REG Missed Questions 2

Question 1

Which of the following items would increase an S corporation’s accumulated adjustments account (AAA)?

A. Taxable interest income

B. Tax-exempt interest income

C. Nondeductible penalties

D. Shareholder distributions

Answer 1

Choice “A” is correct. Taxable interest income is a separately stated item that increases an S corporation’s AAA. The accumulated adjustments account (AAA) is the accumulated earnings and profits of the S corporation. AAA is increased by ordinary business income and separately stated income and gains. AAA is decreased by ordinary business losses, separately stated losses and deductions, nondeductible expenses (other than those related to tax-exempt income), and distributions. An S corporation may also have an other adjustments account (OAA), which is increased by tax-exempt income and decreased by nondeductible expenses related to tax-exempt income.

Question 2

Gail and Mark James contributed to the support of their two children, Jack and Jill, as well as Mark’s mother, Betty. Jack is a 19-year-old full time student who earned $5,000 this year working at a coffee shop on campus. Jill is 24 years old and worked full-time as a librarian and earned $25,000. Jack comes home during the summer and holidays. Jill lives at home year-round. Betty lives in an apartment in town and received $2,000 in municipal bond interest, $6,000 in dividend income, and $4,000 in nontaxable Social Security benefits. Jack, Jill, and Betty are U.S. citizens and unmarried. Gail and Mark provided more than half of the support for Jack, Jill, and Betty. How many people qualify as dependents on Gail and Mark’s tax return?

A. Three

B. One

C. Two

D. Zero

Answer 2

Choice “B” is correct. Jack meets the CARES test for a qualifying child. Jill does not meet the CARES test for a qualifying child because she is 24 and not a full-time student. She fails the age limit test of CARES. Jill also does not meet the SUPORT test because she earns more taxable income than the gross income threshold amount (“U” for under that amount). Betty does not meet the CARES test because she fails the close relative and age limit tests. (The CARES test is for a qualifying child, not a qualifying relative.) Betty also fails the SUPORT test because her taxable income ($6,000) is not under the gross income threshold amount. Therefore, Gail and Mark James can claim one person as a dependent—Jack.

Question 3

Which of the following is the overall limitation to the qualified business income (QBI) deduction?

A. Taxable income limitations based on filing status

B. Lesser of: 50 percent of W-2 wages or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of qualified property

C. Lesser of: 50 percent of the combined QBI deductions or 20 percent of the taxpayer’s taxable income in excess of net capital gain

D. Lesser of: the combined QBI deductions or 20 percent of the taxpayer’s taxable income in excess of net capital gain

Answer 3

Choice “D” is correct. Once the QBI deduction is calculated based on the taxpayer’s eligibility, the overall deduction is limited to the lesser of the combined QBI deductions or 20 percent of the taxpayer’s taxable income in excess of net capital gain.

Question 4

Which of the following is a list of courts that are referred to as courts of original jurisdiction, or trial courts, for tax matters?

A. The U.S. District Court, the U.S. Court of Federal Claims, and the U.S. Court of Appeals.

B. The Tax Court, the U.S. District Court, and the U.S. Bankruptcy Court.

C. The Tax Court, the U.S. Court of Federal Claims, and the U.S. Court of Appeals.

D. The Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims.

Answer 4

Choice “D” is correct. The courts of original jurisdiction for tax cases, i.e., the courts in which a taxpayer would first bring a lawsuit against the IRS, are the Tax Court, the U.S. District Court, and the U.S. Court of Federal Claims.

Question 5

Jane is a widow whose spouse died on December 31, Year 1. Jane and her spouse did not have any children but Jane’s nephew, Phil, moved into her home when Jane’s spouse died and lived there throughout Year 1 and Year 2. Phil is 25 years old and has a part-time job but spends most of his time helping Jane. Phil’s taxable gross income for Year 2 was $10,000. Jane pays all the costs of maintaining the home and provides more than half of Phil’s support. What is Jane’s most advantageous filing status for Year 2?

A. Surviving spouse

B. Married filing jointly

C. Single

D. Head of household

Answer 5

Choice “C” is correct. Jane does not meet the qualifications for head of household, surviving spouse, or married filing jointly filing status in Year 2. She is unmarried so the only filing status she qualifies for is single.

Question 6

In the current year, a self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, self-employed health insurance of $6,000, and $5,000 of alimony pursuant to divorce finalized in 2007. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer’s adjusted gross income for the year?

A. $40,000

B. $46,000

C. $50,000

D. $55,000

Answer 6

Choice “A” is correct. Adjusted gross income is gross income minus adjustments. Half of the $8,000 self-employment tax is an adjustment for AGI, as is the $6,000 self-employed health insurance, the $5,000 alimony, and the $2,000 contribution to a traditional IRA. Alimony paid pursuant to a divorce settlement executed on or before December 31, 2018, is deductible by the payor. Alimony paid pursuant to a divorce settlement executed after December 31, 2018, is not deductible. All of these amounts (total of $17,000) are subtracted from the $57,000 gross income to arrive at AGI of $40,000.

Question 7

Max, a 19-year-old single taxpayer, works part time and goes to school part time. Maxʹs adjusted gross income (AGI) for the current year is $30,000. He made a $3,000 contribution to a Roth individual retirement account (IRA). Which of the following is a true statement about Maxʹs retirement savings contribution credit for the current year?

A. The credit is only available for contributions to a traditional IRA, not a Roth IRA.

B. Max is not eligible for the credit because he is not at least 21 years old by the end of the tax year.

C. Max is eligible for the credit even if he is a dependent of another taxpayer.

D. The credit is only available for $2,000 of Maxʹs contributions to a Roth IRA.

Answer 7

Choice “D” is correct. Only $2,000 of Maxʹs $3,000 Roth IRA contribution is eligible for the credit. The retirement savings contribution credit is a nonrefundable credit for contributions of up to $2,000 to either a traditional or Roth IRA by an eligible taxpayer.

Max is an eligible taxpayer because he is at least 18 years old by the end of the year, he is not a full-time student, and he is not a dependent of another taxpayer.

Question 8

Merrill and Joe’s divorce was finalized in June of 2012. As part of the settlement, Joe received the following:

Alimony $3,000/per month

Child support $1,000/per month

Lump-sum property settlement payment $125,000

Payments began in July, 2012; however, Merrill only paid a total of $15,000 during the year. For the current year, what amount must Joe include in gross income on his individual income tax return?

A. $9,000

B. $140,000

C. $134,000

D. $15,000

Answer 8

Choice “A” is correct. Alimony received pursuant to a divorce agreement executed on or before December 31, 2018 is included in taxable gross income; child support is not. Alimony paid according to a divorce agreement executed after December 31, 2018, is neither taxable to the recipient nor deductible by the payor. Because this divorce was finalized in 2012, the alimony is included in gross income. Joe was to receive $3,000 per month in alimony for the remaining six months of the year (July - December), for a total of $18,000. Child support is non-taxable as are lump-sum property settlements made pursuant to a divorce. When total payments received do not equal the total due, the amounts are first allocated to child support. Thus, of the $15,000 paid by Merrill, $6,000 is first allocated to child support. The remaining $9,000 would constitute alimony and would be taxable income to Joe.

Question 9

Dave and Pam Stevens contributed to the support of their three children, Lisa, Tanya, and Hannah, and Pam’s divorced mother, Ellen. For the current year, Lisa, a 26-year-old sales clerk, earned $27,000. Tanya, a 23-year-old, full-time college graduate student in accounting, earned $35,000 working for a CPA firm. Hannah, a 20-year old artist, earned nothing during the year, but is still aspiring to sell her first piece and has signed on with an art studio. Ellen received $10,000 in nontaxable social security benefits and $2,000 in dividend income. All are U.S. citizens and are over half supported by Dave and Pam. How many dependents do Dave and Pam Stevens have under the qualifying child and qualifying relative rules?

A. Zero

B. Three

C. Two

D. One

Answer 9

Choice “B” is correct. Based on the CARES (QC) and the SUPORT (QR) tests, Dave and Pam have three dependents.

Lisa: NO. Lisa fails the age limit for QC and exceeds the gross income limitation for QR.

Tanya: YES. Tanya meets all tests of QC. She is a full-time student under the age of 24 so she meets the age test.

Hannah: YES. Hannah meets all criteria for QR. She fails the age limit test for QC.

Ellen: YES. Ellen meets the gross income limitation for QR because the Social Security income is nontaxable and not included for the gross income test.

Tanya, Hannah, and Ellen all meet dependency requirements.

Question 10

For the current year, Kelly Corp. had net income per books of $300,000 before the provision for federal income taxes. Included in the net income were the following items:

Dividend income from an unaffiliated domestic taxable corporation (taxable income limitation does not apply and there is no portfolio indebtedness) 50,000

Bad debt expense (represents the increase in the allowance for doubtful accounts)

80,000

Assuming no bad debt was written off, what is Kelly’s taxable income for the current year?

A. $250,000

B. $380,000

C. $330,000

D. $355,000

Answer 10

Choice “D” is correct.

Book net income $300,000

Nondeductible bad debt expense $80,000

Dividends-received deduction $(25,000)

                                                                  355,000

Question 11

A taxpayer reported the following in a tax year:

Salary $122,000
Capital gain dividends 3,700
Partnership short-term capital loss (6,300)
The taxpayer acquired the partnership interest during the year in exchange for a capital contribution of $2,750, and there were no additional items affecting the taxpayer’s basis in the partnership. What is the taxpayer’s adjusted gross income for the year?

A. $122,000

B. $122,950

C. $119,400

D. $122,700

Answer 11

Choice “B” is correct. The taxpayer’s adjusted gross income (AGI) for the year is $122,950. The short-term capital loss (STCL) from the partnership can only be flowed through for deduction on the partner’s individual income tax return to the extent of the partner’s tax basis in the partnership interest. In this case, the partner’s basis is the amount of his capital contribution of $2,750, so only $2,750 of the STCL is flowed through for deduction on his individual tax return. The remaining $3,550 loss ($6,300 − $2,750) is suspended until the partner’s basis is reinstated in future years.

