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Financial Accounting & Reporting 4

Class Questions

1. CPA-00067
On Merf's April 30, 1993, balance sheet a note receivable was reported as a noncurrent asset and its
accrued interest for eight months was reported as a current asset. Which of the following terms would fit
Merf's note receivable?
a. Both principal and interest amounts are payable on August 31, 1993, and August 31, 1994.
b. Principal and interest are due December 31, 1993.
c. Both principal and interest amounts are payable on December 31, 1993, and December 31, 1994.
d. Principal is due August 31, 1994, and interest is due August 31, 1993, and August 31, 1994.

CPA-00067 Explanation
Choice "d" is correct, principal is due August 31, 1994 (more than one year after the balance sheet date
of April 30, 1993, on which it was reported as a noncurrent asset), and interest is due August 31, 1993,
(since the accrued interest for eight months was reported as a current asset due within one year of the
balance sheet date), and interest is due August 31, 1994, for the one year from Sept. 1, 1993, to August
31, 1994.
Choice "a" is incorrect. Noncurrent principal at April 30, 1993 must be due after April 30, 1994.
Choice "b" is incorrect. Noncurrent principal at April 30, 1993 must be due after April 30, 1994, and
current interest must be paid before April 30, 1994.
Choice "c" is incorrect. Noncurrent principal at April 30, 1993 must be due after April 30, 1994, and
current interest must be paid before April 30, 1994.

2. CPA-00061
Cook Co. had the following balances at December 31, 1992:
Cash in checking account $350,000
Cash in money-market account 250,000
U.S. Treasury bill, purchased 12/1/92, maturing 2/28/93 800,000
U.S. Treasury bond, purchased 3/1/92, maturing 2/28/93 500,000
Cook's policy is to treat as cash equivalents all highly liquid investments with a maturity of three months
or less when purchased. What amount should Cook report as cash and cash equivalents in its December
31, 1992, balance sheet?
a. $600,000
b. $1,150,000
c. $1,400,000
d. $1,900,000

CPA-00061 Explanation
Cash and
cash equivalents
Cash in checking account $ 350,000
Cash in money market account 250,000
U.S. treasury bill, purchased 12/1/92, maturing 2/28/93 (90 days) 800,000
U.S. treasury bond, purchased 3/1/92, maturing 2/28/93
(365 days from the date of issue is not a cash equivalent,
even though it is due only 2 months from the balance sheet date.)
Total cash and cash equivalents $1,400,000
Choice "c" is correct, $1,400,000 cash and cash equivalents.

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Financial Accounting & Reporting 4
Class Questions

3. CPA-00049
Inge Co. determined that the net value of its accounts receivable at December 31, 1993, based on an
aging of the receivables, was $325,000. Additional information is as follows:
Allowance for uncollectible accounts, 1/1/93 $30,000
Uncollectible accounts written off during 1993 18,000
Uncollectible accounts recovered during 1993 2,000
Accounts receivable at 12/31/93 350,000
For 1993, what would be Inge's uncollectible accounts expense?
a. $5,000
b. $11,000
c. $15,000
d. $21,000

CPA-00049 Explanation
Choice "b" is correct.
Allowance for uncollectible accounts:
Beginning balance $30,000
Uncollectible accounts written off (18,000)
Written off accounts now collectible 2,000
Uncollectible accounts expense ?
Year end balance $25,000
Thus, the expense (?) equals $11,000. Note that $350,000 accounts receivable less the allowance for
uncollectible accounts balance equals the $325,000 net accounts receivable).
Choice "a" is incorrect. Uncollectible accounts expense is not defined as the difference between the
beginning balance in the allowance for uncollectible account and the ending balance without regard for
transactions during the year.
Choice "c" is incorrect. The allowance account should be credited for the $2,000 written off accounts now
collectible.
Choice "d" is incorrect. The allowance account should be credited for the $2,000 written off accounts now
collectible, and debited for the $18,000 uncollectible accounts written off.

