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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 421
The functional currency of a foreign subsidiary is determined by:
Select an option first.
Correct answer: D — The currency of the PRIMARY ECONOMIC ENVIRONMENT in which the entity operates — the currency that mainly influences sales prices, labour and material costs
Explanation: The FUNCTIONAL currency is that of the PRIMARY ECONOMIC ENVIRONMENT — the currency that principally determines sales prices, labour, material and other costs. It is a matter of FACT and judgement, not a free election. It determines whether TRANSLATION (gain to OCI) or REMEASUREMENT (gain to net income) applies.
Question 422
An entity holds a forward contract designated as a hedge of a FIRM COMMITMENT to buy equipment. This is a:
Select an option first.
Correct answer: A — FAIR VALUE hedge — a firm commitment is an existing (albeit unrecognised) contractual obligation, so changes in value flow through EARNINGS
Explanation: A FIRM COMMITMENT is an existing binding agreement, so hedging it is a FAIR VALUE hedge — both the derivative and the firm commitment are marked to market through EARNINGS, offsetting. A FORECASTED (not yet committed) transaction would instead be a CASH FLOW hedge, with the effective portion deferred in OCI.
Question 423
Hedge documentation must be prepared:
Select an option first.
Correct answer: C — AT INCEPTION of the hedge — including the risk being hedged, the hedging instrument, the hedged item, and how effectiveness will be assessed
Explanation: Formal DOCUMENTATION AT INCEPTION is a prerequisite for hedge accounting — identifying the hedging instrument, the hedged item, the nature of the risk, and the METHOD of assessing effectiveness. Without contemporaneous documentation, hedge accounting is NOT available, however economically effective the hedge actually is.
Question 424
A company issues stock options to employees with a 4-year graded vesting schedule (25% per year). Compensation cost may be recognised:
Select an option first.
Correct answer: A — Using EITHER the straight-line basis over the total vesting period, OR the accelerated (graded) attribution method — an accounting policy election for awards with service conditions only
Explanation: For awards with SERVICE conditions only and GRADED vesting, an entity may ELECT (as an accounting policy) either STRAIGHT-LINE recognition over the total vesting period, or the ACCELERATED (graded/FIN 28) attribution method, which treats each tranche as a separate award. For awards with PERFORMANCE conditions, the accelerated method is REQUIRED.
Question 425
A liability-classified share-based payment award is:
Select an option first.
Correct answer: D — REMEASURED to FAIR VALUE at EACH reporting date until settlement, with changes in earnings
Explanation: An award classified as a LIABILITY (typically cash-settled, such as a stock appreciation right settled in cash) is REMEASURED to fair value at EACH reporting date through SETTLEMENT, with changes in EARNINGS. An EQUITY-classified award is fixed at GRANT-DATE fair value and never remeasured. Classification drives everything.
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Question 426
An entity applies the modified retrospective method on adopting a new standard. This means:
Select an option first.
Correct answer: C — The CUMULATIVE EFFECT is recognised as an adjustment to OPENING RETAINED EARNINGS in the year of adoption; prior periods are NOT restated
Explanation: Under the MODIFIED RETROSPECTIVE method, the cumulative effect of adoption is recorded as an adjustment to the OPENING BALANCE of retained earnings in the year of initial application, and PRIOR PERIODS ARE NOT RESTATED. The FULL RETROSPECTIVE method, by contrast, restates all periods presented.
Question 427
A company recognises revenue over time using the cost-to-cost input method. Costs of WASTED materials that were not anticipated should be:
Select an option first.
Correct answer: D — EXCLUDED from the measure of progress and EXPENSED as incurred — they do not depict transfer of control
Explanation: Costs that do NOT contribute to the entity's progress in satisfying the obligation — WASTED materials, unexpected rework, abnormal inefficiencies — are EXCLUDED from the cost-to-cost measure and EXPENSED as incurred. Including them would falsely inflate the percentage complete and accelerate revenue that has not been earned.
