Regulation 7 Pass Master Questions

Becker CPA Review, PassMaster Questions

Lecture: Regulation 7

1 © 2009 DeVry/Becker Educational Development Corp. All rights reserved.

CPA PassMaster Questions–Regulation 7 Export Date: 10/30/08




Agency CPA-01299 Type1 M/C A-D Corr Ans: C PM#1 R 7-01

1. CPA-01299 Lw R02 #5 Page 12

Lee repairs high-speed looms for Sew Corp., a clothing manufacturer. Which of the following circumstances best indicates that Lee is an employee of Sew and not an independent contractor? a. Lee's work is not supervised by Sew personnel. b. Lee's tools are owned by Lee. c. Lee is paid weekly by Sew. d. Lee's work requires a high degree of technical skill. CPA-01299 Explanation Choice "c" is correct. A clear example of an employee is one who works full time for the employer, uses the employer's tools, is compensated on a time basis, and is subject to supervision of the employer in the details of the work. A clear example of an independent contractor is one who has a calling of his own, who uses his own tools, is hired for a particular job, is paid a given amount for the job, and follows his own discretion. Thus, payment on a weekly basis is an indication that a person is an employee rather than an independent contractor.

Choice "a" is incorrect. If Lee's work is not supervised by Sew's personnel, per the above, that would be an indication of independent contractor status.

Choice "b" is incorrect. Per the above, Lee's ownership of his own tools would indicate that he is an independent contractor.

Choice "d" is incorrect. Work that requires a high degree of skill might be considered a calling or might be difficult to supervise. In any case, it would be indicative of independent contractor status.

CPA-01303 Type1 M/C A-D Corr Ans: C PM#2 R 7-01

2. CPA-01303 Lw R02 #6 Page 4

Blue, a used car dealer, appointed Gage as an agent to sell Blue's cars. Gage was authorized by Blue to appoint subagents to assist in the sale of the cars. Vond was appointed as a sub-agent. To whom does Vond owe a fiduciary duty? a. Gage only. b. Blue only. c. Both Blue and Gage. d. Neither Blue nor Gage. CPA-01303 Explanation Choice "c" is correct. A subagent is one who assists the agent in the performance of his or her duties. When a subagent is appointed by an agent with authority to appoint a subagent, the subagent owes a duty to both the agent and the principal. Thus, choices "a", "b", and "d" are incorrect. CPA-01304 Type1 M/C A-D Corr Ans: A PM#3 R 7-01

3. CPA-01304 Lw R01 #3 Page 4

Which of the following is(are) available to a principal when an agent fraudulently breaches a fiduciary duty? Termination of the agency Constructive trust a. Yes Yes b. Yes No c. No Yes d. No No




CPA-01304 Explanation Choice "a" is correct. If an agent breaches her fiduciary duty, the principal can terminate the agency and receive the remedy of a constructive trust to ensure that the principal can recover secret profits obtained by the agent because of the wrongful conduct. CPA-01307 Type1 M/C A-D Corr Ans: C PM#4 R 7-01

4. CPA-01307 Lw R99 #4 Page 5

Which of the following statements is(are) correct regarding the relationship between an agent and a nondisclosed principal? I. The principal is required to indemnify the agent for any contract entered into by the agent within the

scope of the agency agreement. II. The agent has the same actual authority as if the principal had been disclosed.

a. I only. b. II only. c. Both I and II. d. Neither I nor II. CPA-01307 Explanation Choice "c" is correct. A principal owes her agent the duty of indemnification, which is a type of reimbursement for costs and liabilities incurred by the agent as a result of authorized acts on behalf of the principal.

Actual authority is the authority that the agent reasonably believes she possesses because of the principal's communications to the agent. The agent has the same actual authority whether the principal is disclosed or undisclosed. CPA-01309 Type1 M/C A-D Corr Ans: C PM#5 R 7-01

5. CPA-01309 Lw R96 #3 Page 5

Which of the following statements represent(s) a principal's duty to an agent who works on a commission basis? I. The principal is required to maintain pertinent records, account to the agent, and pay the agent

according to the terms of their agreement. II. The principal is required to reimburse the agent for all authorized expenses incurred unless the

agreement calls for the agent to pay expenses out of the commission.

a. I only. b. II only. c. Both I and II. d. Neither I nor II. CPA-01309 Explanation Choice "c" is correct. A principal is required to pay its commissioned agent as agreed and thus must maintain sufficient records in order to do so. Therefore, statement I is true. Statement II is also true. Generally, a principal must indemnify an agent for all expenses the agent reasonably incurs on the principal's behalf unless the parties have agreed otherwise. CPA-01312 Type1 M/C A-D Corr Ans: C PM#7 R 7-01

6. CPA-01312 Lw May 95 #7 Page 7

Thorp was a purchasing agent for Ogden, a sole proprietor, and had the express authority to place purchase orders with Ogden's suppliers. Thorp placed an order with Datz, Inc. on Ogden's behalf after Ogden was declared incompetent in a judicial proceeding. Thorp was aware of Ogden's incapacity. Which of the following statements is correct concerning Ogden's liability to Datz?




a. Ogden will be liable because Datz was not informed of Ogden's incapacity. b. Ogden will be liable because Thorp acted with express authority. c. Ogden will not be liable because Thorp's agency ended when Ogden was declared incompetent. d. Ogden will not be liable because Ogden was a nondisclosed principal. CPA-01312 Explanation Choice "c" is correct. An agency is terminated by operation of law upon the incapacity of the principal; no notice is needed.

Choice "a" is incorrect. An agency is terminated by operation of law upon the incapacity of the principal; notice to the third party with whom the agent deals is not necessary.

Choice "b" is incorrect. An agent's authority is terminated by operation of law upon the incapacity of the principal regardless of whether the authority was express, implied, or apparent.

Choice "d" is incorrect. Ogden will not be liable because of the incapacity; Ogden's status as a disclosed vs. undisclosed principal is irrelevant. CPA-01314 Type1 M/C A-D Corr Ans: B PM#9 R 7-01

7. CPA-01314 Lw May 95 #9 Page 4

Young Corp. hired Wilson as a sales representative for six months at a salary of $5,000 per month plus 6% of sales. Which of the following statements is correct? a. Young does not have the power to dismiss Wilson during the six-month period without cause. b. Wilson is obligated to act solely in Young's interest in matters concerning Young's business. c. The agreement between Young and Wilson is not enforceable unless it is in writing and signed by

Wilson. d. The agreement between Young and Wilson formed an agency coupled with an interest. CPA-01314 Explanation Choice "b" is correct. An agent owes the principal a duty of loyalty, which includes the duty to act solely in the principal's interest in matters relating to the agency.

Choice "a" is incorrect. A principal has the power to terminate an agency relationship at any time, although the principal might be liable for damages if the termination is in breach of contract.

Choice "c" is incorrect. A contract for services need not be in writing unless it cannot be performed within one year. The service contract here is for six months.

Choice "d" is incorrect. An agency coupled with an interest arises only when the agent is given an interest in the subject matter of the agency. A sales commission is not a sufficient interest. CPA-01315 Type1 M/C A-D Corr Ans: B PM#10 R 7-01

8. CPA-01315 Lw Nov 94 #16 Page 3

Which of the following actions requires an agent for a corporation to have a written agency agreement? a. Purchasing office supplies for the principal's business. b. Purchasing an interest in undeveloped land for the principal. c. Hiring an independent general contractor to renovate the principal's office building. d. Retaining an attorney to collect a business debt owed the principal. CPA-01315 Explanation Choice "b" is correct. Generally, agency power may be granted orally, even if the agent enters into contracts that must be in writing to be enforceable. However, most states require an agency agreement to be in writing if the agent is to purchase or convey interests in land.

Choice "a" is incorrect. Generally, agency power may be granted orally. The power to buy office supplies need not be granted in writing.




Choice "c" is incorrect. Generally, agency power may be granted orally. The power to hire persons to perform services need not be granted in writing. (Note that repairing a building involves a service and not an interest in land.)

Choice "d" is incorrect. Generally, agency power may be granted orally, even if the agent is to enter into contracts that must be in writing to be enforceable. The power to hire persons to perform services need not be granted in writing. CPA-01316 Type1 M/C A-D Corr Ans: C PM#11 R 7-01

9. CPA-01316 Lw Nov 94 #17 Page 8

Bolt Corp. dismissed Ace as its general sales agent and notified all of Ace's known customers by letter. Young Corp., a retail outlet located outside of Ace's previously assigned sales territory, had never dealt with Ace. Young knew of Ace as a result of various business contacts. After his dismissal, Ace sold Young goods, to be delivered by Bolt, and received from Young a cash deposit for 20% of the purchase price. It was not unusual for an agent in Ace's previous position to receive cash deposits. In an action by Young against Bolt on the sales contract, Young will: a. Lose, because Ace lacked any implied authority to make the contract. b. Lose, because Ace lacked any express authority to make the contract. c. Win, because Bolt's notice was inadequate to terminate Ace's apparent authority. d. Win, because a principal is an insurer of an agent's acts. CPA-01316 Explanation Choice "c" is correct. Although Bolt gave known customer's notice of Ace's dismissal, some courts might also require a notice placed in a newspaper to terminate Ace's apparent authority as to people, like Young, who had heard of Ace.

Choice "a" is incorrect. Although Ace lacked implied authority, a court might find that he had apparent authority since Bolt had held Ace out as its agent previously.

Choice "b" is incorrect. Although Ace lacked express authority, a court might find that he had apparent authority since Bolt had held Ace out as its agent previously.

Choice "d" is incorrect. A principal is not an insurer of an agent's acts. A principal is liable only when the agent acts with authority. CPA-01317 Type1 M/C A-D Corr Ans: A PM#12 R 7-01

10. CPA-01317 Lw Nov 94 #18 Page 11

Easy Corp. is a real estate developer and regularly engages real estate brokers to act on its behalf in acquiring parcels of land. The brokers are authorized to enter into such contracts, but are instructed to do so in their own names without disclosing Easy's identity or relationship to the transaction. If a broker enters into a contract with a seller on Easy's behalf: a. The broker will have the same actual authority as if Easy's identity had been disclosed. b. Easy will be bound by the contract because of the broker's apparent authority. c. Easy will not be liable for any negligent acts committed by the broker while acting on Easy's behalf. d. The broker will not be personally bound by the contract because the broker has express authority to

act. CPA-01317 Explanation Choice "a" is correct. Actual authority arises from the communications between the principal and the agent. Whether the agent discloses the principal to the third party with whom the agent contracts has no effect on the communications between the principal and the agent.

Choice "b" is incorrect. Apparent authority arises from the communications between the principal and the third party with whom the agent deals. If the principal is undisclosed, as under the facts here, the third




party has no idea that there is a principal, and so there are no communications between the third party and the principal from which apparent authority can arise.

Choice "c" is incorrect. A principal generally is not liable for an agent's torts, but can be liable when the torts are authorized. The fact that the principal is undisclosed has no effect on this rule.

Choice "d" is incorrect. When a principal is undisclosed, the third party with whom the agent deals may hold either the agent or the principal liable on contracts that the agent enters into on the principal's behalf. CPA-01319 Type1 M/C A-D Corr Ans: D PM#14 R 7-01

11. CPA-01319 Lw Nov 93 #11 Page 3

Noll gives Carr a written power of attorney. Which of the following statements is correct regarding this power of attorney? a. It must be signed by both Noll and Carr. b. It must be for a definite period of time. c. It may continue in existence after Noll's death. d. It may limit Carr's authority to specific transactions. CPA-01319 Explanation Choice "d" is correct. A power of attorney is a form of agency, and like all agencies it may be limited in scope of authority.

Choice "a" is incorrect. As a general rule, no writing is required to form an agency relationship, and even where a writing is required, it need only be signed by the principal (the one sought to be bound).

Choice "b" is incorrect. A power of attorney, like other agencies, need not explicitly state a duration.

Choice "c" is incorrect. A power of attorney, like all agencies, is terminated by the death of either the principal or the agent. CPA-01331 Type1 M/C A-D Corr Ans: B PM#15 R 7-01

12. CPA-01331 Lw Nov 93 #13 Page 12

Generally, a disclosed principal will be liable to third parties for its agent's unauthorized misrepresentations if the agent is an: Employee Independent Contractor a. Yes Yes b. Yes No c. No Yes d. No No CPA-01331 Explanation Choice "b" is correct. An employer is liable for torts of employees committed within the scope of employment. Employers are generally not liable for the torts of independent contractors. CPA-01333 Type1 M/C A-D Corr Ans: C PM#16 R 7-01

13. CPA-01333 Lw Nov 93 #14 Page 11

Which of the following rights will a third party be entitled to after validly contracting with an agent representing an undisclosed principal? a. Disclosure of the principal by the agent. b. Ratification of the contract by the principal. c. Performance of the contract by the agent. d. Election to void the contract after disclosure of the principal.




CPA-01333 Explanation Choice "c" is correct. If the principal is undisclosed, the third party with whom the agent dealt can hold the agent liable on the contract.

Choice "a" is incorrect. A third party has no general right to discover the identity of an undisclosed principal.

Choice "b" is incorrect. A third party never has the right to force a principal to ratify a contract; only a principal has a right to choose to ratify an unauthorized contract. However, an undisclosed principal never has the right to ratify because ratification is available only if the agent entered into the contract purportedly on behalf of the principal, and if the principal is not disclosed, this cannot occur.

Choice "d" is incorrect. As a general rule a third party who has contracted with an agent for an undisclosed principal has no right to rescind the contract on discovering the principal. Such a right exists only if the nondisclosure was fraudulent. CPA-01337 Type1 M/C A-D Corr Ans: B PM#18 R 7-01

14. CPA-01337 Lw May 89 #12 Page 12

Neal, an employee of Jordan, was delivering merchandise to a customer. On the way, Neal's negligence caused a traffic accident that resulted in damages to a third party's automobile. Who is liable to the third party? Neal Jordan a. No No b. Yes Yes c. Yes No d. No Yes CPA-01337 Explanation Choice "b" is correct. A tortfeasor is liable for the damages caused by his negligence. Thus, Neal is liable. Additionally, if the tortfeasor is an employee operating within the scope of his employment, his employer also is liable under the doctrine of repondeat superior. Thus, since Neal was Jordan's employee and was delivering Jordan's merchandise at the time of the accident, Jordan is also liable for the accident. CPA-01339 Type1 M/C A-D Corr Ans: D PM#19 R 7-01

15. CPA-01339 Lw May 87 #4 Page 9

A general agent's apparent authority to bind her principal to contracts with third parties will cease without notice to those third parties when the: a. Agent has fulfilled the purpose for which the agency relationship was created. b. Time set forth in the agreement creating the agency relationship has expired. c. Principal and agent have mutually agreed to end their relationship. d. Principal has received a discharge in bankruptcy under the liquidation provisions of the Bankruptcy

Code. CPA-01339 Explanation Choice "d" is correct. Generally, a general agent's apparent authority does not cease unless and until notice is given. However, if the principal has received a discharge in bankruptcy, notice is not required to terminate the agent's apparent authority.

Choice "a" is incorrect. Apparent authority is based on the reasonable beliefs of the third party with whom the agent deals. Since third parties have no way of knowing whether an agency purpose has been fulfilled, notice is required to terminate agency power after fulfillment of the purpose.




Choice "b" is incorrect. Apparent authority is based on the reasonable beliefs of the third party with whom the agent deals. Since third parties have no way of knowing how long an agency is to last, notice is required to terminate agency power after the period of the agency has elapsed.

Choice "c" is incorrect. Apparent authority is based on the reasonable beliefs of the third party with whom the agent deals. Since third parties have no way of knowing whether the principal and agent have terminated their relationship, notice is required to terminate agency power after the principal and agent agree to terminate the relationship. CPA-01341 Type1 M/C A-D Corr Ans: D PM#20 R 7-01

16. CPA-01341 Lw May 87 #6 Page 9

Starr is an agent of a disclosed principal, Maple. On May 1, Starr entered into an agreement with King Corp. on behalf of Maple that exceeded Starr's authority as Maple's agent. On May 5, King learned of Starr's lack of authority and immediately notified Maple and Starr that it was withdrawing from the May 1 agreement. On May 7, Maple ratified the May 1 agreement in its entirety. If King refuses to honor the agreement and Maple brings an action for breach of contract, Maple will: a. Prevail since the agreement of May 1 was ratified in its entirety. b. Prevail since Maple's capacity as a principal was known to Starr. c. Lose since the May 1 agreement is void due to Starr's lack of authority. d. Lose since King notified Starr and Maple of its withdrawal prior to Maple's ratification. CPA-01341 Explanation Choice "d" is correct. A third party may withdraw from a transaction or agreement entered into with an agent who exceeded his or her authority at any time prior to ratification of the agent's unauthorized acts by the principal. In this case, King notified Maple of King's withdrawal from the agreement on May 1, six days before Maple's attempted ratification on May 7. Therefore, Maple's action will fail.

Choice "a" is incorrect. An unauthorized transaction or agreement can be ratified only before the third party to the transaction or agreement withdraws. Here, King withdrew before Maple ratified.

Choice "b" is incorrect. An unauthorized transaction or agreement can be ratified only if the agent without authority claimed to be acting on behalf of the principal, but knowledge of the principal's capacity does not prevent the third party from withdrawing once it is learned that the transaction or agreement was unauthorized.

Choice "c" is incorrect. An unauthorized act by an agent is voidable, since the principal may ratify the act; it is not void. CPA-04778 Type1 M/C A-D Corr Ans: C PM#21 R 7-01

17. CPA-04778 Released 2005 Page 3

Under the agent's duty to account, which of the following acts must a gratuitous agent perform? Commingle Account for the Funds principal's property a. Yes Yes b. Yes No c. No Yes d. No No CPA-04778 Explanation Choice "c" is correct. An agent is required to properly account for money spent while acting on behalf of the principal. As part of this duty, the agent must keep the principal's money or property separate from his own. Only choice "c" states that the agent must account for the principal's property, but cannot commingle funds.






Which of the following acts, if committed by an agent, will cause a principal to be liable to a third party? a. A negligent act committed by an independent contractor, in performance of the contract, which results

in injury to a third party. b. An intentional tort committed by an employee outside the scope of employment, which results in

injury to a third party. c. An employee's failure to notify the employer of a dangerous condition that results in injury to a third

party. d. A negligent act committed by an employee outside the scope of employment that results in injury to a

third party. CPA-04786 Explanation Choice "c" is correct. An employer is liable for his or her own negligent acts. Under the doctrine of respondeat superior, an employer is also liable for the negligence of employees committed within the scope of employment. Failure to correct a dangerous condition that resulted in injury would be negligence by the employer. Failure of an employee to warn the employer would also be negligence by the employee. This would also subject the employer to liability under the doctrine of respondeat superior.

Choice "a" is incorrect because an employer is only liable for negligent acts of employees committed in the scope of employment. An employer is not usually liable for the negligent acts of independent contractors.

Choices "b" and "d" are incorrect. An employer is only liable for torts committed by employees within the scope of employment. The employer is not liable for torts committed outside the scope of employment. CPA-05285 Type1 M/C A-D Corr Ans: A PM#33 R 7-01


Part agreed to act as Young's agent to sell Young's land. Part was instructed to disclose that Part was acting as an agent but not to disclose Young's identity. Part contracted with Rice for Rice to purchase the land. After Rice discovered Young's identity, Young refused to fulfill the contract. Who does Rice have a cause of action against? Part Young a. Yes Yes b. Yes No c. No Yes d. No No CPA-05285 Explanation Choice "a" is correct. Once an undisclosed principal becomes known to the third party, the third party can elect to hold either the agent or the principal liable for breach of contract. Thus, both Part and Young can be held liable. CPA-05556 Type1 M/C A-D Corr Ans: A PM#34 R 7-01


What is the doctrine under which a corporation is made liable for the torts of its employees, committed within the scope of their employment? a. Respondeat superior. b. Ultra vires. c. Estoppel. d. Ratification. CPA-05556 Explanation




Choice "a" is correct. A principal, including a corporation, can be held liable for an employee's tort committed within the scope of employment under the doctrine of respondeat superior.

Choice "b" is incorrect. Ultra vires is a doctrine limiting a corporation's power to act outside the scope of its stated purposes or statutory powers.

Choice "c" is incorrect. A corporation by estoppel is recognition of a corporate entity where there was no valid incorporation because the other party to the transaction treated the entity as if it were a corporation.

Choice "d" is incorrect. Ratification occurs when a principal agrees to be bound by a previously unauthorized contract entered into by an agent on the principal's behalf. Bankruptcy CPA-01343 Type1 M/C A-D Corr Ans: C PM#1 R 7-02

21. CPA-01343 III.A Lw R03 #5 Page 25

Under Chapter 7 of the federal Bankruptcy Code, what affect does a bankruptcy discharge have on a judgment creditor when there is no bankruptcy estate? a. The judgment creditor's claim is nondischargeable. b. The judgment creditor retains a statutory lien against the debtor. c. The debtor is relieved of any personal liability to the judgment creditor. d. The debtor is required to pay a liquidated amount to vacate the judgment. CPA-01343 Explanation Choice "c" is correct. Under Chapter 7, a discharge discharges most debts of a debtor, whether or not there is a bankruptcy estate from which to pay the debts.

Choices "a", "b", and "d" are incorrect, per the above. CPA-01345 Type1 M/C A-D Corr Ans: B PM#2 R 7-02

22. CPA-01345 Lw R03 #6 Page 15

A family farmer with regular annual income may file a voluntary petition for bankruptcy under any of the following Chapters of the federal Bankruptcy Code, except: a. 7 b. 9 c. 11 d. 13 CPA-01345 Explanation Choice "b" is correct. Chapter 9 is for municipal debt adjustment; a family farmer cannot seek relief under this chapter.

Choice "a" is incorrect. Chapter 7 provides for liquidation of a debtor's estate. A family farmer with regular income may seek relief under Chapter 7.

Choice "c" is incorrect. Chapter 11 is for debt reorganization and is available to family farmers with regular income.

Choice "d" is incorrect. Chapter 13 is for adjustment of debts of individuals with regular income, and so is available to a family farmer with regular income. CPA-01348 Type1 M/C A-D Corr Ans: A PM#3 R 7-02

23. CPA-01348 Lw R01 #6 Page 22




Under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code, certain property acquired by the debtor after the filing of the petition becomes part of the bankruptcy estate. An example of such property is: a. Inheritances received by the debtor within 180 days after the filing of the petition. b. Child support payments received by the debtor within one year after the filing of the petition. c. Social Security payments received by the debtor within 180 days after the filing of the petition. d. Wages earned by the debtor within one year after the filing of the petition. CPA-01348 Explanation Choice "a" is correct. The estate includes income generated from estate property and property the debtor receives from a bequest, devise, inheritances, property settlement, divorce, or beneficial interest in life insurance within 180 days after filing of the petition.

Choices "b", "c", and "d" are incorrect, per the above. CPA-01350 Type1 M/C A-D Corr Ans: A PM#4 R 7-02

24. CPA-01350 Lw R99 #10 Page 22

Under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code, certain property acquired by the debtor after the filing of the petition becomes part of the bankruptcy estate. An example of such property is: a. Municipal bond interest received by the debtor within 180 days after the filing of the petition. b. Alimony received by the debtor within one year after the filing of the petition. c. Social Security payments received by the debtor within 180 days after the filing of the petition. d. Gifts received by the debtor within one year after the filing of the petition. CPA-01350 Explanation Choice "a" is correct. The bankruptcy estate includes property the debtor receives from a bequest, devise, inheritance, property settlement, divorce decree or beneficial interest in a life insurance policy or death benefit plan within 180 days after the filing of the petition. In addition, the estate includes any income generated by estate property (rents, interest and dividends) after the petition is filed. Earned income after the case commences is generally excluded.

Choice "b" is incorrect. Alimony, support or maintenance is exempt property.

Choice "c" is incorrect. Government benefits, such as social security, veterans benefits, unemployment comp. and disability are exempt property.

Choice "d" is incorrect. Certain gifts received within 180 days after the petition is filed are included within the estate, but the one-year period here too long. CPA-01352 Type1 M/C A-D Corr Ans: D PM#5 R 7-02

25. CPA-01352 Lw May 95 #28 (Adapted) Page 20

Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition. Dart has not been paying its business debts as they became due, has defaulted on its mortgage loan payments, and owes back taxes to the IRS. The total cash value of Dart's bankruptcy estate after the sale of all assets and payment of administration expenses is $104,000. Dart has the following creditors:

• Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart's real property. The property was valued at and sold, in bankruptcy, for $70,000.

• The IRS has a $12,000 recorded judgment for unpaid corporate income tax. • JOG Office Supplies has an unsecured claim of $2,000 that was timely filed. • Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed.




• Decoy Publications has a claim of $20,000, of which $2,000 is secured by Dart's inventory that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed.

Which of the following creditors must join in the filing of the involuntary petition? I. JOG Office Supplies. II. Nanstar Electric Co. III. Decoy Publications.

a. I, II, & III. b. II & III. c. I & II. d. III only. CPA-01352 Explanation Choice "d" is correct. If a person has fewer than 12 creditors, any one or more of them with claims that aggregate at least $13,475 more than the value of any collateral securing the claim may file the petition. Decoy Publications has a claim for $18,000 beyond its security. JOG Office Suppliers' claim is for $2,000, not enough by itself to justify filing and unnecessary if Decoy files. Similarly, Nanstar is owed only $1,200, not enough by itself to justify filing and unnecessary if Decoy files. CPA-01355 Type1 M/C A-D Corr Ans: C PM#6 R 7-02




• The IRS has a $12,000 recorded judgment for unpaid corporate income tax. • JOG Office Supplies has an unsecured claim of $2,000 that was timely filed. • Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed. • Decoy Publications has a claim of $20,000, of which $2,000 is secured by Dart's inventory that was

valued and sold, in bankruptcy, for $2,000. The claim was timely filed.

Which of the following statements would correctly describe the result of Dart's opposing the petition? a. Dart will win because the petition should have been filed under Chapter 11. b. Dart will win because there are not more than 12 creditors. c. Dart will lose because it is not paying its debts as they become due. d. Dart will lose because of its debt to the IRS. CPA-01355 Explanation Choice "c" is correct. A person may be petitioned involuntarily into bankruptcy if that person is not paying debts as they become due.

Choice "a" is incorrect. Chapter 7 liquidations are available to liquidate a business. Chapter 11 is used only to restructure debt.

Choice "b" is incorrect. If a debtor has fewer than 12 creditors, any one creditor owed more than $13,475 of unsecured debt can petition the debtor into bankruptcy.

Choice "d" is incorrect. There is no special provision prohibiting opposition to an involuntary bankruptcy petition merely because one creditor is the IRS.




CPA-01357 Type1 M/C A-D Corr Ans: A PM#7 R 7-02






Which of the following events will follow the filing of the Chapter 7 involuntary petition? A stay against A trustee creditor collection will be proceedings will appointed go into effect a. Yes Yes b. Yes No c. No Yes d. No No CPA-01357 Explanation Choice "a" is correct. In a liquidation proceeding, after the petition is filed, a trustee will be appointed and an automatic stay against creditor collection proceedings goes into effect. CPA-01358 Type1 M/C A-D Corr Ans: A PM#8 R 7-02






Assume that the bankruptcy estate was distributed. What dollar amount would Nanstar Electric Co. receive? a. $0 b. $800 c. $1,000




d. $1,200 CPA-01358 Explanation Choice "a" is correct. Nanstar's claim was not timely filed. Late claims are paid only if there is money left over after the general unsecured creditors whose claims were timely filed are paid. CPA-01360 Type1 M/C A-D Corr Ans: C PM#9 R 7-02






Assume that the bankruptcy estate was distributed. What total dollar amount would Fracon Bank receive on its secured and unsecured claims? a. $70,000 b. $72,000 c. $74,000 d. $75,000 CPA-01360 Explanation Choice "c" is correct. In distributing a bankruptcy estate, first all secured claims are paid, then priority claims are paid, and finally the remaining assets are split proportionally among the unsecured creditors who have timely filed a claim. Thus, Fracon Bank is entitled to the $70,000 secured by the mortgage and Decoy is entitled to its $2,000 security interest first. The IRS has a priority claim for $12,000, which will next be paid. Thus, only $20,000 remains to pay the unsecured debt, which amounts to $25,000 ($5,000 remaining on the Fracon Bank debt, $2,000 to JOG, $18,000 to Decoy; Nanstar does not share in the distribution because it failed to file a claim). The unsecured creditors will share in the remainder of the estate proportionally. Thus, in addition to the $70,000 from the sale of the mortgaged property, Fracon is entitled to 4/5 of the $5,000 debt remaining on its loan to Dart, for a total of $74,000. CPA-01362 Type1 M/C A-D Corr Ans: D PM#10 R 7-02









For the next item assume that the bankruptcy estate was distributed. What dollar amount would the IRS receive? a. $0 b. $8,000 c. $10,000 d. $12,000 CPA-01362 Explanation Choice "d" is correct. In distributing a bankruptcy estate, first all secured claims are paid, then priority claims are paid, and finally the remaining assets are split proportionally among the unsecured creditors who have timely filed a claim. Thus, Fracon Bank is entitled to the $70,000 secured by the mortgage and Decoy is entitled to its $2,000 security interest first. After paying these two, $32,000 remains. The IRS has the only priority claim-for $12,000. So that claim will next be paid in full. CPA-01364 Type1 M/C A-D Corr Ans: D PM#11 R 7-02

31. CPA-01364 Lw May 95 #34 Page 34

Strong Corp. filed a voluntary petition in bankruptcy under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code. A reorganization plan was filed and agreed to by all necessary parties. The court confirmed the plan and a final decree was entered. Which of the following parties ordinarily must confirm the plan? 1/2 of the secured 2/3 of the creditors shareholders a. Yes Yes b. Yes No c. No Yes d. No No CPA-01364 Explanation Choice "d" is correct. Technically, only the court can confirm a plan; creditors and security interest holders vote whether to accept the plan. Moreover, unimpaired parties, such as secured creditors are presumed to have affirmed, so their vote is not necessary. A plan need not be affirmed by 2/3 of interested shareholders (called "equity security holders" under the Bankruptcy Code), but rather by 2/3 of the interests (e.g., 2/3 of the outstanding shares, which may be held by fewer than 2/3 of the shareholders). Finally, a plan may be confirmed by a court even if only one impaired class votes to affirm through the "cram down" provision of the Bankruptcy Code. CPA-01368 Type1 M/C A-D Corr Ans: A PM#14 R 7-02

32. CPA-01368 Lw Nov 94 #33 Page 27

Which of the following claims will not be discharged in bankruptcy? a. A claim that arises from alimony or maintenance. b. A claim that arises out of the debtor's breach of a contract. c. A claim brought by a secured creditor that remains unsatisfied after the sale of the collateral. d. A claim brought by a judgment creditor whose judgment resulted from the debtor's negligent

operation of a motor vehicle. CPA-01368 Explanation




Choice "a" is correct. Money owed as alimony is not discharged in bankruptcy.

