Free FAR CPA exam practice questions with answers and explanations

What these questions cover

• FAR-I: Financial Reporting
  • General-Purpose Financial Reporting: For-Profit Business Entities
  • General-Purpose Financial Reporting: Nongovernmental Not-for-Profit Entities
  • State and Local Government Concepts
  • Public Company Reporting Topics
  • Special Purpose Frameworks
  • Financial Statement Ratios and Performance Metrics
• FAR-II: Select Balance Sheet Accounts
  • Cash and cash equivalents
  • Trade receivables
  • Inventory
  • Property, plant and equipment
  • Investments
  • Intangible assets
  • Payables and accrued liabilities
  • Debt (financial liabilities)
  • Equity
• FAR-III: Select Transactions
  • Accounting changes and error corrections
  • Contingencies and commitments
  • Revenue recognition
  • Accounting for income taxes
  • Fair value measurements
  • Lessee accounting
  • Subsequent events

Content groups as published in the AICPA Uniform CPA Examination Blueprints, effective January 2026. These 29 questions are a sample, not every group.

29 FAR practice questions with explanations

Answer first, then check. Each explanation shows the computation or the rule and names the specific error behind every wrong choice.

1. Question 1 · FAR-I: Statement of cash flows (indirect method)

   Delta Corp. prepares its statement of cash flows under U.S. GAAP using the indirect method. For the current year, net income was $120,000. Depreciation expense was $30,000, and the company recognized an $8,000 gain on the sale of equipment. Accounts receivable increased $15,000, inventory decreased $10,000, accounts payable decreased $6,000, and accrued liabilities increased $4,000. What amount should Delta report as net cash provided by operating activities?

   1. A. $135,000
   2. B. $143,000
   3. C. $149,000
   4. D. $151,000
   Show the answer and rationale

   Correct answer: A. $135,000

   120,000 + 30,000 depreciation - 8,000 gain (the sale proceeds are an investing inflow) - 15,000 receivable increase + 10,000 inventory decrease - 6,000 payable decrease + 4,000 accrued liability increase = 135,000.

   • B: Omits the 8,000 gain adjustment (143,000), leaving a gain whose cash is investing in operating cash flow.
   • C: Reverses the signs of all four working capital changes (149,000).
   • D: Adds the gain instead of subtracting it (151,000); a gain raises net income without being an operating cash inflow.

   Sources: OpenStax Principles of Accounting Vol. 1, Sec. 16.3: Statement of Cash Flows, Indirect Method

2. Question 2 · FAR-I: Statement of cash flows (classification, ASC 230)

   Under U.S. GAAP (ASC 230), a for-profit entity that is not a financial institution reports each of the following in its statement of cash flows. Which item is classified as an operating activity?

   1. A. Cash paid to repurchase the entity's own common stock
   2. B. Cash paid for interest on bonds payable
   3. C. Cash paid for dividends to common shareholders
   4. D. Cash received from the sale of land held for investment
   Show the answer and rationale

   Correct answer: B. Cash paid for interest on bonds payable

   ASC 230-10-45-17 lists cash payments to lenders and other creditors for interest as an operating outflow. Treasury stock purchases and dividends paid are financing outflows, and proceeds from selling land are an investing inflow.

   • A: Treasury stock purchases are financing outflows (equity transactions with owners).
   • C: Dividends paid are financing outflows, not operating.
   • D: Proceeds from selling long-term assets such as land are investing inflows.

   Sources: FASB ASU 2016-15 (reproduces ASC 230-10-45-17: interest payments are operating outflows); OpenStax Principles of Accounting Vol. 1, Sec. 16.3: Statement of Cash Flows, Indirect Method

3. Question 3 · FAR-I: Consolidation (noncontrolling interest)

   Parent Co. owns 75% of Sub Inc. and consolidates it. Sub reported net income of $90,000 for the year. There were no intercompany transactions, no acquisition-date fair value differences, and no preferred stock. How much net income should be attributed to the noncontrolling interest in the consolidated income statement?

   1. A. $30,000
   2. B. $67,500
   3. C. $90,000
   4. D. $22,500
   Show the answer and rationale

   Correct answer: D. $22,500

   The noncontrolling interest owns the remaining 25% of Sub: 25% x 90,000 = 22,500. The other 67,500 is attributable to Parent; consolidated net income includes 100% of Sub's income.

   • A: Uses one-third of income, which is not tied to any ownership percentage given.
   • B: Attributes Parent's 75% share to the noncontrolling interest, reversing the interests.
   • C: Attributes 100% of Sub's income to the noncontrolling interest.

