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Tam Co. is negotiating for the purchase of equipment that would cost $100,000,with the expectation that $20,000 per year could be saed in after!tax cash costs ifthe equipment were acquired. The equipment"s estimated useful life is 10 years,with no residual alue, and would be depreciated by the straight!line method. Tam"spredetermined minimum desired rate of return is 12#. resent alue of an annuity

of 1 at 12# for 10 periods is %.&%. resent alue of 1 due in 10 periods at 12# is .'22.

(n estimating the internal rate of return, the factors in the table of present alues ofan annuity should be ta)en from the columns closest to

*+ 0.&%

+ 1.'0

C+ %.00

-+ %.&%

Correct *nswer C

/xplanation The internal rate of return factor is %.0. The internal rate of return timeadusted rate of return+ is that discount rate at which the present alue of thebenets equals the cost of the inestment.

resent alue of benet 3 (nestment$20,000 benet 4 factor 3 $100,0004 factor 3 $100,000 5 $20,000 3 %.0

6ebstar Corp. orally agreed to sell 7orthco, (nc. a computer for $20,000. 7orthcosent a signed purchase order to 6ebstar conrming the agreement. 6ebstar

receied the purchase order and did not respond. 6ebstar refused to delier thecomputer to 7orthco, claiming that the purchase order did not satisfy the 8CC9tatute of :rauds because it was not signed by 6ebstar. 7orthco sells computers tothe general public and 6ebstar is a computer wholesaler. 8nder the 8CC 9ales*rticle, 6ebstar"s position is ;;;;;;;;;;;;;;;;;

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*+ incorrect because it failed to obect to 7orthco"s purchase order.

+incorrect because only the buyer in a sale!of!goods transaction must sign thecontract.

C+correct because it was the party against whom enforcement of the contract isbeing sought.

-+ correct because the purchase price of the computer exceeded $%00.

Correct *nswer *

/xplanation * writing is not required to enforce a contract of more than $%00 if amerchant fails to obect within ten days to a conrming letter sent by anothermerchant. 9ince 6ebstar and 7orthco are both merchants and 6ebstar failed toobect to the purchase order sent by 7orthco, a writing signed by 6ebstar was notrequired under the 9tatute of :rauds. 8CC 9ales does not require that only the buyersign. 8sually only one party need sign whether buyer or seller+, but it can only beenforced against the one who signed. The failure of a merchant to obect to awritten conrmation is an exception to the rule that it can only be enforced againstthe one who signed.

:or a large population of cash disbursement transactions, 9mith, C*, is testingcompliance with internal control by using attribute sampling techniques.*nticipating an occurrence rate of '# 9mith found from a table that the requiredsample si%#.(f 9mith anticipated an occurrence rate of only 2# but wanted to maintain the samedesired upper precision limit and reliability the sample si

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Correct *nswer *

/xplanation (n this problem, the occurrence rate of '# and the other factorsindicated call for a sample of =00. (f the occurrence rate is made smaller, then the

sample would decrease and the only possible answer would be 200.

@ern and ate are partners with capital balances of $&0,000 and $20,000,respectiely. rots and losses are diided in the ratio of &0=0. @ern and atedecided to form a new partnership with Arant, who inested land alued at $1%,000for a 20# capital interest in the new partnership. Arant"s cost of the land was$12,000. The partnership elected to use the bonus method to record the admission

of Arant into the partnership. Arant"s capital account should be credited forB

*+ $12,000

+ $1%,000

C+ $1&,000

-+ $1>,000

Correct *nswer -

/xplanation 8nder the bonus method, the new partner"s capital account is creditedfor 20# of the new balance of total capital. The new total capital is >%,000 $&0,000 $20,000 $1%,000+. Arant"s capital balance will be 20# x $>%,000, or $1>,000.

The bonus to Arant of $=,000 $1>,000 capital balance ! $1%,000 contribution+ willbe charged against the old partners capital accounts according to their prot andloss ratio.

Dainbow wants to use unrestricted random sampling without replacement in 2010.Compared to 200>, the population si0# to >%#. 8nder these assumptions, the

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required sample si sample si sample si sample si%# will cause an increase in the sample si

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Iultiple regression diGers from simple regression in that it

*+ roides an estimated constant term.

+ Jas more dependent ariables.

C+ *llows the computation of the coeKcient of determination.

-+ Jas more independent ariables.

Correct *nswer -

/xplanation Degression analysis is a sampling technique which measures the

relationship of a dependent ariable to one or more independent ariables. (f oneindependent ariable is used, the method is referred to as simple regression. (f morethan one independent ariable is used, the method is referred to as multipleregression.

reed Co. telephoned 9tieb Co. and ordered '0 tables at $100 each. Areed agreed topay 1%# immediately and the balance within thirty days after receipt of the entireshipment. Areed forwarded a chec) for $=%0 and 9tieb shipped 1% tables the nextday, intending to ship the balance by the end of the wee). Areed decided that the

contract was a bad bargain and repudiated it, asserting the statute of frauds. 9tiebsued Areed. 6hich of the following will allow 9tieb to enforce the contract in itsentirety despite the statute of fraudsB

*+ 9tieb shipped 1% tables.

+ Areed paid 1%# down.

C+ The contract is not within the requirements of the statute of frauds.

-+ Areed admitted in court that it made the contract in question.

Correct *nswer -

/xplanation * writing is not required to enforce a contract for more than $%00 if the

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party to be charged admits in court that they made the contract. art receipt andpart payment only allow the contract to be enforced for the amount receied or theamount paid for and the question required the contract to be enforced in its entirety.

This contract was for more than $%00 and the 9tatute of :rauds applies.

Aoernmental nancial reporting should proide information to assist users in whichsituations+B

(. Ia)ing social and political decisions.((. *ssessing whether current!year citi

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-+ 6arranties to be made

Correct *nswer C

/xplanation The 9tatute of :rauds generally requires that the writing contain aquantity. (t does not require the designation of buyer and seller, the deliery termsor the warranties to be made.

Mour client, a retail store, is interested in the relationship between salesindependent ariable+ and theft losses dependent ariable+. 8sing the proper

formula, you compute the coeKcient of correlation at .>%. 6hat can you denitelyconclude about these factors sales and theft losses+B

*+ *n increase in sales causes an increase in theft losses.

+ Ioement of these factors is in opposite directions.

C+ Ioement of these factors is entirely unrelated.

-+ Ioement of these factors is in the same direction.

Correct *nswer -

/xplanation .>% as a coeKcient of correlation is ery high the maximum is at 1.0+,thus showing a denite cause!eGect relationship. *n increase in sales causes anincrease in theft losses is incorrect because it does not proide for the fact that adecrease in sales would be associated with a decrease in theft. Ioement of thesefactors is in the same direction is correct because it coers both possibilities and isthe most correct.

*n accountant who is not independent of a client is precluded from issuing a

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*+ Deport on management adisory serices

+ Compilation report on historical nancial statements

C+ Compilation report on prospectie nancial statements

-+ 9pecial report on compliance with contractual agreements

Correct *nswer -

/xplanation NCompilation report on historical nancial statementsN andNCompilation report on prospectie nancial statements.N do not require theaccountant to render any assurance on the fairness of presentation of theinformation contained in the nancial statements historical or prospectie+. NDeporton management adisory sericesN does not require that an accountant to beindependent. Joweer, when issuing a report on compliance with a contractualagreement the C* must be independent before a negatie assurance is issued.

a)er, C*, was engaged to reiew the nancial statements of Jall Company, anonpublic entity. /idence came to a)er"s attention that indicated substantialdoubt as to Jall"s ability to continue as a going concern. The principal conditionsand eents that caused the substantial doubt hae been fully disclosed in the notes

to Jall"s nancial statements. 6hich of the following statements best describesa)er"s reporting responsibility concerning this matterB

*+ a)er is not required to modify the accountant"s reiew report.

+ a)er is not permitted to modify the accountant"s reiew report.

C+a)er should issue an accountant"s compilation report instead of a reiewreport.

-+ a)er should express a qualied opinion in the accountant"s reiew report.

Correct *nswer *

/xplanation *n accountant"s reiew report must be modied for departures fromA** and5or inadequate disclosure only. The going concern problem is adequately

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disclosed in the nancial statementsO therefore no modication of the accountant"sreiew report is necessary. The accountant may modify his reiew report but again itis not necessary to do so.

6hich of the following may be used to estimate how inentory warehouse costs areaGected by both the number of shipments and the weight of materials handledB

*+ /conomic order quantity analysis.

+ robability analysis.

C+ Correlation analysis.

-+ Iultiple regression analysis.

Correct *nswer -

/xplanation Degression analysis is a mathematical technique used to predict thealue of one ariable and its changes the dependent ariable+ based upon thealue of some other ariable the independent ariable+. 9imple regression analysisinoles the use of only one independent explanatory+ ariable, while multipleregression analysis allows for more than one independent ariable.

