CPA Financial Accounting and Reporting (FAR) : CPA Financial Accounting and Reporting (FAR)
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
Example Question #2 : Accrued Payroll Expense
A company starts a defined benefit pension plan on January 1, Year 1. The service cost for the year is $250,000 and plan funding each year is $175,000 (made each January 1). Interest on the projected benefit obligation is 8% while the expected return on plan assets is 10%. How much is pension expense in Year 2?
$210,750
$233,250
$250,000
$192,500
$233,250
Pension service cost is recorded at the end of each Year, with the PBO determined at that time. PBO at the end of Year 1 is equal to $250K. Plan assets at the end of Year 1 are equal to the $175K deposited in January plus the assets earnings over Year 1 of $17,500 ($175K x 10%). Pension expense in Year 2 is equal to $250K service cost + $20K ($250K PBO x 8%) - $36,750K ($367,500 x 10%)
Example Question #3 : Accrued Payroll Expense
The Capstone Company has a defined benefit pension plan. On January 1, Year 12, the plan is amended, causing the projected benefit obligation to increase by $600,000. At that time, the covered employees are expected to work another 8 years on average. How will this amendment be reported in the Year 12 financial statements?
$525,000 is reported as a plan asset and $75,000 is reported as pension expense
$525,000 is reported within accumulated other comprehensive income within stockholder's equity and $75,000 is reported as pension expense
$600,000 is reported as pension expense
$600,000 is reported within accumulated other comprehensive income within stockholder's equity
$525,000 is reported within accumulated other comprehensive income within stockholder's equity and $75,000 is reported as pension expense
Changes in pension plans and assumptions are initially reported in AOCI, and then amortized to pension expense. The company will expense $75K of this amendment ($600K / 8 years) and leave the remaining $525K in AOCI.
Example Question #4 : Accrued Payroll Expense
Investments must be reported at fair value in the financial statements of pension plans and trusts.
Net realizable value
Historical cost
Lower of cost or market
Fair value
Fair value
In the financial statements of employee benefit pension plans, the plan investments are reported at which valuation?
Example Question #5 : Accrued Payroll Expense
The differences between executive and nonexecutive plans is not a disclosure that is required.
The components of net periodic pension cost
A detailed description of the plan including employee groups covered
The differences in executive and nonexecutive plans
The amount of unrecognized prior service cost
The differences in executive and nonexecutive plans
Footnote disclosures in the financial statements for pensions do not require inclusion of which of the following?
Example Question #6 : Accrued Payroll Expense
The net periodic pension cost for the year of a defined benefit pension plan would be reported on:
Income statement
Both
Neither
Statement of changes in net assets
Income statement
A company would only report the net periodic pension cost on the income statement.
Example Question #1 : Software, R&D Costs
Which of the following costs will be expensed rather than capitalized?
Costs incurred to developed software, which will be sold to customers, after technological feasibility is established
Costs incurred to develop software for internal use, up until the preliminary project state
Costs incurred to develop software for internal use, after the project has reached the preliminary project state
Costs incurred to customize software purchased off the shelf for internal use
Costs incurred to develop software for internal use, up until the preliminary project state
Costs incurred to develop software for internal use will be expensed up until the project has reached the preliminary project state. After this point, costs incurred will be capitalized. Costs incurred to customize purchased software and costs to develop software to sell, after the point of technological feasibility, will be capitalized.
Example Question #2 : Software, R&D Costs
During Year 5, BioTech, Inc incurred $500,000 of research and development costs to develop a product for which a patent was granted on August 1, Year 5. Legal fees and other costs associated with the patent totaled $85,000. BioTech estimates the useful life of the patent to be 15 years. What amount should BioTech capitalize for the patent on August 1, Year 1?
$0
$585,000
$500,000
$85,000
$85,000
Research and development costs that resulted in a patented product will be expensed, but legal fees to establish the patent will be capitalized. Therefore, only the $85K in legal fees will be capitalized.
Example Question #3 : Software, R&D Costs
Coleman Inc produces software for sale and internal use. In the current year, Coleman incurred the following costs: research & development costs outsourced to a third party of $30,000; design and testing of preproduction prototypes of $110,000; testing in search for new products of $15,000; and quality control costs of $18,000. What amount of costs should be expensed as research & development in the current year?
$155,000
$188,000
$173,000
$140,000
$155,000
All of the listed costs will be expensed, however, the $18K in quality control costs will be exposed as quality control costs, not research and development. All other costs will be expensed as research and development costs.
Example Question #4 : Software, R&D Costs
ABC incurred organization costs of $3,000 at the beginning of its first year of operations. How should ABC treat the organization costs in its financial statements?
Expensed immediately
Never amortized
Amortized over 50 years
Amortized over 180 months
Expensed immediately
Organization costs are expensed for US GAAP financial income but deducted later for tax purposes.
Example Question #5 : Software, R&D Costs
ABC company incurred legal fees in defending its patent rights. These legal fees should be capitalize when the outcome of the litigation is:
Successful
Unsuccessful
Both
Neither
Successful
The accounting treatment for legal fees depends on the defense of a legal outcome. If successful the costs are capitalized, the preferable treatment.
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