Wiley CPA Examination Review 2000 potx

Additional features of the book include ¢ Writing, time allocation, and study tips see Chapters 1-4 ¢ A Business Law and Professional Responsibilities examination see Appendix A ¢ Min

The coauthors of Wiley CPA Examination Review and the editors and staff of John Wiley & Sons, Inc were greatly saddened by the passing, on May 14, 2000, of Patrick R Delaney The founder and lead author of Wiley GAAP, the longtime author of the popular Wiley CPA Examination Review series, and an outstanding and award-winning academician, Pat Delaney and his substantial achievements will long be remembered and rarely be exceeded His contributions to the 2001 edition

of this book were significant and will continue to be reflected in future editions The current authors are determined to continue in his tradition.

The objective of this work is to provide you with the knowledge to pass the Business Law and Profes- sional Responsibilities portion of the Uniform Certified Public Accounting (CPA) Exam The text is divided

up into fifteen areas of study called modules Each module contains written text with discussion, examples, and demonstrations of the key exam concepts Following each text area, actual American Institute of Certi- fied Public Accountants (AICPA) unofficial questions and answers are presented to test your knowledge We are indebted to the AICPA for permission to reproduce and adapt examination materials from past examina- tions Author constructed questions are provided for new areas or areas that require updating All author constructed questions are modeled after AICPA question formats The multiple-choice questions are grouped into topical areas, giving candidates a chance to assess their areas of strength and weakness Selection and inclusion of topical content is based upon current AICPA Content Specification Outlines Only testable top- ics are presented If the CPA exam does not test it, this text does not present it

Additional features of the book include

¢ Writing, time allocation, and study tips (see Chapters 1-4)

¢ A Business Law and Professional Responsibilities examination (see Appendix A)

¢ Mini outlines to use as last-minute mind joggers (following AICPA official pronouncement outlines)

¢ References to other products that are available to augment your studies for the CPA Exam (following the corresponding study section)

Remaining current is one of the keys to examination success Here is a list of what’s new in this edition of the Wiley CPA Examination Review Business Law and Professional Responsibilities text

¢ The latest AICPA Content Specification Outline for Business Law and Professional Responsibilities

¢ Discussion of the newly designed Objective Answer Sheet with complete instructions on how to complete

Candidates are encouraged to use a variety of CPA preparation materials An entire examination product suite is available from John Wiley & Sons, Inc Each product provides another approach to learning the mate- rial Here is a list of products available for your use

¢ Fast Track Study Guide (0471-35156-3), for last-minute recap, this study guide gives you the core in- formation you need to know

¢ You Can Pass the CPA Exam: Get Motivated (0471-37010-X), the ultimate exam coach with detailed exam-taking strategies, tips, methodical practice regimes, confidence-building techniques, and a mo- tivational audio CD

¢ Wiley CPA Examination Review 5.0 for Windows (0471-32957-6), user-friendly software that lets you practice answering questions in either study mode or exam mode

¢ Focus Notes (Set: 0471-38958-7) uses acronyms and mnemonic devices to help you remember a va- riety of accounting rules and checklists

¢ Wiley Virtual CPA Exam Review multimedia, web-based course provides a virtual classroom with fully interactive practice exams (www.wileyvirtual.com)

For additional product information and CPA updates, go to www wiley.com/cpa

Take no chances! Since the exam often tests new standards within six months of issuance, it is critical to use CPA examination materials that are current, relevant, and exam-based Do not go off on tangents study- ing material that is not tested Stick with the CPA examination experts who can identify testable topics Your comments and suggestions are readily welcomed Please send your thoughts to John Wiley & Sons, Inc., 155 N 3rd Street, Suite 502, DeKalb, Illinois, 60115 The authors thank you for purchasing the most widely used CPA Examination text in the world We are proud of our success rate We hope that very soon

we can add you to the list of successful CPAs that have used Wiley CPA Examination Review products for over 27 years!

Don’t forget to visit our website at www.wiley.com/cpa

for supplements and updates.

Patrick R Delaney was the Arthur Andersen LLP Alumni Professor of Accountancy and Department Chair at Northern Illinois University He received his PhD in Accountancy from the University of Illinois

He had public accounting experience with Arthur Andersen LLP and was coauthor of GAAP: Interpretation and Application, also published by John Wiley & Sons, Inc He served as Vice President and a member of the Illinois CPA Society’s Board of Directors, and was Chairman of its Accounting Principles Committee; was a past president of the Rockford Chapter, Institute of Management Accountants; and had served on numerous other professional committees He was a member of the American Accounting Association, American Insti- tute of Certified Public Accountants, and Institute of Management Accountants Professor Delaney was pub- lished in The Accounting Review and was a recipient of the Illinois CPA Society’s Outstanding Educator Award, NIU’s Excellence in Teaching Award, and Lewis University’s Distinguished Alumnus Award He was involved in NIU’s CPA Review Course as director and instructor

Debra R Hopkins, CPA, CIA, is the current director of the Northern Illinois University CPA Review program She is a full-time faculty member teaching auditing and financial accounting She earned her Bachelor of Accounting Degree from the University of Wisconsin, Oshkosh, and her Master in Accounting Science Degree from Northern Illinois University She obtained her public accounting experience from Ernst

& Young, LLP and Grant Thornton, LLP She has won several teaching awards, including the 1997 Illinois CPA Society Outstanding Educator Award She is the current chair of the Illinois CPA Society Audit and Assurance Committee and a council representative for the Society to the AICPA She has extensive consult- ing experience with public accounting firms in the United States She conducts training seminars on Interna- tional Accounting Standards and International Standards on Auditing throughout the world Her authored works include, You Can Pass the CPA Exam: Get Motivated! published by John Wiley & Sons, Inc

ABOUT THE MAJOR CONTRIBUTING AUTHOR

Duane R Lambert, JD, MBA, CPA, is a Professor of Business Administration at California State University,

Hayward, where he teaches courses in Business Law and Accounting He also has been, on different occasions, a

Visiting Lecturer and Visiting Professor at the University of California, Berkeley Professor Lambert has “Big Five” experience and also has several years experience teaching CPA review courses and helping examinees prepare

successfully for the CPA examination He wrote and revised the Business Law Modules He also prepared answer explanations for the multiple-choice questions and other objective questions

ABOUT THE OTHER CONTRIBUTING AUTHOR

Susan Smith, MA, CAS (English), CPA, Garvey International, Inc Ms Smith taught rhetoric and technical writing

at Northern Illinois University Ms Smith prepared material for “Improving Your Writing” in Chapter 3

Following in the footsteps of an accounting giant such as Dr Patrick R Delaney is a formidable task While it is with much sadness that I take over the duties of a great colleague and friend of many years, it is also with great eagerness that I look forward to continuing the tradition of updating a text that has helped thousands of students pass the CPA exam I do not undertake this task alone The same expert team of contributing authors will continue to provide their assistance and expertise I am extremely grateful to those professors who have supported and believed in my abilities, especially Drs Richard Baker, Gregory Carnes, Edward Foth, Donald Kieso, Curt Norton, and John Simon

The support, comments, and suggestions from users of this text are key elements in serving the needs of CPA candi- dates Please share your thoughts with me so that together we can make a difference and help more people achieve the prestigious CPA certification

This work continues to be a “community effort.” Special recognition must be given to the many individuals who have given so much in time and effort to bring this edition to you: Brenda Bannon, Margy Miller, Pam Miller, Terri

Pourahmadi, Kristi Sandoval, and Toni Simmons

Special thanks goes to my family, Lorraine, Roger, Tony, and Megan Without their love and support nothing could

be accomplished! Gratitude also goes to former CPA candidates Edward Gin, Joyce Hales, Judith Newman, and Jennie Wong, who provided invaluable review assistance

OTHER CONTRIBUTORS AND REVIEWERS

Kathleen Duff, MAS, CPA, has worked extensively for John Wiley & Sons, Inc

Susan Johnson, BS, is working on a MAS degree at Northern Illinois University

Sarah Leonard, is working on a MAS degree at Northern Illinois University

Brad McDonald, BA, JD, instructor of Business Law at Northern Illinois University, Department of Management and Northern Illinois University CPA Review program, reviewed several modules

Sarah Skorburg, BA, is working on a MAS degree at Northern Illinois University

‘Ya BEGINNING YOUR CPA

REVIEW PROGRAM

To maximize the efficiency of your review program, begin by studying (not merely reading) this chapter and the next three chapters of this volume They have been carefully organized and written to provide you with important information to assist you in successfully completing the Business Law and Professional Re- sponsibilities section of the CPA exam Beyond providing a comprehensive outline to help you organize the material tested on the Business Law and Professional Responsibilities exam, Chapter | will assist you in or- ganizing a study program to prepare for the Business Law and Professional Responsibilities exam Self- discipline throughout your study program is essential

GENERAL COMMENTS ON THE EXAMINATION Successful completion of the Business Law and Professional Responsibilities section of the CPA Exami- nation is an attainable goal Keep this point foremost in your mind as you study the first four chapters in this volume and develop your study plan

Purpose of the Examination*

The CPA examination is designed to measure the wide range of knowledge and skills that entry-level CPAs are expected to possess The examination assesses candidates’ knowledge and skills at three different levels of increasing difficulty

1 Understanding The ability to recognize or recall learned materials and grasp the meaning

2 Application The ability to use learned materials in new situations

3 Evaluation The ability to draw conclusions, make decisions, and communicate judgments

* The following general comments are largely adapted from Information for Uniform CPA Examination Candidates, published by the American Institute of Certified Public Accountants Information for Uniform CPA Examination Candidates is usually sent to CPA candidates by their State Board of Accountancy as they apply to sit for the CPA ex- amination If you will not be immediately applying to your State Board of Accountancy to sit for the exam, you may purchase the latest edition by contacting the AICPA order department at 888-777-7077 You can find some of the in- formation on the web at www.aicpa.org/edu/index.htm

Presently, at least 60% of each examination section assesses candidates’ knowledge and skills at the ap- plication and evaluation levels As the majority of the exam is testing at these higher levels of comprehen- sion, it is crucial that candidates know the material rather than merely being familiar with the material The CPA examination is one of many screening devices to assure the competence of those licensed to per- form the attest function and to render professional accounting services Other screening devices include edu- cational requirements, ethics examinations, and work experience

The examination appears to test the material covered in accounting programs of the better business schools It also appears to be based upon the body of knowledge essential for the practice of public account- ing and the audit of a medium-sized client Since the examination is primarily a textbook or academic exami- nation, you should plan on taking it as soon as possible after completing your undergraduate accounting edu- cation

Examination Content

Guidance concerning topical content of the CPA examination in Business Law and Professional Respon- sibilities can be found in a document prepared by the Board of Examiners of the AICPA entitled Content Specification Outlines for the Uniform Certified Public Accountant Examination We have included the con- tent outline for Business Law and Professional Responsibilities at the beginning of Chapter 5 Although the exam is now nondisclosed, the outline should be used as an indication of the topics’ relative importance on past exams

The Board’s objective in preparing this detailed listing of topics tested on the exam is to help “in assuring the continuing validity and reliability of the Uniform CPA Examination.” These outlines are an excellent source of guidance concerning the areas and the emphasis to be given each area on future exams

The AICPA Board of Examiners issued revised Business Law and Professional Responsibilities Content Specification Outlines in May 2000 These are provided to each candidate in Information for Uniform CPA Examination Candidates along with the examination application, or may be purchased by contacting the AICPA order department at 888-777-7077

New accounting and auditing pronouncements, including those in the governmental and not-for-profit ar- eas, are tested six months after the pronouncement’s effective date If early application is permitted, a pro- nouncement is tested six months after the issuance date; candidates are responsible for the old pronouncement also until it is superseded The exam covers the Internal Revenue Code and federal tax regulations in effect six months before the date of the exam For the Business Law and Professional Responsibilities section, fed- eral laws are tested six months following their effective date and of uniform acts one year after their adoption

by a simple majority of jurisdictions This section deals with federal and widely adopted uniform laws If there is no federal or uniform law on a topic, the questions are intended to test knowledge of the law of the majority of jurisdictions Professional ethics questions are based on the AICPA Code of Professional Con- duct because it is national in its application, whereas codes of other organizations and jurisdictions may be limited in their application The AICPA posts content changes regularly on its Internet site The address is www.aicpa.org

Nondisclosure of Examination Questions and Answers

As of May 1996, the Uniform CPA Examination became nondisclosed For each exam section, candi- dates are required to sign a Statement of Confidentiality, which states that they will not divulge the nature and content of any exam question Candidates no longer retain or receive their question booklets after the exam Complete examination questions and answers are no longer published The AICPA does however, periodi- cally release selected questions and answers The released questions are no longer used on actual exams, but they are representative of questions appearing on future exams

Schedule of Examinations

The 2-day Uniform Certified Public Accountant Examination is given twice a year, usually on the first consecutive Wednesday-Thursday in May and November The subject and time schedules are

CPA EXAM SCHEDULE AND FORMAT

FORMAT

Business Law and Professional Responsibilities Wed 9:00 - Noon 50-60% 20-30% 20-30%

2 Other Objective Answer Formats

3 Free Response Essay/Problem

See the beginning of Chapter 5 for a table of contents of question formats by module and topic The exact number of multiple-choice, other objective answer format, and essay questions that appear on the exam 1s un- known Approximately 10 to 15% of the multiple-choice questions are considered to be “pretest” questions Pretesting means that some questions are not counted in the tabulation of the candidate’s final grade The pretest questions are used to help the AICPA develop future examination test question databases

The AICPA no longer lists suggested time limits In order to avoid the possibility of running out of time,

it is imperative that today’s candidate utilize some form of time management See Chapter 4, Allocation of Time, for suggested time management techniques

The following chart lists upcoming examination administrations and the corresponding uniform mailing dates (dates grades will be mailed by the state boards)

Examination Administration Uniform Mailing Date

November 7 and 8, 2001 February 4, 2002

May 8 and 9, 2002 August 5, 2002

In 2003, the AICPA plans to begin using a computerized Uniform CPA Examination As of the publica- tion date of this text, very little information has been released We will post more detailed information as it becomes available on the CPA Examination Review Wiley website at www.wiley.com/cpa

State Boards of Accountancy

The right to practice public accounting as a CPA is governed by individual state statutes While some rules regarding the practice of public accounting vary from state to state, all State Boards of Accountancy use the Uniform CPA Examination and AICPA advisory grading service as one of the requirements to practice public accounting Every candidate should contact the applicable State Board of Accountancy to determine the requirements to sit for the exam (e.g., education, filing dates, references, and fees) A frequent problem candidates encounter is failure to apply by the deadline Apply to sit for the examination early Also, you should use extreme care in filling out the application and mailing the required materials to your State Board of Accountancy If possible, have a friend review your completed application before mailing with check, photo, etc Candidates can be turned down for a particular CPA examination simply because of minor technical details that were overlooked (check not signed, photo not enclosed, question not answered on appli- cation, etc.) Because of the very high volume of applications received in the more populous states, the administrative staff does not have time to call or write to correct minor details and will simply reject your application This can be extremely disappointing particularly after spending many hours preparing to sit for a particular exam

The various state boards, their addresses, and telephone numbers are listed on the following page Be sure to inquire of your state board for specific and current requirements.

STATE BOARD ADDRESS

Dept of Comm and Econ Dev Div of Occ Licensing ¢ P.O Box 110806 ¢ Juneau, AK © 99811-0806

RSA Plaza e 770 Washington Avenue e STE 236 ¢ Montgomery, AL ¢ 36130-0375

101 E Capitol ¢ STE 430 ¢ Little Rock, AR © 72201

3877 N 7th St e STE 106 ¢ Phoenix, AZ ¢ 85014

2000 Evergreen St.e STE 250 ¢ Sacramento, CA ¢ 95815-3832

1560 Broadway ¢ STE 13470 e Denver, CO e 80202

Secretary of State e 30 Trinity Street ® PO Box 150470 ¢ Hartford, CT se 06106

Dept of Consumer & Reg Aff., Rm 7200 © 941 North Capital St., NE, 7” Fl e Washington, DC e 20002

Cannon Bldg e STE 203 ¢ P.O Box 1401 ¢ Dover, DE « 19903

2610 N.W 43rd St e STE 1A e Gainesville, FL ¢ 32606-4599

237 Coliseum Drive e Macon, GA @ 31217-3858

P.O Box 5753 ¢ Hagatua, Guam s 96932

Dept of Commerce & Consumer Affairs ¢ P.O Box 3469 ¢ Honolulu, HI ¢ 96801-3469

1918 S.E Hulsizer Ave ® Ankeny, IA ¢ 50021-3941

P.O Box 83720 ¢ Boise, ID ¢ 83720-0002

505 E Green St e Room 216 ¢ Champaign, IL ¢ 61820-5723

302 W Washington St Rm E034 e Indianapolis, IN ¢ 46204-2246

900 S.W Jackson Street ® STE 556 e Topeka, KS © 66612-1239

332 W Broadway « STE 310 ¢ Louisville, KY ¢ 40202-2115

Pan-American Life Center ® 601 Poydras St e STE 1770 # New Orleans, LA se 70139

239 Causeway St e Boston, MA e 02114

500 N Calvert St e Room 308 e Baltimore, MD ¢ 21202-3651

Dept of Prof & Fin Reg ¢ #35 State House Station « Augusta, ME « 04333-0035

Dept of Consumer & Industry Services ¢ P.O Box 30018 « Lansing, MI ¢ 48909-7518

85 E 7th Pl e STE 125 @ St Paul, MN e 55101

P.O Box 613 ¢ Jefferson City, MO ¢ 65102-0613

653 N State St ® Jackson, MS ¢ 39202-3304

Arcade Bldg, Lower Level e 111 N Jackson ¢ P.O Box 200513 ¢ Helena, MT ¢ 59620-0513

1101 Oberlin Rd ¢ STE 104 e P.O Box 12827 e Raleigh, NC ¢ 27605-2827

2701 S Columbia Rd ¢ Grand Forks, ND ¢ 58201

P.O Box 94725 ¢ Lincoln, NE © 68509-4725

57 Regional Dr ¢ Concord, NH ¢ 03301

P.O Box 45000 ¢ Newark, NJ « 07101

1650 University N.E ¢ STE 400A e Albuquerque, NM e 87102

200 S Virginia St e STE 670 e Reno, NV ¢ 89501-2408

Cultural Ed Center ¢ Room 3013 ¢ Albany, NY ¢ 12230

77 S High St ¢ 18th Fir e Columbus, OH e 43266-0301

4545 North Lincoln Blvd, ¢ STE 165 ¢ Oklahoma City, OK ¢ 73105-3413

3218 Pringle Rd SE #110 ¢ Salem, OR © 97302-6307

P.O Box 2649 e Harrisburg, PA e 17105-2649

Box 3271 e Old San Juan Station e San Juan, Puerto Rico ¢ 00904-3271

P.O Box 11329 ¢ Columbia, SC ¢ 29211-1329

301 E 14th St e STE 200 ¢ Sioux Falls, SD « 57104-5022

500 James Robertson Prkwy @ 2nd Fir ¢ Nashville, TN ¢ 37243-1141

333 Guadalupe Tower 3 ¢ STE 900 @ Austin, TX ¢ 78701-3900

P.O Box 146741 ¢ Salt Lake City, UT ¢ 84114-6741

3600 West Broad Street © Richmond, VA e 23230-4917

P.O Box 3016 © No 1A Gallows Bay Mkt Plaza e Christiansted @ St Croix, VI « 00822

109 State Street ¢ Montpelier, VT ¢ 05609-1106

Box 9131 ¢ Olympia, WA e 98507-9131

1400 E Washington Ave @ P.O Box 8935 ¢ Madison, WI ¢ 53708-8935

200 L & S Bldg © 812 Quarrier St e Charleston, WV ¢ 25301-2695

First Bank Building * 2020 Carey Ave * Suite 100 ¢ Cheyenne, WY e 82001

TELEPHONE #

(907) 465-2580 (334) 242-5700 (501) 682-1520 (602) 255-3648 (916) 263-3680 (303) 894-7800 (860) 509-6179 (202) 442-4461 (302) 739-4522 (352) 955-2165 (912) 207-1400 (671) 735-2559 (808) 586-2696 (515) 281-4126 (208) 334-2490 (217) 333-1565 (317) 232-5987 (785) 296-2162 (502) 595-3037 (504) 566-1244 (617) 727-1806 (410) 333-6322 (207) 624-8627 (517) 241-9249 (651) 296-7937 (573) 751-0012 (601) 354-7320 (406) 444-7765 (919) 733-4222 (800) 532-5904 (402) 471-3595 (603) 271-3286 (973) 504-6380 (505) 841-9108 (775) 786-0231 (518) 474-3836 (614) 466-4135 (405) 521-2397 (503) 378-4181 (717) 783-1404 (787) 722-4816 (401) 227-3185 (803) 896-4492 (605) 367-5770 (615) 741-2550 (512) 305-7850 (801) 530-6720 (804) 367-8505 (340) 773-4305 (802) 828-2191 (360) 753-2586 (608) 266-5511 (304) 558-3557 (307) 777-7551

NOTE: The publisher does not assume responsibility for errors in the above information You should request information concerning requirements

in your State at least six months in advance of the exam dates.

It is possible for candidates to sit for the examination in another state as an out-of-state candidate Candi- dates desiring to do so should contact the State Board of Accountancy in their home state

ATTRIBUTES OF EXAMINATION SUCCESS Your primary objective in preparing for the Business Law and Professional Responsibilities section is to pass Other objectives such as learning new and reviewing old material should be considered secondary The six attributes of examination success discussed below are essential You should study the attributes and work toward achieving/developing each of them before taking the examination

1 Knowledge of Material

Two points are relevant to “knowledge of material” as an attribute of examination success First, there is a distinct difference between being familiar with material and knowing the material Frequently candidates confuse familiarity with knowledge Can you remember when you just could not answer an examination question or did poorly on an examination, but maintained to yourself or your instructor that you knew the material? You probably were only familiar with the material On the CPA examination, familiarity is insufficient; you must know the material Knowledgeable discussion of the material is re- quired on the CPA examination This text contains outlines of the topical areas in business law Return

to the original material (e.g., your business law textbook, UCC Code Sections, etc.) only if the outlines do not reinforce material you already know Second, the Business Law and Professional Responsibilities exam tests a literally overwhelming amount of material at a rigorous level Furthermore, as noted ear- lier, the CPA exam will test new material, sometimes as early as six months after issuance In other words, you are not only responsible for material you learned in your business law course(s), but also for all new developments in business law

Commitment to Exam Preparation

Your preparation for the CPA exam should begin at least four months prior to your scheduled exam date Over the course of your preparation, you will experience many peaks and valleys There will be days when you feel completely prepared and there will also be days when you feel totally overwhelmed This is not unusual and, in fact, should be expected

The CPA exam is a very difficult and challenging exam How many times in your college career did you study months for an exam? Probably not too many Therefore, candidates need to remain focused on the objective succeeding on the CPA exam

Develop a personal study plan so that you are reviewing material daily Of course, you should sched- ule an occasional study break to help you relax, but don’t schedule too many breaks Candidates who dedicate themselves to studying have a much greater chance of going through this process one time On the other hand, a lack of focus and piecemeal preparation will only extend the process over several exams Solutions Approach

The solutions approach is a systematic approach to solving the questions found on the CPA examina- tion Many candidates know the material fairly well when they sit for the CPA exam, but they do not know how to take the examination Candidates generally neither work nor answer questions efficiently in terms of time or grades The solutions approach permits you to avoid drawing “blanks” on CPA exam questions; using the solutions approach coupled with grader orientation (see below) allows you to pick up

a sizable number of points on questions testing material with which you are not familiar Chapter 3 out- lines the solutions approach for multiple-choice, other objective format and essay questions Example questions are worked as well as explained

Grader Orientation

Your score on each section of the exam is determined by the sum of points assigned to individual questions Thus, you must attempt to maximize your points on each individual question The name of the game is to satisfy the grader, as s/he is the one who awards you points Your answer and the grading guide (which conforms closely to the unofficial answer) are the basis for the assignment of points

This text helps you develop grader orientation by analyzing AICPA grading procedures and grading guides (this is explained further in Chapter 2) The authors believe that the solutions approach and grader orientation, properly developed, are worth at least 10 to 15 points on each section to most candidates.

5 Examination Strategy

Prior to sitting for the examination, it is important to develop an examination strategy, i.e., a prelimi- nary inventory of the questions, the order in which to work questions, etc Your ability to cope success- fully with 3 hours of examination can be improved by

a Recognizing the importance and usefulness of an examination strategy

b Using Chapter 4 “Taking the Examination” and previous examination experience to develop a “per- sonal strategy” for the exam

c Testing your “personal strategy” on previous CPA questions under examination conditions (using no reference material and with a time limit)

6 Examination Confidence

You need confidence to endure the physical and mental demands of 3 hours of test-taking under tre- mendous pressure Examination confidence results from proper preparation for the exam which includes mastering the first four attributes of examination success Examination confidence is necessary to enable you to overcome the initial frustration with questions for which you may not be specifically prepared This study manual, when properly used, contributes to your examination confidence Build confi- dence by completing the questions contained herein

Common Candidate Mistakes

The CPA Exam is a formidable hurdle in your accounting career With a first-time pass rate of less than 20%, the level of difficulty is obvious The good news, though, is that about 20% of all candidates (first-time and re-exam) sitting for each examination eventually pass The authors believe that the first-time pass rate could be higher if candidates would be more careful Seven common mistakes that many candidates make are

1 Failure to understand the exam question requirements

2 Misunderstanding the supporting text of the problem

3 Lack of knowledge of material tested, especially recently issued pronouncements

4 Inability to apply the solutions approach

5 Lack of an exam strategy (e.g., allocation of time)

6 Sloppiness and computational errors

7 Failure to proofread and edit

These mistakes are not mutually exclusive Candidates may commit one or more of the above items Remind yourself that when you decrease the number of common mistakes, you increase your chances of successfully becoming a CPA Take the time to read carefully the exam question requirements Don’t jump into a quick start, only to later find out that you didn’t understand what information the examiners were asking for Read slowly and carefully Take time to recall your knowledge Respond to the question asked Apply an exam strategy such as allocating your time among all question formats Don’t spend too much time on the multiple- choice questions, leaving no time to spend on preparing your essay responses Write neatly and label all an- swer sections Upon completion of the essays, proofread and edit your answer Answer questions quickly but precisely, avoid common mistakes, and increase your score

PURPOSE AND ORGANIZATION OF THIS REVIEW TEXTBOOK This book is designed to help you prepare adequately for the Business Law and Professional Responsi- bilities examination There is no easy way to prepare for the successful completion of the CPA Examination; however, through the use of this manual, your approach will be systematic and logical

The objective of this book is to provide study materials supportive to CPA candidates While no guaran- tees are made concerning the success of those using this text, this book promotes efficient preparation by

1 Explaining how to “satisfy the grader” through analysis of examination grading and illustration of the solutions approach

2 Defining areas tested through the use of the content specification outlines described Note that pre- dictions of future exams are not made You should prepare yourself for all possible topics rather than gambling on the appearance of certain questions.

3 Organizing your study program by comprehensively outlining all of the subject matter tested on the examination in 15 easy-to-use study modules Each study module is a manageable task which facili- tates your exam preparation Turn to Chapter 5 and peruse the contents to get a feel for the organiza- tion of this book

4 Providing CPA candidates with previous examination questions organized by topic (e.g., con- tracts, commercial paper, etc.) Questions have also been developed for new areas

5 Explaining the AICPA unofficial answers to the examination questions included in this text The AICPA publishes unofficial answers for all questions from exams administered prior to 1996 and for any released questions from exams administered on or after May 1996 However, no explanation is made of the approach that should have been applied to the examination questions to obtain these un- official answers Relatedly, the AICPA unofficial answers to multiple-choice questions provide no justification and/or explanation

A significant feature of this manual is the grouping of textual material and multiple-choice questions into study sets within the study modules These distinct study sets are numerically sequenced after each textual set and before the related multiple-choice questions The Wiley CPA logo divides each study set For exam- ple, the end of study set two’s review material in the textual material would be marked by ra 2 |, This num- ber corresponds to multiple-choice problem set found in the following multiple-choice section The study sets include a smaller amount of related material than the study modules which provides greater flexi- bility in the individual candidate’s study strategy It may be helpful to place a marker in the pages on which the multiple-choice question set begins and in the companion answer explanation section to avoid continually flipping through the manual to regain one’s spot The answer explanations for the multiple-choice questions also include headings which provide cross references to the text material For example, in Module 9, Com- mercial Paper, a heading appears above the answers to questions dealing with a holder in due course This heading is identified by the letter F To find the topical coverage of a holder in due course in the text, the candidate would refer to the table of contents for Business Law and Professional Responsibilities modules (Chapter 5) and look under the module title (Commercial Paper) for the letter F At the right on the line marked F would be the appropriate page number in Commercial Paper related to a holder in due course

As you read the next few paragraphs which describe the contents of this book, flip through the chapters to gain a general familiarity with the book’s organization and contents Chapters 2, 3, and 4 are to help you

“satisfy the grader.”

Chapter 2 Examination Grading and Grader Orientation

Chapter 3 The Solutions Approach

Chapter 4 Taking the Examination

Chapters 2, 3, and 4 contain material that should be kept in mind throughout your study program Refer back

to them frequently Reread them for a final time just before you sit for the exam

Chapter 5 (Business Law and Professional Responsibilities Modules) contains

1 AICPA Content Specification Outlines of material tested on the Business Law and Professional Re- sponsibilities examination

Multiple-choice questions

Other objective questions

Essay questions

AICPA unofficial answers with the author’s explanations for the multiple-choice questions

AICPA unofficial answers with the author’s explanations for the other objective questions

AICPA unofficial answers prefaced by the author’s answer outlines for the essay questions

Also included at the end of this text is a complete Sample Business Law and Professional Responsibilities Examination The selection of multiple-choice, other objective format, and essays was based on a statistical analysis of recent exams The sample exam is included to enable candidates to gain experience in taking a

“realistic” exam While studying the modules, the candidate can become accustomed to concentrating on fairly narrow topics By working through the sample examination near the end of their study programs, can- didates will be better prepared for taking the actual examination.

Other Textbooks

This text is a comprehensive compilation of study guides and outlines; it should not be necessary to sup- plement them with accounting textbooks and other materials for most topics You probably already have a business law textbook In such a case, you must make the decision whether to replace it and trade familiarity (including notes therein, etc.), with the cost and inconvenience of obtaining the newer text containing a more updated presentation

Before spending time and money acquiring a new book, begin your study program with CPA EXAMINA- TION REVIEW: BUSINESS LAW and PROFESSIONAL RESPONSIBILITIES to determine your need for a supplemental text

Ordering Other Textual Materials

If you want to order AICPA materials, locate an AICPA educator member to order your materials, since educator members are entitled to a 30% discount and may place telephone orders The backlog at the order department is substantial; telephone orders decrease delivery time

Public Accountants P.O Box 2209 Jersey City, NJ 07303-2209

A variety of supplemental CPA products are available from John Wiley & Sons, Inc By using a variety

of learning techniques, such as software, computer-based learning, and audio CDs, the candidate is more likely to remain focused during the study process and to retain information for a longer period of time Visit our website at www.wiley.com/cpa for other products, supplements, and updates

Working CPA Questions

The AICPA content outlines, study outlines, etc., will be used to acquire and assimilate the knowledge tested on the examination This, however, should be only one-half of your preparation program The other half should be spent practicing how to work questions Some candidates probably spend over 90% of their time reviewing material tested on the CPA exam Much more time should be allocated to working previous examination questions under exam conditions Working previous examination questions serves two func- tions First, it helps you develop a solutions approach as well as solutions that will satisfy the grader Sec- ond, it provides the best test of your knowledge of the material

The multiple-choice questions and answer explanations can be used in many ways First, they may be used as a diagnostic evaluation of your knowledge For example, before beginning to review commercial pa- per you may wish to answer 10 to 15 multiple-choice questions to determine your ability to answer CPA ex- amination questions on commercial paper The apparent difficulty of the questions and the correctness of your answers will allow you to determine the necessary breadth and depth of your review Additionally, ex- posure to examination questions prior to review and study of the material should provide motivation You will develop a feel for your level of proficiency and an understanding of the scope and difficulty of past ex- amination questions Moreover, your review materials will explain concepts encountered in the diagnostic multiple-choice questions

Second, the multiple-choice questions can be used as a poststudy or postreview evaluation You should attempt to understand all concepts mentioned (even in incorrect answers) as you answer the questions Refer

to the explanation of the answer for discussion of the alternatives even though you selected the correct re- sponse Thus, you should read the explanation of the unofficial answer unless you completely understand the question and all of the alternative answers

Third, you may wish to use the multiple-choice questions as a primary study vehicle This is probably the quickest but least thorough approach in preparing for the exam Make a sincere effort to understand the question and to select the correct response before referring to the unofficial answer and explanation In many cases, the explanations will appear inadequate because of your lack of familiarity with the topic Always re- fer back to an appropriate study source, such as the outlines and text in this volume, your business law text- book, UCC Code Sections, etc

The multiple-choice questions outnumber the essay questions by greater than 10 to 1 in this book This is similar to recent CPA exams The numbers are somewhat misleading in that many essay questions contain multiple (and often unrelated) parts One problem with so many multiple-choice questions is that you may overemphasize them Candidates generally prefer to work multiple-choice questions because they are

1 Shorter and less time-consuming

2 Solvable with less effort

3 Less frustrating than essay questions

Another problem with the large number of multiple-choice questions is that you may tend to become overly familiar with the questions The result may be that you begin reading the facts and assumptions of previously studied questions into the questions on your examination Guard against this potential problem by reading each multiple-choice question with extra care

Beginning with the May 1992 examination, the AICPA began testing with other objective formats The other objective format questions that were given on previous exams and others prepared by the author are in- corporated in the modules to which they pertain (see the listing of question material at the beginning of Chapter 5) Essay questions require the ability to organize and compose a solution, as well as knowledge of the subject matter Remember, working essay questions is just as important as, if not more important than, working multiple-choice questions The essay questions and unofficial answers may also be used for study purposes without preparation of answers Before turning to the unofficial answers, study the question and outline the solution (either mentally or in the margin of the book) Look at our answer outline preceding the unofficial answer for each question and compare it to your own Next, read the unofficial answer, underlining keywords and phrases The underlining should reinforce your study of the answer’s content and also assist you in learning how to structure your solutions Answer outlines, representing the major concepts found in the unofficial answer, are provided for each Business Law and Professional Responsibilities question These will facilitate your study of essay questions

Remember! The AICPA does not accept solutions in outline form The AICPA expects the grading concepts to be explained in clear, concise, well-organized sentences However, you may prepare answers

in list form as long as the listed items complete a sentence that begins with a lead-in phrase

The questions and solutions in this volume provide you with an opportunity to diagnose and correct any exam-taking weaknesses prior to sitting for the examination Continually analyze your incorrect solutions to determine the cause of the error(s) during your preparation for the exam Treat each incorrect solution as a mistake that will not be repeated (especially on the examination) Also attempt to generalize your weaknesses

so that you may change, reinforce, or develop new approaches to exam preparation and exam taking

After you have reviewed for the Business Law and Professional Responsibilities part of the exam, work the complete Business Law and Professional Responsibilities Sample Exam provided in Appendix A

Remember that these are only suggestions You should modify them to suit your personality, available study time, and other constraints Some of the suggestions may appear trivial, but CPA candidates generally need all the assistance they can get to systemize their study programs

Study Facilities and Available Time

Locate study facilities that will be conducive to concentrated study Factors that you should consider in- clude

1 Noise distraction

2 Interruptions

3 Lighting

4 Availability (e.g., a local library is not available at 5:00 A.M.)

5 Accessibility (e.g., your kitchen table vs your local] library)

6 Desk or table space

You will probably find different study facilities optimal for different times (e.g., your kitchen table during early morning hours and local libraries during early evening hours.)

