AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 561:

  ABC Co. determined after four years that the estimated useful life of its labeling machine should be 10 years rather than 12 years. The machine originally cost $46,000 and had an estimated salvage value of $1,000. ABC uses straight-line depreciation. What amount should ABC report as depreciation expense for the current year?

  A. $3,200
  B. $3,750
  C. $4,500
  D. $5,000
  D. $5,000

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  Choice "d" is correct. A change in estimated useful life is a change in accounting estimate, and is therefore accounted for prospectively. The revised useful life should be used as of the beginning of the year of the change and should be applied to the current book value of the fixed asset. The first step in determining the depreciation expense in the year of the change in estimate is to determine the book value of the labeling machine at the time of the change: Original cost $46,000 - Accumulated depreciation 15,000 = [(46,000 - 1,000) / 12] *4 Current book value $31,000 This book value is then depreciated over the remaining life of the fixed asset based on the new estimated life. In this problem, the new estimated life is 10 years, four of which have already passed, so the asset must be depreciated over the remaining 6 years: ($31,000 - 1,000) / 6 = $5,000 Choice "a" is incorrect. This answer is incorrectly calculated by adding the salvage value to the current book value, and by using the entire 10 year revised estimated life. Salvage value should always be subtracted and the asset should only be depreciated over the remaining life of the asset. Choice "b" is incorrect. This is the annual depreciation before the change in estimated life ($46,000 -$1,000) / 12 = $3,750]. The depreciation after the change in estimate should be calculated as described above. Choice "c" is incorrect. This would have been the annual straight-line depreciation if the original useful life of the asset had been 10 years rather than 12 years. The change in estimated life is applied prospectively, as described above, not retrospectively.

• Question 562:

  Lewis, Clark, and Beal entered into a written agreement to form a partnership. The agreement required that the partners make the following capital contributions: Lewis, $40,000, Clark, $30,000, and Beal, $10,000. It was also agreed that in the event the partnership experienced losses in excess of available capital, Beal would contribute additional capital to the extent of the losses. The partnership agreement was otherwise silent about division of profits and losses. Which of the following statements is correct?

  A. Profits are to be divided among the partners in proportion to their relative capital contributions.
  B. Profits are to be divided equally among the partners.
  C. Losses will be allocated in a manner different from the allocation of profits because the partners contributed different amounts of capital.
  D. Beal's obligation to contribute additional capital would have an effect on the allocation of profit or loss to Beal.
  B. Profits are to be divided equally among the partners.

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  Choice "b" is correct. Rule: Regardless of the contributions and obligations of the partners, unless the partnership agreement specifically states otherwise, all partners are entitled to an equal share of the profits. Choices "a", "c", and "d" are incorrect, per the above rule.

• Question 563:

  A sharp rise in the price of oil (a major input), would result in:

  A. Cost (Push) inflation.
  B. Demand (Pull) inflation.
  C. An increase in aggregate demand.
  D. An increase in aggregate supply.
  A. Cost (Push) inflation.

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  Choice "a" is correct. Cost (Push) inflation is inflation caused by a shift left in aggregate supply. An increase in input costs, such as a sharp increase in the price of oil, will cause the aggregate supply curve to shift left and thus increase the aggregate price level causing inflation. Choice "b" is incorrect. Demand (Pull) inflation is inflation caused by a shift right in aggregate demand. Choice "c" is incorrect. An increase in the price of oil causes the aggregate supply curve to shift, not the aggregate demand curve. Choice "d" is incorrect. An increase in the price of oil will cause aggregate supply to decrease (shift left), not increase.

• Question 564:

  Which of the following internal controls most likely would justify a reduced assessed level of control risk concerning plant and equipment acquisitions?

  A. Periodic physical inspection of plant and equipment by the internal audit staff.
  B. Comparison of current-year plant and equipment account balances with prior-year actual balances.
  C. The review of prenumbered purchase orders to detect unrecorded trade-ins.
  D. Approval of periodic depreciation entries by a supervisor independent of the accounting department.
  A. Periodic physical inspection of plant and equipment by the internal audit staff.

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  Choice "a" is correct. Periodic physical inspection of plant and equipment by the internal audit staff is an internal control that would most likely justify a reduced assessed level of control risk concerning plant and equipment acquisitions. Such inspections would provide assurance that recorded acquisitions are real (existence assertion). Choice "b" is incorrect. The comparison of current-year plant and equipment account balances with prioryear actual balances might indicate that acquisitions occurred, but it would not justify a reduced assessed level of control risk, since the controls over the acquisition process are not tested. Choice "c" is incorrect. A review of prenumbered purchase orders is unlikely to provide evidence regarding plant and equipment acquisitions. (Generally, a special requisition form is used for such acquisitions.) Choice "d" is incorrect. Approval of depreciation entries has little bearing on the control risk relating to plant and equipment acquisitions.

• Question 565:

  The ABC Corporation is considering the acquisition of a new machine. The machine can be purchased for $90,000; it will cost $6,000 to transport to ABC's plant and $9,000 to install. It is estimated that the machine will last 10 years, and it is expected to have an estimated salvage value of $5,000. Over its 10-year life, the machine is expected to produce 2,000 units per year with a selling price of $500 and combined material and labor costs of $450 per unit. Federal tax regulations permit machines of this type to be depreciated using the straight-line method over 5 years with no estimated salvage value. ABC has a marginal tax rate of 40 percent.

  What is the net cash flow for the third year that ABC Corporation should use in a capital budgeting analysis?

  A. $68,400
  B. $64,200
  C. $53,700
  D. $47,400
  A. $68,400

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  Choice "a" is correct. $68,400 net cash flow for the third year. Alternate Computation: In year 3, ABC will generate a $100,000 profit from the incremental sales (2000 units ?($500 - $450)). This profit will be taxed at 40%, so the net after-tax increase in cash flow is $60,000 BEFORE the depreciation tax shield is considered. Depreciation is not a cash outflow, but it will reduce the amount of tax the company has to pay (by 40% of the depreciation), and this has an effect on the cash-flow for the company. Depreciation, as calculated above, is $21,000 per year ($105,000 cost of the machine divided by 5 years). The depreciation tax shield is $8,400 ($21,000 ?40%), so the total after-tax cash flows in year 3 for the new machine is $60,000 + $8,400 = $68,400.

• Question 566:

  A company obtained a short-term bank loan of $250,000 at an annual interest rate of 6 percent. As a condition of the loan, the company is required to maintain a compensating balance of $50,000 in its checking account. The company's

  checking account earns interest at an annual rate of 2 percent. Ordinarily, the company maintains a balance of $25,000 in its checking account for transaction purposes.

  What is the effective interest rate of the loan?

  A. 6.44 percent.
  B. 7.11 percent.
  C. 5.80 percent.
  D. 6.66 percent.
  A. 6.44 percent.

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  Choice "a" is correct. 6.44%. To calculate the effective interest rate:

• Question 567:

  Which of the following is true regarding significant deficiencies in internal control?

  A. Auditors must search for them.
  B. Auditors must communicate them to management and to those charged with governance.
  C. They must be included in the financial statements.
  D. They must be disclosed in footnotes.
  B. Auditors must communicate them to management and to those charged with governance.

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  Choice "b" is correct. The auditor is required to communicate to management and to those charged with governance (the audit committee) any significant deficiencies in internal control that the auditor observes. Choice "a" is incorrect. The auditor is not obligated to search specifically for significant deficiencies in internal control. Choice "c" is incorrect. Significant deficiencies in internal control are not typically included in the financial statements, as they relate to controls and not to the presentation and disclosure of financial information. Choice "d" is incorrect. Significant deficiencies in internal control are not typically included in the footnotes to the financial statements, as they relate to controls and not to the presentation and disclosure of financial information.

• Question 568:

  A depreciation tax shield is:

  A. An after-tax cash outflow.
  B. A reduction in income taxes.
  C. The expense caused by depreciation.
  D. Caused by the fact that depreciation does not affect cash flow.
  B. A reduction in income taxes.

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  Choice "b" is correct. Whenever depreciation protects income from taxation, it is known as a depreciation tax shield. Choice "a" is incorrect. A depreciation tax shield may result in after-tax cash inflow, but not outflow. Choice "c" is incorrect, per above. Choice "d" is incorrect. A depreciation tax shield is caused by the tax deductibility of the depreciation expense, not by the fact that depreciation does not affect cash flow.

• Question 569:

  Which of the following ratios is appropriate for the evaluation of accounts receivable?

  A. Days sales outstanding.
  B. Return on total assets.
  C. Collection to debt ratio.
  D. Current ratio.
  A. Days sales outstanding.

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  Choice "a" is correct. Among the ratios listed, the ratio that is appropriate for the evaluation of accounts receivable is the number of days sales are outstanding. Sales are related to accounts receivable, so the more days the sales are outstanding, the longer the receivables are outstanding. Choice "b" is incorrect. Return on total assets is not appropriate for the evaluation of accounts receivable. It is appropriate for the evaluation of return and of total assets, but not for the evaluation of account receivable specifically. Choice "c" is incorrect. The collection to debt ratio has nothing to do with the evaluation of accounts receivable. Choice "d" is incorrect. The current ratio is appropriate for the evaluation of liquidity (one of the ways to evaluate liquidity) but has nothing to do with the evaluation of accounts receivable, other than that accounts receivable is in the numerator of the current ratio.

• Question 570:

  Which of the following reporting options is least likely with regard to supplementary information that is required by GAAP?

  A. The auditor's report on the financial statements makes no reference to the supplementary information.
  B. A disclaimer of opinion is issued on supplementary information that is not clearly distinguished from the financial statements and is not marked "unaudited."
  C. The auditor's report on the financial statements includes both an opinion on the supplementary information and a statement restricting the use of the report.
  D. The auditor's report on the financial statements includes an opinion regarding whether the supplementary information is fairly stated in all material respects in relation to the financial statements taken as a whole.
  C. The auditor's report on the financial statements includes both an opinion on the supplementary information and a statement restricting the use of the report.

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  Choice "c" is correct. There is no requirement that the auditor's report on supplementary information required by GAAP be restricted. Choice "a" is incorrect. An auditor is not required to audit supplementary information, and in such cases the auditor's report on the basic financial statements would not generally include a reference to such information. Choice "b" is incorrect. When supplementary information that is not clearly distinguished from the financial statements is not marked "unaudited," the auditor would generally issue a disclaimer on that information. Choice "d" is incorrect. When the auditor chooses to apply auditing procedures to the supplementary information, he or she may express an opinion regarding whether the supplementary information is fairly stated in all material respects in relation to the financial statements taken as a whole.