A company is evaluating the capitalization of software development costs. For the year ended December 31, 2023, the company incurred $500,000 in research and development salaries, $200,000 in amortization of previously capitalized software, and $150,000 in general and administrative expenses related to the software project. The company has determined that $300,000 of the research and development salaries meet the criteria for capitalization. Under U.S. GAAP, what amount should be capitalized as software in the current year?

$300,000. Under U.S. GAAP, costs incurred after the technological feasibility of a product or process has been established are capitalized. Research costs are expensed as incurred. Therefore, only the $300,000 of research and development salaries that meet the capitalization criteria should be capitalized. Amortization and G&A expenses are not capitalized software development costs.

A company issues convertible bonds with a face value of $1,000,000. The bonds are convertible into 20,000 shares of common stock. The stated interest rate is 5%, and the bonds mature in 10 years. Similar non-convertible bonds would have sold for $950,000. The equity component of the convertible bond is estimated to be $50,000. What is the initial carrying amount of the bonds payable and the equity component, respectively, using the cash conversion and incremental-cost methods?

$950,000 and $50,000. Under U.S. GAAP, convertible debt is accounted for using the cash conversion and incremental-cost methods. The bond liability is initially recorded at its fair value, which is the amount similar non-convertible bonds would sell for ($950,000). The residual amount represents the equity component ($1,000,000 total proceeds - $950,000 liability = $50,000 equity).

A company has a defined benefit pension plan. The projected benefit obligation (PBO) at the beginning of the year was $1,500,000. Service cost for the year was $200,000. Actual return on plan assets was $120,000, and the discount rate was 8%. The company made cash contributions to the plan of $250,000 and paid benefits of $180,000. What is the PBO at the end of the year?

$1,770,000. The PBO at the end of the year is calculated as: Beginning PBO + Service Cost + Interest Cost - Benefits Paid. The interest cost is calculated as Beginning PBO * Discount Rate = $1,500,000 * 8% = $120,000. Therefore, PBO = $1,500,000 + $200,000 + $120,000 - $180,000 = $1,770,000. The actual return on plan assets and cash contributions affect the funded status, not the PBO itself.

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Free CPA FAR Exam practice test with 50 realistic multiple-choice questions, instant grading, and explanations. Study with drill mode, category score reports, and a personalized review plan.

Exam format

50 multiple-choice practice questions
Drill mode with instant feedback and explanations after each answer

Study tips

Review the official exam content outline before your first practice run.
Take the full practice exam once to establish a baseline score by category.
Focus review on categories where you score below the passing threshold.
Re-take missed questions in drill mode until you can explain each correct answer.
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Sample CPA FAR practice questions

Try a few representative questions below. Each includes the correct answer and a short explanation — the same style you'll see in the full practice test.

Question 1Software Development Costs
A company is evaluating the capitalization of software development costs. For the year ended December 31, 2023, the company incurred $500,000 in research and development salaries, $200,000 in amortization of previously capitalized software, and $150,000 in general and administrative expenses related to the software project. The company has determined that $300,000 of the research and development salaries meet the criteria for capitalization. Under U.S. GAAP, what amount should be capitalized as software in the current year?
- A.$1,000,000
- B.$300,000(Correct)
- C.$500,000
- D.$800,000
Explanation
Under U.S. GAAP, costs incurred after the technological feasibility of a product or process has been established are capitalized. Research costs are expensed as incurred. Therefore, only the $300,000 of research and development salaries that meet the capitalization criteria should be capitalized. Amortization and G&A expenses are not capitalized software development costs.
Question 2Convertible Debt
A company issues convertible bonds with a face value of $1,000,000. The bonds are convertible into 20,000 shares of common stock. The stated interest rate is 5%, and the bonds mature in 10 years. Similar non-convertible bonds would have sold for $950,000. The equity component of the convertible bond is estimated to be $50,000. What is the initial carrying amount of the bonds payable and the equity component, respectively, using the cash conversion and incremental-cost methods?
- A.$950,000 and $0
- B.$900,000 and $100,000
- C.$1,000,000 and $0
- D.$950,000 and $50,000(Correct)
Explanation
Under U.S. GAAP, convertible debt is accounted for using the cash conversion and incremental-cost methods. The bond liability is initially recorded at its fair value, which is the amount similar non-convertible bonds would sell for ($950,000). The residual amount represents the equity component ($1,000,000 total proceeds - $950,000 liability = $50,000 equity).
Question 3Pension Obligations
A company has a defined benefit pension plan. The projected benefit obligation (PBO) at the beginning of the year was $1,500,000. Service cost for the year was $200,000. Actual return on plan assets was $120,000, and the discount rate was 8%. The company made cash contributions to the plan of $250,000 and paid benefits of $180,000. What is the PBO at the end of the year?
- A.$1,770,000(Correct)
- B.$1,670,000
- C.$1,870,000
- D.$1,570,000
Explanation
The PBO at the end of the year is calculated as: Beginning PBO + Service Cost + Interest Cost - Benefits Paid. The interest cost is calculated as Beginning PBO * Discount Rate = $1,500,000 * 8% = $120,000. Therefore, PBO = $1,500,000 + $200,000 + $120,000 - $180,000 = $1,770,000. The actual return on plan assets and cash contributions affect the funded status, not the PBO itself.

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How many questions are on this CPA FAR practice test?

This practice test includes 50 multiple-choice questions designed to mirror the format and difficulty of the real CPA FAR Exam.

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How should I use this practice test to prepare?

Take the full exam under timed conditions, review missed questions by category, then focus study on your weakest sections before scheduling the real exam.

Does this replace official exam materials?

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