AICPA Released Questions FAR 2015 Difficult

FAR
2015 AICPA Released Questions

Testlet Level: Difficult

Please Note: These questions are released to the CPA Review providers
with the letter answer only (i.e. no explanation given).
This document contains copyrighted material from the American Institute of
Certified Public Accountants and is licensed to NINJA CPA Review for use
by its customers only.
Answers are on Page 17.
1. Clear Co.'s trial balance has the following selected accounts:
Cash (includes $10,000 in bondsinking fund
for long-term bond payable)
Accounts receivable
$50,000
20,000
Allowance for doubtful accounts
5,000
Deposits received from customers
3,000
Merchandise inventory
7,000
Unearned rent
1,000
Investment in trading securities
2,000
FAR 2015: Difficult 1

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What amount should Clear report as total current assets in its balance
sheet?
$64,000
$67,000
$72,000
$74,000
2. Martin Co. had net income of $70,000 during the year. Depreciation
expense was $10,000. The following information is available:
Accounts receivable increase
$20,000
Equipment gain on sale

increase
10,000
Nontrade notes payable

increase
50,000
Prepaid insurance increase
40,000
Accounts payable increase
30,000
What amount should Martin report as net cash provided by operating

activities in its statement of cash flows for the year?
$0
$ 40,000
$ 50,000
$100,000

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3. Which of the following should be disclosed in a summary of significant

accounting policies?
Basis of consolidation.
Concentration of credit risk of financial instruments.
Composition of plant assets.
Adequacy of pension plan assets in relation to vested benefits.
4. Each of the following events is required to be reported to the United

States Securities and Exchange Commission on Form 8-K, except
The creation of an obligation under an off-balance sheet arrangement

of a registrant.
The unregistered sale of equity securities.
A change in a registrant's certifying accountant.
The quarterly results of operations and financial condition of a
registrant.

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5. Garcel, Inc. held unfinished inventory at a cost of $85,000 with a sales

value of $125,000. The inventory will cost $10,500 to complete. The normal
profit margin is 30% of sales. The replacement cost of the inventory was
$75,000. What amount should Garcel report as inventory on balance
sheet?
$114,500
$ 85,000
$ 77,000
$ 75,000
6. Sea Manufacturing Corp. is constructing a new factory building. During

the current calendar year, Sea made the following payments to the
construction company:
January 2
December 31
$1,000,000
1,000,000
Sea has an 8%, three-year construction loan of $3,000,000. What is the

amount of interest costs that Sea may capitalize during the current year?
$0
$ 80,000
$160,000
$240,000

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7. Under IFRS, which of the following statements about intangible assets is

correct?
Internally generated goodwill cannot be recognized as an asset.

Intangible assets within a class may be measured differently using
either the cost model or the revaluation model.
Research and development costs are capitalized as incurred.
Intangible assets with indefinite lives must be amortized annually.
8. A note payable was issued in payment for services received. The

services had a fair value less than the face amount of the note payable.
The note payable has no stated interest rate. How should the note payable
be presented in the statement of financial position?
At the face amount.

At the face amount with a separate deferred asset for the discount
calculated at the imputed interest rate.
At the face amount with a separate deferred credit for the discount
At the face amount minus a discount calculated at the imputed interest
rate.

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9. Which of the following statements is correct regarding valuation

allowances in accounting for income taxes?
The effect of a change in the opening balance of a valuation allowance

that results from a change of circumstances ordinarily is included in income
from operations.
Both deferred tax assets and deferred tax liabilities can be reduced by
a valuation allowance.
Only negative evidence, not positive evidence, should be considered
when determining whether a valuation allowance is needed.
A valuation allowance is necessary when the realistic probability
standard of evidence is satisfied.
10. A company issues $1,500,000 of par bonds at 98 on January 1, year 1,

with a maturity date of December 31, year 30. Bond issue costs are
$90,000, and the stated interest rate of the bonds is 6%. Interest is paid
semiannually on January 1 and July 1. Ten years after the issue date, the
entire issue was called at 102 and canceled.
The company uses the straight-line method of amortization for bond
discounts and issue costs, and the result of this method is not materially
different from the effective interest method. The company should classify
what amount as the loss on extinguishment of debt at the time the bonds
are called?
$ 30,000
$ 50,000
$ 90,000
$110,000

