411 CPA Questions

CPA-01348 (R-08-01: Bankruptcy: Part 1) 1. Under the liquidation provisions of Chapter 7 of the U.S. Bankruptcy Code, certain property acquired by the debtor after the filing of the petition becomes part of the bankruptcy estate. An example of such property is: a. Inheritances received by the debtor within 180 days after the filing of the petition. b. Child support payments received by the debtor within one year after the filing of the petition. c. Social Security payments received by the debtor within 180 days after the filing of the petition. d. Wages earned by the debtor within one year after the filing of the petition.

a.

CPA-01357 (R-08-01: Bankruptcy: Part 1) 4. Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition. Dart has not been paying its business debts as they became due, has defaulted on its mortgage loan payments, and owes back taxes to the IRS. The total cash value of Dart's bankruptcy estate after the sale of all assets and payment of administration expenses is $104,000. Dart has the following creditors: Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart's real property. The property was valued at and sold, in bankruptcy, for $70,000. The IRS has a $12,000 recorded judgment for unpaid corporate income tax. JOG Office Supplies has an unsecured claim of $2,000 that was timely filed. Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed. Decoy Publications has a claim of $20,000, of which $2,000 is secured by Dart's inventory that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed. Which of the following events will follow the filing of the Chapter 7 involuntary petition? A trustee will be appointed A stay against creditor collection proceedings will go into effect a. Yes Yes b. Yes No c. No Yes d. No No

a.

CPA-01582 (R-07-06: Secured Transactions)Under the Secured Transactions Article of the UCC, which of the following remedies is available to a secured creditor when a debtor fails to make a payment when due? Proceed against the collateral Obtain a general judgment against the debtor a. Yes Yes b. Yes No c. No Yes d.No No

a.

CPA-01746 (R-05-02: Partnerships: Part 1) Strom acquired a 25 percent interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom's basis in Ace? a. $0 b. $16,000 c. $26,000 d. $32,000

a.

CPA-01772 (R-05-02: Partnerships: Part 1) Pert contributed land with a fair market value of $20,000 to a new partnership in exchange for a 50% partnership interest. The land had an adjusted basis to Pert of $12,000 and was subject to a $4,000 mortgage, which the partnership assumed. What is the adjusted basis of Pert's partnership interest? a. $10,000 b. $12,000 c. $18,000 d. $20,000

a.

CPA-01795 (R-08-03: Federal Securities Regulation) 9. Bird Corp. made a $1,500,000 exempt common stock offering under Rule 505 of Regulation D of the Securities Act of 1933. This made the shares restricted securities. As the issuer of restricted securities, Bird must: a. Make a reasonable effort to determine that purchasers are buying for themselves and not for others. b. Publicly advertise that the shares are not registered. c. Provide information to all purchasers as to how they can register their shares so that resale will be permitted. d. Apply to the SEC for contingent exemptions so that purchasers may resell their shares as exempt.

a.

CPA-01828 (R-06-01: Trusts and Estates) Lyon, a cash basis taxpayer, died on January 15 of the current taxable year. The estate executor made the required periodic distribution of $9,000 from estate income to Lyon's sole heir. The following pertains to the estate's income and disbursements in the current year: Estate Income: $20,000- Taxable interest 10,000-Net long-term capital gains allocable to corpus Estate Disbursements $5,000- Administrative expenses attributable to taxable income For the current taxable calendar year, what was the estate's distributable net income (DNI)? a. $15,000 b. $20,000 c. $25,000 d. $30,000

a.

CPA-01838 (R-07-05: Suretyship) Which of the following liens generally require(s) the lienholder to give notice of legal action before selling the debtor's property to satisfy the debt? Mechanic's lien Artisan's lien a. Yes Yes b. Yes No c. No Yes d. No No

a.

CPA-01925 (R-05-02: Partnerships: Part 1) Partnership Abel, Benz, Clark & Day is in the real estate and insurance business. Abel owns a 40% interest in the capital and profits of the partnership, while Benz, Clark, and Day each owns a 20% interest. All use a calendar year. At November 1 of the current year, the real estate and insurance business is separated, and two partnerships are formed: Partnership Abel & Benz takes over the real estate business, and Partnership Clark & Day takes over the insurance business. Which one of the following statements is correct for tax purposes? a. Partnership Abel & Benz is considered to be a continuation of Partnership Abel, Benz,Clark & Day. b. Informing Partnership Clark & Day, partners Clark and Day are subject to a penalty surtax if they contribute their entire distributions from Partnership Abel, Benz, Clark & Day. c. Before separating the two businesses into two distinct entities, the partners must obtain approval from the IRS. d. Before separating the two businesses into two distinct entities, Partnership Abel, Benz, Clark & Day must file a formal dissolution with the IRS on the prescribed form.

a.

CPA-02030 (R-04-01: Corporate Formation) Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows: Property Adjusted Basis Fair Market Value Percentage of Ace Stock Acquired Lind Building $40,000 $82,000 60% Post Land $5,000 $48,000 40% The building was subject to a $10,000 mortgage that was assumed by Ace. What amount of gain did Lind recognize on the exchange? a. $0 b. $10,000 c. $42,000 d. $52,000

a.

CPA-04081 (R-04-02: Corporate Taxable Income ) Which expense listed below would be subject to the Uniform Capitalization Rules of Code Sec. 263A? a. Quality control. b. Research and development. c. Advertising. d. Selling.

a.

