AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 1031:

  Smith and James were partners in S and J Partnership. The partnership agreement stated that all profits and losses were allocated 60 percent to Smith and 40 percent to James. The partners decided to terminate and wind up the partnership. The following was the balance sheet for S and J on the day of the windup:

  

  Of the total accounts receivable, $10,000 was collected and the remainder was written off as bad debt. All liabilities of S and J were paid by the partnership. The property and equipment are sold for $32,000. Under the Uniform Partnership Act, what amount of cash was distributed to Smith?

  A. $25,200
  B. $26,000
  C. $30,000
  D. $34,800
  A. $25,200

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  Choice "a" is correct. Upon termination of the partnership creditors are paid first. After payment of creditors, each partner is deemed to have an account that is charged or credited an amount equal to the partner's contribution plus or minus the partner's share of any profits or losses. The agreement between Smith and James was that profits and losses would be allocated 60% to Smith and 40% to James. The partnership had $82,000 in assets ($40,000 in cash, $10,000 from accounts receivable, and $32,000 from property and equipment). The partnership had $90,000 in liabilities and capital. Of the $82,000 in assets, $24,000 is paid first to creditors. This leaves a balance of $58,000. Smith contributed $30,000 in capital and James contributed $36,000 in capital. With $66,000 owed in capital and only $58,000 available, there is a deficit of $8,000. By agreement, Smith is responsible for 60% of the $8,000 deficit or $4,800. Smith would be credited an amount equal to his capital ($30,000) minus his share of the loss ($4,800) or $25,200. Only choice "a" reflects this amount. Choices "b", "c", and "d" are incorrect, per the above calculation.

• Question 1032:

  An inventory loss from a market price decline occurred in the first quarter, and the decline was not expected to reverse during the fiscal year. However, in the third quarter the inventory's market price recovery exceeded the market decline that

  occurred in the first quarter. For interim financial reporting, the dollar amount of net inventory should:

  A. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the decrease in the first quarter.
  B. Decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the market price recovery.
  C. Decrease in the first quarter by the amount of the market price decline and not be affected in the third quarter.
  D. Not be affected in either the first quarter or the third quarter.
  C. Decrease in the first quarter by the amount of the market price decline and not be affected in the third quarter.

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  Choice "a" is correct. Market price declines should be recognized in the interim period in which decline is judged permanent and later, if they "turn around," are recognized as gains in subsequent periods only to the extent of previously reported losses. Choice "b" is incorrect. Recovery should not cause an increase in inventory value above original cost. Choice "c" is incorrect. The recovery should be recognized to the extent of the first quarter write down. Choice "d" is incorrect.

• Question 1033:

  ABC, LP is a limited partnership. Dave is a limited partner. XYZ, Inc. is a creditor of the limited partnership. Upon dissolution of the partnership, the assets of ABC, LP will be distributed to pay:

  A. XYZ, Inc., first.
  B. Dave first.
  C. XYZ, Inc. and Dave.
  D. The general partners first.
  A. XYZ, Inc., first.

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  Choice "a" is correct. Rule: Upon dissolution, the assets of a limited partnership are first used to pay off the outside creditors. Limited partners such as Dave are next in line. Choices "b", "c", and "d" are incorrect, per the above rule.

• Question 1034:

  When managing cash and short-term investments, a corporate treasurer is primarily concerned with:

  A. Maximizing rate of return.
  B. Minimizing taxes.
  C. Investing in common stock due to the dividend exclusion for federal income tax purposes.
  D. Liquidity and safety.
  D. Liquidity and safety.

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  Choice "d" is correct. When managing cash and short-term investments, a corporate treasurer is primarily concerned with liquidity and safety. Choice "a" is incorrect. The board of directors and general management would be interested in maximizing rate of return on company operations. Choices "b" and "c" are incorrect. The tax manager would be interested in minimizing taxes, and investing in common stock due to the dividend exclusion for federal income tax purposes.

• Question 1035:

  Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

  A. Review the cash receipts journal for the month prior to the year-end.
  B. Intensify the study of the internal control structure concerning the revenue cycle.
  C. Increase the assessed level of detection risk for the existence assertion.
  D. Inspect the shipping records documenting the merchandise sold to the debtors.
  D. Inspect the shipping records documenting the merchandise sold to the debtors.

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  Choice "d" is correct. When an auditor does not receive replies to second requests on year-end accounts receivable confirmations, the auditor would most likely perform alternate procedures to support the existence of the receivables. These procedures include inspection of the shipping records to determine that the merchandise was actually sold to the debtors. Choice "a" is incorrect. Alternate procedures would also include reviewing the cash receipts journal for the months subsequent to year-end. Reviewing the cash receipts journal for the month prior to year-end would provide no evidence regarding the existence of a year-end receivable, which obviously had not been paid by year-end. Choice "b" is incorrect. Intensifying the study of the internal control structure concerning the revenue cycle would provide no additional evidence related to the specific accounts receivable confirmations that were not returned. Choice "c" is incorrect. Increasing the assessed level of detection risk for the existence assertion would provide no additional evidence related to the specific accounts receivable confirmations that were not returned by the customer. (By sending out confirmations, the auditor is already performing substantive tests).

