FAR1 50 Multiple Choice Questions

1. A corporation issues quarterly interim financial statements and uses the lower of
cost or market method to value its inventory in its annual financial statements.
Which of the following statements is correct regarding how the corporation should
value its inventory in its interim financial statements?
A. Inventory losses generally should be recognized in the interim statements.
B. Gains from valuations in previous interim periods should be fully recognized.
C. Only the cost method of valuation should be used.
D. Temporary market declines should be recognized in the interim statements.
ANSWER: A
This answer is correct. The requirement is to identify the correct statement
regarding valuing inventory in interim financial statements. ASC Topic 270 provides
that inventory losses from market declines should be recognized in the interim
statements when the decline in value occurs. A temporary market decline need not be
recognized in the financial statements since no loss is expected to be incurred in
the fiscal year. Therefore this answer is correct.

2. As a result of differences between depreciation for financial reporting purposes

and tax purposes, the financial reporting basis of Noor Co.s sole depreciable
asset, acquired in year 3, exceeded its tax basis by $250,000 at December 31, year
3. This difference will reverse in future years. The enacted tax rate is 30% for
year 3, and 40% for future years. Noor has no other temporary differences. In its
December 31, year 3 balance sheet, how should Noor report the deferred tax effect of
this difference?
A. As a liability of $75,000.
B. As a liability of $100,000.
C. As an asset of $100,000.
D. As an asset of $75,000.
ANSWER: B
This answer is correct. At 12/31/Y3, the financial reporting basis of the
depreciable asset exceeds its tax basis by $250,000. This means that in future years
tax depreciation will be less than book depreciation, resulting in future taxable
amounts. The existence of future taxable amounts requires recognition of a deferred
tax liability at 12/31/Y3 based on future enacted tax rates. Therefore, Noor should
report a 12/31/Y3 deferred tax liability of $100,000 ($250,000 x 40%). Note that the
deferred tax liability should reflect the future tax consequences of events which
have been recognized in the financial statements, so its computation is based on
current tax rates, unless future tax rates have been enacted and are different from
the current rate.

3. During year 1, an alumnus of Isabella College, a private not-for-profit college,

transferred $100,000 to the college with the stipulation that it be spent for
library acquisitions. However, the alumnus specified that none of the cash
transferred could be spent until the college had matched the entire amount
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FAR1 50 Multiple Choice Questions

transferred with donations from other alumni by December 31, year 2. As of December
31, year 1, the college had received matching cash donations of only $5,000 from
other alumni, and the college estimated that it was reasonably possible that it
would not reach the goal of $100,000 by December 31, year 2. If the funds are not
matched by December 31, year 2, the cash will be returned to the alumnus. On the
colleges statement of financial position at December 31, year 1, the cash transfer
of $100,000 would be included in the amount reported for
A. Permanently restricted net assets.
B. Liabilities.
C. Temporarily restricted net assets.
D. Unrestricted net assets.
ANSWER:B
This answer is correct. A transfer of assets with a conditional promise to
contribute them shall be accounted for as a refundable advance until the conditions
have been substantially met. The conditions have been substantially met when the
possibility that they will not be met is remote. In this question, the chance that
the condition will not be met is reasonably possible, which is a higher level of
doubt than remote, and thus results in reporting the cash transfer as a liability at
December 31, year 1.

4. Brooklyn, Inc., had an explosion in its plant that destroyed most of its
inventory. Its records show that beginning inventory was $40,000. Brooklyn made
purchases of $480,000 and sales of $620,000 during the year. Its normal gross profit
percentage is 25%. It can sell some of its damaged inventory for $5,000. The
insurance company will reimburse Brooklyn for 70% of its loss. What amount should
Brooklyn report as loss from the explosion?
A. $18,000
B. $35,000
C. $15,000
D. $50,000
ANSWER:
This answer is correct. The requirement is to determine the amount that Brooklyn,
Inc. should report as loss from the explosion. To calculate the loss, you must
first determine an estimate of the inventory on hand, and information is provided to
estimate the inventory based on the gross profit method. If the gross profit
percent is 25% of sales, an estimate of the loss may be calculated as shown below:
Sales
COGS (75%)
Gross Profit 25%
Beginning inventory
+ Purchases
Goods avail. for sale
Cost of goods sold (estimated)
Ending inventory (estimated)

$620,000
(465,000)
$155,000
$ 40,000
480,000
$520,000
(465,000)
$ 55,000
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FAR1 50 Multiple Choice Questions

Ending inventory (estimated)
$ 55,000
Less: sales value of damaged goods
(5,000)
Estimated loss
$ 50,000
30% (not reimbursed)

30%
Amount of loss not reimbursed
$ 15,000
Therefore, this is correct.

5. When goods which have been previously approved for purchase are received by a
governmental unit but not yet paid for, what account is credited?
A. Vouchers Payable.
B. Appropriations.
C. Reserve for Encumbrances.
D. Expenditures.
ANSWER: A
This answer is correct because when goods have been approved for purchase, an
Encumbrances account is debited and a Reserved for Encumbrances account is
credited for the estimated cost of the goods. As the goods are received, the
following entries are recorded:
Reserved for Encumbrances
xx
Encumbrances
xx
Expenditures
xx
Vouchers payable (cash)

xx

The first entry records the receipt of the goods, and the second entry reverses the
original encumbrance that was set up when the goods were initially approved.

