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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 211
Which cost is EXCLUDED from the cost of inventory?
Select an option first.
Correct answer: D — SELLING costs and abnormal spoilage
Explanation: Inventory cost INCLUDES purchase price (net of trade discounts), freight-IN, import duties, insurance in transit, and normal handling. It EXCLUDES SELLING costs (freight-OUT), ABNORMAL spoilage, most general administrative overhead, and storage costs (unless necessary to the production process). Selling costs are period costs, not inventoriable.
Question 212
A company retires treasury stock originally issued at $12 (par $1) that it repurchased for $20. The $8 excess of cost over the original issue price is charged to:
Select an option first.
Correct answer: B — APIC — Treasury Stock (if a balance exists), then RETAINED EARNINGS
Explanation: On retirement: reverse the ORIGINAL issuance (DR Common Stock at par, DR APIC — Common for the original excess), remove treasury stock at cost, and plug. A 'loss' goes first against any existing APIC — TREASURY STOCK balance, then to RETAINED EARNINGS. It NEVER touches net income — a company cannot profit or lose by trading in its own shares.
Question 213
A held-to-maturity debt security's fair value declines below amortised cost due to a rise in market interest rates. The entity should:
Select an option first.
Correct answer: D — Record NO adjustment — HTM securities are carried at AMORTISED COST, and a rate-driven decline is not a credit loss
Explanation: HTM securities are carried at AMORTISED COST, and a decline caused by RISING INTEREST RATES is irrelevant if the entity will hold to maturity and collect par. NO adjustment is made. A CREDIT-related impairment is different — that WOULD require recognition of an allowance for credit losses under CECL.
Question 214
The CECL model requires an entity to recognise an allowance for credit losses based on:
Select an option first.
Correct answer: C — EXPECTED credit losses over the life of the asset, considering historical experience, current conditions AND reasonable, supportable forecasts
Explanation: CECL (Current Expected Credit Loss) requires recognition of LIFETIME expected credit losses AT INCEPTION — not when a loss becomes 'probable'. The estimate incorporates historical experience, current conditions, AND reasonable and supportable FORECASTS. It replaced the old INCURRED-loss model, which was criticised for recognising losses 'too little, too late'.
Question 215
Under the GROSS method, a purchase of $10,000 with terms 2/10, n/30 is initially recorded at:
Select an option first.
Correct answer: D — $10,000, with a purchase discount recorded only IF the discount is taken
Explanation: GROSS method: record the purchase at the FULL invoice price ($10,000). If the discount is taken within the window, record a PURCHASE DISCOUNT (a reduction of inventory or COGS). The NET method instead records the purchase at $9,800 and, if the discount is MISSED, records 'purchase discounts LOST' — which is theoretically purer, because it highlights the cost of inefficiency.
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Question 216
Under the NET method, failing to take a 2/10, n/30 discount results in:
Select an option first.
Correct answer: C — Recording 'PURCHASE DISCOUNTS LOST', treated as a financing/interest expense
Explanation: The NET method records the purchase net of the discount, on the assumption it will be taken. If the discount is MISSED, the extra amount paid is recorded as PURCHASE DISCOUNTS LOST — effectively an interest cost of not paying promptly. This makes the cost of poor cash management visible, which the gross method buries in inventory.
Question 217
A company's inventory has a cost of $50,000, a replacement cost of $44,000, an NRV of $46,000 and an NRV less a normal profit margin of $42,000. Under LCM (LIFO/retail), inventory is reported at:
Select an option first.
Correct answer: A — $44,000 — 'market' is the MIDDLE of ceiling ($46,000), replacement ($44,000) and floor ($42,000); then take the LOWER of cost ($50,000) and market ($44,000)
Explanation: Two steps. STEP 1: 'Market' = the MIDDLE value of the ceiling (NRV = $46,000), replacement cost ($44,000), and the floor (NRV − normal profit = $42,000) → market = $44,000. STEP 2: Inventory = LOWER of cost ($50,000) and market ($44,000) = $44,000. Candidates who collapse this into one step get it wrong.
Question 218
Ravensworth Co. uses FIFO. Which figure would be UNAFFECTED by choosing LIFO instead, assuming rising prices?
Select an option first.
Correct answer: D — TOTAL cost of goods AVAILABLE for sale
Explanation: COST OF GOODS AVAILABLE FOR SALE (beginning inventory + purchases) is a FACT — it is the same regardless of the cost flow assumption. What FIFO and LIFO do is ALLOCATE that total between ending inventory and COGS. So options A, B and A all change; only the total available is invariant.
Question 219
A machine costing $120,000 with a $20,000 salvage value and a 5-year life is depreciated under DDB. Year 2 depreciation is:
Select an option first.
Correct answer: C — $28,800
Explanation: DDB rate = 2/5 = 40%. YEAR 1: $120,000 × 40% = $48,000 (salvage IGNORED). Carrying value = $72,000. YEAR 2: $72,000 × 40% = $28,800. Note salvage is not deducted in the calculation — but depreciation stops once book value reaches $20,000.
Question 220
Using the same machine ($120,000 cost, $20,000 salvage, 5-year life) under SYD, Year 1 depreciation is:
Select an option first.
Correct answer: C — $33,333
Explanation: SYD denominator = n(n+1)/2 = 5(6)/2 = 15. Year 1 numerator = 5. Depreciable base = Cost − Salvage = $120,000 − $20,000 = $100,000. Year 1 = (5/15) × $100,000 = $33,333. Note that unlike DDB, SYD DOES deduct salvage from the base.
Question 221
An entity capitalises a $500,000 building and estimates a 40-year life with no salvage. After 10 years it revises the remaining life to 20 years (total 30). Annual depreciation going forward is:
Select an option first.
Correct answer: B — $18,750
Explanation: Original annual depreciation = $500,000/40 = $12,500. After 10 years, accumulated = $125,000, carrying value = $375,000. The change in useful life is a CHANGE IN ESTIMATE — applied PROSPECTIVELY with no restatement. New annual depreciation = $375,000 / 20 remaining years = $18,750.
Question 222
A bond with a face value of $500,000 is issued at 102. The premium is:
Select an option first.
Correct answer: C — $10,000 — the bond sold for 102% of face, or $510,000, giving a $10,000 premium
Explanation: Bond quotes are a PERCENTAGE OF FACE. '102' means 102% of face: $500,000 × 1.02 = $510,000 proceeds. The PREMIUM is $510,000 − $500,000 = $10,000. A quote of 98 would mean a $10,000 discount. Reading the quote as dollars rather than a percentage is the intended trap.
Question 223
A serial bond differs from a term bond in that a serial bond:
Select an option first.
Correct answer: B — MATURES IN INSTALMENTS over time, rather than entirely on a single date
Explanation: A SERIAL bond matures in INSTALMENTS on a series of dates. A TERM bond matures entirely on ONE date. Serial bonds are common in municipal finance, because they spread the repayment burden across budget years rather than concentrating it in one.
Question 224
An entity extinguishes debt early. The gain or loss equals:
Select an option first.
Correct answer: A — The NET CARRYING AMOUNT of the debt (including any unamortised premium/discount and issue costs) LESS the reacquisition price
Explanation: Gain/loss = NET CARRYING AMOUNT (face ± unamortised premium/discount, less unamortised issue costs) − REACQUISITION PRICE. Using face value alone (option A) ignores the unamortised amounts, which is exactly the error the question targets. The gain or loss is reported in income from CONTINUING operations.
Question 225
A troubled debt restructuring in which the creditor accepts an asset in full settlement results in the DEBTOR recognising:
Select an option first.
Correct answer: D — A gain on RESTRUCTURING (carrying amount of debt less fair value of the asset) AND a gain or loss on DISPOSAL of the asset (fair value less its carrying amount)
Explanation: TWO separate gains/losses arise. First, the ASSET is remeasured to fair value, producing a gain or loss on DISPOSAL (FV − carrying amount of the asset). Second, the DEBT is settled: gain on RESTRUCTURING = carrying amount of the DEBT − fair value of the asset transferred. Recognising only one of the two is the classic error.
Question 226
A lessee's lease liability is remeasured when:
Select an option first.
Correct answer: C — There is a change in the LEASE TERM, a change in the assessment of a purchase option, or a change in amounts probable of being owed under a residual value guarantee
Explanation: The lease liability is REMEASURED only on specified triggering events: a change in the LEASE TERM, a change in the assessment of a PURCHASE OPTION, a change in amounts probable of being owed under a RESIDUAL VALUE GUARANTEE, or a change in an index/rate that affects payments (in some cases). It is NOT routinely remeasured for market rate changes (option A) or fair value changes.
Question 227
A lessor classifies a lease as a SALES-TYPE lease when:
Select an option first.
Correct answer: A — Any of the OWNES criteria (transfer of control) are met — the same criteria the LESSEE uses for finance lease classification
Explanation: The LESSOR applies the SAME criteria (OWNES) the lessee uses. If ANY is met, control has transferred and the lease is a SALES-TYPE lease — the lessor derecognises the asset and recognises a net investment in the lease, plus any selling profit. If none is met, the lessor tests further for a DIRECT FINANCING lease; failing that, it is an OPERATING lease.
Question 228
Prior service cost arising from a pension plan amendment is:
Select an option first.
Correct answer: D — Recognised initially in OCI, then AMORTISED into pension expense over the remaining service period of the affected employees
Explanation: PRIOR SERVICE COST (from a plan amendment granting credit for past service) is recognised initially in OCI, then AMORTISED into net periodic pension cost over the remaining SERVICE PERIOD of the affected employees. It is the 'A' in SIRAGE. Expensing it immediately (option A) would produce enormous volatility on every plan amendment.
Question 229
The 'corridor approach' to amortising actuarial gains and losses requires amortisation only when the unrecognised net gain or loss exceeds:
Select an option first.
Correct answer: A — 10% of the GREATER of the PBO or the market-related value of plan assets
Explanation: The CORRIDOR is 10% of the GREATER of the PBO or the market-related value of PLAN ASSETS. Only the EXCESS over that corridor is amortised (typically over the average remaining service period). The corridor exists to prevent minor, self-reversing actuarial fluctuations from whipsawing reported earnings.
Question 230
An entity has a $3,000,000 note payable due in 6 months. It refinances with a 5-year loan on 15 January; the balance sheet date is 31 December and the statements are issued 1 March. The note should be classified as:
Select an option first.
Correct answer: B — NON-CURRENT — the entity demonstrated both the INTENT and the ABILITY to refinance on a long-term basis before the statements were issued
Explanation: Both INTENT and ABILITY are required. The ACTUAL refinancing on 15 January — before the statements were ISSUED on 1 March — demonstrates the ability. The note is therefore classified as NON-CURRENT at 31 December, even though it was legally due within a year at that date. Substance over legal form.
Question 231
Which is reported as a REDUCTION of stockholders' equity?
Select an option first.
Correct answer: B — TREASURY STOCK (and an accumulated OCI loss)
Explanation: TREASURY STOCK is a CONTRA-EQUITY account, reducing total stockholders' equity. So too is a DEBIT balance in Accumulated Other Comprehensive Income. Common stock, APIC and (positive) retained earnings all INCREASE equity.
Question 232
A property dividend is recorded by:
Select an option first.
Correct answer: A — First REMEASURING the asset to FAIR VALUE (recognising a gain or loss in income), then debiting retained earnings at that FAIR VALUE
Explanation: TWO steps. First, REMEASURE the distributed asset to FAIR VALUE, recognising a GAIN or LOSS in INCOME — counterintuitive, given the company is giving the asset away, which is exactly why it is examined. Second, DECLARE the dividend at that FAIR VALUE (DR Retained Earnings / CR Property Dividends Payable).
Question 233
Cumulative preferred dividends in arrears are:
Select an option first.
