CPA Financial Accounting and Reporting (FAR) : Revenue
Study concepts, example questions & explanations for CPA Financial Accounting and Reporting (FAR)
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Example Questions
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.
Example Question #2 : Revenue
The Scott Company owns an asset with a cost of $320,000, a book value of $305,000, and a fair value of $345,000. The asset is traded for another asset and the exchange is viewed as having no commercial substance. Which of the following is true regarding the exchange?
The new asset will be recorded at $345,000
The new asset will be recorded at $305,000
The new asset will be recorded at $320,000
The new asset will be recorded at its fair value
The new asset will be recorded at $305,000
When an exchange has no commercial substance, and no cash changes hands, the new asset is booked at the book value of the old asset.
Example Question #3 : Revenue
ABC factored receivables without recourse with DEF bank. ABC received cash as a result of the transaction , which is best described as a:
Loan from DEF to be repaid by the proceeds from ABC's A/R
Sale of ABC's A/R to DEF, with the risk of uncollectible accounts transferred to DEF
Loan from DEF collateralized by ABC's A/R
Sale of ABC's A/R to DEF, with the risk of uncollectible accounts held by ABC
Sale of ABC's A/R to DEF, with the risk of uncollectible accounts transferred to DEF
Factoring A/R without recourse is a sales transaction. Factoring without recourse transfers risk of collectability to the buyer.
Example Question #4 : Revenue
One method of estimating uncollectible accounts emphasizes the asset valuation over income measurement. This is the allowance method based on:
Direct write off
Aging receivables
Credit sales less returns and allowances
Gross sales
Aging receivables
Estimating bad debt on aging of receivables is a good matching of revenue and expense. It focuses on the balance sheet and emphasizes the valuation of assets.
Example Question #91 : Cpa Financial Accounting And Reporting (Far)
Under IFRS rules, the ___________ is required for recognizing revenue from construction contracts.
Both
Neither
Completed contract method
Percentage of completion method
Percentage of completion method
The percentage of completion method for revenue recognition is required under IFRS unless the final outcome of the construction project cannot be reasonably estimated.
Example Question #5 : Revenue
The Martino Corporation, in attempt to raise revenues, begins selling goods with an automatic right to return within six months if not completely satisfied. On November 1, $35,000 worth of goods with a cost of $22,000 are sold. Company officials expect that 15% of the goods sold will be returned before the expiration date in the following year. How much gross profit should be recognized on this sale in the current year?
$29,750
$13,000
$11,050
$22,000
$11,050
Because the company can reasonably estimate that 15% of goods will be returned, it should record an allowance and therefore only record 85% of its gross profit on these sales (100% - 15%). Final GP should thus be $13K ($35K sales - $22K expenses) x 85%.
Example Question #6 : Revenue
A company sends 14,000 units of its product to a customer on December 27, Year 3. The buyer has the right to return any merchandise within 90 days for a full refund. Which of the following would require the company to recognize the sale of goods in Year 4 rather than Year 3?
The company can reasonably estimate that 15% of goods will be returned
None of the above
The company cannot reasonably estimate the number of goods that will be returned
Return of the goods is not contingent on resale
None of the above
None of these scenarios would require the company to postpone recognition of the sale to Year 4.
Example Question #7 : Revenue
Bloom’s Gift Shop, a retail store, sold gift certificates that are redeemable in merchandise. On October 1, Year 2, a customer buys $1,000 of gift certificates from Bloom’s Gift Shop. The gift certificates expire 1 year after the date of purchase. Which of the following is correct?
On October 31, Year 2, Bloom should record a debit to prepaid expenses of $1,000
On October 31, Year 2, Bloom should record a credit to revenue of $1,000
On December 31, Year 2, revenue should be recorded for November and December
On October 31, Year 2, Bloom should record a credit to deferred revenue of $1,000
On October 31, Year 2, Bloom should record a credit to deferred revenue of $1,000
When gift cards are purchased, the company will credit deferred revenue. When gift cards are redeemed, the company will debit deferred revenue for the amount redeemed and credit revenue.
Example Question #8 : Revenue
Which expression best describes accrual basis revenue recognition?
Revenue is recognized when earned
Revenue is recognized immediately per transaction
Revenue is recognized when received
A firm should recognize revenue when pledged
Revenue is recognized when earned
Revenue is recognized when earned under accrual basis. Under cash basis, revenue is recognized when cash is received.
Example Question #9 : Revenue
When the total consideration for a contract with multiple embedded obligations reflects a discount, the best way to assign that discount is to:
Reduce the smallest obligation be the full amount of the discount
Assign it equally across all obligations
Allocate it proportionally to all obligations within the contract
Assign it to the obligation with the highest stand alone price
Allocate it proportionally to all obligations within the contract
Any discount that exists in a contract should be allocated proportionally across all obligations within the contract.
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