CPA FAR Liabilities, Debt & Equity Practice Questions
Liabilities, Debt & Equity makes up 5 of every 50 questions on a Tigertest CPA FAR practice test. Here are 10 of the 20 questions on it, each with the answer and the reason.
Updated by the Tigertest team. Based on the AICPA's 2026 FAR blueprint. Original multiple-choice questions; simulations not included. Not affiliated with the AICPA or NASBA.
1. When a company installs an offshore platform it must remove later, the asset retirement obligation is recorded at:
- A.Nothing until removal begins
- B.Fair value, added to the asset's cost
- C.Undiscounted cost, expensed at once
- D.Fair value, expensed at once
Answer: B. ASC 410 records the obligation at fair value, usually an expected present value, when incurred, and adds the same amount to the asset's carrying amount, which is then depreciated.
2. An asset retirement obligation is carried at $200,000 and was measured using a 6% credit-adjusted risk-free rate. Accretion for the next year is:
- A.$6,000
- B.$20,000
- C.$0
- D.$12,000
Answer: D. Accretion = $200,000 x 6% = $12,000, recorded as accretion expense in operating expenses, not as interest expense.
3. Forty employees have each earned 5 unused vacation days that vest, at $240 a day. The accrued vacation liability is:
- A.$48,000
- B.$0
- C.$24,000
- D.$9,600
Answer: A. Vested compensated absences that are probable and estimable are accrued: 40 x 5 x $240 = $48,000.
4. A manager's bonus is 10% of income after the bonus but before taxes. Income before the bonus and taxes is $330,000. The bonus is:
- A.$27,000
- B.$36,300
- C.$30,000
- D.$33,000
Answer: C. B = 10% x ($330,000 - B), so 1.1B = $33,000 and B = $30,000. Taking 10% of income before the bonus gives $33,000.
5. A liability for a cash dividend is recorded on the:
- A.Payment date
- B.Ex-dividend date
- C.Declaration date
- D.Date of record
Answer: C. Declaration creates a legal obligation, so dividends payable is recorded then. Nothing is recorded on the record date, and payment settles the liability.
6. Employees who are let go receive one-time termination benefits only if they work until the plant closes, beyond the minimum retention period. The cost is recognized:
- A.Ratably over the service period
- B.When the board approves the plan
- C.Only when the benefits are paid
- D.In full on the day it is announced
Answer: A. Under ASC 420, when employees must render future service beyond the minimum retention period, the liability is measured at the communication date and recognized ratably over that future service.
7. A self-insured company should accrue a liability for:
- A.Nothing until claims are paid
- B.Expected losses for next year
- C.Any possible future accident
- D.Claims incurred, reported or not
Answer: D. A liability exists only for events that have occurred, including incurred but not reported claims. Future accidents have not happened, so no liability exists for them.
8. Five-year bonds with a $500,000 face value and a 6% annual coupon are issued for $460,073 to yield 8%. Interest expense for the first year under the effective interest method is:
- A.$27,604
- B.$36,806
- C.$30,000
- D.$40,000
Answer: B. Interest expense = carrying amount x market rate = $460,073 x 8% = $36,806. The $30,000 coupon is the cash paid; the $6,806 difference amortizes the discount.
9. Under current U.S. GAAP, debt issuance costs for a term loan are presented as:
- A.A reduction of equity
- B.A deduction from the debt
- C.A deferred charge asset
- D.An expense when paid
Answer: B. ASU 2015-03 presents debt issuance costs as a direct deduction from the carrying amount of the debt, amortized to interest expense over the term.
10. For bonds issued at a premium, interest expense under the effective interest method each period:
- A.Equals the cash coupon
- B.Stays the same each period
- C.Increases over the term
- D.Decreases over the term
Answer: D. Premium amortization lowers the carrying amount each period, so carrying amount times the market rate gives a smaller expense each year.
Practice all 20 liabilities, debt & equity questions, and the rest of the 200-question bank, in the free CPA FAR training sets. Questions you miss come back until you have mastered them.
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