2
Q
How is the book value method applied in converting bonds to stocks?
A
No gain or loss is recognized; Additional Paid-In Capital (APIC) serves as the adjustment between the bond’s book value and the stock’s par value.
3
Q
Under what circumstances does a gain occur in a debt restructuring?
A
A gain is recognized if the modified terms result in future payments that are less than the debt’s carrying amount.
4
Q
How is a gain under debt settlement calculated?
A
The gain is the difference between either the cash paid and the debt’s carrying value or the fair market value of non-cash assets transferred and the debt’s carrying value.
5
Q
How should a creditor record a loan impairment?
A
If discounted future cash flows using the loan’s original effective interest rate are less than the carrying value, record the impairment.
6
Q
When is the fair value method applicable for recording an investment in another company?
A
The fair value method applies when ownership is 20% or less and is treated as a purchase. If the purchase cost is below fair value, it results in a gain in the current period.
7
Q
Under what conditions is the equity method used for stock investments?
A
The equity method is used when ownership is between 21% and 50% and significant influence is present. Record as Purchase Price - Par Value = Goodwill. Dividends decrease the investment account, not income.
8
Q
When must companies prepare consolidated financial statements?
A
Consolidated financials are required when a company owns more than 50% of another. Only the parent prepares them, eliminating the investment account and recording assets/liabilities at fair value.
9
Q
Under what conditions is consolidation not necessary?
A
Consolidation is not required if ownership is below 50% or if the majority owner lacks control due to factors like bankruptcy or foreign regulations.
10
Q
What happens in a step acquisition?
A
Previously held shares, valued under Fair Value or Equity Method, are revalued at fair value, leading to a gain or loss in the current period.
11
Q
What distinguishes an acquisition from a merger?
A
In an acquisition, the acquired entity continues legally, with its books consolidated into the parent’s. In a merger, the acquired entity dissolves, leaving only the parent.
12
Q
How are acquisition expenses handled in a merger?
A
These costs are expensed as incurred, covering areas like accounting, legal, valuation, and consulting. Stock-related costs are netted against proceeds.
13
Q
How should derivatives be recorded on financial statements?
A
Initially recorded at cost, derivatives are revalued to fair value each period on the balance sheet.
14
Q
Where are unrealized gains or losses on trading debt securities reported?
A
They are recorded on the income statement.
15
Q
How are unrealized gains or losses on Available for Sale (AFS) debt securities reported?
A
They are included in Other Comprehensive Income.
16
Q
What defines a Fair Value Hedge and its accounting treatment?
A
A Fair Value Hedge offsets changes in the value of recognized assets/liabilities or unrecognized commitments. Recorded at fair value on the balance sheet, gains/losses appear on the income statement.
17
Q
How is a Cash Flow Hedge defined and recorded?
A
Cash flow hedges protect against cash flow volatility. Initially recorded at fair value on the balance sheet, with gains/losses going to OCI.
Example: A company hedges grain price risk with futures contracts.
18
Q
Where are gains and losses from foreign currency hedges reported?
A
They are recorded in Other Comprehensive Income (OCI).
19
Q
What must be disclosed in derivative transactions?
A
- Objectives and strategies
- Context for investor understanding
- Risk management policies
- List of hedged instruments
20
Q
How do foreign currency transactions affect the income statement?
A
Exchange rate fluctuations result in gains or losses reported as Income from Continuing Operations.
21
Q
What causes a gain or loss in a foreign currency transaction?
A
It arises from changes in exchange rates between the functional and transaction currencies.
22
Q
Where are gains or losses from foreign currency transactions recorded?
A
On the Income Statement.
23
Q
Where are gains or losses from foreign currency translations recorded?
A
In Other Comprehensive Income (OCI).
24
Q
If the functional currency matches the local currency, what rate is used for translating assets and liabilities?
A
The current rate as of the balance sheet date is used.
25
Q
If the functional currency matches the local currency, what rate is used for translating revenues and expenses?
A
The current rate as of the balance sheet date is used.
26
If the functional currency equals the reporting currency, which exchange rates are used?
No currency exchange rate is needed.
27
What is the accounting treatment for an exchange of non-monetary assets with no significant cash flow difference?
