CPA Pass Master Questions-Financial 222 PDF

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Becker CPA Review, PassMaster Questions Lecture: Financial 2

CPA PassMaster Questions-Financial 2 Export Date: 10/30/08

1 © 2009 DeVry/Becker Educational Development Corp. All rights reserved.

Becker CPA Review, PassMaster Questions Lecture: Financial 2

Timing Issues CPA-00536

Type1 M/C

A-D

Corr Ans: B PM#1

F 2-01

1. CPA-00536 FARE R03 #9 Page 18 Miller Co. incurred the following computer software costs for the development and sale of software programs during the current year: Planning costs Design of the software Substantial testing of the project’s initial stages Production and packaging costs for the first month's sales Costs of producing product masters after technology feasibility was established

$ 50,000 150,000 75,000 500,000 200,000

The project was not under any contractual arrangement when these expenditures were incurred. What amount should Miller report as research and development expense for the current year? a. b. c. d.

$200,000 $275,000 $500,000 $975,000

CPA-00536 Explanation Choice "b" is correct. Before technological feasibility is established computer software development costs are expensed as research and development. Miller Co.'s research and development costs are: Planning costs Design of the software Substantial testing of the project's initial stages

$ 50,000 150,000 75,000 $275,000

CPA-00538

PM#3

Type1 M/C

A-D

Corr Ans: A

F 2-01

2. CPA-00538 FARE R97 #6 Page 5 Troop Co. frequently borrows from the bank to maintain sufficient operating cash. The following loans were at a 12% interest rate, with interest payable at maturity. Troop repaid each loan on its scheduled maturity date. Date of Loan 11/1/95 2/1/96 5/1/96

Amount $10,000 30,000 16,000

Maturity Date 10/31/96 7/31/96 1/31/97

Term of Loan 1 year 6 months 9 months

Troop records interest expense when the loans are repaid. Accordingly, interest expense of $3,000 was recorded in 1996. If no correction is made, by what amount would 1996 interest expense be understated? a. b. c. d.

$1,080 $1,240 $1,280 $1,440

CPA-00538 Explanation Choice "a" is correct. $1,080 understated interest expense. Actual interest expense: Date Amount 11/1/95 Loan $10,000

×

Rate 12%

Time × 10/12 mos

=

$1,000

2 © 2009 DeVry/Becker Educational Development Corp. All rights reserved.

Becker CPA Review, PassMaster Questions Lecture: Financial 2

2/1/96 Loan 5/1/96 Loan

30,000 16,000

× ×

12% 12%

6/12 mos 8/12 mos

× ×

1,800 1,280 4,080

= =

Stated interest expense on the cash basis.

3,000

Understated interest expense

CPA-00539

Type1 M/C

$1,080

A-D

Corr Ans: D PM#4

3. CPA-00539 FARE Nov 95 #13

F 2-01

Page 5

Lime Co.'s payroll for the month ended January 31, 1995, is summarized as follows: Total wages Federal income tax withheld

$10,000 1,200

All wages paid were subject to FICA. FICA tax rates were 7% each for employee and employer. Lime remits payroll taxes on the 15th of the following month. In its financial statements for the month ended January 31, 1995, what amounts should Lime report as total payroll tax liability and as payroll tax expense? a. b. c. d.

Liability $1,200 $1,900 $1,900 $2,600

Expense $1,400 $1,400 $700 $700

CPA-00539 Explanation Choice "d" is correct, $2,600 total payroll tax liability; $700 payroll tax expense: Total wages FICA tax rate FICA tax withheld (employee portion) Federal income tax withheld Total tax withheld Employer FICA tax expense and liability Total payroll tax liability at Jan. 31, 1995 Journal entry Dr Wage expense 10,000 Employer FICA tax expense 700 FIT withheld FICA tax withheld (employee portion) Employer FICA tax liability Accrued payroll liability CPA-00540

Type1 M/C

A-D

4. CPA-00540 FARE Nov 95 #16

$10,000 7% 700 1,200 1,900 700 $ 2,600 Cr 1,200 700 700 8,100

Corr Ans: D PM#5

F 2-01

Page 5

On March 1, 1993, Fine Co. borrowed $10,000 and signed a two-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 1995. What amount should Fine report as a liability for accrued interest at December 31, 1994? a. b. c. d.

$0 $1,000 $1,200 $2,320

CPA-00540 Explanation Choice "d" is correct. 3 © 2009 DeVry/Becker Educational Development Corp. All rights reserved.

