2012 AICPA Newly Released Questions Financial Following are multiple choice questions recently released by the AICPA.

. These qu estions were released by the AICPA with letter answers only. Our editorial board has provided the accompanying explanation. Please note that the AICPA generally releases questions that it does NOT intend to use again. These questions and co ntent may or may not be representative of questions you may see on any upcoming exams. 1

2012 AICPA Newly Released Questions Financial 1. A transaction that is unusual in nature or infrequent in occurrence should be reported as a(an): a. b. c. d. Component of income from continuing operations, net of applicable income taxes. Extraordinary item, net of applicable income tax es. Component of income from continuing operations, but not net of applicable in come taxes. Extraordinary item, but not net of applicable income taxes. Solution: Choice "c" is correct. Items of income or loss that are either unusual OR infrequent are not extraordinary. These items should be reported as part of income from continuing operations and not net of tax. Choice "a" is incorrect. I tems reported as part of continuing operations are not reported net of income ta xes. Choice "b" is incorrect. Items that are either unusual or infrequent are no t extraordinary. Under U.S. GAAP, an extraordinary item is one that is both unus ual in nature and infrequent in occurrence. Choice "d" is incorrect. Items that are either unusual or infrequent are not extraordinary. Under U.S. GAAP, an extr aordinary item is one that is both unusual in nature and infrequent in occurrenc e. 2

2012 AICPA Newly Released Questions Financial 2. Which of the following characteristics of accounting information primarily al lows users of financial statements to generate predictions about an organization ? a. b. c. d. Reliability. Timeliness. Neutrality. Relevance. Solution: Choice "d" is correct. According to SFAC No.8, financial information i s relevant if it is capable of making a difference in the decisions made by user s and has predictive and/or confirming value. Choice "a" is incorrect. Reliabili ty, referred to as faithful representation in SFAC No. 8, requires completeness, neutrality and freedom from error. Choice "b" is incorrect. Timeliness is an en hancing qualitative characteristic and means that information is available to us ers in time to be capable of influencing their decisions. Choice "c" is incorrec t. Neutrality is a component of faithful representation, not reliability. 3

2012 AICPA Newly Released Questions Financial 3. A company that is a large accelerated filer must file its Form 10-Q with the United States Securities and Exchange Commission within how many days after the end of the period? a. b. c. d. 30 days. 40 days. 45 days. 60 days. Solution: Choice "b" is correct. Form 10-Q is a quarterly report filed within 40 days for large corporations and 45 days for small corporations after the end of the first three quarters of each fiscal year. It must contain reviews of interi m financial information by an independent CPA. Choice "a" is incorrect. There is no 30 day requirement. Form 10-Q is due 40 days after the end of the quarter fo r large corporations. Choice "c" is incorrect. Form 10-Q is due 45 days after th e end of the quarter for small corporations. Choice "d" is incorrect. Form 10-K, an annual report, is due 60 days after the end of the fiscal year for large cor porations. 4

2012 AICPA Newly Released Questions Financial 4. A company has the following items on its year-end trial balance: Net sales Co mmon stock Insurance expense Wages Cost of goods sold Cash Accounts payable Inte rest payable What is the company's gross profit? a. b. c. d. $230,000 $275,000 $ 400,000 $500,000 $500,000 100,000 75,000 50,000 100,000 40,000 25,000 20,000 Solution: Choice "c" is correct. Gross profit is calculated as sales less cost o f goods sold. Net sales Cost of sales Gross profit $500,000 $100,000 $400,000 Choice "a" is incorrect. Insurance expense, wages and liabilities are not subtra cted to arrive at gross profit. Choice "b" is incorrect. Insurance expense and w ages are not part of cost of goods sold. $275,000 is the amount of net income. C hoice "d" is incorrect. Cost of sales is subtracted from sales to arrive at gros s profit. 5

2012 AICPA Newly Released Questions Financial 5. Alta Co. spent $400,000 during the current year developing a new idea for a p roduct that was patented during the year. The legal cost of applying for a paten t license was $40,000. Also, $50,000 was spent to successfully defend the rights of the patent against a competitor. The patent has a life of 20 years. What amo unt should Alta capitalize related to the patent? a. b. c. d. $40,000 $50,000 $9 0,000 $490,000 Solution: Choice "c" is correct. Development costs of a new product idea are a d irect expense. Legal fees incurred to apply for a patent and to successfully def end the patent rights are capitalized as an asset. Choice "a" is incorrect. The costs incurred to successfully defend the patent are capitalized. Choice "b" is incorrect. The legal costs of applying for a patent license are capitalized. Cho ice "d" is incorrect. The development costs of a new product idea are not capita lized. 6

2012 AICPA Newly Released Questions Financial 6. A retail store sold gift certificates that are redeemable in merchandise. The gift certificates lapse one year after they are issued. How would the deferred revenue account be affected by each of the following? Redemption of certificates Decrease Decrease No effect No effect Lapse of certificates Decrease No effect Decrease No effect a. b. c. d. Solution: Choice "a" is correct. Deferred revenue represents future income colle cted in advance. When the gift certificates are sold, deferred revenue is increa sed. When the certificates are redeemed, the revenue is earned and shown in the income statement. Deferred revenue is decreased. When the certificates lapse, th e company has no further liability and revenue is earned. Deferred revenue is de creased. 7

2012 AICPA Newly Released Questions Financial 7. Brand Co. incurred the following research and development project costs at th e beginning of the current year: Equipment purchased for current and future proj ects Equipment purchased for current projects only Research and development sala ries for current project $100,000 200,000 400,000 Equipment has a five-year life and is depreciated using the straight-line method . What amount should Brand record as depreciation for research and development p rojects at December 31? a. b. c. d. $0 $20,000 $60,000 $140,000 Solution: Choice "b" is correct. Under U.S. GAAP, the only acceptable method of accounting for research and development is a direct charge to expense, except fo r materials, equipment, or facilities that have alternate future uses that are c apitalized and depreciated over their useful lives. The equipment purchased for current projects only must be expensed as research and development cost. Only th e equipment purchased for current and future projects will be capitalized and de precated: $100,000 / 5 years = $20,000. Choice "a" is incorrect. The equipment p urchased for current and future projects is depreciated over the useful life of the equipment of five years: $100,000 / 5 years = $20,000. Choice "c" is incorre ct. The equipment purchased for current projects is an immediate expense and is not depreciated. Choice "d" is incorrect. The equipment purchased for current pr ojects is an immediate expense and is not depreciated. Salaries are a direct exp ense and are not depreciated. 8

2012 AICPA Newly Released Questions Financial 8. How should NSB, Inc. report significant research and development costs incurr ed? a. b. c. d. Expense all costs in the year incurred. Capitalize the costs and amortize over a five-year period Capitalize the costs and amortize over a 40-ye ar period. Expense all costs two years before and five years after the year incu rred. Solution: Choice "a" is correct. Under U.S. GAAP, the only acceptable method of accounting for research and development costs is a direct charge to expense, exc ept for materials, equipment, or facilities that have alternate future uses that are capitalized and depreciated over their useful lives. Choice "b" is incorrec t. The only research and development costs that are capitalized under U.S. GAAP are materials, equipment, or facilities that have alternate future uses that are capitalized and depreciated over their useful lives (not necessarily a 5-year p eriod). Choice "c" is incorrect. The only research and development costs that ar e capitalized under U.S. GAAP are materials, equipment, or facilities that have alternate future uses that are capitalized and depreciated over their useful liv es (not a 40-year period). Choice "d" is incorrect. Under U.S. GAAP, the only ac ceptable method of accounting for research and development costs is a direct cha rge to expense in the period incurred (except for materials, equipment, or facil ities that have alternate future uses that are capitalized and depreciated over their useful lives). 9