CPA-04752 (R-03-01: Basis and Holding Period of Assets) Greller owns 100 shares of Arden Corp., a publicly traded company, which Greller purchased on January 1, Year 1, for $10,000. On January 1, Year 3, Arden declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Arden stock was $62 per share. On February 1, Year 3, Greller had his broker specifically sell the 100 shares of Arden stock received in the split when the FMV of the stock was $65 per share. What is the basis of the 100 shares of Arden sold? a. $5,000 b. $6,000 c. $6,200 d. $6,500

a.

CPA-06403 (R-03-02: Taxable and Nontaxable Dispositions) A taxpayer is trading a building used solely for business purposes for another building to be used in his business. The building originally cost $35,000 and he has taken $18,000 in depreciation. The old building is currently worth $20,000 and the new building the taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the taxpayer's basis in the new building received? a. $17,000 b. $18,000 c. $20,000 d. $35,000

a.

CPA-06405 (R-03-02: Taxable and Nontaxable Dispositions) A taxpayer is trading a building used solely for business purposes for another building to be used in his business. The building originally cost $35,000 and he has taken $12,000 in depreciation. The old building is currently worth $20,000 and the new building the taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the gain or loss recognized by the taxpayer on this transaction? a. $0 b. $3,000 loss. c. $3,000 gain. d. $15,000 loss.

a.

CPA-06408 (R-03-02: Taxable and Nontaxable Dispositions) A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $18,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer wants in exchange is worth $22,000, so the taxpayer has agreed to pay $2,000 cash in addition to the traded real property. What is the gain or loss recognized by the taxpayer on this transaction? a. $0 b. $2,000 gain c. $3,000 gain d. $5,000 gain

a.

CPA-08044 (R-05-02: Partnerships: Part 1) Able, Bill, and Connor admit Dan as a 25 percent partner in the ABC&D partnership. Able, Bill, and Connor each own 25 percent. Dan contributes a parcel of land with a basis to Dan of $50,000 and a fair market value of $150,000. The land is subject to a liability of $60,000 assumed by the partnership. Able, Bill, Connor, and Dan will share profits and losses equally. What is Dan's gain, basis in the partnership, as well as the impact on the other partners' basis upon Dan's contribution? Dan's Gain Dan's Partnership Basis Impact on Basis of Other Partners a. $0 $5,000 Increase by $15,000 each b. $10,000 $50,000 Remains the same c. $5,000 $45,000 Decreases by $15,000 each d. $0 $40,000 Remains the same

a.

CPA-01246 (R-07-03: Contracts: Part 2) To prevail on the defense of fraud in the inducement, a victim must prove that the: a. Defrauder was an expert with regard to the misrepresentations. b. Defrauder made the misrepresentations with knowledge of their falsity and with an intention to deceive. c. Misrepresentations were in writing. d. Defrauder was in a fiduciary relationship with the victim.

b.

CPA-01345 (R-08-01: Bankruptcy: Part 1) 2. A family farmer with regular annual income may file a voluntary petition for bankruptcy under any of the following Chapters of the federal Bankruptcy Code, except: a. 7 b. 9 c. 11 d. 13

b.

CPA-01446 (R-06-07: Legal Duties and Responsibilities) Under the "Ultramares" rule, to which of the following parties will an accountant be liable for negligence? Parties in privity Foreseen parties a. Yes Yes b. Yes No c. No Yes d.No No

b.

CPA-01473 (R-06-07: Legal Duties and Responsibilities) Sun Corp. approved a merger plan with Cord Corp. One of the determining factors in approving the merger was the financial statements of Cord that were audited by Frank & Co., CPAs. Sun had engaged Frank to audit Cord's financial statements. While performing the audit, Frank failed to discover certain irregularities that later caused Sun to suffer substantial losses. For Frank to be liable under common law negligence, Sun at a minimum must prove that Frank: a. Knew of the irregularities. b. Failed to exercise due care. c. Was grossly negligent. d. Acted with scienter.

b.

CPA-01611 (R-08-03: Federal Securities Regulation) 7. Under the Securities Exchange Act of 1934, the SEC is responsible for all of the following activities, except: a. Requiring disclosure of facts concerning offerings of securities listed on national securities exchanges. b. Prosecuting criminal violations of federal securities laws. c.Regulating the activities of securities brokers. d. Investigating securities fraud.

b.

CPA-01633 (R-07-06: Secured Transactions)Grey Corp. sells computers to the public. Grey sold and delivered a computer to West on credit. West executed and delivered to Grey a promissory note for the purchase price and a security agreement covering the computer. West purchased the computer for personal use. Grey did not file a financing statement. Is Grey's security interest perfected? a. Yes, because Grey retained ownership of the computer. b. Yes, because it was perfected at the time of attachment. c. No, because the computer was a consumer good. d. No, because Grey failed to file a financing statements

b.

CPA-01710 (R-05-03: Partnerships: Part 2) Basic Partnership, a cash-basis calendar year entity, began business on February 1, Year 1. Basic incurred and paid the following in Year 1: Filing fees incident to the creation of the partnership $ 3,600 Accounting fees to prepare the representations in offering materials 12,000 Basic elected to amortize costs. What was the maximum amount that Basic could deduct on the Year 1 partnership return? a. $11,000 b. $3,600 c. $2,860 d. $220

b.