9tar Co. leases a building for its product showroom. The ten!year non!renewablelease will expire on -ecember '1, 200>. (n Hanuary 2010, 9tar redecorated itsshowroom and made leasehold improements of $=?,000. The estimated useful lifeof the improements is ? years. 6hat amount of leasehold improements, net ofamorti

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Correct *nswer C

/xplanation Eeasehold improements are capitali

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8nder the 9ales *rticle of the 8CC, which of the following statements is correctB

*+ The obligations of the parties to the contract must be performed in good faith.

+ Ierchants and nonmerchants are treated ali)e.

C+ The contract must inole the sale of goods for a price of more than $%00.

-+ 7one of the proisions of the 8CC may be disclaimed by agreement.

Correct *nswer *

/xplanation 8CC 9ales requires all parties to act in good faith.

The remaining answer choices are incorrect for the following reasons

Q Ierchants are held to a higher standard in some cases.Q Aoods may be sold for less than $%00.Q roisions of the 8CC may be disclaimed. :or example, implied warranties may bedisclaimed if the disclaimer is conspicuous.

Fn Hanuary 1, 2010, Jarrow Co. as lessee signed a e!year noncancellableequipment lease with annual payments of $100,000 beginning -ecember '1, 2010.Jarrow treated this transaction as a capital lease. The e lease payments hae apresent alue of $'P>,000 at Hanuary 1, 2010, based on interest of 10#. 6hatamount should Jarrow report as interest expense for the year ended -ecember '1,2010B

*+ $'P,>00

+ $2P,>00

C+ $2=,200

-+ $0

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Correct *nswer *

/xplanation The interest expense for 2010 is $'P,>00Rthe eGectie interest rate10#+ times the Hanuary 1, 2010, present alue $'P>,000+.

rea)!een analysis assumes that oer the releant range

*+ 8nit reenues are nonlinear.

+ 8nit ariable costs are unchanged.

C+ Total costs are unchanged.

-+ Total xed costs are nonlinear.

Correct *nswer

/xplanation 6ithin the releant range, ariable costs per unit do not change. *basic assumption of brea)!een 5 C.4.. analysis is linearityO therefore, neither unitreenues nor total xed costs are nonlinear. *s ariable cost per unit areunchanged, total ariable cost changes proportionately with actiity. Therefore, totalcost cannot be unchanged.

*n auditor who was engaged to perform an examination of the nancial statementsof a nonpublic entity has been as)ed by the client to refrain from performingarious audit procedures and change the nature of the engagement to a reiew ofthe nancial statements in accordance with standards established by the *(C*.

The client"s request was made because the cost to complete the examination wassignicant. 8nder the circumstances the auditor would most li)ely

*+ Lualify the auditor"s report and refer to the scope limitation.

+ 4iew the request as an indication of a possible irregularity.

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C+ Complete the examination which was in progress.

-+ Jonor the client"s request.

Correct *nswer -

/xplanation The client has changed the type of serice that it wishes the C* toperform. efore honoring the request, the C* should determine whether the clienthas a sound business reason for the change. (n this case, the cost of the audit wasexcessie and could be honored by the C*.

.

Degulation

The Aemini Corporation has a production machine with a tax basis of $?0,000 and afair alue of $>1,000. (t is traded for a newer model machine with a fair alue of$100,000. Aemini also pays cash of $?,000. 6hich of the following is trueB

a. 7o taxable gain and the tax basis of the new asset is $100,000

b. 7o taxable gain and the tax basis of the new asset is $??,000

c. $1,000 taxable gain and the tax basis of the new asset is $100,000

d. $1,000 taxable gain and the tax basis of the new asset is $??,000

The answer and explanation were correct, but copied below after a few ads.

Mou are all set.

D/A *nswer

*nswer is This is a trade of li)e!)ind property. 7o gain is recogni

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:*D

*ssets and liabilities occasionally hae to be reported at fair alue. :air alues canbe determined in many diGerent ways. To help accountants )now which is the bestmethod to use to determine fair alue, :*9 created a three!leel fair aluehierarchy. 6hich of the following is not true about that hierarchyB

a. *n inestment in :ord Iotor Co. shares is alued at its stoc) price which is aEeel 1 aluation.

b. * potential asset retirement obligation is alued at the present alue of the

estimated future cash Sows which is a Eeel 1 aluation.c. * building acquired in trade is alued based on the recent sales price of anearby building that was similar which is a Eeel 2 aluation.

d. * donut franchise is alued based on the sales price of a similar pastry franchisea few miles away which is a Eeel 2 aluation.

Degulation

The Aemini Corporation has a production machine with a tax basis of $?0,000 and afair alue of $>1,000. (t is traded for a newer model machine with a fair alue of$100,000. Aemini also pays cash of $?,000. 6hich of the following is trueB

a. 7o taxable gain and the tax basis of the new asset is $100,000

b. 7o taxable gain and the tax basis of the new asset is $>>,000

c. $1,000 taxable gain and the tax basis of the new asset is $100,000d. $1,000 taxable gain and the tax basis of the new asset is $>>,000

*uditing

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The *ragon Company has two ban) accounts. * chec) for $20,000 is drawn onban) one late on -ecember '1 and deposited into ban) two on the same day. (npreparing a year!end ban) reconciliation for ban) two, the chec) is listed as a

deposit in transit. (n preparing a year!end ban) reconciliation for ban) one, thechec) is not listed as outstanding. 6hat is the client most li)ely doing hereB

a. * wash transfer

b. @iting

c. * reciprocal transaction

d. Dealignment posting

/C

* company holds $'00,000 in cash in a ban) account. The company iews thisbalance as a speculatie balance. 6hich of the following is most li)ely to be trueB

a. The money is being held in case a litigation claim is lost

b. The money is being held in case a weather emergency arises

c. The money is being held in case unexpected repairs are required in an electricgenerator

d. The money is being held in case inentory prices from suppliers suddenlydrops.

*nswers

:*D

*nswer is

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*ccording to :*9, Eeel 1 aluations are preferred because they are based onactie mar)et prices such as the stoc) price for :ord shares+. Eeel 2 comes nextwhich is based on obserable inputs such as the sales price of a nearby building orfranchise. Those sales prices are real not assumptions. Eeel ' aluations are theleast desirable because they are based on unobserable inputs that are based on

assumptions. 8sing the present alue of future cash Sows is only an estimate andcannot be obsered until time passes. The asset retirement obligation is a Eeel 'aluation rather than Eeel 1.

D/A

*nswer is

This is a trade of li)e!)ind property. 7o gain is recogni1,000 and cash with a taxbasis of $?,000. 7ew asset has a total tax basis of $>>,000.

*uditing

*nswer is

y adding the money as a deposit in transit while not recording the reduction as anoutstanding chec), the company appears to hae more money than it actually doeshae. This inSation is )nown as )iting and is used to either ma)e the company loo)better than it actually is or coer up for money that has been stolen.

/C

*nswer is -

*nswers a, b, and c are iewed as precautionary balances. The money is beingheld to ta)e care of unexpected diKculties that might arise. * speculatie balanceproides the Sexibility to ta)e adantage of unexpected income opportunities. Thedrop in the price of inentory would be one such opportunity. The aailable moneywould allow the company to buy inentory at especially low prices.

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7eal Corp. entered into a nine!year capital lease on a warehouse on -ecember '1,200>. Eease payments of $%2,000, which includes real estate taxes of $2,000, aredue annually, beginning on -ecember '1, 2010, and eery -ecember '1 thereafter.7eal does not )now the interest rate implicit in the leaseO 7eal"s incrementalborrowing rate is >#. The rounded present alue of an ordinary annuity for nineyears at ># is %.&. 6hat amount should 7eal report as capitali

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statements

Correct *nswer C

/xplanation There are four types of special reports, one of which in a denite set ofcriteria haing substantial support that is applied to all material items appearing innancial statements. rice!leel nancial statements qualify as a basis ofaccounting haing substantial authoritatie support.

6hen using a Sexible budget, a decrease in production leels within a releantrange would result in which of the followingB

*+ -ecreases ariable cost per unit.

+ -ecreases total costs.

C+ (ncreases total xed costs.

-+ (ncreases ariable cost per unit.

Correct *nswer

/xplanation 6ithin the releant range, total xed costs do not change and ariablecost per unit does not change total ariable costs change proportionately withactiity+. Therefore, a decrease in the production leel within the releant range+would result in an increase in xed costs per unit as the total xed costs areallocated to fewer units and a decrease in total ariable costs as they changeproportionally with actiity or production.

9table Corp. oGered in a signed writing to sell Iix an oKce building for $'%0,000.The oGer, which was sent by 9table on *pril 1, indicated that it would remain openuntil Huly >. Fn Huly %, Iix mailed a letter reecting 9table"s oGer. Fn Huly &, Iix senta telegram to 9table accepting the original oGer. The letter of reection wasreceied by 9table on Huly ? and the telegram of acceptance was receied by 9tableon Huly P. 6hich of the following is correctB

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*+ Iix"s telegram resulted in the formation of a alid contract.

+ Iix"s letter of Huly % terminated 9table"s oGer when mailed.

C+ 9table was not entitled to withdraw its oGer until after Huly >.

-+*lthough 9table"s oGer on *pril 1 was a rm oGer under the 8CC, it will onlyremain open for three months.

