far uscpa sample scenario: qid: chapter: · pdf fileuscpa_sample chapter: 0 0 2 question: fox,...

USCPA_SAMPLE

Category: 01 Partnerships

Chapter: 0

Scenario:

Question:

The partnership agreement of Donn, Eddy, and Farr provides for annual distribution of profit or loss in

the following sequence:

• Donn, the managing partner, receives a bonus of 10% of profit.

• Each partner receives 6% interest on average capital investment.

• Residual profit or loss is divided equally.

Average capital investments for 20X8 were:

Donn $80,000

Eddy 50,000

Farr 30,000

What portion of the $100,000 partnership profit for 20X8 should be allocated to Farr?

A) $35,133

B) $29,800

* C) $28,600

D) $41,600

Explanation:

Read more: Lambers CPA Review Chapter 1

Category: 01 Partnerships Scenario: QID:

USCPA_SAMPLE

Chapter: 0 0 2

Question:

Fox, Greg, and Howe are partners with average capital balances during 20X6 of $120,000, $60,000, and

$40,000, respectively. Partners receive 10% interest on their average capital balances. After deducting

salaries of $30,000 to Fox and $20,000 to Howe, the residual profit or loss is divided equally. In 20X6

the partnership sustained a $33,000 loss before interest and salaries to partners. By what amount should

Fox's capital account change?

A) $11,000 decrease

* B) $7,000 increase

C) $35,000 decrease

D) $42,000 increase

Explanation:

Chapter: 0

Scenario:

Question:

On July 1, 20X8, a partnership was formed by Johnson and Smith. Johnson contributed cash. Smith,

previously a sole proprietor, contributed property other than cash including realty subject to a mortgage,

which was assumed by the partnership. Smith's capital account at July 1, 20X8, should be recorded at?

USCPA_SAMPLE

* A) The fair value of the property less the mortgage payable at July 1, 20X8

B) Smith's book value of the property less the mortgage payable at July 1, 20X8

C) Smith's book value of the property at July 1, 20X8

D) The fair value of the property at July 1, 20X8

Explanation: For financial accounting purposes, non-cash contributions are recorded at the fair market

value of the net assets contributed as of the date of contribution.

Chapter: 0

Scenario:

Question:

Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the

�partnership fs formation:

The building is subject to a mortgage of $10,000, which the partnership has assumed. The partnership

agreement also specifies that profits and losses are to be distributed evenly. What amounts should be

recorded as capital for Roberts and Smith at the formation of the partnership?

A) Roberts $35,000 Smith $85,000

* B) Roberts $35,000 Smith $75,000

C) Roberts $55,000 Smith $55,000

D) Roberts $60,000 Smith $60,000

Explanation: For financial accounting purposes, non-cash contributions are recorded at the fair market

value of the net assets contributed, as of the date of contribution. The mortgage balance attributable to

USCPA_SAMPLE

the building reduces Smith's capital by the amount of the mortgage assumed by the partnership. Even

though profits and losses will be split evenly, the capital balances do not need to be in that ratio.

Chapter: 0

Scenario:

Question:

The following balance sheet is for the partnership of Able, Bayer, and Cain which shares profits and

losses in the ratio of 4:4:2, respectively.

The original partnership was dissolved when its assets, liabilities, and capital were as shown on the

above balance sheet and liquidated by selling assets in installments. The first sale of noncash assets

having a book value of $90,000 realized $50,000, and all cash available after settlement with creditors

was distributed. How much cash should the respective partners receive (to the nearest dollar)?

A) Able $6,667; Bayer $6,667; Cain $6,666

B) Able $8,000; Bayer $8,000; Cain $4,000

C) Able $0; Bayer $13,333; Cain $6,667

* D) Able $0; Bayer $3,000; Cain $17,000

Explanation:

USCPA_SAMPLE

Chapter: 0

Scenario:

Question:

The following condensed balance sheet is presented for the partnership of Cooke, Dorry, and Evans

who share profits and losses in the ratio of 4:3:3, respectively:

USCPA_SAMPLE

Assume that the partners decide to liquidate the partnership. If the other assets are sold for $600,000,

how much of the available cash should be istributed to Cooke?

A) $170,000

* B) $182,000

C) $212,000

D) $300,000

Explanation:

NOTE: Evans' loan account would be offset to capital if his balance were negative; otherwise it would

maintain its priority as a liability.

