CPA Exam — Financial Accounting and Reporting (FAR) — All Questions

At December 31, Year 1, Aster Co. holds: checking account $45,000; petty cash $500; a three-month U.S. Treasury bill bought December 1 $20,000; a six-month certificate of deposit bought October 1 $30,000; a customer's check postdated January 5, Year 2 $2,000; and a bond sinking fund restricted to retiring bonds in Year 6 $50,000. What should Aster report as cash and cash equivalents?

• a.$67,500
• b.$65,500✓
• c.$115,500
• d.$95,500

Cash equivalents are short-term, highly liquid investments with original maturities to the holder of three months or less (ASC 305-10-20): $45,000 + $500 + $20,000 = $65,500. The six-month CD fails the three-month test ($95,500 includes it). A postdated check is a receivable, not cash ($67,500 includes it). Cash restricted for retiring long-term debt is excluded from cash and cash equivalents and is generally noncurrent ($115,500 includes it; ASC 210-10-45-4).

Birch Co.'s bank statement shows a balance of $18,000 at month-end. Deposits in transit total $3,500 and outstanding checks total $4,200. The bank charged Birch's account $300 for a check written by another company. Birch's ledger shows $17,850; the statement also reflects a $50 service charge and a $200 NSF customer check not yet recorded by Birch. What is Birch's correct cash balance?

• a.$17,600✓
• b.$17,850
• c.$17,000
• d.$17,800

Bank side: $18,000 + $3,500 - $4,200 + $300 (the bank's error is added back) = $17,600. Book side: $17,850 - $50 - $200 = $17,600, so the reconciliation proves. $17,000 subtracts the bank error instead of adding it back, $17,800 records the service charge but not the NSF check, and $17,850 is the unadjusted ledger balance.

At December 31, Cedar Co.'s trade receivables total $400,000. Its aging-based estimate of expected credit losses is $20,000. Before adjustment, the allowance for credit losses has a $6,000 credit balance after the year's write-offs. What credit loss expense should Cedar record for the year?

• a.$20,000
• b.$6,000
• c.$14,000✓
• d.$26,000

Under ASC 326-20, the allowance must equal the current estimate of expected credit losses, and an aging schedule is an acceptable loss-rate method (ASC 326-20-55). The allowance needs $20,000 and already holds a $6,000 credit, so the adjustment is $14,000. $20,000 ignores the existing balance, $26,000 treats the balance as a debit, and $6,000 is the existing balance itself.

On December 28, Dune Co. sold 1,000 units at $50 each (cost $30 each) with a 30-day right of return. Dune reliably expects 3% of the units to be returned and concludes that a significant revenue reversal is not probable for the rest. How much revenue should Dune recognize for this sale?

• a.$48,500✓
• b.$49,100
• c.$50,000
• d.$47,600

For sales with a right of return, ASC 606-10-55-23 recognizes revenue only for the products expected to be kept, a refund liability for the rest, and an asset for the right to recover returned goods: 970 x $50 = $48,500. $50,000 ignores expected returns. $47,600 also deducts the $900 recovery asset (30 x $30), which reduces cost of sales, not revenue, and $49,100 deducts only that $900.

Elk Co. transfers $200,000 of trade receivables to a factor without recourse; the transfer meets all conditions for sale accounting. The factor charges a 3% fee and withholds 5% of the receivables to cover customer returns and allowances; Elk expects to recover the full holdback. What loss on sale should Elk recognize?

• a.$16,000
• b.$10,000
• c.$6,000✓
• d.$0

A transfer that surrenders control is a sale (ASC 860-10-40-5), and the transferor recognizes a gain or loss for the difference between the carrying amount and the proceeds (ASC 860-20-40). Proceeds are cash of $184,000 plus a $10,000 receivable for the holdback, so the loss is the $6,000 fee. $16,000 wrongly treats the recoverable holdback as a loss, $10,000 is the holdback itself, and $0 would fit only if the transfer were a secured borrowing.

Fir Co.'s accounts receivable were $120,000 at the beginning of Year 1 and $150,000 at the end. During the year it collected $800,000 from customers and wrote off $12,000 of accounts as uncollectible. All sales are on credit, and there were no recoveries. What were Fir's credit sales for Year 1?

