Certified Public Accountant (Financial Accounting & Reporting) 3 — Questions and Answers
Question 1: Under ASC 360, an asset group is tested for impairment when events indicate the carrying amount may not be recoverable. The impairment loss equals:
- Carrying amount minus fair value (Correct answer)
- Carrying amount minus undiscounted future cash flows
- Fair value minus book value
- Net realizable value minus carrying amount
Correct answer: Carrying amount minus fair value
Once it is determined that carrying amount exceeds undiscounted future cash flows, the impairment loss is measured as carrying amount minus fair value.
Question 2: Which of the following is reported as a component of other comprehensive income (OCI)?
- Gain on sale of equipment
- Unrealized gain on available-for-sale debt securities (Correct answer)
- Dividend income from equity investments
- Gain on extinguishment of debt
Correct answer: Unrealized gain on available-for-sale debt securities
Unrealized gains and losses on available-for-sale debt securities are recorded in OCI until the securities are sold or impaired.
Question 3: A company declares a 10% stock dividend when it has 200,000 shares outstanding at $5 par and a market price of $18. The credit to paid-in capital in excess of par is:
- $100,000
- $260,000 (Correct answer)
- $360,000
- $460,000
Correct answer: $260,000
Stock dividend shares = 20,000; market value = $360,000; par credited = $100,000; excess = $360,000 − $100,000 = $260,000.
Question 4: Under ASC 606, the core principle requires revenue to be recognized:
- When cash is received from customers
- To depict the transfer of promised goods or services in an amount that reflects the consideration the entity expects to receive (Correct answer)
- When an invoice is issued to the customer
- On a straight-line basis over the contract term
Correct answer: To depict the transfer of promised goods or services in an amount that reflects the consideration the entity expects to receive
ASC 606's core principle is to recognize revenue in a manner that depicts the transfer of goods or services for the consideration the entity expects to be entitled to.
Question 5: When a company changes from LIFO to FIFO inventory costing, the change is reported as:
- A prior period adjustment net of tax to retained earnings (Correct answer)
- A cumulative effect in the current period income statement
- A change in estimate requiring prospective treatment
- A disclosure only with no adjustment required
Correct answer: A prior period adjustment net of tax to retained earnings
A change in inventory method is an accounting principle change that requires retrospective application, with a cumulative catch-up adjustment to opening retained earnings.
Question 6: The straight-line method of amortizing bond discount results in:
- Decreasing interest expense over the life of the bond
- Increasing interest expense over the life of the bond
- Equal interest expense in each period (Correct answer)
- Interest expense equal to the coupon payment each period
Correct answer: Equal interest expense in each period
Under the straight-line method, a constant dollar amount of discount is amortized each period, producing equal interest expense in every period.
Question 7: Deferred tax liabilities arise when:
- Tax expense exceeds taxes currently payable (Correct answer)
- Taxes currently payable exceed book tax expense
- A tax loss carryforward exists
- Accelerated depreciation is used for book purposes only
Correct answer: Tax expense exceeds taxes currently payable
A deferred tax liability exists when taxable income is less than book income in the current period, meaning taxes will be higher in future periods.
Certified Public Accountant (Financial Accounting & Reporting) 3
Under ASC 360, an asset group is tested for impairment when events indicate the carrying amount may not be recoverable.
The impairment loss equals: