CPA FAR F3.M5 — Practice Questions
Select Transactions. Below are 8 real practice questions with worked explanations — a free sample of the F3.M5 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · easy · ASC 842
Under ASC 842, a lessee recognizes a right-of-use asset and a lease liability for:
- Neither type of lease, until the lessee actually makes the lease payments
- Finance leases only
- Operating leases only
- ✓ Both finance and operating leases, subject to a short-term exception
Why: ASC 842 requires lessees to recognize a right-of-use asset and a lease liability for both finance and operating leases. A short-term lease of 12 months or less may be exempted.
Q2 · medium · ASC 842
A lessee classifies a lease as a finance lease if, among other criteria, the:
- ✓ Lease term is for the major part of the asset's remaining economic life
- Lease term is less than 12 months
- Asset reverts to the lessor at the end of the term
- Present value of the payments is well below the asset's fair value
Why: A finance lease meets any one of the ASC 842 criteria: ownership transfer, a purchase option reasonably certain to be exercised, a term covering the major part of economic life, payments whose PV is substantially all of fair value, or a specialized asset with no alternative use.
Q3 · medium · ASC 842
For an operating lease under ASC 842, the lessee recognizes:
- Separate interest and amortization, which front-load the total lease expense
- Interest expense only, with no amortization recorded
- No expense, only a reduction of the lease liability
- ✓ A single lease expense on a straight-line basis over the lease term
Why: An operating lease produces a single straight-line lease expense. A finance lease instead reports interest on the liability plus amortization of the right-of-use asset, which front-loads total expense.
Q4 · hard · ASC 842
A 4-year lease requires $20,000 payments at each year end; the lessee's incremental borrowing rate is 6% and the PV of an ordinary annuity of $1 for 4 years at 6% is 3.4651. The initial lease liability is:
- $73,460
- $80,000
- ✓ $69,302
- $20,000
Why: The initial lease liability is the present value of the lease payments: 20,000 x 3.4651 = 69,302. The right-of-use asset begins at the same amount, adjusted for items such as prepaid rent or initial direct costs.
Q5 · medium · ASC 842
In the first year of a finance lease, the lessee's income statement reflects:
- A single straight-line lease expense, as under an operating lease
- Interest expense on the lease liability only, with no amortization
- ✓ Amortization of the right-of-use asset plus interest on the lease liability
- Rent expense equal to the cash lease payment made during the period, on a straight-line basis
Why: A finance lease is presented like a financed purchase: the lessee records amortization of the right-of-use asset and interest expense on the lease liability separately, producing higher total expense in the early years.
Q6 · easy · ASC 715
In a defined contribution pension plan, the employer's obligation each period is:
- Measured by the projected benefit obligation
- To guarantee a fixed retirement income to each employee
- ✓ Limited to the contribution promised for that period
- To fund a specified future benefit regardless of plan performance
Why: In a defined contribution plan the employer owes only the agreed periodic contribution, and investment risk falls on the employee. A defined benefit plan promises a specified future benefit, so the employer bears the funding and investment risk.
Q7 · hard · ASC 715
A defined benefit plan reports service cost $90,000, interest cost $40,000, expected return on plan assets $30,000, amortization of prior service cost $10,000, and amortization of a net loss $5,000. Net periodic pension cost is:
- ✓ $115,000
- $175,000
- $95,000
- $105,000
Why: Net periodic pension cost = service cost + interest cost - expected return + amortization of prior service cost + amortization of net loss = 90,000 + 40,000 - 30,000 + 10,000 + 5,000 = 115,000. The expected return reduces the cost.
Q8 · medium · ASC 715
At year end the projected benefit obligation is $820,000 and the fair value of plan assets is $760,000. The plan's funded status reported on the balance sheet is a:
- $760,000 net pension asset
- $820,000 net pension liability
- $60,000 net pension asset
- ✓ $60,000 net pension liability
Why: Funded status = fair value of plan assets - PBO = 760,000 - 820,000 = -60,000. A negative funded status means the plan is underfunded, and a $60,000 net pension liability is reported.