CPA FAR F4.M1 — Practice Questions
State & Local Government Accounting. Below are 8 real practice questions with worked explanations — a free sample of the F4.M1 set. The full adaptive version (spaced repetition, mastery checks, and the wider FAR bank) lives in the app.
Q1 · medium
A company reacquires 1,000 of its own shares at $20 each using the cost method, then later reissues 600 of those shares at $25 each. What is the effect of the reissuance?
- ✓ Additional paid-in capital from treasury stock increases by $3,000
- Net income increases by a $3,000 gain on the sale
- Retained earnings increases by $3,000
- Common stock increases by $15,000
Why: Under the cost method, reissuing treasury stock above its reacquisition cost credits additional paid-in capital from treasury stock for the $3,000 excess (600 x ($25 - $20)). A company never reports a gain in net income on transactions in its own shares.
Q2 · hard
A company holds treasury stock acquired at $30 per share under the cost method. It reissues 200 shares at $24 when additional paid-in capital from treasury stock has a $500 balance. What is the effect on retained earnings?
- Decrease of $1,200
- ✓ Decrease of $700
- Decrease of $500
- No effect
Why: The $1,200 reissuance shortfall (200 x ($30 - $24)) first absorbs the $500 in additional paid-in capital from treasury stock; the remaining $700 reduces retained earnings. Losses on a company's own shares never hit the income statement.
Q3 · medium
A corporation has 10,000 shares of $1 par common stock outstanding and declares a 10% stock dividend when the market price is $15 per share. By how much does retained earnings decrease?
Why: A small stock dividend (less than 20-25% of shares outstanding) is capitalized at fair value. The 1,000 new shares (10% x 10,000) are valued at $15 each, so retained earnings is reduced by $15,000.
Q4 · hard
A corporation has 50,000 shares of $2 par common stock outstanding and declares a 40% stock dividend when the market price is $9 per share. What amount is transferred out of retained earnings?
- $180,000
- $360,000
- $100,000
- ✓ $40,000
Why: A large stock dividend (more than 20-25% of shares outstanding) is capitalized at par, not fair value. The 20,000 new shares (40% x 50,000) at $2 par transfer $40,000 from retained earnings; the $180,000 figure wrongly uses the $9 market price.
Q5 · medium
A corporation with an accumulated deficit and no retained earnings declares and pays a $50,000 cash dividend. How should this distribution be classified?
- ✓ As a liquidating dividend that reduces additional paid-in capital
- As an ordinary dividend charged to retained earnings
- As compensation expense on the income statement
- As a prior-period adjustment to opening equity
Why: A dividend that exceeds available retained earnings is a liquidating dividend - a return of contributed capital. It reduces additional paid-in capital rather than retained earnings, because there are no earnings to distribute.
Q6 · medium
Pell Corporation accounts for treasury stock under the cost method. It reissued 400 treasury shares that had cost $30 per share for $22 per share. Immediately before the reissuance, additional paid-in capital from treasury stock had a $2,000 balance. By what amount does this reissuance reduce retained earnings?
Why: Cost method is the default. Reissuing below cost creates a $3,200 shortfall (12,000 cost − 8,800 proceeds) that reduces APIC–treasury stock first ($2,000), with the remaining $1,200 charged to retained earnings — never to income. $3,200 ignores the APIC–T/S balance. $0 wrongly books the loss to the income statement. $2,000 is only the APIC–T/S portion.
Q7 · medium
Under the cost method, a company reacquires its own shares as treasury stock. The reacquisition is recorded by:
- ✓ Debiting treasury stock at the reacquisition cost, reducing total equity
- Recognizing a gain or loss on the reacquisition in current net income
- Reducing common stock at its par value and adjusting paid-in capital accordingly
- Increasing retained earnings by the cost of the reacquired shares
Why: Treasury stock (cost method) is debited at the price paid to reacquire the shares and shown as a contra-equity account, reducing total stockholders' equity. Companies never recognize gains or losses on transactions in their own stock through the income statement.
Q8 · hard
A company declares a 10% stock dividend (a 'small' stock dividend). The amount transferred from retained earnings is based on:
- Par value of the shares issued
- ✓ Fair value of the shares issued at declaration
- Original issue price
- Nothing — only a memo entry is made
Why: A small stock dividend (generally under 20-25%) is capitalized at the fair value of the shares on the declaration date. A large stock dividend is recorded at par. A stock SPLIT changes par per share with no journal entry — only a memo.