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Wiley CPA Exam Review Problems And Solutions Vol 2 2011-2012 38th Edition O. Ray Whittington, Patrick R. Delaney - Solutions
30. Lem Co., which accounts for treasury stock under the par value method, acquired 100 shares of its $6 par value common stock for $10 per share. The shares had originally been issued by Lem for $7 per share. By what amount would Lem’s additional paid-in capital from common stock decrease as a
29. Jane Co. owns 90% of the common stock of Dun Corp.and 100% of the common stock of Beech Corp. On December 30, Dun and Beech each declared a cash dividend of$100,000 for the current year. What is the total amount of dividends that should be reported in the December 31 consolidated financial
28. Jonn City entered into a capital lease for equipment during the year. How should the asset obtained through the lease be reported in Jonn City’s government-wide statement of net assets?a. General capital asset.b. Other financing use.c. Expenditure.d. Not reported.
27. In January, Stitch, Inc. adopted the dollar-value LIFO method of inventory valuation. At adoption, inventory was valued at $50,000. During the year, inventory increased$30,000 using base-year prices, and prices increased 10%.The designated market value of Stitch’s inventory exceeded its cost
26. Fenn Museum, a nongovernmental not-for-profit organization, had the following balances in its statement of functional expenses:Education $300,000 Fund-raising 250,000 Management and general 200,000 Research 50,000 What amount should Fenn report as expenses for support services?a. $350,000b.
25. Nongovernmental, not-for-profit organizations are required to provide which of the following external financial statements?a. Statement of financial position, statement of activities, statement of cash flows.b. Statement of financial position, statement of comprehensive income, statement of
24. Which of the following is a component of other comprehensive income?a. Minimum accrual of vacation pay.b. Cumulative currency-translation adjustments.c. Changes in market value of inventory.d. Unrealized gain or loss on trading securities.
23. What is the purpose of reporting comprehensive income?a. To summarize all changes in equity from nonowner sources.b. To reconcile the difference between net income and cash flows provided from operating activities.c. To provide a consolidation of the income of the firm’s segments.d. To
22. How should plan investments be reported in a defined benefit plan’s financial statements?a. At actuarial present value.b. At cost.c. At net realizable value.d. At fair value.
21. A company’s activities for year 2 included the following:Gross sales $3,600,000 Cost of goods sold 1,200,000 Selling and administrative expense 500,000 Adjustment for a prior-year understatement of amortization expense 59,000 Sales returns 34,000 Gain on sale of available-for-sale securities
20. A company has a defined benefit pension plan for its employees. On December 31, year 1, the accumulated benefit obligation is $45,900, the projected benefit obligation is$68,100, and the fair value of the plan assets is $62,000.What amount, if any, related to the defined benefit plan should be
19. Which of the following items would best enable Driver Co. to determine whether the fair value of its investment in Favre Corp. is properly stated in the balance sheet?a. Discounted cash flow of Favre’s operations.b. Quoted market prices available from a business broker for a similar asset.c.
18. Four years ago on January 2, Randall Co. purchased a long-lived asset. The purchase price of the asset was$250,000, with no salvage value. The estimated useful life of the asset was 10 years. Randall used the straight-line method to calculate depreciation expense. An impairment loss on the
17. On January 1, year 1, Newport Corp. purchased a machine for $100,000. The machine was depreciated using the straight-line method over a 10-year period with no residual value. Because of a bookkeeping error, no depreciation was recognized in Newport’s year 1 financial statements, resulting in
16. A company decided to sell an unprofitable division of its business. The company can sell the entire operation for$800,000, and the buyer will assume all assets and liabilities of the operations. The tax rate is 30%. The assets and liabilities of the discontinued operation are as
15. Grayson Co. incurred significant costs in defending its patent rights. Which of the following is the appropriate treatment of the related litigation costs?a. Litigation costs would be capitalized regardless of the outcome of the litigation.b. Litigation costs would be expensed regardless of the
14. Pann, a nongovernmental not-for-profit organization, provides food and shelter to the homeless. Pann received a$15,000 gift with the stipulation that the funds be used to buy beds. In which net asset class should Pann report the contribution?a. Endowment.b. Temporarily restricted.c. Permanently
13. Frame construction company’s contract requires the construction of a bridge in three years. The expected total cost of the bridge is $2,000,000, and Frame will receive$2,500,000 for the project. The actual costs incurred to complete the project were $500,000, $900,000, and$600,000,
12. Which of the following activities should be excluded when governmental fund financial statements are converted to government-wide financial statements?a. Proprietary activities.b. Fiduciary activities.c. Government activities.d. Enterprise activities.
