CPA FAR Practice Exam 1

General purpose external financial reporting of a corporation focuses primarily on the needs of which of the following users?

Which of the following is one of the basic elements of financial reporting?

In a period of rising general price levels, Pollard Corp. discloses income on a current cost basis. Which of the following contributes to Pollard's purchasing power loss on monetary items?

According to the FASB conceptual framework, which of the following best describes a constraint of financial reporting?

Each of the following statements is correct regarding the Financial Accounting Standards Board, except:

"A nongovernmental, not-for-profit organization held the following investments: Investment Cost Fair value (beginning of year) Fair value (end of year) Stock A (50 shares) $30 per share $25 per share $20 per share Stock B (75 shares) $20 per share $21 per share $28 per share What amount of stock investments should be reported in the year-end statement of financial position?"

A donor gives $10,000 to a nongovernmental, not-for-profit organization with instructions that it must be used to fund the organization's general operating expenses during the following fiscal year. The donation will increase the organization's

Pica, a nongovernmental not-for-profit organization, received unconditional promises of $100,000 expected to be collected within one year. Pica received $10,000 prior to the fiscal year end. Pica anticipates collecting 90% of the contributions and has a June 30 fiscal year end. What amount should Pica record as contribution revenue as of June 30?

A nongovernmental not-for-profit organization borrowed $5,000, which it used to purchase a truck. In which section of the organization's statement of cash flows should the transaction be reported?

How should a nongovernmental, not-for-profit organization report donor-restricted cash contributions for long-term-purposes in its statement of cash flows?

What is the basic criterion used to determine the reporting entity for a governmental unit?

Seaview City received a pass-through grant from the state. The money is to be distributed to families who, as determined by the state, are eligible for summer camp scholarships for their children. Seaview does not have administrative or direct financial involvement in the program. In which fund should Seaview record the grant?

Which of the following is a significant characteristic of an enterprise fund?

A city ordered goods at an estimated cost of $4,500. When the goods were received, 30 days after the order was placed, they were accompanied by an appropriate invoice in the amount of $4,800. What amount will be recognized as an adjustment to encumbrances when the goods are delivered?

A local government would report each of the following as a fiduciary fund except

"A U.S. publicly owned corporation is subject to the requirements for segment reporting. In its income statement for the year ended December 31, Year 1, the company reported revenues of $50,000,000, operating expenses of $47,000,000, and net income of $3,000,000. Operating expenses include payroll costs of $15,000,000. The company's combined identifiable assets of all industry segments at December 31, Year 1, were $40,000,000. At what minimum amount, if any, would the company disclose data regarding sales to any single major customer in its Year 1 financial statements?"

In a publicly traded entity, segments are organized for decision-making purposes and assessing performance. Which approach is used to define what constitutes a segment?

Which of the following is a component of other comprehensive income?

On February 2, Flint Corp.'s board of directors voted to discontinue operations of its frozen food division and to sell the division's assets on the open market as soon as possible. The division reported net operating losses of $20,000 in January and $30,000 in February. On February 26, sale of the division's assets resulted in a gain of $90,000. Ignoring income taxes, what amount of gain from discontinued operations should Flint recognize in its income statement for the three months ended March 31?

A U.S. publicly traded company's 2nd fiscal quarter ends on March 31. If the company is an accelerated filer, what is the latest date that the 10-Q should be filed with the U.S. SEC?

The calculation of income in Year 3 of a five-year construction contract accounted for using the cost-to-cost method includes the ratio of

Fenn Stores, Inc. had sales of $1,000,000 during December, Year 2. Experience has shown that merchandise equaling 7% of sales will be returned within 30 days and that an additional 3% will be returned within 90 days. Returned merchandise is readily resalable. In addition, merchandise equaling 15% of sales will be exchanged for merchandise of equal or greater value. What amount should Fenn report for net sales in its income statement for the month of December, Year 2?

An auto repair company has agreed to provide a customer with a package of standard car maintenance services for $100. The package consists of an oil change, for which the company normally charges $75, and a tire rotation, for which the company normally charges $50. What amount of revenue should be recognized from the tire rotation?

On January 2 of the current year, Otto Co. purchased 40% of Penn Co.'s outstanding common stock. The carrying amount of Penn's depreciable assets was $1,000,000 on January 2. Penn's depreciable assets had an original useful life of 10 years, and a remaining useful life of five years. Otto recognized $8,000 amortization for the current year ending December 31 related to its investment in Penn due to the excess of fair value over book value on these assets. What was the fair value of Penn's depreciable assets on January 2 of the current year?

At the beginning of the fiscal year, End Corp. purchased 25% of Turf Co. for $550,000. At the end of the fiscal year, Turf reported net income of $65,000 and declared and paid cash dividends of $30,000. End uses the equity method of accounting. At year end, what amount should End report in its income statement from the investment in Turf?

