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 #1 : Software, R&D Costs
Which term signifies that expenses can begin to be capitalized for software development?
When the software reaches technological feasibility
When the software is created
When the software is functioning
When the software is ready
When the software reaches technological feasibility
Technological feasibility is a key term which indicates that software expenses can begin to be capitalized, which is a preferable outcome.
Example Question #1 : Asset Impairment
A company has a tangible manufacturing asset and is trying to determine whether the asset needs to be evaluated for impairment. Which of the following would not indicate a need to perform this test?
The use of the asset changed significantly during the current year
The asset is being depreciated over 12 years but the company now believes the asset will be sold long before that
The cost of constructing the asset was significantly more than anticipated
The company has experienced an operational loss for the past 3 years
The company has experienced an operational loss for the past 3 years
Operational losses do not indicate that the fair value of the asset is less than the asset's carrying value. The other choices indicate that the asset's fair value could be less than it's carrying value.
Example Question #2 : Asset Impairment
Which of the following is correct, under US GAAP, regarding impairment losses?
Both of the above
Losses are reported before tax if the impairment loss relates to discontinued operations
Neither of the above
Losses reduce the carrying value of an asset due to the book value of an asset falling below its fair value
Neither of the above
Impairment losses on discontinued operations are presented after-tax; Impairment losses are recorded when the fair value of an asset falls below its carrying value, not the other way around.
Example Question #3 : Asset Impairment
The Mallory Corp has a fixed asset with a carrying value of $100,000, expected future cash flows of $90,000, present value of expected future cash flows of $70,000, and a market value of $75,000. What amount of impairment loss should Mallory record for this asset?
$10,000
$25,000
$30,000
$0
$25,000
Because expected future cash flows of $90K are lower than the asset's carrying value of $100K, impairment should be recorded. The amount of impairment loss recorded will be equal to the carrying value of $100K - the asset's fair value of $75K.
Example Question #4 : Asset Impairment
After an impairment loss is recognized, the adjusted carrying amount of the intangible asset shall be its new accounting basis. Which of the following statements about subsequent reversal of a previously recognized impairment loss is correct under US GAAP?
It is encouraged but not required
It is required when the reversal is considered permanent
It must be disclosed in the notes to the financial statements
It is prohibited
It is prohibited
Under US GAAP, subsequent reversal of intangible asset impairment losses is prohibited unless the intangible asset is held for sale.
Example Question #5 : Asset Impairment
Of the following, which is a pair of value that are compared to determined the amount of a possible impairment loss on an intangible asset, with an indefinite life, other than goodwill?
Future value, carrying value
Fair value, present value
Fair value, carrying value
Carrying value, book value
Fair value, carrying value
An intangible asset with an indefinite life is tested for impairment by comparing the fair value of the intangible asset to its carrying amount.
Example Question #1 : Asset Impairment
Under US GAAP, long term fixed assets that are impaired can only have their carrying value reinstated if they are:
Held for use
Both
Held for disposal
Neither
Held for disposal
Only when these assets are held for disposal can they have their carrying values restored.
Example Question #1 : Intangible Assets
Which of the following is correct regarding accounting for patent costs?
Fees to purchase an existing patent from another party are expensed
Legal costs incurred to defend a patent will be capitalized but only if the legal proceedings are unsuccessful
Legal costs incurred to defend a patent will be expensed but only if the legal proceedings are successful
Most costs incurred to generate a patent internally will be expensed
Most costs incurred to generate a patent internally will be expensed
Most costs incurred to generate a patent internally will be expenses; however, legal costs to defend an existing patent will be capitalized if the legal proceedings are successful. When an existing patent is purchased from another party, that cost is capitalized.
Example Question #2 : Intangible Assets
Which of the following is correct regarding costs associated with goodwill?
Costs to develop and maintain goodwill are capitalized in the goodwill account
Goodwill is capitalized and amortized over 40 years
Costs to develop and maintain good are expensed
Companies can elect to amortize goodwill if goodwill is generated internally
Costs to develop and maintain good are expensed
Costs to develop and maintain goodwill be expensed, not capitalized. Goodwill itself is capitalized but not amortized.
Example Question #1 : Intangible Assets
Pop Co purchases a patent in Year 1 from another organization at the cost of $100,000. In Year 3, Pop Co defended its patent in a law suit, during which it spent $20,000 in legal fees. Pop Co was successful in defending the patent. The entry to record the $20,000 in legal fees should include which of the following?
A debit to an intangible asset for $20,000
An allocation between legal expenses and an intangible asset
A debit to amortization expense for $20,000
A debit to legal expenses of $20,000
A debit to an intangible asset for $20,000
Costs incurred to defend a patent will be capitalized if the lawsuit is successful. Therefore, the entry to record these costs will include a debit to an intangible asset.
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