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) insurance policy on his life. The policy provided that upon his death, the proceeds would be paid to Penelope with interest over her present life expectancy, which was calculated at 25 years. Seymour died on January 1 of this year and Penelope received a payment of $5,200 from the insurance company. What amount should she include in her gross income for the year? A) $200 B) $1,200 C) $4,200 D) $5,200 Correct Answer: B Explanation: A lump sum distribution of life insurance is generally not included as gross income. However, when the proceeds are not being paid out immediately, but are paid over a 25 year period, there is an element of interest that must be recognized. The non-taxable recovery is determined on a straight-line basis. $100,000 divided by 25 years for a non-taxable recovery of $4,000 per year. Receipt of payment: 5,200 Excluded portion: -4,000 Taxable portion: $1,200 Which of the following is a step in an auditor's decision to assess control risk at below the maximum? A) Apply analytical procedures to both financial data and nonfinancial information to detect conditions that may indicate weak controls. B) Perform tests of details of transactions and account balances to identify potential errors and irregularities. C) Identify specific internal control policies and procedures that are likely to detect or prevent material misstatements. D) Document that the additional audit effort to perform tests of controls exceeds the potential reduction in substantive testing. Correct Answer: C Explanation: AU 319 states that the auditor may make a preliminary assessment of control risk at less than a high level only when the auditor: Is able to identify policies and procedures of the accounting and internal control systems relevant to specific assertions which are likely to prevent or detect material misstatements in the financial statement. Plans to perform tests of control to support the assessment. Analytical procedures or tests of reasonableness test amounts of financial data. Tests of details are performed as a substantive test to determine material mistakes in the financial statements. If the audit effort of performing tests of controls exceeds the potential reduction in substantive testing, tests of controls will not be performed because doing so would reduce audit efficiency. The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the: A) Evidence to be gathered to provide a sufficient basis for the auditor's opinion B) Procedures to be undertaken to discover litigation, claims, and assessments C) Pending legal matters to be included in the inquiry of the client's attorney D) Timing of inventory observation procedures to be performed Correct Answer: D Explanation: The client is responsible for counting inventory and the auditor is responsible for observing the client's count. Since the timing of the observation depends on the timing of the count, there must be agreement between the auditor and client regarding the inventory observation procedures before the auditor finalizes an audit strategy for inventory. The incorrect answer choices are evidence-gathering issues that are decided by the auditor without specific regard to timing and other client concerns. Independently of the client, the auditor determines the extent of evidence needed in the audit, the nature of procedures to follow in the audit, and the scope of issues to be addressed in a legal letter Today s question: FAR Compared to historical cost income from continuing operations, which of the following conditions increases Pollard's current cost income from continuing operations? A) Current cost of equipment is greater than historical cost. B) Current cost of land is greater than historical cost. C) Current cost of cost of goods sold is less than historical cost. D) Ending net monetary assets are less than beginning net monetary assets.