   Sources: PwC Viewpoint Consolidation Guide 8.2: Intercompany transactions (cites ASC 810-10-45)

4. Question 4 · FAR-I: Consolidation (intercompany eliminations)

   Parent Co. owns 80% of Sub Inc. During the year, Parent sold inventory costing $60,000 to Sub for $90,000. At year-end, Sub still held one-third of this inventory (by selling price); the rest was sold to outside customers. Ignoring income taxes, by what amount should consolidated inventory be reduced at year-end to eliminate the intercompany profit?

   1. A. $8,000
   2. B. $10,000
   3. C. $9,000
   4. D. $30,000
   Show the answer and rationale

   Correct answer: B. $10,000

   Total intercompany profit is 90,000 - 60,000 = 30,000. One-third remains in ending inventory: 30,000 x 1/3 = 10,000. The elimination is 100% of the unrealized profit and is not reduced for the 20% noncontrolling interest.

   • A: Eliminates only Parent's 80% share of the unrealized profit (10,000 x 80%), but the full amount is eliminated.
   • C: Applies an incorrect 30% rate to the profit; the unrealized portion is one-third (10,000).
   • D: Eliminates all the profit on the intercompany sale, though two-thirds was realized through sales to outsiders.

   Sources: PwC Viewpoint Consolidation Guide 8.2: Intercompany transactions (cites ASC 810-10-45)

5. Question 5 · FAR-I: Not-for-profit financial statements (ASU 2016-14)

   Under ASU 2016-14, a not-for-profit entity receives a $400,000 cash gift restricted by the donor to constructing a new building. The donor specified no other time restriction. The entity builds the building and places it in service during Year 3. Absent other donor stipulations, when should the entity reclassify the net assets from with donor restrictions to without donor restrictions?

   1. A. When the cash gift is received
   2. B. Evenly over the building's useful life as it is depreciated
   3. C. When the building is fully depreciated
   4. D. When the building is placed in service
   Show the answer and rationale

   Correct answer: D. When the building is placed in service

   ASU 2016-14 (ASC 958-205-45-12 and 958-360-45-1A) requires that, absent donor stipulations about how long the asset must be used, restrictions on cash given to acquire or construct property, plant, or equipment are released when the asset is placed in service; the entire amount is reclassified at that time. The FASB considered and rejected incremental release as construction costs are incurred.

   • A: The gift carries a purpose restriction at receipt, so it is initially reported as with donor restrictions.
   • B: This is the pre-ASU 2016-14 implied-time-restriction option, which was eliminated.
   • C: Release does not wait for the end of the asset's life; no such requirement exists.

   Sources: FASB ASU 2016-14 (ASC 958-205-45-12; 958-360-45-1A; BC71-BC73); Journal of Accountancy: NFP financial reporting standard (ASU 2016-14)

6. Question 6 · FAR-I: Financial statement ratios (inventory turnover)

   Cardinal Co. reported net sales of $1,050,000 and cost of goods sold of $840,000 for the year. Inventory was $180,000 at the beginning of the year and $240,000 at the end of the year. What is Cardinal's inventory turnover for the year?

   1. A. 3.5 times
   2. B. 4.7 times
   3. C. 5.0 times
   4. D. 4.0 times
   Show the answer and rationale

   Correct answer: D. 4.0 times

   Average inventory = (180,000 + 240,000) / 2 = 210,000. Inventory turnover = cost of goods sold / average inventory = 840,000 / 210,000 = 4.0 times.

   • A: Divides COGS by ending inventory only (840,000 / 240,000).
   • B: Divides COGS by beginning inventory only (840,000 / 180,000 = 4.67).
   • C: Uses net sales rather than cost of goods sold in the numerator (1,050,000 / 210,000).

   Sources: OpenStax Principles of Accounting Vol. 1, Appendix A: Financial Statement Analysis

7. Question 7 · FAR-I: Statement of comprehensive income / OCI

   Under U.S. GAAP, which of the following items is reported in other comprehensive income rather than in net income? Assume the entity has made no special elections.

   1. A. Foreign currency translation adjustment from consolidating a foreign subsidiary whose functional currency is its local currency
   2. B. Unrealized holding gain on equity securities with readily determinable fair values
   3. C. Foreign currency transaction gain on a U.S. dollar entity's euro-denominated receivable
   4. D. Impairment loss on goodwill
   Show the answer and rationale

   Correct answer: A. Foreign currency translation adjustment from consolidating a foreign subsidiary whose functional currency is its local currency

   Foreign currency translation adjustments are listed as OCI items in ASC 220-10-45-10A(a). Other OCI items include the effective portion of cash flow hedge gains and losses, unrealized holding gains and losses on available-for-sale debt securities, and pension and other postretirement gains, losses, prior service costs and transition amounts not yet in net periodic cost. ASU 2016-01 moved all fair value changes on equity securities to net income; ordinary foreign currency transaction gains and goodwill impairments are also in net income.