Individual taxpayers are allowed to deduct up to $3,000 of net capital losses each year, after netting all the capital gains and losses for the year together. The $2,750 STCL from the partnership is offset against the LTCG dividends of $3,700, so the taxpayer has a net LTCG for the year of $950.

Salary $122,000
Capital gain dividends (LTCG) $3,700
STCL from partnership (2,750)
Net LTCG 950
AGI 122,950

Question 12

Which of the following would preclude a taxpayer from deducting student loan interest expense?

A. The total amount paid is $1,000.

B. The taxpayer claims a dependent on his or her income tax return.

C. The taxpayer is married filing jointly with AGI of $135,000.

D. The taxpayer is single with AGI of $110,000.

Answer 12

Choice “D” is correct. $110,000 of AGI is above the current year student loan interest expense AGI limitation for a single taxpayer.

Question 13

The Stevenson’s are filing married filing jointly, and their adjusted gross income was $58,250. Additional information is as follows:

Interest paid on their home mortgage $5,200

State taxes paid $2,000

Medical expenses in excess of AGI floor $1,500

Deductible contributions to IRAs $4,000

Alimony paid to Mr. Stevenson’s first wife (divorce finalized in 2015) $5,000

Child support paid for Mr. Stevenson’s daughter $5,100

What amount may the Stevenson’s claim as itemized deductions on their Schedule A?

A. $8,700

B. $13,800

C. $12,300

D. $7,200

Answer 13

Choice “A” is correct. Interest on a home mortgage, state taxes paid, and medical expenses in excess of the AGI floor are itemized deductions reported on Schedule A. Contributions to IRAs and alimony paid on a divorce executed prior to 2019 are adjustments to gross income to arrive at AGI. Child support is neither an adjustment nor an itemized deduction.

Home mortgage interest $5,200

State taxes paid $2,000

Medical expenses $1,500

Total itemized deductions $8,700

Question 14

For Year 2, Quest Corp., an accrual basis calendar year C corporation, had an $8,000 unexpired charitable contribution carryover from Year 1. Quest’s Year 2 taxable income before the deduction for charitable contributions was $200,000. On December 12, Year 2, Quest’s board of directors authorized a $15,000 cash contribution to a qualified charity, which was made on January 6, Year 3. What is the maximum allowable deduction that Quest may take as a charitable contribution on its Year 2 income tax return?

A. $8,000

B. $20,000

C. $15,000

D. $23,000

Answer 14

Choice “B” is correct. C corporations are allowed a maximum charitable contribution deduction of 10 percent of taxable income before the following deductions:

Any charitable contribution;
The dividends-received deduction;
Any net operating loss carryback; and
Any net capital loss carryback.

Accrued charitable contributions not paid by the end of the year are deductible in the year of accrual if (i) the board of directors authorizes the contribution during the tax year and (ii) the accrual basis corporation pays the accrued amount by the 15th day of the fourth month (generally 3½ months) following the end of the tax year.

Any amount in excess of the “10 percent limitation” may be carried forward for five years.

Question 15

For the current year, Jennifer has self-employment net income of $50,000 before any SEP IRA deduction and no other earned income for the year. The total amount of self-employment tax related to Jennifer’s earnings was $7,064. What is the maximum amount Jennifer may deduct for contributions to her SEP IRA for the year?

A. $66,000

B. $8,587

C. $10,000

D. $9,294

Answer 15

Choice “D” is correct. The maximum annual deductible amount for self-employed individuals to a SEP IRA is the lesser of $66,000 (2023) or 20 percent of net earnings. “Net earnings” is defined as net self-employment income minus 50 percent of self-employment (S/E) taxes.

Net self-employment income $50,000

50% of self-employment taxes (3,532)
[$7,064 × 50%]

Self-employment earnings before SEP IRA 46,468

Times 20% × .20

Calculated SEP IRA Deduction 9,294

The 20 percent of self-employment earnings is less than the maximum of $66,000 (2023), so the SEP IRA deduction is $9,294.

Question 16

In the current year, an unmarried individual with modified adjusted gross income of $25,000 paid $1,000 interest on a qualified education loan entered into on July 1. How may the individual treat the interest for income tax purposes?

A. As a nondeductible item of personal interest.

B. As a $1,000 deduction to arrive at AGI for the year.

C. As a $500 deduction to arrive at AGI for the year.

D. As a $1,000 itemized deduction.

Answer 16

Choice “B” is correct. The $1,000 of qualified education loan interest paid in the year is reported as a deduction to arrive at AGI for the year. The taxpayer’s AGI of $25,000 is below the phase-out threshold for unmarried taxpayers, so the deduction is not phased out.

Question 17

Jane is a widow whose spouse died on January 2, Year 1. Jane and her spouse did not have any children but Jane’s nephew, Phil, moved into her home when Jane’s spouse died and lived there the entire year. Phil is 25 years old and has a part-time job but spends most of his time helping Jane. Phil’s taxable gross income for Year 1 was $10,000. Jane pays all the costs of maintaining the home and provides more than half of Phil’s support. What is Jane’s most advantageous filing status for Year 1?

A. Single

B. Head of household

C. Surviving spouse

D. Married filing jointly

Answer 17

Choice “D” is correct. A taxpayer may file a married filing jointly tax return in the year that a spouse dies, regardless of when in the tax year the spouse died. There is no requirement that the taxpayer maintain a home for a dependent child or dependent relative. The taxpayer does not meet the qualifications for single, head of household, or surviving spouse filing status in Year 1.

Question 18

Chris Baker’s adjusted gross income on her current year tax return was $160,000. The amount covered a 12-month period. For the next tax year, Baker may avoid the penalty for the underpayment of estimated tax if the timely estimated tax payments equal the required annual amount of:

I. 90% of the tax on the return for the current year paid in four equal installments.

II. 110% of prior year’s tax liability paid in four equal installments.

A. Neither I nor II.

B. II only.

C. Both I and II.

D. I only.

Answer 18

Choice “C” is correct. Both I and II.

I. Payment of 90% of the tax on the return for the current year avoids the penalty for underpayment of estimated tax.

II. Generally, payment of 110% of the prior year’s tax liability avoids the penalty for underpayment of estimated tax when the taxpayer’s AGI from the prior year exceeds $150,000. If the taxpayer’s AGI is $150,000 or less, payment of 100% of the prior year’s tax liability avoids the penalty for underpayment of estimated tax.

Note: Payment of the lesser of the two above will provide “safe harbor” to the taxpayer.

Question 19

Dawn White’s adjusted gross income on her Year 1 tax return was $100,000. The amount covered a 12-month period. For the Year 2 tax year, the minimum payments required from White to avoid the penalty for the underpayment of estimated tax is:

A. 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year’s tax liability paid in four equal installments.

B. 90% of the current tax on the return for the current year paid in four equal installments or 110% of the prior year’s tax liability paid in four equal installments.

C. 110% of the prior year’s tax liability paid in four equal installments only.

D. 100% of the prior year’s tax liability paid in four equal installments only.

Answer 19

Choice “A” is correct. The requirement is 90% of the current tax on the return for the current year paid in four equal installments or 100% of the prior year’s tax liability paid in four equal installments.

Question 20

A real estate broker reported the following business income and expenses for the current year:

  Commission income	                                                        $100,000 Expenses:	 
  Auto rentals	                                                                              2,000
  Referral fees to other brokers (legal under state law)        20,000
  Referral fees to nonbrokers (illegal under state law)	      8,000
  Parking fines	                                                                                 200

What amount should be reported as net profit on Schedule C, Profit or Loss from Business?

A. $69,800

B. $70,000

C. $77,800

D. $78,000

Answer 20

Choice “D” is correct. The taxpayer’s Schedule C net profit is $78,000.

The taxpayer may deduct ordinary and necessary business expenses, which include the auto rentals and referral fees to other brokers that are legal under state law. The illegal referral fees to nonbrokers and parking fines are nondeductible.

Commission income $100,000
Auto rentals (2,000)
Referral fees to other brokers (20,000)
Schedule C net profit $ 78,000

Question 21

Daisy Dunn is a single, calendar-year, cash-basis taxpayer with no dependents. Daisy died on March 1, Year 1. Daisy earned $20,000 from her job and $500 of interest income from bank accounts in Year 1 before she died. Her estate received another $1,500 of interest from her bank accounts in Year 1 after her death.

What is Daisy’s taxable gross income on her Year 1 final federal income tax return?

A. $22,000

B. $20,000

C. $20,500

D. $0

Answer 21

Choice “C” is correct. The $20,000 wages and $500 interest earned and received before Daisy died should be included in her taxable gross income on her Year 1 final federal income tax return. The $1,500 of interest income received after Daisy’s death by her estate should be included on the estate’s Year 1 federal income tax return.

Question 22

Which of the following can be subject to the net investment income tax?

A. A domestic C corporation.

B. An individual who is a resident of the United States.

C. A limited partnership.

D. A nonresident alien.

Answer 22

Choice “B” is correct. An individual who is a U.S. resident may be subject to the 3.8 percent net investment income tax on net investment income above statutory AGI threshold amounts.

Question 23

Emmett loaned Baker $10,000. Baker filed for bankruptcy last year, and Emmett was notified that Emmett would receive $0.20 on the dollar. In the current year, Emmett received $1,500 as the final settlement. The loan is nonbusiness. How should Emmett report the loss?

