Recognition & measurement — CPA FAR practice questions

Under U.S. GAAP (post-ASU 2017-04), goodwill impairment is measured as:

1. Reporting unit fair value minus its carrying amount, capped at goodwill
2. Reporting unit fair value minus fair value of identifiable net assets
3. Reporting unit carrying amount minus its fair value, capped at goodwill
4. The full carrying amount of goodwill regardless of reporting unit value

Answer: C — Reporting unit carrying amount minus its fair value, capped at goodwill

A) That reverses the direction. B) That is a business combination measurement. C) Correct - carrying > FV drives loss, limited to goodwill balance. D) Loss is limited to goodwill amount.

Under ASC 606, a performance obligation is satisfied over time when:

1. Cash is collected periodically from the customer under the contract
2. The customer simultaneously receives and consumes the benefits
3. The entity elects to spread recognition evenly across the periods
4. The contract price exceeds a GAAP-specified materiality threshold

Answer: B — The customer simultaneously receives and consumes the benefits

B) Correct - this is one of the three over-time criteria, alongside creating or enhancing a customer-controlled asset and having no alternative use plus an enforceable right to payment. A) Payment timing does not drive recognition. C) The pattern follows transfer of control, not election. D) No such threshold exists.

Under ASU 2017-04, the goodwill impairment loss for a reporting unit is measured as:

1. The excess of carrying amount over fair value, capped at goodwill
2. The excess of fair value over carrying amount, capped at goodwill
3. The full carrying amount of goodwill regardless of reporting unit FV
4. The estimated fair value of goodwill using a residual allocation

Answer: A — The excess of carrying amount over fair value, capped at goodwill

A) Correct - single-step measurement, capped at goodwill balance. B) That reverses the direction. C) Loss is capped at goodwill. D) That was pre-ASU 2017-04 step-2.

A company recognizes $500,000 of revenue for financial reporting purposes in the current year under ASC 606 for a performance obligation satisfied over time, but for tax purposes, the corresponding income is not taxable until a later year, creating a $500,000 taxable temporary difference. Net income after tax effects is $800,000, and the company has 200,000 weighted-average common shares outstanding with no potentially dilutive securities. Which set of effects is MOST accurate?

1. No effect until the related cash is collected from the customer in a later reporting period
2. A deferred tax asset is recorded, and basic EPS is computed on pretax rather than net income
3. The difference affects only the statement of cash flows, not the income statement or EPS
4. A deferred tax liability is recorded, and basic EPS is $4.00 ($800,000 / 200,000 shares)

Answer: D — A deferred tax liability is recorded, and basic EPS is $4.00 ($800,000 / 200,000 shares)

A) the temporary difference is recognized immediately through deferred tax accounting under ASC 740, not deferred until cash collection. B) since book income exceeds taxable income in the current year (revenue recognized for books but not yet taxable), this creates a deferred tax liability, not a deferred tax asset, and EPS is based on net income, not pretax income. C) the temporary difference affects the income statement (through the split between current and deferred tax expense) and the balance sheet (DTL), not merely cash flow presentation. D) correct - recognizing revenue for books before it's taxable creates a DTL; current tax expense is lower than the book-basis tax expense would suggest, with deferred tax expense filling the gap, and EPS is simply net income divided by weighted-average shares ($800,000 / 200,000 = $4.00), since net income already reflects total (current + deferred) tax expense.

A licensor grants a customer a license to use its brand name (a symbolic IP license) for five years, and the licensor continues to actively support and enhance the brand's value throughout that period in ways the customer is exposed to. Revenue from this license is recognized:

1. Over the five-year term, as a right-to-access license affected by the licensor's ongoing activities
2. Entirely at inception, treating the brand license as functional IP transferred at a point in time
3. Only in the periods the customer actually displays the brand name in its marketing materials
4. Ratably over the customer's own fiscal reporting periods rather than over the stated license term

Answer: A — Over the five-year term, as a right-to-access license affected by the licensor's ongoing activities

A) correct - symbolic IP whose value is significantly affected by the licensor's continuing activities (brand maintenance, promotion) that the customer is exposed to is a right-to-access license, recognized over the license term. B) brand names are the classic example of symbolic (not functional) IP, so treating it as always point-in-time functional IP misclassifies the license type. C) usage-based recognition tied to whether the customer physically displays the brand is not how ASC 606's IP licensing model works absent a sales/usage-based royalty arrangement. D) recognition follows the license term under the applicable model, not an arbitrary alignment to the customer's own fiscal periods.