Correct *nswer *

/xplanation The oGer was accepted by telegram before the oGer was terminated.


Q Deections are only eGectie when receied, not when they are mailed.Q *n oGer can be reo)ed anytime before acceptance, een if it says it will be heldopen.Q :irm oGers only apply to sale of goods, not real estate.

*t -ecember '1, 2010, ren Co. had the following deferred income tax items

Q * deferred income tax liability of $1%,000 related to a noncurrent assetQ * deferred income tax asset of $',000 related to a noncurrent liabilityQ * deferred income tax asset of $?,000 related to a current liability

6hich of the following should ren report in the noncurrent section of its -ecember'1, 2010, balance sheetB

*+ * noncurrent asset of $',000 and a noncurrent liability of $1%,000

+ * noncurrent liability of $12,000

C+ * noncurrent asset of $11,000 and a noncurrent liability of $1%,000

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-+ * noncurrent liability of $=,000

Correct *nswer

/xplanation (n determining the deferred tax account that should appear on thebalance sheet, the noncurrent deferred tax liability $1%,000+ would be nettedagainst the noncurrent deferred tax asset $',000+. *s a result a noncurrentdeferred tax liability of $12,000 $1%,000 ! ',000+ would be shown on the -ecember'1, 2010 balance sheet.

(n reporting on compliance with laws and regulations during a nancial statement

audit in accordance with Aoernment *uditing 9tandards, an auditor should includein the auditor"s report

*+* statement of assurance that all controls oer fraud and illegal acts weretested

+ Iaterial instances of fraud and illegal acts that were discoered

C+The materiality criteria used by the auditor in considering whether instances of

noncompliance were signicant

-+*n opinion on whether compliance with laws and regulations aGected theentity"s goals and obecties

Correct *nswer

/xplanation Aoernment *uditing 9tandards include additional reporting standardsfor nancial statement audits. Fne of those standards requires that the report on

the nancial statements describe the scope of the auditors" testing of compliancewith laws and regulations and internal controls and present the results of thosetests. The standard goes on to state that in presenting the results of those tests,auditors should report irregularities, illegal acts, and other material noncompliance.-iscoeries of fraud, which is a type of illegal act inoling the obtaining ofsomething of alue through willful misrepresentation, would also be reported.


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Q The auditor does not test all controls.Q Iateriality criteria are not specied in the auditor"s report.Q *Gects of compliance on an entity"s goals and obecties, which relate more toperformance audits than to nancial audits, would not be included in the auditor"s

report.

Aandy Company has %,000 obsolete des) lamps that are carried in inentory at amanufacturing cost of $%0,000. (f the lamps are rewor)ed for $20,000, they couldbe sold for $'%,000. *lternatiely, the lamps could be sold for $?,000 to a obberlocated in a distant city. (n a decision model analy

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+ 7o, because :ox"s letter was a counteroGer.

C+ Mes, because 9ummers" oGer was alidly accepted.

-+ Mes, because 9ummers" silence is an implied acceptance of :ox"s letter.

Correct *nswer

/xplanation 9ince :ox changed the terms of the oGer, the letter was a counteroGerand not a alid acceptance. The remaining answer choices are incorrect because nocontract was formed and :ox doesn"t hae to sign and return an oGer to accept.

(n an income statement prepared using the ariable costing method, xed factoryoerhead would

*+ 7ot be used.

+ e used in the computation of the contribution margin.

C+e used in the computation of operating income but not in the computation ofthe contribution margin.

-+ e treated the same as ariable factory oerhead.

Correct *nswer C

/xplanation 8nder the direct or ariable costing method, ariable costs arededucted from sales reenue to determine contribution margin and all xed costsoerhead, selling, general and administratie+ are then deducted to obtain netincome or income from operations. The contribution margin is calculated in twosteps

1. 9ales reenue less ariable+ cost of goods sold 3 Contribution marginmanufacturing2. Contribution margin manufacturing less other ariable costs 9, A *+ 3Contribution margin nal

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6est Corp. leased a building and receied the $'&,000 annual rental payment onHune 1%, 200>. The beginning of the lease was Huly 1, 200>. Dental income istaxable when receied. 6est"s tax rates are '0# for 200> and =0# thereafter. 6esthas elected early adoption of :*9 9tatement 7o. 10>, *ccounting for (ncome

Taxes. 6est had no other permanent or temporary diGerences. 6est determined

that no aluation allowance was needed. 6hat amount of deferred tax asset should6est report in its -ecember '1, 200>, balance sheetB

*+ $%,=00

+ $P,200

C+ $10,?00

-+ $1=,=00

Correct *nswer

/xplanation The annual rent of $'&,000 is taxable in 200> but only $1?,000 isconsidered rental income for nancial purposes. This creates a temporary diGerenceof $1?,000 which will be taxed at the future enacted tax rate of =0#. Therefore, thedeferred tax asset at -ecember '1, 200> is $P,200 $1?,000 x =0#+.

*ccepting an engagement to examine an entity"s nancial proection most li)elywould be appropriate if the proection were to be distributed to

*+ *ll employees who wor) for the entity

+ otential stoc)holders who request a prospectus or a registration statement

C+ * ban) with which the entity is negotiating for a loan

-+ *ll stoc)holders of record as of the report date

Correct *nswer C

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/xplanation * nancial proection is a prospectie nancial statement thatpresents, to the best of the )nowledge of the party responsible for its preparation,gien one or more hypothetical assumptions, an entity"s nancial position, results ofoperations, and changes in cash Sows. *s compared to a nancial forecast, which is

aailable for general use, a nancial proection is a limited use report that is notappropriate for general distribution. Eimited use refers to the use of prospectienancial statements by the responsible party and third parties with whom theresponsible party is dealing directly, such as a ban), that is able to question theresponsible party directly about the information.

The incorrect answer choices refer to general users of nancial information who aretypically not dealing directly with those responsible for preparing the prospectieinformation.

Fn 9eptember 10, Jarris, (nc., a new car dealer, placed a newspaper adertisementstating that Jarris would sell 10 cars at its showroom for a special discount only on9eptember 12, 1', and 1=. Fn 9eptember 12, @ing called Jarris and expressed aninterest in buying one of the adertised cars. @ing was told that e of the cars hadbeen sold and to come to the showroom as soon as possible. Fn 9eptember 1',Jarris made a teleised announcement that the sale would end at 1000 p.m. thatnight. @ing went to Jarris" showroom on 9eptember 1= and demanded the right tobuy a car at the special discount. Jarris had sold the 10 cars and refused @ing"sdemand. @ing sued Jarris for breach of contract. Jarris"s best defense to @ing"s suitwould be that Jarris" ;;;;;;;;;;;;;;;;;

*+ oGer was unenforceable.

+ adertisement was not an oGer.

C+ teleision announcement reo)ed the oGer.

-+ oGer had not been accepted.

Correct *nswer

/xplanation *dertisements and price quotes are not usually oGers, they are

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initations to deal. The remaining answer choices are incorrect because no oGer wasmade.

The most li)ely strategy to reduce the brea)een point would be to

*+ (ncrease both the xed costs and the contribution margin.

+ -ecrease both the xed costs and the contribution margin.

C+ -ecrease the xed costs and increase the contribution margin.

-+ (ncrease the xed costs and decrease the contribution margin.

Correct *nswer C

/xplanation rea)een point represents your xed costs diided by yourcontribution margin. Iathematically, by decreasing your numerator xed costs+ orincreasing your denominator contribution margin+, your brea)een point mustdecrease.

Jill, C*, is auditing the nancial statements of Jelping Jand, a not!for!protorgani

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Correct *nswer C

/xplanation The auditor should design the audit to proide reasonable assurancethat the nancial statements are free of material misstatements resulting from

iolations of laws and regulations that hae a direct and material eGect on thedetermination of nancial statement amounts. This responsibility exists for all auditsconducted in accordance with generally accepted auditing standards. The auditorunderta)es the same responsibility in an audit, in accordance with Aoernment*uditing 9tandards, of nancial statements of a not!for!prot organi, Doss Co. purchased a machine for $P0,000. This machine has a%!year useful life, a residual alue of $10,000, and is depreciated using the straight!

line method for nancial statement purposes. :or tax purposes, depreciationexpense was $2%,000 for 200> and $20,000 for 2010. Doss elected early applicationof :*9 9tatement 7o. 10>, *ccounting for (ncome Taxes. Doss" 2010 income,before income taxes and depreciation expense, was $100,000 and its tax rate was'0#. (f Doss had made no estimated tax payments during 2010, what amount ofcurrent income tax liability would Doss report in its -ecember '1, 2010, balancesheetB

*+ $2&,=00

+ $2%,?00

C+ $2=,000

-+ $22,%00

Correct *nswer C

/xplanation (n 2010, the company would increase its deferred tax liability by$',>00 U'0# x 20,000 ! 12,000+V. The current tax liability would be for only theamount due to be paid in 2010, taxable income of $?0,000 x '0# 3 $2=,000.

(n order for an oGer to confer the power to form a contract by acceptance, it musthae all of the following elements exceptB

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*+e communicated to the oGeree and the communication must be made orauthori

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general partner in the same partnership at the same time. * limited partner maynot ta)e part in the control of the partnership.

