FAC Finance and Accounting Taxation & Regulatory Compliance 3 — Questions and Answers
Question 1: Under the Foreign Corrupt Practices Act (FCPA), which of the following payments to a foreign official is generally permissible?
- Payments to win a government contract
- Facilitating payments to expedite routine governmental actions (Correct answer)
- Payments disguised as consulting fees
- Payments routed through third-party agents to conceal the source
Correct answer: Facilitating payments to expedite routine governmental actions
Facilitating payments (also called grease payments) to expedite routine governmental actions such as processing permits are technically exempt under the FCPA, though this exemption is narrow.
Question 2: Which transfer pricing method compares the price charged in a controlled transaction to the price charged in a comparable uncontrolled transaction?
- Comparable profits method (CPM)
- Comparable uncontrolled price method (CUP) (Correct answer)
- Cost-plus method
- Profit split method
Correct answer: Comparable uncontrolled price method (CUP)
The Comparable Uncontrolled Price (CUP) method directly compares the price in a controlled transaction to prices in comparable uncontrolled transactions and is generally preferred by tax authorities.
Question 3: For U.S. tax purposes, a foreign tax credit (FTC) is primarily designed to prevent:
- Double taxation of foreign-source income (Correct answer)
- Excessive deductions on domestic income
- Tax deferral on repatriated earnings
- Underreporting of foreign assets
Correct answer: Double taxation of foreign-source income
The foreign tax credit allows U.S. taxpayers to offset taxes paid to foreign governments against their U.S. tax liability, preventing the same income from being taxed twice.
Question 4: The Bank Secrecy Act (BSA) requires financial institutions to file a Currency Transaction Report (CTR) for cash transactions exceeding:
- $5,000
- $7,500
- $10,000 (Correct answer)
- $25,000
Correct answer: $10,000
The BSA requires financial institutions to file a CTR for any cash transaction exceeding $10,000 in a single business day, including multiple transactions that together exceed this threshold.
Question 5: Under ASC 842, a lessee must recognize a right-of-use asset and lease liability for:
- Only finance leases
- Only operating leases
- Both finance and operating leases (Correct answer)
- Short-term leases with terms under 12 months
Correct answer: Both finance and operating leases
ASC 842 requires lessees to recognize both a right-of-use asset and a lease liability on the balance sheet for both finance and operating leases, with an exemption for short-term leases.
Question 6: Which IRS form is used by taxpayers to report transactions with foreign trusts and receipt of certain foreign gifts?
- Form 5471
- Form 8938
- Form 3520 (Correct answer)
- Form 114 (FBAR)
Correct answer: Form 3520
Form 3520 is used to report transactions with foreign trusts and the receipt of large foreign gifts or bequests, with significant penalties for noncompliance.
Question 7: Under GAAP, a contingent liability must be accrued when it is:
- Possible and the amount can be reasonably estimated
- Probable and the amount can be reasonably estimated (Correct answer)
- Reasonably possible regardless of amount estimation
- Certain, even if the amount cannot be estimated
Correct answer: Probable and the amount can be reasonably estimated
Under ASC 450, a contingent liability is accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated.
FAC Finance and Accounting Taxation & Regulatory Compliance 3
Under the Foreign Corrupt Practices Act (FCPA), which of the following payments to a foreign official is generally permissible?