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Free Questions › CPA › Financial Accounting and Reporting
Free CPA Financial Accounting and Reporting Practice Questions & Answers
500 exam-style Financial Accounting 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 271
A truck costs $60,000, has a $5,000 salvage value, and is expected to run 200,000 miles. It runs 30,000 miles in Year 1. Depreciation is:
Select an option first.
Correct answer: B — $8,250
Explanation: Depreciation per mile = ($60,000 − $5,000) / 200,000 = $55,000/200,000 = $0.275. Year 1 = 30,000 × $0.275 = $8,250. Note salvage IS deducted in units-of-production (as in SL and SYD, but unlike DDB).
Question 272
A $1,000,000, 6% bond (annual interest) is issued when the market rate is 8%, at a price of $920,000. First-year interest EXPENSE under the effective-interest method is:
Select an option first.
Correct answer: D — $73,600
Explanation: Interest EXPENSE = CARRYING VALUE × MARKET rate = $920,000 × 8% = $73,600. Cash interest = FACE × COUPON = $1,000,000 × 6% = $60,000. Discount amortisation = $73,600 − $60,000 = $13,600, raising the carrying value to $933,600. Using face × market ($80,000, option C) is the intended trap.
Question 273
Continuing the prior bond: the carrying value at the END of Year 1 is:
Select an option first.
Correct answer: D — $933,600
Explanation: Carrying value rises by the discount amortisation: $920,000 + $13,600 = $933,600. For a DISCOUNT bond the carrying value RISES toward face; for a PREMIUM it FALLS toward face. Both converge on $1,000,000 at maturity — your sanity check.
Question 274
A $500,000, 10% bond (annual interest) is issued at $540,000 when the market rate is 8%. First-year interest EXPENSE is:
Select an option first.
Correct answer: B — $43,200
Explanation: Interest EXPENSE = $540,000 × 8% = $43,200. Cash interest = $500,000 × 10% = $50,000. Premium amortisation = $50,000 − $43,200 = $6,800, REDUCING the carrying value to $533,200. For a PREMIUM bond, expense is LESS than cash interest.
Question 275
Weighted-average accumulated expenditures are $3,000,000. Specific construction debt is $2,000,000 at 5%; other debt is $4,000,000 at 7%. Avoidable interest is:
Select an option first.
Correct answer: A — $170,000
Explanation: Apply the SPECIFIC rate first: $2,000,000 × 5% = $100,000. Then apply the other-debt rate to the remaining expenditures: ($3,000,000 − $2,000,000) × 7% = $1,000,000 × 7% = $70,000. Avoidable = $100,000 + $70,000 = $170,000. Capitalise the LESSER of this and actual interest incurred ($100,000 + $280,000 = $380,000), so $170,000.
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Question 276
An asset has a carrying value of $1,200,000, undiscounted future cash flows of $1,100,000, and a fair value of $850,000. The impairment loss is:
Select an option first.
Correct answer: A — $350,000
Explanation: STEP 1 (recoverability): undiscounted cash flows $1,100,000 < carrying value $1,200,000 → the test FAILS, so an impairment exists. STEP 2: Loss = Carrying value − FAIR VALUE = $1,200,000 − $850,000 = $350,000. Using the undiscounted figure to measure the loss ($100,000, option A) confuses the test with the measurement.
Question 277
A reporting unit has a carrying value of $5,000,000 (including goodwill of $800,000) and a fair value of $4,500,000. The goodwill impairment loss is:
Select an option first.
Correct answer: A — $500,000
Explanation: Post-ASU 2017-04: Loss = Carrying value of the reporting unit − Fair value = $5,000,000 − $4,500,000 = $500,000. It is CAPPED at the carrying amount of goodwill ($800,000), and $500,000 is below that cap, so the full $500,000 is recognised. The old two-step implied-goodwill computation no longer applies.
Question 278
Change the facts: reporting unit carrying value $5,000,000 (goodwill $300,000); fair value $4,500,000. The goodwill impairment loss is:
Select an option first.
Correct answer: A — $300,000 — the loss is CAPPED at the carrying amount of goodwill
Explanation: The computed shortfall is $5,000,000 − $4,500,000 = $500,000. But the loss is CAPPED at the carrying amount of GOODWILL, which is only $300,000. So the recognised loss is $300,000, writing goodwill to zero. The remaining $200,000 shortfall is NOT recognised (other assets were tested for impairment first).
Question 279
An ARO has an expected undiscounted cost of $1,000,000 in 10 years. The credit-adjusted risk-free rate is 6%. The PV factor for 10 years at 6% is 0.5584. The initial ARO liability is:
Select an option first.
Correct answer: A — $558,400
Explanation: ARO = PV of expected retirement cash outflows = $1,000,000 × 0.5584 = $558,400. The same amount is capitalised as an Asset Retirement Cost into PP&E. Year 1 accretion = $558,400 × 6% = $33,504.
Question 280
A lease requires 5 annual payments of $20,000 at year-END. The incremental borrowing rate is 8%; the PV of an ordinary annuity factor (5 years, 8%) is 3.9927. The lease liability is:
Select an option first.
Correct answer: C — $79,854
Explanation: Lease liability = PV of lease payments = $20,000 × 3.9927 = $79,854. The UNDISCOUNTED total is $100,000 (option A) — the intended trap. Payments at year-END use the ORDINARY ANNUITY factor; payments at the BEGINNING would use the annuity-DUE factor.
Question 281
Using the prior lease ($79,854 liability, 8% rate), the FIRST-year interest component of the $20,000 payment is:
Select an option first.
Correct answer: C — $6,388
Explanation: Interest = Beginning liability × rate = $79,854 × 8% = $6,388. The principal reduction = $20,000 − $6,388 = $13,612, leaving a liability of $66,242. This is a finance-lease presentation; an operating lease would report a single straight-line expense of $20,000 per year instead.
Question 282
Plan assets are $8,000,000; the projected benefit obligation is $9,500,000. The balance sheet reports:
Select an option first.
Correct answer: D — A $1,500,000 pension LIABILITY
Explanation: Funded status = Plan assets − PBO = $8,000,000 − $9,500,000 = $(1,500,000). A NEGATIVE funded status means the plan is UNDERFUNDED, reported as a $1,500,000 LIABILITY. The funded status is recognised IN FULL on the balance sheet.
Question 283
Service cost $400,000; interest cost $250,000; expected return on plan assets $180,000; amortisation of prior service cost $30,000. Net periodic pension cost is:
Select an option first.
Correct answer: D — $500,000
Explanation: SIRAGE: $400,000 (Service) + $250,000 (Interest) − $180,000 (expected Return, the only SUBTRACTION) + $30,000 (Amortisation of prior service cost) = $500,000. Adding the expected return instead of subtracting gives $860,000 (option A).
Question 284
A company repurchases 5,000 shares at $30 (par $1, originally issued at $12). Under the COST method, the entry credits Cash for:
Select an option first.
Correct answer: A — $150,000
Explanation: COST method: DR Treasury Stock $150,000 (5,000 × $30) / CR Cash $150,000. The treasury stock is recorded at the REPURCHASE COST. No gain or loss is recognised, and neither par nor the original issue price enters the entry.
Question 285
The company later reissues 2,000 of those treasury shares (cost $30 each) at $35. The effect on APIC — Treasury Stock is:
Select an option first.
Correct answer: C — A $10,000 CREDIT (2,000 × $5 excess of reissue price over cost)
Explanation: Reissue above cost: DR Cash $70,000 (2,000 × $35); CR Treasury Stock $60,000 (2,000 × $30); CR APIC — Treasury Stock $10,000. The $5-per-share excess NEVER goes to income — a company cannot profit by trading its own shares.
Question 286
Inventory cost $80,000; replacement cost $70,000; NRV $75,000; NRV less normal profit $65,000. Under LCM (LIFO), inventory is reported at:
Select an option first.
Correct answer: C — $70,000
Explanation: STEP 1: 'Market' = the MIDDLE of ceiling (NRV $75,000), replacement ($70,000) and floor (NRV − normal profit, $65,000) → market = $70,000. STEP 2: LOWER of cost ($80,000) and market ($70,000) = $70,000.
Question 287
Under LCNRV (FIFO), the same inventory (cost $80,000; NRV $75,000) is reported at:
Select an option first.
Correct answer: A — $75,000 — LCNRV has ONE ceiling and no floor; replacement cost is irrelevant
Explanation: LCNRV (for FIFO and weighted average) is simply the LOWER of COST ($80,000) and NRV ($75,000) = $75,000. Replacement cost and the profit-margin floor are IRRELEVANT — they belong to the LCM rule that applies only to LIFO and retail. Same facts, different method, different answer.
Question 288
Dollar-value LIFO. Base-year inventory $200,000 (index 1.00). Year 1 ending inventory at current cost $253,000; the index is 1.15. The DVL inventory is:
Select an option first.
Correct answer: D — $223,000
Explanation: Step 1: EI at base = $253,000 / 1.15 = $220,000. Step 2: Layer added at base = $220,000 − $200,000 = $20,000. Step 3: New layer at CURRENT prices = $20,000 × 1.15 = $23,000. Step 4: DVL inventory = base layer $200,000 + new layer $23,000 = $223,000. Only the NEW layer is re-priced; the base layer keeps its original index.
Question 289
Continuing: in Year 2, ending inventory at current cost is $231,000 and the index is 1.10. The DVL inventory is:
Select an option first.
Correct answer: B — $211,500
Explanation: EI at base = $231,000 / 1.10 = $210,000 — BELOW the prior base-year total of $220,000, so a LIQUIDATION occurred and NO new layer is added. The Year 1 layer (originally $20,000 at base) is reduced by $10,000, leaving $10,000 at base, priced at ITS OWN original index of 1.15 = $11,500. DVL = base layer $200,000 + $11,500 = $211,500. Liquidated layers are removed at the index of the layer being CONSUMED, not the current index.
Question 290
A retailer has: beginning inventory at cost $50,000 / retail $80,000; purchases at cost $200,000 / retail $320,000; sales $300,000. Under the retail method, ending inventory at COST is:
Select an option first.
Correct answer: C — $62,500
Explanation: Cost-to-retail ratio = ($50,000 + $200,000) / ($80,000 + $320,000) = $250,000/$400,000 = 62.5%. Ending inventory at RETAIL = $400,000 − $300,000 sales = $100,000. Ending inventory at COST = $100,000 × 62.5% = $62,500.
Question 291
A fire destroys inventory. Beginning inventory $120,000; purchases $400,000; sales $600,000; historical gross margin 30%. Estimated inventory destroyed (gross profit method) is:
Select an option first.
Correct answer: B — $100,000
Explanation: Estimated COGS = Sales × (1 − gross margin) = $600,000 × 70% = $420,000. Goods available for sale = Beginning $120,000 + Purchases $400,000 = $520,000. Estimated inventory destroyed = $520,000 − $420,000 = $100,000. Applying the 30% MARGIN directly to sales ($180,000, option A) computes gross PROFIT rather than COGS — the intended trap.
Question 292
A bond with face $1,000,000 and a carrying value of $960,000 (unamortised discount $40,000) is retired early at 103. The loss on extinguishment is:
Select an option first.
Correct answer: A — $70,000
Explanation: Reacquisition price = $1,000,000 × 1.03 = $1,030,000. Net carrying amount = $960,000. Loss = $1,030,000 − $960,000 = $70,000. Using FACE value instead of carrying value gives $30,000 (option A) — the intended trap, which ignores the unamortised discount.
Question 293
A note receivable of $100,000 is non-interest-bearing, due in 2 years. The imputed rate is 10%; the PV factor is 0.8264. The note is recorded at:
Select an option first.
Correct answer: D — $82,640
Explanation: The note is recorded at PRESENT VALUE: $100,000 × 0.8264 = $82,640. The $17,360 difference is a DISCOUNT, amortised to INTEREST INCOME over the two years. A 'non-interest-bearing' note does bear interest — it is simply embedded in the face amount.
Question 294
Continuing: Year 1 interest income on the note is:
Select an option first.
Correct answer: A — $8,264
Explanation: Interest income = Carrying value × imputed rate = $82,640 × 10% = $8,264. The carrying value rises to $90,904. Year 2 interest = $90,904 × 10% = $9,090, bringing the note to $99,994 ≈ $100,000 at maturity (rounding).
Question 295
An entity has an ARO liability of $600,000 at the start of the year. The credit-adjusted risk-free rate is 7%. Accretion expense is:
Select an option first.
Correct answer: D — $42,000
Explanation: Accretion = Beginning ARO × credit-adjusted risk-free rate = $600,000 × 7% = $42,000. The liability grows to $642,000. Accretion is an OPERATING expense (not interest expense) — a favourite classification trap.
Question 296
Plan assets: beginning $5,000,000; actual return $400,000; contributions $600,000; benefits paid $300,000. Ending plan assets are:
Select an option first.
Correct answer: A — $5,700,000
Explanation: Ending plan assets = Beginning $5,000,000 + Actual return $400,000 + Contributions $600,000 − Benefits paid $300,000 = $5,700,000. Note the plan ASSET rollforward uses the ACTUAL return; the pension EXPENSE calculation (SIRAGE) uses the EXPECTED return.
Question 297
PBO: beginning $6,000,000; service cost $500,000; interest cost $360,000; benefits paid $300,000; actuarial loss $150,000. Ending PBO is:
Select an option first.
Correct answer: A — $6,710,000
Explanation: Ending PBO = $6,000,000 + $500,000 (service) + $360,000 (interest) + $150,000 (actuarial LOSS increases the obligation) − $300,000 (benefits paid REDUCE it) = $6,710,000. Benefits paid reduce BOTH the PBO and plan assets.
Question 298
A capitalised software project incurs $200,000 before technological feasibility and $500,000 after, plus $80,000 of post-release maintenance. The amount CAPITALISED is:
Select an option first.
Correct answer: A — $500,000
Explanation: Only costs incurred AFTER technological feasibility and BEFORE general release are capitalised: $500,000. Pre-feasibility costs ($200,000) are EXPENSED as R&D; post-release maintenance ($80,000) is EXPENSED as incurred. Capitalising the wrong phases is the standard error.
Question 299
Treasury stock: 10,000 shares repurchased at $40. 4,000 are reissued at $50 and 3,000 at $32. Under the cost method, the net effect on APIC — Treasury Stock is:
Select an option first.
Correct answer: B — $16,000 credit
Explanation: Reissue at $50 (above cost): 4,000 × ($50 − $40) = $40,000 CREDIT to APIC — T/S. Reissue at $32 (below cost): 3,000 × ($40 − $32) = $24,000 DEBIT, charged first against the existing APIC — T/S balance. Net = $40,000 − $24,000 = $16,000 CREDIT. Only if the debit exceeded the available balance would the excess go to Retained Earnings.
Question 300
A company's accounts receivable is $800,000 with an allowance of $60,000. It writes off $25,000. Net realisable value AFTER the write-off is:
Select an option first.
Correct answer: A — $740,000
Explanation: Before: NRV = $800,000 − $60,000 = $740,000. The write-off entry is DR Allowance $25,000 / CR AR $25,000. After: AR = $775,000; Allowance = $35,000; NRV = $775,000 − $35,000 = $740,000 — UNCHANGED. A write-off has NO effect on net receivables or on income; the expense was recognised earlier when the allowance was established.
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