Choice "b" is incorrect. Contract claims are dischargeable in bankruptcy.

Choice "c" is incorrect. Debts owed to secured creditors beyond the value of the collateral are treated like any other unsecured debt and are discharged by the bankruptcy.

Choice "d" is incorrect. Debts arising from negligent conduct are dischargeable in bankruptcy (if the auto accident arose from drunk driving or the injuries were willful, the debt would not be discharged). CPA-01371 Type1 M/C A-D Corr Ans: C PM#15 R 7-02

33. CPA-01371 Lw Nov 94 #34 Page 22

Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, which of the following statements applies to a person who has voluntarily filed for and received a discharge in bankruptcy? a. The person will be discharged from all debts. b. The person can obtain another voluntary discharge in bankruptcy under Chapter 7 after three years

have elapsed from the date of the prior filing. c. The person must surrender for distribution to the creditors amounts received as an inheritance, if the

receipt occurs within 180 days after filing the bankruptcy petition. d. The person is precluded from owning or operating a similar business for two years. CPA-01371 Explanation Choice "c" is correct. The bankruptcy estate is deemed to include money inherited within 180 days after the bankruptcy petition is filed.

Choice "a" is incorrect. Not all debts are discharged by a bankruptcy. For example, alimony is not discharged, and neither are debts arising from fraud.

Choice "b" is incorrect. After a Chapter 7 bankruptcy, the debtor may not obtain another bankruptcy for eight years.

Choice "d" is incorrect. There is no limitation on the types of businesses a debtor may own after bankruptcy. CPA-01373 Type1 M/C A-D Corr Ans: B PM#16 R 7-02

34. CPA-01373 Lw Nov 94 #37 Page 35

Under the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code, after a reorganization plan is confirmed, and a final decree closing the proceedings entered, which of the following events usually occurs? a. A reorganized corporate debtor will be liquidated. b. A reorganized corporate debtor will be discharged from all debts except as otherwise provided in the

plan and applicable law. c. A trustee will continue to operate the debtor's business. d. A reorganized individual debtor will not be allowed to continue in the same business. CPA-01373 Explanation Choice "b" is correct. After the reorganization plan is confirmed, the debtor is released from debts except as provided in the plan or by law.

Choice "a" is incorrect. The goal of a reorganization is to allow the debtor's business to continue; it is not dissolved at the conclusion.

Choice "c" is incorrect. Generally in a reorganization the debtor remains in possession and there is no trustee. In any event, a trustee would not be left in place after the reorganization is complete. The goal of Chapter 11 is to allow the debtor's business to continue.




Choice "d" is incorrect. The goal of a reorganization is just the opposite: to allow the debtor's business to continue. CPA-01374 Type1 M/C A-D Corr Ans: D PM#17 R 7-02

35. CPA-01374 Lw Nov 93 #27 Page 19

The filing of an involuntary bankruptcy petition under the Federal Bankruptcy Code: a. Terminates liens on exempt property. b. Terminates all security interests in property in the bankruptcy estate. c. Stops the debtor from incurring new debts. d. Stops the enforcement of judgment liens against property in the bankruptcy estate. CPA-01374 Explanation Choice "d" is correct. The filing of a petition in bankruptcy invokes an automatic stay against all attempts to collect on most debts of the debtor.

Choice "a" is incorrect. The filing of a petition in bankruptcy invokes an automatic stay against all attempts to collect on most debts of the debtor. It does not terminate liens, but merely stays them (i.e., temporarily prevents their enforcement).

Choice "b" is incorrect. The filing of a petition in bankruptcy invokes an automatic stay against all attempts to collect on most debts of the debtor. It does not terminate security interests but rather merely stays them (i.e., temporarily prevents their enforcement).

Choice "c" is incorrect. The filing of a petition in bankruptcy invokes an automatic stay against all attempts to collect on most debts of the debtor. It does not prevent then debtor from incurring new debts. CPA-01375 Type1 M/C A-D Corr Ans: B PM#18 R 7-02

36. CPA-01375 Lw Nov 93 #28 Page 21

Which of the following requirements must be met for creditors to file an involuntary bankruptcy petition under Chapter 7 of the Federal Bankruptcy Code? a. The debtor must owe one creditor more than $5,000. b. The debtor has not been paying its bona fide debts as they become due. c. There must not be more than 12 creditors. d. At least one fully secured creditor must join in the petition. CPA-01375 Explanation Choice "b" is correct. An involuntary petition for bankruptcy can be filed if a debtor owes more than $13,475 in unsecured debt and is not paying its debts as they become due.

Choice "a" is incorrect. The debtor must owe at least $13,475 because the petition must be filed by unsecured creditors owed at least that much, but creditors can aggregate their claims. There is no requirement that the debtor owe one creditor $5,000.

Choice "c" is incorrect. There can be more than 12 creditors. If there are, at least three must join in the petition.

Choice "d" is incorrect. There is no requirement of a secured creditor joining in the petition. In fact, a secured creditor cannot be counted as one of the required petitioners to the extent that the security covers the obligation owed. CPA-01378 Type1 M/C A-D Corr Ans: B PM#21 R 7-02

37. CPA-01378 Lw Nov 93 #31 Page 26

Which of the following acts by a debtor could result in a bankruptcy court revoking the debtor's discharge? I. Failure to list one creditor.




II. Failure to answer correctly material questions on the bankruptcy petition.

a. I only. b. II only. c. Both I and II. d. Neither I nor II. CPA-01378 Explanation Choice "b" is correct. Bankruptcy Code section 727(d) sets out the reasons for revoking a discharge. The grounds include failing to answer a material question on the bankruptcy petition if the question has been approved by the court, unless the fifth amendment privilege against self-incrimination is appropriately claimed. Thus, II. could be a ground for revocation. The grounds do not include failure to list one creditor. Thus, I. is not a possible ground. CPA-01379 Type1 M/C A-D Corr Ans: C PM#22 R 7-02

38. CPA-01379 Lw Nov 93 #32 Page 33

Robin Corp. incurred substantial operating losses for the past three years. Unable to meet its current obligations, Robin filed a petition for reorganization under Chapter 11 of the Federal Bankruptcy Code. Which of the following statements is correct? a. The creditors' committee must select a trustee to manage Robin's affairs. b. The reorganization plan may only be filed by Robin. c. A creditors' committee, if appointed, will consist of unsecured creditors. d. Robin may continue in business only with the approval of a trustee. CPA-01379 Explanation Choice "c" is correct. The creditors' committee, if appointed, is made up of unsecured creditors.

Choice "a" is incorrect. A trustee usually is not appointed in a reorganization.

Choice "b" is incorrect. Robin has a right to file the first plan of reorganization, but creditors can also file a plan.

Choice "d" is incorrect. In a reorganization, there is a presumption that the debtor will remain in possession. CPA-01380 Type1 M/C A-D Corr Ans: A PM#23 R 7-02

39. CPA-01380 Lw Nov 93 #33 Page 15

A reorganization under Chapter 11 of the Federal Bankruptcy Code requires all of the following, except the: a. Liquidation of the debtor. b. The filing of a reorganization plan. c. Confirmation of the reorganization plan by the court. d. Opportunity for each class of claims to accept the reorganization plan. CPA-01380 Explanation Choice "a" is correct. There is no requirement of liquidation in a reorganization.

Choice "b" is incorrect. In a reorganization, a plan of reorganization must be filed.

Choice "c" is incorrect. In a reorganization, the plan of reorganization must be approved by the court.

Choice "d" is incorrect. In a reorganization, each class of claimants has an opportunity to accept the plan (although it need not be accepted by all classes, such as unimpaired classes of security holders). CPA-01381 Type1 M/C A-D Corr Ans: D PM#24 R 7-02




40. CPA-01381 Lw Nov 93 #34 Page 20

Which of the following statements is correct with respect to the reorganization provisions of Chapter 11 of the Federal Bankruptcy Code? a. A trustee must always be appointed. b. The debtor must be insolvent if the bankruptcy petition was filed voluntarily. c. A reorganization plan may be filed by a creditor anytime after the petition date. d. The commencement of a bankruptcy case may be voluntary or involuntary. CPA-01381 Explanation Choice "d" is correct. Under Bankruptcy Code Section 303, a chapter 11 petition for reorganization may be filed involuntarily.

Choice "a" is incorrect. The general rule in a reorganization is that a trustee is not appointed.

Choice "b" is incorrect. There is no requirement of insolvency for filing a voluntary reorganization petition.

Choice "c" is incorrect. A creditor must wait 120 days to file a plan unless a trustee has been appointed. CPA-04782 Type1 M/C A-D Corr Ans: D PM#26 R 7-02


Under the federal Bankruptcy Code, which of the following rights or powers does a trustee in bankruptcy not have? a. The power to prevail against a creditor with an unperfected security interest. b. The power to require persons holding the debtor's property at the time the bankruptcy petition is filed

to deliver the property to the trustee. c. The right to use any grounds available to the debtor to obtain the return of the debtor's property. d. The right to avoid any statutory liens against the debtor's property that were effective before the

bankruptcy petition was filed. CPA-04782 Explanation Choice "d" is correct. A trustee in bankruptcy is treated as a hypothetical lien creditor on all of the debtor's property as of the date the bankruptcy petition is filed. The trustee is subordinate to all prior perfected security interests, including statutory liens that were effective prior to the bankruptcy petition being filed.

Choice "a" is incorrect. An unperfected security interest would be unprotected against other 3rd parties who had a valid interest in the debtor's property, including the trustee in bankruptcy, because the trustee is treated as a lien creditor as of the date the petition is filed, and a lien creditor prevails against an unperfected security interest.

Choice "b" is incorrect. The trustee in bankruptcy is treated as a lien creditor in the debtor's property as of the date of the filing for bankruptcy. Thus, the trustee would have the power to force persons holding the debtor's property to deliver it to the trustee, just as any secured creditor would.

Choice "c" is incorrect. Since the trustee becomes a lien creditor in the debtor's property as of the date of the filing, the trustee would have the same rights the debtor would have. CPA-05541 Type1 M/C A-D Corr Ans: B PM#27 R 7-02


On April 1, Roe borrowed $100,000 from Jet to pay Roe's business expenses. On June 15, Roe gave Jet a signed security agreement and financing statement covering Roe's inventory. Jet immediately filed the financing statement. On July 1, Roe filed for bankruptcy. Under the federal Bankruptcy Code, can Roe's trustee in bankruptcy set aside Jet's security interest in Roe's inventory? a. Yes, because a security agreement may only cover goods actually purchased with the borrowed

funds.




b. Yes, because Roe giving the security interest to Jet created a voidable preference. c. No, because the security interest was perfected before Roe filed for bankruptcy. d. No, because the loan proceeds were used for Roe's business. CPA-05541 Explanation Choice "b" is correct. A trustee in bankruptcy has the power to set aside preferences, which generally may be defined as a transfer made for the benefit of a creditor on account of an antecedent debt made within 90 days of the filing of the bankruptcy petition while the debtor was insolvent (presumed within the 90-day period) that enables the creditor to get more than the creditor would have received in the bankruptcy proceeding. Here, the loan was made on April 1, creating a debt as of that date. The security interest was given on June 15. Thus, the security interest was given on account of an antecedent debt and can therefore be set aside by the trustee.

Choice "a" is incorrect. A security interest can be taken in any of a debtor's property-there is no requirement that the goods covered be purchased with borrowed funds. However, a security interest in such goods does have a special name: a purchase money security interest.

Choice "c" is incorrect. Although the security interest was perfected through filing before the bankruptcy petition was filed, it nevertheless constitutes a preference because it was given on account of an antecedent debt within 90 days of the filing of the bankruptcy petition.

Choice "d" is incorrect. There is no such exemption under preference law. The security interest constitutes a preference because it was given on account of an antecedent debt within 90 days of the filing of the bankruptcy petition. Securities Regulation CPA-01383 Type1 M/C A-D Corr Ans: B PM#1 R 7-03

43. CPA-01383 Lw R03 #7 Page 40

Tork purchased restricted securities that were issued pursuant to Regulation D of the Securities Act of 1933. Which of the following statements is correct regarding Tork's ability to resell the securities? a. Tork may resell the securities so long as the sale does involve interstate commerce. b. Tork may resell the securities as part of another transaction exempt from registration. c. Tork may not resell the securities if the certificates contain a legend indicating that they are

unregistered securities. d. Tork may not resell the securities unless Tork obtains a written SEC exemption. CPA-01383 Explanation Choice "b" is correct. Under Regulation D of the Securities Act of 1933, Tork may only resell if the resale transaction continues to fall under the registration exemptions found in Section 3 of the 1933 Act.

Choice "a" is incorrect. Regulation D prohibits immediate reoffering to the public regardless of whether it is an interstate transaction or not.

Choices "c" and "d" are incorrect; there are no such rules. CPA-01384 Type1 M/C A-D Corr Ans: B PM#2 R 7-03

44. CPA-01384 Lw R03 #8 Page 42

The prospectus for the sale of securities of a not-for-profit corporation contained material misrepresentations due to the negligence of the person who prepared the financial statements. As a result of the misrepresentations, purchasers of the shares lost their investment. Do the anti-fraud provisions of the Securities Act of 1933 apply in this situation? a. Yes, because the securities are required to be registered. b. Yes, because the misrepresentations were material. c. No, because the securities are exempt from registration.




d. No, because only the issuer was negligent. CPA-01384 Explanation Choice "b" is correct. While the securities of a not-for-profit corporation are indeed exempt from registration (making choice "c" a tempting choice), where a prospectus is issued and contains material misrepresentations, liability an be imposed under Section 12(a)(2) of the 1933 Act.

Choice "a" is incorrect. Securities of not-for-profit corporations need not be registered.

Choice "c" is incorrect. See above explanation.

Choice "d" is incorrect. Section 12(a)(2) imposes liability on the negligent issuer for making material misrepresentations in any written offer, and a prospectus is considered to be a written offer under the 1933 Act. CPA-01385 Type1 M/C A-D Corr Ans: C PM#3 R 7-03

45. CPA-01385 Lw R03 #9 Page 42

An original issue of transaction exempt securities was sold to the public based on a prospectus containing intentional omissions of material facts. Under which of the following federal securities laws would the issuer be liable to a purchaser of the securities? I. The anti-fraud provisions of the Securities Act of 1933. II. The anti-fraud provisions of the Securities Exchange Act of 1934.

a. I only. b. II only. c. Both I and II. d. Neither I nor II. CPA-01385 Explanation Choice "c" is correct. The issuer could be liable for issuing securities by means of a false statement under section 12(a)(2) of the 1933 Act and can be liable for making false statements under Section 10(b) of the 1934 Act.

Choices "a", "b", and "d" are incorrect. Each of these choices incorrectly addresses either I and/or II. CPA-01386 Type1 M/C A-D Corr Ans: C PM#4 R 7-03

46. CPA-01386 Lw R02 #15 Page 42

Dean, Inc., a publicly traded corporation, paid a $10,000 bribe to a local zoning official. The bribe was recorded in Dean's financial statements as a consulting fee. Dean's unaudited financial statements were submitted to the SEC as part of a quarterly filing. Which of the following federal statutes did Dean violate? a. Federal Trade Commission Act. b. Securities Act of 1933. c. Securities Exchange Act of 1934. d. North American Free Trade Act. CPA-01386 Explanation Choice "c" is correct. Publicly traded corporations must register with the SEC and make certain periodic reports under the 1934 Act. These reports include business reports (10K, 10Q & 8K), insider trading tender offers & proxy solicitations. CPA-01388 Type1 M/C A-D Corr Ans: B PM#5 R 7-03

47. CPA-01388 Lw R99 #11 Page 43




Under the Securities Exchange Act of 1934, which of the following conditions generally will allow an issuer of securities to terminate the registration of a class of securities and suspend the duty to file periodic reports? The corporation The securities are has fewer than listed on a national 300 shareholders securities exchange a. Yes Yes b. Yes No c. No Yes d. No No CPA-01388 Explanation Choice "b" is correct. The reporting requirements of the 1934 act apply to any company:

1. Whose shares are traded on a national exchange or 2. Which has at least 500 shareholders in any one class and more than $10 million in assets. CPA-01389 Type1 M/C A-D Corr Ans: A PM#6 R 7-03

48. CPA-01389 Lw R96 #6 Page 36

Under the registration requirements of the Securities Act of 1933, which of the following items is (are) considered securities? Investment Collateral-trust contracts certificates a. Yes Yes b. Yes No c. No Yes d. No No CPA-01389 Explanation Choice "a" is correct. A collateral trust certificate is a bond secured by collateral and deposited with a trustee. Like other bonds, it is considered a security. Under the securities laws, "investment contracts" are specifically deemed to be securities. While not defined in the securities laws, an investment contract generally is defined as any financial scheme in which the investor expects to make a profit through the management of others. CPA-01390 Type1 M/C A-D Corr Ans: B PM#7 R 7-03

49. CPA-01390 Lw Nov 94 #41 Page 37

Under the Securities Act of 1933, which of the following statements most accurately reflects how securities registration affects an investor? a. The investor is provided with information on the stockholders of the offering corporation. b. The investor is provided with information on the principal purposes for which the offering's proceeds

will be used. c. The investor is guaranteed by the SEC that the facts contained in the registration statement are

accurate. d. The investor is assured by the SEC against loss resulting from purchasing the security. CPA-01390 Explanation Choice "b" is correct. One piece of information required in a registration statement is a statement of how the funds received will be used.

Choice "a" is incorrect. Generally, the registration statement need not include a list of the issuer's current shareholders.




Choice "c" is incorrect. The SEC does not guarantee the accuracy of the facts contained in a registration statement.

Choice "d" is incorrect. The SEC does not assess the financial merit of registered securities. CPA-01391 Type1 M/C A-D Corr Ans: D PM#8 R 7-03

50. CPA-01391 Lw Nov 94 #42 Page 39

Which of the following securities would be regulated by the provisions of the Securities Act of 1933? a. Securities issued by not-for-profit, charitable organizations. b. Securities guaranteed by domestic governmental organizations. c. Securities issued by savings and loan associations. d. Securities issued by insurance companies. CPA-01391 Explanation Choice "d" is correct. There is an exemption for insurance policies [SA 3(a)(8)], but other securities issued by insurance companies must generally be registered.

Choice "a" is incorrect. Securities Act 3(a)(4) exempts securities of not-for-profit organizations.

Choice "b" is incorrect. Securities Act 3(a)(2) exempts securities guaranteed by domestic governmental organizations.

Choice "c" is incorrect. Securities Act 3(a)(5) exempts securities issued by a savings and loan association. CPA-01392 Type1 M/C A-D Corr Ans: B PM#9 R 7-03

51. CPA-01392 Lw Nov 94 #43 Page 37

Which of the following requirements must be met by an issuer of securities who wants to make an offering by using shelf registration? Original The offeror registration must be a statement must first-time issuer be kept updated of securities a. Yes Yes b. Yes No c. No Yes d. No No CPA-01392 Explanation Choice "b" is correct. Shelf registrations are permitted when the corporation is frequently issuing securities on a national exchange; for example, a well known seasoned issuer (WKSI). The original registration statement must be kept current in order to provide accurate information to investors, and the SEC will not allow a company to use shelf registrations unless they have a history of issuing shares. SA Rule 415 CPA-01393 Type1 M/C A-D Corr Ans: D PM#10 R 7-03

52. CPA-01393 Lw Nov 94 #44 Page 39

Under the Securities Act of 1933, which of the following statements concerning an offering of securities sold under a transaction exemption is correct? a. The offering is exempt from the anti-fraud provisions of the 1933 Act. b. The offering is subject to the registration requirements of the 1933 Act. c. Resales of the offering are exempt from the provisions of the 1933 Act.




d. Resales of the offering must be made under a registration or a different exemption provision of the 1933 Act.

CPA-01393 Explanation Choice "d" is correct. A transaction exemption applies only to the particular transaction. Subsequent sales must qualify for their own exemption or they must be registered.

Choice "a" is incorrect. Exemption from the registration requirements does not exempt a security from the anti-fraud provisions.

Choice "b" is incorrect. If a security is exempt, it is not subject to registration.

Choice "c" is incorrect. A transaction exemption applies only to the transaction at hand. Subsequent sales must qualify for their own exemption. CPA-01394 Type1 M/C A-D Corr Ans: B PM#11 R 7-03

53. CPA-01394 Lw Nov 94 #45 Page 43

Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. Which of the following situations would require Link to be subject to the reporting provisions of the 1934 Act? Shares listed on a national More than one securities exchange class of stock a. Yes Yes b. Yes No c. No Yes d. No No CPA-01394 Explanation Choice "b" is correct. A company must register under the 1934 Act if it is registered on a national exchange, but having more than one class of stock does not require registration. CPA-01395 Type1 M/C A-D Corr Ans: A PM#12 R 7-03

54. CPA-01395 Lw Nov 94 #46 Page 44

Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. Which of the following documents must Link file with the SEC? Quarterly reports Proxy (Form 10-Q) statements a. Yes Yes b. Yes No c. No Yes d. No No CPA-01395 Explanation Choice "a" is correct. A corporation registered under the 1934 Act must file quarterly reports (Form 10-Q) and proxy solicitations by management. CPA-01396 Type1 M/C A-D Corr Ans: A PM#13 R 7-03

55. CPA-01396 Lw Nov 94 #47 Page 44

Link Corp. is subject to the reporting provisions of the Securities Exchange Act of 1934. Which of the following reports must also be submitted to the SEC?




Report by any party making a tender offer to Report of proxy purchase solicitations by Link's stock Link stockholders a. Yes Yes b. Yes No c. No Yes d. No No CPA-01396 Explanation Choice "a" is correct. SEA 13 requires persons making a tender offer to shareholders of a registered corporation to file a report with the SEC, and §14 prohibits anyone from soliciting proxies in a registered company without filing a report with the SEC. CPA-01397 Type1 M/C A-D Corr Ans: C PM#14 R 7-03

56. CPA-01397 Lw Nov 94 #48 Page 39

Which of the following facts will result in an offering of securities being exempt from registration under the Securities Act of 1933? a. The securities are nonvoting preferred stock. b. The issuing corporation was closely held prior to the offering. c. The sale or offer to sell the securities is made by a person other than an issuer, underwriter, or

dealer. d. The securities are AAA-rated debentures that are collateralized by first mortgages on property that

has a market value of 200% of the offering price. CPA-01397 Explanation Choice "c" is correct. The 1933 Act generally is concerned with sales by issuers, underwriters, or dealers. Sales by other persons are exempt.

Choice "a" is incorrect. There is no exemption from registration for issuances of nonvoting stock.

Choice "b" is incorrect. The fact that the issuer was closely held prior to the public offering does not qualify the offering for an exemption.

Choice "d" is incorrect. The fact that securities appear to be relatively safe does not provide an exemption from the registration requirements. CPA-01398 Type1 M/C A-D Corr Ans: A PM#15 R 7-03

57. CPA-01398 Lw Nov 94 #52 Page 40

Which of the following statements concerning an initial intrastate securities offering made by an issuer residing in and doing business in that state is correct? a. The offering would be exempt from the registration requirements of the Securities Act of 1933. b. The offering would be subject to the registration requirements of the Securities Exchange Act of 1934. c. The offering would be regulated by the SEC. d. The shares of the offering could not be resold to investors outside the state for at least one year. CPA-01398 Explanation Choice "a" is correct. Intrastate securities offerings are exempt from the registration requirements of the Securities Act of 1933.

Choice "b" is incorrect. The 1934 Act does not apply to initial offerings. It controls exchanges once the securities are in the market.

Choice "c" is incorrect. Intrastate offerings are exempt from the Securities Act.




Choice "d" is incorrect. Shares exempt under the intrastate offering exemption may not be resold for nine months. CPA-01399 Type1 M/C A-D Corr Ans: A PM#16 R 7-03

58. CPA-01399 Lw May 94 #31 Page 37

Which of the following statements concerning the prospectus required by the Securities Act of 1933 is correct? a. The prospectus is a part of the registration statement. b. The prospectus should enable the SEC to pass on the merits of the securities. c. The prospectus must be filed after an offer to sell. d. The prospectus is prohibited from being distributed to the public until the SEC approves the accuracy

of the facts embodied therein. CPA-01399 Explanation Choice "a" is correct. The registration statement is divided into two parts. Part I is the prospectus.

Choice "b" is incorrect. The SEC never passes on the merits of a security. The prospectus merely gives an investor information on which to make an investment decision.

Choice "c" is incorrect. The registration statement, including the prospectus, must be filed before any offer to sell may be made.

Choice "d" is incorrect. The SEC does not review the accuracy of the prospectus, but merely assures that it contains the required information. CPA-01400 Type1 M/C A-D Corr Ans: D PM#17 R 7-03

59. CPA-01400 Lw May 94 #32 Page 38

A preliminary prospectus, permitted under SEC Regulations, is known as the: a. Unaudited prospectus. b. Qualified prospectus. c. "Blue-sky" prospectus. d. "Red-herring" prospectus. CPA-01400 Explanation Choice "d" is correct. The regulations allow the use of "red herring" prospectuses in certain circumstances. A "red herring" prospectus may be missing certain information that is not yet available.

Choice "a" is incorrect. There is no provision for an unaudited prospectus.

Choice "b" is incorrect. There is no provision for a qualified prospectus.

Choice "c" is incorrect. "Blue sky" is the general name given to state securities laws, derived from the idea that without the laws, people could be lured into investing in the "blue sky." CPA-01401 Type1 M/C A-D Corr Ans: D PM#18 R 7-03

60. CPA-01401 Lw May 94 #33 Page 38

A tombstone advertisement: a. May be substituted for the prospectus under certain circumstances. b. May contain an offer to sell securities. c. Notifies prospective investors that a previously offered security has been withdrawn from the market

and is therefore effectively "dead." d. Makes known the availability of a prospectus. CPA-01401 Explanation




Choice "d" is correct. A tombstone ad can be placed before a registration statement is effective. Only certain information may be included in the ad, such as the nature of the security, price, and the availability of a prospectus.

Choice "a" is incorrect. A tombstone ad is merely a brief advertisement. It cannot replace the prospectus.

Choice "b" is incorrect. A tombstone ad may indicate the nature of the securities to be issued, the price, and the availability of a prospectus; it may not make an offer to sell.

Choice "c" is incorrect. A tombstone ad is used before a registration statement for newly issued securities is effective; it does not announce the death of an old offering. CPA-01403 Type1 M/C A-D Corr Ans: A PM#20 R 7-03

61. CPA-01403 Lw May 94 #35 Page 44

Which of the following events must be reported to the SEC under the reporting provisions of the Securities Exchange Act of 1934? Tender Insider Soliciting offers trading proxies a. Yes Yes Yes b. Yes Yes No c. Yes No Yes d. No Yes Yes CPA-01403 Explanation Choice "a" is correct. Tender offers, insider trading, and proxy solicitations all must be reported under the 1934 Act. CPA-01406 Type1 M/C A-D Corr Ans: B PM#21 R 7-03

62. CPA-01406 Lw May 94 #37 Page 40

Which of the following transactions will be exempt from the full registration requirements of the Securities Act of 1933? a. All intrastate offerings. b. All offerings made under Regulation A. c. Any resale of a security purchased under Regulation D offering. d. Any stockbroker transaction. CPA-01406 Explanation Choice "b" is correct. Regulation A provides an exception from the full registration requirements. It provides a more simplified form of registration.

Choice "a" is incorrect. Intrastate offerings are completely exempt from registration. (The examiners apparently intended "exempt from full registration" to mean that the transaction was subject to some registration.)

Choice "c" is incorrect. Resales must qualify for their own exemption. The fact that the securities were purchased pursuant to a Regulation D offering does not mean that a resale would necessarily be exempt from the registration requirements.

Choice "d" is incorrect. Stockbroker transactions are exempt only if the transaction (i) is on a customer's order, (ii) is through an exchange or over-the-counter market, and (iii) constitutes a usual brokerage function. CPA-01407 Type1 M/C A-D Corr Ans: D PM#22 R 7-03




63. CPA-01407 Lw May 94 #38 Page 36

Under the Securities Exchange Act of 1934, which of the following types of instruments is excluded from the definition of "securities?" a. Investment contracts. b. Convertible debentures. c. Nonconvertible debentures. d. Certificates of deposit. CPA-01407 Explanation Choice "d" is correct. Securities issued by a bank are exempt from registration. A certificate of deposit is an instrument issued by a bank noting a deposit of funds and containing a promise to repay them at a later date.

Choice "a" is incorrect. There is no exemption for investment contracts.

Choice "b" is incorrect. There is no exemption for convertible debentures.

Choice "c" is incorrect. There is no exemption for nonconvertible debentures. CPA-01410 Type1 M/C A-D Corr Ans: A PM#23 R 7-03

64. CPA-01410 Lw May 94 #39 Page 42

If securities are exempt from the registration provisions of the Securities Act of 1933, any fraud committed in the course of selling such securities can be challenged by: SEC Person defrauded a. Yes Yes b. Yes No c. No Yes d. No No CPA-01410 Explanation Choice "a" is correct. The anti-fraud provisions of the 1933 Act are not limited to registered securities. An action can be brought under sections 12 or 17 by either a private citizen or the SEC. CPA-01412 Type1 M/C A-D Corr Ans: D PM#24 R 7-03

65. CPA-01412 Lw Nov 93 #37 Page 42

One of the elements necessary to recover damages if there has been a material misstatement in a registration statement filed under the Securities Act of 1933 is that the: a. Issuer and plaintiff were in privity of contract with each other. b. Issuer failed to exercise due care in connection with the sale of the securities. c. Plaintiff gave value for the security. d. Plaintiff suffered a loss. CPA-01412 Explanation Choice "d" is correct. Under Section 11, all a plaintiff must prove is a false statement in the registration statement and damages.

