AICPA CPA-TEST Online Practice Questions and Exam Preparation

AICPA CPA-TEST Online Questions & Answers

• Question 931:

  Gibson purchased stock with a fair market value of $14,000 from Gibson's adult child for $12,000. The child's cost basis in the stock at the date of sale was $16,000. Gibson sold the same stock to an unrelated party for $18,000. What is Gibson's recognized gain from the sale?

  A. $0
  B. $2,000
  C. $4,000
  D. $6,000
  B. $2,000

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  Choice "b" is correct. Losses are disallowed on most related party sales transactions even if they were made at an arm's length (FMV) price. The basis (and related gain or loss) of the (second) buying relative depends on whether the second relative's resale price is higher, lower, or between the first relative's basis and the lower selling price to the second relative. In this case, the $4,000 capital loss on the sale by Gibson's adult child to Gibson [$12,000 SP - $16,000 Basis] is disallowed. Gibson's basis is determined by his selling price to a third party. In this case, the selling price is $18,000, which is HIGHER than the original basis of Gibson's adult child. Gibson's basis in the stock is, therefore, his adult child's basis of $16,000. Gibson's recognized basis is calculated as follows: Choice "a" is incorrect. There would be a zero gain or loss if the selling price were between the adult child's basis and Gibson's purchase price, but this is not the case in the facts. Choice "c" is incorrect. This answer option uses the fair market value of the stock at the date of purchase as the basis. As is discussed above, the rules do not provide for this treatment. [$18,000 SP - $14,000 FMV = $4,000] Choice "d" is incorrect. This would be the answer if the basis were Gibson's purchase price of $12,000; however, because the stock sold for more than Gibson's child's basis and the child had a disallowed loss on the sale to Gibson, Gibson is allowed to use his child's original basis of $16,000 as his basis for the stock on the date of the second sale. [$18,000 SP - $12,000 PP = $6,000]

• Question 932:

  When the supply of and demand for a good both increase:

  A. Equilibrium price will increase.
  B. Equilibrium price will decrease.
  C. Equilibrium price may increase, decrease, or remain unchanged.
  D. Equilibrium quantity may increase, decrease, or remain unchanged.
  C. Equilibrium price may increase, decrease, or remain unchanged.

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  Explanation Explanation/Reference: Choice "c" is correct. When the supply of and demand for a good both increase, equilibrium quantity increases. However, the impact on price is indeterminate. If demand and supply increase by the same amount, price will remain unchanged (as illustrated above). However, if demand increases by more than supply, price will increase. Conversely, if supply increases by more than demand, price will decrease. Choices "a" and "b" are incorrect, since the impact on price is indeterminate. Choice "d" is incorrect, since equilibrium quantity will increase.

• Question 933:

  Cyclical unemployment results from:

  A. Skills of workers not corresponding to jobs available.
  B. The time it takes to match qualified workers with available jobs.
  C. Seasonal decreases in demand for labor.
  D. A recession in the economy.
  D. A recession in the economy.

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  Choice "d" is correct. Cyclical Unemployment is caused by the business cycle. It tends to rise during a recession and fall during an expansion. Choice "a" is incorrect. This is an example of structural unemployment. Choice "b" is incorrect. This is an example of frictional unemployment. Choice "c" is incorrect. This is an example of seasonal unemployment.

• Question 934:

  Which of the following controls would be most effective in assuring that recorded purchases are free of material errors?

  A. The receiving department compares the quantity ordered on purchase orders with the quantity received on receiving reports.
  B. Vendor's invoices are compared with purchase orders by an employee who is independent of the receiving department.
  C. Receiving reports require the signature of the individual who authorized the purchase.
  D. Purchase orders, receiving reports, and vendor's invoices are independently matched in preparing vouchers.
  D. Purchase orders, receiving reports, and vendor's invoices are independently matched in preparing vouchers.

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  Choice "d" is correct. The most effective control in assuring that recorded purchases are free of material errors is the independent matching of the purchase order, receiving report, and vendor's invoices in preparing the vouchers on which the disbursement check is based. Choice "a" is incorrect. The receiving department should not have access to the quantity ordered on the purchase order. This forces receiving department employees to actually perform an independent count. Choice "b" is incorrect. It is not enough to compare only vendor invoices and purchase orders, as this will still allow payment for goods that were not received. Choice "c" is incorrect. Requiring that receiving reports be authorized by the individual who authorized the purchase does not ensure that the invoice and the related payment will be properly recorded.

• Question 935:

  Which one of the following factors might cause a firm to increase the debt in its financial structure?

  A. An increase in the corporate income tax rate.
  B. Increased economic uncertainty.
  C. An increase in the price/earnings ratio.
  D. A decrease in the times interest earned ratio.
  A. An increase in the corporate income tax rate.

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  Choice "a" is correct. An increase in the corporate income tax rate might cause a firm to increase the debt in its financial structure because interest is tax deductible, while dividends are paid after-tax. Choice "b" is incorrect. Increased economic uncertainty would cause a firm to decrease debt (and interest cost). Choice "c" is incorrect. An increase in the price/earnings ratio would encourage the issuance of equity rather than debt. Choice "d" is incorrect. A decrease in the times interest earned ratio indicates that earnings have declined compared with interest, and that more debt would be unwise (and more difficult to negotiate).

• Question 936:

  Which of the following types of audit evidence generally is the most reliable?

  A. Inquiries made of management.
  B. Confirmation of account information.
  C. Analytical procedures.
  D. Review of prior-year audit procedures.
  B. Confirmation of account information.