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11. On day 1, Clothes Co., sells clothing to Link Corp. for $40,000. Clothes
ships the clothing on day 1 and Link is obligated to pay Clothes within six
months. Link is given 12 months to return any of the clothing for a refund if
they experience low demand. Link is also given 18 months to exchange
any clothing due to low demand. At the time of sale, Clothes cannot
reasonably estimate returns, but estimates $5,000 in exchanged goods.
Clothes should recognize revenue for the aforementioned transaction
On the day of the sale.

Six months after the date of sale.
12 months after the date of sale.
12. At the beginning of year 1, a company amends its defined benefit

pension plan for an additional $500,000 in prior service cost. The
amendment covers employees with a 10-year average remaining service
life. At the end of year 1, what is the net entry to accumulated other
comprehensive income, ignoring income tax effects?
A $450,000 debit.
A $500,000 debit.
A $550,000 credit.
A $450,000 credit.

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13. A company recorded a decommissioning liability and recognized the

amount recorded as part of the cost of the related property. After the
property was fully depreciated, the decommissioning liability was reviewed
and adjusted. How should this change in the decommissioning liability be
recognized under IFRS?
The change in the liability is recognized in other comprehensive

income.
The change in the liability is recognized in profit or loss.
The change in the liability is recognized as a change in the carrying
amount of the property if the liability increases but is otherwise recognized
in profit or loss.
The change in the decommissioning liability is not recognized until it is
settled.

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14. A company incurred the following costs to complete a business

combination in the current year:
Issuing debt securities
$30,000
Registering debt securities
25,000
Legal fees
10,000
Due diligence costs
1,000
What amount should be reported as current-year expenses, not subject to

amortization?
$ 1,000
$11,000
$36,000
$66,000

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15. Based on the stock transactions below, what is the weighted average
number of shares outstanding as of December 31, year 1, that should be
used in the calculation of basic earnings per share in financial statements
issued on March 1, year 2?
Date
January 1, year 1
Transactions
Beginning balance 100,000
April 1, year 1
Issued 30,000 shares for cash
June 1, year 1
February 15, year 2
50% stock dividend

2 for 1 stock split
March 15, year 2
147,500
183,750
295,000
367,500

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16. Which of the following phrases best describes a Level 1 input for
measuring the fair value of an asset or liability?
Inputs for the asset or liability based on the reporting entity's internal
data.
Quoted prices for similar assets or liabilities in active markets.
Inputs that are principally derived from or corroborated by observable
market data.
Unadjusted quoted prices for identical assets or liabilities in active
markets.


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17. On June 1, year 1, ABC Co. issued a 200,000 euro purchase order for
equipment to be supplied by a German company. ABC's functional
currency is the U.S. dollar. The equipment was delivered to ABC on
November 1, year 1, and ABC recorded a payable due to the German
company. ABC paid for the equipment on January 31, year 2. The following
are the exchange rates in effect:
June 1, year 1
1 euro = 1.40 U.S. dollars
November 1, year 1
December 31, year 1
January 31, year 2
Under IFRS, what is the foreign currency gain or loss that ABC should
record for the year ended December 31, year 1?
A loss of $30,000.
A loss of $20,000.
A gain of $10,000.
A gain of $30,000.


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18. A company leases a machine from Leasing, Inc. on January 1, year 1.

