CMA P1 External Financial Reporting Decisions: practice questions with answers

Question 1

Delmont Supply uses FIFO under US GAAP. At year-end it holds 2,000 units of a product with the following per-unit data: cost $52, expected selling price $60, costs to complete and sell $11, current replacement cost $45, and normal profit margin $6. What inventory write-down should Delmont recognize?

1. A $0
2. B $6,000
3. C $14,000
4. D $18,000

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Answer: B. Under ASC 330 (as amended by ASU 2015-11), inventory measured using FIFO or average cost is carried at the lower of cost and net realizable value.

NRV = selling price 60 - costs to complete and sell 11 = $49 per unit, which is below cost of $52.

Write-down = (52 - 49) x 2,000 = $6,000. Replacement cost and normal profit margin are relevant only to the LCM test used for LIFO and the retail method.

Question 2

On January 1, 2026 Corvane Inc. bought $500,000 par value bonds at par and classified them as available-for-sale. Interest of $25,000 was received during 2026. At December 31, 2026 the bonds' fair value is $488,000; the decline is due to rising market rates (no credit loss), and Corvane does not intend to sell. What is the 2026 effect of the bonds on net income and on other comprehensive income (OCI)?

1. A Net income +$13,000; OCI $0
2. B Net income +$25,000; OCI -$12,000
3. C Net income +$25,000; OCI $0
4. D Net income +$25,000; OCI +$12,000

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Answer: B. Available-for-sale debt securities are carried at fair value under ASC 320.

- Interest income of $25,000 is recognized in net income.
- Unrealized holding loss = 500,000 - 488,000 = $12,000. Because no part of the decline is a credit loss, the whole amount is reported in OCI (a credit loss would instead be recognized in net income through an allowance).

Trading securities would put the $12,000 loss in net income; held-to-maturity securities would ignore it.

Question 3

Ostrava Foods is preparing its first integrated report under the International Integrated Reporting Framework. One section describes the skills, experience and motivation of its workforce; another describes its relationships with farming communities and the trust of local stakeholders. Under the Framework, these sections relate to which capitals, respectively?

1. A Human capital; social and relationship capital
2. B Intellectual capital; natural capital
3. C Human capital; manufactured capital
4. D Intellectual capital; social and relationship capital

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Answer: A. The International Integrated Reporting Framework (now maintained by the IFRS Foundation) identifies six capitals: financial, manufactured, intellectual, human, social and relationship, and natural.

- Employees' competencies, capabilities, experience and motivation = human capital.
- Relationships with communities and stakeholder groups, shared norms and the organization's social licence to operate = social and relationship capital.

Intellectual capital covers organizational knowledge-based intangibles (intellectual property, systems, procedures).

Question 4

Brantham plc reports under IFRS and uses the revaluation model for its land, which it bought in 2024 for $1,000,000. At December 31, 2025 the land was revalued to $880,000; there was no revaluation surplus for this land at that time. At December 31, 2026 the land's fair value is $1,150,000. How should Brantham report the 2026 revaluation?

1. A Profit or loss $120,000 gain; OCI $150,000
2. B Profit or loss $0; OCI $270,000
3. C Profit or loss $270,000 gain; OCI $0
4. D Profit or loss $150,000 gain; OCI $120,000

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Answer: A. Under IAS 16:

- 2025: the decrease of $1,000,000 - $880,000 = $120,000 was charged to profit or loss because there was no revaluation surplus.
- 2026: the increase of $1,150,000 - $880,000 = $270,000 is first recognized in profit or loss to the extent it reverses the earlier decrease ($120,000); the rest, $150,000, is recognized in OCI and accumulated in revaluation surplus.

US GAAP does not permit the revaluation model: land would stay at historical cost (less any impairment), and an impairment loss could not be reversed.

Question 5

On January 1, 2026 Halvorsen Freight Inc. issued $2,000,000 face value, 5-year bonds with a stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were priced to yield the market rate of 8%. Halvorsen uses the effective interest method. What total bond interest expense should Halvorsen report for 2026 (nearest dollar)?

1. A $27,563
2. B $120,000
3. C $147,023
4. D $147,563

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Answer: D. Semiannual cash interest = 2,000,000 x 3% = $60,000; semiannual yield = 4%; periods = 10.

Issue price = 60,000 x 8.110896 (PV annuity, 4%, 10) + 2,000,000 x 0.675564 (PV of 1, 4%, 10) = 486,654 + 1,351,128 = $1,837,782.

| Period | Opening carrying amount | Expense at 4% | Cash | Amortization | Closing |
|---|---|---|---|---|---|
| Jan-Jun 2026 | 1,837,782 | 73,511 | 60,000 | 13,511 | 1,851,293 |
| Jul-Dec 2026 | 1,851,293 | 74,052 | 60,000 | 14,052 | 1,865,345 |

2026 interest expense = 73,511 + 74,052 = $147,563.

Question 6

Dunmore Corp. accounts for treasury stock using the cost method and had no paid-in capital from treasury stock transactions before 2026. In 2026 it reacquired 10,000 of its own common shares at $40 per share. Later in 2026 it reissued 4,000 of these shares at $35 per share and, after that, the remaining 6,000 shares at $46 per share. What is the effect of the two reissues?

1. A Paid-in capital from treasury stock of $16,000; no effect on retained earnings
2. B Paid-in capital from treasury stock of $0; retained earnings increased by $16,000 through net income
3. C Paid-in capital from treasury stock of $36,000; retained earnings reduced by $20,000
4. D Paid-in capital from treasury stock of $36,000; no effect on retained earnings, with the $20,000 shortfall charged to common stock

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Answer: C. Cost method: treasury stock is debited at cost of $40 per share.

First reissue: 4,000 x ($35 - $40) = $20,000 shortfall. There is no paid-in capital from treasury stock to absorb it, so retained earnings is debited $20,000.

Second reissue: 6,000 x ($46 - $40) = $36,000 excess, credited to paid-in capital from treasury stock.

Result: paid-in capital from treasury stock $36,000; retained earnings reduced by $20,000. Retained earnings charged earlier is not restored by later excesses, and no gain or loss goes to income.