Unit 1: Financial Reporting Concepts

• Topic 01

  Conceptual Framework and Standard-Setting

  15 questions
• Topic 02

  Financial Statements

  15 questions
• Topic 03

  Notes to Financial Statements and Disclosures

  15 questions
• Topic 04

  Accounting Changes and Error Corrections

  15 questions
• Topic 05

  Earnings Per Share

  15 questions
• Topic 06

  Segment Reporting

  15 questions
• Topic 07

  Interim Financial Reporting

  15 questions
• Topic 08

  Revenue Recognition

  15 questions
• Topic 09

  Contract Assets, Contract Liabilities, and Contract Costs

  15 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. Evergreen Corp has convertible bonds outstanding for the full year. The bonds have a face value of $1,000,000, carry a 6% coupon, and convert to 80,000 common shares. The tax rate is 25%. Net income is $400,000 and weighted average common shares are 200,000. Basic EPS is $2.00. Should the convertible bonds be included in diluted EPS, and what is diluted EPS?

   • A
     Anti-dilutive; diluted EPS equals basic EPS of $2.00
   • B
     Dilutive; diluted EPS = $1.59
     Correct answer
   • C
     Dilutive; diluted EPS = $2.04
   • D
     Dilutive; diluted EPS = $1.86
   Explanation

   If-converted numerator adjustment: $1,000,000 × 6% × (1 − 0.25) = $45,000 added back. Adjusted numerator = $400,000 + $45,000 = $445,000. Adjusted denominator = 200,000 + 80,000 = 280,000. Diluted EPS = $445,000 ÷ 280,000 = $1.59 (rounded). Since $1.59 < $2.00 basic EPS, the bonds are dilutive and must be included in diluted EPS.

2. Boulder Corp modifies an existing contract by adding distinct additional goods at their standalone selling price. Under ASC 606, how is this modification treated?

   • A
     As a new, separate contract; the modification does not affect the accounting for the original contract
     Correct answer
   • B
     As a prospective modification that terminates the original contract and creates a new combined contract
   • C
     As a cumulative catch-up adjustment to the original contract's revenue recognised to date
   • D
     As a contract cost to be capitalised under ASC 340-40 because it relates to obtaining a renewed contract
   Explanation

   ASC 606-10-25-12: a contract modification is treated as a separate new contract if it adds distinct goods or services priced at their standalone selling price. In this case, the original contract continues under its original terms and the new goods are treated as a separate contract. If the new goods are not distinct or not at standalone price, the modification is treated as either a cumulative catch-up or a prospective adjustment depending on circumstances.

3. When an entity voluntarily changes an accounting principle, ASC 250 requires disclosure of which of the following?

   • A
     The specific vote count of the FASB board that approved the new principle
   • B
     A description of whether the change was applied retrospectively or prospectively and the justification for the method chosen
   • C
     The reason why the new principle is preferable to the old principle
     Correct answer
   • D
     A comparison of the new principle against each alternative GAAP method not chosen
   Explanation

   ASC 250-10-50 requires entities to disclose the nature of the change, why the new principle is preferable, and the effect on income from continuing operations, net income, and EPS. Management must justify the change on preferability grounds; the other choices are not required disclosures.