Uniform CPA Examination Questions May 1980 To November 1981

University of Mississippi
eGrove
American Institute of Certified Public Accountants
Examinations and Study
(AICPA) Historical Collection
1982
Uniform CPA examination questions May 1980 to

November 1981
American Institute of Certified Public Accountants. Board of Examiners
Follow this and additional works at: https://egrove.olemiss.edu/aicpa_exam

Part of the Accounting Commons, and the Taxation Commons
Recommended Citation
American Institute of Certified Public Accountants. Board of Examiners, "Uniform CPA examination questions May 1980 to
November 1981" (1982). Examinations and Study. 143.
https://egrove.olemiss.edu/aicpa_exam/143
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Uniform CPA Examination
May 1980 to November 1981
Questions
American Institute of
Certified Public Accountants
Uniform CPA Examination
May 1980 to November 1981
Questions
Published by the
American Institute of
Certified Public Accountants
1211 Avenue of the Americas
New York, N.Y. 10036-8775
Copyright © 1982 American Institute of Certified Public Accountants, Inc.
1211 Avenue of the Americas, New York, N.Y. 10036-8775
1234567890 Ex 898765432
Foreword
This volume, the twentieth of its kind, includes the texts of the Uniform Certified Public Accountant
Examinations from May 1980 to November 1981 prepared by the Board of Examiners of the American Institute of
Certified Public Accountants and adopted by the examining boards of all states, territories, and the District of
Columbia. The nineteen prior volumes contain all the examinations since 1917.
While the American Institute of Certified Public Accountants does not publish official answers, it is felt that
students and CPA candidates may be benefited by a review of the unofficial answers published twice a year as a
supplement to the Journal of Accountancy. Consequently, we are publishing simultaneously with this volume a
companion book entitled Unofficial Answers to the Uniform Certified Public Accountant Examinations, May 1980
to November 1981, which contains unofficial answers to the questions in this volume.
A special note of thanks is extended to John G. Pate, Jr., University of Texas at El Paso, for the comprehensive
index included in this volume. A careful reading of this index may benefit candidates in their review when
preparing for future examinations.
William C. Bruschi, Vice President-Review and Regulation

American Institute of Certified Public Accountants
April 1982
Contents
Examination Questions
Page Page
May 1980 ................................................................... 1 May 1981 .................................................................. 109

November 1980........................................................... 53 November 1981...........................................................167
Accounting Practice—Part I
May 1980 .................................... .............................. 1 May 1981 ...................................................................109

November 1980............... ........................................... 53 November 1981...........................................................167
Accounting Practice—Part II
May 1980 ............................................................ 14 May 1981 .................................................................. 122

November 1980..................... .............................. . 66 November 1981...........................................................181
Auditing
May 1980 ................................................................... 24 May 1981 .................................................................. 136

Business Law
(Commercial Law)
May 1980 ................................................... ............... 33 May 1981 ............... ..................................................145

November 1980.................................... ..................... 87 November 1981 ...........................................................202
Accounting Theory
(Theory of Accounts)
May 1980 ................................................................ . 45 May 1981 ................... .........................................158

Index ............................................................................................................................................................................. 223

May 1980
Uniform Certified Public Accountant Examination

(Prepared by the Board o f Examiners o f the American Institute of Certified Public Accountants
and adopted by the examining boards of all states, territories, and the District of Columbia.)
EXAMINATION IN ACCOUNTING PRACTICE — PART I
May 7, 1980; 1:30 to 6:00 P.M.
NOTE TO CANDIDATES: Suggested time allotments are as follows:
Estimated Minutes
All questions are required: M inimum Maximum
No. 1 45 55
No. 2 45 55
No. 3 45 55
No. 4 45 55
No 5 . . . . 40 50
Total 220 270
INSTRUCTIONS TO CANDIDATES
(Disregard of these instructions may be considered as indicating inefficiency in accounting work.)
1. You must arrange the papers in numerical order of them immediately following the question to which
the questions. If more than one page is required they relate.
for an answer, write “ continued” at the bottom of
the page. Number pages consecutively. For in
stance, if 12 pages are used for your answers, they 4. Fourteen-column sheets, if any, should not be
should be numbered 1 through 12. The printed folded until all sheets, both wide and narrow, are
answer sheet provided for the objective-type items placed in the proper sequence and fastened
should be considered to be Page 1. together at the top left corner. All fourteen-
column sheets should then be wrapped around the
2. Answer all objective-type items on the printed back of the papers.
answer sheet provided for that purpose. It is to
your advantage to attempt all questions even if
you are uncertain of the answer. You are likely to 5. A CPA is continually confronted with the necessi
get the highest score if you omit no answers. ty of expressing opinions and conclusions in writ
ten reports in clear, unequivocal language.
Although the primary purpose of the examination
3 . Enclose all scratch sheets. Failure to enclose is to test the candidate’s knowledge and applica
scratch sheets may result in loss of grading points. tion of the subject matter, the ability to organize
Scratch sheets need not have page numbers, but and present such knowledge in acceptable written
you should show the question number and place language will be considered by the examiners.
1
Examination Questions— May 1980
Number 1 (Estimated time----- 45 to 55 minutes) 2. O n J u n e 3 0 , 1 9 7 9 , N e e d le C o r p o r a tio n p u r c h a se d

fo r c a sh at $10 per sh a re a ll 1 0 0 ,0 0 0 sh a res of th e
Instructions o u ts ta n d in g c o m m o n sto c k o f T h r e a d C o m p a n y . T h e
to ta l a p p r a is e d v a lu e o f id e n t if ia b le a s s e ts le s s lia b ilitie s
S e le c t th e best a n s w e r f o r e a c h o f t h e f o l l o w i n g o f T h r e a d w a s $ 1 ,4 0 0 ,0 0 0 at J u n e 3 0 , 1 9 7 9 , in c lu d in g
i t e m s r e l a t in g t o a variety of financial-accounting prob t h e a p p r a i s e d v a l u e o f T h r e a d ’s p r o p e r t y , p l a n t , a n d
lems. U s e a s o ft p e n c il, p r e fe r a b ly N o . 2 , to b la c k e n th e e q u i p m e n t ( it s o n l y n o n c u r r e n t a s s e t ) o f $ 2 5 0 , 0 0 0 . T h e
a p p r o p r i a t e c ir c l e o n t h e s e p a r a t e p r i n t e d a n s w e r s h e e t c o n s o lid a t e d b a la n c e sh e e t o f N e e d le C o r p o r a tio n a n d
to in d ic a te y o u r a n s w e r . Mark only one answer for each its w h o l l y o w n e d s u b s i d i a r y a t J u n e 3 0 , 1 9 7 9 , s h o u ld
item. Answer all items. Y o u r g r a d e w ill b e b a s e d o n r e fle c t
y o u r to ta l co rrect a n sw ers. a. A d e fe rr ed c r e d it (n e g a tiv e g o o d w ill) of
T h e f o l l o w i n g is a n e x a m p l e o f t h e m a n n e r in w h ic h $ 1 5 0 ,0 0 0 .
th e a n sw e r sh ee t s h o u ld b e m a r k e d : b. G o o d w ill o f $ 1 5 0 ,0 0 0 .
c. A d e fe rr ed c r e d it (n e g a tiv e g o o d w ill) of
Item $ 4 0 0 ,0 0 0 .
d. G o o d w ill o f $ 4 0 0 ,0 0 0 .
97. G ross b illin g s fo r m e r c h a n d is e s o ld by B aker
C om pany to its c u sto m e rs la s t year a m o u n te d to 3. The T roy C o r p o r a tio n w as o r g a n iz e d to con
$ 5 ,2 6 0 ,0 0 0 ; s a le s r e tu r n s a n d a llo w a n c e s r e d u c e d th e s o lid a te th e r e s o u r c e s o f A b le C o m p a n y and B aker,
a m o u n t s o w e d b y $ 1 6 0 ,0 0 0 . H o w m u c h w e r e n e t s a le s I n c . , in a b u s i n e s s c o m b i n a t i o n a p p r o p r i a t e l y a c c o u n t e d
la s t y e a r f o r B a k e r C o m p a n y ? f o r b y t h e p o o l i n g o f i n t e r e s t s m e t h o d . O n J a n u a r y 1,
a $ 4 ,8 0 0 ,0 0 0 1 9 8 0 , T r o y is s u e d 6 5 , 0 0 0 s h a r e s o f its $ 1 0 p a r v a l u e
b $ 5 ,1 0 0 ,0 0 0 v o tin g sto c k in exchange fo r a ll o f th e o u ts ta n d in g
c. $ 5 ,2 0 0 ,0 0 0 c a p ita l s to c k o f A b le a n d B a k e r . T h e e q u ity a c c o u n t
d. $ 5 ,2 6 0 ,0 0 0 b a la n c e s o f A b le a n d B a k e r o n th is d a te w e re :
Answer Sheet Able Baker Total

P a r v a lu e o f
97. c o m m o n sto c k $ 1 5 0 ,0 0 0 $ 4 5 0 ,0 0 0 $ 6 0 0 ,0 0 0
A d d itio n a l
p a id -in c a p ita l 2 0 ,0 0 0 5 5 ,0 0 0 7 5 ,0 0 0
R e t a i n e d e a r n in g s 1 1 0 ,0 0 0 2 1 0 ,0 0 0 3 2 0 ,0 0 0
Items to be Answered $ 2 8 0 ,0 0 0 $ 7 1 5 ,0 0 0 $ 9 9 5 ,0 0 0
W hat is th e b a la n c e in T r o y ’s “ A d d itio n a l P a id -in

C a p it a l’’ a c c o u n t im m e d ia te ly a fte r th e b u s in e s s c o m
1. F r o m in c e p tio n o f o p e r a t io n s , E ss e x C o r p o r a tio n b in a tio n ?
r e c o g n i z e d i n c o m e in it s f i n a n c i a l s t a t e m e n t s a n d f o r i n a. $0
com e ta x r e p o r tin g un der th e c o m p le te d -c o n tr a c t b. $ 2 5 ,0 0 0
m e th o d o f r e p o r tin g in c o m e fr o m lo n g -te r m c o n s tr u c c. $ 7 5 ,0 0 0
t i o n c o n t r a c t s . O n J a n u a r y 1, 1 9 7 9 , E s s e x c h a n g e d t o d. $ 3 9 5 ,0 0 0
th e p e r c e n t a g e -o f-c o m p le tio n m e th o d of in c o m e
r e c o g n itio n fo r fin a n c ia l sta te m e n t r e p o r tin g b u t not f o r
in c o m e ta x r e p o r tin g . E sse x c a n j u s t if y th e c h a n g e . 4. A tr u c k o w n e d a n d o p e r a te d b y G re en C o m p a n y
As of D ecem ber 31, 1978, E ssex c o m p ile d d a ta w a s in v o lv e d in a n a c c i d e n t w it h a n a u t o d r i v e n b y
sh o w in g th a t in c o m e under th e c o m p le te d -c o n tr a c t W h ite o n N o v e m b e r 15, 1 9 7 9 . G r e e n r e c e iv e d n o tic e o n
m e th o d a g g reg a ted $ 3 5 0 ,0 0 0 . If th e p er ce n ta g e -o f- J a n u a r y 1 0 , 1 9 8 0 , o f a la w s u it fo r $ 7 5 0 ,0 0 0 d a m a g e s fo r
c o m p le t io n m e th o d h a d b e e n u s e d , th e a c c u m u la te d in a p erson al in j u r y su ffer ed by W h ite . The com pany
c o m e fo r th e se c o n tr a c ts th r o u g h D e c e m b e r 3 1 , 1 9 7 8 , c o u n s e l b e l i e v e s it is p r o b a b l e t h a t t h e p l a i n t i f f w i l l b e
w o u ld h a v e b e e n $ 4 4 0 ,0 0 0 . A s s u m e th a t th e in c o m e ta x s u c c e s s fu l a g a in s t th e c o m p a n y fo r a n e s tim a te d a m o u n t
r a te fo r a ll y e a r s is 5 0 % . T h e c u m u la tiv e e ffe c t of o f $ 2 5 0 , 0 0 0 . C o u n s e l a l s o b e l i e v e s t h e r e is a c h a n c e t h e
c h a n g in g fr o m th e c o m p le te d -c o n tr a c t m e th o d to th e p l a i n t i f f w ill b e a w a r d e d a s m u c h a s $ 3 5 0 , 0 0 0 . G r e e n ’s
p e r c e n ta g e -o f-c o m p le tio n m e th o d m u st b e r e p o r te d by a c c o u n tin g y ea r e n d s o n D e c e m b e r 3 1 , a n d th e 1979
E s s e x in t h e 1 9 7 9 fin a n c ia l s ta te m e n ts w e r e issu e d on M arch 15, 1980.
a. R e ta in e d e a r n in g s sta te m en t as a $ 4 5 ,0 0 0 W h a t a m o u n t o f lo s s , if a n y , m u st b e a c cr u e d by a
c r e d it a d j u s t m e n t t o t h e b e g i n n i n g b a l a n c e . c h a r g e t o i n c o m e in 1 9 7 9 ?
b. I n c o m e s ta te m e n t a s a $ 4 5 ,0 0 0 c r e d it. a. $0
c. R e ta in e d e a r n in g s sta te m en t as a $ 9 0 ,0 0 0 b. $ 2 5 0 ,0 0 0
c r e d it a d ju s tm e n t t o th e b e g in n in g b a la n c e . c. $ 3 5 0 ,0 0 0
d. I n c o m e s ta te m e n t a s a $ 9 0 ,0 0 0 c r e d it. d. $ 7 5 0 ,0 0 0
2
Accounting Practice— Part I
8. O n J a n u a r y 1 , 1 9 7 9 , B u ild e r A s s o c ia t e s e n te r e d in
to a $ 1 ,0 0 0 ,0 0 0 lo n g - t e r m , fix e d -p r ic e c o n tr a c t t o c o n
Ite m s 5 a n d 6 a re b a s e d o n th e fo llo w in g in fo r m a str u c t a f a c to r y b u ild in g fo r M a n u f a c t u r in g C o m p a n y .
tion: B u ild e r a c c o u n t s fo r th is c o n tr a c t u n d e r th e p e r c e n ta g e -
o f - c o m p le t io n m e th o d . E s tim a te d p e r c e n ta g e o f c o m
I n f o r m a t i o n r e l a t in g t o t h e c a p i t a l s t r u c t u r e o f t h e p le tio n a n d e s t im a te d c o s t s a t c o m p le t io n at the end of
G a l a x y C o m p a n y is a s f o l l o w s : each quarter fo r 1 9 7 9 w e r e a s f o llo w s :
December 31
1978 1979 Estimated Percentage Estimated Costs
Quarter o f Completion at Completion
O u ts ta n d in g sh a r e s o f:
C o m m o n sto c k 9 0 ,0 0 0 90,000 1 10% $ 7 5 0 ,0 0 0
C o n v e r tib le p r e fer re d 1* 10% $ 7 5 0 ,0 0 0
sto c k 1 0 ,0 0 0 1 0 ,0 0 0 3 25% $ 9 6 0 ,0 0 0
9 % c o n v e r tib le b o n d s $ 1 ,0 0 0 ,0 0 0 $ 1 ,0 0 0 ,0 0 0 4* 25% $ 9 6 0 ,0 0 0
D u r in g 1 9 7 9 G a la x y p a id d iv id e n d s o f $ 2 .5 0 p e r s h a r e *N o w o r k p e r f o r m e d in t h e 2 n d a n d 4 t h q u a r t e r s .
o n it s p r e f e r r e d s t o c k . T h e p r e f e r r e d s t o c k is c o n v e r t i b l e
i n t o 2 0 , 0 0 0 s h a r e s o f c o m m o n s t o c k a n d is c o n s i d e r e d a
com m on sto c k e q u iv a le n t. T h e 9 % c o n v e r tib le b o n d s
are c o n v e r tib le in to 3 0 ,0 0 0 sh a r e s o f c o m m o n s to c k , b u t W h a t a m o u n ts sh o u ld b e r e p o r te d b y B u ild e r a s “ In
are not c o n s id e r e d c o m m o n sto c k e q u iv a le n ts . T h e n et c o m e o n C o n s t r u c t i o n C o n t r a c t ” in i t s q u a r t e r ly i n c o m e
in c o m e fo r th e year ended D ecem b er 31, 1979, is s ta te m e n ts b a s e d o n th e a b o v e in fo r m a tio n ?
$ 4 8 5 , 0 0 0 . A s s u m e t h a t t h e i n c o m e t a x r a t e is 5 0 % .
Gain (Loss) fo r the Three Months Ended

5. W h a t s h o u ld b e th e p r im a r y e a r n in g s p e r s h a r e ,
r o u n d e d to th e n e a r e st penny, fo r th e year ended March June September December
D ecem b er 3 1 , 1979? 31, 1979 30, 1979 30, 1979 31, 1979
a. $ 3 .7 9
b. $ 4 .2 1 a. $0 $0 $0 $ 1 0 ,0 0 0
c. $ 4 .4 1 b. $ 2 5 ,0 0 0 $0 $ ( 1 5 ,0 0 0 ) $0
d. $ 4 .7 3 c. $ 2 5 ,0 0 0 $0 $0 $0
d. $ 2 5 ,0 0 0 $0 $ 6 ,0 0 0 $0
6. W hat s h o u ld be th e fu lly d ilu te d e a r n in g s per
sh a r e , r o u n d e d to th e n e a r est p e n n y , fo r th e y ea r e n d e d
D e cem b er 3 1 , 1979? 9. A fo r e ig n s u b s id ia r y o f th e S a te lite C o r p o r a tio n
a. $ 3 .7 9 h a s c e r t a in b a la n c e sh eet a c co u n ts at D ecem ber 31,
b. $ 3 .9 6 1 9 7 9 . I n f o r m a t i o n r e l a t in g t o t h e s e a c c o u n t s in U n i t e d
c. $ 4 .1 1 S t a t e s d o l l a r s is a s f o l l o w s :
d. $ 4 .5 1
Translated at
Current Historical
Rates Rates
7. S e le c te d in fo r m a tio n fo r 1 9 7 9 fo r th e P r in c e C o m
M a r k e t a b l e s e c u r it i e s
p a n y is a s f o l l o w s :
c a r r ie d a t c o s t $ 7 5 ,0 0 0 $ 8 5 ,0 0 0
I n v e n t o r i e s c a r r ie d a t
C o s t o f g o o d s so ld $ 5 ,4 0 0 ,0 0 0
a v era g e co st 6 0 0 ,0 0 0 7 0 0 ,0 0 0
A v e r a g e in v e n to r y 1 , 8 0 0 ,0 0 0
R e fu n d a b le d e p o s it s 2 5 ,0 0 0 3 0 ,0 0 0
N e t s a le s 7 ,2 0 0 ,0 0 0
P a te n ts 5 5 ,0 0 0 7 0 ,0 0 0
A v e r a g e r e c e iv a b le s 9 6 0 ,0 0 0
N e t in c o m e 7 2 0 ,0 0 0 $ 7 5 5 ,0 0 0 $ 8 8 5 ,0 0 0
A s s u m in g a b u s in e s s y ea r c o n s is tin g o f 3 6 0 d a y s , w h a t W h a t t o t a l s h o u l d b e i n c l u d e d in S a t e l i t e ’s b a l a n c e s h e e t
w a s t h e a v e r a g e n u m b e r o f d a y s in t h e o p e r a t i n g c y c l e a t D e c e m b e r 3 1 , 1 9 7 9 , a s a r e s u lt o f t h e a b o v e i n f o r m a
fo r 1979? tio n ?
a. 72 a. $ 7 7 0 ,0 0 0
b. 84 b. $ 7 8 0 ,0 0 0
c. 144 c. $ 8 7 0 ,0 0 0
d. 168 d. $ 8 8 0 ,0 0 0
3
13. S m ith Com pany had net in c o m e for 1979 of

I t e m s 1 0 a n d 11 a r e b a s e d o n t h e f o l l o w i n g i n f o r $ 5 ,3 0 0 ,0 0 0 a n d e a r n in g s per sh a re o n c o m m o n sto c k o f
m a tio n : $ 2 . 5 0 . I n c l u d e d in t h e n e t i n c o m e w a s $ 5 0 0 , 0 0 0 o f b o n d
in te r e st e x p e n s e r e la te d t o its l o n g - t e r m d e b t . T h e in
F o x C o m p a n y , a d e a l e r in m a c h i n e r y a n d e q u i p c o m e ta x rate fo r 1979 w a s 5 0 % . D iv id e n d s o n preferred
m e n t , l e a s e d e q u i p m e n t t o T i g e r , I n c . , o n J u l y 1, 1 9 7 9 . stock w ere $ 3 0 0 ,0 0 0 . The d iv id en d -p a y o u t ra tio on
T h e l e a s e is a p p r o p r i a t e l y a c c o u n t e d f o r a s a s a l e b y F o x c o m m o n sto ck w a s 4 0 % . W h a t w ere the d iv id e n d s o n
a n d a s a p u r c h a s e b y T i g e r . T h e l e a s e is f o r a 1 0 - y e a r c o m m o n s t o c k in 1 9 7 9 ?
p erio d (th e u sefu l life o f the a ss et) e x p irin g J u n e 30, a. $ 1 ,8 0 0 ,0 0 0
1 9 8 9 . T h e fir s t o f 1 0 e q u a l a n n u a l p a y m e n t s o f $ 5 0 0 , 0 0 0 b. $ 1 ,9 0 0 ,0 0 0
w a s m a d e o n J u l y 1, 1 9 7 9 . F o x h a d p u r c h a s e d t h e e q u i p c. $ 2 ,0 0 0 ,0 0 0
m ent for $ 2 ,6 7 5 ,0 0 0 o n January 1, 1979, and esta b d. $ 2 ,1 2 0 ,0 0 0
l i s h e d a list s e l l i n g p r i c e o f $ 3 , 3 7 5 , 0 0 0 o n t h e e q u i p
m e n t . A s s u m e t h a t t h e p r e s e n t v a l u e a t J u l y 1, 1 9 7 9 , o f
th e rent p a y m e n t s o v e r t h e le a s e t e r m d i s c o u n t e d at 12% 14. On January 1, 1979, the C a rp et C o m p a n y lent
(th e a p p r o p r i a t e in te re st r a te) w a s $ 3 , 1 6 5 , 0 0 0 . $ 1 0 0 , 0 0 0 t o its s u p p l i e r , L o o m C o r p o r a t i o n , e v i d e n c e d
b y a n o t e , p a y a b l e in 5 y e a r s . I n t e r e s t at 5 % is p a y a b l e
10 . W h a t is t h e a m o u n t o f p r o f i t o n t h e s a l e a n d t h e a n n u a l l y w it h t h e first p a y m e n t d u e o n D ecem b er 31,
a m o u n t o f in te re st i n c o m e th a t F o x s h o u l d r e c o r d for 1 9 7 9 . T h e g o i n g r a t e o f i n t e r e s t f o r t h i s t y p e o f l o a n is
the yea r e n d e d D e c e m b e r 31, 1979? 1 0 % . T h e p a r t i e s a g r e e d t h a t C a r p e t ’s i n v e n t o r y n e e d s
a. $0 an d $ 1 5 9 ,9 0 0 . fo r th e lo a n p e r io d w ill be m e t b y L o o m at fa v o r a b le
b. $ 4 9 0 ,0 0 0 an d $ 1 5 9 ,9 0 0 . p r ic e s . A s s u m e th a t t h e p r e s e n t v a l u e (at t h e g o i n g rate
c. $ 4 9 0 ,0 0 0 an d $ 1 8 9 ,9 0 0 . o f i n t e r e s t ) o f t h e $ 1 0 0 , 0 0 0 n o t e is $ 8 1 , 0 0 0 a t J a n u a r y 1,
d. $ 7 0 0 ,0 0 0 a n d $ 1 8 9 ,9 0 0 . 1979. W h a t a m o u n t o f interest in c o m e , if a n y , sh o u ld
b e i n c l u d e d in C a r p e t ’s 1 9 7 9 i n c o m e s t a t e m e n t ?
11. A s s u m in g that T ig er u ses str a ig h t-lin e d e p r e c ia a. $0
t i o n , w h a t is t h e a m o u n t o f d e p r e c i a t i o n a n d i n t e r e s t e x b. $ 4 ,0 5 0
pense that T ig er sh o u ld record for the year ended c. $ 5 ,0 0 0
D e ce m b e r 31, 1979? d. $ 8 ,1 0 0
a. $ 1 5 8 ,2 5 0 a n d $ 1 5 9 ,9 0 0 .
b. $ 1 5 8 ,2 5 0 a n d $ 1 8 9 ,9 0 0 .
15. On January 1, 1979, Star Com pany paid
c. $ 1 6 8 ,7 5 0 an d $ 1 5 9 ,9 0 0 .
$ 1 , 2 0 0 , 0 0 0 f o r 4 0 , 0 0 0 s h a r e s o f C o m e t C o r p o r a t i o n ’s
d. $ 1 6 8 ,7 5 0 an d $ 1 8 9 ,9 0 0 .
com m on stock w h ic h rep resents a 2 5 % i n v e s t m e n t in
th e net a ss e ts o f C o m e t . Star has the a b ility to e x ercise
sig n ific a n t in flu e n c e o v e r C o m e t . Star r ec eiv e d a d iv i
12. D a r t C o m p a n y w a s f o r m e d o n J a n u a r y 1, 1 9 7 8 . dend of $3 per share from C om et in 1979. C om et
S elected b a la n ce s fr o m th e h isto rica l c o st b a la n c e sh eet rep orted net in c o m e o f $ 6 4 0 ,0 0 0 for th e year e n d ed
at D e c e m b e r 3 1 , 1 9 7 9 , w e r e a s f o llo w s : D e c e m b e r 3 1 , 1 9 7 9 . T h e b a l a n c e in S t a r ’s b a l a n c e s h e e t
account “ Investm en t in C om et C o rp o ra tio n ’’ at
L a n d ( p u r c h a s e d J a n u a r y 1, D e cem b er 31, 1979, sh o u ld be
1978) $ 9 0 ,0 0 0 a. $ 1 ,2 0 0 ,0 0 0
M a r k e ta b le se c u r ities, n o n - b. $ 1 ,2 4 0 ,0 0 0
con v ertib le b o n d s c. $ 1 ,3 6 0 ,0 0 0
( p u r c h a s e d J u l y 1, 1 9 7 8 , a n d d. $ 1 ,4 8 0 ,0 0 0
e x p e c te d to be h eld to m a tu rity ) 5 0 ,0 0 0
L on g-term debt 7 0 ,0 0 0
16. On A p ril 30, 1979, S ta n d a rd , In c., purchased
T h e a v e ra g e C o n s u m e r P rice In d ex w a s 100 fo r 1978, D y n a m o C o rp o ra tio n , 10-year, 9 % b o n d s w ith a face
and 1 1 0 f o r 1 9 7 9 . In a s u p p l e m e n t a r y c o n s t a n t d o l l a r v a lu e o f $ 1 2 0 ,0 0 0 for $ 1 3 3 ,6 0 0 , w h ic h in c lu d e s $ 3 ,6 0 0
b a la n ce sheet (adju sted for ch a n g in g p rices) at a c c r u e d i n t e r e s t . T h e b o n d s m a t u r e o n J a n u a r y 1, 1 9 8 6 ,
D ecem ber 31, 1979, th ese selected account balan ces a n d p a y i n t e r e s t o n J a n u a r y 1 a n d J u l y 1. S t a n d a r d u s e s
s h o u l d b e s h o w n at the str a ig h t-lin e m e th o d o f a m o r tiz a tio n . T h e a m o u n t
o f in c o m e S ta n d a r d s h o u ld rep ort for the year e n d e d
Marketable Long-term D e c e m b e r 3 1 , 1 9 7 9 , as a resu lt o f th is lo n g - t e r m b o n d
Land Securities Debt i n v e s t m e n t , is
a. $ 9 0 ,0 0 0 $ 5 0 ,0 0 0 $ 7 0 ,0 0 0 a. $ 6 ,2 0 0
b. $ 9 0 ,0 0 0 $ 5 5 ,0 0 0 $ 7 7 ,0 0 0 b. $ 6 ,3 9 3
c. $ 9 9 ,0 0 0 $ 5 0 ,0 0 0 $ 7 0 ,0 0 0 c. $ 6 ,5 3 3
d. $ 9 9 ,0 0 0 $ 5 5 ,0 0 0 $ 7 7 ,0 0 0 d. $ 8 ,2 0 0
4
Accounting Practice — Part I
17. During 1979 Criterion Corporation issued at 105, 20. On March 1, 1980, Williams Corporation issued at
two hundred $1,000 bonds due in ten years. One 103 plus accrued interest, one hundred of its 9 % , $1,000
detachable stock purchase warrant entitling the holder bonds. The bonds are dated January 1, 1980, and
to buy 20 shares of Criterion’s common stock was at mature on January 1, 1990. Interest is payable semi
tached to each bond. Shortly after issuance, each bond annually on January 1 and July 1. Williams paid bond
had a market value o f $940, and each warrant was issue costs of $5,000. Based on the information above,
quoted at $60. What amount, if any, of the proceeds Williams would realize net cash receipts from the bond
from the bond issuance should be recorded as part of issuance of
Criterion’s stockholders’ equity? a. $ 98,000
a. $0 b. $ 99,500
b. $12,000 c. $103,000
c. $12,600 d. $104,500
d. $13,404
18. The net income for the year ended December 31, Number 2 (Estimated time----- 45 to 55 minutes)
1979, for Diamond Company was $2,500,000. Addi
tional information is as follows: Instructions
Depreciation of fixed assets $2,900,000 Select the best answer for each o f the following
Dividends paid on preferred stock 200,000 items relating to a variety of managerial-accounting and
Long-term debt: quantitative-methods problems. Use a soft pencil,
Bond discount amortization 50,000 preferably No. 2, to blacken the appropriate circle on
Interest expense 800,000 the separate printed answer sheet to indicate your
Provision for doubtful accounts on answer. Mark only one answer for each item. Answer all
long-term receivables 250,000 items. Your grade will be based on your total correct
Amortization of goodwill 90,000 answers.
What should be the working capital provided from Items to be Answered

operations in the statement of changes in financial posi
tion for the year ended December 31, 1979? 21. The Insulation Corporation sells two products, D
a. $5,490,000 and W. Insulation sells these products at a rate o f 2
b. $5,540,000 units of D to 3 units of W. The contribution margin is
c. $5,790,000 $4 per unit for D and $2 per unit for W. Insulation has
d. $5,990,000 fixed costs o f $420,000. What would be the total units
sold at the breakeven point?
a. 140,000
19. The following information was taken from the ac b. 150,000
counting records of Oregon Corporation for 1979: c. 168,000
d. 180,000
Proceeds from issuance of preferred
stock $4,000,000 22. Virginia Company invested in a four-year project.
Dividends paid on preferred stock 400,000 Virginia’s expected rate o f return is 10%. Additional in-
Bonds payable converted to common formation on the project is as follows:
stock 2,000,000
Purchases of treasury stock, common 500,000
Sale of plant building 1,200,000 Cash in flo w f r o m P resen t
2% stock dividend on common stock 300,000 op era tio n s, net o f value o f
Year in com e taxes $1 a t 10%
Oregon’s statement of changes in financial position for
the year ended December 31, 1979, should show the 1 $4,000 .909
following sources and uses o f funds, based on the infor 2 4,400 .826
mation above 3 4,800 .751
4 5,200 .683
Sources Uses
Assuming a positive net present value o f $1,000, what
was the amount o f the original investment?
a. $5,200,000 $ 1, 200,000 a. $ 2,552
b. $5,500,000 $ 1, 200,000 b. $ 4,552
c. $7,200,000 $2,900,000 c. $13,427
d. $7,500,000 $3,200,000 d. $17,400
5
Examination Questions—May 1980
23. Davis Company has budgeted its activity for April 27. Superior Company manufactures products A and
1980. Selected data from estimated amounts are as B from a joint process which also yields a by-product,
follows: X. Superior accounts for the revenues from its by
product sales as a deduction from the cost of goods sold
Net income $ 120,000 o f its main products.
Increase in gross amount of Additional information is as follows:
trade accounts receivable
during month 35,000 P ro d u c ts
Decrease in accounts payable A B X T otal
during month 25,000
Depreciation expense 65,000 Units pro
Provision for income taxes 80,000 duced 15,000 9,000 6,000 30,000
Provision for doubtful accounts Joint costs ? ? ? $264,000
receivable 45,000 Sales value
at split-off $290,000 $150,000 $10,000 $450,000
On the basis of the above data, Davis has budgeted a
cash increase for the month in the amount of Assuming that joint product costs are allocated using
a. $ 90,000 the relative-sales-value at split-off approach, what was
b. $195,000 the joint cost allocated to product B?
c. $250,000 a. $79,200
d. $300,000 b. $88,000
c. $90,000
d. $99,000
Items 24 and 25 are based on the following infor
mation: 28. Stellar Corporation manufactures products R and
S from a joint process. Additional information is as
Plastics, Inc., is considering the purchase of a follows:
$40,000 machine which will be depreciated on a Straight-
line basis over an eight-year period with no salvage P ro d u ct
value. The machine is expected to generate net cash in R Total
come before income taxes of $12,000 a year. Assume
that the income tax rate is 50%.
Units produced 4,000 6,000 10,000
24. What is the pay-back period? Joint costs $36,000 $ 54,000 $ 90,000
a. 2.4 years. Sales value at
b. 2.6 years. split-off
c. 3.3 years. Additional costs if
d. 4.7 years. processed further $ 3,000 $ 26,000 $ 29,000
Sales value if
25. What is the accounting (book value) rate of return processed further $63,000 $126,000 $189,000
on the initial increase in required investment? Additional margin if
a. g.75% processed further $ 12,000 ? $ 40,000
b. 17.50%
c. 23.75% Assuming that joint costs are allocated on the basis of
d. 30.00% relative-sales-value at split-off, what was the sales value
at split-off for product S?
a. $ 72,000
b. $ 82,000
c. $ 98,000
26. Day Company is a medium-sized manufacturer of d. $100,000
lamps. During 1979 a new line called “ Twilight” was
made available to Day’s customers. The break-even 29. Moon Company sells product Q at $6 a unit. In
point for sales of Twilight is $400,000 with a contribu 1980 fixed costs are expected to be $200,000 and
tion margin of 40%. Assuming that the operating profit variable costs are estimated at $4 a unit. How many
for the Twilight line for 1979 amounted to $200,000, units o f product 0 must Moon sell to generate operating
total sales for 1979 amounted to income of $40,000?
a. $600,000 a. 50,000
b. $840,000 b. 60,000
G. $900,000 c. 100,000
d. $950,000 d. 120,000
6
30. Roberts, Inc., purchased a machine for $240,000. 33. Roy Company manufactures product X in a two-
The machine has a useful life o f six years and no salvage stage production cycle in Departments A and B.
value. Straight-line depreciation is to be used. The Materials are added at the beginning o f the process in
machine is expected to generate cash flow from opera Department B. Roy uses the weighted-average method.
tions, net o f income taxes, o f $70,000 in each of the six Conversion costs for Department B were 50% complete
years. Roberts’ expected rate o f return is 12%. Informa as to the 6,000 units in the beginning work in process
tion on present value factors is as follows: and 75% complete as to the 8,000 units in the ending
work in process. 12,000 units were completed and
P resen t value o f
P resen t value o rd in a ry an n u ity
transferred out o f Department B during February 1980.
o f $1 a t 12% o f $1 a t 12%
An analysis o f the costs relating to work in process
P e rio d
(WIP) and production activity in Department B for
February 1980 is as follows:
1 .893 .893
2 .797 1.690 C o sts
3 .712 2.402
4 3.037 Trans
.636
.567 f e r r e d In M a teria ls C o n versio n
5 3.605
6 .507 4.111 WIP, February 1:
Costs attached $12,000 $2,500 $1,000
What would be the net present value? February activity:
a. $ 35,490 Costs added 29,000 5,500 5,000
b. $ 47,770
c. $121,680 The total cost per equivalent unit transferred out for
d. $123,330 February 1980 of product X, rounded to the nearest
penny, was
31. The following information relates to the Gerald a. $2.75
Company: b. $2.78
c. $2.82
Optimal production run 500 d. $2.85
Average inventory in units 250
Number of production runs 10 34. Home Company manufactures tables with vinyl
Cost per unit produced $5 tops. The standard material cost for the vinyl used per
Desired annual return on Type-R table is $7.80 based on six square feet of vinyl at
inventory investment 10% a cost o f $1.30 per square foot. A production run o f
Set up costs per production run $10 1,000 tables in January 1980 resulted in usage o f 6,400
square feet of vinyl at a cost of $1.20 per square foot, a
Assuming that the units will be required evenly total cost o f $7,680. The usage variance resulting from
throughout the year, what are the total annual relevant the above production run was
costs using the economic-order-quantity approach? a. $120 favorable.
a. $ 225 b. $480 unfavorable.
b. $ 350 c. $520 unfavorable.
c. $1,350 d. $640 favorable.
d. $2,625
35. Alden Company has a standard absorption and
32. Milton, Inc., had 8,000 units o f work in process in flexible budgeting system and uses a two-way analysis of
its Department M on March 1, 1980, which were 50% overhead variances. Selected data for the February 1980
complete as to conversion costs. Materials are intro production activity is as follows:
duced at the beginning of the process. During March
17,000 units were started, 18,000 units were completed Budgeted fixed factory overhead costs $ 64,000
and there were 2,000 units o f normal spoilage. Milton Actual factory overhead incurred $230,000
had 5,000 units o f work in process at March 31, 1980, Variable factory overhead rate per
which were 60% complete as to conversion costs. Under direct-labor hour $5
Milton’s cost accounting system, spoiled units reduce Standard direct-labor hours 32,000
the number o f units over which total cost can be spread. Actual direct-labor hours 33,000
Using the weighted-average method, the equivalent
units for March for conversion costs were The budget (controllable) variance for February 1980 is
a. 17,000 a. $1,000 favorable.
b. 19,000 b. $1,000 unfavorable.
c. 21,000 c. $6,000 favorable.
d. 23,000 d. $6,000 unfavorable.
7
36. The Beauty Company produces a cosmetic pro 39. Lion Company’s direct-labor costs for the month
duct in 60 gallon batches. The basic ingredients used are of January 1980 were as follows:
material X costing $7 per gallon and material Y costing
$17 per gallon. No more than 18 gallons o f X can be Actual direct-labor hours 20,000
used, and at least 15 gallons o f Y must be used. How Standard direct-labor hours 21,000
would the objective function (minimization of product Direct-labor rate variance-
cost) be expressed? unfavorable $3,000
a. 7 X + 17Y Total payroll $126,000
b. 17 X -I- 7Y
c. 18X + 15Y What was Lion’s direct-labor efficiency variance?
d. 18X + 42Y a. $6,000 favorable.
b. $6,150 favorable.
c. $6,300 favorable.
37. Motor Company manufactures 10,000 units of d. $6,450 favorable.
Part M -1 for use in its production annually. The follow
ing costs are reported: 40. Light Company has 2,000 obsolete light fixtures
that are carried in inventory at a manufacturing cost of
Direct materials $ 20,000 $30,000. If the fixtures are reworked for $10,000, they
Direct labor 55,000 could be sold for $18,000. Alternately, the light fixtures
Variable overhead 45,000 could be sold for $3,000 to a jobber located in a distant
Fixed overhead 70,000 city. In a decision model analyzing these alternatives,
$190,000 the opportunity cost would be
a. $ 3,000
b. $10,000
Valve Company has offered to sell Motor 10,000 units c. $13,000
o f Part M-1 for $18 per unit. If Motor accepts the offer, d. $30,000
some o f the facilities presently used to manufacture Part
M-1 could be rented to a third party at an annual rental
of $15,000. Additionally, $4 per unit of the fixed
overhead applied to Part M-1 would be totally Number 3 (Estimated time----- 45 to 55 minutes)
eliminated. Should Motor accept Valve’s offer, and
why? Instructions
a. No, because it would be $5,000 cheaper to
make the part. Select the b est answer for each of the following
b. Yes, because it would be $10,000 cheaper to items relating to the federal income taxation of in
buy the part. dividuals. Use a soft pencil, preferably No. 2, to
c. No, because it would be $15,000 cheaper to blacken the appropriate circle on the separate printed
make the part. answer sheet to indicate your answer. The answers
d. Yes, because it would be $25,000 cheaper to should be based upon the Internal Revenue Code and
buy the part. Tax Regulations in effect for the tax period specified in
the item. If n o tax period is specified, use the current In
ternal Revenue Code and Tax Regulations. Mark only
38. The following information relates to Eagle one answer for each item. Answer all items. Your grade
Company’s material A: will be based on your total correct answers.
Annual usage in units 7,200 Items to be Answered

Working days per year 240
Normal lead time in working days 20
Maximum lead time in working days 45 41. John Wolf, who is 45 years old and unmarried,
contributed $600 monthly in 1979 to the support o f his
Assuming that the units of material A will be required parents’ household. The parents lived alone and their
evenly throughout the year, the safety stock and order income for 1979 consisted o f $1,000 from qualifying
point would be dividends and interest, and $3,600 from Social Security.
Based on the above information, what is W olf’s filing
Safety Stock Order Point status for 1979, and how many exemptions should he
claim on his tax return?
a. 600 750 a. Single and 1 exemption.
b. 600 1,350 b. Head of household and 1 exemption.
c. 750 600 c. Single and 3 exemptions.
d. 750 1,350 d. Head o f household and 3 exemptions.
8
42. For the year 1979 Peter Paul had the following 45. In examining the records of Bill Temple for 1979,
capital transactions: a cash-basis sole proprietor, the following information
was available:
$3,000 net long-term capital gain
$1,000 net short-term capital loss Gross receipts $45,000
Dividend income (on personal
What is the amount of Paul’s long-term capital gain investments) 300
deduction for 1979? Cost of sales 22,500
a. $ 600 Other operating expenses 4,500
b. $ 800 State business taxes paid 450
c. $1,200 Federal self-employment tax paid 1,400
d. $1,800
What amount should Temple report as net earnings
43. Adam King, a self-employed accountant, sold a from self-employment for 1979?
mahogany executive desk for $1,300 on December 31, a. $16,150
1979. Additional information is as follows: b. $17,550
c. $17,850
Original cost $ 1,200 d. $18,000
Salvage value $ 100
Purchase date January 1 , 1975 46. Jon Parks, a cash-basis taxpayer, is the owner of
Depreciation on the double-declining an apartment building containing 20 identical apart
method properly deducted over the ments. Parks resides in one apartment and rents out the
years held $ 800 remaining units. For 1979 the following information
Straight-line depreciation allowable over was available:
the years held would have been $ 550 Gross rental income $43,200
Fuel 5,000
King would recognize gain on the sale of the desk in Maintenance and repairs
1979 as (rental apartments) 2,400
Advertising for vacant apartments 600
Ordinary Section 1231 Depreciation of building 10,000
Income Treatment
What amount should Parks report as net rental income
a. $100 $800 for 1979?
b. $350 $550 a. $25,200
c. $550 $350 b. $25,950
d. $800 $100 c. $26,100
d. $35,200
47. During 1979 William Dover was granted a divorce

from his wife. The divorce decree stipulated that he was
44. During 1979 John and Mary Leonard received the to pay both alimony and child support for a specified
following dividends on their jointly held investments: period of time. The alimony payments were considered
to be periodic payments for income tax purposes. In ex
• Dividends of $1,400 from Dominion, Ltd., an amining his records for 1979, the following information
Australian corporation. is available:
• Capital gain distribution of $600 from Apollo
Mutual Fund. Salary $60,000
• Dividends of $1,000 from United Utilities Interest received on bank deposits 3,000
Corporation, which constitutes a return of Interest received on municipal
capital. obligations 1,500
• Dividends of $100 from Truck Company, a
$64,500
taxable domestic corporation.
Alimony paid $ 4,200
Assuming that the Leonards file a joint return for 1979, Child support paid 5,400
what amount should they report as dividend income
after the allowable exclusion? What is Dover’s adjusted gross income for 1979?
a. $1,300 a. $54,900
b. $1,400 b. $58,800
c. $2,900 c. $60,300
d. $3,100 d. $63,000
9
48. In 1979 Uriah Stone received the following interest 51. Roger Goodfriend’s adjusted gross income was
payments: $50,000 in 1979. He made the following contributions to
qualified charitable organizations during the year:
• Interest of $400 on refund of federal income
tax for 1976. • $10,000 cash
• Interest of $300 on award for personal injuries • 1,000 shares of common stock of Electronics
sustained in an automobile accident during Corporation (bought in 1974 for $5,000) with
1978. a fair market value of $17,000 on the date of
• Interest of $1,500 on municipal bonds. the contribution.
• Interest of $1,000 on United States savings
bonds (Series H). What is the maximum amount Goodfriend can claim as
a deduction for charitable contributions in 1979?
What amount, if any, should Stone report as interest in a. $15,000
come on his 1979 tax return? b. $21,000
a. $0 c. $22,200
b. $ 700 d. $25,000
c. $1,700
d. $3,200
52. William and Mary Heller had adjusted gross in
49. For the year 1979 Frances Quinn had a time come of $35,000 in 1979. During the year they paid the
savings account with the Benevolent Savings Bank. The following medical expenses:
following entries appeared in her passbook for 1979:
Medicines and drugs $ 300
March 30, 1979, interest credited $150 Doctors 1,000
June 29, 1979, interest credited $160 Medical care insurance 700
July 25, 1979, penalty forfeiture because Cost of vitamins prescribed by physician 500
of a premature withdrawal $ 125
September 28, 1979, interest credited $ 80 What amount can the Hellers utilize as medical expenses
December 28, 1979, interest credited $ 85 in calculating excess itemized deductions for 1979?
a. $ 650
b. $ 950
c. $1,100
The above information should be reported by Ms. d. $1,150
Quinn on her 1979 tax return as
a. Interest income of $350.
b. Interest income of $475. 53. During 1979 Mr. and Mrs. Benson provided
c. Interest income of $475 and an itemized substantially all the support, in their own home, for
deduction for interest expense of $125. their son John, age 26, and for Mrs. Benson’s cousin
d. Interest income of $475 and a deduction of Nancy, age 17. John had $1,100 of income for 1979,
$125 in arriving at adjusted gross income. and Nancy’s income was $500. The Bensons paid the
following medical expenses during the year:
50. Eugene and Linda O’Brien had adjusted gross in
come of $30,000 in 1979. Additional information is Medicines and drugs:
available for 1979 as follows; For themselves $400
For John 500
Cash contribution to church $1,500 For Nancy 100
Tuition paid to parochial school 1,200
Contribution to a qualified charity made by Doctors:
a bank credit card charge on December 14, For themselves 600
1979. The credit card obligation was For John 900
paid on January 11, 1980. 250 For Nancy 200
Cash contribution to needy family 100
What is the total amount of medical expenses (before
What is the maximum amount of the above that they application of any limitation rules) that would enter into
can utilize in calculating excess itemized deductions for the calculation of excess itemized deductions on the
1979? Bensons’ 1979 tax return?
a. $1,500 a. $1,000
b. $1,750 b. $1,300
c. $2,700 c. $2,400
d. $3,050 d. $2,700
10
54. On December 24, 1979, Otis Johnson was seri 57. Richard Brown, who retired on May 31, 1979,
ously injured in a collision while driving his car. The receives a monthly pension benefit of $700 payable for
car, which cost Johnson $6,000 and was used solely for life. The first pension check was received on June 15,
personal use, had an appraised value of $4,200 for 1979. During his years of employment, Brown con
trade-in purposes just before the accident. After his tributed $14,700 to the cost of his company’s pension
release from the hospital on January 25, 1980, Johnson plan. How much of the pension amounts received may
traded in the car for a new car at an allowance of Brown exclude from taxable income for the years 1979,
$2,200. Johnson also received a settlement of $1,500 1980, and 1981?
under his collision insurance policy in February 1980. 1979 1980 1981
What amount can he deduct as a casualty loss on his tax
return, and in which year should the deduction be a. $ 0 $ 0 $ 0
taken? b. $4,900 $4,900 $4,900
a. $400 in 1979. c. $4,900 $8,400 $1,400
b. $400 in 1980. d. $4,900 $8,400 $8,400
c. $500 in 1979. 58 Jerry and Ann Parsell paid the following expenses
d. $500 in 1980. during 1979:
55. The following information is available for Jack Interest on automobile loan $ 1,500
and Jill Moore, who reside in Indiana, for 1979: Interest on bank loan (loan proceeds
were used to purchase municipal bonds) 5,000
Adjusted gross income $10,500 Interest on home mortgage for period
Exemptions (including 2 exemptions January 1 to June 29, 1979 1,800
claimed for being over 65) 4 Penalty payment for prepayment of
Social Security benefits received $3,000 home mortgage on June 29, 1979 1,200
An abstract from the Optional Sales Tax Table for What is the maximum amount that the Parsells can
Indiana is presented below: utilize as interest expense in calculating excess itemized
Sales Tax deductions for 1979?
a. $3,300
Family Size Family Size b. $4,500
Income 1&2 3&4 c. $8,300
d. $9,500
$10,001-$12,000 $124 $148
$12,001-$14,000 $138 $165 59. The following information is available for Chester
Hohn and his wife Pearl for 1979:
Assuming that the Moores elect to use the Optional Adjusted gross income $25,000
Sales Tax Table, what is the maximum amount of Payment to an Individual Retirement
general sales taxes that they can utilize in calculating ex Account 1,500
cess itemized deductions for 1979? Total itemized deductions 7,500
a. $124
b. $138 Based on the above information, the Hohns should
c. $148 report tax table income for 1979 of
d. $165 a. $16,000
b. $17,500
56. Robert Weber resides in a state that imposes a tax c. $19,400
on income. The following information relating to d. $20,900
Weber’s state income taxes is available:
60. Jim Planter, who reached age 65 on January 1,
Taxes withheld in 1979 $3,000 1980, filed a joint return for 1979 with his wife Rita, age
Refund received in 1979 of 1978 tax 300 50. Mary, their 21-year-old daughter, was a full-time
Assessment paid in 1979 of 1977 tax 800 student at a college until her graduation on June 2,
Paid in 1980 with 1979 tax return 200 1979. The daughter had $6,500 of income and provided
25% of her own support during 1979. In addition, dur
What amount should Weber utilize as state and local in ing 1979 the Planters were the sole support for Rita’s
come taxes in calculating excess itemized deductions for niece, who had no income. How many exemptions
his 1979 federal income tax return? should the Planters claim on their 1979 tax return?
a. $3,200 a. 2
b. $3,500 b. 3
c. $3,700 c. 4
d. $3,800 d. 5
11
Number 4 (Estimated tim e------45 to 55 minutes) a note of this type at January 1, 1978, was 12%. Infor
mation on present value and future amount factors is as
Number 4 consists of three unrelated parts. follows:
Period
Part a. From inception of operations in 1975, 1 2 3 4 5
Summit carried no allowance for doubtful accounts. Present value
Uncollectible receivables were expensed as written off of $1 at
and recoveries were credited to income as collected. On 12% 0.89 0.80 0.71 0.64 0.57
March 1, 1979 (after the 1978 financial statements were Present value
issued), management recognized that Summit’s ac of an an
counting policy with respect to doubtful accounts was nuity of
not correct, and determined that an allowance for $1 at 12% 0.89 1.69 2.40 3.04 3.60
doubtful accounts was necessary. A policy was Future
established to maintain an allowance for doubtful ac amount of
counts based on Summit’s historical bad debt loss $1 at 12% 1.12 1.25 1.40 1.57 1.76
percentage applied to year-end accounts receivable. The Future
historical bad debt loss percentage is to be recomputed amount of
each year based on all available past years up to a max an annuity
imum of five years. of $1 at
Information from Summit’s records for five years 12% 1.00 2.12 3.37 4.78 6.35
is as follows:
Required:
Credit Accounts Prepare a schedule showing the income or loss
Year Sales Written O ff Recoveries before income taxes (rounded to the nearest dollar) that
Pitt should record for the years ended December 31,
1975 $1,500,000 $15,000 $0 1978, and 1979, as a result of the above facts. Show sup
1976 2,250,000 38,000 2,700 porting computations in good form.
1977 2,950,000 52,000 2,500
1978 3,300,000 65,000 4,800 Part c. The Maple Corporation sells farm
1979 4,000,000 83,000 5,000 machinery on the installment plan. On July 1, 1979,
Maple entered into an installment sale contract with
Accounts receivable balances were $1,250,000 and Agriculture, Inc., for an eight-year period. Equal an
$1,460,000 at December 31, 1978, and December 31, nual payments under the installment sale are $100,000
1979, respectively. and are due on July 1. The first payment was made on
July 1, 1979.
Required:
1. Prepare the journal entry, with appropriate ex Additional information is as follows:
planation, to set up the allowance for doubtful accounts
as of January 1, 1979. Show supporting computations • The amount that would be realized on an
in good form. outright sale of similar farm machinery is $556,000.
2. Prepare a schedule analyzing the changes in the • The cost of the farm machinery sold to
Allowance for Doubtful Accounts account for the year Agriculture is $417,000.
ended December 31, 1979. Show supporting computa • The finance charges relating to the installment
tions in good form. period are $244,000 based on a stated interest rate of
12%, which is appropriate.
• Circumstances are such that the collection of
Part b. On January 1, 1978, the Pitt Company the installments due under the contract is reasonably
sold a patent to Chatham, Inc., which had a net carry assured.
ing value on Pitt’s books of $10,000. Chatham gave Pitt
an $80,000 noninterest bearing note payable in five Required:
equal annual installments of $16,000, with the first pay What income or loss before income taxes should
ment due and paid on January 1, 1979. There was no Maple record for the year ended December 31, 1979, as
established exchange price for the patent, and the note a result of the above transaction? Show supporting
has no ready market. The prevailing rate of interest for computations in good form.
12
Number 5 (Estimated t i m e ------40 to 50 minutes)
During May 1977 Gilroy, Inc., was organized with

3,000,000 authorized shares of $10 par value common
stock, and 300,000 shares of its common stock were
issued for $3,300,000. Net income through December
31, 1977, was $125,000.
On July 3, 1978, Gilroy issued 500,000 shares of its
common stock for $6,250,000. A 5% stock dividend
was declared on October 2, 1978, and issued on
November 6, 1978, to stockholders of record on
October 23, 1978. The market value of the common
stock was $11 per share on the declaration date. Gilroy’s
net income for the year ended December 31, 1978, was
$350,000.
During 1979 Gilroy had the following transactions:
• in February Gilroy reacquired 30,000 shares of

its common stock for $9 per share. Gilroy uses the cost
method to account for treasury stock.
• In June Gilroy sold 15,000 shares of its treasury
stock for $12 per share.
• In September each stockholder was issued (for
each share held) one stock right to purchase two addi
tional shares of common stock for $13 per share. The
rights expire on December 31, 1979.
• in October 250,000 stock rights were exercised
when the market value of the common stock was $14 per
share.
• In November 400,000 stock rights were exer
cised when the market value of the common stock was
$15 per share.
• On December 15, 1979, Gilroy declared its first
cash dividend to stockholders of $0.20 per share,
payable on January 10, 1980, to stockholders of record
on December 31, 1979.
• On December 21, 1979, in accordance with the
applicable state law, Gilroy formally retired 10,000
shares of its treasury stock and had them revert to an
unissued basis. The market value of the common stock
was $16 per share on this date.
• Net income for 1979 was $750,000.
Required:
Prepare a schedule of all transactions affecting the
capital stock (shares and dollar amounts), additional
paid-in capital, retained earnings, and the treasury stock
(shares and dollar amounts) and the amounts that
would be included in Gilroy’s balance sheet at
December 31, 1977, 1978, and 1979, as a result of the
above facts. Show supporting computations in good
form.
13
(Prepared by the Board o f Examiners of the American Institute of Certified Public Accountants
EXAMINATION IN ACCOUNTING PRACTICE — PART II
May 8, 1980; 1:30 to 6:00 P.M.
Estimated Minutes
All questions are required: Minimum Maximum
No. 1 . . . . 45 55
No. 2 . . . . 45 55
No. 3 . . . . 45 55
No. 4 . . . . 45 55
No. 5 . . . . 40 50
Total 220 270
1. You must arrange the papers in numerical order of you should show the question number and place
the questions. If more than one page is required them immediately following the question to which
for an answer, write “ continued” at the bottom of they relate.
stance, if 12 pages are used for your answers, they 4. Fourteen-column sheets, if any, should not be
should be numbered 1 through 12. The printed folded until all sheets, both wide and narrow, are
answer sheet provided for the objective-type items placed in the proper sequence and fastened
should be considered to be Page 1. together at the top left corner. All fourteen-
column sheets should then be wrapped around the
2. Answer all objective-type items on the printed back of the papers.
answer sheet provided for that purpose. It is to
your advantage to attempt all questions even if 5. A CPA is continually confronted with the necessi
you are uncertain of the answer. You are likely to ty of expressing opinions and conclusions in writ
get the highest score if you omit no answers. ten reports in clear, unequivocal language.
is to test the candidate’s knowledge and applica
3. Enclose all scratch sheets. Failure to enclose tion of the subject matter, the ability to organize
scratch sheets may result in loss of grading points. and present such knowledge in acceptable written
Scratch sheets need not have page numbers, but language will be considered by the examiners.
14
Accounting Practice — Part II
Number 1 (Estimated tim e------45 to 55 minutes) 2. The Plaza Company was organized late in 1978
and began operations on January 1, 1979. Plaza is
Instructions engaged in conducting market research studies on
behalf of manufacturers. Prior to the start of opera
Select the best answer for each of the following tions, the following costs were incurred:
items relating to a variety of financial-accounting pro Attorney’s fees in connection
blems. Use a soft pencil, preferably No. 2, to blacken with organization of Plaza $ 4,000
the appropriate circle on the separate printed answer Improvements to leased offices
sheet to indicate your answer. Mark only one answer for prior to occupancy 7,000
each item. Answer all items. Your grade will be based Meetings of incorporators, state
on your total correct answers. filing fees and other organization
The following is an example of the manner in which expenses 5,000
the answer sheet should be marked: $16,000
Item
Plaza has elected to record amortization of
organization costs over the maximum period allowable
97. Gross billings for merchandise sold by Baker under generally accepted accounting principles. What is
Company to its customers last year amounted to
the amount of organization costs amortized for 1979?
$5,260,000; sales returns and allowances reduced the
a. $ 225
amounts owed by $160,000. How much were net sales
b. $ 400
last year for Baker Company?
c. $1,800
a. $4,800,000 d. $3,200
b. $5,100,000
c. $5,200,000 3. The following information is available for the Leer
d. $5,260,000
Company:
Answer Sheet Credit sales during 1979 $200,000
Allowance for doubtful accounts
97. at December 3 1 , 1978 2,400
Accounts receivable deemed worthless
Items to be Answered and written off during 1979 3,200
1. The following bank reconciliation is presented for During 1979 Leer estimated that its bad debt ex
the Kingston Company for the month of November pense should be 1% of all credit sales.
1979: As a result of a review and aging of accounts
Balance per bank statement, receivable in early January 1980, it has been determined
11/30/79 $18,040 that an allowance for doubtful accounts of $2,200 is
Add: Deposit in transit 4,150 needed at December 31, 1979. What amount should
22,190 Leer record as bad debt expense for the year ended
Less: Outstanding checks $ 6,300 December 31, 1979?
Bank credit recorded in error _____20 6,320 a. $2,000
Balance per books, 11/30/79 $15,870 b. $3,000
c. $3,200
d. $4,200
Data for the month of December 1979 follows:
4. James Dixon, a partner in an accounting firm,
Per bank decided to withdraw from the partnership. Dixon’s
December deposits $26,100 share of the partnership profits and losses was 20%.
December disbursements 22,420 Upon withdrawing from the partnership he was paid
Balance, 12/31/79 21,720 $74,000 in final settlement for his interest. The total of
the partners’ capital accounts before recognition of
AH items that were outstanding as of November 30, partnership goodwill prior to Dixon’s withdrawal was
cleared through the bank in December, including the $210,000. After his withdrawal the remaining partners’
bank credit. In addition, $2,500 in checks were out capital accounts, excluding their share of goodwill,
standing as of December 31, 1979. What is the balance totaled $160,000. The total agreed upon goodwill of the
of cash per books at December 31, 1979? firm was
a. $19,220 a. $120,000
b. $19,240 b. $140,000
c. $21,720 c. $160,000
d. $24,220 d. $250,000
15
5. The Kirby Construction Company has consistently

used the percentage-of-completion method of recogniz Hems 8 and 9 are based on the following informa
ing income. In 1978 it began a construction project to tion:
erect a building for $3,000,000. The project was com
pleted during 1979. Under this method, the accounting Presented below is the condensed balance sheet of
records disclosed the following: the partnership of Kane, Clark and Lane who share pro
fits and losses in the ratio of 6:3:1, respectively:
1978 1979 Cash $ 85,000
Progress billings during Other assets 415,000
year $ 1, 100,000 $1,900,000 $500,000
Cost incurred during year 900,000 1,800,000
Collections on billings Liabilities $ 80,000
during year 700,000 2,300,000 Kane, capital 252,000
Estimated cost to complete 1,800,000 Clark, capital 126,000
Lane, capital 42,000
What amount of income should Kirby have recognized $500,000
in 1978?
a. $100,000
8. The assets and liabilities on the above balance
b. $110,000
sheet are fairly valued and the partnership wishes to
c. $150,000
d. $200,000 admit Bayer with a 25% interest in the capital and
profits/losses without recording goodwill or bonus.
How much should Bayer contribute in cash or other
6. The Gilbert Department Store uses the retail in assets?
ventory method to approximate the lower of cost or a. $ 70,000
market. The following information is available for the b. $105,000
month of August 1979: c. $125,000
Cost Retail d. $140,000
Cost of goods available
for sale $180,000 $225,000 9. Assume that the partners agree instead to sell
Net markups 25,000 Bayer 20% of their respective capital and profit and loss
Net markdowns 10,000 interests for a total payment of $90,000. The payment
Sales 170,000 by Bayer is to be made directly to the individual part
ners. The partners agree that implied goodwill is to be
What was the inventory approximation at the lower of recorded prior to the acquisition by Bayer. What are the
cost or market at August 31, 1979? capital balances of Kane, Clark and Lane, respectively,
a. $50,400
b. $52,500 a. $198,000; $ 99,000; $33,000.
c. $56,000 b. $201,600; $100,800; $33,600.
d. $57,600 c. $216,000; $108,000; $36,000.
d. $255,600; $127,800; $42,600.
7. The books of The Hazel Company for the year
ended December 31, 1979, showed income of $180,000
before provision for income tax. In computing the tax
able income for federal income tax purposes, the 10. The Hickory Company made a lump sum purchase
following timing differences were taken into account: of three pieces of machinery for $115,000 from an unaf
filiated company. At the time of acquisition, Hickory
Depreciation deducted for tax purposes in paid $5,000 to determine the appraised value of the
excess of depreciation recorded on the machinery. The appraisal disclosed the following
books $8,000 values:
Income from installment sale reportable for
tax purposes in excess of income recognized Machine A $70,000
on the books $6,000 Machine B 42,000
Machine C 28,000
What should Hazel record as its current federal income
tax liability at December 31, 1979, assuming a corporate What cost should be assigned to machines A, B, and C,
income tax rate of 50%? respectively?
a. $86,000 a. $40,000; $40,000 $40,000.
b. $89,000 b. $57,500; $34,500 $23,000.
c. $90,000 c. $60,000; $36,000 $24,000.
d. $91,000 d. $70,000; $42,000 $28,000.
16
Accounting Practice— Part II
11. In January 1978 Solataire Company purchased 14. During 1979 The Simon Company sustained a loss
equipment for $60,000, to be used in its manufacturing of $72,000 when a fire destroyed its merchandise inven
operations. The equipment was estimated to have a tory. The merchandise had a fair value of $100,000 im
useful life of 8 years, with salvage value estimated at mediately before the loss. The loss was covered by an
$6,000. Solataire considered various methods of insurance policy with a face value of $70,000 and an
depreciation and selected the sum-of-the-years-digits 80% coinsurance clause. What is the amount of the in
method of depreciation. On December 31, 1979, the demnity collectible as a result of this loss?
related allowance for accumulated depreciation will a. $57,600
have a balance b. $63,000
a. $7,500 less than under the straight-line c. $70,000
method. d. $72,000
b. $7,500 less than under the double-declining
balance method. 15. The Jonas Company is a diversified company that
c. $9,000 greater than under the straight-line discloses supplemental financial information as to in
method. dustry segments of its business. The following informa
d. $9,000 greater than under the double- tion is available for 1979:
declining balance method. Traceable Allocable
Sales Costs Costs
12. A new product introduced by Maude Corporation
carries a two-year warranty against defects. The Product A $400,000 $225,000
estimated warranty costs related to dollar sales are as Product B 300,000 240,000
follows: Product C 200,000 135,000
Year of sale $900,000 $600,000 $150,000
Year after sale 5%
Allocable costs are allocated based on the ratio of a seg
Sales and actual warranty expenditures for the years ment’s income before allocable costs to total income
ended December 31, 1978, and 1979 are as follows: before allocable costs. This should be considered an ap
propriate method of allocation. What is the operating
profit for Product B for 1979?
Actual Warranty
Sales Expenditures a. $0
b. $10,000
c. $30,000
1978 $400,000 $ 10,000 d. $50,000
1979 500,000 35,000
16. Theodore Corporation’s stockholders’ equity sec
What amount should Maude report as its estimated war tion of its December 31, 1978, balance sheet was as
ranty liability as of December 31, 1979? follows:
a. $ 2,000
b. $12,000 Common stock, authorized
c. $27,000 1,000,000 shares; issued
d. $37,000 900,000 shares; outstanding
800,000 shares; $10 par
value $ 9,000,000
13. The Culture Corporation had the following classes Capital in excess of par 2 , 200,000
of stock outstanding as of December 31, 1979: Retained earnings 5,600,000
Less shares held in treasury,
Common stock, $20 par value, 20,000 shares out 100,000 shares at cost ( 800,000)
standing. $16,000,000
Preferred stock, 6% , $100 par value, cumulative Total stockholders’ equity
and fully participating, 1,000 shares outstanding.
During 1979 Theodore reissued 50,000 shares of the
Dividends on preferred stock have been in arrears for treasury stock at $12 per share. No other treasury stock
1977 and 1978. On December 31, 1979, a total cash divi transactions occurred during 1979. What amount and
dend of $90,000 was declared. What are the amounts of type of income should be reported on this transaction
dividends payable on both the common and preferred on the financial statements for the year ended December
stock, respectively? 31, 1979?
a. $57,600 and $32,400. a. $0.
b. $62,400 and $27,600. b. $100,000 ordinary income.
c. $67,200 and $22,800. c. $200,000 ordinary income.
d. $72,000 and $18,000. d. $200,000 extraordinary income.
17
17. An analysis and aging of the accounts receivable Number 2 (Estimated tim e ------45 to 55 minutes)
of the Franklin Company at December 31, 1979, re
vealed the following data: Instructions
Accounts receivable $450,000 Select the best answer for each of the following
Allowance for uncollectible accounts items relating to the federal income taxation of corpora
per books 25,000 tions and partnerships. Use a soft pencil, preferably No.
Accounts deemed uncollectible 32,000 2, to blacken the appropriate circle on the separate
printed answer sheet to indicate your answer. The
Based upon the above data, the net realizable value of answers should be based upon the Internal Revenue
the accounts receivable at December 31, 1979, was Code and Tax Regulations in effect for the tax period
a. $393,000 specified in the item. If no tax period is specified, use
b. $418,000 the current Internal Revenue Code and Tax Regula
c. $425,000 tions. Mark only one answer for each item. Answer all
d. $443,000 items. Your grade will be based on your total correct
answers.
18. On April 1, 1979, the Jack Company paid Items to be Answered
$800,000 for all the issued and outstanding common
stock of Ann Corporation in a transaction properly ac 21. For the year 1979, Morris Corporation reported
counted for as a purchase. The recorded assets and taxable income of $100,000 before any special deduc
liabilities of Ann Corporation on April 1, 1979, follows: tions. Included in taxable income was dividend income
of $120,000 received from unaffiliated domestic cor
Cash $ 80,000 porations. What is the dividends received deduction for
Inventory 240,000 1979?
Property and equipment (net of accumu a. $0
lated depreciation of $320,000) 480,000 b. $ 17,000
Liabilities ( 180,000) c. $ 85,000
d. $102,000
On April 1, 1979, it was determined that the inventory
of Ann had a fair value of $190,000, and the property 22. April Corporation’s book income before income
and equipment (net) had a fair value of $560,000. What taxes for 1979 was $60,000. During 1979 April paid
is the amount of goodwill resulting from the business $3,000 in cash dividends on its outstanding cumulative
combination? preferred stock and paid $4,000 as a contribution to a
a. $0 qualified charitable organization. For 1979 April’s tax
b. $ 50,000 able income was
c. $150,000 a. $54,000
d. $180,000 b. $60,800
c. $60,850
19. Jordon Corporation has 80,000 shares of $50 par d. $61,000
value common stock authorized, issued and out
standing. All 80,000 shares were issued at $55 per share. 23. On December 31, 1979, Mark Corporation sold
Retained earnings of the company amounts to $160,000. machinery for $48,000. The machinery which had been
If 1,000 shares of Jordon common stock are reacquired purchased on January 1, 1975, for $40,000 had an ad
at $62 and the par value method of accounting for justed basis of $28,000 on the date of sale. For 1979
treasury stock is used, stockholders’ equity would Mark should report
decrease by a. A section 1231 gain of $20,000.
a. $0 b. Ordinary income of $20,000.
b. $50,000 c. A section 1231 gain of $12,000 and ordinary
c. $55,000 income of $8,000.
d. $62,000 d. A section 1231 gain of $8,000 and ordinary in
20. The Vandiver Corporation provides an incentive come of $12,000.
compensation plan under which its president receives a 24. The Market Corporation had taxable income in
bonus equal to 10% of the corporation’s income in ex 1979 of $40,000 before deducting contributions to
cess of $100,000 before income tax but after the bonus. qualified charitable organizations. During 1979 it gave
If income before income tax and bonus is $320,000 and $5,000 cash to a charitable organization. Market also
the effective tax rate is 40% , the amount of the bonus had a contribution carryover from 1978 of $1,000.
would be What is Market’s contribution deduction for 1979?
a. $20,000 a. $1,000
b. $22,000 b. $2,000
c. $29,090 c. $5,000
d. $32,000 d. $6,000
18
25. The Tempest Corporation, not a dealer in 29. In computing the taxable income of a partnership
securities, had accumulated earnings and profits of a deduction is allowed for
$75,000 at the beginning of 1979. The earnings and pro a. Fixed salaries paid to partners for services
fits for 1979 were $25,000. On October 15, 1979, determined without regard to the income of
Tempest distributed to its shareholders as a dividend, the partnership.
marketable securities having a fair market value of b. The net operating loss deduction.
$12,000. The securities had cost $7,000. As a result of c. Contributions to charitable organizations.
the distribution, accumulated earnings and profits were d. Personal exemptions of the partners.
a. Increased by $5,000.
b. Decreased by $5,000. 30. The partnership of Spencer and Rey realized an or
c. Decreased by $7,000. dinary loss of $42,000 in 1979. Both the partnership and
d. Decreased by $12,000. the two partners are on a calendar-year basis. The part
ners share profits and losses equally. At December 31,
26. During 1979 Steam Corporation, a cash-basis cor 1979, Rey had an adjusted basis of $18,000 for his part
poration, paid the following education expenses for its nership interest before taking the 1979 loss into con
employees: sideration. On his individual income tax return for
1979, Rey should deduct
Tuition $ 10,000
a. An ordinary loss of $18,000.
Textbooks 3,000 b. An ordinary loss of $21,000.
T ravel 2,000
c. An ordinary loss of $18,000 and a capital loss
Laboratory fees 1,000
of $3,000.
$16,000 d. A capital loss of $21,000.
The education was not required of the employees to 31. The partnership of Truman and Hanover realized
maintain or improve their skills in their present posi the following items of income during the year ended
tions. For 1979, Steam can claim a deduction for these December 31, 1979:
expenses of
a. $0 Net income from sales $62,000
b. $10,000 Dividends from domestic corporations 4,000
c. $11,000 Interest on corporate bonds 3,000
d. $16,000 Net long-term capital gains 5,000
Net short-term capital gains 1,000
27. The Vanity Corporation was organized and began 7,000
operations in January 1979. The corporation’s ten equal Net rental income
shareholders elected to have Vanity taxed as a Sub
chapter S Corporation, and such election was approved. Both the partnership and the partners are on a calendar-
For its year ended December 31, 1979, Vanity had tax year basis. The total income which should be reported
able income and current earnings and profits of $80,000 as ordinary income of the partnership for 1979 is
comprised of $64,000 derived from operations and a. $72,000
$16,000 from short-term capital gains. During 1979 it b. $75,000
distributed $30,000 in cash to its ten shareholders. c. $76,000
For 1979 each shareholder should include in his or her d. $82,000
respective gross income
a. Ordinary income of $3,000. 32. For the year ended December 31, 1979, Murray
b. Ordinary income of $3,400 and short-term Corporation, a calendar-year corporation, reported
capital gain of $1,600. book income before income taxes of $120,000. Included
c. Ordinary income of $6,400 and short-term in the determination of this amount were the following
capital gain of $1,600. items:
d. Ordinary income of $8,000. Loss on sale of building depreciated on
the straight-line method ($12,000)
28. During 1979 Lodge Corporation had net long-term Gain on sale of land used in business 7,000
capital losses of $14,000, net short-term capital gains of Loss on sale of investments in market
$6,000, gains on the sale of Section 1231 property of able securities (long-term) ( 8,000)
$3,000 and losses on the sale of Section 1245 property of
$4,000. There was no capital loss carryforward from For the year ended December 31, 1979, Murray’s tax
prior years. The capital gains deduction for 1979 was able income was
a. $0 a. $113,000
b. $2,000 b. $120,000
c. $3,000 c. $125,000
d. $9,000 d. $128,000
19
33. The Robert Corporation, a calendar-year com 37. In 1979 Nugent Corporation sold for $21,000,
pany, has elected Subchapter S status for the past five 1,000 shares of its own $10 par value common stock that
years. For the year ended December 31, 1979, Robert it had reacquired in 1977. The shares were originally
had taxable income and current earnings and profits of issued for $15 per share, and subsequently reacquired
$185,000. At December 31, 1978, Robert had un for $19 per share. For 1979 Nugent should report a
distributed taxable income of $45,000 earned in 1978. long-term capital gain of
During 1979 Robert made the following cash distribu a. $0
tions to its ten equal shareholders who are also on a b. $ 2,000
calendar-year basis: c. $ 6,000
d. $11,000
January 2 9 , 1979 $ 30,000
March 13, 1979 20,000 38. For the year ended December 31, 1979, Ginny
July 8 , 1979 15,000 Corporation had gross income of $180,000. Included in
December 2 9 , 1979 35,000 this amount was $48,000 of dividend income from non-
$ 100,000 affiliated domestic corporations. Its deductions for
1979 were $130,000 in business deductions and a net
operating loss carryover of $4,000. What is Ginny’s
For the calendar year 1979, what amount should be in 1979 dividends received deduction?
cluded in each shareholder’s gross income from Robert? a. $39,100
a. $ 8,500 b. $40,800
b. $10,000 c. $42,500
c. $18,500 d. $48,000
d. $19,000
34. Edward Corporation’s book income before in 39. During 1979 Ashley Corporation charged the
come taxes for the year ended December 31, 1979, was following payments to miscellaneous expense:
$130,000. The Company was organized three years
earlier and organization costs of $65,000 are being writ • Travel expense of $300 for the company presi
ten off over a ten-year period for financial statement dent to offer voluntary testimony at the state
purposes. For tax purposes these costs are being written capital against proposed legislation regarded
off over the minimum period. For the year ended as unfavorable to its business.
December 31, 1979, Edward’s taxable income was • Christmas gifts to 20 customers at $75 each.
a. $117,000 • Contribution of $600 to local political can
b. $123,500 didate.
c. $130,000
d. $136,500 The maximum deduction that Ashley can claim for
these payments is
a. $ 800
35. In determining whether a corporation is subject to b. $1,400
the accumulated earnings tax, which of the following c. $1,800
items is not a subtraction in arriving at accumulated tax d. $2,400
able income?
a. Federal income tax.
b. Capital loss carryback. 40. On July 2, 1979, Milford Corporation purchased
c. Dividends paid deduction. for $70,000 machinery that was installed in its factory.
d. Accumulated earnings credit. The machinery was estimated to have a salvage value of
$4,000 and Milford elected to depreciate this machinery
over eight years using the double-declining balance
method of depreciation. Milford in addition elected to
36. During 1979, its first year of operations, Emma take additional first-year depreciation. This acquisition
Corporation had a loss from operations of $38,000 and was the only investment in tangible personal property
short-term capital gains of $12,000. Included in the loss made during 1979. Counting the year of acquisition as
from operations was a fire loss of $7,000. Emma has a one-half year, Milford should deduct depreciation on
net operating loss carryover from 1979 of this machinery for 1979 of
a. $19,000 a. $10,000
b. $26,000 b. $10,250
c. $31,000 c. $10,500
d. $38,000 d. $10,750
20
Number 3 (Estimated time 45 to 55 minutes) Description Amount
The December 31, 1979, balance sheets of Encanto Dec. 31, 1977 Acquired 6,000 shares $ 70,800
Corporation and its subsidiary, Norris Corporation, are Dec. 31, 1978 60% of 1978 net income
presented below: of $78,000 46,800
Sept. 1, 1979 Acquired 3,000 shares 92,000
Dec. 31, 1979 Subsidiary income for
Encanto Norris 1979: 67,200*
Assets Corporation Corporation Dec. 31, 1979 90% of dividends declared (36,000)
$240,800
Cash $ 167,250 $101,000
Accounts receivable 178,450 72,000
*Subsidiary income for 1979:
Notes receivable 87,500 28,000 $57,600
60% of $96,000
Dividends receivable 36,000 30% of $96,000 X 33⅓
% 9,600
Inventories 122,000 68,000
Property, plant and $67,200
equipment 487,000 252,000
Accumulated depreciation (117,000) ( 64,000) Assume that Norris’s net income is earned ratably dur
Investment in Norris ing the year. Amortization of the excess of cost over the
Corporation 240,800 net assets acquired is to be recorded over sixty months.
$1,202,000 $457,000 • On December 15, 1979, Norris declared a cash
dividend of $4 per share of common stock, payable to
shareholders on January 7, 1980.
Liabilities and Stock-
• During 1979 Encanto sold merchandise to
holders’ Equity Norris. Encanto’s cost for this merchandise was
$68,000, and the sale was made at 125% of cost.
Accounts payable $ 222,000 $ 76,000 Norris’s inventory at December 31, 1979, included mer
Notes payable 79,000 89,000 chandise purchased from Encanto at a cost to Norris of
Dividend payable 40,000 $35,000.
Common stock, $10 • In December 1978 Norris sold merchandise to
par value: Encanto for $67,000, which was at a markup of 35%
Encanto Corporation 400,000 over Norris’s cost. On January 1, 1979, $54,000 of this
Norris Corporation 100,000 merchandise remained in Encanto’s inventory. This
Retained earnings: merchandise was subsequently sold by Encanto at a pro
Encanto Corporation 501,000 fit of $11,000 during 1979.
Norris Corporation 152,000 • On October 1, 1979, Encanto sold for $42,000,
$1,202,000 $457,000 excess equipment to Norris. Data relating to this equip
ment is as follows:
Additional information: Book value on Encanto’s records $36,000
• Encanto initially acquired 60 percent of the Method of depreciation Straight-line
outstanding common stock of Norris in 1977. This pur Estimated remaining life on
chase resulted in no difference between cost and net October 1, 1979 10 years
assets acquired. As of December 31, 1979, the percen • Near the end of 1979, Norris reduced the
tage owned is 90 percent. An analysis of the account balance of its intercompany account payable to Encanto
“ Investment in Norris Corporation” is as follows: to zero by transferring $8,000 to Encanto. This payment
was still in transit on December 31, 1979.
Required:
Complete the enclosed consolidated balance sheet
worksheet of Encanto Corporation and its subsidiary,
Norris Corporation, as of December 31, 1979. Formal
statements and journal entries are not required.
Supporting computations should be in good form.
21
Number 4 (Estimated tim e ------45 to 55 minutes) 9. Cash collections recorded by the General Fund
during the year were as follows:
The Village of Dexter was recently incorporated
and began financial operations on July 1, 1978, the Property taxes $386,000
beginning of its fiscal year. Licenses and permits 7,000
The following transactions occurred during this
first fiscal year, July 1, 1978, to June 30, 1979: 10. The village council decided to build a village
hall at an estimated cost of $500,000 to replace space
1. The village council adopted a budget for occupied in rented facilities. The village does not record
general operations during the fiscal year ending June 30, project authorizations. It was decided that general
1979. Revenues were estimated at $400,000. Legal obligation bonds bearing interest at 6% would be
authorizations for budgeted expenditures were issued. On June 30, 1979, the bonds were issued at their
$394,000. face value of $500,000, payable June 30, 1999.
2. Property taxes were levied in the amount of
$390,000; it was estimated that 2% of this amount No contracts have been signed for this project and
would prove to be uncollectible. These taxes are no expenditures have been made.
available as of the date of levy to finance current expen
ditures. 11. A fire truck was purchased for $15,000 and
3. During the year a resident of the village the voucher approved and paid by the General Fund.
donated marketable securities valued at $50,000 to the This expenditure was previously encumbered for
village under the terms of a trust agreement. The terms $15,000.
of the trust agreement stipulated that the principal
amount is to be kept intact; use of revenue generated by Required:
the securities is restricted to financing college scholar Prepare journal entries to properly record each of
ships for needy students. Revenue earned and received the above transactions in the appropriate fund(s) or
on these marketable securities amounted to $5,500 group of accounts of Dexter Village for the fiscal year
through June 30, 1979. ended June 30, 1979. Use the following funds and
4. A General Fund transfer of $5,000 was made groups of accounts:
to establish an Intragovernmental Service Fund to pro
vide for a permanent investment in inventory. General Fund
5. The village decided to install lighting in the Capital Projects Fund
village park and a special assessment project was Special Assessment Fund
authorized to install the lighting at a cost of $75,000. Intragovernmental Service Fund
The appropriation was formally recorded. Trust Fund
6. The assessments were levied for $72,000 with General Long-Term Debt Group of Accounts
the village contributing $3,000 out of the General Fund. General Fixed Assets Group of Accounts
All assessments were collected during the year including
the village’s contribution. Each journal entry should be numbered to corres
7. A contract for $75,000 was let for the installa pond with the transactions described above. Do not
tion of the lighting. At June 30, 1979, the contract was prepare closing entries for any fund.
completed but not approved. The contractor was paid Your answer sheet should be organized as follows:
all but 5 percent, which was retained to insure com
pliance with the terms of the contract. Encumbrances
and other budgetary accounts are maintained. Trans- Fund or Account
8. During the year the Intragovernmental Service action Group o f Title and Amounts
Fund purchased various supplies at a cost of $1,900. No. Accounts Explanation Debit Credit
22
Number 5 (Estimated time 40 to 50 minutes) The work in process inventory (labor and over
head) in the Saturating department is estimated to be
The Adept Company is a manufacturer of two pro 50% complete both at the beginning and end of
ducts known as “ Prep” and “ Pride.” Incidental to the November.
production of these two products, it produces a by
Costs of production for November are as follows:
product known as “ Wilton.” The manufacturing pro
cess covers two departments, Grading and Saturating. Materials Labor and
The manufacturing process begins in the Grading Used Overhead
department when raw materials are started in process. Costs o f Production
Upon completion of processing in the Grading depart
ment, the by-product “ Wilton” is produced, which ac Grading department $265,680 $86,400
counts for 20% of the material output. This by-product Saturating department 86,000
needs no further processing and is transferred to
finished goods. The material used in the Grading department
The net realizable value of the by-product weighed 36,000 pounds.
“ Wilton” is accounted for as a reduction of the cost of
materials in the Grading department. The current sell Adept uses the first-in, first-out method of process
ing price of “ Wilton” is $1.00 per pound and the costing.
estimated selling and delivery costs total ten cents per
pound. Required:
The remaining output is transferred to the Prepare a cost of production report for both the
Saturating department for the final phase of produc Grading and Saturating departments for the month of
tion. In the Saturating department, water is added at the November. Show supporting computations in good
beginning of the production process which results in a form.
50% gain in weight of the materials in production.
The following information is available for the The answer should include:
month of November 1979:
• Equivalent units of production (in pounds);
November I, November 30, • Total manufacturing costs;
• Cost per equivalent unit (pounds);
Quantity Quantity • Dollar amount of ending work in process;
Inventories (pounds) Amount (pounds) • Dollar amount of inventory cost transferred out.
Work in
process:
Grading dept. None — None
Saturating dept. 1,600 $17,600 2,000
Finished goods:
Prep 600 14,520 1,600
Pride 2,400 37,110 800
Wilton None — None
23
(Prepared by the Board of Examiners of the American Institute of Certified Public Accountants
EXAMINATION IN AUDITING
May 8, 1980; 8:30 A.M. to 12:00 M
Estimated Minutes
No. 1 ..................................................................................................... 90 no
No. 2 ..................................................................................................... 15 25
No. 3 ..................................................................................................... 15 25
No. 4 ................................................... .............................................. 15 25
No. 5 ..................................................................................................... 15 25
T o ta l............................................ ............................................... 150 210
(Disregard o f these instructions may be considered as indicating inefficiency in accounting work.)
1. You must arrange the papers in numerical order of you are uncertain o f the answer. You are likely to
the questions. If more than one page is required get the highest score if you omit no answers.
for an answer, write “ continued” at the bottom of
stance, if 12 pages are used for your answers, they
should be numbered 1 through 12. The printed 3. A CPA is continually confronted with the necessi
answer sheet provided for the objective-type items ty of expressing opinions and conclusions in writ
should be considered to be Page 1. ten reports in clear, unequivocal language.
Although the primary purpose o f the examination
2. Answer all objective-type items on the printed tion of the subject matter, the ability to organize
answer sheet provided for that purpose. It is to and present such knowledge in acceptable written
your advantage to attempt all questions even if language will be considered by the examiners.
24
Auditing
Number 1 (Estimated tim e------90 to 110 minutes) 4. During the first part of the current fiscal year, the
client company began dealing with certain customers on
Instructions a consignment basis. Which of the following audit pro
cedures is least likely to bring this new fact to the
Select the best answer for each of the following auditor’s attention?
items. Use a soft pencil, preferably No 2, to blacken the a. Tracing of shipping documents to the sales
appropriate circle on the separate printed answer sheet Journal.
to indicate your answer. Mark only one answer for each b. Test of cash receipts transactions.
item. Answer all items. Your grade will be based on c. Confirmation of accounts receivable.
your total correct answers. d. Observation of physical inventory.
The following is an example of the manner in which
the answer sheet should be marked: 5. If certain forms are not consecutively numbered
a. Selection of a random sample probably is not
Item possible.
b. Systematic sampling may be appropriate.
96. One of the generally accepted auditing standards c. Stratified sampling should be used.
specifies that the auditor d. Random number tables can not be used.
a. Inspect all fixed assets acquired during the
year. 6. Which of the following, when materially affecting
b. Charge fair fees based on cost. comparability, would ordinarily be referred to by an in
c. Make a proper study and evaluation of the ex dependent auditor reporting on the statement of
isting internal control. changes in financial position?
d. Count client petty-cash funds. a. Changing from a balanced to an unbalanced
form of presentation.
Answer Sheet b. Changes in terminology.
c. Changing from a cash to working capital form
of presentation.
96. d. Changes in the content of working capital.
Items to be Answered 7. Proper segregation of functional responsibilities
1. To be competent, evidence must be both a. Authorization, approval, and execution func
a. Timely and substantial. tions.
b. Reliable and documented. b. Authorization, execution, and payment func
c. Valid and relevant. tions.
d. Useful and objective. c. Receiving, shipping, and custodial functions.
d. Authorization, recording, and custodial func
2. In accordance with the AICPA Statements On tions.
Responsibilities In Tax Practice, where a question on a
federal income tax return has not been answered, the 8. Which of the following audit procedures would be
CPA should sign the preparer’s declaration only if least likely to lead the auditor to find unrecorded fixed
a. The CPA can provide reasonable support for asset disposals?
this omission upon examination by IRS. a. Examination of insurance policies.
b. The information requested is not available. b. Review of repairs and maintenance expense.
c. The question is not applicable to the taxpayer. c. Review of property tax files.
d. An explanation of the reason for the omission d. Scanning of invoices for fixed asset additions.
is provided.
9. Most of the independent auditor’s work in for
3. Under which of the following circumstances could mulating an opinion on financial statements consists of
an auditor consider rendering an opinion on pro forma a. Studying and evaluating internal control.
statements that give effect to proposed transactions? b. Obtaining and examining evidential matter.
a. When the proposed transactions are subject to c. Examining cash transactions.
a definitive agreement among the parties. d. Comparing recorded accountability with
b. When the time interval between the date of the assets.
financial statements and consummation of the
transactions is relatively long. 10. The program flowcharting symbol representing a
c. When certain subsequent events have some decision is a
chance of interfering with the consummation a. Triangle.
of the transactions. b. Circle.
d. When the pro forma statements include c. Rectangle.
amounts based on financial projections. d. Diamond.
25
11. A CPA has received an attorney’s letter in which 17. The client’s EDP exception reporting system helps
no significant disagreements with the client’s assess an auditor to conduct a more efficient audit because it
ments of contingent liabilities were noted. The resigna a. Condenses data significantly.
tion of the client’s lawyer shortly after receipt of the b. Highlights abnormal conditions.
letter should alert the auditor that c. Decreases the EDP compliance testing.
a. Undisclosed unasserted claims may have d. Is an efficient EDP input control.
arisen.
b. The attorney was unable to form a conclusion 18. Which of the following is an advantage of
with respect to the significance of litigation, generalized computer audit packages?
claims and assessments. a. They are all written in one identical computer
c. The auditor must begin a completely new ex language.
amination of contingent liabilities. b. They can be used for audits of clients that use
d. An adverse opinion will be necessary. differing EDP equipment and file formats.
c. They have reduced the need for the auditor to
12. In the audit of a medium sized manufacturing con study input controls for EDP-related pro
cern, which one of the following areas would be ex cedures.
pected to require the least amount of audit time? d. Their use can be substituted for a relatively
a. Owners’ equity. large part of the required compliance testing.
b. Revenue.
c. Assets. 19. The auditor can best verify a client’s bond sinking
d. Liabilities. fund transactions and year-end balance by
a. Confirmation with the bond trustee.
13. Which of the following procedures is not included b. Confirmation with individual holders of
in a review engagement of a nonpublic entity? retired bonds.
a. Inquiries of management. c. Recomputation of interest expense, interest
b. Inquiries regarding events subsequent to the payable, and amortization of bond discount
balance sheet date. or premium.
c. Any procedures designed to identify relation d. Examination and count of the bonds retired
ships among data that appear to be unusual. during the year.
d. A study and evaluation of internal control.
20. An auditor is reporting on cash-basis financial
14. Those procedures specifically outlined in an audit statements. These statements are best referred to in his
program are primarily designed to opinion by which one of the following descriptions?
a. Gather evidence. a. Financial position and results of operations
b. Detect errors or irregularities. arising from cash transactions.
c. Test internal systems. b. Assets and liabilities arising from cash trans
d. Protect the auditor in the event of litigation. actions, and revenue collected and expenses
paid.
15. An auditor will usually trace the details of the test c. Balance sheet and income statement resulting
counts made during the observation of the physical in from cash transactions.
ventory taking to a final inventory schedule. This audit d. Cash balance sheet and the source and ap
procedure is undertaken to provide evidence that items plication of funds.
physically present and o bserved by the auditor at the
time of the physical inventory count are
a. Owned by the client. 21. In a daily computer run to update checking ac
b. Not obsolete. count balances and print-out basic details on any
c. Physically present at the time of the prepara customer’s account that was overdrawn, the overdrawn
tion of the final inventory schedule. account of the computer programmer was never
d. Included in the final inventory schedule. printed. Which of the following control procedures
would have been most effective in detecting this ir
16. Jackson, the purchasing agent of Judd Hardware regularity?
Wholesalers, has a relative who owns a retail hardware a. Use of the test-deck approach by the auditor
store. Jackson arranged for hardware to be delivered by in testing the client’s program and verification
manufacturers to the retail store on a C.O.D. basis of the subsidiary file.
thereby enabling his relative to buy at Judd’s wholesale b. Use of a running control total for the master
prices. Jackson was probably able to accomplish this file of checking account balances and com
because of Judd’s poor internal control over parison with the printout.
a. Purchase orders. c. A program check for valid customer code.
b. Purchase requisitions. d. Periodic recompiling of programs from
c. Cash receipts. documented source decks, and comparison
d. Perpetual inventory records. with programs currently in use.
26
Auditing
22. In accordance with the AICPA Statements On 26. In a first audit of a new company the auditor’s
Responsibilities In Tax Practice, if after having pro report will
vided tax advice to a client there are legislative changes a. Remain silent with respect to consistency.
which affect the advice provided, the CPA b. State that the accounting principles have been
a. Is obligated to notify the client of the change applied on a consistent basis.
• and the effect thereof. c. State that accounting principles have been ap
b. Is obligated to notify the client of the change plied consistently during the period.
and the effect thereof if the client was not ad d. State that the consistency standard does not
vised that the advice was based on existing apply because the current year is the first year
laws which are subject to change. of audit.
c. Can not be expected to notify the client of the
change unless the obligation is specifically
undertaken by agreement. 27. The objective of precision in sampling for com
d. Can not be expected to have knowledge of the pliance testing on an internal control system is to
change. a. Determine the probability of the auditor’s
conclusion based upon reliance factors.
b. Determine that financial statements taken as a
23. The physical count of inventory of a retailer was whole are not materially in error.
higher than shown by the perpetual records. Which of c. Estimate the reliability of substantive tests.
the following could explain the difference? d. Estimate the range of procedural deviations in
a. Inventory items had been counted but the tags the population.
placed on the items had not been taken off the
items and added to the inventory accumula 28. Treetop Corporation acquired a building and ar
tion sheets. ranged mortgage financing during the year. Verification
b. Credit memos for several items returned by of the related mortgage acquisition costs would be least
customers had not been prepared. likely to include an examination of the related
c. No journal entry had been made on the a. Deed.
retailer’s books for several items returned to b. Cancelled checks.
its suppliers. c. Closing statement.
d. An item purchased “ FOB shipping point’’ d. Interest expense.
had not arrived at the date of the inventory
count and had not been reflected in the 29. Johnson is engaged in the audit of a utility which
perpetual records. supplies power to a residential community. All accounts
receivable balances are small and internal control is
effective. Customers are billed bi-monthly. In order to
24. The fourth reporting standard requires the determine the validity of the accounts receivable
auditor’s report to either contain an expression of balances at the balance sheet date, Johnson would most
opinion regarding the financial statements, taken as a likely
whole, or an assertion to the effect that an opinion a. Examine evidence of subsequent cash receipts
cannot be expressed. The objective of the fourth stan instead of sending confirmation requests.
dard is to prevent b. Send positive confirmation requests.
a. The CPA from reporting on one basic finan c. Send negative confirmation requests.
cial statement and not the others. d. Use statistical sampling instead of sending
b. The CPA from expressing different opinions confirmation requests.
on each of the basic financial statements.
c. Misinterpretations regarding the degree of 30. The auditor may conclude that depreciation
responsibility the auditor is assuming. charges are insufficient by noting
d. Management from reducing its final respon a. Insured values greatly in excess of book
sibility for the basic financial statements. values.
b. Large amounts of fully depreciated assets.
25. A CPA’s client has changed from straight-line c. Continuous trade-ins of relatively new assets.
depreciation to sum-of-the-years-digits depreciation. d. Excessive recurring losses on assets retired.
The effect on this year’s income is immaterial but in the
future the change, which is adequately disclosed in the 31. The auditor is least likely to learn of retirements of
notes to the financial statements, may be expected to equipment through which of the following?
result in materially different results. Based upon this a. Review of the purchase return and allowance
fact, the auditor should express account.
a. An unqualified opinion. b. Review of depreciation.
b. A consistency exception. c. Analysis of the debits to the accumulated
c. A “ subject to” opinion. depreciation account.
d. An “ except for” opinion. d. Review of insurance policy riders.
27
32. The understanding between the client and the 38. If a control total were to be computed on each of
auditor as to the degree of responsibilities to be assumed the following data items, which would best be identified
by each are normally set forth in a (an) as a hash total for a payroll EDP application?
a. Representation letter. a. Gross pay.
b. Engagement letter. b. Hours worked.
c. Management letter. c. Department number.
d. Comfort letter. d. Number of employees.
33. The auditor’s review of the client’s system of inter 39. The concept of materiality would be least impor
nal control is documented in order to substantiate tant to an auditor in determining the
a. Conformity of the accounting records with a. Transactions that should be reviewed.
generally accepted accounting principles. b. Need for disclosure of a particular fact or
b. Representation as to adherence to re transaction.
quirements of management. c. Scope of the CPA’s audit program relating to
c. Representation as to compliance with general various accounts.
ly accepted auditing standards. d. Effects of direct financial interest in the client
d. The fairness of the financial statement presen upon the CPA’s independence.
tation.
40. To check the accuracy of hours worked, an
34. The auditor is concerned with establishing that auditor would ordinarily compare clock cards with
dividends are paid to stockholders of the client corpora a. Personnel records.
tion owning stock as of the b. Shop job time tickets.
a. Issue date. c. Labor variance reports.
b. Declaration date. d. Time recorded in the payroll register.
c. Record date.
d. Payment date. 41. It is important for the CPA to consider the com
petence of the audit clients’ employees because their
35. Which of the following is the most efficient audit competence bears directly and importantly upon the
procedure for the detection of unrecorded liabilities at a. Cost/benefit relationship of the system of in
the balance sheet date? ternal control.
a. Confirm large accounts payable balances at b. Achievement of the objectives of the system
the balance sheet date. of internal control.
b. Compare cash disbursements in the subse c. Comparison of recorded accountability with
quent period with the accounts payable trial assets.
balance at year end. d. Timing of the tests to be performed.
c. Examine purchase orders issued for several
days prior to the close of the year. 42. Which of the following requires recognition in the
d. Obtain an attorney’s letter from the client’s auditor’s opinion as to consistency?
attorney. a. Changing the salvage value of an asset.
36. Jones, CPA, is the principal auditor who is b. Changing the presentation of prepaid in
auditing the consolidated financial statements of his surance from inclusion in “ other assets’’ to
client. Jones plans to refer to another CPA’s examina disclosing it as a separate line item.
tion of the financial statements of a subsidary company c. Division of the consolidated subsidiary into
but does not wish to present the other CPA’s audit two subsidiaries which are both consolidated.
report. Both Jones and the other CPA’s audit reports d. Changing from consolidating a subsidiary to
have noted no exceptions to generally accepted account carrying it on the equity basis.
ing principles. Under these circumstances the opinion 43. The major reason that the difference and ratio
paragraph of Jones’ consolidated audit report should estimation methods would be expected to produce audit
express efficiency is that the
a. An unqualified opinion. a. Number of members of the populations of
b. A “ subject to’’ opinion. differences or ratios is smaller than the
c. An “ except for’’ opinion. number of members of the population of
d. A principal opinion. book values.
b. Beta risk may be completely ignored.
37. How does the extent of substantive tests required c. Calculations required in using difference or
to constitute sufficient evidential matter vary with the ratio estimation are less arduous and fewer
auditor’s reliance on internal control? than those required when using direct estima
a. Randomly. tion.
b. Disproportionately. d. Variability of the populations of differences
c. Directly. or ratios is less than that of the populations of
d. Inversely. book values or audited values.
28
Auditing
44. Once satisfied that the balance sheet and income 50. Which of the following is essential to determine
statement are fairly presented in accordance with whether the necessary internal control procedures were
generally accepted accounting principles, an auditor prescribed and are being followed?
who is examining the statement of changes in financial a. Developing questionnaires and checklists.
position would be most concerned with details of tran b. Studying and evaluating administrative con
sactions in trol policies.
a. Cash. c. Reviewing the system and testing compliance.
b. Trade receivables. d. Observing employee functions and making in
c. Notes payable. quiries.
d. Dividends payable.
51. In general, a material internal control weakness
45. When an examination is made in accordance with may be defined as a condition in which material errors
generally accepted auditing standards, the independent or irregularities would ordinarily not be detected within
auditor must a timely period by
a. Utilize statistical sampling. a. An auditor during the normal study and
b. Employ analytical review procedures. evaluation of the system of internal control.
c. Obtain certain written representations from b. A controller when reconciling accounts in the
management. general ledger.
d. Observe the taking of physical inventory on c. Employees in the normal course of perform
the balance sheet date. ing their assigned functions.
d. The chief financial officer when reviewing in
46. Whenever special reports, filed on a printed form terim financial statements.
designed by authorities, call upon the independent
auditor to make an assertion that the auditor believes is 52. Auditor confirmation of accounts payable
not justified, the auditor should balances at the balance sheet date may be unnecessary
a. Submit a short-form report with explanations. because
b. Reword the form or attach a separate report. a. This is a duplication of cutoff tests.
c. Submit the form with questionable items b. Accounts payable balances at the balance
clearly omitted. sheet date may not be paid before the audit is
d. Withdraw from the engagement. completed.
c. Correspondence with the audit client’s
47. Which of the following audit tests would be attorney will reveal all legal action by vendors
regarded as a test of “ compliance?” for nonpayment.
a. Tests of the specific items making up the d. There is likely to be other reliable external
balance in a given general ledger account. evidence available to support the balances.
b. Tests of the inventory pricing to vendors’ in
voices. 53. An auditor need not mention consistency in the
c. Tests of the signatures on cancelled checks to audit report if
board of director’s authorizations. a. The client has acquired another company
d. Tests of the additions to property, plant, and through a “ pooling of interests.”
equipment by physical inspections. b. An adverse opinion is issued.
c. This is the first year the client has had an
48. When an adverse opinion is expressed, the opinion audit.
paragraph should include a direct reference to d. Comparative financial statements are issued.
a. A footnote to the financial statements which
discusses the basis for the opinion. 54. After a preliminary phase of the review of a
b. The scope paragraph which discusses the basis client’s EDP controls, an auditor may decide not to per
for the opinion rendered. form compliance tests related to the control procedures
c. A separate paragraph which discusses the within the EDP portion of the client’s internal control
basis for the opinion rendered. system. Which of the following would not be a valid
d. The consistency or lack of consistency in the reason for choosing to omit compliance tests?
application of generally accepted accounting a. The controls appear adequate.
principles. b. The controls duplicate operative controls ex
isting elsewhere in the system.
49. In verifying debits to perpetual inventory records c. There appear to be major weaknesses that
of a non-manufacturing firm, the auditor would be would preclude reliance on the stated pro
most interested in examining the purchase cedure.
a. Journal. d. The time and dollar costs of testing exceed the
b. Requisitions. time and dollar savings in substantive testing
c. Orders. if the compliance tests show the controls to be
d. Invoices. operative.
29
55. The third standard of fieldwork states that suffi 60. Operational audits generally have been conducted
cient competent evidential matter may in part be ob by internal auditors and governmental audit agencies
tained through inspection, observation, inquiries, and but may be performed by certified public accountants.
confirmations to afford a reasonable basis for an opin A primary purpose of an operational audit is to provide
ion regarding the financial statements under examina a. A means of assurance that internal accounting
tion. The evidential matter required by this standard controls are functioning as planned.
may in part be obtained through b. Aid to the independent auditor, who is con
a. Auditor working papers. ducting the examination of the financial
b. Proper planning of the audit engagement. statements.
c. Analytical review procedures. c. The results of internal examinations of finan
d. Review of the system of internal control. cial and accounting matters to a company’s
top-level management.
56. Propex Corporation uses a voucher register and d. A measure of management performance in
does not record invoices in a subsidiary ledger. Propex meeting organizational goals.
will probably benefit most from the additional cost of
maintaining an accounts payable subsidiary ledger if
a. There are usually invoices in an unmatched in
voice file.
b. Vendors’ requests for confirmation of
receivables often go unanswered for several
months until paid invoices can be reviewed.
c. Partial payments to vendors are continuously
made in the ordinary course of business.
d. It is difficult to reconcile vendors’ monthly
statements.
57. The primary difference between an audit of the

balance sheet and an audit of the income statement lies
in the fact that the audit of the income statement deals Number 2 (Estimated tim e----- 15 to 25 minutes)
with the verification of
a. Transactions. Savage, CPA, has been requested by an audit client
b. Authorizations. to perform a non-recurring engagement involving the
c. Costs. implementation of an EDP information and control
d. Cutoffs. system. The client requests that in setting up the new
system and during the period prior to conversion to the
58. A CPA establishes quality control policies and new system, that Savage:
procedures for deciding whether to accept a new client • Counsel on potential expansion of business ac
or continue to perform services for a current client. The tivity plans.
primary purpose for establishing such policies and pro • Search for and interview new personnel.
cedures is • Hire new personnel.
a. To enable the auditor to attest to the integrity • Train personnel.
or reliability of a client. In addition, the client requests that during the three
b. To comply with the quality control standards months subsequent to the conversion, that Savage:
established by regulatory bodies. • Supervise the operation of new system.
c. To minimize the likelihood of association with • Monitor client-prepared source documents and
clients whose managements lack integrity. make changes in basic EDP generated data as Savage
d. To lessen the exposure to litigation resulting may deem necessary without concurrence of the client.
from failure to detect irregularities in client Savage responds that he may perform some of the ser
financial statements. vices requested, but not all of them.
59. In updating a computerized accounts receivable
file, which one of the following would be used as a Required:
batch control to verify the accuracy of the posting of a. Which of these services may Savage perform
cash receipts remittances? and which of these services may Savage not perform?
a. The sum of the cash deposits plus the dis b. Before undertaking this engagement, Savage
counts less the sales returns. should inform the client of all significant matters related
b. The sum of the cash deposits. to the engagement. What are these significant matters?
c. The sum of the cash deposits less the discounts c. If Savage adds to his staff an individual who
taken by customers. specializes in developing computer systems, what degree
d. The sum of the cash deposits plus the dis of knowledge must Savage possess in order to supervise
counts taken by customers. the specialist’s activities?
30
Auditing
Number 3 (Estimated time----- 15 to 25 minutes) Number 5 (Estimated time----- 15 to 25 minutes)
After determining that computer controls are valid, A CPA’s audit working papers contain a narrative
Hastings is reviewing the sales system of Rosco Cor description of a segment of the Croyden Factory, Inc.,
poration in order to determine how a computerized payroll system and an accompanying flowchart as
audit program may be used to assist in performing tests follows:
of Rosco’s sales records.
Rosco sells crude oil from one central location. All NARRATIVE
orders are received by mail and indicate the pre-assigned
customer identification number, desired quantity, pro The internal control system with respect to the per
posed delivery date, method of payment and shipping sonnel department is well-functioning and is not includ
terms. Since price fluctuates daily, orders do not in ed in the accompanying flowchart.
dicate a price. Price sheets are printed daily and details At the beginning of each work week payroll clerk
are stored in a permanent disc file. The details of orders No. 1 reviews the payroll department files to determine
are also maintained in a permanent disc file. the employment status of factory employees and then
Each morning the shipping clerk receives a com prepares time cards and distributes them as each in
puter printout which indicates details of customers’ dividual arrives at work. This payroll clerk, who is also
orders to be shipped that day. After the orders have responsible for custody of the signature stamp machine,
been shipped, the shipping details are inputted in the verifies the identity of each payee before delivering
computer which simultaneously updates the sales jour signed checks to the foreman.
nal, perpetual inventory records, accounts receivable, At the end of each work week the foreman
and sales accounts. distributes payroll checks for the preceding work week.
The details of all transactions, as well as daily up Concurrent with this activity, the foreman reviews the
dates, are maintained on discs which are available for current week’s employee time cards, notes the regular
use by Hastings in the performance of the audit. and overtime hours worked on a summary form, and
initials the aforementioned time cards. The foreman
Required: then delivers all time cards and unclaimed payroll
a. How may a computerized audit program be checks to payroll clerk No. 2.
used by Hastings to perform substantive tests of
Rosco’s sales records in their machine readable form? Required:
Do not discuss accounts receivable and inventory. a. Based upon the narrative and accompanying
b. After having performed these tests with the flowchart, what are the weaknesses in the system of in
assistance of the computer, what other auditing pro ternal control?
cedures should Hastings perform in order to complete b. Based upon the narrative and accompanying
the examination of Rosco’s sales records? flowchart, what inquiries should be made with respect
to clarifying the existence of possible additional
weaknesses in the system of internal control?
Note: Do not discuss the internal control system of the

personnel department.
Number 4 (Estimated tim e----- 15 to 25 minutes)
Analytical review procedures are substantive tests

which are extremely useful in the initial audit planning
stage.
Required:
a. Explain why analytical review procedures are
considered substantive tests.
b. Explain how analytical review procedures may
be useful in the initial audit planning stage.
c. Identify the analytical review procedures which
one might expect a CPA to utilize during an examina
tion performed in accordance with generally accepted
auditing standards.
31
Number 5—Flowchart
CROYDEN INC., FACTORY PAYROLL SYSTEM
FACTORY FACTORY PAYROLL PAYROLL
EMPLOYEES FOREMAN PERSONNEL CLERK NO. 1 CLERK NO. 2 BOOKKEEPING
32
and adopted by the examining boards o f all states, territories, and the District of Columbia.)
EXAMINATION IN BUSINESS LAW
(Commercial Law)
May 9, 1980; 8:30 AM to 12:00 M.
Estimated Minutes
No. 1 ..................... 90 105

No. 2 ..................... 20 25
No. 3 ..................... 20 25
No. 4 ..................... 25 30
No. 5 ..................... 20 25
T otal............. 175 210
1. You must arrange the papers in numerical order of are uncertain of the answer. You are likely to get
the questions. If more than one page is required for the highest score if you omit no answers.
an answer, write “ continued” at the bottom of the
page. Number pages consecutively. For instance, if
12 pages are used for your answers, they should be 3. A CPA is continually confronted with the necessity
numbered 1 through 12. The printed answer sheet of expressing opinions and conclusions in written
provided for the objective-type items should be reports in clear, unequivocal language. Although
considered to be Page 1. the primary purpose of the examination is to test
the candidate’s knowledge and application of the
2. Answer ail objective-type items on the printed subject matter, the ability to organize and present
answer sheet provided for that purpose. It is to such knowledge in acceptable written language
your advantage to attempt all questions even if you will be considered by the examiners.
33
Number 1 (Estimated time----- 90 to 105 minutes) 2. Congress recently amended the antitrust laws to
provide stiffer penalties and increased sanctions for
Instructions violation of the various acts’ provisions. Which of the
following represents an Incorrect statement of the
changed provisions?
Select the best answer for each of the following a. The maximum fine for corporations was in
items. Use a soft pencil, preferably No. 2, to blacken the creased to one million dollars.
appropriate circle on the separate printed answer sheet b. Violations of the Sherman Act are now
to indicate your answer. Mark only one answer for each classified as felonies with a maximum prison
item. Answer all items. Your grade will be based on term of 3 years.
your total correct answers. c. Punitive damages obtainable in private an
The following is an example of the manner in which titrust actions have been increased from 3
the answer sheet should be marked: times to 5 times actual damages.
Item d. The maximum fine for individuals has been
increased to $100,000.
99. The text of the letter from Bridge Builders, Inc., to 3. The federal bankruptcy act contains several im
Allied Steel Co. follows: portant terms. One such term is “ insider.’’ The term is
used in connection with preferences and preferential
We offer to purchase 10,000 tons of No. 4 transfers. Which among the following is not an “ in
steel pipes at today’s quoted price for delivery two sider?’’
months from today. Your acceptance must be a. A secured creditor having a security interest in
received in five days. at least 25% or more of the debtor’s property.
b. A partnership in which the debtor is a general
Bridge Builders intended to create a (an) partner.
a. Option contract. c. A corporation of which the debtor is a direc
b. Unilateral contract. tor.
c. Bilateral contract. d. A close blood relative of the debtor.
d. Joint contract.
Answer Sheet 4. Marble Manufacturing, Inc., produces a high
quality, trademarked line of distinctive clocks which it
sells to selected wholesalers and retailers. The clocks are
99. © sold in free and open competition with the clocks of
many other manufacturers. The selection of the
Items to be Answered wholesalers and retailers is dependent upon their agree
ing to the pricing policies of Marble. Several other
1. Jay Manufacturing Company sells high quality, manufacturers also have similar marketing ar
high-priced lawn mowers to retailers throughout the rangements. The above-described marketing arrange
United States. Jay unilaterally announced suggested ment is
retail prices in its advertisements. Jay also informed a. Legal, in that Marble is merely “ meeting the
retailers that its products would not be sold to them if competition’’ of other clock manufacturers.
the retailers used them as “ loss leaders’’ or b. Legal, since it is a permissible resale price
“ come-ons.’’ There was no requirement that any maintenance agreement.
retailer agree to sell at the suggested prices or refrain c. Fully subject to the general antitrust prohibi
from selling at whatever price they wished. Monroe tions against price fixing.
Sales, Inc., a large home supply discounter, persistently d. To be tested under the rule of reason, since the
engaged in loss-leader selling of the Jay mower. Jay has agreement is not among competitors but
terminated sales to Monroe and declined to do any fur rather between a supplier and its customers.
ther business with it. Monroe claims that Jay has
violated the antitrust laws. Under the circumstances, 5. The Duplex Corporation has been charged by the
which is a correct statement? United States Justice Department with an “ attempt to
a. The arrangement in question is an illegal joint monopolize’’ the duplex industry. In defending itself
boycott. against such a charge, Duplex will prevail if it can
b. The arrangement in question amounts to establish
price-fixing and is illegal per se. a. It had no intent to monopolize the duplex in
c. The mere unilateral refusal to deal with dustry.
Monroe is not illegal under antitrust laws. b. Its percentage share of the relevant market
d. Even if it were found that in fact the over was less than 50%.
whelming preponderance of retailers had will c. Its activities do not constitute an unreasonable
ingly agreed to follow the suggested prices, restraint of trade.
Jay would not have violated antitrust laws. d. It does not have monopoly power.
34
Business Law
6. Barton Corporation and Clagg Corporation have 9. A major characteristic of the corporation is its
decided to combine their separate companies pursuant recognition as a separate legal entity. As such it is
to the provisions of their state corporation laws. After capable of withstanding attacks upon its valid existence
much discussion and negotiation, they decided that a by various parties who would wish to disregard its ex
consolidation was the appropriate procedure to be istence or “ pierce the corporate veil” for their own pur
followed. Which of the following is an incorrect state poses. The corporation will normally be able to suc
ment with respect to the contemplated statutory con cessfully resist such attempts except when
solidation? a. The corporation was created with tax savings
a. A statutory consolidation pursuant to state in mind.
law is recognized by the Internal Revenue b. The corporation was created in order to in
Code as a type of tax-free reorganization. sulate the assets of its owners from personal
b. The larger of the two corporations will emerge liability.
as the surviving corporation. c. The corporation being attacked is a wholly
c. Creditors of Barton and Clagg will have their owned subsidiary of its parent corporation.
claims protected despite the consolidation. d. The creation of and transfer of property to the
d. The shareholders of both Barton and Clagg corporation amounts to a fraud upon
must approve the plan of consolidation. creditors.
10. Bunker Industries, Inc., ceased doing business and
is in bankruptcy. Among the claimants are employees
7. Mark Corporation is a moderate-sized closely held seeking unpaid wages. The following statements
corporation which is owned by Joseph Mark. The describe the possible status of such claims in a
remaining 20% of stock is owned by Mark’s wife, sons, bankruptcy proceeding or legal limitations placed upon
daughter, and parents. One son, David Mark, who them. Which one is an incorrect statement?
recently graduated from business school, has been hired a. They are entitled to a priority.
by the corporation as financial vice president at a salary b. If a priority is afforded such claims, it cannot
of $60,000 per year. Other members of the family are exceed $2,000 per wage earner.
either officers or directors of the corporation and are all c. Such claims cannot include vacation,
generously compensated. Joseph Mark is paid $300,000 severance, or sick-leave pay.
as Chairman of the Board and Chief Executive Officer. d. The amounts of excess wages not entitled to a
The corporation is profitable, solvent, and meeting all priority are mere unsecured claims.
claims as they become due. Who of the following would
have standing to attack the reasonableness of the salary 11. Carr owns 100 acres of undeveloped land on the
payments? outskirts of New Town. He bought the land several
a. The creditors of the corporation. years ago to build an industrial park in the event New
b. The attorney general of the state in which Town grew and prospered. The land was formerly used
Mark is incorporated. for grazing and truck gardening. A subsequent inspec
c. The Internal Revenue Service. tion revealed that several adjacent landowners recently
d. The Securities and Exchange Commission. had been using a shortcut across his land in order to
reach a newly constructed highway. Which of the
following is a correct statement?
8. The Board of Directors of Wilcox Manufacturing a. There is a danger that the adjacent land-
Corporation, a publicly held corporation, has noted a owners will obtain title by adverse possession.
significant drop in the stock market price of its 7% b. Since Carr has properly recorded his deed, the
preferred stock and proposes to purchase some of the facts do not pose a problem for him.
stock. The proposed purchase price is substantially c. There is a danger that an easement may be
below the redemption price of the stock. The Board has created.
decided to acquire 100,000 shares of said preferred d. Since the adjacent landowners are trespassers,
stock and either place it in the treasury or retire it. Carr has nothing to fear.
Under these circumstances, which of the following is a
correct statement? 12. Golden Enterprises, Inc., entered into a contract
a. The corporation will realize a taxable gain as a with Hidalgo Corporation for the sale of its mineral
result of the transaction. holdings. The transaction proved to be ultra vires.
b. The preferred stock so acquired must be Which of the following parties, for the reason stated,
retired and may not be held as treasury stock. may properly assert the ultra vires doctrine?
c. The corporation may not acquire its own a. Golden Enterprises to avoid performance.
shares unless the articles of incorporation so b. A shareholder of Golden Enterprises to enjoin
provide. the sale.
d. Such shares may be purchased by the corpora c. Hidalgo Corporation to avoid performance.
tion to the extent of unreserved and d. Golden Enterprises to rescind the consum
unrestricted earned surplus available therefor. mated sale.
35
13. Grandiose secured an option to purchase a tract of 16. Plimpton subscribed to 1,000 shares of $1 par
land for $100,000. He then organized the Dunbar Cor value common stock of the Billiard Ball Corporation at
poration and subscribed to 51% of the shares of stock $10 a share. Plimpton paid $1,000 upon the incorpora
of the corporation for $100,000, which was issued to tion of Billiard and paid an additional $4,000 at a later
him in exchange for his three-month promissory note time. The corporation subsequently became insolvent
for $100,000. Controlling the board of directors and is now in bankruptcy. The creditors of the corpora
through his share ownership, he had the corporation tion are seeking to hold Plimpton personally liable.
authorize the purchase of the land from him for Which of the following is a correct statement?
$200,000. He made no disclosure to the board or to a. Plimpton has no liability directly or indirectly
other shareholders that he was making a $100,000 pro to the creditors of the corporation since he
fit. He promptly paid the corporation for his shares and paid the corporation the full par value of the
redeemed his promissory note. A disgruntled shares.
shareholder subsequently learned the full details of the b. As a result of his failure to pay the full
transaction and brought suit against Grandiose on the subscription price, Plimpton has unlimited
corporation’s behalf. Which of the following is a cor joint and several liability for corporate debts.
rect statement? c. Plimpton is liable for the remainder of the un
a. Grandiose breached his fiduciary duty to the paid subscription price.
corporation and must account for the profit d. Had Plimpton transferred his shares to an in
he made. nocent third party, neither he nor the third
b. The judgment of the board of directors was party would be liable.
conclusive under the circumstances.
c. Grandiose is entitled to retain the profit since 17. Which of the following provisions is a part of the
he controlled the corporation as a result of his Social Security law?
share ownership. a. Social Security benefits must be fully funded
d. The giving of the promissory note in exchange and payments, current and future, must con
for the stock constituted payment for the stitutionally come only from Social Security
shares. taxes.
b. Upon the death of an employee prior to his
14. Destiny Manufacturing, Inc., is incorporated retirement, his estate is entitled to receive the
under the laws of Nevada. Its principal place of business amount attributable to his contributions as a
is in California and it has permanent sales offices in death benefit.
several other states. Under the circumstances, which of c. A self-employed person must contribute an
the following is correct? annual amount which is less than the com
a. California may validly demand that Destiny bined contributions of an employee and his or
incorporate under the laws of the state of her employer.
California. d. Social Security benefits are taxable as income
b. Destiny must obtain a certificate of authority when they exceed the individual’s total con
to transact business in California and the tributions.
other states in which it does business.
c. Destiny is a foreign corporation in California, 18. At age 66, Jonstone retired as a general partner of
but not in the other states. Gordon & Co. He no longer participates in the affairs of
d. California may prevent Destiny from the partnership but does receive a distributive share of
operating as a corporation if the laws of the partnership profits as a result of becoming a limited
California differ regarding organization and partner upon retirement. Jonstone has accepted a part-
conduct of the corporation’s internal affairs. time consulting position with a corporation near his
retirement home. Which of the following is correct
15. Mask stole one of Bloom’s checks. The check was regarding Jonstone’s Social Security situation?
already signed by Bloom and made payable to Duval. a. Jonstone’s limited partner distributive share
The check was drawn on United Trust Company. Mask will be considered self-employment income
forged Duval’s signature on the back of the check and for Social Security purposes up to a maximum
cashed the check at the Corner Check Cashing Com of $10,000.
pany which in turn deposited it with its bank, Town Na b. There is no limitation on the amount Jonstone
tional Bank of Toka. Town National proceeded to col may earn in the first year of retirement.
lect on the check from United. None of the parties men c. Jonstone will lose $1 of Social Security
tioned was negligent. Who will bear the loss assuming benefits for each $1 of earnings in excess of a
the amount cannot be recovered from Mask? statutorily permitted amount.
a. Bloom. d. Jonstone will be subject to an annual earnings
b. Duval. limitation until he attains a stated age which,
c. United Trust Company. if exceeded, will reduce the amount of Social
d. Corner Check Cashing Company. Security benefits.
36
Business Law
19. Gomer developed a fraudulent system whereby he 23. A formal protest of dishonor must be made in
could obtain checks payable to the order of certain order to hold the drawer or indorsers liable for all of the
repairmen who serviced various large corporations. following foreign instruments except
Gomer observed the delivery trucks of repairmen who a. Drafts.
did business with the corporations, and then he submit b. Promissory notes.
ted bills on the bogus letterhead of the repairmen to the c. Trade acceptances.
selected large corporations. The return envelope for d. Checks.
payment indicated a local post office box. When the
checks arrived, Gomer would forge the payees’ 24. Dodson drew a check to the order of Swanson for
signatures and cash the checks. The parties cashing the services which were partially rendered. The check was
checks are holders in due course. Who will bear the loss left blank because the exact amount was not known at
assuming the amount cannot be recovered from Gomer? the time of issue. The understanding between Dodson
a. The defrauded corporations. and Swanson was that Swanson would complete the
b. The drawee banks. job, fill in the check for the exact amount due which was
c. Intermediate parties who indorsed the in estimated as $650, but which would in no event exceed
struments for collection. $700. Swanson failed to complete the work as agreed,
d. The ultimate recipients of the proceeds of the but filled in the amount of the check for $1,000. He then
checks even though they are holders in due negotiated it to Irwin in satisfaction of a $500 debt, with
course. the balance paid to Swanson in cash. Swanson has
disappeared, Dodson stopped payment and Irwin is
20. Monrad is contemplating making a contract for seeking to collect the $1,000 from Dodson. What will
the purchase of certain real property. Which of the Irwin be able to collect?
following is incorrect insofar as such a contract is con a. Nothing.
cerned? b. $500.
a. It must meet the requirements of the statute of c. $700.
frauds. d. $1,000.
b. If the agreement is legally consummated,
Monrad could obtain specific performance.
c. The contract is nonassignable as a matter of
law. 25. A holder in due course will take an instrument free
d. An implied covenant of marketability applies from which of the following defenses?
to the contract. a. Claims of ownership on the part of other per
sons.
21. An instrument is order paper when it is b. Infancy of the maker or drawer.
a. Payable to the order of cash on its face. c. Discharge in insolvency proceedings.
b. Indorsed to John Smith by Marvin Frank, the d. The forged signature of the maker or drawer.
payee.
c. Payable to the order of Marvin Frank and in
dorsed in blank.
26. Dombres is considering purchasing Blackacre. The
d. Payable to a specified person or bearer.
title search revealed that the property was willed by
22. Barber has in his possession a negotiable instru Adams jointly to his children, Donald and Martha. The
ment which he purchased in good faith and for value. language contained in the will is unclear as to whether a
The drawer of the instrument stopped payment on it joint tenancy or a tenancy in common was intended.
and has asserted that Barber does not qualify as a holder Donald is dead and Martha has agreed to convey her en
in due course since the instrument is overdue. In deter tire interest by quit-claim deed to Dombres. The pur
mining whether the instrument is overdue, which of the chase price is equal to the full fair market price of the
following is incorrect? property. Dombres is not interested in anything less
a. A reasonable time for a check drawn and than the entire title to the tract. Under the cir
payable in the United States is presumed to be cumstances, which of the following is correct?
30 days after issue. a. There is a statutory preference which favors
b. A reasonable time for a check drawn and the finding of a joint tenancy.
payable in the United States is presumed to be b. Whether the will created a joint tenancy or a
20 days after the last negotiation. tenancy in common is irrelevant since Martha
c. All demand instruments, other than checks, is the only survivor.
are not overdue until a reasonable time after c. Dombres will not obtain title to the entire
their issue has elapsed. tract of land by Martha’s conveyance.
d. The instrument will be deemed to be overdue d. There is no way or means whereby Dombres
if a demand for payment had been made and may obtain a clear title under the cir
Barber knew this. cumstances.
37
27. Ford bought a used typewriter for $625 from Jem 30. Robb stole one of Markum’s blank checks, made
Typewriters. The contract provided that the typewriter it payable to himself, and forged Markum’s signature to
was sold “ with all faults, as is, and at the buyer’s risk.’’ it. The check was drawn on the Unity Trust Company.
The typewriter broke down within a month. Ford took Robb cashed the check at the Friendly Check Cashing
it back to Jem, and after prolonged arguing and Company which in turn deposited it with its bank, the
negotiating, Jem orally agreed to reduce the price by $50 Farmer’s National. Farmer’s National proceeded to col
and refund that amount. Jem has reconsidered his rights lect on the check from Unity Trust. The theft and
and duties and decided not to refund the money. Under forgery were quickly discovered by Markum who
the circumstances, which of the following is correct? promptly notified Unity. None of the parties mentioned
a. The disclaimer of the implied warranties of was negligent. Who will bear the loss, assuming the
merchantability and fitness is invalid. amount cannot be recovered from Robb?
b. The agreement to reduce the price is valid and a. Markum.
binding. b. Unity Trust Company.
c. Jem’s promise is unenforceable since Ford c. Friendly Check Cashing Company.
gave no new consideration. d. Farmer’s National.
d. Since the contract as modified is subject to the
statute of frauds, the modification must be in
writing.
31. Merchant is in serious financial difficulty and is
28. The Astor Bank and Trust Company is the trustee unable to meet current unsecured obligations of $25,000
of the Wayne Trust. A significant portion of the trust to some 15 creditors who are demanding immediate pay
principal has been invested in AAA rated public utility ment. Merchant owes Flintheart $5,000 and Flintheart
bonds. Some of the bonds have been purchased at face has decided to file an involuntary petition against Mer
value, some at a discount, and others at a premium. chant. Which of the following is necessary in order for
Which of the following is a proper allocation of the Flintheart to validly file?
various items to income? a. Flintheart must be joined by at least two other
a. The income beneficiary is entitled to the entire creditors.
interest without dilution for the premium paid b. Merchant must have committed an act of
but is not entitled to the proceeds attributable bankruptcy within 120 days of the filing.
to the discount upon collection. c. Flintheart must allege and subsequently
b. The income beneficiary is entitled to the entire establish that Merchant’s liabilities exceed
interest without dilution and to the proceeds Merchant’s assets upon fair valuation.
attributable to the discount. d. Flintheart must be a secured creditor.
c. The income beneficiary is only entitled to the
interest less the amount of the premium amor
tized over the life of the bond. 32. Target Company, Inc., ordered a generator from
d. The income beneficiary is entitled to the full Maximum Voltage Corporation. A dispute has arisen
interest and to an allocable share of the gain over the effect of a provision in the specifications that
resulting from the discount. the generator have a 5,000 kilowatt capacity. The
specifications were attached to the contract and were in
29. Marblehead Manufacturing, Inc., contracted with corporated by reference in the main body of the con
Wellfleet Oil Company in June to provide its regular tract. The generator did not have this capacity but in
supply of fuel oil from November 1 through March 31. stead had a maximum capacity of 4,800 kilowatts. The
The written contract required Marblehead to take all of contract had a disclaimer clause which effectively
its oil requirements exclusively from Wellfleet at a fixed negated both of the implied warranties of quality.
price subject to an additional amount not to exceed 10% Target is seeking to avoid the contract based upon
of the contract price and only if the market price in breach of warranty and Maximum is relying on its
creases during the term of the contract. By the time per disclaimer. Which of the following is a correct state
formance was due on the contract, the market price had ment?
already risen 20%. Wellfleet seeks to avoid perfor a. The 5,000 kilowatt term contained in the
mance. Which of the following will be Wellfleet’s best specifications does not constitute a warranty.
argument? b. The disclaimer effectively negated any and all
a. There is no contract since Marblehead was not warranty protection claimed by Target.
required to take any oil. c. The description language (5,000 kilowatt)
b. The contract fails because of lack of contained in the specifications is an express
definiteness and certainty. warranty and has not been effectively
c. The contract is unconscionable. disclaimed.
d. Marblehead has ordered amounts of oil d. The parol evidence rule will prevent Target
unreasonably disproportionate to its normal from asserting the 5,000 kilowatt term as a
requirements. warranty.
38
Business Law
33. Buyer ordered goods from Seller. The contract re 37. Pure Food Company packed and sold quality food
quired Seller to deliver them f.o.b. Buyer’s place of products to wholesalers and fancy food retailers. One of
business. Buyer inspected the goods, discovered they its most popular items was “ southern style’’ baked
failed to conform to the contract, and rightfully rejected beans. Charleston purchased a large can of the beans
them. In the event of loss of the goods, which of the from the Superior Quality Grocery. Charleston’s
following is a correct statement? mother bit into a heaping spoonful of the beans at a
a. Seller initially had the risk of loss and it re family outing and fractured her jaw. The evidence
mains with him after delivery. revealed that the beans contained a brown stone, the
b. Risk of loss passes to Buyer upon tender of size of a marble. In a subsequent lawsuit by Mrs.
the goods f.o.b. Buyer’s place of business. Charleston, which of the following is correct?
c. Buyer initially had the risk of loss, but it is a. Mrs. Charleston can collect against Superior
shifted to Seller upon rightful rejection. Quality for negligence.
d. If Seller used a public carrier to transport the b. Privity will not be a bar in a lawsuit against
goods to Buyer, risk of loss is on Buyer during either Pure Food or Superior Quality.
transit. c. The various sellers involved could have effec
tively excluded or limited the rights of third
34. Milgore, the vice president of Deluxe Restaurants, parties to sue them.
telephoned Specialty Restaurant Suppliers and ordered d. Privity is a bar to recovery by Mrs.
a made-to-order dishwashing unit for one of its Charleston, although her son may sue
restaurants. Due to the specifications, the machine was Superior Quality.
not adaptable for use by other restauranteurs. The
agreed price was $2,500. The machine was constructed
as agreed but Deluxe has refused to pay for it. Which of 38. Martha Supermarkets ordered 1,000 cases of giant
the following is correct? pitted olives from Grove Packers and Wholesalers. The
a. Milgore obviously lacked the authority to olives were to be packed, labelled and shipped in 30
make such a contract. days. The payment terms were 2/10, net/30 upon
b. The statute of frauds applies and will bar delivery. After the order was nearly ready for shipment,
recovery by Specialty. Grove learned that Martha was not paying its debts as
c. Specialty can successfully maintain an action they became due. Martha insisted on delivery according
for the price. to the terms of the contract. Which of the following is
d. Specialty must resell the machine and recover correct?
damages based upon the resale price. a. Upon discovery of Martha’s financial condi
tion, Grove was relieved from any duty under
35. Hapless is a bankrupt. In connection with a debt the contract.
owed to the Suburban Finance Company, he used a b. Martha has the right of performance since it
false financial statement to induce it to loan him $500. was not insolvent in the bankruptcy sense.
Hapless is seeking a discharge in bankruptcy. Which of c. Grove must perform but it is entitled to de
the following is a correct statement? mand cash.
a. Hapless will be denied a discharge of any of d. The terms of the contract provided credit to
his debts. Martha and Grove is bound by it.
b. Even if it can be proved that Suburban did not
rely upon the financial statement, Hapless will 39. Nolan Surety Company has agreed to serve as a
be denied a discharge either in whole or part. guarantor of collection (a form of conditional guaranty)
c. Hapless will be denied a discharge of the of the accounts receivable of the Dunbar Sales Corpora
Suburban debt. tion. The duration of the guarantee is one year and the
d. Hapless will be totally discharged despite the maximum liability assumed is $3,000. Nolan charged
false financial statement. the appropriate fee for acting in this capacity. Which of
the following statements best describes the difference
36. Dilworth provided collateral to Maxim to secure between a guarantor of collection and the typical surety
Dilworth’s performance of an obligation owed to Max relationship?
im. Maxim also obtained the Protection Surety Com a. A guaranty need not be in writing provided
pany as a surety for Dilworth’s performance. Dilworth the duration is less than a year.
has defaulted and Protection has discharged the obliga b. The guarantor is not immediately liable upon
tion in full. Which of the following is the correct legal default; the creditor must first proceed against
basis for Protection’s assertion of rights to the col the debtor.
lateral? c. A guaranty is only available from a surety
a. Promissory estoppel. who is a compensated surety.
b. Exoneration. d. A guaranty is only used in connection with the
c. Indemnification. sale of goods which have been guaranteed by
d. Subrogation. the seller.
39
40. Waldorf’s last will and testament named Franklin 44. Cornwith agreed to serve as a surety on a loan by
as the executor of the will. In respect to Franklin’s serv Super Credit Corporation to Fairfax, one of Cornwith’s
ing as executor, which of the following is correct? major customers. The relationship between Fairfax and
a. He serves without compensation unless the Super deteriorated to a point of hatred as a result of
will provides otherwise. several late payments on the loan. On the due date of
b. He is at liberty to purchase the estate’s pro the final payment, Fairfax appeared 15 minutes before
perty the same as any other person dealing at closing and tendered payment of the entire amount
arm’s length. owing to Super. The office manager of Super told Fair
c. Waldorf must have obtained Franklin’s con fax that he was too late and would have to pay the next
sent in writing to serve as executor. day with additional interest and penalties. Fairfax again
d. Upon appointment by the court, he serves as tendered the payment, which was again refused. It is
the legal representative of the estate. now several months later and Super is seeking to collect
from either Cornwith or Fairfax or both. What are
Super’s rights under the circumstances?
41. Simpson and Thomas made separate contracts of a. It cannot collect anything from either party.
suretyship with Allan to guarantee repayment of a b. The tender of performance released Cornwith
$12,000 loan Allan made to Parker. Simpson’s from his obligation.
guarantee was for $12,000 and Thomas’ for $8,000. In c. The tender of performance was too late and
the event Simpson pays the full amount ($12,000), what rightfully refused.
may he recover from Thomas? d. Cornwith is released only to the extent that the
a. Nothing since their contracts were separate. refusal to accept the tender harmed him.
b. $4,800.
c. $6,000.
d. $8,000.
45. At his death, Filmore owned a $100,000 life in
surance policy on his life in which he designated his wife
42. Moncrief is a surety on a $ 100,000 obligation owed as the beneficiary. The insurer paid the proceeds of the
by Vicars to Sampson. The debt is also secured by a policy directly to Mrs. Filmore after his death. Which of
$50,000 mortgage to Sampson on Vicars’ factory. the following is a correct statement?
Vicars is in bankruptcy. Moncrief has satisfied the debt. a. If Filmore’s will designates a person other
Which of the following is a correct statement? than his wife to receive the proceeds of the in
a. Moncrief is a secured creditor to the extent of surance policy, such a designation will not be
the $50,000 mortgage and a general creditor valid.
for the balance. b. Upon receipt of the proceeds, Mrs. Filmore
b. Moncrief would not be entitled to a priority in will have received $100,000 of taxable income,
bankruptcy, even though Sampson could but income averaging is permitted.
validly claim it. c. The insurance proceeds are not includible in
c. Moncrief is only entitled to the standing of a Filmore’s estate for federal estate tax pur
general creditor in bankruptcy. poses.
d. Moncrief is entitled to nothing in bankruptcy d. Filmore, having designated his wife as the
since this was a risk he assumed. beneficiary of the policy, could not change the
beneficiary unless she died or they were
divorced.
43. Newton is an employee of the Black Motor Com
pany. She is covered to the extent of $50,000 by a group
term life insurance policy which covers all the full-time
employees of Black. She pays no premiums on the 46. Dupree buys and sells merchandise at wholesale.
policy. Regarding the legal and tax aspects of this She is concerned with her insurance coverage on her
policy, which of the following is a correct statement? purchases. Her desire is to insure the property at the
a. Black is not entitled to a deduction for the earliest possible time legally permitted. Which of the
premiums paid on the policy. following times or circumstances correctly indicates the
b. Newton must include the annual premium to earliest time permissible?
purchase the $50,000 policy in her gross in a. At the time the goods are identified to the con
come. tract.
c. Newton is obligated to name the Black Motor b. When title to the goods has passed to her.
Company as the contingent beneficiary. c. When she has received possession of the
d. The policy is cancelled upon her terminating goods.
her employment unless she elects to pay the d. At the time the contract is made whether or
premiums herself at the non-group rate. not the goods are identified.
40
Business Law
47. Rollo Trading Corporation insured its 15 50. Mullins created a trust pursuant to her last will and
automobiles for both liability and collision. Poindexter, testament which named her husband as the life income
one of its salesmen, was in an automobile accident while beneficiary and her children as the remaindermen. She
driving a company car on a sales trip. The facts clearly is dead. Which of the following does not apply to the
reveal that the accident was solely the fault of Connors, above-described trust?
the driver of the other car. Poindexter was seriously in a. It is a testamentary trust.
jured, and the automobile was declared a total loss. The b. The husband has the right to appoint the
value of the auto was $2,850. Which of the following is ultimate beneficiaries.
an incorrect statement regarding the rights and liabilities c. The children have a vested interest in the trust.
of Rollo, its insurer, Poindexter, and Connors? d. The trustee owes a fiduciary duty to both the
a. Rollo’s insurer has no liability whatsoever husband and the children.
since the accident was the result of Connors’
negligence.
b. Rollo’s insurer is liable for $2,850, less any
deductible, on the collision policy, but will be
subrogated to Rollo’s fights. Number 2 (Estimated tim e----- 20 to 25 minutes)
c. Rollo’s insurer must defend Rollo against any
claims by Poindexter or Connors. Part a. For the first time in the history of federal
d. Poindexter has an independent action against income tax law, Congress enacted legislation in 1976
Connors for the injuries caused by Connors’ that imposed civil liabilities and penalties upon in
negligence. dividuals who are guilty of certain misconduct in con
nection with their preparing income tax returns for a
fee. Prior provisions of the Internal Revenue Code
which dealt with criminal fraud remained unchanged.
Required: Answer the following, setting forth reasons

48. Hazard & Company was the owner of a building for any conclusions stated.
valued at $100,000. Since Hazard did not believe that a What potential civil liabilities and penalties to the
fire would result in a total loss, it procured two standard United States government should the practitioner be
fire insurance policies on the property. One was for aware of in connection with the improper preparation
$24,000 with the Asbestos Fire Insurance Company and of a federal income tax return, and what types of con
the other was for $16,000 with the Safety Fire Insurance duct would give rise to these liabilities and penalties?
Company. Both policies contained standard pro rata
and 80% coinsurance clauses. Six months later, at Part b. The directors of Clarion Corporation,
which time the building was still valued at $100,000, a their accountants, and their attorneys met to discuss the
fire occurred which resulted in a loss of $40,000. What desirability of this highly successful corporation going
is the total amount Hazard can recover on both policies public. In this connection, the discussion turned to the
and the respective amount to be paid by Asbestos? potential liability of the corporation and the parties in
a. $0 and $0. volved in the preparation and signing of the registration
b. $20,000 and $10,000. statement under the Securities Act of 1933. Craft,
c. $20,000 and $12,000. Watkins, and Glenn are the largest shareholders. Craft
d. $40,000 and $20,000. is the Chairman of the Board; Watkins is the Vice
Chairman; and Glenn is the Chief Executive Officer. It
has been decided that they will sign the registration
statement. There are two other directors who are also
executives and shareholders of the corporation. All of
49. A group of real estate dealers has decided to form the board members are going to have a percentage of
a Real Estate Investment Trust (REIT) which will invest their shares included in the offering. The firm of
in diversified real estate holdings. A public offering of Witherspoon & Friendly, CPAs, will issue an opinion as
$10,0 0 ,000 of trust certificates is contemplated. Which to the financial statements of the corporation which will
of the following is an incorrect statement? accompany the filing of the registration statement, and
a. Those investing in the venture will not be in Blackstone & Abernathy, Attorneys-at-Law, will render
sulated from personal liability. legal services and provide any necessary opinion letters.
b. The entity will be considered to be an
“ association” for tax purposes. Required: Answer the following, setting forth reasons
c. The offering must be registered under the for any conclusions stated.
Securities Act of 1933. Discuss the types of potential liability and defenses
d. If the trust qualifies as a REIT and distributes pursuant to the Securities Act of 1933 that each of the
all its income to the investors, it will not be above parties or classes of parties may be subject to as a
subject to federal income tax. result of going public.
41
Number 3 (Estimated tim e------20 to 25 minutes) Part b. Jane Anderson offered to sell Richard
Heinz a ten acre tract of commercial property.
Part a. Smithers contracted with the Silverwater Anderson’s letter indicated the offer would expire on
Construction Corporation to build a home. The con March 1, 1980, at 3:00 p.m. and that any acceptance
tract contained a detailed set of specifications including must be received in her office by that time. On February
the type, quality, and manufacturers’ names of the 29, 1980, Heinz decided to accept the offer and posted
building materials that were to be used. After construc an acceptance at 4:00 p.m. Heinz indicated that in the
tion was completed, a rigid inspection was made of the event the acceptance did not arrive on time, he would
house and the following defects were discovered: assume there was a contract if he did not hear anything
from Anderson in five days. The letter arrived on March
(1) Some of the roofing shingles were improperly 2, 1980. Anderson never responded to Heinz’s letter.
laid. Heinz claims a contract was entered into and is suing
(2) The ceramic tile in the kitchen and three thereon.
bathrooms was not manufactured by Disco
Tile Company as called for in the specifica Required: Answer the following, setting forth reasons
tions. The price of the alternate tile was $325 for any conclusions stated.
less than the Disco but was of approximately Is there a contract?
equal quality.
(3) The sewerage pipes that were imbedded in Part c. Betty Monash was doing business as Vic
concrete in the basement were also not tory Stamp Company. She sold the business as a going
manufactured by the specified manufacturer. concern. The assets of the business consist of an inven
It could not be shown that there was any dif tory of stamps, various trade fixtures which are an in
ference in quality and the price was the same. herent part of the business, a building which houses the
(4) Various minor defects such as improperly retail operation, goodwill, and miscellaneous office
hung doors. equipment. On the liability side, there are numerous
trade accounts payable and a first mortgage on the
Silverwater has corrected defects (1) and (4) but has building.
refused to correct defects (2) and (3) because the cost Joe Franklin purchased the business. In addition to
would be substantial. Silverwater claims it is entitled to a cash payment, he assumed all outstanding debts and
recover under the contract and demands full payment. promised to hold Monash harmless from any and all
Smithers is adamant and is demanding literal perfor liability on the scheduled debts listed in the contract of
mance of the contract or he will not pay. sale.
for any conclusions stated.
1. If the dispute goes to court, who will prevail, What is the legal relationship of Monash, Franklin,
assuming Silverwater’s breach of contract was and the creditors to each other after the consummation
intentional? of the sale with respect to the outstanding debts of the
2. If the dispute goes to court, who will prevail, business?
assuming Silverwater’s breach of contract was
unintentional?
42
Business Law
Number 4 (Estimated tim e------25 to 30 minutes) Required: Answer the following, setting forth reasons
Part a. After much study and deliberation, the 1. Based upon the facts given, is the field
marketing division of Majestic Enterprise, Inc., has warehousing arrangement valid?
recommended to the board of directors that the cor 2. When does a security interest in the negotiable
poration market its products almost exclusively via con warehouse receipts attach?
signment arrangements instead of other alternate mer 3. What, if anything, is necessary to perfect a
chandising - security arrangements. The board moved security interest in goods covered by negotiable
favorably upon this proposal. warehouse receipts?
4. What are the dangers, if any, that National
Required: Answer the following, setting forth reasons faces by relinquishing the warehouse receipts to Nor
for any conclusions stated. wood?
What are the key legal characteristics of a consign
ment? Part c. Newfeld purchased a parcel of land in
New City from Stoneham Realty. His plan was to con
Part b. Norwood Furniture, Inc., found that its struct a professional building and parking lot on the
credit rating was such that it was unable to obtain a line property. In order to do this, Newfeld needed financing
of unsecured credit. National Bank indicated that it and approached the New City National Bank for a first
would be willing to supply funds based upon a “ pledge” mortgage loan. The proposal looked good to New City
of Norwood’s furniture inventory which was located in National and they loaned Newfeld $200,000 to help
two warehouses. The bank would receive notes and finance the venture. Newfeld engaged builders who ac
bearer negotiable warehouse receipts covering the mer complished the construction of the building and the
chandise securing the loans. An independent parking lot. After two years of ownership and operation
warehouseman was to have complete control over the of the building and lot, Newfeld decided to sell.
areas in the warehouse set aside as field warehousing Robbins agreed to purchase Newfeld's interest but in
facilities. The Hastings Field Warehousing Corporation dicated she was not willing to assume the existing
was selected to serve as the independent warehouseman. mortgage. It was finally agreed that the entire property
It was to retain keys to the posted area in which the in would be transferred to Robbins subject to the New City
ventory was contained. Negotiable bearer warehouse National’s first mortgage. Robbins subsequently
receipts were issued to Norwood when it delivered the defaulted.
merchandise to Hastings. The receipts were then
delivered by Norwood to National to secure the loans Required: Answer the following, setting forth reasons
which were made at 80% of the market value of the fur for any conclusions stated.
niture indicated on the receipts. Upon occasion, Nor 1. Who is expected to make the payments during
wood would take temporary possession of the furniture the remaining life of the mortgage?
for the purpose of packaging it, surrendering the 2. What rights does New City Bank have against
warehouse receipt for this limited purpose. As orders Robbins and Newfeld upon default?
were filled out of the field warehouse inventory, the re 3. Assume that the bank has to resort to
quisite receipt would be relinquished by National, the foreclosure and that after the debt, interest, and all ex
merchandise obtained by Norwood, and other items penses have been paid, there is $2,000 remaining. Who
substituted with a new receipt issued. is entitled to this amount?
43
Number 5 (Estimated tim e ------20 to 25 minutes) • Since each party to this agreement has discon
tinued a profitable individual business at great
Part a. Vogel, an assistant buyer for the Granite financial sacrifice, it is mutually agreed that
City Department Store, purchased metal art objects this partnership shall be irrevocable for a
from Duval Reproductions. Vogel was totally without period of five (5) years from the date of execu
express or apparent authority to do so, but believed that tion.
his purchase was a brilliant move likely to get him a pro
motion. The head buyer of Granite was livid when he For the first year things went smoothly for the part
learned of Vogel’s activities. However, after examining nership. The relationship of the partners was amicable
the merchandise and listening to Vogel’s pitch, he reluc as they integrated the three separate businesses into one.
tantly placed the merchandise in the storeroom and put However, in the middle of the second year, policy
a couple of pieces on display for a few days to see disputes began to arise. In virtually every instance, Ryan
whether it was a “ hot item’’ and a “ sure thing’’ as and Lopez opposed Whipple on matters of expansion
Vogel claimed. The item was neither “ hot’’ nor “ sure’’ and billing rates. At the end of the second year, Whipple
and when it didn’t move at all, the head buyer ordered announced “ he had had enough.’’ He indicated that the
the display merchandise repacked and the entire order ultra-conservative thinking of his partners was
returned to Duval with a letter that stated the merchan deplorable and he could not remain in the partnership
dise had been ordered by an assistant buyer who had ab under the circumstances. He immediately resigned as a
solutely no authority to make the purchase. Duval partner, re-established his own business, and actively
countered with a lawsuit for breach of contract. competed with the partnership. Many of his former
clients followed him.
for any conclusions stated. Required: Answer the following, setting forth reasons
Will Duval prevail? for any conclusions stated.
What recourse, if any, do Ryan and Lopez, or the
Part b. Foremost Realty, Inc., is a real estate partnership, have against Whipple?
broker that also buys and sells real property for its own
account. Hobson purchased a ranch from Foremost. Part d. Marvello and Stein decided to promote
The terms were 10% down with the balance payable the Beacon Limited Partnership and to act as the
over a 25 year period. After several years of profitable general partners thereof. The partnership was to engage
operation of the ranch, Hobson had two successive bad in the machinery leasing business. The general partners
years. As a result, he defaulted on the mortgage. had no previous experience in this business nor did they
Foremost did not want to foreclose, but instead offered have what one would call exemplary personal
to allow Hobson to remain on the ranch and suspend characters. However, by grandiose claims, pressure tac
the payment schedule until Foremost could sell the tics, and extolling the supposed tax benefits of the in
property at a reasonable price. However, Foremost in vestment they managed to sell 250 limited partnership
sisted that it be appointed as the irrevocable and ex interests at $2,000 each. All this was done via a “ private
clusive agent for the sale of the property. Although placement’’ as the promoters called it. The venture got
Hobson agreed, he subsequently became dissatisfied off the ground. However, largely through the in
with Foremost’s efforts to sell the ranch and gave competence of the general partners, the partnership lost
Foremost notice in writing terminating the agency. a substantial amount of money in the first year of
Foremost has indicated to Hobson that he does not have operations. The limited partners are shocked by the per
the legal power to do so. formance of the general partners and the heavy losses
incurred. They also have been informed by their tax ad
Required: Answer the following, setting forth reasons visors that there are definite limits on the tax benefits
for any conclusions stated. they were promised.
Can Hobson terminate the agency?
Part c. Whipple, Ryan, and Lopez decided to Required: Answer the following, setting forth reasons
pool their assets and talents in a partnership. The part for any conclusions stated.
nership was to provide management consulting services. 1. What are the rights of the limited partners
The partnership agreement provided the following;• under common law?
2. Has there been any violation of the federal
• All policy questions regarding the scope, securities laws, and do the limited partners have any
nature, billings, size, and future expansion of rights thereunder?
the business are to be decided by a majority 3. What is the maximum federal income tax loss
vote of the partners. Each partner shall be that an individual limited partner may take on his or her
bound by the decision reached. investment?
44
EXAMINATION IN ACCOUNTING THEORY
May 9, 1980; 1:30 to 5:00 P.M.
Estimated Minutes
No. 1 ....................... 90 no
No. 2 ....................... 15 25
No. 3 ....................... 15 25
No. 4 ....................... 15 25
No. 5 ....................... 15 25
T o ta l............... 150 210
(Disregard o f these instructions may be considered as indicating inefficiency in accounting work.)
1. You must arrange the papers in numerical order of are uncertain o f the answer. You are likely to get
numbered 1 through 12. The printed answer sheet o f expressing opinions and conclusions in written
considered to be Page 1. the primary purpose o f the examination is to test
the candidate’s knowledge and application o f the
2. Answer all objective-type items on the printed subject matter, the ability to organize and present
45
Number 1 (Estimated tim e ------90 to 110 minutes) 4. If the conventional (lower of cost or market) retail
inventory method is used, which of the following
Instructions calculations would include (exclude) net markdowns?
Cost ratio Ending inventory

Select the best answer for each of the following items (percentage) at retail
relating to a variety of issues in accounting. Use a soft a. Include Include
pencil, preferably No. 2, to blacken the appropriate cir b. Include Exclude
cle on the separate printed answer sheet to indicate your c. Exclude Include
answer. Mark only one answer for each item. Answer ail d. Exclude Exclude
items. Your grade will be based on your total correct
answers. 5. When an investor uses the equity method to ac
The following is an example of the manner in which count for investments in common stock, cash dividends
the answer sheet should be marked: received by the investor from the investee should be
Item recorded as
a. Dividend income.
b. A deduction from the investor’s share of the
99. The financial statement which summarizes the investee’s profits.
financial position of a company is the c. A deduction from the investment account.
a. Income statement. d. A deduction from the stockholders’ equity ac
b. Balance sheet. count, dividends to stockholders.
c. Statement of changes in financial position.
d. Retained earnings statement. 6. The calculation of the income recognized in the
second year of a four-year construction contract which
Answer Sheet is accounted for using the percentage-of-completion
method is based on the
a. Cumulative actual costs incurred only.
99. b. Incremental cost for the second year only.
Items to be Answered c. Estimated costs at the inception of the con
tract.
d. Latest available estimated costs.
1. If current assets exceed current liabilities, pay
ments to creditors made on the last day of the month
will 7. Rent collected in advance by the lessor for an
operating lease is a (an)
a. Decrease current ratio.
a. Accrued liability.
b. Increase current ratio.
b. Deferred asset.
c. Decrease net working capital.
c. Accrued revenue.
d. Increase net working capital.
d. Deferred revenue.
2. The carrying amount of a current marketable
equity securities portfolio in the balance sheet of a 8. Which of the following is a deferred cost that
company shall be the aggregate should be amortized over the periods estimated to be
a. Cost of the portfolio, whether it is higher than benefitted?
or lower than the aggregate market value of a. Prepayment of three-year insurance premiums
the portfolio. on machinery.
b. Cost of the portfolio, when it is higher than b. Security deposit representing two-months’
the aggregate market value of the portfolio. rent on leased office space.
c. Market value of the portfolio, whether it is c. Advance from customer to be returned when
higher than or lower than the aggregate cost sale completed.
of the portfolio. d. Property tax for this year payable next year.
d. Market value of the portfolio, when it is lower
than the aggregate cost of the portfolio. 9. A foreign exchange gain that is a consequence of
translation should be
3. Estimates of price-level changes for specific inven a. Included in net income in the period it occurs.
tories are required for which of the following inventory b. Deferred and amortized over a period not to
methods? exceed forty years.
a. Dollar-value LIFO. c. Deferred until a subsequent year when a loss
b. Weighted average cost. occurs and offset against that loss.
c. FIFO. d. Included as a separate item in the equity sec
d. Conventional retail. tion of the balance sheet.
46
Accounting Theory
10. Gains or losses from the early extinguishment of 15. A transaction that is material in amount, unusual
debt, if material, should be in nature, and infrequent in occurrence, should be
a. Amortized over the remaining original life of presented in the income statement separately as a com
the extinguished issue. ponent of income
b. Amortized over the life of the new issue. a. Net of applicable income taxes.
c. Recognized as an extraordinary item in the b. As a prior period adjustment.
period of extinguishment. c. From continuing operations.
d. Recognized in income before taxes in the d. From discontinued operations.
period of extinguishment.
16. If a company issues both a balance sheet and an in
come statement with comparative figures from last year,
11. When a segment of a business has been discon a statement of changes in financial position
tinued during the year, the gain or loss on disposal a. Is no longer necessary; but may be issued at
should the company’s option.
a. Be an extraordinary item. b. Should not be issued.
b. Exclude operating losses during the phase-out c. Should be issued for each period for which an
period. income statement is presented.
c. Include operating losses of the current period d. Should be issued for the current year only.
up to the measurement date.
d. Be net of applicable income taxes.
12. Which of the following interperiod tax allocation 17. Which of the following items is included on a
methods uses the tax rates in effect at the origination of statement of changes in financial position only because
the timing differences and does not adjust for subse of the all-financial-resources concept?
quent changes in tax rates? a. Depreciation.
a. Deferred method. b. Issuance (sale) of common stock.
b. Liability method. c. Purchase of treasury stock.
c. Net of tax method. d. Retirement of long-term debt by issuance of
d. Net present value method. preferred stock.
13. An example of intraperiod income tax allocation is 18. The working capital format is an acceptable for
a. Interest income on municipal obligations. mat for presenting a statement of changes in financial
b. Estimated expenses for major repairs accrued position. Which of the following formats is (are) also
for financial statement purposes in one year, acceptable?
but deducted for income tax purposes when
paid in a subsequent year.
c. Rental income included in income for income Cash Quick assets
tax purposes when collected, but deferred for a. Acceptable Not acceptable
financial statement purposes until earned in a b. Not acceptable Not acceptable
subsequent year. c. Not acceptable Acceptable
d. Reporting the cumulative effect on prior years d. Acceptable Acceptable
of changing to a different depreciation
method in the income statement, net of direct
tax effects.
19. The amortization of bond discount on long-term
14. Which of the following is a potential abuse that debt should be presented in a statement of changes in
can arise when a business combination is accounted for financial position as a (an)
as a pooling of interests? a. Addition to net income.
a. Assets of the investee may be overvalued when b. Deduction from net income.
the price paid by the investor is allocated c. Use of funds.
among specific assets. d. Source and use of funds.
b. Liabilities may be undervalued when the price
paid by the investor is allocated to the specific 20. Which of the following must be disclosed in a
liabilities. statement of changes in financial position or in a related
c. An undue amount of cost may be assigned to tabulation for at least the current period?
goodwill, thus potentially allowing for an a. Net change in each balance sheet account.
overstatement of pooled earnings. b. Net change in each element of working
d. Earnings of the pooled entity may be in capital.
creased because of the combination only and c. Gross changes in depreciable assets.
not as a result of efficient operations. d. Earnings per share.
47
21. Which of the following disclosures concerning 27. Financial statements that are expressed assuming a
pension plans should be made in a company’s financial stable monetary unit are
statements or their notes? a. General price-level financial statements.
a. A statement o f a company’s accounting and b. Historical-dollar financial statements.
funding policies. c. Current-value financial statements.
b. The amount o f retirement benefits paid dur d. Fair-value financial statements.
ing the year.
c. A description o f the actuarial assumptions 28. Historical cost is a measurement base currently
made. used in financial accounting. Which o f the following
d. The amount of unfunded past service costs. measurement bases is (are) also currently used in finan
cial accounting?
22. When the accounts receivable o f a company are
sold outright to a company which normally buys ac C u rren t D isco u n ted R ep la ce
counts receivable o f other companies without recourse, selling p ric e cash f l o w m en t co st
the accounts receivable have been a. Yes No Yes
a. Pledged. b. Yes Yes Yes
b. Assigned. c. Yes No No
c. Factored. d. No Yes Yes
d. Collateralized.
29. What is the underlying concept that supports the
23. APB Opinion No. 22, “ Disclosure o f Accounting immediate recognition o f a loss?
Policies,’’ a. Conservatism.
a. Requires description of every accounting b. Consistency.
policy followed by a reporting entity. c. Judgment.
b. Provides a specific listing o f all types o f ac d. Matching.
counting policies which must be disclosed.
c. Requires disclosure o f the format for the 30. Company A and Company B exchanged non
statement o f changes in financial position. monetary assets with no monetary consideration in
d. Requires description o f all significant ac volved and no impairment o f value. The exchange did
counting policies to be included as an integral not culminate an earning process for either Company A
part o f the financial statements. or Company B. The accounting for the exchange should
be based on the
a. Recorded amount of the asset received.
b. Recorded amount o f the asset relinquished.
24. An example o f an inventory accounting policy that
c. Fair value of the asset received.
should be disclosed is the
d. Fair value of the asset relinquished.
a. Effect o f inventory profits caused by infla
tion. 31. When translating foreign currency financial
b. Composition of inventory into raw materials, statements, which o f the following items would be
work-in-process, and finished goods. translated using current exchange rates?
c. Identification o f major suppliers. a. Inventories carried at cost.
d. Method used for inventory pricing. b. Prepaid insurance.
c. Goodwill.
d. Marketable equity securities carried at current
25. Reserves for contingencies for general or market price.
unspecified business risks should
a. Be accrued in the financial statements and 32. When translating foreign currency financial
disclosed in the notes thereto. statements, which of the following items would be
b. Not be accrued in the financial statements but translated using historical exchange rates?
should be disclosed in the notes thereto. a. Notes payable.
c. Not be accrued in the financial statements and b. Long-term debt.
need not be disclosed in the notes thereto. c. Deferred income.
d. Be accrued in the financial statements but d. Accrued expenses payable.
need not be disclosed in the notes thereto.
33. In accounting for the cost o f pension plans, an ac
26. The principle o f objectivity includes the concept of ceptable actuarial cost method for financial purposes is
a. Summarization. a. Pay-as-you-go.
b. Classification. b. Terminal funding.
c. Conservatism. c. Entry age normal.
d. Verifiability. d. Turnover.
48
Accounting Theory
34. The maximum annual provision for pension cost 40. On October 1, Company X acquired for cash all of
permitted is normal cost, plus the outstanding common stock of Company Y. Both
a. 10 percent of past service cost (until fully companies have a December 31 year end and have been
amortized). in business for many years. Consolidated net income for
b. A provision for vested benefits. the year ended December 31 should include net income
c. 10 percent of past service cost (until fully of
amortized), plus 10 percent of any increases or a. Company X for 3 months and Company Y for
decreases in prior service cost arising on 3 months.
amendments of the plan, plus interest b. Company X for 12 months and Company Y
equivalents on the difference between provi for 3 months.
sions and amounts funded. c. Company X for 12 months and Company Y
d. Interest equivalents on any unfunded prior for 12 months.
service cost, plus a provision for the excess of d. Company X for 12 months; but no income
the actuarially computed value of vested from Company Y until Company Y
benefits over the total of the pension fund if distributes a dividend.
such excess is not at least 5 percent less than
the comparable excess at the beginning of the 41. Which is the best cost accumulation procedure to
year. use when there is a continuous mass production of like
units?
35. A method which excludes salvage value from the a. Actual.
base for the depreciation calculation is b. Standard.
a. Straight-line. c. Job order.
b. Sum-of-the-years-digits. d. Process.
c. Double-declining-balance.
d. Productive-output.
36. When a company purchases land with a building 42. In job order costing, the basic document to ac
on it and immediately tears down the building so that cumulate the cost of each order is the
the land can be used for the construction of a plant, the a. Invoice.
costs incurred to tear down the building should be b. Purchase order.
a. Expensed as incurred. c. Requisition sheet.
b. Added to the cost of the plant. d. Job cost sheet.
c. Added to the cost of the land.
d. Amortized over the estimated time period 43. Joint product costs generally are allocated using
between the tearing down of the building and the
the completion of the plant. a. Relative sales value at split-off.
b. Additional costs after split-off.
37. Goodwill from a business combination c. Relative profitability.
a. Should be expensed in the year of acquisition. d. Direct labor hours.
b. Is an asset that is not subject to amortization.
c. Is an intangible asset.
d. Occurs in a pooling of interests.
44. In a make-or-buy decision,
38. In financial reporting for segments of a business a. Only variable costs are relevant.
enterprise, the operating profit or loss of a segment b. Fixed costs that can be avoided in the future
should include are relevant.
a. Federal income taxes. c. Fixed costs that will continue regardless of the
b. Interest expense even though segment’s opera decision are relevant.
tions are not principally of a financial nature. d. Only conversion costs are relevant.
c. Revenue earned at the corporate level.
d. Common costs allocated on a reasonable 45. How is a labor rate variance computed?
basis. a. The difference between standard and actual
rate multiplied by actual hours.
b. The difference between standard and actual
39. The issuer should directly charge retained earnings rate multiplied by standard hours.
for the market value of the shares issued in a (an) c. The difference between standard and actual
a. Pooling of interests. hours multiplied by actual rate.
b. 2 for 1 stock split. d. The difference between standard and actual
c. Employee stock bonus. hours multiplied by the difference between
d. 10 percent stock dividend. standard and actual rate.
49
46. Regression analysis is superior to other cost 53. Taxes collected and held by a municipality for a
behavior analysis techniques because it school district would be accounted for in a (an)
a. Produces measures of probable error. a. Enterprise fund.
b. Examines only one variable. b. Intragovernmental service fund.
c. Proves a cause and effect relationship. c. Agency fund.
d. Is not a sampling technique. d. Special revenue fund.
47. If the fixed costs attendant to a product increase 54. Which of the following requires the use of the en
while variable costs and sales price remain constant, cumbrance system?
what will happen to (1) contribution margin and (2) a. Special assessment fund.
breakeven point? b. Debt service fund.
Contribution Breakeven c. General fixed assets group of accounts.
margin point d. Enterprise fund.
a. Increase Decrease
b. Decrease Increase 55. When the budget of a governmental unit is
c. Unchanged Increase adopted and the estimated revenues exceed the ap
d. Unchanged Unchanged propriations, the excess is
48. On May 1, 1980, a company purchased a new a. Debited to reserve for encumbrances.
machine which it does not have to pay for until May 1, b. Credited to reserve for encumbrances.
1982. The total payment on May 1, 1982, will include c. Debited to fund balance.
both principal and interest. Assuming interest at a 10% d. Credited to fund balance.
rate, the cost of the machine would be the total payment
multiplied by what time value of money concept? 56. Which of the following will increase the fund
a. Future amount of annuity of 1. balance of a governmental unit at the end of the fiscal
b. Future amount of 1. year?
c. Present value of annuity of 1. a. Appropriations are less than expenditures and
d. Present value of 1. reserve for encumbrances.
49. On what basis is the cost of capital derived from b. Appropriations are less than expenditures and
bonds and preferred stock measured, respectively? encumbrances.
a. Pretax rate of interest for bonds and stated c. Appropriations are more than estimated
annual dividend rate less the expected earn revenues.
ings per share for preferred stock. d. Appropriations are more than expenditures
b. Pretax rate of interest for bonds and stated and encumbrances.
annual dividend rate for preferred stock.
c. Aftertax rate of interest for bonds and stated 57. Which of the following funds should use the
annual dividend rate less the expected earn modified accrual basis of accounting?
ings per share for preferred stock. a. Capital projects.
d. Aftertax rate of interest for bonds and stated b. Intragovernmental service.
annual dividend rate for preferred stock. c. Special revenue.
50. Which of the following ratios measures short-term d. Trust.
solvency?
a. Current ratio. 58. What is not a major concern of governmental
b. Age of receivables. units?
c. Creditors’ equity to total assets. a. Budgets.
d. Return on investment. b. Funds.
51. The accounting for special revenue funds is most c. Legal requirements.
similar to which type of fund? d. Consolidated statements.
a. Capital projects.
b. Enterprise.
c. General.
d. Special assessment. 59. A reason for a voluntary health and welfare
organization to adopt fund accounting is that
52. The general fixed assets group of accounts would a. Restrictions have been placed on certain of its
be used for the fixed assets of the assets by donors.
a. Special assessment fund. b. It provides more than one type of program
b. Enterprise fund. service.
c. Trust fund. c. Fixed assets are significant.
d. Intragovernmental service fund. d. Donated services are significant.
50
Accounting Theory
60. Depreciation should be recognized in the financial Number 3 (Estimated tim e------15 to 25 minutes)
statements of
a. Proprietary (for-profit) hospitals only. Part a. Capital leases and operating leases are the
b. Both proprietary (for-profit) and not-for- two classifications of leases described in FASB pro
profit hospitals. nouncements, from the standpoint of the lessee.
c. Both proprietary (for-profit) and not-for-
profit hospitals, only when they are affiliated Required:
with a college or university. 1. Describe how a capital lease would be ac
d. All hospitals, as a memorandum entry not af counted for by the lessee both at the inception of the
fecting the statement of revenues and ex lease and during the first year of the lease, assuming the
penses. lease transfers ownership of the property to the lessee by
the end of the lease.
Number 2 (Estimated time----- 15 to 25 minutes) 2. Describe how an operating lease would be ac
counted for by the lessee both at the inception of the
Part a. Cost for inventory purposes should be lease and during the first year of the lease, assuming
determined by the inventory cost flow method most equal monthly payments are made by the lessee at the
clearly reflecting periodic income. beginning of each month of the lease. Describe the
change in accounting, if any, when rental payments are
Required: not made on a straight-line basis.
1. Describe the fundamental cost flow assump
tions of the average cost, FIFO, and LIFO inventory Do not discuss the criteria for distinguishing
cost flow methods. between capital leases and operating leases.
2. Discuss the reasons for using LIFO in an infla
tionary economy. Part b. Sales-type leases and direct financing
3. Where there is evidence that the utility of leases are two of the classifications of leases described in
goods, in their disposal in the ordinary course of FASB pronouncements, from the standpoint of the
business, will be less than cost, what is the proper ac lessor.
counting treatment and under what concept is that treat
ment justified? Required:
Compare and contrast a sales-type lease with a
Part b. Public enterprises are required to present direct financing lease as follows:
earnings per share data on the face of the income state
ment. 1. Gross investment in the lease.
2. Amortization of unearned interest income.
Required: 3. Manufacturer’s or dealer’s profit.
Compare and contrast primary earnings per share
with fully diluted earnings per share for each of the Do not discuss the criteria for distinguishing
following: between the leases described above and operating leases.
1. The effect of common stock equivalents on the
number of shares used in the computation of earnings
per share data.
2. The effect of convertible securities that are not
common stock equivalents on the number of shares used
in the computation of earnings per share data.
3. The effect of antidilutive securities.
51
Number 4 (Estimated tim e ----- 15 to 25 minutes) Number 5 (Estimated tim e------15 to 25 minutes)
Part a. The various types of accounting changes Part a. An important concept in process costing is
may significantly affect the presentation of both finan that of equivalent units.
cial position and results of operations for an accounting
period and the trends shown in comparative financial Required:
statements and historical summaries. 1. Describe the difference between units placed in
process for a period and equivalent units for a period
Required: when there is no beginning work in process inventory
1. Describe a change in accounting principle and and the ending work in process inventory is 50% com
how it should be reported in the income statement of the plete.
period of the change. 2. Describe the difference between units com
2. Describe a change in accounting estimate and pleted for a period and equivalent units for a period
how it should be reported in the income statement of the when there is no beginning work in process inventory
period of the change. and the ending work in process inventory is 50% com
3. Describe a change in reporting entity and how plete.
it should be reported. Give an appropriate example of a 3. Describe how equivalent units for a period are
change in reporting entity. used to compute the cost of the ending work in process
inventory.
Part b. A corporation has a noncompensatory
stock purchase plan for all of its employees and a com Part b. Indirect manufacturing costs (factory
pensatory stock option plan for some of its corporate overhead) include indirect materials, indirect labor, and
officers. other indirect costs.
Required: Required:
1. Compare and contrast the accounting at the 1. Describe indirect materials and give an ap
date the stock is issued for the noncompensatory stock propriate example.
purchase plan and the compensatory stock option plan. 2. Describe indirect labor and give an appropriate
2. What entry should be made for the compen example.
satory stock option plan at the date of the grant? 3. Describe fixed indirect manufacturing costs
(factory overhead).
4. Describe variable indirect manufacturing costs
(factory overhead).
5. Describe semivariable indirect manufacturing
costs (factory overhead).
52
November 1980

(Prepared by th e B oard o f Exam iners o f the A m erican Institute o f Certified Public A ccountants
and adopted by the exam ining boards o f a ll states, territories, and the D istrict o f C olum bia.)
November 5, 1980; 1:30 to 6:00 P.M.
Estimated Minutes
No. 1 . . . . 45 55
No. 2 . . . . 45 55
No. 3 . . . . 45 55
No. 4 . . . . 45 55
No. 5 . . . . 40 50
Total 220 270
1. You must arrange the papers in numerical order of may result in loss of grading points. Scratch sheets
the questions. If more than one page is required need not have page numbers, but you should show
for an answer, write “ continued” at the bottom of the question number and place them immediately
the page. Number pages consecutively. For in following the question to which they relate.
should be numbered 1 through 12. The printed
answer sheet provided for the objective-type items 4. Fourteen-column sheets, if any, should not be
should be considered to be Page 1. folded until all sheets, both wide and narrow, are
placed in the proper sequence and fastened
2. Answer all objective-type items on the printed together at the top left corner. All fourteen-
answer sheet provided for that purpose. It is to column sheets should then be wrapped around the
your advantage to attempt all questions even if back of the papers.
you are uncertain of the answer. You are likely to
get the highest score if you omit no answers. Since 5. A CPA is continually confronted with the necessi
objective items are computer graded, your com ty of expressing opinions and conclusions in writ
ments and calculations associated with them are ten reports in clear, unequivocal language
not considered. Although the primary purpose of the examination
tion of the subject matter, the ability to organize
3. For problem-type questions you should enclose all and present such knowledge in acceptable written
scratch sheets. Failure to enclose scratch sheets language will be considered by the examiners.
53
Examination Questions— November 1980
Number 1 (Estimated tim e------45 to 55 minutes) 3. On January 1, 1979, Jay Company changed to the
weighted-average cost method from the first-in, first-
Instructions out (FIFO) cost method for inventory cost flow pur
poses. Jay can justify the change, which was made for
Select the best answer for each of the following both financial statement and income tax reporting pur
items relating to a variety of financial accounting poses. The change will result in a $120,000 decrease in
problems. Use a soft pencil, preferably No. 2, to the beginning inventory at January 1, 1979. Ignoring in
blacken the appropriate circle on the separate printed come taxes, the cumulative effect of changing to the
answer sheet to indicate your answer. Mark only one weighted-average method from the FIFO method must
answer for each item. Answer all items. Your grade will be reported by Jay in the 1979
be based on your total correct answers. a. Income statement as a $120,000 debit.
The following is an example of the manner in which b. Retained earnings statement as a $120,000
the answer sheet should be marked: debit adjustment to the beginning balance.
c. Income statement as a $120,000 credit.
Item d. Retained earnings statement as a $120,000
credit adjustment to the beginning balance.
97. Gross billings for merchandise sold by Baker
Company to its customers last year amounted to 4. Information relating to the capital structure of
$5,260,000; sales returns and allowances reduced the Vauxhall Corporation is as follows:
amounts owed by $160,000. How much were net sales December 31
last year for Baker Company? 1978 1979
a. $4,800,000. Outstanding shares of:
b. $5,100,000. Common stock 200,000 200,000
c. $5,200,000. Preferred 6% stock, $100
d. $5,260,000. par, convertible into 3 shares
of common stock for each
Answer Sheet share of preferred 10,000 10,000
97. The preferred stock was issued at par on July 1, 1978,

when the bank prime interest rate was 9.5%. During
Items to be Answered 1979 Vauxhall paid dividends of $6 per share on its
preferred stock. The net income for the year ended
1. Shaw Company purchased a machine on January December 31, 1979, is $860,000. The primary earnings
1, 1978, for $350,000. The machine has an estimated per common share, rounded to the nearest penny, for
useful life of five years and a salvage value of $50,000. the year ended December 31, 1979, should be
The machine is being depreciated using the double- a. $3.74
declining balance method. The asset balance net of ac b. $4.00
cumulated depreciation at December 31, 1979, should c. $4.10
be d. $4.30
a. $126,000
b. $158,000 5. Utica Company’s net accounts receivable were
$250,000 at December 31, 1978, and $300,000 at
c. $170,000
December 31, 1979. Net cash sales for 1979 were
d. $224,000
$100,000. The accounts receivable turnover for 1979
was 5.0. What were Utica’s total net sales for 1979?
2. Taylor Company was involved in a tax dispute a. $1,475,000
with the Internal Revenue Service at the close of its year b. $1,500,000
ended December 31, 1979. The company’s tax counsel c. $1,600,000
believes that an unfavorable outcome is probable. A d. $2,750,000
reasonable estimate of additional tax payments is in the
range between $300,000 and $800,000, but $500,000 is a 6. In January 1980 Kemper Construction Company
better estimate than any other amount in that range. exchanged an old truck, which cost $54,000 and was
The situation was unchanged when the financial one-third depreciated, and paid $35,000 cash for a used
statements were issued on March 5, 1980. What amount crane having a current fair value of $65,000. At what
of additional taxes should be accrued and charged to in amount should the crane be recorded on the books of
come in 1979? Kemper?
a. $0 a. $54,000
b. $300,000 b. $65,000
c. $500,000 c. $71,000
d. $800,000 d. $89,000
54
7. Selected information for Irvington Company is as 10. Weaver Company had 100,000 shares of common
follows: stock issued and outstanding at December 31, 1978. On
July 1, 1979, Weaver issued a 10% stock dividend.
December 31 Unexercised stock options to purchase 20,000 shares of
1978 1979 common stock (adjusted for the 1979 stock dividend) at
$20 per share were outstanding at the beginning and end
Preferred stock, par $100, of 1979. The average market price of Weaver’s common
nonconvertible, noncumulative $125,000 $125,000 stock (which was not affected by the stock dividend)
Common stock 300,000 400,000 was $25 per share during 1979. Net income for the year
Retained earnings 75,000 185,000 ended December 31, 1979, was $550,000. What should
Dividends paid on preferred be Weaver’s 1979 primary earnings per common share,
stock for year ended 10,000 10,000
rounded to the nearest penny?
Net income for year ended 60,000 120,000
a. $4.82
b. $5.00
Irvington’s return on common stockholders’ equity, c. $5.05
rounded to the nearest percentage point, for 1979 is d. $5.24
a. 17%
b. 19% 11. A wholly owned foreign subsidiary of Union Cor
c. 23% poration has certain expense accounts for the year end
d. 25% ed December 31, 1979, stated in local currency units
(LCU) as follows:
8. On January 1, 1980, Liberty Company sold a
machine to Bell Corporation in an “ arms length’’ tran LCU
saction. Bell signed a noninterest bearing note requiring
payment of $20,000 annually for ten years. The first Amortization of patent (related patent
payment was made on January 1, 1980. The prevailing was acquired January 1, 1977) 40,000
rate of interest for this type of note at date of issuance Provision for doubtful accounts 60,000
was 12%. Information on present value factors is as Rent 100,000
follows:
The exchange rates at various dates are as follows:
Present value o f
Present value ordinary annuity Dollar equivalent
Period o f $1 at 12% o f $1 at 12% o f 1 LCU
9 0.361 5.328
10 0.322 5.650 December 31, 1979 $.20
Average for the year ended
Liberty should record the above sale in January 1980 at December 31, 1979 .22
a. $ 64,400 January 1, 1977 .25
b. $ 84,980
c. $113,000 What total dollar amount should be included in Union’s
d. $126,560 income statement to reflect the above expenses for the
year ended December 31, 1979?
9. Bailey Company, a calendar year corporation, has a. $40,000
the following income before income tax provision and b. $42,000
estimated effective annual income tax rates for the first c. $44,000
three quarters of 1979:
d. $45,200
Income before Estimated effective
income tax annual tax rate 12. On July 1, 1979, Glenn Company purchased Dell
Quarter provision at end o f quarter Corporation 10-year, 9% bonds with a face value of
$200,000, for $216,000, which included $6,000 of ac
First $60,000 40% crued interest. The bonds, which mature on March 1,
Second 70,000 40% 1986, pay interest semiannually on March 1 and
Third 40,000 45% September 1. Glenn uses the straight-line method of
amortization. The amount of income Glenn should
Bailey’s income tax provision in its interim income report for the calendar year 1979 as a result of the above
statement for the third quarter should be long-term investment would be
a. $18,000 a. $ 7,800
b. $24,500 b. $ 8,250
c. $25,500 c. $ 9,000
d. $76,500 d. $15,000
55
13. On January 10, 1979, Wayne, Inc., purchased 16. Arrow Company purchased a machine on January
5,000 shares of Jason Corporation’s common stock at 1 , 1979, for $1,440,000 for the purpose of leasing it. The
$60 per share. The purchase is a long-term investment machine is expected to have an eight-year life from date
and is less than 20% of Jason’s outstanding shares. This of purchase, no residual value, and be depreciated on
investment is appropriately reflected in Wayne’s the straight-line basis. On February 1, 1979, the
balance sheet as a noncurrent marketable equity security machine was leased to Baxter Company for a three-year
at December 31, 1979. The market value of Wayne’s in period ending January 31, 1982, at a monthly rental of
vestment in Jason’s common stock was as follows: $30,000. Additionally, Baxter paid $72,000 to Arrow on
February 1, 1979, as a lease bonus. What is the amount
Market value of income before income taxes that Arrow should report
Date Per share Total on this leased asset for the year ended December 31,
1979?
December 15, 1979 $47 $235,000 a. $172,000
December 31, 1979 46 230,000 b. $187,000
c. $222,000
On December 15, 1979, Wayne determined that there d. $237,000
had been an other than temporary decline in the market
value. What amount should Wayne record as a loss in
its income statement for the year ended December 31, 17. Hadley Corporation purchased a machine in 1977
1979? when the average Consumer Price Index (CPI) was 180.
a. $0 The average CPI was 190 for 1978, and 200 for 1979.
b. $ 5,000 Hadley prepares supplementary constant dollar
c. $65,000 statements (adjusted for changing prices). Depreciation
d. $70,000 on this machine is $200,000 a year. In Hadley’s sup
14. Benedict Company leased equipment to Mark, plementary constant dollar statement for 1979, the
Inc., on January 1, 1978. The lease is for an eight-year amount of depreciation expense should be stated as
period expiring December 31, 1985. The first of 8 equal a. $180,000
annual payments of $600,000 was made on January 1, b. $190,000
1978. Benedict had purchased the equipment on c. $210,526
December 29, 1977, for $3,200,000. The lease is ap d. $222,222
propriately accounted for as a sales-type lease by
Benedict. Assume that the present value at January 1, 18. Victor Company purchased a machine on
December 31, 1977, for $100,000. The machine is being
1978, of all rent payments over the lease term dis
depreciated on the straight-line basis with no salvage
counted at a 10% interest rate was $3,520,000. What value and a five-year life. Assume that there was a rise
amount of interest income should Benedict record in
in current (replacement) cost of the machine of 10%
1979 (the second year of the lease period) as a result of during 1978, and of 10% during 1979 (based on the
the lease? December 31, 1978, current cost). In a supplementary
a. $261,200 current cost statement at December 31, 1979, Victor
b. $292,000 would report accumulated depreciation for the above
c. $320,000 machine of
d. $327,200 a. $42,000
15. On January 1, 1974, Provident Corporation issued b. $44,000
for $1,040,000, one thousand of its 9%, $1,000 callable c. $46,200
bonds. The bonds are dated January 1, 1974, and d. $48,400
mature on January 1, 1984. Interest is payable semi
annually on July 1 and January 1. The bonds can be 19. Arnold Company depreciates its machinery using
called by the issuer at 101 at any time after December an accelerated method of depreciation for income tax
31, 1978. reporting and the straight-line method for financial
On July 1, 1979, Provident called in all of the statement reporting. For the 1979 calendar year,
bonds and retired them. Assume that Provident uses the depreciation on machinery amounted to $900,000 under
straight-line method of amortizing bond premium. the accelerated method and $550,000 under the straight-
Ignoring income taxes, what is the amount of gain or line method. Also in 1979 Arnold received interest on
loss that Provident should record on this early ex municipal obligations of $150,000. Assuming an income
tinguishment of debt in its income statement for the tax rate of 40%, by what amount should the Deferred
year ended December 31, 1979? Income Tax account change?
a. $8,000 gain. a. $0
b. $10,000 loss. b. $ 80,000
c. $12,000 gain. c. $140,000
d. $30,000 gain. d. $200,000
56
20. An analysis of Pickwick Corporation’s short-term 23. Reid Company is developing a forecast o f March
marketable equity securities portfolio acquired in 1979 1980 cash receipts from credit sales. Credit sales for
reveals the following totals at the end o f its 1979 calen March 1980 are estimated to be $320,000. The accounts
dar year; receivable balance at February 29, 1980, is $300,000;
one-quarter o f the balance represents January credit
Aggregate cost $90,000 sales and the remainder is from February sales. All ac
Aggregate market value 80,000 counts receivable from months prior to January 1980
Aggregate lower o f cost or market have been collected or written off. Reid’s history o f ac
value applied to each security counts receivable collections is as follows:
in the portfolio 76,000 In the month o f sale 20%
In the first month after month o f sale 50%
What is the amount of the valuation allowance that In the second month after month of sale 25%
Pickwick should record at December 31, 1979? Written o ff as uncollectible at the end of
a. $0 the second month after month o f sale 5%
b. $ 4,000
c. $10,000 Based on the above information, Reid is forecasting
d. $14,000 March 1980 cash receipts from credit sales o f
a. $176,500
b. $195,250
c. $253,769
Number 2 (Estimated tim e ------45 to 55 minutes) d. $267,125
Instructions 24. Jonathan Company manufactures products N, P,

and R from a joint process. The following information
Select the best answer for each o f the following is available:
items relating to a variety of managerial accounting and
quantitative methods problems. Use a soft pencil,
P ro d u c t
preferably No. 2, to blacken the appropriate circle on
the separate printed answer sheet to indicate your N P R T o ta l
answer. Mark only one answer for each item. Answer all
items. Your grade will be based on your total correct Units pro
answers. duced 6,000 ? 7 12,000
Sales value
Items to be Answered at split-off 7 7 $25,000 $100,000
Joint costs $ 24,000 7 7 $ 60,000
21. Jarvis, Inc., a calendar year company, purchased a Sales value
new machine for $28,000 on January 1, 1980. The if pro
machine has an estimated useful life o f eight years with cessed fur
no salvage value and is being depreciated on the ther $ 55,000 $45,000 $30,000 $130,000
straight-line basis. The accounting (book-value) rate of Additional
return is expected to be 15% on the initial increase in re costs if
quired investment. On the assumption o f a uniform processed
cash inflow, this investment is expected to provide an further $ 9,000 $ 7,000 $ 5,000 $ 21,000
nual cash flow from operations, net of income taxes, of
a. $3,500 Assuming that joint product costs are allocated using
b. $4,025 the relative-sales-value at split-off approach, what was
c. $4,200 the sales value at split-off for product N?
d. $7,700 a. $33,000
b. $40,000
22. Energy Company is planning to spend $84,000 for c. $46,000
a new machine which it will depreciate on the straight- d. $50,000
line basis over ten years with no salvage value. The
related cash flow from operations, net of income taxes, 25. Anthony Company has projected cost o f goods
is expected to be $10,000 a year for each of the first six sold of $4,000,000, including fixed costs o f $800,000.
years and $12,000 for each o f the next four years. What Variable costs are expected to be 75% o f net sales. What
is the payback period? will be the projected net sales?
a. 4.4 years. a. $4,266,667
b. 7.6 years. b. $4,800,000
c. 7.8 years. c. $5,333,333
d. 8.0 years. d. $6,400,000
57
26. Scott, Inc,, is planning to invest $120,000 in a ten- 29. Thomas Company sells products X, Y, and Z,
year project. Scott estimates that the annual cash in Thomas sells three units of X for each unit of Z, and
flow, net of income taxes, from this project will be two units of Y for each unit of X. The contribution
$20,000. Scott’s desired rate of return on investments of margins are $1.00 per unit of X, $1.50 per unit of Y, and
this type is 10%. Information on present value factors is $3.00 per unit of Z, Fixed costs are $600,000. How
as follows: many units of X would Thomas sell at the breakeven
point?
At At a. 40,000
Present value of $1 for b. 120,000
ten periods 0.386 0.322 c. 360,000
Present value of an annuity d. 400,000
of $1 for ten periods 6.145 5.650
30. Johnson, Inc., manufactures product X and pro
Scott’s expected rate of return on this investment is duct Y which are processed as follows:
a. Less than 10%, but more than 0%.
b. 10%. Type A Type B
c. Less than 12%, but more than 10%. machine machine
d. 12%. Product X 6 hours 4 hours
Product Y 9 hours 5 hours
27. Hilltop Company invested $100,000 in a two-year The contribution margin is $12 for product X and $7 for
project. Hilltop’s expected rate of return was 12%, The product Y. The available time daily for processing the
cash flow, net of income taxes, was $40,000 for the first two products is 120 hours for machine Type A and 80
year. Information on present value and future value fac hours for machine Type B. How would the restriction
tors is as follows: (constraint) for machine Type B be expressed?
a. 4 X + 5 Y
Present value Future value b. 4 X + 5 Y ≤ 80
Period o f $1 at 12% o f $1 at 12% c. 6 X + 9 Y ≤ 120
d. 12 X + 7Y
1 .8929 1.1200
2 .7972 1.2544 31. The Blade Division of Dana Company produces
hardened steel blades. One-third of the Blade Division’s
Assuming that the rate of return was exactly 12%, what output is sold to the Lawn Products Division of Dana;
was the cash flow, net of income taxes, for the second the remainder is sold to outside customers. The Blade
year of the project? Division’s estimated sales and standard cost data for the
a. $51,247 fiscal year ending June 30, 1981, are as follows:
b. $60,000
c. $64,284 Lawn Products Outsiders
d. $80,638
Sales $15,000 $40,000
Variable costs ( 10, 000) ( 20, 000)
28. Sussex Corporation’s production cycle starts in the Fixed costs ( 3,000) ( 6, 000)
Mixing Department. The following information is Gross margin $ 2,000 $14,000
available for the month of April 1980:
Units Unit sales 10,000 20,000
Work-in-process, April 1 (50% complete) 40,000 The Lawn Products Division has an opportunity to pur
Started in April 240,000 chase 10,000 identical quality blades from an outside
Work-in-process, April 30 (60% complete) 25,000 supplier at a cost of $1.25 per unit on a continuing basis.
Assume that the Blade Division cannot sell any addi
Materials are added in the beginning of the process in tional products to outside customers. Should Dana
the Mixing Department. Using the weighted-average allow its Lawn Products Division to purchase the blades
method, what are the equivalent units of production for from the outside supplier, and why?
the month of April 1980? a. Yes, because buying the blades would save
Dana Company $500.
Materials Conversion No, because making the blades would save
Dana Company $1,500.
a. 240,000 250,000 c. Yes, because buying the blades would save
b. 255,000 255,000 Dana Company $2,500.
c. 270,000 280,000 d. No, because making the blades would save
d. 280,000 270,000 Dana Company $2,500.
58
32. Ohio Corporation manufactures liquid chemicals 35. Sullivan Corporation’s direct-labor costs for the
A and B from a joint process. Joint costs are allocated month of March 1980 were as follows:
on the basis of relative-sales-value at split-off. It costs
$4,560 to process 500 gallons of product A and 1,000 Standard direct-labor hours 42,000
gallons of product B to the split-off point. The sales Actual direct-labor hours 40,000
value at split-off is $10 per gallon for product A and $14 Direct-labor rate variance-favorable $8,400
for product B. Product B requires an additional process Standard direct-labor rate per hour $6.30
beyond split-off at a cost of $1 per gallon before it can
be sold. What is Ohio’s cost to produce 1,000 gallons of What was Sullivan’s total direct-labor payroll for the
product B? month of March 1980?
a. $3,360 a. $243,600
b. $3,660 b. $244,000
c. $4,040 c. $260,000
d. $4,360 d. $260,400
33. The Cutting Department is the first stage of Mark 36. Duguid Company is considering a proposal to in
Company’s production cycle. Conversion costs for this troduce a new product, XPL. An outside marketing
department were 80% complete as to the beginning consultant prepared the following payoff probability
work-in-process and 50% complete as to the ending distribution describing the relative likelihood of month
work-in-process. Information as to conversion costs in ly sales volume levels and related income (loss) for XPL:
the Cutting Department for January 1980 is as follows:
Monthly sales Income
Conversion volume Probability (loss)
Units costs 3,000 0.10 $(35,000)
Work-in-process at 6,000 0.20 5,000
January 1, 1980 25,000 $ 22,000 9,000 0.40 30,000
Units started and 12,000 0.20 50,000
costs incurred 15,000 0.10 70,000
during January 135,000 $143,000
Units completed and If Duguid decides to market XPL, the expected value of
transferred to next the added monthly income will be
department during a. $ 24,000
January 100,000 b. $ 26,500
c. $ 30,000
Using the FIFO method, what was the conversion cost d. $120,000
of the work-in-process in the Cutting Department at
January 31, 1980?
a. $33,000
b. $38,100 37. Indiana Corporation began its operations on
c. $39,000 January 1, 1979, and produces a single product that sells
d. $45,000 for $9.00 per unit. Indiana uses an actual (historical)
cost system. 100,000 units were produced and 90,000
34. Argus Company, a manufacturer of lamps, units were sold in 1979. There was no work-in-process
budgeted sales of 400,000 lamps at $20.00 per unit for inventory at December 31, 1979.
1980. Variable manufacturing costs were budgeted at Manufacturing costs and selling and administrative
$8.00 per unit, and fixed manufacturing costs at $5.00 expenses for 1979 were as follows:
per unit. A special order offering to buy 40,000 lamps
for $11.50 each was received by Argus in April 1980. Fixed costs Variable costs
Argus has sufficient plant capacity to manufacture the Raw materials — $1.75 per unit produced
additional quantity of lamps; however, the production Direct labor — 1.25 per unit produced
would have to be done by the present work force on an Factory overhead $100,000 .50 per unit produced
overtime basis at an estimated additional cost of $1.50 Selling and
per lamp. Argus will not incur any selling expenses as a administrative 70,000 .60 per unit sold
result of the special order. What would be the effect on
operating income if the special order could be accepted What would be Indiana’s operating income for 1979 us
without affecting normal sales? ing the direct-costing method?
a. $ 60,000 decrease. a. $181,000
b. $ 80,000 increase. b. $271,000
c. $120,000 decrease. c. $281,000
d. $140,000 increase. d. $371,000
59
38. Durable Company installs shingle roofs on Number 3 (Estimated tim e----- 45 to 55 minutes)
residential houses. The standard material cost for a
Type R house is $1,250 based on 1,000 units at a cost of
$1.25 each. During April 1980 Durable installed roofs Instructions
on 20 Type R houses, using 22,000 units of material at a
cost of $1.20 per unit, and a total cost of $26,400. Select the best answer for each of the following
Durable’s material price variance for April 1980 is items relating to the federal income taxation of corpora
a. $1,000 favorable. tions and partnerships. Use a soft pencil, preferably No.
b. $1,100 favorable. 2, to blacken the appropriate circle on the separate
c. $1,400 unfavorable. printed answer sheet to indicate your answer. The
d. $2,500 unfavorable. answers should be based upon the Internal Revenue
Code and Tax Regulations in effect for the tax period
specified in the item. If no tax period is specified, use
the current Internal Revenue Code and Tax Regula
tions. Mark only one answer for each item. Answer all
answers.
Items to be Answered
41. In 1979 Clark Corporation, not a dealer in

39. Information on Ripley Company’s overhead costs securities, realized taxable income of $40,000 from the
for the January 1980 production activity is as follows: operation of its business. Additionally in 1979, Clark
realized a long-term capital loss of $10,000 from the sale
Budgeted fixed overhead $ 75,000 of marketable securities. Clark did not realize any other
Standard fixed overhead rate capital gains or losses since it began operations. What is
per direct-labor hour $3 the proper treatment for the $10,000 long-term capital
Standard variable overhead rate loss in Clark’s income tax returns?
per direct-labor hour $6 a. Use $3,000 of the loss to reduce taxable in
Standard direct-labor hours allowed come for 1979, and carry $7,000 of the long
for actual production 24,000 term capital loss forward five years.
Actual total overhead incurred $220,000 b. Use $6,000 of the loss to reduce taxable in
come by $3,000 for 1979, and carry $4,000 of
Ripley has a standard absorption and flexible budgeting the long-term capital loss forward five years.
system, and uses the two-variance method (two-way c. Use $10,000 of the long-term capital loss to
analysis) for overhead variances. The volume reduce taxable income by $5,000 for 1979.
(denominator) variance for January 1980 is d. Carry the $10,000 long-term capital loss for
a. $3,000 unfavorable. ward five years, treating it as a short-term
b. $3,000 favorable. capital loss.
c. $4,000 unfavorable.
d. $4,000 favorable. 42. Geyer, Inc., a calendar year corporation, had net
income per books of $80,000 for the year 1979. For each
of the years 1975-1978, Geyer’s net income (loss) per
books was as follows:
1975 $ 5,000
1976 15,000
1977 10,000
40. The following information is available for Digby 1978 (60,000)
Company’s material Y:
Annual usage in units 10,000 Included in Geyer’s gross revenues for 1978 were tax
Working days per year 250 able dividends of $20,000 received from an unrelated
Normal lead time in working days 30 domestic corporation. When filing its tax return for
Maximum lead time in working days 70 1978 on March 10, 1979, Geyer elected to give up the
three-year carryback of the loss for 1978. Geyer should
Assuming that the units of material Y will be required report a net operating loss carryover on its tax return for
evenly throughout the year, the order point would be 1979 of
a. 1,200 a. $30,000
b. 1,600 b. $47,000
c. 2,000 c. $60,000
d. 2,800 d. $77,000
60
43. On July 1, 1979, Mr. Grey formed Dover Cor 47. Tyler Corporation had taxable income of $560,000
poration. The same date Grey paid $100,000 cash and before deducting charitable contributions for its tax
transferred property with an adjusted basis of $50,000 year ended December 31, 1979. The dividends received
to Dover in exchange for 3,000 shares of its common deduction was $85,000. Tyler made cash contributions
stock. The property had a fair market value of $85,000 of $50,000 to charitable organizations. How much can
on the date of the exchange. Dover had no other shares Tyler deduct as contributions for 1979?
of common stock outstanding on July 1, 1979. As a a. $28,000
result of the above transaction, Grey’s basis in his stock b. $32,250
and Dover’s basis in the property, respectively, are: c. $33,000
a. $150,000 and $50,000. d. $50,000
b. $150,000 and $85,000.
c. $185,000 and $50,000.
d. $185,000 and $85,000. 48. During 1979 Gilbert Manufacturing Company, in
need of additional factory space, exchanged 10,000
shares of its common stock with a par value of $100,000
for a building with a fair market value of $120,000. On
the date of the exchange the stock had a market value of
44. Thayer Corporation purchased an apartment $130,000. For 1979, how much and what type of gain or
building on January 1, 1976, for $200,000. The building loss should Gilbert report on this transaction?
was depreciated on the straight-line basis. On December a. No gain or loss.
31, 1979, the building was sold for $220,000, when the b. $10,000 capital loss.
asset balance net of accumulated depreciation was c. $20,000 capital gain.
$170,000. On its 1979 tax return, Thayer should report d. $20,000 section 1231 gain.
a. Section 1231 gain of $20,000 and ordinary in
come of $30,000. 49. Pursuant to a plan of reorganization adopted in
b. Section 1231 gain of $30,000 and ordinary in 1979, Daly Corporation exchanged property with an ad
come of $20,000. justed basis of $100,000 for 1,000 shares of the common
c. Ordinary income of $50,000. stock of Galen Corporation. The 1,000 shares of Galen
d. Section 1231 gain of $50,000. common stock had a fair market value of $110,000 on
the date of the exchange. As a result of this exchange,
what is Daly’s recognized gain and what is its basis in
the Galen common stock, respectively?
45. Drury Corporation, a Subchapter S Corporation, a. $0 and $100,000.
had taxable income and current earnings and profits of b. $0 and $110,000.
$45,000 for the year ended December 3 1 , 1979. Included c. $10,000 and $100,000.
in the above is $42,000 excess net long-term capital gain d. $10,000 and $110,000.
over net short-term capital losses. Drury paid $4,760 in
capital gains taxes for 1979. Cash distributions to Mr. 50. In December 1979 Margate Corporation paid
Hoyt, the sole shareholder, totaled $60,000 during 1979. $650,000 for a used machine for use in its business. The
On December 31, 1978, Drury had accumulated earn machine had an estimated remaining useful life of ten
ings and profits of $50,000, none of which had been years, and was put in service on December 15, 1979.
previously taxed. What amount should Hoyt report on Margate’s tax liability for the year ended December 31,
his individual income tax return for 1979 as long-term 1979, was $75,000, before claiming an investment tax
capital gain passed through from Drury? credit. What is the maximum investment tax credit that
a. $37,240 Margate can utilize for 1979?
b. $42,000 a. $0
c. $45,000 b. $10,000
d. $46,760 c. $55,000
d. $65,000
46. Redco, Inc., a Subchapter S Corporation, has five
equal shareholders. For the year ended December 31, 51. For the year ended December 31, 1979, Canter
1979, Redco had taxable income and current earnings bury Corporation had dividend income from non-
and profits of $100,000. Redco made cash distributions affiliated domestic corporations of $50,000 and gross
totaling $40,000 during 1979. For the calendar year business income of $30,000. Business deductions for
1979, what amount should be included in each 1979 amounted to $45,000. What is Canterbury’s
shareholder’s gross income from Redco? dividends received deduction for 1979?
a. $ 7,900 a. $0
b. $ 8,000 b. $29,750
c. $12,000 c. $42,500
d. $20,000 d. $50,000
61
52. Wright Corporation reported $100,000 of book in 55. Grady Corporation’s book income before income
come before income taxes for the year ended December taxes was $300,000 for the year 1979 after recording
31, 1979. The income statement disclosed the following amortization of organization costs. Organization costs
information: of $140,000 incurred at the organization date two years
earlier are being written off over a ten-year period for
• Christmas gifts to 40 customers at $100 each. financial reporting purposes, and over the minimum
• Dividends of $20,000 received from Morley, period for income tax purposes. Assuming that there
Ltd., a corporation not subject to United were no other reconciling items, what is Grady’s taxable
States income tax. income for 1979?
• Insurance premiums of $ 15,000 on a policy in a. $272,000
suring the life of the president of the corpora b. $286,000
tion, under which Wright Corporation is the c. $300,000
beneficiary. d. $314,000
What should Wright report as its taxable income for 56. Hutton Corporation purchased new factory equip
1979? ment that was installed and put in service on January 4,
a. $ 98,000 1979, at a total cost of 170,000. The equipment will be
b. $103,000 depreciated over seven years using the sum-of-the-years-
c. $115,000 digits method, with no salvage value. Hutton elected to
d. $118,000 take the additional first-year depreciation deduction.
What is the maximum amount that Hutton can deduct
53. For the year ended December 31, 1979, Marshall as depreciation on its tax return for the year ended
Corporation reported book income,before federal in December 31, 1979?
come taxes,of $200,000. The following items were in a. $44,000
cluded in the determination of income before federal in b. $44,500
come taxes: c. $68,000
d. $76,500
Provision for state corporation income tax $15,000
Interest on United States obligations 20,000 57. Davies Corporation (not a Subchapter S Corpora
Net long-term capital loss from the sale tion) had a deficit of $160,000 at December 31, 1978. Its
of marketable securities (10,000) net income per books was $80,000 for 1979. Cash
Interest paid on loan to purchase dividends on common stock totaling $40,000 were paid
United States obligations 12,000 in December 1979. Davies should report the distribution
to its shareholders as
Marshall’s taxable income on its1979 federal income a. Return of capital 100%.
tax return would be b. Ordinary dividends 25% ; return of capital
a. $192,000 75%.
b. $193,000 c. Ordinary dividends 50%; return of capital
c. $210,000 50%.
d. $225,000 d. Ordinary dividends 100%.
54. Chaucer Corporation reported taxable income of 58. For the year ended December 31, 1979, the part
$350,000 on its federal income tax return for the 1979 nership of Murray and Parker had book income of
calendar year. Selected information for 1979 is available $100,000 which included the following:
from Chaucer’s records as follows:
Long-term capital gain (on sale of securities) $7,000
Interest income on municipal bonds $20,000 Section 1231 loss (3,000)
Depreciation claimed on the tax return based Dividends qualifying for the $100 exclusion 200
on the double-declining-balance method 75,000 Interest paid to partners for use of capital 12,000
Depreciation recorded on the books based on
the straight-line method 50,000 The partners share profits and losses equally. What
Provision for federal income tax per books 140,000 amount of partnership income (excluding all partner
ship items which must be reported separately) should
Based on the above information, Chaucer should report each partner report in his individual income tax return
net income per books for 1979 in the amount of for 1979?
a. $235,000 a. $47,900
b. $255,000 b. $48,000
c. $395,000 c. $50,000
d. $445,000 d. $53,900
62
59. Atley had an adjusted basis of $11,000 for his in December 31, 1979. Estimated percentage of comple
terest in the Atley and Donald partnership on December tion, accumulated contract costs incurred, estimated
31, 1979. On this date Atley received from the partner costs to complete the contract, and accumulated billings
ship, in complete liquidation of his interest, $10,000 to Axelrod under the contract were as follows:
cash and land with a basis to the partnership of $2,000
and a fair market value of $3,000. What is Atley’s basis
for the land distributed to him? At At At
a. $0 December December December
b. $1,000 31,1977 31,1978 31,1979
c. $2,000 Percentage of
d. $3,000 completion 10% 60% 100%
Contract costs
60. Clark and Lewis are partners who share profits incurred $ 350,000 $2,500,000 $4,250,000
and losses 60% and 40%, respectively. The tax basis of Estimated costs
each partner’s interest in the partnership as of to complete
December 31, 1978, was as follows: the contract $3,150,000 $1,700,000 —
Billings to
Clark $24,000 Axelrod $ 720,000 $2,160,000 $3,600,000
Lewis $18,000
Required:
During 1979 the partnership had ordinary income of
$50,000 and a long-term capital loss of $10,000 from the 1. Prepare schedules to compute the amount to be
sale of securities. There were no distributions to the shown as “ cost of uncompleted contract in excess of
partners during 1979. What is the amount of Lewis’ tax related billings’’ or “ billings on uncompleted contract
basis as of December 31, 1979? in excess of related costs” at December 31, 1977, 1978,
a. $33,000 and 1979. Ignore income taxes. Show supporting com
b. $34,000 putations in good form.
c. $38,000 2. Prepare schedules to compute the profit or loss
d. $42,000 to be recognized as a result of this contract for the years
ended December 31, 1977, 1978, and 1979. Ignore in
come taxes. Show supporting computations in good
form.
Part b. On April 1, 1979, Butler, Inc., entered in
to a cost-plus-fixed-fee contract to construct an electric
generator for Dalton Corporation. At the contract date,
Butler estimated that it would take two years to com
Number 4 (Estimated tim e----- 45 to 55 minutes) plete the project at a cost of $2,000,000. The fixed fee
stipulated in the contract is $300,000. Butler ap
Number 4 consists of two unrelated parts. propriately accounts for this contract under the
percentage-of-completion method. During 1979 Butler
Part a. Curtiss Construction Company, Inc., incurred costs of $700,000 related to the project, and the
entered into a firm fixed-price contract with Axelrod estimated cost at December 31, 1979, to complete the
Associates on July 1, 1977, to construct a four-story of contract is $1,400,000. Dalton was billed $500,000
fice building. At that time, Curtiss estimated that it under the contract.
would take between two and three years to complete the
project. The total contract price for construction of the Required:
building is $4,000,000. Curtiss appropriately accounts Prepare a schedule to compute the amount of gross
for this contract under the completed-contract method profit to be recognized by Butler under the contract for
in its financial statements and for income tax reporting. the year ended December 31, 1979. Show supporting
The building was deemed substantially completed on computations in good form.
63
Number 5 (Estimated time----- 40 to 50 minutes) Additional information:

• Madison recorded its investment in Adams at
Madison, Inc., acquired all of the outstanding $10 the underlying equity in the net assets of Adams of
par voting common stock of Adams Corporation on $2,205,000.
December 31, 1979, in exchange for 90,000 shares of its • On December 31, 1979, Adams’ assets and
$10 par voting common stock in a business combination liabilities had fair values equal to the book balances
which meets all of the conditions for a pooling of in with the exception of Land, which had a fair value of
terests. On the acquisition date, Madison’s common $400,000.
stock had a closing market price of $26 per share on a • Madison’s accounting policy is to amortize ex
national stock exchange. Both corporations continued cess cost over fair market value of net assets acquired
to operate as separate businesses maintaining separate over a 40-year period.
accounting records with years ending December 31. • On December 15, 1979, Adams paid a cash divi
On December 31, 1979, after the nominal accounts dend of $3 per share on its common stock.
were closed and immediately after acquisition, the con • Adams’ Long-Term Debt consisted of 9%, ten-
densed balance sheets for both corporations were as year bonds, issued at face value on June 30, 1975, and
follows: due on June 30, 1985. Interest is paid semiannually on
June 30 and December 31. Madison had purchased
Adams’ bonds at face value of $250,000. There was no
change in Madison’s ownership of Adams’ bonds
through December 31, 1979.
Madison Adams • During the three-month period ended December
Assets: 31, 1979, Madison purchased merchandise from Adams
Cash $ 750,000 $ 300,000 at an aggregate invoice price of $600,000. Madison had
Accounts receivable, net 1,950,000 750,000 not paid for the merchandise as of December 31, 1979.
Inventories 2,100,000 950,000 The amount of profit realized by Adams on these trans
Land 500,000 200,000 actions was $120,000. At December 31, 1979, one-half
Depreciable assets, net 4,160,000 1,800,000 of the merchandise remained in Madison’s inventory.
Investment in Adams There were no intercompany merchandise transactions
Corporation 2,205,000 —
prior to October 1, 1979.
Long-term investments • The 1979 net income amounts per the separate
and other assets 785,000 350,000 books of Madison and Adams were $2,100,000 and
$1,125,000, respectively.
Total assets $12,450,000 $4,350,000
• The balances in Retained Earnings at December
Liabilities and 31, 1978, were $1,600,000 and $275,000 for Madison
stockholders’ equity: and Adams, respectively.
Accounts payable and Required:
other current liabilities $ 1,750,000 $ 945,000 1. Go to page 13 and remove tear-out worksheet.
Long-term debt 1,500,000 1, 200,000 Complete the tear-out worksheet to prepare a con
Common stock, par value solidated balance sheet of Madison, Inc., and its sub
$10 per share 3,000,000 900,000 sidiary, Adams Corporation, as of December 31, 1979.
Additional paid-in A formal consolidated balance sheet and journal entries
capital 1,370,000 175,000 are not required. Supporting computations should be in
Retained earnings 4,830,000 1,130,000 good form. Include the completed tear-out worksheet in
Total liabilities and the proper sequence and turn in with other answer
stockholders’ sheets.
equity $12,450,000 $4,350,000 2. Prepare a formal consolidated statement of re
tained earnings for the year ended December 31, 1979.
Show supporting computations in good form.
64

Madison, Inc. and Subsidiary Candidate’s No.-----------
Accounting Practice-----Part I Consolidated Balance Sheet Worksheet State-------------------------
November 1980 December 31, 1979 Question No. Page
Madison Adams Adjustments and Eliminations

Inc. Corporation Debit Credit Consolidated
Assets:
Cash S 750,000 $ 300,000
Accounts receivable, net 1,950,000 750,000
Inventories 2,100,000 950,000
Land 500,000 200,000
Depreciable assets, net 4,160,000 1,800,000
Investment in Adams Corp. 2,205,000
Long-term investments
and other assets 785,000 350,000
$12,450,000 $4,350,000
Liabilities and,
Stockholders'equity:
Accounts payable and other
current liabilities $ 1,750,000 $ 945,000
Long-term debt 1,500,000 1,200,000
Common stock, $10 par value 3,000,000 900,000
Additional paid-in capital 1,370,000 175,000
Retained earnings 4,830,000 1,130,000
$12,450,000 $4,350,000
65
(Prepared b y th e B oard o f E x a m in e s o f the A m erican Institu te o f Certified Public A ccountants
and adopted by the exam ining boards o f all states, territories, and the D istrict o f Colum bia.)
November 6, 1980; 1:30 to 6:00 P.M.

Estimated Minutes
No. 1 ........................................................................................... 45 55
No. 2 ........................................................................ ................... 45 55
No. 3 ........................................................................................... 45 55
No. 4 ........................................................................................... 45 55
No. 5 ........................................................................................... 40 50
T otal.................................................................................... 220 270
objective items are computer-graded, your com ty of expressing opinions and conclusions in writ
ments and calculations associated with them are ten reports in clear, unequivocal language.
3 . For problem-type questions you should enclose all and present such knowledge in acceptable written
66

Items 2 and 3 are based on the following informa
Instructions tion:
Select the best answer for each of the following The following condensed statement of income of
items relating to a variety of financial accounting Helen Corporation, a diversified company, is presented
problems. Use a soft pencil, preferably No. 2, to for the two years ended December 31, 1979 and 1978;
blacken the appropriate circle on the separate printed
answer sheet to indicate your answer. Mark only one 1979 1978
answer for each item. Answer all items. Your grade will
be based on your total correct answers. Net sales $10,000,000 $9,600,000
The following is an example of the manner in which Cost of sales 6,200,000 6,000,000
the answer sheet should be marked:
Gross profit 3,800,000 3,600,000
Item Operating expenses 2,200,000 2,400,000
Operating income 1,600,000 1,200,000
97. Gross billings for merchandise sold by Baker
Company to its customers last year amounted to Gain on sale of division 900,000 —
$5,260,000; sales returns and allowances reduced the 2,500,000 1,200,000

amounts owed by $160,000. How much were net sales Provision for income
last year for Baker Company? taxes 1,250,000 600,000
a. $4,800,000
b. $5,100,000 Net income $ 1,250,000 $ 600,000
c. $5,200,000
d. $5,260,000
On January 1, 1979, Helen entered into an agreement to
sell for $3,200,000 the assets and product line of one of
its separate operating divisions. The sale was consum
mated on December 31, 1979, and resulted in a gain on
Answer Sheet disposition of $900,000. This division’s contribution to
Helen’s reported income before income taxes for each
97. year was as follows:
1979 $(640,000) loss
Items to be Answered 1978 $(500,000) loss
Assume an income tax rate of 50%.

1. Elaine Corporation was organized on January 1,
1979, with an authorization of 1,000,000 shares of com 2. In the preparation of a revised comparative state
mon stock with a par value of $5 per share. ment of income, Helen should report income from con
tinuing operations after income taxes for 1979 and 1978,
During 1979, the corporation had the following respectively, amounting to
capital transactions: a. $1,120,000 and $600,000.
b. $1,120,000 and $850,000.
January 4 - issued 200,000 shares @ $5 per share. c. $1,250,000 and $600,000.
April 8 - issued 100,000 shares @ $7 per share. d. $1,250,000 and $850,000.
June 9 - issued 30,000 shares @ $10 per share.
July 29 - purchased 50,000 shares @ $4 per share.
December 31 - sold 50,000 shares held in treasury
@ $8 per share. 3. In the preparation of a revised comparative state
ment of income, Helen should report under the caption
Elaine used the cost method to record the purchase “ Discontinued Operations” for 1979 and 1978, respec
and reissuance of the treasury shares. What should be tively
the balance in the account “capital in excess of par a. Income of $130,000 and a loss of $250,000.
value” as of December 31, 1979? b. Income of $130,000 and $0.
a. $400,000 c. Income of $260,000 and a loss of $500,000.
b. $450,000 d. A loss of $640,000 and a loss of $500,000.
c. $500,000
d. $550,000
67
4. Newton Corporation was organized on January 1,

1977. On that date it issued 200,000 shares of its $10 par Items 7 and 8 are based on the following informa
value common stock at $15 per share (400,000 shares tion:
were authorized). During the period January 1, 1977,
through December 31, 1979, Newton reported net in The Shannon Corporation began operations on
come of $750,000 and paid cash dividends of $380,000. January 1, 1978. Financial statements for the years
On January 5, 1979, Newton purchased 12,000 shares ended December 31, 1978, and 1979, contained the
of its common stock at $12 per share. On December 31, following errors:
1979, 8,000 treasury shares were sold at $8 per share. December 31,
Newton used the cost method of accounting for treasury 1978 1979
shares. What is the total stockholders’ equity of Newton Ending inven
as of December 31, 1979? tory $16,000 understated $15,000 overstated
a. $3,290,000 Depreciation
b. $3,306,000 expense $ 6,000 understated —
c. $3,338,000 Insurance
d. $3,370,000 expense $10,000 overstated $10,000 understated
Prepaid in
5. Sprint Company has 1,000,000 shares of common surance $10,000 understated —
stock authorized with a par value of $3 per share, of
which 600,000 shares are outstanding. When the market In addition, on December 31, 1979, fully depreciated
value was $8 per share, Sprint issued a stock dividend machinery was sold for $10,800 cash, but the sale was
whereby for each six shares held one share was issued as not recorded until 1980. There were no other errors dur
a stock dividend. The par value of the stock was not ing 1978 or 1979 and no corrections have been made for
changed. What entry should Sprint make to record this any of the errors.
transaction? 7. Ignoring income taxes, what is the total effect of
the errors on 1979 net income?
a. Net income overstated by $30,200.
a. Retained earnings $300,000 b. Net income overstated by $11,000.
Common stock $300,000 c. Net income overstated by $5,800.
b. Additional paid-in d. Net income understated by $1,800.
capital 300,000
Common stock 300,000 8. Ignoring income taxes, what is the total effect of
c. Retained earnings 800,000 the errors on the amount of working capital at
Common stock 300,000 December 31, 1979?
Additional paid-in a. Working capital overstated by $4,200.
capital 500,000 b. Working capital understated by $5,800.
d. Additional paid-in c. Working capital understated by $6,000.
capital 800,000 d. Working capital understated by $9,800.
Common stock 300,000
Retained earnings 500,000
6. The following information was abstracted from

the accounts of the Oar Corporation at December 31, 9. During 1979 the Commander Corporation ac
1979: quired 3 pieces of machinery at an auction for a lump
sum price of $240,000. In addition. Commander paid
Total income since incorporation $840,000 $12,000 to have the machines installed. An appraisal
Total cash dividends paid 260,000 disclosed the following values:
Proceeds from sale of donated stock 90,000
Total value of stock dividends distributed 60,000 Machine A $ 50,000
Excess of proceeds over cost of Machine B $150,000
treasury stock sold 140,000 Machine C $100,000
What should be the current balance of retained earn What costs should be assigned to Machines A, B, and C,
ings? respectively?
a. $520,000 a. $40,000, $120,000, and $ 80,000.
b. $580,000 b. $42,000, $126,000, and $ 84,000.
c. $610,000 c. $50,000, $150,000, and $100,000.
d. $670,000 d. $84,000, $ 84,000, and $ 84,000.
68
Accounting Practice — Part II
10. On January 1, 1979, Barton Corporation acquired 14. The December 31, 1979, trial balance of the Mark
as a long-term investment for $500,000, a 30% common Company before adjustments included the following ac
stock interest in Buffer Company. On that date, Buffer counts:
had net assets with a book value and current market
value of $1,600,000. During 1979 Buffer reported net Debit Credit
income of $180,000 and declared and paid cash
dividends of $40,000. What is the maximum amount of Allowance for doubtful
income that Barton should report from this investment accounts $2,000
for 1979? Sales $830,000
a. $12,000 Sales returns and allowances 10,000
b. $42,000
c. $53,500 Mark estimates its bad debts based upon 2% of net
d. $54,000 sales. What amount should Mark record as bad debt
expense for 1979?
a. $14,400
11. The following information is available for the
Silver Company for the three months ended March 31, b. $14,600
1979: c. $16,400
d. $16,600
Merchandise inventory, January 1, 1979 $ 900,000
Purchases 3,400,000
Freight-in 200,000
Sales 4,800,000 15. On January 2, 1975, Hermes Corporation ac
quired a patent for $192,000. The patent had a remain
The gross margin recordedwas 25% of sales. What ing legal life of twelve years and an estimated useful life
should be the merchandise inventory at March 31, 1979? of eight years. In January 1979 Hermes paid $12,000 in
a. $ 700,000 legal fees in a successful defense of the patent. What
b. $ 900,000 should Hermes record as patent amortization for 1979?
c. $1,125,000 a. $16,000
d. $1,200,000 b. $24,000
c. $25,500
12. The following changes in account balances of the d. $27,000
Marvel Corporation during 1979 are presented below:
Increase 16. On June 3 0 , 1979, the stockholders’ equity section

Assets $356,000 of Comet Corporation was as follows:
Liabilities 108,000
Capital stock 240,000 Common stock, par value $25; authorized
Additional paid-in capital 24,000 500,000 shares; issued and outstanding
300,000 shares $ 7,500,000
Assuming there were no charges to retained earnings Additional paid-in capital 1,400,000
other than for a dividend payment of $52,000, the net Retained earnings 1,890,000
income for 1979 should be $10,790,000
a. $16,000
b. $36,000
c. $52,000 On July 1, 1979, the board of directors of Comet
d. $68,000 declared a 5% stock dividend on common stock, to be
distributed on August 10, 1979, to shareholders of
13. The Action Corporation issued non-voting pre record on July 31, 1979. The market price of Comet’s
ferred stock with a fair market value of $4,000,000 in common stock on each of these dates was as follows:
exchange for all of the outstanding common stock of
Master Corporation. On the date of the exchange, July 1 $30
Master had tangible net assets with a book value of July 31 31
$2,000,000 and a fair value of $2,500,000. In addition, August 10 32
Action issued preferred stock valued at $400,000 to an
individual as a finder’s fee in arranging the transaction. What is the amount of the charge to retained earn
As a result of this transaction, Action should record an ings as a result of the declaration and distribution of this
increase in net assets of stock dividend?
a. $2,000,000 a. $375,000
b. $2,500,000 b. $450,000
c. $2,900,000 c. $465,000
d. $4,400,000 d. $480,000
69
value of each warrant was $4. What amount of the pro

Items 17 and 18 are based on the following infor ceeds from the bond issue should Danna record as an in
mation: crease in stockholders’ equity?
a. $0
The Gaston Company has sustained heavy losses b. $ 15,000
over a period of time and conditions warrant that c. $ 60,000
Gaston undergo a quasi-reorganization at December 31, d. $375,000
1979.
Selected balance sheet items prior to the quasi 20. On January 1, 1975, Gilbert Corporation issued
reorganization are as follows: $1,200,000 of 6% ten-year bonds at 103. The bonds are
callable at the option of Gilbert at 105. Gilbert has
• Inventory was recorded in the accounting recorded amortization of the bond premium on the
records at December 31, 1979, at its market value of straight-line method (which was not materially different
$6,000,000. Cost was $6,500,000. from the interest method).
• Property, plant and equipment was recorded in On December 31, 1979, Gilbert repurchased
the accounting records at December 31, 1979, at $600,000 of the bonds in the open market at 98. Gilbert
$12,000,000, net of accumulated depreciation. The ap has recorded interest and amortization for 1979. Ignor
praised value was $8,000,000. ing income taxes and assuming that all amounts in
• Stockholders’ equity on December 31, 1979, volved are material, Gilbert should report the gain from
was as follows: this reacquisition as
a. Other income of $21,000.
Common stock, par value $10 per share; b. An extraordinary gain of $21,000.
authorized, issued and outstanding, c. Other income of $42,000.
700,000 shares $7,000,000 d. An extraordinary gain of $42,000.
Capital in excess of par 1,600,000
Retained earnings (deficit) (900,000)
$7,700,000
• Under the terms of the quasi-reorganization, Number 2 (Estimated time----- 45 to 55 minutes)

the par value of the common stock is to be reduced from
$10 per share to $5 per share. Instructions
17. Immediately after the quasi-reorganization has Select the best answer for each of the following
been accomplished, the total of stockholders’ equity items relating to the federal income taxation of in
should be dividuals. Use a soft pencil, preferably No. 2, to
a. $3,300,000 blacken the appropriate circle on the separate printed
b. $3,500,000 answer sheet to indicate your answer. The answers
c. $3,700,000 should be based upon the Internal Revenue Code and
d. $4,200,000 Tax Regulations in effect for the tax period specified in
the item. If no tax period is specified, use the current In
ternal Revenue Code and Tax Regulations. Mark only
18. Immediately after the quasi-reorganization has one answer for each item. Answer all items. Your grade
been accomplished, retained earnings (deficit) should be will be based on your total correct answers.
a. $0
b. $ (200,000) Items to be Answered
c. $(4,400,000)
d. $(4,900,000) 21. On January 1, 1979, James Davis was awarded a
post-doctorate fellowship grant of $4,500 by a tax-
exempt educational organization. Davis is not a can
didate for a degree and was awarded the grant to con
tinue his research. The grant was awarded for the period
19. On March 1, 1979, Danna Corporation issued March 1, 1979, through July 31, 1980.
$500,000 of 8% nonconvertible bonds at 103 which are On March 1, 1979, Davis elected to receive the full
due on February 28, 1999. In addition, each $1,000 amount of the grant. What amount should be included
bond was issued with 30 detachable stock warrants, in his gross income for 1979?
each of which entitled the bondholder to purchase, for a. $0
$50, one share of Danna common stock, par value $25. b. $1,500
On March 1, 1979, the fair market value of Danna’s c. $3,000
common stock was $40 per share and the fair market d. $4,500
70
22. On January 5 , 1979, Norman Harris purchased for 26. The records of Paul Thorpe, a cash-basis sole pro
$6,000, 100 shares of Campbell Corporation common prietor, for 1979 include the following information:
stock. On July 8, 1979, he received a nontaxable stock
dividend of 10 shares of Campbell Corporation $100 Gross receipts $60,000
par value preferred stock. On that date the market Dividend income (on personal
values per share of the common and preferred stock investments) 400
were $75 and $150, respectively. Harris’s tax basis for Cost of sales 30,000
the common stock after the receipt of the stock dividend Other operating expenses 6,000
is State business taxes paid 600
a. $2,000 Federal self-employment tax paid 1,600
b. $4,500
c. $5,000 What amount should Thorpe report as net earnings
d. $6,000 from self-employment for 1979?
a. $21,800
23. On June 8, 1979, Sam Meyer, age 62, sold for b. $23,400
$210,000 his principal residence which had an adjusted c. $23,800
basis of $60,000. On November 1, 1979, he purchased a d. $24,000
new residence for $80,000. Meyer elected the exclusion
of realized gain available to taxpayers over age 55. 27. For the year 1979 Susan Otis had salary income of
For 1979 Meyer should recognize a gain on the sale $19,000. In addition she reported the following capital
of his residence of transactions during the year:
a. $0
b. $ 30,000 Long-term capital gain $7,000
c. $ 50,000 Short-term capital gain 3,000
d. $130,000 Long-term capital loss (2,000)
Short-term capital loss (4,000)
24. During 1979 Dennis Wilson was granted a divorce
from his wife. The divorce decree stipulated that he was There were no other items includable in her gross in
to pay both alimony and child support for a specified come. What is her adjusted gross income for 1979?
period of time. The alimony payments were considered a. $19,000
to be periodic payments for income tax purposes. The b. $20,600
following information was abstracted from his 1979 c. $21,400
records: d. $23,000
Salary $ 100,000
Interest received on bank deposit 4,000 28. Seymour Thomas named his wife Penelope the
Interest received on municipal obligations 2,000 beneficiary of a $100,000 (face amount) insurance
$106,000 policy on his life. The policy provided that upon his
Alimony paid death, the proceeds would be paid to Penelope with
$ 7,200
Child support paid interest over her present life expectancy, which was
9,600
calculated at 25 years. Seymour died during 1979 and
What is Wilson’s adjusted gross income for 1979? Penelope received a payment of $5,200 from the in
a. $ 89,200 surance company. What amount should she include in
b. $ 96,800 her gross income for 1979?
c. $ 98,800 a. $ 200
d. $104,000 b. $1,200
c. $4,200
25. During 1979 John Bulvon had the following d. $5,200
capital losses on security transactions:
29. On January 10, 1979, Albert Hart received a gift
$2,000 net short-term capital loss of income-producing property having an adjusted basis
$1,200 net long-term capital loss of $25,000 at the time of the gift. The fair market value
of the property at the date of the gift was $20,000. Hart
In addition, for 1979 he reported ordinary income of decided to sell the property on August 1, 1979, and
$36,000. How much of this loss can Bulvon offset received $23,000 on the sale. What is the amount of the
against ordinary income in 1979? gain or loss that Hart should report for 1979?
a. $2,600 a. $2,000 ordinary loss.
b. $2,720 b. $2,000 short-term capital loss.
c. $3,000 c. $3,000 short-term capital gain.
d. $3,200 d. No gain or loss.
71
30. For the year ended December 31, 1979, David 33. During 1979 Anita Simms was entirely supported
Roth, a married taxpayer filing a joint return, reported by her three sons Dudley, Carlton and Isidore who pro
the following: vided support for her in the following percentages:
Investment income from dividends Dudley 8%

and interest $24,000 Carlton 45%
Long-term capital gains 25,000 Isidore 47%
Investment expenses 4,000
Interest expense on funds borrowed Which of the brothers is entitled to claim his mother as a
in 1979 to purchase investment dependent, assuming a multiple support agreement
property 70,000 exists?
a. Dudley.
What amount can Roth deduct in 1979 as investment b. Dudley or Carlton.
interest expense? c. Carlton or Isidore.
a. $20,000 d. Dudley, Carlton or Isidore.
b. $30,000 34. Nancy and Dennis Martin are married and file a
c. $45,000 joint income tax return. Both were employed during
d. $70,000 1979 and earned the following salaries:
31. Martin Hart, who is not an outside salesman, Dennis $32,000

earned a salary of $30,000 during the current year. Nancy 14,000
During the year he was required by his employer to take
several overnight business trips, and he received an ex In order to enable Nancy to work she incurred at-home
pense allowance of $1,500 for travel and lodging. In the child care expenses of $6,000 for their two-year-old
course of these trips he incurred the following expenses daughter and four-year-old son. What is the amount of
which were either adjustments to income or deductions the child care credit that they can claim for 1979?
from adjusted gross income. a. $ 400
b. $ 800
Travel $1,100 c. $1,200
Lodging 500 d. $2,800
Entertainment of customers 400
35. Alvin Pearl is a self-employed individual. During
What is Hart’s adjusted gross income? the current year, his auto, which he used 75% for
a. $28,000 business and 25% for personal use, was totally
b. $29,500 destroyed in an accident.
c. $29,600 The auto had a fair market value of $7,200 when
d. $29,900 destroyed, which was less than the auto’s adjusted basis.
Pearl received only $6,000 as a recovery from his in
surance company.
32. Ray and Alice Owens elected to file a joint tax What amount can Pearl deduct as a casualty loss
return for the current year. Their adjusted gross income for the current year if he were to itemize his personal
was $30,000. During the year they incurred and paid the deductions?
following medical and related expenses: a. $1,200
b. $ 300
Medical care insurance premium c. $ 200
($400 each) $800 d. $0
Medicines prescribed by doctors 450
Doctors 1,700 36. In October 1979, John Dill’s wife was involved in
Transportation to and from doctors’ an accident while driving the family automobile.
offices 100 Damage to the automobile was estimated at $300.
Though fully insured, Dill was fearful that his
In addition they received $900 as reimbursement from automobile insurance rates would rise as a result of the
their insurance company for doctor bills paid during the accident. He did not notify his insurance company and
year. In itemizing their deductions for the current year, had the automobile repaired at his own expense. What
what amount can they report as a medical expense amount can he deduct as a casualty loss on his income
deduction? tax return for 1979?
a. $ 950 a. $0
b. $1,250 b. $100
c. $2,150 c. $200
d. $3,050 d. $300
72
37. During the current year Mike Larsen sustained a 40. Grace Allen is the owner of a two-family house
serious injury in the course of his employment. As a which contains two identical apartments. Allen lives in
result of the injury sustained, he received the following one apartment and rents out the other. During the cur
payments during the year: rent year, the rental apartment was fully occupied and
she received $4,800 in rent. During the year she paid the
Workmen’s compensation $ 1,200 following amounts:
Reimbursement from his employer’s
accident and health plan for Real estate taxes $ 2,200
medical expenses paid by Larsen 900 Painting of rental apartment 600
Damages for personal injuries 4,000 Annual fire insurance premium 400
The amount to be included in Larsen’s gross income for For the current year depreciation for the entire house
the current year should be was determined to be $3,000. Allen should include in
a. $0 her adjusted gross income for the current year
b. $ 900 a. Income of $500.
c. $4,000 b. Loss of $1,000.
d. $6,100 c. Loss of $1,400.
d. Income of $1,400.
38. Harold Brodsky is an electrician employed by a
contracting firm. During the current year he incurred
and paid the following expenses:
Number 3 (Estimated tim e------45 to 55 minutes)
Use of personal auto for company business
(reimbursed by employer for $200) $300 Number 3 consists of two unrelated parts.
Specialized work clothes 550
Union dues 600 Part a. The Rebecca Corporation is a manufac
Cost of income tax preparation 150 turer which produces special machines made to
Preparation of will 100 customer specifications. All production costs are ac
cumulated by means of a job-order costing system. The
If Brodsky were to itemize hispersonal deductions, following information is available at the beginning of
what amount should he claim as miscellaneous deduct the month of October 1980.
ible expenses?
a. $1,300 • Direct materials inventory, October 1 $16,200
b. $1,400 • Work-in-process, October 1 3,600
c. $1,500
d. $1,700 A review of the job-order cost sheets revealed the com
position of the work-in-process inventory on October 1,
39. During 1979 William Clark was assessed a defi as follows:
ciency on his 1978 federal income tax return. As a result
of this assessment he was required to pay $1,120 deter Direct materials $1,320
mined as follows: Direct labor (300 hours) 1,500
Additional tax $900 Factory overhead applied 780
Late filing penalty 60 $3,600
Negligence penalty 90
Interest 70
Activity during the month of October was as follows:
What portion of the $1,120 would qualify as
itemized deductions for 1979? • Direct materials costing $20,000 were purchased.
a. $0 • Direct labor for job orders totaled 3,300 hours
b. $ 70 at $5 per hour.
c. $150 • Factory overhead was applied to production at
d. $220 the rate of $2.60 per direct labor hour.
73
On October 31, inventories consisted of the following The following activity occurred during the month
components: of June:
Direct materials inventory $17,000 • 10,000 units were transferred in from the
Molding Department at a cost of $160,000.
Work-in-process inventory: • $150,000 of costs were added by the Assembling
Department:
Direct materials $4,320
Direct labor (500 hours) 2,500 Direct materials $ 96,000
Factory overhead applied 1,300 Direct labor 36,000
$ 8,120 Factory overhead
applied 18,000
Required: $150,000
Prepare in good form a detailed statement of the
cost of goods manufactured for the month of October. • 8,000 units were completed and transferred to
the Finishing Department.
Part b. Lakeview Corporation is a manufacturer At June 30, 4,000 units were still in work-in-
that uses the weighted-average process-cost method to process. The degree of completion of work-in-process at
account for costs of production. Lakeview manufac June 30, was as follows:
tures a product that is produced in three separate
departments: Molding, Assembling, and Finishing. The Direct materials 90%
following information was obtained for the Assembling Direct labor 70%
Department for the month of June 1980. Factory overhead applied 35%
Work-in-process, June 1 -- 2,000 units composed of Required:
the following: Prepare in good form a cost of production report
for the Assembling Department for the month of June.
Degree o f Show supporting computations in good form. The
Amount Completion report should include:
Transferred in from the • Equivalent units of production;
Molding Department $32,000 100% • Total manufacturing costs;
• Cost per equivalent unit;
Costs added by • Dollar amount of ending work-in-process;
the Assembling • Dollar amount of inventory cost transferred
Department: out.
Direct materials $20,000 100%

Direct labor 7,200 60%
Factory overhead
applied 5,500 50%
32,700
Work-in-process,
June 1 $64,700
74
Number 4 (Estimated time 45 to 55 minutes)
Presented below are comparative statements of financial position of Kenwood Corporation as of December
31, 1979, and December 31, 1978, respectively.
Kenwood Corporation
Statement o f Financial Position
December 31, Increase

1979 1978 (Decrease)
Assets
Current assets:
Cash $ 100,000 $ 90,000 $ 10,000
Accounts receivable (net of
allowance for uncollectible
accounts of $10,000 and
$8,000, respectively) 210,000 140,000 70,000
Inventories 260,000 220,000 40,000
Total current assets 570,000 450,000 120,000
Land 325,000 200,000 125,000

Plant and equipment 580,000 633,000 (53,000)
Less: accumulated depreciation (90,000) (100,000) 10,000
Patents 30,000 33,000 (3,000)
Total assets $1,415,000 $1,216,000 $199,000
Liabilities and Shareholders'

Equity
Liabilities:
Current liabilities:
Accounts payable $ 260,000 $ 200,000 $ 60,000
Accrued expenses 200,000 210,000 (10,000)
Total current liabilities 460,000 410,000 50,000
Deferred income taxes 140,000 100,000 40,000
Long-term bonds (due
December 15, 1990) 130,000 180,000 (50,000)
Total liabilities 730,000 690,000 40,000
Shareholders’ equity:
Common stock, par value $5,
authorized 100,000 shares,
issued and outstanding 50,000
and 42,000 shares, respectively 250,000 210,000 40,000
Additional paid-in capital 233,000 170,000 63,000
Retained earnings 202,000 146,000 56,000
Total shareholders’ equity 685,000 526,000 159,000
Total liabilities and shareholders’
equity $1,415,000 $1,216,000 $199,000
75
Presented below is the income statement of Ken- Additional information:

wood Corporation for the year ended December 31, • On February 2, 1979, Kenwood issued a 10%
1979. stock dividend to shareholders of record on January 15,
1979. The market price per share of the common stock
Kenwood Corporation on February 2, 1979, was $15.
INCOME STATEMENT • On March 1, 1979, Kenwood issued 3,800
For the Year Ended December 31, 1979 shares of common stock for land. The common stock
and land had current market values of approximately
Sales $1,000,000 $40,000 on March 1, 1979.
Expenses: • On April 15, 1979, Kenwood repurchased long
term bonds with a face value of $50,000. The gain of
Cost of sales 560,000 $22,000 was reported as an extraordinary item on the in
Salary and wages 190,000 come statement.
Depreciation 20,000 • On June 30, 1979, Kenwood sold equipment
Amortization 3,000 costing $53,000, with a book value of $23,000, for
Loss on sale of equipment 4,000 $19,000 cash.
Interest 16,000 • On September 30, 1979, Kenwood declared and
Miscellaneous 8,000 paid a $0.04 per share cash dividend to shareholders of
record August 1, 1979.
Total expenses 801,000 • On October 10, 1979, Kenwood purchased land
Income before income taxes for $85,000 cash.
and extraordinary item 199,000 • Deferred income taxes represent timing dif
Income taxes ferences relating to the use of accelerated depreciation
Current 50,000 methods for income tax reporting and straight-line
Deferred 40,000 depreciation methods for financial statement reporting.
Provision for income taxes 90,000
Required:
Income before extraordinary item 109,000 Using the working-capital concept of funds,
prepare a statement of changes in financial position of
Extraordinary item - gain Kenwood Corporation for the year ended December 31,
on repurchase of long-term 1979. (Do not prepare a schedule of changes in working
bonds (net of $10,000 income tax) 12,000 capital.)
Net income $ 121,000
Earnings per share:

Income before extraordinary item $2.21
Extraordinary item .24
Net income $2.45
76
Number 5 (Estimated tim e----- 40 to 50 minutes) 3. On July 5, 1979, the City signed a contract with
F&A Construction Company to build the
The City of Westgate’s fiscal year ends on June 30. library for $4,980,000.
During the fiscal year ended June 30, 1979, the City 4. On January 15, 1980, the library capital proj
authorized the construction of a new library and sale of ects fund received $3,040,000, from the maturi
general obligation term bonds to finance the construc ty of short-term notes purchased on July 3. The
tion of the library. The authorization imposed the cost of these notes was $3,000,000. The interest
following restrictions: of $40,000 was transferred to the library debt
service fund.
• Construction cost was not to exceed $5,000,000;
• Annual interest rate was not to exceed 5. On January 20, 1980, F&A Construction Com
pany properly billed the City $3,000,000 for
The City does not record project authorizations, but work performed on the new library. The con
other budgetary accounts are maintained. The follow tract calls for 10% retention until final inspec
ing transactions relating to the financing and construc tion and acceptance of the building. The library
ting of the library occurred during the fiscal year ended capital projects fund paid F&A $2,700,000.
June 30, 1980: 6. On June 30, 1980, the Library Capital Projects
Fund made the proper adjusting entries (in
1. On July 1, 1979, the City issued $5,000,000 of cluding accrued interest receivable of $103,000)
30 year 8% general obligation bonds for and closing entries.
$5,100,000. The semiannual interest dates are
December 31 and June 30. The premium of Required:
$100,000 was transferred to the library debt ser 1. Prepare in good form journal entries to record
vice fund. the six preceding sets of facts in the Library Capital Pro
2. On July 3, 1979, the library capital projects jects Fund. List the transaction numbers (1 to 6) and
fund invested $4,900,000 in short-term com give the necessary entry or entries. Do not record jour
mercial paper. These purchases were at face nal entries in any other Fund or Group of Accounts.
value with no accrued interest. Interest on cash 2. Prepare in good form a Balance Sheet for the
invested by the library capital projects fund City of Westgate—Library Capital Projects Fund as of
must be transferred to the library debt service June 30, 1980.
fund. During the fiscal year ending June 30,
1980, estimated interest to be earned is
$140,000.
77
November 6, 1980; 8:30 A.M. to 12:00 M
Estimated Minutes
No. 1 ..................... 90 110

No. 2 ..................... 15 25
No. 3 ..................... 15 25
No. 4 ..................... 15 25
No. 5 ..................... 15 25
T otal............. 150 210
1. You must arrange the papers in numerical order of you are uncertain of the answer. You are likely to
the questions. If more than one page is required get the highest score if you omit no answers.
for an answer, write “continued” at the bottom of
2. Answer a ll objective-type items on the printed tion of the subject matter, the ability to organize
your advantage to attempt all questions even if language will be considered by the examiners.
78
Auditing
Number 1 (Estimated time----- 90 to 110 minutes) 4. When a CPA prepares a federal income tax return
for an audit client, one would expect
Instructions a. The CPA to take a position of client ad
vocacy.
Select the best answer for each of the following b. The CPA to take a position of independent
items. Use a soft pencil, preferably No. 2, to blacken the neutrality.
appropriate circle on the separate printed answer sheet c. The taxable net income in the audited finan
to indicate your answer. Mark only one answer for each cial statements to agree with taxable net in
item. Answer all items. Your grade will be based on come in the federal income tax return.
your total correct answers. d. The expenses in the audited financial
The following is an example of the manner in which statements to agree with the deductions in the
the answer sheet should be marked: federal income tax return.
Item 5. Auditing interpretations, which are issued by the
staff of the AICPA Auditing Standards Division in
96. One of the generally accepted auditing standards order to provide timely guidance on the application of
specifies that the auditor should pronouncements of the Auditing Standards Board, are
a. Inspect all fixed assets acquired during the a. Less authoritative than a pronouncement of
year. the Auditing Standards Board.
b. Charge fair fees based on cost. b. Equally authoritative as a pronouncement of
c. Make a proper study and evaluation of the ex the Auditing Standards Board.
isting internal control. c. More authoritative than a pronouncement of
d. Count client petty-cash funds. the Auditing Standards Board.
d. Nonauthoritative opinions which are issued
Answer Sheet without consulting members of the Auditing
Standards Board.
96. 6. When outside firms of nonaccountants specializ
Items to be Answered ing in the taking of physical inventories are used to
count, list, price and subsequently compute the total
dollar amount of inventory on hand at the date of the
1. Which of the following is not a typical analytical physical count, the auditor will ordinarily
review procedure? a. Consider the report of the outside inventory
a. Study of relationships of the financial infor taking firm to be an acceptable alternative
mation with relevant nonfinancial informa procedure to the observation of physical in
tion. ventories.
b. Comparison of the financial information with b. Make or observe some physical counts of the
similar information regarding the industry in inventory, recompute certain inventory
which the entity operates. calculations and test certain inventory trans
c. Comparison of recorded amounts of major actions.
disbursements with appropriate invoices. c. Not reduce the extent of work on the physical
d. Comparison of the financial information with count of inventory.
budgeted amounts. d. Consider the reduced audit effort with respect
to the physical count of inventory as a scope
2. Which of the following would be least likely to be limitation.
included in an auditor’s tests of compliance?
a. Inspection. 7. All corporate capital stock transactions should
b. Observation. ultimately be traced to the
c. Inquiry. a. Minutes of the Board of Directors.
d. Confirmation. b. Cash receipts journal.
c. Cash disbursements journal.
3. When erroneous data are detected by computer d. Numbered stock certificates.
program controls, such data may be excluded from pro
cessing and printed on an error report. The error report
should most probably be reviewed and followed up by 8. Tests of compliance are concerned primarily with
the each of the following questions except
a. EDP control group. a. How were the procedures performed?
b. System analyst. b. Why were the procedures performed?
c. Supervisor of computer operations. c. Were the necessary procedures performed?
d. Computer programmer. d. By whom were the procedures performed?
79
9. Stone was asked to perform the first audit of a 13. According to the AICPA rules of conduct, con
wholesale business that does not maintain perpetual in tingent fees are permitted by CPAs engaged in tax prac
ventory records. Stone has observed the current inven tice because
tory but has not observed the physical inventory at the a. This practice establishes fees which are com
previous year-end date and concludes that the opening mensurate with the value of the services.
inventory balance, which is not auditable, is a material b. Attorneys in tax practice customarily set con
factor in the determination of cost of goods sold for the tingent fees.
current year. Stone will probably c. Determinations by taxing authorities are a
a. Decline the engagement. matter of judicial proceedings which do not
b. Express an unqualified opinion on the balance involve third parties.
sheet and income statement except for inven d. The consequences are based upon findings of
tory. judicial proceedings or the findings of tax
c. Express an unqualified opinion on the balance authorities.
sheet and disclaim an opinion on the income
statement. 14. A decision table is most closely associated with
d. Disclaim an opinion on the balance sheet and which of the following auditor functions?
income statement. a. Preparation of a generalized EDP computer
audit program.
10. A basic objective of a CPA firm is to provide pro b. Preliminary review of the client’s system of in
fessional services to conform with professional stan ternal control.
dards. Reasonable assurance of achieving this basic ob c. Performance of tests of balances and trans
jective is provided through actions.
a. Continuing professional education. d. Preparation of an audit program.
b. A system of quality control.
c. Compliance with generally accepted reporting 15. The annual report of a publicly held company
standards. presents the prior year’s financial statements which are
d. A system of peer review. clearly marked “ unaudited” in comparative form with
current year audited financial statements. The auditor’s
11. Cortney has moved to a distant city but desires to report should
continue to retain Blake, CPA, to prepare his personal a. Express an opinion on the audited financial
federal tax return. Blake telephones Cortney after statements and contain a separate paragraph
receiving his written list of information to be used in the describing the responsibility assumed for the
preparation of the tax return because it appears to con financial statements of the prior period.
tain an understatement of interest expense. Based upon b. Disclaim an opinion on the unaudited finan
the conversation Blake learns that the interest expense cial statements, modify the consistency
should be double the amount indicated on the written phrase, and express an opinion on the current
list. Blake, who asked Cortney to send a photocopy of year’s financial statements.
the supporting evidence indicating the correct amount c. State that the unaudited financial statements
of the interest expense, has not received the cor are presented solely for comparative purposes
respondence and the filing deadline is five days away. and express an opinion only on the current
Under the circumstances Blake should year’s financial statements.
a. Prepare the return based upon the written in d. Express an opinion on the audited financial
formation received and not sign the preparer’s statements and state whether the unaudited
declaration. financial statements were compiled or re
b. Prepare the return based upon the written in viewed.
formation received, clearly indicating that an
amended return will follow. 16. Under which of the following circumstances may
c. Prepare the return based upon the written and audited financial statements contain a note disclosing a
oral information received. subsequent event which is labeled unaudited?
d. Send Cortney a telegram indicating that no a. When the subsequent event does not require
tax return will be prepared until all requested adjustment of the financial statements.
data are received. b. When the event occurs after completion of
fieldwork and before issuance of the auditor’s
report.
12. The auditor’s preliminary understanding of the c. When audit procedures with respect to the
client’s EDP system is primarily obtained by subsequent event were not performed by the
a. Inspection. auditor.
b. Observation. d. When the event occurs between the date of the
c. Inquiry. auditor’s original report and the date of the
d. Evaluation. reissuance of the report.
80
Auditing
17. When an independent CPA is associated with the 23. For a reporting entity that has participated in
financial statements of a publicly held entity, but has related party transactions that are material, disclosure
not audited or reviewed such statements, the ap in the financial statements should include
propriate form of report to be issued must include a (an) a. The nature of the relationship and the terms
a. Negative assurance. and manner of settlement.
b. Compilation opinion. b. Details of the transactions within major
c. Disclaimer of opinion. classifications.
d. Explanatory paragraph. c. A statement to the effect that a transaction
was consummated on terms no less favorable
18. In order to efficiently establish the correctness of than those that would have been obtained if
the accounts payable cutoff, an auditor will be most the transaction had been with an unrelated
likely to party.
a. Coordinate cutoff tests with physical inven d. A reference to deficiencies in the entity’s
tory observation. system of internal accounting control.
b. Compare cutoff reports with purchase orders.
c. Compare vendors’ invoices with vendors’ 24. Which of the following should be recognized in the
statements. auditor’s report, whether or not the item is fully dis
d. Coordinate mailing of confirmations with closed in the financial statements?
cutoff tests. a. A change in accounting estimate.
b. Correction of an error not involving a change
19. The auditor is most likely to verify accrued com in accounting principle.
missions payable in conjunction with the c. A change from a nonaccepted accounting
a. Sales cutoff review. principle to a generally accepted one.
b. Verification of contingent liabilities. d. A change in classification.
c. Review of post balance sheet date dis
bursements. 25. An auditor will use the EDP test data method in
d. Examination of trade accounts payable. order to gain certain assurances with respect to the
a. Input data.
20. When using a statistical sampling plan, the auditor b. Machine capacity.
would probably require a smaller sample if the c. Procedures contained within the program.
a. Population increases. d. Degree of keypunching accuracy.
b. Desired precision interval narrows.
c. Desired reliability decreases. 26. A CPA’s retention of client records as a means of
d. Expected error occurrence rate increases. enforcing payment of an overdue audit fee is an action
that is
21. Auditors often request that the audit client send a a. Not addressed by the AICPA Code of Profes
letter of inquiry to those attorneys who have been con sional Ethics.
sulted with respect to litigation, claims, or assessments. b. Acceptable if sanctioned by the state laws.
The primary reason for this request is to provide the c. Prohibited under the AICPA rules of con
auditor with duct.
a. An estimate of the dollar amount of the prob d. A violation of generally accepted auditing
able loss. standards.
b. An expert opinion as to whether a loss is 27. Which of the following best describes how the
possible, probable or remote. detailed audit program of the CPA who is engaged to
c. Information concerning the progress of cases audit the financial statements of a large publicly held
to date. company compares with the audit client’s comprehen
d. Corroborative evidential matter. sive internal audit program?
a. The comprehensive internal audit program is
22. A note to the financial statements of the First more detailed and covers areas that would
Security Bank indicates that all of the records relating to normally not be reviewed by the CPA.
the bank’s business operations are stored on magnetic b. The comprehensive internal audit program is
discs, and that there are no emergency back-up systems more detailed although it covers less areas
or duplicate discs stored since the First Security Bank than would normally be covered by the CPA.
and their auditors consider the occurrence of a c. The comprehensive internal audit program is
catastrophe to be remote. Based upon this, one would substantially identical to the audit program
expect the auditor’s report to express used by the CPA because both review substan
a. A “ subject to’’ opinion. tially identical areas.
b. An “ except for’’ opinion. d. The comprehensive internal audit program is
c. An unqualified opinion. less detailed and covers less areas than would
d. A qualified opinion. normally be reviewed by the CPA.
81
28. Which of the following statements with respect to 33. Which of the following is not a Management Ad
an auditor’s report expressing an opinion on a specific visory Service Practice Standard?
item on a financial statement is correct? a. In performing management advisory service,
a. Materiality must be related to the specified a practitioner must act with integrity and ob
item rather than to the financial statements jectivity and be independent in mental at
taken as a whole. titude.
b. Such a report can only be expressed if the b. The management advisory services engage
auditor is also engaged to audit the entire set ment is to be performed by a person or per
of financial statements. sons having adequate technical training as a
c. The attention devoted to the specified item is management consultant.
usually less than it would be if the financial c. Management advisory service engagements
statements taken as a whole were being are to be performed by practitioners having
audited. competence in the analytical approach and
d. The auditor who has issued an adverse process, and in the technical subject matter
opinion on the financial statements taken as a under consideration.
whole can never express an opinion on a d. Before undertaking a management advisory
specified item in these financial statements. service engagement, a practitioner is to notify
the client of any reservations regarding an
29. An auditor would be least likely to use confirma ticipated benefits.
tions in connection with the examination of
a. Inventories. 34. Which of the following procedures is least likely to
b. Long-term debt. be performed before the balance sheet date?
c. Property, plant, and equipment. a. Observation of inventory.
d. Stockholders’ equity. b. Review of internal control over cash
disbursements.
c. Search for unrecorded liabilities.
d. Confirmation of receivables.
30. The sequence of steps in gathering evidence as the
basis of the auditor’s opinion is: 35. With respect to an internal control measure that
a. Substantive tests, internal control review and will assure accountability for fixed asset retirements,
compliance tests. management should implement a system that includes
b. Internal control review, substantive tests and a. Continuous analysis of miscellaneous revenue
compliance tests. to locate any cash proceeds from sale of plant
c. Internal control review, compliance tests and assets.
substantive tests. b. Periodic inquiry of plant executives by inter
d. Compliance tests, internal control review and nal auditors as to whether any plant assets
substantive tests. have been retired.
c. Continuous utilization of serially numbered
31. The auditor’s count of the client’s cash should be retirement work orders.
coordinated to coincide with the d. Periodic observation of plant assets by the in
a. Study of the system of internal controls with ternal auditors.
respect to cash.
b. Close of business on the balance sheet date. 36. An auditor would be most likely to learn of slow-
c. Count of marketable securities. moving inventory through
d. Count of inventories. a. Inquiry of sales personnel.
b. Inquiry of stores personnel.
c. Physical observation of inventory.
32. The objective of a review of the interim financial d. Review of perpetual inventory records.
information of a publicly held company is to
a. Provide the accountant with a basis for the ex 37. Which of the following statements best describes
pression of an opinion. the phrase “ generally accepted auditing standards?’’
b. Estimate the accuracy of financial statements a. They identify the policies and procedures for
based upon limited tests of accounting the conduct of the audit.
records. b. They define the nature and extent of the
c. Provide the accountant with a basis for auditor’s responsibilities.
reporting to the board of directors or c. They provide guidance to the auditor with
stockholders. respect to planning the audit and writing the
d. Obtain corroborating evidential matter audit report
through inspection, observation and confir d. They set forth a measure of the quality of the
mation. performance of audit procedures.
82
Auditing
38. Which of the following is not one of the auditor’s 44. An auditor evaluates the existing system of inter
primary objectives in an examination of marketable nal control in order to
securities? a. Determine the extent of compliance tests
a. To determine whether securities are authentic. which must be performed.
b. To determine whether securities are the prop b. Determine the extent of substantive tests
erty of the client. which must be performed.
c. To determine whether securities actually exist. c. Ascertain whether irregularities are probable.
d. To determine whether securities are properly d. Ascertain whether any employees have incom
classified on the balance sheet. patible functions.
45. A CPA has audited financial statements and
39. The “ generally accepted auditing standards” are issued an unqualified opinion on them. Subsequently
standards which the CPA was requested to compile financial statements
a. Are sufficiently established so that indepen for the same period that omit substantially all
dent auditors generally agree on their ex disclosures and are to be used for comparative pur
istence. poses. In these circumstances the CPA may report on
b. Are generally accepted based upon a pro comparative compiled financial statements that omit
nouncement of the Financial Accounting such disclosures provided the
Standards Board. a. Missing disclosures are immaterial in amount.
c. Are generally accepted in response to the b. Financial statements and notes appended
changing needs of the business community. thereto are not misleading.
d. Are generally accepted as a consequence of c. Accountant’s report indicates the previous
approval of the AICPA membership. audit and the date of the previous report.
d. Previous auditor’s report accompanies the
comparative financial statement.
40. Which of the following is a primary function of
the purchasing department? 46. Which of the following eliminates voluminous
a. Authorizing the acquisition of goods. details from the auditor’s working trial balance by
b. Ensuring the acquisition of goods of a classifying and summarizing similar or related items?
specified quality. a. Account analyses.
c. Verifying the propriety of goods acquired. b. Supporting schedules.
d. Reducing expenditures for goods acquired. c. Control accounts.
41. Use of the ratio estimation sampling technique to d. Lead schedules.
estimated dollar amounts is inappropriate when
a. The total book value is known and cor 47. To replace the human element of error detection
responds to the sum of all the individual book associated with manual processing, a well-designed
values. automated system will introduce
b. A book value for each sample item is a. Dual circuitry.
unknown. b. Programmed limits.
c. There are some observed differences between c. Echo checks.
audited values and book values. d. Read after write.
d. The audited values are nearly proportional to
the book values. 48. Rogers & Co., CPAs, policies require that all
members of the audit staff submit weekly time reports
42. Several years ago Conway, Inc., secured a conven to the audit manager, who then prepares a weekly sum
tional real estate mortgage loan. Which of the following mary work report regarding variance from budget for
audit procedures would be least likely to be performed Rogers’ review. This provides written evidence of
by an auditor examining the mortgage balance? Rogers & Co.’s professional concern regarding com
a. Examine the current years’ cancelled checks. pliance with which of the following generally accepted
b. Review the mortgage amortization schedule. auditing standards?
c. Inspect public records of lien balances. a. Quality control.
d. Recompute mortgage interest expense. b. Due professional care.
c. Adequate review.
43. Jones, CPA, believes the industry-wide occurrence d. Adequate planning.
rate of client billing errors is 3% and has established a 49. In the examination of which of the following
maximum acceptable occurrence rate of 5%. In the general ledger accounts will tests of procedures be par
review of client invoices Jones should use ticularly appropriate?
a. Discovery sampling. a. Equipment.
b. Attribute sampling. b. Bonds payable.
c. Stratified sampling. c. Bank charges.
d. Variable sampling. d. Sales.
83
50. Which of the following analytical review pro 54. When examining a client’s statement of changes in
cedures, should be applied to the income statement? financial position, for audit evidence, an auditor will
a. Select sales and expense items and trace rely primarily upon
amounts to related supporting documents. a. Determination of the amount of working
b. Ascertain that the net income amount in the capital at year-end.
statement of changes in financial position b. Cross-referencing to balances and transac
agrees with the net income amount in the in tions reviewed in connection with the ex
come statement. amination of the other financial statements.
c. Obtain from the proper client representatives, c. Analysis of significant ratios of prior years as
the beginning and ending inventory amounts compared to the current year.
that were used to determine costs of sales. d. The guidance provided by the APB Opinion
d. Compare the actual revenues and expenses on the statement of changes in financial
with the corresponding figures of the previous position.
year and investigate significant differences.
55. The SEC has strengthened auditor independence
51. Which of the following is the best audit procedure by requiring that management
for determining the existence of unrecorded liabilities? a. Engage auditors to report in accordance with
a. Examine confirmation requests returned by the Foreign Corrupt Practices Act.
creditors whose accounts appear on a sub b. Report the nature of disagreements with
sidiary trial balance of accounts payable. former auditors.
b. Examine unusual relationships between c. Select auditors through audit committees.
monthly accounts payable balances and d. Acknowledge their responsibility for the
recorded purchases. fairness of the financial statements.
c. Examine a sample of invoices a few days prior
to and subsequent to year end to ascertain 56. A company issues audited financial statements
whether they have been properly recorded. under circumstances which require the presentation of a
d. Examine a sample of cash disbursements in statement of changes in financial position. If the com
the period subsequent to year end. pany refuses to present a statement of changes in finan
cial position, the independent auditor should
52. Which of the following procedures would best a. Disclaim an opinion.
detect the theft of valuable items from an inventory that b. Prepare a statement of changes in financial
consists of hundreds of different items selling for $1 to position and note in a middle paragraph of the
$10 and a few items selling for hundreds of dollars? report that this statement is auditor-prepared.
a. Maintain a perpetual inventory of only the c. Prepare a statement of changes in financial
more valuable items with frequent periodic position and disclose in a footnote that this
verification of the validity of the perpetual in statement is auditor-prepared.
ventory record. d. Qualify his opinion with an “ except for’’
b. Have an independent CPA firm prepare an in qualification and a description of the omis
ternal control report on the effectiveness of sion in a middle paragraph of the report.
the administrative and accounting controls
over inventory.
c. Have separate warehouse space for the more 57. In determining the adequacy of the allowance for
valuable items with sequentially numbered uncollectible accounts, the least reliance should be
tags. placed upon which of the following?
d. Require an authorized officer’s signature on a. The credit manager’s opinion.
all requisitions for the more valuable items. b. An aging schedule of past due accounts.
c. Collection experience of the client’s collection
53. It would not be appropriate for the auditor to in agency.
itiate discussion with the audit committee concerning d. Ratios calculated showing the past relation
a. The extent to which the work of internal ship of the valuation allowance to net credit
auditors will influence the scope of the sales.
examination.
b. Details of the procedures which the auditor in 58. When title to merchandise in transit has passed to
tends to apply. the audit client, the auditor engaged in the performance
c. The extent to which change in the company’s of a purchase cutoff will encounter the greatest diffi
organization will influence the scope of the culty in gaining assurance with respect to the
examination. a. Quantity.
d. Details of potential problems which the b. Quality.
auditor believes might cause a qualified c. Price.
opinion. d. Terms.
84
Auditing
59. A CPA examining inventory may appropriately Number 4 (Estimated time----- 15 to 25 minutes)
apply sampling for attributes in order to estimate the
a. Average price of inventory items. The Art Appreciation Society operates a museum
b. Percentage of slow-moving inventory items. for the benefit and enjoyment of the community. Dur
c. Dollar value of inventory. ing hours when the museum is open to the public, two
d. Physical quantity of inventory items. clerks who are positioned at the entrance collect a five
dollar admission fee from each nonmember patron.
60. A corporate balance sheet indicates that one of the Members of the Art Appreciation Society are permitted
corporate assets is a patent. An auditor will most likely to enter free of charge upon presentation of their
obtain evidence regarding the continuing validity and membership cards.
existence of this patent by obtaining a written represen At the end of each day one of the clerks delivers the
tation from proceeds to the treasurer. The treasurer counts the cash
a. A patent attorney. in the presence of the clerk and places it in a safe. Each
b. A regional State Patent Office. Friday afternoon the treasurer and one of the clerks
c. The patent inventor. deliver all cash held in the safe to the bank, and receive
d. The patent owner. an authenticated deposit slip which provides the basis
for the weekly entry in the cash receipts journal.
Number 2 (Estimated time----- 15 to 25 minutes) The board of directors of the Art Appreciation
Society has identified a need to improve their system of
Rose & Co., CPAs, has satisfactorily completed the internal control over cash admission fees. The board has
examination of the financial statements of Bale & determined that the cost of installing turnstiles, sales
Booster, a partnership, for the year ended December 31, booths or otherwise altering the physical layout of the
1979. The financial statements which were prepared on museum will greatly exceed any benefits which may be
the entity’s income tax (cash) basis include footnotes derived. However, the board has agreed that the sale of
which indicate that the partnership was involved in con admission tickets must be an integral part of its im
tinuing litigation of material amounts relating to alleged provement efforts.
infringement of a competitor’s patent. The amount of Smith has been asked by the board of directors of
damages, if any, resulting from this litigation could not the Art Appreciation Society to review the internal con
be determined at the time of completion of the engage trol over cash admission fees and provide suggestions
ment. The prior years’ financial statements were not for improvement.
presented.
Required:
Required: Indicate weaknesses in the existing system of inter
Based upon the information presented, prepare an nal control over cash admission fees,which Smith should
auditor’s report which includes appropriate explanatory identify, and recommend one improvement for each of
disclosure of significant facts. the weaknesses identified.
Organize the answer as indicated in the following il
lustrative example:
Number 3 (Estimated time 15 to 25 minutes)
Weakness Recommendation
The auditor should obtain a level of knowledge of
the entity’s business, including events, transactions, and 1. T h e re is no b a s is fo r 1. P r e n u m b e re d a d m is s io n
practices, that will enable the planning and performance e s ta b lis h in g th e d o c u m e n ta tio n tic k e ts s h o u ld b e issu e d u p o n
of an examination in accordance with generally ac o f th e n u m b e r o f p a y in g p a tr o n s . p a y m e n t o f th e a d m is s io n fee.
cepted auditing standards. Adhering to these standards
enables the auditor’s report to lend credibility to finan
cial statements by providing the public with certain
assurances.
Required
a. How does knowledge of the entity’s business
help the auditor in the planning and performance of an
examination in accordance with generally accepted
auditing standards?
b. What assurances are provided to the public
when the auditor states that the financial statements
“ present fairly... in conformity with generally accepted
accounting principles applied on a consistent basis’’?
85
Examination Questions—November 1980
Number 5 (Estimated tim e----- 15 to l5 minutes)
James, who was engaged to examine the financial statements of Talbert Corporation, is about to audit payroll.
Talbert uses a computer service center to process weekly payroll as follows:
Each Monday Talbert’s payroll clerk inserts data in appropriate spaces on the preprinted service center prepared in
put form, and sends it to the service center via messenger. The service center extracts new permanent data from the input
form and updates master files. The weekly payroll data are then processed. The weekly payroll register and payroll checks
are printed and delivered by messenger to Talbert on Thursday.
Part of the sample selected for audit by James includes the following input form and payroll register:
Talbert Corporation Payroll Input — Week Ending Friday, Nov. 23, 1979
— Employee Data — Permanent Fite - — Current Week's Payroll Data —

W-4 Hourly Hours Special Deductions
Name Social Security Information Rate Reg OT Bonds Union Other
A. Bell 999-99-9991 M-1 10.00 35 5 18.75

B. Carr 999-99-9992 M-2 10.00 35 4
C. Dawn 999-99-9993 S-1 10.00 35 6 18.75 4.00
D. Ellis 999-99-9994 S-1 10.00 35 2 4.00 50.00
E. Frank 999-99-9995 M-4 10.00 35 1 4.00
F. Gillis 999-99-9996 M-4 10.00 35 4.00
G. Hugh 999-99-9997 M-1 7.00 35 2 18.75 4.00
H. Jones 999-99-9998 M-2 7.00 35 4.00 25.00
J. King 999-99-9999 S-1 7.00 35 4 4.00
New Employee
J. Smith 999-99-9990 M-3 7.00 35
Talbert Corporation Payroll Register — Nov. 23, 1979
Social Hours Payroll Gross Taxes Withheld Other Net Check

Employee Security Reg OT Regular OT Payroll FICA Fed State Withheld Pay No.
A. Bell 999-99-9991 35 5 350.00 75.00 425.00 26.05 76.00 27.40 18.75 276.80 1499
B. Carr 999-99-9992 35 4 350.00 60.00 410.00 25.13 65.00 23.60 296.27 1500
C. Dawn 999-99-9993 35 6 350.00 90.00 440.00 26.97 100.90 28.60 22.75 260.78 1501
D. Ellis 999-99-9994 35 2 350.00 30.00 380.00 23.29 80.50 21.70 54.00 200.51 1502
E. Frank 999-99-9995 35 1 350.00 15.00 365.00 22.37 43.50 15.90 4.00 279.23 1503
F. Gillis 999-99-9996 35 350.00 350.00 21.46 41.40 15.00 4.00 268.14 1504
G. Hugh 999-99-9997 35 2 245.00 21.00 266.00 16.31 34.80 10.90 22.75 181.24 1505
H. Jones 999-99-9998 35 245.00 245.00 15.02 26.40 8.70 29.00 165.88 1506
J. King 999-99-9999 35 4 245.00 42.00 287.00 17.59 49.40 12.20 4.00 203.81 1507
J. Smith 999-99-9990 35 245.00 245.00 15.02 23.00 7.80 199.18 1508
Totals 350 24 3,080.00 333.00 3,413.00 209.21 540.90 171.80 159.25 2,331.84
Required:
a. Describe how James should verify the information in the payroll input form shown above.
b. Describe (but do not perform) the procedures that James should follow in the examination of the November 23,
1979, payroll register shown above.
86
(Prepared by th e B oard o f Exam iners of the A m erican Institute of Certified Public A ccountants
and adopted by the exam ining boards of all states, territories, and the D istrict of Colum bia.)
(Commercial Law)
November 7, 1980; 8:30 AM to 12:00 M.
Estimated Minutes
No. 1 no 130
No. 2 15 20
No. 3 15 20
No. 4 15 20
No. 5 15 20
Total 170 210
87
Number 1 (Estimated tim e----- 110 to 130 minutes) 3. Your client, Globe, Inc., has in its possession an
undated instrument which is payable 30 days after date.
Instructions It is believed that the instrument was issued on or
about August 10, 1980, by Dixie Manufacturing, Inc.,
to Harding Enterprises in payment of goods purchased.
Select the best answer for each of the following On August 13, 1980, it was negotiated to Desert
items. Use a soft pencil, preferably No. 2, to blacken the Products, Inc., and thereafter to Globe on the 15th.
appropriate circle on the separate printed answer sheet Globe took for value, in good faith and without notice
to indicate your answer. Mark only one answer for each of any defense. It has been learned that the goods
item. Answer all items. Your grade will be based on shipped by Harding to Dixie are defective. Which of the
your total correct answers. following is correct?
The following is an example of the manner in which a. Since the time of payment is indefinite, the in
the answer sheet should be marked: strument is non-negotiable and Globe can not
qualify as a holder in due course.
Item b. By issuing an undated instrument payable 30
days after date, Dixie was reserving the right
to avoid liability on it until it filled in or
99. The text of the letter from Bridge Builders, Inc. to authorized the filling in of the date.
Allied Steel Co. follows: c. Since the defense involves a rightful rejection
of the goods delivered, it is valid against
We offer to purchase 10,000 tons of No. 4 Globe.
steel pipes at today’s quoted price for delivery two d. Globe can validly fill in the date and will
months from today. Your acceptance must be qualify as a holder in due course.
received in five days.
4. A CPA’s client has an instrument which contains
Bridge Builders intended to create a (an) certain ambiguities or deficiencies. In construing the in
a. Option contract. strument, which of the following is incorrect?
b. Unilateral contract. a. Where there is doubt whether the instrument
c. Bilateral contract. is a draft or a note, the holder may treat it as
d. Joint contract. either.
b. Handwritten terms control typewritten and
Answer Sheet printed terms, and typewritten terms control
printed terms.
c. An instrument which is payable only upon the
99. © happening of an event that is uncertain as to
Items to be Answered the time of its occurrence is payable at a
definite time if the event has occurred.
1. Who among the following can personally qualify d. The fact that the instrument is antedated will
as a holder in due course? not affect the instrument’s negotiability.
a. A payee.
b. A reacquirer who was not initially a holder in 5. Smith buys a TV set from the ABC Appliance
due course. Store and pays for the set with a check. Later in the day
c. A holder to whom the instrument was Smith finds a better model for the same price at another
negotiated as a gift. store. Smith immediately calls ABC trying to cancel the
d. A holder who had notice of a defect but who sale. ABC tells Smith that they are holding him to the
took from a prior holder in due course. sale and have negotiated the check to their wholesaler,
Glenn Company, as a partial payment on inventory pur
2. The Mechanics Bank refused to pay a check drawn chases. Smith telephones his bank, the Union Trust
upon it by Clyde, one of its depositors. Which of the Bank, and orders the bank to stop payment on the
reasons listed below is not a proper defense for the bank check. Which of the following statements is correct?
to assert when it refused to pay? a. If Glenn can prove it is a holder in due course,
a. The bank believed the check to be an over the drawee bank, Union Trust, must honor
draft as a result of its misdirecting a deposit Smith’s check.
made by Clyde. b. Union Trust is not bound or liable for Smith’s
b. The required indorsement of an intermediary stop payment order unless the order is placed
transferee was missing. in writing.
c. Clyde had orally stopped payment on the c. If Union Trust mistakenly pays Smith’s check
check. two days after receiving the stop order, the
d. The party attempting to cash the check did not bank will not be liable.
have proper identification. d. Glenn can not hold Smith liable on the check.
88
Business Law
6. Marshall Franks purchased $1,050 worth of inven 8, Harrison obtained from Bristow his $11,500 check
tory for his business from Micro Enterprises. Micro in drawn on the Union National Bank in payment for
sisted on the signature of Franks’ former partner, bogus uranium stock. He immediately negotiated it by a
Hobart, before credit would be extended, Hobart reluc blank indorsement to Dunlop in return for $1,000 in
tantly signed. Franks delivered the following instrument cash and her check for $10,400. Dunlop qualified as a
to Micro: holder in due course. She deposited the check in her
checking account in the Oceanside Bank. Upon
January 15, 1980 discovering that the stock was bogus, Bristow notified
Union National to stop payment on his check, which it
We, the undersigned, do hereby promise to did. The check was returned to Oceanside Bank, which
pay to the order of Micro Enterprises, Inc., One in turn debited Dunlop’s account and returned the
Thousand and Fifty Dollars ($1,050.00) on the check to her. Which of the following statements is cor
15th of April, 1980. rect?
a. Dunlop can collect from Union National
Bank since Bristow’s stop payment order was
Marshall Franks invalid in that the defense was only a personal
defense.
b. Oceanside’s debiting of Dunlop’s account was
\ Norman Hobart improper since she qualified as a holder in due
course.
Memo: c. Dunlop can recover $11,500 from Bristow
N. Hobart signed as an despite the stop order, since she qualified as a
accommodation for Franks holder in due course.
d. Dunlop will be entitled to collect only $1,000.
Franks defaulted on the due date. Which of the follow
ing is correct?
a. The instrument is non-negotiable.
b. Hobart is liable on the instrument but only for
$525.
c. Since it was known to Micro that Hobart
signed as an accommodation party, Micro
must first proceed against Franks.
d. Hobart is liable on the instrument for the full
amount and is obligated to satisfy it im
mediately upon default. 9. An otherwise valid negotiable bearer note is signed
with the forged signature of Darby. Archer, who be
lieved he knew Darby’s signature, bought the note in
good faith from Harding, the forger. Archer transferred
7. Rapid Delivery, Inc., has in its possession the the note without indorsement to Barker, in partial pay
following instrument which it purchased for value. ment of a debt. Barker then sold the note to Chase for
80% of its face amount and delivered it without indorse
ment. When Chase presented the note for payment at
March 1 , 1980 maturity, Darby refused to honor it, pleading forgery.
Chase gave proper notice of dishonor to Barker and to
Thirty days from date, I, Harold Kales, do Archer. Which of the following statements best
hereby promise to pay Ronald Green four describes the situation from Chase’s standpoint?
hundred dollars and no cents ($400.00). This a. Chase can not qualify as a holder in due
note is given for value received. course for the reason that he did not pay face
value for the note.
b. Chase can hold Barker liable on the ground
Harold Kales that Barker warranted to Chase that neither
Darby nor Archer had any defense valid
Which of the following is correct? against Barker.
a. The instrument is negotiable. c. Chase can hold Archer liable on the ground
b. The instrument is non-negotiable, and that Archer warranted to Chase that Darby’s
therefore Rapid has obtained no rights on the signature was genuine,
instrument. d. Chase can not hold Harding, the forger, liable
c. Rapid is an assignee of the instrument and has on the note because his signature does not ap
the same rights as the assignor had on it. pear on it and thus, he made no warranties to
d. The instrument is non-transferable on its face. Chase.
89
10. Hargrove lost some stock certificates of the Apex 13. The Balboa Custom Furniture Company sells fine
Corporation which were registered in his name, but custom furniture. It has been encountering difficulties
which he had indorsed in blank. Flagg found the lately with some customers who have breached their
securities and sold them through a brokerage house to contracts after the furniture they have selected has been
Waldorf. Apex, unaware of Hargrove’s problem, customized to their order or the fabric they have
transferred them to Waldorf. Hargrove is seeking to selected has been cut or actually installed on the piece of
recover the securities or damages for their value. Which furniture purchased. The company therefore wishes to
of the following is correct? resort to a liquidated damages clause in its sales contract
a. The stock in question is transferable but to encourage performance or provide an acceptable
Waldorf takes subject to Hargrove’s claim of amount of damages. Regarding Balboa’s contemplated
title. resort to a liquidated damages clause, which of the
b. Waldorf is a holder in due course of a following is correct?
negotiable instrument and therefore will a. Balboa may not use a liquidated damages
prevail. clause since it is a merchant and is the
c. Apex is liable for wrongfully transferring preparer of the contract.
Hargrove’s stock to Waldorf. b. Balboa can simply take a very large deposit
d. Waldorf qualifies as a bona fide purchaser which will be forfeited if performance by a
and acquires the stock free of Hargrove’s customer is not made for any reason.
adverse claim. c. The amount of the liquidated damages
stipulated in the contract must be reasonable
in light of the anticipated or actual harm
caused by the breach.
d. Even if Balboa uses a liquidated damages
11. Base Electric Co. has entered an agreement to buy clause in its sales contract, it will nevertheless
its actual requirements of copper wiring for six months have to establish that the liquidated damages
from the Seymour Metal Wire Company and Seymour claimed did not exceed actual damages by
Metal has agreed to sell all the copper wiring Base will more than 10%.
require for six months. The agreement between the two
companies is
a. Unenforceable because it is too indefinite. 14. Fernandez is planning to attend an auction of the
b. Unenforceable because it lacks mutuality of assets of Cross & Black, one of his major competitors
obligation. who is liquidating. In the conduct of the auction, which
c. Unenforceable because of lack of considera of the following rules applies?
tion. a. Such a sale is without reserve unless the goods
d. Valid and enforceable. are explicitly put up with reserve.
b. A bidder may retract his bid at any time until
the falling of the hammer.
c. The retraction of a bid by a bidder revives the
previous bid.
d. If the auction is without reserve, the auc
tioneer can withdraw the article at any time
12. Gibbeon Manufacturing shipped 300 designer prior to the fall of the hammer.
navy blue blazers to Custom Clothing Emporeum. The
blazers arrived on Friday, earlier than Custom had an
ticipated and on an exceptionally busy day for its receiv 15. Joseph Manufacturing, Inc., received an order
ing department. They were perfunctorily examined and from Raulings Supply Company for certain valves it
sent to a nearby warehouse for storage until needed. On manufactured. The order called for prompt shipment.
Monday of the following week, upon closer examina In respect to Joseph’s options as to the manner of ac
tion, it was discovered that the quality of the linings of ceptance, which of the following is incorrect?
the blazers was inferior to that specified in the sales con a. Joseph can accept only by prompt shipment
tract. Which of the following is correct insofar as since this was the manner indicated in the
Custom’s rights are concerned? order.
a. Custom can reject the blazers upon subse b. The order is construed as an offer to enter into
quent discovery of the defects. either a unilateral or bilateral contract and
b. Custom must retain the blazers since it ac Joseph may accept by a promise of or prompt
cepted them and had an opportunity to in shipment.
spect them upon delivery. c. If Joseph promptly ships the goods, Raulings
c. Custom’s only course of action is rescission. must be notified within a reasonable time.
d. Custom had no rights if the linings were of d. Joseph may accept by mail, but he must make
merchantable quality. prompt shipment.
90
Business Law
16. Which of the following requirements must be met 19. Perone was a member of Cass, Hack & Perone, a
for modification of a sales contract under the Uniform general trading partnership. He died on August 2, 1980.
Commercial Code? The partnership is insolvent, but Peronc’s estate is
a. There must be consideration present if the substantial. The creditors of the partnership are seeking
contract is between merchants. to collect on their claims from Perone’s estate. Which of
b. There must be a writing if the original sales the following statements is correct insofar as their
contract is in writing. claims are concerned?
c. The modification must satisfy the Statute of a. The death of Perone caused a dissolution of
Frauds if the contract as modified is within its the firm, thereby freeing his estate from per
provisions. sonal liability.
d. The parol evidence rule applies and thus a b. If the existing obligations to Perone’s per
writing is required. sonal creditors are all satisfied, then the re
maining estate assets are available to satisfy
partnership debts.
17. Barstow Hardware Company received an order for c. The creditors must first proceed against the
$850 of assorted hardware from Flanagan & Company. remaining partners before Perone’s estate can
The shipping terms were F.O.B. Mannix Freight Line, be held liable for the partnership’s debts.
seller’s place of business, 2/10, net/30. Barstow packed d. The liability of Perone’s estate can not exceed
and crated the hardware for shipment and it was loaded his capital contribution plus that percentage
upon Mannix Freight’s truck. While the goods were in of the deficit attributable to his capital con
transit to Flanagan, Barstow learned that Flanagan was tribution.
insolvent in the equity sense (unable to pay its debts in
the ordinary course of business). Barstow promptly 20. The partnership agreement of one of your clients
wired Mannix Freight’s office in Pueblo, Colorado, and provides that upon death or withdrawal, a partner shall
instructed them to stop shipment of the goods to be entitled to the book value of his or her partnership in
Flanagan and to store them until further instructions. terest as of the close of the year preceding such death or
Mannix complied with these instructions. Regarding the withdrawal and nothing more. It also provides that the
rights, duties, and liabilities of the parties, which of the partnership shall continue. Regarding this partnership
following is correct? provision, which of the following is a correct statement?
a. Barstow’s stoppage in transit was improper if a. It is unconscionable on its face.
Flanagan’s assets exceeded its liabilities. b. It has the legal effect of preventing a dissolu
b. Flanagan is entitled to the hardware if it pays tion upon the death or withdrawal of a part
cash. ner.
c. Once Barstow correctly learned of Flanagan’s c. It effectively eliminates the legal necessity of a
insolvency, it had no further duty or obliga winding up of the partnership upon the death
tion to Flanagan. or withdrawal of a partner.
d. The fact that Flanagan became insolvent in no d. It is not binding upon the spouse of a deceased
way affects the rights, duties, and obligations partner if the book value figure is less than the
of the parties. fair market value at the date of death.
21. Watson decided to withdraw from the Sterling

Enterprises Partnership. Watson found Holmes as a
18. Divco Corporation manufactured and sold a high prospective purchaser and his successor as a partner in
quality line of distinctive calculators. In order to fully the partnership. The other partners agreed to admit
realize the potential of the products, it decided to Holmes as a general partner in Watson’s place. As a
engage in a franchising arrangement with selected part of the agreement between Watson and Holmes,
outlets throughout the country. Its basic arrangement Holmes promised to satisfy any prior partnership debts
was to grant to each dealer the exclusive right to sell in a for which Watson might be liable. What potential
designated area and each dealer agreed not to sell out liability does Holmes or Watson have to firm creditors?
side its allotted geographic area. Which of the following a. Holmes has no liability for the obligations
best describes the status of the law? arising before he entered the partnership.
a. Such arrangements are per se illegal. b. Holmes is liable for the obligations arising
b. Divco must sell on consignment, thereby re before he entered the partnership, but only to
taining title, in order to avoid illegality. the extent of partnership property.
c. Such franchising arrangements will be tested c. Holmes is fully liable to firm creditors for
under the rule of reason and as long as they liabilities occurring before and after his entry
are found to be reasonable they are legal. into the partnership.
d. Such arrangements are specifically declared to d. Watson’s liability to firm creditors has been
be illegal under existing antitrust statutes. extinguished.
91
22. One of your audit clients, Major Supply, Inc., is 25. Wallers and Company has decided to expand the
seeking a judgment against Danforth on the basis of a scope of its business. In this connection, it contemplates
representation made by one Coleman, in Danforth’s engaging several agents. Which of the following agency
presence, that they were in partnership together doing relationships is within the Statute of Frauds and thus
business as the D & C Trading Partnership. Major Sup should be contained in a signed writing?
ply received an order from Coleman on behalf of D &C a. An irrevocable agency.
and shipped $800 worth of goods to Coleman. Coleman b. A sales agency where the agent normally will
has defaulted on payment of the bill and is insolvent. sell goods which have a value in excess of
Danforth denies he is Coleman’s partner and that he has $500.
any liability for the goods. Insofar as Danforth’s liabili c. An agency for the forthcoming calendar year
ty is concerned, which of the following is correct? which is entered into in mid-December of the
a. Danforth is not liable if he is not in fact prior year.
Coleman’s partner. d. An agency which is of indefinite duration but
b. Since Danforth did not make the statement which is terminable upon one month’s notice.
about being Coleman’s partner, he is not
liable. 26. A power of attorney is a useful method of creation
c. If Major Supply gave credit in reliance upon of an agency relationship. The power of attorney
the misrepresentation made by Coleman, a. Must be signed by both the principal and the
Danforth is a partner by estoppel. agent.
d. Since the “ partnership” is operating under a b. Exclusively determines the purpose and
fictitious name (the D & C Partnership) a fil powers of the agent.
ing is required and Major Supply’s failure to c. Is the written authorization of the agent to act
ascertain whether there was in fact such a on the principal’s behalf.
partnership precludes it from recovering. d. Is used primarily in the creation of the
attorney-client relationship.
23. In the course of your audit of James Fine, doing

business as Fine’s Apparels, a sole proprietorship, you 27. Agents sometimes have liability to third parties for
discovered that in the past year Fine had regularly their actions taken for and on behalf of the principal.
joined with Charles Walters in the marketing of bathing An agent will not be personally liable in which of the
suits and beach accessories. You are concerned whether following circumstances?
Fine and Walters have created a partnership relation a. If he makes a contract which he had no
ship. Which of the following factors is the most impor authority to make but which the principal
tant in ascertaining this status? ratifies.
a. The fact that a partnership agreement is not in b. If he commits a tort while engaged in the prin
existence. cipal’s business.
b. The fact that each has a separate business of c. If he acts for a principal which he knows is
his own which he operates independently. nonexistent and the third party is unaware of
c. The fact that Fine and Walters divide the net this.
profits equally on a quarterly basis. d. If he acts for an undisclosed principal as long
d. The fact that Fine and Walters did not intend as the principal is subsequently disclosed.
to be partners.
28. Mayberry engaged Williams as her agent. It was
mutually agreed that Williams would not disclose that
24. Ms. Walls is a limited partner of the Amalgamated he was acting as Mayberry’s agent. Instead he was to
Limited Partnership. She is insolvent and her debts ex deal with prospective customers as if he were a principal
ceed her assets by $28,000. Goldsmith, one of Walls’ acting on his own behalf. This he did and made several
largest creditors, is resorting to legal process to obtain contracts for Mayberry. Assuming Mayberry, Williams
the payment of Walls’ debt to him. Goldsmith has ob or the customer seeks to avoid liability on one of the
tained a charging order against Walls’ limited partner contracts involved, which of the following statements is
ship interest for the unsatisfied amount of the debt. As a correct?
result of Goldsmith’s action, which of the following will a. Williams has no liability once he discloses that
happen? Mayberry was the real principal.
a. The partnership will be dissolved. b. Mayberry must ratify the Williams contracts
b. Walls’ partnership interest must be redeemed in order to be held liable.
with partnership property. c. The third party may choose to hold either
c. G oldsm ith autom atically becomes a Williams or Mayberry liable.
substituted limited partner. d. The third party can avoid liability because he
d. Goldsmith becomes in effect an assignee of believed he was dealing with Williams as a
Walls’ partnership interest. principal.
92
Business Law
29. Park Manufacturing hired Stone as a traveling 32. The Jolly Finance Company provides the financ
salesman to sell goods manufactured by Park. Stone ing for Triple J Appliance Company’s inventory. As a
also sold a line of products manufactured by a friend. part of its sales promotion and public relations cam
He did not disclose this to Park. The relationship was paign, Jolly Finance placed posters in Triple J ’s stores
unsatisfactory and Park finally fired Stone after learn indicating that Triple J is another satisfied customer of
ing of Stone’s sales of the other manufacturer’s goods. Jolly and that the goods purchased at Triple J are
Stone, enraged at Park for firing him, continued to available through the financing by Jolly. Jolly also files
make contracts on Park’s behalf with both new and old a financing statement which covers the financed inven
customers that were almost uniformly disadvantageous tory. Victor Restaurants purchased four hi-fi sets for
to Park. Park, upon learning of this, gave written notice use in its restaurants and had read one of the Jolly
of Stone’s discharge to all parties with whom Stone had posters. Triple J has defaulted on its loan and Jolly
dealt. Which of the following statements is incorrect? Finance is seeking to repossess the hi-fi sets. Which of
a. Park can bring an action against Stone to have the following is correct?
him account for any secret profits. a. Jolly has a perfected security interest in the hi-
b. Prior to notification, Stone retained some fi sets which is good against Victor.
continued authority to bind Park despite ter b. Victor’s knowledge of the financing arrange
mination of the agency relationship. ment between Jolly and Triple J does not af
c. New customers who contracted with Stone for fect its rights to the hi-fi sets.
the first time could enforce the contracts c. Jolly’s filing was unnecessary to perfect its
against Park if they knew that Stone had been security interest in Triple J ’s inventory since it
Park’s salesman but were unaware that Stone was perfected upon attachment.
was fired. d. The hi-fi sets are consumer goods in Victor’s
d. If Park had promptly published a notification hands.
of termination of Stone’s employment in the
local newspapers and in the trade publica
tions, he would not be liable for any of 33. The Gordon Manufacturing Company manufac
Stone’s contracts. tures various types of lathes. It sold on credit 25 general-
use lathes to Hardware City, a large retail outlet. Hard
30. Michaels appointed Fairfax as his agent. The ap ware City sold one of the lathes to Johnson for use in his
pointment was in writing and clearly indicated the scope home repair business, reserving a security interest for
of Fairfax’s authority and also that Fairfax was not to the unpaid balance. However, Hardware City did not
disclose that he was acting as an agent for Michaels. file a financing statement. Johnson’s creditors are
Under the circumstances asserting rights against the lathe. Which of the follow
a. Fairfax is an agent coupled with an interest. ing statements is correct?
b. Michaels must ratify any contracts made by a. The lathe is a consumer good in Johnson’s
Fairfax on behalf of Michaels. hands.
c. Fairfax’s appointment had to be in writing to b. No filing was necessary to perfect a security
be enforceable. interest in the lathe against Johnson’s
d. Fairfax has the implied and apparent authori creditors.
ty of an agent. c. Gordon Manufacturing could assert rights
31. In the course of an examination of the financial against the lathe sold to Johnson in the event
statements of Control Finance Company for the year Hardware City defaults in its payments.
ended September 30, 1980, the auditors learned that the d. The lathe was inventory in both Gordon and
company has just taken possession of certain heavy in Hardware’s hands and is equipment in
dustrial equipment from Arrow Manufacturing Com Johnson’s, and both Gordon and Hardware
pany, a debtor in default. Arrow had previously bor City must file to perfect their interests.
rowed $60,000 from Control secured by a security in
terest in the heavy industrial equipment. The amount of 34. The Town Bank makes collateralized loans to its
the loan outstanding is $30,000. Which of the following customers at 1% above prime on securities owned by the
is correct regarding the rights of Control and Arrow? customer, subject to existing margin requirements. In
a. Control is not permitted to sell the repossessed doing so, which of the following is correct?
equipment at private sale. a. Notification of the issuer is necessary in order
b. Arrow has no right to redeem the collateral at to perfect a security interest.
any time once possession has been taken. b. Filing is a permissible method of perfecting a
c. Control is not entitled to retain the collateral security interest in the securities if the cir
it has repossessed in satisfaction of the debt cumstances dictate.
even though it has given written notice to the c. Any dividend or interest distributions during
debtor and he consents. the term of the loan belong to the bank.
d. Arrow is not entitled to a compulsory disposi d. A perfected security interest in the securities
tion of the collateral. can only be obtained by possession.
93
35. Bass, an automobile dealer, had an inventory of 40 39. The Securities Exchange Act of 1934 requires that
cars and 10 trucks. He financed the purchase of this in certain persons register and that the securities of certain
ventory with County Bank under an agreement dated issuers be registered. In respect to such registration
July 7 that gave the bank a security interest in all under the 1934 Act, which of the following statements is
vehicles on Bass’ premises, all future acquired vehicles, incorrect?
and the proceeds thereof. On July 11, County Bank a. All securities offered under the Securities Act
properly filed a financing statement that identified the of 1933 also must be registered under the 1934
collateral in the same way that it was identified in the Act.
agreement. On October 1, Bass sold a passenger car to b. National securities exchanges must register.
Dodd for family use and a truck to Diamond Company c. The equity securities of issuers, which are
for its hardware business. Which of the following is cor traded on a national securities exchange, must
rect? be registered.
a. The security agreement may not provide for a d. The equity securities of issuers having in ex
security interest in future acquired vehicles cess of $1 million in assets and 500 or more
even if the parties agree. stockholders which are traded in interstate
b. The passenger car sold by Bass to Dodd con commerce must be registered.
tinues to be subject to the security interest of
the County Bank.
c. The bank’s security interest is perfected as of
July 7 despite the fact it was not filed until 40. Theobold Construction Company, Inc., is con
July 11. sidering a public stock offering for the first time. It
d. The security interest of the County Bank does wishes to raise $1.2 million by a common stock offering
not include the proceeds from the sale of the and do this in the least expensive manner. In this con
truck to Diamond Company. nection, it is considering making an offering pursuant to
Regulation A. Which of the following statements is cor
36. Retailer Corp. was in need of financing. To secure rect regarding such an offering?
a loan, it made an oral assignment of its accounts a. Such an offering can not be made to more
receivable to J. Roe, a local investor, under which Roe than 250 people.
loaned Retailer on a continuing basis, 90% of the face b. The maximum amount of securities permitted
value of the assigned accounts receivable. Retailer col to be offered under Regulation A is $1
lected from the account debtors and remitted to Roe at million.
intervals. Before the debt was paid, Retailer filed a peti c. Only those corporations which have had an
tion in bankruptcy. Which of the following is correct? initial registration under the Securities Act of
a. As between the account debtors and Roe, the 1933 are eligible.
assignment is not an enforceable security in d. Even if Regulation A applies, Theobold is re
terest. quired to distribute an offering circular.
b. Roe is a secured creditor to the extent of the
unpaid debt.
c. Other unpaid creditors of Retailer Corp. who
knew of the assignment are bound by its
terms.
d. An assignment of accounts, to be valid, re 41. Shariff is a citizen of a foreign country. He has
quires the debtors owing the accounts to be just purchased six percent (6%) of the outstanding com
notified. mon shares of Stratosphere Metals, Inc., a company
37. The Secured Transactions Article of the Code listed on a national stock exchange. He has instructed
recognizes various methods of perfecting a security in the brokerage firm that quietly and efficiently handled
terest in collateral. Which of the following is not the execution of the purchase order that he wants the
recognized by the Code? securities to be held in street name. What are the legal
a. Filing. implications of the above transactions? Shariff must
b. Possession. a. Immediately have the securities registered in
c. Consent. his own name and take delivery of them.
d. Attachment. b. Sell the securities because he has violated the
anti-fraud provisions of the Securities Ex
38. Which of the following is included within the change Act of 1934.
scope of the Secured Transactions Article of the Code? c. Notify Stratosphere Metals, Inc., of his ac
a. The outright sale of accounts receivable. quisition and file certain information as to his
b. A landlord’s lien. identity and background with the SEC.
c. The assignment of a claim for wages. d. Notify the SEC and Stratosphere Metals, Inc.,
d. The sale of chattel paper as a part of the sale only if he acquires ten percent (10%) or more
of a business out of which it arose. of Stratosphere’s common shares.
94
Business Law
42. Which of the following statements concerning the 46. Anderson agreed to purchase Parker’s real prop
scope of Section 10(b) of the Securities Exchange Act of erty. Anderson’s purchase was dependent upon his be
1934 is correct? ing able to sell certain real property that he owned.
a. In order to come within its scope, a transac Anderson gave Parker an instrument for the purchase
tion must have taken place on a national stock price. Assuming the instrument is otherwise negotiable,
exchange. which one of the statements below, written on the face
b. It applies exclusively to securities of corpora of the instrument, will render it non-negotiable?
tions registered under the Securities Exchange a. A statement that Parker’s cashing or indors
Act of 1934. ing the instrument acknowledges full satisfac
c. There is an exemption from its application for tion of Anderson’s obligation.
securities registered under the Securities Act b. A statement that payment of the instrument is
of 1933. contingent upon Anderson’s sale of his real
d. It applies to purchases as well as sales of property.
securities in interstate commerce. c. A statement that the instrument is secured by
a first mortgage on Parker’s property and that
upon default in payment the entire amount of
the instrument is due.
43. Which of the following statements is correct d. A statement that the instrument is subject to
regarding qualification for the private placement ex the usual implied and constructive conditions
emption from registration under the Securities Act of applicable to such transactions.
1933? 47. Gilgo has entered into a contract for the purchase
a. The instrumentalities of interstate commerce of land from the Wicklow Land Company. A title
must not be used. search reveals certain defects in the title to the land to be
b. The securities must be offered to not more conveyed by Wicklow. Wicklow has demanded that
than 35 persons. Gilgo accept the deed and pay the balance of the pur
c. The minimum amount of securities purchased chase price. Furthermore, Wicklow has informed Gilgo
by each offeree must not be less than that unless Gilgo proceeds with the closing, Wicklow
$ 100, 000 . will hold Gilgo liable for breach of contract. Wicklow
d. The offerees must have access to or be fur has pointed out to Gilgo that the contract says nothing
nished with the kind of information that about defects and that he must take the property “ as
would be available in a registration statement. is.’’ Which of the following is correct?
a. Gilgo can rely on the implied warranty of mer
chantability.
b. Wicklow is right in that if there is no express
warranty against title defects, none exists.
44. The Foreign Corrupt Practices Act of 1977 pro c. Gilgo will prevail because he is entitled to a
hibits bribery of foreign officials. Which of the follow perfect title from Wicklow.
ing statements correctly describes the Act’s application d. Gilgo will win if the title is not marketable.
to corporations engaging in such practices?
a. It only applies to multinational corporations. 48. Marks is a commercial tenant of Tudor Buildings,
b. It applies to all domestic corporations en Inc. The term of the lease is five years and two years
gaged in interstate commerce. have elapsed. The lease prohibits subletting, but does
c. It only applies to corporations whose not contain any provision relating to assignment. Marks
securities are registered under the Securities approached Tudor and asked whether Tudor could
Exchange Act of 1934. release him from the balance of the term of the lease for
d. It applies only to corporations engaged in $500. Tudor refused unless Marks would agree to pay
foreign commerce. $2,000. Marks located Flint who was interested in rent
ing in Tudor’s building and transferred the entire
balance of the lease to Flint in consideration of his
promise to pay Tudor the monthly rental and otherwise
45. The Marquis Trust has been properly created and perform Marks’ obligations under the lease. Tudor ob
it qualifies as a real estate investment trust (REIT) for jects. Which of the following statements is correct?
federal income tax purposes. As such, it will a. A prohibition of the right to sublet contained
a. Be taxed as any other trust for income tax pur in the lease completely prohibits an assign
poses. ment.
b. Have been created under the Federal Trust In b. The assignment need not be in writing.
denture Act. c. The assignment does not extinguish Marks’
c. Provide limited liability for the parties in obligation to pay the rent if Flint defaults.
vesting in the trust. d. The assignment is invalid without Tudor’s
d. Be exempt from the Securities Act of 1933. consent.
95
49. James Gordon decided to create an inter vivos 52. An executor named in a decedent’s will
trust for the benefit of his grandchildren. Gordon a. Must consent to serve, have read the will, and
wished to bypass his own children and to provide an in be present at the execution of the will,
dependent income for his grandchildren. He did not, b. Need not serve if he does not wish to do so.
however, wish to completely part with the assets he c. Must serve without compensation unless the
would transfer to the trust. Therefore, he transferred will provides otherwise,
the assets to the York Trust Company in trust for the d. Can not be the principal beneficiary of the
benefit of his grandchildren irrevocably for a period of will.
21 years. In relation to the Gordon trust and the rights
and duties of the parties in respect to it 53. Bernard Manufacturing, Inc., owns a three-story
a. Such a trust is quite useful in skipping genera building which it recently purchased. The purchase price
tions and tying up the ownership of property, was $200,000 of which $160,000 was financed by the
since its duration can be potentially infinite. proceeds of a mortgage loan from the Cattleman Sav
b. The trust is not recognized as a legal entity for ings and Loan Association. Bernard immediately pro
tax purposes, thus Gordon must include the cured a standard fire insurance policy on the premises
trust income with his own. for $200,000 from the Magnificent Insurance Company.
c. York has legal title to the trust property, the Cattleman also took out fire insurance of $160,000 on
grandchildren have equitable title, and the property from the Reliable Insurance Company of
Gordon has a reversionary interest. America. The property was subsequently totally de
d. If the trust deed is silent on the point, York stroyed as a result of a fire which started in an adjacent
must not sell or otherwise dispose of the trust loft and spread to Bernard’s building. Insofar as the
assets without Gordon’s advice and consent. rights and duties of Bernard, Cattleman, and the in
surers are concerned, which of the following is a correct
statement?
a. Cattleman Savings and Loan lacks the re
50. Paul Good’s will left all of his commercial real quisite insurable interest to collect on its
property to his wife Dorothy for life and the remainder policy,
to his two daughters, Joan and Doris, as tenants in com b. Bernard Manufacturing can only collect
mon. AH beneficiaries are alive and over 21 years of age. $40,000.
Regarding the rights of the parties, which of the follow c. Reliable Insurance Company is subrogated to
ing is a correct statement? Cattleman’s rights against Bernard upon pay
a. Dorothy may not elect to take against the will ment of Cattleman’s insurance claim.
and receive a statutory share instead. d. The maximum am ount that Bernard
b. The daughters must survive Dorothy in order Manufacturing can collect from Magnificent
to receive any interest in the property. is $40,000, the value of its insurable interest.
c. Either of the daughters may sell her interest in
the property without the consent of their
mother or the other daughter. 54. Real Life Insurance Company has refused to pay
d. If only one daughter is alive upon the death of on a $50,000 term life insurance policy taken out by
Dorothy, she is entitled to the entire property. Dodson. The circumstances surrounding Dodson’s pro
curing the policy are as follows: Maxwell, an acquain
tance of Dodson’s, contacted him one day and asked
him if he would like to make $100. Dodson said, “ Sure,
as long as it is easy money.’’ Maxwell assured Dodson
51. Larson is considering the creation of either a that the only thing Dodson had to do was sign an ap
lifetime (inter vivos) or testamentary (by his will) trust. plication for insurance, submit to a physical, name
In deciding what to do, which of the following Maxwell as the beneficiary, and subsequently assign the
statements is correct? policy to Maxwell, Maxwell paid Dodson the $100 and
a. If the trust is an inter vivos trust, the trustee reimbursed him for the premium. Two years after tak
must file papers in the appropriate state office ing out the policy, Dodson died. Maxwell presented the
roughly similar to those required to be filed by policy to Real Life for payment and it refused to pay.
a corporation to qualify. Which of the following is correct?
b. An inter vivos trust must meet the same legal a. Real Life must pay the $50,000 to Maxwell
requirements as one created by a will, since he is the beneficiary.
c. Property transferred to a testamentary trust b. Dodson’s estate is entitled to the $50,000 pro
upon the grantor’s (creator’s) death is not in ceeds of the life insurance policy.
cluded in the decedent’s gross estate for c. Maxwell will recover the $50,000 since the
federal tax purposes, policy was assigned to him,
d. Larson can retain the power to revoke an inter d. Maxwell will recover nothing in that he lacked
vivos trust. an insurable interest in Dodson’s life.
96
Business Law
55. Morse is seeking to collect on a property insurance (4%) is manufactured at its United States facility.
policy covering certain described property which was Under these circumstances
destroyed. The insurer has denied recovery based upon a. Ichi Ban is exempt from state workmen’s
Morse’s alleged lack of an insurable interest in the prop compensation laws.
erty. In which of the situations described below will the b. Ichi Ban is exempt from the Fair Labor Stan
insurance company prevail? dards Act provided it is governed by com
a. The property has been willed to Morse’s parable Japanese law.
father for life and, upon his father’s death, to c. Ichi Ban is subject to generally prevailing
Morse as the remainderman. federal and state laws applicable to American
b. The insured property does not belong to employees with respect to its employees at the
Morse, but instead to a corporation which he United States facility.
controls. d. Ichi Ban could legally institute a policy which
c. Morse is not the owner of the insured property limited promotions to Japanese-Americans.
but a mere long-term lessee.
d. The insured property belongs to a general
trade debtor of Morse and the debt is 59. Harris was engaged as a crane operator by the
unsecured. Wilcox Manufacturing Corporation, a company com
plying with state worker’s compensation laws. Harris
suffered injuries during regular working hours as a
result of carelessly climbing out on the arm of the crane
56. The Fargo Corporation provides its employees to make an adjustment. While doing so, he lost his
with free group life insurance of $1,000 for each $1,000 balance, fell off the arm of the crane and fractured his
of annual salary. Maxwell is an Executive Vice Presi leg. Wilcox’s safety manual for the operation of the
dent of Fargo and receives a salary of $100,000 a year. crane strictly forbids such conduct by an operator.
Consistent with state laws, Maxwell has assigned the Wilcox denies any liability, based upon Harris’ gross
group policy to his wife Joan. Regarding the group negligence, his disobedience and a waiver of all liability
policy and its assignment, which of the following is cor signed by Harris shortly after the accident. Wilcox fur
rect? ther asserts that Harris is not entitled to worker’s com
a. The assignee of a group policy must have an pensation because he is a skilled worker and is on a
insurable interest in the life of the insured. guaranteed biweekly salary. Which of the following is a
b. The assignment of the policy to Joan trans correct statement insofar as Harris’ rights are con
ferred all the legal incidents of ownership to cerned?
her. a. If he elects to sue under common law for
c. Maxwell does not have any income for income negligence, his own negligence will result in a
tax purposes as a result of Fargo’s payment of denial of recovery.
the insurance premiums. b. Harris is not entitled to worker’s compensa
d. The proceeds from the group policy will be an tion because he is not an “ employee.”
asset of Maxwell’s estate upon his death. c. Harris is not entitled to recovery because his
conduct was a clear violation of the safety
manual.
d. Harris waived his rights by signing a waiver of
liability.
57. Which of the following defenses by a life insurance
company would be unsuccessful by reason of the in
contestable clause? 60. Which of the following is a correct statement
a. A limitation upon the scope of the causes of regarding the federal income tax treatment of social
death which the policy covers. security tax payments and retirement benefits?
b. Cancellation of the policy due to nonpayment a. The employer’s social security tax payments
of premiums. are not deductible from its gross income.
c. A material misstatement of fact by the insured b. Social security retirement benefits are fully in
relating to his health. cludable in the gross income of the retiree if he
d. Lack of an insurable interest on the part of the earns an amount in excess of certain estab
party who insured the deceased. lished ceilings.
c. Social security retirement benefits are ex
cludable from the retiree’s gross income even
if the retiree has recouped all he has con
58. Ichi Ban Mopeds, Inc., is a Japanese manufac tributed.
turer which has a manufacturing facility in the United d. The employee’s social security tax payments
States. United States business comprises ten percent are deductible from the employee’s gross in
(10%) of the sales of Ichi Ban of which four percent come.
97
Number 2 (Estimated tim e ------15 to 20 minutes) tial between “ major” and “ non-major” brands of
gasoline. Subsequently however, beginning in
Part a. The Dexter Corporation has not paid a December, Best by Test from time to time reduced its
dividend since 1970 on its 7% non-cumulative preferred price, sometimes to 91.9 cents or 90.9 cents per gallon,
stock. In the years 1970-1973 the company had net and on each occasion Banner’s sales suffered. Banner
losses which threatened to impair its financial position. sought assistance from Marvel to meet Best by Test’s
Since 1974 the company has had earnings sufficient to competition. After four months of watchful waiting,
pay the preferred stock dividend. In fact, earnings have Marvel gave Banner a discount of 1.7 cents per gallon in
gradually increased since 1974, and by 1976 Dexter had April 1980 to permit the latter to reduce its retail price to
recouped all losses which occurred in the years 95.9 cents per gallon to counter a Best by Test retail
1970-1973. During the years 1974-1979 the profits were price of 94.9 cents per gallon, later lowered to 93.9 cents
credited to retained earnings. per gallon. At this point, other Marco dealers, located
The funds were neither committed to physical plant within a three and one-half mile radius of Banner, suf
or equipment nor did the board indicate that it had long fered substantial declines in sales; they had not received
range plans calling for such a commitment. Preferred any discount from Marvel and had not reduced their
shareholders had complained at board meetings re retail prices. They observed some of their former
garding the repeated passing over of preferred customers buying gasoline from Banner. Those Marco
dividends. The board’s actions were explained on the retail stations which suffered losses as a result of
grounds of pessimism about the company’s and the Marvel’s pricing policies have claimed a violation of
economy’s outlook and therefore, the need to build up federal antitrust law by Marvel and have brought legal
adequate additional reserves to provide for the possi action against it to recover damages.
bility of future losses. The board’s outlook during the
time in question could properly be categorized as one of Required: Answer the following, setting forth reasons
pessimism and conservatism. for any conclusions stated.
On January 15, 1980, the board decided to pay the 1. Will the Marco retail stations which suffered
7% dividend on the preferred stock and a large dividend losses prevail?
on the common stock. The preferred shareholders were 2. What probable defense will Marvel assert
irate. A group of preferred shareholders have com in order to avoid liability?
menced a suit seeking an injunction against Dexter and
its board of directors prohibiting the payment of Number 3 (Estimated tim e----- 15 to 20 minutes)
dividends on the common stock unless it first pays
dividends on the non-cumulative preferred for previous Part a. Hardaway Lending, Inc., had a 4 year
years to the extent that the corporation had net earnings $800,000 callable loan to Superior Metals, Inc., out
available for payment. standing. The loan was callable at the end of each year
upon Hardaway’s giving 60 days written notice. Two
Required: Answer the following, setting forth reasons and one-half years remained of the four years.
for any conclusions stated. Hardaway reviewed the loan and decided that Superior
Will the preferred shareholders prevail? Metals was no longer a prime lending risk and it
therefore decided to call the loan. The required written
notice was sent to and received by Superior 60 days
Part b. In 1979 Banner was one of 38 retail Marco prior to the expiration of the second year.
gasoline stations in greater Fort Wayne, Massachusetts, Merriweather, Superior’s chief executive officer and
and one of 8 such stations in its particular sales ter principal shareholder, requested Hardaway to continue
ritory. The nearest competing Marco station was 11 the loan at least for another year. Hardaway agreed,
blocks away. Banner’s supplier, Marvel Company, was provided that an acceptable commercial surety would
a major integrated refiner and distributor of petroleum guarantee $400,000 of the loan and Merriweather would
products. Like other Marco stations in Fort Wayne, personally guarantee repayment in full. These condi
Banner purchased gasoline from Marvel at 94.1 cents tions were satisfied and the loan was permitted to con
per gallon and resold it at 98.9 cents per gallon. tinue.
In September 1979 Best by Test Oil Company, The following year the loan was called and
operator of a chain of 65 retail gasoline stations, opened Superior defaulted. Hardaway released the commercial
its only Best by Test station in Fort Wayne diagonally surety but retained its rights against Merriweather and
across the street from Banner and began selling its demanded that Merriweather pay the full amount of the
gasoline at 96.9 cents per gallon. Best by Test was ex loan. Merriweather refused, asserting the following:
clusively a retailer and did not compete with Marvel. • There was no consideration for his promise.
This differential of 2 cents per gallon between Banner’s The loan was already outstanding and he per
and Best by Test’s retail prices was the normal differen sonally received nothing.
98
Business Law
Hardaway must first proceed against Superior with generally accepted auditing standards, the
before it can collect from Merriweather. embezzlement would have been discovered. However,
Hardaway had released the commercial Mitchell & Moss had no knowledge of the embezzlement
surety, thereby releasing Merriweather. nor could their conduct be categorized as reckless.

Required: Answer the following, setting forth reasons for any conclusions stated.
for any conclusions stated. 1. What liability to Thaxton, if any, does Mitchell
Discuss the validity of each of Merriweather’s & Moss have under the Securities Exchange Act of
assertions. 1934?
2. What theory or theories of liability, if any, are
Part b. In connection with the audit of One-Up, available to Whitlow & Company’s customers and
Inc., a question has arisen regarding the validity of a shareholders under the common law?
$10,000 purchase money security interest in certain
machinery sold to Essex Company on March 2nd. Essex
was petitioned into bankruptcy on May 1st by its Part b. Jackson is a sophisticated investor. As
creditors. The trustee is seeking to avoid One-Up’s such, she was initially a member of a small group who
security interest on the grounds that it is a preferential was going to participate in a private placement of $1
transfer, hence voidable. The machinery in question was million of common stock of Clarion Corporation.
sold to Essex on the following terms: $1,000 down and Numerous meetings were held among management and
the balance plus interest at nine percent (9%) to be paid the investor group. Detailed financial and other infor
over a three year period. One-Up obtained a signed mation was supplied to the participants. Upon the eve
security agreement which created a security interest in of completion of the placement, it was aborted when
the property on March 2nd, the date of the sale. A one major investor withdrew. Clarion then decided to
financing statement was filed on March 10th. offer $2.5 million of Clarion common stock to the
public pursuant to the registration requirements of the
Required: Answer the following, setting forth reasons Securities Act of 1933. Jackson subscribed to $300,000
for any conclusions stated. of the Clarion public stock offering. Nine months later,
Clarion’s earnings dropped significantly and as a result
1. Would One-Up’s security interest in the the stock dropped 20% beneath the offering price. In
machinery be a voidable preference? addition, the Dow Jones Industrial Average was down
2. In general, what are the requirements necessary 10% from the time of the offering.
to permit the trustee to successfully assert a preferential Jackson has sold her shares at a loss of $60,000 and
transfer and thereby set aside a creditor’s security in seeks to hold all parties liable who participated in the
terest? public offering including Allen, Dunn, and Rose,
Clarion’s CPA firm. Although the audit was performed
in conformity with generally accepted auditing stan
dards, there were some relatively minor irregularities.
The financial statements of Clarion Corporation, which
were part of the registration statement, contained minor
Number 4 (Estimated tim e----- 15 to 20 minutes) misleading facts. It is believed by Clarion and Allen,
Dunn and Rose, that Jackson’s asserted claim is without
Part a. Whitlow & Company is a brokerage firm merit.
registered under the Securities Exchange Act of 1934.
The Act requires such a brokerage firm to file audited Required: Answer the following, setting forth reasons
financial statements with the SEC annually. Mitchell & for any conclusions stated.
Moss, Whitlow’s CPAs, performed the annual audit for 1. Assuming Jackson sues under the Securities
the year ended December 31, 1979, and rendered an un Act of 1933, what will be the basis of her claim?
qualified opinion, which was filed with the SEC along 2. What are the probable defenses which might be
with Whitlow’s financial statements. During 1979 asserted by Allen, Dunn, and Rose in light of these
Charles, the president of Whitlow & Company, engaged facts?
in a huge embezzlement scheme that eventually
bankrupted the firm. As a result substantial losses were
suffered by customers and shareholders of Whitlow &
Company, including Thaxton who had recently pur
chased several shares of stock of Whitlow & Company
after reviewing the company’s 1979 audit report. Mit
chell & Moss’ audit was deficient; if they had complied
99
Number 5 (Estimated tim e----- 15 to 20 minutes) officer, approached him and stated firmly and clearly
that the bank’s offer had been revoked and that the
Part a. Fennimore owned a ranch which was en bank would refuse to accept tender of payment. Dumb
cumbered by a seven percent (7%) mortgage held by the founded by all this, Fennimore nevertheless tendered
Orange County Bank. As of July 31, 1980, the out the check, which was refused.
standing mortgage amount was $83,694; Fennimore
decided to sell the ranch and engage in the grain storage Required: Answer the following, setting forth reasons
business. During the time that he was negotiating the for any conclusions stated.
sale of the ranch, the bank sent out an offer to several In the eventual lawsuit that ensued, who will
mortgagors indicating a five percent (5%) discount on prevail?
the mortgage if the mortgagors would pay the entire Part b. Austin wrote a letter and mailed it to
mortgage in cash or by certified check by July 31, 1980. Hernandez offering to sell Hernandez his tuna canning
The bank was doing this in order to liquidate older un business for $125,000. Hernandez promptly mailed a
profitable mortgages which it had on the books. reply acknowledging receipt of Austin’s letter and ex
Anyone seeking to avail himself of the offer was re pressing an interest in purchasing the cannery.
quired to present his payment at the Second Street However, Hernandez offered Austin only $110,000.
branch on July 31, 1980. Fennimore, having obtained a Later Hernandez decided that the business was in fact
buyer for his property, decided to take advantage of the worth at least the $125,000 that Austin was asking. He
offer since his buyer was arranging his own financing therefore decided to accept the original offer tendered
and was not interested in assuming the mortgage. to him at $125,000 and telegraphed Austin an uncondi
Therefore, on July 15th he wrote the bank a letter which tional acceptance at $125,000. The telegram reached
stated: “ I accept your offer on my mortgage, see you on Austin before Hernandez’ prior letter, although the let
July 31, 1980, I’ll have a certified check.” Fennimore ter arrived later that day. Austin upon receipt of the
did not indicate that he was selling the ranch and would telegram telegraphed Hernandez that as a result of fur
have to pay off the full amount in any event. On July ther analysis as to the worth of the business, he was not
28, the bank sent Fennimore a letter by certified mail willing to sell at less than $150,000. Hernandez claims a
which was received by Fennimore on the 30th of July contract at $125,000 resulted from his telegram. Austin
which stated: ‘‘We withdraw our offer. We are over asserts either that there is no contract or that the pur
subscribed. Furthermore, we have learned that you are chase price is $150,000.
selling your property and the mortgage is not being
assumed.” Nevertheless, on July 31 at 9:05 in the morn Required: Answer the following, setting forth reasons
ing when Fennimore walked in the door of the bank for any conclusions stated.
holding his certified check, Vogelspiel, a bank mortgage If the dispute goes to court, who will prevail?
100
(Prepared by the B oard o f E xam iners o f the A m erican Institute o f Certified Public A ccountants
and adopted by the exam ining boards of all states, territories, and the D istrict o f C olum bia.)
November 7, 1980; 1:30 to 5:00 P.M.

Estimated Minutes
No. 1 ..................... 90 no
No. 2 ..................... 15 25
No. 3 ..................... 15 25
No. 4 ..................... 15 25
No. 5 ..................... 15 25
T otal............. 150 210
You must arrange the papers in numerical order of your advantage to attempt all questions even if
the questions. If more than one page is required you are uncertain of the answer. You are likely to
for an answer, write “ continued” at the bottom of get the highest score if you omit no answers.
stance, if 12 pages are used for your answers, they 3. A CPA is continually confronted with the neces
should be numbered 1 through 12. The printed sity of expressing opinions and conclusions in
answer sheet provided for the objective-type items written reports in clear, unequivocal language.
should be considered to be Page 1. Although the primary purpose of the examination
Answer all objective-type items on the printed and present such knowledge in acceptable written
answer sheet provided for that purpose. It is to language will be considered by the examiners.
101
Number 1 (Estimated tim e ------90 to 110 minutes) 4. A characteristic of all assets and liabilities com
prising working capital is that they are
Instructions a. Cash equivalents.
b. Current.
Select the best answer for each of the following items c. Monetary.
relating to a variety of issues in accounting. Use a soft d. Marketable.
pencil, preferably No. 2, to blacken the appropriate cir
cle on the separate printed answer sheet to indicate your 5. Objectivity is assumed to be achieved when an ac
answer. Mark only one answer for each item. Answer all counting transaction
items. Your grade will be based on your total correct a. Is recorded in a fixed amount of dollars.
answers. b. Involves the payment or receipt of cash.
The following is an example of the manner in which c. Involves an arm’s-length transaction between
the answer sheet should be marked: two independent parties.
d. Allocates revenues or expenses in a rational
Item and systematic manner.
99. The financial statement which summarizes the 6. The concept of consistency is sacrificed in the ac
financial position of a company is the counting for which of the following income statement
a. Income statement. items?
b. Balance sheet. a. Discontinued operations.
c. Statement of changes in financial position. b. Loss on disposal of a segment of a business.
d. Retained earnings statement. c. Extraordinary items.
d. Cumulative effect of change in accounting
Answer Sheet principle.
7. The computation of the current value of an asset

99. using the present value of future cash flows method
does not include the
Items to be Answered a. Cost of alternate uses of funds given up.
b. Productive life of the asset.
1. When a specific customer’s account receivable is c. Applicable interest rate.
written off as uncollectible, what will be the effect on d. Future amounts of cash receipts or cash
net income under each of the following methods of savings.
recognizing bad debt expense?
Allowance Direct W rite o f f

8. In accounting for income taxes, interest received
a. None Decreased on municipal obligations is an example of
b. Decreased None a. Intraperiod tax allocation.
c. Decreased Decreased b. Interperiod tax allocation.
d. None None c. A permanent difference.
d. A timing difference.
2. When should an indicated loss on a long-term con
tract be recognized under the completed-contract
method and the percentage-of-completion method, 9. Which of the following should be disclosed in the
respectively? Summary of Significant Accounting Policies?
Percentage-of- a. Composition of inventory (raw materials,
Completed-Contract Completion work-in-process, and finished goods).
a. Immediately Immediately b. Basis of consolidation.
b. Immediately Over the life of the c. Depreciation expense amount.
project d. Adequacy of pension plan assets in relation
c. Completion of con Over the life of the ship to vested benefits.
tract project
Completion of con Immediately
tract
10. How should the gain or loss from the disposal of a
3. Which of the following is an accrued liability? segment of a business enterprise be shown in the finan
a. Cash dividends payable. cial statements?
b. Wages payable. a. An extraordinary item.
c. Rent revenue collected one month in advance. b. A separate item after continuing operations.
d. Portion of long-term debt payable in current c. A separate item before income taxes.
year. d. A retained earnings adjustment.
102
Accounting Theory
11. In applying the treasury stock method of com 17. Goods on consignment should be included in the
puting the dilutive effect of outstanding options or war inventory of
rants, for quarterly fully diluted earnings per share, a. The consignor but not the consignee.
when is it appropriate to use the ending market price of b. Both the consignor and the consignee.
common stock as the assumed repurchase price? c. The consignee but not the consignor.
a. Always. d. Neither the consignor nor the consignee.
b. Never.
c. When the ending market price is higher than 18. Which of the following inventory cost flow
the average market price and the exercise methods could use dollar-value pools?
price. a. Conventional (lower of cost or market) retail.
d. When the ending market price is lower than b. Weighted average.
the average market price and higher than the c. FIFO.
exercise price. d. LIFO.
12. When bad debt expense is estimated on the basis of 19. The equity method of accounting for an invest
the percentage of past actual losses from bad debts to ment in the common stock of another company should
past net credit sales, and this percentage is adjusted for be used when the investment
anticipated conditions, the accounting concept of a. Is composed of common stock and it is the in
a. Matching is being followed. vestor’s intent to vote the common stock.
b. Matching is not being followed. b. Ensures a source of supply such as raw
c. Substance over form is being followed. materials.
d. Going concern is not being followed. c. Enables the investor to exercise significant in
fluence over the investee.
13. An extraordinary item is one which d. Is obtained by an exchange of stock for stock.
a. Occurs infrequently and is uncontrollable in
nature. 20. A parent corporation which uses the equity
b. Occurs infrequently and is unusual in nature. method of accounting for its investment in a 40 percent
c. Is material and is unusual in nature. owned subsidiary, which earned $20,000 and paid
d. Is material and is uncontrollable in nature. $5,000 in dividends, made the following entries:
14. Exchange gains and losses resulting from Investment in subsidiary $8,000
translating foreign currency financial statements into Equity in earnings of
U.S. dollars should be included as subsidiary $8,000
a. A deferred item in the balance sheet. Cash 2,000
b. An extraordinary item in the income state Dividend revenue 2,000
ment for the period in which the rate changes.
c. An ordinary item in the income statement for What effect will these entries have on the parent’s state
losses but deferred for gains. ment of financial position?
d. An ordinary item in the income statement for a. Investment in subsidiary understated, retained
the period in which the rate changes. earnings understated.
b. Investment in subsidiary overstated, retained
earnings overstated.
15. A consideration in determining the useful life of c. Investment in subsidiary overstated, retained
an intangible asset is not the earnings understated.
a. Legal, regulatory, or contractual provisions. d. Financial position will be fairly stated.
b. Provisions for renewal or extension.
c. Expected actions of competitors.
d. Initial cost.
21. Lease Y contains a bargain purchase option and
the lease term is equal to 75 percent of the estimated
economic life of the leased property. Lease Z contains a
16. The computation of a company’s third quarter bargain purchase option and the lease term is equal to
provision for income taxes should be based upon earn less than 75 percent of the estimated economic life of the
ings leased property. How should the lessee classify these
a. For the quarter at an expected annual effec leases?
tive income tax rate.
b. For the quarter at the statutory rate. Lease Y Lease Z
c. To date at an expected annual effective in a. Operating lease Operating lease
come tax rate less prior quarters’ provisions. b. Operating lease Capital lease
d. To date at the statutory rate less prior c. Capital lease Capital lease
quarters’ provisions. d. Capital lease Operating lease
103
22. In a lease that is recorded as a sales-type lease by 28. Selected data for a segment of a business enter
the lessor, the difference between the gross investment prise are to be separately reported in accordance with
in the lease and the sum of the present values of the two FASB Statement No. 14 when the revenues of the seg
components of the gross investment should be recorded ment exceed 10 percent of the
as a. Combined net income of all segments report
a. Unearned income. ing profits.
b. Manufacturer’s or dealer’s profit. b. Total revenues obtained in transactions with
c. Rental income. outsiders.
d. Deferred charge. c. Total revenues of all the enterprise’s industry
segments.
23. For a marketable equity securities portfolio in d. Total combined revenues of all segments
cluded in noncurrent assets, which of the following reporting profits.
should be included in net income of the period?
a. Realized gains during the period. 29. Which of the following need not be disclosed in a
b. Unrealized losses during the period. statement of changes in financial position as a source
c. Accumulated changes in the valuation and use of funds?
allowance. a. Acquisition of fixed assets in exchange for
d. Increases in the valuation allowance during capital stock.
the period. b. Dividend paid in capital stock of the company
(stock dividend).
24. When the fair value is determinable, a c. Retirement of a bond issue through the is
nonreciprocal transfer of a nonmonetary asset to suance of another bond issue.
another entity should be recorded at the d. Conversion of convertible debt to capital
a. Fair value of the asset received, but no gain or stock.
loss should be recognized on the disposition of
the asset. 30. How should the amortization of bond discount for
b. Fair value of the asset transferred, and a gain a bond issuer be shown on the statement of changes in
or loss should be recognized on the disposition financial position (defining funds as working capital)?
of the asset. a. Need not be shown.
c. Recorded amount of the asset transferred. b. Use of funds.
d. Recorded amount of the asset received. c. Expense not requiring the use of funds.
d. Contra-expense item not providing funds.
25. The pension expense accrued by a company will be
increased by interest equivalents when 31. Which of the following must be known about a
a. Amounts funded are less than pension cost ac production process in order to institute a direct costing
crued. system?
b. Amounts funded are greater than pension cost a. The variable and fixed components of all costs
accrued. related to production.
c. The plan is fully vested. b. The controllable and noncontrollable com
d. The plan is fully funded. ponents of all costs related to production.
c. Standard production rates and times for all
26. In accordance with FASB Statement No. 33, the elements of production.
Consumer Price Index for All Urban Consumers is used d. Contribution margin and breakeven point for
to compute information on a all goods in production.
a. Historical cost basis. 32. The net present value of a proposed project
b. Current cost basis. represents the
c. Nominal dollar basis. a. Cash flows less the present value of the cash
d. Constant dollar basis. flows.
b. Cash flows less the original investment.
27. An activity that would be expensed currently as c. Present value of the cash flows plus the
research and development costs is the present value of the original investment less
a. Adaptation of an existing capability to a par the original investment.
ticular requirement or customer’s need as a d. Present value of the cash flows less the
part of continuing commercial activity. original investment.
b. Legal work in connection with patent applica
tions or litigation, and the sale or licensing of 33. Which of the following is necessary in order to
patents. calculate the pay-back period for a project?
c. Engineering follow-through in an early phase a. Useful life.
of commercial production. b. Minimum desired rate of return.
d. Testing in search for or evaluation of product c. Net present value.
or process alternatives. d. Annual cash flow.
104
Accounting Theory
34. Within a relevant range, the amount of variable 41. The use of the graphic method as a means for solv
cost per unit ing linear programming problems
a. Differs at each production level. a. Can be used when there are more than two
b. Remains constant at each production level. restrictions (constraints).
c. Increases as production increases. b. Is limited to situations where there are two
d. Decreases as production increases. restrictions (constraints).
c. Is limited to situations where there is one
restriction (constraint).
d. Cannot be used if there are any restrictions
35. The contribution margin ratio always increases (constraints).
when the
a. Breakeven point increases.
b. Breakeven point decreases.
c. Variable costs as a percentage of net sales 42. What is the appropriate technique for defining the
decrease. critical path when the completion of a total project is
d. Variable costs as a percentage of net sales in dependent upon the completion of various subunits at
crease. specific times to enable the work to progress?
a. Linear programming.
36. The estimates necessary to compute the economic b. Multiple regression analysis.
order quantity are c. Program evaluation review technique.
a. Annual usage in units, cost per order, and an d. Queuing theory.
nual cost of carrying one unit in stock.
b. Annual usage in units, cost per unit of inven
tory, and annual cost of carrying one unit in
stock. 43. The weighted average method of process costing
c. Annual cost of placing orders, and annual differs from the first-in, first-out method of process
cost of carrying one unit in stock. costing in that the weighted average method
d. Cost per unit of inventory, annual cost of a. Requires that ending work-in-process inven
placing orders, and annual carrying cost. tory be stated in terms of equivalent units of
production.
37. A flexible budget is b. Considers the ending work-in-process inven
a. Appropriate for control of factory overhead tory only partially complete.
but not for control of direct materials and c. Does not consider the degree of completion of
direct labor. beginning work-in-process inventory when
b. Appropriate for control of direct materials computing equivalent units of production.
and direct labor but not for control of factory d. Can be used under any cost-flow assumption.
overhead.
c. Not appropriate when costs and expenses are
affected by fluctuations in volume limits. 44. When using the first-in, first-out method of pro
d. Appropriate for any level of activity. cess costing, total equivalent units of production for a
given period of time is equal to the number of units
38. A standard cost system may be used in a. Started into process during the period, plus
a. Either job order costing or process costing. the number of units in work in process at the
b. Job order costing but not process costing. beginning of the period.
c. Process costing but not job order costing. b. In work in process at the beginning of the
d. Neither process costing nor job order costing. period, plus the number of units started dur
ing the period, plus the number of units re
39. Relative sales value at split-off is used to maining in work in process at the end of the
a. Allocate separable costs. period times the percent of work necessary to
b. Determine relevant costs. complete the items.
c. Determine the breakeven point in sales c. In work in process at the beginning of the
dollars. period times the percent of work necessary to
d. Allocate joint costs. complete the items, plus the number of units
started during the period, less the number of
40. Which of the following products are difficult to units remaining in work in process at the end
cost because of indivisibility? of the period times the percent of work
By-products Joint products necessary to complete the items.
a. Yes Yes d. Transferred out during the period, plus the
b. Yes No number of units remaining in work in process
c. No Yes at the end of the period times the percent of
d. No No work necessary to complete the items.
105
45. The type of costs presented to management for an 52. If a credit was made to the fund balance in the
equipment replacement decision should be limited to process of recording a budget for a governmental unit,
a. Relevant costs. it can be assumed that
b. Standard costs. a. Estimated revenues exceed appropriations.
c. Controllable costs. b. Estimated expenses exceed actual revenues.
d. Conversion costs. c. Actual expenses exceed estimated expenses.
d. Appropriations exceed estimated revenues.
46. Normal spoilage and abnormal spoilage should be 53. Which of the following accounts is closed out at
classified as the end of the fiscal year?
a. Fund balance.
Normal Abnormal b. Expenditures.
a. Period cost Period cost c. Vouchers payable.
b. Product cost Period cost d. Reserve for encumbrances,
c. Period cost Product cost
d. Product cost Product cost
54. What journal entry should be made at the end of
47. Which of the following methods can be used to the fiscal year to close out encumbrances for which
determine the fixed and variable elements of a goods and services have not been received?
semivariable expense? a. Debit reserve for encumbrances and credit en
a. Statistical scattergraph method. cumbrances.
b. Linear programming. b. Debit reserve for encumbrances and credit
c. Input-output analysis. fund balance.
d. Program evaluation review technique. c. Debit fund balance and credit encumbrances.
d. Debit encumbrances and credit reserve for en
cumbrances.
48. The absolute minimum cost that would be possible

under the best conceivable operating conditions is a
description of which type of standard cost? 55. Within a governmental unit, three funds that are
a. Currently attainable (expected). accounted for in a manner similar to a for-profit entity
b. Theoretical. are
c. Normal. a. General, Debt Service, Special Assessment.
d. Practical. b. Intragovernmental Service, Enterprise,
General.
49. If the actual hours worked exceed the standard c. Enterprise, General, Debt Service,
hours allowed, what type of variance will occur? d. Special Assessment, Enterprise, Intragovern
a. Favorable labor usage (efficiency)variance. mental Service.
b. Favorable labor rate variance.
c. Unfavorable labor usage (efficiency)variance. 56. When a capital project is financed entirely from a
d. Unfavorable labor rate variance. single bond issue, and the proceeds of the bond issue
equal the par value of the bonds, the capital projects
50. Ah unfavorable price variance occurs becauseof fund would record this transaction by debiting cash and
a. Price increases on raw materials. crediting
b. Price decreases on raw materials. a. Bond issue proceeds.
c. Less than anticipated levels of waste in the b. Fund balance.
manufacturing process. c. Appropriations.
d. More than anticipated levels of waste in the d. Bonds payable.
manufacturing process.
51. One of the differences between accounting for a 57. When fixed assets purchased from general fund
governmental (not-for-profit) unit and a commercial revenues were received, the appropriate journal entry
(for-profit) enterprise is that a governmental (not-for- was made in the general fixed assets group of accounts.
profit) unit should What account, if any, should have been debited in the
a. Not record depreciation expense in any of its general fund?
funds. a. No journal entry should have been made in
b. Always establish and maintain complete self the general fund.
balancing accounts for each fund, b. Expenditures.
c. Use only the cash basis of accounting. c. Fixed assets.
d. Use only the modified accrual basis of ac d. Due from general fixed assets group of ac
counting. counts.
106
Accounting Theory
58. Which of the following funds should account for Number 3 (Estimated tim e------15 to 25 minutes)
the payment of interest and principal on revenue bond
debt? Part a. Loss contingencies may exist for com
a. Capital projects. panies.
b. Enterprise.
c. Trust. Required:
d. Debt service. 1. What conditions should be met for an estimated
loss from a loss contingency to be accrued by a charge to
income?
59. Which of the following should be used in ac 2. When is disclosure required, and what disclosure
counting for not-for-profit colleges and universities? should be made for an estimated loss from a loss con
a. Fund accounting and accrual accounting. tingency that need not be accrued by a charge to in
b. Fund accounting but not accrual accounting. come?
c. Accrual accounting but not fund accounting,
d. Neither accrual accounting nor fund ac- Part b. Income determination for long-term con
counting. struction contracts presents special problems because
the construction work often extends over two or more
60. A voluntary health and welfare organization accounting periods. The two methods commonly
received a pledge in 1979 from a donor specifying that followed are the percentage-of-completion method and
the amount pledged be used in 1981. The donor paid the the completed-contract method.
pledge in cash in 1980. The pledge should be accounted
for as Required:
a. A deferred credit in the balance sheet at the Evaluate the use of the percentage-of-completion
end of 1979, and as support in 1980. method for income determination purposes for long
b. A deferred credit in the balance sheet at the term construction contracts. Discuss only theoretical
end of 1979 and 1980, and as support in 1981. arguments.
c. Support in 1979.
d. Support in 1980, and no deferred credit in the
balance sheet at the end of 1979.
Number 4 (Estimated time----- 15 to 25 minutes)
One way for a corporation to accomplish long-term

financing is through the issuance of long-term debt in
struments in the form of bonds.
Required:
a. Describe how to account for the proceeds from
Number 2 (Estimated tim e----- 15 to 25 minutes) bonds issued with detachable stock purchase warrants.
b. Contrast a serial bond with a term (straight)
Among the principal topics related to the account bond.
ing for the property, plant, and equipment of a com c. For a five-year term bond issued at a premium,
pany are acquisition and retirement. why would the amortization in the first year of the life
of the bond differ using the interest method of amor
Required: tization instead of the straight-line method? Include in
a. What expenditures should be capitalized when your discussion whether the amount of amortization in
equipment is acquired for cash? the first year of the life of the bond would be higher or
b. Assume that the market value of equipment ac lower using the interest method instead of the straight-
quired is not determinable by reference to a similar pur line method.
chase for cash. Describe how the acquiring company d. When a bond issue is sold between interest
should determine the capitalizable cost of equipment dates at a discount, what journal entry is made and how
purchased by exchanging it for each of the following: is the subsequent amortization of bond discount
1. Bonds having an established market price. affected? Include in your discussion an explanation of
2. Common stock not having an established how the amounts of each debit and credit are deter
market price. mined.
3. Similar equipment having a determinable e. Describe how to account for and classify the
market value. gain or loss from the reacquisition of a long-term bond
c. Describe the factors that determine whether ex prior to its maturity.
penditures relating to property, plant, and equipment
already in use should be capitalized.
d. Describe how to account for the gain or loss on
the sale of property, plant, and equipment for cash.
107
Number 5 (Estimated tim e------15 to 25 minutes)
Problems may be encountered in accounting for

transactions involving the stockholders’ equity section
of the balance sheet.
Required:
a. Describe the accounting for the subscription of
common stock at a price in excess of the par value of the
common stock.
b. Describe the accounting for the issuance for
cash of no par value common stock at a price in excess
of the stated value of the common stock.
c. Explain the significance of the three dates that
are important in accounting for cash dividends to
stockholders. State the journal entry, if any, needed at
each date.
d. Assume retained earnings can be used for stock
dividends distributable in shares. What is the effect of
an ordinary 10 percent common stock dividend on re
tained earnings and total stockholders’ equity?
108
May 1981

(P repared by th e B oard o f E xam iners o f the A m erican Institute o f Certified Public A ccountants
and ad o p ted by the exam ining boards o f all states, territories, and the D istrict of C olum bia.)
May 6, 1981; 1:30 to 6:00 P.M.
Estimated Minutes
No. 1 . . . . 45 55
No. 2 . . . . 45 55
No. 3 . . . . 45 55
No. 4 . . . . 45 55
No. 5 . . . . 40 50
Total 220 270
should be numbered I through 12. The printed
objective items are computer graded, your com ty of expressing opinions and conclusions in writ
109
Number 1 (Estimated tim e ------45 to 55 minutes) 2. The following data were available from the
records of the Bricker Department Store for the year
Instructions ended December 31, 1980:
Select the best answer for each of the following A t cost A t retail
items relating to a variety of financial accounting Merchandise inventory,
problems. Use a soft pencil, preferably No. 2, to January 1, 1980 $180,000 $260,000
blacken the appropriate circle on the separate printed Purchases 660,000 920,000
answer sheet to indicate your answer, Mark only one Markups 20,000
answer for each item. Answer all items. Your grade will Markdowns 80,000
be based on your total correct answers. Sales 960,000
the answer sheet should be marked: Using the retail method, an estimate of the merchandise
inventory at December 31, 1980, valued at the lower of
Item average cost or market, would be
a. $220,000
97. Gross billings for merchandise sold by Baker b. $160,000
Company to its customers last year amounted to c. $120,000
$5,260,000; sales returns and allowances reduced the d. $112,000
amounts owed by $160,000. How much were net sales
a. $4,800,000 3. During 1978 Lawton Company introduced a new
b. $5,100,000 line of machines that carry a three-year warranty against
c. $5,200,000 manufacturer’s defects. Based on industry experience,
d. $5,260,000 warranty costs are estimated at 2% of sales in the year
of sale, 4% in the year after sale, and 6% in the second
Answer Sheet year after sale. Sales and actual warranty expenditures
for the first three-year period were as follows:
97. © © © Actual warranty
Sales expenditures
1978 $ 200,000 $ 3,000
Items to be Answered 1979 500,000 15,000
1980 700,000 45,000
$1,400,000 $63,000
1. Details of Monmouth Corporation’s fixed assets
at December 31, 1980, are as follows:
What amount should Lawton report as a liability at
Estimated December 31, 1980?
Year Historical current a. $0
Percent
b. $ 5,000
acquired depreciated cost cost
c. $ 68,000
1978 30 $50,000 $70,000 d. $105,000
1979 20 15,000 19,000
1980 10 20,000 22,000
Monmouth calculates depreciation at 10% per annum, 4. Plains, Inc., engages in three lines of business,
using the straight-line method. A full year’s deprecia each of which is considered to be a significant industry
tion is charged in the year of acquisition. There were no segment. Company sales aggregated $1,800,000 in 1980,
disposals of fixed assets. Monmouth prepares sup of which Segment No. 3 contributed 60%. Traceable
plementary information for inclusion in its 1980 annual costs were $600,000 for Segment No. 3 out of a total of
report as required by the Financial Accounting Stan $1,200,000 for the company as a whole. In addition
dards Board. In Monmouth’s supplementary informa $350,000 of common costs are allocated based on the
tion restated into current cost, the net current cost (after ratio of a segment’s income before common costs to the
accumulated depreciation) of the fixed assets should be total income before common costs. What should Plains
stated as report as operating profit for Segment No. 3 in 1980?
a. $58,000 a. $200,000
b. $65,000 b. $270,000
c. $84,000 c. $280,000
d. $91,000 d. $480,000
no
5. Mercer Construction Company recognizes income 8. Shannon Company was formed on January 1,
under the percentage-of-completion method o f repor 1978, and used an accelerated method o f depreciation
ting income from long-term construction contracts. on its machinery until January 1, 1980. At that time,
During 1978 Mercer entered into a fixed-price contract Shannon adopted the straight-line method o f deprecia
to construct a bridge for $15,000,000. Contract costs in tion for the machinery previously acquired as well as for
curred and estimated costs to complete the bridge were any new machinery acquired in 1980.
as follows; Information concerning depreciation amounts under
each method is as follows:
C u m u la tive E stim a te d
c o n tra c t c o sts c o sts to D ep recia tio n i f a ccel D ep recia tio n i f stra ig h t-
in cu rred c o m p le te Y ear e ra te d m e th o d u sed lin e m e th o d u sed
1978 $400,000 $300,000
At December 31, 1978 $ 1,000,000 $8,000,000 1979 530,000 375,000
At December 31, 1979 5,500,000 5,500,000 1980 600,000 400,000
At December 31, 1980 10,000,000 2,000,000
Assume that the direct effects o f this change are limited
How much income should Mercer recognize on the to the effect on depreciation and the related tax provi
above contract for the year ended December 31, 1980? sions, and that the income tax rate was 40% in each o f
a. $ 500,000 these years. What should be reported in Shannon’s in
b. $ 833,333 come statement for the year ended December 31, 1980,
c. $1,350,000 as the cumulative effect on prior years o f changing to a
d. $2,500,000 different depreciation method?
a. $0
b. $153,000
6, In January 1980 Horner Company paid $80,000 in c. $255,000
property taxes on its plant for the calendar year 1980. d. $273,000
Also in January 1980 Horner estimated that its year-end
bonus to executives for 1980 would be $320,000. What
is the amount o f the expenses related to these two items 9. On January 1, 1979, Current Company purchased
that should be reflected in Horner’s quarterly income a new machine for $5,000,000. The new machine has an
statement for the three months ended June 30, 1980 (se estimated useful life of five years and the salvage value
cond quarter)? was estimated to be $500,000. Current uses the sum-of-
a. $0 the-years’-digits method o f depreciation. The amount
b. $ 20,000 of depreciation expense for 1980 (the second year)
c. $ 80,000 would be
d. $100,000 a. $ 800,000
b. $1,200,000
c. $1,333,333
7. On January 1, 1980, Pierce, Inc., adopted a non d. $1,500,000
contributory pension plan for all o f its eligible
employees. The plan requires Pierce to make annual
payments to the designated trustee three months after 10. The working capital o f Rogers Company at
the end of each year. The first payment was due on December 31, 1979, was $10,000,000. Selected informa
March 31, 1981. Information relating to the plan is as tion for the year 1980 for Rogers is as follows:
follows:
Working capital provided from
Normal cost for 1980 $ 200,000 operations $1,700,000
Past service cost at January 1, 1980 Capital expenditures 3,000,000
(unfunded) 1,000,000 Proceeds from short-term borrowings 1,000,000
Funds held by the trustee are expected Proceeds from long-term borrowings 2,000,000
to earn an 8½ return. Payments on short-term borrowings 500,000
Payments on long-term borrowings 600,000
Assuming that Pierce elects to maximize its pension ex Proceeds from issuance o f common stock 1,400,000
pense in accordance with GAAP, what would be the Dividends paid on common stock 800,000
amount o f accrued pension expense at December 31,
1980? What is Rogers’ working capital at December 31, 1980?
a. $216,000 a. $10,700,000
b. $280,000 b. $11,200,000
c. $300,000 c. $11,500,000
d. $380,000 d. $12,000,000
111
11. On January 1, 1980, Richmond, Inc., signed a 14. During 1980 Trencher, Inc., incurred research and
fixed-price contract to have Builder Associates con development costs as follows:
struct a major plant facility at a cost of $4,000,000. It
was estimated that it would take three years to complete Experimental and development costs
the project. Also on January 1, 1980, to finance the con of a new process patented in
struction cost, Richmond borrowed $4,000,000 payable December 1980 $250,000
in 10 annual installments of $400,000, plus interest at Testing for evaluation of new products 300,000
the rate of 11%. During 1980 Richmond made deposit Modification of the formulation of a
and progress payments totaling $1,500,000 under the chemical product 150,000
contract; the average amount of accumulated expen Research and development costs re
ditures was $650,000 for the year. The excess borrowed imbursable under a contract with
funds were invested in short-term securities, from which Quality Chemicals Corporation 500,000
Richmond realized investment income of $250,000.
What amount should Richmond report as capitalized in
terest at December 31, 1980? What amount should Trencher report as research and
a. $ 71,500 development expense in its income statement for the
b. $165,000 year ended December 31, 1980?
c. $190,000 a. $0
d. $440,000 b. $450,000
c. $700,000
d. $950,000
12. Redford Corporation’s capital structure at

December 31, 1979, was as follows:
Shares issued 15. Stark, Inc., has $1,000,000 of notes payable due
and outstanding June 15, 1981. At the financial statement date of
December 31, 1980, Stark signed an agreement to bor
Common stock 100,000 row up to $1,000,000 to refinance the notes payable on a
Nonconvertible preferred stock 20,000 long-term basis. The financing agreement called for
borrowings not to exceed 80% of the value of the col
On July 1, 1980, Redford issued a 10% stock dividend lateral Stark was providing. At the date of issue of the
on its common stock, and paid a cash dividend of $2.00 December 31, 1980, financial statements the value of the
per share on its preferred stock. Net income for the year collateral was $1,200,000 and was not expected to fall
ended December 31, 1980, was $780,000. What should below this amount during 1981. On the December 31,
be Redford’s 1980 earnings per common share? 1980, balance sheet, Stark should classify
a. $6.73 a. $40,000 of notes payable as short-term and
b. $7.05 $960,000 as long-term obligations.
c. $7.09 b. $200,000 of notes payable as short-term and
d. $7.80 $800,000 as long-term obligations.
c. $1,000,000 of notes payable as short-term
obligations.
13. On January 1, 1980, Belmont Company changed d. $1,000,000 of notes payable as long-term
its inventory cost flow method to the FIFO cost method obligations.
from the LIFO cost method. Belmont can justify the
change, which was made for both financial statement
and income tax reporting purposes. Belmont’s inven
tories aggregated $4,000,000 on the LIFO basis at
December 31, 1979. Supplementary records maintained 16. On January 1, 1980, Battle Corporation sold at 97
by Belmont showed that the inventories would have plus accrued interest, two hundred of its 8%, $1,000
totaled $4,800,000 at December 31, 1979, on the FIFO bonds. The bonds are dated October 1, 1979, and
basis. Ignoring income taxes, the adjustment for the ef mature on October 1, 1989. Interest is payable semi
fect of changing to the FIFO method from the LIFO annually on April 1 and October 1. Accrued interest for
method should be reported by Belmont in the 1980 the period October 1, 1979, to January 1, 1980,
a. Income statement as an $800,000 debit. amounted to $4,000. As a result, on January 1, 1980,
b. Retained earnings statement as an $800,000 Battle would record bonds payable, net of discount, at
debit adjustment to the beginning balance. a. $190,000
c. Income statement as an $800,000 credit. b. $194,000
d. Retained earnings statement as an $800,000 c. $196,000
credit adjustment to the beginning balance. d. $198,000
112
17. Certain balance sheet accounts in a foreign sub 20. Livingston Corporation has incurred losses from
sidiary of Rose Company at December 31, 1980, have operations for several years. At the recommendation of
been translated into United States dollars as follows: the newly hired president, the board of directors voted
to implement a quasi-reorganization, subject to
stockholder approval. Immediately prior to the restate
Translated at ment, on June 30, 1980, Livingston’s balance sheet was
Current Historical as follows:
rates rates
Current assets $ 550,000
Accounts receivable, current $200,000 $220,000 Property, plant and equipment (net) 1,350,000
Accounts receivable, long-term 100,000 110,000 Other assets 200,000
Prepaid insurance 50,000 55,000
Goodwill 80,000 85,000 $2 , 100,000
$430,000 $470,000 Total liabilities $ 600,000
Common stock 1,600,000
Additional paid-in capital 300,000
What total should be included in Rose’s balance sheet at Retained earnings (deficit) (400,000)
December 31, 1980, for the above items? $2 , 100,000
a. $430,000
b. $435,000
C. $440,000 The stockholders approved the quasi-reorganization ef
d. $450,000 fective July 1, 1980, to be accomplished by a reduction
in other assets of $150,000, a reduction in property,
plant and equipment (net) of $350,000, and appropriate
adjustment to the capital structure. To implement the
quasi-reorganization, Livingston should reduce the
18. At December 31, 1979, Sonic Company had common stock account in the amount of
20,000 shares of common stock issued and outstanding a. $0
and 5,000 shares of nonconvertible preferred stock b. $100,000
issued and outstanding. Sonic’s net income for the year c. $400,000
ended December 31, 1980, was $120,000. During 1980 d. $600,000
Sonic declared and paid $50,000 cash dividends on com
mon stock and $8,000 cash dividends on the nonconver
tible preferred stock. There were no common stock or Number 2 (Estimated time----- 45 to 55 minutes)
preferred stock transactions during the year. The earn
ings per common share for the year ended December 31, Instructions
1980, should be
a. $3.50 Select the best answer for each of the following
b. $4.80 items relating to a variety of managerial accounting and
c. $5.60 quantitative methods problems. Use a soft pencil,
d. $6.00 preferably No. 2, to blacken the appropriate circle on
the separate printed answer sheet to indicate your
19. In 1980 Waldo Company paid the annual answers.
premiums of $80,000 on officers’ life insurance (on
which the company is the beneficiary) and received in Items to be Answered
terest income of $120,000 on municipal obligations.
Also in 1980 Waldo collected $200,000 in royalties. For 21. Tracy Corporation is planning to invest $80,000 in
income tax reporting, the royalties are taxed when col a three-year project. Tracy’s expected rate of return is
lected. For financial statement reporting, the royalties 10%. The present value of $1 at 10% for one year is
are recognized as income in the period earned. The .909, for two years is .826, and for three years is .751.
unearned portion of the royalties collected in 1980 The cash flow, net of income taxes, will be $30,000 for
amounted to $150,000 at December 31, 1980. Assuming the first year (present value of $27,270) and $36,000 for
that the income tax rate is 40%, what amount of defer the second year (present value of $29,736). Assuming
red taxes would be recorded as a result of these transac the rate of return is exactly 10%, what will the cash
tions? flow, net of income taxes, be for the third year?
a. $ 60,000 a. $17,268
b. $ 76,000 b. $22,000
c. $ 96,000 c. $22,994
d. $108,000 d. $30,618
113
22. On January 1, 1981, Jenkins, Inc., purchased for 25. Peters Company uses a flexible budget system and
$520,000 a new machine with a useful life of eight years prepared the following information for 1980:
and no salvage value. The machine will be depreciated
using the straight-line method and it is expected to pro
duce annual cash flow from operations, net of income Percent of capacity 80% 90%
taxes, of $120,000. The present value of an ordinary an Direct-labor hours 24,000 27,000
nuity of $1 for eight periods at 14% is 4.639. The pres Variable factory
ent value of $1 for eight periods at 14% is 0.351. overhead $ 48,000 $ 54,000
Assuming that Jenkins uses a time-adjusted rate of Fixed factory
return of 14%, what is the net present value? overhead $108,000 $108,000
a. $ 36,680 Total factory overhead
b. $ 94,848 rate per direct-labor
c. $154,440 hour $6.50 $6.00
d. $255,145
Peters operated at 80% of capacity during 1980, but ap
plied factory overhead based on the 90% capacity level.
Assuming that actual factory overhead was equal to the
budgeted amount for the attained capacity, what is the
23. During January 1981 Gable, Inc., produced amount of overhead variance for the year?
10,000 units of product F with costs as follows: a. $ 6,000 overabsorbed.
b. $ 6,000 underabsorbed.
Direct materials $40,000 c. $12,000 overabsorbed.
Direct labor 22,000 d. $12,000 underabsorbed.
Variable overhead 13,000
Fixed overhead 10,000 26. Dickey Company had total underapplied overhead
$85,000 of $15,000. Additional information is as follows:
What is Gable’s unit cost of product F for January 1981 Variable Overhead:
calculated on the direct costing basis? Applied based on standard direct-
a. $6.20 labor hours allowed $42,000
b. $7.20 Budgeted based on standard direct-
c. $7.50 labor hours 38,000
d. $8.50 Fixed Overhead:
Applied based on standard direct-
labor hours allowed 30,000
Budgeted based on standard direct-
labor hours 27,000
24. Fields Corporation projects the following transac
tions for 1981, its first year of operations: What is the actual total overhead?
a. $50,000
Proceeds from issuance of common b. $57,000
stock $1,000,000 c. $80,000
Sales on account 2,200,000 d. $87,000
Collections of accounts receivable 1,800,000
Cost of goods sold 1,400,000
Disbursements for purchases of 27. Information on Barber Company’s direct-labor
merchandise and expenses 1,200,000 costs for the month of January 1981 is as follows:
Disbursements for income taxes 250,000
Disbursements for purchase of Actual direct-labor hours 34,500
fixed assets 800,000 Standard direct-labor hours 35,000
Depreciation on fixed assets 150,000 Total direct-labor payroll $241,500
Proceeds from borrowings 700,000 Direct-labor efficiency variance -
Payments on borrowings 80,000 favorable $3,200
The projected cash balance at December 31, 1981, is What is Barber’s direct-labor rate variance?
a. $1,170,000 a. $17,250 unfavorable.
b. $1,220,000 b. $20,700 unfavorable.
c. $1,370,000 c. $21,000 unfavorable.
d. $1,820,000 d. $21,000 favorable.
114
28. During March 1981 Younger Company’s direct- 31. On January 1, 1981, Welling Company purchased
material costs for the manufacture of product T were as 100 of the $1,000 face value, 8%, ten-year bonds of
follows: Mann, Inc. The bonds mature on January 1, 1991, and
pay interest annually on January 1. Welling purchased
Actual unit purchase price $6.50 the bonds to yield 10% interest. Information on present
Standard quantity allowed for actual value factors is as follows:
production 2,100
Quantity purchased and used for actual Present value of $1 at 8%
production 2,300 for 10 periods 0.4632
Standard unit price $6.25 Present value of $1 at 10%
for 10 periods 0.3855
Present value of an annuity of $1
Younger’s material usage variance for March 1981 was at 8% for 10 periods 6.7101
a. $1,250 unfavorable. Present value of an annuity of $1
b. $1,250 favorable. at 10% for 10 periods 6.1446
c. $1,300 unfavorable.
d. $1,300 favorable. How much did Welling pay for the bonds?
a. $ 87,707
b. $ 92,230
c. $ 95,477
29. Plainfield Company manufactures part G for use d. $100,000
in its production cycle. The costs per unit for 10,000
units of part G are as follows:
32. Information concerning department A of Stover
Direct materials $ 3 Company for the month of June is as follows:
Direct labor 15
Variable overhead 6 Materials
Fixed overhead 8 Units costs
$32 Work-in-process, beginning 17,000 $12,800
Started in June 82,000 69,700
Units completed 85,000
Verona Company has offered to sell Plainfield 10,000 Work-in-process, end 14,000
units of part G for $30 per unit. If Plainfield accepts
Verona’s offer, the released facilities could be used to All materials are added at the beginning of the process.
save $45,000 in relevant costs in the manufacture of part Using the weighted-average method, the cost per
H. In addition $5 per unit of the fixed overhead applied equivalent unit for materials costs is
to part G would be totally eliminated. What alternative a. $0.83
is more desirable and by what amount is it more b. $0.85
desirable? c. $0.97
d. $1.01
A lte rn a tiv e Am ount
a. Manufacture $ 10,000
33. Department One is the first stage of Drucker
b. Manufacture $15,000 Company’s production cycle. The following informa
c. Buy $35,000 tion is available for conversion costs for the month of
d. Buy $65,000 April:
Units
30. Brunswick Company is planning to purchase a Work-in-process, beginning

new machine. The payback period will be six years. The (40% complete) 40,000
new machine is expected to produce cash flow from Started in April 320,000
operations, net of income taxes, of $3,500 a year for Completed in April and transferred
each of the first three years of the payback period and to department Two 340,000
$2,500 a year for each of the last three years of the pay Work-in-process, end (60% complete) 20,000
back period. Depreciation of $2,000 a year will be
charged to income for each of the six years of the pay Using the FIFO method, the equivalent units for the
back period. How much will the machine cost? conversion cost calculation are
a. $ 6,000 a. 320,000
b. $12,000 b. 336,000
c. $18,000 c. 352,000
d. $21,000 d. 360,000
115
34. Mapes Corporation has estimated its activity for 37. Stayman, Inc., manufactures products F, G, and
January 1981. Selected data from these estimated H from a joint process.
amounts are as follows: Additional information is as follows:
• Sales $1,400,000 P ro d u c t
Gross profit (based on sales) 30% F G H T o ta l
Increase in trade accounts receivable
during month $ 40,000
Change in accounts payable during Units pro
duced 8,000 4,000 2,000 14,000
month $ 0 ? ?
Increase in inventory during month $ 20,000 Joint cost $18,000 $120,000
Sales value
at split-off $120,000 ? 7 $200,000
• Variable selling, general and administrative ex
penses (S, G & A) include a charge for uncollectible ac Additional
counts o f 1% o f sales. costs if
• Total S, G & A is $142,000 per month plus 15% processed
further $ 14,000 $10,000 $ 6,000 $ 30,000
o f sales.
• Depreciation expense of $80,000 per month is Sales value
included in fixed S, G & A. if pro
cessed fur
ther $140,000 $60,000 $50,000 $250,000
What are the estimated cash disbursements for January
1981? Assuming that joint product costs are allocated using
a. $1,238,000 the relative-sales-value at split-off approach, what were
b. $1,252,000 the joint costs allocated to product G?
c. $1,258,000 a. $28,800
d. $1,272,000 b. $30,000
c. $34,000
d. $51,000
35. Warfield Company is planning to sell 100,000
units o f product T for $12.00 a unit. The fixed costs are
38. Tillman Corporation uses a job-order cost system
$280,000. In order to realize a profit of $200,000, what
would the variable costs be? and has two production departments, M and A.
Budgeted manufacturing costs for 1980 are as follows:
a. $480,000
b. $720,000
c. $900,000
D e p a rtm e n t D ep a rtm en t
d. $920,000
M A
Direct materials $700,000 $100,000
Direct labor 200,000 800,000
36. Sun Company’s tentative budget for product H Manufacturing
for 1981 is as follows: overhead 600,000 400,000
Sales $600,000 The actual material and labor costs charged to Job No.
Variable manufacturing 432 during 1980 were as follows:
costs 360,000
Fixed costs: Direct material $25,000
Manufacturing 90,000 Direct labor:
Selling and administrative 110,000 Department M $ 8,000
Department A 12,000 20,000
Mr. Johnston, the marketing manager, proposes an ag
gressive advertising campaign costing an additional Tillman applies manufacturing overhead to production
$50,000 and resulting in a 30% unit sales increase for orders on the basis o f direct-labor cost using departmen
product H. Assuming that Johnston’s proposal is incor tal rates predetermined at the beginning o f the year
porated into the budget for product H, what should be based on the annual budget. The total manufacturing
the increase in the budgeted operating profit for 1981? cost associated with Job No. 432 for 1980 should be
a. $ 12,000 a. $50,000
b. $ 22,000 b. $55,000
c. $ 72,000 c. $65,000
d. $130,000 d. $75,000
116
39. Stowe, Inc., produces two joint products, PEL 42. Richard and Alice Kelley lived apart during 1980
and VEL. The joint production costs for March 1981 and did not file a joint tax return for the year. Under the
were $15,000. During March 1981 further processing terms of the written separation agreement they signed
costs beyond the split-off point, needed to convert the on July 1, 1980, Richard was required to pay Alice
products into salable form, were $8,000 and $12,000 for $1,500 per month of which $600 was designated as child
800 units of PEL and 400 units of VEL, respectively support. He made six such payments in 1980. Addi
PEL sells for $25 per unit and VEL sells for $50 per tionally, Richard paid Alice $1,200 per month for the
unit. Assuming that Stowe uses the net realizable value first six months of 1980, no portion of which was
method for allocating joint product costs, what were the designated as child support. Assuming that Alice has no
joint costs allocated to product PEL for March 1981? other income, her tax return for 1980 should show gross
a. $ 5,000 income of
b. $ 6,000 a. $0
c. $ 9,000 b. $ 5,400
d. $10,000 c. $ 9,000
d. $12,600
40. Gerber Company is planning to sell 200,000 units
of product O for $2.00 a unit. The contribution margin
is 25%. Gerber will break even at this level of sales. 43. On July 1, 1980, Thomas Rich acquired certain
What would be the fixed costs? stocks with a fair market value of $22,000 by gift from
a. $100,000 his father. The stocks had been acquired by the father
b. $160,000 on April 1, 1978, at a cost of $40,000. Thomas sold all
c. $200,000 the stocks for $28,000 on December 12, 1980. What
d. $300,000 amount should Thomas report as capital gain or loss on
his 1980 tax return as a result of the above?
Number 3 (Estimated tim e----- 45 to 55 minutes) a. $0.
b. $ 2,400 gain.
Instructions c. $ 6,000 gain.
d. $12,000 loss.
Select the best answer for each of the following
items relating to the federal income taxation of in
dividuals. Use a soft pencil, preferably No. 2, to 44. During 1980 Howard Thomson maintained his
blacken the appropriate circle on the separate printed home in which he and his sixteen-year old son resided.
answer sheet to indicate your answer. The answers
The son qualifies as his dependent. Thomson’s wife died
should be based upon the Internal Revenue Code and in 1979, for which year a joint return was appropriately
Tax Regulations in effect for the tax period specified in
filed. Thomson remarried on March 15, 1981. What is
the item. If no tax period is specified, use the current In
ternal Revenue Code and Tax Regulations. Mark only Thomson’s filing status for 1980?
one answer for each item. Answer all items. Your grade a. Single.
will be based on your total correct answers. b. Head of household.
c. Surviving spouse.
Items to be Answered d. Married filing jointly.
41. Phil and Joan Crawley made the following

payments during 1980; 45. Henry Adams, an unmarried taxpayer, received
the following amounts during 1980:
Interest on bank loan (loan proceeds were used
to purchase United States savings bonds Interest on savings accounts $1,000
Series H) $4,000 Interest on municipal bonds 500
Interest on installment charge accounts 500 Dividends on General Steel
Interest on home mortgage for period common stock 750
April 1 to December 31, 1980 2,700 Dividends on life insurance
Points paid to obtain conventional policies 200
mortgage loan on April 1, 1980 900
What is the maximum amount that the Crawleys can Adams should report taxable income, after exclusions,
utilize as interest expense in calculating excess itemized if any, from dividends and interest for 1980 in the total
deductions for 1980? amount of
a. $4,100 a. $1,650
b. $7,200 b. $1,750
c. $7,600 c. $1,850
d. $8,100 d. $2,150
117
46. Frank Clarke, an employee of Smithson Com 50. Don and Cynthia Wallace filed a joint return for
pany, was covered under a noncontributory pension 1980 in which they reported adjusted gross income of
plan. Frank died on April 15, 1980, at age 64 and pur $35,000. During 1980 they made the following contribu
suant to the plan, his widow received monthly pension tions to qualified organizations:
payments of $500 beginning May 1, 1980. In addition Land (stated at its current fair market value)
Mrs. Clarke received an employee death payment of donated to church for new building site $22,0(X)
$10,000 in May 1980. What is the total amount of the Cash contributions to church 300
above receipts that the widow should exclude from her Cash contributions to the local community
gross income for 1980? college 200
a. $ 5,000
b. $ 9,000 Assuming that the Wallaces did not elect to reduce the
c. $10,000 deductible amount of the land contribution by 40% of
d. $14,000 the property’s appreciation in value, how much can they
claim as a deduction for charitable contributions in
47. Benedict Atley, who is single, was out of work in 1980?
the early months of 1980 and received $2,800 of a. $10,800
unemployment benefits from his state of residence. His b. $11,000
adjusted gross income was $22,500 for 1980 excluding c. $17,500
the $2,800 of unemployment benefits. Assuming that d. $22,500
Atley had no other items of income or adjustments to
gross income, what amount must Atley report as ad
justed gross income on his income tax return for 1980? 51. Alan Kupper had the following transactions
a. $22,500 during 1980:
b. $23,750
c. $25,150 • Gain of $7,000 on sale of common stock pur
d. $25,300 chased on June 15, 1978, and sold on April
15, 1980.
48. Jim and Nancy Walton had adjusted gross income
of $35,000 in 1980. During the year they paid the • Gain of $5,000 on sale of common stock pur
following medical related expenses: chased on October 15, 1979, and sold on July
25, 1980.
Medicines and drugs $300
Doctors 700 • Receipt of a $10,000 installment payment on
Health Club membership (recommended an installment contract created in 1977 when
by the family doctor for Kupper sold for $100,000 (exclusive of 6% in
general health care) 400 terest on installments) land acquired in 1975
Medical care insurance 280 for $20,000. The contract provides for ten
equal annual principal payments of $10,000
How much may the Waltons utilize as medical expenses beginning on July 1, 1977, and ending on July
in calculating excess itemized deductions for 1980? 1, 1986.
a. $330
b. $230 What is the taxable amount of Kupper’s long-term
c. $140 capital gain for 1980?
d. $0 a. $8,000
b. $7,500
49. Nelson Harris had adjusted gross income in 1980 c. $6,800
of $60,000. During the year his personal summer home d. $6,000
was completely destroyed by a cyclone. Pertinent data
with respect to the home follows: 52. Dennis Cowper, age 25 and single, provided the
following information for his 1980 income tax return:
Cost basis $39,000
Value before casualty 45,000 Adjusted gross income $20,000
Value after casualty 3,000 Personal exemption 1,000
Harris was partially insured for his loss and in 1980 he Total itemized deductions 2,600
received a $15,000 insurance settlement. What is Harris’
allowable casualty loss deduction for 1980? Cowper should report tax table income for 1980 of
a. $23,900 a. $17,400
b. $24,000 b. $18,700
c. $26,900 c. $19,600
d. $27,000 d. $19,700
118
53. Bill McDonald, a cash-basis taxpayer, is the owner 56. Fred Harvey itemized deductions on his 1979 in
of a house with two identical apartments. He resides in come tax return and his total itemized deductions ex
one apartment and rents the other apartment to a tenant ceeded the zero bracket amount by $1,000. Harvey
under a five-year lease dated March 1, 1979, and expir plans to itemize deductions again in 1980 and the
ing on February 29, 1984. The tenant made timely following information relating to his state income taxes
monthly rental payments of $500 for the months of is available:
January through November 1980. Rents for December
1980 and January 1981 were paid by the tenant on Taxes withheld in 1980 $2,500
January 5, 1981. The following additional information Refund received in 1980 of 1979 tax 500
for 1980 was available: Assessment paid in 1980 of 1978 tax 700
Fuel and utilities $3,600 The above information should be reported by Harvey in
Depreciation of building 3,000 his 1980 tax return as:
Maintenance and repairs a. State and local income taxes of $2,500.
(rental apartment) 400 b. State and local income taxes of $2,700.
Insurance on building 600 c. State and local income taxes of $3,200.
d. State and local income taxes of $3,200 and in
What amount should McDonald report as net rental in come from state and local income tax refund
come for 1980? of $500.
a. $2,200
b. $2,000
c. $1,700 57. During 1980 Mr. and Mrs. West paid the following
d. $1,500 taxes:
54. Jon and Connie Cooke, who are filing a joint Property taxes on residence $1,800
return for 1980, elect to use the Optional Sales Tax Special assessment for installation of a
Table which allows them to deduct general sales taxes of sewer system in their town 1,000
$400 based on their gross income and family size. Dur State personal property tax on their
ing 1980 they paid general sales taxes on the following automobile 600
large purchases: Property taxes on land held for
General sales long-term appreciation 300
taxes paid
What amount can the Wests deduct as property taxes in
Purchase of a new car for $8,500 $510 calculating excess itemized deductions for 1980?
Purchase of wearing apparel during a. $2,100
year totaling $3,000 180 b. $2,700
c. $3,100
What is the maximum amount of general sales taxes that d. $3,700
the Cookes can utilize in calculating excess itemized
deductions for 1980?
a. $ 400
b. $ 580 58. During 1980 William and Jane Conley made the
c. $ 910 following energy-conserving component additions to
d. $1,090 their personal residence (a five-year-old house pur
chased by them in July 1980):
55. Albert and Lois Stoner, age 66 and 64, respective Aluminum siding (on the north side
ly, filed a joint tax return for 1980. They provided all of of the house) $1,000
the support for their blind 19-year-old son, who has no Insulation 750
gross income. Their 23-year-old daughter, a full-time Automatic setback thermostat 150
student until her graduation on June 14, 1980, earned Used storm windows (purchased from an
$2,000, which was 40% of her total support during unrelated party) 300
1980. Her parents provided the remaining support. The
Stoners also provided the total support of Lois’ father, Assuming that t he Conleys have a tax liability of $3,000
who is a citizen and life-long resident of Peru. How without any other credits against their tax for 1980,
many exemptions can the Stoners claim on their 1980 in what amount can they claim as a residential energy
come tax return? credit on their 1980 income tax return?
a. 4 a. $135
b. 5 b. $180
c. 6 c. $300
d. 7 d. $330
119
59. Robert and Mary Jason, filing a joint tax return Required:
for 1980, had a tax liability of $9,000 based on their tax Prepare a schedule showing the income or loss
table income and three exemptions. Robert and Mary before income taxes from the bond investment that
had earned income of $20,000 and $12,000, respective Warner should record for the years ended December 31,
ly, during 1980. In order for Mary to be gainfully 1979, and 1980. Show supporting computations in good
employed, the Jasons incurred the following form.
employment-related expenses for their four-year-old
son John in 1980: Part b. On January 1, 1979, Jeffries, Inc., paid
$700,000 for 10,000 shares of Wolf Company’s voting
Payee Amount common stock which was a 10% interest in Wolf. At
Union Day Care Center $1,500 that date the net assets of Wolf totaled $6,000,000. The
Acme Home Cleaning Service 500 fair values of all of Wolf’s identifiable assets and
Wilma Jason, babysitter liabilities were equal to their book values. Jeffries does
(Robert Jason’s mother) 1,000 not have the ability to exercise significant influence over
the operating and financial policies of Wolf. Jeffries
Assuming that the Jasons do not claim any other credits received dividends of $0.90 per share from Wolf on
against their tax, what is the amount of the child care October 1, 1979. Wolf reported net income of $400,000
tax credit they should report on their tax return for for the year ended December 31, 1979.
1980? On July 1, 1980, Jeffries paid $2,300,000 for
a. $300 30,000 additional shares of Wolf Company’s voting
b. $400 common stock which represents a 30% investment in
c. $500 Wolf. The fair values of all of Wolf’s identifiable assets
d. $600 net of liabilities were equal to their book values of
$6,500,000. As a result of this transaction, Jeffries has
the ability to exercise significant influence over the
60. Roger Burrows, age 19, is a full-time student at operating and financial policies of Wolf. Jeffries re
Marshall College and a candidate for a bachelor’s ceived dividends of $1.10 per share from Wolf on April
degree. During 1980 he received the following 1, 1980, and $1.35 per share on October 1, 1980. Wolf
payments: reported net income of $500,000 for the year ended
December 31, 1980, and $200,000 for the six months
State scholarship for ten months $3,600 ended December 31, 1980. Jeffries amortizes goodwill
Loan from college financial aid office 1,500 over a forty-year period.
Cash support from parents 3,000
Cash dividends on qualified investments 700 Required:
Cash prize awarded in contest 500 1. Prepare a schedule showing the income or loss
$9,300 before income taxes for the year ended December 31,
1979, that Jeffries should report from its investment in
Wolf in its income statement issued in March 1980.
What is Burrows’ adjusted gross income for 1980? 2. During March 1981 Jeffries issues comparative
a. $1,100 financial statements for 1979 and 1980. Prepare
b. $1,200 schedules showing the income or loss before income
c. $4,800 taxes for the years ended December 31, 1979, and 1980,
d. $9,300 that Jeffries should report from its investment in Wolf.
Show supporting computations in good form.
Number 4 (Estimated tim e----- 45 to 55 minutes) Number 5 consists of two unrelated parts.
Number 4 consists of two unrelated parts. Part a. On February 20, 1980, Riley, Inc., pur
chased a machine for $1,200,000 for the purpose of
Part a. On June 1, 1979, Warner, Inc., purchased leasing it. The machine is expected to have a ten-year
as a long-term investment 800 of the $1,000 face value, life, no residual value, and will be depreciated on the
8% bonds of Universal Corporation for $738,300. The straight-line basis. The machine was leased to Sutter
bonds were purchased to yield 10% interest. Interest is Company on March 1, 1980, for a four-year period at a
payable semiannually on December 1 and June 1. The monthly rental of $18,000. There is no provision for the
bonds mature on June 1, 1984. Warner uses the effec renewal of the lease or purchase of the machine by the
tive interest method of amortization. On November 1, lessee at the expiration of the lease term. Riley paid
1980, Warner sold the bonds for $785,000. This amount $60,000 of commissions associated with negotiating the
includes the appropriate accrued interest. lease in February 1980.
120
Required: • The lease is appropriately accounted for as a

1. What expense should Sutter record as a result direct financing lease by Dumont and as a capital lease
of the above facts for the year ended December 31, by Finley. Both lessor and lessee are calendar-year cor
1980? Show supporting computations in good form. porations and depreciate all fixed assets on the straight-
2. What income or loss before income taxes line basis.
should Riley record as a result of the above facts for the
year ended December 31, 1980? Show supporting com Information on present value factors is as follows:
putations in good form.
Present value of $1 for seven periods
Part b. Dumont Corporation, a lessor of office at 12% 0.452
machines, purchased a new machine for $500,000 on Present value of $1 for seven periods
December 31, 1979, which was delivered the same day at 14% 0.400
(by prior arrangement) to Finley Company, the lessee. Present value of an annuity of $1 in
The following information relating to the lease trans advance for seven periods at 12% 5.111
action is available: Present value of an annuity of $1 in
advance for seven periods at 14% 4.889
• The leased asset has an estimated useful life of
seven years which coincides with the lease term.
• At the end of the lease term, the machine will
revert to Dumont, at which time it is expected to have a
residual value of $60,000 (none of which is guaranteed Required (round all amounts to the nearest dollar):
by Finley).
• The 10% investment tax credit on the asset cost 1. Compute the annual rental under the lease.
is retained by Dumont and is expected to be realized in Show all computations in good form.
its 1979 income tax return. 2. Compute the amounts of the gross lease rentals
• Dumont’s implicit interest rate (on its net in receivable and the unearned interest revenue that
vestment) is 12%, which is known by Finley. Dumont should disclose at the inception of the lease on
• Finley’s incremental borrowing rate is 14% at December 31, 1979. Show all computations in good
December 31, 1979. form.
• Lease rentals consist of seven equal annual 3. What expense should Finley record for the year
payments, the first of which was paid on December 31, ended December 31, 1980? Show supporting computa
1979. tions in good form.
121
(Prepared by the B oard o f Exam iners o f the A m erican Institute o f Certified Public A ccountants
and adopted by the exam ining boards o f all states, territories, and the D istrict o f Columbia.)
May 7, 1981; 1:30 to 6:00 P.M.
Estimated Minutes
No. 1 . . . . 45 55
No. 2 . . . . 45 55
No. 3 . . . . 45 55
No. 4 . . . . 45 55
No. 5 . . . . 40 50
Total 220 270
objective items are computer-graded, your com ty of expressing opinions and conclusions in writ
122
Number 1 (Estimated time----- 45 to 55 minutes) 2. Town Corporation purchased factory equipment

that was installed and put into service January 2, 1979,
Instructions at a total cost of $64,000. Salvage value was estimated at
$4,000. The equipment is being depreciated over eight
Select the best answer for each of the following years using the double-declining balance method. For
items relating to a variety of financial accounting the year 1980, Park should record depreciation expense
problems. Use a soft pencil, preferably No. 2, to on this equipment of
blacken the appropriate circle on the separate printed a. $11,250
answer sheet to indicate your answer. Mark only one b. $12,000
answer for each item. Answer ail items. Your grade will c. $15,000
be based on your total correct answers. d. $16,000
3. On December 1, 1980, Fontaine Corporation ex
Item changed 1,000 shares of its $25 par value common stock
held in treasury for a parcel of land to be held for a
future plant site. The treasury shares were acquired by
97. Gross billings for merchandise sold by Baker Fontaine at a cost of $50 per share, and on the exchange
Company to its customers last year amounted to date the common shares of Fontaine had a fair market
$5,260,000; sales returns and allowances reduced the value of $60 per share. Fontaine received $7,500 for sell
amounts owed by $160,000. How much were net sales ing scrap when an existing building on the property was
last year for Baker Company? removed from the site. The land should be capitalized at
a. $4,800,000. a. $42,500
b. $5,100,000. b. $50,000
c. $5,200,000. c. $52,500
d. $5,260,000. d. $60,000
Answer Sheet
4. In January 1980 Farley Corporation acquired 20%
9 7 . of the outstanding common stock of Davis Company
for $800,000. This investment gave Farley the ability to
Items to be Answered exercise significant influence over Davis. The book
1. The following schedule lists the average consumer value of the acquired shares was $600,000. The excess of
price index (all urban consumers) of the indicated year: cost over book value was attributed to an identifiable in
tangible asset which was undervalued on Davis’s
1978 100 balance sheet and which had a remaining useful life of
1979 125 ten years.
1980 150 For the year ended December 31, 1980, Davis
reported net income of $180,000 and paid cash
Carl Corporation’s plant and equipment at December dividends of $40,000 on its common stock. What is the
31, 1980, are as follows: proper carrying value of Farley’s investment in Davis at
December 31, 1980?
Date Percent Historical a. $772,000
acquired depreciated cost b. $780,000
c. $800,000
1978 30 $30,000 d. $808,000
1979 20 20,000
1980 10 10,000
5. At the end of its first year of operations,
$60,000 December 31, 1980, Wonder Company had accounts
receivable of $500,000, which were net of the related
Depreciation is calculated at 10% per annum, straight- allowance for doubtful accounts. During 1980 Wonder
line. A full year’s depreciation is charged in the year of recorded charges to bad debt expense of $80,000 and
acquisition. There were no disposals in 1980. wrote off as uncollectible, accounts receivable of
What amount of depreciation expense would be in $20,000. What should Wonder report on its balance
cluded in the income statement adjusted for general in sheet at December 31, 1980, as accounts receivable
flation (historical cost/constant dollar accounting)? before the allowance for doubtful accounts?
a. $6,000 a. $500,000
b. $7,200 b. $520,000
c. $7,900 c. $560,000
d. $9,000 d. $600,000
123
6. An analysis of the stockholders’ equity of Barton 9. Bold Company estimates its annual warranty ex
Corporation as of January 1, 1980, is as follows; pense at 2% of annual net sales. The following data are
available:
Common stock, par value $20; authorized
200,000 shares; issued and outstanding, Net sales for 1980 $ 4,000,000
120,000 shares $2,400,000 Warranty liability account:
Additional paid-in capital 280,000 December 31, 1979 $60,000 credit
Retained earnings 1,540,000 Warranty payments
Total $4,220,000 during 1980 50,000 debit
Barton uses the cost method of accounting for treasury After recording the 1980 estimated warranty expense,
stock and during 1980 recorded the following transac the warranty liability account would show a December
tions: 31, 1980, balance of
a. $10,000
• Acquired 2,000 shares of its stock for $70,000 b. $70,000
• Sold 1,200 treasury shares at $40 per share c. $80,000
• Retired the remaining treasury shares d. $90,000
Assuming no other equity transactions occurred during

1980, what should Barton report at December 31, 1980,
as additional paid-in capital?
a. $274,000
b. $280,000
c. $304,000
d. $316,000
Items 10 and 11 are based on the following infor
7. Fulton Cereal Company inaugurated a new sales mation:
promotional program. For every 10 cereal box tops On January 1, 1980, Karva Company granted
returned to the company, customers receive an attrac James Dean, the president, an option to purchase 1,000
tive prize. Fulton estimates that only 30% of the cereal shares of Karva’s $30 par value common stock at $40
box tops reaching the consumer market will be re per share. The option becomes exercisable on January
deemed. 1, 1982, after Dean has completed two years of service.
Additional information is as follows:
10. Assume that the quoted market prices of Karva’s
Units Amounts $30 par value common stock were as follows:
Sales of cereal boxes 2 , 000,000 $1,400,000
Purchase of prizes 36,000 18,000 January 1 , 1980 $40
Prizes distributed to December 31,1980 55
customers 28,000
As a result of the option granted to Dean, Karva should
At the end of its year, Fulton recognized a liability equal recognize compensation expense in 1980 of
to the estimated cost of potential prizes outstanding. a. $0
What is the amount of this estimated liability? b. $ 5,000
a. $ 4,000 c. $ 7,500
b. $16,000 d. $15,000
c. $18,000
d. $42,000
11. Assume that the quoted market prices of Karva’s
8. On December 1, 1980, Leonard Company ex $30 par value common stock were as follows:
changed a delivery truck (that was acquired in 1976) for
a new delivery truck. The old truck was purchased for January 1 , 1980 $45
$14,000 and had a book value of $5,600. On the date of December 31, 1980 55
the exchange the old truck had a market value of
$6,000. In addition, Leonard paid $7,000 cash for the As a result of the option granted to Dean, Karva should
new truck, which had a list price of $16,000. At what recognize compensation expense in 1980 of
amount should Leonard record the new truck for finan a. $0
cial accounting purposes? b. $2,500
a. $10,000 c. $5,000
b. $12,600 d. $7,500
c. $13,000
d. $16,000
124
12. On July 1, 1980, Metaro Corporation purchased

for $108,000, 2,000 shares o f Jean Corporation’s newly
issued 6% cumulative $20 par value preferred stock. Items 15 through 18 are based on the following in
Each share also had one stock warrant attached, which formation:
entitled the holder to acquire, at $19, one share o f Jean
$10 par value common stock for each two warrants Al p h a C o rp o ra tio n
held. On July 2, 1980, the market price o f the preferred S elected F inancial D a ta
stock (without warrants) was $50 per share and the
market price o f the stock warrants was $10 per warrant. A s o f D ecem b er 31,
On September 1, 1980, Metaro sold all the stock war 1980 1979
rants for $19,800.
Cash $ 10,000 $ 80,000
Accounts receivable (net) 50,000 150,000
What should be the gain on the sale o f the stock
Merchandise inventory 90,000 150,000
warrants?
Short-term marketable
a. $0
securities 30,000 10,000
b. $ 800
Land and buildings (net) 340,000 360,(XX)
c. $1,800
Mortgage payable
d. $9,800
(no current portion) 270,000 280,000
13. On December 31, 1979, the stockholders’ equity Accounts payable (trade) 70,000 110,000
section o f Mercedes Corporation was as follows: Short-term notes payable 20,000 40,000
Common stock, par value $5; authorized Year e n d e d D ecem b er 31,
30,000 shares; issued and outstanding,
9,000 shares $ 45,000 1980 1979
Additional paid-in capital 58,000 Cash sales $1,800,000 $1,600,000
Retained earnings 73,000 Credit sales 500,000 800,000
Cost of goods sold 1,000,000 1,400,000
Total stockholders’ equity $176,000
On April 1, 1980, the board o f directors declared a 15. Alpha’s quick (acid test) ratio as o f December 31,
10% stock dividend, and accordingly 900 additional 1980, is
shares were issued, when the fair market value o f the a. 0.5 to 1.
stock was $8 per share. For the three months ended b. 0.7 to 1.
March 31, 1980, Mercedes sustained a net loss of c. 1.0 to 1.
$16,000. d. 2.0 to 1.
What amount should Mercedes report as retained
earnings as of April 1, 1980?
a. $49,800 16. Alpha’s receivable turnover for 1980 is
b. $52,500 a. 5 times.
c. $54,300 b. 10 times.
d. $57,000 c. 23 times.
d. 46 times.
14. Hestor Company’s records indicate the following
information;
17. Alpha’s merchandise inventory turnover for 1980
Merchandise inventory, is
January 1 , 1980 $ 550,000 a. 8.3 times.
Purchases, January 1 through b. 10.0 times.
December 31, 1980 2,250,000 c. 11.1 times.
Sales, January 1 through d. 13.3 times.
December 3 1 , 1980 3,000,000
On December 31, 1980, a physical inventory determined
that ending inventory of $600,000 was in the warehouse. 18. Alpha’s current ratio at December 31, 1980, is
Hestor’s gross profit on sales has remained constant at a. 0.5 to 1.
30%. Hestor suspects some of the inventory may have b. 0.7 to 1.
been taken by some new employees. At December 31, c. 1.0 to 1.
1980, what is the estimated cost of missing inventory? d. 2.0 to 1.
a. $100,000
b. $200,000
c. $300,000
d. $700,000
125
19. Steven Corporation began operations in 1980. For 21. Elba Corporation issued $200,000 face amount of
the year ended December 31, 1980, Steven made 8% bonds with interest payable on April 1 and October
available the following information: 1. The bonds were callable at 105. Interest and amor
tization of bond discount have been accounted for up to
Total merchandise purchases October 1, 1980, at which date the bonds were called.
for the year $350,000 Unamortized bond discount on that date amounted to
Merchandise inventory at $16,000. Ignoring the income tax effect, what was
December 31 , 1980 70.000 Elba’s gain or loss on the bond retirement?
Collections from customers 200,000 a. $ 6,000 gain.
b. $ 6,000 loss.
All merchandise was marked to sell at 40% above cost. c. $10,000 loss.
Assuming that all sales are on a credit basis and all d. $26,000 loss.
receivables are collectible, what should be the balance in
accounts receivable at December 31, 1980?
a. $ 50,000
b. $192,000 22. Pine Corporation’s stockholders’ equity at
c. $250,000 December 31, 1980, consisted of the following:
d. $290,000
Cumulative preferred stock, 6%,
$100 par value; 1,000 shares
issued and outstanding $100,000
20. Maple Corporation’s stockholders’ equity at June Common stock, $10 par value; 300,000
30, 1980, consisted of the following: shares authorized; 50,000 shares
issued and outstanding 500,000
Preferred stock, 10% , $50 par value; Retained earnings 90,000
liquidating value $55 per share;
20,000 shares issued and outstanding $1,000,000 Dividends have not been declared on the preferred stock
Common stock, $10 par value; 500,000 for the years 1976 through 1980. The book value per
shares authorized; 150,000 shares share of common stock is
issued and outstanding 1,500,000 a. $10.00
Retained earnings 500,000 b. $11.20
c. $11.80
The book value per share of common stock is d. $14.12
a. $10.00
b. $12.67
c. $13.33
d. $17.65 23. The following capital stock information pertains
to Palisades Corporation:
Number o f
shares issued Amount
Common stock, $10 par
value; 300,000 shares
authorized:
January 1, 1980 45,000 $450,000
Sold on May 1,
Number 2 (Estimated time----- 45 to 55 minutes) 1980 3,000 30,000
Total, December 31,
Instructions 1980 48,000 $480,000
Select the best answer for each of the following Preferred stock, 9%,
items relating to a variety of financial accounting cumulative nonconver
problems. Use a soft pencil, preferably No. 2, to tible, $100 par value;
blacken the appropriate circle on the separate printed 10,000 shares authorized 1,000 $100,000
answer sheet to indicate your answer. Mark only one which the 1980 earnings
answer for each item. Answer all items. Your grade will per share computation should be based is
be based on your total correct answers. a. 46,500
b. 47,000
c. 48,000
Items to be Answered d. 49,000
126
24. Flex Company owns a machine that was bought on Debbie Dress Shops, Inc.
January 2, 1977, for $94,000. The machine was INCOME STATEMENTS
estimated to have a useful life of five years and a salvage
value of $6,000. Flex uses the sum-of-the-years digits Year ended December 31,
method of depreciation. At the beginning of 1980, Flex 1980 1979
determined that the useful life of the machine should
have been four years and the salvage value $8,800. For Net credit sales $6,400,000 $4,000,000
the year 1980, Flex should record depreciation expense Cost of goods sold 5,000,000 3,200,000
on this machine of Gross profit 1,400,000 800,000
a. $11,100 Expenses (including
b. $14,800 income taxes) 1,000,000 520,000
c. $17,600 Net income $ 400,000 $ 280,000
d. $21,300
Additional information available included the
following:
Items 25 through 28 relate to data to be reported in
the Statement of Changes in Financial Position of
Debbie Dress Shops, Inc., based on the following infor • Although the Corporation will report all
mation: changes in financial position, management has adopted
a format emphasizing the flow of cash.
Debbie Dress Shops, Inc. • All accounts receivable and accounts payable
BALANCE SHEETS relate to trade merchandise. Accounts payable are re
corded net and always are paid to take all of the dis
December 31, count allowed. The Allowance for Doubtful Accounts
1980 1979 at the end of 1980 was the same as at the end of 1979; no
Assets receivables were charged against the Allowance during
1980.
Current assets: • The proceeds from the note payable were used
Cash $ 300,000 $ 200,000 to finance a new store building. Capital stock was sold
Accounts receivable to provide additional working capital.
—net 840,000 580,000
Merchandise inventory 660,000 420,000 25. Cash collected during 1980 from accounts
Prepaid expenses 100,000 50,000 receivable amounted to
Total current assets 1,900,000 1,250,000 a. $5,560,000
Long-term investments 80,000 — b. $5,840,000
Land, buildings and c. $6,140,000
fixtures 1,130,000 600,000 d. $6,400,000
Less accumulated
depreciation 110,000 50,000
26. Cash payments during 1980 on accounts payable
1,020,000 550,000 to suppliers amounted to
Total assets $3,000,000 $1,800,000 a. $4,670,000
b. $4,910,000
Equities c. $5,000,000
Current liabilities: d. $5,150,000
Accounts payable $ 530,000 $ 440,000
Accrued expenses 140,000 130,000 27. Cash receipts during 1980 which were not provided
Dividends payable 70,000 by operations totaled
Total current a. $140,000
liabilities b. $300,000
740,000 570,000
c. $500,000
Note payable — due d. $800,000
1983 500,000
Stockholders’ equity: 28. Cash payments for non-current assets purchased
Common stock 1,200,000 900,000 during 1980 were
Retained earnings 560,000 330,000 a. $ 80,000
1,760,000 1,230,000 b. $530,000
c. $610,000
Total liabilities d. $660,000
and stockholders’
equity $3,000,000 $1,800,000
127
Items 29 and 30 are based on the following infor Items 31 and 32 pertain to classification of short
mation: term obligations expected to be refinanced, and are
based on the following data:
Magnolia, Inc.
BALANCE SHEETS
Royal Corporation’s liabilities at December 31, 1980,
December 31, were as follows:
1980 1979 Trade accounts payable $ 100,000
Current assets $ 474,000 $ 320,000 16% notes payable issued November 1,
Equipment 1,230,000 1,200,000 1980, maturing July 1, 1981 30,000
Accumulated depre 14% debentures payable issued
ciation (436,000) (420,000) February 1, 1980; final install
Goodwill 480,000 500,000 ment due February 1, 1985;
Total assets $ 1,748,000 $ 1,600,000 balance at December 31, 1980,
including annual installment
of $50,000 due February 1, 1981 300,000
Current liabilities $ 360,000 $ 160,000 $430,000
Bonds payable 400,000 600,000
Discount on bonds (12,000) (20,000)
Common stock 1,112,000 1,112,000 Royal’s December 31, 1980, financial statements were
Retained earnings issued on March 31, 1981. On January 5, 1981, the en
(deficit) (112,000) (252,000) tire $300,000 balance of the 14% debentures was
Total liabilities refinanced by issuance of a long-term obligation. In
and stockholders’ addition, on March 1, 1981, Royal consummated a non-
equity $ 1,748,000 $ 1,600,000 cancelable agreement with the lender to refinance the
16% note payable on a long-term basis, on readily
determinable terms that have not yet been implemented.
You have discovered the following facts; Both parties are financially capable of honoring the
• During 1980, Magnolia sold at no gain or loss
agreement, and there have been no violations of any of
equipment with a book value of $76,000 and purchased
the agreement’s provisions.
new equipment costing $150,000.
• During 1980, bonds with a face and book value
of $200,000 were extinguished, with no gain or loss.
They were not current liabilities prior to their ex
tinguishment. 31. The total amount of Royal’s short-term obliga
• Retained earnings was affected only by the 1980 tions that may properly be excluded from current
net income or loss. liabilities at December 31, 1980, is
a. $0
b. $30,000
29. How much working capital was provided by c. $50,000
operations during 1980? d. $80,000
a. $208,000
b. $212,000
c. $220,000
d. $228,000
32. Assume the same facts for Royal Corporation’s
liabilities, except that the agreement with the lender to
30. Assume that $200,000 face value of bonds became refinance the 16% note payable on a long-term basis is
current at December 31, 1980, to be repaid in early cancellable at any time upon ten days’ notice by the
1981. What should be the change in working capital lender. The total amount of Royal’s short-term obliga
under this assumption after considering all changes in tions that may properly be excluded from current
financial position? liabilities at December 31, 1980, is
a. $ 46,000 increase. a. $0
b. $ 46,000 decrease. b. $30,000
c. $246,000 increase. c. $50,000
d. $246,000 decrease. d. $80,000
128
33. On January 2, 1978, Gow Corporation bought a 37. Volner Company’s fire insurance premiums were
press for $22,000, with an estimated useful life of four increased from $60,000 to $200,000 in 1980. To avoid
years and a salvage value of $6,000. Straight-line paying such a substantial additional expense, Volner in
depreciation is used for financial statement purposes creased the deductible on its policy from $100,000 to
and the sum-of-the-years digits method is used for in $1,000,000. Volner’s income tax rate is 40%. At
come tax purposes. Assuming an income tax rate of December 31, 1980, how much of a contingent liability
50%, and no other timing differences, what amount should Volner accrue to cover possible future fire
should be reported in the balance sheet as deferred in losses?
come taxes at December 31, 1980? a. $0
a. $ 400 debit. b. $ 540,000
b. $1,200 credit. c. $ 600,000
c. $1,600 credit. d. $1,000,000
d. $2,400 credit.
38. Howard Company sublet a portion of its
warehouse for five years at an annual rental of $18,000,
34. Electro Corporation bought a new machine and beginning on May 1, 1980. The tenant paid one year’s
agreed to pay for it in equal annual installments of rent in advance, which Howard recorded as a credit to
$5,000 at the end of each of the next five years. Assume unearned rental income. Howard reports on a calendar-
a prevailing interest rate of 15%. The present value of year basis. The adjustment on December 31, 1980,
an ordinary annuity of $1 at 15% for five periods is should be
3.35. The future amount of an ordinary annuity of $1 at
15% for five periods is 6.74. The present value of $1 at Dr. Cr.
15% for five periods is 0.5. How much should Electro
record as the cost of the machine? a. No Entry
a. $12,500 b. Unearned rental income $ 6,000
b. $16,750 Rental income $ 6,000
c. $25,000 Rental income $ 6,000
d. $33,700 Unearned rental
income $ 6,000
d. Unearned rental income $ 12,000
35. Janis Manufacturing Company recorded the Rental income $ 12,000
following data pertaining to raw material X:
Units
Date Received Cost Issued On hand Items 39 and 40 are based on the following data:
1/1/80 In Marvel Construction Co., Inc., had a net income of
ventory $1.00 400 $600,000 for the year ended December 31, 1980, after
1/8/80 inclusion of the following special events that occurred
Purchase 600 $1.10 1,000 during the year:
1/12/80
Issue 800 200 • The decision was made on January 2 to
discontinue the cinder block manufacturing
segment.
The weighted average unit cost of raw material X at • The cinder block manufacturing segment was
January 12, 1980, is actually sold on July 1.
a. $1.00 • Operating income from January 1 to June 30
b. $1.05 for the cinder block manufacturing segment
c. $1.06 amounted to $90,000 before taxes.
d. $1.10 • Cinder block manufacturing equipment with a
book value of $250,000 was sold for $100,000.
36. Boa Constructors, Inc., had an operating loss
carryforward of $100,000 at December 31, 1979, for Marvel was subject to income tax at the rate of 40%.
which the tax benefit was fully realized at the end of
1980, when the income tax rate was 40%. For the year
ended December 31, 1980, the tax benefit should be 39. Marvel’s after-tax income from continuing opera
reported in the income statement as tions for the year ended December 31, 1980, was
a. A $40,000 reduction in income tax expense. a. $360,000
b. An extraordinary item of $40,000. b. $564,000
c. An operating gain of $40,000. c. $600,000
d. An extraordinary item of $100,000. d. $636,000
129
40. Marvel’s aggregate income tax expense for the 43. During the 1980 holiday season, Taurus
year ended December 31, 1980, should be Corporation gave business gifts to 34 customers. The
a. $216,000 value of the gifts, which were not of an advertising
b. $240,000 nature, was as follows;
c. $264,000
d. $400,000 8@ $10
8@ $25
8@ $50
10 @ $100
For 1980 Taurus can deduct as a business expense

a. $0
Number 3 (Estimated time----- 45 to 55 minutes) b. $ 280
c. $ 730
Instructions d. $1,680

items relating to the federal income taxation of corpora
44. On December 31, 1960, Homer Corporation
tions and partnerships. Use a soft pencil, preferably No. issued $2,000,000 of fifty-year bonds for $2,600,000.
2, to blacken the appropriate circle on the separate On December 31, 1980, Homer issued new bonds with a
printed answer sheet to indicate your answer. The face value of $3,000,000 for which it received
answers should be based upon the Internal Revenue $3,400,000 and used part of the proceeds to repurchase
Code and Tax Regulations in effect for the tax period for $2,320,000 the bonds issued in 1960. No elections
specified in the item. If no tax period is specified, use
were made to adjust the basis of any property. What is
the current Internal Revenue Code and Tax Regula the taxable income to Homer on the repurchase of the
tions. Mark only one answer for each item. Answer all
items. Your grade will be based on your total correct 1960 bonds?
a. $0
answers.
b. $ 40,000
c. $280,000
d. $360,000
41. On October 1, 1980, Derek Corporation sold 4,000

shares of its $10 par value treasury stock for $60,000. 45. Sarge Corporation sold machinery for $40,000 on
These shares were acquired by Derek on January 2, December 31, 1980. The machinery had been purchased
1980, for $50,000. For 1980 Derek should report on January 1, 1976, for $34,000. The machinery had an
a. Neither income nor capital gain. adjusted basis of $20,000 at the date of sale. For 1980
b. A long-term capital gain of $10,000. Sarge should report
c. A short-term capital gain of $10,000. a. Ordinary income of $6,000 and Section 1231
d. A long-term capital gain of $20,000. gain of $14,000.
b. Ordinary income of $14,000 and Section 1231
gain of $6,000.
42. For the year ended December 31, 1980, Apollo c. Ordinary income of $20,000.
Corporation had net income per books of $1,200,000. d. Section 1231 gain of $20,000.
Included in the determination of net income were the
following items:
Interest income on municipal bonds $ 40,000 46. For its year ended December 31, 1980, Valor
Gain on settlement of life insurance Corporation, a Subchapter S Corporation, had net in
policy (death of officer) 200,000 come per books of $216,000 which included $180,000
Interest paid on loan to purchase from operations and a $36,000 net long-term capital
municipal bonds 8,000 gain. During 1980, $90,000 was distributed to the
Provision for federal income tax 524,000 corporation’s nine equal shareholders, all of whom are
on a calendar-year basis. Each shareholder should
What should Apollo report as its taxable income for report for 1980
1980? a. $10,000 ordinary income.
a. $1,492,000 b. $20,000 ordinary income.
b. $1,524,000 c. $20,000 ordinary income and $4,000 long
c. $1,684,000 term capital gain.
d. $1,692,000 d. $24,000 ordinary income.
130
47. Marina Corporation, a Subchapter S Corporation, 50. Pursuant to a plan of corporate reorganization
had taxable income and current earnings and profits of adopted in 1980, Bart Smith exchanged 1,000 shares of
$390,000 for the year ended December 31, 1980. There Talbot Corporation common stock that he had pur
were no capital gains or losses during 1980. For the year chased for $150,000, for 1,800 shares of Mark Corpora
ended December 31, 1979, Marina had undistributed tion common stock having a fair market value of
taxable income of $90,000. During 1980 Marina made $172,000. As a result of this exchange. Smith’s recog
the following cash distributions to its ten equal nized gain and his basis in the Mark Corporation com
shareholders: mon stock should be
Recognized Gain Basis
January 31 $50,000 a. $0 $150,000
March 1 80,000 b. $0 $172,000
October 1 60,000 c. $22,000 $150,000
d. $22,000 $172,000
What is the undistributed taxable income for the year
ended December 31, 1980?
a. $200,000
b. $290,000 51. Charles Jordan files his income tax return on a
c. $300,000 calendar-year basis. He is the principal partner of a
d. $330,000 partnership reporting on a June 30 fiscal-year basis.
Jordan’s share of the partnership’s ordinary income was
$24,000 for the fiscal year ended June 30, 1979, and
$72,000 for the fiscal year ended June 30, 1980. How
48. Norwood Corporation is an accrual-basis tax much should Jordan report on his 1980 return as his
payer. For the year ended December 31, 1980, it had share of taxable ordinary income from the partnership?
book income before tax of $500,000 after deducting a a. $24,000
charitable contribution of $100,000. The contribution b. $36,000
was authorized by the Board of Directors in December c. $48,000
1980, but was not actually paid until March 1, 1981. d. $72,000
How should Norwood treat this charitable contribution
for tax purposes to minimize its 1980 taxable income?
a. It cannot claim a deduction in 1980, but must
apply the payment against 1981 income.
b. Make an election claiming a deduction for
52. Richard Wilson is a partner in the firm of Day and
1980 of $25,000 and carry the remainder over
a maximum of five succeeding tax years. Wilson. His profit and loss sharing ratio is 50%. In 1978
c. Make an election claiming a deduction for he contributed a capital asset to the business with a basis
to him of $40,000 and a fair market value of $30,000 to
1980 of $30,000 and carry the remainder over
the partnership. His capital account was credited for
a maximum of five succeeding tax years.
$30,000. During 1980 the property was sold for
d. Make an election claiming a 1980 deduction of
$ 100,000 .
$36,000. There were no other sales of capital assets in
1980. As a result of the sale, Wilson’s share of the part
nership’s capital asset transaction is a
a. $2,000 capital loss.
b. $3,000 capital gain.
c. $4,000 capital loss.
49. The partnership of Felix and Oscar had the follow d. $6,000 capital gain.
ing items of income during the taxable year ended
December 31, 1980:
Income from operations $156,000

Tax-exempt interest income 8,000
Dividends from foreign corporations 6,000 53. During 1980 Waner Corporation exchanged
Net rental income 12,000 10,000 shares of its own common stock with a par value
of $10 per share for a building with a fair market value
What is the total ordinary income of the partnership for of $150,000. What should Waner report in its 1980 tax
1980? return as a result of this transaction?
a. $170,000 a. No gain.
b. $174,000 b. $50,000 ordinary income.
c. $176,000 c. $50,000 Section 1231 gain.
d. $182,000 d. $50,000 Section 1245 gain.
131
54. Robert Elk paid $100,000 for all of the issued and 58. Elmo Corporation had the following income and
outstanding capital stock o f Elkom Corp., a Subchapter expenses for the year ended December 31, 1980:
S corporation established in January 1978. Elkom’s
operating results and dividend distribution were as Gross profit on sales $150,000
follows: Dividends from domestic taxable
corporations 15,000
N et D iv id e n d Salaries and wages 90,000
T axable operatin g d istrib u Interest expense 22,500
D a te in com e loss tion Taxes on real estate and payroll 52,500
Depreciation 15,000
12/31/78 ($40,000) Contributions 7,500
9/30/79 $20,000
12/31/79 $60,000 Elmo’s net operating loss for 1980 is
12/31/80 $30,000 a. $15,000
b. $17,250
The basis of Elk’s stock on December 31, 1980, is c. $22,500
a. $ 50,000 d. $27,750
b. $100,000
c. $130,000
d. $150,000 59. Baxter Manufacturers, Inc., a calendar-year cor
poration, bought the following new assets during 1980:
55. Filo, Inc., began business on July 1, 1980, and D a te U seful

elected to file its income tax returns on a calendar-year D a te p la c e d life
basis. The following expenditures were incurred in P ro p e rty bought in service (years) C o st
organizing the corporation: Manuals Jan. 2 Jan. 4 2 $ 210
Truck April 1 June 30 3 15,000
August 1, 1980 $300 Desk and
September 3, 1980 $600 chair Dec. 1 Dec. 31 7 1,200
The maximum allowable deduction for amortiza Baxter’s total qualified investment in 1980 for computa
tion of organization expense in 1980 is tion o f the investment credit is
a. $60 a. $2,570
b. $65 b. $3,920
c. $81 c. $6,200
d. $90 d. $6,270
60. Cromwell Investors, Inc., has ten unrelated equal

56. Delve Co., Inc., issued $1,000,000 o f 8-year con stockholders. For the year ended June 30, 1980,
vertible bonds on October 1, 1980, for $880,000. The Cromwell’s adjusted gross income comprised the
amount o f bond discount deductible on Delve’s income following:
tax return for the year ended March 31, 1981, is
a. $0 Dividends from domestic taxable
b. $ 7,500 corporations $ 10,000
c. $15,000 Dividends from savings and loan
d. $120,000 associations on passbook savings
accounts 1,000
Interest earned on notes receivable 5,000
57. On June 30, 1980, Ral Corporation had retained Net rental income 3,000
earnings o f $100,000. On that date, it sold a plot o f land
to a stockholder for $50,000. Ral had paid $40,000 for The corporation paid no dividends during the taxable
the land in 1975, and it had a fair market value of year. Deductible expenses totaled $4,000 for the year.
$80,000 when the stockholder bought it. The amount of Cromwell’s liability for personal holding company tax
dividend income taxable to the stockholder in 1980 for the year will be based on undistributed personal
(before the dividend exclusion) is holding company income of
a. $0 a. $0
b. $10,000 b. $ 3,500
c. $20,000 c. $ 6,500
d. $30,000 d. $15,000
132
Number 4 consists of two unrelated parts.
Part a. The City of Merlot operates a central 2. The inventory of materials and supplies at
garage through an Internal (Intragovernmental) Service June 30, 1980, was $58,000, which agreed
Fund to provide garage space and repairs for all city- with the physical count taken.
owned and operated vehicles. The Central Garage Fund 3. Salaries and wages paid to employees totaled
was established by a contribution of $200,000 from the $230,000, including related costs.
General Fund on July 1, 1977, at which time the 4. A billing was received from the Enterprise
building was acquired. The after-closing trial balance at Fund for utility charges totaling $30,000, and
June 30, 1979, was as follows: was paid.
5. Depreciation of the building was recorded
D eb it C redit in the amount o f $5,000. Depreciation o f the
machinery and equipment amounted to
$ 8 ,000.
Cash $150,000 6. Billings to other departments for services
Due from General Fund 20,000 rendered to them were as follows:
Inventory o f materials and
supplies 80,000 General Fund $262,000
Land 60,000 Water and Sewer Fund 84,000
Building 200,000 Special Revenue Fund 32,000
Allowance for deprecia
tion — building $ 10,000 7. Unpaid interfund receivable balances at June
Machinery and equipment 56,000 30, 1980, were as follows:
Allowance for deprecia
tion — machinery and General Fund $ 6,000
equipment 12,000 Special Revenue Fund 16,000
Vouchers payable 38,000
Contribution from 8. Vouchers payable at June 30, 1980, were
General Fund 200,000 $14,000.
Retained earnings 306,000
$566,000 $566,000
Required:
The following information applies to the fiscal year 1. For the period July 1, 1979, through June 30,
ended June 30,1980: 1980, prepare journal entries to record all of the trans
actions in the Central Garage Fund accounts.
1. Materials and supplies were purchased on 2. Prepare closing entries for the Central Garage
account for $74,000. Fund at June 30, 1980.
133
Part b. The following information was abstracted from the accounts of the General Fund of the City of Rom
after the books had been closed for the fiscal year ended June 30, 1980:
Post-Closing Post-Closing
Trial Balance Transactions Trial Balance
June 30, 1979 July 1, 1979 to June 30, 1980
Debit Credit
Cash $ 700,000 $1,820,000 $1,852,000 $ 668,000
Taxes receivable 40,000 1,870,000 1,828,000 82,000
$ 740,000 $ 750,000
Allowance for
uncollectible
taxes $ 8,000 8,000 10,000 $ 10,000
Vouchers payable 132,000 1,852,000 1,840,000 120,000
Fund balance:
Reserved for en
cumbrances — 1,000,000 1,070,000 70,000
Unreserved 600,000 140,000 60,000
30,000 550,000
$ 740,000 $ 750,000
Additional information:
The budget for the fiscal year ended June 30, 1980, provided for estimated revenues of $2,000,000 and appropria
tions of $1,940,000.
Required:
Prepare journal entries to record the budgeted and actual transactions for the fiscal year ended June 30, 1980.
134
Number 5 (Estimated time----- 40 to 50 minutes) 3. M anufacturing overhead during June

amounted to $45,600.
Vogue Fashions, Inc., manufactures ladies’ blouses 4. A total of $576,000 was budgeted for manufac
of one quality, produced in lots to fill each special order turing overhead for the year 1980, based on estimated
from its customers, comprised of department stores production at the plant’s normal capacity of 48,000
located in various cities. Vogue sews the particular dozen blouses annually. Manufacturing overhead at this
stores’ labels on the blouses. The standard costs for a level of production is 40% fixed and 60% variable.
dozen blouses are: Manufacturing overhead is applied on the basis of direct
labor hours.
Direct materials 24 yards @ $1.10 $26.40 5. There was no work in process at June 1.
Direct labor 3 hours @ $4.90 14.70 During June, lots 22 and 23 were completed. All
Manufacturing material was issued for lot 24, which was 80% com
overhead 3 hours @ $4.00 12.00 pleted as to direct labor.
Standard cost
per dozen $53.10
Required:
a. Prepare a schedule showing the computation
During June 1980, Vogue worked on three orders, of standard cost of lots 22, 23, and 24 for June 1980.
for which the month’s job cost records disclose the b. Prepare a schedule showing the computation
following: of the materials price variance for June 1980. Indicate
whether the variance is favorable or unfavorable.
Lot Units in Lot Material Used Hours c. Prepare a schedule showing, for each lot pro
No. (dozens) (yards) Worked duced during June 1980, computations of the
22 1,000 24,100 2,980
23 1,700 40,440 5,130 1. Materials quantity variance in yards.
24 1,200 28,825 2,890 2. Labor efficiency variance in hours.
3. Labor rate variance in dollars.
The following information is also available:
1. Vogue purchased 95,000 yards of material dur Indicate whether each variance is favorable or un
ing June at a cost of $106,400. The materials price favorable.
variance is recorded when goods are purchased. All in d. Prepare a schedule showing computations of
ventories are carried at standard cost. the total controllable and noncontrollable (volume)
2. Direct labor during June amounted to $55,000. manufacturing overhead variances for June 1980. In
According to payroll records, production employees dicate whether the variances are favorable or un
were paid $5.00 per hour. favorable.
135
(P repared by th e B oard o f E xam iners o f the A m erican Institute o f Certified Public A ccountants
and adopted by the exam ining boards o f all states, territories, and the D istrict o f Colum bia.)
May 7, 1981; 8:30 A.M. to 12:00 M
Estimated Minutes
No. 1 ................... 90 no
No. 2 ................... 15 25
No. 3 ................... 15 25
No. 4 ................... 15 25
No. 5 ................... 15 25
T otal........... 150 210
1. You must arrange the papers in numerical order of your advantage to attempt all questions even if
2. Answer all objective-type items on the printed tion of the subject matter, the ability to organize
language will be considered by the examiners.
136
Auditing
Number 1 (Estimated time----- 90 to 110 minutes) 4. Which of the following is not a primary objective
of the auditor in the examination of accounts
Instructions receivable?
a. Determine the approximate realizable value.
Select the best answer for each of the following b. Determine the adequacy of internal controls.
items. Use a soft pencil, preferably No 2, to blacken the c. Establish validity of the receivables.
appropriate circle on the separate printed answer sheet d. Determine the approximate time of collec
to indicate your answer. Mark only one answer for each tibility of the receivables.
item. Answer all items. Your grade will be based on
your total correct answers. 5. In general, material irregularities perpetrated by
The following is an example of the manner in which which of the following are most difficult to detect?
the answer sheet should be marked; a. Cashier.
b. Controller.
Item c. Internal auditor.
d. Key-punch operator.
96. One of the generally accepted auditing standards 6. The computer system most likely to be used by a
specifies that the auditor large savings bank for customers’ accounts would be
a. Inspect all fixed assets acquired during the a. An on-line, real time system.
year. b. A batch processing system.
b. Charge fair fees based on cost. c. A generalized utility system.
c. Make a proper study and evaluation of the ex d. A direct access data base system.
isting internal control.
d. Count client petty-cash funds.
7. The primary purpose of the auditor’s study and
Answer Sheet evaluation of internal control is to provide a basis for
a. Determining whether procedures and records
that are concerned with the safeguarding of
96. assets are reliable.
b. Constructive suggestions to clients concerning
improvements in internal control.
Items to be Answered c. Determining the nature, extent, and timing of
audit tests to be applied.
1. The AICPA Code of Professional Ethics states d. The expression of an opinion.
that a CPA shall not disclose any confidential informa
tion obtained in the course of a professional engage 8. The purpose of tests of compliance is to provide
ment except with the consent of the client. This rule reasonable assurance that the
should be understood to preclude a CPA from respond a. Accounting treatment of transactions and
ing to an inquiry made by balances is valid and proper.
a. The trial board of the AICPA. b. Accounting control procedures are function
b. An investigative body of a state CPA society. ing as intended.
c. A CPA-shareholder of the client corporation. c. Entity has complied with disclosure re
d. An AICPA voluntary quality review body. quirements of generally accepted accounting
principles.
2. Once the initial audit of a newly constructed in d. Entity has complied with requirements of
dustrial plant has been performed, with respect to con quality control.
sistency, which of the following is of least concern to the
continuing auditor in the following year? 9. A sales cutoff test of billings complements the
a. Prior years’ capitalization policy. verification of
b. Prior years’ capitalized costs. a. Sales returns.
c. Prior years’ depreciation methods. b. Cash.
d. Prior years’ depreciable life. c. Accounts receivable.
d. Sales allowances.
3. An auditor should be familiar with a client’s elec
tronic data processing hardware and software. An im 10. During an examination of a publicly-held
portant element of the client’s software is the program. company, the auditor should obtain written confirma
Another element of software is the tion regarding debenture transactions from the
a. Cathode ray tube (CRT). a. Debenture holders.
b. Central processing unit (CPU). b. Client’s attorney.
c. Magnetic tape drive. c. Internal auditors.
d. Compiler. d. Trustee.
137
11. An advantage of using statistical sampling tech 15. Early appointment of the independent auditor will
niques isthat such techniques enable
a. Mathematically measure risk. a. A more thorough examination to be per
b. Eliminate the need for judgmental decisions. formed.
c. Define the values of precision and reliability b. A proper study and evaluation of internal
required to provide audit satisfaction. control to be performed.
d. Have been established in the courts to be c. Sufficient competent evidential matter to be
superior to judgmental sampling. obtained.
d. A more efficient examination to be planned.
12. Karr has examined the financial statements of
Lurch Corporation for the year ended December 31, 16. The accuracy of perpetual inventory records may
1980. Although Karr’s field work was completed on be established, in part, by comparing perpetual inven
February 27, 1981, Karr’s auditor’s report was dated tory records with
February 28, 1981, and was received by the management a. Purchase requisitions.
of Lurch on March 5, 1981. On April 4, 1981, the b. Receiving reports.
management of Lurch asked that Karr approve inclu c. Purchase orders.
sion of this report in their annual report to stockholders d. Vendor payments.
which will include unaudited financial statements for
the first quarter ended March 31, 1981. Karr approved 17. The auditor should ordinarily mail confirmation
of the inclusion of this auditor’s report in the annual requests to all banks with which the client has conducted
report to stockholders. Under the circumstances Karr is any business during the year, regardless of the year-end
responsible for inquiring as to subsequent events occur balance, since
ring through a. The confirmation form also seeks information
a. February 27, 1981. about indebtedness to the bank.
b. February 28, 1981. b. This procedure will detect kiting activities
c. March 31, 1981. which would otherwise not be detected.
d. April 4, 1981. c. The mailing of confirmation forms to all such
banks is required by generally accepted
13. The fourth generally accepted auditing standard of auditing standards.
reporting requires an auditor to render a report when d. This procedure relieves the auditor of any
ever an auditor’s name is associated with financial responsibility with respect to nondetection of
statements. The overall purpose of the fourth standard forged checks.
of reporting is to require that reports
a. Assure that the auditor is independent with 18. In estimation sampling for attributes, which one
respect to the financial statements under ex of the following must be known in order to appraise the
amination. results of the auditor’s sample?
b. State that the auditor’s examination of the a. Estimated dollar value of the population.
financial statements has been conducted in ac b. Standard deviation of the values in the
cordance with generally accepted auditing population.
standards. c. Actual occurrence rate of the attribute in the
c. Indicate the character of the auditor’s ex population.
amination and the degree of responsibility d. Sample size.
assumed.
d. Express whether the accounting principles 19. Which of the following analyses appearing in a
used in preparing the financial statements predecessor’s working papers is the successor auditor
have been applied consistently in the period least likely to be interested in reviewing?
under examination. a. Analysis of noncurrent balance sheet ac
counts.
14. An audit program for the examination of the re b. Analysis of current balance sheet accounts.
tained earnings account should include a step that re c. Analysis of contingencies.
quires verification of the d. Analysis of income statement accounts.
a. Market value used to charge retained earnings
to account for a two-for-one stock split. 20. In the study and review of a client’s EDP internal
b. Approval of the adjustment to the beginning control system, the auditor will encounter general con
balance as a result of a write-down of an ac trols and application controls. Which of the following is
count receivable. an application control?
c. Authorization for both cash and stock a. Dual read.
dividends. b. Hash total.
d. Gain or loss resulting from disposition of c. Systems flowchart.
treasury shares. d. Control over program changes.
138
Auditing
21. Assume that an auditor estimates that 10,000 26. In which of the following instances would it be ap
checks were issued during the accounting period. If an propriate for the auditor to refer to the work of an ap
EDP application control which performs a limit check praiser in the auditor’s report?
for each check request is to be subjected to the auditor’s a. An unqualified opinion is expressed and the
test-data approach, the sample should include auditor wishes to place emphasis on the use of
a. Approximately 1,000 test items, a specialist.
b. A number of test items determined by the b. A qualified opinion is expressed because of a
auditor to be sufficient under the cir major uncertainty unrelated to the work of
cumstances. the appraiser.
c. A number of test items determined by the c. An adverse opinion is expressed based on a
auditor’s reference to the appropriate sam difference of opinion between the client and
pling tables. the outside appraiser as to the value of certain
d. One transaction. assets.
d. A disclaimer of opinion is expressed due to a
scope limitation imposed on the auditor by the
22. During the review of an EDP internal control appraiser.
system an auditor may review decision tables prepared
by the client. A decision table is usually prepared by a
client to supplement or replace the preparation of 27. An example of a transaction which may be in
a. An internal control questionnaire when the dicative of the existence of related parties is
number of alternative responses is large. a. Borrowing or lending at a rate of interest
b. A narrative description of a system where which equals the current market rate.
transactions are not processed in batches. b. Selling real estate at a price that is comparable
c. Flowcharts when the number of alternatives to its appraised value.
is large. c. Making large loans with specified terms as to
d. An internal control questionnaire not when or how the funds will be repaid.
specifically designed for an EDP installation. d. Exchanging property for similar property in a
nonmonetary transaction.
23. Which of the following consistency phrases would 28. A common audit procedure in the audit of payroll
be contained in a continuing auditor’s standard report transactions involves tracing selected items from the
on comparative financial statements? payroll journal to employee time cards that have been
a. Applied on a consistent basis. approved by supervisory personnel. This procedure is
b. Applied on a basis consistent with that of the designed to provide evidence in support of the audit
preceding year. proposition that
c. Applied consistently during interim periods. a. Only bona fide employees worked and their
d. Applied consistently with previous years pay was properly computed.
audited. b. Jobs on which employees worked were
charged with the appropriate labor cost.
24. The auditor faces a risk that the examination will c. Internal controls relating to payroll
not detect material errors which occur in the accounting disbursements are operating effectively.
process. In regard to minimizing this risk, the auditor d. All employees worked the number of hours
primarily relies on for which their pay was computed.
a. Substantive tests.
b. Compliance tests.
29. Which of the following would not be required for
c. Internal control. the statements to be “ presented fairly” in conformity
d. Statistical analysis. with generally accepted accounting principles?
a. That generally accepted accounting principles
25. Which of the audit procedures listed below would be followed in presenting all material items in
be least likely to disclose the existence of related party the statements.
transactions of a client during the period under audit? b. That the generally accepted accounting prin
a. Reading “ conflict-of-interest” statements ob ciples selected from alternatives be ap
tained by the client from its management, propriate for the circumstances of the par
b. Scanning accounting records for large trans ticular company,
actions at or just prior to the end of the period c. That generally accepted accounting principles
under audit. be applied on a basis consistent with those
c. Inspecting invoices from law firms. followed in the prior year.
d. Confirming large purchase and sales transac d. That the generally accepted accounting prin
tions with the vendors and/or customers in ciples selected from alternatives reflect trans
volved. actions in accordance with their substance.
139
30. An auditor is confronted with an exception con 35. The use of a header label in conjunction with
sidered sufficiently material as to warrant some devia magnetic tape is most likely to prevent errors by the
tion from the standard unqualified auditor’s report. If a. Computer operator.
the exception relates to a departure from generally ac b. Keypunch operator.
cepted accounting principles, the auditor must decide c. Computer programmer.
between expressing a (an) d. Maintenance technician.
a. Adverse opinion and a “ subject to’’ opinion.
b. Adverse opinion and an “ except for’’ 36. In pursuing its quality control objectives with
opinion. respect to acceptance of a client, a CPA firm is not
c. Adverse opinion and a disclaimer of likely to
opinion. a. Make inquiries of the proposed client’s legal
d. Disclaimer of opinion and a “ subject to’’ counsel.
opinion. b. Review financial statements of the proposed
client.
31. A continuing auditor would update his opinion on c. Make inquiries of previous auditors.
prior financial statements by issuing a “ subject to’’ d. Review the personnel practices of the pro
opinion for the posed client.
a. Subsequent resolution of an uncertainty in the
current period. 37. Analytical review procedures may be classified as
b. Discovery of an uncertainty in the current being primarily
period. a. Compliance tests.
c. Discovery of an uncertainty in the current b. Substantive tests.
period that relates to the prior-period state c. Tests of ratios.
ments being reported on. d. Detailed tests of balances.
d. Restatement of prior-period statements in
conformity with generally accepted account
ing principles. 38. In tax practice, which of the following would not
be considered reasonable support for taking a position
contrary to the Internal Revenue Code?
a. Proposed regulations advocated by the IRS.
32. Which of the following ultimately determines the
b. Legal opinions as to the constitutionality of a
specific audit procedures necessary to provide an in
specific provision.
dependent auditor with a reasonable basis for the ex
c. Possible conflicts between two sections of the
pression of an opinion?
Internal Revenue Code.
a. The audit program.
d. Tax court decisions not acquiesced to by the
b. The auditor’s judgment.
IRS.
c. Generally accepted auditing standards.
d. The auditor’s working papers.
39. A CPA examines a sample of copies of December
and January sales invoices for the initials of the person
33. In which of the following circumstances would an who verified the quantitative data. This is an example
adverse opinion be appropriate? of a
a. The auditor is not independent with respect to a. Compliance test.
the enterprise being audited. b. Substantive test.
b. An uncertainty prevents the issuance of an un c. Cutoff test.
qualified opinion. d. Statistical test.
c. The statements are not in conformity with
APB Opinion No. 8 regarding pension plans. 40. Patentex developed a new secret formula which is
d. A client-imposed scope limitation prevents the of great value because it resulted in a virtual monopoly.
auditor from complying with generally ac Patentex has capitalized all research and development
cepted auditing standards. costs associated with this formula. Greene, CPA, who is
examining this account, will probably
a. Confer with management regarding transfer
34. A procedural control used in the management of a of the amount from the balance sheet to the
computer center to minimize the possibility of data or income statement.
program file destruction through operator error in b. Confirm that the secret formula is registered
cludes and on file with the county clerk’s office.
a. Control figures. c. Confer with management regarding a change
b. Crossfooting tests. in the title of the account to “ goodwill.”
c. Limit checks. d. Confer with management regarding owner
d. External labels. ship of the secret formula.
140
Auditing
41. Which of the following statements best describes 45. Which of the following explanations might satisfy
the primary purpose of Statements on Auditing Stan an auditor who discovers significant debits to an ac
dards? cumulated depreciation account?
a. They are guides intended to set forth auditing a. Extraordinary repairs have lengthened the life
procedures which are applicable to a variety of an asset.
of situations. b. Prior years’ depreciation charges were er
b. They are procedural outlines which are in roneously understated.
tended to narrow the areas of inconsistency c. A reserve for possible loss on retirement has
and divergence of auditor opinion. been recorded.
c. They are authoritative statements, enforced d. An asset has been recorded at its fair value.
through the code of professional ethics, and
are intended to limit the degree of auditor 46. To conceal defalcations involving receivables, the
judgment. auditor would expect an experienced bookkeeper to
d. They are interpretations which are intended to charge which of the following accounts?
clarify the meaning of “ generally accepted a. Miscellaneous income.
auditing standards.’’ b. Petty cash.
c. Miscellaneous expense.
42. An auditor’s report would be designated as a d. Sales returns.
special report when it is issued in connection with which
of the following? 47. A CPA, while performing ah audit, strives to
a. Financial statements for an interim period achieve independence in appearance in order to
which are subjected to a limited review. a. Reduce risk and liability.
b. Financial statements which are prepared in b. Maintain public confidence in the profession.
accordance with a comprehensive basis of c. Become independent in fact.
accounting other than generally accepted ac d. Comply with the generally accepted standards
counting principles. of fieldwork.
c. Financial statements which purport to be in
accordance with generally accepted account 48. The third general standard states that due care is to
ing principles but do not include a presenta be exercised in the performance of the examination.
tion of the statement of changes in financial This standard should be interpreted to mean that a CPA
position. who undertakes an engagement assumes a duty to per
d. Financial statements which are unaudited and form
are prepared from a client’s accounting a. With reasonable diligence and without fault
records. or error.
b. As a professional who will assume respon
43. The auditor’s program for the examination of sibility for losses consequent upon error of
long-term debt should include steps that require the judgment.
a. Verification of the existence of the bond c. To the satisfaction of the client and third
holders. parties who may rely upon it.
b. Examination of any bond trust indenture. d. A s a professional possessing the degree of skill
c. Inspection of the accounts payable subsidiary commonly possessed by others in the field.
ledger.
d. Investigation of credits to the bond interest in 49. Inclusion of which of the following in a promo
come account. tional brochure published by a CPA firm would be most
likely to result in a violation of the AICPA rules of con
44. When an independent auditor decides that the duct?
work performed by internal auditors may have a bear a. Names and addresses, telephone numbers,
ing on the nature, timing, and extent of contemplated number of partners, office hours, foreign
audit procedures, the independent auditor should plan language competence, and date the firm was
to evaluate the objectivity of the internal auditors. established.
Relative to objectivity, the independent auditor should b. Services offered and fees for such services, in
a. Consider the organizational level to which in cluding hourly rates and fixed fees.
ternal auditors report the results of their c. Educational and professional attainments, in
work. cluding date and place of certification,
b. Review the quality control program in effect schools attended, dates of graduation, degrees
for the internal audit staff. received, and memberships in professional
c. Examine the quality of the internal audit associations.
reports. d. Names, addresses and telephone numbers of
d. Consider the qualifications of the internal the firm’s clients, including the number of
audit staff. years served.
141
50. An auditor’s flowchart of a client’s internal con 55. Once a CPA has determined that accounts
trol system is a diagrammatic representation which receivable have increased due to slow collections in a
depicts the auditor’s “ tight money’’ environment, the CPA would be likely
a. Understanding of the system. to
b. Program for compliance tests. a. Increase the balance in the allowance for bad
c. Documentation of the study and evaluation of debts account.
the system. b. Review the going concern ramifications.
d. Understanding of the types of irregularities c. Review the credit and collection policy.
which are probable, given the. present system. d. Expand tests of collectibility.
51. In the audit of which of the following types of 56. To establish illegal “ slush funds,’’ corporations
profit-oriented enterprises would the auditor be most may divert cash received in normal business operations.
likely to place special emphasis on testing the internal An auditor would encounter the greatest difficulty in
controls over proper classification of payroll transac detecting the diversion of proceeds from
tions? a. Scrap sales.
a. A manufacturing organization. b. Dividends.
b. A retailing organization. c. Purchase returns.
c. A wholesaling organization. d. C. O. D. sales.
d. A service organization.
57. Which of the following statements best describes
52. Before reissuing a report which was previously the auditor’s responsibility with respect to illegal acts
issued on the financial statements of a prior period, a that do not have a material effect on the client’s finan
predecessor auditor should cial statements?
a. Review the successor auditor’s working a. Generally, the auditor is under no obligation
papers. to notify parties other than personnel within
b. Examine significant transactions or events the client’s organization.
since the date of previous issuance. b. Generally, the auditor is under an obligation
c. Obtain a signed engagement letter from the to see that stockholders are notified.
client. c. Generally, the auditor is obligated to disclose
d. Obtain a letter of representation from the suc the relevant facts in the auditor’s report.
cessor auditor. d. Generally, the auditor is expected to compel
the client to adhere to requirements of the
53. A modification of the CPA’s report on a review of Foreign Corrupt Practices Act.
the interim financial statements of a publicly-held com
pany would be necessitated by which of the following? 58. The independent auditor’s plan for an examina
a. An uncertainty. tion in accordance with generally accepted auditing
b. Lack of consistency. standards is influenced by the possibility of material
c. Reference to another accountant. errors. The auditor will therefore conduct the examina
d. Inadequate disclosure. tion with an attitude of
a. Professional skepticism.
54. Thomas, CPA, has examined the consolidated b. Subjective mistrust.
financial statements of Kass Corporation. Jones, CPA, c. Objective indifference.
has examined the financial statements of the sole sub d. Professional responsiveness.
sidiary which is material in relation to the total ex
amined by Thomas. It would be appropriate for 59. When evaluating inventory controls with respect
Thomas to serve as the principal auditor, but it is im to segregation of duties, a CPA would be least likely to
practical for Thomas to review the work of Jones. a. Inspect documents.
Assuming an unqualified opinion is expressed by Jones, b. Make inquiries.
one would expect Thomas to c. Observe procedures.
a. Refuse to express an opinion on the con d. Consider policy and procedure manuals.
solidated financial statements.
b. Express an unqualified opinion on the con 60. The objective of precision in sampling for com
solidated financial statements and not refer to pliance testing on an internal control system is to
the work of Jones. a. Determine the probability of the auditor’s
c. Express an unqualified opinion on the con conclusion based upon reliance factors.
solidated financial statements and refer to the b. Determine that financial statements taken as a
work of Jones. whole are not materially in error.
d. Express an “ except for’’ opinion on the con c. Estimate the reliability of substantive tests.
solidated financial statements and refer to the d. Estimate the range of procedural deviations in
work of Jones. the population.
142
Auditing
Number 2 (Estimated tim e----- 15 to 25 minutes) In our opinion, except for the effects, if any, on the
financial statements of the ultimate resolution of the
Windek, a CPA, is nearing the completion of an matter discussed in the second preceding paragraph, the
examination of the financial statements of Jubilee, Inc., financial statements referred to above present fairly the
for the year ended December 31, 1980. Windek is cur financial position of American Widgets, Inc., as of
rently concerned with ascertaining the occurrence of December 31, 1980, and the results of operations for the
subsequent events that may require adjustment or years then ended, in conformity with generally accepted
disclosure essential to a fair presentation in conformity accounting principles applied on a basis consistent with
with generally accepted accounting principles. that of the preceding year.
Required: To be signed by
a. Briefly explain what is meant by the phrase Better & Best, CPAs
“ subsequent event. ”
b. How do those subsequent events which require March 1, 1981, except
financial statement adjustment differ from those that for Note 4 as to which
require financial statement disclosure? the date is January 8, 1981
c. What are the procedures which should be per
formed in order to ascertain the occurrence of subse
quent events? Required:
Identify deficiencies in the staff accountant’s ten
Number 3 (Estimated tim e----- 15 to 25 minutes) tative report which constitute departures from the
generally accepted standards of reporting. Do not con
The following tentative auditor’s report was sider any AICPA exposure drafts that are currently
drafted by a staff accountant and submitted to a partner outstanding.
in the accounting firm of Better & Best, CPAs:
To the Audit Committee of Number 4 (Estimated tim e----- 15 to 25 minutes)

American Widgets, Inc.
Taylor, a CPA, has been engaged to audit the
We have examined the consolidated balance sheets financial statements of University Books, Incorporated.
of American Widgets, Inc., and subsidiaries as of University Books maintains a large revolving cash fund
December 31, 1980, and 1979, and the related con exclusively for the purpose of buying used books from
solidated statements of income, retained earnings, and students for cash. The cash fund is active all year
changes in financial position, for the years then ended. because the nearby university offers a large variety of
Our examinations were made in accordance with courses with varying starting and completion dates
generally accepted auditing standards as we considered throughout the year.
necessary in the circumstances. Other auditors examin Receipts are prepared for each purchase and reim
ed the financial statements of certain subsidiaries a nd bursement vouchers are periodically submitted.
have furnished us with reports thereon containing no ex
ceptions. Our opinion expressed herein, insofar as it Required:
relates to the amounts included for those subsidiaries, is Construct an internal control questionnaire to be
based solely upon the reports of the other auditors. used in the evaluation of the system of internal control
As discussed in Note 4 to the financial statements, of University Books’s buying segments revolving cash
on January 8, 1981, the company halted the production fund. The internal control questionnaire should elicit a
of certain medical equipment as a result of inquiries by yes or no response. Do not discuss the internal controls
the Food and Drug Administration, which raised ques over books that are purchased.
tions as to the adequacy of some of the company’s
sterilization equipment and related procedures.
Management is not in a position to evaluate the effect of
this production halt and the ensuing litigation, which Number 5 (Estimated tim e----- 15 to 25 minutes)
may have an adverse effect on the financial position of
American Widgets, Inc. Decker, CPA, is performing an examination of the
As fully discussed in Note 7 to the financial financial statements of Allright Wholesale Sales, Inc.,
statements, in 1980 the company extended the use of the for the year ended December 31, 1980. Allright has been
last-in, first-out (LIFO) method of accounting to in in business for many years and has never had its finan
clude all inventories. In examining inventories, we cial statements audited. Decker has gained satisfaction
engaged Dr. Irwin Same (Nobel Prize winner 1978) to with respect to the ending inventory and is considering
test check the technical requirements and specifications alternative audit procedures to gain satisfaction with
of certain items of equipment manufactured by the respect to management’s representations concerning the
company. beginning inventory which was not observed.
143
Allright sells only one product (bottled brand X

beer), and maintains perpetual inventory records. In
addition, Allright takes physical inventory counts
monthly. Decker has already confirmed purchases with
the manufacturer and has decided to concentrate on
evaluating the reliability of perpetual inventory records
and performing analytical review procedures to the ex
tent that prior years’ unaudited records will enable such
procedures to be performed.
Required:
What are the audit tests, including analytical review
procedures, which Decker should apply in evaluating
the reliability of perpetual inventory records and gain
ing satisfaction with respect to the January 1, 1980, in
ventory?
144
(Prepared by the B oard o f Exam iners o f the A m erican Institute o f Certified Public A ccountants
and ad o p ted by the exam ining boards o f all states, territories, and the D istrict o f C olum bia.)
(Commercial Law)
May 8, 1981; 8:30 AM to 12:00 M.
Estimated Minutes
No. 1 110 130

No. 2 15 20
No. 3 15 20
No. 4 15 20
No. 5 15 20
Total 170 210
145
Number 1 (Estimated time----- 110 to 130 minutes) 2. The CPA firm of Knox & Knox has been sub
poenaed to testify and produce its correspondence and
Instructions workpapers in connection with a lawsuit brought by a
third party against one of their clients. Knox considers
Select the best answer for each of the following the subpoenaed documents to be privileged communica
items. Use a soft pencil, preferably No. 2, to blacken the tion and therefore seeks to avoid admission of such
appropriate circle on the separate printed answer sheet evidence in the lawsuit. Which of the following is cor
to indicate your answer. Mark only one answer for each rect?
Item. Answer all items. Your grade will be based on a. Federal law recognizes such a privilege if the
your total correct answers. accountant is a Certified Public Accountant.
The following is an example of the manner in which b. The privilege is available regarding the work
the answer sheet should be marked: ing papers since the CPA is deemed to own
them.
Item c. The privileged communication rule as it ap
plies to the CPA-client relationship is the
99. The text of the letter from Bridge Builders, Inc., to same as that of attorney-client.
Allied Steel Co. follows: d. In the absence of a specific statutory provi
We offer to purchase 10,000 tons of No. 4 sion, the law does not recognize the existence
steel pipes at today’s quoted price for of the privileged communication rule between
delivery two months from today. Your ac a CPA and his client.
ceptance must be received in five days.
3. Major, Major & Sharpe, CPAs, are the auditors of
Bridge Builders intended to create a (an) MacLain Industries. In connection with the public of
a. Option contract. fering of $10 million of MacLain securities, Major
b. Unilateral contract. expressed an unqualified opinion as to the financial
c. Bilateral contract. statements. Subsequent to the offering, certain
d. Joint contract. misstatements and omissions were revealed. Major has
been sued by the purchasers of the stock offered pur
Answer Sheet suant to the registration statement which included the
financial statements audited by Major. In the ensuing
lawsuit by the MacLain investors, Major will be able to
99. © avoid liability if
a. The errors and omissions were caused
primarily by MacLain.
b. It can be shown that at least some of the in
Items to be Answered vestors did not actually read the audited
financial statements.
1. DMO Enterprises, Inc., engaged the accounting c. It can prove due diligence in the audit of the
firm of Martin, Seals & Anderson to perform its annual financial statements of MacLain.
audit. The firm performed the audit in a competent, d. MacLain had expressly assumed any liability
nonnegligent manner and billed DMO for $16,000, the in connection with the public offering.
agreed fee. Shortly after delivery of the audited finan
cial statements, Hightower, the assistant controller,
disappeared, taking with him $28,000 of DMO’s funds. 4. Donalds & Company, CPAs, audited the financial
It was then discovered that Hightower had been engaged statements included in the annual report submitted by
in a highly sophisticated, novel defalcation scheme Markum Securities, Inc., to the Securities and Exchange
during the past year. He had previously embezzled Commission. The audit was improper in several
$35,000 of DMO funds. DMO has refused to pay the ac respects. Markum is now insolvent and unable to satisfy
counting firm’s fee and is seeking to recover the $63,000 the claims of its customers. The customers have in
that was stolen by Hightower. Which of the following is stituted legal action against Donalds based upon section
correct? 10b and rule 10b-5 of the Securities Exchange Act of
a. The accountants can not recover their fee and 1934. Which of the following is likely to be Donalds’
are liable for $63,000. best defense?
b. The accountants are entitled to collect their a. They did not intentionally certify false finan
fee and are not liable for $63,000. cial statements.
c. DMO is entitled to rescind the audit contract b. Section 10b does not apply to them.
and thus is not liable for the $16,000 fee, but it c. They were not in privity of contract with the
can not recover damages. creditors.
d. DMO is entitled to recover the $28,000 d. Their engagement letter specifically dis
defalcation, and is not liable for the $16,000 claimed any liability to any party which
fee. resulted from Markum’s fraudulent conduct.
146
Business Law
5. The 1976 Tax Reform Act substantially changed 9. Martin sent Dobbs the following offer by mail:
the regulation of tax return preparers by 1offer you 150 fantastic television sets,
a. Granting the Internal Revenue Service the model J-1, at $65 per set, F.O.B. your
power to seek injunctive relief against a truck at my warehouse, terms 2/10,
wrongdoing preparer. net/30. 1 am closing out this model, hence
b. Providing criminal sanctions. the substantial discount. Accept all or
c. Imposing civil liability regardless of whether none. (signed) Martin
the preparer does the preparation for compen
sation. Dobbs immediately wired back:
d. Expanding the legal remedies of the client for 1accept your offer re the fantastic televi
whom the return was prepared. sion sets, but will use Blue Express Com
pany for the pickup, at my expense of
6. If a CPA firm is being sued for common law fraud course. In addition, if possible, could you
by a third party based upon materially false financial have the shipment ready by Tuesday at
statements, which of the following is the best defense 10:00 AM because of the holidays? (sign
which the accountants could assert? ed) Dobbs
a. Lack of privity.
b. Lack of reliance. Based on the above correspondence, what is the
c. A disclaimer contained in the engagement let status of Dobbs’ acceptance?
ter. a. It is valid upon dispatch despite the fact it
d. Contributory negligence on the part of the states both additional and different terms
client. than those contained in the offer.
b. It is valid but will not be effective until
received by Martin.
7. Smith contracted to perform for $500 certain ser c. It represents a counteroffer which will become
vices for Jones. Jones claimed that the services had been a valid acceptance if not negated by Martin
performed poorly. Because of this, Jones sent Smith a within ten days.
check for only $425. Marked clearly on the check was d. It is not a valid acceptance because it states
“ payment in full” . Smith crossed out the words “ pay both additional and different terms than those
ment in full” and cashed the check. Assuming that there contained in the offer.
was a bona fide dispute as to whether Smith had in fact
performed the services poorly, the majority of courts 10. On March 1, Wilkins wrote Conner a letter and of
would hold that fered to sell him his factory for $150,000. The offer
a. The debt is liquidated, and Smith can collect stated that the acceptance must be received by him by
the remaining $75. April 1. Under the circumstances, Wilkins’ offer
b. The debt is liquidated, but Jones by adding a. Will be validly accepted if Conner posts an ac
the words “ payment in full” cancelled the ceptance on April 1.
balance of the debt owed. b. May be withdrawn at any time prior to accep
c. The debt is unliquidated and the cashing of tance.
the check by Smith completely discharged the c. May not be withdrawn prior to April 1.
debt. d. Could not be validly accepted since Wilkins
d. The debt is unliquidated, but the crossing out could assert the Statute of Frauds.
of the words “ payment in full” by Smith
revives the balance of $75 owed.
8. Harper is opening a small retailing business in

Hometown, U.S.A. To announce her grand opening, 11. Maurice sent Schmit Company a telegram offering
Harper places an advertisement in the newspaper to sell him a one-acre tract of commercial property
quoting sales prices on certain items in stock. Many located adjacent to Schmit’s warehouse for $8,000.
local residents come in and make purchases. Harper’s Maurice stated that Schmit had three days to consider
grand opening is such a huge success that she is unable the offer and in the meantime the offer would be ir
to totally satisfy the demand of the customers. Which of revocable. The next day Maurice received a better offer
the following correctly applies to the situation? from another party, and he telephoned Schmit inform
a. Harper has made an offer to the people ing him that he was revoking the offer. The offer was
reading the advertisement. a. Irrevocable for three days upon receipt by
b. Harper has made a contract with the people Schmit.
reading the advertisement. b. Effectively revoked by telephone.
c. Harper has made an invitation seeking offers. c. Never valid, since the Statute of Frauds ap
d. Any customer who demands the goods adver plies.
tised and tenders the money is entitled to d. Not effectively revoked because Maurice did
them. not use the same means of communication.
147
12. Martin agreed to purchase a two-acre home site 15. Brown ordered 100 cases of Delicious Brand peas
from Foxworth. The contract was drafted with great at list price from Smith Wholesaler. Immediately upon
care and meticulously set forth the alleged agreement receipt of Brown’s order, Smith sent Brown an accep
between the parties. It was signed by both parties. tance which was received by Brown. The acceptance in
Subsequently, Martin claimed that the contract did not dicated that shipment would be made within ten days.
embody all of the agreements that the parties had On the tenth day Smith discovered that all of its supply
reached in the course of their negotiations. Foxworth of Delicious Brand peas had been sold. Instead it
has asserted that the parol evidence rule applies. As shipped 100 cases of Lovely Brand peas, stating clearly
such, the rule on the invoice that the shipment was sent only as an ac
a. Applies to both written and oral agreements commodation. Which of the following is correct?
relating to the contract made prior to the sign a. Smith’s shipment of Lovely Brand peas is a
ing of the contract. counteroffer, thus no contract exists between
b. Does not apply to oral agreements made at the Brown and Smith.
time of the signing of the contract. b. Smith’s note of accommodation cancels the
c. Applies exclusively to written contracts signed contract between Smith and Brown.
by both parties. c. Brown’s order is a unilateral offer, and can
d. Is not applicable if the Statute of Frauds ap only be accepted by Smith’s shipment of the
plies. goods ordered.
d. Smith’s shipment of Lovely Brand peas con
13. Wilcox mailed Norriss an unsigned contract for stitutes a breach of contract.
the purchase of a tract of real property. The contract
represented the oral understanding of the parties as to
the purchase price, closing date, type of deed, and other 16. Ace Auto Sales, Inc., sold Williams a secondhand
details. It called for payment in full in cash or certified car for $9,000. One day Williams parked the car in a
check at the closing. Norriss signed the contract, but shopping center parking lot. When Williams returned to
added above his signature the following: the car, Montrose and several policemen were waiting.
This contract is subject to my (Norriss) It turned out that the car had been stolen from Mon
being able to obtain conventional mort trose who was rightfully claiming ownership. Subse
gage financing of $100,000 at 13% or less quently, the car was returned by Williams to Montrose.
interest for a period of not less than 25 Williams seeks recourse against Ace Auto Sales who had
years. sold him the car with the usual disclaimer of warranty.
Which of the following is correct?
Which of the following is correct? a. Since Ace Auto Sales’ contract of sale dis
a. The parties had already made an enforceable claimed “ any and all warranties’’ arising in
contract prior to Wilcox’s mailing of the for connection with its sale to Williams, Williams
malized contract. must bear the loss.
b. Norriss would not be liable on the contract b. Since Ace Auto and Williams were both inno
under the circumstances even if he had not ad cent of any wrongdoing in connection with the
ded the “ conventional mortgage’’ language theft of the auto, the loss will rest upon the
since Wilcox had not signed it. party ultimately in possession.
c. By adding the “ conventional mortgage’’ c. Had Williams litigated the question of
language above his signature, Norriss created Montrose’s ownership to the auto, he would
a condition precedent to his contractual have won since possession is nine-tenths of the
obligation and made a counteroffer. law.
d. The addition of the “ conventional mortgage’’ d. Ace Auto will bear the loss since a warranty of
language has no legal effect upon the contrac title in Williams’ favor arose upon the sale of
tual relationship of the parties since it was an the auto.
implied condition in any event.
14. The Uniform Commercial Code provides for a 17. A dispute has arisen between two merchants over
warranty against infringement. Its primary purpose is to the question of who has the risk of loss in a given sales
protect the buyer of goods from infringement of the transaction. The contract does not specifically cover the
rights of third parties. This warranty point. The goods were shipped to the buyer who
a. Only applies if the sale is between merchants. rightfully rejected them. Which of the following factors
b. Must be expressly stated in the contract or the will be the most important factor in resolving their
Statute of Frauds will prevent its enforce dispute?
ability. a. Who has title to the goods.
c. Protects the seller if the buyer furnishes b. The shipping terms.
specifications which result in an infringement. c. The credit terms.
d. Can not be disclaimed. d. The fact that a breach has occurred.
148
Business Law
18. Doral Inc., wished to obtain an adequate supply of 21. Universal Joint Corporation has approached
lumber for its factory extension which was to be con Minor Enterprises, Inc., about a tax-free statutory
structed in the spring. It contacted Ace Lumber merger of Minor into Universal. The stock of both cor
Company and obtained a 75-day written option (firm porations is listed on the NYSE. Which of the following
offer) to buy its estimated needs for the building. Doral requirements or procedures need not be complied with
supplied a form contract which included the option. Ace in order to qualify as a statutory merger pursuant to
Lumber signed at the physical end of the contract but state and federal law?
did not sign elsewhere. The price of lumber has risen a. The boards of directors of both corporations
drastically and Ace wishes to avoid its obligation. must approve the plan of merger.
Which of the following is Ace’s best defense against b. Universal, the surviving corporation, must
Doral’s assertion that Ace is legally bound by the op apply for and obtain a favorable revenue
tion? ruling from the Treasury Department.
a. Such an option is invalid if its duration is for c. The boards of both corporations must submit
more than two months. the plan of merger to their respective
b. The option is not supported by any considera shareholders for approval.
tion on Doral’s part. d. The securities issued and exchanged by
c. Doral is not a merchant. Universal for the shares of Minor must be
d. The promise of irrevocability was contained in registered since they are considered to be
a form supplied by Doral and was not “ offered” and “ sold” for purposes of the
separately signed by Ace. Securities Act of 1933.
22. The consideration for the issuance of shares by a

19. Ambrose telephoned Miller Adding Machine corporation may not be paid in
Company and ordered 1,000 pocket calculators at $4.05 a. Tangible property.
each. Ambrose agreed to pay 10% immediately and the b. Intangible property.
balance within ten days after receipt of the entire ship c. Services to be performed for the corporation.
ment. Ambrose forwarded a check for $405.00 and d. Services actually performed for the corpora
Miller shipped 500 calculators the next day, intending to tion.
ship the balance by the end of the week. Ambrose
decided that the contract was a bad bargain and
repudiated it, asserting the Statute of Frauds. Miller 23. Bixler obtained an option on a building he believed
sued Ambrose. Which of the following will allow Miller was suitable for use by a corporation he and two other
to prevail despite the Statute of Frauds? men were organizing. After the corporation was suc
a. The contract is not within the requirements of cessfully promoted, Bixler met with the Board of Direc
the statute. tors who agreed to acquire the property for $200,000.
b. Ambrose paid 10% down. Bixler deeded the building to the corporation and the
c. Miller shipped 500 of the calculators. corporation began business in it. Bixler’s option con
d. Ambrose admitted in court that it made the tract called for the payment of only $155,000 for the
contract in question. building and he purchased it for that price. When the
directors later learned that Bixler paid only $155,000,
they demanded the return of Bixler’s $45,000 profit.
Bixler refused, claiming the building was worth far
20. Darrow purchased 100 sets of bookends from more than $200,000 both when he secured the option
Benson Manufacturing, Inc. Darrow made substantial and when he deeded it to the corporation. Which of the
prepayments of the purchase price. Benson is insolvent following statements correctly applies to Bixler’s con
and the goods have not been delivered as promised. duct?
Darrow wants the bookends. Under the circumstances, a. It was improper for Bixler to contract for the
which of the following will prevent Darrow from ob option without first having secured the assent
taining the bookends? of the Board of Directors.
a. The fact that he did not pay the full price at b. If, as Bixler claimed, the building was fairly
the time of the purchase even though he has worth more than $200,000, Bixler is entitled to
made a tender of the balance and holds it retain the entire price.
available to Benson upon delivery. c. Even if, as Bixler claimed, the building was
b. The fact that he can obtain a judgment for fairly worth more than $200,000, Bixler never
damages. theless must return the $45,000 to the corpora
c. The fact that he was not aware of Benson’s in tion.
solvency at the time he purchased the d. In order for Bixler to be obligated to return
bookends. any amount to the corporation, the Board of
d. The fact that the goods have not been iden Directors must establish that the building was
tified to his contract. worth less than $200,000.
149
24. Delta Corporation has decided to purchase 27. The Larkin Corporation is contemplating a two-
$2,000,000 of its own outstanding shares. In connection for-one stock split of its common stock. Its $4 par value
with this acquisition, which of the following is a correct common stock will be reduced to $2 after the split. It
statement? has 2 million shares issued and outstanding out of a
a. The shares may not be acquired out of capital total of 3 million authorized. In considering the legal or
surplus. tax consequences of such action, which of the following
b. The shares in question must be classified as is a correct statement?
treasury shares if not cancelled. a. The transaction will require both authoriza
c. A subsequent offering of the acquired shares tion by the Board of Directors and approval
to the public in interstate commerce would be by the shareholders.
exempt from SEC registration. b. The distribution of the additional shares to
d. If the shares are acquired at a price less than the shareholders will be taxed as a dividend to
the original offering price, the corporation the recipients,
has realized a taxable capital gain. c. Surplus equal to the par value of the existing
number of shares issued and outstanding must
be transferred to the stated capital account.
25. The stock of Crandall Corporation is regularly d. The trustees of trust recipients of the addi
traded over the counter. However, 75% is owned by the tional shares must allocate them ratably
founding family and a few of the key executive officers. between income and corpus.
It has had a cash dividend record of paying out annually
less than 5% of its earnings and profits over the past 10
years. It has, however, declared a 10% stock dividend 28. At their annual meeting, shareholders of the
during each of these years. Its accumulated earnings and Laurelton Corporation approved several proposals
profits are beyond the reasonable current and an made by the Board of Directors. Among them was the
ticipated needs of the business. Which of the following ratification of the salaries of the executives of the cor
is correct? poration. In this connection, which of the following is
a. The shareholders can compel the declaration correct?
of a dividend only if the directors’ dividend a. The shareholders can not legally ratify the
policy is fraudulent. compensation paid to director-officers.
b. The Internal Revenue Service can not attack b. The salaries ratified are automatically valid
the accumulation of earnings and profits since for federal income tax purposes.
the Code exempts publicly held corporations c. Such ratification by the shareholders is re
from the accumulations provisions. quired as a matter of law.
c. The fact that the corporation was paying a d. The action by the shareholders serves the pur
pose of confirming the board’s action.
10% stock dividend, apparently in lieu of a
cash distribution, is irrelevant insofar as the
ability of the Internal Revenue Service to suc
cessfully attack the accumulation. 29. Barton, a wealthy art collector, orally engaged
d. Either the Internal Revenue Service or the Deiter to obtain a rare and beautiful painting from
shareholders could successfully obtain a court Cumbers, a third party. Cumbers did not know that
order to compel the distribution of earnings Barton had engaged Deiter to obtain the painting for
and profits unreasonably accumulated. Barton because as Barton told Deiter “ that would cause
the price to skyrocket.” Regarding the liability of the
parties if a contract is made or purported to be made,
26. Global Trucking Corporation has in its corporate which of the following is correct?
treasury a substantial block of its own common stock, a. Since the appointment of Deiter was oral, no
which it acquired several years previously. The stock agency exists, and any contract made by
had been publicly offered at $25 a share and had been Deiter on Barton’s behalf is invalid.
reacquired at $15. The board is considering using it in b. Because Barton specifically told Deiter not to
the current year for various purposes. For which of the reveal for whom he (Deiter) was buying the
following purposes may it validly use the treasury painting, Deiter can not be personally liable
stock? on the contract made on Barton’s behalf,
a. To pay a stock dividend to its shareholders. c. If Deiter makes a contract with Cumbers
b. To sell it to the public without the necessity of which Deiter breaches, Cumbers may, after
a registration under the Securities Act of 1933, learning of the agreement between Barton and
since it had been previously registered. Deiter, elect to recover from either Barton or
c. To vote it at the annual meeting of Deiter.
shareholders. d. If Deiter makes a contract to purchase the
d. To acquire the shares of another publicly held painting, without revealing he is Barton’s
company without the necessity of a registra agent, Cumbers has entered into a contract
tion under the Securities Act of 1933. which is voidable at his election.
150
Business Law
30. Moderne Fabrics, Inc., hired Franklin as an assis 33. Duval Manufacturing Industries, Inc., orally
tant vice president of sales at $2,000 a month. The engaged Harris as one of its district sales managers for
employment had no fixed duration. In light of their an 18-month period commencing April 1, 1980. Harris
relationship to each other, which of the following is cor commenced work on that date and performed his duties
rect? in a highly competent manner for several months. On
a. Franklin has a legal duty to reveal any interest October 1, 1980, the company gave Harris a notice of
adverse to that of Moderne in matters con termination as of November 1, 1980, citing a downturn
cerning his employment. in the market for its products. Harris sues seeking either
b. If Franklin voluntarily terminates his employ specific performance or damages for breach of contract.
ment with Moderne after working for it for Duval pleads the Statute of Frauds and/or a justified
several years, he can not work for a com dismissal due to the economic situation. What is the
petitor for a reasonable period after termina probable outcome of the lawsuit?
tion. a. Harris will prevail because he has partially
c. Moderne can dismiss Franklin only for cause. performed under the terms of the contract.
d. The employment contract between the parties b. Harris will lose because his termination was
must be in writing. caused by economic factors beyond Duval’s
control.
31. Sly was a general agent of the Cute Cosmetics c. Harris will lose because such a contract must
Company with authority to sell, make collections, and be in writing and signed by a proper agent of
adjust disputes. Sly was caught padding his monthly ex Duval.
pense account by substantial amounts and was dis d. Harris will prevail because the Statute of
missed. Cute hired another general agent, Ready, to Frauds does not apply to contracts such as his.
replace Sly. Ready was slowly but steadily calling upon
Sly’s accounts to make sales and was informing them 34. Jason Manufacturing Company wished to acquire
that Sly’s services had been terminated. Cute also a site for a warehouse. Knowing that if it negotiated
published a notice in the appropriate trade journals and directly for the purchase of the property the price would
the local newspaper announcing the replacement of Sly be substantially increased, it employed Kent, an agent,
with Ready. Sly, after he was let go, called on all the to secure lots without disclosing that he was acting for
customers who had outstanding accounts payable and Jason. Kent’s authority was evidenced by a writing
quickly made whatever collections he could in cash-and signed by the proper officers of Jason. Kent entered into
absconded. Which of the following statements is correct a contract in his own name to purchase Peter’s lot, giv
regarding Cute’s legal right against the customers? ing Peter a negotiable note for $1,000 signed by Kent as
a. Cute can regain possession of the goods since first payment. Jason wrote Kent acknowledging the pur
title did not pass because Sly’s actions con chase. Jason also disclosed its identity as Kent’s prin
stituted a fraud. cipal to Peter. In respect to the rights and liabilities of
b. Cute can obtain payment from the customers the parties, which of the following is a correct state
despite Sly’s wrongful acts since it had ment?
published a notice of Sly’s dismissal. a. Peter is not bound on the contract since
c. Cute will have to absorb the loss since Sly had Kent’s failure to disclose he was Jason’s agent
continuing implied authority to make collec was fraudulent.
tions. b. Jason, Kent and Peter are potentially liable on
d. Cute will have to absorb the loss unless Cute the contract.
can prove the customers had actual notice of c. Unless Peter formally ratifies the substitution
Sly’s dismissal. of Jason for Kent, he is not liable.
32. Marcross is an agent for Fashion Frocks, Ltd. As d. Kent has no liability since he was acting for
and on behalf of an existing principal.
such, Marcross made a contract for and on behalf of
Fashion Frocks with Sowinski Fabrics which was not
authorized and upon which Fashion has disclaimed
liability. Sowinski has sued Fashion on the contract 35. Doral is the surety on a loan made by Nelson to
asserting that Marcross had the apparent authority to Gordon. Which statement describes Doral’s legal rela
make it. In considering the factors which will determine tionship or status among the respective parties?
the scope of Marcross’ apparent authority, which of the a. As between Gordon and Doral, Doral has the
following would not be important? ultimate liability.
a. The custom and usages of the business. b. Upon default by Gordon and payment by
b. Previous acquiescence by the principal in Doral, Doral is entitled to subrogation to the
similar contracts made by Marcross. rights of Nelson or to obtain reimbursement
c. The express limitations placed upon Mar from Gordon.
cross’ authority which were not known by c. Doral is a fiduciary insofar as Nelson is con
cerned.
Sowinski.
d. The status of Marcross’ position in Fashion d. Doral is not liable immediately upon default
by Gordon, unless the agreement so provides.
Frocks.
151
36. Don loaned $10,000 to Jon, and Robert agreed to 39. Overall, Inc., owns 100% of the stock of Con
act as surety. Robert’s agreement to act as surety was in trolled Corporation, each being a separate entity.
duced by (1) fraudulent misrepresentations made by Overall telephoned the Factory Supply Company and
Don concerning Jon’s financial status and (2) a bogus ordered $400 of miscellaneous merchandise. Overall
unaudited financial statement of which Don had no told Factory to ship the supplies to Controlled and
knowledge, and which was independently submitted by Overall would pay for them. Factory did so and now
Jon to Robert. Which of the following is correct? seeks recovery of the price or damages. Which of the
a. Don’s fraudulent misrepresentations will not following is correct?
provide Robert with a valid defense unless a. Overall is a surety.
they were contained in a signed writing. b. The Statute of Frauds will not bar Factory
b. Robert will be liable on his surety undertaking from recovering from Overall.
despite the facts since the defenses are per c. Controlled is the principal debtor.
sonal defenses. d. Overall and Controlled are jointly and sever
c. Robert’s reliance upon Jon’s financial ally liable on the contract.
statements makes Robert’s surety undertaking
voidable. 40. A client has joined other creditors of the Martin
d. Don’s fraudulent misrepresentations provide Construction Company in a composition agreement
Robert with a defense which will prevent Don seeking to avoid the necessity of a bankruptcy pro
from enforcing the surety undertaking. ceeding against Martin. Which statement describes the
composition agreement?
a. It provides a temporary delay, not to exceed
six months, insofar as the debtor’s obligation
to repay the debts included in the composi
37. Welch is a surety on Stanton’s contract to build an tion.
office building for Brent. Stanton intentionally aban b. It does not discharge any of the debts included
doned the project after it was 85% completed because until performance by the debtor has taken
of personal animosity which developed toward Brent. place.
Which of the following is a correct statement concern c. It provides for the appointment of a receiver
ing the rights or responsibilities of the various parties? to take over and operate the debtor’s business.
a. Any modification of the contract, however d. It must be approved by all creditors.
slight and even if beneficial to Welch, will
release Welch. 41. In a bankruptcy proceeding, the trustee
b. Welch would be ordered to specifically per a. Must be an attorney admitted to practice in
form the completion of the building if Brent the federal district in which the bankrupt is
sought this remedy. located.
c. Neither Stanton’s failure to give Welch prior b. Will receive a fee based upon the time and fair
notice of its intention to abandon the project value of the services rendered, regardless of
nor its actual abandonment of the project will the size of the estate.
release Welch. c. May not have had any dealings with the
d. Welch can not engage a contractor to finish bankrupt within the past year.
the job and obtain from Brent the balance due d. Is the representative of the bankrupt’s estate
on the contract. and as such has the capacity to sue and be
sued on its behalf.
42. Haplow engaged Turnbow as his attorney when

threatened by several creditors with a bankruptcy pro
ceeding. Haplow’s assets consisted of $85,000 and his
38. Reginald, who is insolvent, defaulted on a loan debts were $125,000. A petition was subsequently filed
upon which Jayne was the surety. Edward, the creditor, and was uncontested. Several of the creditors are con
demanded payment from Jayne of the amount owed by cerned that the suspected large legal fees charged by
Reginald. The loan was also secured by a mortgage Turnbow will diminish the size of the distributable
which Edward has the right to foreclose. Which of the estate. What are the rules or limitations which apply to
following is Jayne’s best legal course of action? such fees?
a. Seek specific performance by Reginald. a. None, since it is within the attorney-client
b. Refuse to pay until Reginald has been peti privileged relationship.
tioned into bankruptcy and the matter has b. The fee is presumptively valid as long as ar
been decided by the trustee in bankruptcy. rived at in an arm’s-length negotiation.
c. Pay Edward and resort to the subrogation c. Turnbow must file with the court a statement
rights to the collateral. of compensation paid or agreed to for review
d. Refuse to pay because Edward must first as to its reasonableness.
resort to the collateral. d. The trustee must approve the fee.
152
Business Law
43. If a secured party’s claim exceeds the value of the 47. Larkin insured his own life for $40,000 and named
collateral of a bankrupt, he will be paid the total his wife as beneficiary. He took out the policy on July
amount realized from the sale of the security and will 15, 1978. He has paid all premiums as they became due.
a. Not have any claim for the balance. The policy included the following two provisions;
b. Become a general creditor for the balance.
c. Retain a secured creditor status for the • The Insured represents that the statements he
balance. has made in the application for insurance and
d. Be paid the balance only after all general in the questionnaire submitted in connection
creditors are paid. with his physical health are true and are a part
of the policy issued to him.
• This Policy shall be incontestable after it has
44. In order to establish a preference under the federal been in force for a period of two years from
bankruptcy act, which of the following is the trustee re the date of issue, except for failure to pay
quired to show where the preferred party is not an in premiums.
sider?
a. That the preferred party had reasonable cause Larkin died on January 10, 1981, and the insurance
to believe that the debtor was insolvent. company cancelled the policy on February 1, 1981,
b. That the debtor committed an act of upon learning that Larkin had lied about his health.
bankruptcy. Larkin’s widow seeks recovery of the $40,000 from the
c. That the transfer was for an antecedent debt. insurer. What will be the probable outcome of the
d. That the transfer was made within 60 days of dispute between the widow and the insurers?
the filing of the petition. a. The widow will receive a refund of all the
premiums paid.
45. On October 15, 1980, Golden made a loan of b. The widow will receive nothing because of the
$100,000 to Phillips and obtained a mortgage for false health statements made by Larkin at the
$50,000 on Phillips’ home as security for the loan. The inception of the policy.
home was worth $50,000. The following day Golden, to c. The widow will receive the full $40,000.
protect himself further, took out a fire insurance policy d. The widow will receive a refund of all the
on Phillips’ home in the sum of $50,000 with himself as premiums paid plus accrued interest.
beneficiary, and also a policy on Phillips’ life in the
same sum, with himself as beneficiary. Golden paid the 48. Burt owns an office building which is leased to
premiums on both policies for one year. On March 1, Hansen Corporation under the terms of a long-term
1981, Phillips paid his debt to Golden in full and the lease. Both Burt and Hansen have procured fire in
mortgage was satisfied and cancelled. On April 15, surance covering the building. Which of the following is
1981, Phillips’ home was completely destroyed by fire, correct?
and Phillips, trapped in the house, died in the flames. a. Both Burt and Hansen have separate insurable
At this time, the two policies were still in effect and interests.
there had been no change in the beneficiary. On which, b. Burt’s insurable interest is limited to the book
if any, policy is Golden entitled to collect? value of the property.
a. Life insurance policy only. c. Hansen has an insurable interest in the
b. Fire insurance policy only. building, but only to the extent of the value of
c. Both insurance policies. any additions or modifications it has made.
d. Neither insurance policy. d. Since Burt has legal title to the building, he is
the only party who can insure the building.
46. Lincoln loaned Osgood $20,000 and obtained an
unsecured negotiable promissory note for that amount.
Lincoln wishes to obtain a life insurance policy on
Osgood’s life as added protection on the loan. With 49. With respect to trusts, which of the following
respect to Lincoln’s obtaining an insurance policy on states an invalid legal conclusion?
Osgood’s life, which of the following is true? a. The trustee must obtain the consent of the ma
a. Lincoln has an insurable interest in Osgood’s jority of the beneficiaries if a major change in
life and may legally assign the insurance the investment portfolio of the trust is to be
policy to a transferee of the note. made.
b. If Osgood consented to Lincoln’s insuring b. For federal income tax purposes, a trust is en
him for an amount substantially in excess of titled to an exemption similar to that of an in
the loan, Lincoln would be able to recover the dividual although not equal in amount.
face amount of the policy. c. Both the life beneficiaries of a trust and the
c. Lincoln does not have an insurable interest ultimate takers have rights against the trustee,
since the note is negotiable. and the trustee is accountable to them.
d. The only policy that Lincoln may legally ob d. A trust is a separate taxable entity for federal
tain is a term policy. income tax purposes.
153
50. The last will and testament of Jean Bond left 53. Golden sold his moving and warehouse business,
various specific property and sums of money to relatives including all the personal and real property used
and friends. She left the residue of her estate equally to therein, to Clark Van Lines, Inc. The real property was
her favorite niece and nephew. Which of the various encumbered by a duly-recorded $300,000 first mortgage
properties described below will become a part of Bond’s upon which Golden was personally liable. Clark ac
estate and be distributed in accordance with her last will quired the property subject to the mortgage but did not
and testament? assume the mortgage. Two years later, when the
a. A joint savings account which listed her sister, outstanding mortgage was $260,000, Clark decided to
who is still living, as the joint tenant. abandon the business location because it had become
b. The entire family homestead which she had unprofitable and the value of the real property was less
owned in joint tenancy with her older brother than the outstanding mortgage. Clark moved to another
who predeceased her and which was still location and refused to pay the installments due on the
recorded as jointly owned. mortgage. What is the legal status of the parties in
c. Several substantial gifts that she made in con regard to the mortgage?
templation of death to various charities. a. Clark took the real property free of the mort
d. A life insurance policy which designated a gage.
former partner as the beneficiary. b. Clark breached its contract with Golden when
it abandoned the location and defaulted on
the mortgage.
51. Shepard created an inter vivos trust for the benefit c. Golden must satisfy the mortgage debt in the
of his children with the remainder to his grandchildren event that foreclosure yields an amount less
upon the death of his last surviving child. The trust con than the unpaid balance.
sists of both real and personal property. One of the d. If Golden pays off the mortgage, he will be
assets is an apartment building. In administering the able to successfully sue Clark because Golden
trust and allocating the receipts and disbursements, is subrogated to the mortgagee’s rights against
which of the following would be improper? Clark.
a. The allocation of forfeited rental security
deposits to income. 54. Tremont Enterprises, Inc., needed some addi
b. The allocation to principal of the annual ser tional working capital to develop a new product line. It
vice fee of the rental collection agency. decided to obtain intermediate term financing by giving
c. The allocation to income of the interest on the a second mortgage on its plant and warehouse. Which
mortgage on the apartment building. of the following is true with respect to the mortgages?
d. The allocation to income of the payment of a. If Tremont defaults on both mortgages and a
the insurance premiums on the apartment bankruptcy proceeding is initiated, the second
building. mortgagee has the status of general creditor.
b. If the second mortgagee proceeds to foreclose
on its mortgage, the first mortgagee must be
52. Glover Manufacturing, Inc., purchased a four- satisfied completely before the second mort
acre tract of commercially zoned land. A survey of the gagee is entitled to repayment.
tract was made prior to the closing, and it revealed an c. Default on payment to the second mortgagee
unpaved road which passed across the northeast corner will constitute default on the first mortgage.
of the land. The title search revealed a mortgage held by d. Tremont can not prepay the second mortgage
Peoples National Bank, which was satisfied at the clos prior to its maturity without the consent of the
ing by the seller out of the funds received from Glover. first mortgagee.
The title search did not indicate the existence of any
other adverse interest which would constitute a defect in
title. There was no recordation made in connection with 55. The Aden Corporation entered into its standard
the unpaved road. Which of the following statements is dealership contract with the Downtown Corporation.
correct regarding Glover’s title and rights to the land The contract provided Downtown with an exclusive
against the claims of adverse parties? right to sell Aden’s products in Columbia County.
a. The unpaved road poses no potential problem Which of the following provisions, if included as a part
if Glover promptly fences off the property of the contract, wilt not create a potential antitrust pro
and puts up “ no trespassing’’ signs. blem?
b. Glover does not have to be concerned with the a. Aden retains all rights, title, and interest to
unpaved road since whatever rights the users the goods shipped to Downtown.
might claim were negated by failing to record. b. Downtown agrees to certain resale price
c. The mere use of the unpaved road as con ranges stipulated by Aden.
trasted with the occupancy of the land can not c. Downtown may not sell any product which
create any interest adverse to Glover. Aden Corporation designates as being com
d. The unpaved road revealed by the survey may petitive with its products.
prove to be a valid easement created by pre d. Downtown agrees not to sell to certain
scription. retailers designated by Aden as price cutters.
154
Business Law
56. The Radiant Furnace Company entered into 59. The Social Security Act provides for the imposi
agreements with retail merchants whereby they agreed tion of taxes and the disbursement of benefits. Which of
not to sell beneath Radiant’s minimum “ suggested” the following is a correct statement regarding these taxes
retail price of $850 in exchange for Radiant’s agreeing and disbursements?
not to sell its furnaces at retail in their respective ter a. Only those who have contributed to Social
ritories. The agreement does not preclude the retail mer Security are eligible for benefits.
chants from selling competing furnaces. What is the b. As between an employer arid its employee, the
legal status of the agreement? tax rates are the same.
a. It is illegal even though the price fixed is c. A deduction for federal income tax purposes
reasonable. is allowed the employee for Social Security
b. It is legal if the product is a trade name or taxes paid.
trademarked item. d. Social Security payments are includable in
c. It is legal if the power to fix maximum prices gross income for federal income tax purposes
is not relinquished. unless they are paid for disability.
d. It is illegal unless it can be shown that the
parties to the agreement were preventing cut
throat competition.
60. Musgrove Manufacturing Enterprises is subject to
compulsory worker’s compensation laws in the state in
which it does business. It has complied with the state’s
worker’s compensation provisions. State law provides
57. Global Reproductions, Inc., makes and sells high that where there has been compliance, worker’s com
quality, expensive lithographs of the works of famous pensation is normally an exclusive remedy. However,
artists. It sells to art wholesalers throughout the United the remedy will not be exclusive if
States. It requires that its wholesalers not purchase
lithographs of competing companies during the three- a. The employee has been intentionally injured
by the employer personally.
year duration of the contract. They may sell all other
b. The employee dies as a result of his injuries.
types of pictures, including oil, watercolor and char
c. The accident was entirely the fault of a fellow-
coal. The Federal Trade Commission has attacked the
servant of the employee.
legality of this exclusive dealing arrangement. This ex
d. The employer was only slightly negligent and
clusive dealing arrangement
the employee’s conduct was grossly negligent.
a. Is legal per se since its duration is less than five
years.
b. Could be found to be illegal under the Sher
man, Clayton, and Federal Trade Commis
sion Acts.
c. Will be tested under the rule of reason, and Number 2 (Estimated time 15 to 20 minutes)
only if found to be unreasonable, will be
declared illegal. Part a. Oliver gave Morton his 90-day negotiable
d. Is legal since the wholesalers are permitted to promissory note for $10,000 as a partial payment for the
sell all other types of pictures. purchase of Morton’s business. Morton had submitted
materially false unaudited financial statements to Oliver
in the course of establishing the purchase price of the
business. Morton also made various false statements
about the business’ value. For example, he materially
58. Stephens is an employee o f the Jensen Manufac misstated the size of the backlog of orders. Morton
turing Company, a multi-state manufacturer of roller promptly negotiated the note to Harrison who pur
skates. The plant in which he works is unionized and chased it in good faith for $9,500, giving Morton $5,000
Stephens is a dues paying union member. Which state in cash, a check for $3,500 payable to him which he in
ment is correct insofar as the Federal Fair Labor Stan dorsed in blank and an oral promise to pay the balance
dards Act is concerned? within 5 days. Before making the final payment to
a. The Act allows a piece-rate method to be Morton, Harrison learned of the fraudulent cir
employed in lieu of the hourly-rate method cumstances under which the negotiable promissory note
where appropriate. for $10,000 had been obtained. Morton has disappeared
b. Jensen is permitted to pay less than the and the balance due him was never paid. Oliver refuses
minimum wage to employees since they are to pay the note.
represented by a bona fide union.
c. The Act sets the maximum number of hours Required: Answer the following, setting forth reasons
that an employee can work in a given day or for any conclusions stated.
week.
d. The Act excludes from its coverage the In the subsequent suit brought by Harrison against
employees of a labor union. Oliver, who will prevail?
155
Part b. McCarthy, a holder in due course, Part b. Lebow Woolens, Inc., sold several thou
presented a check to the First National Bank, the sand bolts of Australian wool on credit to Fashion Plate
drawee bank named on the face of the instrument. The Exclusives, Inc., a clothing manufacturer, obtaining a
signature of the drawer, Williams, was forged by Nash duly executed security agreement and a financing state
who took the check from the bottom of Williams’ check ment. Fashion Plate became delinquent in meeting its
book along with a cancelled check in the course of payments. Lebow subsequently discovered that a
burglarizing Williams’ apartment. The bank examined miscaptioned financing statement for a $12,500 sale had
the signature of the drawer carefully, but the signature been filed under the name of Fashion Styles Limited,
was such an artful forgery of the drawer’s signature that another customer. Lebow took the following actions.
only a handwriting expert could have detected a dif First, on August 11, 1980, it repossessed the bolts of
ference. The bank therefore paid the check. The check wool which were not already altered by Fashion Plate.
was promptly returned to Williams, but he did not This amounted to some 65% of the invoice in question.
discover the forgery until thirteen months after the Next on August 20, 1980, it filed a corrected financing
check was returned to him. statement covering the sale in question. Dunbar,
another creditor of Fashion Plate’s, levied against
Required: Answer the following, setting forth reasons Fashion Plate’s inventory, work in process, and raw
for any conclusions stated. materials on August 13th and obtained a judgment of
1. Williams seeks to compel the bank to credit his $14,000 against Fashion Plate, an amount in excess of
account for the loss. Will he prevail? the value of the Lebow bolts of wool. The judgment was
2. The facts are the same as above, but you are to obtained and entered on August 18, 1980. Dunbar
assume that the bank discovered the forgery before asserts its rights as a lien judgment creditor.
returning the check to Williams and credited his
account. Can the bank in turn collect from McCarthy Required: Answer the following, setting forth reasons
the $1,000 paid to McCarthy? for any conclusions stated.
3. Would your answers to 1 and 2 above be
modified if the forged signature was that of the payee or In a lawsuit to determine the rights of the parties,
an indorser rather than the signature of the drawer? how should the competing claims of Lebow and Dunbar
be decided?
Part a. Walpole Electric Products, Inc., manu
factures a wide variety of electrical appliances. Walpole Part a. Delwood is the Central American repre
uses the consignment as an integral part of its marketing sentative of Massive Manufacturing, Inc., a large diver
plan. The consignments are “ true” consignments rather sified conglomerate listed on the New York Stock Ex
than consignments intended as security interests. Un change. Certain key foreign government and large
sold goods may be returned to the owner-consignor. foreign manufacturing company contracts were in the
Walpole contracted with Petty Distributors, Inc., an crucial stages of bidding and negotiation. During this
electrical appliance wholesaler, to market its products crucial time, Feldspar, the CEO of Massive, summoned
under this consignment arrangement. Subsequently, Delwood to the company’s home office for an urgent
Petty became insolvent and made a general assignment consultation. At the meeting, Feldspar told Delwood
for the benefit of creditors. Klinger, the assignee, took that corporate sales and profits were lagging and
possession of all of Petty’s inventory, including all the something definitely had to be done. He told Delwood
Walpole electrical products. Walpole has demanded that his job was on the line and that unless major con
return of its appliances asserting that the relationship tracts were obtained, he would have to reluctantly ac
created by the consignment between itself and Petty was cept his resignation. Feldspar indicated he was aware of
one of agency and that Petty never owned the ap both the competition and the legal problems that were
pliances. Furthermore, Walpole argues that under the involved. Nevertheless, he told Delwood “ do what is
consignment arrangement there is no obligation owing necessary in order to obtain the business.” Delwood
by Petty at any time, thus there is nothing to secure flew back to Central America the next day and began to
under the secured transactions provisions of the implement what he believed to be the instructions he
Uniform Commercial Code. Klinger has denied the had received from Feldspar. He first contacted influen
validity of these assertions claiming that the consign tial members of the ruling parties of the various coun
ment is subject to the Code’s filing provisions unless the tries and indicated that large discretionary contributions
Code has otherwise been satisfied. Walpole sues to to their re-election campaign funds would be forthcom
repossess the goods. ing if Massive’s bids for foreign government contracts
were approved. Next, he contacted the large foreign
Required: Answer the following, setting forth reasons manufacturers and indicated that loans were available
for any conclusions stated. to them on a non-repayment basis if they placed their
1. What are the requirements, if any, to perfect a business with Massive. These payments were to be ac
true consignment such as discussed above? counted for by charging certain nebulous accounts or by
2. Will Walpole prevail? listing the payments as legitimate loans to purchasers. In
156
Business Law
any event, the true nature of the expenditures was not learn of the agreement between Davis, Clay and Wilkins
to be shown on the books. All this was accomplished, until April 1981, when an involuntary bankruptcy peti
and Massive’s sales improved markedly in Central tion was filed against Wilkins and an order for relief
America. entered. Ace Lumber has demanded payment from
Two years later the Securities and Exchange Com Davis and Clay. The lumber was used in the construc
mission discovered the facts described above. tion of a house pursuant to the agreement between the
parties.
for any conclusions stated. Required: Answer the following, setting forth reasons
What are the legal implications of the above to
Delwood, Feldspar, and Massive Manufacturing? In the event Ace sues Davis and Clay as well as
Wilkins, will Ace prevail? Discuss the legal basis upon
which Ace will rely in asserting liability.
Part b. Marigold Corporation is incorporated in
one of the states of the United States and does substan
tially all of its business within that state. It is consider Part b. Lawler is a retired film producer. She had
ing reliance upon the intrastate exemption to the a reputation in the film industry for aggressiveness and
Securities Act of 1933 in order to offer and sell its shrewdness; she was also considered somewhat
securities without registering them under the 1933 Act. overbearing. Cyclone Artistic Film Productions, a
Its proposed offering will consist of $800,000 of com growing independent producer, obtained the film rights
mon stock and $1 million of debentures. Most of the to “ Claws,” a recent best seller. Cyclone has decided to
people it has talked to about the feasibility of such an syndicate the production of “ Claws.” Therefore, it
offering are very wary of such a course of action and created a limited partnership, Claws Productions, with
warn of significant limitations and dangers inherent in Harper, Von Hinden and Graham, the three ranking ex
such action. ecutives of Cyclone, serving as general partners. The
three general partners each contributed $50,000 to the
Required: Answer the following, setting forth reasons partnership capital. One hundred limited partnership
for any conclusions stated. interests were offered to the public at $50,000 each.
Lawler was offered the opportunity to invest in the ven
1. What are the requirements, limitations, and tured Intrigued by the book and restless in her retire
problems that are typically encountered in an intrastate ment, she decided to purchase 10 limited partnership in
offering? terests for $500,000. She was the largest purchaser of
2. Even if the Securities Act’s requirements for the limited partnership interests of Claws Productions.
the exemption can be satisfied, what must be done from All went well initially for the venture, but midway
the standpoint of state law? through production, some major problems arose.
Lawler, having nothing else to do and having invested a
Number 5 (Estimated tim e----- 15 to 20 minutes) considerable amount of money in the venture, began to
take an increasingly active interest in the film’s produc
Part a. Davis and Clay are licensed real estate tion.
brokers. They entered into a contract with Wilkins, a She began to appear frequently on the set and made
licensed building contractor, to construct and market numerous suggestions on handling the various problems
residential housing. Under the terms of the contract, that were encountered. When the production still
Davis and Clay were to secure suitable building sites, seemed to be proceeding with difficulty, Lawler
furnish prospective purchasers with plans and specifica volunteered her services to the general partners who as a
tions, pay for appliances and Venetian blinds and result of her reputation and fi nancial commitment to
drapes, obtain purchasers, and assist in arranging for “ Claws” decided to invite her to join them in their
financing. Wilkins was to furnish the labor, material, executive deliberations. This she did and her personality
and supervision necessary to construct the houses. In ac insured an active participation.
cordance with the agreement, Davis and Clay were to be “ Claws” turned out to be a box office disaster and
reimbursed for their expenditures. Net profits from the its production costs were considered to be somewhat
sale of each house were to be divided 80% to Wilkins, extraordinary even by Hollywood standards. The
10% to Davis, and 10% to Clay. The parties also agreed limited partnership is bankrupt and the creditors have
that each was to be free to carry on his own business sued Claws Productions, Harper, Von Hinden,
simultaneously and that such action would not be con Graham, and Lawler.
sidered a conflict of interest. In addition, the agreement
provided that their relationship was as independent con Required: Answer the following, setting forth reasons
tractors, pooling their interests for the limited purposes for any conclusions stated.
described above.
Ace Lumber Company sold lumber to Wilkins on What are the legal implications and liabilities of
credit from mid-1980 until February 1981. Ace did not each of the above parties as a result of the above facts?
157
(Prepared by the B oard o f Exam iners of the A m erican Institute of Certified Public A ccountants
and ad o p ted by the exam ining boards o f all states, territories, and the D istrict o f Colum bia.)
May 8, 1981; 1:30 to 5:00 P.M.
Estimated Minutes
No. 1 ....................... 90 110

No. 2 ....................... 15 25
No. 3 ....................... 15 25
No. 4 ....................... 15 25
No. 5 ....................... 15 25
T o ta l............... 150 210
an answer, write “ continued” at the bottom o f the
the candidate’s knowledge and application o f the
158
Accounting Theory
Number 1 (Estimated tim e----- 90 to 110 minutes) 4. Accruing net losses on firm purchase com
mitments for inventory is an example o f the accounting
Instructions concept of
a. Conservatism.
Select the best answer for each of the following items b. Realization.
relating to a variety of issues in accounting. Use a soft c. Consistency.
pencil, preferably No. 2, to blacken the appropriate cir d. Materiality.
cle on the separate printed answer sheet to indicate your
answer. Mark only one answer for each item. Answer all 5. Which of the following accounting concepts states
items. Your grade will be based on your total correct that an accounting transaction should be supported by
answers. sufficient evidence to allow two or more qualified in
The following is an example of the manner in which dividuals to arrive at essentially similar measures and
the answer sheet should be marked: conclusions?
a. Matching.
Item b. Objectivity.
c. Periodicity.
99. The financial statement which summarizes the d. Stable monetary unit.
financial position o f a company is the
a. Income statement. 6. Glen, Inc., purchased certain plant assets under a
b. Balance sheet. deferred payment contract on December 31, 1980. The
c. Statement of changes in financial position. agreement was to pay $10,000 at the time o f purchase
d. Retained earnings statement. and $10,000 at the end o f each o f the next five years.
The plant assets should be valued at
a. The present value o f a $10,000 ordinary an
A n sw e r Sheet nuity for five years.
b. $60,000.
c. $60,000 plus imputed interest.
9 9 . d. $60,000 less imputed interest.
items to be Answered 7. Which of the following should be expensed as in

curred by the franchisee for a franchise with an
1. What is the most likely effect o f a stock split on estimated useful life of ten years?
the par value per share and the number o f shares a. Amount paid to the franchisor for the fran
outstanding? chise.
b. Periodic payments to a company, other than
P a r value N u m b e r o f shares the franchisor, for that company’s franchise.
p e r share ou tstan din g c. Legal fees paid to the franchisee’s lawyers to
a. Decrease Increase obtain the franchise.
b. Decrease No effect d. Periodic payments to the franchisor based on
c. Increase Increase the franchisee’s revenues.
d. No effect No effect
8. For a capital lease, an amount equal to the present
2. The valuation o f a promise to receive cash in the value at the beginning o f the lease term o f minimum
future at present value on the financial statements of a lease payments during the lease term, excluding that
business entity is valid because o f the accounting con portion of the payments representing executory costs
cept of such as insurance, maintenance, and property taxes to
a. Entity. be paid by the lessor, together with any profit thereon,
b. Materiality. should be recorded by the lessee as a (an)
c. Going concern. a. Expense.
d. Neutrality. b. Liability but not an asset.
c. Asset but not a liability.
d. Asset and a liability.
3. Which o f the following is an example o f the ex
pense recognition principle o f associating cause and ef 9. How should the value of warrants attached to a
fect? debt security be accounted for?
a. Allocation o f insurance cost. a. No value assigned.
b. Sales commissions. b. A separate portion o f paid-in capital.
c. Depreciation o f fixed assets. c. An appropriation o f retained earnings.
d. Officers’ salaries. d. A liability.
159
Examination* Questions—May 1981
10. How should a loss contingency that is reasonably 15. How should the cash proceeds from convertible
possible and for which the amount can be reasonably bonds sold at issue date at par be recorded?
estimated be reported? a. As additional paid-in capital for the portion
of the proceeds attributable to the conversion
Accrued Disclosed feature and as a liability for the portion of the
a. Yes No proceeds attributable to the debt.
b. No Yes b. As retained earnings for the portion of the
c. Yes Yes proceeds attributable to the conversion
d. No No feature and as a liability for the portion of the
proceeds attributable to the debt.
c. As a liability for the entire proceeds.
d. As additional paid-in capital for the portion
11. Financial reporting provides information about an of the proceeds attributable to the conversion
enterprise’s performance during a period when it was feature and as retained earnings for the por
under the direction of a particular management tion of the proceeds attributable to the debt.
a. But does not directly provide information
about that management’s performance. 16. Assume the cost method of accounting for
b. And directly provides information about that treasury stock transactions is used. Any excess of the
management’s performance. amount received upon resale over the price paid for the
c. And directly provides information about both treasury stock should be shown as an
management performance and enterprise per a. Increase in additional paid-in capital.
formance. b. Increase in retained earnings.
d. And directly provides estimates of an enter c. Element of operating income.
prise’s earning power. d. Extraordinary gain.
12. How should the excess of the subscription price
over the par value of common stock subscribed be 17. Which of the following depreciation methods is
recorded? computed in the same way as depletion is computed?
a. As additional paid-in capital when the a. Straight-line.
subscription is received. b. Sum-of-the-years-digits.
b. As additional paid-in capital when the c. Double-declining-balance.
subscription is collected. d. Productive-output.
c. As retained earnings when the subscription is
received.
d. As additional paid-in capital when the capital 18. A two-year note was issued in an arm’s-length
stock is issued. transaction at face value solely for cash at the beginning
of this year. There were no other rights or privileges ex
13. An example of an item which should be reported changed. The interest rate is specified at 10 percent per
as a prior period adjustment is the year. Principal and interest are payable at maturity. The
a. Collection of previously written-off accounts prevailing rate of interest for a loan of this type is 15
receivable. percent per year. What annual interest rate should be
b. Payment of taxes resulting from examination used to record interest expense for this year and next
of prior year income tax returns. year?
c. Correction of error in financial statements of
a prior year. This year Next year
d. Receipt of insurance proceeds for damage to a. 10 percent 15 percent
building sustained in a prior year. b. 10 percent 10 percent
c. 15 percent 10 percent
d. 15 percent 15 percent
14. When a fixed asset with a five-year estimated
useful life is sold during the second year, how would the
use of the sum-of-the-years-digits method of deprecia
tion instead of the straight-line method of depreciation 19. For a compensatory stock option plan for which
affect the gain or loss on the sale of the fixed asset? the date of grant and the measurement date are the
same, compensation cost should be recognized in the in
Gain Loss come statement
a. Decrease Increase a. At the date of retirement.
b. Increase Decrease b. Of each period in which services are rendered.
c. No effect No effect c. At the exercise date.
d. No effect Decrease d. At the adoption date of the plan.
160
Accounting Theory
20. In which of the following methods is salvage value 25. For purposes of computing the weighted-average
not considered in the calculation of the first year’s number of shares outstanding during the year, a
depreciation on fixed assets? midyear event that must be treated as occurring at the
a. Straight-line. beginning of the year is the
b. Double-declining-balance. a. Declaration and payment of stock dividend.
c. Sum-of-the-years-digits. b. Purchase of treasury stock.
d. Productive-output. c. Sale of additional common stock.
d. Issuance of stock warrants.
21. A transaction that is material in amount, unusual
in nature, but not infrequent in occurrence, should be 26. When preparing a statement of changes in finan
cial position (defining funds as cash), an increase in
presented separately as a (an)
ending inventory over beginning inventory will result in
a Component of income from continuing
an adjustment to reported net earnings because
operations, but not net of applicable income a. Funds were increased since inventory is a cur
taxes.
b. Component of income from continuing rent asset.
operations, net of applicable income taxes. b. Inventory is an expense deducted in com
c. Extraordinary item, net of applicable income puting net earnings, but is not a use of funds.
taxes. c. The net increase in inventory reduces cost of
d. Prior period adjustment, but not net of ap goods sold and represents an assumed use of
plicable income taxes. cash.
d. All changes in non-cash accounts must be
disclosed under the all financial resources con
22. An extraordinary item should be reported cept.
separately as a component of income
a. Before cumulative effect of accounting 27. In a statement of changes in financial position
changes and after discontinued operations of (defining funds as working capital) bad debt expense
a segment of a business. should be added back to net income when it relates to
b. Before cumulative effect of accounting
changes and before discontinued operations Current Long-term
of a segment of a business. receivables receivables
c. After cumulative effect of accounting changes a. Yes Yes
and after discontinued operations of a seg b. Yes No
ment of a business. c. No No
d. After cumulative effect of accounting changes d. No Yes
and before discontinued operations of a seg
ment of a business. 28. Which of the following should be disclosed in the
Summary of Significant Accounting Policies?
23. An example of a special change in accounting prin a. Rent expense amount.
ciple that should be reported by restating the financial b. Maturity dates of long-term debt.
statements of prior periods is the change from the c. Methods of amortizing intangibles.
a. Straight-line method of depreciating plant d. Composition of plant assets.
equipment to the sum-of-the-years-digits
method. 29. How should a change in accounting estimate that
b. Sum-of-the-years-digits method of depre is recognized by a change in accounting principle be
ciating plant equipment to the straight-line reported?
method.
c. LIFO method of inventory pricing to the Change in account Change in account
FIFO method. ing estimate ing principle_____
d. FIFO method of inventory pricing to the a. No No
LIFO method. b. Yes Yes
c. No Yes
d. Yes No
24. When computing fully diluted earnings per share,
convertible securities that are not common stock
equivalents are 30. Which of the following is an appropriate computa
a. Ignored. tion for return on investment?
b. Recognized whether they are dilutive or anti a. Income divided by total assets.
dilutive. b. Income divided by sales.
c. Recognized only if they are dilutive. c. Sales divided by total assets.
d. Recognized only if they are anti-dilutive. d. Sales divided by stockholders’ equity.
161
31. How should long-term debt assumed in a business 36. Gain contingencies are usually recognized in the
combination be shown under each o f the following income statement when
methods? a. Realized.
Pooling o f b. Occurrence is reasonably possible and the
Purchase interests amount can be reasonably estimated.
a. Recorded value Recorded value c. Occurrence is probable and the amount can be
b. Recorded value Fair value reasonably estimated.
c. Fair value Fair value d. The amount can be reasonably estimated.
d. Fair value Recorded value
37. APB Opinion No. 8 sets minimum and maximum
limits on the annual provision for pension cost. An
32. For interim financial reporting, an inventory loss amount that is always included in the calculation of
from a temporary market decline in the first quarter both the min imum and maximum limit is
which can reasonably be expected to be restored in the a. Normal cost.
fourth quarter b. Amortization o f past service cost.
a. Should be recognized as a loss proportionately c. Interest on unfunded past and prior service
in each o f the first, second, third, and fourth costs.
quarters. d. Retirement benefits paid.
b. Should be recognized as a loss proportionately
in each o f the first, second, and third 38. For a compensatory stock option plan for which
quarters. the date o f the grant and the measurement date are the
c. Need not be recognized as a loss in the first same, what account is credited at the date of the grant?
quarter. a. Retained earnings.
d. Should be recognized as a loss in the first b. Stock options outstanding.
quarter. c. Deferred compensation cost.
d. Compensation expense.
33. In order to report a business combination as a
pooling o f interests, the minimum amount o f an in 39. In financial reporting for segments o f a business
vestee’s common stock which must be acquired during enterprise, the operating profit or loss of a segment
the combination period in exchange for the investor’s should include among other items
common stock is a. Traceable costs.
a. 100 percent. b. Foreign income taxes.
b. 90 percent. c. Extraordinary items.
c. 80 percent. d. Loss on discontinued operations.
d. 51 percent.
34. When translating foreign currency financial 40. Which of the following accounts would be in
statements, which o f the following accounts would be cluded in the calculation of the acid test (quick) ratio?
translated using current exchange rates?
Accounts receivable Inventories
Property, plant, and Inventories a. No No
equipment carried at cost b. No Yes
c. Yes No
a. Yes Yes d. Yes Yes
b. No No
c. Yes No 41. For a manufacturing company, which o f the
d. No Yes following is an example o f a period rather than a prod
uct cost?
35. When progress billings are sent on a long-term a. Depreciation on factory equipment.
contract, what type o f account should be credited under b. Wages o f salespersons.
the completed-contract method and percentage-of- c. Wages o f machine operators.
completion method? d. Insurance on factory equipment.
Completed- Percentage-of- 42. Prime cost and conversion cost share what com
contract completion mon element of total cost?
a. Revenue Revenue a. Variable overhead.
b. Revenue Contra asset b. Fixed overhead.
c. Contra asset Revenue c. Direct materials.
d. Contra asset Contra asset d. Direct labor.
162
Accounting Theory
43. In order to identify costs that relate to a specific 48. Joint costs are most frequently allocated based
product, an allocation base should be chosen that upon relative
a. Does not have a cause and effect relationship. a. Profitability.
b. Has a cause and effect relationship. b. Conversion costs.
c. Considers variable costs but not fixed costs. c. Prime costs.
d. Considers direct materials and direct labor but d. Sales value.
not factory overhead.
49. Under an acceptable method of costing by
44. What is the best cost accumulation procedure to products, inventory costs of the by-product are based
use when many batches, each differing as to product on the portion of the joint production cost allocated to
specifications, are produced? the by-product
a. Job order. a. But any subsequent processing cost is debited
b. Process. to the cost of the main product.
c. Actual. b. But any subsequent processing cost is debited
d. Standard. to revenue of the main product.
c. Plus any subsequent processing cost.
d. Less any subsequent processing cost.
45. In the computation of manufacturing cost per
equivalent unit, the weighted-average method of process
costing considers 50. Which department is customarily held responsible
a. Current costs only. for an unfavorable materials usage variance?
b. Current costs plus cost of beginning work in a. Quality control.
process inventory. b. Purchasing.
c. Current costs plus cost of ending work in pro c. Engineering.
cess inventory. d. Production.
d. Current costs less cost of beginning work in
process inventory. 51. When the estimated revenue account of a govern
mental unit is closed out at the end of the fiscal year, the
excess of revenues over estimated revenues is
46. The units transferred in from the first department a. Debited to fund balance.
to the second department should be included in the com b. Debited to reserve for encumbrances.
putation of the equivalent units for the second depart c. Credited to fund balance.
ment for which of the following methods of process d. Credited to reserve for encumbrances.
costing?
First-in first-out Weighted-average 52. Encumbrances would not appear in which fund?
a. Yes Yes a. General.
b. Yes No b. Enterprise.
c. No Yes c. Capital projects.
d. No No d. Special revenue.
47. What factor, related to manufacturing costs,

causes the difference in net earnings computed using ab 53. When goods which have been previously approved
sorption costing and net earnings computed using direct for purchase are received by a governmental unit but
costing? not yet paid for, what account is credited?
a. Absorption costing considers all costs in the a. Reserve for encumbrances.
determination of net earnings, whereas direct b. Vouchers payable.
costing considers only direct costs. c. Expenditures.
b. Absorption costing allocates fixed costs d. Appropriations.
between cost of goods sold and inventories,
and direct costing considers all fixed costs to 54. Which of the following types of revenue would
be period costs. generally be recorded directly in the general fund of a
c. Absorption costing “ inventories” all direct governmental unit?
costs, but direct costing considers direct costs a. Receipts from a city-owned parking structure.
to be period costs. b. Interest earned on investments held for retire
d. Absorption costing “ inventories” all fixed ment of employees.
costs for the period in ending finished goods c. Revenues from intragovernmental service
inventory, but direct costing expenses all fixed funds.
costs. d. Property taxes.
163
55. A capital projects fund of a municipality is an ex Required:

ample of what type of fund? 1. State the advantages and disadvantages of the
a. Internal service (intragovernmental service). payback method.
b. Proprietary. 2. What other capital budgeting techniques could
c. Fiduciary. be used?
d. Governmental.
Part b. A company is presently using breakeven
56. Which of the following accounts could be included analysis. The president has requested an explanation of
in the balance sheet of an enterprise fund? this analytical tool.
Reserve fo r Revenue Retained Required:

encumbrances bonds payable earnings 1. What is the breakeven point and how is it com
a. No No Yes puted?
b. No Yes Yes 2. What are the major uses of breakeven
c. Yes Yes No analysis?
d. No No No
57. Which of the following accounts would be in

cluded in the combined balance sheet for the long-term Number 3 (Estimated time 15 to 25 minutes)
debt account group?
a. Amount to be provided for retirement of Financial reporting should provide information to
general long-term debt. help investors, creditors, and other users of financial
b. Unreserved fund balance. statements. Statement of Financial Accounting Stan
c. Reserve for encumbrances. dards No. 33 requires large public enterprises to disclose
d. Cash. certain supplementary information.
58. Customers’ meter deposits which cannot be spent Required:

for normal operating purposes would be classified as a. Describe the historical cost/constant dollar
restricted cash in the balance sheet of which fund? method of accounting. Include in your discussion how
a. Internal service (intragovernmental service). historical cost amounts are used to make historical
b. Trust. cost/constant dollar measurements.
c. Agency. b. Describe the principal advantage of the
d. Enterprise. historical cost/constant dollar method of accounting
over the historical cost method of accounting.
59. For state and local governmental units, the full ac c. Describe the current cost method of account
crual basis of accounting should be used for what type ing.
of fund? d. Why would depreciation expense for a given
a. Special revenue. year differ using the current cost method of accounting
b. General. instead of the historical cost method of accounting? In
c. Debt service. clude in your discussion whether depreciation expense is
d. Internal service (intragovernmental service). likely to be higher or lower using the current cost
method of accounting instead of the historical cost
60. A gift to a voluntary not-for-profit hospital that is method of accounting in a period of rising prices, and
not restricted by the donor should be credited directly to why.
a. Fund balance.
b. Deferred revenue.
c. Operating revenue.
d. Nonoperating revenue.
Part a. A company is presently using the payback

method for evaluating capital budgeting projects and is
considering using other more sophisticated capital
budgeting techniques. The president has requested an
explanation of the advantages and disadvantages of the
payback method.
164
Accounting Theory
Retail, Inc., sells normal brand name household

products both from its own store and on consignment
through The Mall Space Company.
Required:
a. Should Retail, Inc., include in its inventory
normal brand name goods purchased from its suppliers
but not yet received if the terms of purchase are FOB
shipping point (manufacturer’s plant)? Why?
b. Should Retail, Inc., include freight-in expen
ditures as an inventoriable cost? Why?
c. Retail, Inc., purchased cooking utensils for
sale in the ordinary course of business three times
during the current year, each time at a higher price than
the previous purchase. What would have been the effect
on ending inventory and cost of goods sold had Retail,
Inc., used the weighted-average cost method instead of
the FIFO method?
d. How and why will Retail, Inc., treat net
markdowns when it calculates the estimated cost of
ending inventory using the conventional (lower of cost
or market) retail inventory method?
e. What are products on consignment and how
should they be presented on the balance sheets of Retail,
Inc., and The Mall Space Company?
Many companies have pension plans for their

employees. Accounting for the cost of pension plans is a
complex subject in which many technical terms are en
countered.
Required:
a. Describe normal cost.
b. Describe vested benefits. Include in your
discussion what the actuarially computed value of
vested benefits represents.
c. How should actuarial gains and losses directly
related to the operation of a pension plan be accounted
for?
d. What disclosures concerning pension plans
should be made in the company’s financial statements
or notes?
165
November 1981

November 4, 1981; 1:30 to 6:00 P.M.

Estimated Minutes
No. 1 ................... 45 55
No. 2 ................... 45 55
No. 3 ................... 45 55
No. 4 ................... 45 55
No. 5 ................... 40 50
Total........... 220 270
for an answer, write “continued” at the bottom of the question number and place them immediately
should be numbered 1 through 12. The printed 4. Fourteen-column sheets, if any, should not be
answer sheet provided for the objective-type items folded until all sheets, both wide and narrow, are
should be considered to be Page 1. placed in the proper sequence and fastened
together at the top left corner. All fourteen-
2. Answer all objective-type items on the printed column sheets should then be wrapped around the
answer sheet provided for that purpose. It is to back of the papers.
you are uncertain of the answer. You are likely to 5. A CPA is continually confronted with the necessi
get the highest score if you omit no answers. Since ty of expressing opinions and conclusions in writ
objective items are computer graded, your com ten reports in clear, unequivocal language.
ments and calculations associated with them are Although the primary purpose of the examination
not considered. is to test the candidate’s knowledge and applica
167
Number 1 (Estimated tim e----- 45 to 55 minutes) 2. On January 1, 1980, Derby Company lent $20,000
cash to Elliott Company. The promissory note made by
Instructions Elliott did not bear interest and was due on December
31, 1981. No other rights or privileges were exchanged.
Select the best answer for each of the following The prevailing interest for a loan of this type was 12%.
items relating to a variety of financial accounting The present value of $1 for two periods at 12% is 0.797.
problems. Use a soft pencil, preferably No. 2, to Derby should recognize interest income in 1980 of
blacken the appropriate circle on the separate printed a. $0
answer sheet to indicate your answer. Mark only one b. $1,913
answer for each item. Answer all items. Your grade will c. $2,030
be based on your total correct answers. d. $2,400
Item
97. Gross billings for merchandise sold by Baker 3. On July 1, 1980, Hilltop Company purchased as a
Company to its customers last year amounted to long-term investment Essex Company’s ten-year 9%
$5,260,000; sales returns and allowances reduced the bonds, with a face value of $100,000 for $95,200. In
amounts owed by $160,000. How much were net sales terest is payable semiannually on January 1 and July 1.
last year for Baker Company? The bonds mature on July 1, 1984. Hilltop uses the
a. $4,800,000 straight-line method of amortization. What is the
b. $5,100,000 amount of interest income and amortization of bond
c. $5,200,000 discount that Hilltop should report in its income state
d. $5,260,000 ment for the year ended December 31, 1980?
a. $4,284 and $240.
b. $4,284 and $600.
Answer Sheet c. $4,500 and $240.
d. $4,500 and $600.
97.
1. Blake Foods Corporation mails coupons to con

sumers which may be presented by a stated expiration 4. Information from Greg Company’s balance sheet
date at retail food stores to obtain discounts on certain is as follows:
Blake products. Retailers are reimbursed for the face
value of coupons redeemed, plus 10% of coupon value Current assets:
as compensation for handling costs. Blake honors re Cash $ 2,400,000
quests for coupon redemption by retailers received up to Marketable securities 7,500,000
three months after the consumer expiration date. In Accounts receivable 57,600,000
Blake’s experience, 60% of the coupons issued ultimate Inventories 66,300,000
ly are redeemed. Information with respect to the two Prepaid expenses 1,200,000
separate series of coupons issued by Blake during 1980 Total current assets $135,000,000
is as follows:
Current liabilities:
Series A Series B Notes payable $ 1,500,000
Consumer expiration date June 30, December 31, Accounts payable 19,500,000
1980 1980 Accrued expenses 12,500,000
Total face value of Income taxes payable 500,000
coupons issued $100,000 $200,000 Payments due within one
Total payments to retailers year on long-term debt 3,500,000
as of December 31, 1980 $ 60,500 $ 40,500 Total current liabilities $ 37,500,000
report as a liability for
unredeemed coupons at December 31, 1980? What is the quick (acid test) ratio?
a. $0 a. 1.60 to 1
b. $79,500 b. 1.80 to 1
c. $91,500 c. 1.99 to 1
d. $97,000 d. 3.60 to 1
168
5. In December 1980 Belmont Company exchanged 8. On December 31, 1979, Livonia Corporation had
an old bottling machine, which cost $60,000 and was outstanding 7% , $2,000,000 face value, 15-year bonds
two-thirds depreciated, for a similar used machine maturing on December 31, 1989. Interest is payable on
having a current fair value of $24,000, and received a June 30 and December 31. The unamortized balances on
cash difference of $8,000. What is the amount of gain December 31, 1979, in the premium on bonds payable
that Belmont should recognize on this exchange in the and deferred bond issue costs accounts were $50,000
year ended December 31, 1980? and $25,000, respectively. Livonia reacquired all of
a. $0 these bonds at 95 on December 31, 1980. Livonia uses
b. $3,000 the straight-line method for the amortization of bond
c. $5,000 premium and bond issue costs. Ignoring income taxes,
d. $8,000 what is the amount of gain or loss that Livonia should
report on this early extinguishment of debt in its income
statement for the year ended December 31, 1980?
a. $122,500 gain.
b. $122,500 loss.
c. $167,500 gain.
6. Cartwright Corporation prepared the following d. $167,500 loss.
data needed to compute the purchasing power gain or
loss on net monetary items for inclusion in its sup
plementary information for the year ended December
31, 1980:
9. Lelak Company was formed on January 1, 1979.
Amount in nominal dollars Its machinery is being depreciated using an accelerated
December December method of depreciation for income tax reporting and
31, 1979 31, 1980 the straight-line method for financial statement repor
Monetary assets $ 600,000 $ 1,000,000 ting.
Monetary liabilities $1,566,000 $2,449,000 Information concerning depreciation amounts
Net monetary liabilities $ 966,000 $1,449,000 under each method is as follows:
Assumed Consumer Price Accelerated Straight-line
Index numbers: Year method method
At December 31, 1979 210
At December 31, 1980 230 1979 $600,000 $400,000
Average for 1980 220 1980 800,000 500,000
Cartwright’s purchasing power gain or loss (expressed Assuming that the income tax rate is 40% , the
in average 1980 constant dollars) on net monetary items amount of deferred taxes charged to expense in Lelak’s
for the year ended December 31, 1980, should be 1980 income statement should be
a. $109,000 gain. a. $ 40,000
b. $109,000 loss. b. $120,000
c. $111,000 gain. c. $180,000
d. $111,000 loss. d. $200,000
10. At December 31, 1979, Richmond Company had

7. Kipling Company does not carry insurance on its 100,000 shares of $10 par value common stock issued
office typewriters. On December 28, 1980, one of its and outstanding. There was no change in the number of
typewriters was stolen. The book value of the typewriter shares outstanding during 1980. Total stockholders’
at the date of the burglary was $500. On January 15, equity at December 31, 1980, was $2,800,000. The net
1981, another typewriter was vandalized. The book income for the year ended December 31, 1980, was
value of that typewriter, depreciated to the date of the $800,000. During 1980 Richmond paid $3.00 per share
vandalism, was $600. On February 1, 1981, before the in dividends on its common stock. The quoted market
issuance of the 1980 financial statements, the vandalized value of Richmond’s common stock on a national stock
typewriter was repaired for $120. The total amount of exchange was $24 on December 31, 1980. What was the
losses that should be charged to income in 1980 is price-earnings ratio on common stock for 1980?
a. $0 a. 3.0 to 1.
b. $ 500 b. 3.5 to 1.
c. $ 620 c. 4.8 to 1.
d. $1,100 d. 8.0 to 1.
169
11. Effective April 27, 1981, the stockholders of 14. Tapscott, Inc., is indebted to Bush Finance
Bennett Corporation approved a two-for-one split of Company under a $600,000, 10% , five-year note dated
the company’s common stock, and an increase in January 1, 1978. Interest, payable annually on
authorized common shares from 100,000 shares (par December 31, was paid on the December 31, 1978, and
value $20 per share) to 200,000 shares (par value $10 per 1979 due dates. However, during 1980 Tapscott ex
share). Bennett’s stockholders’ equity accounts im perienced severe financial difficulties and is likely to
mediately before issuance of the stock split shares were default on the note and interest unless some concessions
as follows: are made. On December 31, 1980, Tapscott and Bush
signed an agreement restructuring the debt as follows:
Common stock, par value $20;
100,000 shares authorized; • Interest for 1980 was reduced to $30,000
50,000 shares outstanding $ 1,000,000 payable March 31, 1981.
Additional paid-in capital • Interest payments each year were reduced to
(premium of $3 per share on $40,000 per year for 1981 and 1982.
issuance of common stock) 150,000 • The principal amount was reduced to
Retained earnings 1,350,000 $400,000.
What should be the balances in Bennett’s additional What is the amount of gain that Tapscott should report
paid-in capital and retained earnings accounts im- on the debt restructure in its income statement for the
mediately after the stock split is effected? year ended December 31, 1980?
a. $120,000
Additional paid-in b. $150,000
capital Retained earnings c. $200,000
a. $0 $ 500,000 d. $230,000
b. $ 150,000 $ 350,000
c. $ 150,000 $1,350,000
d. $1,150,000 $ 350,000
15. On January 15, 1980, Forrester Company paid
property taxes on its factory building for the calendar
12. Sherwood Corporation incurred $68,000 of year 1980 in the amount of $60,000. The first week of
research and development costs in its laboratory to April 1980 Forrester made unanticipated major repairs
develop a patent which was granted on January 2, 1980. to its plant equipment at a cost of $240,000. These
Legal fees and other costs associated with registration of repairs will benefit operations for the remainder of the
the patent totaled $13,600. Sherwood estimates that the calendar year. How should these expenses be reflected
economic life of the patent will be eight years. What in Forrester’s quarterly income statements?
amount should Sherwood charge to patent amortization
expense for the year ended December 31, 1980? Three months ended
a. $0 March June September December
b. $ 800 31,1980 30,1980 30,1980 31,1980
c. $ 1,700 a. $15,000 $ 95,000 $95,000 $95,000
d. $10,200 b. $15,000 $255,000 $15,000 $15,000
c. $60,000 $240,000 $0 $0
d. $75,000 $ 75,000 $75,000 $75,000
13. On January 1, 1980, Platt Company issued
200,000 additional shares of $5 par value voting com
mon stock in exchange for all of Drew Company’s
voting common stock in a business combination ap 16. Damon, Inc., leased equipment to Union Com
propriately accounted for by the pooling of interests pany on January 1, 1980. The lease is for an eight-year
method. Immediately before the business combination period expiring January 1, 1988. The first equal annual
the total stockholders’ equity of Platt was $16,000,000 payment of $800,000 was made on January 1, 1980. The
and of Drew was $4,000,000. Net income for the year cash selling price of the equipment is $4,695,000, which
ended December 31, 1980, was $1,500,000 for Platt, ex is equal to the present value of the lease payments at
clusive of any consideration of Drew, and $450,000 for 10%. Damon had purchased the equipment for
Drew. During 1980, Platt paid $750,000 in dividends to $4,200,000. The lease is appropriately recorded as a sale
its stockholders. The consolidated stockholders’ equity by Damon. What amount of interest income should
at December 31, 1980, should be Damon record in 1980 as a result of the lease?
a. $17,750,000 a. $389,500
b. $19,250,000 b. $420,000
c. $21,200,000 c. $469,500
d. $21,950,000 d. $560,000
170
17, Inform ation with respect to Roundtree 20. The net income for Mountain Corporation was
Company’s cost of goods sold for 1980 is as follows: $4,000,000 for the year ended December 31, 1980, Addi
tional information is as follows:
Historical
Units cost Depreciation on fixed assets $2 ,000,000
Inventory, January 1, 1980 10,000 $ 530,000 Provision for doubtful accounts
Production during 1980 45,000 2,790,000 on short-term receivables 200,000
55,000 3,320,000 Provision for doubtful accounts
Inventory, December 31, on long-term receivables 300,000
1980 15,000 945,000 Dividends on preferred stock 400,000
Cost of goods sold 40,000 $2,375,000 The working capital provided from operations in the
statement of changes in financial position for the year
Roundtree estimates that the current cost per unit of in ended December 31, 1980, should be
ventory was $58 at January 1, 1980, and $72 at a. $4,900,000
December 31, 1980. In Roundtree’s supplementary in b. $6,000,000
formation restated into average current cost, the cost of c. $6,300,000
goods sold for the year ended December 31, 1980, d. $6,500,000
should be
a. $2,290,000
b. $2,520,000 Number 2 (Estimated time----- 45 to 55 minutes)
c. $2,600,000
d. $2,880,000 Instructions

items relating to a variety of managerial accounting and
18. Selected information from Brook Corporation’s quantitative methods problems. Use a soft pencil,
accounting records and financial statements for 1980 is preferably No. 2, to blacken the appropriate circle on
as follows: the separate printed answer sheet to indicate your
Working capital provided by operations $1,500,000 items. Your grade will be based on your total correct
Mortgage payable issued to acquire land answers.
and building 1,800,000
Common stock issued to retire preferred Items to be Answered
stock 500,000
Proceeds from sale of equipment 400,000
Cost of office equipment purchased 200,000 21. Materials are added at the start of the process in
Cedar Company’s blending department, the first stage
On the statement of changes in financial position for the of the production cycle. The following information is
year ended December 31, 1980, Brook should disclose available for the month of July 1981:
total sources of funds in the amount of
a. $1,700,000 Units
b. $2,400,000
c. $3,700,000 Work-in-process, July 1 (60% complete
d. $4,200,000 as to conversion costs) 60,000
Started in July 150,000
Transferred to the next department 110,000
Lost in production 30,000
19. Evergreen Company purchased a patent on Work-in-process, July 31 (50% complete
January 1, 1977, for $178,500. The patent was being as to conversion costs) 70,000
amortized over its remaining legal life of 15 years expir
ing on January 1, 1992. During 1980 Evergreen deter Under Cedar’s cost accountingsystem, the costs in
mined that the economic benefits of the patent would curred on the lost units are absorbed by the remaining
not last longer than ten years from the date of acquisi good units. Using the weighted-average method, what
tion. What amount should be charged to patent amor are the equivalent units for the materials unit cost
tization expense for the year ended December 31, 1980? calculation?
a. $10,500 a. 120,000
b. $17,850 b. 145,000
c. $20,400 c. 180,000
d. $35,700 d. 210,000
171
22. A s h w o o d C o m p a n y m a n u fa c tu r e s p r o d u c ts F , G , 2 5 . J a c k so n , In c ., is p rep arin g a fle x ib le b u d g et for

an d W fro m a jo in t p ro c e ss. J o in t c o s ts are a llo c a te d o n 1981 an d req u ires a b r ea k d o w n o f th e c o s t o f stea m u sed
th e b a sis o f re la tiv e-sa le s-v a lu e at s p lit-o ff. A d d itio n a l in its fa c to r y in to th e fix e d an d v a ria b le ele m en ts. T h e
in fo r m a tio n fo r th e J u n e 1981 p r o d u c tio n a ctiv ity is as fo llo w in g d a ta o n th e c o s t o f stea m u sed a n d d irect-
fo llo w s: la b o r h o u r s w o rk ed are a v a ila b le fo r th e last six m o n th s
Products o f 1980:
F G W Total
Cost o f Direct-labor
U n its p r o Month steam hours
d u ced 5 0 ,0 0 0 4 0 ,0 0 0 1 0 ,0 0 0 1 0 0 ,0 0 0 Ju ly $ 1 5 ,8 5 0 3 ,0 0 0
J o in t co s ts 7 7 7 $ 4 5 0 ,0 0 0 A u g u st 1 3 ,4 0 0 2 ,0 5 0
S ales v a lu e S ep tem b er 1 6 ,3 7 0 2 ,9 0 0
at s p lit-o ff $ 4 2 0 ,0 0 0 $ 2 7 0 ,0 0 0 $ 6 0 ,0 0 0 $ 7 5 0 ,0 0 0 O c to b er 1 9 ,8 0 0 3 ,6 5 0
A d d itio n a l N ovem ber 1 7 ,6 0 0 2 ,6 7 0
c o s ts if D ec em b e r 1 8 ,5 0 0 2 ,6 5 0
p ro cessed
T o ta l $ 1 0 1 ,5 2 0 1 6 ,9 2 0
furth er $ 8 8 ,0 0 0 $ 3 0 ,0 0 0 $ 1 2 ,0 0 0 $ 1 3 0 ,0 0 0
S a les v a lu e
if p r o A ssu m in g th a t J a c k so n u ses th e h ig h -lo w p o in ts m eth o d
cessed fu r o f a n a ly sis, th e estim a te d v a ria b le c o st o f stea m per
ther $ 5 3 8 ,0 0 0 $ 3 2 0 ,0 0 0 $ 7 8 ,0 0 0 $ 9 3 6 ,0 0 0 d ire ct-la b o r h o u r sh o u ld b e
a. $ 4 .0 0
A ssu m in g th at th e 1 0 ,0 0 0 u n its o f W w ere p ro ce sse d b. $ 5 .4 2
furth er an d so ld fo r $ 7 8 ,0 0 0 , w h at w as A s h w o o d ’s g ro ss c. $ 5 .8 2
p ro fit o n th is sale? d. $6.00
a. $ 2 1 ,0 0 0
b . $ 2 8 ,5 0 0
c. $ 3 0 ,0 0 0 2 6 . T h r o o p C o m p a n y had b u d g eted 5 0 ,0 0 0 u n its o f
d . $ 6 6 ,0 0 0 o u tp u t u sin g 5 0 ,0 0 0 u n its o f raw m a teria ls a t a to ta l
m aterial c o st o f $ 1 0 0 ,0 0 0 . A c tu a l o u tp u t w as 5 0 ,0 0 0
2 3 . L in c o ln C o m p a n y , a g lo v e m a n u fa c tu r e r , h as u n its o f p ro d u ct req u irin g 4 5 ,0 0 0 u n its o f raw m aterials
e n o u g h id le ca p a city a v a ila b le to a ccep t a sp ec ia l ord er at a c o st o f $ 2 .1 0 per u n it. T h e d irect-m a teria l price
o f 2 0 ,0 0 0 pairs o f g lo v e s at $ 1 2 .0 0 a p a ir. T h e n o rm a l v a ria n ce a n d u sa g e v a ria n ce w ere
sellin g p rice is $ 2 0 .0 0 a p air. V a ria b le m a n u fa c tu r in g
co s ts are $ 9 .0 0 a p air, a n d fix ed m a n u fa c tu r in g c o s ts are Price Usage
$ 3 .0 0 a p air. L in c o ln w ill n o t in cu r an y se llin g ex p e n se s a. $ 4 ,5 0 0 u n fa v o r a b le $ 1 0 ,0 0 0 fa v o ra b le
as a resu lt o f th e sp ecia l o rd er . W h a t w o u ld b e th e e ffe c t b. $ 5 ,0 0 0 fa v o r a b le $ 1 0 ,5 0 0 u n fa v o ra b le
o n o p era tin g in c o m e if th e sp ec ia l o rd er c o u ld b e a c c. $ 5 ,0 0 0 u n fa v o r a b le $ 1 0 ,5 0 0 fa v o ra b le
cep ted w ith o u t a ffe c tin g n o rm a l sales? d. $ 1 0 ,0 0 0 fa v o r a b le $ 4 ,5 0 0 u n fa v o ra b le
a. $0.
b. $ 6 0 ,0 0 0 in crea se. 2 7 . U n io n C o m p a n y u ses a sta n d a rd c o st a cc o u n tin g
c. $ 1 8 0 ,0 0 0 in crea se. sy ste m . T h e fo llo w in g o v er h e a d c o s ts an d p ro d u c tio n
d . $ 2 4 0 ,0 0 0 in crea se. d a ta are a v a ila b le fo r A u g u st 1981:
2 4 . In fo r m a tio n o n T o w n se n d C o m p a n y ’s d irect- S ta n d a rd fix ed o v er h e a d rate per

la b o r c o s ts fo r M ay 1981 is as fo llo w s: d ire ct-la b o r h o u r $ 1. 0 0
S ta n d a rd v a ria b le o v er h e a d rate
S tan d ard d irect-la b o r rate $ 6.00 per d irect-la b o r h o u r $ 4 .0 0
A c tu a l d irect-la b o r rate $ 5 .8 0 B u d g e ted m o n th ly d ire ct-la b o r h o u r s 4 0 ,0 0 0
S tan d ard d irect-la b o r h o u rs 20,000 A c tu a l d ire ct-la b o r h o u r s w o rk ed 3 9 ,5 0 0
A ctu a l d irect-la b o r h ou rs 21,000 S ta n d a rd d ire ct-la b o r h o u rs a llo w e d
D ire ct-la b o r rate v a ria n c e— fo r a ctu a l p r o d u c tio n 3 9 ,0 0 0
fa v o ra b le $ 4 ,2 0 0 O v era ll o v er h e a d v a ria n ce — fa v o r a b le $ 2 ,0 0 0
W h at is T o w n s e n d ’s to ta l d ire ct-la b o r p a y ro ll fo r M a y T h e a p p lied fa cto ry o v er h e a d fo r A u g u st 1981 sh o u ld be

1981? a . $ 1 9 5 ,0 0 0
a. $ 1 1 6 ,0 0 0 b. $ 1 9 7 ,0 0 0
b. $ 1 1 7 ,6 0 0 c . $ 1 9 7 ,5 0 0
c. $ 1 2 0 ,0 0 0 d . $ 1 9 9 ,5 0 0
d . $ 1 2 1 ,8 0 0
172
28. Sussex Company has budgeted its operations for 31. Garfield Company, which sells a single product,
February 1981. No change in inventory level during the provided the following data from its income statements
month is planned. Selected data from estimated for the calendar years 1980 and 1979:
amounts are as follows:
1980
Net loss $100,000 Sales (150,000 units) $750,000
Increase in accounts payable 40,000 Cost of goods sold 525,000
Depreciation expense 35,000 Gross profit $225,000
Decrease in gross amount of trade
accounts receivable 60,000
Purchase of office equipment on 45-day 1979
credit terms 15,000 (Base year)
Provision for estimated warranty liability 10,000 Sales (180,000 units) $720,000
Cost of goods sold 575,000
How much change in cash position is expected for Gross profit $145,000
February?
a. $15,000 decrease.
b. $25,000 decrease. In an analysis of variation in gross profit between the
c. $30,000 increase. two years, what would be the effects of changes in sales
d. $45,000 increase. price and sales volume?
Sales price Sales volume

29. Ridgefield, Inc., is considering a three-phase a. $150,000 favorable $120,000 unfavorable
research project. The time estimates for completion of b. $150,000 unfavorable $120,000 favorable
Phase 1 of the project are: c. $180,000 favorable $150,000 unfavorable
d. $180,000 unfavorable $150,000 favorable
Months
Optimistic 4 32. Lindsay Company reported the following results
Most likely 8 from sales of 5,000 units of product A for the month of
Pessimistic 18 June 1981:
Using the Program Evaluation Review Technique Sales
(PERT), the expected time for completion of Phase 1 $200,000
Variable costs 120,000
should be Fixed costs
a. 8 months. 60,000
Operating income 20,000
b. 9 months.
c. 10 months.
d. 18 months. Assume that Lindsay increases the selling price of pro
duct A by 10% on July 1 , 1981. How many units of pro
duct A would have to be sold in July 1981 in order to
generate an operating income of $20,000?
30. Pitt Company is considering a proposal to replace a. 4,000
existing machinery used for the manufacture of product b. 4,300
A. The new machines are expected to cause increased c. 4,500
annual fixed costs of $120,000; however, variable costs d. 5,000
should decrease by 20% due to a reduction in direct-
labor hours and more efficient usage of direct materials. 33. Juniper Company is preparing its cash budget for
Before this change was under consideration, Pitt had the month of August 1981. Projections for the month
budgeted product A sales and costs for 1981 as follows: include the following:
Sales $2 ,000,000 Sales $400,000
Variable costs 70% of sales Gross profit (based on sales) 25%
Fixed costs $400,000 Increase in inventories $ 30,000
Decrease in trade accounts payable $ 12,000
Assuming that Pitt implemented the above proposal by
January 1, 1981, what would be the increase in budgeted What are the estimated cash disbursements for inven
operating profit for product A for 1981? tories in August 1981?
a. $160,000 a. $142,000
b. $280,000 b. $312,000
c. $360,000 c. $318,000
d. $480,000 d. $342,000
173
34. Birney Company is planning its advertising cam 37. Hillsdale Company purchased a machine for
paign for 1981 and has prepared the following budget $480,000. The machine has a useful life of six years and
data based on a zero advertising expenditure: no salvage value. Straight-line depreciation is to be
used. The machine is expected to generate cash flow
Normal plant capacity 200,000 units from operations, net of income taxes, of $140,000 in
Sales 150,000 units each of the six years. Hillsdale’s desired rate of return is
Selling price $25.00 per unit 14%. Information on present value factors is as follows:
Variable manufacturing costs $15.00 per unit
Fixed costs: Present value o f
Manufacturing $800,000 Present value ordinary annuity
Selling and administrative $700,000 Period o f $1 at 14% o f $1 at 14%
An advertising agency claims that an aggressive adver 1 .877 .877

tising campaign would enable Birney to increase its unit 2 .769 1.647
sales by What is the maximum amount that Birney 3 .675 2.322
can pay for advertising and obtain an operating profit 4 .592 2.914
of $200,000? 5 .519 3.433
a. $100,000 6 .456 3.889
b. $200,000
c. $300,000 What would be the net present value?
d. $550,000 a. $ 63,840
b. $ 64,460
c. $218,880
35. In planning its operations for 1981 based on a sales d. $233,340
forecast of $6,000,000, Wallace, Inc., prepared the
following estimated data:
38. Saratoga Company is planning to purchase a new
Costs and expenses machine for $600,000. The new machine will be
Variable Fixed depreciated on the straight-line basis over a six-year
Direct materials $1,600,000 period with no salvage, and a full year’s depreciation
Direct labor 1,400,000 will be taken in the year of acquisition. The new
Factory overhead 600,000 $ 900,000 machine is expected to produce cash flow from opera
Selling expenses 240,000 360,000 tions, net of income taxes, of $150,000 a year in each of
Administrative the next six years. The accounting (book value) rate of
expenses 60,000 140,000 return on the initial investment is expected to be
$1,400,000 a. 8.3%
$3,900,000 b. 12.0%
c. 16.7%
d. 25.0%
What would be the amount of sales dollars at the break
even point?
a. $2,250,000 39. Garwood Company purchased a machine which
b. $3,500,000 will be depreciated on the straight-line basis over an
c. $4,000,000 estimated useful life of seven years and no salvage
d. $5,300,000 value. The machine is expected to generate cash flow
from operations, net of income taxes, of $80,000 in each
of the seven years. Garwood’s expected rate of return is
36. Nelson Company is planning to purchase a new 12%. Information on present value factors is as follows:
machine for $500,000. The new machine is expected to
produce cash flow from operations, before income Present value of $1 at 12% for
taxes, of $135,000 a year in each of the next five years. seven periods 0.452
Depreciation of $100,000 a year will be charged to in Present value of an ordinary annuity of $1
come for each of the next five years. Assume that the in at 12% for seven periods 4.564
come tax rate is 40%. The payback period would be ap
proximately Assuming a positive net present value of $12,720, what
a. 2.2 years. was the cost of the machine?
b. 3.4 years. a. $240,400
c. 3.7 years. b. $253,120
d. 4.1 years. c. $352,400
d. $377,840
174
40. Kingston Company needs 10,000 units of a certain 42. Paramount Corporation has consistently used the
part to be used in its production cycle. The following in reserve method to compute the bad debt deduction on
formation is available: its tax returns. The year-end reserve for bad debts
reported on the 1979 tax return was $11,200. Additional
Cost to Kingston to make the part: information is available as follows:
Direct materials $ 6
Direct labor 24 Accounts receivable Bad debt
Variable overhead 12 at end o f year Losses Recoveries
Fixed overhead applied 15 1975 $ 255,000 $12,000 $1,150
$57 1976 265,000 13,500 1,300
1977 270,000 11,500 1,450
Cost to buy the part from Utica 1978 250,000 12,000 1,500
Company $53 1979 280,000 14,000 1,920
1980 300,000 18,000 2,400
If Kingston buys the part from Utica instead of
making it, Kingston could not use the released facilities Totals $1,620,000 $81,000 $9,720
in another manufacturing activity. 60% of the fixed
overhead applied will continue regardless of what deci % of re
sion is made. ceivables 5.0% 0.6%
In deciding whether to make or buy the part, the
total relevent costs to make the part are In December 1980 one of Paramount’s important
a. $342,000 customers experienced financial difficulties, which
b. $480,000 could result in a bad debt write-off of $10,000 during
c. $530,000 1981 in respect of this customer. What is the maximum
d. $570,000 bad debt deduction that Paramount can claim on its tax
return for 1980?
a. $13,200
Number 3 (Estimated time----- 45 to 55 minutes) b. $17,600
c. $19,400
Instructions d. $27,600

items relating to the federal income taxation of corpora
tions and partnerships. Use a soft pencil, preferably No. 43. In 1980 Trapp, Inc., had $400,000 of gross profit
2, to blacken the appropriate circle on the separate from operations and $160,000 of dividends from non-
printed answer sheet to indicate your answer. The affiliated domestic corporations. Trapp’s operating
answers should be based upon the Internal Revenue expenses totaled $410,000. What is Trapp’s dividends
Code and Tax Regulations in effect for the tax period received deduction for 1980?
specified in the item. If no tax period is specified, use a. $ 80,000
the current Internal Revenue Code and Tax Regula b. $127,500
tions. Mark only one answer for each item. Answer all c. $136,000
items. Your grade will be based on your total correct d. $160,000
answers.
Items to be Answered 44. Wheeler Corporation, a Subchapter S corpora

tion, has two equal shareholders. During 1980 Wheeler
had taxable income and current earnings and profits of
41. On July 1, 1980, in connection with a recapitaliza $10,000. Included in the above is $20,000 excess net
tion of Yorktown Corporation, Robert Moore ex long-term capital gain over net short-term capital loss.
changed 1,000 shares of stock which cost him $95,000 Wheeler distributed $7,500 cash to each shareholder
for 1,000 shares of new stock worth $108,000 and bonds during 1980. What amount should each shareholder
in the principal amount of $10,000 with a fair market report on his or her individual income tax return for
value of $10,500. What is the amount of Moore’s 1980 as long-term capital gain passed through from
recognized gain during 1980? Wheeler?
a. $0 a. $ 2,000
b. $10,500 b. $ 4,000
c. $23,000 c. $ 5,000
d. $23,500 d. $10,000
175
45. B ella m y C o rp o r a tio n rep o rted R eta in ed E a rn in g s- 4 8 . J o h n G erry, th e so le sh a re h o ld er in R o c k v ille C o r

U n a p p ro p ria ted o f $ 1 ,5 0 0 ,0 0 0 at D ec em b e r 3 1 , 1979, p o r a tio n , elec te d to liq u id a te th e c o r p o r a tio n in a o n e -
o n its 1979 tax return. In fo r m a tio n fo r 1980 is a v a ila b le m o n th liq u id a tio n w h ich w a s b eg u n an d co m p leted
as fo llo w s: w ith in th e m o n th o f O c to b e r 1980. G erry received a
liq u id a tin g d istr ib u tio n d u rin g O c to b er 1980 as fo llo w s:
N et in c o m e per b o o k s $ 6 0 0 ,0 0 0
T a x a b le in c o m e 8 5 0 ,0 0 0 • C a sh o f $ 6 ,0 0 0 .
D iv id en d s p aid o n c o m m o n sto ck 4 5 0 ,0 0 0 • M a c h in e ry (su b je ct to a $ 1 3 ,0 0 0 lien )
D eb it a d ju stm en t to th e b eg in n in g w ith a fair m ark et v a lu e o f $ 4 0 ,0 0 0 .
b a la n ce o f retain ed ea rn in g s fo r
co r re ctio n o f an a c c o u n tin g error 5 0 0 ,0 0 0 A t th e tim e o f liq u id a tio n , th e b a sis o f G erry’s sto ck in
v estm en t in R o c k v ille w a s $ 2 0 ,0 0 0 , a n d th e a ccu m u la ted
W h at a m o u n t sh o u ld B ella m y report fo r R eta in ed ea rn in g s an d p r o fits o f th e c o r p o r a tio n a m o u n te d to
E a rn in g s-U n a p p ro p ria ted at D ec em b e r 3 1 , 1980, on its $ 5 ,0 0 0 . H o w m u ch o f th e liq u id a tin g d istr ib u tio n is ta x
1980 tax return? a b le to G erry as o rd in a ry in c o m e an d as ca p ita l g ain in
a. $ 1 ,1 5 0 ,0 0 0 1980?
b . $ 1 ,4 0 0 ,0 0 0
c. $ 1 ,6 5 0 ,0 0 0 Ordinary income Capital gain
d . $ 1 ,9 0 0 ,0 0 0 a. $0 $ 6 ,0 0 0
b. $ 5 ,0 0 0 $0
c. $ 5 ,0 0 0 $ 1 ,0 0 0
d. $ 6 ,0 0 0 $ 7 ,0 0 0
4 6 . R o b erta W arner a n d S a lly R o g ers fo r m e d th e
A c m e C o rp o ra tio n o n O c to b er 1, 1980. O n th e sa m e
d a te W arner paid $ 7 5 ,0 0 0 cash to A c m e fo r 7 5 0 sh ares 4 9 . J e ffr e y , th e so le p ro p rieto r o f a hard w are
o f its c o m m o n sto c k . S im u lta n e o u sly , R o g ers received b u sin e ss, h ired E a s tw o o d on J a n u a ry 1, 1 977, fo r an
100 sh ares o f A c m e ’s c o m m o n sto c k fo r services a greed salary an d a p ro m ise to g iv e him a 25% o w n e r
ren d ered . H o w m u ch sh o u ld R o g ers in c lu d e as ta x a b le sh ip in terest if h e w ere still e m p lo y e d at th e en d o f three
in co m e for 1980, an d w h at w ill b e th e b a sis o f her yea rs, an d an a d d itio n a l 25% in terest if he c o n tin u e d in
sto ck ? th e b u sin ess fo r a se c o n d th ree-y ea r p e r io d . O n Jan uary
1, 1980, a p a rtn ersh ip w a s fo r m e d a n d E a s tw o o d re
Taxable income Basis o f stock ceiv ed a 25% in terest in th e ca p ita l an d p r o fits o f the
b u sin ess. O n that d a te th e net w o rth o f th e p artnersh ip
a. $0 $0
w as $ 6 0 ,0 0 0 . W h at is E a s tw o o d ’s tax b a sis o f h is p art
b. $0 $ 1 0 ,0 0 0
n ersh ip in terest at J a n u a ry 1, 1980, an d w hat a m o u n t
c. $ 1 0 ,0 0 0 $0
sh o u ld be ad d ed to h is ta x a b le in c o m e fo r 1980?
d. $ 1 0 ,0 0 0 $ 1 0 ,0 0 0
Partnership Addition to
interest taxable income
4 7 . C arr, In c ., a ca len d a r-y ea r c o r p o r a tio n in c o r a. $0 $0
p o ra ted in Jan uary 1 9 7 5 , h ad a net o p era tin g lo ss o f b. $ 1 5 ,0 0 0 $ 1 5 ,0 0 0
$ 7 5 ,0 0 0 in 1979. F or each o f th e years 1 9 7 5 -1 9 7 8 , Carr c. $ 3 0 ,0 0 0 $ 1 5 ,0 0 0
rep orted ta x a b le in c o m e (lo ss) b e fo r e net o p era tin g lo ss d. $ 3 0 ,0 0 0 $ 3 0 ,0 0 0
d e d u c tio n as fo llo w s:
50. R egan C o r p o r a tio n p u rch a sed a m a ch in e for
1975 $ 1 5 ,0 0 0 $ 1 8 0 ,0 0 0 o n J an u ary 1, 1977, an d esta b lish ed an an n u al
1976 (2 0 ,0 0 0 ) d ep rec ia tio n rate o f 10% u sin g th e stra ig h t-lin e m eth o d ,
1977 1 0 ,0 0 0 w ith n o sa lv a g e v a lu e . O n D ec em b e r 3 1 , 1980, R egan
1978 3 0 ,0 0 0 d eterm in ed that th e a ctu a l o b so le s c e n c e w as su b sta n
tia lly h igh er th an w as a n tic ip a te d at th e tim e o f p u r
W h en filin g its tax return fo r 1979, Carr d id n o t elect to c h a se , an d th at th e m a ch in e w ill n o t b e e c o n o m ic a lly
g iv e up th e carryb ack o f its lo ss fo r 1979. C a rr’s ta x a b le u se fu l a fter D ec em b e r 3 1 , 1982. A ssu m in g th at R egan
in co m e b e fo r e net o p era tin g lo ss d e d u c tio n fo r 1980 w as can ju stify th e c h a n g e , h o w m u ch d e p rec ia tio n for this
$ 8 0 ,0 0 0 . C arr sh o u ld report a net o p era tin g lo ss d e d u c m a ch in e sh o u ld R egan d ed u ct o n its tax return for the
tio n o n its tax return fo r 1980 o f year en d ed D ecem b er 3 1 , 1980?
a . $ 3 0 ,0 0 0 a . $ 1 8 ,0 0 0
b . $ 3 5 ,0 0 0 b . $ 3 0 ,0 0 0
c. $ 4 0 ,0 0 0 c. $ 4 2 ,0 0 0
d . $ 5 5 ,0 0 0 d . $ 6 6 ,0 0 0
176
51. In 1980, its first year of operations, Rowley Cor 54. On December 1, 1980, Alan Younger, a member
poration, not a dealer in securities, realized taxable in of a three-man equal partnership, bought securities
come of $128,000 from the operation of its business. In from the partnership for $27,000, their market value.
addition to its regular business operations, it realized The securities were acquired by the partnership for
the following gains and losses from the sale of $15,000 on March 1, 1980. By what amount will this
marketable securities: transaction increase Younger’s taxable income for
1980?
Short-term capital gain $ 10,000 a. $0
Short-term capital loss ( 4,000) b. $ 1,600
Long-term capital gain 12,000 c. $ 4,000
Long-term capital loss (32,000) d. $12,000
What is Rowley’s total taxable income for 1980?
a. $114,000
b. $124,000
c. $128,000 55. During 1980 Bell Corporation had worldwide tax
d. $134,000 able income of $675,000 and a tentative United States
income tax of $270,000. Bell’s taxable income from
business operations in Country A was $300,000, and
foreign income taxes imposed were $135,000 stated in
United States dollars.
52. For the year ended December 31, 1980, Powell,
Inc., reported $900,000 income before federal taxes per How much should Bell claim as a credit for foreign in
books which included the following items: come taxes on its United States income tax return for
1980?
State corporate income tax refunds $ 8,000 a. $0
Interest income on tax-exempt b. $ 75,000
municipal securities 30,000 c. $120,000
Loss on sale of land acquired in 1975 d. $135,000
for investment 40,000
Interest expense on loan to purchase
tax-exempt municipal securities 16,000
56. On April 1, 1980, George Hart, Jr., acquired a
What is the taxable income of Powell for 1980? 25% interest in the Wilson, Hart and Company partner
a. $886,000 ship by gift from his father. The partnership interest
b. $900,000 had been acquired by a $50,000 cash investment by
c. $918,000 Hart, Sr., on July 1, 1965. The tax basis of Hart, Sr.’s
d. $926,000 partnership interest was $60,000 at the time of the gift.
Hart, Jr., sold the 25% partnership interest for $85,000
on December 17, 1980. What type and amount (before
consideration of the capital gain deduction) of capital
gain should Hart, Jr., report on his 1980 tax return?
53. At December 31, 1979, Burns and Cooper were a. A long-term capital gain of $25,000.
equal partners in a partnership with net assets having a b. A short-term capital gain of $25,000.
tax basis and fair market value of $100,000. On January c. A long-term capital gain of $35,000.
1, 1980, Todd contributed securities with a fair market d. A short-term capital gain of $35,000.
value of $50,000 (purchased in 1978 at a cost of $35,000)
to become an equal partner in the new firm of Burns,
Cooper and Todd. The partnership agreement provided
that Todd would report all gain attributable to the pre 57. On December 31, 1980, Day Corporation sold
contribution appreciation in the securities and that post machinery for $48,000. The machinery which had been
contribution appreciation is to be shared equally by the purchased on January 1, 1976, for $40,000 had an ad
partners. The securities were sold on December 15, justed basis of $28,000 on the date of sale. For 1980 Day
1980, for $65,000. How much of the partnership’s should report
capital gain from the sale of these securities should be a. Ordinary income of $20,000.
allocated to Todd? b. Section 1231 gain of $20,000.
a. $ 5,000 c. Section 1231 gain of $12,000 and ordinary in
b. $10,000 come of $8,000.
c. $15,000 d. Section 1231 gain of $8,000 and ordinary in
d. $20,000 come of $12,000.
177
58. Gilroy, a calendar-year taxpayer, is a partner in Number 4 (Estimated time----- 45 to 55 minutes)

the firm of Adams and Company which has a fiscal year
ending June 30. The partnership agreement provides for
Gilroy to receive 25% of the ordinary income of the
partnership. Gilroy also receives a guaranteed payment Number 4 consists of two unrelated parts.
of $1,000 monthly which is deductible by the partner
ship. The partnership reported ordinary income of Part a. On January 1, 1976, Grover Company
$88,000 for the year ended June 30, 1980, and $132,000 changed its inventory cost flow method to the LIFO cost
for the year ended June 30, 1981. How much should method from the FIFO cost method for its raw
Gilroy report on his 1980 return as total income from materials inventory. The change was made for both
the partnership? financial statement and income tax reporting purposes.
a. $25,000 Grover uses the multiple-pools approach under which
b. $30,500 substantially identical raw materials are grouped into
c. $34,000 LIFO inventory pools; weighted average costs are used
d. $39,500 in valuing annual incremental layers. The composition
of the December 31, 1978, inventory for the Class F in
ventory pool is as follows:
59. Nash and Ford are partners who share profits and
losses equally. For the year ended December 31, 1980,
the partnership had book income of $80,000 which in Weighted
cluded the following deductions: average Total
Units unit cost cost
Guaranteed salaries to partners:
$35,000 Base year inventory —
Nash 9,000 $10.00 $ 90,000
25,000 1976
Ford Incremental layer —
Contributions 5,000 1977 3,000 11.00 33,000
Incremental layer —
What amount should be reported as ordinary income on
1978 2,000 12.50 25,000
the partnership return for 1980?
a. $ 80,000 Inventory,
b. $ 85,000 December 31, 1978 14,000 $148,000
c. $140,000
d. $145,000
Inventory transactions for the Class F inventory pool

during 1979 were as follows:
60. On January 1, 1980, John Pierce acquired a 10% • On March 1, 1979, 4,800 units were purchased
interest in the Saratoga and Company partnership for a at a unit cost of $13.50 for $64,800.
cash investment of $20,000. In 1980 the partnership • On September 1, 1979, 7,200 units were pur
reported an ordinary loss of $40,000 of which Pierce’s chased at a unit cost of $14.00 for $100,800.
distributive share was $4,000. On January 1, 1980, the • A total of 15,000 units were used for production
partnership had no liabilities; however, during 1980 the during 1979.
partnership had the following transactions:
• A $50,000 loan from the Second National

Bank due June 30, 1981.
• A $100,000 nonrecourse loan (secured by in The following transactions for the Class F inventory
ventory) from the Union Finance Company pool took place during 1980:
due December 31, 1981.
• On January 10, 1980, 7,500 units were pur
After allocation of the operating loss, what should be chased at a unit cost of $14.50 for $108,750.
the tax basis of Pierce’s partnership interest at • On May 15, 1980, 5,500 units were purchased at
December 31, 1980? a unit cost of $15.50 for $85,250.
a. $16,000 • On December 29, 1980, 7,000 units were pur
b. $20,000 chased at a unit cost of $16.00 for $112,000.
c. $21,000 • A total of 16,000 units were used for production
d. $31,000 during 1980.
178
Required: 7. Goods received from a vendor on December

1. Prepare a schedule to compute the inventory 26, 1980, were included in the physical count. However,
(units and dollar amounts) of the Class F inventory pool the related $60,000 vendor invoice was not included in
at December 31, 1979. Show supporting computations accounts payable at December 31, 1980, because the ac
in good form. counts payable copy of the receiving report was lost.
2. Prepare a schedule to compute the cost of 8. On January 3, 1981, a monthly freight bill in
Class F raw materials used in production for the year the amount of $4,000 was received. The bill specifically
ended December 31, 1979. related to merchandise purchased in December 1980,
3. Prepare a schedule to compute the inventory one-half of which was still in the inventory at December
(units and dollar amounts) of the Class F inventory pool 31, 1980. The freight charges were not included in either
at December 31, 1980. Show supporting computations the inventory or in accounts payable at December 31,
in good form. 1980.
Part b. Layne Corporation, a manufacturer of small

tools, provided the following information from its ac Required;
counting records for the year ended December 31, 1980; Using the format shown below, prepare a schedule
of adjustments as of December 31, 1980, to the initial
Inventory at December 31, 1980 (based amounts per Layne’s accounting records. Show
on physical count of goods in Layne’s separately the effect, if any, of each of the eight trans
plant at cost on December 31, 1980) $1,750,000 actions on the December 31, 1980, amounts. If the
Accounts payable at December 3 1 , 1980 1,200,000 transactions would have no effect on the initial amount
Net sales (sales less sales returns) 8,500,000 shown, state NONE.
Accounts Net
Additional information is as follows: Inventory payable sales
Initial amounts $1,750,000 $1,200,000 $8,500,000

1. Included in the physical count were tools billed
to a customer F.O.B. shipping point on December 31, Adjustments-
1980. These tools had a cost of $28,000 and were billed increase
at $35,000. The shipment was on Layne’s loading dock (decrease)
waiting to be picked up by the common carrier, 1
2. Goods were in transit from a vendor to Layne 2
on December 31, 1980. The invoice cost was $50,000, 3
and the goods were shipped F.O.B. shipping point on 4
December 29, 1980. 5
3. Work-in-process inventory costing $20,000 was 6
sent to an outside processor for plating on December 30, 7
1980. 8
4. Tools returned by customers and held pending
inspection in the returned goods area on December 31, Total adjustments
1980, were not included in the physical count. On
January 8, 1981, the tools costing $26,000 were in Adjusted
spected and returned to inventory. Credit memos total amounts $ $ $
ing $40,000 were issued to the customers on the same
date.
5. Tools shipped to a customer F.O.B. destina
tion on December 26, 1980, were in transit at December
31, 1980, and had a cost of $25,000. Upon notification
of receipt by the customer on January 2, 1981, Layne
issued a sales invoice for $42,000.
6. Goods, with an invoice cost of $30,000, re
ceived from a vendor at 5:00 P.M. on December 31,
1980, were recorded on a receiving report dated January
2, 1981. The goods were not included in the physical
count, but the invoice was included in accounts payable
at December 31, 1980.
179
Number 5 (Estimated time 40 to 50 minutes) • Unexercised stock options to purchase 30,000

shares of common stock at $22.50 per share were
outstanding at the beginning and end of 1980. The
Number 5 consists of two unrelated parts. average market price of Mason’s common stock was $36
per share during 1980. The market price was $33 per
Part a. On January 1, 1978, Holt, Inc., granted share at December 31, 1980.
stock options to officers and key employees for the pur • Warrants to purchase 20,000 shares of common
chase of 20,000 shares of the company’s $10 par com stock at $38 per share were attached to the preferred
mon stock at $25 per share. The options were exer stock at the time of issuance. The warrants, which ex
cisable within a four-year period beginning January 1, pire on December 31, 1985, were outstanding at
1980, by grantees still in the employ of the company, December 31, 1980.
and expiring December 31, 1983. The market price of • Mason’s effective income tax rate was 40% for
Holt’s common stock was $33 per share at the date of 1979 and 1980.
grant. Holt prepares a formal journal entry to record
this award. Required (show supporting computations in good form,
On April 1, 1979, 2,000 option shares were ter and round earnings per share to the nearest penny):
minated when the employees resigned from the com
pany. The market value of the common stock was $35 1. Compute the number of shares which should
per share on this date. be used for the computation of primary earnings per
On March 31, 1980, 12,000 option shares were ex common share for the year ended December 31, 1980.
ercised when the market value of the common stock was 2. Compute the primary earnings per common
$40 per share. share for the year ended December 31, 1980.
3. Compute the number of shares which should
be used for the computation of fully diluted earnings
per common share for the year ended December 31,
Required: 1980.
Prepare journal entries to record issuance of the 4. Compute the fully diluted earnings per com
stock options, termination of the stock options, exercise mon share for the year ended December 31, 1980.
of the stock options, and charges to compensation ex
pense, for the years ended December 3 1 , 1978,1979 and
1980. Show supporting computations in good form.
Part b. Mason Corporation’s capital structure is

as follows:
December 31
1980 1979
Outstanding shares of:
Common stock 336,000 300,000
Nonconvertible
preferred stock 10,000 10,000
8% convertible bonds $ 1,000,000 $ 1,000,000
The following additional information is available:
• On September 1, 1980, Mason sold 36,000 addi

tional shares of common stock.
• Net income for the year ended December 31,
1980, was $750,000.
• During 1980 Mason paid dividends of $3.00 per
share on its nonconvertible preferred stock.
• The 8% convertible bonds are convertible into
40 shares of common stock for each $1,000 bond, and
were not considered common stock equivalents at the
date of issuance.
180
(Prepared by the Board o f Examiners o f the American Institute of Certified Public Accountants
November 5, 1981; 1:30 to 6:00 P.M.
Estimated Minutes
No. 1 ................... 45 55
No. 2 ................... 45 55
No. 3 ................... 45 55
No. 4 ................... 45 55
No. 5 ................... 40 50
T otal........... 220 270
should be numbered 1 through 12. The printed 4. Fourteen-column sheets, if any, should not be
answer sheet provided for the objective-type items folded until all sheets, both wide and narrow, are
should be considered to be Page 1. placed in the proper sequence and fastened
together at the top left corner. All fourteen-
2. Answer all objective-type items on the printed column sheets should then be wrapped around the
answer sheet provided for that purpose. It is to back of the papers.
you are uncertain of the answer. You are likely to 5. A CPA is continually confronted with the neces
get the highest score if you omit no answers. Since sity of expressing opinions and conclusions in
objective items are computer-graded, your com written reports in clear, unequivocal language.
ments and calculations associated with them are Although the primary purpose of the examination
not considered. is to test the candidate’s knowledge and applica
181
Number 1 (Estimated tim e ------45 to 55 minutes) 2. Lee Corporation’s checkbook balance on

December 31, 1980, was $4,000. In addition, Lee held
Instructions the following items in its safe on December 31:
Select the best answer for each of the following Check payable to Lee Corporation, dated
items relating to a variety of financial accounting January 2, 1981, not included in
problems. Use a soft pencil, preferably No. 2, to December 31 checkbook balance $1,000
blacken the appropriate circle on the separate printed
answer sheet to indicate your answer. Mark only one Check payable to Lee Corporation, de
answer for each item. Answer all items. Your grade will posited December 20, and included in
be based on your total correct answers. December 31 checkbook balance, but
The following is an example of the manner in which returned by bank on December 30,
the answer sheet should be marked: stamped “ NSF.” The check was rede
posited January 2, 1981, and cleared
Item January 7 200
Postage stamps received from mail-order

customers 75
97. Gross billings for merchandise sold by Baker Check drawn on Lee Corporation’s account,
Company to its customers last year amounted to payable to a vendor, dated and recorded
$5,260,000; sales returns and allowances reduced the December 31, but not mailed until
amounts owed by $160,000. How much were net sales January 15, 1981 500
a. $4,800,000 The properamount to be shown as Cash on Lee’s
b. $5,100,000 balance sheet at December 31, 1980, is
c. $5,200,000 a. $3,800
d. $5,260,000 b. $4,000
c. $4,300
d. $4,875
Answer Sheet
97. 3. Malcolm Corporation has an incentive compensa

tion plan under which the sales manager receives a
Items to be Answered bonus equal to 10% of the company’s income after
deducting income taxes, but before deducting the
bonus. Income before income tax and the bonus is
$100,000. The effective income tax rate is 40%. How
much is the bonus?
1. The following accounts were abstracted from the a. $ 5,400
December 31, 1980, trial balance of Robby Company: b. $ 6,000
c. $ 6,250
Debit Credit d. $10,000
Credit sales $750,000

Sales discounts $15,000
On January 1, 1980, Allowance for Doubtful Accounts 4. On January 2, 1979, Luco Manufacturing Com
had a credit balance of $18,000. During 1980, $30,000 pany bought a new machine for $1,000,000. The
of uncollectible accounts receivable were written off. machine has an estimated useful life of eight years and a
Past experience indicates that 3% of gross sales proves salvage value of $100,000. Depreciation was computed
to be uncollectible. What should be the balance of by the sum-of-the-years-digits method. What amount
Allowance for Doubtful Accounts at December 31, should appear for this machine on Luco’s balance sheet
1980, after provision is made for the current year? at December 3 1 , 1980, net of accumulated depreciation?
a. $10,050 a. $525,000
b. $10,500 b. $625,000
c. $22,050 c. $787,500
d. $34,500 d. $825,000
182
5. During 1975, Traco Machine Company spent 8. Marmol Corporation uses the allowance method
$176,000 on research and development costs for an in for bad debts. During 1980, Marmol charged $30,000 to
vention. This invention was patented on January 2, bad debt expense, and wrote off $25,200 of uncollecti
1976, at a nominal cost that was expensed in 1976. The ble accounts receivable. These transactions resulted in a
patent had a legal life of 17 years and an estimated decrease in working capital of
useful life of 8 years. In January 1980, Traco paid a. $0
$16,000 for legal fees in a successful defense of the pa b. $ 4,800
tent. Amortization for 1980 should be c. $25,200
a. $0 d. $30,000
b. $ 1,231
c. $ 4,000
d. $26,000
9. On January 2, 1980, Lafayette Machine Shops,

Inc., signed a ten-year noncancellable lease for a heavy
6. The following information is available for Wagner duty drill press, stipulating annual payments of $15,000
Corporation for 1980: starting at the end of the first year, with title passing to
Sales $500,000 Lafayette at the expiration of the lease. Lafayette
Beginning inventory 180,000 treated this transaction as a capital lease. The drill press
Ending inventory 95,000 has an estimated useful life of 15 years, with no salvage
Freight-out 45,000 value. Lafayette uses straight-line depreciation for all of
Purchases 215,000 its fixed assets. Aggregate lease payments were deter
mined to have a present value of $92,170, based on im
How much is the cost of goods sold? plicit interest of 10% . For 1980, Lafayette should
a. $200,000 record
b. $300,000
c. $345,000 Interest Depreciation
d. $440,000 expense expense
a. $0 $0
b. $7,717 $6,145
c. $9,217 $6,145
7. In 1980, Wallace Corporation purchased d. $9,217 $9,217
marketable securities, and at December 31, 1980, had
the following marketable equity securities:
Unrealized
Cost Market gain (loss)
In Current
Assets: 10. Tech Products, Inc., incurred the following costs
Security X $80,000 $50,000 $(30,000) during the year ended December 31, 1980:
Y 15,000 20,000 5,000
Laboratory research aimed at
Totals $95,000 $70,000 $(25,000) discovery of new knowledge $ 7,000
In Noncurrent
Assets: Design, construction, and testing
of pre-production prototypes 9,000
Security Q $ 60,000 $ 70,000 $ 10,000
R 90,000 45,000
_______ (45,000) Design of tools, jigs, molds, and
Totals $150,000 $115,000 $(35,000) dies involving new technology 15,000
Quality control during commercial

Valuation allowances at December 31, 1980, should be production, including routine
established with a corresponding charge against testing of products 18,000
Stockholders’ The total amount to be
Income equity research and development
a. $0 $60,000 a. $ 7,000
b. $25,000 $0 b. $22,000
c. $25,000 $35,000 c. $31,000
d. $60,000 $0 d. $49,000
183
11. On January 1, 1980, Rey Corporation paid 14. During 1980, Belardo Corporation constructed
$150,000 for 10,000 shares of Rio Corporation’s com and manufactured certain assets, and incurred the
mon stock, representing a 15% investment in Rio. Rio following interest costs in connection with those ac
declared and paid a dividend of $1 a share to its com tivities:
mon stockholders during 1980. Rio’s net income was Interest costs
$130,000 for the year ended December 31, 1980. At incurred
what amount should Rey’s investment in Rio appear on
Rey’s balance sheet as of December 31, 1980? Warehouse constructed for Belardo’s
a. $140,000 own use $20,000
b. $150,000
c. $159,500 Special-order machine for sale to
d. $169,500 unrelated customer, produced
according to customer’s specifications 9,000
Inventories routinely manufactured,

produced on a repetitive basis 7,000
All of these assets required an extended period of time

for completion. Assuming the effect of interest
12. On January 10, 1981, an explosion and fire oc capitalization is material, what is the total amount of in
curred at Staren Chemical Corporation’s plant, causing terest costs to be capitalized?
extensive property damage to neighboring buildings. On a. $0
March 1, 1981, Staren’s management and attorneys b. $20,000
concluded that $2,000,000 would be a reasonable c. $29,000
estimate of liability for damages, although no claims d. $36,000
had yet been asserted against Staren in connection with
the accident. Of the $2,000,000 potential liability, only
$500,000 was covered by insurance. In Staren’s
December 31, 1980, financial statements, which were Items 15 and 16 are based on the following data:
issued on April 1, 1981, how should this item be City Stationers, Inc., had 200 calculators on hand at
reported? January 1, 1981, costing $18 each. Purchases and sales
a. As a footnote disclosure indicating the possi of calculators during the month of January were as
ble loss of $1,500,000. follows:
b. As an accrued liability of $1,500,000, with a
corresponding direct charge to retained earn Date Purchases Sales
ings. Jan. 12 150 @ $28
c. As an accrued liability of $2,000,000, with a 14 100 @ $20
corresponding charge to income. 29 100 @ $22
d. As an accrued liability of $1,500,000, with a 30 100 @ $32
corresponding charge to income.
City does not maintain perpetual inventory records. Ac

cording to a physical count, 150 calculators were on
hand at January 31, 1981.
13. The following pertains to an inventory item held

by Moore Wholesalers, Inc., at December 31, 1980: 15. The cost of the inventory at January 31, 1981,
under the FIFO method is
Cost $60 a. $ 400
Estimated selling price 68 b. $2,700
Estimated cost of disposal 1 c. $3,100
Normal profit margin 11 d. $3,200
Replacement cost 51
16. The cost of the inventory at January 31, 1981,
Under the lower of cost or market rule, this inventory under the LIFO method is
item should be valued at a. $ 400
a. $51 b. $2,700
b. $56 c. $3,100
c. $60 d. $3,200
d. $67
184
17, Bibi Corporation owns of the outstanding Number 2 (Estimated tim e------45 to 55 minutes)
capital stock of Daniels Corporation. On July 1, 1980,
Bibi advanced $50,000 in cash to Daniels. On the con Instructions
solidated balance sheet at December 31, 1980, how
much of the advance should be eliminated? Select the best answer for each of the following
a. $0 items relating to a variety of financial accounting
b. $10,000 problems. Use a soft pencil, preferably No. 2, to
c. $40,000 blacken the appropriate circle on the separate printed
d. $50,000 answer sheet to indicate your answer. Mark only one
answer for each item. Answer all items. Your grade will
be based on your total correct answers.
18. George Corporation declared a cash dividend of

$10,000 on January 17, 1981. This dividend was payable Items to be Answered
to stockholders of record on February 10, 1981, and
payment was made on March 2, 1981. As a result of this
cash dividend, working capital will increase (decrease)
on 21. Goodel Corporation was organized on January 1,
January 17 February 10
1980, with authorized capital of 500,000 shares of $10
a. $0 $0 par value common stock. During 1980, Goodel had the
b. $ 10,000 $0 following transactions affecting stockholders’ equity:
c. $(10,000) $0
d. $(10,000) $10,000
January 10 — Issued 10,000 shares @ $12 per
share
19. Doe Corporation owned 1,000 shares of Spun May 8 — Purchased 1,000 shares of
Corporation. These shares were purchased in 1977 for treasury stock @ $13 per share
$9,000. On September 15, 1981, Doe declared a prop
erty dividend of one share of Spun for every ten shares
of Doe held by a stockholder. On that date, when the September 10 Sold 1,000 shares of treasury
market price of Spun was $14 per share, there were stock @ $14 per share
9,000 shares of Doe outstanding. What gain and net
reduction in retained earnings would result from this
property dividend? Goodel used the cost method for recording treasury
stock transactions. What is the amount of additional
Net reduction in paid-in capital at
Gain retained earnings a. $0
a. $0 $ 8,100 b. $ 1,000
b. $0 $12,600 c. $20,000
c. $4,500 $ 3,600 d. $21,000
d. $4,500 $ 8,100
20. On June 30, 1980, Rickert Corporation declared

and issued a 10% common stock dividend. Prior to this 22. On July 14, 1981, JX Corporation exchanged
dividend, Rickert had 10,000 shares of $5 par value 1,000 shares of its $8 par value common stock for a plot
common stock issued and outstanding. The market of land, JX’s common stock is listed on the NYSE and
price of Rickert’s common stock on June 30 was $12 per traded at an average price of $21 per share on July 14.
share. As a result of this stock dividend, by what The land was appraised by independent real estate ap
amount should Rickert’s total stockholders’ equity in praisers on July 14 at $23,000. As a result of this ex
crease (decrease)? change, JX’s additional paid-in capital will increase by
a. $0 a. $0
b. $ 5,000 b. $ 8,000
c. $ 7,000 c. $13,000
d. $(12,000) d. $15,000
185
23. On July 1, 1980, Mundo Corporation purchased 26. The following condensed balance sheet is
factory equipment for $50,000. Salvage value was presented for the partnership of Alexander, Bell and
estimated at $2,000. The equipment will be depreciated Graham, who share profits and losses in the ratio of
over ten years using the double-declining-balance 6:2:2, respectively:
method. Counting the year of acquisition as one-half
year, Mundo should record 1981 depreciation expense Cash $ 80,000
of Other assets 280,000
a. $ 7,680 Total $360,000
b. $ 9,000
c. $ 9,600 Liabilities $140,000
d. $10,000 Alexander, capital 100,000
Bell, capital 100,000
Graham, capital 20,000
Total $360,000
24. Cicci and Arias are partners who share profits and
losses in the ratio of 7:3, respectively. On October 5, The partners agreed to liquidate the partnership after
1980, their respective capital accounts were as follows: selling the other assets. If the other assets are sold
for $160,000, how much should Alexander receive upon
Cicci $35,000 liquidation?
Arias 30,000 a. $ 25,000
b. $ 26,000
Total $65,000 c. $ 28,000
d. $100,000
On that date they agreed to admit Soto as a partner with
a one-third interest in the capital and profits and losses,
upon his investment of $25,000. The new partnership
will begin with a total capital of $90,000. Immediately
after Soto’s admission, what are the capital balances of
Cicci, Arias, and Soto, respectively? 27. On July 1, 1981, Motta and Puleo formed a part
a. $30,000; $30,000; $30,000 nership, agreeing to share profits and losses in the ratio
b. $31,500; $28,500; $30,000 of 4:6, respectively. Motta contributed a parcel of land
c. $31,667; $28,333; $30,000 that cost him $25,000. Puleo contributed $50,000 cash.
d. $35,000; $30,000; $25,000 The land was sold for $50,000 on July 1, 1981, four
hours after formation of the partnership. How much
should be recorded in Motta’s capital account on for
mation of the partnership?
25. On June 30, 1981, the balance sheet for the part a. $10,000
nership of Coll, Maduro, and Prieto, together with their b. $20,000
respective profit and loss ratios, were as follows: c. $25,000
d. $50,000
Assets, at cost $180,000
Coll, loan $ 9,000
Coll, capital (20%) 42,000
Maduro, capital (20%) 39,000
Prieto, capital (60%) 90,000
28. On July 1, 1981, Molloy Corporation entered into
Total $180,000 a 10-year noncancellable lease with Macless, Inc., for a
machine owned by Macless. The machine had a fair
Coll has decided to retire from the partnership. By value of $200,000 at inception of the lease, and an
mutual agreement, the assets are to be adjusted to their estimated useful life of 13 years. Present value of the
fair value of $216,000 at June 30, 1981. It was agreed minimum lease payments is $120,000, and executory
that the partnership would pay Coll $61,200 cash for costs amounted to $3,000. Molloy is obligated to return
Coil’s partnership interest, including Coil’s loan which the machine to Macless upon expiration of the lease. No
is to be repaid in full. No goodwill is to be recorded. bargain purchase option is provided. How much should
After Coil’s retirement, what is the balance of Maduro’s Molloy record as an asset and corresponding liability at
capital account? the inception of this lease?
a. $36,450 a. $0
b. $39,000 b. $120,000
c. $45,450 c. $123,000
d. $46,200 d. $200,000
186
29. On March 1, 1981, Harbour Corporation issued 33. On January 1, 1980, Cardow Corporation sold a
10% debentures dated January 1, 1981, in the face machine to Simpson Corporation, and simultaneously
amount of $1,000,000, with interest payable on January leased it back for three years. Pertinent data are:
1 and July 1. The debentures were sold at par and ac
crued interest. How much should Harbour debit to cash Estimated remaining useful life at
on March 1, 1981? December 31, 1979 10 years
a. $ 966,667 Sales price $120,000
b. $ 983,333 Carrying value at December 31, 1979 $ 20,000
c. $1,016,667 Monthly rental under leaseback $ 1,266
d. $1,033,333 Interest rate implicit in lease 12%
Present value of lease rentals
($1,266 for 36 months @ 12%) $ 38,116
How much profit should Cardow recognize on January

1, 1980, on the sale of the machine?
30. On January 1, 1980, Ulmer Corporation incurred a. $0
organization costs of $12,000. For financial accounting b. $ 33,333
purposes, Ulmer is amortizing these costs on the same c. $ 61,884
basis as the maximum allowable for Federal income tax d. $100,000
purposes. What portion of the organization costs will
Ulmer defer to years subsequent to 1980?
a. $0 34. Caravan Corporation owned a warehouse located
b. $2,400 in the path of a proposed highway. Caravan bought the
c. $ 9,600 land in 1940 for $10,000. That same year, it built the
d. $12,000 warehouse at a cost of $50,000. In 1980, after prolonged
litigation, the state exercised its right of eminent domain
and condemned the property, awarding Caravan
$200,000. Depreciation accumulated to the date of the
award was $45,000. On its 1980 Federal income tax
return, Caravan elected not to recognize the gain since
replacement property was bought for $225,000. For in
come statement purposes, Caravan should recognize a
31. On January 1, 1980, Yuki Yogurt Company decid gain in 1980 of
ed to replace its obsolete refrigeration system with a a. $0
more efficient one. The old system had a book value of b. $160,000
$9,000 and a fair market value of $1,000. Yuki’s new c. $185,000
refrigeration system has a fair market value of d. $200,000
$190,000, for which Yuki paid $189,000 after permitting
the contractor to keep the old refrigeration equipment.
How much should Yuki capitalize as the cost of the new 35. On April 30, 1980, Empire Corporation, whose
refrigeration system? fiscal year-end is September 30, adopted a plan to
a. $189,000 discontinue the operations of Bello Division on
b. $190,000 November 30, 1980. Bello contributed a major portion
c. $197,000 of Empire’s sales volume. Empire estimated that Bello
d. $198,000 would sustain a loss of $460,000 from May 1, 1980,
through September 30, 1980, and would sustain an addi
tional loss of $220,000 from October 1, 1980, to
November 30, 1980. Empire also estimated that it would
realize a gain of $600,000 on the sale of Bello’s assets.
At September 30, 1980, Empire determined that Bello
had actually lost $1,120,000 for the fiscal year, of which
32. U. S. Importers, Inc., bought 5,000 dolls from $420,000 represented the loss from May 1 to September
Latin American Exporters, S. A., at 12.5 pesos each, 30, 1980.
when the rate of exchange was $.08 per peso. How much Ignoring income tax effects, how much should
should U. S. Importers record on its books as the total Empire report in its September 30, 1980, financial
dollar cost for the merchandise purchased? statements as gain or loss on disposal of Bello?
a. $ 400 a. $ 40,000 loss.
b. $ 625 b. $ 80,000 loss.
c. $5,000 c. $180,000 gain.
d. $6,250 d. $600,000 gain.
187
39. On July 1, 1981, an erupting volcano destroyed

Coastal Corporation’s operating plant, resulting in a
Items 36 and 37 are based on the following data: loss of $1,500,000, of which only $500,000 was covered
On January 1, 1981, Rolan Corporation issued by insurance. Coastal’s income tax rate is 46%. How
10,000 shares of common stock in exchange for all of should this event be shown in Coastal’s income state
Sandin Corporation’s outstanding stock. Condensed ment for the year ended December 31, 1981?
balance sheets of Rolan and Sandin immediately prior a. As an operating loss of $540,000, net of
to the combination are as follows: $460,000 income tax.
b. As an extraordinary loss of $540,000, net of
$460,000 income tax.
Rolan Sandin c. As an operating loss of $1,000,000.
Total assets $ 1, 000,000 $500,000 d. As an extraordinary loss of $1,000,000.
Liabilities $ 300,000 $150,000

Common stock 40. Bucca Warehousing Corporation bought a
($10 par) 200,000 100,000 building at auction on June 30, 1980, for $1,000,000.
Retained earnings 500,000 250,000 On July 2, 1980, before occupying the building, Bucca
Total equities $ 1,000,000 $500,000 sold it to a triple-A rated company for $1,200,000.
Bucca received a cash down payment of $300,000 and a
first mortgage note at the market rate of interest, for the
Rolan’s common stock had a market price of $60 per balance. No additional payments were required until
share on January 1, 1981. The market price of Sandin’s 1981. On September 1, 1980, an independent appraiser
stock was not readily ascertainable. valued the property at $1,500,000. On its 1980 income
tax return, Bucca reported the sale on the installment
basis. How much gain should Bucca recognize in its
income statement for the year ended December 31,
36. Assuming that the combination of Rolan and 1980?
Sandin qualifies as a purchase, Rolan’s investment in a. $0
Sandin’s stock will be stated in Rolan’s balance sheet b. $ 50,000
immediately after the combination in the amount of c. $200,000
a. $100,000 d. $300,000
b. $350,000
c. $500,000 Number 3 (Estimated time------45 to 55 minutes)
d. $600,000
Instructions

37. Assuming that the combination of Rolan and items relating to the federal income taxation of in
Sandin qualifies as a pooling of interests, rather than as dividuals. Use a soft pencil, preferably No. 2, to
a purchase, what should be reported as retained earn blacken the appropriate circle on the separate printed
ings in the consolidated balance sheet immediately after answer sheet to indicate your answer. The answers
the combination? should be based upon the Internal Revenue Code and
a. $500,000 Tax Regulations in effect for the tax period specified in
b. $600,000 the item. If no tax period is specified, use the current In
c. $750,000 ternal Revenue Code and Tax Regulations. Mark only
d. $850,000 one answer for each item. Answer all items. Your grade
will be based on your total correct answers.
41. Paul Beyer, who is unmarried, has taxable income

38. On July 1, 1981, Boulevard Corporation split its of $30,000 exclusive of capital gains and losses and his
common stock 4 for 1, when the market value was $80 personal exemption. In 1980, Paul incurred a $1,000 net
per share. Prior to the split, Boulevard had 50,000 short-term capital loss and a $5,000 net long-term
shares of $12 par value common stock issued and capital loss. His long-term capital loss carryover to 1981
outstanding. After the split, the par value of the stock is
a. Remained the same. a. $0
b. Was reduced by $3 per share. b. $1,000
c. Was reduced to $3 per share. c. $2,500
d. Was reduced by $4 per share. d. $5,000
188
46. Richard Putney, who lived in Idaho for five years,

Items 42 and 43 are based on the following data: moved to Texas in 1980 to accept a new position. His
Laura and Leon Lewis were granted a divorce in employer reimbursed him in full for all direct moving
1980. In accordance with the decree, Leon made the costs, but did not pay for any part of the following in
following payments to Laura in 1980: direct moving expenses incurred by Putney:
Lump-sum cash settlement $ 10,000 Househunting trips to Texas $800

Indefinite periodic payments $ 6,000 Temporary housing in Texas $900
42. How much should Laura include in her 1980 tax How much of the indirect expenses can be deducted by
able income as alimony? Putney as moving expenses?
a. $0 a. $0
b. $ 6,000 b. $ 900
c. $10,000 c. $1,500
d. $16,000 d. $1,700
43. Assuming that Leon does not itemize his deduc

tions, how much of the payments can he deduct as
alimony in 1980?
a. $0
b. $ 6,000
c. $10,000 Items 47 and 48 are based on the following data:
d. $16,000 Donald Duval owns a two-family home. He rents out
the first floor and resides on the second floor. The
following expenses attributable to the building were in
curred by Duval for the year ended December 31, 1980:
44. Carl Slater was the sole proprietor of a high- Expenses for
volume drug store which he owned for 25 years before Entire First Second
he sold it to Statewide Drug Stores, Inc., in 1980. building floor floor
Besides the $800,000 selling price for the store’s tangible
assets and goodwill, Slater received a lump sum of Depreciation $ 2,000
$60,000 in 1980 for his agreement not to operate a com Realty taxes 1,800
peting enterprise within ten miles of the store’s location, Mortgage interest 1,200
for a period of six years. How will the $60,000 be taxed Utilities 1,000
to Slater? Repairs $300
a. As $60,000 ordinary income in 1980. Painting $400
b. As $60,000 short-term capital gain in 1980.
c. As $60,000 long-term capital gain in 1980.
d. As ordinary income of $10,000 a year for six
years. 47. What portion of the expenses can Duval deduct on
Schedule E of Form 1040?
a. $1,800
b. $3,300
c. $6,000
45. Under a written agreement between Mrs. Norma d. $6,300
Lowe and an approved religious exempt organization, a
ten-year old girl from Vietnam came to live in Mrs.
Lowe’s home on August 1, 1980, in order to be able to
start school in the U. S. on September 3, 1980. Mrs.
Lowe actually spent $500 for food, clothing, and school
supplies for the student during 1980, without receiving 48. What portion of the expenses can Duval take as
any compensation or reimbursement of costs. What itemized deductions on Schedule A of Form 1040?
portion of the $500 may Mrs. Lowe deduct on her 1980 a. $1,500
income tax return as a charitable contribution? b. $1,900
a. $0 c. $3,400
b. $200 d. $6,400
c. $250
d. $500
189
49. John Clark, a widower, maintains a household for 53. Martin Dale, single, paid the entire cost of main
himself and his two dependent preschool children. For taining his dependent mother in a home for the aged,
the year ended December 31, 1980, Clark earned a for the whole year 1980. How much is Martin’s zero
salary of $36,000. He paid $3,500 to a housekeeper to bracket amount for 1980?
care for his children in his home, and also paid $1,500 to a. $0
a nursery school for child care. How much can Clark b. $1,700
claim as a child care credit in 1980? c. $2,300
a. $ 300 d. $3,400
b. $ 700
c. $ 800
d. $1,000 54. Arthur Kronk’s adjusted gross income for the year
ended December 31, 1980, was $20,000. He was not
50. Walter Wilson and his wife, Wilma, went shop covered under any medical insurance plan. During 1980,
ping on May 3, 1981, and left their coats in their locked he paid $300 to a physician for treatment of a heart con
automobile. When they returned to the car, they found dition. He also owed the physician a balance of $700 for
that the coats had been stolen. Neither of the coats was an operation performed in December 1980, which he
covered by insurance. Walter’s coat had cost $300, but paid in January 1981. In addition, Kronk incurred a
was worth only $150 on the date of the theft. Wilma’s $1,500 hospital bill in 1980, which he charged to his
coat had cost $500, and was worth $400 on the date it bank credit card in December 1980 and paid to the bank
was stolen. The automobile was not damaged by the in January 1981. Kronk’s total allowable medical
theft. On Mr. and Mrs. Wilson’s joint income tax return deduction for 1980 is
for 1981, how much of the theft loss will qualify as an a. $0
itemized deduction? b. $ 300
a. $0 c. $1,200
b. $350 d. $1,900
c. $450
d. $700
55. Gabriel Colon, a jet airplane mechanic, paid the
51. Mr. and Mrs. Donald Curry’s real property tax following items in 1980, for which he received no reim
year is on a calendar-year basis, with payment due an bursement:
nually on August 1. The realty taxes on their home
amounted to $1,200 in 1981, but the Currys did not pay Tools used in connection with
any portion of that amount since they sold the house on his work (bought on July 1, 1980;
April 1, 1981, four months before payment was due. estimated useful life 5 years;
However, realty taxes were prorated on the closing no salvage value) $600
statement. Assuming that they owned no other real pro Union dues $180
perty during the year, how much can the Currys deduct Legal fee in connection with
on Schedule A of Form 1040 for real estate taxes in preparation of his will, 25%
1981? of which was attributable to
a. $0 income tax advice $300
b. $ 296
c. $ 697 How much can Colon claim in 1980 as allowable
d. $1,200 miscellaneous deductions on Schedule A of Form 1040?
a. $ 315
52. Magda Micale, a public school teacher, paid the b. $ 780
following items in 1980, for which she received no reim c. $ 855
bursement: d. $1,080
Initiation fee for membership in
teachers’ union $100
Dues to teachers’ union 180 56. George Granger sold a plot of land to Albert King
Voluntary unemployment benefit on July 1, 1981. Granger had not paid any realty taxes
fund contributions to union- on the land since 1979. Delinquent 1980 taxes amounted
established fund 72 to $600, and 1981 taxes amounted to $700. King paid
the 1980 and 1981 taxes in full in 1981, when he bought
How much can Magdaclaim in 1980 as allowable the land. What portion of the $1,300 is deductible by
miscellaneous deductions on Schedule A of Form 1040? King in 1981?
a. $180 a. $ 353
b. $280 b. $ 700
c. $252 c. $ 953
d. $352 d. $1,300
190
57. In 1980, Alex Burgos paid $600 to Rita, his ex- Number 4 (Estimated tim e------45 to 55 minutes)
wife, for child support. Under the terms of the divorce
decree, Alex claims the exemption for his five-year-old
son, William, who lived with Rita for the entire year. Armando Corporation manufactures a product
Alex’s only income in 1980 was from wages of $5,500, with the following standard costs:
resulting in an income tax of $172. How much is Alex’s Direct materials - 20 yards @ $1.35per yard $27
earned income credit for 1980? Direct labor - 4 hours @ $9.00 per hour 36
a. $0 Factory overhead - applied at five-sixths
b. $328 of direct labor. Ratio of variable
c. $378 costs to fixed costs: 2 to 1 30
d. $500
Total standard cost per unit of output $93
Standards are based on normal monthly produc

58. Melvin Crane is 66 years old, and his wife, tion involving 2,400 direct labor hours (600 units of out
Matilda, is 65. They filed a joint income tax return for put).
1980, reporting an adjusted gross income of $7,800, on
which they paid a tax of $60. They received $1,250 from The following information pertains to the month of
social security benefits in 1980. How much can they July 1981:
claim on Schedule R of Form 1040 in 1980, as a credit
for the elderly? Direct materials purchased - 18,000
a. $0 yards @ $1.38 per yard $24,840
b. $ 60 Direct materials used - 9,500 yards
c. $315 Direct labor - 2,100 hours @ $9.15
d. $375 per hour 19,215
Actual factory overhead 16,650
500 units of the product were actually produced in

July 1981.
59. During 1980, Harry Gibbs, a resident of Florida,
received the following dividends:
Required:
a. Prepare the following schedules computing:
Source Amount
Real estate investment trust $1,000 1. Variable factory overhead rate per direct
Delaware corporation operating labor hour.
exclusively in Puerto Rico 500 2. Total fixed factory overhead based on normal
activity.
The total amount of gross dividends eligible for the divi
dend exclusion on Gibbs’ 1980 federal income tax return
is b. Prepare the following schedules for the month
a. $0 of July 1981, indicating whether each variance is
b. $ 500 favorable or unfavorable:
c. $1,000
d. $1,500
1. Materials price variance (based on purchases).
2. Materials usage variance.
3. Labor rate variance.
4. Labor efficiency variance.
60. Martin Kohl, who is 67 years old, was permanently 5. Controllable factory overhead variance.
and totally disabled when he retired in 1976. He has 6. Capacity (volume) factory overhead variance.
been receiving disability payments in lieu of wages since
his retirement. In 1980, such payments amounted to
$6,200. Kohl also had $10,800 of other income. Kohl’s
maximum disability income exclusion for 1980 is
a. $0
b. $3,200
c. $4,600
d. $5,200
191
Number 5 (Estimated tim e----- 40 to 50 minutes) 5. Other cash collections were as follows:
Licenses and permits $270,000

Fines 200,000
The following financial activities affecting Judbury Sale of public works equipment
City’s general fund took place during the year ended (original cost, $75,000) 15,000
June 30, 1981: Total $485,000
1. The following budget was adopted:
6. The following purchase orders were executed:
Estimated revenues:
Property taxes $4,500,000 Outstanding
Licenses and permits 300,000 Total at 6/30/81
Fines 200,000 General government $1,050,000 $ 60,000
Total $5,000,000 Police services 300,000 30,000
Fire department
services 150,000 15,000
Appropriations: Public works
General government $1,500,000 services 250,000 10,000
Police services 1,200,000 Fire engines 400,000 -
Fire department services 900,000 Totals $2,150,000 $115,000
Public works services 800,000
Acquisition of fire engines 400,000
Total $4,800,000 No encumbrances were outstanding at June 30, 1980.
7. The following vouchers were approved:
2. Property tax bills totaling $4,650,000 were General government $1,440,000

mailed. It was estimated that $300,000 of this amount Police services 1,155,000
will be delinquent, and $150,000 will be uncollectible. Fire department services 870,000
Public works services 700,000
3. Property taxes totaling $3,900,000 were col Fire engines 400,000
lected. The $150,000 previously estimated to be un Total $4,565,000
collectible remained unchanged, but $630,000 was
reclassified as delinquent. It is estimated that delinquent
taxes will be collected soon enough after June 30, 1981,
to make these taxes available to finance obligations in 8. Vouchers totaling $4,600,000 were paid.
curred during the year ended June 30, 1981. There was
no balance of uncollected taxes at July 1, 1980. Required:
Prepare journal entries to record the foregoing
4. Tax anticipation notes in the face amount of financial activities in the general fund. Omit explana
$300,000 were issued. tions. Ignore interest accruals.
192
November 5, 1981; 8:30 A.M. to 12:00 M.
Estimated Minutes
No. 1 ..................... 90 no
No. 2 ..................... 15 25
No. 3 ..................... 15 25
No. 4 ..................... 15 25
No. 5 ..................... 15 25
T otal............. 150 210
1. You must arrange the papers in numerical order of your advantage to attempt all questions even if
stance, if 12 pages are used for your answers, they 3. A CPA is continually confronted with the necessi
should be numbered 1 through 12. The printed ty of expressing opinions and conclusions in writ
answer sheet provided for the objective-type items ten reports in clear, unequivocal language.
should be considered to be Page 1. Although the primary purpose of the examination
2. Answer all objective-type items on the printed and present such knowledge in acceptable written
answer sheet provided for that purpose. It is to language will be considered by the examiners.
193
Number 1 (Estimated tim e----- 90 to 110 minutes) 3. A conceptually logical approach to the auditor’s
evaluation of accounting controls consists of the follow
Instructions ing four steps:
Select the best answer for each of the following I. Determine the accounting control pro
items. Use a soft pencil, preferably No 2, to blacken the cedures that should prevent or detect errors
appropriate circle on the separate printed answer sheet and irregularities.
to indicate your answer. Mark only one answer for each II. Evaluate any weakness to determine its
item. Answer all items. Your grade will be based on effect on the nature, timing or extent of
your total correct answers. auditing procedures to be applied and sug
The following is an example of the manner in which gestions to be made to the client.
the answer sheet should be marked: III. Determine whether the necessary procedures
are prescribed and are being followed
Item satisfactorily.
IV. Consider the types of errors and irregu
96. One of the generally accepted auditing standards larities that could occur.
specifies that the auditor
a. Inspect all fixed assets acquired during the What should be the order in which these four steps are
year. performed?
b. Charge fair fees based on cost. a. I, II, III, and IV.
c. Make a proper study and evaluation of the ex b. I, III, IV, and II.
isting internal control. c. III, IV, I, and II.
d. Count client petty cash funds. d. IV, I, III, and II.
Answer Sheet
4. Jones was engaged to examine the financial
96. statements of Gamma Corporation for the year ended
June 30, 1980. Having completed an examination of the
Items to be Answered investment securities, which of the following is the best
method of verifying the accuracy of recorded dividend
income?
1. Which of the following is required for a firm to a. Tracing recorded dividend income to cash
designate itself “Member of the American Institute of receipts records and validated deposit slips.
Certified Public Accountants” on its letterhead? b. Utilizing analytical review techniques and
a. At least one of the partners must be a statistical sampling.
member. c. Comparing recorded dividends with amounts
b. The partners whose names appear in the firm appearing on federal information forms 1099.
name must be members. d. Comparing recorded dividends with a stan
c. All partners must be members. dard financial reporting service’s record of
d. The firm must be a dues paying member. dividends.
2. In the course of the examination of financial 5. The AICPA Code of Professional Ethics provides,
statements for the purpose of expressing an opinion where a CPA is required to express an opinion on com
thereon, the auditor will normally prepare a schedule of bined or consolidated financial statements which in
unadjusted differences for which the auditor did not clude a subsidiary, branch, or other component audited
propose adjustment when they were uncovered. What is by another independent public accountant, that the
the primary purpose served by this schedule? CPA may
a. To point out to the responsible client officials a. Insist on auditing any such component which
the errors made by various company person the CPA judges necessary to warrant the ex
nel. pression of an opinion.
b. To summarize the adjustments that must be b. Insist only on performing a review of any such
made before the company can prepare and component.
submit its federal tax return. c. Not insist on auditing any such component
c. To identify the potential financial statement but may request copies of all worksheets rele
effects of errors or disputed items that were vant to the other independent public accoun
considered immaterial when discovered. tant’s examinations.
d. To summarize the errors made by the com d. Not insist on auditing any such component or
pany so that corrections can be made after the reviewing worksheets belonging to the other
audited financial statements are released. independent public accountant.
194
Auditing
6. Which of the following would be inappropriate 11. The management of Stanley Corporation has
during a preliminary evaluation of the system of in decided not to account for a material transaction in ac
ternal control? cordance with the provisions of a recent statement of
a. Completion of an internal control question the FASB. They have set forth their reasons in note “ B”
naire. to the financial statements which clearly demonstrates
b. Use of attribute sampling. that due to unusual circumstances the financial
c. Oral inquiries. statements would otherwise have been misleading. The
d. Review of an accounting manual prepared by auditor’s report will probably contain a (an)
the client. a. Consistency exception and a reference to note
“ B” .
b. Unqualified opinion and an explanatory mid
7. If the size of the sample to be used in a particular dle paragraph.
test of attributes has not been determined by utilizing c. “ Subject to’’ opinion and an explanatory
statistical concepts, but the sample has been chosen in middle paragraph.
accordance with random selection procedures d. “ Except for” opinion and an explanatory
a. No inferences can be drawn from the sample. middle paragraph.
b. The auditor has committed a nonsampling
error.
c. The auditor may or may not achieve desired 12. Which of the following statistical selection tech
precision at the desired level of confidence. niques is least desirable for use by an auditor?
d. The auditor will have to evaluate the results by a. Systematic selection.
reference to the principles of discovery samp b. Stratified selection.
ling. c. Block selection.
d. Sequential selection.
8. Where disc files are used, the grandfather-father-
son updating backup concept is relatively difficult to
implement because the 13. In planning an audit engagement, which of the
a. Location of information points on discs is an following is a factor that affects the independent
extremely time consuming task. auditor’s judgment as to the quantity, type, and content
b. Magnetic fields and other environmental fac of working papers?
tors cause off-site storage to be impractical. a. The estimated occurrence rate of attributes.
c. Information must be dumped in the form of b. The preliminary evaluations based upon ini
hard copy if it is to be reviewed before used in tial substantive testing.
updating. c. The content of the client’s representation let
d. Process of updating old records is destructive. ter.
d. The anticipated nature of the auditor’s report.
9. Under which of the following set of circumstances

might an auditor disclaim an opinion? 14. Hawkins requested permission to communicate
a. The financial statements contain a departure with the predecessor auditor and review certain portions
from generally accepted accounting prin of the predecessor auditor’s working papers. The pro
ciples, the effect of which is material. spective client’s refusal to permit this will bear directly
b. The principal auditor decides to make on Hawkins decision concerning the
reference to the report of another auditor who a. Adequacy of the preplanned audit program.
audited a subsidiary. b. Ability to establish consistency in application
c. There has been a material change between of accounting principles between years.
periods in the method of the application of c. Apparent scope limitation.
accounting principles. d. Integrity of management.
d. There are significant uncertainties affecting
the financial statements.
15. Which one of the following would the auditor con
sider to be an incompatible operation if the cashier
10. Which of the following is likely to be least impor receives remittances from the mailroom?
tant to an auditor who is reviewing the internal controls a. The cashier prepares the daily deposit.
surrounding the automated data processing function? b. The cashier makes the daily deposit at a local
a. Ancillary program functions. bank.
b. Disposition of source documents. c. The cashier posts the receipts to the accounts
c. Operator competence. receivable subsidiary ledger cards.
d. Bit storage capacity. d. The cashier endorses the checks.
195
16. An internal control questionnaire indicates that an 20. If accounts receivable turned over 7.1 times in
approved receiving report is required to accompany 1979 as compared to only 5.6 times in 1980, it is possible
every check request for payment of merchandise. Which that there were
of the following procedures provides the greatest a. Unrecorded credit sales in 1980.
assurance that this control is operating effectively? b. Unrecorded cash receipts in 1979.
a. Select and examine receiving reports and c. More thorough credit investigations made by
ascertain that the related cancelled checks are the company late in 1979.
dated no earlier than the receiving reports. d. Fictitious sales in 1980.
b. Select and examine receiving reports and
ascertain that the related cancelled checks are
dated no later than the receiving reports. 21. Under which of the following circumstances would
c. Select and examine cancelled checks and an auditor be most likely to intensify an examination of
ascertain that the related receiving reports are a $500 imprest petty cash fund?
dated no earlier than the checks. a. Reimbursement vouchers are not pre
d. Select and examine cancelled checks and numbered.
ascertain that the related receiving reports are b. Reimbursement occurs twice each week.
dated no later than the checks. c. The custodian occasionally uses the cash fund
to cash employee checks.
d. The custodian endorses reimbursement
17. In general, a material internal control weakness checks.
may be defined as a condition in which material errors
or irregularities would ordinarily not be detected within
a timely period by 22. Which of the following is the least persuasive
a. An auditor during the normal study and documentation in support of an auditor’s opinion?
evaluation of the system of internal control. a. Schedules of details of physical inventory
b. A controller when reconciling accounts in the counts conducted by the client.
general ledger. b. Notation of inferences drawn from ratios and
c. Employees in the normal course of perform trends.
ing their assigned functions. c. N otation of ap p raisers’ conclusions
d. The chief financial officer when reviewing in documented in the auditor’s working papers.
terim financial statements. d. Lists of negative confirmation requests for
which no response was received by the
auditor.
18. The audit client’s board of directors and audit
committee refused to take any action with respect to an
immaterial illegal act which was brought to their atten 23. Which of the following best describes what is
tion by the auditor. Because of their failure to act, the meant by generally accepted auditing standards?
auditor withdrew from the engagement. The auditor’s a. Acts to be performed by the auditor.
decision to withdraw was primarily due to doubts con b. Measures of the quality of the auditor’s per
cerning formance.
a. Inadequate financial statement disclosures. c. Procedures to be used to gather evidence to
b. Compliance with the Foreign Corrupt Prac support financial statements.
tices Act. d. Audit objectives generally determined on
c. Scope limitations resulting from their inac audit engagements.
tion.
d. Reliance on management’s representations.
24. An auditor includes a middle paragraph in an
otherwise unqualified report in order to emphasize that
19. A CPA who performs primary actuarial services the entity being reported upon is a subsidiary of another
for a client would normally be precluded from express business enterprise. The inclusion of this middle
ing an opinion on the financial statements of that client paragraph
if the a. Is appropriate and would not negate the un
a. Fees for the actuarial services have not been qualified opinion.
paid. b. Is considered a qualification of the report.
b. Actuarial services are a major determinant of c. Is a violation of generally accepted reporting
the pension expense. standards if this information is disclosed in
c. Client is an insurance company. footnotes to the financial statements.
d. Actuarial assumptions used are not in accor d. Necessitates a revision of the opinion
dance with generally accepted auditing stan paragraph to include the phrase “ with the
dards. foregoing explanation.’’
196
Auditing
25. An accounts receivable aging schedule was 28. Which of the following narrative disclosures ap
prepared on 300 pages with each page containing the pearing in notes to financial statements would an
aging data for 50 accounts. The pages were numbered auditor be most likely to consider inappropriate?
from 1 to 300 and the accounts listed on each were a. The related party transaction was consum
numbered from 1 to 50. mated on terms no less favorable than those
Godla, an auditor, selected accounts receivable for that would have been obtained if the transac
confirmation using a table of numbers as illustrated: tion had been with an unrelated party.
b. The accounts of subsidiaries in which the cor
Procedures performed by Godla poration has more than 50% ownership are
Select column from Separate 5 digits: fully consolidated.
table o f First 3 digits c. Legal and other costs associated with the
numbers Last 2 digits covenant-not-to-compete will be amortized
using the straight-line method during the next
02011 020—11 X three years.
85393 853—93 ♦ d. Minor fluctuations in foreign currency ex
97265 972—65 * change rates are not reflected in the accom
61680 616—80 * panying financial statements.
16656 166—56 *
42751 427—51 *
69994 699—94 *
07942 079—42 y 29. When performing a compliance test with respect to
10231 control over cash disbursements, a CPA may use a
102—31 z
systematic sampling technique with a start at any ran
53988 539—88 *
domly selected item. The biggest disadvantage of this
x Mailed confirmation to account 11 listed on page 20 type of sampling is that the items in the population
y Mailed confirmation to account 42 listed on page 79 a. Must be recorded in a systematic pattern
z Mailed confirmation to account 31 listed on page 102 before the sample can be drawn.
* Rejected b. May occur in a systematic pattern, thus
destroying the sample randomness.
This is an example of which of the following sampling c. May systematically occur more than once in
methods? the sample.
a. Acceptance sampling. d. Must be systematically replaced in the popula
b. Systemic sampling. tion after sampling.
c. Sequential sampling.
d. Random sampling.
30. When a CPA is associated with the preparation of
forecasts, all of the following should be disclosed except
26. After performing a study and evaluation of the the
client’s system of internal control an auditor has con a. Sources of information.
cluded that the system is well designed and is function b. Character of the work performed by the CPA.
ing as anticipated. Under these circumstances the c. Major assumptions in the preparation of the
auditor would most likely forecasts.
a. Cease to perform further substantive tests. d. Probability of achieving estimates.
b. Not increase the extent of predetermined
substantive tests.
c. Increase the extent of anticipated analytical 31. A CPA engaged to examine financial statements
review procedures. observes that the accounting for a certain material item
d. Perform all compliance tests to the extent is not in conformity with generally accepted accounting
outlined in the preplanned audit program. principles, and that this fact is prominently disclosed in
a footnote to the financial statements. The CPA should
a. Express an unqualified opinion and insert a
middle paragraph emphasizing the matter by
27. In the context of an audit of financial statements, reference to the footnote.
substantive tests are audit procedures that b. Disclaim an opinion.
a. May be eliminated under certain conditions. c. Not allow the accounting treatment for this
b. Are designed to discover significant subse item to affect the type of opinion because the
quent events. deviation from generally accepted accounting
c. May be either tests of transactions, direct tests principles was disclosed.
of financial balances, or analytical tests. d. Qualify the opinion because of the deviation
d. Will increase proportionately with the from generally accepted accounting prin
auditor’s reliance on internal control. ciples.
197
32. When there is a change in accounting principle 38. Auditors often make use of computer programs
with which the auditor concurs, what modification, if that perform routine processing functions such as sort
any, should be made to the auditor’s report? ing and merging. These programs are made available by
a. Modify the consistency phrase and remain electronic data processing companies and others and are
silent regarding concurrence. specifically referred to as
b. Modify the consistency phrase and explicitly a. Compiler programs.
express concurrence. b. Supervisory programs.
c. Not modify the consistency phrase and remain c. Utility programs.
silent regarding concurrence. d. User programs.
d. Not modify the consistency phrase but ex
plicitly express concurrence.
39. For several years a client’s physical inventory
count has been lower than what was shown on the books
33. The auditor who becomes aware of a material at the time of the count so that downward adjustments
weakness in internal control is required to communicate to the inventory account were required. Contributing to
this to the the inventory problem could be weaknesses in internal
a. Audit committee and board of directors. control that led to the failure to record some
b. Senior management and board of directors. a. Purchases returned to vendors.
c. Board of directors and internal auditors. b. Sales returns received.
d. Internal auditors and senior management. c. Sales discounts allowed.
d. Cash purchases.
34. A representation letter issued by a client

a. Is essential for the preparation of the audit 40. Which of the following is one of the better
program. auditing techniques that might be used by an auditor to
b. Is a substitute for testing. detect kiting?
c. Does not reduce the auditor’s responsibility. a. Review composition of authenticated deposit
d. Reduces the auditor’s responsibility only to slips.
the extent that it is relied upon. b. Review subsequent bank statements and
cancelled checks received directly from the
banks.
35. An auditor’s report on comparative financial c. Prepare a schedule of bank transfers from the
statements should be dated as of the date of the client’s books.
a. Issuance of the report. d. Prepare year-end bank reconciliations.
b. Completion of the auditor’s recent field work.
c. Latest financial statements being reported on.
d. Last subsequent event disclosed in the 41. Which of the following is not an acceptable man
statements. ner of designating that an estimated figure was used in
preparing a federal income tax return?
a. State expressly that an amount has been
36. Which of the following procedures would or estimated.
dinarily be expected to best reveal unrecorded sales at b. Use a round amount.
the balance sheet date? c. Use an amount suggested in a treasury depart
a. Compare shipping documents with sales ment guideline.
records. d. Modify the tax preparer’s declaration on the
b. Apply gross profit rates to inventory disposed return before signing the tax return.
of during the period.
c. Trace payments received subsequent to the
balance sheet date. 42. When financial statements examined by the in
d. Send accounts receivable confirmation re dependent auditor contain notes which are captioned
quests. “ unaudited” or “ not covered by the auditor’s report,”
the auditor
a. May refer to these notes in the auditor’s
37. Which of the following is not a primary purpose of report.
audit working papers? b. Has no responsibility with respect to informa
a. To coordinate the examination. tion contained in these notes.
b. To assist in preparation of the audit report. c. Must refer to these notes in the auditor’s
c. To support the financial statements. report.
d. To provide evidence of the audit work per d. Is precluded from referring to these notes in
formed. the auditor’s report.
198
Auditing
43. Inclusion of which of the following statements in a 48. The negative form of accounts receivable confir
CPA’s advertisement is not acceptable pursuant to the mation request is particularly useful except when
AICPA Code of Professional Ethics? a. Internal control surrounding accounts receiv
a. Paul Fall able is considered to be effective.
Certified Public Accountant b. A large number of small balances are in
Fluency in Spanish and French volved.
b. Paul Fall c. The auditor has reason to believe the persons
Certified Public Accountant receiving the requests are likely to give them
J.D., Evans Law School 1964 consideration.
c. Paul Fall d. Individual account balances are relatively
Certified Public Accountant large.
Free Consultation
d. Paul Fall
Certified Public Accountant 49. An auditor who is engaged to examine the finan
Endorsed by AICPA cial statements of a business enterprise will request a
cutoff bank statement primarily in order to
a. Verify the cash balance reported on the bank
44. In verifying the amount of goodwill recorded by a confirmation inquiry form.
client, the most convincing evidence which an auditor b. Verify reconciling items on the client’s bank
can obtain is by comparing the recorded value of assets reconciliation.
acquired with the c. Detect lapping.
a. Assessed value as evidenced by tax bills. d. Detect kiting.
b. Seller’s book value as evidenced by financial
statements.
c. Insured value as evidenced by insurance 50. Which of the following reports is an indication of
policies. the changing role of the CPA that calls for an extension
d. Appraised value as evidenced by independent of the auditor’s attest function?
appraisals. a. Report on annual comparative financial
statements.
b. Report on internal control based on an audit.
45. Which of the following conditions would not c. Report on separate balance sheet of a holding
normally cause the auditor to question whether material company.
errors or possible irregularities exist? d. Report on balance sheet and statements of in
a. Bookkeeping errors are listed on an EDP- come, retained earnings, and changes in
generated exception report. financial position prepared from incomplete
b. Differences exist between control accounts financial records.
and supporting subsidiary records.
c. Transactions are not supported by proper
documentation. 51. The principal auditor is satisfied with the in
d. Differences are disclosed by confirmations. dependence and professional reputation of the other
auditor who has audited a subsidiary but wants to in
dicate the division of responsibility. The principal
46. A cash shortage may be concealed by transporting auditor should
funds from one location to another or by converting a. Modify the scope paragraph of the report.
negotiable assets to cash. Because of this, which of the b. Modify the scope and opinion paragraphs of
following is vital? the report.
a. Simultaneous confirmations. c. Not modify the report except for inclusion of
b. Simultaneous bank reconciliations. an explanatory middle paragraph.
c. Simultaneous verification. d. Modify the opinion paragraph of the report.
d. Simultaneous surprise cash count.
52. “ Subsequent events’’ for reporting purposes are

47. Which of the following elements ultimately deter defined as events which occur subsequent to the
mines the specific auditing procedures that are necessary a. Balance sheet date.
in the circumstances to afford a reasonable basis for an b. Date of the auditor’s report.
opinion? c. Balance sheet date but prior to the date of the
a. Auditor judgment. auditor’s report.
b. Materiality. d. Date of the auditor’s report and concern con
c. Relative risk. tingencies which are not reflected in the finan
d. Reasonable assurance. cial statements.
199
53. Taylor Sales Corp. maintains a large full-time 58. Whenever negative assurance is provided by a
internal audit staff which reports directly to the chief ac CPA it is based upon
countant. Audit reports prepared by the internal a. An absence of nullifying evidence.
auditors indicate that the system is functioning as it b. A presence of substantiating evidence.
should and that the accounting records are reliable. The c. An objective examination in accordance with
independent auditor will probably generally accepted auditing standards.
a. Eliminate compliance testing. d. A judgmental determination in accordance
b. Increase the depth of the study and evaluation with guidelines promulgated by the AICPA.
of administrative controls.
c. Avoid duplicating the work performed by the
internal audit staff. 59. An auditor’s decision concerning whether or not
d. Place limited reliance on the work performed to “ dual date’’ the audit report is based upon the
by the internal audit staff. auditor’s willingness to
a. Extend auditing procedures.
b. Accept responsibility for subsequent events.
54. A CPA examining inventory may appropriately c. Permit inclusion of a footnote captioned:
apply sampling for attributes in order to estimate the event (unaudited) subsequent to the date of
a. Average price of inventory items. the auditor’s report.
b. Percentage of slow-moving inventory items. d. Assume responsibility for events subsequent
c. Dollar value of inventory. to the issuance of the auditor’s report.
d. Physical quantity of inventory items.
55. Which of the following statements with respect to 60. A CPA’s study and evaluation of the system of in
required auditor communication of weaknesses in inter ternal accounting control in an audit
nal accounting controls is correct? a. Is generally more limited than that made in
a. Such communication is required to be in connection with an engagement to express an
writing. opinion on the system of internal accounting
b. Such communication must include a descrip control.
tion of all weaknesses. b. Is generally more extensive than that made in
c. Such communication is the principal reason connection with an engagement to express an
for testing and evaluating internal controls. opinion on the system of internal accounting
d. Such communication is incidental to the control.
auditor’s study and evaluation of the system c. Is generally identical to that made in connec
of internal accounting control. tion with an engagement to express an opinion
on the system of internal accounting control.
d. Will generally result in the CPA expressing an
56. A CPA who is not independent may issue a opinion on the system of internal accounting
a. Compilation report. control.
b. Review report.
c. Comfort letter.
d. Qualified opinion.
57. A lawyer’s response to an auditor’s request for in Number 2 (Estimated time 15 to 25 minutes)
form ation concerning litigation, claims, and
assessments will ordinarily contain which of the follow During an examination of the financial statements
ing? of Gole Inc., Robbins, CPA, requested and received a
a. An explanation regarding limitations on the client-prepared property casualty insurance schedule
scope of the response. which included appropriate premium information.
b. A statement of concurrence with the client’s
determination of which unasserted possible Required:
claims warrant specification. a. Identify the type of information, in addition to
c. Confidential information which would be pre the appropriate premium information, that would
judicial to the client’s defense if publicized. ordinarily be expected to be included in a property
d. An assertion that the list of unasserted possi casualty insurance schedule.
ble claims identified by the client represent all b. What are the basic audit procedures which
such claims of which the lawyer may be Robbins should perform in examining the client-
aware. prepared property casualty insurance schedule?
200
Auditing
Number 3 (Estimated time----- 15 to 25 minutes) Number 4 (Estimated time----- 15 to 25 minutes)
Dunbar Camera Manufacturing, Inc., is a Johnson, CPA, was engaged to examine the financial
manufacturer of high-priced precision motion picture statements of Horizon Incorporated which has its own
cameras in which the specifications of component parts computer installation. During the preliminary review,
are vital to the manufacturing process. Dunbar buys Johnson found that Horizon lacked proper segregation
valuable camera lenses and large quantities of of the programming and operating functions. As a
sheetmetal and screws. Screws and lenses are ordered by result, Johnson intensified the study and evaluation of
Dunbar and are billed by the vendors on a unit basis. the system of internal control surrounding the computer
Sheetmetal is ordered by Dunbar and are billed by the and concluded that the existing compensating general
vendors on the basis of weight. The receiving clerk is controls provided reasonable assurance that the objec
responsible for documenting the quality and quantity of tives of the system of internal control were being met.
merchandise received.
A preliminary review of the system of internal con
trol indicates that the following procedures are being
followed: Required:
a. In a properly functioning EDP environment,
how is the separation of the programming and operating
Receiving Report functions achieved?
b. What are the compensating general controls
1. Properly approved purchase orders, which are
that Johnson most likely found? Do not discuss hard
prenumbered, are filed numerically. The copy sent to ware and application controls.
the receiving clerk is an exact duplicate of the copy sent
to the vendor. Receipts of merchandise are recorded on
the duplicate copy by the receiving clerk.
Sheetmetal
2. The company receives sheetmetal by railroad.
The railroad independently weighs the sheetmetal and Sturdy Corporation owns and operates a large
reports the weight and date of receipt on a bill of lading office building in a desirable section of New York City’s
(waybill), which accompanies all deliveries. The receiv financial center. For many years the management of
ing clerk only checks the weight on the waybill to the Sturdy Corporation has modified the presentation of
purchase order. their financial statements by:
Screws 1. Reflecting a write-up to appraisal values in the

building accounts.
3. The receiving clerk opens cartons containing 2. Accounting for depreciation expense on the
screws, then inspects and weighs the contents. The basis of such valuations.
weight is converted to number of units by means of con
version charts. The receiving clerk then checks the com
puted quantity to the purchase order.
Wyley, a successor CPA, was asked to examine the
Camera lenses financial statements of Sturdy Corporation, for the year
ended December 31, 1980. After completing the ex
4. Each camera lens is delivered in a separate cor amination Wyley concluded that, consistent with prior
rugated carton. Cartons are counted as they are received years, an adverse opinion would have to be expressed
by the receiving clerk and the number of cartons are because of the materiality of the apparent deviation
checked to purchase orders. from the historical-cost principle.
Required:
Required: a. Describe in detail the form of presentation of
a. Explain why the internal control procedures as the middle paragraph of the auditor’s report on the
they apply individually to receiving reports and the financial statements of Sturdy Corporation for the year
receipt of sheetmetal, screws, and camera lenses are ade ended December 31, 1980, clearly identifying the infor
quate or inadequate. Do not discuss recommendations mation contained in the paragraph. Do not discuss
for improvements. deferred taxes.
b. What financial statement distortions may arise b. Write a draft of the opinion paragraph of the
because of the inadequacies in Dunbar’s system of inter auditor’s report on the financial statements of Sturdy
nal control and how may they occur? Corporation for the year ended December 31, 1980.
201
(Commercial Law)
November 6, 1981; 8:30 A.M. to 12:00 M.
Estimated Minutes
No. 1 110 130

No. 2 15 20
No. 3 15 20
No. 4 15 20
No. 5 15 20
Total 170 210
202
Business Law
Number 1 (Estimated tim e----- 110 to 130 minutes) 2. When a lengthy delay has occurred between the
breach of a contract and the commencement of the
Instructions lawsuit, the statute of limitations defense may be raised.
The statute
Select the best answer for each of the following a. Is three years irrespective of the type of legal
items. Use a soft pencil, preferably No. 2, to blacken the action the plaintiff is bringing.
appropriate circle on the separate printed answer sheet b. Does not apply to an action brought in a court
to indicate your answer. Mark only one answer for each of equity.
item. Answer all items. Your grade will be based on c. Is a defense to recovery if the requisite period
your total correct answers. of time has elapsed.
The following is an example of the manner in which d. Fixes a period of time in which the plaintiff
the answer sheet should be marked: must commence the action or be barred from
recovery, regardless of the defendant’s con
Item duct during the period.
99. The text of the letter from Bridge Builders, Inc. to 3. Madison advertised for the submission of bids on
Allied Steel Co. follows: the construction of a parking lot. Kilroy submitted a bid
of $112,000. There were nine other bids. Kilroy’s bid
We offer to purchase 10,000 tons of No. 4 was $45,000 less than the next lowest bid. The
steel pipe at today’s quoted price for delivery discrepancy was due to the omission of a $46,000 item
two months from today. Your acceptance on the part of Kilroy’s staff. Madison accepted the bid
must be received in five days. and demands either performance or damages from
Kilroy. Kilroy is
Bridge Builders intended to create a (an) a. Bound by the acceptance at $112,000.
a. Option contract. b. Not bound by the acceptance but only if
b. Unilateral contract. Madison knew of the mistake.
c. Bilateral contract. c. Not bound by the acceptance if the mistake
d. Joint contract. should have been known by Madison.
d. Not bound by the bid submitted because there
Answer Sheet was no subjective meeting of the minds.
99. 4. Which of the following offers for the sale of the

Lazy L Ranch is enforceable?
Items to be Answered a. Owner tells buyer she will sell the ranch for
$35,000 and that the offer will be irrevocable
for ten days.
b. Owner writes buyer offering to sell the ranch
for $35,000 and stating that the offer will re
main open for ten days.
1. Dustin received a telephone call on Monday from c. Owner telegraphs buyer offering to sell the
his oil supplier. The supplier offered him 1,000 barrels ranch for $35,000 and promises to hold the
of heating oil at $48 a barrel, the current price in a offer open for ten days.
rapidly changing market. Dustin said he would take the d. Owner writes buyer offering to sell the ranch
offer under advisement. The next day, the market price for $35,000 and stating that the offer will be
rose to $50 a barrel and Dustin sent the supplier a letter irrevocable for ten days if buyer will pay
late that afternoon accepting the offer at $48 a barrel. $1.00. Buyer pays.
The letter arrived in the usual course on Thursday
morning, by which time the market price had moved to
$56 a barrel. The supplier called Dustin and said it 5. Fennell and McLeod entered into a binding con
would not accept his order. Dustin insisted that he had a tract whereby McLeod was to perform routine construc
contract. Which of the following is correct? tion services according to Fennell’s blueprints. McLeod
a. Acceptance took place on dispatch of Dustin’s assigned the contract to Conerly. After the assignment
letter. a. Fennell can bring suit under the doctrine of
b. Acceptance did not take place upon dispatch anticipatory breach.
as the offer had already expired. b. McLeod extinguishes all his rights and duties
c. Acceptance did not take place because the under the contract.
only means of acceptance Dustin could use c. McLeod extinguishes all his rights but is not
was the phone. relieved of his duties under the contract.
d. Acceptance could only be made by a signed d. McLeod still has all his rights but is relieved of
writing. his duties under the contract.
203
6. Monroe purchased a ten-acre land site from Acme 9. The element which makes fraud or deceit an inten
Land Developers, Inc. He paid 10% at the closing and tional tort is
gave his note for the balance secured by a 20-year mort a. The materiality of the misrepresentation.
gage. Three years later, Monroe found it increasingly b. Detrimental reliance.
difficult to make payments on the note and finally c. Actual reliance by the aggrieved party upon
defaulted. Acme Land threatened to accelerate the loan the misrepresentation.
and foreclose if he continued in default. It told him d. Scienter or knowledge of falsity.
either to get the money or obtain an acceptable third
party to assume the obligation. Monroe offered the land
to Thompson for $1,000 less than the equity he had in
the property. This was acceptable to Acme and at the 10. Marglow Supplies Inc., mailed a letter to Wilson
closing Thompson paid the arrearage, executed a new Distributors on September 15, 1981, offering a three-
mortgage and note, and had title transferred to his year franchise dealership. The offer stated the terms in
name. Acme surrendered Monroe’s note and mortgage detail and at the bottom stated that the offer would not
to him. The transaction in question is a (an) be withdrawn prior to October 1, 1981. Which of the
a. Assignment and delegation. following is correct?
b. Third party beneficiary contract. a. The statute of frauds would not apply to the
c. Novation. proposed contract.
d. Purchase of land subject to a mortgage. b. The offer is an irrevocable option which can
not be withdrawn prior to October 1, 1981.
c. The offer can not be assigned to another party
7. Water Works had a long-standing policy of offer by Wilson if Wilson chooses not to accept.
ing employees $100 for suggestions actually used. Due d. A letter of acceptance from Wilson to
to inflation and a decline in the level and quality of sug Marglow sent on October 1, 1981, but not
gestions received, Water Works decided to increase the received until October 2, 1981, would not
award to $500. Several suggestions were under con create a valid contract.
sideration at that time. Two days prior to the public an
nouncement of the increase to $500, a suggestion by
Farber was accepted and put into use. Farber is seeking
to collect $500. Farber is entitled to 11. Where a client accepts the services of an accoun
a. $500 because Water Works had decided to pay tant without an agreement concerning payment there is
that amount. a. An implied in fact contract.
b. $500 because the suggestion submitted will be b. An implied in law contract.
used during the period that Water Works in c. An express contract.
dicated it would pay $500. d. No contract.
c. $100 in accordance with the original offer.
d. Nothing if Water Works chooses not to pay
since the offer was gratuitous.
12. Which of the following is not an essential element
of an agency relationship?
a. It must be created by contract.
8. Nichols wrote Dilk and offered to sell Dilk a b. The agent must be subject to the principal’s
building for $50,000. The offer stated it would expire 30 control.
days from July 1, 1981. Nichols changed his mind and c. The agent is a fiduciary in respect to the prin
does not wish to be bound by his offer. If a legal dispute cipal.
arises between the parties regarding whether there has d. The agent acts on behalf of another and not
been a valid acceptance of the offer, which of the himself.
following is correct?
a. The offer will not expire prior to the 30 days
even if Nichols sells the property to a third
person and notifies Dilk. 13. To successfully invoke the doctrine of ratification
b. If Dilk categorically rejects the offer on July a. The agent must have had the legal capacity to
10th, Dilk can not validly accept within the re have so acted.
maining stated period of time. b. The agent must in fact be the agent of the
c. If Dilk phoned Nichols on August 1 and un principal although the action taken was totally
equivocally accepted the offer, it would create without authority.
a contract, provided he had no notice of c. The ratification must have been stated ex
withdrawal of the offer. pressly.
d. The offer can not be legally withdrawn for the d. The ratification must be made with knowledge
stated period of time. of the material facts of the transaction.
204
Business Law
14. Kent works as a welder for Mighty Manufactur 17. For which of the following does a partner have
ing, Inc. He was specially trained by Mighty in the pro joint liability as contrasted with joint and several lia
cedures and safety precautions applicable to installing bility?
replacement mufflers on automobiles. One rule of a. The negligent injury of a third person by a
which he was aware involved a prohibition against in partner while acting in the ordinary course of
stalling a muffler on any auto which had heavily con the firm’s business.
gealed oil or grease or which had any leaks. Kent b. The misapplication of funds by a partner
disregarded this rule, and as a result a customer’s auto acting within the scope of his apparent
caught fire causing extensive property damage and in authority.
jury to Kent. Which of the following is correct? c. The intentional interference with an existing
a. Mighty is not liable to Kent under the contractual relationship with the tacit ap
worker’s compensation laws. proval of his fellow partners.
b. Mighty is not liable to the customer because d. The bond and mortgage on the partnership’s
Mighty’s rule prohibited Kent from installing office building.
the muffler in question.
c. Kent does not have any personal liability to
the customer for the loss because Kent was Items 18 and 19 are based on the following infor
acting for and on behalf of his employer. mation:
d. Mighty is liable to the customer irrespective of Daniels, Beal, and Wade agreed to form the DBW
its efforts to prevent such an occurrence and Partnership to engage in the import-export business.
the fact that it exercised reasonable care. They had been life-long friends and had engaged in
numerous business dealings with each other. It was
orally agreed that Daniels would contribute $20,000,
Beal $15,000 and Wade $5,000. It was also orally agreed
that in the event the venture proved to be a financial
disaster all losses above the amounts of capital con
15. The key characteristic of a servant is that tributed would be assumed by Daniels and that he
a. His physical conduct is controlled or subject would hold his fellow partners harmless from any addi
to the right of control by the employer. tional amounts lost. The partnership was consummated
b. He is paid at an hourly rate as contrasted with with a handshake and the contribution of the agreed
the payment of a salary. upon capital by the partners. There were no other ex
c. He is precluded from making contracts for press agreements.
and on behalf of his employer.
d. He lacks apparent authority to bind his 18. Under these circumstances, which of the following
employer. is correct?
a. Profits are to be divided in accordance with
the relative capital contributions of each part
ner.
b. Profits are to be divided equally.
c. The partnership is a nullity because the agree
16. Brian purchased an automobile from Robinson ment is not contained in a signed writing.
Auto Sales under a written contract by which Robinson d. Profits are to be shared in accordance with the
obtained a security interest to secure payment of the relative time each devotes to partnership
purchase price. Robinson reserved the right to repossess business during the year.
the automobile if Brian failed to make any of the re
quired ten payments. Ambrose, an employee of Robin
son, was instructed to repossess the automobile on the 19. If the partnership becomes insolvent and the part
ground that Brian had defaulted in making the third nership debts exceed assets by $15,000, which of the
payment. Ambrose took possession of the automobile following is correct insofar as the rights of partnership
and delivered it to Robinson. It was then discovered that creditors are concerned?
Brian was not in default. Which of the following is a. Daniels is a surety insofar as partnership debts
incorrect ? in excess of $40,000 are concerned.
a. Brian has the right to regain possession of the b. Those creditors who were aware of the oral
agreement among the partners regarding part
automobile and to collect damages.
b. Brian may sue and collect from either Robin nership liability are bound by it.
c. Partnership creditors must first proceed
son or Ambrose.
against Daniels and have a judgment returned
c. If Ambrose must pay in damages, he will be
unsatisfied before proceeding against Beal or
entitled to indemnification from Robinson.
d. Ambrose is not liable for the wrongful Wade.
repossession of the automobile since he was d. Each partner may be held jointly liable to firm
obeying the direct order of Robinson. creditors.
205
20. For which of the following is a partnership 24. Dustin is a very cautious lender. When approached
recognized as a separate legal entity? by Lanier regarding a $2,000 loan, he not only demand
a. The liability for and payment of taxes on part ed an acceptable surety but also collateral equal to 50%
nership gains from the sale of capital assets. of the loan. Lanier obtained King Surety Company as
b. In respect to contributions and advances made his surety and pledged rare coins worth $1,000 with
by partners to the partnership. Dustin. Dustin was assured by Lanier one week before
c. The recognition of net operating losses. the due date of the loan that he would have no difficulty
d. The status of the partnership as an employer in making payment. He persuaded Dustin to return the
for worker’s compensation purposes. coins since they had increased in value and he had a pro
spective buyer. What is the legal effect of the release of
the collateral upon King Surety?
a. It totally releases King Surety.
b. It does not release King Surety if the collateral
21. Donaldson reached the mandatory retirement age was obtained after its promise.
as a partner of the Malcomb and Black partnership. c. It releases King Surety to the extent of the
Edwards was chosen by the remaining partners to suc value of the security.
ceed Donaldson. The remaining partners agreed to d. It does not release King Surety unless the col
assume all of Donaldson’s partnership liability and lateral was given to Dustin with the express
released Donaldson from such liability. Additionally, understanding that it was for the benefit of
Edwards expressly assumed full liability for King Surety as well as Dustin.
Donaldson’s partnership liability incurred prior to
retirement. Which of the following is correct? 25. When the debtor has defaulted on its obligation,
a. Edwards’ assumption of Donaldson’s liability the creditor is entitled to recover from the surety, unless
was a matter of form since as an incoming which of the following is present?
partner he was liable as a matter of law. a. The surety is in the process of exercising its
b. Firm creditors are not precluded from assert right of exoneration against the debtor.
ing rights against Donaldson for debts in b. The debtor has died or become insolvent.
curred while she was a partner, the agreements c. The creditor could collect the entire debt from
of Donaldson and the remaining partners not the debtor’s collateral in his possession.
withstanding. d. The surety is a guarantor of collection and the
c. Donaldson has no continuing potential liabili creditor failed to exercise due diligence in en
ty to firm creditors as a result of the forcing his remedies against the debtor.
agreements contained in the retirement plan.
d. Since Donaldson obtained a release from firm
debts she has no liability for debts incurred
while she was a partner. 26. Dependable Surety Company, Inc., issued a surety
bond for value received which guaranteed: (1) comple
22. Which of the following may a partner not do tion of a construction contract Mason had made with
without the express unanimous assent of the remaining Lund and (2) payment by Mason of his workmen.
partners? Mason defaulted and did not complete the contract. The
a. Assign his entire partnership interest to an workers were not paid for their last week’s work. Mason
outsider. had in fact become insolvent, and a petition in
b. Dismiss the accounting firm engaged to audit bankruptcy was filed two months after the issuance of
the partnership’s accounts. the bond. What is the effect upon Dependable as a
c. Submit a long-standing dispute regarding a result of the above events?
partnership claim against a recalcitrant a. If Dependable pays damages to Land as a
customer to arbitration. result of the default on the contract, Depen
d. Obtain a short-term loan from the partner dable is entitled to recover in the bankruptcy
ship’s banker to increase the partnership’s proceedings the entire amount it paid prior to
working capital. the payment of the general creditors of
Mason.
23. Wichita Properties is a limited partnership created b. If Dependable pays the workers in full, it is
in accordance with the provisions of the Uniform entitled to the same priority in the bankruptcy
Limited Partnership Act. The partners have voted to proceedings that the workers would have had.
dissolve and settle the partnership’s accounts. Which of c. If Dependable has another separate claim
the following will be the last to be paid? against Lund, Dependable may not set it off
a. General partners in respect to profits. against any rights Lund may have under this
b. Limited partners in respect to capital. contract.
c. Limited partners in respect to their share of d. As a compensated surety, Dependable would
the profits. be discharged from its surety obligation by
d. General partners in respect to capital. Mason’s bankruptcy.
206
Business Law
27. Marbury Surety, Inc., agreed to act as a guarantor 30. The social security tax does not apply to which of
of collection of Madison’s trade accounts for one year the following?
beginning on April 30, 1980, and was compensated for a. Payments on account of sickness including
same. Madison’s trade debtors are in default in payment medical and hospital expenses paid by the
of $3,853, as of May 1, 1981. As a result employer.
a. Marbury is liable to Madison without any b. Compensation paid in forms other than cash.
action on Madison’s part to collect the c. Self-employment income of $1,000.
amounts due. d. Bonuses and vacation time pay.
b. Madison can enforce the guarantee even if it is
not in writing since Marbury is a del credere
agent. 31. Sunrise Company has a distribution system com
c. The relationship between the parties must be prised of distributors and retailers. Each distributor has
filed in the appropriate county office since it is a defined geographic area in which it has the exclusive
a continuing security transaction. right to sell to retailers and to which sales are restricted.
d. Marbury is liable for those debts for which a Franchised retailers are authorized to sell Sunrise’s pro
judgment is obtained and returned un ducts only within specified locations. Both distributors
satisfied. and retailers are forbidden to sell to nonfranchised
retailers. Under present law this marketing arrangement
will be
28. Hargrove borrowed $40,000 as additional working a. Judged under the rule of reason, whether or
capital for her business from the Old Town Bank. Old not title passes.
Town required that the loan be collateralized to the ex b . Illegal per se if title passes to the distributor or
tent of and an acceptable surety for the entire retailer, but judged under the rule of reason if
amount be obtained. Prudent Surety Company agreed title does not pass (as under an agency or con
to act as surety on the loan and Hargrove pledged signment).
$24,000 of bearer negotiable bonds, which belonged to c. Illegal per 5e, whether or not title passes.
her husband, with Old Town. Hargrove has defaulted. d. Illegal per se if title does not pass, but judged
Which of the following is correct? under the rule of reason if title passes.
a. As a result of the default, Prudent and
Hargrove’s husband are cosureties.
b. Old Town must first proceed against 32. Which of the following is a per se violation of the
Hargrove and obtain a judgment for payment federal antitrust laws?
before it can proceed against the collateral. a. Exclusive territorial rights to sell and corre
c. Old Town must first liquidate the collateral sponding limitations on selling outside the
before it can proceed against Prudent. allocated territory by a manufacturer and its
d. Prudent is liable in full immediately upon distributors.
default by Hargrove, but will upon satisfac b. Unilateral refusal to deal with a troublesome
tion of the debt be entitled to the collateral. wholesaler.
c. Tacit agreement with several leading com
29. Allen was the surety for the payment of rent by petitors to respect established customer rela
Lear under a lease from Rosenthal Rentals. The lease tionships of each other.
was for two years. A clause in the lease stated that at the d. Sale of a patented product at an unreasonably
expiration of the lease, the lessee had the privilege to high price.
renew upon thirty days’ prior written notice or, if the
lessee remained in possession after its expiration, it was
agreed that the lease was to continue for two years 33. The United States Justice Department has pro
more. There was a default in the payment of rent during mulgated the Merger Guidelines in order to inform the
the extended term of the lease and Rosenthal is suing public of its views on the factors and considerations to
Allen for the rent due based upon the guarantee. Allen be taken into account in ascertaining whether a merger
contends that he is liable only for the initial term of the is potentially illegal. The Merger Guidelines are
lease and not for the extended term. Allen is a. Strongly influenced by the factor of size,
a. Not liable since it does not appear that a judg stated in percentage shares of the market of
ment against Lear has been returned un the parties to the proposed merger.
satisfied. b. Based exclusively upon the decisions of the
b. Not liable because there has been a material Supreme Court of the United States.
alteration of the surety undertaking. c. Binding on all parties affected by them subse
c. Not liable because there was a binding exten quent to the date of their promulgation.
sion of time. d. Not of great importance, since they are too in
d. Liable on the surety undertaking which would definite and uncertain to have any meaning in
include the additional two years. respect to an actual merger.
207
34. Robinson’s pricing policies have come under at 36. What liability do McHugh and Luft have to
tack by several of its retailers. In fact, one of those Howard?
retailers, Patman, has instigated legal action against a. McHugh has primary liability and Luft has
Robinson alleging that Robinson charges other favored secondary liability.
retailers prices for its products which are lower than b. Luft has primary liability and McHugh has no
those charged to it. Patman’s legal action against liability.
Robinson c. Luft has primary liability and McHugh has
a. Will fail unless Patman can show that there secondary liability.
has been an injury to competition. d. McHugh has primary liability and Luft has no
b. Will be sufficient if the complaint alleges that liability.
Robinson charged different prices to different
customers and there is a reasonable possibility
that competition may be adversely affected.
c. Is groundless since one has the legal right to
sell at whatever price one wishes as long as the 37. Calhoun has in his possession a negotiable instru
price is determined unilaterally. ment which was originally payable to the order of
d. Is to be tested under the rule of reason and if Bannister. It was transferred to Calhoun by a mere
the different prices charged are found to be delivery by Travis, who took it from Bannister in good
reasonable, the complaint will be dismissed. faith in satisfaction of an antecedent debt. The back of
the instrument read as follows, “ Pay to the order of
Travis in satisfaction of my prior purchase of a used
Items 35 and 36 are based on the following infor IBM typewriter, signed Bannister.’’ Which of the
mation: following is correct?
a. Travis’s taking the instrument for an antece
Howard Corporation has the following instrument dent debt prevents him from qualifying as a
which it purchased in good faith and for value from holder in due course.
Luft Manufacturing, Inc. b. Calhoun is a holder in due course.
c. Calhoun has the right to assert Travis’s rights,
including his standing as a holder in due
July 2, 1981 course and also has the right to obtain
McHugh Wholesalers, Inc. Travis’s signature.
Pullman, Washington d. Bannister’s indorsement was a special indorse
ment; thus Travis’s signature was not required
Pay to the order of Luft Manufacturing, Inc., in order to negotiate it.
one thousand seven hundred dollars ($1,700)
three months after acceptance.
38. Clarkson received a check from Shipley which was
Peter Crandall, President incomplete as to the amount. The check was given as
Luft Manufacturing, Inc. payment in advance on the purchase of 100 CB radios.
The amount was left blank because Clarkson had the
Accepted right to substitute other CB models if available for those
McHugh Wholesalers, Inc. ordered, which would change the price. It was agreed
By that in no event would the purchase price exceed $1,800.
Desperate for cash, Clarkson wrongfully substituted
much more expensive CB radios thereby increasing the
Crandall indorsed the instrument on the back in his purchase price to $2,200. Clarkson then negotiated the
capacity as president of Luft when it was transferred to check to Marshall, one of his suppliers. Clarkson filled
Howard on July 15, 1981. in the $2,200 in Marshall’s presence showing him the
shipping order and invoice applicable to the sale to
35. This instrument Shipley. Marshall accepted the check in payment of
a. Would be treated as a promissory note since $1,400 overdue debts and $800 in cash. Under the cir
the drawee is not a bank. cumstances, Marshall is
b. Is a negotiable draft and Howard is a holder a. A holder in due course but only to the extent
in due course. of the $800 in cash.
c. Is not negotiable under Article 3 (commercial b. A holder in due course and entitled to recover
paper) of the Uniform Commercial Code, the full amount.
although it may be negotiable under another c. Not a holder in due course because the
Article. amount filled in was greater than authorized.
d. Is not negotiable since the drawer and the d. Not a holder in due course because the instru
payee are the same person. ment was completed in his presence.
208
Business Law
39. Filmore had a negotiable instrument in its posses 42. Dilworth, an employee of Excelsior Super
sion which it had received in payment of certain equip Markets, Inc., stole his payroll check from the cashier
ment it had sold to Marker Merchandising. The instru before it was completed. The check was properly made
ment was originally payable to the order of Charles out to his order but the amount payable had not been
Danforth or bearer. It was indorsed specially by Dan filled in because Dilworth’s final time sheet had not yet
forth to Marker which in turn negotiated it to Filmore been received. Dilworth filled in an amount which was
via a blank indorsement. The instrument in question, $300 in excess of his proper pay and cashed it at the
along with some cash and other negotiable instruments, Good Luck Tavern. Good Luck took the check in good
was stolen from Filmore on October 1, 1981. Which of faith and without suspecting that the instrument had
the following is correct? been improperly completed. Excelsior’s bank paid the
a. A holder in due course will prevail against instrument in due course. Excelsior is demanding that
Filmore’s claim to the instrument. the bank credit its account for the $300 or that it be paid
b. Filmore’s signature was necessary in order to by Good Luck. Which of the following is correct?
further negotiate the instrument. a. Good Luck has no liability for the return of
c. The theft constitutes a common law conver the $300.
sion which prevents anyone from obtaining a b. Excelsior’s bank must credit Excelsior’s ac
better title to the instrument than the owner. count for the $300.
d. Once an instrument is bearer paper it is always c. A theft defense would be good against all par
bearer paper. ties including Good Luck.
d. Only in the event that negligence on
Excelsior’s part can be shown will Excelsior
40. A client has in its possession the instrument below. bear the loss.
43. Wilbur executed and delivered a check for $80

payable to the order of Muldowney. Muldowney raised
I, Margaret Dunlop, hereby promise to pay the amount to $800, and negotiated it to Lester, who
to the order of Caldwell Motors five thou took the check in good faith and for value without
sand dollars ($5,000) upon the receipt of the notice of the alteration. When Lester presented it for
final distribution from the estate of my payment to the bank, the bank refused to honor it due
deceased uncle, Carlton Dunlop. This to insufficient funds in Wilbur’s account. Lester is
negotiable instrument is given by me as the seeking to collect the $800 from Wilbur. Which of the
down payment on my purchase of a 1981 following is correct?
Lincoln Continental to be delivered in two a. Lester is a holder in due course, but is only en
weeks. titled to collect $80 from Wilbur unless
Wilbur’s negligence facilitated the alteration.
b. The bank’s dishonor of the instrument was
Margaret Dunlop wrongful.
c. Wilbur is liable for $800 since Lester is a
holder in due course and the defense is a per
The instrument is sonal defense.
a. Negotiable. d. The material alteration of the check by
b. Not negotiable as it is undated. Muldowney released Wilbur from all liability
c. Not negotiable in that it is subject to the two to subsequent parties.
week delivery term regarding the purchase of
the Lincoln Continental.
d. Not negotiable because it is not payable at a 44. Macho Financial loans money on the strength of
definite time. negotiable warehouse receipts. Its policy is always to ob
tain a perfected security interest in the receipts and to
41. Dunbar is the holder and payee of a check. He maintain it until the loan has been satisfied. Insofar as
takes it to the Federal Bank upon which it was drawn this policy is concerned, which of the following is cor
and has it certified. Which of the following is correct? rect?
a. Prior to certification of the check, Federal is a. Macho can not perfect a security interest by
only secondarily liable on the check. filing.
b. Federal is obligated to certify the check so b. Relinquishment of the receipts is not permit
long as there are adequate funds in the ac ted under any circumstances without the loss
count. of the perfected security interest in them.
c. After certification of the check, Federal is c. Macho has a perfected security interest in
primarily liable and the drawer is discharged goods which the receipts represent.
on the check. d. If the receipts are wrongfully but duly
d. If Federal refuses to certify the check, the negotiated to a holder, Macho’s perfected
check will be dishonored. security interest will not be prejudiced.
209
45. Bass, an automobile dealer, had an inventory of 40 48. Futuristic Appliances, Inc., sells various brand
cars and ten trucks. He financed the purchase of this in name appliances at discount prices. Futuristic maintains
ventory with County Bank under an agreement dated a large inventory which it obtains from various
January 5 that gave the bank a security interest in all manufacturers on credit. These manufacturer-creditors
vehicles on Bass’ premises, all future acquired vehicles, have all filed and taken secured interests in the ap
and the proceeds from their sale. On January 10, pliances and proceeds therefrom which they have sold to
County Bank properly filed a financing statement that Futuristic on credit. Futuristic in turn sells to hundreds
identified the collateral in the same way that it was iden of ultimate consumers; some pay cash but most buy on
tified in the agreement. On April 1, Bass sold a credit. Futuristic takes a security interest but does not
passenger car to Dodd for family use and a truck to file a financing statement for credit sales. Which of the
Diamond Company for its hardware business. Which of following is correct?
the following is correct? a. The appliance manufacturers can enforce
a. The security agreement may not provide for a their secured interests against the appliances
security interest in after-acquired property in the hands of the purchasers who paid cash
even if the parties so agree. for them.
b. County Bank’s security interest is perfected as b. A subsequent sale by one of Futuristic’s
of January 5. customers to a bona fide purchaser will be
c. The passenger car sold by Bass to Dodd con subject to Futuristic’s secured interest.
tinues to be subject to the security interest of c. The appliances in Futuristic’s hands are con
County Bank. sumer goods.
d. The security interest of County Bank does not d. Since Futuristic takes a purchase money
include the proceeds from the sale of the truck security interest in the consumer goods sold,
to Diamond Company. its security interest is perfected upon attach
ment.
49. Which of the following requirements is not

46. A purchase money security interest necessary in order to have a security interest attach?
a. May be taken or retained only by the seller of a. The debtor must have rights in the collateral.
collateral. b. There must be a proper filing.
b. Is exempt from the Uniform Commercial c. Value must be given by the creditor.
Code’s filing requirements. d. Either the creditor must take possession or the
c. Entitles the person who is the original pur debtor must sign a security agreement which
chase money lender to certain additional describes the collateral.
rights and advantages, which are non-
transferable.
d. Entitles the purchase money lender to a pri 50. A filing requirement applies to which of the
ority through a ten-day grace period for filing. following transactions under Article 9 (Secured Trans
actions) of the Uniform Commercial Code?
a. The factoring of accounts receivable.
b. A collateralized bank loan, with securities
serving as the collateral.
c. The transfer of an interest in an insurance
47. Boyd Corporation owned 100 cases of canned fish policy to secure a loan.
and stored them in a public warehouse. It asked for and d. The retention of title by a seller of land to
received from the bailee a negotiable warehouse receipt
secure payment under the terms of a land con
payable to bearer. It sold the document in the ordinary tract.
course of business for cash to the Payton Corporation.
Boyd delivered the document and indorsed it “ Deliver
to order of Payton Corporation, signed Boyd Corpora 51. The Martin Trust consisted primarily of various
tion.’’ A thief then stole the document and forged the income-producing real estate properties. During the
signature of the Payton Corporation. The thief sold and year, the trustee incurred various charges. Among the
delivered the document to Slate Corporation who charges were the following: depreciation, principal
bought it for cash in good faith and in the ordinary payments on various mortgages, and a street assess
course of business. Which of the following is correct? ment. Which of the following would be a proper alloca
a. Slate has legal title to the document. tion of these items?
b. Payton has legal title to the document, a. All to income, except the street assessment.
c. Boyd has legal title to the document. b. All are to be allocated equally between prin
d. Payton can recover the document from Slate cipal and income.
but must reimburse Slate for the resultant c. All to principal.
damages. d. All to principal, except depreciation.
210
Business Law
52. Madison died 15 years after executing a valid will. 55. Jerry’s House of Jewelry, Inc., took out an in
In it she named her daughter, Janet, as the executrix of surance policy with the Old Time Insurance Company
the will and bequeathed two-thirds of her estate to her which covered the stock of jewelry displayed in the
husband after all taxes, expenses, and fees were paid, store’s windows. Old Time agreed to indemnify Jerry’s
and the balance equally to her children. The approxi House for losses due to window smashing and theft of
mate size of Madison’s estate is $1 million. Which of the the jewels displayed. The application contained the
following is correct? following provision: “ It is hereby warranted that the
a. Upon Madison’s death, Janet does not have maximum value of the jewelry displayed shall not ex
the legal right to act for and on behalf of the ceed $10,000.’’ The insurance policy’s coverage was for
estate until the will has been admitted to pro $8,000. The application was initialed alongside the war
bate and she has been appointed as executrix. ranty and attached to the policy. Subsequently, thieves
b. All the property bequeathed to Madison’s smashed the store window and stole $4,000 worth of
husband will be excluded from her estate for jewels. The total value of the display during that week,
federal estate tax purposes. including the day of the robbery, was $12,000. Which of
c. Upon execution of her will, Madison’s benefi the following is correct?
ciaries had a vested interest in her property. a. Jerry’s House will recover nothing.
d. Had Madison died without making a will, her b. Jerry’s House will recover $2,000, the loss less
husband would have received everything. the amount in excess of the $10,000 display
limitation.
c. Jerry’s House will recover the full $4,000 since
the warranty will be construed as a mere
representation.
d. Jerry’s House will recover the full $4,000 since
53. Annette’s will provides for a trust upon her death. attaching the application to the policy is insuf
York Trust Company is named as the trustee and the ficient to make it a part thereof.
trust’s terms provide for the payment of income to
Annette’s husband for life and the remainder to her
children. The Annette Trust 56. Carter, Wallace, and Jones are partners. Title to
a. Is not recognized as a taxable entity for in the partnership’s office building was in Carter’s name.
come tax purposes. The Carter, Wallace, and Jones partnership procured a
b. Does not qualify for the estate tax marital $150,000 fire insurance policy on the building from the
deduction since Annette’s husband’s rights Amalgamated Insurance Company. The policy con
represent a terminable interest. tained an 80% coinsurance clause. Subsequently, the
c. Is subject to an implied restriction which building was totally destroyed by fire. The value of the
obligates York to obtain the beneficiaries’ building was $200,000 at the time the policy was issued,
consent if it wishes to dispose of trust assets. and $160,000 at the time of the fire. Under the fire in
d. Vests legal and equitable title in York. surance policy, how much can the partnership recover?
a. Nothing, since it did not have legal title to the
building.
b. The face value of the policy ($150,000).
c. Eighty percent of the loss ($128,000).
d. The value at the time of the loss ($160,000).
54. Harper died and his will was admitted to probate.
It named his son Harris and his daughter Jean as co
executors. Under the terms of the will, he left 60% of
his estate outright to his wife, Martha, after all ex 57. Carey insured his own life for $25,000 and named
penses, taxes, and fees were paid. The balance was Allen, a long-time friend, as the beneficiary. If the life
equally divided among his children, Harris, Jean, insurance policy was a ten-year term policy, which of
Tobey, and Lydia. The value of the gross estate is the following is correct?
$400,000. Which of the following is correct? a. Allen could not continue to pay the premium
a. Martha would be better off electing to take on Carey’s life even if he subsequently owns
under the intestate succession laws. the policy since he lacks the requisite insurable
b. The estate will be able to take a $250,000 interest.
statutory marital deduction. b. The policy is nonassignable since term in
c. Tobey and Lydia are also entitled to qualify as surance normally does not have a cash sur
executors since Harris and Jean are residuary render value.
takers as well as executors. c. Allen does not have an insurable interest in
d. All the property bequeathed to Martha will be the life of Carey.
deducted from Harper’s estate for federal d. Allen owns the policy because he is the
estate tax purposes. designated beneficiary.
211
58. Mammoth Furniture, Inc., is in the retail furniture Number 2 (Estimated tim e----- 15 to 20 minutes)
business and has stores located in principal cities in the
United States. Its designers created a unique coffee Part a. Diversified Enterprises, Inc., and Car
table. After obtaining prices and schedules, Mammoth dinal Manufacturing Corporation have each appointed
ordered 2,000 tables to be made to its design and a committee to discuss Diversified’s proposed acquisi
specifications for sale as a part of its annual spring sales tion of Cardinal. After protracted bargaining, the two
promotion campaign. Which of the following represents committees have agreed to the following terms: Diver
the earliest time Mammoth will have an insurable in sified would acquire Cardinal in exchange for 500,000
terest in the tables? shares of Diversified’s voting common stock and
a. Upon shipment of conforming goods by the 250,000 shares of its 11% noncumulative, nonvoting
seller. preferred. The committees have submitted a proposal
b. When the goods are marked or otherwise incorporating the above to their respective boards of
designated by the seller as the goods to which directors. Both corporations are incorporated in the
the contract refers. same state and this state has adopted the Model
c. At the time the contract is made. Business Corporation Act. Cardinal has only one class
d. At the time the goods are in Mammoth’s of stock outstanding, 250,000 shares of common. Diver
possession. sified has 2,000,000 shares of $1 par value common
stock authorized of which 700,000 shares are outstand
ing. The preferred stock would be a new class of stock
with a $5 par value. Diversified is in the lower 20th
percentile of the Fortune 500 companies and is listed on
59. A fire insurance policy is one common type of con the New York Stock Exchange. Cardinal is considerably
tract. As such it must meet the general requirements smaller with assets of $11 million and sales of $4
necessary to establish a binding contract. In a dispute million. It is traded in the over-the-counter market.
between the insured and the insurance company, which Diversified does not compete with, nor does it buy from
of the following is correct? or sell to, Cardinal. The form of the acquisition is to be
a. The contract is always unilateral. a statutory merger.
b. Insurance contracts are specifically included You have been assigned to an accounting team to
within the general Statute of Frauds. provide assistance to Diversified in this undertaking.
c. The insured must satisfy the insurable interest
requirement.
d. The actual delivery of the policy to the insured
is a prerequisite to the creation of the in Required: Answer the following, setting forth reasons
surance contract. for any conclusions stated.
1. In separate paragraphs, discuss the re
quirements of the Securities Act of 1933 arising out of
the above facts as well as federal antitrust implications.
2. From a corporate law standpoint, what must
be done to validly consummate the proposed merger?
60. Fuller Corporation insured its factory and

warehouse against fire with the Safety First Insurance
Company. As a part of the bargaining process, in con Part b. During the initial audit of Haskell Cor
nection with obtaining the policy Fuller was required by poration, a medium-sized company engaged in in
Safety First to give in writing certain warranties regard terstate commerce, the CPA discovers that Haskell has
ing the insured risk. Fuller did so and they were incor recently instituted a generous and broadly-based
porated into the policy. Which of the following cor employees’ stock purchase plan. Haskell’s philosophy is
rectly describes the law applicable to such warranties? based upon maximum participation by all employees.
a. The warranties given by Fuller will be treated This philosophy is generally stated in Haskell’s employ
as representations. ment brochures and has been fully implemented.
b. It was not necessary that the warranties given Haskell employs approximately 13,000 people in plants
by Fuller be in writing to be effective. located in several states. Approximately 95% of the
c. In the event that Fuller does not strictly employees are participating in the plan.
comply with the warranties it has given, it will
be denied recovery in a substantial number of Required: Answer the following, setting forth reasons
states. for any conclusions stated.
d. In deciding whether the language contained in Does the Securities Act of 1933 pose any problems
a policy constitutes a warranty, the courts to Haskell in connection with its employees’ stock
usually construe ambiguous language in a way purchase plan or can it claim an exemption as a private
which favors the insurance company. placement?
212
Business Law
Number 3 (Estimated tim e----- 15 to 20 minutes) examined all accounting procedures, and took other
appropriate steps necessary to assure himself that
Part a. Herbert McCoy is the chief executive nothing was amiss. The only thing unearthed by this was
officer of McCoy Forging Corporation, a small but a $300 discrepancy in petty cash which had apparently
rapidly growing manufacturing company. For the past been stolen.
several years, Donovan & Company, CPAs, had been Dutch talked to Wheeler , the president of Arm and
engaged to do compilation work, a systems improve told him his fears. He also suggested that in addition to
ment study, and to prepare the company’s federal and the regular annual audit performed by Rice &
state income tax returns. In 1980, McCoy decided that Campbell, CPAs, that they be engaged to perform a
due to the growth of the company and requests from full-fledged defalcation audit. This was authorized by
bankers it would be desirable to have an audit. Wheeler, and the engagement letter for the audit in
Moreover, McCoy had recently received a disturbing question clearly reflected this understanding.
anonymous letter which stated: “ Beware you have a Rice & Campbell performed the normal annual
viper in your nest. The money is literally disappearing audit in their usual competent, nonnegligent manner.
before your very eyes! Signed: A friend.’’ The special defalcation audit revealed additional
McCoy believed that the audit was entirely shortages in petty cash. The method was determined
necessary and easily justifiable on the basis of the and the culprit was exposed and dismissed. Nothing else
growth and credit factors mentioned above. He decided was revealed despite the fact that the customary pro
he would keep the anonymous letter to himself. cedures for such an audit were followed. Ten months
Therefore, McCoy on behalf of McCoy Forging later, Schultz, the warehouse supervisor, was caught by
engaged Donovan & Company, CPAs, to render an another employee substituting inexpensive copies of the
opinion on the financial statements for the year ended watchbands for the genuine Arm items. The copies were
June 30, 1981. He told Donovan he wanted to verify remarkably similar to the originals in appearance. In
that the financial statements were “ accurate and fact, it would take a precious metals expert to tell the
proper.’’ He did not mention the anonymous letter. The difference based upon a careful visual examination. The
usual engagement letter providing for an audit in accor packaging was the same since Schultz had access to the
dance with generally accepted auditing standards packaging materials including the seals which were used
(GAAS) was drafted by Donovan & Company and in an attempt to provide greater security and detect
signed by both parties. theft. Schultz always placed the boxes of the copies at
The audit was performed in accordance with the bottom of the inventory supplies. Despite this fact
GAAS. The audit did not reveal a clever defalcation one such carton had been shipped to a leading depart
plan by which Harper, the assistant treasurer, was ment store several months ago, but the substitution of
siphoning off substantial amounts of McCoy Forging’s copies for the originals had not been detected.
money. The defalcations occurred both before and after
the audit. Harper’s embezzlement was discovered in Required: Answer the following, setting forth reasons
October 1981. Although the scheme was fairly sophis for any conclusions stated.
ticated, it could have been detected had additional Would Rice & Campbell be liable for failure to
checks and procedures been performed by Donovan & detect the defalcation scheme in question?
Company. McCoy Forging demands reimbursement
from Donovan for the entire amount of the embezzle Number 4 (Estimated tim e----- 15 to 20 minutes)
ment, some $20,000 of which occurred before the audit
and $25,000 after. Donovan has denied any liability and Part a. A small business client, John Barry, doing
refuses to pay. business as John Barry Fashions, is worried about an in
voluntary bankruptcy proceeding being filed by his
Required: Answer the following, setting forth reasons creditors. His net worth using a balance-sheet approach
for any conclusions stated. is $8,000 ($108,000 assets - $100,000 liabilities). How
1. In the event McCoy Forging sues Donovan & ever, his cash flow is negative and he has been hard
Company, will it prevail in whole or in part? pressed to meet current obligations as they mature. He
2. Might there be any liability to McCoy Forging is, in fact, some $12,500 in arrears in payments to his
on McCoy’s part and if so, under what theory? creditors on bills submitted during the past two months.
Part b. Arm Watchband Company manufactures
a full line of expansion watch bands, including Required: Answer the following, setting forth reasons
platinum, gold, and a medium-priced silver. With the for any conclusions stated.
skyrocketing prices of precious metal and booming 1. What are the current requirements for a
sales, Arm is bursting at the seams with cash and ex creditor or creditors filing an involuntary petition in
tremely valuable inventory. Dutch, the controller of bankruptcy and could they be satisfied in this situation?
Arm, noted some irregularities which aroused his suspi 2. Will the fact that Barry is solvent in the
cion that there might be some embezzlement of bankruptcy sense result in the court’s dismissing the
company funds. He therefore instituted a full-fledged creditors’ petition if Barry contests the propriety of the
internal audit of the company’s books and records, filing of a petition?
213
Part b. Vance Manufacturing, Inc., needed an Required: Answer the following, setting forth reasons
additional plant location. The executive committee of for any conclusions stated.
Vance made a survey to determine what property was 1. What is the legal nature of the proposed ac
available and to select the most desirable location. After quisition described above?
much deliberation, Vance decided to purchase a four- 2. There are certain legal procedures necessary to
acre tract of land belonging to Dave Lauer. Lauer was make the transaction described above valid and effec
in financial difficulty and desperately needed to raise tive against any creditor. What are the major pro
money. Vance felt that the asking price of $70,000 was cedures and what do they attempt to prevent?
too high and that Lauer would come down to $60,000 in 3. Were the two precautions taken by the buyer in
light of his financial difficulties. After much negotia connection with the purchase necessary in order to pro
tion, Lauer agreed to sell for $61,000. Vance’s attorney tect its rights?
promptly examined Lauer’s title to the property and
found that a $40,000 mortgage had recently been filed Part b. Maxwell was window shopping one day
by Second Bank & Trust Company. Lauer had men when she noticed an advertisement at Ultraclear Elec
tioned this and indicated that the mortgage would be tronics for the sale of a shortwave radio for $495.
satisfied out of the $61,000 sale price. The title search, Beneath the large caption indicating the sale and the
completed on February 2, 1981, revealed that Lauer’s price were the following:
title was otherwise clear. Closing was scheduled for • Never sold before below $550.
March 1. • Listen to the BBC, Radio Moscow, Radio
Meanwhile, desperate for additional financing, Tokyo, and other international radio stations.
Lauer had been negotiating a second mortgage with • Easy tuning, great reception, and made of the
Adventure Mortgage Company. Lauer did not reveal to highest quality material.
Adventure that he was in the process of selling the • Don’t hesitate, this is a limited offer on the
property to Vance, nor did he tell Vance about the buy of a lifetime.
second mortgage. Adventure loaned Lauer $10,000 on Maxwell entered the store and proceeded to the
February 20 and took a second mortgage on the proper place where the shortwave radio featured in the window
ty. This mortgage was filed by Adventure on February was displayed with a similar although smaller sign ex
22. Vance’s attorney made a cursory final examination tolling the virtues of the radio. Maxwell was examining
of the title on February 20, and the parties proceeded to the radio when Golden, an Ultraclear salesman, ap
close on March 1 as scheduled. Lauer promptly cashed proached her. Maxwell told Golden that she was a great
his check for $21,000 and disappeared. Adventure is music lover and that she had long wished to listen to the
demanding that it be paid by Vance and threatens Moscow symphony, the Moscow opera, and the music
foreclosure of its second mortgage. of the Bolshoi Ballet. Golden merely nodded his head
and smiled knowingly. Golden said that at this price the
company could not afford to give any implied warran
Required: Answer the following, setting forth reasons ties of quality beyond the replacement of defective parts
for any conclusions stated. for ninety days.
Discuss the legal rights and liabilities of each of the When Maxwell got home and used the radio she
parties involved in the above situation. found it to be in proper working order and that the
shortwave reception was satisfactory for much of the
world, but that it was not capable of picking up Moscow
without severe static and at an exceptionally low audio
Number 5 (Estimated tim e----- 15 to 20 minutes) level. Maxwell returned to Ultraclear and demanded
that the radio be put in proper working order. The com
Part a. A client engaged its CPA to perform plaint department told her there was nothing that they
services in connection with the proposed acquisition of could do about it, that the set was in proper working
the entire inventory of a company that decided to ter order and the fact that reception of Radio Moscow was
minate its business and dissolve. Among the services re poor was something she would just have to live with.
quested was the examination of the seller’s inventory Maxwell asserted that there has been a breach of war
schedules which describe the subject matter of the sale. ranty and demanded her money back. This was refused.
In addition, the client-buyer obtained from the seller a Ultraclear’s agent then informed Maxwell that she had
list of the seller’s creditors and requested the CPA to no warranty protection. The company never
make an examination of the seller’s accounts payable “ guaranteed” or “ warranted” anything. In fact, the
ledger to verify the accuracy of the list. The sale was only thing stated with respect to warranties at all was
consummated on March 1, 1981, and the examination Golden’s remark clearly disclaiming any and all warran
of the inventory schedules and the accounts payable ties.
ledger was completed 20 days prior to that date. The
CPA performed the services as agreed and the schedules Required: Answer the following, setting forth reasons
of inventory and the list of the seller’s creditors ap for any conclusions stated.
peared to be proper and were accepted by the client- In the subsequent suit brought by Maxwell against
buyer. Ultraclear to rescind the sale, who will prevail?
214
November 6, 1981; 1:30 to 5:00 P.M.
Estimated Minutes
No. 1 90 110
No. 2 15 25
No. 3 15 25
No. 4 15 25
No. 5 15 25
Total 150 210
2. Answer ail objective-type items on the printed subject matter, the ability to organize and present
215
Number 1 (Estimated time----- 90 to 110 minutes) 4. A patent, purchased in 1978 and being amortized
over a ten-year life, was determined to be worthless in
Instructions 1981. The write-off of the asset in 1981 is an example of
which of the following principles?
Select the best answer for each of the following items a. Associating cause and effect.
relating to a variety of issues in accounting. Use a soft b. Immediate recognition.
pencil, preferably No. 2, to blacken the appropriate cir c. Systematic and rational allocation.
cle on the separate printed answer sheet to indicate your d. Objectivity.
answers. 5. The accrued balance in a revenue account
The following is an example of the manner in which represents an amount which is
Earned Collected
Item a. Yes Yes
b. Yes No
99. The financial statement which summarizes the c. No Yes
financial position of a company is the d. No No
a. Income statement.
b. Balance sheet.
c. Statement of changes in financial position. 6. FASB Statement No. 33 requires that the current
d. Retained earnings statement. cost for inventories be measured as the
a. Recoverable amount regardless of the current
Answer Sheet cost.
b. Current cost regardless of the recoverable
99. amount.
c. Higher of current cost or recoverable amount.
Items to be Answered d. Lower of current cost or recoverable amount.
1. Imputing interest for certain assets and liabilities is 7. When computing information on a historical
primarily based on the concept of cost/constant dollar basis, which of the following is
a. Valuation. classified as nonmonetary?
b. Conservatism. a. Cash surrender value of life insurance.
c. Consistency. b. Long-term receivables.
d. Stable monetary unit. c. Allowance for doubtful accounts.
d. Inventories, other than inventories used on
contracts.
2. The information provided by financial reporting
pertains to
a. Individual business enterprises, rather than to 8. On September 1, 1981, a company borrowed cash
industries or an economy as a whole or to and signed a one-year interest-bearing note on which
members of society as consumers. both the principal and interest are payable on
b. Individual business enterprises and industries, September 1, 1982. How will the note payable and the
rather than to an economy as a whole or to related interest be classified in the December 31, 1981,
members of society as consumers. balance sheet?
c. Individual business enterprises and an
economy as a whole, rather than to industries Note payable Accrued interest
or to members of society as consumers. a. Current liability Noncurrent liability
d. Individual business enterprises, industries, b. Noncurrent liability Current liability
and an economy as a whole, rather than to c. Current liability Current liability
members of society as consumers. d. Noncurrent liability No entry
3. Which of the following is an application of the 9. When a note receivable of a company is sold with
principle of systematic and rational allocation? recourse before maturity, the note receivable has been
a. Amortization of intangible assets. a. Pledged.
b. Sales commissions. b. Assigned.
c. Research and development costs. c. Factored.
d. Officers’ salaries. d. Discounted.
216
Accounting Theory
10. The moving average inventory cost flow method is 16. Which of the following conditions generally exists
applicable to which of the following inventory systems? before market value can be used as the basis for valua
tion of a company’s marketable equity securities?
Periodic Perpetual a. Management’s intention must be to dispose of
a. Yes Yes the securities within one year.
b. Yes No b. Market value must be less than cost for each
c. No No security held in the company’s marketable
d. No Yes equity security portfolio.
c. Market value must approximate historical
cost.
11. The retail inventory method would include which d. The aggregate market value of a company’s
of the following in the calculation of the goods available marketable equity security portfolio must be
for sale at both cost and retail? less than the aggregate cost of the portfolio.
a. Freight-in.
b. Purchase returns.
c. Markups. 17. Goodwill represents the excess of the cost of an ac
d. Markdowns. quired company over the
a. Sum of the fair values assigned to identifiable
12. The composite depreciation method assets acquired less liabilities assumed.
a. Is applied to a group of homogeneous assets. b. Sum of the fair values assigned to tangible
b. Is an accelerated method of depreciation. assets acquired less liabilities assumed.
c. Does not recognize gain or loss on the retire c. Sum of the fair values assigned to intangible
ment of single assets in the group. assets acquired less liabilities assumed.
d. Excludes salvage value from the base of the d. Book value of an acquired company.
depreciation calculation.
18. What is the market rate of interest for a bond issue
13. A donated fixed asset for which the fair value has which sells for more than its par value?
been determined should be recorded as a debit to fixed a. Less than rate stated on the bond.
assets and a credit to b. Equal to rate stated on the bond.
a. Additional paid-in capital. c. Higher than rate stated on the bond.
b. Retained earnings. d. Independent of rate stated on the bond.
c. Deferred income.
d. Other income.
19. For a company that has only common stock
outstanding, total shareholders’ equity divided by the
14. A threat of expropriation of assets which is number of shares outstanding represents the
reasonably possible, and for which the amount of loss a. Return on equity.
can be reasonably estimated, is an example of a (an) b. Stated value per share.
a. Loss contingency that should be disclosed, but c. Book value per share.
not accrued. d. Price-earnings ratio.
b. Loss contingency that should be accrued and
disclosed.
c. Appropriation of retained earnings against 20. Authorized common stock is sold on a subscrip
which losses should be charged. tion basis at a price in excess of par value. Additional
d. General business risk which should not be ac paid-in capital should be recorded when the subscribed
crued, and need not be disclosed. stock is
a. Contracted for.
b. Paid for.
c. Issued.
15. The premium on a three-year insurance policy d. Authorized.
which expires in 1984 was paid in advance in 1980. What
is the effect of this transaction on the 1980 financial
statements for each of the following? 21. In a periodic inventory system which uses the
LIFO inventory cost flow method, the cost of goods
Prepaid assets Expenses sold is the total cost of goods available for sale
a. Increase No effect a. Plus the ending inventory.
b. Increase Increase b. Minus the ending inventory.
c. No effect Increase c. Plus the beginning inventory.
d. No effect No effect d. Minus the beginning inventory.
217
22. When treasury stock which was purchased for 27. At what translation rates should the following
more than the par value of the stock is subsequently sold balance sheet accounts in foreign statements be
for more than its purchase price, additional paid-in translated into United States dollars?
capital from the sale of the treasury stock is credited
under which of the following methods? Accumulated
depreciation o f
Cost method Par value method Equipment equipment____
a. No No a. Current Current
b. No Yes b. Current Average for year
c. Yes Yes c. Historical Current
d. Yes No d. Historical Historical
23. The granting by a company to its shareholders of

the opportunity to buy additional shares of stock within
a specified future time at a specified price is an example 28. Intraperiod income tax allocation arises because
of a a. Items included in the determination of taxable
a. Dividend reinvestment plan. income may be presented in different sections
b. Stock right. of the financial statements.
c. Stock dividend. b. Income taxes must be allocated between cur
d. Stock option. rent and future periods.
c. Certain revenues and expenses appear in the
financial statements either before or after they
are included in taxable income.
24. A prior period adjustment should be reflected, net d. Certain revenues and expenses appear in the
of applicable income taxes, in the financial statements financial statements but are excluded from
of a business entity in the taxable income.
a. Retained earnings statement after net income
but before dividends.
b. Retained earnings statement as an adjustment
of the opening balance.
c. Income statement after income from continu
ing operations. 29. For a troubled debt restructuring involving only
d. Income statement as part of income from con modification of terms, it is appropriate for a debtor to
tinuing operations. recognize a gain when the carrying amount of the debt
a. Exceeds the total future cash payments
specified by the new terms.
b. Is less than the total future cash payments
25. Actuarial gains or losses directly related to the specified by the new terms.
operation of a pension plan should be c. Exceeds the present value specified by the new
a. Allocated to current and future periods. terms.
b. Deferred until pension plan investments give d. Is less than the present value specified by the
rise to actuarial gains or losses. new terms.
c. Offset against pension expense in year of oc
currence.
d. Disclosed in a note to the financial statements
only.
30. A loss from the disposal of a segment of a business
enterprise should be reported separately as a component
26. In a lease that is recorded as an operating lease by of income
the lessee, the equal monthly rental payments should be a. After cumulative effect of accounting changes
a. Allocated between interest expense and and before extraordinary items.
depreciation expense. b. Before cumulative effect of accounting
b. Allocated between a reduction in the liability changes and after extraordinary items.
for leased assets and interest expense. c. After extraordinary items and cumulative ef
c. Recorded as a reduction in the liability for fect of accounting changes.
leased assets. d. Before extraordinary items and cumulative ef
d. Recorded as rental expense. fect of accounting changes.
218
Accounting Theory
31. W hen co m p u tin g p rim a ry e a rn in g s per share, 36. I f a n n u a l m a j o r r e p a i r s m a d e in t h e f i r s t q u a r t e r

c o m m o n sto c k e q u iv a le n ts are a n d p a i d f o r in t h e s e c o n d q u a r t e r c l e a r l y b e n e f i t t h e e n
a. R e co g n ize d o n ly if they are d ilu tiv e. tire y e a r , w h e n s h o u l d t h e y b e e x p e n s e d ?
b. R e c o g n iz e d o n ly if th ey are a n ti-d ilu tiv e. a. A n a l l o c a t e d p o r t i o n in e a c h o f t h e l a s t t h r e e
c. R e co g n ize d w h eth er th ey are d ilu tiv e or a n ti qu arters.
d ilu tiv e. b. A n a l l o c a t e d p o r t i o n in e a c h q u a r t e r o f t h e
d. Ign ored. year.
c. In f u l l in t h e fir s t q u a r t e r .
d. In f u l l in t h e s e c o n d q u a r t e r .
32. A c o m p a n y w ith a sim p le ca p ita l stru ctu re for p u r

p o s e s o f c o m p u t in g e a r n in g s per sh a re w o u ld in c lu d e
w h i c h o f t h e f o l l o w i n g in t h e c o m p u t a t i o n o f e a r n i n g s 37. An estimated loss from a loss contingency should
per sh are? be accrued when
a. D iv id en d s on n o n co n v ertib le cu m u la tiv e a. It is probable at the date of the financial
preferred sto c k . statements that a loss has been incurred and
b. D iv id en d s on c o m m o n sto ck . the amount of the loss can be reasonably
c. C o m m o n stock eq u ivalen ts. estimated.
d. N um ber of shares of n o n co n v ertib le b. The loss has been incurred by the date of the
cu m u la tiv e preferred sto c k . financial statements and the amount of the
loss may be material.
c. It is probable at the date of the financial
statements that a loss has been incurred and
the amount of the loss may be material.
33. T h e a m o r t i z a t i o n o f p a t e n t s s h o u l d b e p r e s e n t e d in d. It is probable that a loss will be incurred in a
a s t a t e m e n t o f c h a n g e s in f i n a n c i a l p o s i t i o n a s a ( a n ) future period and the amount of the loss can
a. S o u rce an d use o f fu n d s. be reasonably estimated.
b. U se o f fu n d s.
c. A d d itio n to net in c o m e .
d. D e d u c tio n fr o m net in c o m e .
38. Compensatory stock options were granted to ex

ecutives on January 1, 1979, with a measurement date
of June 30, 1980, for services to be rendered during
34. W h ich of the fo llo w in g w o u ld be used in the 1979, 1980, and 1981. The excess of the market value of
c a l c u l a t i o n o f t h e i n c o m e r e c o g n i z e d in t h e t h i r d a n d the stock over the option price at the measurement date
f i n a l y e a r o f a c o n s t r u c t i o n c o n t r a c t w h i c h is a c c o u n t e d was reasonably estimable at the date of grant. The stock
for u sin g the p e r c e n ta g e -o f-c o m p le tio n m e th o d ? option was exercised on October 31, 1981. Compensa
tion expense should be recognized in the income state
Actual total Income previously ment in which of the following years?
Contract price costs recognized
a. Yes Yes No 1979 1980 1981
b. Yes Yes Yes a. No No Yes
c. Yes No Yes b. No Yes Yes
d. No No Yes c. Yes No No
d. Yes Yes Yes
35. In ter p e rio d in c o m e tax a llo c a tio n is j u s t i f i e d b y

th e b a sic th e o r y that in c o m e ta x e s s h o u ld b e tr ea te d as 39. What is the effect of the collection of accounts
w h ic h o f the fo llo w in g ? receivable on the current ratio and net working capital,
a. An expense for the current p ortion and a respectively?
d istr ib u tio n o f ea rn in g s fo r th e d e fe rr ed p o r
tio n . Current ratio Net working capital
b. A n expense. a. No effect No effect
c. A d istr ib u tio n o f e a rn in g s for the current p o r b. Increase Increase
tion a n d an e x p e n s e fo r th e d e ferred p o r tio n . c. Increase No effect
d. A d istr ib u tio n o f ea rn in g s. d. No effect Increase
219
40. In financial reporting for segments of a business 45. Purchased materials are added in the second
enterprise, which of the following assets should be in department of a three-department process; this does not
cluded as an identifiable asset of industry segment A? increase the number of units produced in the second
a. An intangible asset used by industry segment department a nd would
A. a. N ot change the dollar amount transferred to
b. An advance from nonfinancial industry seg the next department.
ment A to another industry segment. b. Decrease total work in process inventory.
c. An allocation of a tangible asset used for c. Increase the factory overhead portion of the
general corporate purposes, and not used in ending work in process inventory.
the operations of any particular industry seg d. Increase total unit cost.
ment.
d. An allocation of a tangible asset used by
another industry segment which transfers pro 46. Direct materials are a
ducts to industry segment A.
Conversion Manufacturing Prime
cost cost cost
a. Yes Yes No
b. Yes Yes Yes
c. No Yes Yes
41. Indirect materials are a (an) d. No No No
a. Prime cost.
b. Fixed cost.
c. Irrelevant cost. 47. The direct costing method includes in inventory
d. Factory overhead cost. a. Direct materials cost, direct labor cost, but
not all factory overhead cost.
b. Direct materials cost, direct labor cost, and
variable factory overhead cost.
c. Prime cost but not conversion cost.
d. Prime cost and all conversion cost.
42. Factory overhead
a. Is a prime cost.
b. Can be a variable cost or a fixed cost. 48. For purposes of allocating joint costs to joint
c. Can only be a fixed cost. products, the relative sales value at split-off is equal to
d. Includes all factory labor. a. Sales price less a normal profit margin at
point of sale.
b. Sales price at point of sale reduced by cost to
complete after split-off.
c. Total sales value less joint costs at point of
split-off.
43. Purchased materials are added in the second d. Separable product cost plus a normal profit
department of a three-department process; this in margin.
creases the number of units produced in the second
department and would always
a. Change the direct labor cost percentage in the 49. At the split-off point, products may be salable or
ending work in process inventory. may require further processing in order to be salable.
b. Cause no adjustment to the unit cost trans Which of the following have both of these
ferred in from the first department. characteristics?
c. Increase total unit costs.
d. Decrease total ending work in process inven By-products Joint products
tory. a. No No
b. No Yes
c. Yes No
d. Yes Yes
4. A nonmanufacturing organization may use 50. At the breakeven point, fixed cost is always
a. Job order costing but not process costing. a. Less than the contribution margin.
b. Process costing but not job order costing. b. Equal to the contribution margin.
c. Either job order costing or process costing. c. More than the contribution margin.
d. Neither job order costing nor process costing. d. More than the variable cost.
220
Accounting Theory
51. Controllable costs for responsibility accounting 56. The dollar amount of sales needed to attain a
purposes are those costs that are directly influenced by desired profit is calculated by dividing the contribution
a. A given manager within a given period of margin ratio into
time. a. Fixed cost.
b. A change in activity. b. Desired profit.
c. Production volume. c. Desired profit plus fixed cost.
d. Sales volume. d. Desired profit less fixed cost.
52. An unfavorable labor efficiency variance connotes 57. Which of the following is an inventoriable cost?
that
a. The actual labor rate was higher than the stan Abnormal spoilage Normal spoilage
dard labor rate. a. No No
b. The total labor variance must also be un b. No Yes
favorable. c. Yes No
c. Actual labor hours worked exceeded standard d. Yes Yes
labor hours for the production level achieved.
d. Overtime labor was used during the period.
58. Probability (risk) analysis

a. Ignores probability weights under fifty per
53. Which of the following unfavorable variances cent.
would be directly affected by the relative position of a b. Is only for situations in which there are three
production process on a learning curve? or fewer possible outcomes.
a. Materials mix. c. Does not enhance the usefulness of sensitivity
b. Materials price. analysis data.
c. Labor rate. d. Is an extension of sensitivity analysis.
d. Labor efficiency.
59. When using the graphic method of solving a linear

54. Which of the following could be determined by programming problem, the optimal solution will always
using the economic order quantity formula? be at
a. Optimum size of a production run. a. Minimum value of X.
b. Safety stock. b. X and Y intercept.
c. Stockout cost. c. A corner point described by the feasible area.
d. Order point. d. Point of inception.
55. In a program evaluation review technique system 60. The minimum return that a project must earn for a
(PERT), reducing total time can be accomplished only company in order to leave the value of the company un
by changed is the
a. Shortening a slack path. a. Current borrowing rate.
b. Shortening the critical path. b. Discount rate.
c. Working overtime. c. Capitalization rate.
d. Using sensitivity analysis. d. Cost of capital.
221
Number 2 (Estimated time 15 to 25 minutes) Number 4 (Estimated tim e----- 15 to 25 minutes)
It is important in accounting theory to be able to Part a. The Whit Company and the Berry Com
distinguish the types of accounting changes. pany, a manufacturer and retailer, respectively, entered
into a business combination whereby the Whit Com
pany acquired for cash all of the outstanding voting
Required: common stock of the Berry Company.
a. If a public company desires to change from the
sum-of-the-years-digits depreciation method to the Required:
straight-line method for its fixed assets, what type of ac 1. The Whit Company is preparing consolidated
counting change would this be? Discuss the permissi financial statements immediately after the consumma
bility of this change. tion of the above-stated business combination. How
b. When pro forma disclosure is required for an should the Whit Company determine in general the
accounting change, how are these pro forma amounts amounts to be reported for the assets and liabilities of
determined? Berry Company? Assuming that the business combina
c. If a public company obtained additional infor tion resulted in goodwill, indicate how the amount of
mation about the service lives of some of its fixed assets goodwill is determined.
which showed that the service lives previously used 2. Why and under what circumstances should
should be shortened, what type of accounting change Berry Company be included in the entity’s consolidated
would this be? Include in your discussion how the financial statements?
change should be reported in the income statement of
the year of the change, and what disclosures should be Part b. The Bert Company and the Lyle Com
made in the financial statements or notes. pany entered into a business combination accounted for
d. Changing specific subsidiaries comprising the as a pooling of interests.
group of companies for which consolidated financial
statements are presented is an example of what type of Required:
accounting change, and what effect does it have on the 1. How should the expenses related to effecting
consolidated income statements? the business combination be handled, and why?
2. How should the results of operations for the
year in which the business combination occurred be
reported? Why is this reporting appropriate?

Governmental accounting gives substantial recog Doherty Company leased equipment from Lambert
nition to budgets, with those budgets being recorded in Company. The classification of the lease makes a dif
the accounts of the governmental unit. ference in the amounts reflected on the balance sheet
and income statement of both Doherty Company and
Lambert Company.
Required: Required:
a. What is the purpose of a governmental ac a. What criteria must be met by the lease in order
counting system and why is the budget recorded in the that Doherty Company classify it as a capital lease?
accounts of a governmental unit? Include in your b. What criteria must be met by the lease in order
discussion the purpose and significance of appropria that Lambert Company classify it as a sales-type or
tions. direct financing lease?
b. Describe when and how a governmental unit c. Contrast a sales-type lease with a direct financ
records its budget, and closes it out. ing lease.
222
Index
HOW TO USE THIS INDEX: T h is in d ex in clu d es an ex am in atio n and q u estio n n u m b e r re feren ce in ad d itio n to the norm al page re feren ce.
T h e e x am in atio n a n d q u estio n n u m b e r re fe re n c e is in p a re n th e se s im m ediately p re c ed in g th e p ag e re feren ce (e .g ., A c co u n ta n t’s legal liability
(M 7 8 L -3 ) 20). T h e in itial le tte r o f the re fe re n c e id en tifies th e M ay o r N o v e m b er ex am in atio n , the n e x t tw o n um bers identify th e y e ar and are
fo llo w ed by the sectio n o f th e ex am in atio n id en tified as fo llo w s: A — A u d itin g , L — B u sin ess L a w , T — T h e o ry , P I— A cco u n tin g P rac tic e -P a rt I, a nd
PII— A cco u n tin g P rac tic e -P a rt II. T h e first n u m b e r a fte r th e dash identifies the questio n n u m b e r. In th e case o f m u ltip le c hoice q u estio n s th is is
fo llo w e d b y th e item n u m b e r and an “ m , ” w h ich m ean s m u ltip le choice.
A A ccounting ch an g es
C hange in estim ate (cont.)
(N 81T -2) 222
A c c o u n ta n t’s leg al liability
P atent am o rtizatio n ex p en se y e a r o f change
A u d it
(N 8 1 P I-1-19m ) 171
B est d e fe n se is d id n o t in ten tio n ally certify false statem en ts
R ecognized b y a ch an g e in acc o u n tin g p rin c ip le , re p o rte d as c h an g e in
(M 8 1L - 1-4m ) 146 a ccounting estim ate (M 8 1T - 1-29m ) 161
C ircu m stan ces u n d e r w h ich sto ck h o ld er m ig h t h o ld (u n d e r S ecurities C h an g e in re p o rtin g e ntity (M 8 0 T -4 ) 52,
E x ch an g e A c t o f 1934) au d ito rs liable fo r n o t d isco v e rin g and (N 81T -2) 222
d isclo sin g e m b e zz le m e n t th at b an k ru p ted c o m p a n y
C o rrectio n o f an e rro r (M 8 0 P I-4 ) 12
(N 8 0 L -4 ) 99
D ep reciatio n (M 8 0 T -1-13m ) 47
D e fe n se s ag ain st suit b y in v e sto r, w ho su sta in e d lo ss, c o n ce rn in g F IF O to w e ig h ted -av erag e fo r in v en to ry (N 8 0 P I-1-3m ) 54
m in o r m islead in g facts in fin an cial statem en ts a n d m in o r
Pro form a d isclo su re (N 81T -2) 222
irreg u larities in a u d it (N 8 0 L -4 ) 99
F in an cial statem en ts m islead in g (as re su lt o f c o n ta in in g m in o r
A cco u n tin g eq u atio n
m islead in g facts) w o u ld b e b a sis o f in v e sto r’s cla im fo r loss
N e t incom e g iven inc re a se s and d e crea ses in item s
u n d e r S ecu rities A ct o f 1933 (N 8 0 L -4 ) 99
(N 8 0 P II-1-12m ) 69
N e g lig e n ce (N 8 0 L -4 ) 98
A u d ito r in fu ll-fled g ed d e fa lc atio n a u d it d id n o t d isc o v e r d e fa lc atio n and
A cco u n tin g P rin cip les B oard
is n o t liab le w h ere co n d u cted c arefu l a n d co m p e ten t d e fa lc atio n
See A PB O p inions
a u d it (N 8 1 L -3 ) 213
D e fa lca tio n , hig h ly so p h istica te d , n o v e l (M 8 1 L -1 -1 m ) 146
A cco u n tin g R ese arch B ulletins
M issta te m en ts and o m issio n s in fin an cial statem en ts
See A R B s
(M 8 1L - 1-3m ) 146
N orm al a u d it in acco rd w ith G A A S d o e s n o t leav e au d ito r liab le fo r not
A c co u n ts p ayable
d isco v e rin g c le v er d e fa lc atio n p lan (N 8 1 L -3 ) 213
A dju stm en ts schedule (N 8 1PI-4) 179
T h ird p arty su it fo r c o m m o n law frau d b a se d u p o n m aterially false
C o n firm atio n (M 8 0 A -1-52m ) 29
statem en ts (M 8 1L - 1-6 m ) 147
S ubsidiary le d g e r m ay be ju s tifie d w h ere there is a v o u c h er sy stem b u t
partial p ay m en ts to v en d o rs are c o n tin u o u sly m ade
A c c o u n ta n t’s rep o rt
(M 8 0 A -1-56m ) 30
See also A u d ito r’s re p o rt
C o m p ila tio n (N 8 0 A -1-45m ) 83
A cco u n ts receiv ab le
See also A llo w an ce fo r d o u b tfu l accounts
A cco u n tin g ch an g es
A u d it p ro ced u res
See also A u d ito r’s re p o rt
E lectro n ic d a ta pro cessin g
E rro rs and irreg u larities
R eceivables
C h an g e in a cc o u n tin g p rin cip le
B alance e n d o f first y e a r in v o lving p u rch ases, in v e n to ry , c o lle ctio n s,
A u d ito r’s re p o rt m o d ifies co n siste n c y p h rase an d ex p resses
and m ark u p (M 8 1 P II-1-19m ) 126
c o n cu rren ce (N 8 1A -1-3 2 m ) 198
B alan ce g iven net o f a llo w a n ce , b a d d ebt ex p en se , a nd w rite-o ffs
C u m u la tiv e effe c t o f c h an g in g fro m c o m p le ted -co n tra ct to
(M 8 1 P II-1 -5m ) 123
p e rc en tag e -o f-co m p letio n and w h ere re p o rte d g iv en the
C o n firm atio n s (M 8 0 A -1 -29 m ) 27
resp ectiv e in co m es and the in co m e tax rate
F acto red (M 8 0 T -1 -22m ) 48
(M 8 0 P I-1 -1 m ) 2
N et realizab le value c o m p u ta tio n (M 8 0 P II- 1 -17m ) 18
C u m u la tiv e effe c t on p rio r y ears o f c h an g in g d ep reciatio n
m eth o d s (M 8 1P I - 1-8 m ) 111 A ccru al acco u n tin g
D e p re cia tio n m eth o d c h an g e (M 8 0 A -1-2 5 m ) 27,
Jo u rn al en try to set up allo w a n ce fo r d o u b tfu l acco u n ts
(N 8 1 T -2 ) 222
(M 8 0 P I-4 ) 12
D e sc rib e a n d how re p o rte d in in co m e statem en t in p erio d o f
ch an g e (M 8 0 T -4 ) 52 A ccru ed revenue
L IF O to F IF O (M 8 1P I - 1-1 3 m ) 112, E arn ed bu t no t co llected (N 8 1 T -1-5 m ) 216
(M 8 1 T -1-23 m ) 161
P erm issib ility (N 8 1 T -2 ) 222 A ccu m u lated d epreciation
C h an g e in estim ate B alance a fte r tw o years d ifferen ce b e tw ee n su m -o f-th e-y ears-d ig its and
D escrib e a n d how rep o rte d o n in co m e statem en t in p erio d o f straig h t-lin e d e p re ciatio n (M 8 0 P II-1-11 m ) 17
ch an g e (M 8 0 T -4 ) 52 S ig n ifican t d eb its m a y b e e x tra o rd in a ry rep airs
H ow re p o rte d in y e a r o f ch an g e a n d d isclo su re s n ecessary (M 8 1 A -1-45 m ) 141
223
Index
A d d itio n al p aid -in cap ital A llocation

See also P aid -in cap ital S y stem atic and rational am o rtizatio n o f in tangibles
Sto ck (N 8 1 T -1 -3m ) 216
S to c k w arran ts
S to c k h o ld e rs’ eq u ity A llow ance fo r dou b tfu l acco u n ts
T reasu ry sto ck A m o u n t o f jo u rn a l en try c o m p u ta tio n w hen a g ing in d icates larg er
B alan ce a fte r stock sp lit (N 81PI-1-11 m ) 170 a m o u n t should be in allo w an ce th a n an e stim ate d p e rc en tag e o f
B alan ce g iv e n b eg in n in g b alan ce and T rea su ry sto ck tra n sac tio n s on cost sales (M 8 0 P II-1 -3m ) 15
m eth o d (M 8 1 P II-1-6 m ) 124 B alance e n d o f y ear afte r w rite offs a nd p e rcen tag e o f g ro ss sales
C red ited fo r fa ir valu e o f d o n ated fix ed asset u n collectible m e th o d fo r bad d e b ts (N 8 1 P I-1 -1 m ) 182
(N 8 1 T - 1 - 13m) 217 Journal e n try (and a n aly sis o f acco u n t) to s e t u p a llo w a n ce fo r dou b tfu l
C red ited u n d e r e ith e r c o st o r p a r v alu e m eth o d s w h en T reasu ry stock acco u n ts (M 80P I-4) 12
sold for m ore th an its p urchase p rice (N 8 1 T -1-2 2 m ) 217
C red ited w h en sto ck su b scrib ed at p ric e in e x ce ss o f p a r A llo w an ce fo r u n collectible a ccounts
(N 8 1 T -1-2 0 m ) 217 See A u d it procedures
E x c e ss o f su b scrip tio n p rice o v e r p a r (M 8 1 T - 1 - 12m ) 160
In creased by ex cess o f m ark et o v e r p a r o f N Y S E c o m p a n y ’s sto ck issued A m e ric a n In stitute o f C ertifie d P ublic A c co u n ta n ts
fo r lan d (N 8 1 P II-2 -2 2 m ) 185 See A IC P A
T rea su ry sto ck tra n sac tio n s (N 8 1 P II-2 -2 1 m ) 185
A m o rtizatio n
A dju stin g en trie s
See also O rg an izatio n c o sts
B ad d eb ts (N 8 0 P II- 1 -14m ) 69
S ystem atic and ra tional a llocation (N 8 1 T -1 -3m ) 216
R en tal in co m e (M 8 1 P II-2 -3 8 m ) 129
A d ju stm en ts (sch ed u le) to in v e n to ry , a cc o u n ts p a y ab le, a n d net A naly tical rev iew (M 8 0 A -4 ) 31,
sales (N 8 1 P I-4 ) 179 (M 8 1 A -1 -47m ) 140
A gen cy A n titru st
A p p a re n t au th o rity fa c to rs (M 8 1L -1 -3 2 m ) 151 A g re e m en t n o t to sell co m p e tin g type p ro d u cts c o u ld b e illegal u nder
A p p o in tm e n t in w ritin g g iv es a g en t im p lied a n d a p p aren t S h e rm a n , C layton, and Federal T rad e C o m m issio n A cts
au th o rity (N 8 0 L -1-30 m ) 93 (M 8 1 L -1 -57m ) 155
C o n sig n m en t (M 8 1 L -3 ) 156 Fine (m axim um ) for co rp o ra tio n s (M 8 0 L -1 -2m ) 34
E ssen tial e le m en ts (N 8 1L - 1 - 12m ) 204 Fine (m axim um ) fo r in d iv id u als (M 8 0 L -1 -2m ) 34
Irre v o ca b le w h en co u p le d w ith an in te re st (M 8 0 L -5 ) 44 G en eral pro h ib itio n s a g ain st price fix in g (M 8 0 L -1-4 m ) 34
P e rso n a lly liab le if c o m m its a to rt w h ile o n p rin c ip a l’s b u sin ess, acts for M ark etin g a rran g em en t w h ereb y d istrib u to rs are lim ited to a geo g rap h ic
n o n e x isten t p rin cip al a n d th ird p arty is u n a w are, o r acts fo r a re a an d fo rb id d en to sell to n o n fran c h ised re ta ile rs w ill be ju d g e d
u n d isclo se d p rin cip al su b seq u en tly d isclo se d , b u t no t if m akes u n d e r ru le o f re a so n (N 8 1 L -1 -31m ) 207
c o n tra c t w ith o u t a u th o rity b u t p rin c ip a l ra tifies M eetin g co m p e titio n de fe n se (N 80L -2) 98
(N 8 0 L -1 -2 7 m ) 92 M erg er G u idelines o f Ju stic e D e p artm e n t (N 8 1L - 1-33m ) 207
P o w e r o f atto rn ey (N 8 0 L -1 -2 6 m ) 92 M erg er im plications (N 81L -2) 212
R atific atio n (N 8 1 L - 1 - 13m) 204 N o in te n t to m o n o p o lize (M 8 0 L -1 -5m ) 34
S tatu te o f F rau d s (N 8 0 L -1 -2 5 m ) 92 Per se vio la tio n (N 8 1 L -1 -32m ) 208
T e rm in ate d agent (N 8 0 L -1 -2 9 m ) 93 P rice discrim in a tio n b y d istrib u to r to o n e retail c o m p a n y to m eet
T e rm in atio n p u b lic iz ed (M 8 1 L -1 -3 1 m ) 151 c o m p e titio n is a v io la tio n (N 80L -2) 98
T w o p rin c ip a ls (N 8 0 L -1 -2 9 m ) 93 P rice fix in g illegal e v en th o u g h p ric e is reasonable
U n d isclo se d p rin cip al (M 8 1 L -1 -56m ) 155
B re ac h by a g en t (M 8 1 L -1 -2 9 m ) 150 P rison te rm m a x im u m (M 8 0 L -1 -2m ) 34
P rin cip al, ag en t a n d th ird party p o te n tia lly liab le on c o n tra c t R e ta ile r’s legal action su ffic ie n t if alle g es m a n u fa c tu re r ch arg ed
(M 8 1 L -1 -34m ) 151 d ifferen t prices to d ifferen t cu sto m ers and re a so n a b le po ssib ility
T h ird p arty m ay h o ld e ith e r ag en t o r p rin c ip a l liab le u n d er co m p e titio n a d v ersely a ffe c te d (N 8 1 L -1 -34m ) 208
co n tract (N 8 0 L -1 -2 8 m ) 92 U n ilateral re fu sa l o f m an u fa c tu re r to d e al w ith d isco u n ter, that
p e rsiste n tly e n g ag e d in lo ss-lea d e r selling o f m a n u fa c tu re r’s
A IC P A C o d e o f P ro fessio n al E th ics p ro d u c t, is not illegal u n d e r a n titru st law s
A d v e rtisin g (N 8 1 A -1-4 3 m ) 199 (M 8 0 L -1 -1 m ) 34
C o n fid e n tia l in fo rm atio n p reclu d es re sp o n d in g to in q u iry by V iolatio n if d e aler a g rees to price fix in g , if d e aler m ay n o t sell
C P A -sh areh o ld er o f c lie n t c o rp o ra tio n co m p etitiv e p ro d u c ts, o r if d e a le r a g rees n o t to sell to price
(M 8 1 A -1 -1 m ) 137 c u tte rs (M 8 1 L -1-55 m ) 154
C o n tin g en t fees (N 8 0 A - 1 - 13m ) 80 V iolatio n s o f Sherm an A c t are felo n ies (M 8 0 L -1 -2 m ) 34
Firm m ay no t d e sig n a te its e lf as ‘ ‘M em b e rs o f th e A m e ric a n In stitu te o f
C P A s ” u n less all p artn ers are m em b ers
A PB O p in io n s
(N 8 1 A -1 -1 m ) 194 48, (M 8 0 T -1 -34m ) 49,
N o. 8 (M 8 0 T -1 -21m )
In d ep en d en ce (M 8 0 A -2 ) 30 111,
(N 8 0 T -1 -25m ) 104, (M 8 1 P I-1 -7m )
P ro h ib its reten tio n o f c lie n t re c o rd s to e n fo rc e p ay m en t
(M 8 1 T -1 -36m ) 162, (M 81T -5) 165
(N 8 0 A -1-2 6 m ) 81
N o. 9 (M 81P I-4) 120
P ro m o tio n a l b ro ch u re o f C P A firm (M 8 1 A -1-4 9 m ) 141 47, (N 8 0 T -1 -8m ) 102.
N o. 11 (M 8 0 T - 1 - 12m)
S ec. 505 (N 8 1 A -1 -1 m ) 194 129,
(M 8 1 P I- 1 -19m) 113, (M 8 1 P Il-1 -2 -3 6 m )
S ec. 10 1 .0 4 (M 8 0 A -2 ) 30 (N 8 1 P I-1 -9m ) 169, (N 8 1 T -1 -35m ) 219
S ec. 1 9 1 .1 0 9 -1 9 1 .1 1 4 (M 8 0 A -2 ) 30
N o. 12 (N 80T -4) 107
S ec. 2 9 1 .0 1 5 -2 9 1 .0 1 8 (M 8 0 A -2 ) 30
N o. 14 (M 8 0 P I- 1 - 17m) 5, (N 8 0 P II- 1 - 19m ) 70,
T o ex p re ss o p in io n C P A m ay in sist o n au d itin g a n y co m p o n en t
(N 80T -4) 107, (M 8 1 T -1 -9m ) 159,
(su b sid iary , e tc .) the C P A ju d g e s n ecessary
(M 8 1 T - 1 - 15m) 160
(N 8 1 A -1 -5m ) 194
N o. 15 (M 8 0 P I-1 -5m ) 3, (M 8 0 P I-1-6m ) 3,
A IC P A R u le s o f C o n d u ct (N 8 0 P I-1-4m ) 54, (N 8 0 P I- 1 -10m ) 55,
See A IC P A C ode o f P ro fessio n al E th ics (N 8 0 T -1 -1 1 m ) 103, (M 8 1 P I- 1 -12m ) 112,
224
Index
A PB O p in io n s ARBs
N o. \5(cont.) N o. 4 3 , C h. 7 (cont.)
(M 8 1 P I- 1 -18m) 113, (M 8 1 P II-2 -2 3 m ) 126, (N 8 0 P II-1 -5m ) 68, (N 8 0 P II-1-6m ) 68,
(M 8 1 T -1 -2 4 m ) 161, (M 8 1 T -1-2 5 m ) 161, (N 8 0 P II- 1 -16m) 69, (N 80P II- 1 -17m ) 70,
(N 8 1 P I-5 ) 180, (N 8 1 T -1 -3 2 m ) 2 /9 , (N 8 0 P II- 1 -18m) 70, (N 80T -5) 108,
(N 8 1 T -1 -3 1 m ) 2 19 (M 8 1 P I-1 -20m ) 113, (M 8 1 T -1 -1 m ) 159,
N o. 16 (M 8 0 P I-1 -2m ) 2, (M 8 0 P l-1 -3 m ) 2, (N 8 1 P I-1-11m ) 170, (N 81P II-20m ) 185
(M 8 0 P II- 1 -18m ) 18, (M 8 0 T -1-5 m ) 46, N o. 4 3 , C h . 8 (M 80P I-5) 4, (M 8 0 P II- 1 - 16m) 17
(M 8 0 T - 1 - 14m) 47, (M 8 0 T -1-4 0 m ) 49, N o . 4 3 , C h . 11 (N 8 0 P I-4 ) 63
(N 8 0 P I-5 ) 64, (N 8 0 P II- 1 -10m ) 69, N o. 45 (M 8 0 T -1-6m ) 46, (N 80P I-4) 63,
(M 8 1 T -1 -31m ) 162, (M 8 1 T -1-3 3 m ) 162, (N 8 0 T -1 -2m ) 102, (N 80T -3) 107,
(N 8 1 P I- 1 - 13m) 170, (N 8 1 P II-2 -3 6 m ) 188, (M 8 1 P I-1 -5m ) 111, (N 8 1 T -1-34m ) 219
(N 8 1 P II-2 -3 7 m ) 188, (N 8 1 T -1 -17m ) 2 /7 , N o . 51 (N 81T -4) 222
(N 8 1 T -4 ) 222
N o . 17 (M 8 0 P II-1 -2m ) 15, (N 8 0 P II- 1 - 10m ) 69, A sset
(N 8 0 P II- 1 - 15m) 69, (N 8 0 T - 1 -15m ) 103, See M achine
(N 8 1 P I- 1 - 12m) 170, (N 8 1 P I- 1 -19m ) 171,
(N 8 1 P II-1 -5m ) 1 83 A ssignm ent
N o. 18 (M 8 0 P I- 1 - 15m) 4, (N 8 0 T - 1 - 19m ) 103, P arty to p e rfo rm serv ices a ssigns c o n tra c t to a n o th e r, thereby
(N 8 0 T -1 -2 0 m ) 103, (M 8 1 P I-4 ) 120 e x tin g u ish in g all his rig h ts, b u t is n o t re lie v e d o f his d uties
N o. 19 (M 8 0 P I- 1 - 18m) 5, (M 8 0 P I- 1 -19m ) 5, (N 8 1 L -1 -5m ) 203
(M 8 0 T - 1 - 16m) 47, (M 8 0 T - 1 -17m ) 47,
(M 8 0 T - 1 - 18m) 47, (M 8 0 T - 1 -19m ) 47, A tte st fu nction
(M 8 0 T -1 -20m ) 47, (M 8 1 P II-2 -2 5 m ) 127, E x ten d e d by re p o rt on in ternal c o n tro l (N 8 1 A -1 -50m ) 199
(M 8 lP II-2 -2 6 m ) 127, (M 8 1 P II-2 -2 7 m ) 127,
(M 8 lP II-2 -2 8 m ) 127, (M 8 1 T -1-2 7 m ) 161, A uction
(M 8 1 T -1 -26m ) 161, (N 8 1 P I- 1 - 18m ) 171, B id d er m ay re tra c t until fallin g o f h a m m e r (N 8 0 L - 1 -14m) 90
(N 8 1 P I-1 -20m ) 171, (N 8 0 T -1 -2 9 m ) 104,
(N 8 0 T -1 -30m ) 104, (N 8 1 T -1 -3 3 m ) 219 A udit co m m ittee
N o . 20 (M 8 0 P I-1 -1 m ) 2, (M 8 0 P I-4 ) 12, T o p ics a u d ito r m ay o r m ay n o t a p p ro p riately d iscu ss w ith them
(M 8 0 T - 1 -13m) 47, (M 8 0 T -4 ) 52, (N 8 0 A -1 -53m ) 84
(N 8 0 P I-1 -3m ) 54, (M 8 1 P I-1 -8 m ) 111,
(M 8 1 P I- 1 -13m) 11 2 , (M 8 1 T -1-2 2 m ) 161, A u d itin g In terpretations
(M 8 1 T -1 -2 3 m ) 161, (M 8 1 T -1-2 9 m ) 161, L ess auth o rita tiv e than p ro n o u n c e m e n t o f A u d itin g S tandards
( N 8 lP I - 1 -19m) 171 (N 8 1 T -2 ) 221 B o ard (N 8 0 A -1 -5m ) 79
N o . 21 (M 8 0 P I- 1 -14m) 4, (M 8 0 P I-4 ) 12, N o. 1 o n SA S N o. 2 (N 8 0 A -1 -6m ) 79
(M 8 0 T -1-48 m ) 50, (N 8 0 P I-1 -8 m ) 55,
(M 8 1 P I- 1 - 16m) 112, (M 8 1 P I-4 ) 120, A uditor
(M 8 1 P II-2 -3 4 m ) 129, (M 8 1 T -1-6 m ) 159, E arly en g ag e m e n t w ill e n ab le m o re effic ie n t ex am in atio n
(M 8 1 T -1 -2m ) 159, (M 8 1 T -1 -18m ) 160, (M 8 1 A - 1 - 15m) 138
(N 8 1 P I-1 -2m ) 168, (N 8 1 T -1 -1 m ) 216
N o . 22 (M 8 0 T -1 -23 m ) A u d ito r’s leg al liability
48, (M 8 0 T -1 -2 4 m ) 48,
(N 8 0 T -1 -9m ) 102, (M 8 1 T -1 -28 m ) 161 See A c c o u n ta n t’s legal liab ility — A udit
N o . 25 (M 8 1 P II- 1 - 10m ) 124,
(M 8 1 P II-1 -1 1 m ) 124, A u d ito r’s re p o rt
(M 8 1 T - 1 - 19m) 160, A c co u n tin g changes (N 8 0 A -1 -2 4 m ) 81
(M 8 1 T -1-3 8 m ) 162,
(N 8 1 P I-5 ) 180 C ash (in c o m e tax) b a sis (N 8 0 A -2 ) 85
C o m p arativ e statem ents (N 8 1 A -1 -35m ) 198
N o . 26 (N 8 0 P II-1 -2 0 m ) 70, (N 8 0 T -4 ) 107,
C o m p ilatio n
(N 8 1 P I-1 -8 m ) 169
See A c c o u n ta n t’s re p o rt
N o. 28 (N 8 0 P I-1 -9 m ) 55, (N 8 0 T - 1 - 16m ) 103, D ate (N 8 1 A -1 -3 5 m ) 198, ( N 8 lA -1 -59m ) 2
(M 8 1 P I-1-6m ) 111, (M 8 1 T -1 -3 2 m ) 162,
D eficien cies in g iv e n re p o rt c o n stitu tin g d e p artu re s fro m G A A S
(N 8 1 P I- 1 -15m) 170, (N 8 1 T -1 -36 m ) 219
(M 8 1 A -3 ) 143
N o. 29 (M 8 0 P I-4 ) 12, (M 8 0 T -1 -30 m ) 48, D isclaim er
(N 8 0 P I-1-6m ) 54, (N 8 0 T -1-2 4 m ) 104, Incom e statem en t on first a udit w here o p e n in g in v en to ry no t
(N 8 0 T -2 ) 107, (M 8 1 P II-1 -3m ) 123, aud ita b le (N 8 0 A -1-9m ) 80
(M 8 1 P II-1 -8m ) 124, (N 8 1 P I-1 -5 m ) 169, S ig n ifican t un certain ties affe c tin g statem ents
(N 8 1 P II-2 -3 1 m ) 187 (N 8 1 A -1-9m ) 195
N o. 3 0 (M 8 0 T -1 -1 1 m ) 47, (M 8 0 T - 1 - 15m ) 47, W hen a sso c iated w ith statem e n ts, b u t has not au d ited o r re v ie w ed
(N 8 0 P I- 1 -15m ) 56, (N 8 0 T -1 -10m ) 102, su ch (N 8 0 A -1 -17m ) 81
(N 8 0 T - 1 -13m) 103, (M 8 1 P II-2 -3 9 m ) 129, F o o tn o tes c ap tio n ed “ u n a u d ite d ” o r “ n o t co v ered b y a u d ito r’s re p o rt”
(M 8 1 T -1 -21m ) 161, (M 8 1 T -1 -22 m ) 161, m ay b e referred to (N 8 1 A -1-4 2 m ) 198
(N 8 1 T -1 -30m ) 218 Incom e tax (cash) basis (N 8 0 A -2 ) 85
N o. 37 (M 8 0 T -1 -37m ) 49 L itig atio n (N 8 0 A -2 ) 85
M iddle p ara g ra p h
A PB S tatem en ts E m p h asizin g entity is su b sid iary w ou ld not n e g ate unqu alified
N o. 3 (M 8 0 P I- 1 - 12m ) 4, (N 8 0 P I- 1 - l7 m ) 56, o p inion (N 8 1A - 1-24m ) 196
(N 8 0 P I- 1 -18m) 56 R easo n s fo r a dverse o p inion a nd prin c ip a l effe c ts o f the su b ject m a tte r
N o. 4 (M 8 1 P I- 1 - 15m ) 112, (N 8 1 T -1 -8m ) 216 o f the reaso n s (N 8 1 A -5 ) 201
O p inion
ARBs A dverse
N o. 4 3 , C h . 1 (M 8 1 T - 1 - 16m) 160 A PB o p in io n n o t fo llo w ed (M 8 1 A -1 -33 m ) 140
N o. 4 3 , C h. 4 (N 8 1 P II-1 -13m ) 184 B ased upon d ifferen c e w ith clie n t a s to v alu e o f assets re fe r to
N o. 43, C h. 7 (M 8 0 P I-5 ) 4, (M 8 0 T -1 -3 9 m ) 49, a p p ra ise r (M 8 1 A -1 -26m ) 139
225
Index
A u d ito r’s rep o rt A udit pro ced u res

O p in io n (cont.) A cco u n ts receivable (cont.)
C o n sisten cy n o t m e n tio n e d (M 8 0 A -1 -5 3 m ) 29 P rim ary o bjectives in clu d e v a lid ity , realizab le v a lu e , a nd internal
D ire c t referen ce sh o u ld b e m ad e to a sep arate p a ra g ra p h w h ich co n tro ls (M 8 1 A -1-4 m ) 137
d iscu sses th e b a sis ('M 80A -1-4 8 m ), 29 V erificatio n c o m p le m en ted by sales c u to ff test
R eferen c e m id d le p ara g ra p h , state statem en ts d o n o t “ presen t (M 8 1 A -1 -9m ) 137
f a ir ly ,” and m ak e no re fe re n c e to co n siste n c y A llo w an ce fo r u n collectible a cc o u n ts (N 8 0 A -1 -57 m ) 84
(N 8 1 A -5 ) 201 A n alytical re v ie w p ro c e d u re s
B an k w ith E D P h a s all reco rd s o n m ag n etic d iscs a n d no b a ck -u p In clu d e study o f re la tio n sh ip s b e tw ee n financial and n o n fin an cial
sy stem s o r d u p lic a te d iscs sto red since it a n d au d ito rs c o n sid e r in fo rm a tio n , an d co m p ariso n s w ith indu stry and w ith
c atastro p h e re m o te (N 8 0 A -1-2 2 m ) 81 budget (N 8 0 A -1 -1 m ) 79
C ash -b a sis fin an cial statem en ts (M 8 0 A -1 -2 0 m ) 26 In co m e statem ent (N 8 0 A -1 -50 m ) 84
A u d ito r’s ju d g m e n t d eterm in es specific p ro c e d u re s necessary
C o m p a ra tiv e statem e n ts w ith p rio r y e a r m a rk e d “ u n a u d ite d ”
(N 8 0 A - 1 -15m) 80 (M 8 1 A -1 -32m ) 140, (N 8 1 A -1-4 7 m ) 199
A u to m ated d a ta pro c e ssin g (N 8 1 A - 1 -10m ) 195
C o n sisten cy
B an k reconciliation (N 8 1 A -4 9 m ) 199
“ A p p lie d on a c o n siste n t b a s is ” u sed by c o n tin u in g au d ito r on
B onds p a y ab le (M 8 1 A -1-43 m ) 141
co m p arativ e statem en ts (M 8 1 A -1 -2 3 m ) 139
C ap ital sto ck (N 8 0 A -1-7m ) 79
C h an g in g fro m c o n so lid atin g a su b sid iary to c arry in g it on the C ash (N 8 0 A -1 -31 m ) 82, (N 8 1 A -1 -46 m ) 199
eq u ity b a sis m u st b e re c o g n iz ed in th is co n n ec tio n , bu t not C o n firm atio n s
c h an g in g salv a g e v alu e o f an a sse t, c h an g in g p re sen ta tio n o f B anks w ith w hich c lie n t has do n e a ny busin ess re g a rd le ss o f b alance
p rep aid in su ran ce fro m in c lu sio n in “ o th e r a ss e ts ” to a because a lso see k info rm atio n a b o u t ind eb ted n ess
sep arate line ite m , o r d iv isio n o f a c o n so lid ate d su bsidiary into (M 8 1 A - 1 -17m ) 138
tw o su b sid iaries w h ich are b o th co n so lid ate d F rom tru stee fo r d e b en tu re transactions
(M 8 0 A -1-4 2 m ) 28 (M 8 1 A - 1 -10m ) 137
M o d ified fo r ch an g e in p rin c ip le and co n cu rre n ce ex p ressed L e a st likely used in e x am o f fixed assets than fo r in v en to ries,
(N 8 1 A -1 -3 2 m ) 198 lo n g -term d e b t, o r sto c k h o ld e rs ’ equity
N o t m e n tio n ed in c ase o f first a u d it o f new c o m p an y (N 8 0 A -1 -29m ) 82
(M 8 0 A -1-2 6 m ) 27 C on tin u in g a uditor less c o n ce rn e d w ith p rio r y e a r s ’ c ap italized c o sts
E x c e p tio n to G A A P (M 8 1 A -1 -3 0 m ) 140 th a n w ith p rio r y e a r s ’ c ap italiza tio n p o lic y , d e p re ciatio n m eth o d s,
M o st o f a u d ito r’s w o rk co n sists o f o b tain in g a n d ex am in in g o r d epreciable life (M 8 1 A -1 -2m ) 137
ev id e n ce (M 8 0 A -1 -9 m ) 25 C u to ff
“ P rese n t fa irly ” (N 8 0 A -3 ) 85, A c co u n ts payable (N 8 0 A - 1 -18m ) 81
(M 8 1 A -1-2 9 m ) 139 S ales (N 80A - 1 - 19m ) 81
P ro fo rm a statem en ts (M 8 0 A -3 m ) 25 D isposal o f fixed assets (M 8 0 A -1 -8m ) 25
Q u a lifie d (N 8 0 A -1-56 m ) 84, D iversion o f pro ceed s fro m scrap sales m o st d iffic u lt to d e te ct
(N 8 1 A -1 -3 1 m ) 197 (M 8 1 A -1 -56m ) 142
Sp ecific item on statem en t (N 8 0 A -1 -2 8 m ) 82 D iv idend incom e (N 8 1 A -1-4 m ) 194
“ S u b je c t t o ” (M 8 1 A -1 -3 1 m ) 140 E D P lim it c h e c k (M 8 1 A -1 -21m ) 139
U n q u alified E D P te st d a ta m ethod (N 8 0 A -1 -25 m ) 81
D ep reciatio n ch an g e from straig h t-lin e to su m -o f-th e-y ea rs-d ig its G o odw ill (N 8 1 A -1-44 m ) 199
h as im m aterial c u rre n t e ffe c t b u t m ay b e m aterially d ifferen t in Illegal im m aterial acts (M 8 1 A -1 -57m ) 142
fu tu re (M 8 0 A -1 -2 5 m ) 27 Inquiry o f c lie n t’s la w y er (N 8 1 A -1 -57m ) 200
O n b a la n ce sheet o n first a u d it a lth o u g h d isclaim in co m e statem ent Internal au d it (N 8 IA -1 -5 3 m ) 200
w h ere o p en in g in v en to ry n o t au d itab le Internal aud ito rs (M 8 1 A -1-4 4 m ) 141
(N 8 0 A -1-9 m ) 80 Internal co n tro l
P rin cip al a u d ito r re fe rs to a n o th e r C P A ’s ex am in atio n o f a See also Internal c o n tro l
su b sid iary , d o e s no t p re sen t th e o th er a u d ito r’s re p o rt, and A cco u n tin g
n e ith e r a u d ito r h as n o ted e x ce p tio n s to G A A P R eq u ire d c o m m u n ic atio n o f w e ak n e sse s in c id e n tal to study and
(M 8 0 A -1 -3 6 m ) 28 e v alu atio n (N 8 1 A -1 -55 m ) 200
U n q u a lifie d w ith e x p la n ato ry m id d le p arag rap h S tudy a nd e v alu atio n fo r a udit m o re lim ited th a n th a t m ad e in
M an a g e m e n t d o e s no t fo llo w F A S B and re a so n s in fo otnotes co n n ectio n w ith e x p re ssin g an o p inion o n the system o f
clearly d e m o n stra te u n u su al c irc u m stan c e s th a t w o u ld be internal acc o u n tin g co n tro l (N 8 1A - 1-60m ) 200
o th erw ise m isle ad in g (N 8 1 A -1 -1 1 m ) 195 E v a lu a tio n (N 8 1 A -1 -3m ) 194
P red e c esso r a u d ito r (M 8 1 A -1 -5 2 m ) 142 F lo w c h a rt (M 8 1 A -1-50 m ) 142
P rin cip al au d ito r (N 8 1 A -1 -5 1 m ) 199 M aterial w eakness re q u ire d notify sen io r m a n a g em e n t and
R eferen ce to ap p ra ise r (M 8 1 A -1 -2 6 m ) 139 d ire c to rs (N 8 1 A -1 -33m ) 198
R eissu an c e (N 8 0 A - 1 -16m ) 80 P relim in ary e v alu atio n (N 8 1 A -1-6m ) 195
R ev iew o f in terim statem en ts (M 8 1 A -1 -5 4 m ) 142 P rim ary p urpose o f study a nd ev alu atio n is d e te rm in in g n a tu re ,
S p ecial re p o rt (M 8 1 A -1-4 2 m ) 141 e x te n t, and tim in g o f audit tests (M 8 1 A -1-7m ) 137
S ta te m e n t o f ch an g es in fin an cial p o sitio n (M 8 0 A -1-6m ) 25 R ec e iv in g rep o rt m u st acco m p an y re q u e st fo r ch ec k to p ay fo r
S u b se q u en t ev en ts (M 8 1 A - 1 - 12m ) 138 m erch an d ise (N 8 1A - 1-16m ) 196
S tudy and evalu atio n in d icates w e ll-d e sig n ed an d functioning
(N 8 1 A -1 -26m ) 197
A u d it p ro ced u res S ubstan tiv e tests (M 8 1 A -1-2 4 m ) 139
See also A n aly tical rev iew Inventory
A u d it p ro g ram A ttrib u te sam pling (N 8 1 A -1 -54m ) 200
R ese arch an d d e v elo p m en t C o n sig n m en ts (M 8 0 A -1-4 m ) 25
S u ccesso r au d ito r O b se rv a tio n (N 8 0 A -1 -6m ) 79
A c co u n ts receiv ab le P e rp e tu a l (M 8 1 A -1 -16m ) 138
E x p a n d tests o f c o lle ctib ility if in c re a se d d u e to slow Q u a lity o f in tra n sit w h e re title has p assed is g re a te r difficu lty fo r
c o llectio n s (M 8 1 A -1 -5 5 m ) 142 a u d ito r th a n q u a n tity , p ric e , o r term s
N e g ativ e c o n firm atio n s e x ce p t w h e n larg e in d iv id u al acco u n t (N 8 0 A -1-58m ) 84
b alan ces (N 8 1 A -1-4 8 m ) 199 S eg reg atio n o f d uties co n tro ls (M 8 1 A -1 -59m ) 142
226
Index
A udit p ro ced u res B alan ce sheet

In ven to ry (cont.) P a re n t’s in v estm en t a cc o u n t b a la n ce is m ark et p ric e o f shares issued fo r
S lo w -m o v in g (N 8 0 A -1 -36 m ) 82 sto ck o f subsidiary (N 8 1 P II-2 -3 6 m ) 188
T e sts, an aly tical re v ie w , etc. ev alu atin g p e rp e tu a l reco rd s a n d gaining
satisfactio n w ith u n o b serv ed b eg in n in g in v en to ry o n first a udit o f B an k reco n ciliatio n
o ld c o m p an y (M 8 1 A -5 ) 143 See C ash
K itin g (N 8 1 A -1 -4 0 m ) 198
L ead sch ed u les (N 8 0 A -1-4 6 m ) 83 B ankruptcy
L e tte r o f in q u iry to atto rn ey s (N 8 0 A -1 -2 1 m ) 81 A tto rn e y fo r b a n k ru p t m u st file w ith c o u rt statem en t o f c o m p e n sa tio n fo r
L iab ilitie s, u n rep o rted rev iew as to rea so n a b le n e ss (M 8 1 L -1 -42 m ) 152
See A u d it p ro ced u res— U n reco rd ed liab ilities C o m p o sitio n ag reem en t
M ark eta b le secu rities (N 8 0 A -1 -31 m ) 82, N o d ebts d isch arg ed u n til pe rfo rm an c e b y d e b to r
(N 8 0 A -1 -38m ) 83 (M 8 1 L -1-4 0 m ) 152
M o rtg ag e p ay ab le (N 8 0 A -1-4 2 m ) 83 C orp o ratio n
P aten ts (N 8 0 A -1 -6 0 m ) 85 S ubscrip tio n s receiv ab le
P ayro ll S ub scrib ers p e rso n ally liable fo r re m a in d e r unpaid
E x a m in a tio n o f c o m p u te r serv ice c e n te r g e n erated p ay ro ll (M 8 0 L - 1 -16m ) 36
re g iste r (N 8 0 A -5 ) 86 F alse financial statem en t in d u ced lo a n (M 8 0 L -1 -35m ) 39
E m p h asis on testin g c o n tro ls o v e r p ro p e r c la ssificatio n “ In s id e r” te rm inclu sio n s (M 8 0 L -1 -3m ) 34
(M 8 1 A -1-5 1 m ) 142 Involuntary pe titio n
T rac in g jo u rn a l to a p p ro v e d tim e c ard s to e v id e n ce em p lo y e es w orked In so lv e n t b y not g enerally p a y in g d ebts as b e co m e d ue a n d , e v en
h o u rs fo r w h ich p aid (M 8 1 A -1-2 8 m ) 139 th o u g h solvent in bank ru p tc y sen se, c o u ld no t g e t petitio n
V erificatio n o f d ata in serted on p rep rin ted c o m p u te r serv ice c en ter d ism isse d (N 81L -4) 213
in p u t fo rm (N 8 0 A -5 ) 86 R eq u irem en ts fo r c re d ito r o r cre d ito rs to file a nd are they satisfied in
P e rfo rm e d b efo re b a la n ce sh eet d ate (N 8 0 A -1 -34 m ) 82 giv en situation (N 8 1L -4) 213
Petty c ash fu n d (N 8 1 A -1 -21m ) 196 L iqu id atio n
P rim ary d ifferen ce b e tw ee n a u d it o f b a la n ce sh eet a n d o f incom e Invo lu n tary
statem en t is th a t in co m e statem en t au d it d e als w ith v e rifica tio n o f C re d ito r o w ed $ 5 ,0 0 0 o f d e b to r w ith 12 o r m o re cre d ito rs, w h ich
tra n sac tio n s (M 8 0 A -1-5 7 m ) 30 d e b to r is u n a b le to m e e t c u rre n t u n sec u re d o b lig a tio n s, m u st
R elated p arty tra n sac tio n s (M 8 1 A -1 -2 5 m ) 139 be jo in e d b y a t least tw o o th er c re d ito rs to file pe titio n
S ales (M 8 0 L -1-31 m ) 38
C u to ff te st co m p lem en ts v erificatio n o f a cc o u n ts receiv ab le O ra l a ssig n m e n t o f re c eiv ab le s is n o t an en fo rc e ab le security in terest as
(M 8 1 A -1-9 m ) 137 b e tw ee n b a n k ru p t’s deb to rs an d assignee
T e sts o f p ro ced u res p a rticu larly ap p ro p riate (N 8 0 L -1 -36m ) 94
(N 8 0 A -1-4 9 m ) 83 P reference
S ales re tu rn s (M 8 1 A -1-4 6 m ) 141 T ran sfe r w as fo r an a n te ce d e n t d e b t (M 8 1 L -1-4 4 m ) 153
Sales u n re c o rd e d (N 8 1 A -1 -3 6 m ) 198 P referen tial tran sfers th a t p e rm it setting aside a c re d ito r’s security
S ta te m e n t o f ch an g es in fin an cial p o sitio n (N 8 0 A -1 -5 4 m ) 84 in terest (N 8 0 L -3 ) 99
S u b se q u en t ev en ts (M 8 1A -2) 143 P urchase m o n ey security in terest filed w ith in 10 d a y s is valid
S ub sta n tiv e tests (N 8 1 A -1 -2 7 m ) 197 (N 80L -3) 99
U n a d ju ste d d ifferen ces sch ed u le (N 8 1 A -1 -3m ) 194 S ecured c re d ito r
U n reco rd ed liab ilities (M 8 0 A -1 -35 m ) 28, G en eral c re d ito r fo r e x ce ss o f c la im o v e r c o lla te ra l’s value
(N 8 0 A -1 -51m ) 84 (M 8 1 L -1-4 3 m ) 153
W o rk in g p a p ers (N 8 1 A -1 -3 7 m ) 198 S urety p a y s w o rk ers o f b an k ru p t o b lig o r in full an d is en title d to sam e
p rio rity in b a n kruptcy th at w o rk e rs w ou ld have had
A u dit p ro g ram (M 8 1 A -1-4 3 m ) 141 (N 8 1 L -1 -26m ) 206
Intern al a u d it p ro g ram (N 8 0 A -1 -2 7 m ) 81 T ru stee is rep resen tativ e o f b a n k ru p t’s esta te and c a n sue o r be sued on
P ro ced u res sp ecifically o u tlin ed p rim arily d e sig n e d to g a th e r its b e h a lf (M 8 1 L -1-4 1 m ) 152
e v id e n ce (M 8 0 A - 1 -14m ) 26 U npaid w a g es lim its, e x clu sio n s, a nd p rio rity o f lim it and excess
R etain ed earn in g s sh o u ld in clu d e re q u irin g v erificatio n o f a u th orization (M 8 0 L - 1 - 10m) 35
o f a n y d iv id en d s (M 8 1 A - 1 -14m ) 138
B id
B id d er n o t b o u n d b y a ccep tan ce if o m ission o f large item sh o u ld have
A udit tim e
b e en kno w n b y p e rso n a ccep tin g (N 8 1 L -1 -3m ) 203
O w n e rs ’ e q u ity w o u ld tak e less tim e th an any o f re v e n u e, assets or
liab ilities (M 8 0 A - 1 - 12m) 26
B o n d sinking fund
C o n firm atio n w ith b o n d tru ste e is b e st verificatio n o f tran sactio n s
A udit w o rk in g p ap ers (M 8 0 A - 1 - 19m ) 26
See A u d it p ro ced u res— W o rk in g p a p ers
B o n d s p ayable
See also A u d it p ro ced u res
C ash— D ebit
E arly e x tin g u ish m en t o f d e b t
B C ash re c eiv ed u pon issu an ce b e tw e e n in terest d a te s n e t o f issue
c o sts (M 8 0 P I-1-20 m ) 5
C o n tra st serial and term (straig h t) b o n d s (N 80T -4) 107
B ad d e b t ex p en se C onv ertib le
See also A d ju stin g en tries P ro ceed s a liability (M 8 1 T - 1 -15m ) 160
M atc h in g is reaso n fo r estim atin g on b a sis o f p e rcen tag e o f p a st lo sses to D eb en tu res
p ast n e t cre d it sales (ad ju sted fo r an tic ip ated c o n d itio n s) See A u d it p ro c e d u re s— C on firm atio n s
(N 8 0 T - 1 - 12m) 103 D etach ab le stock p u rc h a se w arrants
W rite o ff o f an a cc o u n t receiv ab le d e creases n et in co m e u n d e r direct A c co u n tin g d e sc rip tio n (N 8 0 T -4 ) 107
w rite o ff m eth o d o f rec o g n iz in g , b u t has no e ffe c t o n n et incom e C o m p u tatio n o f p ro c e ed s re c o rd e d as p a rt o f sto c k h o ld e rs’
u n d e r allo w an ce m e th o d (N 8 0 T -1 -1 m ) 102 e q u ity (M 8 0 P I- 1 - 17m ) 5
227
Index
B on d s p ay ab le (cont.) B usiness c o m binations (cont.)

E n try fo r sale b etw een in terest d a te s at d isco u n t, e ffe c t on am o rtizatio n P ooling o f interests
an d d ete rm in a tio n o f am o u n ts d iscu ssio n (N 8 0 T -4) 107 A d d itio n a l p a id -in c ap ital a cc o u n t b a la n ce o f new ly o rg a n iz e d p arent
G a in o r lo ss o n re tirem e n t (M 8 1 P II-2 -2 1 m ) 126 at co m b in in g d ate o f tw o subsidiaries
P rem iu m am o rtizatio n (M 8 0 P I-1 -3m ) 2
D ifferen c e in in terest m e th o d a n d straig h t-lin e m eth o d C o n so lid ate d re ta in e d earn in g s im m ed iately a fte r c o m b in a tio n
(N 8 0 T -4 ) 107 (N 8 1 P II-2-37m ) 188
R etire m en t C o n so lid ate d sto c k h o ld e rs’ e q u ity e n d o f first y e a r
See E a rly e x tin g u ish m en t o f d eb t (N 8 1 P I- 1 -13m) 170
S o ld in e x ce ss o f p a r b ecau se m a rk e t ra te o f in terest is less th a n stated E a rn in g s m ay be in c re a se d b ecau se o f co m b in a tio n an d n o t re su lt o f
rate (N 8 1 T - 1 -18m ) 2 17 op e ra tio n s (M 8 0 T -1-14 m ) 47
V a lu atio n , n et o f d isc o u n t, d ate sale (M 8 1 P I- 1 -16m ) 112 H ow a nd w hy op e ra tio n s re p o rte d fo r y e a r o f c o m b in a tio n
(N 8 1 T -4 ) 222
Bonus H ow re la te d ex p en se s h a n d le d , and w hy (N 8 1 T -4 ) 222
A m o u n t in v o lv in g n et in co m e a fte r ta x , b efo re b o n u s L o n g -te rm d e b t assu m ed sh o w n at re c o rd e d value
(N 8 1 P II-1 -3m ) 182 (M 8 1 T -1 -31m ) 162
C o m p u ta tio n (M 8 0 P II-1-2 0 m ) 18 90 p e rc en t m in im u m o f in v e ste e ’s sto ck that m u st be a cq u ire d durin g
c o m b in a tio n p e rio d in e x ch a n g e fo r in v e s to r’s c o m m o n
sto ck (M 8 1 T -1 -33 m ) 162
B o o k v alu e p e r sh are
P urchase
See R atio s
C o n so lid ate d fin an cial statem ents
A sse t (and goo d w ill) a nd liab ility valu atio n s determ in atio n
B reach (N 8 1 T -4 ) 222
D efen se G o o d w ill c o m p u ta tio n (M 8 0 P II- 1 -18m ) 18
S tatu te o f lim itatio n s, if req u isite p e rio d b e tw ee n b re a c h and L o n g -te rm d e b t assu m ed sh o w n at fa ir value
la w su it (N 8 1 L -1 -2m ) 203 (M 8 1 T -1 -31m ) 162
P a re n t’s in v estm en t a cc o u n t b a la n ce is m ark et price o f sh ares issued
B re ak e v e n an aly sis fo r sto ck o f su b sid iary (N 8 1 P II-2 -3 6 m ) 188
See C V P an aly sis
B re ak e v e n p o in t
See also C V P an aly sis c
C o m p u ta tio n w ith tw o p ro d u cts (M 8 0 P I-2 -2 1 m ) 5
D e fin itio n and h o w co m p u ted (M 8 1 T -2 ) 164
F ix e d c o sts at b re a k ev e n p o in t (M 8 1 P I-2 -4 0 m ) 117 C apital bud g etin g
F ix e d c o st eq u als co n trib u tio n m a rg in (N 8 1 T -1 -5 0 m ) 220 See also C o st o f c ap ital
In creases w h en fix ed c o sts in creases w ith o th e r c o sts an d p rices Q uan titativ e m eth o d s— N e t p re sen t value
c o n sta n t, b u t co n trib u tio n m a rg in u n ch an g ed Q uantitative m e th o d s— P ro b ab ility
C ash flow
(M 8 0 T -1-4 7 m ) 50
In v e stm e n t p ro ject
Sales d o lla rs a m o u n t (N 8 1 P I-2 -3 5 m ) 174
S eco n d y e ar, net o f tax (N 8 0 P I-2 -2 7 m ) 58
T h ree p ro d u cts
M ach in e pu rch ased
U n its o f one p ro d u c t so ld (N 8 0 P I-2 -2 9 m ) 58
A n n u a l c ash flow fro m o p e ra tio n s, net o f tax
(N 8 0 P I-2 -2 1 m ) 57
B ud g ets N e t o f ta x , th ird y e a r (M 8 1 P I-2 -2 1 m ) 113
See also C V P an aly sis C o st o f m ach in e g iv e n net p re sen t v a lu e , etc.
C ap ital b u d g e tin g (N 8 1 P I-2 -3 9 m ) 174
D ecisio n m a k in g — R ep lacem en t In v e stm e n t p ro ject
C ash R ate o f re tu rn e x p ec te d (N 8 0 P I-2 -2 6 m ) 58
See also F o recasts M in im u m re tu rn to leave value o f c o m p a n y u n c h an g e d is c o st o f
B alan ce e n d o f first y e a r (M 8 1 P I-2 -2 4 m ) 114 c ap ital (N 8 1 T -1-60 m ) 22/
C h an g e fo r m o n th (N 8 1 P I-2 -2 8 m ) 173 N et p re sen t value o f m a c h in e p ro je c t (N 8 1 P I-2 -3 7 m ) 174
C o m p u tatio n o f in crease fo r m o n th (M 8 0 P I-2 -2 3 m ) 6 N e t p re se n t value o f new m ach in e (M 8 1 P I-2 -2 2 m ) 114
E s tim a te d c ash d isb u rsem e n ts fo r in v en to ries fo r m o n th N et p re se n t value o f pro p o sal (N 8 0 T -1 -32 m ) 104
(N 8 1 P I-2 -3 3 m ) 173 P a y -b a c k p e rio d (N 8 1 P I-2 -3 6 m ) 174
F lex ib le ap p ro p riate fo r a n y lev el o f a ctiv ity A d v a n tag e s and d isad v a n ta g e s (M 81T -2) 164
(N 8 0 T -1 -3 7 m ) 105 A nnual c ash flow n e ce ssa ry (N 8 0 T -1 -33 m ) 104
W h en a n d how re c o rd e d and clo sed (N 8 1 T -3 ) 222 C o m p u ta tio n (M 8 0 P I-2 -2 4 m ) 6
D eterm in e m achine c o st (M 8 1 P II-2 -3 0 m ) 115
B uild in g M ac h in e pu rch ased (N 8 0 P I-2 -2 2 m ) 57
G a in o n sale (o w n ed few d ays) (N 8 1 P II-2 -4 0 m ) 188 P rese n t value o f future c ash flow s d o e s no t c o n sid e r c o st o f alternate
uses o f funds (N 8 0 T -1 -7m ) 102
B u sin ess co m b in atio n s R ate o f re tu rn
See also C o n so lid ated fin an cial statem en ts A c co u n tin g (b o o k v alue) (N 8 1 P I-2 -3 8 m ) 174
M ark etab le secu rities C o m p u ta tio n on th e initial in crease in in v estm en t
C o n so lid ate d b alan ce sh eet w o rk sh eet (M 8 0 P I-2 -2 5 m ) 6
C o m p letio n in v o lv in g e x ce ss o f c o st o v e r n et assets and am o rtiz a tio n , T ec h n iq u e s o th e r than p ay b ac k p e rio d (M 8 1 T -2 ) 164
m in o rity in te re st, a n d in terco m p an y d iv id e n d s, in te re st, g ain,
an d re c eiv ab le (M 8 0 P II-3 ) 21 C apital in e x ce ss o f p a r value
G o o d w ill B alan ce in clu d es am o u n ts re c eiv ed fo r issuance in e x ce ss o f p a r and
E x c e ss o f c o st o f a cq u ire d co m p an y o v er fa ir v a lu e s o f assets less am o u n ts re c eiv ed fo r treasury sto ck in e x ce ss o f c o st
liab ilities a ssu m ed (N 8 1 T - 1 - 17m) 2 /7 (N 8 0 P II-1 -1 m ) 67
228
Index
C ap ital sto ck C o m m ercial paper

See A u d it p ro ced u res N eg o tiab le instrum ents (cont.)
D iv id en d s p ayable n o t in d o rsed (N 8 0 L -1 -9m ) 89
Sto ck H o ld er in d u e co u rse (N 8 1 L -1 -35m ) 208
S to c k certificates C an re c o v er full a m o u n t o f c h ec k despite stop ord er
S to c k h o ld e rs’ e q u ity (N 8 0 L -1 -8m ) 89
C o m p a n y w h ich “ a c c e p te d ” n eg o tiab le d ra ft has p rim ary liability
C ap italiza tio n o f in terest and indorser has seco n d ary liability
A m o u n t e q u als rate tim e s a v erag e a cc u m u la te d e x p en d itu re s fo r (N 8 1 L -1 -36m ) 208
y e ar (M 81PI-1-11 m ) 112 D efenses
In fan cy o f m a k e r o r d ra w e r, d isch arg e in inso lv en cy proceedings
F o r w a re h o u se and sp ec ia l-o rd er m ach in e fo r sale, b u t no t
in v en to ry (N 8 1 P II- 1 -14m ) 184 a nd fo rg ed sig n atu re o f m a k e r o r d ra w e r
(M 8 0 L -1 -25 m ) 37
C ash E n title d to full a m o u n t o f ch ec k g iv e n b y d ra w e r, b la n k as to
a m o u n t, and filled -in b y p a y ee fo r un co m p leted w o rk fo r m ore
See also A u d it p ro ced u res
B u d g ets— C ash
than a m o u n t agreed (M 8 0 L -1-2 4 m ) 37
E n title d to re c o v er full a m o u n t o f ch ec k (o rig in ally left b la n k and
S tatem en t o f c h an g e s in fin a n c ia l p o sitio n
filled-in b y p re v io u s h o ld e r fo r h ig h e r a m o u n t than
B alan ce c o m p u ta tio n g iv e n b a n k re c o n ciliatio n d ata
(M 8 0 P II-1- 1m ) 15 a uthorized) (N 8 1 L -1 -38m ) 208
F ree fro m claim s o f o w n e rsh ip on p art o f o th e r p ersons
B alan ce in v o lv in g p o std ated c h ec k , N S F ch ec k d e p o sited , and c h e c k not
(M 8 0 L -1 -25m ) 37
m a ile d (N 8 1 P II-1 -2 m ) 182
M a k e r liable (even th o u g h n ote issued as re s u lt o f
D e b it fo r b o n d s so ld a fte r issu an ce d ate a t p a r p lu s accru ed
m isrep resen tatio n s) fo r “ v a lu e ” holder gave (not in cluding
in te re st (N 8 1P II-2 -2 9 m ) 187
D isb u rse m e n ts g iv en c erta in b alan ce sh eet a n d in co m e statem ent
p ro m ise to pay) (M 8 1 L -2 ) 155
in fo rm a tio n (M 8 1 P I-2 -3 4 m ) 116 P ayee (N 8 0 L -1 -1 m ) 88
T ransferee b y m ere d e liv e ry has rig h t to asse rt p rev io u s h o ld e r’s
C ash flo w standing as a h o ld er in d ue course a nd th e rig h t to p rev io u s
See C ap ital b u d g etin g h o ld e r’s signature (N 8 1 L -1 -37 m ) 208
U n d a ted accep ted fo r v alu e in goo d fa ith a nd w ith o u t notice o f any
C la y to n A ct (M 8 1 L -1 -5 7 m ) 155 d e fe n se , c an fill in date (N 8 0 L -1 -3m ) 88
W ill p revail a g ain st p rev io u s h o ld e r fro m w h o m instru m en t w as
C olleg e a cc o u n tin g stolen (N 8 1 L -1 -39 m ) 209
See U n iv ersity a cc o u n tin g O rd er p a p er
In d o rse d to a specific p a rty by the p ayee
C o m m e rc ial p a p er (M 8 0 L -1 -21m ) 37
N e g o tia b le in stru m en ts O verdue
A n te d ated no e ffe c t on n eg o tia b ility (N 8 0 L -1-4 m ) 88 20 d ays afte r la st ne g o tia tio n p re su m ed to b e re a so n a b le tim e in
A ssig n e e has sam e rig h ts as a ssig n o r (N 8 0 L -1 -7 m ) 89 US (M 8 0 L -1 -22m ) 37
B an k re fu sa l to p ay ch ec k p ro p e r w h e n in d o rsem en t m issin g , has stop P arty cash in g stolen c h ec k w ith fo rg ed ind o rsem en t m u st b e a r
p a y m e n t o rd e r, o r w h en party attem p tin g to c ash d id n o t have loss (M 8 0 L -1 -30 m ) 38
p ro p e r id e n tific a tio n , b u t no t w h en b an k e rro r m ad e c h ec k a p p ea r S ig n ed by m ak er, a nd only as an acco m m o d atio n b y fo rm er p a rtn e r,
to b e o v e rd ra ft (N 8 0 L -1 -2 m ) 88 le a v es fo rm er p a rtn e r fully liab le u pon d e fa u lt
B lan k ch eck (N 8 0 L -1-6m ) 89
L iab ility o f d ra w e r is fo r am o u n t filled -in h ig h e r th a n c o n tra c t, even Stop o rd e r, b u t b a n k m ista k en ly p a y s, w ill n o t leave ban k
th o u g h w o rk w as u n co m p le ted and c h e c k w a s n e g o tia ted by liable (N 8 0 L -1 -5m ) 88
p ay ee fo r less th a n th a t a m o u n t (M 8 0 L -1 -2 4 m ) 37 N o t neg o tiab le instru m en t if not pay ab le at d efin ite tim e
C h eck m ark ed ‘‘p a y m e n t in full’’ m a d e o u t fo r less th a n d e b t because (N 8 1 L -1-40 m ) 209
b o n a fid e d isp u te a b o u t p o o r serv ice leav es d e b t u n liq u id a te d and P rotest
d e b to r co m p letely d isch arg ed (M 8 1 L -1 -7 m ) 147 Form al
C h eck s m ad e p ay ab le as a re su lt o f frau d to leg itim a te b u sin esses and M u st b e m ade to h o ld d ra w e r o r indorsers liable fo r fo reig n d ra fts,
sen t to a p o st o ffice b o x o f d e fra u d e r, w h o fo rg es in d o rse m e n ts, tra d e acc e p ta n ce s a nd c h ec k s, b u t not fo r prom issory
m ay re su lt in lo ss to th e d efra u d e d co rp o ra tio n s w h ic h w rote the n otes (M 8 0 L -1 -2 3 m ) 37
c h ec k s (M 8 0 L -1 -19m ) 37
C o m m o n stock
D ra ft o r n o te d o u b t, m ay b e tre a te d as eith e r
See D iv idends payable
(N 8 0 L -1-4 m ) 88
F o rg ed ch eck C o m p e n sa tio n expense
B an k h as paid fo rg ed ch ec k o f d e p o sito r an d can n o t recover from See S tock o p tions
p arty w ho re c eiv ed p ay m en t in g ood faith
(M 8 1 L -2 ) 156 C o m p ilatio n re p o rt
D e p o sito r m u st d isco v e r and re p o rt w ith in o n e y e a r fo r b a n k to M ay be issu ed by C P A w ho is no t ind ep en d en t
cre d it his a cc o u n t (M 8 1 L -2 ) 156 (N 8 1 A -1-56 m ) 200
F o rg ed in d o rsem en t o f sto len c h ec k m ay re su lt in loss to first party
c ash in g it (M 8 0 L - 1 -15m ) 36 . C on d em n atio n
F o rg ed sig n atu re o f p ay ee o r in d o rse r o n ch eck G ain (N 81 P II-2 -3 4 m ) 187
B an k h as p aid , an d c a n re c o v e r fro m p arty co llectin g
(M 8 1 L -2 ) 156 C on serv atism
D e p o sito r allo w e d 3 y e ars to d is c o v e r a n d h av e a cc o u n t c re d ite d , E x am p le is a ccru in g n e t lo sses o n firm p u rch ase co m m itm en ts
b u t m u st re p o rt p ro m p tly u p o n d isco v ery (M 8 1 T -1-4m ) 159
(M 8 1 L -2 ) 156 L argest am o u n t o f bad d e b t ex p en se ch o se n w h en a g ing o f acco u n ts
H a n d w ritte n term s co n tro l ty p e w ritte n a n d p rin ted , and ty p e w ritte n re c eiv ab le indicates m ore sh ould be in allo w a n ce fo r d o u b tfu l
c o n tro l p rin ted term s (N 8 0 L -1-4 m ) 88 a cc o u n ts than d o e s e stim ate d p e rcen tag e o f sales
H o ld e r c an h o ld p rev io u s n e g o tia to r o f fo rg ed n ote liab le e v en th o u g h (M 8 0 P II-1 -3m ) 15
229
Index
C o n serv atism (cont.) C o n tracts (cont.)

S u p p o rts im m ed iate re c o g n itio n o f a lo ss (M 8 0 T -1 -29m ) 48 O ffe r
A c ce p ta n c e o f o ffe r a rriv in g b efo re c o u n te ro ffe r creates
C o n sig n m en t c o n tra c t (N 8 0 L -5 ) 100
See In v en to ry A ccep ted fo r m ak in g su g gestion fo r w h ich a w ard ed , d ecisio n to
inc re a se future aw ard s d o e s n o t affect orig in al o ffer
C o n sisten cy (N 8 1 L -1-7m ) 204
S acrificed fo r in co m e statem en t ite m , cu m u lativ e e ffe c t o f change in B y teleg ram stating irrev o c a b le , re v o k e d by telep h o n e
a cc o u n tin g p rin cip le (N 8 0 T -1 -6m ) 102 (M 8 1 L -1 -1 1 m ) 147
C an n o t be a ssigned to a n o th e r (N 8 1L - 1 - 10m ) 204
C o n so lid ate d b a la n ce sh eet w o rk sh eet C ateg o rical rejectio n p re v e n ts future acceptance
See B u sin ess c o m b in a tio n s (N 8 1 L -1 -8m ) 204
C o u n te ro ffe r d oes no t destro y o ffe r until receiv ed
C on so lid ated fin an cial statem en ts (N 8 0 L -5 ) 100
See also B u sin ess co m b in atio n s M ay be rev o k ed at a ny tim e p rio r to a cceptance
B alan ce sheet (N 80L -5) 100
A d v a n ce to su b sid iary elim in ated (N 8 1 P II- 1 - 17m) 185 M ay be w ithdraw n at any tim e p rio r to acceptance
G o o d w ill (M 8 1 L - 1 -10m ) 147
N e g ativ e c o m p u ta tio n a n d p re sen ta tio n u pon acq u isitio n T o e n te r into u nilateral c o n tra c t re q u irin g an a c t as ex clu siv e m e a n s o f
(M 8 0 P I-1-2 m ) 2 a ccep tan ce, a nd p ro m ise to p erfo rm in effectu al
N e t in co m e in c lu sio n (M 8 0 T -1 -4 0 m ) 49 (N 8 0 L -5 ) 100
P o o lin g o f interests O p tio n (firm o ffer) to b u y needs
B alan ce sh eet w o rk sh ee t on d ate o f a cq u isitio n O ffe re e n o t bou n d to prom ise o f irrev o cab ility n o t sep arately signed
(N 8 0 P I-5 ) 64 by o fferee co n ta in ed in w ritten fo rm supplied b y o ffero r (signed
R etain e d earn in g s on d ate o f a cq u isitio n (N 8 0 P I-5 ) 64 at p h y sical e nd b y o fferee ) (M 8 1 L - 1 - 18m ) 149
Parol e v id e n ce rule
C o n tin g en cies A pp lies to w ritten a nd o ral a g re em en ts p rio r to signing
A ccru ed loss (M 8 1 L - 1 - 12m) 148
P ro b ab le h as b e en in cu rred an d re a so n a b ly e stim ate d P erform ance
(N 8 1 T -1 -37 m ) 219 C o n stru cto r o f d ish w ash e r (n o t a daptable fo r use by o th er
E x p ro p riatio n loss p o ssib le a n d re a so n a b ly e stim ate d d isclo se d , b u t not restau ran teu rs) as a g re ed c an su ccessfu lly m ain tain an actio n for
a cc ru e d (N 8 1 T - 1 -14m) 2 /7 th e price (M 8 0 L -1 -34 m ) 39
G a in re c o g n iz ed in in c o m e w h en re a liz ed
P roperty
(M 8 1 T -1 -36 m ) 162
O ffe ro r c an n o t im pose silence u pon o th e r p arty as acc e p ta n ce w ith
G en eral o r u n sp ecified sh o u ld n o t b e a cc ru e d o r d isclo sed
n a rro w e x ce p tio n s (M 8 0 L -3 ) 42
(M 8 0 T -1 -25m ) 48
L aw su it R eal p ro p e rty purchase
P ro b ab le a m o u n t o f lo ss sh o u ld b e a cc ru e d by c h arg e to
N o n a ssig n a b le (M 8 0 L -1-20m ) 37
in co m e (M 8 0 P I-1-4 m ) 2 Sale o f a busin ess
L oss B o th a ssig n m e n t o f rig h ts a nd d ele g atio n (assu m p tio n ) o f d u tie s by
A c cru ed a n d ch arg ed to in co m e if p ro b ab le a n d reaso n ab ly seller and b u y e r, w ith seller b e co m in g su re ty a nd b u y e r
b e co m in g prin c ip a l d e b to r, w ith c re d ito r’s rights
e stim ab le (N 8 0 T -3 ) 107
D isclo su re re q u ire m e n ts w h en n e ed n o t b e a cc ru e d a n d c h arg ed to
u n affected (M 8 0 L -3 ) 42
in co m e (N 8 0 T -3 ) 107 S ales
P o ssib le a n d reaso n ab ly estim ated See also A uction
D isclo su re (N 8 1 P II-1 -12m ) 184 C o n sig n m en t
P o ssib le a n d reaso n ab ly e stim ate d d isclo se d b u t n o t a ccru ed L egal c h arac te ristic s (M 80L -4) 43
(M 8 1 T - 1 -10m ) 160 C u sto m ize d furniture
P ro b ab le B re ac h o f co n tract
A ccru e a n d ch arg e in co m e w ith b e st estim ate L iq u id ate d d a m a g es stipulated m u st b e re a so n a b le
(N 8 0 P I-1-2 m ) 54 (N 8 0 L - 1 -13m ) 90
R aisin g d ed u ctib le o n fire in su ran ce re su lts in no acc ru a l o f liab ility to F .O .B . sh ip p in g p o in t, in tra n sit sh ip p er d isco v e rs b u y e r is in solvent
c o v er p o ssib le fu tu re fire lo sses (M 8 1P II-2 -3 7 m ) 129 an d stops sh ip m en t, b u y e r en title d if p a y s cash
(N 8 0 L -1 -17m ) 91
C on tin u in g o p eratio n s in co m e (M 8 1P II-2 -3 9 m ) 129 F ranchising
A rra n g e m e n ts leg al if fo u n d to be reaso n ab le
C on tracts (N 8 0 L - 1 -18m ) 91
A cce p ta n c e by w ire o f m a ile d o ffe r is valid u p o n d isp atch desp ite both In ferio r (to specificatio n s) q u a lity m erch an d ise c an be re je c ted
ad d itio n al and d ifferen t term s (M 8 1 L -1 -9 m ) 147 su b seq u en t to re c eip t and b rie f storage
A ccep tan ce o f te le p h o n ed o ffe r did n o t tak e p lace u p o n d isp atch o f letter (N 8 0 L - 1 -12m) 90
th e n e x t d a y as o ffe r had a lre a d y ex p ired M o d ificatio n m ust satisfy S tatute o f F rauds if m o d ified w ith in its
(N 8 1 L -1 -1 m ) 203 provisio n s (N 8 0 L - 1 - 16m ) 91
A d v e rtisem en t q u o tin g sales p rices is an in v itatio n seek in g o ffers O rd e r fo r pro m p t sh ipm ent
(M 8 1 L -1 -8m ) 147 O ffe r m ay be a cc e p te d by p ro m ise o f o r p ro m p t sh ip m e n t, m ay
C o m p o sitio n ag reem en t a cc e p t by m a il b u t m ak e p ro m p t sh ip m e n t, a nd if prom ptly
N o d e b ts d isch a rg e d un til p e rfo rm an c e by d e b to r ship p ed m u st n otify b u y e r w ith in re a so n a b le tim e
(M 8 1 L -1-4 0 m ) 152 (N 8 0 L - 1 -15m ) 90
C o u n te ro ffe r P rivity n o t a b a r in la w su it a g ain st e ith e r w h o le sa le r o r p a c k e r o f
A d d itio n o f “ su b ject t o ” (co n d itio n p reced en t) p a ra g ra p h before d efective p ro d u c t cau sin g injury to suing in ju red party th o u g h
sig n in g an u n sig n ed c o n tra c t (M 8 1 L - 1 -13m ) 148 pu rc h a se w as by a n o th e r p arty (M 8 0 L -1-37m ) 39
Im p lied in fact R eq u ire m en ts
C lien t accep ts serv ices o f a cco u n tan t w ith o u t ag re em en t c o n cern in g S e lle r w ishes to a v o id p erfo rm an ce
p ay m en t (N 8 1 L -1 -1 1 m ) 204 B est d efense is b u y e r has o rd ered am o u n ts d isp ro p o rtio n ate to
230
Index
C ontracts C o st accounting
Sales (cont.) C o st b e h av io r an aly sis (cont.)
n o rm al (M 8 0 L -1 -2 9 m ) 38 R eg ressio n analysis p ro d u c e s m e a su re s o f pro b ab le e rro r
“ R e q u ire m e n ts” p u rc h a se v alid a n d en fo rceab le (M 8 0 T -1-46 m ) 50
(N 8 0 L -1 -1 1 m ) 90 D ifferen ce in e arn in g s b etw een d ire c t a nd ab so rp tio n c o sting
S eller o f g o o d s rig h tfu lly re je c ted b y b u y e r fo r n o n c o n fo rm ity to F ix e d m an u factu rin g c o sts are p ro d u c t c osts in a b so rption a nd p eriod
c o n tra c t has risk o f lo ss e v en afte r d eliv ery f.o .b . c o sts in d ire c t (M 8 1 T -1-47 m ) 163
d estin atio n (M 8 0 L -1-3 3 m ) 39 D irect c o sting
Statute o f frau d s C on trib u tio n m a rg in ra tio increases w hen v ariable costs as p e rc en t o f
M o d ificatio n s m u st b e in w ritin g (M 8 0 L -1-2 7 m ) 38 sales decrease (N 8 0 T -1 -35m ) 105
W arra n tie s C o n trib u tio n m a rg in unch an g ed w h e n fixed c o sts increase w ith other
D e sc rip tio n lan g u ag e is e x p re ss w arran ty a n d n o t effe c tiv e ly c o sts a nd p rices c o n sta n t, b u t b re a k ev e n p o in t increases
d isclaim ed b y d isclaim e r c lau se o f im p lied w a rra n tie s o f (M 8 0 T -1-47 m ) 50
q u a lity (M 8 0 L -1 -3 2 m ) 38 In v en to ry in clu d es dire c t m a te ria ls, dire c t lab o r, and v ariab le fa c to ry
W h o le sa le r m u st p e rfo rm o n acc e p te d c o n tra c t b u t is e n title d to o v e rh e ad (N 8 1 T -1 -47 m ) 220
d em a n d cash , a fte r d isco v e rin g th at b u y e r is n o t p a y in g d e b ts as Operating in co m e (N 8 0 P I-2 -3 7 m ) 59
th ey b eco m e d u e , e v en th o u g h n o t acco rd in g to o rig in al term s o f U n it c o st o f p roduct (M 81 P I-2 -2 3 m ) 114
paym ent (M 8 0 L -1 -3 8 m ) 39 V ariable a nd fixed p ro d u ctio n c o sts m u st be k n o w n to install
Statute o f F rauds (N 8 0 T -1 -31m ) 104
S e lle r p re v a ils d esp ite S tatu te b u y e r a d m its co n tract D irect la b o r in cluded in b o th p rim e c o st and c o n v ersio n c ost
( M 8 ]L -1-19 m ) 149 (M 8 1 T -1-42 m ) 162
T o rt D irect lab o r p ayroll g iven varian ce inform ation
In ten tio n al (N 81 P I-2 -2 4 m ) 171
F rau d o r d eceit w ith scien ter o r k n o w led g e o f falsity D irect m aterials
(N 8 1 L -1-9 m ) 204 L IF O c o st used in pro d u ctio n (N 81P I-4) 178
M an u factu rin g and p rim e c o st, b u t n o t co n v ersio n c ost
C o rp o ratio n s (N 8 1 T -1-46 m ) 220
C E O m ay b e liab le fo r n eg lig en ce in n o t ta k in g p ru d e n t a ctio n (notifying H igh-low poin ts m ethod
no o n e , b u t re q u e stin g n o rm al au d it) o n a n o n y m o u s letter in d icating See Q uantitativ e m eth o d s
d efalcatio n (N 81L-31 213 In d irect m an u factu rin g costs
C o n sid eratio n D escrib e in direct m ate ria ls a nd g iv e exam ple (M 80T -5) 52
F o r sh ares o f co rp o ra tio n m a y b e ta n g ib le s, in ta n g ib le s, o r services F ixed
p e rfo rm ed , b u t n o t serv ices to b e p erfo rm ed D escrib e and give ex am p le (M 80T -5) 52
(M 8 1 L -1-2 2 m ) 149 In d irect lab o r
D escrib e and give ex am p le (M 80T -5) 52
C o n so lid atio n (M 8 0 L -1-6m ) 35
F id u ciary d u ty o f 51% o w n e r (M 8 0 L - 1 - 13m ) 36 In d irect m aterials
D e sc rib e and give ex am p le (M 80T -5) 52
M erg er
D ire c to rs and sh areh o ld ers o f b o th c o rp o ra tio n s m u st ap p ro v e , and S em ivariable
D e sc rib e and give exam ple (M 80T -5) 52
secu rities issu ed and e x ch a n g e d m u st b e reg istered (no ruling
fro m T reasu ry D e p t. n eed ed ) (M 8 1 L -1 -2 1 m ) 149 V ariable
Steps to validly co n su m m ate (N 8 1 L -2 ) 212 D escrib e and g ive ex am p le (M 80T -5) 52
O rg a n iz er m u st re tu rn am o u n t paid b y c o rp o ra tio n fo r b u ild in g in excess Job o rd e r
o f h is c o st (M 8 1 L -1-2 3 m ) 149 B est w h en m any b a tc h es, differin g as to specifications,
P aren t co m p a n y p h o n ed o rd e r for deliv ery to su b sid iary an d su p p lie r can p roduced (M 8 1 T -1-4 4 m ) 163
c o lle ct fro m p a re n t (M 8 1 L -1 -3 9 m ) 152 Job o rd e r c o st sheet to accu m u late c o st o f e ac h ord er
“ P ie rc in g the co rp o rate v e il” su ccessfu l w h en c re atio n is frau d on (M 8 0 T -1-42 m ) 49
c re d ito rs (M 8 0 L -1 -9m ) 35 S tan d ard c o st o f three lots (M 81P II-5) 135
S h areh o ld ers ratified (co n firm ed ) d ire c to rs ’ action S tatem en t o f c o st o f goods m a n u fa c tu re d (N 8 0 P II-3 ) 73
(M 8 1 L -1-2 8 m ) 150 T o tal m a n u fa c tu rin g c o st usin g o v e rh e ad a p p lie d o n b a sis o f
S tate o f in co rp o ratio n d ire c t-la b o r c o st usin g dep artm en tal rates
C ertific a te o f a u th o rity to tra n sac t b u sin ess m u st b e o b tain ed in o th er (M 8 1 P I-2 -3 8 m ) 116
states (M 8 0 L - 1 -14m) 36 Join t c osts
S to ck sp lit req u ires ap p ro v al by d ire c to rs and sh areh o ld ers A llo c a ted on b asis o f re la tiv e sales value at sp lit-o ff
(M 8 1 L -1-2 7 m ) 150 (N 8 0 T -1 -39m ) 105
T rea su ry sto ck is re a cq u ire d sh ares n o t can celled A llo cated to p ro d u c t on b a sis o f relativ e-sales-v alu e at sp lit-o ff
(M 8 1 L -1-2 4 m ) 150 (M 8 1 P I-2 -3 7 m ) 116
T rea su ry sto ck m ay b e u sed fo r sto ck d iv id en d A llocated to product on n e t re a liz ab le value m eth o d
(M 8 1 L -1-26 m ) 150 (M 8 1 P I-2 -3 9 m ) 117
T reasu ry sto ck pu rch ase lim it (M 8 0 L -1 -8m ) 35 A llo cated to p ro d u cts o n re la tiv e sales value a t sp lit-o ff w h ic h e quals
Ultra vires sales price re d u c ed by c o st to com plete a fte r split-o ff
P arties w h o m ay asse rt (M 8 0 L - 1 - 12m) 35 (N 8 1 T -1-48m ) 220
A llocation to m a in p ro d u c ts o n relativ e-sales-v alu e at sp lit-o ff
C o st acco u n tin g ap p ro a ch , b u t none to b y -p ro d u ct (M 8 0 P I-2 -2 7 m ) 6
See also R esp o n sib ility a cco u n tin g In d ivisibility cau ses difficu lty to c o st (N 8 0 T -1-40 m ) 105
B o th b y -p ro d u cts a n d jo in t p ro d u cts m ay b e salable o r req u ire further M o st freq u en tly allo cated o n re la tiv e sales value
p ro c e ssin g to b e salab le (N 8 1 T -1-4 9 m ) 220 (M 8 1 T -1-48m ) 163
B re ak e v e n R elativ e-sales-v alu e at sp lit-o ff co m p u tatio n w h e re th at w a s allocation
See B reak ev en p o in t m e th o d , allocation am o u n ts giv en along w ith add itio n al c o sts to
B y -p ro d u c ts pro cess fu rth er, sales v alu e if p ro cessed fu rth er, and additional
A llo c a ted jo in t c o st p lu s su b seq u en t p ro cessin g c o sts m a rg in if p ro c e sse d fu rth er (M 80P I-2-28m ) 6
(M 8 1 T -1-4 9 m ) 163 R elative sales value at sp lit-o ff g en erally used fo r a llocation
In d iv isib ility c au se s difficu lty to c o st (N 8 0 T -1-4 0 m ) 105 (M 8 0 T -1-43m ) 49
C o st b e h av io r an aly sis R elativ e-sales-v alu e at sp lit-o ff used fo r a llocation
231
Index
C o st a cc o u n tin g C ost a cc ounting (com.)

Jo in t co sts (com.) P roduct c ost
S ales value at sp lit-o ff fo r one p ro d u c t A llo catio n base sh ould have cau se a nd e ffe c t relatio n sh ip
(N 8 0 P I-2 -2 4 m ) 57 (M 8 1 T -1-43m ) 163
O n e p ro d u c t’s to ta l c o st in clu d in g c o sts afte r sp lit-o ff S em iv ariab le expense
(N 8 0 P I-2 -3 2 m ) 59 S tatistical scattergraph separates variab le and fixed elem en ts
M aterials (N 8 0 T -1-4 7 m ) 106
W eig h ted av erag e u n it c o st (M 8 1 P II-2 -3 5 m ) 129 S e m ivariable indirect m a n u fa c tu rin g c osts
N o n m a n u fa ctu rin g o rg a n iz a tio n m ay use e ith e r jo b o rd e r o r process D escrib e (M 80T -5) 52
c o stin g (N 8 1 T -1-4 4 m ) 220 Spoilage
O p e ra tin g p ro fit fo r p ro d u c t w ith tra c e ab le c o sts an d c o sts allo cated on A bn o rm al is period c o st (N 8 0 T -1-46m ) 106
ratio o f p ro d u c t’s in co m e b e fo re a llo cab le c o sts to to ta l incom e o f N orm al is in v e ntoriable b u t n o t abnorm al
all p ro d u cts b e fo re a llo cated c o sts (M 8 0 P II- 1 -15m ) 17 (N 8 1 T -1-57m ) 221
O p p o rtu n ity c o st N orm al is p roduct c o st (N 8 0 T -1-46 m ) 106
See D e cisio n m ak in g S tandard c osts
O p tim u m size o f p ro d u ctio n run T he o re tic a l is absolute m inim um u n d e r b e st co n d itio n s
See Q u an titativ e m eth o d s (N 8 0 T -1-48m ) 106
O rd e r p o in t (N 8 0 P I-2 -4 0 m ) 60 U sed in jo b ord er co stin g o r p ro c e ss costing
O v erh ead (N 8 0 T -1 -38m ) 105
A p p lie d , giv en v a rian ce in fo rm atio n (N 8 1 P I-2 -2 7 m ) 172 V ariable c o st
C an b e v ariab le o r fix ed (N 8 1 T -1-4 2 m ) 220 C o n sta n t p e r unit w ith in relev an t ran g e (N 8 0 T -1-34 m ) 1 05
F ix ed total b ased on n o rm al activ ity (N 8 1 P II-4 ) 191 V ariable in d irect m an u factu rin g co sts
In clu d es in d irect m a te ria ls (N 8 1 T -1-4 1 m ) 220 D e sc rib e (M 80T -5) 52
V ariab le rate p e r d ire c t lab o r h o u r (N 8 1 P II-4 ) 191 V ariance analysis
Pro cess c o stin g D irect la b o r (M 8 0 T -1-45 m ) 49
B est w h e n c o n tin u o u s m ass p ro d u c tio n o f like u n its E ffic ie n cy (N 8 1 P II-4 ) 191
(M 8 0 T -1-4 1 m ) 49 C om p u tatio n (M 8 0 P I-2 -3 9 m ) 8
C o st o f p ro d u ctio n re p o rt fo r tw o d ep artm en ts In hours (M 81P II-5) 135
(M 8 0 P II-5 ) 23 U n fav o rab le, actu al hours ex ce e d standard allow ed
D escrib e d ifferen ce b e tw ee n un its c o m p leted an d e q u iv a len t units (N 80T -1-4 9 m ) 106
w h en no b eg in n in g in v en to ry an d p artially co m p le ted ending U nfavorable c o n n o te s actu al la b o r hours e x ce e d stan d ard fo r
in v en to ry (M 8 0 T -5 ) 52 pro d u ctio n a ch iev ed (N 8 1 T -1 -52m ) 221
D escrib e differen ce in un its p laced in p ro d u ctio n an d eq u iv a len t units U nfavorable d ire c tly a ffe c te d by relative p o sitio n o f p ro d u ctio n
w h ere no b e g in n in g in v en to ry a n d p artially co m p le ted en d in g o n learn in g c u rv e ( N 8 I T - 1-53m ) 221
in v en to ry (M 8 0 T -5 ) 52 P ay ro ll fo r m o n th (N 8 0 P I-2 -3 5 m ) 59
E q u iv alen t un it c o st R ate (M 8 1 P I-2 -2 7 m ) 114,
W eig h ted -av e ra g e m e th o d c o n sid e rs c u rre n t c o sts p lu s b e g in n in g in (M 8 1 P II-5 ) 135, (N 8 1 P II-4 ) 191
p ro cess in v en to ry (M 8 1 T -1-4 5 m ) 163 M aterials
E q u iv ale n t units P rice (N 8 0 P I-2 -3 8 m ) 60,
C o n v ersio n c o sts (M 81P II-5) 135, (N 8 1 P I-2 -2 6 m ) 172,
W eig h ted -av e ra g e co m p u tatio n (M 8 0 P I-2 -3 2 m ) 7 (N 81P1I-4) 191
M aterials a n d c o n v ersio n U n favorable, raw m aterials p ric e increases
W eig h ted -av e ra g e m eth o d (N 8 0 P I-2 -2 8 m ) 58 (N 8 0 T -1 -50m ) 106
U n its tran sferred in in clu d ed in c o m p u ta tio n u n d e r b o th F IF O and Q uan tity (M 8 1 P II-5 ) 135,
w e ig h ted -av erag e m eth o d s (M 8 1 T -1-4 6 m ) 163 (M 8 1 P I-2-28m ) 115, (N 8 1P I-2-26m ) 172,
W eig h ted -av e ra g e m e th o d fo r m aterials u n it c o st (N 8 1PII-4) 191, (M 8 0 P I-2 -3 4 m ) 7
(N 8 1 P I-2 -2 1 m ) 171 P ro d u ctio n d ep artm e n t cu sto m arily resp o n sib le
E q u iv ale n t un its u sed fo r c o m p u ta tio n o f c o st o f e n d in g w o rk in (M 8 lT -1 -50 m ) 163
p ro cess in v en to ry d escrip tio n (M 8 0 T -5 ) 52 O v erh ead
F IF O T o tal co m p u tatio n (M 8 1 P I-2 -2 6 m ) 114
E q u iv ale n t units d efin ed (N 8 0 T -1-4 4 m ) 105 T w o -v arian c e m e th o d
E q u iv ale n t u n its fo r co n v ersio n co sts B u d g et (co n tro llab le) (M 80P I-2-35m ) 7,
(M 8 1 P I-2 -3 3 m ) 115 (N 81P II-4) 191
F IFO c o n v ersio n c o sts o f w o rk -in -p ro c e ss o f one d e p artm e n t C o n tro llab le and volum e (M 8 1 P II-5 ) 135
(N 8 0 P I-2 -3 3 m ) 59 V olum e (N 8 1 P II-4 ) 191,
M ate rials ad d ed in seco n d d e p artm e n t in creasin g th e n u m b e r o f units (N 80P I-2-39m ) 60
a n d w o u ld a lw ay s c h an g e d ire c t la b o r c o st p e rcen tag e in en d in g U n d erab so rb ed a m o u n t (M 8 1 P I-2 -2 5 m ) 114
w o rk in p ro cess in v en to ry (N 8 1 T -1-4 3 m ) 220 V ariation in gross p rofit analysis
M aterials ad d ed in sec o n d d ep artm en t n o t in creasin g th e n u m b er o f See G ross profit va ria tio n analysis
u n its b u t in creasin g to tal u n it c o st (N 8 1 T -1-4 5 m ) 220
T o tal c o st p e r eq u iv a len t un it tran sferred o u t o f seco n d
d ep artm en t (M 8 0 P I-2 -3 3 m ) 7 C o st o f cap ital
W eig h ted -av e ra g e m eth o d See also C ap ital b u dgeting
C o st p e r e q u iv a len t u n it fo r m aterials B onds a nd p referred sto ck
(M 8 1 P I-2 -3 2 m ) 115 A ftertax interest and stated div id en d (M 8 0 T -1-4 9 m ) 50
D iffers fro m F IF O m e th o d in th a t it does n o t c o n sid e r d egree o f
co m p letio n o f b e g in n in g in v en to ry w h en co m p u tin g
C o st o f g o ods sold
e q u iv a len t un its (N 8 0 T -1-43 m ) 105 A m ount (N 8 1P I I-1-6m ) 183
P ro d u ctio n re p o rt fo r d e p artm e n t fo r m o n th in clu d in g e q u iv a len t
(and c o st p er) u n its, to tal m an u factu rin g c o sts, and d o lla r
am o u n ts o f e n d in g w o rk -in -p ro cess and c o st tran sferred C o st-v o lu m e-p ro fit analysis
out (N 8 0 P II-3 ) 74 See C V P analysis
232
Index
C urren t liab ilities D epreciation (cont.)

E x c lu d e d am o u n t o f sh o rt-term o b lig atio n s refin an ced after y e ar-e n d , D o u b le -d e clin in g ba la n ce (M 8 1P II-1-2m ) 123
b u t b e fo re statem en ts are issu ed (M 8 1 P II-2 -3 1 m ) 128 A m o u n t o f last y e a r o f first 18 m o n th s cou n tin g y e a r o f a cq u isitio n as
E x c lu d e d am o u n t o f sh o rt-term o b lig a tio n s refin an ced afte r y e ar-e n d , o n e -h a lf y e ar (N 8 1 P II-2 -2 3 m ) 186
b u t b e fo re statem en ts are issu ed , one a g re em en t re fin a n c in g S alvage v alu e ig nored (M 8 0 T -1 -35m ) 49,
can c e lla b le on 10 days n o tice b y len d er (M 8 1 T -1-2 0 m ) 161
(M 8 1 P II-2 -3 2 m ) 128 U n d e p re cia te d b a la n ce o f m ach in e (N 8 0 P I-1 -1 m ) 54
H ospitals recognize (M 8 0 T -1 -60m ) 51
C u to ff b a n k statem en ts In su fficie n t po ssib ly if e x cessiv e rec u rrin g losses o n assets retired
See A u d it p ro c e d u re s— B an k reco n ciliatio n (M 8 0 A -1 -30m ) 27
P rod u ctiv e-o u tp u t
C V P an aly sis C o m p u te d sam e as dep letio n (M 8 1 T - 1 -17m ) 160
A d v e rtisin g m ax im u m a m o u n t to o b ta in g iv en o p eratin g p ro fit S u m -of-the-years-digits (N 8 1 P II-1-4m ) 182
(N 8 1 P I-2 -3 4 m ) 174 A ccu m u lated d e p re ciatio n b a la n ce as c o m p a re d to straight-line after
D o lla r am o u n t o f sales to a ttain d e sired p ro fit calcu la te d by d iv iding tw o years (M 80PII-1-11 m ) 17
co n trib u tio n m a rg in in to d e sired p ro fit plu s fix ed c o st L a st y e a r o f rev ised life a nd salv ag e value
(N 8 1 T -1 -56m ) 221 (M 81P II-2-24m ) 127
M ajo r u ses (M 8 1 T -2 ) 164 S econd y e a r expense (M 8 1 P I-1-9m ) 111
N et sales p ro jected (N 8 0 P I-2 -2 5 m ) 57
O p e ra tin g p ro fit increase w ith ad d itio n al a d v ertisin g D irect c o stin g
(M 8 1 P I-2 -3 6 m ) 116 See C o st accounting
S ales c o m p u ta tio n g iv en an o p e ra tin g p ro fit
(M 8 0 P I-2 -2 6 m ) 6 D isclosure
S ales to realize g iv en p ro fit (M 8 1 P I-2 -3 5 m ) 116 D escrip tio n o f all sig n ifican t a cc o u n tin g po lic ie s req u ired
U n its so ld c o m p u ta tio n to g en erate g iv e n incom e (M 8 0 T -1 -23m ) 48
(M 8 0 P I-2 -2 9 m ) 6 In v en to ry pricin g m e th o d should be disclo sed
U n its th a t m u st b e so ld at in creased p ric e to p ro v id e g iv en operatin g (M 8 0 T -1 -24m ) 48
in co m e (N 8 1 P I-2 -3 2 m ) 173 R elated party tra n sac tio n s (N 8 0 A -1 -23m ) 81
D isco n tin u ed operations (d isposal o f a segm ent)

D G ain o r loss rep o rted n e t o f ap p licab le incom e tax es
(M 8 0 T -1-11m ) 47
D ata p ro c e ssin g G ain o r loss show n as sep arate item after c o n tin u in g operatio n s
See E lec tro n ic d ata p ro c e ssin g (N 8 0 T - 1 -10m) 102
Incom e fro m c o n tin u in g op e ra tio n s (M 8 1P II-2-39m ) 129
D e b t restru ctu rin g Incom e fro m c o ntinuing op e ra tio n s fo r re v ised c o m p a ra tiv e statem ents
See T ro u b le d d eb t re stru c tu rin g fo r tw o years b e fo re c o n su m m atio n (N 8 0 P II-1-2m ) 67
Incom e o r loss fro m d isco n tin u ed op e ra tio n s re p o rte d on re v ised
D ecisio n m a k in g c o m p arativ e statem ents fo r tw o y e ars b efo re co n su m m atio n
M ak e o r b u y (N 8 0 P I-2 -3 1 m ) 58, (N 8 0 P II-1 -3m ) 67
(M 8 lP I-2 -2 9 m ) 115 In co m e tax expense y e a r o f disp o sa l (M 8 1 P II-2 -4 0 m ) 130
C o m p u tatio n o f lo w e st c o st (M 8 0 P I-2 -3 7 m ) 8 L oss on disp o sal (N 8 1P II-2 -3 5 m ) 187
R elev an t c o sts in clu d e fix ed th at c an b e av o id ed L oss re p o rte d sep arately b e fo re ex tra o rd in a ry ite m s a nd c u m ulative
(M 8 0 T -1-4 4 m ) 49 effe c t o f acco u n tin g ch an g es (N 8 1 T -1 -30m ) 218
T o tal re le v a n t co sts to m ak e (N 8 1 P I-2 -4 0 m ) 175
O p p o rtu n ity cost D iversion o f proceeds
S ell o r re w o rk (M 8 0 P I-2 -4 0 m ) 8 See A udit procedures
R ep lac e m en t (N 8 0 T -1-4 5 m ) 106
R ep lac e m en t o f ex istin g m ach in ery D ividends
In crease in b u d g e te d o p eratin g p ro fit (N 8 1 P I-2 -3 0 m ) 173 C ash
Special o rd e r T h ree sig nificant dates a nd e n try , if any, at e a c h
E ffect on o p eratin g in co m e if accep ted (N 80T -5) 108
(N 8 1 P I-2 -2 3 m ) 171 P aid to stock h o ld ers o w n in g stock as o f the re c o rd date
O p e ra tin g income e ffe c t (N 8 0 P I-2 -3 4 m ) 59 (M 8 0 A -1 -34m ) 28
Property
D efalcatio n s G ain and net re d u c tio n in re ta in e d earnings
See R eceiv ab les (N 8 1 P II- 1 -19m ) 185
D eficit D ividends payable

See Q u a si-re o rg a n iza tio n C om p u tatio n o f am o u n ts payable to c o m m o n and cu m u lativ e,
R etain e d earn in g s pa rtic ip a tin g p re fe rred w ith d iv id en d s in a rre a rs given total
d iv id e n d (M 8 0 P II- 1 - 13m) 17
D ep letio n
P ro d u ctiv e-o u tp u t c o m p u te d sam e as d ep reciatio n
(M 8 1 T -1 -17m ) 160
E
D ep reciatio n
See also E rro rs and irreg u larities— E rro rs E arly e x tin g u ish m en t o f d e b t
C o m p a riso n o f straig h t-lin e and su m -o f-th e-y ears-d ig its effe c t on gain or B onds
loss o n sale (M 8 1 T - 1 -14m ) 160 E xtrao rd in ary gain re su ltin g (N 8 0 P II-1 -20m ) 70
C o m p o site G ain (N 80P I- 1 - 15m ) 56
N o g ain o r loss rec o g n iz ed on re tirem e n t o f sin g le assets G ain on re tirem e n t o f b o n d s w ith p re m iu m and b o n d issue c o sts accounts
(N 8 1 T -1 -12m ) 2 /7 a m o rtiz e d straight-line (N 8 1 P I-1 -8m ) 169
233
Index
E arly ex tin g u ish m en t o f d e b t (cont.) E lectro n ic d ata p rocessing

G a in o r lo ss o n in co m e statem en t, as ex trao rd in ary item if E rro r re p o rts (cont.)
m a te ria l (N 8 0 T -4 ) 107 E D P co n tro l gro u p sh o u ld re v ie w and follow -up
G a in o r lo ss on re tirem e n t o f callab le b o n d s (N 8 0 A -1 -3m ) 79
(M 8 1 P II-2 -2 1 m ) 126 E xcep tio n re p o rtin g system h elps a u d ito r c o n d u ct m o re e ffic ie n t a udit
G ain s o r lo sses are e x tra o rd in a ry item s (M 8 0 T -1 -10m) 47 b e ca u se it high lig h ts a b n o rm a l conditio n s
(M 8 0 A - 1 -17m) 26
E a rn in g s p e r sh are (M 8 1 P I- 1 - 18m ) 113 G en eralize d co m p u te r a u d it p ack ag es
C om m on (M 8 1 P I- 1 - 12m ) 112 U sed fo r audits o f clie n ts th at use d ifferin g E D P e q u ip m e n t and file
C o n trast p rim ary and fu lly d ilu ted fo rm ats (M 8 0 A - 1 - 18m) 26
A n tid ilu tiv e secu rities effe c t (M 8 0 T -2 ) 51 H e ad e r label m o st likely to p re v e n t e rro rs b y c o m p u te r o p e ra to r
C o m m o n sto ck eq u iv a len ts e ffe c t on n u m b e r o f sh ares (M 8 1 A -1 -35m ) 140
(M 8 0 T -2 ) 51 Inquiry g iv e s au d ito r p re lim in a ry u n d e rstan d in g o f system
C o n v ertib le secu rities n o t c o m m o n sto ck e q u iv a len ts e ffe c t o n n um ber (N 8 0 A - 1 -12m) 80
o f sh ares (M 8 0 T -2 ) 51 Internal control
F u lly d ilu ted S ep aratio n o f p ro g ram m in g and operatin g fu nctions
C o m p u ta tio n (N 8 1 P I-5 ) 180 C om p en satin g g e n eral con tro ls fo r lack o f p ro p e r separation
C o m p u tatio n in clu d in g c o n v ertib le p re fe rred , co n v ertib le b o n d s, the (N 81A -4) 201
n et in co m e a n d the in co m e tax rate (M 8 0 P I-1 -6m ) 3 H ow ach iev ed (N 8 1 A -4 ) 201
C o n v ertib le secu rities no t co m m o n sto ck e q u iv a len ts rec o g n iz ed only O n -line, real tim e system m o st likely used by la rg e savings b a n k fo r
if d ilu tiv e (M 8 1 T -1 -2 4 m ) 161 c u sto m e rs ’ a ccounts (M 8 1 A -1 -6m ) 137
N u m b e r o f shares u sed in c o m p u ta tio n , in v o lv in g sto ck options, O v erdraw n ch eck in g acc o u n ts p rin t-o u t
an tid ilu tiv e w a rra n ts, sale o f sto ck , a n d c o n v ertib le b o nds C o m p u te r p ro g ra m m e r’s p e rso n al acco u n t n e v er o n prin t-o u t m o st
(N 8 1 P I-5 ) 180 effectiv ely d e te cte d by pe rio d ic re c o m p ilin g o f p ro g ram s from
T reasu ry sto ck m ethod d o c u m e n ted source d e ck s, a nd c o m p a riso n w ith pro g ram s
Q u a rte rly , u se e n d in g m a rk e t p ric e o f c o m m o n as a ssu m ed c u rre n tly in use (M 8 0 A -1 -21 m ) 26
re p u rch ase p ric e w h en it is h ig h e r th an a v erag e m a rk e t price P ayroll
a n d e x ercise p ric e (N 8 0 T -1 -1 1 m ) 103 H ash to ta l
N u m b e r o f shares to b e u sed in co m p u tatio n D e p artm e n t n u m b e r (M 8 0 A -1 -38m ) 28
(M 8 1 P II-2 -2 3 m ) 126 P ro ced u ral co n tro l
P rim ary E x tern al labels to m in im ize d ata o r p ro g ram file d e stru ctio n th ro u g h
C o m m o n sto ck e q u iv a len ts re c o g n iz ed o n ly if d ilu tiv e o p e ra to r e rro r (M 8 1 A -1 -34 m ) 140
(N 8 1 T -1 -31m ) 219 P ro g ra m m e d lim its
C o m p u tatio n (N 8 1 P I-5 ) 180 R eplace hum an e le m en t o f e rro r detectio n in m anual
C o m p u ta tio n in clu d in g co n v ertib le p re fe rred th at is c o n sid e re d a p ro c e ssin g (N 8 0 A -1-4 7 m ) 83
c o m m o n stock eq u iv a len t (M 8 0 P I-1 -5 m ) 3 S oftw are
N u m b e r o f sh ares u sed in c o m p u ta tio n , in v o lv in g sto ck o ptio n s, C o m p ile r (M 8 1 A -1-3 m ) 137
an tid ilu tiv e w a rra n ts, and sale o f sto ck (N 8 1 P I-5 ) 180 S up erv isio n o f sp ecialist em p lo y ees
P referred is co m m o n sto ck e q u iv a len t (N 8 0 P I-1 -4 m ) 54 C P A n e ed n o t b e q u a lifie d to p e rfo rm e ac h o f sp e c ia lis t’s ta sk s , b u t he
Sm all sto ck d iv id e n d an d u n e x ercise d sto ck o p tio n s inv o lved sh ould be able to d e fin e task s and ev alu ate the end
(N 8 0 P I- 1 - 10m) 55 p ro d u c t (M 80A -2) 30
S im p le c ap ital stru ctu re U tility p ro g ram s
In clu d e in c o m p u ta tio n d iv id en d s o n n o n co n v ertib le cu m u lativ e P erfo rm routine pro c e ssin g such as so rtin g a n d m erging
p referred sto ck (N 8 1 T -1 -3 2 m ) 219 (N 8 1 A -1-38m ) 198
W eig h ted -av e ra g e n u m b e r o f sh ares o u tstan d in g
S to ck d iv id e n d tre a te d as o ccu rrin g at b eg in n in g o f y e a r E m in en t d o m a in con d em n atio n
(M 8 1 T -1 -25 m ) 161 G ain (N 81P II-2-34m ) 187
E c o n o m ic o rd e r q u an tity E m p lo y er a nd em p lo y ee re lationships
See Q u an titativ e m eth o d s See also S ocial security
Social S ecurity A ct
EDP A ssistan t b u y e r o rders m erch an d ise w ith o u t e x p re ss o r ap p aren t
See E lec tro n ic d a ta p ro c e ssin g a u th o rity to d o so , b u t head b u y e r displays th e m to see if th e y w ill
sell and th e n m ay not repudiate the co n tract o n the b asis o f the
E lec tro n ic d a ta p ro cessin g a ssistan t b u y e r’s lack o f au th o rity (M 80L -5) 44
See also A IC P A C ode o f P ro fessio n al E th ics— In d ep en d en ce C onflict o f interest
A u d it p ro c e d u re s— A u to m a te d d ata p ro c e ssin g E m p lo y ee d u ty to rev eal (M 8 1 L -1 -30 m ) 151
A u d it p ro c e d u re s— E D P E m p lo y ee no t liable fo r w ro n g fu l re p o sse ssio n o f a u to be ca u se obey in g
A u d it p ro ced u res— E D P te st d a ta m eth o d d ire c t o rd e r o f em p lo y e r (N 8 1 L -1 -16m ) 205
A u d ito r’s re p o rt— O p in io n E m p lo y er is liable to c u sto m er d a m a g ed by e m p lo y e e ’s n eg lig en ce
In tern al c o n tro l— E D P irresp e ctiv e o f e m p lo y e r’s e ffo rts to p re v e n t su ch o r to e x ercise
A c co u n ts receiv ab le reaso n ab le c are (N 8 1 L - 1 - 14m ) 205
B atch co n tro l F oreign m a n u fa c tu re r w ith facility in U .S . is su b ject to federal an d state
S u m o f c ash d e p o sits plu s d isco u n ts tak en b y c u sto m ers w ould be law s ap p licab le to A m erican e m p lo y e es at th e U .S . facility
u sed to v erify accu racy o f p o stin g o f c ash receip ts (N 8 0 L -1 -58m ) 97
re m itta n c e s (M 8 0 A -1 -5 9 m ) 30 Piece ra te s allo w e d in lieu o f hourly ra te s (M 8 1L - 1-58m ) 155
C o m p u te riz ed audit p ro g ram S ervant
U ses to p erfo rm su b stan tiv e te sts o f sales re c o rd s in th e ir m ach in e P h y sical c o n d u ct c o n tro lle d by em p lo y e r
read ab le fo rm (M 8 0 A -3 ) 31 (N 8 1 L - 1 - 15m) 205
D isc files T e rm in atio n
G ra n d fa th e r-fath e r-so n u p d atin g d iffic u lt b ecau se u p d atin g is Suit fo r specific p erfo rm an ce o r b re a ch o f c o n tra c t w ill fail b ecause
d estru ctiv e (N 8 1 A -1 -8m ) 195 su ch c o n tra c t m u st b e in w ritin g and sig n ed by agent o f
E rro r re p o rts e m p lo y e r (M 8 1 L -1 -33 m ) 151
234
Index
E m p lo y er and em p lo y ee re la tio n sh ip s (cont.) E xtraordinary item s (cont.)

W o rk m e n ’s co m p en satio n T a x e ffe c t o f operatin g loss carry fo rw a rd
E x c lu siv e rem ed y n o t a p p licab le if e m p lo y ee in te n tio n a lly in ju red by (M 81P II-2-36m ) 129
e m p lo y e r p erso n ally (M 8 1L - 1-6 0 m ) 155 U n usual a n d in freq u en t p re sen te d n e t o f ta x sep a ra te ly in incom e
W o rk e r’s o w n n e g lig e n ce w ill d e n y re c o v ery , if h e sues u n d e r statem e n t (M 8 0 T - 1 -15m ) 47
co m m o n law (N 8 0 L -1 -5 9 m ) 97
E n g a g e m e n t letter
B efo re u n d ertak in g C P A sh o u ld in fo rm c lie n t o f all sig n ifican t m atters
re la tin g to the e n g ag e m e n t, w h ic h g en erally in clu d es o b je c tiv es,
sco p e , ap p ro ach , ro le o f all p e rso n n el, m a n n e r in w h ich re su lts are
to b e c o m m u n ic ated , tim e ta b le , a n d fee (M 8 0 A -2 ) 30 FA SB S tatem ents
U n d e rstan d in g b e tw ee n c lie n t and a u d ito r as to d e g re e o f resp o n sib ilitie s N o. 2 (M 81A -1 -4 0 m ) 140, (M 8 1 P I- 1 - 14m) 112,
to b e assu m ed b y e ac h set fo rth (M 8 0 A -1 -3 2 m ) 28 (N 8 1 P I- 1 - 12m) 170, (N 8 1 P II-1 -5m ) 183,
(N 8 1 P II- 1 - 10m) 183
EPS N o. 4 (M 8 0 T -1-10m ) 47, (N 8 0 P II-1-20m ) 70,
See E a rn in g s p er share (N 8 0 T -4 ) 107
N o. 5 (M 8 0 P I-1-4m ) 2, (M 8 0 T -1 -25m ) 48,
E q u ip m en t (N 8 0 P I-1 -2m ) 54, (N 80T -3) 107,
See also F ix ed assets (M 8 1 P II-2 -3 7 m ) 129, (M 8 1 T - 1 - 10m ) 160,
R etirem en ts (M 8 1 T -1 -36m ) 162, (N 8 1 P II- 1 - 12m ) 184,
M ay d isco v e r th ro u g h rev iew o f d e p re ciatio n , an aly sis o f d eb its to (N 8 1 T - 1 -14m ) 2 17 , (N 8 1 T -1 -37m ) 2 /9
acc u m u la te d d e p re ciatio n , o r rev iew o f in su ran ce p o licy N o. 6 (M 8 1 P II-2 -3 1 m ) 128,
rid e rs (M 8 0 A -1 -31m ) 27 (M 81P II-2-32m ) 128
V alu es assig n ed to in d iv id u a l m a c h in es in lu m p -su m p u rc h a se include N o. 8 (M 8 0 P I-1 -9m ) 3, (M 8 0 T -1 -9m ) 46,
ap p raisal c o st (M 8 0 P II- 1 -10m ) 16 (M 8 0 T -1 -31m ) 48, (M 8 0 T -1 -32m ) 48,
(N 8 0 P I-1-11m ) 55, (N 8 0 T -1 -14m ) 103,
E rro rs an d irreg u larities (M 8 1 P I- 1 - 17m) 113, (M 8 1 T -1 -3 4 m ) 162,
E rro rs (N 8 1 T -1-27 m ) 218
N e t in co m e (b o o k) e ffe c t as re su lt o f u n d erstatem en ts and N o . 12 (M 8 0 T -1-2m ) 46, (N 8 0 P I-1 -20m ) 57,
o v erstatem en ts o f en d in g in v e n to rie s, d e p re ciatio n and insurance (N 8 0 T -1 -23 m ) 104, (N 8 1 P II-1 -7m ) 183,
in c u rre n t a n d p rio r y e ar (N 8 0 P II-1 -7 m ) 68 (N 8 1 P II-1 -1 1 m ) 184, (N 8 1 T -1 -1 6m ) 2 /7
W o rk in g cap ital e ffe c t as resu lt o f u n d e rstatem e n ts and N o. 13 (M 8 0 P I- 1 -10m) 4, (M 8 0 P I-1 -1 1 m )
o v erstatem en ts o f en d in g in v e n to rie s, d e p re ciatio n a n d insurance (M 8 0 T -1 -7m ) 46, (N 8 0 P I-1- 14 m ) 56,
in c u rre n t a n d p rio r y ear (N 8 0 P II-1 -7 m ) 68 (N 8 0 P I- 1 - 16m) 56, (N 8 0 T -1 -21 m ) 103,
Irreg u larities (N 8 0 T -1 -22m ) 104, (M 8 1 T -1 -8m ) 159,
P e rp e tra te d b y co n tro lle r m o re d iffic u lt to d e te ct th a n if b y c ash ie r, (N 8 1 P I- 1 -16m) 170, (N 8 1 P n -1 -9m ) 183,
in tern al a u d ito r, o r k ey -p u n c h o p e ra to r (N 81P II-2-28m ) 186, (N 8 1 P II-2 -3 3 m ) 187,
(M 8 1 A -1 -5 m ) 137 (N 8 1 T -1 -26m ) 218, (N 81T -5) 222
Q u estio n s arise a b o u t w h e th er m aterial e rro rs, e tc ., e x ist w hen th e re are N o. 14 (M 8 0 P II-1 -15m ) 17, (N 8 0 T -1-28m ) 104,
d ifferen ces b e tw ee n co n tro l a n d su b sid iary re c o rd s, tra n sac tio n s not (M 8 0 T -1 -38m ) 49, (M 8 1 P I-1-4 m ) 110,
su p p o rted by p ro p e r d o cu m e n tatio n , o r d ifferen ces d isclo sed by (M 8 1 T -1 -3 9 m ) 162
co n firm atio n s (N 8 1 A -1-4 5 m ) 199 N o . 15 (N 8 1 P I- 1 - 14m) 170, (N 8 1 T -1 -29m ) 218
N o. 16 (M 8 1 T - 1 - 13m) 160, (N 8 1 T -1-24m ) 218
E states N o. 28 (N 81P II-2-33) 187
See W ills, tru sts, and estates N o. 33 (N 8 0 T -1 -26m ) 104,
(M 8 1 P I-1 -1 m ) 110, (M 8 1 P II-1 -1 m ) 123,
(M 8 1 T -3 ) 164, (N 8 1 P I-1 -6m ) 169,
E stim a te d w arran ty liab ility
See P ro v isio n fo r p ro d u c t w arran ty (N 8 1 P I- 1 - 17m) 171, (N 8 1 T -1-6 m ) 216,
(N 8 1 T -1-7m ) 216
E thics
N o. 34 (M 8 1 P I-1 -1 1 m ) 112,
(N 8 1 P II- 1 -14m) 184
See A IC P A C o d e o f P ro fessio n al E th ics
N o. 3 6 (M 8 0 T -1 -21m ) 48, (M 8 1 T -5 ) 165
E vid en ce
F ed eral F a ir L a b o r S tandards A ct
See also G en erally acc e p te d au d itin g stan d ard s— S tan d ard s o f fie ld w ork
A llow s piece rates in lieu o f hourly rates (M 8 1 L -1 -58m ) 155
C o m p eten t
M u st b e b o th v a lid a n d relev an t (M 8 0 A -1 -1 m ) 25
F ederal incom e tax
See also E x tra o rd in a ry item s
E x p en se re c o g n itio n p rin cip le T a x practice
A sso ciatin g cau se and e ffe c t e x am p le is sales co m m issio n s A llocation
(M 8 1 T -1-3m ) 159 D e ferred incom e ta x as re su lt o f d ifferen t d e p re ciatio n m e th o d s fo r
acco u n tin g a nd fo r tax (M 8 1 P II-2 -3 3 m ) 129
E x tra o rd in a ry item s D e fe rre d tax a s re su lt o f ro y a ltie s tax ed w hen co llected bu t incom e in
See also E arly e x tin g u ish m en t o f d e b t— B onds p e rio d e arn ed (M 81 P I-1 -1 9 m ) 113
E arly ex tin g u ish m en t o f d e b t D eferred taxes from d e p re ciatio n d ifferen ces c h arg ed to
G ain s o r losses (M 8 0 T - 1 - 10m ) 47 e x p en se (N 8 1 P I-1 -9m ) 169
G ain o r lo ss on e arly e x tin g u ish m en t o f d e b t (N 8 0 T -4 ) 107 Interperio d
In freq u en t and u n u su al (N 8 0 T - 1 -13m ) 103 D eferred m ethod (M 8 0 T - 1 - 12m ) 47
P la n t d e stro y ed by e ru p tin g v o lcan o (m in u s in su ran ce) re p o rte d net o f T rea te d as ex p en se (N 8 1 T -I-3 5 m ) 2 /9
tax (N 8 1 P II-2 -3 9 m ) 188 Intraperiod
R ep o rte d sep arately b e fo re cu m u lativ e e ffe c t o f a cc o u n tin g ch an g es and B ec a u se item s in tax ab le in co m e p re sen te d in d ifferen t sections o f
afte r d isco n tin u ed o p eratio n s (M 8 1 T -1-2 2 m ) 161 statem ents (N 8 1 T -1-2 8 m ) 218
235
Index
F ederal in co m e tax Federal income tax

A llo catio n (cont.) Corporations (cont.)
C u m u la tiv e effect o f c h an g in g d e p re ciatio n m e th o d s, n et o f ta x , on n o t req u ired to m ain tain o r im p ro v e th eir sk ills in th e ir p re sen t
in co m e statem en t (M 8 0 T -1 -13m ) 47 p o sitio n (M 8 0 P II-2 -2 6 m ) 19
P e rm a n e n t d ifferen ces E x change o f stock fo r b u ild in g results in no g ain
M u n icip al o b lig a tio n ’s in terest (N 8 0 T -1 -8 m ) 102 (M 8 1 P II-3 -5 3 m ) 131
C o n tin g en cies Federal incom e tax not dedu ctib le (N 8 0 P I-3 -5 4 m ) 62
Pro b ab le G ain (S ec. 1231) (M 8 1 P II-3 -4 5 m ) 130
A ccru e tax es and c h arg e incom e w ith b e st estim ate G ifts (bu sin ess) d ed u ctib le lim ited to $25 p e r c u sto m er
(N 8 0 P M -2 m ) 54 (N 80 P I-3 -5 2 m ) 62
C o rp o ratio n s G ifts to c ustom ers de d u ctib le lim ited to $25 e ac h
A ccu m u lated earn in g s a n d profits (M 8 1 P II-3 -4 3 m ) 130
D e crea sed by c o st o f m a rk etab le secu rities d istrib u te d as a Incom e tax expense y e a r o f d isp o sa l o f segm ent
d iv id en d (M 8 0 P II-2 -2 5 m ) 19 (M 8 1 P II-2 -4 0 m ) 130
A ccu m u lated earn in g s tax Insurance p rem ium s o n p re sid en t w ith c o rp o ra tio n as b e n efic iary are
S u b tractio n s in arriv in g a t acc u m u la te d tax ab le in co m e include n o t dedu ctib le (N 8 0 P I-3 -5 2 m ) 62
fed eral in co m e ta x , d iv id en d s p a id , a n d a ccu m u lated earnings Issuance o f stock fo r b u ild in g
c re d it, b u t n o t c ap ital lo ss c arry b ack N o g ain o r loss (N 80 P I-3 -4 8 m ) 61
(M 8 0 P II-2 -3 5 m ) 20 In v estm en t cre d it qu a lifie d investm ent
A ccu m u lated earn in g s u n re a so n a b le — stock d iv id e n d s no t (M 8 1 P II-3 -5 9 m ) 132
re le v a n t (M 8 1 L -1-2 5 m ) 150 In v estm en t tax credit
B ad d e b t d e d u ctio n m ax im u m (N 8 1 P I-3 -4 2 m ) 175 P u rch a se o f used m achine (N 8 0 P I-3 -5 0 m ) 61
B asis o f p ro p erty tra n sfe rre d by p e rso n fo rm in g c o rp o ra tio n is M u n icip al b o n d interest n o t ta xable (N 8 0 P I-3 -5 4 m ) 62
tra n s fe ro r’s b a sis (8 0 P I-3 -4 3 m ) 61 N et lo n g -term capital loss fro m sale o f m ark etab le securities not
B o n d d isco u n t am o rtiz a tio n first 1/2 y ear dedu ctib le (N 80P I-3-53m ) 62
(M 8 1 P II-3 -5 6 m ) 132 N et o p e ra tin g loss (M 8 1 P II-3 -5 8 m ) 132
B onds retired e arly a n d tax ab le in co m e resu ltin g C arry o v e r not affected b y u n tax ed d ividends re c eiv ed from
(M 8 1 P II-3 -4 4 m ) 130 unrelated d om estic c o rp o ra tio n s (N 8 0 P I-3 -4 2 m ) 60
C ap ital g a in s d e d u ctio n c o m p u ta tio n in v o lv in g n e t lo n g -term capital N et op e ra tin g loss c arry o v e r
lo sse s, n et sh o rt-term c ap ital g a in s , S ectio n 1231 g a in s, and S h o rt-term capital g ains d ed u cted fro m loss fro m o p e ra tio n s in
S ectio n 1245 lo sses (M 8 0 P II-2 -2 8 m ) 19 d eterm ining (M 8 0 P II-2 -3 6 m ) 20
C ap ital loss N e t o p e ra tin g loss d e d u ctio n (N 8 1 P I-3 -4 7 m ) 176
L o ng-term O rg an izatio n costs
O n secu rities, b u t no t a d e aler in secu rities a n d no o th e r capital A m o rtiza tio n fo r m in im u m p erio d (5 years) fo r tax a nd 10 y e ars for
gains o r lo sses since b e g in n in g o p e ra tio n s, m u st c arry the b o o k incom e (N 8 0 P I-3 -5 5 m ) 62
loss fo rw a rd five y e ars, treatin g it as sh o rt-term O rg a n iz atio n costs m ay be w ritte n -o ff o v er n o t less than 5 y e ars in
(N 8 0 P I-3 -4 1 m ) 60 d eterm ining ta x a b le in co m e (M 8 0 P II-2 -3 4 m ) 20
C h aritab le c o n trib u tio n s a u th o riz e d b u t u n p aid an d c arry o v e r O rgan izatio n ex p en ses d e d u cted ra ta b ly o v e r 6 0 m onths b e g in n in g
(M 8 1 P II-3 -4 8 m ) 131 w ith m o n th it b e g an b u sin ess, e v en tho u g h ex p en ses in cu rred
C h aritab le c o n trib u tio n s d e d u ctio n lim ited to 5% o f tax ab le la te r (M 8 1 P II-3 -5 5 m ) 132
in co m e (M 8 0 P II-2 -2 2 m ) 18 R eo rg an izatio n
L im itatio n N o g a in o n ex ch an g e o f pro p erty w ith an a d ju sted b a sis less than
5% o f tax ab le in co m e (p lu s d iv id e n d s re c eiv ed d e d u ctio n , in this that o f stock o f a n o th e r co rp o ratio n re c eiv ed , a nd b a sis o f the
c ase) (N 8 0 P I-3 -4 7 m ) 61 stock is b a sis o f the pro p erty (N 8 0 P I-3 -4 9 m ) 61
C red it fo r foreign in co m e tax es (N 8 1 P I -3 -5 5 m ) 177 R etain ed e arn in g s— U n a p p ro p ria te d am o u n t on return
C u rre n t liab ility c o m p u ta tio n in v o lv in g tim in g d ifferen ces fro m (N 81 P I-3 -4 5 m ) 176
d ep reciatio n a n d in stallm en t sale (M 8 0 P II-1 -7 m ) 16 Sale o f m ach in ery a b o v e c o st re su lts in section 1231 g a in (o f
D ed u ctio n s include g ifts to c u sto m ers no t e x ce e d in g $25 e ac h and d ifferen ce b e tw ee n c o st and sale price) an d ord in ary in co m e fo r
tra v e l ex p en se to o ffer testim o n y re la tiv e to p ro p o se d leg islatio n , a m o u n t o f d e p re ciatio n ta k e n (M 8 0 P II-2 -2 3 m ) 18
bu t n o t p o litical co n trib u tio n s (M 8 0 P II-2 -3 9 m ) 20 S alary re a so n a b le n e ss a ttack (M 8 0 L -1 -7m ) 35
D ep re cia tio n d ed u ctio n assu m in g c an ju s tify c h an g in g e stim ate d S ection 1231 g ain an d ord in ary in co m e re su ltin g fro m sale o f
life (N 8 1 P I-3 -5 0 m ) 176 m ach in e (N 8 1 P I-3 -5 7 m ) 177
D ep reciatio n d ifferen ces b etw een b o o k s and tax n o t tax ab le S ection 1231 g ain on sale o f a p artm e n t b u ilding
(N 8 0 P I-3 -5 4 m ) 62 (N 80P I-3-44m ) 61
D ep reciatio n re c ap tu re u pon sale is o rd in ary in co m e S pecial d eductions
(M 8 1 P II-3 -4 5 m ) 130 D iv id en d s re c eiv ed is 85% o f d iv id e n d s fro m u n affiliated do m estic
D ep reciatio n c o rporations (M 8 0 P II-2 -2 1 m ) 18
A d d itio n al first-y ea r a n d su m -o f-th e-y ears-d ig its fo r first S u b c h a p te r S
year (N 8 0 P I-3 -5 6 m ) 62 E a c h sh areh o ld e r m u st in clu d e in h is in dividual g ross in c o m e his
A d d itio n al first y e ar plu s d o u b le -d e c lin in g b alan ce (d ed u ctin g the p roportionate share in the ta xable incom e
“ a d d itio n a l” ) fo r o n e -h a lf y ear (N 80P I-3-46m ) 61
(M 8 0 P II-2 -4 0 m ) 20 E a c h sh areh o ld e r re p o rts his share o f the c o rp o ra tio n ord in ary
D iv id en d s in co m e and o f the lo n g -term capital g ain
O rd in ary d iv id en d s fro m am o u n t p aid less th an c u rre n t n et incom e (M 8 1 P II-3 -4 6 m ) 130
e v en th o u g h to tal d e fic it (N 8 0 P I-3 -5 7 m ) 62 L o n g -term cap ital g ain a m o u n t e a c h sh areh o ld e r should
D iv id en d s receiv ed d ed u ctio n (N 8 0 P I-3 -5 1 m ) 61, re p o rt (N 8 1P I-3 -4 4 m ) 175
(N 8 1 P I-3 -4 3 m ) 175 S h a re h o ld e r’s b asis fo r stock (M 8 1 P II-3 -5 4 m ) 132
N o t av ailab le fro m c o rp o ra tio n n o t su b ject to U S in co m e ta x S h a re h o ld e r’s incom e (rep o rted as o rdinary in co m e) is h is o r h e r
(N 8 0 P I-3 -5 2 m ) 62 share o f taxable incom e from operatio n s a nd short-term capital
85% o f d iv id en d s re c eiv ed fro m n o n affiliated d o m estic g a in s (M 8 0 P II-2 -2 7 m ) 19
co rp o ratio n s (M 8 0 P II-2 -3 8 m ) 20 S h a re h o ld e r’s in co m e w ould be his share o f taxable incom e (cash
E d u c a tio n ex p en ses (in clu d in g tu itio n , tex tb o o k s, tra v e l, and distrib u tio n s g iv e n are irrelevant)
lab o rato ry fees) p a id fo r e m p lo y e es are d e d u ctib le e v en though (M 8 0 P II-2 -3 3 m ) 20
236
Index
Federal income tax F ed eral incom e tax

Corporations (cont.) Ind iv id u al (cont.)
Sole sh areh o ld er, w h o receiv ed c ash d istrib u tio n s ex ce e d in g h om e a ttending g rade school (N 8 1P II-3-45m ) 189
cu rren t tax ab le in co m e, m u st in clu d e (as lo n g -term cap ital C h aritab le con trib u tio n s lim it is 50% o f ad ju sted gross incom e
g ain ) in his in d iv id u al re tu rn th e c o rp o ra tio n ’s n et long-term (M 8 0 P I-3 -5 1 m ) 10
cap ital gain o v e r n e t sh o rt-term cap ital lo sses less th e capital C h ild c are c re d it (lim it su rp a ssed here)
g a in s tax es p a id by th e c o rp o ra tio n (N 8 1 P II-3 -4 9 m ) 190
(N 8 0 P I-3 -4 5 m ) 61 C h ild c are cre d it o f 20% o f day c are c en ter and h om e clean in g service
U n d istrib u ted c ap ital in co m e (M 8 1 P II-3 -4 7 m ) 131 c o sts (M 8 1 P I-3 -5 9 m ) 120
T a x a b le in co m e (N 8 1 P I-3 -5 2 m ) 177 C hild c are c redit m a x im u m fo r tw o c h ild re n is 20% o f
T ax ab le incom e c o m p u ta tio n g iv e n b o o k in co m e b e fo re in co m e tax $ 4 ,0 0 0 — $ 800 (N 8 0 P II-2 -3 4 m ) 72
a n d c h aritab le c o n trib u tio n e x ce e d in g 5% a llo w ab le C hild sup p o rt p aym ents not de d u ctib le (N 8 0 P II-2 -2 4 m ) 71
(M 8 0 P II-2 -2 2 m ) 18 C redit fo r the eld erly o n Sched. R (N 8 1 P II-3 -5 8 m ) 191
T a x a b le in co m e c o m p u ta tio n g iv en b o o k in co m e, loss on sale o f D am ages fo r p e rso n al inju ries n o t included in gross incom e
b u ild in g , g ain o n sale o f lan d , a n d loss on sale o f lo n g -term (N 8 0 P II-2 -3 7 m ) 73
in v estm en ts (M 8 0 P II-2 -3 2 m ) 19 D e ath b e n e fit e x c lu sio n lim ited to $ 5 ,0 0 0 o f w id o w ’s re c eip ts from
T ax ab le in co m e g iv e n a n d acco u n tin g in co m e ask ed co m p a n y (e m p lo y e r o f husb an d ) (M 8 1P I-3-46m ) 118
(N 8 0 P I-3 -5 4 m ) 62 D e p re cia tio n on tools (no re im b u rse m e n t) used in w o rk , u n io n d ues,
T a x a b le in co m e, in v o lv in g n et in c o m e , m u n icip al in terest, interest on and fees fo r incom e tax ad v ice m iscellan eo u s d e d u ctio n on
lo a n to p u rch ase m u n icip als, ta x , g ain o n life in su ran ce on S ch ed . A (N 8 1 P II-3 -5 5 m ) 190
o ffice r (M 8 1P II-3 -4 2 m ) 130 D isability incom e ex clu sio n (N 8 1 P II-3 -6 0 m ) 191
T o tal tax ab le in co m e, in v o lv in g o p e ra tin g in co m e and short- and D iv id en d exclu sio n n o t ap p licab le to R E IT o r co rp . operatin g o n ly in
lo n g -term cap ital gain s and lo sses P u e rto R ico (N 8 1P II-3 -5 9 m ) 191
(N 8 1 P I-3 -5 1 m ) 177 D iv id e n d incom e includes th at fro m foreign c o rp o ra tio n s (b u t not that
T rea su ry sto ck w h ic h con stitu tes a re tu rn o f c ap ital o r a c ap ital g a in distrib u tio n
N o g ain re c o g n iz ed on sale (M 8 0 P II-2 -3 7 m ) 20 fro m a m utual fu n d ), h o w e v er the d iv id e n d e x clu sio n m ay not
T reasu ry sto ck sale re su lts in n e ith e r in co m e n o r c ap ital g ain e x ce e d the divid en d s re c eiv ed from ta x a b le do m estic
(M 8 1 P II-3 -4 1 m ) 130 c o rp o ra tio n s e v en o n a jo in t re tu rn (M 8 0 P I-3 -4 4 m ) 9
U n d istrib u ted p e rso n al ho ld in g c o m p a n y incom e D iv idends e x clusion from ta xable incom e o f $ 100
(M 8 1 P II-3 -6 0 m ) 132 (M 8 1 P I-3 -4 5 m ) 117
D eferred in co m e tax D ividends on life insu ran ce not ta x a b le incom e
C h an g e as resu lt o f d ifferen t d e p re ciatio n m eth o d s fo r tax a nd for (M 8 1 P I-3 -4 5 m ) 117
acco u n tin g (N 8 0 P I- 1 - 19m ) 56 E arn ed incom e cre d it (N 8 1 P II-3 -5 7 m ) 191
E stim ates E m p lo y e e ’s ex p en ses o f tra v e l a nd lo d g in g e x ce e d in g re im b u rse m e n t
State e stim ate d , use ro u n d am o u n t o r treasu ry g u id elin e de d u ctib le (N 80 P II-2 -3 1 m ) 72
(N 8 1 A -1-4 1 m ) 198 E xcess item ized ded u ctio n s o v e r zero b ra c k et a m o u n t d e d u cted from
In d iv id u al ad ju sted gross to arrive at tax tab le incom e
A d ju sted gro ss in co m e d o e s n o t in clu d e in terest on m u n icipal (M 8 1 P I-3 -5 2 m ) 118
o b lig atio n s o r p e rio d ic p ay m en ts fo r alim o n y , b u t d o e s include E x ch an g e o f stock o f o ne c o rp o ra tio n fo r th a t o f another as re s u lt of
c h ild su p p o rt p a id as a re su lt o f a div o rce d ecree c o rp o ra te re o rg a n iz a tio n re su lts in n o re c o g n iz ed g a in and b a sis
(M 8 0 P I-3 -4 7 m ) 9 re m a in s sam e (M 8 1 P II-3 -5 0 m ) 131
A g reem en t-n o t-to -co m p ete p ay m en ts are o rd in ary incom e E x e m p tio n s fo r ta x p a y ers o n jo in t re tu rn , o ne 6 6 , son and
(N 8 1 P II-3 -4 4 m ) 189 d a u g h te r (M 8 1 P I-3 -5 5 m ) 119
A lim o n y indefinite p e rio d ic re c eip ts in clu d ed in tax ab le E x e m p tio n s
in c o m e (N 8 1 P II-3 -4 2 m ) 189 Jo in t re tu rn c o n sid e rin g a g e, d a u g h te r (fu ll-tim e stu d en t w ith
A lim o n y indefinite p e rio d ic p a y m e n ts d ed u ctib le e v en th o u gh does incom e o f $ 6 500 p ro v id in g 25% o f h e r o w n su p p o rt), and
no t item ize (N 8 1 P II-3 -4 3 m ) 189 n iece w ith no incom e (M 8 0 P I-3 -6 0 m ) II
A lim o n y perio d ic p a y m e n ts d e d u ctib le fro m g ro ss in co m e in arriving G ain o n ex ch an g e o f stock (in c o n n ec tio n w ith re c ap italiza tio n o f
a t ad ju sted g ro ss in co m e (N 8 0 P II-2 -2 4 m ) 71 c o rp o ra tio n ) fo r o th e r sto ck a nd b onds
B asis o f sto ck tran sferred to him by c o rp o ra tio n he fo rm ed is c ash he (N 8 1 P I-3 -4 1 m ) 175
p a id plu s ad ju sted b a sis o f p ro p e rty he tran sferred G ain o n sale o f d ep reciab le p e rso n al p ro p e rty u sed in ta x p a y e r’s trad e
(N 8 0 P I-3 -4 3 m ) 61 o r b u sin ess w ill re s u lt in ord in ary in c o m e to the ex ten t o f
C ap ital gains d e p re ciatio n tak en a fte r 1961 (recapture) an d a ny a d d itio n a l g ain
L o n g -te rm su rv iv in g re d u c ed b y 60% and ad d ed to salary in tre a te d as Sec. 1231 g a in su b ject to possib le c ap ital gain
arriv in g at ad ju sted gross in co m e tre a tm e n t if gains from sales o f su ch assets ex ce e d losses
(N 8 0 P II-2 -2 7 m ) 71 (M 80P I-3-43m ) 9
C asu alty loss d e d u ctio n (M 81 P I-3 -4 9 m ) 118 G ain (reco g n ized ) o n sale o f re sid en c e re d u c ed b y pu rc h a se o f m ore
C asu a lty loss less in su ran ce reim b u rse m e n t a n d less $10 0 flo o r is e x p en siv e new resid en ce a nd by ex clu sio n to ta x p a y ers o v e r
d e d u ctib le in y e a r o f in su ran ce settlem en t ra th e r th a n y e ar o f 55 (N 8 0 P II-2 -2 3 m ) 71
accid en t (M 8 0 P I-3 -5 4 m ) 11 G ift sold b e tw ee n d o n o r’s b a sis a nd fa ir m a rk e t value at d ate o f gift
C asu a lty loss o f a u to u sed in p a rt fo r busin ess re su lts in n o capital g ain o r loss (M 8 1 P I-3 -4 3 m ) 117
(N 8 0 P II-2 -3 5 m ) 72 G ift sold b e tw ee n d o n o r’s b a sis and fa ir m a rk e t value at d ate o f gift
C asu alty lo ss on fu lly in su red p e rso n al a u to n o t d ed u ctib le by resu lts in n o g ain o r loss (N 8 0 P II-2 -2 9 m ) 71
ta x p a y er w ho d id no t no tify h is in su ran ce co m p a n y fo r G ra n t fo r po st-d o cto ral re sea rc h from a tax -e x e m p t e d u ca tio n a l
in d em n ity (N 8 0 P II-2 -3 6 m ) 72 o rg a n iz a tio n not in cluded in g ross incom e
C h aritab le c o n trib u tio n s d ed u ctio n in v o lv in g a p p reciated lan d d o nated (N 8 0 P II-2 -2 1 m ) 70
to ch u rc h , etc. (M 8 1 P I-3 -5 0 m ) 118 H ead o f ho u seh o ld
C h aritab le c o n trib u tio n s include co n trib u tio n to q u a lifie d ch arity by U n m arried m an c o n trib u te s o v e r o n e -h a lf his p a re n ts’ su p p o rt in
c re d it card ch arg e d u rin g tax y e a r e v en th o u g h th e c re d it card th e ir separate h o u seh o ld (M 8 0 P I-3 -4 1 m ) 8
o b lig a tio n w as n o t p a id u n til th e n ex t y e a r b u t do n o t include In te re st ex p en se dedu ctio n inclu d es p en alty fo r p re p a y m e n t o f
tu itio n to p aro ch ial school o r co n trib u tio n to need y fam ily m o rtg ag e bu t n o t interest o n loan to purchase m u nicipal
(M 8 0 P I-3 -5 0 m ) 10 b onds (M 8 0 P I-3 -5 8 m ) 11
C h aritab le c o n trib u tio n (up to $ 5 0 m o n th ) fo r fo reig n stu d en t liv in g in In terest incom e includes interest c re d ite d in p a ssb o o k savings account
237
Index
Federal income tax Federal incom e tax

Individual (cont.) In dividual (cont.)
an d a p en alty fo rfeitu re o f in terest fo r p re m a tu re w ithdraw al a p p re ciatio n de d u ctib le in y e a r p a id , but n o t special a ssessm ent
w o u ld b e tre a te d as a d ed u ctio n in a rriv in g a t a d ju sted gross fo r sew e r system (M 81P I-3-57m ) 119
in co m e (M 8 0 P I-3 -4 9 m ) 10 R eal e state taxes u n p a id b u t p ro rated on n u m b e r o f d ays o n closing
In te re st in co m e in clu d es in terest on a re fu n d o f fed eral in com e tax, statem e n t fo r sale d ed u ctib le on S ched. A
in terest on an aw ard fo r p e rso n al in ju ries, a n d in terest on U .S . (N 81 P II-3 -5 1 m ) 190
sav in g s b o n d s, b u t no t m u n icip al b o n d in terest R ealty ta x e s (p ro rated on n u m b e r o f d ays) p a id b y b u y e r fo r y e a r o f
(M 8 0 P I-3 -4 8 m ) 10 p u rc h a se are d e d u ctib le (N 8 1 P II-3 -5 6 m ) 190
In terest on b an k lo a n (p ro ceed s u sed to p u rc h a se U .S . sav ings bon d s), R en t tax ab le w hen re c eiv ed , a nd 1/2 ex p en ses o f tw o ap artm en t
o n in stallm en t a cc o u n ts, o n h o m e m o rtg ag e , and p o in ts p aid to b u ild in g (one in w h ic h ta x p a y er resid es) p lu s any e x p en se s
o b ta in m o rtg ag e d ed u ctib le in y e a r p aid specific to the re n te d ap artm en t dedu ctib le in a rriving at net
(M 8 1 P I-3 -4 1 m ) 117 re n ta l incom e (M 8 1 P I-3 -5 3 m ) 119
In te re st on m u n icip al b o n d s n o t tax ab le in co m e R ental o f o ne o f tw o id en tical ap artm e n ts in tw o -fam ily house results
(M 8 1 P I-3 -4 5 m ) 117, (N 8 0 P II-2 -2 4 m ) 71 in a djusted g ross incom e afte r co n sid eratio n o f ren t re c eiv ed , 1/2
In te re st on sav in g s acc o u n ts ta x ab le (M 8 1 P I-3 -4 5 m ) 117 (real esta te tax es, fire in su ra n ce , a nd d e p re ciatio n ), and pain tin g
In v e stm e n t in terest d e d u ctio n (N 8 0 P II-2 -3 0 m ) 72 o f re n ta l ap artm en t (N 8 0 P II-2 -4 0 m ) 73
L ife in su ran ce p ro ceed s re c eiv ed b y a spouse in in sta llm e n ts o v e r 25 R esid e n t o w n e r o f tw o -fam ily h om e c a n d e d u ct o n e -h a lf o f ex p en se s
y e ars life ex p ec ta n c y e x clu d ab le fro m g ro ss in co m e to ex te n t o f o f en tire b u ilding a nd all e x p en se s o f re n te d first flo o r o n S ched.
1/25 o f face a m o u n t plu s $ 1 ,0 0 0 w id o w ’s sp ecial E (N 8 1 P II-3 -4 7 m ) 189
ex clu sio n (N 8 0 P II-2 -2 8 m ) 71 R esid en t o w n e r o f tw o fam ily h om e c an d e d u ct re a lty tax es and
L iq u id atin g d istrib u tio n in th is c ase p a rtia lly ta x a b le as o rdinary m o rtg ag e interest not ap p licab le to re n te d first flo o r as item ized
in co m e and as c ap ital g ain (N 8 1 P I-3 -4 8 m ) 176 ded u ctio n s on Sched. A (N 8 1 P II-3 -4 8 m ) 189
L o n g -te rm cap ital g a in d ed u ctio n is 60% o f th e su rv iv in g n e t R esid en tial energy c re d it o f 15% o f insulation a nd autom atic setback
lo n g -term cap ital g ain afte r c o m b in in g a n et sh o rt-term capital th e rm o sta t c o sts, b u t not alu m in u m sid in g o r used storm
lo ss (M 8 0 P I-3 -4 2 m ) 9 w indow s (M 8 1 P I-3 -5 8 m ) 119
L o n g -te rm cap ital g a in re a liz ed fro m sale o f g ift (p a rtn e rsh ip interest) S a le s ta x p a id o n new c a r a d d ed to am o u n t in O p tio n a l S a le s T a x
a b o v e d o n o r’s b a sis (N 8 1 P I-3 -5 6 m ) 177 T a b le to d eterm in e ded u ctio n (M 8 1 P I-3 -5 4 m ) 119
L o n g -te rm capital g a in tax ab le a m o u n t co m p u ta tio n S e lf-em p lo y m en t n e t earnings (N 80 P II-2 -2 6 m ) 71
(M 8 1P I-3 -5 1 m ) 118 S e p a ra tio n ag reem en t m o nthly re c eip ts (o th e r th a n c hild support)
L o n g -te rm cap ital lo ss c arry o v e r (N 8 1 P II-3 -4 1 m ) 188 in clu d ed in g ross incom e (M 8 1 P I-3 -4 2 m ) 117
M ed ic a l ex p en ses c o m p u ta tio n in v o lv in g the 1% a n d 3% lim its and S tate a nd lo cal incom e tax d ed u ctio n includes such tax es w ithheld
m ed ical care in su ran ce (M 8 0 P I-3 -5 2 m ) 10 d u rin g the tax y e a r a nd assessm en ts p aid d u rin g th a t y e ar fo r
M ed ical ex p en se d e d u ctio n (N 8 0 P II-2 -3 2 m ) 72, p rev io u s y e a r’s ta x e s, bu t not am o u n ts p a id in the next y e ar w ith
(M 8 1 P I-3 -4 8 m ) 118, (N 8 1 P II-3 -5 4 m ) 190 the ta x return o r refu n d s o f p rev io u s years ’ taxes
M ed ic a l ex p en ses in clu d e th o se p a id fo r an in d iv id u al q u a lify in g as a (M 8 0 P I-3 -5 6 m ) 11
d e p en d e n t e v en th o u g h an e x em p tio n fo r him m ay n o t be cla im ed S tate a nd local incom e tax es w ith h e ld and a ssessm ent o f such fo r p rio r
b e ca u se he h as g ro ss in co m e o f $ 1 ,0 0 0 o r m ore y e a r dedu ctib le in y e a r p a id o r w ith h e ld , a nd re fu n d o f su ch fo r
(M 8 0 P I-3 -5 3 m ) 10 p rio r y e a r a dded to in co m e (M 8 1 P I-3 -5 6 m ) 119
M ed ic a l ex p en se re im b u rse m e n t fro m e m p lo y e r’s a cc id e n t and h ealth S tock d ividend results in b asis allo c ate d b e tw ee n old (co m m o n ) and
p la n no t in clu d ed in gross in co m e (N 8 0 P II-2 -3 7 m ) 73 new (p referred ) sh ares o n relativ e m a rk e t values
M isc e lla n eo u s d e d u ctib le e x p en se s in clu d e sp ec ia liz ed w o rk c lo th e s, (N 8 0 P II-2 -2 2 m ) 71
u n io n d u e s, a n d c o st o f in co m e ta x p re p a ra tio n S tock re c eiv ed fo r serv ices in cluded in taxable incom e at m a rk e t value
(N 8 0 P II-2 -3 8 m ) 73 a nd th a t b e co m es b a sis o f the stock
M o v in g ex p en ses o f h o u seh u n tin g trip s and tem p o rary h o u sin g to (N 8 1 P I-3 -4 6 m ) 176
a cc e p t new p o sitio n d ed u ctib le u p to $ 1 ,5 0 0 S to c k h o ld e r reports d iv id e n d incom e (before e x clu sio n ) o f differen c e
(N 8 1 P II-3 -4 6 m ) 189 b e tw ee n his c o st o f land sold to him b y co rp o ra tio n and its fa ir
M u ltip le su p p o rt ag re em en ts a llo w any o ne o f th ree sons w ho m a rk e t value (M 8 1 P II-3 -5 7 m ) 132
co n trib u te m o re th a n 10% o f th e su p p o rt to claim the S u b c h a p te r S c o rporation
e x em p tio n (N 8 0 P II-2 -3 3 m ) 72 E a c h sh areh o ld er m u st in clu d e in h is gross incom e his
N et e arn in g s fro m self-e m p lo y m e n t w o u ld n o t in clu d e a d ed u ctio n fo r p ro p ortionate share in the taxable incom e
federal self-e m p lo y m e n t tax p a id (M 8 0 P I-3 -4 5 m ) 9 (N 8 0 P I-3 -4 6 m ) 61
N et lo n g -term c ap ital lo ss 50% d e d u ctib le a g ain st o rd in ary incom e Sole shareholder, w ho re c eiv ed c ash d istrib u tio n s ex ce e d in g
an d n e t sh o rt-term cap ital lo ss fu lly d ed u ctib le c u rre n t taxable in c o m e , m u st include (as lo n g -term cap ital
(N 8 0 P II-2 -2 5 m ) 71 g ain ) in his in d iv id u a l re tu rn the c o rp o ra tio n ’s n e t long-term
N e t re n ta l incom e o f o w n e r-ta x p a y er re sid in g in h is o w n ap artm en t cap ital g ain o v e r n e t sh o rt-term capital lo sse s less the capital
b u ild in g w o u ld n o t in clu d e a d ed u ctio n (d e te rm in e d by gains taxes p a id by the c o rp o ra tio n
allo catio n ) fo r fu el o r d e p re ciatio n o f h is o w n ap artm en t (N 8 0 P I-3 -4 5 m ) 61
(M 8 0 P I-3 -4 6 m ) 9 S u rv iv in g spouse statu s (M 8 1P I-3-44m ) 117
N e t sh o rt-term c ap ital loss fully d e d u ctib le a g ain st o rd in a ry incom e T ax d e fic ie n cy interest is item ized d e d u ctio n , b u t not a d ditional
a n d n e t lo n g -term c ap ital lo ss 50% d e d u ctib le federal ta x , late filin g p e n alty , o r n eg lig en ce penalty
(N 8 0 P II-2 -2 5 m ) 71 (N80Pn-2-39m) 73
O p tio n a l S ales T a x T a b le “ fam ily s iz e ” c o lu m n selected not T ax ta b le in co m e co m p u ta tio n g iv e n a djusted g ross incom e and
in flu en ced by ex em p tio n s fo r b e in g o v e r 65 a n d “ in c o m e ” line item ized ded u ctio n s (M 8 0 P I-3 -5 9 m ) 11
selected is in flu en c e d by b o th a d ju sted g ro ss in co m e a nd social T h e ft loss item ized d e d u ctio n o n jo in t retu rn is fa ir v alu e o f item s
secu rity b e n efits re c eiv ed (M 8 0 P I-3 -5 5 m ) 11 sto len less $10 0 (N 8 1 P II-3 -5 0 m ) 190
P en sio n p lan b e n efits re c eiv ed as an ann u ity e x ce e d em p lo y ee T o tal incom e from p artn e rsh ip (N 8 1 P I-3 -5 8 m ) 178
c o n trib u tio n s w ith in th ree y e ars an d are e x clu d ed fro m gross U nem p lo y m en t b e n efits tax ab le a m o u n t c o m p u ta tio n a d d ed to gross
in co m e until the en tire c o n sid e ra tio n h as b e en reco v ered incom e (M 8 IP I-3 -4 7 m ) 118
(M 8 0 P I-3 -5 7 m ) 11 U nion in itiation fee and d u e s d ed u ctib le as m iscellan eo u s ded u ctio n s
Prize a n d d iv id en d s in clu d ed in ad ju sted g ro ss in c o m e , b u t not o n S ch ed . A , b u t not v o lu n tary b e n efit c o n trib u tio n s to
sch o larsh ip , lo a n fro m c o lleg e a id , o r su p p o rt fro m u n io n (N 8 1 P II-3 -5 2 m ) 190
p a re n ts (M 8 1 P I-3 -6 0 m ) 120 W o rk m e n ’s co m p e n sa tio n not included in g ross incom e
P ro p erty tax es o n re sid en c e , on au to m o b ile , and o n la n d h eld fo r (N 8 0 P II-2 -3 7 m ) 73
238
Index
Federal in co m e tax Federal sec u rities reg u latio n

In d iv id u al (cont.) F oreign c itiz en (cont.)
Z e ro b ra c k et am o u n t fo r h ead o f h o u seh o ld c o m p a n y o f his acq u isitio n and file inform ation as to id e ntity and
(N 8 1 P II-3 -5 3 m ) 190 b a ck g ro u n d w ith SE C (N 8 0 L -1-41 m ) 94
P artn ersh ip Intrastate offering req u ire m e n ts, lim itatio n s, and typical
B asis o f p a rtn e r in creased by h is sh are o f o rd in ary in co m e b u t not by p ro b le m s (M 8 1 L -4 ) 157
h is sh are o f lo n g -term cap ital lo ss, e v en th o u g h no M erg er c o n stitu tes “ s a le ,” re q u ire m e n ts o f S ecu rities A c t o f
d istrib u tio n s (N 8 0 P I-3 -6 0 m ) 63 1933 (N 8 1 L -2 ) 2 /2
B asis o f p a rtn e r’s in terest (N 8 1 P I-3 -6 0 m ) 178 R egulation A
C ap ital g ain am o u n t allo cated to p a rtn e r co n trib u tin g ap p reciated C om pany c onsidering public o fferin g o f $ 1 .2 m illion co m m o n stock
secu rities th a t w e re later so ld at a g ain re q u ire d to d istrib u te an o fferin g circular e v en if this reg u latio n
(N 8 1 P l-3 -5 3 m ) 177 a p p lie s (N 8 0 L -1-4 0 m ) 94
D e d u ctio n allo w e d fo r fixed salaries p a id to p a rtn e rs fo r services Securities A c t o f 1933 (N 8 0 L -4 ) 99
w ith o u t re g a rd to p a rtn e rsh ip in co m e L iab ilities and d efen ses g iven p arties o r c lasses o f p arties as re su lt o f
(M 8 0 P II-2 -2 9 m ) 19 g o in g public (M 8 0 L -2 ) 41
L iq u id atio n P rivate p lacem en t ex em p tio n
B asis o f land re c eiv ed by p a rtn e r is h is ad ju sted b a sis in partn ersh ip O ffe re e s m u st have a ccess to o r be fu rn ish e d w ith info rm atio n that
less cash re c eiv ed (N 8 0 P I-3 -5 9 m ) 63 w ou ld be in a re g istra tio n statem ent
O rd in ary in co m e (M 8 1 P II-3 -4 9 m ) 131, (N 8 0 L -1-4 3 m ) 95
(N 8 1 P I-3 -5 9 m ) 178 R eal E sta te In v estm en t T ru st (R E IT )
O rd in a ry in co m e in clu d es n et in co m e fro m sales, in te re st on co rp o rate M u st b e reg istered (M 8 0 L -1-49 m ) 41
b o n d s, and n e t re n ta l in co m e, b u t no t d iv id en d s fro m dom estic Securities E xchange A c t o f 1934 (N 80L -4) 99
co rp o ratio n s o r n e t lo n g -term o r sh o rt-term cap ital gains F o reig n C o rru p t P ractices A ct o f 1977
(M 8 0 P II-2 -3 1 m ) 19 P ro h ib itio n o f brib ery o f foreign officials a p p lie s to all d om estic
P a rtn e r g iv e n in terest in p artn e rsh ip re c eiv es ta x a b le in co m e co rp o ratio n s e n g ag ed in in terstate co m m erce
(N 8 1 P I-3 -4 9 m ) 176 (N 8 0 L -1-44 m ) 95
P a rtn e r in creases h is ta x a b le in co m e b y p u rc h a sin g secu rities fro m the N atio n al securities e x ch a n g e s, equ ity securities (o f issuers) traded
p a rtn e rsh ip a b o v e th e ir c o st to th e p artn ersh ip th e re o n , and e q u ity sec u rities o f issuers w ith assets in e x ce ss o f
(N 8 1 P I-3 -5 4 m ) 177 $1 m illion and 5 0 0 o r m o re stockholders m u st be re g iste re d , but
P a rtn e r’s lo ss d e d u ctio n lim ited to a d ju sted b a sis o f h is/h er n o t all securities o ffered u n d e r the S ecurities A ct o f 1933 m u st be
p artn e rsh ip in terest (M 8 0 P II-2 -3 0 m ) 19 re g iste re d u n d e r the 1934 A c t (N 8 0 L -1 -39m ) 94
P a rtn e r’s sh are o f c ap ital lo ss, asset c o n trib u te d to p artn e rsh ip by him S ec. 10 (b)
h ad b a sis to h im h ig h e r th a n fa ir m ark et fo r w h ich he w as A pp lies to p u rch ases and sales interstate
c re d ite d (M 8 1 P II-3 -5 2 m ) 131 (N 8 0 L -1-42 m ) 95
P a rtn e r’s share o f n et in co m e (ex clu d in g lo n g -term c ap ital g a in ,
S ectio n 1231 lo ss, an d d iv id e n d s fro m d o m estic Federal T rad e C om m ission (M 8 1 L -1 -57m ) 155
c o rp o ratio n s— all o f w h ich m u st b e re p o rte d sep arately) includes
in terest p a id to p artn ers fo r u se o f cap ital FIC A
(N 8 0 P I-3 -5 8 m ) 62 See S ocial security
P a rtn e r’s share o f o rd in ary in co m e fo r c alen d a r y e a r is h is share o f
ord in ary in co m e fo r p a rtn e rsh ip in co m e fo r fiscal y e a r ended F inancial acco u n tin g
Ju n e 30 (M 8 1 P II-3 -5 1 m ) 131 M ea su re m en t bases c u rre n tly used
P rac titio n e r civ il lia b ilities a n d p e n alties (M 8 0 L -2 ) 41 H istorical c o st, c u rre n t selling p ric e , d isco u n ted c ash flo w , and
B ased u p o n w ritten an d o ral in fo rm a tio n re c eiv ed re p la c em e n t c o st (M 8 0 T -1 -28m ) 48
(N 8 0 A -1 -1 1 m ) 80
IR S c a n seek in ju n ctiv e re lie f ag ain st w ro n g d o in g p re p a re r F inancial A cco u n tin g S tandards B o ard
(M 8 1 L -1 -5m ) 147 See FA SB
P re p a re r’s d eclaratio n
U n an sw ered q u estio n o n retu rn F inancial re p o rtin g
C P A sho u ld sign o n ly if an e x p la n atio n fo r the re a so n fo r the N o t d ire c t info rm atio n on m a n a g e m e n t’s pe rfo rm an c e
o m issio n is p ro v id e d (M 8 0 A -1 -2 m ) 25 (M 8 1 T -1 -1 1 m ) 160
P rep a re r C P A is e x p ec te d to tak e p o sitio n o f clie n t ad v o cacy P ertains to individual b u sin ess e n te rp rise s (N 8 1 T -I-2 m ) 216
(N 8 0 A -1-4 m ) 79
S o cial secu rity re tirem e n t b e n efits e x clu d ab le fro m g ro ss in com e e v en F inancial statem ents
th o u g h re c o u p ed all retiree co n trib u te d H istorical d o lla r
(N 8 0 L -1-6 0 m ) 97 A ssu m e a stable m o n e ta ry unit (M 8 0 T -1 -27m ) 48
T ax ad v ice
I f a fterw ard s leg islativ e ch an g es w o u ld affect ad v ic e p ro v id e d , the Fire loss
C P A can n o t b e ex p ec te d to n o tify c lien t o f ch an g e u nless that Indem nity collectib le o n u n d erin su red inventory
o b lig a tio n is sp ecifically u n d e rta k e n b y ag reem en t (M 8 0 P II-1 -14m) 17
(M 8 0 A -1-2 2 m ) 27
Fixed assets
Fed eral In su ra n c e C o n trib u tio n s A ct See also A udit p rocedures
See S o cial security B uild in g
E q uipm ent
F ed eral secu rities re g u la tio n In tern al c ontrol
C iv il lia b ility o f co rp o ra tio n as re su lt o f vio latio n s o f F o reign C orrupt A cco u n tin g fo r g a in o r loss o n sale (N 80T -2) 107
P ractices A c t o f 1977 (M 8 1 L -4 ) 156 E q uipm ent
C rim in al p ro se cu tio n o f co rp o ra tio n , its C E O , an d its C en tral A m erican C ap italizab le c ost o n e x ch a n g e s o th er than cash
re p resen tativ e fa c ed as re su lt o f v io latio n s o f F o reig n C o rru p t (N 80T -2) 107
P rac tic e s A c t o f 1977 (M 8 1 L -4 ) 156 E x p e n d itu res c ap italize d (N 8 0 T -2 ) 107
E m p lo y e e s ’ sto ck p u rc h a se p la n p ro b le m s (N 8 1 L -2 ) 2 /2 E x p e n d itu res cap italized o n item s a lread y in use
F o reig n citiz en (N 80T -2) 107
P u rch a ses 6% o f sto ck o f co m p an y in street nam e a n d m u st n otify the L um p-purchase
239
Index
F ixed assets
L um p -p u rch ase (cont.)
M a c h in e s ’ in d iv id u al v alu atio n s in clu d in g in stallatio n c o sts
(N 8 0 P II-1-9 m ) 68 G ain on e m in e n t do m ain c o n d em n atio n o f p ro p e rty aw ard
M ach in e (N 8 1 P II-2 -3 4 m ) 187
B alan c e (a fte r d e p re ciatio n on su m -o f-th e-y ea rs-d ig its) n et o f
accu m u lated d e p re ciatio n (N 8 1 P II-1 -4 m ) 182 G ain on sale o f building (N 8 1 P II-2 -4 0 m ) 188
M ach in e
C o st is p re sen t v alu e o f in stallm en t p ay m en ts G en erally acc e p te d auditin g standards
(M 8 1 P II-2 -3 4 m ) 129 A pp ro v al o f A IC P A m e m b e rsh ip (N 8 0 A -1 -39m ) 83
V alu atio n G eneral standards
D ue care
A ll p a y m e n ts less im p u te d in terest (M 8 1 T -1-6 m ) 159
D uty to perform w ith co m m o n pro fessio n al skill
(M 8 1 A -1-4 8 m ) 141
F low ch arts
In dependence
D ia m o n d sy m b o l re p re sen ts a d e cisio n (M 8 0 A - 1 - 10m ) 25
See also M ateriality
C P A perform s actu arial serv ices fo r in su ran ce co m p an y a nd
F o otn o tes p re c lu d e d fro m auditin g it (N 8 1 A - 1 -19m ) 196
See also D isclo su re S tren g th en ed b y S E C req u irin g that m a n a g em e n t report
C ap tio n ed “ u n a u d ite d ” o r “ no t co v ered by a u d ito r’s re p o rt” d isag reem en ts w ith fo rm er a uditors
A u d ito r’s re p o rt m a y re fe r to th ese (N 8 1 A -1-4 2 m ) 198 (N 8 0 A -1 -55m ) 84
In a p p ro p riate to d iscu ss v a lid ity o f re la te d party tra n sac tio n s T o m a in ta in pub lic c o n fid e n c e (M 8 1 A -1 -47 m ) 141
(N 8 1A -1 -28m ) 197 M easu res qu a lity o f a u d ito r’s p erfo rm an ce
(N 8 1 A -1 -23m ) 196
F o recasts Q uality m e a su re o f p e rfo rm an c e (N 8 0 A -1 -37 m ) 82
C ash re c eip ts fro m c re d it sales (N 8 0 P I-2 -2 3 m ) 57 Standards o f field w o rk
C P A asso ciated E vidence
D isclo se a ssu m p tio n s, so u rces, c h a ra c te r o f w o rk A n a ly tic al rev iew p ro c e d u re s m ay p ro v id e th is in p art
(N 8 1 A -1 -3 0 m ) 197 (M 8 0 A -1 -5 5 m ) 30
G a th erin g sequence is in te rn a l c o n tro l re v ie w , c o m p lia n ce te sts and
F o reig n C o rru p t P ractices A c t o f 1977
substantive te sts (N 8 0 A -1 -30m ) 82
M o st o f a u d ito r’s w ork in fo rm u la tin g an o p in io n c o n sists o f
See F ed eral secu rities re g u la tio n — S ecu rities E x c h a n g e A c t o f 1934
obtain in g a nd e x am in in g (M 8 0 A -1 -9m ) 25
N otatio n o f inferences fro m ra tio s a n d tre n d s, o f a p p ra ise rs ’
F oreig n ex ch an g e conclu sio n s d o c u m e n ted in w o rk in g p a p e rs, a nd lists o f
F o reig n cu rre n c y tran slatio n unansw ered n eg ativ e c o n firm atio n re q u e sts be tte r than details
A verag e ra te fo r c u rre n t y e ar o f physical in v en to ry (N 8 1 A -1 -2 2 m ) 196
R en t a n d p ro v isio n fo r d o u b tfu l acco u n ts P ro ced u res specifically o u tlin e d in audit p ro g ram p rim arily
(N 8 0 P I-1 -1 1 m ) 55 de sig n e d to g a th e r (M 8 0 A - 1 -14m ) 26
C u rre n t rates u sed fo r m ark etab le e q u ity sec u rities c arrie d at c u rre n t S ubstan tiv e tests
m a rk e t p rice (M 8 0 T -1 -31 m ) 48 E x ten t varies inversely w ith a u d ito r’s re lia n c e on internal
E q u ip m en t and its acc u m u la te d d e p re ciatio n tra n sla ted at h istorical co n tro l (M 8 0 A -1 -37 m ) 28
ra te (N 8 1 T -1 -2 7 m ) 218 Planning
G a in in clu d ed in n e t in co m e (M 8 0 T -1 -9 m ) 46 A n tic ip a ted n ature o f a u d ito r’s re p o rt a ffects q u a n tity , type and
G a in s o r lo sses re su ltin g in c lu d e d as o rd in ary item in in co m e c ontent o f w o rk in g p a p ers (N 8 1 A - 1 - 13m ) 195
statem en t fo r p e rio d in w h ic h rate ch an g es E v id en c e d by staff w e ek ly tim e re p o rts a nd w eekly
(N 8 0 T - 1 -14m ) 103 sum m ary (N 8 0 A -1-48 m ) 83
H isto rical rate K n o w led g e o f e n tity ’s b u sin ess h elps in p la n n in g and
P a te n t am o rtiz a tio n (N 80PI-1-11 m ) 55 perform ance (N 8 0 A -3 ) 85
H isto rical rates u sed fo r d e ferred in co m e S u pervision
(M 8 0 T -1 -3 2 m ) 48 C P A n e ed not be q u a lifie d to p erfo rm e a c h o f E D P sp ecialist
N e ith e r fixed assets n o r in v en to ries c arrie d at c o st w o u ld use c u rren t e m p lo y e e ’s ta sk s, bu t he should be able to d efine ta sk s and
ra te s (M 8 1 T -1 -3 4 m ) 162 e v a luate the e nd p ro d u c t (M 8 0 A -2 ) 30
P a re n t’s balance sheet to tal a m o u n t fo r fo reig n su b sid iary w ith Standards o f reporting
m ark etab le sec u rities, in v e n to rie s, re fu n d a b le d ep o sits and C o nsistency
p a te n ts and tra n sla ted a m o u n ts g iv en at c u rre n t rates a nd S a c rifice d fo r cu m u lativ e e ffe c t o f c h an g e in acco u n tin g
h isto rical rates (M 8 0 P I-1 -9 m ) 3 p rin cip le (N 8 0 T -1 -6m ) 102
T o tal in p a re n t’s b a la n ce sheet fo r a cc o u n ts re c eiv ab le c u rre n t and F ourth standard
lo n g -term , p re p a id in su ra n ce , an d goo d w ill O b jectiv e is to p re v e n t m isin te rp re ta tio n o f the degree o f
(M 8 1 P I- 1 -17m ) 113 re sponsibility th e a u d ito r is a ssum ing
V a lu atio n o f im p o rted in v en to ry (N 8 1P II-2 -3 2 m ) 187 (M 8 0 A -1-24 m ) 27
P u rp o se is to req u ire ind icatio n o f c h arac te r o f e x am in atio n and
F ranch ise ex p en se d eg ree o f re sp o n sib ility (M 8 1 A - 1 - 13m) 138
E x p en se as in cu rred p a y m e n ts to fran c h iso r b ased on fra n c h is e e ’s
re v e n u es (M 8 1 T -1 -7 m ) 159 G oing c o n ce rn
V alid ates valu atio n o f future re c eiv ab le at p re sen t value
F ran ch isin g (M 8 1 T -1 -2m ) 159
See C o n tra c ts- -S ales
G oodw ill
F und a cco u n tin g See also A u d itin g pro ced u res
See G o v ern m en tal a cc o u n tin g C o n solidated financial statem ents
M u n icip alities E x c e ss o f c o st o f acq u ired co m p an y o v e r fa ir v a lu e s o f assets less
V o lu n tary h ealth an d w elfare o rg an izatio n s liab ilities assum ed (N 8 1 T - 1 - 17m ) 2 17
240
Index
G ood w ill (cont.) G o v ern m en tal accounting

P a rtn e r’s w ith d raw al a n d co m p u ta tio n o f to tal goo d w ill Special revenue funds (cont.)
(M 8 0 P II-1-4 m ) 15 (M 8 0 T -1 -57m ) 50
S tate a nd local
G o v e rn m e n ta l a cc o u n tin g In tern al service (intragovern m e n ta l service) fu n d u ses full
See also M u n icip alities accru al (M 8 1 T -1 -59m ) 164
A p p ro p riatio n s m o re th a n ex p en d itu re s a n d e n cu m b ra n ce s in creases V ouchers pay ab le c re d ite d fo r g o ods receiv ed n o t y e t p a id fo r
fu n d b alan ce (M 8 0 T -1-5 6 m ) 50 (M 8 1 T -1-53 m ) 163
A p p ro p riatio n s p u rp o se a n d sig n ifican ce (N 8 1 T -3 ) 222
B u d g et G ro ss profit va ria tio n analysis
C red it fu n d b alan ce if e stim ate d re v e n u es ex ceed E ffects o f c h an g e s in sales p ric e a n d sales volum e
ap p ro p riatio n s (N 8 0 T -1 -5 2 m ) 106 (N 8 1 P I-2 -4 1 m ) 173
E stim a te d rev en u es e x ce e d ap p ro p riatio n s
E x c e ss cred ited to fu n d b alan ce (M 8 0 T -1 -55 m ) 50
C ap ital p ro jects fu n d
E n try fo r p ro ceed s o f b o n d issue fin a n c in g c ap ital p ro ject
(N 8 0 T -1-5 6 m ) 106
C o n so lid ate d statem en ts n o t a m a jo r co n ce rn
H
(M 8 0 T -1 -57m ) 50
D iffers fro m c o m m ercial acco u n tin g H ospitals
S elf-b alan cin g a cc o u n ts fo r e ac h fu n d (N 8 0 T -1 -51 m ) 106 D ep reciatio n
E n c u m b ran c e s R eco g n ized (M 8 0 T -1-6 0 m ) 51
E n try to clo se w h en g o o d s and serv ices no t receiv ed
(N 8 0 T -1 -5 4 m ) 106
E n c u m b ran c e system
N o t re q u ire d b y D eb t serv ice o r E n terp rise fu n d s, o r G e n eral fixed
a sse ts gro u p o f acco u n ts (M 8 0 T -1 -5 4 m ) 50 I
E n c u m b ran c e s w o u ld a p p e a r in g e n eral, cap ital p ro je c ts, an d special
rev e n u e fu n d s, b u t n o t in e n terp rise fu n d Im m ediate re c o g n itio n
(M 8 1 T -1-52 m ) 163 W rite -o ff o f asset w o rth less b efo re e n d o f orig in al estim ated life
E n terp rise fund
(N 8 1 T -1-4 m ) 216
B alan ce sh eet c o u ld c o n ta in rev e n u e b onds p a y ab le and retain ed
e arn in g s, b u t n o t re serv e fo r e n cu m b ran ces
Im puted interest
(M 8 1 T -1-5 6 m ) 164 B ased on v a luation c o n ce p t (N 8 1 T -1 -1 m ) 216
C u sto m e rs ’ m e te r d e p o sits w h ich can n o t b e sp en t fo r norm al
o p e ra tin g p u rp o se s cla ssifie d as re stric te d c ash in b alance
Incentive c o m pensation
sh eet (M 8 1 T -1-5 8 m ) 164
See B onus
P a y m e n t o f interest and p rin cip al o n re v e n u e b o n d d eb t
(N 8 0 T -1-58 m ) 107
E stim a te d re v e n u e acco u n t Incom e statem ent
A udit d e als w ith v e rifica tio n o f tra n sac tio n s
C lo se d , ex cess o f re v e n u es o v e r e stim ate c re d ite d to fu n d
b a la n ce (M 8 1 T -1-5 1 m ) 163 (M 8 0 A -1 -57m ) 30
E x p e n d itu res
C lo se d at e n d o f fisc al y e a r (N 8 0 T -1 -5 3 m ) 106 Insurance
F u n d s acco u n ted fo r sim ila r to fo r-p ro fit en tity are S p ecial A sse ssm e n t, See also E rro rs and irreg u larities— E rrors
E n terp rise, a n d In trag o v e rn m e n ta l Serv ice Fire loss
(N 8 0 T -1 -5 5 m ) 106 A utom obile
G en eral fix ed assets g ro u p o f acco u n ts C ollision
N o t u sed fo r E n terp rise, T ru st, o r In trag o v ern m e n ta l serv ice In su re r liable fo r value o f a u to , less any d e d u ctib le, w h ich w as total
fu n d s (M 8 0 T -1 -5 2 m ) 50 lo ss, but w ill be su brogated to in s u re d ’s rights
G e n eral fu n d (M 8 0 L -1-47 m ) 41
D eb it e x p en d itu re s w h en fix ed assets p u rch ased D riv e r o f c o m pany in su red c a r has in d ep en d en t action ag ain st
(N 8 0 T -1-5 7 m ) 106 neg lig en t d riv e r o f o th e r c a r cau sin g a ccid en t
P ro p erty ta x e s re c o rd e d d irectly in (M 8 1 T -1 -5 4 m ) 163 (M 8 0 L -1-47m ) 41
L o n g -te rm d e b t acco u n t g ro u p L iability
C o m b in ed b alan ce sheet w o u ld c o n ta in am o u n t to be p ro v id e d fo r In su re r m u st defen d in su red a g ain st a ny cla im s by d riv e r o f insured
re tirem e n t o f g en eral lo n g -term debt c a r o r by n e g lig e n t d riv e r o f c a r c au sin g a ccident
(M 8 1 T -1-5 7 m ) 164 (M 8 0 L -1-47 m ) 41
M ajo r c o n cern s in clu d e b u d g e ts, fu n d s a n d leg al re q u ire m e n ts B eneficiary
(M 8 0 T -1 -57m ) 50 W ife desig n a te d and p aid n o t ch an g e d b y w ill d e sig n a tin g
M o d ified accru al b a sis o f acco u n tin g a n o th e r (M 8 0 L -1-4 5 m ) 40
N o t u sed by C ap ital p ro jects, in trag o v e rnm e n ta l serv ice , o r trust Fire
fu n d s (M 8 0 T -1 -5 7 m ) 50 See also C o n tingencies
P u rp o se o f sy stem (N 8 1T -3 ) 222 B oth o w n e r and lesso r o f build in g have separate insurable
R easo n b u d g et is re c o rd e d (N 8 1 T -3 ) 222 in te re sts (M 8 1 L -1 -48 m ) 153
S p ecial assessm en t fu n d C o in su ran ce and pro ra ta c lau ses o n policies w ith total less than
E n cu m b ran ce sy stem req u ired (M 8 0 T -1-5 4 m ) 50 in su ra b le value
G e n eral fix ed assets g ro u p o f a cc o u n ts u sed fo r fix ed assets A m o u n t collectib le fro m e ac h co m p an y u pon p artial loss
(M 8 0 T -1-5 2 m ) 50 (M 8 0 L -1-48 m ) 41
S p ecial rev en u e fu n d s Face o f policy re c o v ered u pon to ta l d estru ctio n o f bu ild in g w here
A c co u n tin g m o st sim ilar to g en eral fund co in su ran c e re q u ire m e n t w as m et (N 8 1 L -1 -56m ) 211
(M 8 0 T -1 -5 1 m ) 50 In su re d m u st satisfy insurable in terest re q u ire m e n t
M o d ified accru al b a sis o f a cc o u n tin g used (N 8 1 L -1-59m ) 272
241
Index
Insuran ce Interest ex p en se
F ire (cont.) S tated ra te w hen note is issued solely fo r cash e q u al to face
Party (p rev io u sly a m o rtg ag ee) c an n o t co lle ct on in su ran ce on hom e (M 8 1 T - 1 - 18m) 160
still in e ffe c t a t d ate o f fire (m o rtg a g e w as p a id and
c an celled ) (M 8 1 L -1-4 5 m ) 153 Interest incom e
P u rch a ser and m o rtg ag o r tak e o u t sep arate p o lic ie s o n b u ild in g , and See also Investm ents— L o n g -term — B onds
m o rtg a g o r’s in su ran ce co m p a n y is su b ro g ated to m o rtg a g o r’s N otes receivable
rig h ts u pon p a y m e n t (N 8 0 L -1 -5 3 m ) 96 N o n in terest b e arin g note (M 8 0 P I-4 ) 72
W arran ties in co rp o rated in p o licy m u st b e strictly ad h ered to o r there
w ill b e denial o f reco v ery in a su b stan tial n u m b e r o f states
Interim financial re porting
(N 8 1 L -1-6 0 m ) 2 12
Incom e statem ent o f th ird q u a rte r
Insu rab le in terest in ta b le s o rd ered w h e n d e sig n a te d b y seller as goods to
P ro v isio n fo r incom e ta x (N 8 0 P I-1 -9m ) 55
w h ich co n tract re fe rs (N 8 1 L -1-58 m ) 2 12
In co m e tax prov isio n fo r th ird q u a rte r b a se d upon earn in g s to d ate at
Inven to ry
e x p ec te d annual e ffe c tiv e ra te less p rio r q u a rte rs ’ provisio n s
E a rliest p o ssib le tim e to c o v er p u rch ases is a t tim e g o o d s are
(N 8 0 T -1 -16m ) 103
id e n tified to th e p u rch ase c o n tra c t (M 8 0 L -1-4 6 m ) 40
Inventory tem p o rary m a rk e t d ecline ex p ec te d re sto re d by y e a r en d need
Life
no t b e reco g n ized (M 8 1 T -1 -32m ) 762
A cq u ain tan ce n am ed b en eficiary b y in su red (fo r $ 1 0 0 p aid to insured)
P roperty ta x a n d b onus to ex ec u tiv e s o n seco n d q u a rte r’s incom e
lack ed in su rab le in terest and c an n o t c o llect
statem e n t (M 8 1P I-1-6m ) 111
(N 8 0 L -1 -5 4 m ) 96
P roperty tax es and m a jo r rep airs ex p en se s in q u a rte rly rep o rts
A ssig n m e n t o f e m p lo y e e ’s free g ro u p life in su ran ce to w ife tran sfers
(N 8 1 P I- 1 -15m ) 170
all legal in cid en ts o f o w n e rsh ip to h e r
R epairs in first q u a rte r b e n efit e n tire y e ar and allo cated to e a c h
(N 8 0 L -1-5 6 m ) 97
q u a rte r (N 8 1 T -1 -36m ) 2 19
B en eficiary c an c o lle c t o n po licy in c o n testab le tw o y e ars after in force
R eview o b jectiv e is to p ro v id e b a sis fo r re p o rtin g to b o a rd o f d ire c to rs o f
in spite o f in s u re d ’s m isrep resen tatio n as to h ealth
stock h o ld ers (N 8 0 A -1 -32 m ) 82
(M 8 1 L -1-4 7 m ) 153
C re d ito r h as insurable in terest in d e b to r’s life and m ay a ssig n it
Internal audit
(M 8 1 L -1-4 6 m ) 153
G ro u p term p rem iu m s paid by e m p lo y e r
See also A u dit pro ced u res
O b je ctiv ity , c o n sid e r o rg an izatio n al level to w hich they report
T erm in atio n o f e m p lo y m e n t c an c e ls p o licy u n less (p rev io us)
em p lo y ee elects to p ay th e p rem iu m s at th e n o n -g ro u p (M 8 1 A -1-44m ) 141
rate (M 8 0 L -1-4 3 m ) 40
In co n testab le clau se w o u ld m ak e m a te ria l m isstate m e n t o f fact by Internal co n tro l
in su red relatin g to h ealth an u n su ccessfu l d efen se by insurance See also R ep o rts on internal control
co m p a n y (N 8 0 L -1-5 7 m ) 97 C ash adm issio n fees w e ak n e sse s an d im provem ents
L o n g -tim e frien d d o e s n o t have in su rab le in terest (N 8 0 A -4 ) 85
(N 8 1 L -1-5 7 m ) 2 11 C om p lian ce testing
P arty (p rev io u sly a c red ito r) c an c o lle ct u pon d e ath o f in su red w ith See also Q u antitative m eth o d s— S tatistical sam pling
p o licy still in e ffe c t (M 8 1 L -1 -4 5 m ) 153 Includes in spection, o b serv atio n and inquiry
P rep a id assets in crease fo r p a y m e n t in ad v an ce (N 8 0 A -1-2m ) 79
(N 8 1 T - 1 -15m) 277 Includes tests o f signatures o n can c e lle d c h ec k s to b o a rd o f d ire c to r’s
P rep ay m en t is am o rtized o v e r p e rio d b en efitted a u th orizations (M 8 0 A -1-47 m ) 29
(M 8 0 T -1 -8m ) 46 M ay b e om itted w ith re sp ec t to E D P afte r re v ie w o f E D P co n tro ls
P roperty w h e re the c o n tro ls d u p licate o p erativ e c o n tro ls e x isting
L ack in su rab le in terest (an d c an n o t re co v er) o n p ro p erty b e lo n g in g to e lse w h e re in the sy ste m , th e re a p p ea r to be m a jo r w eak n esses
trad e d eb to r a n d the d e b t is u n secu red th a t p re c lu d e re lia n c e on the stated p ro c e d u re , o r w h ere th e tim e
(N 8 0 L -1-55m ) 97 a nd d o lla r c osts o f testin g ex ce e d the tim e a nd d o lla r sav in g s in
Pro p erty casu alty in su ra n ce schedule sub stan tiv e te stin g if the c o m p lia n ce tests show th e c o n tro ls to be
T y p e o f in fo rm atio n o rd in arily in c lu d e d (N 8 1 A -2 ) 200 o p e ra tiv e , b u t not w h ere the c o n tro ls a p p ea r adequate
T h e ft (M 8 0 A -1 -54m ) 29
W arra n ty (in itialed ) in p o licy th a t in su red w in d o w d isp lay w o u ld not O bjectiv e o f p recision in sam pling is to estim ate the range o f
e x c e e d sp ecified v a lu e , w h ic h w as e x ce e d e d at tim e o f th e ft, pro c e d u ra l dev iatio n s in th e p o pulation
resu lts in no re c o v ery ( N 8 IL -1 -5 5 m ) 2 11 (M 8 0 A -1-27m ) 27
W o rk m e n ’s c o m p en satio n P rim arily c o n ce rn e d w ith b y w h o m , h o w , a nd w e re the p ro c e d u re s
See E m p lo y er and e m p lo y ee re latio n sh ip s p e rfo rm ed (N 8 0 A -1 -8m ) 79
P urpose is reasonable assurance th a t a cc o u n tin g co n tro ls
Intang ib le assets fu n c tio n in g (M 8 1 A -1 -8m ) 137
See also G o o d w ill S am ple invoices fo r initials o f v e rifier o f q u a n tita tiv e d ata
M ark etab le secu rities— E q u ity m eth o d (M 8 1 A -1 -39m ) 140
O rg a n iz atio n c o sts EDP
P aten ts A pplicatio n control
G o o d w ill fro m b u sin ess c o m b in a tio n (M 8 0 T -1 -3 7 m ) 49 H ash total (M 8 1 A -1 -20 m ) 138
P aten ts D ecisio n tab le to su p p lem en t o r re p la c e flo w c h a rts w hen altern ativ es
A m o rtize d o v e r u sefu l life (w h en less th a n le g a l life) an d successful n u m e ro u s (M 8 1 A -1-2 2 m ) 139
in frin g em en t suit is c ap italize d into th is a cc o u n t and a m ortized E lectronic d ata p rocessing
o v e r rem ain in g u sefu l life (N 8 0 P II- 1 - 15m) 69 S ep aratio n o f p ro g ram m in g and op e ra tin g fu nctions
U sefu l life co n sid eratio n s (N 8 0 T - 1 - 15m) 103 C o m p en satin g general c o n tro ls fo r lack o f p ro p e r separation
(N 8 1 A -4 0 ) 207
Integrity o f m an ag em en t H ow ach iev ed (N 8 1 A -4 ) 201
See S u c c esso r au d ito r E v alu atio n to d eterm ine e x te n t o f sub stan tiv e tests
(N 8 0 A -1-4 4 m ) 83
Interest E x c e p tio n re porting E D P system h e lp s a uditor c o n d u ct m o re e fficien t
See C ap italizatio n o f in terest a udit because it high lig h ts a b n o rm a l conditions
242
Index
Internal c o n tro l (cont.) Inventory

(M 8 0 A - 1 -17m) 26 C o n sig n m en t (cont.)
F ix e d assets T racin g o f shipping d o cu m en ts to the sales jo u rn a l, te st o f c ash
S erially n u m b ered re tirem e n t w o rk o rd e rs re c eip ts transactions to sales jo u rn a l, te st o f c ash receipts
(N 8 0 A -1 -35m ) 82 tra n sac tio n s, o r c o n firm atio n o f acco u n ts re c eiv ab le are all m ore
In c o m p a tib le duties lik e ly th a n observ atio n o f in v entory to b rin g to a u d ito r’s atten tio n
C ash ie r p o sts a cc o u n ts receiv ab le (N 8 1 A - 1 - 15m) 195 n ew policy o f d e alin g w ith c e rta in cu sto m ers on c o n sig n m en t
M aterial w eak n ess b a sis (M 8 0 A -1-4m ) 25
M ate rial erro rs o r irreg u larities w o u ld o rd in arily n o t b e d e te cte d FIF O
w ith in a tim ely p e rio d by em p lo y e es in n o rm al co u rse o f C ost flo w assum ption (M 8 0 T -2 ) 51
p e rfo rm in g a ssig n e d fu n ctio n s (M 8 0 A -1 -5 1 m ) 29 F reig h t in is in v en to riab le c o st (M 81T -4) 165
O b je ctiv es G ross m a rg in (profit) m eth o d
A c h iev e m e n t is a ffected d irectly an d im p o rtan tly b y co m p e ten c e o f E stim ated inventory (N 8 0 P II-1 -11m ) 69
c lie n t’s em p lo y e es (M 8 0 A -1-41 m ) 28 E stim a te d c ost o f m issing inven to ry (M 8 1P II- 1 -14m) 125
O v e rd ra w n c h eck in g acco u n ts Include g o o d s not yet re c eiv ed if shipped FO B sh ipping po in t
C o m p u te r p ro g ra m m e r’s p erso n al acco u n t n e v er o n p rin t-o u t m o st (M 8 1 T -4 ) 165
effectiv ely d e te cte d by p e rio d ic re c o m p ilin g o f p ro g ram s from L IFO
d o cu m en ted so u rce d e c k s, an d co m p a riso n w ith p ro g ram s C o st flow a ssum ption (M 80T -2) 51
c u rre n tly in use (M 8 0 A -1 -2 1 m ) 26 D o llar-v alu e
P ayroll R eq u ire s e stim ate s o f pric e -le v e l changes
W ea k n e sse s and in q u iries to m ak e in clarify in g p o ssib le w eaknesses (M 8 0 T -1 -3m ) 46
in d icated in flo w c h a rt and n a rra tiv e (M 8 0 A -5 ) 31 D ollar-v alu e pools c an b e u sed (N 8 0 T - 1 -18m ) 103
P u rch ase o rd ers R easons fo r u sing in inflatio n (M 80T -2) 51
P o o r co n tro l m ay en ab le p u rch asin g a g en t to a llo w relativ e to L oss in cu rren t period
p u rc h a se at w h o le sa le r e m p lo y e r p rices U tility less th a n c o st (M 8 0 T -2 ) 51
(M 8 0 A - 1 - 16m) 26 L o w er o f c o st o r m arket
Q u estio n n aire V a luation o f item (N 8 1 P II-1 -1 3m ) 184
C o n stru ct fo r b o o k s to re ’s re v o lv in g c ash u sed b o o k b u y in g M o ving average
fu n d (M 8 1 A -4 ) 143 A pp licab le to p erp etu al bu t not perio d ic
R ec e iv in g re p o rts a n d re c eip ts o f g o o d s (N 8 1 T - 1 -10m) 216
D isto rtio n s th at m ay arise b e ca u se o f in ad eq u acies O rd e r po in t
(N 8 1 A -3 ) 201 C om p u tatio n (M 8 0 P l-2 -3 8 m ) 8
E x p lain w h y g iv en p ro c e d u re s are ad eq u ate o r no t Periodic
(N 8 1 A -3 ) 201 C G S is c o st o f g oods av ailab le m in u s e n d in g in v entory
R ev iew (N 8 1 T -1-21m ) 2 17
D e cisio n tab le (N 8 0 A - 1 - 14m ) 80 F IF O (N 8 1 P II- 1 - 15m) 184
D o cu m en ted to su b stan tiate co m p lian ce w ith g en erally accepted L IF O (N 8 1 P II-1-16m ) 184
au d itin g stan d ard s (M 8 0 A -1 -3 3 m ) 28 P erpetual
R ev iew in g th e system an d te stin g co m p lian ce is e sse n tia l to determ ine V erify in g d eb its the a u d ito r w o u ld be m o st in terested in ex am in in g
w h e th er the n e ce ssa ry internal c o n tro l p ro c e d u re s w ere prescrib ed p u rch ase invoices as o p p o sed to the p u rch ase jo u rn a l,
a n d are b e in g fo llo w e d (M 8 0 A -1 -5 0 m ) 29 re q u isitio n s, o r ord ers (M 8 0 A -1-4 9 m ) 29
S e g re g a tio n o f d u ties P hysical h ig h e r than p erpetual
A u th o riz a tio n , re c o rd in g , and cu sto d ial fu n ctio n s sep arated C redit m em os not p re p a re d fo r several item s retu rn ed b y cu sto m ers
(M 8 0 A -1-7 m ) 25 m ig h t e xplain (M 8 0 A -1 -23 m ) 27
S u b sta n tiv e tests P hysical lo w e r than b o o k s o v e r years
E x ten t v aries in v ersely w ith relian ce on internal c o n tro l M ay be re su lt o f failure to re c o rd pu rc h a se re tu rn s
(M 8 0 A -1 -37m ) 28 (N 8 1 A -1 -39m ) 198
W eak n ess Pool valu atio n (units a nd d ollars) a t e n d o f each o f tw o years using
M aterial erro rs o r irreg u larities o rd in a rily not d e te cte d tim ely by L IF O (N 8 1 P I-4 ) 178
em p lo y e es in n o rm al co u rse (N 8 1 A - 1 - 17m ) 196 P ricin g m e th o d should b e d isclosed (M 8 0 T -1 -24m ) 48
R etail m eth o d
In tern al rate o f retu rn C om putation to ap p ro x im ate L C M w o u ld include m a rk u p s, b u t not
See C ap ital b u d g etin g m a rk d o w n s, at p o in t c o m p u tin g c o st ra tio , b u t m a rk d o w n s and
sales sub tracted fro m m erch an d ise available at retail b efo re
In tern al R ev en u e C ode (M 8 0 L -2 ) 41 app ly in g c ost ra tio (M 8 0 P II-1-6m ) 16
C on v en tio n al (lo w er o f c o st o r m arket)
In tern atio n al au d itin g g u id e lin e s H ow and w hy tre a t net m a rk d o w n s in c alculations
Sec. 8002 (M 8 0 A -2 ) 30 (M 81T -4) 165
LCM (M 80T -1 -4m ) 46
Inven to ry L o w e r o f average c o st o r m a rk e t (M 8 1 P I-1 -2m ) 110
See also A u d it p ro c e d u re s P urchase re tu rn s in cluded in c o st o f g oods available
A u d it p ro c e d u re s— C u to ff (N 8 1 T -1-11m ) 2 /7
E rro rs and irreg u larities— E rro rs S afety sto ck
F ire loss C om p u tatio n (M 8 0 P I-2 -3 8 m ) 8
Q u an titativ e m eth o d s— E co n o m ic o rd er q u an tity S everal p u rc h a se s d u rin g y e ar at in creasin g p rices w ou ld re su lt in lo w e r
A d ju stm e n ts sch ed u le (N 81P1-4) 179 inventory and h ig h e r C G S on w eig h ted -av erag e ra th e r th a n
A v erag e c o st F IF O (M 81T -4) 165
C o st flo w assu m p tio n (M 8 0 T -1 ) 51 T est c o u n ts durin g o b serv atio n to p ro v id e ev id e n ce (by tracin g ) those
C o n sig n m en t item s are included in the fin al inventory schedule
D efin e and how p resen ted on b a la n ce sheets o f c o n sig n o r and (M 8 0 A - 1 -15m) 26
co n sig n ee (M 8 1 T -4 ) 165 T h e ft detectio n
In c o n sig n o r’s in v en to ry (N 8 0 T - 1 - 17m) 103 P erp etu al inventory o f only m ore e x p en siv e w ith freq u en t p h ysical
243
Index
Inventory Leases ( c o n t.)

Theft detection (c o n t.) Lessee
counts where many different inexpensive items and few very Capital
expensive (N80A-1-52m) 84 Accounting at inception and during first year
Valuation of imported inventory (N81PII-2-32m) 187 (M80T-3) 51
Weighted average Asset and liability recorded at inception at present value of
Unit cost of raw materials (M81PII-2-35m) 129 minimum lease payments (N81PII-2-28m) 186
Asset and liability valuation (M81T-1-8m) 159
Investments Bargain purchase options (N80T-1-21m) 103
S e e a ls o Marketable securities Criteria (N8IT-5) 222
Bonds Depreciation and interest expense computation, given present value
Cost using present value amounts and yield rate of lease payments, initial payment, effective interest rate and
(M81PI-2-31m) 115 useful life of asset (M80PI-1-11m) 4
Long-term Expense involving depreciation and interest
Bonds (M81PI-5) 121
Amounts of interest income and straight-line amortization of Interest expense and depreciation for first year
discount (N81PI-1-3m) 168 (N81PII-1-9m) 183
Income before tax for half of first year and for second year Operating
involving interest, amortization of discount (interest method), Accounting at inception and during first year assuming equal
and gain on sale of bonds between interest dates payments beginning of each month and, then, payments not on
(M81PI-4) 120 straight-line basis (M80T-3) 51
Interest income (N80PI-1-12m) 55 Equal monthly rental payments recorded as rental expense
Interest income computation using straight-line amortization (N81T-1-26m) 218
(M80PI-1-16m) 4 Rental expense 10 months (M81PI-5) 120
Equity method (M80T-1-5m) 46 Lessor
Balance of account computation (M80PI-1-15m) 4 Contrast sales-type with direct financing lease
Dividend revenue credit for dividend received overstates (M80T-3) 51 (N81T-5) 222
investment and retained earnings Direct financing
(N80T-1-20m) 103 Annual rental involving cost, investment tax credit, present value
Parent’s balance is market price of share issued for purchase of stock of of residual value, and present value of lease rental
subsidiary (N81PII-2-36m) 188 payments (M81PI-5) 121
Criteria (N81T-5) 222
Irregularities Gross lease rentals receivable and unearned interest revenue at
S e e Errors and irregularities inception (M 81PI-5) 121
Operating
Income involving depreciation and amortization of negotiating
commission (M81PI-5) 120
J Income involving lease bonus received at inception

(N80PI-1-16m) 56
Rent collected in advance is a deferred revenue
Joint costs (M80T-1-7m) 46
Cost accounting
S e e a ls o
Sales-type
Allocated on relative-sales-value at split-off Computation of profit (present value of rent payments minus cost)
Gross profit on sale of joint product after processing further and interest income (present value of rent payments minus first
(N81PI-2-22m) 172
payment made beginning date of lease, multiplied by the
interest rate contemplated and by the one-half year it was
leased during first fiscal-calendar year)
(M80PI-1-I0m) 4
K Criteria (N81T-5) 222
Interest income first year (N81PI-1-16m) 170
Kiting Interest income second year of lease (N80PI-1-14m) 56
See Audit procedures Unearned income is difference between gross investment in the
lease and sum of the present values of the two components of
the gross investment (N80T-1-22m) 104
L Letterhead
All partners must be members for a firm to use ‘‘Member of the
Land AICPA” (N81A-1-1m) 194
Includes costs of razing building immediately after purchase of
both (M80T-1-36m) 49 Liability
Valuation involving treasury stock at fair market value and sale of scrap “ Accrued” wages payable (N80T-1-3m) 102
from existing building on property (M81PII-1-3m) 123
Long-term
Refinanced short-term obligations (M81PII-2-31m) 128
Lawyer’s letters Refinanced short-term obligations, one agreement refinancing
Resignation of client’s lawyer shortly after sending a letter indicating no cancellable on 10 days notice by lender
significant disagreement with client’s assessment of contingent (M81PII-2-32m) 128
liabilities should alert auditor that undisclosed unasserted claims Prizes potentially payable estimated (M81PII-1-7m) 124
may have arisen (M80A-1-11m) 26 Unredeemed coupons (N81PI-1-1m) 168
Warranty liability balance (M81PII-1-9m) 124
Lead schedules
S e e Audit procedures
Long-term contracts
Leases S e e a ls o Accounting changes— Change in accounting principle
S e e a ls o Sale and leaseback Completed-contract
244
Index
L ong -term co n tracts M arketable securities

C o m p le ted -co n tra ct (com.) See also A u d it p rocedures
B illin g s o n u n co m p leted c o n tra c t in e x ce ss o f re la te d c o sts In vestm ents
(N 8 0 P I-4 ) 63 E quity
C o sts o f u n c o m p leted c o n tra c t in ex ce ss o f re la te d b illin g s B o th c u rre n t and non cu rren t
(N 8 0 P I-4 ) 63 C h arg es against incom e and s to c k h o ld e rs’ e q u ity fo r valu atio n
C o sts re la tin g to su b stan tially co m p le ted c o n tra c t in e x ce ss o f allo w an ces (N 8 1 P II-1-7m ) 183
b illin g s (N 8 0 P I-4 ) 63 C ost m e th o d
In co m e no t re c o g n iz ed u n til c o n tra c t is c o m p le ted , o r su b stantially B alan ce o f account e nd o f first y ear
so (N 8 0 P I-4 ) 63 (N 8 1 P II-1 -1 1 m ) 184
L oss p ro v isio n m ad e fo r e x p ec te d loss e v en b efo re c o n tra c t is In co m e (M 8 1 P I-4 ) 120
co m p le te (N 8 0 P I-4 ) 63 C urrent
C o n tra a sse t acco u n t c re d ite d fo r p ro g ress billin g s u n d e r V aluation allow ance (N 8 0 P I-1 -20m ) 57
co m p le ted -co n tra ct an d p e rc en tag e -o f-co m p letio n E quity m eth o d
(M 8 1 T -1 -35m ) 762 In co m e afte r am o rtiz a tio n o f excess o f c o st o v e r b o o k value
L oss in d ic a ted w o u ld b e re c o g n iz ed u n d e r b o th c o m p le ted -co n tra ct and (N 8 0 P II-1-10 m ) 69
p e rc en tag e -o f-co m p letio n m eth o d s (N 8 0 T -1 -2 m ) 102 U sed w h en in v e sto r is e n ab led to ex ercise sig n ifican t influence o v er
P ercen tag e-o f-co m p letio n (M 8 0 T -1 -6 m ) 46 in v estee (N 8 0 T -1 -1 9m ) 103
C o m p u ta tio n o f q u a rte rly in co m e (M 8 0 P I-1-8 m ) 3 V a lu atio n e nd o f first y e ar (M 8 1 P II-1 -4m ) 123
G ro ss p ro fit to be re c o g n iz ed in first p artial y ear Incom e fo r e ac h o f first tw o y e ars a fte r initial in v e stm en t, tw o
(N 8 0 P I-4 ) 63 p u rc h a se s, re statin g first y e ar, tw o go o d w ill am o u n ts (and
In co m e co m p u tatio n g iv en p ro g ress b illin g s a n d c o st in cu rred am o rtiz a tio n s), c o st m eth o d and e q u ity m eth o d
(M 8 0 P II-1 -5m ) 16 (M 8 1 P I-4 ) 120
In c o m e in th ird y e a r o f c o n tra c t (M 8 1 P I-1 -5 m ) 111 L ong-term
P rice , to ta l co sts, an d in co m e p re v io u sly rec o g n iz ed used in P erm an en t d ecline in value in incom e statem ent
calcu la tio n o f in co m e in th ird (fin al) y e ar (N 8 0 P I- 1 -13m ) 56
(N 8 1 T -1-3 4 m ) 219 N o n c u rre n t
T h e o re tic a l d iscu ssio n a n d ev alu atio n (N 8 0 T -3 ) 107 R ea liz e d gains in clu d ed in net incom e
(N 8 0 T -1-23 m ) 104
L ong -term d eb t V alu atio n (M 8 0 T -1-2m ) 46
See B o n d s p ayable V a luation is m a rk e t w h ere ag g reg ate m ark et v alu e is less than
M o rtg ag e a g g re g ate c o st (N 8 1 T - 1 - 16m ) 217
L oss M A S P ractice standards

S to len ty p ew riter (N 8 1 P I-1 -7 m ) 169 See M an ag em en t A d visory Service P ractice S tandards
L oss rec o g n iz ed on su b stan tially co m p le ted c o n tra c t, a fte r e x p ec te d loss M atching

re c o g n iz ed in p re v io u s y e ar (N 8 0 P I-4 ) 63 See B ad d e b t expense
L u m p -su m p u rch ase M ateriality

V alu es a ssig n ed to in d iv id u al m ach in es in clu d e a p p raisal c o st M ore im p o rtan t in d eterm in in g the tran sactio n s th a t should be re v ie w ed ,
(M 8 0 P II- 1 - 10m) 16 the need fo r disclo su re o f a p a rtic u la r fact o r tra n sac tio n , o r the
scope o f the C P A ’s a udit p ro g ram relatin g to v ario u s acc o u n ts th a n
in determ in in g the e ffects o f d ire c t financial interest in the client
upon the C P A ’s indep en d en ce (M 8 0 A -1 -3 9 m ) 28
M M odel B u sin ess C o rp o ra tio n A ct (N 81L -2) 2 12
M ach in e M ortgage
See also F ix ed assets A c q u isitio n c osts
F ix ed assets— L u m p -su m p u rch ase V erification least likely to include an e x am in atio n o f the related deed
U n d ep reciated b alan ce as c o m p ared to e x am in atio n o f the re la te d can celled c h e c k s,
D o u b le-d eclin in g -b alan ce d e p re ciatio n (N 8 0 P I-1 -1 m ) 54 clo sin g statem en t, o r in terest expense
(M 8 0 A -1 -28m ) 27
M ach in ery
See E q u ip m en t M u n icip alities
F ix e d assets See also G ov ern m en tal a cc ounting
A g en cy fu n d
M ake o r b u y T ax es co lle cte d and h eld fo r school d istrict
See D e cisio n m aking (M 8 0 T -1 -53m ) 50
C apital p ro jects fund
M an ag em en t advisory serv ices E x am p le o f g o v ern m en tal fund (M 8 1 T -1 -55m ) 164
S ec. 150 (M 8 0A -2 ) 30 C entral garage fund
C lo sin g e ntries (M 8 1 P II-4 ) 133
M an a g e m e n t A d v iso ry Serv ice P ractice Stan d ard s E n trie s fo r transactions (M 81P II-4) 133
A ct w ith in teg rity and o b jectiv ity a n d b e in d e p e n d en t, c o m p e ten t, and G eneral fu n d
n o tify clien ts in a d v an c e o f a n y reserv atio n s re g a rd in g b en efits, E n tries fo r budgeted and actual transactions
b u t it is n o t re q u ire d th at th e serv ices b e p erfo rm ed by p erso n s (M 8 1 P II-4 ) 134
h av in g ad eq u ate tra in in g as a m an ag em en t c o n su ltan t Journal entries (N 8 1 P II-5 ) 192
(N 8 0 A -1 -33m ) 82 Journal e n trie s in v o lving the g eneral long-term d e b t g ro u p , g e n eral fixed
assets g ro u p , and the follo w in g funds; g e n eral, cap ital p ro je c ts,
M an ag erial acco u n tin g special assessm en t, in trag o v e rn m ental serv ice , and trust
See C o st acco u n tin g (M 80P II-4) 22
D e cisio n m ak in g L ibrary C ap ital P ro jects F u n d jo u rn a l en tries (N 80P II-5) 77
245
Index
N N otes payable (cont.)

Interest ex p en se is a t stated ra te w h e n issu e d solely fo r c ash e q u al to
N eg ativ e assu ran ce face (M 8 1 T - 1 - 18m ) 160
W h en e v e r g iv en by C P A it is b a se d u p o n ab sen ce o f n u llify in g
e v id e n ce (N 8 1 A -1 -5 8 m ) 200 N otes receiv ab le
D isco u n ted w h en sold w ith reco u rse b e fo re m atu rity
N eglig en ce (N 8 1 T -1 -9m ) 216
D riv e r o f c o m p an y in su red c a r h as in d e p e n d en t a ctio n ag ain st negligent N o in terest incom e o n n o n interest b e arin g note re c eiv ed fo r c ash
d riv e r o f o th e r c a r c au sin g a ccid en t (M 8 0 L -1-4 7 m ) 41 o n ly (N 8 1 P L -1-2m ) 168
N o n in te re st bearing
N eg o tiab le in stru m en ts In te re st incom e (M 80P I-4) 12
See also C o m m ercial p a p e r R ec o rd e d at p re sen t v alu e o f all pay m en ts to b e m ade
H o ld e r in d ue co u rse (N 8 0 P I-1 -8m ) 55
C h eck certifie d by b a n k m ak es b a n k p rim arily liab le and d ra w e r is Interest incom e
d isch arg ed on th e ch ec k (N 8 1 L -1-4 1 m ) 209 C o m p u ta tio n , g iven presen t v alu e o f the note and the g o in g ra te o f
H as n o liab ility to re tu rn ex cess a m o u n t filled -in b y em p lo y e e w ho interest (M 8 0 P I- 1 -14m ) 4
sto le his p ay ro ll ch ec k b e fo re am o u n t w as c o m p le ted and
n eg o tiated it (N 8 1 L -1-4 2 m ) 209 N o vation (N 8 1 L -1 -6m ) 204
O nly en titled to c o lle ct o rig in al am o u n t o f raised c h e c k u n less m a k e r’s
n eg lig en ce fa c ilita te d the alteratio n
(N 8 1 L -1-4 3 m ) 209
o
N e t assets
See S to c k h o ld e rs’ e q u ity
O b jectivity
N e t incom e A rm ’s le n g th tra n sac tio n b etw een tw o in d ep en d en t p arties
See A cco u n tin g eq u atio n (N 8 0 T -1 -5m ) 102
E rro rs and irreg u laritie s- -E rrors Includes v erifiability (M 8 0 T -1 -2 6 m ) 48
T w o o r m o re q u alified in d ividuals arriv e a t sim ila r c o nclusions
N e t sales (M 8 1 T -1 -5m ) 159
A d ju stm e n ts sch ed u le (N 8 1 P I-4 ) 179
O ffe r
1976 T a x R efo rm A ct (M 8 1 L -1 -5m ) 147 E n fo rceab le
O w n er w rites b u y e r o fferin g to sell ra n c h fo r g iv e n price stating
N o n m o n etary tran sactio n s irrev o c a b le if b u y e r p ays $ 1 , a n d b u y e r p a y s
See also L an d (N 8 1 L -1-4m ) 203
E q u ip m en t
C ap italiza b le c o st o n ex ch a n g e s o th e r th a n c ash O p e ra tio n a l audit
(N 8 0 T -2 ) 107 P rim ary p u rp o se is to p ro v id e a m e a su re o f m a n a g em e n t pe rfo rm an c e in
E x c h a n g e in v o lv in g n o m o n etary c o n sid e ra tio n , im p airm en t o f value or m e e tin g o rg a n iz a tio n al g oals (M 8 0 A -1 -60 m ) 30
cu lm in a tio n o f an e arn in g p ro c e ss
A c co u n tin g b a se d o n re c o rd e d a m o u n t o f asset relin q u ish ed O pp o rtu n ity c o st
(M 8 0 T -1 -30 m ) 48 See D e cisio n m aking
E x ch an g e o f like e q u ip m e n t w ith c a s h b o o t re c o rd e d at fa ir m a rk e t
value (N 8 1 P II-2 -3 1 m ) 187 O rd e r point
E x ch an g e o ld tru ck fo r n ew w ith c a s h b o o t See C o st acco u n tin g
(M 8 1 P II-1 -8m ) 124
G ain o n ex ch an g e o f m a c h in es w ith c a s h b o o t O rg a n iz atio n c osts
(N 8 1 P I-1 -5m ) 169 B alance a fte r first y e ar, am o rtiz a tio n o v e r five years
L ike assets (N 8 1 P II-2 -3 0 m ) 187
Include a tto rn e y ’s fe e s, m eetings o f in c o rp o ra to rs, state filing fees and
N ew asset reco rd ed a t fa ir value (less th a n c arry in g v alu e o f o ld plus
o th e r e x p en se s in co n n ectio n w ith o rg an izatio n s, w hich m a y be
c ash b o o t) (N 8 0 P I-1 -6 m ) 54
N o n re c ip ro c al tran sfer to an o th er re c o rd e d at fa ir value o f asset am o rtiz e d o v e r no t m ore than 4 0 years
tra n sfe rre d , and g ain o r loss re c o g n iz ed (M 8 0 P II-1 -3m ) 15
(N 8 0 T -1 -2 4 m ) 104
N o n p u b lic e n tity
R ev iew p
In clu d es in q u iries o f m a n a g em e n t, in q u iries re g a rd in g ev en ts
su b seq u en t to b alan ce sheet d a te , a n d any p ro c e d u re s d e sig n e d to
id en tify re la tio n sh ip s am o n g d a ta th at a p p ea r u n u su al, b u t not a P aid-in cap ital
stu d y and ev alu atio n o f in tern al c o n tro l See A d d itional paid -in capital
(M 8 0 A - 1 -13m) 26 Stock
S to c k w arrants
N o t-fo r-p ro fit acco u n tin g S to c k h o ld e rs ’ equity
D iffers fro m co m m ercial a cc o u n tin g T rea su ry sto ck
S elf-b alan cin g a cc o u n ts fo r each fu n d (N 8 0 T -1 -5 1 m ) 106
P artn ersh ip
N otes p ay ab le A d m issio n o f p artn er
C u rre n t, am o u n t b o rro w e d in ex cess o f p ercen t o f v alu e o f co lla teral in In v estm en t
lo n g -term ag reem en t (M 8 1 P I- 1 -15m) 112 C ash con trib u tio n c o m p u ta tio n g iv e n p e rcen tag e in te re st, cap ital
C u rren t liab ility b alan ces o f o ld p a rtn e rs, and no go o d w ill o r b o nus to be
P rin cip al and in terest o f o n e -y e ar n o te (N 8 1 T -1 -8m ) 216 reco rd ed (M 8 0 P II-1 -8m ) 16
246
Index
P artnersh ip P artnership (cont.)

A d m issio n o f p a rtn e r (c o n t.) W ith d raw al o r death
P u rch ase P ro v isio n th a t u pon d e ath o r w ith d ra w a l, p a rtn e r en title d to b o o k
C ap ital b alan ces o f o rig in al p a rtn e rs co m p u tatio n v alu e o f th e ir in terest as o f clo se o f y e ar p reced in g (noth in g
(M 8 0 P II-1 -9 m ) 16 m o re ), and that p a rtn e rsh ip shall c o n tin u e , elim in ates n ecessity
B alan ce o f p a rtn e r’s a cc o u n t after a n o th e r p a rtn e r retires o f e n d in g p a rtn e rsh ip u p o n d e ath o r w ithdraw al
(N 8 1 P II-2 -2 5 m ) 186 (N 8 0 L -1 -20m ) 91
C ap ital b a la n ce s o f p a rtn e rs a fte r ad m issio n o f n ew p a rtn e r by
in v e stm en t (N 8 1 P II-2 -2 4 m ) 186 P atents
C reatio n m ay b e b y d iv id in g p ro fits o f a jo in t v en tu re w ith a n o th e r by a See also Intangible assets
sole p ro p rieto r (N 8 0 L -1-2 3 m ) 92 A m o rtizatio n ex p en se y e a r o f c h an g e in estim ate
D e ath (N 8 1 P I- 1 - 19m) 171
See Partn ersh ip — L iability A m o rtizatio n o f in frin g em en t suit o v e r rem ain in g u sefu l life
P ^ n e r s h ip — W ith d raw al o r d eath (N 8 1 P II-1 -5m ) 183
E sto p p e l Incom e on sale c o m p u ta tio n (M 80P I-4) 12
P arty w h o in his p re sen c e allo w ed an o th er p arty to m isre p re se n t they L egal fe e s and reg istratio n c o sts c ap italize d and am o rtized
w ere p artn ers is liab le to a co m p a n y w h ich g ran ted c re d it to the straight-line (N 8 1P I - 1-12m ) 170
sec o n d party in re lia n c e on th a t m isrep resen tatio n
(N 8 0 L -1-2 2 m ) 92
P ay -b ack
E x isten ce d eterm in in g ru les o f U n ifo rm P a rtn e rsh ip A ct
See C ap ital b u dgeting
(M 8 1 L -5 ) 157
G e n eral p artn ers liab le fo r u n p aid d e b ts o f lim ited p artn ersh ip
(M 8 1 L -5 ) 157 P ayroll
G o o d w ill c o m p u tatio n (M 8 0 P II-1 -4 m ) 15 D ire c t-la b o r g iven v a rian ce info rm atio n (N 8 1 P I-2 -2 4 m ) 171
In so lv en t H ours w orked
R ig h ts o f cred ito rs C om pare clo c k c ard s w ith shop jo b tim e tickets to ch eck
E a c h p artn er jo in tly liab le e v en th o u g h p artn e rsh ip a g re em en t is accu racy (M 8 0 A -1-4 0 m ) 28
th a t all lo sses ab o v e c ap ital invested w ill b e b o rn e by one Internal c o n tro l w e ak n e sse s and in q u iries to m ak e in clarify in g po ssib le
specific p a rtn e r (N 8 1 L - 1 - 19m) 205 w eak n esses indicated in flo w ch art a nd n arrativ e
Irre v o ca b le term in a g re em en t (M 8 0 A -5 ) 31
P a rtn e r w ith d raw s w ith in th at term
R eco u rse o f o th e r p artn ers a g ain st th a t p a rtn e r P ension plans
(M 8 0 L -5 ) 44 A c co u n tin g and funding policies disclo sed
Join t liab ility (as c o n tra sted w ith jo in t and sev eral liab ility ) (M 8 0 T -1 -21m ) 48
B o n d an d m o rtg ag e o n p a rtn e rs h ip ’s o ffice bu ild in g A ctuarial g a in s and losses a cc o u n tin g (M 8 1 T -5 ) 165
(N 8 1 L - 1 -17m) 205 A ctuarial g a in s o r losses dire c tly related to o p e ra tio n allo cated to current
L an d in v estm en t o f n ew p a rtn e r sh o u ld b e re c o rd e d at fa ir value and future periods (N 8 1 T -1 -25 m ) 218
(N 8 1 P II-2 -2 7 m ) 186 D isclo su res in statem ents o r n otes (M 8 1 T -5 ) 165
L iab ility E ntry age norm al is a ccep tab le actu arial c o st m eth o d
E state o f partn er m u st settle all p erso n al c re d ito rs, th e n rem ain in g (M 8 0 T -1 -33m ) 48
assets av ailab le fo r p a rtn e rsh ip d eb ts E xpense
(N 8 0 L -I-I9 m ) 91 Increased b y interest e q u iv a len ts w hen a m o u n ts funded a re le ss than
L im ited pen sio n c o st accrued (N 8 0 T -1-25m ) 104
C re d ito r’s o b tain in g c h arg in g o rd e r ag ain st lim ited p a rtn e r’s interest M ax im ized accrued ex p en se (M 8 1 P I-1-7m ) 111
b eco m es in e ffe c t an assig n ee o f th at in terest M ax im u m annual prov isio n (M 8 0 T -1-34m ) 49
(N 8 0 L -1-24 m ) 92 N orm al c o st
D isso lu tio n D e finition (M 81T -5) 165
G e n eral p artn ers la st to b e p a id in re sp ec t to cap ital N orm al c o st is in cluded in b o th m in im u m and m a x im u m lim its
(N 8 1 L -1-2 3 m ) 206 (M 8 1 T -1 -37m ) 162
L iab le an d m u st satisfy ju d g m e n t to ex te n t it has assets V ested b en efits and w h at th e ir actu arially c o m p u te d value
(M 8 1 L -5 ) 157 re p re sen ts (M 8 1 T -5 ) 165
P a rtn e r b eco m es liab le as g en eral p a rtn e r b y assu m in g m an ag erial
ro le (M 8 1 L -5 ) 157 PERT
L im ited p artn ers See Q u an titativ e m eth o d s
R ig h t to sue g en eral p a rtn e rs fo r d a m a g es b ased u pon th eir n egligence
o r b re a ch o f fid u ciary d u ty (M 8 0 L -5 ) 44 P ercen tag e-o f-co m p letio n m eth o d
N ew p a rtn e r
See L o n g -term co n tracts
A g re e m en t to satisfy a n y p rio r p a rtn e rsh ip d eb ts o f w ith d raw ing
p a rtn e r m ak es n ew p a rtn e r fully liab le fo r firm d e b ts occurring
P erio d c ost
b efo re and a fte r his en try (N 8 0 L -1 -2 1 m ) 91
W ag es o f salespersons (M 8 1 T -1-4 1 m ) 162
P a rtn e r m ay no t su b m it lo n g -sta n d in g d isp u te w ith c u sto m er to
arb itratio n w ith o u t u n an im o u s a sse n t o f re m a in in g p artn ers
(N 8 1 L -1-22m ) 206 P lant assets
P a rtn e r’s receip ts u pon liq u id atio n o f p a rtn ersh ip See F ixed assets
(N 8 1 P II-2 -2 6 m ) 186
P ro fits d iv id e d eq u ally w h ere o n ly ag re em en t is o ral an d is th a t all losses P lan t, p ro p e rty a nd eq u ip m en t
a b o v e cap ital c o n trib u te d in v ested b y p artn ers w ill be a ssum ed by See Fixed assets
o n e specific p a rtn e r (N 8 1 L - 1 -18m ) 205
R etired p a rtn e r liable to firm c re d ito rs fo r debts in cu rred w h ile active P o w e r o f a ttorney
p a rtn e rs, d espite a g re em en t o f re m a in in g p a rtn e rs to assum e his See A gency
liab ility (N 8 1 L -1 -12m ) 206
S ep arate legal e n tity as an e m p lo y e r fo r w o rk e r’s c o m p en sation P red e c esso r a uditor
p u rp o ses (N 8 1 L -1-2 0 m ) 206 See A u d ito r’s report
247
Index
P referred sto ck P roperty

See D iv id en d s p ayable B u y er b u y s land w ithout a ssum ing ex istin g m o rtg ag e (cont.)
S to ck S e lle r d efaults
B u y er ex p ected to p ay ex istin g m o rtg ag e (M 80L -4) 43
P resen t value S e lle r still has p e rso n al liab ility to p a y , and m o rtg ag o r has no rights
See Q u an titativ e m eth o d s a g ain st b u y e r (M 80L -4) 43
C o m p an y h o ld in g v alid second m o rtg ag e p ro p e rly filed and reco rd ed
P rice-lev el a cco u n tin g p rio r to sale o f the land has rig h t to be p a id by new o w n e r o r
C o n stan t d o lla r foreclose (N 8 1 L -4 ) 214
C o m p u ta tio n o f su p p lem en tary b a la n ce sheet a m o u n ts fo r land, C ontract fo r purchase
in v estm en t in b o n d s to b e h e ld to m a tu rity , a n d lo n g -term D efects revealed in title search
debt (M 8 0 P I- 1 - 12m) 4 I f title not m a rk e ta b le, p u rc h a se r w o n ’t have to p ro c e ed w ith
C o n su m e r P rice In d ex fo r A ll U rb a n C o n su m ers u sed clo sin g (N 8 0 L -1-47 m ) 95
(N 8 0 T -1 -26m ) 104 E a sem en t m ay be evid en ced by u n p a v ed road
D e p reciatio n e x p en se (M 8 1 P II-1 -1 m ) 123 (M 8 1 L -1 -52m ) 154
D escrib e and in clu d e how am o u n ts c o m p u ted Instru m en t g iven fo r pu rc h a se is non-n eg o tiab le if states on face that
(M 8 1 T -3 ) 164 p ay m en t is co n tin g en t on the m a k e r’s sale o f his o w n real
G ain o n n et m o n etary item s (N 8 1 P I-1-6 m ) 169 p ro p e rty (N 8 0 L -1-46m ) 95
N on m o n etary L and
In v e n to ries, o th e r th a n th o se u sed on co n tra c ts E a sem en t d an g er (M 8 0 L -1 -1 1 m ) 35
(N 8 1 T -1 -7 m ) 216 L ease
P rin cip al advantage o v e r h isto rical c o st (M 8 1 T -3 ) 164 A ssig n m e n t d oes no t ex tin g u ish le s s e e ’s ob lig atio n to p ay if assignee
C o n sta n t d o lla r su p p lem en tary statem en ts de fa u lts (N 8 0 L -1-48 m ) 95
D e p reciatio n (N 8 0 P I- 1 -17m ) 56 M o rtg a g o r sold subject to m o rtg ag e b u t b u y e r did not assum e it, b u y e r
C u rre n t c o st la te r aban d o n ed a nd m o rtg ag o r m u st satisfy m ortgage d ebt if
C o st o f goo d s so ld (N 8 1 P I- 1 - 17m ) 171 foreclosure yields le ss than unp aid b alance
D escrip tio n (M 8 1 T -3 ) 164 (M 8 1 L -1-53m ) 154
F ix e d assets n et c u rre n t c o st (M 8 1 P I-1 -1 m ) 110 Purchase c o n tra c t nonassignable (M 8 0 L -1 -2 0 m ) 37
In v en to ries P u rch aser o f la n d has c au se o f action against seller fo r n o t disclo sin g
L o w e r o f c u rre n t c o st o r re c o v erab le am o u n t sec o n d m ortgage very recen tly filed b efo re clo sin g
(N 8 1 T -1-6 m ) 216 (N 8 1 L -4 ) 214
P resen t valu e o f fu tu re c ash flo w s d o e s n o t c o n sid e r c o st o f a lternate R eal E sta te In v estm en t T ru st (R E IT )
u ses o f fu n d s (N 8 0 T -1 -7 m ) 102 N o t subject to federal incom e tax if distrib u te s all its incom e to the
R ep lacem en t investors and c o n sid ered an “ a ss o c ia tio n ” fo r tax p u rp o ses
A c cu m u late d d e p re ciatio n on su p p lem en tary statem en t (M 8 0 L -1-49 m ) 41
(N 8 0 P I- 1 -18m ) 56 Sale o f a b usiness
W h y d e p re ciatio n d iffers fro m h isto rical c o st, a n d w h e th er h ig h e r o r B o th a ssig n m e n t o f rig h ts and d e le g atio n (assu m p tio n ) o f d u ties by
lo w e r (M 8 1 T -3 ) 164 se lle r and b u y er, w ith seller b e co m in g su rety and b u y e r
b e co m in g p rin cip al d e b to r, w ith c re d ito r’s rig h ts
P rincip le u n affected (M 80L -3) 42
See O b je ctiv ity p rin cip le Second m ortgagee fo reclo ses b u t first m o rtg ag ee m u st be satisfied
b efo re second m o rtg ag ee entitled to re p a y m e n t
P rior p erio d a d ju stm en ts (M 8 1 L -1 -54m ) 154
C o rre c tio n o f erro r in p rio r y e ar (M 8 1 T - 1 -13m ) 160
R etain ed earn in g s statem en t ad ju stm en t o f o p en in g b alan ce P ro vision fo r p ro d u c t w arranty
(N 8 1 T -1-2 4 m ) 218 L iability co m p u tatio n (M 8 0 P II- 1 - 12m) 17
P riv ileg ed co m m u n icatio n

P urchasing d epartm ent
N o t re c o g n iz ed b etw een C P A a n d clie n t in a b sen ce o f statute
P rim ary fu nctions
(M 8 1 L -1-2 m ) 146
A c q u isitio n o f specified quality (N 8 0 A -1 -40 m ) 83
Prizes
See L iab ility
P robab ility (risk ) an aly sis

E x ten sio n o f sen sitiv ity an aly sis (N 8 1 T -1 -5 8 m ) 221 Q
P rogram e v alu atio n re v ie w tech n iq u e

Q uality co n tro l
See Q u an titativ e m eth o d s— P E R T
A cceptance o f client
In q u iries o f p ro p o se d c lie n t’s legal co u n se l and p re v io u s aud ito rs, and
Pro fo rm a statem en ts
rev iew statem en ts (M 8 1 A -1 -36m ) 140
See A u d ito r’s rep o rt— O p in io n s
For reaso n ab le assurance th a t pro fessio n al serv ices co n fo rm w ith
stan d ard s (N 8 0 A - 1 - 10m ) 80
P roperty
Prim ary p u rp o se fo r e sta b lish in g p o lic ie s and p ro c e d u re s fo r deciding
A tto rn ey lia b le fo r n eg lig en ce fo r failin g to d isco v e r n ew ly filed second
w h e th er to accept a new c lient o r co n tin u e services to a cu rren t
m o rtg ag e on la n d p rio r to its p u rch ase b e ca u se h is search w as too
c lie n t is to m in im ize the likelih o o d o f a sso c iatio n w ith clien ts
fa r in ad v an ce o f clo sin g (N 8 1 L -4 ) 214
w h o se m a n a g em e n ts la c k integrity (M 8 0 A -1 -58m ) 30
B reach o f co n tract
In ten tio n al
S u b stan tial p e rfo rm an c e d o c trin e in co n stru ctio n Q uantitativ e m ethods
(M 8 0 L -3 ) 42 See also B reak ev en point
B u y er b u y s lan d w ith o u t a ssu m in g ex istin g m o rtg ag e C o st o f capital
248
Index
Q u an titativ e m eth o d s (cont.) Q u an titativ e m ethods

E c o n o m ic o rd e r q u an tity S tatistical sam pling (cont.)
C o m p u ta tio n o f to tal an n u al re le v a n t c o sts o f m a n u fa c tu re r differences or ra tio s is less th a n th a t o f the populatio n s o f b o o k
(M 8 0 P I-2 -3 1 m ) 7 valu es o r a udited v a lu e s (M 8 0 A -1 -43 m ) 28
E stim a te s n ecessary (N 8 0 T -1 -36m ) 105 R an d o m ex am p le (N 8 1 A -1 -25m ) 197
F o rm u la co u ld d e te rm in e o p tim u m size o f p ro d u c tio n ru n R atio e stim ation
(N 8 1 T -1-5 4 m ) 221 W h en appropriate and inap p ro p riate (N 8 0 A -1 -41 m ) 83
H ig h -lo w p o in ts m eth o d R isk m ath em atically m e a su re d (M 8 1 A -1 -1 1 m ) 138
V ariab le c o st p e r d ire c t-la b o r h o u r (N 8 1 P I-2 -2 5 m ) 172 S m a lle r sam ple if d e sired re lia b ility d ecreases
Intern al ra te o f retu rn (N 8 0 A -1 -20m ) 81
See C ap ital b u d g etin g S y stem atic
L in ea r p ro g ram m in g A p p ro p riate w hen fo rm s n o t co n se c u tiv e ly n u m b ered
C o n strain t fo rm u la (N 8 0 P I-2 -3 0 m ) 58 (M 8 0 A -1 -5m ) 25
G rap h ic m e th o d o f solv in g S ystem atic sam pling startin g w ith ran d o m item
O p tim a l solution alw ay s a t a c o m e r p o in t d e sc rib e d by th e feasible S y stem atic item s in pop u latio n m ay d estroy ra n d o m n e ss
area (N 81 T -1 -5 9 m ) 221 (N 8 1 A -1 -29m ) 197
G rap h ic m eth o d o f so lv in g c an b e u sed w h en m o re th a n tw o S y ste m a tic, stratified, and seq u en tial selectio n b e tte r th a n b lock
co n strain ts (N 8 0 T -1-4 1 m ) 105 selectio n fo r a u d ito r (N 8 1 A - 1 -12m ) 195
O b jectiv e function (m in im izatio n o f p ro d u c t co st) S tatistical scattergraph
(M 8 0 P I-2 -3 6 m ) 8 S eparate fixed and variab le e le m en ts o f sem iv ariab le expense
N e t p re sen t value (N 8 0 T -1-47 m ) 106
See also C apital b u d g etin g
C o m p u ta tio n , g iv en c o st a n d life o f m a c h in e, no salv a g e , y e arly cash Q uasi-reo rg an izatio n
flo w n et o f ta x e s, a n d p re sen t v alu e o f an n u ity at e x p ec te d rate o f C om m on sto ck account re d u c tio n (M 8 1 P I-1 -20 m ) 113
re tu rn (M 8 0 P I-2 -3 9 m ) 7 R etain e d earn in g s (deficit) is $0 im m ed iately after
O rig in al in v estm en t co m p u ta tio n , g iv e n p o sitiv e n e t p re sen t value (N 8 0 P II- 1 - 18m) 70
am o u n t, c ash in flo w s, and p re sen t valu e m u ltip liers S tock h o ld ers’ e q u ity total a fte r w ritin g d ow n fix ed assets
(M 8 0 P I-2 -2 2 m ) 5 (N 8 0 P II- 1 -17m) 70
O p tim u m size o f p ro d u c tio n run
U se eco n o m ic o rd e r q u a n tity fo rm u la (N 8 1 T -1 -5 4 m ) 221
PERT (N 8 0 T -1 -4 2 m ) 105
E x p e c te d tim e fo r co m p le tio n o f p h a se , g iv e n th re e estim ates
(N 8 1 P I-2 -2 9 m ) 173 R
R ed u c e total tim e o n ly b y sh o rten in g critic a l p ath
(N 8 1 T -1-5 5 m ) 22/ R ate o f re tu rn
P resen t v alu e See C ap ital bud g etin g
See also C apital b u d g e tin g
Fix ed assets— M ach in e R atios
In v estm en ts— B onds See also E arnings p e r share
C o m p u tatio n o f in co m e on sale o f p a te n t u tilizin g p resen t value o f an A cco u n ts receiv ab le tu rn o v e r (N 8 0 P I-1 -5 m ) 54,
an n u ity (M 8 0 P I-4 ) 12 (M 8 1 P II- 1 - 16m) 125
C o st o f m ach in e to b e p aid fo r tw o y ears h en ce (w ith p rin c ip a l and L arge decrease m ay in dicate fictitio u s sales in la te r y ear
in terest) w o u ld b e to tal p a y m e n t m u ltip lied by p re sen t v alu e o f (N 8 1 A -1 -20m ) 196
1 (M 8 0 T -1-4 8 m ) 50 A cid test (quick) ratio
P ro b ab ility A c co u n ts receiv ab le in clu d ed b u t n o t inven to ries
E x p e c te d value o f a d d ed m o n th ly in co m e fro m n e w p ro d u ct (M 8 1 T -1-40 m ) 162
(N 8 0 P I-2 -3 6 m ) 59 B o o k v alu e p e r share (M 8 1 P II-1 -20 m ) 126,
P ro b ab ility (risk) an aly sis (M 8 1 P II-2 -2 2 m ) 126
S en sitiv ity an aly sis e x te n sio n (N 8 1 T -1 -5 8 m ) 22/ T o tal shareholders’ e q u ity d iv id e d b y no. o f sh ares outstan d in g
R ate o f re tu rn (N 8 1 T - 1 - 19m) 2 /7
See C ap ital b u d g etin g C u rre n t (M 8 1P I I-1-18m ) 125
R eg ressio n an aly sis C o lle ctio n o f accounts receiv ab le has no effect
M ea su re s p ro b ab le e rro r o f c o st b e h av io r an aly sis (N 8 1 T -1 -39m ) 2 /9
(M 8 0 T -1-4 6 m ) 50 In c re a se s by p a y m e n ts to c re d ito rs o n la st d ay o f m onth
S tatistical sam p lin g (M 8 0 T -1 -1 m ) 46
A ttrib u te M ea su re s short-term solvency (M 8 0 T -1 -50m ) 50
E stim a te p ercen tag e o f slo w -m o v in g inv en to ry item s D ifferen c e and ratio estim atio n
(N 8 0 A -1 -5 9 m ) 85 A u d it efficien cy en h an c e d because variab ility o f popu latio n s o f
R an d o m selectio n w ith o u t sam p le size c h o se n by statistical differen c e s o r ratios is less th a n th at o f the po p u la tio n s o f b ook
co n cep ts m ay n o t ach iev e d e sired level o f co n fid en ce v a lu e s o r au d ited v alu es (M 8 0 A -1-4 3 m ) 28
(N 8 1 A -1-7 m ) 195 D iv id en d -p ay o u t
S a m p le size m u st b e k n o w n to a p p raise resu lts C o m p u ta tio n o f d iv id e n d s to c o m m o n g iven n e t in c o m e , p re fe rred
(M 8 1 A - 1 -18m ) 138 d iv id e n d s, and th is ra tio (M 80P I- 1 - 13m ) 4
T o d eterm in e ra te o f b illin g e rro rs o n in v o ices In v en to ry tu rn o v e r (M 8 1 P II-1-17m ) 125
(N 8 0 A -1-4 3 m ) 83 O p e ra tin g cycle
T o estim ate p e rcen tag e o f slo w -m o v in g in v en to ry item s C o m p u tatio n in v o lving c o st o f g o ods sold, a v erag e in v en to ry , net
(N 8 1 A -1-5 4 m ) 200 sale s, average re c eiv ab le s a nd a 360 d ay busin ess y e ar
C o m p lia n ce testing (M 8 0 P I-1-7m ) 3
O b jectiv e o f p re c isio n is to e stim ate the ra n g e o f p ro ced ural P rice-earn in g s ratio o n co m m o n (N 8 1 P I- 1 - 10m ) 169
d ev iatio n s in th e p o p u la tio n (M 8 0 A -1 -27 m ) 27 Q u ic k (a c id test) (M 81 P II-1-15m ) 125,
P recisio n o b je c tiv e is estim ate ra n g e o f p ro ced u ral d ev iatio n s in (N 8 1 P I-1-4m ) 168
p o p u latio n (M 8 1 A -1 -6 0 m ) 142 R etu rn o n co m m o n sto c k h o ld e rs’ e q u ity (N 8 0 P I-1 -7m ) 55
D ifferen c e an d ra tio estim atio n R eturn o n investm ent
A u d it efficien cy e n h an c e d b ecau se v ariab ility o f p o p u latio n s o f In c o m e divided by to ta l assets (M 8 1 T -1 -30m ) 161
249
Index
R eal esta te in v estm en t trust Sales

See also Pro p erty See also C ontracts
P ro v id es lim ited liab ility fo r in v estin g p arties A u d itin g pro ced u res fo r records a fte r app ly in g c o m p u te riz ed audit
(N 8 0 L -1-4 5 m ) 95 p ro g ram (M 8 0 A -3 ) 31
B reach o f co n tract
R eceiv ab les R ejec te d (rightfully) goods m ak es seller b e a r loss
See also A c co u n ts re c eiv ab le (M 8 1 L - 1 -17m) 148
N o tes receiv ab le S h ip m en t o f d ifferen t b ra n d than o rdered
D e falcatio n s (M 8 1 L - 1 -15m) 148
Sales re tu rn s ch arg ed b y e x p erie n ce d b o o k k eep er B u lk (N 81L -5) 214
( M 8 lA -1-4 6 m ) 141 M ajo r legal p ro c e d u re s to m ake tran sactio n v alid and effectiv e against
P resen t v alu e v alu atio n o f future am o u n ts v a lid a ted b y g o in g co n cern a ny c re d ito r a nd w h at they a tte m p t to p re v e n t
c o n ce p t (M 8 1 T -1-2 m ) 159 (N 8 1L -5) 214
N e ce ssity o f p re c au tio n s tak en b y b u y e r (N 81L -5) 214
R E IT C o m p u te riz ed audit p ro g ram u ses in p erfo rm in g su b stan tiv e tests o f
See R eal esta te in v e stm en t trust re c o rd s in th e ir m a c h in e re a d ab le fo rm (M 80A -3) 31
In solvency o f seller
R elate d p arty tran sactio n s G oo d s n o t identified to b u y e r’s c o n tra c t w ill p re v e n t b u y e r from
See also A u d it p ro ced u res o b ta in in g the g o o d s (M 8 1 L -1-2 0 m ) 149
D isclo su re In stallm ent
N o n m o n e ta ry e x ch a n g e s m ay be in d icativ e In co m e co m p u tatio n (M 8 0 P I-4 ) 12
(M 8 1 A -1-27 m ) 139 W arranties
Several m ad e or im p lie d as to qu a lity o f radio an d its re c ep tio n allow
b u y e r to re scin d th e sale w h e n ra d io p ro v e d to b e less th a n fa ir or
R ep lac e m en t o f m ach in es
a v erag e (N 8 1 L -5 ) 214
See D ecisio n m ak in g
W arranty a g ain st in frin g em en t
P ro tec ts seller if b u y e r’s specificatio n s re su lt in in frin g e m en t
R ep o rt (M 8 1 L - 1 -14m) 148
See A c c o u n ta n t’s re p o rt W arran ty o f title
A u d ito r’s rep o rt S e lle r o f stolen used c a r w ill b e a r loss th o u g h so ld w ith usu al
S p ecial re p o rt d isclaim e r o f w a rra n ty (M 8 1 L -1- l6 m ) 148
R ep o rts on in tern al co n tro l S ales com m issio n s

E x ten d a ttest fu n ctio n (N 8 1 A -1 -5 0 m ) 199 E x a m p le o f ex p en se re c o g n itio n p rin c ip le o f a ssociating cause and
e ffe c t (M 8 1 T -1 -3m ) 159
R ep rese n ta tio n letters
G A A S re q u ire s th at c erta in w ritten re p re sen ta tio n s b e o b ta in e d from S ales returns
m a n a g em e n t (M 8 0 A -1-4 5 m ) 29 See A u d it procedures
S ig n ed b y client
R esp o n sib ility o f a u d ito r u n ch an g ed (N 8 1 A -1 -3 4 m ) 198
SA S
See also S tatem en ts o n A u d itin g S tandards
R ese arch an d d e v elo p m en t (M 8 1P I - 1-14 m ) 112 N o. 1 (M 80A -1 -1 m ) 25, (M 8 0 A -5 ) 31,
C ap italize d , co n fe r w ith m a n a g em e n t re g a rd in g ex p en sin g (M 8 0 A -1-6m ) 25, (N 8 0 A -1 -2m ) 79,
(M 8 1 A -1-4 0 m ) 140 (N 8 0 A -3 ) 85, (M 81A -3) 143,
E x p e n se in v o lv in g d e sig n , c o n stru ctio n , a n d testin g (N 8 1 A -1-2m ) 194,
(M 81A -5) 143,
(N 8 1 P II- 1 -10m) 183 (N 8 1 A -1 -6m ) 195, (N 8 1 A -1 -10m ) 195,
E x p e n sed as in cu rred (N 8 1 P I-1 -1 2 m ) 170, (N 8 1 A - 1 -13m) 195, (N 8 1 A -1-2 6 m ) 197,
(N 8 1 P II-1 -5 m ) 183 197, (N 8 1 A -1 -32m ) 198,
(N 8 1 A -1-27m )
T e stin g in search fo r o r ev alu atio n o f p ro d u ct o r p ro c e ss a lternatives (N 8 1 A -1-47m ) 199, (N 8 1 A -1-48 m ) 199,
ex p en se d c u rre n tly (N 8 0 T -1 -27 m ) 104 (N 8 1 A -1 -51m ) 199, (N 8 1 A -1 -5 2ra) 199,
(N 8 1 A -1-56m ) 200, (N 8 1 A -1 -59m ) 200
R esp o n sib ility a cc o u n tin g N o. 2 (N 80A -2) 85, (M 81A -3) 143,
C o n tro lla b le co sts d ire c tly in flu en ced by g iv en m a n a g er w ithin given (N 8 1 A -1 -9m ) 195, (N 8 1 A -1 -1 1 m ) 195,
p e rio d (N 8 1 T -1-51 m ) 221 (N 8 1 A -1-24m ) 196, (N 8 1 A -1 -31m ) 197,
(N 8 1 A -1-42m ) 198
R etain ed earn in g s N o. 3 (M 80A -3) 31, (N 8 1 A - 1 - 10m ) 195,
See also Q u asi-reo rg an izatio n (N 8 1 A -1-4 5 m ) 199
B alan ce (N 8 0 P II-1 -6 m ) 68 N o. 5 (N 80A -3) 85, (N 8 1 A -1 -1 1 m ) 195
B alan ce a fte r sm all sto ck d iv id en d and n et loss N o. 6 (M 80A -3) 31, (N 8 0 A -1 -23 m ) 81
(M 8 1 P IM -1 3 m ) 125 N o. 7 (N 81A - 1 - 14m) 195
B alan ce a fte r sto ck split (N 8 1 P I-1 -11m ) 170 N o. 11 (M 81A -3) 143
N o. 12 (M 80A -1 -1 1 m ) 26, (N 8 1 A -1 -57m ) 200
N o. 14 (M 80A -1-46 m ) 29, (N 80A -2) 85,
(M 8 1 A -1-42m ) 141, (N 8 1 A -1 -39 m ) 198,
(N 8 1 A -1 -58m ) 200
S (M 8 1 A -1 -53m ) 142, (N 8 1 A -1 -35m ) 198
N o. 15
N o. 16 (M 8 1 A -1 -5m ) 137, (M 8 1 A -1-58m ) 142,
S ale and leaseb ack (N 8 1 A -1-21 m ) 196, (N 8 1 A -1-4 5 m ) 199
S eller-lessee N o. 17 (M 8 1 A -1 -57m ) 142, (N 8 1 A - 1 -18m) 196
O p eratin g lease N o. 18 (N 8 1 A -1 -42m ) 198
R elin q u ish e s su b sta n tia lly all re m a in in g u se an d re c o rd s g a in as N o. 2 0 (N 8 1 A -1-33m ) 198. (N 8 1 A -1 -53m ) 200,
sales p ric e m in u s carry in g v alu e m in u s p re sen t v alu e o f lease (N 8 1 A -1 -55m ) 200
re n ta ls (N 8 1 P II-2 -3 3 ) 187 N o . 21 (M 80A -3) 31
250
Index
SA S (cont.) S ecured T ran sa ctio n s A rticle (N 8 0 L -1 -37m ) 94,

N o . 22 (N 8 0 A -3 ) 85 (N 8 0 L -1 -38m ) 94
N o . 23 (M 8 0 A -4 ) 31, (N 8 0 P II-1 -1 m ) 79,
(M 8 1 A -5 ) 143, (N 8 1 A -1-2 7 m ) 797 S ecurities A c t o f 1933
N o. 24 (N 8 0 A -1 -32 m ) 82 See also Federal sec u rities reg u latio n
N o . 25 (M 8 0 A -1 -58 m ) 30, (N 8 0 A - 1 - 10m) 80, (N 8 0 L -1 -39m ) 94, (M 8 1 L -1-21m ) 149,
(M 8 1 A -1 -36m ) 140 (M 81L -4) 157, (N 81L -2) 212
N o . 26 (N 8 1 A -1 -56 m ) 200, (N 8 1 A -1-58 m ) 200
N o . 30 (M 8 1 A -1 -5m ) 137, (N 8 1 A -1 -5 0 m ) 199
S ecu rities a n d E x change C o m m issio n (M 8 1 L -1-4 m ) 146,
N o . 31 (N 8 1 A -1 -60 m ) 200
(M 8 1 L -4 ) 157
Sched u le o f u n ad ju sted d ifferen ces
S ecurities E x c h a n g e A c t o f 1934
See A u d it p ro ced u res— U n ad ju sted d ifferen c e s sch ed u le
See also F ed eral sec u rities re g u la tio n
S ec. 10b a nd rule 10b-5 (M 8 1 L -1-4m ) 146
SE C (N 8 0 A -1-5 5 m ) 84
S ecu red tran sactio n s S egm ents

C o n sig n m en t See also D isco n tin u ed o p eratio n s (d isp o sal o f a segm ent)
C o n sig n o r c an n o t re c o v e r h is g o o d s fro m assig n e e o f in so lv en t, Iden tifiab le asset o f seg m en t is an in tangible used b y th a t seg m ent
b e ca u se he d id n o t g iv e n o tice o f c o n sig n m en t to c re d ito rs o f (N 8 1 T -1-4 0 m ) 220
co n sig n e e (M 8 1 L -3 ) 156 O p eratin g p ro fit (M 8 1 P I-1-4 m ) 110
R eq u ire m en ts to p e rfe c t (M 8 1 L -3 ) 156 O p eratin g p ro fit o r loss
D e b to r in d e fa u lt n o t e n title d to c o m p u ls ory d isp o sitio n o f c o llateral Includes allo cated co m m o n c o sts (M 8 0 T -1 -38m ) 49
(ta k e n b y c red ito r) w h ic h ex ce e d s in v alu e th e lo a n O p e ra tin g p ro fit o r loss inclu d es a m o n g o th e r ite m s traceable
o u tsta n d in g (N 8 0 L -1 -3 1 m ) 93 c o sts (M 8 1 T -1 -39m ) 162
F ield w areh o u sin g R ev en u es o f segm ent ex ce e d 10 p e rc e n t o f to tal re v e n u es o f all the
D a n g ers o f re lin q u ish in g re c eip ts to p le d g o r (M 8 0 L -4) 43 e n te rp ris e ’s industry segm ents an d selected d a ta m u st b e separately
S ecu rity in terest in re c e ip ts a tta ch e s (tim in g ) (M 8 0 L -4) 43 re p o rte d (N 8 0 T -1 -28 m ) 104
T a k in g p o ssessio n o f th e re c eip ts p erfects secu rity in terest
(M 8 0 L -4 ) 43 S e nsitivity an aly sis
V alid (M 8 0 L -4 ) 43 P robability (risk) a n aly sis is e x te n sio n ( N 8 lT -1 -58m ) 221
F ilin g re q u ire m e n t a p p lie s to facto rin g o f acco u n ts re c eiv ab le
(N 8 1 L -1 -5 0 m ) 210 S h erm an A c t (M 8 1 L -1 -57m ) 155
H o ld e r to w h o m n eg o tia b le w areh o u se re c eip ts w ere in d o rse d h a s legal
title th o u g h th ey w ere sto len an d b o u g h t b y a n o th e r in g ood S h o rt-term ob lig atio n s refin an ced (M 8 1 P II-2 -3 1 m ) 128
fa ith ( N 8 lL -1-4 7 m ) 210
In c lu d e s o u trig h t sale o f re c eiv ab le s (N 8 0 L -1 -3 8 m ) 94 “ Slush fu n d s ”
L ien c re d ito r lev ied p rio r to p e rfe c tio n b y filin g o f sec o n d c re d ito r and See A u d it p ro c e d u re s— D iv e rsio n o f proceeds
p re v a ils (M 8 1 L -3 ) 156
O ral a ssig n m e n t o f re c eiv ab le s is n o t an en fo rceab le security interest as S o cial S ecu rity A ct
b e tw ee n b a n k ru p t’s d eb to rs and assig n ee E m p lo y er and em p lo y e e ta x ra te s are e q u al
(N 8 0 L -1 -36m ) 94 (M 8 1 L -1 -59m ) 155
P e rfec te d secu rity interest
A s o f d ate ag reem en t w a s sig n ed d esp ite fact not filed u n til 4 days S ocial security tax
la te r (N 8 0 L -1 -35m ) 94 E arnings lim itatio n (M 8 0 L - 1 -18m ) 36
A u to m o b ile d e a le r’s fin an cin g ag re em en t w ith b a n k g av e ban k N o t ap p licab le to p ay m en ts o n a cc o u n t o f sickness
secu rity in terest in all v eh icles o n his p re m ise s, b a n k la te r (N 8 1 L -1 -30 m ) 207
p ro p e rly filed , bu t th e secu rity in terest is p e rfe c te d as o f d ate of S e lf-em p lo y ed c o n trib u tio n s (M 8 0 L -1 -17m ) 36
th e ag reem en t (N 8 1 L -1 -4 5 m ) 210
B o th m a n u fa c tu re r an d re ta ile r m u st file to p e rfe c t th e ir in terests in S pecial order
in v en to ry sold to a n o th e r w h ere it b e ca m e eq u ip m en t See D e cisio n m aking
(N 8 0 L -1-33 m ) 93
M eth o d s in clu d e filin g , p o sse ssio n a n d atta ch m e n t, b u t n o t S pecial re p o rts
co n se n t (N 8 0 L -1-3 7 m ) 94 Issu e d in co n n ectio n w ith statem e n ts p re p a re d o n co m p re h e n siv e b asis
M u st b e filed w ith in 10 d ay s a fte r a ttach m en t (N 8 0 L -3 ) 99 o th e r th a n G A A P (M 8 1 A -1-4 2 m ) 141
N e g o tia b le w areh o u se re c eip ts g iv e (a fte r p e rfe c te d secu rity in te re st is P rinted fo rm de sig n e d b y a u th o ritie s re q u irin g asse rtio n a u d ito r be lie v es
o b ta in e d ) a p e rfe c te d sec u rity in te re st in g o o d s th e re c eip ts is n ’t ju s tifie d sh o u ld be re w o rd e d o r a sep arate re p o rt sh ould be
re p re sen t (N 8 1 L -1-4 4 m ) 209 a tta ch e d (M 8 0 A -1-46 m ) 29
P o ssessio n o f sec u rities is o n ly w ay fo r b a n k m a k in g co lla teralize d
lo a n s on th em (N 8 0 L -1 -3 4 m ) 93 SSARS
P erfectio n b y p o ssessio n N o. 1 (N 8 1 A -1 -56m ) 200
P rec e d es tim e lien c re d ito r o b tain ed rig h ts, an d p rev ails
(M 8 1 L -3 ) 156 S tate sec u rities law s
P u rch ase m o n ey security in terest F ilin g g e n erally re q u ire d and clearan ce to o ffer a nd sell w ith in the
E n title s pu rch ase m o n e y le n d e r to p rio rity th ro u g h a ten -d ay grace state (M 8 1 L -4 ) 757
p e rio d fo r filing (N 8 1L - 1-4 6 m ) 210
T a k e n in c o n su m e r g o o d s so ld , th e secu rity in terest is p e rfe c te d upon S tatem ent o f ch an g es in fin a n c ia l positio n
atta ch m e n t (N 8 1L - 1-4 8 m ) 210 See also A u d it p ro c e d u re s
P u rc h a s e r’s rig h ts to m erch an d ise fin an ce c o m p an y tries to re p o sse ss not A u d ito r’s re p o rt— O p in io n — Q ualified
a ffe c te d by h is k n o w le d g e th a t seller (in d e fa u lt) fin an cin g W o rk in g capital
in v en to ry and sales th ro u g h fin an ce co m p an y A m o rtiza tio n o f b o n d d isco u n t show n a s ex p en se no t re q u irin g use o f
(N 8 0 L -1 -3 2 m ) 93 fu n d s (N 8 0 T -1 -30m ) 104
R eq u ire m en ts fo r a secu rity in terest to attach A m o rtiza tio n o f p atents a d d ed to n e t incom e
(N 8 1 L -1-4 9 m ) 210 (N 8 1 T -1 -33m ) 279
251
Index
S tatem en t o f ch an g es in fin an cial p o sitio n (cont.) Stock

C ash b asis C om m on (cont.)
In c re a se d inv en to ry a d ju st in co m e a ssu m es use o f c ash N o p a r w ith stated value
(M 8 1 T -1-2 6 m ) 161 A c co u n tin g fo r issu an ce a b o v e stated value
C ash co lle cte d fro m a cc o u n ts re c eiv ab le (N 80T -5) 108
(M 8 1 P II-2 -2 5 m ) 127 P referred
C ash p a y m e n ts to a cc o u n ts p a y ab le to su p p liers N o n cu m u lativ e
(M 8 1 P II-2 -2 6 m ) 127 D iv id e n d s p assed o v e r do not a ccu m u late, w ith in b o a rd o f d ire c to rs
C ash p a y m e n ts fo r n o n -c u rren t a sse ts p u rch ases d iscretio n w h e th e r to d e clare a nd no t o v e r-rid d en b y co u rts
(M 8 1 P II-2 -2 8 m ) 127 unless d ishonesty o r c le ar ab u se o f d iscretion
C ash re c eip ts n o t p ro v id e d by o p eratio n s (N 80L -2) 98
(M 8 1 P II-2 -2 7 m ) 127
F o rm at
Stock c ertificates
C ash (M 8 0 T - 1 - 18m ) 47 B ona fid e p u rc h a se r a cq u ire s free o f cla im s o f p a rty w ho lost
Q u ic k assets (M 8 0 T -1 -1 8m ) 47
sto ck (N 8 0 L - 1 - 10m ) 90
W o rk in g cap ital (M 8 0 T - 1 -18m ) 47
In clu d es retirem en t o f lo n g -term d e b t b y issu an ce o f p re fe rred stock
b e ca u se o f th e all-fin an c ia l re so u rc e s c o n ce p t S to c k d iv id en d s
(M 8 0 T -1 -17m ) 47 In v o lv ed in b alance o f re ta in e d e arn in g s (N 8 0 P II-1 -6m ) 68
N e t c h an g e in e a c h e le m e n t o f w o rk in g cap ital m u st b e p re sen te d fo r R esu lt in n o c h an g e in to ta l sto c k h o ld e rs’ equity
c u rre n t p erio d (M 8 0 T -1 -2 0 m ) 47 (N 8 1 P II-1 -20m ) 185
N et in co m e Sm all
A d d itio n s E ffe ct o n retain ed e arn in g s a nd to ta l s to c k h o ld e rs ’ equity
A m o rtiza tio n o f b o n d d isco u n t (M 8 0 T - 1 - 19m ) 47 (N 8 0 T -5 ) 108
N o te s p a y ab le d etails o f tra n sac tio n s o f m o re co n ce rn to a u d ito r th a n E n try (N 8 0 P II-1 -5m ) 68
c a sh , tra d e re c eiv ab le s, o r d iv id en d s p a y ab le, o n ce th e a u d ito r is M ark et p ric e d ate o f d e claratio n c ap italize d
satisfied th at th e b a la n ce sheet a n d in co m e statem en t are fairly (N 8 0 P II- 1 -16m ) 69
p re sen te d (M 8 0 A -1-4 4 m ) 29 M ark et v a lu e o f sh ares issu e d c h arg ed (M 8 0 T -1 -3 9 m ) 49
O p e ra tio n s R etain e d e arn in g s b a la n ce after th is a nd n e t loss
W o rk in g cap ital p ro v id e d c o m p u ta tio n (M 8 0 P I- 1 -18m ) 5 (M 8 1 P I- 1 - 13m ) 125
P resen ted fo r e ac h p erio d fo r w h ic h an in co m e statem e n t is p re sen te d
w h e n ev e r b alan ce sh eet in fo rm atio n is a lso p re sen te d (fo r any Stock o p tio n p la n
y ear) (M 8 0 T - 1 - 16m ) 47 See also S to c k pu rch ase p la n (fo r e m p lo y e es) and sto ck op tio n p la n fo r
S o u rce s an d u ses c o m p u ta tio n (M 8 0 P I- 1 - 19m ) 5 e x ec u tiv e s
S o u rce s to ta l (N 8 1 P I- 1 - 18m) 171 C o m p en sato ry
S to c k d iv id e n d n o t d isclo se d (N 8 0 T -1 -2 9 m ) 104 E x p e n se re c o g n iz ed in p e rio d serv ice s re n d e re d w h e re g ra n t d a te is
W o rk in g c ap ital b asis m e a su re m e n t d ate (M 8 1T - 1-19 m ) 160
B ad d e b ts e x p en se re la te d to lo n g -term re c eiv ab le s ad d ed to S to c k op tio n s ou tsta n d in g c re d ite d d a te o f g ra n t (w h e n sam e as
in c o m e (M 8 1 T -1 -2 7 m ) 161 m e a su re m e n t d a te ) (M 8 1T - 1-38m ) 162
W o rk in g c ap ital c o n c e p t (N 8 0 P II-4 ) 75 E ntry a t d a te o f g ran t (M 8 0 T -4 ) 52
W o rk in g c ap ital p ro v id e d b y o p e ra tio n s (N 8 1 P I-1 -2 0 m ) 171
S tock o p tions
S tatem en ts o n A u d itin g S tan d ard s C o m p e n sa tio n ex p en se , e x ercisa b le a fte r tw o years serv ice, o p tio n price
See also SA S less th a n m a rk e t d a te o f g ran t (M 8 1 P II-1 -11m ) 124
P rim ary p u rp o se is c la rify G A A S (M 8 1 A -1 -4 1 m ) 141 C o m p e n sa tio n ex p en se , e x ercisa b le a fte r tw o y e ars serv ice, o p tio n price
= m a rk e t price d ate o f g ra n t (M 8 1 P II- 1 - 10m ) 124
S ta te m e n ts o n Q u a lity C o n tro l S tan d ard s C o m pensatory
N o. 1 (M 8 1 A -1 -36 m ) 140 E x p e n se re c o g n iz ed in y ears services ren d e re d , w h en issu e d at
b e g in n in g o f those years a nd e x ce ss o f m a rk e t o v e r o p tio n price
S tatem en ts o n resp o n sib ilities in ta x p ra c tic e at m e a su re m e n t date re a so n a b ly e stim ab le a t date o f g ra n t
S ec. 131 (M 8 0 A -1 -2m ) 25 (N 8 1 T -1-38m ) 219
S ec. 181 (M 8 0 A -1 -2 2 m ) 27 Jo u rn al e n trie s fo r issu a n c e, te rm in a tio n , e x ercise , and ch arg es to
S ec. 201 (M 8 1 A -1 -38m ) 140 com p e n sa tio n e x p en se in each o f th re e y ears
(N 8 1 P I-5 ) 180
S tatem en ts o n Stan d ard s fo r A c co u n tin g a n d R ev iew S erv ices
See S S A R S S tock p u rc h a se p lan (for e m p lo y e es) a nd sto ck o p tio n p lan fo r ex ec u tiv e s
C o m p a re and co n tra st the acc o u n tin g o n d a te sto ck issues
S tatistical sam p lin g (M 8 0 T -4 ) 52
See Q u an titativ e m eth o d s
S tock p u rc h a se w arrants
S tatu te o f F rau d s (N 8 0 L - 1 - 16m ) 91,
See S tock w arrants
(M 8 1 L - 1 - 19m ) 149, (M 8 1 L -1-3 3 m ) 151,
(M 8 1L -1 -3 9 m ) 152
A g en cy fo r co m in g y e a r e n te re d in to in p reced in g m o n th sh o u ld be in a S tock rights
sig n ed w ritin g (N 8 0 L -1 -2 5 m ) 92 See also S to c k h o ld e rs’ e q uity
G rant by co m p a n y to its sh areh o ld ers o f o p p o rtu n ity to b u y add itio n al
Stock shares w ithin sp ecified tim e at specified price
See also C ap ital stock (N 8 1 T -1 -2 3 m ) 218
S to c k options
S to c k split S to c k split
S to c k w arran ts D e creases p a r a nd increases n u m b e r o f shares
C om m on (M 8 1 T -1 -1 m ) 159
A c co u n tin g fo r su b sc rip tio n at p re m iu m (N 8 0 T -5 ) 108 P a r v alu e afterw ards (N 8 1 P II-2 -3 8 m ) 188
252
Index
S to ck w arran ts S u retyship (cont.)

G ain o n sale in v o lv in g allo catio n o f c o st o f sto ck b e tw ee n sto ck and C osureties
w a rra n ts issu ed (M 8 1 P II- 1 - 12m ) 125 R elease o f o ne surety re le a se s o th e r sureties to e x te n t o f rele a se d
S to c k h o ld e rs ’ eq u ity in c re a se d by to ta l fa ir m a rk e t v alu e o f de ta ch a b le s u re ty ’s p ro p o rtio n o f the a g g re g ate c o s u re ty ’s guarantees
sto ck w arran ts issu e d w ith n o n co n v ertib le b o n d s (N 8 0 L -3 ) 99
(N 8 0 P II- 1 -19m ) 70 C re d ito r m a y p ro c e ed im m ed iately a g ain st the surety
V alu e in p a id -in c ap ital (th o se a ttach ed to d e b t secu rity ) (N 8 0 L -3 ) 99
( M 8 lT -1 -9m ) 159 D e b t a lso secured by m o rtg ag e
S urety w ho pays is sec u re d c re d ito r to ex ten t o f m o rtg ag e a nd g eneral
S to c k h o ld e rs ’ eq u ity c re d ito r fo r b alan ce (M 8 0 L -1-42 m ) 40
See also A d d itio n al p a id -in cap ital D eb to r d efaulted
B u sin ess co m b in a tio n s— P o o lin g o f in terests C re d ito r en title d to re c o v e r fro m su rety , unless surety is g u a ra n to r o f
C ap ital in e x ce ss o f p a r v alu e c o lle ctio n and c re d ito r failed to ex ercise d u e d iligence
D iv id en d s p ay ab le (N 8 1 L -1-2 5 m ) 206
Q u a si-re o rg a n iza tio n D e fa u lt a nd p ay m en t b y surety
R etain e d e arn in g s S urety en title d to su b ro g atio n to rig h ts o f c re d ito r o r re im b u rse m e n t
Sto ck fro m o b lig o r (M 8 1 L -1 -35m ) 151
S to ck d iv id e n d s S urety m ay assert rig h ts b y su b ro g atio n to co lla teral p ro v id ed by
S to ck o p tio n s a n o th e r party to th e d e b to r (M 8 0 L -1 -36m ) 39
S to ck split S urety re so rts to su b ro g a tio n rig h ts to c ollateral
S to ck w a rra n ts (M 8 1 L -1 -38m ) 152
T reasu ry sto ck F rau d u len t m isre p re se n ta tio n s b y c re d ito r to in d u c e surety p re v e n ts
N e t assets in creased b y issu an ce o f sto ck fo r sto ck o f a n o th e r c o m pany c re d ito r from e n fo rc in g surety und ertak in g
and fo r a fin d e r’s fee (N 8 0 P II- 1 - 13m ) 69 (M 8 1 L -1 -36m ) 152
S c h ed u le o f all tra n sac tio n s affe c tin g an d b alan ce G u a ra n to r o f c o llection
(M 8 0 P I-5 ) 13 D ifferen t than typ ical su rety re la tio n sh ip is th at g u a ra n to r is not
T o tal (N 8 0 P II-1-4 m ) 68 im m ed iately liable u p o n d efault— c re d ito r m u st first p ro c e ed
a g ain st d e b to r (M 8 0 L -1 -39m ) 39
S ub scrip tio n s receiv ab le L iable fo r those d e b ts fo r w h ic h ju d g m e n t is o b ta in e d and re tu rn e d
See S to c k — C o m m o n unsatisfied (N 8 1 L -1 -2 7 m ) 207
N e ith e r o b lig o r’s failu re to g ive no tice n o r actu al ab an d o n m en t o f
S u b se q u en t e v en ts p ro je c t w ill re le a se surety (M 8 1 L -1 -3 7 m ) 152
See also A u d it p ro ced u res R efu se d te n d e r o f p e rfo rm an c e b y d e b to r ju s t b e fo re c lo sin g tim e o f
D ifferen c e b e tw ee n th o se req u irin g a d ju stm en t a n d th o se re q u irin g c re d ito r releases surety (M 8 0 L -1-4 4 m ) 40
d isclo su re (M 81A -21 143 R elease o f c o llateral b y le n d e r re le a se s surety to e x te n t o f its
D efin itio n (M 8 1 A -2 ) 143 v alu e (N 8 1 L -1 -24 m ) 206
M ay b e la b e led u n a u d ite d w h en o c cu rs b e tw ee n d a te s o f a u d ito r’s S urety is lia b le fo r re n t o f lease o n e x te n d ed term w h ere c lause in
o rig in al re p o rt a n d reissu an ce o f th e re p o rt orig in al lease p ro v id e d p o ssib ility o f e x te n d ed term
(N 8 0 A - 1 -16m) 80 (N 8 1 L -1 -29m ) 207
O c cu r su b seq u en t to b a la n ce sheet b e fo re a u d ito r’s re p o rt S urety is liable in full im m ediately u p o n d e fa u lt b y o b lig o r, b u t w ill
(N 8 1 A -1-5 2 m ) 199 u p o n satisfaction o f the d e b t be entitled to co lla teral h eld by
c re d ito r (N 8 1 L -1 -27m ) 207
S u b sta n tiv e tests T w o sep arate su rety sh ip co n tra c ts fo r sale loan
See also A u d it p ro c e d u re s S urety fo r full a m o u n t w ho p ays m ay c o lle ct fro m o th e r surety th a t
A n a ly tic al rev iew p ro c e d u re s p ro p o rtio n o f the to ta l g u a ra n te es fo r w h ic h th e o th e r surety
D e fin itio n , u ses in in itia l au d it p la n n in g , and u ses d u rin g a udit co n tra c ted (M 8 0 L -1-41m ) 41
(M 8 0 A -4 ) 31
S u ccesso r a u d ito r
In teg rity o f m a n a g em e n t m ay b e re fle c te d in c lie n t’s re fu sa l to perm it
c o m m u n ic atio n w ith p re d e ce sso r a u d ito r an d re v ie w o f those
w o rk p a p e rs (N 8 1 A - 1 - 14m ) 195
P red e c esso r w o rk in g p a p e r review T a x p ractice
B alan ce sh eet a cc o u n ts a n aly ses o f m o re in terest th a n th at o f incom e C o n trary p o sitio n to IR C re a so n a b le su p p o rt includes legal o p in io n s as
statem en t (M 8 1 A - 1 - 19m ) 138 to c o n stitu tio n a lity , c o n flic ts b e tw ee n sections o f IR C , an d tax
co u rt d ecisions n o t acq u iesc ed , b u t not p ro p o se d regulations
S u m m ary o f sig n ifican t a cc o u n tin g p o lic ie s (M 8 1 A -1 -38m ) 140
In clu d es b a sis o f c o n so lid atio n (N 8 0 T -1 -9m ) 102
In clu d es m eth o d s o f a m o rtiz in g in tan g ib les T reasu ry sto ck
(M 8 1 T -1 -2 8 m ) 161 See also A d ditional p a id -in cap ital
S to c k h o ld e rs’ e q uity
Sup erv isio n C o st m eth o d
See G e n erally acc e p te d a u d itin g stan d a rd s— S tan d ard s o f fie ld w o rk * E x c e ss re c eiv ed o v e r c o st is p a id -in c ap ital
(M 8 1 T - 1 -16m) 160
S u rety sh ip D ecrease in sto ck h o ld er’s e q u ity c au se d b y pu rc h a se
B an k ru p tc y o f o b lig o r (M 8 0 P II- 1 -19m) 18
I f surety pays w o rk ers in fu ll, it is en title d to sam e p rio rity in N o incom e o n sale (M 8 0 P II- 1 - 16m ) 17
b an k ru p tc y th a t w o rk e rs w o u ld h av e had
(N 8 1 L -1 -2 6 m ) 206 T ro u b le d d e b t restructure
C o n sid eratio n G ain d e b to r rep o rts in in co m e statem ent (N 8 1 P I-1 -14m ) 170
F o reg o in g rig h t to c all lo a n fo r o n e y e a r w as c o n sid e ra tio n fo r M o d ificatio n o f term s
sh a re h o ld e r’s p ro m ise to b e p erso n ally liab le fo r c o rp . lo a n , and D e b to r reco g n izes g a in w h e n c arry in g a m o u n t o f d e b t ex ce e d s total
c o n sid e ra tio n n e ed n o t pass to su rety (N 8 0 L -3) 98 fu tu re p a y m e n ts (N 8 1 T -1 -29m ) 218
253
Index
T rusts W ills, tru sts, and estates

See W ills, tru sts, a n d e sta te s E state d istrib u te d in a cc o rd (cont.)
a cc o u n t, o r life insurance (M 8 1 L -1 -5 0 m ) 154
E state tax m arital d ed u ctio n n o t av ailab le since h u s b a n d ’s (life) rights
u re p re sen t a term in ab le interest
E x e c u to r
(N 8 1 L -1-53 m ) 211
U pon a p p ointm ent b y c o u rt, he serv es as le g a l re p re sen ta tiv e o f

U n c o lle ctib le acco u n ts e sta te (M 8 0 L -1-4 0 m ) 40
See A d ju stin g en tries— B ad d eb ts E x e c u to r n am ed in w ill n e ed n o t serve if he d o e s n o t w ish
(N 8 0 L -1 -52m ) 96
U n ifo rm C o m m e rc ial C o d e (N 8 0 L - 1 -16m ) 91, In su ran ce p o lic y d e sig n a te d b e n efic iary o f in su ran ce no t c h an g e d by
(M 8 1 L - 1 -14m ) 148, (M 8 1 L -3 ) 156, w ill (M 8 0 L -1-45 m ) 40
(N 8 1 L -1 -5 0 m ) 210 L eft all re a l pro p erty to w ife fo r life a nd re m a in d e r to tw o d au g h te rs
(o v e r 21) as te n a n ts in co m m o n , and eith e r d a u g h te r m a y sell h e r
U n ifo rm L im ite d P a rtn e rsh ip A c t (N 8 1 L -1 -2 3 m ) 206 in terest w ithout c o n se n t o f o th e rs (N 8 0 L -1 -50 m ) 96
P arty n a m e d e x ec u trix in w ill d o e s n o t have le g a l rig h t to a c t fo r and
U n iv ersity a cc o u n tin g on b e h a lf o f esta te until w ill ad m itted to pro b ate a nd she
N o t-fo r-p ro fit a p p o in te d e x ec u trix (N 8 1 L -1-5 2 m ) 211
F u n d acco u n tin g an d a cc ru a l acc o u n tin g used P ro p erty b e q u ea th e d to w ife d e d u cted from e sta te fo r federal estate
(N 8 0 T -1-5 9 m ) 107 ta x (N 8 1 L -1 -54m ) 211
P ro p erty w ille d jo in tly to tw o c h ild re n (one d e ad ) a nd a q u it-cla im by
U n u su a l, b u t no t in freq u en t the live c hild w ill not co n v ey title to the en tire tra c t
P resen t sep arately in co n tin u in g o p e ra tio n s in c o m e , b u t n o t n e t o f (M 8 0 L -1-26m ) 37
ta x (M 8 1 T -1 -2 1 m ) 161
T rusts
F o r ta x separate en tity en title d to e x em p tio n (not e q u al a m o u n t to
in d iv id u a l), and trustee acc o u n ta b le to life b e n efic iaries an d to
V ultim a te takers (M 8 1 L -1-4 9 m ) 153
Incom e b en eficiary e n title d to en tire in terest o n in v e stm en ts w ithout
d ilu tio n fo r p rem iu m s bu t is not e n title d to p ro ceed s a ttrib u ta b le
V aluatio n
Im p u tin g in terest b a se d on (N 8 1 T -1 -1 m ) 216 to d isco u n ts u pon c o lle ctio n (M 8 0 L -1 -28m ) 38
In te r vivos
V ariab le c o st
C re ato r c a n re ta in p o w e r to re v o k e (N 8 0 L -1-5 1 m ) 96
G ra n d fa th e r tra n sfe rre d assets to T ru st C o m p a n y in tru st fo r
See C o st a cco u n tin g
gra n d c h ild re n irrev o c a b ly fo r 21 y e ars, re su ltin g in T ru st C o.
h a v in g legal title , g ra n d c h ild re n hav in g e q u ita b le title , a nd
V a ria tio n in gro ss p ro fit an aly sis
g ra n d fa th e r hav in g re v e rsio n ary interest
See G ro ss p ro fit v a ria tio n an aly sis
(N 8 0 L -1-4 9 m ) 96
In c o m e (a llocated) includes fo rfe ite d re n ta l sec u rity d e p o sits,
V erifiab ility
interest on m o rtg ag e , in su ran ce o n b u ild in g , a nd re n ta l
In c lu d e d w ith in o b jectiv ity (M 8 0 T -1 -26 m ) 48
c o lle ctio n agency serv ice fe e (M 8 1 L -1-5 1 m ) 154
P rin cip al p aym ents o n m o rtg ag e s a n d stre et a sse ssm e n t a llo c ate d to
V oluntary h e alth a n d w e lfa re o rg a n iz a tio n s
p rin cip al (N 8 1 L -1-51 m ) 210
N o t-fo r-p ro fit h ospital
T e sta m en ta ry trust c re ated b y w ill, g iv in g h u sb an d the life in co m e,
G ift n o t restricted b y d o n o r c re d ite d to n o n o p eratin g rev en u e
a nd c h ild re n v ested interest as re m a in d e rm e n , and the trustee
(M 8 1 T -1-6 0 m ) 164
o w e s a fid u ciary d u ty to b o th hu sb an d and child ren
P led g e re c eiv ed one y e ar, p a id n ex t y e ar, sp ec ified use in th ird y e ar
(M 8 0 L -1 -50m ) 41
acc o u n te d fo r as d e fe rre d cre d it e n d o f first tw o y ears a n d su p p o rt in
th ird y e a r (N 8 0 T -1-6 0 m ) 107
R estrictio n s p laced o n c erta in asse ts b y d o n o rs w o u ld b e a re a so n for W ith d raw al b y au d ito r
a d o p tin g fu n d acc o u n tin g (M 8 0 T -1 -5 9 m ) 50 M an a g e m e n t re p re sen ta tio n s in d o u b t after re fu sa l b y d ire c to rs a nd a udit
co m m ittee to act o n im m aterial illegal a c t b ro u g h t to a tte n tio n by
V o u c h er sy stem a u d ito r (N 8 1 A - 1 - 18m ) 196
S ub sid iary acco u n ts p a y ab le le d g e r m ay b e ju s tifie d w h ere p artial
p a y m e n ts to v en d o rs are co n tin u o u sly m ad e
(M 8 0 A -1 -56m ) 30 W o rk in g c ap ital
See also E rro rs a nd irreg u larities— E rrors
S tatem en t o f c h an g e s in fin an cial positio n
w C hange fo r y e ar (M 8 1 P II-2 -3 0 m ) 128
C o lle ctio n o f accounts re c eiv ab le has no effect
(N 8 1 T -1 -39m ) 219
W arran ts C om p u tatio n (M 8 1 P I- 1 -10m ) 111
See S to c k w arran ts C u rren t a sse ts and c u rre n t lia b ilities (N 8 0 T -1-4 m ) 102
D e crea sed b y cre d it to allo w an ce fo r b ad d ebts
W arran ty liab ility (M 8 1 P I-1 -3 m ) 110 (N 8 1 P II-1 -8m ) 183
See also L iab ility P ro v id ed b y operatio n s (M 8 1 P II-2 -2 9 m ) 128
P ro v isio n fo r p ro d u c t w arran ty R ed u c e d b y d iv id e n d d e claratio n , b u t not b y p a y m e n t
(N 8 1 P II- 1 -18m ) 185
W ills, tru sts, a n d estates
E sta te d istrib u ted in a cc o rd
In c lu d e s h o m e stea d o w n e d jo in tly w ith p re d e ce a se d p a rty , b u t not W o rk m e n ’s com p en satio n law s
g ifts to c h arity in c o n te m p latio n o f d e ath , jo in t sav in g s See E m p lo y e r and em p lo y e e re lationships
M071326
254
M071326

Uniform CPA Examination Questions May 1980 To November 1981

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Uniform CPA Examination Questions May 1980 To November 1981

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University of Mississippi

Uniform CPA examination questions May 1980 to

Follow this and additional works at: https://egrove.olemiss.edu/aicpa_exam

William C. Bruschi, Vice President-Review and Regulation

May 1980 ................................................................... 1 May 1981 .................................................................. 109

May 1980 .................................... .............................. 1 May 1981 ...................................................................109

May 1980 ............................................................ 14 May 1981 .................................................................. 122

May 1980 ................................................................... 24 May 1981 .................................................................. 136

May 1980 ................................................... ............... 33 May 1981 ............... ..................................................145

May 1980 ................................................................ . 45 May 1981 ................... .........................................158

Index ............................................................................................................................................................................. 223

Uniform Certified Public Accountant Examination

EXAMINATION IN ACCOUNTING PRACTICE — PART I

May 7, 1980; 1:30 to 6:00 P.M.

NOTE TO CANDIDATES: Suggested time allotments are as follows:

(Disregard of these instructions may be considered as indicating inefficiency in accounting work.)

Number 1 (Estimated time----- 45 to 55 minutes) 2. O n J u n e 3 0 , 1 9 7 9 , N e e d le C o r p o r a tio n p u r c h a se d

Answer Sheet Able Baker Total

W hat is th e b a la n c e in T r o y ’s “ A d d itio n a l P a id -in

Gain (Loss) fo r the Three Months Ended

13. S m ith Com pany had net in c o m e for 1979 of

What should be the working capital provided from Items to be Answered

Annual usage in units 7,200 Items to be Answered

47. During 1979 William Dover was granted a divorce

Number 5 (Estimated t i m e ------40 to 50 minutes)

During May 1977 Gilroy, Inc., was organized with

During 1979 Gilroy had the following transactions:

• in February Gilroy reacquired 30,000 shares of

EXAMINATION IN ACCOUNTING PRACTICE — PART II

May 8, 1980; 1:30 to 6:00 P.M.

NOTE TO CANDIDATES: Suggested time allotments are as follows:

(Disregard of these instructions may be considered as indicating inefficiency in accounting work.)

5. The Kirby Construction Company has consistently

Number 3 (Estimated time 45 to 55 minutes) Description Amount

May 8, 1980; 8:30 A.M. to 12:00 M

NOTE TO CANDIDATES: Suggested time allotments are as follows:

T o ta l............................................ ............................................... 150 210

(Disregard o f these instructions may be considered as indicating inefficiency in accounting work.)

57. The primary difference between an audit of the

Number 3 (Estimated time----- 15 to 25 minutes) Number 5 (Estimated time----- 15 to 25 minutes)

Note: Do not discuss the internal control system of the

Number 4 (Estimated tim e----- 15 to 25 minutes)

Analytical review procedures are substantive tests

EXAMINATION IN BUSINESS LAW

May 9, 1980; 8:30 AM to 12:00 M.

NOTE TO CANDIDATES: Suggested time allotments are as follows:

No. 1 ..................... 90 105

T otal............. 175 210

(Disregard of these instructions may be considered as indicating inefficiency in accounting work.)

Required: Answer the following, setting forth reasons

EXAMINATION IN ACCOUNTING THEORY

May 9, 1980; 1:30 to 5:00 P.M.

NOTE TO CANDIDATES: Suggested time allotments are as follows:

T o ta l............... 150 210

(Disregard o f these instructions may be considered as indicating inefficiency in accounting work.)

Cost ratio Ending inventory

Uniform Certified Public Accountant Examination

EXAMINATION IN ACCOUNTING PRACTICE — PART I

November 5, 1980; 1:30 to 6:00 P.M.

NOTE TO CANDIDATES: Suggested time allotments are as follows:

(Disregard of these instructions may be considered as indicating inefficiency in accounting work.)

97. The preferred stock was issued at par on July 1, 1978,

Instructions 24. Jonathan Company manufactures products N, P,

value of each warrant was $4. What amount of the pro