CPA-01728 (R-08-02: Bankruptcy: Part 2) 5. On February 28, Year 1, Master, Inc. had total assets with a fair market value of $1,200,000 and total liabilities of $990,000. On January 15, Year 1, Master made a monthly installment note payment to Acme Distributors Corp., a creditor holding a properly perfected security interest in equipment having a fair market value greater than the balance due on the note. On March 15, Year 1, Master voluntarily filed a petition in bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. One year later, the equipment was sold for less than the balance due on the note to Acme. Which of the following statements correctly describes Acme's distribution from Master's bankruptcy estate? a. Acme will receive the total amount it is owed, even if the proceeds from the sale of the collateral were less than the balance owed by Master. b. Acme will have the same priority as unsecured general creditors to the extent that the proceeds from the sale of its collateral are insufficient to satisfy the amount owed by Master. c. The total proceeds from the sale of the collateral will be paid to Acme even if they are less than the balance owed by Master, provided there is sufficient cash to pay all administrative costs associated with the bankruptcy. d. Acme will receive only the proceeds from the sale of the collateral in full satisfaction of the debt owed by Master.

b.

CPA-01735 (R-05-03: Partnerships: Part 2) Hart's adjusted basis in Best Partnership was $9,000 at the time he received the following nonliquidating distributions of partnership property: Cash $5,000 Land Adjusted basis 7,000 Fair market value 10,000 What was the amount of Hart's basis in the land? a. $0 b. $4,000 c. $7,000 d. $10,000

b.

CPA-01777 (R-08-03: Federal Securities Regulation) 8. For a CPA to be liable for damages under the anti-fraud provisions of Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934, a plaintiff must prove all of the following, except that: a. The plaintiff relied on the financial statements audited by the CPA. b. The CPA violated generally accepted auditing standards. c. There was a material misrepresentation of fact in the financial statements audited by the CPA. d. The CPA acted with scienter.

b.

CPA-01836 (R-07-05: Suretyship) Which of the following statements is(are) correct regarding debtors' rights? I.State exemption statutes prevent all of a debtor's personal property from being sold to pay a federal tax lien. II.Federal social security benefits received by a debtor are exempt from garnishment by creditors. a. I only. b. II only. c. Both I and II. d. Neither I nor II.

b.

CPA-01923 (R-05-02: Partnerships: Part 1) On June 1, Year 1, Don Kerr received a 10% interest in the capital of Rev Company, a partnership, for services rendered. Rev's net assets on June 1, Year 1, had a basis of $35,000 and a fair market value of $50,000. What income must Kerr include in his Year 1 tax return for the partnership interest transferred to him by the other partners? a. $5,000 capital gain. b. $5,000 ordinary income. c. $3,500 capital gain. d. $3,500 ordinary income.

b.

CPA-01957 (R-05-01: S Corporations) Beck Corp. has been a calendar-year S corporation since its inception on January 2, Year 1. On January 1, Year 4, Lazur and Lyle each owned 50% of the Beck stock, in which their respective tax bases were $12,000 and $9,000. For the year ended December 31, Year 4, Beck had $81,000 in ordinary business income and $10,000 in tax-exempt income. Beck made a $51,000 cash distribution to each shareholder on December 31, Year 4. What was Lazur's tax basis in Beck after the distribution? a. $1,500 b. $6,500 c. $52,500 d. $57,500

b.

CPA-01959 (R-05-01: S Corporations) Village Corp., a calendar year corporation, began business in Year 1. Village made a valid S corporation election on December 5, Year 3, with the unanimous consent of its shareholders. The eligibility requirements for S status continued to be met throughout Year 4. On what date did Village's S status become effective? a. January 1, Year 3. b. January 1, Year 4. c. December 5, Year 3. d. December 5, Year 4.

b.

CPA-02016 (R-04-02: Corporate Taxable Income ) Which of the following taxpayers may use the cash method of accounting? a. A tax shelter. b. A qualified personal service corporation. c. A C corporation with annual gross receipts of $50,000,000. d. A manufacturer.

b.

CPA-02034 (R-04-01: Corporate Formation) Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows: Propert y Adjuste d basis Fair market value Percentage of Ace stock acquired Lind Building $40,000 $82,000 60% Post Land $5,000 $48,000 40% The building was subject to a $10,000 mortgage that was assumed by Ace. What was Ace's basis in the building? a. $30,000 b. $40,000 c. $72,000 d. $82,000

b.

CPA-02048 (R-04-02: Corporate Taxable Income ) In Year 2, Cable Corp., a calendar year C corporation, contributed $80,000 to a qualified charitable organization. Cable's Year 2 taxable income before the deduction for charitable contributions was $820,000 after a $40,000 dividends-received deduction. Cable also had carryover contributions of $10,000 from Year 1. In Year 2, what amount can Cable deduct as charitable contributions? a. $90,000 b. $86,000 c. $82,000 d. $80,000

b.

CPA-02085 (R-04-04: Tax Computations and Credits) Edge Corp., a calendar-year C corporation, had a net operating loss and zero tax liability for its Year 1 tax year. To avoid the penalty for underpayment of estimated taxes, Edge could compute its first quarter Year 2 estimated income tax payment using the: Annualized income method Preceding year method a. Yes Yes b. Yes No c. No Yes d. No No

b.