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Financial Accounting & Reporting 4
Class Questions

4. CPA-00036
At January 1, 1994, Jamin Co. had a credit balance of $260,000 in its allowance for uncollectible
accounts. Based on past experience, 2% of Jamin's credit sales have been uncollectible. During 1994,
Jamin wrote off $325,000 of uncollectible accounts. Credit sales for 1994 were $9,000,000. In its
December 31, 1994, balance sheet, what amount should Jamin report as allowance for uncollectible
accounts?
a. $115,000
b. $180,000
c. $245,000
d. $440,000

CPA-00036 Explanation
Choice "a" is correct. Under the percentage of credit sales approach, uncollectible accounts expense
would be debited and allowance for uncollectible accounts would be credited for $180,000 (2% ×
$9,000,000). For accounts written off, allowance for uncollectible accounts would be debited and
accounts receivable would be credited for $325,000. The December 31, 1994 allowance for uncollectible
accounts balance would be $115,000 ($260,000 + $180,000 − $325,000).
Choice "b" is incorrect. $180,000 is the 1994 addition to the allowance for uncollectible accounts
recognized under the percentage of credit sales method. It does not represent the balance of the account
at year-end.
Choice "c" is incorrect. This calculation incorrectly debits the allowance for uncollectible accounts for the
$180,000 adjustment.
Choice "d" is incorrect. This calculation does not reduce (debit) the allowance for uncollectible accounts
for the $325,000 of accounts written off.

5. CPA-00034
Gar Co. factored its receivables without recourse with Ross Bank. Gar received cash as a result of this
transaction, which is best described as a:
a. Loan from Ross collateralized by Gar's accounts receivable.
b. Loan from Ross to be repaid by the proceeds from Gar's accounts receivable.
c. Sale of Gar's accounts receivable to Ross, with the risk of uncollectible accounts retained by Gar.
d. Sale of Gar's accounts receivable to Ross, with the risk of uncollectible accounts transferred to Ross.

CPA-00034 Explanation
Choice "d" is correct. Factoring receivables without recourse is a sales transaction. Factoring without
recourse transfers the risk of uncollectible accounts to the buyer. SFAS 77 para. 12
Choice "a" is incorrect. Pledging receivables is the process of obtaining a loan using the receivables as
collateral.
Choice "b" is incorrect. Assigning receivables is the process of obtaining a loan by transferring to the
lender the debtor's right to cash collected on receivables.
Choice "c" is incorrect. Factoring receivables may be treated as a sales transaction. Factoring with
recourse leaves the risk of uncollectible accounts with the seller. SFAS 77 para. 12

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Financial Accounting & Reporting 4
Class Questions

6. CPA-00059
Roth, Inc. received from a customer a one-year, $500,000 note bearing annual interest of 8%. After
holding the note for six months, Roth discounted the note at Regional Bank at an effective interest rate of
10%. What amount of cash did Roth receive from the bank?
a. $540,000
b. $523,810
c. $513,000
d. $495,238

CPA-00059 Explanation
Choice "c" is correct, $513,000 cash proceeds received from bank.
Net
proceeds
at
discount
Face of note $ 500,000
Int. rate on note - 8% x 1 yr x 8%
40,000
Maturity value of note 540,000
Disc by bank - 10% x 1/2 yr x 5%
(27,000)
Proceeds from bank $ 513,000

7. CPA-00114
Bren Co.'s beginning inventory at January 1, 1993, was understated by $26,000, and its ending inventory
was overstated by $52,000. As a result, Bren's cost of goods sold for 1993 was:
a. Understated by $26,000.
b. Overstated by $26,000.
c. Understated by $78,000.
d. Overstated by $78,000.

CPA-00114 Explanation
Choice "c" is correct. The $26,000 understatement of beginning inventory creates an understatement of
cost of goods available for sale which leads to a $26,000 understatement of cost of goods sold. The
$52,000 overstatement of ending inventory creates a $52,000 understatement of cost of goods sold.
Thus, cost of goods sold, in total, is understated by $78,000 ($26,000 plus $52,000).
Note: Amounts for beginning and ending balances and purchases are assumed.
As stated – Should be = Difference
Beginning balance $ 0 $ 26,000 ($ 26,000)
Plus purchases $ 100,000 $ 100,000 $ 0
Less ending inventory $ 52,000 $ 0 $ 52,000
Cost of goods sold $ 48,000 $ 126,000 ($ 78,000)
Choice "a" is incorrect. Cost of goods sold is also understated by $52,000 due to the overstatement of
ending inventory.
Choice "b" is incorrect. The $26,000 understatement of beginning inventory creates an understatement,
rather than an overstatement, of cost of goods sold. Cost of goods sold is also understated by $52,000
due to the overstatement of ending inventory.
Choice "d" is incorrect. Cost of goods sold is understated, rather than overstated, by $78,000.

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Financial Accounting & Reporting 4
Class Questions

8. CPA-00112
Herc Co.'s inventory at December 31, 1993, was $1,500,000 based on a physical count priced at cost,
and before any necessary adjustment for the following:
• Merchandise costing $90,000, shipped FOB shipping point from a vendor on December 30, 1993, was
received and recorded on January 5, 1994.
• Goods in the shipping area were excluded from inventory although shipment was not made until
January 4, 1994. The goods, billed to the customer FOB shipping point on December 30, 1993, had a
cost of $120,000.
What amount should Herc report as inventory in its December 31,1993, balance sheet?
a. $1,500,000
b. $1,590,000
c. $1,620,000
d. $1,710,000

CPA-00112 Explanation
Choice "d" is correct. The $90,000 inventory purchase should be included in inventory since it was
shipped prior to year end and title transferred to the company at the shipping point. The unshipped goods
of $120,000 belong to the company since at year end there has been no title transfer to the buyer.
Inventory includes the physical count of $1,500,000, the inventory in transit of $90,000, and the
unshipped sale with a cost of $120,000 for a total inventory valuation of $1,710,000.
Choice "a" is incorrect. Adjustments to the physical inventory count should be made.
Choice "b" is incorrect. The adjustment for the cost of goods sold but not yet shipped should be made.
Choice "c" is incorrect. Adjustment to include the cost of goods purchased and in transit should be made.

9. CPA-00132
On December 1, 1992, Alt Department Store received 505 sweaters on consignment from Todd. Todd's
cost for the sweaters was $80 each, and they were priced to sell at $100. Alt's commission on consigned
goods is 10%. At December 31, 1992, 5 sweaters remained. In its December 31, 1992, balance sheet,
what amount should Alt report as payable for consigned goods?
a. $49,000
b. $45,400
c. $45,000
d. $40,400

CPA-00132 Explanation
Choice "c" is correct. Consigned goods are not included in inventory by Alt and a payable is not recorded
until the goods are sold. 500 sweaters were sold for $50,000. After a 10% commission, $45,000 is
payable.

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Financial Accounting & Reporting 4
Class Questions

10. CPA-00092
A company decided to change its inventory valuation method from FIFO to LIFO in a period of rising
prices. What was the result of the change on ending inventory and net income in the year of the change?
Ending inventory Net income
a. Increase Increase
b. Increase Decrease
c. Decrease Decrease
d. Decrease Increase

CPA-00092 Explanation
Choice "c" is correct. Under LIFO, ending inventory has a lower valuation than under FIFO since older,
lower costs are assigned to ending inventory. Similarly, under LIFO, cost of goods sold has a higher
valuation than under FIFO since recent, higher costs are assigned to goods sold. This higher cost of
goods sold means that net income under LIFO decreases.
Choice "a" is incorrect. Under LIFO, older, lower costs are assigned to ending inventory and cost of
goods sold has a higher valuation (since recent, higher costs are assigned to goods sold) resulting in a
lower net income under LIFO compared to FIFO.
Choice "b" is incorrect. Under LIFO, ending inventory has a lower valuation than under FIFO since older,
lower costs are assigned to ending inventory.
Choice "d" is incorrect. Under LIFO, cost of goods sold has a higher valuation than under FIFO since
recent, higher costs are assigned to goods sold. Thus, net income under LIFO would decrease since the
costs of goods sold expense is higher.

11. CPA-00134
Samm Corp. purchased a plot of land for $100,000. The cost to raze a building on the property amounted
to $50,000 and Samm received $10,000 from the sale of scrap materials. Samm built a new plant on the
site at a total cost of $800,000 including excavation costs of $30,000. What amount should Samm
capitalize in its land account?
a. $150,000
b. $140,000
c. $130,000
d. $100,000

CPA-00134 Explanation
Choice "b" is correct. $140,000: The proper amount to capitalize to land, includes the cost of $100,000
plus the cost to raze the building of $50,000, less the sale of scrap materials of $10,000.
Excavation costs are treated as part of the cost of the building.

