Test Prep Test Prep Certifications CPA-REGULATION Questions & Answers

• Question 11:

  Elm Corp. is an accrual-basis calendar-year C corporation with 100,000 shares of voting common stock issued and outstanding as of December 28, 1996. On Friday, December 29, 1996, Hall surrendered 2,000 shares of Elm stock to Elm in exchange for $33,000 cash. Hall had no direct or indirect interest in Elm after the stock surrender. Additional information follows:

  

  What amount of income did Hall recognize from the stock surrender?

  A. $33,000 dividend.

  B. $25,000 dividend.

  C. $18,000 capital gain.

  D. $17,000 capital gain.

  Correct Answer: D

  Choice "d" is correct. $17,000 capital gain. Amount realized:

  

  Choices "a" and "b" are incorrect. Dividends are distributions of earnings. These proceeds are from the

  sale of stock.

  Choice "c" is incorrect, per above. Accumulated earnings and profits do not effect the gain calculation, they

  only affect the taxability of dividends paid to shareholders.

• Question 12:

  The uniform capitalization method must be used by:

  I. Manufacturers of tangible personal property.

  II.

  Retailers of personal property with $2 million dollars in average annual gross receipts for the 3 preceding years.

  A.

  I only.

  B.

  II only.

  C.

  Both I and II.

  D.

  Neither I nor II.

  Correct Answer: A

  Choice "a" is correct. I only.

  Rule: The uniform capitalization rules apply to the following:

  1.

  Real or tangible personal property produced by the taxpayer for use in a trade or business.

  2.

  Real or tangible personal property produced by the taxpayer for sale to customers.

  3.

  Real or personal property acquired by the taxpayer for resale.

  4.

  However, the uniform capitalization rules do not apply to property acquired for resale if the taxpayer's annual gross receipts for the preceding three tax years do not exceed $10,000,000 (not $2 million).

• Question 13:

  Among which of the following related parties are losses from sales and exchanges not recognized for tax purposes?

  A. Father-in-law and son-in-law.

  B. Brother-in-law and sister-in-law.

  C. Grandfather and granddaughter.

  D. Ancestors, lineal descendants, and all in-laws.

  Correct Answer: C

  Choice "c" is correct. Losses from sales and exchanges are not recognized for tax purposes between

  grandfather and granddaughter. Rule: Losses are disallowed on sales between related parties. "Related"

  includes brothers and sisters, husband-wife, lineal descendants (father, son, grandfather), and entities that

  are more than 50% owned by individuals, corporations, trusts and/or partnerships.

  Choices "a", "b", and "d" are incorrect, because losses from sales and exchanges are recognized for all

  "in-laws."

• Question 14:

  Ryan, age 57, is single with no dependents. On July 1, 1997, Ryan's principal residence was sold for the net amount of $500,000 after all selling expenses. Ryan bought the house in 1963 and occupied it until sold. On the date of sale, the house had a basis of $180,000. Ryan does not intend to buy another residence. What is the maximum exclusion of gain on sale of the residence that may be claimed in Ryan's 1997 income tax return?

  A. $320,000

  B. $250,000

  C. $125,000

  D. $0

  Correct Answer: B

  Choice "b" is correct. $250,000 maximum exclusion from taxable income.

  Rule: An individual may exclude from income up to $250,000 gain provided that the property was the

  taxpayer's primary residence for 2 of the last 5 years. Married taxpayers may exclude gains up to

  $500,000.

  Choice "a" is incorrect. $320,000. Ryan, age 57, was not married. Thus, his exclusion was limited to

  $250,000.

  Choice "c" is incorrect. The $125,000 exclusion was old law and eliminated for sales after 5/6/97.

  Choice "d" is incorrect, per the above rule.

• Question 15:

  Hall, a divorced person and custodian of her 12-year old child, filed her 1990 federal income tax return as head of a household. She submitted the following information to the CPA who prepared her 1990 return:

  • In 1990, Hall sold an antique that she bought in 1980 to display in her home. Hall paid $800 for the antique and sold it for $1,400, using the proceeds to pay a court ordered judgment.

  The $600 gain that Hall realized on the sale of the antique should be treated as:

  A. Ordinary income.

  B. Long-term capital gain.

  C. An involuntary conversion.

  D. A nontaxable antiquities transaction.

  Correct Answer: B

  Choice "b" is correct. The gain should be treated as a long-term capital gain because the property was held for more than one year and was sold for more than it cost. Choice "a" is incorrect. Because Hall was not in the business of selling antiques, the profit from the sale will be treated as a gain from the disposition of a capital asset, not ordinary income. Choice "c" is incorrect. This transaction does not qualify as an involuntary conversion. In order to be treated as an involuntary conversion, the transaction must result from a condemnation of property or a destruction or loss from theft or casualty. Choice "d" is incorrect. An obvious distracter.

• Question 16:

  For a cash basis taxpayer, gain or loss on a year-end sale of listed stock arises on the:

  A. Trade date.

  B. Settlement date.

  C. Date of receipt of cash proceeds.

  D. Date of delivery of stock certificate.

  Correct Answer: A

  Choice "a" is correct. Trade date.

  Gain or loss on a year-end sale of listed stock arises on the trade date.

  Rule: Whether on the cash or accrual method of accounting taxpayers who sell stock or securities on an

  established securities market must recognize gains and losses on the trade date, rather than on the

  settlement date.

  Choices "b", "c", and "d" are incorrect, per the above rule.

• Question 17:

  Fred Berk bought a plot of land with a cash payment of $40,000 and a mortgage of $50,000. In addition, Berk paid $200 for a title insurance policy. Berk's basis in this land is:

  A. $40,000

  B. $40,200

  C. $90,000

  D. $90,200

  Correct Answer: D

  Choice "d" is correct. $90,200 is Berk's basis in the land.

  Rule: The basis of the property acquired will be the property's cost consisting of the amount of cash paid

  plus any amount of related debt assumed. Cost will be adjusted to reflect any additional costs incurred in

  purchasing the property.

  

  Choices "a", "b", and "c" are incorrect, per the above rule.

• Question 18:

  On December 31, 1989, a building owned by Pine Corp. was totally destroyed by fire. The building had fire insurance coverage up to $500,000. Other pertinent information as of December 31, 1989 follows:

  

  During January 1990, before the 1989 financial statements were issued, Pine received insurance proceeds of $500,000. On what amount should Pine base the determination of its loss on involuntary conversion?

  A. $520,000

  B. $530,000

  C. $550,000

  D. $560,000

  Correct Answer: B

  Choice "b" is correct. $530,000 basis of involuntary converted building.

  

• Question 19:

  Doris and Lydia are equal partners in the capital and profits of Agee and Nolan, but are otherwise unrelated. The following information pertains to 300 shares of Mast Corp. stock sold by Lydia to Agee and Nolan:

  

  The amount of long-term capital loss that Lydia realized in 1988 on the sale of this stock was:

  A. $5,000

  B. $3,000

  C. $2,500

  D. $0

  Correct Answer: A

  Choice "a" is correct. $5,000 long term capital loss "realized" in 1988 by Lydia. Be careful, and always check the question being asked. In this case, the question is how much of a capital loss Lydia realized in 1988.

  

  Choice "b" is incorrect. $3,000 represents the portion of the $5,000 realized loss that would currently be recognized unless there were additional capital transactions resulting in gains. Remember that the deduction for capital losses for an individual is limited to $3,000 each year. Choice "c" is incorrect. $2,500 represents the pre-1986 portion of the $5,000 realized loss that would have given rise to a recognized loss. Pre-1986 law required $2 of net long term loss to give the benefit of $1 of tax deduction. Current law gives a dollar-for-dollar deduction limited to $3,000 in any year. Choice "d" is incorrect. $0 would have been the amount of loss recognized if Lydia owned more than a 50% interest in the partnership. Losses realized on transactions between a partnership and a partner owning more than a 50% interest are not deductible as the parties would be considered related and any realized loss would be disallowed.

• Question 20:

  A cash basis taxpayer should report gross income:

  A. Only for the year in which income is actually received in cash.

  B. Only for the year in which income is actually received whether in cash or in property.

  C. For the year in which income is either actually or constructively received in cash only.

  D. For the year in which income is either actually or constructively received, whether in cash or in property.

  Correct Answer: D

  Choice "d" 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.

  Choice "a" is incorrect. Income also be constructively received in property - not only actually in cash.

  Choice "b" is incorrect. Income also be constructively received - not only actually. Choice "c" is incorrect. Income also be received in property - not only cash.