AICPA Financial Accounting and Reporting 2 — Questions and Answers
Question 1: Under ASC 842, how should a lessee classify a lease where the lease term is for the major part of the remaining economic life of the underlying asset?
- Operating lease
- Finance lease (Correct answer)
- Short-term lease
- Sale-leaseback transaction
Correct answer: Finance lease
Under ASC 842, a lease is classified as a finance lease when the lease term covers the major part of the remaining economic life of the underlying asset.
Question 2: A company issues bonds at a premium. How is the premium amortized under the effective interest method?
- Credited to interest expense each period
- Debited to interest expense each period
- Credited to bond payable each period
- Debited to premium on bonds payable and credited to interest expense (Correct answer)
Correct answer: Debited to premium on bonds payable and credited to interest expense
Under the effective interest method, bond premium amortization reduces the carrying value of the bonds by debiting premium on bonds payable and crediting interest expense.
Question 3: Which inventory cost flow assumption generally results in the lowest net income during a period of rising prices?
- FIFO
- LIFO (Correct answer)
- Weighted-average
- Specific identification
Correct answer: LIFO
LIFO results in the highest cost of goods sold (most recent, higher-cost items expensed first) and therefore the lowest net income during periods of rising prices.
Question 4: Under ASC 606, when should revenue from a contract be recognized if performance obligations are satisfied over time?
- At contract inception
- When payment is received
- Ratably over the contract period regardless of progress
- As progress toward completion is measured (Correct answer)
Correct answer: As progress toward completion is measured
When a performance obligation is satisfied over time, revenue is recognized by measuring progress toward complete satisfaction of that obligation.
Question 5: A deferred tax liability arises when:
- Book income exceeds taxable income due to permanent differences
- Taxable income exceeds book income creating a future deductible amount
- Book income exceeds taxable income creating a future taxable amount (Correct answer)
- Tax expense exceeds taxes currently payable
Correct answer: Book income exceeds taxable income creating a future taxable amount
A deferred tax liability arises when book income exceeds taxable income due to temporary differences that will result in taxable amounts in future periods.
Question 6: When a parent company acquires a subsidiary and the purchase price exceeds the fair value of net identifiable assets, the excess is recorded as:
- Bargain purchase gain
- Goodwill (Correct answer)
- Additional paid-in capital
- Minority interest premium
Correct answer: Goodwill
The excess of purchase price over the fair value of net identifiable assets acquired in a business combination is recorded as goodwill.
Question 7: Which of the following is NOT a component of other comprehensive income (OCI)?
- Unrealized gains on available-for-sale securities
- Foreign currency translation adjustments
- Pension prior service costs
- Dividends declared to shareholders (Correct answer)
Correct answer: Dividends declared to shareholders
Dividends declared are a distribution of retained earnings and are not a component of other comprehensive income.
AICPA Financial Accounting and Reporting 2
Under ASC 842, how should a lessee classify a lease where the lease term is for the major part of the remaining economic life of the underlying asset?