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Financial Accounting & Reporting 4
Class Questions

12. CPA-00139
On December 1, 1991, Boyd Co. purchased a $400,000 tract of land for a factory site. Boyd razed an old
building on the property and sold the materials it salvaged from the demolition. Boyd incurred additional
costs and realized salvage proceeds during December 1991 as follows:
Demolition of old building $50,000
Legal fees for purchase contract and recording ownership 10,000
Title guarantee insurance 12,000
Proceeds from sale of salvaged materials 8,000
In its December 31, 1991, balance sheet, Boyd should report a balance in the land account of:
a. $464,000
b. $460,000
c. $442,000
d. $422,000

CPA-00139 Explanation
Choice "a" is correct. Land costs include the costs of getting the land ready for intended use which
includes razing old buildings less salvage plus title insurance and legal fees.
Land $400,000
Demolition 50,000
Legal fees 10,000
Title insurance 12,000
Salvaged materials (8,000)
Total $464,000
Choice "b" is incorrect. Title insurance and salvaged materials proceeds are included in the cost of the
land.
Choice "c" is incorrect. Legal fees and title insurance are included in the cost of the land.
Choice "d" is incorrect. Demolition cost less salvaged materials proceeds are included in the cost of the
land.

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Financial Accounting & Reporting 4
Class Questions

13. CPA-00142
Spiro Corp. uses the sum-of-the-years'-digits method to depreciate equipment purchased in January 1996
for $20,000. The estimated salvage value of the equipment is $2,000 and the estimated useful life is four
years. What should Spiro report as the asset's carrying amount as of December 31, 1998?
a. $1,800
b. $2,000
c. $3,800
d. $4,500

CPA-00142 Explanation
Choice "c" is correct. Spiro should report the asset's carrying value on December 31, 1998, as $3,800.
Base for Depreciation Using
Sum-of-the-years' Digits Method

Purchase price $ 20,000

Salvage value (2,000)
Base $ 18,000

Depreciation Schedule

Depreciation
Fraction Base Expense
Year 1 (1996) 4/10 × $18,000 = $ 7,200
Year 2 (1997) 3/10 × 18,000 = 5,400
Year 3 (1998) 2/10 × 18,000 = 3,600
Year 4 (1999) 1/10 × 18,000 = 1,800
10/10 $ 18,000

Calculation of the Carrying Amount

Purchase price $ 20,000

1996 depreciation (7,200)
1997 depreciation (5,400)
1998 depreciation (3,600)
Carrying value at 12/31/98 $ 3,800

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Financial Accounting & Reporting 4
Class Questions

14. CPA-00144
Rye Co. purchased a machine with a four-year estimated useful life and an estimated 10% salvage value
for $80,000 on January 1, 1992. In its income statement, what would Rye report as the depreciation
expense for 1994 using the double-declining-balance method?
a. $9,000
b. $10,000
c. $18,000
d. $20,000

CPA-00144 Explanation
Choice "b" is correct. The double-declining-balance rate is 50% (2 x 25% straight-line rate). 1992
expense is $40,000 (.5 x book value of $80,000). 1993 expense is $20,000 [50% x book value of
$40,000 ($80,000 – $40,000)]. 1994 expense is $10,000 [50% x book value of $20,000 ($40,000 –
$20,000)].
Choice "a" is incorrect. Salvage value is not included in the calculation of depreciation under the double-
declining-balance method.
Choice "c" is incorrect. Salvage value is not included in the calculation of depreciation under the double-
declining-balance method. The double-declining-balance rate is 50% (2 x 25% straight-line rate).
Choice "d" is incorrect. The double-declining-balance rate is 50% (2 x 25% straight-line rate).

15. CPA-00151
Gei Co. determined that, due to obsolescence, equipment with an original cost of $900,000 and
accumulated depreciation at January 1, 1992, of $420,000 had suffered permanent impairment, and as a
result should have a carrying value of only $300,000 as of the beginning of the year. In addition, the
remaining useful life of the equipment was reduced from 8 years to 3. In its December 31, 1992, balance
sheet, what amount should Gei report as accumulated depreciation?
a. $100,000
b. $520,000
c. $600,000
d. $700,000

CPA-00151 Explanation
Choice "d" is correct. When a permanent impairment occurs, the book value is reduced and a loss is
recorded. The loss is credited to accumulated depreciation. In addition, the current year's depreciation
expense should be added. The new book value is depreciated over the new life.
Accumulated depreciation, 1/1/92 $420,000
Loss ($900,000 – 420,000) – 300,000 180,000
Depreciation for 1992 ($300,000 ÷ 3) 100,000
Accumulated depreciation, 12/31/92 $700,000
Choice "a" is incorrect. The $100,000 is the depreciation expense for 1992. The question asks for
accumulated depreciation balance on 12/31/92.
Choice "b" is incorrect. The $180,000 loss is added to accumulated depreciation.
Choice "c" is incorrect. The $600,000 is the accumulated depreciation as of the date of impairment,
1/1/92. The question asks the balance on 12/31/92.

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