CPA FAR F2.M2 — Practice Questions
Select Financial Statement Accounts. Below are 5 real practice questions with worked explanations — a free sample of the F2.M2 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · easy
Why does U.S. GAAP require the allowance method rather than the direct write-off method for uncollectible accounts?
- ✓ It matches bad-debt expense to the period of the related sale and states receivables at net realizable value
- It avoids estimating uncollectible amounts and recognizes a loss only when a specific account actually defaults
- It is simpler to apply because no estimate of uncollectible accounts is ever required
- It is permitted only for income-tax reporting, not for financial-statement purposes
Why: The allowance method estimates uncollectibles in the same period as the related revenue (matching) and reports receivables at net realizable value. The direct write-off method, which waits until a specific account is deemed worthless, violates matching and overstates receivables, so GAAP disallows it.
Q2 · medium
A company factors its receivables WITHOUT recourse. This transaction is accounted for as:
- A secured borrowing, keeping the receivables on the books
- ✓ A sale, removing the receivables and recognizing any gain or loss
- A contingent liability only
- An equity transaction
Why: Factoring without recourse transfers the risk of non-collection to the buyer, so the seller derecognizes the receivables and records a sale (with a loss/financing fee). Factoring WITH recourse, where the seller retains collection risk, is typically treated as a secured borrowing.
Q3 · hard
A noninterest-bearing note receivable due in three years is initially recorded at:
- ✓ Its present value, discounted at the market rate, with the difference recognized as interest over time
- Its face amount reduced by a fixed ten-percent allowance for imputed interest
- Zero until the note is collected, when the full amount is recorded as interest income
- Its face (maturity) amount, since a noninterest-bearing note carries no stated rate and therefore no discount
Why: A long-term note that bears no (or an unreasonably low) stated rate is recorded at present value using the market/imputed rate. The discount is amortized to interest income over the note's life, so the carrying amount accretes toward face value.
Q4 · medium
Under the current expected credit loss (CECL) model, the allowance for credit losses on financial assets reflects:
- Only the credit losses already incurred and probable at the balance sheet date, under the old incurred-loss model
- ✓ Expected credit losses over the asset's contractual life, using past, current, and reasonable forecasted information
- A fixed one percent of the outstanding receivable balance applied uniformly each period
- Credit losses recognized only once an account becomes ninety days past due
Why: CECL (ASC 326) is a forward-looking model: recognize a lifetime expected-credit-loss allowance at origination, incorporating historical experience, current conditions, and reasonable, supportable forecasts. It replaced the older 'incurred loss' approach that waited until a loss was probable.
Q5 · hard
Under the current expected credit loss (CECL) model, the allowance for credit losses on trade receivables is measured based on:
- Actual write-offs incurred during the period, recognized when specific accounts default
- A fixed percentage prescribed by GAAP for every class of trade receivable, applied uniformly across all periods
- ✓ Expected credit losses over the life of the asset, using past events, current conditions, and reasonable forecasts
- Only the losses probable and estimable at the balance sheet date, under the incurred-loss model
Why: ASC 326 (CECL) requires recognizing expected credit losses over the asset's life at inception, using historical experience, current conditions, and reasonable and supportable forecasts. It replaced the older incurred-loss (probable) threshold.