2017 Far Aicpa Q-A

AICPA Released Questions from the
2016 Uniform CPA Exam

- Released April 2017 -
FINANCIAL ACCOUNTING & REPORTING
Uniform CPA Examination Questions and unofficial Answers, copyright by American Institute of Certified Public
Accountants, Inc. All rights reserved. Reprinted by Roger CPA Review with permission.
2017 AICPA Released Questions – FAR
2017 AICPA Released Financial Accounting & Reporting Questions

Please note: This document contains all the question information released by the AICPA. The table below each question contains
placement data for the question within the exam template from which the question comes. The “Key” value is the correct letter
answer for each preceding question.
MULTIPLE CHOICE - DIFFICULT
The following information pertains to Ash Co., which prepares its statement of cash flows using the
indirect method:
Interest payable at beginning of year $15,000
Interest expense during the year 20,000
Interest payable at end of year 5,000
What amount of interest should Ash report as a supplemental disclosure of cash flow information?
A. $10,000
B. $20,000
C. $30,000
D. $35,000
Item ID: 41573

Key: C
FAR.CSO.20170401: FAR.001.002.005
A. Incorrect. Interest payable decreased by $10,000, and interest expense during the year was
$20,000. This information can be used to reconstruct the summarizing journal entry that shows cash paid
for interest, a required supplemental disclosure for entities using the indirect method.
B. Incorrect. Interest payable decreased by $10,000, and interest expense during the year was
C. Correct! Interest payable decreased by $10,000 and interest expense during the year was
$20,000. This information can be used to reconstruct the following summarizing journal entry:
Interest payable (decrease) $10,000

Interest expense $20,000
Cash $30,000
This journal entry shows cash paid for interest, a required supplemental disclosure for entities using the
indirect method.
D. Incorrect. Interest payable decreased by $10,000, and interest expense during the year was
Bloom’s skill level: Application
Lecture # 25.04
2
Delar Co. completed its year-end physical count of inventory. The inventory was valued at first-in, first-out
(FIFO) costs and totaled $500,000. Delar subsequently noted the following two items:
1,000 units of inventory with a FIFO cost of $10 each were shipped and billed to a customer,
f.o.b. destination. These items were included in the physical count.
6,000 units at a FIFO cost of $5 each were held on consignment for one of its suppliers, but
were excluded from the physical count.
What amount should Delar report as inventory at year end?

A. $530,000
B. $520,000
C. $500,000
D. $490,000
Item ID: 43375

Key: C
FAR.CSO.20170401: FAR.002.003.000
A. Incorrect. Inventory held on consignment was properly excluded from the physical count.
B. Incorrect. In-transit inventory shipped f.o.b. destination was properly included in the physical
count. Inventory held on consignment was properly excluded from the physical count.
C. Correct! The total resulting from the physical count requires no adjustment. In-transit inventory
shipped f.o.b. destination was properly included in the physical count. Inventory held on consignment was
properly excluded from the physical count.
Editor’s note: One must make the assumption that the goods shipped f.o.b. destination had not yet made
it to the customer as of the year end; the examiners occasionally require candidates to make similar
assumptions.
D. Incorrect. In-transit inventory shipped f.o.b. destination was properly included in the physical
count. Such inventory will not be removed from Delar’s books until it is received by the customer.
Lecture # 7.01
3
Kind Nurses Assoc. is a voluntary health and welfare organization. Nurses are paid to visit homes of
elderly people and are reimbursed for mileage and supplies. Which of the following items should Kind
record as a support activity expense in its statement of functional expense?
A. Nurses' mileage expense.
B. Payment for nurses' employee benefits.
C. Payment for nurses' supplies.
D. Fundraising costs.
Item ID: 43773

Key: D
FAR.CSO.20170401: FAR.001.003.004
A. Incorrect. The mission of the organization is to provide nursing care to the elderly, so nurses’
mileage expense would be a program expense.
B. Incorrect. The mission of the organization is to provide nursing care to the elderly, so
compensation paid to the nurses who are carrying out the organization’s mission would be a program
expense.
C. Incorrect. The mission of the organization is to provide nursing care to the elderly, so payment for
nurses’ supplies would be a program expense.
D. Correct! The mission of the organization is to provide nursing care to the elderly. Fundraising
costs are a support activity expense.
Bloom’s skill level: Remembering & Understanding
Lecture # 30.03
4
A government's assets include inventory of $2 million, roads constructed for $25 million with accumulated
depreciation of $10 million, and equipment acquired for $5 million with accumulated depreciation of $1
million. Its liabilities include an outstanding balance of $5 million for bonds payable issued to construct the
roads and a $1 million short-term loan for inventory purchases. What amount should be reported as the
net investment in capital assets in the government-wide statement of net position?
A. $26 million.
B. $25 million.
C. $14 million.
D. $10 million.
Item ID: 43977

Key: C
FAR.CSO.20170401: FAR.004.004.001
A. Incorrect. The net investment in capital assets is the total of capital assets reduced by
accumulated depreciation and obligations, including bonds, mortgages, notes, and other borrowings, that
are associated with the acquisition, construction, or improvement of capital assets.
B. Incorrect. The net investment in capital assets is the total of capital assets reduced by
C. Correct! The net investment in capital assets is the total of capital assets reduced by
Here, the gross total of capital assets is $30 million, consisting of roads constructed for $25 million and
equipment acquired for $5 million. This gross amount is reduced by accumulated depreciation of $11
million -- $10 for the roads and $1 for the equipment – and $5 million in bonds payable, for a net
investment in capital assets of $30 million - $16 million, or $14 million.
D. Incorrect. The net investment in capital assets is the total of capital assets reduced by
Lecture # 29.08
5
Which of the following information about threatened litigation should not be considered to determine
whether an accrual is appropriate prior to an issuance of a company's financial statements?
A. The period in which the underlying cause of the threatened litigation occurred.
B. The degree of probability of an unfavorable outcome.
C. The ability to make a reasonable estimate of the amount of loss.
D. The period in which the threatened litigation became known to management.
Item ID: 43985

Key: D
FAR.CSO.20170401: FAR.003.003.000
A. Incorrect. ASC 450-20-25-2 requires evaluation of whether a liability had been incurred as of the
date of the financial statements. For that reason, the period during which the underlying cause of the
threatened litigation occurred should be considered when determining whether an accrual is appropriate.
See also counterexamples in ASC 450-20-25-6.
B. Incorrect. ASC 450 requires that an entity consider the degree of probability of an unfavorable
outcome when determining whether a loss contingency accrual is appropriate.
C. Incorrect. ASC 450 requires that an entity consider the ability to make a reasonable estimate of
the amount of loss when determining whether a loss contingency accrual is appropriate.
D. Correct! The period in which the threatened litigation became known to management is not
considered when determining whether a loss contingency accrual is appropriate.
ASC 450 requires that an entity consider the degree of probability of an unfavorable outcome, and the
ability to make a reasonable estimate of the amount of loss, when determining whether a loss
contingency accrual is appropriate.
In addition, ASC 450-20-25-2 requires evaluation of whether a liability had been incurred as of the date of
the financial statements. For that reason, the period during which the underlying cause of the threatened
litigation occurred will be considered when determining whether an accrual is appropriate. See also
counterexamples in ASC 450-20-25-6
Lecture # 13.02
6
What is the appropriate characterization of the net assets of a nongovernmental not-for-profit

organization?
A. Residual interest.
B. Ownership interest.
C. Donor's interest.
D. Equity interest.
Item ID: 44067

