,1. Multiple Choice: What is the effect of a capital lease on a lessee's
balance sheet?
a) Increase in assets and liabilities
b) Decrease in equity
c) No effect
d) Decrease in assets
Correct Answer: a) Increase in assets and liabilities
Rationale: A capital lease is recorded as both an asset and a
liability on the balance sheet, reflecting the lessee's right to use the
asset and the obligation to make lease payments.
2. Fill-in-the-Blank: The equity method of accounting for
investments requires the investor to recognize their share of the
investee's _______.
Correct Answer: Income
Rationale: Under the equity method, the investor recognizes their
proportionate share of the earnings or losses of the investee in their
income statement.
3. True/False: The fair value option allows companies to revalue
financial assets and liabilities at each reporting date.
Correct Answer: True
, Rationale: The fair value option gives companies the choice to
measure eligible financial assets and liabilities at fair value, with
changes in fair value recognized in earnings.
4. Multiple Response: Which of the following are potential
indicators of impairment?
a) Significant decrease in market value
b) Adverse change in legal factors or in the business climate
c) Increase in market interest rates
d) Evidence of obsolescence or physical damage
Correct Answers: a), b), d)
Rationale: These are considered indicators of impairment as they
may signal that the carrying amount of the asset is not recoverable.
, Rationale: Vested benefits are the portion of benefits that the
employee is entitled to receive upon leaving the company,
regardless of whether they remain until retirement.
6. Fill-in-the-Blank: When a company changes its accounting
policy, it must apply the change _______.
Correct Answer: Retrospectively
Rationale: Accounting standards typically require that a change in
accounting policy be applied retrospectively, meaning that past
financial statements are adjusted as if the new policy had always
been in place.
7. True/False: The direct method of reporting cash flows from
operating activities is preferred under U.S. GAAP.
Correct Answer: False
Rationale: While the direct method is preferred, U.S. GAAP
allows both the direct and indirect methods for reporting cash flows
from operating activities.
8. Multiple Response: Which of the following are components of
Other Comprehensive Income (OCI)?
a) Foreign currency translation adjustments
b) Gains and losses from investment securities
c) Changes in the fair value of derivatives
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