USCPA_SAMPLE

Category: 01 Planning the Engagement

Chapter: 0

Scenario:

Question:

The first general standard requires that an audit of financial statements is to be

performed by a person or persons having

A) Seasoned judgment in varying degrees of supervision and review.

* B) Adequate technical training and proficiency.

C) Knowledge of the standards of field work and reporting.

D) Independence with respect to the financial statements and supplementary

disclosures.

Explanation: The first general standard requires: "The audit is to be performed by a

person or persons having adequate technical training and proficiency as an auditor."

-- Seasoned judgment in varying degrees of supervision and review is not explicitly

required by GAAS, although it is an element in the first GAAS standard of fieldwork.

-- Knowledge of the standards of field work and reporting although implicitly covered is

not explicitly required by the first general GAAS standard.

-- The second general standard does refer to independence with respect to the financial

statements.

Chapter: 0

Scenario:

Question:

The exercise of due professional care requires that an auditor

* A) Critically review the judgment exercised at every level of supervision.

B) Examine all available corroborating evidence.

C) Reduce control risk below the maximum.

D) Attain the proper balance of professional experience and formal education.

Explanation: Exercise of due care requires critical review at every level of supervision

USCPA_SAMPLE

of the work done and the judgment exercised by those assisting the audit.

-- An auditor is not required to examine all available corroborating evidence.

-- An auditor is not required to assess control risk below the maximum.

-- The proper balance of professional experience and formal education relates to

technical training and proficiency, not due professional care.

Chapter: 0

Scenario:

Question:

Which of the following is the authoritative body designated to promulgate attestation

standards?

A) Governmental Accounting Standards Board.

* B) Auditing Standards Board.

C) Financial Accounting Standards Board.

D) General Accounting Office.

Explanation: Attestation standards are issued by the Auditing Standards Board under

the authority granted to them by the Council of the AICPA.

-- The GASB issues pronouncements for governmental accounting.

-- The FASB issues pronouncements for financial accounting.

-- The General Accounting Office is the authoritative body for governmental audits.

Chapter: 0

Scenario:

Question:

In planning a new engagement, which of the following is not a factor that affects the

auditor's judgment as to the quantity, type, and content of working papers?

A) The auditor's estimated occurrence rate of attributes.

USCPA_SAMPLE

* B) The content of the client's representation letter.

C) The type of report to be issued by the auditor.

D) The auditor's preliminary evaluations of risk based on discussions with the client.

Explanation: Factors that affect the auditor's judgment about the quantity, type, and

content of the working papers include:

1. the nature of the engagement

2. the nature of the auditor's report

3. the nature of the financial statements, schedules, or other information on which the

auditor is reporting

4. the nature and condition of the client's records

5. the assessed level of control risk

6. the needs in the particular circumstances for supervision and review of the work

The content of the client's representation letter is not a factor.

-- The type of report to be issued by the auditor is a factor that affects the auditor's

judgment as to the quantity, type, and content of working papers.

-- The auditor's estimated occurrence rate of attributes is a factor that affects the

auditor's judgment as to the quantity, type, and content of working papers.

-- The auditor's preliminary evaluations of risk based on discussions with the client is a

factor that affects the auditor's judgment as to the quantity, type, and content of working

papers.

Chapter: 0

Scenario:

Question:

The element of the audit planning process most likely to be agreed upon with the client

before implementation of the audit strategy is the determination of the

* A) Timing of inventory observation procedures to be performed.

B) Evidence to be gathered to provide a sufficient basis for the auditor's opinion.

USCPA_SAMPLE

C) Procedures to be undertaken to discover litigation, claims, and assessments.

D) Pending legal matters to be included in the inquiry of the client's attorney.

Explanation: The timing of inventory procedures to be performed would be an item

that the auditor and client would normally agree on during the planning of the audit.

Chapter: 0

Scenario:

Question:

The scope and nature of an auditor's contractual obligation to a client ordinarily is set

forth in the

A) Scope paragraph of the auditor's report.

B) Management letter.

* C) Engagement letter.

D) Introductory paragraph of the auditor's report.

Explanation: A clear understanding of the terms of the engagement should exist

between the client and the CPA firm. The terms should be in writing to minimize

misunderstandings. The engagement letter is a contract between the CPA firm and the

client.

