Sample Questions
Question 1
Easy
Under ASC 606, an entity recognizes revenue from a contract with a customer when:
Solution
C is correct. ASC 606 (Step 5 of the five-step model) requires revenue to be recognized when (or as) the entity satisfies a performance obligation by transferring control of a promised good or service to the customer. Control transfer, not cash collection or billing, is the recognition trigger.
Question 2
Medium
Under U.S. GAAP, which of the following expenditures should be capitalized as an intangible asset rather than expensed as incurred?
Solution
C is correct. Under ASC 350 and ASC 730, internal research and development costs are generally expensed as incurred because the future economic benefits are too uncertain at that stage. However, legal fees incurred to register a patent (or to successfully defend it) represent costs to acquire and protect a specific legal right and are capitalized as part of the intangible asset's cost. These fees create a separately identifiable, controllable asset with a measurable cost.
Question 3
Hard
A company reports the following for the year: beginning inventory $50,000; purchases $200,000; ending inventory at cost $40,000 with a net realizable value of $35,000; sales $300,000; operating expenses $40,000; and an effective tax rate of 25%. Assuming the inventory write-down is recognized through cost of goods sold, what is net income?
Solution
D is correct. Cost of goods sold before write-down equals . The inventory write-down of is added to COGS, giving adjusted COGS of . Gross profit equals . Operating income equals . Net income equals .