Hago Co. has 2 products that use the same manufacturing facilities and cannot besubcontracted. /ach product has suKcient orders to utili

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-+ $'>,000

Correct *nswer

/xplanation The $=%,000 capitali

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(f the auditor notes no reportable conditions during an audit he may so state, ratherthan gie negatie assurance.

Fn 7oember 1, 200>, -ais Co. discounted with recourse at 10# a one!year,noninterest bearing, $20,%00 note receiable maturing on Hanuary '1, 2010. 6hatamount of contingent liability for this note must -ais disclose in its nancialstatements for the year ended -ecember '1, 200>B

*+ $0

+ $20,000

C+ $20,'''

-+ $20,%00

Correct *nswer -

/xplanation * note discounted with recourse creates a contingent liability for theface of the note plus any interest due on the note. 9ince this note is a noninterestbearing note, the contingent liability disclosed in the nancial statements would be

$20,%00.

* standard cost system may be used in which of the followingB

*+ 7either process costing nor ob order costing.

+ rocess costing but not ob order costing.

C+ /ither ob order costing or process costing.

-+ Hob order costing but not process costing.

Correct *nswer C

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/xplanation 9tandard costs may be used in either ob order costing or processcosting. 9tandard costing is a cost estimation technique used for control purposesand to simplify costing procedures and expedite cost reports. The system ofrecording costs ob order or process+ is independent of the costs to be recordedstandard or actual+.

*ccepting an engagement to compile a nancial proection for a publicly heldcompany most li)ely would be inappropriate if the proection were to be distributedto

*+ * ban) with which the entity is negotiating for a loan

+ * labor union with which the entity is negotiating a contract

C+ The principal stoc)holder, to the exclusion of the other stoc)holders

-+ *ll stoc)holders of record as of the report date

Correct *nswer -

/xplanation * report on a nancial proection is identied as a Nlimited useN report,which means that the report is not for general distribution. 9uch a report is

restricted to be used only the parties named in the report. 9ince the stoc)holderscould hae changed from the report date it would be inappropriate to distribute areport on a nancial proection to those indiiduals who are no longer stoc)holders.

Moung Corp. hired 6ilson as a sales representatie for six months at a salary of$%,000 per month plus of sales. 6hich of the following statements is correctB

*+Moung does not hae the power to dismiss 6ilson during the six!month periodwithout cause.

+6ilson is obligated to act solely in Moung"s interest in matters concerning

Moung"s business.

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C+The agreement between Moung and 6ilson is not enforceable unless it is inwriting and signed by 6ilson.

-+The agreement between Moung and 6ilson formed an agency coupled with aninterest.

Correct *nswer

/xplanation ecause an agent owes a duciary duty of loyalty to their principal,they must act solely in the principal"s best interests in matters concerning theirbusiness.


Q Iost agencies are terminable at will and therefore Moung does hae the power todismiss 6ilson without cause.Q Fnly an agency to buy land or one impossible to perform in one year wouldrequire a writing under the statute of frauds AD(/ marriage+.Q 6ith an agency coupled with an interest the principal ma)es a party their agentsolely to pay oG a debt that the principal owes the agent. There is no indication that6ilson was hired by Moung solely to pay oG a debt that 6ilson owed Moung.

6or) Corp. has decided to expand the scope of its business. (n this connection, it

contemplates engaging seeral agents. 6hich of the following agency relationshipsis within the statute of frauds and thus should be contained in a signed writingB

*+* sales agency where the agent normally will sell goods which hae a alue inexcess of $%00

+ *n irreocable agency

C+

*n agency which is of indenite duration but which is terminable upon one

month"s notice

-+*n agency for the forthcoming calendar year which is entered into in mid!-ecember of the prior year

Correct *nswer -

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/xplanation The statute of frauds only requires a writing for contracts for sale ofgoods of $%00 or more, real estate, contracts impossible to perform in one year, apromise to answer the debt of another, an executor"s promise to be personally liablefor the debt of an estate and contracts where marriage is the consideration AD(/

marriage+. *n agency entered into in mid!-ecember and to last for the entire nextyear would be impossible to perform in one year and would require a writing.


Q *lthough the sales contracts of $%00 or more would need a writing, the agencywould not need to be in writing.Q *n irreocable agency does not require a writing under the statute of frauds.Q *n agency which is terminable upon one month"s notice is not impossible toperform in one year.

7orth Corp. has an employee benet plan for compensated absences that giesemployees 10 paid acation days and 10 paid sic) days. oth acation and sic)days can be carried oer indenitely. /mployees can elect to receie payment inlieu of acation daysO howeer, no payment is gien for sic) days not ta)en. *t-ecember '1, 200>, 7orth"s unadusted balance of liability for compensatedabsences was $21,000. 7orth estimated that there were 1%0 acation days and P%sic) days aailable at -ecember '1, 200>. 7orth"s employees earn an aerage of$100 per day. (n its -ecember '1, 200>, balance sheet, what amount of liability forcompensated absences is 7orth required to reportB

*+ $'&,000

+ $22,%00

C+ $21,000

-+ $1%,000

Correct *nswer -

/xplanation The liability for compensated absences at -ecember '1, 200>, is$1%,000 for the 1%0 acation days times $100 per day. The )ey word in dealing with

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sic) pay is the word NrequiredN. The problem as)s what is the liability required at-ecember '1, 200>. 9ince the accrual of sic) pay is optional, 7orth Corp. would notbe required to accrue a liability for sic) pay.

Jow should a usage ariance that is signicant in amount be treated at the end ofan accounting periodB

*+ Deported as a deferred charge or credit.

+*llocated among wor)!in!process inentory, nished goods inentory, and costof goods sold.

C+ Charged or credited to cost of goods manufactured.

-+*llocated among cost of goods manufactured, nished goods inentory, andcost of goods sold.

Correct *nswer

/xplanation This method proides for allocation among all units that were handledduring the period.

6hen an accountant examines a nancial forecast that fails to disclose seeralsignicant assumptions used to prepare the forecast, the accountant shoulddescribe the assumptions in the accountant"s report and issue aan+

*+ N/xcept forN qualied opinion

+ N9ubect toN qualied opinion

C+ 8nqualied opinion with a separate explanatory paragraph

-+ *derse opinion

Correct *nswer -

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/xplanation *n accountant should not examine a presentation that omits alldisclosures of assumptions. (f the presentation fails to disclose assumptions thatappear to be signicant, the accountant should describe the assumptions in hisreport and issue an aderse opinion. N/xcept forN qualied opinion. 6ould beappropriate if, in the accountant"s opinion, the prospectie nancial statements

depart from *(C* presentation guidelines, other than a failure to disclosesignicant assumptions.

The incorrect answer choices are not examples of modied accountant"s reportsinoling a nancial forecast examination.

*ccording to the standards of the profession, which of the following circumstanceswill preent a C* performing audit engagements from being independentB

*+ Fbtaining a collaterali

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arianceB

*+ 6hen material is issued.

+ 6hen material is purchased.

C+ 6hen material is used in production.

-+ 6hen purchase order is originated.

Correct *nswer

/xplanation 9ince the material price ariance relates to the diGerence betweenstandard price and actual price and might be iewed as measuring the performance

of the company"s purchasing department, the ariance should be determined on thebasis of the units purchased and should therefore be computed when the purchaseoccurs.

*n examination of a nancial forecast is a professional serice that inoles

*+ Compiling or assembling a nancial forecast that is based on management"sassumptions

+Eimiting the distribution of the accountant"s report to management and theboard of directors

C+*ssuming responsibility to update management on )ey eents for one yearafter the report"s date

-+

/aluating the preparation of a nancial forecast and the support underlying

management"s assumptions

Correct *nswer -

/xplanation *n accountant may be engaged to examine, compile, or apply agreed!upon procedures to nancial forecasts or other prospectie nancial statements. *n

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examination of a nancial forecast inoles ealuating the preparation of theforecasted statements, ealuating the support underlying the assumptions used inpreparing the statements, ealuating the presentation of the statements forconformity with *(C* guidelines, and issuing an examination report.


Q Compilation is not an examination.Q The accountant"s report on the examination of a nancial forecast can bedistributed to parties outside of the reporting entity.Q The accountant"s report specically states that the accountant assumes noresponsibility to update the report for eents and circumstances occurring after thedate of the report.

Fgden Corp. lends a supplier cash which is to be repaid e years hence with nostated interest. *t the same time a purchase contract is entered into for thesupplier"s products. Fgden will be required to recogni

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*+ Hoint costs.

+ Total costs.

C+ 7et sales alue at split!oG.

-+ 9ales price less a normal prot margin at point of sale.

Correct *nswer C

/xplanation The relatie sales alue of oint products may be un)nown at the pointof split!oG or because of extensie subsequent processing required to ma)e the

product salable, may be diKcult to determine. (n such cases, it is recommendedthat the subsequent costs be applied as a reduction in reenue on a dollar!for!dollarbasis and the remaining reenue used as the sales alue at split!oG for assignmentof oint cost.

(n which of the following situations would a C*"s independence be considered to beimpairedB

(. The C* maintains a chec)ing account that is fully insured by a goernment

deposit insurance agency at an audit!client nancial institution.

((. The C* has a direct nancial interest in an audit client, but the interest ismaintained in a blind trust.

(((. The C* owns a commercial building and leases it to an audit client. The rentalincome is material to the C*.

*+ ( and ((

+ (( and (((

C+ ( and (((

-+ (, ((, and (((

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Correct *nswer

/xplanation 8nder Dule 101 of the Dules of Conduct as interpreted, independenceis impaired if there is a direct nancial interest in an audit client regardless of

materiality. Thus any direct nancial interest in an audit client impairsindependence. (ndependence is specically impaired if the auditor owns a buildingand leases space to the client. (ndependence is not impaired if the C* maintains achec)ing account at a nancial institution audit client and the account is fullyinsured by a goernment agency. (( and ((( impair independence, but ( does not.

*n accountant"s standard report on a compilation of a proection should not include

*+ * separate paragraph that describes the limitations on the presentation"susefulness

+ * statement that a compilation of a proection is limited in scope

C+* disclaimer of responsibility to update the report for eents occurring after thereport"s date

-+* statement that the accountant expresses only limited assurance that theresults may be achieed

Correct *nswer -

/xplanation The accountant"s standard report on a compilation of prospectienancial statements should include an identication of the nancial statements, astatement that the accountant compiled the statements in accordance with *(C*standards, a statement that a compilation is limited in scope and does not enablethe accountant to express an opinion or any other form of assurance, a caeat thatthe results may not be achieed, a statement that the accountant assumes no

responsibility to update the report for eents and circumstances occurring after thedate of the report. 6hen the presentation is a proection, the report should include aseparate paragraph that describes the limitations on the usefulness of thepresentation.

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Fn -ecember '1, 2010, it Co. had capitali

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Correct *nswer *

/xplanation The research deelopment costs should be expensed because of theuncertainty associated with any D - eGort. Joweer, the cost of registering the

patent should be capitaliB

*+ $0

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+ $%,000

C+ $>,000

-+ $1=,000

Correct *nswer C

/xplanation The cost of normal spoilage is a product cost which should be absorbedby the good units produced and included in the recorded cost of both wor)!in!process and nished goods inentories. The cost of abnormal spoilage $>,000+ is aperiod cost and should be expensed in the current period.

* iolation of the profession"s ethical standards most li)ely would hae occurredwhen a C* ;;;;;;;;;;;;;;;;;

*+issued an unqualied opinion on the 200> nancial statements when fees forthe 200? audit were unpaid.

+

recommended a controller"s position description with candidate specications

to an audit client.

C+purchased a C* rm"s practice of monthly write!ups for a percentage of fees tobe receied oer a three!year period.

-+made arrangements with a nancial institution to collect notes issued by aclient in payment of fees due for the current year"s audit.

Correct *nswer *

/xplanation 8nder Dule 101 of the Dules of Conduct as interpreted, independenceis impaired if there is a direct nancial interest in an audit client regardless ofmateriality. 9pecically independence is impaired if audit fees remain unpaid formore than one year prior to the date of the current year"s report. (t is considered aloan.

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Q (ndependence is not impaired by merely recommending a ob position includingcandidate specications. Joweer, independence would be impaired if the C*actually did the hiring of the controller because this would be management.

Q There is no prohibition against purchase of a C* rm"s monthly write!ups for apercentage of fees.Q * C* may ma)e arrangements with a ban) to collect notes issued by a client inpayment for a fee that is due.

9un Corp. approed a merger plan with Cord Corp. Fne of the determining factors inapproing the merger was the nancial statements of Cord that were audited by:ran) Co., C*s. 9un had engaged :ran) to audit Cord"s nancial statements.6hile performing the audit, :ran) failed to discoer certain irregularities that later

caused 9un to suGer substantial losses. :or :ran) to be liable under common lawnegligence, 9un at a minimum must proe that :ran) ;;;;;;;;;;;;;;;;;

*+ )new of the irregularities.

+ failed to exercise due care.

C+ was grossly negligent.

-+ acted with scienter.

Correct *nswer

/xplanation Eiability for negligence requires proof of four elements duty of care,breach lac) of due care+, damages and causality. Thus 9un must proe :ran) failedto exercise due care.


Q @nowledge is not an element of negligence.Q Aross negligence is constructie fraud. :raud requires an element of intent andnegligence does not.Q 9cienter is the intent element of fraud and negligence does not require proof ofintent.

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9tone Co. began operations in 200> and reported $22%,000 in income beforeincome taxes for the year. 9tone"s 200> tax depreciation exceeded its boo)depreciation by $2%,000. 9tone also had nondeductible boo) expenses of $10,000

related to permanent diGerences. 9tone"s tax rate for 1>>> was =0#, and theenacted rate for years after 200> is '%#. 9tone elected early adoption of :*99tatement 7o. 10>, *ccounting for (ncome Taxes. (n its -ecember '1, 200>, balancesheet, what amount of deferred income tax liability should 9tone reportB

*+ $?,P%0

+ $10,000

C+ $12,2%0

-+ $1=,000

Correct *nswer *

/xplanation The nondeductible boo) expenses are permanent diGerences and donot aGect taxes. The temporary depreciation diGerence $2%,000+ times the enactedfuture tax rate '%#+ will be the deferred tax liability on the -ecember '1, 200>balance sheet $2%,000 x '%# 3 $?,P%0 deferred tax liability+.

(n a traditional ob order cost system, the issue of indirect materials to a productiondepartment increases which of the followingB

*+ 9tores control.

+ 6or) in process control.

C+ :actory oerhead control.

-+ :actory oerhead applied.

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Correct *nswer C

/xplanation 6hen indirect materials were initially purchased, they would becharged to the stores control. Joweer, when they are issued to a production

department, they would be charged increased+ to the factory oerhead controlaccount.

6hich of the following audit procedures would most li)ely assist an auditor inidentifying conditions and eents that may indicate there could be substantialdoubt about an entity"s ability to continue as a going concernB

*+ Deiew compliance with the terms of debt agreements

+ Conrmation of accounts receiable from principal customers

C+ Deconciliation of interest expense with debt outstanding

-+ Conrmation of ban) balances

Correct *nswer *

/xplanation Deiew of compliance with terms of debt and loan agreements is anaudit procedure that may identify conditions and eents that indicate there could besubstantial doubt about an entity"s ability to continue as a going concern for areasonable period of time. -efault on such agreements may indicate possiblenancial diKculty.

The audit procedures listed in the incorrect answer choices would be less li)ely toidentify information about an entity"s ability to continue as a going concern.

* company using the composite depreciation method for its Seet of truc)s, cars,and campers retired one of its truc)s and receied cash from a salage company.

The net carrying amount of these composite asset accounts would be decreased bythe

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*+ Cash proceeds receied and original cost of the truc)

+ Cash proceeds receied

C+ Friginal cost of the truc) less the cash proceeds

-+ Friginal cost of the truc)

Correct *nswer

/xplanation 8sing the composite depreciation method, when an asset is sold the

asset account is credited for the entire sales price. 7o gain or loss is recogni

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are accumulated homogeneous cost pools+ by actiities cost driers+ rather thanby department or function as in more traditional costing systems. 7onalue!addedactiities cost driers+, such as moement of product, storage, set up, andinspection are minimi

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A**.Q (t inoles a situation which has limited reporting obectiesO the auditor can issuean unqualied opinion on one basic nancial statement and not on the others.

urn Ianufacturing borrowed $%00,000 from Joward :inance Co., secured byurn"s present and future inentory, accounts receiable, and the proceeds thereof.

The parties signed a nancing statement that described the collateral and it wasled in the appropriate state oKce. urn subsequently defaulted in the repaymentof the loan and Joward attempted to enforce its security interest. urn contendedthat Joward"s security interest was unenforceable. (n addition, Areen, whosubsequently gae credit to urn without )nowledge of Joward"s security interest,is also attempting to defeat Joward"s alleged security interest. The security interestin question is alid with respect to ;;;;;;;;;;;;;;;;;

*+ both urn and Areen.

+ neither urn nor Areen.

C+ burn but not Areen.

-+ green but not urn.

Correct *nswer *

/xplanation * creditor with a security interest will hae rights against a debtorwhen attachment has occurred. Three elements are required for attachment anagreement between the debtor and the creditor, alue must be gien by thecreditor and the debtor must hae rights in the collateral. Joward will hae rightsagainst urn debtor+, because there was a written security agreement, alue wasgien by Joward $%00,000+ and the debtor had rights in the collateral inentoryand accounts receiable+. 6hen two creditors are ghting oer the same collateral,usually the rst creditor to perfect wins. 9ince Joward perfected by ling before

Areen gae credit, Joward"s security interest has priority oer Areen.