2012 AICPA Newly Released Questions Financial 9. On June 19, Don Co., a U.S. company, sold and delivered merchandise on a 30-d ay account to Cologne GmbH, a German corporation, for 200,000 euros. On July 19, Cologne paid Don in full. Relevant currency exchange rates were: Spot rate 30-d ay forward rate June 19 $.988 .990 July 19 $.995 1.000 What amount should Don record on June 19 as an account receivable for its sale t o Cologne? a. b. c. d. $197,600 $198,000 $199,000 $200,000 Solution: Choice "a" is correct. A transaction denominated in a foreign currency is recorded at the spot rate on the date of the transaction: $200,000 x .988 = $197,600. Choice "b" is incorrect. The transaction is not recorded at the forwar d exchange rate of .99. Choice "c" is incorrect. The transaction is not original ly recorded at the exchange rate when the invoice is paid. That amount would not be known at the date of the transaction. The difference between the spot rate o n the transaction date and the settlement date is a foreign currency translation gain or loss. In this case, it is a gain that would be recognized on July 19. C hoice "d" is incorrect. The transaction is not recorded at the forward rate when the transaction is eventually settled. That amount would not be known at the ti me of the original transaction. 10

2012 AICPA Newly Released Questions Financial 10. Burns Corp. had the following items: Sales revenue Loss on early extinguishm ent of bonds Realized gain on sale of available-for-sale securities Unrealized l oss on sale of available-for-sale securities Loss on write-down of inventory $45 ,000 36,000 28,000 17,000 3,100 Which of the following amounts would the statement of comprehensive income repor t as other comprehensive income or loss? a. b. c. d. $11,000 other comprehensive income. $16,900 other comprehensive income. $17,000 other comprehensive loss. $ 28,100 other comprehensive loss. Solution: Choice "c" is correct. Unrealized losses on available-for-sale securit ies are reported in other comprehensive income. Choice "a" is incorrect. Realize d gains on available-for-sale securities are reported on the income statement. C hoice "b" is incorrect. Only the unrealized losses on available-for-sale securit ies are reported in other comprehensive income. All of the other items listed ar e reported in the income statement. Choice "d" is incorrect. Only the unrealized losses on available-for-sale securities are reported in other comprehensive inc ome. The other gain and loss items would be reported on the income statement. 11

2012 AICPA Newly Released Questions Financial 11. On January 1 of the current year, Barton Co. paid $900,000 to purchase two-y ear, 8%, $1,000,000 face value bonds that were issued by another publicly-traded corporation. Barton plans to sell the bonds in the first quarter of the followi ng year. The fair value of the bonds at the end of the current year was $1,020,0 00. At what amount should Barton report the bonds in its balance sheet at the en d of the current year? a. b. c. d. $900,000 $950,000 $1,000,000 $1,020,000 Solution: Choice "d" is correct. The bond investments are classified as trading securities because the bonds are held for the purpose of selling them in the nea r term. Trading securities are reported at fair value on the balance sheet. Choi ce "a" is incorrect. Trading securities are not reported at the original cost of the bonds. Choice "b" is incorrect. Trading securities are not reported at the amortized cost of the bonds. Choice "c" is incorrect. Trading securities are not reported at the face value of the bonds. 12

2012 AICPA Newly Released Questions Financial 12. Tinsel Co.'s balances in allowance for uncollectible accounts were $70,000 a t the beginning of the current year and $55,000 at year end. During the year, re ceivables of $35,000 were written off as uncollectible. What amount should Tinse l report as uncollectible accounts expense at year end? a. b. c. d. $15,000 $20, 000 $35,000 $50,000 Solution: Choice "b" is correct. The uncollectible (bad debts) expense is calcul ated as follows: B A S E Beginning balance, allowance for uncollectible accounts Uncollectible accounts expense Accounts written off Ending balance, allowance f or uncollectible accounts $70,000 Unknown (35,000) $55,000 The uncollectible account expense is $20,000. Choice "a" is incorrect. Because t here were write-offs during the year, the uncollectible accounts expense is not the difference between the beginning and end of year balances in the allowance a ccount. Choice "c" is incorrect. The accounts written off are specific accounts removed from the accounts receivable listing. The amount written off is not the uncollectible accounts expense because the direct write-off method is prohibited by GAAP. Choice "d" is incorrect. When calculating the ending allowance, the un collectible accounts expense must be added and the accounts written off must be subtracted. 13

2012 AICPA Newly Released Questions Financial 13. During the year, Hauser Co. wrote off a customer's account receivable. Hause r used the allowance method for uncollectable accounts. What impact would the wr ite-off have on net income and total assets? a. b. c. d. Net income Decrease Dec rease No effect No effect Total assets Decrease No effect Decrease No effect Solution: Choice "d" is correct. The journal entry for a write off of a specific account receivable under the allowance method is as follows: DR: Allowance for doubtful accounts CR: Accounts receivable $xxx $xxx Since both accounts are asset accounts, there is no effect on net income or tota l assets. 14

2012 AICPA Newly Released Questions Financial 14. The original cost of an inventory item is above the replacement cost. The in ventory item's replacement cost is above the net realizable value. Under the low er of cost or market method, the inventory item should be valued at: a. b. c. d. Original cost. Replacement cost. Net realizable value. Net realizable value les s normal profit margin. Solution: Choice "c" is correct. Inventory is reported at the lower of cost or m arket under U.S. GAAP. Market value is the middle value of an item's replacement cost, net realizable value, and net realizable value less a normal profit margi n. In this problem, the cost is higher than replacement cost, which is higher th an net realizable value, which is higher than net realizable value less normal p rofirm margin. From highest to lowest: Cost Replacement cost Net realizable valu e <-- Market Net realizable value less normal profit margin Therefore, market is equal to net realizable value and market is less than cost, so the inventory sh ould be valued at net realizable value. Choice "a" is incorrect. The inventory w ill not be reported at original cost because the cost of the item is higher than market. Choice "b" is incorrect. The replacement cost is higher than both the n et realizable value and the net realizable value less a normal profit margin. Th erefore, market is net realizable value and market is less than cost, so the inv entory should be valued at net realizable value. Choice "d" is incorrect. The ne t realizable value less a normal profit margin is lower than both the replacemen t cost and net realizable value. Therefore, market is net realizable value and m arket is less than cost, so the inventory should be valued at net realizable val ue. 15

2012 AICPA Newly Released Questions Financial 15. Kauf Co. had the following amounts related to the sale of consignment invent ory: Cost of merchandise shipped to consignee Sales value for two-thirds of inve ntory sold by consignee Freight cost for merchandise shipped Advertising paid fo r by consignee, to be reimbursed 10% commission due the consignee for the sale $ 72,000 80,000 7,500 4,500 8,000 What amount should Kauf report as net profit(loss) from this transaction for the year? a. b. c. d. $(12,000) $8,000 $14,500 $32,000 Solution: Choice "c" is correct. Revenue is recognized when the goods are sold t o a third party. Until the sale, the goods remain in the consigner's inventory. Freight is a cost of inventory and expensed when inventory is sold. Commissions and advertising are expenses. Net sales Cost of sales (2/3 x $72,000) Freight (2 /3 x $7,500) Commissions (10% x $80,000) Advertising Net Profit $80,000 (48,000) (5,000) (8,000) (4,500) $14,500 Choice "a" is incorrect. Unsold inventory is not included as an expense. Choice "b" is incorrect. Total sales less total inventory is not considered to be the n et income. Choice "d" is incorrect. Freight, commissions and advertising are exp enses used to calculate the net income. 16

