CPA FAR: Select Transactions

CPA means Certified Public Accountant. FAR means Financial Accounting and Reporting. Use this focused page when your CPA FAR misses are about transaction timing, recognition, measurement, contingencies, or period effects. Drill this topic before returning to mixed practice.

Topic snapshot

What this topic tests

This topic tests the accounting effect of specific events: what is recognized, when it is recognized, how it is measured, and where it appears. Strong answers separate the event date, measurement date, financial-statement line, and disclosure implication before calculating.

Common traps

• recognizing a gain, loss, liability, or revenue item in the wrong period
• missing whether the issue is recognition, measurement, presentation, or disclosure only
• treating a contingency, subsequent event, or related-party fact as a normal recurring transaction
• using the right formula before deciding whether the transaction changes income, equity, cash flows, or only notes

How to reason through these questions

Build a short timeline from the facts. Then identify the accounting event, the measurement basis, and the statement effect. If two answers produce similar amounts, the better answer is usually the one tied to the correct recognition date and financial-statement consequence.

Sample questions

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.

Question 1

Topic: Select Transactions

A nongovernmental not-for-profit entity is preparing its December 31, 20X1 financial statements. Donors receive no commensurate value in return for the following agreements, and collectibility is not in doubt. Ignore discounting.

What amount should be recognized as contribution revenue and a receivable at December 31, 20X1?

• A. $120,000
• B. $170,000
• C. $500,000
• D. $200,000

Best answer: B

What this tests: Select Transactions

Explanation: Unconditional promises to give are recognized as contribution revenue and receivables when the promise is made. Conditional promises are not recognized until the barrier is overcome and the donor’s right of release no longer applies.

For a nongovernmental not-for-profit entity, an unconditional promise to give creates a receivable and contribution revenue when the promise is received, assuming collectibility is reasonably assured. A conditional promise includes both a barrier to entitlement and a right of release or return; it is recognized only when the condition is substantially met. The operating pledge is unconditional, so $120,000 is recognized. The matching pledge is conditional because the donor is released if the matching target is not met, so no revenue or receivable is recognized yet. The training grant is conditional until allowable costs are incurred and reported; because $50,000 of costs had been incurred and reported by year-end, $50,000 is recognized. Total recognized revenue and receivable is $170,000.

• $120,000 omits the portion of the training grant for which the condition was met by year-end.
• $200,000 incorrectly recognizes the full $80,000 training grant even though only $50,000 of allowable costs had been incurred and reported.
• $500,000 incorrectly recognizes the conditional matching pledge before the matching barrier was overcome.

The unconditional $120,000 pledge is recognized when promised, and $50,000 of the conditional training grant is recognized because the condition has been met.

Question 2

Topic: Select Transactions

A controller prepared the following year-end memo for Oran Co.’s December 31, Year 1 financial statements:

On December 20, Year 1, Oran signed a material, noncancelable contract to purchase raw materials for \$600,000 in March Year 2. No materials have been delivered, title has not transferred, and Oran has made no payment. At December 31, Year 1, the market price of the raw materials was not below the contract price. The draft financial statements include a \$600,000 debit to inventory and a \$600,000 credit to accounts payable.

How should Oran correct the Year 1 financial statements?

• A. Reverse the inventory and accounts payable entry and disclose the noncancelable purchase commitment in the notes.
• B. Record an intangible contract asset and amortize it over the raw materials purchase period.
• C. Retain inventory and accounts payable because signing the fixed-price contract transfers control of the raw materials.
• D. Reclassify accounts payable to a loss contingency liability for the full contract price.

Best answer: A

What this tests: Select Transactions

Explanation: The contract is an executory purchase commitment at year-end because neither party has performed with respect to delivery or payment. Since there is no expected loss, Oran should not recognize inventory, accounts payable, or a loss liability, but the material noncancelable commitment should be disclosed.

Under U.S. GAAP, a firm purchase commitment for goods to be delivered in a future period generally remains off the balance sheet until performance occurs. Here, no raw materials were delivered, title did not transfer, and Oran made no payment, so the draft inventory and accounts payable entry is premature. Because the market price is not below the fixed contract price, the facts do not indicate a probable loss on the commitment. The appropriate correction is to reverse the recognized asset and liability and include note disclosure of the material noncancelable purchase commitment.