Key: A
FAR.CSO.20170401: FAR.001.001.001
A. Correct! Residual interest is the appropriate characterization of the net assets of a

nongovernmental not-for-profit organization. As per Statement of Financial Accounting Concepts No. 6
(SFAC 6), equity or net assets is the residual interest in the assets of an entity that remains after
deducting its liabilities. With business enterprises this residual interest is often referred to as owners’
equity, but a not-for-profit organization has no ownership interest in the same sense as a business
enterprise.
B. Incorrect. As per Statement of Financial Accounting Concepts No. 6 (SFAC 6), a not-for-profit
organization has no ownership interest in the same sense as a business enterprise.
C. Incorrect. As per Statement of Financial Accounting Concepts No. 6 (SFAC 6), a not-for-profit
organization has no ownership interest in the same sense as a business enterprise, and consequently
there is no terminology implying such an ownership interest.
D. Incorrect. As per Statement of Financial Accounting Concepts No. 6 (SFAC 6), a not-for-profit
organization has no ownership interest in the same sense as a business enterprise, and consequently
there is no terminology implying such an ownership interest.
Lecture # 30.01
7
A nongovernmental, not-for-profit organization had the following investments:

Fair value Fair value
Investment Cost (beginning of year) (end of year)
Bonds $9,900 $10,000 $9,950
Stock A (100 shares) $50 per share $45 $51
Stock B (200 shares) $40 per share $41 $49
What amount should be the total value of investments reported in the year-end statement of financial
position?
A. $24,850
B. $24,800
C. $23,800
D. $22,900
Item ID: 44487

Key: A
FAR.CSO.20170401: FAR.002.005.001
A. Correct! A nongovernmental not-for-profit organization is required by ASC 954-320-35-1 to

measure all investments in debt securities and all investments in equity securities with readily
determinable fair values at fair value in the statement of financial position.
The amount reported for the investments will therefore be their year-end fair values:
• Bonds at $9,950
• Stock A at 100 x $51, or $5,100
• Stock B at 200 x $49, or $9,900
• Total: $24,850
B. Incorrect. A nongovernmental not-for-profit organization is required by ASC 954-320-35-1 to
C. Incorrect. A nongovernmental not-for-profit organization is required by ASC 954-320-35-1 to

D. Incorrect. A nongovernmental not-for-profit organization is required by ASC 954-320-35-1 to

Lecture # 30.04
8
Pane Co. had the following borrowings on its books at the end of the current year:
$100,000, 12% interest rate, borrowed five years ago on September 30; interest payable
March 31 and September 30.
$75,000, 10% interest rate, borrowed two years ago on July 1; interest paid April 1, July 1,
October 1, and January 1.
$200,000, noninterest bearing note, borrowed July 1 of current year, due January 2 of next
year; proceeds $178,000.
What amount should Pane report as interest payable in its December 31 balance sheet?
A. $ 4,875
B. $ 6,750
C. $26,875
D. $41,500
Item ID: 44765

Key: A
FAR.CSO.20170401: FAR.002.008.001
A. Correct! Interest payable at December 31 will consist of

• Three months’ accrued interest payable at 12% on the $100,000 borrowing, or $3,000, and
• Three months’ accrued interest payable at 10% on the $75,000 borrowing, or $1,875, for a total of
• $3,000 + $,1875, or $4,875.
No interest is payable on the noninterest bearing note, so no interest payable is recorded for it. Instead,
its interest rate is imputed and the initial discount of $22,000 is amortized to interest expense each period,
as required by ASC 835-30-35-2.
B. Incorrect. No interest is payable on the noninterest bearing note, so no interest payable is
recorded for it. Instead, its interest rate is imputed and the initial discount of $22,000 is amortized to
interest expense each period, as required by ASC 835-30-35-2.
For the noninterest bearing note payable there will be a debit to Interest expense and a credit to Discount
on note payable.
For the other borrowings there will be a debit to Interest expense and a credit to Interest payable. The
interest payable will be the amount of interest that has accrued since the last payment date.
C. Incorrect. No interest is payable on the noninterest bearing note, so no interest payable is

D. Incorrect. No interest is payable on the noninterest bearing note, so no interest payable is

Lecture # 13.03
9
Which of the following financial statements would provide information about the ongoing revenues and
expenses associated with a voluntary health and welfare organization?
A. The statement of activities.
B. The statement of cash flows.
C. The statement of functional expenses.
D. The statement of financial position.
Item ID: 45199

Key: A
FAR.CSO.20170401: FAR.001.003.002
A. Correct! The statement of activities provides information about the ongoing revenues and
expenses associated with a nongovernmental not-for-profit organization such as a voluntary health and
welfare organization.
B. Incorrect. The statement of cash flows provides information about the cash flows of a
nongovernmental not-for-profit organization.
C. Incorrect. The statement or analysis of functional expenses provides information about the
expenses of a nongovernmental not-for-profit organization. The question asks about revenues as well as
expenses.
D. Incorrect. The statement of financial position provides information about the asset, liabilities, and
net assets of a nongovernmental not-for-profit organization at a particular point in time.
Lecture # 30.03
10
Dannon Co. mistakenly reported its expenses of $35,200 on the cash basis. Corporate records revealed
the following information:
Beginning prepaid expense $1,300
Beginning accrued expense 1,650
Ending prepaid expense 1,800
Ending accrued expense 1,200
What amount of expense should the Dannon report on its books under the accrual basis?
A. $34,250
B. $35,150
C. $35,300
D. $36,150
Item ID: 45199

Key: A
FAR.CSO.20170401: FAR.001.006.000
A. Correct! Starting with cash-basis expenses of $35,200, the following adjustments must be made
to calculate accrual-basis expenses:
• With a beginning balance of $1,300 and an ending balance of $1,800, prepaid expenses
increased by $500. Subtract the $500 increase in prepaid expenses, because prepaid
expenses are a cash outflow but not yet an expense under the accrual basis.
• With a beginning balance of $1,650 and an ending balance of $1,200, accrued expenses
decreased by $450. Subtract the $450 decrease in accrued expenses, because a decrease in
accrued expenses represents a cash outflow but not an accrual expense, rather a decrease in a
liability account.
As a result, accrual basis expenses are $35,200 - $500 - $450, or $34,250.
B. Incorrect. A decrease in accrued expenses represents a cash outflow but not an accrual-basis
expense. There is a debit to a liability account such as Accounts payable, decreasing Accounts payable.
There is no debit increase to an accrual expense.
C. Incorrect. There is a $500 increase in prepaid expenses and a $450 decrease in accrued
expenses. Each of these will necessitate an adjustment in converting from cash-basis to accrual-basis
expenses.
D. Incorrect. An increase in prepaid expenses represents a cash outflow but not an accrual
expense. When prepaid expenses increase, there is a debit to Prepaid expenses, an asset account.
There is no debit increase to an accrual expense account.
A decrease in accrued expenses represents a cash outflow but not an accrual-basis expense. There is a
debit to a liability account such as Accounts payable, decreasing Accounts payable. There is no debit to
expense.
Lecture # 25.04
11
Arena Corp. leased equipment from Bolton Corp. and correctly classified the lease as a capital lease. The
present value of the minimum lease payments at lease inception was $1,000,000. The executory costs to
be paid by Bolton were $50,000, and the fair value of the equipment at lease inception was $900,000.
What amount should Arena report as the capital lease obligation at the lease's inception?
A. $900,000
B. $950,000
C. $1,000,000
D. $1,050,000
Item ID: 46507

Key: A
FAR.CSO.20170401: FAR.003.006.000
A. Correct! ASC 840-30-30-3 stipulates that if the present value of the minimum lease payments at
lease inception exceeds the fair value of the leased asset, then the amount measured initially as the
capital lease asset and obligation shall be the fair value.
B. Incorrect. Executory costs are excluded from the amount recorded as the capital lease obligation.
C. Incorrect. ASC 840-30-30-3 stipulates that if the present value of the minimum lease payments at
lease inception exceeds the fair value of the leased asset, then the amount measured initially as the
capital lease asset and obligation shall be the fair value.
D. Incorrect. Executory costs are excluded from the amount recorded as the capital lease obligation.
In addition, the amount recorded as the capital lease obligation should be the lesser of
• The present value of the minimum lease payments
• The fair value of the leased asset.
Lecture # 12.02
12
West Co. paid $50,000 for an intangible asset other than goodwill. Fair value of the asset is $55,000.
West signed a contract to sell the asset for $10,000 in 10 years. What amount of amortization expense
should West record each year?
A. $4,000
B. $4,500
C. $5,000
D. $5,500
Item ID: 47053

Key: A
FAR.CSO.20170401: FAR.002.006.000
A. Correct! Amortization of this acquired intangible asset would be based on its cost minus residual
value amortized over the 10-year useful life to West Co. With a cost of $50,000, residual value of
$10,000, and a useful life to West of 10 years, yearly amortization expense will be $4,000.
Please see the similar illustrative example in ASC 350-30-55 paragraphs 5 through 7, Example 2:
Acquired Patent.
B. Incorrect. Amortization of this acquired intangible asset would be based on its cost minus
residual value amortized over the 10-year useful life to West Co.
C. Incorrect. Amortization of this acquired intangible asset would be based on its cost minus
D. Incorrect. Amortization of this acquired intangible asset would be based on its cost minus
Lecture # 9.01
13
Which of the following is a level three input to valuation techniques used to measure the fair value of an
asset?
A. Quoted prices in active markets for identical assets.
B. Quoted prices for similar assets in active markets.
C. Unobservable inputs for the asset.
D. Inputs other than quoted prices that are observable for the asset.
Item ID: 47129

Key: C
FAR.CSO.20170401: FAR.003.011.000
A. Incorrect. Quoted prices in active markets are Level 1 inputs.
B. Incorrect. Quoted prices for similar assets in active markets are Level 2 inputs.
C. Correct! Level 3 inputs are unobservable inputs, as state by ASC 820-10-35-37. Unobservable
inputs are commonly internal data and estimates, relied upon because there is little to no market activity
for the asset or liability, or for any approximate equivalents, at the measurement date. Quoted prices in
active markets are Level 1 inputs. Quoted prices for similar assets in active markets are Level 2 inputs.
D. Incorrect. Level 3 inputs are unobservable inputs; see also ASC 820-10-35-37.
Lecture # 1.04
14
Which of the following statements is a primary objective of accounting for income taxes?
A. To compare an enterprise's federal tax liability to its state tax liability.
B. To identify all of the permanent and temporary differences of an enterprise.
C. To estimate the effect of the tax consequences of future events.
D. To recognize the amount of deferred tax liabilities and deferred tax assets reported for future tax
consequences.
Item ID: 47981

Key: D
FAR.CSO.20170401: FAR.002.012.000
A. Incorrect. ASC 710-10-10-1 identifies two primary objectives of accounting for income taxes:
• To recognize the current-year amount of taxes payable or refundable, and
• To recognize the amount of deferred tax liabilities and deferred tax assets reported for
future tax consequences.
B. Incorrect. In ASC 710-10-10-1 identifies two primary objectives of accounting for income taxes:
C. Incorrect. In ASC 710-10-10-1 identifies two primary objectives of accounting for income taxes:
D. Correct! In ASC 710-10-10-1 identifies two primary objectives of accounting for income taxes:
Lecture # 19.01
15
Thyme, Inc. owns 16,000 of Sage Co.'s 20,000 outstanding common shares. The carrying value of Sage's
equity is $500,000. Sage subsequently issues an additional 5,000 previously unissued shares for
$200,000 to an outside party that is unrelated to either Thyme or Sage. What is the total noncontrolling
interest after the additional shares are issued?
A. $140,000
B. $172,000
C. $252,000
D. $300,000
Item ID: 48189

Key: C
FAR.CSO.20170401: FAR.001.002.007
A. Incorrect. As per ASC 810-10-55-23 and the associated example in ASC 810-10-55, paragraphs
4D and 4E, the carrying amount of the noncontrolling interest must be changed to reflect the change in its
ownership interest in the subsidiary.
B. Incorrect. As per ASC 810-10-55-23 and the associated example in ASC 810-10-55, paragraphs
C. Correct! The carrying amount of the noncontrolling interest must be changed to reflect the
change in its ownership interest in the subsidiary. Prior to the sale of the new shares, the noncontrolling
interest had a carrying value of 4,000 / 20,000 times $500,000 – because the noncontrolling interest
consisted of 4,000 of 20,000 total shares and Sage’s total equity was $500,000. Immediately after the
sale of the new shares, the noncontrolling interest will be adjusted to a new carrying value of 9,000 /
25,000 times $700,000 – because the noncontrolling interest is now 9,000 of 25,000 total shares, and the
carrying value of Sage’s total equity has now increased by $200,000 to $700,000.
Therefore, the total noncontrolling interest after the additional shares are issues is $252,000, because
(9,000 / 25,000) x $700,000 = $252,000.
Please see also ASC 810-10-55-23 and the associated example in ASC 810-10-55, paragraphs 4D and
4E.
D. Incorrect. As per ASC 810-10-55-23 and the associated example in ASC 810-10-55, paragraphs
Lecture # 31.06
16
At year end, a company has a defined benefit pension plan with a projected benefit obligation of
$350,000; a net gain of $140,000 that was not previously recognized in net periodic pension cost; and
prior service cost of $210,000 that was not previously recognized in net periodic pension cost. What
amount should be reported in accumulated other comprehensive income related to the company's defined
benefit pension plan at year end?
A. A credit balance of $420,000.
B. A debit balance of $420,000.
C. A credit balance of $70,000.
D. A debit balance of $70,000.
Item ID: 48231

Key: D
FAR.CSO.20170401: FAR.002.011.002
A. Incorrect. Any gains and losses not already recognized as pension expense are recognized in
accumulated other comprehensive income (AOCI). Here there is both a gain and a loss of this nature, the
net of which will be presented in AOCI.
B. Incorrect. Any gains and losses not already recognized as pension expense are recognized in
accumulated other comprehensive income (AOCI). Here there is both a gain and a loss of this nature, the
net of which will be presented in AOCI.
C. Incorrect. Any gains and losses not already recognized as pension expense are recognized in
accumulated other comprehensive income (AOCI). A net loss in AOCI is presented as a debit. A net gain
in AOCI is presented as a credit.
D. Correct! Any gains and losses not already recognized as pension expense are recognized in
accumulated other comprehensive income. There is a credit gain of $140,000 and a debit loss of
$210,000, for a net debit to AOCI of $70,000.
Lecture 14.03
17
A collection agency spent $50,000 in staff payroll costs investigating the feasibility of developing its own
software program for tracking customer contacts. After committing to funding the project, software
developers were paid $200,000 to write the code, and the company incurred $70,000 in general and
administrative costs related to training and software maintenance. What amount should be capitalized?
A. $200,000
B. $250,000
C. $270,000
D. $320,000
Item ID: 48319

Key: A
FAR.CSO.20170401: FAR.003.009.000
A. Correct! ASC 350-40-30-1 states the following costs incurred in obtaining or developing internal-
use software may be capitalized:
• External direct costs such as fees paid to third parties for software development, costs of
obtaining the software from a vendor, travel expenses incurred by employees associated with
developing the software;
• Payroll costs for employees for time spent working directly on the internal-use software
project;
• Interest costs incurred while developing internal-use software.
Accordingly, $200,000 paid to developers to write the code is capitalizable. The other costs would simply
be expensed as incurred.
B. Incorrect. ASC 350-40-30-1 states the following costs incurred in obtaining or developing internal-
project;
C. Incorrect. ASC 350-40-30-1 states the following costs incurred in obtaining or developing internal-
project;
D. Incorrect. ASC 350-40-30-1 states the following costs incurred in obtaining or developing internal-
project;
Lecture # 9.03
18
A company granted its employees 100,000 stock options on January 1, year 1. The stock options had a
grant date fair value of $15 per option and a three-year vesting period. On January 1, year 2, the
company estimated the fair value of the stock options to be $18 per option. Assuming that the company
did not grant any additional options or modify the terms of any existing option grants during year 2, what
amount of share-based compensation expense should the company report for the year ended December
31, year 2?
A. $500,000
B. $600,000
C. $700,000
D. $800,000
Item ID: 48495

Key: A
FAR.CSO.20170401: FAR.002.011.003
A. Correct! In accordance with ASC 718-10-30-3, the fair value of the options at the grant date is
the basis for recognizing the compensation expense evenly over the vesting period.
With a fair value at grant date of $15 per option, the 100,000 options have a total fair value of $1,500,000.
This total fair value at grant date is recognized evenly over the vesting period, at a rate of $500,000 per
year. The amount of share-based compensation expense for the year ended December 31, year 2 will be
$500,000.
B. Incorrect. In accordance with ASC 718-10-30-3, the fair value of the options at the grant date
is the basis for recognizing the compensation expense evenly over the vesting period.
C. Incorrect. In accordance with ASC 718-10-30-3, the fair value of the options at the grant date
D. Incorrect. In accordance with ASC 718-10-30-3, the fair value of the options at the grant date
Lecture # 15.03
19
A company acquires another company for $3,000,000 in cash, $10,000,000 in stock, and the following
contingent consideration: $1,000,000 after year 1, $1,000,000 after year 2, and $500,000 after year 3, if
earnings of the subsidiary exceed $10,000,000 in each of the three years. The fair value of the contingent
-based consideration portion is $2,100,000. What is the total consideration transferred for this business
combination?
A. $15,500,000
B. $15,100,000
C $13,000,000
D. $5,100,000
Item ID: 50581

Key: B
FAR.CSO.20170401: FAR.003.002.000
A. Incorrect. The total consideration transferred in a business combination is measured at its fair
value at the time of the transaction.
B. Correct! The total consideration transferred in a business combination is measured at its fair
value at the time of the transaction. The cash and stock have a fair value of $3M and $10M, respectively.
The fair value of the contingent consideration is $2,100,000. The total consideration transferred is
therefore $15,100,000.
C. Incorrect. The total consideration transferred in a business combination is measured at its fair
D. Incorrect. The total consideration transferred in a business combination is measured at its fair
Lecture # 31.02
20
Which of the following factors would not be an indicator of an investor's ability to exercise significant
influence over the operating and financial policies of an investee?
A. Investor recommendation for the investee to hire a specific executive.
B. Interchange of managerial personnel between investor and investee.
C. Investor representation on the investee board of directors.
D. Dependence by the investee on the investor's proprietary technology.
Item ID: 51105

Key: A
FAR.CSO.20170401: FAR.002.005.003
A. Correct! Just because the investor makes a recommendation doesn’t mean the recommendation
is actually followed or even considered.
ASC 323-10-15-6 lists the following factors as indicative of the ability to exercise significant influence over
an investee:
• Representation on the board of directors
• Participation in policy-making processes
• Material inter-entity transactions
• Interchange of managerial personnel
• Technological dependency
B. Incorrect. ASC 323-10-15-6 lists the following factors as indicative of the ability to exercise
significant influence over an investee:
C. Incorrect. ASC 323-10-15-6 lists the following factors as indicative of the ability to exercise
D. Incorrect. ASC 323-10-15-6 lists the following factors as indicative of the ability to exercise
Lecture # 3.01
21
The FASB amends the Accounting Standards Codification through the issuance of
A. Accounting Standards Updates.
B. Statements of Financial Accounting Standards.
C Technical Bulletins.
D. Staff Accounting Bulletins.
Item ID: 51773

Key: A
FAR.CSO.20170401: FAR.001.001.002
A. Correct! The FASB amends the Accounting Standards Codification through the issuance of
Accounting Standards Updates.
B. Incorrect. The FASB amends the Accounting Standards Codification through the issuance of
C. Incorrect. The FASB amends the Accounting Standards Codification through the issuance of
D. Incorrect. The FASB amends the Accounting Standards Codification through the issuance of
Lecture # 1.05
22
A company has experienced operating losses from its appliances division for the past five years. The
division is the lowest level of identifiable cash flows. Having determined the division is the lowest level of
identifiable cash flows, the company's next step in performing its impairment test is to
A. Perform a recoverability test on the carrying amount of the division's assets.
B. Reduce the carrying amount of the division's assets to the amount of expected divisional cash
flows.
C Adjust the carrying amount of the division's assets to fair value.
D. Adjust the carrying amount of the division's assets to replacement value.
Item ID: 51781

Key: A
FAR.CSO.20170401: FAR.002.004.000
A. Correct! To test whether an asset, such as a division of a company, has been impaired, the
recoverability test is first conducted. The recoverability test entails comparing the expected future net
undiscounted cash flows from the asset to the asset’s carrying amount.
If the recoverability test reveals that the asset is impaired, then the impairment amount is measured by
comparing the asset’s carrying amount to its fair value. The fair value is either the market value or the
present value, i.e. the discounted expected future net cash flows, of the asset. The impairment loss is
the amount by which the carrying value of the asset exceeds its fair value.
B. Incorrect. Before any reduction in carrying amount can occur, it must first be determined whether
the asset is in fact impaired.
If the asset is indeed impaired, then the impairment loss is the amount by which the carrying value
exceeds its fair value
C. Incorrect. Before any reduction in carrying amount can occur, it must first be determined whether
If the asset is indeed impaired, then it is true the impairment loss is the amount by which the carrying
value exceeds its fair value.
D. Incorrect. Before any reduction in carrying amount can occur, it must first be determined whether
If the asset is indeed impaired, then the impairment loss is the amount by which the carrying value
exceeds its fair value.
Lecture # 8.09
23
As of December 31, year 2, a company has an inventory item that was originally purchased for $80 in
year 1. The inventory item was written down to its net realizable value of $60 as of December 31, year 1.
As of December 31, year 2, the inventory item had a net realizable value of $75 and a replacement cost
of $65. Normal profit margins for this company are 20%. Under IFRS, what is the carrying amount of the
inventory item as of December 31, year 2?
A. $60
B. $65
C $75
D. $80
Item ID: 54365

Key: C
FAR.CSO.20170401: FAR.003.012.000
A. Incorrect. IFRS allows for recoveries of previously written down inventory.
B. Incorrect. IFRS allows for recoveries of previously written down inventory, limited by the amount
required to restore the inventory to its current value or the extent of the previously recorded loss,
whichever is lower. IFRS and most GAAP inventories are valued at the lower of cost or NRV.
C. Correct! IFRS allows for recoveries of previously written down inventory, limited by the lower of:
• The amount required to restore the inventory to its current value, or

• The extent of the previously recorded loss.
IFRS and most GAAP inventories are valued at the lower of cost or NRV.
Here, the current value of the inventory is its $75 NRV, because it is lower than its $80 original cost. The
previously recorded loss will be recovered up to the current value of $75.
D. Incorrect. IFRS allows for recoveries of previously written down inventory, limited by the amount
required to restore the inventory to its current value or the extent of the previously recorded loss,
whichever is lower. IFRS and most GAAP inventories are valued at the lower of cost or NRV.
Lecture # 7.09
24
A government-wide statement of net position must include which of the following?
A. Prior-year comparative financial data.

B. Primary government fiduciary fund data.
C A consolidation of all government-wide activities.
D. A distinction between governmental and business-type activities.
Item ID: 74647

Key: D
FAR.CSO.20170401: FAR.004.002.001
A. Incorrect. A government-wide statement of net position must be divided into governmental and
business-type activities.
B. Incorrect. A government-wide statement of net position must be divided into governmental and
C. Incorrect. A government-wide statement of net position must be divided into governmental and
D. Correct! A government-wide statement of net position must be divided into governmental and
Lecture # 29.03
25
Which of the following should be considered part of one of the three primary user groups of the external
financial reports of a state government?
A. Citizens of a neighboring state.

B. Advocate groups within the state.
C Preparers of state government financial reports.
D. Internal managers in the executive branch of the state government.
Item ID: 79346

Key: B
FAR.CSO.20170401: FAR.004.001.001
A. Incorrect. GASB Concepts Statement No. 1 identifies three primary user groups of state and local
governmental financial reports:
• The citizenry of the reporting governmental entity

• Legislative and oversight bodies
• Investors and creditors
B. Correct! Advocate groups often exert oversight over governmental entities. Oversight bodies are
one of three primary user groups of state and local governmental financial reports as identified by GASB
Concepts Statement No. 1:

C. Incorrect. GASB Concepts Statement No. 1 identifies three primary user groups of state and local

D. Incorrect. GASB Concepts Statement No. 1 identifies three primary user groups of state and local

Lecture # 29.03
26
MULTIPLE CHOICE – MEDIUM
Which of the following defines equity as it relates to a business entity?

A. Net revenues.
B. Total revenues less total expenses.
C. Total assets and liabilities.
D. Total assets less total liabilities.
Item ID: 43103

Key: D
FAR.CSO.20170401: FAR.001.001.001
A. Incorrect. For a business entity, equity is defined as assets less liabilities. The basic accounting
equation, in the form of Assets – Liabilities = Equity, expresses this relationship.
B. Incorrect. Equity is defined as assets less liabilities. The basic accounting equation, in the form of
Assets – Liabilities = Equity, expresses this relationship.
C. Incorrect. Equity is defined as assets less liabilities. The basic accounting equation, in the form of
Assets – Liabilities = Equity, expresses this relationship.
D. Correct! Equity is defined as assets less liabilities. The basic accounting equation, in the form of
Assets – Liabilities = Equity, expresses this relationship. Equity, or net assets, is a balance sheet
component. Net revenues is an income statement component, equal to gross revenues less returns. Total
revenues less total expenses commonly is called operating income.
Lecture # 1.03
27
What basis of accounting should be used when preparing a governmental funds statement of revenues,
expenditures, and changes in fund balances?
A. Accrual basis of accounting.
B. Modified accrual basis of accounting.
C. Modified cash basis of accounting.
D. Cash basis of accounting.
Item ID: 43191

Key: B
FAR.CSO.20170401: FAR.004.001.002
A. Incorrect. Proprietary funds use the accrual basis in their fund financial statements. Governmental
fund financial statements use the modified accrual basis.
B. Correct! Governmental fund financial statements use the modified accrual basis of accounting.
C. Incorrect. The modified cash basis of accounting is not used by any fund type.
D. Incorrect. The cash basis would be used for a proprietary fund’s statement of cash flows, but not
for any governmental fund financial statements.
Lecture # 29.02
28
A city received a $9,000,000 federal grant to finance the construction of a homeless shelter. In which fund
should the proceeds be recorded?
A. Permanent.
B. General.
C. Capital project.
D. Special revenue.
Item ID: 43293

Key: C
FAR.CSO.20170401: FAR.004.001.003
A. Incorrect. A permanent fund accounts for assets whose principal is restricted and may not be
spent, which is not applicable to this situation.
B. Incorrect. A general fund is a government’s basic operating fund. The construction of a homeless
shelter is a capital project.
C. Correct! Capital project funds of a governmental entity account for major acquisition or
construction activities of capital assets, such as the construction of a homeless shelter. Revenue sources
of a capital project fund may include special tax revenues, proceeds from bonds, transfers, or capital
grants such as the $9,000,000 federal grant.
D. Incorrect. Special revenue funds account for earmarked revenues received for activities other
than capital projects and debt service. The construction of a homeless shelter is a capital project.
Lecture # 29.02
29
Hill Corp. began production of a new product. During the first calendar year, 1,000 units of the product
were sold for $1,200 per unit. Each unit had a two-year warranty. Based on warranty costs for similar
products, Hill estimates that warranty costs will average $100 per unit. Hill incurred $12,000 in warranty
costs during the first year and $22,000 in warranty costs during the second year. The company uses the
expense warranty accrual method. What should be the balance in the estimated liability under warranties
account at the end of the first calendar year?
A. $ 66,000
B. $ 88,000
C. $100,000
D. $112,000
Item ID: 43323

Key: B
REG.CSO.20170401: REG.002.001.001
A. Incorrect. At the end of first calendar year, only the $12,000 in first year warranty costs would
have been applied against the estimated liability under warranties balance.
B. Correct! With estimated warranty costs of $100 per unit and 1,000 units sold in the first calendar
year, Hill Corp. would have accrued an estimated liability under warranties of 1,000 x $100, or $100,000.
This amount is adjusted for the $12,000 in warranty costs incurred, for a year-end balance of $88,000.
Summarizing journal entry to accrue the warranty liability:
Warranty expense $100,000

Estimated liability under warranties $100,000
Summarizing journal entry to record year 1 actual warranty costs:
Estimated liability under warranties $12,000

Cash $12,000
C. Incorrect. The estimated liability under warranties balance must be decreased by actual year 1
warranty costs incurred.
D. Incorrect. Year 1 warranty costs incurred would decrease the liabilities balance, not increase it.
Lecture # 13.01
30
Alton Co. had a cash balance of $32,300 recorded in its general ledger at the end of the month, prior to
receiving its bank statement. Reconciliation of the bank statement reveals the following information:
Bank service charge - $15
Check deposited and returned for insufficient funds check - $120
Deposit recorded in the general ledger as $258 but should be $285
Checks outstanding - $1,800
After reconciling its bank statement, what amount should Alton report as its cash account balance?
A. $30,338
B. $30,392
C. $32,138
D. $32,192
Item ID: 43421

Key: D
FAR.CSO.20170401: FAR.002.001.000
A. Incorrect. No adjustment is necessary for the outstanding checks; they were already deducted
from the general ledger balance when written and recorded. In addition, the $27 difference between the
$258 recorded deposit amount and $285 actual deposit amount must be added to the general ledger
cash balance.
B. Incorrect. No adjustment is necessary for the outstanding checks; they were already deducted
from the general ledger balance when written and recorded.
C. Incorrect. The $27 difference between the $258 recorded deposit amount and $285 actual
deposit amount must be added to the general ledger cash balance.
D. Correct! The unadjusted $32,300 general ledger balance must be adjusted for the following
items:
• Decreased by $15 for the bank service charge
• Decreased by the $120 deposit returned by the bank for insufficient funds
• Increased to correct the $27 error in the $285 actual / $258 recorded deposit amount
These adjustments result in a cash account balance of $32,192. No adjustment is necessary for the
outstanding checks; they were already deducted from the general ledger balance when written and
recorded.
Lecture # 2.01
31
What is the primary objective of financial reporting?

A. To provide economic information that is comprehensible to all users.
B. To provide management with an accurate evaluation of their financial performance.
C. To provide forecasts for future cash flows and financial performance.
D. To provide information that is useful for economic decision making.
Item ID: 43529

Key: D
FAR.CSO.20170401: FAR.001.001.001
A. Incorrect. This is not a primary objective of financial reporting.
B. Incorrect. This is not a primary objective of financial reporting.
C. Incorrect. This is not a primary objective of financial reporting.
D. Correct! The primary objective of financial reporting is to provide information that is useful to
existing and potential investors, lenders, and other stakeholders in making decisions about providing
resources to the entity.
Lecture # 1.01
32
During a reporting period, a computer manufacturing company used raw materials of $50,000, had direct
labor costs of $75,000, and factory overhead of $30,000. Other expenses were for advertising of $5,000,
staff salaries of $10,000, and bad debt of $3,000. The company did not have a beginning balance in any
inventory account. All goods manufactured during the period were sold during the period. What amount
was the company's cost of goods sold during the reporting period?
A. $155,000
B. $160,000
C. $170,000
D. $173,000
Item ID: 43925

Key: A
FAR.CSO.20170401: FAR.002.003.000
A. Correct! Raw materials, direct labor, and factory overhead are all inventoriable costs and
therefore will be included in cost of goods sold for inventory sold during the reporting period. Advertising,
staff salaries, and bad debt are period expenses. They are not included in inventory or cost of goods sold.
B. Incorrect. Advertising is normally a period expense, not an inventoriable cost.
C. Incorrect. Advertising and staff salaries are period expenses.
D. Incorrect. Advertising, staff salaries, and bad debt expense are period expenses. They are not
included in inventory or cost of goods sold.
Lecture # 7.01
33
Which of the following types of assets would typically be reported on a company's balance sheet as an
intangible asset?
A. Derivative securities.
B. Cost of research and development.
C. Leasehold improvements.
D. Cost of patent registrations.
Item ID: 44311