• a.$842,000✓
• b.$830,000
• c.$818,000
• d.$770,000

Rolling forward receivables: beginning balance + credit sales - collections - write-offs = ending balance, so credit sales = $150,000 + $800,000 + $12,000 - $120,000 = $842,000. $830,000 ignores the write-offs, $818,000 subtracts them instead of adding them back, and $770,000 treats collections as if receivables had fallen.

Grove Co.'s accounts receivable control account shows $250,000, while its customer subledger totals $247,600. Investigation shows a $2,400 credit memo for returned goods was posted to the customer's subledger account but never recorded in the general ledger. What adjustment is needed?

• a.Debit the customer's subledger account for $2,400
• b.Credit accounts receivable in the general ledger for $2,400✓
• c.Credit the customer's subledger account for another $2,400
• d.Debit accounts receivable in the general ledger for $2,400

The subledger is correct because the credit memo was posted there; the general ledger is missing the entry that debits sales returns and allowances and credits accounts receivable. Crediting the control account by $2,400 brings it to $247,600. A debit to the control account widens the gap, and changing the subledger would undo a correct posting.

Hale Co. uses a periodic inventory system. Beginning inventory was 100 units at $10; purchases were 200 units at $12 and later 150 units at $14. It sold 280 units. What is ending inventory under FIFO?

• a.$1,840
• b.$2,380
• c.$2,340✓
• d.$2,078

Ending inventory is 450 - 280 = 170 units. FIFO leaves the most recent costs in ending inventory: 150 x $14 + 20 x $12 = $2,340 (ASC 330-10-30-9 permits FIFO). $2,078 is weighted average ($5,500 / 450 x 170), $1,840 is periodic LIFO (100 x $10 + 70 x $12), and $2,380 prices every unit at $14.

Ivy Co. measures its inventory, costed on a FIFO basis, at the lower of cost and net realizable value. At year-end the inventory's cost is $80,000, its estimated selling price is $85,000, estimated costs to complete and sell are $9,000, and its current replacement cost is $70,000. At what amount should the inventory be reported?

• a.$85,000
• b.$70,000
• c.$80,000
• d.$76,000✓

For inventory measured using FIFO or average cost, ASC 330-10-35-1B requires the lower of cost and net realizable value; NRV is $85,000 - $9,000 = $76,000, which is below the $80,000 cost. Replacement cost ($70,000) matters only under the lower-of-cost-or-market test used for LIFO and the retail method. $80,000 is cost, and $85,000 ignores the costs to complete and sell.

Jet Co. uses LIFO, so it applies the lower of cost or market. For one product line, cost is $50,000, replacement cost is $38,000, net realizable value is $45,000, and the normal profit margin is $5,000. At what amount should the inventory be reported?

• a.$50,000
• b.$38,000
• c.$40,000✓
• d.$45,000

For LIFO and the retail inventory method, market is current replacement cost limited by a ceiling of NRV ($45,000) and a floor of NRV less a normal profit margin ($40,000) (ASC 330-10-35-1C and the glossary definition of market). Replacement cost of $38,000 is below the floor, so market is $40,000, which is lower than the $50,000 cost. $38,000 ignores the floor, $45,000 uses the ceiling, and $50,000 is cost.

Kale Co.'s December 31 physical count of goods in its warehouse totaled $300,000 at cost. That count included $20,000 of goods held on consignment for a supplier. Not counted were $15,000 of goods bought FOB shipping point and still in transit to Kale, and $10,000 (cost) of goods Kale shipped to a customer FOB destination that were still in transit. What is Kale's correct inventory?

• a.$285,000
• b.$305,000✓
• c.$295,000
• d.$325,000

Consigned goods belong to the consignor, whose control is not transferred (ASC 606-10-55-79 to 55-80), so remove $20,000. Under FOB shipping point, title passes to the buyer at shipment, so add the $15,000 in transit to Kale; under FOB destination, the seller keeps title until delivery, so add the $10,000 in transit to the customer (UCC 2-319 and 2-401). $300,000 - $20,000 + $15,000 + $10,000 = $305,000. $295,000 omits the goods shipped FOB destination, $285,000 subtracts them, and $325,000 leaves the consigned goods in.

Lime Co. buys a machine for an invoice price of $100,000. It also pays $3,000 freight to deliver it, $5,000 to install it, and $1,000 for test runs before use. After installation, its own employees dropped a part, and repairing that damage cost $1,200. What should Lime capitalize as the machine's cost?

• a.$109,000✓
• b.$100,000
• c.$110,200
• d.$108,000

The historical cost of property, plant and equipment includes the costs necessarily incurred to bring the asset to the condition and location necessary for its intended use (ASC 360-10-30-1): $100,000 + $3,000 + $5,000 + $1,000 = $109,000. Repairing damage caused by the entity's own mishandling is not necessary to put the asset in service and is expensed, so $110,200 overstates cost. $108,000 omits the testing and $100,000 omits all the costs of getting the machine ready.

On January 1, Year 1, Moss Co. bought equipment for $50,000 with an estimated salvage value of $5,000 and a five-year life. It uses the double-declining-balance method. What is depreciation expense for Year 2?

• a.$9,000
• b.$10,800
• c.$12,000✓
• d.$20,000

The double-declining rate is 2 x 1/5 = 40%, applied to the carrying amount without first deducting salvage (salvage only limits total depreciation). Year 1: $50,000 x 40% = $20,000; Year 2: $30,000 x 40% = $12,000. $10,800 deducts salvage before applying the rate, $9,000 is straight-line, and $20,000 is Year 1's charge. ASC 360-10-35-7 recognizes declining-balance methods as systematic and rational.

Nash Co. bought a machine for $80,000. By January 1, Year 6, accumulated depreciation was $45,000, and straight-line depreciation is $8,000 per year. On July 1, Year 6, Nash sold the machine for $30,000 cash. What gain or loss should Nash recognize on the sale?

• a.$1,000 gain
• b.$1,000 loss✓
• c.$3,000 gain
• d.$5,000 loss

Depreciation is recorded up to the disposal date: $45,000 + $4,000 (half a year) = $49,000, so the carrying amount is $31,000 and the $30,000 proceeds produce a $1,000 loss (ASC 360-10-40). A $5,000 loss skips the Year 6 depreciation, and a $3,000 gain records a full year of it. A $1,000 gain has the right amount but the wrong direction.

Oak Co. tests a production line (a held-and-used asset group) for impairment. Its carrying amount is $900,000, the sum of its undiscounted future cash flows is $950,000, and its fair value is $700,000. What impairment loss should Oak recognize?

• a.$50,000
• b.$0✓
• c.$250,000
• d.$200,000

Under ASC 360-10-35-17, an impairment loss is recognized only if the carrying amount is not recoverable, meaning it exceeds the sum of the undiscounted cash flows. Here $900,000 is less than $950,000, so the asset group is recoverable and no loss is recognized, even though fair value is lower. $200,000 skips the recoverability test, $250,000 compares undiscounted cash flows with fair value, and $50,000 treats the cushion as a loss.

On October 1, a building with a carrying amount of $400,000 meets all criteria to be classified as held for sale. Its fair value is $380,000, and costs to sell are estimated at $15,000. What loss should be recognized on classification?

• a.$0
• b.$35,000✓
• c.$15,000
• d.$20,000

A long-lived asset classified as held for sale is measured at the lower of its carrying amount or fair value less cost to sell (ASC 360-10-35-43): $380,000 - $15,000 = $365,000, so the loss is $400,000 - $365,000 = $35,000. $20,000 ignores costs to sell, $15,000 is the costs to sell alone, and $0 would apply only if fair value less cost to sell were at least $400,000.

A building meets all the held-for-sale criteria on October 1 and is expected to sell within six months. Which statement describes its accounting after October 1?

• a.It is no longer depreciated✓
• b.It is depreciated over the expected six months to sale
• c.It is written up to fair value if fair value exceeds carrying amount
• d.It stays within property, plant, and equipment on the balance sheet

ASC 360-10-35-43 states that a long-lived asset shall not be depreciated while it is classified as held for sale. Write-ups above carrying amount are not allowed; later gains are limited to losses previously recognized (ASC 360-10-35). ASC 360-10-45 requires held-for-sale assets to be presented separately in the balance sheet, not within property, plant and equipment.