Choice "a" is incorrect. A plaintiff must prove a false statement in the registration statement and damages. Privity is not required.

Choice "b" is incorrect. Due diligence is a defense under section 11, but it must be proved by the defendant.

Choice "c" is incorrect. A plaintiff needs to have given value for the securities as long as the plaintiff can prove a material misstatement and a loss. The plaintiff could have received the securities as a gift.





66. CPA-01413 Lw Nov 93 #40 Page 40

An offering made under the provisions of Regulation A of the Securities Act of 1933 requires that the issuer: a. File an offering circular with the SEC. b. Sell only to accredited investors. c. Provide investors with the prior four years' audited financial statements. d. Provide investors with a proxy registration statement. CPA-01413 Explanation Choice "a" is correct. Under Regulation A, an offering circular must be filed with the SEC.

Choice "b" is incorrect. Under Regulation A, sales can be made to any number of investors as long as sales do not exceed $5 million.

Choice "c" is incorrect. There is no requirement of providing investors with four years' audited financial statements.

Choice "d" is incorrect. There is no requirement under Regulation A that investors be provided with proxy registrations. CPA-01416 Type1 M/C A-D Corr Ans: C PM#26 R 7-03

67. CPA-01416 Lw Nov 93 #41 Page 43

Adler, Inc. is a reporting company under the Securities Exchange Act of 1934. The only security it has issued is voting common stock. Which of the following statements is correct? a. Because Adler is a reporting company, it is not required to file a registration statement under the

Securities Act of 1933 for any future offerings of its common stock. b. Adler need not file its proxy statements with the SEC because it has only one class of stock

outstanding. c. Any person who owns more than 10% of Adler's common stock must file a report with the SEC. d. It is unnecessary for the required annual report (Form 10K) to include audited financial statements. CPA-01416 Explanation Choice "c" is correct. Persons who own more than 10% of a corporation's stock must file an annual report with the SEC.

Choice "a" is incorrect. Corporations are not exempted from registering new issues under the 1933 Act simply because they report under the 1934 Act.

Choice "b" is incorrect. All proxy statements must be filed, even if there is only one class of stock.

Choice "d" is incorrect. 10Ks must include audited financials. CPA-01418 Type1 M/C A-D Corr Ans: B PM#27 R 7-03

68. CPA-01418 Lw Nov 93 #42 Page 43

Which of the following persons is not an insider of a corporation subject to the Securities Exchange Act of 1934 registration and reporting requirements? a. An attorney for the corporation. b. An owner of 5% of the corporation's outstanding debentures. c. A member of the board of directors. d. A stockholder who owns more than 10% of the outstanding common stock. CPA-01418 Explanation




Choice "b" is correct. Officers, directors, and more than 10% stockholders are required to register and report under Section 16(a) of the 1934 Act. Holders of debt securities are not considered insiders and are not subject to the registration and reporting requirements.

Choice "a" is incorrect. An attorney can be an insider, at least for purposes of Rule 10b-5.

Choices "c" and "d" are incorrect. Officers, directors, and 10% equity holders are required to register and report under Section 16(a) of the 1934 Act. CPA-01423 Type1 M/C A-D Corr Ans: C PM#30 R 7-03

69. CPA-01423 Lw Nov 93 #45 Page 40

Frey, Inc. intends to make a $2,000,000 common stock offering under Rule 505 of Regulation D of the Securities Act of 1933. Frey: a. May sell the stock to an unlimited number of investors. b. May make the offering through a general advertising. c. Must notify the SEC within 15 days after the first sale of the offering. d. Must provide all investors with a prospectus. CPA-01423 Explanation Choice "c" is correct. Under Regulation D, the SEC must be notified within 15 days after the first sale of the offering.

Choice "a" is incorrect. Rule 505 offerings can be sold to an unlimited number of accredited investors, but there can be no more than 35 unaccredited investors.

Choice "b" is incorrect. General solicitation generally is prohibited under Regulation D.

Choice "d" is incorrect. Under Rule 505, a balance sheet is required if there are unaccredited investors, but a prospectus is not required. CPA-01426 Type1 M/C A-D Corr Ans: B PM#31 R 7-03

70. CPA-01426 Lw May 93 #29 Page 37

Which of the following disclosures must be contained in a securities registration statement filed under the Securities Act of 1933? a. A list of all existing stockholders. b. The principal purposes for which the offering proceeds will be used. c. A copy of the corporation's latest proxy solicitation statement. d. The names of all prospective accredited investors. CPA-01426 Explanation Choice "b" is correct. Under sections 6 and 7 of the 1933 Act, a registration statement must include specific financial information such as a balance sheet and a profit and loss statement, and "other material facts." One such material fact is the use to which the proceeds of the issuance will be put.

Choice "a" is incorrect. The registration statement need not include a list of current stockholders.

Choice "c" is incorrect. A registration statement need not include a corporation's latest proxy statement.

Choice "d" is incorrect. The registration statement need not include the names of all prospective investors; indeed, there might not be any prospective investors at the time the registration statement is filed since preregistration solicitation is limited. CPA-01429 Type1 M/C A-D Corr Ans: C PM#32 R 7-03

71. CPA-01429 Lw May 93 #30 Page 36

Which of the following is least likely to be considered a security under the Securities Act of 1933?




a. Stock options. b. Warrants. c. General partnership interests. d. Limited partnership interests. CPA-01429 Explanation Choice "c" is correct. An investment is a security if it is generally recognized as a security, mentioned in the Securities Act, or represents a profit-making scheme whereby one invests in a business and expects to make a profit from the efforts of others. A general partnership interest is not included within this definition since the partners take part in running the business and are not passive investors.

Choice "a" is incorrect. Stock options generally are recognized as securities.

Choice "b" is incorrect. Warrants generally are recognized as securities.

Choice "d" is incorrect. A limited partnership interest is a security since the limited partner does not take part in management of the firm, but rather is very much like a stockholder of a corporation. CPA-01431 Type1 M/C A-D Corr Ans: A PM#33 R 7-03

72. CPA-01431 Lw May 93 #31 Page 45

Corporations that are exempt from registration under the Securities Exchange Act of 1934 are subject to the Act's: a. Antifraud provisions. b. Proxy solicitation provisions. c. Provisions dealing with the filing of annual reports. d. Provisions imposing periodic audits. CPA-01431 Explanation Choice "a" is correct. The Securities Exchange Act's antifraud provisions apply to all schemes to sell stock in interstate commerce and are not limited to registered corporations.

Choice "b" is incorrect. A company must follow the proxy provisions of the Securities Exchange Act only if it is subject to the Act's registration requirements.

Choice "c" is incorrect. A company must file annual reports under the Securities Exchange Act only if it is subject to the Act's registration requirements.

Choice "d" is incorrect. A company is subject to the periodic audit requirements of the Securities Exchange Act only if it is subject to the Act's registration requirements. CPA-01434 Type1 M/C A-D Corr Ans: B PM#34 R 7-03

73. CPA-01434 Lw May 93 #32 Page 43

Under the Securities Exchange Act of 1934, a corporation with common stock listed on a national stock exchange: a. Is prohibited from making private placement offerings. b. Is subject to having the registration of its securities suspended or revoked. c. Must submit Form 10-K to the SEC except in those years in which the corporation has made a public

offering. d. Must distribute copies of Form 10-K to its stockholders. CPA-01434 Explanation Choice "b" is correct. A reporting company is subject to having its registration revoked for willful violation of the securities laws.

Choice "a" is incorrect. A company can make a private placement even if it has stock listed on a national exchange.




Choice "c" is incorrect. Even though form 10K contains information similar to that required under form S-1 under the 1933 Act, there is no exemption from filing a 10K merely because a public offering was made that year.

Choice "d" is incorrect. Form 10K must be submitted to the SEC, not to the shareholders. CPA-01435 Type1 M/C A-D Corr Ans: A PM#35 R 7-03

74. CPA-01435 Lw May 93 #33 Page 39

The Securities Act of 1933 provides an exemption from registration for: Bonds issued by Securities issued a municipality by a not-for-profit for governmental charitable purposes organization a. Yes Yes b. Yes No c. No Yes d. No No CPA-01435 Explanation Choice "a" is correct. The 1933 Securities Act exempts from regulation both bonds issued by municipalities for governmental purposes and securities issued by not-for-profit charitable organizations. CPA-01436 Type1 M/C A-D Corr Ans: B PM#36 R 7-03

75. CPA-01436 Lw May 93 #35 Page 40

Regulation D of the Securities Act of 1933: a. Restricts the number of purchasers of an offering to 35. b. Permits an exempt offering to be sold to both accredited and nonaccredited investors. c. Is limited to offers and sales of common stock that do not exceed $1.5 million. d. Is exclusively available to small business corporations as defined by Regulation D. CPA-01436 Explanation Choice "b" is correct. Under Regulation D rules 504, 505, and 506, sales may be made to both accredited and nonaccredited investors, although under rules 505 and 506 the nonaccredited investors may not number more than 35.

Choice "a" is incorrect. The 35 investor limit refers to the number of unaccredited investors under rules 505 and 506. There may be an unlimited number of investors under rule 504 of Regulation D and an unlimited number of accredited investors under rules 505 and 506 under Regulation D.

Choice "c" is incorrect. Under rule 505 under Regulation D there may be up to $5 million in sales. Sales under rule 506 are unlimited in amount.

Choice "d" is incorrect. Regulation D is for limited offerings, not small businesses. CPA-04777 Type1 M/C A-D Corr Ans: C PM#37 R 7-03


Under the liability provisions of Section 18 of the Securities Exchange Act of 1934, for which of the following actions would an accountant generally be liable? a. Negligently approving a reporting corporation's incorrect internal financial forecasts. b. Negligently filing a reporting corporation's tax return with the IRS. c. Intentionally preparing and filing with the SEC a reporting corporation's incorrect quarterly report. d. Intentionally failing to notify a reporting corporation's audit committee of defects in the verification of

accounts receivable.




CPA-04777 Explanation Choice "c" is correct. Section 18 of the Securities Exchange Act of 1934 subjects a defendant to liability for false or misleading information in the registration statement or other required reports (i.e., 10K, 10Q, or 8K). The defendant is not liable if the defendant can prove a lack of scienter. Since quarterly reports (10Q) are required under the 1934 Act, a defendant who intentionally prepared and filed an incorrect quarterly report would be liable under Section 18.

Choices "a" and "b" are incorrect because they do not deal with registration statements or reports required under the 1934 Act. Additionally, they specify that the accountant acted negligently. The 1934 Act requires scienter or intentional action.

Choice "d" is incorrect because it does not deal with registration statements or reports required under the 1934 Act. CPA-04780 Type1 M/C A-D Corr Ans: B PM#38 R 7-03


Under the Securities Act of 1933, which of the following statements is(are) correct regarding the purpose of registration? I. The purpose of registration is to allow for the detection of management fraud and prevent a public

offering of securities when management fraud is suspected. II. The purpose of registration is to adequately and accurately disclose financial and other information

upon which investors may determine the merits of securities.

a. I only. b. II only. c. Both I and II. d. Neither I nor II. CPA-04780 Explanation Choice "b" is correct. The principal purpose of the Securities Act of 1933 is to provide investors with sufficient information to make an informed investment decision. It accomplishes this goal by requiring registration of new issues of securities. Thus, II is a correct statement. The SEC does not guarantee the accuracy of this information, evaluate the offerings financial merits or give assurances against loss. Thus, I is an incorrect statement. CPA-05269 Type1 M/C A-D Corr Ans: A PM#39 R 7-03


Under the Securities Exchange Act of 1934, which of the following penalties could be assessed against a CPA who intentionally violated the provisions of Section 10(b), Rule 10b-5 of the Act? Civil liability of Criminal liability monetary damages of a fine a. Yes Yes b. Yes No c. No Yes d. No No CPA-05269 Explanation Choice "a" is correct. Violation of Rule 10b-5 of the Securities Exchange Act of 1934 can result in civil damages, an SEC injunctive action and or criminal fines and penalties.

Only choice "a" reflects that both civil and criminal liability can be assessed against a CPA who intentionally violates the provisions of Rule 10b-5 of the Securities Exchange Act of 1934.






Which of the following securities is exempt from registration under the Securities Act of 1933? a. Municipal bonds. b. Securities sold by a discount broker. c. Pre-incorporation stock subscriptions. d. One-year notes issued to raise working capital. CPA-05289 Explanation Choice "a" is correct. Municipal bonds are securities issued by the government and are generally exempt from registration.

Choice "b" is incorrect. A security is not exempt from registration merely because it is issued by a discount broker.

Choice "c" is incorrect. There is no exemption from registration for pre-incorporation stock subscriptions.

Choice "d" is incorrect. One-year notes are securities that are required to be registered and do not fall within the exempt securities of section 3 of the 1933 Act. CPA-05515 Type1 M/C A-D Corr Ans: A PM#40 R 7-03


The Securities Act of 1933 provides an exemption from registration for: Bonds issued by Securities issued a municipality by a not-for-profit for governmental charitable purposes organization a. Yes Yes b. Yes No c. No Yes d. No No CPA-05515 Explanation Choice "a" is correct. The 1933 Act generally requires issuances of securities to be registered unless a securities or transaction exemption applies. The 1933 Act includes a securities exemption for bonds issued by a municipality for governmental purposes and securities issued by a not-for-profit charitable organization. CPA-05528 Type1 M/C A-D Corr Ans: C PM#42 R 7-03


Which of the following circumstances is a defense to an accountant's liability under Section 11 of the Securities Act of 1933 for misstatements and omissions of material facts contained in a registration statement? a. The absence of scienter on the part of the accountant. b. The absence of privity between purchasers and the accountant. c. Due diligence on the part of the accountant. d. Nonreliance by purchasers on the misstatements. CPA-05528 Explanation Choice "c" is correct. To make out a case under Section 11, a plaintiff need only prove that the plaintiff acquired the stock; there was a material misstatement in a registration statement signed by the defendant, and damages. However, an accountant can avoid liability by raising the defense of due diligence.




Choice "a" is incorrect. Because scienter is not an element of the cause of action, the absence of scienter is not a defense.

Choice "b" is incorrect. Because privity is not required, the absence of privity is not a defense.

Choice "d" is incorrect. Because reliance on the misstatement is not a requirement, the absence of reliance is not a defense. CPA-05546 Type1 M/C A-D Corr Ans: D PM#43 R 7-03


Under Section 12 of the Securities Exchange Act of 1934, in addition to companies whose securities are traded on a national exchange, what class of companies is subject to the SEC's continuous disclosure system? a. Companies with annual revenues in excess of $5 million and 300 or more shareholders. b. Companies with annual revenues in excess of $10 million and 500 or more shareholders. c. Companies with assets in excess of $5 million and 300 or more shareholders. d. Companies with assets in excess of $10 million and 500 or more shareholders. CPA-05546 Explanation Choice "d" is correct. Under Section 12, companies must register (are subject to continuous disclosure requirements) if they are listed on a national securities exchange or they have at least 500 shareholders in any outstanding class and have at least $10 million in assets.

Choices "a", "b", and "c" are incorrect, per the above. CPA-05551 Type1 M/C A-D Corr Ans: B PM#44 R 7-03


A CPA firm must do which of the following before it can participate in the preparation of an audit report of a company registered with the Securities and Exchange Commission (SEC)? a. Join the SEC Practice Section of the AICPA. b. Register with the Public Company Accounting Oversight Board. c. Register with the Financial Accounting Standards Board (FASB). d. Register with the SEC pursuant to the Securities Exchange Act of 1934. CPA-05551 Explanation Choice "b" is correct. To participate in the preparation of audit reports, a CPA firm must register with the Public Company Accounting Oversight Board.

Choices "a", "c", and "d" are incorrect, per the above. CPA Legal Liability CPA-01437 Type1 M/C A-D Corr Ans: D PM#1 R 7-04

84. CPA-01437 Lw R02 #3 Page 52

Which of the following statements is (are) correct regarding a CPA employee of a CPA firm taking copies of information contained in client files when the CPA leaves the firm? I. A CPA leaving a firm may take copies of information contained in client files to assist another firm in

serving that client. II. A CPA leaving a firm may take copies of information contained in client files as a method of gaining

technical expertise.

a. I only. b. II only.




c. Both I and II. d. Neither I nor II. CPA-01437 Explanation Choice "d" is correct. Information contained in client files ("workpapers") are the property of the CPA firm. Although the accounting firm owns the workpapers, the firm and its employees are generally prohibited from showing the workpapers to anyone without the client's permission. Furthermore, an employee of a CPA firm may not take information contained in client files when leaving the firm. Workpapers produced by the firm for, or on behalf of a client, may not be copied and removed by an employee for personal use. CPA-01439 Type1 M/C A-D Corr Ans: C PM#2 R 7-04

85. CPA-01439 Lw R02 #4 Page 52

Which of the following statements is correct regarding an accountant's working papers? a. The accountant owns the working papers and generally may disclose them as the accountant sees fit. b. The client owns the working papers but the accountant has custody of them until the accountant's bill

is paid in full. c. The accountant owns the working papers but generally may not disclose them without the client's

consent or a court order. d. The client owns the working papers but, in the absence of the accountant's consent, may not disclose

them without a court order. CPA-01439 Explanation Choice "c" is correct. While a CPA owns his or her workpapers, the ownership rights are very limited. Generally, a CPA may not reveal client workpapers to third parties without the client's consent. CPA-01441 Type1 M/C A-D Corr Ans: D PM#4 R 7-04

86. CPA-01441 Lw R01 #2 Page 52

To which of the following parties may a CPA partnership provide its working papers without either the client's consent or a lawful subpoena? The IRS The FASB a. Yes Yes b. Yes No c. No Yes d. No No CPA-01441 Explanation Choice "d" is correct. An accountant is prohibited from showing the workpapers to anyone without the client's permission, except:

1. Lawful subpoena. 2. Surviving member of the firm. 3. Quality control panel. 4. AICPA/State Trial Board. 5. Court proceedings. CPA-01443 Type1 M/C A-D Corr Ans: C PM#5 R 7-04

87. CPA-01443 Lw R99 #2 Page 49

Which of the following statements is(are) correct regarding the common law elements that must be proven to support a finding of constructive fraud against a CPA? I. The plaintiff has justifiably relied on the CPA's misrepresentation.




II. The CPA has acted in a grossly negligent manner.

a. I only. b. II only. c. Both I and II. d. Neither I nor II. CPA-01443 Explanation Choice "c" is correct.

The elements of constructive fraud:

1. Misrepresentation of a material fact. 2. Defendant acts with gross negligence or recklessly. 3. Intent to induce plaintiff's reliance. 4. Actual and justifiable reliance by plaintiff. 5. Damages.

Actual fraud requires intent ("scienter"). CPA-01444 Type1 M/C A-D Corr Ans: C PM#6 R 7-04

88. CPA-01444 Lw R99 #3 Page 50

Under the liability provisions of Section 11 of the Securities Act of 1933, an auditor may help to establish the defense of due diligence if: I. The auditor performed an additional review of the audited statements to ensure that the statements

were accurate as of the effective date of a registration statement. II. The auditor complied with GAAS. a. I only. b. II only. c. Both I and II. d. Neither I nor II. CPA-01444 Explanation Choice "c" is correct. Due diligence is an affirmative defense that requires the CPA to prove that the CPA made a reasonable investigation and had reasonable grounds to believe that the financial statements were true and that no material facts were omitted. In essence, the CPA must prove that they followed the standards of the profession GAAP/GAAS. CPA-01446 Type1 M/C A-D Corr Ans: B PM#8 R 7-04

89. CPA-01446 Lw Nov 95 #8 Page 48

Under the "Ultramares" rule, to which of the following parties will an accountant be liable for negligence? Parties in privity Foreseen parties a. Yes Yes b. Yes No c. No Yes d. No No CPA-01446 Explanation Choice "b" is correct. Ultramares limits the accountant's liability for negligence to parties in privity; parties who are merely "foreseen" cannot recover. CPA-01447 Type1 M/C A-D Corr Ans: C PM#9 R 7-04

90. CPA-01447 Lw Nov 95 #9 Page 49




When performing an audit, a CPA will most likely be considered negligent when the CPA fails to: a. Detect all of a client's fraudulent activities. b. Include a negligence disclaimer in the client engagement letter. c. Warn a client of known internal control weaknesses. d. Warn a client's customers of embezzlement by the client's employees. CPA-01447 Explanation Choice "c" is correct. A CPA has a duty to warn clients of known weaknesses in internal controls. The failure to communicate the known weakness to the client constitutes negligence.

Choice "a" is incorrect. A CPA is not required to actively search for frauds. Thus, a CPA is not liable for failure to discover all frauds.

Choice "b" is incorrect. While the disclaimer probably would not be effective, in itself, the disclaimer does not constitute negligence, i.e., a departure from the ordinary due care for CPAs.

Choice "d" is incorrect. A CPA is not expected to warn outsiders of client matters. In fact, such a disclosure would violate the CPA's duty of confidentiality. CPA-01448 Type1 M/C A-D Corr Ans: D PM#10 R 7-04

91. CPA-01448 Lw Nov 95 #10 Page 49

Which of the following is the best defense a CPA firm can assert in a suit for common law fraud based on its unqualified opinion on materially false financial statements? a. Contributory negligence on the part of the client. b. A disclaimer contained in the engagement letter. c. Lack of privity. d. Lack of scienter. CPA-01448 Explanation Choice "d" is correct. A suit for common law fraud may succeed only if the accountant acted with scienter (knew that the statement was wrong or recklessly disregarded the truth).

Choice "a" is incorrect. Contributory negligence is a defense to negligence in some jurisdictions, but it is not a defense to fraud.

Choice "b" is incorrect. A disclaimer against committing fraud would violate public policy and would not be enforceable.

Choice "c" is incorrect. Privity is not required in an action for fraud. CPA-01449 Type1 M/C A-D Corr Ans: D PM#11 R 7-04

92. CPA-01449 Lw Nov 95 #11 Page 45

Under the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934, a CPA may be liable if the CPA acted: a. Negligently. b. With independence. c. Without due diligence. d. Without good faith. CPA-01449 Explanation Choice "d" is correct. Section 10(b) prohibits fraud in connection with the sale of securities. If a CPA acts without good faith, the CPA is probably acting fraudulently.

Choice "a" is incorrect. Section 10(b) is violated by fraudulent conduct; negligence is not sufficiently culpable.




Choice "b" is incorrect. Section 10(b) prohibits fraud in connection with the sale of securities. Acting with independence is not tantamount to fraud. Indeed, a CPA generally must be independent when performing an audit.

Choice "c" is incorrect. Section 10(b) prohibits fraud in connection with the sale of securities. Lack of due diligence probably indicates negligence, but does not necessarily constitute fraud. CPA-01453 Type1 M/C A-D Corr Ans: A PM#14 R 7-04

93. CPA-01453 Lw Nov 95 #15 Page 52

Thorp, CPA, was engaged to audit Ivor Co.'s financial statements. During the audit, Thorp discovered that Ivor's inventory contained stolen goods. Ivor was indicted and Thorp was subpoenaed to testify at the criminal trial. Ivor claimed accountant-client privilege to prevent Thorp from testifying. Which of the following statements is correct regarding Ivor's claim? a. Ivor can claim an accountant-client privilege only in states that have enacted a statute creating such a

privilege. b. Ivor can claim an accountant-client privilege only in federal courts. c. The accountant-client privilege can be claimed only in civil suits. d. The accountant-client privilege can be claimed only to limit testimony to audit subject matter. CPA-01453 Explanation Choice "a" is correct. The accountant-client privilege can be claimed only in those states that recognize the privilege.

Choice "b" is incorrect. Generally, there is no federal accountant-client privilege. (There is a limited federal privilege for tax practitioners in noncriminal proceedings, but here the engagement was for audit services and the proceeding is criminal.)

Choice "c" is incorrect. Except in federal tax cases, where the privilege exists, it is not limited to civil cases.

Choice "d" is incorrect. Where the privilege exists, it would prevent testimony about the audit, not limit testimony to the audit. CPA-01454 Type1 M/C A-D Corr Ans: B PM#15 R 7-04

94. CPA-01454 Lw May 95 #5 Page 52

A CPA is permitted to disclose confidential client information without the consent of the client to: I. Another CPA firm if the information concerns suspected tax return irregularities. II. A state CPA society voluntary quality control review board.

a. I only. b. II only. c. Both I and II. d. Neither I nor II. CPA-01454 Explanation Choice "b" is correct. A CPA may reveal confidential information without the client's consent in a number of situations (e.g., when subpoenaed, when requested by a CPA society voluntary quality control review board). However, there is no exception to the duty of confidentiality merely because tax irregularities are suspected. CPA-01455 Type1 M/C A-D Corr Ans: A PM#16 R 7-04

95. CPA-01455 Lw Nov 94 #9 Page 49

In a common law action against an accountant, lack of privity is a viable defense if the plaintiff:




a. Is the client's creditor who sues the accountant for negligence. b. Can prove the presence of gross negligence that amounts to a reckless disregard for the truth. c. Is the accountant's client. d. Bases the action upon fraud. CPA-01455 Explanation Choice "a" is correct. A creditor of a client generally cannot sue the client's accountant for negligence unless the accountant had reason to know that the creditor would be relying on the accountant's work.

Choice "b" is incorrect. If the plaintiff can prove gross negligence, privity is not a defense; the accountant generally is liable to anyone who is injured by gross negligence.

Choice "c" is incorrect. The client is always in privity of contract with the accountant.

Choice "d" is incorrect. If the action is based on fraud, privity is not a defense; the accountant generally can be held liable to anyone who is injured by the accountant's fraud. CPA-01456 Type1 M/C A-D Corr Ans: C PM#17 R 7-04

96. CPA-01456 Lw Nov 94 #10 Page 50

Under common law, which of the following statements most accurately reflects the liability of a CPA who fraudulently gives an opinion on an audit of a client's financial statements? a. The CPA is liable only to third parties in privity of contract with the CPA. b. The CPA is liable only to known users of the financial statements. c. The CPA probably is liable to any person who suffered a loss as a result of the fraud. d. The CPA probably is liable to the client even if the client was aware of the fraud and did not rely on

the opinion. CPA-01456 Explanation Choice "c" is correct. A CPA who commits fraud is liable to anyone who is injured by the fraud.

Choice "a" is incorrect. A CPA's liability for fraud is not limited by privity.

Choice "b" is incorrect. A CPA's liability for fraud is not limited to known users of the CPA's work product.

Choice "d" is incorrect. Actual and justifiable reliance are necessary elements of fraud. CPA-01457 Type1 M/C A-D Corr Ans: A PM#18 R 7-04

97. CPA-01457 Lw Nov 94 #11 Page 50

Under the provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, which of the following activities must be proven by a stock purchaser in a suit against a CPA? I. Intentional conduct by the CPA designed to deceive investors. II. Negligence by the CPA.

a. I only. b. II only. c. Both I and II. d. Neither I nor II. CPA-01457 Explanation Choice "a" is correct. Under Rule 10b-5, a purchaser must prove an intent to deceive; negligence is insufficient to establish scienter. CPA-01459 Type1 M/C A-D Corr Ans: D PM#19 R 7-04

98. CPA-01459 Lw Nov 94 #13 Page 62

Under Section 11, which of the following must be proven by a purchaser of the security?




Reliance on the Fraud by financial statements the CPA a. Yes Yes b. Yes No c. No Yes d. No No CPA-01459 Explanation Choice "d" is correct. Under Section 11, a plaintiff need only prove that there was a material misstatement in the financial statements included in the registration statement that was signed by the defendant and that damages were incurred. The purchaser need not prove reliance or fraud. CPA-01462 Type1 M/C A-D Corr Ans: B PM#20 R 7-04

99. CPA-01462 Lw May 94 #9 Page 50

If a CPA recklessly departs from the standards of due care when conducting an audit, the CPA will be liable to third parties who are unknown to the CPA based on: a. Negligence. b. Gross negligence. c. Strict liability. d. Criminal deceit. CPA-01462 Explanation Choice "b" is correct. Reckless departure from standards of due care constitutes gross negligence, which is also called constructive fraud. A CPA who commits constructive fraud is liable to all foreseeable plaintiffs, not just those with whom the CPA dealt or knew of.

Choice "a" is incorrect. Negligence connotes less of a departure from due care than recklessness. If a CPA is merely negligent, liability is limited to clients and persons whom the CPA knew would be relying on the CPA's work.

Choice "c" is incorrect. Strict liability imposes liability without fault. CPAs generally are not strictly liable for departures from the standard of due care. Moreover, a fault standard (recklessness) is involved here.

Choice "d" is incorrect. Criminal acts give rise to criminal liability. Only the government can impose liability for criminal acts. Private parties must rely on a tort theory to hold a CPA liable. CPA-01465 Type1 M/C A-D Corr Ans: C PM#21 R 7-04

100. CPA-01465 Lw Nov 93 #1 Page 48

Beckler & Associates, CPAs, audited and gave an unqualified opinion on the financial statements of Queen Co. The financial statements contained misstatements that resulted in a material overstatement of Queen's net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to recover for its losses associated with Queen's default. Which of the following must Mac prove in order to recover? I. Beckler was negligent in conducting the audit. II. Mac relied on the financial statements.

a. I only. b. II only. c. Both I and II. d. Neither I nor II. CPA-01465 Explanation Choice "c" is correct. Although a CPA generally is liable to third parties only for fraud or constructive fraud (gross negligence), where the CPA knows that the third party will be relying on the audit, the CPA




can be liable to the third party for mere negligence (the CPA owes the third party a duty of care since the third party is an intended beneficiary of the engagement). An action for negligence requires both reliance on a misstatement and negligence. CPA-01468 Type1 M/C A-D Corr Ans: A PM#22 R 7-04

101. CPA-01468 Lw Nov 93 #6 Page 50

Jay and Co., CPAs, audited the financial statements of Maco Corp. Jay intentionally gave an unqualified opinion on the financial statements even though material misstatements were discovered. The financial statements and Jay's unqualified opinion were included in a registration statement and prospectus for an original public offering of Maco stock. Which of the following statements is correct regarding Jay's liability to a purchaser of the offering under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934? a. Jay will be liable if the purchaser relied on Jay's unqualified opinion on the financial statements. b. Jay will be liable if Jay was negligent in conducting the audit. c. Jay will not be liable if the purchaser's loss was under $500. d. Jay will not be liable if the misstatement resulted from an omission of a material fact by Jay. CPA-01468 Explanation Choice "a" is correct. A defendant is liable under rule 10b-5 if the defendant intentionally makes a misstatement in connection with the purchase and sale of stock, and the plaintiff justifiably relies on the misstatement and suffers a loss. Here, Jay intentionally gave an unqualified opinion knowing that the financial statements included material misstatements. Thus, if the purchaser relied on the misstatements, Jay will be liable.

Choice "b" is incorrect. Rule 10b-5 prohibits fraud in the sale of stock. It does not impose liability for mere negligence.

Choice "c" is incorrect. Rule 10b-5 has no minimum liability threshold.

Choice "d" is incorrect. Rule 10b-5 liability can arise both from false statements of material fact and from omissions of statements necessary to make statements made not misleading. CPA-01470 Type1 M/C A-D Corr Ans: B PM#23 R 7-04

102. CPA-01470 Lw Nov 93 #7 Page 49

Which of the following is the best defense a CPA firm can assert in defense to a suit for common law fraud based on their unqualified opinion on materially false financial statements? a. Lack of privity. b. Lack of scienter. c. Contributory negligence on the part of the client. d. A disclaimer contained in the engagement letter. CPA-01470 Explanation Choice "b" is correct. Common law fraud requires a showing of intent to deceive, which is scienter.

Choice "a" is incorrect. Privity is not required in a common law fraud action. Therefore, lack of privity is not a defense.

Choice "c" is incorrect. Contributory negligence is a defense to a negligence cause of action in some jurisdictions, but it is not a defense to an action for fraud.

Choice "d" is incorrect. One cannot contractually limit liability for intentional torts. CPA-01473 Type1 M/C A-D Corr Ans: B PM#24 R 7-04

103. CPA-01473 Lw May 93 #1 Page 48




Sun Corp. approved a merger plan with Cord Corp. One of the determining factors in approving the merger was the financial statements of Cord that were audited by Frank & Co., CPAs. Sun had engaged Frank to audit Cord's financial statements. While performing the audit, Frank failed to discover certain irregularities that later caused Sun to suffer substantial losses. For Frank to be liable under common law negligence, Sun at a minimum must prove that Frank: a. Knew of the irregularities. b. Failed to exercise due care. c. Was grossly negligent. d. Acted with scienter. CPA-01473 Explanation Choice "b" is correct. For a cause of action for negligence, the client must prove at least that the CPA failed to exercise due care.

Choice "a" is incorrect. Knowledge of the irregularities without reporting them to the client would constitute fraud. This is not the minimum that must be proved for negligence.

Choice "c" is incorrect. A client can maintain a cause of action against a CPA for simple negligence; gross negligence need not be proved.

Choice "d" is incorrect. Scienter (intent to deceive) is not required for negligence. CPA-01474 Type1 M/C A-D Corr Ans: A PM#25 R 7-04

104. CPA-01474 Lw May 93 #2 Page 48

A CPA will most likely be negligent when the CPA fails to: a. Correct errors discovered in the CPA's previously issued audit reports. b. Detect all of a client's fraudulent activities. c. Include a negligence disclaimer in the CPA's engagement letter. d. Warn a client's customers of embezzlement by the client's employees. CPA-01474 Explanation Choice "a" is correct. It would be negligent (i.e., a failure to exercise due care) to not correct discovered errors.

Choice "b" is incorrect. An auditor does not have a duty to discover all of a client's fraudulent activities.

Choice "c" is incorrect. A CPA is negligent if the CPA fails to use due care. Attempting to include a contract provision disclaiming liability for negligence is not itself a breach of care. In any case, the inclusion of such a disclaimer would probably be ineffective because it in essence would be an attempt to avoid responsibility to perform the audit with due care.

Choice "d" is incorrect. A CPA generally does not owe a duty to a client's customers. Indeed, reporting to the clients could violate a duty of confidentiality. CPA-01475 Type1 M/C A-D Corr Ans: B PM#26 R 7-04

105. CPA-01475 Lw May 93 #10 Page 50

An accountant will be liable for damages under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 only if the plaintiff proves that: a. The accountant was negligent. b. There was a material omission. c. The security involved was registered. d. The security was part of an original issuance. CPA-01475 Explanation




Choice "b" is correct. Among other things to prove a cause of action under Rule 10b-5, a plaintiff must prove that the defendant made a material false statement or omission in connection with the purchase or sale of securities.

Choice "a" is incorrect. Negligence is not a high enough standard; Rule 10b-5 requires scienter (an intent to deceive) or reckless disregard for the truth.

Choice "c" is incorrect. Section 10(b) and Rule 10b-5 apply to all sales of securities involving interstate commerce, not just those registered.

Choice "d" is incorrect. Section 10(b) of the 1934 Act primarily governs post-issuance transactions; issuance of securities generally is governed by the 1933 Act. Although Section 10(b) and Rule 10b-5 could be applied to the issuance of securities, it certainly is not a requirement that the securities involved be part of an original issuance. CPA-04790 Type1 M/C A-D Corr Ans: C PM#27 R 7-04


A client suing a CPA for negligence must prove each of the following factors, except: a. Breach of duty of care. b. Proximate cause. c. Reliance. d. Injury. CPA-04790 Explanation Choice "c" is correct. Negligence has 4 elements: duty of care, breach (which is lack of due care), causality and injury.

Choices "a", "b", and "d" are elements of negligence. Only choice "c" is not. CPA-05277 Type1 M/C A-D Corr Ans: B PM#28 R 7-04


An accounting firm was hired by a company to perform an audit. The company needed the audit report in order to obtain a loan from a bank. The bank lent $500,000 to the company based on the auditor's report. Fifteen months later, the company declared bankruptcy and was unable to repay the loan. The bank discovered that the accounting firm failed to discover a material overstatement of assets of the company. Which of the following statements is correct regarding a suit by the bank against the accounting firm? The bank: a. Cannot sue the accounting firm because of the statute of limitations. b. Can sue the accounting firm for the loss of the loan because of negligence. c. Cannot sue the accounting firm because there was no privity of contact. d. Can sue the accounting firm for the loss of the loan because of the rule of privilege. CPA-05277 Explanation Choice "b" is correct. In most states, a CPA or accounting firm is liable not only to the client for negligence, but also to any person or foreseeable class of persons whom the CPA or firm knows will be relying on the CPA's work. Here, assuming that the accounting firm knew that the purpose of the audit was to obtain a loan from a bank, it could be held liable by any bank that made a loan based on a negligently performed audit.

Choice "a" is incorrect. The statute of limitations requires that a lawsuit be brought within a specified period of time. Although states vary as to the time in which lawsuits must be commenced, no state would preclude a lawsuit brought within fifteen months.

Choice "c" is incorrect. In most states, privity of contract is not required for a negligence action against an accounting firm. In addition to the client, the firm is liable to any person or foreseeable class of persons




whom the CPA or firm knows will be relying on the CPA's work. Although not clear from the facts, it is likely that the bank can show the accountant had reason to know it would rely on the accountant's work.

Choice "d" is incorrect. There is no rule of privilege in the law concerning lawsuits between accountants and banks. CPA-05280 Type1 M/C A-D Corr Ans: C PM#29 R 7-04


At a confidential meeting, an audit client informed a CPA about the client's illegal insider-trading actions. A year later, the CPA was subpoenaed to appear in federal court to testify in a criminal trial against the client. The CPA was asked to testify to the meeting between the CPA and the client. After receiving immunity, the CPA should do which of the following? a. Take the Fifth Amendment and not discuss the meeting. b. Site the privileged communications aspect of being a CPA. c. Discuss the entire conversation including the illegal acts. d. Discuss only the items that have a direct connection to those items the CPA worked on for the client

in the past. CPA-05280 Explanation Choice "c" is correct. A CPA can be compelled to disclose confidential client information if he is subpoenaed and the information is relevant to the court case. The CPA's information regarding illegal insider trading would be relevant in a criminal case.

Choice "a" is incorrect. The Fifth Amendment only applies to self-incriminating evidence. A person may not claim a Fifth Amendment privilege after receiving immunity from prosecution.

Choice "b" is incorrect. The privileged communication rule for accountants does not apply at the federal level.

Choice "d" is incorrect. Since there is no privilege communication rule in federal courts, the CPA must reveal all relevant information if subpoenaed. CPA-05553 Type1 M/C A-D Corr Ans: C PM#30 R 7-04


Which of the following penalties is usually imposed against an accountant who, in the course of performing professional services, breaches contract duties owed to a client? a. Specific performance. b. Punitive damages. c. Money damages. d. Rescission. CPA-05553 Explanation Choice "c" is correct. When a CPA breaches a contract for professional services, the client and any third party beneficiary of the contract is entitled to compensatory money damages.

Choice "a" is incorrect. Generally, specific performance (an order to perform as agreed) is available only in a contract for the sale of rare or unique property. It is not available to enforce a personal services contract, as such an order would constitute an order for involuntary servitude.

Choice "b" is incorrect. Punitive damages are not available in a contract action.

Choice "d" is incorrect. Rescission is the cancellation of a contract. It is available after a breach, but usually the nonbreaching party will choose to recover its money damages instead of canceling. Property Insurance




CPA-01861 Type1 M/C A-D Corr Ans: B PM#1 R 7-05

110. CPA-01861 Lw R01 #10 Page 54

A building was purchased for $350,000 and insured under a $300,000 fire insurance policy containing an 80% coinsurance clause. Several years later, the building, having a fair market value of $500,000, sustained fire damage of $40,000. What is the amount recoverable from the insurance company?

a. $28,000 b. $30,000 c. $32,000 d. $40,000 CPA-01861 Explanation Choice "b" is correct.

300,000 40,000 30,00080% 500,000

× =×


111. CPA-01866 Lw R99 #17 Page 54

In 1992, King bought a building for $250,000. At that time, King took out a $200,000 fire insurance policy with Omni Insurance Co. and a $50,000 fire insurance policy with Safe Insurance Corp. Each policy contained a standard 80% coinsurance clause. In 1996, when the building had a fair market value of $300,000, a fire caused $200,000 in damage. What dollar amount would King recover from Omni?

a. $100,000 b. $150,000 c. $160,000 d. $200,000 CPA-01866 Explanation Choice "c" is correct.

Omni $200,000 Safe 50,000 Total Insurance $250,000

Face amount of policy(s) Partial loss80% FMV

200,000250,000 200,000 Max80% 300,000 recovery

××

× =×

Omni 200,000/250,000 = 80% × 200,000 = 160,000. Choice "c". Safe 50,000/250,000 = 20% × 200,000 = 40,000. Recovery is limited to the lesser of the face value of the policy(s) or amount of the loss. CPA-01872 Type1 M/C A-D Corr Ans: B PM#3 R 7-05

112. CPA-01872 Lw R96 #10 Page 55




Which of the following losses, resulting from a fire, generally may be recovered under a standard fire insurance policy? Water damage Loss of resulting from income due extinguishing to business the fire interruption a. Yes Yes b. Yes No c. No Yes d. No No CPA-01872 Explanation Choice "b" is correct. A standard fire insurance policy usually covers the damages from the fire and from putting the fire out. Thus, damages caused by water used in extinguishing a fire are recoverable. Loss of income from business interruption, however, is too speculative and remote to be included as damages under the fire policy.


113. CPA-01904 Lw Nov 95 #60 Page 53

Which of the following statements correctly describes the requirement of insurable interest relating to property insurance? An insurable interest: a. Must exist when any loss occurs. b. Must exist when the policy is issued and when any loss occurs. c. Is created only when the property is owned in fee simple. d. Is created only when the property is owned by an individual. CPA-01904 Explanation Choice "a" is correct and "b" is incorrect because an insurable interest needs to exist in the property only at the time of the loss.

Choice "c" is incorrect. An insurable interest does not require fee simple ownership; a lessee has an insurable interest, as does the buyer of goods identified to the contract for their sale.

Choice "d" is incorrect. Insurable interests are not limited to individuals. CPA-01906 Type1 M/C A-D Corr Ans: B PM#5 R 7-05

114. CPA-01906 Lw May 95 #59 Page 54

Clark Corp. owns a warehouse purchased for $150,000 in 1990. The current market value is $200,000. Clark has the warehouse insured for fire loss with Fair Insurance Corp. and Zone Insurance Co. Fair's policy is for $150,000 and Zone's policy is for $75,000. Both policies contain the standard 80% coinsurance clause. If a fire totally destroyed the warehouse, what total dollar amount would Clark receive from Fair and Zone?

a. $225,000 b. $200,000 c. $160,000 d. $150,000 CPA-01906 Explanation Choice "b" is correct. If an insured has more than one policy, they are combined to determine whether the coinsurance threshold has been exceeded. Here, the combined total of the insurance policies is more than the value of the property, so the insurers will be liable for the whole loss. Of course, the recovery cannot exceed the value of the property, $200,000.





115. CPA-01909 Lw May 95 #60 Page 53

Which of the following parties has an insurable interest? I. A corporate retailer in its inventory. II. A partner in the partnership property.

a. I only. b. II only. c. Both I and II. d. Neither I nor II. CPA-01909 Explanation Choice "c" is correct. For property insurance, the insured need only have some real economic interest in the property being insured; an ownership interest is not necessary. A retailer certainly has a sufficient interest in its inventory, and although a partner has no personal ownership interest in partnership property, there is still an economic interest in the property so it can be insured.


116. CPA-01912 Lw May 93 #59 Page 53

In 1988, Pod bought a building for $220,000. At that time, Pod purchased a $150,000 fire insurance policy with Owners Insurance Co. and a $50,000 fire insurance policy with Group Insurance Corp. Each policy contained a standard 80% co-insurance clause. In 1992, when the building had a fair market value of $250,000, it was damaged in a fire. How much would Pod recover from Owners if the fire caused $180,000 in damage? a. $90,000 b. $120,000 c. $135,000 d. $150,000 CPA-01912 Explanation Choice "c" is correct. Where an insured has multiple policies that have a coinsurance clause, the face value of the policies are added together to determine whether the coinsurance percentage is met. Here, Pod owned two policies with a combined face value of $200,000 ($150,000 Owners policy and $50,000 Group policy), each with an 80% coinsurance clause. At the time of the loss, the property was worth $250,000. Since Pod's total insurance coverage met the coinsurance percent ($250,000 × 80% = $200,000), Pod may recover the full loss, up to the face value of the policies. Each insurer will be liable for its pro rata share of the loss. Owner's pro rata share is ¾. Thus, if the loss was $180,000, Owners would be liable for $135,000. CPA-01915 Type1 M/C A-D Corr Ans: B PM#8 R 7-05

117. CPA-01915 Lw May 93 #60 Page 54

In 1988, Pod bought a building for $220,000. At that time, Pod purchased a $150,000 fire insurance policy with Owners Insurance Co. and a $50,000 fire insurance policy with Group Insurance Corp. Each policy contained a standard 80% co-insurance clause. In 1992, when the building had a fair market value of $250,000, it was damaged in a fire. How much would Pod recover from Owners and Group if the fire totally destroyed the building? a. $160,000 b. $200,000 c. $220,000




d. $250,000 CPA-01915 Explanation Choice "b" is correct. Where an insured has multiple policies that have a coinsurance clause, the face value of the policies are added together to determine whether the coinsurance percentage is met. Here, Pod owned two policies with a combined face value of $200,000 ($150,000 Owners policy and $50,000 Group policy), each with an 80% coinsurance clause. At the time of the loss, the property was worth $250,000. Since Pod's total insurance coverage met the coinsurance percent ($250,000 × 80%=$200,000), Pod may recover the full loss, up to the face value of the policies. Here the loss was $250,000 and the face value of the policies was $200,000. Thus, Pod may recover $200,000. Antitrust Law (required homework reading) CPA-01536 Type1 M/C A-D Corr Ans: A PM#1 R 7-06

118. CPA-01536 Nov 84 #32 Page 59

Which of the following sanctions is/are available against an individual who has violated the federal antitrust laws? Fine Imprisonment Civil Damages a. Yes Yes Yes b. Yes Yes No c. Yes No Yes d. Yes No No CPA-01536 Explanation Choice "a" is correct. Violation of the Sherman Act provides for criminal penalties including imprisonment. Sherman also provides for fines and civil damages. Only choice "a" indicates that all three are available. CPA-01539 Type1 M/C A-D Corr Ans: C PM#2 R 7-06

119. CPA-01539 Nov 84 #33 Page 56

The term "illegal per se" as it is frequently used in antitrust law: a. Applies exclusively to illegal price fixing and other related activities by competitors. b. Must be established by the Justice Department in order to impose criminal sanctions under the

Federal Trade Commission Act. c. Represents anticompetitive conduct or agreements which are inherently illegal and without legal

justification. d. Applies exclusively to illegal anticompetitive activities by competitors. CPA-01539 Explanation Choice "c" is correct. By definition an "illegal per se" act is one that is inherently illegal and without legal justification.

Choice "a" is incorrect. Tying arrangements may be illegal per se when the seller has considerable economic power in the tying product.

Choice "b" is incorrect. The Federal Trade Commission Act does not provide for criminal penalties. Additionally, it provides for action by the FTC, not the Justice Department.

Choice "d" is incorrect. Tying arrangements are not between competitors and may be illegal per se. CPA-01542 Type1 M/C A-D Corr Ans: C PM#3 R 7-06

120. CPA-01542 Nov 84 #34 Page 60




Section 7 of the Clayton Act is the primary statutory provision used by the Department of Justice in controlling anticompetitive mergers and acquisitions. In general, the Clayton Act is invoked because: a. The Sherman Act applies to asset mergers or acquisitions only and not to stock mergers or

acquisitions. b. It provides for harsher criminal penalties than does the Sherman Act. c. It enables the Department of Justice to proscribe mergers and acquisitions in their incipiency. d. It provides for exclusive jurisdiction over such activities. CPA-01542 Explanation Choice "c" is correct. Section 7 of Clayton prohibits the merger or acquisition of a company if the effect is to substantially lessen competition. It allows the Department of Justice to proscribe mergers and acquisitions in their incipiency, before they develop monopoly power.

Choice "a" is incorrect. The Sherman Act prohibits restraints on trade and monopolies. Under the Sherman Act, a stock merger could be opposed if it could be demonstrated that the effect unreasonably restrained trade. Under the Clayton Act, the government does not have to wait until the merger has that effect, the merger can be opposed at the outset.

Choice "b" is incorrect. Only the Sherman Act provides for criminal penalties, the Clayton Act does not.

Choice "d" is incorrect. As indicated above, a merger could violate both the Sherman Act and the Clayton Act. Thus, the Clayton Act does not provide for exclusive jurisdiction. CPA-01550 Type1 M/C A-D Corr Ans: C PM#4 R 7-06

121. CPA-01550 Nov 83 #33 Page 59

Loop Corp. has made a major breakthrough in the development of a micropencil. Loop has patented the product and is seeking to maximize the profit potential. In this effort, Loop can legally: a. Require its retailers to sell only Loop's products, including the micropencils, and not sell similar

competing products. b. Require its retailers to take stipulated quantities of its other products in addition to the micropencils. c. Sell the product at whatever price the traffic will bear even though Loop has a monopoly. d. Sell the product to its retailers upon condition that they do not sell the micropencils to the public for

less than a stated price. CPA-01550 Explanation Choice "c" is correct. By its very nature a patent grants a limited monopoly to the patent holder. The patent holder may sell the item at whatever price it desires.

Choice "a" is incorrect. Requiring retailers to sell only Loop's products and not competitors would violate the exclusive dealing provisions of the Clayton Act if the effect were to substantially lessen competition.

Choice "b" is incorrect. Requiring retailers to take stipulated quantities of its other products would violate the tying arrangements section of the Sherman and Clayton Acts if the effect were to substantially lessen competition.

Choice "d" is incorrect. Requiring retailers to sell at not less than a stated price is a form of vertical price fixing and could be a violation of the Sherman Act. CPA-01553 Type1 M/C A-D Corr Ans: A PM#5 R 7-06

122. CPA-01553 Nov 83 #34 Page 56

Certain members of the Tri-State Railway Construction Association decided that something must be done about the disastrous competition, which, when coupled with the depressed status of the industry and economy, was causing financial chaos for many of its members. They met privately after one of the association meetings and decided to allocate construction projects among themselves based upon an historical share of the market. Under the arrangement, a certain designated company would submit the low bid, thereby ensuring that the company would obtain the job. Such an arrangement is:




a. Illegal per se, and a criminal violation of the antitrust law. b. Illegal under the rule of reason, but not a criminal violation of the antitrust law. c. Legally justifiable due to the economic conditions in the marketplace. d. Legal under antitrust law since it does not fix prices. CPA-01553 Explanation Choice "a" is correct. This is an agreement between competitors to fix prices (horizontal price fixing and/or to allocate the market). Horizontal price fixing (i.e., agreements among competitors to fix prices) and/or market allocations are per se violations of the Sherman Act.

Choice "b" is incorrect. Horizontal price fixing (i.e., agreements among competitors to fix prices) and/or market allocations are per se violations of the Sherman Act. They are not judged under the rule of reason.

Choices "c" and "d" are incorrect. This activity is illegal, not legal. CPA-01554 Type1 M/C A-D Corr Ans: B PM#6 R 7-06

123. CPA-01554 Nov 83 #35 Page 61

In a pure conglomerate merger: a. The government must establish an actual restraint on competition in the marketplace in order to

prevent the merger. b. The acquiring corporation neither competes with nor sells to or buys from the acquired corporation. c. The merger is prima facie valid unless the government can prove the acquiring corporation had an

intent to monopolize. d. Some form of additional anticompetitive behavior must be established (e.g., price fixing) in order to

provide the basis for the government's obtaining of injunctive relief. CPA-01554 Explanation Choice "b" is correct. In a conglomerate merger, a firm acquires a company in a completely different business (i.e., a merger between firms that neither compete nor have a customer/supplier relationship).

Choice "a" is incorrect. The government does not have to establish an actual restraint on competition. They have been challenged when it is highly likely that one of the firms will enter the market of the other.

Choice "c" is incorrect. The government does not have to prove an intent to monopolize.

Choice "d" is incorrect. The government does not have to prove some additional form of anticompetitive behavior. They have been challenged when it is highly likely that one of the firms will enter the market of the other or where the merged company would become substantially large. No additional anticompetitive behavior is required. CPA-01556 Type1 M/C A-D Corr Ans: C PM#7 R 7-06

124. CPA-01556 May 82 #27 Page 59

The United States Department of Justice has alleged that Variable Resources, Inc., the largest manufacturer and seller of variable speed drive motors, is a monopolist. It is seeking an injunction ordering divestiture by Variable of a significant portion of its manufacturing facilities. Variable denies it has monopolized the variable speed drive motor market. Which of the following statements is correct insofar as the government's action against Variable is concerned? a. The government must prove that Variable is the sole source of a significant portion of the market. b. In order to establish monopolization, the government must prove that Variable has at least 75% of the

market. c. If Variable has the power to control prices or exclude competition, it has monopoly power. d. As long as Variable has not been a party to a contract, combination, or conspiracy in restraint of

trade, it can not be found to be guilty of monopolization.




CPA-01556 Explanation Choice "c" is correct. Monopoly power exists when a firm has sufficient market power to control prices or exclude competition.

Choice "a" is incorrect. The government does not have to prove Variable is the sole source of a significant portion of the market.

Choice "b" is incorrect. Companies with market shares of between 40% and 70% may or may not be monopolies. Companies with a market share of 70% or more are generally considered a monopoly. 75% market share is not required.

Choice "d" is incorrect. The Sherman Act has two prominent sections. Section 1 prohibits contracts, combinations and conspiracies that restrain trade. Section 2 prohibits monopolies and attempts to monopolize. Variable can violate section 2 without entering into a contract or conspiracy in restraint of trade. CPA-01558 Type1 M/C A-D Corr Ans: A PM#8 R 7-06

125. CPA-01558 May 82 #31 Page 61

Gould Machinery builds bulldozers. Prior to 2007, it sold on credit a substantial amount of equipment to Mace Contractors. Mace went into bankruptcy in 2007. In order to protect its investment, Gould took over the business of Mace. Erhart Contractors now complains that the acquisition harms its business, on the ground that its business would have improved had not Gould entered the market as a competitor. Erhart can: a. Not recover damages under the antitrust laws. b. Recover treble damages. c. Recover only its actual damages. d. Obtain injunctive relief ordering divestiture. CPA-01558 Explanation Choice "a" is correct. Since Mace became insolvent, the "Failing Company" exception applies. Under this exception, if the acquired firm is in danger of becoming insolvent and no other purchasers are interested in acquiring it, a merger can be lawful even if the effect is to lessen competition.

Choices "b", "c", and "d" are incorrect. All of these choices indicated there was a violation of antitrust law. Supplemental Questions CPA-01608 Type1 M/C A-D Corr Ans: D PM#1 R 7-99

126. CPA-01608 Nov 97 #12 Page 26

Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, a debtor will be denied a discharge in bankruptcy if the debtor: a. Fails to list a creditor. b. Owes alimony and support payments. c. Cannot pay administration expenses. d. Refuses to satisfactorily explain a loss of assets. CPA-01608 Explanation Choice "d" is correct. Under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code, a debtor will be denied a discharge in bankruptcy if the debtor refuses to satisfactorily explain a loss of assets.

Choice "a" is incorrect. If the debtor fails to list a creditor, only listed and dischargeable debts will be discharged.

Choice "b" is incorrect. Alimony and support payments are not dischargeable, but all other listed and dischargeable debts will be discharged.




Choice "c" is incorrect. Inability to pay administration expenses is not a ground to deny a discharge in bankruptcy. CPA-01611 Type1 M/C A-D Corr Ans: B PM#2 R 7-99

127. CPA-01611 May 96 #5 Page 46

Under the Securities Exchange Act of 1934, the SEC is responsible for all of the following activities, except: a. Requiring disclosure of facts concerning offerings of securities listed on national securities

exchanges. b. Prosecuting criminal violations of federal securities laws. c. Regulating the activities of securities brokers. d. Investigating securities fraud. CPA-01611 Explanation Choice "b" is correct. Only the U.S. Justice department may prosecute criminal violations of the federal securities laws. (Tricky!)

Choices "a", "c", and "d" are incorrect. The SEC is responsible for:

• Requiring disclosure of facts concerning offerings of securities listed on national stock exchanges. • Regulating the activities of securities brokers. • Investigating securities fraud. CPA-01623 Type1 M/C A-D Corr Ans: B PM#3 R 7-99

128. CPA-01623 Lw Nov 94 #12 Page 43

Under Section 11, a CPA usually will not be liable to the purchaser: a. If the purchaser is contributorily negligent. b. If the CPA can prove due diligence. c. Unless the purchaser can prove privity with the CPA. d. Unless the purchaser can prove scienter on the part of the CPA. CPA-01623 Explanation Choice "b" is correct. Due diligence is a defense to Section 11 liability.

Choice "a" is incorrect. The purchaser's contributory negligence is not a defense to an action under Section 11 because Section 11 is not based on a showing of negligence.

Choice "c" is incorrect. The purchaser need prove only (i) a material misstatement exists in the financial papers signed by the defendant and included in the registration statement and (ii) damages were incurred. There is no requirement of privity.

Choice "d" is incorrect. As indicated above, a purchaser need not prove any level of fault. There is no requirement of scienter. CPA-01637 Type1 M/C A-D Corr Ans: B PM#4 R 7-99

129. CPA-01637 Lw Nov 93 #8 Page 50

Ivor and Associates, CPAs, audited the financial statements of Jaymo Corporation. As a result of Ivor's negligence in conducting the audit, the financial statements included material misstatements. Ivor was unaware of this fact. The financial statements and Ivor's unqualified opinion were included in a registration statement and prospectus for an original public offering of stock by Jaymo. Thorp purchased shares in the offering. Thorp received a copy of the prospectus prior to the purchase but did not read it. The shares declined in value as a result of the misstatements in Jaymo's financial statements becoming known. Under which of the following Acts is Thorp most likely to prevail in a lawsuit against Ivor?




Securities Exchange Securities Act of Act of 1934, Section 1933, Section 11 10(b), Rule 10b-5 a. Yes Yes b. Yes No c. No Yes d. No No CPA-01637 Explanation

Choice "b" is correct. To make out a cause of action under Section 11, a person need only prove that there was a false statement in a registration statement, which caused the person damages. The facts here support this. An action under rule 10b-5 requires a showing of scienter (an intent to deceive or possibly reckless disregard for truth). Here, the misstatement was not intentional, but merely negligent. Thus, Ivor cannot be liable under rule 10b-5. The facts indicate that Ivor had no intent to deceive, as he was unaware of the misstatement. The facts also state that the party suing did not read the prospectus, showing there was no reliance. Therefore, the requirements of intent and reliance in addition to material misstatement and damages under Sec 10b-5 of the 1934 Act are not met. CPA-01639 Type1 M/C A-D Corr Ans: A PM#5 R 7-99

130. CPA-01639 Lw Nov 93 #5 Page 49

While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. In a suit by a purchaser against Larson for common law fraud, Larson's best defense would be that: a. Larson did not have actual or constructive knowledge of the misstatements. b. Larson's client knew or should have known of the misstatements. c. Larson did not have actual knowledge that the purchaser was an intended beneficiary of the audit. d. Larson was not in privity of contract with its client. CPA-01639 Explanation Choice "a" is correct. An action for common law fraud requires a showing that the defendant made a misstatement with actual knowledge (i.e., with an intent to deceive).

Choice "b" is incorrect. An action for common law fraud requires reliance on the misstatement. If the purchaser knew of the misstatement, there can be no reliance, but the mere fact that the purchaser should have known of the misstatement does not negate reliance. Courts do not impose a duty to investigate.

Choice "c" is incorrect. A CPA owes all potential plaintiffs a duty to refrain from committing fraud, not just plaintiffs whom the CPA knows are intended beneficiaries of the audit.

