CPA FAR core section (first CPA hub practice form)

57 questions/tasks. Use the approved directions below.

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Question 1

Testlet 1 of 5. Read the accompanying directions. Allow 240 answering minutes; submit each testlet before opening the next. An optional 15-minute stopped break follows Question 52; other breaks use answering time. Use scratch paper and a calculator, with an optional blank offline spreadsheet. Choose one answer per MC item. This original paper practice uses diagnostic scoring and does not reproduce CPA scaled scoring or live software.
Aster has a 15-month operating cycle. At December 31, its inventory of $84,000 will be sold within that cycle, trade receivables of $32,000 will be collected in 13 months, and an investment of $19,000 is held for a factory replacement in three years. A $11,000 note receivable is due in eight months and is unrestricted. What amount belongs in current assets?
  • ☐ A. $95,000
  • ☐ B. $116,000
  • ☐ C. $127,000
  • ☐ D. $146,000
Show answer and explanation

Response: C

Final answer: $127,000
The thirteen-month receivable belongs in current assets because Aster collects it within its normal fifteen-month operating cycle, even though a calendar-year shortcut would exclude it. The note matures sooner. Its unrestricted $11,000 joins $84,000 inventory and $32,000 trade receivables to give $127,000, while the factory reserve stays outside current assets because its three-year purpose prevents use for current operations.

Question 2

Bramble's cash ledger shows $48,200. The bank statement shows $51,500; deposits in transit total $6,400 and outstanding checks total $7,800. The bank collected a $2,500 customer note plus $100 interest, charged a $60 fee, and returned a $740 customer check unpaid. Bramble recorded a $3,600 payment as $3,700. What is corrected cash?
  • ☐ A. $50,100
  • ☐ B. $49,900
  • ☐ C. $50,160
  • ☐ D. $50,840
Show answer and explanation

Response: A

Final answer: $50,100
The bank records give $51,500 + $6,400 - $7,800 = $50,100 after including transit receipts and excluding outstanding checks. Those items need no ledger posting. On the book side, start at $48,200 and add the $2,500 collection, $100 interest and $100 payment correction, then deduct the $60 fee and $740 returned check. Restore the overstated payment reduction. The ledger removed $3,700 for an actual $3,600 payment, so restoring $100 brings it to the independently reconciled $50,100 rather than the $49,900 obtained by subtracting that difference again.

Question 3

At January 1, Cedar's machine has a carrying amount of $72,000 and a remaining estimated life of six years. Cedar now expects to use it for four more years and estimates an $8,000 residual value. The revision results from new usage information, not an error. Under straight-line depreciation, what expense should Cedar record this year?
  • ☐ A. $10,667
  • ☐ B. $12,000
  • ☐ C. $16,000
  • ☐ D. $18,000
Show answer and explanation

Response: C

Final answer: $16,000
Earlier depreciation stays recorded because Cedar's earlier estimates were reasonable. The revision affects future expense. Subtract the new $8,000 residual from the $72,000 carrying amount and allocate the remaining $64,000 over the four years now expected, giving $16,000 annually. A calculation using all $72,000 would depreciate the residual too. Continuing the old six-year estimate would miss the new information that determines the remaining allocation.

Question 4

Dune reports net sales of $690,000, cost of goods sold of $410,000, selling costs of $82,000, and administrative costs of $57,000. Separately classified nonoperating items are $9,000 interest income, $16,000 interest expense, and a $12,000 gain on equipment disposal. What is operating income under this presentation?
  • ☐ A. $125,000
  • ☐ B. $141,000
  • ☐ C. $146,000
  • ☐ D. $153,000
Show answer and explanation

Response: B

Final answer: $141,000
The $146,000 alternative includes a net $5,000 from items expressly outside Dune's operating subtotal, so it answers a different presentation question even though its arithmetic reconciles. Start with gross profit. Sales less COGS yield $280,000, and the $139,000 selling and administrative costs reduce that to $141,000 operating income. The interest and specified nonoperating gains enter the later subtotal instead.

Question 5

Elm estimates expected credit losses on year-end trade receivables at $24,600. Before the year-end adjustment, the allowance has a $7,800 credit balance after all write-offs and recoveries have been posted. What credit-loss expense is needed to bring the allowance to the estimated ending amount?
  • ☐ A. $7,800
  • ☐ B. $16,800
  • ☐ C. $24,600
  • ☐ D. $32,400
Show answer and explanation

Response: B

Final answer: $16,800
An ending allowance estimate is a balance, while bad-debt expense supplies the adjustment needed to reach it. Here $7,800 is already credited. Another $16,800 brings the account to its supported $24,600 target, as $7,800 + $16,800 = $24,600. Charging the full target again would leave $32,400 in the allowance and count its existing credit twice. Use the remaining gap for expense.

Question 6

Fern discovers that prior-year ending inventory was overstated by $18,000. Purchases and sales were correctly recorded; current-year ending inventory is correct. Comparative statements are being corrected, and taxes are ignored. Relative to the uncorrected current-year figures, what is the effect on current-year cost of goods sold and net income?
  • ☐ A. COGS decreases $18,000; net income increases $18,000.
  • ☐ B. COGS increases $18,000; net income decreases $18,000.
  • ☐ C. COGS and net income are unchanged.
  • ☐ D. COGS decreases $18,000; net income decreases $18,000.
Show answer and explanation

Response: A

Final answer: COGS decreases $18,000; net income increases $18,000.
Correct the current opening inventory first. Because beginning inventory enters COGS with a positive sign, its $18,000 overstatement has also overstated current expense by $18,000, requiring a decrease to COGS and an equal increase to current income. The prior year differs. Its inflated ending inventory reduced that year's COGS, so the prior-period correction increases expense instead. Applying that ending-inventory sign to the current opening balance would reverse the requested effect.

Question 7

Which current-period item ordinarily belongs in other comprehensive income rather than net income for a U.S. GAAP business entity?
  • ☐ A. An unrealized gain on an equity security measured at fair value.
  • ☐ B. Interest earned on a bank deposit.
  • ☐ C. A foreign-currency translation adjustment from translating a foreign operation.
  • ☐ D. A gain on selling an operating asset.
Show answer and explanation

Response: C

Final answer: A foreign-currency translation adjustment from translating a foreign operation.
An unrealized gain does not automatically belong in OCI. The investment model matters. This equity security's fair-value gain enters net income, along with bank interest and the disposal gain, whereas translating the entire foreign operation produces the OCI item in C. If A looked attractive, connect its gain to the specified equity-security model before deciding where to present it. Sale is unnecessary for that earnings recognition.

Question 8

Glen begins the year with gross trade receivables of $126,000. Credit sales are $740,000, customer cash collections are $698,000, sales returns credited to customers are $11,000, and uncollectible balances written off are $9,000. What is gross receivables at year-end, before subtracting the allowance?
  • ☐ A. $148,000
  • ☐ B. $157,000
  • ☐ C. $159,000
  • ☐ D. $168,000
Show answer and explanation

Response: A

Final answer: $148,000
Leaving the written-off customer debt in the balance would produce $157,000, but a write-off removes that receivable even when the question asks for gross balances before the allowance. Follow the ledger movement. Opening $126,000 plus $740,000 credit sales, less $698,000 collections, $11,000 returns and $9,000 write-offs, leaves $148,000. Deducting the allowance would answer a net-receivable question. Omitting the returns as well as the write-off would instead leave $168,000.

Question 9

Haven's counsel concludes that loss in a pending lawsuit is probable and reasonably estimates a single settlement amount of $63,000. The underlying event occurred before year-end. No insurance recovery is involved. What accounting is appropriate at year-end?
  • ☐ A. Disclose the matter but record no loss until settlement.
  • ☐ B. Record a $63,000 loss and liability, with appropriate disclosure.
  • ☐ C. Record the $63,000 liability but defer the loss expense until payment.
  • ☐ D. Record a $63,000 loss but no liability until the court enters judgment.
Show answer and explanation

Response: B

Final answer: Record a $63,000 loss and liability, with appropriate disclosure.
Both accrual conditions are supplied: counsel supports a probable loss from the preyear-end event and can reasonably estimate it at $63,000. Record expense and a liability together. Payment and judgment can occur later without postponing this recognition, and recording only one side would leave either income or the balance sheet incomplete. Disclosure is still appropriate alongside the accrual. It does not replace the $63,000 entry.