7ile Co."s cost allocation and product costing procedures follow actiity!basedcosting principles. *ctiities hae been identied and classied as being eitheralue!adding or nonalue!adding as to each product. 6hich of the followingactiities, used in 7ile production process, is nonalue!addingB

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*+ -esign engineering actiity

+ Jeat treatment actiity

C+ -rill press actiity

-+ Daw materials storage actiity

Correct *nswer -

/xplanation (n the production process, storing raw materials until they are neededrepresents a non!alue added step, whereas engineering, heat treatment or drilling

represents improing the product. (n addition, storage requires handling costs, costof holding inentory, possible brea)age or misappropriation, while inentory simplywaits for use at a later time.

*ttachment and perfection will occur simultaneously when ;;;;;;;;;;;;;;;;;

*+ the security agreement so proides.

+ there is a purchase money security interest ta)en in inentory.

C+ attachment is by possession.

-+ the goods are sold on consignment.

Correct *nswer C

/xplanation There are only three diGerent ways to perfect by possession, by lingand perfection by attachment. ossession will not only create the securityagreement required for attachment, but will also result in perfection. Thus whenattachment is by possession, attachment and possession occur simultaneously. 7otethat they would also occur simultaneously when perfection by attachment occurs.

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Q erfection will not occur merely because the security agreement so proides. Moumust perfect by one of the three methods.Q 7o possession or ling occurred and perfection by attachment requires a I9(

creditor in consumer goods, not a I9( creditor in inentory. Thus, no perfectionoccurred.Q 7o possession, ling or perfection by attachment occurred and therefore there isno perfection.

Destrictions imposed by a client prohibit the obseration of physical inentories,which account for '%# of all assets. *lternatie audit procedures cannot be applied,

although the auditor was able to examine satisfactory eidence for all other itemsin the nancial statements. The auditor should issue aan+

*+ N/xcept forN qualied opinion

+ -isclaimer of opinion

C+ 8nqualied opinion with a separate explanatory paragraph

-+ 8nqualied opinion with an explanation in the scope paragraph

Correct *nswer

/xplanation Destrictions on the scope of an audit such as the timing of the wor),inability to obtain suKcient competent eidential matter, or an inadequacy in theaccounting records, may require an auditor to qualify his opinion or disclaim anopinion. 6hen restrictions that signicantly limit the scope of the audit are imposedby the client, ordinarily the auditor should disclaim an opinion on the nancialstatements.

Ierry Co. purchased a machine costing $12%,000 for its manufacturing operationsand paid shipping costs of $20,000. Ierry spent an additional $10,000 testing andpreparing the machine for use. 6hat amount should Ierry record as the cost of themachineB

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*+ $1%%,000

+ $1=%,000

C+ $1'%,000

-+ $12%,000

Correct *nswer *

/xplanation The cost of the machine should include all the necessary cost to

purchase the machine and get it ready for use. (n this case that would include thepurchase price of the machine plus the shipping and testing. $12%,000 20,000 $10,000 3 $1%%,000.

* direct labor oertime premium should be charged to a specic ob when theoertime is caused by the

*+ (ncreased oerall leel of actiity

+ Customer"s requirement for early completion of ob.

C+ Ianagement"s failure to include the ob in the production schedule.

-+Ianagement"s requirement that the ob be completed before the annual factoryacation closure

Correct *nswer

/xplanation Aenerally, an oertime premium is charged to oerhead, and allocatedto all obs, as the arbitrary scheduling of obs should not aGect the cost of obswor)ed on during oertime. Joweer, if an oertime premium is due to a specic

ob or customer"s requirements, it is appropriately charged to that ob, increasing itscosts.

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*n auditor concludes that there is a material inconsistency in the other informationin an annual report to shareholders containing audited nancial statements. (f theauditor concludes that the nancial statements do not require reision, but theclient refuses to reise or eliminate the material inconsistency, the auditor may

*+(ssue an Nexcept forN qualied opinion after discussing the matter with theclient"s board of directors.

+Consider the matter closed since the other information is not in the auditednancial statements.

C+-isclaim an opinion on the nancial statements after explaining the materialinconsistency in a separate explanatory paragraph.

-+Deise the auditor"s report to include a separate explanatory paragraphdescribing the material inconsistency.

Correct *nswer -

/xplanation The auditor"s responsibility with respect to information in an annualreport does not extend beyond the nancial information identied in his report.Joweer, he should read the other information and consider whether it is materiallyinconsistent with information appearing in the nancial statements. (f he concludes

that the other information is inconsistent and the client refuses to correct theinconsistency, the auditor should either reise his report to include an explanatoryparagraph describing the material inconsistency, withhold the use of his report inthe annual report, or withdraw from the engagement.

6inslow Co., which is in the business of selling furniture, borrowed $&0,000 fromine an). 6inslow executed a promissory note for that amount and used all of itsaccounts receiable as collateral for the loan. 6inslow executed a securityagreement that described the collateral. 6inslow did not le a nancing statement.6hich of the following statements best describes this transactionB

*+erfection of the security interest occurred een though 6inslow did not le anancing statement.

+ erfection of the security interest occurred by ine haing an interest in

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accounts receiable.

C+*ttachment of the security interest did not occur because 6inslow failed to lea nancing statement.

-+*ttachment of the security interest occurred when the loan was made and6inslow executed the security agreement.

Correct *nswer -

/xplanation Three elements are required for attachment an agreement betweenthe debtor and the creditor, alue must be gien by the creditor and the debtormust hae rights in the collateral. *ttachment occurred when the loan was madebecause an executed agreement was present, ine gae alue by ma)ing the loan

and the debtor certainly had rights in the collateral since the collateral was all of thedebtor"s receiables. :iling is the only way to perfect with accounts receiable andno ling occurred.

Aibbs Co. uses the allowance method for recogni

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* principal auditor decides not to refer to the audit of another C* who audited asubsidiary of the principal auditor"s client. *fter ma)ing inquiries about the otherC*"s professional reputation and independence, the principal auditor most li)elywould

*+*dd an explanatory paragraph to the auditor"s report indicating that thesubsidiary"s nancial statements are not material to the consolidated nancialstatements.

+-ocument in the engagement letter that the principal auditor assumes noresponsibility for the other C*"s wor) and opinion.

C+Fbtain written permission from the other C* to omit the reference in theprincipal auditor"s report.

-+Contact the other C* and reiew the audit programs and wor)ing paperspertaining to the subsidiary.

Correct *nswer -

/xplanation (f an auditor decides that he or she is the principal auditor and that heor she can use the other auditor"s report, because the other auditor is reputable andindependent, the principal auditor must decide whether or not to ma)e reference tothe other auditor. (f the principal auditor decides not to refer to the other auditor, heor she should isit the other auditor, discuss the procedures followed, and reiewthe audit program and wor)ing papers of the other auditor.


Q (f the principal auditor decides not to refer to the other auditor, no references of

any )ind would be made in the report.Q *ssuming no responsibility for the other C*"s wor) and opinion would not fulllthe principal auditor"s reporting responsibilities.Q ermission would only be necessary if the principal auditor decides to refer to andname the other auditor.

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(n an actiity!based costing system, what should be used to assign a department"smanufacturing oerhead costs to products produced in arying lot si

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C+ $1>>,000

-+ $2%>,000

Correct *nswer *

/xplanation * company records compensation expense based upon cash or stoc)sat fair mar)et alue+ contributed to the plan during the year. Therefore, the$=%,000 cash and $%=,000 alue of the shares contributed to the plan are reportedas compensation expense. The second and third transactions noted in the questiondo not result in any expense recognition.

8nder the 9ales *rticle of the 8CC, which of the following statements is correctregarding the warranty of merchantability arising when there has been a sale ofgoods by a merchant sellerB

*+ The warranty must be in writing.

+

The warranty arises when the buyer relies on the seller"s s)ill in selecting the

goods purchased.

C+ The warranty cannot be disclaimed.

-+The warranty arises as a matter of law when the seller ordinarily sells the goodspurchased.

Correct *nswer -

/xplanation The warranty of merchantability is implied by law if the seller is amerchant. Fne who ordinarily sells the product purchased would be a merchant.9ince merchantability is an implied warranty, no written or oral words are neededfor it to arise. The implied warranty of tness for a particular purpose arises whenthe buyer relies on seller to select goods, not the warranty of merchantability.Ierchantability, li)e all implied warranties, can be disclaimed.

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9:*9 12'D suggests the use of two types of option pricing models. 6hich of thefollowing models are mentioned in the pronouncementB

*+ lac)!9hoals!Ierton Iodel

+ Eattice Type Iodel

C+ inomial Iodel

-+ Closed!/xit Iodel

Correct *nswer

/xplanation The pronouncement mentions two types of models, the Eattice typemodel and the closed!form model. The lac)!9holes!Ierton model is an example ofthe closed!form model and the binomial model is an example of the Eattice type.

6ebstar Corp. orally agreed to sell 7orthco, (nc. a computer for $20,000. 7orthcosent a signed purchase order to 6ebstar conrming the agreement. 6ebstar

receied the purchase order and did not respond. 6ebstar refused to delier thecomputer to 7orthco, claiming that the purchase order did not satisfy the 8CC9tatute of :rauds because it was not signed by 6ebstar. 7orthco sells computers tothe general public and 6ebstar is a computer wholesaler. 8nder the 8CC 9ales*rticle, 6ebstar"s position is ;;;;;;;;;;;;;;;;;

*+ incorrect because it failed to obect to 7orthco"s purchase order.