Choice "d" is incorrect. Privity is not required in a common law action for fraud. CPA-01641 Type1 M/C A-D Corr Ans: A PM#6 R 7-99

131. CPA-01641 Lw Nov 93 #4 Page 48

While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. In a suit by a purchaser against Larson for common law negligence, Larson's best defense would be that the: a. Audit was conducted in accordance with generally accepted auditing standards.




b. Client was aware of the misstatements. c. Purchaser was not in privity of contract with Larson. d. Identity of the purchaser was not known to Larson at the time of the audit. CPA-01641 Explanation Choice "a" is correct. Negligence requires a showing that the Lawson breached a duty of care by failing to act as a reasonably prudent accountant would under the circumstances. The best evidence that Lawson acted as a reasonably prudent accountant would be that the audit was conducted in accordance with generally accepted auditing standards.

Choice "b" is incorrect. Whether the client was aware of the misstatements goes to the issue of reliance. Reliance is an element in an action for fraud but it is irrelevant to an action for negligence.

Choice "c" is incorrect. Accountants are liable for negligence to those parties in privity of contract with the accountant. Accountants are also liable for negligence to those parties they have reason to know will rely on their work, even though they are not in privity of contract with them.

Choice "d" is incorrect. In the majority of jurisdictions, an accountant is liable for negligence to foreseen users and members of a foreseen class of users. If Lawson had reason to know that purchasers as a group would use the financial statements, then purchasers would be a foreseen class of users. Lawson could be liable whether or not he knew the specific identity of a purchaser because that purchaser was within a foreseen class of users. CPA-01646 Type1 M/C A-D Corr Ans: C PM#7 R 7-99

132. CPA-01646 Lw Nov 93 #3 Page 42

While conducting an audit, Larson Associates, CPAs, failed to detect material misstatements included in its client's financial statements. Larson's unqualified opinion was included with the financial statements in a registration statement and prospectus for a public offering of securities made by the client. Larson knew that its opinion and the financial statements would be used for this purpose. Which of the following statements is correct with regard to a suit against Larson and the client by a purchaser of the securities under Section 11 of the Securities Act of 1933? a. The purchaser must prove that Larson was negligent in conducting the audit. b. The purchaser must prove that Larson knew of the material misstatements. c. Larson will not be liable if it had reasonable grounds to believe the financial statements were

accurate. d. Larson will be liable unless the purchaser did not rely on the financial statements. CPA-01646 Explanation Choice "c" is correct. Under Section 11 of the 1933 Securities Act, a person who makes a false statement in a registration statement generally is strictly liable. However, a due diligence defense is available. If the person who made the statement can prove that a reasonable investigation was made and there were reasonable grounds to believe that the statements made were true, the person will not be liable.

Choice "a" is incorrect. A purchaser need only prove a false statement and a loss to make out a claim under Section 11; a showing of negligence is not required.

Choice "b" is incorrect. A purchaser need only prove a false statement and a loss to make out a claim under Section 11; a showing of knowledge of the misstatement is not required.

Choice "d" is incorrect. A purchaser need only prove a false statement and a loss to make out a claim under Section 11; reliance is not an element of an action under Section 11. CPA-01651 Type1 M/C A-D Corr Ans: B PM#8 R 7-99

133. CPA-01651 May 93 #34 Page 39

Which of the following securities is exempt from registration under the Securities Act of 1933?




a. Shares of nonvoting common stock, provided their par value is less than $1.00. b. A class of stock given in exchange for another class by the issuer to its existing stockholders without

the issuer paying a commission. c. Limited partnership interests sold for the purpose of acquiring funds to invest in bonds issued by the

United States. d. Corporate debentures that were previously subject to an effective registration statement, provided

they are convertible into shares of common stock. CPA-01651 Explanation Choice "b" is correct. A class of stock given in exchange for another class by the issuer to its existing shareholders without the issuer paying a commission is exempt from registration.

Choice "a" is incorrect. Shares of stock, whether voting or nonvoting, regardless of how cheap, are required to be registered under Securities Act 1933.

Choice "c" is incorrect. Limited partnership interests, regardless of the purpose of the investment, are required to be registered under Securities Act 1933.

Choice "d" is incorrect. Corporate convertible bonds are subject to registration under the Securities Act of 1933. CPA-01679 Type1 M/C A-D Corr Ans: B PM#9 R 7-99

134. CPA-01679 Lw May 93 #5 Page 42

To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove the: Plaintiff's reliance Defendant's intent on the registration to deceive statement a. No Yes b. No No c. Yes No d. Yes Yes CPA-01679 Explanation Choice "b" is correct. A plaintiff can bring a cause of action under section 11 merely by showing that the plaintiff suffered a loss and that there was a false statement made by the defendant in the registration statement. No intent or reliance need be proved. CPA-01682 Type1 M/C A-D Corr Ans: D PM#10 R 7-99

135. CPA-01682 Lw May 93 #4 Page 49

A CPA's duty of due care to a client most likely will be breached when a CPA: a. Gives a client an oral instead of written report. b. Gives a client incorrect advice based on an honest error of judgment. c. Fails to give tax advice that saves the client money. d. Fails to follow generally accepted auditing standards. CPA-01682 Explanation Choice "d" is correct. Negligence is the failure to exercise due care, and GAAS represents the industry's opinion of what is required for due care. Thus, failure to follow GAAS will likely breach the standard of due care owed to a client.

Choice "a" is incorrect. Although it is not wise to give a client an oral report (because there is greater room for misinterpretation and it would be difficult to later prove what was said), there are occasions where an oral report may be necessary (e.g., where speed is important). In any case, there is no requirement that client reports be written.




Choice "b" is incorrect. An "honest error" will not necessarily breach a duty of care. Whether the duty is breached depends on whether other CPAs in a similar situation would not have made the error. Breach of duty is especially unlikely if the question involved is a "gray" area where little guidance is available.

Choice "c" is incorrect. Failure to give tax advice that would save the client money is a breach of the duty of care only if the client was seeing the CPA for a tax matter and the average CPA in a similar situation would have given the tax advice. CPA-01684 Type1 M/C A-D Corr Ans: A PM#11 R 7-99

136. CPA-01684 Lw May 93 #3 Page 49

Which of the following elements, if present, would support a finding of constructive fraud on the part of a CPA? a. Gross negligence in applying generally accepted auditing standards. b. Ordinary negligence in applying generally accepted accounting principles. c. Identified third party users. d. Scienter. CPA-01684 Explanation Choice "a" is correct. Gross negligence would support a constructive fraud finding.

Choice "b" is incorrect. Constructive fraud requires much more culpable conduct than ordinary negligence.

Choice "c" is incorrect. Liability for constructive fraud extends to anyone injured as a result of the fraud. It is not limited to identified third party users.

Choice "d" is incorrect. Scienter is a requirement for actual fraud. It means that the party knowingly or intentionally made the material misstatement. Constructive fraud requires that the party made the misrepresentation with a reckless disregard for the truth. CPA-01685 Type1 M/C A-D Corr Ans: C PM#12 R 7-99

137. CPA-01685 Nov 92 #39 Page 24

On August 1, 1992, Hall filed a voluntary petition under Chapter 7 of the Federal Bankruptcy Code. Hall's assets are sufficient to pay general creditors 40% of their claims. The following transactions occurred before the filing: • On May 15, 1992, Hall gave a mortgage on Hall's home to National Bank to secure payment of a loan

National had given Hall two years earlier. When the loan was made, Hall's twin was a National employee.

• On June 1, 1992, Hall purchased a boat from Olsen for $10,000 cash. • On July 1, 1992, Hall paid off an outstanding credit card balance of $500. The original debt had been

$2,500. The credit card payment was: a. Preferential, because the payment was made within 90 days of the filing of the petition. b. Preferential, because the payment was on account of an antecedent debt. c. Not preferential, because the payment was for a consumer debt of less than $600. d. Not preferential, because the payment was less than 40% of the original debt. CPA-01685 Explanation Choice "c" is correct. An antecedent debt of less than $600 paid within the preference period by an individual whose debts are primarily consumer debts will not be set aside as a preferential transfer.

Choices "a" and "b" are incorrect because of the $600 individual consumer debt exception.

Choice "d" is incorrect. Far out distractor.




CPA-01686 Type1 M/C A-D Corr Ans: D PM#13 R 7-99

138. CPA-01686 Nov 92 #38 Page 23




$2,500. The payment to Olsen was: a. Preferential, because the payment was made within 90 days of the filing of the petition. b. Preferential, because the payment enabled Olsen to receive more than the other general creditors. c. Not preferential, because Hall is presumed insolvent when the payment was made. d. Not preferential, because the payment was a contemporaneous exchange for new value. CPA-01686 Explanation Choice "d" is correct. Hall's payment to Olsen would not be set aside as a preference because there was a "contemporaneous exchange" of the boat for the cash payment.

Choices "a" and "b" are incorrect, because it was a contemporaneous exchange.

Choice "c" is incorrect. Although there is a presumption of insolvency within 90 days of bankruptcy, a contemporaneous exchange for new value is not a preference. CPA-01688 Type1 M/C A-D Corr Ans: B PM#14 R 7-99

139. CPA-01688 Nov 92 #37 Page 24




$2,500. The National mortgage was: a. Preferential, because National would be considered an insider. b. Preferential, because the mortgage was given to secure an antecedent debt. c. Not preferential, because Hall is presumed insolvent when the mortgage was given. d. Not preferential, because the mortgage was a security interest. CPA-01688 Explanation Choice "b" is correct. The granting of a mortgage or a security interest to secure an antecedent debt within the preference period will be set aside by the trustee in bankruptcy.

Choice "a" is incorrect. Because the preferential transfer took place within 90 days of bankruptcy, it is irrelevant as to whether National was an insider.

Choice "c" is incorrect. There is a presumption of insolvency within 90 days of bankruptcy and that is the basis for finding a preference.




Choice "d" is incorrect, just the opposite. It is preferential because the mortgage is a security interest in real estate. CPA-01690 Type1 M/C A-D Corr Ans: D PM#15 R 7-99

140. CPA-01690 Nov 92 #32 Page 18

Under Chapter 11 of the Federal Bankruptcy Code, which of the following would not be eligible for reorganization? a. Retail sole proprietorship. b. Advertising partnership. c. CPA professional corporation. d. Savings and loan corporation. CPA-01690 Explanation Choice "d" is correct. Savings and loan corporations may not go into bankruptcy either voluntarily or involuntarily under the Bankruptcy Code.

Choices "a", "b", and "c" are incorrect, because retail sole proprietorships, advertising partnerships and CPA professional corporations may go bankrupt under Chapter 11 of the Bankruptcy Code. CPA-01692 Type1 M/C A-D Corr Ans: A PM#16 R 7-99

141. CPA-01692 Nov 92 #31 Page 34

Under Chapter 11 of the Federal Bankruptcy Code, which of the following actions is necessary before the court may confirm a reorganization plan? a. Provision for full payment of administration expenses. b. Acceptance of the plan by all classes of claimants. c. Preparation of a contingent plan of liquidation. d. Appointment of a trustee. CPA-01692 Explanation Choice "a" is correct. A reorganization plan under Chapter 11 will not be approved unless it provides for the full payment of administration expenses.

Choice "b" is incorrect, because unimpaired classes do not need to accept the plan; nor do impaired classes if the plan does not discriminate unfairly and is fair and equitable to all impaired classes.

Choice "c" is incorrect. Far out distractor.

Choice "d" is incorrect, because the court is not required to appoint a trustee in all Chapter 11 cases, but will do so in cases involving fraud or gross management. CPA-01693 Type1 M/C A-D Corr Ans: A PM#17 R 7-99

142. CPA-01693 Nov 92 #30 Page 21

A party involuntarily petitioned into bankruptcy under Chapter 7 of the Federal Bankruptcy Code who succeeds in having the petition dismissed could recover: Court costs and Compensatory Punitive Attorney's fees damages damages a. Yes Yes Yes b. Yes Yes No c. No Yes Yes d. Yes No No CPA-01693 Explanation Choice "a" is correct. Yes - Yes - Yes.




A party who successfully defends an involuntary bankruptcy petition is entitled to receive court costs, attorney's fees, compensatory damages, and if the petition was filed in bad faith, punitive damages. CPA-01694 Type1 M/C A-D Corr Ans: B PM#18 R 7-99

143. CPA-01694 May 92 #43 Page 39

Under the Securities Act of 1933, which of the following securities must be registered? a. Bonds of a railroad corporation. b. Common stock of an insurance corporation. c. Preferred stock of a domestic bank corporation. d. Long-term notes of a charitable corporation. CPA-01694 Explanation Choice "b" is correct. Common stock of an insurance corporation must be registered under the 1933 Act (insurance "contracts" are exempt, but not an insurance corporation's common stock).

Choice "a" is incorrect. Securities of common carriers are exempt from registration under the 1933 Act because they are regulated by another federal agency.

Choice "c" is incorrect. Securities of savings institutions are exempt under the 1933 Act because they are regulated by another federal agency.

Choice "d" is incorrect. Because no one expects to make a profit from a charity, it is exempt from registering under the 1933 Act.


144. CPA-01698 May 92 #42 Page 44

Integral Corp. has assets in excess of $4 million, has 350 stockholders, and has issued common and preferred stock. Integral is subject to the reporting provisions of the Securities Exchange Act of 1934. For its 2007 fiscal year, Integral filed the following with the SEC: quarterly reports, an annual report, and a periodic report listing newly appointed officers of the corporation. Integral did not notify the SEC of stockholder "short swing" profits; did not report that a competitor made a tender offer to Integral's stockholders; and did not report changes in the price of its stock as sold on the New York Stock Exchange. Under the Securities Exchange Act of 1934, Integral must be registered with the SEC because: a. It issues both common and preferred stock. b. Its shares are listed on a national stock exchange. c. It has more than 300 stockholders. d. Its shares are traded in interstate commerce. CPA-01698 Explanation Rule: A company must be registered with the SEC if:

1. It has both 500 or more shareholders and total assets of at least $10,000,000, or 2. It is currently traded on a national stock exchange.

Choice "b" is correct. Integral must register with the SEC because its stock is traded on the "New York Stock Exchange," which is a national stock exchange.

Choices "a" and "d" are incorrect; they both are far out distractors.

Choice "c" is incorrect, because the rule requires 500 or more stockholders and $10 million or more of total assets.





145. CPA-01701 May 92 #41 Page 44

Integral Corp. has assets in excess of $4 million, has 350 stockholders, and has issued common and preferred stock. Integral is subject to the reporting provisions of the Securities Exchange Act of 1934. For its 2007 fiscal year, Integral filed the following with the SEC: quarterly reports, an annual report, and a periodic report listing newly appointed officers of the corporation. Integral did not notify the SEC of stockholder "short swing" profits; did not report that a competitor made a tender offer to Integral's stockholders; and did not report changes in the price of its stock as sold on the New York Stock Exchange. Under SEC reporting requirements, which of the following was Integral required to do? a. Report the tender offer to the SEC. b. Notify the SEC of stockholder "short swing" profits. c. File the periodic report listing newly appointed officers. d. Report the changes in the market price of its stock. CPA-01701 Explanation Choice "c" is correct. Under SEC reporting requirements, a public company (Integral) is required to report in form 8-K newly appointed officers as part of the "material events" that occurred in that month.

Choice "a" is incorrect. The person making the tender offer is required to notify the SEC, not the corporation receiving it.

Choice "b" is incorrect. The corporation is not required to report stockholder's short swing profits to the SEC (only insiders are subject to SEC insider (short or long swing) reporting provisions and they must update the SEC monthly of their holdings).

Choice "d" is incorrect. Reporting the changes (ranges) in the market price of it's stock is sometimes shown in the annual report of a company, but is not a requirement of the Securities Exchange Act of 1934. CPA-01703 Type1 M/C A-D Corr Ans: D PM#21 R 7-99

146. CPA-01703 May 92 #40 Page 44

World Corp. wanted to make a public offering of its common stock. On May 10, World prepared and filed a registration statement with the SEC. On May 20, World placed a "tombstone ad" announcing that it was making a public offering. On May 25, World issued a preliminary prospectus, and the registration statement became effective on May 30. On what date may World first sell the shares assuming it is not a well known seasoned issuer? a. May 10 b. May 20 c. May 25 d. May 30 CPA-01703 Explanation Choice "d" is correct. May 30. It is unlawful to "sell" the shares until the "effective date."

Choices "a", "b", and "c" are incorrect. Because the date of advertising (tombstone ad) and the date the "preliminary prospectus" is issued are not relevant as to when a stock may be "offered" for sale or "sold." CPA-01707 Type1 M/C A-D Corr Ans: A PM#22 R 7-99

147. CPA-01707 May 92 #39 Page 38

World Corp. wanted to make a public offering of its common stock. On May 10, World prepared and filed a registration statement with the SEC. On May 20, World placed a "tombstone ad" announcing that it was




making a public offering. On May 25, World issued a preliminary prospectus and the registration statement became effective on May 30. On what date may World first make oral offers to sell the shares assuming it is not a well known seasoned issuer? a. May 10 b. May 20 c. May 25 d. May 30 CPA-01707 Explanation Choice "a" is correct. May 10, immediately after filing the registration statement, it is lawful to make oral offers to sell shares.

Choices "b", "c", and "d" are incorrect, per the above. CPA-01709 Type1 M/C A-D Corr Ans: A PM#23 R 7-99

148. CPA-01709 May 92 #9 Page 4

Ogden Corp. hired Thorp as a sales representative for nine months at a salary of $3,000 per month plus 4% of sales. Which of the following statements is correct? a. Thorp is obligated to act solely in Ogden's interest in matters concerning Ogden's business. b. The agreement between Ogden and Thorp formed an agency coupled with an interest. c. Ogden does not have the power to dismiss Thorp during the nine-month period without cause. d. The agreement between Ogden and Thorp is not enforceable unless it is in writing and signed by

Thorp. CPA-01709 Explanation Choice "a" is correct. As an agent for a principal, Thorp (agent) is obligated to act solely in the principal's best interest in matters concerning the principal's business.

Choice "b" is incorrect. An agency coupled with an interest is created where the agent has an interest (e.g., ownership) in the subject matter of the agency or where the agency is given as security. Having an interest in a sale commission is not a sufficient interest.

Choice "c" is incorrect because, regardless of the length of the term the parties agree to, unless the agency is coupled with an interest the principal and the agent always have the power to terminate their agency relationship. Note: While the employer may have the "power," he/she may not have the contractual "right."

Choice "d" is incorrect, since an employment contract for less than one year (nine months) may be oral and enforceable. CPA-01712 Type1 M/C A-D Corr Ans: B PM#24 R 7-99

149. CPA-01712 May 92 #8 Page 11

Long Corp. is a real estate developer and regularly engages real estate brokers to act on its behalf in acquiring parcels of land. The brokers are authorized to enter into such contracts, but are instructed to do so in their own names without disclosing Long's identity or Long's relationship to the transaction. If a broker enters into a contract with a seller on Long's behalf: a. Long will not be liable for any negligent acts committed by the broker while acting on Long's behalf. b. The broker will have the same actual authority as if Long's identity had been disclosed. c. The broker will not be personally bound by the contract because the broker has express authority to

act. d. Long will be bound by the contract because of the broker's apparent authority. CPA-01712 Explanation




Choice "b" is correct. As an agent for an undisclosed principal, the broker (agent) has the same actual authority as if the principal's identity were disclosed. Actual authority depends on the communications between the principal and the agent and is unaffected by whether the principal's identity is disclosed to third parties with whom the agent deals.

Choice "a" is incorrect. While a principal generally is not liable for the agent's torts, there are some exceptions to this rule, and keeping the principal's identity undisclosed does not negate these exceptions.

Choice "c" is incorrect. Where the principal is undisclosed, both the agent and the principal can be held liable on contracts that the agent enters into on the principal's behalf.

Choice "d" is incorrect. Where the principal is undisclosed, there can be no apparent authority, because apparent authority is based on the principal's communications with the third party with whom the agent deals, and when the principal is undisclosed there are no such communications. CPA-01716 Type1 M/C A-D Corr Ans: B PM#25 R 7-99

150. CPA-01716 May 92 #7 Page 7

Young was a purchasing agent for Wilson, a sole proprietor. Young had the express authority to place purchase orders with Wilson's suppliers. Young conducted business through the mail and had little contact with Wilson. Young placed an order with Vanguard, Inc. on Wilson's behalf after Wilson was declared incompetent in a judicial proceeding. Young was aware of Wilson's incapacity. With regard to the contract with Vanguard, Wilson (or Wilson's legal representative) will: a. Not be liable because Vanguard dealt only with Young. b. Not be liable because Young did not have authority to enter into the contract. c. Be liable because Vanguard was unaware of Wilson's incapacity. d. Be liable because Young acted with express authority. CPA-01716 Explanation Choice "b" is correct. The incapacity of the principal (Wilson) results in the termination of the agency relationship immediately, by operation of law. It does not matter whether the agent and third party are aware of the principal's incapacity.

Choice "a" is incorrect. The mere fact that the third party dealt only with an agent is not ground for releasing a principal from liability for the agent's act.

Choice "c" is incorrect, since there is no requirement that the third party know of the principal's incapacity.

Choice "d" is incorrect, since the principal's incapacity will terminate the agency relationship even though the agent was acting with express authority. CPA-01720 Type1 M/C A-D Corr Ans: C PM#26 R 7-99

151. CPA-01720 May 92 #6 Page 3

A principal and agent relationship requires a: a. Written agreement. b. Power of attorney. c. Meeting of the minds and consent to act. d. Specified consideration. CPA-01720 Explanation Choice "c" is correct. A principal-agent relationship is consensual.

Choice "a" is incorrect. Generally a writing is not required unless the agent is to purchase land.

Choice "b" is incorrect, since a power of attorney is just one form of a principal-agent relationship.

Choice "d" is incorrect. Consideration is not required to create an agency.





152. CPA-01723 May 92 #5 Page 47

Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart's financial statements and gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Jay's opinion was included in Dart's registration statement. Larson purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. If Larson succeeds in the Section 10(b) and Rule 10b-5 suit, Larson would be entitled to: a. Only recover the original public offering price. b. Only rescind the transaction. c. The amount of any loss caused by the fraud. d. Punitive damages. CPA-01723 Explanation Choice "c" is correct. Under Section 10(b) and Rule 10b-5, a successful plaintiff (Larson) will be entitled to recover the amount of any loss caused by the fraud.

Choice "a" is incorrect. The plaintiff's recovery is not limited to the original public offering price; the plaintiff may recover the amount of any loss caused by the fraud. (Be careful of answers with words like "only," "always," "never," "all," etc.)

Choice "b" is incorrect. The plaintiff may recover the amount of any loss or obtain recission. ("only," "always," etc.)

Choice "d" is incorrect. Even though punitive damages are available for fraud under common law, punitive damages are not available for fraud under Section 10(b). CPA-01725 Type1 M/C A-D Corr Ans: C PM#28 R 7-99

153. CPA-01725 May 92 #3 Page 42

Dart Corp. engaged Jay Associates, CPAs, to assist in a public stock offering. Jay audited Dart's financial statements and gave an unqualified opinion, despite knowing that the financial statements contained misstatements. Jay's opinion was included in Dart's registration statement. Larson purchased shares in the offering and suffered a loss when the stock declined in value after the misstatements became known. If Larson succeeds in the Section 11 suit against Dart, Larson would be entitled to: a. Damages of three times the original public offering price. b. Rescind the transaction. c. Monetary damages only. d. Damages, but only if the shares were resold before the suit was started. CPA-01725 Explanation Choice "c" is correct. Only monetary damages are available under Section 11 of the 1933 Act.

Choice "a" is incorrect. No such rule. Treble damages are allowed under some laws where there is intentional wrongful conduct, but they are not allowed under Section 11, which is nearly a strict liability offense (i.e., the defendant can be held liable without proof of fault).

Choice "b" is incorrect, because rescission is not available under Section 11 of the 1933 Act.

Choice "d" is incorrect, because Section 11 of the 1933 Act does not require the plaintiff to resell the shares prior to suing. CPA-01728 Type1 M/C A-D Corr Ans: B PM#29 R 7-99

154. CPA-01728 Nov 91 #45 Page 29




On February 28, 2006, Master, Inc. had total assets with a fair market value of $1,200,000 and total liabilities of $990,000. On January 15, 2006, Master made a monthly installment note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note. On March 15, 2006, Master voluntarily filed a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold for less than the balance due on the note to Acme. Which of the following statements correctly describes Acme's distribution from Master's bankruptcy estate? a. Acme will receive the total amount it is owed, even if the proceeds from the sale of the collateral were

less than the balance owed by Master. b. Acme will have the same priority as unsecured general creditors to the extent that the proceeds from

the sale of its collateral are insufficient to satisfy the amount owed by Master. c. The total proceeds from the sale of the collateral will be paid to Acme even if they are less than the

balance owed by Master, provided there is sufficient cash to pay all administrative costs associated with the bankruptcy.

d. Acme will receive only the proceeds from the sale of the collateral in full satisfaction of the debt owed by Master.

CPA-01728 Explanation Choice "b" is correct. The class unsecured creditor includes the unsecured portion of collateralized debt where the collateral was insufficient. Thus, Acme will become an unsecured creditor with equal priority to the other unsecured creditors to the extent proceeds from the sale of its collateral are insufficient to satisfy the debt owed by Master.

Choice "a" is incorrect. Acme will receive only a pro-rata share of the debtor's estate along with the other unsecured creditors to the extent that the proceeds from the sale of the collateral are insufficient.

Choice "c" is incorrect. Acme will receive the total proceeds up to the amount it is owed regardless of whether there is sufficient cash to pay the administrative costs of the bankrupcy--secured creditors are entitled to recover up to their whole debt first, to the extent of the value of the collateral.

Choice "d" is incorrect. Acme will receive the proceeds of the sale; but it will not be in full satisfaction of the debt unless the proceeds equal the amount of the debt. CPA-01731 Type1 M/C A-D Corr Ans: C PM#30 R 7-99

155. CPA-01731 Nov 91 #44 Page 24

On February 28, 2006, Master, Inc. had total assets with a fair market value of $1,200,000 and total liabilities of $990,000. On January 15, 2006, Master made a monthly installment note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note. On March 15, 2006, Master voluntarily filed a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold for less than the balance due on the note to Acme. Master's payment to Acme could: a. Be set aside as a preferential transfer because the fair market value of the collateral was greater than

the installment note balance. b. Be set aside as a preferential transfer unless Acme showed that Master was solvent on January 15,

1991. c. Not be set aside as a preferential transfer because Acme was oversecured. d. Not be set aside as a preferential transfer if Acme showed that Master was solvent on March 15,

1991. CPA-01731 Explanation Choice "c" is correct. Payments to fully secured creditors within the preference period (90 days, or 12 months for insiders) will not be set aside as a preferential transfer.




Choice "a" is incorrect. No such rule.

Choice "b" is incorrect. Acme was fully secured. If Acme was unsecured or not fully secured, the January 15 payment to Acme would be set aside as a preference made within 90 days of bankruptcy unless Acme could prove that Master was not insolvent in the bankruptcy sense at the time the payment was made.

Choice "d" is incorrect. Bankruptcy sense insolvency is measured at the time of payment, not at the date of bankruptcy. CPA-01733 Type1 M/C A-D Corr Ans: C PM#31 R 7-99

156. CPA-01733 Nov 91 #43 Page 19

On February 28, 2006, Master, Inc. had total assets with a fair market value of $1,200,000 and total liabilities of $990,000. On January 15, 2006, Master made a monthly installment note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note. On March 15, 2006, Master voluntarily filed a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold for less than the balance due on the note to Acme. If Master's voluntary petition is filed properly: a. Master will be entitled to conduct its business as a debtor-in-possession unless the court appoints a

trustee. b. A trustee must be appointed by the creditors. c. Lawsuits by Master's creditors will be stayed by the Federal Bankruptcy Code. d. The unsecured creditors must elect a creditors' committee of three to eleven members to consult with

the trustee. CPA-01733 Explanation Choice "c" is correct. Immediately upon the filing of a petition in bankruptcy (voluntary of involuntary) creditors (secured and unsecured) are stopped from pursuing collection actions (such as lawsuits) against the debtor. (The "automatic stay.")

Choice "a" is incorrect. A trustee is appointed in all Chapter 7 cases; the debtor may conduct its business as a debtor-in-possession only in Chapter 11 reorganizations.

Choice "b" is incorrect. In a Chapter 7 case a trustee is always appointed by the bankruptcy court; thereafter, another trustee may be elected by the creditors. (Avoid answers with must, always, never, etc.)

Choice "d" is incorrect. In a Chapter 7 bankruptcy the creditors have the option to elect a committee of three to eleven members (the committee is not mandatory, as the choice suggests). A creditor's committee is mandatory (must be appointed) in a Chapter 11 case. In a Chapter 11 reorganization, the court must appoint a creditors committee. (Avoid answers with must, always, etc.) CPA-01738 Type1 M/C A-D Corr Ans: D PM#32 R 7-99

157. CPA-01738 Nov 91 #42 Page 19

On February 28, 2006, Master, Inc. had total assets with a fair market value of $1,200,000 and total liabilities of $990,000. On January 15, 2006, Master made a monthly installment note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note. On March 15, 2006, Master voluntarily filed a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold for less than the balance due on the note to Acme. If a creditor challenged Master's right to file, the petition would be dismissed: a. If Master had less than 12 creditors at the time of filing.




b. Unless Master can show that a reorganization under Chapter 11 of the Federal Bankruptcy Code would have been unsuccessful.

c. Unless Master can show that it is unable to pay its debts in the ordinary course of business or as they come due.

d. If Master is an insurance company. CPA-01738 Explanation Choice "d" is correct. Insurance companies may not go into bankruptcy voluntarily or involuntarily under the Bankruptcy Code.

Choice "a" is incorrect. For a voluntary bankruptcy petition, a minimum number of creditors is not required (for an involuntary petition, three creditors must file if the debtor has more than twelve creditors).

Choice "b" is incorrect. No such rule for corporations.