Pike Co.'s PP&E records for Year 1 show: beginning gross cost $1,200,000; additions $300,000; disposals at original cost $150,000; beginning accumulated depreciation $400,000; depreciation expense $120,000; and accumulated depreciation on the disposed assets $90,000. What is Pike's net PP&E at December 31, Year 1?

• a.$1,040,000
• b.$1,070,000
• c.$830,000
• d.$920,000✓

Gross cost: $1,200,000 + $300,000 - $150,000 = $1,350,000. Accumulated depreciation: $400,000 + $120,000 - $90,000 = $430,000. Net PP&E = $920,000. $1,070,000 fails to remove the disposed cost, $830,000 fails to remove the disposed assets' accumulated depreciation, and $1,040,000 omits the year's depreciation.

Which cost should be capitalized as an intangible asset?

• a.Salaries of scientists developing a patentable process
• b.Staff costs to compile an internally generated customer list
• c.Advertising to build awareness of an internally created brand
• d.The price paid to acquire a patent from its inventor✓

An intangible asset acquired individually is initially recognized at its cost (ASC 350-30-25-1 and 30-1). Research and development salaries are expensed as incurred (ASC 730-10-25-1), and costs of internally developing or maintaining intangible assets that are not specifically identifiable, such as brand awareness and customer lists, are expensed (ASC 350-30-25-3).

On January 1, Year 1, Yarrow Co. purchased a patent for $120,000. The patent has 12 years of remaining legal life, but Yarrow expects it to provide benefits for only 8 years. What is Year 1 amortization expense under the straight-line method?

• a.$0
• b.$7,500
• c.$15,000✓
• d.$10,000

A finite-lived intangible is amortized over its useful life to the entity, which is limited by, not equal to, its legal life (ASC 350-30-35-1 and 35-2): $120,000 / 8 = $15,000. $10,000 uses the legal life, $7,500 uses a 16-year life that has no support in the facts, and $0 would apply only to an indefinite-lived intangible.

Zinc Co. acquired a trademark whose registration can be renewed every 10 years at minimal cost. Zinc intends to renew it indefinitely, has the ability to do so, and expects it to generate cash flows indefinitely. How should Zinc account for the trademark after acquisition?

• a.Amortize it over a maximum period of 40 years from acquisition
• b.Amortize it over 15 years, the period used for tax purposes
• c.Amortize it over the current 10-year registration period
• d.Do not amortize it; test it for impairment at least annually✓

If no legal, regulatory, contractual, competitive or economic factor limits useful life, the life is indefinite; the asset is not amortized (ASC 350-30-35-4) and is tested for impairment annually or more often if events indicate (ASC 350-30-35-18). Renewals at minimal cost do not cap the useful life at the registration term (ASC 350-30-35-3). The 40-year cap was eliminated long ago, and tax recovery periods do not govern GAAP amortization.

A purchased customer list (finite-lived) has a carrying amount of $300,000. Indicators of impairment exist. The undiscounted future cash flows from the list are $250,000 and its fair value is $210,000. What impairment loss should be recognized?

• a.$90,000✓
• b.$40,000
• c.$0
• d.$50,000

Finite-lived intangibles are tested for impairment under ASC 360-10 (ASC 350-30-35-14). The carrying amount of $300,000 exceeds undiscounted cash flows of $250,000, so it is not recoverable, and the loss is measured as carrying amount minus fair value: $300,000 - $210,000 = $90,000. $50,000 measures the loss against undiscounted cash flows, $40,000 is the gap between those cash flows and fair value, and $0 ignores the failed recoverability test.

Ash Co. enters a three-year cloud computing arrangement that is a service contract (it has no right to take possession of the software). It capitalizes qualifying implementation costs. How are those capitalized costs expensed and presented?

• a.Depreciated as property, plant, and equipment over a standard five-year life
• b.Expensed over the arrangement's term, in the same line item as the hosting fees✓
• c.Expensed immediately in full, whatever the stage of the implementation project
• d.Carried as an indefinite-lived intangible asset and tested annually for impairment

ASC 350-40-35-13 requires capitalized implementation costs of a hosting arrangement that is a service contract to be expensed over the term of the arrangement, and ASC 350-40-45 requires the expense in the same line as the hosting fees and the asset in the same balance sheet line as prepaid hosting fees. They are not PP&E, are not expensed all at once, and have a finite term tied to the contract.