CPA Financial Accounting and Reporting Practice Questions

1. On December 31, 2008, Flow, Inc. reported $200,000 as a retained earnings balance. In July of 2009, Flow, Inc. discovers that merchandise that cost $50,000 was wrongly not included as inventory in its financial statements for 2008. How much should Flow, Inc. report as adjusted beginning retained earnings in its statement of retained earnings at the end of 2009 (December 31, 2009)? Flow's tax rate is 30%.

a. $50,000
b. $200,000
c. $235,000
d. $250,000

2. The Sea Protection Alliance is a private, not-for-profit oceanographic organization. In 2007, they received a total of $25,000 in donations restricted for research. They didn't use the funds in 2007, but did use $10,000 of them for research in 2008. Which of the following statements are true?

I. The $25,000 in contributions should be reported on the 2007 statement of activities as an increase in temporarily restricted net assets.
II. A reclassification of net assets should be reported on the 2008 statement of activities.
III. The 2008 statement of activities should show a $10,000 decrease in temporarily restricted net assets.
IV. The 2008 statement of activities should show a $10,000 increase in unrestricted net assets.

a. I and II only
b. I, II, and III only
c. I, II, and IV only
d. I, II, III, and IV

3. Convergence Corp. changed its method of inventory valuation during 2008 from FIFO to LIFO. The inventory balances under both methods were as follows:

What cumulative effect-as either a gain or loss-should Convergence Corp. report on its 2008 financial statements as a result of this change? Their tax rate is 30%.

a. $0
b. $600
c. $1,200
d. None of the above

4. In 2008, LeTarte Company made the following payments for their building:

How much should LeTarte Company charge to repair and maintenance expense in 2008?

a. $50,500
b. $50,000
c. $45,000
d. $5,500

5. Industry Co. must determine its income tax expense for its 2008 second quarter interim income statement. Their effective income tax rate for 2007 was 20%, their effective income tax rate for the 2008 first quarter was 30%, their effective income tax rate for the 2008 second quarter was 20%, and they expect their 2008 effective annual tax rate to be 25%.

If Industry's 2008 second quarter income was $1,000,000, what should they record as the interim tax expense on the 2008 second quarter interim income statement?

a. $200,000
b. $250,000
c. $300,000
d. None of the above

6. Apex, Inc. takes a $300,000 loan from a bank. The interest rate is 6% and Apex must make monthly payments of $3,300. The bank incurred $7,500 in direct loan origination costs.

What is Apex's carrying amount?

a. $292,500
b. $295,000
c. $297,500
d. $303,300

7. Smack Corporation's pretax income for 2008 is $2,200. For the same year, temporary differences total ($1,000), taxable income totals $1,200, and the enacted tax rate is 30%. There were no prior deferred tax balances. What should Smack Corporation report as current income tax expense on its 2008 income statement?

a. $300
b. $333
c. $360
d. $400

8. Spartan Co. has an outstanding ten-year, $120,000, 8% face-value bond. The bond was originally sold to yield 5% interest annually, and on June 30, 2008 its carrying amount was $134,000. Spartan Co. does not elect the fair value option for reporting financial liabilities, but does use the effective interest rate method for amortizing bond premiums. What amount should Spartan Co. report as unamortized premium on the bond on its June 30, 2008 balance sheet?

a. $4,720
b. $9,280
c. $11,167.00
d. $14,000

9. Blue Wing Corp. newly formed as a company on June 1, 2008.

On that date, Blue Wing issued 25,000 shares of common stock at $40 per share with no par and a stated value of $2.

On the same date, Blue Wing issued 5,000 shares of preferred stock at $60 per share with a par value of $10.

Which of the following should be included on Blue Wing's June 1, 2008 statement of stockholder equity report?

I. $50,000 for common stock
II. $300,000 for preferred stock
III. No additional amount paid in capital

a. I only
b. II only
c. III only
d. I, II, and III

10. Which items should an auditor include in the cost of inventory when using the net method?

I. Direct expenses required to bring inventory to location
II. Indirect expenses required to bring inventory to location

a. I only
b. II only
c. I and II
d. Neither I nor II

11. The data for Docent Company's marketable equity securities is as follows. Trading securities had a market value of $235,000 on December 31, 2008; a market value of $200,000 on December 31, 2007; and a cost of $220,000. Available-for-sale securities had a market value of $170,000 on December 31, 2007; a market value of $150,000 on December 31, 2008; and a cost of $180,000.