2012 AICPA Newly Released Questions Financial 16. A manufacturer has the following per-unit costs and values for its sole prod uct: Cost Current replacement cost Net realizable value Net realizable value les s normal profit margin $10.00 5.50 6.00 5.20 In accordance with IFRS, what is the per-unit carrying value of inventory in the manufacturer's statement of financial position? a. b. c. d. $5.20 $5.50 $6.00 $ 10.00 Solution: Choice "c" is correct. IFRS requires inventory to be reported at the l ower of cost or net realizable value. Choice "a" is incorrect. Net realizable va lue less normal profit margin is not recognized under IFRS. U.S. GAAP sets this as the market floor. Choice "b" is incorrect. The current replacement cost is no t recognized by IFRS in determining the lower of cost or market. Choice "d" is i ncorrect. The net realizable value is lower than the cost and is the carrying va lue of inventory according to IFRS. 17

2012 AICPA Newly Released Questions Financial 17. At the beginning of the year, Cann Co. started construction on a new $2 mill ion addition to its plant. Total construction expenditures made during the year were $200,000 on January 2, $600,000 on May 1, and $300,000 on December 1. On Ja nuary 2, the company borrowed $500,000 for the construction at 12%. The only oth er outstanding debt the company had was a 10% interest rate, long-term mortgage of $800,000, which had been outstanding the entire year. What amount of interest should Cann capitalize as part of the cost of the plant addition? a. b. c. d. $ 140,000 $132,000 $72,500 $60,000 Solution: Choice "c" is correct. Construction period interest is capitalized bas ed on the weighted average of accumulated construction expenditures. The interes t rate paid on borrowings specifically for asset construction is used first to d etermine the amount of interest cost capitalized. If the average accumulated exp enditures outstanding exceed the amount of the specific new borrowing, interest on the excess is computed based on the interest rate for other borrowings of the company. Average expenditures: $200,000 4/12 (Jan-Apr) $800,000 7/12 (May-Nov) $1,100,000 1/12 (Dec) Average Expenditures Capitalized Interest Expense: Constru ction loan $500,000 x 12% Excess Expenditures $125,000 x 10% Capitalized interes t $ 66,667 466,667 91,666 $625,000 $60,000 12,500 $72,500 Choice "a" is incorrect. Only the interest related to construction expenditures is capitalized. The entire amount of interest is not capitalized. Choice "b" is incorrect. The capitalized interest is based on the weighted average constructio n expenditures during the year and the rates of interest for specific borrowings . It is not calculated as the year end amount of expenditures at the constructio n loan rate. Choice "d" is incorrect. The capitalized interest is not based simp ly on the construction loan interest paid. It is based on the average expenditur es and the interest rates paid by the company. 18

2012 AICPA Newly Released Questions Financial 18. Hudson Corp. operates several factories that manufacture medical equipment. The factories have a historical cost of $200 million. Near the end of the compan y's fiscal year, a change in business climate related to a competitor's innovati ve products indicated to Hudson's management that the $170 million carrying amou nt of the assets of one of Hudson's factories may not be recoverable. Management identified cash flows from this factory and estimated that the undiscounted fut ure cash flows over the remaining useful life of the factory would be $150 milli on. The fair value of the factory's assets is reliably estimated to be $135 mill ion. The change in business climate requires investigation of possible impairmen t. Which of the following amounts is the impairment loss? a. b. c. d. $15 millio n $20 million $35 million $65 million Solution: Choice "c" is correct. A fixed asset is first tested for impairment. I f the sum of the undiscounted expected future cash flows is less than the carryi ng amount, an impairment loss needs to be recognized. In this problem, the carry ing value is $170 million and the undiscounted future cash flows are estimated t o be $150 million. Therefore, an impairment loss must be recorded. The amount of the impairment loss is the amount by which the carrying amount exceeds the fair value of the asset: $170 million carrying amount $135 million fair value of ass ets = $35 million impairment loss. Choice "a" is incorrect. The impairment loss is not calculated by taking the difference between the undiscounted expected cas h flows and the fair value of the assets. Choice "b" is incorrect. The impairmen t loss is not the difference between the carrying value and the expected cash fl ows. But, this calculation is used to determine whether there is an impairment l oss. Choice "d" is incorrect. The carrying amount of the asset, not the original cost, is used to calculate the impairment loss. 19

2012 AICPA Newly Released Questions Financial 19. On January 2, Vole Co. issued bonds with a face value of $480,000 at a disco unt to yield 10%. The bonds pay interest semiannually. On June 30, Vole paid bon d interest of $14,400. After Vole recorded amortization of the bond discount of $3,600, the bonds had a carrying amount of $363,600. What amount did Vole receiv e upon issuing the bonds? a. b. c. d. $360,000 $367,200 $476,400 $480,000 Solution: Choice "a" is correct. The unamortized discount on bonds payable is a contra to bonds payable. It is presented on the balance sheet as a direct reduct ion from the face value of the bonds to arrive at the bond's carrying amount. As the discount is amortized, the carrying value of the bond decreases. The carryi ng amount is $363,600 after recording amortization of $3,600. Therefore, the car rying amount before amortization is $360,000. Choice "b" is incorrect. Amortizat ion of a discount increases, not decreases, the carrying amount of the bond. Amo rtization of the discount or premium always moves the carrying value closer to t he face value. Choice "c" is incorrect. Amortization is calculated on the carryi ng amount of the bond, not the face value of the bond. Choice "d" is incorrect. The face value of the bond is received if there was no discount or premium. 20

2012 AICPA Newly Released Questions Financial 20. What type of bonds mature in installments? a. b. c. d. Debenture. Term. Vari able rate. Serial. Solution: Choice "d" is correct. Serial bonds are pre-numbered bonds that the is suer may call and redeem a portion by serial number. Choice "a" is incorrect. De bentures are unsecured bonds. Choice "b" is incorrect. Term bonds are bonds that have a single fixed maturity date. Choice "c" is incorrect. Variable rate bonds have interest rates that change. 21

2012 AICPA Newly Released Questions Financial 21. Bondholders of Balm Co. converted their bonds into 90,000 shares of $5 alue common stock. In Balm's accounting records, the bonds had a par value 75,000 and unamortized discount of $23,000 at the time of conversion. What t of additional paid-in capital from the conversion should Balm record? a. d. $302,000 $325,000 $348,000 $798,000 par v of $7 amoun b. c.