Key: D
FAR.CSO.20170401: FAR.002.006.000
A. Incorrect. Derivative securities would be reported as financial assets on the balance sheet.
B. Incorrect. R&D costs are normally expensed when incurred, not carried as an asset on the
balance sheet. An exception is acquired R&D costs as per ASC 730-10-15-4F, but the answer choice
does not reference this exception.
C. Incorrect. Leasehold improvements are normally presented as part of property, plant & equipment
(PP&E) on the balance sheet.
D. Correct! Patents are typically reported on a company’s balance sheet as intangible assets. Costs
of obtaining and successfully defending patents are capitalized.
Lecture # 9.01
34
Which of the following methods should a company use to account for a contingent liability when the loss
is probable but not reasonably estimated?
A. The liability should not be reported.
B. The liability should be reported as a short-term liability.
C. The liability should be reported as a long-term liability.
D. The liability should only be disclosed in the notes to the financial statements.
Item ID: 45303

Key: D
FAR.CSO.20170401: FAR.003.003.000
A. Incorrect. A probable contingent liability must be reported.
B. Incorrect. A contingent liability that is probable but not reasonably estimable will merely be
disclosed in the notes to the financial statements.
C. Incorrect. A contingent liability that is probable but not reasonably estimable will merely be
disclosed in the notes to the financial statements.
D. Correct! A contingent liability that is probable but not reasonably estimable must be reported in
the financial statements, but only as a note disclosure.
Lecture # 13.02
35
How should unearned rent that has already been paid by tenants for the next eight months of occupancy
be reported in a landlord's financial statements?
A. Current asset.
B. Current liability.
C. Long-term asset.
D. Long-term liability.
Item ID: 45797

Key: B
FAR.CSO.20170401: FAR.002.010.000
A. Incorrect. Rent collected but not yet earned is considered unearned revenue, a liability.
B. Correct! Rent collected but not yet earned is considered unearned revenue, a liability. It is a
current liability in this case because it will be earned within a year.
C. Incorrect. Rent collected but not yet earned is considered unearned revenue, a liability.
D. Incorrect. Rent collected but not yet earned is considered unearned revenue, a liability. It is a
current liability in this case because it will be earned within a year.
Lecture # 13.01
36
Ott Co. purchased a machine at an original cost of $90,000 on January 2, year 1. The estimated useful
life of the machine is 10 years, and the machine has no salvage value. Ott uses the straight-line method
to calculate depreciation. On July 1, year 10, Ott sold the machine for $5,000. What is the amount of gain
or loss on the disposal of the machine?
A. $500 loss.
B. $500 gain.
C. $4,500 loss.
D. $4,500 gain.
Item ID: 46045

Key: B
FAR.CSO.20170401: FAR.002.004.000
A. Incorrect. At the time of sale the 9.5 years of $9,000 in yearly depreciation had reduced the
carrying value by 9.5 * $9,000, or $85,500.
B. Correct! The 9.5 years of $9,000 in yearly depreciation reduced the carrying value by 9.5 *
$9,000, or $85,500. Carrying value at the time of sale was therefore $90,000 - $85,500, or $4,500. With a
$4,500 carrying value at the time of the sale and selling price of $5,000, there is a $500 gain upon
disposal.
C. Incorrect. At the time of sale the 9.5 years of $9,000 in yearly depreciation had reduced the
D. Incorrect. At the time of sale the 9.5 years of $9,000 in yearly depreciation had reduced the
Lecture # 8.09
37
Which of the following is a pair of values that are compared to determine the amount of a possible
impairment loss on an intangible asset, with an indefinite life, other than goodwill?
A. Fair value, present value.
B. Carrying value, book value.
C. Future value, carrying value.
D. Fair value, carrying value.
Item ID: 46569

Key: D
FAR.CSO.20170401: FAR.002.006.000
A. Incorrect. As per ASC 350-30-35-19, fair value and carrying value are compared for the
quantitative impairment test of an intangible asset with an indefinite life.
B. Incorrect. As per ASC 350-30-35-19, fair value and carrying value are compared for the
C. Incorrect. As per ASC 350-30-35-19, fair value and carrying value are compared for the
D. Correct! As per ASC 350-30-35-19, fair value and carrying value are compared for the
Lecture # 9.01
38
A company issued a purchase order on December 15, year 1, for a piece of capital equipment that costs
$100,000. The capital equipment was shipped from the vendor on December 31, year 1, and received by
the company on January 5, year 2. The equipment was installed and placed in service on February 1,
year 2. On what date should the depreciation expense begin?
A. December 15, year 1.
B. December 31, year 1.
C. January 5, year 2.
D. February 1, year 2.
Item ID: 46613

Key: D
FAR.CSO.20170401: FAR.002.004.000
A. Incorrect. Depreciation expense begins the date the asset is placed into service.
B. Incorrect. Depreciation expense begins the date the asset is placed into service.
C. Incorrect. Depreciation expense begins the date the asset is placed into service.
D. Correct! Depreciation expense begins the date the asset is placed into service.
Lecture # 8.01
39
Which of the following statements is correct regarding fair value measurement?

A. Fair value is a market-based measurement.
B. Fair value is an entity-specific measurement.
C. Fair value measurement does not consider risk.
D. Fair value measurement does not consider restrictions.
Item ID: 47475

Key: A
FAR.CSO.20170401: FAR.003.011.000
A. Correct! The preferred Level I and Level II inputs for fair value measurement rely on observable
data from actual market transactions.
B. Incorrect. Financial reporting is more useful for decision making when it is comparable across
different business enterprises, with the same principles being used by different entities.
C. Incorrect. Fair value measurement does consider risk.
D. Incorrect. Fair value measurement does consider restrictions.
Lecture # 1.04
40
On June 1, year 2, Archer, Inc. issued a purchase order to Cotton Co. for a new copier machine. The
machine requires one month to produce and is shipped f.o.b. destination on July 1, year 2, and is
received by Archer on July 15, year 2. Cotton issues a sales invoice dated July 2, year 2, for the machine.
As of what date should Archer record a liability for the machine?
A. June 1, year 2.
B. July 1, year 2.
C. July 2, year 2.
D. July 15, year 2.
Item ID: 47559

Key: D
FAR.CSO.20170401: FAR.002.007.000
A. Incorrect. The liability will only be recorded when the associated asset is recorded.
B. Incorrect. The liability will only be recorded when the associated asset is recorded.
C. Incorrect. The liability will only be recorded when the associated asset is recorded.
D. Correct! With supplier shipping terms of f.o.b. destination, Archer will not record the asset until it
is received, on July 15, year 2. Because the liability will only be recorded when the associated asset is
recorded, July 15, year 2 is also the date Archer will record a liability for the machine.
Lecture # 7.01
41
On January 1, year 1, a company with a calendar year end began developing a software program that it
intends to market and sell to its customers. The software coding was completed on March 31, year 1, at a
cost of $200,000, and the software testing was completed on June 30, year 1, at a cost of $100,000. The
company achieved technological feasibility on July 31, year 1, at which time the company began
producing product masters at a cost of $125,000. What amount should the company report for the total
research and development expense for the year ended December 31, year 1?
A. $100,000
B. $200,000
C. $300,000
D. $425,000
Item ID: 48587

Key: C
FAR.CSO.20170401: FAR.003.009.000
A. Incorrect. All software costs incurred prior to technological feasibility are expensed as research
and development. Costs associated with converting a technologically feasible software product into final
commercial form are capitalized.
B. Incorrect. All software costs incurred prior to technological feasibility are expensed as research
and development.
C. Correct! All software costs incurred prior to technological feasibility are expensed as research
and development. The $300,000 in coding and testing costs incurred prior to technological feasibility
would therefore be expensed as research and development.
D. Incorrect. Only software costs incurred prior to technological feasibility are expensed as research
and development. Costs associated with converting a technologically feasible software product into final
commercial form are capitalized.

Lecture 9.03
42
For purposes of consolidating financial interests, a majority voting interest is deemed to be

A. 50% of the directly or indirectly owned outstanding voting shares of another entity.
B. 50% of the directly or indirectly owned outstanding voting shares and at least 50% of the directly
or indirectly owned outstanding nonvoting shares of another entity.
C. Greater than 50% of the directly or indirectly owned outstanding voting shares of another entity.
D. Greater than 50% of the directly or indirectly owned outstanding voting shares and at least 50%
of the directly or indirectly owned outstanding nonvoting shares of another entity.
Item ID: 49011

Key: C
FAR.CSO.20170401: FAR.001.002.007
A. Incorrect. A majority is greater than 50%.
B. Incorrect. Majority voting interest is determined on the basis of voting shares.
C. Correct! For purposes of consolidating financial interests, a majority voting interest is greater
than 50% of the directly or indirectly owned outstanding voting shares of another entity.
D. Incorrect. Majority voting interest is determined on the basis of voting shares.
Lecture # 31.01
43
Which of the following is the annual report that is filed with the United States Securities and Exchange
Commission?
A. Form 8-K.
B. Form 10-K.
C. Form S-1.
D. Form 10-Q.
Item ID: 49551

Key: B
FAR.CSO.20170401: FAR.001.004.000
A. Incorrect. Form 8-K is the “current report” companies must file with the SEC to announce
significant events shareholders should know about.
B. Correct! Form 10-K is the annual report that is filed with the SEC.
C. Incorrect. Form S-1 is the initial registration statement under the 1933 Act.
D. Incorrect. Form 10-Q is the quarterly report that is filed with the SEC.
Lecture # 17.05
44
A public entity sells steel for use in construction. One of its customers accounts for 43% of sales, and
another customer accounts for 40% of sales. What should the entity disclose in its annual financial
statements about these two customers?
A. The payment terms of accounts receivable due from each of the two customers.
B. The amount of the entity's revenue from each of the two customers.
C. The names of the two customers.
D. The financial condition of the two customers.
Item ID: 50147

Key: B
FAR.CSO.20170401: FAR.001.002.006
A. Incorrect. A different answer choice includes information of more potential relevance to users of
the financial statements.
B. Correct! ASC 275 requires disclosure of any risks and uncertainties associated with the entity’s
• Nature of operations
• Use of estimates
• Certain significant estimates
• Vulnerability associated with certain concentrations
Concentration of 83% of revenue with just two customers would require disclosure. The implementation
guidance in ASC 275-10-55 paragraphs 8 through 10 indicate that details of the two customers, such as
names and financial condition, are not required as part of the disclosure.
C. Incorrect. The vulnerability associated with having an undiversified customer base must be
disclosed. Details of the two major customers are not required as part of this disclosure.
D. Incorrect. The vulnerability associated with having an undiversified customer base must be
disclosed. Details of the two major customers are not required as part of this disclosure.
Lecture # 1.05
45
On December 31, year 1, Andover Co. acquired Barrelman, Inc. Before the acquisition, a product lawsuit
seeking $10 million in damages was filed against Barrelman. As of the acquisition date, Andover believed
that it was probable that a liability existed and that the fair value of the liability was $5 million. What
amount should Andover record as a liability as of December 31, year 1?
A. $0
B. $5,000,000
C. $7,500,000
D. $10,000,000
Item ID: 50303

Key: B
FAR.CSO.20170401: FAR.003.002.000
A. Incorrect. Contingent liabilities that are probable and estimable must be accrued.
B. Correct! Contingent liabilities that are probable and estimable must be accrued. Because
Andover believes the contingency is probable and that its fair value is $5 million, it is accrued and $5
million is the amount of the accrual.
C. Incorrect. Andover estimates the fair value of the liability at $5 million.
D. Incorrect. Andover estimates the fair value of the liability at $5 million.
Lecture # 13.02
46
Which of the following should a company classify as a research and development expense?
A. Periodic design changes to existing products.
B. Routine design of tools, jigs, molds, and dies.
C Redesign of a product prerelease.
D. Legal work on patent applications.
Item ID: 52591

Key: C
FAR.CSO.20170401: FAR.003.008.000
A. Incorrect. Periodic design changes to existing products are directly related to current revenue and
are therefore part of the cost of sales.
B. Incorrect. Routine costs of setting up production for commercially viable products are directly
related to current revenue and are therefore part of the cost of sales.
C. Correct! The term ‘prelease’ indicates the redesign applies to a product that has not yet been
produced. This redesign is therefore a development cost as defined by the ASC Glossary. Development
costs include construction of prototypes and the conceptual formulation, design, and testing of product
alternatives. Such a cost is classified as a research and development expense.
D. Incorrect. Legal work on successful patent applications is capitalized, not classified as research
and development expense. Legal work on unsuccessful patent applications is expensed as legal fees or
unsuccessful patent expense, not R&D expense.
Lecture # 9.01
47
Yellow Co. received a large worker's compensation claim of $90,000 in the third quarter for an injury
occurring in the third quarter. How should Yellow account for the transaction in its interim financial report?
A. Recognize $30,000 for each of the first three quarters.
B. Recognize $90,000 in the third quarter.
C Recognize $22,500 ratably over the four quarters of the year.
D. Disclose the $90,000 in the third quarter and recognize it at year end.
Item ID: 52817

Key: B
FAR.CSO.20170401: FAR.001.002.002
A. Incorrect. The injury occurred in the third quarter.
B. Correct! GAAP requires that expenses be matched to the applicable quarter or quarters.
Because the injury occurred in the third quarter, the entire expense is allocated to the third quarter.
C. Incorrect. The injury occurred in the third quarter.
D. Incorrect. The expense and its cause both occurred in the third quarter and must be recognized in
the third quarter interim financial report.
Lecture # 20.01
48
Palm City uses the modified approach for reporting eligible infrastructure assets. In which of the following
components of its basic financial statements, if any, would Palm report this information?
A. Letter of transmittal.
B. Statement of activities.
C Notes to the financial statements.
D. Not required to report.
Item ID: 53049

Key: C
FAR.CSO.20170401: FAR.004.002.005
A. Incorrect. The letter of transmittal merely introduces the Comprehensive Annual Financial Report
(CAFR).
B. Incorrect. The statement of activities reports revenues and expenses on the full accrual basis.
C. Correct! The notes to a governmental entity’s general purpose financial statements must include
a summary of significant accounting policies such as policies regarding the reporting of infrastructure
assets.
D. Incorrect. Policies regarding the reporting of infrastructure assets are a required disclosure.
Lecture # 29.06
49
When should a conditional pledge to a nongovernmental not-for-profit organization be recognized as

revenue?
A. Immediately.
B. When the cash is received.
C When the pledge conditions are met.
D. At the beginning of the next fiscal period.
Item ID: 53159

Key: C
FAR.CSO.20170401: FAR.003.007.000
A. Incorrect. A conditional pledge should be recognized when the pledge conditions are met.
B. Incorrect. A conditional pledge should be recognized when the pledge conditions are met.
C. Correct! A conditional pledge should be recognized when the pledge conditions are met.
D. Incorrect. A conditional pledge should be recognized when the pledge conditions are met.
Lecture # 30.04 Contributions
50
Within the context of the qualitative characteristics of accounting information, which of the following is a
fundamental qualitative characteristic?
A. Relevance.
B. Timeliness.
C Comparability.
D. Feedback value.
Item ID: 56113

Key: A
FAR.CSO.20170401: FAR.001.001.001
A. Correct! The FASB’s Conceptual Framework, in paragraph QC5 of Statement of Financial