6. On September 22, year 2, Zoe Corp. purchased merchandise from an unaffiliated

foreign company for 10,000 units of the foreign companys local currency. On that
date, the spot rate was $.55. Zoe paid the bill in full on March 20, year 3, when
the spot rate was $.65. The spot rate was $.70 on December 31, year 2. What amount
should Zoe report as a foreign currency transaction loss in its income statement for
the year ended December 31, year 2?
A. $1,000
B. $1,500
C. $0
D. $ 500
ANSWER: B
This answer is correct. A transaction has occurred for which settlement will be made
in a foreign currency. A foreign exchange transaction gain (loss) will result if the
spot rate on the settlement date is different than the rate on the transaction date.
A gain (loss) must be recognized at any intervening year-end date if there has been
a rate change. Thus, in year 2, Zoe would recognize a $1,500 foreign exchange
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FAR1 50 Multiple Choice Questions

transaction loss [10,000 ($.70 $.55)]. Zoe would recognize a foreign exchange
transaction gain of $500 in year 3 [10,000 ($.65 $.70)].

7. According to the cost recovery method of accounting, gross profit on an

installment sale is recognized in income
A. In proportion to the cash collections.
B. On the date of sale.
C. After cash collections equal to the cost of sales have been received.
D. On the date the final cash collection is received.
ANSWER: C
This answer is correct. Installment methods of recognizing revenue are appropriate
only when "collection of the sale price is not reasonably assured." Under the cost
recovery method, gross profit is deferred and recognized only when the cumulative
receipts exceed the cost of the asset sold.

8. On January 1, year 2, Taylor Corp. acquired 50,000 shares of Riley Corp. stock
which represented 80% of Rileys $10 par common stock for $19.50 per share. On the
date of acquisition, the fair value of the 12,500 shares representing the
noncontrolling interest in Riley was $18 per share. On this date, the carrying
amount of Rileys net assets was $1,000,000. The fair values of Rileys identifiable
assets and liabilities were the same as their carrying amounts. For the year ended
December 31, year 2, Riley had net income of $190,000 and paid cash dividends
totaling $125,000. In the December 31, year 2, consolidated balance sheet,
noncontrolling interest should be reported at
A. $233,000
B. $200,000
C. $225,000
D. $238,000
ANSWER: D
This answer is correct. The percentage of the acquirees stockholders equity not
owned by the acquirer company represents the noncontrolling interest. The
acquisition date noncontrolling interest is valued based on the fair value of the
shares, which is 12,500 (20% 50,000) $18 = $225,000. At 12/31/Y2 the
noncontrolling interest is computed below
1/1/Y2 noncontrolling interest
Year 2 net income (20% $190,000)
Year 2 dividends (20% $125,000)
Noncontrolling interest at 12/31/Y2

$225,000
38,000
(25,000)
$238,000

9. Which of the following is not a type of foreign currency hedge?

A. A held-to-maturity security.
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FAR1 50 Multiple Choice Questions

B. An unrecognized firm commitment.
C. A forecasted transaction.
D. A net investment in foreign operations.
ANSWER: A
This answer is correct. The four foreign currency hedges are (1) an unrecognized
firm commitment, (2) available-for-sale securities, (3) foreign currency denominated
forecasted transactions, and (4) net investments in foreign operations.

10. Under IFRS, a change in accounting estimate is accounted for

A. Prospectively in the period of change and future periods.
B. Retrospectively.
C. As a cumulative effect of an accounting change in the income statement.
D. Currently in the financial statements.
ANSWER: A
This answer is correct. Changes in accounting estimates are accounted for on a
prospective basis in the period of the change and in future periods.

11. On December 31, year 1, Trinity Corp. sold a machine to Diego and simultaneously
leased it back for 1 year. Pertinent information at this date follows:
Sales price
Carrying amount
Present value of reasonable rentals ($3,000 for 12 months @ 12%)
Estimated remaining useful life

$360,000
330,000
34,100
12 years

In Trinitys December 31, year 1 balance sheet, the deferred revenue from the sale
of this machine should be
A. $30,000
B. $34,100
C. $0
D. $ 4,100
ANSWER: C
This answer is correct. ASC Topic 840 generally treats a sale-leaseback as a single
financing transaction in which any profit on the sale is deferred and amortized by
the seller. However, ASC Topic 840 amends this general rule when either only a minor
part of the remaining use of the leased asset is retained (case 1), or when more
than a minor part but less than substantially all of the remaining use of the leased
asset is retained (case 2). Case 1 occurs when the PV of the lease payments is 10%
or less of the FV of the sale-leaseback property. Case 2 occurs when the leaseback
is more than minor but does not meet the criteria of a capital lease. This is an
example of case 1, because the PV of the lease payments ($34,100) is equal to or
less than 10% of the FV of the asset ($360,000). ASC Topic 840 specifies that under
these circumstances, the full gain ($360,000 $330,000 = $30,000) is recognized,
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FAR1 50 Multiple Choice Questions

and none is deferred.

12. The estimated current values of Madelyns personal assets at December 31, year
1, totaled $1,000,000, with tax bases aggregating $600,000. Included in these assets
was a vested interest in a deferred profit-sharing plan with a current value of
$80,000 and a tax basis of $70,000. The estimated current amounts of Madelyns
personal liabilities equaled their tax bases at December 31, year 1. Madelyns year
1 effective income tax rate was 30%. In Madelyns personal statement of financial
condition at December 31, year 1, what amount should be provided for estimated
income taxes relating to the excess of current values over tax bases?
A. $0
B. $120,000
C. $117,000
D. $ 3,000
ANSWER: B
This answer is correct. Per ASC Topic 274, estimated taxes that would be paid if all
the assets were converted to cash and all the liabilities were paid should be
included with the liabilities. Thus, $120,000 [($1,000,000 $600,000) x .30] should
be provided for estimated income taxes relating to the excess of current values over
tax bases.

13. On January 16, Bailey Co. paid $60,000 in property taxes on its factory for the
current calendar year. On April 2, Bailey paid $240,000 for unanticipated major
repairs to its factory equipment. The repairs will benefit operations for the
remainder of the calendar year. What amount of these expenses should Bailey include
in its third quarter interim financial statements for the three months ended
September 30?
A. $75,000
B. $95,000
C. $0
D. $15,000
ANSWER: B
This answer is correct. The requirement is to determine the amount of expenses that
should be included in the third quarter interim financial statements. ASC Topic 270
states that expenditures which clearly benefit more than one interim period may be
allocated among the periods benefited. The major repairs were paid in the second
quarter and benefited three quarters, the current and the next two. Therefore, the
repairs expense of $80,000 ($240,000/3) should be allocated to the current quarter.
Property taxes of $60,000 are allocated to four quarters at $15,000 ($60,000/4) per
quarter. Therefore, the correct answer is $95,000 ($80,000 + $15,000) to be
allocated to the third quarter.