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  Choice "b" is correct. Confirmations are among the most reliable types of evidence, as they constitute external evidence sent directly to the auditor. Choice "a" is incorrect. Inquiries provide oral evidence, which is less reliable than confirmations. Choice "c" is incorrect. Analytical procedures provide the auditor with direct personal knowledge, but because these procedures often are based on internal accounting data, the evidence obtained is not as reliable as that obtained from confirmations. Choice "d" is incorrect. Review of audit procedures from the previous year does not provide appropriate audit evidence regarding the current year's financial statements.

• Question 937:

  When assessing an internal auditor's competence, a CPA ordinarily obtains information about all of the following, except:

  A. Quality of audit documentation.
  B. Educational level and professional experience.
  C. The audit plan and audit procedures.
  D. Access to information about related parties.
  D. Access to information about related parties.

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  Choice "d" is correct. The degree of access the independent auditor has to information about related parties provides no information regarding an internal auditor's competence. Choice "a" is incorrect. In evaluating the work of internal auditors, the independent auditor should examine, on a test basis, documentary evidence of the work performed by internal auditors and should consider such factors as whether the scope of the work is appropriate, the audit plan is adequate, audit documentation adequately documents work performed, conclusions reached are appropriate in the circumstances, and any reports prepared are consistent with the results of the work performed. Choice "b" is incorrect. When considering the competence of internal auditors, the independent auditor should inquire about the qualifications of the internal audit staff, including for example, consideration of the client's practices for hiring, training, and supervising internal audit staff. This includes inquiries as to the internal auditor's educational level and professional experience. Choice "c" is incorrect. In evaluating the work of internal auditors, the independent auditor should examine, on a test basis, documentary evidence of the work performed by internal auditors and should consider such factors as whether the scope of the work is appropriate, the audit plan is adequate, audit documentation adequately documents work performed, conclusions reached are appropriate in the circumstances, and any reports prepared are consistent with the results of the work performed.

• Question 938:

  The adverse effects of events causing an auditor to believe there is substantial doubt about an entity's ability to continue as a going concern would most likely be mitigated by evidence relating to the:

  A. Ability to expand operations into new product lines in the future.
  B. Feasibility of plans to purchase leased equipment at less than market value.
  C. Marketability of assets that management plans to sell.
  D. Committed arrangements to convert preferred stock to long-term debt.
  C. Marketability of assets that management plans to sell.

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  Choice "c" is correct. The adverse effects of events causing an auditor to believe there is a substantial doubt about an entity's ability to continue, as a going concern would most likely be mitigated by evidence relating to the marketability of assets that management plans to sell. By providing evidence that there is a ready market for assets that could be converted to cash, management has demonstrated that the company could remain in operation for a longer period of time, thereby mitigating the need for an explanatory paragraph describing the matter. Choices "a", "b", and "d" are incorrect. Evidence regarding the ability to expand operations into new product lines in the future, the feasibility of plans to purchase leased equipment at less than market value, or committed arrangements to convert preferred stock to long-term debt would not be sufficient to mitigate doubts about an entity's ability to continue as a going concern, unless it could also be demonstrated that the events would provide adequate cash flow to fund operations for at least the next year.

• Question 939:

  Which of the following factors determines whether an identified segment of an enterprise should be reported in the enterprise's financial statements under SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information?

  A. The segment's assets constitute more than 10% of the combined assets of all operating segments. II. The segment's liabilities constitute more than 10% of the combined liabilities of all operating segments.
  B. I only.
  C. II only.
  D. Both I and II.
  E. Neither I nor II.
  A. The segment's assets constitute more than 10% of the combined assets of all operating segments. II. The segment's liabilities constitute more than 10% of the combined liabilities of all operating segments.

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  Choice "a" is correct. For segment reporting, if an identified segment's assets constitute more than 10% of the combined assets of all operating segments, the segment should be reported. The same rule does not apply for the segment's liabilities. The candidate does have to remember the 10% and also the 10% of "what." Choice "b" is incorrect. For segment reporting, if an identified segment's assets constitute more than 10% of the combined assets of all operating segments, the segment should be reported. The same rule does not apply for the segment's liabilities. Choice "c" is incorrect. For segment reporting, if an identified segment's assets constitute more than 10% of the combined assets of all operating segments, the segment should be reported. The same rule does not apply for the segment's liabilities, so the correct answer cannot be "Both." Choice "d" is incorrect. For segment reporting, if an identified segment's assets constitute more than 10% of the combined assets of all operating segments, the segment should be reported. The correct answer cannot be "Neither."

• Question 940:

  Which of the following statements is correct with respect to the differences and similarities between a corporation and a limited partnership?

  A. Stockholders may be entitled to vote on corporate matters but limited partners are prohibited from voting on any partnership matters.
  B. Stock of a corporation may be subject to the registration requirements of the federal securities laws but limited partnership interests are automatically exempt from those requirements.
  C. Directors owe fiduciary duties to the corporation and limited partners owe such duties to the partnership.
  D. A corporation and a limited partnership may be created only under a state statute and each must file a copy of its organizational document with the proper governmental body.
  D. A corporation and a limited partnership may be created only under a state statute and each must file a copy of its organizational document with the proper governmental body.

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  Choice "d" is correct. Both a limited partnership and a corporation: 1. Can only be created by statute, and 2. Each must file a copy of its certificate with the proper state agency. Choice "a" is incorrect. There are instances in which limited partners do vote on certain partnership matters (e.g., approve new general or limited partners). Choice "b" is incorrect. Limited partnership interests are not automatically exempt from the federal securities laws. Choice "c" is incorrect. Limited partners do not owe a fiduciary duty to the limited partnership.