CPA Financial Accounting & Reporting 3 — Questions and Answers
Question 1: Under ASC 606, revenue is recognized when (or as) performance obligations are satisfied. Which of the following represents recognition OVER TIME rather than at a point in time?
- Sale of inventory to a customer with immediate delivery
- Construction of a specialized asset with no alternative use and an enforceable right to payment (Correct answer)
- Transfer of a software license granting access for a fixed period
- Sale of land with title transfer at closing
Correct answer: Construction of a specialized asset with no alternative use and an enforceable right to payment
Revenue is recognized over time when the asset has no alternative use to the seller and the seller has an enforceable right to payment for performance completed to date.
Question 2: What is the effect on the accounting equation when a company collects cash on a previously recorded 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
Cash (asset) increases while accounts receivable (asset) decreases by the same amount, keeping total assets unchanged.
Question 3: Under ASC 805, how is a bargain purchase in a business combination recognized?
- As goodwill on the balance sheet
- As a gain in the income statement (Correct answer)
- As additional paid-in capital
- Deferred and amortized over future periods
Correct answer: As a gain in the income statement
A bargain purchase occurs when fair value of net assets acquired exceeds the purchase price, and the resulting gain is recognized immediately in the income statement.
Question 4: Which of the following events after the balance sheet date requires an ADJUSTMENT to the financial statements (adjusting subsequent event)?
- A major flood destroys a warehouse after year-end
- Settlement of litigation for an amount different from what was accrued at year-end, where the cause of action existed before year-end (Correct answer)
- Issuance of new common stock after year-end
- Acquisition of a new subsidiary after year-end
Correct answer: Settlement of litigation for an amount different from what was accrued at year-end, where the cause of action existed before year-end
A lawsuit settlement that provides evidence of conditions existing at the balance sheet date requires adjustment to the financial statements.
Question 5: Which depreciation method allocates the same dollar amount of depreciation expense to each period of the asset's useful life?
- Double-declining balance
- Sum-of-the-years'-digits
- Straight-line (Correct answer)
- Units of production
Correct answer: Straight-line
The straight-line method spreads the depreciable cost evenly over the asset's useful life, resulting in equal annual depreciation expense.
Question 6: A company receives $120,000 cash for a 12-month service contract on October 1, Year 1. Using accrual accounting, how much revenue is recognized in Year 1?
- $120,000
- $90,000
- $30,000 (Correct answer)
- $0
Correct answer: $30,000
Only 3 months (October–December) of service have been performed by December 31, so $120,000 × 3/12 = $30,000 is recognized in Year 1.
Question 7: Under the lower of cost or net realizable value (LCNRV) rule for inventories, net realizable value is defined as:
- Replacement cost less selling costs
- Estimated selling price less costs of completion and disposal (Correct answer)
- Historical cost less accumulated depreciation
- Fair value less estimated costs to sell
Correct answer: Estimated selling price less costs of completion and disposal
ASC 330 defines NRV as the estimated selling price in the ordinary course of business minus reasonably predictable costs of completion and disposal.
CPA Financial Accounting & Reporting 3
Under ASC 606, revenue is recognized when (or as) performance obligations are satisfied.
Which of the following represents recognition OVER TIME rather than at a point in time?