FRA

Question 1

Under U.S. GAAP, if a reliable estimate of total costs of a long-term contract does not exist, which of the following revenue recognition methods should be used?

Answer 1

Completed-Contract Method

NOTE: Cost of Recovery Method used for installment sales when future cash collections are not assured.

Question 2

GTO Corporation purchased all of the common stock of Charger Company for $4 million. At the time, Charger reported total assets of $3 million and total liabilities of $1 million. At the acquisition date, the fair value of Charger’s assets was $3.5 million and the fair value of Charger’s liabilities was $1.3 million. What amount of goodwill should GTO report as a result of the acquisition and is it necessary for GTO to amortize the goodwill?

Answer 2

Goodwill: $1.8M
Amortization: Not Required

NOTE: Goodwill is not amortized but subject to annual impairment test.

Question 3

Do the following characteristics have to be met in order to classify a liability as current on the balance sheet?

Characteristic #1 – Settlement is expected within one year or operating cycle, whichever is less.

Characteristic #2 – Settlement will require the use of cash within one year or operating cycle, whichever is greater.

Answer 3

#1: Yes
#2: No

NOTE: A current liability is expected to be settled within one year or operating cycle, whichever is greater. It is not necessary to settle a current liability with cash. There are a number of ways to settle a current liability. For example, unearned revenue is a liability that is settled by providing goods or services.

Question 4

A company that reports under IFRS has developed a new product which required research costs of $2 million and development costs of $3 million. The maximum amount the company can record as the value of the new product on its balance sheet is:

Answer 4

$3M

NOTE: Under IFRS, research costs must be expensed but development costs, under certain circumstances, may be capitalized.

(Study Session 7, Module 24.5, LOS 24.e)

Question 5

A common-size cash flow statement is least likely to provide payments to employees as a percentage of:

Answer 5

CFO, CFI, CFF, INDIVIDUALLY

Question 6

Assuming inventory levels remain constant during the year and prices have been stable over time, COGS would be:

Answer 6

the same for both LIFO & FIFO

Question 7

An analyst will most likely use the average age of depreciable assets to estimate the company’s:

Answer 7

near-term financing requirements

Question 8

Under IFRS, the principal portion of a finance lease payment:

Answer 8

is recognized as CFF by the lessee, and CFI by the lessor

Question 9

In the early years of an asset’s life, a firm that chooses an accelerated depreciation method instead of using straight-line depreciation will tend to have:

Answer 9

lower net income and lower equity.

Question 10

GAAP, LEAST LIKELY requires PPE to be tested for impairment:

Answer 10

at least annually.

NOTE: This is under IFRS

Question 11

La Crosse Partners LLC has a franchise agreement with Arnolds Crispy Fry that expires in seven years, but is renewable at each expiration date for a nominal fee. If the franchise agreement is initially valued at $60,000:

Answer 11

amortization exp in the sixth year will be zero

NOTE: because this agreement can be renewed, the asset has an indefinite life, and is instead tested for impairment regularly.

Question 12

how are “Income Before Taxes” & “Taxable Income” translated into deferred taxes, after a tax rate?

Answer 12

Income Before Taxes: Income Tax Expense

Taxable Income: Taxes Paid

Question 13

When selecting between two mutually exclusive projects, neither project should be accepted if they both have a ______ NPV.

Answer 13

Negative