CPA Financial Accounting and Reporting Far Quiz: Accounts Payable And Accrued Liabilities

What this quiz covers

This quiz focuses on Accounts Payable And Accrued Liabilities, giving you a quick way to practice the rules, question types, and explanations that matter most for CPA Financial Accounting and Reporting Far.

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

Question 1

1. Require the accounts payable clerk to both add new vendors to the master file and process invoice payments to increase efficiency.
2. Implement a system edit that rejects invoices with duplicate vendor number, invoice number, and amount, and require supervisory review of exceptions. (correct answer)
3. Record all vendor invoices to accrued expenses rather than accounts payable until paid.
4. Allow payment processing without three-way matching as long as invoices are approved by department heads.

Explanation: This question tests internal controls over accounts payable to prevent duplicate payments. The key issue is preventing duplicate payment of the same invoice in an electronic invoice environment. Under COSO control principles and consistent with proper liability accounting under FASB ASC 405, implementing system edits that reject duplicate combinations of vendor number, invoice number, and amount with supervisory review of exceptions provides the most effective preventive control (Answer B). Answer A violates segregation of duties by combining incompatible functions. Answer C does not address the duplicate payment risk and misclassifies liabilities. Answer D weakens controls by eliminating three-way matching requirements. The decision rule is that automated preventive controls with appropriate exception handling provide the most effective defense against duplicate payments while maintaining proper accrual accounting.

Question 2

1. Do not record or disclose because the invoice was received after year-end and is a nonrecognized subsequent event.
2. Record a December 31 adjusting entry: debit Legal Expense $75,000; credit Accrued Liabilities (or Accounts Payable)$75,000. (correct answer)
3. Record the expense in January 20X6 because the invoice date determines the period of recognition.
4. Record a December 31 entry: debit Prepaid Legal Expense $75,000; credit Cash$75,000.

Explanation: This question tests the treatment of services performed before year-end but invoiced after year-end. The key facts are that $75,000 of legal services were performed entirely in December 20X5 but invoiced on January 8, 20X6, with financial statements not yet issued. Under FASB ASC 855, this is a Type I subsequent event providing evidence about conditions existing at the balance sheet date. According to FASB ASC 405 and the accrual basis, the expense and liability must be recorded in December when services were performed, requiring an adjusting entry to debit Legal Expense$75,000 and credit Accrued Liabilities $75,000 (Answer B). Answer A incorrectly treats this as a nonrecognized event. Answer C violates the matching principle by using invoice date rather than service date. Answer D incorrectly assumes cash payment and creates a prepaid asset. The decision rule is that expenses must be accrued in the period when services are received, regardless of invoice timing.

Question 3

1. Record no liability at December 31, 20X5 because the invoices were not recorded until January; disclose the commitment in the notes.
2. Debit Raw Materials Inventory (or Inventory) $410,000 and credit Accounts Payable$410,000 at December 31, 20X5. (correct answer)
3. Debit Cost of Goods Sold $410,000 and credit Accrued Expenses$410,000 at December 31, 20X5.
4. Debit Purchases $410,000 and credit Accrued Liabilities$451,000 to include estimated late fees and interest through January 5, 20X6.

Explanation: This question tests the proper accounting for goods received but not yet recorded in accounts payable at year-end. The key facts are that raw materials worth $410,000 were received in December with invoices dated December 28, 20X5, and the materials were included in ending inventory. Under FASB ASC 405, a liability must be recognized when an obligation exists, which occurs upon receipt of goods with a valid invoice, regardless of when the invoice is processed. The correct entry is to debit Raw Materials Inventory$410,000 and credit Accounts Payable $410,000 (Answer B) to properly match the asset and liability at year-end. Answer A is incorrect because failing to record the liability violates the matching principle and understates both assets and liabilities. Answer C incorrectly charges the materials directly to expense rather than inventory. Answer D incorrectly includes estimated late fees that are not yet incurred obligations. The decision rule is that liabilities must be recorded when goods are received and accepted, not when invoices are processed.

