CA Financial Accounting & Reporting 2 — Questions and Answers
Question 1: Under ASC 842, how should a lessee classify a lease where the lease term is 75% or more of the asset's remaining economic life?
- Operating lease
- Finance lease (Correct answer)
- Short-term lease
- Direct financing lease
Correct answer: Finance lease
ASC 842 classifies a lease as a finance lease if the lease term is for the major part (generally 75% or more) of the remaining economic life of the underlying asset.
Question 2: A company issues $1,000,000 of 8% bonds when the market rate is 10%. The bonds will be issued at:
- Par value
- A premium
- A discount (Correct answer)
- Book value
Correct answer: A discount
When the stated interest rate (8%) is lower than the market rate (10%), bonds are issued at a discount because investors demand a higher yield than the bond offers.
Question 3: Which inventory costing method results in the highest net income during a period of rising prices?
- LIFO
- FIFO (Correct answer)
- Weighted average
- Specific identification
Correct answer: FIFO
FIFO assigns older, lower-cost inventory to cost of goods sold first, resulting in lower COGS and higher net income when prices are rising.
Question 4: Under the percentage-of-completion method, how is gross profit recognized on a long-term contract?
- Evenly over the contract term
- Only when the contract is complete
- Based on the ratio of costs incurred to total estimated costs (Correct answer)
- Based on cash collected
Correct answer: Based on the ratio of costs incurred to total estimated costs
Gross profit is recognized proportionally based on the ratio of costs incurred to date divided by total estimated contract costs.
Question 5: What is the effect on the accounting equation when a company pays a previously declared cash dividend?
- Assets decrease, liabilities decrease (Correct answer)
- Assets decrease, equity decreases
- Liabilities decrease, equity increases
- No effect on the accounting equation
Correct answer: Assets decrease, liabilities decrease
Paying a declared dividend reduces cash (an asset) and eliminates the dividends payable liability, so both assets and liabilities decrease equally.
Question 6: Which of the following is included in comprehensive income but NOT in net income?
- Unrealized gains on trading securities
- Unrealized gains on available-for-sale securities (Correct answer)
- Realized gains on sale of equipment
- Interest income from bonds
Correct answer: Unrealized gains on available-for-sale securities
Unrealized gains on available-for-sale securities bypass net income and are reported directly in other comprehensive income (OCI) under ASC 320.
Question 7: A company acquires equipment for $500,000 with a salvage value of $50,000 and a useful life of 10 years. Using the double-declining balance method, what is depreciation in Year 1?
- $45,000
- $90,000
- $100,000 (Correct answer)
- $50,000
Correct answer: $100,000
DDB rate is 2/10 = 20%; applied to the full $500,000 book value in Year 1 gives $100,000 depreciation (salvage value is ignored initially).
CA Financial Accounting & Reporting 2
Under ASC 842, how should a lessee classify a lease where the lease term is 75% or more of the asset's remaining economic life?