Practice Financial Accounting & Reporting (FAR) questions for the Certified Public Accountant Exam. Every question includes a full explanation of why the correct answer is right and why the tempting distractors are wrong.
10 example questions with full explanations. Use the interactive practice above to work through the complete set.
Question 1medium
Kellerman Co. has a temporary difference at December 31, Year 2: the book value of a depreciable asset exceeds its tax basis by $80,000 because straight-line depreciation is used for books while MACRS accelerated depreciation is used for taxes. The enacted tax rate is 25% for Year 2 and all future years. During Year 2, Congress passed legislation changing the future tax rate to 30%, effective January 1, Year 3. What deferred tax liability should Kellerman report on its December 31, Year 2, balance sheet related to this difference?
- A.$24,000✓
- B.$20,000
- C.$4,000
- D.$16,000
Correct answer: A
Under ASC 740, deferred tax assets and liabilities are measured using the enacted tax rate expected to apply when the temporary difference reverses. Because Congress enacted a 30% rate for future years before December 31, Year 2, the deferred tax liability = $80,000 × 30% = $24,000. OptionA($20,000) incorrectly uses the current Year 2 rate of 25%. Option C ($4,000) represents only the incremental adjustment from 25% to 30% applied to $80,000, not the full DTL. Option D ($16,000) has no logical basis and may reflect a misapplication of a blended rate.
Question 2medium
Marigold Inc. enters into a contract to sell a software license and one year of customer support for a total contract price of $120,000. Marigold determines these are two separate performance obligations. The standalone selling price of the software license is $100,000, and the standalone selling price of the support is $25,000 (total SSP = $125,000). The software license is transferred at contract inception; support is provided evenly over 12 months. How much revenue should Marigold recognize at contract inception (license transfer)?
- A.$120,000
- B.$96,000✓
- C.$100,000
- D.$95,000
Correct answer: B
Under ASC 606, the transaction price is allocated to each performance obligation based on relative standalone selling prices. The license's allocation = $120,000 × ($100,000 / $125,000) = $96,000. The support's allocation = $120,000 × ($25,000 / $125,000) = $24,000. At inception, only the license obligation is satisfied, so $96,000 is recognized. Option A ($120,000) incorrectly recognizes the entire contract price at inception. OptionB($100,000) uses the standalone selling price of the license rather than the allocated portion of the transaction price. Option D ($95,000) is a plausible arithmetic error that does not reflect the correct allocation formula.
Question 3medium
Foxdale Corp. acquires a patent for $120,000 with a remaining legal life of 20 years and an estimated useful life of 8 years. Foxdale also acquires goodwill of $500,000 in the same transaction. Both intangible assets are properly recorded. At year-end, Foxdale should amortize the patent over 8 years and test goodwill for impairment annually rather than amortizing it.
Correct answer: A
Under U.S. GAAP, finite-life intangible assets such as patents are amortized over the shorter of their legal life or useful life. Because the patent's estimated useful life (8 years) is shorter than its legal life (20 years), Foxdale should amortize it over 8 years. Goodwill, on the other hand, is considered an indefinite-life intangible asset under ASC 350 and is not amortized; instead, it is subject to an annual impairment test (or more frequently if triggering events exist). Both treatments described in the statement are correct, making the statement True.
Question 4medium
Brightwell Inc. holds an investment in 25% of the voting common stock of Tartan Co. During the year, Tartan reports net income of $200,000 and pays cash dividends of $60,000. Under the equity method, Brightwell should recognize $50,000 of investment income and reduce its investment account by $15,000 when dividends are received.
Correct answer: A
Under the equity method (ASC 323), an investor with significant influence (generally 20–50% ownership) recognizes its proportionate share of the investee's net income as investment income. Brightwell's share is 25% × $200,000 = $50,000, which increases the investment account. When dividends are received, they reduce the investment account rather than being recognized as income; Brightwell's share of dividends is 25% × $60,000 = $15,000. Therefore, Brightwell recognizes $50,000 of equity income and reduces the investment account by $15,000 upon receipt of dividends — both amounts stated in the question are correct, making the statement True.
Question 5medium
Meridian Co. has a defined benefit pension plan. At year-end, the projected benefit obligation (PBO) is $950,000 and the fair value of plan assets is $800,000. Meridian should report a pension liability of $150,000 on its balance sheet, and any unrecognized actuarial gains or losses are recorded in other comprehensive income (OCI) rather than immediately in net income.
Correct answer: A
Under ASC 715, a company must recognize the funded status of its defined benefit pension plan on the balance sheet. When the PBO exceeds the fair value of plan assets, the plan is underfunded and a net pension liability is reported. Here, $950,000 − $800,000 = $150,000 liability. Additionally, under ASC 715, actuarial gains and losses that are not immediately recognized in net income are recorded in accumulated other comprehensive income (AOCI) and amortized into net periodic pension cost over future periods using the corridor method or faster recognition. Both elements of the statement are correct under U.S. GAAP, making the statement True.
Question 6medium
Westfield Corp. has the following stockholders' equity transactions during Year 2: (1) Issued 5,000 shares of $2 par value common stock at $18 per share; (2) Repurchased 1,000 shares of its own common stock at $20 per share using the cost method; (3) Reissued 400 shares of treasury stock at $23 per share. After these three transactions, what is the balance in the Additional Paid-In Capital (APIC) account, assuming APIC had a beginning balance of $200,000 and no other transactions occurred?
- A.$279,200
- B.$282,000
- C.$281,200✓
- D.$278,000
Correct answer: C
Transaction 1 — stock issuance: Proceeds = 5,000 × $18 = $90,000; par value credited = 5,000 × $2 = $10,000; APIC credit = $90,000 − $10,000 = $80,000. Transaction 2 — treasury stock repurchase at cost: Under the cost method, the entire repurchase price is debited to Treasury Stock; APIC is NOT affected by the repurchase. Transaction 3 — reissue of treasury stock at $23 above cost of $20: APIC from treasury stock = 400 shares × ($23 − $20) = 400 × $3 = $1,200 credit to APIC. Total APIC = $200,000 + $80,000 + $1,200 = $281,200. Choice A ($279,200) incorrectly credits APIC for only $79,200 from the issuance (perhaps miscalculating par). Choice B ($282,000) ignores par value and credits all $90,000 to APIC. Choice D ($278,000) may reflect debiting APIC for the treasury stock repurchase, which is incorrect under the cost method.
Question 7medium
Hartwell Corp. is preparing its statement of cash flows using the indirect method for the year ended December 31. The following information is available: net income was $180,000; depreciation expense was $25,000; accounts receivable increased by $12,000; inventory decreased by $8,000; accounts payable decreased by $5,000; the company sold equipment with a book value of $30,000 for $38,000; and the company paid $50,000 to purchase new machinery. Select all that apply regarding the correct treatment of these items on the statement of cash flows.
- A.The $25,000 depreciation expense is added back to net income in the operating activities section.✓
- B.The $12,000 increase in accounts receivable is added to net income in the operating activities section.
- C.The $8,000 decrease in inventory is added to net income in the operating activities section.✓
- D.The $38,000 proceeds from the sale of equipment are reported as an investing cash inflow.✓
- E.The $8,000 gain on the sale of equipment is added to net income in the operating activities section.
Correct answer: A, C, D
Under the indirect method, non-cash charges like depreciation are added back to net income (A is correct). A decrease in inventory means less cash was used for purchases than expensed, so it is added back to net income (C is correct). The full $38,000 proceeds from the equipment sale are an investing cash inflow (D is correct). An increase in accounts receivable means cash collected was less than revenue recognized, so it must be subtracted from net income — not added — making B incorrect. The $8,000 gain on the sale ($38,000 proceeds minus $30,000 book value) is subtracted from net income in operating activities (not added) because the full proceeds are already captured in investing activities; adding the gain would double-count it, making E incorrect.