Next review your personal and professional commitments from now until the exam to determine regularly available study time Formalize a schedule to which you can reasonably commit yourself At the end of this chapter, you will find a detailed approach to managing your time available for the exam preparation program Self-Evaluation

The CPA EXAMINATION REVIEW: BUSINESS LAW and PROFESSIONAL RESPONSIBILITIES self-

study program is partitioned into 15 topics or modules Since each module is clearly defined and should be studied separately, you have the task of preparing for the CPA Business Law and Professional Responsibili- ties exam by tackling 15 manageable tasks Partitioning the overall project into 15 modules makes prepara- tion psychologically easier, since you sense yourself completing one small step at a time rather than seem- ingly never completing one or a few large steps

By completing the following “Preliminary Estimate of Your Present Knowledge of Subject” inventory below, organized by the 15 modules in this program, you will tabulate your strong and weak areas at the be- ginning of your study program This will help you budget your limited study time Note that you should be- gin studying the material in each module by answering up to 1/4 of the total multiple-choice questions cover- ing that module’s topics (see instruction 4.A in the next section) This “mini-exam” should constitute a diag- nostic evaluation as to the amount of review and study you need

PRELIMINARY ESTIMATE OF YOUR PRESENT KNOWLEDGE OF SUBJECT*

[2 1⁄2 hrs.] 1 Study Chapters 2-4 in this volume These chapters are essential to your efficient prepa-

ration program (Time estimate includes candidate’s review of the examples of the solu- tions approach in Chapters 2 and 3.)

[1/2 hr.] 2 Begin by studying the introductory material at the beginning of Chapter 5.

Time estimate: 3 minutes each, not to exceed | hour total

Study the outlines and illustrations Where necessary, refer to your business law textbook and original authoritative pronouncements (e.g., UCC code sections) (This will occur more frequently for topics in which you have a weak background.)

Time estimate: 1 hour minimum per module with more time devoted to topics less familiar to you

Work the remaining multiple-choice questions Study the explanations of the multiple-choice questions you missed or had trouble answering

Time estimate: 3 minutes to answer each question and 2 minutes to study the answer explanation of each question missed

Work the other objective format questions

Time estimate: 20 minutes for each other objective question and 10 minutes to study the answer explanations for each item missed

Under exam conditions, work at least 2 essay questions Work additional questions

to each question and your exam Strategy to the overall exam

You should limit yourself to the time you will have when taking the actual CPA exam section (3 hours for the Business Law and Professional Responsibilities section) Spend time afterwards grading your work and reviewing your effort It might be helpful to do this with other CPA candidates Another person looking over your exam might be more objective and notice things such as clarity of essays, etc

Time estimate: To take the exam and review it later, approximately 4 hours

The total suggested time of 63 hours is only an average Allocation of time will vary candidate by candidate Time requirements vary due to the diverse backgrounds and abilities of CPA candidates

Allocate your time so you gain the most proficiency in the least time Remember that while 63 hours will be required, you should break the overall project down into 15 more manageable tasks Do not study more than one module during each study session

Below are one candidate’s notecards on business law topics which illustrate how key definitions, lists, etc., can be summarized on index cards for quick review Since candidates can take these anywhere they go, they are a very efficient review tool.

Commercial Laper_—> Requirement of Negotiability 1) Consideration of Land (é.e., mortgages, leases) 1) Must be in uniting (anitten)

2) Agreements > 1 year (Prom “dale” of agreement) 2) Must be signed by person who ts ordering payment

3) Answer for Debt of another (seqned)

NOTE: a) Any form will do 4) Must be unconditional

b) tan bein move than one document 5) Hate a specific amount of money (sum certain) c) Writing need net occur al time of contract 6) Contain no other promises or orders

7) Be paryble on demand ov at a definite time ở) Be pyulle ‘Lo Orden” ox “Bearer.”

to essay questions) can be disastrous on the exam You should work a substantial number of essay questions under exam conditions, even though multiple-choice questions are easier to work and are used to gauge your proficiency The authors believe that practicing essay questions will also improve your proficiency on the multiple-choice questions

Multiple-Choice Feedback

One of the benefits of working through previous exam questions is that it helps you to identify your weak areas Once you have graded your answers, your strong areas and weak areas should be clearly evident Yet, the important point here is that you should not stop at a simple percentage evaluation The percentage only provides general feedback about your knowledge of the material contained within that particular module The percentage does not give you any specific feedback regarding the concepts which were tested In order to get this feedback, you should look at the questions missed on an individual basis because this will help you gain a better understanding of why you missed the question

This feedback process has been facilitated by the fact that within each module where the multiple-choice answer key appears, two blank lines have been inserted next to the multiple-choice answers As you grade the multiple-choice questions, mark those questions which you have missed However, instead of just marking the questions right and wrong, you should now focus on marking the questions in a manner which identifies why you missed the question As an example, a candidate could mark the questions in the following manner:

v for math mistakes, x for conceptual mistakes, and ? for areas which the candidate was unfamiliar with The candidate should then correct these mistakes by reworking through the marked questions

The objective of this marking technique is to help you identify your weak areas and thus, the concepts which you should be focusing on While it is still important for you to get between 75% and 80% correct when working multiple-choice questions, it is more important for you to understand the concepts This un- derstanding applies to both the questions answered correctly and those answered incorrectly Remember, questions on the CPA exam will be different from the questions in the book; however, the concepts will be the same Therefore, your preparation should focus on understanding concepts, not just getting the correct an- swer

Conditional Candidates

If you have received conditional status on the examination, you must concentrate on the remaining part(s) Unfortunately, many candidates do not study after conditioning the exam, relying on luck to get them through the remaining part(s) Conditional candidates will find that material contained in Chapters 1-4 and the information contained in the appropriate modules will benefit them in preparing for the remaining part(s)

of the examination.

PLANNING FOR THE EXAMINATION Overall Strategy

An overriding concern should be an orderly, systematic approach toward both your preparation program and your examination strategy A major objective should be to avoid any surprises or anything else that would rattle you during the examination In other words, you want to be in complete control as much as pos- sible Control is of paramount importance from both positive and negative viewpoints The presence of con- trol on your part will add to your confidence and your ability to prepare for and take the exam Moreover, the presence of control will make your preparation program more enjoyable (or at least less distasteful) On the other hand, a lack of organization will result in inefficiency in preparing for and taking the examination, with

a highly predictable outcome Likewise, distractions during the examination (e.g., inadequate lodging, long drive) are generally disastrous

In summary, establishing a systematic, orderly approach to taking the examination is of paramount im- portance

1 Develop an overall strategy at the beginning of your preparation program (see below)

Supplement your overall strategy with outlines of material tested on the Business Law and Profes- sional Responsibilities exam

3 Supplement your overall strategy with an explicitly stated set of question-solving procedures the solutions approach

4 Supplement your overall strategy with an explicitly stated approach to each examination session (See Chapter 4)

5 Evaluate your preparation progress on a regular basis and prepare lists of things “to do.” (See Weekly Review of Preparation Program Progress on following page.)

6 RELAX: You can pass the exam About 10,000 candidates successfully complete the exam each sit- ting You will be one of them if you complete an efficient preparation program and execute well (i.e., solutions approach and exam strategy) while writing the exam

The following outline is designed to provide you with a general framework of the tasks before you You should tailor the outline to your needs by adding specific items and comments

A Preparation Program (refer to Self-Study Program discussed previously)

1 Obtain and organize study materials

2 Locate facilities conducive for studying and block out study time

3 Develop your solutions approach (including solving essay questions as well as multiple-choice and other objective questions)

4 Prepare an examination strategy

5 Study the material tested recently and prepare answers to actual exam questions on these topics under examination conditions

6 Periodically evaluate your progress

B Physical Arrangements

1 Apply to and obtain acceptance from your State Board

2 Reserve lodging for examination night(s)

C Taking the Examination (covered in detail in Chapter 4)

1 Become familiar with exam facilities and procedures

2 Implement examination strategies and the solutions approach

Weekly Review of Preparation Program Progress

The following pages contain a hypothetical weekly review of program progress You should prepare a similar progress chart This procedure, taking only 5 minutes per week, will help you proceed through a more efficient, complete preparation program.

Make notes of materials and topics

1 That you have studied

2 That you have completed

3 That need additional study

Weeks to go Comments on progress, “to do” items, etc

08 2 ) Worked some INC, Other Objective, and Ossay questions in these areas

07 2 ) Worked some INC, Other Objective, and Ossay questions in these areas

3 ') Reviewed remedres for breach

1) Read BANK, DBCR, AGEN — made notecards

06 2 ) Worked some INC, Other Objective, and Ossay questions in these areas

3 yy Reviewed firm offer examples and battle of, forms

05 2 ) Worked some INC, Other Objective, and Ossay questions in these areas

3 y Keguirements of negotiability needs work

7 ) Reviewed, requirements of negotiability —> made notecards

04 2 ) Worked Cssays from vartous mods

03 2 ) Worked some INC, Other Objective, and Ossay questions i these areas

i) evrewed, strong areas —> GOXT CPAP SECU, ete

02 2 ) Worked through Cssays in strong areas

3 ') Worked 27 rn strong areas

4 1) Worked Other Objective questions in strong areas

/ ) Reviewed weak areas > CORP TRUSTS and Estates, Federal Securities Acts

01 2 ) Worked through Ossays in weak areas

3 W Worked HC in weak areas

4 1) Worked Other Objective questions in weak areas

/ ) Took sample exam in Dus Law and Frof Resp

00 2 ) Reviewed exam polices and, ‘procedures

Reviewed notecards Reviewed mint outlines

Time Management of Your Preparation

As you begin your CPA exam preparation, you obviously realize that there is a large amount of material

to cover over the course of the next 3 to 4 months Therefore, it is very important for you to organize your calendar, and maybe even your daily routine, so that you can allocate sufficient time to studying An organ- ized approach to your preparation is much more effective than a last week cram session An organized ap- proach also builds up the confidence necessary to succeed on the CPA exam.