Question 10

Iris begins the year with retained earnings of $280,000, earns net income of $76,000, and declares $22,000 of dividends. Of those dividends, $6,000 remain unpaid at year-end. There are no other equity changes. What is ending retained earnings?
  • ☐ A. $334,000
  • ☐ B. $340,000
  • ☐ C. $356,000
  • ☐ D. $350,000
Show answer and explanation

Response: A

Final answer: $334,000
The $340,000 choice subtracts only dividends already paid, although Iris committed to all $22,000 at declaration and reduced retained earnings then. Include the unpaid portion. Opening $280,000 plus $76,000 income less $22,000 declared dividends gives $334,000. The remaining $6,000 is a dividend payable, whose later cash settlement reduces the liability without a second retained-earnings charge.

Question 11

Juniper uses periodic FIFO. Opening inventory is 100 units at $14; purchases are 180 units at $16 and then 120 units at $19. During the period, 250 units are sold. What is ending inventory cost?
  • ☐ A. $2,100
  • ☐ B. $2,460
  • ☐ C. $2,760
  • ☐ D. $2,850
Show answer and explanation

Response: C

Final answer: $2,760
Only 120 units carry the newest $19 cost, so valuing all 150 remaining units at $19 would exceed the quantity in that layer. Use the next layer too. Periodic FIFO leaves 120 at $19 and 30 at $16 after selling 250 of the 400 available units, giving $2,760. The $2,460 alternative comes from averaging the available costs. It would be appropriate to a different inventory method.

Question 12

Kestrel has an unrecorded, noncancelable four-year take-or-pay contract negotiated to support a supplier's facility financing. Fixed minimum annual payments are material and determinable. No goods have yet been delivered, the arrangement does not transfer an asset or create a lease, and no loss is expected. Which conclusion follows from the purchase-obligation disclosure rule?
  • ☐ A. The commitment need not be disclosed because no loss is expected.
  • ☐ B. The full four-year payment total must automatically be recorded as current expense.
  • ☐ C. Disclosure is limited to payments due in the next year.
  • ☐ D. Disclose the nature and term and quantify fixed commitments; signing alone does not require automatic balance-sheet recognition.
Show answer and explanation

Response: D

Final answer: Disclose the nature and term and quantify fixed commitments; signing alone does not require automatic balance-sheet recognition.
Signing this material, noncancelable contract creates a disclosure obligation under the stated long-term purchase-commitment scope, including its financing connection and fixed future payments. Goods have not arrived. D supplies the nature, term and fixed-payment information even without an expected loss, since the scoped commitment disclosure neither depends on such a loss nor treats future purchases as current expense.

Question 13

Larch has net income of $91,000 and depreciation expense of $18,000. Trade receivables increased $12,000, inventory decreased $7,000, and trade payables decreased $5,000. These are the only reconciling items. What is operating cash flow under the indirect method?
  • ☐ A. $81,000
  • ☐ B. $99,000
  • ☐ C. $109,000
  • ☐ D. $123,000
Show answer and explanation

Response: B

Final answer: $99,000
The $109,000 alternative treats the $5,000 payable decrease as an addition, even though paying down an operating obligation uses cash. Subtract that decrease. Starting with $91,000 income, add $18,000 noncash depreciation, subtract the $12,000 receivable increase and add the $7,000 inventory decrease to obtain $99,000 operating cash. Receivables contain uncollected income and lower inventory releases a cost already charged to income, so reversing these accrual effects connects earnings to cash received and spent.

Question 14

Mesa applies lower of cost and net realizable value separately to its two FIFO inventory products. Product P costs $32,000, can sell for $35,000, and needs $6,000 of completion and selling costs. Product Q costs $21,000, can sell for $25,000, and needs $2,000 of completion and selling costs. What total carrying amount is appropriate?
  • ☐ A. $50,000
  • ☐ B. $52,000
  • ☐ C. $53,000
  • ☐ D. $60,000
Show answer and explanation

Response: A

Final answer: $50,000
Q's $23,000 NRV cannot raise its reported inventory above its $21,000 cost. P needs a reduction. Its $35,000 selling price less $6,000 completion and selling costs leaves $29,000 NRV, below the $32,000 recorded cost. Report P at $29,000 and Q at $21,000, totaling $50,000. Summing both NRVs would offset part of P's loss with a prohibited $2,000 write-up of Q under the required separate-product comparisons.

Question 15

Nectar sells equipment and a distinct one-year maintenance service together for $18,000. Standalone selling prices are $16,000 for the equipment and $4,000 for maintenance. The allocation has no special discount exception or variable consideration. What transaction price is allocated to maintenance?
  • ☐ A. $2,000
  • ☐ B. $3,200
  • ☐ C. $3,600
  • ☐ D. $4,000
Show answer and explanation

Response: C

Final answer: $3,600
Maintenance has one-fifth of the combined standalone value, since $4,000 / ($16,000 + $4,000) = 20%. Allocate $3,600 to it. That is 20% of the $18,000 package consideration under the stated proportionate-allocation facts, so both promises share the discount. Giving equipment its entire $16,000 standalone price would leave maintenance only $2,000. That approach assigns the whole discount to maintenance without the exception needed to support it.

Question 16

Oak acquires a $90,000 machine by paying $15,000 cash and issuing the seller a $75,000 note. There are no other charges or cash movements. How should the acquisition appear in the cash-flow statement and related noncash disclosure?
  • ☐ A. Investing outflow $90,000; financing inflow $75,000.
  • ☐ B. Investing outflow $15,000; disclose $75,000 noncash investing and financing.
  • ☐ C. Operating outflow $15,000; disclose $90,000 noncash investing.
  • ☐ D. Financing outflow $15,000; investing outflow $75,000.
Show answer and explanation

Response: B

Final answer: Investing outflow $15,000; disclose $75,000 noncash investing and financing.
The seller's $75,000 note never passed through Oak's bank account, so presenting it as a borrowing receipt followed by an equipment payment would manufacture cash flows. Only $15,000 cash moved. Report that amount as an investing outflow and disclose the remaining $75,000 equipment acquisition as noncash investing and financing. B keeps the actual payment separate from the promise to pay.

Question 17

A U.S. GAAP retailer has one inventory pool measured using FIFO and another measured using LIFO. Which subsequent measurement bases ordinarily apply to the two pools?
  • ☐ A. FIFO: lower of cost and NRV; LIFO: lower of cost or market.
  • ☐ B. FIFO: lower of cost or market; LIFO: lower of cost and NRV.
  • ☐ C. Both pools: fair value through net income.
  • ☐ D. Both pools: lower of cost and NRV.
Show answer and explanation

Response: A

Final answer: FIFO: lower of cost and NRV; LIFO: lower of cost or market.
The 2015 inventory simplification excludes LIFO, so the two pools in this question retain different lower-of comparisons. A gives the correct pair. FIFO uses cost and NRV, while LIFO uses cost or market. Applying NRV to both would extend the simplification outside its scope, and reversing the pair would put each pool under the other's measurement rule. Neither inventory pool is measured using the fair-value-through-earnings model in C.

Question 18

Pine's $800,000 service contract qualifies for revenue recognition over time. Cost-to-cost progress faithfully depicts performance; no excluded inefficiencies or uninstalled materials exist. Cumulative costs incurred through the current year-end are $180,000 and estimated total costs are $600,000. Pine recognized $96,000 revenue in the prior year. How much revenue is recognized this year?
  • ☐ A. $96,000
  • ☐ B. $144,000
  • ☐ C. $240,000
  • ☐ D. $180,000
Show answer and explanation

Response: B

Final answer: $144,000
The $240,000 calculation represents revenue through the current date, rather than revenue belonging entirely to this year. Remove what was already recognized. Eligible costs of $180,000 / $600,000 show 30% progress, yielding $240,000 cumulative revenue on the $800,000 contract and $144,000 after deducting the earlier $96,000. The stated over-time and eligible-cost conditions support this measure without an additional adjustment for uninstalled materials or inefficiency.