• Retaining inventory and accounts payable incorrectly treats contract signing as delivery and transfer of control.
• Reclassifying the credit to a loss contingency liability is inappropriate because no probable loss is indicated.
• Recording an intangible contract asset is not the proper presentation for an unperformed raw materials purchase commitment.

An executory purchase commitment generally is not recognized before performance unless a loss is probable, but a material noncancelable commitment should be disclosed.

Question 3

Topic: Select Transactions

Hoyt Co. is preparing the following year-end U.S. GAAP journal entry to record its income tax provision:

Dr Income tax expense        \$255,000
    Cr Income taxes payable          \$212,500
    Cr Deferred tax liability         \$42,500

The entry is intended to record current tax payable and the current-year increase in net taxable temporary differences at the enacted tax rate. Which source support would best support preparing and reviewing the complete journal entry?

• A. The prior-year audited deferred tax rollforward showing beginning deferred tax balances
• B. A cash disbursements report showing quarterly estimated tax payments remitted during the year
• C. A fixed asset tax depreciation schedule showing book-tax differences for equipment only
• D. A year-end income tax provision worksheet that ties estimated taxable income to current tax payable and rolls forward deferred tax balances by temporary difference using enacted tax rates

Best answer: D

What this tests: Select Transactions

Explanation: The complete tax provision entry requires support for both the current and deferred portions of income tax expense. A full tax provision worksheet provides the link from taxable income to tax payable and from temporary differences to deferred tax balances.

To prepare an income tax provision journal entry under U.S. GAAP, the accountant needs support for current tax expense or payable and for deferred tax expense or benefit. Current tax payable is based on taxable income and applicable enacted rates. Deferred tax amounts are based on temporary differences measured at enacted rates and recorded as changes in deferred tax assets or liabilities. A comprehensive tax provision worksheet best supports the complete entry because it ties the current provision to taxable income and rolls forward deferred tax balances to determine the deferred component recorded in the journal entry.

• Estimated tax payment reports support cash paid or prepaid tax activity, not the full income tax provision.
• A fixed asset depreciation schedule may support one temporary difference but does not support total taxable income or all deferred taxes.
• Prior-year deferred tax support helps verify beginning balances but does not support the current-year provision by itself.

This worksheet supports both components of the entry: current tax payable and the deferred tax change recorded through tax expense.

Question 4

Topic: Select Transactions

On January 1, 2025, before recording 2025 depreciation, Blake Co. discovered that equipment purchased for $120,000 on January 1, 2023, was incorrectly recorded as repairs expense in 2023. The equipment has a 5-year useful life, no residual value, and is depreciated using the straight-line method. Blake’s 2023 and 2024 financial statements have been issued, and income taxes are ignored. Which correcting journal entry should Blake record on January 1, 2025?

• A. Debit Equipment $120,000; credit Accumulated depreciation $48,000; credit Retained earnings $72,000.
• B. Debit Equipment $72,000; credit Retained earnings $72,000.
• C. Debit Equipment $120,000; credit Accumulated depreciation $72,000; credit Retained earnings $48,000.
• D. Debit Equipment $120,000; credit Retained earnings $120,000.

Best answer: A

What this tests: Select Transactions

Explanation: Because the error occurred in prior years that have already been issued, the correction is recorded through beginning retained earnings, not current-year income. The asset should be reinstated at its original cost, with accumulated depreciation recorded for 2023 and 2024.

The original error expensed the full $120,000 cost instead of capitalizing the equipment. Correct depreciation should have been $24,000 per year ($120,000 ÷ 5 years). By January 1, 2025, two years of depreciation should have been recorded, so accumulated depreciation should be $48,000. Prior-period income was understated by the net book value not yet expensed through depreciation: $120,000 cost less $48,000 accumulated depreciation = $72,000. Because the affected years are closed and issued, the offset is a credit to beginning retained earnings rather than a credit to current depreciation expense or repairs expense.

• Crediting retained earnings for $120,000 omits the depreciation that should have reduced prior-year earnings.
• Recording $72,000 of accumulated depreciation incorrectly includes 2025 depreciation even though the entry is made before 2025 depreciation is recorded.
• Debiting equipment for only $72,000 records net carrying amount but fails to present the asset at cost with accumulated depreciation separately.

The entry restores the equipment at cost, records two years of missed depreciation, and credits retained earnings for the net prior-period income understatement.

Question 5

Topic: Select Transactions

Pine Co. is preparing its Year 1 income tax provision under U.S. GAAP. Pretax financial income is $600,000 and includes $20,000 of municipal bond interest that is exempt from income tax. Pretax financial income also includes $50,000 of accrued warranty expense that is not deductible for tax purposes until paid; no warranty payments were made in Year 1. The enacted tax rate is 25%, and Pine has no beginning deferred tax balances or valuation allowance. Which journal entry should Pine record for Year 1?

• A. Debit income tax expense $157,500; credit income taxes payable $157,500.
• B. Debit income tax expense $150,000; debit deferred tax asset $12,500; credit income taxes payable $162,500.
• C. Debit income tax expense $170,000; credit deferred tax liability $12,500; credit income taxes payable $157,500.
• D. Debit income tax expense $145,000; debit deferred tax asset $12,500; credit income taxes payable $157,500.

Best answer: D

What this tests: Select Transactions

Explanation: The warranty accrual is deductible in a future period, so it creates a deferred tax asset. The municipal bond interest is a permanent difference, so it reduces both taxable income and tax expense rather than creating deferred tax.

Start with pretax financial income of $600,000. Subtract the $20,000 permanent tax-exempt municipal bond interest and add back the $50,000 warranty expense that is not currently deductible. Taxable income is $630,000, so current income taxes payable are $157,500 at 25%. The $50,000 future deductible warranty amount creates a deferred tax asset of $12,500. Because the deferred tax asset reduces total tax expense, income tax expense is $157,500 current tax less the $12,500 deferred tax benefit, or $145,000.

• Recording only income tax expense and payable omits the deferred tax asset from the future deductible warranty accrual.
• Recording a deferred tax liability reverses the direction of the warranty temporary difference.
• Treating municipal bond interest as taxable overstates both taxable income and the tax provision.

Taxable income is $630,000, current tax payable is $157,500, and the accrued warranty creates a $12,500 deferred tax asset, leaving $145,000 of tax expense.

Question 6

Topic: Select Transactions

A company operates an online marketplace and initially proposed recognizing the full amount charged to customers as product revenue. The following source-material excerpt was obtained from the marketplace seller agreement:

How should the company present revenue from these marketplace transactions under U.S. GAAP?

• A. Present the full customer payment as deferred revenue until the seller is paid.
• B. Present only the 10% marketplace fee as revenue from arranging the sale.
• C. Present the 10% marketplace fee as a nonoperating gain rather than revenue.
• D. Present the full customer charge as product revenue and the seller remittance as cost of revenue.

Best answer: B

What this tests: Select Transactions

Explanation: The contract excerpt shows the company arranges a transaction between the seller and customer rather than controlling the goods. As an agent, it presents revenue net, limited to the fee or commission it is entitled to retain.

Under U.S. GAAP revenue guidance, a company presents revenue gross when it is the principal that controls the promised good or service before transfer to the customer. It presents revenue net when it is an agent arranging for another party to provide the good or service. Here, the seller retains control of inventory, sets pricing, and bears fulfillment, return, and warranty responsibilities. The company’s obligation is to operate the marketplace and collect a fixed fee. Therefore, the accounting treatment changes from gross product revenue to net revenue for the 10% marketplace fee.

• Gross product revenue is inappropriate because the company does not control the goods before transfer.
• Deferred revenue for the full payment confuses payment processing with a performance obligation for the goods.
• Nonoperating gain classification is inappropriate because the marketplace fee is earned from the company’s ordinary revenue-generating activity.

The excerpt indicates the company is an agent because it does not control the goods before transfer and earns a fixed fee for arranging the sale.

Question 7

Topic: Select Transactions

At December 31, Arlen Co. must measure a production machine at fair value. The machine has no quoted price for an identical asset, but there is an active broker market with recent transactions for similar machines. Arlen concluded that the fair value measurement should be based on the market approach. Which source would best support that FAR conclusion?

• A. A vendor quote for a new replacement machine, reduced by the machine’s accumulated depreciation from the general ledger
• B. The original purchase invoice and current carrying amount of the machine before the fair value measurement
• C. An independent broker schedule of recent sale prices for comparable machines, with adjustments for age, capacity, condition, and location as of December 31
• D. An internal cash flow forecast for the machine’s expected use, discounted at a risk-adjusted rate

Best answer: C

What this tests: Select Transactions

Explanation: The market approach uses prices and other relevant information from market transactions involving identical or comparable assets. Because Arlen has an active broker market for similar machines, recent comparable sale prices adjusted for differences provide the best support.

Under U.S. GAAP fair value measurement concepts, the selected valuation technique should maximize relevant observable inputs when available. The market approach estimates fair value using prices from transactions for identical or comparable assets or liabilities, with adjustments for differences such as condition, capacity, location, or timing. Here, no quoted price exists for the identical machine, but recent sales of similar machines are available in an active broker market. A schedule of those comparable sales, adjusted to the measurement date and for asset-specific differences, best supports applying the market approach.

• A discounted cash flow forecast supports an income approach, not a market approach.
• A replacement cost estimate supports a cost approach and accumulated depreciation may not capture market participant assumptions.
• Historical cost and carrying amount do not establish current fair value.

Comparable market transaction prices, adjusted for relevant differences, directly support a market approach fair value estimate.

Question 8

Topic: Select Transactions

Ridge Corp. is preparing its December 31, Year 1, U.S. GAAP financial statements. The controller reviews the following legal counsel response:

• A product liability claim was filed against Ridge on November 18, Year 1, for products sold before December 31, Year 1.
• Counsel states that an unfavorable outcome is probable.
• Counsel estimates the settlement or judgment will be between $600,000 and $900,000, and no amount within the range is a better estimate.
• The matter is material, and the financial statements have not yet been issued.

How should Ridge report this matter in its December 31, Year 1, financial statements?

• A. Disclose the lawsuit and estimated range only, with no recognized loss or liability until judgment or settlement occurs.
• B. Recognize a $750,000 loss and liability, because the midpoint is the most neutral estimate when a range is provided.
• C. Recognize a $900,000 loss and liability, because the maximum amount in the range is reasonably possible.
• D. Recognize a $600,000 loss and liability, and disclose the nature of the contingency and possible additional exposure up to $300,000.

Best answer: D

What this tests: Select Transactions

Explanation: Ridge should accrue the loss because the unfavorable outcome is probable and the amount is reasonably estimable. When the estimate is a range and no amount is better than another, U.S. GAAP requires accrual of the minimum amount, with disclosure of the possible additional loss.

For a loss contingency, recognition is required when information available before financial statement issuance indicates that a loss is probable and the amount can be reasonably estimated. If the estimate is a range and no amount within the range is a better estimate, the minimum amount in the range is accrued. Here, the claim existed before year-end, counsel says loss is probable, and the range is $600,000 to $900,000. Ridge should accrue $600,000 as a loss and liability and disclose the contingency, including the potential additional exposure of $300,000.

• Disclosure-only treatment is incorrect because the loss is both probable and reasonably estimable.
• Using the midpoint is incorrect because no amount in the range is a better estimate under the facts.
• Accruing the maximum amount is incorrect because U.S. GAAP uses the low end of the range when no estimate within the range is better supported.

A probable and reasonably estimable loss contingency is accrued at the low end of the range when no amount in the range is a better estimate.

Question 9

Topic: Select Transactions

While preparing Pike Co.’s 2026 comparative financial statements, staff identified a material error: on January 1, 2024, Pike incorrectly expensed as repairs a $120,000 machine that should have been capitalized and depreciated straight-line over 5 years with no residual value. No depreciation was subsequently recorded. Pike presents comparative financial statements for 2026 and 2025. Ignore income taxes. Which treatment is appropriate in the 2026 comparative financial statements?

• A. Recognize a $72,000 gain in 2026 income, capitalize the machine at its remaining carrying amount, and disclose the out-of-period correction.
• B. Increase January 1, 2026 retained earnings by $72,000, leave the 2025 comparative statements as previously reported, and disclose the correction prospectively.
• C. Treat the correction as a change in estimate by capitalizing $120,000 in 2026 and depreciating it prospectively over its remaining useful life.
• D. Increase January 1, 2025 retained earnings by $96,000, restate 2025 depreciation expense upward by $24,000, and disclose the nature and effects of the correction.

Best answer: D

What this tests: Select Transactions

Explanation: A material error in previously issued financial statements is corrected by restating prior periods presented and adjusting beginning retained earnings of the earliest period presented. The machine should have had a $96,000 carrying amount at January 1, 2025 and $24,000 of depreciation in 2025.

Because Pike presents comparative 2026 and 2025 statements, the earliest period presented begins January 1, 2025. The 2024 error understated 2024 income and January 1, 2025 retained earnings by $96,000: the $120,000 repair expense should have been replaced by $24,000 of 2024 depreciation. The 2025 comparative income statement also must be restated because depreciation of $24,000 should have been recognized in 2025. Error corrections are not reported as current-period income effects or treated prospectively like changes in estimate. The notes should disclose the nature of the error and its effects on the financial statement line items presented.

• Adjusting only January 1, 2026 retained earnings ignores that 2025 is presented comparatively and must be restated.
• Recognizing a 2026 gain would improperly run a prior-period error correction through current-period income.
• Treating the item as a change in estimate is inappropriate because the issue is a misclassification and omitted depreciation, not a revision of an accounting estimate.

The 2024 error is corrected as a prior-period adjustment to the earliest period presented, with 2025 restated for the depreciation that was omitted.

Question 10

Topic: Select Transactions

Community Impact Fund (CIF), a not-for-profit entity, operates a community fundraising platform. CIF is not financially interrelated with any outside organization named below. CIF recorded each cash receipt as contribution revenue. Which receipt is the best candidate for reclassification because CIF received the assets as an agent or intermediary rather than as a contribution?

• A. The $90,000 receipt restricted to CIF’s after-school tutoring program that CIF operates and controls.
• B. The $140,000 receipt required to be transferred to Eastside Clinic with no power for CIF to redirect or use the funds.
• C. The $75,000 receipt for county homeless services for which CIF may choose providers and grant timing.
• D. The $60,000 receipt naming Eastside Clinic but giving CIF unilateral variance power to redirect the funds.

Best answer: B

What this tests: Select Transactions

Explanation: A transfer is not a contribution to the recipient not-for-profit when the recipient must pass the assets to a specified beneficiary and lacks discretion to redirect them. CIF should report the $140,000 as a liability to Eastside Clinic, not contribution revenue.

When a not-for-profit receives assets and agrees to transfer them to a specified unaffiliated beneficiary, the accounting depends on whether the recipient has discretion over the beneficiary. If the recipient has no variance power and cannot use the assets for its own programs, it is acting as an agent, trustee, or intermediary. The receipt creates an obligation to the specified beneficiary rather than contribution revenue. In contrast, donor restrictions on the recipient’s own program, broad purpose restrictions, or variance power generally indicate the recipient has received a contribution, often with donor restrictions.

• A restriction to CIF’s own tutoring program limits use but still supports contribution revenue to CIF.
• A broad homeless-services purpose allows CIF to choose providers, so CIF is not merely passing through funds to one specified beneficiary.
• Variance power over funds initially naming Eastside Clinic gives CIF discretion inconsistent with pure agent treatment.

CIF is acting only as an intermediary for a specified beneficiary, so the receipt is a liability rather than contribution revenue.

Continue with full practice

Use the CPA FAR Practice Test page for the full practice route, mixed-topic practice, timed mock exams, and explanations.

Related focused pages

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

Free review resource

Read the CPA FAR guide on CPAExamsMastery.com, then return to Mastery Exam Prep for timed practice.