CPA FAR Practice Exam 3

A company reports on the cash basis. During the company's first year of business, it had sales on account of $1,000,000, inventory purchases on account of $400,000, and other expenses of $200,000. At the end of the year, the company had accounts receivable, inventory, and inventory related accounts payable of $100,000, $10,000, and $50,000, respectively. What is the company's cash-basis income for its first year of operations?

Pollard Corp. discloses income on a current cost basis. Compared to historical cost income from continuing operations, which of the following conditions increases Pollard's current cost income from continuing operations?

According to the FASB conceptual framework, which of the following situations violates the concept of neutrality?

Which of the following defines equity as it relates to a business entity?

A company owns land and a building that houses its manufacturing operations. When the company purchased the manufacturing facility 10 years ago, the purchase price allocated to the land account was $120,000. The manufacturing facility is located in an area that was once the site of many factories. The owners of many of the neighboring factories have recently sold their facilities to residential real estate developers. The company's land is also suitable for residential development. The estimated current value of the land as part of the manufacturing facility is $150,000. The estimated current value of the land as an undeveloped investment is $130,000, and the current value of the land as part of a residential development would be $180,000. What is the fair value of the land?

On April 30, Year 1, Deer Corp. approved a plan to dispose of a segment of its business. For the period January 1 through April 30, Year 1, the segment had revenues of $500,000 and expenses of $800,000. The assets of the segment were sold on October 15, Year 1. Ignoring income taxes, how should Deer report the segment's operations from January 1 to April 30, Year 1?

After three profitable years, Dodd Co. decided to offer a bonus to its branch manager, Cone, of 25% of income over $100,000 earned by her branch. For Year 4, income for Cone's branch was $160,000 before income taxes and Cone's bonus. Cone's bonus is calculated on income in excess of $100,000 after deducting the bonus, but before deducting taxes. What is Cone's bonus for Year 4?

What information should a public company disclose in the financial statements about revenues from reportable segments with significant foreign operations?

A U.S. public company with a worldwide public float of $800 million at the end of the second quarter of the fiscal year is required to file its annual report with the U.S. SEC on

On June 30, Mill Corp. incurred a $100,000 net loss from disposal of a business segment. Also, on June 30, Mill paid $40,000 for property taxes assessed for the calendar year. What amount of net loss should Mill report for the six-month interim period ended June 30?

Which of the following funds should be reported as part of a local government's governmental activities column in its government-wide statements?

The city accountant for a newly established municipality is setting up the new fund structure for the city's accounting system. How many funds should the accountant establish for the city?

A city government reported a $9,000 increase in net position in the motor pool internal service fund, a $12,000 increase in net position in the water enterprise fund, and a $7,000 increase in the employee pension fund. The motor pool internal service fund provides service primarily to the police department. What amount should the city report as the change in net position for business-type activities in its statement of activities?

A government makes a contribution to its pension plan in the amount of $10,000 for year 1. The actuarially-determined annual required contribution for year 1 was $13,500. The pension plan paid benefits of $8,200 and refunded employee contributions of $800 for year 1. What is the pension expenditure for the general fund for year 1?

The general fund of Cliff Township acquired two police cars at the beginning of January, Year 3, at a total cost of $40,000. The cars are expected to last for 4 years and have a $10,000 residual value. What amount of depreciation, if any, will be reported for the police cars in the general fund for the year ended December 31, Year 3?

During the current year, the Finn Foundation, a nongovernmental not-for-profit organization, received a $1,000,000 endowment from a donor. The donor stipulated that the income must be used to provide recreational activities for the elderly. The endowment reported income of $80,000 in the current year. What amount of donor-restricted revenue should Finn report at the end of the current year?

Janna Association, a nongovernmental not-for-profit organization, received a cash gift with the stipulation that the principal be held for at least 20 years. How should the cash gift be recorded?

During the current year, Mill Foundation, a nongovernmental not-for-profit organization, received $100,000 in unrestricted contributions from the general public. Mill's board of directors stipulated that $75,000 of these contributions would be used to create an endowment. At the end of the current year, how should Mill report the $75,000 in the net assets section of the statement of financial position?

Home Care, Inc., a nongovernmental voluntary health and welfare organization, received two contributions in Year 3. One contribution of $250,000 was restricted for use as general support in Year 4. The other contribution of $200,000 carried no donor restrictions. What amount should Home Care report as contributions with donor restrictions in its Year 3 statement of activities?

The net asset reclassifications of a nongovernmental not-for-profit organization would be reported on which of the following?

Acorn Software provides subscribers with access to web-based software for 365 days for a single payment, regardless of how often the customer uses the software. Acorn developed the software, regularly updates it, and provides 24-hour customer service access for subscribers at no extra charge. If the company recognizes revenue while the performance obligation is being satisfied, what base is most appropriate to measure progress toward completion of the obligation?

After speaking to the company's sales manager, a customer placed a large order. The customer has no immediate need for the products, so the customer asked the company to wait 60 days before delivering the products. In this case, the company should recognize revenue for the sale when the order is

PJ Paint & Body sells car parts and provides services. PJ is contracted to provide ten replacement bumpers to Smyth New & Used Auto Mall. When should PJ recognize revenue?

Sork Inc. has a portfolio of marketable debt securities classified as available for sale. The fair value option was elected when the securities were purchased. At the end of the year, the securities' fair values exceeded their costs. The increase is considered temporary and due to improved market conditions. The unrealized gains are

On March 1, Year 3, Shore Co. purchased trading securities that cost $17,500. At the end of Year 3, the securities had a fair value of $16,500. At the end of Year 4, the securities' fair value increased to $19,000. What is the impact of the trading securities on Shore's Year 4 income statement?

Puff Co. acquired 40% of Straw, Inc.'s voting common stock on January 2, Year 1, for $400,000. The carrying amount of Straw's net assets at the purchase date totaled $900,000. Fair values equaled carrying amounts for all items except equipment, for which fair values exceeded carrying amounts by $100,000. The equipment has a five-year life. Puff's policy is to amortize goodwill over ten years. During Year 1, Straw reported net income of $150,000. What amount of income from this investment should Puff report in its Year 1 income statement?

"Herc Co's inventory at December 31, Year 2, was $1,500,000 based on a physical count priced at cost, and before any necessary adjustment for the following: Merchandise costing $90,000 shipped FOB shipping point by a vendor on December 30, Year 2, was received and recorded on January 5, Year 3. Goods in the shipping area were excluded from inventory although shipment was not made until January 3, Year 3. The goods, billed to the customer FOB shipping point on December 30, Year 2, had a cost of $120,000. What amount should Herc report as Inventory in its December 31, Year 2, balance sheet?"

Which of following is true regarding the retail inventory method?

During periods of rising prices, a perpetual inventory system would result in the same dollar amount of ending inventory as a periodic inventory system under which of the following inventory cost flow methods?

Cole Co. began constructing a building for its own use in January, Year 3. During Year 3, Cole incurred interest of $50,000 on specific construction debt and $20,000 on other borrowings. Interest computed on the weighted-average amount of accumulated expenditures for the building during Year 3 was $40,000. What amount of interest cost should Cole capitalize?

Crestman Co. exchanged inventory with Dandy Co. in a transaction that lacks commercial substance. Crestman's inventory had a cost of $50,000 and fair value of $80,000 on the date of the exchange. Crestman received inventory with a fair value of $56,000 and $24,000 cash from Dandy. What amount, if any, should Crestman recognize as a gain on the exchange?

On January 1, Feld traded a delivery truck and paid $10,000 cash for a tow truck owned by Baker. The delivery truck had an original cost of $140,000, accumulated depreciation of $80,000, and an estimated fair value of $90,000. Feld estimated the fair value of Baker's tow truck to be $100,000. The transaction had commercial substance. What amount of gain should be recognized by Feld?

Tech Co. bought a trademark on January 2, Year 2. The intangible was being amortized over its useful life of 40 years. The carrying value at the beginning of Year 2 was $38,000. It was determined during the current year that the cash flow from the trademark will be generated indefinitely at the current level. What amount should Tech report as amortization expense on its December 31, Year 4, income statement?

Park, Inc. acquired 100% of Gravel Co.'s net assets. On the acquisition date, Gravel's accounting records reflected $50,000 of costs associated with in-process research and development activities. The fair value of the in-process research and development activities was $400,000. What amount, if any, will Park record as an intangible asset due to the acquisition of the in-process research and development activities?

Yellow Co. spent $12,000,000 during the current year developing its new software package. Of this amount, $4,000,000 was spent before it was at the application development stage, and the package was only to be used internally. The package was completed during the year and is expected to have a four-year useful life. Yellow has a policy of taking a full-year's amortization in the first year. After the development stage, $50,000 was spent on training employees to use the program. What amount should Yellow report as an expense for the current year?

Paxton Co. signed contracts for the purchase of raw materials to be executed the following year at a firm price of $5 million. The market price of the materials dropped to $3 million on December 31. What amount should Paxton record as an estimated liability on purchase commitments as of December 31?

For a troubled debt restructuring involving only a modification of terms, which of the following items specified by the new terms would be compared to the carrying amount of the debt to determine if the debtor should report a gain on restructuring?

On July 1 of the current year, Hayworth Co. sold cooking equipment with culinary classes for a single payment of $20,000. The fair value of the equipment was $18,000. The classes are to be performed once a month for the next 12 months. Hayworth recorded this transaction with a debit of $20,000 to cash and a credit of $20,000 to sales revenue. Which of the following statements is correct regarding Hayworth's current-year financial statements?

At the end of Year 3, Wissa Co. had a $19,000 deferred tax asset and a related valuation allowance of $4,000. During Year 4, $5,000 of the deferred tax asset was realized. Due to future anticipated operating losses, management determined on December 31, Year 4, that it is more likely than not that only $8,000 of the deferred tax asset would be realized in the future. What should Wissa report as the balance in the valuation allowance account at the end of Year 4?

According to current generally accepted accounting principles, justification for the method of determining periodic deferred tax expense is based on the concept of

For the year ended December 31, Year 3, Tack Co. had pretax accounting income of $450,000, which included $10,000 in municipal bond interest. Tack had $60,000 rents received in advance. Any temporary differences are expected to reverse equally over the next two years. The enacted income tax rates are 20% for Year 3, 25% for Year 4, and 30% for Year 5. In Tack's December 31, Year 3, balance sheet, the deferred income tax asset should be

Compared to its Year 1 cash basis net income, Potoma Co.'s Year 2 accrual basis net income increased when it

In a statement of cash flows, if used equipment is sold at a gain, the amount shown as a cash inflow from investing activities equals the carrying amount of the equipment

A company that wishes to disclose information in the financial statements about the effect of changing prices should report this information in

At what value should a nongovernmental, not-for-profit organization record shares of stock when received?

Which of the following is characteristic of a perfect hedge?

How should gains or losses from fair value hedges be recognized?

A foreign subsidiary of a U.S. parent company should measure its assets, liabilities, and operations using

Park Company, a U.S. corporation, owns100% of a Swiss corporation. The Swiss franc is the functional currency. The remeasurement of the financial statements results in a $7,600 gain at year end. The translation of the financial statements results in an $8,100 gain at year end. What amount should Park recognize as a foreign currency gain in its consolidated income statement for the year ended December 31, Year 1?