Assuming that Docent uses SFAS 115 to report its investments, which of the following statements is true for 2008?

I. Docent should report an unrealized holding gain of $15,000 on trading securities on its 2008 income statement.
II. The unrealized holding gain of $20,000 on the available-for-sale securities should be reported as other comprehensive income.
III. The unrealized holding gain of $30,000 should be reported on its 2008 income statement.

a. I and II only
b. II and III only
c. I and III only
d. I, II, and III

12. On December 31, 2008, Konch Company has the following accounts at Liberty First Bank, all of which it classifies as cash or cash equivalents.

In addition, Konch has a second checking account at Liberty First bank with an overdrawn balance of $5,000 on the same date.

Which of the following statements about the amount that Konch should report as cash and cash equivalent on its December 31, 2008 balance sheet is most accurate?

a. Konch should report $120,000 as cash and cash equivalents on the balance sheet.
b. Konch should report $115,000 as cash and cash equivalents on the balance sheet.
c. Konch should report $120,000 as cash and cash equivalents and $5,000 as a current liability.
d. None of the above

13. For which of the following is it acceptable to use combined statements to present the results of operations and financial positions?

I. Companies under common management
II. Commonly controlled companies
III. A group of unconsolidated subsidiaries

a. I only
b. I and II only
c. II and III only
d. I, II, and III

14. Assume a company has a hybrid financial instrument and chooses not to bifurcate the instrument, recording it instead at fair value. Which of the following statements are true according to SFAS 155?

I. The entire hybrid financial instrument is recorded at fair value.
II. As the fair value of that instrument changes yearly, those changes are recognized for the period in earnings.

a. I only
b. II only
c. Neither I nor II
d. Both I and II

15. When recording an asset in a personal financial statement, which of the following statements is true?

I. An asset is typically recorded at its estimated current value.
II. Estimation of the current value can be done through appraised value, discounted cash flow, fair market value, or net realizable value, depending on the type of asset.

a. I only
b. II only
c. I and II
d. Neither I nor II

16. Which of the following tests must a division satisfy before it qualifies as a reportable segment?

I. Assets must be at least 10% of the total assets of all segments.
II. Operating profit/loss must be at least 10% of the combined segment profit or loss (whichever is greater in absolute amount).
III. Revenue must equal at least 10% of total revenue of all segments.

a. I and II
b. II and III
c. I, II, and III
d. Any one of I, II, or III

17. Ethos, Inc. implemented a defined benefit pension play for employees on January 2, 2008 and is a nonpublicly traded company. What should Ethos, Inc. record as its pension liability on December 31, 2008?

a. The projected benefit obligation (PBO) of $202,000 minus the plan assets at fair value (FV) of $188,000
b. The plan assets at fair value (FV) of $188,000 minus the projected benefit obligation (PBO) of $202,000
c. The combined total of the projected benefit obligation (PBO) plus the plan assets at fair value (FV)
d. None of the above

18. On January 1, 2008, Appleton City issues $500,000, 5% revenue bonds at par in order to pay for a new sewer line. What should Appleton City report as interest expense on the bonds for the year ended December 31, 2008?

a. $25,000
b. $50,000
c. $55,000
d. $500,000

19. Which of the following is/are a general overview of the objectives, definitions, and ideas of accounting, and is/are intended to function as an aid in creating standards for financial accounting and reporting?

a. Generally Accepted Accounting Principles (GAAP)
b. Generally Accepted Auditing Standards (GAAS)
c. Statements of Financial Accounting Concepts (SFAC)
d. Financial Accounting Standards Board (FASB)

20. Sales at Plush, Inc. totaled $50,000 in December of 2008. Past trends show that customers will return 10% of those sales for cash within three months and that customers will return an additional 5% of the merchandise for merchandise of the same value or greater. What should Plush, Inc. report for its net sales for the month of December 2008 in its income statement?

a. $50,000
b. $47,500
c. $45,000
d. $42,500

Answer Key