No gain or loss is recorded if there's no significant cash flow difference; the new asset is measured at the book value of the asset given up. Gain is recognized only if boot (cash) is received.
28
How is gain or loss recognized in an exchange of non-monetary assets when cash flows differ significantly?
A gain or loss is recorded due to commercial substance if cash flows differ significantly. The new asset is recorded at the fair value of the asset given up unless the acquired asset's fair value is more readily determinable.
29
How should a donee account for donated property?
Donated property is recorded at fair value plus any costs necessary to prepare it for its intended use.
30
How does a donor record the donation of property?
The donation is recorded at the fair value of the asset given up, with any gain or loss recognized.
31
What is the amortization treatment for legal fees incurred in defending a patent?
If the defense is successful, legal fees are amortized over the patent's economic life. If unsuccessful, they are immediately expensed.
32
How are software development costs accounted for?
- Costs before technological feasibility are expensed as R&D.
- Costs after technological feasibility but before production are capitalized.
- Production costs are added to inventory.
- Training costs for internal use software are expensed.
33
What does an ROU (Right of Use) Asset represent?
It represents the lessee's right to use the underlying asset for the lease term.
34
What defines a Finance Lease under the POETS criteria?
A lease is a Finance Lease if any of the following apply:
- **P**resent Value: Equals or exceeds Fair Value
- **O**ption to Purchase: Exercise is reasonably certain
- **E**conomic Life: Lease term is a major part
- **T**ransfer of Ownership
- **S**pecialized Nature: No alternative use for lessor after lease
35
What determines an Operating Lease?
None of the Finance Lease (POETS) criteria are met, and the lease term exceeds 12 months. If less than 12 months, it's a Short-Term Lease with no Balance Sheet recognition.
36
What are the characteristics and benefits of a Short-Term Lease?
Advantages: No Balance Sheet recognition
Requirements:
- Lease term is 12 months or less
- No recognition if purchase option exercise is reasonably certain
Recognition:
- No asset or liability recorded
- Lease payments are on a straight-line basis
37
How are lease payments recorded for a Short-Term Lease?
Dr. Rent Expense
Cr. Cash or Lease Payable
38
What are the journal entries for a Finance Lease?
Initial Recognition:
Dr. ROU Asset
Cr. Cash
Cr. Lease Liability
Lease Payments:
Dr. Interest Expense
Dr. Lease Liability
Cr. Cash
Amortization:
Dr. ROU Asset Amortization
Cr. ROU Asset
39
What are the journal entries for an Operating Lease?
Initial Lease:
Dr. ROU Asset
Cr. Lease Liability
Lease Payments:
Dr. Lease Liability
Cr. Cash
Amortization:
Dr. Lease Expense
Cr. ROU Asset
40
What are the journal entries for a Sales-Type Lease by the lessor?
Lease Commencement:
Dr. Net Investment in Lease
Cr. Asset (CV)
Cr. Selling Profit
Dr. Initial Direct Cost
Cr. Cash
Receipt:
Dr. Cash
Cr. Interest Income
Cr. Net Investment in Lease
Termination:
Dr. Asset
Cr. Net Investment in Lease
41
What are the journal entries for a Direct Financing Lease by the lessor?
Lease Commencement:
Dr. Net Investment in Lease
Cr. Asset (CV)
Cr. Cash (Initial Direct Cost)
Receipt:
Dr. Cash
Cr. Interest Income
Cr. Net Investment in Lease
Termination:
Dr. Asset
Cr. Net Investment in Lease
42
What are the journal entries for an Operating Lease by the lessor?
Lease Commencement:
Dr. Initial Direct Cost
Cr. Cash
Receipt:
Dr. Cash
Dr. Accrued Rent Receivable
Cr. Lease Revenue
43
How are capital contributions with mortgages recorded in a partnership?
The capital balance is calculated by netting the fair value of the contributed asset against the liability.
## Footnote
AICPA confirms that Partnership Accounting is testable on FAR.
44
How is a new partner's interest recorded if no goodwill is recognized?
**Bonus Method:**
Old Partnership Equity + New Partner Contribution = New Partnership Equity
New Partnership Equity x New Partner % = New Partner Equity Amount
New Partner Contribution - New Partner Equity Amount = Bonus to Prior Partners (same allocation as P/L)
45
How is a new partner's interest recorded if goodwill is recognized?
