AICPA Financial Reporting & Analysis 3 — Questions and Answers
Question 1: Under ASC 350, when must an entity test indefinite-lived intangible assets for impairment?
- Only when triggering events occur
- Annually, and when triggering events occur (Correct answer)
- Every three years
- Only upon sale or disposal
Correct answer: Annually, and when triggering events occur
Indefinite-lived intangible assets must be tested for impairment at least annually and more frequently when triggering events suggest possible impairment.
Question 2: A company issues a $1,000 bond at a discount. Over the life of the bond, what happens to interest expense relative to the coupon payment?
- Interest expense equals the coupon payment
- Interest expense is less than the coupon payment
- Interest expense is greater than the coupon payment (Correct answer)
- Interest expense decreases each period
Correct answer: Interest expense is greater than the coupon payment
When a bond is issued at a discount, interest expense (effective interest) exceeds the coupon payment because the discount is amortized to interest expense over the bond's life.
Question 3: Which of the following best describes the concept of 'substance over form' in financial reporting?
- Transactions should be recorded based on their legal form
- Transactions should reflect their economic reality regardless of legal structure (Correct answer)
- Financial statements should be formatted according to SEC requirements
- All disclosures must use standardized terminology
Correct answer: Transactions should reflect their economic reality regardless of legal structure
Substance over form requires that transactions be accounted for in accordance with their economic substance and financial reality, not merely their legal form.
Question 4: Under ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This is known as:
- Entry price
- Exit price (Correct answer)
- Transaction price
- Carrying value
Correct answer: Exit price
ASC 820 defines fair value as an exit price — the price received to sell an asset or paid to transfer a liability in the principal (or most advantageous) market.
Question 5: When the effective interest rate method is used for amortizing bond premium, how does the amortization amount change over time?
- It remains constant each period
- It increases each period
- It decreases each period (Correct answer)
- It fluctuates based on market rates
Correct answer: It decreases each period
Under the effective interest method for a premium bond, amortization decreases each period because the carrying value (and thus effective interest) decreases as premium is amortized.
Question 6: A parent company owns 80% of a subsidiary. Under ASC 810, how should the noncontrolling interest be presented?
- As a liability on the consolidated balance sheet
- As a contra-equity account
- As a separate component of equity in the consolidated balance sheet (Correct answer)
- As a deduction from the parent's retained earnings
Correct answer: As a separate component of equity in the consolidated balance sheet
ASC 810 requires noncontrolling interest to be presented as a separate component of stockholders' equity in the consolidated balance sheet.
Question 7: Which financial statement analysis technique involves expressing each line item as a percentage of a base amount within the same period?
- Horizontal analysis
- Vertical analysis (Correct answer)
- Ratio analysis
- Trend analysis
Correct answer: Vertical analysis
Vertical (common-size) analysis expresses each financial statement line item as a percentage of a base amount (e.g., total assets on the balance sheet, net sales on the income statement) for a single period.
AICPA Financial Reporting & Analysis 3
Under ASC 350, when must an entity test indefinite-lived intangible assets for impairment?