Part 1 Recognition, Measurement, Valuation & Disclosure (Liabilities, Equity)

Question 1
Yang Co.’s trial balance included the following account balances at December 31, Year 6:

What amount should be included in the current liability section of Yang's December 31,
Year 6 balance sheet?
A. $51,000
B. $65,000
C. $71,000
D. $45,000
Question 2
The service warranty method recognizes service warranty expenses:
A. When the product is sold
B. At the end of the warranty period
C. When actual warranty costs are incurred
D. Equally over the life of the warranty, regardless of when the actual warranty costs
are incurred
Question 3
The BSC Company has the following independent scenarios with established customers:
 Part 1 Recognition, Measurement, Valuation & Disclosure (Liabilities, Equity)

Which scenario or scenarios are “contracts” for revenue recognition purposes?

A. Scenario 1 only
B. Scenarios 2 and 3 only
C. Scenarios 1 and 3 only
D. Scenarios 1, 2, and 3
Question 4
Under U.S. GAAP, which of the following expenditures qualifies for asset capitalization?
A. Cost of materials used in prototype testing.
B. Costs of testing a prototype and modifying its design.
C. Salaries of engineering staff developing a new product.
D. Legal costs associated with obtaining a patent on a new product.
Question 5
In 20X1 the ABC Company purchased inventory for $50,000. In December of 20X1, ABC
wrote down the inventory to $35,000 because it believed its value was permanently
impaired. In Q1 of 20X2, the value of the inventory increased to $51,000. How would
ABC value the inventory at the end of Q1 20X2 in accordance with US GAAP and IFRS,
respectively?
A. $35,000 and $35,000
B. $35,000 and $51,000
C. $51,000 and $35,000
D. $35,000 and $50,000
Question 6
Under which set of facts would a company be able to classify a liability due within the
next 12 months as a long-term liability under US GAAP?
A. On 12/31/20X6 a company has a liability due on 2/15/20X7. On 11/30/20X6, the
company’s board of directors voted to seek to refinance the debt with the lender.
It plans to talk to the lender at the beginning of 20X7 about refinancing the debt
for 3 more years. The company issued its financial statements on 2/15/20X7.
B. Never, US GAAP requires all liabilities to be satisfied within the next 12 months or
one operating cycle (whichever is longer) to be classified as current liabilities.
C. On 12/31/20X6 a company has a liability due on 8/15/20X7. On 11/30/20X6, the
company’s board of directors voted to seek to refinance the debt with the lender.
On 12/20/20X6, the lender agreed to refinance the debt with a new due date of
12/20/20X7. The company issued its financial statements on 2/15/20X7.
 Part 1 Recognition, Measurement, Valuation & Disclosure (Liabilities, Equity)

D. On 12/31/20X6 a company has a liability due on 6/15/20X7. On 11/30/20X6, the

company’s board of directors voted to seek to refinance the debt with the lender.
On 2/1/20X7, the lender agreed to refinance the debt with a new due date of
12/31/20X9. The company issued its financial statements on 2/15/20X7.
Question 7
On January 1, Year 1, Babson, Inc. leased two automobiles for executive use. The lease
requires Babson to make five annual payments of $13,000 beginning January 1, Year 1.
At the end of the lease term, December 31, Year 5, Babson has the option to buy the
automobiles for $10,000, which is considered a bargain. The lease qualifies as a finance
lease. The interest rate implicit in the lease is 9%.
Present value factors for the 9% rate implicit in the lease are as follows:

• For an annuity due with five payments: 4.240

• For an ordinary annuity with five payments: 3.890
• Present value of $1 for five periods: 0.650
Babson's recorded finance lease liability immediately after the first required payment
should be:
A. $42,120
B. $35,620
C. $61,620
D. $48,620
Question 8
A company has the following loans:
 Part 1 Recognition, Measurement, Valuation & Disclosure (Liabilities, Equity)