**Goodwill Method:**
New Contribution / New Equity % = Partnership Value
Implied Partnership Value - Capital Accounts of all partners = Goodwill to Old Partners
46
How should assets and liabilities be recorded when contributed to a partnership?
Assets are recorded at fair value, and liabilities are recorded at the present value of remaining cash flows.
47
How is gain or loss determined when a non-monetary asset is distributed to a shareholder?
The gain or loss is the difference between the fair market value of the asset at the distribution date and its carrying amount on the books.
48
What is the effect on retained earnings when a non-monetary asset is distributed?
Retained Earnings is debited by the carrying amount of the asset. The gain or loss from distribution offsets the initial debit, resulting in a net decrease by the asset's carrying value.
49
When is Retained Earnings debited for the FMV of stock in a small stock dividend?
Retained Earnings is debited for the FMV of stock when the stock dividend is less than 25% of common stock outstanding.
50
When is Retained Earnings debited for the par value in a large stock dividend?
Retained Earnings is debited for par value when the stock dividend exceeds 25% of common stock outstanding.
51
What are the five steps of the revenue recognition process under ASC 606?
* Identify the contract with a customer
* Identify the performance obligations in the contract
* Determine the transaction price
* Allocate the transaction price to the performance obligations
* Recognize revenue when (or as) the entity satisfies a performance obligation
## Footnote
ASC 606 provides a five-step framework for recognizing revenue, ensuring consistent treatment across industries.
52
# True or False:
Under ASC 606, companies must recognize revenue only when control of a good or service transfers to the customer.
TRUE
## Footnote
The core principle of ASC 606 is that revenue is recognized when control of a promised good or service is transferred to a customer.
53
# Fill in the blank:
Under ASC 606, a contract modification is treated as a new contract if it adds \_\_\_\_\_\_ and the price increases by an amount that reflects the standalone selling prices of the additional goods or services.
distinct goods or services
## Footnote
If the contract modification does not meet these criteria, it is treated as a continuation of the original contract.
54
What is the primary criterion for recognizing revenue from a non-monetary transaction?
Fair value of the assets exchanged
## Footnote
Non-monetary transactions are typically recognized at fair value unless the transaction lacks commercial substance.
55
# True or False:
Revenue from software development costs should be recognized as incurred.
FALSE
## Footnote
Software development costs are capitalized and amortized over the useful life of the software, aligning with the matching principle.
56
What are the two types of subsequent events?
* Recognized subsequent events
* Non-recognized subsequent events
## Footnote
Recognized events provide additional evidence about conditions that existed at the balance sheet date, while non-recognized events relate to conditions that arose after the balance sheet date.
57
In the context of subsequent events, what is a recognized subsequent event?
An event that provides additional evidence about conditions that existed at the balance sheet date
## Footnote
Recognized subsequent events require adjustments to the financial statements.
58
What is the accounting treatment for non-recognized subsequent events?
Disclose the nature and financial impact
## Footnote
Non-recognized subsequent events do not require adjustments to the financial statements but may require disclosure.
59
# Fill in the blank:
A contract with a customer may include an option that provides a \_\_\_\_\_\_. This is considered a separate performance obligation under ASC 606.
material right
## Footnote
A material right is an option that the customer would not receive without entering into the contract.
60
# True or False:
In a non-monetary exchange, if the transaction has commercial substance, the exchange should be recognized at the carrying amount.
FALSE
## Footnote
If a non-monetary transaction has commercial substance, it should be recognized at fair value.
61
How should software development costs incurred during the preliminary project stage be treated?
Expensed as incurred
## Footnote
Costs incurred during the preliminary project stage are not capitalized as they do not meet the criteria for asset recognition.
62
What is the definition of 'commercial substance' in non-monetary transactions?
A transaction has commercial substance if the future cash flows are expected to change significantly as a result of the exchange.
## Footnote
Commercial substance exists when the risk, timing, or amount of future cash flows is expected to change.
63
In the context of subsequent events, give an example of a recognized event.