Becker CPA Review, PassMaster Questions Lecture: Financial 2

12%, 2-yr note payable 1993 interest expense [12% × $10,000 × 10/12] 1993 net liability 1994 interest expense = [12% × $11,000]

$10,000 1,000 $11,000 $ 1,320

Accrued interest payable at 12/31/94 equals $2,320 [$1,000 + $1,320] Choice "a" is incorrect. Accrued interest must be recognized and recorded during the term of the note. Choice "b" is incorrect. 1993 accrued interest equals $1,000 [$10,000 × 12% × 10/12]. Choice "c" is incorrect. This is simple interest on the original note [12% × $10,000] for one year and is not the accrued interest payable balance. CPA-00541

Type1 M/C

A-D

5. CPA-00541 FARE Nov 95 #30

Corr Ans: C PM#6

F 2-01

Page 7

Rill Co. owns a 20% royalty interest in an oil well. Rill receives royalty payments on January 31 for the oil sold between the previous June 1 and November 30, and on July 31 for oil sold between the previous December 1 and May 31. Production reports show the following oil sales: June 1, 1993-November 30, 1993 December 1, 1993-December 31, 1993 December 1, 1993-May 31, 1994 June 1, 1994-November 30, 1994 December 1, 1994-December 31, 1994

$300,000 50,000 400,000 325,000 70,000

What amount should Rill report as royalty revenue for 1994? a. b. c. d.

$140,000 $144,000 $149,000 $159,000

CPA-00541 Explanation Choice "c" is correct. Royalty revenue accrued for 1994 is based on 20% of production in 1994. Production, Jan. 1 thru May 31 [$400,000 − $50,000] June 1 through November 30 production Production for December Total 1994 production

$350,000 325,000 70,000 $745,000

Royalty revenue on this production equals $149,000 [20% × $745,000]. CPA-00543

Type1 M/C

A-D

6. CPA-00543 FARE May 95 #13

Corr Ans: A PM#8

F 2-01

Page 11

During 1994, Jase Co. incurred research and development costs of $136,000 in its laboratories relating to a patent that was granted on July 1, 1994. Costs of registering the patent equaled $34,000. The patent's legal life is 17 years, and its estimated economic life is 10 years. In its December 31, 1994, balance sheet, what amount should Jase report as patent, net of accumulated amortization? a. b. c. d.

$32,300 $33,000 $161,500 $165,000

CPA-00543

Explanation 4 © 2009 DeVry/Becker Educational Development Corp. All rights reserved.

Becker CPA Review, PassMaster Questions Lecture: Financial 2

Choice "a" is correct. The research and development costs should be expensed. The patent will be capitalized and amortized over 10 years (the lesser of legal life or economic life). 1994 amortization equals $1,700 ($34,000/10 × 6/12). The patent balance at year-end is $32,300 ($34,000 − $1,700). SFAS 2 para. 12 APB 17 para. 9 Choice "b" is incorrect. The amortization should be calculated based on the lesser of legal life or economic life. APB 17 para. 9 Choice "c" is incorrect. The research and development costs should not be capitalized as part of the cost of the patent. SFAS 2 para. 12 Choice "d" is incorrect. The research and development costs should not be capitalized as part of the cost of the patent. SFAS 2 para. 12

CPA-00546

Type1 M/C

A-D

7. CPA-00546 FARE May 95 #38

Corr Ans: B PM#11

F 2-01

Page 5

Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of a patent for three years. The royalties paid should be reported as expense: a. In the period paid. b. In the period incurred. c. At the date the royalty agreement began. d. At the date the royalty agreement expired. CPA-00546 Explanation Choice "b" is correct. Royalties paid should be reported as expense in the period incurred. Choice "a" is incorrect. Reporting the royalties paid in the period in which they are paid would be the correct treatment under the cash basis of accounting, not accrual. Choices "c" and "d" are incorrect. Both of these answers do not necessarily match the expense with the related revenue over an appropriate period.

CPA-00547

Type1 M/C

A-D

8. CPA-00547 FARE Nov 94 #9

Corr Ans: C PM#12

F 2-01

Page 5

The following trial balance of Trey Co. at December 31, 1993, has been adjusted except for income tax expense. Cash Accounts receivable, net Prepaid taxes Accounts payable Common stock Additional paid-in capital Retained earnings Foreign currency translation adjustment Revenues Expenses

Dr. $ 550,000 1,650,000 300,000

Cr.

