FAR Practice Exam #2 Questions with Complete Solutions, Exams of Finance

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FAR Practice Exam #2 Questions with

Complete Solutions

Red Co. had $3 million in accounts receivable recorded on its books. Red wanted to convert the $ million in receivables to cash in a more timely manner than waiting the 45 days for payment as indicated on its invoices. Which of the following would alter the timing of Red's cash flows for the $3 million in receivables already recorded on its books? a) Change the due date of the invoice b) Factor the receivables outstanding c) Discount the receivables outstanding d) Demand payment from customers before the due date - ANS: b) Factor the receivables outstanding Gar Co. factored its receivables without recourse with Ross Bank. Gar received cash as a result of this transaction, which is best described as a a) Loan from Ross collateralized by Gar's accounts receivable b) Loan from Ross to be repaid by the proceeds from Gar's account receivable c) Sale of Gar's accounts receivable to Ross, with the risk of uncollectible accounts retained by Gar d) Sale of Gar's accounts receivable to Ross with the risk of uncollectible accounts transferred to Ross. - ANS: d) Sale of Gar's accounts receivable to Ross with the risk of uncollectible accounts transferred to Ross. Which of the following costs of goodwill should be amortized? a) Maintaining GW - Yes, Developing GW - No b) Maintaining GW - No, Developing GW - No c) Maintaining GW - Yes, Developing GW - Yes d) Maintaining GW - No, Developing GW - Yes - ANS: b) Maintaining GW - No, Developing GW - No An entity purchases a trademark and incurs the following costs in connection with the trademark: Trademark Purchase Price $100k VAT taxes $5k

Training Sales Personnel $7k Research for the trademark $24k Legal Costs $10.5k Salaries of employees $12k Assuming that the trademark meets all of the applicable initial asset recognition criteria, the entity should recognize an asset in the amount of: a) $100k b) $115.5k c) $146.5k d) $158.5k - ANS: b) $115.5k Tech Co. bought a trademark 2 years ago on January 2. Tech accounted for the trademark as instructed under the provisions of the Accounting Standards Codification during the current year. The intangible was being amortized over 40 yrs. The carrying amount at the beg. of the yr was $38k. It was determined that the cash flow will be generated indefinitely at the current level for the trademark. What amount should tech report as amortization expense for the current year? a) $ b) $ c) $1k d) $38k - ANS: a) $ 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 U.S. GAAP? a. It is prohibited. b. It is required when the reversal is considered permanent. c. It must be disclosed in the notes to the financial statements. d. It is encouraged, but not required. - ANS: a. It is prohibited. Vadis Co. sells appliances that include a three-year warranty. Service calls under the warranty are performed

by an independent mechanic under a contract with Vadis. Based on experience, warranty costs are estimated at $30 for each machine sold. When should Vadis recognize these warranty costs? a. Evenly over the life of the warranty. b. When the service calls are performed. c. When payments are made to the mechanic. d. When the machines are sold. - ANS: d. When the machines are sold. Temporary differences arises when expenses are deductible for tax purposes a) After Recognized in Financial Income - No, Before Recognized in Financial Income - No b) After Recognized in Financial Income - No, Before Recognized in Financial Income - Yes c) After Recognized in Financial Income - Yes, Before Recognized in Financial Income - Yes d) After Recognized in Financial Income - Yes, Before Recognized in Financial Income - No - ANS: c) After Recognized in Financial Income - Yes, Before Recognized in Financial Income - Yes Orlean Co., a cash basis taxpayer, prepares accrual-basis financial statements. In its current-year balance sheet, Orlean's deferred income tax liabilities increased compared with those reported for the prior yr. Which of the following changes would cause this increase in deferred income tax liabilities? I. An increase in prepaid insurance II. An increase in rent receivable III. An increase in warranty obligations a) I only b) I and II only c) II and III only d) III only - ANS: b) I and II only Brass Co. reported income before income tax expense of $60,000 for Year 2. Brass had no permanent or temporary differences for tax purposes. Brass has an effective tax rate of 30% and a $40,000 net operating loss carryforward from Year 1. What is the maximum income tax benefit that Brass can realize from the loss carryforward for Year 2? a) $12k b) $18k

c) $20k d) $40k - ANS: a) $12k Verona Co. had $500,000 in short-term liabilities at the end of the current year. Verona issued $400, of common stock subsequent to the end of the year, but before the financial statements were issued. The proceeds from the stock issue were intended to be used to pay the short-term debt. What amount should Verona report as a short-term liability on its balance sheet at the end of the current year? a) $ b) $100k c) $400k d) $500k - ANS: b) $100k Munn Corp's records included the following equity account: Preferred Stock $15 par, 20000 shares - $255k Addtl. PIC, Preferred Stock - $15k Common Stock, no par, $5 stated value, 100000 shares - $300k In Munn's statement of equity, the number of issued and outstanding shares for each class of stock is: a) CS - $60k PS - $17k b) CS - $60k PS - $18k c) CS - $63k PS - $17k d) CS - $63k PS - $18k - ANS: a) Common Stock - $60k Preferred Stock - $17k An entity issued rights to its existing shareholders without consideration. The rights allowed the recipients to purchase unissued common stock for an amount in excess of par value. When the rights are issued, which of the following accounts will be increased? a) CS - yes, Addtl PIC - yes b) CS - yes, Addtl PIC - no c) CS - no, Addtl PIC - no d) CS - no, Addtl PIC - yes - ANS: c) Common Stock - no, Additional Paid In Capital - no