11. On April 1, year 1, Hall Fitness Center leased its gym to Dunn Fitness Center under a four-year operating lease. Hall normally charges $6,000 per month to lease its gym, but as an incentive, Hall gave Dunn half off the first year’s rent, and one quarter off the second year’s rent. Dunn’s
10. Marr Co. had the following sales and accounts receivable balances, prior to any adjustments at year-end:Credit sales $10,000,000 Accounts receivable 3,000,000 Allowance for uncollectible accounts (debit balance) 50,000 Marr uses 3% of accounts receivable to determine its allowance for
9. Chape Co. had the following information related to common and preferred shares during the year:Common shares outstanding, 1/1 700,000 Common shares repurchased, 3/31 20,000 Conversion of preferred shares, 6/30 40,000 Common shares repurchased, 12/1 36,000 Chape reported net income of $2,000,000
8. Rowe Inc. owns 80% of Cowan Co.’s outstanding capital stock. On November 1, Rowe advanced $100,000 in cash to Cowan. What amount should be reported related to the advance in Rowe’s consolidated balance sheet as of December 31?a. $0b. $ 20,000c. $ 80,000d. $100,000
7. Which of the following transactions qualifies as a discontinued operation?a. Disposal of part of a line of business.b. Planned and approved sale of a segment.c. Phasing out a production line.d. Changes related to technological improvements.
6. Larkin Co. has owned 25% of the common stock of Devon Co. for a number of years, and has the ability to exercise significant influence over Devon. The following information relates to Larkin’s investment in Devon during the most recent year:Carrying amount of Larkin’s investment in Devon at
5. During the current year, the Finn Foundation, a nongovernmental not-for-profit organization, received a $1,000,000 permanent endowment from Chris. Chris stipulated that the income must be used to provide recreational activities for the elderly. The endowment reported income of $80,000 in the
4. Which of the following costs is unique to postretirement health-care benefits?a. Per capita claims.b. Service.c. Prior service.d. Interest.
3. Roy City received a gift, the principal of which is to be invested in perpetuity with the income to be used to support the local library. In which fund should this gift be recorded?a. Permanent fund.b. Investment trusts fund.c. Private-purpose trusts fund.d. Special revenue fund.
2. Encumbrances would not appear in which fund?a. Capital projects.b. Special revenue.c. General.d. Enterprise.
1. The replacement cost of an inventory item is below the net realizable value less a normal profit margin. The inventory item’s original cost is above the net realizable value.Under the lower of cost or market method, the inventory item should be valued ata. Original cost.b. Replacement cost.c.
50. According to the SEC, an auditor is not independent of its issuer audit client in which of the following situations:a. The auditor’s cousin has an insurance policy obtained from the issuer before it became an audit client.b. The auditor has an automobile loan at standard terms from the audit
49. In an accountant’s review of interim financial information, the accountant typically performs each of the following, excepta. Reading the available minutes of the latest stockholders’meeting.b. Applying financial ratios to the interim financial information.c. Inquiring of the accounting
48. An accountant has been engaged to compile pro forma financial statements. During the accountant’s acceptance procedures, it is discovered that the accountant is not independent with respect to the company. What action should the accountant take with regard to compilation?a. The accountant
47. When planning a review of an audit client’s interim financial statements, which of the following procedures should the accountant perform to update the accountant’s knowledge about the entity’s business and its internal control?a. Perform analytical procedures on selected accounts by
46. According to the AICPA Code of Professional Conduct, which of the following actions by a CPA most likely involves an act discreditable to the profession?a. Refusing to provide the client with copies of the CPA’s workpapers.b. Auditing financial statements according to governmental standards
45. An auditor discovers that an account balance believed not to be materially misstated based on an audit sample was materially misstated based on the total population of the account balance. This is an example of which of the following sampling types of risks?a. Incorrect rejection.b. Incorrect
44. The company being audited has an internal auditor that is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform.Under these circumstances, the independent auditor maya. Allow the internal auditor to perform tests of internal controls.b.
43. Which of the following should an auditor do when control risk is assessed at the maximum level?a. Perform fewer substantive tests of details.b. Perform more tests of controls.c. Document the assessment.d. Document the control structure more extensively.
42. Which of the following analytical procedures most likely would be used during the planning stage of an audit?a. Comparing current year to prior year sales volumes.b. Reading the financial statements and notes and considering the adequacy of evidence.c. Comparing the current year ratio of
41. A CPA purchased stock in a client corporation and placed it in a trust as an educational fund for the CPA’s minor child. The trust securities are not material to the CPA’s wealth but are material to the child’s personal net worth.According to the AICPA Code of Professional Conduct, would
40. A company hires one of its board members, a CPA, to issue accounting reports for the company. Assuming any required disclosures are made, which of the following reports may the CPA issue without violating independence rules?a. Compilations.b. Reviews.c. Audits.d. Agreed-upon procedures.
39. A portion of a client’s inventory is in public warehouses.Evidence of the existence of this merchandise can most efficiently be acquired through which of the following methods?a. Observation.b. Confirmation.c. Calculation.d. Inspection.
38. After issuing an auditor’s report, an auditor becomes aware of facts that existed at the report date that would have affected the report had the auditor known of the facts at the time. What is the first thing the auditor should do?a. Notify each member of the board of directors that the
37. An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. The entity’s financial statements adequately disclose its financial difficulties. Under these circumstances, the auditor’s report is required to
36. An auditor believes there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. In evaluating the entity’s plans for dealing with the adverse effects of future conditions and events, the auditor most likely would consider, as a
35. In auditing contingent liabilities, which of the following procedures would an auditor most likely perform?a. Confirm the details of outstanding purchase orders.b. Apply analytical procedures to accounts payable.c. Read the minutes of the board of directors’ meetings.d. Perform tests of
34. During a financial statement audit an internal auditor may provide direct assistance to the independent CPA in performing Tests of controls Substantive testsa. Yes Yesb. Yes Noc. No Yesd. No No
33. When assessing internal auditors’ objectivity, an independent auditor shoulda. Consider the policies that prohibit the internal auditors from auditing areas where they were recently assigned.b. Review the internal auditors’ reports to determine that their conclusions are consistent with the
32. General Retailing, a nonissuer, has asked Ford, CPA, to compile its financial statements that omit substantially all disclosures required by GAAP. Ford may comply with General’s request provided the omission is clearly indicated in Ford’s report and thea. Distribution of the financial
31. Which of the following statements is correct regarding internal control?a. A well-designed internal control environment ensures the achievement of an entity’s control objectives.b. An inherent limitation to internal control is the fact that controls can be circumvented by management
30. Which of the following statements is ordinarily correct about the sample size in statistical sampling when testing controls?a. The expected population deviation rate has little effect on determining the sample size.b. As the population size doubles, the sample size should also double.c. As the
29. Which of the following statement is correct concerning analytical procedures used in planning an audit engagement?a. They often replace the test of controls that are performed to assess control risk.b. They usually use financial and nonfinancial data aggregated at a high level.c. They usually
28. As a condition of obtaining a loan from First National Bank, Maxim Co. is required to submit an audited balance sheet but not the related statements of income, retained earnings, or cash flows. Maxim would like to engage a CPA to audit only it s balance sheet. Under these circumstances, the
27. How does an auditor make the following representations when issuing the standard auditor’s report on comparative financial statements?Consistent application of accounting principles Examination of evidence on a test basisa. Implicitly Explicitlyb. Explicitly Implicitlyc. Implicitly
26. An entity’s comparative financial statements include the financial statements of the prior year that were audited by a predecessor auditor whose report is not presented. If the predecessor’s report was qualified, the successor shoulda. Issue an updated comparative audit report indicating
25. An issuer may hire an employee of a registered public accounting firm who served on the audit engagement team within the previous year for which of the following positions?a. Controller.b. CFO.c. CEO.d. Staff accountant.