Question 4

1. Accrue a liability and expense of $120,000 because the loss is probable and reasonably estimable. (correct answer)
2. Disclose the contingency only, with no accrual, because the supplier has not issued an invoice as of year-end.
3. Record a liability of $0 and disclose only if the loss is remote.
4. Accrue a liability only when the penalty is paid, consistent with cash basis accounting for executory contracts.

Explanation: This question tests the accounting for contractual penalty obligations. The key facts are that the entity has not met minimum purchase requirements, management believes the $120,000 penalty is likely to be enforced based on past practice, and the amount is reasonably estimable. Under FASB ASC 450, a loss contingency must be accrued when it is both probable and reasonably estimable. Since management believes enforcement is likely (probable) and the$120,000 amount is known, the entity must accrue a liability and expense of $120,000 (Answer A). Answer B incorrectly requires an invoice before accrual. Answer C incorrectly suggests no disclosure for a probable loss. Answer D incorrectly applies cash basis accounting to a probable obligation. The decision rule is that contractual penalties must be accrued when it becomes probable they will be incurred and the amount can be reasonably estimated.

Question 5

1. Trace the $10,000 payment to the January bank statement and reduce accounts payable at December 31 because the check was mailed before year-end.
2. Perform a three-way match of receiving reports, vendor invoices, and purchase orders around year-end and record the unrecorded invoice and credit memo as of December 31. (correct answer)
3. Rely on the vendor statement balance of $312,000 as the correct accounts payable amount because it is externally generated.
4. Record an adjusting entry to increase accounts payable by $34,000 ($312,000 − $278,000) with an offset to Cost of Goods Sold.

Explanation: This question tests the proper procedure for reconciling vendor statements to accounts payable records. The key facts are a $34,000 difference between the vendor statement ($312,000) and company records ($278,000), with three identified reconciling items. Under FASB ASC 405 and proper cutoff procedures, the most effective approach is to perform a three-way match of receiving reports, vendor invoices, and purchase orders to ensure all December transactions are properly recorded (Answer B). This would result in recording the$44,000 unrecorded invoice and $4,000 credit memo as of December 31. Answer A incorrectly reduces payables for an outstanding check. Answer C inappropriately relies solely on external documentation without verification. Answer D incorrectly records the net difference without investigating individual items. The decision rule is that vendor reconciliations require detailed investigation of reconciling items and proper cutoff procedures to ensure accurate liability reporting.

Question 6

1. The current ratio increases because both current assets and current liabilities increase by $180,000.
2. The current ratio is unchanged because the accrual affects only the income statement.
3. The current ratio decreases because current liabilities increase by $180,000 with no change to current assets. (correct answer)
4. The current ratio decreases because current assets decrease by $180,000 with no change to current liabilities.

Explanation: This question tests the impact of recording an accrued liability on the current ratio. The key facts are that before adjustment, current assets are $2,400,000 and current liabilities are$1,200,000 (ratio of 2.0), and $180,000 of utilities expense needs to be accrued. Under FASB ASC 405, the accrual entry debits Utilities Expense and credits Accrued Liabilities, increasing current liabilities to$1,380,000 with no change to current assets. The new current ratio becomes $2,400,000 ÷$1,380,000 = 1.74, a decrease from 2.0 (Answer C). Answer A incorrectly assumes current assets increase with the accrual. Answer B incorrectly states the accrual affects only the income statement. Answer D incorrectly suggests current assets decrease. The decision rule is that expense accruals increase current liabilities without affecting current assets, thereby decreasing the current ratio when the ratio is above 1.0.

Question 7

1. Debit Wages Expense $96,000; credit Wages Payable (Accrued Payroll Liability)$96,000. (correct answer)
2. Debit Wages Payable $96,000; credit Cash$96,000.
3. Debit Prepaid Wages $96,000; credit Cash$96,000.
4. Debit Wages Expense $96,000; credit Accounts Payable$96,000.

Explanation: This question tests the accrual of wages earned but not yet paid at year-end. The key fact is that employees earned $96,000 of wages from December 27-31 that will be paid on January 4, 2024. Under FASB ASC 710 and the accrual basis of accounting, compensation expense must be recognized in the period when services are rendered, regardless of when payment occurs. The correct entry is to debit Wages Expense$96,000 and credit Wages Payable (Accrued Payroll Liability) $96,000 (Answer A). Answer B represents the payment entry in January, not the year-end accrual. Answer C incorrectly treats unpaid wages as a prepaid asset. Answer D uses Accounts Payable instead of the more specific Wages Payable account typically used for payroll liabilities. The decision rule is that employee compensation must be accrued in the period earned based on approved time records.