-- The management letter is a voluntary communication provided by the auditor to the

client. It makes recommendations to improve the effectiveness and efficiency of the

client.

-- The scope paragraph of the auditor's report describes the nature of the audit, not the

scope and nature of the auditor's contractual obligation to the client.

-- The introductory paragraph of the auditor's report does not address the scope and

nature of the auditor's contractual obligation to a client.

Chapter: 0

Scenario:

Question:

USCPA_SAMPLE

Which of the following are elements of a CPA firm's quality control that should be

considered in establishing its quality control policies and procedures?

* A) Choice II

B) Choice I

C) Choice III

D) Choice IV

Explanation: The elements of a CPA firm's quality control that should be considered in

establishing its quality internal controls include: independence, integrity and objectivity,

personnel management, engagement performance, monitoring, and acceptance and

continuance of clients. Since personnel management, monitoring and engagement

performance are included in the above, answer Choice II is correct.

USCPA_SAMPLE

Category: 02 Corporations ? Subchapter C

Chapter: 0

Scenario:

Question:

An S corporation has 30,000 shares of voting common stock and 20,000 shares of non-voting common stock

issued and outstanding. The S election can be revoked voluntarily with the consent of the shareholders

holding, on the day of the revocation:

* C) c.

Explanation: 10,000 and 16,000. What is needed is a majority of the voting and nonvoting shares to revoke

the election. In this problem the total number of shares is 50,000, therefore more than 25,000 is needed.

Chapter: 0

Scenario:

Question:

After a corporation's status as an S corporation is revoked or terminated, how many years is the corporation

generally required to wait before making a new S election, in the absence of IRS consent to an earlier election?

* A) 5

USCPA_SAMPLE

Explanation: The corporation generally is required to wait five years. Once an S Corporation is revoked or

terminated, the corporation generally may not re-elect for five years without IRS consent to an earlier election.

Chapter: 0

Scenario:

Question:

Tau Corp. which has been operating since 1980, has an October 31 year end, which coincides with its natural

business year. On May 15, 2003, Tau filed the required form to elect S corporation status. All of Tau's

stockholders consented to the election, and all other requirements were met. The earliest date that Tau can be

recognized as an S corporation is:

A) November 1, 2002

B) May 15, 2003

* C) November 1, 2003

D) November 1, 2004

Explanation: November 1, 2003. In order to make a valid S Corporation election, all the shareholders must

consent in writing. Form 2553 must be filed by the 15th day of the third month of the year in which the

election is to be valid, or anytime during the preceding year. Since the election was not made by January 15,

2003, the election is effective for the following tax year beginning November 1, 2003.

Chapter: 0

Scenario:

Question:

Which of the following is not a requirement for a corporation to elect S corporation status?

A) Must confine stockholders to individuals, estates, and certain qualifying trusts.

* B) Must be a member of a controlled group.

C) Must be a domestic corporation.

D) Must have only one class of stock.

USCPA_SAMPLE

Explanation: An S Corporation has restrictions on its shareholders, must be a domestic corporation and have

only one class of stock. However, it does not need to be a member of a controlled group.

Chapter: 0

Scenario:

Question:

If a calendar-year S corporation does not request an automatic six-month extension of time to file its income

tax return, the return is due by:

* A) March 15

B) January 31

C) April 15

D) June 30

Explanation: The return is due by March 15. This is same as for a regular C Corporation. The 15th day of the

third month following the close of the taxable year.

Chapter: 0

Scenario:

Question:

A corporation that has been an S corporation from its inception may:

1. Have both passive and nonpassive income

2. Be owned by a bankruptcy estate

A) (2) only

B) (1) only

C) Neither (1) nor (2)

* D) Both (1) and (2)

Explanation: Since the corporation was always an S Corporation (and therefore cannot have any accumulated

C Corporation earnings) the passive income is not an issue. A shareholder may be a bankruptcy estate.

USCPA_SAMPLE

Chapter: 0

Scenario:

Question:

For the taxable year ended December 31, Elk Inc., an S corporation, had net income per books of $54,000,

which included $45,000 from operations and a $9,000 net long-term capital gain. During the year, $22,500

was distributed to Elk's three equal stockholders, all of whom are on a calendar-year basis. On what amounts

should Elk compute its income and capital gain taxes?