Question 428
Uninstalled MATERIALS on a construction site (e.g. a large elevator delivered but not installed) under the cost-to-cost method should:
Select an option first.
Correct answer: C — Generally be EXCLUDED from the measure of progress, with revenue recognised only to the extent of the cost of those materials (a zero-margin adjustment)
Explanation: Where the entity transfers control of significant UNINSTALLED materials, including their full cost in the cost-to-cost calculation would OVERSTATE progress. The standard requires an adjustment: revenue is recognised only to the EXTENT OF THE COST of those goods (a ZERO margin), so no profit is recognised until they are actually installed.
Question 429
A company's contract has a performance obligation satisfied over time, but the entity CANNOT reasonably measure progress. It should:
Select an option first.
Correct answer: A — Recognise revenue only to the extent of COSTS INCURRED that it expects to recover (a zero-margin approach), until it can reasonably measure progress
Explanation: If the entity cannot reasonably measure progress but EXPECTS TO RECOVER its costs, it recognises revenue only to the EXTENT OF COSTS INCURRED — a ZERO-MARGIN approach — until it can reasonably measure progress. Recognising nothing (option A) would understate performance that has genuinely occurred.
Question 430
Under ASC 606, breakage (unexercised customer rights, e.g. unredeemed gift cards) is recognised:
Select an option first.
Correct answer: D — In PROPORTION to the pattern of rights exercised by customers, if the entity EXPECTS to be entitled to a breakage amount
Explanation: If the entity EXPECTS to be entitled to BREAKAGE, it recognises the expected breakage amount as revenue IN PROPORTION to the pattern of rights EXERCISED by the customer. If it does NOT expect breakage, the amount is recognised only when the likelihood of exercise becomes remote. Waiting for legal expiry (option A) is the pre-606 approach.
Question 431
Consideration PAYABLE to a customer (e.g. a slotting fee paid to a retailer) is:
Select an option first.
Correct answer: B — A REDUCTION OF THE TRANSACTION PRICE (and therefore of revenue), unless it is in exchange for a DISTINCT good or service received from the customer
Explanation: Consideration PAYABLE TO A CUSTOMER is presumed to be a REDUCTION OF REVENUE. It is treated as an EXPENSE (a purchase) only if the entity receives a DISTINCT good or service from the customer in exchange, and can reasonably estimate its fair value. Slotting fees and coupons typically reduce revenue.
Question 432
An entity capitalises costs to FULFIL a contract when the costs:
Select an option first.
Correct answer: C — Relate DIRECTLY to a contract, GENERATE OR ENHANCE resources used in satisfying the obligation, and are EXPECTED TO BE RECOVERED
Explanation: ALL THREE criteria must be met to capitalise FULFILMENT costs: they relate DIRECTLY to a contract (or anticipated contract), they GENERATE OR ENHANCE resources that will be used in satisfying performance obligations, and they are EXPECTED TO BE RECOVERED. General and administrative costs and wasted materials are expensed.
Question 433
A contract has two obligations with standalone selling prices of $40,000 and $60,000. The contract price is $90,000. Revenue allocated to the FIRST obligation is:
Select an option first.
Correct answer: D — $36,000
Explanation: Allocate on RELATIVE standalone selling price. Total SSP = $100,000. First obligation share = $40,000/$100,000 = 40%. Allocation = 40% × $90,000 = $36,000 (the second gets $54,000). The $10,000 discount is spread PROPORTIONATELY across both.
Question 434
A construction contract has a price of $10,000,000. Costs incurred to date are $3,000,000; estimated total costs are $7,500,000. Revenue recognised to date under cost-to-cost is:
Select an option first.
Correct answer: C — $4,000,000
Explanation: Progress = $3,000,000 / $7,500,000 = 40%. Revenue to date = 40% × $10,000,000 = $4,000,000. Gross profit to date = $4,000,000 − $3,000,000 = $1,000,000 (or 40% × the $2,500,000 estimated total profit).
Question 435
Continuing: in Year 2, costs to date reach $6,000,000 and total estimated costs remain $7,500,000. Revenue recognised IN YEAR 2 is:
Select an option first.