Question 8

1. Debit Warranty Liability $60,000; credit Warranty Expense$60,000.
2. Debit Warranty Expense $60,000; credit Warranty Liability$60,000. (correct answer)
3. Debit Warranty Expense $38,000; credit Cash$38,000.
4. Debit Cost of Goods Sold $22,000; credit Accounts Payable$22,000.

Explanation: This question tests the accounting for warranty expense under an assurance-type warranty. The key facts are December sales of $2,000,000, a 3$2,000,000 × 3% = $60,000. The correct entry is to debit Warranty Expense$60,000 and credit Warranty Liability $60,000 (Answer B). Answer A incorrectly reverses the debit and credit. Answer C only records actual claims paid, violating the matching principle. Answer D misclassifies the warranty obligation. The decision rule is that warranty expense must be accrued based on estimated costs at the time of sale, with the liability adjusted as actual claims are processed.

Question 9

1. $55,556 (correct answer)
2. $60,000
3. $64,800
4. $69,444

Explanation: When the bonus is based on net income after deducting the bonus itself, use the formula: Bonus = Rate × (Income - Bonus), which rearranges to Bonus = (Rate × Income) ÷ (1 + Rate). Here: Bonus = (0.08 × $750,000) ÷ (1 + 0.08) =$60,000 ÷ 1.08 = $55,556. Choice B ($60,000) incorrectly calculates 8% of $750,000 without adjusting for the circular calculation. Choice C ($64,800) appears to add the bonus to income before calculating. Choice D uses an incorrect formula application.

Question 10

1. $235,500
2. $345,000
3. $435,500 (correct answer)
4. $580,500

Explanation: Current liabilities include all liabilities due within one year: Accrued wages $47,000 + Accrued interest$12,000 + Accrued property taxes $8,500 + Accrued warranty costs$23,000 + Note payable due in 6 months $200,000 + Accounts payable$145,000 = $435,500. Choice A omits the note payable. Choice B omits accrued liabilities. Choice D appears to double-count some items or include non-current liabilities.

Question 11

1. Debit Insurance Expense $15,000; Credit Insurance Payable$15,000
2. Debit Insurance Expense $12,000; Credit Prepaid Insurance$12,000
3. No journal entry is required on December 31, 2024
4. Debit Insurance Expense $4,000; Credit Prepaid Insurance$4,000 (correct answer)

Explanation: When you encounter insurance questions on the CPA exam, focus on the matching principle—expenses must be recorded in the period they relate to, regardless of when cash is paid. Let's trace through the timeline. Sunrise paid $12,000 on October 1, 2024, for three months of coverage (October-December). This means$4,000 per month was initially recorded as prepaid insurance. By December 31, you need to recognize the expense for December's coverage, which requires moving $4,000 from the prepaid asset account to insurance expense. The correct answer is D: Debit Insurance Expense $4,000; Credit Prepaid Insurance$4,000. This entry recognizes December's insurance cost and reduces the prepaid balance appropriately. Answer A incorrectly calculates $15,000, which appears to be one quarter of the new$60,000 annual premium. However, the new rate doesn't take effect until January 1, 2025, so it's irrelevant for 2024's year-end entry. Additionally, this creates a payable when no amount is actually owed. Answer B uses $12,000, which represents the entire quarterly payment already made. This would incorrectly expense the full three months in December alone, violating the matching principle. Answer C suggests no entry is needed, but this ignores the requirement to record December's insurance expense from the prepaid amount. Remember: When dealing with prepaid expenses, always calculate the monthly expense amount and ensure you're recording only the current period's portion. The key is matching the expense to the correct time period, not the payment timing.

