and local governments have various sources of revenue. When revenues are received from Unrestricted Grants, these revenues are classified as:

Answer 31

General Revenues

Question 32

What is the purpose of SFAC 4 as stated in that concepts statement?

Answer 32

To provide a basis for establishing detailed accounting and reporting standards for nonbusiness entities

Question 33

Which of the following characteristics of accounting information primarily allows users of financial statements to generate predictions about an organization?

Answer 33

Relevance

Question 34

What are the Statements of Financial Accounting Concepts intended to establish?

Answer 34

The objectives and fundamental concepts that will be the basis for development of financial accounting and reporting guidance.

Question 35

IFRS - Does goodwill have to be recognized

Answer 35

No, Goodwill does not have to be recognized. It must be for GAAP.

Question 36

Band Co. uses the equity method to account for its investment in Guard, Inc., common stock. How should Band record a 2% stock dividend received from Guard?

Answer 36

As a memorandum entry reducing the unit cost of all Guard stock owned

Question 37

Which of the following is true regarding the comparison of managerial to financial accounting?

A. Managerial accounting is generally more precise.

B. Managerial accounting has a past focus and financial accounting has a future focus.

C. The emphasis on managerial accounting is relevance and the emphasis on financial accounting is timeliness.

D. Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them.

Answer 37

D. Managerial accounting need not follow generally accepted accounting principles (GAAP) while financial accounting must follow them.

Financial accounting’s major objective is to provide useful information to investors and creditors. Managerial accounting is used by management and is not subject to GAAP.

Question 38

Price to Earnings Ratio

Answer 38

Stock Price / EPS

Question 39

Investing Activities (LIP)

Answer 39

L - Loans or principal collections made by the entity (interest and dividends received are operating)

I - Acquisition or disposal of AFS or HTM Investments (Not Trading)

P - Acquisition or disposal of PP&E and intangibles

Question 40

During periods of rising prices, a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which of the following inventory cost flow methods?

A. FIFO, not LIFO.

B. Both FIFO and LIFO.

C. LIFO, not FIFO.

D. Neither FIFO nor LIFO

Answer 40

A. FIFO, not LIFO.

Question 41

A bond is purchased a premium when…

Answer 41

The stated rate is greater than the market rate.

Question 42

General purpose external financial reporting of a corporation focuses primarily on the needs of which of
the following users?

A. Regulatory and taxing authorities.

B. Investors and creditors and their advisors.

C. The board of directors of the corporation.

D. The management of the corporation.

Answer 42

B. Investors and creditors and their advisors.

Question 43

An entity, upon initial recognition of an asset retirement obligation, should not take which of the following
actions?

A. Allocate asset retirement cost to expense over the useful life of the related asset.

B. Measure the asset retirement cost at fair value.

C. Capitalize the asset retirement cost by increasing the carrying amount of the related asset.

D. Capitalize the asset retirement cost at its undiscounted cash flow value

Answer 43

D. Capitalize the asset retirement cost at its undiscounted cash flow value

Question 44

Which of the following is an intangible asset that is subject to the recoverability test when testing for impairment?

A. A patent.

B. Goodwill.

C. R&D costs for a patent.

D. A trademark with indefinite useful life.

Answer 44

A. A patent.

Question 45

During the current year, Vann County’s motor pool internal service fund sold two vehicles for $5,000. The
vehicles had a cost of $6,000 and a carrying value of $4,000. How should Vann County’s motor pool
internal service fund report this transaction in its fund financial statements?

A. Revenue of $5,000.

B. Other financing source of $5,000.

C. Special item of $1,000.

D. Gain of $1,000.

Answer 45

D. Gain of $1,000.

Question 46

The net asset reclassifications of a nongovernmental not-for-profit organization would be reported on which of the following?
A. Statement of financial position.

B. Statement of activities.

C. Statement of cash flows.

D. Statement of functional expenses.

Answer 46

B. Statement of activities.

Question 47

A business interest that constitutes a large part of an individual’s total assets should be presented in a personal statement of financial condition as:

A. a separate listing of the individual assets and liabilities at cost.

B. separate line items of both total assets and total liabilities at cost.

C. a single amount equal to the proprietorship equity.

D. a single amount equal to the estimated current value of the business interest.

Answer 47

D. a single amount equal to the estimated current value of the business interest.

FASB ASC 274-10-45-9, Accounting and Financial Reporting for Personal Financial Statements, contains guidelines for preparation of personal statements of financial condition. For business interests that constitute a large part of a person’s total assets:

The estimated current value of an investment…should be shown in one amount as an investment….