CPA-02217 (R-07-02: Contracts: Part 1) On September 27, Summers sent Fox a letter offering to sell Fox a vacation home for $150,000. On October 2, Fox replied by mail agreeing to buy the home for $145,000. Summers did not reply to Fox. Do Fox and Summers have a binding contract? a. No, because Fox failed to sign and return Summers' letter. b. No, because Fox's letter was a counteroffer. c. Yes, because Summers' offer was validly accepted. d. Yes, because Summers' silence is an implied acceptance of Fox's letter.

b.

CPA-04633 (R-04-01: Corporate Formation) Which of the following forms of business can be formed with only one individual owning the business? Sole Proprietorship Limited Liability Company Partnership a. Yes Yes Yes b. Yes Yes No c. Yes No Yes d. No No No

b.

CPA-04761 (R-05-02: Partnerships: Part 1) Bailey contributed land with a fair market value of $75,000 and an adjusted basis of $25,000 to the ABC Partnership in exchange for a 30% interest. The partnership assumed Bailey's $10,000 recourse mortgage on the land. What is Bailey's basis for his partnership interest? a. $15,000 b. $18,000 c. $65,000 d. $75,000

b.

CPA-04967 (R-07-02: Contracts: Part 1) Jen offers to sell Bob her laptop computer for $500. Bob is not sure he can afford it and asks Jen if she will keep the offer open until noon the next day. Jen tells Bob that she will keep her offer open if he gives her his promise that he won't buy another computer before that time. Bob gives Jen his promise not to buy another computer. Is Jen obligated to keep the offer open until noon the next day? a. No, because Bob did not buy the computer. b. Yes, because there is a valid option contract in place. c. No, because Bob did not give valid consideration to create an option contract. d. Yes, because Jen gave Bob her word to keep the offer open.

b.

CPA-05519 (R-05-04: Partnerships: Part 3) Olson, Wayne, and Hogan are equal partners in the OWH partnership. Olson's basis in the partnership interest is $70,000. Olson receives a liquidating distribution of $10,000 cash and land with a fair market value of $63,000, and a basis of $58,000. What is Olson's basis in the land? a. $58,000 b. $60,000 c. $63,000 d. $70,000

b.

CPA-06404 (R-03-02: Taxable and Nontaxable Dispositions) A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $12,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer wants in exchange is worth $20,000. No other cash or property is exchanged in the transaction. What is the gain or loss realized by the taxpayer on this transaction? a. $0 b. $3,000 loss c. $3,000 gain d. $15,000 loss

b.

CPA-06409 (R-03-02: Taxable and Nontaxable Dispositions) A taxpayer is trading real property used solely for business purposes for new real property to be used in hi s business. The real property originally cost $35,000 and he has taken $18,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer wants in exchange is worth $22,000. The taxpayer has agreed to pay $2,000 cash in addition to the traded real property. What is the taxpayer's basis in the new real property received? a. $17,000 b. $19,000 c. $20,000 d. $22,000

b.

CPA-06410 (R-03-02: Taxable and Nontaxable Dispositions) A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $18,000 in depreciation. The old real property is currently worth $20,000 and the new real property the taxpayer wants in exchange is only worth $16,500. The other party agrees to give the taxpayer a trailer worth $3,500 in addition to the new real property. What is the gain or loss realized by the taxpayer on this transaction? a. $3,500 gain b. $3,000 gain c. $500 loss d. $3,500 loss

b.

CPA-08214 (R-06-01: Trusts and Estates) Pat created a trust, transferred property to this trust, and retained certain interests. For income tax purposes, Pat was treated as the owner of the trust. Pat has created which of the following types of trusts? a. Simple. b. Grantor. c. Complex. d. Pre-need funeral.

b.

CPA-08994 (R-06-01: Trusts and Estates) Which of the following is a characteristic of a revocable trust? a. The trust is excluded from the gross estate of the transferor. b. The transferor retains the power to terminate the trust. c. The income of the trust is taxed to the trust. d. A taxable gift occurs on the creation of the trust.

b.

CPA-01079 (R-07-03: Contracts: Part 2) If a person is induced to enter into a contract by another person because of the close relationship between the parties, the contract may be voidable under which of the following defenses? a. Fraud in the inducement. b. Unconscionability. c. Undue influence. d. Duress.

c.

CPA-01405 (R-07-03: Contracts: Part 2) Maco, Inc. and Kent contracted for Kent to provide Maco certain consulting services at an hourly rate of $20. Kent's normal hourly rate was $90 per hour, the fair market value of the services. Kent agreed to the $20 rate because Kent was having serious financial problems. At the time the agreement was negotiated, Maco was aware of Kent's financial condition and refused to pay more than $20 per hour for Kent's services. Kent has now sued to rescind the contract with Maco, claiming duress by Maco during the negotiations. Under the circumstances, Kent will: a. Win, because Maco refused to pay the fair market value of Kent's services. b. Win, because Maco was aware of Kent's serious financial problems. c. Lose, because Maco's actions did not constitute duress. d. Lose, because Maco cannot prove that Kent, at the time, had no other offers to provide consulting services.

c.

CPA-01439 (R-06-07: Legal Duties and Responsibilities) Which of the following statements is correct regarding an accountant's working papers? a. The accountant owns the working papers and generally may disclose them as the accountant sees fit. b. The client owns the working papers but the accountant has custody of them until the accountant's bill is paid in full. c. The accountant owns the working papers but generally may not disclose them without the client's consent or a court order. d. The client owns the working papers but, in the absence of the accountant's consent, may not disclose them without a court order.

c.

CPA-01450 (R-08-03: Federal Securities Regulation) 6. Ocean and Associates, CPAs, audited the financial statements of Drain Corporation. As a result of Ocean's negligence in conducting the audit, the financial statements included material misstatements. Ocean was unaware of this fact. The financial statements and Ocean's unqualified opinion were included in a registration statement and prospectus for an original public offering of stock by Drain. Sharp purchased shares in the offering. Sharp received a copy of the prospectus prior to the purchase, but did not read it. The shares declined in value as a result of the misstatements in Drain's financial statements becoming known. Under which of the following acts is Sharp most likely to prevail in a lawsuit against Ocean? Securities Exchange Act of 1934,Section 10b,Rule 10b-5 Securities Act of 1933,Section 11 a. Yes Yes b. Yes No c. No Yes d. No No

c.

CPA-01560 (R-07-06: Secured Transactions)Under the Secured Transactions Article of the UCC, which of the following requirements is necessary to have a security interest attach? Debtor has rights in the collateral Proper filing of a security agreement Value given by the creditor a. Yes Yes Yes b. Yes Yes No c. Yes No Yes d. No Yes Yes

c.

CPA-01822 (R-06-01: Trusts and Estates) A distribution to an estate's sole beneficiary for the current calendar year equaled $15,000, the amount currently required to be distributed by the will. The estate's current year records were as follows: Estate income: $40,000-Taxable interest Estate disbursements $34,000-Expenses attributable to taxable interest What amount of the distribution was taxable to the beneficiary? a. $40,000 b. $15,000 c. $6,000 d. $0

c.

CPA-01847 (R-07-05: Suretyship) When a principal debtor defaults and a surety pays the creditor the entire obligation, which of the following remedies gives the surety the best method of collecting from the debtor? a. Exoneration. b. Contribution. c. Subrogation. d. Attachment.

c.

CPA-01886 (R-06-01: Trusts and Estates) A distribution from estate income, that was currently required, was made to the estate's sole beneficiary during its calendar year. The maximum amount of the distribution to be included in the beneficiary's gross income is limited to the estate's: a. Capital gain income. b. Ordinary gross income. c. Distributable net income. d. Net investment income.

c.

CPA-01909 (R-03-01: Basis and Holding Period of Assets) Alice gifted stock to her son, Bob, in Year 5. Alice bought the stock in Year 1 for $8,300. The value of the stock on the date of gift was $13,400. Bob sold the stock in Year 7 for $15,800. What is Bob's recognized gain or loss on the sale in Year 7? a. $0 b. $2,400 gain c. $7,500 gain d. $15,800 gain

c.

CPA-01920 (R-07-05: Suretyship) Nash, Owen, and Polk are cosureties with maximum liabilities of $40,000, $60,000 and $80,000, respectively. The amount of the loan on which they have agreed to act as cosureties is $180,000. The debtor defaulted at a time when the loan balance was $180,000. Nash paid the lender $36,000 in full settlement of all claims against Nash, Owen, and Polk. The total amount that Nash may recover from Owen and Polk is: a. $0 b. $24,000 c. $28,000 d. $140,000

c.

CPA-01964 (R-05-01: S Corporations) Zinco Corp. was a calendar year S corporation. Zinco's S status terminated on April 1, Year 1, when Case Corp. became a shareholder. During Year 1 (365-day calendar year), Zinco had nonseparately computed income of $310,250. If no election was made by Zinco, what amount of the income, if any, was allocated to the S short year for Year 1? a. $233,750 b. $155,125 c. $76,500 d. $0

c.

CPA-01987 (R-06-01: Trusts and Estates) The charitable contribution deduction on an estate's fiduciary income tax return is allowable: a. If the decedent died intestate. b. To the extent of the same adjusted gross income limitation as that on an individual income tax return. c. Only if the decedent's will specifically provides for the contribution. d. Subject to the 2% threshold on miscellaneous itemized deductions.

c.

CPA-02020 (R-06-02: Estate and Gift Transactions) Which of the following requires filing a gift tax return, if the transfer exceeds the available annual gift tax exclusion? a. Medical expenses paid directly to a physician on behalf of an individual unrelated to the donor. b. Tuition paid directly to an accredited university on behalf of an individual unrelated to the donor. c. Payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor. d. Campaign expenses paid to a political organization.

c.

CPA-02021 (R-04-02: Corporate Taxable Income ) On January 2 of the current year, Shaw Corp., an accrual-basis, calendar-year C corporation, purchased all the assets of a sole proprietorship, including $300,000 in goodwill. Current-year federal income tax expense of $110,100 and $7,500 for goodwill impairment were deducted to arrive at Shaw's reported book income of $239,200. What should be the amount of Shaw's current-year taxable income, as reconciled on Shaw's Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return? a. $239,200 b. $329,300 c. $336,800 d. $349,300

c.

CPA-02060 (R-04-04: Tax Computations and Credits) Dart Corp., a calendar year domestic C corporation, is not a personal holding company. For purposes of the accumulated earnings tax, Dart has accumulated taxable income for Year 1. Which step(s) can Dart take to eliminate or reduce any Year 1 accumulated earnings tax? I.Demonstrate that the "reasonable needs" of its business require the retention of all or part of the Year 1 accumulated taxable income. II.Pay dividends by April 15, Year 2. a. I only. b. II only. c. Both I and II. d. Neither I nor II.

c.