A. $8,000 short-term capital loss last year and $500 ordinary loss in the current year.

B. $8,500 short-term capital loss in the current year.

C. $8,000 short-term capital loss last year and $500 capital loss in the current year.

D. $8,500 ordinary loss in the current year.

Answer 23

Choice “B” is correct. Emmett should report the loss as an $8,500 short-term capital loss in the current year. Nonbusiness bad debt losses are treated as short-term capital losses in the year that the debt becomes totally worthless. Since Emmett received the final settlement in the current year, the loss should be reported in the current year.

Question 24

Alex and Myra Burg, married and filing joint income tax returns, derive their entire income from the operation of their retail candy shop. Their adjusted gross income was $50,000. The Burgs itemized their deductions on Schedule A. The following unreimbursed cash expenditures were among those made by the Burgs during the year:

Repair and maintenance of motorized wheelchair for physically handicapped dependent child

$ 300

Tuition, meals, and lodging at special school for physically handicapped dependent child in the institution primarily for the availability of medical care, with meals and lodging furnished as necessary incidents to that care

4,000

State income tax

1,200

Self-employment tax

7,650

Four tickets to a theatre party sponsored by a qualified charitable organization; not considered a business expense; similar tickets would cost $25 each at the box office

160

Repair of glass vase accidentally broken in home by dog; vase cost $500 5 years ago; fair value $600 before accident and $200 after accident 90

Fee for breaking lease on prior apartment residence located 20 miles from new residence 500

Security deposit placed on apartment at new location 900

Without regard to the adjusted gross income percentage threshold, what amount may the Burgs claim in their current year return as qualifying medical expenses?

A. $4,000

B. $300

C. $4,300

D. $0

Answer 24

Choice “C” is correct. $4,300 medical expenses.

Wheelchair repair 300

School for handicapped 4,000

Total 4,300

Question 25

Mary purchased an annuity that pays her $500 per month for the rest of her life. She paid $70,000 for the annuity. Based on IRS annuity tables, Mary's life expectancy is 16 years. If Mary dies after receiving 10 full years of the annuity payments, how is Mary's annuity treated on her final tax return? A. Deduct $43,749.60 as an itemized deduction. B. Deduct $26,250.40 as an itemized deduction. C. Deduct $70,000 as an itemized deduction. D. No deduction for the annuity.

Answer 25

Choice "B" is correct. If Mary dies after receiving 10 full years of annuity payments, she will have received 120 payments (10 years × 12 months). Mary's IRS life expectancy was 16 years (16 years × 12 months = 192 months). For the first 192 payments, Mary will have a return of capital of $364.58 ($70,000/192 months). Therefore, after 10 full years of payments she will have recovered $43,749.60 ($364.58 × 12 × 10) of the $70,000 investment in the annuity. The unrecovered portion ($70,000 – $43,749.60 = $26,250.40) can be deducted on Mary's final tax return as an itemized deduction.

Question 26

Roger Corp. had operating income of $300,000 after deducting $12,000 for charitable contributions made during the fiscal year, but not including dividends of $10,000 received from a 10 percent-owned domestic taxable corporation. How much is the base amount to which the percentage limitation should be applied in computing the maximum deduction for the charitable contribution? A. $300,000 B. $322,000 C. $317,000 D. $312,000

Answer 26

Choice "B" is correct. The percentage threshold limit for charitable contributions for a corporation is 10 percent of adjusted taxable income. Total taxable income is calculated before the deduction of any charitable contributions, the dividends-received deduction, or any capital loss carryback. Thus, the $300,000 must be adjusted to add back the charitable contribution deduction of $12,000 plus the $10,000 of dividend income not included in the $300,000. The base equals $322,000.

Question 27

Mark and Mary formed MM Inc. as an S corporation. Each contributed $50,000 in exchange for five shares of corporate stock. In addition, MM obtained a $60,000 loan from a local bank that was still outstanding at the end of the year. In MM's first year of operation, it reported a loss of $20,000 and did not make any distributions to the shareholders. What is Mark's basis in his MM shares at the beginning of the second year? A. $70,000 B. $50,000 C. $40,000 D. $100,000

Answer 27

Choice "C" is correct. Mark’s initial stock basis of $50,000 is reduced by his 50 percent share of MM's Year 1 ordinary loss. An S corporation shareholder does not include any S corporation debt in stock basis. Initial contribution $ 50,000 Ordinary loss (50 percent) (10,000) Tax basis in stock $ 40,000

Question 28

Which of the following statements about the child and dependent care credit is correct? A. The maximum credit is $600. B. The credit is available for the cost of the care of a disabled spouse. C. The child must be under the age of 18 years. D. The child must be a direct descendant of the taxpayer.

Answer 28

Choice "B" is correct. The expenses for care of a spouse who is disabled and unable to take care of himself or herself are eligible for the credit, up to a maximum expenditure of $3,000.

Question 29

A cash basis taxpayer should report gross income: A. For the year in which income is either actually or constructively received, whether in cash or in property. B. For the year in which income is either actually or constructively received in cash only. C. Only for the year in which income is actually received in cash. D. Only for the year in which income is actually received whether in cash or in property.

Answer 29

Choice "A" is correct. A cash basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property.

Question 30

Dreamscape, Inc., a widget retailer, had taxable income of $150,000 from operations during its taxable year. In addition, Dreamscape incurred a $35,000 loss from the sale of investment land, a capital asset. No other gains or losses were generated during the taxable year, nor had been in past years. In Dreamscape's tax return for that year, what is the proper treatment of the $35,000 loss? A. Use $3,000 of the loss to reduce the taxable income to $147,000 and carry the remaining $32,000 forward for 5 years. B. Use $3,000 of the loss to reduce the taxable income of $147,000 carry the remaining $32,000 forward for 3 years. C. Carry the $35,000 capital loss forward for five years. D. The $35,000 capital loss can be used in the current year to reduce taxable income to $115,000.

Answer 30

Choice "C" is correct. Capital gains are taxed at the same rate as ordinary income for a corporation. However, capital losses can only be used to offset capital gains. Any amount not utilized in the year of generation can either be carried back 3 years to offset prior capital gains or carried forward for 5 years.

Question 31

Where is the deduction for qualified business income (QBI) applied in the individual tax formula? A. As an alternative to the standard deduction B. As an adjustment to arrive at adjusted gross income C. As a deduction from adjusted gross income separate from the standard deduction and itemized deductions D. As an itemized deduction

Answer 31

Choice "C" is correct. The QBI deduction is taken from adjusted gross income ("below the line"). It is not part of the itemized deductions.

Question 32

On January 2, Year 1, the Kanes paid $60,000 cash and obtained a $300,000 mortgage to purchase a home. In Year 4, they borrowed $20,000 secured by their home on a home equity line of credit and used the cash to pay bills and take a vacation. That same year they took out a $7,000 auto loan. The following information pertains to interest paid in Year 4: Mortgage interest on first loan $19,000 Interest on home equity line of credit $2,500 Auto loan interest $500 For Year 4, how much interest is deductible? A. $19,000 B. $21,500 C. $19,500 D. $22,000

Answer 32

Choice "A" is correct. Interest on mortgages of up to $750,000 to buy, build, or substantially improve a home (the first loan) are fully deductible. Interest on home equity loans is only deductible if the proceeds are used to substantially improve the home. Interest for personal expenses such as auto loans and credit cards is not deductible. The total deduction is $19,000.

Question 33

Brown Corp., a calendar-year taxpayer, was organized and actively began operations on July 1, Year 1, and incurred the following costs: Legal fees to obtain corporate charter $41,000 Commission paid to underwriter $25,000 Other stock issue costs $10,000 Brown wishes to amortize its organizational costs over the shortest period allowed for tax purposes. In Year 1, what amount should Brown deduct for the organizational expenses? A. $5,000 B. $6,200 C. $1,200 D. $8,600

Answer 33

Choice "B" is correct. Organizational costs are amortizable over a minimum period of 15 years (180 months). In addition, subject to a $50,000 total expenditure limitation, a $5,000 deduction is allowed in Year 1. Allowable costs in connection with the corporate organization are legal fees to obtain the corporate charter, necessary accounting services, expenses of temporary directors, and incorporation fees paid to the state. Organizational costs exclude stock issue costs and commissions paid to underwriters to help sell the shares. Only the legal fees of $41,000 qualify as organizational costs. $41,000 − $5,000 = $36,000/180 months = $200 × 6 months = $1,200 + $5,000 (expense in Year 1) = $6,200.

Question 34

Smith made a gift of property to Thompson. Smith's basis in the property was $1,200. The fair market value at the time of the gift was $1,400. Thompson sold the property for $2,500. What was the amount of Thompson's gain on the disposition? A. $0 B. $1,300 C. $1,100 D. $2,500

Answer 34

Choice "B" is correct. The general rule for the basis on gifted property is that the donee receives the property with a rollover cost basis (equal to the donor's basis). An exception exists where the fair market value of the property at the time of the gift is less than the donor's basis. That is not the case in this question; thus, the calculation of the gain on the disposition of the property is: Amount realized $2,500 Basis $(1,200) Gain recognized $1,300

Question 35

he question below includes actual dates that must be used to determine the appropriate tax treatment of the transaction. Fred and Wilma were divorced in 2017. Fred is required to pay Wilma $12,000 of alimony each year until their child turns 18. At that time, the payment will be reduced to $10,000 per year. In the current year, in accordance with the divorce agreement, Fred paid $6,000 directly to Wilma and $6,000 directly to the law school Wilma is attending. What amount of the payments received in the current year is income to Wilma? A. $10,000 B. $0 C. $12,000 D. $6,000

Answer 35

Choice “A” is correct. Alimony pursuant to a divorce or separation agreement executed on or before December 31, 2018, is taxable to the recipient and deductible by the payor. Child support is not taxable to the recipient and not deductible by the payor. Because the total payment decreases to $10,000 once Fred and Wilma’s child turns 18, the $2,000 decrease is deemed child support. The fact that Fred pays the law school in accordance with the divorce agreement on Wilma’s behalf does not change the fact that $10,000 is considered alimony.

