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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 391
A company reports a $200,000 deferred tax asset and a $150,000 deferred tax liability in the same tax jurisdiction. The balance sheet presentation is:
Select an option first.
Correct answer: A — A single NET NON-CURRENT deferred tax ASSET of $50,000
Explanation: Deferred tax assets and liabilities within the SAME tax jurisdiction are NETTED and presented as a single NON-CURRENT amount. $200,000 − $150,000 = a net non-current DTA of $50,000. Amounts in DIFFERENT jurisdictions may NOT be offset against each other.
Question 392
An uncertain tax position is recognised only if it is:
Select an option first.
Correct answer: C — MORE LIKELY THAN NOT (greater than 50%) to be sustained on examination, based on its technical merits
Explanation: TWO steps. RECOGNITION: recognise the benefit only if the position is MORE LIKELY THAN NOT (over 50%) to be sustained on EXAMINATION, assuming the taxing authority has full knowledge. MEASUREMENT: measure at the LARGEST amount that is cumulatively more than 50% likely to be realised. Passing recognition does not entitle you to the full benefit.
Question 393
A cash flow hedge of a forecasted inventory purchase is settled. The amount in AOCI should be:
Select an option first.
Correct answer: B — Reclassified to income WHEN THE INVENTORY AFFECTS EARNINGS (i.e. when it is sold and hits COGS)
Explanation: The deferred hedge 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 the inventory is purchased. This achieves the MATCHING the hedge was designed to produce.
Question 394
An embedded derivative must be BIFURCATED from its host contract when:
Select an option first.
Correct answer: B — Its economic characteristics are NOT clearly and closely related to the host, the hybrid is not measured at fair value through earnings, AND a standalone instrument with the same terms would be a derivative
Explanation: ALL THREE conditions must be met for bifurcation: (1) economic characteristics NOT clearly and closely related to the host; (2) the hybrid instrument is NOT already measured at fair value through earnings; and (3) a separate instrument with the same terms WOULD meet the definition of a derivative. An entity may also elect the FAIR VALUE OPTION for the entire hybrid instead.
Question 395
A company changes from the cost method to the equity method because its ownership rose from 10% to 30%. It should:
Select an option first.
Correct answer: C — Apply the equity method PROSPECTIVELY from the date significant influence is obtained — no retrospective adjustment
Explanation: Since ASU 2016-07, an increase in ownership that triggers equity-method accounting is applied PROSPECTIVELY. The investor simply ADDS the cost of the additional interest to the existing carrying amount and applies the equity method going forward. The old requirement to RETROSPECTIVELY restate was eliminated.
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Question 396
When an investor LOSES significant influence (ownership drops from 25% to 5%), it should:
Select an option first.
Correct answer: C — DISCONTINUE the equity method; the remaining investment is measured at FAIR VALUE, with the difference recognised in earnings
Explanation: On losing significant influence, the equity method is DISCONTINUED. The retained investment is remeasured to FAIR VALUE, and the difference between fair value and the carrying amount is recognised in EARNINGS. No retrospective adjustment is made to prior periods.
Question 397
A gain from a bargain purchase is recognised:
Select an option first.
Correct answer: A — IMMEDIATELY IN EARNINGS, but only after the acquirer REASSESSES whether all assets and liabilities have been correctly identified and measured
Explanation: A BARGAIN PURCHASE GAIN goes to EARNINGS immediately — but the standard REQUIRES the acquirer first to REASSESS the identification and measurement of the acquired assets and liabilities, because a genuine bargain purchase is rare and a negative residual usually signals an error in the valuation.
Question 398
Under ASC 606, when should an entity recognise revenue for a NON-REFUNDABLE upfront fee that DOES transfer a distinct good or service?
Select an option first.
Correct answer: B — When the DISTINCT good or service is transferred, since it is a separate performance obligation
Explanation: If the upfront fee relates to a DISTINCT good or service, it is a SEPARATE PERFORMANCE OBLIGATION and revenue is recognised WHEN THAT GOOD OR SERVICE IS TRANSFERRED. Deferral over the contract term (option A) applies only where the fee does NOT transfer anything distinct — i.e. it is an advance payment for future services.
