Certified Public Accountant (CPA)
Examination Questions And Correct
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Rationales 2026 Q&A | Instant
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Section 1: Financial Accounting and Reporting (FAR)
1. A company changes from the double-declining balance method of
depreciation to the straight-line method for a piece of equipment. How
should this change be reported in the financial statements? A. As a
cumulative effect of a change in accounting principle in the current period
income statement. B. As a change in accounting estimate effected by a
change in accounting principle, accounted for prospectively. C. By restating
the financial statements of all prior periods presented. D. As a correction of
an error recorded directly to beginning retained earnings. Rationale: Under
FASB ASC 250, a change in depreciation method is considered a change in
accounting estimate effected by a change in accounting principle. It is
accounted for prospectively in the current and future periods because it
represents a refinement of how the future economic benefits of the asset
are consumed. Prior periods are not restated, and no cumulative-effect
adjustment is made to beginning retained earnings.
2. During the current year, a company experienced a temporary decline in the
market value of its inventory, which is expected to fully reverse by year-end.
Under US GAAP for interim financial reporting, how should this inventory
loss be recognized? A. Recognized in full in the interim period in which the
decline occurs. B. Not recognized in the interim period financial
statements. C. Recognized allocations equally over the remaining interim
, periods of the fiscal year. D. Disclosed only in the footnotes without any
income statement impact. Rationale: Under US GAAP interim reporting
rules, inventory losses from market declines that can reasonably be
expected to be restored within the fiscal year do not need to be recognized
in the interim period. This is because the decline is temporary and the
annual financial statements will not be distorted by seasonal or
temporary market fluctuations.
3. Entity A enters into a contract to sell a machine to Entity B for $100,000.
The contract includes a provision where Entity A will service the machine
for two years at no additional cost. The standalone selling price of the
machine is $95,000, and the standalone selling price of the service contract
is $15,000. How much revenue should be allocated to the machine? A.
$100,000 B. $95,000 C. $86,364 D. $85,000 Rationale: Under ASC 606,
transaction price allocation is based on relative standalone selling prices.
Total standalone selling price is $95,000 + $15,000 = $110,000. The
allocation to the machine is calculated as ($95,000 / $110,000) * $100,000
= $86,364.
4. On January 1, Year 1, a lessee enters into a 5-year lease of equipment with
annual payments of $20,000 due at the end of each year. The lessee's
incremental borrowing rate is 6%, and the lessor's implicit rate is not readily
determinable. The present value factor for an ordinary annuity at 6% for 5
periods is 4.2124. What is the initial measurement of the right-of-use (ROU)
asset? A. $100,000 B. $84,248 C. $94,340 D. $79,480 Rationale: Under ASC
842, a lessee must recognize a right-of-use asset and a lease liability at
the commencement date. The initial value is measured as the present
value of the lease payments using the incremental borrowing rate if the
implicit rate is unknown. Present Value = $20,000 * 4.2124 = $84,248.
5. Which of the following items should be reported as a component of Other
Comprehensive Income (OCI)? A. Gain on the sale of a segment of a
business. B. Unrealized holding gains on available-for-sale debt securities.
C. Losses from extraordinary events that are both unusual and infrequent.
, D. Cumulative effect of a change in inventory valuation from FIFO to
Weighted-Average. Rationale: Other Comprehensive Income (OCI) includes
specific items defined by GAAP that bypass the income statement,
including unrealized holding gains and losses on available-for-sale debt
securities, foreign currency translation adjustments, and certain pension
plan adjustments.
6. A firm has an option to designate a financial asset at fair value through
profit or loss under the fair value option. When is this election permitted to
be made? A. Only when the financial asset is initially recognized. B. At any
financial reporting date during the life of the asset. C. Only when the fair
value of the asset drops below its amortized cost. D. When management
changes its strategic business model for managing assets. Rationale: The
fair value option under ASC 825 is an irrevocable election that can only be
made at the date the asset or liability is initially recognized, or when an
event triggers a new basis of accounting for that item.
7. On December 31, Year 1, a company has outstanding accounts receivable of
$500,000. Based on an aging schedule, the company estimates that $25,000
of these receivables will be uncollectible. The Allowance for Doubtful
Accounts has a pre-adjustment credit balance of $3,000. What is the Bad
Debt Expense for Year 1? A. $28,000 B. $25,000 C. $22,000 D. $3,000
Rationale: Using the balance sheet aging approach, the target balance for
the Allowance for Doubtful Accounts is $25,000. Since the account already
has a credit balance of $3,000, the required adjusting entry to record Bad
Debt Expense is $25,000 - $3,000 = $22,000.
8. How should research and development (R&D) costs be accounted for under
US GAAP? A. Capitalized as intangible assets and amortized over their
estimated useful lives. B. Expensed in the period incurred, with limited
exceptions for assets with alternative future uses. C. Capitalized only after
technological feasibility has been fully established. D. Deferred and
matched against future revenues generated by the developed products.
Rationale: US GAAP (ASC 730) requires all research and development costs
, to be expensed as incurred because of the high degree of uncertainty
regarding future economic benefits. An exception is made for physical
assets purchased that have alternative future uses, which are capitalized
and depreciated over their useful lives.
9. A company issues $1,000,000 face value, 8% bonds at 102. Each $1,000
bond is issued with 20 detachable stock warrants. Shortly after issuance,
the bonds are trading at 98 ex-warrants, and the warrants are trading at $2
each. Under US GAAP, how much of the issuance proceeds should be
allocated to the warrants using the relative fair value method? A. $20,000 B.
$39,216 C. $40,000 D. $20,400 *Rationale: Total proceeds = $1,000,000 *
1.02 = $1,020,000. Number of warrants = 1,000 bonds * 20 = 20,000
warrants. Market value of warrants = 20,000 * $2 = $40,000. Market value
of bonds ex-warrants = $1,000,000 * 0.98 = $980,000. Total fair value =
$980,000 + $40,000 = $1,020,000. The allocation to the warrants is
($40,000 / $1,020,000) * $1,020,000 = $40,000. Wait, if total fair value
matches proceeds exactly, the allocation equals market value. Let's
recalculate if total proceeds is $1,020,000 and total fair value is
$1,020,000, allocation is exactly $40,000. Let's use proportional
distribution. If proceeds were different, relative weights apply. Let's adjust
options to ensure correct answers align. Let's check: ($40,000 /
$1,020,000) * $1,020,000 = $40,000. Let's set Option C as correct. Wait,
let's fix Option C to be the bolded answer: C. $40,000 Rationale: The total
market value of the detached warrants is 20,000 * $2 = $40,000. The
market value of the bonds is $980,000. The total combined market value is
$1,020,000, which is exactly equal to the proceeds. Therefore, the relative
fair value allocation assigns exactly $40,000 to the warrants.
10.A company reports basic earnings per share (EPS) of $3.00. The company
has convertible bonds outstanding that are dilutive. In calculating diluted
EPS, the numerator of the basic EPS fraction must be: A. Decreased by the
after-tax interest expense on the convertible bonds. B. Increased by the
after-tax interest expense on the convertible bonds. C. Increased by the
pre-tax interest expense on the convertible bonds. D. Decreased by the
Examination Questions And Correct
Answers (Verified Answers) Plus
Rationales 2026 Q&A | Instant
Download Pdf
Section 1: Financial Accounting and Reporting (FAR)
1. A company changes from the double-declining balance method of
depreciation to the straight-line method for a piece of equipment. How
should this change be reported in the financial statements? A. As a
cumulative effect of a change in accounting principle in the current period
income statement. B. As a change in accounting estimate effected by a
change in accounting principle, accounted for prospectively. C. By restating
the financial statements of all prior periods presented. D. As a correction of
an error recorded directly to beginning retained earnings. Rationale: Under
FASB ASC 250, a change in depreciation method is considered a change in
accounting estimate effected by a change in accounting principle. It is
accounted for prospectively in the current and future periods because it
represents a refinement of how the future economic benefits of the asset
are consumed. Prior periods are not restated, and no cumulative-effect
adjustment is made to beginning retained earnings.
2. During the current year, a company experienced a temporary decline in the
market value of its inventory, which is expected to fully reverse by year-end.
Under US GAAP for interim financial reporting, how should this inventory
loss be recognized? A. Recognized in full in the interim period in which the
decline occurs. B. Not recognized in the interim period financial
statements. C. Recognized allocations equally over the remaining interim
, periods of the fiscal year. D. Disclosed only in the footnotes without any
income statement impact. Rationale: Under US GAAP interim reporting
rules, inventory losses from market declines that can reasonably be
expected to be restored within the fiscal year do not need to be recognized
in the interim period. This is because the decline is temporary and the
annual financial statements will not be distorted by seasonal or
temporary market fluctuations.
3. Entity A enters into a contract to sell a machine to Entity B for $100,000.
The contract includes a provision where Entity A will service the machine
for two years at no additional cost. The standalone selling price of the
machine is $95,000, and the standalone selling price of the service contract
is $15,000. How much revenue should be allocated to the machine? A.
$100,000 B. $95,000 C. $86,364 D. $85,000 Rationale: Under ASC 606,
transaction price allocation is based on relative standalone selling prices.
Total standalone selling price is $95,000 + $15,000 = $110,000. The
allocation to the machine is calculated as ($95,000 / $110,000) * $100,000
= $86,364.
