BU.920.602
Accounting Foundations
Final Exam Review
(With Solutions)
2025
1
,1. A multinational corporation enters into a contract that includes a
volume rebate clause. Under ASC 606, which approach should the entity
use to allocate the transaction price?
A. Exclude variable consideration from the transaction price until
realized
B. Include the estimated rebate in variable consideration if it is
probable that a significant reversal will not occur
C. Recognize the full rebate amount as a separate performance
obligation
D. Defer all revenue until the rebate period ends
Correct ANS: B. Include the estimated rebate in variable consideration if
it is probable that a significant reversal will not occur
Rationale: ASC 606 requires entities to estimate variable consideration
at contract inception if it is probable that a significant reversal will not
happen, using either the expected value or most likely amount method.
2. A company revises the useful life of manufacturing equipment from 10
to 15 years prospectively. What is the effect on depreciation expense in
the current and future periods?
A. No change; prior depreciation is restated
B. Increase in current expense only
C. Decrease in current and future expense
D. Decrease in current expense, then return to original levels
Correct ANS: C. Decrease in current and future expense
Rationale: A change in accounting estimate, such as useful life, is
applied prospectively, reducing the remaining annual depreciation
expense based on the new estimate.
2
, 3. Under IFRS 16, a lessee recognizes a right-of-use asset and lease
liability on the balance sheet. Which costs form part of the initial
measurement of the right-of-use asset?
A. Lease payments during the lease term only
B. Lease liability plus initial direct costs and estimated restoration cost
C. Present value of lease payments plus lease liability interest
D. Operating lease expense recognized on a straight-line basis
Correct ANS: B. Lease liability plus initial direct costs and estimated
restoration cost
Rationale: IFRS 16 requires the right-of-use asset to include the initial
lease liability, any lease payments made at or before commencement,
initial direct costs, and restoration obligations.
4. A retailer using LIFO reports an inventory liquidation that releases
older, lower-cost layers. What is the typical impact on cost of goods sold
(COGS) and net income in an inflationary environment?
A. COGS increases, net income decreases
B. COGS decreases, net income increases
C. COGS remains unchanged, net income stable
D. COGS decreases, net income decreases
Correct ANS: B. COGS decreases, net income increases
Rationale: Liquidating lower-cost LIFO layers reduces COGS below
replacement cost, artificially boosting current period net income.
5. During goodwill impairment testing, a reporting unit’s fair value
declines below its carrying amount. Which step does IFRS 3 require next?
A. Recognize an impairment loss equal to carrying amount minus
recoverable amount
B. Calculate recoverable amount as higher of fair value less costs to sell
and value in use
C. Reverse any previously recognized impairment losses
3
Accounting Foundations
Final Exam Review
(With Solutions)
2025
1
,1. A multinational corporation enters into a contract that includes a
volume rebate clause. Under ASC 606, which approach should the entity
use to allocate the transaction price?
A. Exclude variable consideration from the transaction price until
realized
B. Include the estimated rebate in variable consideration if it is
probable that a significant reversal will not occur
C. Recognize the full rebate amount as a separate performance
obligation
D. Defer all revenue until the rebate period ends
Correct ANS: B. Include the estimated rebate in variable consideration if
it is probable that a significant reversal will not occur
Rationale: ASC 606 requires entities to estimate variable consideration
at contract inception if it is probable that a significant reversal will not
happen, using either the expected value or most likely amount method.
2. A company revises the useful life of manufacturing equipment from 10
to 15 years prospectively. What is the effect on depreciation expense in
the current and future periods?
A. No change; prior depreciation is restated
B. Increase in current expense only
C. Decrease in current and future expense
D. Decrease in current expense, then return to original levels
Correct ANS: C. Decrease in current and future expense
Rationale: A change in accounting estimate, such as useful life, is
applied prospectively, reducing the remaining annual depreciation
expense based on the new estimate.
2
, 3. Under IFRS 16, a lessee recognizes a right-of-use asset and lease
liability on the balance sheet. Which costs form part of the initial
measurement of the right-of-use asset?
A. Lease payments during the lease term only
B. Lease liability plus initial direct costs and estimated restoration cost
C. Present value of lease payments plus lease liability interest
D. Operating lease expense recognized on a straight-line basis
Correct ANS: B. Lease liability plus initial direct costs and estimated
restoration cost
Rationale: IFRS 16 requires the right-of-use asset to include the initial
lease liability, any lease payments made at or before commencement,
initial direct costs, and restoration obligations.
4. A retailer using LIFO reports an inventory liquidation that releases
older, lower-cost layers. What is the typical impact on cost of goods sold
(COGS) and net income in an inflationary environment?
A. COGS increases, net income decreases
B. COGS decreases, net income increases
C. COGS remains unchanged, net income stable
D. COGS decreases, net income decreases
Correct ANS: B. COGS decreases, net income increases
Rationale: Liquidating lower-cost LIFO layers reduces COGS below
replacement cost, artificially boosting current period net income.
5. During goodwill impairment testing, a reporting unit’s fair value
declines below its carrying amount. Which step does IFRS 3 require next?
A. Recognize an impairment loss equal to carrying amount minus
recoverable amount
B. Calculate recoverable amount as higher of fair value less costs to sell
and value in use
C. Reverse any previously recognized impairment losses
3
