CPA FAR

Question 1

When are Gain Contingencies recognized?

Answer 1

Never. This would be the recgniztion of revenue prior to realization. They are disclosed in the notes only.

Question 2

Vulnerability to Concentrations refers to…

Answer 2

Risk due to lack of diversification. Disclosure must be made if criteria is met.

Question 3

Vulnerability to concentrations must be disclosed when…

Answer 3

The Following Criteria is met:
1. The concentration exists at the date of the FS
2 The concentration makes the entity vulnerable to the risk of a near-term severe impact
3. It is at least reasonably possible that the events could cause the severe impact in the near term

Question 4

Impaired long-lived assets to be disposed of by sale that are subject to the reporting requirements of FASB ASC 360-10-35 are measured at:

Answer 4

Lower of the Fair Value less costs to sell or carrying amount

Question 5

Basic EPS Formula

Answer 5

(Net Income / Weighted Average Common Stock Outstanding) Net Income must be reduced by preferred cumulative dividends

Question 6

3 Primary Criteria for reporting operating segments

Answer 6

Revenues, Assets, or profit and loss equals 10% or more of combined operating segments

Question 7

FASB ASC 805-20-55-4 requires long-term customer-relationship intangible assets to be:

Answer 7

subject to the same impairment loss recognition as other long-lived intangible assets that are held and used.

Question 8

Where and how is Basic EPS reported?

Answer 8

Basic EPS is reported on the Face of the income statement

Question 9

A private company may elect any one of the following accounting alternatives when considering the fair value intangible assets

A. assessing the nature of the difference between the carrying amount of an investment and the amount of underlying equity.

B. adopting fresh-start reporting.

C. applying the acquisition method.

D. applying the pooling of interest method.

Answer 9

A private company may elect any one of the following accounting alternatives:

1. Assessing the nature of the difference between the carrying amount of an investment and the amount of the underlying equity in net assets of an investee when applying the equity method
2. Adopting fresh-start reporting
3. Applying the acquistion method

Question 10

“Options to purchase common stock are excluded from the computation of diluted EPS if:

Answer 10

Their exercise price is greater than the average market price

Question 11

What is a monetary asset?

Answer 11

Monetary assets are cash or items whose amounts are fixed in terms of numbers of dollars. For example: Advances to unconsolidated subsidiaries, Allowance for uncollectible accounts, Unamortized premium on bonds payable. Depreciation is not considered a monetary unit.

Question 12

How should a company report its decision to change from a cash basis of accounting to accrual basis of accounting?

Answer 12

As a correction of an error (net of tax), by adjusting the beginning balance of retained earnings

Question 13

An entity shall subsequently measure each class of servicing assets and servicing liabilities using either of the following methods:

Answer 13

Amortization method. - Amortize servicing assets or servicing liabilities in proportion to and over the period of estimated net servicing income (if servicing revenues exceed servicing costs) or net servicing loss (if servicing costs exceed servicing revenues), and assess servicing assets or servicing liabilities for impairment or increased obligation based on fair value at each reporting date.

Fair value measurement method. - Measure servicing assets or servicing liabilities at fair value at each reporting date and report changes in fair value of servicing assets and servicing liabilities in earnings in the period in which the changes occur.

Question 14

When should costs of one time termination benefits be recorded?

Answer 14

They should be recorded and measured at its Fair Value on the communication date.

Question 15

FASB ASC 850 Related Party Disclosures

Answer 15

a. The nature of the relationship between the related parties
b. A description of the related party transaction
c. The dollar amount of transactions for each of the periods for which an income statement is presented and the effects of any change in the method of establishing the terms from that used in the preceding period
d. Amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement

Question 16

3 Characteristics of a derivative financial instrument

NUNS

Answer 16

1. There is an underlying or notional amount
2. There is little or no initial net investment
3. Its term requires or permits net settlement

Question 17

Types of leases tested for impairment (4)

Answer 17

1. Capital Leases or lessees
2. Long-lived assets of lessor subject to operating leases
3. Proved oil and gas properties that are being accounted for using the successful-efforts method of accounting
4. Long-term prepaid assets

Question 18

FASB ASC 825 Fair Value Option

Answer 18

The Statement permits election of fair value measurement on a contract by contract basis

Question 19

Proper accounting for losses when non-monetary assets are exchanged for other non-monetary assets?

Answer 19

A loss is recognized immediately because assets received should not be valued at more than their cash equivalent price

Question 20

FASB ASC 985 Software Amortization

Answer 20

The annual amortization shall be the greater of the amount computed using:
1. The ratio that current gross revenues for a product bear to the total of current and anticipated future gross revenues for that product, or

2. The straight-line method over the remaining estimated economic life of the product including the period being reported on.

Question 21

An accounting error is found in a prior year FS, what is the proper way to handle this?

Answer 21

A correction of an accounting error must be reported by restating the financial statements for all prior years. The carrying amounts for assets, liabilities, and beginning retained earnings must be restated for the earliest year presented in the financial statements presented in the year the error is discovered.

Question 22

if a change in the provisions of a capital lease gives rise to a new agreement classified as an operating lease, the transaction shall be accounted for under?

Answer 22

The Sale-leaseback requirements

Question 23

Discontinued Operations result from a disposal that represents a strategic shift. What are some examples?

Answer 23

a sale of a product line that represents 15% of the entity’s total revenues;

a sale of a geographical area that represents 20% of the entity’s total assets;

a sale of the entity’s stores in one of its two types of store formats that have provided 15% of current-period net income and have, in the past, represented 30% to 40% of the entity’s net income;

the sale of an equity method investment representing 20% of the entity’s total assets; or

the sale of 80% of a product line representing 40% of total revenue, but only if the entity retains 20% of its ownership interest.

Question 24

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

Answer 24

subsidiary’s functional currency

Question 25

Accounting for sales with Leasebacks. Recognition of profit or loss on sales with leasebacks circumstances

Answer 25

a. If the seller-lessee retains the use of only a minor part of the property or a minor part of the remaining life, the sale and the lease are accounted for on the basis of their separate terms. If the lease rentals are unreasonable, however, an appropriate amount is deferred or accrued by adjusting the gain or loss on the sale. The amount deferred or accrued is then amortized as an adjustment to the rentals.
b. If the seller-lessee retains the use of a significant part, but less than substantially all of the property, and the profit on the sale exceeds the present value of the minimum lease payments in the leaseback in an operating lease or the recorded amount of the leased asset in a capital lease, the excess is recognized as profit on the date of the sale.
c. When the fair value of the property, at the time of the transaction, is less than its undepreciated cost, the seller-lessee must immediately recognize the loss.

Question 26

FASB ASC 825 Lists items that are not eligible for the Fair Value Election. Can you name a few?

Answer 26

1. An investment in a subsidiary that the entity is required to consolidate
2. An interest in a variable interest entity that the entity is required to consolidate
3. Financial assets and liabilities recognized under leases

Question 27

How should a capital lease be depreciated?

Answer 27

“the asset recorded under a capital lease shall be amortized depending on the provisions of the lease. When a bargain purchase option exists or ownership of the leased asset reverts to the lessee, depreciation should be computed over the useful life of the assets using estimated salvage value at the end of that life.” (In other cases, the lessee computes depreciation over the lease term using residual value at the end of the lease term.)

Question 28

A financial instrument that embodies an unconditional obligation, or one other than an outstanding share that embodies a conditional obligation, that the issuer must or may settle by issuing a variable number of its equity shares must be classified as a liability if, at inception, the monetary value of the obligation is based solely or predominantly on any one of the following:

A. A fixed monetary amount known at inception

B. Variations in something other than the fair value of the issuer’s equity shares

C. Variations inversely related to changes in the fair value of the issuer’s equity shares

D. Any one of the conditions listed

Answer 28

1. A fixed monetary amount known at inception (for example, a payable settleable with a variable number of the issuer’s equity shares)
2. Variations in something other than the fair value of the issuer’s equity shares (for example, a financial instrument indexed to the Standard and Poor’s 500 and settleable with a variable number of the issuer’s equity shares)
3. Variations inversely related to changes in the fair value of the issuer’s equity shares (for example, a written put option that could be net share settled)

Question 29

Business combinations accounted for as an acquisition should treat expenses related to the combination as follows:

Answer 29

1. Out-of-pocket costs such as fees of finders and consultants are expensed.
2. Issuance costs such as SEC filing fees are charged to the paid-in-capital account.

Question 30

Under IFRS, which revenue recognition method should be used if the outcome of rendering services cannot reliably be estimated?

