CGA Financial Accounting & Reporting 2 — Questions and Answers
Question 1: Under ASC 842, how should a lessee classify a lease where the present value of lease payments equals 92% of the asset's fair value?
- Operating lease
- Finance lease (Correct answer)
- Short-term lease
- Sale-leaseback
Correct answer: Finance lease
Under ASC 842, a lease is classified as a finance lease if the PV of lease payments equals or exceeds substantially all of the asset's fair value (typically 90% threshold).
Question 2: Which method of inventory cost flow typically results in the highest net income during a period of rising prices?
- LIFO
- FIFO (Correct answer)
- Weighted-average
- Specific identification
Correct answer: FIFO
FIFO assigns the oldest (lowest) costs to COGS during rising prices, leaving higher-cost items in ending inventory and resulting in higher net income.
Question 3: A company issues bonds with a face value of $500,000 at 98. What is the initial carrying value of the bonds payable?
- $510,000
- $490,000 (Correct answer)
- $500,000
- $480,000
Correct answer: $490,000
Bonds issued at 98 means 98% of face value, so $500,000 × 0.98 = $490,000 initial carrying value.
Question 4: Under the percentage-of-completion method, if a project is 40% complete and total estimated costs are $1,000,000 with a contract price of $1,500,000, what revenue is recognized?
- $400,000
- $600,000 (Correct answer)
- $500,000
- $1,000,000
Correct answer: $600,000
Revenue recognized = 40% × $1,500,000 contract price = $600,000.
Question 5: Which of the following is NOT a component of Other Comprehensive Income (OCI)?
- Unrealized gains on available-for-sale securities
- Foreign currency translation adjustments
- Pension liability adjustments
- Gains on sale of equipment (Correct answer)
Correct answer: Gains on sale of equipment
Gains on sale of equipment are recognized in net income, not OCI; OCI captures items bypassing the income statement.
Question 6: A company declares a 15% stock dividend when 100,000 shares ($1 par) are outstanding and market price is $20. What is the debit to retained earnings?
- $15,000
- $300,000 (Correct answer)
- $285,000
- $200,000
Correct answer: $300,000
For stock dividends above 20-25%, use par value; below that, use market value: 15,000 shares × $20 = $300,000 debit to retained earnings.
Question 7: Under ASC 350, goodwill impairment testing requires comparing the reporting unit's fair value to its:
- Net book value of assets only
- Carrying amount including goodwill (Correct answer)
- Replacement cost
- Liquidation value
Correct answer: Carrying amount including goodwill
Under the simplified one-step goodwill impairment test, if the reporting unit's fair value is less than its carrying amount (including goodwill), an impairment loss is recognized.
CGA Financial Accounting & Reporting 2
Under ASC 842, how should a lessee classify a lease where the present value of lease payments equals 92% of the asset's fair value?