CPA — Financial Accounting & Reporting CPA - Financial Accounting & Reporting Practice Test 2025

The correct answer is (c) $333,333. Under ASC 606 (Step 4: Allocate the transaction price to the performance obligations), the transaction price is allocated on a relative standalone selling price basis. Total standalone selling prices =$400,000 + $200,000 =$600,000. Allocation to software license = ($400,000 /$600,000) x $500,000 =$333,333. The remaining $166,667 is allocated to the PCS obligation and recognized over the two-year service period.

(a) $500,000 -- This is the entire transaction price. Allocating the full amount to one obligation ignores the distinct PCS performance obligation, violating ASC 606.

(b) $400,000 -- This is the standalone selling price of the software license, not the allocated transaction price. When total standalone prices exceed the transaction price, a discount must be allocated proportionally.

(d) $250,000 -- This would result from splitting the transaction price equally between the two obligations, which is not consistent with the relative standalone selling price method.

The correct answer is (b) Operating lease. Under ASC 842, a lessee classifies a lease as a finance lease if any one of five criteria is met: (1) transfer of ownership -- not met; (2) purchase option reasonably certain to exercise -- not met; (3) lease term is for a major part (generally 75% or more) of the economic life -- 5/8 = 62.5%, not met; (4) present value of lease payments equals or exceeds substantially all (generally 90% or more) of fair value -- $120,000/$180,000 = 66.7%, not met; (5) specialized asset -- not indicated. Since none of the five criteria are met, the lease is classified as an operating lease.

(a) Finance lease -- Requires meeting at least one of the five criteria. None are met here.

(c) Sales-type lease -- This is a lessor classification under ASC 842, not a lessee classification.

(d) Direct financing lease -- This is also a lessor classification under ASC 842, not applicable to the lessee.

The correct answer is (c) $1,250 (FIFO higher). Under periodic FIFO, ending inventory consists of the most recently purchased units. The 350 units: 150 units from November 5 at$15 = $2,250; 200 units from August 22 at$14 = $2,800. FIFO ending inventory =$5,050. Under periodic LIFO, ending inventory consists of the oldest units. The 350 units: 200 units from beginning inventory at $10 =$2,000; 150 units from March 15 at $12 =$1,800. LIFO ending inventory = $3,800. Difference =$5,050 - $3,800 =$1,250 (FIFO higher). In a period of rising prices, FIFO always produces a higher ending inventory than LIFO because FIFO assigns the most recent (higher) costs to ending inventory.

(a) $500 (FIFO higher) -- This understates the difference between the two methods given the significant price increases from$10 to $15 per unit.

(b) $1,250 (LIFO higher) -- In a period of rising prices, LIFO ending inventory is always lower than FIFO. LIFO cannot be higher in this scenario.

(d) $2,100 (FIFO higher) -- This overstates the difference between the two methods for the given data.

The correct answer is (b) $53,333. Under the double-declining-balance (DDB) method, the depreciation rate is 2 / useful life = 2/6 = 33.33$240,000 x 33.33% = $80,000. Book value at end of Year 1 =$160,000. Year 2: Depreciation = $160,000 x 33.33$53,333. Book value at end of Year 2 = $106,667.

(a) $36,000 -- This is the annual straight-line depreciation: ($240,000 - $24,000) / 6 =$36,000. The question specifies DDB.

(c) $80,000 -- This is the Year 1 depreciation under DDB, not Year 2. In Year 2, the rate is applied to the reduced book value of$160,000.

(d) $71,111 -- This does not correspond to the correct DDB calculation for any year of this asset life.

The correct answer is (b) $32,559. Under the effective-interest method, interest expense equals the carrying amount multiplied by the market (effective) interest rate for the period. Semiannual market rate = 6$1,085,301 x 3% = $32,559. The cash interest payment is$1,000,000 x 4% = $40,000. Premium amortization =$40,000 - $32,559 =$7,441.

(a) $40,000 -- This is the cash interest payment (face value x stated semiannual rate), not the interest expense. When bonds are issued at a premium, interest expense is less than the cash payment.

(c) $43,412 -- This would result from an incorrect application of rates or bases.