Question 48

Abel Company will decommission a nuclear electric utility plant at the end of the plant’s useful life. The obligation associated with the retirement should be recorded at fair value in the period in which it is incurred. The journal entry would:

A. debit Asset and credit Liability.

B. debit Expense and credit Liability.

C. debit Asset and credit Contra Asset.

D. debit Expense and credit Contra Asset.

Answer 48

A. debit Asset and credit Liability.

Upon initial recognition of a liability for an asset retirement obligation, an entity shall capitalize an asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount as the liability.

Question 49

Bale Co. incurred $100,000 of acquisition costs related to the purchase of the net assets of Dixon Co. The $100,000 should be:

A. allocated on a pro rata basis to the nonmonetary assets acquired.

B. capitalized as part of goodwill and tested annually for impairment.

C. capitalized as an other asset and amortized over five years.

D. expensed as incurred in the current period.

Answer 49

D. expensed as incurred in the current period.

The acquisition method is required to account for the acquisition of another company. The acquisition method requires that acquisition-related costs be expensed as incurred. The costs to acquire stock or bonds must be included in the cost of the stock or bonds.

Question 50

Which of the following items is included in accumulated other comprehensive income or loss?

A. Unrealized gains and losses from the ineffective portion of a derivative properly designated as a
cash flow hedge.

B. Unrealized holding gains or losses on securities classified as trading securities.

C. A reduction of shareholders’ equity related to employee stock ownership plans.

D. Prior service costs not previously recognized as a component of net periodic pension costs.

Answer 50

D. Prior service costs not previously recognized as a component of net periodic pension costs.

Question 51

Long Co. invested in marketable securities. At year-end, fair-value changes in this investment were
included in Long’s other comprehensive income. How would Long classify this investment?

A. Held-to-maturity securities.

B. Trading securities.

C. Equity securities.

D. Available-for-sale securities.

Answer 51

D. Available-for-sale securities.

Question 52

Are leases eligible for Fair Value Option Accounting?

Answer 52

No.

Question 53

A portfolio of equity securities that are traded on a national exchange is donated to a private, not-for-profit
college as an endowment fund. How should the equity portfolio be valued in the college’s year-end
financial statements three years after the donation?

A. Using the donor’s original cost basis.

B. Using the fair value at the time of donation.

C. Using fair value at the date of the financial statements.

D. Using the lower of fair value at donation and fair value at the date of the financial statements

Answer 53

C. Using fair value at the date of the financial statements.

Question 54

Property taxes and fines represent which of the following classes of nonexchange transactions for governmental units?

A. Derived tax revenues

B. Imposed nonexchange revenues

C. Government-mandated nonexchange transactions

D. Voluntary nonexchange transactions

Answer 54

B. Imposed nonexchange revenues

GASB N50.104 requires that nonexchange revenues be classified into four different categories: Derived Tax Revenues, Imposed Nonexchange Revenues, Government Mandated Nonexchange Transactions, and Voluntary Nonexchange Transactions. Property taxes and fines are examples of imposed nonexchange revenues insofar as they are assessed by governments on nongovernmental entities, including individuals, and are not assessments on exchange transactions.

Question 55

If a premium on a bonds payable transaction is not amortized, what are the effects on interest expense and total stockholders’ equity?

A. Interest expense: overstated; Total stockholders’ equity: overstated

B. Interest expense: understated; Total stockholders’ equity: overstated

C. Interest expense: overstated; Total stockholders’ equity: understated

D. Interest expense: understated; Total stockholders’ equity: understated

Answer 55

C. Interest expense: overstated; Total stockholders’ equity: understated

When a bond is issued for a premium, then the issuer receives more than the face amount of the debt upon issuance. Thus, the issuer will pay back (the face amount) less than the amount received. The additional receipts lower the interest expense over the course of the repayment, since the overall net repaid amount is less. As the bonds are repaid, the premium is amortized and lowers the interest expense taken over the term of the bond. If the amortization is not taken, then the interest expense is overstated, and the net income understated. (Thus, retained earnings and stockholder’s equity are also too low.)

Question 56

An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the sink­ing fund and subsequently used to purchase investments. The sinking fund:

I. increases by revenue earned on the investments.
II. is not affected by revenue earned on the investments.
III. decreases when the investments are purchased.

