Certified Public Accountant Case Studies & Practical Application 4

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?

Accepted Answer

No gain recognized; $500,000 carryover basis in land

Answer

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?

Accepted Answer

Risk of premature or fictitious revenue recognition; extend substantive testing of Q4 revenue transactions

Answer

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?

Accepted Answer

$6,460 (3.8% × $170,000 — the excess of MAGI over the $250,000 MFJ threshold)

Answer

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?

Accepted Answer

Amortized over a period not to exceed 10 years and tested for impairment only upon a triggering event

Answer

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?

Accepted Answer

Withdraw from the engagement if management refuses to include the disclosures

Answer

Under AR-C 80, if management omits substantially all disclosures without a stated reason acceptable under the standard, the CPA should withdraw.

Certified Public Accountant Practice Test

Certified Public Accountant Practice Test

Certified Public Accountant Case Studies & Practical Application 4