AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 1081:

  During the second quarter of 1988, ABC Company sold a piece of equipment at a $12,000 gain. What portion of the gain should ABC report in its income statement for the second quarter of 1988?

  A. $12,000
  B. $6,000
  C. $4,000
  D. $0
  A. $12,000

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  Choice "a" is correct. $12,000. Rule: The entire amount of an "extraordinary gain or loss" or an "unusual or infrequently occurring item," e.g., a gain or loss from sale of fixed assets, should be reported during the period (quarter) incurred. Choices "b", "c", and "d" are incorrect. The full gain should be reported in the second quarter when it occurred.

• Question 1082:

  Barkley owns a vacation cabin that was rented to unrelated parties for 10 days during the year for $2,500. The cabin was used personally by Barkley for three months and left vacant for the rest of the year. Expenses for the cabin were as follows:

  Real estate taxes $1,000 Maintenance and utilities $2,000

  How much rental income (loss) is included in Barkley's adjusted gross income?

  A. $0
  B. $500
  C. $(500)
  D. $(1,500)
  A. $0

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  RULE: If a vacation residence is rented for less than 15 days per year, it is treated as a personal residence. The rental income is excluded from income, and mortgage interest (first or second home) and real estate taxes are allowed as itemized deductions. Depreciation, utilities, and repairs are not deductible. Choice "a" is correct. Applying the rule above, if a vacation residence is rented for less than 15 days per year, it is treated as a personal residence. The rental income ($2,500 in this case) is excluded from income. A Schedule E is not filed for this property (i.e., no income is reported, the taxes are reported as itemized deductions, and the maintenance and utilities are not deductible), so the effect on AGI is zero. Choice "b" is incorrect. This assumes that the property taxes are reported as itemized deductions but that the rental income ($2,500) less the maintenance and utilities ($2,000) are reported net on Schedule E. Per the above RULE, the rental income is excluded from income, and the maintenance and utilities are not deductible. Choice "c" is incorrect. This assumes that all of the items shown are reported net on the Schedule E-$2,500 - $1,000 - $2,000 = ($500). Per the above RULE, the rental income is excluded from income, the maintenance and utilities are not deductible, and the property taxes are reported on Schedule A as an itemized deduction. Choice "d" is incorrect, per the above rule and discussion.

• Question 1083:

  Cobb, an unmarried individual, had an adjusted gross income of $200,000 in 1990 before any IRA deduction, taxable social security benefits, or passive activity losses. Cobb incurred a loss of $30,000 in 1990 from rental real estate in which he actively participated. What amount of loss attributable to this rental real estate can be used in 1990 as an offset against income from nonpassive sources?

  A. $0
  B. $12,500
  C. $25,000
  D. $30,000
  A. $0

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  Choice "a" is correct. Cobb may not use any of the loss attributable to his rental real estate as an offset against income from nonpassive sources in 1990 because he does not qualify for the "Mom and Pop" exception. Under this exception, up to $25,000 of passive losses and the deduction equivalent of tax credits that are attributable to rental real estate may be used as an offset against income from nonpassive sources. This $25,000 allowance is reduced, but not below zero, by 50% of the amount by which the individual's modified AGI exceeds $100,000. The $25,000 is therefore completely phased out when modified AGI reaches $150,000. Because Cobb's AGI was $200,000, he did not qualify for the exception. Choices "b", "c", and "d" are incorrect. Rental activities are passive activities and generally are not allowed to use any of the loss attributable to the rental activity to offset any income produced from nonpassive sources. There is a limited exception in the case of losses from rental real estate in which the taxpayer actively participates, but Cobb did not qualify for it.

• Question 1084:

  Which of the following controls would be most effective in assuring that the proper custody of assets in the investing cycle is maintained?

  A. Direct access to securities in the safety deposit box is limited to only one corporate officer.
  B. Personnel who post investment transactions to the general ledger are not permitted to update the investment subsidiary ledger.
  C. The purchase and sale of investments are executed on the specific authorization of the board of directors.
  D. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel.
  D. The recorded balances in the investment subsidiary ledger are periodically compared with the contents of the safety deposit box by independent personnel.

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  Choice "d" is correct. An independent person comparing the contents of the safety deposit box with the recorded balances in the investment subsidiary ledger is an effective control for assuring that the proper custody of assets in the investing cycle is maintained. Choice "a" is incorrect. Direct access to securities in the safety deposit box being limited to only one corporate officer is a weakness in internal control since there is no independent verification of the box's contents. Good internal control generally requires that two or more individuals be present when the safety deposit box is opened. Choice "b" is incorrect. While it is a good idea to have separate employees post investment transactions to the general and subsidiary ledgers (so they can later be reconciled), this control relates to recordkeeping, not to custody. Choice "c" is incorrect. Authorization of the purchase and sale of investments by the board of directors is a good control over the approval of investment transactions but does little to assure that proper custody of assets is maintained.

• Question 1085:

  If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the:

  A. Cash receipts journal to the sales journal.
  B. Sales journal to the cash receipts journal.
  C. Source documents to the accounting records.
  D. Accounting records to the source documents.
  D. Accounting records to the source documents.

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  Choice "d" is correct. If the objective of a test of details is to detect overstatements of sales (existence assertion), the auditor should trace transactions from the accounting records (i.e., sales journal) to the source documents (e.g., customer order, sales order, shipping documents, etc.). Choices "a" and "c" are incorrect. Tracing from the supporting documents to the accounting records gives assurance as to the completeness assertion (all sales are properly included). Choice "b" is incorrect. Tracing from the sales journal to the cash receipts journal only shows whether cash has been received for the sale. Failure to find a related cash receipt may indicate simply that the sale was made on account.

• Question 1086:

  In general, an enterprise preparing interim financial statements should:

  A. Defer recognition of seasonal revenue.
  B. Disregard permanent decreases in the market value of its inventory.
  C. Allocate revenues and expenses evenly over the quarters, regardless of when they actually occurred.
  D. Use the same accounting principles followed in preparing its latest annual financial statements.
  D. Use the same accounting principles followed in preparing its latest annual financial statements.

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  Choice "d" is correct. Generally accepted accounting principles that were used in the most recent annual report of an enterprise should be applied to interim financial statements of the current year, unless a change in accounting principle is adopted in the current year. Choices "a", "b", and "c" are incorrect, per above.

• Question 1087:

  The senior auditor responsible for coordinating the fieldwork usually schedules a pre-audit conference with the audit team primarily to:

  A. Give guidance to the staff regarding both technical and personnel aspects of the audit.
  B. Discuss staff suggestions concerning the establishment and maintenance of time budgets.
  C. Establish the need for using the work of specialists and internal auditors.
  D. Provide an opportunity to document staff disagreements regarding technical issues.
  A. Give guidance to the staff regarding both technical and personnel aspects of the audit.

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  Choice "a" is correct. Pre-audit planning meetings are typically held to plan technical and personnel aspects of the audit. Assistants should be informed of their responsibilities and the objectives of the procedures that they are to perform. Choice "b" is incorrect. While staff suggestions regarding time budgets may be discussed, this is not typically the primary reason for the meeting. Choice "c" is incorrect. Establishing the need for specialists and internal auditors may be discussed, but this is not the primary reason for the meeting. Choice "d" is incorrect. Disagreements about technical issues arise and are resolved after testing begins, not during the pre-audit conference.

• Question 1088:

  An oligopolist faces a "kinked" demand curve. This terminology indicates that:

  A. When an oligopolist lowers its price, the other firms in the oligopoly will match the price reduction, but if the oligopolist raises its price, the other firms will ignore the price change.
  B. An oligopolist faces a non-linear demand for its product, and price changes will have little effect on demand for that product.
  C. An oligopolist can sell its product at any price, but after the "saturation point," another oligopolist will lower its price and, therefore, shift the demand curve to the left.
  D. An oligopolist is similar to a monopolist, and as the quantity demanded for its product increases, the demand curve for that firm shifts to the right.
  A. When an oligopolist lowers its price, the other firms in the oligopoly will match the price reduction, but if the oligopolist raises its price, the other firms will ignore the price change.

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  Choice "a" is correct. In an oligopoly, each firm faces a "kinked" demand curve. Others will match price cuts, but ignore price increases. The "kink" is at the prevailing price. Best real world examples of oligopoly are the airline and auto industries. Choice "b" is incorrect. An oligopolist's demand curve is linear but "kinked." Above the "kink," demand is highly elastic. Below, very inelastic. Choice "c" is incorrect. An oligopolist cannot sell at any price. There is no "saturation point." Choice "d" is incorrect. A change in quantity demanded indicates a movement along the demand curve, not a shift in the curve.

• Question 1089:

  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 fieldwork and reporting.
  D. Independence with respect to the financial statements and supplementary disclosures.
  B. Adequate technical training and proficiency.

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  Choice "b" is correct. The "first" general standard states that the auditor must have adequate technical training and proficiency to perform the audit. Comment: It is important to memorize the 10 auditing standards. Choices "a", "c", and "d" are incorrect, as they do not represent a requirement of the first general standard of reporting.

• Question 1090:

  Price owns 2,000 shares of ABC Corp.'s $10 cumulative preferred stock. During its first year of operations, cash dividends of $5 per share were declared on the preferred stock but were never paid. In the second year, dividends on the preferred stock were neither declared nor paid. If ABC is dissolved, which of the following statements is correct?

  A. ABC will be liable to Price as an unsecured creditor for $10,000.
  B. ABC will be liable to Price as a secured creditor for $20,000.
  C. Price will have priority over the claims of ABC's bond owners.
  D. Price will have priority over the claims of ABC's unsecured judgment creditors.
  A. ABC will be liable to Price as an unsecured creditor for $10,000.

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  Choice "a" is correct. After a dividend is declared but not paid on cumulative preferred stock, the unpaid dividend ranks with other "unsecured" debts. Choice "b" is incorrect. The unpaid dividend ranks as an "unsecured" not a "secured" debt and Price has no right to a dividend for the second year because no dividend was declared that year. Choice "c" is incorrect. As an "unsecured" creditor, Price does not have priority over the company's bondholders. Choice "d" is incorrect. The "unsecured" creditors will share in the "unsecured" category as a whole and not with any priority within the class.