Practice Test 4 - CPA Financial Accounting & Reporting (FAR)

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

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1. A retail company must choose between two inventory valuation methods that are both acceptable under GAAP. Method A results in higher reported profits during inflationary periods, while Method B provides better matching of current costs with current revenues. The company's stakeholders include both equity investors focused on profitability trends and lenders concerned with cash flow stability. Under the FASB Conceptual Framework, which approach best supports the selection decision?
2. A for-profit technology company issued $500,000 of 8% bonds on January 1, 20X1, at 105 when the market interest rate was 6%. The bonds pay cash interest annually each December 31 and mature in 10 years. In accordance with FASB ASC, which journal entry should the issuer record at issuance to recognize the bonds issued at a premium?
3. What is the final carrying amount of Zeta Corp.'s inventory on its year-end balance sheet?
4. Under ASC 830, foreign currency translation adjustments arise when:
5. Which of the following is a required financial statement for a defined contribution plan but not for a health and welfare benefit plan?
6. A for-profit entity uses straight-line depreciation for financial reporting and MACRS for tax. At December 31, 20X5, the equipment has a carrying amount of $900,000 and a tax basis of $600,000 due solely to depreciation differences; the enacted tax rate is 21% and no valuation allowance is needed. Under FASB ASC 740, what is the appropriate journal entry at December 31, 20X5 to record the deferred tax effect of this temporary difference?
7. A public for-profit entity previously reported segments based on product lines (Medical Devices and Diagnostics) because those were the operating segments reviewed by the chief operating decision maker. During the current year, management reorganized and now the chief operating decision maker reviews results and allocates resources by geographic regions (Americas, Europe/Middle East/Africa, and Asia-Pacific), using region-level revenue, operating income, and assets; inter-segment transfers of inventory between regions are tracked. What impact does the management approach have on segment reporting?
8. City Airport operates as an enterprise fund and charges landing fees based on aircraft weight. During 2024, the airport billed airlines $2,400,000 in landing fees, of which $180,000 remained uncollected at year-end. The airport also earned $320,000 from concession agreements and received a $500,000 federal grant restricted for runway improvements that were completed during the year. Which amount should be reported as operating revenues in the airport's proprietary fund financial statements?
9. A U.S. public company must file a Form 8-K with the Securities and Exchange Commission (SEC) to report significant corporate events. Which of the following events would most likely trigger the requirement to file a Form 8-K?
10. A U.S. GAAP for-profit entity changes its accounting principle for long-term contracts from the completed-contract method to the percentage-of-completion method and applies the change retrospectively under FASB ASC 250. Management is preparing the note disclosure describing the change. Which disclosure is most appropriate regarding the reason for the change?
11. A company issues bonds at a premium. Which of the following statements accurately describes the relationship between total interest expense and total cash interest payments over the life of the bonds?
12. A company has a contract to deliver 100 units at $10 each ($1,000 total). After delivering 40 units, the customer requests 20 additional units at $9 each. The $9 price does not reflect the standalone selling price of $10. The remaining goods are not distinct from those already delivered. How should this modification be accounted for?
13. On July 1, 20X4, a U.S. for-profit entity with U.S. dollar functional currency borrowed 1,000,000 from a European bank, with principal due June 30, 20X5. The spot rate was $1.12/ on July 1 and $1.09/ on December 31, 20X4; interest is paid quarterly and is not at issue. Under U.S. GAAP, calculate the foreign currency gain or loss recognized in 20X4 earnings from remeasuring the euro-denominated note payable at year-end.
14. How should Quantum Labs classify the $350,000 of costs incurred in its income statement?
15. For purposes of the statement of cash flows, which of the following correctly describes the treatment of bank overdrafts?
16. What is the total adjustment required to retained earnings on the December 31, Year 1 statement of changes in equity as a result of these subsequent events?
17. A for-profit entity (Lark Co.) purchased 30,000 shares (3% ownership) of a publicly traded company for $900,000 on December 15, 20X4. Lark has no board representation, does not participate in policy-making, and intends to hold the shares for price appreciation; the shares are quoted on an active exchange and Lark prepares 20X4 financial statements under FASB ASC. Under ASC 321, what is the appropriate classification for this equity investment?
18. A two-year service contract is priced at $24,000. After 9 months, the parties agree to reduce the monthly fee by $300 going forward. The remaining services are distinct. What is the total revenue to be recognized over the remaining 15 months under the modified terms?
19. What is the correct order to include these securities when calculating diluted EPS?
20. A U.S. GAAP not-for-profit organization changed its accounting principle for recognizing certain government grants, concluding under FASB ASC 958 that the grants are conditional and should not be recognized until the qualifying conditions are met. The change is applied retrospectively under FASB ASC 250 and affects both the statement of activities and statement of financial position. Which disclosure is required in the year of adoption in the notes to the financial statements?

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