Answer 30

The same as GAAP, The Cost Recovery Method

Question 31

IFRS - When a company has decided to discontinue operations of a component unit, the loss on disposal should…

Answer 31

Include operating losses of the current period

Question 32

IFRS - Disclosure of the entity’s financial instruments are required when…

Answer 32

When its practicable to estimate those values, or if the aggregated fair values are material to the entity

Question 33

All expenses reported on the statement of activities for a not for profit are reported for as a decrease in…

Answer 33

Unrestricted Net Assets

Question 34

N4P - A Statement of activities is similar to a business entity’s…

Answer 34

Income Statement

Question 35

How should a nongovernmental not-for-profit organization report investments in its financial statements?

Answer 35

Investments should be reported at fair value on the statement of financial position with gains and losses reported on the statement of activities as a change in net assets.

Question 36

N4P - What happens when assets are released from restriction? Net assets categories.

Answer 36

When assets are released from restriction, the unrestricted category of net assets increases as the temporarily restricted category decreases.

Question 37

What is the primary purpose of the statement of activities for not-for-profit organizations?

Answer 37

To report the change of net assets for the period

Question 38

N4P - Contribution revenues and assets or expenses should be reported for donated services if:

Answer 38

• Special skills are required to perform the service,
• The individual providing the service has those special skills, and
• The organization would have to buy the services if they were not donated.Definition

Question 39

Acceptable accounting when NFP entities accept unconditional promises tot give

Answer 39

• NFPs may use the fair value at the date a promise to give securities was initially recognized even if the contribution will not take place for several years.
• when promises to give cash are initially recognized, the amount recorded could be based on the present value of estimated future cash flows.
• when promises to give cash are initially recognized, the amount recognized should exclude amounts expected to be uncollectible.

Question 40

N4P - When should noncompliance with donor imposed restrictions be disclosed

Answer 40

• If there is a reasonable possibility that a material contingent liability has been incurred at the date of the financial statements
• If there is at least a reasonable possibility that the noncompliance could lead to a material loss of revenue
• If it could cause an entity to be unable to continue as a going concern

Question 41

The three categories of net assets reported for nongovernmental not-for-profit entities are:

Answer 41

• Unrestricted net assets
• Temporarily restricted (by donors or grantors) net assets
• Permanently restricted (by donors or grantors) net assets

Question 42

Financial Statements required for voluntary health and welfare organizations.

Answer 42

Statement of Financial Position
Statement of Activities
Statement of Cash Flows
Statement of Functional Expenses

Question 43

How should a nongovernmental not-for-profit entity classify gains and losses on investments purchased with permanently restricted assets?

Answer 43

Investment gains and losses are reported as unrestricted revenues in the statement of activities unless the donor of the principal investment amount has explicitly instructed otherwise. The statement of activities is focused on clarifying whether revenues are unrestricted, temporarily restricted, or permanently restricted so gains may or may not be netted for presentation, and gains may or may not be reported net of expenses.

Question 44

When should unconditional contributions be recognized as revenue?

Answer 44

Unconditional contributions, whether promised or received as cash, are recognized as revenue in the period received. Contributions revenue should be measured at fair value, not donor’s book value. Donor intentions to give, rather than unconditional promises, are not considered revenue.

Question 45

How should unconditional pledges received by a not for profit organization that will be collected over more than one year be reported?

Answer 45

Pledges Receivable, calculated at PV

Question 46

Refundable Advance

Answer 46

Pledges or other assets recieved that are subject to conditions. once conditions have been met they are recognized as revenue

Question 47

How is Treasury Stock Gain and Loss Reported?

Answer 47

It is not reported. APIC and Retained Earnings are affected by Treasury Stock transactions, not income.

Question 48

How are Securities of a subsidiary that are convertible into parent company’s stock treated?

Answer 48

Securities of a subsidiary that are convertible into parent company’s common stock are potential common shares for diluted EPS.

Question 49

Assumptions for related Party Transactions (2)

Answer 49

1. Transactions between related parties cannot be presumed to have been carried out on an arm’s-length basis.
2. Representations about transactions between related parties should not imply that they are equivalent to arm’s-length transactions unless such representations can be substantiated.

Question 50

How are Voluntary changes in accounting principle recognized?

Answer 50

Retrospectively, in which the cumulative effect is reported as an adjustment of the beginning-of-year retained earnings of the earliest year presented

Question 51

For non-monetary exchanges that have commercial substance how are gains and losses treated? Are there any exceptions?

Answer 51

Based on the FV’s, thus recognizing gains and losses immediately.

Exceptions: (No gains or losses are recognized)

• Fair value is not determinable
• Exchange transaction to facilitate sales to customers
• Exchange transaction that lacks commercial substance

Question 52

The Intrinsic Method

Answer 52

The intrinsic method is the excess of the market price over the exercise price.

Question 53

At the time of death of an insured officer or employee,

How is a gain recognized?

Answer 53

A gain would be recognized equal to the excess of the face amount of the policy over the cash surrender value at the time, as presented:

Cash XXX
Cash Surrender Value XXX
Gain from Proceeds of Life Insurance XXX

Question 54

Which exchange rate is used for revenues, expenses, gains, and losses?

Answer 54

a weighted-average exchange rate for the period

Question 55

Supplemental Disclosures for the Statement of Cash Flows

Answer 55

Must be disclosed regardless of indirect or direct method:

• Amount of income taxes paid during the year
• Amount of Interest paid during the period

Question 56

Major Funds

Answer 56

Governmental fund and proprietary fund financial statements focus on major funds that should each be shown in a separate column. Nonmajor fund information can be combined into one column for presentation.

-Major Fund Requirements do not apply to the internal service fund

Question 57

Temporary market declines expected to reverse are not recognized in interim financial statements. If the market decline did not reverse by year end is it recognized?

Answer 57

The decline should not be recognized until year-end. It is then recognized in the 4th Quarter.

Question 58

The Government Wide Financial Statements do not report information in the _____ Funds.

Answer 58

The Fiduciary Funds (APIP):

• Agency
• Private Purpose
• Investment
• Pension

Question 59

How are assets and liabilities valued in personal financial statements?

Answer 59

Assets - Estimated Current Values

Liabilities - Estimated Current Amounts

Question 60

Liquidation Preference of Preferred Stock in excess of Par - Recognition? Disclosure?

Answer 60

Disclose the liquidation preference in the equity section of the statement of financial position.

Question 61

Composite Life System (Depreciation)

Answer 61

Composite life system is a depreciation method that applies a composite rate of depreciation to a heterogeneous group of assets, such as all the assets in a plant. The composite depreciation rate is based on a weighted-average of the various lives of the assets in the group. It is based on the total carrying amount of the group regardless of the age of each individual asset in the group. No gain or loss is recognized on the disposal or retirement of an individual asset in the group

The computation is composite depreciation expense = the composite depreciation rate × the group total carrying amount.

Question 62

For Interim Financial Statements which tax rate do you use to calculate the estimated income tax expense?

Answer 62

The estimated effective tax rate for the year, ignore all other tax rates

Question 63

Pensions: As prior year service cost is recognized as an expense, it is taken out of what?

Answer 63

Other Comprehensive Income

Question 64

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

Answer 64

The over- or underfunded status of a defined benefit pension plan must be shown as an asset or a liability on the balance sheet, the statement of financial position. If plan assets exceed the projected benefit obligation, then the excess is a noncurrent asset; if plan assets are less, the deficiency is a current or noncurrent liability.

Question 65

In a sale-leaseback transaction, a gain resulting from the sale should be deferred at the time of the sale-leaseback and subsequently amortized when:

I. the seller-lessee has transferred substantially all the risks of ownership.

II. the seller-lessee retains the right to substantially all of the remaining use of the property.

Answer 65

II. the seller-lessee retains the right to substantially all of the remaining use of the property.

Question 66

Governmental - Securities Lending Transactions, the costs should be reported how?

Answer 66

The costs of securities lending transactions should be reported as expenditures or expenses in the operating statement.” They should not be netted with interest revenue or the income from the investment of any cash collateral

Question 67

In accordance with FASB ASC 860-30, debtors sometimes grant a security interest in assets to secured party lenders. When this happens, the debtor should:

A. reclassify the asset(s) and report it separately on the balance sheet.

B. remove the asset(s) from the balance sheet.

C. report a loss equal to the carrying value of the pledged assets.

D. report the asset(s) as usual on the balance sheet.

FASB ASC 860-30-45-1 provides the following guidance:

Answer 67

A. reclassify the asset(s) and report it separately on the balance sheet.

Question 68

How do you calculate the EFFECTIVE tax rate?

Answer 68

The first step is to know the taxable income. Net income for accounting purposes before tax would be the starting point. Adjust this number up or down for nontaxable or nondeductible items.

The municipal interest income would be nontaxable, so this would be subtracted from accounting income and the insurance premiums would be nondeductible (since they relate to nontaxed income) and would need to be added.