Question 399
Consolidated financial statements are required when the parent has:
Select an option first.
Correct answer: B — CONTROL — generally a majority voting interest, or being the primary beneficiary of a VIE
Explanation: CONSOLIDATION follows CONTROL — usually a MAJORITY VOTING INTEREST (over 50%), or being the PRIMARY BENEFICIARY of a variable interest entity. SIGNIFICANT INFLUENCE (20%–50%) triggers the EQUITY method, not consolidation. Control, not ownership percentage per se, is the criterion.
Question 400
A parent must present consolidated statements even if the subsidiary's operations are dissimilar (e.g. a manufacturer owning a bank). This is because:
Select an option first.
Correct answer: B — Consolidation is based on CONTROL, not on the similarity of operations; segment disclosures address the differing businesses
Explanation: CONTROL, not similarity of operations, drives consolidation. The old exception for 'non-homogeneous' subsidiaries was ELIMINATED — a manufacturer's finance subsidiary IS consolidated. SEGMENT reporting then provides users with the disaggregated information they need about the dissimilar businesses.
Question 401
Push-down accounting (reflecting the acquirer's basis in the acquiree's own separate statements) is:
Select an option first.
Correct answer: C — An OPTIONAL election available to the acquiree when a change-in-control event occurs
Explanation: PUSH-DOWN accounting is an OPTION the ACQUIREE may elect when an acquirer obtains control. If elected, the acquiree's separate financial statements reflect the acquirer's new BASIS (fair values and goodwill). The election is made in the reporting period in which the change of control occurred, and once made it is irrevocable.
Question 402
An entity determines the transaction price includes $50,000 of variable consideration but concludes only $30,000 is highly probable not to reverse. It should include in the transaction price:
Select an option first.
Correct answer: D — $30,000 — the CONSTRAINT limits variable consideration to the amount for which a significant reversal is probable NOT to occur
Explanation: The CONSTRAINT limits variable consideration to the amount for which it is PROBABLE that a SIGNIFICANT REVERSAL will not occur. Only $30,000 meets that bar, so the transaction price includes $30,000. The remaining $20,000 is recognised later, once the uncertainty resolves.
Question 403
In a sale with a REPURCHASE OPTION (a call) held by the seller at a price BELOW the original selling price, the transaction is accounted for as:
Select an option first.
Correct answer: B — A LEASE (if the customer has significant economic incentive to exercise... ) — more precisely, if the repurchase price is BELOW the original price, it is a LEASE
Explanation: With a seller CALL option or customer PUT option: if the repurchase price is BELOW the original selling price, the arrangement is a LEASE (the customer effectively rented the asset). If the repurchase price is EQUAL TO OR ABOVE the original selling price, it is a FINANCING arrangement (the seller effectively borrowed against the asset). Either way, NO SALE is recognised.
Question 404
A company sells a product with a right of return. It estimates 5% will be returned. Revenue of $1,000,000 should be recognised as:
Select an option first.
Correct answer: B — $950,000, with a $50,000 REFUND LIABILITY and an ASSET for the right to recover the returned goods
Explanation: Revenue is recognised only for the amount the entity EXPECTS to be entitled to: $1,000,000 × 95% = $950,000. A REFUND LIABILITY of $50,000 is recorded for the expected returns, and an ASSET is recognised for the right to RECOVER the returned goods (at the former carrying amount, less expected recovery costs), with a corresponding adjustment to COGS.
Question 405
Under ASC 606, shipping and handling activities performed AFTER control transfers may be:
Select an option first.
Correct answer: B — ELECTED as an ACCOUNTING POLICY to be treated as a FULFILMENT COST rather than a separate performance obligation
Explanation: An entity may make an ACCOUNTING POLICY ELECTION to treat shipping and handling activities occurring AFTER control has transferred as FULFILMENT COSTS (accrued when the related revenue is recognised) rather than as a separate performance obligation. This practical expedient avoids splitting out a trivial obligation.
Question 406
A cash flow hedge's INEFFECTIVE portion under current GAAP is:
Select an option first.
Correct answer: B — NO LONGER separately measured — under ASU 2017-12, the ENTIRE change in fair value of a qualifying cash flow hedge is deferred in OCI and reclassified when the hedged item affects earnings
Explanation: ASU 2017-12 ELIMINATED the requirement to separately measure and report hedge INEFFECTIVENESS for cash flow hedges. The ENTIRE change in the fair value of the hedging instrument is now recorded in OCI and reclassified to earnings when the hedged item affects earnings. Study material predating 2017 will describe the old bifurcation.
Question 407
A company grants share options that vest only if a market condition (a share price target) is met. The market condition:
Select an option first.
Correct answer: A — Is INCORPORATED into the grant-date FAIR VALUE; compensation cost is recognised even if the condition is never met, provided the service is rendered
Explanation: A MARKET condition (a share price or TSR target) is BUILT INTO the grant-date FAIR VALUE via the option-pricing model. Compensation cost is recognised as long as the SERVICE is rendered — EVEN IF the market condition is NEVER met. This contrasts sharply with a PERFORMANCE condition (an earnings target), where no cost is recognised if the condition is not achieved.
Question 408
A company modifies a share-based payment award. Incremental compensation cost equals:
Select an option first.
Correct answer: D — The EXCESS of the fair value of the MODIFIED award over the fair value of the ORIGINAL award, both measured IMMEDIATELY BEFORE and AFTER the modification
Explanation: INCREMENTAL cost = fair value of the MODIFIED award (measured immediately AFTER modification) − fair value of the ORIGINAL award (measured immediately BEFORE modification). This incremental amount is recognised in ADDITION to any remaining unrecognised cost of the original award. Repricing underwater options is the classic case.
Question 409
Under ASC 606, when a contract has multiple performance obligations and one is delivered, the entity recognises:
Select an option first.
Correct answer: A — Only the portion of the transaction price ALLOCATED to the obligation that was satisfied
Explanation: Revenue is recognised as EACH performance obligation is satisfied, in the amount ALLOCATED to it (on relative standalone selling price). Waiting for all obligations to be delivered (option C) is the pre-606 'completed contract' instinct and is wrong; recognising the full contract price (option A) accelerates revenue improperly.
Question 410
A company transfers receivables in a securitisation and retains a servicing obligation. The servicing asset or liability is:
Select an option first.
Correct answer: A — Recognised at FAIR VALUE at the time of transfer, and subsequently measured under either the amortisation or the fair value method
Explanation: When an entity transfers financial assets but RETAINS SERVICING, it recognises a SERVICING ASSET (if the fee more than adequately compensates it) or a SERVICING LIABILITY (if it does not), measured at FAIR VALUE at the transfer date. Subsequently, the entity elects either the AMORTISATION method or the FAIR VALUE method, applied by class.
Question 411
In an asset acquisition (NOT a business combination), transaction costs are:
Select an option first.
Correct answer: D — CAPITALISED as part of the cost of the assets acquired
Explanation: The treatment REVERSES between the two. In an ASSET ACQUISITION, transaction costs are CAPITALISED into the cost of the assets acquired. In a BUSINESS COMBINATION, acquisition-related costs are EXPENSED as incurred. And an asset acquisition NEVER produces goodwill — any excess is allocated pro rata to the identifiable assets.
Question 412
A parent sells equipment to its subsidiary at a gain. In consolidation, the gain is:
Select an option first.
Correct answer: C — ELIMINATED, and the excess depreciation on the written-up asset is also reversed each period until the asset is sold outside the group or fully depreciated
Explanation: The intercompany gain is UNREALISED from the group's perspective and is ELIMINATED. Because the subsidiary now depreciates a WRITTEN-UP carrying amount, the EXCESS DEPRECIATION must also be reversed each period — which progressively 'realises' the deferred gain. The elimination continues until the asset leaves the group or is fully depreciated.
Question 413
Under ASC 606, revenue for a customer LOYALTY POINTS programme is:
Select an option first.