A. I only

B. I and III

C. II and III

D. III only

Answer 56

A. I only

Sinking funds are special-purpose investments, in the form of cash and/or securities. Sinking funds are increased by revenues earned and by additional investment.

Question 57

A material overstatement in ending inventory was discovered after the year-end financial statements of a company were issued to the public. What effect did this error have on the year-end financial statements?

A. Current assets were understated and gross profit was overstated.

B. Current assets and gross profit were both overstated.

C. Current assets and gross profit were both understated.

D. Current assets were overstated and gross profit was understated.

Answer 57

B. Current assets and gross profit were both overstated.

The overstatement of ending inventory (a current asset) results in an understatement of cost of goods sold.

The understatement of cost of goods sold results in an overstatement of gross profit.

Question 58

Which of the following statements is correct concerning the appearance of noncontrolling interest on the income statement?

A. Revenues, expenses, gains, losses, net income or loss, and other comprehensive income are reported in the consolidated financial statements at the consolidated amounts, which include the amounts attributable to the owners of the parent and the noncontrolling interest.

B. Revenues, expenses, gains, losses, net income or loss, and other comprehensive income are reported in the consolidated financial statements as the amounts attributable to the owners of the parent, followed by a separate disclosure of the revenues, expenses, gains, losses, net income or loss, and other comprehensive income attributable to the noncontrolling interest.

C. Revenues, expenses, gains, losses, net income or loss, and other comprehensive income are reported in the consolidated financial statements at the owners’ amounts with disclosure of the noncontrolling interest only in the footnotes.

D. None of the answer choices are appropriate disclosure of the noncontrolling interest on the income statement.

Answer 58

A. Revenues, expenses, gains, losses, net income or loss, and other comprehensive income are reported in the consolidated financial statements at the consolidated amounts, which include the amounts attributable to the owners of the parent and the noncontrolling interest.

FASB ASC 810-10-45-19 requires that the consolidated amounts of these items (revenues, expenses, gains, losses, net income or loss, and other comprehensive income) be reported on the income statement. The amount of consolidated net income attributable to the parent and to the noncontrolling interest must be clearly identified and presented on the face of the consolidated statement of income.

Question 59

Which of the following items is a required disclosure regarding fair value hedges?

A. The net amount of gains or losses included in the cumulative translation adjustment during the reporting period

B. The amount of net gain or loss recognized in earnings when a hedged firm commitment no longer qualifies as a fair value hedge

C. A description of the transactions or other events that will result in the reclassification into earnings of gains and losses that are reported in accumulated other comprehensive income

D. The estimated net amount of the existing gains or losses at the reporting date that is expected to be reclassified into earnings within the next 12 months

Answer 59

B. The amount of net gain or loss recognized in earnings when a hedged firm commitment no longer qualifies as a fair value hedge

Of the answer choices listed, only “the amount of net gain or loss recognized in earnings when a hedged firm commitment no longer qualifies as a fair value hedge” is a disclosure requirement for a fair value hedge.

The other answer choices are disclosure requirements for a cash flow hedge.

Question 60

How are these Treated:

1. Change in estimate
2. Change in accounting estimate effected by a change in accounting principle
3. Change in accounting principle
4. Change in reporting entity
5. Correction of an error

Answer 60

1. Prospective Approach
2. Prospective Approach
3. Retrospective Approach
4. Retrospective Approach
5. Restatement

Question 61

The per-share amount must be reported on the face of a public company’s income statement for which of the following items?

A. Income from continuing operations

B. Preferred stock dividend

C. U.S. Treasury stock

D. Compensation effect of fair value on stock options

Answer 61

A. Income from continuing operations

EPS, or earnings per share, (if applicable, both basic EPS and diluted EPS) must be presented on the face of the income statement for Income from Continuing Operations and Net Income. EPS for discontinued operations may be disclosed either on the face of the income statement or in the notes.

EPS is not required for preferred stock dividends, U.S. Treasury stock, or for the compensation effect of fair value on stock options.

Question 62

Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise. The excess of the merchandise’s carrying amount over its market value should be:

A. ignored.

B. reported as a separately disclosed reduction of retained earnings.

C. reported as an ordinary loss, net of income taxes.

D. reported as a reduction in income.

Answer 62

D. reported as a reduction in income.

A transfer of a nonmonetary asset to a stockholder or to another entity in a nonreciprocal transfer should be recorded at the fair value of the asset transferred, and a gain or loss should be recognized on the disposition of the asset.

