Free CPA FAR (Financial Accounting & Reporting) Select Transactions Practice Questions
Select transactions on the CPA FAR exam cover business combinations (ASC 805), consolidation accounting, foreign currency transactions and translation, contingencies, and subsequent events disclosure requirements.
Sample Questions
Question 1
Easy
Under ASC 740, a deferred tax liability arises when:
Solution
D is correct.
Under ASC 740-10-25, a deferred tax liability (DTL) arises from taxable temporary differences, which occur when an asset's book carrying amount exceeds its tax basis. When the asset is recovered (through depreciation, sale, or use), the excess book amount over tax basis will result in additional taxable income in future periods.
Under ASC 740-10-25, a deferred tax liability (DTL) arises from taxable temporary differences, which occur when an asset's book carrying amount exceeds its tax basis. When the asset is recovered (through depreciation, sale, or use), the excess book amount over tax basis will result in additional taxable income in future periods.
Question 2
Medium
A company discovers in Year 3 that depreciation expense was understated by 50,000 in Year 1. Under ASC 250, how should this error be corrected?
Solution
B is correct.
Under ASC 250-10-45, errors in previously issued financial statements are corrected by restating those prior periods when presented comparatively. Beginning retained earnings of the earliest period presented is adjusted for the cumulative effect.
Under ASC 250-10-45, errors in previously issued financial statements are corrected by restating those prior periods when presented comparatively. Beginning retained earnings of the earliest period presented is adjusted for the cumulative effect.
Question 3
Hard
Parkside Corp. corrects a prior-period error discovered in Year 3: Year 1 revenue was overstated by 100,000. Tax rate 25%. Comparative statements for Years 1 and 2 are presented. Which of the following correctly describes the restatement adjustments?
Solution
A is correct.
Under ASC 250-10, material prior-period errors are corrected retrospectively by restating all comparative periods presented. Year 1 revenue overstated by 100,000: debit Revenues 100,000; credit Income Tax Expense (benefit) 25,000; credit Retained Earnings 75,000. When Year 2 comparatives are also presented, the Year 2 beginning retained earnings must be reduced to reflect the Year 1 correction. Users of Year 3 financial statements see corrected Year 1 and Year 2 comparatives. Beginning Year 3 retained earnings is also reduced by 75,000 if Year 1 is not a presented comparative period.
Under ASC 250-10, material prior-period errors are corrected retrospectively by restating all comparative periods presented. Year 1 revenue overstated by 100,000: debit Revenues 100,000; credit Income Tax Expense (benefit) 25,000; credit Retained Earnings 75,000. When Year 2 comparatives are also presented, the Year 2 beginning retained earnings must be reduced to reflect the Year 1 correction. Users of Year 3 financial statements see corrected Year 1 and Year 2 comparatives. Beginning Year 3 retained earnings is also reduced by 75,000 if Year 1 is not a presented comparative period.