CPA FAR Exam Questions & Answers 2026 (21–30)

Question 1

Using the double-declining balance (DDB) method, a company depreciates equipment costing $80,000 with a 4-year life and $8,000 salvage value. What is the depreciation expense in Year 2?

TheoryPractice · Accepted Answer

$20,000. DDB rate = 2/4 = 50%. Year 1: $80,000 × 50% = $40,000; book value = $40,000. Year 2: $40,000 × 50% = $20,000; book value = $20,000. Since $20,000 > $8,000 salvage, the full $20,000 is recorded. Annual depreciation in Year 2 is $20,000.

Question 2

A company uses the units-of-production method. Equipment costs $50,000, has a salvage value of $5,000, and is expected to produce 90,000 units. In Year 1 it produces 18,000 units. What is Year 1 depreciation?

TheoryPractice · Accepted Answer

$9,000. Depreciation per unit = ($50,000 – $5,000) / 90,000 = $0.50/unit. Year 1 depreciation = 18,000 × $0.50 = $9,000. The units-of-production method ties depreciation directly to actual usage rather than the passage of time.

Question 3

A company acquires a machine on April 1, Year 1, for $120,000 (no salvage, 5-year life, straight-line). On January 1, Year 3, the company revises the remaining useful life to 2 more years (from January 1, Year 3). What is depreciation expense for Year 3?

TheoryPractice · Accepted Answer

$36,000. Using a full-year convention: Year 1 and Year 2 depreciation = $24,000 each ($120,000 / 5 years). Book value at January 1, Year 3 = $120,000 – $24,000 – $24,000 = $72,000. With the revised remaining life of 2 years: new annual depreciation = $72,000 / 2 = $36,000. Changes in useful life estimates are applied prospectively (no catch-up adjustment).

Question 4

Under ASC 360, a two-step impairment test for long-lived assets held and used requires that in Step 1, impairment is indicated when:

TheoryPractice · Accepted Answer

The asset's undiscounted future cash flows are less than its carrying amount. In the recoverability test (Step 1) under ASC 360, impairment is indicated when the sum of undiscounted future cash flows expected from the asset is less than its carrying amount. Only if Step 1 indicates impairment does Step 2 measure the loss as carrying amount minus fair value.

Question 5

A long-lived asset has a carrying amount of $500,000, undiscounted future cash flows of $480,000, and a fair value of $420,000. What is the impairment loss to be recognized?

TheoryPractice · Accepted Answer

$80,000. Step 1: Undiscounted cash flows ($480,000) < Carrying amount ($500,000) → impairment is indicated. Step 2: Impairment loss = Carrying amount – Fair value = $500,000 – $420,000 = $80,000. The undiscounted shortfall ($20,000) is NOT the loss; fair value is used to measure the impairment.

Question 6

Under U.S. GAAP, after an impairment loss is recognized on a long-lived asset held and used, can the asset be written back up if fair value subsequently recovers?

TheoryPractice · Accepted Answer

No, impairment reversals on held-and-used assets are prohibited under U.S. GAAP. U.S. GAAP (ASC 360) prohibits the reversal of impairment losses on long-lived assets held and used. The written-down amount becomes the new cost basis and is depreciated going forward. This differs from IFRS, which allows impairment reversals in certain circumstances.

Question 7

For a long-lived asset to be classified as 'held for sale' under ASC 360, which of the following criteria must be met?

TheoryPractice · Accepted Answer

Management commits to a plan, the asset is available for immediate sale in its present condition, and the sale is probable within 12 months. ASC 360 requires six criteria for held-for-sale classification, including management commitment, asset availability for immediate sale in present condition, active marketing at a reasonable price, and the sale being probable within 12 months. Simply completing the sale or identifying a buyer is insufficient.

Question 8

An asset classified as held for sale has a carrying amount of $200,000, a fair value of $180,000, and estimated selling costs of $12,000. How is this asset measured?

TheoryPractice · Accepted Answer

$168,000 (fair value less costs to sell). Assets held for sale are measured at the lower of carrying amount or fair value less costs to sell. Fair value less costs to sell = $180,000 – $12,000 = $168,000, which is less than the $200,000 carrying amount. An impairment loss of $32,000 is recognized.

Question 9

Which of the following intangible assets with an indefinite useful life is NOT amortized under U.S. GAAP?

TheoryPractice · Accepted Answer

A trade name with no foreseeable end to its useful life. Intangible assets with indefinite useful lives (no foreseeable limit to cash-generating period) are not amortized; they are tested for impairment at least annually. A trade name with no foreseeable end qualifies. Assets with finite lives (patents, customer lists, franchise terms) are amortized over their useful lives.

Question 10

A company purchases a patent for $120,000. The patent has a remaining legal life of 15 years but the company estimates it will be economically useful for only 8 years. What is annual amortization?

TheoryPractice · Accepted Answer

$15,000 (over 8 years). Intangible assets are amortized over their useful economic life, not necessarily their legal life, if the economic life is shorter. $120,000 / 8 years = $15,000 per year. The legal life ceiling of 15 years is not binding here because economic obsolescence is expected in 8 years.

CPA FAR Exam Questions & Answers 2026 (21–30)

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