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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 241
A note receivable is exchanged for property. The note bears NO stated interest. The note should be recorded at:
Select an option first.
Correct answer: A — The FAIR VALUE of the property (or the PRESENT VALUE of the note using an imputed market rate), with interest IMPUTED over the term
Explanation: A non-interest-bearing note does not truly bear no interest — the interest is EMBEDDED in the face amount. The note is recorded at the fair value of the property received, or at the present value of the note using an IMPUTED market rate. The difference between face and present value is a DISCOUNT, amortised to INTEREST INCOME over the term.
Question 242
An entity's held-to-maturity security suffers a CREDIT-related decline. Under CECL, the entity records:
Select an option first.
Correct answer: B — An ALLOWANCE for credit losses, with the loss in earnings (the security remains at amortised cost, presented net of the allowance)
Explanation: Under CECL, credit losses on HTM debt securities are recorded through an ALLOWANCE with the loss recognised in EARNINGS. The security remains at AMORTISED COST, presented NET of the allowance. The allowance approach — unlike a direct write-down — permits REVERSAL if the credit outlook improves.
Question 243
Which condition would make a decline in an AFS DEBT security's fair value result in a charge to EARNINGS rather than OCI?
Select an option first.
Correct answer: B — A decline attributable to CREDIT deterioration (requiring an allowance for credit losses through earnings); rate-driven declines remain in OCI
Explanation: For AFS DEBT securities, the fair value decline is bifurcated. The portion attributable to CREDIT deterioration is recognised through an ALLOWANCE for credit losses in EARNINGS (capped at the amount by which fair value is below amortised cost). The remainder — driven by interest rates and other non-credit factors — stays in OCI.
Question 244
A company records a capitalised software cost. Amortisation of software developed FOR SALE begins:
Select an option first.
Correct answer: A — When the product is available for GENERAL RELEASE to customers
Explanation: Capitalisation of software for SALE begins at TECHNOLOGICAL FEASIBILITY, but AMORTISATION begins only when the product is available for GENERAL RELEASE to customers. The annual amortisation is the GREATER of (a) straight-line over the economic life or (b) the ratio of current revenue to total expected revenue — an unusual conservatism rule.
Question 245
Land held for a currently undetermined future use is classified as:
Select an option first.
Correct answer: B — An INVESTMENT (a non-current asset), not PP&E — because it is not used in operations
Explanation: PP&E requires the asset to be USED IN OPERATIONS. Land held for SPECULATION or for an undetermined future use is an INVESTMENT, presented separately from PP&E. Land held for SALE in the ordinary course of business (by a developer) would be INVENTORY.
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Question 246
The cost of a NON-MONETARY exchange that LACKS commercial substance is measured at:
Select an option first.
Correct answer: B — The BOOK VALUE of the asset given up (no gain recognised, unless boot is received)
Explanation: An exchange LACKING commercial substance (the future cash flows do not significantly change) is recorded at the BOOK VALUE of the asset surrendered — NO GAIN is recognised. Losses are ALWAYS recognised. If BOOT (cash) is received, a PROPORTIONATE gain is recognised: boot / (boot + FV of asset received) × total gain.
Question 247
In a non-monetary exchange WITH commercial substance, the asset received is recorded at:
Select an option first.
Correct answer: A — FAIR VALUE, with the full gain or loss recognised
Explanation: An exchange WITH commercial substance is recorded at FAIR VALUE, with the FULL gain or loss recognised in income. Commercial substance exists when the future cash flows of the entity are expected to change SIGNIFICANTLY as a result of the exchange — which is the ordinary case.
Question 248
Interest cost capitalised on a self-constructed asset during construction is:
Select an option first.
Correct answer: C — Added to the ASSET'S COST and subsequently depreciated over the asset's useful life
Explanation: Capitalised interest becomes part of the ASSET'S COST and is DEPRECIATED over the asset's useful life, alongside the other construction costs. Capitalisation CEASES when the asset is substantially complete and ready for its intended use — continuing to capitalise beyond that point overstates the asset.
Question 249
A company using the periodic system computes COGS as:
Select an option first.
Correct answer: C — Beginning inventory + Purchases − ENDING inventory
Explanation: PERIODIC: COGS = Beginning inventory + Purchases − Ending inventory. COGS is a PLUG derived from a physical count — which means SHRINKAGE (theft, spoilage) is buried inside it and invisible. Under PERPETUAL, COGS is recorded at each sale, so shrinkage surfaces as a difference between the records and the count. That is the control argument for perpetual.
Question 250
Freight-IN (transportation to acquire inventory) is:
Select an option first.
Correct answer: A — INVENTORIABLE — added to the cost of inventory
Explanation: FREIGHT-IN is a cost of GETTING the inventory ready for sale, so it is INVENTORIABLE (part of inventory cost, flowing through COGS when sold). FREIGHT-OUT (delivery to the customer) is a SELLING expense — a period cost. The direction of the freight determines its treatment.
