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web.groovymark@gmail.com
- December 15, 2024
Question 21
A company changes its method of revenue recognition from point-in-time to over-time.
How should this change be accounted for?
A) Prospectively
B) Retrospectively
C) As a prior period adjustment
D) No adjustment needed
Answer: B) Retrospectively
Explanation:
Changes in accounting principles, such as revenue recognition, are accounted for
retrospectively, adjusting prior period financial statements to reflect the new method.
Question 22
Which event triggers the recognition of a right-of-use asset?
A) Signing the lease contract
B) Payment of the first lease installment
C) Lease commencement date
D) End of the lease term
Answer: C) Lease commencement date
Explanation:
The right-of-use asset is recognized when the lease commences, which is when the lessor
makes the underlying asset available for use.
Question 23
What type of pension plan is characterized by employer contributions and no
guaranteed future benefit amount?
A) Defined contribution plan
B) Defined benefit plan
C) Noncontributory plan
D) Deferred benefit plan
Answer: A) Defined contribution plan
Explanation:
In a defined contribution plan, the employer contributes to an employee’s pension, but
the future benefits depend on investment performance, and there is no guarantee of a
specific payout amount.
Question 24
What is the main reason companies choose LIFO or FIFO inventory methods?
A) To match physical flow of goods
B) To reduce tax liability
C) To conform to international standards
D) To maximize gross profit
Answer: B) To reduce tax liability
Explanation:
Many companies choose LIFO or FIFO to minimize tax liability, as these methods impact
the cost of goods sold and, consequently, taxable income.
Question 25
How are accounting changes for estimates, such as useful life of an asset, treated in
financial statements?
A) Retrospectively
B) As a prior period adjustment
C) Prospectively
D) No disclosure is required
Answer: C) Prospectively
Explanation:
Changes in accounting estimates, like the useful life of an asset, are applied
prospectively, affecting only the current and future financial statements.
Question 26
What happens when a lessee fails to record a lease liability?
A) The income statement will be overstated
B) The balance sheet will be understated
C) Depreciation expense will increase
D) The lease expense will be overstated
Answer: B) The balance sheet will be understated
Explanation:
Failure to record a lease liability results in an understatement of liabilities on the balance
sheet, as the company has not recognized its obligation under the lease.
Question 27
Which lease classification results in the lessee recording interest expense on the lease
liability?
A) Finance lease
B) Operating lease
C) Sales-type lease
D) Short-term lease
Answer: A) Finance lease
Explanation:
Under a finance lease, the lessee records interest expense on the lease liability over the
life of the lease using the effective interest method.
Question 28
How should a company disclose subsequent events that are recognized in the financial
statements?
A) As an extraordinary item
B) In a note to the financial statements
C) By restating the prior period’s financial statements
D) No disclosure is needed
Answer: B) In a note to the financial statements
Explanation:
Subsequent events that are recognized in the financial statements must be disclosed in a
note to ensure transparency for financial statement users.
Question 29
What is the appropriate journal entry for a lessee’s first lease payment in a finance
lease?
A) Debit interest expense, credit cash
B) Debit right-of-use asset, credit cash
C) Debit lease liability, credit cash
D) Debit lease expense, credit lease liability
Answer: C) Debit lease liability, credit cash
Explanation:
The lessee’s first lease payment in a finance lease reduces the lease liability, as the lessee
is repaying part of the obligation.
Question 30
When a company changes its reporting entity, how should the financial statements be
adjusted?
A) Prospectively
B) Retrospectively
C) No adjustment needed
D) As an extraordinary item
Answer: B) Retrospectively
Explanation:
Changes in the reporting entity require retrospective application, adjusting prior period
financial statements to reflect the new reporting entity.
Question 31
When is lease expense recognized as a single expense for an operating lease?
