CPA FAR: Financial Accounting and Reporting Practice Test

Use this page when you are preparing for the Certified Public Accountant Financial Accounting and Reporting section and want a direct practice route. The public preview gives you sample questions and a full-length MCQ diagnostic; the web app adds mixed sets, topic drills, timed mocks, progress tracking, and full practice.

Mastery Exam Prep is independent exam-prep software. These are original practice questions, not official CPA Exam questions from AICPA, NASBA, or any state board.

What this CPA FAR page gives you

• a direct web route into Certified Public Accountant Financial Accounting and Reporting practice
• 24 public sample questions with detailed explanations before you subscribe
• a free 50-question multiple-choice question (MCQ) diagnostic across the FAR blueprint areas
• focused topic pages for each major blueprint area
• timed mixed practice for pacing, review discipline, and exam-day readiness
• explanations written to show why the reasoning is right, not just which answer is marked correct

CPA FAR exam snapshot

Abbreviation guide for this page

Topic coverage for CPA FAR practice

What CPA FAR is really testing

CPA FAR rewards candidates who can turn facts into the correct recognition, measurement, classification, disclosure, or financial-statement effect. Strong answers usually trace the account, event, timing, and reporting basis before calculating or choosing presentation.

CPA FAR versus other CPA sections

High-yield CPA FAR traps

• using a memorized rule without checking timing, classification, or measurement basis
• missing whether a fact affects net income, other comprehensive income, equity, cash flows, or disclosure only
• treating governmental accounting like commercial accrual accounting
• answering a calculation before identifying the correct account or statement line

Simulation-style skills to pair with MCQs

Use multiple-choice practice to test recognition and measurement rules, then pair it with exhibit-style accounting review. For CPA FAR, that means reading trial-balance snippets, statement excerpts, disclosure facts, transaction timelines, and account rollforwards before deciding recognition, measurement, presentation, or disclosure. When you miss an MCQ, label the underlying skill: account identification, measurement basis, reporting period, classification, or disclosure judgment.

How to use CPA FAR practice efficiently

1. Start with focused topic drills until you can explain the rule, objective, or calculation setup behind each answer.
2. Use the free 50-question diagnostic once as a baseline rather than as a memorization set.
3. Review misses by weakness type and return to the matching topic page before another timed set.
4. Move into timed mixed practice when topic-level accuracy is stable and you need pacing discipline.
5. If several unseen timed attempts are above roughly 75%, schedule or proceed instead of trying to memorize the full bank.

Miss pattern to next drill

CPA section routes

• CPA AUD : Auditing and Attestation
• CPA FAR: Financial Accounting and Reporting
• CPA REG : Taxation and Regulation
• CPA BAR : Business Analysis and Reporting
• CPA ISC : Information Systems and Controls
• CPA TCP : Tax Compliance and Planning

Free review resources

Need concept review before timed practice? Read the CPA FAR guide on CPAExamsMastery.com, then return here for sample questions, topic drills, timed mocks, and the full practice route.

Focused sample questions

Use these child pages when you want focused Mastery Exam Prep practice before returning to mixed sets and timed mocks.

• Free CPA FAR Full-Length Practice Exam
• CPA FAR: Financial Reporting
• CPA FAR: Select Balance Sheet Accounts
• CPA FAR: Select Transactions

Free samples and full practice

• Live now: CPA FAR practice is available on web.
• On-page sample set: this page includes 24 public sample questions for the FAR route.
• Full practice: open the web route for mixed sets, topic drills, timed mocks, progress tracking, and detailed explanations.

24 CPA FAR sample questions with detailed explanations

These are original Mastery Exam Prep practice questions aligned to the live CPA FAR route and the main blueprint areas shown above. Use them to test readiness here, then continue in Mastery Exam Prep with mixed sets, topic drills, and timed mocks.

Question 1

Topic: Financial Reporting

A city controller is clearing year-end unclassified activity before preparing the fund financial statements and the government-wide statement of activities. Bank deposits have been reconciled to the cash receipts ledger, but the reporting classification has not yet been assigned.

Which step should the controller perform next?

• A. Update the schedule to report the police grant in governmental funds/governmental activities, the water charges in a proprietary fund/business-type activities, and the school district taxes in a fiduciary custodial fund only.
• B. Defer classification until government-wide conversion entries are prepared, using the cash receipts ledger classifications for the fund financial statements.
• C. Update the schedule to report all three items in governmental funds/governmental activities because the city initially received the cash.
• D. Update the schedule to report the police grant and school district taxes in governmental funds/governmental activities and the water charges in fiduciary funds because the charges are restricted to utility operations.

Best answer: A

Explanation: The next step is to classify each item by fund purpose before preparing the statements. Government public safety activity is governmental, a self-supporting utility is proprietary and business-type, and amounts held for another government are fiduciary custodial activity excluded from government-wide activities. State and local government reporting separates activities based on the nature of the program and who benefits from the resources. The police grant supports a city-run public safety program, so it belongs in governmental funds and governmental activities. The water utility provides services financed primarily by user charges, so it is reported in an enterprise fund within proprietary funds and as business-type activities in the government-wide statements. The school district taxes are not city resources; the city is holding and remitting them for a legally separate government. That activity is reported in a fiduciary custodial fund and is not included in governmental or business-type activities in the government-wide statements.