Correct answer: A — ALLOCATED between the goods sold and the points (a material right), with the points' portion DEFERRED until redeemed or expired
Explanation: Loyalty POINTS give the customer a MATERIAL RIGHT — a separate performance obligation. Part of the transaction price is ALLOCATED to the points (based on their standalone selling price, adjusted for expected redemption rates) and DEFERRED as a contract liability until the points are redeemed or expire (breakage).
Question 414
An entity concludes that a contract does NOT meet the ASC 606 criteria (e.g. collection is not probable). Cash received should be:
Select an option first.
Correct answer: A — Recorded as a LIABILITY until the contract criteria are met, or until the consideration is non-refundable AND the entity has transferred control and stopped performing
Explanation: If the Step 1 criteria are NOT met, the entity does NOT have a contract under ASC 606. Cash received is recorded as a LIABILITY. It becomes revenue only when the criteria are subsequently met, OR when the consideration is NON-REFUNDABLE and either performance is complete and the entity has stopped transferring goods, or the contract has been terminated.
Question 415
Under ASC 606, collectibility must be assessed as:
Select an option first.
Correct answer: C — PROBABLE that the entity will collect the consideration to which it will be entitled — a Step 1 criterion for a contract to exist
Explanation: Collectibility being PROBABLE is one of the five Step 1 criteria for a contract to EXIST. Critically, the assessment is of the amount the entity EXPECTS to be entitled to — which may be less than the stated price if the entity intends to offer a concession. If collectibility is not probable, there is no contract and no revenue.
Question 416
An entity has a $2,000,000 DTA arising from an NOL carryforward. Under current law, post-2017 NOLs:
Select an option first.
Correct answer: B — Carry forward INDEFINITELY, but the deduction is limited to 80% of taxable income in the carryforward year
Explanation: Post-2017 NOLs carry forward INDEFINITELY with NO carryback, but the deduction is LIMITED TO 80% of taxable income in the year used. Pre-2018 NOLs had a 2-year carryback and 20-year carryforward with no 80% cap. The vintage of the NOL determines the rules — the question will tell you the year.
Question 417
A company's effective tax rate differs from the statutory rate primarily because of:
Select an option first.
Correct answer: D — PERMANENT differences (municipal interest, fines, the DRD) and tax credits
Explanation: TEMPORARY differences do NOT change the EFFECTIVE tax rate — they only shift tax between periods (creating deferred taxes). Only PERMANENT differences and TAX CREDITS move the effective rate away from the statutory rate. That is why the rate reconciliation disclosure exists.
Question 418
A subsidiary is acquired mid-year. The consolidated income statement includes the subsidiary's results:
Select an option first.
Correct answer: D — From the ACQUISITION DATE forward only
Explanation: Only POST-ACQUISITION results are consolidated — from the acquisition date forward. Pre-acquisition results belong to the previous owners. (Supplemental PRO FORMA disclosure of revenue and earnings as if the acquisition had occurred at the beginning of the period IS required for public entities.)
Question 419
A parent deconsolidates a subsidiary upon losing control. Any retained non-controlling investment is measured at:
Select an option first.
Correct answer: A — FAIR VALUE, with the resulting gain or loss recognised in EARNINGS
Explanation: On LOSS OF CONTROL, the parent DERECOGNISES the subsidiary's assets and liabilities, and REMEASURES any RETAINED investment to FAIR VALUE. The gain or loss — comprising the difference on both the disposed and the retained portions — is recognised in EARNINGS. Any related CTA in AOCI is also reclassified to income.
Question 420
Changes in a parent's ownership interest that do NOT result in a loss of control (e.g. selling 10% while retaining 70%) are accounted for as:
Select an option first.
Correct answer: D — EQUITY transactions — the carrying amount of the NCI is adjusted, with any difference recognised in APIC, NOT income
Explanation: So long as CONTROL is RETAINED, transactions in a subsidiary's shares are EQUITY transactions between owners. NO gain or loss is recognised in income; the difference between the consideration and the adjustment to the NCI's carrying amount goes to APIC. Only a LOSS OF CONTROL triggers income recognition.
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