Practice Exam A

Question 1

For nongovernmental accounting, the recognition of revenue occurs when

Answer 1

a pledge is made for the current period net estimation for uncollectible pledges.

Question 2

Cost of software that is to be sold, leased, or licensed is immediately expensed until

Answer 2

the technological feasibility is achieved.

Question 3

Technological feasibility means

Answer 3

there is a working product or a detailed program design is complete.

Question 4

Costs incurred after technological feasibility is achieved are

Answer 4

capitalized and amortized.

Question 5

Five items to calculate the compensation expense for stock options:

Answer 5

1. service period =
   the year the stock options are GRANTED to the year the stock options are EXERCISED
2. total estimated compensation expense at year end =
   (options expected to vest adjusted for forfeitures * fair value of options)
3. compensation expense for current year =
   (total compensation expense at year end * # of completed year in service period / service period) - compensation expense for previous years.
4. total estimated compensation expense at year end =
   (options estimated to vest adjusted for forfeitures * fair value options)
5. compensation expense for current year =
   (Total compensation expense at year end * # of completed service period years / service period) - compensation expense from previous years

Question 6

the loss on the sale of long term investments =

Answer 6

the carrying value of the portion of the transferred asset and the cash received for the transferred portion.

The carrying value of the portion of the asset transferred =
(CV of portion of asset transferred / CV of portion of asset transferred and retained) * CV of portion of asset transferred and retained.

Question 7

PBO, January 1, $200mn

Assets, January 1, $160mn

Pension expense, $60mn

Funding contribution, $50mn

PBO gain (year-end), $14mn

Amortization of PSC for year, $4mn

The ending pension liability balance is

Answer 7

Ending pension liability = PBO - plan assets.

Change in PBO =
PBO, beg. bal.
Pension expense
(PBO gain)
(Amortization of PSC for Year, the previous recognition of prior service cost already affect the pension liability) 

Change in Plan Assets =
Plan assets, beg. bal.
Funding contribution

Question 8

When treasury stock is resold, is there gain on the sale of the treasury stock? show journal entry

Answer 8

There is no gain on the re-issuance of treasury stock.
Dr. Cash
Cr. Treasury Stock
Cr. Contributed Capital from Treasury Stock

Question 9

Non-controlling interest at year end =

Answer 9

Non-controlling interest at acquisition date
non-controlling share of subsidiary income
(non-controlling share of subsidiary cash dividends)
(non-controlling share of plant asset revaluation)

Question 10

Expenditures is a term reserved for

Answer 10

funds using modified accrual basis of accounting.

Question 11

Government funds used which basis of accounting

Answer 11

the modified accrual basis of accounting

Question 12

Tuition scholarships for which there is no intention of collection from the student should be classified by a private university as:

Answer 12

a reduction in gross revenue in order to get to net revenue.

Question 13

A derivative cannot be used as a fair value hedge for:

Answer 13

an unrecognized forecasted transaction.

A derivative can be used as a fair value hedge for
a recognized liability or asset or
an unrecognized firm commitment

Question 14

contracts that are financial instruments result in two items

Answer 14

1. an exchange for cash or ownership equity and

2. impose a contractual obligation one entity and a contractual right on another

Question 15

the fair value hierarchy

Answer 15

Level 1 are observable inputs quoted prices from active markets.

Level 2 are indirectly or directly observable inputs other than quoted prices.

Level 3 are unobservable inputs.

Question 16

2 statements about disclosures when fair value measurements are being used:

Answer 16

1. disclosures showing information about each major category of assets/liabilities.
2. most disclosures must be included in interim and annual financial statements.

Question 17

Net sales revenue $187,000
Results from discontinued operations:
Loss from operations of segment, net of $1,200 tax effect $ 2,400
Gain on disposal of segment, net of $7,200 tax effect 14,400 12,000
Interest revenue 10,200
Gain on sale of equipment 4,700
Cumulative change in previous year’s income due to change
In depreciation method, net of $750 tax effect 1,500
Total revenues $215,400

In the revenues section of the income statement,
LM should have reported total revenues of

Answer 17

TOTAL REVENUE =

Net sales revenue
Interest Revenue
Gain on Sale of equipment

Question 18

Goodwill should be tested for impairment at the

Answer 18

reporting level unit.

Question 19

2 items to capitalize related to research and development costs

Answer 19

1. successful defense of a patent

2. fees to apply to patent

Question 20

Appropriations
1. at budget and

2. at year end

Answer 20

Appropriations should be

1. credited in budgeting and
2. debited at year end

Question 21

Four criteria for capitalizing a lease

Answer 21

1. title transfer to lessee at end of the lease.
2. there is a bargain purchase option.
3. lease is at least 75% of the building’s useful life.
4. present value of lease payment is at 90% of the building’s fair value.

Question 22

A parent company’s gain on sale for consolidated financial statements is BLANK.

An asset sold from the parent to subsidiary is

Answer 22

eliminated and the depreciation expense is therefore reduced.

left alone because the parent would have depreciated if it were on their books and, in consolidation, the asset is placed on the consolidated books.

Question 23

At December 31, 2004, Lyle has a $50,000 debit balance in its accounts payable to Ross, a supplier, resulting from a $50,000 advance payment for goods to be manufactured to Lyle’s specifications.

Answer 23

This $50,000 should be a credit to Accounts Payable.

The $50,000 should go to the asset account ADVANCES TO SUPPLIERS.

Question 24

n its first four years of operations ending December 31, 20X2, Alder, Inc.’s depreciation for income tax purposes exceeds its depreciation for financial-statement purposes. This temporary difference is expected to reverse in 20X3, 20X4, and 20X5.

Answer 24

Higher depreciation for tax purposes means lower income for tax purposes.

Lower income for tax purposes means higher tax income later on.

Higher tax income later on means higher taxes.

The result of this is a non-current deterred tax liability

Question 25

On January 2, 2004, Emme Co. sold equipment with a carrying amount of $480,000 in exchange for a $600,000 noninterest-bearing note due January 2, 2007. There was no established exchange price for the equipment. The prevailing rate of interest for a note of this type on January 2, 2004, was 10%. The present value of $1 at 10% for three periods is 0.75.

In Emme’s 2004 income statement, what amount should be reported as interest income?

Answer 25

Initial entry:

Dr. Note Receivable 450,000*
Cr. Loss on sale of equipment 30,000
Cr. Equipment 480,000

*600,000 * .75
The note is not recorded at 600,000 because the amount recognized future interest payments.

Interest income =
450,000 * .1

Question 26

Under the modified accrual basis of accounting for governmental funds of a governmental unit, revenues should be recognized in the accounting period in which they

Answer 26

become available and measurable.