CA Financial Accounting & Reporting 3

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?

Accepted Answer

The entity has physical possession of the asset

Answer

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:

Accepted Answer

Probable and the amount can be reasonably estimated

Answer

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?

Accepted Answer

A change in principle is retrospective; a change in estimate is prospective

Answer

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?

Accepted Answer

Future tax payments resulting from taxable temporary differences

Answer

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?

Accepted Answer

Debit Accounts Receivable, Credit Allowance; then Debit Cash, Credit Accounts Receivable

Answer

The recovery requires two entries: first reinstate the receivable by reversing the write-off, then record the cash collection against the receivable.

(CA) Certified Accountant Practice Test

(CA) Certified Accountant Practice Test

CA Financial Accounting & Reporting 3