ABA Financial Accounting & Reporting 2 — Questions and Answers
Question 1: Under the allowance method, when a previously written-off account is subsequently collected, the correct journal entry first requires:
- Debit Cash, Credit Accounts Receivable
- Debit Accounts Receivable, Credit Allowance for Doubtful Accounts (Correct answer)
- Debit Bad Debt Expense, Credit Allowance for Doubtful Accounts
- Debit Cash, Credit Bad Debt Expense
Correct answer: Debit Accounts Receivable, Credit Allowance for Doubtful Accounts
Reinstating the written-off account requires debiting Accounts Receivable and crediting Allowance for Doubtful Accounts before recording the cash receipt.
Question 2: A company issues a 3-year, $100,000 bond at a premium. Which statement correctly describes the carrying value over the bond's life?
- Carrying value increases each period toward face value
- Carrying value decreases each period toward face value (Correct answer)
- Carrying value remains constant at the issuance price
- Carrying value decreases below face value at maturity
Correct answer: Carrying value decreases each period toward face value
When a bond is issued at a premium, the premium is amortized, reducing carrying value toward face value over the bond's life.
Question 3: Which inventory costing method results in the highest net income during a period of rising prices?
- LIFO
- FIFO (Correct answer)
- Weighted-average
- Specific identification of highest-cost items
Correct answer: FIFO
FIFO assigns older (lower) costs to COGS during rising prices, leaving higher-cost inventory on the balance sheet and producing higher gross profit.
Question 4: Under GAAP, which of the following is reported as a component of Other Comprehensive Income (OCI)?
- Gain on sale of equipment
- Unrealized gain on trading securities
- Foreign currency translation adjustments (Correct answer)
- Dividend income from investments
Correct answer: Foreign currency translation adjustments
Foreign currency translation adjustments bypass net income and are recorded directly in OCI under ASC 830.
Question 5: A lessee signs a 5-year lease for equipment. The lease transfers ownership at the end of the term. How should the lessee classify this lease under ASC 842?
- Operating lease
- Finance lease (Correct answer)
- Short-term lease
- Direct financing lease
Correct answer: Finance lease
Transfer of ownership is one of the criteria that requires classification as a finance lease under ASC 842.
Question 6: When a company changes from straight-line to double-declining balance depreciation, this is considered a change in:
- Accounting principle requiring retrospective application
- Accounting estimate requiring prospective application (Correct answer)
- Accounting entity requiring restatement
- Error correction requiring prior-period adjustment
Correct answer: Accounting estimate requiring prospective application
A change in depreciation method is treated as a change in accounting estimate and applied prospectively under ASC 250.
Question 7: Which of the following best describes the matching principle in accrual accounting?
- Revenue is recorded when cash is received
- Expenses are recorded in the period when the related revenue is recognized (Correct answer)
- Assets equal liabilities plus equity
- Expenses are recorded when cash is paid
Correct answer: Expenses are recorded in the period when the related revenue is recognized
The matching principle requires expenses to be recognized in the same period as the revenues they help generate.
ABA Financial Accounting & Reporting 2
Under the allowance method, when a previously written-off account is subsequently collected, the correct journal entry first requires: