Louisiana Certified Public Accountant
Exam Practice Questions And Correct
Answers (Verified Answers) Plus Rationale
1. A software company enters a three-year contract to license its customer relationship
management (CRM) software, provide implementation services, and supply
unspecified future updates. The implementation significantly modifies the software's
functionality. Under ASC 606, how should the performance obligations be identified?
A. Three separate performance obligations: license, implementation, and updates.
B. Two performance obligations: a combined license and implementation, and updates.
C. One performance obligation for the entire contract.
D. Two performance obligations: license and a combined implementation and updates.
Answer: B. Two performance obligations: a combined license and implementation,
and updates.
Rationale: The implementation significantly modifies the software, so it is not distinct from
the license; they are combined. Updates are distinct because they are unspecified and
provide a separate benefit. Thus, two performance obligations exist: combined
license/implementation and updates.
2. During an audit, the auditor identifies a material weakness in internal control over
financial reporting. Management agrees and remediates the weakness before year-end.
The auditor concludes that the remediation was effective. What is the impact on the
audit report?
A. The auditor must issue an adverse opinion on internal control.
B. The auditor must issue a qualified opinion on internal control.
C. The auditor may issue an unqualified opinion on internal control if no material
weaknesses exist as of year-end.
D. The auditor must disclaim an opinion on internal control.
Answer: C. The auditor may issue an unqualified opinion on internal control if no
material weaknesses exist as of year-end.
Rationale: Under PCAOB AS 2201, if a material weakness is remediated before year-end
and the auditor tests and concludes it is effective as of the report date, an unqualified
opinion is appropriate. Adverse opinions are for material weaknesses existing at year-end.
Page 1 of 89
,Qualified opinions are not used for material weaknesses.
Page 2 of 89
,3. A corporation distributes appreciated property to a shareholder in a nonliquidating
distribution. The property has a fair market value of $100,000 and an adjusted basis
of $60,000. The corporation has ample earnings and profits. What is the tax
consequence to the corporation?
A. No gain or loss recognized; basis carries over to shareholder.
B. Recognize $40,000 gain; shareholder takes $100,000 basis.
C. Recognize $40,000 gain; shareholder takes $60,000 basis.
D. Recognize $100,000 gain; shareholder takes $100,000 basis.
Answer: B. Recognize $40,000 gain; shareholder takes $100,000 basis.
Rationale: Under IRC §311(b), a corporation recognizes gain on nonliquidating
distributions of appreciated property as if sold at fair market value. The shareholder takes
a fair market value basis under §301(d). Thus, gain is $40,000 and shareholder basis is
$100,000.
4. A parent company owns 80% of a subsidiary. During the year, the parent sold
inventory to the subsidiary for $500,000, with a gross profit of $100,000. At year-end,
40% of the inventory remains unsold. Under ASC 810, what adjustment is required in
consolidation?
A. Eliminate $40,000 of gross profit and reduce inventory by $40,000.
B. Eliminate $100,000 of gross profit and reduce inventory by $100,000.
C. Eliminate $40,000 of gross profit and reduce inventory by $40,000, with 20%
attributed to noncontrolling interest.
D. Eliminate $100,000 of gross profit and reduce inventory by $100,000, with 20%
attributed to noncontrolling interest.
Answer: A. Eliminate $40,000 of gross profit and reduce inventory by $40,000.
Rationale: Intercompany profit elimination is based on the unsold inventory: 40% of
$100,000 = $40,000. Since the parent is the seller, the entire profit elimination is attributed
to the parent; no NCI adjustment is needed. Thus, eliminate $40,000 and reduce inventory.
Page 3 of 89
, 5. A CPA firm provides audit services to a public company. The firm's consulting
division also provides IT system implementation services that are unrelated to the
financial statements. Under AICPA and SEC independence rules, which statement is
correct?
A. The firm is independent because the IT services are unrelated to financial reporting.
B. The firm is not independent because any non-audit service impairs independence.
C. The firm is independent if the client's management takes responsibility for the IT
system.
D. The firm is not independent because IT services are prohibited for public company
audit clients.
Answer: D. The firm is not independent because IT services are prohibited for public
company audit clients.
Rationale: Under SEC rules, an auditor cannot provide IT system implementation services
to a public company audit client, even if unrelated to financial reporting, because it creates
a mutual interest and self-review threat. Thus, independence is impaired. AICPA rules may
allow if safeguards, but SEC prohibits.
6. A company enters a 5-year lease for equipment with annual payments of $20,000
due at the beginning of each year. The implicit rate is 6%. The present value of an
annuity due of $1 for 5 periods at 6% is 4.4651. What is the initial lease liability under
ASC 842?
A. $89,302
B. $84,247
C. $100,000
D. $94,660
Answer: A. $89,302
Rationale: The lease liability is the present value of lease payments not yet paid. Since
payments are annuities due, use the annuity due factor: $20,000 × 4.4651 = $89,302. The
first payment is made at inception, so it is not included in the liability.
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Exam Practice Questions And Correct
Answers (Verified Answers) Plus Rationale
1. A software company enters a three-year contract to license its customer relationship
management (CRM) software, provide implementation services, and supply
unspecified future updates. The implementation significantly modifies the software's
functionality. Under ASC 606, how should the performance obligations be identified?
A. Three separate performance obligations: license, implementation, and updates.
B. Two performance obligations: a combined license and implementation, and updates.
C. One performance obligation for the entire contract.
D. Two performance obligations: license and a combined implementation and updates.
Answer: B. Two performance obligations: a combined license and implementation,
and updates.
Rationale: The implementation significantly modifies the software, so it is not distinct from
the license; they are combined. Updates are distinct because they are unspecified and
provide a separate benefit. Thus, two performance obligations exist: combined
license/implementation and updates.
2. During an audit, the auditor identifies a material weakness in internal control over
financial reporting. Management agrees and remediates the weakness before year-end.
The auditor concludes that the remediation was effective. What is the impact on the
audit report?
A. The auditor must issue an adverse opinion on internal control.
B. The auditor must issue a qualified opinion on internal control.
C. The auditor may issue an unqualified opinion on internal control if no material
weaknesses exist as of year-end.
D. The auditor must disclaim an opinion on internal control.
Answer: C. The auditor may issue an unqualified opinion on internal control if no
material weaknesses exist as of year-end.
Rationale: Under PCAOB AS 2201, if a material weakness is remediated before year-end
and the auditor tests and concludes it is effective as of the report date, an unqualified
opinion is appropriate. Adverse opinions are for material weaknesses existing at year-end.
Page 1 of 89
,Qualified opinions are not used for material weaknesses.
Page 2 of 89
,3. A corporation distributes appreciated property to a shareholder in a nonliquidating
distribution. The property has a fair market value of $100,000 and an adjusted basis
of $60,000. The corporation has ample earnings and profits. What is the tax
consequence to the corporation?
A. No gain or loss recognized; basis carries over to shareholder.
B. Recognize $40,000 gain; shareholder takes $100,000 basis.
C. Recognize $40,000 gain; shareholder takes $60,000 basis.
D. Recognize $100,000 gain; shareholder takes $100,000 basis.
Answer: B. Recognize $40,000 gain; shareholder takes $100,000 basis.
Rationale: Under IRC §311(b), a corporation recognizes gain on nonliquidating
distributions of appreciated property as if sold at fair market value. The shareholder takes
a fair market value basis under §301(d). Thus, gain is $40,000 and shareholder basis is
$100,000.
4. A parent company owns 80% of a subsidiary. During the year, the parent sold
inventory to the subsidiary for $500,000, with a gross profit of $100,000. At year-end,
40% of the inventory remains unsold. Under ASC 810, what adjustment is required in
consolidation?
A. Eliminate $40,000 of gross profit and reduce inventory by $40,000.
B. Eliminate $100,000 of gross profit and reduce inventory by $100,000.
C. Eliminate $40,000 of gross profit and reduce inventory by $40,000, with 20%
attributed to noncontrolling interest.
D. Eliminate $100,000 of gross profit and reduce inventory by $100,000, with 20%
attributed to noncontrolling interest.
Answer: A. Eliminate $40,000 of gross profit and reduce inventory by $40,000.
Rationale: Intercompany profit elimination is based on the unsold inventory: 40% of
$100,000 = $40,000. Since the parent is the seller, the entire profit elimination is attributed
to the parent; no NCI adjustment is needed. Thus, eliminate $40,000 and reduce inventory.
Page 3 of 89
, 5. A CPA firm provides audit services to a public company. The firm's consulting
division also provides IT system implementation services that are unrelated to the
financial statements. Under AICPA and SEC independence rules, which statement is
correct?
A. The firm is independent because the IT services are unrelated to financial reporting.
B. The firm is not independent because any non-audit service impairs independence.
C. The firm is independent if the client's management takes responsibility for the IT
system.
D. The firm is not independent because IT services are prohibited for public company
audit clients.
Answer: D. The firm is not independent because IT services are prohibited for public
company audit clients.
Rationale: Under SEC rules, an auditor cannot provide IT system implementation services
to a public company audit client, even if unrelated to financial reporting, because it creates
a mutual interest and self-review threat. Thus, independence is impaired. AICPA rules may
allow if safeguards, but SEC prohibits.
6. A company enters a 5-year lease for equipment with annual payments of $20,000
due at the beginning of each year. The implicit rate is 6%. The present value of an
annuity due of $1 for 5 periods at 6% is 4.4651. What is the initial lease liability under
ASC 842?
A. $89,302
B. $84,247
C. $100,000
D. $94,660
Answer: A. $89,302
Rationale: The lease liability is the present value of lease payments not yet paid. Since
payments are annuities due, use the annuity due factor: $20,000 × 4.4651 = $89,302. The
first payment is made at inception, so it is not included in the liability.
Page 4 of 89