Since the market value of the merchandise was less than its carrying amount, Evie Corp. should report the resulting loss as a reduction in income.

Question 63

A balance arising from the translation or remeasurement of a subsidiary’s foreign currency financial statements is reported in the consolidated income statement when the subsidiary’s functional currency is:

A. neither the foreign currency nor the U.S. dollar.

B. the U.S. dollar.

C. the foreign currency.

D. both the foreign currency and the U.S. dollar.

Answer 63

B. the U.S. dollar.

The objective of translation or remeasurement is to report the subsidiary’s income statement results in the U.S. parent’s currency—which is the U.S. dollar.

Question 64

Indirect Method: You are converting from Accrual to Cash basis. TIP.

Answer 64

Every change in an account with a normal DR balance: has the opposite effect! - i.e. if the account increases, cash decreases! Every change in an account with a normal CR balance: has the same effect!- i.e. if the account increases, cash increases!

Question 65

The retail inventory method includes which of the following in the calculation of both cost and retail amounts of goods available for sale?

A. Purchase returns

B. Sales returns

C. Net markups

D. Freight in

Answer 65

A. Purchase returns

When applying the retail inventory method, one must compute the total cost and total retail amounts for goods available for sale. Some items are only included in one of these totals, sales returns and markups only go into the retail column, and freight in only goes into the cost column. Purchase returns are an adjustment to both columns.

Question 66

IFRS - Is internally generated goodwill recognized as an asset?

Answer 66

No. Internally generated goodwill cannot be recognized as an asset.

Question 67

A note payable was issued in payment for services received. The services had a fair value less
than the face amount of the note payable. The note payable has no stated interest rate. How
should the note payable be presented in the statement of financial position?

A. At the face amount.

B. At the face amount with a separate deferred asset for the discount calculated at the
imputed interest rate.

C. At the face amount with a separate deferred credit for the discount calculated at the
imputed interest rate.

D. At the face amount minus a discount calculated at the imputed interest rate

Answer 67

D. At the face amount minus a discount calculated at the imputed interest rate

Question 68

Which of the following phrases best describes a Level 1 input for measuring the fair value of an
asset or liability?

A. Inputs for the asset or liability based on the reporting entity’s internal data.

B. Quoted prices for similar assets or liabilities in active markets.

C. Inputs that are principally derived from or corroborated by observable market data.

D. Unadjusted quoted prices for identical assets or liabilities in active markets.

Answer 68

D. Unadjusted quoted prices for identical assets or liabilities in active markets.

Question 69

Harmony Co. has a single-employer defined benefit pension plan. Harmony should report a liability
related to the plan equal to which of the following amounts?

A. The unfunded projected benefit obligation.

B. The accumulated benefit obligation.

C. The projected benefit obligation.

D. The unfunded vested benefit obligation.

Answer 69

A. The unfunded projected benefit obligation.

Question 70

A foreign subsidiary of a U.S. parent company should measure its assets, liabilities and operations using

A. The subsidiary’s local currency.

B. The subsidiary’s functional currency.

C. The U.S. dollar.

D. The best available spot rate.

Answer 70

B. The subsidiary’s functional currency.

Question 71

When dealing with foreign operations under IFRS, the proper terms are defined as

a. International and functional.
b. Foreign, functional, and presentation.
c. Domestic and international.
d. Operating, international, and presentation.

Answer 71

b. Foreign, functional, and presentation.

Under IFRS, the functional currency is the currency of the primary economic environment in which the entity does business, a foreign currency is any currency other than the functional currency, and the presentation currency, which may or may not be the functional currency, is the currency in which the financial statements are being presented.

Question 72

Executory Costs (Leases)

Answer 72

Are recognized in the period in which they are incurred as an expense

Question 73

Which of the following statements are required to be presented for special-purpose government entities engaged only in business-type activities (such as utilities)?

a. Statement of net assets only.

b. Management’s Discussion and Analysis (MD&A) and
Required Supplementary Information (RSI) only.

c. The financial statements required for governmental funds, including MD&A.
d. The financial statements required for enterprise funds, including MD&A and RSI.

Answer 73

d. The financial statements required for enterprise funds, including MD&A and RSI.

Correct! Because a special-purpose government entity engaged only in business-type activities is by definition an enterprise fund, it would need to present the financial statements required for enterprise funds, including MD&A and RSI.