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FAR1 50 Multiple Choice Questions

14. Jaxon Corp. has an effective tax rate of 30%. On January 1, year 2, Jaxon
purchased equipment for $100,000. The equipment has a useful life of 10 years. What
amount of current tax benefit will Jaxon realize during year 2 by using the 150%
declining balance method of depreciation for tax purposes instead of the
straight-line method?
A. $3,000
B. $5,000
C. $4,500
D. $1,500
ANSWER: D
This answer is correct because the additional $5,000 in depreciation on the tax
return by using the 150% declining balance method would result in a tax savings or
current tax benefit of $1,500 ($5,000 x 30%). If Jaxon used the straight-line method
of depreciation for tax purposes, depreciation for year year 2 would have been
$10,000 ($100,000/ 10 years). If Jaxon uses the 150% declining balance method for
tax purposes, depreciation would be $15,000 ($100,000 x 1/10 x 1.5 = $15,000).

15. When an investor uses the cost adjusted for fair value method to account for
investments in common stock held in either a trading or available-for-sale
portfolio, cash dividends received by the investor from the investee should normally
be recorded as
A. Dividend income.
B. A deduction from the investment account.
C. An addition to the investors share of the investees profit.
D. A deduction from the investors share of the investees profit.
ANSWER: A
This answer is correct because using the cost adjusted for fair value method, cash
dividends are normally recorded as dividend income.

16. The equity method of accounting for an investment in the common stock of another
company should be used when the investment
A. Is obtained by an exchange of stock for stock.
B. Is composed of common stock and it is the investors intent to vote the common
stock.
C. Enables the investor to exercise significant influence over the investee.
D. Ensures a source of supply such as raw materials.
ANSWER: C
This answer is correct because the equity method should be used in those cases in
which "an investor has the ability to exercise significant influence over an
investee"

17. In determining diluted earnings per share, a potentially dilutive security was
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FAR1 50 Multiple Choice Questions

antidilutive in year 1 and dilutive in year 2. The common stock equivalent would be
included in the computation for

A.
B.
C.
D.

year 1
Yes
No
No
Yes

year 2
Yes
Yes
No
No

A. D
B. B
C. C
D. A
ANSWER: B
This answer is correct. In computing diluted EPS, only dilutive common stock
equivalents are included. Furthermore, the determination of whether a potentially
dilutive security is dilutive must be made at every reporting date. A situation may
arise in which a potentially dilutive security may be dilutive at one reporting date
and antidilutive the next. In this circumstance, the potentially dilutive security
should only be included in the diluted EPS calculation on the date on which it is
dilutive. Therefore, the potentially dilutive security would be included in the year
2 computation but not the year 1 computation.

18. Max Co. reported the following items in its year-end financial statements:
Capital expenditures
Capital lease payments
Income taxes paid
Dividends paid
Net interest payments

$1,000,000
125,000
325,000
200,000
220,000

What amount should Max report as supplemental disclosures in its statement of cash
flows prepared using the indirect method?
A. $1,870,000
B. $ 545,000
C. $ 745,000
D. $1,125,000
ANSWER: B
This answer is correct. ASC Topic 230 (SFAS 95, par. 29) requires that if the
indirect method is used to prepare the statement of cash flows, supplemental
disclosures are required to report the amount of interest paid and the amount of
income taxes paid during the period. This answer is correct because the total amount
of supplemental disclosures are $325,000 + $220,000 = $545,000.

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FAR1 50 Multiple Choice Questions

19. Genesis Co. discovered that in the prior year, it failed to report $40,000 of
depreciation related to a newly constructed building. The depreciation was computed
correctly for tax purposes. The tax rate for the current year was 40%. What was the
impact of the error on Genesiss financial statements for the prior year?
A. Understatement of accumulated depreciation of $40,000.
B. Understatement of net income of $24,000.
C. Understatement of depreciation expense of $24,000.
D. Understatement of accumulated depreciation of $24,000.
ANSWER: A
This answer is correct. The requirement is to determine the impact of the error. The
result of this error would have been an understatement of depreciation by $40,000
and understatement of accumulated depreciation by $40,000 and an overstatement of
net income by $24,000 [$40,000 x (1 - .4)].

20. Under IFRS reporting, how is presentation currency defined?

A. The currency of the primary economic environment in which the entity operates.
B. A currency other than the functional currency.
C. The currency in which financial statements are presented.
D. The currency that uses the current rate.
ANSWER: C
This answer is correct because currency in which financial statements are presented
is the definition of the presentation currency.

21. Kennedy Company leased equipment from Howe, Inc. on December 31, year 1, for a
10-year period (the useful life of the asset) expiring December 30, year 11. Equal
annual payments under the lease are $100,000 and are due on December 31 of each
year. The first payment was made on December 31, year 1, and the second payment was
made on the due date. The present value at December 31, year 1, of the minimum lease
payments over the lease term discounted at 10% (the implicit rate computed by Howe
and known by Kennedy) was $676,000. Kennedys incremental borrowing rate was 12% at
December 31, year 1. The lease is appropriately accounted for as a capital lease by
Kennedy. What should be the balance in Kennedys liability under capital lease
account at December 31, year 2?
A. $545,120
B. $800,000
C. $533,600
D. $607,960
ANSWER: C
This answer is correct. The first payment (paid on the date the lease is signed)
contains no interest and is, therefore, all reduction of principal. The second
payment includes interest of $57,600 (10% x $576,000) and principal of $42,400
($100,000 $57,600). Note that because Howes implicit interest rate of 10% is
known by Kennedy and is lower than Kennedys incremental rate, it is used to compute
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FAR1 50 Multiple Choice Questions

the interest payment.
Date
Cash payment
Lease liability
12/31/Y1
$676,000
12/31/Y1
$100,000
576,000
12/31/Y2
100,000
533,600

10% Interest

$57,600

Reduction of principal

$42,400

Therefore, Kennedy should report a liability under capital lease as of 12/31/Y2 of

$533,600.

