Accounts Payable And Accrued Liabilities - CPA Far

1. A for-profit entity has a long-term supply contract that requires it to purchase a minimum quantity each year. As of December 31, 20X5, the entity has not met the minimum, but the supplier has not billed any penalty and management believes it is likely the supplier will enforce the penalty of $120,000 based on past practice; the amount is reasonably estimable. Under FASB ASC 450 (Contingencies) and ASC 405, what is the most appropriate treatment at December 31, 20X5?
   Answer: Accrue a liability and expense of $120,000 because the loss is probable and reasonably estimable. This question tests the accounting for contractual penalty obligations. The key facts are that the entity has not met minimum purchase requirements, management believes the $120,000 penalty is likely to be enforced based on past practice, and the amount is reasonably estimable. Under FASB ASC 450, a loss contingency must be accrued when it is both probable and reasonably estimable. Since management believes enforcement is likely (probable) and the $120,000 amount is known, the entity must accrue a liability and expense of $120,000 (Answer A). Answer B incorrectly requires an invoice before accrual. Answer C incorrectly suggests no disclosure for a probable loss. Answer D incorrectly applies cash basis accounting to a probable obligation. The decision rule is that contractual penalties must be accrued when it becomes probable they will be incurred and the amount can be reasonably estimated.
2. What amount should Mountain View record as a restructuring liability at December 31, 2024?
   Answer: $405,000 Under GAAP, restructuring liabilities include costs directly associated with the restructuring that will not benefit future operations. This includes severance payments ($320,000) and lease termination costs ($85,000) = $405,000. Employee retraining costs ($45,000) benefit future operations and should not be accrued as part of the restructuring liability. Choice A includes only severance costs. Choice B incorrectly excludes lease termination costs. Choice D incorrectly includes retraining costs that benefit future periods.
3. Calculate Westfield's accounts payable balance at December 31, 2024.
   Answer: $175,000 Accounts payable activity: Beginning balance $280,000 + Purchases $1,850,000 - Payments $1,920,000 - Returns $35,000 = $175,000. Returns reduce accounts payable because they eliminate the obligation to pay for defective goods. Choice B ($210,000) incorrectly adds the returns instead of subtracting them. Choice C ($245,000) ignores the returns entirely. Choice D ($315,000) incorrectly subtracts returns from purchases before adding to beginning balance.
4. What amount should Pacific Industries report as pension liability on its December 31, 2024 balance sheet?
   Answer: $250,000 The pension liability equals the unfunded portion of the pension obligation: $2,400,000 obligation - $2,150,000 plan assets = $250,000. Unrecognized prior service cost affects other comprehensive income but not the balance sheet liability measurement under current GAAP. Accrued vacation pay is a separate liability. Choice A includes only vacation pay. Choice C incorrectly adds vacation pay to pension liability. Choice D incorrectly includes the unrecognized prior service cost in the liability calculation.
5. What amount should Sterling report as total current liabilities on its December 31, 2024 classified balance sheet?
   Answer: $435,500 Current liabilities include all liabilities due within one year: Accrued wages $47,000 + Accrued interest $12,000 + Accrued property taxes $8,500 + Accrued warranty costs $23,000 + Note payable due in 6 months $200,000 + Accounts payable $145,000 = $435,500. Choice A omits the note payable. Choice B omits accrued liabilities. Choice D appears to double-count some items or include non-current liabilities.
6. After correcting all identified errors, what should be the correct accounts payable balance?
   Answer: $458,000 Starting with subsidiary ledger total of $485,000: subtract duplicate purchase entry ($15,000), subtract the unrecorded payment ($12,000), resulting in $458,000. The purchase return was correctly recorded in the subsidiary ledger, so the general ledger needs to be corrected to match. The correct balance is $458,000. Choice B uses the uncorrected general ledger balance. Choice C incorrectly adds back the purchase return. Choice D uses the uncorrected subsidiary ledger balance.
7. A for-profit entity offers a one-year assurance-type warranty on products sold. During December 20X5, it sold $2,000,000 of products and estimates warranty costs at 3% of sales based on historical claims; actual claims paid in December were $22,000. The warranty liability balance at December 1, 20X5 was $58,000. Under FASB ASC 460 (Guarantees) and ASC 405, what is the correct journal entry to record December warranty expense?
   Answer: Debit Warranty Expense $60,000; credit Warranty Liability $60,000. This question tests the accounting for warranty expense under an assurance-type warranty. The key facts are December sales of $2,000,000, a 3% warranty estimate, and the need to record December's warranty expense. Under FASB ASC 460, warranty expense must be recognized in the period of sale using the matching principle, calculated as $2,000,000 × 3% = $60,000. The correct entry is to debit Warranty Expense $60,000 and credit Warranty Liability $60,000 (Answer B). Answer A incorrectly reverses the debit and credit. Answer C only records actual claims paid, violating the matching principle. Answer D misclassifies the warranty obligation. The decision rule is that warranty expense must be accrued based on estimated costs at the time of sale, with the liability adjusted as actual claims are processed.
8. On November 15, 2024, Sunrise Corporation was notified by its insurance company that its annual insurance premium would increase from $48,000 to $60,000 effective January 1, 2025. Sunrise pays insurance premiums quarterly in advance. The company paid $12,000 on October 1, 2024, covering October through December 2024. What journal entry should Sunrise record on December 31, 2024, related to this insurance matter?
   Answer: Debit Insurance Expense $4,000; Credit Prepaid Insurance $4,000 When you encounter insurance questions on the CPA exam, focus on the matching principle—expenses must be recorded in the period they relate to, regardless of when cash is paid. Let's trace through the timeline. Sunrise paid $12,000 on October 1, 2024, for three months of coverage (October-December). This means $4,000 per month was initially recorded as prepaid insurance. By December 31, you need to recognize the expense for December's coverage, which requires moving $4,000 from the prepaid asset account to insurance expense. The correct answer is D: Debit Insurance Expense $4,000; Credit Prepaid Insurance $4,000. This entry recognizes December's insurance cost and reduces the prepaid balance appropriately. Answer A incorrectly calculates $15,000, which appears to be one quarter of the new $60,000 annual premium. However, the new rate doesn't take effect until January 1, 2025, so it's irrelevant for 2024's year-end entry. Additionally, this creates a payable when no amount is actually owed. Answer B uses $12,000, which represents the entire quarterly payment already made. This would incorrectly expense the full three months in December alone, violating the matching principle. Answer C suggests no entry is needed, but this ignores the requirement to record December's insurance expense from the prepaid amount. Remember: When dealing with prepaid expenses, always calculate the monthly expense amount and ensure you're recording only the current period's portion. The key is matching the expense to the correct time period, not the payment timing.
9. A for-profit retailer closes its books on December 31, 20X5. Based on approved timecards, employees earned $96,000 of wages from December 27–31 that will be paid on January 4, 20X6. Under FASB ASC 405 and ASC 710 (Compensation), what is the correct journal entry for the year-end accrual?
   Answer: Debit Wages Expense $96,000; credit Wages Payable (Accrued Payroll Liability) $96,000. This question tests the accrual of wages earned but not yet paid at year-end. The key fact is that employees earned $96,000 of wages from December 27-31 that will be paid on January 4, 2024. Under FASB ASC 710 and the accrual basis of accounting, compensation expense must be recognized in the period when services are rendered, regardless of when payment occurs. The correct entry is to debit Wages Expense $96,000 and credit Wages Payable (Accrued Payroll Liability) $96,000 (Answer A). Answer B represents the payment entry in January, not the year-end accrual. Answer C incorrectly treats unpaid wages as a prepaid asset. Answer D uses Accounts Payable instead of the more specific Wages Payable account typically used for payroll liabilities. The decision rule is that employee compensation must be accrued in the period earned based on approved time records.
10. A for-profit distributor is reconciling a major vendor statement as of December 31, 20X5. The vendor statement shows a balance due of $312,000, while the company's accounts payable subsidiary ledger shows $278,000. Investigation found: (1) a $44,000 invoice dated December 29 for goods received December 30 was not recorded by the company; (2) a $10,000 payment mailed December 31 was received by the vendor on January 3 and is not reflected on the vendor statement; and (3) a $4,000 credit memo issued by the vendor on December 20 was not recorded by the company but is included on the vendor statement. Under FASB ASC 405, which procedure is most effective for verifying the accuracy of the company's December 31 accounts payable balance related to this vendor?