4. On January 1, Year 1, a lessee enters into a 5-year lease of equipment with
annual payments of $20,000 due at the end of each year. The lessee's
incremental borrowing rate is 6%, and the lessor's implicit rate is not readily
determinable. The present value factor for an ordinary annuity at 6% for 5
periods is 4.2124. What is the initial measurement of the right-of-use (ROU)
asset? A. $100,000 B. $84,248 C. $94,340 D. $79,480 Rationale: Under ASC
842, a lessee must recognize a right-of-use asset and a lease liability at
the commencement date. The initial value is measured as the present
value of the lease payments using the incremental borrowing rate if the
implicit rate is unknown. Present Value = $20,000 * 4.2124 = $84,248.
5. Which of the following items should be reported as a component of Other
Comprehensive Income (OCI)? A. Gain on the sale of a segment of a
business. B. Unrealized holding gains on available-for-sale debt securities.
C. Losses from extraordinary events that are both unusual and infrequent.
, D. Cumulative effect of a change in inventory valuation from FIFO to
Weighted-Average. Rationale: Other Comprehensive Income (OCI) includes
specific items defined by GAAP that bypass the income statement,
including unrealized holding gains and losses on available-for-sale debt
securities, foreign currency translation adjustments, and certain pension
plan adjustments.
6. A firm has an option to designate a financial asset at fair value through
profit or loss under the fair value option. When is this election permitted to
be made? A. Only when the financial asset is initially recognized. B. At any
financial reporting date during the life of the asset. C. Only when the fair
value of the asset drops below its amortized cost. D. When management
changes its strategic business model for managing assets. Rationale: The
fair value option under ASC 825 is an irrevocable election that can only be
made at the date the asset or liability is initially recognized, or when an
event triggers a new basis of accounting for that item.
7. On December 31, Year 1, a company has outstanding accounts receivable of
$500,000. Based on an aging schedule, the company estimates that $25,000
of these receivables will be uncollectible. The Allowance for Doubtful
Accounts has a pre-adjustment credit balance of $3,000. What is the Bad
Debt Expense for Year 1? A. $28,000 B. $25,000 C. $22,000 D. $3,000
Rationale: Using the balance sheet aging approach, the target balance for
the Allowance for Doubtful Accounts is $25,000. Since the account already
has a credit balance of $3,000, the required adjusting entry to record Bad
Debt Expense is $25,000 - $3,000 = $22,000.
8. How should research and development (R&D) costs be accounted for under
US GAAP? A. Capitalized as intangible assets and amortized over their
estimated useful lives. B. Expensed in the period incurred, with limited
exceptions for assets with alternative future uses. C. Capitalized only after
technological feasibility has been fully established. D. Deferred and
matched against future revenues generated by the developed products.
Rationale: US GAAP (ASC 730) requires all research and development costs
, to be expensed as incurred because of the high degree of uncertainty
regarding future economic benefits. An exception is made for physical
assets purchased that have alternative future uses, which are capitalized
and depreciated over their useful lives.
9. A company issues $1,000,000 face value, 8% bonds at 102. Each $1,000
bond is issued with 20 detachable stock warrants. Shortly after issuance,
the bonds are trading at 98 ex-warrants, and the warrants are trading at $2
each. Under US GAAP, how much of the issuance proceeds should be
allocated to the warrants using the relative fair value method? A. $20,000 B.
$39,216 C. $40,000 D. $20,400 *Rationale: Total proceeds = $1,000,000 *
1.02 = $1,020,000. Number of warrants = 1,000 bonds * 20 = 20,000
warrants. Market value of warrants = 20,000 * $2 = $40,000. Market value
of bonds ex-warrants = $1,000,000 * 0.98 = $980,000. Total fair value =
$980,000 + $40,000 = $1,020,000. The allocation to the warrants is
($40,000 / $1,020,000) * $1,020,000 = $40,000. Wait, if total fair value
matches proceeds exactly, the allocation equals market value. Let's
recalculate if total proceeds is $1,020,000 and total fair value is
$1,020,000, allocation is exactly $40,000. Let's use proportional
distribution. If proceeds were different, relative weights apply. Let's adjust
options to ensure correct answers align. Let's check: ($40,000 /
$1,020,000) * $1,020,000 = $40,000. Let's set Option C as correct. Wait,
let's fix Option C to be the bolded answer: C. $40,000 Rationale: The total
market value of the detached warrants is 20,000 * $2 = $40,000. The
market value of the bonds is $980,000. The total combined market value is
$1,020,000, which is exactly equal to the proceeds. Therefore, the relative
fair value allocation assigns exactly $40,000 to the warrants.
10.A company reports basic earnings per share (EPS) of $3.00. The company
has convertible bonds outstanding that are dilutive. In calculating diluted
EPS, the numerator of the basic EPS fraction must be: A. Decreased by the
after-tax interest expense on the convertible bonds. B. Increased by the
after-tax interest expense on the convertible bonds. C. Increased by the
pre-tax interest expense on the convertible bonds. D. Decreased by the