   • B: Equity securities fair value changes are recognized in net income under current GAAP.
   • C: Ordinary foreign currency transaction gains and losses on a receivable are recognized in net income; only specified items (net investment hedges, long-term-investment intra-entity balances, cash flow hedges) go to OCI.
   • D: Goodwill impairment is an income statement charge.

   Sources: FASB ASU 2016-01 (amends ASC 220-10-45-10A list of OCI items; all equity-security fair value changes to net income)

8. Question 8 · FAR-I: Statement of comprehensive income / OCI

   For the current year, Zeta Corp. reported net income of $200,000. Separately, net of tax, it had an unrealized holding gain of $30,000 on available-for-sale debt securities, a foreign currency translation loss of $12,000, and a net actuarial loss of $8,000 on its defined benefit pension plan recognized in OCI. What amount of comprehensive income should Zeta report?

   1. A. $150,000
   2. B. $190,000
   3. C. $210,000
   4. D. $250,000
   Show the answer and rationale

   Correct answer: C. $210,000

   Per ASC 220-10-45-10A, unrealized holding gains and losses on available-for-sale debt securities, foreign currency translation adjustments, and pension gains and losses not yet recognized in net periodic cost are all OCI items (net of tax as stated). OCI = 30,000 - 12,000 - 8,000 = 10,000. Comprehensive income = 200,000 + 10,000 = 210,000.

   • A: Subtracts all three OCI amounts, including the gain, from net income (200,000 - 30,000 - 12,000 - 8,000).
   • B: Subtracts net OCI from net income (200,000 - 10,000) instead of adding it.
   • D: Adds the absolute values of all OCI items (200,000 + 50,000), ignoring the losses' signs.

   Sources: FASB ASU 2016-01 (amends ASC 220-10-45-10A list of OCI items; all equity-security fair value changes to net income)

9. Question 9 · FAR-I: Financial statement ratios (EPS)

   Omega Inc. had net income of $540,000 for the calendar year. It declared and paid $40,000 of dividends on noncumulative preferred stock. Common shares outstanding were 100,000 on January 1, and the company issued 60,000 additional shares on July 1. There are no dilutive securities. What is basic earnings per share, rounded to the nearest cent?

   1. A. $3.85
   2. B. $3.13
   3. C. $4.15
   4. D. $5.00
   Show the answer and rationale

   Correct answer: A. $3.85

   Weighted-average common shares = 100,000 + 60,000 x 6/12 = 130,000. Income available to common = 540,000 - 40,000 = 500,000. Basic EPS = 500,000 / 130,000 = $3.85.

   • B: Divides by all 160,000 year-end shares instead of the weighted average.
   • C: Fails to subtract preferred dividends (540,000 / 130,000).
   • D: Uses only the 100,000 beginning shares, ignoring the July issuance.

   Sources: OpenStax Principles of Accounting Vol. 1, Sec. 14.5: Earnings per Share

10. Question 10 · FAR-I: Government-wide vs. fund statements (GASB 34)

    A city's general fund pays $2,000,000 cash for a new fire truck with a ten-year useful life. Under GASB Statement No. 34, how is the purchase reported?

    1. A. Capital asset in the governmental fund statements; expenditure in the government-wide statements
    2. B. Expenditure in the governmental fund statements; capital asset in the government-wide statements
    3. C. Capital asset in both the governmental fund statements and the government-wide statements
    4. D. Expenditure in both the governmental fund statements and the government-wide statements
    Show the answer and rationale

    Correct answer: B. Expenditure in the governmental fund statements; capital asset in the government-wide statements

    Governmental fund statements use the current financial resources measurement focus and modified accrual basis, so the cash outlay is an expenditure and the truck is not reported as an asset in the fund. Government-wide statements use the economic resources measurement focus and accrual basis, so the truck is capitalized and depreciated over its useful life.

    • A: Reverses the two sets of statements; governmental fund statements do not report general capital assets (they are reported only in the government-wide statements).
    • C: Governmental funds do not capitalize long-lived assets; they report the outlay as an expenditure.
    • D: Government-wide statements capitalize and depreciate capital assets rather than expensing the purchase.

    Sources: NCES Financial Accounting for Local and State School Systems, ch. 4 (measurement focus and basis of accounting under GASB 34); Washington State Auditor BARS GAAP Manual: Governmental Funds Financial Statements (capital assets not reported in governmental funds; reported only government-wide)

11. Question 11 · FAR-II: Group C. Inventory

    Harbor Supply uses a periodic inventory system and the FIFO cost flow assumption. Beginning inventory was 200 units at $10. Purchases during the year were 300 units at $12 and later 400 units at $14. Harbor sold 600 units during the year. What is cost of goods sold?

    1. A. $4,200
    2. B. $7,000
    3. C. $7,467
    4. D. $8,000
    Show the answer and rationale

    Correct answer: B. $7,000

    Under FIFO the oldest costs are expensed first: 200 x $10 + 300 x $12 + 100 x $14 = $2,000 + $3,600 + $1,400 = $7,000. Ending inventory is the remaining 300 units at $14 = $4,200, and goods available total $11,200.

    • A: Ending inventory under FIFO ($4,200), not cost of goods sold.
    • C: Weighted-average cost of goods sold ($11,200/900 x 600), not FIFO.
    • D: LIFO cost of goods sold (400 x $14 + 200 x $12), not FIFO.

    Sources: OpenStax Principles of Accounting Vol. 1, 10.2 Periodic method (FIFO layers, COGS and ending inventory)

12. Question 12 · FAR-II: Group C. Inventory

    At year-end, a manufacturer using FIFO holds 1,000 units of an item with a cost of $40 per unit. The estimated selling price in the ordinary course of business is $52 per unit, and the estimated costs of completion, disposal, and transportation are $15 per unit. Replacement cost is $38 per unit. Under current US GAAP (ASC 330, as amended by ASU 2015-11), what write-down to the inventory should the company recognize?

    1. A. $12,000
    2. B. $15,000
    3. C. $3,000
    4. D. $37,000
    Show the answer and rationale

    Correct answer: C. $3,000

    For FIFO inventory, measure at the lower of cost and net realizable value. NRV = $52 - $15 = $37 per unit, below cost of $40, so the write-down is ($40 - $37) x 1,000 = $3,000, recognized in earnings. Replacement cost is not used.

    • A: Selling price less cost ($52 - $40) x 1,000, an expected profit rather than a write-down.
    • B: Total costs to complete and sell ($15 x 1,000), not the cost-over-NRV difference.
    • D: The NRV of the inventory ($37,000), not the write-down.

    Sources: FASB ASU 2015-11, Simplifying the Measurement of Inventory (NRV definition; lower of cost and NRV for FIFO/average cost)

13. Question 13 · FAR-II: Group D. Property, plant and equipment

    On January 1, Year 1, Delta Corp. acquired equipment for $90,000 with an estimated useful life of 5 years and an estimated salvage value of $10,000. Delta uses the double-declining-balance method with a calendar fiscal year and does not subtract salvage value when applying the rate, but never depreciates below salvage value. What is depreciation expense for Year 5?

    1. A. $4,666
    2. B. $1,664
    3. C. $6,998
    4. D. $7,776
    Show the answer and rationale

    Correct answer: B. $1,664

    Rate = 2 x 20% = 40% of beginning book value. Depreciation: Y1 $36,000; Y2 $21,600; Y3 $12,960; Y4 $7,776; book value entering Y5 is $11,664. 40% would be $4,666, but that would take book value below salvage, so Y5 is capped at $11,664 - $10,000 = $1,664.

    • A: Uncapped 40% x $11,664, which would drop book value below salvage value.
    • C: Book value after an uncapped Year 5 charge ($6,998), not the expense.
    • D: Year 4 depreciation, not Year 5.

    Sources: OpenStax Principles of Accounting Vol. 1, 11.3 Depreciation Methods (DDB; no depreciation below salvage)

14. Question 14 · FAR-II: Group D. Property, plant and equipment

    A triggering event indicates that a held-and-used asset group may be impaired under ASC 360. The asset group has a carrying amount of $8,000,000, estimated undiscounted future net cash flows from use and eventual disposition of $7,700,000, and a fair value of $6,500,000. What impairment loss should be recognized?

    1. A. $0
    2. B. $300,000
    3. C. $1,500,000
    4. D. $1,200,000
    Show the answer and rationale

    Correct answer: C. $1,500,000

    Step 1 (recoverability): carrying amount $8,000,000 exceeds undiscounted cash flows of $7,700,000, so the group is not recoverable. Step 2: the loss is carrying amount minus fair value = $8,000,000 - $6,500,000 = $1,500,000.

