Sample practice questions

A few real questions from this free bank, with full explanations. Use the practice tool above for the whole set.

1. 1. For-Profit and Public Company Reporting

   On December 31, Year 1, Kestrel Co. owes a $500,000 note payable due March 1, Year 2. On January 20, Year 2, before its Year 1 financial statements are issued, Kestrel issues $500,000 of five-year bonds and uses the proceeds to repay the note when due. How should the note be reported in Kestrel's December 31, Year 1 balance sheet?

   • a.As a noncurrent liability, with the refinancing disclosed
   • b.As a current liability, with the refinancing disclosed only
   • c.As a current liability, because it matures within one year
   • d.Split equally between current and noncurrent liabilities

   Answer: a

   Explanation: ASC 470-10-45-14 lets a short-term obligation be excluded from current liabilities when, after the balance sheet date but before the statements are issued, the entity actually issues a long-term obligation to refinance it; ASC 470-10-50-4 then requires disclosure of the refinancing. Keeping the note in current liabilities ignores that exception, whether or not the refinancing is disclosed. Nothing in the guidance splits the note into equal halves; the amount excluded is the amount actually refinanced, here all $500,000.

2. 2. For-Profit and Public Company Reporting

   Pine Corp. acquired 80% of Shore Co. on January 1, Year 1, when the noncontrolling interest's fair value was $160,000. For Year 1, Shore reported net income of $150,000 (no acquisition-date fair value adjustments require amortization) and paid dividends of $50,000. What noncontrolling interest should be reported in consolidated equity at December 31, Year 1?

   • a.$190,000
   • b.$140,000
   • c.$160,000
   • d.$180,000

   Answer: d

   Explanation: The noncontrolling interest starts at its acquisition-date fair value and is then attributed its share of the subsidiary's income and dividends (ASC 810-10-45-16 and ASC 810-10-45-19 to 45-21): $160,000 + 20% x $150,000 - 20% x $50,000 = $180,000. $190,000 omits the dividends to noncontrolling holders, $140,000 starts from 20% of Shore's book value ($120,000) instead of fair value, and $160,000 ignores the year's activity.

3. 3. Not-for-Profit and Government Reporting

   A city issues general obligation bonds to finance construction of a new fire station, a general government facility. In which fund should the bond proceeds and construction expenditures be reported?

   • a.Internal service fund
   • b.Capital projects fund
   • c.Special revenue fund
   • d.Debt service fund

   Answer: b

   Explanation: GASB Statement 54 describes capital projects funds as the funds used for financial resources restricted, committed or assigned to expenditure for capital outlays, including the acquisition or construction of capital facilities, other than those financed by proprietary or trust funds. A debt service fund later accumulates resources to repay the bonds; special revenue funds account for specific revenue sources restricted or committed to purposes other than debt service or capital projects; internal service funds bill other departments for services.

4. 4. For-Profit and Public Company Reporting

   A partnership prepares its financial statements on the cash basis of accounting. Which title for its operating statement matches the titles used in the illustrative auditor's reports of AU-C Section 800?

   • a.Statement of revenue collected and expenses paid
   • b.Statement of activities
   • c.Statement of revenue and expenses, income tax basis
   • d.Statement of comprehensive income

   Answer: a

   Explanation: AU-C 800 requires special purpose financial statements to be suitably titled, and its illustrative cash-basis report refers to a statement of assets and liabilities arising from cash transactions and a statement of revenue collected and expenses paid. The income tax basis title belongs to tax-basis statements. Statement of comprehensive income is a GAAP statement, and statement of activities is the GAAP title used by not-for-profit entities.

5. 5. Cash, Receivables, Inventory, PP&E and Intangibles

   Fir Co.'s accounts receivable were $120,000 at the beginning of Year 1 and $150,000 at the end. During the year it collected $800,000 from customers and wrote off $12,000 of accounts as uncollectible. All sales are on credit, and there were no recoveries. What were Fir's credit sales for Year 1?

   • a.$842,000
   • b.$830,000
   • c.$818,000
   • d.$770,000

   Answer: a

   Explanation: Rolling forward receivables: beginning balance + credit sales - collections - write-offs = ending balance, so credit sales = $150,000 + $800,000 + $12,000 - $120,000 = $842,000. $830,000 ignores the write-offs, $818,000 subtracts them instead of adding them back, and $770,000 treats collections as if receivables had fallen.

