CPA FAR Select balance sheet accounts: practice questions with answers

Question 1

On July 1, 2025, Sutter Bay Printing bought a press for $280,000. It estimated an 8-year useful life and a $20,000 salvage value, and uses the double-declining-balance method, taking depreciation for the months the asset is held in the year of purchase. What depreciation expense should Sutter Bay record for 2026?

1. A $52,500
2. B $56,875
3. C $61,250
4. D $70,000

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Answer: C. Double-declining-balance rate = 2 / 8 = 25%, applied to carrying amount (salvage is ignored except as a floor).

- 2025: $280,000 x 25% x 6/12 = $35,000
- Carrying amount at January 1, 2026 = $280,000 - $35,000 = $245,000
- 2026: $245,000 x 25% = $61,250

(Allocating each asset-year across calendar years gives the same answer: $70,000 x 6/12 + $52,500 x 6/12 = $61,250.) Carrying amount at the end of 2026, $183,750, is still above salvage.

Question 2

Kinsale Quarry Co. bought a haul truck on January 1, 2024 for $156,000. It estimated a residual value of $12,000 and a total of 240,000 miles of use, and depreciates the truck by the units-of-production method. Miles driven were 52,000 in 2024, 61,000 in 2025 and 38,000 from January 1 to August 31, 2026. On August 31, 2026, Kinsale sold the truck for $72,500 cash. What gain or loss should Kinsale report on the sale?

1. A Gain of $7,100
2. B Gain of $14,650
3. C Gain of $19,100
4. D Loss of $15,700

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Answer: A. Rate per mile = ($156,000 - $12,000) / 240,000 = $0.60.

Accumulated depreciation at August 31, 2026 = (52,000 + 61,000 + 38,000) x $0.60 = 151,000 x $0.60 = $90,600 (including 2026 depreciation of $22,800, recorded before the sale).

Carrying amount = $156,000 - $90,600 = $65,400.

Gain = $72,500 - $65,400 = $7,100 (ASC 360).

Question 3

On January 1, 2026, Kestrel Insurance Agency Inc. paid $457,876 for $500,000 face amount of five-year corporate bonds with a stated interest rate of 4%, payable each December 31. The price gives a yield of 6%. Kestrel classifies the bonds as held to maturity and uses the effective interest method. Ignore credit losses. What is the amortized cost of the bonds at December 31, 2026?

1. A $457,876
2. B $465,349
3. C $466,301
4. D $467,876

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Answer: B. Held-to-maturity securities are carried at amortized cost using the effective interest method (ASC 320 and ASC 310-20).

| Step | Amount |
|---|---|
| Opening amortized cost | $457,876 |
| Interest income at 6% ($457,876 x 6%) | $27,473 |
| Cash interest received ($500,000 x 4%) | $20,000 |
| Discount amortization | $7,473 |
| Amortized cost at Dec 31, 2026 | $465,349 |

Question 4

Which statement about an asset retirement obligation (ARO) under ASC 410-20 is correct?

1. A The ARO is first recognized only when retirement activities begin, measured at the undiscounted estimate of the retirement costs.
2. B Accretion of the ARO is reported as interest expense and is included in the interest cost eligible for capitalization.
3. C Upward revisions to estimated cash flows are discounted at the credit-adjusted risk-free rate used when the ARO was first recognized.
4. D The ARO is first measured at fair value when incurred, and the same amount is added to the carrying amount of the related long-lived asset.

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Answer: D. ASC 410-20 summary:

- Recognize the ARO at fair value in the period the legal obligation is incurred, if fair value can be reasonably estimated; an expected present value technique uses a credit-adjusted risk-free rate.
- Capitalize an equal asset retirement cost in the related long-lived asset and depreciate it over the asset's life.
- Accrete the liability each period; accretion is an operating expense and is not interest for capitalization purposes.
- Upward revisions in cash flows are discounted at the current credit-adjusted risk-free rate; downward revisions at the rate(s) used originally.

Question 5

On July 1, 2026, immediately after paying interest, Halberd Marine Corp. reacquired all of its $3,000,000 face amount of bonds payable at 101. On that date the bonds' carrying amount, before deducting unamortized debt issuance costs of $18,000, was $2,946,000. What loss on extinguishment should Halberd report in 2026?

1. A $30,000
2. B $66,000
3. C $84,000
4. D $102,000

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Answer: D. On extinguishment, the difference between the reacquisition price and the net carrying amount of the debt (including unamortized premium or discount and issuance costs) is recognized in income (ASC 470-50-40).

1. Reacquisition price = $3,000,000 x 101% = $3,030,000
2. Net carrying amount = $2,946,000 - $18,000 = $2,928,000
3. Loss = $3,030,000 - $2,928,000 = $102,000, reported in income from continuing operations

Question 6

On January 1, 2026, Kilbride Bakery Inc. acquired a commercial oven by issuing a $300,000 non-interest-bearing note due in a single payment on December 31, 2028. The oven has no established cash price and the note has no market value. An appropriate imputed interest rate is 7%; the present value of $1 at 7% for 3 periods is 0.8163. What interest expense should Kilbride report on the note for 2026?

1. A $0
2. B $17,142
3. C $18,370
4. D $21,000

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Answer: B. When a note with no stated interest is exchanged for a noncash asset and neither the asset's nor the note's fair value is determinable, the note is recorded at its present value using an imputed rate (ASC 835-30).

1. Present value = $300,000 x 0.8163 = $244,890 (the oven's cost and the note's net carrying amount)
2. Discount = $300,000 - $244,890 = $55,110
3. 2026 interest expense = $244,890 x 7% = $17,142; carrying amount at Dec 31, 2026 = $262,032