    • A: Would apply only if undiscounted cash flows covered the carrying amount; here they do not.
    • B: Carrying amount minus undiscounted cash flows ($8.0M - $7.7M), the wrong measurement base.
    • D: Undiscounted cash flows minus fair value ($7.7M - $6.5M), the wrong starting point.

    Sources: Deloitte DART Roadmap 2.4 Testing Long-Lived Assets (ASC 360-10-35-17 recoverability; loss = carrying amount over fair value)

15. Question 15 · FAR-II: Group F. Intangible assets

    Under current US GAAP (ASU 2017-04), Rho Co. performs its annual goodwill impairment test for a reporting unit with a carrying amount of $50,000,000 (including goodwill of $12,000,000) and a fair value of $36,000,000. Ignore income taxes. What goodwill impairment loss should Rho recognize?

    1. A. $0
    2. B. $14,000,000
    3. C. $36,000,000
    4. D. $12,000,000
    Show the answer and rationale

    Correct answer: D. $12,000,000

    The test is a single comparison of reporting-unit fair value with carrying amount. The shortfall is $50,000,000 - $36,000,000 = $14,000,000, but the loss cannot exceed the goodwill allocated to the unit, so the loss is $12,000,000.

    • A: Ignores that fair value is below carrying amount.
    • B: The full shortfall, ignoring the cap at the goodwill balance.
    • C: The reporting unit's fair value, not a loss amount.

    Sources: FASB ASU 2017-04, Simplifying the Test for Goodwill Impairment (loss limited to goodwill allocated)

16. Question 16 · FAR-II: Group B. Trade receivables

    At year-end, Vale Co. estimates lifetime expected credit losses on trade receivables under ASC 326 using an aging-based loss-rate approach. Current receivables of $400,000 have a 1% loss rate; 31-90 days past due, $150,000 at 8%; over 90 days past due, $80,000 at 30%. Before adjustment, Allowance for Credit Losses has a debit balance of $6,000 because of write-offs. What credit loss expense should Vale record?

    1. A. $24,000
    2. B. $34,000
    3. C. $40,000
    4. D. $46,000
    Show the answer and rationale

    Correct answer: D. $46,000

    Required ending allowance = $4,000 + $12,000 + $24,000 = $40,000. Because the allowance currently has a $6,000 debit balance, the adjustment is $40,000 + $6,000 = $46,000 credit loss expense.

    • A: Only the over-90 bucket; ignores the other pools and the debit balance.
    • B: Subtracts the debit balance instead of adding it.
    • C: The required allowance, ignoring the existing debit balance.

    Sources: OpenStax 9.2 Uncollectible Accounts (aging; debit balance added to required ending allowance); FASB ASU 2016-13, Measurement of Credit Losses on Financial Instruments (CECL, expected losses)

17. Question 17 · FAR-II: Group E. Investments

    At December 31, Year 1, Kite Co. held an equity security with a readily determinable fair value (cost $40,000, fair value $46,000, no significant influence) and an available-for-sale debt security (amortized cost $100,000, fair value $96,000). The debt decline is due solely to market interest rates, Kite does not intend to sell, and no credit loss is expected. Both were purchased during Year 1. Ignoring taxes, which amounts are recognized for Year 1?

    1. A. Net income $2,000; OCI $0
    2. B. Net income $(4,000); OCI $6,000
    3. C. Net income $6,000; OCI $(4,000)
    4. D. Net income $0; OCI $2,000
    Show the answer and rationale

    Correct answer: C. Net income $6,000; OCI $(4,000)

    Equity securities with readily determinable fair values are remeasured through net income (+$6,000). AFS debt with a decline not attributable to credit loss recognizes the unrealized loss in OCI ($(4,000)) with no allowance.

    • A: Nets both changes through net income, treating the AFS debt like an equity security.
    • B: Reverses the classification of the two securities.
    • D: Treats both securities as AFS with all changes in OCI, a treatment eliminated for equity securities.

    Sources: FASB ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (equity securities at fair value through net income); FASB ASU 2016-13 (AFS debt: only credit losses through allowance)

18. Question 18 · FAR-II: Group H. Debt (financial liabilities)

    On January 1, Year 1, Tern Co. issued $1,000,000 face-value, 3-year bonds with a 5% stated rate, interest paid annually on December 31. The market rate was 6%, and the bonds were issued at their present value of $973,270. Tern uses the effective interest method. Round interest expense to the nearest dollar each year. What is the carrying amount of the bonds at December 31, Year 2, after the second interest payment?