* D) d.

Explanation: An S Corporation is a pass-through entity. The ordinary income and long-term capital gains

flow-through to its shareholders.

Chapter: 0

Scenario:

Question:

If an S corporation has no accumulated earnings and profits, the amount distributed to a shareholder

A) Increases the shareholder's basis for the stock.

B) Must be returned to the S corporation.

* C) Decreases the shareholder's basis for the stock.

USCPA_SAMPLE

D) Has no effect on the shareholder's basis for the stock.

Explanation: Distributions to a shareholder decrease the shareholder's basis.

Chapter: 0

Scenario:

Question:

The Haas Corp., a calendar year S corporation, has two equal shareholders. For the year ended December 31,

2003, Haas had taxable income and current earnings and profits of $60,000, which included $50,000 from

operations and $10,000 from investment interest income. There were no other transactions that year. Each

shareholder's basis in the stock of Haas will increase by

A) $25,000

* B) $30,000

C) $50,000

Explanation: A shareholder in an S Corporation must recognize his proportionate share of income,

deductions, credits and losses. In addition, the amounts of income reported by Haas Corporation will cause

each shareholder's basis to increase by their share of the income (50% of $60,000, or $30,000). Recognize that

the total income of $60,000 is passed through to the shareholders in their separate components of ordinary

income and interest income. Also note that any tax-exempt income, while not present in this problem, also

increases a shareholder's basis.

USCPA_SAMPLE

Category: 06 Federal Taxation of Entities

Chapter: 0

Scenario:

Question:

Rona Corp.'s 2001 alternative minimum taxable income was $200,000. The exempt portion of Rona's2001

alternative minimum taxable income was

B) $12,500

* C) $27,500

D) $52,500

Explanation: For corporations, the alternative minimum tax is computed at a 20% rate on alternative minimum

taxable income (AMTI) in excess of $40,000. The $40,000 exemption is reduced by 25% of the amount of AMTI

in excess of $150,000. Therefore, the exemption amount in the case is $40,000 - 25% x ($200,000 - $150,000) =

$27,500.

Category: 01 Ethics and Professional and Legal Responsibilities

Chapter: 0

Scenario:

Question:

Which of the following best describes what is meant by the term generally accepted auditing standards?

A) Pronouncements issued by the Auditing Standards Board.

B) Rules acknowledged by the accounting profession because of their universal application.

* C) Measures of the quality of the auditor's performance.

D) Procedures to be used to gather evidence to support financial statements.

Explanation: "Auditing standards differ from auditing procedures in that procedures relate to acts to be

performed, whereas standards deal with measures of the quality of the performance of those acts and the

objectives to be attained by the use of the procedures undertaken."

Chapter: 0

Scenario:

Question:

According to the ethical standards of the profession, which of the following acts is generally prohibited?

USCPA_SAMPLE

* A) Accepting a commission for recommending a product to an audit client.

B) Writing a financial management newsletter promoted and sold by a publishing company.

C) Purchasing a product from a third party and reselling it to a client.

D) Accepting engagements obtained through the efforts of third parties.

Explanation: Rule 503 prohibits a CPA from accepting a commission for recommending a product to an audit

client. Purchasing a product from a third party and reselling it to a client is not prohibited. Writing a financial

management newsletter promoted and sold by a publishing company is not prohibited. Accepting engagements

obtained through the efforts of third parties is not prohibited.

Chapter: 0

Scenario:

Question:

According to the profession's ethical standards, which of the following events may justify a departure from a

Statement of Financial Accounting Standards?

* A) Choice III

B) Choice II

C) Choice I

D) Choice IV

Explanation: A CPA must use professional judgment in deciding when a deviation from GAAP is appropriate.

Circumstances that may justify a departure include new legislation or the evolution of a new form of business.

Chapter: 0

Scenario:

Question:

The profession's ethical standards most likely would be considered to have been violated when a CPA represents

USCPA_SAMPLE

that specific consulting services will be performed for a stated fee, and it is apparent at the time of the

representation that the

* A) Actual fee would be substantially higher.

B) Actual fee would be substantially lower than the fees charged by other CPAs for comparable services.

C) CPA would not be independent.

D) Fee was a competitive bid.

Explanation: Advertising or other forms of solicitation that are false, misleading, or deceptive are not in the

public interest and are prohibited. A prohibited activity is one that contains a representation that specific

professional services in current or future periods will be performed for a stated fee, estimated fee, or fee range

when it is likely at the time of representation that such fees would be substantially increased and the prospective

client was not advised of such likelihood.

Chapter: 0

Scenario:

Question:

A violation of the profession's ethical standards most likely would have occurred when a CPA

* A) Received a fee for referring audit clients to a company that sells limited partnership interests.

B) Compiled the financial statements of a client that employed the CPA's spouse as a bookkeeper.

C) Purchased the portion of an insurance company that performs actuarial services for employee benefit plans.

D) Arranged with a financial institution to collect notes issued by a client in payment of fees due.

Explanation: The acceptance by a member in public practice of a payment for the referral of products or services

of others to a client is prohibited. Such action is considered to create a conflict of interest that results in a loss of

objectivity and independence. Further, this situation is addresses directly by stating that a member is in violation

of Rule 503 if he sells limited partnership interests where payment is received for these referrals either as a

percentage of amounts invested or through any other manner.

Chapter: 0

Scenario:

Question:

A violation of the profession's ethical standards least likely would have occurred when a CPA

USCPA_SAMPLE

* A) Had a public accounting practice and also was president and sole stockholder of a corporation that engaged

in data processing services for the public.

B) Is the sole shareholder in a professional accountancy corporation that uses the designation "and company" in

the firm title.

C) Is also admitted to the Bar and represents on letterhead to be both an attorney and a CPA.

D) Formed an association--not a partnership--with two other sole practitioners and called the association "Adams,

Betts and Associates."

Explanation: Because the member is engaged in a public accounting practice his relationship to the corporation

should be solely that of an investor, and his financial interest in the corporation should not be material to the

corporation's net worth. His association with the data processing corporation should be limited to that of a

consultant, as opposed to that of an officer and a shareholder. A lawyer-CPA designation on a letterhead is not

prohibited by the Code of Professional Conduct. A sole shareholder CPA is prohibited from using the designation

"and company" since it would be interpreted to mean more than one shareholder. Forming an association with two

other sole practitioners and calling the association "Adams, Betts and Associates would cause the public to

assume that a partnership existed. Members should not use a letterhead showing the names of two accountants

when a partnership does not exist.

Chapter: 0

Scenario:

Question:

A CPA's working papers must be

A) Turned over to any government agency that requests them.

B) Transferred permanently to the client if demanded.

C) Transferred to another accountant purchasing the CPA's practice even if the client hasn't given permission.

* D) Turned over pursuant to a valid federal court subpoena.

Explanation: Working papers are the property of the accountant and need not be given to the client. Since the

Fifth Amendment to the U.S. Constitution does not extend to the CPA-client relationship, CPAs must turn over

their working papers pursuant to a valid federal court subpoena, but need not turn over papers merely at

government request. CPAs must turn over their working papers pursuant to a valid federal court subpoena.

Chapter: 0

Scenario:

USCPA_SAMPLE

Question:

According to the standards of the profession, which of the following circumstances will prevent a CPA

performing audit engagements from being independent?

A) Obtaining a collateralized automobile loan from a financial institution client.

B) Litigation with a client relating to billing for consulting services for which the amount is immaterial.

* C) Employment of the CPA's spouse as a client's internal auditor.

D) Acting as an honorary trustee for a not-for-profit organization client.

Explanation: Independence is impaired if a spouse's employment is in a position where the spouse's activities are

audit sensitive, and specifically mentions internal auditors. A CPA's independence is not impaired by an honorary

trusteeship for a not-for-profit organization. Loans at market rates of interest collateralized by homes or vehicles

do not impair independence. Independence is not impaired in the case of litigation that is not related to the audit

performed for the client for an amount that is not material to the firm or to the financial statements of the client.

Examples include disputes over billings for services.

Chapter: 0

Scenario:

Question:

According to the standards of the profession, which of the following activities may be required in exercising due

* A) Choice II

B) Choice I

C) Choice III

D) Choice IV

Explanation: According to the standards of the profession, an exercise in due care may require consulting with

experts, but would not require obtaining specialty accreditation.

far uscpa sample scenario: qid: chapter: · pdf fileuscpa_sample chapter: 0 0 2 question: fox,...

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