An approach which we have already suggested, is to develop weekly “to do” lists This technique helps you to establish intermediate objectives and goals as you progress through your study plan You can then fo- cus your efforts on small tasks and not feel overwhelmed by the entire process And as you accomplish these tasks you will see yourself moving one step closer to realizing the overall goal, succeeding on the CPA exam Note, however, that the underlying assumption of this approach is that you have found the time during the week to study and thus accomplish the different tasks Although this is an obvious step, it is still a very im- portant step Your exam preparation should be of a continuous nature and not one that jumps around the cal- endar Therefore, you should strive to find available study time within your daily schedule, which can be utilized on a consistent basis For example, everyone has certain hours of the day which are already commit- ted for activities such as jobs, classes, and, of course, sleep There is also going to be the time you spend re- laxing because CPA candidates should try to maintain some balance in their lives Sometimes too much studying can be counterproductive But there will be some time available to you for studying and working through the questions Block off this available time and use it only for exam prep Use the time to accom- plish your weekly tasks and to keep yourself committed to the process After awhile your preparation will develop into a habit and the preparation will not seem as overwhelming as it once did.

NOW IS THE TIME

TO MAKE YOUR COMMITMENT

Va EXAMINATION GRADING

AND GRADER ORIENTATION

Setting the Passi

All State Boards of Accountancy use the AICPA advisory grading service As your grade is to be deter- mined by this process, it is very important that you understand the AICPA grading process and its implica- tions for your preparation program and for the solutions techniques you will use during the examina- tion

The AICPA has a full-time staff of CPA examination personnel whose responsibilities include:

1 Preparing questions for the examination

2 Working with outside consultants who prepare questions

3 Preparing grading guides and unofficial answers

4 Supervising and reviewing the work of examination graders

The AICPA examination staff is under the supervision of the AICPA Board of Examiners, which has respon- sibility for the CPA examination

This chapter contains a description of the AICPA grading process including a determination of the pass- ing standard and a description of AICPA grading in Information for Uniform CPA Examination Candidates Setting the Passing Standard of the Uniform CPA Examination

Until May 1997, the passing standard for the CPA examination was based on the policy that all candidates who achieved a raw score of 75% on each section would pass; however, if nationally fewer than 30% of the candidates achieved this standard, candidates’ raw scores were bumped up to 75 or higher; this policy passed the top 30% on each section for every examination administration Consequently, if a group of candidates were particularly well prepared or not, the top 30% would pass, regardless

Today, the 30% criterion no longer exists, since neither the Board of Examiners (BOE) nor the state boards were comfortable with it The passing standard for each section of the Uniform CPA Examination is currently based on the Angoff passing standard studies which were held during 1996 The procedure, known

as a modified Angoff standard-setting method, generally involves convening a panel of judges familiar with the work of entry-level professionals who evaluate each question of each section of an examination Each panelist’s task is to estimate the probability that a “borderline” or “minimally qualified” professional would answer each question correctly For the May 1996 exam, the panelists were given the questions and official answers for the specific sections they were assigned They were instructed to read each question and assign a minimum pass level (MPL) The individual MPLs were tallied and the panelists were provided with a sum- mary of the range of MPLs they had assigned Then the panelists were given the statistics on actual candidate performance They were then instructed to rate each question again The second set of MPLs for all ques- tions were tallied to arrive at the “initial passing score” that, in the judgment of the panelists, was needed for the minimally qualified candidate to pass that section of the examination

The BOE uses a method called “equating” to determine if one examination is more or less difficult than another examination and to test for evidence that the candidate pools are significantly different Examina- tions are “equated” by imbedding questions from earlier examinations into later ones If the candidate pools are equal in ability, they should perform equally well on the equating questions If the candidates perform significantly better or worse on the equating questions, it is assumed the candidate pools were different.

Grading the Examination

The AICPA exercises very tight control over all of the examination papers during the grading process and prior to their return to the individual State Boards of Accountancy

Multiple-choice and other objective questions are graded electronically Only the candidates’ responses are graded No consideration is given to any comments or explanations The AICPA has begun to pretest multiple-choice questions on the exam; approximately 10-15% of the questions in each section of the exam are pretest questions that are not included in the candidate’s grade Different versions of each exam section contain different pretest questions Essay and problem answers are graded individually on the basis of grading guides Grading guides consist of grading concepts, which are ideas, constructs, principles, etc., that can be clearly defined

While tentative grading guides (answers) are prepared prior to the examination, the final grading guides are based upon a test grading of samples of actual examinations Objective questions are analyzed to deter- mine whether a significant number of candidates selected an answer other than the one identified as the best answer by the AICPA If an alternative answer is determined to be valid, the Grading Subcommittee may accept both answers Other acceptable concepts may be added to the grading guide as a result of the test grading process Additionally, alternative interpretations and approaches to essay and problem solutions may result in changes in the grading guides Once grading guides are fully developed, “production graders” per- form the first grading of the examination The “production graders” are practicing CPAs, university profes- sors, attorneys, etc., commissioned by the AICPA on a per diem basis to grade the examination These grad- ers specialize in a single essay or problem answer and grade answers to that question for about 6 weeks

In this process examination papers move from grader to grader Attached to each essay/problem is a grading guide similar to the “Hypothetical Grading Guide” on page 25 The objective at this stage is to sepa- rate candidates’ papers into three categories: obvious pass, marginal, and obvious failure

A first review is performed by highly experienced graders Essays or problem answers that receive this review fall in the 65-79 range Quality control is obtained in this process because the reviewer examines the work of individual graders to make sure that the grading guides are being applied correctly Grading errors are corrected in this process

Upon completion of the first review for all sections of the exam, a second review is done To qualify for

a second review, the candidates’ papers must earn grades from 72 through 74 on the section of the exam failed According to the Information for Uniform CPA Examination Candidates, as amended, the second re- view consists of

1 Manual verification of the accuracy of the objective answer grade

2 Independent verification of the accuracy of the essay and problem grading by a reviewer who did not perform the first review

Based on this review, candidate grades are adjusted to reflect any scoring inconsistencies Second reviews are also given to failing papers of candidates who need to meet a minimum grade requirement in their state in order to condition the exam

The examination grades are returned to the individual state boards several weeks prior to the official grade release date The grade release date is usually at the beginning of February for the November exam and

at the beginning of August for the May exam

Multiple-Choice Grading

In the past, each correct response on the Business Law and Professional Responsibilities section of the examination was assigned one point Since your grade is based on an overall curve for the Business Law and Professional Responsibilities section of the exam, you should do your best regardless of the difficulty of the questions Perfect and use the “multiple-choice question solutions approach” discussed in Chapter 3 If you are unsure about a particular question, you should make an educated guess (i.e., pick the “best” answer) Your grade will be based on your total correct answers since no penalty exists for incorrect answers The grading procedure for multiple-choice questions is explained in the instructions at the beginning of each sec- tion of the exam As mentioned earlier, 10-15% of the multiple-choice questions are pretest items that are not included in the candidate’s grade The importance of carefully reading and following these and all other in- structions cannot be overemphasized.

Other Objective Question Grading

These questions are also graded electronically The weight for each item will depend on the points as- signed to the question For example, if a question that has been assigned 10 points contains 13 items, each correct response would be worth 77 (10/13) of a point Again, do not be discouraged by your performance; the Business Law and Professional Responsibilities section is curved on an overall basis

Essay Grading

To illustrate the grading of essay questions, we have included an essay question from the Business Law Examination in this section Following the question are the AICPA Unofficial Answer and a hypothetical grading guide

ESSAY QUESTION

On June 1, Classic Corp., a manufacturer of desk

chairs, orally agreed to sell 100 leather desk chairs to Rand

Stores, a chain of retail furniture stores, for $50,000 The

parties agreed that delivery would be completed by Septem-

ber 1, and the shipping terms were “FOB seller’s loading

dock.” On June 5, Classic sent Rand a signed memorandum

of agreement containing the terms orally agreed to Rand

received the memorandum on June 7 and made no response

On July 31, Classic identified the chairs to be shipped

to Rand and placed them on its loading dock to be picked up

by the common carrier the next day That night, a fire on

the loading dock destroyed 50 of the chairs On August 1,

the remaining 50 chairs were delivered to the common car-

rier together with 50 vinyl chairs The truck carrying the

chairs was involved in an accident, resulting in extensive

damage to 10 of the leather chairs and 25 of the vinyl chairs

On August 10, the chairs were delivered to Rand On

August 12, Rand notified Classic that Rand was accepting

40 of the leather chairs and 10 of the vinyl chairs, but the

rest of the shipment was being rejected Rand also informed

Classic that, due to Classic’s failure to perform under the

terms of the contract, Rand would seek all remedies avail-

able under the Sales Article of the UCC

Classic contended that it has no liability to Rand and

that the shipment was strictly an accommodation to Rand

because Rand failed to sign the memorandum of agreement,

thus preventing a contract from being formed

The above parties and transactions are governed by the

provisions of the Sales Article of the UCC

Required:

a Determine whether Classic’s contention is correct and

give the reasons for your conclusion

b Assuming that a valid contract exists between Classic

and Rand, answer the following questions and give the rea-

sons for your conclusions Do not consider any possible

liability owed by the common carrier

1 Who bears the risk of loss for the 50 destroyed

leather chairs?

2 Who bears the risk of loss for the 25 damaged vi-

nyl chairs?

3 What is the earliest date that title to any of the

chairs would pass to Rand?

c With what UCC requirements must Rand comply to be entitled to recover damages from Classic?

d Assuming that a valid contract exists between Classic and Rand, state the applicable remedies to which Rand would be entitled Do not consider any possible liability owed by the common carrier

UNOFFICIAL ANSWER

a Classic’s contention is incorrect Under the provisions

of the Sales Article of the UCC, a written memorandum

stating an agreement between merchants does not have to be

signed by both parties The contract is enforceable against Classic because Classic signed the memorandum and against Rand because Rand did not object to the memorandum within 10 days of receiving it

b 1 Classic bears the risk of loss for the 50 leather chairs destroyed in the fire Even though the goods were identified to the contract and placed on the loading dock, the risk of loss remains with Classic The shipping terms “FOB seller’s loading dock” provide that risk of loss remains with the seller until the goods are delivered to the common car-

rier The 50 leather chairs destroyed in the fire had not yet

been delivered to the carrier

2 Classic bears the risk of loss for the damaged vinyl chairs Even though these goods were delivered to the common carrier, the risk of loss did not pass to Rand be- cause the vinyl chairs were nonconforming goods

3 August 1 was the earliest date that title to any of the chairs passed to Rand Title passed when goods identi- fied to the contract were delivered to the carrier

c Under the Sales Article of the UCC, for Rand to be entitled to damages from Classic, Rand must comply with the following requirements:

¢ Rand has to notify Classic of the rejection of the goods within a reasonable time

¢ Rand must act in good faith with respect to the re- jected goods by following any reasonable instructions from

Classic

¢« Rand must give Classic the opportunity to cure until the contract time of performance expires

d Rand would be entitled to the following remedies:

¢« The right to cancel the contract

¢ The right of cover

¢ The right to recover monetary damages for nonde- livery

Essay questions are generally graded based on the number of grading concepts in the candidate’s solu- tion The grading guide is a list of the grading concepts and raw point(s) assigned to each concept It is nec- essary for candidates to identify all concepts listed in the AICPA Unofficial Answer in order to receive all available points A hypothetical grading guide for the preceding Business Law essay question appears below

In the grading guide which follows, note that each grading concept is summarized by several keywords Graders undoubtedly scan for these keywords during the first grading Note that if one of the writing sam- ples, worth 2 points, were taken from the above essay, then each concept would be worth 1/2 point (8 + 16) However, the number of points allocated to writing skills will not be specified in the candidate’s grade

To assure full credit, however, candidates should be very careful to organize their answers to meet the question requirements; you should answer requirement a in answer a., answer requirement b in answer b., etc Additionally, the efficient use of time is of the utmost importance If you have included grading con- cepts in one part of a question that are applicable to another part of the same question, do not repeat them Simply refer the grader to your previous answer

Two common misconceptions about the AICPA grading of essay questions have cost candidates points in recent years First, answers should not consist of a listing (or outline) of keywords Answers should be set forth in short, concise sentences, organized per the requirements of the question However, it is acceptable to prepare answers in list form so long as the listed items are in sentence form (i.e., the listed items complete an introductory phrase) Second, a candidate should not answer only one or two parts of a question very thor- oughly and leave the remaining parts blank Maximize your points by attempting all question requirements The examiners grade two samples from essay questions (e.g., requirement “c.” from one essay and re- quirement “b.” from another essay) in the Business Law and Professional Responsibilities exam for writing skills Five percent of the points available on each of these sections are allocated to writing skills The sam- ples are graded according to the following characteristics:

6 Appropriateness for the reader The “holistic” grading process will provide for the same graders who grade for content to assign 0-5 points based on their overall evaluation of the six characteristics as follows:

Prior to the actual grading, writing consultants will grade a sample of papers and assign points as shown above The content graders then use the consultant’s evaluations as a guide.

HYPOTHETICAL GRADING GUIDE”

Grading

a Classic’s contention is incorrect

Written memorandum is enforceable against both parties

Against Classic because Classic signed it

Against Rand because contract was between merchants

and Rand did not object to it within 10 days after receiving it

b 1 Classic has risk of loss for the 50 leather chairs destroyed by fire

“FOB seller’s loading dock” means risk of loss remains with the seller

until goods are delivered to carrier

2 Classic has risk of loss for the vinyl chairs

Because sent nonconforming goods

3 August | was earliest date that title of chairs passed to Rand

This is when goods identified to contract were delivered to carrier 900990

Notify Classic of rejection of goods within reasonable time

Follow any reasonable instructions of Classic

Give Classic opportunity to cure until contract time of performance expires 300

d Rand's remedies include rights

To cancel contract

Of cover

To recover monetary damages for nondelivery

The conversion scale below converts the number of concepts mentioned to the grade earned on the question

Mentioned | 16 15 14 13 12 1] 10 9 8 7 6 5 4 3 2 1 0 Grade 10 19.375 | 8.75 {8.125 | 7.5 [6.875 | 6.25 {5.625 | 5 |4.375 | 3.75 13.125 | 2.5 [1.875 | 1.25 |0625| 0

The grading guide might be thought of as a brief outline of the unofficial answer Note the similarities between the grading guide and the unofficial answer shown with question Number 1 In the above grading guide, note that each grading concept is summarized by several keywords Graders undoubtedly scan for keywords during the first grading Note that if one of the writing samples, worth 2 points, were taken from the above essay then each concept would be worth 1/2 point [(10 total points — 2 writing points) + 16 concepts mentioned.] If the candidate received a 4 (out of 5 available writing points) on the writing sample from this question, 1.6 (4/5 x 2) points would be added to the points received for the concepts portion of the question Overall Grade

A hypothetical example appears below to indicate how a candidate’s grade is determined for the Business Law and Professional Responsibilities section of the exam The example presents one possibility for the for- mat and point distribution on this section of the exam Candidates should remember that the point assignment

on the Law exam could consist of 50-60% multiple-choice, 20-30% other objective answer format, and 20- 30% essay

* The AICPA Board of Examiners does not release the grading guides used for scoring essay questions The grading guide above was prepared by the authors to illustrate to candidates the manner in which points are allocated to grading concepts

Type Question Points

74.0

*Excluding pretested questions

**Including writing Skill points

**4TF less than 5, rounding adjustment would be negative

Allocation of Points to Questions

Candidates should be concerned with point allocations for the purpose of allocating their time on the exam When answering each question, candidates should allocate the total examination time in proportion to the question’s point value For more information, see “Allocation of Time” in Chapter 4

Grading Implications for CPA Candidates

Analysis of the grading process helps you understand what graders are looking for and how you can pre-

- gent solutions to “satisfy the grader.” Before turning to Chapter 3 for a discussion of how to prepare solu- tions, consider the following conclusions derived from the foregoing grading analysis

1 Present solutions in a neat and organized manner to maximize points earned

2 Allocate your time based on point value

3 Do your best on every question, no matter how difficult

a Remember that the test is graded on a relative basis

b Ifa question is difficult for you, it probably is difficult for others also

c Develop a “solutions approach” to assist you

4 No supporting notes or computations are required for the multiple-choice questions Use the margins

of the Examination Booklet for related notes The multiple-choice answers are machine-graded and any related work on the Examination Booklet is ignored

5 Essay solutions should be numbered and organized according to the problem requirements (e.g., a., b.1., b.2., c.1., ¢.2., ¢.3.)

a Start your solution to each question at the top of a new page

b Emphasize keywords

c Separate grading concepts into individual sentences or short paragraphs

1) Do not bury grading concepts in lengthy paragraphs that might be missed by the grader In- clude as many sensible grading concepts as possible

2) Use short, uncomplicated sentence structure

3) Do not present your answer in outline format

d Do not omit any requirements

In summary, Satisfy the grader You need neat, readable solutions organized according to the require- ments, which will also be the organization of the grading guides Remember that a legible, well-organized, grammatically correct answer gives a professional appearance Additionally, recognize the plight of the grader having to decipher one mess after another, day after day Give him/her a break with a neat, orderly solution The “halo” effect will be rewarded by additional consideration (and hopefully points!).

Candidate Diagnostic Report

State Boards may include a “Candidate Diagnostic Report” along with the candidates’ scores A sample Business Law and Professional Responsibilities report appears below The report provides useful information

to candidates who must repeat a section In those areas where the percentage of points is low (10% or less),

be cautious as the results are based on very few questions

IV Debtor-Creditor Relationships 10% *

V Government Regulation of Business 15% *

VI Uniform Commercial Code 20% *

NOW IS THE TIME

TO MAKE YOUR COMMITMENT

Va THE SOLUTIONS APPROACH

Multiple-Choice Question Solutions Approach Highlights of the Solutions Approach to Essay

The solutions approach is a systematic problem-solving methodology The purpose is to assure efficient, complete solutions to CPA exam problems, some of which are complex and confusing relative to most under- graduate accounting problems Unfortunately, there appears to be a widespread lack of emphasis on problem- solving techniques in accounting courses Most accounting books and courses merely provide solutions to specific types of problems Memorization of these solutions for examinations and preparation of homework problems from examples is “cookbooking.” “Cookbooking” is perhaps a necessary step in the learning pro- cess, but it is certainly not sufficient training for the complexities of the business world Professional ac- countants need to be adaptive to a rapidly changing complex environment For example, CPAs have been called on to interpret and issue reports on new concepts such as price controls, energy allocations, and new taxes These CPAs rely on their problem-solving expertise to understand these problems and to formulate solutions to them

The steps outlined below are only one of many possible series of solution steps Admittedly, the proce- dures suggested are very structured; thus, you should adapt the suggestions to your needs You may find that some steps are occasionally unnecessary, or that certain additional procedures increase your own problem- solving efficiency Whatever the case, substantial time should be allocated to developing an efficient solu- tions approach before taking the examination You should develop your solutions approach by working ques- tions and problems

Note that the steps below relate to any specific question or problem; overall examination or section strategies are discussed in Chapter 4

Multiple-Choice Question Solutions Approach Algorithm

1 Work individual questions in order

a If a question appears lengthy or difficult, skip it until you can determine that extra time is avail- able Put a big question mark in the margin to remind you to return to questions you have skipped or need to review

2 Cover the choices before reading each question

a The answers are sometimes misleading and may cause you to misread or misinterpret the ques- tion

3 Read each question carefully to determine the topical area

a Study the requirements first so you know which data are important

b | Underline keywords and important data

C Identify pertinent information with notations in the margin of the exam

d Be especially careful to note when the requirement is an exception, for example, “Which of the following is not an effective disclaimer of the implied warranty of merchantability?”

€ If a set of data is the basis for two or more questions, read the requirements of each of the

ques-tions first before beginning to work the first question (sometimes it is more efficient to work the questions out of order or simultaneously)

f Be alert to read questions as they are, not as you would like them to be You may encounter a familiar looking item; don’t jump to the conclusion that you know what the answer is without reading the question completely

4 Anticipate the answer before looking at the alternative answers

a _ Recall the applicable principle (e.g., offer and acceptance, requisites of negotiability, etc.) and the respective applications thereof

b lfa question deals with a complex area, it may be very useful to set up a timeline or diagram using abbreviations

Read the answers and select the best alternative

Mark the correct answer (or your educated guess) on the examination booklet itself

After completing all of the individual questions in an overall question, transfer the answers to the machine gradable answer sheet with extreme care

a Be very careful not to fall out of sequence with the answer sheet A mistake would cause most

of your answers to be wrong Since the AICPA uses answer sheets with varying formats, it would be very easy to go across the sheet instead of down or vice versa Note the format of your answer sheet carefully!

Review to check that you have transferred the answers correctly

C Do not leave this step until the end of the exam as you may find yourself with too little time to transfer your answers to the answer sheet The exam proctors are not permitted to give you extra time to transfer your answers

EXAMPLE: The following is an example of the manner in which the answer sheet should be marked for a multiple-choice question A No 2 pencil should be used to blacken the appropriate oval(s) on the Objective Answer Sheet to indicate the answer

% |o @ ©©@

Multiple-Choice Question Solutions Approach Example

A good example of the multiple-choice solutions approach follows, using an actual multiple-choice ques- tion from the previous Examination in Business Law and Professional Responsibilities

Topical area? Contracts Revocation and Attempted _ ° cEeters brally offered to sell a used

Principle? An offer may be revoked at any time

prior to acceptance and is effective when eon

mower for $150 from@ronson) Mason’s-neighbor

a Incorrect Mason’s acceptance was ineffective be- wrote to Peters to accept the June 15 offer

cause the offer had been revoked prior to Ma- L~ Which of the following statements 3 correct?

c Correct Peters’ offer was effectively revoked received by Peters

when Mason learned that the lawn mower had b hàn s acceptance would be effective when

d Incorrect Peters’ was not obligated to keep the offer c Peters’ offer had nen revoked and Mason’s open because no consideration had been paid by acceptance was Inetfective

Mason Note that if consideration had been d Peters was obligated to keep the June 15 offer open given, an option contract would have been form: until June 20

ed and the offer would have been irrevocable

before June 20

Currently, all multiple-choice questions are scored based on the number correct (i.e., there is no penalty for guessing) The rationale is that a “good guess” indicates knowledge Thus, you should answer all

Other Objective Questions Solutions Approach Algorithm

The following three types of other objective questions have been tested previously on the Business Law and Professional Responsibilities Section:

a) Matching b) Yes/no or true/false c) Numerical computations The following solutions approach is suggested for answering other objective questions:

1 Glance over the entire problem Scan the problem to get a feel for the topical area and related con- cepts that are being tested Even though the format of the question may vary, the exam continues to test your understanding of applicable principles or concepts Relax, take a deep breath, and determine your strategy for conquering the problem

2 Identify the requirements of the problem This step will help you focus in more quickly on the solution(s) without wasting time reading irrelevant material

3 Study the items to be answered As you do this and become familiar with the topical area being tested, you should review the concepts of that area This will help you organize your thoughts so that you can relate logically the requirements of the question with the applicable concepts

4 Answer each item one at a time The type of OOAF question determines how the candidate should accomplish this step For instance, when the answer choices are presented in a matching question, the candidate must first understand how the answer choices apply to the question items The candidate will then be able to differentiate among the answer choices in order to select the appropriate answer for each question You may want to work backwards from the answers to the questions Don’t be afraid to answer questions out of order Just be careful to place your selected answer next to the ap- propriate item number in your question booklet

5 Use time lines, etc., as appropriate The use of these items helps to lay out the information in a

~ logical manner to avoid silly mistakes

6 Mark your selected answer on the examination booklet itself Once the candidate has selected an answer it should be clearly marked on the examination booklet before moving on to the next question

7 After completing all of the items, carefully transfer the answers to the answer sheet It is very important that all items be recorded on the objective answer sheet, as they cannot be graded if they are not

Other Objective Questions Solutions Approach Example

Matching Question Example

On June 10, 1998, Bond sold real property to Edwards for $100,000 Edwards assumed the $80,000 recorded mort- gage Bond had previously given to Fair Bank and gave a $20,000 purchase money mortgage to Heath Finance Heath did not record this mortgage On December 15, 1999, Edwards sold the property to Ivor for $115,000 Ivor bought the property subject to the Fair mortgage but did not know about the Heath mortgage Ivor borrowed $50,000 from Knox Bank and gave Knox a mortgage on the property Knox knew of the unrecorded Heath mortgage when its mortgage was recorded Ivor, Edwards, and Bond defaulted on the mortgages Fair, Heath, and Knox foreclosed and the property was sold at a judicial foreclosure sale for $60,000 At the time of the sale, the outstanding balance of principal and accrued interest on the Fair mortgage was $75,000 The Heath mortgage balance was $18,000 and the Knox mortgage was

$47,500

Fair, Heath, and Knox all claim that their mortgages have priority and should be satisfied first from the sale

proceeds Bond, Edwards, and Ivor all claim that they are not liable for any deficiency resulting from the sale

The above transactions took place in a jurisdiction that has a notice-race recording statute and allows foreclosure de- ficiency judgments

*Estimated time is no longer provided on the Uniform CPA Examination See Allocation of Time” in Chapter 4

101 Knox Bank — Anew of Health € A First Priority

102 Heath Finance B B Second Priority

103 FairBank L-/ixst vecorded ©: ‘Third Priority

b Items 104 through 106 For each mortgage, select from List B the reason for its priority and blacken the corre- sponding oval on the Objective Answer Sheet A reason may be selected once, more than once, or not at all

An unrecorded mortgage has priority over any subse- quently recorded mortgage Z4

B._ A recorded mortgage has priority over any unrecorded mOortgage 2ø

C The first recorded mortgage has priority over all sub- sequent mortgages Tie

D An unrecorded mortgage has priority over a subse- quently recorded mortgage if the subsequent mortga- gee knew of the unrecorded mortgage /»we

E A purchase money mortgage has priority over a pre- viously recorded mortgage G,/,,

c Items 107 through 109 Determine whether each would le to pay a mortgage foreclosure deficiency judgment on the Fair Bank mortgage If the party would be held liable, select from List D the reason for that party’s li- ability and blacken the corresponding oval on the Objective Answer Sheet If you determine there is no liability,

blacken@) on the Objective Answer Sheet A reason may be selected once, more than once, or not at all

109 Ivor-— 1⁄4 My look subject to Dp C Took subject to the mortgage

ước D Not liable.

OTHER OBJECTIVE ANSWERS AND ANSWER EXPLANATIONS

Problem 1

Part a

101.(C) 102.(B) 103.(A) Under a notice-race recording statute, a subsequent mortgagee (lender) who loans money without notice of the previous mortgagee and records the mortgage first has priority over that previous mortgagee Once a mortgagee records, this gives constructive notice to any subsequent parties who then cannot obtain priority over the one who recorded In

this fact pattern, Fair Bank was the first mortgagee Since Fair Bank also recorded this mortgage first, Fair Bank has the first

priority over the subsequent mortgagees Therefore, the answer to number 3 is (A) Of the two remaining mortgagees, Heath

Finance was next in time but did not record the mortgage Knox Bank was third in time and did record However, Knox is

unable to gain priority over Heath because Knox, when it recorded, knew of the Heath mortgage Therefore, Knox does not meet all of the rules necessary to have priority over Heath Thus Heath has the second priority after Fair Bank and Knox has the third priority Therefore, the answer to number 2 is (B) and number | is (C)

Part b

104.(D) 105.(D) 106.(C) This part covers the reason for the priority that applies to each of the mortgagees Reason (A) states that “an unrecorded mortgage has priority over any subsequently recorded mortgage.” This is incorrect for all mortgagees and goes against the policy behind the recording statutes to encourage recording to warn subsequent parties of the previous mort-

gages Reason (B) is not a correct statement It states that “A recorded mortgage has priority over any unrecorded mortgage.”

In this fact pattern, Knox recorded but Heath did not; however, Knox still has a lower priority because Knox knew of the Heath

mortgage when its mortgage was recorded Reason (C) is the correct answer for Fair Bank It states that “the first recorded mortgage has priority over all subsequent mortgages.” This is true because once Fair Bank recorded, subsequent mortgagees had constructive notice of the Fair Bank mortgage and thus could not obtain priority The correct answer to number 6 is there-

fore (C) Reason (D) states that “An unrecorded mortgage has priority over a subsequently recorded mortgage if the subsequent

mortgagee knew of the unrecorded mortgage.” In this fact pattern, the Heath mortgage was the unrecorded mortgage that still had a higher priority than the recorded Knox mortgage because Knox Bank knew of the Heath mortgage when its mortgage was

recorded Thus Knox never fulfilled the rule which would allow it as the subsequent mortgagee, to gain a higher priority Therefore, reason (D) is the correct answer for both Knox Bank, number 4, and Heath Finance, number 5, because the same rule

determines the relative priority of these two parties Note that reason (E) is not a correct statement for any of the mortgagees because there is no rule that gives purchase money mortgages priority over previously recorded mortgages

Part c

107.(B) 108.(A) 109.(D) When a foreclosure sale does not provide enough money to pay off the mortgages, the mortgagee,

in states that allow foreclosure deficiency judgments, will attempt to collect any deficiency from the parties involved In this

fact pattern, Bond is liable because s/he was the original mortgagor on the property and as such agreed to pay the mortgage Thus, (A) is the correct answer for number 11 When Edwards later bought the property from Bond, s/he assumed the Fair Bank mortgage Edwards, thus, became personally liable on the mortgage even though the seller, Bond, also remained liable

Therefore, (B) is the correct answer for number 10 When Ivor subsequently purchased the property from Edwards, Ivor pur-

chased the property subject to the Fair Bank mortgage In so doing, s/he did not accept any liability on the mortgage Note that although reason (C) states “Took subject to the mortgage,” the correct answer for number 12 is (D) “Not liable.” This is true

because the directions to part d indicate that reasons (A), (B), or (C) are to be chosen as reasons for liability and (D) is to be

chosen if the party is not liable

Yes/No and Numerical Computations Example

On April 15, 2000, Wren Corp., an appliance wholesaler, was petitioned involuntarily into bankruptcy under the liquida- tion provisions of Chapter 7 of the Federal Bankruptcy Code

When the petition was filed, Wren’s creditors included

Hart Manufacturing Corp. perfected purchase money security interest in inventory 30,000

TVN Computers, Inc. perfected security interest in office computers 15,000

* Estimated time is no longer provided on the Uniform CPA Examination See “Allocation of Time” in Chapter 4

Unsecured creditors Amount owed

Acme Office Cleaners services for January, February, and March 2000 750

Joan Sims (employee) March 2000 commissions 3,000

Power Electric Co. electricity charges for January, February, and March 2000 600

The following transactions occurred before the bankruptcy petition was filed:

¢ On December 31, 1999, Wren paid off a $5,000 loan from Mary Lake, the sister of one of Wren’s directors

* On January 30, 2000, Wren donated $2,000 to Universal Charities

* On February 1, 2000, Wren gave Young Finance Co a security agreement covering Wren’s office fixtures to secure a loan previously made by Young

* On March 1, 2000, Wren made the final $1,000 monthly payment to Integral Appliance Corp on a 2-year note

° On April 1, 2000, Wren purchased from Safety Co., a new burglar alarm system for its factory, for $5,000 cash

101 Payment to Mary Lake

102 Donation to Universal Charities

103 Security agreement to Young Finance Co

104 Payment to Integral Appliance Corp

105 Purchase from Safety Co

b Items 106 through 110 represent creditor claims against the bankruptcy estate Select from List I each_creditor’s order of payment in relation to the other creditors named in items 106 through 110 and blacken the corresponding oval on the Objective 6 Mame? in tems IO rover 2S ane Answer Sheet

List I

114 Power Electric Co F $ 4300 M $27,500

115 Soft Office Supplies G $ 4,500 N $30,000

OTHER OBJECTIVE ANSWERS AND ANSWER EXPLANATIONS

Problem 2

Part a

The trustee in bankruptcy may set aside preferential transfers of nonexempt property made to a creditor within the 90 days prior to the filing of the bankruptcy petition while the debtor was insolvent Preferential transfers are those made for antecedent debts which enable the creditor to receive more than s/he would otherwise be entitled to under a Chapter 7 liquidation pro- ceeding Preferential transfers made to insiders within the previous 12 months may also be set aside

101 (Y) This payment may be set aside because Mary Lake is an insider since she is the sister of one of Wren’s direc- tors The preferential transfer to her on December 31, 1999, falls within the 12 months prior to the filing of the bankruptcy

petition on April 15, 2000

102 (N) This transaction represents a donation rather than payment on an antecedent debt, therefore it would not be set aside as a preferential transfer

103 (Y) The transaction would be set aside as a preferential transfer On February |, 2000, Wren gave Young Finance

Co a security agreement to secure a loan previously made by Young Preferential transfers include the granting of a security interest by the debtor to secure an antecedent debt

104 (N) Transfers in the ordinary course of business are not voidable preferences

105 (N) In this case Wren purchased a new burglar alarm system for its factory for $5,000 cash A contemporaneous exchange between a creditor and debtor whereby the debtor receives new value is not a preferential transfer

108 (A) The claim of Fifth Bank will be the first claim satisfied because it had a Ist mortgage on the warehouse owned

by Wren This warehouse was sold for $75,000 which more than satisfies the $50,000 owed to Fifth Bank

109 (D) The IRS has priority for taxes due just before the priority of general creditors, therefore the IRS has fourth pri- ority

110 (C) Joan Sims, the employee, will have third priority because the bankrupt’s employees have highest priority for wages and commission accrued within 3 months before the filing of the bankruptcy petition (up to a maximum of $4,300 each) after the administration costs have been satisfied

Part c

The fact pattern states that after paying the secured creditors, the bankruptcy administration expenses, and the priority gen- eral creditors, each nonpriority general creditor receives 50 cents on the dollar

111 (J) TVN will receive $13,500 This is true because TVN’s collateral sold for $12,000 TVN receives all of this

$12,000 as a secured creditor owed $15,000 TVN becomes a general creditor for the remaining debt of $3,000 and receives 50 cents on the dollar for this which amounts to $1,500 TVN, therefore, receives $13,500 in total

112 (M)_ Hart’s collateral was sold for $25,000 The remaining $5,000 of the debt owed to Hart is paid at 50 cents on the dollar which amounts to $2,500 Hart, therefore, receives a total of $27,500

113 (G) Ted Smith receives $4,300 as a priority for wages earned within the previous 3 months Any wages in excess

of the $4,300 are treated as a general claim, therefore he receives 50 cents on the dollar for the remaining $400 owed to him for

a total of $4,500

114 (B) Power Electric Co., as a general creditor, receives half of the $600 of charges which amounts to $300

115 (D) Soft Office Supplies is a general creditor and thus receives 50 cents on the dollar for the $2,000 debt owed for

a total of $1,000

Essay Question Solutions Approach Algorithm

1 Glance over the question Scan the question to get a feel for the topical area addressed Do not read

it Until you understand the requirements, you cannot discriminate important data from irrelevant data

2 Study the requirements “Study” as differentiated from “read.” Candidates continually lose points due to misunderstanding the requirements Underline key phrases and words

2a Visualize the solution format Determine the expected format of the required solution As you would expect, the usual format for the solution to essay questions will be the paragraph format However, there will be occasions where the requirements of the question may be answered by a list of items Also, a single question may contain two or more requirements Explicitly recognize multiple requirements (e.g., a, b, c) by numbering or lettering them on your examination booklet, expanding on the letters already assigned to the question (e.g., a.1, a.2, a.3, b.1, b.2, .) |

3 Outline the required procedures mentally Interrelate the background data given in the question to the expected solution format, mentally formulating a “to do” list Determine what it is you are going

to do before you begin doing it You should work through the requirements in order but be alert for questions with interrelated requirements

3a Review applicable principles, knowledge Before immersing yourself in the details of the essay, quickly (30-60 seconds) review and organize your knowledge of the principles applicable to the question Jot down any acronyms, formulas, or other memory aids relevant to the topics of the ques- tion Otherwise, the details of the question may confuse and overshadow your previous knowledge of the applicable principles

4 Study the text of the question Read the question carefully With the requirements in mind, you can now begin to discriminate relevant from irrelevant data Underline and circle important data The data necessary for answering each requirement may be scattered throughout the question List the re- quirements in the margin alongside the data to which they pertain Remember this is your exam and you should use whatever technique you find effective to highlight important data and concepts 4a Write down keywords (concepts) Jot down a list of keywords (grading concepts) in the margin of the examination booklet Some candidates may want to organize the list of keywords into a solutions

5 Prepare the solution You are now in a position to write a neat, complete, and organized solution Remember that 5% of your score on each section comes from the grading of your writing skills Therefore, it is very important that you write something for each requirement of the question and take the time to develop a clear and organized essay for the reader/grader

6 Proofread and edit Do not underestimate the benefits of this step Just recall all of the “silly” mis- takes you made on undergraduate exams Corrections of errors and completion of oversights during this step can easily be the difference between passing and failing

7 Review the requirements Assure yourself that you have answered them all

Essay Question Solutions Approach Example

To illustrate the use of the solutions approach in answering essay questions, we have included Question | from the May 1998 Examination in Business Law & Professional Responsibilities section The illustration appears on the following pages

Highlights of the Solutions Approach to Essay Questions

After studying the requirements and visualizing the format of the unofficial answer, study the text of the question, making notes and also preparing a keyword outline After the keyword outline has been prepared, a basic distinction must be made as to the type of essay question presented The first type of essay question contains one fact situation from which two or more requirements cover the same or similar auditing topics, points of law, or accounting rules The proper method of answering this type of question is to handle the re- quirements simultaneously In other words, apply each step in the solutions approach to all of the require- ments before moving on to the next step

The second type of essay question contains one fact situation from which two or more requirements cover different topics or rules The proper method of answering this type of question is to handle the requirements

independently, following each step of the solutions approach separately for each requirement Thus, after the first requirement is completed, repeat the solutions approach for each remaining requirement The benefit to handling the requirements independently is to keep the different topics or rules separate in your mind This allows you to complete one requirement before moving on to another requirement and mentally “changing gears.”

When you have identified the type of question involved, reorganize the keyword outline for the entire an- swer Make sure that you have answered each requirement (and only that requirement) completely Be care- ful not to preempt an answer to another requirement The keyword outline for the example question should

be similar to the grading guide in Chapter 2 Next, write up your solution and edit as needed Use only 3/4 of each page to write up your solution The remaining 1/4 can then be used to add material and to make revi- sions which can be keyed to the text with asterisks The solution will thus be easier for the grader to read, and also easier for you to proofread and edit Remember, there is no limit on the amount of lined paper you may use If you have time later, review your solution again

Problem 1

On June 1, a manufacturer of desk

chairs, orally agreed to sel] 100 leather desk chairs t«Rand>

parties agreed that.delivery would be completed by.Sep-

tember |, and the shipping terms were “FOB seller’s

loading dock.” On June 5, Classic Sen Rand) s —

odum of agreement containing the Té

eceived the memorandum on June 7 and

made no response

On July 31,Classic }Uentified the chairs to he shipped

Rand 3p laced them on its loading dock to_be picked

up by Enon ete next day That night, a_fire on

the remaining 50 chairs were delivered to the

Gamienyouether with 50 vinyl chairs The truck carrying the

chairs was involved in an accident, resulting in extensive

damage to 10 of the leather chairs and 25 of the vinyl

chairs

_— Ơn August 10, the chairs were delivered tdand On

Casio hat@and

under the terms of the contract, Randy ould seek all reme-

dies available under the Sales Article of the

Classic that it has no liability toRand 3nd

that the shipment was strictly an accommodation to Rand

because Rand)failed to sign the memorandum of agreement,

thus preventing a contract from being formed

The above parties and transactions are governed by the

provisions of the Sales Article of the UCC

Required:

a Determine whether€]assic 3 contention is correct and

give the reasons for your conclusion

b Assuming that a valid contract exists betweer€Classic

and Rand, answer the following questions and give the rea-

sons for your conclusions Do not consider any possible

1 Who bears the risk of loss for the 50 destroyed

leather chairs?

2 Whobears the risk of loss for the 25 damaged vi-

nyl chairs?

3 What is the earliest date that title to any of the

chairs would pass t@

Keyword Oulline

Bolt parties are merchants

General rule: Sale of goods > $500 musl be tn “t2 (Halule of

Frauds)

party does not object wllhin 10 days FOB Seller's loading dock POD shipping

seller has risk of (oss until delivered lo common carrier

buyer has no risk of loss for nonconforming goods

To vecetue damages

zo/// ⁄ of repects (On

Remedies for buyer cancel contract

~-COVEK

~-KOCOVER monary damages

c With what UCC requirements mus(&andomply to

be entitled to recover damages fro CClassic7 2

d _Assuming that a valid contract exists between

Visualize solution format

1 The solution will be in paragraph form

2 For requirement a., one may expect the solu-

tion to discuss the Statute of Frauds, and any

exceptions to the Statute of Frauds under the

UCC

3 For requirement b., one may expect the solu-

tion to discuss shipment terms and risk of loss

and title under the UCC

4 For requirement c., one may expect the solu-

tion to discuss UCC requirements for recover-

ing damages

5 For requirement d., one may expect the solu-

tion to discuss a buyer’s remedies available

under the UCC

For steps 3 - 7, each requirement should be addressed

and fully answered before the next requirement is ad-

dressed

For requirement a

Hepp 3:

Outline required procedures mentally The approach

will be to carefully read the question and determine the

facts related to the formation of the contract and

whether or not the requirements for meeting the Statute

of Frauds were met

Hop 5.9

Review applicable principles with regard to the Statute

of Frauds under the UCC

a Agreement for sale of goods for $500 or

more is required to be in writing under the

UCC

b When a writing is required, it must indi-

cate in writing that a contract for sale has

been made, be signed by party to be

charged, and specify quantity of goods

sold

c Exception to signature requirement exists

under UCC when both parties are mer-

chants One party may send written con-

firmation stating terms of oral agreement

to other party within reasonable time, then

nonsigning party must object within 10 days or the contract is enforceable against him/her

b If seller breaches (sends nonconforming goods), risk of loss remains with seller until cure by seller or acceptance by buyer

c Ifseller breaches, title passes under original terms despite delivery of nonconforming goods

For requirement c For requirement d

Outline required procedures mentally The approach Outline required procedures mentally The approach will be to carefully read the question and determine the will be to consider applicable remedies to which Rand facts related to the breach of contract and what UCC (the buyer) would be entitled, based on Classic’s breach requirements would be applicable for Rand to comply of contract

Hopi De Cf

Review applicable principles with regard to a buyer remedies based on a seller’s breach of contract (delivery receiving nonconforming goods (the seller’s breach of of nonconforming goods)

contract) and what UCC requirement the buyer must

comply with in order to recover damages

is monetary damages

a Buyer may reject nonconforming goods, either b If seller does not notify buyer of his intention

in entirety or any commercial unit to cure, buyer has right to cancel contract

b If buyer rejects nonconforming goods, s/he c Buyer has the right of cover and will still have must do so in reasonable time and give notice the right to damages

c If buyer is a merchant, s/he must follow rea- of contract

sonable instructions of seller (e.g., ship, sell) e Specific performance is used only when money

d Buyer must allow seller to cure nonconformity damages will not suffice (When subject mat-

within original time of contract ter is unique or rare)

*See Unofficial Answer in Chapter 2 *See Unofficial Answer in Chapter 2

NOTE: You must write out the answers to the essay questions Keyword outlines are not sufficient The AICPA requires you to show an understanding of the grading concepts, not merely a listing of grading concepts However, you may prepare answers in list form so long as the listed items are in sentence format Prepare brief paragraphs consisting of several concise sentences about each grading concept The paragraphs may be numbered in an outline format similar to that of the unofficial answers

The examiners grade candidates on their writing skills Samples will be taken from each section of the exam (e.g., requirement c from one essay and requirement b from another essay) Candidates will not be told which responses will be evaluated Writing skills will be assessed by the same individuals who grade the essay responses for technical content The grading will be done using a holistic approach Holistic grading attempts to measure the effectiveness with which you communicate your knowledge and ideas; thus, the grad- ers judge your work by how easily they understand the ideas which you are attempting to present Five per- cent of the total points available on the Business Law and Professional Responsibilities section will be based

on writing skills However, candidates’ scores with respect to writing skills will not be disclosed separately

in the candidate diagnostic report.

Candidates’ writing skills will be graded according to the following six characteristics:

1 Coherent organization

Candidates should organize their responses in a manner that is logical and easy to follow Jum- bled paragraphs and disorderly sentences will only confuse the grader and make his/her job more dif- ficult The following techniques will help improve written coherence.*

Indent paragraphs to set off lists, equations, key ideas, etc when appropriate Maintain coherence within paragraphs

- Use a topic sentence at the beginning of each paragraph

- Develop and support this topic throughout the rest of the paragraph

- Present old or given information before discussing new information

- Discuss ideas in chronological order

- Use parallel grammatical structure

- Be-consistent in person, verb tense, and number

- Substitute pronouns or synonyms for previously used keywords

- Use transitions (e.g., therefore, finally) Maintain coherence between paragraphs

- Repeat keywords from previous paragraph

- Use transitions

As discussed above, candidates are strongly advised to keyword outline their responses before writing their essays This technique helps the candidate to focus on the flow of ideas s/he wants to convey before starting the actual writing task

Use words instead of phrases Combine sentences, if possible Avoid empty fillers (e.g., it is apparent; there seems to be) Avoid multiple negatives (e.g., no reason for not using)

Written responses should leave no doubt in the reader’s mind as to the meaning intended Clarity can be improved as follows:

Do not use abbreviations Use correct terminology Use words with specific and precise meanings Write in short, well-constructed sentences Make sure subjects and verbs agree in number Make sure pronouns and their antecedents agree in number (e.g., the partnership must de- cide how it (not they) wants to split profits.)

Avoid unclear reference to a pronoun’s antecedent (e.g., A should inform B that he must perform on the contract by January | To whom does “he” refer?)

Adapted from Writing for Accountants by Aletha S Hendrickson (Cincinnati, OH: Southwestern Publishing Co., 1993) pp 128- 209