    1. A. $990,566
    2. B. $981,666
    3. C. $991,090
    4. D. $1,000,000
    Show the answer and rationale

    Correct answer: A. $990,566

    Year 1 interest expense = $973,270 x 6% = $58,396; discount amortization = $58,396 - $50,000 cash = $8,396, so carrying amount is $981,666. Year 2 expense = $981,666 x 6% = $58,900; amortization $8,900; carrying amount = $990,566. Interest expense is rounded to the nearest dollar.

    • B: Carrying amount after only one year of amortization.
    • C: Straight-line amortization of the discount ($26,730/3 per year), not the effective interest method.
    • D: Face value, which is reached only at maturity.

    Sources: OpenStax 13.2 Effective-Interest Method

19. Question 19 · FAR-II: Group D. Property, plant and equipment

    Orion Co. purchased a machine for $200,000 and incurred sales tax of $14,000, freight-in of $6,000, installation of $9,000, and testing before first production of $3,000. It also paid $5,000 to train employees and $4,000 for a first-year maintenance contract. At what amount should Orion record the machine?

    1. A. $232,000
    2. B. $209,000
    3. C. $218,000
    4. D. $237,000
    Show the answer and rationale

    Correct answer: A. $232,000

    Capitalize all costs to acquire the asset and get it ready for use: $200,000 + $14,000 + $6,000 + $9,000 + $3,000 = $232,000. Training and maintenance do not prepare the asset for use or extend its life and are expensed.

    • B: Omits sales tax and freight, which are part of acquisition cost.
    • C: Omits the sales tax, which is part of acquisition cost.
    • D: Capitalizes the $5,000 training cost.

    Sources: OpenStax Ch. 11 Summary: cost includes costs to acquire the asset and get it ready for use; other costs expensed

20. Question 20 · FAR-III: Group B. Contingencies and commitments

    At year-end, Sable Co. is defendant in a lawsuit. Counsel believes an unfavorable outcome is probable and the loss is reasonably estimable in the range of $300,000 to $700,000, with no amount in the range a better estimate than any other. Sable has no insurance. Under ASC 450-20, what amount should Sable accrue?

    1. A. $0
    2. B. $500,000
    3. C. $300,000
    4. D. $700,000
    Show the answer and rationale

    Correct answer: C. $300,000

    A loss that is probable and reasonably estimable is accrued. When no amount in the range is a better estimate, accrue the minimum ($300,000) and disclose the possible additional loss.

    • A: Zero applies only if the loss were remote or reasonably possible, or not reasonably estimable; here it is probable and estimable, so an accrual is required.
    • B: Midpoint is not used when no amount is a better estimate.
    • D: Maximum of the range is not accrued.

    Sources: Deloitte DART Roadmap 2.4 Measurement (ASC 450-20-30-1: minimum of range when no better estimate)

21. Question 21 · FAR-III: Group C. Revenue recognition

    Under ASC 606, Tech Co. sells a bundle for a total contract price of $10,800: equipment (standalone selling price $8,000), installation (standalone selling price $1,500) and one year of support (standalone selling price $2,500). Each is a distinct performance obligation. Equipment control transfers to the customer at delivery. How much revenue is allocated to the equipment?

    1. A. $5,400
    2. B. $8,000
    3. C. $10,800
    4. D. $7,200
    Show the answer and rationale

    Correct answer: D. $7,200

    Total standalone selling prices are $12,000, so the bundle carries a $1,200 discount allocated proportionally. Equipment = $10,800 x ($8,000 / $12,000) = $7,200, recognized at delivery (a point in time).

    • A: One-half of the transaction price; ignores allocation by relative standalone selling price.
    • B: Uses the standalone selling price without allocating the discount.
    • C: Allocates the entire transaction price to the equipment, ignoring the other performance obligations.

    Sources: FASB ASU 2014-09 (Topic 606), paras 606-10-32-28 to 32-31 (relative standalone selling price allocation) and 606-10-25-27 to 25-31

22. Question 22 · FAR-III: Group C. Revenue recognition

    Builder Co. contracts to construct a facility on the customer's land for a fixed price of $5,000,000. The customer controls the asset as it is built, so revenue is recognized over time using a cost-to-cost measure of progress. In Year 1, costs incurred were $1,200,000 and total costs are estimated at $4,000,000. What revenue is recognized in Year 1?

    1. A. $300,000
    2. B. $1,200,000
    3. C. $4,000,000
    4. D. $1,500,000
    Show the answer and rationale

    Correct answer: D. $1,500,000

    Progress = $1,200,000 / $4,000,000 = 30%. Revenue = 30% x $5,000,000 = $1,500,000 (gross profit would be $300,000). Over-time recognition applies because the entity's performance creates an asset the customer controls.