Thus, net income before taxes of $200,000 minus the municipal bond interest of $20,000, plus the insurance premiums $10,000 equals taxable income of $190,000:

$200,000 - $20,000 + $10,000 = $190,000

Taxable income times the tax rate equals tax due of $57,000:

$190,000 × 0.30 = $57,000

The effective tax rate would be the total tax due divided by the total income earned:

$57,000 ÷ $200,000 = 0.285 (28.5%)

Question 69

How to calculate Book Value per share?

Answer 69

(Total Stockholder’s Equity / Total Number of Shares Outstanding)

Question 70

Large Stock Dividends are recorded at ___?

Answer 70

Par or Stated Value

Large stock Dividends > 25%

Question 71

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

Answer 71

APIC when the subscription is recorded

Cash (down payment) xxx
Subscriptions Rec. xxx
CS Subscribed xxx
APIC-CS xxx

Question 72

The issuance of shares for legal services is recorded at ____.

Answer 72

The market value of the stock issued, it doesn’t matter what the person usually charges.

CS ($5 Par value, but a $135 market rate, means a $130 APIC)

Question 73

The MD&A is classified as what?

Answer 73

A component of Required Supplementary Information

Question 74

Fund Accounting Types (2)

Accounting Basis

Answer 74

Accrual Basis

Modified Accrual Basis

Question 75

Accrual Basis: Focus? Revenue Recognized?

Answer 75

Current Economic Resources Focus

Revenues Recognized when Earned

Question 76

Modified Accrual Basis: Focus? Revenue Recognized?

Answer 76

Current Financial Resources Focused

Revenues Recognized when available and Measurable

Question 77

Governmental: Opening Budgetary Journal Entry

Answer 77

Debit:Estimated Revenues Control
Credit: Appropriations Control
PLUG: Budgetary Fund Balance

Question 78

PD-Consents-to-Smoking-Grass

Answer 78

Governmental Funds

• Uses Modified Accrual
• Current Financial Resources Focus

Revenue Recognized when available and Measurable

Permanent, Debt Service, Capital Projects, Special Revenue, General

Question 79

The Combining Fund Statements are…

Answer 79

part of the comprehensive financial report but not part of the basic financial statements.

Question 80

The statement of activities of the government-wide financial statements is designed primarily to provide information to assess which of the following?

Answer 80

Operational Accountability

Question 81

The 3 Sections of a CAFR

Answer 81

Introductory, Financial, and Statistical

Question 82

The MD&A should provide the user with

Answer 82

• an objective and easily readable analysis based on currently known facts, decisions, or conditions.
• a fact-based analysis providing positive and negative aspects of comparisons with prior years.
• information about the primary government and matters related to a component unit if deemed appropriate in the managers’ professional judgment.

Question 83

A component unit of the primary government may be…

Answer 83

• Governmental
• Not for Profit
• For Profit

Question 84

Governmental Fund Balance Types (5)

RACUN

Answer 84

Restricted - Restricted by contributor
Committed - Restricted by government
Assigned - Intended to be used for a purpose
Unassigned - Available to be spent
Non-spendable - Not in a “spendable” state (Inventory, prepaid expenses)

Question 85

Fixed assets donated to a governmental unit should be recorded:

Answer 85

“Donated capital assets should be recorded at their estimated fair value at the time of acquisition plus ancillary charges, if any.”

Question 86

CAFR: What’s included in the introductory section?

Answer 86

• Table of Contents
• Letter of transmittal
• Other materials determined by management

Question 87

Which characteristic of service efforts and accomplishments is the most difficult to report for a governmental entity?

Answer 87

Relevance and Understandability

Question 88

The measurement focus of governmental-type funds is the determination of:

Answer 88

Both the changes in financial position (flow of resources) and financial position

Question 89

The debt service fund of a governmental unit is used to account for the accumulation of resources for, and the payment of, principal, and interest in connection with:

Answer 89

General obligation long-term debt principal and interest.

Debt accounted for in a pension trust or a proprietary fund is serviced from that fund and is not general long-term debt.

Question 90

For an imposed nonexchange form of tax, when are assets (cash or receivables) recognized?

Answer 90

For an imposed nonexchange form of tax, assets (cash or receivables) are recognized in the period when an enforceable legal claim has arisen, or when resources are received, whichever occurs first.

Question 91

Do government-wide financial statements show individual funds or fund types?

Answer 91

No. The statements should be prepared using the accrual basis of accounting and distinguish between governmental and business-type activities. Information about fiduciary funds should not be included in the statements.

Question 92

CAFR: What is included in the CAFR financial Section?

Answer 92

• Auditor’s Report
• MD&A
• Basic Financial Statements
• Notes to the Financial Statements
• RSI other than MD&A
• Combining Statements: by fund type and/or fund category
• Schedules

Question 93

BASIC FINANCIAL STATEMENTS: Goverment-wide FS

Answer 93

• Government wide statement of Net Position

- Government wide statement of activites

Question 94

BASIC FINANCIAL STATEMENTS: Government Funds FS

Answer 94

• Balance Sheet

- Statement of Revenues, Expenditures, and changes in Fund Balance

Question 95

BASIC FINANCIAL STATEMENTS: Proprietary Funds FS

Answer 95

• Statement of Net position

- Statement of revenues, expenses, and changes in NEt position

Question 96

BASIC FINANCIAL STATEMENTS: Fiduciary Fund FS

Answer 96

• Statement of Net Position

- Statement of changes in Net Position

Question 97

In preparing combined financial statements for a governmental entity, interfund receivables and payables should be:

Answer 97

reported as amounts due to and due from other funds.

Question 98

What is included in the government-wide FS?

Answer 98

The government-wide financial statements report governmental activities, business-type activities, the primary government totals, and discretely presented component units. Fiduciary funds and fiduciary component units are not included in these statements.

Question 99

What effect would the write-off of the receivables during the year ultimately have on equity?
(Think initial Journal entry)

Answer 99

Receivables usually are reported at the same time that revenue is recognized. For reporting purposes, revenues should be reduced by an appropriate allowance for amounts estimated to be uncollectible when revenue is recognized, thus affecting equity at time of recognition. To the extent of the allowance made ($50,000), the actual write-off of the receivable against the allowance would have no effect on equity.

Question 100

How are narrative explanations of combining and individual fund statements presented?

Answer 100

On divider pages, directly on the statements or schedules, or in a separate section.

Question 101

Which accounts close at the end of a fiscal year?

Answer 101

Non Permanent accounts (accounts that don’t show up on the BS) Income statement accounts close, Expenditures

Question 102

When are derived tax revenues recognized?

Answer 102

Revenues from derived tax revenues are recognized in the period when the underlying exchange has occurred (i.e., in the period the taxed sales transaction took place).

Question 103

If determining the actual historical cost of general infrastructure assets is not practical because of inadequate records, public institutions that report as special-purpose governments either engaged only in governmental activities or engaged in both governmental and business-type activities should report major general infrastructure assets using:

Answer 103

If determining the actual historical cost of general infrastructure assets is not practical because of inadequate records, public institutions reporting as special-purpose governments should report the estimated historical cost for major general infrastructure assets.

Question 104

Cash receipts from grants and subsidies to decrease operating deficits should be classified in which of the following sections of the statement of cash flows for governmental not-for-profit entities?

Answer 104

Noncapital financing

Question 105

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?

Answer 105

cash receipts: Operating transfers;

Cash payments: Expenditures

Question 106

Governmental Fund Types?

Answer 106

Proprietary
Fiduciary
Governmental

Question 107

Valuation Approaches

Answer 107

Market Approach - Price from similar transactions
Cost Approach (asset) - Price to replace similar asset
Income Approach - Converts future cash flows to current amounts

Question 108

Statement of Net Position (Layout)

Answer 108

Assets (current and Non-current) - ordered by liquidity

Deferred Outflows of Resources - Future use of net assets (leaving)

Liabilities (Current and Non-current) - ordered by liquidity

Deferred inflows of resources - Future increase of net assets (entering)

Question 109

Blue City’s finance staff is analyzing expenses for presentation on the government-wide statement of activities. The City has some notes payable that clearly benefit specific governmental functions, but most of the city’s long-term debt consists of general long-term liabilities. How should the interest on the debt be reported?

Answer 109

Interest that clearly derives from borrowing that is essential to support a program should be reported as a direct expense of that program, and interest that does not qualify as a direct expense should be reported as a separate line. The two types of interest should not be combined. Interest is reported as a component of other functions or a separate line, but not at the bottom of the statement. Although interest on long-term debt is usually an indirect expense, it should be reported as a separate line and not allocated.

Question 110

How do you compute current year revenue?

Answer 110

Receipts current year
Add ending receivables
Less ending allowance for doubtful accounts
Less beginning receivables
Add beginning allowance for doubtful accounts

Question 111

How are Infrastructure Fixed Assets accounted for?