22. On January 1, year 1, Weaver Company purchased as a long-term investment

$500,000 face value of Park Corporations 8% bonds for $456,200. The bonds were
purchased to yield 10% interest. The bonds mature on January 1, year 7, and pay
interest annually on January 1. Weaver intends to hold the bonds until their
scheduled maturity. Weaver uses the interest method of amortization and does not
elect the fair value option for reporting financial assets. What amount should
Weaver report on its December 31, year 1 balance sheet as long-term investment?
A. $466,200
B. $456,200
C. $450,580
D. $461,820
ANSWER: D
This answer is correct. Held-to-maturity investments should be reported at
amortized cost on the balance sheet. The carrying value of long-term investments on
December 31, year 1, will be the carrying value on January 1, year 1, plus the
discount amortization. Discount amortization is the difference between interest
revenue and interest receivable. Interest revenue is the book value of the bonds
times the yield rate of interest ($456,200 .10 = $45,620). Interest receivable is
the face value of the bonds times the face rate of interest ($500,000 .08 =
$40,000). The adjusting entry on December 31, year 1, will be
Interest receivable
Kennedy investment (long-term)
Interest revenue

40,000
5,620
45,620

Thus, the carrying value of the bonds on December 31, year 1, is $461,820 ($456,200
+ $5,620). The above entry assumes that the bonds were recorded net when purchased.
If a discount of $43,800 was recorded, the $5,620 debit would be to the discount
account.

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FAR1 50 Multiple Choice Questions

23. Mackenzie Company is in its first year of operations. Mackenzie estimates its
annual warranty expense at 2% of net annual sales. Mackenzie provides its customers
with a three-year warranty plan. Expected warranty expense is shown below:
Year
year 1
year 2
year 3
Total

Expected warranty expense

$40,000
10,000
10,000
$60,000

Present value discounted at 8%

$37,037
8,573
7,938
$53,548

The current borrowing rate for Mackenzie is 8%. Mackenzie can contract with a third
party to provide the warranty work. The cost for a contract to settle the warranties
is $57,000. If Mackenzie elects the fair value option to report warranty
obligations, at what amount will the warranty liability be recorded on the balance
sheet?
A. $0
B. $53,548
C. $60,000
D. $57,000
ANSWER: D
This answer is correct. ASC Topic 825 provides that a company can elect the fair
value option to record its warranties if the warranty liability can be satisfied by
contracting with a third party. ASC Topic 820 provides that the fair value is the
exchange price in an orderly transaction between market participants to sell the
asset or transfer the liability in the principal or most advantageous market.
Therefore, if the fair value option is elected, the fair value of the warranty
liability is the cost to settle or transfer the liability in the market.

24. On June 30, year 2, a fire in Brooke Companys plant caused a total loss to a
production machine. The machine had a book value of $80,000 at December 31, year 1,
and was being depreciated at an annual rate of $10,000. The machine had a fair
value of $110,000 at the date of the fire, and Brooke received insurance proceeds of
$100,000 in October year 2. The same month Brooke purchased a replacement machine
for $130,000. Ignoring income taxes, what amount should Brooke report on its year 2
income statement as involuntary conversion gain or loss?
A. $10,000 loss.
B. $20,000 gain.
C. $25,000 gain.
D. $0.
ANSWER: C
This answer is correct. Per ASC 605-40-45-1, a gain (loss) on such conversions
should be recognized as the difference between the proceeds and the book value of
the converted asset, regardless of whether or not the proceeds are reinvested.
Proceeds

$100,000
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FAR1 50 Multiple Choice Questions

Book value ($80,000 -$5,000)
75,000
Gain
$ 25,000
The book value of $80,000 is decreased by a half-years depreciation (1/2 $10,000
= $5,000) for 12/31/Y1 to 6/30/Y2.

25. Scarlett Inc. specializes in real estate transactions other than retail land
sales. On January 1, year 1, Scarlett consummated a sale of property to Cole Ltd.
The amount of profit on the sale is determinable and Scarlett is not obligated to
perform any additional activities to earn the profit. Coles initial and continuing
investments were adequate to demonstrate a commitment to pay for the property.
However, Scarletts receivable may be subject to future subordination. Scarlett
should account for the sale using the
A. Cost recovery method.
B. Reduced profit method.
C. Deposit method.
D. Full accrual method.
ANSWER: A
This answer is correct. The problem states that the sale has been consummated and
that Coles initial and continuing investments are adequate to demonstrate a
commitment to pay for the property. However, the fact that Scarletts receivable is
subject to future subordination precludes recognition of the profit in full.
Instead, the cost recovery method must be used to account for the sale.

26. Harper Corp. entered into a troubled debt restructuring agreement with National
Bank. National agreed to accept land with a carrying amount of $75,000 and a fair
value of $100,000 in exchange for a note with a carrying amount of $150,000.
Disregarding income taxes, what amount should Harper report as a gain on
restructuring the debt?
A. $75,000
B. $50,000
C. $25,000
D. $0
ANSWER: B
This answer is correct. The gain on restructuring the debt would be the difference
between the carrying amount of the note received and the FMV of the land given. The
amount that Harper should report as gain in its income statement is
$150,000
100,000
--------$ 50,000

CV of note
FMV of land
Gain on restructuring the debt

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FAR1 50 Multiple Choice Questions

27. During year 1 London Company sold a parcel of land used as a plant site. The
amount London received was $100,000 in excess of the lands carrying amount.
Londons income tax rate for year 1 was 30%. In its year 1 income statement, London
should report a gain on sale of land of
A. $ 30,000
B. $100,000
C. $0
D. $ 70,000
ANSWER: B
This answer is correct. Generally, gains and losses on the sale of land are not
accorded special treatment. The entire $100,000 gain should, therefore, be included
in income before taxes. The gain is not reported as an extraordinary item because it
does not meet the criteria of unusual and infrequent.

