CA Financial Accounting & Reporting 3 — Questions and Answers
Question 1: Under ASC 606, revenue is recognized when or as a company satisfies a performance obligation by transferring control of a good or service to the customer. Which factor does NOT indicate transfer of control?
- The customer has the significant risks and rewards of ownership
- The entity has a present right to payment
- The customer has legal title to the asset
- The entity has physical possession of the asset (Correct answer)
Correct answer: The entity has physical possession of the asset
Physical possession by the seller indicates control has NOT transferred; control transfers when the customer gains possession, legal title, or rights to the asset.
Question 2: A contingent liability should be accrued when it is:
- Reasonably possible and the amount can be reasonably estimated
- Probable and the amount can be reasonably estimated (Correct answer)
- Possible and the amount is known exactly
- Remote but could be significant
Correct answer: Probable and the amount can be reasonably estimated
Under ASC 450, a loss contingency is accrued only when it is both probable that a liability has been incurred and the amount can be reasonably estimated.
Question 3: Which statement correctly describes the difference between a change in accounting principle and a change in accounting estimate?
- Both are reported retrospectively
- A change in principle is retrospective; a change in estimate is prospective (Correct answer)
- A change in principle is prospective; a change in estimate is retrospective
- Both are reported prospectively
Correct answer: A change in principle is retrospective; a change in estimate is prospective
Changes in accounting principle require retrospective restatement of prior periods, while changes in accounting estimate are applied prospectively to current and future periods.
Question 4: What does a deferred tax liability represent?
- Taxes paid in advance due to temporary differences
- Future tax payments resulting from taxable temporary differences (Correct answer)
- Tax benefits expected from deductible temporary differences
- Permanent differences between book and tax income
Correct answer: Future tax payments resulting from taxable temporary differences
A deferred tax liability arises when taxable income will be higher in future periods than book income due to taxable temporary differences, creating a future tax obligation.
Question 5: Under the allowance method for bad debts, which entry is made when a previously written-off account is unexpectedly collected?
- Debit Cash, Credit Bad Debt Expense
- Debit Accounts Receivable, Credit Allowance; then Debit Cash, Credit Accounts Receivable (Correct answer)
- Debit Cash, Credit Allowance for Doubtful Accounts
- Debit Bad Debt Expense, Credit Cash
Correct answer: Debit Accounts Receivable, Credit Allowance; then Debit Cash, Credit Accounts Receivable
The recovery requires two entries: first reinstate the receivable by reversing the write-off, then record the cash collection against the receivable.
Question 6: How is goodwill tested for impairment under US GAAP (ASC 350)?
- Annually using straight-line amortization over 40 years
- Annually (or more often if events indicate) at the reporting unit level (Correct answer)
- Only when there is an indication of impairment at the asset group level
- Every three years using the income approach
Correct answer: Annually (or more often if events indicate) at the reporting unit level
ASC 350 requires goodwill to be tested for impairment at least annually at the reporting unit level, and more frequently when triggering events occur.
Question 7: Which of the following transactions would appear in the investing activities section of the cash flow statement?
- Payment of dividends to shareholders
- Issuance of common stock
- Purchase of a patent from another company (Correct answer)
- Payment of interest on a bank loan
Correct answer: Purchase of a patent from another company
Purchases of long-term assets such as patents are capital expenditures classified as investing activities under ASC 230.
CA Financial Accounting & Reporting 3
Under ASC 606, revenue is recognized when or as a company satisfies a performance obligation by transferring control of a good or service to the customer.
Which factor does NOT indicate transfer of control?