The lease terms include a $100,000 annual payment beginning January 1,
year 1. The machine's fair value is $500,000 and the residual value is
estimated at $20,000. The company guarantees the residual value.
The useful life of the machine is six years, and the lease term is five years.
The implicit rate of interest is 6% and is known by the company. The
following present value factors are provided:
Present value of $1 at 6%
Present value of an annuity due at
6%
Present value of an ordinary annuity
at 6%
Five years
0.7473
Six years
0.7050
4.4651
5.2124
4.2124
4.9173
What is the value of the machine in the company's balance sheet at lease
inception?
$446,510
$461,456
$520,000
$535,340

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19. Isle Co. owned a copy machine that cost $5,000 and had accumulated
depreciation of $2,000. Isle exchanged the copy machine for a computer
that cost $4,000. Isle's future cash flows are not expected to change
significantly as a result of the exchange. What amount of gain or loss
should Isle report and at what amount should it record the asset?
No gain or loss in the income statement; $3,000 asset in the balance
sheet.
sheet.
$1,000 gain in the income statement; $3,000 asset in the balance
sheet.
sheet.
20. On January 1, year 1, a company capitalized $100,000 of costs for

software that is to be sold. The company amortizes the software costs on a
straight-line basis over five years. The carrying value of the software costs
on January 1, year 3, was $60,000.
As of December 31, year 3, the estimated future gross revenue to be
generated from the sale of the software is $23,000, and the estimated
future cost of disposing of the software is $8,000. What amount should the
company expense related to the software costs for the year ended
December 31, year 3?
$18,400
$20,000
$37,000
$45,000
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21. Which of the following is a required part of a local government's

management's discussion and analysis (MD&A) as part of its financial
statements?
The MD&A should be presented with other required supplementary

information.
The MD&A should compare current-year results to the prior year with
emphasis on the current year.
The MD&A should include an analysis for each fund.
The MD&A should present condensed financial information from the
fund financial statements.
22. A city government reported a $9,000 increase in net position in the

motor pool internal service fund, a $12,000 increase in net position in the
water enterprise fund, and a $7,000 increase in the employee pension
fund. The motor pool internal service fund provides service primarily to the
police department. What amount should the city report as the change in net
position for business-type activities in its statement of activities?
$ 9,000
$12,000
$21,000
$28,000

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23. Land and other real estate held as investments by endowments in a

government's permanent fund should be reported at
Historical cost.
The lower of cost and net realizable value.
Fair value.
Fair value less costs of disposal.
24. A statement of financial position for a nongovernmental not-for-profit

organization reports amounts for which of the following classes of net
assets?
Current.
Long-term.
Permanently restricted.
Temporarily unrestricted.

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25. A nongovernmental not-for-profit college has a portfolio of bond

investments that had an original cost of $2,000,000. The college's board of
trustees voted to hold the principal of this fund intact in perpetuity and
designated the earnings to reimburse faculty for travel to academic
conferences.
During the year, interest of $50,000 was earned in cash. The fair value of
the bonds was $1,980,000. What amount should the college report as
permanently restricted net assets at year end?
$0
$1,980,000
$2,000,000
$2,030,000
Answers:
1. Clear Co.'s trial balance has the following selected accounts:
Cash (includes $10,000 in bondsinking fund
for long-term bond payable)
Accounts receivable
$50,000
20,000
Allowance for doubtful accounts
5,000
Deposits received from customers
3,000
Merchandise inventory
7,000
Unearned rent
1,000
Investment in trading securities
2,000

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What amount should Clear report as total current assets in its balance
sheet?
$64,000
$67,000
$72,000
$74,000
2. Martin Co. had net income of $70,000 during the year. Depreciation
expense was $10,000. The following information is available:
Accounts receivable increase
$20,000
Equipment gain on sale

increase
10,000
Nontrade notes payable

increase
50,000
Prepaid insurance increase
40,000
Accounts payable increase
30,000
What amount should Martin report as net cash provided by operating

activities in its statement of cash flows for the year?
$0
$ 40,000
$ 50,000
$100,000

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3. Which of the following should be disclosed in a summary of significant

accounting policies?
Basis of consolidation.
Concentration of credit risk of financial instruments.
Composition of plant assets.
Adequacy of pension plan assets in relation to vested benefits.
4. Each of the following events is required to be reported to the United

States Securities and Exchange Commission on Form 8-K, except
The creation of an obligation under an off-balance sheet arrangement

of a registrant.
The unregistered sale of equity securities.
A change in a registrant's certifying accountant.
The quarterly results of operations and financial condition of a
registrant.