    Answer: Perform a three-way match of receiving reports, vendor invoices, and purchase orders around year-end and record the unrecorded invoice and credit memo as of December 31. This question tests the proper procedure for reconciling vendor statements to accounts payable records. The key facts are a $34,000 difference between the vendor statement ($312,000) and company records ($278,000), with three identified reconciling items. Under FASB ASC 405 and proper cutoff procedures, the most effective approach is to perform a three-way match of receiving reports, vendor invoices, and purchase orders to ensure all December transactions are properly recorded (Answer B). This would result in recording the $44,000 unrecorded invoice and $4,000 credit memo as of December 31. Answer A incorrectly reduces payables for an outstanding check. Answer C inappropriately relies solely on external documentation without verification. Answer D incorrectly records the net difference without investigating individual items. The decision rule is that vendor reconciliations require detailed investigation of reconciling items and proper cutoff procedures to ensure accurate liability reporting.
11. A for-profit technology company is evaluating its December 31, 20X5 current ratio as part of a bank covenant. Before year-end adjustments, current assets are $2,400,000 and current liabilities are $1,200,000 (current ratio 2.0). The company failed to accrue $180,000 of utilities expense incurred in December that will be invoiced and paid in January. Under FASB ASC 405, which statement correctly describes the impact of recording the accrued liability on the current ratio?
    Answer: The current ratio decreases because current liabilities increase by $180,000 with no change to current assets. This question tests the impact of recording an accrued liability on the current ratio. The key facts are that before adjustment, current assets are $2,400,000 and current liabilities are $1,200,000 (ratio of 2.0), and $180,000 of utilities expense needs to be accrued. Under FASB ASC 405, the accrual entry debits Utilities Expense and credits Accrued Liabilities, increasing current liabilities to $1,380,000 with no change to current assets. The new current ratio becomes $2,400,000 ÷ $1,380,000 = 1.74, a decrease from 2.0 (Answer C). Answer A incorrectly assumes current assets increase with the accrual. Answer B incorrectly states the accrual affects only the income statement. Answer D incorrectly suggests current assets decrease. The decision rule is that expense accruals increase current liabilities without affecting current assets, thereby decreasing the current ratio when the ratio is above 1.0.
12. A for-profit manufacturer is preparing its December 31, 20X5 financial statements. The company received $410,000 of raw materials during December with vendor invoices dated December 28, 20X5, but the invoices were not entered into the accounts payable subledger until January 5, 20X6; the materials were included in December ending inventory. Under FASB ASC 405 (Liabilities) and ASC 330 (Inventory), how should the entity account for the unpaid vendor invoices at year-end?
    Answer: Debit Raw Materials Inventory (or Inventory) $410,000 and credit Accounts Payable $410,000 at December 31, 20X5. This question tests the proper accounting for goods received but not yet recorded in accounts payable at year-end. The key facts are that raw materials worth $410,000 were received in December with invoices dated December 28, 20X5, and the materials were included in ending inventory. Under FASB ASC 405, a liability must be recognized when an obligation exists, which occurs upon receipt of goods with a valid invoice, regardless of when the invoice is processed. The correct entry is to debit Raw Materials Inventory $410,000 and credit Accounts Payable $410,000 (Answer B) to properly match the asset and liability at year-end. Answer A is incorrect because failing to record the liability violates the matching principle and understates both assets and liabilities. Answer C incorrectly charges the materials directly to expense rather than inventory. Answer D incorrectly includes estimated late fees that are not yet incurred obligations. The decision rule is that liabilities must be recorded when goods are received and accepted, not when invoices are processed.
13. What is the total amount that Meridian should record as accrued liabilities on its December 31, 2024 balance sheet related to these items?