Question 8medium
Meridian Co. has the following items to classify on its December 31 balance sheet: (1) a $200,000 note payable due in 18 months, (2) $15,000 of accrued wages payable, (3) a $90,000 bond payable due in 8 months that Meridian intends and has the ability to refinance on a long-term basis — a refinancing agreement was signed with the lender on January 15 of the following year before the financial statements were issued, (4) a $40,000 deferred revenue balance expected to be earned within the next 12 months, and (5) $60,000 of dividends declared but not yet paid. Select all that apply regarding items that should be classified as current liabilities.
- A.The $200,000 note payable due in 18 months.
- B.The $15,000 accrued wages payable.✓
- C.The $90,000 bond payable due in 8 months.
- D.The $40,000 deferred revenue balance.✓
- E.The $60,000 dividends declared but not yet paid.✓
Correct answer: B, D, E
Accrued wages payable (B) are typically due within the normal operating cycle and are current. Deferred revenue expected to be earned within 12 months (D) is classified as current. Dividends declared but not yet paid (E) represent a current obligation and are current liabilities. The $200,000 note payable due in 18 months (A) is non-current because it matures beyond one year. The $90,000 bond (C) matures within 8 months but qualifies for non-current classification because Meridian has both the intent and ability to refinance on a long-term basis and completed a refinancing agreement before the financial statements were issued, satisfying the criteria under ASC 470 to reclassify it as non-current.
Question 9medium
On October 1, Year 1, Calloway Manufacturing became aware of a lawsuit filed against it for patent infringement. Calloway's legal counsel assessed the following scenarios as of December 31, Year 1 (the balance sheet date): (1) a $500,000 loss is probable and the amount can be reasonably estimated; (2) a separate $200,000 loss from a different claim is reasonably possible but not probable; (3) a third claim with a remote likelihood of loss of $50,000; and (4) a range of loss for the first claim is estimated at $500,000 to $800,000, with no amount in the range being a better estimate than another (assume this replaces the single-point $500,000 estimate). Select all that apply regarding Calloway's correct accounting and disclosure treatment under U.S. GAAP.
- A.If the loss from the first claim is probable and the range is $500,000–$800,000 with no better estimate, Calloway should accrue $500,000 (the minimum of the range).✓
- B.The $200,000 reasonably possible loss requires disclosure in the notes to the financial statements but should not be accrued.✓
- C.The $50,000 remote loss requires both accrual and disclosure in the financial statements.
- D.A probable loss that cannot be reasonably estimated requires disclosure but no accrual.✓
- E.If accrued, the contingent liability for the first claim should be classified as a current liability regardless of when the lawsuit is expected to be resolved.
Correct answer: A, B, D
Under ASC 450, when a loss is probable and estimable with a range and no better estimate exists, the minimum of the range ($500,000) is accrued (A is correct). A reasonably possible loss is not accrued but requires footnote disclosure (B is correct). A probable loss that is not reasonably estimable requires disclosure but no accrual because the amount cannot be measured (D is correct). A remote contingency requires neither accrual nor disclosure under ASC 450, making C incorrect. The classification of the accrued contingent liability (current vs. non-current) depends on when it is expected to be paid or resolved — it is not automatically current — making E incorrect.
Question 10easy
A company has net assets of $500,000, of which $120,000 is restricted by donor stipulations for building construction and $80,000 is restricted by donor stipulations for scholarships. The remaining balance is unrestricted. On the statement of financial position, what amount should be reported as net assets without donor restrictions?
- A.$120,000
- B.$200,000
- C.$500,000
- D.$300,000✓
Correct answer: D
Under ASC 958, net assets are classified as either 'with donor restrictions' or 'without donor restrictions.' The total net assets with donor restrictions are $120,000 + $80,000 = $200,000. Therefore, net assets without donor restrictions = $500,000 − $200,000 = $300,000. Option B ($200,000) is the total donor-restricted amount, not the unrestricted amount. Option C ($500,000) is total net assets before classification. Option A ($120,000) represents only one of the two restricted categories.