Choice "c" is incorrect. Insolvency is unnecessary for voluntary bankruptcy. CPA-01740 Type1 M/C A-D Corr Ans: A PM#33 R 7-99

158. CPA-01740 Nov 91 #40 Page 41

Kamp is offering $10 million of its securities. Under Rule 506 of Regulation D of the Securities Act of 1933: a. The securities may be debentures. b. Kamp must be a corporation. c. There must be more than 35 purchasers. d. Kamp may make a general solicitation in connection with the offering. CPA-01740 Explanation Choice "a" is correct. Under Rule 506 of Regulation D, any type of security, including debentures, of an unlimited amount, may be sold without registration so long as:

1. There is no general solicitation; 2. The buyer's right to resell is restricted for two years; 3. Non-accredited investors are:

(a) Limited in number to 35 investors, (b) Sophisticated, and (c) Provided with an audited balance sheet and other financial statements.

Choice "b" is incorrect. Rule 506 is not limited to securities of a corporation.

Choice "c" is a distractor. The "35" limitation is on the number of unaccredited investors.

Choice "d" is incorrect because general solicitation is prohibited under Rule 506.

CPA-01745 Type1 M/C A-D Corr Ans: D PM#34 R 7-99

159. CPA-01745 Nov 91 #37 Page 39

Under the Securities Act of 1933, an initial offering of securities must be registered with the SEC, unless: a. The offering is made through a broker-dealer licensed in the states in which the securities are to be

sold. b. The offering prospectus makes a fair and full disclosure of all risks associated with purchasing the

securities. c. The issuer's financial condition meets certain standards established by the SEC. d. The type of security or the offering involved is exempt from registration. CPA-01745 Explanation




Choice "d" is correct. The 1933 Act requires the registration of all public sales of securities in interstate commerce unless there is an applicable exemption.

Choice "a" is incorrect. There is no registration exemption under the 1933 Act for offers made through state-licensed broker-dealers.

Choice "b" is incorrect. There is no registration exemption under the 1933 Act for offers merely because the offers include a prospectus that makes full and fair disclosures (which is a general requirement of registered offerings anyway).

Choice "c" is incorrect. There is no registration exemption under the 1933 Act for offers of corporations meeting certain financial standards. CPA-01748 Type1 M/C A-D Corr Ans: B PM#35 R 7-99

160. CPA-01748 Nov 91 #36 Page 36

When a common stock offering requires registration under the Securities Act of 1933: a. The registration statement is automatically effective when filed with the SEC. b. The issuer would act unlawfully if it were to sell the common stock without providing the investor with

a prospectus. c. The SEC will determine the investment value of the common stock before approving the offering. d. The issuer may make sales 10 days after filing the registration statement. CPA-01748 Explanation Choice "b" is correct. It is unlawful to sell a registered security without delivering a prospectus to the investor.

Choice "a" is incorrect. Generally, the registration is not effective for 20 days, but the SEC may accelerate this time period.

Choice "c" is incorrect. The SEC does not value or otherwise pass on the merits of the security.

Choice "d" is incorrect. The issuer may make sales only after the effective date. CPA-01752 Type1 M/C A-D Corr Ans: D PM#36 R 7-99

161. CPA-01752 Nov 91 #31 Page 29

By signing a reaffirmation agreement on April 15, 2006, a debtor agreed to pay certain debts that would be discharged in bankruptcy. On June 20, 2006, the debtor's attorney filed the reaffirmation agreement and an affidavit with the court indicating that the debtor understood the consequences of the reaffirmation agreement. The debtor obtained a discharge on August 25, 2006. The reaffirmation agreement would be enforceable only if it was: a. Made after discharge. b. Approved by the bankruptcy court. c. Not for a household purpose debt. d. Not rescinded before or within 60 days after discharge. CPA-01752 Explanation Choice "d" is correct. A reaffirmation by a debtor of a claim otherwise dischargeable in bankruptcy will only be enforceable if it is not rescinded before or within 60 days after discharge.

Choice "a" is incorrect. A reaffirmation may only be made prior to discharge.

Choice "b" is incorrect. A reaffirmation does not need to be approved by the court unless it is not filed by an attorney.

Choice "c" is incorrect. No such rule.





162. CPA-01756 Nov 91 #27 Page 44

Wool, Inc. is a reporting company under the Securities Exchange Act of 1934. The only security it has issued is its voting common stock. Which of the following statements is correct? a. It is unnecessary for the required annual report (Form 10k) to include audited financial statements. b. Any person who owns more than 5% of Wool's common stock must file a report with the SEC. c. Because Wool is a reporting company, it is not required to file a registration statement under the

Securities Act of 1933 for any future offerings of its common stock. d. Wool need not file its proxy statements with the SEC because it has only one class of stock

outstanding. CPA-01756 Explanation Choice "b" is correct. Under the Securities Exchange Act of 1934, any person who owns more than 5% of a class of "equity" securities must file reports with the SEC.

Choice "a" is incorrect. The annual report form 10k must include audited financial statements.

Choice "c" is incorrect. No such exemption. A 1934 Act reporting company is still subject to the 1933 Act registration requirements, although some streamlining is available to certain reporting companies, especially well known seasoned issuers.

Choice "d" is incorrect. No such exemption. A 1934 Act reporting company must file its proxy statements regardless of how many classes of stock it has. CPA-01758 Type1 M/C A-D Corr Ans: C PM#38 R 7-99

163. CPA-01758 Nov 91 #13 Page 3

Orr gives North power of attorney. In general, the power of attorney: a. Will be valid only if North is a licensed attorney at law. b. May continue in existence after Orr's death. c. May limit North's authority to specific transactions. d. Must be signed by both Orr and North. CPA-01758 Explanation Choice "c" is correct. A power of attorney is simply a principal's written authorization granting an agent authority to enter into binding contracts on the principal's behalf. It may limit the agent's authority to specific transactions, and usually does.

Choice "a" is incorrect. No such rule! One does not have to be an attorney to receive a power of attorney.

Choice "b" is incorrect. A power of attorney will terminate upon the death of the grantor (principal) unless it specifies that it is a durable power of attorney.

Choice "d" is incorrect. A written power of attorney need only be signed by the grantor/principal. CPA-01763 Type1 M/C A-D Corr Ans: C PM#39 R 7-99

164. CPA-01763 Nov 91 #11 Page 3

Forming an agency relationship requires that: a. The agreement between the principal and agent be supported by consideration. b. The principal and agent not be minors. c. Both the principal and agent consent to the agency. d. The agent's authority be limited to the express grant of authority in the agency agreement. CPA-01763 Explanation Choice "c" is correct. An agency agreement requires the consent of both parties.




Choice "a" is incorrect, since there is no requirement that the agency agreement be supported by consideration. An agency relationship is consensual, but not necessarily contractual, so contract consideration is not required.

Choice "b" is incorrect, since minors have the capacity to be agents.

Choice "d" is incorrect, since the agent's authority can be expressed or implied. CPA-01765 Type1 M/C A-D Corr Ans: D PM#40 R 7-99

165. CPA-01765 Nov 91 #10 Page 52

Which of the following statements is correct with respect to ownership, possession, or access to a CPA firm's audit workpapers? a. Workpapers are subject to the privileged communication rule which, in most jurisdictions, prevents

any third-party access to the workpapers. b. Workpapers may never be obtained by third parties unless the client consents. c. Workpapers are the client's exclusive property. d. Workpapers are not transferable to a purchaser of a CPA practice unless the client consents. CPA-01765 Explanation Choice "d" is correct. A CPA has a confidential relationship with his client, and so workpapers are not transferable to a purchaser of a CPA practice unless the client consents (although a prospective purchaser of a CPA's practice may be allowed to review client workpapers without the client's consent if confidentiality is assured).

Choice "a" is incorrect. Under common law, a CPA's workpapers are not subject to the privileged communication rule, and most jurisdictions do not have statutes providing for privileged communications for CPAs.

Choice "b" is incorrect. Workpapers may be obtained by third parties if:

1. The client consents. 2. Disclosure is necessary to comply with GAAP or GAAS. 3. Disclosure is in compliance with an enforceable subpoena. 4. Disclosure is for a voluntary quality review under AICPA authorization. 5. Disclosure is in response to an AICPA trial board.

Choice "c" is incorrect. Workpapers are the CPA's property, although the CPA still owes the client a duty of confidentiality with respect to the workpapers. CPA-01777 Type1 M/C A-D Corr Ans: B PM#41 R 7-99

166. CPA-01777 Nov 91 #7 Page 50

For a CPA to be liable for damages under the anti-fraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, a plaintiff must prove all of the following, except that: a. The plaintiff relied on the financial statements audited by the CPA. b. The CPA violated generally accepted auditing standards. c. There was a material misrepresentation of fact in the financial statements audited by the CPA. d. The CPA acted with scienter. CPA-01777 Explanation Choice "b" is correct. For a CPA to be liable for damages under section 10(b) of the 1934 act, the plaintiff must prove the following:

1. The plaintiff purchased or sold securities, 2. Material misrepresentation of fact with respect to the securities, 3. Scienter (or an equivalent such as constructive fraud, gross negligence or recklessness), 4. Reliance, and




5. Damages.

While a violation of GAAS might help prove fault, it is not a necessary element. CPA-01780 Type1 M/C A-D Corr Ans: A PM#42 R 7-99

167. CPA-01780 Nov 91 #5 Page 50

A CPA who fraudulently performs an audit of a corporation's financial statements will: a. Probably be liable to any person who suffered a loss as a result of the fraud. b. Be liable only to the corporation and to third parties who are members of a class of intended users of

the financial statements. c. Probably be liable to the corporation even though its management was aware of the fraud and did not

rely on the financial statements. d. Be liable only to third parties in privity of contract with the CPA. CPA-01780 Explanation Choice "a" is correct. A CPA who fraudulently performs an audit will be liable to any person who is harmed as a result of the fraud.

Choice "b" is incorrect. This choice is too narrow -- a CPA who commits fraud is liable to anyone harmed. The limitation of liability to the client and third parties who will use the financial statements is for a CPA who negligently (not fraudulently) performs an audit.

Choice "c" is incorrect. The CPA will not be liable to the corporation's management who was aware of the fraud -- fraud requires reliance.

Choice "d" is incorrect. A CPA who fraudulently performs an audit is liable to any person who is harmed as a result, not just parties in privity. CPA-01784 Type1 M/C A-D Corr Ans: D PM#43 R 7-99

168. CPA-01784 Nov 91 #1 Page 49

Cable Corp. orally engaged Drake & Co., CPAs, to audit its financial statements. Cable's management informed Drake that it suspected the accounts receivable were materially overstated. Though the financial statements Drake audited included a materially overstated accounts receivable balance, Drake issued an unqualified opinion. Cable used the financial statements to obtain a loan to expand its operations. Cable defaulted on the loan and incurred a substantial loss. If Cable sues Drake for negligence in failing to discover the overstatement, Drake's best defense would be that Drake did not: a. Have privity of contract with Cable. b. Sign an engagement letter. c. Perform the audit recklessly or with an intent to deceive. d. Violate generally accepted auditing standards in performing the audit. CPA-01784 Explanation Choice "d" is correct. If Cable (the client) sues Drake (the CPA) for negligence, the CPA's best defense would be that the audit was performed in accordance with GAAS because it tends to show that the CPA was not negligent, although literally following GAAS is no guarantee against liability.

Choice "a" is incorrect. This is contrary to the facts. Because Cable hired Drake, they had a contractual relationship and were, by definition, in privity of contract.

Choice "b" is incorrect. Negligence is an action alleging breach of the applicable standard of care. Whether the engagement was entered orally or in writing is not relevant to whether the audit was performed with due care.

Choice "c" is incorrect. The client only needs to prove that the CPA was negligent. Negligence is a lower level of fault than intentional or reckless conduct. Thus, it is not a defense in a negligence action that the CPA did not act recklessly or with an intent to deceive.





169. CPA-01789 May 91 #44 Page 46

The antifraud provisions of Rule 10b-5 of the Securities Exchange Act of 1934: a. Apply only if the securities involved were registered under either the Securities Act of 1933 or the

Securities Exchange Act of 1934. b. Require that the plaintiff show negligence on the part of the defendant in misstating facts. c. Require that the wrongful act must be accomplished through the mail, any other use of interstate

commerce, or through a national securities exchange. d. Apply only if the defendant acted with intent to defraud. CPA-01789 Explanation Choice "c" is correct. Section 10(b) of the 1934 Act, and Rule 10b-5 promulgated thereunder, only applies if the wrongful act occurred through interstate commerce (i.e., through the mail) or a national securities exchange.

Choice "a" is incorrect. Rule 10b-5 applies to all sales of securities in interstate commerce, even if not registered under the 33 or 34 Acts.

Choices "b" and "d" are incorrect. Either intent to deceive (scienter) or its equivalent, such as gross negligence, recklessness, or constructive fraud, can satisfy the prima facie case under Rule 10b-5. Negligence is insufficient. CPA-01795 Type1 M/C A-D Corr Ans: A PM#45 R 7-99

170. CPA-01795 May 91 #39 Page 40

Bird Corp. made a $1,500,000 exempt common stock offering under Rule 505 of Regulation D of the Securities Act of 1933. This made the shares restricted securities. As the issuer of restricted securities, Bird must: a. Make a reasonable effort to determine that purchasers are buying for themselves and not for others. b. Publicly advertise that the shares are not registered. c. Provide information to all purchasers as to how they can register their shares so that resale will be

permitted. d. Apply to the SEC for contingent exemptions so that purchasers may resell their shares as exempt. CPA-01795 Explanation Choice "a" is correct. Under Rule 505 of Regulation D, the issuer must make reasonable effort to ensure that the purchasers are purchasing for their own account and not for resale.

Choice "b" is incorrect. General solicitation is prohibited. Thus, public advertisement is neither required nor allowed.

Choices "c" and "d" are incorrect. There are no such rules. Resale generally is restricted for two years. CPA-01798 Type1 M/C A-D Corr Ans: A PM#46 R 7-99

171. CPA-01798 May 91 #34 Page 23

On May 1, 1991, two months after becoming insolvent, Quick Corp., an appliance wholesaler, filed a voluntary petition for bankruptcy under the provisions of Chapter 7 of the Federal Bankruptcy Code. On October 15, 1990, Quick's board of directors had authorized and paid Erly $50,000 to repay Erly's April 1, 1990, loan to the corporation. Erly is a sibling of Quick's president. On March 15, 1991, Quick paid Kray $100,000 for inventory delivered that day. Quick's payment to Kray would: a. Not be voidable, because it was a contemporaneous exchange.




b. Not be voidable, unless Kray knew about Quick's insolvency. c. Be voidable, because it was made within 90 days of the bankruptcy filing. d. Be voidable, because it enabled Kray to receive more than it otherwise would receive from the

bankruptcy estate. CPA-01798 Explanation Choice "a" is correct. Quick's payment to Kray would not be voidable because even though payment occurred during the 90-day preference period, it was a "contemporaneous exchange" of equivalent value and therefore not a preference.

Choices "b", "c", and "d" are incorrect. It was a contemporaneous exchange of equivalent value. Thus it is irrelevant whether:

- Kray knew about Quick's insolvency; - It was made within 90 days of bankruptcy; or - It enabled Kray to receive more than it would have from Quick's bankruptcy estate. CPA-01799 Type1 M/C A-D Corr Ans: C PM#47 R 7-99

172. CPA-01799 May 91 #33 Page 23

On May 1, 1991, two months after becoming insolvent, Quick Corp., an appliance wholesaler, filed a voluntary petition for bankruptcy under the provisions of Chapter 7 of the Federal Bankruptcy Code. On October 15, 1990, Quick's board of directors had authorized and paid Erly $50,000 to repay Erly's April 1, 1990, loan to the corporation. Erly is a sibling of Quick's president. On March 15, 1991, Quick paid Kray $100,000 for inventory delivered that day. Which of the following is not relevant in determining whether the repayment of Erly's loan is a voidable preferential transfer? a. Erly is an insider. b. Quick's payment to Erly was made on account of an antecedent debt. c. Quick's solvency when the loan was made by Erly. d. Quick's payment to Erly was made within one year of the filing of the bankruptcy petition. CPA-01799 Explanation Choice "c" is correct. The debtor's solvency at the time the loan was made by the creditor is not relevant. The debtor's solvency at the time the loan is paid is relevant.

Choice "a" is incorrect. It is relevant that Erly is an insider (a close relative of Quick's president); the preference period for insiders is extended from 90 days to 12 months.

Choice "b" is incorrect. It is relevant that Quick's payment to Erly was for an antecedent debt; otherwise it would not be voidable as a preference.

Choice "d" is incorrect. It is relevant that quick's payment to Erly was made within one year of filing; payments for antecedent debt to an insider within one year of bankruptcy are voidable as a preference if the creditor knew the debtor was insolvent. CPA-01804 Type1 M/C A-D Corr Ans: D PM#48 R 7-99

173. CPA-01804 May 91 #32 Page 29

Peters Co. repairs computers. On February 9, 1991, Stark Electronics Corp. sold Peters a circuit tester on credit. Peters executed an installment note for the purchase price, a security agreement covering the tester, and a financing statement that Stark filed on February 11, 1991. On April 13, 1991, creditors other than Stark filed an involuntary petition in bankruptcy against Peters. What is Stark's status in Peters' bankruptcy? a. Stark will be treated as an unsecured creditor because Stark did not join in the filing against Peters. b. Stark's security interest constitutes a voidable preference because the financing statement was not

filed until February 11.




c. Stark's security interest constitutes a voidable preference because the financing statement was filed within 90 days before the bankruptcy proceeding was filed.

d. Stark is a secured creditor and can assert a claim to the circuit tester that will be superior to the claims of Peters' other creditors.

CPA-01804 Explanation Choice "d" is correct. A secured creditor's claim is superior to the claims of all other creditors if the security interest is perfected before the petition in bankruptcy is filed. Stark is a secured creditor because:

1. Peters signed a security agreement; 2. Stark gave value (credit to purchase the circuit tester); and 3. Peters had rights in the collateral (received the circuit tester).

Furthermore, Stark's security interest will be treated as having been perfected on February 9, because he filed within 30 days of attachment (30-day relation back rule for PMSI's in equipment) and so the security interest does not constitute a preference given on an antecedent debt. Because the bankruptcy petition was not filed until April 13, Stark's security interest is superior.

Choice "a" is incorrect. No such rule.

Choices "b" and "c" are incorrect. Because of the 30-day relation back rule for PMSI's in equipment, Stark's perfected security interest is not treated as received in exchange for an antecedent debt, even though the financing statement was not filed until 2 days after attachment occurred. Thus, it is not a voidable preference. CPA-01805 Type1 M/C A-D Corr Ans: D PM#49 R 7-99

174. CPA-01805 May 91 #29 Page 16

Unger owes a total of $50,000 to eight unsecured creditors and one fully secured creditor. Quincy is one of the unsecured creditors and is owed $18,000. Quincy has filed a petition against Unger under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Unger has been unable to pay debts as they become due. Unger's liabilities exceed Unger's assets. Unger has filed papers opposing the bankruptcy petition. Which of the following statements regarding Quincy's petition is correct? a. It will be dismissed because the secured creditor failed to join in the filing of the petition. b. It will be dismissed because three unsecured creditors must join in the filing of the petition. c. It will be granted because Unger's liabilities exceed Unger's assets. d. It will be granted because Unger is unable to pay Unger's debts as they become due. CPA-01805 Explanation Choice "d" is correct. There are three requirements to be successfully petitioned involuntarily into bankruptcy:

1. The debtor must owe at least $13,475 in unsecured debt; 2. If there are 12 or more creditors, at least 3 with unsecured claims aggregating at least $13,475 must

join in the petition; otherwise one creditor with at least $13,475 in unsecured claims may file; and 3. The debtor is unable to pay debts as they become due (equity sense bankruptcy).

Choice "a" is incorrect. Secured creditors need not join (and usually would not do so because they are protected by their security interests).

Choice "b" is incorrect. There were fewer than 12 creditors here, so only one is needed to file.

Choice "c" is incorrect. Insolvency in the bankruptcy sense (liabilities exceeding assets) is not a criterion for involuntary bankruptcy. CPA-01819 Type1 M/C A-D Corr Ans: B PM#50 R 7-99

175. CPA-01819 May 91 #2 Page 9




Kent, without authority, contracted to buy computer equipment from Fox Corp. for Ace Corp. Kent told Fox that Kent was acting on Ace's behalf. For Ace to ratify the contract with Fox, a. Kent must be a general agent of Ace. b. Ace must know all material facts relating to the contract at the time it is ratified. c. Ace must notify Fox that Ace intends to ratify the contract. d. Kent must have acted reasonably and in Ace's best interest. CPA-01819 Explanation Choice "b" is correct. In order to ratify the contract (ratification of an entire unauthorized act) between Kent and Fox, Ace (principal) must have knowledge of all material facts of the transaction (and want to ratify) it at the time of the ratification.

Choice "a" is incorrect. Ratification of an unauthorized act does not require that the party acting be a general agent.

Choice "c" is incorrect. The principal (Ace) need not give notice of the intent to ratify because the third party already presumed the principal was bound through the agent's act.

Choice "d" is incorrect. There is no requirement that the agent must have acted reasonably and in the principal's best interest; the principal is given the option to ratify even if the agent acted recklessly and in his own interest. CPA-01826 Type1 M/C A-D Corr Ans: C PM#51 R 7-99

176. CPA-01826 May 91 #1 Page 3

Simpson, Ogden Corp.'s agent, needs a written agency agreement to: a. Enter into a series of sales contracts on Ogden's behalf. b. Hire an attorney to collect a business debt owed Ogden. c. Purchase an interest in undeveloped land for Ogden. d. Retain an independent general contractor to renovate Ogden's office building. CPA-01826 Explanation Choice "c" is correct. Under the law of agency, a writing will be required where the agreement concerns the purchase of land (real estate). This is one area of agency law that follows the statute of frauds under contract law.

Choice "a" is incorrect, since there is no requirement of a writing where an agent enters into a series of sales contracts on behalf of a principal.

Choice "b" is incorrect, since there is no requirement of a writing where the agent acts to hire an attorney to collect a debt for the principal.

Choice "d" is incorrect, since there is no requirement for a written agency agreement where the agent seeks to hire a contractor to renovate the principal's building. Note that this is a contract for services to be performed on real property and is not a contract for real property itself; therefore it does not come within the land provision discussed in choice "c". CPA-01829 Type1 M/C A-D Corr Ans: D PM#52 R 7-99

177. CPA-01829 Nov 90 #43 Page 40

Imperial Corp. is offering $450,000 of its securities under Rule 504 of Regulation D of the Securities Act of 1933. Under Rule 504, Imperial is required to: a. Provide full financial information to all non-accredited purchasers. b. Make the offering through general solicitation. c. Register the offering under the provisions of the Securities Exchange Act of 1934. d. Notify the SEC within 15 days after the first sale of the securities.




CPA-01829 Explanation Choice "d" is correct. The issuer (Imperial) must notify the SEC within 15 days after the first sale of securities for any Regulation D sale (Rules 504, 505 and 506).

Choices "a", "b", and "c" are incorrect. Under Rule 504:

- No "specific" disclosure (financial information) is required for any investor. - General solicitation generally is prohibited; and - Registration under the 1934 Act is not required under Rule 504. CPA-01832 Type1 M/C A-D Corr Ans: B PM#53 R 7-99

178. CPA-01832 Nov 90 #39 Page 36

The registration requirements of the Securities Act of 1933 are intended to provide information to the SEC to enable it to: a. Evaluate the financial merits of the securities being offered. b. Ensure that investors are provided with adequate information on which to base investment decisions. c. Prevent public offerings of securities when management fraud or unethical conduct is suspected. d. Assure investors of the accuracy of the facts presented in the financial statements. CPA-01832 Explanation Choice "b" is correct. The registration requirements of the Securities Act of 1933 are intended to ensure that investors are provided with adequate information on which to base investment decisions.

Choice "a" is incorrect. The SEC does not determine the financial merits of the offering.

Choice "c" is incorrect. The registration requirements are not designed to prevent management fraud or unethical conduct.

Choice "d" is incorrect. The SEC does not determine the accuracy of the facts presented in the financial statements. It merely establishes penalties for those who present inaccurate facts. CPA-01835 Type1 M/C A-D Corr Ans: D PM#54 R 7-99

179. CPA-01835 Nov 90 #35 Page 22

A debtor who filed voluntarily and received a discharge in bankruptcy under the provisions of Chapter 7 of the Federal Bankruptcy Code: a. May obtain another voluntary discharge in bankruptcy under Chapter 7 after five years have elapsed

from the date of the prior filing. b. Will receive a discharge of any and all debts owed. c. Is precluded from owning or operating a similar business for two years. d. Must surrender for distribution to the creditors any amount received as an inheritance if received

within 180 days after filing the petition. CPA-01835 Explanation Choice "d" is correct. An inheritance received within 180 days after filing of the petition must be surrendered for distribution to the creditors.

Choice "a" is incorrect. A debtor can obtain another voluntary discharge in bankruptcy after eight (not five) years have passed.

Choice "b" is incorrect. Certain debts are not discharged, e.g., alimony, taxes. (Avoid options using words such as "all," "always," and "never.")

Choice "c" is incorrect. A far out distractor; there is no such rule. CPA-01837 Type1 M/C A-D Corr Ans: C PM#55 R 7-99




180. CPA-01837 Nov 90 #33 Page 27

A claim will not be discharged in a bankruptcy proceeding if it: a. Is brought by a secured creditor and remains unsatisfied after receipt of the proceeds from the

disposition of the collateral. b. Is for unintentional torts that resulted in bodily injury to the claimant. c. Arises from an extension of credit based upon false representations by the debtor to the creditor. d. Arises out of the breach of a contract by the debtor. CPA-01837 Explanation Choice "c" is correct. A debt incurred through a fraud on a specific creditor, e.g., by making a false representation to the creditor, is a non-dischargeable debt.

Choice "a" is incorrect, because the unsecured portion of collateralized debt is dischargeable.

Choice "b" is incorrect, because claims for unintentional torts are dischargeable. Debts arising from intentional torts are not dischargeable.

Choice "d" is incorrect, because a claim arising out of a breach of contract is dischargeable. CPA-01839 Type1 M/C A-D Corr Ans: D PM#56 R 7-99

181. CPA-01839 Nov 90 #32 Page 25

Chapter 7 of the Federal Bankruptcy Code will deny a debtor a discharge when the debtor: a. Made a preferential transfer to a creditor. b. Accidentally destroyed information relevant to the bankruptcy proceeding. c. Obtained a Chapter 7 discharge 10 years previously. d. Is a corporation or a partnership. CPA-01839 Explanation Choice "d" is correct. While a corporation or a partnership may voluntarily or involuntarily be petitioned into a Chapter 7 bankruptcy, a corporation or a partnership is "dissolved," while an individual is "discharged."

Choice "a" is incorrect. Making a preferential transfer to a creditor will not cause the debtor to be denied a discharge. The transfer will simply be set aside by the trustee in bankruptcy.

Choice "b" is incorrect. The accidental destruction of information relevant to the bankruptcy will not cause a discharge to be denied. The intentional destruction or failure to keep such records will result in denial.

Choice "c" is incorrect. A Chapter 7 discharge may be obtained once every eight years. CPA-01842 Type1 M/C A-D Corr Ans: D PM#57 R 7-99

182. CPA-01842 Nov 90 #29 Page 20

A contested involuntary petition in bankruptcy will be dismissed if the debtor: a. Owes unsecured obligations exceeding $13,475 to less than three creditors. b. Had all its property taken to enforce a lien within 120 days of filing. c. Is failing to pay undisputed debts as they become due. d. Is an individual engaged in the business of farming. CPA-01842 Explanation Choice "d" is correct. An individual engaged in the business of farming cannot be involuntarily petitioned into bankruptcy.

Choice "a" is incorrect. One creditor who is owed at least $13,475 or more in unsecured debt may involuntarily petition the debtor into bankruptcy.

Choice "b" is incorrect. A far out distractor.




Choice "c" is incorrect. Just the opposite, because a debtor who is not paying undisputed debts as they become due (i.e., bankruptcy in the equity sense) may be involuntarily petitioned into bankruptcy. CPA-01846 Type1 M/C A-D Corr Ans: C PM#58 R 7-99

183. CPA-01846 Nov 90 #28 Page 25

Flax, a sole proprietor, has been petitioned involuntarily into bankruptcy under the Federal Bankruptcy Code's liquidation provisions. Simon & Co., CPAs, has been appointed trustee of the bankruptcy estate. If Simon also wishes to act as the tax return preparer for the estate, which of the following statements is correct? a. Simon is prohibited from serving as both trustee and preparer under any circumstances because

serving in that dual capacity would be a conflict of interest. b. Although Simon may serve as both trustee and preparer, it is entitled to receive a fee only for the

services rendered as a preparer. c. Simon may employ itself to prepare tax returns if authorized by the court and may receive a separate

fee for services rendered in each capacity. d. Although Simon may serve as both trustee and preparer, its fee for services rendered in each

capacity will be determined solely by the size of the estate. CPA-01846 Explanation Choice "c" is correct. A court appointed trustee may serve as both a trustee of an estate and also be its tax return preparer if authorized by the court. The CPA may receive a separate fee for services rendered in each capacity.

Choices "a" and "b" are incorrect because of the rule set forth above.

Choice "d" is incorrect. There is no such rule. CPA-01848 Type1 M/C A-D Corr Ans: A PM#59 R 7-99

184. CPA-01848 Nov 90 #6 Page 42

Holly Corp. engaged Yost & Co., CPAs, to audit the financial statements to be included in a registration statement Holly was required to file under the provisions of the Securities Act of 1933. Yost failed to exercise due diligence and did not discover the omission of a fact material to the statements. A purchaser of Holly's securities may recover from Yost under Section 11 of the Securities Act of 1933 only if the purchaser: a. Brings a civil action within one year of the discovery of the omission and within three years of the

offering date. b. Proves that the registration statement was relied on to make the purchase. c. Proves that Yost was negligent. d. Establishes privity of contract with Yost. CPA-01848 Explanation Choice "a" is correct. The statute of limitations for Section 11 of the Securities Act of 1933 is one year after the discovery of the untrue statement or omission and within three years of the offering date.