"During Year 2, Pipp Co. incurred the following costs to develop and produce a routine, low-risk computer software product: Completion of detailed program design $10,000 Costs incurred for coding and testing to establish technological feasibility $15,000 Other coding and testing costs incurred after establishment of technological feasibility $44,000 In Pipp's December 31, Year 2, balance sheet, what amount should be capitalized as software cost?"

Which of the following is the proper treatment of the cost of equipment used in research and development activities that will have alternative future uses?

A six-year finance lease that specifies equal annual lease payments expires on December 31. The payments being made represent both interest and a reduction in the net lease liability. The portion of the lease payment in the fifth year applicable to the reduction of the net lease liability should be:

On January 1, Year 1, Tile Co., as lessee, entered into a 5-year finance lease for equipment. The present value of lease payments is $120,000, which includes a $5,000 purchase option. At the end of the lease, Tile expects to exercise the purchase option. The equipment has an 8-year useful life. For the year ended December 31, Year 1, what amount would Tile recognize as amortization expense on the right-of-use asset?

Dari, Inc. guaranteed the performance of a related party. In December, Dari learned that it is probable it will be required to pay between $150,000 and $200,000 within the next six months in satisfaction of its guarantee, but no amount within that range is more likely. What amount of contingent liability should Dari accrue in its December 31 balance sheet?

Tiger Rags is evaluating its financial statement disclosures relating to gain contingencies. When should Tiger Rags recognize the gain on the contingency?

The summary of significant accounting policies should disclose the

Bailey Co. changed their accounting for insurance expense from the cash-basis to the accrual-basis in the current year. In January of the prior year, Bailey recorded insurance expense of $240,000 for the cash purchase of a four-year insurance policy. How should Bailey report the insurance transaction in the current year's financial statements?

Damon Co. purchased 100% of the outstanding common stock of Smith Co. in an acquisition by issuing 20,000 shares of its $1 par common stock that had a fair value of $10 per share and providing contingent consideration that had a fair value of $10,000 on the acquisition date. Damon also incurred $15,000 in acquisition costs. On the acquisition date, Smith had assets with a book value of $200,000, a fair value of $350,000, and related liabilities with a book and fair value of $70,000. What amount of gain should Damon report related to this transaction?

On November 30, Year 1, Parlor, Inc. purchased for cash at $15 per share all 250,000 shares of the outstanding common stock of Shaw Co. At November 30, Year 1, Shaw's balance sheet showed a carrying amount of net assets of $3,000,000. At that date, the fair value of Shaw's property, plant, and equipment exceeded its carrying amount by $400,000, and the fair value of Shaw's trademark name brand is $75,000. In its November 30, Year 1, consolidated balance sheet, what amount should Parlor report as goodwill?

An unrestricted grant received from another government to support enterprise fund operations should be reported as

If a governmental fund has no outstanding encumbrances at year end, closing entries for which of the following situations would increase the unreserved fund balance?

A city government would report each of the following categories in its government-wide statement of net position except

Which of the following financial statements is required for a special purpose government entity engaged in only business-type activities?

In the Adel-Brick partnership, Adel and Brick had a capital ratio of 3:1 and a profit and loss ratio of 2:1, respectively. The bonus method was used to record Colter's admittance as a new partner. What ratio would be used to allocate, to Adel and Brick, the excess of Colter's contribution over the amount credited to Colter's capital account?

Toft Co. had 120,000 shares of common stock outstanding on January 1. On April 1, it issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of nonconvertible preferred stock on which a dividend of $5 per share was declared during the year. Net income for the year was $480,000. What should Toft report as earnings per share for the year?

A company granted its employees 100,000 stock options on January 1, Year 1. The stock options had a grant date fair value of $15 per option and a three-year vesting period. On January 1, Year 2, the company estimated the fair value of the stock options to be $18 per option. Assuming that the company did not grant any additional options or modify the terms of any existing option grants during Year 2, what amount of share-based compensation expense should the company report for the year ended December 31, Year 2?