On 1/5, Yr 5, Rico Co. declared its annual cash dividend on common stock for the year ended 1/31, Yr 5. The dividend was paid on 2/9 , yr 5 to shareholders of record as of 1/28, yr 5. On what date should Rico decrease retained earnings by the amount of the dividend? a) 1/15, yr 5 b) 1/31, yr 5 c) 1/28, yr 5 d) 2/9 , yr 5 - ANS: a) 1/15, yr 5 A corporation declared a dividend, a portion of which was liquidating. How would this distribution affect each of the following? a) Addtl PIC - decrease, Retained Earnings - No Effect b) Addtl PIC - decrease, Retained Earnings - decrease c) Addtl PIC - no effect, Retained Earnings - decrease d) Addtl PIC - no effect, Retained Earnings - No effect - ANS: b) Addtl PIC - decrease, Retained Earnings - decrease Primor, a manufacturer, own 75% of the voting interests of Sublette, an investment firm. Sublette owns 60% of the voting interests of Minos, an insurer. In Primor's consolidated financial statements, should consolidation accounting or equity method accounting be used for Sublette and Minos? a) Consolidation used for Sublette and equity method used for Minos b) Consolidation used for both Sublette and Minos c) Equity method used for Sublette and consolidation used for Minos d) Equity method used for both Sublette and Minos - ANS: b) Consolidation used for both Sublette and Minos Acquirer Corporation acquired for cash at $10 per share 100,000 shares of the outstanding common stock of Acquiree Company. The total fair value of the identifiable assets acquired minus liabilities assumed of Acquiree was $1.4 million on the acquisition date, including the fair value of its property, plant, and equipment (its only noncurrent asset) of $250,000. The consolidated financial statements of Acquirer Corporation and its wholly owned subsidiary must reflect a) a deferred credit of $150k b) goodwill of $150k c) a gain of $150k

d) a gain of $400k - ANS: d) a gain of $400k Wright Corp. has several subsidiaries that are included in its consolidated financial statements. In its 12/31 trial balance, Wright had the following intraentity balances before eliminations: Debit: Current Receivable $32k Debit: Noncurrent Receivable $114k Debit: Cash Advance to Corn Corp $6k Credit: Cash Advance from King Co. $15k Credit: Payable to King Co. $101k In 12/31 consolidated balance sheet, what amount should Wright report as intraentity receivables? a) $152k b) $146k c) $36k d) $0 - ANS: d) $ Jane Co. owns 90% of the common stock of Dun Corp. and 100% of the common stock of Beech Corp. On December 30, Dun and Beech each declared a cash dividend of $100,000 for the current year. What is the total amount of dividends that should be reported in the December 31 consolidated financial statements of Jane and its subsidiaries, Dun and Beech? a) $10k b) $100k c) $190k d) $200k - ANS: a) $10k Which of the following must be included in a summary of significant accounting policies in the notes to the financial statements? a) Description of current yr equity transactions b) Summary of long-term debt outstanding c) Schedule of fixed assets d) Revenue recognition policies - ANS: d) Revenue recognition policies

Which of the following qualifies as a reportable operating segment? a) Corporate headquarters, which oversees $1B in sales for the company b) North America segment, whose assets are 12% of the company's assets of all segments, and management reports to the COO c) South American segment, whose results of operations are reported directly to the COO, and 5% of the company's asset, 9% revenues, and 8% of the profits d) Eastern Europe segment, which reports its results directly to the manager of the European division, and has 20% of the company's assets, 12% of revenues, and 11% of profits - ANS: b) North America segment, whose assets are 12% of the company's assets of all segments, and management reports to the COO Bean Co. included interest expense and depreciation expense in its determination of segment profit, which Bean's chief financial officer considered in determining the segment's operating budget. Bean is required to report the segment's financial data in accordance with GAAP. Which of the following items should be Bean disclose in reporting segment data? a) Interest Expense - No, Depreciation Expense - No b) Interest Expense - No, Depreciation Expense - Yes c) Interest Expense - Yes, Depreciation Expense - No d) Interest Expense - Yes, Depreciation Expense - Yes - ANS: d) Interest Expense - Yes, Depreciation Expense - Yes Conceptually, interim financial statements can be described as emphasizing a) Timeliness over reliability b) Reliability over relevance c) Relevance over comparability d) Comparability over neutrality - ANS: a) Timeliness over reliability A loss from market price decline on inventory accounted for under the LIFO method occured in the first quarter. The loss was not expected to be restored in the fiscal year. However, in the third quarter the inventory had a market price recovery that exceeded the market decline that occured in the first quarter. For interim financial reporting, the dollar amount of net inventory should

a) Decrease in Q1 by the amount of the market price decline and increase in Q3 by the amount of the market price recovery b) Decrease in Q1 by the amount of the market price decline and increase in Q3 by the amount of decrease in Q c) Decrease in Q1 by the amount of the market price decline and not be affected in the third quarter d) Not be affected in either Q1 or Q3 - ANS: b) Decrease in Q1 by the amount of the market price decline and increase in Q3 by the amount of decrease in Q On January 15, Yr 2, before the Mapleview Co. released its financial statements for the year ended Dec 31, Yr 1, it settled a long-standing lawsuit. A material loss resulted and no prior liability had been recorded. How should this loss be disclosed or recognized in the Yr 1 financial statements? a) The loss should be disclosed, but the financial statements themselves need not be adjusted b) The loss should be disclosed in an explanatory paragraph in the auditor's report c) No disclosure or recognition is required d) The loss must be recognized in the financial statements - ANS: d) The loss must be recognized in the financial statements Each of the following would be considered a level 2 observable input that could be used to determine an asset or liability's fair value except a) Quoted prices for identical assets and liabilities in markets that are not active b) Quoted prices for similar assets and liabilities in markets that are active c) Internally generated cash flow projections for a related asset or liability d) Interest rates that are observable at commonly quoted intervals - ANS: c) Internally generated cash flow projections for a related asset or liability