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5. Garcel, Inc. held unfinished inventory at a cost of $85,000 with a sales

value of $125,000. The inventory will cost $10,500 to complete. The normal
profit margin is 30% of sales. The replacement cost of the inventory was
$75,000. What amount should Garcel report as inventory on balance
sheet?
$114,500
$ 85,000
$ 77,000
$ 75,000
6. Sea Manufacturing Corp. is constructing a new factory building. During

the current calendar year, Sea made the following payments to the
construction company:
January 2
December 31
$1,000,000
1,000,000
Sea has an 8%, three-year construction loan of $3,000,000. What is the

amount of interest costs that Sea may capitalize during the current year?
$0
$ 80,000
$160,000
$240,000

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7. Under IFRS, which of the following statements about intangible assets is

correct?
Internally generated goodwill cannot be recognized as an asset.

Intangible assets within a class may be measured differently using
either the cost model or the revaluation model.
Research and development costs are capitalized as incurred.
Intangible assets with indefinite lives must be amortized annually.
8. A note payable was issued in payment for services received. The

services had a fair value less than the face amount of the note payable.
The note payable has no stated interest rate. How should the note payable
be presented in the statement of financial position?
At the face amount.

At the face amount with a separate deferred asset for the discount
At the face amount with a separate deferred credit for the discount
At the face amount minus a discount calculated at the imputed
interest rate.

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9. Which of the following statements is correct regarding valuation

allowances in accounting for income taxes?
The effect of a change in the opening balance of a valuation

allowance that results from a change of circumstances ordinarily is
included in income from operations.
Both deferred tax assets and deferred tax liabilities can be reduced by
a valuation allowance.
Only negative evidence, not positive evidence, should be considered
when determining whether a valuation allowance is needed.
A valuation allowance is necessary when the realistic probability
standard of evidence is satisfied.
10. A company issues $1,500,000 of par bonds at 98 on January 1, year 1,

with a maturity date of December 31, year 30. Bond issue costs are
$90,000, and the stated interest rate of the bonds is 6%. Interest is paid
semiannually on January 1 and July 1. Ten years after the issue date, the
entire issue was called at 102 and canceled.
The company uses the straight-line method of amortization for bond
discounts and issue costs, and the result of this method is not materially
different from the effective interest method. The company should classify
what amount as the loss on extinguishment of debt at the time the bonds
are called?
$ 30,000
$ 50,000
$ 90,000
$110,000

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11. On day 1, Clothes Co., sells clothing to Link Corp. for $40,000. Clothes
ships the clothing on day 1 and Link is obligated to pay Clothes within six
months. Link is given 12 months to return any of the clothing for a refund if
they experience low demand. Link is also given 18 months to exchange
any clothing due to low demand. At the time of sale, Clothes cannot
reasonably estimate returns, but estimates $5,000 in exchanged goods.
Clothes should recognize revenue for the aforementioned transaction
On the day of the sale.

Six months after the date of sale.
12. At the beginning of year 1, a company amends its defined benefit

pension plan for an additional $500,000 in prior service cost. The
amendment covers employees with a 10-year average remaining service
life. At the end of year 1, what is the net entry to accumulated other
comprehensive income, ignoring income tax effects?
A $450,000 debit.
A $500,000 debit.
A $550,000 credit.
A $450,000 credit.