Question 251
An entity discovers that ENDING inventory was OVERSTATED by $50,000 in Year 1 (undetected). The effect on Year 2 net income is:
Select an option first.
Correct answer: A — UNDERSTATED by $50,000 — the overstated ending inventory of Year 1 becomes the overstated BEGINNING inventory of Year 2, inflating Year 2 COGS
Explanation: Inventory errors are SELF-CORRECTING over two periods. Year 1: ending inventory overstated → COGS understated → income OVERSTATED. Year 2: that same figure is BEGINNING inventory, now overstated → COGS OVERSTATED → income UNDERSTATED. By the end of Year 2, retained earnings is correct — but each year's income was wrong.
Question 252
An entity uses the gross profit method to estimate ending inventory. This method is:
Select an option first.
Correct answer: C — Acceptable for INTERIM reporting and for estimating losses, but NOT for annual financial statements (which require a physical count)
Explanation: The GROSS PROFIT method estimates inventory by applying a historical gross-margin percentage. It is acceptable for INTERIM reporting, for estimating inventory destroyed by fire, and for testing the reasonableness of a count — but NOT for the ANNUAL financial statements, which require an actual physical count.
Question 253
An entity's PP&E includes an asset that is idle and awaiting disposal but does NOT meet the held-for-sale criteria. It should:
Select an option first.
Correct answer: B — CONTINUE to be depreciated, because it remains held for use
Explanation: Depreciation continues while an asset is HELD FOR USE, even if temporarily IDLE. Depreciation stops ONLY when the asset meets the HELD-FOR-SALE criteria (all six conditions) or is derecognised. An idle asset that fails the held-for-sale test keeps depreciating.
Question 254
An asset classified as HELD FOR SALE is measured at:
Select an option first.
Correct answer: D — The LOWER of carrying value and FAIR VALUE LESS COSTS TO SELL; depreciation CEASES
Explanation: HELD-FOR-SALE assets are measured at the LOWER of carrying amount and FAIR VALUE LESS COSTS TO SELL, and DEPRECIATION STOPS. Unlike held-for-use impairments, a held-for-sale write-down CAN be reversed — but only up to the amount of the previous write-downs (never above the original carrying amount).
Question 255
The cost of a patent PURCHASED from another entity includes:
Select an option first.
Correct answer: D — The PURCHASE PRICE plus legal fees and registration costs — capitalised and amortised over the shorter of legal or useful life
Explanation: A PURCHASED patent is capitalised at its purchase price plus directly attributable costs, and amortised over the SHORTER of its legal life (20 years) and its USEFUL life. INTERNALLY DEVELOPED patents are different: the R&D is EXPENSED, and only the legal and registration costs are capitalised.
Question 256
Legal fees for SUCCESSFULLY defending a patent are:
Select an option first.
Correct answer: D — CAPITALISED and amortised over the patent's remaining useful life
Explanation: Legal costs of SUCCESSFULLY defending a patent are CAPITALISED, because the defence preserved the future economic benefit. Costs of an UNSUCCESSFUL defence are EXPENSED — and the patent's carrying amount is written off, since the right no longer exists.
Question 257
A franchise fee paid by the franchisee is:
Select an option first.
Correct answer: A — CAPITALISED as an intangible and amortised over the franchise term (or its useful life)
Explanation: The INITIAL franchise fee paid by the FRANCHISEE is CAPITALISED as an intangible asset and amortised over the franchise's useful life. CONTINUING royalty payments are EXPENSED as incurred. (From the FRANCHISOR's side, the initial fee is revenue recognised as the related performance obligations are satisfied.)
Question 258
Organisation and start-up costs are:
Select an option first.
Correct answer: D — EXPENSED as incurred
Explanation: START-UP and ORGANISATION costs (legal fees for incorporation, pre-opening costs, one-time activities for a new facility) are EXPENSED AS INCURRED under ASC 720-15. They may be amortised over 15 years for TAX purposes — a book/tax difference — but for BOOK purposes they are expensed immediately.
Question 259
A contingent liability assumed in a BUSINESS COMBINATION is recognised at:
Select an option first.
Correct answer: A — FAIR VALUE at the acquisition date, if fair value is determinable — even if it is not 'probable' under ASC 450
Explanation: In a BUSINESS COMBINATION, a contingency is recognised at FAIR VALUE at the acquisition date if fair value can be determined — which is a LOWER threshold than the 'probable and estimable' test of ASC 450. The acquirer paid for that contingency in the price, so it must be recognised.
Question 260
The current portion of long-term debt is classified as:
Select an option first.
Correct answer: A — A CURRENT liability — the portion of principal due within one year (or the operating cycle)
Explanation: The portion of long-term debt maturing within ONE YEAR (or the operating cycle, if longer) is reclassified as a CURRENT liability. The exception: if the entity has both the INTENT and ABILITY to refinance on a long-term basis, it remains NON-CURRENT.
Question 261
An entity issues bonds with detachable warrants. The proceeds are:
Select an option first.