CPA-02160 (R-04-04: Tax Computations and Credits) Kari Corp., a manufacturing company, was organized on January 2, Year 1. Its Year 1 federal taxable income was $400,000 and its federal income tax was $100,000. What is the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for Year 1 if Kari takes only the minimum accumulated earnings credit? a. $300,000 b. $150,000 c. $50,000 d. $0

c.

CPA-04061 (R-04-02: Corporate Taxable Income ) A sole proprietor wants to incorporate and has requested a projection of the first-year tax results as a C corporation and as an S corporation. Taxable income from ordinary operations is projected to be $100,000. The company expects to make a $20,000 charitable contribution and projects a long-term capital loss on stock of $7,000. Which of the following projections is correct? a. C corporation, $73,000 taxable income; S corporation, $80,000 ordinary business income; long-term capital loss is separately stated. b. C corporation, $90,000 taxable income; S corporation, $80,000 ordinary business income; long-term capital loss is separately stated. c. C corporation, $90,000 taxable income; S corporation, $100,000 ordinary business income; remaining items are separately stated. d. C corporation, $80,000 taxable income; S corporation, $100,000 ordinary business income; remaining items are separately stated.

c.

CPA-04894 (R-04-07: Entity/Owner Transactions) On June 1, Year 2, Green Corp. adopted a plan of complete liquidation. On December 1, Year 2, Green distributed to its stockholders installment notes receivable that Green had acquired in connection with the sale of land in Year 1. The following information pertains to these notes: Green's basis $ 90,000 Fair market value 162,000 Face amount 185,000 How much gain must Green recognize in Year 2 as a result of this distribution a. $0 b. $23,000 c. $72,000 d. $95,000

c.

CPA-04925 (R-06-01: Trusts and Estates) Copper Trust, a simple trust, reported the following income and expenses during the current year: Interest income from corporate bonds $10,000 Rental income from properties 5,000 Trust fees allocable to income 2,000 Real estate taxes related to income - producing property 2,000 What is Copper's distributable net income (DNI) for the current year? a. $5,000 b. $10,000 c. $11,000 d. $15,000

c.

CPA-05544 (R-06-01: Trusts and Estates) Brown transfers property to a trust. A local bank was named trustee. Brown retained no powers over the trust. The trust instrument provides that current income and $6,000 of principal must be distributed annually to the beneficiary. What type of trust was created? a. Simple. b. Grantor. c. Complex. d. Revocable.

c.

CPA-06021 (R-04-01: Corporate Formation) An S corporation engaged in manufacturing has a year-end of June 30. Revenue consistently has been more than $30 million under both cash and accrual basis of accounting. The stockholders would like to change the tax status of the corporation to a C corporation using the cash basis with the same year-end. Which of the following statements is correct if it changes to a C corporation? a. The year-end will be December 31, using the cash basis of accounting. b. The year-end will be December 31, using the accrual basis of accounting. c. The year-end will be June 30, using the accrual basis of accounting. d. The year-end will be June 30, using the cash basis of accounting.

c.

CPA-06151 (R-06-02: Estate and Gift Transactions) Parents lend $2,000,000 to their child to start a business. The loan is interest-free and is payable on demand. The imputed interest is subject to: a. The gift tax only in the year the parents lend the money. b. The generation-skipping transfer tax, but not the gift tax. c. The gift tax each year the loan is outstanding. d. An excise tax.

c.

CPA-06407 (R-03-02: Taxable and Nontaxable Dispositions) A taxpayer is trading a building used solely for business purposes for another building to be used in his business. The building originally cost $35,000 and he has taken $18,000 in depreciation. The old building is currently worth $20,000 and the new building the taxpayer wants in exchange is worth $22,000, so the taxpayer has agreed to pay $2,000 cash in addition to the trade-in. What is the gain or loss realized by the taxpayer on this transaction? a. $0 b. $2,000 gain c. $3,000 gain d. $5,000 gain

c.

CPA-06511 (R-05-02: Partnerships: Part 1) In the absence of an election to adopt an annual accounting period, the required tax year for a partnership is: a. A tax year that results in the greatest aggregate deferral of income. b. A calendar year. c. A tax year of one or more partners with a more than 50% interest in profits and capital. d. A tax year of a principal partner having a 10% or greater interest.

c.

CPA-08654 (R-06-02: Estate and Gift Transactions) Mike and Carol, a married couple, have two assets at the time of Mike's death: a $10,000,000 life insurance policy owned by Mike naming Carol as the sole beneficiary, and $8,000,000 of real estate owned by the couple as joint tenants with right of survivorship. What is the amount of the marital deduction to Mike's estate for these two assets? a. $9,000,000 b. $10,000,000 c. $14,000,000 d. $18,000,000

c.

In April, X and Y formed Z Corp. X contributed $50,000 cash, and Y contributed land worth $70,000 (with an adjusted basis of $40,000). Y also received $20,000 cash from the corporation. X and Y each receives 50% of the corporation's stock. What is the tax basis of the land to Z Corp.? a. $40,000 b. $50,000 c. $60,000 d. $70,000

c.

Able authorized Brown to enter contracts with third parties on Able's behalf. In which of the following situations must Able provide notice to these third parties to effectively terminate Brown's authority? a. When it has become impossible for Brown to lawfully perform Brown's duties. b. When war has broken out between Able's country and Brown's country. c. When Brown has been declared insane by a court of law. d. When Able has revoked Brown's authority.

d.