$120,000 500,000 680,000 630,000 430,000 3,600,000 2,600,000 $5,530,000

$5,530,000

Additional information • During 1993, estimated tax payments of $300,000 were charged to prepaid taxes. Trey has not yet recorded income tax expense. There were no differences between financial statement and income tax income, and Trey's tax rate is 30%. • Included in accounts receivable is $500,000 due from a customer. Special terms granted to this customer require payment in equal semiannual installments of $125,000 every April 1 and October 1. 5 © 2009 DeVry/Becker Educational Development Corp. All rights reserved.

Becker CPA Review, PassMaster Questions Lecture: Financial 2

In Trey's December 31, 1993, balance sheet, what amount should be reported as total retained earnings? a. b. c. d.

$1,029,000 $1,200,000 $1,330,000 $1,630,000

CPA-00547 Explanation Choice "c" is correct. $1,330,000. Revenue Expenses Pre-tax income Tax expense − 30% Net income Beginning retained earnings Ending retained earnings

$3,600 (2,600) 1,000 (300) 700 630 $1,330

Notes: 1. The estimated tax payments do not affect the expense. 2. For GAAP purposes, 100% of the profit on an installment sale is recorded at time of sale unless there is doubt as to collectibility. CPA-00549

Type1 M/C

A-D

9. CPA-00549 FARE Nov 94 #21

Corr Ans: D

PM#14

F 2-01

Page 9

For $50 a month, Rawl Co. visits its customers' premises and performs insect control services. If customers experience problems between regularly scheduled visits, Rawl makes service calls at no additional charge. Instead of paying monthly, customers may pay an annual fee of $540 in advance. For a customer who pays the annual fee in advance, Rawl should recognize the related revenue: a. When the cash is collected. b. At the end of the fiscal year. c. At the end of the contract year after all of the services have been performed. d. Evenly over the contract year as the services are performed. CPA-00549 Explanation Choice "d" is correct. For a customer who pays the $540 annual fee in advance, the related revenue should be recognized evenly over the contract year as the services are performed (GAAP-accrual basis of accounting). Choice "a" is incorrect. Under the cash basis of accounting, revenue is recognized when the cash is collected. Choice "b" is incorrect. Revenue should not be recognized at the end of the fiscal year; it should be recognized evenly over the contract year. Choice "c" is incorrect. Revenue should not be recognized at the end of the contract year after all of the services have been performed; it should be recognized evenly over the contract year.

CPA-00550

Type1 M/C

A-D

10. CPA-00550 FARE Nov 94 #23

Corr Ans: C PM#15

F 2-01

Page 5

House Publishers offered a contest in which the winner would receive $1,000,000, payable over 20 years. On December 31, 1993, House announced the winner of the contest and signed a note payable to the winner for $1,000,000, payable in $50,000 installments every January 2. Also on December 31, 1993, House purchased an annuity for $418,250 to provide the $950,000 prize monies remaining after the first $50,000 installment, which was paid on January 2, 1994. In its 1993 income statement, what should House report as contest prize expense? 6 © 2009 DeVry/Becker Educational Development Corp. All rights reserved.

Becker CPA Review, PassMaster Questions Lecture: Financial 2

a. b. c. d.

$0 $418,250 $468,250 $1,000,000

CPA-00550 Explanation Choice "c" is correct. $468,250 contest prize expense. First payment on 1/2/94 Present value of 19 subsequent payments Contest prize expense in 1993 income statement CPA-00551

Type1 M/C

A-D

11. CPA-00551 FARE Nov 94 #40

$ 50,000 418,250 $468,250

Corr Ans: A PM#16

F 2-01

Page 7

Wren Corp.'s trademark was licensed to Mont Co. for royalties of 15% of sales of the trademarked items. Royalties are payable semiannually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year. Wren received the following royalties from Mont: 1992 1993

March 15 $10,000 12,000

September 15 $15,000 17,000

Mont estimated that sales of the trademarked items would total $60,000 for July through December 1993. In Wren's 1993 income statement, the royalty revenue should be: a. b. c. d.

