Financial Accounting and Reporting (FAR) Test

Acme Plumbing is a wholly owned subsidiary of Prestige Construction. Both companies have separate general ledgers and prepare separate financial statements. Acme Plumbing requires standalone financial statements, so they can be provided to the company’s lenders.

Which of the following statements is correct?

Consolidated financial statements should be prepared only by Prestige and not by Acme

Midwest Broadcasting entered into a contract to exchange unsold advertising time for travel and lodging services with Sterling Hotels. As of October 30, advertising commercials of $20,000 were used. However, travel and lodging services were not provided. How should Midwest account for advertising in its October 31st financial statements?

Both accounts receivable and advertising revenue of $20,000 are recognized.

Hillside Furniture sells customized furniture pieces. If the company estimates its bad debt expense using the percent of net credit sales method, which of the following statements is true?

The matching principle (matching revenue with expenses) is being followed.

A $12,000 premium on a 3‐year insurance policy expiring on December 31, 2023, was paid in total on January 1, 2021. What amount is posted to insurance expense on December 31, 2021?

$4000

On January 2, 2024, Riverside Manufacturing discovered that it had incorrectly expensed a $280,000 machine purchased on January 2, 2021. Riverside estimated the machine’s original useful life to be 10 years and its salvage value to be $25,000. Riverside uses the straight‐line method of depreciation and is subject to a 30-percent tax rate. In its December 31, 2024, financial statements, what amount should Riverside report as a prior period adjustment?

$137,200

Butler Chemicals purchased a patent on January 1, 2021, for $210,000. The patent was being amortized over its remaining legal life of 15 years, expiring on January 1, 2026. During 2024, Butler determined that the economic benefits of the patent would not last longer than 10 years from the date of acquisition. What amount should be charged to patent amortization expense for the year ended December 31, 2024?

$24,000

Fahey Construction had the following infrequent gains during 2021:

A $220,000 gain on sale of a plant facility. Fahey continues similar operations at another location.

A $105,000 gain on repayment of an 8%, 12-year long‐term note.

A $170,000 gain on reacquisition and retirement of a 6%, 10-year corporate bond.

In its 2021 income statement, how much should Fahey report as total infrequent gains, which are not considered extraordinary?

$325,000

A company reports the following information as of December 31:

Sales revenue $780,000
Cost of goods sold $570,000
Operating expenses $120,000
Unrealized gain on available-for-sale securities, net of tax $45,000

What amount should the company report as comprehensive income as of December 31?

$135,000

Lakeside Co. reviewed its inventory values for proper pricing at year end. Here are the details of an inventory item examined for the lower of cost or market:

Original cost $615,000
Replacement cost $525,000
Net realizable value $655,000
Net realizable value less profit margin $618,000

What amount should Lakeside include in inventory at year‐end if it values inventory using lower of cost or market?

$615,000

Lakeside Gifts sells its merchandise at a gross profit of 30 percent. The following figures are among those pertaining to Lakeside’s operations for the 6 months ended June 30, 2022:

Sales $300,000
Beginning inventory $80,000
Purchases $190,000

On June 30, 2022, all of Lakeside's inventory was destroyed by fire. The estimated cost of this destroyed inventory was

$60,000

Mason Company owns a tract of land, which it purchased in 2021 for $140,000. The land is held as a future plant site and has a fair market value of $180,000 on July 1, 2024. Hammond Company also owns a tract of land held as a future plant site. Hammond paid $200,000 for the land in 2023, and the land has a fair market value of $230,000 on July 1, 2024. On July 1, 2024, Mason exchanged its land and paid $60,000 cash for the land owned by Hammond. It is expected that the cash flows from the two tracts of land will not be significantly different. At what amount should Mason record the land acquired in the exchange?

$200,000

Tanner Construction purchases a machine with a 5‐year estimated useful life and an estimated 10 percent salvage value, which was acquired on January 1, 2023. Would depreciation expense using the sum‐of‐the‐years’ digits method of depreciation be higher or lower than depreciation expense using the double‐declining balance method of depreciation in the first and second years?

Lower first year and lower second year

In its December 31, 2021, balance sheet, Fleming Co. reported accounts receivable of $130,000 and uses the allowance for uncollectable accounts to compute bad debt expenses. Credit sales during 2022 were $614,000, and collections from customers, excluding recoveries, totaled $586,000. During 2022, accounts receivable of $40,000 were written off as uncollectable. In its December 31, 2022, balance sheet, what amount should Fleming report as accounts receivable before allowance for uncollectable accounts?

$118,000

On September 1, 2021, Seaside Gifts borrowed cash and signed a 2‐year interest‐bearing note on which both the principal and interest are payable on September 1, 2023. Seaside needed funds to purchase inventory for the holiday season. The company did not elect the fair value option for reporting this note. On December 31, 2022, the liability for accrued interest should be

For 16 months of interest

On January 1, 2021, Branson Corporation adopted a plan to accumulate funds for a new plant building to be erected beginning July 1, 2026, at an estimated cost of $1,500,000. Branson intends to make five equal annual deposits in a fund that will earn interest at 8 percent compounded annually. The first deposit is made on July 1, 2021. Future amount factors are as follows:

Future amount of ordinary annuity of 1 at 8% for 5 periods: 5.87
Future amount of annuity in advance of 1 at 8% for 5 periods: 6.34

Branson should make five annual deposits (rounded) of

$236,593

On April 1, 2021, Harbour Corporation issued 10 percent corporate bonds dated January 1, 2021, in the face amount of $1,000,000, with interest payable on January 1 and July 1. The bonds were sold at par plus accrued interest. How much should Harbour debit to cash on April 1, 2021?

$1,025,000

Sterling Corporation issues a $1,000,000 6 percent corporate bond due in 10 years. The bond is issued at $980,000.

Which statement is incorrect?

The issuer receives the face amount of the bond in cash.

Evergreen Partnership purchased land for $500,000 on May 1, 2021, paying $100,000 cash and giving a $400,000 note payable to Regal Bank. Evergreen made three annual payments on the note totaling $179,000, which included interest of $89,000. What is the balance on the note after the third payment?

$310,000

Sterling Corporation has both a defined benefit and a defined contribution pension plan in place. In 2023, the projected benefit obligation for all pensions was greater than the fair value of plan assets.

Which statement is incorrect?

A new pension liability balance does not need to be posted to the balance sheet.

Which of the following is not a criterion used by a lessor to record a lease as a direct financing lease?

The lease term is less than 25 percent of the asset’s economic life.

Central Construction owns five trucks. The company uses an accelerated method of depreciation for tax purposes and straight-line depreciation for book purposes.

Which statement is incorrect?

Central will recognize more depreciation expense in the later years for tax purposes than the book method.

On January 1 2022, Lewis Construction pays a $15,000 insurance premium for commercial liability insurance coverage from 1/1/22 to 5/31/22.

Which statement is incorrect?

On 1/1/22, Lewis credits accounts payable $15,000.

Midwest Plumbing Supply has these balances as of 12/31/22:

Beginning inventory $130,000
Cost of goods sold $410,000
Ending inventory $180,000

Midwest’s CPA firm performs a physical inventory count on 12/31/22.

Which statement is incorrect?

Purchases total $310,000 on 12/31/22.

Reliable Electricians purchases a truck for $30,000 with a six-year useful life.

Which statement is incorrect?

The double-declining balance method will generate more depreciation expense in the later years.

East Coast Chemicals owns a $1 million piece of equipment with a 12-year remaining useful life. The company also owns a patent with a 30-year remaining life.

Which statement is incorrect?

Businesses should not change the useful life of an intangible asset if the asset becomes less valuable.

On January 1, 2023, Precision Architects pays a $20,000 insurance premium for commercial liability insurance coverage from 1/1/23 to 5/31/23.

Which statement is incorrect?

On 1/1/23, Precision credits accounts payable $20,000.

Custom Furniture has these balances as of 12/31/22:

Beginning inventory $150,000
Cost of goods sold $390,000
Ending inventory $170,000

Custom’s CPA firm performs a physical inventory count on 12/31/22.

Which statement is incorrect?

Purchases total $460,000 on 12/31/22.

Same-Day Printing purchases a machine for $40,000 with a 10-year useful life.

Which statement is incorrect?

The double-declining balance method will generate more depreciation expense in the later years

O’Reilly Home Builders owns a $30,000 piece of equipment with a 10-year remaining useful life. The company also owns a patent with a 30-year remaining life.

Which statement is incorrect?

Businesses should not change the useful life of an intangible asset if the asset becomes less valuable.

Standard Logistics has both defined benefit and defined contribution pension plans in place. In 2023, the projected benefit obligation for all pensions was less than the fair value of plan assets.

Which statement is incorrect?

A new pension liability balance must be posted to the balance sheet.