Solution: Choice "a" is correct. No gain or loss is recognized at conversion. At conversion, the bond payable and discount are written off and common stock is c redited at par. Additional paid in capital is credited for the excess of the bon d's carrying value over the stock's par value. DR: Bond Payable CR: Unamortized discount CR: Common stock par value CR: Additional paid in capital $775,000 $ 23 ,000 450,000 302,000 Choice "b" is incorrect. The unamortized discount needs to be subtracted from th e amount of bonds payable. Choice "c" is incorrect. The unamortized discount nee ds to be subtracted, not added, to the amount of bonds payable. Choice "d" is in correct. The stock amount needs to be split between common stock and additional paid in capital and the unamortized discount should be subtracted, not added. 22

2012 AICPA Newly Released Questions Financial 22. On June 1 of the current year, a company entered into a real estate lease ag reement for a new building. The lease is an operating lease and is fully execute d on that day. According to the terms of the lease, payments of $28,900 per mont h are scheduled to begin on October 1 of the current year and to continue each m onth thereafter for 56 months. The lease term spans five years. The company has a calendar year end. What amount is the company's lease expense for the current calendar year? a. b. c. d. $86,700 $161,838 $188,813 $202,300 Solution: Choice "c" is correct. If free or reduced rent is part of the lease pa ckage, the lessee must take the total rent expense to be paid for the entire ter m of the lease and divide it evenly over each period. Rent to be paid per month Rent payments Total rent to be paid Months in lease Monthly rent expense Months in current year Rent expense for current year $ 28,900 56 $1,618,400 60 $ 26,973 7 $ 188,813 Choice "a" is incorrect. The rent expense is not the amount of cash paid in the current year. Rent expense must be recognized evenly over the life of the lease. Choice "b" is incorrect. The rent expense for the current year is 7 months, not 6 months. Choice "d" is incorrect. The rent expense is not calculated at the pa yment amount for seven months. 23

2012 AICPA Newly Released Questions Financial 23. Each of the following is a component of the changes in the net assets availa ble for benefits of a defined benefit pension plan trust, except: a. b. c. d. Th e net change in fair value of each significant class of investments. The net cha nge in the actuarial present value of accumulated plan benefits. Contributions f rom the employer and participants. Benefits paid to participants. Solution: Choice "b" is correct. The statement of changes in net assets availabl e for benefits shows the appreciation in the fair value of investments, any othe r investment income, investment expenses, contributions, benefits paid, and admi nistrative expenses to arrive at the net increase or decrease in net assets avai lable for benefits during the period. The change in actuarial present value of a ccumulated plan benefits is shown on the statement of changes in accumulated pla n benefits. Choice "a" is incorrect. The net change in fair value is reported on the statement of changes in net assets available for benefits. Choice "c" is in correct. Contributions to the plan, whether from the employer or participants, a re reported on the statement of changes in net assets available for benefits. Ch oice "d" is incorrect. Benefits paid are reported on the statement of changes in net assets available for benefits. 24

2012 AICPA Newly Released Questions Financial 24. The funded status of a defined benefit pension plan for a company should be reported in a. b. c. d. The income statement. The statement of cash flows. The s tatement of financial position. The notes to the financial statements only. Solution: Choice "c" is correct. Companies are required to report the funded sta tus of their pension plan on the statement of financial position as an asset or liability (or both). The statement of financial position is also known as the ba lance sheet. The funded status of a pension plan is the fair value of plan asset s less the projected benefit obligation. Choice "a" is incorrect. The funded sta tus of a pension plan is not shown in the income statement. Choice "b" is incorr ect. The funded status of a pension plan is not shown in the statement of cash f lows. Choice "d" is incorrect. The funded status of a pension plan is explained in the notes to the financial statements and also shown on the statement of fina ncial position. 25

2012 AICPA Newly Released Questions Financial 25. Baler Co. prepared its statement of cash flows at year-end using the direct method. The following amounts were used in the computation of cash flows from op erating activities: Beginning inventory Ending Inventory Cost of goods sold Begi nning accounts payable Ending accounts payable $200,000 150,000 1,200,000 300,00 0 200,000 What amount should Baler report as cash paid to suppliers for inventory purchase s? a. b. c. d. $1,200,000 $1,250,000 $1,300,000 $1,350,000 Solution: Choice "b" is correct. Cash paid to suppliers is calculated as follows : Cost of goods sold Minus: Decrease in inventory Plus: Decrease in accounts pay able Cash paid to suppliers $1,200,000 (50,000) 100,000 $1,250,000 Choice "a" is incorrect. Cost of goods sold is an accrual basis amount. Adjustme nts for the decreases in inventory and accounts payable must be made to calculat e the amount of cash actually paid. Choice "c" is incorrect. The decrease in inv entory must be subtracted from the cost of sales to get the amount of cash paid to suppliers. Choice "d" is incorrect. The decrease in inventory must be subtrac ted from the cost of sales (not added) to get the amount of cash paid to supplie rs. Since the overall inventory level decreased, purchases during the period wer e less than the cost of sales. 26

2012 AICPA Newly Released Questions Financial 26. Which of the following transactions is included in the operating activities section of a cash flow statement prepared using the indirect method? a. b. c. d. Gain on sale of plant asset. Sale of property, plant and equipment. Payment of cash dividend to the shareholders. Issuance of common stock to the shareholders. Solution: Choice "a" is correct. Gains on the sale of plant assets are an adjust ment to net income in the operating section of a cash flow statement since they are included in net income but do not affect operating cash receipts and disburs ements. Choice "b" is incorrect. The sale of property, plant and equipment is an investing activity. Choice "c" is incorrect. The payment of cash dividends is a financing activity. Choice "d" is incorrect. Issuance of common stock is a fina ncing activity. 27

2012 AICPA Newly Released Questions Financial 27. Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following events occurred during the year: 4/1 6/1 7/1 9/1 Issued 30,000 shares of common stock. Issued 36,000 shares of common stock. Declared a 5% stock divi dend. Purchased as treasury stock 35,000 shares of its common stock. Balm used t he cost method to account for the treasury stock. What is Balm's weighted average of common stock outstanding at December 31? a. b . c. d. 131,000 139,008 150,675 162,342 Solution: Choice "b" is correct. Total Shares 100,000 130,000 166,000 139,300 x Period Outstanding 3/12(Jan-Mar) 2/12(Apr-May) 3/12(June-Aug) 4/12(Sept-Dec) x A djustment for split 1.05 1.05 1.05 Weighted Average = Weighted Avg. 26,250 22,75 0 43,575 46,433 139,008 Choice "a" is incorrect. rred at the beginning of end must be restated for ce "c" is incorrect. The outstanding. Choice "d" tion, not an addition to 28 The 5% stock dividend must be treated as though it occu the year. The shares outstanding before the stock divid the portion of the year before the stock dividend. Choi purchase of treasury stock reduces the amount of shares is incorrect. The purchase of treasury stock is a reduc the amount of shares outstanding.

2012 AICPA Newly Released Questions Financial 28. The stockholders of Meadow Corp. approved a stock-option plan that grants th e company's top three executives options to purchase a maximum of 1,000 shares e ach of Meadow's $2 par common stock for $19 per share. The options were granted on January 1 when the fair value of the stock was $20 per share. Meadow determin ed that the fair value of the compensation is $300,000 and the vesting period is three years. What amount of compensation expense from the options should Meadow record in the year the options were granted? a. b. c. d. $20,000 $60,000 $100,0 00 $300,000 Solution: Choice "c" is correct. Compensation expense is calculated at the grant date of the option and allocated over the vesting period: $300,000 / 3 years = $100,000 per year. Choice "a" is incorrect. Compensation expense is not recorded at the total par value of the stock divided by the vesting period. Choice "b" i s incorrect. Compensation expense is not recorded at the total par value of the stock. Choice "d" is incorrect. Compensation expense is not recorded in full in the year the options are issued when the vesting period is three years. Compensa tion expense is recognized equally over the vesting period. 29