Correct answer: A — DISCLOSED in the notes (not a liability, since no obligation exists until declared), but SUBTRACTED in the EPS numerator
Explanation: Dividends in arrears are NOT a liability — no obligation exists until the board DECLARES them. They are DISCLOSED in the notes. However, for EPS purposes, the CURRENT year's cumulative preferred dividend is SUBTRACTED from the numerator whether declared or not, because it is not available to common shareholders.
Question 234
A stock subscription receivable is normally presented as:
Select an option first.
Correct answer: B — A CONTRA-EQUITY account (a reduction of stockholders' equity), unless collection is assured and imminent
Explanation: A SUBSCRIPTION RECEIVABLE is normally presented as a REDUCTION OF EQUITY (contra-equity), not as an asset — the company has not yet received the capital, and reporting it as an asset would inflate both assets and equity on the strength of a promise. (SEC guidance permits asset classification only where collection is assured and imminent.)
Question 235
An entity records a gain contingency related to a lawsuit it expects to win. It should:
Select an option first.
Correct answer: C — NOT accrue; disclose only if probable, taking care not to imply that realisation is assured
Explanation: Gain contingencies are NEVER accrued. They may be DISCLOSED if probable, but the disclosure must avoid MISLEADING IMPLICATIONS about the likelihood of realisation. Recognition awaits actual REALISATION. This asymmetry with loss contingencies is deliberate conservatism.
Question 236
A company guarantees the debt of an unconsolidated affiliate. The likelihood of payment is REMOTE. The guarantee should be:
Select an option first.
Correct answer: B — DISCLOSED, because guarantees of the debt of others must be disclosed even when the likelihood is REMOTE (the DOG exception)
Explanation: DOG: Debt of others Guaranteed; Obligations under standby letters of credit; Guarantees to repurchase receivables sold. These must be DISCLOSED even when REMOTE — because they are otherwise invisible to users. All OTHER remote contingencies require no disclosure at all. (Separately, ASC 460 requires initial recognition of the guarantee at fair value.)
Question 237
The fair value of an ARO increases because the estimated retirement cost rises. The entity should:
Select an option first.
Correct answer: A — Record an UPWARD revision as an ADDITIONAL layer of liability, discounted at the CURRENT credit-adjusted risk-free rate, with a corresponding increase to the asset
Explanation: An UPWARD revision to an ARO is treated as a NEW LAYER of liability, measured using the CURRENT credit-adjusted risk-free rate, with a corresponding increase to the capitalised asset retirement cost. A DOWNWARD revision reduces the existing layers using the rates at which they were originally recognised. No gain or loss is recognised on the revision itself.
Question 238
A company's inventory is pledged as collateral for a loan. This requires:
Select an option first.
Correct answer: B — DISCLOSURE of the pledge — the inventory remains on the balance sheet, because the entity still controls it
Explanation: PLEDGED assets remain on the balance sheet — the entity still OWNS and CONTROLS them; the lender merely holds a security interest. But the pledge RESTRICTS the assets, so it must be DISCLOSED, so that users understand the assets are not freely available to other creditors.
Question 239
Under CECL, the allowance for credit losses on trade receivables is measured based on:
Select an option first.
Correct answer: C — Historical loss experience, ADJUSTED for current conditions and reasonable, supportable FORECASTS about the future
Explanation: CECL requires the estimate to reflect HISTORICAL loss experience, ADJUSTED for CURRENT conditions and reasonable and supportable FORECASTS. Purely historical rates (option A) are the starting point, not the answer — the model is explicitly FORWARD-LOOKING, which is what distinguishes it from the old incurred-loss approach.
Question 240
A company factors $500,000 of receivables WITHOUT recourse for $460,000. It should record:
Select an option first.
Correct answer: D — A SALE: remove the receivables, recognise a $40,000 LOSS on sale
Explanation: Factoring WITHOUT RECOURSE is a true SALE — the factor bears the credit risk. The entity DERECOGNISES the $500,000 receivable, records $460,000 cash, and recognises a $40,000 LOSS on sale. Factoring WITH RECOURSE is a sale only if three conditions are met; otherwise it is a SECURED BORROWING, with the receivable staying on the books and a liability recorded.
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