Choices "b", "c", and "d" are incorrect, because under Section 11 of the 1933 Act, the purchaser (plaintiff) need not prove:

- Reliance (there is a rebuttable presumption of reliance). - Negligence (or any other level of fault). - Privity of contract (the duty is imposed by statute). Under Section 11, the purchaser (plaintiff) needs to prove only two elements to establish a prima facie case:

1. Material misstatement, and




2. Damages. CPA-01857 Type1 M/C A-D Corr Ans: D PM#60 R 7-99

185. CPA-01857 May 90 #37 Page 40

Zack Limited Partnership intends to sell $6,000,000 of its limited partnership interests. Zack conducts all of its business activities in the state in which it was organized. Zack intends to use the offering proceeds to acquire municipal bonds. Which of the following statements is correct concerning the offering and the registration exemptions that might be available to Zack under the Securities Act of 1933? a. The offering is exempt from registration because of the intended use of the offering proceeds. b. Under Rule 147 (regarding intrastate offerings), Zack may make up to five offers to non-residents

without jeopardizing the Rule 147 exemption. c. If Zack complies with the requirements of Regulation D, any subsequent resale of a limited

partnership interest by a purchaser is automatically exempt from registration. d. If Zack complies with the requirements of Regulation D, Zack may make an unlimited number of

offers to sell the limited partnership interests. CPA-01857 Explanation Choice "d" is correct. Regulation D permits an unlimited number of "offers" to sell securities (e.g., limited partnership interests), but not a "general solicitation" such as by TV or by newspapers.

The limitations of numbers generally pertain to the number of persons who can buy the securities. Generally, any number of "accredited investors" and 35 "non-accredited investors" can buy securities under Regulation D Rule 506 (which is available for offerings exceeding $5,000,000).

Choice "a" is incorrect. There is no exemption that depends on the ultimate use of the solicited funds.

Choice "b" is incorrect. Rule 147 does not allow for any offers to nonresidents.

Choice "c" is incorrect. Resales will be exempt only if they qualify for their own exemption. The rule is not "once exempt, always exempt." CPA-01860 Type1 M/C A-D Corr Ans: A PM#61 R 7-99

186. CPA-01860 May 90 #33 Page 41

Pate Corp. is offering $3 million of its securities solely to accredited investors. Under Rule 505 of Regulation D of the Securities Act of 1933, Pate is: a. Not required to provide any specified information to the accredited investors. b. Permitted to make a general solicitation. c. Not allowed to sell to investors using purchaser representatives. d. Required to provide accredited investors with audited financial statements for the three most recent

fiscal years. CPA-01860 Explanation Choice "a" is correct. Regulation D does not require that any specified information be provided to "accredited" investors. They are presumed sophisticated enough to seek out what they need.

Choice "b" is incorrect. No "general solicitation" (e.g., TV or mass mailings) is permitted under Rule 505.

Choice "c" is incorrect. Pate Corp. is allowed to sell to investors using purchaser representatives.

Choice "d" is incorrect. Regulation D requires only that "non-accredited" investors be provided with audited financial statements for no more than two previous years. CPA-01864 Type1 M/C A-D Corr Ans: C PM#62 R 7-99

187. CPA-01864 May 90 #32 Page 40




Which of the following are exempt from the registration requirements of the Securities Act of 1933? a. Bankers' acceptances with maturities at the time of issue ranging from one to two years. b. Participation interests in money market funds that consist wholly of short-term commercial paper. c. Corporate stock offered and sold only to residents of the state in which the issuer was incorporated

and is doing all of its business. d. All industrial development bonds issued by municipalities. CPA-01864 Explanation Choice "c" is correct. The Securities Act of 1933 exempts from its registration requirements securities traded in intrastate (within the state) commerce.

Choices "a" and "b" are incorrect. No such exemptions. Bankers' acceptances and participation interests in money market funds are "not" exempt from the Securities Act of 1933. Commercial paper itself is exempt if it is due within nine months.

Choice "d" is incorrect. Not all industrial development bonds issued by municipalities are exempt. Only such bonds that serve a governmental purpose are exempt.

(The word "all" ruined this answer. Be careful of words that are totally exclusive or inclusive, such as "always," "never," "all," "none," etc.) CPA-01865 Type1 M/C A-D Corr Ans: B PM#63 R 7-99

188. CPA-01865 May 90 #31 Page 44

Under the Securities Exchange Act of 1934, which of the following individuals would not be subject to the insider reporting provisions? a. An owner of ten percent of a corporation's stock. b. An owner of five percent of a corporation's voting stock. c. The vice-president of marketing. d. A member of the board of directors. CPA-01865 Explanation Choice "b" is correct. An owner of 5% or less of a corporation's voting stock is not subject to the insider reporting provisions (although there are reporting requirements for acquiring 5% of a registered equity).

Choice "a" is incorrect. An owner of more than 10% of a corporation's stock is considered an "insider."

Choice "c" is incorrect. An officer (vice-president) is considered an "insider."

Choice "d" is incorrect. Directors are considered "insiders." CPA-01868 Type1 M/C A-D Corr Ans: A PM#64 R 7-99

189. CPA-01868 May 90 #30 Page 45

Dice, Inc. is a reporting company under the Securities Exchange Act of 1934. The only security Dice issued is voting common stock. With regard to Dice's proxy solicitation requirements, which of the following statements is correct? a. Dice must file its proxy statements with the SEC even though it has only one class of stock

outstanding. b. Dice's current unaudited financial statements must be sent to each shareholder with every proxy

solicitation. c. Shareholder proposals need not be included in the proxy statements unless consented to by a

majority of Dice's board of directors. d. Dice need not provide any particular information to its shareholders unless Dice is soliciting proxies

from them. CPA-01868 Explanation




Choice "a" is correct. A reporting company under the Securities Exchange Act of 1934 must file its proxy statements with the SEC at least 10 days before sending the proxy statements to the shareholders irrespective of the number of stock classes outstanding.

Choice "b" is incorrect. Audited balance sheets for the last 2 years must be sent to each shareholder.

Choice "c" is incorrect. Qualifying shareholder proposals (i.e., those regarding a proper subject for shareholder voting) must be included with the proxy statement whether or not the board consents.

Choice "d" is incorrect. Registrants under the 1934 Act must provide certain information (e.g., Form 10-K - an annual report with audited financial statements, Form 10-Q - a quarterly report, and Form 8-K - a current report) to the SEC. Comparable reports must be sent to shareholders. CPA-01870 Type1 M/C A-D Corr Ans: C PM#65 R 7-99

190. CPA-01870 May 90 #29 Page 37

Under the Securities Act of 1933, the registration of an interstate securities offering is: a. Required only in transactions involving more than $500,000. b. Mandatory, unless the cost to the issuer is prohibitive. c. Required, unless there is an applicable exemption. d. Intended to prevent the marketing of securities which pose serious financial risks. CPA-01870 Explanation Choice "c" is correct. The 1933 Act requires registration of all public sales of securities in interstate commerce unless there is an applicable exemption.

Choice "a" is incorrect. There is no general $500,000 minimum.

Choice "b" is incorrect. Registration is required to protect investors; the cost to the registrant is not relevant.

Choice "d" is incorrect. The 1933 Act protects investors by requiring disclosure of relevant information about the issuer. The SEC does not assess the risk of the issuers' securities, but rather leaves that to the investors who are armed with the required disclosures. CPA-01873 Type1 M/C A-D Corr Ans: B PM#66 R 7-99

191. CPA-01873 May 90 #5 Page 6

Ace engages Butler to manage Ace's retail business. Butler has the implied authority to do all of the following, except: a. Purchase inventory for Ace's business. b. Sell Ace's business fixtures. c. Pay Ace's business debts. d. Hire or discharge Ace's business employees. CPA-01873 Explanation Choice "b" is correct. An agent hired to manage a business does not have the implied authority to sell the principal's business fixtures. The agent here was hired to manage the principal's retail business, not to dismantle it by selling the business fixtures. Therefore, the act would be considered to be outside the scope of the agency.

Choice "a" is incorrect, since hiring a person as manager of a retail business would include the implied authority to purchase inventory for the principal.

Choice "c" is incorrect, since hiring a person as manager of a retail business would include the implied authority to pay the principal's debts.




Choice "d" is incorrect, since hiring a person as manager of a retail business would include the implied authority to hire or fire employees of the business. CPA-01874 Type1 M/C A-D Corr Ans: D PM#67 R 7-99

192. CPA-01874 May 90 #2 Page 13

Pine, an employee of Global Messenger Co., was hired to deliver highly secret corporate documents for Global's clients throughout the world. Unknown to Global, Pine carried a concealed pistol. While Pine was making a delivery, he suspected an attempt was being made to steal the package, drew his gun and shot Kent, an innocent passerby. Kent will not recover damages from Global if, a. Global discovered that Pine carried a weapon and did nothing about it. b. Global instructed its messengers not to carry weapons. c. Pine was correct and an attempt was being made to steal the package. d. Pine's weapon was unlicensed and illegal. CPA-01874 Explanation Choice "d" is correct. Generally, an employer is not liable in tort for an employee's conduct that constitutes a crime unless the employer authorized the act. Thus, Global would not be liable if Pine was carrying an unlicensed, illegal gun and shot Kent with it.

Choices "a", "b", and "c" are incorrect, because under the doctrine of respondeat superior, a principal can be liable for an agent's torts that were committed within the scope of the employment. The tort need not have been specifically authorized; the employer can be liable for acts incident to the conduct the employee was hired to perform that are actuated by a desire to serve the employer. Obviously, failing to do anything about Pine's carrying a gun does nothing to help Global. Thus, choice "a" is incorrect. Instructing messengers not to carry guns helps some, but it still does not negate the two requirements (an act incident to the employment actuated by an intent to serve the employer), thus choice "b" is incorrect. Pine's motivation for negligently shooting Kent also is irrelevant. Thus, choice "c" is incorrect. CPA-01875 Type1 M/C A-D Corr Ans: C PM#68 R 7-99

193. CPA-01875 Lw May 90 #1 Page 7

Generally, an agency relationship is terminated by operation of law in all of the following situations, except the: a. Principal's death. b. Principal's incapacity. c. Agent's renunciation of the agency. d. Agent's failure to acquire a necessary business license. CPA-01875 Explanation Choice "c" is correct. Either party has the power (but not necessarily the right) to terminate an agency relationship; the agent's termination is called renunciation. Renunciation would terminate the agency not by operation of law but by the acts of the parties.

Choice "a" is incorrect. A principal's death terminates the relationship by operation of law.

Choice "b" is incorrect. A principal must be capable of carrying out the agency relationship; his incapacity terminates the relationship by operation of law.

Choice "d" is incorrect. The failure to acquire a license will terminate the agency by operation of law relationship since it would be unlawful for the agent to act without a necessary license. CPA-01877 Type1 M/C A-D Corr Ans: A PM#69 R 7-99

194. CPA-01877 Nov 89 #39 Page 39




Which of the following types of securities are generally exempt from registration under the Securities Act of 1933? Securities of nonprofit Securities of savings charitable and loan organizations associations a. Yes Yes b. Yes No c. No Yes d. No No CPA-01877 Explanation Choice "a" is correct. Yes - Yes.

The Securities Act of 1933 provides an exemption for:

1. Stock dividends, 2. Municipal bonds issued for government purposes, 3. Securities of:

a. Banks b. Carriers c. S & L associations d. Farm co-ops,

4. Commercial paper (Law 3) due within 9 months, 5. Insurance and conventional annuity contracts, 6. Intrastate issues, and 7. Charitable organizations. Choices "b", "c", and "d" are incorrect, per the above. CPA-01880 Type1 M/C A-D Corr Ans: B PM#70 R 7-99

195. CPA-01880 Nov 89 #35 Page 40

An issuer making an offering under the provisions of Regulation A of the Securities Act of 1933 must file a (an): a. Prospectus. b. Offering statement. c. Shelf registration. d. Proxy. CPA-01880 Explanation Choice "b" is correct. Regulation A is a short form registration that only requires an offering statement (called an "offering circular").

Choice "a" is incorrect. A prospectus is not required under a Regulation A registration.

Choice "c" is incorrect. A shelf registration is a type of constant registration available to certain issuers; it is not part of Regulation A.

Choice "d" is incorrect. A proxy is a type of agency that allows one person to vote another person's stock at a corporate meeting. It is not a Regulation A filing. CPA-01883 Type1 M/C A-D Corr Ans: A PM#71 R 7-99

196. CPA-01883 Nov 89 #27 Page 22

Which of the following assets would be included in a debtor's bankruptcy estate in a liquidation proceeding? a. Proceeds from a life insurance policy received 90 days after the petition was filed.




b. An inheritance received 270 days after the petition was filed. c. Property from a divorce settlement received 365 days after the petition was filed. d. Wages earned by the debtor after the petition was filed. CPA-01883 Explanation Choice "a" is correct. Proceeds from life insurance, inheritance or divorce settlement received within 180 days after the filing of the petition are included in the estate.

Choices "b" and "c" are incorrect. They were received outside of the 180-day period.

Choice "d" is incorrect. Post-petition wages are excluded from the estate. CPA-01888 Type1 M/C A-D Corr Ans: B PM#72 R 7-99

197. CPA-01888 Nov 89 #25 Page 19

Filing a valid petition in bankruptcy acts as an automatic stay of actions to: Garnish the Collect alimony debtor's wages from the debtor a. Yes Yes b. Yes No c. No Yes d. No No CPA-01888 Explanation Choice "b" is correct. The "automatic stay" created upon filing a petition in bankruptcy stops any attempt by creditors to collect through the garnishment of the debtor's wages. However, it does not stop the collection of alimony.

Choices "a", "c", and "d" are incorrect, per the above. CPA-01892 Type1 M/C A-D Corr Ans: C PM#73 R 7-99

198. CPA-01892 Nov 89 #23 Page 19

The filing of an involuntary petition in bankruptcy: a. Allows creditors to continue their collection actions against the debtor while the bankruptcy action is

pending. b. Terminates liens associated with exempt property. c. Stops the enforcement of a judgment lien against property in the bankruptcy estate. d. Terminates all security interests in property in the bankruptcy estate. CPA-01892 Explanation Choice "c" is correct. The filing of a petition in bankruptcy (voluntary or involuntary) stops the enforcement of all judgment liens and collection actions against the debtor (called "automatic stay").

Choice "a" is incorrect. The automatic stay stops creditors from pursuing collection actions against the debtor while the bankruptcy is pending.

Choice "b" is incorrect. Liens against the debtor's property (exempt or otherwise) are not terminated upon the filing of a petition in bankruptcy (voluntary or involuntary); they are merely stayed.

Choice "d" is incorrect. Security interests in the debtor's property do not terminate upon the filing of a petition in bankruptcy (voluntary or involuntary); they continue until the secured interest is satisfied. CPA-01897 Type1 M/C A-D Corr Ans: B PM#74 R 7-99

199. CPA-01897 Nov 89 #22 Page 26




Rolf, an individual, filed a voluntary petition in bankruptcy. A general discharge in bankruptcy will be denied if Rolf: a. Negligently made preferential transfers to certain creditors within 90 days of filing the petition. b. Unjustifiably failed to preserve Rolf's books and records. c. Filed a fraudulent federal income tax return two years prior to filing the petition. d. Obtained a loan by using financial statements that Rolf knew were false. CPA-01897 Explanation Choice "b" is correct. A voluntary petition in bankruptcy will be denied if the debtor failed to keep or preserve adequate books and records.

Choice "a" is incorrect. A "preferential transfer" does not result in a denial of a discharge in bankruptcy. The "preferential transfer" is merely set aside.

Choice "c" is incorrect. The debt owed to the government for the tax and penalties due will not be discharged (both because of their nature as taxes and penalties owed to the government and due to the fraud). However, this type of fraud is not a ground for denying the whole bankruptcy petition.

Choice "d" is incorrect. Obtaining a loan by using knowingly false financial statements would result in the denial of a discharge on that debt (loan) only. CPA-01901 Type1 M/C A-D Corr Ans: C PM#75 R 7-99

200. CPA-01901 Nov 89 #3 Page 11

Parc contracted with Furn Brothers Corp. to buy hotel furniture and fixtures on behalf of Global Motor House, a motel chain. Global instructed Parc to use Parc's own name and not to disclose to Furn that Parc was acting on Global's behalf. Who is liable to Furn on this contract? Parc Global a. Yes No b. No Yes c. Yes Yes d. No No CPA-01901 Explanation Choice "c" is correct. Yes - Yes.

The third party to a contract with an agent for an undisclosed principal may elect to hold either the subsequently discovered principal or the agent liable. CPA-01905 Type1 M/C A-D Corr Ans: B PM#76 R 7-99

201. CPA-01905 Nov 89 #2 Page 12

A principal will not be liable to a third party for a tort committed by an agent: a. Unless the principal instructed the agent to commit the tort. b. Unless the tort was committed within the scope of the agency relationship. c. If the agency agreement limits the principal's liability for the agent's tort. d. If the tort is also regarded as a criminal act. CPA-01905 Explanation Choice "b" is correct. Generally, a principal is not liable for an agent's torts. However, there is an exception to this general rule for principals who are employers. An employer can be held vicariously liable for the torts of an employee that occur within the scope of employment.

Choice "a" is incorrect, since the principal has potential liability for torts committed by an employee within the scope of employment whether or not he/she instructs the agent to commit the tort.




Choice "c" is incorrect, since agreements between the principal and agent will not affect the rights of third parties.

Choice "d" is incorrect. Although criminal acts normally are outside the scope of an agency relationship, the principal may be liable for a tort that is also a criminal violation if the principal authorized the conduct. CPA-01907 Type1 M/C A-D Corr Ans: C PM#77 R 7-99

202. CPA-01907 May 89 #45 Page 41

Maco Limited Partnership intends to sell $6,000,000 of its limited partnership interests. The state in which Maco was organized is also the state in which it carries on all of its business activities. If Maco intends to offer the limited partnership interests in reliance on Rule 506 of Regulation D under the Securities Act of 1933 to prospective investors residing in several states, which of the following statements is correct? a. The offering will be exempt from the anti-fraud provisions of the Securities Exchange Act of 1934. b. Any subsequent resale of a limited partnership interest by a purchaser will be exempt from

registration. c. Maco may make an unlimited number of offers to sell the limited partnership interests. d. No more than 35 purchasers may acquire the limited partnership interests. CPA-01907 Explanation Choice "c" is correct. There is no limit on the number of offers that can be made under the securities laws. There are some restrictions on the number of sales that can be made under some rules. For example, in a Rule 506 offering, the number of sales that can be made to unaccredited investors is limited to 35.

Choice "a" is incorrect. The anti-fraud provisions apply even if the securities are exempt from registration or the transactions are exempt from registration as long as interstate commerce is involved.

Choice "b" is incorrect. There is no exemption for resales. Resales must qualify for their own exemptions.

Choice "d" is incorrect. While there can be no more than 35 unaccredited investors under Rule 506, sales can be made to an unlimited number of accredited investors (e.g., banks, rich people) who are sophisticated in financial transactions. CPA-01908 Type1 M/C A-D Corr Ans: C PM#78 R 7-99

203. CPA-01908 May 89 #44 Page 40

Maco Limited Partnership intends to sell $6,000,000 of its limited partnership interests. The state in which Maco was organized is also the state in which it carries on all of its business activities. If Maco intends to offer the limited partnership interests in reliance on Rule 147, the intrastate registration exception under the Securities Act of 1933, which one of the following statements is correct? a. Maco may make up to five offers to nonresidents without the offering being ineligible for the Rule 147

exemption. b. The offering is not exempt under Rule 147 because it exceeds $5,000,000. c. Under Rule 147, certain restrictions apply to resales of the limited partnership interests by

purchasers. d. Rule 147 limits to 100 the number of purchasers of the limited partnership interests. CPA-01908 Explanation Choice "c" is correct. The Securities Act of 1933 provides an exception in the case of intrastate issues. Rule 147 provides that for 9 months after the last sale by the issuer, resales can only be made to residents of the state.

Choice "a" is incorrect. Rule 147 requires that all offerees and buyers be residents of state.




Choice "b" is incorrect. Rule 147 does not have a dollar cap on the offering.

Choice "d" is incorrect. Rule 147 does not have a limit on the number of purchasers. CPA-01910 Type1 M/C A-D Corr Ans: A PM#79 R 7-99

204. CPA-01910 May 89 #43 Page 39

Which of the following securities is exempt from registration under the Securities Act of 1933? a. A class of shares of stock given in exchange for another class by the issuer to its existing

shareholders without payment of a commission. b. Limited partnership interests sold for the purpose of acquiring funds to invest in bonds issued by the

United States. c. Corporate debentures that were previously subject to an effective registration statement, provided

they are convertible into shares of common stock. d. Shares of common stock, provided their par value is less than $1.00 and they are nonvoting. CPA-01910 Explanation Choice "a" is correct. Under the Securities Act of 1933, an exemption exists for securities exchanged by the issuer exclusively with its existing shareholders so long as no commission is paid and both sets of securities are issued by the same person.

Choice "b" is incorrect. Limited partnership interests are subject to registration even if the partnership is formed to invest in U.S. bonds.

Choice "c" is incorrect. There is no securities exemption for corporate debentures and there is no general "resale" transaction exemption, either.

Choice "d" is incorrect. There is no securities exemption for low priced, nonvoting stock. CPA-01911 Type1 M/C A-D Corr Ans: B PM#80 R 7-99

205. CPA-01911 May 89 #41 Page 43

Pace Corp. previously issued 300,000 shares of its common stock. The shares are now actively traded on a national securities exchange. The original offering was exempt from registration under the Securities Act of 1933. Pace has $2,500,000 in assets and 425 shareholders. With regard to the Securities Exchange Act of 1934, Pace is: a. Required to file a registration statement because its assets exceed $2,000,000 in value. b. Required to file a registration statement even though it has fewer than 500 shareholders. c. Not required to file a registration statement because the original offering of its stock was exempt from

registration. d. Not required to file a registration statement unless insiders own at least 5% of its outstanding shares

of stock. CPA-01911 Explanation Choice "b" is correct. Because the securities of Pace Corp. are traded on a national securities exchange, Pace is required to file a registration statement under the 1934 Act.

Choice "a" is incorrect. The requirement to file here under the 1934 Act is not based on the asset base but rather on the fact that the securities are traded on a national exchange.

Choice "c" is incorrect. While the original offering may be exempt under the 1933 Securities Act, the 1934 Securities Act requires the filing of a registration statement since the securities are traded on a national securities exchange.

Choice "d" is incorrect. No such rule! CPA-01913 Type1 M/C A-D Corr Ans: C PM#81 R 7-99




206. CPA-01913 May 89 #13 Page 4

Simmons, an agent for Jensen, has the express authority to sell Jensen's goods. Simmons also has the express authority to grant discounts of up to 5% of list price. Simmons sold Hemple goods with a list price of $1,000 and granted Hemple a 10% discount. Hemple had not previously dealt with either Simmons or Jensen. Which of the following courses of action may Jensen properly take? a. Seek to void the sale to Hemple. b. Seek recovery of $50 from Hemple only. c. Seek recovery of $50 from Simmons only. d. Seek recovery of $50 from either Hemple or Simmons. CPA-01913 Explanation Choice "c" is correct. It would be reasonable for a third party to rely on a sales agent's title and status to believe that the agent would have authority to give a 10% discount. Thus, Simmons had apparent authority to grant the discount and Jensen is bound to the contract with Hemple and cannot recover the extra $50 from him. However, Jenson will be entitled to recover $50 from Simmons because Simmons was disobedient and breached the agency contract by giving a 10% discount.

Choices "a", "b", and "d" are incorrect, because Simmons had apparent authority to bind Jensen. Thus, the contract is enforceable and Jensen may only recover from Simmons. CPA-01914 Type1 M/C A-D Corr Ans: B PM#82 R 7-99

207. CPA-01914 Lw May 89 #11 Page 5

Pell is the principal and Astor is the agent in an agency coupled with an interest. In the absence of a contractual provision relating to the duration of the agency, who has the right to terminate the agency before the interest has expired? Pell Astor a. Yes Yes b. No Yes c. No No d. Yes No CPA-01914 Explanation Choice "b" is correct. An agency relationship can normally be terminated by either the principal or the agent, but this is not true in the case of an agency coupled with an interest (basically, where the agent pays for the right to be an agent). A principal has no authority to terminate an agency with an interest, although the agent does have such a right. CPA-01916 Type1 M/C A-D Corr Ans: A PM#83 R 7-99

208. CPA-01916 Lw Nov 88 #1 Page 3

Anker wishes to give Mix power of attorney. In general, the power of attorney: a. May limit Mix's authority to specific transactions. b. Must be signed by both Anker and Mix. c. Will be valid only if Mix is a licensed attorney at law. d. May continue in existence after Anker's death. CPA-01916 Explanation Choice "a" is correct. A power of attorney (an agency appointing the agent as the principal's attorney in fact) can limit the agent's authority to specific matters; this is called a "special power of attorney."

Choice "b" is incorrect. Only the principal needs to sign a power of attorney.

Choice "c" is incorrect. The agent (attorney in fact) need not be a licensed attorney; "attorney" in this context means "one who acts for another," rather than "lawyer."




Choice "d" is incorrect. Unless a power of attorney provides that it is durable, it ends by operation of law on the incapacity or death of the principal. CPA-02208 Type1 M/C A-D Corr Ans: C PM#84 R 7-99

209. CPA-02208 Nov 89 #60 Page 53

To recover under a property insurance policy, an insurable interest must exist: When the policy At the time is purchased of loss a. Yes Yes b. Yes No c. No Yes d. No No CPA-02208 Explanation Choice "c" is correct. No - Yes.

To recover under a property insurance policy, an insurable interest must exist at the time of the loss. The insurable interest need not exist when the policy is purchased. CPA-02285 Type1 M/C A-D Corr Ans: A PM#85 R 7-99

210. CPA-02285 Nov 90 #57 Page 54

One of the primary purposes of including a coinsurance clause in a property insurance policy is to: a. Encourage the policyholder to insure the property for an amount close to its full value. b. Make the policyholder responsible for the entire loss caused by some covered perils. c. Cause the policyholder to maintain a minimum amount of liability insurance that will increase with

inflation. d. Require the policyholder to insure the property with only one insurance company. CPA-02285 Explanation Choice "a" is correct. The primary purpose of co-insurance is to encourage (not require) the insured to insure property for an amount close to the full value. If the insured elects to insure for less, he/she will share in the loss as a co-insurer.

Choice "b" is incorrect. As noted above, the policyholder shares in the loss.

Choice "c" is incorrect. No such rule! It is the responsibility of the policyholder to see that the insurance coverage keeps up with inflation.

Choice "d" is incorrect. A policyholder may insure with any number of companies. CPA-02305 Type1 M/C A-D Corr Ans: C PM#86 R 7-99

211. CPA-02305 Nov 91 #59 Page 54

In 1985, Ring purchased a building for $90,000 and insured it with a $90,000 fire insurance policy having a standard 80% coinsurance clause. Ring never increased the amount of the policy. In 1990, the building, worth $120,000, was destroyed by fire. What amount could Ring collect from the insurance company? a. $0 b. $72,000 c. $90,000 d. $120,000 CPA-02305 Explanation




Choice "c" is correct. With total destruction of the property, co-insurance does not apply. Since Ring has $90,000 in insurance, Ring can recover $90,000. CPA-02306 Type1 M/C A-D Corr Ans: C PM#87 R 7-99

212. CPA-02306 Nov 91 #60 Page 55

Mason Co. maintained two standard fire insurance policies on one of its warehouses. Both policies included an 80% coinsurance clause and a typical "other insurance" clause. One policy was with Ace Fire Insurance, Inc., for $24,000, and the other was with Thrifty Casualty Insurance Co., for $16,000. At a time when the warehouse was worth $100,000, a fire in the warehouse caused a $40,000 loss. What amounts can Mason recover from Ace and Thrifty, respectively?

a. $0 and $0. b. $10,000 and $10,000. c. $12,000 and $8,000. d. $24,000 and $16,000. CPA-02306 Explanation Choice "c" is correct. Mason Co. may recover a total of $20,000.

Combined face of policies LossCo insurance% FMV of asset

×− ×

$24,000 $16,000 $40,000

80% $100,000+ ×

×= $20,000 recovery

Allocation of loss:

Ace 24,000/40,000 = 60% = $12,000 recovery

Thrifty 16,000/40,000 = 40% = $8,000 recovery CPA-02333 Type1 M/C A-D Corr Ans: D PM#88 R 7-99

213. CPA-02333 Nov 92 #57 Page 53

Daly tried to collect on a property insurance policy covering a house that was damaged by fire. The insurer denied recovery, alleging that Daly had no insurable interest in the house. In which of the following situations will the insurer prevail? a. The house belongs to a corporation of which Daly is a 50% stockholder. b. Daly is not the owner of the house but a long-term lessee. c. The house is held in trust for Daly's mother and, on her death, will pass to Daly. d. Daly gave an unsecured loan to the owner of the house to improve the house. CPA-02333 Explanation Choice "d" is correct. In order to have an insurable interest in property, a person must have a recognized interest in the property at the time of the loss. An unsecured creditor does not have any interest in any particular item of a debtor's property.

Choice "a" is incorrect, since Daly has a controlling interest in the corporation he/she would have an insurable interest.

Choice "b" is incorrect. As a lessee Daly would have an insurable interest in the house.

Choice "c" is incorrect. As a potential beneficiary of the trust Daly would have an insurable interest in the house, which is held in trust. CPA-02355 Type1 M/C A-D Corr Ans: C PM#89 R 7-99




214. CPA-02355 May 90 #45 Page 53

Pulse Corp. maintained a warehouse where it stored its manufactured goods. Pulse received an order from Star. Shortly after Pulse identified the goods to be shipped to Star, but before moving them to the loading dock, a fire destroyed the warehouse and its contents. With respect to the goods, which of the following statements is correct?

a. Pulse has title but no insurable interest. b. Star has title and an insurable interest. c. Pulse has title and an insurable interest. d. Star has title but no insurable interest. CPA-02355 Explanation Choice "c" is correct. Generally, title and risk of loss pass to a buyer from a merchant upon tender of delivery. Until that time, the merchant seller has an insurable interest, too. However, a buyer from a merchant seller obtains an insurable interest in the goods as soon as they are identified to the contract. Thus, Pulse, the seller here, had both title to the goods and an insurable interest because the goods had been identified but not delivered.

Choice "a" is incorrect. Pulse has title and an insurable interest for the reasons stated above.