Kale Co. purchased bonds at a discount on the open market as an investment and intends to hold these bonds to maturity. Kale should account for these bonds at

What is the appropriate treatment for goods held on consignment?

Pinewall, Inc.'s ending inventory balance was understated by $8,000 in the current year. Which of the following statements is correct according to a periodic inventory system?

The original cost of a LIFO inventory item is above the replacement cost. The inventory item's replacement cost is above the net realizable value. Under the lower of cost or market method for LIFO and retail method inventories, the inventory item should be valued at

On January 1, ten years ago, Andrew Co. created a subsidiary for buying an oil tanker depot at a cost of $1,500,000. Andrew expected to operate the depot for 10 years, at which time Andrew is legally required to dismantle the depot and remove the underground storage tanks. It was estimated that the cost of dismantling the depot at the end of its useful life and removing the tanks would be $150,000. However, the actual cost to demolish and dismantle the depot and remove the tanks in the 10 year is $155,000. What amount of expense should Andrew recognize in its financial statements in Year 10?

Gold Co. purchased equipment from Marshall Co. on July 1. Gold paid Marshall $10,000 cash and signed a $100,000 noninterest-bearing note payable, due in three years. Gold recorded a $24,868 discount on notes payable related to this transaction. What is the acquired cost of the equipment on July 1?

When should a long-lived asset be tested for recoverability?

X Company, a public entity, has goodwill that consists of five reporting units from three acquisitions. In the first acquisition, the assets and liabilities of the subsidiary were integrated into X Company's books. The second acquisition involves an additional payment to the seller if certain results are achieved. As a result, separate books are maintained for the subsidiary. The third acquisition involves three separate managers, each running a different department. As a result, three separate sets of books and records are being maintained for this acquisition, one for each department, with goodwill separately allocated to each one. X Company is preparing financial statements and performing an impairment evaluation on its reported goodwill. How many separate impairment evaluations is X Company required to perform?

On January 2, Year 3, Paye Co. purchased Shef Co. at a cost of $500,000 that resulted in recognition of goodwill of $200,000. During the first quarter of Year 3, Paye spent an additional $80,000 on expenditures intended to maintain goodwill. On December 31, Year 3, the fair value of the reporting unit with which the goodwill is associated was $505,000. The change in fair value was attributed to the unidentifiable assets acquired from Shef. In its December 31, Year 3 balance sheet, what amount should Paye report as goodwill?

In Year 3, a company developed software to be sold to customers. The company incurred $320,000 to produce product masters and test the software after achieving technological feasibility but before commercial production. The company estimated that the software will be sold for a total of 10 years. In Year 3, the company earned $120,000 of revenues from software sales. Sales in future periods are expected to amount to $680,000. What amount should the company expense related to the software costs for the year ended December 31, Year 3?

A company has outstanding accounts payable of $30,000 and a short-term construction loan in the amount of $100,000 at year end. The loan was refinanced through issuance of long-term bonds after year end but before issuance of financial statements. How should these liabilities be recorded in the balance sheet?

A company finances the purchase of equipment with a $500,000 five-year note payable. The note has an interest rate of 12% and a monthly payment of $11,122. After two payments have been made, what amount should the company report as the note payable balance in its December 31 balance sheet?

Which of the following information about threatened litigation should not be considered to determine whether an accrual is appropriate prior to an issuance of a company's financial statements?

Which of the following statements is correct regarding valuation allowances in accounting for income taxes?

Rein, Inc. reported $40,000 as deferred tax assets and $53,000 as deferred tax liabilities at the beginning of Year 2. At the end of Year 2, Rein reported $58,000 as deferred tax assets and $65,000 as deferred tax liabilities. What should Rein report as deferred income tax expense or benefit at the end of Year 2?

A publicly traded corporation reported a $10,000 deduction in its current-year tax return for an item it expects to be disallowed. The tax rate is 40%. How should the corporation report this tax position in the financial statements?

Ace Co. issued 1,000 shares of its $10 par value common stock for $15 per share in cash. How should this transaction be reported in Ace's statement of cash flows for the year of issuance?

"Red Co. reported cash paid for interest of $55,000 in its statement of cash flows for the current year. Red did not capitalize any interest during the current year. Decreases occurred in the following balance sheet accounts: Accrued interest payable $13,000 Prepaid interest 21,500 What amount should Red report as interest expense in its current-year income statement?"

Which of the following statements is correct regarding fair value measurement?

The objectives of financial reporting stem from which of the following sources?

Which of the following financial instruments is not considered a derivative financial instrument?

On January 1, Year 1, a company purchased for $10,000 an at-the-money call option on 1,200 barrels of crude oil, which the company intends to purchase in five years. The company elected to exclude the time value of the option from the assessment of effectiveness, classified the option as a cash flow hedge, and applied a straight-line amortization to the initial option premium. On December 31, Year 1, the time value of the option decreased by $1,200, and the change in intrinsic value increased by $1,800. The journal entry that the company should make on December 31, Year 1, to record the change in value of the derivative should include which of the following as a credit?

