1. Which of the following best describes accounting principles in general?

They state that the financial transactions are recorded in the accounting period in
which they occur regardless of whether cash has been exchanged.
They specify how transactions and other business events should be recognized,
measured, presented, and disclosed in financial statements.
They outline the fundamental rules and concepts and establish the framework on
which detailed accounting standards are based.
They provide useful financial information about a business’ resources which allows
users to make informed decisions.
2. A sound accounting framework allows for all of the following benefits except:

Increased reliability and relevance of financial statements

Uniform comparisons between companies
Consistency in financial reporting across industries
Identical items being reported on the financial statements of different companies
3. Match the correct description to each of the accounting principles.

Conservatism Principle
A

Historical Cost Principle

D

Objectivity Principle
B

Economic Entity Principle

C

Matching Principle

A. It states that assets and liabilities are recorded on the financial statements at the cost at
which they were acquired or assumed.
B. It states that transactions carried out by a business are separated from those conducted
by its owner.
C. It states that the expenses of a business should be recorded in the periods in which the
corresponding revenues are earned.
D. It states that financial statements must be free from bias and based on verifiable
evidence.
E. It provides guidance on how to record transactions when there is uncertainty.

4. On March 1st, Mr. Smithe signed up for a fitness program at Fit Co. and paid $960 for
the entire program upfront. The program includes a total of 12 sessions and two
sessions are delivered each month. How much revenue from Mr. Smithe should Fit Co.
recognize at the end of March?

$960
$480
$160
$80
5. Which of the following characteristics does not enhance the usefulness of financial
information?

Relevance
Comparability
Verifiability
Timeliness
6. Identify the statement that is most accurate.
Review Later
International Financial Reporting Standards (IFRS) are adopted by the majority of
the companies in the United States.
Financial information that has confirmatory value provides feedback that either
confirms or changes previous evaluations.
Financial information is considered a faithful representation if it is complete, timely,
and error-free.
Understandability of financial information refers to the extent to which similar
conclusions can be drawn by independent observers given the same information.
7. Which of the following is not a correct description of how an operating lease is
recognized on the financial statements?

The amortization expense of the right-of-use asset and the interest expense on the
lease liability are recorded as a single item called lease expense on the income
statement.
A lease liability is recognized on the balance sheet and represents the present value
of all remaining lease payments.
The interest expense is calculated based on the outstanding lease liability balance.
The amortization expense of the right-of-use asset is calculated using the straight-
line depreciation method over the lease term.
8. Company Inc. enters into a 10-year finance lease at the beginning of 2021 for a total
of $250,000. The annual lease payment is $25,000 (payable at the end of each year)
and the rate implicit in the lease is 5%. No initial direct costs are incurred. How much
interest expense should be recognized in 2021?

$9,652
 $8,871
$8,034
$9,930
Explanation
Lease liability = PV of 10-year annuity with payments of $25,000 = $193,043

Interest expense = $193,043 x 5% = $9,652

9. Which of the following statements about income taxes is not correct?

Deferred taxes arise because of temporary differences between the tax base and the
carrying amount of assets and liabilities on the balance sheet.
Deductible temporary differences give rise to deferred tax liabilities, meaning that
more tax is payable in the future.
Income taxes are based on taxable income and not accounting income.
Income tax expense includes both the amount of tax payable in the current period
and the amount of tax due in future periods.
10. Match the appropriate items to each type of temporary differences.
Review Later
B

Generally arise when there are differences that result in current accounting income
being greater than taxable income
A

Give rise to deferred tax assets

A

Generally arise when the tax base of the assets is greater than the carrying amount
B

Arise when the tax base of the liabilities is greater than the carrying amount
A

Arise when the carrying amount of the liabilities is greater than the tax base
B

Give rise to deferred tax liabilities

A. Deductible Temporary Differences
B. Taxable Temporary Differences

11. Calculate the deferred tax liability given the following items incurred in 2020 by
Company B. Bonuses are tax deductible only in the year in which they are paid.

Accounting Income $86,000

Depreciation Expense $6,500
Tax Depreciation $4,000
Income Not Recognized in $4,700
The Current Period For Tax
Purposes
2019 Bonus Paid in 2020 $2,630
Accrued Bonuses in 2020 $3,500
Tax Rate 28%

Review Later
$350
$372
$425
$394
Explanation
To determine taxable income:

1.       Add back items that are not deductible for tax purposes but are for accounting
purposes (accounting depreciation, accrued bonuses not paid in the current year)

2.       Deduct items that are deductible for tax purposes but are not for accounting
purposes (tax depreciation, 2019 bonus paid in 2020)

3.       Deduct income recognized for accounting purposes but not for tax purposes in the
current period 

Taxable Income = $86,000 + $6,500 + $3500 - $4,000 - $2,630 - $4,700 = $84,670

Taxable Temporary Difference = Accounting Income – Taxable Income = $86,000 -

$84,670 = $1,330. It is a taxable temporary difference as accounting income > taxable
income

Deferred Tax Liability = $1,330 x 28% = $372

12. Company Co. has 1,000 employees and it decides to grant each of the employees
200 share options as part of its new rewards plan. The options are exercisable over 5
years and subject only to the condition that the company’s stock price must be at least
30% higher than its original issue price. Company Co.’s share-based payments are
subject to:
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Non-vesting condition
Non-market performance conditions
Service and market performance conditions
Service condition
13. Company A has 800 employees, and it decides to grant each of the employees 50
share options as part of its new rewards plan. The options are exercisable over 5 years
and subject to a 3-year service condition. The fair value of each option at the grant date
is $16. The company estimates that 80% of its employees will meet the service
condition required for receiving the options. Calculate the total share-based payment
expense for Company A assuming that 80% of the employees actually meet the service
condition.

$170,667
$853,333
$512,000
$341,333
14. Which of the following is not a required criterion for a transaction to be considered a
business combination?

Presence of outputs
Presence of inputs
Presence of a substantive process
Less than 90% of the value acquired is in a single asset of group of similar assets

15. Which of the following statements regarding the accounting for business combinations is
false?

The identifiable assets acquired, liabilities assumed, and noncontrolling interest in the
acquiree are recognized separately from the goodwill arising out of a business combination.
Under the acquisition method, the identifiable assets acquired during a business combination
are measured at their acquisition-date fair values.
Goodwill is the difference between the consideration transferred by the acquirer to the
acquiree and the fair value of identifiable assets acquired.
The acquirer in a business combination will only recognize the liabilities assumed if they
meet the definition of liabilities and are part of the business combination transaction.
16. Debt issuance costs are:
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Recognized initially as a current liability on the balance sheet
Expensed on the income statement when the transaction occurs
Accounted for as a deduction from the equity balance on the balance sheet
Amortized over the term of the related debt liability