Try 10 focused Certified Public Accountant Financial Accounting and Reporting (CPA FAR) questions on cash, receivables, inventory, assets, liabilities, valuation, and presentation.
CPA means Certified Public Accountant. FAR means Financial Accounting and Reporting. Use this focused page when your CPA FAR misses are about account-level recognition, valuation, current versus noncurrent classification, or balance-sheet presentation. Drill this topic before returning to mixed practice.
| Field | Detail |
|---|---|
| Exam route | CPA FAR |
| Issuer | American Institute of Certified Public Accountants (AICPA) |
| Topic area | Select Balance Sheet Accounts |
| Blueprint weight | 35% |
| Page purpose | Account-level practice for recognition, valuation, classification, assets, liabilities, and reporting-date judgments |
This topic tests account-level recognition, measurement, valuation, classification, and presentation. The hard part is usually not naming the account; it is deciding the measurement date, the valuation basis, and whether the fact changes the balance sheet amount or only the disclosure.
Name the account first, then write down the measurement basis: historical cost, amortized cost, fair value, NRV, present value, or classification-only. If the answer choice changes the wrong account or uses the right rule at the wrong date, reject it.
Use this page to isolate Select Balance Sheet Accounts for CPA FAR. Work through the 10 questions first, then review the explanations and return to mixed practice in Mastery Exam Prep.
| Pass | What to do | What to record |
|---|---|---|
| First attempt | Answer without checking the explanation first. | The fact, rule, calculation, or judgment point that controlled your answer. |
| Review | Read the explanation even when you were correct. | Why the best answer is stronger than the closest distractor. |
| Repair | Repeat only missed or uncertain items after a short break. | The pattern behind misses, not the answer letter. |
| Transfer | Return to mixed practice once the topic feels stable. | Whether the same skill holds up when the topic is no longer obvious. |
Blueprint context: 35% of the practice outline. A focused topic score can overstate readiness if you recognize the pattern too quickly, so use it as repair work before timed mixed sets.
These questions are original Mastery Exam Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.
Topic: Select Balance Sheet Accounts
On January 1, 20X1, Lark Co. issued 5-year bonds with a $800,000 face amount. Interest is paid each December 31, and Lark uses the effective interest method. Debt issuance costs were deducted in measuring the initial carrying amount. The following amortization schedule excerpt uses rounded dollar amounts:
| Year ended | Beginning carrying amount | Cash interest paid | Interest expense | Discount and issuance cost amortization |
|---|---|---|---|---|
| December 31, 20X1 | $764,000 | $40,000 | $45,840 | $5,840 |
| December 31, 20X2 | $769,840 | $40,000 | $46,190 | $6,190 |
What amounts should Lark report for 20X2 interest expense and the bonds’ carrying amount at December 31, 20X2, after recording the annual interest entry?
Best answer: A
What this tests: Select Balance Sheet Accounts
Explanation: The effective-interest schedule identifies interest expense separately from the cash coupon payment. Because the bonds are carried below face amount, the $6,190 amortization increases the liability’s carrying amount. The December 31, 20X2 carrying amount is $769,840 + $6,190 = $776,030.
For debt issued at a discount, including debt issuance costs deducted from the liability, the effective-interest method records interest expense based on the carrying amount and effective yield. The cash interest paid is only the coupon payment. The difference between interest expense and cash paid is amortization of the discount and issuance costs, which increases the carrying amount toward face value over time. For 20X2, the schedule shows interest expense of $46,190 and amortization of $6,190. After recording the annual interest entry, the carrying amount is the beginning 20X2 carrying amount of $769,840 plus $6,190, or $776,030.
The schedule gives 20X2 interest expense of $46,190, and the discount and issuance cost amortization increases the carrying amount from $769,840 to $776,030.
Topic: Select Balance Sheet Accounts
At December 31, Valley Co. included the following items in a single current-asset line called “cash and cash equivalents,” totaling $1,260,000. Valley has no legal right of offset for the overdraft.
| Item | Amount | Facts |
|---|---|---|
| Operating checking account | $500,000 | Unrestricted |
| Money market fund | 120,000 | Unrestricted and available on demand |
| Commercial paper | 300,000 | Purchased September 30; matures February 28 |
| Treasury bills | 250,000 | Purchased December 15; mature February 15 |
| Compensating balance | 160,000 | Legally restricted under a note payable due in 3 years |
| Bank overdraft | (70,000) | Separate bank account |
Which correction should Valley make to the year-end balance sheet?
Best answer: C
What this tests: Select Balance Sheet Accounts
Explanation: Valley should classify unrestricted cash and qualifying cash equivalents together, but remove items that are restricted, nonqualifying investments, or liabilities. The commercial paper’s original maturity exceeds three months, the compensating balance is legally restricted for long-term debt, and the overdraft cannot be offset.
Cash equivalents are short-term, highly liquid investments that were acquired with original maturities of three months or less. The Treasury bills qualify because they were purchased on December 15 and mature February 15. The commercial paper does not qualify because its original maturity from September 30 to February 28 exceeds three months, so it should be a short-term investment. A legally restricted compensating balance related to a note due in three years should be classified separately as noncurrent restricted cash. A bank overdraft in a separate account with no legal right of offset should be reported as a current liability rather than netted against cash. Therefore, cash and cash equivalents are $500,000 + $120,000 + $250,000 = $870,000.
Cash equivalents exclude investments with original maturities over three months and legally restricted long-term compensating balances, while an overdraft without offset rights is a liability.
Topic: Select Balance Sheet Accounts
Juno Co. holds marketable equity securities that are not accounted for under the equity method and are measured at fair value through net income. Source documents have been verified, and no current-year investment-related journal entries have been posted. There are no transaction costs or income tax effects.
Current-year activity:
| Item | Amount |
|---|---|
| Jan. 1 investment carrying amount, equal to fair value | $90,000 |
| Cash purchase of securities | $25,000 |
| Cash dividend received, not a return of capital | $2,000 |
| Cash sale proceeds | $36,000 |
| Carrying amount of securities sold | $32,000 |
| Dec. 31 fair value of remaining securities | $87,000 |
What should Juno do next to complete the investment closing analysis?
Best answer: C
What this tests: Select Balance Sheet Accounts
Explanation: The verified activity should be recorded before the year-end fair value adjustment is calculated. For equity securities measured at fair value through net income, dividends and realized gains are recognized in earnings, and the $4,000 increase from adjusted carrying amount to fair value is also recognized in earnings.
For fair value equity investments not accounted for under the equity method, purchases are recorded at cost, dividends that are not returns of capital are recognized as dividend income, and sales remove the carrying amount of the securities sold with any difference recognized as a realized gain or loss. Here, after posting the $25,000 purchase and removing the $32,000 carrying amount of the securities sold, the remaining carrying amount is $83,000. The $36,000 proceeds less the $32,000 carrying amount produce a $4,000 realized gain. Because the remaining securities have a Dec. 31 fair value of $87,000, Juno records a $4,000 unrealized holding gain in net income.
After recording the purchase, dividend, and sale, the remaining carrying amount is $83,000, so Juno records a $4,000 fair value gain in earnings to reach $87,000.
Topic: Select Balance Sheet Accounts
A corporation had the following equity information and transactions during the year. There was no net income or loss and no other equity activity.
| Date | Item | Details |
|---|---|---|
| Jan. 1 | Common stock | $1 par; 100,000 shares issued and outstanding; common stock balance $100,000 |
| Jan. 1 | Additional paid-in capital | $900,000 |
| Jan. 1 | Retained earnings | $2,000,000 |
| May 1 | Cash dividend | Declared and paid $0.50 per share on shares then outstanding |
| Jul. 1 | Stock dividend | Distributed 10% common stock dividend when market price was $12 per share |
| Dec. 1 | Stock split | 2-for-1 split; par value changed to $0.50 per share |
Which year-end equity amounts and shares outstanding are supported by the exhibit?
Best answer: C
What this tests: Select Balance Sheet Accounts
Explanation: The cash dividend reduces retained earnings when declared. The 10% stock dividend is a small stock dividend, so retained earnings is reduced by the fair value of shares issued, while the later stock split changes shares outstanding and par value but not equity dollar balances.
The cash dividend is $50,000, calculated as 100,000 shares outstanding times $0.50, and reduces retained earnings. The 10% stock dividend adds 10,000 shares. Because it is a small stock dividend, retained earnings is reduced by fair value of $120,000, common stock is credited for par value of $10,000, and additional paid-in capital is credited for $110,000. Before the split, common stock is $110,000, additional paid-in capital is $1,010,000, retained earnings is $1,830,000, and shares outstanding are 110,000. The 2-for-1 split doubles shares to 220,000 and changes par to $0.50, but no journal entry changes the equity balances.
The cash dividend reduces retained earnings, the small stock dividend is recorded at fair value, and the stock split changes shares and par value without changing equity account balances.
Topic: Select Balance Sheet Accounts
Greer Co. prepares a classified balance sheet as of December 31, Year 1. At year-end, Greer had a $900,000 note payable due April 30, Year 2. Management intended at December 31 to refinance part of the note on a long-term basis. On February 10, Year 2, before the financial statements were issued, Greer executed a noncancelable loan agreement that allows Greer to refinance $700,000 of the note with principal due February 10, Year 7. The lender cannot cancel the agreement except for standard covenant violations, and Greer was in compliance. Greer will repay the remaining $200,000 with current assets. How should the note be presented on Greer’s December 31, Year 1 classified balance sheet?
Best answer: D
What this tests: Select Balance Sheet Accounts
Explanation: A short-term obligation may be classified as noncurrent to the extent the entity intends and is able to refinance it on a long-term basis. Greer demonstrated that ability only for $700,000 through the qualifying long-term refinancing agreement before issuance of the financial statements.
Under U.S. GAAP, debt due within one year is generally classified as current. However, if the borrower intends to refinance the obligation on a long-term basis and demonstrates the ability to do so before the financial statements are issued, the refinanced portion may be classified as noncurrent. A qualifying financing agreement can demonstrate ability if it is sufficiently long-term and not cancelable by the lender except for standard conditions. Here, Greer’s $900,000 note is due within one year, but the $700,000 refinancing agreement meets the long-term refinancing criteria. The remaining $200,000 will be settled using current assets, so it remains current.
Greer demonstrated both intent and ability to refinance $700,000 on a long-term basis before the financial statements were issued, but the remaining $200,000 will be paid with current assets.
Topic: Select Balance Sheet Accounts
A corporation has 100,000 shares of $1 par value common stock issued and outstanding and no treasury stock. The board declared and distributed a 10% stock dividend when the market price was $18 per share. The controller recorded the transaction as:
Dr. Retained earnings \$10,000
Cr. Common stock \$10,000
Which correction should be made to properly report the stock dividend under U.S. GAAP?
Best answer: B
What this tests: Select Balance Sheet Accounts
Explanation: A 10% stock dividend is treated as a small stock dividend and capitalized at the fair value of the shares issued. Because the controller already recorded the $10,000 par value increase to common stock, the needed correction is the missing $170,000 transfer from retained earnings to additional paid-in capital.
For a small stock dividend, generally less than 20% to 25% of previously outstanding shares, retained earnings is reduced by the fair value of the shares issued. Here, 10,000 shares were issued at $18 per share, so total retained earnings should decrease by $180,000. Common stock should increase by par value, or $10,000, and additional paid-in capital should increase for the $170,000 excess. The entry already recorded the $10,000 debit to retained earnings and credit to common stock, so only the omitted excess amount remains to be corrected.
A 10% stock dividend is a small stock dividend recorded at fair value, so the omitted excess of fair value over par should reduce retained earnings and increase APIC.
Topic: Select Balance Sheet Accounts
Ridge Co. acquired the following separately identifiable intangible assets and is determining whether each asset should be amortized under U.S. GAAP.
| Asset | Stated facts |
|---|---|
| Trademark | Registered for 10 years; renewal is expected, legally available, perfunctory, and at nominal cost; no foreseeable economic, competitive, or legal limit on cash flows. |
| Customer list | No legal expiration; customer attrition is expected to substantially reduce benefits over 5 years. |
| Patent | Legal protection expires in 8 years; no expected alternative use after expiration. |
| Purchased software license | Noncancelable right to use vendor software for 3 years; renewal would require a new contract at market rates. |
Which classification conclusion is supported by the exhibit?
Best answer: D
What this tests: Select Balance Sheet Accounts
Explanation: An intangible asset is indefinite-lived only when no legal, contractual, regulatory, competitive, economic, or other factor limits its useful life. The trademark qualifies because renewals are expected and nominal with no foreseeable limit on benefits; the other assets have finite limiting factors.
Under U.S. GAAP, finite-lived intangible assets are amortized over their useful lives. Indefinite-lived intangible assets are not amortized, but they are tested for impairment. A stated legal term does not automatically make an asset finite-lived if renewal is legally available, expected, and achievable without substantial cost, and if no other factor limits useful life. Here, the trademark’s renewable registration and continuing expected cash flows support indefinite-lived classification. The customer list is finite-lived because expected attrition limits its economic benefits. The patent is finite-lived because legal protection expires in 8 years and no alternative use is expected. The purchased software license is finite-lived because the current right to use the software lasts 3 years and renewal would require a new market-rate contract.
The trademark has no foreseeable limit on useful life, while the other assets have contractual, legal, or economic limits.