Answer 111

The fund incurring the cost records an expenditure. The governmental unit can then record it in the general fixed assets account, but it is not required.

Question 112

I-PIPE-A LOT

Answer 112

The Accrual Funds:

• Internal service
• Investment Trust
• Private Purpose Trust
• Enterprise
• Agency

Question 113

How is interest expense treated for governmental funds?

Answer 113

Interest is not accrued, it is recorded as an expenditure when paid. If nothing is paid during the year, then nothing is recorded.

Question 114

An acceptable method to present component units in a combined Financial Statements?

Answer 114

Most component units should be included in the financial Reporting Entity by discrete presentation

Question 115

Net Income + OCI = ?

Answer 115

Comprehensive Income

Question 116

Steps included in the SEC rule making process: (3)

Answer 116

Concept Release
Rule Proposal
Rule Adoption

Question 117

Difference between combined Financial Statements and Consolidated Financial Statements?

Answer 117

The only difference in combined financial statements and consolidated statements is that a parent is not included in combined statements. Therefore, different fiscal periods, foreign operations, and noncontrolling interest are all treated in the same manner.

Question 118

What items should be treated the in the same manner in both combined financial statements and consolidated statements?

Answer 118

Different fiscal periods, foreign operations, and noncontrolling interest

Question 119

How can forfeited nonvested accounts of an employee benefit plan be used?

Answer 119

Required disclosure includes, among other items, the amount and disposition of forfeited nonvested accounts—specifically, identification of those amounts that are used to reduce future employer contributions, expenses, or reallocated to participant’s accounts, in accordance with plan documents.

Question 120

IFRS Revlaution model how are changes in FV treated? Gains/Losses?

Answer 120

• An increase is included in Asset revaluation surplus (an equity account)
• A Decrease, decreases operating income for the period

Question 121

Not For Profit: Program and Support Services Expenses

Answer 121

Program Services: Costs incurred for carrying out it’s primary mission

Support Services: Management and General, Fundraising

Question 122

Financial statements shall include disclosures of material related party transactions, other than…?

Answer 122

• Compensation Arrangements
• Expense Allowances
• Other similar items in the ordinary course of business

Question 123

Governmental - 6 expenditure Classifications

Answer 123

1. Fund
2. Function or Program
3. Organizational Unit (Department)
4. Activity
5. Character
6. Object (type of items/services purchased)

Question 124

The diluting effect of options and warrants and their equivalents is reflected in diluted EPS by application of the treasury stock method, which assumes that:

A. proceeds from exercise are used to retire treasury stock.

B. proceeds from exercise are used to issue treasury stock.

C. proceeds from exercise are used to retire convertible debentures that were issued at par.

D. proceeds from exercise are used to purchase common stock at the average market price.

Answer 124

D. proceeds from exercise are used to purchase common stock at the average market price.

Exercise of options and warrants is assumed at the beginning of the period. Proceeds are assumed used to purchase common stock at the average market price during the period. The incremental shares are included in the denominator of diluted EPS.

Question 125

Disclosures for if there was substantial doubt to continue as a going concern, but has been alleviated as a result of consideration of management’s plans.

Answer 125

• the principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans).
• management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.
• management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations.

AUDITOR’s OPINION IS NOT INCLUDED

Question 126

Topic 275 of the FASB’s Accounting Standards Codification is entitled “Risks and Uncertainties.” The types of risks and uncertainties discussed in the topic are:

Answer 126

• the nature of the entity’s operations.
• the use of estimates in the preparation of the entity’s financial statements.
• significant concentrations in certain aspects of the entity’s operations.

Question 127

A mandatorily redeemable financial instrument, such as mandatorily redeemable preferred stock, must be classified as a liability unless the redemption is required to occur only:

Answer 127

upon the liquidation or termination of the reporting entity.

Question 128

Risk of Accounting Loss

Answer 128

the amount of write-off that a company would record if any party to an agreement failed to fully perform in accordance with the terms of the contract.

AR-AFDA = Risk of accounting loss

Question 129

The price used to measure fair value should be adjusted for which transaction costs?

Answer 129

The costs, if any, that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market

Question 130

An entity must classify as a liability a financial instrument, other than an outstanding share, that, at inception:

Answer 130

• embodies an obligation to repurchase the issuer’s equity shares, or is indexed to such an obligation and
• requires or may require the issuer to settle the obligation by transferring assets.

Question 131

When there is a change in the reporting entity, how should the change be reported in the financial statements?

Answer 131

With a change in reporting entity, all prior years’ financial statements must be reported as if the change happened before the financial statements were presented. The cumulative effect of the change is an adjustment to beginning retained earnings for the first year presented. This treatment is the retrospective approach.

Question 132

How should the acquirer recognize a bargain purchase in a business acquisition?

Answer 132

As a gain in earnings at the acquisition date

Question 133

An entity is required to disclose:

A. a reconciliation of the numerators and denominators of the basic and diluted EPS computations.

B. the effect given to preferred dividends in income available to common shareholders.

C. securities that could be diluted in the future that were excluded from the current period’s diluted EPS because they were not dilutive.

D. All of the answer choices are correct.

Answer 133

D. All of the answer choices are correct.

Question 134

Under IFRS accounting for business combinations, how is goodwill and Bargain purchases treated?

Answer 134

IFRS differs from U.S. GAAP when accounting for a business combination. IFRS does not require goodwill to be recognized but allows it as an option. Under IFRS, a recognition of extraordinary gain as a “bargain purchase” is prohibited.

Question 135

Any fair value measurement should assume that the transaction to sell the asset or transfer the liability occurs in which market?

Answer 135

The principal market for the asset or liability

NOT THE ADVANTAGEOUS

Question 136

For a correction of an error, IFRS requires that the following be disclosed:

Answer 136

• The nature of the error
• The correction to specific line items and earnings per share
• The amount of the correction at the beginning of the earliest period presented

Question 137

The initial test in FASB ASC 360-10-35 for determining whether an impairment of the carrying amount of a long-lived asset is indicated is:

Answer 137

carrying amount exceeds undiscounted future cash flows.

Question 138

In a business combination with goodwill recorded, how should any subsequent impairment of the goodwill be recognized on the income statement or statement of retained earnings?

Answer 138

As a loss from continuing operations

Question 139

In preparing consolidated financial statements of a U.S. parent company with a foreign subsidiary, the foreign subsidiary’s functional currency is the currency:

Answer 139

FASB ASC 830-10-45-2 states that the functional currency is the currency of the primary economic environment in which the entity operates or the currency in which most of the subsidiary’s transactions are denominated.

Question 140

Employee benefit plans and trusts must prepare two financial statements according to GAAP:

Answer 140

1. A statement of net assets available for benefits of the plan as of the end of the plan year
2. A statement of changes in net assets available for benefits of the plan for the year then ended

Question 141

For the statement of cash flows which section of a capital lease payment included in the financing section?

Answer 141

Only the principal amount, the interest would be included in the operating section

Question 142

Three acceptable basis’ of accounting for reporting taxable income

Answer 142

1. Cash
2. Accrual
3. Hybrid

Question 143

The primary characteristics of governmental structure are:

Answer 143

(1) The representative form of government and the separation of powers
(2) The federal system of government and the prevalence of intergovernmental revenues
(3) The relationship of taxpayers to services received

Question 144

Permanent differences between taxable income and pre-tax accounting income affect:

A. interperiod income tax allocation.

B. intraperiod income tax allocation.

C. both interperiod and intraperiod income tax allocation.

D. neither interperiod nor intraperiod income tax allocation.

Answer 144

D. neither interperiod nor intraperiod income tax allocation.

The items referred to in this passage are commonly called permanent differences. A permanent difference affects only the current reconciliation of book income to taxable income, and the permanent difference has no effect on the computation of deferred taxes. Permanent differences do not affect either interperiod or intraperiod income tax allocation.

Question 145

Pension Expense/Cost (A-SPIDER)

Answer 145

\+Amortization of Net Obligation/Asset
\+Service Cost
\+Prior Service Cost
\+Interest Cost
\+Deferred Gain -Loss
-Excess Amortization of Deferred Gain +Loss
-Actual Return on Net Assets

Question 146

Pensions: Project Benefit Obligation (PBO)

Answer 146

Reflects Future Compensation levels

Question 147

Pensions: Accumulated Benefit Obligation

Answer 147

PV of Pension Benefits accrued based on PRESENT Compensation Levels

Question 148

Pensions: Service Cost

Answer 148

+ to Pension Cost/Expense

Increase in PBO for 1 year

Question 149

Pensions: FV of Plan Assets (Over/Under funded, Gains/losses)

Answer 149

Overfunded = Non-current Asset
Underfunded = Non-current Liability
Gains/Losses go to OCI (Net of Tax)

Question 150

Pension Disclosures

Answer 150

• Pension Funding Policies
• Types of assets held
• Next 5 years Benefits to be paid
• 5 Year Benefits in Aggregate thereafter
• Estimated Pension Contribution for next period

Question 151

Pensions: Interest Cost

Answer 151

+Pension Cost/Expense
Change in PBO resulting from passage of time
Calculation = Beginning PBO * Discount Rate (Settlement Rate)

Question 152

Pensions: Actual Return on Plan Assets

Answer 152

• to Pension Cost/Expense
  Calculation = Ending PA - Beginning PA - Contribution Made + Benefits Paid

or

Beg FV of Plan Assets * Actual Rate

Question 153

Pensions: Deferred Gain (Unrecognized Pension Gain/Loss)

Answer 153

+Gain -Loss
When actual investment results differ from long run expected returns
Calculation = Return on PA - Beginning PA * Expected Rate of Return

Question 154

When are dividends recorded? Which date?

