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CPA Exam - FAR (Financial Accounting and Reporting) practice questions

200 free questions with answers and explanations.

Practice test
  1. 101.A public university, which is considered a component unit of the state government, received a cash contribution of $5,000,000 from an alumnus to establish an endowed scholarship fund. The donor stipulated that the principal must be invested in perpetuity, and only the investment earnings can be used for scholarships. How should the university classify this contribution in its financial statements?State and Local Governments
  2. 102.A city's General Fund purchased a new police vehicle for $70,000. Under modified accrual accounting, how should this transaction be recorded in the General Fund's accounting records?State and Local Governments
  3. 103.A county government received a federal grant of $1,000,000 to be used exclusively for the construction of a new public library. The grant funds were received on October 1, 2024. Construction is expected to begin in January 2025. Which fund will account for the receipt of these grant funds, and how will it be classified in that fund's financial statements for the fiscal year ending December 31, 2024?State and Local Governments
  4. 104.A city government received $2,000,000 from the sale of general obligation bonds for capital improvements. The bonds carry a 5% interest rate, payable semi-annually. The bond proceeds were immediately transferred to a Capital Projects Fund. How should this interfund transfer be reported in the governmental funds' financial statements?State and Local Governments
  5. 105.A public university, a component unit of the state government, received a $5,000,000 endowment. The donor stipulated that the principal must be held in perpetuity, but the earnings from the investment of the principal can be used for any purpose determined by the university's board of trustees. How should this endowment be classified in the university's Statement of Net Position?State and Local Governments
  6. 106.A public university, a component unit of the state government, received a $2,000,000 endowment from a donor. The donor stipulated that the principal must be invested in perpetuity, and the income generated from the investment must be used to fund student scholarships. How should this endowment be classified in the university's Statement of Net Position (assuming it follows GASB standards)?State and Local Governments
  7. 107.A city government received $1,000,000 in property tax revenues during its fiscal year. Of this amount, $900,000 was collected within 60 days after year-end, and the remaining $100,000 was collected 90 days after year-end. For its General Fund, which uses modified accrual accounting, how much property tax revenue should the city recognize for the fiscal year?State and Local Governments
  8. 108.A company issues 1,000 shares of $10 par value common stock for $50 per share. The journal entry to record this transaction would include a credit to Common Stock for:Select Transactions
  9. 109.A company issues a 5-year, $1,000,000 bond with a stated interest rate of 6%, payable annually. The market interest rate at the time of issuance is 8%. Which of the following statements is true regarding the issuance of this bond?Select Transactions
  10. 110.A company reports pre-tax financial income of $800,000. It has a permanent difference due to non-taxable municipal bond interest of $50,000. The company also has a temporary difference: depreciation for tax purposes is $120,000, while depreciation for financial reporting is $80,000. The enacted tax rate is 25%. What is the deferred tax liability at the end of the year if the beginning balance was zero?Select Transactions
  11. 111.A company sells a product for $1,000 with a right of return. Based on historical data, the company estimates that 10% of customers will return the product. The cost of the product is $600. How much revenue should the company recognize at the time of sale?Select Transactions
  12. 112.A company has a defined benefit pension plan. At year-end, the projected benefit obligation (PBO) is $1,500,000, and the fair value of plan assets is $1,200,000. The current service cost for the year is $100,000, and the actual return on plan assets is $80,000. The expected return on plan assets was $100,000. What is the pension expense (service cost component) for the current year?Select Transactions
  13. 113.A company enters into a 5-year lease for equipment. The present value of the lease payments is $450,000. The fair value of the equipment is $500,000. There is no bargain purchase option, and the lease does not transfer ownership at the end of the lease term. The lease term is 75% of the economic life of the asset. The present value of lease payments is 90% of the fair value of the asset. How should this lease be classified by the lessee under ASC 842?Select Transactions
  14. 114.A company reports a net income of $500,000. It has 100,000 shares of common stock outstanding for the entire year. Additionally, it has 20,000 shares of 5% cumulative preferred stock, $100 par value, outstanding for the entire year. No dividends were declared on preferred stock in the current year. What is the basic earnings per share (EPS) for the company?Select Transactions
  15. 115.A company has a defined benefit pension plan. At the end of the year, the projected benefit obligation (PBO) is $5,000,000, and the fair value of plan assets is $4,200,000. The unrecognized prior service cost is $300,000 (debit), and the unrecognized net gain is $100,000 (credit). What is the amount of the net pension liability (or asset) that should be reported on the balance sheet?Select Transactions
  16. 116.A company uses the FIFO inventory costing method. At year-end, the inventory records show 500 units on hand. The cost of the last 500 units purchased was $12 per unit. The current replacement cost of these units is $11 per unit, and their net realizable value (NRV) is $13 per unit. The normal profit margin is $2 per unit. What is the value of the ending inventory using the lower-of-cost-or-net-realizable-value (LCNRV) rule?Select Transactions
  17. 117.A company acquires a subsidiary for $1,200,000. The fair value of the identifiable net assets acquired is $1,000,000. The acquisition also incurred $50,000 in legal fees and $20,000 in due diligence costs. What amount of goodwill should the company recognize from this business combination?Select Transactions
  18. 118.A chemical manufacturing company incurs costs related to environmental cleanup of a contaminated site. The contamination occurred ten years ago, and the company has been legally mandated to remediate the site. The cleanup is expected to take several years, and the company can reliably estimate the fair value of the obligation. How should the company account for the estimated future cleanup costs?Select Transactions
  19. 119.A company acquired a patent for $90,000 on January 1, Year 1. The patent has a legal life of 15 years and an estimated economic useful life of 10 years. What is the book value of the patent on December 31, Year 3?Select Transactions
  20. 120.A company uses the allowance method for uncollectible accounts. At year-end, the company's accounts receivable balance is $500,000, and the allowance for doubtful accounts has a debit balance of $5,000 before adjustment. If the company estimates that 3% of accounts receivable will be uncollectible, what is the amount of bad debt expense to be recognized?Select Transactions
  21. 121.A company manufactures custom machinery. It charges customers an upfront non-refundable fee for setup and customization of the machinery, which represents a distinct service. The company then transfers control of the machinery over time. How should the company recognize revenue for the non-refundable upfront fee?Select Transactions
  22. 122.A company holds an investment in another entity's equity securities. The company intends to hold the securities for capital appreciation and does not have significant influence over the investee. The fair value of the securities increased by $50,000 during the year. What is the impact of this fair value change on the company's financial statements if the securities are classified as equity investments without readily determinable fair value?Select Transactions
  23. 123.A company is preparing its financial statements and discovers that it failed to record accrued salaries of $15,000 at the end of Year 1. The salaries were paid in Year 2. Assuming the error was discovered in Year 2 before the Year 2 financial statements were issued, and the company uses the accrual basis of accounting, what is the effect of correcting this error on the Year 1 financial statements?Select Transactions
  24. 124.A company issues 1,000 shares of $1 par value common stock for $25 per share. Concurrently, the company also issues 500 shares of $50 par value preferred stock for $60 per share. What is the total amount that should be credited to the 'Additional Paid-in Capital - Common Stock' account?Select Transactions
  25. 125.A company enters into a derivatives contract to hedge its exposure to changes in the fair value of a recognized asset. The derivative is designated as a fair value hedge. During the period, the fair value of the derivative increased by $10,000, and the fair value of the hedged asset decreased by $9,000. What is the net effect of these fair value changes on the company's net income for the period?Select Transactions
  26. 126.A company purchased a machine for $100,000 on January 1, Year 1. The machine has an estimated useful life of 10 years and a salvage value of $10,000. The company uses the straight-line depreciation method. On July 1, Year 3, the company sold the machine for $70,000. What is the gain or loss on the sale of the machine?Select Transactions
  27. 127.A company incurred $500,000 in research costs and $200,000 in development costs for a new product. The development costs met the criteria for capitalization under GAAP. Additionally, the company spent $100,000 on general and administrative expenses related to the project. What amount should the company report as research and development expense in the current period?Select Transactions
  28. 128.A company uses the indirect method to prepare its statement of cash flows. During the year, the company reported net income of $250,000. Depreciation expense was $40,000, and a gain on the sale of equipment was $15,000. Accounts receivable decreased by $20,000, and accounts payable increased by $10,000. What is the net cash provided by operating activities?Select Transactions
  29. 129.A company issues a 10-year, $1,000,000 bond on January 1, Year 1, with a stated interest rate of 5%, payable annually on December 31. The market interest rate on the date of issuance is 6%. The bond was issued at a discount. Which of the following statements is true regarding the interest expense recognized for this bond in Year 1, using the effective interest method?Select Transactions
  30. 130.A company, a U.S. parent, has a subsidiary in Germany. The subsidiary's functional currency is the Euro (€). At the end of the year, the subsidiary's net assets translated into U.S. dollars using the current exchange rate are $5,000,000. The historical cost of these net assets, translated at historical rates, would have been $4,500,000. The difference arises solely from changes in exchange rates. How should this difference be reported in the consolidated financial statements?Select Transactions
  31. 131.A company holds an investment in another company's equity securities. The fair value of the investment at year-end is $150,000, while its cost was $120,000. The company classifies this investment as 'available-for-sale.' How should the unrealized gain or loss on this investment be reported in the financial statements?Select Transactions
  32. 132.A company sells a product for $200,000 on credit. The terms are 2/10, net 30. The company expects 70% of customers to take the discount. Using the net method for recording sales discounts, how much revenue should the company initially recognize?Select Transactions
  33. 133.A company recognized revenue of $500,000 for a construction contract using the percentage-of-completion method in Year 1. In Year 2, the company incurred additional costs of $300,000 and updated its estimate of total costs to $1,000,000. Total contract revenue is $1,200,000. What amount of revenue should the company recognize in Year 2?Select Transactions
  34. 134.A company sells a product for $200,000 on credit with terms 2/10, net 30. The company expects 70% of customers to take the discount. Using the net method, what is the initial journal entry to record the sale?Select Transactions
