The Client May Use a Variety of Methods to Understate

question 55

Multiple Choice

The client may use a variety of methods to understate liabilities,interest expense and long-term debt.These include

• A)Recording operating leases as capital leases to avoid putting the liability on the balance sheet.
• B)Failing to record interest expense.
• C)Changing the interest rate used to capitalize long-term liabilities to vary the amount of interest expense
• D)Failing to disclose special arrangements,such as transactions with special purpose entities.
• E)Forward dating stock options and failing to record compensation expense for the difference between the market price of the stock at the date of the grant and the price of the stock on the date of the backdating.
• F)both A and B
• G)both B and C
• H)both D and E

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Definitions:

Separately Stated Item

A specific item of income, deduction, gain, or loss that must be reported separately on tax returns to ensure it is treated correctly for tax purposes.

Ordinary Income

Income earned through standard operations, including wages, salaries, commissions, and interest, which is taxed at individual rates.

Recourse Liabilities

Liabilities for which an individual or entity is personally liable, meaning creditors can pursue the individual's assets if the liability is not settled.

Partnership Interest

An ownership share in a partnership, representing the holder's proportionate rights and obligations in the partnership's profits, losses, and capital.