Question 19

Quartz owns all of Reed. During the year, Quartz sold inventory costing $48,000 to Reed for $60,000. At year-end Reed still holds 35% of these goods. No other intercompany inventory remains, and taxes are ignored. What unrealized profit should be eliminated from consolidated inventory?
  • ☐ A. $4,200
  • ☐ B. $12,000
  • ☐ C. $16,800
  • ☐ D. $21,000
Show answer and explanation

Response: A

Final answer: $4,200
Trace the goods still inside the group: 35% of the $12,000 transfer profit remains in ending inventory, so eliminate $4,200 and retain the group's underlying cost. Sales outside the group have occurred. Eliminating all $12,000 would reverse profit already earned on those external sales, while removing the entire $21,000 unsold transfer-price inventory would erase original cost too. The remaining inventory reconciles as $21,000 - $4,200 = $16,800.

Question 20

Sage purchases a machine for $98,000, pays $6,000 delivery and installation costs necessary to make it usable, and places it in service on April 1. Residual value is $8,000 and useful life is eight years. Straight-line depreciation is recorded monthly. What first-calendar-year depreciation is appropriate?
  • ☐ A. $8,438
  • ☐ B. $9,000
  • ☐ C. $12,000
  • ☐ D. $13,000
Show answer and explanation

Response: B

Final answer: $9,000
Depreciation starts when the machine becomes available in April, after delivery and installation bring usable cost to $104,000. Count nine months this year. Deduct the $8,000 residual and divide the $96,000 depreciable amount by eight years, giving $12,000 annually and $9,000 for April through December. A full annual charge would include unavailable months. Omitting installation instead would understate the cost being allocated.

Question 21

A donor transfers $120,000 to a nonprofit for job training. The agreement requires the nonprofit to train 60 people before it is entitled to the funds and gives the donor a right of return if that measurable barrier is not met. Only 20 people have been trained at year-end, and no portion of the award is earned separately. What is the transfer's classification at year-end?
  • ☐ A. Contribution revenue with donor restrictions.
  • ☐ B. Contribution revenue without donor restrictions.
  • ☐ C. A refundable advance until the condition is substantially met.
  • ☐ D. A release from donor restrictions for one-third of the award.
Show answer and explanation

Response: C

Final answer: A refundable advance until the condition is substantially met.
Training 20 people earns no separate portion of this award because the agreement requires the sixty-person barrier to be met and grants the donor a right of return. No partial entitlement exists. The full $120,000 cash therefore remains a refundable advance in C. A purpose restriction governs the class of a recognized contribution, but this unmet condition first determines whether there is a contribution to classify.

Question 22

A nonprofit receives an unconditional gift to be used for next year's literacy program. What net-asset class increases when the contribution is recognized under the current two-class presentation?
  • ☐ A. Net assets without donor restrictions.
  • ☐ B. Net assets with donor restrictions.
  • ☐ C. Permanently restricted net assets as a separate required class.
  • ☐ D. A refundable-advance liability.
Show answer and explanation

Response: B

Final answer: Net assets with donor restrictions.
A return obligation would require an unmet contribution condition, which this unconditional gift does not contain. Recognize it now. The donor's program-use and next-year restrictions put it in net assets with donor restrictions, even though the organization has received the cash. The separate permanently restricted class in another choice would revive the former three-class presentation. Current reporting uses two net-asset classes.

Question 23

Tern's equipment cost $86,000 and had accumulated depreciation of $50,000 at January 1. Annual straight-line depreciation is $12,000. Tern sells it on September 30 for $25,000 after recording depreciation through that date. What gain or loss is recognized?
  • ☐ A. $11,000 loss.
  • ☐ B. $2,000 loss.
  • ☐ C. $1,000 gain.
  • ☐ D. $11,000 gain.
Show answer and explanation

Response: B

Final answer: $2,000 loss.
The $11,000 loss alternative uses January's carrying amount and misses depreciation before Tern's sale. Update through the disposal date. Nine months add $9,000 to the earlier $50,000 accumulated balance, leaving $86,000 - $59,000 = $27,000 carrying value against $25,000 proceeds. The resulting loss is $2,000. A full twelve-month charge would instead reduce carrying value to $24,000 and incorrectly create the $1,000 gain choice.

Question 24

A nonprofit receives 80 hours of donated legal work from licensed attorneys. The work satisfies a need the nonprofit otherwise would have paid outside counsel to perform, and its fair value is $24,000. Volunteers also provide $7,000 of general event help that neither requires specialized skills nor creates a nonfinancial asset. What contributed-service revenue should be recognized?
  • ☐ A. $0
  • ☐ B. $7,000
  • ☐ C. $24,000
  • ☐ D. $31,000
Show answer and explanation

Response: C

Final answer: $24,000
The attorneys' $24,000 work is specialized and would otherwise have been purchased, satisfying the supplied criteria for contribution revenue and matching expense. Recognize both for $24,000. Assigning the general helpers a $7,000 value cannot make their work a qualifying specialized service or creation of a nonfinancial asset, so adding it would incorrectly raise recognized revenue and expense to $31,000.

Question 25

Vale's shared staff payroll is $180,000. Reliable time records assign 65% to program services, 25% to management and general, and 10% to fundraising. There are no other shared costs or adjustments. What amount is classified as management and general expense?
  • ☐ A. $18,000
  • ☐ B. $45,000
  • ☐ C. $63,000
  • ☐ D. $117,000
Show answer and explanation

Response: B

Final answer: $45,000
The $63,000 choice combines management with fundraising, but the requested management-and-general function takes only the supported 25% of paid staff time. That gives $45,000. The $180,000 payroll separately allocates $117,000 to programs and $18,000 to fundraising, which together with $45,000 returns to the original total. Keep the functions separate when choosing the requested amount.

Question 26

Testlet 2 of 5. Begin only after submitting Questions 1-25; do not return to that testlet.
A held-and-used asset group has a $460,000 carrying amount. Expected undiscounted cash flows from its use and eventual disposal total $420,000, and fair value is $365,000. A triggering event requires a recoverability test. What impairment loss should be recorded?
  • ☐ A. $0
  • ☐ B. $40,000
  • ☐ C. $55,000
  • ☐ D. $95,000
Show answer and explanation

Response: D

Final answer: $95,000
A $40,000 shortfall in undiscounted flows establishes that this asset group cannot recover its $460,000 carrying amount, but that shortfall does not measure the impairment loss. Proceed to fair value. The supported $365,000 fair value requires a $95,000 write-down from carrying amount. Using the gate's $40,000 difference would leave the asset at $420,000, still above the required measurement after recoverability has failed.

Question 27

West's pretax book income is $240,000. This includes $12,000 of tax-exempt interest. Tax depreciation exceeds book depreciation by $30,000, creating the only temporary difference. The enacted tax rate is 25%; there are no beginning deferred balances or valuation allowances. What is total income-tax expense?
  • ☐ A. $49,500
  • ☐ B. $57,000
  • ☐ C. $60,000
  • ☐ D. $42,000
Show answer and explanation

Response: B

Final answer: $57,000
Tax-exempt interest removes $12,000 permanently from the tax base, while the $30,000 depreciation difference postpones tax rather than eliminating it. Compute current tax first. Taxable income of $240,000 - $12,000 - $30,000 = $198,000 produces $49,500 current tax at 25%, to which the temporary difference adds $7,500 deferred tax expense and liability for $57,000 total expense. Subtracting that deferred amount would treat future tax as a benefit and produce the $42,000 alternative.

Question 28

Which pairing correctly describes the basic measurement focus and basis of accounting for governmental-fund financial statements and government-wide financial statements?
  • ☐ A. Governmental funds: economic resources/accrual; government-wide: current financial resources/modified accrual.
  • ☐ B. Both: current financial resources/modified accrual.
  • ☐ C. Governmental funds: current financial resources/modified accrual; government-wide: economic resources/accrual.
  • ☐ D. Both: economic resources/accrual.
Show answer and explanation

Response: C

Final answer: Governmental funds: current financial resources/modified accrual; government-wide: economic resources/accrual.
Equipment helps explain why these reporting levels use different bases: a governmental fund records the acquisition as an expenditure, while government-wide reporting retains the long-lived asset and reports later depreciation. C preserves that distinction. Governmental funds use current financial resources and modified accrual. Government-wide statements use economic resources and accrual, so applying either pair to both would lose the difference in what they measure. Proprietary funds are outside this comparison.