(d) $30,000 -- This would result from applying the semiannual market rate (3$1,000,000) rather than the carrying amount ($1,085,301). The effective-interest method requires the rate to be applied to the carrying amount.

The correct answer is (c) Increase of $66,000. Under the cost method, treasury stock is recorded at the reacquisition price. Reissuance of 3,000 shares at$22: Cash received = 3,000 x $22 =$66,000. Cost of treasury shares = 3,000 x $18 =$54,000. Excess over cost = $12,000 (credited to APIC-Treasury Stock). The total effect on stockholders equity is an increase of$66,000 (the total cash received), because Treasury Stock (contra-equity) decreases by $54,000 (increasing equity) and APIC increases by$12,000.

(a) Increase of $12,000 -- This represents only the gain on reissuance (the APIC credit). The total equity effect also includes the$54,000 reduction in the treasury stock contra account.

(b) Increase of $54,000 -- This represents only the cost basis of the reissued shares. The total effect includes both this amount and the$12,000 APIC increase.

(d) Increase of $90,000 -- This does not correspond to any correct calculation of the reissuance impact.

The correct answer is (c) Financing activity -- cash outflow of $35,000. Under US GAAP (ASC 230), dividends paid to shareholders are classified as financing activities on the statement of cash flows. This is because dividends represent a distribution of earnings to the owners (equity holders) of the company, which is a financing decision.

(a) Operating activity -- cash outflow of $35,000 -- Under US GAAP, dividends paid are not classified as operating activities. (Note: Under IFRS, entities may classify dividends paid as either operating or financing.)

(b) Investing activity -- cash outflow of $35,000 -- Investing activities relate to acquisition and disposal of long-term assets and investments. Dividend payments are not investing activities.

(d) Not reported on the statement of cash flows -- All cash transactions must be reported on the statement of cash flows. Only non-cash transactions are disclosed in a supplemental schedule.

The correct answer is (b) $24,000. In consolidation, all intercompany transactions must be eliminated. The intercompany profit =$180,000 - $120,000 =$60,000 total. Since Parentco still holds 40% of this inventory at year-end, only the unrealized portion must be eliminated. Unrealized profit = $60,000 x 40$24,000. This reduces consolidated ending inventory by $24,000, restating it to its original cost to the consolidated entity.

(a) $60,000 -- This is the total intercompany profit, not just the unrealized portion. The 60% already sold to outside parties has been realized.

(c) $72,000 -- This represents 40$180,000 x 40%), which is the total cost of remaining inventory, not the unrealized profit.

(d) $48,000 -- This represents 40$120,000 x 40%), which is the cost basis of remaining inventory, not the unrealized profit to be eliminated.

The correct answer is (c) Capital projects fund. Capital projects funds account for financial resources restricted, committed, or assigned to capital outlays, including acquisition or construction of major capital facilities. Since the federal grant is legally restricted for library construction, it belongs in a capital projects fund.

(a) General fund -- Accounts for all financial resources not required to be in another fund. This grant is restricted for a specific capital purpose.

(b) Special revenue fund -- Used for specific revenue sources restricted or committed to specified purposes other than debt service or capital projects. Since this is specifically for construction, a capital projects fund is more appropriate.

(d) Permanent fund -- Used for resources legally restricted so that only earnings, not principal, may be used. This grant is intended to be spent on construction, not preserved as an endowment.

The correct answer is (d) Net assets with donor restrictions. Under ASC 958 (as updated by ASU 2016-14), not-for-profit organizations classify net assets into two categories: (1) net assets without donor restrictions and (2) net assets with donor restrictions. This donation carries a perpetual restriction (principal must be maintained in perpetuity) and a purpose restriction (income for nursing scholarships). Therefore, the $500,000 principal is classified as net assets with donor restrictions.

(a) Net assets without donor restrictions -- This applies to resources not subject to donor-imposed restrictions. This donation has both perpetual and purpose restrictions.

(b) Temporarily restricted net assets -- This was a valid classification under the old pre-ASU 2016-14 framework but has been eliminated. The current framework uses a two-tier system.

(c) Permanently restricted net assets -- Also from the old three-tier classification eliminated by ASU 2016-14. The correct current classification is simply "net assets with donor restrictions."