    • A: This is the Year 1 gross profit ($1,500,000 revenue - $1,200,000 cost), not revenue.
    • B: Reports costs incurred as revenue.
    • C: Uses total estimated costs rather than the percentage of completion applied to the contract price.

    Sources: FASB ASU 2014-09 (Topic 606), paras 606-10-32-28 to 32-31 (relative standalone selling price allocation) and 606-10-25-27 to 25-31

23. Question 23 · FAR-III: Group F. Lessee accounting

    A lessee signs a 5-year noncancelable lease of general-purpose equipment with a remaining economic life of 12 years. Title does not transfer, there is no purchase option, and the present value of the lease payments is about 60% of the equipment's fair value. The equipment has alternative uses to the lessor. How should the lessee classify the lease under ASC 842?

    1. A. Finance lease
    2. B. Operating lease
    3. C. Sales-type lease
    4. D. Direct financing lease
    Show the answer and rationale

    Correct answer: B. Operating lease

    A lessee classifies a lease as a finance lease only if at least one of the five criteria is met at commencement (ownership transfer, reasonably certain purchase option, major part of economic life, PV of payments substantially all of fair value, specialized asset). Here 5 of 12 years is not a major part, 60% is not substantially all, and none of the other tests are met, so it is an operating lease.

    • A: Noncancelability alone does not make a lease a finance lease; none of the criteria are met.
    • C: Sales-type is a lessor classification, not a lessee classification.
    • D: Direct financing is a lessor classification, not a lessee classification.

    Sources: FASB ASU 2016-02 (Topic 842), 842-10-25-2, 842-10-25-3 and 842-20-30-5

24. Question 24 · FAR-III: Group F. Lessee accounting

    A lessee enters a 4-year lease with annual payments of $20,000 due at the beginning of each year (first payment at commencement). The lessee's discount rate is 6%. Present value factors: 1 year = 0.9434, 2 years = 0.8900, 3 years = 0.8396. What is the lease liability measured at commencement, before any payment is made? (Round to the nearest dollar.)

    1. A. $69,302
    2. B. $80,000
    3. C. $73,460
    4. D. $85,000
    Show the answer and rationale

    Correct answer: C. $73,460

    The liability is the present value of the lease payments not yet paid at commencement. As an annuity due: $20,000 x (1 + 0.9434 + 0.8900 + 0.8396) = $20,000 x 3.6730 = $73,460 (a closed-form calculation gives $73,460.24).

    • A: Discounts all four payments as an ordinary annuity (end of year), ignoring that the first is due at commencement.
    • B: Sums the undiscounted payments ($80,000), ignoring time value.
    • D: Not supported by any calculation; the liability is a present value and cannot exceed the undiscounted payments.

    Sources: FASB ASU 2016-02 (Topic 842), 842-10-25-2, 842-10-25-3 and 842-20-30-5

25. Question 25 · FAR-III: Group F. Lessee accounting

    A lessee signs a 3-year lease with payments of $14,000 at the end of each year, discounted at 8% (present value of an ordinary annuity factor for 3 periods = 2.5771). At commencement the lessee pays $3,000 of initial direct costs and receives a $2,000 lease incentive from the lessor. What is the initial measurement of the right-of-use asset? (Round to the nearest dollar.)

    1. A. $34,079
    2. B. $37,079
    3. C. $36,079
    4. D. $39,079
    Show the answer and rationale

    Correct answer: B. $37,079

    Lease liability = $14,000 x 2.5771 = $36,079.40, rounded to $36,079. Under ASC 842-20-30-5 the ROU asset = lease liability + initial direct costs - lease incentives received = $36,079 + $3,000 - $2,000 = $37,079.

    • A: Subtracts the incentive but omits the initial direct costs ($36,079 - $2,000).
    • C: Equals the lease liability only, omitting both adjustments.
    • D: Adds the initial direct costs but omits the lease incentive received ($36,079 + $3,000).

    Sources: FASB ASU 2016-02 (Topic 842), 842-10-25-2, 842-10-25-3 and 842-20-30-5

26. Question 26 · FAR-III: Group D. Accounting for income taxes

    For the current year, Dalton Corp. reports pretax financial income of $500,000. Included are $20,000 of nondeductible fines (a permanent difference) and tax depreciation exceeding book depreciation by $60,000 (a temporary difference; no prior temporary differences exist). The enacted tax rate is 25% for the current and all future years. What is total income tax expense?