Question 2

Topic: Select Balance Sheet Accounts

Oak LLC is a pass-through entity that maintains separate member capital accounts. On June 1, a new member contributed $40,000 cash and equipment with a fair value of $90,000. The equipment was subject to a $25,000 note payable that Oak LLC assumed. For its U.S. GAAP financial statements, which journal entry should Oak record for the contribution?

• A. Dr. Cash $40,000; Dr. Equipment $90,000; Cr. Note payable $25,000; Cr. Contribution revenue $105,000
• B. Dr. Cash $40,000; Dr. Equipment $90,000; Cr. New member, capital $130,000
• C. Dr. Cash $40,000; Dr. Equipment $90,000; Cr. Note payable $25,000; Cr. New member, capital $105,000
• D. Dr. Cash $40,000; Dr. Equipment $90,000; Cr. Note payable $25,000; Cr. Additional paid-in capital $105,000

Best answer: C

Explanation: Owner contributions to a pass-through entity are recorded as capital transactions, not revenue. Oak should debit the contributed assets at fair value, credit the liability it assumed, and credit the new member’s capital account for the net amount of $105,000. In a partnership or LLC with member capital accounts, contributions from owners increase the contributing owner’s capital account. For U.S. GAAP financial statements, contributed noncash property is recorded at fair value, and any liability assumed by the entity is recorded separately as a liability. Here, Oak receives $40,000 cash plus equipment worth $90,000 and assumes a $25,000 note payable. The net increase to the new member’s capital account is $105,000, calculated as $40,000 + $90,000 - $25,000.

Question 3

Topic: Select Transactions

On January 1, Year 1, Kira Co. entered into a three-year services contract and paid the following contract-related costs in cash. No journal entries have been recorded. Services are provided evenly over 36 months beginning January 1, Year 1, and Kira does not elect the practical expedient to expense acquisition costs.

Which set of Year 1 journal entries is most appropriate?

• A. Debit contract acquisition cost asset $60,000; debit contract fulfillment cost asset $90,000; debit expense $30,000; credit cash $180,000. Also debit amortization expense $50,000; credit accumulated amortization for acquisition costs $20,000 and fulfillment costs $30,000.
• B. Debit expense $180,000; credit cash $180,000, with no contract cost asset or amortization recorded.
• C. Debit contract cost asset $180,000; credit cash $180,000. Also debit amortization expense $60,000; credit accumulated amortization for contract costs $60,000.
• D. Debit contract fulfillment cost asset $90,000; debit expense $90,000; credit cash $180,000. Also debit amortization expense $30,000; credit accumulated amortization for fulfillment costs $30,000.

Best answer: A

Explanation: The success-based sales commission is an incremental cost of obtaining the contract and is recoverable, so it is capitalized. The customer-specific setup labor meets the provided fulfillment cost criteria, while the proposal costs and general training do not. The capitalized $150,000 is amortized over the 36-month service period, producing $50,000 of Year 1 amortization. Under U.S. GAAP for contract costs, incremental costs of obtaining a contract are capitalized if expected to be recovered, unless a practical expedient to expense short-amortization costs is elected. The sales commission qualifies because it would not have been paid without the signed contract. Fulfillment costs are capitalized when they relate directly to the contract, generate or enhance resources used to satisfy performance obligations, and are expected to be recovered; the customer-specific setup labor meets those provided criteria. Legal and proposal costs are not incremental because they would have been incurred regardless, and the general training does not create a contract-specific resource. The capitalized costs are amortized consistently with service transfer: \(60,000 / 3 =\)20,000 and \(90,000 / 3 =\)30,000 for Year 1.

Question 4

Topic: Financial Reporting

A nongovernmental not-for-profit organization is preparing a brief description of the statement of financial position for its annual financial statements. Which characterization best describes the purpose of this statement under U.S. GAAP?

• A. It reports the organization’s budgeted and actual program spending to demonstrate compliance with approved spending plans.
• B. It reports the organization’s cash receipts and cash payments during the period by operating, investing, and financing activities.
• C. It reports the organization’s assets, liabilities, and net assets at a point in time to help users assess liquidity, financial flexibility, and ability to meet obligations.
• D. It reports the organization’s revenues, expenses, gains, and losses during the period to explain the change in net assets.

Best answer: C

Explanation: The statement of financial position is the not-for-profit equivalent of a balance sheet. Its purpose is to present assets, liabilities, and net assets at a specific date so users can assess liquidity, financial flexibility, and the organization’s ability to meet obligations. For a nongovernmental not-for-profit, the statement of financial position focuses on financial position as of the reporting date. It presents the entity’s assets, liabilities, and net assets, with net assets classified based on the existence or absence of donor restrictions. Along with related notes, this statement helps donors, creditors, and other users evaluate available resources, claims against those resources, liquidity, financial flexibility, and the need for external financing. It does not primarily explain operating results, cash flow activity, or budget compliance; those are addressed by other statements or supplemental information.

