CPA FAR F2.M7 — Practice Questions
Select Financial Statement Accounts. Below are 7 real practice questions with worked explanations — a free sample of the F2.M7 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · medium
Poe Company holds equity securities representing a 5% interest in another entity, with no significant influence. The securities cost $100,000 and have a fair value of $120,000 at year-end. How should the $20,000 increase in fair value be reported?
- In other comprehensive income
- ✓ In net income
- Not recognized until the securities are sold
- As a direct adjustment to retained earnings
Why: Equity securities without significant influence are measured at fair value through net income; the $20,000 unrealized gain goes to net income. Routing equity-security fair-value changes to OCI is the superseded available-for-sale treatment (eliminated). Deferring recognition until sale and adjusting retained earnings directly are both incorrect.
Q2 · hard
Yarn Company holds debt securities appropriately classified as available-for-sale. The securities cost $200,000. At December 31, Year 1, their fair value was $185,000 and Yarn recognized the resulting unrealized loss. At December 31, Year 2, their fair value was $172,000. There is no expected credit loss. What unrealized loss should Yarn report in other comprehensive income for Year 2?
- $28,000
- $15,000
- ✓ $13,000
- $0
Why: For AFS debt, unrealized gains and losses accumulate in OCI; the current-year amount is the change in the cumulative unrealized position. Cumulative loss = 200,000 − 172,000 = 28,000; $15,000 was recognized in Year 1, so Year 2 OCI loss = $13,000. $28,000 is the cumulative figure. $15,000 repeats the prior year. $0 recognizes nothing.
Q3 · medium
Unrealized holding gains and losses on TRADING debt securities are reported in:
- Other comprehensive income
- ✓ Net income (earnings)
- Retained earnings directly
- Not recognized until sale
Why: Trading securities are measured at fair value with unrealized gains and losses recognized in net income each period. Available-for-sale debt securities, by contrast, route unrealized changes through OCI.
Q4 · medium
Held-to-maturity debt securities are reported on the balance sheet at:
- Fair value, changes to OCI
- Fair value, changes to net income
- ✓ Amortized cost
- Lower of cost or market
Why: Debt securities the entity has the positive intent and ability to hold to maturity are carried at amortized cost (no fair-value marking), with premium/discount amortized to interest income. Only debt can be HTM; equity cannot.
Q5 · hard
Under ASU 2016-01, an equity investment with a readily determinable fair value (not consolidated and without significant influence) is measured at:
- Cost less impairment
- ✓ Fair value with changes recognized in net income
- Fair value with changes in OCI
- Amortized cost
Why: Since ASU 2016-01, such equity investments are measured at fair value through net income; the old available-for-sale (OCI) treatment for equity securities was eliminated. The remaining OCI-eligible category is AFS debt securities.
Q6 · medium
Which set of items is reported in other comprehensive income (the 'PUFI' items)?
- ✓ Pension adjustments, unrealized AFS debt gains, foreign-currency translation, and instrument-specific credit risk
- Accounts payable, unsecured debt, finance leases, and interest expense
- Prepaid expenses, unearned revenue, fixed assets, and inventory
- Profit on sales, undistributed retained earnings, fixed manufacturing overhead costs, and interest paid to lenders during the year
Why: PUFI is a memory aid for common OCI items: Pension funded-status changes, Unrealized gains/losses on AFS debt securities, Foreign-currency translation adjustments, and changes in fair value attributable to Instrument-specific credit risk for certain liabilities under the fair-value option. These bypass net income until reclassified.
Q7 · easy
A quoted price in an active market for an identical asset is which level of the fair value hierarchy?
- Level 2
- ✓ Level 1
- Level 3
- Not part of the hierarchy
Why: Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Level 2 uses observable inputs other than Level 1 quotes (for example quotes for similar items); Level 3 uses unobservable inputs.