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## 2017 AICPA Released Questions

Financial Accounting and Reporting (FAR)

Acknowledgements
Material from Uniform CPA Examination, Selected Questions and Unofficial Answers,
Copyright © for the year 2017, by the American Institute of Certified Public Accountants, is
reprinted and/or adapted with permission. No further use nor distribution is permitted.

Portions of various FASB and GASB documents, copyrighted by the Financial Accounting
Foundation (FAF), 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116, are used with
permission. Complete copies of these documents are available from the FAF.
Glomont | Exam CPA Review 14

Question 11
Ott Co. purchased a machine at an original cost of \$90,000 on January 2, year 1. The
estimated useful life of the machine is 10 years, and the machine has no salvage value.
Ott uses the straight-line method to calculate depreciation. On July 1, year 10, Ott sold the
machine for \$5,000. What is the amount of gain or loss on the disposal of the machine?
a. \$500 loss
b. \$500 gain
c. \$4,500 loss
d. \$4,500 gain

To calculate the gain or loss on the sale of an asset, we need to compare the amount
of cash received for the asset to the asset’s net book value (carrying value) at the time
of sale. If the cash received is greater than the asset’s net book value, the difference is
recorded as a gain. On the other hand, if the cash received is less than the asset’s net
book value, the difference is recorded as a loss.
That machine is shown on the company records at its original cost of \$90,000 less
accumulated depreciation of \$ 85,500. When these two amounts are combined (“netted
together”) the net amount is known as the net book value (the carrying value) of the
asset, which is \$4,500.
The straight-line depreciation method charges the cost evenly over the useful life of a
fixed asset. Straight-line depreciation can be calculated using the following formula:
(Cost – Residual value)
Depreciation per annum =
Useful life

= (90,000 – 0)
= \$9,000 per annum
10
Each year the contra asset account referred to as accumulated depreciation increases
by \$9,000. Accumulated depreciation is the cumulative depreciation of an asset up to a
single point in its life, which is 9 years and a half up to July 1, year 10 multiplied by
\$9,000 = 85,500 in this question.
Glomont | Exam CPA Review 15

## The gain is calculated as follows:

Cost of the machine \$90,000
Less: Accumulated depreciation 85,500
Net book value \$ 4,500

The cash received of \$5,000 is greater than the asset’s net book value of \$4,500. The
difference of \$500 is recorded as a gain. The following journal entry is recorded to
dispose the machine at the date of sale:
Dr. Accumulated depreciation  \$85,500
Dr. Cash 5,000
Cr. Machine \$90,000
Cr. Gain 500
Glomont | Exam CPA Review 17

Question 13
A company issued a purchase order on December 15, year 1, for a piece of capital
equipment that costs \$100,000. The capital equipment was shipped from the vendor on
December 31, year 1, and received by the company on January 5, year 2. The equipment
was installed and placed in service on February 1, year 2. On what date should the
depreciation expense begin?
a. December 15, year 1
b. December 31, year 1
c. January 5, year 2
d. February 1, year 2

Depreciation is the process of matching the cost of an item of machinery with the
revenues it generates as closely as possible. Therefore depreciation should be calculated
over the useful life of the asset, and that begins when the asset is put into production
or when the asset is available for its intended use. In this case, the capital equipment
is not put in to operation until February 1, year 2, so that is when the depreciation
expense should start.
Glomont | Exam CPA Review 20

Question 16
On January 1, year 1, a company with a calendar year end began developing a software
program that it intends to market and sell to its customers. The software coding was
completed on March 31, year 1, at a cost of \$200,000, and the software testing was
completed on June 30, year 1, at a cost of \$100,000. The company achieved technological
feasibility on July 31, year 1, at which time the company began producing product
masters at a cost of \$125,000. What amount should the company report for the total
research and development expense for the year ended December 31, year 1?
a. \$100,000
b. \$200,000
c. \$300,000
d. \$425,000

Technological feasibility
achieved

## Completed on Completed on July 31, year 1

March 31, year 1 June 30, year 1

## Research and development costs Costs of producing product masters

Should be charged to expense when incurred incurred subsequent to establishing
technological feasibility should be
capitalized

## All costs incurred to establish the technological feasibility of a computer software

product to be sold, leased, or otherwise marketed are research and development costs
and should be charged to expense when incurred.
Glomont | Exam CPA Review 21

## The technological feasibility of a computer software product is established when the

entity has completed all planning, designing, and testing activities that are necessary to
establish that the product can be produced to meet its design specifications, including
functions, features, and technical performance requirements.
Costs of producing product masters incurred subsequent to establishing technological
feasibility should be capitalized. Those costs include coding and testing performed
subsequent to establishing technical feasibility.
Capitalization of computer software costs should cease when the product is available
for general release to customers. Cost of maintenance and customer support should
be charged to expense when related revenue is recognized or when these costs are
incurred, whichever occurs first.
Glomont | Exam CPA Review 23

Question 18
Which of the following is the annual report that is filed with the United States Securities
and Exchange Commission?
a. Form 8-K
b. Form 10-K
c. Form S-1
d. Form 10-Q

Domestic issuers must submit annual reports on Form 10-K. The annual report on Form
10-K provides a comprehensive overview of the company’s business and financial
condition. It includes audited financial statements prepared in accordance with U.S. GAAP.

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Glomont | Exam CPA Review 39

Question 30
Which of the following information about threatened litigation should not be
considered to determine whether an accrual is appropriate prior to an issuance of a
company’s financial statements?
a. The period in which the underlying cause of the threatened litigation occurred
b. The degree of probability of an unfavorable outcome
c. The ability to make a reasonable estimate of the amount of loss
d. The period in which the threatened litigation became known to management

The period in which the threatened litigation became known to management should
not be considered to determine whether an accrual is appropriate prior to an issuance of
a company’s financial statements.
Refer to Question 9 for a detailed answer.
Glomont | Exam CPA Review 64

Question 48
As of December 31, year 2, a company has an inventory item that was originally
purchased for \$80 in year 1. The inventory item was written down to its net realizable
value of \$60 as of December 31, year 1. As of December 31, year 2, the inventory item had
a net realizable value of \$75 and a replacement cost of \$65. Normal profit margins for this
company are 20%. Under IFRS, what is the carrying amount of the inventory item as of
December 31, year 2?
a. \$60
b. \$65
c. \$75
d. \$80

Under IFRS, inventory is carried at the lower of cost or net realizable value (NRV). NRV
is defined as the estimated selling price less the estimated costs of completion and the
estimated costs necessary to make the sale. Previously recognized impairment losses
are reversed up to the amount of the original impairment loss when the reasons for the
impairment no longer exist.
As of December 31, year 2, the inventory cost was \$80 and the NRV was \$75. Inventory
should be reported at the lower amount, which is the NRV of \$75.
Both U.S. GAAP and IFRS define inventory as the aggregate of those items of tangible
personal property that have any of the following characteristics:
a. Held for sale in the ordinary course of business (the merchandise of a
trading concern and the finished goods of a manufacturer)
b. In process of production for such sale (work in process)
c. To be currently consumed, directly or indirectly, in the production of
goods or services to be available for sale (raw materials and supplies)
Under U.S. GAAP, subsequent measurement of inventory depends on the cost method
and is different for the following:
a. Inventory measured using last-in, first-out (LIFO) or the retail inventory
method is stated at the lower of cost or market value. The rule of lower
of cost or market value is intended to provide a means of measuring the
residual usefulness of an inventory item.
Glomont | Exam CPA Review 65

b. Inventory measured using any method other than LIFO or the retail
inventory method shall be measured at the lower of cost and NRV.
The purpose of reducing the carrying amount of inventory is to reflect fairly the income of
the period.
Please keep visiting us at Glomont.com for potential updates to this question.
Glomont | Exam CPA Review 68

Question 50
Which of the following should be considered part of one of the three primary user
groups of the external financial reports of a state government?
a. Citizens of a neighboring state
b. Advocate groups within the state
c. Preparers of state government financial reports
d. Internal managers in the executive branch of the state government

There are three groups of primary users of external state and local governmental
financial reports. They are:
a. Those to whom government is primarily accountable (the citizenry)
b. Those who directly represent the citizens (legislative and oversight bodies)
c. Those who lend or who participate in the lending process (investors
and creditors)
The needs of intergovernmental grantors and other users are considered to be
encompassed within the needs of the three primary user groups. Internal managers in the
reporting are not considered primary users for the purposes of this statement. However,
internal users also have many uses for external financial reports. Many who use special
purpose financial reports also rely on general purpose external financial reporting.
The citizenry group includes citizens (whether they are classified as taxpayers, voters,
or service recipients), the media, advocate groups, and public finance researchers. The
legislative and oversight officials group includes members of state legislatures, county
commissions, city councils, boards of trustees, and school boards, and those executive
branch officials with oversight responsibility over other levels of government. Investors
and creditors include individual and institutional investors and creditors, municipal
security underwriters, bond rating agencies, bond insurers, and financial institutions.
Financial reporting by state and local governments is used in making economic, social,
and political decisions and in assessing accountability primarily by:
a. Comparing actual financial results with the legally adopted budget
b. Assessing financial condition and results of operations
Glomont | Exam CPA Review 69

