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Free CPA Business Analysis and Reporting Practice Questions & Answers
500 exam-style Business Analysis and Reporting questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 301
A lessee's lease requires 4 annual year-end payments of $25,000. The IBR is 6%; the 4-year ordinary annuity factor is 3.4651. The lease liability is:
Select an option first.
Correct answer: C — $86,628
Explanation: Lease liability = PV of payments = $25,000 × 3.4651 = $86,628. The UNDISCOUNTED total is $100,000 (option A) — the intended trap.
Question 302
Continuing: the Year 1 INTEREST component of the $25,000 payment is:
Select an option first.
Correct answer: C — $5,198 — $86,628 × 6%
Explanation: Interest = Beginning liability × rate = $86,628 × 6% = $5,198. Principal reduction = $25,000 − $5,198 = $19,802, leaving a liability of $66,826. (Under an OPERATING lease, a single straight-line expense of $25,000 would be reported instead.)
Question 303
A lessor's sales-type lease: FV of the asset $300,000; carrying amount $260,000; PV of lease payments $300,000. Selling profit at commencement is:
Select an option first.
Correct answer: B — $40,000
Explanation: Selling profit = PV of lease payments (or FV) $300,000 − carrying amount $260,000 = $40,000, recognised at COMMENCEMENT. Interest income is then recognised over the term on the net investment.
Question 304
A company sells $2,000,000 of goods with an expected 6% return rate. Revenue recognised is:
Select an option first.
Correct answer: B — $1,880,000, with a $120,000 refund liability
Explanation: Revenue = the amount the entity EXPECTS to be entitled to = $2,000,000 × 94% = $1,880,000. A REFUND LIABILITY of $120,000 is recorded, along with an ASSET for the right to recover the returned goods.
Question 305
Gift cards of $800,000 are sold; expected breakage is 5%; $400,000 has been redeemed. Total revenue recognised is:
Select an option first.
Correct answer: C — $421,053
Explanation: Expected redemptions = $800,000 × 95% = $760,000. Proportion redeemed = $400,000/$760,000 = 52.63%. Breakage revenue = 52.63% × $40,000 total expected breakage = $21,053. Total revenue = $400,000 + $21,053 = $421,053. Breakage is recognised IN PROPORTION to actual redemptions.
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Question 306
A significant financing component: the customer pays $1,000,000 three years after delivery; the appropriate rate is 5%. Revenue at delivery is approximately:
Select an option first.
Correct answer: B — $863,838 — the CASH SELLING PRICE, with the balance as interest income
Explanation: Revenue = the CASH SELLING PRICE = $1,000,000 / (1.05)³ = $1,000,000 / 1.157625 = $863,838. The remaining $136,162 is recognised as INTEREST INCOME over the three years — NOT as revenue.
Question 307
A parent buys 90% for $18m. FV of NCI is $2m; FV of identifiable net assets is $17m. Goodwill is:
Select an option first.
Correct answer: A — $3m
Explanation: Goodwill = Consideration ($18m) + FV of NCI ($2m) − FV of identifiable net assets ($17m) = $3m.
Question 308
A parent sells inventory costing $150,000 to its subsidiary for $250,000. The sub has sold 80% to outsiders. The unrealised profit to ELIMINATE is:
Select an option first.
Correct answer: D — $20,000 — 20% of the $100,000 intercompany profit
Explanation: Total intercompany profit = $250,000 − $150,000 = $100,000. Goods still on hand = 20%. Unrealised profit = 20% × $100,000 = $20,000. The 80% sold to outsiders IS realised from the group's perspective.
Question 309
An investor holds 25% of an investee. The investee earns $1,200,000 and pays $400,000 of dividends. The investment account changes by:
Select an option first.
Correct answer: A — +$200,000 — 25% of income LESS 25% of dividends
Explanation: Equity method: + share of income (25% × $1,200,000 = $300,000) − share of dividends (25% × $400,000 = $100,000) = a NET INCREASE of $200,000. Dividends REDUCE the investment — they are a return OF capital.
Question 310
An investor pays $6,000,000 for 30% of an investee whose identifiable net assets have a fair value of $18,000,000. Equity-method goodwill is:
Select an option first.
Correct answer: A — $600,000 — cost less 30% of the FV of net assets
Explanation: Equity-method goodwill = Cost ($6,000,000) − Share of FV of net assets (30% × $18,000,000 = $5,400,000) = $600,000. Goodwill is NOT amortised; any FV/BV differential relating to depreciable assets IS.
Question 311
A contract has three obligations with standalone prices of $50,000, $30,000 and $20,000. The contract price is $90,000. The allocation to the SECOND is:
Select an option first.
Correct answer: A — $27,000 — ($30,000/$100,000) × $90,000
Explanation: Total SSP = $100,000. Second obligation's share = 30%. Allocation = 30% × $90,000 = $27,000. The $10,000 discount is spread PROPORTIONATELY (first gets $45,000, third gets $18,000).
Question 312
A construction contract: price $20m; costs to date $8m; estimated costs to COMPLETE $12m. Revenue to date is:
Select an option first.
Correct answer: B — $8m — progress is 8/20 = 40%, and 40% × $20m = $8m
Explanation: Total estimated costs = Costs to date ($8m) + Costs to complete ($12m) = $20m. Progress = $8m/$20m = 40%. Revenue to date = 40% × $20m = $8m. (Gross profit to date = $0 — the contract is break-even.)
Question 313
A cash-flow-hedged forecasted purchase has a $50,000 gain in AOCI. The hedged inventory is later SOLD. The $50,000 is:
Select an option first.
Correct answer: A — RECLASSIFIED to EARNINGS (through COGS) when the inventory is SOLD
Explanation: The deferred amount is reclassified from AOCI to EARNINGS when the HEDGED ITEM affects earnings. For hedged inventory, that is when the inventory is SOLD and enters COGS — NOT when it is purchased.
Question 314
A liability-classified SAR has a grant-date fair value of $200,000 and a year-end fair value of $260,000, with 2 of 4 years vested. Cumulative expense is:
Select an option first.
Correct answer: C — $130,000 — 50% vested × the YEAR-END fair value of $260,000
Explanation: A LIABILITY-classified award is REMEASURED to fair value at EACH reporting date. Cumulative expense = Vested fraction (2/4 = 50%) × the CURRENT fair value ($260,000) = $130,000. An EQUITY-classified award would use the fixed GRANT-DATE fair value: 50% × $200,000 = $100,000.
Question 315
A company capitalises $180,000 of contract acquisition costs for a 3-year contract with one expected 3-year renewal (no new commission). Annual amortisation is:
Select an option first.
Correct answer: B — $30,000 — amortised over the 6-year PERIOD OF BENEFIT
Explanation: Capitalised contract costs are amortised over the PERIOD OF BENEFIT, which INCLUDES anticipated RENEWALS if no new commission is payable. Benefit period = 3 + 3 = 6 years. Annual = $180,000/6 = $30,000. Using only the initial term over-amortises.
Question 316
A company's goodwill impairment: the reporting unit's carrying value is $6m (including $900,000 of goodwill); fair value is $5.4m. The impairment loss is:
Select an option first.
Correct answer: B — $600,000 — carrying value less fair value, capped at the goodwill balance
Explanation: Loss = Carrying value $6,000,000 − Fair value $5,400,000 = $600,000. It is CAPPED at the goodwill carrying amount ($900,000), and $600,000 is below that cap — so the full $600,000 is recognised.
Question 317
Same facts, but goodwill is only $400,000. The impairment loss is:
Select an option first.
Correct answer: B — $400,000 — CAPPED at the carrying amount of goodwill
Explanation: The computed shortfall is $600,000, but the loss is CAPPED at the carrying amount of GOODWILL ($400,000), writing goodwill to zero. The remaining $200,000 shortfall is NOT recognised — other assets were tested for impairment first.
Question 318
A company issues $5,000,000 of convertible bonds at par. Under ASU 2020-06, the amount recorded as EQUITY is:
Select an option first.
Correct answer: C — $0 — the entire proceeds are recorded as DEBT; no separation is required
Explanation: ASU 2020-06 ELIMINATED the separation models. The ENTIRE $5,000,000 is recorded as DEBT at face, with interest at the stated rate. Bifurcation is required only if the conversion feature is a DERIVATIVE under ASC 815 or a SUBSTANTIAL PREMIUM exists.
Question 319
A lessee's ROU asset: lease liability $200,000; initial direct costs $8,000; prepaid rent $5,000; lease incentives received $12,000. The ROU asset is:
Select an option first.
Correct answer: B — $201,000 — $200,000 + $8,000 + $5,000 − $12,000
Explanation: ROU asset = Lease liability ($200,000) + Initial direct costs ($8,000) + Prepayments ($5,000) − Lease incentives ($12,000) = $201,000. With none of the three adjustments, the ROU asset would simply EQUAL the liability.
Question 320
A parent acquires 60% of a sub for $9m. FV of NCI is $5.5m; FV of identifiable net assets is $12m. Goodwill is:
Select an option first.
Correct answer: C — $2.5m — consideration $9m + NCI $5.5m − net assets $12m
Explanation: Goodwill = $9m + $5.5m − $12m = $2.5m. Note the NCI's fair value ($5.5m) EXCEEDS its proportionate share of net assets (40% × $12m = $4.8m) — meaning $0.7m of goodwill is attributed to the NCI under the FULL goodwill method US GAAP requires. IFRS's PARTIAL method would give goodwill of only $9m − (60% × $12m) = $1.8m.
Question 321
A parent owns 80%. The SUB sells equipment upstream to the parent at a $200,000 gain; the asset has a 4-year remaining life. In Year 1, the reduction in NCI income is:
Select an option first.
Correct answer: B — $30,000 — 20% of ($200,000 gain − $50,000 excess depreciation reversed)
Explanation: UPSTREAM sale: the unrealised gain belongs to the SUBSIDIARY and is SHARED with the NCI. Net unrealised at year-end = $200,000 gain − $50,000 excess depreciation ($200,000/4) = $150,000. NCI's share = 20% × $150,000 = $30,000 REDUCTION. A DOWNSTREAM sale would allocate the entire adjustment to the PARENT, leaving the NCI untouched.
Question 322
A cash flow hedge of a forecasted purchase has $80,000 deferred in AOCI. The forecasted transaction becomes NO LONGER PROBABLE but is still REASONABLY POSSIBLE. The $80,000 should be:
Select an option first.
Correct answer: D — RECLASSIFIED to EARNINGS IMMEDIATELY — hedge accounting requires the transaction to remain PROBABLE
Explanation: Hedge accounting requires the forecasted transaction to remain PROBABLE. Once it drops to merely REASONABLY POSSIBLE, the hedge relationship FAILS and the AOCI balance is RECLASSIFIED to EARNINGS immediately. (If the transaction were merely DELAYED but still PROBABLE, the amount would STAY in AOCI.) The distinction turns on a single word.
Question 323
A company grants options with a PERFORMANCE condition (an EPS target) that is ultimately NOT met. Previously recognised compensation cost is:
Select an option first.
Correct answer: D — REVERSED — no cost is recognised for a performance condition that is not satisfied
Explanation: For a PERFORMANCE condition, cost is recognised only if the condition is expected to be, and ultimately IS, met. Failure means REVERSAL of all previously recognised cost. Contrast a MARKET condition (a share-price target), where cost is recognised EVEN IF the condition is never met — because it was priced into the grant-date fair value.
Question 324
A construction contract: price $30m; costs to date $12m; total estimated costs $24m. The company then discovers total costs will actually be $33m. The IMMEDIATE effect is:
Select an option first.
Correct answer: C — Recognise the ENTIRE $3m expected loss IMMEDIATELY, and reverse previously recognised profit
Explanation: Expected total loss = $30m − $33m = $(3m). The ENTIRE loss is recognised IMMEDIATELY, and any profit recognised in prior periods must be REVERSED. Prorating the loss by the percentage complete (option C) is the intended trap. Profits are spread; losses land at once.
Question 325
A company allocates $100,000 to a SERVICE-type warranty (3-year coverage) and incurs $18,000 of actual warranty costs in Year 1. Year 1 reports:
Select an option first.
Correct answer: A — $33,333 of warranty REVENUE and $18,000 of warranty EXPENSE
Explanation: A SERVICE-type warranty is a separate PERFORMANCE OBLIGATION, so the allocated $100,000 is recognised as REVENUE over the 3-year coverage period ($33,333 in Year 1). The ACTUAL costs of $18,000 are expensed as INCURRED. Contrast an ASSURANCE-type warranty, which produces NO revenue — only an accrued liability at the point of sale.
Question 326
Under IFRS, a company writes inventory down from $500,000 to $420,000. The NRV later recovers to $470,000. IFRS requires:
Select an option first.
Correct answer: D — REVERSAL of $50,000, restoring inventory to $470,000 (capped at the original $500,000 cost)
Explanation: IFRS REQUIRES reversal of an inventory write-down (capped at ORIGINAL COST) when the NRV recovers: restore to $470,000, recognising a $50,000 credit to COGS. US GAAP PROHIBITS reversal entirely — the $420,000 becomes the new cost basis. Same facts, opposite answers.
Question 327
An acquirer discovers, 8 months after acquisition, that a liability existing at the acquisition date was understated by $500,000. It should:
Select an option first.
Correct answer: D — Increase the liability and increase GOODWILL by $500,000, with retrospective adjustment — it is a MEASUREMENT PERIOD adjustment
Explanation: A MEASUREMENT PERIOD adjustment reflects new information about facts that EXISTED AT the acquisition date and is recorded RETROSPECTIVELY by adjusting GOODWILL. The measurement period runs up to ONE YEAR, and 8 months is within it. Only changes from events AFTER the acquisition date go to earnings.
Question 328
The same discovery is made 14 MONTHS after acquisition. It should:
Select an option first.
Correct answer: C — Be recognised in EARNINGS — the measurement period (max 1 year) has EXPIRED
Explanation: The MEASUREMENT PERIOD cannot exceed ONE YEAR. At 14 months it has EXPIRED, so the adjustment goes to EARNINGS, not goodwill. Identical facts, and only the TIMING changes the answer — which is precisely why the one-year boundary is examinable.
Question 329
A company's functional currency for a foreign sub is the LOCAL currency. The sub has a US-dollar-denominated PAYABLE. The exchange gain on that payable is reported in:
Select an option first.
Correct answer: A — NET INCOME — a foreign currency TRANSACTION gain on a payable denominated in a currency OTHER than the functional currency goes to earnings
Explanation: Two layers operate here. FIRST: the sub has a payable in a currency (USD) OTHER than its FUNCTIONAL currency (local), so remeasuring it produces a TRANSACTION gain/loss → NET INCOME. SECOND: the sub's statements are then TRANSLATED to the parent's currency, and THAT adjustment goes to OCI (the CTA). Both happen, and they go to different places.
Question 330
A parent sells 15% of a subsidiary for $8m, reducing ownership from 90% to 75%. The carrying amount of the NCI increases by $6m. The $2m difference is:
Select an option first.
Correct answer: C — Credited to APIC — control was RETAINED, so it is an EQUITY transaction
Explanation: Control was RETAINED (75%), so this is an EQUITY TRANSACTION between owners. NO gain touches income. The difference between the $8m received and the $6m increase in the NCI's carrying amount is credited to APIC. Only a LOSS OF CONTROL triggers income recognition.
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