AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 661:

  Fred Berk bought a plot of land with a cash payment of $40,000 and a mortgage of $50,000. In addition, Berk paid $200 for a title insurance policy. Berk's basis in this land is:

  A. $40,000
  B. $40,200
  C. $90,000
  D. $90,200
  D. $90,200

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  Choice "d" is correct. $90,200 is Berk's basis in the land. Rule: The basis of the property acquired will be the property's cost consisting of the amount of cash paid plus any amount of related debt assumed. Cost will be adjusted to reflect any additional costs incurred in purchasing the property. Choices "a", "b", and "c" are incorrect, per the above rule.

• Question 662:

  In inventory management, the safety stock will tend to increase if the:

  A. Carrying cost increases.
  B. Cost of running out of stock decreases.
  C. Variability of lead-time increases.
  D. Fixed order cost decreases.
  C. Variability of lead-time increases.

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  Explanation Explanation/Reference:Choice "c" is correct. If lead times became more variable, the amount of safety stock needed to reduce the risk of stock outs will increase. Choice "a" is incorrect. A high carrying cost would decrease safety stock. Choice "b" is incorrect. A lower stockout cost would decrease safety stock. Choice "d" is incorrect. If order costs decrease, then inventory will be ordered more frequently and less safety stock will be needed.

• Question 663:

  ABC Corp. failed to accrue warranty costs of $50,000 in its December 31, 1992, financial statements. In addition, a $30,000 change from straight-line to accelerated depreciation was made at the beginning of 1993. Both the $50,000 and the $30,000 are net of related income taxes. What amount should ABC report as prior period adjustments in 1993?

  A. $0
  B. $30,000
  C. $50,000
  D. $80,000
  C. $50,000

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  Choice "c" is correct. $50,000. The cumulative effect of a change in accounting principle is now shown on the retained earnings statement as an adjustment to the beginning balance of retained earnings, assuming that the cumulative effect can be calculated. An exception is made however, for a change in depreciation method, since a change in depreciation method is no longer considered to be a change in accounting principle. A change in depreciation method is now considered to be both a change in method and a change in estimate. These changes should now be accounted for as a change in estimate and handled prospectively. The new depreciation method should be used as of the beginning of the year of change and should start with the current book value of the underlying asset. No retroactive or retrospective calculations should be made, and no adjustment should be made to retained earnings. The correction of the failure to accrue warranty costs is treated as a correction of an error and thus as a prior period adjustment. Choices "a", "b", and "d" are incorrect, per the above explanation.

• Question 664:

  Which of the following would not be considered a significant audit finding that should be included in audit documentation?

  A. Retirement of the accounts payable manager and subsequent hiring of a replacement.
  B. Discovery of a material sale recorded in the current year that properly belonged in the subsequent year.
  C. Determination that there is substantial doubt about the entity's ability to continue as a going concern.
  D. Implementation of a new accounting standard to account for a complex and unusual transaction.
  A. Retirement of the accounts payable manager and subsequent hiring of a replacement.

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  Choice "a" is correct. Significant audit findings do not include staffing changes at the client. Choice "b" is incorrect. Discovery of a material sale recorded in the current year that properly belonged in the subsequent year represents a possible material misstatement in the financial statements. Possible material misstatements are considered to be significant audit findings. Choice "c" is incorrect. When substantial doubt about an entity's ability to continue as a going concern exists, there is likely to be a modification to the auditor's standard report. Items resulting in report modifications are generally considered to be significant audit findings. Choice "d" is incorrect. Matters related to the application of accounting principles to complex and unusual transactions are considered to be significant audit findings.

• Question 665:

  An auditor should trace corporate stock issuances and treasury stock transactions to the:

  A. Numbered stock certificates.
  B. Articles of incorporation.
  C. Transfer agent's records.
  D. Minutes of the board of directors.
  D. Minutes of the board of directors.