Correct answer: D — ALLOCATED between the bonds and the WARRANTS based on their relative fair values, with the warrants credited to APIC
Explanation: DETACHABLE warrants are separately tradable, so the proceeds are ALLOCATED between the debt and the warrants on RELATIVE FAIR VALUES. The warrant portion is credited to APIC — WARRANTS (equity), and the debt portion establishes the bond's carrying amount (creating a discount). Note the contrast with convertible debt, where post-ASU 2020-06 there is NO separation.
Question 262
A liability is classified as CURRENT even if it will be refinanced, when:
Select an option first.
Correct answer: A — The entity has NEITHER the intent NOR the demonstrated ABILITY to refinance on a long-term basis
Explanation: BOTH intent AND ability are required for non-current classification. Ability must be DEMONSTRATED — by actually refinancing before the statements are issued, or by a FIRM, non-cancellable financing agreement. Intent alone is not enough, so absent demonstrated ability the obligation stays CURRENT.
Question 263
A company records an accrued liability for compensated absences (vacation pay) when:
Select an option first.
Correct answer: D — The obligation relates to services ALREADY RENDERED, the rights VEST or ACCUMULATE, payment is PROBABLE, and the amount is ESTIMABLE
Explanation: ALL FOUR conditions must be met: the obligation relates to services already RENDERED; the rights VEST (are payable even on termination) or ACCUMULATE (carry forward); payment is PROBABLE; and the amount is reasonably ESTIMABLE. Notably, if the leave does NOT accumulate (use-it-or-lose-it sick leave), no accrual is required.
Question 264
Under CECL, the allowance for a portfolio of similar receivables should be estimated on:
Select an option first.
Correct answer: A — A COLLECTIVE (POOL) basis for assets sharing similar risk characteristics; individually only when an asset no longer shares those characteristics
Explanation: CECL requires evaluation on a COLLECTIVE (pool) basis where assets share SIMILAR RISK CHARACTERISTICS — because expected credit losses are a portfolio-level statistical estimate. An asset is evaluated INDIVIDUALLY only when it no longer shares risk characteristics with any pool.
Question 265
Beginning inventory 100 units at $10; purchases 200 units at $12 and 100 units at $15. 250 units were sold. Under FIFO, ending inventory (150 units) is:
Select an option first.
Correct answer: C — $2,100
Explanation: FIFO leaves the NEWEST costs in ending inventory. Ending 150 units = the 100 most recent units at $15 = $1,500, plus 50 units from the $12 layer = $600. Total = $1,500 + $600 = $2,100.
Question 266
Using the same facts, COGS under FIFO (250 units sold) is:
Select an option first.
Correct answer: A — $2,800
Explanation: FIFO expenses the OLDEST costs first: 100 units at $10 = $1,000, then 150 units at $12 = $1,800. COGS = $1,000 + $1,800 = $2,800. Check: Goods available = $1,000 + $2,400 + $1,500 = $4,900. Less ending inventory $2,100 = $2,800. The two methods reconcile.
Question 267
Same facts (100 @ $10, 200 @ $12, 100 @ $15; 250 sold). Under WEIGHTED AVERAGE, the cost per unit is:
Select an option first.
Correct answer: B — $12.25
Explanation: Total cost = (100 × $10) + (200 × $12) + (100 × $15) = $1,000 + $2,400 + $1,500 = $4,900. Total units = 400. Weighted average = $4,900 / 400 = $12.25 per unit. COGS = 250 × $12.25 = $3,062.50; ending inventory = 150 × $12.25 = $1,837.50.
Question 268
A machine costs $90,000, has a $10,000 salvage value and a 4-year life. Under DDB, Year 1 depreciation is:
Select an option first.
Correct answer: A — $45,000
Explanation: DDB rate = 2/4 = 50%. Year 1 = $90,000 × 50% = $45,000. Salvage is IGNORED in the DDB calculation (though depreciation stops once book value reaches $10,000). Deducting salvage first — ($90,000 − $10,000) × 50% = $40,000, option B — is the classic error.
Question 269
Continuing: the same machine's Year 2 DDB depreciation is:
Select an option first.
Correct answer: A — $22,500
Explanation: Year 1 depreciation was $45,000, leaving a carrying value of $90,000 − $45,000 = $45,000. Year 2 = $45,000 × 50% = $22,500. Carrying value falls to $22,500 — still above the $10,000 salvage, so the full amount is taken.
Question 270
Equipment costing $150,000 with a 5-year life and $30,000 salvage is depreciated under SYD. Year 2 depreciation is:
Select an option first.
Correct answer: D — $32,000
Explanation: SYD denominator = 5(6)/2 = 15. Depreciable base = $150,000 − $30,000 = $120,000. Year 1 = (5/15) × $120,000 = $40,000. YEAR 2 = (4/15) × $120,000 = $32,000. Note the numerator falls by one each year, and salvage IS deducted (unlike DDB).
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