Certified Public Accountant (Financial Accounting & Reporting) 4 — Questions and Answers
Question 1: Under ASC 230, which of the following cash flows is classified as an investing activity?
- Payment of dividends to shareholders
- Proceeds from issuance of long-term debt
- Purchase of property, plant, and equipment (Correct answer)
- Payment of interest on debt
Correct answer: Purchase of property, plant, and equipment
Purchases and sales of long-lived assets and investments are investing activities under ASC 230.
Question 2: A company uses the allowance method for bad debts. When a previously written-off account is unexpectedly collected, the entry first requires:
- Debit cash; credit bad debt expense
- Debit accounts receivable; credit allowance for doubtful accounts (Correct answer)
- Debit bad debt expense; credit allowance for doubtful accounts
- Debit cash; credit retained earnings
Correct answer: Debit accounts receivable; credit allowance for doubtful accounts
Recovery requires reversing the original write-off (debit A/R, credit allowance), then recording the cash receipt (debit cash, credit A/R).
Question 3: For a defined benefit pension plan, the service cost component of net periodic pension cost represents:
- Interest accrued on the projected benefit obligation
- The actuarial present value of benefits earned by employees in the current period (Correct answer)
- The difference between expected and actual return on plan assets
- Amortization of prior service cost
Correct answer: The actuarial present value of benefits earned by employees in the current period
Service cost is the actuarial present value of benefits attributed to employee service rendered during the current period.
Question 4: Which of the following best describes the concept of 'faithful representation' under the FASB conceptual framework?
- Information is presented in a timely manner
- Financial information agrees with the phenomena it purports to represent (Correct answer)
- Information is comparable across entities
- Financial statements are free from complex disclosures
Correct answer: Financial information agrees with the phenomena it purports to represent
Faithful representation means financial information completely, neutrally, and accurately depicts the real-world economic phenomena it represents.
Question 5: When computing diluted earnings per share, options and warrants are included using the treasury stock method. This method assumes proceeds from exercise are used to:
- Retire outstanding debt
- Repurchase common shares at the average market price (Correct answer)
- Pay a special dividend
- Fund capital expenditures
Correct answer: Repurchase common shares at the average market price
The treasury stock method assumes hypothetical exercise proceeds are used to repurchase shares at the average market price during the period.
Question 6: Under the lower of cost or net realizable value (LCNRV) rule, net realizable value is defined as:
- Estimated selling price less estimated costs to complete and sell (Correct answer)
- Current replacement cost of the inventory
- Historical cost adjusted for obsolescence
- Fair value of inventory as determined by appraisal
Correct answer: Estimated selling price less estimated costs to complete and sell
ASC 330 defines NRV as estimated selling price in the ordinary course of business less reasonably predictable costs of completion and disposal.
Question 7: A sale-leaseback transaction qualifies as a sale under ASC 842. How does the seller-lessee account for the leaseback?
- Recognize the full gain immediately and treat the leaseback as an operating lease
- Recognize any gain or loss on sale and account for the leaseback as a new lease under ASC 842 (Correct answer)
- Defer the entire gain and amortize it over the lease term
- Recognize only the portion of gain related to the buyer-lessor's retained interest
Correct answer: Recognize any gain or loss on sale and account for the leaseback as a new lease under ASC 842
When the transfer qualifies as a sale, the seller-lessee recognizes the full gain/loss on disposal and records a right-of-use asset and lease liability for the leaseback.
Certified Public Accountant (Financial Accounting & Reporting) 4
Under ASC 230, which of the following cash flows is classified as an investing activity?