Free Certified Public Accountant (Financial Accounting & Reporting) Questions and Answers — Questions and Answers
Question 1: Which two of the following accounting concepts are most similar to consistency and feedback, respectively?
- Recognition and full disclosure
- Predictive value and confirmatory value (Correct answer)
- Recognition and matching
- Conservatism and cost/benefit
Correct answer: Predictive value and confirmatory value
Consistency in accounting refers to applying the same accounting methods from period to period, which enhances comparability and allows users to identify trends and make better predictions. This aligns with **predictive value**, as consistent information helps users forecast future outcomes. Feedback, in the context of financial reporting, refers to information that confirms or corrects prior expectations, which is the definition of **confirmatory value**. Therefore, consistency is most similar to predictive value, and feedback is most similar to confirmatory value.
Question 2: According to Catastrophe Corporation, it is not a going concern and is most certainly going out of business. Which accounting principle will Catastrophe use?
- Remain with GAAP
- Tax basis
- Liquidation basis (Correct answer)
- Cash basis
Correct answer: Liquidation basis
The going concern assumption is a fundamental principle in GAAP, presuming that a business will continue operating for the foreseeable future. However, if a company like Catastrophe Corporation is not a going concern and liquidation is imminent, it must abandon the going concern assumption. In such cases, the company must switch to the **liquidation basis of accounting**, which values assets at their estimated net realizable value and liabilities at their estimated settlement amounts, reflecting the impending cessation of operations.
Question 3: When a company decides it is not a going concern, there is a good chance it won't be able to pay its debts, which are due at least a year after the financial accounts are released. The entity will change to the liquidation basis of accounting when liquidation is imminent, which occurs when the entity has adopted a plan of liquidation or when one is being imposed upon it. Whether or not an entity will use the tax or cash basis of accounting is unrelated to whether or not it is a going concern.
- Foreign currency translation adjustments (Correct answer)
- Unrealized gains or losses at fair value on assets held to maturity
- Certain gains and losses on derivative financial instruments designated as fair value hedges.
Correct answer: Foreign currency translation adjustments
Other Comprehensive Income (OCI) includes revenues, expenses, gains, and losses that are not recognized in net income but are part of comprehensive income. Foreign currency translation adjustments, which arise from translating the financial statements of foreign subsidiaries into the reporting currency, are a common example of items recognized in OCI. Unrealized gains/losses on assets held to maturity are not recognized, and gains/losses on fair value hedges are recognized in net income.
Question 4: A customer gave Misk, Inc. a $750,000 note with a one-year term and 9% yearly interest. Misk discounted the note at National Bank for a 12% effective interest rate after holding it for six months. How much money did Misk get from the bank?
- $719,400
- $700,950
- $768,450 (Correct answer)
- $780,713
Correct answer: $768,450
First, calculate the note's maturity value: $750,000 principal + ($750,000 * 9% annual interest) = $750,000 + $67,500 = $817,500. Misk held the note for 6 months, so the bank will discount it for the remaining 6 months of its one-year term. The discount amount is calculated as the maturity value multiplied by the discount rate and the discount period: $817,500 * 12% * (6/12) = $49,050. Therefore, Misk received $817,500 (maturity value) - $49,050 (discount) = $768,450 from the bank.
Question 5: Which of the following statements regarding the effect a collection of an account previously written off would have on accounts receivable and allowance for doubtful account balances is correct when the allowance method of recognizing uncollectible performances is used?
- The allowance for doubtful accounts would rise, but accounts receivable would remain the same. (Correct answer)
- Allowance for Doubtful Accounts would decline but Accounts Receivable would remain the same.
- The allowance for doubtful accounts would remain constant, while accounts receivable would rise.
- The allowance for doubtful accounts would decline while accounts receivable would rise.
Correct answer: The allowance for doubtful accounts would rise, but accounts receivable would remain the same.
When an account previously written off using the allowance method is collected, two journal entries are typically made. First, the account receivable is reinstated by debiting Accounts Receivable and crediting Allowance for Doubtful Accounts, which increases both balances. Second, the cash collection is recorded by debiting Cash and crediting Accounts Receivable. The net effect of these two steps is that Accounts Receivable returns to its balance before the collection process (as the reinstatement debit is offset by the collection credit), while the Allowance for Doubtful Accounts balance increases from its previous level.
Question 6: The Candy Company and Dandy Company traded inventory in an ineffective business deal. The list for Candy and Dandy had fair values that were 30% more than their expenses. However, Candy paid Dandy cash to make up the difference because Dandy's inventory was more valuable. Who, if anyone, will count the deal as a gain?
- Dandy only (Correct answer)
- Candy only
- Neither Candy nor Dandy
- Both Candy and Dandy
Correct answer: Dandy only
In a nonmonetary exchange that lacks commercial substance, gains are generally not recognized unless cash is received. If cash is paid, no gain is recognized by the payer. In this scenario, Candy paid Dandy cash to equalize the value of the inventory exchanged. Therefore, Candy (the payer of cash) will not recognize a gain, but Dandy (the recipient of cash) will recognize a partial gain on the exchange.
Question 7: Which of the following claims about donated assets are true?
- Donated assets are recorded at historical cost on a company’s balance sheet.
- If the donor wishes anonymity, the assets are not listed on the company's balance sheet.
- A donation asset cannot have a gain recorded under GAAP until it is sold to a third party.
- Under GAAP the donation of an asset will result in a credit to either revenue or gain (Correct answer)
Correct answer: Under GAAP the donation of an asset will result in a credit to either revenue or gain
Under Generally Accepted Accounting Principles (GAAP), donated assets are recorded on the company's balance sheet at their fair value at the date of donation. The corresponding credit entry for the donation is recognized as either revenue or a gain in the income statement. This reflects the increase in the company's economic resources from the non-reciprocal transfer.
Free Certified Public Accountant (Financial Accounting & Reporting) Questions and Answers
Which two of the following accounting concepts are most similar to consistency and feedback, respectively?