Correct answer: C — $4,000,000
Explanation: Progress = $6,000,000 / $7,500,000 = 80%. Revenue TO DATE = 80% × $10,000,000 = $8,000,000. Revenue recognised IN YEAR 2 = $8,000,000 − $4,000,000 recognised in Year 1 = $4,000,000. Always compute cumulatively, then BACK OUT the prior periods.
Question 436
A contract price is $5,000,000 and total estimated costs rise to $5,400,000 (an expected loss). Costs to date are $2,700,000. The loss recognised is:
Select an option first.
Correct answer: B — $400,000 — the ENTIRE expected loss is recognised IMMEDIATELY
Explanation: Expected total loss = $5,000,000 − $5,400,000 = $(400,000). The ENTIRE expected loss is recognised IMMEDIATELY — never prorated by percentage complete. Profits are spread; losses land at once. Multiplying the loss by the 50% completion (option A) is the intended error.
Question 437
Book income $800,000 includes $50,000 of municipal interest and $30,000 of non-deductible fines. The tax rate is 21%. Current income tax PAYABLE is:
Select an option first.
Correct answer: B — $163,800
Explanation: Taxable income = Book income $800,000 − $50,000 (municipal interest: income for BOOK, not taxable) + $30,000 (fines: expense for BOOK, not deductible) = $780,000. Tax payable = 21% × $780,000 = $163,800. Applying 21% to BOOK income gives $168,000 (option A) — the intended trap. Both adjustments are PERMANENT differences, so they create NO deferred tax; they simply change the effective rate.
Question 438
Taxable temporary differences total $400,000. The enacted future tax rate is 21%. The deferred tax LIABILITY is:
Select an option first.
Correct answer: C — $84,000
Explanation: DTL = Taxable temporary difference × ENACTED future rate = $400,000 × 21% = $84,000. The DIFFERENCE itself ($400,000) is not the liability — only its TAX EFFECT is.
Question 439
A company has a DTA of $500,000 and concludes a valuation allowance of 40% is needed. The NET deferred tax asset reported is:
Select an option first.
Correct answer: B — $300,000
Explanation: Valuation allowance = 40% × $500,000 = $200,000. Net DTA = $500,000 − $200,000 = $300,000. The gross DTA REMAINS on the books, presented net of the contra-account allowance — which can be reversed if the outlook improves.
Question 440
An acquirer pays $10,000,000 for 80% of a target. The fair value of the NCI is $2,400,000. The fair value of identifiable net assets is $11,000,000. Goodwill is:
Select an option first.
Correct answer: B — $1,400,000
Explanation: Goodwill = Consideration ($10,000,000) + FV of NCI ($2,400,000) − FV of identifiable net assets ($11,000,000) = $1,400,000. Note the FULL goodwill approach (required under US GAAP) includes the NCI at fair value, so goodwill attributable to the NCI is captured too.
Question 441
A parent sells inventory costing $80,000 to its subsidiary for $120,000. The subsidiary sells 70% of it to outsiders by year-end. The unrealised profit to ELIMINATE is:
Select an option first.
Correct answer: A — $12,000
Explanation: Total intercompany profit = $120,000 − $80,000 = $40,000. Goods REMAINING in inventory = 30%. Unrealised profit = 30% × $40,000 = $12,000. The 70% sold to outsiders IS realised from the group's perspective and is not eliminated.
Question 442
An investor holds 30% of an investee. The investee reports net income of $800,000 and pays dividends of $200,000. The investor's investment account changes by:
Select an option first.
Correct answer: D — +$180,000
Explanation: Equity method: + share of income (30% × $800,000 = $240,000) − share of dividends (30% × $200,000 = $60,000) = a NET INCREASE of $180,000. Dividends REDUCE the investment — they are a return OF capital, not income. Recording the $240,000 without the dividend reduction (option A) is the classic error.
Question 443
A company grants 10,000 options with a grant-date fair value of $6 each, vesting over 3 years. Annual compensation expense (straight-line) is:
Select an option first.