Question 12

1. Debit Unearned Revenue $9,000; Credit Service Revenue$9,000 (correct answer)
2. Debit Unearned Revenue $27,000; Credit Service Revenue$27,000
3. Debit Service Revenue $9,000; Credit Unearned Revenue$9,000
4. Debit Cash $36,000; Credit Unearned Revenue$36,000

Explanation: Northland has earned 3 months of the 12-month contract (October, November, December), which equals $9,000 ($36,000 ÷ 12 × 3). The adjusting entry transfers the earned portion from Unearned Revenue to Service Revenue. Choice B incorrectly recognizes 9 months instead of 3 months. Choice C reverses the proper entry. Choice D represents the initial receipt of cash, not the year-end adjustment.

Question 13

1. $320,000
2. $365,000
3. $405,000 (correct answer)
4. $450,000

Explanation: Under GAAP, restructuring liabilities include costs directly associated with the restructuring that will not benefit future operations. This includes severance payments ($320,000) and lease termination costs ($85,000) = $405,000. Employee retraining costs ($45,000) benefit future operations and should not be accrued as part of the restructuring liability. Choice A includes only severance costs. Choice B incorrectly excludes lease termination costs. Choice D incorrectly includes retraining costs that benefit future periods.

Question 14

1. $95,000
2. $250,000 (correct answer)
3. $345,000
4. $430,000

Explanation: The pension liability equals the unfunded portion of the pension obligation: $2,400,000 obligation -$2,150,000 plan assets = $250,000. Unrecognized prior service cost affects other comprehensive income but not the balance sheet liability measurement under current GAAP. Accrued vacation pay is a separate liability. Choice A includes only vacation pay. Choice C incorrectly adds vacation pay to pension liability. Choice D incorrectly includes the unrecognized prior service cost in the liability calculation.

Question 15

1. $458,000 (correct answer)
2. $463,000
3. $470,000
4. $485,000

Explanation: Starting with subsidiary ledger total of $485,000: subtract duplicate purchase entry ($15,000), subtract the unrecorded payment ($12,000), resulting in$458,000. The purchase return was correctly recorded in the subsidiary ledger, so the general ledger needs to be corrected to match. The correct balance is $458,000. Choice B uses the uncorrected general ledger balance. Choice C incorrectly adds back the purchase return. Choice D uses the uncorrected subsidiary ledger balance.

Question 16

1. $175,000 (correct answer)
2. $210,000
3. $245,000
4. $315,000

Explanation: Accounts payable activity: Beginning balance $280,000 + Purchases$1,850,000 - Payments $1,920,000 - Returns$35,000 = $175,000. Returns reduce accounts payable because they eliminate the obligation to pay for defective goods. Choice B ($210,000) incorrectly adds the returns instead of subtracting them. Choice C ($245,000) ignores the returns entirely. Choice D ($315,000) incorrectly subtracts returns from purchases before adding to beginning balance.

Question 17

1. $45,000
2. $78,000
3. $0, because the payments will be made in 2025
4. $123,000 (correct answer)

Explanation: When you encounter questions about year-end accruals, you're being tested on the matching principle and accrual accounting. The key is identifying expenses that were incurred in the current period but haven't yet been paid or recorded. Both items described meet the criteria for accrued liabilities. The legal services were performed in December 2024 ($45,000), creating an obligation regardless of when the invoice was processed. Similarly, employees earned wages during the last week of December 2024 ($78,000), establishing a liability even though payment occurs in January 2025. Under accrual accounting, you record expenses when incurred, not when cash changes hands. The total accrued liabilities should be $45,000 + 78,000 = 123,000$. Answer choice A ($45,000) incorrectly includes only the legal fees while ignoring the earned wages liability. Answer choice B ($78,000) makes the opposite mistake—including wages but excluding the legal services expense. Answer choice C ($0) reflects a fundamental misunderstanding of accrual accounting, incorrectly suggesting that timing of payment determines when liabilities should be recorded. Answer choice D ($123,000) correctly recognizes both liabilities that existed as of December 31, 2024. Study tip: For CPA-FAR accrual questions, always ask yourself: "Was the service performed or expense incurred by year-end?" If yes, record the liability regardless of payment timing. The matching principle requires expenses to be recorded in the period they're incurred, creating corresponding accrued liabilities when payment hasn't yet occurred.