    Answer: $123,000 When you encounter questions about year-end accruals, you're being tested on the matching principle and accrual accounting. The key is identifying expenses that were incurred in the current period but haven't yet been paid or recorded. Both items described meet the criteria for accrued liabilities. The legal services were performed in December 2024 ($45,000), creating an obligation regardless of when the invoice was processed. Similarly, employees earned wages during the last week of December 2024 ($78,000), establishing a liability even though payment occurs in January 2025. Under accrual accounting, you record expenses when incurred, not when cash changes hands. The total accrued liabilities should be $45,000 + 78,000 = 123,000$. Answer choice A ($45,000) incorrectly includes only the legal fees while ignoring the earned wages liability. Answer choice B ($78,000) makes the opposite mistake—including wages but excluding the legal services expense. Answer choice C ($0) reflects a fundamental misunderstanding of accrual accounting, incorrectly suggesting that timing of payment determines when liabilities should be recorded. Answer choice D ($123,000) correctly recognizes both liabilities that existed as of December 31, 2024. Study tip: For CPA-FAR accrual questions, always ask yourself: "Was the service performed or expense incurred by year-end?" If yes, record the liability regardless of payment timing. The matching principle requires expenses to be recorded in the period they're incurred, creating corresponding accrued liabilities when payment hasn't yet occurred.
14. What amount should Riverstone accrue for executive bonuses at December 31, 2024?
    Answer: $55,556 When the bonus is based on net income after deducting the bonus itself, use the formula: Bonus = Rate × (Income - Bonus), which rearranges to Bonus = (Rate × Income) ÷ (1 + Rate). Here: Bonus = (0.08 × $750,000) ÷ (1 + 0.08) = $60,000 ÷ 1.08 = $55,556. Choice B ($60,000) incorrectly calculates 8% of $750,000 without adjusting for the circular calculation. Choice C ($64,800) appears to add the bonus to income before calculating. Choice D uses an incorrect formula application.
15. A for-profit company receives an invoice on January 8, 20X6 for $75,000 of legal services performed entirely in December 20X5. The December 31, 20X5 financial statements have not yet been issued. Under FASB ASC 405 and ASC 855 (Subsequent Events), what is the most appropriate treatment for the $75,000 at December 31, 20X5?
    Answer: Record a December 31 adjusting entry: debit Legal Expense $75,000; credit Accrued Liabilities (or Accounts Payable) $75,000. This question tests the treatment of services performed before year-end but invoiced after year-end. The key facts are that $75,000 of legal services were performed entirely in December 20X5 but invoiced on January 8, 20X6, with financial statements not yet issued. Under FASB ASC 855, this is a Type I subsequent event providing evidence about conditions existing at the balance sheet date. According to FASB ASC 405 and the accrual basis, the expense and liability must be recorded in December when services were performed, requiring an adjusting entry to debit Legal Expense $75,000 and credit Accrued Liabilities $75,000 (Answer B). Answer A incorrectly treats this as a nonrecognized event. Answer C violates the matching principle by using invoice date rather than service date. Answer D incorrectly assumes cash payment and creates a prepaid asset. The decision rule is that expenses must be accrued in the period when services are received, regardless of invoice timing.
16. What adjusting entry should Northland record on December 31, 2024?
    Answer: Debit Unearned Revenue $9,000; Credit Service Revenue $9,000 Northland has earned 3 months of the 12-month contract (October, November, December), which equals $9,000 ($36,000 ÷ 12 × 3). The adjusting entry transfers the earned portion from Unearned Revenue to Service Revenue. Choice B incorrectly recognizes 9 months instead of 3 months. Choice C reverses the proper entry. Choice D represents the initial receipt of cash, not the year-end adjustment.
17. A for-profit company is assessing internal control over its accounts payable process after discovering duplicate payments. The company uses a purchase order system and receives vendor invoices by email. Under COSO-based control concepts and consistent with accrual reporting under FASB ASC 405, which control is most effective at preventing duplicate payments for the same invoice?
    Answer: Implement a system edit that rejects invoices with duplicate vendor number, invoice number, and amount, and require supervisory review of exceptions. This question tests internal controls over accounts payable to prevent duplicate payments. The key issue is preventing duplicate payment of the same invoice in an electronic invoice environment. Under COSO control principles and consistent with proper liability accounting under FASB ASC 405, implementing system edits that reject duplicate combinations of vendor number, invoice number, and amount with supervisory review of exceptions provides the most effective preventive control (Answer B). Answer A violates segregation of duties by combining incompatible functions. Answer C does not address the duplicate payment risk and misclassifies liabilities. Answer D weakens controls by eliminating three-way matching requirements. The decision rule is that automated preventive controls with appropriate exception handling provide the most effective defense against duplicate payments while maintaining proper accrual accounting.

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