Question 74

Gross Profit Calculation

Answer 74

Gross Profit / Sales Price

Question 75

Functional Expenses of a nonprofit (3)

Answer 75

Program services, management and general, and fund-raising.

Program services, management and general, and fund raising expenses are all functional expense categories for a nongovernmental not-for-profit organization. Program services are expenses that further the mission of the organization and are directly related to the program. Management and general and fund-raising expenses are for services in support of the organization’s mission.

Question 76

During a period of inflation in which an asset account remains constant, which of the following occurs?

a. A purchasing power gain, if the item is a monetary asset.
b. A purchasing power gain, if the item is a nonmonetary asset.
c. A purchasing power loss, if the item is a monetary asset.
d. A purchasing power loss, if the item is a nonmonetary asset.

Answer 76

c. A purchasing power loss, if the item is a monetary asset.

During a period of inflation, monetary assets are redeemed in dollars that have less purchasing power than the dollars originally assigned to the asset at its creation. As a result, when a monetary asset has a balance that remains constant during a period of inflation, a purchasing power loss is realized.

Question 77

A company that wishes to disclose information about the effect of changing prices should report this information in

a. The body of the financial statements.
b. The notes to the financial statements.
c. Supplementary information to the financial statements.
d. Management’s report to shareholders.

Answer 77

c. Supplementary information to the financial statements.

Companies are not required to provide information about the effects of changing prices on their financial information. When the information is presented, it is included as supplementary information to the financial statements.

Question 78

On which of the following dates is a public entity required to measure the cost of employee services in exchange for an award of equity interests, based on the fair market value of the award?

a. Date of grant.
b. Date of restriction lapse.
c. Date of vesting.
d. Date of exercise.

Answer 78

a. Date of grant.

Public entities are required to measure and record the cost of employee services in exchange for an award of equity interests at the date of grant.

Question 79

According to the FASB conceptual framework, the objectives of financial reporting for business enterprises are based on
Your Answer:

a. Generally accepted accounting principles.
b. Reporting on management’s stewardship.
c. The need for conservatism.
d. The needs of the users of the information.

Answer 79

d. The needs of the users of the information.

The objective of financial reporting is to serve the needs of users. It is presumed that the objectives will be met when financial statements are prepared in conformity with generally accepted accounting principles. In order to meet the objective, the financial statements provide indirect information about management’s stewardship. Conservatism is a characteristic, not an objective.

Question 80

PDX Corp. acquired 100% of the outstanding common stock of Sea Corp. in a business combination accounted for using the acquisition method. The cost of the acquisition exceeded the fair value of the identifiable assets and assumed liabilities. The general guidelines for assigning amounts to the inventories acquired provide for
Your Answer:

a. Raw materials to be valued at original cost.
b. Work in process to be valued at the estimated selling prices of finished goods, less both costs to complete and costs of disposal.
c. Finished goods to be valued at replacement cost.
d. Finished goods to be valued at estimated selling prices, less both costs of disposal and a reasonable profit allowance.

Answer 80

d. Finished goods to be valued at estimated selling prices, less both costs of disposal and a reasonable profit allowance.

In a business combination accounted for under the acquisition method, the guidelines for assigning amounts to inventory provide for raw materials to be valued at replacement cost. Work in process is to be valued at selling price of the finished goods less costs to complete, cost of disposal, and a reasonable profit. Finished goods are to be valued at selling prices less costs of disposal and a reasonable profit.

Question 81

A 70%-owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and minority interest balances in the parent company’s consolidated balance sheet?
Your Answer:

a. No effect on either retained earnings or minority interest.
b. No effect on retained earnings and a decrease in minority interest.
c. Decreases in both retained earnings and minority interest.
d. A decrease in retained earnings and no effect on minority interest.

Answer 81

b. No effect on retained earnings and a decrease in minority interest.

When a subsidiary pays dividends, the portion that is paid to the parent is eliminated and has no effect on retained earnings. The remainder, which is paid to the minority shareholders, reduces the minority interest.

Question 82

To meet the disclosure requirements related to risks and uncertainties, an entity will disclose which of the following?

I. The legal form of entity
II. The use of estimates
III. Concentrations of risk

a. I, II, and III
b. I and II only
c. I and III only
d. II and III only

Answer 82

d. II and III only

To comply with the disclosure requirements related to risks and uncertainties, an entity is required to disclose the nature of its operations, the use of estimates, certain significant estimates, and vulnerability to certain concentrations of risk. There is no requirement to disclose the legal form of entity.