28. The capital accounts of the partnership of Grayson, Payton, and Cameron on June
1, year 1, are presented below with their respective profit and loss ratios.
Grayson
Payton
Cameron

$139,200
208,800
96,000
--------$444,000

1/2
1/3
1/6

On June 1, year 1, Lauren was admitted to the partnership when he purchased, for
$132,000, a proportionate interest from Grayson and Payton in the net assets and
profits of the partnership. As a result of this transaction, Lauren acquired a
one-fifth interest in the net assets and profits of the firm. Assuming that implied
goodwill is not to be recorded, what is the combined gain realized by Grayson and
Payton upon the sale of a portion of their interests in the partnership to Lauren?
A. $62,400
B. $0
C. $82,000
D. $43,200
ANSWER: D
This answer is correct. Under the bonus method, the excess of a new partners
contribution over that partners purchased share (percent of equity) is allocated to
the original partners capital accounts as if they had been paid a bonus. The book
value of 1/5 of the partnership purchased by Lauren is $88,800 ($444,000 5). Thus
the gain to be recognized is $43,200 ($132,000 selling price $88,800 book value).
Note there is no need to allocate gains or losses and capital balances between
Grayson and Payton, as the requirement is in terms of the combined gain.

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FAR1 50 Multiple Choice Questions

29. On December 31, year 1, Serenity Township paid a contractor $2,000,000 for the
total cost of a new firehouse built in year 1 on Township-owned land. Financing was
by means of a $1,500,000 general obligation bond issue sold at face value on
December 31, year 1, with the remaining $500,000 transferred from the general fund.
What should be reported on Serenitys year 1 financial statements for the Capital
Project Fund?
A. Revenues, $1,500,000; Expenditures, $1,500,000.
B. Revenues, $1,500,000; Other financing sources, $500,000; Expenditures,
$2,000,000.
C. Other financing sources, $2,000,000; Expenditures, $2,000,000.
D. Revenues, $2,000,000; Expenditures, $2,000,000.
ANSWER: C
This answer is correct because per Section 1800 of the GASB Codification, neither
proceeds from a general obligation bond nor transfers from the general fund are
revenues. Rather they are recognized as "other financing sources" when they become
measurable and available as net current assets. Section 1600 states that
expenditures of Governmental Funds are generally recognized in the accounting period
in which the fund liability is incurred, which is the current year in this question.

30. The following data were available from Xavier Co.s records on December 31, year
2:
Finished goods inventory, 1/1/Y2
Finished goods inventory, 12/31/Y2
Cost of goods manufactured
Loss on sale of plant equipment

$120,000
110,000
520,000
50,000

The cost of goods sold for year 2 was

A. $580,000
B. $520,000
C. $530,000
D. $510,000
ANSWER: C
This answer is correct. For a manufacturing company, cost of goods sold is computed
as follows:
Finished goods inv., 1/1/Y2
Cost of goods manufactured
Cost of goods available for sales
Less finished goods inv., 12/31/Y2
Cost of goods sold

$120,000
520,000
640,000
110,000
$530,000

Note that the above computation is very similar to the computation of cost of goods
sold for a merchandising firm. For a merchandising firm, merchandise inventory is
used instead of finished goods inventory and cost of goods purchased is used instead
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FAR1 50 Multiple Choice Questions

of cost of goods manufactured. In either case, a loss on sale of equipment
($50,000) would not affect the computation.

31. Which of the following qualifies as an operating segment?

A. Corporate headquarters, which oversees $1 billion in sales for the entire
company.
B. Eastern Europe segment, which reports its results directly to the manager of the
European division, and has 20% of the companys assets, 12% of revenues, and 11% of
profits.
C. North American segment, whose assets are 12% of the companys assets of all
segments, and management reports to the chief operating officer.
D. South American segment, whose results of operations are reported directly to the
chief operating officer, and has 5% of the companys assets, 9% of revenues, and 8%
of the profits.
ANSWER: C
This answer is correct. The requirement is to identify the business unit that
qualifies as an operating segment. This answer is correct because the North American
segment has revenue that is at least 10% of combined revenue and its management
reports to the chief operating officer.

32. Parker-Hunter Partnership was formed on January 2, year 1. Under the partnership
agreement, each partner has an equal initial capital balance accounted for under the
goodwill method. Partnership net income or loss is allocated 60% to Parker and 40%
to Hunter. To form the partnership, Parker originally contributed assets costing
$30,000 with a fair value of $60,000 on January 2, year 1, while Hunter contributed
$20,000 in cash. Drawings by the partners during year 1 totaled $3,000 by Cor and
$9,000 by Hunter. Parker-Hunters year 1 net income was $25,000. Parkers share of
Parker-Hunters year 1 net income is
A. $15,000
B. $12,500
C. $ 7,800
D. $12,000
ANSWER: A
This answer is correct. The partnership agreement states that partnership income or
loss will be allocated 60% to Parker and 40% to Hunter. Thus, Parkers share of year
1 income is $15,000 ($25,000 x 60%). Note that the relative capital balances of
Parker and Hunter have nothing to do with the allocation of income and loss since
the allocation percentages are explicitly stated in the partnership agreement.

