B. Acy Bachelor of Accountancy Bachelor of Science in Accountancy: FAR 5 — Questions and Answers
Question 1: A foreign subsidiary's functional currency is the euro. When translating to USD for consolidation, which exchange rate is used for plant and equipment?
- Current rate at balance sheet date (Correct answer)
- Historical rate when the asset was acquired
- Average rate for the period
- Spot rate on the date of translation
Correct answer: Current rate at balance sheet date
Under the current rate method (ASC 830), all assets and liabilities of a foreign subsidiary are translated at the current exchange rate at the balance sheet date.
Question 2: Which of the following creates a permanent difference between book income and taxable income?
- Accelerated depreciation for tax purposes
- Warranty expense accrued for book but deducted when paid for tax
- Tax-exempt municipal bond interest income (Correct answer)
- Installment sale revenue recognized differently
Correct answer: Tax-exempt municipal bond interest income
Tax-exempt interest is included in book income but never taxable, creating a permanent difference that does not reverse and generates no deferred tax.
Question 3: A company reports basic EPS of $3.00 and has 10,000 stock options with an exercise price of $20 when the average market price is $25. How many incremental shares are added using the treasury stock method?
- 2,000 shares (Correct answer)
- 10,000 shares
- 8,000 shares
- 4,000 shares
Correct answer: 2,000 shares
Under the treasury stock method: proceeds = 10,000 × $20 = $200,000; shares repurchased = $200,000 / $25 = 8,000; incremental shares = 10,000 – 8,000 = 2,000.
Question 4: Under ASC 958, a not-for-profit hospital receives volunteer services from licensed nurses. How should these services be recorded?
- Not recorded because no cash changes hands
- Recorded at fair value if they create or enhance a nonfinancial asset or require specialized skills (Correct answer)
- Recorded at minimum wage rate
- Disclosed only in footnotes
Correct answer: Recorded at fair value if they create or enhance a nonfinancial asset or require specialized skills
ASC 958-605 requires recognition of contributed services that require specialized skills (such as nursing) and would otherwise be purchased.
Question 5: Which of the following is an example of an other post-employment benefit (OPEB) obligation?
- Employee 401(k) contributions
- Defined benefit pension plan payments
- Employer-sponsored retiree health insurance (Correct answer)
- Workers' compensation insurance
Correct answer: Employer-sponsored retiree health insurance
OPEBs include benefits other than pensions, most commonly retiree healthcare coverage provided by employers after the employee retires.
Question 6: When preparing a statement of cash flows, how is a gain on sale of equipment classified?
- Added to net income in operating activities
- Deducted from net income in operating activities (Correct answer)
- Included as an investing activity inflow
- Included as a financing activity inflow
Correct answer: Deducted from net income in operating activities
The total proceeds from the equipment sale are an investing activity; the gain is deducted from net income in operating activities under the indirect method to avoid double-counting.
Question 7: Under ASC 350, how is impairment of an indefinite-lived intangible asset other than goodwill tested?
- Two-step test comparing book value to fair value then measuring loss
- Qualitative assessment followed by quantitative comparison of fair value to carrying amount (Correct answer)
- Straight-line write-down over remaining useful life
- Annual amortization adjusted for market changes
Correct answer: Qualitative assessment followed by quantitative comparison of fair value to carrying amount
ASC 350-30 permits an optional qualitative assessment; if it indicates possible impairment, a quantitative test compares the asset's fair value to its carrying amount and records any excess as impairment.
B. Acy Bachelor of Accountancy Bachelor of Science in Accountancy: FAR 5
A foreign subsidiary's functional currency is the euro.
When translating to USD for consolidation, which exchange rate is used for plant and equipment?