Question 36

A beneficiary acquired property from a decedent. The fair market value at the date of the decedent's death was $100,000. The decedent had paid $130,000 for the property. Estate taxes attributed to the property were $2,000. The beneficiary sold the property two years after receipt from the estate. What is the basis of the property for the beneficiary? A. $102,000 B. $100,000 C. $132,000 D. $130,000

Answer 36

Choice “B” is correct. The basis of inherited property to the beneficiary is the fair market value of the property at the date of the decedent's death (or the alternate valuation date, if the alternate valuation date is used for determining the value of the estate for estate tax purposes).

Question 37

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. $50,000 C. $150,000 D. $0

Answer 37

Choice "B" is correct. For the accumulated earnings tax, in this case, accumulated taxable income would equal taxable income ($400,000) minus federal income taxes ($100,000) minus the minimum accumulated earnings credit ($250,000) for manufacturing companies or $50,000.

Question 38

Mock operates a retail business selling illegal narcotic substances. Which of the following item(s) may Mock deduct in calculating business income? I. Cost of merchandise. II. Business expenses other than the cost of merchandise. A. Both I and II. B. I only. C. II only. D. Neither I nor II.

Answer 38

Choice "B" is correct. A gain from an illegal activity is includible in income. To determine the gain, a deduction is permitted for cost of merchandise. Business expenses for operating an illegal business, other than the cost of merchandise, are not permitted as deduction.

Question 39

Which of the following taxpayers may use the cash method of accounting? A. A C corporation with annual gross receipts of $50,000,000. B. A tax shelter. C. A manufacturer. D. A qualified personal service corporation.

Answer 39

Choice "D" is correct. Rule: The general rule is that the accrual method of accounting will be required by tax shelters, large C corporations (average annual gross receipts over three-year period greater than $29 million) and manufacturers. The IRS has the authority to require that a taxpayer use a method of accounting to accurately reflect the proper income and expenses. Personal Service Corporations are permitted the use of the cash method.

Question 40

American Corp. retained Baker, CPA, to conduct an audit of its financial statements to obtain a bank line of credit. American signed an engagement letter drafted by Baker that included a disclaimer provision. As a result of Baker's failure to detect a material misstatement in American's financial statements, the audit report contained an unmodified opinion. Based on American's audited financial statements, National extended credit to American. American filed a petition in bankruptcy shortly thereafter. National sued Baker for damages based on common law fraud. What would be Baker's best defense? A. Baker lacked the intent to deceive. B. Baker included a disclaimer provision in the engagement letter with American. C. National was not in privity with Baker. D. Baker acted with due diligence in conducting the audit.

Answer 40

Choice "A" is correct. In order to prove fraud, National must prove the five elements of fraud. These are a misrepresentation of a material fact, intent to deceive, actual and justifiable reliance on the misrepresentation, an intent to induce that reliance, and damages. A defense by Baker that there was no intent to deceive would be a valid defense against a claim of fraud.

Question 41

Calculate the taxpayer's qualified business income deduction for a qualified trade or business: Filing status: Single Taxable income: $100,000 Net capital gains: $0 Qualified business income (QBI): $30,000 W-2 wages: $10,000 A. $6,000 B. $15,000 C. $20,000 D. $5,000

Answer 41

Choice "A" is correct. $30,000 QBI × 20% = $6,000. W-2 wage and property limits do not apply to single taxpayers with taxable income before the QBI deduction below the taxable income threshold of $182,100 (2023).

Question 42

An S corporation has two shareholders who are also employees of the corporation. Shareholder A owns 20 shares and shareholder B owns 90 shares. The total number of shares issued and outstanding is 2,000. The corporation pays the health insurance premiums for all its employees and families. The cost of family coverage is $5,300. The corporation pays for family coverage for both shareholders. Because the company paid for health insurance, which of the following amounts would be reported to Shareholder A as his income? A. $0 B. $2,650 C. $4,240 D. $5,300

Answer 42

Choice “A” is correct. The value of fringe benefits such as health insurance is includable in the gross income of S corporation shareholders who own more than 2 percent of the S corporation's stock (unless the S corporation does not deduct the cost of such benefits). In this case, Shareholder A only owns 1 percent of the S corporation's stock (20 shares/2,000 shares = 1 percent). Thus, Shareholder A is not required to include the value of the health insurance in his gross income.

Question 43

Charles and Marcia are married cash-basis taxpayers. In Year 8, they had interest income as follows: $500 interest on federal income tax refund. $600 interest on state income tax refund. $800 interest on federal government obligations. $1,000 interest on state government obligations. What amount of interest income is taxable on Charles and Marcia's Year 8 joint income tax return? A. $2,900 B.$500 C. $1,900 D. $1,100

Answer 43

Choice "C" is correct. The $500 interest on federal income tax refund, the $600 interest on state income tax refund, and the $800 interest on federal government obligations are taxable, for a total of $1,900. The $1,000 interest on state government obligations is normally not taxable. Recall that to determine whether or not a state tax refund is taxable for federal tax purposes, we must know if the taxpayer took the standard deduction in the prior year or itemized deductions. This is not the case for interest on a tax refund. Interest on a federal or state income tax refund is included in taxable income.

Question 44

Chris, age 5, has $3,000 of interest income and no earned income this year. Assuming the current applicable standard deduction for dependents is $1,250, how much of Chris' income will be taxed at his parents' marginal rate? A. $1,750 B. $3,000 C. $500 D. $0

Answer 44

Choice "C" is correct. The net unearned income of a dependent child under age 18 is taxed at the parents' marginal rate under the "kiddie tax" rules. Net unearned income is calculated by taking the child's unearned income and reducing it by the dependent child's allowable standard deduction of $1,250 plus an additional $1,250 (which is taxed at the child's marginal tax rate). Chris' net unearned income taxed at his parents' marginal rate is $500 ($3,000 interest income – $1,250 standard deduction – $1,250 taxed at child's marginal rate).

Question 45

On April 1, Fine Corp. e-mailed Moss an offer to purchase Moss' warehouse for $500,000. The offer stated that it would remain open only until April 4 and that acceptance must be received to be effective. Moss sent an acceptance on April 4 by overnight mail and Fine received it on April 5. Which of the following statements is correct? A. No contract was formed because Fine received Moss' acceptance after April 4. B. A contract was formed when Fine received Moss' acceptance. C. A contract was formed when Moss sent the acceptance. D. No contract was formed because Moss sent the acceptance by an unauthorized method.

Answer 45

Choice "A" is correct. Generally, under the mailbox rule, acceptance is effective when sent. However, an offeror may opt out of the mailbox rule by stating that the acceptance must be received by a certain date to be effective. Fine's offer here required receipt by April 4. Moss' acceptance was received after the April 4th deadline.

Question 46

During Year 9, Ash had the following cash receipts: Wages $13,000 Interest income from U.S. Treasury bonds $350 Workers' compensation following a job-related injury $8,500 What is the total amount that must be included in gross income on Ash's Year 9 income tax return? A. $13,000 B. $21,500 C. $13,350 D. $21,850

Answer 46

Choice "C" is correct. The total amount that must be included in gross income is $13,350 ($13,000 in wages plus $350 in interest income on U.S. Treasury bonds). Wages and interest on U.S. Treasury bonds are includable in gross income and must be reported as part of gross income on a taxpayer's income tax return. Damages for personal injury (i.e., workers' compensation for a job-related injury) are specifically excluded from gross income.

Question 47

An individual taxpayer's adjusted gross income (AGI) for the current year is $200,000 and AGI for the prior year is $160,000. The taxpayer had federal income tax withholdings from wages throughout the year. In which of the following independent situations could the IRS impose a penalty for failure to pay sufficient estimated tax payments for the current year? A. The taxpayer's current year withholding is $500 less than the current year's tax liability. B. The taxpayer's current year withholding is 90 percent of the current year's tax liability. C. The taxpayer's current year withholding is 100 percent of the prior year's tax liability. D. The taxpayer's current year withholding is 110 percent of the prior year's tax liability.

Answer 47

Choice "C" is correct. An individual taxpayer must pay taxes throughout the tax year, through withholdings and/or quarterly estimated tax payments, of the lesser of (a) 90 percent of the current year's tax or (b) 100 percent of the prior year's tax (110 percent if prior year's AGI is more than $150,000). This question evaluates each situation independently. Here, the taxpayer's prior year AGI of $160,000 is more than $150,000, so withholding of 100 percent of the prior year's tax liability is not sufficient to avoid the penalty for failure to pay estimated tax payments.

Question 48

Freeman, a single individual, reported the following income in the current year: Guaranteed payment from services rendered to a partnership $50,000 Ordinary income from an S corporation $20,000 What amount of Freeman's income is subject to self-employment tax? A. $70,000 B. $20,000 C. $0 D. $50,000

Answer 48

Choice "D" is correct. Guaranteed payments are reasonable compensation paid to a partner for services rendered (or use of capital) without regard to his ratio of income. Earned compensation is subject to self-employment tax. Payments not guaranteed are merely another way to distribute partnership profits. The ordinary income reported from an S corporation is taxable income to the individual on their own individual tax return but is not subject to self-employment tax. The ordinary income reported from a partnership may be subject to self-employment tax (if to a general partner).

Question 49

A client suing a CPA for negligence must prove each of the following factors, except: A. Injury. B. Proximate cause. C. Reliance. D. Breach of duty of care.

Answer 49

Choice "C" is correct. Negligence has 4 elements: duty of care, breach (which is lack of due care), causality and injury.

Question 50

All of the following are effective methods of ratifying a contract entered into by a minor, except: A. Expressly ratifying the contract after reaching the age of majority. B. Failing to disaffirm the contract within a reasonable time after reaching the age of majority. C. Ratifying the contract before reaching the age of majority. D. Impliedly ratifying the contract after reaching the age of majority.

Answer 50

Choice "C" is correct. A minor can disaffirm any contract until a reasonable time after reaching the age of majority. Thus, a "ratification" prior to reaching majority can be revoked and is not effective.

Question 51

Elrod is attempting to introduce evidence in court to modify a written contract he made with Weaver. Weaver has pleaded the parol evidence rule. In which of the following circumstances will Elrod not be able to introduce the oral evidence: A. The modification asserted was made several days after the written contract had been executed. B. The contract indicates that it was intended as “the entire contract” between the parties, the oral conversation occurred before the contract was written, and the point is covered in detail. C. There was a mutual mistake of fact by the parties regarding the subject matter of the contract. D. The contract contains an obvious ambiguity on the point at issue.

Answer 51

Choice "B" is correct. Oral and written evidence of communications made before a contract is reduced to writing that contradicts the written contract is inadmissible in court. Since Elrod is attempting to modify a point that was covered in detail in the written contract, the evidence is inadmissible.

Question 52

Bond and Spear orally agreed that Bond would buy a car from Spear for $475. Bond paid Spear a $100 deposit. The next day, Spear received an offer of $575, the car's fair market value. Spear immediately notified Bond that Spear would not sell the car to Bond and returned Bond's $100. If Bond sues Spear and Spear defends on the basis of statute of frauds, Bond will probably: A. Win, because the agreement was for less than $500. B. Win, because Bond paid a deposit. C. Lose, because the agreement was for less than the fair market value of the car. D. Lose, because the agreement was not in writing and signed by Spear.

Answer 52

Choice "A" is correct. Under the Statute of Frauds, contracts for the sale of goods of $500 or more must be evidenced by a writing. A car is goods, but the contract price here was $475, so no writing was required.

Question 53

Anderson and Decker are equal members in Andek, an LLC, which has not elected to be treated as a corporation. Anderson contributes $7,000 cash, and Decker contributes a machine with an adjusted basis of $5,000 and fair market value of $10,000, subject to a liability of $3,000. What is Decker's basis in Andek? A. $5,000 B. $10,000 C. $3,500 D. $2,000

Answer 53

Choice "C" is correct. This LLC has not elected to be treated as a corporation. Therefore, it will be treated as a partnership by default. Decker's basis will be the adjusted basis of the property contributed less 50% of the liability, which is assumed by the other partner. $5,000 – $1,500 = $3,500.

Question 54

n accuracy-related penalty applies to the portion of tax underpayment attributable to: I. Negligence or a disregard of the tax rules or regulations. II. Any substantial understatement of income tax. A. I only. B. II only. C. Both I and II. D. Neither I nor II.

Answer 54

Choice "C" is correct. Accuracy-related penalties apply to the portion of tax underpayments attributable to negligence or disregard of tax rules and regulations as well as to any substantial understatement of income tax.

Question 55

Mort and Mindy met at a New Year's Eve party held December 31, Year 1. They instantly bonded, fell madly in love, and were married at 11:38 p.m. that night. Sadly, Mort passed away November 15, Year 2. In January, Year 3, Mindy gave birth to triplets Mark, Mandy, and Maureen. The triplets live with Mindy and she provides all of their support. Assuming Mindy has not remarried, what filing status should she use for Year 5? A. Single. B. Head of household. C. Surviving spouse. D. Married filing jointly.

Answer 55

Choice "B" is correct. Mindy should file using the head of household status. She has dependent children living with her, and no longer qualifies as married or as a surviving spouse. Head of household is the most favorable filing status for which she qualifies.

Question 56

On reaching majority, a minor may ratify a contract in any of the following ways, except by: A. Acting in a manner that amounts to ratification. B. Orally ratifying the entire contract. C. Failing to disaffirm within a reasonable time after reaching majority. D. Affirming, in writing, some of the terms of the contract.

Answer 56

Choice "D" is correct. The term "ratification" refers to the process by which a minor by his/her action or "inaction" legally accepts an entire contract after he/she reaches the age of majority. Accepting some of the terms is not "ratification."

Question 57

The consideration needed to support a contract must: Flow to the promisee Have monetary value A. Yes Yes B. Yes No C. No Yes D. No No

Answer 57

Choice "D" is correct. Generally, a promise is not binding under contract law unless it was bargained for in exchange for consideration. Consideration is something of legal value—usually defined as a detriment to the promisee or a benefit to the promisor. However, consideration need not flow to the promisee; it is sufficient to promise to do something for or give something to a third party, such as in a third party beneficiary situation. Thus, flow to the promisee is "no." Neither must consideration be of monetary value. As long as the promisee is promising to do something that he or she is not already obligated to do, there is consideration. Thus, have monetary value is a "no." The only choice reflecting "no" to both elements is choice "D" making all of the other answer choices incorrect.

Question 58

Gavin, a 50 percent partner in the ABC Partnership, had a $4,000 basis at the beginning of the preceding year. During the preceding year, ABC incurred a $12,000 loss. In the current year, ABC reported $7,000 of ordinary income and made a $1,000 pro rata distribution. What is Gavin's basis at the end of the current year? A. $3,000 B. $6,500 C. $1,000 D. $3,500

Answer 58

Choice "C" is correct. Gavin's share of the preceding year's partnership loss was $6,000 ($12,000 × 50%). Gavin can pass through and deduct the loss to the extent of his $4,000 tax basis in his partnership interest, reducing his basis to zero. The remaining $2,000 of loss is suspended, and can be deducted in the future when his basis is reinstated. In the current year, Gavin's share of the partnership's ordinary business income is $3,500 ($7,000 × 50%), which increases his basis in his partnership interest. His share of the pro rata distribution is $500 ($1,000 × 50%), which decreases his basis. Gavin now has a $3,000 positive basis in his partnership interest so he can deduct the $2,000 suspended loss from the preceding year, decreasing his basis to $1,000 ($0 beginning current year basis + $3,500 ordinary income − $500 distribution − $2,000 suspended loss = $1,000).

Question 59

A taxpayer received a painting valued at $8,000 as a gift. The donor purchased the painting a year earlier for $4,500 and paid no gift tax on the transfer. Nine months later, the taxpayer sold the painting for $9,000. What is the amount and classification of the capital gain? A. $4,500 long-term B. $1,000 long-term C. $1,000 short-term D. $4,500 short-term

Answer 59

Choice "A" is correct. The taxpayer has a $4,500 long-term capital gain. The basis of property acquired as a gift is the same as the basis in the hands of the donor, which is $4,500 in this situation. The donor's holding period of one year also rolls over. The total holding period is more than one year, so the gain recognized is long-term. Sales price $9,000 Rollover cost basis (4,500) Long-term capital gain $4,500

Question 60

Under the common law, which of the following defenses, if used by a CPA, would best avoid liability in an action for negligence brought by a client? A. The client was contributorily negligent. B. The client was comparatively negligent. C. The accuracy of the CPA's report was not guaranteed. D. The CPA's negligence was not the proximate cause of the client's losses.

Answer 60

Choice "D" is correct. A plaintiff must show four elements to make a case for negligence against a CPA. The plaintiff must show the defendant owed a duty of care to the plaintiff, the defendant breached that duty by failing to act with due care, the breach caused the plaintiff's injury, and damages. A defense that the negligence was not the proximate cause of plaintiff's losses would be a valid defense, as the third element would not exist.

Question 61

Which of the following statements is correct regarding the formation of a unilateral contract? A. A unilateral contract does not require performance. B. Only one party to a unilateral contract makes a promise. C. A unilateral contract may be formed without consideration. D. Only one party to a unilateral contract receives a benefit or suffers a detriment.

Answer 61

Choice "B" is correct. In a unilateral contract situation, only one promise is made—by the offeror. By the terms of the offer, the offeree can accept only by performing the act requested in the offer; the offer cannot be accepted by making a counter-promise.

Question 62

Kelly owed Connor $500. Connor agreed to accept Kelly's microwave oven instead of the money. Kelly immediately delivered the oven to Connor. Which of the following terms correctly describes this agreement? A. Mutual rescission. B. Material alteration. C. Novation. D. Accord and satisfaction.

Answer 62

Choice "D" is correct. An accord is an agreement to substitute one contract for another (the agreement to accept the microwave instead of the money), and satisfaction is the execution of the accord (here, the delivery of the microwave). Accord and satisfaction discharge the original duty.

Question 63

Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $13,550, which included $5,500 of state income taxes paid last year. Robbe's itemized deduction amount exceeded the standard deduction available to single taxpayers for last year by $1,150. In the current year, Robbe received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund? A. Amend the prior-year's return and reduce the claimed itemized deductions for that year. B. Include none of the refund in income in the current year. C. Include $1,500 in income in the current year. D. Include $1,150 in income in the current year.

Answer 63

Choice "D" is correct. Under the tax benefit rule, an itemized deduction recovered in a subsequent year is included in income in the year recovered. In this situation, the taxpayer only received a tax benefit of $1,150, the amount by which total itemized deductions exceeded the standard deduction in the prior year. Therefore only $1,150 of the $1,500 state tax refund is included in taxable income for the current year.

Question 64

A taxpayer received a 90-day letter proposing a deficiency. The taxpayer challenged the proposed deficiency in the Small Cases Division of the U.S. Tax Court. If the taxpayer loses the case, then the decision is: A. Appealable to the regular division of the U.S. Tax Court. B. Appealable to the United States District Court if the deficiency is paid. C. Appealable to the U.S. Court of Federal Claims if the deficiency is paid. D. Not appealable.

Answer 64

Choice "D" is correct. Neither party can appeal a decision of the Small Cases Division of the U.S Tax Court.

Question 65

During the current year, Adler had the following cash receipts: Wages $18,000 Interest income from investments in municipal bonds $400 Unemployment compensation $3,900 What is the total amount that must be included in gross income on Adler's current year income tax return? A. $22,300 B. $21,900 C. $18,000 D. $18,400

Answer 65

Choice "B" is correct. The wages of $18,000 and unemployment compensation of $3,900 are both includable in gross income on Adler's current year income tax return.