24. A person identified as an audit committee financial expert of an issuer generally must have acquired the attributes of a financial expert through any of the following experiences, excepta. As a principal financial officer, principal accounting officer, controller, public accountant, or
23. Which of the following is a correct statement regarding the nature and timing of communications between an accounting firm performing an initial audit of an issuer and the issuer’s audit committee?a. Prior to accepting the engagement, the firm must orally affirm its independence to the audit
22. When performing a review of interim financial information, an accountant would typically do each of the following, excepta. Consider the results from the latest audit.b. Test controls related to the preparation of annual financial information.c. Perform analytical procedures.d. Make inquiries
21. Which of the following statements would not normally be included in a representation letter for a review of interim financial information?a. To the best of our knowledge and belief, no events have occurred subsequent to the balance sheet and through the date of this letter that would require
20. Each of the following types of controls is considered to be an entity-level control, except thosea. Relating to the control environment.b. Pertaining to the company’s risk assessment process.c. Regarding the company’s annual stockholder meeting.d. Addressing policies over significant risk
19. Prior to, or in conjunction with, the information gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion?a.
18. Which of the following is not a component of internal control?a. Control environment.b. Control activities.c. Inherent risk.d. Monitoring.
17. Which of the following is a definition of control risk?a. The risk that a material misstatement will not be prevented or detected on a timely basis by the client’s internal controls.b. The risk that the auditor will not detect a material misstatement.c. The risk that the auditor’s
16. An auditor has identified the controller’s review of the bank reconciliation as a control to test. In connection with this test, the auditor interviews the controller to understand the specific data reviewed on the reconciliation. In addition, the auditor verifies that the bank reconciliation
15. After an audit report is issued, an auditor discovers that an important audit procedure was not performed. Which of the following procedures is acceptable in this situation?a. No further action is necessary if the audit report can still be supported.b. Let the current report stand and correct
14. Which of the following actions should a CPA firm take to comply with the AICPA’s quality control standards?a. Establish procedures that comply with the standards of the Sarbanes-Oxley Act.b. Use attributes sampling techniques in testing internal controls.c. Consider inherent risk and control
13. A CPA audits the financial statements of a client. The CPA has also been asked to perform bookkeeping functions for the client. Under the AICPA Code of Professional Conduct, which of the following activities would impair the CPA’s independence with respect to the client?a. The CPA records
12. Which of the following activities is an analytical procedure an auditor would perform in the final overall review stage of an audit to ensure that the financial statements are free from material misstatement?a. Reading the minutes of the board of directors’meetings for the year under audit.b.
11. The purpose of tracing a sample of inventory tags to a client’s computerized listing of inventory items is to determine whether the inventory itemsa. Represented by tags were included on the listing.b. Included on the listing were properly counted.c. Represented by tags were reduced to the
10. Before accepting an engagement to audit a new client, a CPA is required to obtaina. An assessment of fraud risk factors likely to cause material misstatements.b. An understanding of the prospective client’s industry and business.c. The prospective client’s signature to a written engagement
9. A CPA started to audit the financial statements of a nonissuer. After completing certain audit procedures, the client requested the CPA to change the engagement to a review because of a scope limitation. The CPA concludes that there is reasonable justification for the change. Under these
8. A CPA is reporting on comparative financial statements of a nonissuer. The CPA audited the prior year’s financial statements and reviewed those of the current year in accordance with Statements on Standards for Accounting and Review Services (SSARS). The CPA has added a separate paragraph to
7. When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmationsa. Copies of the client’s shipping documents that support the account balances.b. Lists of the customers’ recent payments that
6. Which of the following procedures would an auditor most likely perform to obtain evidence about the occurrence of subsequent events?a. Determine whether inventory ordered before the year-end was included in the physical count.b. Inquire about payroll checks that were recorded before year-end but
5. After considering management’s plans, an auditor concludes that there is substantial doubt about a client’s ability to continue as a going concern for a reasonable period of time. The auditor’s responsibility includesa. Disclaiming an opinion on the financial statements due to the
4. Which of the following statements extracted from a client’s lawyer’s letter concerning litigation, claims, and assessments most likely would cause the auditor to request clarification?a. “We believe that the possible liability to the company is nominal in amount.”b. “We believe that
3. Accepting an engagement to compile a financial projection most likely would be inappropriate if the projection is to be distributed toa. The entity’s principal stockholder, to the exclusion of the other stockholders.b. Potential stockholders in an offering statement.c. A financial institution
2. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern?a. Significant related-party transactions are pervasive.b. Usual trade credit from suppliers is denied.c. Arrearages in preferred
1. A primary objective of analytical procedures used in the final review stage of an audit is toa. Identify account balances that represent specific risks relevant to the audit.b. Gather evidence from tests of details to corroborate financial statement assertions.c. Detect fraud that may cause the
8. Which of the following is true about activity-based costing?a. It should not be used with process or job costing.b. It can be used only with process costing.c. It can be used only with job costing.d. It can be used with either process or job costing.
