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Question 1Financial Accounting and Reporting

Under IFRS 15 and ASC 606, revenue from a contract with a customer is recognized when:

  1. the contract is signed and approved by both parties
  2. cash is received from the customer under the contract
  3. an invoice is issued for the goods or services delivered
  4. control of a promised good or service transfers to the customer Correct answer.

Explanation

The core principle is that revenue is recognized when a performance obligation is satisfied, which occurs when control of the promised good or service transfers to the customer. Receipt of cash, contract signing, and invoicing are not, by themselves, indicators that control has transferred.

Question 2Financial Accounting and Reporting

During a period of rising prices and stable inventory quantities, ending inventory will be reported at the highest amount under which cost flow assumption?

  1. Weighted average
  2. FIFO Correct answer.
  3. LIFO
  4. Specific identification

Explanation

FIFO assigns the most recent, higher costs to cost of goods sold and leaves the older, lower costs in ending inventory. LIFO does the opposite, producing a lower ending inventory in a period of rising prices. Weighted average produces an amount between the two.

Question 3Financial Accounting and Reporting

Equipment costing $100,000 has an estimated residual value of $10,000 and a five-year useful life. Using straight-line depreciation, what is the annual depreciation expense?

  1. $16,000
  2. $20,000
  3. $18,000 Correct answer.
  4. $22,500

Explanation

Straight-line depreciation equals the depreciable base divided by the useful life. The depreciable base is cost minus residual value, or $90,000, divided by five years, giving $18,000 per year.

Question 4Financial Accounting and Reporting

Bonds are issued at a discount when:

  1. the bonds are issued between interest payment dates
  2. the stated rate of interest is higher than the market rate
  3. the stated rate of interest is lower than the market rate Correct answer.
  4. the stated rate of interest is equal to the market rate

Explanation

Investors pay less than face amount when the bond's stated coupon rate is below the market rate required for similar risk. The discount raises the effective yield to the market rate. A stated rate above the market rate produces a premium.

Question 5Financial Accounting and Reporting

In a bank reconciliation, deposits in transit are:

  1. added to the book balance
  2. deducted from the book balance
  3. deducted from the bank statement balance
  4. added to the bank statement balance Correct answer.

Explanation

Deposits in transit have been recorded by the company but have not yet been recorded by the bank. They are therefore added to the bank statement balance to arrive at the adjusted bank balance. They require no adjustment to the book balance.

Question 6Financial Accounting and Reporting

When an uncollectible account is written off under the allowance method, what is the effect on net accounts receivable?

  1. It decreases total assets.
  2. It has no effect on net accounts receivable. Correct answer.
  3. It decreases net accounts receivable.
  4. It increases net accounts receivable.

Explanation

A write-off reduces both gross accounts receivable and the allowance for doubtful accounts by the same amount. Because net accounts receivable is the difference between those two balances, the net amount is unchanged. Total assets are also unchanged.

Question 7Financial Accounting and Reporting

A company purchases its own shares in the open market and holds them as treasury stock. What is the effect of the purchase on total stockholders' equity?

  1. It increases total stockholders' equity.
  2. It increases the number of shares outstanding.
  3. It decreases total stockholders' equity. Correct answer.
  4. It has no effect on total stockholders' equity.

Explanation

Treasury stock is a contra-equity account, so the cost of repurchased shares reduces total stockholders' equity. The shares are no longer outstanding, so the number of shares outstanding decreases.

Question 8Financial Accounting and Reporting

How is goodwill accounted for after a business combination?

  1. It is amortized over a period not exceeding 40 years.
  2. It is amortized over its estimated useful life.
  3. It is not amortized but is tested for impairment at least annually. Correct answer.
  4. It is written off immediately against retained earnings.

Explanation

Goodwill has an indefinite useful life and is not amortized. Instead, it is tested for impairment at least annually, or more frequently when events indicate possible impairment.

Question 9Financial Accounting and Reporting

A contract contains multiple distinct performance obligations. The transaction price is generally allocated among them based on:

  1. the fair value of the entity's shares at contract inception
  2. the cost incurred to fulfill each performance obligation
  3. the order in which the performance obligations are satisfied
  4. relative standalone selling prices of each performance obligation Correct answer.

