A company uses FIFO. At year-end its inventory cost $50,000. Estimated selling price less costs to complete and sell is $46,000, and current replacement cost is $44,000. Under US GAAP, at what amount should inventory be reported?
$46,000 Inventory measured with FIFO or average cost is reported at the lower of cost and net realizable value. Net realizable value is the selling price less costs to complete and sell, so that’s $46,000. Replacement cost doesn’t matter under this rule.
On July 1, a calendar-year company buys equipment for $100,000. It expects a 5-year useful life and a $10,000 salvage value, and it uses straight-line depreciation, counted by the month. What is depreciation expense for the first year?
$9,000 The depreciable base is $100,000 minus $10,000, which is $90,000. Spread over 5 years that’s $18,000 a year. The equipment was used for only 6 months of the first year, so expense is $18,000 × 6/12 = $9,000.
At year-end, accounts receivable is $200,000. The company estimates that 5% will be uncollectible. Before adjusting, the allowance for doubtful accounts has a $3,000 credit balance. What is bad debt expense for the year?
$7,000 With the balance sheet approach, the allowance should end the year at 5% of $200,000, which is $10,000. It already has $3,000, so the adjustment, and the expense, is $7,000.
A company issues 10-year bonds with a stated interest rate of 5% when the market rate for similar bonds is 6%. The company uses the effective interest method. Which statement is correct?
The bonds are issued at a discount, and interest expense is more than the cash interest paid. Investors won’t pay full price for a 5% bond when they can earn 6% elsewhere, so the bonds sell at a discount. Each period the discount is amortized and added to interest expense, so expense is higher than the cash coupon.
Under ASC 606, Revenue from Contracts with Customers, what is the third step in the five-step revenue recognition model?
Determine the transaction price The five steps are: identify the contract, identify the performance obligations, determine the transaction price, allocate it to the performance obligations, and recognize revenue as each obligation is satisfied. Step three is determining the transaction price.
Under ASC 842, a company signs a 5-year lease for office space that it classifies as an operating lease. Which statement describes the lessee’s balance sheet at the start of the lease?
It reports a right-of-use asset and a lease liability. Under ASC 842, a lessee puts almost every lease longer than 12 months on the balance sheet. It records a right-of-use asset and a lease liability, for operating leases as well as finance leases. The two types differ mainly in how expense shows up on the income statement.
Under US GAAP for not-for-profit entities, into which classes must net assets be reported on the statement of financial position?
With donor restrictions and without donor restrictions Since ASU 2016-14, not-for-profits report two classes of net assets: with donor restrictions and without donor restrictions. Amounts a donor has restricted, by purpose or time or permanently, go in the first class.
An auditor assesses the risk of material misstatement for inventory as high. What effect should this have on the audit?
The acceptable level of detection risk should be lower, so more persuasive substantive evidence is needed. Audit risk is the risk of material misstatement multiplied by detection risk. To keep audit risk at an acceptably low level, a higher risk of material misstatement means the auditor must accept less detection risk. In practice that means more, better-timed or more persuasive substantive procedures.
Under the AICPA Code of Professional Conduct, a covered member owns a small direct financial interest in an attest client. The amount is immaterial to the covered member. What is the effect on independence?
Independence is impaired. Any direct financial interest in an attest client held by a covered member impairs independence. Materiality doesn’t matter for a direct interest. It only matters for indirect interests.
An auditor wants to test the existence assertion for recorded sales. Which procedure gives the most direct evidence?
Vouching entries in the sales journal to shipping documents and customer orders Existence asks whether recorded sales really happened. So you start with what’s recorded, the sales journal, and vouch back to evidence that a sale occurred, like shipping documents. Going the other way, from documents to the journal, tests completeness.
An auditor sends confirmations of accounts receivable balances to customers. Which assertion does this procedure mainly support?
Existence A confirmation asks the customer to agree that they owe the recorded amount. That’s strong evidence the receivable exists. It says little about completeness, because a customer who isn’t on the list never gets a confirmation.
Which pair of duties should be kept apart for good internal control over cash receipts?
Custody of cash and recording cash receipts in the accounting records Segregation of duties keeps authorization, recording and custody of assets with different people. Someone who both handles cash and records it could take cash and hide it by changing the records.
An auditor concludes the financial statements are materially misstated, and the effects are pervasive. What opinion should the auditor express?
An adverse opinion When misstatements are both material and pervasive, the statements as a whole aren’t fairly presented, so the opinion is adverse. If the misstatement were material but not pervasive, a qualified opinion would fit.
Under US GAAP and AICPA auditing standards, over what period does management evaluate, and the auditor consider, whether there is substantial doubt about an entity’s ability to continue as a going concern?
One year after the date the financial statements are issued, or available to be issued US GAAP (ASC 205-40) asks whether there’s substantial doubt about the entity’s ability to continue within one year after the date the financial statements are issued, or available to be issued. The auditor’s evaluation under AU-C 570 uses that same period.
Maria inherits stock from her father. His basis was $10,000, and the stock was worth $50,000 on the date he died. No alternate valuation date was elected. Two months later Maria sells it for $55,000. What gain does she report?
$5,000 long-term capital gain Inherited property generally gets a basis equal to its fair market value at the date of death, here $50,000. So the gain is $55,000 minus $50,000, or $5,000. Inherited property is treated as held long-term, however soon it’s sold.
Ken receives stock as a gift. The donor’s adjusted basis was $8,000, and the stock was worth $12,000 on the date of the gift. No gift tax was paid. Ken later sells the stock for $15,000. What is Ken’s gain?
$7,000 When gifted property is worth more than the donor’s basis at the time of the gift, the person receiving it takes the donor’s basis. Ken’s basis is $8,000, so his gain is $15,000 minus $8,000, or $7,000.
Which exchange can qualify as a like-kind exchange under Section 1031 for exchanges completed after 2017?
An office building held for investment for raw land held for investment Since 2018, Section 1031 applies only to real property held for use in a business or for investment, and not held mainly for sale. US real property for US real property is like-kind even if the types differ, such as a building for land.
Which of the following would make a corporation ineligible to be an S corporation?
One of its shareholders is a C corporation. An S corporation can’t have a corporation as a shareholder. Its shareholders generally must be individuals, certain trusts and estates, or certain exempt organizations. The other choices are all allowed.
Lee contributes land to a new partnership in exchange for a partnership interest. The land has an adjusted basis of $20,000 and a fair market value of $30,000, and there are no liabilities. What is Lee’s basis in the partnership interest?
$20,000 Contributions of property to a partnership are generally tax-free. The partner’s basis in the interest equals the cash plus the adjusted basis of property contributed, adjusted for any liabilities. Lee’s basis is $20,000.
Under the statute of frauds, which of these contracts must be in writing to be enforceable?
A contract for the sale of a parcel of land Contracts for the sale of an interest in land fall under the statute of frauds and generally need a signed writing. The other contracts can be performed within a year, or involve goods under $500, so they don’t need one.
United States · Licensing exam