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  Choice "d" is correct. The auditor should trace corporate stock issuances and treasury stock transactions to the minutes of the board of directors to make sure they were authorized. Choice "a" is incorrect. Numbered stock certificates for shares that are issued and outstanding would be in the hands of the stockholders. Choice "b" is incorrect. Information about stock issuances and treasury stock transactions would not be included in the articles of incorporation. Generally, only the shares authorized and their par value would be included therein. Choice "c" is incorrect. The transfer agent might confirm a transaction, but the auditor would not generally review the transfer agent's records.

• Question 666:

  Which one of the following is most likely to accompany a reduction in aggregate demand?

  A. An increase in the price level.
  B. A decrease in employment.
  C. An increase in real GDP.
  D. A decrease in the unemployment rate.
  B. A decrease in employment.

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  Choice "b" is correct. As aggregate demand falls, the unemployment rate rises so employment would decrease. Choice "a" is incorrect. The price level would fall, not rise. Choice "c" is incorrect. Real GDP would fall, not rise. Choice "d" is incorrect. The unemployment rate would rise, not fall.

• Question 667:

  Park, CPA, was engaged to audit the financial statements of ABC Co., a new client, for the year ended December 31, 20X3. Park obtained sufficient audit evidence for all of ABC's financial statement items except ABC's opening inventory. Due to inadequate financial records, Park could not verify ABC's January 1, 20X3, inventory balances. Park's opinion on ABC's 20X3 financial statements most likely will be:

  

  A. Option A
  B. Option B
  C. Option C
  D. Option D
  B. Option B

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  Choice "b" is correct. When the auditor is unable to satisfy himself or herself regarding the amount of beginning inventory, he or she must disclaim an opinion on the income statement because of the inability to verify the cost of goods sold during the year. The auditor may, however, still be able to issue an unqualified opinion on the balance sheet, since inventory can be verified as of the balance sheet date. Choices "a", "c", and "d" are incorrect, based on the explanation above.

• Question 668:

  On January 2, 1989, ABC Co. purchased a machine for $264,000 and depreciated it by the straight-line method using an estimated useful life of eight years with no salvage value. On January 2, 1992, ABC determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $24,000. An accounting change was made in 1992 to reflect the additional data. The accumulated depreciation for this machine should have a balance at December 31, 1992, of:

  A. $176,000
  B. $160,000
  C. $154,000
  D. $146,000
  D. $146,000

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  Choice "d" is correct, $146,000 accumulated depreciation balance at Dec. 31, 1992.

• Question 669:

  An accountant compiles unaudited financial statements that are not expected to be used by a third party. The accountant may decline to issue a compilation report provided:

  A. Each page of the financial statements is clearly marked to restrict its use. II. A written engagement letter is used to document the understanding with the client. III. A written representation letter is obtained from the client's management.
  B. Option A
  C. Option B
  D. Option C
  E. Option D
  B. Option A

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  Choice "b" is correct. The accountant may decline to issue a compilation report provided that each page of the financial statements is clearly marked to restrict its use and a written engagement letter is used to document the understanding with the client. Choice "a" is incorrect, since a written engagement letter is required to document the understanding with the client, and since representation letters are not required in compilation engagements. Choice "c" is incorrect, since the accountant may decline to issue a compilation report provided that each page of the financial statements is clearly marked to restrict its use and a written engagement letter is used to document the understanding with the client. Representation letters are not required in compilation engagements. Choice "d" is incorrect, since the accountant may decline to issue a compilation report provided that each page of the financial statements is clearly marked to restrict its use (and a written engagement letter is used to document the understanding with the client).

• Question 670:

  If the elasticity of demand for a normal good is estimated to be 1.5, then a 10% reduction in its price would cause:

  A. Total revenue to fall by 10%.
  B. Total revenue to fall by 15%.
  C. Quantity demanded to rise by 15%.
  D. Demand to decrease by 10%.
  C. Quantity demanded to rise by 15%.

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  Choice "c" is correct. The elasticity of demand is calculated as: % Change in demand % Change in price If the elasticity of demand is 1.5 (assumed to be the absolute value, as the elasticity of demand for a normal good is always negative), then a 10% price reduction would cause an increase in the quantity demanded by 15% (a ratio of 15 to 10 or 1.5). Choices "a", "b", and "d" are incorrect, perabove.