Question 66

Luisa Gomez converted her personal use riding lawn mower to business use when she started her lawncare business. The mower cost $2,000, and it was worth $1,500 on the date of conversion. After taking $1,500 in depreciation deductions, Luisa sold the mower for $800. What is Luisa’s tax basis in the mower for purposes of calculating gain or loss? A. $1,500 B. $500 C. $2,000 D. $0

Answer 66

Choice "B" is correct. The $800 sales price is greater than the $500 adjusted basis at the date of the sale ($2,000 original cost basis – $1,500 accumulated depreciation), so the property is sold at a gain. The tax basis for determining a gain is the adjusted basis at the date of the sale of $500.

Question 67

Under the UCC Sales Article, a seller will be entitled to recover the full contract price from the buyer when the: A. Goods are destroyed after title passed to the buyer. B. Goods are destroyed while risk of loss is with the buyer. C. Buyer revokes its acceptance of the goods. D. Buyer rejects some of the goods.

Answer 67

Choice "B" is correct. Under the UCC a seller is entitled to recover the full contract price from the buyer when the goods are destroyed while the risk of loss is with the buyer.

Question 68

Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. Carson accurately reported $28,000 in gross income on Carson's individual tax return. If the corporation had been an S corporation and the distributions to the owners had been proportionate, how much income would Carson have reported on Carson's individual return? A. $28,000 B. $132,000 C. $160,000 D. $188,000

Answer 68

Choice "C" is correct. In an S corporation, the income is passed through to the shareholder and included in taxable income whether or not it is actually distributed. Therefore, Carson will report 40% of the $400,000 taxable income, or $160,000. The $28,000 distribution will not affect the taxable income, but will reduce Carson's basis in the S Corporation stock.

Question 69

Smith, a single taxpayer who itemizes deductions, paid the following unreimbursed medical expenses: Dentist and eye doctor fees $5,000 Contact lenses $500 Facial cosmetic surgery to improve Smith's personal appearance (surgery is unrelated to personal injury or congenital deformity) $10,000 Premium on disability insurance policy to pay him if he is injured and unable to work $2,000 What is the total amount of Smith's tax-deductible medical expenses before the adjusted gross income limitation? A. $7,500 B. $5,500 C. $15,500 D. $17,500

Answer 69

Choice "B" is correct. The doctor fees ($5,000) and the contact lenses ($500) are deductible medical expenses. The surgery is not deductible because elective cosmetic surgery is not done to improve or maintain health. Premiums on disabilities policies are not deductible since payments under the policy are made to replace lost income, not to pay for medical expenses.

Question 70

Lite-Mart, a C corporation, had a beginning credit balance in its warranty reserve account of $120,000. During the year, Lite-Mart accrued estimated warranty expense of $16,000. At the end of the year, Lite-Mart's warranty reserve had a $90,000 credit balance. What amount of warranty expense should Lite-Mart deduct? A. $30,000 B. $14,000 C. $16,000 D. $46,000

Answer 70

Choice "D" is correct. Companies may only deduct the actual amount of cost incurred in meeting their warranty obligations. The actual cost incurred by Lite-Mart in meeting its warranty obligation is calculated as follows: Beginning warranty reserve $120,000 Add: estimated warranty expense $16,000 *Less: ending warranty reserve $(90,000) Actual warranty costs incurred $46,000

Question 71

For Year 2, Quest Corp., an accrual basis calendar year C corporation, had an $8,000 unexpired charitable contribution carryover from Year 1. Quest's Year 2 taxable income before the deduction for charitable contributions was $200,000. On December 12, Year 2, Quest's board of directors authorized a $15,000 cash contribution to a qualified charity, which was made on January 6, Year 3. What is the maximum allowable deduction that Quest may take as a charitable contribution on its Year 2 income tax return? A. $8,000 B. $23,000 C. $15,000 D. $20,000

Answer 71

Choice "D" is correct. C corporations are allowed a maximum charitable contribution deduction of 10 percent of taxable income before the following deductions: Any charitable contribution; The dividends-received deduction; Any net operating loss carryback; and Any net capital loss carryback. Accrued charitable contributions not paid by the end of the year are deductible in the year of accrual if (i) the board of directors authorizes the contribution during the tax year and (ii) the accrual basis corporation pays the accrued amount by the 15th day of the fourth month (generally 3½ months) following the end of the tax year. Any amount in excess of the "10 percent limitation" may be carried forward for five years.

Question 72

An individual reports the following capital transactions in the current year: Short-term capital gain $1,000 Short-term capital loss $(11,000) Long-term capital gain $10,000 Long-term capital loss $(6,000) What amount is deducted in arriving at adjusted gross income? A. $6,000 B. $0 C. $3,000 D. $10,000

Answer 72

C. 3,000

Question 73

A guaranteed payment by a partnership to a partner for services rendered may include an agreement to pay: I. A salary of $5,000 monthly without regard to partnership income. II. A 25 percent interest in partnership profits. A. Both I and II. B. I only. C. II only. D. Neither I nor II.

Answer 73

Choice "B" is correct. I. A guaranteed payment is a salary or other payment to a partner that is not calculated with respect to partnership income. II. Since the 25 percent interest is calculated with respect to partnership profits, it is not a guaranteed payment.

Question 74

As of the beginning of Year 3, Wolf Inc. has a written accounting policy to expense amounts paid for tangible personal 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 safe harbor rule, how much can Wolf deduct for tax purposes in Year 3? A. $7,500 B. $0 C. $12,000 D. $4,000

Answer 74

Choice "C" is correct. The de minimis safe harbor rule will apply, because Wolf has a written policy to expense certain property as of the beginning of the year. Because it has an applicable financial statement (AFS), the de minimis rule allows the company to expense items costing up to $5,000 each. These three items cost $4,000 each, so all $12,000 ($4,000 × 3) can be expensed and deducted.

Question 75

Capital assets include: A. A corporate real estate developer's unimproved land that is to be subdivided to build homes, which will be sold to customers. B. A corporation's accounts receivable from the sale of its inventory. C. Seven-year MACRS property used in a corporation's trade or business. D. A manufacturing company's investment in U.S. Treasury bonds.

Answer 75

Choice "D" is correct. Investment assets of a taxpayer that are not inventory are capital assets. The manufacturing company would have capital assets including an investment in U.S. Treasury bonds.

Question 76

The Rites are married, file a joint income tax return, and qualify to itemize their deductions in the current year. Their adjusted gross income for the year was $55,000, and during the year they paid the following taxes: Real estate tax on personal residence $2,000 Personal property tax on personal automobile $500 Current-year state and city income taxes withheld from paycheck $1,000 What total amount of the expense should the Rites claim as an itemized deduction on their current-year joint income tax return? A. $3,500 B. $2,500 C. $1,000 D. $3,000

Answer 76

Choice "A" is correct. Taxes are generally deductible in the year paid, and real estate taxes, income taxes, and personal property taxes are allowable deductions. The total amount of itemized deductions for tax expense is calculated as follows: Real estate tax on personal residence 2,000 Personal property tax on personal automobile 500 Current-year state and city income taxes withheld 1,000 Total deduction for taxes 3,500

Question 77

Jim had gambling losses totaling $2,500 for the year. He is including a lottery prize of $5,000 in his gross income this year. The gambling losses are: A. A deduction from adjusted gross income, subject to a 2% AGI Floor. B. A deduction to arrive at adjusted gross income. C. A deduction from adjusted gross income. D. Not deductible.

Answer 77

Choice "C" is correct. Gambling losses are deductible as a miscellaneous itemized deduction (from AGI) limited to gambling winnings.

Question 78

During Year 9, Ash had the following cash receipts: Wages $13,000 Interest income from U.S. Treasury bonds $350 Workers' compensation following a job-related injury $8,500 What is the total amount that must be included in gross income on Ash's Year 9 income tax return? A. $21,500 B. $13,350 C. $21,850 D. $13,000

Answer 78

Choice "B" is correct. The total amount that must be included in gross income is $13,350 ($13,000 in wages plus $350 in interest income on U.S. Treasury bonds). Wages and interest on U.S. Treasury bonds are includable in gross income and must be reported as part of gross income on a taxpayer's income tax return. Damages for personal injury (i.e., workers' compensation for a job-related injury) are specifically excluded from gross income.

Question 79

Charlie is a cash basis, self-employed computer technician. In the current year, Charlie had gross business receipts of $150,000. Charlie’s cash payments were as follows: Supplies $1,000 Wages of employees $40,000 Contributions to local church $10,000 Advertising $2,000 Utilities for office $3,000 Self-employment tax (estimated) $5,000 Real estate taxes on personal home $10,000 Rent for office space $12,000 Alimony paid to ex-wife (divorce in 2012) $8,000 What amount should Charlie report as net self-employment income on Schedule C? A. $82,000 B. $87,000 C. $92,000 D. $59,000

Answer 79

Choice “C” is correct. Only business expenses are deductible against business income on Schedule C. Therefore, Charlie’s net self-employment income = $92,000. $150,000 gross income – $1,000 supplies – $40,000 wages – $2,000 advertising – $3,000 utilities – $12,000 rent = $92,000. The charitable contributions are deductible on Schedule A as an itemized deduction. The estimated self employment tax is not deductible on Schedule C. However, one half of self-employment tax paid is deductible as an adjustment to AGI. The real estate taxes on Charlie’s personal home are deductible on Schedule A as an itemized deduction. The alimony paid to his ex-wife is deductible as an adjustment to AGI because the divorce was finalized prior to December 31, 2018.

Question 80

Sanderson has made deductible contributions to his traditional IRA for many years. Sanderson recently retired at age 60 and received a distribution of $150,000. In which way, if any, will the distribution be taxed? A. As a capital gain. B. As ordinary income. C. Subject to a 10 percent penalty. D. It will not be taxed.