Question 29

A company holds an equity security with a readily determinable fair value and no significant influence over the investee. It purchased the security for $44,000, and its year-end fair value is $51,000. There are no dividends or sales. Under the fair-value-through-earnings guidance, what is the year-end effect?
  • ☐ A. Investment stays at $44,000; no gain is recognized.
  • ☐ B. Investment is $51,000; a $7,000 gain enters OCI.
  • ☐ C. Investment is $51,000; a $7,000 gain enters net income.
  • ☐ D. Investment is $51,000; a $51,000 gain enters net income.
Show answer and explanation

Response: C

Final answer: Investment is $51,000; a $7,000 gain enters net income.
The ending $51,000 investment balance includes the $44,000 originally invested, so recognizing all $51,000 as a gain would count capital as earnings. Recognize only the $7,000 change. Under the specified equity-security model, fair-value remeasurement raises the investment to $51,000 and sends the increase to net income even without a sale. OCI would apply a different model from the one stated here.

Question 30

Which conclusion supports a valuation allowance against a deferred tax asset under U.S. GAAP?
  • ☐ A. The deferred tax asset will reverse more than one year after the reporting date.
  • ☐ B. Based on available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized.
  • ☐ C. The current tax payable is smaller than the deferred tax asset.
  • ☐ D. The tax rate might change, although no change has been enacted.
Show answer and explanation

Response: B

Final answer: Based on available evidence, it is more likely than not that some portion of the deferred tax asset will not be realized.
A deferred tax asset represents a future tax benefit, and B asks whether the available evidence supports realizing that benefit under the more-likely-than-not threshold. Reduce the unsupported portion with an allowance. Neither a reversal beyond one year nor a small current tax payable establishes that some benefit will go unrealized. Speculation about an unenacted rate also supplies no such realization conclusion.

Question 31

A town receives a donor's $900,000 endowment whose principal must remain intact; earnings may support a public park that benefits the town and its residents. Which governmental fund is appropriate for the endowment?
  • ☐ A. General fund.
  • ☐ B. Special revenue fund.
  • ☐ C. Permanent fund.
  • ☐ D. Private-purpose trust fund.
Show answer and explanation

Response: C

Final answer: Permanent fund.
The park's public beneficiaries distinguish this gift from a private-purpose trust, and its intact principal distinguishes the arrangement from an ordinary restricted-purpose special revenue fund. Use a permanent fund. It preserves principal while allowing earnings to support the government and its residents. General-fund treatment would also miss the restrictions that define the gift.

Question 32

A held-to-maturity debt investment has a beginning amortized cost of $190,000 and a 6% annual effective yield. Annual cash interest received at year-end is $10,000. There are no credit losses, sales or other changes. What are interest income and ending amortized cost for the year?
  • ☐ A. $10,000 and $190,000.
  • ☐ B. $11,400 and $191,400.
  • ☐ C. $11,400 and $188,600.
  • ☐ D. $10,000 and $191,400.
Show answer and explanation

Response: B

Final answer: $11,400 and $191,400.
Cash-only income of $10,000 cannot explain the $1,400 increase in carrying value that the discount earns this period. Apply the effective return. Six percent of the $190,000 opening amortized cost gives $11,400 income, of which $10,000 arrives as coupon cash and $1,400 raises the investment to $191,400. Decreasing its carrying value would instead amortize a premium, inconsistent with this discount.

Question 33

A valuation uses observable market inputs for most assumptions but a significant unobservable estimate of future demand. The measurement's sensitivity to that demand estimate is substantial. Under the fair-value hierarchy, what level applies to the entire measurement?
  • ☐ A. Level 1 because some market information is available.
  • ☐ B. Level 2 because most assumptions are observable.
  • ☐ C. Level 3 because a significant input is unobservable.
  • ☐ D. A weighted average of Levels 2 and 3.
Show answer and explanation

Response: C

Final answer: Level 3 because a significant input is unobservable.
Even if most valuation assumptions are observable, the significant unobservable demand input controls the level assigned to the whole measurement. C therefore places it in Level 3. The supplied sensitivity establishes significance. Averaging Levels 2 and 3 is not a hierarchy classification, and the presence of some market information cannot turn the estimate into a Level 1 unadjusted quoted price.

Question 34

An investor wants an issuer's annual audited financial statements and the related discussion of results. Which SEC filing is the most direct source?
  • ☐ A. Form 10-K.
  • ☐ B. Form 10-Q.
  • ☐ C. Form 8-K.
  • ☐ D. A proxy statement for the annual meeting.
Show answer and explanation

Response: A

Final answer: Form 10-K.
Look for the annual audited package. Form 10-K contains the financial statements and MD&A requested together here, while Form 10-Q provides interim reporting and Form 8-K reports specified current events. The proxy statement serves voting and governance. Those other documents can supplement an investor's reading, but none replaces the annual report containing both requested components.

Question 35

A $310,000 beginning investment is accounted for under the equity method. The investor owns 30% of the investee, which earns $180,000 and declares $50,000 in dividends during the year. No basis differences, intercompany profits or impairment adjustments apply. What is ending investment carrying amount?
  • ☐ A. $310,000
  • ☐ B. $349,000
  • ☐ C. $364,000
  • ☐ D. $379,000
Show answer and explanation

Response: B

Final answer: $349,000
Dividends distribute value the investor already recognizes through its share of investee earnings, so adding them to the investment again would double-count that distribution. Deduct the $15,000 dividend share. Starting from $310,000, add 30% of $180,000 earnings, or $54,000, and subtract $15,000 to reach $349,000. Omitting the deduction stops at $364,000. Adding it instead produces $379,000, and the stated facts introduce no other rollforward adjustments.

Question 36

A vacant parcel is currently used for storage. A residential development use is physically possible, legally permitted and financially feasible, and market participants would price it at $1.4 million for that use. Storage-use value is $900,000. The owner intends to continue storage. What use and value govern this nonfinancial asset's fair-value measurement?
  • ☐ A. Storage use, $900,000, because of the owner's intent.
  • ☐ B. Residential use, $1.4 million, based on market participants' highest and best use.
  • ☐ C. An average of the two uses, $1.15 million.
  • ☐ D. Storage use, $1.4 million, to reflect a potential gain.
Show answer and explanation

Response: B

Final answer: Residential use, $1.4 million, based on market participants' highest and best use.
Storage reflects the owner's preference, whereas the supported market-participant premise is residential development meeting the physical, legal and financial feasibility conditions. Pair that use with $1.4 million. B makes this pairing, and D improperly attaches the residential price to storage. Averaging the two use values would also abandon the supported highest-and-best-use premise rather than measure the market participants' asset.

Question 37

A company has net income of $360,000 and cumulative preferred dividends of $24,000 for the year. Common shares outstanding are 100,000 from January through March and 140,000 from April through December after a cash issuance. There are no splits or other share changes. What is basic EPS?
  • ☐ A. $2.40
  • ☐ B. $2.58
  • ☐ C. $2.77
  • ☐ D. $3.36
Show answer and explanation

Response: B

Final answer: $2.58
An EPS denominator must represent common shares over the earnings period, so the 140,000 year-end balance cannot stand for shares outstanding throughout the year. Weight the periods. Three months at 100,000 and nine at 140,000 give 130,000 weighted shares. Deduct the $24,000 cumulative preferred claim from $360,000 income and divide the remaining $336,000 by 130,000, giving $2.5846 and $2.58 after rounding. Year-end shares produce $2.40. Ignoring preferred dividends produces $2.77 even with the right weighted denominator.

Question 38

A company buys a patent for $84,000 and makes it available for use on July 1. The remaining legal life is seven years, but its expected economic useful life is four years. No residual value is expected, and straight-line amortization is appropriate. What amortization expense is recorded for the calendar year?
  • ☐ A. $6,000
  • ☐ B. $10,500
  • ☐ C. $12,000
  • ☐ D. $21,000
Show answer and explanation

Response: B

Final answer: $10,500
Seven years of legal protection will not extend the patent's expected four-year economic benefit, so use the shorter life to allocate its $84,000 cost. Annual amortization is $21,000. July through December takes half, giving $10,500. The $21,000 choice has the correct life but a full year's expense, while $6,000 uses the longer legal life and $12,000 combines that longer life with a full-year charge.