Assuming the company’s operating cycle is 97 days and financial statements are issued
on 2/28/20Y1, which loan or loans would be classified as a long-term liability on the
December 31, 20Y0 balance sheet?
A. Loan 1 only
B. Loans 1, 2 and 3
C. Loans 2 and 3 only
D. Loans 1 and 2 only
Question 9
Jackson Construction has a 4-year construction contract to build 250 miles of highway
for $1,000,000. The estimated total cost to complete the project is $400,000. During
Year 1, Jackson incurred costs of $120,000 and completed 60 miles of highway. At the
end of Year 2, Jackson incurred total costs of $280,000 and completed a total of 130
miles of highway. How much revenue would Jackson report in Year 2 under the input
method and the output method to recognize revenue, respectively, assuming the
contract qualifies for revenue recognition over time?
A. $700,000 and $520,000
B. $300,000 and $240,000
C. $400,000 and $280,000
D. $250,000 and $250,000
Question 10
A company prepared the following journal entries at the end of its first two years in
business:
 Part 1 Recognition, Measurement, Valuation & Disclosure (Liabilities, Equity)

Which of the following statements is correct about this company assuming the effective
tax rate is consistent from year to year?
A. This company had higher future deductible amounts at the end of Year 2 than at
the end of Year 1.
B. This company owed the IRS different amounts in Years 1 and 2.
C. This company had more future taxable amounts at the end of Year 2 than at the
end of Year 1.
D. This company reported the same tax expense on its GAAP income statement in
Years 1 and 2.
Question 11
A company building its own warehouse expects to spend $1,000,000 on the project. It
took out a loan for $400,000 to finance part of the construction of the building. It also
has taken out loans for general corporate purposes totaling $2,000,000. Which of the
following statements concerning capitalized interest is correct?
A. Under US GAAP the company could capitalize only the interest on the $400,000
loan, while under IFRS it would capitalize some interest on both loans.
B. Under US GAAP the company could capitalize interest from both loans, while under
IFRS the company could capitalize only the interest on the $400,000 loan.
C. Under US GAAP the company could capitalize interest on both loans, while under
IFRS capitalizing interest on self-constructed assets is prohibited.
D. Under both US GAAP and IFRS the company could capitalize only the interest on
the $400,000 loan.
Question 12
Which method for warranty accounting requires the organization to record deferred
revenue?
A. Assurance Warranty approach.
B. Service Warranty approach.
C. Prepaid Warranty approach.
D. Special Warranty approach.
Question 13
The XYZ Company has the following liabilities as of 12/31/20X8:
 Part 1 Recognition, Measurement, Valuation & Disclosure (Liabilities, Equity)

Assuming XYZ’s operating cycle is less than 12 months and it issues its financial
statements on 3/15/20X9, how much would it classify as current liabilities on its
12/31/20X8 balance sheet?
A. $20,000
B. $220,000
C. $320,000
D. $300,000
Question 14
A firm has just signed an 8-year lease on a new standardized machine after which, the
machine will be returned to the lessor.
• Fair value of the machine is $420,000.
• Lease payments are $72,000 per year, payable at the end of the year.
• The machine has a 12-year useful life.
• The firm’s incremental borrowing cost is 10%.
• The PV of an ordinary annuity having 8 payments of $1 at 10% is $5.3349.
The lease should be classified as:
A. operating lease.
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B. finance lease.
C. either operating or finance since the firm does not keep the asset at the end of
the lease.
D. purchase lease.
Question 15
All of the following statements concerning the Assurance Warranty approach to
accounting for warranties is correct except:
A. Under the Assurance Warranty approach, no revenue is recorded for warranties.
B. Under the Assurance Warranty approach, no expense is recorded when warranty
services are performed.
C. Under the Assurance Warranty approach, a liability for deferred revenue is
recorded when a product is sold with an attached warranty.
D. The Assurance Warranty approach is used for warranties that are automatically
included when a product is purchased.
Question 16
Assuming all information is available to an organization, which of the following is the
most preferable method for identifying stand-alone selling prices for use in allocating the
transaction price to the performance obligations?
A. Adjusted market price.
B. Observable stand-alone selling price.
C. Expected cost plus margin.
D. Residual approach.
Question 17
The ASW Company has a five-year loan for $60,000 due on June 30, 20X1, a four-year
loan for $80,000 due on March 31, 20X1, and a two-year loan for $40,000 due on
December 15, 20X1. On February 1, 20X1, ASW signed an agreement to refinance the
$60,000 loan for another four months past the due date. When ASW released its
financial statements on February 28, 20X1, it was working on an agreement to refinance
the $80,000 for another four years. ASW signed an agreement on February 5, 20X1 to
refinance the $40,000 loan for another two years. Assuming ASW’s operating cycle is 120
days, how should ASW classify these loans on its balance sheet dated December 31,
20X0?
A. The $40,000 loan as a long-term liability, the $60,000 loan as a long-term liability,
and the $80,000 loan as a long-term liability
 Part 1 Recognition, Measurement, Valuation & Disclosure (Liabilities, Equity)