Answer 80

Choice "B" is correct. Withdrawals from traditional IRAs (i.e., IRAs for which the contributions were deducted) are taxed as ordinary income. Withdrawals prior to age 59½ are also subject to a 10 percent penalty tax (unless an exception applies). Because Sanderson is over 59½, the withdrawal is not subject to the 10 percent penalty tax.

Question 81

Bill and Anne Chambers are married and file a joint return. They have no children. Their college friend, Ryan, lived with them for the entire current tax year. Ryan is 40 years old and earned $2,000 at a part-time job and received $25,000 in municipal bond interest. Ryan is a citizen of the United States and is unmarried. Which of the following statements is true regarding claiming Ryan as a dependent on the Chambers' tax return? A. Ryan qualifies as a dependent for the Chambers under the qualifying relative rules as long as the Chambers provide more than half of Ryan’s support. B. Ryan qualifies as a dependent for the Chambers under the qualifying child rules. C. Ryan qualifies as a dependent for the Chambers under the qualifying relative rules because he lived with the Chambers for the entire year, as long as Ryan does not provide more than half of his own support. D. If Ryan earns $15,000 in self-employment income in addition to the part-time job and municipal bond interest, he would qualify as a dependent on the Chambers’ tax return.

Answer 81

Choice “A” is correct. Ryan meets the SUPORT tests for a qualifying relative if the Chambers provide more than half of Ryan’s support.

Question 82

Azure, a C corporation, reports the following: Pretax book income of $543,000. Depreciation on the tax return is $20,000 greater than depreciation on the financial statements. Rent income reportable on the tax return is $36,000 greater than rent income per the financial statements. Fines for pollution appear as a $10,000 expense in the financial statements. Interest earned on municipal bonds is $25,000. What is Azure's taxable income? A. $559,000 B. $543,000 C. $528,000 D. $544,000

Answer 82

Choice "D" is correct. Azure's taxable income is calculated as follows: Pretax book income 543,000 Depreciation for tax purposes in excess of book depreciation (20,000) Rent income for tax purposes in excess of book rent income 36,000 Fines expensed for book purposes but not deductible for tax purposes 10,000 Municipal bond interest not taxable for tax purposes (25,000) Taxable income 544,000

Question 83

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. $50,000 B. $100,000 C. $45,000 D. $65,000

Answer 83

Choice "C" is correct. The dividends-received deduction (DRD) is generally calculated as 50 percent of dividends received, which would be $50,000 (50% × $100,000). However, the deduction is limited to 50% × dividends-received deduction (DRD) modified taxable income. DRD modified taxable income is calculated as taxable income before the dividends-received deduction, any NOL deduction, and capital loss carryback deduction. Because the loss of $10,000 is a current year loss and not a carryover, it is not an adjustment to taxable income when calculating modified taxable income. DRD modified taxable income is $90,000. Best's DRD deduction on its Year 1 tax return is limited to $45,000 (50% × $90,000).

Question 84

Which of the following statements is correct regarding disclosure of client working papers prepared by a CPA? A. Working papers may not be turned over to a CPA quality review team without the client's permission. B. Working papers may not be disclosed under a federal court subpoena without the client's permission. C. Working papers may not be transferred to another accountant without the client's permission. D. Working papers may not be disclosed to any third parties without the client's permission.

Answer 84

Choice "C" is correct. As a general rule, although a CPA owns his or her working papers, because of confidentiality issues, the working papers cannot be turned over to another accountant without the client's permission.

Question 85

Under the Sales Article of the UCC, which of the following rights is(are) available to the buyer when a seller commits an anticipatory breach of contract? Demand Cancel the contract Collect Punitive Damages assurance of performance A. Yes No Yes B. Yes Yes Yes C. Yes Yes No D. No Yes Yes

Answer 85

Choice "C" is correct. On an anticipatory breach of contract (or repudiation) the non-breaching party has a right to demand assurances of performance or to cancel the contract. There is no right to punitive damages under contract law in general, even on anticipatory breach.

Question 86

Under the liquidation provisions of Chapter 7 of the federal Bankruptcy Code, which of the following statements applies to a person who has voluntarily filed for and received a discharge in bankruptcy? A. The person must surrender for distribution to the creditors amounts received as an inheritance, if the receipt occurs within 180 days after filing the bankruptcy petition. B. The person will be discharged from all debts. C. The person can obtain another voluntary discharge in bankruptcy under Chapter 7 after three years have elapsed from the date of the prior filing. D. The person is precluded from owning or operating a similar business for two years.

Answer 86

Choice "A" is correct. The bankruptcy estate is deemed to include money inherited within 180 days after the bankruptcy petition is filed.

Question 87

Which of the following pairs of elements must a client prove to hold an accountant liable for common law negligence? A. Scienter and a violation of GAAP. B. Breach of the accountant's duty of care and loss. C. Willful misrepresentation and breach of the accountant's duty of care. D. Freedom from contributory negligence and privity.

Answer 87

Choice "B" is correct. A plaintiff must show four elements to make a case for negligence against a CPA. The plaintiff must show that the defendant owed a duty of care to the plaintiff, the defendant breached that duty by failing to act with due care, the breach caused the plaintiff's injury, and damages.

Question 88

Under Chapter 7 of the federal Bankruptcy Code, what effect does a bankruptcy discharge have on a judgment creditor when there is no bankruptcy estate? A. The debtor is relieved of any personal liability to the judgment creditor. B. The debtor is required to pay a liquidated amount to vacate the judgment. C. The judgment creditor retains a statutory lien against the debtor. D. The judgment creditor's claim is non-dischargeable.

Answer 88

Choice "A" is correct. Under Chapter 7, a discharge discharges most debts of a debtor, whether or not there is a bankruptcy estate from which to pay the debts.

Question 89

Master Mfg., Inc. contracted with Accur Computer Repair Corp. to maintain Master's computer system. Master's manufacturing process depends on its computer system operating properly at all times. A liquidated damages clause in the contract provided that Accur pay $1,000 to Master for each day that Accur was late responding to a service request. On January 12, Accur was notified that Master's computer system failed. Accur did not respond to Master's service request until January 15. If Master sues Accur under the liquidated damage provision of the contract, Master will: A. Lose, because Accur's breach was not material. B. Win, unless the liquidated damage provision is determined to be a penalty. C. Win, because under all circumstances liquidated damage provisions are enforceable. D. Lose, because liquidated damage provisions violate public policy.

Answer 89

Choice "B" is correct. A liquidated damages clause is enforceable if at the time of contracting it appears that the amount of damages in case of breach would be difficult to assess and the amount is a reasonable approximation of damages and not a penalty.

Question 90

As of the beginning of Year 3, Wolf Inc. has a written accounting policy to expense amounts paid for tangible personal property costing up to $8,000. Wolf does not have 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 safe harbor rule, how much can Wolf deduct for tax purposes in Year 3? A. $12,000 B. $4,000 C. $7,500 D. $0

Answer 90

Choice "D" is correct. The de minimis safe harbor rule will apply, because Wolf has a written policy to expense certain property as of the beginning of the year. Because it does not have an applicable financial statement (AFS), the de minimis rule allows the company to expense items costing up to $2,500 each. These three items cost $4,000 each, which is in excess of $2,500 each. Therefore, none of these costs can be expensed under the de minimis rule.

Question 91

Charitable contributions subject to the 60-percent limit that are not fully deductible in the year made may be: A. Neither carried back nor carried forward. B. Carried forward five years. C. Carried forward indefinitely until fully deducted. D. Carried back two years or carried forward twenty years.

Answer 91

Choice "B" is correct. Charitable contributions subject to the 60 percent limit that are not fully deductible in the year made may be carried forward five years.

Question 92

If an employee has, within the scope of the agency relationship, committed both negligent and intentional acts resulting in injury to third parties, the principal: A. Will never be criminally liable unless it actively participated in the acts. B. Will be liable under the doctrine of respondeat superior only for intentional acts. C. May effectively limit its liability to those third parties if the agent has signed a disclaimer absolving the principal from liability. D. May be liable even if the employee's acts were unauthorized.

Answer 92

Choice "D" is correct. An employer may be liable for a tort committed by an employee within the scope of employment.

Question 93

A corporate taxpayer's capital gains and losses are as follows: Short-term capital gain $7,000 Short-term capital loss $(43,000) Long-term capital gain $9,000 Long-term capital loss $(21,000) What amount of capital loss deduction is the taxpayer entitled to use to offset against ordinary income? A. $48,000 B. $3,000 C. $0 D. $12,000

Answer 93

Choice "C" is correct. The net capital loss for the year is $48,000. None of that loss is currently deductible against ordinary income. It can be carried back three years and forward five years to offset net capital gains in other years.

Question 94

Ania received a $400 state income tax refund this year. Ania deducted $1,000 of state income taxes paid in the prior year as part of her itemized deductions. Which of the following statements regarding the taxability of Ania’s refund is true? A. The $400 is taxable if Ania claimed the standard deduction in the prior year. B. The $400 is taxable if Ania’s itemized deductions in the prior year exceeded the standard deduction by $100. C. The $400 is taxable if Ania’s itemized deductions in the prior year exceeded the standard deduction by $400. D. Ania’s refund is not taxable.

Answer 94

Choice “C” is correct. Ania’s refund is includable in gross income only to the extent that the original deduction provided a tax benefit. If Ania’s itemized deductions last year exceeded the standard deduction by $400, then the state income taxes deducted created a tax benefit. Therefore, the $400 refund of the state income taxes received in the current year is taxable.

Question 95

Kaye contracted to sell Hodges a building for $310,000. The contract required Hodges to pay the entire amount at closing. Kaye refused to close the sale of the building. Hodges sued Kaye. To what relief is Hodges entitled? A. Consequential damages or punitive damages. B. Punitive damages and compensatory damages. C. Compensatory damages or specific performance. D. Specific performance and compensatory damages.