+incorrect because only the buyer in a sale!of!goods transaction must sign the

contract.

C+correct because it was the party against whom enforcement of the contract isbeing sought.

-+ correct because the purchase price of the computer exceeded $%00.

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Correct *nswer *

/xplanation * writing is not required to enforce a contract of more than $%00 if amerchant fails to obect within ten days to a conrming letter sent by another

merchant. 9ince 6ebstar and 7orthco are both merchants and 6ebstar failed toobect to the purchase order sent by 7orthco, a writing signed by 6ebstar was notrequired under the 9tatute of :rauds. 8CC 9ales does not require that only the buyersign. 8sually only one party need sign whether buyer or seller+, but it can only beenforced against the one who signed. The failure of a merchant to obect to awritten conrmation is an exception to the rule that it can only be enforced againstthe one who signed.

@ing, C*, was engaged to audit the nancial statements of 7ewton Company afterits scal year had ended. @ing neither obsered the inentory count nor conrmedthe receiables by direct communication with debtors, but was satised concerningboth after applying alternatie procedures. @ing"s auditor"s report most li)elycontained aan+

*+ Lualied opinion

+ -isclaimer of opinion

C+ 8nqualied opinion

-+ 8nqualied opinion with an explanatory paragraph

Correct *nswer C

/xplanation Fbseration of the inentory count and conrmation of receiables isnormally performed during an audit. Joweer, if circumstances do not permit theseprocedures to be performed, the auditor may apply alternatie audit proceduresthat may include obseration of an inentory count at a later date and theerication of receiable balances by auditing subsequent cash receipts. (f theauditor is able to employ alternatie procedures he considers appropriate in thecircumstances, no modication or qualication of the audit report is necessary.

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(n order to preent, detect, and correct errors and unauthori

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-+ Areed admitted in court that it made the contract in question.

Correct *nswer -

/xplanation * writing is not required to enforce a contract for more than $%00 if theparty to be charged admits in court that they made the contract. art receipt andpart payment only allow the contract to be enforced for the amount receied or theamount paid for and the question required the contract to be enforced in its entirety.

This contract was for more than $%00 and the 9tatute of :rauds applies.

6hich one of the following tas)s is E/*9T li)ely to be underta)en in theimplementation phase of an accounting software applicationB

*+ Fbtain and install hardware

+ /nter and erify test data

C+ (dentify inputs and outputs

-+ -ocument user procedures

Correct *nswer C

/xplanation The identication of inputs and outputs must occur well beforeimplementation. (nputs and outputs of the current system are identied duringsystems analysis, while inputs and outputs of the new system are deeloped duringthe design phase. Jardware installation often ta)es place during theimplementation phase of an application. Testing the system is usually part of theimplementation phase. Completing the documentation usually ta)es place duringthe implementation phase.

(n connection with the examination of the consolidated nancial statements of Iott(ndustries, :ra

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*+ The name of the other C* and the type of report issued by the other C*.

+

The magnitude of the portion of the nancial statements examined by the other

C*.

C+ The nature of :ra, Fa) Corp. granted stoc) options to certain )ey employees asadditional compensation. The options were for 1,000 shares of Fa)"s $2 par aluecommon stoc) at an option price of $1% per share. Iar)et price of this stoc) on

Hune 1, 200>, was $20 per share. The options were exercisable beginning Hanuary 2,2010, and expire on -ecember '1, 2010.

Fa) Corp. used the binomial option pricing model and estimated the alue of eachoption at $P.

Fn *pril 1, 2010, when Fa)"s stoc) was trading at $21 per share, all the optionswere exercised. 6hat amount of pretax compensation should Fa) report in 200> inconnection with the optionsB

*+ $&,000

+ $%,000

C+ $2,%00

-+ $P,000

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Correct *nswer -

/xplanation The )ey point is that the serice period is from Hune 1, 200>, to-ecember '1, 200> because the options are exercisable on Hanuary 2, 2010.

Therefore, the total compensation from the pricing model $P x 1,000 options+$P,000 is charged to compensation for 200>.

Eoeb, C*, has completed preparation of the loto Company"s unaudited nancialstatements and has prepared the following report to accompany them

The accompanying balance sheet of the loto Company as of *ugust '1, 2011, and

the related statements of income, retained earnings, and cash Sows for the yearthen ended were not audited by us and accordingly we do not express an opinionon them.

The nancial statements fail to disclose that the debentures issued on Huly 1%,200P, limit the payment of cash diidends to the amount of earnings after *ugust'1, 200>. The company"s statements of income for the years 2010 and 2011, bothof which are unaudited, show this amount to be $1?,>00. Aenerally acceptedaccounting principles require disclosure of matters of this nature.

6hich of the following comments best describes the appropriateness of this reportB

*+ The report is satisfactory.

+ The report is decient because Eoeb does not describe the scope of the reiew.

C+The report is decient because the second paragraph gies the impression thatsome audit wor) was done.

-+The report is decient because the explanatory comment in the secondparagraph should precede the opinion paragraph.

Correct *nswer *

/xplanation The report is satisfactory because when the C* is preparing unauditedstatements, he has the responsibility to ensure that the statements are in

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accordance with A**. (f they are not, the C* must propose adustments, and if theclient refuses to boo) said adustments, to so disclose in his report.

To satisfy the 8CC 9tatute of :rauds regarding the sale of goods, which of thefollowing must generally be in writingB

*+ -esignation of the parties as buyer and seller

+ -eliery terms

C+ Luantity of the goods

-+ 6arranties to be made

Correct *nswer C

/xplanation The 9tatute of :rauds generally requires that the writing contain aquantity. (t does not require the designation of buyer and seller, the deliery termsor the warranties to be made.

6hich one of the following controls is least li)ely to be closely associated withassuring the accuracy and completeness of data in computer!processed masterlesB

*+ 9ource data controls.

+ :ile maintenance controls.

C+ Fnline data entry controls.

-+ Eogical access controls.

Correct *nswer -

/xplanation Eogical access relates to the ability to use computer equipment toaccess data. *ccordingly, while helpful, these controls would not be as closely

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associated with assuring accuracy and completeness of data as the other choices.9ource data controls would be helpful in assuring that data entered from sourceinformation are correct and complete. :ile maintenance controls are useful for theaddition, deletion, and changing of records in les which would ma)e them useful inassuring their accuracy and completeness. Fnline data entry controls are used

during on!line processing to help assure the accuracy and completeness of les.

The installment method of recogni

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-+will permit 7oll to sue immediately after Iay 2, 2010, een though theperformance called for under the contract was not due until Hune ', 2010.

Correct *nswer -

/xplanation *n anticipatory repudiation occurs when one side states they will notperform before the time of performance. The inured party can sue immediately orwait until the time of performance and then sue. 6ax told 7oll prior to the time ofperformance that 6ax would not perform. Thus, 7oll can sue immediately and neednot wait until Hune '. 6ax may retract its repudiation as long as 7oll hasn"t canceledthe contract or materially changed position.

6hen, in the auditor"s udgment, the nancial statements are not presented fairly inconformity with generally accepted accounting principles, the auditor will issuean+

*+ Lualied opinion

+ 9pecial report

C+ -isclaimer of opinion

-+ *derse opinion

Correct *nswer -

/xplanation The question states the auditor concludes the statements are not inconformity with A**. (n order to ma)e this statement in his report, the auditormust issue an aderse opinion. * qualication, rather than an aderse opinion, stillstates the nancial statements present fairly, except for... *n aderse opinion statesthe Nnancial statements do not present fairly...N

(n a computer system enironment, the procedures that include the equipmentconguration, program, and data les to be used as well as description of

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conditions that may require interruption of a program execution are )nown as

*+ Fperating documentation.

+ *pplication controls.

C+ *dministratie documentation.

-+ 9ystems documentation.

Correct *nswer *

/xplanation Fperating documentation is prepared for the computer operator so

that he or she can run the program. (t includes the equipment conguration,instructions for entering data on the console, and descriptions of conditions whichcause the program to halt. *pplication controls are controls built into a speciccomputer application. *dministratie documentation includes oerall standards,policies, and procedures for the computer facility. 9ystems documentation is acomplete description of all aspects of each application, including Sowcharts andprogram listings.

The calculation of the income recogni

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of the total cost incurred to date diided by the estimated total cost times theestimated total gross prot on the contract less the gross prot recogni, before the issuance of its 200? nancial statements, Cali issued long!termbonds in the amount of $=,%00,000. roceeds from the bonds were used to repaythe note when it came due. Jow should Cali classify the note in its -ecember '1,200?, nancial statementsB

*+ *s a current liability, with separate disclosure of the note renancing

+ *s a current liability, with no separate disclosure required

C+ *s a concurrent liability, with separate disclosure of the note renancing

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-+ *s a concurrent liability, with no separate disclosure required

Correct *nswer C

/xplanation 7ormally this note would be classied as a current liability. Joweer,:*9 W & states that if Cali (nc. intends to renance the note and has the ability torenance the obligation within one year, the note should be classied asnoncurrent. The ability to renance must be demonstrated by either accomplishingthe renancing or entering into an agreement to do so before the nancialstatements are issued. (n this case, Cali (nc. renanced the note accomplished therenancing+ on Hanuary 2?, 200> before the nancial statements were issued.