CPA-01295 (R-07-03: Contracts: Part 2) West, an Indiana real estate broker, misrepresented to Zimmer that West was licensed in Kansas under the Kansas statute that regulates real estate brokers and requires all brokers to be licensed. Zimmer signed a contract agreeing to pay West a 5% commission for selling Zimmer's home in Kansas. West did not sign the contract. West sold Zimmer's home. If West sued Zimmer for nonpayment of commission, Zimmer would be: a. Liable to West only for the value of services rendered. b. Liable to West for the full commission. c. Not liable to West for any amount because West did not sign the contract. d. Not liable to West for any amount because West violated the Kansas licensing requirements.

d.

CPA-01352 (R-08-01: Bankruptcy: Part 1) 3. Dart Inc., a closely held corporation, was petitioned involuntarily into bankruptcy under the liquidation provisions of Chapter 7 of the Federal Bankruptcy Code. Dart contested the petition. Dart has not been paying its business debts as they became due, has defaulted on its mortgage loan payments, and owes back taxes to the IRS. The total cash value of Dart's bankruptcy estate after the sale of all assets and payment of administration expenses is $104,000. Dart has the following creditors: Fracon Bank is owed $75,000 principal and accrued interest on a mortgage loan secured by Dart's real property. The property was valued at and sold, in bankruptcy, for $70,000. The IRS has a $12,000 recorded judgment for unpaid corporate income tax. JOG Office Supplies has an unsecured claim of $2,000 that was timely filed. Nanstar Electric Co. has an unsecured claim of $1,200 that was not timely filed. Decoy Publications has a claim of $20,000, of which $2,000 is secured by Dart's inventory that was valued and sold, in bankruptcy, for $2,000. The claim was timely filed. Which of the following creditors must join in the filing of the involuntary petition? I.JOG Office Supplies II.Nanstar Electric Co. III.Decoy Publications. a. I, II, & III. b. II & III. c. I & II. d. III only.

d.

CPA-01437 (R-06-07: Legal Duties and Responsibilities) Which of the following statements is (are) correct regarding a CPA employee of a CPA firm taking copies of information contained in client files when the CPA leaves the firm? I.A CPA leaving a firm may take copies of information contained in client files to assist another firm in serving that client. II.A CPA leaving a firm may take copies of information contained in client files as a method of gaining technical expertise. a. I only. b. II only. c. Both I and II. d. Neither I nor

d.

CPA-01441 (R-06-07: Legal Duties and Responsibilities) To which of the following parties may a CPA partnership provide its working papers without either the client's consent or a lawful subpoena? The IRS The FASB a. Yes Yes b. Yes No c. No Yes d. No No

d.

CPA-01737 (R-05-03: Partnerships: Part 2) Stone's basis in Ace Partnership was $70,000 at the time he received a nonliquidating distribution of partnership capital assets. These capital assets had an adjusted basis of $65,000 to Ace and a fair market value of $83,000. Ace had no unrealized receivables, appreciated inventory, or properties that had been contributed by its partners. What was Stone's recognized gain or loss on the distribution? a. $18,000 ordinary income. b. $13,000 capital gain. c. $5,000 capital loss. d. $0.

d.

CPA-01843 (R-07-05: Suretyship) Which of the following acts always will result in the total release of a compensated surety? a. The creditor changes the manner of the principal debtor's payment. b. The creditor extends the principal debtor's time to pay. c. The principal debtor's obligation is partially released. d. The principal debtor's performance is tendered.

d.

CPA-01853 (R-03-01: Basis and Holding Period of Assets) Fred Berk bought a plot of land with a cash payment of $40,000 and a mortgage of $50,000. In addition, Berk paid $200 for a title insurance policy. Berk's basis in this land is: a. $40,000 b. $40,200 c. $90,000 d. $90,200

d.

CPA-01955 (R-05-01: S Corporations) Lane Inc., an S corporation, pays single-coverage health insurance premiums of $4,800 per year and family coverage premiums of $7,200 per year. Mill is a 10 percent shareholder-employee in Lane. On Mill's behalf, Lane pays Mill's family coverage under the health insurance plan. What amount of insurance premiums is includable in Mill's gross income? a. $0 b. $720 c. $4,800 d. $7,200

d.

CPA-02045 (R-04-02: Corporate Taxable Income ) Lake Corp., an accrual-basis calendar year corporation, had the following Year 1 receipts: Year 2 advanced rental payments where the lease ends in Year 3 $ 125,000 Lease cancellation payment from a 5-year lease tenant 50,000 Lake had no restrictions on the use of the advanced rental payments and renders no services. What amount of income should Lake report on its Year 1 tax return? a. $0 b. $50,000 c. $125,000 d. $175,000

d.

CPA-02047 (R-04-02: Corporate Taxable Income ) In Year 1, Best Corp., an accrual basis calendar year C corporation, received $100,000 in dividend income from the common stock that it held in an unrelated domestic corporation. The stock was not debt financed and was held for over a year. Best recorded the following information for Year 1: Loss from Best's operations $(10,000) Dividends received 100,000 Taxable income (before dividends-received deduction) 90,000 Best's dividends-received deduction on its Year 1 tax return was: a. $100,000 b. $65,000 c. $50,000 d. $45,000

d.

