Test Bank MCQ 5 Flashcards
(FA-0131)
For IFRS reporting, what valuation methods are used for intangible assets?
IFRS requires intangible assets to be measured using either the cost model or the revaluation model.
(AICPA.090876FAR)
At the end of the current year, Swen Inc. prepares its tax return, which reflects an uncertain amount, reducing the firm's tax liability by $40,000. Swen estimates that, upon audit by the IRS, there is a 20% chance that the full $40,000 benefit will be upheld, and a 40% chance that the benefit will be only $25,000. As a result of the required recognition and measurement principles for uncertain tax positions, current-year income tax expense is reduced by what amount? $18,000 $25,000 $40,000 $15,000
ANSWER: $25,000
This is the largest amount, which has at least a 50% probability of occurring. The cumulative probability through this amount is 60%. A liability is recognized for the $15,000 of the total $40,000, which has less than a 50% chance of occurring.
(AICPA.100901FAR-OFS-SIM)
Under IFRS for SMEs, which of the following cost flow assumptions can be used for inventory valuation purposes?
FIFO
LIFO
Weighted Average Cost
ANSWER: Yes No Yes
Under IFRS for SMEs, the FIFO and weighted average cost assumptions of cost flow may be used for inventory valuation purposes, but the LIFO cost flow assumption may not be used.
(AICPA.130723FAR)
A company recently moved to a new building. The old building is being actively marketed for sale, and the company expects to complete the sale in four months. Each of the following statements is correct regarding the old building, except:
It will be reclassified as an asset held for sale.
It will be classified as a current asset.
It will no longer be depreciated.
It will be valued at historical cost.
Only assets used in current operations are included in the category of property, plant and equipment (PPE) on the balance sheet. Assets that are held for sale are reclassified from PPE to ‘assets held for sale’ and are no longer depreciated. This questions is an example of a questions framed in the null form. That is, the question wants you to find the exception. This response states the asset will be valued at historical cost—that is false. An asset held for sale is reported at net realizable value.
(SCF-0003)
A company’s accounts receivable decreased from the beginning to the end of the year. In the company’s statement of cash flows (operating activities shown using direct approach), the cash collected from customers would be
Sales revenues plus accounts receivable at the beginning of the year.
Sales revenues plus the decrease in accounts receivable from the beginning to the end of the year.
Sales revenues less the decrease in accounts receivable from the beginning to the end of the year.
The same as sales revenues.
ANSWER: Sales revenues plus the decrease in accounts receivable from the beginning to the end of the year.
In a statement of cash flows in which the operating activities section is prepared using the direct method, the cash collected from customers would equal the accrual-basis sales revenue plus/minus any decrease/increase in accounts receivable account.
(AICPA.910548FAR-P1-FA)
Marr Corp. reported rental revenue of $2,210,000 in its cash basis federal income tax return for the year ended November 30, 2004. Additional information is as follows:
Rents receivable - November 30, 2004 $1,060,000
Rents receivable - November 30, 2003 800,000
Uncollectible rents written off during the fiscal year 30,000
Under the accrual basis, Marr should report rental revenue of
$1,920,000
$1,980,000
$2,440,000
$2,500,000
ANSWER: $2,500,000
The cash basis revenue in the tax return is the amount of rent collected for tax purposes.
beg. rent receivable + accrual revenue - collections - write-offs = end. rent receivable
$800,000 + accrual revenue - $2,210,000 - $30,000 = $1,060,000
accrual revenue = $2,500,000
(AICPA.130716FAR)
On October 31, year 1, a company with a calendar year end paid $90,000 for services that will be performed evenly over a six-month period from November 1, year 1, through April 30, year 2. The company expensed the $90,000 cash payment in October, year 1, to its services expense general ledger account. The company did not record any additional journal entries in year 1 related to the payment. What is the adjusting journal entry that the company should record to properly report the prepayment in its year 1 financial statements?
Debit prepaid services and credit services expense for $30,000.
Debit prepaid services and credit services expense for $60,000.
Debit services expense and credit prepaid services for $30,000.
Debit services expense and credit prepaid services for $60,000.
ANSWER: Debit prepaid services and credit services expense for $60,000.
