AICPA Financial Accounting and Reporting 3 — Questions and Answers
Question 1: Under the allowance method, when a specific account receivable is written off as uncollectible, the entry:
- Reduces net accounts receivable
- Reduces total assets
- Reduces net income
- Has no effect on net accounts receivable (Correct answer)
Correct answer: Has no effect on net accounts receivable
Writing off a specific account reduces both accounts receivable and the allowance for doubtful accounts by equal amounts, leaving net accounts receivable unchanged.
Question 2: A company using the equity method records its share of an investee's net income by:
- Debiting investment income and crediting the investment account
- Debiting the investment account and crediting investment income (Correct answer)
- Debiting cash and crediting the investment account
- Debiting the investment account and crediting other comprehensive income
Correct answer: Debiting the investment account and crediting investment income
Under the equity method, the investor debits the investment account and credits investment income for its proportionate share of the investee's net income.
Question 3: Which depreciation method allocates cost based on actual usage or output rather than time?
- Straight-line
- Double-declining balance
- Sum-of-the-years'-digits
- Units-of-production (Correct answer)
Correct answer: Units-of-production
The units-of-production method allocates depreciation based on actual output or usage, making it activity-based rather than time-based.
Question 4: A contingent liability should be accrued when it is:
- Reasonably possible and can be reasonably estimated
- Probable and can be reasonably estimated (Correct answer)
- Probable regardless of estimation ability
- Remote but the amount is known
Correct answer: Probable and can be reasonably estimated
Under ASC 450, a contingent liability is accrued only when the loss is probable and the amount can be reasonably estimated.
Question 5: When computing earnings per share (EPS), preferred dividends on cumulative preferred stock are:
- Deducted only when declared
- Added back to net income
- Deducted from net income whether declared or not (Correct answer)
- Ignored entirely
Correct answer: Deducted from net income whether declared or not
For cumulative preferred stock, preferred dividends are deducted from net income in the EPS numerator whether or not they have been declared.
Question 6: Under ASC 330, inventories are reported at the lower of cost or net realizable value (NRV). NRV is defined as:
- Replacement cost less selling costs
- Estimated selling price less costs to complete and sell (Correct answer)
- Historical cost less accumulated depreciation
- Fair value less disposal costs
Correct answer: Estimated selling price less costs to complete and sell
Net realizable value is the estimated selling price in the ordinary course of business less reasonably predictable costs of completion and selling.
Question 7: Which statement about goodwill impairment testing under U.S. GAAP is correct?
- Goodwill is amortized over 40 years and tested for impairment annually
- Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually (Correct answer)
- Goodwill is tested for impairment only when triggering events occur
- Goodwill impairment is recognized in other comprehensive income
Correct answer: Goodwill is not amortized but is tested for impairment at the reporting unit level at least annually
Under ASC 350, goodwill is not amortized but must be tested for impairment at the reporting unit level at least annually or when a triggering event occurs.
AICPA Financial Accounting and Reporting 3
Under the allowance method, when a specific account receivable is written off as uncollectible, the entry: