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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 361
The constraint on variable consideration means an entity includes it only to the extent that:
Select an option first.
Correct answer: C — It is PROBABLE that a significant REVERSAL of cumulative revenue will NOT occur
Explanation: The CONSTRAINT limits variable consideration to the amount for which it is PROBABLE that a SIGNIFICANT REVERSAL will not subsequently occur. Factors suggesting a reversal is likely: susceptibility to factors outside the entity's influence, a long time until resolution, limited experience with similar contracts, and a broad range of possible amounts.
Question 362
A change in depreciation method (e.g. from DDB to straight-line) is treated as:
Select an option first.
Correct answer: C — A change in ESTIMATE effected by a change in principle — applied PROSPECTIVELY
Explanation: A change in DEPRECIATION METHOD is treated as a CHANGE IN ESTIMATE effected by a change in principle, and is therefore applied PROSPECTIVELY — no restatement. This surprises candidates, who expect retrospective treatment because it looks like a principle change.
Question 363
A change TO the LIFO inventory method is accounted for:
Select an option first.
Correct answer: C — PROSPECTIVELY, because the prior-period LIFO layers are impracticable to reconstruct
Explanation: A change TO LIFO is one of the two exceptions to retrospective treatment (the other being a change in depreciation method). Because reconstructing prior LIFO layers is impracticable, the opening inventory in the year of change becomes the base-year layer and the change is applied PROSPECTIVELY.
Question 364
Intraperiod tax allocation means:
Select an option first.
Correct answer: C — Allocating the period's total tax among continuing operations, discontinued operations, and OCI items — each shown net of its own tax
Explanation: INTRAPERIOD tax allocation distributes the period's tax expense WITHIN the financial statements — to continuing operations, discontinued operations, and each OCI item — so that each is presented NET OF ITS OWN TAX. It prevents a tax benefit in one component from distorting another. (INTERPERIOD allocation is what creates deferred taxes.)
Question 365
Halloway Inc. sells equipment with a two-year service contract for a bundled price of $10,000. Standalone selling prices: equipment $9,000; service $3,000. Revenue allocated to the EQUIPMENT is:
Select an option first.
Correct answer: C — $7,500
Explanation: Allocate on RELATIVE STANDALONE SELLING PRICE. Total SSP = $9,000 + $3,000 = $12,000. Equipment share = $9,000/$12,000 = 75%. Allocation = 75% × $10,000 = $7,500 (service gets $2,500). The $3,000 discount is spread PROPORTIONATELY across both obligations. Allocating the full $9,000 to equipment (option C) ignores the discount and accelerates revenue.
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Question 366
An entity determines a performance obligation is satisfied OVER TIME. Which method of measuring progress reflects the ENTITY'S EFFORTS rather than the value transferred?
Select an option first.
Correct answer: D — INPUT method (costs incurred, labour hours)
Explanation: An INPUT method measures the ENTITY'S efforts or inputs — costs incurred (cost-to-cost), labour hours, machine hours. An OUTPUT method measures the VALUE TRANSFERRED to the customer — units delivered, milestones, surveys of performance. Input methods can distort progress when there are large uninstalled materials on site, or when inefficiencies inflate costs without transferring value.
Question 367
A parent sells inventory costing $60,000 to its 100%-owned subsidiary for $100,000. At year-end the subsidiary still holds 40% of those goods. The unrealised profit to be ELIMINATED is:
Select an option first.
Correct answer: B — $16,000
Explanation: Total intercompany profit = $100,000 − $60,000 = $40,000. Only the portion still IN INVENTORY at year-end is UNREALISED: 40% × $40,000 = $16,000. The other 60% was sold on to outside parties and IS realised from the group's perspective. Eliminating the full $40,000 (option A) would understate consolidated income.
Question 368
Book income is $500,000. It includes $40,000 of municipal bond interest and $20,000 of fines. Taxable income is:
Select an option first.
Correct answer: B — $480,000
Explanation: Start with book income of $500,000. SUBTRACT the $40,000 municipal interest (income for book, NOT taxable). ADD BACK the $20,000 in fines (expense for book, NOT deductible). $500,000 − $40,000 + $20,000 = $480,000. Both are PERMANENT differences and create NO deferred tax — they simply change the effective tax rate.
Question 369
An entity has a DTA of $300,000 and concludes it is more likely than not that $120,000 will NOT be realised. The entity records:
Select an option first.
Correct answer: A — A VALUATION ALLOWANCE of $120,000, presented as a contra-account against the DTA (net DTA $180,000)
Explanation: A VALUATION ALLOWANCE of $120,000 is recorded as a contra-account, leaving a NET DTA of $180,000. The gross DTA remains on the books — it is not written off — because the allowance can be REVERSED if the outlook improves. The offsetting debit goes to income tax expense.
Question 370
In a business combination, the acquirer holds a previously held 30% equity interest in the acquiree, with a carrying value of $2 million and a fair value of $3 million at the acquisition date. The acquirer should:
Select an option first.
Correct answer: D — REMEASURE it to FAIR VALUE ($3 million), recognising a $1 million GAIN in income, and include the $3 million in the goodwill computation
Explanation: In a STEP ACQUISITION, the previously held equity interest is REMEASURED to FAIR VALUE at the acquisition date, and the resulting GAIN (or loss) of $1 million goes to INCOME. The fair value of $3 million is then included in the goodwill calculation alongside the consideration transferred and the fair value of any NCI.
Question 371
A cash flow hedge is discontinued because the forecasted transaction is NO LONGER PROBABLE of occurring. The amount accumulated in AOCI should be:
Select an option first.
Correct answer: C — RECLASSIFIED to NET INCOME immediately
Explanation: If the forecasted transaction is no longer PROBABLE, the hedge relationship fails — there is nothing left to match the deferred gain or loss against. The amount in AOCI is therefore RECLASSIFIED to NET INCOME IMMEDIATELY. (If the transaction is merely DELAYED but still probable, the amount stays in AOCI.)
Question 372
Under ASC 606, a customer's non-refundable UPFRONT FEE (e.g. a gym joining fee) that does not transfer a distinct good or service should be:
Select an option first.
Correct answer: B — DEFERRED and recognised over the period of the customer's expected relationship, because it is an advance payment for future services
Explanation: A non-refundable UPFRONT FEE that does NOT transfer a distinct good or service is an ADVANCE PAYMENT for future goods or services. It is DEFERRED and recognised over the period of benefit — typically the expected customer relationship period, which may extend well beyond the stated contract term (a gym membership renewed for years).
Question 373
An entity concludes it is an AGENT rather than a principal. The revenue it recognises is:
Select an option first.
Correct answer: C — The NET amount (its fee or commission)
Explanation: An AGENT arranges for another party to provide the goods or services and does NOT control them before transfer. It recognises revenue NET — only its fee or commission. A PRINCIPAL, which controls the goods before transfer, recognises the GROSS amount. The gross-versus-net decision can transform reported revenue by an order of magnitude without changing profit at all.
Question 374
A company issues convertible bonds. Under current US GAAP (post-ASU 2020-06), the proceeds are:
Select an option first.
Correct answer: D — Recorded ENTIRELY as DEBT, with no separation, unless the conversion feature is a derivative or a substantial premium exists
Explanation: ASU 2020-06 SIMPLIFIED convertible debt accounting: the proceeds are recorded ENTIRELY as DEBT at face, with interest at the stated rate. The old beneficial conversion feature (BCF) and cash conversion separation models were ELIMINATED. Bifurcation is now required only if the conversion feature is a DERIVATIVE under ASC 815, or a SUBSTANTIAL PREMIUM exists. Study material predating 2020 will get this wrong.
Question 375
An entity acquires IPR&D (in-process research and development) in a business combination. It should be:
Select an option first.
Correct answer: B — Capitalised as an INDEFINITE-LIFE intangible, tested for impairment, until the project is completed or abandoned
Explanation: IPR&D acquired in a BUSINESS COMBINATION is capitalised as an INDEFINITE-LIFE intangible and tested for impairment — it is NOT expensed, unlike internally generated R&D. Once the project is COMPLETED, it becomes a finite-life intangible and is amortised. If ABANDONED, it is written off. Internally generated R&D remains expensed under ASC 730.
Question 376
A company's tax rate changes from 21% to 25%, enacted in the current year and effective next year. Existing deferred tax balances should be:
Select an option first.
Correct answer: C — REMEASURED at the new ENACTED rate immediately, with the effect recognised in income from CONTINUING OPERATIONS in the period of enactment
Explanation: Deferred taxes are measured at the ENACTED rate expected to apply when the difference REVERSES. When a new rate is ENACTED, existing deferred balances are REMEASURED IMMEDIATELY, and the effect is reported in income from CONTINUING OPERATIONS in the period of enactment — even if the deferred item originally arose in OCI (the 'backwards tracing' prohibition).
Question 377
Under the acquisition method, a contingent consideration arrangement (an 'earn-out') classified as a LIABILITY is:
Select an option first.
Correct answer: C — REMEASURED to FAIR VALUE at each reporting date, with changes recognised in EARNINGS
Explanation: Contingent consideration classified as a LIABILITY is REMEASURED to fair value at each reporting date, with changes flowing through EARNINGS — NOT through goodwill. (Goodwill is adjusted only for MEASUREMENT PERIOD adjustments reflecting facts that existed at the acquisition date.) Contingent consideration classified as EQUITY is NOT remeasured at all.
Question 378
An entity sells a building and immediately leases it back. If the transfer QUALIFIES as a sale under ASC 606, the seller-lessee should:
Select an option first.
Correct answer: C — Recognise the full gain or loss on the sale and account for the leaseback separately
Explanation: If the transfer QUALIFIES as a sale under ASC 606 (control has passed), the seller-lessee RECOGNISES the full gain or loss and accounts for the LEASEBACK as a separate lease. If the transfer does NOT qualify as a sale (for instance, because a repurchase option exists), the transaction is a FINANCING arrangement — no sale, no gain, and the asset stays on the books.
Question 379
A contract modification is treated as a SEPARATE contract when:
Select an option first.
Correct answer: D — The additional goods or services are DISTINCT AND the price increases by an amount reflecting their STANDALONE SELLING PRICE
Explanation: BOTH conditions must be met: the added goods/services are DISTINCT, AND the price increase reflects their STANDALONE SELLING PRICE. If so, the modification is a SEPARATE contract with no effect on the original. If not, it is either a TERMINATION of the old contract and creation of a new one (if the remaining goods are distinct) or a CUMULATIVE CATCH-UP adjustment to the existing contract.
Question 380
An entity grants a customer a coupon for 40% off future purchases; the entity typically offers 10% discounts to all customers. The INCREMENTAL 30% represents:
Select an option first.
Correct answer: D — A MATERIAL RIGHT — a separate performance obligation to which part of the transaction price must be allocated
Explanation: A discount option that is INCREMENTAL to what the entity ordinarily offers gives the customer a MATERIAL RIGHT — a separate performance obligation. Part of the transaction price must be ALLOCATED to it (based on the standalone selling price of the option, considering the discount AND the likelihood of exercise) and deferred until the option is exercised or expires.
Question 381
Blythe Corp receives $120,000 upfront for a 3-year service contract, providing services evenly. In Year 1, it recognises:
Select an option first.
Correct answer: A — $40,000, with $80,000 remaining as a contract liability (deferred revenue)
Explanation: The performance obligation is satisfied EVENLY OVER TIME, so revenue is recognised ratably: $120,000 / 3 = $40,000 in Year 1. The remaining $80,000 is a CONTRACT LIABILITY (deferred revenue) — cash received in advance of performance. Recognising the full amount on receipt (option A) is the error the question targets.
Question 382
An entity sells goods with a WARRANTY that provides assurance the product will function as specified (an assurance-type warranty). The warranty is:
Select an option first.
Correct answer: C — NOT a separate performance obligation — it is accounted for as a COST ACCRUAL under ASC 460
Explanation: An ASSURANCE-type warranty (the product will work as promised) is NOT a separate performance obligation — it is a COST ACCRUAL (a warranty liability). A SERVICE-type warranty (extended coverage the customer could buy separately) IS a separate performance obligation, and part of the transaction price must be allocated to it and recognised over the coverage period.
Question 383
A significant FINANCING COMPONENT exists in a contract when:
Select an option first.
