Sample Aba Review Questions

1.

All of the following would be included in the working papers for a compilation engagement except:
- A.
  
  The engagement letter
- B.
  
  A working trial balance
- C.
  
  The client’s individual tax return
- D.
  
  A time budget
Correct Answer
C. 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.

Rate this question:
2.

Comparative financial statements in which each amount is expressed as a percentage of a base amount are called:
- A.
  
  Asset comparative statements
- B.
  
  Percentage comparative statements
- C.
  
  Common-size statements
- D.
  
  Sales comparative statements
Correct Answer
C. 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.

Rate this question:
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):
- A.
  
  Funded plan
- B.
  
  Unfunded plan
- C.
  
  Defined benefit plan
- D.
  
  Defined contribution plan
Correct Answer
D. 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.

Rate this question:
4.

Another name for a capital lease is:
- A.
  
  Mature lease
- B.
  
  Mortgage
- C.
  
  Operating lease
- D.
  
  Short-term lease
Correct Answer
D. 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.

Rate this question:
5.

Financial accounting is concerned with:
- A.
  
  General-purpose reports on financial position and results of operations
- B.
  
  Specialized reports for inventory management and control
- C.
  
  Specialized reports for income tax computation and recognition
- D.
  
  General-purpose reports on changes in stock prices and future estimates of market position
Correct Answer
A. General-purpose reports on financial position and results of operations

Explanation
The question is broken up into two parts. First, is financial accounting concerned with general-purpose reports or specialized reports? Second, what is the purpose of the reports: financial position and results of operations, inventory management and control, tax computation and recognition, or changes in stock prices and future estimates of market position? Another definition of the balance sheet is a statement of financial position. The financial reports produced for financial accounting are general-purpose reports. Management and cost accounting use specialized reports.

Rate this question:
6.

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?
- A.
  
  Dewey – $80,000, Louie – $85,000
- B.
  
  Dewey – $90,000, Louie – $115,000
- C.
  
  Dewey – $110,000, Louie – $110,000
- D.
  
  Dewey – $90,000, Louie – $110,000
Correct Answer
B. 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.

Rate this question:
7.

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.
- A.
  
  Statements I and II are correct
- B.
  
  All the statements are correct
- C.
  
  Statements III is correct
- D.
  
  None of the statements is correct
Correct Answer
C. 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.

Rate this question:
8.

All of the following are requirements to qualify as an S corporation, with the exception of the following statement:
- A.
  
  The corporation must be a domestic corporation
- B.
  
  The corporation may not have more than 100 shareholders
- C.
  
  The corporation may issue only one class of stock
- D.
  
  The corporation’s shareholders may consist of only individuals, estates, trusts, and partnerships
Correct Answer
D. 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).

Rate this question:
9.

All of the following are accurate statements about corporations, except:
- A.
  
  A corporation does not compute AGI
- B.
  
  A corporation is not allowed a standard deduction
- C.
  
  Dividends received from a domestic corporation are fully taxed like ordinary income
- D.
  
  The limit on the charitable contribution deduction is ten percent of taxable income (with certain adjustments)
Correct Answer
C. 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.

Rate this question:

1
0
10.

Which one of the following is not a refundable credit?
- A.
  
  Dependent care credit
- B.
  
  EIC
- C.
  
  Adoption credit
- D.
  
  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).

Rate this question:

Sample Aba Review Questions

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

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

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):

Another name for a capital lease is:

Financial accounting is concerned with:

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?