FAR Mock Exam 1

Question 1

Faber Company was contracted to construct the Acme building at a total contract price of $40,000,000. The company uses the percentage of completion method and anticipated a 10 percent gross profit on January 1, Year 1, the date the contract began. At December 31, Year 2, the company had recognized $1,200,000 in inception to date profit. Assuming the job was 40% complete, by what amount had total estimated project costs increased?

Answer 1

Application of the four-step formula for percentage of completion construction accounting
1. Gross profit at the eoy (given) $1,200,000

Then use the % of completion to compute gross profit (1,200,000 / 40%) = $3,000,000

Compute the estimated costs $37,000,000 (40,000,000 - 3,000,000).

Compute the original costs $36,000,000 (40,000,000 selling price - 10% of selling price)

Then compare estimated costs to original costs $1,000,000 (37,000,000 - 36,000,000)

Question 2

Vadis Co. sells appliances that include a three-year warranty. Service calls under warranty are preformed by an independent mechanic under a contract with Vadis. Based on experience, warranty costs are estimated at $30 for each machine sold. When should Vadis recognize these warranty costs?

When payments are made to the mechanic

When the machines are sold

Evenly over the life of the warranty

When the service calls are performed

Answer 2

Warranty costs should be recognized when the machines are sold. The concept is that of matching revenues and the related expenses in the period of benefit.

Question 3

Identified concentrations only need to be disclosed if all of the following criteria are met:

Answer 3

1. The concentration exists at the financial statement date.
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 that could cause the severe impact will occur in the near-term.

Question 4

Which of the following qualifies as a reportable segment?

North America segment, whose assets are 12% of the company’s assets of all segments, and management reports to the chief operating officer.

South America segment, whose results of operations are reported to the chief operating officer, and has 5% of the company’s assets, 9% of revenues, and 8% of the profits.

Eastern Europe segment, which reports its results directly to the manager of the European division, and has 20% of the company’s assets, 12% of revenues, and 11% of profits.

Corporate headquarters, which oversees $1 billion in sales for the entire company.

Answer 4

Assets of North America segment exceed 10% combined assets of all operating segments.