Topic: Select Balance Sheet Accounts
Ridge Co. purchased a parcel of land with an unusable warehouse that Ridge intended to demolish immediately and replace with a new office building. Ridge incurred legal fees to obtain title to the land, net demolition costs for the old warehouse, architect fees for the new office building, and a repair to a roof leak six months after occupancy that restored the roof to its original condition. How should these costs be classified under U.S. GAAP?
Best answer: D
What this tests: Select Balance Sheet Accounts
Explanation: The legal fees and demolition costs were necessary to acquire and prepare the land for its intended use, so they are capitalized to land. Architect fees are directly attributable to constructing the new building, while a repair that merely restores original condition is expensed.
Under U.S. GAAP, costs necessary to acquire property and prepare it for intended use are capitalized. Legal fees to obtain title to land are part of the land cost. When land is acquired with an existing structure that will be demolished immediately, the net demolition cost is also capitalized to land because it prepares the land for use. Architect fees for designing the new office building are capitalized as part of the building cost. After an asset is in service, costs that only maintain or restore the asset to its original operating condition are repairs and maintenance expense, unless they increase capacity, improve quality, or extend useful life.
Title-related costs and demolition costs to ready land for intended use are capitalized to land, building design costs are capitalized to the building, and ordinary restorative repairs are expensed.
Topic: Select Balance Sheet Accounts
On January 1, Year 1, Lark Corp. issued $1,000,000 face amount of 6% bonds for $962,000 and paid $12,000 of debt issuance costs. Interest is paid annually on December 31. Lark uses the effective-interest method, and the effective annual rate based on the initial net carrying amount is 7%.
Year 1 debt schedule excerpt:
| Item | Amount |
|---|---|
| Initial net carrying amount | $950,000 |
| Cash interest paid | 60,000 |
| Interest expense | 66,500 |
| Ending net carrying amount | 956,500 |
How should the $6,500 increase in net carrying amount be characterized?
Best answer: C
What this tests: Select Balance Sheet Accounts
Explanation: The $6,500 is the excess of effective interest expense over cash interest paid. For bonds issued at a discount with debt issuance costs deducted from the liability, that excess is amortization that increases the net carrying amount of the debt.
Cash interest is based on the stated rate applied to the face amount: $1,000,000 × 6% = $60,000. Interest expense under the effective-interest method is based on the beginning net carrying amount and the effective rate: $950,000 × 7% = $66,500. Because the bonds were issued below face and issuance costs further reduced the initial net carrying amount, the $6,500 difference is not additional cash paid. It is amortization of the net discount, including debt issuance costs, and it increases the liability’s carrying amount toward the face amount over the bond term.
Because effective interest expense exceeds stated cash interest, the difference accretes the net discount, including issuance costs, into the bond’s carrying amount.
Topic: Select Balance Sheet Accounts
Merit Co. holds a portfolio of marketable equity securities with readily determinable fair values. The securities do not provide significant influence and are measured at fair value through net income. Merit’s draft income statement reports investment income of $28,000 based only on dividends and gains on sales.
Investment subledger for the year ended December 31:
| Activity | Amount |
|---|---|
| Beginning carrying amount, at fair value | $400,000 |
| Purchases at cost | 120,000 |
| Carrying amount of securities sold on sale date | 150,000 |
| Cash proceeds from securities sold | 160,000 |
| Cash dividends received | 18,000 |
| Ending fair value of remaining securities | 390,000 |
Which interpretation is correct?
Best answer: B
What this tests: Select Balance Sheet Accounts
Explanation: For equity securities measured at fair value through net income, both realized and unrealized holding gains and losses are included in earnings. Merit must add the $20,000 increase in fair value of the remaining portfolio to the dividends and realized gain already recorded.
The realized gain on securities sold is $10,000, computed as $160,000 cash proceeds less the $150,000 carrying amount on the sale date. The remaining portfolio’s pre-adjustment carrying amount is $370,000: beginning fair value of $400,000 plus $120,000 of purchases less the $150,000 carrying amount of securities sold. Because the ending fair value is $390,000, Merit has a $20,000 unrealized holding gain. Total investment income recognized in net income is $18,000 dividends + $10,000 realized gain + $20,000 unrealized gain = $48,000.
Net income includes dividends of $18,000, realized gains of $10,000, and the $20,000 unrealized holding gain on the remaining fair value portfolio.
Use the CPA FAR Practice Test page for the full practice route, mixed-topic practice, timed mock exams, and explanations.
Read the CPA FAR guide on CPAExamsMastery.com, then return to Mastery Exam Prep for timed practice.