This question is testing your knowledge of what portion of a cash outlay should be recognized as an asset and what portion should be recognized as an expense. The entire cost of the service is $90,000 for 6 months; therefore, the monthly cost is $15,000 a month. On October 31, the company expensed the entire $90,000, but will receive future benefit over 4 months in the next year. The adjusting entry would be to reduce service expense for $60,000 (4 × $15,000) and increase prepaid services for $60,000.
(AICPA.110564FAR)
In January, Stitch, Inc. adopted the dollar-value LIFO method of inventory valuation. At adoption, inventory was valued at $50,000. During the year, inventory increased $30,000 using base-year prices, and prices increased 10%. The designated market value of Stitch's inventory exceeded its cost at year-end. What amount of inventory should Stitch report in its year-end balance sheet? $80,000 $83,000 $85,000 $88,000
Beginning inventory of $50,000 is at base-year dollars and the current year increase of $30,000 is also at base-year dollars. The current year layer must be converted to current year costs ($30,000 × 1.10) = $33,000. Ending dollar value LIFO is the beginning dollar value LIFO (in this case it was adopted in January so the beginning inventory must be $50,000) plus the current year layer of $33,000 or $83,000. Note that the sentence “The designated market value of Stitch’s inventory exceeded its cost at year end” is a distracter. It is simply stating that there is not an issue with the lower of cost or market since cost is lower.
(AICPA.911117FAR-P1-FA)
On July 1, 2005, Lee Co. sold goods in exchange for a $200,000, 8-month, noninterest-bearing note receivable. At the time of the sale, the note’s market rate of interest was 12%.
What amount did Lee receive when it discounted the note at 10% on September 1, 2005?
$194,000
$193,800
$190,000
$188,000
ANSWER: $190,000
Six months remain in the note term at the date of discounting.
Maturity value of note: $200,000
Less discount: $200,000(.10)(6/12) (10,000)
Equals proceeds on note $190,000
(FA-0110)
On December 31, year 1, the New Bite Company had capitalized costs for a new computer software product with an economic life of 4 years. Sales for year 2 were 10% of expected total sales of the software. At December 31, year 2, the software had a net realizable value equal to 80% of the capitalized cost. The unamortized cost reported on the December 31, year 2 balance sheet should be Net realizable value. 90% of net realizable value. 75% of capitalized cost. 90% of capitalized cost.
ANSWER: 75% of capitalized cost.
Per ASC 985, the annual amortization of capitalized software costs shall be the greater of
(1) The ratio of the software’s current sales to its expected total sales,
or
(2) The straight-line method over the economic life of the product.
In this case, the ratio of current to expected total sales is 10% (given). The annual straight-line rate is 25% per year (1/economic life of 4 years). The straight-line amortization should be used in year 2, since it is the higher of the two. The unamortized cost on the 12/31/Y2 balance sheet should, therefore, be 75% (100% − 25% amortization).
(PVE-0062)
Spring Corp. entered into a five-year lease agreement with Fall Corp. Spring, the lessee, paid an additional $5,000 nonrefundable lease bonus to Fall upon signing the operating lease agreement. When would Fall recognize in income the nonrefundable lease bonus paid by Spring?
When received.
Over the life of the lease.
At the expiration of the lease.
At the inception of the lease.
ANSWER: Over the life of the lease.
Lease bonuses are treated as unearned rent by the lessor and amortized to rental revenue on a straight-line basis over the lease term.
(assess.AICPA.FAR.goodwill-0017)
If both an asset group and goodwill in one of a company’s reporting units have to be tested for impairment, which of the following statements is correct regarding impairment testing and impairment losses?
The other asset group should be tested for an impairment loss before goodwill is tested.
Impairment testing may be conducted concurrently for the other asset group and goodwill.
If the other asset group is impaired, the loss should not be recognized prior to goodwill being tested for impairment.
If goodwill is impaired, the loss should be recognized prior to testing the other assets for impairment.
ANSWER: The other asset group should be tested for an impairment loss before goodwill is tested.