6. 6. Investments, Liabilities, Debt and Equity

   On March 1, Year 1, Quay Co. bought 1,000 shares of a listed company's common stock for $40,000; it does not have significant influence. It received dividends of $1,000 during Year 1, and the shares' fair value at December 31 was $46,000. What total investment income should Quay recognize in Year 1 net income?

   • a.$6,000
   • b.$7,000
   • c.$0
   • d.$1,000

   Answer: b

   Explanation: Equity securities with readily determinable fair values are measured at fair value with changes in net income (ASC 321-10-35-1), and dividends are income (ASC 321-10-35-6): $6,000 unrealized gain + $1,000 dividends = $7,000. $1,000 treats the gain as other comprehensive income, which is no longer allowed for equity securities; $6,000 ignores the dividends, and $0 ignores both.

7. 7. Cash, Receivables, Inventory, PP&E and Intangibles

   Ash Co. enters a three-year cloud computing arrangement that is a service contract (it has no right to take possession of the software). It capitalizes qualifying implementation costs. How are those capitalized costs expensed and presented?

   • a.Depreciated as property, plant, and equipment over a standard five-year life
   • b.Expensed over the arrangement's term, in the same line item as the hosting fees
   • c.Expensed immediately in full, whatever the stage of the implementation project
   • d.Carried as an indefinite-lived intangible asset and tested annually for impairment

   Answer: b

   Explanation: ASC 350-40-35-13 requires capitalized implementation costs of a hosting arrangement that is a service contract to be expensed over the term of the arrangement, and ASC 350-40-45 requires the expense in the same line as the hosting fees and the asset in the same balance sheet line as prepaid hosting fees. They are not PP&E, are not expensed all at once, and have a finite term tied to the contract.

8. 8. Investments, Liabilities, Debt and Equity

   Using the cost method, Mink Co. bought 1,000 of its own shares for $30 each. It later reissued 600 shares at $36 and then the remaining 400 shares at $25. No other treasury stock transactions have occurred. After both reissues, what is the balance of additional paid-in capital from treasury stock?

   • a.$3,600
   • b.$0
   • c.$5,600
   • d.$1,600

   Answer: d

   Explanation: Under the cost method, gains on reissuing treasury stock are credited to additional paid-in capital and losses are charged first to paid-in capital from the same class's treasury transactions, then to retained earnings (ASC 505-30-30). The first reissue credits $3,600 (600 x $6); the second has a $2,000 loss (400 x $5), charged against that capital, leaving $1,600. $3,600 ignores the loss, $0 assumes the loss wipes out the whole balance, and $5,600 adds the loss.

9. 9. Accounting Changes, Contingencies and Revenue

   Kudu Co. runs an online marketplace. Third-party sellers set prices, hold the inventory, and fulfill orders; Kudu never controls the goods and keeps a 10% commission. During Year 1, customers bought $500,000 of goods through the marketplace. How much revenue should Kudu report?

   • a.$450,000
   • b.$50,000
   • c.$550,000
   • d.$500,000

   Answer: b

   Explanation: An entity that does not control the specified good before it is transferred is an agent and recognizes revenue as the fee or commission it retains (ASC 606-10-55-37A and 55-38): 10% x $500,000 = $50,000. Reporting $500,000 treats Kudu as the principal, $450,000 is the amount due to the sellers, and $550,000 adds the commission to gross sales.

10. 10. Income Taxes, Fair Value, Leases and Subsequent Events

    Pace Co. owns an interest rate swap that is not traded on an exchange. It measures fair value with a model whose significant inputs are observable market interest rate yield curves. In which level of the fair value hierarchy does the measurement fall?

    • a.Level 1
    • b.Outside the hierarchy
    • c.Level 2
    • d.Level 3

    Answer: c

    Explanation: Level 2 inputs are inputs other than quoted prices in active markets for identical assets that are observable, directly or indirectly, including interest rates and yield curves observable at commonly quoted intervals (ASC 820-10-35-48). Level 1 requires quoted prices for identical assets in active markets, and Level 3 applies when significant inputs are unobservable. Every fair value measurement is categorized within the hierarchy.