Settlement of a lawsuit
## Footnote
If a lawsuit is settled after the balance sheet date and provides evidence about the conditions that existed at that date, it is a recognized event.
64
# Fill in the blank:
When recognizing revenue over time, an entity should use a method that depicts the \_\_\_\_\_\_ of goods or services to the customer.
transfer of control
## Footnote
Revenue is recognized over time when control is transferred continuously to the customer.
65
What criteria must be met for costs to be capitalized in software development after the preliminary project stage?
* Technical feasibility
* Intention to complete the software
* Ability to use or sell the software
## Footnote
Capitalization begins when the project moves beyond the preliminary stage and the criteria for capitalization are met.
66
# True or False:
A subsequent event that provides new information about a condition that arose after the balance sheet date is a recognized event.
FALSE
## Footnote
Such events are non-recognized and may only require disclosure.
67
What should companies disclose about non-recognized subsequent events?
Nature and financial impact
## Footnote
Disclosure ensures transparency about events that could significantly affect future financial statements.
68
In revenue recognition, what is the 'transaction price'?
The amount of consideration an entity expects to be entitled to in exchange for transferring goods or services
## Footnote
Transaction price includes fixed amounts, variable consideration, and any non-cash consideration.
69
What are the indicators of transfer of control in a revenue contract?
* Customer acceptance
* Legal title
* Physical possession
* Risks and rewards of ownership
## Footnote
Transfer of control indicates when the customer has the ability to direct the use of and obtain benefits from the asset.
70
# Fill in the blank:
In a non-monetary transaction, if the fair value of neither asset can be determined, the transaction should be measured at the \_\_\_\_\_\_ of the asset given up.
carrying amount
## Footnote
When fair values are not determinable, the carrying amount provides a practical measure.
71
# True or False:
Software development costs related to maintenance and minor upgrades should be capitalized.
FALSE
## Footnote
Such costs are typically expensed as they do not significantly enhance the functionality of the software.
72
What does ASC 606 require to identify performance obligations in a contract?
Identify distinct goods or services
## Footnote
A good or service is distinct if it is separately identifiable and provides economic benefit to the customer.
73
In the context of revenue recognition, what is a 'material right'?
A customer option for additional goods or services that the customer would not receive without entering into the contract
## Footnote
Material rights are treated as separate performance obligations when they provide significant benefit to the customer.
74
# True or False:
An entity should adjust financial statements for non-recognized subsequent events.
FALSE
## Footnote
Adjustments are not made for non-recognized events; only disclosures may be required.
75
What is a 'distinct' good or service under ASC 606?
A good or service that is separately identifiable and provides economic benefit to the customer
## Footnote
Goods or services are distinct if the customer can benefit from them on their own or with other readily available resources.
76
What should an entity consider when determining if a non-monetary transaction has commercial substance?
* Changes in cash flows
* Timing of cash flows
* Risk of cash flows
## Footnote
Commercial substance is assessed based on the expected impact on future cash flows.
77
# True or False:
A contract is required to have a minimum of two performance obligations under ASC 606.
FALSE
## Footnote
A contract can have one or multiple performance obligations, depending on the goods or services promised.
78
What is the effect of a subsequent event on the financial statements if it is a recognized event?
Adjustment to the financial statements
## Footnote
Recognized events require adjustments to reflect the conditions that existed at the balance sheet date.
79
# Fill in the blank:
Revenue from the sale of software licenses should be recognized when the \_\_\_\_\_\_ over the software transfers to the customer.
control
## Footnote
Control is transferred when the customer has the ability to use and benefit from the software.
80
What is the primary consideration for determining the transaction price under ASC 606?
Amount of consideration expected to be entitled
## Footnote
The transaction price includes all forms of consideration, including fixed and variable amounts.
81
# True or False:
Non-monetary exchanges involving similar assets should be recognized at fair value.
FALSE
## Footnote
Such exchanges are generally measured at the carrying amount unless the transaction has commercial substance.
82
What is the treatment of research and development costs in software development?
Expensed as incurred
## Footnote
R&D costs are expensed because they do not meet the criteria for capitalization until technical feasibility is established.
83
What is a performance obligation in the context of revenue recognition?
