Cpa Review

Lebanese Association of Certified Public Accountants
Examination Year June 2006
Accounting
1- According to the FASB conceptual framework, the objectives of financial reporting for business
enterprises are based on
Answers
A: The need for conservatism.
B: Reporting on managements stewardship.
C: Generally accepted accounting principles.
D: The needs of the users of the information.
Answer Explanations
A. Answer A is incorrect. Refer to the correct answer explanation.
B. Answer B is incorrect. Refer to the correct answer explanation.
C. Answer C is incorrect. Refer to the correct answer explanation.
D. Answer D is correct. Per SFAC 1, the objectives of financial reporting focus on providing
present and potential investors with information useful in making investment decisions. Financial
statement users do not have the authority to prescribe the data they desire; therefore, they must rely
on external financial reporting to satisfy their information needs.
2 - According to the FASB conceptual framework, which of the following situations violates the
concept of reliability?
Answers
A: Financial statements were issued 9 months late.
B: Report data on segments having the same expected risks and growth rates to analysts estimating
future profits.
C: Financial statements included property with a carrying amount increased to managements

estimate of market value.
D: Management reports to stockholders regularly refer to new projects undertaken, but the financial
statements never report project results.
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Answer Explanations
A. Answer A is incorrect because if financial statements are issued late, this violates the
characteristic of timeliness, which is a component of relevance, not reliability.
B. Answer B is not a violation of reliability because the same information is simply being
reported to two different groups (i.e. shareholders and financial analysts), which is acceptable.
C. Answer C is correct. Reliability has three subcomponents, as defined in SFAC 2: neutrality,

representational faithfulness, and verifiability. Neutrality means that information should not be
prepared or reported in such a way as to obtain a predetermined result. Also, the information should
be free from bias. Representational faithfulness is defined as the correspondence or agreement
between a measure and what it purports to represent. Verifiability means that two or more
individuals who are independent of each other, would arrive at a similar conclusion, based on an
examination of the same evidence. Answer C is the answer because management's estimate violates
the characteristic of verifiability. Property should be valued at its carrying amount on the financial
statements, not management's estimates of market value.
D. Answer D is incorrect because reliability is not violated.
3 - While preparing its 2001 financial statements, Dek Corp. discovered computational errors in its
2000 and 1999 depreciation expense. These errors resulted in overstatement of each years income
by $25,000, net of income taxes. The following amounts were reported in the previously issued
financial statements:
2000 1999
Retained earnings, 1/1 $700,000 $500,000
Net income 150,000 200,000
Retained earnings, 12/31 $850,000 $700,000
Deks 2000 net income is correctly reported at $180,000. Which of the following amounts should
be adjusted to retained earnings and presented for net income in Deks 2001 and 2000 comparative
financial statements?
Retained
Year earnings Net income
A. 2000 -- $150,000
2001 ($50,000) 180,000
B. 2000 ($50,000) $150,000
2001 -- 180,000
C. 2000 ($25,000) $125,000
2001 -- 180,000
D. 2000 -- $125,000
2001 -- 180,000
Answers
A: A.
B: B.
C: C.
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D: D.
Answer Explanations
C. Answer C is correct. SFAS 16 requires that items of profit or loss related to the correction of an
error in the financial statements of a prior period be accounted for and reported as prior period
adjustments and excluded from the determination of net income for the current period. Per APB 9,
when comparative financial statements are prepared, it is necessary to adjust net income, its
components, retained earnings balances, and other affected balances for all of the periods presented
to reflect retroactive application of prior period adjustments. Hence, the amounts for each period
must be stated in the comparative statements as if the errors had not occurred. Thus, both 1999 and
2000 net income and retained earnings would be retroactively reduced by $25,000 to reflect the
correct amounts for each period. After these adjustments are made, the amounts for 2001 will be
correctly stated. Note that this retroactive treatment is only used for presentation purposes in the
comparative financial statements. The actual journal entry made to correct retained earnings at
1/1/01 is
Retained earnings 50,000
Accumulated depreciation 50,000
D. Answer D is incorrect. Refer to the correct answer explanation.
4- Simultaneous recognition of both a revenue and an expense may result from certain transactions or
events. An example of an expense so recognized may be
Answers
A: Expired portion of prepaid insurance.
B: Salespersons monthly salaries.
C: Transportation to customers.
D: Electricity used to light offices.
Answer Explanations
A. Answer A is incorrect because the expired portion of prepaid insurance is recognized based upon
systematic and rational allocation. It is not directly caused by a revenue transaction.
B. Answer B is incorrect because the salespersons' monthly salaries are recognized based upon
immediate recognition. It is not directly caused by a revenue transaction.
C. Answer C is correct because the revenue transaction (sales of goods to customers) directly causes
the incurrence of the expense (transportation to customers).
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D. Answer D is incorrect because the electricity used to light offices is recognized based upon
immediate recognition. It is not directly caused by a revenue transaction.
5- Recognizing depletion expense is an example of the accounting process of
Answers Allocation Amortization

A: a. a. No No
B: b. b. No Yes
C: c. c. Yes Yes
D: d. d. Yes No
Answer Explanations
C. Answer C is correct because SFAC 6 defines allocation as the process of assigning or

distributing an amount according to a plan or formula and amortization as an allocation process for
accounting for prepayments and deferrals. Allocation is broader in scope and thus includes
amortization. Specific examples of amortization include recognizing expenses for depletion,
depreciation, and insurance, and recognizing earned subscription revenues.
6 - Which of the following is an example of the expense recognition principle of associating cause
and effect?
Answers
A: Allocation of insurance cost.
B: Sales commissions.
C: Depreciation of fixed assets.
D: Officers salaries.
Answer Explanations
A. Answer A is incorrect because allocation of insurance cost is an example of the systematic

and rational allocation expense recognition principle.
B. Answer B is correct because sales commissions are recognized as an expense on the basis of
a presumed direct association with the related sales revenue (SFAC 5).
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C. Answer C is incorrect because depreciation of fixed assets is an example of the systematic
and rational allocation expense recognition principle.
D. Answer D is incorrect because officers' salaries is an example of the immediate recognition

expense recognition principle.
7 - On January 3, 2005, Paterson Services, Inc. signed an agreement authorizing Cobb Company to
operate as a franchisee over a 20-year period for an initial franchise fee of $50,000 received when
the agreement was signed. Cobb commenced operations on July 1, 2005, at which date all of the
initial services required of Paterson had been performed. The agreement also provides that Cobb
must pay a continuing franchise fee equal to 5% of the revenue from the franchise annually to
Paterson. Cobbs franchise revenue for 2005 was $400,000. For the year ended December 31,
2005, how much should Paterson record as revenue from franchise fees in respect of the Cobb
franchise?
Answers
A: $70,000
B: $50,000
C: $45,000
D: $22,500
Answer Explanations

D. Answer D is correct. The requirement is to determine which of the following outflows
should be expensed as incurred by the franchisee. Continuing franchise fees, based on revenues
(Answer D), should be reported as expenses when incurred. Answers A, B, and C are incorrect
because they represent direct franchise costs. Since these costs relate to the acquisition of the
franchise, they should be capitalized and deferred, rather than expensed.
8 - Under what condition is it proper to recognize revenues prior to the sale of the merchandise?
Answers
A: When the ultimate sale of the goods is at an assured sales price.
B: When the revenue is to be reported as an installment sale.
C: When the concept of internal consistency (of amounts of revenue) must be complied with.
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D: When management has a long-established policy to do so.
Answer Explanations
A. Answer A is correct because per ch 1A of ARB 43, profit is to be considered realized when
a sale in the ordinary course of business is effected. Statement 9 of ch 4 of ARB 43 indicates that
inventory valuation above cost can only be justified by the following: an inability to determine
approximate costs, immediate marketability at a quoted price, and the characteristic of unit
interchangeability. Thus, a condition permitting recognition of revenue prior to sale would be an
assured sales price.
B. Answer B is incorrect because, with the installment sales method, revenue recognition is
deferred until cash is collected (as a result of the questionability of collection of the sales price).
C. Answer C is incorrect because the concept of internal consistency of amounts of revenue is a

nonsense term.
D. Answer D is incorrect because a long established management policy of noncompliance

with GAAP does not justify noncompliance.
9 - The effect of a change in accounting principle which is inseparable from the effect of a change
in accounting estimate should be reported
Answers
A: In the period of change and future periods if the change affects both.
B: By restating the financial statements of all prior periods presented.
C: By showing the pro forma effects of retroactive application.
D: As a correction of an error.
Answer Explanations
A. Answer A is correct. Per APB 20, the effect of a change in accounting principle which is
inseparable from the effect of a change in accounting estimate should be accounted for as a change
in accounting estimate. Answer A is correct because changes in estimate should be accounted for in
the period of change and also in any affected future periods (APB 20).
B. Answer B is incorrect because financial statements are restated for special changes in
accounting principle, changes in entity, and changes due to an error.
C. Answer C is incorrect because the pro forma effects of retroactive application are shown for
all changes in accounting principle other than those designated as special changes.
D. Answer D is incorrect because errors would include mathematical mistakes, mistakes in
applying principles, oversights or misuse of available facts, and changes from unacceptable to
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acceptable GAAP (APB 20). The situation described in this question does not meet the description
of an error.
10 - During a period of inflation, an account balance remains constant. When supplemental

statements are being prepared, a purchasing power gain is reported if the account is a
Answers
A: Monetary asset.
B: Monetary liability.
C: Nonmonetary asset.
D: Nonmonetary liability.
Answer Explanations
A. This answer is incorrect. Refer to the correct answer explanation.

B. Answer B is correct. Per SFAS 89, the dollar amounts of monetary assets and liabilities are
fixed or determinable without reference to future prices or specific goods or services. If the general
price level changes, a purchasing power gain (loss) may occur on monetary items. A monetary
liability held constant during a period of inflation creates a purchasing power gain because the
liability could be paid using a fixed amount of cash which is worth less than the cash borrowed
earlier.
C. Answer C is incorrect. The dollar amount of nonmonetary assets is not fixed; and, therefore,
changes in the general price level will not result in a purchasing power gain (loss).
D. Answer D is incorrect. The dollar amount of nonmonetary liabilities is not fixed; and,
therefore, changes in the general price level will not result in a purchasing power gain (loss).
11 - When computing information on a historical cost-constant dollar basis, which of the following
is classified as nonmonetary?
Answers
A: Accumulated depreciation of equipment.
B: Advances to unconsolidated subsidiaries.
C: Allowance for doubtful accounts.
D: Unamortized premium on bonds payable.
Answer Explanations
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A. Answer A is correct because per SFAS 89, nonmonetary items include assets and liabilities
whose amounts may change over time in terms of a monetary unit (e.g., the U.S. dollar). Examples
of nonmonetary assets and liabilities included inventory, property, plant, equipment, and obligations
under warranties. Accumulated depreciation is a nonmonetary item because it relates to equipment.
B. Answer B is incorrect because the advance represents a claim to receive a fixed amount in
terms of a monetary unit and is therefore a monetary item.
C. Answer C is incorrect because the allowance account relates to the accounts receivable,
which is a monetary item.
D. Answer D is incorrect because the unamortized premium relates to the bonds payable
account, which is a monetary item.
12- A company changes from the double-declining balance method of depreciation for previously
recorded assets to the straight-line method. The cumulative effect of the change on the amount of
retained earnings at the beginning of the period in which the change is made should be reported
separately as a(n)
Answers
A: Extraordinary item.
B: Component of income after extraordinary items.
C: Component of income from continuing operations.
D: Prior period adjustment.
Answer Explanations
A. Answer A is incorrect because a switch from the double-declining method to the straight-line
method is a change in accounting principle. The cumulative effect of this change is a catch-up
adjustment and not an extraordinary item.
B. Answer B is correct because APB 20 states that the cumulative effect of a change in accounting
principle should be shown after continuing operations between extraordinary items and net income.
In addition, income statements should be made on a pro forma basis reflecting the change in
principle for all periods presented.
D. Answer D is incorrect because a change in accounting principle does not meet the criteria for a
prior period adjustment, which is reported as an adjustment to beginning retained earnings.
13- The cumulative effect of an accounting change on the amount of retained earnings at the
beginning of the period in which the change is made should generally be included in net income for
the period of the change for a
Change in Change in
Answers accounting principle accounting entity
A: a. a. Yes Yes
B: b. b. Yes No
C: c. c. No Yes
D: d. d. No No
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Answer Explanations
B. Answer B is correct because APB 20 states that the cumulative effect of a change in accounting
principle is required to be shown on the income statement. A change in an accounting entity should
be reported by restating the financial statements of prior periods.
14- Based upon its past collection experience, Alden Company provides for bad debt expense at the
rate of 2% of credit sales. On January 1, 2001, the allowance for doubtful accounts balance was
$10,000. During 2001 Alden wrote off $18,000 of uncollectible receivables and recovered $5,000
of bad debts written off in prior years. If credit sales for 2001 totaled $1,000,000, the allowance for
doubtful accounts balance at December 31, 2001, should be
Answers
A: $12,000
B: $17,000
C: $20,000
D: $30,000
Answer Explanations
This answer is incorrect. Refer to the correct answer explanation.
B. Answer B is correct. The ending balance of the allowance for doubtful accounts includes the
Beginning balance + Recoveries of bad debts written off in prior years + Current year's bad debt
expense - Write-offs of uncollectibles. The beginning balance was $10,000 and write-offs (debits)
were $18,000. Recoveries of bad debts written off in prior years ($5,000) would be a credit to the
allowance account and a debit to accounts receivable. Finally, the credit to the allowance account
for bad debts expense would be $20,000 (2% of $1,000,000), leaving a 12/31/01 balance of
$17,000.
Allowance for Doubtful Accounts
Write-offs 18,000 10,000 Beg. balance
5,000 Recoveries
20,000 2001 Bad debt exp.
17,000

15 - When the accounts receivable of a company are sold outright to a company which normally
buys accounts receivable of other companies without recourse, the accounts receivable have been
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Answers
A: Pledged.
B: Assigned.
C: Factored.
D: Collateralized.
Answer Explanations
A. Answer A is incorrect because pledging does not result in a sale of accounts receivable. It is a
method of providing security to obtain financing.
B. Answer B is incorrect because assigning does not result in a sale of receivables. It is a method of
providing security to obtain financing.
C. Answer C is correct because factoring is the term used for the sale of accounts receivable.
D. Answer D is incorrect because collateralizing is a term not normally used for methods of
financing receivables.
16- The following condensed balance sheet is presented for the partnership of Lever, Polen, and
Quint, who share profits and losses in the ratio of 4:3:3, respectively:
Assume that instead of admitting a new partner, the Cash $ 90,000

partners decide to liquidate the partnership. If the Other assets 830,000
other assets are sold for $700,000, how much of the Lever, loan 20,000
available cash should be distributed to Lever? $940,000
Accounts payable $210,000
Quint, loan 30,000
Answers
Lever, capital 310,000
A: $230,000 Polen, capital 200,000
Quint, capital 190,000
B: $238,000
$940,000
C: $258,000
D: $310,000
Answer Explanations
B. Answer B is correct. The solutions approach is to prepare an abbreviated statement of

partnership liquidation. Recall that in a partnership liquidation, cash is distributed based on the
capital balances of the partners after adjusting them for any income (loss) to the date of liquidation,
including the sale of partnership assets, and any loans or advances between the partnership and one
or more of the partners. The abbreviated statement follows:
Lever Polen Quint Total
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Beg. capital bal. $310,000 $200,000 $190,000 $ 700,000
Adj. for loans (20,000) -- 30,000 10,000
Adj. for loss on sale of other (52,000) (39,000) (39,000) (130,000)
assets*
Adj. capital bal. $238,000 $161,000 $181,000 $580,000
*($830,000 - $700,000)
Note that the payment of the partnership's liabilities to outside creditors does not affect the
abbreviated statement of liquidation as only equity related items are shown and there was sufficient
cash to cover all liabilities. The total adjusted capital balances is reconciled to total cash available
as follows: $90,000 original cash balance + $700,000 from asset sale - $210,000 liabilities to
creditors = $580,000.
C. This answer is incorrect. Refer to the correct answer explanation.

D. This answer is incorrect. Refer to the correct answer explanation.
17 - The December 31, 2001 condensed balance sheet of Mason & Gross, a partnership, follows:
Current assets $125,000 Liabilities $ 10,000

Equipment (net) 15,000 Mason capital 80,000
Total assets $140,000 Gross, capital 50,000
Total liabilities and capital $140,000
Market values at December 31, 2001, are as follows:
Current assets $90,000

Equipment 30,000
Liabilities 10,000
On January 2, 2002, the partnership was incorporated and 1,000 shares of $5 par value common
stock were issued. What amount should be credited to additional contributed capital?
Answers
A: $0
B: $105,000
C: $125,000
D: $135,000
Answer Explanations
B. Answer B is correct. When a partnership incorporates, assets and liabilities must be

revalued to their fair market values on the date of incorporation. In this case, the assets and
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liabilities will have fair market values of $120,000 ($90,000 + $30,000) and $10,000, respectively.
The stockholders' equity of the new corporation will be $110,000 ($120,000 - $10,000), and the
journal entry to create this new corporation will be
Current assets 90,000
Equipment 30,000
Liabilities 10,000
Common stock ($5 x 1,000) 5,000
Add. contributed capital ($110,000 - $5,000) 105,000

18 - Gar Co. factored its receivables with recourse with Ross Bank. Assume Gar surrenders control
of the receivables. Gar received cash as a result of this transaction, which is best described as a
Answers
A: Loan from Ross collateralized by Gars accounts receivable.
B: Loan from Ross to be repaid by the proceeds from Gars accounts receivable.
C: Sale of Gars accounts receivable to Ross, with the risk of uncollectible accounts retained by
Gar.
D: Sale of Gars accounts receivable to Ross, with the risk of uncollectible accounts transferred to
Ross.
Answer Explanations
B. This answer is incorrect. Refer to the correct answer explanation.
C. Answer C is correct. Under SFAS 140, the situation qualifies as a sale because the
transferor surrenders control of the receivables. Since Ross has accepted the receivables subject to
recourse, Gar has continuing involvement with the receivables and has, in effect, guaranteed the
receivables.
D. This answer is incorrect. Refer to the correct answer explanation
19 - Theoretically, which of the following costs incurred in connection with a machine purchased
for use in a company's manufacturing operations would be capitalized?
Insurance on Testing and

machine while preparation of
in transit machine for
use
A. Yes Yes
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Answers B. Yes No
C. No Yes
A: A. D. No No
B: B.
C: C.
D: D.
Answer Explanations
A. Answer A is correct. The cost of machinery includes all expenditures incurred in acquiring
the asset and preparing it for use. Cost includes the purchase price, freight and handling charges,
insurance on the machine while in transit, cost of special foundations, and costs of assembling,
installation, and testing. Therefore, both costs given in this problem would be capitalized.

20 - On August 1, 2004 Bamco Corporation purchased a new machine on a deferred payment basis.
A down payment of $1,000 was made and 4 monthly installments of $2,500 each are to be made
beginning on September 1, 2004. The cash equivalent price of the machine was $9,500. Bamco
incurred and paid installation costs amounting to $300. The amount to be capitalized as the cost of
the machine is
Answers
A: $ 9,500
B: $ 9,800
C: $11,000
D: $11,300
Answer Explanations

B. Answer B is correct. The total of the payments made by Bamco for the machine was
$11,000 (4 payments of $2,500 + $1,000 down payment). However, the cash equivalent price of the
machine was $9,500. The difference of $1,500 ($11,000 $9,500) is considered interest and is not
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capitalized because it is ready for use when acquired. In addition, the $300 installation cost is
capitalized, as all costs required to get goods in their operating condition and location should be
capitalized. Thus the total cost of the machine is $9,800 ($9,500 + $300).

21- In October 2004 Ewing Company exchanged an old packaging machine, which cost $120,000
and was 50% depreciated, for a dissimilar used machine and paid a cash difference of $16,000. The
market value of the old packaging machine was determined to be $70,000. For the year ended
December 31, 2004, what amount of gain or loss should Ewing recognize on this exchange?
Answers
A: $0.
B: $ 6,000 loss.
C: $10,000 loss.
D: $10,000 gain.
Answer Explanations

D. Answer D is correct. Per APB 29, nonmonetary exchanges of dissimilar assets are
accounted for on the basis of fair values. In this transaction, an asset with a book value of $60,000
(50% x $120,000) is exchanged when it has a fair market value of $70,000. Therefore, a $10,000
gain ($70,000 $60,000) is recognized. The new asset acquired is recorded at the fair value of the
assets surrendered ($16,000 cash and $70,000 machine, or $86,000).
New machine 86,000 ($70,000 + $16,000)

Accum. depr. 60,000 (50% x $120,000)
Old machine 120,000
Cash 16,000
Gain on exchange 10,000 ($70,000 $60,000)
22 - During November 2004, Ball Company determined, as a result of a plant rearrangement, that
there had been a significant change in the manner in which its machinery was going to be used in its
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manufacturing process. In December 2004, Ball's analysis of the future cash flows related to the
machinery resulted in the following information:
Expected future cash inflows from use of the machinery $350,000

Expected future cash outflows from use of the machinery 75,000
Expected future cash proceeds from sale of the machinery at the disposal date 50,000
For purposes of determining whether or not Ball should recognize an impairment loss in 2004, what
is the amount of expected future cash flows that would be used for Ball's machinery?
Answers
A: $350,000
B: $400,000
C: $275,000
D: $325,000
Answer Explanations

D. Answer D is correct. The expected cash flows from Ball's machinery are computed in the
following way:
Expected cash inflows from use of the machinery $350,000

Expected proceeds from disposal of the machinery 50,000
Less the expected cash outflows from use of the machinery (75,000)
Expected cash flows for determining impairment loss $325,000
23 - On January 1, 1999, an intangible asset with a 50-year estimated useful life was acquired. On
January 1, 2004, a review was made of the estimated useful life, and it was determined that the
intangible asset had an estimated useful life of 30 more years. As a result of the review, the amount
to be amortized should be
Answers
A: The original cost at January 1, 1999, allocated equally over a 35-year life.
B: The original cost at January 1, 1999, allocated equally over a 50-year life.
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C: The unamortized cost on January 1, 2004, allocated equally over a 40-year life.
D: The unamortized cost on January 1, 2004, allocated equally over a 30-year life.
Answer Explanations
A. Answer A is incorrect because it implies a retroactive restatement of amortization, and APB

20 requires that a change in estimate be treated prospectively.
B. Answer B is incorrect because revisions in useful life should result in revisions of

amortization rates.
C. Answer C is incorrect because the useful life at 1/1/03 is 30 years, and to use a life of 40
years would violate conservatism and overstate income.
D. Answer D is correct because SFAS 142 states that periodic review of amortization policies
should be undertaken and required changes should be made prospectively. When the asset was
acquired on January 1, 1999, it was to be amortized over its useful life. The asset was determined
to have a remaining useful life of 30 years at January 1, 2004. The unamortized cost at that date
should be amortized over the remaining useful life of 30 years.
24 - Which of the following describes the appropriate accounting for intangible assets with finite
useful lives?
Answers
A: The cost of the asset is not amortized but is periodically tested for impairment.
B: The cost of the asset is amortized over its useful life and the asset is never tested for impairment.
C: The cost of the asset is amortized over its useful life and the asset is periodically tested for
impairment.
D: The cost of the asset is amortized over 40 years.
Answer Explanations
A. Answer A is incorrect. The costs of such assets are amortized over their useful lives.
C. Answer C is correct. SFAS 142 states that the costs of such assets should be amortized over
their useful lives and they should also be tested periodically for impairment in accordance with
SFAS 121.
D. Answer D is incorrect. The costs of such assets are amortized over their useful lives.
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25- Which of the following accurately describes the appropriate accounting for goodwill acquired
through a business combination?
Answers
A: It should be recorded at cost and tested for impairment every three years.
B: It should be recorded at cost and tested for impairment on an annual basis and more often if
certain events occur.
C: It should be recorded at cost and amortized over a 10-year period.
D: It should be recorded at cost and amortized over a 40-year period.
Answer Explanations
A. Answer A is incorrect. Goodwill should be tested for impairment annually or more often if
certain events occur.
B. Answer B is correct. Goodwill should be recorded at cost and tested for impairment on an
annual basis and more often if certain events occur.
C. Answer C is incorrect. Goodwill should not be amortized.

D. Answer D is incorrect. Goodwill should not be amortized.
26 - In January 2004 Horner Company paid $80,000 in property taxes on its plant for the calendar
year 2004. Also in January 2004 Horner estimated that its year-end bonus to executives for 2004
would be $320,000. What is the amount of the expenses related to these two items that should be
reflected in Horners quarterly income statement for the 3 months ended June 30, 2004 (second
quarter)?
Answers
A: $0
B: $ 20,000
C: $ 80,000
D: $100,000
Answer Explanations

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D. Answer D is correct. According to APB 28, costs should be charged to income in interim
periods as they are incurred or allocated among the periods based upon estimated benefits received.
Since both the property taxes and executive bonus benefit the entire calendar year, the $400,000
($80,000 property taxes + $320,000 bonus) total expense should be allocated evenly among the four
quarters.
27 - The following costs were among those incurred by Woodcroft Corporation during 2005:
How much should be charged to the cost Merchandise purchased for resale $500,000
of the merchandise purchases? Salesmen's commissions 40,000
Interest on notes payable to vendors 5,000
Answers
A: $500,000
B: $505,000
C: $540,000
D: $545,000
Answer Explanations
A. Answer A is correct. The costs to be charged to merchandise purchases should include

those costs necessary to prepare the merchandise for sale. Salesmen's commissions are a selling
expense and not related to the acquisition of the merchandise. These costs are expensed in the
period incurred. The interest is a financing expense and is also expensed in the period incurred.
Thus, only the $500,000 should be included in the cost of the merchandise purchases.

28 - In a periodic inventory system which uses the FIFO cost flow method, the cost of goods
available for sale is net purchases
Answers
A: Plus the ending inventory.
B: Plus the beginning inventory.
C: Minus the ending inventory.
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D: Minus the beginning inventory.
Answer Explanations

B. Answer B is correct because cost of goods available for sale will be computed the same way
regardless of the cost flow method. The cost flow method only affects the allocation of costs
between ending inventory and cost of goods sold. Cost of goods available for sale is computed
as
Beginning inventory
+ Net purchases
Cost of goods available for sale

29- The percentage-of-completion method of accounting for long-term construction-type contracts

is preferable when
Answers
A: Estimates of costs to complete and extent of progress toward completion are reasonably
dependable.
B: The collectibility of progress billings from the customer is reasonably assured.
C: A contractor is involved in numerous projects.
D: The contracts are of a relatively short duration.
Answer Explanations
A. Answer A is correct. Per ARB 45, the percentage-of-completion method for long-term
contracts is preferable over the completed-contract method when estimates of cost to complete and
extent of progress made toward completion are reasonably dependable. Under the percentage-of-
completion method, income would be periodically recognized as the contract is completed.
B. Answer B is incorrect because under either method of accounting for long-term contracts, a
reserve for doubtful accounts should be established for noncollectible billings.
C. Answer C is incorrect because if the contractor is involved in numerous projects, the
completed-contract method may approximate the results of percentage-of-completion, as there
would be a number of projects being completed each period.
19
D. Answer D is incorrect because the completed-contract method is not appropriate for short-
term contracts.
30- The following items were included in Venicio Corporations inventory account at December 31,
2004:
Merchandise out on consignment, at sales price, including 40% markup on
selling price $14,000
Goods purchased, in transit, shipped FOB shipping point 12,000
Goods held on consignment by Venicio 9,000
Venicios inventory account at December 31, 2004, should be reduced by
Answers
A: $14,600
B: $17,400
C: $23,000
D: $35,000
Answer Explanations
A. Answer A is correct. The inventory account should be reduced by two amounts. The
merchandise out on consignment should be priced at cost, not retail. Inventory should be
reduced by the $5,600 markup above cost ($14,000 x 40%). The goods purchased FOB
shipping point are appropriately included in the inventory account as the title has transferred to
Venicio; no adjustment is necessary. Finally, the inventory account should be reduced for the
goods held on consignment by Venicio. These goods are owned by the consignor, not Venicio.
Consignment inventory markup $ (5,600)
Goods held on consignment (9,000)
$(14,600)

31 - On December 31, 2004, Ott Co. had investments in marketable equity securities as follows:
Cost Market value

Mann Co. $10,000 $ 8,000
Kemo, Inc. 9,000 10,000
Fenn Corp. 11,000 9,000
$30,000 $27,000
20
The Mann investment is classified as held-to-maturity, while the remaining securities are classified
as available-for-sale. Otts December 31, 2004 balance sheet should report total marketable equity
securities as
Answers
A: $26,000
B: $28,000
C: $29,000
D: $30,000
Answer Explanations

C. Answer C is correct. SFAS 115 requires that held-to-maturity securities be carried at
amortized cost and that available-for-sale and trading securities be carried at market value.
Therefore, Ott's investment portfolio is reported at 12/31/04 at the following amounts:
Security Amount reported

Mann Co. $10,000 cost
Kemo, Inc. 10,000 FMV
Fenn Corp. 9,000 FMV
$29,000
32- An investor uses the equity method to account for an investment in common stock. After the
date of acquisition, the investment account of the investor would
Answers
A: Not be affected by its share of the earnings or losses of the investee.
B: Not be affected by its share of the earnings of the investee, but would be decreased by its share
of the losses of the investee.
C: Be increased by its share of the earnings of the investee, but would not be affected by its share of
the losses of the investee.
D: Be increased by its share of the earnings of the investee, and decreased by its share of the losses
of the investee.
21
Answer Explanations

D. Answer D is correct. When an entity uses the equity method to account for an investment in
another entity's stock, the investment is recorded at cost on the date of acquisition. As the investee
reports income or losses, the investor will recognize its percentage of ownership share of that
income or loss by increasing or decreasing the investment account.
33 - On July 1, 2001, an erupting volcano destroyed Coastal Corporations operating plant, resulting
in a loss of $1,500,000, of which only $500,000 was covered by insurance. Coastals income tax
rate is 30%. How should this event be shown in Coastals income statement for the year ended
December 31, 2001?
Answers
A: As an operating loss of $700,000, net of $300,000 income tax.
B: As an extraordinary loss of $700,000, net of $300,000 income tax.
C: As an operating loss of $1,000,000.
D: As an extraordinary loss of $1,000,000.
Answer Explanations
B. Answer B is correct. To qualify as an extraordinary item an event must be both unusual and
infrequent. A volcanic eruption would generally meet these criteria (APB 30). Per APB 30,
extraordinary items should be shown net of taxes in a separate section in the income statement.
Loss from volcano ($1,500,000 $500,000) $1,000,000

Less: Tax effect (30% tax rate) (300,000)
Net loss after tax effect $ 700,000
34- Which of the following facts concerning plant assets should be disclosed in the summary of
significant accounting policies?
Depreciation
Composition expense amount
22
Answers A. No Yes
B. No No
A: A. C. Yes No
D. Yes Yes
B: B.
C: C.
D: D.
Answer Explanations

B. Answer B is correct because APB 22 states that disclosure of accounting policies should
identify and describe the accounting principles and the methods of applying them. Information and
details presented elsewhere as a part of the financial statements should not be repeated. Thus, the
depreciation expense amount should not be disclosed in the summary of significant accounting
policies. APB 22 specifically states that composition of plant assets should not be presented.

35 - A company received royalties from the assignment of patents to other enterprises. In the period
in which the royalties are earned, the royalties should be
Answers
A: Subtracted from the capitalizable cost of the patent.
B: Amortized to income over the remaining useful life of the patent.
C: Netted against patent amortization expense.
D: Reported as revenue.
Answer Explanations
A. Answer A is incorrect. The assignment of the patent has no effect on the carrying value of
the patent. Refer to the correct answer explanation.
B. Answer B is incorrect. The company that holds the patent has earned the royalties from its
patent assignment. Refer to the correct answer explanation.
C. Answer C is incorrect. The assignment of the patent has no effect on the related
amortization expense. Refer to the correct answer explanation.
D. Answer D is correct. Per SFAC 5, revenues are considered to be earned when the entity
has substantially completed the duties entitling it to the benefits represented by the revenues. When
23
a company assigns patents to other enterprises, it earns royalties as the sales of patented products
are made. Therefore, these royalties should be reported as revenue in the period in which they are
earned.
36 - Pride, Inc. owns 80% of Simba, Inc.s outstanding common stock. Simba, in turn, owns 10%
of Prides outstanding common stock. What percentage of the common stock cash dividends
declared by the individual companies should be reported as dividends declared in the consolidated
financial statements?
Dividends declared by Dividends declared by

Answers Pride Simba
A: a. a. 90% 0%
B: b. b. 90% 20%
C: c. c. 100% 0%
D: d. d. 100% 20%
Answer Explanations
A. Answer A is correct because of the reciprocal ownership relationship that exists between the
two companies. Pride (the parent) owns 80% of Simba (the sub), and Simba owns 10% of Pride.
When Pride declares a cash dividend, 90% of it is distributed to outside parties and 10% goes to
Simba. Because Simba is part of the consolidated entity, its 10% share is eliminated; thus, only
90% of dividends declared by Pride are reported in the consolidated statements. When Simba
declares a dividend, 80% is distributed to Pride and 20% to outside parties. Pride's 80% share is
eliminated as an intercompany transaction and the remaining 20% is also excluded because, from
the parent's point of view, subsidiary dividends do not represent dividends of the consolidated entity
and must be eliminated.

37 - Effective with the year ended December 31, 2001, Grimm Company adopted a new accounting
method for estimating the allowance for doubtful accounts at the amount indicated by the year-end
aging of accounts receivable. The following data are available:
Allowance for doubtful accounts, 1/1/01 $24,000

Provision for doubtful accounts during 2001
(2% on credit sales of $1,000,000) 20,000
Bad debts written off, 11/30/01 19,500
Estimated uncollectible accounts per aging 21,000
After year-end adjustment, the bad debt expense for 2001 would be
Answers
24
A: $16,500
B: $19,500
C: $20,000
D: $21,000
Answer Explanations
A. Answer A is correct. The solutions approach is to set up a T- account for the allowance for
doubtful accounts.
Allowance for Doubtful
Accounts
19,500 24,000 Beg. balance
Write-offs
20,000 Expensed during 2001
Adjustment 3,500 24,500 Unadjusted balance
21,000 End balance
Before the year-end adjustments, the allowance account had a balance of $24,500. To adjust the
account to the appropriate balance indicated by the year-end aging ($21,000), it must be reduced by
$3,500 ($24,500 $21,000). Unadjusted bad debt expense is $20,000. After the adjustment, bad
debt expense is $16,500 ($20,000 $3,500).

38 - Taylored Corp. factors $200,000 of accounts receivable in a transaction in which control is

surrendered and without recourse to Rich Corp. on July 1, 2001. Rich assessed a fee of 3% and
retains a holdback equal to 5% of the accounts receivable. In addition, Rich charged 15% interest
computed on a weighted-average time to maturity of the receivables of 41 days.
Taylored will receive and record cash of
Answers
A: $190,630
B: $174,630
C: $180,630
D: $184,630
Answer Explanations
25
C. Answer C is correct. Taylored will receive the value of the receivables ($200,000), reduced
by $10,000 for the amount of the holdback ($200,000 x .05), $6,000 withheld as fee income
($200,000 x .03), and $3,370 withheld as interest expense ($200,000 x .15 x 41/365). Answer C is
therefore correct ($200,000 $6,000 $3,370 $10,000).
39 - Esmond Bank approves a 10-year loan to Matt Schweitzer. In doing so, Esmond Bank incurs
$2,000 of loan origination costs (attorney fees, title insurance, wages of employees direct work on
loan origination). The loan origination fees shall be
Answers
A: Deferred and recognized upon final payment of the loan.
B: Reported as service fee income.
C: Deferred and recognized over the life of the loan as an adjustment of yield (interest income).
D: Recognized as revenue when the loan is granted.
Answer Explanations
C. Answer C is correct. According to SFAS 91, the lender shall defer and recognize loan
origination costs over the life of the loan when the costs relate directly to the loan and would not
have been incurred but for the loan.
40 - If a company issues both a balance sheet and an income statement with comparative figures
from last year, a statement of cash flows
Answers
A: Is no longer necessary, but may be issued at the companys option.
B: Should not be issued.
C: Should be issued for each period for which an income statement is presented.
D: Should be issued for the current year only.
Answer Explanations
26
C. Answer C is correct. When a balance sheet, income statement, and statement of retained
earnings are issued, a statement of cash flows must be presented for each period for which an
income statement is presented.
41 - Kollar Corp.s transactions for the year ended December 31, 2001, included the following:
Purchased real estate for $550,000 cash which was borrowed from a bank.
Sold available-for-sale investment securities for $500,000.
Paid dividends of $600,000.
Issued 500 shares of common stock for $250,000.
Purchased machinery and equipment for $125,000 cash.
Paid $450,000 toward a bank loan.
Reduced accounts receivable by $100,000.
Increased accounts payable by $200,000.
Kollars net cash used in investing activities for 2001 was
Answers
A: $675,000
B: $375,000
C: $175,000
D: $ 50,000
Answer Explanations
C. Answer C is correct. Investing activities include cash flows involving assets other than
operating items. The investing activities are
Purchased real estate $(550,000)

Sold available-for-sale investment securities 500,000
Purchased mach. and equip. (125,000)
Net cash used in investing activities $(175,000)
The bank borrowing ($550,000), dividend payment ($600,000), issuance of stock ($250,000), and
bank loan payment ($450,000) are financing activities. The reduction of accounts receivable
($100,000) and the increase in accounts payable ($200,000) are operating items.
42 Information with respect to Bruno Co.s cost of goods sold for 2005 is as follows:
27
Historical
Cost Units
Inventory, $1,060,000 20,000
1/1/05
Production 5,580,000 90,000
during 2005
6,640,000 110,000
Inventory, 2,520,000 40,000
12/31/05
Cost of $4,120,000 70,000
goods sold
Bruno estimates that the current cost per unit of inventory was $58 at January 1, 2005, and $72 at
December 31, 2005. In Brunos supplementary information restated into average current cost, the
cost of goods sold for 2005 should be
Answers
A: $5,040,000
B: $4,550,000
C: $4,410,000
D: $4,060,000
Answer Explanations

B. Answer B is correct. Per SFAS 89, cost of goods sold is restated into average current cost
by multiplying units sold (70,000) by the average current cost during the year. Average current
cost is the current cost at the beginning of the year, plus the current cost at the end of the year,
divided by 2.
($58 + $72) 2 = $65
Therefore, cost of goods sold restated into average current cost is $4,550,000 (70,000 x $65).
43- The following information pertains to Been Corp. and its operating segments for the year ended
December 31, 2004:
In its financial statements, Been should disclose major Total revenues $80,000,000
customer data if sales to any single customer amount to at Sales to external $30,000,000
least customers (included in
total)
Answers
28
A: $ 5,000,000
B: $ 3,000,000
C: $11,000,000
D: $ 8,000,000
Answer Explanations

D. Answer D is correct per SFAS 131, if 10% or more of the revenues of an enterprise is
derived form sales to any single customer, that fact and the amount of revenue from each significant
customer shall be disclosed in this problem, Been reported revenues of $ 80,000,000 and thus
should disclose major customer data if sales to any single customer amount to $8,000,000(
$80,000,000x10%) .The segment generating the sales must be disclosed but the name of the
customer does not need to be disclosed.
44- The following information pertains to a sale of real estate by Ryan Co. to Sud Co. on December
31, 2004:
Carrying $2,000,000
amount
Sales price:
Cash $ 300,000
Purchase 2,700,000 3,000,000
money
mortgage
The mortgage is payable in nine annual installments of $300,000 beginning December 31, 2005,
plus interest of 10%. The December 31, 2005 installment was paid as scheduled, together with
interest of $270,000. Ryan uses the cost recovery method to account for the sale. What amount of
income should Ryan recognize in 2005 from the real estate sale and its financing?
Answers
A: $570,000
B: $370,000
C: $270,000
D: $0
Answer Explanations
29
D. Answer D is correct. Under the cost recovery method no profit of any type is recognized
until the cumulative receipts (principal and interest) exceed the cost of the asset sold. This means
that the entire gross profit ($3,000,000 $2,000,000 = $1,000,000) and the 2005 interest received
($270,000) will be deferred until cash collections exceed $2,000,000. Therefore, no income is
recognized in 2005.
45 - Which of the following accounting bases may be used to prepare financial statements in
conformity with a comprehensive basis of accounting other than IAS?
I. Basis of accounting used by an entity to file its income tax return.
II. Cash receipts and disbursements basis of accounting.
Answers
A: I only.
B: II only.
C: Both I and II.
D: Neither I nor II.
Answer Explanations

C. Answer C is correct. Both bases mentioned in I and II are comprehensive bases of
accounting which may be used to prepare financial statements.
Problem I
Adjusting Entries - Missing Information
The Ming Company's accounting records contained the following information:
Balances Adjusted Balances
Jan. 1, 1998 Dec. 31, 1998
Supplies $13, 750 $ 9, 400
Prepaid Insurance 6, 800 4,800
Salaries payable 3, 500 2,100
Interest payable 2, 500 3,950
Unearned rent revenue 1, 200 9, 600
The following information is pertinent to the above accounts:
30
a. Transactions involving supplies, insurance premiums, rent received in advance were originally
recorded in real accounts.
b. Supplies costing $6,500 were acquired during 1998.
c. During 1998, premiums of $3,600 were paid for an 18 month fire insurance policy.
d. Salaries of $69,000 were paid in cash during the year. Cash paid for salaries was correctly
recorded during the year.
e. During 1998, cash interest of $18, 000 was paid on debt, and it was correctly recorded on the
books.
f. During 1998, $36,000 cash was received in advance from tenants for rent.
g. Adjusting entries are prepared once a year on December 31.
Required
1- Prepare the 5 (five) adjusting entries to correct recordings made on 31/12/1998 in the
accounts balances mentioned here above
2- The net income during 1998 which amount to $78,500 is not adjusted.
Calculate and show the net results corrected during 1998 after elucidating the corrections
referred to here above.
3- Calculate the total costs relating to salaries and interests recorded during the year 1998.
31

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Lebanese Association of Certified Public Accountants

Examination Year June 2006

B. Answer B is incorrect. Refer to the correct answer explanation.

C. Answer C is incorrect. Refer to the correct answer explanation.

C: Financial statements included property with a carrying amount increased to managements

C. Answer C is correct. Reliability has three subcomponents, as defined in SFAC 2: neutrality,

D. Answer D is incorrect because reliability is not violated.

B. Answer B is incorrect. Refer to the correct answer explanation.

5- Recognizing depletion expense is an example of the accounting process of

Answers Allocation Amortization

C. Answer C is correct because SFAC 6 defines allocation as the process of assigning or

D. Answer D is incorrect. Refer to the correct answer explanation.

A: Allocation of insurance cost.

C: Depreciation of fixed assets.

A. Answer A is incorrect because allocation of insurance cost is an example of the systematic

D. Answer D is incorrect because officers' salaries is an example of the immediate recognition

A. Answer A is incorrect. Refer to the correct answer explanation.

A: When the ultimate sale of the goods is at an assured sales price.

B: When the revenue is to be reported as an installment sale.

C. Answer C is incorrect because the concept of internal consistency of amounts of revenue is a

D. Answer D is incorrect because a long established management policy of noncompliance

B: By restating the financial statements of all prior periods presented.

C: By showing the pro forma effects of retroactive application.

10 - During a period of inflation, an account balance remains constant. When supplemental

A. This answer is incorrect. Refer to the correct answer explanation.

A: Accumulated depreciation of equipment.

B: Advances to unconsolidated subsidiaries.

C: Allowance for doubtful accounts.

D: Unamortized premium on bonds payable.

C. Answer C is incorrect. Refer to the correct answer explanation.

This answer is incorrect. Refer to the correct answer explanation.

Assume that instead of admitting a new partner, the Cash $ 90,000

B. Answer B is correct. The solutions approach is to prepare an abbreviated statement of

C. This answer is incorrect. Refer to the correct answer explanation.

Current assets $125,000 Liabilities $ 10,000

Market values at December 31, 2001, are as follows:

Current assets $90,000

B. Answer B is correct. When a partnership incorporates, assets and liabilities must be

C. This answer is incorrect. Refer to the correct answer explanation.

D. This answer is incorrect. Refer to the correct answer explanation

Insurance on Testing and

B. This answer is incorrect. Refer to the correct answer explanation.

A. This answer is incorrect. Refer to the correct answer explanation.

C. This answer is incorrect. Refer to the correct answer explanation.

A. This answer is incorrect. Refer to the correct answer explanation.

New machine 86,000 ($70,000 + $16,000)

Expected future cash inflows from use of the machinery $350,000

A. Answer A is incorrect. Refer to the correct answer explanation.

Expected cash inflows from use of the machinery $350,000

A. Answer A is incorrect because it implies a retroactive restatement of amortization, and APB

B. Answer B is incorrect because revisions in useful life should result in revisions of

D: The cost of the asset is amortized over 40 years.

C: It should be recorded at cost and amortized over a 10-year period.

D: It should be recorded at cost and amortized over a 40-year period.

C. Answer C is incorrect. Goodwill should not be amortized.

A. This answer is incorrect. Refer to the correct answer explanation.

A. Answer A is correct. The costs to be charged to merchandise purchases should include

B. Answer B is incorrect. Refer to the correct answer explanation.

A: Plus the ending inventory.

B: Plus the beginning inventory.

C: Minus the ending inventory.

A. Answer A is incorrect. Refer to the correct answer explanation.

C. Answer C is incorrect. Refer to the correct answer explanation.

29- The percentage-of-completion method of accounting for long-term construction-type contracts