B. The $40,000 loan as a long-term liability, the $60,000 loan as a current liability, and
the $80,000 loan as a current liability
C. The $40,000 loan as a current liability, the $60,000 loan as a current liability, and
the $80,000 loan as a current liability
D. The $40,000 loan as a long-term liability, the $60,000 loan as a long-term liability,
and the $80,000 loan as a current liability
Question 18
The JKH Company has a three-year loan for $50,000 due on April 30, 20X1, a four-year
loan for $30,000 due on March 31, 20X1, and a two-year loan for $40,000 due on
December 15, 20X1. On February 1, 20X1, JKH signed an agreement to refinance the
$50,000 loan for another three years. When JKH released its financial statements on
February 28, 20X1, it was working on an agreement to refinance the $30,000 loan for
another four years. JKH has refinanced the $40,000 loan twice before and planned to
refinance it again before the due date. Assuming JKH’s operating cycle is 120 days, how
should JKH classify these loans on its balance sheet dated December 31, 20X0?
A. The $30,000 loan as a current liability, the $40,000 loan as a current liability, and
the $50,000 loan as a long-term liability
B. The $30,000 loan as a current liability, the $40,000 loan as a long-term liability, and
the $50,000 loan as a long-term liability
C. The $30,000 loan as a current liability, the $40,000 loan as a current liability, and
the $50,000 loan as a current liability
D. The $30,000 loan as a long-term liability, the $40,000 loan as a long-term liability,
and the $50,000 loan as a long-term liability
Question 19
Which statement concerning accounting for warranties is correct?
A. The Assurance Warranty approach is used to account for warranties that are
automatically included in the purchase of a product and the Service Warranty
approach is used to account for extended warranties that are sold separately from
the product for additional revenue.
B. The Service Warranty approach is used to account for warranties that are
automatically included in the purchase of a product and the Assurance Warranty
approach is used to account for extended warranties that are sold for additional
revenue separately from the product.
C. Firms must use either the Service Warranty approach or the Assurance Warranty
approach for all of its warranties (whether included in the purchase of the product
or sold separately for additional revenue) when accounting for warranties.
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D. Firms can elect, on a warranty-by-warranty basis, whether to use the Service

Warranty approach or the Assurance Warranty approach for any warranty.
Question 20
The DFR Company includes a four-year warranty with each unit of the product it sells.
DFR estimates that each unit will require an average of $80 of warranty services over the
four-year warranty period. DFR sold 2,000 units in its first year of operations and 2,500
in its second year of operations. DFR spent $60,000 on services covered under
warranties in its first year of operations and $190,000 in its second year of operations.
What amount of warranty expense should DFR record in Year 2 of operations?
A. $200,000
B. $190,000
C. $110,000
D. $90,000
Question 21
The OJY Company sells a product for $4,500. Customers have the option of purchasing a
three-year warranty at the time of purchase for $240. OJY sold 2,000 units and 1,600
warranties in its first year of operations and 2,400 units and 1,800 warranties in its
second year of operations. OJY spent $80,000 on services covered under warranties in its
first year of operations and $240,000 in its second year of operations. What amount of
warranty revenue should OJY recognize in Year 2 assuming it recognizes warranty
revenue on a straight-line basis?
A. $432,000
B. $416,000
C. $272,000
D. $240,000
Question 22
In its first year of operations, the MLS Company reported pretax income on its GAAP
income statement of $400,000. Additional information from MLS is shown below.
 Part 1 Recognition, Measurement, Valuation & Disclosure (Liabilities, Equity)

What is MLS’s taxable income?

A. $440,500
B. $434,000
C. $432,500
D. $360,500
Question 23
A firm leases a piece of machinery having an 8-year expected life for 4 years. The lease
was properly classified as an operating lease. After the initial lease ended, the company
signed a second lease for the same machinery for another 4 years with the same terms
as the initial lease (same annual payment, same implied discount rate, etc.). Assuming
the market value and the overall expected life of the machine has not materially
changed during the 4 years, how should this new lease be classified?
The lease should be classified as:
A. an operating lease since the initial lease was classified as an operating lease and
subsequent leasing of the same machinery would be automatically classified as an
operating lease.
B. a finance lease since the initial lease was classified as an operating lease and
subsequent leasing of the same machinery would be automatically classified as a
finance lease.
C. a finance lease since it satisfies one of the criteria established by the FASB for
classifying a lease as a finance lease.
D. an operating lease since the lease term is for only 50% of the machine’s expected
useful life.
Question 24
A company signs a 4-year lease for a piece of machinery on January 1, 20X0, with the
first payment of $68,000 being due on December 31, 20X0, and continuing on December
31 thereafter. The company’s incremental borrowing rate is 9% and the rate implicit in
 Part 1 Recognition, Measurement, Valuation & Disclosure (Liabilities, Equity)

the lease is unknown. The present value of the minimum lease payments is $220,301.
The lease is correctly classified as an operating lease. What is the total expense related
to the lease for 20X0?
A. $55,075
B. $19,827
C. $68,000
D. $74,902
Question 25
Brady Co. sells merchandise to two main groups of customers: large retailers who buy in
bulk and smaller local retailers who buy only a few units at a time. Brady offers a 5%
cash discount if payment is received within 10 days of delivery. Historical evidence
indicates that virtually all of the large retailers take advantage of the cash discount and a
very small number of small retailers are able to pay early enough to benefit from the
discount terms. What is the transaction price for a contract to sell merchandise for
$100,000 if the sale was to a large retailer or small retailer, respectively?
A. $100,000, $100,000
B. $100,000, $95,000
C. $95,000, $100,000
D. $95,000, $95,000
Question 26
On January 2, Year One, Rex Enterprises, Inc., authorized Adam Company to operate as a
franchise over a 20-year period for an initial franchise fee of $60,000 received on signing
the agreement. Adam started operations on June 30, Year One, by which date Rex had
performed all the required initial services. In its income statement for the six months
ended June 30, Year One, what amount should Rex report as revenue from franchise
fees in connection with Adam's franchise?
A. $0
B. $1,500
C. $60,000
D. $30,000
Question 27
The BCG Company records the same amount of total expense related to a lease [interest
expense plus amortization of the right-of-use (ROU) asset] four years in a row. What is
the correct conclusion to draw about this lease?
 Part 1 Recognition, Measurement, Valuation & Disclosure (Liabilities, Equity)

A. BCG classified this lease as a finance lease since operating leases do not result in
an ROU asset.
B. BCG classified this lease as an operating lease since finance leases do not result in
an ROU asset.
C. BCG classified this lease as a finance lease since a finance lease is treated as a
“straight” rental.
D. BCG classified this lease as an operating lease since an operating lease is treated
as a “straight” rental.
Question 28
A company prepared the following journal entries at the end of its first two years in
business:

Which of the following statements is correct about this company assuming the effective
tax rate is consistent from year to year?
A. This company owed the IRS different amounts in Years 1 and 2.
B. This company had higher future taxable amounts at the end of Year 2 than at the
end of Year 1.
C. This company had higher future deductible amounts at the end of Year 2 than at
the end of Year 1.
D. This company reported the same tax expense on its GAAP income statement in
Years 1 and 2.
 Part 1 Recognition, Measurement, Valuation & Disclosure (Liabilities, Equity)

Question 29
The LMK Company includes a three-year warranty with each unit of the product it sells.
LMK estimates that each unit will require an average of $60 of warranty services over
the three-year warranty period. LMK sold 1,000 units in its first year of operations and
1,200 in its second year of operations. LMK spent $18,000 on services covered under
warranties in its first year of operations and $46,000 in its second year of operations.
What amount of estimated warranty liability should LMK record at the end of Year 2?
A. $42,000
B. $72,000
C. $68,000
D. $26,000
Question 30
On January 1, XYZ Company (lessee) entered into a finance lease with ABC Company
(lessor). XYZ Company will make an annual payment of $25,000 for five years as part of
the lease, with the first payment due at the end of the year. The interest rate implicit in
the lease is 8% and the lease liability is properly calculated to be $99,818. How much of
the first payment is interest expense and how much is a reduction of the lease liability?
Interest expense Lease liability
A. $17,015 $7,985
B. $7,985 $17,015
C. $0 $25,000
D. $25,000 $0
Question 31
Clack Co. sold 3,000 televisions in Year 1, with a two-year assurance warranty. The
warranty was estimated to cost $5 per television. Actual warranty costs were $8,000 in
Year 1, and $9,000 in Year 2.
How much warranty expense would Clack Co. report in Year 2 under the assurance
warranty method?
If the warranty had been sold separately for cash, how much warranty expense would
Clack Co. report in Year 2 under the service warranty method?
A. $1,000, $9,000
B. $2,000, $17,000
C. $2,000, $9,000
D. $1,000, $17,000
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Question 32
The NTD Company includes a three-year warranty with each unit of the product it sells.
NTD estimates that each unit will require an average of $45 of warranty services over
the three-year warranty period. NTD sold 1,000 units in its first year of operations and
1,800 in its second year of operations. NTD spent $12,000 on services covered under
warranties in its first year of operations and $39,000 in its second year of operations.
What amount of estimated warranty liability should NTD record at the end of Year 2?
A. $33,000
B. $75,000
C. $42,000
D. $81,000
Question 33
An entity is in its first year of business. Business operations are expected to be profitable
in the foreseeable future. The items being sold are covered by an attached warranty. No
items were reported by customers as defective this year, but some are estimated to fail
next year so the entity has accrued the related warranty expense in its financial records.
Which of the following is a result of this situation?
A. The entity will recognize a deferred tax asset.
B. The entity will not have deferred taxes this year.
C. The entity will recognize a deferred tax liability.
D. The entity will recognize both a deferred tax asset and a deferred tax liability.
Question 34
The underlying asset for Lease A is so specialized for the lessee that it is expected to
have no alternative future use to the lessor at the end of the lease term; however, Lease
A does not contain a bargain purchase option. The lease term for Lease B is less than
75% of the estimated economic life of the leased property, but Lease B does transfer
ownership of the property to the lessee by the end of the lease term. How should the
lessee classify Lease A and Lease B, respectively?
A. Finance lease; Finance lease
B. Finance lease; Operating lease
C. Operating lease; Finance lease
D. Operating lease; Operating lease
Question 35
The UAM Company sells three distinct products as part of a single contract. Each product
meets the definition of a separate performance obligation under the contract. It has sold
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Products 1 and 2 individually in the past and a competitor sells Products 2 and 3
individually. Information on the three products is shown below:

If the transaction price is determined to be $1,710, how much revenue should be

allocated to each product?
A. $510 for Product 1, $800 for Product 2, and $400 for Product 3
B. $500 for Product 1, $900 for Product 2, and $310 for Product 3
C. $570 for Product 1, $570 for Product 2, and $570 for Product 3
D. $475 for Product 1, $855 for Product 2, and $380 for Product 3
Question 36
Which of the following statements concerning the accounting for share-based
compensation under International Financial Reporting Standards (IFRS) and US Generally
Accepted Accounting Principles (GAAP) is correct?
A. US GAAP mandates that companies use the fair value method to measure share-
based compensation while IFRS allows companies to use the intrinsic value
method.
B. US GAAP allows companies to use the intrinsic value method to measure share-
based compensation in some situations, while IFRS mandates the fair value
method.
C. Both US GAAP and IFRS mandate that companies use the fair value method to
measure share-based compensation.
D. Both US GAAP and IFRS mandate that companies use the intrinsic value method to
measure share-based compensation.
Question 37
Lease A covers 60% of a standardized machine’s expected useful life, the present value
of the minimum lease payments equals 81% of the machine’s fair market value, and the
owner of the machine retains ownership of the machine at the end of the lease. Lease B
covers 68% of a standardized machine’s expected useful life, the present value of the
minimum lease payments equals 85% of the machine’s fair market value, and the lessee
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has the option to buy the asset at the end of the lease for $1. How should the lessee
classify Lease A and Lease B?
A. Lease A is a finance lease and Lease B is a finance lease.
B. Lease A is a finance lease and Lease B is an operating lease.
C. Lease A is an operating lease and Lease B is an operating lease.
D. Lease A is an operating lease and Lease B is a finance lease.
Question 38
All of the following are criteria for a lease to be classified as a finance lease except:
A. The lease agreement indicates that ownership of the asset transfers to the lessee
at the end of the lease term.
B. The lease term is for a minor part of the remaining economic life of the asset.
C. The lease contains a bargain purchase option.
D. The present value of the minimum lease payments exceeds substantially all of the
fair value of the underlying asset.
Question 39
When accounting for income taxes, a temporary difference occurs in which of the
following scenarios?
A. An item is included in the calculation of net income, but is never taxable or
deductible.
B. An item is included in the calculation of net income in one year and in taxable
income in a different year.
C. An item is not taxable due to a change in the tax law.
D. The accrual method of accounting is used.
Question 40
Diamond, Inc. (Diamond) has a 5-year construction contract to build a 60-mile canal for
$600,000. The estimate of total costs is $400,000. Year 1 and Year 2 incurred costs are,
respectively, $100,000 and $20,000. Diamond finished 18 miles in Year 1 and 6 miles in
year 2. If Diamond uses the output method based on miles completed to recognize
revenue, which of the following revenue amounts would Diamond report for Year 1 and
Year 2, respectively?
A. $0, $0
B. $60,000, $180,000
C. $120,000, $120,000
D. $180,000, $60,000
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Question 41
Which of the following statements concerning lease accounting under International
Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles
(GAAP) is correct?
A. IFRS uses the same treatment for all material long-term leases as US GAAP uses
for finance leases.
B. IFRS classifies all leases as either finance leases or operating leases, similar to US
GAAP.
C. IFRS uses the same treatment for all leases as US GAAP uses for operating leases.
D. IFRS gives companies more discretion in classifying leases than does US GAAP
Question 42
Which of the following statements concerning differences between US GAAP and IFRS is
correct?
A. US GAAP and IFRS account for capitalized interest for self-constructed assets in the
same way.
B. US GAAP and IFRS both consider asset impairment at the cash-generating unit
(CGU) level.
C. A fixed asset comprised of separately identifiable components is depreciated as
one asset under US GAAP and as separate components under IFRS.
D. Accounting for research and development expenditures is the same under US
GAAP and IFRS.
Question 43
In its first year of operations, the LMN Company reported pretax income on its GAAP
income statement of $400,000. LMN has a current tax rate of 25% and a future enacted
tax rate of 20%. Additional information from LMN is below:

What is LMN’s net deferred tax asset or deferred tax liability to be reported on the
balance sheet?
 Part 1 Recognition, Measurement, Valuation & Disclosure (Liabilities, Equity)