7. Which of the following definitions best characterizes benchmarking?a. A technique that examines product and process attributes to identify areas for improvements.b. The comparison of existing activities with the best levels of performance in other, similar organizations.c. The development of the
6. Which of the following procedures would an entity most likely include in its disaster recovery plan?a. Convert all data from EDI format to an internal company format.b. Maintain a Trojan horse program to prevent illicit activity.c. Develop an auxiliary power supply to provide uninterrupted
5. The greatest financial threat to an organization that implemented the financial accounting module of an enterprise resource planning (ERP) system from a major vendor exists from errors detected during which of the following times?a. Project initiation.b. Requirements determination.c. Table
4. A customer intended to order 100 units of product Z96014, but incorrectly ordered nonexistent product Z96015.Which of the following controls would detect this error?a. Check digit verification.b. Record count.c. Hash total.d. Redundant data check.
3. Which of the following cash management techniques focuses on cash disbursements?a. Lockbox system.b. Zero-balance account.c. Preauthorized checks.d. Depository transfer checks.
2. A project should be accepted if the present value of cash flows from the project isa. Equal to the initial investment.b. Less than the initial investment.c. Greater than the initial investment.d. Equal to zero.
1. In which of the following situations would there be inelastic demand?a. A 5% price increase results in a 3% decrease in the quantity demanded.b. A 4% price increase results in a 6% decrease in the quantity demanded.c. A 4% price increase results in a 4% decrease in the quantity demanded.d. A 3%
8. Furl Corp., a corporation organized under the laws of Sate X, sued Row, a customer residing in State Y, for nonpayment for goods sold. Row attempted to dismiss the suit brought by Furl in State Y on the grounds that Furl was conducting business in State Y but had not obtained a certificate of
7. Which of the following statements concerning the similarities between a general partnership and a corporation are correct?a. Corporate stockholders and general partners have limited personal liability.b. Corporations and general partnerships have perpetual existence.c. Corporations and general
6. Strom acquired a 25% interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a$24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom’s
5. If a corporation’s charitable contributions exceed the limitation for deductibility in a particular year, the excessa. Is not deductible in any future or prior year.b. May be carried back or forward for one year at the corporation’s election.c. May be carried forward to a maximum of five
4. Leker exchanged a van that was used exclusively for business and had an adjusted tax basis of $20,000 for a new van. The new van had a fair market value of $10,000, and Leker also received $3,000 in cash. What was Leker’s tax basis in the acquired van?a. $20,000b. $17,000c. $13,000d. $ 7,000
3. Which of the following rights is a holder of a public corporation’s cumulative preferred stock always entitled to?a. Conversion of the preferred stock into common stock.b. Voting rights.c. Dividend carryovers from years in which dividends were not paid, to future years.d. Guaranteed dividends.
2. Furl Corp., a corporation organized under the laws of State X, sued Row, a customer residing in State Y, for nonpayment for goods sold. Row attempted to dismiss the suit brought by Furl in State Y on the grounds that Furl was conducting business in State Y but had not obtained a certificate of
1. Which of the following statements concerning the similarities between a general partnership and a corporation are correct?a. Corporate stockholders and general partners have limited personal liability.b. Corporations and general partnerships have perpetual existence.c. Corporations and general
5. During the year, Jones Foundation received the following support:• A cash contribution of $875,000 to be used at the board of directors’ discretion;• A promise to contribute $500,000 in the following year from a supporter who has made similar contributions in prior periods;• Contributed
4. Governmental financial reporting should provide information to assist users in which situation(s)?I. Making social and political decisions.II. Assessing whether current-year citizens received services but shifted part of the payment burden to future-year citizens.a. I only.b. II only.c. Both I
3. A bond issued on June 1, 2011, has interest payment dates of April 1 and October 1. Bond interest expense for the year ended December 31, 2011, is for a period ofa. Three months.b. Four months.c. Six months.d. Seven months.
2. Simm Co. has determined its December 31 inventory on a FIFO basis to be $400,000. Information pertaining to that inventory follows:Estimated selling price $403,000 Estimated cost of disposal 20,000 Normal profit margin 60,000 Current replacement cost 360,000 Simm records losses that result from
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