Question 5

Topic: Select Balance Sheet Accounts

At December 31, Year 1, Mesa Co. had not yet closed the sale of a production line. Management concluded that the production line qualified as held for sale on December 15, Year 1, stopped depreciation after that date, and recorded a $120,000 loss to write the asset group down from its $900,000 carrying amount to fair value less cost to sell. Which source support would best support this FAR conclusion?

• A. Board minutes authorizing management to study possible strategic alternatives for the production line and to begin evaluating replacement equipment.
• B. A fixed-asset depreciation schedule showing the production line’s remaining useful life, salvage value, and depreciation expense computed through December 31, Year 1.
• C. A January Year 2 closing statement showing legal title transferred and a disposal gain or loss computed as of the closing date.
• D. A held-for-sale assessment package with board approval dated December 15, evidence the production line was immediately available and actively marketed for sale, expected completion within one year, a broker valuation of $820,000, estimated selling costs of $40,000, and fixed-asset subledger support for the $900,000 carrying amount.

Best answer: D

Explanation: The best support must substantiate both classification and measurement. For held-for-sale accounting, the evidence should show that the criteria were met by the classification date and should support the lower of carrying amount or fair value less cost to sell measurement. A long-lived asset classified as held for sale is measured at the lower of its carrying amount or fair value less cost to sell, and depreciation stops while it is held for sale. The supporting documentation should therefore address both the classification criteria and the measurement inputs. In this case, the correct support shows a committed plan, immediate availability, active marketing, expected sale within one year, fair value, estimated costs to sell, and the carrying amount. The valuation of $820,000 less $40,000 selling costs equals $780,000, which is $120,000 below the $900,000 carrying amount.

Question 6

Topic: Select Transactions

Orion Co. must measure the fair value of a 10-acre tract of land at year-end. The applicable accounting guidance identifies the entire 10-acre tract as the unit of account. Orion currently uses the land for warehouse parking and intends to continue that use.

Additional facts:

Which interpretation best supports Orion’s fair value measurement?

• A. Use $4,850,000, because the price in the market with the greatest activity should be reduced by selling costs.
• B. Use $5,000,000, based on retail development in Market X for the single 10-acre tract, without reducing the price for selling costs.
• C. Use $5,250,000, because the highest gross price in any accessible market is the fair value measurement.
• D. Use $3,700,000, because Orion’s intended continued use as warehouse parking controls the fair value measurement.

Best answer: B

Explanation: The land’s highest and best use is retail development because that use is legally permitted, physically possible, financially feasible, and maximizes value to market participants. Since Market X is the principal market, Orion uses that market’s price for the specified 10-acre unit of account and does not deduct selling costs from fair value. Fair value is based on assumptions that market participants would use, not on the reporting entity’s intended use. For a nonfinancial asset, the highest and best use determines the valuation premise when that use is legally permissible, physically possible, and financially feasible. Here, retail development produces a higher value than warehouse parking and meets those conditions. The accounting guidance also defines the unit of account as the entire 10-acre tract, so the measurement should not change to a different unit. Because Market X has the greatest volume and activity for comparable tracts, it is the principal market. When a principal market exists, the entity uses that market rather than searching for the most advantageous market. Transaction costs affect net proceeds but are not deducted from the fair value measurement.

Question 7

Topic: Financial Reporting

Keaton Co. is preparing a multi-step income statement for the year ended December 31, Year 1, from the following adjusted trial balance accounts:

Supporting documentation states that the inventory write-down relates to normal goods held for sale and should be included in cost of goods sold. The delivery truck sale is not a discontinued operation. Which presentation is appropriate?

• A. Report net sales of $1,140,000, gross profit of $432,000, and income from operations of $147,000; present interest revenue, interest expense, and the truck-sale gain below income from operations.
• B. Report net sales of $1,200,000, gross profit of $492,000, and income from operations of $207,000; present sales returns and sales discounts below income from operations.
• C. Report net sales of $1,140,000, gross profit of $432,000, and income from operations of $163,000; include interest revenue, interest expense, and the truck-sale gain in operating income.
• D. Report net sales of $1,140,000, gross profit of $450,000, and income from operations of $165,000; present the inventory write-down below income from operations.

Best answer: A

Explanation: In a multi-step income statement, sales returns and discounts reduce sales revenue to arrive at net sales. Cost of goods sold includes the ordinary inventory write-down, while interest items and the gain on sale of a delivery truck are reported below income from operations as other income or expense. Net sales are $1,200,000 less sales returns of $45,000 and sales discounts of $15,000, or $1,140,000. Because the supporting documentation states that the inventory write-down relates to normal goods held for sale, it is included in cost of goods sold: $690,000 plus $18,000, or $708,000. Gross profit is therefore $432,000. Operating expenses are selling expenses of $155,000 plus administrative expenses of $130,000, or $285,000, resulting in income from operations of $147,000. Interest revenue, interest expense, and the gain on sale of the delivery truck are not part of normal operating income for this presentation and are shown below income from operations.

