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Practice Test 1 - CPA Financial Accounting & Reporting (FAR)

20 questions. Answer them in any order, then submit to see your score and every explanation.

  1. A company repurchases 2,000 shares of its own $1 par value common stock at $35 per share using the cost method. What is the journal entry to record the repurchase?
  2. A local government's General Fund had a legally adopted annual budget under GASB guidance with estimated revenues of $12,000,000, appropriations of $12,300,000, and a planned use of beginning fund balance of $300,000. Midyear, the city council approves a budget amendment due to a revenue shortfall that reduces estimated revenues by $500,000 and reduces appropriations by $200,000 (the remainder will be covered by additional planned use of fund balance). What journal entry should be recorded in the General Fund to reflect the budget amendment?
  3. A U.S. GAAP for-profit entity changes its inventory costing method from FIFO to weighted-average in 20X5 and applies the change retrospectively under FASB ASC 250. The entity presents two years of comparative income statements and balance sheets and reports basic earnings per share (EPS). Which statement best describes how retrospective application affects EPS disclosures?
  4. A non-recognized subsequent event (Type II) requires disclosure in the financial statements but no adjustment. What is the primary characteristic of such an event?
  5. A city government adopted an annual budget for its General Fund. The budget estimated revenues of $9,500,000 and appropriated expenditures of $9,300,000. During the year, the city recorded budgetary entries at the beginning of the year. At year-end, actual revenues were $9,650,000 and actual expenditures were $9,280,000 (modified accrual; GASB). What is the appropriate accounting treatment for the budgetary accounts at year-end in the General Fund?
  6. At what amount should this land be reported in Sigma's consolidated balance sheet at December 31, 2024?
  7. During a period of rising prices, which inventory method produces the lowest net income and the lowest ending inventory balance?
  8. A company grants 9,000 stock options on January 1, Year 1 with a grant-date fair value of $12 each, vesting in equal annual installments over 3 years. Using straight-line attribution, what is compensation expense in Year 2?
  9. What amount of administrative expenses should be reported as a deduction in the plan's statement of changes in net assets available for benefits?
  10. During a period of rising prices, which inventory method produces ending inventory that most closely approximates current replacement cost?
  11. A private, for-profit marketing agency enters into a contract to provide (1) a brand strategy deliverable and (2) a six-month digital campaign management service. The customer pays a fixed $80,000 plus a $20,000 success fee if specified lead-generation targets are met; the agency estimates the expected value of the success fee to be $12,000 and concludes it is not constrained, so it includes $12,000 in the transaction price. The observable standalone selling prices are $50,000 for brand strategy and $50,000 for campaign management. How should the entity allocate the transaction price?
  12. Omega Manufacturing has a defined benefit pension plan covering 85% of its workforce. During 2024, the plan experienced significant changes including a plan amendment that increased benefits retroactively, resulting in a $3.2 million increase in prior service cost. The plan's funded status deteriorated due to declining asset values and changes in actuarial assumptions, creating an underfunded position of $8.7 million at year-end. The company made contributions of $2.1 million during 2024 and expects to contribute $2.8 million in 2025. Which combination of disclosures is required for Omega's pension plan?
  13. A municipality's enterprise fund reports net position of $5,200,000, which includes $800,000 in capital assets that are used to provide services to the general government and $300,000 due from the general fund for utility services. When preparing the government-wide statement of net position, how should these items be classified?
  14. A for-profit construction contractor discovered in 2026 that in 2025 it recorded $350,000 of customer deposits as revenue upon receipt rather than as a contract liability. The error caused 2025 revenues and retained earnings to be overstated and liabilities to be understated; the deposits remained unearned at December 31, 2025. The 2025 financial statements were issued and are presented comparatively with 2026. Under FASB ASC 250, how should the prior period error be corrected in accordance with GAAP?
  15. What is the appropriate accounting treatment for the decline in market value in the company's Year 1 financial statements?
  16. Delta Industries issued $1,000,000 of 10-year, 5% bonds when the market rate was 7%. The bonds pay interest annually on December 31. Three years after issuance, when the carrying amount was $891,450, Delta retired the entire bond issue by paying bondholders $920,000 in cash. How should Delta account for this bond retirement?
  17. How should these 50,000 contingently issuable shares be treated in the calculation of earnings per share?
  18. What amount of actuarial loss should be amortized from accumulated other comprehensive income to pension expense in 2024 under the corridor approach?
  19. During a bank reconciliation, a company discovers that it recorded a $540 check as $450 in its cash disbursements journal. The check was for a utility bill. What adjustment is required to the book balance?
  20. What is the primary difference in the subsequent events evaluation period for these two entities?

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