A company's local currency is the Mexican peso, but its functional and reporting currency is the U.S. dollar. In preparing its financial statements in U.S. dollars, the company will

A company's foreign subsidiary operation maintains its financial statements in the local currency. The foreign operation's capital accounts would be translated to the functional currency of the reporting entity using which of the following rates?

On January 1, Year 1, a company appropriately capitalized $40,000 of software development costs for computer software to be sold. The company estimated an economic life of two years for the software and believes that it will generate $500,000 in total software sales. It had software sales of $300,000 in Year 1. What amount of software amortization expense, if any, should the company report in its financial statements for the year ended December 31, Year 1?

A collection agency spent $50,000 in staff payroll costs investigating the feasibility of developing its own software program for tracking customer contacts. After committing to funding the project, software developers were paid $200,000 to write the code and the company incurred $70,000 in general and administrative costs related to training and software maintenance. What amount should be capitalized?

In the long-term liabilities section of its balance sheet at December 31, Year 1, Mene Co. reported a finance lease obligation of $75,000, net of current portion of $1,364. Payments of $9,000 were made on both January 2, Year 2, and January 2, Year 3. Mene's incremental borrowing rate on the date of the lease was 11% and the lessor's implicit rate, which was known to Mene, was 10%. In its December 31, Year 2 balance sheet, what amount should Mene report as finance lease obligation, net of current portion?

Conn Corp. owns an office building and normally charges tenants $30 per square foot per year for office space. Because the occupancy rate is low, Conn agreed to lease 10,000 square feet to Hanson Co. at $12 per square foot for the first year of a 3-year operating lease. Rent for remaining years will be at the $30 rate. Hanson moved into the building on January 1, Year 1, and paid the first year's rent in advance. What amount of rental revenue should Conn report from Hanson in its income statement for the year ended September 30, Year 1?

Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400,000 of common stock subsequent to the end of the year but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year?

A company can estimate the amount of loss that will occur if a foreign government expropriates some company assets. After considering all of the facts, the company believes that the fair value of the seized assets will be between $300,000 and $450,000, with $410,000 being the most likely amount. If expropriation is reasonably possible, what amount, if any, should be accrued with respect to the liability?

Dex Co. is a nonpublic company that began operations on January 1, Year 3. Dex decided to prepare cash-basis financial statements. On the first day of operations, Dex paid $24,000 upfront for a two-year lease for office space. Dex also incurred $25,000 in salary expense for its employee in Year 3, including $21,000 paid and $4,000 accrued as of December 31, Year 3. During Year 3, Dex recorded $50,000 of total sales revenue, which includes $20,000 of sales recorded on credit. What is the company's Year 3 cash-basis income/loss from operations?

The effects of a change in accounting principle should be recorded on a prospective basis when the change is from the

For purposes of consolidating financial interests, a majority voting interest is deemed to be

Nolan owns 100% of the capital stock of both Twill Corp. and Webb Corp. Twill purchases merchandise inventory from Webb at 140% of Webb's cost. During Year 1, merchandise that cost Webb $40,000 was sold to Twill. Twill sold all of this merchandise to unrelated customers for $81,200 during Year 1. In preparing combined financial statements for Year 1, Nolan's bookkeeper disregarded the common ownership of Twill and Webb. What amount should be eliminated from cost of goods sold in the combined income statement for Year 1?

Which of the following is one of the three standard sections of a governmental annual comprehensive financial report?

On March 1, Wag City issued $1,000,000, ten-year, 6% general obligation bonds at par with no bond issue costs. The bonds pay interest September 1 and March 1. What amount of interest expense and bond interest payable should Wag report in its government-wide financial statements at the close of the fiscal year on December 31?

What is the major difference between an exchange transaction and a nonexchange transaction for governmental units?

On January 2, Basketville City purchased equipment with a useful life of three years to be used by its water and sewer enterprise fund. Which of the following is the correct treatment for the asset?

Keder, Inc. factored, with recourse, $90,000 of its accounts receivable with an allowance for credit losses of $1,800. The factor retained 8% of the accounts receivable as an allowance for sales returns and disputed receivables. A 4% commission on the gross amount of the factored receivables was charged. What amount of cash did Keder receive from the factored receivables?

When purchasing a bond, the present value of the bond's expected net future cash inflows discounted at the market rate of interest provides what information about the bond?

Eagle and Falk are partners with capital balances of $45,000 and $25,000, respectively. They agree to admit Robb as a partner. After the assets of the partnership are revalued, Robb will have a 25% interest in capital and profits, for an investment of $30,000. What amount, if any, should be recorded as goodwill to the original partners?