2012 AICPA Newly Released Questions Financial 29. Jones Co. had 50,000 shares of $5 par value common stock outstanding at Janu ary 1. On August 1, Jones declared a 5% stock dividend followed by a two-for-one stock split on September 1. What amount should Jones report as common shares ou tstanding at December 31? a. b. c. d. 105,000 100,000 52,500 50,000 Solution: Choice "a" is correct. The common shares outstanding at year-end are c alculated as follows: 50,000 shares outstanding at the beginning of the year x 1 .05 (stock dividend) x 2 (stock split) = 105,000 Choice "b" is incorrect. Shares are increased 5% on 8/1 as a result of the 5% stock dividend. Choice "c" is inc orrect. Shares are increased by the two-for-one stock split on 9/1. Choice "d" i s incorrect. Shares have increased during the year due to the stock dividend and stock split. 30

2012 AICPA Newly Released Questions Financial 30. Polk Co. acquires a forklift from Quest Co. for $30,000. The terms require P olk to pay $3,000 down and finance the remaining $27,000. On March 1, year 1, Po lk pays the $3,000 down and accepted delivery of the forklift. Polk signed a not e that requires Polk to pay principal payments of $1,000 per month for 27 months beginning July 1, year 1. What amount should Polk report as an investing activi ty in the statement of cash flows for the year ended December 31, year 1? a. b. c. d. $3,000 $9,000 $12,000 $30,000 Solution: Choice "a" is correct. Only the cash down payment is considered to be a cash flow from the purchase of noncurrent assets. The remaining $27,000 note i s a non-cash investing and financing activity, disclosed separately and not cons idered as a cash flow. The $9,000 in principal payments on the note are financin g activities since they are payments on a debt obligation. Choice "b" is incorre ct. The $9,000 in principal payments on the note are financing activities since they are payments on a debt obligation. Choice "c" is incorrect. The $9,000 in p rincipal payments on the note are financing activities since they are payments o n a debt obligation. Choice "d" is incorrect. Only the actual cash down payment of $3,000 is considered to be a cash flow from investing activities. The remaini ng $27,000 note is a non-cash investing and financing activity, disclosed separa tely and not considered as a cash flow. The $9,000 in principal payments on the note are financing activities since they are payments on a debt obligation. 31

2012 AICPA Newly Released Questions Financial 31. Wood Co.'s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred s tock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the inc ome available to common stockholders be calculated? a. The current-year dividend s and the dividends in arrears on the cumulative preferred stock should be added to the net loss, but the dividends on the noncumulative preferred stock should not be included in the calculation. b. The dividends on the noncumulative prefer red stock should be added to the net loss, but the currentyear dividends and the dividends in arrears on the cumulative preferred stock should not be included i n the calculation. c. The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss. d. Neither the dividends on the noncumulative preferred stock nor the current-year dividends and the dividends in arrears on cumulative preferred sto ck should be included in the calculation. Solution: Choice "c" is correct. Income available to common shareholders is dete rmined by deducting dividends declared in the period on non-cumulative preferred stock (regardless of whether they have been paid) and dividends accumulated in the period on cumulative preferred stock (regardless of whether they have been d eclared). Choice "a" is incorrect. Dividends on noncumulative preferred stock ar e added to the net loss since the dividend was declared in the current period. A dditionally, only the current period dividends and not the dividends in arrears on the cumulative preferred stock are added to the net loss. Dividends in arrear s were subtracted from income in the year that they first were an obligation of the company. Choice "b" is incorrect. Current year dividends on cumulative prefe rred stock are added to the net loss since the company is obligated to pay these dividends before distributions are made to common shareholders. Dividends in ar rears were subtracted from income in the year that they first were an obligation of the company. Choice "d" is incorrect. Income available to common shareholder s is determined by deducting dividends declared in the period on non-cumulative preferred stock (regardless of whether they have been paid) and dividends accumu lated in the period on cumulative preferred stock (regardless of whether they ha ve been declared). 32

2012 AICPA Newly Released Questions Financial 32. Which of the following funds would be reported as a fiduciary fund in Pine C ity's financial statements? a. b. c. d. Special revenue. Permanent. Private-purp ose trust. Internal service. Solution: Choice "c" is correct. Fiduciary funds include Private Purpose Funds. Fund structure is generally defined using the following framework / mnemonic (GR SPP SE PAPI). Governmental funds General Special Revenue Debt Service Capital Pr ojects Permanent Proprietary funds Internal Service Enterprise Fiduciary funds P ension Agency Private Purpose Investment Trust Choice "a" is incorrect. Special Revenue funds are governmental funds. Choice "b " is incorrect. Permanent funds are governmental funds. Choice "d" is incorrect. Internal service funds are proprietary funds. 33

2012 AICPA Newly Released Questions Financial 33. On January 1, Fonk City approved the following general fund resources for th e new fiscal period: Property taxes Licenses and permits Intergovernmental reven ues Transfers in from other funds $5,000,000 400,000 150,000 350,000 What amount should Fonk record as estimated revenues for the new fiscal year? a. b. c. d. $5,400,000 $5,550,000 $5,750,000 $5,900,000 Solution: Choice "b" is correct. Revenues include property taxes, licenses and i ntergovernmental revenues. Transfers would be considered estimated other financi ng sources. Estimated revenues are: Property taxes Licenses and permits Intergov ernmental revenues Total estimated revenues $5,000,000 400,000 150,000 $5,550,00 0 Choice "a" is incorrect. Total estimated revenues are computed above. The propos ed solution incorrectly excludes intergovernmental revenue. Choice "c" is incorr ect. Total estimated revenues are computed above. The proposed solution incorrec tly excludes intergovernmental revenue and includes transfers, a resource inflow classified as other financing sources, not revenue. Choice "d" is incorrect. To tal estimated revenues are computed above. The proposed solution incorrectly inc ludes transfers, resources inflow classified as other financing sources, not rev enue. 34

2012 AICPA Newly Released Questions Financial 34. Kenn City obtained a municipal landfill and passed a local ordinance that re quired the city to operate the landfill so that the costs of operating the landf ill, as well as the capital costs, are to be recovered with charges to customers . Which of the following funds should Kenn City use to report the activities of the landfill? a. b. c. d. Enterprise. Permanent. Special revenue. Internal servi ce. Solution: Choice "a" is correct. Kenn City should account for the landfill as an enterprise fund. Activities are required to be reported as enterprise funds if any one of the following criteria are met: a. The activity is financed with debt that is secured solely by a pledge of the net revenue from fees and charges b. Laws and regulations require that the cost of providing services be recovered th rough fees c. The pricing policies of the activity establish fees and charges de signed to recover its costs The local ordinance adopted by the city requires it to operate the landfill so t hat the costs of operating the landfill, as well as the capital costs, be recove red with charges to customers. The landfill is an enterprise fund. Choice "b" is incorrect. Permanent funds should be used to report resources that are legally restricted to the extent that only earnings and not principal may be used for th e purposes that support the reporting government's programs. The landfill operat ions are not restricted in this manner. Choice "c" is incorrect. Special revenue funds account for expenditures that are legally restricted or committed for spe cific purposes other than debt service or capital projects. Typically sales taxe s, gasoline taxes or grant funds are accounted for in special revenue funds. The landfill is a fee based enterprise that fully defrays operating and capital cos ts. Choice "d" is incorrect. Although the question does not specifically state t hat the landfill will serve external customers, that's a safe assumption. Landfi lls will generally provide waste disposal services to citizens of a region, not the departments of government. 35

2012 AICPA Newly Released Questions Financial 35. At the beginning of the current year, Paxx County's enterprise fund had a $1 25,000 balance for accrued compensated absences. At the end of the year, the bal ance was $150,000. During the year, Paxx paid $400,000 for compensated absences. What amount of compensated absences expense should Paxx County's enterprise fun d report for the year? a. b. c. d. $375,000 $400,000 $425,000 $550,000 Solution: Choice "c" is correct. The amount of the expense associated with compe nsated absences can be derived from the change in liability account as follows: Beginning (balance of liability) Add (accrued compensated absence expenses) Subt ract (payments) Ending (balance of liability) $125,000 425,000 (Squeeze) (400,00 0) $150,000 Choice "a" is incorrect. The proposed answer is backwards, it reverses the begin ning and ending balances from the fact pattern in arriving at $375,000. Choice " b" is incorrect. The amount of the expense is not equal to the payments. Choice "d" is incorrect. The amount of the payments plus the ending balance of the liab ility is not the amount of the expense. This computation ignores the effect of t he beginning balance. 36

2012 AICPA Newly Released Questions Financial 36. A government makes a contribution to its pension plan in the amount of $10,0 00 for year 1. The actuarially-determined annual required contribution for year 1 was $13,500. The pension plan paid benefits of $8,200 and refunded employee co ntributions of $800 for year 1. What is the pension expenditure for the general fund for year 1? a. b. c. d. $8,200 $9,000 $10,000 $13,500 Solution: Choice "c" is correct. The general fund would record an expenditure eq ual to $10,000, the amount that it paid toward its contribution to pension fundi ng. A governmental fund's payments to a pension fund are accounted for as a fund expenditure. Any actuarially determined contribution requirement is accounted f or as part of pension fund reporting. Choice "a" is incorrect. A governmental fu nd's payments to a pension fund are accounted for as the fund expenditure. The g overnmental fund expenditure is not the amount paid to beneficiaries, $8,200, as suggested by this answer. Choice "b" is incorrect. A governmental fund's paymen ts to a pension fund are accounted for as the fund expenditure. The governmental fund expenditure is not the amount paid to beneficiaries, $8,200 plus the $800 in refunded contributions totaling $9,000, as suggested by this answer. Choice " d" is incorrect. The $13,500 in actuarially determined contributions would not b e the general fund expenditure as proposed by this solution. The general fund wo uld record an expenditures equal to $10,000, the amount that it paid toward its contribution to pension funding. A governmental fund's payments to a pension fun d are accounted for as the fund expenditure. Any actuarially determined contribu tion requirement is accounted for as part of pension fund reporting. 37

2012 AICPA Newly Released Questions Financial 37. Which of the following is one of the three standard sections of a government al comprehensive annual financial report? a. b. c. d. Investment. Actuarial. Sta tistical. Single audit. Solution: Choice "c" is correct. A comprehensive annual financial report (CAFR) includes a statistical section. A CAFR is divided into three sections; 1. Introd uctory 2. Financial (which includes both basic financial statements and required supplementary information as required by GASB #34) 3. Statistical Neither the i ntroductory section nor the statistical section is audited. Choice "a" is incorr ect. The term "investment section" is not used to define CAFR sections. Choice " b" is incorrect. The term "actuarial section" is not used to define CAFR section s. Choice "d" is incorrect. The term "single audit section" is not used to defin e CAFR sections. 38

2012 AICPA Newly Released Questions Financial 38. Which of the following financial categories are used in a nongovernmental no t-for-profit organization's statement of financial position? a. b. c. d. Net ass ets, income, and expenses. Income, expenses, and unrestricted net assets. Assets , liabilities, and net assets. Changes in unrestricted, temporarily restricted, and permanently restricted net assets. Solution: Choice "c" is correct. A not-for-profit organization classifies balanc es in its statement of financial position as assets, liabilities, and net assets . Choice "a" is incorrect. A not-for-profit organization classifies balances in its statement of financial position as assets, liabilities, and net assets, not net assets, income, and expenses. The statement of activities generally uses inc ome and expense classifications along with net assets. Choice "b" is incorrect. A not-for-profit organization classifies balances in its statement of financial position as assets, liabilities, and net assets. The statement of activities gen erally uses income and expense classifications along with net assets by classifi cation, including unrestricted net assets. Choice "d" is incorrect. A not-for-pr ofit organization classifies balances in its statement of financial position as assets, liabilities, and net assets. The statement of activities generally accou nts for changes in all classifications of net assets. 39

2012 AICPA Newly Released Questions Financial 39. In year 2, the Nord Association, a nongovernmental not-for-profit organizati on, received a $100,000 contribution to fund scholarships for medical students. The donor stipulated that only the interest earned on the contribution be used f or the scholarships. Interest earned in year 2 of $15,000 was used to award scho larships in year 3. What amount should Nord report as temporarily restricted net assets at the end of year 2? a. b. c. d. $115,000 $100,000 $15,000 $0 Solution: Choice "c" is correct. At the end of year 2, Nord Association has temp orarily restricted net assets of $15,000, the amount of unspent earnings stipula ted by the donor to be used for a specific purpose, scholarships. The fact patte rn notes that this amount was not used until year 3. Choice "a" is incorrect. At the end of year 2, Nord Association has temporarily restricted net assets of $1 5,000, the amount of unspent earnings stipulated by the donor to be used for sch olarships. The $100,000 received by the Nord Association and subject to a donor restriction that allows only for earnings to be used for specified purposes (a c ontribution with restrictions that can never be removed), is classified as perma nently restricted. Choice "b" is incorrect. The $100,000 received by the Nord As sociation and subject to a donor restriction that allows only for earnings to be used for specified purposes (a contribution with restrictions that can never be removed) is classified as permanently restricted. Choice "d" is incorrect. At t he end of year 2, Nord Association has temporarily restricted net assets of $15, 000, the amount of unspent earnings stipulated by the donor to be used for schol arships. 40

2012 AICPA Newly Released Questions Financial 40. On January 1, Read, a nongovernmental not-for-profit organization, received $20,000 and an unconditional pledge of $20,000 for each of the next four calenda r years to be paid on the first day of each year. The present value of an ordina ry annuity for four years at a constant interest rate of 8% is 3.312. What amoun t of restricted net assets is reported in the year the pledge was received? a. b . c. d. $66,240 $80,000 $86,240 $100,000 Solution: Choice "a" is correct. Read would display temporarily restricted net a ssets of $66,240. Multiyear pledges are recorded at their net present value at t he date the pledge is made. Thus, multiyear pledges should be discounted. Multiy ear pledges have an implied time restriction and are temporarily restricted. The question requires that we presume that the discount rate given is appropriate a nd reasonable so the net present value of a four year annuity beginning on the f irst of the next year (end to the current year) discounted at 8% using the ordin ary annuity factor is: $20,000 x 3.312 = $66,240 Choice "b" is incorrect. The pr oposed response of $80,000 does not discount the annuity in error. The cash rece ipts should be discounted to the net present value. Choice "c" is incorrect. The proposed solution appears to compound the annuity rather than discount it to it s present value in error. Choice "d" is incorrect. The proposed solution appears to consider the annuity for a five year period instead of four and, furthermore , does not discount the income stream in error. 41

2012 AICPA Newly Released Questions Financial 41. Belle, a nongovernmental not-for-profit organization, received funds during its annual campaign that were specifically pledged by the donor to another nongo vernmental not-for-profit health organization. How should Belle record these fun ds? a. b. c. d. Increase in assets and increase in liabilities. Increase in asse ts and increase in revenue. Increase in assets and increase in deferred revenue. Decrease in assets and decrease in fund balance. Solution: Choice "a" is correct. Belle would account for the monies pledged by t he donor to another not-for-profit organization as an asset and as a liability t o that other organization. Recipients (like Belle) that do not have variance pow er (do not have any latitude with regard to use of the funds received) would rec ognize the asset received as a liability to the beneficiary. Choice "b" is incor rect. Belle would recognize revenues if it had variance power (discretion) over the funds received. Since Belle does not have variance power, they would not rec ognize revenue, they would recognize a liability. Choice "c" is incorrect. Belle would potentially recognize deferred revenue if the receipts could be earned, h owever, Belle does not have variance power so there is no deferral of revenue, t here is a liability to the beneficiary. Choice "d" is incorrect. Receipts owed t o another entity would not be a direct entry to equity. Regardless, equity accou nts in not for profit entities are titled net assets and not fund balance. 42

2012 AICPA Newly Released Questions Financial 42. Ragg Coalition, a nongovernmental not-for-profit organization, received a gi ft of treasury bills. The cost to the donor was $20,000, with an additional $500 for brokerage fees that were paid by the donor prior to the transfer of the tre asury bills. The treasury bills had a fair value of $15,000 at the time of the t ransfer. At what amount should Ragg report the treasury bills in its statement o f financial position? a. b. c. d. $15,000 $15,500 $20,000 $20,500 Solution: Choice "a" is correct. Ragg would report the treasury bills at their f air value of $15,000 on the statement of financial position. All debt securities that have readily determinable fair values are measured at fair value in the st atement of financial position. Donated items are valued at fair value upon recei pt. Securities are marked to market and valued at fair value at the balance shee t date. The question is silent as to the receipt date and the value at year end, so we are left to assume that the value on the statement of financial position is the last fair value provided, $15,000. Choice "b" is incorrect. The fair valu e plus brokerage costs is not the valuation used by the recipient. The recipient would purely use the fair value. Choice "c" is incorrect. The donor's basis is not the valuation used by the recipient. The recipient would use the fair value. Choice "d" is incorrect. The donor's basis plus brokerage costs is not the valu ation used by the recipient. The recipient would use the fair value. 43

2012 AICPA Newly Released Questions Financial 43. At the beginning of the year, the carrying value of an asset was $1,000,000 with 20 years of remaining life. The fair value of the liability for the asset r etirement obligation was $100,000. At year end, the carrying value of the asset was $950,000. The risk-free interest rate was 5%. The credit-adjusted riskfree i nterest rate was 10%. What was the amount of accretion expense for the year rela ted to the asset retirement obligation? a. b. c. d. $10,000 $50,000 $95,000 $100 ,000 Solution: Choice "a" is correct. Accretion expense is the increase in the ARO li ability due to the passage of time. The credit adjusted interest rate is used to calculate the ARO, as follows: Beginning ARO x Risk-adjusted rate = $100,000 x 10% = $10,000 Choice "b" is incorrect. Accretion expense is not equal to the car rying value of the asset times the riskfree rate. Accretion expense is the incre ase in the ARO liability due to the passage of time. Accretion expense is beginn ing asset retirement obligation times the appropriate accretion rate, in this ca se the credit-adjusted rate. Choice "c" is incorrect. Accretion expense is not e qual to the ending carrying value of the asset times the risk-adjusted rate. Acc retion expense is the increase in the ARO liability due to the passage of time. Accretion expense is beginning asset retirement obligation times the appropriate accretion rate, in this case the credit-adjusted rate. Choice "d" is incorrect. Accretion expense is not equal to the asset retirement obligation. Accretion ex pense is the increase in the ARO liability due to the passage of time. Accretion expense is beginning asset retirement obligation times the appropriate accretio n rate, in this case the credit-adjusted rate. 44

2012 AICPA Newly Released Questions Financial 44. Blythe Corp. is a defendant in a lawsuit. Blythe's attorneys believe it is r easonably possible that the suit will require Blythe to pay a substantial amount . What is the proper financial statement treatment for this contingency? a. b. c . d. Accrued and disclosed. Accrued but not disclosed. Disclosed but not accrued . No disclosure or accrual. Solution: Choice "c" is correct. A financial statement disclosure only, not an a ccrual, shall be made when there is a reasonable possibility that a loss may hav e occurred. Choice "a" is incorrect. Accrual and disclosure would occur when a l oss contingency is considered to be probable. Choice "b" is incorrect. A loss co ntingency that is required to be disclosed (probable) would also need to be adeq uately disclosed. Choice "d" is incorrect. No disclosure or accrual is necessary when a loss contingency is considered to be remote. 45

2012 AICPA Newly Released Questions Financial 45. Giaconda, Inc. acquires an asset for which it will measure the fair value by discounting future cash flows of the asset. Which of the following terms best d escribes this fair value measurement approach? a. b. c. d. Market. Income. Cost. Observable inputs. Solution: Choice "b" is correct. The income approach converts future amounts, in cluding cash flows or earnings to a single discounted amount to measure fair val ue. Choice "a" is incorrect. The market approach uses prices and other relevant information from identical or comparable market transactions to measure fair val ue. Choice "c" is incorrect. The cost approach uses current replacement cost to measure fair value. Choice "d" is incorrect. Observable inputs is not a fair val ue measurement approach. Observable inputs are inputs other than quoted market v alues that are directly or indirectly observable for the asset or liability. 46

2012 AICPA Newly Released Questions Financial 46. A company owns a financial asset that is actively traded on two different ex changes (market A and market B). There is no principal market for the financial asset. The information on the two exchanges is as follows: Market A Market B Quo ted price of asset $1,000 1,050 Transaction costs $75 150 What is the fair value of the financial asset? a. b. c. d. $900 $925 $1,000 $1,0 50 Solution: Choice "c" is correct. The price in the most advantageous market is us ed if there is no principal market. The most advantageous market is the market w ith the best price after considering transaction costs: Market A = $1,000 - $75 = $925 Market B = $1,050 - $150 = $900 Market A is the most advantageous market. Although transaction costs are used to determine the most advantageous market, transaction costs are not included in the final fair value measurement, so the f air value is the $1,000 quoted market price in Market A. Choice "a" is incorrect . Transaction costs are not included in the final fair value measurement. Additi onally, Market A is the most advantageous market because it has the best price a fter considering transaction costs. Choice "b" is incorrect. Transaction costs a re not included in the final fair value measurement. Choice "d" is incorrect. Th e most advantageous market is the market with the best price after considering t ransaction costs. Although transaction costs are used to determine the most adva ntageous market, transaction costs are not included in the final fair value meas urement. 47

2012 AICPA Newly Released Questions Financial 47. Martin Pharmaceutical Co. is currently involved in two lawsuits. One is a cl ass-action suit in which consumers claim that one of Martin's best selling drugs caused severe health problems. It is reasonably possible that Martin will lose the suit and have to pay $20 million in damages. Martin is suing another company for false advertising and false claims against Martin. It is probable that Mart in will win the suit and be awarded $5 million in damages. What amount should Ma rtin report on its financial statements as a result of these two lawsuits? a. b. c. d. $0 $5 million income. $15 million expense. $20 million expense. Solution: Choice "a" is correct. The likelihood of loss on the drug lawsuit is r easonably possible and is disclosed on the financial statement notes but not acc rued on the financial statements. The false advertising lawsuit is a gain contin gency and gain contingencies are not recorded because to do so may cause recogni tion of revenue prior to its realization. Choice "b" is incorrect. The false adv ertising lawsuit is a gain contingency and gain contingencies are not recorded b ecause to do so may cause recognition of revenue prior to its realization. Choic e "c" is incorrect. The likelihood of loss on the drug lawsuit is reasonably pos sible and is disclosed on the financial statement notes but not accrued on the f inancial statements. The false advertising lawsuit is a gain contingency and gai n contingencies are not recorded because to do so may cause recognition of reven ue prior to its realization. Choice "d" is incorrect. The likelihood of loss on the drug lawsuit is reasonably possible and is disclosed on the financial statem ent notes but not accrued on the financial statements. 48

2012 AICPA Newly Released Questions Financial 48. The fair value for an asset or liability is measured as: a. The appraised va lue of the asset or liability. b. The price that would be paid to acquire the as set or received to assume the liability in an orderly transaction between market participants. c. The price that would be received when selling an asset or paid when transferring a liability in an orderly transaction between market particip ants. d. The cost of the asset less any accumulated depreciation or the carrying value of the liability on the date of the sale. Solution: Choice "c" is correct. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction betwe en market participants in the principal market at the measurement date under mar ket conditions. Choice "a" is incorrect. Fair value measurements are not based o n the appraised value of an asset or liability. Choice "b" is incorrect. Fair va lue is an exit price, not an entrance price (i.e., sell an asset, not acquire an asset). Choice "d" is incorrect. Fair value is not based on the carrying amount or book value of an asset or liability. 49

2012 AICPA Newly Released Questions Financial 49. On January 1, year 1, Peabody Co. purchased an investment for $400,000 that represented 30% of Newman Corp.'s outstanding voting stock. For year 1, Newman r eported net income of $60,000 and paid dividends of $20,000. At year end, the fa ir value of Peabody's investment in Newman was $410,000. Peabody elected the fai r value option for this investment. What amount should Peabody recognize in net income for year 1 attributable to the investment? a. b. c. d. $6,000 $10,000 $16 ,000 $18,000 Solution: Choice "c" is correct. Entities may elect the fair value option for re cognized financial assets and liabilities. An entity can choose to measure at fa ir value an investment that would otherwise be accounted for using the equity me thod. Under the fair value option, income is calculated as the amount of the div idend received of $6,000 ($20,000 x 30%) plus the appreciation for the year of $ 10,000. Choice "a" is incorrect. Both the dividend income and the appreciation o f the investment must be recorded in earnings under the fair value option. Choic e "b" is incorrect. Both the dividend income and the appreciation of the investm ent must be recorded in earnings under the fair value option. Choice "d" is inco rrect. Because the entity opted to use the fair value option, the entity will no t record equity method income of $18,000 ($60,000 Newman net income x 30%). 50

2012 AICPA Newly Released Questions Financial 50. On March 21, year 2, a company with a calendar year end issued its year 1 fi nancial statements. On February 28, year 2, the company's only manufacturing pla nt was severely damaged by a storm and had to be shut down. Total property losse s were $10 million and determined to be material. The amount of business disrupt ion losses is unknown. How should the impact of the storm be reflected in the co mpany's year 1 financial statements? a. Provide no information related to the st orm losses in the financial statements until losses and expenses become fully kn own. b. Accrue and disclose the property loss with no accrual or disclosure of t he business disruption loss. c. Do not accrue the property loss or the business disruption loss, but disclose them in the notes to the financial statements. d. Accrue and disclose the property loss and additional business disruption losses in the financial statements. Solution: Choice "c" is correct. Subsequent events that provide information abou t conditions that occurred after the balance sheet date and did not exist at the balance sheet date are nonrecognized subsequent events. This type of subsequent event is not recognized in the financial statements; but, is disclosed in the n otes to the financial statements. Choice "a" is incorrect. A nonrecognized subse quent event is disclosed in the notes to the financial statements. Choice "b" is incorrect. Neither situation is accrued in the financial statements since the s ituation is a nonrecognized subsequent event. Choice "d" is incorrect. Neither t he property loss nor the business disruption is accrued in the financial stateme nts because they are nonrecognized subsequent events. Both situations are disclo sed. 51

AICPA Newly Released FAR Simulations Task 3038_01

AJE #1 Dr. Prepaid expenses Cr. Rent expense $5,000 $5,000 The rent expense attributable to year 3 that has been paid in year 2 is a prepai d item as of December 31, year 2. AJE#2 Dr. Depreciation expense Cr. Accumulated depreciation pp&e $1,500 $1,500 Depreciation is calculated on the original cost of $20,000, less salvage value o f $5,000 over a 10 year useful life.

AJE#3 Dr. Bad debt expense Cr. Allowance for doubtful accounts $750 $750 Bad debt expense is estimated to be .25% of the Sales amount of $300,000. AJE#4 Dr. Allowance for doubtful accounts Cr. Accounts receivable $855 $855 When a specific account is written off, the allowance account is reduced (debit) and the receivable is removed from Accounts receivable (credit). AJE#5 Dr. Insurance expense Cr. Prepaid expenses $650 $650 Insurance expense for the year ended December 31, year 2 that has been posted to Prepaid expenses needs to be adjusted to an expense account. AJE#6 Dr. Interest receivable Cr. Interest income $300 $300 Interest income that has been earned in Year 2 is shown as income even though it has not as yet been received (accrual concept). AJE#7 Dr. Tax expense Cr. Taxes payable $2,000 $2,000 Income tax expense for the the year. Since the amount tional $2,000 is needed to d appear that JRM Co. made year of $3,000 for Year 2 is shown as an expense for in the expense and payable account is $1,000, an addi adjust the amount to the balance at year end. It woul a tax accrual of $1,000 earlier in the year.

Task 3042_01

Explanation: Apri 1, year 1

DR CR Patents Cash $50,000 $50,000 The cost of purchasing a patent from an outside source for $50,000 is capitalize d as an intangible asset. The $35,000 in development costs incurred by DD Co. is research and development which is a direct charge to expense. July 1, year 1 DR CR Equipment Cash $79,000 $79,000 Research and development costs are a direct charge to income EXCEPT for material s or equipment that have alternate future uses. Because the equipment qualifies under this rule, the amount capitalized is the original cost plus any expenditur e directly related to the acquisition of the asset. October 1, year 1 DR CR Legal Expense Cash $25,000 $25,000 Legal fees for an unsuccessful defense of a trademark are an expense. Legal fees for a successful defense of the trademark are added to the asset value of the t rademark. December 31, year 1 DR CR Amortization Expense $3,750 Accumulated Amortization - Patent $3,750 A patent is amortized over the shorter of its estimated useful life or its remai ning useful life. Amortization is on a straight line basis: $50,000/10 years x 9 /12. December 31, year 1 DR CR Reseach and Development Expense Accumulated Depreciation $7,900 $7,900 Depreciation expense is calculated on the capitalized amount of $79,000. Depreci ation is on the straight line basis: 79,000/5 years x 6/12. Because the equipmen t is currently used for research and development, the depreciation is charged to reseach and development expense. December 31, year 1 No entry required Goodwill amortization is a two step process. First, since the carrying value of the identifiable net assets exceeds the fair value, there is a potential for impairment. Second, the amount of goodwill loss is measured by co mparing the implied fair value of the goodwill to the carrying amount of that go odwill. If the implied fair value is less than its carrying amount, a goodwill l oss is recognized. In this case, the implied fair value is higher so no goodwill impairment is recognized.

Task 4465_01 Key words: Share purchase plan, compensation expense