Question 39

A finance lease begins January 1 with a $120,000 lease liability. A $34,000 payment is due December 31, and the applicable annual interest rate is 5%. No other payments or changes occur during the year. What is the liability immediately after the payment?
  • ☐ A. $86,000
  • ☐ B. $92,000
  • ☐ C. $114,000
  • ☐ D. $126,000
Show answer and explanation

Response: B

Final answer: $92,000
Taking the full $34,000 payment off principal would leave $86,000 and overlook the interest included in that payment. Separate interest first. Five percent of the $120,000 opening liability is $6,000, leaving $28,000 paid toward principal and $92,000 liability afterward. Check the same result as $120,000 + $6,000 - $34,000. The $126,000 choice stops before the payment.

Question 40

A company has $500,000 of income available to common shareholders and 100,000 weighted-average common shares. Its only potential common shares are 20,000 options outstanding all year with a $15 exercise price; average market price is $25. All options are dilutive, and taxes and compensation adjustments are ignored. What is diluted EPS?
  • ☐ A. $4.17
  • ☐ B. $4.46
  • ☐ C. $4.63
  • ☐ D. $5.00
Show answer and explanation

Response: C

Final answer: $4.63
The treasury-stock calculation assumes exercise proceeds fund repurchases, so all 20,000 options do not become additional shares for the denominator. Proceeds total $300,000. At $25 per share they buy 12,000 shares, leaving 8,000 incremental shares and diluted EPS of $500,000 / 108,000 = $4.63 after rounding. Adding the repurchased shares would produce the 112,000 denominator behind $4.46. Basic EPS of $5.00 leaves out the dilution entirely.

Question 41

A December 31 close omits a $18,400 invoice for goods owned and received on December 28; the invoice arrives January 5. It also omits $7,600 wages earned by employees through December 31 and paid January 4. No other accruals are needed. By how much are year-end liabilities understated?
  • ☐ A. $7,600
  • ☐ B. $0
  • ☐ C. $18,400
  • ☐ D. $26,000
Show answer and explanation

Response: D

Final answer: $26,000
The December receiving record and staff service dates establish the obligations before the January invoice and payment arrive. Both belong at year-end. The supplier payable is $18,400 and payroll adds $7,600, totaling $26,000 omitted liabilities. Whether the purchased goods remain in inventory changes their asset or expense treatment, but it does not erase the supplier obligation created when the goods were received.

Question 42

An operating lease has an opening lease liability and ROU asset of $100,000 each. For the year, interest accretion on the liability is $5,000, the cash payment is $24,000, and straight-line single lease cost is $24,000. No impairments, incentives or other adjustments apply. What is the year-end ROU asset carrying amount?
  • ☐ A. $76,000
  • ☐ B. $81,000
  • ☐ C. $95,000
  • ☐ D. $105,000
Show answer and explanation

Response: B

Final answer: $81,000
The question asks for the ROU asset, whose reduction reflects the operating lease's single cost after its interest component. Reduce it by $19,000. The $24,000 cost less $5,000 interest leaves that reduction, taking the $100,000 asset to $81,000. The liability also happens to end at $100,000 + $5,000 - $24,000 = $81,000 under these opening balances, but equality is a check here rather than a universal operating-lease rule. Deducting the entire cost from the asset would overlook the interest component.

Question 43

For a service business, customer cash receipts are $420,000. Trade receivables rise from $38,000 to $49,000, and customer advances for services not yet performed fall from $26,000 to $18,000. There are no write-offs, refunds or other reconciling items. What is accrual service revenue?
  • ☐ A. $401,000
  • ☐ B. $417,000
  • ☐ C. $423,000
  • ☐ D. $439,000
Show answer and explanation

Response: D

Final answer: $439,000
Services using up $8,000 of opening advances earn revenue without generating another cash receipt, and $11,000 of newly earned revenue remains uncollected in receivables. Add both to receipts. The $420,000 receipts plus both accrual adjustments yield $439,000 revenue. Reversing the advance decrease as though it were a receivable movement would produce $423,000 and omit revenue earned from those earlier collections.

Question 44

A bond payable has a $194,000 beginning carrying amount and $200,000 face amount. The annual coupon rate is 5%, and the annual effective yield is 6%. Interest is paid at year-end. What interest expense and discount amortization are recorded for the year?
  • ☐ A. $10,000 expense; $0 amortization.
  • ☐ B. $11,640 expense; $1,640 amortization.
  • ☐ C. $12,000 expense; $2,000 amortization.
  • ☐ D. $11,640 expense; $6,000 amortization.
Show answer and explanation

Response: B

Final answer: $11,640 expense; $1,640 amortization.
The $12,000 expense alternative applies the effective yield to face value, although yield measures a return on the bond's opening carrying amount. Use $194,000 for yield. At 6% it gives $11,640 expense, compared with $10,000 coupon cash from 5% of the $200,000 face. Their $1,640 difference amortizes discount. The full $6,000 opening discount is allocated over time rather than consumed in this one year's expense.

Question 45

At December 31, a customer is already in severe financial difficulty. On January 20, before the financial statements are issued, its bankruptcy confirms that an additional $17,000 of the year-end receivable is uncollectible. In February, a storm destroys a warehouse that was undamaged at year-end. Which event ordinarily calls for adjustment of the year-end financial statements?
  • ☐ A. Both events, because both became known before issuance.
  • ☐ B. Only the bankruptcy confirmation, because it provides evidence about a year-end condition.
  • ☐ C. Only the storm, because the physical loss can be measured.
  • ☐ D. Neither event, because both occurred after December 31.
Show answer and explanation

Response: B

Final answer: Only the bankruptcy confirmation, because it provides evidence about a year-end condition.
December financial difficulty already existed, so the January bankruptcy confirms a loss condition that belongs in the year-end receivable measurement. Only that event calls for adjustment. The additional $17,000 is evidence of the existing loss, whereas February's storm damages a warehouse that was intact in December. Material storm damage calls for later-event disclosure. Knowing both events before issuance does not make both conditions present at the reporting date.

Question 46

Use quick ratio = (cash + short-term investments + net trade receivables) ÷ current liabilities. A company has cash $29,000, short-term investments $16,000, net trade receivables $55,000, inventory $72,000, prepaid expenses $8,000, and current liabilities $80,000. What is the quick ratio?
  • ☐ A. 1.05
  • ☐ B. 1.25
  • ☐ C. 1.35
  • ☐ D. 2.25
Show answer and explanation

Response: B

Final answer: 1.25
The supplied quick-asset definition includes short-term investments, so excluding their $16,000 would shrink the numerator and produce the 1.05 alternative. Include all three named assets. Cash, investments and net receivables total $100,000 and give 1.25 when divided by $80,000 current liabilities, whereas the 2.25 current ratio also includes inventory and prepaid costs excluded from this definition.

Question 47

A debt covenant requires an adjusted current ratio of at least 1.20. It defines the ratio as (current assets less inventory) ÷ (current liabilities less the current portion of this loan). Current assets are $260,000 including $95,000 inventory; current liabilities are $150,000 including $25,000 of this loan. Under that exact definition, is the covenant met?
  • ☐ A. Yes; the ratio is 1.32.
  • ☐ B. Yes; the ratio is 1.73.
  • ☐ C. No; the ratio is 1.10.
  • ☐ D. No; the ratio is 0.94.
Show answer and explanation

Response: A

Final answer: Yes; the ratio is 1.32.
The lender's definition controls compliance, even though an ordinary current ratio can also be computed from these accounts. Apply both exclusions. Removing $95,000 inventory and $25,000 identified loan principal leaves $165,000 / $125,000 = 1.32, above the 1.20 requirement. The 1.73 current ratio ignores the contractual adjustments. Excluding inventory alone instead gives 1.10 and a mistaken failure conclusion because the denominator still contains the loan the covenant removes.

Question 48

Use inventory turnover = cost of goods sold ÷ average inventory. Cost of goods sold is $624,000, sales are $960,000, beginning inventory is $72,000, and ending inventory is $84,000. What is inventory turnover?
  • ☐ A. 7.43 times
  • ☐ B. 8.00 times
  • ☐ C. 8.67 times
  • ☐ D. 12.31 times
Show answer and explanation

Response: B

Final answer: 8.00 times
Use cost on both sides of turnover. COGS of $624,000 divided by average inventory of ($72,000 + $84,000) / 2 = $78,000 gives 8.00 times under the stated convention. The sales numerator includes markup. It produces 12.31 instead, while using only ending inventory produces 7.43 and substitutes one endpoint for the average specifically requested. Beginning inventory alone would yield 8.67.