Question 83

When collectability is reasonably assured, the excess of the subscription price over the stated value of the no par common stock subscribed should be recorded as
Your Answer:

a. No par common stock.
b. Additional paid-in capital when the subscription is recorded.
c. Additional paid-in capital when the subscription is collected.
d. Additional paid-in capital when the common stock is issued.

Answer 83

b. Additional paid-in capital when the subscription is recorded.

When an issue of common stock is subscribed to, and collectability is reasonably assured, a receivable for the remaining subscription price is recorded immediately as a debit along with cash received. The accompanying credits are to Common stock subscribed and Additional paid-in capital.

Question 84

Which of the following should be disclosed in a company’s financial statements related to deferred taxes?

I. The types and amounts of existing temporary differences
II. The types and amounts of existing permanent differences.
III. The nature and amount of each type of operating loss and tax credit carry forward.

a. I and II only.
b. I and III only.
c. II and III only.
d. I, II, and III.

Answer 84

b. I and III only.

The types and amounts of existing temporary difference and the nature and amount of each type of operating loss and tax carry forward must be disclosed in a company’s financial statements. A company must disclose the significant components of income tax expense arising from continuing operations on either the income statement or in the footnotes. Disclosure of the types and amounts of existing permanent differences is not required.

Question 85

What is the present value of all future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date only?
Your Answer:

a. Service cost.
b. Interest cost.
c. Projected benefit obligation.
d. Accumulated benefit obligation.

Answer 85

d. Accumulated benefit obligation.

The accumulated benefit obligation is the present value of all future retirement payments that the employee is already entitled to based on services rendered prior to that date.

Question 86

A company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods. This type of commitment is:

A. recorded and reported on the balance sheet at the present value of the future required payments.

B. recorded and reported on the balance sheet at the fair value of the goods to be received.

C. not reported on the balance sheet but disclosed in the notes to the financial statements.

D. not reported or disclosed in the financial statements.

Answer 86

C. not reported on the balance sheet but disclosed in the notes to the financial statements.

When a company is obligated to pay a specified amount to a supplier even if it does not take delivery of the contracted goods, it has an unconditional purchase commitment. Such an obligation is not reported on the balance sheet but is disclosed in the notes to the financial statements at the present value of the future required payments.

Question 87

What is the present value of all future retirement payments attributed by the pension benefit formula to employee services rendered prior to that date and based on current and past compensation levels?

A. Service cost

B. Interest cost

C. Projected benefit obligation

D. Accumulated benefit obligation

Answer 87

A. Service cost

Question 88

Which of the following is generally associated with the terms of convertible debt securities?

A. An interest rate that is lower than nonconvertible debt

B. An initial conversion price that is less than the market value of the common stock at time of issuance

C. A noncallable feature

D. A feature to subordinate the security to nonconvertible debt

Answer 88

A. An interest rate that is lower than nonconvertible debt

The conversion feature has an economic value. Consequently, if all other terms are the same, a convertible debt security should receive a lower interest rate than a nonconvertible debt security.

Question 89

Davis Tire Co. has a deferred compensation plan for several key employees. Each employee’s plan contains an agreement not to compete and has a different set of benefits. How should Davis Co. account for this plan?

A. The plan should be accounted for as a pension plan or as a health and welfare plan.

B. The plan should be accounted for as a current expense and accrued liability each year of an employee’s service life.

C. Deferred compensation plans do not need to be reported or disclosed.

D. A liability, not less than the sum of the nondiscounted future cash flows, should be reported.

Answer 89

B. The plan should be accounted for as a current expense and accrued liability each year of an employee’s service life.

A deferred compensation plan which is not the equivalent of a pension plan should be reported in accordance with FASB ASC 710-10-25-11. Davis Co. would accrue a liability of not less than the present value of the estimated future payments.

Question 90

Four conditions are necessary for accrual of employees’ compensation for future absences according to provisions in FASB ASC 710-10-25-1. The four conditions are:

Answer 90

1. rights to compensation vest or accumulate,
2. payment of compensation is probable,
3. amount of payment can be reasonably estimated, and
4. the compensation is attributable to employees’ services already rendered.

Question 91

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:

A. faithful representation.

B. materiality.

C. legal entity.

D. economic entity.

Answer 91

D. economic entity.

The purpose of consolidated statements is to present…the results of operations and the financial position of a parent and all its subsidiaries essentially as if the consolidated group were a single economic entity.