Answer 95

Choice "C" is correct. When a contract for the sale of real property is breached, the nonbreaching party can either recover compensatory damages (damages that compensate for the breach) or obtain specific performance (forced performance).

Question 96

Graphite Corp. has been a calendar year S corporation since its inception on January 2, Year 1. On January 2, Year 4, Smith and Tyler each owned 50 percent of the Graphite stock, in which their respective bases were $12,000 and $9,000. For the year ended December 31, Year 4, Graphite had $80,000 in ordinary business income and $6,000 in tax-exempt income. Graphite made a $53,000 cash distribution to each shareholder on December 31, Year 4. What total amount of income from Graphite is includable in Smith's Year 4 adjusted gross income? A. $40,000 B. $96,000 C. $93,000 D. $43,000

Answer 96

Choice "A" is correct. $40,000 of income from Graphite Corp. is includable in Smith's Year 4 adjusted gross income (on his Form 1040). Rule: An S corporation is a hybrid of a corporation and a partnership, but is mostly like a partnership. Earnings (ordinary income is separately defined from other types of income) and cash distributions (reductions to basis) are treated as they would be in a partnership. Schedule K-1 is the form used by the S corporation to report activity of the corporation related to the shareholders. (Note: Losses are limited to basis in the corporation, so it is calculated for each shareholder. Basis cannot be negative, or capital gain will be recognized.)

Question 97

Wells paid the following expenses during the year: Premiums on an insurance policy against loss of earnings due to sickness or accident $3,000 Physical therapy after spinal surgery $2,000 Premium on an insurance policy that covers reimbursement for the cost of prescription drugs $500 In the current year, Wells recovered $1,500 of the $2,000 that she paid for physical therapy through insurance reimbursement from a group medical policy paid for by her employer. Disregarding the adjusted gross income percentage threshold, what amount could be claimed on Wells' current year income tax return for medical expenses before the adjusted gross income limitation? A. $500 B. $1,000 C. $3,500 D. $4,000

Answer 97

Choice "B" is correct. Medical expenses include physical therapy (professional medical services) and insurance premiums providing reimbursement for medical care. Prescription drugs are considered medical care. Insurance against loss of income is not payment for medical care and therefore is not deductible. Qualified medical expenses must be reduced by insurance reimbursement ($2,000 + $500 - $1,500 = $1,000).

Question 98

Thorn purchased a used entertainment system from Sound Corp. The sales contract stated that the entertainment system was being sold "as is." Under the Sales Article of the UCC, which of the following statements is (are) correct regarding the seller's warranty of title and against infringement? I. Including the term "as is" in the sales contract is adequate communication that the seller is conveying the entertainment system without warranty of title and against infringement. II. The seller's warranty of title and against infringement may be disclaimed at any time after the contract is formed. A. I only. B. II only. C. Neither I nor II. D. Both I and II.

Answer 98

Choice "C" is correct. Under the Sales Article, all sales of goods include a warranty that the seller has title to the goods being sold unless the warranty is specifically disclaimed or the circumstances of the sale indicate that no such warranty is being made (e.g., a sheriff's sale). A disclaimer must be made before or contemporaneously with the sale. A later disclaimer would be ineffective. Thus, neither I nor II is correct.

Question 99

Which of the following statements is correct regarding the Federal Unemployment Tax Act? A. An employee who resigns, regardless of cause, is eligible for unemployment benefits. B. The federal unemployment system is funded by both employer and employee taxes. C. The Act is intended to assist workers who are permanently out of work and need assistance in supporting themselves. D. The unemployment insurance system is administered by the states through their employment laws.

Answer 99

Choice "D" is correct. This is a true statement: The unemployment insurance system is administered by the states through their employment laws.

Question 100

Which of the following conditions, if any, must a debtor meet to file a voluntary bankruptcy petition under Chapter 7 of the federal Bankruptcy Code? Insolvency Three or more creditors A. Yes No B. No No C. Yes Yes D. No Yes

Answer 100

Choice "B" is correct. A debtor need not be insolvent to file a voluntary petition under Chapter 7. Although the debtor's income may not exceed certain specified levels, insolvency is not a requirement. Additionally, there is no requirement of 3 creditors in a voluntary petition. An involuntary petition requires at least 3 creditors to file if the debtor has 12 or more creditors.

Question 101

All of the following are effective methods of ratifying a contract entered into by a minor, except: A. Failing to disaffirm the contract within a reasonable time after reaching the age of majority. B. Expressly ratifying the contract after reaching the age of majority. C. Ratifying the contract before reaching the age of majority. D. Impliedly ratifying the contract after reaching the age of majority.

Answer 101

Choice "C" is correct. A minor can disaffirm any contract until a reasonable time after reaching the age of majority. Thus, a "ratification" prior to reaching majority can be revoked and is not effective.

Question 102

Bolt Corp. dismissed Ace as its general sales agent and notified all of Ace's known customers by letter. Young Corp., a retail outlet located outside of Ace's previously assigned sales territory, had never dealt with Ace. Young knew of Ace as a result of various business contacts. After his dismissal, Ace sold Young goods, to be delivered by Bolt, and received from Young a cash deposit for 20% of the purchase price. It was not unusual for an agent in Ace's previous position to receive cash deposits. In an action by Young against Bolt on the sales contract, Young will: A. Lose, because Ace lacked any express authority to make the contract. B. Win, because Bolt's notice was inadequate to terminate Ace's apparent authority. C. Lose, because Ace lacked any implied authority to make the contract. D. Win, because a principal is an insurer of an agent's acts.

Answer 102

Choice "B" is correct. Although Bolt gave known customer's notice of Ace's dismissal, some courts might also require a notice placed in a newspaper to terminate Ace's apparent authority as to people, like Young, who had heard of Ace.

Question 103

Chris owns 25 percent, Tracy owns 35 percent, and Sam owns 40 percent of a business that has always been treated as an S corporation for federal income tax purposes. During the current year, $500,000 of taxable income is generated. Who is responsible for claiming the taxable income? A. Chris, Tracy, and Sam, according to their profit distribution agreement. B. The corporation. C. Chris, Tracy, and Sam, according to their percentage of ownership. D. Chris, Tracy, and Sam equally.

Answer 103

Choice "C" is correct. S corporations flow through income or loss items to the shareholders. A shareholder must include on his or her individual income tax return his or her distributive share of ordinary business income or loss and separately stated pass-through items. Since the business is treated as an S corporation, Chris, Tracy, and Sam are responsible for claiming their respective ownership percentage of taxable income.

Question 104

Which of the following will release all original parties to a contract but will maintain a contractual relationship between the original parties? Novation Substituted contract A. No Yes B. Yes Yes C. No No D. Yes No

Answer 104

Choice "A" is correct. In a novation, the agreement is unchanged but one of the original parties is released and a new party is substituted into their place. In a substituted contract, the original parties are both released from the original agreement but are both bound by a new agreement.

Question 105

In Year 4, a taxpayer gifted an undivided one-half interest in the taxpayer's farm to the taxpayer's child. Title to the farm was held by parent and child as tenants in common. In Year 10, the taxpayer died and the other one-half interest in the farm was left to the same child. The taxpayer paid $40,000 for the farm in Year 1, and the fair market value of the entire farm was $100,000 at the date of the taxpayer's death. An alternate valuation date was not elected. What is the child's basis in the farm after the taxpayer's death? A. $100,000 B. $0 C. $40,000 D. $70,000

Answer 105

Choice "D" is correct. The child's basis in the farm after the taxpayer's death is $70,000 ($20,000 original one-half interest + $50,000 other one-half interest). A gift of an undivided one-half interest in property when the property is held as tenants in common is a complete gift, despite the possibility that the property may revert to the donor at some future time. The basis in property acquired as a gift is generally the same as the cost basis in the hands of the donor. The child's basis in the undivided one-half interest in the farm received as a gift in Year 4 is one-half the donor's cost basis: $40,000 Year 1 purchase price × 1/2 = $20,000. The basis in property acquired by bequest or inheritance is the fair market value at the date of the decedent's death if an alternate valuation date is not elected. The fair market value of the farm at the date of the taxpayer's death was $100,000, so the child's basis in the other one-half interest in the farm inherited in Year 10 is $50,000 ($100,000 × 1/2).

Question 106

Heather, Erika, and Shelby are members in HES LLC. Heather works 40 hours per week and Erika and Shelby work 20 hours per week. Heather contributed $30,000 to the LLC and Erika and Shelby contributed $60,000 each. Erika and Shelby have each originated 45% of the LLC's business and Heather has originated the other 10%. Absent an agreement to the contrary, how will the LLC's $120,000 profits be divided among the members? Heather Erika Shelby A. $40,000 $40,000 $40,000 B. $24,000 $48,000 $48,000 C. $12,000 $54,000 $54,000 D. $60,000 $30,000 $30,000

Answer 106

Absent an agreement to the contrary, the LLC's profits will be divided among the members in proportion to their contributions. Here, Heather's, Erika's and Shelby's contributions were $30,000, $60,000, and $60,000, respectively. Thus, the profits will be divided in a 1:2:2 ratio (20% of $120,000 to Heather; 40% of $120,000 to Erika; and 40% of $120,000 to Shelby). Choice "B" is correct. Heather Erika Shelby "B" $24,000 $48,000 $48,000

Question 107

Which of the following circumstances generally will cause a discharge of contractual duties by operation of law? A. Accord and satisfaction B. Novation C. Anticipatory repudiation D. Impossibility of performance

Answer 107

Choice "D" is correct. Impossibility (that no one can perform) discharges a contract by operation of law as opposed to by the action of the parties. All the other choices will discharge contract, but by the agreement of the parties.