AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 141:

  A parent corporation owned more than 90% of each class of the outstanding stock issued by a subsidiary corporation and decided to merge that subsidiary into itself. Under the Revised Model Business Corporation Act, which of the following actions must be taken?

  A. The subsidiary corporation's board of directors must pass a merger resolution.
  B. The subsidiary corporation's dissenting stockholders must be given an appraisal remedy.
  C. The parent corporation's stockholders must approve the merger.
  D. The parent corporation's dissenting stockholders must be given an appraisal remedy.
  B. The subsidiary corporation's dissenting stockholders must be given an appraisal remedy.

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  Choice "b" is correct. In a short form merger (one between a parent and a subsidiary 90% of which is owned by the parent), the subsidiary's shareholders have a right to dissent and take advantage of the appraisal remedy. Choice "a" is incorrect. The subsidiary's board is not required to take any action in a short-form merger. Choice "c" is incorrect. The parent corporation's shareholders have no right to approve or disapprove a short-form merger. Choice "d" is incorrect. The parent corporation's shareholders have no right to dissent to a short-form merger.

• Question 142:

  When assessing the internal auditors' competence, the independent CPA should obtain information about the:

  A. Organizational level to which the internal auditors report.
  B. Educational background and professional certification of the internal auditors.
  C. Policies prohibiting the internal auditors from auditing areas where relatives are employed.
  D. Internal auditors' access to records and information that is considered sensitive.
  B. Educational background and professional certification of the internal auditors.

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  Choice "b" is correct. When assessing the internal auditors' competence, the auditor should obtain information about such factors as educational level, experience, professional certification, continuing education, supervision, review, and evaluation of performance. Choice "a" is incorrect. The organizational level to which the internal auditors report is related to their objectivity. Choice "c" is incorrect. Policies prohibiting internal auditors from auditing areas where relatives are employed are related to objectivity. Choice "d" is incorrect. Access to sensitive records and information is related to the overall objectives of the internal audit function, not to internal auditor competence.

• Question 143:

  A company has daily cash receipts of $150,000. The treasurer of the company has investigated a lockbox service whereby the bank that offers this service will reduce the company's collection time by four days at a monthly fee of $2,500. If money market rates average four percent during the year, the additional annual income (loss) from using the lockbox service would be:

  A. $6,000
  B. $(6,000)
  C. $12,000
  D. $(12,000)
  B. $(6,000)

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  Choice "b" is correct. $(6,000). A company's decision to commit to a lockbox plan is an example of marginal analysis. In other words, do the marginal benefits exceed the marginal costs of the plan? Choices "a", "c", and "d" are incorrect, per the above calculation.

• Question 144:

  The negative request form of accounts receivable confirmation is useful particularly when the: A. Option A

  

  B. Option B

  C. Option C

  D. Option D

  Correct Answer. A
  A

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  Choice "a" is correct. The negative request form of accounts receivable confirmation is useful particularly when: - the assessed level of control risk relating to receivables is low (if control risk is high, then positive confirmation requests would probably be sent), - there are many small balances (which would make it difficult to keep the number of positive confirmations to a reasonably low level), and - consideration of the confirmation by the recipient is likely (since the auditor is relying on the customers' consideration as the sole basis of support for the confirmation). Choices "b", "c", and "d" are incorrect, based on the above .

• Question 145:

  Tracing bills of lading to sales invoices provides evidence that:

  A. Shipments to customers were recorded as sales.
  B. Recorded sales were shipped.
  C. Invoiced sales were shipped.
  D. Shipments to customers were invoiced.
  D. Shipments to customers were invoiced.

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  Choice "d" is correct. Tracing from a population of bills of lading (shipping documents) to sales invoices provides evidence that shipments to customers were invoiced. Choice "a" is incorrect. Tracing bills of lading to the sales invoice provides assurance that shipments to customers were invoiced, not that they were recorded as sales. Choice "b" is incorrect. Tracing from the sales journal to bills of lading provides evidence that recorded sales were shipped. Choice "c" is incorrect. Tracing from a population of sales invoices to the bills of lading provides evidence that invoiced sales were shipped.

• Question 146:

  Farr made a gift of stock to her child, Pat. At the date of gift, Farr's stock basis was $10,000 and the stock's fair market value was $15,000. No gift taxes were paid. What is Pat's basis in the stock for computing gain?

  A. $0
  B. $5,000
  C. $10,000
  D. $15,000
  C. $10,000

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  Choice "c" is correct. Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift. Basis is increased by any gift tax paid that is attributable to the net appreciation in the value of the gift. Since there were no gift taxes paid, Pat's basis for computing a gain is the rollover cost (basis), $10,000. Choices "a", "b", and "d" are incorrect, per the explanation above.

• Question 147:

  A vendor offered ABC Co. $25,000 compensation for losses resulting from faulty raw materials. Alternately, a lawyer offered to represent ABC in a lawsuit against the vendor for a $12,000 retainer and 50% of any award over $35,000. Possible court awards with their associated probabilities are:

  

  Compared to accepting the vendor's offer, the expected value for ABC to litigate the matter to verdict provides a:

  A. $4,000 loss.
  B. $18,200 gain.
  C. $21,000 gain.
  D. $38,000 gain.
  A. $4,000 loss.

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  Explanation Explanation/Reference:Choice "a" is correct. Choices "b", "c", and "d" are incorrect based on the above Explanation.

• Question 148:

  Harry, Betty, and Jim decide to form a hair salon business. Betty and Jim agree to equally manage the business and have agreed to accept full personal liability for obligations of the business. Harry contributes money to help them get started. Harry does not want any personal liability but does want access to the books and records and to share in the profits. They have all agreed that unanimous consent is needed to transfer their ownership interests. Assume any necessary filings

  have been made. What type of business entity best reflects the terms of their agreement? The three have formed:

  A. A limited partnership.
  B. A limited liability company.
  C. A general partnership.
  D. A corporation.
  A. A limited partnership.

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  Choice "a" is correct. A limited partnership best reflects the terms of the parties' agreement. A limited partnership has one or more general partners and one or more limited partners. The general partners are personally liable for partnership obligations and run the business (such as Betty and Jim agreed). A limited partner does not have personal liability for partnership obligations and does not take part in management; however, limited partners have a right to inspect partnership books and records relevant to their interest. Thus, a limited partnership has the attributes that Harry agreed to. Finally, all partners must unanimously consent to a transfer of an ownership interest in a limited partnership, as the parties agreed here. Thus, a limited partnership best reflects the agreement of the parties. Choice "b" is incorrect. Members of a limited liability company are not personally liable for the company's debt. (They may agree otherwise, but this is not a general attribute of a limited liability company.) Because the facts say Betty and Jim each agreed to have full personal liability, a limited liability company does not best reflect the parties' agreement. Choice "c" is incorrect. All partners are personally liable for all obligations of a general partnership. Because the facts say Harry did not accept personal liability, the agreement does not reflect a general partnership. Choice "d" is incorrect. Corporate shareholders generally are not liable for the corporation's obligations. (They may agree otherwise, but this is not a basic attribute of a corporation.) As the facts say Betty and Jim share full personal liability, the agreement does not reflect a corporation.

• Question 149:

  Baum, an unmarried optometrist and sole proprietor of Optics, buys and maintains a supply of eyeglasses and frames to sell in the ordinary course of business. In 1999, Optics had $350,000 in gross business receipts and its year-end

  inventory was not subject to the uniform capitalization rules. Baum's 1999 adjusted gross income was $90,000 and Baum qualified to itemize deductions. During 1999, Baum recorded the following information:

  Business expenses:

  

  What amount should Baum report as 1999 net earnings from self-employment?

  A. $243,250
  B. $252,000
  C. $273,000
  D. $281,750
  D. $281,750

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  Explanation Explanation/Reference:Choice "d" is correct. Baum should report $281,750 as 1999 net earnings from self-employment (line 12 of the Form 1040), calculated as follows: Choices "a", "b", and "c" are incorrect. Self-employment tax and self-employment health insurance expenses are adjustments from total gross income. They are not deducted from self-employment earnings (i.e., not reported net on line 12 of the Form 1040). Note: There are many distracters in this question, all relating to items that are either deductible as part of itemized deductions or not deductible. Be careful to read the requirement of the question before spending unnecessary time on the question. The statement that Baum's year-end inventory was not subject to the uniform capitalization rules is a distracter as well. There is not enough information given in the facts to apply the rules if he had been subject to them.

• Question 150:

  During 1990, ABC Co. had the following unusual financial events occur:

  ?Bonds payable were retired five years before their scheduled maturity, resulting in a $260,000 gain. ABC has frequently retired bonds early when interest rates declined significantly. ?A steel forming segment suffered $255,000 in losses due to hurricane damage. This was the fourth similar loss sustained in a 5-year period at that location. ?A component of ABC's operations, steel transportation, was sold at a net loss of $350,000.

  This was ABC's first divestiture of one of its operating segments. Before income taxes, what amount of gain (loss) should be reported separately as a component of income from continuing operations in 1990?

  A. $260,000
  B. $5,000
  C. $(255,000)
  D. $(350,000)
  B. $5,000

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  Choice "b" is correct. $5,000. The steel forming segment's hurricane damage (4th in 5 years) of $255,000 is only "unusual in nature" and does not occur infrequently, therefore, it is not an "extraordinary item," and should be reported separately as a component of "income from continuing operations." The retirement of debt, although unusual, is not infrequent for the company; therefore, the gain does not qualify for classification as an extraordinary item per APBO No. 30 (and SFAS No. 145).