33. While preparing its year 3 financial statements, Austin Corp. discovered
computational errors in its year 2 and year 1 depreciation expense. These errors
resulted in overstatement of each years income by $25,000, net of income taxes. The
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FAR1 50 Multiple Choice Questions

following amounts were reported in the previously issued financial statements:

Retained earnings, 1/1

Net income
Retained earnings, 12/31

year 2
---------$700,000
150,000
$850,000

year 1
-------$500,000
200,000
$700,000

Austins year 3 income is correctly reported at $180,000. Which of the following

amounts should be adjusted to retained earnings and presented for net income in
Austins year 3 and year 2 comparative financial statements?

A.
B.
C.
D.

Year Retained earnings

year 2
-year 3 ($50,000)
year 2 ($50,000)
year 3
-year 2 ($50,000)
year 3
-year 2
-year 3
--

Net income
150,000
180,000
$150,000
180,000
$125,000
180,000
$125,000
180,000

A. D
B. C
C. A
D. B
ANSWER: B
This answer is correct. ASC Topic 250 requires that items of profit or loss related
to the correction of an error in the financial statements of a prior period be
accounted for and reported as prior period adjustments and excluded from the
determination of net income for the current period. When comparative financial
statements are prepared, it is necessary to adjust net income, its components,
retained earnings balances, and other affected balances for all of the periods
presented to reflect retroactive application of prior period adjustments. Hence,
the amounts for each period must be stated in the comparative statements as if the
errors had not occurred. Thus, both year 1 and year 2 net income and retained
earnings would be retroactively reduced by $25,000 to reflect the correct amounts
for each period. After these adjustments are made, the amounts for year 3 will be
correctly stated. Note that this retroactive treatment is only used for
presentation purposes in the comparative financial statements. The actual journal
entry made to correct retained earnings at 1/1/Y3 is
Retained earnings
50,000
Accumulated depreciation

50,000

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FAR1 50 Multiple Choice Questions

34. On October 1, year 1, Savannah Retailers signed a 4-month, 16% note payable to
finance the purchase of holiday merchandise. At that date, there was no direct
method of pricing the merchandise, and the notes market rate of interest was 11%.
Savannah recorded the purchase at the notes face amount. All of the merchandise was
sold by December 1, year 1. Savannahs year 1 financial statements reported interest
payable and interest expense on the note for 3 months at 16%. All amounts due on the
note were paid February 1, year 2. Savannahs year 1 cost of goods sold for the
holiday merchandise was
A. Understated by the difference between the notes face amount and the notes
October 1, year 1 present value.
B. Overstated by the difference between the notes face amount and the notes
October 1, year 1 present value plus 11% interest for 2 months.
C. Overstated by the difference between the notes face amount and the notes
October 1, year 1 present value.
D. Understated by the difference between the notes face amount and the notes
October 1, year 1 present value plus 16% interest for 2 months.
ANSWER: A
This answer is correct. Per ASC Topic 835, when a note is exchanged for property,
goods, or services, the stated interest rate is presumed to be fair unless (1)
interest is not stated, (2) the stated rate is unreasonable, or (3) the current cash
price of the property, goods, or services is materially different from the market
value of the note. In these circumstances, the note and the cost of the property,
goods, or services should be recorded at the fair value of the property, goods, or
services or the market value of the note, whichever is more clearly determinable.
The note signed by Savannah bears an unreasonable interest rate of 16% as compared
to the market rate of 11%.
If the note payable had been for more than 1 year, the correct entry would have
recorded the inventory at the market value of the note, since at the time of the
transaction there was no direct method of pricing the merchandise. A premium on the
note payable would have been recorded (since the stated rate was greater than the
market rate) and the premium would have been subsequently amortized over the term of
the note payable.
However, since the term of the note is less than 1 year (4 months), Savannahs
recording of the inventory purchase and the note payable at the face amount of the
note is appropriate accounting treatment per ASC Topic 835.
Because the entry records inventory at the face amount of the note rather than at
its present value, and the inventory was all sold prior to December 31, year 1, cost
of goods sold would already be recorded appropriately. However, since that is not
an option for the solution, the best answer would be that the cost of goods sold
would be understated by the difference between the face value of the note and the
present value of the note. (If the market rate of 11% had been used to value the
note, the purchases would have been recorded at a higher amount.)

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FAR1 50 Multiple Choice Questions

35. In a troubled debt restructuring, when the fair value option is not elected, if
a noncash asset is exchanged to settle the debt:
A. The noncash asset is revalued to fair value, with a gain or loss recognized on
the asset.
B. Noncash assets cannot be exchanged to settle debt.
C. The noncash asset is revalued to fair value, with no gain or loss recognized on
the asset.
D. The noncash asset is not revalued to fair value.
ANSWER: A
This answer is correct because when a noncash asset is exchanged to settle debt, it
must be revalued to fair value with a gain or loss recognized on the asset.

36. Connor Co. reported a total asset retirement obligation of $257,000 in last
years financial statements. This year, Connor acquired assets subject to
unconditional retirement obligations measured at undiscounted cash flow estimates of
$110,000 and discounted cash flow estimates of $68,000. Connor paid $87,000 toward
the settlement of previously recorded asset retirement obligations and recorded an
accretion expense of $26,000. What amount should Connor report for the asset
retirement obligation in this years balance sheet?
A. $306,000
B. $264,000
C. $280,000
D. $238,000
ANSWER: B
This answer is correct. The asset retirement obligation (ARO) is recorded at its
fair value in the period in which it is incurred. Subsequently, it is adjusted for
revisions in estimates and the passage of time. The beginning balance in the asset
retirement obligation account is $257,000. The fair value of the additional
unconditional retirement obligations incurred during the year was $68,000 and
increases the ARO. The $87,000 paid toward the settlement of obligations decreases
the ARO. The $26,000 accretion expense is the expense recognized on the ARO due to
the passage of time and will increase the ARO. ($257,000 + $68,000 $87,000 +
$26,000 = $264,000).