$26,000 $29,000 $38,000 $41,000

CPA-00551 Explanation Choice "a" is correct. Royalties to be received on March 15 reflect earnings from the latter half of the prior year. Royalties to be received on September 15 reflect earnings from the first half of the current year. Earnings for the latter half of 1993 equal $9,000 (15% × $60,000). 1993 earnings equal first half earnings of $17,000 plus second half earnings of $9,000 for a total of $26,000. Note: 1992 earnings equal $27,000 ($12,000 plus $15,000); 1991 earnings equal $10,000. SFAC 5 para. 83

CPA-00553

Type1 M/C

A-D

12. CPA-00553 FARE Nov 94 #44

Corr Ans: D PM#17

F 2-01

Page 16

During 1993, Orr Co. incurred the following costs: Research and development services performed by Key Corp. for Orr Design, construction, and testing of preproduction prototypes and models Testing in search for new products or process alternatives

$150,000 200,000 175,000

In its 1993 income statement, what should Orr report as research and development expense? a. b. c. d.

$150,000 $200,000 $350,000 $525,000

CPA-00553 Explanation Choice "d" is correct. R&D contracted out to a third party, preproduction prototypes and models costs, and, costs for searching for new products or new process alternatives are reported as R&D expense. 7 © 2009 DeVry/Becker Educational Development Corp. All rights reserved.

Becker CPA Review, PassMaster Questions Lecture: Financial 2

Choice "a" is incorrect. R&D expense should include the preproduction prototypes and models costs and the costs of searching for new products or new process alternatives. Choice "b" is incorrect. R&D expense should include the costs incurred through contracting with a third party for the R&D work to be done and the costs of searching for new product or new process alternatives. Choice "c" is incorrect. R&D expense should include the costs for searching for new products or new process alternatives.

CPA-00554

Type1 M/C

A-D

13. CPA-00554 FARE May 94 #20

Corr Ans: C PM#18

F 2-01

Page 14

On January 2, 1993, Rafa Co. purchased a franchise with a useful life of ten years for $50,000. An additional franchise fee of 3% of franchise operation revenues must be paid each year to the franchisor. Revenues from franchise operations amounted to $400,000 during 1993. In its December 31, 1993, balance sheet, what amount should Rafa report as an intangible asset franchise? a. b. c. d.

$33,000 $43,800 $45,000 $50,000

CPA-00554 Explanation Choice "c" is correct. The $50,000 franchise cost will be amortized on a straight-line basis over 10 years ($5,000 per year). The balance in the franchise account will be $50,000 − $5,000 = $45,000. The 3% of franchise operation revenue is an operating expense, unrelated to the intangible asset balance. CPA-00557

Type1 M/C

A-D

14. CPA-00557 FARE May 94 #42

Corr Ans: D PM#20

F 2-01

Page 5

Compared to the accrual basis of accounting, the cash basis of accounting understates income by the net decrease during the accounting period of:

a. b. c. d.

Accounts Receivable Yes Yes No No

CPA-00557

Accrued Expenses Yes No No Yes

Explanation

Sales Expenses Net income

Accrual Basis 1,000 600 400

Adjustments Accrual to Cash 300 100 200

Accounts Beginning balance Add: Sales accrued Subtotal Less: Cash collections Ending balance

Receivable 300 1,000 -Add Accrued Exps. 1,300 -Less Payments 0 No 8

Cash Basis 1,300 700 600

AR - No AP - Yes

Accrued Expenses Payable 100 600 700

0 Yes

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Net Income =

400

=

600

Becker CPA Review, PassMaster Questions Lecture: Financial 2

Choice "d" is correct. No - Accounts receivable Yes - Accrued expenses payable CPA-00563

Type1 M/C

A-D

Corr Ans: B PM#21

15. CPA-00563 Th Nov 93 #10 (Adapted)

F 2-01

Page 16

Which of the following costs of goodwill should be capitalized?

a. b. c. d.

Maintaining goodwill Yes No Yes No

Developing goodwill No No Yes Yes

CPA-00563 Explanation Choice "b" is correct. Goodwill is capitalized only when incurred in the purchase of another entity. Costs incurred for maintaining or developing goodwill are expensed. APB 17 para. 9

CPA-00564

Type1 M/C

A-D

Corr Ans: C

PM#22

F 2-01

16. CPA-00564 PI Nov 93 #17 Page 6 Frame Co. has an 8% note receivable dated June 30, 1991, in the original amount of $150,000. Payments of $50,000 in principal plus accrued interest are due annually on July 1, 1992, 1993, and 1994. In its June 30, 1993, balance sheet, what amount should Frame report as a current asset for interest on the note receivable? a. b. c. d.

$0 $4,000 $8,000 $12,000

CPA-00564 Explanation Choice "c" is correct. The current asset for interest receivable on June 30, 1993, is the interest to be received within one year. Interest to be received on July 1...