• Question 1036:

  Management accountants are frequently asked to analyze various decision situations including the following.

  A. The cost of a special device that is necessary if a special order is accepted. II. The cost proposed annually for the plant service for the grounds at corporate headquarters. III. Joint production costs incurred, to be considered in a sell-at-split versus a process-further decision. IV. The costs associated with alternative uses of plant space, to be considered in a make/buy decision.
  B. The cost of obsolete inventory acquired several years ago, to be considered in a keep-versus disposal decision. The costs described in situations I and IV above are:
  C. Prime costs.
  D. Sunk costs.
  E. Discretionary costs.
  F. Relevant costs.
  D. Sunk costs.
  E. Discretionary costs.

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  Choice "d" is correct. Relevant costs. Both I and IV are costs that are relevant to a decision. Choice "a" is incorrect. Prime costs include direct material and direct labor. Choice "b" is incorrect. Sunk costs are costs previously incurred and not relevant to decision-making. Choice "c" is incorrect. Discretionary costs are discretionary. In I, the special device is necessary.

• Question 1037:

  ABC Products has received proposals from several banks to establish a lockbox system to speed up receipts. ABC receives an average of 700 checks per day averaging $1,800 each, and its cost of short- term funds is 7 percent per year. Assuming that all proposals will produce equivalent processing results and using a 360-day year, which one of the following proposals is optimal for ABC?

  A. A flat fee of $125,000 per year.
  B. A fee of 0.03 percent of the amount collected.
  C. A compensating balance of $1,750,000.
  D. A fee of $0.35 per check plus 0.01 percent of the amount collected.
  C. A compensating balance of $1,750,000.

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  Explanation Explanation/Reference:Choice "c" is correct. The optimal proposal is that which has the lowest cost for ABC. Thus, the lowest cost is "c" at $122,500. Choices "a", "b", and "d" are incorrect, per the above calculations/Explanation.

• Question 1038:

  Average daily cash outflows are $3 million for ABC Inc. A new cash management system can add two days to the disbursement schedule. Assuming ABC earns 10 percent on excess funds, how much should the firm be willing to pay per year for this cash management system?

  A. $3,000,000
  B. $1,500,000
  C. $600,000
  D. $150,000
  C. $600,000

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  Choice "c" is correct. $600,000 allowed for new cash management system.

• Question 1039:

  During the first quarter of 1993, ABC Co. had income before taxes of $200,000, and its effective income tax rate was 15%. ABC's 1992 effective annual income tax rate was 30%, but ABC expects its 1993 effective annual income tax rate to be 25%. In its first quarter interim income statement, what amount of income tax expense should ABC report?

  A. $0
  B. $30,000
  C. $50,000
  D. $60,000
  C. $50,000

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  Choice "c" is correct. Interim period tax expense is the estimated annual effective tax rate (25% in this case) applied to the year-to-date income before taxes minus the tax expense recognized in previous interim periods. Since this question involves the first quarter, there are no previous interim periods. 25% ?$200,000 = $50,000. FIN 18, para. 16 Choice "a" is incorrect. Income tax expense is reported in interim income statements. Choice "b" is incorrect. The 1993 annual estimated tax rate, not the first quarter effective tax rate, is used to calculate income tax expense for interim statements. Choice "d" is incorrect. The 1993 annual estimated tax rate, not the 1992 annual effective tax rate, is used to calculate income tax expense for interim statements.

• Question 1040:

  In using the work of a specialist, an auditor referred to the specialist's findings in the auditor's report. This would be an appropriate reporting practice if the:

  A. Client is not familiar with the professional certification, personal reputation, or particular competence of the specialist.
  B. Auditor, as a result of the specialist's findings, adds an explanatory paragraph emphasizing a matter regarding the financial statements.
  C. Auditor understands the form and content of the specialist's findings in relation to the representations in the financial statements.
  D. Auditor, as a result of the specialist's findings, decides to indicate a division of responsibility with the specialist.
  B. Auditor, as a result of the specialist's findings, adds an explanatory paragraph emphasizing a matter regarding the financial statements.

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  Choice "b" is correct. When expressing an unqualified opinion, the auditor generally will not refer to the work or findings of a specialist. The auditor may, however, make reference to a specialist in an explanatory paragraph if such a reference will facilitate understanding of the explanatory paragraph or of the departure from an unqualified opinion. Choice "a" is incorrect. Lack of client familiarity with the specialist does not affect the auditor's report. Also, it is the auditor (not the client) who must be satisfied regarding the specialist's qualifications. Choice "c" is incorrect. The auditor must understand the form and content of the specialist's findings in relation to the representations in the financial statements to be able to review the specialist's work. However, this does not affect whether or not the auditor refers to the specialist in the auditor's report. Choice "d" is incorrect. An auditor should not divide responsibility for the audit with a specialist. Further, making reference to the specialist in an unmodified unqualified report generally is inappropriate.