When conducting goodwill impairment testing in a reporting unit, one must first determine the fair value of the identifiable net assets (assets minus liabilities). The fair value of the identifiable net assets is used to calculate implied goodwill to test recorded goodwill for impairment. Since the fair value of the identifiable assets is needed to determine implied goodwill. The measurement of the fair value of the identifiable net assets is essentially measuring (and recognizing) any impairment in that asset group before the impairment testing for goodwill is completed.
(PVE-0018)
On January 1, year 1, Nobb Corp. signed a 12-year lease for warehouse space. Nobb has an option to renew the lease for an additional 8-year period on or before January 1, year 5. During January year 3, Nobb made substantial improvements to the warehouse. The cost of these improvements was $540,000, with an estimated useful life of 15 years. At December 31, year 3, Nobb intended to exercise the renewal option. Nobb has taken a full year’s amortization on this leasehold. In Nobb’s December 31, year 3 balance sheet, the carrying amount of this leasehold improvement should be
$486,000
$504,000
$510,000
$513,000
ANSWER: $504,000
The cost of the leasehold improvements ($540,000) should be amortized over the remaining life of the lease, or over the useful life of the improvements, whichever is shorter. The remaining life of the lease should include periods covered by a renewal option if it is probable that the option will be exercised. In this case, the remaining life of the lease is 18 years (12 years of original lease + 8 years in option period − 2 years past), and the useful life of the improvements is 15 years. Therefore, amortization is based on a 15-year life ($540,000 ÷ 15 = $36,000). The 12/31/Y3 carrying amount is $504,000 ($540,000 − $36,000).
(AICPA.901110FAR-P1-FA)
Black Corp.’s accounts payable at December 31, 20X4, totaled $900,000 before any necessary year-end adjustments relating to the following transactions:
On December 27, 20X4, Black wrote and recorded checks to creditors totaling $400,000, causing an overdraft of $100,000 in Black’s bank account at December 31, 20X4. The checks were mailed out on January 10, 20X5.
On December 28, 20X4, Black purchased and received goods for $153,061, terms 2/10, n/30. Black records purchases and accounts payable at net amounts. The invoice was recorded and paid on January 3, 20X5.
Goods shipped F.O.B. destination on December 20, 20X4 from a vendor to Black were received January 2, 20X5. The invoice cost was $65,000.
At December 31, 20X4, what amount should Black report as total accounts payable?
$1,515,000
$1,450,000
$1,153,061
$1,053,061
ANSWER: $1,450,000
Preadjusted balance in accounts payable $900,000
Plus checks not sent to creditors until Jan. 10 (this amount was debited to accounts payable and must be reversed because the checks have not been sent - accounts payable has not been reduced as of December 31) 400,000
Plus goods received Dec. 28, at net: .98($153,061)(the firm records purchases at net of 2% discount) 150,000
Equals ending accounts payable $1,450,000
There is no liability at December 31, 20X4 for the goods shipped FOB destination because title does not pass until the goods reach the destination, which did not occur until January.
The firm must include the Dec. 28 receipt of goods in accounts payable because the firm has received the goods.
(AICPA.083752FAR-SIM)
At the end of the previous year, a firm reported a $6,000 deferred tax asset from a net-operating-loss carry-forward that can be carried forward several years into the future. The tax rate is 30%. For the current year, the firm records estimated warranty expense of $30,000 for the year and incurred $10,000 of warranty-claims costs. Taxable income for the current year is $12,000. Compute income tax expense (benefit) for the current year.
($5,400)
($2,400)
$3,600
Neither expense nor benefit.
ANSWER: ($2,400)
The unused net operating loss (NOL) at the beginning of the year is $20,000 (= $6,000/.3). The firm pays no tax for the current year, because $12,000 of the NOL is used to absorb the $12,000 of taxable income. $8,000 of the NOL remains to carry forward to the next year. Also, there is a future temporary difference of $20,000 from the future warranty deduction ($30,000 − $10,000 current-year claims). In total, then, the basis for the ending deferred tax asset is $28,000 (= $8,000 + $20,000). The ending deferred tax asset balance is $8,400 (= $28,000 × .3). The beginning deferred tax asset balance is $6,000. Therefore, the deferred tax asset is increased by $2,400 and income tax benefit of that amount also is recorded (credited) in the tax-accrual entry.