Question 49

A company uses the cost method for treasury stock. It repurchases 2,000 common shares for $18 each, then reissues 500 of those shares for $23 each. There are no transaction costs or other treasury-stock transactions. What balance and reissue credit are appropriate after these transactions?
  • ☐ A. Treasury stock $27,000; additional paid-in capital $2,500.
  • ☐ B. Treasury stock $24,500; no additional paid-in capital credit.
  • ☐ C. Treasury stock $36,000; additional paid-in capital $2,500.
  • ☐ D. Treasury stock $27,000; gain in net income $2,500.
Show answer and explanation

Response: A

Final answer: Treasury stock $27,000; additional paid-in capital $2,500.
A sale of the issuer's own shares changes capital rather than creating an earnings gain, so separate the cost removed from treasury stock from the proceeds received. Remove $9,000 of cost. The 500 reissued shares at $18 reduce the $36,000 balance to $27,000, while their $11,500 proceeds leave $2,500 credited to additional paid-in capital. Crediting all proceeds to treasury stock would instead leave $24,500 and fail to separate that capital credit.

Question 50

Use static-budget expense variance = actual expense minus original budgeted expense, with a positive difference labeled unfavorable. Original budgeted utilities are $42,000 for 12,000 usage units; actual utilities are $46,500 for 15,000 units. A separate flexible-budget comparison would adjust the budget at $3.50 per unit. What is the original static-budget variance?
  • ☐ A. $4,500 favorable.
  • ☐ B. $4,500 unfavorable.
  • ☐ C. $6,000 favorable.
  • ☐ D. $6,000 unfavorable.
Show answer and explanation

Response: B

Final answer: $4,500 unfavorable.
The flexible-budget $6,000 favorable result in C uses actual usage to change the comparator, while this question specifically asks for the original static budget. Keep its $42,000 comparator. Actual utilities of $46,500 exceed that amount by $4,500, unfavorable under the supplied expense convention. Recomputing to $52,500 answers the flexible-variance question, and calling the static difference favorable instead reverses the supplied expense convention.

Question 51

Testlet 3 of 5. Begin only after submitting Questions 26-50. Write all ten numbered responses in each simulation. An optional stopped-clock break is available after Question 52.
Repair Lumen's five specified December 31 balance-sheet lines. For each line, choose CA (current asset), NCA (noncurrent asset), CL (current liability), or NCL (noncurrent liability), and enter the corrected dollars. Include only balances belonging in that named line; amounts excluded from a line belong elsewhere. Do not prepare those other lines. The normal operating cycle is 15 months. No refinancing exception applies.
Exhibit 1 - Draft balance-sheet extract
Named lineDraft classDraft amount
Cash available for operationsNCA$120,000
Long-term investmentsCA$80,000
Owned inventoryNCA$96,000
Gross trade receivablesCL$77,000
Current notes payableNCL$125,000
Exhibit 2 - Treasury register
Ledger componentAmountTerms at December 31
Cash: debt reserve$18,000Debt due in 18 months; no other use
Investment: certificate$25,000Unrestricted; matures in 6 months
Investment: factory reserve$55,000Replacement in 3 years
Exhibit 3 - Count and shipment files
The December 31 count, valued at $96,000, includes rack K: $14,000 held for the vendor, with proceeds remitted only after sale. Carrier scan L is dated December 30; the $9,000 purchase contract transfers ownership at shipment (FOB shipping point). Receiving records show L arrived January 3 and is absent from the count. No other ownership or cutoff difference exists.
Exhibit 4 - Customer and loan records
The control-account balance is $77,000. Its December 31 subledger lists debit balances $86,000 and advance-payment credits $9,000; credits are presented separately. Trade debits will be collected in 13 months. Signed note schedules show $75,000 due in 10 months and $50,000 in 20 months. Both cash and investment registers reconcile to the draft before classification.
CellRequested responseYour response
1Cash classification
2Cash amount
3Long-term investments classification
4Long-term investments amount
5Owned inventory classification
6Owned inventory amount
7Gross trade receivables classification
8Gross trade receivables amount
9Current notes payable classification
10Current notes payable amount
Show answer and explanation

Response: 1: CA; 2: $102,000; 3: NCA; 4: $55,000; 5: CA; 6: $91,000; 7: CA; 8: $86,000; 9: CL; 10: $75,000

Final answer: 1: CA; 2: $102,000; 3: NCA; 4: $55,000; 5: CA; 6: $91,000; 7: CA; 8: $86,000; 9: CL; 10: $75,000
Compare the draft with the treasury detail before accepting its account labels: $18,000 reserved for long-term debt must leave operating cash, giving $102,000 current, and the unrestricted six-month certificate must leave the long-term line, giving $55,000 noncurrent factory funds. The labels alone are insufficient. Rack K contains $14,000 belonging to the vendor, while scan L establishes ownership of the omitted $9,000 shipment, so current inventory is $96,000 - $14,000 + $9,000 = $91,000. Keep the customer debits gross. The $86,000 subledger debits remain current within the fifteen-month cycle, including the thirteen-month collection, and the separate $9,000 advance credits explain the draft's $77,000 net control amount. Notes split by maturity. The named current line includes $75,000 due within ten months and excludes $50,000 due in twenty, producing the five pairs CA/$102,000, NCA/$55,000, CA/$91,000, CA/$86,000 and CL/$75,000. Reclassifying whole draft totals would leave the ownership omissions and customer offset unresolved.

Question 52

Review Crest's December 31 close using the records below. For each named record, enter the account and signed balance adjustment: + increases and - decreases. Use INV (inventory), PPE (equipment cost), AD (accumulated depreciation), or NONE with 0 for no correction. Do not net separate rows. Average-cost inventory uses direct write-down to NRV; equipment uses monthly straight-line depreciation from readiness, no residual value. Round final dollar adjustments only.
Exhibit 1 - Offsite inventory log
RecordCostCount status and terms
Shipment S$12,000Absent; Dec 29 carrier / Jan 3 receipt; FOB shipping point
Agent A$18,000Absent; unsold Dec 31; title passes on sale to customer
Exhibit 2 - Lot D quality file
The count includes Lot D at its $10,000 cost. A December 28 customer quotation supports $7,000 ordinary-course proceeds after damage, with $1,200 remaining selling costs and no completion work. Neither S nor A belongs to Lot D.
Exhibit 3 - Vendor invoice paid
Work orderAmountInvoice description
P1$60,000New press, serial P1
P1 installation$13,000Mounting and calibration before acceptance
M2 service$7,000Routine repair, existing machine M2
Exhibit 4 - Posted asset close
All $80,000 of the paid invoice appears in the P1 cost register. The technician signed P1 acceptance on October 1; operation could begin that day. The six-year life is supported. The posted accumulated-depreciation schedule uses a $73,000 base for four months through December. The year-end inventory posting contains only on-premises counts; there are no separate S or A entries.
CellRequested responseYour response
1Shipment S: account
2Shipment S: signed adjustment
3Agent A: account
4Agent A: signed adjustment
5Lot D: account
6Lot D: signed adjustment
7P1 invoice posting: account
8P1 invoice posting: signed adjustment
9P1 depreciation: account
10P1 depreciation: signed adjustment
Show answer and explanation

Response: 1: INV; 2: +$12,000; 3: INV; 4: +$18,000; 5: INV; 6: -$4,200; 7: PPE; 8: -$7,000; 9: AD; 10: -$1,014

Final answer: 1: INV; 2: +$12,000; 3: INV; 4: +$18,000; 5: INV; 6: -$4,200; 7: PPE; 8: -$7,000; 9: AD; 10: -$1,014
The count-only posting excludes S despite the December 29 ownership terms, and the agent's unsold A goods still belong to Crest, requiring distinct inventory additions of $12,000 and $18,000. Lot D needs separate measurement. Its supported $7,000 sale price less $1,200 selling costs gives $5,800 NRV and a $4,200 inventory reduction from $10,000 cost. Match the equipment work orders. P1's acquisition and preacceptance installation total $73,000, whereas M2's $7,000 routine repair must leave PPE without removing P1's qualifying installation. The posted depreciation base is correct. Its timing is wrong: four months were recorded but the October 1 acceptance permits only three, so remove $73,000 / 6 / 12 = $1,013.8889, decreasing AD $1,014 after final rounding. An $80,000 depreciation base would wrongly bring M2's repair into a schedule that had correctly excluded it. Keep the five account/amount corrections distinct rather than netting the unrelated inventory changes.