  35. 135.A company is preparing its financial statements and discovers that it failed to record accrued salaries of $50,000 at the end of Year 1. The error was discovered in Year 2 before the Year 2 financial statements were issued. The company uses a calendar year-end. What is the appropriate accounting treatment for this error in Year 2?Select Transactions
  36. 136.A company holds an investment in another entity's equity securities. The company intends to hold the investment for the long term and does not have a readily determinable fair value for these securities. The company elects the practical expedient to measure the investment at cost, less any impairment, plus or minus changes resulting from observable price changes of identical or similar investments. What is the appropriate accounting treatment for an impairment loss on this investment?Select Transactions
  37. 137.A company enters into a derivatives contract to hedge its exposure to changes in the fair value of a recognized asset. The derivative is designated as a fair value hedge. At the end of the reporting period, the fair value of the derivative increased by $10,000, and the fair value of the hedged asset decreased by $9,500. What is the impact on the company's net income for the period?Select Transactions
  38. 138.A company manufactures custom machinery. It charges customers an upfront non-refundable fee of $20,000 for design and engineering services, which are performed evenly over a 4-month period. The manufacturing of the machinery begins after the design is approved, taking another 6 months. The total contract price is $500,000. How much revenue should the company recognize from the upfront fee in the first month following the contract signing?Select Transactions
  39. 139.A company, a U.S. parent, has a subsidiary operating in a foreign country. The subsidiary's functional currency is its local currency, which is different from the U.S. dollar. At year-end, the subsidiary's assets and liabilities are translated into U.S. dollars for consolidation purposes. Which of the following exchange rates should be used to translate the subsidiary's plant and equipment?Select Transactions
  40. 140.A company issues a 10-year, $1,000,000 bond on January 1, Year 1, with a stated interest rate of 6% payable annually on December 31. The market interest rate on the issuance date was 5%. The bond was issued for $1,077,217. Using the effective interest method, what is the interest expense recognized for the year ended December 31, Year 1?Select Transactions
  41. 141.A company exchanges an old machine for a new, dissimilar machine. The old machine has an original cost of $100,000 and accumulated depreciation of $70,000. Its fair value at the time of exchange is $35,000. The new machine has a fair value of $120,000. The company also pays $85,000 in cash as part of the exchange. What is the gain or loss on the exchange of the old machine?Select Transactions
  42. 142.A multinational corporation has a subsidiary in a foreign country. The subsidiary's financial statements are denominated in its local currency, which is determined to be its functional currency. The parent company's reporting currency is the U.S. dollar. Which of the following exchange rates should be used to translate the subsidiary's equipment and accumulated depreciation at year-end using the current rate method?Select Transactions
  43. 143.A company determines that its defined benefit pension plan has a projected benefit obligation (PBO) of $1,500,000 and plan assets with a fair value of $1,200,000. Additionally, the company has unrecognized prior service cost of $100,000 and an unrecognized net actuarial loss of $50,000. What is the amount of the net pension liability or asset that should be reported on the balance sheet?Select Transactions
  44. 144.A company sells goods on credit for $100,000 with terms 2/10, net 30. The company expects customers to take advantage of the discount. Under the net method of accounting for sales discounts, what is the initial journal entry to record the sale?Select Transactions
  45. 145.A construction company enters into a contract to build a custom bridge for a municipality. The contract price is $10,000,000. The company estimates total costs to be $8,000,000. In Year 1, the company incurs costs of $2,000,000 and estimates additional costs to complete the project of $6,000,000. Under ASC 606, what amount of revenue should the company recognize in Year 1 if the performance obligation is satisfied over time?Select Transactions
  46. 146.A company, a U.S. parent, has a subsidiary in Germany. The subsidiary's functional currency is the Euro (€), and the U.S. dollar ($) is the reporting currency. At the end of the year, the subsidiary's net assets increased by €500,000 due to operations. The average exchange rate for the year was $1.15/€, and the year-end rate was $1.20/€. What is the impact of this change in net assets on the cumulative translation adjustment (CTA) for the year, assuming the current rate method is used?Select Transactions
  47. 147.A company holds equity securities classified as available-for-sale (AFS). At the end of the year, the fair value of these securities is $150,000, while their cost was $130,000. There were no sales of AFS securities during the year. How should the $20,000 unrealized gain be reported in the financial statements?Select Transactions
  48. 148.A company discovers that it failed to record accrued salaries of $20,000 at the end of Year 1. The error was discovered in Year 2 before the financial statements for Year 2 were issued. The company uses a calendar year-end. How should this error be corrected, assuming the error is material?Select Transactions
  49. 149.A company uses the LIFO inventory costing method. Due to obsolescence, a specific inventory item, which originally cost $100, has a current replacement cost of $80 and an estimated selling price of $110. Selling costs are $15, and normal profit margin is $10. What is the value of this inventory item using the lower-of-cost-or-market (LCM) rule?Select Transactions
  50. 150.A company issues 1,000 shares of $10 par value common stock for $50 per share. Concurrently, it incurs $5,000 in direct costs related to the stock issuance. How should these stock issuance costs be recorded?Select Transactions