CPA Exam – FAR QUESTIONS AND ANSWERS ALL CORRECT

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Cash Correct Answer: Money that is FREE and CLEAR and available to be spend in current operations. Not Cash: Correct Answer: Security deposits & bond sinking funds Three-Month Rule Correct Answe... r: Highly liquid securities with ORIGINAL maturity dates of three months or less are treated as cash. Bad Debts - Direct Write-Off Method Correct Answer: - No entry for bad debts until customer actually defaults. - At default, the cutomer's account is written off. - Theoretically weak, matching issue - Only allowed if bad debt expense is immaterial Bad Debts - Allowance Method Correct Answer: Income Statement Approach Balance Sheet Approach Income Statement Approach Correct Answer: - Matching Concept - Estimate of bad debt expense is based on the income statement - Allowance account balance has no bearing on the amount of adjustment Balance sheet reporting: Correct Answer: Accounts Receivable Less: Allowance for bad debts = Net realizable value of A/R Balance Sheet Approach Correct Answer: - Estimate of bad debt expense is based on the balance sheet - Period sales have no bearing on the amount of adjustment Written-off account later collected Correct Answer: Reverse write-off entry. Collect as usual. Assigning Accounts Receivable Correct Answer: - Assignment of A/R normally is done with recourse - Assignment usually is done without notification to customers Factoring Accounts Receivable Correct Answer: - With or without recourse. Pledging A/R Correct Answer: - Use receivables as security for a loan - Requires footnote disclosure Noninterest-Bearing Notes Correct Answer: APB 21 requires interest to be inputed - When a note is made under customary trade terms and is due in less than one year, there is no requirement to impute interest to that note. Investments Correct Answer: - Held-to-Maturity - Trading Securities - Available-for-Sale Securities [Show More]

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