Sample Aba Review Questions

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.

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.

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.

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.

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.

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).

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.

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).

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.

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.