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Practice Test 8 - CPA Financial Accounting & Reporting (FAR)

20 questions. Answer them in any order, then submit to see your score and every explanation.

  1. How should the company account for this event in its Year 1 financial statements?
  2. A local government is preparing the statement of net position for its proprietary funds under GASB standards. One enterprise fund has a $3.0 million long-term note payable due in 8 years and a related $0.3 million principal payment due within the next fiscal year; the fund expects to pay the $0.3 million from existing current assets. Which factor affects the classification of liabilities in the proprietary fund?
  3. A for-profit medical supplies wholesaler reporting under U.S. GAAP (ASC 326) identifies internal control weaknesses in its receivables process, including delayed posting of customer payments and lack of timely review of past-due accounts. At year-end, the company reassesses collectability and concludes the allowance for credit losses should be increased by $22,000. What is the correct journal entry for adjusting the allowance for credit losses?
  4. A for-profit equipment leasing company updated its estimate of an asset's residual (salvage) value due to observable changes in secondary market prices for similar equipment. The company continues to apply the same depreciation method but revised the salvage value estimate in accordance with FASB ASC 250-10-45 and ASC 360-10. How does the change in estimate affect the income statement?
  5. Under the FASB Conceptual Framework, which of the following is an implicit assumption about the unit of measure in financial statements?
  6. A local government issued $25,000,000 of general obligation bonds to finance construction of a new public safety building, and it is legally required that the bond proceeds be used only for this construction project. Under GASB standards, which fund should be used to account for the receipt and expenditure of these bond proceeds during construction?
  7. At which point should the company begin capitalizing the direct costs of materials and services and the payroll costs for employees working on the project?
  8. A public, for-profit corporation (Granite Corp.) has a loan covenant that restricts cash dividends unless retained earnings exceed $500,000. At year-end, Granite's retained earnings are $650,000, but management's board approves an appropriation of $200,000 of retained earnings for plant expansion, disclosed in the statement of changes in equity. Under FASB ASC 505, what is the effect of the appropriation on Granite's total retained earnings and its ability to pay dividends (ignoring any other covenant terms)?
  9. A company experiences a material inventory write-down due to obsolescence. According to U.S. GAAP, which of the following is a required disclosure related to this event?
  10. Fines and penalties paid to the government for violation of a law are deducted for book purposes but are nondeductible for tax purposes. How are these classified under ASC 740?
  11. A for-profit wholesale distributor reporting under U.S. GAAP (ASC 326) has $800,000 of trade accounts receivable at year-end. Management expects lifetime credit losses and has segmented the portfolio by customer type; for one segment, it applies a loss-rate method based on historical losses adjusted for current conditions and reasonable and supportable forecasts. Which method best estimates the allowance for credit losses under U.S. GAAP for these trade receivables?
  12. A corporation is liquidating and distributes assets to stockholders. Which of the following correctly states the priority order of claims?
  13. Based on the following information, what impairment loss should Central Industries recognize for this facility? Carrying amounts: Land $200,000, Building $600,000, Equipment $400,000. Estimated undiscounted future cash flows: $950,000. Fair value of entire facility: $850,000. Individual fair values: Land $180,000, Building $500,000, Equipment $250,000.
  14. Meridian Corporation has outstanding debt that includes financial covenants requiring maintenance of specific financial ratios. As of December 31, 2024, the company is in compliance with all debt covenants, but management's projections indicate a high probability of covenant violation within the next twelve months. The debt agreement provides a cure period of 90 days after any covenant breach, during which the company can remedy the violation. If not cured within 90 days, the lender has the right to accelerate the entire debt balance of $15 million. What disclosure is required in Meridian's December 31, 2024 financial statements?
  15. What type of fund should the City of Millbrook use to account for these state gasoline tax distributions?
  16. What adjusting entry should Vortex record to reconcile the perpetual inventory records to the physical count results?
  17. According to U.S. GAAP, what is the carrying value of this inventory item on the December 31, Year 1 balance sheet?
  18. Which of the following financial statements are required for a defined benefit pension plan?
  19. TechStart Inc. received a $500,000 government grant on January 1, 2023, to develop environmentally friendly technology. The grant agreement requires the company to: (1) hire at least 10 new employees by June 30, 2023, (2) spend at least $400,000 on qualifying research activities by December 31, 2024, and (3) maintain operations in the designated economic development zone for 3 years. Failure to meet any condition requires full repayment. By December 31, 2023, TechStart hired 12 employees and spent $250,000 on qualifying research. What amount should TechStart recognize as grant income in 2023?
  20. A company experiences a material inventory write-down due to obsolescence. According to U.S. GAAP, which of the following is a required disclosure related to this event?

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