37. Aubree uses IFRS to prepare its financial statements. During year 4, Aubree
voluntarily changes its accounting method because the new method will provide more
reliable and relevant information. Aubree can estimate the effects of the change.
How should Aubree treat the change in accounting principle?
A. By a cumulative adjustment on the income statement.
B. On a retrospective basis.
C. On a prospective basis.
D. By restating the financial statements.
ANSWER: B
This answer is correct because IFRS requires changes in accounting principles to be
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FAR1 50 Multiple Choice Questions

reported by giving retrospective application to the earliest period presented.

38. On July 1, year 1, Trinity Corporation issued for $960,000, 1,000 of its 9%,
$1,000 callable bonds. The bonds are dated July 1, year 1, and mature on July 1,
year 11. Interest is payable semiannually on January 1 and July 1. Trinity uses the
straight-line method of amortizing bond discount. The bonds can be called by the
issuer at 101 at any time after June 30, year 6. On July 1, year 7, Trinity called
in all of the bonds and retired them. How much loss should Trinity report on this
early extinguishment of debt for the year ended December 31, year 7?
A. $10,000
B. $26,000
C. $34,000
D. $50,000
ANSWER: B
This answer is correct. The loss on early extinguishment of debt is the difference
between cash paid and the carrying amount. The bonds payable ($1,000,000) were
issued at a discount of $40,000 on 7/1/Y1. The bonds are called at 101 6 years later
on 7/1/Y7. Since the bonds were due in 10 years, 6/10 of the discount (6/10
$40,000, or $24,000) would have been amortized by 7/1/Y7. Therefore, the balance in
the bond discount account is $16,000 ($40,000 $24,000), and the carrying amount of
the debt is $984,000 ($1,000,000 $16,000). The loss on the retirement is the
difference between the $1,010,000 cash paid ($1,000,000 1.01) and the $984,000
carrying amount, or $26,000.

39. Harper Co. exchanged similar nonmonetary assets with Dale Co. No cash was
exchanged. The carrying amount of the asset surrendered by Harper exceeded both the
fair value of the asset received and Dales carrying amount of that asset. If the
transaction lacks commercial substance, Harper should recognize the difference
between the carrying amount of the asset it surrendered and
A. Dales carrying amount of the asset it received as a loss.
B. The fair value of the asset it received as a gain.
C. Dales carrying amount of the asset it received as a gain.
D. The fair value of the asset it received as a loss.
ANSWER: D
This answer is correct. Per ASC Topic 845, exchanges that lack commercial substance
are accounted for at book value. Although ASC Topic 845 prohibits recognition of a
gain on these exchanges, it requires the recognition of any loss. Since the carrying
value of the asset surrendered by Harper exceeds the fair market value of the asset
received, Harper realized a loss on this exchange. Harper should value the asset
received at its fair market value. The difference between the carrying amount of the
asset surrendered and its fair market value (measured by the fair market value of
the asset received in this case) should be recognized as a loss.

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FAR1 50 Multiple Choice Questions

40. Personal financial statements should include which of the following statements?

A.
B.
C.
D.

Financial condition
No
Yes
Yes
Yes

Changes in net worth

Yes
No
Yes
Yes

Cash flows
Yes
No
No
Yes

A. D
B. B
C. A
D. C
ANSWER: D
This answer is correct. Per ASC Topic 274, personal financial statements consist of
(1) a statement of financial condition, and (2) a statement of changes in net worth.
A statement of cash flows is not required.

41. Which of the following is an appropriate market approach for determining fair
value measurements?
A. Using the undiscounted cash flows from the asset.
B. Using the current replacement cost of the asset.
C. Using present value techniques to discount cash flows.
D. Using relevant information from recent transactions.
ANSWER: D
This answer is correct. Relevant information from recent transactions is a market
approach to determining fair value measurement.

42. A nongovernmental not-for-profit organizations statement of activities is

similar to which of the following for-profit financial statements?
A. Statement of retained earnings.
B. Balance sheet.
C. Statement of cash flows.
D. Income statement.
ANSWER: D
This answer is correct because a statement of activities reports revenues and
expenses for the government. The requirement is to identify the for-profit financial
statement that is similar to a statement of activities.

43. A loan is granted in the amount of $500,000 with a stated interest rate of 10%.
The lender incurs direct loan origination costs of $10,000 and charges the borrower
a 3-point nonrefundable fee. The effective interest rate to the lender will be
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FAR1 50 Multiple Choice Questions

A. Greater than 9% but less than 10%.
B. Greater than 10%
C. 10%
D. Less than 10%
ANSWER: B
This answer is correct. The lender has a carrying amount of $495,000. This reflects
the $500,000 less the $15,000 nonrefundable fee plus the $10,000 loan origination
costs. A carrying amount less than the face amount will yield an effective interest
rate greater than the stated interest rate of 10%.

44. In financial reporting for segments of a business enterprise, segment data may
be aggregated
A. Before performing the 10% tests if a majority of the aggregation criteria are
met.
B. Before performing the 10% tests if all of the aggregation criteria are met.
C. If any one of the aggregation criteria is met.
D. If the segments do not meet the 10% tests but meet some of the aggregation
criteria.
ANSWER: B
This answer is correct. Per ASC Topic 280, two or more operating segments may be
aggregated into a single operating segment if all of the aggregation criteria are
met, or if after performing the 10% test a majority of the aggregation criteria are
met.

