Sample ABA Review Questions

2.

All of the following would be included in the working papers for a compilation engagement except:

The engagement letter
A working trial balance
The client’s individual tax return
A time budget

Correct Answer

A. The client’s individual tax return

Explanation

Underline the word except. Recommended working papers include the engagement letter (A), evidence of obtaining knowledge of the industry, evidence of obtaining a knowledge of the client, working trial balance (B), adjusting journal entries, copy of accounting policies and procedures, a guide to compilation of financial statements, a time budget (D), an engage¬ment summary checklist of reports and work papers of other accountants, a memorandum of unusual matters encountered, a financial statement disclosure checklist, and other working papers developed from the performance of specific procedures.

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3.

A pension plan which requires the employer to make annual pension contributions, with no promise to employees regarding future pension benefits, is called a(n):

Funded plan
Unfunded plan
Defined benefit plan
Defined contribution plan

Correct Answer

A. Defined contribution plan

Explanation

The question is a good definition of a defined contribution plan, which defines the amount of funding to the plan and does not specify the benefits that will be paid to retired employees. The amount paid into the defined contribution plan is often determined as a percentage of the employee’s earnings. The amount of benefits received at retirement in a defined contribution plan often depends upon how much money was paid into the plan for the benefit of the employee, the employee’s retirement age, which determines the estimated number of years the employee will receive benefits, and the employee’s salary level, which also determines how much was paid into the plan. A defined benefit plan (C) will be discussed in the next question, #2. A funded plan (A) is when the employer sets funds aside for future benefits by making payments to a funding agency that is responsible for accumulating the assets of the pension fund and making payments to the recipients as benefits come due. In an unfunded plan (B), the employer pays into no such fund. In an unfunded retirement plan, the retirement fund remains under control of the sponsoring employer. Most health care plans are unfunded. The question has nothing to do with funded or unfunded plans.

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4.

Dewey and Louie agree to combine their sole proprietorships into one business. They will be equal partners in the Dewlou Diner. Dewey will contribute a building worth $100,000 (adjusted basis of $80,000), and $10,000 in cash. Louie will contribute inventory worth $80,000 (adjusted basis of $85,000) and $30,000 cash. What are Dewey and Louie’s tax bases in the partnership?

Dewey – $80,000, Louie – $85,000
Dewey – $90,000, Louie – $115,000
Dewey – $110,000, Louie – $110,000
Dewey – $90,000, Louie – $110,000

Correct Answer

A. Dewey – $90,000, Louie – $115,000

Explanation

If the IRC Section 721 non-recognition rules apply, Section 722 provides a substituted basis rule for determining the basis of a partnership interest. IRC Section 723 provides that the partnership’s basis is the contributing partner’s adjusted basis in the property.

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5.

Linda decides to convert her $30,000 traditional IRA to a Roth IRA in mid-December so she withdraws the full amount from her traditional IRA and contributes it to a Roth IRA. The income limitation still applies for that year. Immediately after the end of the year, she changes her mind. What are her options? I. She can agree with her employer to reduce her salary for the last year to have income below the $100,000 limitation. II. She can pay the tax on the $30,000 and a ten percent early withdrawal penalty. III. She can re-characterize her Roth IRA back to a traditional IRA before she files a timely return.

Statements I and II are correct
All the statements are correct
Statements III is correct
None of the statements is correct

Correct Answer

A. Statements III is correct

Explanation

Statement III is correct. Linda can recharacterize the amount. She cannot have her employer adjust her income because the employer must report all her income for that year.

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6.

All of the following are requirements to qualify as an S corporation, with the exception of the following statement:

The corporation must be a domestic corporation
The corporation may not have more than 100 shareholders
The corporation may issue only one class of stock
The corporation’s shareholders may consist of only individuals, estates, trusts, and partnerships

Correct Answer

A. The corporation’s shareholders may consist of only individuals, estates, trusts, and partnerships

Explanation

The corporation’s shareholders may consist of only individuals, estates, trusts, and partnerships. The question has three true answers and one false. Partnerships cannot be shareholders in an S corporation (Instructions for Form 2553).

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7.

All of the following are accurate statements about corporations, except:

A corporation does not compute AGI
A corporation is not allowed a standard deduction
Dividends received from a domestic corporation are fully taxed like ordinary income
The limit on the charitable contribution deduction is ten percent of taxable income (with certain adjustments)

Correct Answer

A. Dividends received from a domestic corporation are fully taxed like ordinary income

Explanation

C corporations may deduct 70 percent of the dividends received or accrued from domestic corporations (Publication 542). A corporation’s charitable deduction for a tax year cannot exceed ten percent of its taxable income for that year (Publication 542). Standard deductions and AGI are all characteristics of individual income tax returns and not part of C corporation law. There is no provision for a standard deduction on Form 1120 or Form 1120A.

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1

8.

Which one of the following is not a refundable credit?

Dependent care credit
EIC
Adoption credit
American Opportunity credit

Correct Answer

A. Dependent care credit

Explanation

An eligible individual is allowed an EIC equal to the credit percentage times the amount of the individual’s earned income for the tax year that does not exceed the statutory earned income amount. The refundable credits include the EIC, an additional child credit, the adoption credit, the American Opportunity Credit (partially refundable) and credits for tax withheld, excess Social Security tax withheld, capital gains tax paid by a regulated investment company allocated to a shareholder, and excise tax for non-taxable use of fuels. Non-refundable credits are for the elderly and disabled, dependent care expenses, and also include the child tax credit for certain taxpayers, the mortgage credit, and Lifetime Learning credit, the credit for electric vehicles, a first-time homebuyer credit, a minimum tax credit, and the Retirement Savings Contribution Credit (Publication 17, Child and Dependent Care Credit).

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9.

Comparative financial statements in which each amount is expressed as a percentage of a base amount are called:

Asset comparative statements
Percentage comparative statements
Common-size statements
Sales comparative statements

Correct Answer

A. Common-size statements

Explanation

Common-size statements. In a common-size comparative statement analysis, each financial statement number is expressed as a percentage of a base amount. In the balance sheet, the common-size base amount is always total assets. In the income statement, the common-size base amount is always total sales.

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10.

Another name for a capital lease is:

Mature lease
Mortgage
Operating lease
Short-term lease

Correct Answer

A. Short-term lease

Explanation

An operating lease (C) is a regular lease where there is no conveyance of rights and responsibilities of ownership. A capital lease is a sale of property disguised as a lease. The lease payments are really installment payments on a loan. A mortgage (B) is a loan against property (i.e., real estate) that has the real estate as security through a lien.

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Sample Aba Review Questions

Financial accounting is concerned with:

Quiz Preview

All of the following would be included in the working papers for a compilation engagement except:

A pension plan which requires the employer to make annual pension contributions, with no promise to employees regarding future pension benefits, is called a(n):

All of the following are requirements to qualify as an S corporation, with the exception of the following statement:

All of the following are accurate statements about corporations, except:

Which one of the following is not a refundable credit?

Comparative financial statements in which each amount is expressed as a percentage of a base amount are called:

Another name for a capital lease is: