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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 451
Same facts, but the allowance has a $3,000 DEBIT balance (over-written-off). Bad debt expense is:
Select an option first.
Correct answer: A — $48,000 — the allowance must move from a $3,000 DEBIT to a $45,000 CREDIT, requiring $48,000
Explanation: To reach a $45,000 CREDIT target from a $3,000 DEBIT balance, the entry must cover both: $45,000 + $3,000 = $48,000. A debit balance means write-offs exceeded the prior estimate, so this year's expense must make up the shortfall as well as fund the new target.
Question 452
Under the PERCENTAGE-OF-SALES method: credit sales $2,000,000; rate 2%; the allowance has a $6,000 credit balance. Bad debt expense is:
Select an option first.
Correct answer: D — $40,000 — the % of SALES method IGNORES the existing allowance balance
Explanation: The PERCENTAGE-OF-SALES (income statement) method simply computes 2% × $2,000,000 = $40,000 and ADDS it to the allowance — the existing balance is IRRELEVANT. Contrast the AGING method, which SETS the ending allowance to a target and therefore must back out what is already there. Mixing the two is the most common receivables error.
Question 453
A company acquires a machine by exchanging an old machine (book value $40,000, fair value $50,000) plus $20,000 cash. The exchange HAS commercial substance. The new machine is recorded at:
Select an option first.
Correct answer: C — $70,000
Explanation: WITH commercial substance, the exchange is recorded at FAIR VALUE. New asset = FV of the asset given up ($50,000) + cash paid ($20,000) = $70,000. A GAIN of $10,000 is recognised ($50,000 FV − $40,000 book value of the old machine).
Question 454
Same exchange, but WITHOUT commercial substance and no boot received. The new machine is recorded at:
Select an option first.
Correct answer: D — $60,000 — book value of the asset given up ($40,000) plus cash paid ($20,000); NO gain recognised
Explanation: WITHOUT commercial substance and with no boot RECEIVED, the exchange is recorded at BOOK VALUE: $40,000 (book value of old machine) + $20,000 cash = $60,000. NO GAIN is recognised — the $10,000 gain is deferred into the new asset's (lower) basis. Losses, by contrast, are ALWAYS recognised.
Question 455
Standalone selling prices: hardware $600, installation $200, 2-year support $400. Contract price $1,080. Revenue allocated to SUPPORT is:
Select an option first.
Correct answer: C — $360
Explanation: Total SSP = $600 + $200 + $400 = $1,200. Support's share = $400/$1,200 = 33.33%. Allocation = 33.33% × $1,080 = $360. The $120 discount is spread proportionately: hardware gets $540, installation $180, support $360 — totalling $1,080.
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Question 456
A company has taxable temporary differences of $600,000 and deductible temporary differences of $200,000. The enacted rate is 21%. The NET deferred tax balance is:
Select an option first.
Correct answer: B — $84,000 liability
Explanation: DTL = $600,000 × 21% = $126,000. DTA = $200,000 × 21% = $42,000. Same jurisdiction, so they NET: $126,000 − $42,000 = $84,000 NET DEFERRED TAX LIABILITY, presented as a single non-current amount.
Question 457
Pre-tax book income $1,000,000. Temporary difference: tax depreciation exceeds book by $200,000. Tax rate 21%. Total income tax EXPENSE is:
Select an option first.
Correct answer: D — $210,000
Explanation: Total tax EXPENSE is based on BOOK income: $1,000,000 × 21% = $210,000. It splits into CURRENT tax (on taxable income of $1,000,000 − $200,000 = $800,000 × 21% = $168,000) plus DEFERRED tax expense ($200,000 × 21% = $42,000). $168,000 + $42,000 = $210,000. Temporary differences shift tax between periods but do NOT change total expense.
Question 458
An acquirer pays $8,000,000 for 100% of a target whose identifiable net assets have a fair value of $8,600,000. The result is:
Select an option first.
Correct answer: B — A BARGAIN PURCHASE GAIN of $600,000, recognised in earnings
Explanation: Consideration ($8,000,000) is LESS than the fair value of identifiable net assets ($8,600,000), producing a NEGATIVE residual of $600,000 — a BARGAIN PURCHASE GAIN recognised immediately in EARNINGS. Before recording it, the acquirer must REASSESS the identification and valuation of the assets and liabilities, because a genuine bargain purchase is rare.
Question 459
A parent owns 75% of a sub. The sub's net income is $600,000 and it includes $40,000 of unrealised intercompany profit (parent was the seller). Net income attributable to the NCI is:
Select an option first.
Correct answer: B — $150,000
Explanation: When the PARENT is the seller (a DOWNSTREAM sale), the unrealised profit belongs entirely to the PARENT and is allocated 100% to the parent — the NCI is unaffected. NCI share = 25% × $600,000 = $150,000. If the SUBSIDIARY had been the seller (upstream), the unrealised profit WOULD be shared, giving 25% × ($600,000 − $40,000) = $140,000.
Question 460
An investor buys 40% of an investee for $5,000,000. The investee's identifiable net assets have a fair value of $11,000,000 and a book value of $10,000,000. Equity-method goodwill is:
Select an option first.
Correct answer: D — $600,000
Explanation: Investor's share of FAIR VALUE of net assets = 40% × $11,000,000 = $4,400,000. Cost = $5,000,000. Equity-method GOODWILL = $5,000,000 − $4,400,000 = $600,000. The $400,000 excess of fair value over book value (40% × $1,000,000) is AMORTISED against equity-method income if it relates to depreciable assets; the goodwill portion is NOT amortised.
Question 461
A company grants 20,000 options, grant-date fair value $9, 4-year cliff vesting. At the end of Year 2 it expects 10% forfeitures. Cumulative compensation recognised through Year 2 is:
Select an option first.
Correct answer: D — $81,000
Explanation: Total expected compensation = 20,000 × $9 × 90% (net of expected forfeitures) = $162,000. Recognised over the 4-year vesting period: cumulative through Year 2 = $162,000 × 2/4 = $81,000. Forfeiture estimates adjust the TOTAL cost; the recognition pattern remains straight-line over the vesting period.
Question 462
A contract has a $2,000,000 fixed fee plus a $400,000 bonus if completed early. The entity estimates a 70% probability of earning the bonus and concludes only the most-likely-amount approach applies. The transaction price is:
Select an option first.
Correct answer: B — $2,400,000 — with two outcomes, use the MOST LIKELY AMOUNT, and 70% makes the bonus the most likely outcome
Explanation: With essentially TWO outcomes (bonus earned or not), the MOST LIKELY AMOUNT method applies. At 70% probability, earning the bonus is the most likely single outcome, so the transaction price is $2,000,000 + $400,000 = $2,400,000 — subject to the CONSTRAINT (is a significant reversal probable NOT to occur?). The probability-weighted figure of $2,280,000 (option C) would be the EXPECTED VALUE method, which is not applied here.
Question 463
A lessor's sales-type lease: fair value of the asset $500,000; carrying amount $420,000; PV of lease payments $500,000. Selling profit recognised at commencement is:
Select an option first.
Correct answer: D — $80,000
Explanation: SELLING PROFIT = PV of lease payments (or fair value) $500,000 − carrying amount of the asset $420,000 = $80,000, recognised at COMMENCEMENT. The lessor derecognises the asset and records a net investment in the lease. Interest income is then recognised over the lease term.
Question 464
A company issues $1,000,000 of convertible bonds at par. Under current GAAP (post-ASU 2020-06), the amount allocated to EQUITY is:
Select an option first.
Correct answer: B — $0 — the entire proceeds are recorded as DEBT; no separation is required
Explanation: ASU 2020-06 ELIMINATED the separation models. The ENTIRE $1,000,000 is recorded as DEBT, 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. Study material predating 2020 would allocate a portion to equity — the intended trap.
Question 465
Warranty liability: beginning $80,000; warranty expense accrued $200,000; actual costs incurred $170,000. Ending warranty liability is:
Select an option first.
Correct answer: B — $110,000
Explanation: Ending liability = Beginning $80,000 + Expense accrued $200,000 − Actual costs paid $170,000 = $110,000. The EXPENSE is recognised in the period of SALE (matching); the actual costs REDUCE the liability when incurred.
Question 466
A company estimates a loss contingency between $300,000 and $700,000, with no amount more likely. Under US GAAP, it accrues:
Select an option first.
Correct answer: D — $300,000 (the LOW end) and discloses the range
Explanation: US GAAP accrues the LOW END of the range when no amount within it is more likely than any other, and DISCLOSES the additional exposure. IFRS would accrue the MIDPOINT ($500,000, option C) — one of the most frequently examined GAAP/IFRS divergences and the intended trap.
Question 467
A firm commitment to purchase inventory for €1,000,000 is hedged with a forward. At year-end the forward's fair value is a $30,000 gain and the firm commitment's fair value is a $28,000 loss. The NET effect on earnings is:
Select an option first.
Correct answer: A — $2,000 gain — both sides go to EARNINGS in a FAIR VALUE hedge and largely offset; only the ineffectiveness shows through
Explanation: A FIRM COMMITMENT hedge is a FAIR VALUE hedge: BOTH the derivative's gain ($30,000) and the hedged item's loss ($28,000) go to EARNINGS, offsetting. Net effect = $30,000 − $28,000 = $2,000 gain, which is the INEFFECTIVE portion. (A hedge of a FORECASTED transaction would instead be a cash flow hedge, deferring the effective portion in OCI.)
Question 468
A company sells equipment (book value $300,000) for $250,000 and immediately leases it back under an operating lease. The transfer QUALIFIES as a sale. It recognises:
Select an option first.
Correct answer: D — A $50,000 LOSS on sale, and accounts for the leaseback separately
Explanation: If the transfer QUALIFIES as a sale under ASC 606, the seller-lessee recognises the FULL gain or loss immediately: $250,000 − $300,000 = a $50,000 LOSS. The leaseback is then a separate lease. Deferring and amortising the loss (option C) is the pre-ASC 842 treatment.
Question 469
An entity has an uncertain tax position with a $500,000 benefit. Cumulative probabilities of sustaining amounts: $500,000 → 25%; $400,000 → 45%; $300,000 → 60%; $200,000 → 80%. The benefit recognised is:
Select an option first.
Correct answer: C — $300,000 — the LARGEST amount that is CUMULATIVELY more than 50% likely of being realised
Explanation: Step 1 (recognition): the position must be more likely than not to be sustained — assume it passes. Step 2 (measurement): recognise the LARGEST amount whose CUMULATIVE probability EXCEEDS 50%. $400,000 has only 45% (fails); $300,000 has 60% (passes). So $300,000 is recognised, with a $200,000 unrecognised tax benefit liability.
Question 470
A company's effective tax rate reconciliation: statutory rate 21%; municipal interest reduces tax by $21,000; pre-tax book income $500,000. The EFFECTIVE tax rate is approximately:
Select an option first.
Correct answer: A — 16.8%
Explanation: Tax at statutory = 21% × $500,000 = $105,000. Less the $21,000 permanent benefit = $84,000 total tax expense. Effective rate = $84,000 / $500,000 = 16.8%. Only PERMANENT differences move the effective rate away from the statutory rate — temporary differences never do.
Question 471
A company holds a 15% equity investment with a cost of $400,000 and a year-end fair value of $460,000. The effect on NET INCOME is:
Select an option first.
Correct answer: B — A $60,000 GAIN in net income — equity securities are measured at fair value through NET INCOME
Explanation: Post-ASU 2016-01, EQUITY securities with a readily determinable fair value are measured at FAIR VALUE with changes in NET INCOME. The $60,000 unrealised gain hits earnings. (Under the pre-2016 AFS model it would have gone to OCI — option C, the intended trap for candidates using older material.)
Question 472
An operating lease has annual payments of $12,000 for 5 years, with a $5,000 lease incentive received at commencement. Annual straight-line lease expense is:
Select an option first.
Correct answer: B — $11,000
Explanation: Total lease cost = ($12,000 × 5) − $5,000 incentive = $60,000 − $5,000 = $55,000. Straight-line annual expense = $55,000 / 5 = $11,000. Incentives REDUCE the total cost and are spread over the term, not recognised immediately.
Question 473
A company capitalises a contract acquisition cost (sales commission) of $90,000 for a 3-year contract expected to renew once for a further 3 years. Annual amortisation is:
Select an option first.
Correct answer: C — $15,000 — amortise over the PERIOD OF BENEFIT (6 years), which includes the anticipated renewal
Explanation: Capitalised contract acquisition costs are amortised over the PERIOD OF BENEFIT — which includes ANTICIPATED RENEWALS if no new commission is payable on renewal. Benefit period = 3 + 3 = 6 years. Annual amortisation = $90,000/6 = $15,000. Using only the initial contract term (option A) over-amortises.
Question 474
A company's contract liability (deferred revenue) is $500,000 at the start of the year. It receives $2,000,000 in advances and recognises $1,800,000 of revenue from the contract liability during the year. The ending contract liability is:
Select an option first.
Correct answer: B — $700,000
Explanation: Ending contract liability = Beginning $500,000 + Cash received in advance $2,000,000 − Revenue recognised $1,800,000 = $700,000. The contract liability represents the entity's remaining OBLIGATION to transfer goods or services for which it has already been paid.
Question 475
A contract includes a $1,000,000 fixed fee and a performance bonus. The entity uses the EXPECTED VALUE method: $200,000 bonus at 60%, $100,000 at 30%, $0 at 10%. It concludes only $120,000 of variable consideration is highly probable not to reverse. The transaction price is:
Select an option first.
Correct answer: D — $1,120,000
Explanation: Expected value = (0.60 × $200,000) + (0.30 × $100,000) + (0.10 × $0) = $120,000 + $30,000 = $150,000. BUT the CONSTRAINT limits variable consideration to the amount for which a significant reversal is probable NOT to occur — here $120,000. Transaction price = $1,000,000 + $120,000 = $1,120,000. Two steps: estimate, then CONSTRAIN. Stopping at $150,000 (option B) skips the constraint.
Question 476
A company sells a machine and provides a 2-year SERVICE-type warranty. Standalone prices: machine $50,000; warranty $6,000. Contract price $52,000. Revenue recognised on DELIVERY of the machine is:
Select an option first.
Correct answer: D — $46,429
Explanation: A SERVICE-type warranty is a SEPARATE performance obligation. Total SSP = $56,000. Machine share = $50,000/$56,000 = 89.29%. Allocation = 89.29% × $52,000 = $46,429, recognised on DELIVERY. The warranty gets $5,571, recognised OVER the 2-year coverage period. (An ASSURANCE-type warranty would instead be a cost accrual with all $52,000 recognised on delivery.)
Question 477
A parent acquires 60% of a sub for $6,000,000 when the fair value of the sub's identifiable net assets is $8,000,000 and the fair value of the NCI is $3,800,000. Goodwill is:
Select an option first.
Correct answer: C — $1,800,000
Explanation: Goodwill = Consideration ($6,000,000) + FV of NCI ($3,800,000) − FV of identifiable net assets ($8,000,000) = $1,800,000. Note the NCI's fair value ($3,800,000) EXCEEDS its proportionate share of net assets (40% × $8,000,000 = $3,200,000), because the FULL goodwill method attributes goodwill to the NCI too. US GAAP REQUIRES full goodwill; IFRS permits the partial method.
Question 478
A subsidiary (80%-owned) sells inventory to its parent at a $50,000 profit; 60% remains unsold at year-end. The sub's net income is $500,000. Net income attributable to the NCI is:
Select an option first.
Correct answer: A — $94,000
Explanation: This is an UPSTREAM sale (sub → parent), so the unrealised profit is attributed to the SUBSIDIARY and is therefore SHARED with the NCI. Unrealised profit = 60% × $50,000 = $30,000. Adjusted sub income = $500,000 − $30,000 = $470,000. NCI share = 20% × $470,000 = $94,000. A DOWNSTREAM sale would allocate the unrealised profit entirely to the parent, leaving the NCI at 20% × $500,000 = $100,000.
Question 479
An entity has a DTL of $200,000 measured at a 21% rate. A new 25% rate is enacted. The adjustment is:
Select an option first.
Correct answer: C — $38,095 increase to the DTL, charged to income from CONTINUING OPERATIONS
Explanation: The underlying taxable temporary difference = $200,000 / 0.21 = $952,381. Remeasured at 25%: $952,381 × 0.25 = $238,095. The INCREASE of $38,095 is recognised IMMEDIATELY in income from CONTINUING OPERATIONS in the period of ENACTMENT — even if the deferred item originally arose in OCI (the backwards-tracing prohibition). You must work back to the DIFFERENCE, not just re-rate the balance.
Question 480
A company has book depreciation of $100,000 and tax depreciation of $160,000, plus $20,000 of municipal interest income. Pre-tax book income is $500,000; the tax rate is 21%. The DEFERRED tax expense is:
Select an option first.
Correct answer: B — $12,600
Explanation: Only the TEMPORARY difference creates deferred tax. Tax depreciation exceeds book by $60,000 — a taxable temporary difference. Deferred tax expense = $60,000 × 21% = $12,600 (an increase in the DTL). The $20,000 municipal interest is a PERMANENT difference and creates NO deferred tax; including it ($80,000 × 21% = $16,800, option B) is the intended trap.
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