    1. A. $130,000
    2. B. $100,000
    3. C. $115,000
    4. D. $125,000
    Show the answer and rationale

    Correct answer: A. $130,000

    Taxable income = $500,000 + $20,000 - $60,000 = $460,000; current tax = $115,000. Deferred tax liability = $60,000 x 25% = $15,000. Total expense = $115,000 + $15,000 = $130,000, which also equals ($500,000 + $20,000) x 25%; the permanent difference is not tax-effected.

    • B: Subtracts the deferred tax liability from current tax instead of adding it.
    • C: Reports only current tax payable and omits deferred tax expense.
    • D: Applies the rate to pretax income, ignoring the permanent difference.

    Sources: FASB ASU 2015-17 (ASC 740-10-05 text: enacted tax law used for recognition and measurement of deferred tax liabilities and assets); AICPA Uniform CPA Examination Blueprints, effective January 2026 (FAR Area III)

27. Question 27 · FAR-III: Group A. Accounting changes and error corrections

    A machine cost $120,000 with no salvage value and was depreciated straight-line over 10 years. At the end of Year 4, management revises the estimate of total useful life to 9 years (salvage value remains zero). What is depreciation expense in Year 5?

    1. A. $14,400
    2. B. $12,000
    3. C. $13,333
    4. D. $18,000
    Show the answer and rationale

    Correct answer: A. $14,400

    A change in accounting estimate is applied prospectively. Book value at the end of Year 4 = $120,000 - (4 x $12,000) = $72,000, spread over the remaining 5 years: $72,000 / 5 = $14,400.

    • B: Continues the original depreciation; the estimate change is ignored.
    • C: Spreads original cost over 9 years, ignoring depreciation already taken.
    • D: Divides book value by 4 years, miscounting the remaining life.

    Sources: FASB Statement No. 154, Accounting Changes and Error Corrections (codified in ASC 250)

28. Question 28 · FAR-III: Group A. Accounting changes and error corrections

    In Year 3, Kelso Co. discovers that depreciation on equipment placed in service in Year 1 was omitted by mistake in the Year 1 and Year 2 financial statements; the amounts are material. Year 3 statements present Year 2 comparatively. Under US GAAP, how should this be reported?

    1. A. Restate the prior-period statements and adjust opening retained earnings of the earliest period presented
    2. B. Include the omitted depreciation in Year 3 income as a change in accounting estimate
    3. C. Record the omitted depreciation prospectively over the remaining life of the equipment
    4. D. Record a cumulative-effect adjustment through other comprehensive income in Year 3
    Show the answer and rationale

    Correct answer: A. Restate the prior-period statements and adjust opening retained earnings of the earliest period presented

    Omitting depreciation by mistake is an error in previously issued financial statements, not a change in estimate or principle. FAS 154 para. 25 (ASC 250) requires restating prior-period statements: the cumulative effect on periods before those presented is reflected in the carrying amounts of assets and liabilities at the beginning of the first period presented, with an offsetting adjustment to opening retained earnings for that period (here, Year 1's effect adjusts opening Year 2 retained earnings; Year 2's amounts are restated).

    • B: Treats an error as a change in estimate and hides it in current income.
    • C: Prospective treatment applies to changes in estimate, not to errors.
    • D: Error corrections do not run through other comprehensive income.

    Sources: FASB Statement No. 154, Accounting Changes and Error Corrections (codified in ASC 250)

29. Question 29 · FAR-I: Group D. Public Company Reporting Topics (basic EPS)

    Marlow Corp. had 200,000 common shares outstanding on January 1. It issued 60,000 shares for cash on April 1 and repurchased 30,000 shares as treasury stock on October 1. Net income was $540,000 and preferred dividends declared were $40,000. The company has no dilutive securities. What is basic earnings per share (rounded to the nearest cent)?

    1. A. $2.17
    2. B. $2.27
    3. C. $2.11
    4. D. $2.50
    Show the answer and rationale

    Correct answer: C. $2.11

    Weighted-average shares = 200,000 + (60,000 x 9/12) - (30,000 x 3/12) = 200,000 + 45,000 - 7,500 = 237,500. Income to common = $540,000 - $40,000 = $500,000. EPS = $500,000 / 237,500 = $2.11. Shares reacquired are weighted for the portion of the period they were outstanding, so the October 1 repurchase reduces the average by 3/12.

    • A: Divides by year-end shares of 230,000 instead of the weighted average.
    • B: Fails to subtract preferred dividends ($540,000 / 237,500).
    • D: Uses beginning shares (200,000) rather than weighting the changes.

    Sources: FASB Statement No. 128, Earnings per Share, paras. 8-9 (codified in ASC 260-10-45): shares issued and reacquired weighted for the portion of the period outstanding; preferred dividends declared deducted

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