Accounting Concepts 8 (SFAC 8), identifies relevance and faithful representation as the two
fundamental qualitative characteristics of useful financial information.
B. Incorrect. Timeliness is an enhancing qualitative characteristic.
C. Incorrect. Comparability is an enhancing qualitative characteristic.
D. Incorrect. The term feedback value has been superseded by the term confirmatory value in the
FASB’s Conceptual Framework, as per paragraph BC3.15 of Statement of Financial Accounting
Concepts 8 (SFAC 8).
Lecture # 1.01
51
Task 3614_01
52
Task 3614_01
Selection List
Answer Explanation
The best way to approach this problem is to evaluate each line item of the information given, determining
how each should be accounted for. When all items have been evaluated, the information can be
summarized, combining all amounts for each item to provide amounts for the journal entry. Amounts to
offset each receipt or expenditure will be to cash.
• When bonds are issued at face value, the proceeds are equal to the principal amount, $1,000,000
in this case, recorded with a debit to cash and a credit to bonds payable for $1,000,000.
• The $500,000 paid to purchase the land will be debited to land and credited to cash.
• The $700,000 incurred to construct the building will be recorded to the building account.
• Accrued property taxes represent amounts owed by the seller for periods prior tro the date of
sale. Since it is for a prior period, it is not recognized as propertytax expense and the $6,000 is,
instead, added to the cost of the land.
• The building permit is considered a cost that is directly associated with the construction and the
$7,000 is considered a building cost.
53
• A building that is demolished before construction of another building on that land is considered a
cost of preparing the land for its intended use and the $54,000 cost incurred is recognized as part
of the cost of the land.
• Amounts paid to settle a loan on land being purchased is considered part of the purchase price
and the $25,000 is considered part of the cost of the land.
• While the cost to demolish a building tgat exists on land that will be used for another purpose is
added to the cost of the land, ny proceeds from the sale of those buildings or parts and materials
from them, such as the $40,000 received for materials salvaged , reduces the amount reported as
land.
• The purchase of factory equipment for $51,000 will ber recorded as equipment.
• Insurance premiums incurred to protect purchased equipment while it is in transit is considered a
cost of getting the asset, the equipment, ready for its intended use. As a result, the $5,000 paid
for insurance will be added to the cdost of the equipment.
• A $12,000 premium on a property insurance policy that goes into effect on July 1, of year 1
represents the prepayment of an expense that will be incurred over the first year of operations
and will be recorded as prepaid expense.
• Office furniture and fixtures acquired for $100,000 will be recorded in office furniture.
• The $13,000 cost of installing the office furniture and fixtures is a cost incurred in getting the
assets ready for their intended uses and will be capitalized, recorded in office furniture.
• The cost of maintaining the equipment is an expense and the $2,000 paid in advance for a
maintenance contract related to a future period is a prepaid expense.
As a result, the following items will be recorded with a debit or credit to cash in the amount required to
balance the entry:
Bonds payable (Credit) $1,000,000
Land - $500,000 + 6,000 + 54,000 + 25,000 – 40,000 (Debit) $545,000
Building - $700,000 + 7,000 (Debit) $707,000
Equipment – $51,000 + 5,000 (Debit) $56,000
Prepaid expenses - $12,000 + 2,000 (Debit) $14,000
Office furniture - $100,000 + 13,000 (Debit) $113,000
Cash - $1,000,000 – 520,000 – 732,000 – 56,000 – 14,000 – 113,000 (Credit) $435,000
54
Task 619_01
2,200
55
Task 619_01
Selection List – Column B Selection List – Column D
1. 100 shares of ABC Co. – these shares will be classified as trading securities because Adell
Corp. has definite plans to sell them in the near term, no more than 30 days after the balance
sheet date. Accordingly they will be measured at fair value on the balance sheet date, at their
market value of $22 per share on 100 shares, for $2,200 total. They are a current asset because
all trading securities are current assets. Editors’ Note: The AICPA had a response of $220 as
correct when this question was disclosed, but we believe this to be a typographical error.
2. Bond sinking fund – this $525,000 amount will be classified as restricted cash because the
bond agreement requires that money be set aside for a sinking fund for repayment of the bond
principal. It is a noncurrent asset because the bond is payable in five years.
3. Government bond – this $100,000 amount will be classified as Held-to-maturity because that
intent is clear from the description that the cash at maturity will be used for expansion. It is a
noncurrent asset because the bond matures in two years.
56
4. 1,000 shares of equity securities – These shares will be classified as Available-for-sale

because management has no definite near term plans to sell them. Because available-for-sale
securities must be held at fair value on the balance sheet, their amount at December 31, year 1 is
$75,000, which reflects their fair value of $75 per share on 1,000 shares. They are a noncurrent
asset because management does not expect to sell them in the near future. ‘Near future’ in this
context generally means within one year of the balance sheet date.
Discussion: ASC 320-10-25-1 gives judgment-based classification criteria for classifying securities as
trading, available-for-sale, and held-to-maturity.
Only securities acquired with the intent to resell within hours or days are required to be classified as
trading. However, the entity may still classify securities as trading based on intent. Clearly in this situation
the entity has definite plans to sell the ABC Co. shares within one year, so it is reasonable to conclude
they will be classified as trading, which is the official AICPA-released answer.
The classification of available-for-sale securities is defined by negation: ASC 320-10-25-1 states that
securities which are neither trading nor held-to-maturity shall be classified as available-for-sale. The
1,000 shares of equity securities fall into this category. Only debt securities can be classified as held-to-
maturity. Management has no definite plans to sell them in the near term, so there is no clear indication
that trading is the appropriate classification. Therefore it is reasonable to conclude they will be classified
as available-for-sale, which is the official AICPA-released answer.
57
Task 4547_01_Research
58

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AICPA Released Questions from the

2016 Uniform CPA Exam

FINANCIAL ACCOUNTING & REPORTING

2017 AICPA Released Financial Accounting & Reporting Questions

MULTIPLE CHOICE - DIFFICULT

Item ID: 41573

Interest payable (decrease) $10,000

Bloom’s skill level: Application

What amount should Delar report as inventory at year end?

Item ID: 43375

Bloom’s skill level: Application

Item ID: 43773

Bloom’s skill level: Remembering & Understanding

Item ID: 43977

Bloom’s skill level: Application

Item ID: 43985

Bloom’s skill level: Remembering & Understanding

What is the appropriate characterization of the net assets of a nongovernmental not-for-profit

Item ID: 44067

A. Correct! Residual interest is the appropriate characterization of the net assets of a

Bloom’s skill level: Remembering & Understanding

A nongovernmental, not-for-profit organization had the following investments:

Item ID: 44487

A. Correct! A nongovernmental not-for-profit organization is required by ASC 954-320-35-1 to

C. Incorrect. A nongovernmental not-for-profit organization is required by ASC 954-320-35-1 to

D. Incorrect. A nongovernmental not-for-profit organization is required by ASC 954-320-35-1 to

Bloom’s skill level: Application

Item ID: 44765

A. Correct! Interest payable at December 31 will consist of

C. Incorrect. No interest is payable on the noninterest bearing note, so no interest payable is

D. Incorrect. No interest is payable on the noninterest bearing note, so no interest payable is

Bloom’s skill level: Application

Item ID: 45199

Bloom’s skill level: Remembering & Understanding

Item ID: 45199

Bloom’s skill level: Application

Item ID: 46507

Bloom’s skill level: Application

Item ID: 47053

Bloom’s skill level: Application

Item ID: 47129

A. Incorrect. Quoted prices in active markets are Level 1 inputs.

Bloom’s skill level: Remembering & Understanding

Item ID: 47981

Bloom’s skill level: Remembering & Understanding

Item ID: 48189

Bloom’s skill level: Application

Item ID: 48231

Bloom’s skill level: Application

Item ID: 48319

Item ID: 48495

Bloom’s skill level: Application

Item ID: 50581

Bloom’s skill level: Application

Item ID: 51105

Bloom’s skill level: Remembering & Understanding

Item ID: 51773

Bloom’s skill level: Remembering & Understanding