## c. Assisting in determining compliance with finance-related laws, rules,

and regulations
d. Assisting in evaluating efficiency and effectiveness

All three user groups are interested in comparing original or modified budgets
with actual results. For example, to assess accountability, citizens and legislative
and oversight bodies want to ensure that resources were used in accordance with
appropriations. Spending in excess of budgeted amounts may indicate poor financial
management, weak budgetary practices, or uncontrollable, unforeseen circumstances.
Underspending may indicate that there was effective cost containment, that the quality
or quantity of services could have been increased within available appropriations, that
actions were taken to achieve a budget surplus, or that resources were over-budgeted
for a particular program.
Glomont | Exam CPA Review 71

Simulations
Glomont | Exam CPA Review 72

Simulation 1
Scroll down to complete all parts of this task.

On July 1, year 1, AC Corp. completed building its new corporate headquarters and
incurred the costs and expenses listed below. AC made all payments to acquire clear title
to the land. AC issued on July 1, year 1, at face value, five-year 10% bonds for \$1,000,000
to pay for the new corporate headquarters. Any remaining costs were paid in cash. AC
plans to use straight-line depreciation and an estimated useful life of five years for office
furniture and equipment, and 30 years for the building.
1. Purchase of land: \$500,000
2. Construction costs for new building: \$700,000
3. Payment for accrued property tax: \$6,000
4. Building permit: \$7,000
5. Demolition of old building: \$54,000
6. Settlement of lien on land: \$25,000
7. Proceeds from sale of material salvaged from existing building: \$40,000
8. Factory equipment: \$51,000
9. Insurance on factory equipment while in transit: \$5,000
10. Annual property insurance policy premium beginning July 1, year 1: \$12,000
11. Office furniture and fixtures: \$100,000
12. Installation of office furniture: \$13,000 Select Item
13. Annual maintenance contract for equipment Accounts payable
beginning July 1, year 1: \$2,000 Accumulated depreciation
Bonds payable
Prepare the journal entry needed on July 1, year 1, to
Building
record all the costs and expenses associated with the
Demolition expense
To prepare the entry: Depreciation expense
•    Double-click the shaded cells in the Account Equipment
Name columns and select, from the list provided, Insurance expense
the appropriate account name. An account may Land
be used once or not at all for the entry.
Maintenance expense
•    Enter the corresponding debit or credit Notes payable
amount in the appropriate column.
Office furniture
•    Round all amounts to the nearest dollar. Prepaid expenses
•    All rows may not be required to complete the entry.
OK Cancel
Glomont | Exam CPA Review 73

The historical cost of acquiring an asset includes the costs incurred to bring it to the
condition and location necessary for its intended use.
Cost of Land
Expenditures made to acquire land and ready it for use are considered part of the land
cost. Land costs typically include:
a. The purchase price
b. Closing costs, such as title to the land, attorney’s fees, and recording fees
c. Costs incurred in getting the land in condition for its intended use, such
as grading, filling, draining, and clearing
d. Assumption of any liens, mortgages, or encumbrances on the property
e. Any additional land improvements that have an indefinite life

## LAST MINUTE NOTE

When a company purchases land for the purpose of constructing a
building, it considers all costs incurred up to the excavation for the
new building as land costs. Removal of old buildings such as clearing,
grading, and filling is a land cost because this activity is necessary to
get the land in condition for its intended purpose. Any proceeds from
getting the land ready for its intended use, such as salvage receipts on the
demolition of an old building or the sale of cleared timber, are treated as
reductions in the cost of the land.
In some cases, when a company purchases land, it may assume certain
obligations on the land such as back taxes or liens. In such situations, the cost
of the land is the cash paid for it, plus the encumbrances. In other words,
if the purchase price of the land is \$60,000 cash but the company assumes
accrued property taxes of \$3,000 and liens of \$12,000, its land cost is \$75,000.
Special assessments imposed by local governments for
improvements, such as pavements, streetlights, sewers, and drainage
systems, should be debited to the land account because they are
relatively permanent in nature and will not be depreciated. That is,
after installation, they are maintained by the local government. In
addition, any permanent improvements, such as landscaping, should
be debited to the land account.
Any improvements with limited lives, such as private driveways,
walks, fences, and parking lots, are recorded separately. These
costs are depreciated over their estimated lives.