ACCT 3020 - CPA EXAM PREP UPDATED ACTUAL
QUESTIONS AND CORRECT ANSWERS
Question:
1. After many years of success, Kaputnik Co. recorded net operating losses for the years year 13 through
year 16, totaling $250 million, resulting in the recording of large deferred tax assets based on the
assumption of a rapid return to profitability. However, attempts by management to revamp its outmoded
business model have so far failed. A radical final attempt to save the company will be implemented in year
18. It will entail selling off the vast majority of Kaputnik's asset groups while maintaining a small but
promising segment. The projected outlook for the near term is a modest net profit of $5 million over the
next three years, beyond which it is impossible to determine if Kaputnik Co. will even still be in existence.
The enacted tax rate has been 35% for the last several years and is expected to be 21% in year 17 and
future years. No addition to the deferred tax asset balance will be recorded for year 17, during which
Kaputnik recorded a $70 million net operating loss, nor has Kaputnik ever recorded a deferred tax asset
valuation allowance. Given these facts, what amount should Kaputnik record as Valuation allowance -
deferred tax asset as part of its year 17 year-end adjusting entries?
Answer:
86,450,000
250 million x 0.35 - tax rate equals = 87,500,000
5 million x 0.21 equals = 1,050,000
87,500,000
-1,050,000 equals = 86,450,000
Question:
2. Which of the following statements is true regarding the financial statement presentation of long-term
debt?
Answer:
Both the investor and the issuer of long-term debt report the associated interest received or paid as an
operating activity in the statement of cash flows.
Question:
3. During year 8, Alpha Co. purchased debt securities classified as trading securities. At the end of year 8,
the market value of Alpha's investment in debt securities exceeded the amortized cost. Alpha should report
the debt securities on its year 8 balance sheet at
Answer:
Market value
Question:
4. At year end, Mayce Co. held debt investments with the intent of selling them in the near term. The
investments consisted of $300,000, 9%, seven-year bonds, purchased for $278,000. Mayce also held an
investment in equity securities purchased for $75,000. At year end, the bonds were selling on the open
market for $320,000 and the equity securities had a market value of $90,000. What amount should Mayce
report for these investments in its year-end balance sheet?
Answer:
410,000
320,000 + 90,000 = 410,000
, Question:
5. Caradonna Company has 100,000 shares of $5 par common stock issued and outstanding as of January
1, year 8. The shares were originally issued for $22 per share. On February 3, year 8, Caradonna
repurchased 5,000 shares at $19 per share for the purposes of retiring them. On April 10, year 8,
Caradonna repurchased an additional 2,000 shares at $25 per share. No other transactions involving
common stock occurred during the year. What will be the balance in additional paid in capital from retired
stock as a result of those transactions?
Answer:
$9,000
5,000 x 3 = 15,000 2,000 x 3 = 6,000 15,000 - 6,000 = 9,000
Question:
6. Under IFRS, which of the following is not reported for a publicly traded entity, when applicable?
Answer:
Per share amounts for extraordinary items
Question:
7. OK Co. uses the equity method to account for its January 1, year 8 purchase of FDL Inc.'s common
stock. On January 1, year 8, the fair values of FDL's FIFO inventory and plant exceeded their carrying
amounts. How do these excesses of fair values over carrying amounts affect OK's reported portion of
FDL's year 8 earnings? Inventory excessPlant excess
a. Decrease Decrease
b. Decrease No effect
c. Increase Increase
d. Increase No effect
Answer:
Option A
Question:
8. Endymion Co. is preparing the electronic spreadsheet below, to amortize the discount on its 10-year,
4%, $500,000 bonds payable. Bonds were issued on December 31 to yield 6%. Interest is paid annually.
Endymion uses the effective interest method to amortize bond discounts. Which formula should Endymion
use in cell G2 to calculate the bonds' carrying amount at the end of Year 1?
Answer:
B2+F2
Question:
9. On January 1, year 9, Blue Co. leased a new machine from Green Co. The following information
pertains to the lease:
Lease term 5yearsAnnual rental payable at beginning of each year$55,000 Useful life of machine 7years
Blue's incremental borrowing rate 12% Implicit interest rate in lease (known by Blue) 10% Present value
of annuity of $1 in advance for 5 periods at 10% 4.17 12% 4.04
There is no bargain purchase option but title transfers to Blue Co. at the end of the lease. The cost of the
machine on Green's accounting records is $294,500. At the beginning of the lease term, Blue Co. should
record a lease liability of
QUESTIONS AND CORRECT ANSWERS
Question:
1. After many years of success, Kaputnik Co. recorded net operating losses for the years year 13 through
year 16, totaling $250 million, resulting in the recording of large deferred tax assets based on the
assumption of a rapid return to profitability. However, attempts by management to revamp its outmoded
business model have so far failed. A radical final attempt to save the company will be implemented in year
18. It will entail selling off the vast majority of Kaputnik's asset groups while maintaining a small but
promising segment. The projected outlook for the near term is a modest net profit of $5 million over the
next three years, beyond which it is impossible to determine if Kaputnik Co. will even still be in existence.
The enacted tax rate has been 35% for the last several years and is expected to be 21% in year 17 and
future years. No addition to the deferred tax asset balance will be recorded for year 17, during which
Kaputnik recorded a $70 million net operating loss, nor has Kaputnik ever recorded a deferred tax asset
valuation allowance. Given these facts, what amount should Kaputnik record as Valuation allowance -
deferred tax asset as part of its year 17 year-end adjusting entries?
Answer:
86,450,000
250 million x 0.35 - tax rate equals = 87,500,000
5 million x 0.21 equals = 1,050,000
87,500,000
-1,050,000 equals = 86,450,000
Question:
2. Which of the following statements is true regarding the financial statement presentation of long-term
debt?
Answer:
Both the investor and the issuer of long-term debt report the associated interest received or paid as an
operating activity in the statement of cash flows.
Question:
3. During year 8, Alpha Co. purchased debt securities classified as trading securities. At the end of year 8,
the market value of Alpha's investment in debt securities exceeded the amortized cost. Alpha should report
the debt securities on its year 8 balance sheet at
Answer:
Market value
Question:
4. At year end, Mayce Co. held debt investments with the intent of selling them in the near term. The
investments consisted of $300,000, 9%, seven-year bonds, purchased for $278,000. Mayce also held an
investment in equity securities purchased for $75,000. At year end, the bonds were selling on the open
market for $320,000 and the equity securities had a market value of $90,000. What amount should Mayce
report for these investments in its year-end balance sheet?
Answer:
410,000
320,000 + 90,000 = 410,000
, Question:
5. Caradonna Company has 100,000 shares of $5 par common stock issued and outstanding as of January
1, year 8. The shares were originally issued for $22 per share. On February 3, year 8, Caradonna
repurchased 5,000 shares at $19 per share for the purposes of retiring them. On April 10, year 8,
Caradonna repurchased an additional 2,000 shares at $25 per share. No other transactions involving
common stock occurred during the year. What will be the balance in additional paid in capital from retired
stock as a result of those transactions?
Answer:
$9,000
5,000 x 3 = 15,000 2,000 x 3 = 6,000 15,000 - 6,000 = 9,000
Question:
6. Under IFRS, which of the following is not reported for a publicly traded entity, when applicable?
Answer:
Per share amounts for extraordinary items
Question:
7. OK Co. uses the equity method to account for its January 1, year 8 purchase of FDL Inc.'s common
stock. On January 1, year 8, the fair values of FDL's FIFO inventory and plant exceeded their carrying
amounts. How do these excesses of fair values over carrying amounts affect OK's reported portion of
FDL's year 8 earnings? Inventory excessPlant excess
a. Decrease Decrease
b. Decrease No effect
c. Increase Increase
d. Increase No effect
Answer:
Option A
Question:
8. Endymion Co. is preparing the electronic spreadsheet below, to amortize the discount on its 10-year,
4%, $500,000 bonds payable. Bonds were issued on December 31 to yield 6%. Interest is paid annually.
Endymion uses the effective interest method to amortize bond discounts. Which formula should Endymion
use in cell G2 to calculate the bonds' carrying amount at the end of Year 1?
Answer:
B2+F2
Question:
9. On January 1, year 9, Blue Co. leased a new machine from Green Co. The following information
pertains to the lease:
Lease term 5yearsAnnual rental payable at beginning of each year$55,000 Useful life of machine 7years
Blue's incremental borrowing rate 12% Implicit interest rate in lease (known by Blue) 10% Present value
of annuity of $1 in advance for 5 periods at 10% 4.17 12% 4.04
There is no bargain purchase option but title transfers to Blue Co. at the end of the lease. The cost of the
machine on Green's accounting records is $294,500. At the beginning of the lease term, Blue Co. should
record a lease liability of