Question 8

Topic: Select Balance Sheet Accounts

Milo Co. is preparing its December 31 balance sheet. Its unrestricted operating checking account is the company’s only cash account. Before any year-end reconciliation entries, the controller provided the following information:

Which interpretation of this reconciliation is correct?

• A. Report cash of $107,945 because deposits in transit and outstanding checks are only timing differences.
• B. Report cash of $118,250 because the bank statement is the independent source for year-end cash.
• C. Report cash of $100,445 and record a net $7,500 decrease for deposits in transit and outstanding checks.
• D. Report cash of $110,750 and record a net $2,805 increase to the general ledger cash account.

Best answer: D

Explanation: The correct cash balance is the reconciled, adjusted balance, not the unadjusted bank or book balance. Bank-side timing items bring the bank balance to $110,750, while book-side reconciling items require entries that increase the general ledger cash balance by $2,805. A bank reconciliation separates timing differences from items requiring book entries. Deposits in transit and outstanding checks have already been recorded by the company, so they adjust the bank balance but do not require journal entries. The adjusted bank balance is $118,250 + $18,400 - \(25,900 =\)110,750. Items not yet recorded in the company’s books, plus book errors, adjust the general ledger: bank collection of $5,250, less service charge of $75, NSF check of $2,100, and check recording error of $270. These book adjustments net to a $2,805 increase, bringing the $107,945 book balance to $110,750.

Question 9

Topic: Select Transactions

During the review of Oak Co.’s December 31, 20X5 draft financial statements before issuance, the CPA noted that Oak included only a general litigation note and recorded no liability for the following matter:

• A patent infringement lawsuit was filed against Oak in September 20X5 and was pending at year-end.
• On December 18, 20X5, the court ruled that Oak infringed the patent; only damages remain to be determined.
• Oak’s outside counsel states that an unfavorable damages award is probable.
• Counsel estimates damages will range from $900,000 to $1,400,000, and no amount in the range is a better estimate than any other amount.
• The amounts are material.

Which correction should Oak make?

• A. Record a $1,400,000 litigation loss and liability, with no disclosure of additional exposure.
• B. Record a $900,000 litigation loss and liability, and disclose the nature of the contingency and possible additional loss up to $500,000.
• C. Disclose the $900,000 to $1,400,000 range, but record no litigation liability.
• D. Record a $1,150,000 litigation loss and liability, with no disclosure of additional exposure.

Best answer: B

Explanation: Oak must recognize a loss contingency because the unfavorable outcome is probable and reasonably estimable. When the estimate is a range and no amount is better than another, U.S. GAAP requires accrual of the minimum amount and disclosure of the possible additional exposure. A loss contingency is accrued when it is both probable that a liability has been incurred as of the financial statement date and the amount can be reasonably estimated. Here, the lawsuit existed at year-end, the court had already ruled against Oak on infringement before year-end, and counsel states that an unfavorable damages award is probable. Because counsel provided a reasonably estimable range but no amount within the range is a better estimate, Oak should accrue the low end, $900,000. Since the ultimate loss could be as high as $1,400,000, Oak should also disclose the nature of the contingency and the possible additional loss of $500,000 beyond the amount accrued.

Question 10

Topic: Financial Reporting

Weston Co. is preparing its statement of changes in stockholders’ equity for the year ended December 31, 2026. All transactions shown were recorded in cash or net of tax as stated, and no other equity transactions occurred. Which ending equity rollforward is supported by the exhibit?

• A. Common stock $500,000; additional paid-in capital $1,200,000; retained earnings $1,355,000; accumulated OCI $35,000; treasury stock $(150,000); total equity $2,940,000.
• B. Common stock $550,000; additional paid-in capital $1,410,000; retained earnings $1,095,000; accumulated OCI $35,000; treasury stock $(220,000); total equity $2,870,000.
• C. Common stock $550,000; additional paid-in capital $1,410,000; retained earnings $1,130,000; accumulated OCI $35,000; treasury stock $(220,000); total equity $2,905,000.
• D. Common stock $550,000; additional paid-in capital $1,410,000; retained earnings $1,050,000; accumulated OCI $80,000; treasury stock $(220,000); total equity $2,870,000.

Best answer: B

Explanation: Prior-period adjustments correct beginning retained earnings, not current income, so retained earnings starts at $865,000. Net income increases retained earnings, dividends decrease it, OCI changes accumulated OCI, stock issuances increase common stock and APIC, and treasury repurchases reduce equity at cost. Equity rollforwards separate transactions by equity component. The prior depreciation error is presented as a net-of-tax adjustment to opening retained earnings: $900,000 - \(35,000 =\)865,000. Retained earnings then increases for net income and decreases for dividends: $865,000 + $320,000 - \(90,000 =\)1,095,000. Accumulated OCI decreases for the OCI loss: $80,000 - \(45,000 =\)35,000. The stock issuance increases common stock to $550,000 and APIC to $1,410,000. Treasury stock is a contra-equity account measured at cost, so the $70,000 repurchase makes it $(220,000). Total equity is $550,000 + $1,410,000 + $1,095,000 + $35,000 - \(220,000 =\)2,870,000.