Answer 154

On the date of declaration

Question 155

In accordance with FASB ASC 860-10, when a transfer of financial assets occurs and the transferor surrenders control over those financial assets, a sale is deemed to have occurred as long as the consideration received is not:

A. a long-term debt instrument of the transferee.

B. a beneficial interest in the transferred assets controlled by the transferor.

C. cash.

D. other stock held by transferee as an investment.

Answer 155

B. a beneficial interest in the transferred assets controlled by the transferor.

Question 156

What are the measurement focus and basis of accounting for the government-wide financial statements?

Answer 156

Measurement focus: Economic resources

Basis of accounting: Accrual

Question 157

Is proceeds from sale of treasury stock a inflow or outflow on the statement of cash flows financing section?

Answer 157

It is an outflow

Question 158

Cash receipts from grants and subsidies to decrease operating deficits should be classified in which of the following sections of the statement of cash flows for governmental not-for-profit entities?

Answer 158

Non-capital financing

Question 159

What is a debenture bond?

Answer 159

A debenture bond is an unsecured note

Question 160

Comprehensive Income Includes:

Answer 160

“the change in equity (net assets) of a business enterprise, during a period, from transactions and other events and circumstances from nonowner sources.” Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. Dividends are a distribution to owners and would therefore not be included in comprehensive income.

Question 161

Modified Cash Basis - Compared to Cash Basis? GAAP?

Answer 161

• Modified cash basis financial statements are intended to provide more information to users than cash basis statements while continuing to avoid the complexities of GAAP.
• The modified cash basis does not comply with GAAP unless there are no material differences in this method and GAAP.

Question 162

How would a municipality that uses modified accrual and encumbrance accounting record the condition of an excess of estimated inflows over estimated outflows?

A. Credit appropriations control

B. Credit budgetary fund balance

C. Debit appropriations control

D. Credit other financing sources

Answer 162

B. Credit budgetary fund balance

Question 163

Over what period of time should leasehold improvements be amortized?

Answer 163

Over the shorter of the useful life of the improvement or the remaining lease term

Question 164

Estimates are a necessary part of the preparation of financial statements. It is necessary to explicitly communicate to the users of the financial statements that estimates have been used and that many of the amounts reported are approximations rather than exact amounts. This understanding should help users to make better decisions. Disclosure of certain significant estimates must be made when which conditions are present?

Answer 164

BOTH MUST BE PRESENT:

• It is at least reasonably possible that the estimate of the effect on the financial statements will change in the near term due to one or more future confirming events.
• The effect of the change would be material.

Question 165

Pensions: disclosures

Answer 165

• A description of the plan’s key elements, such as investment policies
• Components of pension expense
• Reconciliation of projected benefit obligation and fair value of plan assets
• Funded status
• Rates used in measuring benefit amounts (discount, return on plan assets, compensation)
• Best estimates of next year’s contributions to the plan

Question 166

How do Not-for-Profits recognize expenses?

Answer 166

The same way as a business

Question 167

Acid Test Ratio

Answer 167

Also known as the quick ratio

Total Cash + AR / Total Current Liabilities

Question 168

A company using the composite depreciation method for its fleet of trucks, cars, and campers retired one of its trucks and received cash from a salvage company. The net carrying amount of these composite asset accounts would be decreased by the:

Answer 168

Cash Proceeds Recieved

Question 169

A development-stage enterprise should use the same generally accepted accounting principles that apply to established operating enterprises for:

A. revenue recognition and deferral of expenses.

B. revenue recognition.

C. neither revenue recognition nor deferral of expenses.

D. deferral of expenses.

Answer 169

A. revenue recognition and deferral of expenses.

Question 170

How to calculate impairment loss (using carrying amount and future cash flows)

Answer 170

If the carrying amount exceeds the future cash flows, an impairment loss should be recognized. The loss is the excess of the asset’s carrying amount over its fair value.

Question 171

Examples of significant estimates that can be found in the FS: (Disclosures)

Answer 171

• Inventory subject to rapid technological obsolescence
• Specialized equipment subject to technological obsolescence
• Environmental remediation-related obligations
• Contingent liabilities for obligations of other entities
• Amounts reported for long-term obligations, such as amounts reported for pension and postemployment benefits
• Estimated net proceeds recoverable, the provisions for expected loss to be incurred, or both, on disposition of a business or assets

Question 172

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

Answer 172

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

Question 173

mandatorily redeemable stock

Answer 173

The stock is classified as a liability.
Disclosure is required.
The stock is mandatorily redeemable financial instrument.

Question 174

In accordance with FASB ASC 860-30, debtors sometimes grant a security interest in assets to secured party lenders. When this happens, the debtor should:

Answer 174

If the secured party (transferee) has the right by contract or custom to sell or repledge the collateral, then the obligor (transferor) shall reclassify that asset and report that asset in its statement of financial position separately (for example, as security pledged to creditors) from other assets not so encumbered.

Question 175

An entity should recognize the fair value of an asset retirement obligation in the period:

Answer 175

in which the obligation is incurred if a reasonable estimate of fair value can be made.

Question 176

XYZ Museum, a not-for-profit entity, received a very important painting three years ago as a donation to its permanent collection. At the time of receipt, the painting was appropriately valued. The museum does not capitalize its collections. Disclosure would be handled by:

A. disregarding the painting entirely because XYZ Museum opted not to capitalize.

B. including a line item on the face of the financial statement with disclosures regarding XYZ Museum’s permanent art collection, which includes the painting.

C. including the value of the painting in the permanently restricted net assets total.

D. including the value of the painting in the unrestricted net assets total.

Answer 176

B. including a line item on the face of the financial statement with disclosures regarding XYZ Museum’s permanent art collection, which includes the painting.

A not-for-profit entity may opt not to capitalize works of art, historical treasures, and the like as long as the items meet the definition of collection items: held for exhibition, protected, and preserved, with a policy that requires sales only for acquisition of other collection items. Capitalization means an addition to both sides of the accounting equation, assets and equities. If the collection is not capitalized, there is no amount included in equities or net assets. However, the existence of the collection, including the donated painting, cannot be disregarded and a note describing the collection must be referenced on a line on the face of the financial statement.

Question 177

IAS 20 requires that revenue for a grant provided by a government entity be recognized when:

Answer 177

BOTH:

• there is reasonable assurance that the entity can comply with the conditions of the grant.
• when there is reasonable assurance that the grant will be received.

Question 178

Under IFRS, which revenue recognition method should be used if the outcome of rendering services cannot reliably be estimated?

Answer 178

The same as GAAP, The Cost Recovery Method

Question 179

IFRS: When a company has decided to discontinue operations of a component unit, the loss on disposal should…

Answer 179

Include operating losses of the current period

Question 180

IFRS: Disclosure of the entity’s financial instruments are required when…

Answer 180

When its practicable to estimate those values, or if the aggregated fair values are material to the entity

Question 181

IFRS: Under IFRS, an entity that acquires an intangible asset may use the revaluation model for subsequent measurement only if

Answer 181

An active market exists for the intangible asset

Question 182

Under IFRS, for an intangible to be recognized it must:

Answer 182

• be probable that the expected future benefits that are attributable to the asset will flow to the entity; and
• The cost of the asset can be measured
• Be an identifiable intangible asset that lacks physical substance

Question 183

IFRS allows an entity to recognize an intangible asset if it is an identifiable intangible that lacks physical substance. In order to be considered identifiable:

Answer 183

Either:

• Separable (it can be sold, transferred, licensed, exchanged or disposed of)
• Arises from contractual or legal rights

Question 184

Under the revaluation model allowed under IFRS for the accounting for identifiable intangible assets:

Answer 184

Assets are periodically revalued and adjusted to their Fair Values and are amortized in between revaluation dates

Question 185

IFRS - How is internally generated goodwill recognized

Answer 185

It cannot be capitalized

Question 186

Under IFRS, what valuation methods are used for in­tangible assets?