Correct answer: C — The timing of payments provides the customer or the entity with a significant BENEFIT OF FINANCING — for instance, payment due two years after delivery
Explanation: A significant FINANCING COMPONENT exists when the timing of payments provides a significant financing benefit to either party. The transaction price is then adjusted to reflect the CASH SELLING PRICE, with the difference recognised as INTEREST income or expense. A PRACTICAL EXPEDIENT permits ignoring it if the period between transfer and payment is ONE YEAR OR LESS.
Question 384
In a BILL-AND-HOLD arrangement, revenue may be recognised only if:
Select an option first.
Correct answer: C — The arrangement is SUBSTANTIVE, the product is separately IDENTIFIED as the customer's, it is READY for physical transfer, and the entity CANNOT use it or direct it to another customer
Explanation: ALL FOUR criteria must be met: (1) the reason for the arrangement is SUBSTANTIVE (the customer requested it); (2) the product is separately IDENTIFIED as belonging to the customer; (3) it is READY for physical transfer; and (4) the entity CANNOT use it or direct it elsewhere. Invoicing (option A) proves nothing — bill-and-hold is a classic revenue manipulation.
Question 385
A deferred tax liability arises from the equity method when:
Select an option first.
Correct answer: A — The investor recognises its SHARE OF INVESTEE INCOME for book purposes but is taxed only on DIVIDENDS received
Explanation: The investor recognises its SHARE of the investee's income for BOOK purposes, but is TAXED only when DIVIDENDS are received. Book income precedes taxable income, so tax will be paid LATER — a deferred tax LIABILITY. (An exception may apply for undistributed earnings of a foreign subsidiary indefinitely reinvested.)
Question 386
The tax effect of an item reported in OCI is recorded:
Select an option first.
Correct answer: D — In OCI — each OCI component is presented NET OF ITS OWN TAX (intraperiod allocation)
Explanation: INTRAPERIOD tax allocation requires each OCI component to be presented NET of its OWN tax effect. So the tax on an unrealised AFS gain goes to OCI, not to income tax expense on the income statement — otherwise income tax expense would include tax on items that never touched net income.
Question 387
A company acquires 100% of a target. The target has an unrecognised internally developed BRAND with a fair value of $5 million. In the acquisition accounting, the brand:
Select an option first.
Correct answer: A — IS recognised as an identifiable intangible at its $5 million fair value, reducing goodwill accordingly
Explanation: The acquisition method requires recognition of ALL IDENTIFIABLE intangibles at FAIR VALUE — even those the target could never recognise itself (internally generated brands, customer relationships, technology). This REDUCES goodwill, since goodwill is the residual plug. Failing to identify intangibles inflates goodwill and understates future amortisation.
Question 388
During the MEASUREMENT PERIOD (up to one year after acquisition), a revision to a provisional fair value based on facts existing at the acquisition date is recorded:
Select an option first.
Correct answer: A — RETROSPECTIVELY, by adjusting GOODWILL (and the comparative information)
Explanation: MEASUREMENT PERIOD adjustments — reflecting new information about facts and circumstances that EXISTED AT the acquisition date — are recorded by adjusting GOODWILL, with comparative information revised as needed. Changes arising from events AFTER the acquisition date go to EARNINGS instead. The distinction is when the underlying fact arose.
Question 389
Intercompany DIVIDENDS from a subsidiary to its parent are:
Select an option first.
Correct answer: B — ELIMINATED in consolidation — the group cannot pay dividends to itself
Explanation: Intercompany dividends are ELIMINATED entirely in consolidation. From the GROUP's perspective, no cash left the group and no income was earned — money simply moved between pockets. (In the parent's SEPARATE books under the cost method, the dividend WOULD be income, which is why the elimination is needed.)
Question 390
A VARIABLE INTEREST ENTITY (VIE) must be consolidated by the party that:
Select an option first.
Correct answer: B — Is the PRIMARY BENEFICIARY — the party with the POWER to direct the activities that most significantly affect economic performance AND the obligation to absorb losses or right to receive benefits that could be significant
Explanation: The PRIMARY BENEFICIARY consolidates a VIE. BOTH criteria must be met: (1) POWER to direct the activities that most significantly affect the VIE's economic performance; AND (2) the OBLIGATION TO ABSORB LOSSES or RIGHT TO RECEIVE BENEFITS that could be significant. Equity ownership alone (option A) is NOT determinative — that is precisely the point of the VIE model.
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