The SEC has historically scrutinized bill-and-hold revenue recognition primarily because:

1. U.S. GAAP prohibits recognizing revenue on bill-and-hold sales in all circumstances
2. Bill-and-hold sales are transacted with related parties whose terms lack substance
3. Revenue is recognized before the customer takes physical control of the goods
4. GAAP conditions the sale on full cash collection before any revenue is recorded

Answer: C — Revenue is recognized before the customer takes physical control of the goods

C) correct - separating the revenue event from delivery removes the most visible evidence that a sale occurred, which is why the criteria are applied strictly. A) The arrangements are permitted when the criteria are met. B) Related parties are not inherent to the structure. D) Collection in full has never been a condition for recording the sale.

A manufacturer sells equipment with a standard one-year warranty covering defects, included in the sales price with no option to purchase separately. Under ASC 460, this warranty is accounted for as:

1. An assurance-type warranty, accrued as a liability and expense at the time of sale
2. A separate performance obligation under ASC 606, with revenue deferred over the warranty period
3. A contingent gain, recognized only when a warranty claim is actually filed by a customer
4. An extended warranty, amortized straight-line over the equipment's total estimated useful life

Answer: A — An assurance-type warranty, accrued as a liability and expense at the time of sale

A) correct - a standard warranty that only assures the product meets agreed-upon specifications is assurance-type, accounted for as a cost accrual under ASC 460, not revenue deferral. B) Treating it as a separate performance obligation applies to service-type warranties providing a service beyond mere assurance, not this scenario. C) Contingent gains are never recognized before realization; this is a cost contingency, not a gain. D) An extended warranty is, by definition, a separately priced add-on, which isn't the case here.

Continuing (royalty) fees a franchisor earns based on a percentage of the franchisee's monthly sales are recognized:

1. Upfront with the initial fee, as one combined performance obligation for the license
2. Ratably over the franchise term, ignoring the franchisee's actual monthly sales
3. As the franchisee's underlying sales occur, under the sales-based royalty exception
4. At the end of the agreement, when cumulative royalties become fixed and determinable

Answer: C — As the franchisee's underlying sales occur, under the sales-based royalty exception

C) correct - royalties based on sales of a licensed IP are recognized at the later of the underlying sale occurring and satisfaction of the related obligation. A) The royalty exception keeps sales-based amounts out of the upfront allocation. B) Straight-line recognition would report royalty revenue in periods with no qualifying sales. D) The amount for each period is determinable as those sales occur.

Under current U.S. federal tax law as amended by the Tax Cuts and Jobs Act (as later modified), a net operating loss (NOL) arising in a post-2017 tax year generally may be:

1. Carried forward indefinitely, capped at 80% of taxable income, with no carryback allowed
2. Carried back two years and forward twenty years, offsetting 100% of taxable income when used
3. Carried forward ten years, after which any unused portion expires and is written off entirely
4. Used only to offset capital gains, and never ordinary taxable income, in any carryforward year

Answer: A — Carried forward indefinitely, capped at 80% of taxable income, with no carryback allowed

A) correct - post-2017 NOLs generally carry forward indefinitely but are capped at 80% of taxable income in the year used (before the NOL deduction), and, absent a specific carryback allowance for the taxpayer's situation, cannot be carried back. B) the two-year-back/twenty-year-forward, 100%-offset regime describes the older pre-TCJA rules for NOLs, not the current post-2017 general rule. C) there is no ten-year expiration under current law - post-2017 NOLs carry forward indefinitely, subject to the 80% limitation. D) NOLs offset ordinary taxable income, not merely capital gains; that restriction does not describe how NOLs function.

Under ASC 210, a liability is classified as current if expected to be settled within:

1. One year, regardless of the entity's operating cycle length
2. One year or the entity's operating cycle, whichever is longer
3. The entity's operating cycle only, regardless of the calendar time
4. Six months from the balance sheet date under all circumstances

Answer: B — One year or the entity's operating cycle, whichever is longer

A) That ignores the operating cycle. B) Correct - the longer of one year or the operating cycle. C) The one-year threshold also applies. D) Six months is not the GAAP threshold.

Exit/disposal costs scoped OUT of ASC 420?

Costs incurred in connection with a business combination — accounted for under ASC 805 instead.

Environmental remediation liability measurement basis?

Generally undiscounted, unless the amount and timing of payments are fixed or reliably determinable.

How does a cumulative loss position affect the valuation allowance analysis?

It's significant negative evidence that is difficult to overcome, generally requiring strong objectively verifiable positive evidence (e.g., feasible tax-planning strategies) to avoid a full allowance.

Internal-use software?

Capitalize during application development stage. Preliminary and post-implementation expensed.