CPA FAR F2.M1 — Practice Questions
Select Financial Statement Accounts. Below are 8 real practice questions with worked explanations — a free sample of the F2.M1 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · hard
Under ASC 606, an entity contracts to build a specialized asset with no alternative use, but the contract gives no enforceable right to payment for performance completed to date. How should revenue be recognized?
- Over time using a cost-to-cost input method
- ✓ At a point in time when control of the finished asset transfers to the customer
- Over time using an output method based on milestones
- Ratably in equal amounts over each period of the stated construction contract duration
Why: Over-time recognition for an asset with no alternative use also requires an enforceable right to payment for performance completed to date. Without that right, none of the over-time criteria are met, so revenue is recognized at the point control transfers.
Q2 · medium
An entity expects to earn a $50,000 performance bonus, but achieving it is highly uncertain. Under ASC 606, the entity includes variable consideration in the transaction price only to the extent that:
- The related cash has already been collected
- The contract has been signed by both parties
- ✓ It is probable a significant revenue reversal will not subsequently occur
- The bonus amount has been separately guaranteed in writing by an authorized representative of the customer
Why: The variable consideration constraint limits the estimate to the amount for which it is probable that a significant reversal of cumulative revenue will not occur once the uncertainty is resolved. High uncertainty about the bonus means little or none is included.
Q3 · medium
Vance Company contracts to build equipment for a fixed price of $500,000 plus a $50,000 bonus if completed by a target date. Vance concludes it is not highly probable that a significant reversal of the bonus will not occur. What transaction price should Vance use?
- $550,000
- $525,000
- ✓ $500,000
- $450,000
Why: Variable consideration is included only to the extent it is highly probable that a significant reversal will not occur (the constraint). The bonus fails that test, so it is excluded: transaction price = $500,000. $550,000 ignores the constraint. $525,000 includes half. $450,000 wrongly reduces the fixed price.
Q4 · medium
Mott operates a platform that arranges services performed by independent providers. Mott does not control the services before they transfer to customers. During Year 1, customers paid $100,000; Mott remitted $85,000 to providers and retained $15,000. What amount of revenue should Mott recognize?
- $100,000
- $85,000
- $115,000
- ✓ $15,000
Why: An entity that arranges for another party to provide goods or services, and does not control them before transfer, is an agent and recognizes revenue net of amounts paid to the provider: $15,000. $100,000 treats Mott as a principal (gross). $85,000 is the providers' share. $115,000 double-counts.
Q5 · medium
Under ASC 606, how should Welk Company account for a sale of goods for which no over-time criterion is met?
- ✓ Recognize revenue at the point in time control transfers
- Recognize revenue over time as costs are incurred
- Defer all revenue until cash is collected
- Recognize revenue when the contract is signed
Why: When none of the three over-time criteria are met, the obligation is satisfied at a point in time, so recognize revenue when control transfers. Indicators of control transfer: physical possession, legal title, risks and rewards, customer acceptance, and a present right to payment. Cash collection and contract signing are not, by themselves, control-transfer events.
Q6 · medium
Under ASC 606, how should Marr Company account for a service the customer simultaneously receives and consumes as the entity performs?
- Recognize revenue at completion
- ✓ Recognize revenue over time
- Recognize revenue when invoiced
- Defer until the customer confirms satisfaction
Why: This is the first over-time criterion: the customer simultaneously receives and consumes the benefits as the entity performs (routine or recurring services such as cleaning or transaction processing). Recognize revenue over time using a measure of progress. Invoice date and completion date do not drive recognition here.
Q7 · medium
Under ASC 606, how should Oste Company account for construction of an asset the customer controls as it is built?
- Recognize revenue at delivery
- Recognize revenue when title transfers
- ✓ Recognize revenue over time
- Recognize revenue only upon final inspection
Why: Second over-time criterion: the customer controls the asset as it is created or enhanced (for example, building on land the customer owns). Recognize revenue over time by a measure of progress. Title transfer or final inspection is not the trigger when the customer already controls the work in progress.
Q8 · medium
Under ASC 606, how should Penn Company account for an asset with no alternative use to the entity plus an enforceable right to payment for performance to date?
- Recognize revenue at the point of delivery
- Defer revenue until the asset is sold to a third party
- Recognize revenue when production begins
- ✓ Recognize revenue over time
Why: Third over-time criterion: the asset has no alternative use to the seller AND the seller has an enforceable right to payment for performance completed to date. Both conditions must hold. When they do, recognize revenue over time using a progress measure, not at delivery and not when production merely begins.