Certified Public Accountant (Financial Accounting & Reporting) 2 — Questions and Answers
Question 1: Under ASC 842, how does a lessee classify a lease that transfers ownership of the underlying asset to the lessee by the end of the lease term?
- Operating lease
- Finance lease (Correct answer)
- Sales-type lease
- Direct financing lease
Correct answer: Finance lease
ASC 842 requires lessees to classify a lease as a finance lease when ownership transfers to the lessee by the end of the lease term.
Question 2: A company issues bonds with a face value of $500,000 at 102. What amount should be recorded as the bond premium?
- $5,000
- $10,000 (Correct answer)
- $1,000
- $2,500
Correct answer: $10,000
Bonds issued at 102 means 102% of face value, so proceeds = $510,000; the premium is $510,000 − $500,000 = $10,000.
Question 3: Which inventory costing method typically results in the lowest ending inventory balance during a period of rising prices?
- FIFO
- Weighted-average
- LIFO (Correct answer)
- Specific identification
Correct answer: LIFO
LIFO assigns the most recent (highest) costs to cost of goods sold, leaving the oldest (lowest) costs in ending inventory.
Question 4: Under the equity method of accounting, how does an investor record dividends received from an investee?
- As dividend income on the income statement
- As a reduction of the investment account (Correct answer)
- As an increase in the investment account
- As other comprehensive income
Correct answer: As a reduction of the investment account
Under the equity method, dividends received reduce the carrying amount of the investment because they represent a return of the investment.
Question 5: What is the effect on the accounting equation when a company collects cash on accounts receivable?
- Assets increase; liabilities increase
- Assets decrease; equity decreases
- One asset increases; another asset decreases (Correct answer)
- Assets increase; equity increases
Correct answer: One asset increases; another asset decreases
Collecting cash on accounts receivable increases cash and decreases accounts receivable by equal amounts, leaving total assets unchanged.
Question 6: A contingent liability should be accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. Which accounting standard governs this treatment?
- ASC 480
- ASC 420
- ASC 450 (Correct answer)
- ASC 410
Correct answer: ASC 450
ASC 450 (Contingencies) requires accrual of a loss contingency when it is probable and the amount is reasonably estimable.
Question 7: When using the percentage-of-completion method for long-term contracts, revenue is recognized based on:
- Cash collected to date
- Total expected profit times percentage complete
- Costs incurred to date divided by total expected costs (Correct answer)
- Milestones achieved per the contract
Correct answer: Costs incurred to date divided by total expected costs
The most common measure of completion is costs incurred to date divided by total estimated costs, which drives the proportion of revenue recognized.
Certified Public Accountant (Financial Accounting & Reporting) 2
Under ASC 842, how does a lessee classify a lease that transfers ownership of the underlying asset to the lessee by the end of the lease term?