Correct answer: C — $20,000
Explanation: Total compensation = 10,000 × $6 = $60,000. Recognised over the 3-year VESTING period: $60,000 / 3 = $20,000 per year. The fair value is fixed at GRANT DATE and is NOT remeasured for later share-price movements.
Question 444
A company sells $1,000,000 of goods with an expected 8% return rate. Revenue recognised is:
Select an option first.
Correct answer: C — $920,000, with an $80,000 refund liability
Explanation: Revenue = amount the entity EXPECTS to be entitled to = $1,000,000 × (1 − 8%) = $920,000. A REFUND LIABILITY of $80,000 is recorded for the expected returns, together with an ASSET for the right to recover the returned goods.
Question 445
A company estimates warranty costs at 3% of sales. Sales are $5,000,000 and actual warranty costs paid during the year are $110,000. Warranty EXPENSE is:
Select an option first.
Correct answer: B — $150,000
Explanation: Warranty EXPENSE = 3% × $5,000,000 = $150,000 (accrued in the period of SALE, under the matching principle). The $110,000 actually PAID reduces the warranty LIABILITY — it is not the expense. The ending liability increases by $150,000 − $110,000 = $40,000.
Question 446
A gift card programme sells $500,000 of cards. The entity expects 4% breakage and $300,000 has been redeemed. Revenue recognised (including breakage) is approximately:
Select an option first.
Correct answer: A — $312,500
Explanation: Expected redemptions = $500,000 × 96% = $480,000. Redeemed to date = $300,000, so the proportion of expected redemptions completed = $300,000/$480,000 = 62.5%. Breakage revenue recognised = 62.5% × $20,000 total expected breakage = $12,500. Total revenue = $300,000 + $12,500 = $312,500. Breakage is recognised IN PROPORTION to actual redemptions.
Question 447
A company issues 1,000 bonds ($1,000 face) with detachable warrants. The bonds alone are worth $950,000 and the warrants $50,000. Proceeds are $1,020,000. Amount allocated to the WARRANTS is:
Select an option first.
Correct answer: A — $51,000
Explanation: Allocate on RELATIVE FAIR VALUES. Total FV = $950,000 + $50,000 = $1,000,000. Warrants' share = $50,000/$1,000,000 = 5%. Allocation = 5% × $1,020,000 proceeds = $51,000 (credited to APIC — Warrants). The bonds receive 95% × $1,020,000 = $969,000.
Question 448
A 10% stock dividend is declared on 200,000 outstanding shares (par $1) when the market price is $25. Retained earnings is reduced by:
Select an option first.
Correct answer: B — $500,000
Explanation: A 10% stock dividend is SMALL (under 20–25%), so it is capitalised at FAIR MARKET VALUE. Shares issued = 200,000 × 10% = 20,000. RE reduction = 20,000 × $25 = $500,000. (Common Stock is credited $20,000 at par; APIC gets $480,000.) A LARGE stock dividend would instead be recorded at par ($20,000, option A).
Question 449
A 40% stock dividend is declared on 200,000 shares (par $1, market $25). Retained earnings is reduced by:
Select an option first.
Correct answer: B — $80,000 — a LARGE stock dividend is capitalised at PAR
Explanation: A 40% stock dividend EXCEEDS the 20–25% threshold, so it is treated like a SPLIT and capitalised at PAR. Shares issued = 200,000 × 40% = 80,000. RE reduction = 80,000 × $1 par = $80,000. FMV is IGNORED. Small = FMV, large = par — the same facts give a dramatically different answer.
Question 450
Bad debt expense under the AGING method: estimated uncollectible $45,000; the allowance currently has a $7,000 CREDIT balance. Bad debt expense is:
Select an option first.
Correct answer: A — $38,000
Explanation: The AGING method SETS the ending allowance to the $45,000 target. Since $7,000 already sits there as a credit, the entry needed is $45,000 − $7,000 = $38,000. Recording the full $45,000 (option A) would overstate the allowance to $52,000.
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