Certified Public Accountant Case Studies & Practical Application 4 — Questions and Answers
Question 1: A client exchanges a building (FMV $900,000, adjusted basis $500,000) for land (FMV $900,000) in a transaction that qualifies as a like-kind exchange under IRC §1031. What is the recognized gain and basis in the new property?
- $400,000 gain recognized; $900,000 basis in land
- No gain recognized; $500,000 carryover basis in land (Correct answer)
- $400,000 gain recognized; $500,000 basis in land
- No gain recognized; $900,000 stepped-up basis in land
Correct answer: No gain recognized; $500,000 carryover basis in land
In a qualifying §1031 exchange with no boot, gain recognition is deferred and the basis in the replacement property equals the relinquished property's adjusted basis.
Question 2: A CPA notices that a client's revenue in Q4 is unusually high compared to prior quarters and industry benchmarks. What analytical procedure risk does this suggest, and what is the appropriate response?
- Liquidity risk; recommend cash flow forecasting
- Risk of premature or fictitious revenue recognition; extend substantive testing of Q4 revenue transactions (Correct answer)
- Tax exposure risk; review Q4 for deferred revenue items
- Cutoff risk only; confirm year-end dates with customers
Correct answer: Risk of premature or fictitious revenue recognition; extend substantive testing of Q4 revenue transactions
Unusual revenue spikes are a red flag for revenue manipulation; the auditor should perform additional substantive procedures including inspection of contracts and confirmations.
Question 3: A married couple filing jointly has $350,000 in net investment income and $420,000 in modified AGI. What is the Net Investment Income Tax (NIIT) liability?
- $13,300 (3.8% × $350,000)
- No liability because the threshold is $500,000 for MFJ
- $6,460 (3.8% × $170,000 — the excess of MAGI over the $250,000 MFJ threshold) (Correct answer)
- Cannot be determined without knowing the type of investment income
Correct answer: $6,460 (3.8% × $170,000 — the excess of MAGI over the $250,000 MFJ threshold)
NIIT is 3.8% on the lesser of net investment income ($350,000) or the excess of MAGI over the MFJ threshold of $250,000 ($420,000 − $250,000 = $170,000), so tax = 3.8% × $170,000 = $6,460.
Question 4: A company reports goodwill of $5 million from a 2019 acquisition. Under current US GAAP for a private company using the alternative, how is goodwill accounted for?
- Tested annually for impairment using a two-step quantitative model
- Amortized over a period not to exceed 10 years and tested for impairment only upon a triggering event (Correct answer)
- Amortized over its useful life, which must be estimated and cannot exceed 40 years
- Carried indefinitely with no amortization or impairment testing
Correct answer: Amortized over a period not to exceed 10 years and tested for impairment only upon a triggering event
Under the FASB private company alternative (ASU 2014-02), goodwill is amortized over up to 10 years and impairment testing is triggered only by a qualifying event.
Question 5: A CPA is engaged to compile financial statements but discovers that the client's management intentionally omitted substantially all required disclosures. What should the CPA do?
- Issue the compilation report without modification since disclosures are management's responsibility
- Withdraw from the engagement if management refuses to include the disclosures (Correct answer)
- Add an emphasis-of-matter paragraph describing the omissions
- Upgrade the engagement to a review to add limited assurance
Correct answer: Withdraw from the engagement if management refuses to include the disclosures
Under AR-C 80, if management omits substantially all disclosures without a stated reason acceptable under the standard, the CPA should withdraw.
Question 6: A corporation distributes appreciated property (FMV $300,000; basis $100,000) as a dividend to a shareholder. What are the tax consequences to the corporation?
- No gain recognized since the distribution is not a sale
- The corporation recognizes $200,000 gain as if the property were sold at FMV (Correct answer)
- The corporation recognizes gain only to the extent it exceeds E&P
- The corporation recognizes gain only if the shareholder is a related party
Correct answer: The corporation recognizes $200,000 gain as if the property were sold at FMV
Under IRC §311(b), a corporation recognizes gain on distributions of appreciated property as if the property were sold for its FMV.
Question 7: A CPA is auditing a pension plan and finds the projected benefit obligation (PBO) exceeds the fair value of plan assets by $2 million. Under ASC 715, what must the employer report?
- Disclose the underfunded status in a footnote only
- Record a $2 million net pension liability on the balance sheet (Correct answer)
- Record an intangible pension asset to offset the liability
- Record the $2 million as a prior service cost in equity
Correct answer: Record a $2 million net pension liability on the balance sheet
ASC 715 requires the funded status of a defined benefit plan to be recognized on the balance sheet; an underfunded plan results in a net pension liability.
Certified Public Accountant Case Studies & Practical Application 4
A client exchanges a building (FMV $900,000, adjusted basis $500,000) for land (FMV $900,000) in a transaction that qualifies as a like-kind exchange under IRC §1031.
What is the recognized gain and basis in the new property?