Certified Public Accountant Case Studies & Practical Application 2 — Questions and Answers
Question 1: A manufacturing client discovers mid-year that its inventory costing method (LIFO) is no longer permitted under the new contracts with international partners requiring IFRS compliance. What is the most appropriate CPA recommendation?
- Continue LIFO and disclose the conflict in the footnotes
- Change to FIFO or weighted-average and apply the change retrospectively with full disclosure (Correct answer)
- Switch to specific identification to avoid any GAAP vs. IFRS conflict
- Maintain LIFO for US tax purposes only and use FIFO for financial reporting
Correct answer: Change to FIFO or weighted-average and apply the change retrospectively with full disclosure
A change in accounting principle requires retrospective application and full disclosure under ASC 250, and LIFO is prohibited under IFRS.
Question 2: During an audit, a CPA discovers that a client's accounts receivable balance includes $500,000 from a related party that has been outstanding for 18 months with no repayment activity. What is the auditor's primary concern?
- Revenue recognition timing
- Collectibility and proper classification as a related-party transaction (Correct answer)
- Whether the amount exceeds materiality thresholds
- Whether the related party has filed its own financial statements
Correct answer: Collectibility and proper classification as a related-party transaction
The auditor must assess whether the receivable is collectible and whether the related-party nature is properly disclosed per ASC 850.
Question 3: A client enters a 10-year operating lease with annual payments of $120,000. Under ASC 842, what must the lessee record at commencement?
- Only a lease liability equal to total undiscounted payments of $1,200,000
- A right-of-use asset and lease liability measured at the present value of lease payments (Correct answer)
- Rent expense on a straight-line basis with no balance sheet recognition
- A capital asset equal to the fair value of the leased property
Correct answer: A right-of-use asset and lease liability measured at the present value of lease payments
ASC 842 requires lessees to recognize a right-of-use asset and lease liability at the present value of future lease payments for all leases over 12 months.
Question 4: A CPA preparing a client's tax return finds the client received $50,000 in PPP loan forgiveness. How should this be treated for federal income tax purposes?
- Included as ordinary income in the year of forgiveness
- Excluded from gross income with deductions for related expenses still allowed (Correct answer)
- Excluded from gross income but related expenses are nondeductible
- Treated as a capital gain in the year the loan was forgiven
Correct answer: Excluded from gross income with deductions for related expenses still allowed
The Consolidated Appropriations Act of 2021 clarified that PPP forgiveness is excluded from income AND related expenses remain fully deductible.
Question 5: A publicly traded company's CFO asks its CPA firm to also provide internal audit outsourcing services. Under PCAOB and SEC independence rules, how should the CPA firm respond?
- Accept the engagement since internal audit is not a prohibited service
- Decline because providing internal audit outsourcing for a public audit client impairs independence (Correct answer)
- Accept only if the engagement is performed by a separate practice unit
- Accept with written consent from the audit committee
Correct answer: Decline because providing internal audit outsourcing for a public audit client impairs independence
SEC rules prohibit external auditors of public companies from providing internal audit outsourcing services, as it creates a self-review threat.
Question 6: A client sells equipment with a book value of $80,000 for $110,000 cash. The equipment originally cost $200,000 and had accumulated depreciation of $120,000. How is this transaction classified on the statement of cash flows?
- $110,000 inflow in operating activities
- $110,000 inflow in investing activities with a $30,000 gain removed in operating activities (Correct answer)
- $30,000 gain shown in investing activities only
- $110,000 inflow in financing activities
Correct answer: $110,000 inflow in investing activities with a $30,000 gain removed in operating activities
Cash proceeds from asset sales are investing inflows; the gain is removed from operating activities under the indirect method to avoid double-counting.
Question 7: A not-for-profit organization receives a $200,000 donation restricted to building a new community center. The building is completed during the year. Under ASC 958, when should the restriction be released?
- When the pledge is received
- When the cash is collected from the donor
- When the restricted asset (building) is placed in service (Correct answer)
- At the end of the fiscal year in which construction began
Correct answer: When the restricted asset (building) is placed in service
Under ASC 958, purpose restrictions are released when the specified purpose is accomplished — here, when the building is completed and placed in service.
Certified Public Accountant Case Studies & Practical Application 2
A manufacturing client discovers mid-year that its inventory costing method (LIFO) is no longer permitted under the new contracts with international partners requiring IFRS compliance.
What is the most appropriate CPA recommendation?