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Practice Test 12 - CPA Financial Accounting & Reporting (FAR)

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

  1. A company has a three-year IT support contract for $36,000 ($1,000/month). At the end of Year 1, the parties agree to add a new module of support at an additional $500/month for the remaining two years. The new module is a distinct service with a standalone selling price of $500/month. How should this modification be treated?
  2. For the purpose of calculating diluted EPS, what are the incremental shares related to these options?
  3. Under U.S. GAAP, through which date must the company evaluate subsequent events?
  4. Which of the following best describes the treatment of pre-existing relationships between the acquirer and acquiree that are effectively settled in a business combination?
  5. A company has pretax book income of $300,000 and a 21% statutory tax rate. Permanent differences include $10,000 of tax-exempt municipal bond interest and $5,000 of nondeductible fines. What is the effective tax rate?
  6. What amount should DataFlow allocate to the software performance obligation?
  7. Which of the following items is a component of other comprehensive income under U.S. GAAP?
  8. A for-profit investment advisory firm is issuing annual GAAP financial statements and holds a material portfolio of corporate bonds measured at fair value on a recurring basis. The fair values are based primarily on observable market inputs such as quoted prices for similar instruments and interest rate yield curves from pricing services. Under FASB ASC 820, what disclosure requirement applies?
  9. At the time of a stock split effected in the form of a stock dividend (also called a stock split-up effected as a dividend), which of the following occurs?
  10. Which of the following correctly describes how treasury stock is presented on the balance sheet?
  11. A company uses the weighted average cost method (periodic). Beginning inventory: 200 units at $5. Purchases: 300 units at $8. Sales: 400 units. What is the weighted average cost per unit?
  12. How should this event be handled in the financial statements for the period just ended?
  13. A contract modification is approved verbally but not yet in writing. Under ASC 606, how should the company treat this modification?
  14. A for-profit entity grants 30,000 equity-classified stock options on January 1, 20X1 under ASC 718 that vest after 3 years of service and only if the entity completes an IPO by December 31, 20X3 (a performance condition). The grant-date fair value is $5 per option. At 12/31/20X1, management concludes it is not probable the IPO will occur by the deadline. Based on the scenario, how should the entity recognize compensation expense for 20X1?
  15. Under ASC 321 (post-ASU 2016-01), unrealized gains and losses on equity securities with readily determinable fair values are:
  16. According to the constraint on variable consideration, how much of the bonus should be included in the transaction price at the inception of the contract?
  17. A for-profit manufacturer discovered in 2026 that depreciation on equipment was calculated using a 10-year life instead of the correct 5-year life beginning in 2025. The equipment cost $1,000,000, has no salvage value, and was placed in service on January 1, 2025; straight-line depreciation is used. The 2025 financial statements were issued and are presented comparatively with 2026. Under FASB ASC 250, what journal entry should be made to rectify the prior period error (ignoring income taxes)?
  18. What gain or loss should be reported in Beta Corp's consolidated income statement for 2024 related to this equipment sale?
  19. Innovate Corp. purchased a patent for $1.2 million on January 1, 2022. The patent had a remaining legal life of 15 years and an estimated useful life of 10 years. On January 1, 2024, due to technological changes, the company determined that the patent's future cash flows would be $600,000 and its fair value was $500,000. What is the carrying amount of the patent after any necessary adjustments on January 1, 2024?
  20. Considering the purchase option, how should Harbor initially measure the lease liability on March 1, Year 1? (PV factors: 60-period annuity due at 0.5% = 51.73; single payment 60 periods at 0.5% = 0.697)

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