CPA Financial Accounting and Reporting (FAR) : CPA Financial Accounting and Reporting (FAR)
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
All CPA Financial Accounting and Reporting (FAR) Resources
Example Questions
Example Question #1 : Current Liabilities
The Truman Company sells 12,500 of microwaves during Year 5. All sales are covered by a warranty through the end of Year 6. Based on past experience, the company expects 4% of microwaves sold to break during Year 6 and expects it will cost $30 to fix each microwave. However, during Year 6, 540 microwaves actually break and they each cost $28 to fix. The company is now preparing comparative financial statements for Years 5 and 6. What amount of warranty expense should be recognized?
$15,000 in Year 5 and $1,120 in Year 6
$0 in Year 5 and $15,120 in Year 6
$14,500 in Year 5 and $620 in Year 5
$15,120 in Year 5 and $0 in Year 6
$15,000 in Year 5 and $1,120 in Year 6
The company will estimate warranty expense in Year 5 based on expectations (12,500 microwaves x 4% x $30 each = $15K in warranty expense). In Year 6, it will record the difference needed to true up the warranty expense to actual cost (remaining 40 microwaves x $28 per microwave = $1,120).
Example Question #2 : Current Liabilities
Of the following, which is not a criteria for recognizing a liability associated with exit or disposal activities?
A commitment to an exit plan
The existence of a present obligation to transfer assets in the future
The entity has no discretion to avoid the future transfer of assets
The occurrence of an obligating event
A commitment to an exit plan
An entity's commitment to an exit or disposal plan is not enough to result in liability recognition.
Example Question #3 : Current Liabilities
Which terms indicate that a contingent liability likely should be recognized?
Probable
Neither
Estimable
Both
Both
Both of these terms indicate that a contingent liability must be recognized. Estimable indicates a number available for disclosure and probable indicates that the event will likely occur.
Example Question #4 : Current Liabilities
Which of the following is true regarding purchases made from a seller that offers a discount for early payment?
The purchase is recorded as a credit to accounts payable as if the discount is going to be taken, if using the gross method
The purchase is recorded as a credit to accounts payable as if the discount is going to be taken, if using the net method
The purchase is recorded as a credit to accounts payable as if the discount is going to be taken, under the gross or net method
The purchase is recorded as a credit to accounts payable without regard for the discount, if using the net method
The purchase is recorded as a credit to accounts payable as if the discount is going to be taken, if using the net method
Under the net method, a company initially records a purchase as if the discount is going to be taken. Recording the purchase includes a credit to accounts payable.
Example Question #5 : Current Liabilities
Glidell Company issues coupons for its products, which are redeemable at grocery stores. Each coupon entities the customer to $.65 off their purchase of Glidell's products. Additionally, Glidell reimburses retailers an additional $.05 per coupon. On July 1 of the current year, Glidell mailed out $1 million coupons to consumers, and expects 300,000 to be redeemed by their expiration date of December 31. Retailers can take up to 90 days to mail their coupons to Glidell. As of December 31, Glidell has made payments of $95,000 to retailers, and has 115,000 coupons waiting to be processed for payment. What amount should Glidell report as outstanding liability for coupons in its December 31 balance sheet?
$175,000
$210,000
$115,000
$90,000
$115,000
Glidell must record an expense of $.70 ($.65 savings to customer + $.05 fee to retailers) for each of the 300K coupons it expects to be redeemed. 300K x $.70 = $210K. Glidell then subtracts the $95K it has already paid out.
Example Question #6 : Current Liabilities
The Wyman Company borrowed $250,000 on October 31, Year 1, and signed a two-year note bearing interest of 10% on that date. Interest is compounded annually and is payable in full at the note’s maturity date of March 31, Year 3. What amount of liability for interest should Wyman report at December 31, Year 2?
$0
$29,584
$4,167
$25,416
$29,584
The liability for interest at the end of Year 2 should include interest expense recorded in Year 1 and in Year 2. In Year 1, Wyman will record $4,167 in interest ($250K x 10% x 2/12 months). In Year 2, this interest will be compounded and added to the principal. Therefore, interest expense in Year 2 will be $25,417 ($245,167 x 10% x 12/12 months). The interest from both years will be added together to get the total liability at the end of Year 2.
Example Question #7 : Current Liabilities
Under which of the following circumstances does substantial doubt exist about an entity's ability to continue as a going concern?
It is probable that the entity will be unable to meet its obligations coming due within 12 months of financial statement issuance
The entity is not in compliance with statutory capital requirements
The entity projects that it will have negative cash flows from operating activities over the next 12 months
The entity's CFO has retired and there is no definitive succession plan in place
It is probable that the entity will be unable to meet its obligations coming due within 12 months of financial statement issuance
Substantial doubt exists when relevant conditions and events, indicate it is probable that the entity will not be able to meet its obligations as they become due within one year from the financial statement issuance date.
Example Question #1 : Payables And Accrued Liabilities
Which of the following conditions or events would least likely raise substantial doubt about an entity's ability to continue as a going concern?
Loss of a significant customer or supplier
Negative cash flows from operating activities
Flood damage to an insured warehouse
Default on a loan agreement
Flood damage to an insured warehouse
In this example, the warehouse is insured and likely to be covered by insurance after the flood.
Example Question #2 : Payables And Accrued Liabilities
Of the following liabilities, which would a company include in the current liability section of its balance sheet?
All of the answer choices are correct
Deferred tax liability resulting from depreciation
Current portion due of a mortgage payable
Short term debt to be refinanced with long term debt
Current portion due of a mortgage payable
While a mortgage is a long term liability, any portion of it due within one year is considered a current liability. The other options are all long term liabilities.
Example Question #1 : Revenue
On January 2, Year 1, a company buys a piece of equipment for $50,000 with a 10 year life and a residual value of $8,000. It is depreciated using the straight line method. On July 1, Year 4, the equipment is worth $44,000 and is traded for a van worth $46,000. What amount of gain is recognized on this exchange?
$10,700
$8,700
$2,000
$0
$8,700
Depreciation is recorded at $4,200 per year ($50K purchase price - $8K residual value over 10 years) for 3.5 years. The total book value at the time of the exchange is $35,300 ($50K purchase price - $14,700 depreciation). This book value is compared to the old asset's fair value to determine how much gain is realized ($44K FV - $35,300 BV). Because this transaction has commercial substance the gain is recognized.
Certified Tutor
All CPA Financial Accounting and Reporting (FAR) Resources