45. Wyatt Corp., a company whose stock is publicly traded, provides a

noncontributory defined benefit pension plan for its employees. The companys
actuary has provided the following information for the year ended December 31, year
5:
Projected benefit obligation
$400,000
Accumulated benefit obligation
350,000
Plan assets (fair value)
410,000
Service cost
120,000
Interest on projected benefit obligation
12,000
Amortization of unrecognized prior service cost
30,000
Expected and actual return on plan assets
41,000
The market-related asset value equals the fair value of plan assets. Prior
contributions to the defined benefit pension plan equaled the amount of net periodic
pension cost accrued for the previous year-end. No contributions have been made for
year 5 pension cost. In its December 31, year 5 balance sheet, Wyatt should report
a pension asset of
A. $0
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FAR1 50 Multiple Choice Questions

B. $121,000
C. $203,000
D. $ 10,000
ANSWER: D
This answer is correct. Since prior contributions equaled the amount of net pension
cost previously accrued, there is no pension asset/liability at 1/1/Y5. Year 5
pension expense is $121,000, as computed below.
Service cost
Interest on PBO
Amort. of unrec. PSC
Return on plan assets
Pension cost

$120,000
12,000
30,000
(41,000)
$121,000

Although no year 5 contributions have been made, there is no liability at 12/31/Y5

because the plan assets exceed the PBO. Therefore, a pension plan asset of $10,000
is recognized.

46. The following items relate to the preparation of a statement of cash flows:

Cash
Dividends payable
Common stock
Retained earnings

year 2
$150,000
35,000
600,000
280,000

year 1
$100,000
0
450,000
165,000

Net sales
CGS
Expenses
Net income

Capital stock was sold to provide additional working capital.

activities, cash dividend payments during year 2 amounted to

year 2
$3,200,000
(2,500,000)
(500,000)
$ 200,000

Under financing

A. $ 50,000
B. $ 85,000
C. $ 35,000
D. $115,000
ANSWER: A
This answer is correct. Retained earnings increased $115,000 ($280,000 $165,000)
even though net income was $200,000 for year 2. This indicates that dividends
declared during this period amounted to $85,000 ($200,000 $115,000). However,
$35,000 of this represents a liability at the end of year 2. Therefore, cash
dividend payments for year 2 is $50,000 ($85,000 $35,000).

47. The functional currency of Max, Inc.s subsidiary is the Swiss franc. Max
borrowed Swiss francs as a partial hedge of its investment in the subsidiary. In
preparing consolidated financial statements, Maxs translation loss on its
investment in the subsidiary exceeded its exchange gain on the borrowing. How should
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FAR1 50 Multiple Choice Questions

the effects of the loss and gain be reported in Maxs consolidated financial
statements?
A. The translation loss less the exchange gain is reported in the income statement.
B. The translation loss is reported in the income statement and the exchange gain is
reported as "other comprehensive income" and in the stockholders equity section of
the balance sheet.
C. The translation loss is reported separately as "other comprehensive income" and
in the stockholders equity section of the balance sheet and the exchange gain is
reported in the income statement.
D. The translation loss less the exchange gain is reported as "other comprehensive
income" under one of three alternatives and "accumulated other comprehensive income"
in the stockholders equity section of the balance sheet.
ANSWER: D
This answer is correct. According to ASC Topic 830, translation adjustments
resulting from the translation of foreign currency statements should be reported
separately as a component of "other comprehensive income" under one of three
alternatives and in "accumulated other comprehensive income" in stockholders
equity. Additionally, gains and losses on certain foreign currency transactions
should be reported in the same manner. Those gains and losses which should be
excluded from net income and instead reported in "other comprehensive income" and as
a component of stockholders equity include foreign currency transactions designated
as economic hedges of a net investment in a foreign entity. Thus, both the
translation loss and the exchange gain are to be reported as "other comprehensive
income" and in the stockholders equity section of the balance sheet.

48. For purposes of computing the weighted-average number of shares outstanding

during the year, a midyear event that must be treated as occurring at the beginning
of the year is the
A. Issuance of stock warrants.
B. Declaration and payment of stock dividend.
C. Sale of additional common stock.
D. Purchase of treasury stock.
ANSWER: B
This answer is correct because a stock dividend is considered to have occurred on
the first day of the year when computing the weighted-average number of shares
outstanding.

49. Colton, Inc. owns 80% of Bentley, Inc.s outstanding common stock. Bentley, in
turn, owns 10% of Coltons outstanding common stock. What percentage of the common
stock cash dividends declared by the individual companies should be reported as
dividends declared in the consolidated financial statements?

A.

Dividends declared by Colton

90%

Dividends declared by Bentley

0%
Page 23

B.
C.
D.

90%
100%
100%

FAR1 50 Multiple Choice Questions

20%
0%
20%

A. C
B. D
C. B
D. A
ANSWER: D
This answer is correct because of the reciprocal ownership relationship that exists
between the two companies. Colton (the acquirer) owns 80% of Bentley (the acquiree),
and Bentley owns 10% of Colton. When Colton declares a cash dividend, 90% of it is
distributed to outside parties and 10% goes to Bentley. Because Bentley is part of
the consolidated entity, its 10% share is eliminated; thus, only 90% of dividends
declared by Colton are reported in the consolidated statements. When Bentley
declares a dividend, 80% is distributed to Colton and 20% to outside parties.
Coltons 80% share is eliminated as an intercompany transaction and the remaining
20% is also excluded because, from the acquirers point of view, acquiree dividends
do not represent dividends of the consolidated entity and must be eliminated.

50. Carter Company adopted a defined benefit pension plan on January 1, year 4.
Carter amortizes the prior service cost over 16 years and funds prior service cost
by making equal payments to the fund trustee at the end of each of the first 10
years. The service (normal) cost is fully funded at the end of each year. The
following data are available for year 4:
Service (normal) cost for year 4
Prior service cost:
Amortized
Funded

$110,000
41,700
57,200

Carters pension asset/liability at December 31, year 4, is

A. $57,200
B. $41,700
C. $0
D. $15,500
ANSWER: D
This answer is correct. Pension asset (liability) is the excess of the amount
funded over the amount recorded as pension expense. The amount funded is $167,200
($110,000 service cost + $57,200 funding of prior service cost). Pension expense is
$151,700 ($110,000 service cost + $41,700 amortization of prior service cost).
Therefore, pension asset/liability is $15,500 ($167,200 $151,700).

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