CPA Financial Accounting and Reporting (FAR) : Asset Retirement Obligations
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #1 : Asset Retirement Obligations
Which of the following is untrue regarding asset retirement obligations?
A business should recognize the fair value of an asset retirement obligations when it incurs the liability and if it can make a reasonable estimate of its fair value
If a company acquires a fixed asset to which an asset retirement obligation is attached, the company should recognize a liability as of the acquisition date
If the fair value of an asset retirement obligation cannot initially be obtained, the liability can be recorded at a later date when the fair value is available
When estimating the fair value of an asset retirement obligation, a company should use a discounted cash flow model using a rate that factors in market risk
When estimating the fair value of an asset retirement obligation, a company should use a discounted cash flow model using a rate that factors in market risk
Companies do not need to discount cash flows when estimated asset retirement obligations.
Example Question #4 : Property, Plant And Equipment
Which of the following would be included in the journal entry to retire a fixed asset?
A debit to accumulated depreciation
A credit to accumulated depreciation
A debit to depreciation expense
A credit to sales revenue
A debit to accumulated depreciation
When an asset is retired, the asset value and its related accumulated depreciation are reverse. This means a debit will be booked to accumulated depreciation to clear the account.
Example Question #2 : Asset Retirement Obligations
Which of the following is not a common method of asset disposal?
Scrap
Conversion
Exchange
Sale
Conversion
The most common methods of asset disposal are sale, scrap, and exchange.
Example Question #5 : Property, Plant And Equipment
Of the following assets, which is an intangible that is subject to a recoverability test when testing for impairment?
A patent
R&D costs for a patent
Goodwill
A trademark with indefinite useful life
A patent
The recoverability test is only performed on intangible assets with a limited life. A patent generally has a limited life.
Example Question #3 : Asset Retirement Obligations
Goodwill should be tested for value impairment at which of the following levels under US GAAP?
Each acquisition unit
Entire business as a whole
Each identifiable long term asset
Each reporting unit
Each reporting unit
US GAAP requires that goodwill be tested for impairment at the reporting unit level.
Example Question #12 : Property, Plant And Equipment
Which situation would likely dictate use of units of production depreciation?
Land
Building
Truck
Machine which produces products
Machine which produces products
Land is not depreciated, and a machine which produces products would incur damage, wear and tear, and usage only as it produces goods. Buildings and trucks would be depreciated throughout their lives.
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