Question 11

Topic: Select Balance Sheet Accounts

On January 1, Year 1, Larkin Co. purchased 30% of Mora Inc.’s voting common stock for $500,000 and obtained significant influence. Larkin did not elect the fair value option. At acquisition, Larkin’s share of Mora’s book value was $440,000; the $60,000 excess basis was attributable solely to equipment with a remaining useful life of 5 years, straight-line. During Year 1, Mora reported net income of $100,000 and paid total dividends of $20,000. On December 31, Year 1, after considering investee results and dividends, Larkin determined the investment’s fair value was $485,000 and the decline was other-than-temporary. How should Larkin record the Year 1 equity method activity and impairment?

• A. Debit investment $18,000 and credit equity in earnings $18,000; debit cash $6,000 and credit dividend income $6,000; debit impairment loss $33,000 and credit investment $33,000.
• B. Debit investment $18,000 and credit equity in earnings $18,000; debit cash $6,000 and credit investment $6,000; debit accumulated other comprehensive loss $27,000 and credit investment $27,000.
• C. Debit investment $18,000 and credit equity in earnings $18,000; debit cash $6,000 and credit investment $6,000; debit impairment loss $27,000 and credit investment $27,000.
• D. Debit investment $30,000 and credit equity in earnings $30,000; debit cash $6,000 and credit investment $6,000; debit impairment loss $39,000 and credit investment $39,000.

Best answer: C

Explanation: Larkin recognizes its 30% share of Mora’s income, reduced by amortization of the $60,000 equipment basis difference. Dividends received are a return of investment under the equity method, not dividend income. Because the decline is other-than-temporary, Larkin recognizes an impairment loss in earnings. Under the equity method, the investor increases the investment for its share of investee income and decreases it for dividends received. Larkin’s share of Mora’s income is $30,000, but the $60,000 equipment basis difference is amortized over 5 years, reducing equity method income by $12,000. Net equity in earnings is therefore $18,000. Larkin receives 30% of Mora’s $20,000 dividends, or $6,000, which reduces the investment. The carrying amount before impairment is $512,000 ($500,000 + $18,000 − $6,000). Since fair value is $485,000 and the decline is other-than-temporary, Larkin records a $27,000 impairment loss in earnings and reduces the investment.

Question 12

Topic: Select Transactions

On January 1, Year 1, Rowan Corp. obtained a three-year customer service contract and paid a $150,000 sales commission that was incremental to obtaining the contract. Rowan concluded the commission is recoverable and capitalized it as a contract cost asset. The commission relates only to this three-year contract. Services transfer evenly over the contract term, and straight-line amortization is appropriate.

On December 31, Year 1, after recording any required amortization but before recording any impairment, Rowan expects to receive $210,000 of remaining consideration under the contract and expects to incur $165,000 of direct costs to provide the remaining services. What impairment loss should Rowan recognize on the capitalized contract cost asset for Year 1?

• A. $50,000
• B. $55,000
• C. $0
• D. $45,000

Best answer: B

Explanation: The capitalized commission is amortized over the three-year contract term because the services transfer evenly. After Year 1 amortization, the remaining carrying amount is compared with the remaining expected consideration less remaining direct costs, resulting in a $55,000 impairment loss. A capitalized cost to obtain a contract is amortized on a systematic basis consistent with the transfer of the related goods or services. Rowan amortizes $150,000 over three years, or $50,000 in Year 1, leaving a pre-impairment carrying amount of $100,000. For impairment, the carrying amount is compared with the remaining amount expected to be received from the customer less the remaining direct costs of providing the services: $210,000 − \(165,000 =\)45,000. Because the $100,000 carrying amount exceeds the $45,000 recoverable amount, Rowan recognizes an impairment loss of $55,000.

Question 13

Topic: Financial Reporting

In preparing year-end U.S. GAAP financial statements, Pike Co.’s draft balance sheet reports inventory of $507,000. The amount was traced to the following source data:

Which correction should be made to support the inventory amount reported in the balance sheet?

• A. Decrease inventory by $52,000 to $455,000.
• B. Increase inventory by $28,000 to $535,000.
• C. Decrease inventory by $17,000 to $490,000.
• D. Decrease inventory by $24,000 to $483,000.

Best answer: D

Explanation: The reported inventory amount should include goods owned by Pike and exclude goods Pike does not own. Consigned goods and FOB destination goods not received by year-end are excluded, while Pike-owned goods held by a third party are included. A year-end inventory balance should be reconciled to ownership, not merely to physical possession or invoices received. Pike’s physical count of $490,000 includes $35,000 of consigned goods, which Pike does not own and should exclude. Pike also omitted $28,000 of goods it owns at a third-party warehouse, which should be included. The $17,000 in-transit purchase was FOB destination and not received until after year-end, so Pike did not yet have ownership and it should not be included. Therefore, supported inventory is $483,000: $490,000 − $35,000 + $28,000. Compared with the draft balance of $507,000, inventory is overstated by $24,000.

Question 14

Topic: Select Balance Sheet Accounts

Oak Corp. reports its available-for-sale debt investments at fair value. At December 31, Year 1, Oak had no beginning allowance for credit losses on these securities.

What impairment loss should Oak recognize in Year 1 earnings?

• A. $110,000
• B. $30,000
• C. $20,000
• D. $50,000

Best answer: D

Explanation: The impairment loss recognized in earnings is $50,000. For available-for-sale debt securities, credit losses are recognized in earnings when the entity does not intend or need to sell, but the full fair value decline is recognized in earnings when the entity intends to sell before recovery. For an available-for-sale debt security with fair value below amortized cost, the accounting depends on the selling assessment. If the entity does not intend to sell and is not more likely than not required to sell before recovery, only the credit-loss component is recognized in earnings, limited to the fair value shortfall. Alpha has a $20,000 credit loss, computed as $500,000 amortized cost less $480,000 expected cash flows. Beta has no credit loss because expected cash flows equal amortized cost. Gamma must be written down to fair value because Oak intends to sell it, so the entire $30,000 decline is recognized in earnings. Total impairment loss is $20,000 + \(30,000 =\)50,000.

Question 15

Topic: Select Transactions

During 20X6, Harbor Learning Center, a calendar-year not-for-profit entity, received the following items. No amounts were previously recognized, and all fair values are reliably measurable. What total amount should Harbor recognize as contribution revenue in its 20X6 statement of activities?

• A. $193,000
• B. $343,000
• C. $401,000
• D. $331,000

Best answer: D

Explanation: Contribution revenue includes financial and nonfinancial asset gifts measured at fair value on the contribution date. The conditional matching promise is excluded until the condition is substantially met, so the recognized amount is $40,000 + $65,000 + $88,000 + $120,000 + \(18,000 =\)331,000. A not-for-profit entity generally recognizes contributed financial assets and nonfinancial assets as contribution revenue at fair value when the contribution is received or when an unconditional promise is made. A long-term unconditional promise is measured at its present value, not its undiscounted face amount. Donor cost, donor carrying amount, and donor tax basis do not determine the recipient NFP’s recognized contribution amount. Conditional promises to give are not recognized until the conditions are substantially met. Harbor therefore recognizes the cash, securities, present value of the unconditional promise, donated equipment, and donated supplies, but no revenue for the conditional matching promise in 20X6.

Question 16

Topic: Financial Reporting

Maple Co. is preparing its year-end statement of comprehensive income under U.S. GAAP. The controller identified several material items that have not yet been classified, and none relates to a prior-period error. Which item should be reported in other comprehensive income rather than net income?

• A. Unrealized holding loss on an available-for-sale debt security, with no expected credit loss identified
• B. Loss on disposal of equipment used in operations
• C. Unrealized holding gain on an equity security measured at fair value and held as a noncontrolling investment
• D. Foreign currency transaction gain from collecting a euro-denominated receivable

Best answer: A

Explanation: The available-for-sale debt security holding loss is an OCI item under U.S. GAAP when no credit loss is identified. OCI captures certain changes in equity that bypass net income until reclassified or otherwise resolved. Other comprehensive income includes specific items that U.S. GAAP excludes from net income, such as unrealized holding gains and losses on available-for-sale debt securities, foreign currency translation adjustments, certain pension or OPEB adjustments, and the effective portion of qualifying cash flow hedges. In this fact pattern, the unrealized loss on an available-for-sale debt security is reported in OCI because it is not a realized gain or loss and no credit loss is identified. By contrast, most equity security fair value changes, foreign currency transaction gains or losses, and operating asset disposal gains or losses are recognized in net income.

Question 17

Topic: Select Balance Sheet Accounts

At December 31, Year 1, Pine Co. is determining investment income to recognize in net income for the year. Pine held the following investments for all of Year 1:

There were no purchases, sales, credit losses, premiums, discounts, or income taxes during Year 1. What amount of investment income should Pine recognize in net income for Year 1?

• A. $55,000
• B. $63,000
• C. $37,000
• D. $43,000

Best answer: D

Explanation: Investment income in net income includes dividends, interest, and fair value changes for equity securities measured at fair value through net income and trading debt securities. Unrealized gains and losses on available-for-sale debt securities generally go to OCI, not net income. Pine recognizes $37,000 of dividends and interest in net income: $12,000 on the equity securities, $10,000 on trading debt, and $15,000 on AFS debt. Pine also recognizes fair value changes in net income for equity securities and trading debt securities. The equity securities increased by $18,000, and the trading debt securities decreased by $12,000. The available-for-sale debt securities increased by $20,000, but that unrealized holding gain is reported in other comprehensive income, not net income. Therefore, investment income in net income is $37,000 + $18,000 - \(12,000 =\)43,000.

Question 18

Topic: Select Transactions

Filo Co. is preparing its December 31, 20X5, U.S. GAAP financial statements, which will be issued on March 15, 20X6. No entry has been recorded for a pending lawsuit, and the draft note states that a later settlement will be disclosed only as a subsequent event.

Source excerpts:

Which correction is the most supportable under U.S. GAAP?

• A. Recognize a $720,000 loss and liability in 20X5 and revise the note to describe the settlement.
• B. Recognize a $600,000 loss in 20X5 because no amount in the original estimated range was a better estimate.
• C. Leave 20X5 unadjusted and disclose the settlement only as a nonrecognized subsequent event.
• D. Recognize a $900,000 loss in 20X5 because the maximum exposure in the legal range was reasonably possible.

Best answer: A

Explanation: The lawsuit related to conditions that existed before year-end, and counsel concluded that loss was probable and estimable. The February settlement occurred before the financial statements were issued and provides additional evidence of the amount to recognize for the year-end contingency. Under U.S. GAAP, a loss contingency is accrued when the loss is probable and reasonably estimable. Events after the balance sheet date but before issuance are recognized when they provide additional evidence about conditions that existed at the balance sheet date. Here, the lawsuit was filed before year-end and related to products sold before January 1, 20X6. Counsel already concluded that an adverse outcome was probable. Although the January letter initially supported the low end of the range, the February signed settlement provides a better estimate before the financial statements are issued. Therefore, Filo should accrue $720,000 in 20X5 and revise the related disclosure.

Question 19

Topic: Financial Reporting

Ridge Corp., a public company, prepared the following draft diluted EPS computation for the current year:

The draft denominator of 830,000 shares excludes convertible debt because the bonds were not converted. The bonds were outstanding all year, interest expense on the bonds was $60,000, the tax rate was 25%, and the bonds are convertible into 150,000 common shares. Which correction should be made to the draft diluted EPS computation?

• A. Add $60,000 to the numerator and 150,000 shares to the denominator for the convertible debt, resulting in diluted EPS of $1.90.
• B. Add 150,000 shares for the convertible debt without adjusting the numerator, resulting in diluted EPS of $1.84.
• C. Add $45,000 to the numerator and 150,000 shares to the denominator for the convertible debt, resulting in diluted EPS of $1.88.
• D. Make no correction because convertible debt is included in diluted EPS only if the bonds were actually converted during the year.

Best answer: C

Explanation: The convertible debt should be tested using the if-converted method. Because including the bonds reduces EPS, Ridge must add back after-tax interest and include the conversion shares, producing diluted EPS of $1.88. Diluted EPS starts with income available to common shareholders, which is net income less dividends on nonconvertible preferred stock. Ridge’s draft numerator is therefore $1,800,000. For convertible debt, the if-converted method assumes conversion at the beginning of the period if dilutive. Because interest would not have been incurred after assumed conversion, the numerator is increased by after-tax interest: \(60,000 × 75% =\)45,000. The denominator is increased by the 150,000 common shares issuable on conversion. Correct diluted EPS is ($1,800,000 + \(45,000) ÷ (830,000 + 150,000) =\)1,845,000 ÷ 980,000 = $1.88.

Question 20

Topic: Select Balance Sheet Accounts

On December 31, 2026, Arco Co. is preparing the year-end allowance rollforward for trade receivables. The controller compiled the following information:

No credit loss expense has been recorded during 2026 before the year-end adjusting entry. What amount of credit loss expense should Arco record in the year-end adjusting entry?

• A. $93,000
• B. $78,000
• C. $117,000
• D. $105,000

Best answer: A

Explanation: The allowance rollforward starts with the beginning credit balance, subtracts write-offs, adds recoveries, and then records credit loss expense to reach the required ending credit balance. Before the adjusting entry, the allowance has a $15,000 debit balance, so Arco needs $93,000 of expense to end at a $78,000 credit balance. Under the allowance method, write-offs reduce the allowance, while recoveries of previously written-off accounts increase the allowance when the receivable is reinstated. Arco’s preadjustment allowance balance is: $64,000 credit beginning balance − $91,000 write-offs + \(12,000 recoveries =\)15,000 debit balance. The year-end aging requires a $78,000 credit balance. Therefore, the adjusting entry must credit the allowance for $93,000: $15,000 to eliminate the debit balance plus $78,000 to establish the required credit balance. Sales returns reduce receivables and revenue-related accounts, not the allowance for credit losses.

Question 21

Topic: Select Transactions

At contract inception, Solara Systems enters into a contract to install specialized equipment for a fixed fee plus a $100,000 bonus if installation is completed on or before September 30. Management concluded that the bonus should be included in the transaction price. Which source support best supports that conclusion under U.S. GAAP revenue recognition guidance?

• A. A sales manager email stating that the customer is expected to be satisfied and that the bonus is important to meeting Solara’s quarterly revenue target.
• B. A customer aging report showing the customer has paid prior invoices within stated credit terms during the last two years.
• C. A project-status and historical-completion schedule showing 30 comparable installations were all completed at least two weeks before similar bonus deadlines, customer site access and permits are complete, and remaining tasks are routine work controlled by Solara.
• D. The executed contract excerpt showing that Solara is legally entitled to a $100,000 bonus if installation is completed by September 30.

Best answer: C

Explanation: Variable consideration is included in the transaction price only to the extent it is probable that a significant reversal will not occur when the uncertainty is resolved. The project-status and historical-completion schedule directly supports that conclusion with relevant probability and constraint evidence. Under the revenue recognition model, an early-completion bonus is variable consideration. Management must estimate the variable consideration and then apply the constraint, including only the amount for which it is probable that a significant revenue reversal will not occur. The strongest support is evidence about comparable performance history and current contract-specific factors affecting achievement of the deadline. A schedule showing consistent success on similar installations, completed customer dependencies, and routine remaining work controlled by Solara directly supports including the bonus in the transaction price.

Question 22

Topic: Financial Reporting

Ridge Co. provided the following comparative data. All dividends are common dividends, and common shares outstanding were unchanged during each year.

Which interpretation is best supported by these data?

• A. The price-to-earnings ratio increased because the market price per share rose from $30 to $33.
• B. Asset turnover declined from 1.25 to 1.10 because average total assets increased faster than net sales.
• C. EBITDA decreased because depreciation and amortization should be deducted from net income.
• D. The dividend payout ratio increased because Year 2 net income increased while dividends were declared to common shareholders.

Best answer: B

Explanation: Asset turnover measures how efficiently assets generate sales. Ridge’s sales increased 10%, but average total assets increased 25%, causing asset turnover to fall from 1.25 to 1.10. Performance metrics must be calculated using the correct numerator and denominator. Asset turnover is net sales divided by average total assets. For Year 1, Ridge’s asset turnover is \(5,000,000 /\)4,000,000 = 1.25. For Year 2, it is \(5,500,000 /\)5,000,000 = 1.10. Even though sales increased, the asset base grew more rapidly, so Ridge generated fewer sales dollars per dollar of average assets. That supports the interpretation that operating efficiency, as measured by asset turnover, declined.

Question 23

Topic: Select Balance Sheet Accounts

During its year-end close, Delta Co. identified a significant adverse change in the use of a production asset group that will continue to be used. At December 31, the asset group has a carrying amount of $1,200,000. Management estimates the asset group will generate undiscounted future cash flows of $1,050,000 and has a fair value of $930,000. What impairment loss should Delta recognize for the asset group at December 31?

• A. $0
• B. $150,000
• C. $270,000
• D. $120,000

Best answer: C

Explanation: A long-lived asset group held and used is first tested for recoverability using undiscounted expected cash flows. Because $1,050,000 is less than the $1,200,000 carrying amount, Delta recognizes impairment measured as carrying amount minus fair value, or $270,000. Under U.S. GAAP, a long-lived asset group held and used is impaired only if its carrying amount is not recoverable. Recoverability is assessed by comparing the carrying amount with the sum of expected undiscounted future cash flows. Here, the $1,200,000 carrying amount exceeds the $1,050,000 undiscounted cash flows, so the asset group is not recoverable. Once that test is failed, the impairment loss is measured using fair value, not undiscounted cash flows. The loss is $1,200,000 carrying amount minus $930,000 fair value, which equals $270,000.

Question 24

Topic: Select Transactions

A calendar-year manufacturer entered into a fixed-price contract on October 1, Year 1, and collected the full $120,000 contract price at signing. The contract has no significant financing component.

Which interpretation best describes the amount and timing of revenue recognition under the five-step model?

• A. Recognize $120,000 in Year 1 because the customer paid the full contract price at signing.
• B. Recognize $80,000 in Year 1 and defer $40,000 to be recognized over Year 2.
• C. Recognize $72,000 in Year 1 and defer $48,000 until the installation and support services are complete.
• D. Recognize $100,000 in Year 1 and defer $20,000 to Year 2 based on the equipment and installation standalone selling prices.

Best answer: B

Explanation: Revenue is recognized as each distinct performance obligation is satisfied, not when cash is received. The fixed transaction price is allocated using relative standalone selling prices, so the equipment and installation portions are recognized in Year 1 and the support portion is recognized over Year 2. Under the five-step model, the entity identifies the contract, identifies the distinct performance obligations, determines the transaction price, allocates that price based on relative standalone selling prices, and recognizes revenue when or as each obligation is satisfied. Total standalone selling prices are $150,000. The $120,000 transaction price is allocated as follows: equipment $72,000, installation $8,000, and support $40,000. Because control of the equipment transferred on December 15 and the distinct installation service was completed by December 31, both allocated amounts are recognized in Year 1. The support service is a stand-ready service provided throughout Year 2, so its $40,000 allocation remains a contract liability at December 31, Year 1 and is recognized over Year 2.

In this section

• CPA FAR: Financial Reporting
  Try 10 focused Certified Public Accountant Financial Accounting and Reporting (CPA FAR) questions on statement presentation, classification, cash flows, OCI, and reporting adjustments.
• CPA FAR: Select Balance Sheet Accounts
  Try 10 focused Certified Public Accountant Financial Accounting and Reporting (CPA FAR) questions on cash, receivables, inventory, assets, liabilities, valuation, and presentation.
• CPA FAR: Select Transactions
  Try 10 focused Certified Public Accountant Financial Accounting and Reporting (CPA FAR) questions on transaction timing, recognition, measurement, contingencies, and accounting effects.
• Free CPA FAR Full-Length Practice Exam: 50 Questions
  Try 50 free Certified Public Accountant Financial Accounting and Reporting (CPA FAR) questions across the FAR blueprint areas, with answers and explanations, then continue in Mastery Exam Prep.