Question 53

Testlet 4 of 5. Begin after submitting Questions 51-52 and any optional 15-minute stopped-clock break.
Reconcile Harbor's November cash and receivables. Enter dollars in all ten cells; use a + or - sign only for cells asking for a balance adjustment, and enter 0 if none is needed. Gross receivables exclude customer credit balances. The aging estimates apply to the corrected, still-outstanding debit balances after every listed exception. No item has been posted unless the exhibit says so.
Exhibit 1 - Bank statement and notices
November closing bank cash is $54,000. The statement contains an $8,000 customer collection, a $200 fee and a $1,200 returned NSF customer deposit. A separate bank notice confirms a $3,000 withdrawal belongs to another company and will be reversed. A cleared supplier check image shows $1,050.
Exhibit 2 - Cash posting extract
RecordAmountPosting status
Book closing cash$50,000Before the statement notices
Deposit in transit$6,000Recorded receipt; absent from bank
Outstanding checks$7,000Recorded payments; absent from bank
Supplier check image$450Amount entered in books
Exhibit 3 - Customer close files
The draft control balance is $160,000 after netting $6,000 advance-payment credits. Statement notices in Exhibit 1, a $3,000 accepted sales-return memo and a $1,200 approved write-off are not posted. The transit deposit was posted against receivables. Before the write-off the allowance is a $2,500 credit. After all corrections, the supported forward-looking aging assigns 20% expected loss to $15,000 debit balances and 1% to the remainder. No other allowance posting exists; these exercise estimates are not universal policy.
CellRequested responseYour response
1Adjusted bank cash
2Adjusted book cash
3Erroneous bank withdrawal: book-cash adjustment
4Bank collection: book-cash adjustment
5Supplier posting error: book-cash adjustment
6Corrected gross receivables
7Write-off: allowance balance adjustment
8Required ending credit allowance
9Allowance increase still needed
10Net receivables
Show answer and explanation

Response: 1: $56,000; 2: $56,000; 3: $0; 4: +$8,000; 5: -$600; 6: $155,000; 7: -$1,200; 8: $4,400; 9: $3,100; 10: $150,600

Final answer: 1: $56,000; 2: $56,000; 3: $0; 4: +$8,000; 5: -$600; 6: $155,000; 7: -$1,200; 8: $4,400; 9: $3,100; 10: $150,600
Restore the bank's $3,000 other-company withdrawal on the bank side, not in books where it was never posted, and include $6,000 transit receipts less $7,000 outstanding checks to reconcile bank cash to $56,000. Books reach the same balance. Add the $8,000 collection to $50,000 and deduct the $200 fee, $1,200 NSF reversal and $600 additional supplier payment correction. Transit items are already recorded. For receivables, first remove the control account's offsetting credits: $160,000 + $6,000 - $8,000 + $1,200 - $3,000 - $1,200 gives $155,000 gross customer debits after collection, NSF, return and write-off. The allowance needs its own rollforward. Writing off $1,200 reduces its $2,500 credit to $1,300, while $15,000 at 20% plus $140,000 at 1% supports a $4,400 ending target. Add only $3,100 expense and credit. Subtracting the target from $155,000 leaves $150,600 net receivables, and using the full $4,400 as new expense would ignore the surviving allowance credit.

Question 54

Complete Northwind's December 31 loss and subsequent-event review. Statements will be issued February 28; consider evidence available through that date. For each matter, select ACC (recognize a loss and liability), DISC (disclose without recognizing a loss), or NEITHER, then enter the recognized loss dollars, using 0 when none. Matters are independent and material except where the facts say otherwise. There are no guarantees or special disclosure obligations. For cells 9-10 select from the distinct note-revision lists below.
Exhibit 1 - Counsel letter, January 10
Our review covers conditions at December 31. Matter 1: breach evidence is persuasive; an unfavorable outcome is likely. Our best supported loss estimate is $90,000. Matter 2: the claimant has a credible case and an unfavorable result is more than remote, but is not likely; exposure is estimable at $60,000. Matter 4: independent records refute the allegation; the chance of loss is slight, with $12,000 claimed. Each is a separate preyear-end matter.
Exhibit 2 - Dated event file
DateMatterDocumented event
January 153Warehouse accident; $140,000 uninsured damage
January 201Same breach settled for $92,000
Exhibit 3 - Draft note and response lists
The warehouse was undamaged at December 31; the January accident has no preyear-end causative condition. All later evidence concerns the same claims, and statements issue February 28. Portion 1: "The settlement and warehouse loss, $232,000 in total, are accrued at December 31." A retain; B replace with $92,000 settlement recognition and material new-accident disclosure; C delete all subsequent-event information. Portion 2: "A $12,000 loss is accrued for Matter 4." D retain; E substitute $60,000; F delete this unsupported accrual. For this exercise use the standard meanings: probable means likely, reasonably possible means more than remote but less than likely, and remote means slight.
CellRequested responseYour response
1Matter 1 treatment
2Matter 1 recognized loss
3Matter 2 treatment
4Matter 2 recognized loss
5Matter 3 treatment
6Matter 3 recognized loss
7Matter 4 treatment
8Matter 4 recognized loss
9Draft portion 1 revision
10Draft portion 2 revision
Show answer and explanation

Response: 1: ACC; 2: $92,000; 3: DISC; 4: $0; 5: DISC; 6: $0; 7: NEITHER; 8: $0; 9: B; 10: F

Final answer: 1: ACC; 2: $92,000; 3: DISC; 4: $0; 5: DISC; 6: $0; 7: NEITHER; 8: $0; 9: B; 10: F
The warehouse's January accident cannot enter December's recognized loss, but it is material enough for subsequent-event disclosure even though the settlement of a different matter also occurred in January. Keep the matters separate. Counsel's likely preyear-end contract loss supports ACC, measured at the confirming $92,000 settlement rather than the earlier $90,000 estimate. Matter 2 requires disclosure only. Its chance is above remote but below likely, leaving zero recognized loss despite the measurable $60,000 exposure, while Matter 4's slight supported chance requires NEITHER and zero under the supplied ordinary-claim facts. The first eight cells are therefore ACC/$92,000, DISC/$0, DISC/$0 and NEITHER/$0. Replacement B distinguishes the recognized settlement from the disclosed new accident. F deletes Matter 4's accrual. That claimed amount does not establish a likely loss, and substituting Matter 2's $60,000 would merely change the size of the same recognition error.

Question 55

Repair Vale's two-year close. Use AP (accounts payable), PAY (accrued payroll), or NONE for cells 1 and 3; enter signed balance adjustments in 2 and 4. Cells 5-8 concern the inventory-error effects on the named prior-year and opening amounts. Cell 9 asks the combined current-year COGS correction from all exhibits. A + increases the named amount; a - decreases it. Ignore taxes. Current ending inventory is correct; periodic closing uses beginning inventory plus purchases less ending inventory. Cell 10 revises the controller's error-and-estimate proposal.
Exhibit 1 - Cutoff documents
RecordAmountDates and posting evidence
Supplier goods$23,000Owned/received Dec 29; in count; Jan invoice unposted
Staff time earned$12,000Through Dec 31; paid Jan 5; no accrual
Exhibit 2 - Comparative count review
Inventory scheduleReportedOwned amount
Prior Dec 31 / current Jan 1$82,000$72,000
Current Dec 31$91,000$91,000
Exhibit 3 - Supporting close memorandum
The prior count included another owner's $10,000 lot. The reported prior ending inventory was carried into current opening inventory and the periodic COGS closing; no earlier error exists. Comparative statements are presented and the error is material. No prepayment, purchase accrual or other posting exists for Exhibit 1; staff wages are operating payroll, outside inventory cost. At current January 1, new information validly revises an asset's remaining life: current depreciation is $30,000 rather than $60,000, and the previous estimate was reasonable. The controller proposes $40,000 current expense as a prior-period correction. A restate the inventory error, carry corrected opening equity and record current inventory effects, with $30,000 depreciation prospectively; B charge $40,000 now; C restate prior depreciation too; D defer both matters.
CellRequested responseYour response
1Supplier correction account
2Supplier liability adjustment
3Payroll correction account
4Payroll liability adjustment
5Prior-year COGS correction
6Prior-year income correction
7Prior-year ending equity correction
8Current-year opening equity correction
9Current-year COGS correction
10Combined proposal replacement
Show answer and explanation

