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US Certified Public Accountant (AICPA Uniform CPA Examination) · Financial Accounting and Reporting

CPA FAR Select transactions: practice questions with answers

6 free exam-style questions on Select transactions for CPA FAR Financial Accounting and Reporting. Try each one, then open the answer to read the explanation. Fincora has 81 original questions on this syllabus area.

Question 1

Brockhurst Tool Co. made four changes during 2026. Under US GAAP, which ONE of them is applied prospectively, with no adjustment to prior-period statements?

  1. A A change from the LIFO method to the FIFO method for all of its inventories
  2. B A change in the group of subsidiaries included in its consolidated financial statements
  3. C Correction of an arithmetic mistake made in calculating the prior year's depreciation expense
  4. D A change from double-declining-balance to straight-line depreciation for its existing equipment
Show the answer

Answer: D. ASC 250 sets the treatment for each kind of change:

| Change | Type | Treatment |
|---|---|---|
| DDB to straight-line depreciation | Change in estimate effected by a change in principle | Prospective (current and future periods) |
| LIFO to FIFO | Change in accounting principle | Retrospective application |
| Different subsidiaries consolidated | Change in reporting entity | Retrospective |
| Arithmetic mistake in prior-year depreciation | Error | Restatement (prior-period adjustment) |

Only the change in depreciation method is applied prospectively: the remaining carrying amount is depreciated by the new method over the remaining life.

Question 2

Ashdown Dental Group made four accounting changes in 2026. Which ONE should be reported as the correction of an error?

  1. A It raised its estimated warranty cost from 2% to 3% of sales because of new claims experience
  2. B It changed from the straight-line method to the units-of-production method for its delivery vans
  3. C It changed from FIFO to the weighted-average method for its supplies inventory because the new method is preferable
  4. D It began accruing vested vacation pay earned by employees, having previously expensed vacation pay only when it was paid
Show the answer

Answer: D. ASC 250 treats a change from an accounting principle that is not generally accepted to one that is as the correction of an error.

Vested vacation pay that relates to services already rendered, is probable of payment and can be estimated must be accrued (ASC 710). Expensing it only when paid was a cash-basis method that GAAP did not allow, so moving to accrual is an error correction, reported by restating prior periods.

The other changes are a change in estimate (warranty rate), a change in estimate effected by a change in principle (depreciation method) and a change in accounting principle (FIFO to weighted average).

Question 3

On July 1, 2026, Saxby Industries guaranteed a $2,000,000 bank loan of an unrelated supplier and received a $30,000 fee, which equals the fair value of the guarantee. Saxby judges the chance that it will have to pay under the guarantee to be remote. How should Saxby account for the guarantee at its inception?

  1. A Disclose the guarantee only, because the likelihood of any payment is remote
  2. B Recognize a liability of $2,000,000, the maximum potential future payment
  3. C Recognize a $30,000 liability for the stand-ready obligation and disclose the guarantee
  4. D Recognize the $30,000 fee as revenue immediately and record no liability
Show the answer

Answer: C. Under ASC 460, a guarantor recognizes at inception a liability for the fair value of the obligation it undertakes in issuing the guarantee (the noncontingent stand-ready obligation). This applies even when payment under the guarantee is remote. A guarantee of an unrelated party's debt is not exempt from this initial recognition (guarantees of a parent's or subsidiary's debt would be).

When the guarantee is issued for a premium, the premium received is the practical measure of fair value: Dr Cash $30,000; Cr Guarantee liability $30,000.

Saxby also discloses the nature and term of the guarantee and the maximum potential future payments ($2,000,000). A contingent loss would be accrued under ASC 450 only if payment became probable.

Question 4

Selwyn Biotech had a gross deferred tax asset of $360,000 and a valuation allowance of $90,000 at January 1, 2026. At December 31, 2026, the gross deferred tax asset is $480,000, and the available evidence shows it is more likely than not that $150,000 of it will not be realized. Selwyn has no deferred tax liabilities. What deferred tax amount should Selwyn report in its 2026 income statement?

  1. A Deferred tax benefit of $120,000
  2. B Deferred tax benefit of $180,000
  3. C Deferred tax expense of $30,000
  4. D Deferred tax benefit of $60,000
Show the answer

Answer: D. A valuation allowance reduces a deferred tax asset to the amount more likely than not to be realized (ASC 740-10-30). Deferred tax expense or benefit is the change in the net deferred tax position.

| | Jan 1, 2026 | Dec 31, 2026 |
|---|---|---|
| Gross DTA | $360,000 | $480,000 |
| Valuation allowance | (90,000) | (150,000) |
| Net DTA | $270,000 | $330,000 |

Increase in net DTA = $330,000 - $270,000 = $60,000 deferred tax benefit.

(Gross increase $120,000 less the $60,000 increase in the allowance.)

Question 5

At December 31, 2026, Fairburn Grocers has a federal deferred tax liability of $90,000, a federal deferred tax asset of $35,000 and a deferred tax asset of $20,000 in State X. No valuation allowance is needed. How should Fairburn present these amounts in its classified balance sheet?

  1. A A single noncurrent deferred tax liability of $35,000
  2. B A noncurrent deferred tax liability of $90,000 and a noncurrent deferred tax asset of $55,000
  3. C A current deferred tax asset of $55,000 and a noncurrent deferred tax liability of $90,000
  4. D A noncurrent deferred tax liability of $55,000 and a noncurrent deferred tax asset of $20,000
Show the answer

Answer: D. ASC 740-10-45 requires all deferred tax assets and liabilities to be classified as noncurrent. Within a single tax-paying component in a particular tax jurisdiction, deferred tax assets and liabilities are offset and shown as one amount; amounts for different jurisdictions are not offset.

| Jurisdiction | Net |
|---|---|
| Federal: $90,000 liability - $35,000 asset | $55,000 noncurrent liability |
| State X | $20,000 noncurrent asset |

Question 6

On September 1, 2026, Tolland Events leased a large event tent for 11 months, with no renewal or purchase option. The first month is rent-free; rent of $4,400 is paid at the start of each of the remaining 10 months. Tolland has elected the short-term lease exemption for this class of asset. What lease expense should Tolland recognize for 2026?

  1. A $13,200
  2. B $14,667
  3. C $16,000
  4. D $17,600
Show the answer

Answer: C. A lease of 12 months or less with no purchase option reasonably certain to be exercised qualifies for the short-term lease election (ASC 842-20-25). No ROU asset or lease liability is recognized, and the payments are expensed straight-line over the lease term.

Total payments = 10 x $4,400 = $44,000

Monthly expense = $44,000 / 11 = $4,000

2026 (September to December, 4 months) = $4,000 x 4 = $16,000

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