A promise in a contract to transfer a distinct good or service to the customer
## Footnote
Identifying performance obligations helps determine when and how much revenue to recognize.
84
# Fill in the blank:
A non-recognized subsequent event is one that provides new information about conditions that \_\_\_\_\_\_ after the balance sheet date.
arose
## Footnote
These events relate to new conditions and typically require disclosure rather than adjustment.
85
What should be included in the disclosure of non-recognized subsequent events?
* Nature of the event
* Financial impact
## Footnote
Disclosure provides users with information about potential impacts on future financial statements.
86
# True or False:
The transaction price must include only fixed consideration under ASC 606.
FALSE
## Footnote
The transaction price may include both fixed and variable consideration, as well as non-cash consideration.
87
Describe the 'output methods' in measuring progress toward satisfying a performance obligation.
* Surveys of performance completed
* Appraisals of results achieved
* Milestones reached
## Footnote
Output methods measure progress based on the value to the customer of the goods or services transferred.
88
What is a 'recognized subsequent event'?
An event that provides additional evidence about conditions that existed at the balance sheet date
## Footnote
These events are recognized because they affect the estimates and conditions as of the balance sheet date.
89
# True or False:
Costs incurred to develop internal-use software during the application development stage are capitalized.
TRUE
## Footnote
Capitalization of these costs aligns with the matching principle, recognizing costs over the software's useful life.
90
What are the two primary characteristics of a distinct good or service?
* Separately identifiable
* Provides economic benefit
## Footnote
These characteristics ensure that a good or service can stand alone in the context of the contract.
91
# Fill in the blank:
Under ASC 606, an entity must determine the transaction price and allocate it to performance obligations based on \_\_\_\_\_\_.
standalone selling prices
## Footnote
Allocating based on standalone selling prices ensures fair and accurate revenue recognition.
92
What is a 'non-recognized subsequent event'?
An event that provides new information about conditions that arose after the balance sheet date
## Footnote
These events may require disclosure but do not affect the financial statements as of the balance sheet date.
93
# True or False:
An entity should adjust the financial statements for a non-recognized subsequent event.
FALSE
## Footnote
Financial statements are not adjusted for non-recognized events, but disclosures may be necessary.
94
What is the definition of 'variable consideration' under ASC 606?
Consideration that varies based on future events
## Footnote
Variable consideration can include discounts, rebates, refunds, credits, incentives, and similar items.
95
What are the input methods used to measure progress toward satisfying a performance obligation?
* Costs incurred
* Resources consumed
* Labor hours expended
## Footnote
Input methods focus on the entity’s efforts or inputs in fulfilling a performance obligation.
96
# Fill in the blank:
The transaction price is allocated to each performance obligation based on the \_\_\_\_\_\_ at contract inception.
relative standalone selling price
## Footnote
This allocation method ensures that revenue is recognized proportionately to the value delivered to the customer.
97
What principle governs revenue recognition for specific contracts under ASC 606?
Revenue is recognized when control of the promised goods or services is transferred to the customer.
## Footnote
ASC 606 establishes a five-step model for recognizing revenue, focusing on the transfer of control rather than the transfer of risks and rewards, which was the focus of previous guidance.
98
# True or False:
A non-monetary transaction can result in a gain or loss if the fair value of the asset exchanged is different from its carrying amount.
TRUE
## Footnote
In a non-monetary transaction, if the fair value of the asset given up differs from its carrying amount, a gain or loss is recognized based on the difference, unless the transaction lacks commercial substance.
99
List the three main stages of software development costs that must be capitalized.
* Preliminary project stage
* Application development stage
* Post-implementation/operation stage
## Footnote
Only costs incurred during the application development stage are typically capitalized. Costs incurred in the preliminary project stage and post-implementation stage are expensed as incurred.
100
What are subsequent events, and how are they classified?
Subsequent events are events occurring after the balance sheet date but before financial statements are issued. They are classified as:
* Recognized subsequent events
* Non-recognized subsequent events
## Footnote
Recognized subsequent events provide additional evidence about conditions that existed at the balance sheet date, requiring adjustments to the financial statements. Non-recognized events provide evidence about conditions that arose after the balance sheet date, usually disclosed in the notes to the financial statements.
CPA (2) FAR
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