CPA FAR F2.M5 — Practice Questions
Select Financial Statement Accounts. Below are 8 real practice questions with worked explanations — a free sample of the F2.M5 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · hard
Quill Company incurred the following during Year 1 on a project to develop a new product: research staff salaries $400,000; equipment purchased solely for this project with no alternative future use $250,000; and routine quality-control testing of existing products $60,000. What amount should Quill expense as research and development for Year 1?
- ✓ $650,000
- $400,000
- $710,000
- $460,000
Why: Under U.S. GAAP, R&D is expensed as incurred. Equipment with no alternative future use is expensed in full as R&D (only equipment with alternative future use is capitalized and depreciated). Routine quality control is a production cost, not R&D. R&D = 400,000 + 250,000 = $650,000. $400,000 wrongly capitalizes the special-purpose equipment. $710,000 includes quality control. $460,000 makes both errors.
Q2 · medium
Research and development costs incurred internally are generally:
- Capitalized and amortized over 40 years
- ✓ Expensed as incurred
- Capitalized as goodwill
- Recorded in other comprehensive income
Why: U.S. GAAP requires most R&D costs to be expensed as incurred, because future benefits are too uncertain at that stage. (Once technological feasibility is established, certain software development costs may be capitalized.)
Q3 · medium
An intangible asset with an indefinite useful life (e.g., a renewable broadcast license) is:
- ✓ Not amortized, but tested for impairment at least annually
- Expensed in full immediately in the period it is acquired
- Amortized over a maximum allowable period of forty years
- Amortized on a straight-line basis over a ten-year statutory period
Why: Indefinite-life intangibles are not amortized; instead they are tested for impairment at least annually (and when events indicate possible impairment). Finite-life intangibles are amortized over their useful lives.
Q4 · hard
To test a finite-lived long-lived asset (held for use) for impairment, the first step is to compare the carrying amount with:
- The asset's current replacement cost
- The asset's original acquisition cost
- The asset's current fair value measured using market-participant assumptions
- ✓ The sum of the undiscounted future cash flows expected from the asset
Why: Step 1 is a recoverability test: if the carrying amount exceeds the undiscounted expected future cash flows, the asset is impaired. Step 2 then measures the loss as carrying amount minus fair value. Undiscounted cash flows screen for impairment; fair value sizes it.
Q5 · medium
Under current U.S. GAAP, goodwill impairment for a reporting unit is measured as:
- ✓ The excess of the reporting unit's carrying amount over its fair value, limited to the goodwill balance
- The excess of implied goodwill over carrying goodwill in a two-step test
- Always the full goodwill balance
- Amortization over 10 years
Why: After ASU 2017-04, goodwill impairment is a single-step test: the loss equals the amount by which the reporting unit's carrying amount exceeds its fair value, capped at the goodwill recorded. The old Step 2 (computing implied goodwill) was eliminated. Internally generated goodwill is never recorded.
Q6 · hard
To test a long-lived asset held for use for impairment, recoverability is assessed by comparing the asset's carrying amount to:
- ✓ The sum of the undiscounted future cash flows expected from the asset
- Its current replacement cost in the asset's existing condition
- Its fair value measured using market-participant assumptions at the test date
- The present value of the discounted future cash flows from the asset
Why: Step 1 (recoverability test): if carrying amount exceeds the undiscounted expected future cash flows, the asset is impaired. Step 2: the impairment loss equals carrying amount minus fair value. Using undiscounted flows for the trigger is the key trap.
Q7 · easy
A finite-life intangible asset, such as a patent, is:
- Expensed immediately when acquired
- Not amortized but tested annually for impairment
- ✓ Amortized over its useful life
- Revalued to fair value each year
Why: Finite-life intangibles are amortized over their useful life (the shorter of economic or legal life) and tested for impairment when indicators exist. Indefinite-life intangibles are not amortized but tested for impairment; goodwill is covered in more depth in BAR.
Q8 · easy
Under U.S. GAAP, internally incurred research and development costs are generally:
- Capitalized and amortized over the expected benefit period
- ✓ Expensed as incurred
- Capitalized only if the project is successful
- Recorded as an intangible asset at fair value
Why: U.S. GAAP requires most R&D costs to be expensed as incurred because of uncertainty about future benefits. Limited exceptions exist, such as materials or equipment with alternative future uses, which are capitalized and depreciated, and certain software costs.