B. Acy Bachelor of Accountancy Bachelor of Science in Accountancy: FAR 4 — Questions and Answers
Question 1: Which of the following best describes a Type I subsequent event?
- An event that provides evidence about conditions that did not exist at the balance sheet date
- An event that provides evidence about conditions that existed at the balance sheet date (Correct answer)
- An event occurring after the auditor's report date
- An event requiring only disclosure, not adjustment
Correct answer: An event that provides evidence about conditions that existed at the balance sheet date
Type I (recognized) subsequent events provide additional evidence about conditions existing at the balance sheet date and require adjustment to the financial statements.
Question 2: A company capitalizes a $120,000 asset with a 5-year life and no salvage value using double-declining balance. What is depreciation expense in year 2?
- $24,000
- $28,800 (Correct answer)
- $19,200
- $48,000
Correct answer: $28,800
Year 1 DDB: $120,000 × 40% = $48,000; Book value end of year 1 = $72,000; Year 2: $72,000 × 40% = $28,800.
Question 3: When a company issues convertible bonds, how are the proceeds allocated under U.S. GAAP (ASC 470-20)?
- Entirely to debt; no allocation to equity (Correct answer)
- Split between debt and equity based on fair values
- Entirely to equity if conversion is likely
- Allocated based on the residual method with equity getting the residual
Correct answer: Entirely to debt; no allocation to equity
Under U.S. GAAP, convertible bonds that are not required to be bifurcated are recorded entirely as debt; no portion is allocated to equity at issuance.
Question 4: In a business combination accounted for under ASC 805, goodwill is measured as:
- The excess of the purchase price over book value of net assets acquired
- The excess of fair value of consideration over fair value of net identifiable assets acquired (Correct answer)
- The difference between acquisition cost and historical cost of assets
- The present value of expected future synergies
Correct answer: The excess of fair value of consideration over fair value of net identifiable assets acquired
Under ASC 805, goodwill equals the total consideration transferred plus any noncontrolling interest, minus the fair value of identifiable net assets acquired.
Question 5: A company has a loss contingency that is probable and the amount can be reasonably estimated. Under ASC 450, the company should:
- Disclose only in the footnotes
- Accrue the liability and disclose (Correct answer)
- Do nothing until the amount is certain
- Disclose only if the amount exceeds materiality thresholds
Correct answer: Accrue the liability and disclose
When a loss is both probable and reasonably estimable, ASC 450 requires that a liability be accrued and the nature of the contingency disclosed.
Question 6: Which fund type would a city use to account for proceeds from a bond issuance used to finance a new public library?
- General Fund
- Debt Service Fund
- Capital Projects Fund (Correct answer)
- Enterprise Fund
Correct answer: Capital Projects Fund
Capital Projects Funds account for financial resources restricted, committed, or assigned for the acquisition or construction of major capital facilities.
Question 7: Under GASB standards, which of the following is classified as a business-type activity in government-wide statements?
- General government operations
- Public safety services
- Municipal water utility (Correct answer)
- Property tax collection
Correct answer: Municipal water utility
Business-type activities are financed primarily through user charges, such as utilities, and are reported separately from governmental activities in government-wide statements.
B. Acy Bachelor of Accountancy Bachelor of Science in Accountancy: FAR 4
Which of the following best describes a Type I subsequent event?