Answer 186

The Cost Model or the Revaluation Model

Question 187

IFRS: EPS

Answer 187

• Requires companies report both basic and diluted EPS.

- Must show for continuing operations, but not for discontinued or extraordinary

Question 188

IASB - Qualitative Characteristics of relevance

Answer 188

Roger is PC, but also materialistic

• Predictive Value
• Confirmatory value
• Materiality

Question 189

IFRS: Presentation of FS (required and allowed)

Answer 189

Required:
-Comparative FS, presenting information from the prior year
-Assets/Liabilities distinguished between current and noncurrent or listed in order of liquidity
-Requires a separate statement of comprehensive income and statement of changes in equity
Allowed:
-Classification of expenses by nature or function

Question 190

IFRS: Inventories (Required, Allowed, Not Allowed)

Answer 190

Required:
-Inventory reported at Lower of cost or net realizable value
-Items that are not interchangeable to be accounted for using specific identification
-All other items under FIFO or weighted Average
Allowed:
-Measurement under standard costing or the retail method if the amount approximates cost
-Recoveries of losses (reverse impairment)
Not Allowed:
-LIFO

Question 191

IFRS: SoCF

Required, Allowed

Answer 191

Required:
-Cash overdrafts as negative cash equivalents
Allowed:
-Direct, Indirect or the modifier indirect method (shows revenues and expenses in operating activities, and then reports the changes in working capital accounts)
-Interest and dividends RECEIVED as either operating or investing activities
-Interest and dividends PAID as either operating or financing activities

Question 192

IFRS: Accounting changes/estimates/errors

Answer 192

• Change in Reporting Entity doesn’t exist under IFRS

- No other significant differences

Question 193

IFRS: Construction Contracts (Revenue Recognition)

Answer 193

Required:
-Stage of completion (% of completion) accounting when the outcome can be reasonably estimated
-Zero Profit (Cost Recovery) accounting when the outcome cannot be reasonably estimated
Not Allowed:
-Completed Contract method

Question 194

IFRS: Income Taxes

Answer 194

Required:
-Measuring DTA/DTL at the future tax rate that is enacted or substantially enacted as of the end of the period
-All DTA’s and DTL’s are noncurrent
Not Allowed:
-Recognition of deferred tax assets unless

Question 195

IFRS: PP&E (Required)

Answer 195

Required:

Use of component depreciation with each significant cost depreciated separately (land and building, furniture, fixtures, equipment)

Question 196

IFRS: Leases

Answer 196

Required:

Classification based on transfer of risks and rewards of ownership

• Finance Lease if transferred (Capital Lease under GAAP)
• Operating Lease if not transferred

Impairment loss may be recovered
To record as a finance lease, TT, BPO, “Major part” of life or PV equal to “substantially all” of FV
Initial direct costs are capitalized when a Finance Lease

Question 197

IFRS: Provisions, Contingent liabilities and assets

Answer 197

Required:

Recognition of PROVISIONS when 3 conditions apply:

• Entity has present obligation resulting from a past event
• an outflow of resources will probably be required to settle the obligation
• the amount can be reliably estimated (measurable)
  - else just disclose it

Not Allowed:
Recognition of contingent assets or liabilities

Question 198

Non-monetary Asset Dividends (inventory) should be valued at

Answer 198

Fair Value as Dividend Revenue and Fair Value as employee compensatin expense

Question 199

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

A. No effect on either retained earnings or noncontrolling interest

B. No effect on retained earnings and a decrease in noncontrolling interest

C. Decreases in both retained earnings and noncontrolling interest

D. A decrease in retained earnings and no effect on noncontrolling interest

Answer 199

B. No effect on retained earnings and a decrease in noncontrolling interest

The dividend will have no effect on consolidated retained earnings because consolidated retained earnings include only retained earnings of the parent company. However, since the noncontrolling (minority) interest (in this case, 30%) is a percentage of the stockholder equity (including retained earnings) of the subsidiary, any reduction in subsidiary retained earnings (such as dividend declaration) will decrease noncontrolling (minority) interest.

Question 200

The price used to measure fair value should be adjusted for which transaction costs?

Answer 200

The costs, if any, that would be incurred to transport the asset or liability to (or from) its principal (or most advantageous) market

Question 201

Cash Flow Hedge Disclosures

Answer 201

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

Question 202

The diluting effect of options and warrants and their equivalents is reflected in diluted EPS by application of the treasury stock method, which assumes that:

Answer 202

proceeds from exercise are used to purchase common stock at the average market price.

Exercise of options and warrants is assumed at the beginning of the period. Proceeds are assumed used to purchase common stock at the average market price during the period. The incremental shares are included in the denominator of diluted EPS.

Question 203

When should a lessor recognize in income a nonrefundable lease bonus paid by a lessee on signing an operating lease?

Answer 203

Over the life of the lease

Question 204

Examples of nonrecognized subsequent events (Disclosed, but not accrued) (7)

Answer 204

1. Sale of a bond or capital stock issued after the balance sheet date but before financial statements are issued or are available to be issued
2. A business combination that occurs after the balance sheet date but before financial statements are issued or are available to be issued
3. Settlement of litigation when the event giving rise to the claim took place after the balance sheet date but before financial statements are issued or are available to be issued
4. Loss of plant or inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or are available to be issued
5. Losses on receivables resulting from conditions (such as a customer’s major casualty) arising after the balance sheet date but before financial statements are issued or are available to be issued
6. Changes in the fair value of assets or liabilities (financial or nonfinancial) or foreign exchange rates after the balance sheet date but before financial statements are issued or are available to be issued
7. Entering into significant commitments or contingent liabilities, for example, by issuing significant guarantees after the balance sheet date but before financial statements are issued or are available to be issued.

Question 205

In a sale-leaseback transaction, a gain resulting from the sale should be deferred at the time of the sale-leaseback and subsequently amortized when:

Answer 205

the seller-lessee retains the right to substantially all of the remaining use of the property.

if the lease meets one of the criteria for capital lease treatment (it does—the lease transfers title to the seller-lessee at end of lease term), then any gain on the sale should be deferred and amortized.

Again, the key element is the retention of the right to all remaining use of the property. Transfer of risks of ownership is not one of the four criteria for capital lease treatment.

Question 206

FASB ASC 860 (Transfers and Servicing) provides for recognition of servicing assets and liabilities. These result when expected servicing income exceeds expected costs for assets or vice versa for liabilities. The resulting asset or liability should be amortized proportionally over:

Answer 206

the period of estimated servicing income or loss.

Question 207

Net assets can be computed in either of two ways:

Answer 207

1. book values of stockholders’ equity

2. book value of assets less book value of liabilities

Question 208

A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?

A. Cumulative 8%, $50 par preferred stock

B. 10% convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock

C. 7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock

D. 6%, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock

Answer 208

C. 7% convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock

Dilutive securities reduce earnings per share. To determine dilution, a conversion basis must be stated. Each 7% $1,000 bond yields $49 ($70 - 30% tax) of earnings after tax. The conversion increases the number of shares by 40. The earning per share on the converted bonds is only $1.225 (49/40) thus diluting the basic earnings per share of $1.29.

Question 209

Glade Co. leases computer equipment to customers under direct financing leases. The equipment has no residual value at the end of the lease and the leases do not contain bargain purchase options. Glade wishes to earn 8% interest on a 5-year lease of equipment with a fair value of $323,400. The present value of an annuity due of $1 at 8% for five years is 4.312. What is the total amount of interest revenue that Glade will earn over the life of the lease?

Answer 209

323,400 / 4.312 = 75,000 Annual Lease Payment

75,000 * 5 Years = 375,000 Total Lease Amount collected

375,000 - 323,400 = 51,600 Interest Revenue Earned

Question 210

Restorations of carrying value for long-lived assets are permitted if an asset’s fair value increases subsequent to recording an impairment loss for which of the following?

A. Both held for use and held for disposal

B. Held for use

C. Held for disposal

D. Neither held for use nor held for disposal

Answer 210

C. Held for disposal

A long-lived asset classified as held for sale (disposal) must be measured at the lower of its carrying amount or fair value less cost to sell.

A loss should be recognized for any initial or subsequent write-down to fair value less cost to sell. A gain should be recognized for any subsequent increase in fair value less cost to sell, but not in excess of the cumulative loss previously recognized for a write-down to fair value less cost to sell.

Question 211

The FASB has jurisdiction over entities with which of the following characteristics?

Answer 211

Exempt from federal taxation

The joint FASB/GASB definition of governmental organizations that is included in several AICPA Audit and Accounting Guides, including State and Local Governments (paragraph 1.01), indicates that bodies corporate and politic and entities with the power to enact and enforce a tax levy are governments. Not-for-profit organizations that are not governmental are exempt from federal taxation.

Question 212

The three classes of financial instruments that must be presented in the balance sheet as liabilities:

Answer 212

1. Mandatorily redeemable financial instruments
2. Obligations to repurchase the issuer’s equity shares by transferring assets
3. Certain obligations to issue a variable number of shares

Question 213

A change in accounting entity is reported how?

Answer 213

Retrospectively

Question 214

If Company C is established for the merging of Company A and Company B, the business combination is classified as:

A. an acquisition of stock.

B. an acquisition of assets.

C. statutory merger.

D. statutory consolidation.

Answer 214

D. statutory consolidation.

The statutory consolidation classification refers to the merging of two enterprises into a newly established enterprise.

Question 215

SubsequentEvents

Answer 215

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or are available to be issued.

Question 216

The FASB’s fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:

• Level 1
• Level 2
• Level 3

Answer 216

Level 1 inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date

Level 2 inputs—inputs other than quoted prices included within Level 1 that are observable for similar assets or liabilities, either directly or indirectly

Level 3 inputs—unobservable inputs for the asset or liability

Question 217

How should gains or losses from fair value hedges be recognized?

Answer 217

The gain or loss, along with the offsetting loss or gain attributable to the hedged risk, should be recognized currently in earnings in the same accounting period.

The FASB requires that the following be recognized for fair value hedges:

• Changes in the fair value of the fair value hedge
• Changes in the fair value of the item being hedged

Question 218

At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset retirement obligation was $100,000. At year-end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted risk-free interest rate was 10%. What was the amount of accretion expense for the year related to the asset retirement obligation?

Answer 218

Changes in the value of a liability for an asset retirement obligation must be measured by applying an interest method of allocation using a credit-adjusted, risk-free interest rate. Accretion expense would be:

$100,000 × 0.10 = $10,000

Question 219

Acquisition Costs should be…

Answer 219

Expensed in the period incurred, they are not considered part of the acquisition cost

Question 220

FASB ASC 270-10-45-1 concluded that interim financial reporting should be viewed primarily in which of the following ways?

A. As useful only if activity is spread evenly throughout the year

B. As if the interim period were an annual accounting period

C. As reporting for an integral part of an annual period

D. As reporting under a comprehensive basis of accounting other than GAAP

Answer 220

C. As reporting for an integral part of an annual period

The Financial Accounting Standards Board in FASB ASC 270-10-45-1 noted that “each interim period should be viewed primarily as an integral part of an annual period.”

Question 221

opic 275 of the FASB’s Accounting Standards Codification is entitled “Risks and Uncertainties.” The primary subject discussed in this topic is:

A. bankruptcy.

B. going concern.

C. disclosure.

D. All of the answer choices are discussed.

Answer 221

C. disclosure.

One of the purposes of financial statements is to provide information to help users predict the reporting entity’s future cash flows and results of operations. This assessment depends, to some degree, on the users’ knowledge and assessment of the risks and uncertainties involving the entity’s operations. Disclosure of these risks and uncertainties is a critical component of the user’s process of evaluating these variables. FASB ASC 275-10 addresses the disclosures required to facilitate a user’s evaluation of an entity’s risks and uncertainties.

Question 222

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

Answer 222

supplementary information to the financial statements.

A business entity that prepares its financial statements in U.S. dollars and in accordance with U.S. generally accepted accounting principles is encouraged, but not required, to disclose supplementary information on the effects of changing prices.

Question 223

financial statements of a foreign subsidiary must be translated to U.S. dollars. What exchange rate is used?

Answer 223

The current Exchange Rate

Question 224

How should a gain from the sale of used equipment for cash be reported in a statement of cash flows using the indirect method?

Answer 224

In operating activities as a deduction from income

Question 225

Bonds sell at a premium when..?

Bonds sell at a discount when..?

Answer 225

Bonds sell at a premium when the stated rate of interest paid by the bonds exceeds the market rate. The opposite is true if bonds sell at a discount.

Premium = Stated > Market

Question 226

Gross Profit Recognized (Installment Sales)

Answer 226

Cash Collected * Gross Profit % = Profit Recognized (IS)

Question 227

Deferred Gross Profit (Installment Sales)

Answer 227

Receivable Balance * Gross Profit % = Deferred Profit (BS)

Gross Profit = Sales - COGS
Gross Profit % = Gross Profit / Sales Price

Question 228

Income recognized using the installment method of accounting generally equals cash collected multiplied by the

Answer 228

Gross Profit %

Question 229

Drew Co. produces expensive equipment for sale on installment contracts. When there is doubt about eventual collectibility, the income recognition method least likely to overstate income is

Answer 229

The cost recovery Method

Question 230

Milton Co. pledged some of its accounts receivable to Good Neighbor Financing Corporation in return for a loan. Which of the following statements is correct?

A. Good Neighbor Financing cannot take title to the receivables if Milton does not repay the loan. Title can only be taken if the receivables are factored.

B. Good Neighbor Financing will assume the responsibility of collecting the receivables.

C. Milton will retain control of the receivables.

D. Good Neighbor Financing will take title to the receivables, and will return title to Milton after the loan is paid.

Answer 230

C. Milton will retain control of the receivables.

Under a pledge, an account receivable is used as collateral for a loan. Milton continues to collect the receivables and applies the collection to the loan balance.

Question 231

During periods of inflation, 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 valuation methods?

A. FIFO, Yes; LIFO, No

B. FIFO, Yes; LIFO, Yes

C. FIFO, No; LIFO, Yes

D. FIFO, No; LIFO, No

Answer 231

A. FIFO, Yes; LIFO, No

Under the FIFO inventory method, the ending inventory would consist of the last units purchased under both the perpetual and periodic inventory systems. Under the LIFO inventory method, the periodic inventory system would include in ending inventory the earliest units (beginning inventory and early purchases). Under LIFO, the perpetual inventory system would have expensed some of the beginning inventory and early purchases when sales were made early in the year.

Question 232

IFRS - How are interest costs reported when purchasing PP&E with a loan?

Answer 232

The interest Costs are expensed immediately, they are not capitalized

Question 233

Enterprises often carry life insurance policies on the lives of key officers and employees. If the enterprise is the beneficiary, the cash surrender value of the policy is an asset of the enterprise. The amount to be charged to expense is:

Answer 233

the amount of such premiums paid less the increase in cash surrender value during the period.

Question 234

Trading Securities should be reported at ____ and holding gains/losses should be included in _____

Answer 234

Fair Value, earnings

Question 235

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 235

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 236

On which date 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?

Answer 236

Date of grant

Both the intrinsic value method and the fair market value method use the grant date to measure the cost for stock issued to employees. At the grant date, one must compute a value for the shares used as compensation, which will be earned and taken as an expense over the service period.

Question 237

For a defined benefit pension plan, the discount rate used to calculate the projected benefit obligation is determined by:

Answer 237

The discount rate for the projected benefit obligation is generally based on long-term debt interest rates. It has no direct relationship to the actual or the expected rate of return on plan assets.

Question 238

Which of the following is a required financial statement for an investment trust fund?

A. Statement of revenues, expenditures, and changes in fiduciary net position

B. Statement of activities

C. Statement of revenues, expenses, and changes in fiduciary net position

D. Statement of changes in fiduciary net position

Answer 238

D. Statement of changes in fiduciary net position

Investment trust funds are one of the fiduciary fund types for state and local governments. Two financial statements are required for fiduciary funds—a statement of fiduciary net position and a statement of changes in fiduciary net position. (The statement of changes in fiduciary net position is not required for agency funds.)

Question 239

For goods on consignment,are commissions included in COGS?

Answer 239

No, they are a selling expense not an inventory cost.

Question 240

What is the purpose of reporting comprehensive income?

Answer 240

To summarize all changes in equity from nonowner sources

SFAC 6 defines comprehensive income as “the change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.”

Question 241

IFRS requires inventory to be reported at:

Answer 241

Lower of Cost or Net Realizable Value (LCNRV)

Question 242

Common Stock Book Value per share

Answer 242

Total SHE / CS Outstanding

Question 243

The term “tax position” as used in FASB ASC 740-10-20 refers to what?

Answer 243

A position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets. The term tax position also encompasses, but is not limited to:

1. A decision not to file a tax return
2. An allocation or a shift of income between jurisdictions
3. The characterization of income or a decision to exclude reporting taxable income in a tax return
4. A decision to classify a transaction, entity, or other position in a tax return as tax exempt
5. An entity’s status, including its status as a pass-through entity or a tax-exempt not-for-profit entity.

Question 244

A transaction that is unusual in nature or infrequent in occurrence should be reported as:

Answer 244

a component of income from continuing operations, but not net of applicable income taxes.

Question 245

Assuming constant inventory quantities, which of the following inventory costing methods will produce a lower inventory turnover ratio in an inflationary economy?

Answer 245

FIFO (first in, first out)

In an inflationary period, rising prices will cause LIFO cost of goods sold to be highest (from recent purchases) and LIFO ending inventory to be lowest (earliest purchases). FIFO will give opposite results, with a lowest cost of goods sold (from earliest purchases) and highest ending inventory (from recent purchases). Average costing will be in the middle of the other two on both measures.

Inventory turnover is the division of cost of goods sold by average inventory.

Since FIFO gives the lowest cost of goods sold and a relatively high ending inventory amount going into the denominator average, FIFO will produce the lowest inventory turnover ratio.

Lower numerators and higher denominators yield lower ratios.

Question 246

Rein, Inc., reported deferred tax assets and deferred tax liabilities at the end of the previous year and at the end of the current year. For the current year ended, Rein should report deferred income tax expense or benefit equal to the:

A. decrease in the deferred tax assets.

B. increase in the deferred tax liabilities.

C. sum of the net changes in deferred tax assets and deferred tax liabilities.

D. amount of the current tax liability plus the sum of the net changes in deferred tax assets and deferred tax liabilities.

Answer 246

C. sum of the net changes in deferred tax assets and deferred tax liabilities.

The basic way that income tax expense is computed is to compute the correct measured values of the deferred tax assets and deferred tax liabilities at the end of the period. When the journal entry is prepared to pay the current income tax due, the necessary adjustments are made to the balances in the accounts of the deferred tax assets and deferred tax liabilities, and the income tax expense is the amount needed to balance that journal entry.

Thus, the income tax expense is basically the sum of the changes in those deferred tax asset and liabilities accounts.

Question 247

Disclosure of information about significant concentrations of credit risk is required for:

A. all financial instruments.

B. financial instruments with off-balance-sheet credit risk only.

C. financial instruments with off-balance-sheet market risk only.

D. financial instruments with off-balance-sheet risk of accounting loss only.

Answer 247

A. all financial instruments.

An entity shall disclose all significant concentrations of credit risk arising from all financial instruments, whether from an individual counterparty or groups of counterparties. An entity must also recognize all of its derivatives as an asset or liability.

Question 248

For the purpose of determining that no additional segments should be reported, the total of external revenues of all reportable segments must make up at least what percentage of total consolidated revenues?

Answer 248

75%

Question 249

When a full set of general purpose financial statements are presented, comprehensive income and its components should:

Answer 249

be displayed in a financial statement that has the same prominence as other financial statements.

Question 250

The times preferred dividend earned ratio

Answer 250

Net Income / Total Preferred Stock dividends

Question 251

A Liquidating Dividend, how is it recorded?

Answer 251

is not income, but a return on investment

Question 252

How is the prepayment of last month’s rent recognized in a lease? Is it capitalized?

Answer 252

The rent is capitalized as prepaid rent and not capitalized over the life of the lease. It is expensed in the last month of the lease term.

Question 253

assets conveyed in a troubled debt restructuring should be valued at their

Answer 253

Fair Value

Question 254

Able Co. provides an incentive compensation plan under which its president receives a bonus equal to 10% of the corporation’s income before income tax but after deduction of the bonus. If the tax rate is 40% and net income after bonus and income tax was $360,000, what was the amount of the bonus?

A. $36,000

B. $60,000

C. $66,000

D. $90,000

Answer 254

B. $60,000

To solve this problem, work backwards. If net income after the bonus and the taxes was $360,000, then (taking the tax expense back first) income before taxes was $600,000 (using the after-tax back to pre-tax conversion formula, $360,000 ÷ 0.6 = $600,000, 0.6 = 1 less the tax rate of 40%). Now, the bonus is equal to 10% of the income after deducting the bonus, which would be the income before taxes of $600,000. Thus the bonus is 0.10 × $600,000, or $60,000.

Question 255

When should an anticipated loss on a long-term contract be recognized under the percentage-of-comple­tion method and the completed-contract method, respectively?

Answer 255

Under the percentage-of-completion method, gains are recognized on profitable long-term contracts as the work is progressing, and under the completed-contract method, all gains are deferred and recognized when the contract is complete. However, both methods are alike in recognizing estimated ultimate losses on a losing contract immediately.

Question 256

Receivables Turnover Ratio

Answer 256

Net Credit Sales / Average AR (Net)

Question 257

If a temporary difference results in additional taxes being paid then it is a …

Answer 257

liability

Question 258

The lower of cost or market rule for inventories may be applied to total inventory, to groups of similar items, or to each item. Which application generally results in the lowest inventory amount?

A. All applications result in the same amount.

B. Total inventory

C. Groups of similar items

D. Separately to each item

Answer 258

D. Separately to each item

Question 259

Which of the following statements regarding inventory accounting systems is true?

A. A disadvantage of the perpetual inventory system is that the inventory dollar amounts used for interim reporting purposes are estimated amounts.

B. A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.

C. An advantage of the perpetual inventory system is that the record keeping required to maintain the system is relatively simple.

D. An advantage of the periodic inventory system is that it provides a continuous record of the inventory balance.

Answer 259

B. A disadvantage of the periodic inventory system is that the cost of goods sold amount used for financial reporting purposes includes both the cost of inventory sold and inventory shortages.

The periodic inventory system calculates cost of goods sold as the difference between cost of goods available for sale and ending inventory. This system does not maintain records indicating what the amount of ending inventory should be. It simply requires a company to determine what the amount of ending inventory is at period end. Therefore, there is no way to determine what portion of the items represented by the difference between cost of goods available for sale and cost of ending inventory was sold and what portion was stolen, broken and discarded, etc. In short, this system assigns the entire difference to cost of goods sold because of the inability to determine what portion represents inventory shortages.

Question 260

Which statements are usually included in a set of personal financial statements?

Answer 260

A statement of financial condition and a statement of changes in net worth

Question 261

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:

1. increases by revenue earned on the investments.
2. is not affected by revenue earned on the investments.
3. decreases when the investments are purchase

Answer 261

1. increases by revenue earned on the investments.

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 262

For a correction of an error, IFRS requires that the following be disclosed:

Answer 262

1. The nature of the error
2. The correction to specific line items and earnings per share
3. The amount of the correction at the beginning of the earliest period presented

There is no requirement to describe how the error will be prevented in the future.

Question 263

Which of the following is used in calculating the income recognized in the fourth and final year of a contract accounted for by the percentage-of-completion method?

A. Actual total costs

B. Income previously recognized

C. Both actual total costs and income previously recognized

D. Neither actual total costs nor income previously recognized

Answer 263

C. Both actual total costs and income previously recognized

Question 264

Which of the following must be done when an entity is required to use the liquidation basis of accounting?

A. Measure assets at fair value

B. Recognize previously unrecognized items that the entity expects to sell

C. Recognize costs and income expected to be incurred or earned through liquidation only after the liquidation is complete

D. Recognize the costs of liquidation only after the liquidation is complete

Answer 264

B. Recognize previously unrecognized items that the entity expects to sell

“Recognize previously unrecognized items that the entity expects to sell” is correct. Assets must be measured at the estimated amount of cash expected to be collected. Costs and income should be recognized when it becomes apparent that liquidation is imminent.

Question 265

An increase in the cash surrender value of a life insurance policy owned by a company would be recorded by:

A. decreasing annual insurance expense.

B. increasing investment income.

C. recording a memorandum entry only.

D. decreasing a deferred charge.

Answer 265

A. decreasing annual insurance expense.

Debit: Insurance Expense
Credit: Cash

Question 266

For a defined benefit postretirement plan, an employer recognizes a transition obligation or transition asset, determined as the measurement date for the beginning of the fiscal year in which GAAP employers’ accounting for postretirement benefits other than pensions is applied. The transition obligation or transi­tion asset may be recognized:

A. immediately in net income of the period of change as the effect of a change in accounting principle and on a delayed basis as a component of net periodic postretirement benefit cost.

B. immediately in net income of the period of change as the effect of a change in accounting principle.

C. on a delayed basis as a component of net periodic postretirement benefit cost.

D. neither immediately in net income of the period of change as the effect of a change in accounting principle nor on a delayed basis as a component of net periodic postretirement benefit cost.

Answer 266

A. immediately in net income of the period of change as the effect of a change in accounting principle and on a delayed basis as a component of net periodic postretirement benefit cost.

Question 267

Qualifying Assets

Answer 267

assets that are constructed or otherwise produced for an entity’s own use (including assets constructed or produced for the entity by others for which deposits or progress payments have been made).

The interest is CAPITALIZED not expensed

Question 268

Inventory Turn Over Ratio

Answer 268

COGS / Average Inventory

Question 269

When does the Attribution period begin and end?

Answer 269

Begins at the employee’s date of hire and ends at the full eligibility date