Therefore, both the intent and ability criteria were met and the note should beclassied on the -ecember '1, 200? balance sheet as noncurrent with a separatedisclosure of the criteria used in ma)ing the classication decision.

Dyan Company has an accounting information system that operates in aclient5serer enironment. 6hich one of the following situations is E/*9T li)ely toproide Dyan with an appropriate security enironmentB

*+ 8se of application passwords.

+ ower!on passwords for personal computers.

C+ (nstallation of anti!irus programs.

-+ lacing complete systems application controls under one indiidual.

Correct *nswer -

/xplanation (f one indiidual has complete authority oer systems applicationscontrols, he or she could too easily bypass those controls. *pplication passwords are

helpful in prohibiting access to software to only those authori

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* company issues audited nancial statements under circumstances which requirethe presentation of a statement of cash Sows. (f the company refuses to present astatement of cash Sows, the independent auditor should

*+ -isclaim an opinion.

+repare a statement of cash Sows and note in a middle paragraph of the reportthat this statement is auditor!prepared.

C+repare a statement of cash Sows and disclose in a footnote that this statementis auditor!prepared.

-+Lualify his opinion with an Nexcept forN qualication and a description of theomission in a middle paragraph of the report.

Correct *nswer -

/xplanation The statement of cash Sows is required by A** and its omissionresults in a qualied except for opinion. The statement of cash Sows, for reportingpurposes, is considered the omission of a disclosure.

9table Corp. oGered in a signed writing to sell Iix an oKce building for $'%0,000.

The oGer, which was sent by 9table on *pril 1, indicated that it would remain openuntil Huly >. Fn Huly %, Iix mailed a letter reecting 9table"s oGer. Fn Huly &, Iix senta telegram to 9table accepting the original oGer. The letter of reection wasreceied by 9table on Huly ? and the telegram of acceptance was receied by 9tableon Huly P. 6hich of the following is correctB

*+ Iix"s telegram resulted in the formation of a alid contract.

+ Iix"s letter of Huly % terminated 9table"s oGer when mailed.

C+ 9table was not entitled to withdraw its oGer until after Huly >.

-+*lthough 9table"s oGer on *pril 1 was a rm oGer under the 8CC, it will onlyremain open for three months.

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Correct *nswer *

/xplanation The oGer was accepted by telegram before the oGer was terminated.


Q Deections are only eGectie when receied, not when they are mailed.Q *n oGer can be reo)ed anytime before acceptance, een if it says it will be heldopen.Q :irm oGers only apply to sale of goods, not real estate.

Eimitation on the scope of the auditor"s examination may require the auditor toissue a qualied opinion or to disclaim an opinion. 6hich of the following wouldgenerally be a limitation on the scope of the auditor"s examinationB

*+ The unaailability of suKcient competent eidential matter

+ The engagement of the auditor to report on only one basic nancial statement

C+The examination of a subsidiary"s nancial statements by an auditor other than

the one who examines and reports on the consolidated nancial statements

-+ The engagement of the auditor after year end

Correct *nswer *

/xplanation Eimitations on the scope of the audit can come about by clientrestrictions, inability to obtain suKcient competent eidential matter or inadequacyof client accounting records.


Q The auditor can report on only one basic nancial statement.Q The use of another auditor is not a scope limitation.Q NThe engagement of the auditor after year end.N is incorrect because this wouldnot necessarily result in a scope limitation.

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Fn Iarch 1, 200>, /an Corp. issued $%00,000 of 10# nonconertible bonds at10', due on :ebruary 2?, 201>. /ach $1,000 bond was issued with '0 detachablestoc) warrants, each of which entitled the holder to purchase, for $%0, one share of

/an"s $2% par common stoc). Fn Iarch 1, 200>, the mar)et price of each warrantwas $=. y what amount should the bond issue proceeds increase stoc)holders"equityB

*+ $0

+ $1%,000

C+ $=%,000

-+ $&0,000

Correct *nswer -

/xplanation 9ince no mar)et alue is gien for the bonds, the amount attributableto the warrants stoc)holders" equity+ is $= each x '0 warrants per bond 3 $120 x%00 bonds 3 $&0,000.

6hich one of the following would increase the wor)ing capital of a rmB

*+ Denancing a short!term note payable with a two year note payable.

+ urchase of a new plant nanced by a 20!year mortgage.

C+ Cash collection of accounts receiable.

-+ ayment of a 20!year mortgage payable with cash.

Correct *nswer *

/xplanation Denancing a short!term note payable with a two!year note payable

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would increase the wor)ing capital of a rm.

Current *ssets ! Current Eiabilities 3 6or)ing Capital*ssuming C* 3 $10 and CE 3 $&, 6C 3 $=. $10 ! $& 3 $=+

(f a company renances $2 worth of short!term notes payable with a two year notepayable, wor)ing capital would increase. $10 ! $= 3 $&+.

The purchase of a new plant nanced by a 20!year mortgage would not increase thewor)ing capital of a rm. 6C would stay the same. * cash collection of accountsreceiable would not increase the wor)ing capital of a rm. 6C would stay thesame. * payment of a 20!year mortgage payable with cash would not increase thewor)ing capital of a rm. 6C would decrease.

(n open mar)et transactions, Fa) Corp. simultaneously sold its long!terminestment in Iaple Corp. bonds and purchased its own outstanding bonds. Thebro)er remitted the net cash from the two transactions. Fa)"s gain on the purchaseof its own bonds exceeded its loss on the sale of Iaple"s bonds. Fa) should reportthe

*+ 7et eGect of the two transactions as an extraordinary gain

+ 7et eGect of the two transactions in income before extraordinary items

C+/Gect of its own bond transaction gain in income before extraordinary items,and report the Iaple bond transaction as an extraordinary loss

-+/Gect of its own bond transaction as an ordinary gain, and report the Iaplebond transaction loss in income before extraordinary items

Correct *nswer -

/xplanation /ach transaction must be reported separately since the gain on earlyextinguishment of the company"s debt is reported as an ordinary item and the losson the sale of the inestment is an ordinary loss.

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Fn 9eptember 2P, 9ummers sent :ox a letter oGering to sell :ox a acation homefor $1%0,000. Fn Fctober 2, :ox replied by mail agreeing to buy the home for$1=%,000. 9ummers did not reply to :ox. -o :ox and 9ummers hae a bindingcontractB

*+ 7o, because :ox failed to sign and return 9ummers" letter.

+ 7o, because :ox"s letter was a counteroGer.

C+ Mes, because 9ummers" oGer was alidly accepted.

-+ Mes, because 9ummers" silence is an implied acceptance of :ox"s letter.

Correct *nswer

/xplanation 9ince :ox changed the terms of the oGer, the letter was a counteroGerand not a alid acceptance. The remaining answer choices are incorrect because nocontract was formed and :ox doesn"t hae to sign and return an oGer to accept.

(n ealuating an entity"s accounting estimates, one of an auditor"s obecties is todetermine whether the estimates are

*+ 7ot subect to bias

+ Consistent with industry guidelines

C+ ased on obectie assumptions

-+ Deasonable in the circumstances

Correct *nswer -

/xplanation The auditor"s obectie when ealuating accounting estimates is toobtain suKcient competent eidential matter to proide reasonable assurance thatall accounting estimates that could be material to the nancial statements haebeen deelopedO those accounting estimates are reasonable in the circumstancesOand the accounting estimates are presented in conformity with applicable

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accounting principles and are properly disclosed.


Q /stimates are based on subectie as well as obectie factors and may inole

biased udgments made by management.Q NConsistent with industry guidelinesN presents a procedure the auditor wouldperform to determine whether the estimates are reasonable. (n addition toconsistency with industry data, the auditor would ealuate consistency with othersupporting and releant historical data.

(f a rm"s credit terms require payment with =% days but allow a discount of 2percent if paid within 1% days using a '&0!day year+, the approximate cost5benetof the trade credit terms is whatB

*+ 2 percent.

+ 1& percent.

C+ =? percent.

-+ 2= percent.

Correct *nswer -

/xplanation (f the credit terms are 251% net =%, then a company not ta)ing the 2#discount would hae an extra '0 days =% ! 1%+ to use the money. Thirty daysdiided into a '&0 day year equals twele '0 day periods in a year. Therefore, if itcosts 2# to hold the money an additional '0 days, and there are twele '0 dayperiods in a year, then the approximate cost5benet of the trade credit terms is 2=#2# x 12+.

9tarrs Company has current assets of $'00,000 and current liabilities of $200,000.6hich of the following options could increase 9tarrs wor)ing capitalB

*+ repayment of $%0,000 of next year"s rent.

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+ Denancing of $%0,000 of short!term debt with long!term debt.

C+ *cquisition of land alued at $%0,000 through the issuance of common stoc).

-+ urchase

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