CPA FAR F2.M4 — Practice Questions
Select Financial Statement Accounts. Below are 4 real practice questions with worked explanations — a free sample of the F2.M4 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · medium
Dax Company purchased equipment for $120,000 on October 1, Year 1. The equipment has a four-year useful life and is depreciated straight-line. The reporting period ends December 31. What is depreciation expense for Year 1?
- $30,000
- $22,500
- $10,000
- ✓ $7,500
Why: Salvage value is assumed to be zero when not stated, so the annual straight-line charge is 120,000 / 4 = $30,000. The asset was held only three months in Year 1 (Oct 1–Dec 31): 30,000 × 3/12 = $7,500. $30,000 ignores the partial period. $22,500 uses nine months (counts in the wrong direction). $10,000 miscounts the partial period as four months.
Q2 · hard
Nuss Company is constructing a building for its own use. Weighted-average accumulated expenditures during the year were $400,000, total construction cost to date was $800,000, and the relevant interest rate was 10% (actual interest cost exceeded the computed amount). How much interest should be capitalized this year?
- $80,000
- $400,000
- $20,000
- ✓ $40,000
Why: Capitalized interest = weighted-average accumulated expenditures × rate = $400,000 × 10% = $40,000 (capped at actual interest, not binding here). Distractors apply the rate to total cost, omit the rate, or halve the result.
Q3 · hard
While constructing a building for its own use, a company may capitalize interest equal to:
- All interest incurred by the company during the entire construction period
- ✓ Interest on the weighted-average accumulated expenditures, capped at actual interest incurred
- No interest at all, because all borrowing costs incurred during construction must be expensed as a period cost
- Only interest on debt that was used to retire other outstanding obligations
Why: Interest is capitalized on qualifying assets based on weighted-average accumulated expenditures times an appropriate rate, but capitalized interest cannot exceed the total interest actually incurred in the period. Routine inventory and assets already in use do not qualify.
Q4 · hard
An exchange of nonmonetary assets that has commercial substance is recorded at:
- The lower of fair value or book value
- Book value of the asset given up, with no gain or loss
- Current replacement cost
- ✓ Fair value, recognizing any gain or loss
Why: If an exchange has commercial substance (the future cash flows of the entity change significantly), it is recorded at fair value and gains or losses are recognized. Without commercial substance, it is generally recorded at book value with gains deferred, subject to the boot rules.