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13. A company recorded a decommissioning liability and recognized the

amount recorded as part of the cost of the related property. After the
property was fully depreciated, the decommissioning liability was reviewed
and adjusted. How should this change in the decommissioning liability be
recognized under IFRS?
The change in the liability is recognized in other comprehensive

income.
The change in the liability is recognized in profit or loss.
The change in the liability is recognized as a change in the carrying
amount of the property if the liability increases but is otherwise recognized
in profit or loss.
The change in the decommissioning liability is not recognized until it is
settled.

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14. A company incurred the following costs to complete a business

combination in the current year:
Issuing debt securities
$30,000
Registering debt securities
25,000
Legal fees
10,000
Due diligence costs
1,000
What amount should be reported as current-year expenses, not subject to

amortization?
$ 1,000
$11,000
$36,000
$66,000

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15. Based on the stock transactions below, what is the weighted average
number of shares outstanding as of December 31, year 1, that should be
used in the calculation of basic earnings per share in financial statements
issued on March 1, year 2?
Date
January 1, year 1
Transactions
Beginning balance 100,000
April 1, year 1
June 1, year 1
February 15, year 2
50% stock dividend

2 for 1 stock split
March 15, year 2
147,500
183,750
295,000
367,500

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16. Which of the following phrases best describes a Level 1 input for
measuring the fair value of an asset or liability?
Inputs for the asset or liability based on the reporting entity's internal
data.
Quoted prices for similar assets or liabilities in active markets.
Inputs that are principally derived from or corroborated by observable
market data.
Unadjusted quoted prices for identical assets or liabilities in
active markets.


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17. On June 1, year 1, ABC Co. issued a 200,000 euro purchase order for
equipment to be supplied by a German company. ABC's functional
currency is the U.S. dollar. The equipment was delivered to ABC on
November 1, year 1, and ABC recorded a payable due to the German
company. ABC paid for the equipment on January 31, year 2. The following
are the exchange rates in effect:
June 1, year 1
November 1, year 1
December 31, year 1
January 31, year 2
Under IFRS, what is the foreign currency gain or loss that ABC should
record for the year ended December 31, year 1?
A loss of $30,000.
A loss of $20,000.
A gain of $10,000.
A gain of $30,000.


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18. A company leases a machine from Leasing, Inc. on January 1, year 1.

The lease terms include a $100,000 annual payment beginning January 1,
year 1. The machine's fair value is $500,000 and the residual value is
estimated at $20,000. The company guarantees the residual value.
The useful life of the machine is six years, and the lease term is five years.
The implicit rate of interest is 6% and is known by the company. The
following present value factors are provided:
Present value of $1 at 6%
Present value of an annuity due at
6%
Present value of an ordinary annuity
at 6%
Five years
0.7473
Six years
0.7050
4.4651
5.2124
4.2124
4.9173
What is the value of the machine in the company's balance sheet at lease
inception?
$446,510
$461,456
$520,000
$535,340

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19. Isle Co. owned a copy machine that cost $5,000 and had accumulated
depreciation of $2,000. Isle exchanged the copy machine for a computer
that cost $4,000. Isle's future cash flows are not expected to change
significantly as a result of the exchange. What amount of gain or loss
should Isle report and at what amount should it record the asset?
No gain or loss in the income statement; $3,000 asset in the
balance sheet.
sheet.
sheet.
sheet.
20. On January 1, year 1, a company capitalized $100,000 of costs for

software that is to be sold. The company amortizes the software costs on a
straight-line basis over five years. The carrying value of the software costs
on January 1, year 3, was $60,000.
As of December 31, year 3, the estimated future gross revenue to be
generated from the sale of the software is $23,000, and the estimated
future cost of disposing of the software is $8,000. What amount should the
company expense related to the software costs for the year ended
December 31, year 3?
$18,400
$20,000
$37,000
$45,000
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21. Which of the following is a required part of a local government's

management's discussion and analysis (MD&A) as part of its financial
statements?
The MD&A should be presented with other required supplementary

information.
The MD&A should compare current-year results to the prior year
with emphasis on the current year.
The MD&A should include an analysis for each fund.
The MD&A should present condensed financial information from the
fund financial statements.
22. A city government reported a $9,000 increase in net position in the

motor pool internal service fund, a $12,000 increase in net position in the
water enterprise fund, and a $7,000 increase in the employee pension
fund. The motor pool internal service fund provides service primarily to the
police department. What amount should the city report as the change in net
position for business-type activities in its statement of activities?
$ 9,000
$12,000
$21,000
$28,000