A. Deferred tax asset of $800

B. Deferred tax asset of $3,500
C. Deferred tax asset of $2,800
D. Deferred tax asset of $3,800
Question 44
A company signs a contract to provide two separate products to a customer for $500.
The products are considered to be separate performance obligations. Product 1 has a
stand-alone price of $450 and Product 2 has a stand-alone price of $150. How should
the contract price of $500 be allocated between Product 1 and Product 2?
A. $450 for Product 1 and $50 for Product 2
B. $350 for Product 1 and $150 for Product 2
C. $250 for Product 1 and $250 for Product 2
D. $375 for Product 1 and $125 for Product 2
Question 45
Which of the following statements concerning the Service Warranty approach to
accounting for warranties is correct?
A. Under the Service Warranty approach, a liability for the estimated expected
expenses over the life of the warranty is recorded when the warranty is sold.
B. Under the Service Warranty approach, a liability for deferred revenue is recorded
when a warranty is sold.
C. Under the Service Warranty approach, no expense is recorded over the life of the
warranty.
D. The Service Warranty approach is used for warranties that are automatically
included when a product is purchased.
Question 46
Under IFRS, an impairment loss is the amount by which the carrying amount of a cash-
generating unit exceeds its recoverable amount. Recoverable amount is:
A. The higher of fair value less disposal costs or value in use.
B. The higher of value in use or present value.
C. The higher of the net selling price or fair value less costs to sell.
D. The higher of fair value or carrying value
Question 47
All of the following are conditions for recognizing revenue at a point in time under the
FASB's revenue recognition standard except:
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A. The customer has formally accepted the good or service.

B. Risks and rewards of ownership have transferred to the customer.
C. Title to the asset transfers to the customer when they pay for the asset in full.
D. The entity has an enforceable right to payment.
Question 48
A company signs a 4-year lease for a piece of machinery on January 1, 20X0, with the
first payment of $75,000 being due on December 31, 20X0, and continuing on December
31 thereafter. The company’s incremental borrowing rate is 8% and the rate implicit in
the lease is unknown. The present value of the minimum lease payments is $248,410.
The lease is correctly classified as a finance lease. What is the balance in the lease
liability after the second lease payment is made on December 31, 20X1?
A. $193,283
B. $133,745
C. $98,410
D. $124,205
Question 49
Lease A does not contain a bargain purchase option, but the lease term is for a major
part of the remaining economic life of the underlying asset. Lease B does not transfer
ownership of the property to the lessee by the end of the lease term, but the present
value of the minimum lease payments exceeds substantially all of the fair value of the
underlying asset. How should the lessee classify these leases? (Answers are in form of:
Lease A, Lease B)
A. Finance lease, Finance lease
B. Finance lease, Operating lease
C. Operating lease, Finance lease
D. Operating lease, Operating lease
Question 50
The DFR Company includes a four-year warranty with each unit of the product it sells.
DFR estimates that each unit will require an average of $80 of warranty services over the
four-year warranty period. DFR sold 2,000 units in its first year of operations and 2,500
in its second year of operations. DFR spent $60,000 on services covered under
warranties in its first year of operations and $190,000 in its second year of operations.
What amount of estimated warranty liability should DFR record at the end of Year 2?
A. $10,000
B. $110,000
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C. $100,000
D. $200,000
Question 51
A company has the following loans:

Assuming the company’s operating cycle is 112 days and financial statements are issued
on 2/27/20X6, which loan or loans would be classified as a long-term liability on the
December 31, 20X5 balance sheet?
A. Loan 2 only
B. Loans 1, 2, and 3
C. Loans 2 and 3 only
D. Loans 3 only
Question 52
The HJK Company sells a product for $2,500. Because the product does not have a
manufacturer’s warranty, HJK Company offers a separate warranty for purchase.
Customers have the option of purchasing a three-year warranty at the time of sale for
$180 and HJK expects that related warranty expenditures will be incurred evenly over
the three-year warranty period. All sales of this product are made near the beginning of
HJK’s fiscal year. HJK sold 1,000 units and 900 warranties in its first year of operations
and 1,500 units and 1,200 warranties in its second year of operations. HJK spent $24,000
on services covered under warranties in its first year of operations and $89,000 in its
second year of operations. What amount of deferred warranty revenue should HJK
report at the end of Year 2?
A. $198,000
B. $252,000
C. $108,000
D. $126,000
Question 53
Generous Company (Generous), a company that follows IFRS, gives stock options with
 Part 1 Recognition, Measurement, Valuation & Disclosure (Liabilities, Equity)