Explanation

The transaction price is allocated to each performance obligation in proportion to its standalone selling price. This reflects the amount the entity expects to be entitled to for transferring each promised good or service. The timing of satisfaction and the entity's cost are not the allocation basis.

Question 10Financial Accounting and Reporting

At the commencement date of a finance lease, the lessee initially measures the lease liability at:

  1. the fair value of the underlying asset at the commencement date
  2. the total undiscounted lease payments over the lease term
  3. the present value of the lease payments over the lease term Correct answer.
  4. the carrying amount of the asset as recorded by the lessor

Explanation

The lease liability is measured at the present value of the lease payments that are not paid at the commencement date, discounted using the rate implicit in the lease or the lessee's incremental borrowing rate. An equal right-of-use asset is recognized, adjusted for initial direct costs and prepayments.

Question 11Financial Accounting and Reporting

Under the effective interest method, interest expense on a bond payable is calculated as:

  1. carrying amount multiplied by the market rate at issuance Correct answer.
  2. face amount multiplied by the stated rate
  3. carrying amount multiplied by the stated rate
  4. face amount multiplied by the market rate at issuance

Explanation

The effective interest method applies the market rate at issuance to the bond's carrying amount to determine interest expense. The difference between that expense and the cash coupon payment amortizes the premium or discount. Cash interest paid equals face amount times the stated rate.

Question 12Financial Accounting and Reporting

Accelerated depreciation deducted for tax purposes in excess of book depreciation creates:

  1. a deferred tax asset, because the difference will reverse in future periods
  2. a deferred tax asset, because taxable income is higher than pretax income
  3. a permanent difference that does not create a deferred tax amount
  4. a deferred tax liability, because taxable income is lower than pretax income Correct answer.

Explanation

Accelerated tax depreciation lowers taxable income now and will produce higher taxable income later when book depreciation exceeds tax depreciation. That taxable temporary difference creates a deferred tax liability. Deferred tax assets arise from deductible temporary differences.

Question 13Financial Accounting and Reporting

A company reports net income of $500,000, preferred dividends of $50,000, and weighted-average common shares of 100,000. What is basic earnings per share?

  1. $5.00
  2. $4.50 Correct answer.
  3. $5.50
  4. $4.00

Explanation

Basic EPS equals income available to common shareholders divided by weighted-average common shares. Income available to common shareholders is $500,000 minus $50,000 of preferred dividends, or $450,000, divided by 100,000 shares, giving $4.50.

Question 14Financial Accounting and Reporting

Under the indirect method of preparing the statement of cash flows, an increase in accounts receivable is:

  1. added to cash collections
  2. subtracted from net income Correct answer.
  3. added to net income
  4. reported as an investing cash outflow

Explanation

An increase in accounts receivable means revenue recognized exceeded cash collected, so it is subtracted from net income to convert accrual income to cash flow. A decrease would be added. Changes in receivables affect operating activities, not investing activities.

Question 15Financial Accounting and Reporting

Inventory costing $100 has an estimated selling price of $120 and estimated costs to complete and sell of $25. Under lower of cost and net realizable value, what is the amount of the write-down?

  1. $25
  2. $5 Correct answer.
  3. $0
  4. $20

Explanation

Net realizable value is the estimated selling price of $120 less the $25 of costs to complete and sell, or $95. Because cost of $100 exceeds net realizable value of $95, the inventory is written down by $5.

Question 16Financial Accounting and Reporting

Interest incurred on funds borrowed specifically to finance the construction of a qualifying asset is:

  1. capitalized as part of the cost of the asset Correct answer.
  2. recognized as a deferred charge and amortized
  3. expensed as incurred
  4. charged directly against retained earnings

Explanation

Borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset are capitalized as part of the asset's cost. Capitalization stops when the asset is substantially ready for its intended use or sale. Other borrowing costs are expensed.

Question 17Financial Accounting and Reporting

A lawsuit against a company is both probable to result in a loss and reasonably estimable. How should the company account for the contingency?

  1. Disclose the contingency only in the notes.
  2. Accrue the estimated loss in the current period. Correct answer.
  3. Record a receivable for the expected insurance recovery.
  4. Defer recognition until the case is settled.

Explanation

A loss contingency that is probable and can be reasonably estimated is accrued by a charge to income and a liability. Disclosure alone is used when a loss is reasonably possible but not probable. An expected insurance recovery is recognized separately only when it is virtually certain.

Question 18Financial Accounting and Reporting

A company changes the estimated useful lives of its machinery. How should this change be accounted for?

  1. A change in accounting estimate applied prospectively. Correct answer.
  2. A change in accounting principle applied retrospectively.
  3. A change in reporting entity applied retrospectively.
  4. A correction of a prior-period error.

Explanation

A change in estimated useful life is a change in accounting estimate, which is applied prospectively. Prior-period financial statements are not restated, and the effect is recognized over current and future periods.

Question 19Financial Accounting and Reporting

A parent owns 80% of a subsidiary that reports net income of $100,000. What amount of the subsidiary's income is attributed to noncontrolling interest?

  1. $100,000
  2. $0
  3. $20,000 Correct answer.
  4. $80,000

Explanation

Noncontrolling interest is attributed its proportionate share of the subsidiary's income. The 20% interest not owned by the parent receives 20% of $100,000, or $20,000. The parent's consolidated income includes the remaining $80,000.

Question 20Financial Accounting and Reporting

A company has a payable denominated in a foreign currency, and the foreign currency appreciates against the company's functional currency before settlement. What is the effect?

  1. no gain or loss, because the payable is recorded at historical cost
  2. a deferred foreign exchange gain
  3. a foreign currency transaction gain
  4. a foreign currency transaction loss Correct answer.

Explanation

Appreciation of the foreign currency increases the amount of functional currency needed to settle the payable. That increase is recognized as a foreign currency transaction loss in income. Foreign currency monetary balances are remeasured at the current rate.

Question 21Financial Accounting and Reporting

A defined benefit plan reports service cost of $100,000, interest cost of $60,000, expected return on plan assets of $70,000, and amortization of prior service cost of $10,000. What is pension expense?

  1. $240,000
  2. $90,000
  3. $100,000 Correct answer.
  4. $170,000

Explanation

Pension expense includes service cost, interest cost, and amortization of prior service cost, less the expected return on plan assets. The computation is $100,000 + $60,000 + $10,000 - $70,000 = $100,000.

Question 22Financial Accounting and Reporting

A company has a taxable temporary difference of $100,000 and a deferred tax liability of $40,000 recorded at the 40% enacted rate. A new law lowers the enacted rate to 30%. What adjustment is required?

  1. Increase the deferred tax liability by $10,000.
  2. Reduce the deferred tax liability by $10,000. Correct answer.
  3. Reduce the deferred tax liability by $40,000.
  4. No adjustment is required until the temporary difference reverses.

Explanation

Deferred tax balances are measured using the enacted rates expected to apply when the temporary difference reverses. At 30%, the liability becomes $30,000, so the recorded $40,000 liability is reduced by $10,000. The adjustment is recognized in income from continuing operations.

Question 23Financial Accounting and Reporting

A company has net income of $1,000,000 and 200,000 weighted-average common shares. It also has 20,000 options outstanding with an exercise price of $30 when the average market price is $40. Using the treasury stock method, what is diluted earnings per share?

  1. $4.55
  2. $5.00
  3. $4.76
  4. $4.88 Correct answer.

Explanation

The treasury stock method assumes option proceeds are used to repurchase shares at the average market price. Incremental shares are 20,000 less 15,000 shares repurchased ($600,000 proceeds divided by $40), or 5,000 shares. Diluted EPS is $1,000,000 divided by 205,000 shares, or approximately $4.88.

Question 24Financial Accounting and Reporting

A contract modification adds a distinct good at a price that reflects its standalone selling price. How should the modification be accounted for?

  1. A termination of the original contract and creation of a new one at the original prices.
  2. A change in accounting estimate applied prospectively to future periods.
  3. A separate contract accounted for prospectively. Correct answer.
  4. A cumulative catch-up adjustment to revenue.

Explanation

When a modification adds a distinct good or service and the price increases by an amount reflecting its standalone selling price, the modification is treated as a separate contract. The original contract continues unchanged. Other modifications are accounted for as termination and creation of a new contract or as a cumulative catch-up.

Question 25Financial Accounting and Reporting

A parent acquires 80% of a subsidiary for $1,000,000. The fair value of the subsidiary's identifiable net assets is $800,000, and the noncontrolling interest is measured at its fair value of $200,000. What amount of goodwill is recognized under the full goodwill method?

  1. $360,000
  2. $200,000
  3. $400,000 Correct answer.
  4. $800,000

Explanation

Under the full goodwill method, goodwill equals the fair value of the whole business less the fair value of identifiable net assets. The whole business is $1,000,000 plus the $200,000 noncontrolling interest, or $1,200,000, less $800,000, giving $400,000.

Question 26Financial Accounting and Reporting

Which item is classified as a cash equivalent?

  1. A customer loan receivable due in 18 months
  2. A five-year government bond held to maturity
  3. Ordinary shares of a listed entity held for trading
  4. A Treasury bill maturing in 60 days Correct answer.

Explanation

Cash equivalents are short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value. A Treasury bill maturing in 60 days normally meets this definition.

Question 27Financial Accounting and Reporting

A deposit made by the entity has been recorded in its cash book but does not yet appear on the bank statement. In the bank reconciliation, the deposit is:

  1. added to the bank statement balance Correct answer.
  2. deducted from the book cash balance
  3. deducted from the bank statement balance
  4. added to the book cash balance

Explanation

A deposit in transit is already recorded by the entity but not yet by the bank, so it is added to the bank statement balance to arrive at the correct cash balance.

Question 28Financial Accounting and Reporting

Goods held by a dealer on consignment from a manufacturer should be included in the inventory of:

  1. the dealer, because it has physical possession
  2. the manufacturer, because it retains the risks and rewards Correct answer.
  3. the customer, once the goods are sold
  4. neither party until the dealer sells the goods

Explanation

The consignor retains control and the significant risks and rewards of ownership, so consigned goods remain in the consignor's inventory despite physical possession by the consignee.

Question 29Financial Accounting and Reporting

Under IFRS, costs incurred in the research phase of an internally generated intangible asset are:

  1. expensed as incurred Correct answer.
  2. capitalized if technical feasibility has been demonstrated
  3. deferred until commercial production begins
  4. capitalized and amortized over the expected useful life

Explanation

Research-phase costs are expensed because the entity cannot demonstrate probable future economic benefits at that stage; capitalization begins only in the development phase when specified criteria are met.

Question 30Financial Accounting and Reporting

An entity uses the fair value model for an investment property. An increase in fair value above carrying amount is recognized as:

  1. a gain in profit or loss Correct answer.
  2. a deferred credit amortized over the property's life
  3. a direct increase in retained earnings
  4. a gain in other comprehensive income

Explanation

Under the fair value model, changes in the fair value of investment property are recognized in profit or loss in the period they arise.

Question 31Financial Accounting and Reporting

Dividends paid to shareholders are classified in the statement of cash flows as:

  1. financing activities Correct answer.
  2. operating activities
  3. investing activities
  4. a non-cash disclosure only

Explanation

Distributions to owners are financing activities because they relate to the entity's equity financing structure.

Question 32Financial Accounting and Reporting

A contingent asset is probable and can be measured reliably. How should it be treated in the financial statements?

  1. not recognized but disclosed Correct answer.
  2. ignored entirely until cash is received
  3. recognized as an asset and income
  4. recognized if management expects receipt

Explanation

Contingent assets are not recognized because recognition could result in income that may never be realized; if an inflow is probable, the asset is disclosed.

Question 33Financial Accounting and Reporting

Costs directly attributable to issuing new ordinary shares are accounted for as:

  1. an intangible asset
  2. a deduction from the equity proceeds Correct answer.
  3. a deferred charge amortized over time
  4. an expense in profit or loss

Explanation

Incremental costs directly attributable to an equity transaction are deducted from equity, reducing the proceeds of the share issue.

Question 34Financial Accounting and Reporting

An entity estimates bad debt expense at 2% of credit sales. Credit sales are $800,000, and the allowance account has a $5,000 credit balance before adjustment. What is bad debt expense?

  1. $11,000
  2. $21,000
  3. $16,000 Correct answer.
  4. $5,000

Explanation

Under the percentage-of-credit-sales method, bad debt expense is the estimated percentage of credit sales; the existing allowance balance is not added or subtracted when determining the expense.

Question 35Financial Accounting and Reporting

An entity has beginning inventory of 100 units at $10, purchases 200 units at $13, and sells 150 units. Under the periodic weighted-average method, ending inventory is:

  1. $1,950
  2. $2,100
  3. $1,800 Correct answer.
  4. $1,500

Explanation

Total cost is $1,000 + $2,600 = $3,600 for 300 units, giving a weighted-average cost of $12; ending inventory of 150 units is therefore $1,800.

Question 36Financial Accounting and Reporting

Which subsequent expenditure on machinery is capitalized?

  1. Replacement of a small worn part with no increase in capacity
  2. Routine lubrication of moving parts
  3. Repainting of the factory walls
  4. A major overhaul that extends the machine's useful life Correct answer.

Explanation

Subsequent expenditure is capitalized when it is probable that future economic benefits beyond the originally assessed standard of performance will flow to the entity; a major overhaul extending useful life meets this criterion.

Question 37Financial Accounting and Reporting

Equipment has a carrying amount of $500,000. Its fair value less costs of disposal is $430,000, and its value in use is $450,000. What is the impairment loss?

  1. $50,000 Correct answer.
  2. $0
  3. $20,000
  4. $70,000

Explanation

Recoverable amount is the higher of fair value less costs of disposal and value in use, so it is $450,000; the impairment loss is $500,000 - $450,000 = $50,000.

Question 38Financial Accounting and Reporting

An investor owns 30% of an investee and applies the equity method. The investee reports profit of $200,000 and pays dividends of $50,000. What is the net effect on the investment carrying amount?

  1. Decrease of $15,000
  2. Increase of $60,000
  3. Increase of $45,000 Correct answer.
  4. No effect

Explanation

The investor increases the investment by 30% of the investee's profit ($60,000) and decreases it by 30% of dividends received ($15,000), for a net increase of $45,000.

Question 39Financial Accounting and Reporting

A lessee leases equipment for three years with annual rent of $100,000 in year 1 and $130,000 in years 2 and 3. What is the lease expense in year 1 under straight-line recognition?

  1. $120,000 Correct answer.
  2. $130,000
  3. $100,000
  4. $110,000

Explanation

Total rent over the lease term is $360,000, so straight-line annual expense is $120,000; the timing of cash payments does not change the recognized expense.

Question 40Financial Accounting and Reporting

An entity grants 10,000 share options to employees. The options vest after three years, and their fair value at grant date is $6 per option. What expense is recognized in year 1?

  1. $6,000
  2. $60,000
  3. $0
  4. $20,000 Correct answer.

Explanation

The total grant-date fair value is $60,000 and is recognized over the three-year vesting period, giving $20,000 of expense in year 1.

Question 41Financial Accounting and Reporting

An entity had 100,000 ordinary shares outstanding all year. On July 1 it issued a 2-for-1 stock split. What is the weighted-average number of shares for EPS?

  1. 150,000
  2. 100,000
  3. 200,000 Correct answer.
  4. 125,000

Explanation

A stock split changes the number of shares without changing resources, so it is applied retroactively; the 100,000 shares become 200,000 for the entire year.

Question 42Financial Accounting and Reporting

An entity has a receivable of 10,000 foreign currency units. The exchange rate was 5.0 when the receivable arose and is 5.2 at year-end. What is the effect at year-end?

  1. No effect until the receivable is collected
  2. Foreign exchange gain of 200
  3. Foreign exchange loss of 2,000
  4. Foreign exchange gain of 2,000 Correct answer.

Explanation

The receivable is remeasured at the closing rate, increasing from 50,000 to 52,000; the 2,000 increase is a foreign exchange gain.

Question 43Financial Accounting and Reporting

Which item creates a permanent difference between accounting profit and taxable profit?

  1. A warranty provision accrued for accounting but deducted for tax when paid
  2. A fine for breach of law that is not deductible for tax Correct answer.
  3. Revenue received in advance that is taxed when received
  4. Depreciation deducted for tax before accounting depreciation

Explanation

A non-deductible fine never affects taxable profit in any period, so it creates a permanent difference and no deferred tax.

Question 44Financial Accounting and Reporting

An entity receives a $100,000 government grant for equipment costing $500,000 with a five-year useful life. Under the deferred income approach, grant income in year 1 is:

  1. $20,000 Correct answer.
  2. $100,000
  3. $50,000
  4. $0

Explanation

The grant is recognized as deferred income and amortized to profit or loss over the asset's five-year useful life, giving $20,000 per year.

Question 45Financial Accounting and Reporting

A non-current asset classified as held for sale is measured at:

  1. lower of carrying amount and fair value less costs to sell Correct answer.
  2. value in use based on discounted expected future cash flows
  3. fair value determined using the market approach
  4. cost less accumulated depreciation and any impairment loss

Explanation

Assets held for sale are measured at the lower of carrying amount and fair value less costs to sell, and depreciation ceases while they are so classified.

Question 46Financial Accounting and Reporting

The results of a discontinued operation are presented in the statement of profit or loss as:

  1. part of operating expenses within continuing operations
  2. a single post-tax amount, shown separately Correct answer.
  3. a direct adjustment to retained earnings at year-end
  4. an item of other comprehensive income net of tax

Explanation

A discontinued operation is presented separately as a single amount comprising the post-tax profit or loss of the discontinued operation and the post-tax gain or loss on disposal.

Question 47Financial Accounting and Reporting

A parent sells inventory costing $60,000 to its subsidiary for $100,000. At year-end the subsidiary still holds all the inventory. In consolidation, inventory should be reduced by:

  1. $0
  2. $100,000
  3. $60,000
  4. $40,000 Correct answer.

Explanation

The $40,000 unrealized profit included in the subsidiary's closing inventory must be eliminated, reducing consolidated inventory and consolidated profit.

Question 48Financial Accounting and Reporting

A lawsuit existed at the reporting date. Before the financial statements are issued, a court judgment confirms the amount the entity must pay. This event is:

  1. a non-adjusting event requiring only disclosure
  2. recognized as a change in accounting policy
  3. ignored because it occurred after the reporting period
  4. an adjusting event requiring recognition of a liability Correct answer.

Explanation

The judgment provides evidence of a condition that existed at the reporting date, so it is an adjusting event and the liability is recognized in the current financial statements.

Question 49Financial Accounting and Reporting

An entity factors receivables without recourse and surrenders control of the receivables. How should the transfer be accounted for?

  1. as a sale with the receivables derecognized Correct answer.
  2. as an equity transaction
  3. as a secured borrowing with the receivables retained
  4. as a sale only when the customer pays

Explanation

When the transferor surrenders control of the receivables, the transaction is accounted for as a sale and the receivables are removed from the statement of financial position.

Question 50Financial Accounting and Reporting

An entity reports net income of $600,000 and 200,000 ordinary shares outstanding all year. It also has 1,000 convertible bonds with face value $1,000, a 6% coupon, each convertible into 20 ordinary shares. The tax rate is 25%. What is diluted EPS?

  1. $2.25
  2. $2.75
  3. $2.93 Correct answer.
  4. $3.00

Explanation

The bonds add $60,000 of interest; after tax this is $45,000, so adjusted income is $645,000. Conversion adds 20,000 shares, giving 220,000 shares and diluted EPS of $2.93.