A) Over the useful life of the asset
B) In the first year of the lease
C) Evenly throughout the lease term
D) At the end of the lease
Answer: C) Evenly throughout the lease term
Explanation:
For operating leases, the lease expense is recognized evenly throughout the lease term as
a single expense, combining interest and depreciation components.
Question 32
Which item is excluded from the calculation of a lessee’s right-of-use asset?
A) Initial direct costs
B) Incentives from the lessor
C) Fixed lease payments
D) Variable lease payments not tied to an index
Answer: D) Variable lease payments not tied to an index
Explanation:
Variable lease payments that are not tied to an index or rate are excluded from the
calculation of the right-of-use asset because they are considered contingent payments.
Question 33
What is the term for the difference between book basis and tax basis of an asset?
A) Permanent difference
B) Temporary difference
C) Timing difference
D) Carryforward basis
Answer: B) Temporary difference
Explanation:
A temporary difference occurs when the book basis and tax basis of an asset or liability
differ, typically due to the timing of when revenue or expenses are recognized for
financial versus tax purposes.
Question 34
How should companies account for lease payments for short-term leases?
A) Capitalize the payments and recognize a right-of-use asset
B) Record lease payments as expenses as incurred
C) Include them in the operating activities section of the statement of cash flows
D) Include them in the investing activities section of the statement of cash flows
Answer: B) Record lease payments as expenses as incurred
Explanation:
For short-term leases (less than 12 months), companies record lease payments as
expenses as they are incurred, without recognizing a right-of-use asset or lease liability.
Question 35
How should errors in financial statements be corrected if they are discovered after the
statements are issued?
A) Prospectively in future statements
B) By recording a correction in the current year’s financial statements
C) By restating prior period financial statements
D) By including an extraordinary item
Answer: C) By restating prior period financial statements
Explanation:
Material errors must be corrected by restating prior period financial statements to reflect
the correct information.
Question 36
How are noncounterbalancing errors treated in financial statements?
A) They are corrected over two periods
B) They self-correct in future periods
C) They are corrected in the current year
D) They are corrected in the prior period’s financial statements
Answer: C) They are corrected in the current year
Explanation:
Noncounterbalancing errors take longer than two periods to correct themselves, so they
must be corrected in the current year’s financial statements.
Question 37
Which financial statement reports cash flows from financing, investing, and operating
activities?
A) Income statement
B) Balance sheet
C) Statement of cash flows
D) Statement of equity
Answer: C) Statement of cash flows
Explanation:
The statement of cash flows reports cash flows from operating, investing, and financing
activities, showing the inflows and outflows of cash during a specific period.
Question 38
What is the journal entry for a lessor’s initial sales-type lease?
A) Debit lease receivable, credit inventory
B) Debit lease receivable, debit cost of goods sold, credit inventory, credit sales
revenue
C) Debit cash, credit lease receivable
D) Debit interest revenue, credit lease receivable
Answer: B) Debit lease receivable, debit cost of goods sold, credit inventory, credit sales
revenue
Explanation:
In a sales-type lease, the lessor records the present value of the lease payments as a lease
receivable and recognizes the cost of goods sold, inventory reduction, and sales revenue.
Question 39
Which statement is true about the difference between a finance lease and an operating
lease?
A) Finance leases transfer ownership of the asset to the lessee
B) Operating leases transfer the risks and rewards of ownership to the lessee
C) Finance leases recognize lease payments as a single expense
D) Operating leases record interest and depreciation separately
Answer: A) Finance leases transfer ownership of the asset to the lessee
Explanation:
In finance leases, control of the asset is transferred to the lessee, often with an ownership
transfer or bargain purchase option at the end of the lease term.
Question 40
What happens when a company discovers an error in its financial statements after
issuing them?
A) The company makes no changes
B) The company adjusts its current financial statements
C) The company restates its prior financial statements
D) The company records the error as an extraordinary item
Answer: C) The company restates its prior financial statements
Explanation:
When an error is discovered after financial statements are issued, the company must
restate the prior period’s financial statements to reflect the corrected information.