Response: 1: AP; 2: +$23,000; 3: PAY; 4: +$12,000; 5: +$10,000; 6: -$10,000; 7: -$10,000; 8: -$10,000; 9: +$13,000; 10: A

Final answer: 1: AP; 2: +$23,000; 3: PAY; 4: +$12,000; 5: +$10,000; 6: -$10,000; 7: -$10,000; 8: -$10,000; 9: +$13,000; 10: A
The received supplier goods are already in the $91,000 ending count, so the missing $23,000 purchase raises AP and periodic COGS without another addition to ending inventory. Payroll is a separate obligation. The time record requires $12,000 PAY but states that this operating payroll is outside inventory cost. Now trace the old count error. Prior ending inventory was $82,000 rather than $72,000 owned goods, requiring prior COGS +$10,000 and prior income, ending equity and current opening equity -$10,000 each. The corrected current opening inventory also reduces current COGS by $10,000, combining with the omitted purchase to give cell 9's $23,000 - $10,000 = $13,000 increase. Do not double-count the goods. The estimate revision uses new information after reasonable earlier depreciation, so its $30,000 current expense is prospective, while the material inventory error is corrected retrospectively. A preserves these separate treatments. B pools an inappropriate $40,000 charge, C restates the previously reasonable estimate, and D postpones a correction already required.

Question 56

Testlet 5 of 5. Begin only after submitting Questions 53-55.
Complete Spruce's current-year nonprofit worksheet. Enter dollars in cells 1-8 and 10. All expenses reduce net assets without donor restrictions. For cell 9 choose REV (contribution revenue), ADV (refundable advance liability), or RELEASE (release from restriction). Do not offset an unmet condition against a different donor's fulfilled restriction. All arrangements are nonexchange contributions, with no collection-policy or same-period reporting exception.
Exhibit 1 : Activity and opening balances
Opening net assets are $200,000 without donor restrictions and $80,000 with donor restrictions. Current unrestricted cash gifts are $120,000. Unconditional purpose-restricted gifts are $60,000; $40,000 of applicable program work fulfills existing purpose restrictions. Other recognized expenses, excluding staff and contributed services, are $60,000. Licensed accountants donate specialized services worth $20,000 that Spruce would otherwise purchase; no donor restriction applies.
Exhibit 2 : Shared staff allocation
The $100,000 paid staff-cost pool covers program, management and fundraising functions. Supported time records allocate 70% to program, 20% to management and 10% to fundraising. No employee time belongs in more than one pool. The donated accounting services are additional management expense, outside the paid staff pool.
Exhibit 3 : Separate conditional grant
Spruce received $25,000 in cash under an agreement requiring 200 specified service sessions before entitlement. The measurable performance barrier is substantive, and the donor has an enforceable right of return if it is unmet. Only 120 sessions are completed at year-end. No partial entitlement is allowed. This grant is separate from the unconditional $60,000 purpose gifts and the $40,000 fulfilled restrictions.
CellRequested responseYour response
1Program paid salary allocation
2Management paid salary allocation
3Fundraising paid salary allocation
4Revenue without donor restrictions
5Revenue with donor restrictions
6Release from restriction
7Ending net assets without donor restrictions
8Ending net assets with donor restrictions
9Conditional cash grant treatment
10Recognized contribution from conditional grant
Show answer and explanation

Response: 1: $70,000; 2: $20,000; 3: $10,000; 4: $140,000; 5: $60,000; 6: $40,000; 7: $200,000; 8: $100,000; 9: ADV; 10: $0

Final answer: 1: $70,000; 2: $20,000; 3: $10,000; 4: $140,000; 5: $60,000; 6: $40,000; 7: $200,000; 8: $100,000; 9: ADV; 10: $0
The $25,000 award has an unmet 200-session barrier and return right, with only 120 sessions completed and no partial entitlement, so classify that cash as ADV and recognize zero contribution. It is a separate agreement. Spruce's other unconditional gifts and earned restriction releases therefore cannot satisfy this barrier. Paid staff allocate $70,000 program, $20,000 management and $10,000 fundraising, while the qualified donated accounting adds $20,000 management expense and unrestricted contribution revenue. Unrestricted revenue is $140,000. The purpose gifts supply $60,000 restricted revenue, and fulfilling $40,000 of prior purpose restrictions transfers that amount between classes without creating a new gift. Expenses total $180,000. Ending unrestricted net assets are $200,000 + $140,000 + $40,000 - $180,000 = $200,000, and the restricted class ends at $80,000 + $60,000 - $40,000 = $100,000. These class rollforwards exclude the conditional advance rather than treating every cash receipt as a contribution.

Question 57

Repair Elm's cash-flow worksheet for the year just ended, then complete a separate lessee schedule commencing January 1 of the following year. Enter signed cash-flow totals in cells 1-3, cash totals in 4-5, and positive amounts in 6-10. Use the indirect operating method. Include cash and restricted cash in the reconciliation total. The following-year lease is outside this year's cash-flow statement; round its final responses to whole dollars using unrounded intermediate calculations.
Exhibit 1 - Comparative ledger
BalanceBeginningEnding
Unrestricted cash$50,000$80,000
Restricted cash$10,000$25,000
Trade receivables$62,000$72,000
Inventory$88,000$80,000
Operating payables$34,000$40,000
Exhibit 2 - Close and transaction file
Net income is $50,000, including a $5,000 equipment-disposal gain; depreciation is $20,000. Sale receipt: $15,000. New equipment: $40,000 cash plus a separate $30,000 purchase entirely by note. Stock receipts: $20,000; debt principal paid: $12,000; dividends paid: $7,000. A $15,000 internal transfer is the only restricted-cash movement. No other cash changes exist. The draft reports operating $70,000, investing -$55,000 and financing $1,000, and reconciles unrestricted cash alone.
Exhibit 3 - Separate following-year lease
A finance lease starts January 1 of the following year. Three $12,000 payments occur at each year-end; the rate is 10% and the ordinary-annuity factor is 2.486852. There is no payment at commencement, incentive, initial direct cost or residual guarantee. Calculate initial liability, first-year interest, first-payment principal and liability after that payment.
CellRequested responseYour response
1Operating cash flow
2Investing cash flow
3Financing cash flow
4Beginning total cash reconciliation
5Ending total cash reconciliation
6Noncash acquisition disclosure
7Initial lease liability
8First-year lease interest
9First-payment principal
10Liability after first payment
Show answer and explanation

Response: 1: +$69,000; 2: -$25,000; 3: +$1,000; 4: $60,000; 5: $105,000; 6: $30,000; 7: $29,842; 8: $2,984; 9: $9,016; 10: $20,826

Final answer: 1: +$69,000; 2: -$25,000; 3: +$1,000; 4: $60,000; 5: $105,000; 6: $30,000; 7: $29,842; 8: $2,984; 9: $9,016; 10: $20,826
The financing draft is already supported: $20,000 stock proceeds less $12,000 principal and $7,000 dividends equals $1,000, while the $30,000 note-financed equipment belongs in a separate noncash disclosure. Leave financing unchanged. Rebuild operating cash from $50,000 income + $20,000 depreciation - $5,000 disposal gain - $10,000 receivables + $8,000 inventory + $6,000 payables = $69,000. Investing is $15,000 sale proceeds less $40,000 purchases, or -$25,000. Include restricted cash in reconciliation. Beginning $60,000 and ending $105,000 change by $45,000, agreeing to $69,000 - $25,000 + $1,000 without treating the internal transfer as a flow. The future lease starts later. Its liability is $12,000 times 2.486852 = $29,842.224, leading at 10% to $2,984.2224 interest, $9,015.7776 principal and $20,826.4464 remaining liability after the first payment. Round only the final requested cells to $29,842, $2,984, $9,016 and $20,826. Using a payment-at-commencement factor would contradict the stated timeline.