Choice "b" is incorrect. Star does not have title but does have an insurable interest for the reasons stated above.

Choice "d" is incorrect. Star does not have title but does have an insurable interest for the reasons stated above. CPA-04183 Type1 M/C A-D Corr Ans: A PM#90 R 7-99

215. CPA-04183 Lw Nov 95 #3a 1 Page 29

On June 1, 2007, Rusk Corp. was petitioned involuntarily into bankruptcy. At the time of the filing, Rusk had the following creditors:

• Safe Bank, for the balance due on the secured note and mortgage on Rusk's warehouse. • Employee salary claims. • 2006 federal income taxes due. • Accountant's fees outstanding. • Utility bills outstanding.

Prior to the bankruptcy filing, but while insolvent, Rusk engaged in the following transactions:

• On February 1, 2007, Rusk repaid all corporate directors' loans made to the corporation. • On May 1, 2007, Rusk purchased raw materials for use in its manufacturing business and paid cash

to the supplier. This question relates to Rusk's creditors and the February 1 and May 1 transactions. Select from the list below whether only statement I is correct, whether only statement II is correct, whether both statements I and II are correct, or whether neither statement I nor II is correct. I. Safe Bank's claim will be the first paid of the listed claims because Safe is a secured creditor.

II. Safe Bank will receive the entire amount of the balance of the mortgage due as a secured creditor regardless of the amount received from the sale of the warehouse.

A. I only. B. II only. C. Both I and II. D. Neither I nor II. CPA-04183 Explanation Choice "A" is correct.




I. In bankruptcy, a secured creditor is paid before the priority claimants.

II. A secured creditor's priority extends only to the extent of the proceeds of the sale and the amount owed; if the debt owed to the secured creditor exceeds the value of the collateral, the secured creditor is treated as a general creditor with regard to the deficiency and is unlikely to recover much with respect to the deficiency.


216. CPA-04194 Lw Nov 95 #3a 2 (Adapted) Page 30





to the supplier. This question relates to Rusk's creditors and the February 1 and May 1 transactions. Select from the list below whether only statement I is correct, whether only statement II is correct, whether both statements I and II are correct, or whether neither statement I nor II is correct. I. The employee salary claims will be paid in full after the payment of any secured party.

II. The employee salary claims up to $10,950 per claimant will be paid before payment of any general creditors' claims.

A. I only. B. II only. C. Both I and II. D. Neither I nor II. CPA-04194 Explanation Choice "B" is correct.

I. Employees have a fourth priority for salary claims to the extent of $10,950 per claimant, but there is no guarantee that they will be paid in full.

II. Employee salary claims have priority only to the extent of $10,950 per claimant.


217. CPA-04199 Lw Nov 95 #3a 3 Page 31








to the supplier. This question relates to Rusk's creditors and the February 1 and May 1 transactions. Select from the list below whether only statement I is correct, whether only statement II is correct, whether both statements I and II are correct, or whether neither statement I nor II is correct. I. The claim for 2006 federal income taxes due will be paid as a secured creditor claim.

II. The claim for 2006 federal income taxes due will be paid prior to the general creditor claims.

A. I only. B. II only. C. Both I and II. D. Neither I nor II. CPA-04199 Explanation Choice "B" is correct.

I. Tax claims have an eighth priority; they are not treated as secured.

II. Tax claims have an eighth priority and are paid before general creditors.


218. CPA-04201 Lw Nov 95 #3a 4 Page 23





to the supplier. This question relates to Rusk's creditors and the February 1 and May 1 transactions. Select from the list below whether only statement I is correct, whether only statement II is correct, whether both statements I and II are correct, or whether neither statement I nor II is correct. I. The February 1 repayments of the directors' loans were preferential transfers even though the

payments were made more than 90 days before the filing of the petition.

II. The February 1 repayments of the directors' loans were preferential transfers because the payments were made to insiders.

A. I only. B. II only. C. Both I and II. D. Neither I nor II. CPA-04201 Explanation Choice "C" is correct.




I. and II. Payments to insiders while the debtor is insolvent within one year of the bankruptcy can be set aside as preferential. The payments to directors here repay loans and were made within one year of the bankruptcy and while the debtor was insolvent.


219. CPA-04203 Lw Nov 95 #3a 5 Page 24





to the supplier. This question relates to Rusk's creditors and the February 1 and May 1 transactions. Select from the list below whether only statement I is correct, whether only statement II is correct, whether both statements I and II are correct, or whether neither statement I nor II is correct. I. The May 1 purchase and payment was not a preferential transfer because it was a transaction in the

ordinary course of business.

II. The May 1 purchase and payment was a preferential transfer because it occurred within 90 days of the filing of the petition.

A. I only. B. II only. C. Both I and II. D. Neither I nor II. CPA-04203 Explanation Choice "A" is correct.

I. and II. The purchase and payment were not preferential because the transaction was in the ordinary course of business.

CPA-04206 Type1 M/C Y,N Corr Ans: Y PM#95 R 7-99

220. CPA-04206 Lw May 93 #2 1 Page 23

On April 15, 2007, Wren Corp., an appliance wholesaler, was petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. When the petition was filed, Wren's creditors included:

Secured creditors Amount owed Fifth Bank - 1st mortgage on warehouse owned by Wren $50,000 Hart Manufacturing Corp. - perfected purchase money security interest in inventory 30,000 TVN Computers, Inc. - perfected security interest in office computers 15,000

Unsecured creditors Amount owed IRS - 2005 federal income taxes $20,000 Acme Office Cleaners - services for January, February, and March 2007 750




Ted Smith (employee) - February and March 2007 wages 2,400 Joan Sims (employee) - March 2007 commissions 1,500 Power Electric Co. - electricity charges for January, February, and March 2007 600 Soft Office Supplies - supplies purchased in 2006 2,000

The following transactions occurred before the bankruptcy petition was filed:

• On December 31, 2006, Wren paid off a $5,000 loan from Mary Lake, the sister of one of Wren's directors.

• On January 30, 2007, Wren donated $2,000 to Universal Charities. • On February 1, 2007, Wren gave Young Finance Co. a security agreement covering Wren's office

fixtures to secure a loan previously made by Young. • On March 1, 2007, Wren made the final $1,000 monthly payment to Integral Appliance Corp. on a

two-year note. • On April 1, 2007, Wren purchased from Safety Co., a new burglar alarm system for its factory, for

$5,000 cash.

All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a transaction that occurred before the filing of the bankruptcy petition. For this transaction, determine if the transaction would be set aside as a preferential transfer by the bankruptcy court. Select (Y) if the transaction would be set aside or (N) if the transaction would not be set aside. ∙ Payment to Mary Lake N. No Y. Yes CPA-04206 Explanation "Yes" is the correct answer. The payment to Mary constitutes a preferential transfer. The transfer of the debtor's property was made for the benefit of a creditor on account of an antecedent debt while the debtor was insolvent and within one year of the filing of the bankruptcy petition. The one year rule (rather than the 90 day rule) is used since Mary, as a close relative of a director, would be considered an insider. CPA-04219 Type1 M/C Y,N Corr Ans: N PM#96 R 7-99

221. CPA-04219 Lw May 93 #2 2 Page 23



Unsecured creditors Amount owed IRS - 2005 federal income taxes $20,000 Acme Office Cleaners - services for January, February, and March 2007 750 Ted Smith (employee) - February and March 2007 wages 2,400 Joan Sims (employee) - March 2007 commissions 1,500 Power Electric Co. - electricity charges for January, February, and March 2007 600 Soft Office Supplies - supplies purchased in 2006 2,000









$5,000 cash.

All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a transaction that occurred before the filing of the bankruptcy petition. For this transaction, determine if the transaction would be set aside as a preferential transfer by the bankruptcy court. Select (Y) if the transaction would be set aside or (N) if the transaction would not be set aside. ∙ Donation to Universal Charities N. No Y. Yes CPA-04219 Explanation "No" is the correct answer. The donation is not a preferential transfer because it was not given on account of an antecedent debt. Instead the donation can be set aside as a fraudulent transfer. CPA-04222 Type1 M/C Y,N Corr Ans: Y PM#97 R 7-99

222. CPA-04222 Lw May 93 #2 3 Page 23









$5,000 cash.




All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a transaction that occurred before the filing of the bankruptcy petition. For this transaction, determine if the transaction would be set aside as a preferential transfer by the bankruptcy court. Select (Y) if the transaction would be set aside or (N) if the transaction would not be set aside. ∙ Security agreement to Young Finance Co. N. No Y. Yes CPA-04222 Explanation "Yes" is the correct answer. The security interest constitutes a preferential transfer since it was a transfer of the debtor's property made for the benefit of a creditor given on account of an antecedent debt within 90 days of the filing of the bankruptcy petition. CPA-04225 Type1 M/C Y,N Corr Ans: N PM#98 R 7-99

223. CPA-04225 Lw May 93 #2 4 Page 16









$5,000 cash.

All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar.




This question represents a transaction that occurred before the filing of the bankruptcy petition. For this transaction, determine if the transaction would be set aside as a preferential transfer by the bankruptcy court. Select (Y) if the transaction would be set aside or (N) if the transaction would not be set aside. ∙ Payment to Integral Appliance Corp. N. No Y. Yes CPA-04225 Explanation "No" is the correct answer. Although this does meet all of the requisites for a preferential transfer, there is an exception from the voidable preference rule for transfers in the ordinary course of business. The payment here was the last payment of an installment note in the ordinary course of business. CPA-04228 Type1 M/C Y,N Corr Ans: N PM#99 R 7-99

224. CPA-04228 Lw May 93 #2 5 Page 24









$5,000 cash.

All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a transaction that occurred before the filing of the bankruptcy petition. For this transaction, determine if the transaction would be set aside as a preferential transfer by the bankruptcy court. Select (Y) if the transaction would be set aside or (N) if the transaction would not be set aside. ∙ Purchase from Safety Co. N. No




Y. Yes CPA-04228 Explanation "No" is the correct answer. This is not a preferential transfer because there was a contemporaneous exchange for new value here (the $5,000 was given in exchange for a new burglar alarm). CPA-04281 Type1 M/C A-E Corr Ans: B PM#100 R 7-99

225. CPA-04281 Lw May 93 #2 6 Page 29









$5,000 cash.

All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a creditor claim against the bankruptcy estate. Select from the following list each creditor's order of payment in relation to the other creditors (Bankruptcy administration expense, Acme Office Cleaners, Fifth Bank, IRS, and Joan Sims). ∙ Bankruptcy administration expense

A. First B. Second C. Third D. Fourth E. Fifth CPA-04281 Explanation Choice "B" is the correct answer. As explained below, bankruptcy administration expenses would be paid second.




The five creditors listed would be paid in the following order:

1. Fifth Bank would be paid first because it is a secured creditor.

2. Bankruptcy administration expenses are paid second (second priority among priority claimants).

3. Joan Sims would be paid third (unpaid wages up to $10,950 within 180 days of filing have a fourth priority among priority claimants). Ted Smith's unpaid wages would be entitled similar priority.

4. The IRS would be paid fourth (tax claims are entitled to an eighth level priority among priority claimants).

5. Acme Office Cleaners would be paid fifth. Acme is not a priority claimant. Thus, Acme would be paid only after the secured creditor and the three priority claimants.

CPA-04282 Type1 M/C A-E Corr Ans: E PM#101 R 7-99

226. CPA-04282 Lw May 93 #2 7 Page 31









$5,000 cash.

All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a creditor claim against the bankruptcy estate. Select from the following list each creditors order of payment in relation to the other creditors (Bankruptcy administration expense, Acme Office Cleaners, Fifth Bank, IRS, and Joan Sims). ∙ Acme Office Cleaners A. First B. Second C. Third




D. Fourth E. Fifth CPA-04282 Explanation Choice "E" is the correct answer. As explained below, Acme is not a secured creditor or priority claimant. Acme would be paid fifth.


1. Fifth Bank would be paid first because they are a secured creditor.


3. Joan Sims would be paid third (unpaid wages up to $10,950 within 180 days of filing have a fourth priority among priority claimants). Ted Smith's unpaid wages would be entitled to similar priority.



CPA-04283 Type1 M/C A-E Corr Ans: A PM#102 R 7-99

227. CPA-04283 Lw May 93 #2 8 Page 29









$5,000 cash.

All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a creditor claim against the bankruptcy estate. Select from the following list each creditors order of payment in relation to the other creditors (Bankruptcy administration expense, Acme Office Cleaners, Fifth Bank, IRS, and Joan Sims).




∙ Fifth Bank A. First B. Second C. Third D. Fourth E. Fifth CPA-04283 Explanation Choice "A" is the correct answer. As explained below, Fifth Bank would be paid first because they are a secured creditor.




3. Joan Sims would be paid third (unpaid wages up to $10,950 within 180 days of filing have a fourth priority among priority claimants). Ted Smith's unpaid wages also would be entitled to similar priority.



CPA-04284 Type1 M/C A-E Corr Ans: D PM#103 R 7-99

228. CPA-04284 Lw May 93 #2 9 Page 31









$5,000 cash.




All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a creditor claim against the bankruptcy estate. Select from the following list each creditors order of payment in relation to the other creditors (Bankruptcy administration expense, Acme Office Cleaners, Fifth Bank, IRS, and Joan Sims). ∙ IRS A. First B. Second C. Third D. Fourth E. Fifth CPA-04284 Explanation Choice "D" is the correct answer. As explained below, the IRS would be paid fourth.




3. Joan Sims would be paid third (unpaid wages up to $10,950 within 180 days of filing have a fourth priority among priority claimants). Ted Smith's unpaid wages would be entitled to similar priority.



CPA-04285 Type1 M/C A-E Corr Ans: C PM#104 R 7-99

229. CPA-04285 Lw May 93 #2 10 Page 30






• On January 30, 2007, Wren donated $2,000 to Universal Charities.




• On February 1, 2007, Wren gave Young Finance Co. a security agreement covering Wren's office fixtures to secure a loan previously made by Young.

• On March 1, 2007, Wren made the final $1,000 monthly payment to Integral Appliance Corp. on a two-year note.

• On April 1, 2007, Wren purchased from Safety Co., a new burglar alarm system for its factory, for $5,000 cash.

All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a creditor claim against the bankruptcy estate. Select from the following list each creditors order of payment in relation to the other creditors (Bankruptcy administration expense, Acme Office Cleaners, Fifth Bank, IRS, and Joan Sims).

∙ Joan Sims A. First B. Second C. Third D. Fourth E. Fifth CPA-04285 Explanation Choice "C" is the correct answer. As explained below, Joan Sims would be paid third.




3. Joan Sims would be paid third (unpaid wages up to $10,950 within 180 days of filing have a fourth priority among priority claimants). Ted Smith's unpaid wages also would be entitled to similar priority.



CPA-04286 Type1 M/C A-N Corr Ans: J PM#105 R 7-99

230. CPA-04286 Lw May 93 #2 11 Page 29












$5,000 cash.

All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a creditor claim against the bankruptcy estate. For the creditor listed, select from the following list the amount the creditor will receive. ∙ TVN Computers, Inc. A. $0 B. $300 C. $600 D. $1,000 E. $1,200 F. $2,000 G. $2,200 H. $2,400 I. $12,000 J. $13,500 K. $15,000 L. $25,000 M. $27,500 N. $30,000 CPA-04286 Explanation Choice "J" is the correct answer. Since TVN is a secured creditor, it gets the proceeds of the sale of the collateral ($12,000). The remaining $3,000 is treated as an unsecured debt, of which TVN will get half ($1,500) (because the facts say general unsecured creditors will receive only 50 cents on the dollar), for a total of $13,500. CPA-04287 Type1 M/C A-N Corr Ans: M PM#106 R 7-99

231. CPA-04287 Lw May 93 #2 12 Page 29



Unsecured creditors Amount owed IRS - 2005 federal income taxes $20,000 Acme Office Cleaners - services for January, February, and March 2007 750




Ted Smith (employee) - February and March 2007 wages 2,400 Joan Sims (employee) - March 2007 commissions 1,500 Power Electric Co. - electricity charges for January, February, and March 2007 600 Soft Office Supplies - supplies purchased in 2006 2,000






$5,000 cash.

All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a creditor claim against the bankruptcy estate. For the creditor listed, select from the following list the amount the creditor will receive. ∙ Hart Manufacturing Corp. A. $0 B. $300 C. $600 D. $1,000 E. $1,200 F. $2,000 G. $2,200 H. $2,400 I. $12,000 J. $13,500 K. $15,000 L. $25,000 M. $27,500 N. $30,000 CPA-04287 Explanation Choice "M" is the correct answer. Since Hart is a secured creditor, it will get the proceeds of the sale of the collateral ($25,000). The remaining $5,000 is treated as an unsecured debt, of which Hart will get half, because the facts say that general unsecured creditors will receive 50 cents on the dollar for a total of $27,500. CPA-04288 Type1 M/C A-N Corr Ans: H PM#107 R 7-99

232. CPA-04288 Lw May 93 #2 13 Page 30












$5,000 cash.

All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a creditor claim against the bankruptcy estate. For the creditor listed, select from the following list the amount the creditor will receive. ∙ Ted Smith A. $0 B. $300 C. $600 D. $1,000 E. $1,200 F. $2,000 G. $2,200 H. $2,400 I. $12,000 J. $13,500 K. $15,000 L. $25,000 M. $27,500 N. $30,000 CPA-04288 Explanation Choice "H" is the correct answer. Smith has a fourth priority claim for up to $10,950 in wages earned within 180 days of the bankruptcy. Since Smith's wages were earned within 180 days of the bankruptcy and there is sufficient money to pay all priority claims in full (otherwise the nonpriority creditors could not receive anything), Smith is entitled to all $2,400 in unpaid wages. CPA-04289 Type1 M/C A-N Corr Ans: B PM#108 R 7-99

233. CPA-04289 Lw May 93 #2 14 Page 31












$5,000 cash.

All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a creditor claim against the bankruptcy estate. For the creditor listed, select from the following list the amount the creditor will receive. ∙ Power Electric Co. A. $0 B. $300 C. $600 D. $1,000 E. $1,200 F. $2,000 G. $2,200 H. $2,400 I. $12,000 J. $13,500 K. $15,000 L. $25,000 M. $27,500 N. $30,000 CPA-04289 Explanation Choice "B" is correct. Power is an unsecured creditor with no priority claim and so, under the facts, will get half of its $600 claim, a total of $300. CPA-04290 Type1 M/C A-N Corr Ans: D PM#109 R 7-99

234. CPA-04290 Lw May 93 #2 15 Page 31












$5,000 cash.

All of Wren's assets were liquidated. The warehouse was sold for $75,000, the computers were sold for $12,000, and the inventory was sold for $25,000. After paying the bankruptcy administration expenses of $8,000, secured creditors, and priority general creditors, there was enough cash to pay each nonpriority general creditor 50 cents on the dollar. This question represents a creditor claim against the bankruptcy estate. For the creditor listed, select from the following list the amount the creditor will receive. ∙ Soft Office Supplies A. $0 B. $300 C. $600 D. $1,000 E. $1,200 F. $2,000 G. $2,200 H. $2,400 I. $12,000 J. $13,500 K. $15,000 L. $25,000 M. $27,500 N. $30,000 CPA-04290 Explanation Choice "D" is correct. Soft is an unsecured creditor with no priority claim and so, under the facts, will get half of its $2,000 claim, a total of $1,000. CPA-04291 Type1 M/C Y,N Corr Ans: Y PM#110 R 7-99




235. CPA-04291 Lw Nov 92 #2 1 Page 40

Butler Manufacturing Corp. planned to raise capital for a plant expansion by borrowing from banks and making several stock offerings. Butler engaged Weaver, CPA, to audit its December 31, 1989, financial statements. Butler told Weaver that the financial statements would be given to certain named banks and included in the prospectuses for the stock offerings. In performing the audit, Weaver did not confirm accounts receivable and, as a result, failed to discover a material overstatement of accounts receivable. Also, Weaver was aware of a pending class action product liability lawsuit that was not disclosed in Butler's financial statements. Despite being advised by Butler's legal counsel that Butler's potential liability under the lawsuit would result in material losses, Weaver issued an unqualified opinion on Butler's financial statements. In May 1990, Union Bank, one of the named banks, relied on the financial statements and Weaver's opinion in giving Butler a $500,000 loan. Butler raised an additional $16,450,000 through the following stock offerings, which were sold completely: • June 1990 - Butler made a $450,000 unregistered offering of Class B nonvoting common stock under

Rule 504 of Regulation D of the Securities Act of 1933. This offering was sold over two years to 30 nonaccredited investors and 20 accredited investors by general solicitation. The SEC was notified eight days after the first sale of this offering.

• September 1990 - Butler made a $10,000,000 unregistered offering of Class A voting common stock under Rule 506 of Regulation D of the Securities Act of 1933. This offering was sold over two years to 200 accredited investors and 30 nonaccredited investors through a private placement. The SEC was notified 14 days after the first sale of this offering.

• November 1990 - Butler made a $6,000,000 unregistered offering of preferred stock under Rule 505 of Regulation D of the Securities Act of 1933. This offering was sold during an one-year period to 40 nonaccredited investors by private placement. The SEC was notified 18 days after the first sale of this offering.

Shortly after obtaining the Union loan, Butler began experiencing financial problems but was able to stay in business because of the money raised by the offerings. Butler was found liable in the product liability suit. This resulted in a judgment Butler could not pay. Butler also defaulted on the Union loan and was involuntarily petitioned into bankruptcy. This caused Union to sustain a loss and Butler's stockholders to lose their investments. As a result: • The SEC claimed that all three of Butler's offerings were made improperly and were not exempt from

registration. • Union sued Weaver for

• Negligence • Common Law Fraud

• The stockholders who purchased Butler's stock through the offerings sued Weaver, alleging fraud under Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934.

These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the June 1990 offering made under Rule 504 of Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Did the offering comply with the dollar limitation of Rule 504?

N. No Y. Yes CPA-04291 Explanation "Yes" is the correct answer. The offering did comply. A Rule 504 offering may not exceed $1 million dollars within a 12-month period.




CPA-04292 Type1 M/C Y,N Corr Ans: N PM#111 R 7-99

236. CPA-04292 Lw Nov 92 #2 2 Page 40









These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the June 1990 offering made under Rule 504 of Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Did the offering comply with the method of sale restrictions?

N. No Y. Yes CPA-04292 Explanation




"No" is the correct answer. The offering did not comply. Use of general solicitation or general advertising is generally prohibited [S.A. Rule 502(c)]. CPA-04293 Type1 M/C Y,N Corr Ans: N PM#112 R 7-99

237. CPA-04293 Lw Nov 92 #2 3 Page 40









These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the June 1990 offering made under Rule 504 of Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Was the offering sold during the applicable time limit?

N. No Y. Yes




CPA-04293 Explanation "No" is the correct answer. Under Rule 504 of the Securities Act of 1933, securities are to be sold within a 12-month period. Since the securities were sold over a two-year period, the offering was not sold during the applicable time limit. CPA-04294 Type1 M/C Y,N Corr Ans: Y PM#113 R 7-99

238. CPA-04294 Lw Nov 92 #2 4 Page 40









These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the June 1990 offering made under Rule 504 of Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N).




Was the SEC notified timely of the first sale of the securities?

N. No Y. Yes CPA-04294 Explanation "Yes" is the correct answer. The SEC was notified timely of the first sale of the securities. Notice of the sales must be given within 15 days of the first sale [S.A. Rule 503]. CPA-04295 Type1 M/C Y,N Corr Ans: Y PM#114 R 7-99

239. CPA-04295 Lw Nov 92 #2 5 Page 40









These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations.




This question relates to the June 1990 offering made under Rule 504 of Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Was the SEC correct in claiming that this offering was not exempt from registration?

N. No Y. Yes CPA-04295 Explanation "Yes" is the correct answer. The SEC was correct. Since Butler used general solicitation, the offering was not exempt. CPA-04296 Type1 M/C Y,N Corr Ans: Y PM#115 R 7-99

240. CPA-04296 Lw Nov 92 #2 6 Page 41












These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the September 1990 offering made under Rule 506 of the Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Did the offering comply with the dollar limitation of Rule 506?

N. No Y. Yes CPA-04296 Explanation "Yes" is the correct answer. The offering did comply. Offerings under Rule 506 are unlimited in amount. CPA-04297 Type1 M/C Y,N Corr Ans: Y PM#116 R 7-99

241. CPA-04297 Lw Nov 92 #2 7 Page 40












These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the September 1990 offering made under Rule 506 of the Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Did the offering comply with the method of sale restrictions?

N. No Y. Yes CPA-04297 Explanation "Yes" is the correct answer. The offering did comply. Use of general solicitation is prohibited, private placement is proper. CPA-04298 Type1 M/C Y,N Corr Ans: Y PM#117 R 7-99

242. CPA-04298 Lw Nov 92 #2 8 Page 41












These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the September 1990 offering made under Rule 506 of the Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Was the offering sold to the correct number of investors?

N. No Y. Yes CPA-04298 Explanation "Yes" is the correct answer. The offering was sold to the correct number of investors. A Rule 506 offering can be made to any number of accredited investors but no more than 35 (sophisticated) unaccredited investors. CPA-04299 Type1 M/C Y,N Corr Ans: Y PM#118 R 7-99

243. CPA-04299 Lw Nov 92 #2 9 Page 40





Shortly after obtaining the Union loan, Butler began experiencing financial problems but was able to stay in business because of the money raised by the offerings. Butler was found liable in the product liability suit. This resulted in a judgment Butler could not pay. Butler also defaulted on the Union loan and was involuntarily petitioned into bankruptcy. This caused Union to sustain a loss and Butler's stockholders to lose their investments. As a result:




• The SEC claimed that all three of Butler's offerings were made improperly and were not exempt from registration.

• Union sued Weaver for • Negligence • Common Law Fraud


These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the September 1990 offering made under Rule 506 of the Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Was the SEC notified timely of the first sale of the securities?

N. No Y. Yes CPA-04299 Explanation "Yes" is the correct answer. The SEC was notified timely of the first sale of the securities. Notice of the sales must be given within 15 days of the first sale [S.A. Rule 503]. CPA-04300 Type1 M/C Y,N Corr Ans: N PM#119 R 7-99

244. CPA-04300 Lw Nov 92 #2 10 Page 41





Shortly after obtaining the Union loan, Butler began experiencing financial problems but was able to stay in business because of the money raised by the offerings. Butler was found liable in the product liability suit. This resulted in a judgment Butler could not pay. Butler also defaulted on the Union loan and was




involuntarily petitioned into bankruptcy. This caused Union to sustain a loss and Butler's stockholders to lose their investments. As a result: • The SEC claimed that all three of Butler's offerings were made improperly and were not exempt from




These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the September 1990 offering made under Rule 506 of the Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Was the SEC correct in claiming that this offering was not exempt from registration?

N. No Y. Yes CPA-04300 Explanation "No" is the correct answer. The SEC was not correct. Butler appears to have complied with Rule 506. CPA-04301 Type1 M/C Y,N Corr Ans: N PM#120 R 7-99

245. CPA-04301 Lw Nov 92 #2 11 Page 40





Shortly after obtaining the Union loan, Butler began experiencing financial problems but was able to stay in business because of the money raised by the offerings. Butler was found liable in the product liability




suit. This resulted in a judgment Butler could not pay. Butler also defaulted on the Union loan and was involuntarily petitioned into bankruptcy. This caused Union to sustain a loss and Butler's stockholders to lose their investments. As a result: • The SEC claimed that all three of Butler's offerings were made improperly and were not exempt from




These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the November 1990 offering made under Rule 505 of Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Did the offering comply with the dollar limitation of Rule 505?

N. No Y. Yes CPA-04301 Explanation "No" is the correct answer. The offering did not comply. A Rule 505 offering must not exceed $5 million. CPA-04302 Type1 M/C Y,N Corr Ans: Y PM#121 R 7-99

246. CPA-04302 Lw Nov 92 #2 12 Page 40












These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the November 1990 offering made under Rule 505 of Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Was the offering sold during the applicable time limit?

N. No Y. Yes CPA-04302 Explanation "Yes" is the correct answer. The offering was sold during the applicable time limit. Sales may not exceed the statutory limit within 12 months. CPA-04303 Type1 M/C Y,N Corr Ans: N PM#122 R 7-99

247. CPA-04303 Lw Nov 92 #2 13 Page 40




• November 1990 - Butler made a $6,000,000 unregistered offering of preferred stock under Rule 505 of Regulation D of the Securities Act of 1933. This offering was sold during an one-year period to 40




nonaccredited investors by private placement. The SEC was notified 18 days after the first sale of this offering.





These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the November 1990 offering made under Rule 505 of Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Was the offering sold to the correct number of investors?

N. No Y. Yes CPA-04303 Explanation "No" is the correct answer. The offering was not sold to the correct number of investors. A Rule 505 offering is limited to 35 unaccredited investors. CPA-04304 Type1 M/C Y,N Corr Ans: N PM#123 R 7-99

248. CPA-04304 Lw Nov 92 #2 14 Page 40












These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the November 1990 offering made under Rule 505 of Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Was the SEC notified timely of the first sale of the securities?

N. No Y. Yes CPA-04304 Explanation "No" is the correct answer. The SEC was not notified timely of the first sale of the securities. Notice of the sales must be given within 15 days of the first sale. CPA-04305 Type1 M/C Y,N Corr Ans: Y PM#124 R 7-99

249. CPA-04305 Lw Nov 92 #2 15 Page 40



• September 1990 - Butler made a $10,000,000 unregistered offering of Class A voting common stock under Rule 506 of Regulation D of the Securities Act of 1933. This offering was sold over two years




to 200 accredited investors and 30 nonaccredited investors through a private placement. The SEC was notified 14 days after the first sale of this offering.






These transactions took place in a jurisdiction providing for accountant's liability for negligence to known and intended users of financial statements and within the applicable statute of limitations. This question relates to the November 1990 offering made under Rule 505 of Regulation D of the Securities Act of 1933. Indicate your answer by selecting either yes (Y) or no (N). Was the SEC correct in claiming that this offering was not exempt from registration?

N. No Y. Yes CPA-04305 Explanation "Yes" is the correct answer. The SEC was correct. The offering was not exempt under Rule 505 because $6 million exceeded the dollar limitation, there were too many nonaccredited investors and the SEC was not notified within 15 days of the first sale.

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