CPA FAR F2.M6 — Practice Questions
Select Financial Statement Accounts. Below are 8 real practice questions with worked explanations — a free sample of the F2.M6 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · medium
On January 1, Year 1, Saxe Company acquired 30% of the voting common stock of Vee Company for $400,000, giving Saxe significant influence. During Year 1, Vee reported net income of $200,000 and paid cash dividends of $50,000. What amount should Saxe report as its investment in Vee at December 31, Year 1?
- ✓ $445,000
- $460,000
- $415,000
- $400,000
Why: Under the equity method (20–50% ownership), the investment increases by the investor's share of investee net income (+60,000) and decreases by its share of dividends (−15,000): 400,000 + 60,000 − 15,000 = $445,000. $460,000 omits the dividend reduction (treats dividends as income). $415,000 records dividends but not income. $400,000 leaves the investment at cost.
Q2 · hard
In preparing consolidated financial statements for Jode Company and its subsidiary, intercompany receivables and payables between a parent and subsidiary is:
- Eliminated only to the extent of the parent's ownership
- ✓ Eliminated in full, regardless of the ownership percentage
- Reported as related-party balances
- Netted against noncontrolling interest
Why: Intercompany receivables and payables are eliminated in full in consolidation, even when the subsidiary is only partially owned, because the consolidated entity cannot owe money to itself. The noncontrolling-interest percentage affects the allocation of equity and income, not whether intra-group balances are removed.
Q3 · hard
In preparing consolidated financial statements for Kerr Company and its subsidiary, the noncontrolling interest at the acquisition date under U.S. GAAP is:
- Measured at the parent's cost
- Measured at the NCI's share of book value
- ✓ Measured at fair value
- Not recognized until the subsidiary is sold
Why: Under U.S. GAAP, noncontrolling interest is measured at fair value on the acquisition date (the full-goodwill approach), and it is recognized immediately as a component of consolidated equity. It is not the parent's cost and not merely the NCI's share of book value.
Q4 · hard
In preparing consolidated financial statements for Lund Company and its subsidiary, acquisition-related legal, advisory, and due-diligence costs is:
- Capitalized as part of the consideration transferred
- Added to goodwill
- Recorded as a reduction of equity
- ✓ Expensed as incurred
Why: Under the acquisition method, direct acquisition costs (legal, advisory, due-diligence) are expensed as incurred. They are not part of consideration transferred and do not affect goodwill. (Costs to issue debt or equity are handled under their own guidance, separate from this rule.)
Q5 · hard
In preparing consolidated financial statements for Mabe Company and its subsidiary, the accounting method required for a business combination is:
- ✓ The acquisition method
- The pooling-of-interests method
- The equity method
- The proportionate consolidation method
Why: Under U.S. GAAP, noncontrolling interest is measured at fair value on the acquisition date (the full-goodwill approach), and it is recognized immediately as a component of consolidated equity. It is not the parent's cost and not merely the NCI's share of book value.
Q6 · hard
In preparing consolidated financial statements for Nuss Company and its subsidiary, unrealized profit in ending inventory from an intercompany sale is:
- Recognized immediately in consolidated income
- ✓ Deferred until the inventory is sold to an outside party
- Allocated entirely to noncontrolling interest
- Ignored if the subsidiary is wholly owned
Why: Profit on intercompany inventory still on hand at year-end is unrealized to the group, so defer it until that inventory is sold to an outside party. It is not recognized immediately, and for upstream (subsidiary-to-parent) sales the deferral is shared between the controlling and noncontrolling interests.
Q7 · hard
In preparing consolidated financial statements for Pace Company and its subsidiary, a gain on an intercompany sale of land is:
- Recognized in consolidated income in the year of sale
- Recorded directly in equity
- ✓ Deferred until the land is sold outside the consolidated group
- Amortized over the land's remaining life
Why: Intercompany profit is not earned from the consolidated group's perspective until the asset leaves the group. A gain on an intercompany land sale is eliminated and deferred, then recognized only when the land is sold to an outside party. It is not recognized in the year of the intercompany sale, and it is never recorded directly in equity.
Q8 · hard
In preparing consolidated financial statements for Rune Company and its subsidiary, an investment that conveys control (more than 50% of voting interest) is:
- Accounted for under the equity method
- Reported at fair value through net income
- Reported at amortized cost
- ✓ Consolidated
Why: A controlling financial interest, generally more than 50% of voting interest absent other arrangements, requires consolidation: combine 100% of the subsidiary's assets, liabilities, revenues, and expenses, and present any noncontrolling interest within equity. The equity method (significant influence, roughly 20-50%) and fair-value or amortized-cost reporting do not apply once control exists.