CPA 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 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 classifies a lessee lease as a finance lease if ownership transfers to the lessee by the end of the lease term.
Question 2: A company has a deferred tax liability of $40,000 and a deferred tax asset of $15,000 with a valuation allowance of $5,000. What is the net deferred tax position reported on the balance sheet?
- Net liability of $25,000
- Net liability of $30,000 (Correct answer)
- Net liability of $20,000
- Net asset of $10,000
Correct answer: Net liability of $30,000
The net deferred tax liability is $40,000 minus the net deferred tax asset of ($15,000 − $5,000) = $10,000, yielding $30,000.
Question 3: Which inventory cost flow assumption generally 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 (lower) costs to COGS, leaving higher-cost inventory on hand and producing higher net income when prices rise.
Question 4: Under ASC 350, which intangible assets are NOT amortized but instead tested for impairment at least annually?
- Patents with finite useful lives
- Customer lists acquired in a business combination
- Indefinite-lived intangible assets (Correct answer)
- Capitalized software development costs
Correct answer: Indefinite-lived intangible assets
ASC 350 requires indefinite-lived intangible assets to be tested for impairment at least annually rather than amortized.
Question 5: A bond is issued at a premium. How does amortization of the bond premium affect interest expense over the life of the bond?
- Increases interest expense each period
- Decreases interest expense each period (Correct answer)
- Has no effect on interest expense
- Increases interest expense only in the first period
Correct answer: Decreases interest expense each period
Amortizing a bond premium reduces the carrying value of the bond toward par, which decreases interest expense recognized each period.
Question 6: Under the equity method of accounting, how does an investor record dividends received from an investee?
- As dividend income in the income statement
- As a reduction in the investment account (Correct answer)
- As an increase in the investment account
- As other comprehensive income
Correct answer: As a reduction in the investment account
Under the equity method, dividends received reduce the carrying amount of the investment rather than being recognized as income.
Question 7: Which of the following is included in other comprehensive income (OCI) but NOT in net income?
- Gain on sale of held-to-maturity securities
- Unrealized gain on available-for-sale debt securities (Correct answer)
- Dividend income from trading securities
- Impairment loss on goodwill
Correct answer: Unrealized gain on available-for-sale debt securities
Unrealized gains and losses on available-for-sale debt securities are reported in OCI and excluded from net income until realized.
CPA Financial Accounting & Reporting 2
Under ASC 842, how does a lessee classify a lease that transfers ownership of the underlying asset by the end of the lease term?