CPA-02068 (R-04-04: Tax Computations and Credits) The accumulated earnings tax can be imposed: a. On both partnerships and corporations. b. On companies that make distributions in excess of accumulated earnings. c. On personal holding companies. d. Regardless of the number of stockholders in a corporation.

d.

CPA-02147 (R-04-02: Corporate Taxable Income ) Ace Rentals Inc., an accrual-basis taxpayer, reported rent receivable of $35,000 and $25,000 in its Year 2 and Year 1 balance sheets, respectively. During Year 2, Ace received $50,000 in rent payments and $5,000 in nonrefundable rent deposits. In Ace's Year 2 corporate income tax return, what amount should Ace include as rent revenue? a. $50,000 b. $55,000 c. $60,000 d. $65,000

d.

CPA-02234 (R-04-04: Tax Computations and Credits) The following information pertains to Hull, Inc., a personal holding company, for the current year: Undistributed personal holding company income $100,000 Dividends paid during the current year 20,000 Consent dividends reported in the current year individual income tax returns of the holders of Hull's common stock, but not paid by Hull to its stockholders 10,000 In computing its current year personal holding company tax, what amount should Hull deduct for dividends paid? a. $0 b. $10,000 c. $20,000 d. $30,000

d.

CPA-04130 (R-04-07: Entity/Owner Transactions) On December 31, a C corporation made a nonliquidating distribution of the following assets to its sole shareholder: Land Fair market value $ 100,000 Adjusted basis 50,000 Patent Fair market value 25,000 Adjusted basis 0 Building Fair market value 50,000 Adjusted basis 150,000 What gain or loss should the corporation recognize as a result of the distribution? a. $50,000 loss. b. No gain and no loss. c. $25,000 gain. d. $75,000 gain.

d.

CPA-04915 (R-05-04: Partnerships: Part 3) Kent King's adjusted basis for his partnership interest in Troy Partnership was $32,000. In complete liquidation of his interest in Troy, King received cash of $2,000 and realty having a fair market value of $25,000. Troy's adjusted basis for this realty was $15,000. King's basis for the realty after distribution is: a. $13,000 b. $15,000 c. $25,000 d. $30,000

d.

CPA-06012 (R-06-02: Estate and Gift Transactions) George and Suzanne have been married for 40 years. Suzanne inherited $1,000,000 from her mother. Assume that the annual gift tax exclusion is $14,000. What amount of the $1,000,000 can Suzanne give to George without incurring a gift tax liability? a. $14,000 b. $28,000 c. $500,000 d. $1,000,000

d.

CPA-06538 (R-05-03: Partnerships: Part 2) Brown, a 50% partner in Brown & White, received a distribution of $12,500 in the current year. The partnership's income for the year was $25,000. What is the character of the payment that Brown received? a. Partial liquidation. b. Liquidating distribution. c. Disproportionate distribution. d. Current distribution.

d.

CPA-08206 (R-05-02: Partnerships: Part 1) When the AQR partnership was formed, partner Acre contributed land with a fair market value of $100,000 and a tax basis of $60,000 in exchange for a one-third interest in the partnership. The AQR partnership agreement specifies that each partner will share equally in the partnership's profits and losses. During its first year of operation, AQR sold the land to an unrelated third party for $160,000. What is the proper tax treatment of the sale? a. Each partner reports a capital gain of $33,333. b. The entire gain of $100,000 must be specifically allocated to Acre. c. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by the other two partners. d. The first $40,000 of gain is allocated to Acre, and the remaining gain of $60,000 is shared equally by all the partners in the partnership.

d.

CPA-08337 (R-03-01: Basis and Holding Period of Assets) As of the beginning of Year 3, Wolf Inc. has a written accounting policy to expense amounts paid for tangible property costing up to $8,000. Wolf also has an applicable financial statement for the year. During Year 3, Wolf pays $12,000 for three pieces of office furniture that cost $4,000 each and have an economic life of five years. Under the de minimis rule, how much can Wolf deduct for tax purposes in Year 3? a. $0 b. $7,500 c. $4,000 d. $12,000

d.

CPA-08339 (R-03-01: Basis and Holding Period of Assets) Davis, Inc. has had an average annual gross receipts of $8.5 million during Years 1 through 3. During Year 4, Davis pays $9,250 for repairs and improvements on a building it owns with an unadjusted basis of $700,000. The costs do not qualify as routine maintenance. Under the safe harbor rules, how much can Davis deduct as repairs and maintenance in Year 4? a. $0 b. $2,500 c. $5,000 d. $9,250

d.

CPA-08638 (R-06-01: Trusts and Estates) Which of the following is a disadvantage of a revocable trust? a. The grantor will be subject to gift taxes on the transfer of property to the trust. b. The trust assets are subject to being probated upon the death of the grantor. c. The grantor loses power to control the trust funds for federal estate tax purposes. d. The trust is included in the gross estate of the grantor.

d.

CPA-08991 (R-05-02: Partnerships: Part 1) Danson and Ellerby are equal partners in DE Partnership, which is in the business of selling fine art. DE owns assets with a tax basis and fair market value of $240,000. In January of the current year, Finley contributes to the partnership some personal investment art with a fair market value of $120,000 (tax basis $80,000) to become a one-third partner in the new DEF partnership. In October of the current year, DEF sells the art received from Finley for $141,000. What amount of gain from the sale of the artwork should be allocated to Finley? a. $7,000 b. $20,333 c. $40,000 d. $47,000

d.