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Practice Test 3 - CPA Financial Accounting & Reporting (FAR)

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

  1. A company acquires equipment with a list price of $80,000 by trading in old equipment with a book value of $15,000 and a fair value of $20,000, plus paying $60,000 cash. The exchange has commercial substance. What cost is recorded for the new equipment?
  2. A company grants 10,000 stock options on January 1, Year 1. Each option has a grant-date fair value of $8. The options vest ratably over 4 years. What is the compensation expense recognized in Year 1?
  3. A for-profit entity sponsors a defined benefit pension plan. On October 1, 20X5, the entity implements a workforce reduction that eliminates future service for a significant number of employees, meeting the definition of a curtailment under FASB ASC 715. As a result, the projected benefit obligation decreases by $1,100,000, and the entity has unrecognized prior service cost of $700,000 related to the affected employees. What is the appropriate accounting treatment in 20X5 (ignore tax effects)?
  4. A company completes a 3-for-1 stock split when it has 100,000 shares of $6 par value common stock outstanding. What is the effect on par value per share and total par value after the split?
  5. Which of the following correctly describes the effect of issuing common stock on total stockholders' equity?
  6. Meridian Corp constructed a warehouse for its own use. Direct costs included materials $800,000, labor $600,000, and allocated overhead $200,000. During construction, Meridian borrowed $1,000,000 specifically for this project at 8% annual interest. Construction began January 1 and was completed December 31. The company also has general debt of $2,000,000 at 6% that could have been avoided. What amount should be capitalized as the total cost of the warehouse?
  7. A company has book income before taxes of $200,000. Temporary differences result in taxable income of $240,000. The enacted tax rate is 21%. What is the current tax expense and the deferred tax benefit?
  8. Which of the following correctly describes the presentation of restricted cash on the balance sheet under ASC 230?
  9. In addition to the accounting for recognized and non-recognized events, U.S. GAAP requires a specific disclosure in the notes to the financial statements regarding the subsequent events evaluation process itself. Which of the following disclosures is required?
  10. Which of the following is NOT a temporary difference under ASC 740?
  11. What is the company's diluted earnings per share for the year?
  12. A for-profit business entity, Redstone Services, recognized goodwill from a prior acquisition and is evaluating whether to perform its annual goodwill impairment test. Redstone's reporting unit has stable cash flows, but management notes that overall interest rates increased during the year without a specific adverse effect on the reporting unit's operations. Under FASB ASC 350, which factor indicates an impairment test is necessary for goodwill?
  13. Which of the following is NOT a factor used to determine the useful life of a depreciable asset?
  14. Atlas Corporation's calendar year 2023 financial statements were authorized for issuance on February 20, 2024, and actually issued on March 8, 2024. The following subsequent events occurred: January 18, 2024: Atlas received notification that a key customer from December 2023 sales was experiencing severe financial difficulties and would likely pay only 40% of its $200,000 outstanding balance. February 25, 2024: Atlas announced a major restructuring plan involving facility closures and workforce reductions, with estimated costs of $3 million. March 1, 2024: A patent infringement lawsuit was filed against Atlas seeking $2.5 million in damages for products sold throughout 2023. Atlas's legal counsel believes the lawsuit is without merit. How should Atlas account for these events in its 2023 financial statements?
  15. A company has pretax book income of $500,000. It has $20,000 of tax-exempt interest and $15,000 of nondeductible meals and entertainment expenses. What is the company's taxable income?
  16. A school district (local government reporting under GASB) prepares its General Fund statements on the modified accrual basis. At year-end, the district received $250,000 in cash from the state government for a reimbursement-based grant. The reimbursement relates to eligible expenditures incurred after year-end (in the next fiscal year). How should the General Fund report the $250,000 receipt at year-end?
  17. A for-profit technology company invests excess cash by writing (selling) call options on a publicly traded stock index to generate premium income; the options are not designated as hedging instruments under FASB ASC 815. At the end of the reporting period, the options have increased in fair value (i.e., the company has an unrealized loss). Which is the appropriate accounting treatment for this derivative instrument?
  18. A private, for-profit corporation (Barton Inc.) declared a $75,000 cash dividend on March 1, 20X5 and paid it on April 1, 20X5. Consistent with FASB ASC 505, which journal entry correctly reflects the dividend payment on April 1, 20X5?
  19. What is the total loss from inventory write-down that the company should recognize for the period?
  20. How should Quantum Labs classify the $350,000 of costs incurred in its income statement?

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