Deecee's adjusted income statement is prepared according to: A) Fair value accounting B) General purchasing power accounting C) Current cost accounting D) Current cost/general purchasing power accounting Correct Answer: C Explanation: FASB # 89 suggests that income from operations be reported on a current cost basis. This is called a short-form merger.000 .000 Harris was partially insured for his loss and he received a $15. The adjustment of depreciation expense and cost of goods sold to a current cost basis may be made by using current cost. D) The parent corporation's dissenting stockholders must be given an appraisal remedy.500 D) $27. Inventory counts may be observed prior to year if the client maintains perpetual inventory records and the controls surrounding those records are effective. In a short-form merger stockholders of the subsidiary corporation have dissenters' rights.500 C) $26. B) The subsidiary corporation's dissenting stockholders must be given an appraisal remedy. During the year his personal summer home was completely destroyed by a cyclone. Pertinent data with respect to the home follows: Cost basis = $39. but the stockholders of the parent corporation do not. Today s question: BEC 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. the subsidiary may be merged into the parent corporation without the approval of the stockholders of either the parent corporation or the subsidiary corporation and without the approval of the subsidiary corporation's board of directors. exit value. "Fair value accounting" is incorrect because current cost of goods would not be the same as fair value (selling price). Today s question: REG Nelson Harris had an adjusted gross income of $60. Today s question: AUD Which of the following procedures is least likely to be performed before the balance sheet date? A) Testing of internal control over cash B) Confirmation of receivables C) Search for unrecorded liabilities D) Observation of inventory Correct Answer: C Explanation: The auditor is concerned with unrecorded liabilities as of the balance sheet date (completeness assertion). Specific price indexes are indexes compiled specifically for inventory or for plant and equipment. Today s question: FAR Deecee Co. Accounts receivable may be confirmed prior to the balance sheet date if the auditor concludes internal controls surrounding accounts receivable are effective. capitalization of net cash flows. Under the Revised Model Business Corporation Act. "General purchasing power accounting" and "Current cost/general purchasing power accounting" are incorrect because both deal with the calculation of purchasing power. Specific indexes should not be confused with a general index such as the CPI-Urban which is normally used to adjust historical cost for the change in price level.900 B) $17.000 Value before casualty = $45.000. which of the following actions must be taken? A) The subsidiary corporation's board of directors must pass a merger resolution. The reduction in cost of goods sold is reflected in income from continuing operations and is not applicable for current cost measurement. C) The parent corporation's stockholders must approve the merger. What is Harris' allowable casualty loss deduction? A) $17.000 insurance settlement. or by applying specific indexes to the historical cost.Correct Answer: C Explanation: Holding gains for equipment and land are not part of income from continuing operations. adjusted its historical cost income statement by applying specific price indexes to its depreciation expense and cost of goods sold. thus audit procedures performed to identify unrecorded liabilities before the balance sheet date would be meaningless. Correct Answer: B Explanation: When a corporation owns 90% or more of the shares of a subsidiary corporation.000 Value after casualty = $3.
A price set equal to the total cost of production fails to recognize that the total cost should be divided by the number of units produced. the computations are: Cost basis of house: $39. Make a public offering of its common stock. Some will be able to afford it and some will not. and then subject to 10% of the taxpayer's adjusted gross income.000 to Lind each year. If the trustee distributes these amounts. The disposable income of the consumers dictates whether or not they can afford the product at the equilibrium price.900 Today s question: BEC Which of these statements is true in the long run about equilibrium price in competitive product markets? A) It will be a fair price all consumers can afford. Settle an outstanding lawsuit for an amount less than the accrued loss contingency. Accordingly.Correct Answer: A Explanation: The personal casualty loss deduction is determined taking the lessor of decrease in the FMV of the property or its basis. The client's plans included in the other answers. When a client plans to discontinue a line of business. Correct Answer: D Explanation: In some cases.000 Allowable casualty loss: $17.000 Less: $100 floor: -100 Less: AGI limitation ($60. the variable costs per unit would be ignored. Even then. cause price to equal marginal cost. the corroborating information that can be obtained by the application of auditing procedures other than inquiry is limited. A competitive market cannot assure a fair price that all consumers can afford.000. The trustee is required to distribute $60. less the insurance reimbursement. D) It will be set equal to the marginal costs of production Correct Answer: D Explanation: In a competitive market.000 ($45. A price set equal to the total fixed cost of production fails to recognize that the total fixed cost should be divided by the total number of units produced. the auditor should obtain a written representation to provide confirmation of management's intent. C) It will be set equal to the total fixed costs of production. what amount is includible in Lind's gross income? A) $0 .000 x 10%): -6.000 Less reimbursement: -15.000 for the current year.000 down to $3. could be more readily corroborated by other evidence. in comparison to the plans to discontinue a line of business. additional production will be forthcoming.000 to Kent and $90. the forces of demand and supply will. If price is higher than marginal cost. for example. The decrease in fair market value was $42. D) Discontinue a line of business. subject to a $100 floor. using the cost basis. producers will quit producing. the auditor may not be able to obtain information through other auditing procedures to corroborate the plan or intent.000 Loss by taxpayer: 24. Today s question: REG The Simone Trust reported distributable net income of $120. If price is lower than marginal cost. in the long run. B) It will be set equal to the total costs of production. Therefore.000) and the cost basis was $39. Today s question: AUD A written client representation letter most likely would be an auditor's best source of corroborative information of a client's plans to: A) B) C) Terminate an employee pension plan.
Wax Corp.000 of dividends from Von Corporation in which Trapp had a 25% ownership interest.000) before the dividends received deduction is less than dividends received. Income per books: $80.000 Ordinary income: $85.000 D) $120. contracted with Noll Wholesalers to supply Noll with specific electrical parts. 2008..000 Correct Answer: D Explanation: The lesser of 80% of the (1) dividends received or (2) taxable income is used.000 Add back contributions: $5.000 will not cause a net operating loss. What is Trapp's dividends received deduction? A) $80. even though the performance called for under the contract was not due until June 3.000 What amount should be reported as ordinary income on the partnership return? A) $80. D) will permit Noll to sue immediately after May 2. and its capacity was such that it could not fulfill both orders. 2008.000 D) $90.000 B) $128. 2008. For the current year. B) are not sufficient to clearly establish an anticipatory repudiation. you must pro-rate the distribution. Inc.000 C) $72. Wax had received a larger and more lucrative contract on April 21.000. However. The contributions represent a separately stated item and are not deductible in computing ordinary income. Today s question: REG Nash and Ford are partners in a calendar year partnership and share profits and losses equally. Delivery was called for on June 3.000 Ford = $25. C) will permit Noll to sue only after June 3. then 60% of the $120.) Today s question: REG On March 7. the latest performance date. 2008.000 Correct Answer: C Explanation: When the distributable net income has been determined ($120. . only guaranteed payments are allowed. Trapp's operating expenses totaled $410.000 D) $145.000 Contributions = $5. (Note: Using the $128. As taxable income ($150. 2008. 2008. the partnership had book income of $80.000) and the distribution is greater than the DNI. had $400. for the computation of ordinary income. 2008.000 Correct Answer: B Explanation: Book income should include the deductions for guaranteed payments and contributions.000 is included as taxable income. Wax notified Noll that it would not perform and that Noll should look elsewhere. then in order to determine the taxable income to include in the beneficiary's income.000.B) $60. Trapp.000 is the DRD for this year. On May 2.000 B) $85. the $120.000 Today s question: REG This taxable year. Since Lind received 60% of the distribution.000 C) $140.000 C) $136.000 of gross profit from operations and $160.000 which included the following deductions: Guaranteed salaries to partners: Nash = $35. The facts _________________ A) will prevent Wax from retracting its repudiation of the Noll contract. or $72.
discounted with recourse at 10% a one-year. Wax may retract its repudiation as long as Noll hasn't canceled the contract or materially changed position. $20. A balance sheet reports on the financial position of a business enterprise. Current assets are presented in the order that they will be converted to cash or used up.500. 2010. Today s question: FAR On November 1. B. True B. 2009. B. Solvency refers to the amount of time that is expected to elapse until a liability has to be paid.500 note receivable maturing on January 31. 4. The statement of cash flows is divided into three different activities. 2. True False A. noninterest bearing. 71% (15 out of 21 correct) Responses to questions are indicated by the symbol. True False A. 2009? A) $0 B) $20. A. False Solvency refers to the ability to pay debts as they mature. 1. The balance sheet is sometimes referred to as the Statement of Financial Position. Thus. What amount of contingent liability for this note must Davis disclose in its financial statements for the year ended December 31. . Since this note is a noninterest bearing note. which is their order of liquidity. The injured party can sue immediately or wait until the time of performance and then sue. the contingent liability disclosed in the financial statements would be $20. Davis Co.Correct Answer: D Explanation: An anticipatory repudiation occurs when one side states they will not perform before the time of performance. 3. Wax told Noll prior to the time of performance that Wax would not perform. Noll can sue immediately and need not wait until June 3.333 D) $20.000 C) $20. Current assets are presented in the balance sheet in their order of liquidity.500 Correct Answer: D Explanation: A note discounted with recourse creates a contingent liability for the face of the note plus any interest due on the note.
7. 6. True B. True False The activities are: operating. B. A liability that is payable within the next year is sometimes included in long-term debt if the company expects to refinance the debt through another long-term issue or to retire the debt out of non-current assets. The current cash debt coverage ratio is equal to net cash provided by operating activities ÷ average total liabilities. True False A.A. 5. Indicators of strong financial flexibility include a low debt coverage ratio and negative free cash flow. A lower debt coverage ratio and negative free cash flow are indicators of poor financial flexibility. B. Companies rarely use estimates in valuing items on the balance sheet. True False A. B. Net working capital is the excess of total current assets over total current liabilities. True False A. The excess of total assets over total liabilities is referred to a net working capital. B. False It is net cash provided by operating activities ÷ average current liabilities. . investing and financing. B. A liability that is payable within the next year is sometimes included in long-term debt. True False A. 8. A. 9. Companies use judgments and estimates to determine many of the items reported on the balance sheet.
liquidity. 5 B. The use of the term reserve is discouraged in both U. Investments. C. 4 3 2 There are 5 subclassifications: current. The issuance of debt and equity securities is reported as a financing activity on the statement of cash flows. GAAP. solvency. A balance sheet is useful for analyzing all of the following except: A. Investments is a subcategory of assets. D. Investing activities on the statement of cash flows include the issuance of debt and equity securities. While the use of the term reserve is discouraged in U. B. B. GAAP and iGAAP. D. C.S. B. D. Held to maturity. True False A. Assets can be divided into how many subclassifications? A. 14. and other. there is no such prohibition in iGAAP. A. Which of the following is not one of the portfolio groupings for investments in debt and equity securities? Available-for-sale.S. financial flexibility.10. long-term investments. PP & E. Trading. 11. Profitability is determined primarily by analyzing information from the income statement. profitability. intangibles. C. B. True False A. not a type of portfolio. . 13. 12.
Franchises. B. Goodwill. B. Which of the following is not an intangible asset? Patents. Available-for-sale. D. C. D. D. cross-references and contra items. 17. 19. 4 B. A. Which of the following types of securities do not include equity securities? A. B. Trading. 18. Available-for-sale.15. A. B. and supporting schedules. plant & equipment asset. Which of the following securities are not reported in the balance sheet at their fair value? Held to maturity. Payment of interest expense would come under which activity on the statement of cash flows? Financing. C. None of the above. Held to maturity. Held to maturity securities are reported at their amortized cost. Held to maturity securities are only debt securities. C. . 16. 3 2 1 There are 4: parenthetical explanations. Trading. A. How many different ways may pertinent information be disclosed in the financial statements? A. D. notes. Wasting resources are a type of property. C. Operating. Wasting resources. None of the above include equity securities.
Investing. None of the above. B. Retake Test .C. 21. financing activities. D. D. Gain on sale of equipment. B. investing activities. Cash dividends are an outflow under the financing activities section. C. A. D. Operating activities involve the cash effects of transactions that enter into the determination of net income including interest expense. C. 20. Increase in inventory. Increase in accounts payable. None of the above. Which of the following would be added back to net income in the operating activities section of the statement of cash flows? Payment of a cash dividend. Increases in current liabilities are positive adjustments to net income in the operating activities section of the statement of cash flows. A. Payment of a cash dividend would be reported as a cash outflow in which of the following sections: operating activities.
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