graded vesting to all its employees. How should Generous account for this share-based
compensation?
A. Total compensation expense is measured by using the intrinsic value method
[(Market Price − Strike Price) × Number of Shares]. Total compensation expense is
spread over the service period using the accelerated method.
B. Total compensation expense is measured at grant date by multiplying the number
of options granted by their fair value at grant date. Total compensation expense is
spread over the service period using the accelerated method.
C. Total compensation expense is measured at grant date by multiplying the number
of options granted by their fair value at grant date. Total compensation expense is
spread over the service period using the straight-line method.
D. Total compensation expense is measured by using the intrinsic value method
[(Market Price − Strike Price) × Number of Shares]. Total compensation expense is
spread over the service period using the straight-line method.
Question 54
Which of the following statements concerning accounting for income taxes is correct?
A. Permanent differences do not result in deferred tax assets and liabilities while all
temporary differences result in deferred tax assets and liabilities.
B. All permanent differences result in deferred tax assets and liabilities while
temporary differences do not result in deferred tax assets and liabilities.
C. All permanent differences and all temporary differences result in deferred tax
assets and liabilities.
D. Some permanent differences and some temporary differences result in deferred
tax assets and liabilities.
Question 55
The CSB Company sells a product for $3,000. Because the product does not have a
manufacturer’s warranty, CSB Company offers a separate warranty for purchase.
Customers have the option of purchasing a four-year warranty at the time of sale for
$160 and CSB expects that related warranty expenditures will be incurred evenly over
the four-year warranty period. All sales of this product are made near the beginning of
CSB’s fiscal year. CSB sold 4,800 warranties in Year 1, 5,000 in Year 2, 5,300 in Year 3, and
5,100 in Year 4. CSB spent $184,000 on services covered under warranties in Year 1,
$220,000 in Year 2, $244,000 in Year 3, and $286,000 in Year 4. What amount of
deferred warranty revenue should CSB report at the end of Year 4?
A. $816,000
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B. $1,236,000
C. $286,000
D. $808,000
Question 56
Kent, Inc.’s reconciliation between financial statement and taxable income for Year 2
follows:

Additional information:

The enacted tax rate was 34% for Year 1, and 40% for Year 2 and years thereafter. In its
December 31, Year 2, balance sheet, what amount should Kent report as deferred
income tax liability?
A. $3,600
B. $6,800
C. $7,340
D. $8,000
Question 57
The OJY Company sells a product for $4,500. Customers have the option of purchasing a
three-year warranty at the time of purchase for $240. OJY sold 2,000 units and 1,600
warranties in its first year of operations and 2,400 units and 1,800 warranties in its
second year of operations. OJY spent $80,000 on services covered under warranties in its
first year of operations and $240,000 in its second year of operations. What amount of
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deferred warranty revenue should OJY report at the end of Year 2 assuming it recognizes
warranty revenue on a straight-line basis?
A. $256,000
B. $272,000
C. $544,000
D. $416,000
Question 58
A firm has just signed a 10-year lease on a new machine.

• Fair value of the machine is $450,000.

• Lease payments are $55,000 per year, payable at the end of the year.
• The machine has an estimated salvage value of $15,000 at the end of the lease
term.
• The machine has an 11-year useful life.
• The firm's incremental borrowing cost is 9%.
This lease should be classified as:
A. Operating
B. Conventional
C. Unable to determine from information provided
D. finance
Question 59
A company uses the IFRS lower-of-cost-or-NRV rule to value its inventory of frozen foods.
The company applies this method on a total inventory basis, not directly to each item of
frozen food. Information on the frozen food inventory at December 31 of the year just
ended is provided below.

Using this approach, the company should value its inventory at

A. $80,000
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B. $85,000
C. $90,000
D. $100,000
Question 60
If a company recognizes total lease-related expense of $70,000 in the first year of an
operating lease, how much expense would it recognize in the second year of the lease,
assuming lease payments are the same each year?
A. $70,000
B. More than $70,000
C. Whether it is more or less than $70,000 depends of the lease details (for
example, lease term and the interest rate used.)
D. Less than $70,000