CA Financial Accounting & Reporting 2

Question 1

Under ASC 842, how should a lessee classify a lease where the lease term is 75% or more of the asset's remaining economic life?

Accepted Answer

Finance lease

Answer

ASC 842 classifies a lease as a finance lease if the lease term is for the major part (generally 75% or more) of the remaining economic life of the underlying asset.

Question 2

A company issues $1,000,000 of 8% bonds when the market rate is 10%. The bonds will be issued at:

Accepted Answer

A discount

Answer

When the stated interest rate (8%) is lower than the market rate (10%), bonds are issued at a discount because investors demand a higher yield than the bond offers.

Question 3

Which inventory costing method results in the highest net income during a period of rising prices?

Accepted Answer

FIFO

Answer

FIFO assigns older, lower-cost inventory to cost of goods sold first, resulting in lower COGS and higher net income when prices are rising.

Question 4

Under the percentage-of-completion method, how is gross profit recognized on a long-term contract?

Accepted Answer

Based on the ratio of costs incurred to total estimated costs

Answer

Gross profit is recognized proportionally based on the ratio of costs incurred to date divided by total estimated contract costs.

Question 5

What is the effect on the accounting equation when a company pays a previously declared cash dividend?

Accepted Answer

Assets decrease, liabilities decrease

Answer

Paying a declared dividend reduces cash (an asset) and eliminates the dividends payable liability, so both assets and liabilities decrease equally.

(CA) Certified Accountant Practice Test

(CA) Certified Accountant Practice Test

CA Financial Accounting & Reporting 2