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23. Land and other real estate held as investments by endowments in a

government's permanent fund should be reported at
Historical cost.
The lower of cost and net realizable value.
Fair value.
Fair value less costs of disposal.
24. A statement of financial position for a nongovernmental not-for-profit

organization reports amounts for which of the following classes of net
assets?
Current.
Long-term.
Permanently restricted.
Temporarily unrestricted.

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25. A nongovernmental not-for-profit college has a portfolio of bond

investments that had an original cost of $2,000,000. The college's board of
trustees voted to hold the principal of this fund intact in perpetuity and
designated the earnings to reimburse faculty for travel to academic
conferences.
During the year, interest of $50,000 was earned in cash. The fair value of
the bonds was $1,980,000. What amount should the college report as
permanently restricted net assets at year end?
$0
$1,980,000
$2,000,000
$2,030,000

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AICPA Released Questions FAR 2015 Difficult

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FAR

2015 AICPA Released Questions

Allowance for doubtful accounts

Deposits received from customers

Investment in trading securities

FAR 2015: Difficult 1

Equipment gain on sale

Nontrade notes payable

Prepaid insurance increase

Accounts payable increase

What amount should Martin report as net cash provided by operating

3. Which of the following should be disclosed in a summary of significant

4. Each of the following events is required to be reported to the United

The creation of an obligation under an off-balance sheet arrangement

FAR 2015: Difficult 3

5. Garcel, Inc. held unfinished inventory at a cost of $85,000 with a sales

6. Sea Manufacturing Corp. is constructing a new factory building. During

Sea has an 8%, three-year construction loan of $3,000,000. What is the

FAR 2015: Difficult 4

7. Under IFRS, which of the following statements about intangible assets is

Internally generated goodwill cannot be recognized as an asset.

8. A note payable was issued in payment for services received. The

At the face amount.

FAR 2015: Difficult 5

9. Which of the following statements is correct regarding valuation

The effect of a change in the opening balance of a valuation allowance

10. A company issues $1,500,000 of par bonds at 98 on January 1, year 1,

FAR 2015: Difficult 6

On the day of the sale.

12. At the beginning of year 1, a company amends its defined benefit

13. A company recorded a decommissioning liability and recognized the

The change in the liability is recognized in other comprehensive

FAR 2015: Difficult 8

14. A company incurred the following costs to complete a business

Issuing debt securities

Registering debt securities

Due diligence costs

What amount should be reported as current-year expenses, not subject to

FAR 2015: Difficult 9

Issued 30,000 shares for cash

50% stock dividend

March 15, year 2

Issued 40,000 shares for cash

FAR 2015: Difficult 10

FAR 2015: Difficult 11

1 euro = 1.40 U.S. dollars

1 euro = 1.50 U.S. dollars

December 31, year 1

1 euro = 1.35 U.S. dollars

January 31, year 2

1 euro = 1.30 U.S. dollars

FAR 2015: Difficult 12

18. A company leases a machine from Leasing, Inc. on January 1, year 1.

20. On January 1, year 1, a company capitalized $100,000 of costs for

21. Which of the following is a required part of a local government's

The MD&A should be presented with other required supplementary

22. A city government reported a $9,000 increase in net position in the

23. Land and other real estate held as investments by endowments in a

24. A statement of financial position for a nongovernmental not-for-profit

25. A nongovernmental not-for-profit college has a portfolio of bond

Allowance for doubtful accounts

Deposits received from customers

Investment in trading securities

FAR 2015: Difficult 17