Test Prep CPA-REGULATION Online Practice Questions and Exam Preparation

Test Prep CPA-REGULATION Online Questions & Answers

• Question 11:

  Tom and Joan Moore, both CPAs, filed a joint 1994 federal income tax return showing $70,000 in taxable income. During 1994, Tom's daughter Laura, age 16, resided with Tom. Laura had no income of her own and was Tom's dependent.

  Determine the amount of income or loss, if any that should be included on page one of the Moores' 1994 Form 1040.

  The Moores received $8,400 in gross receipts from their rental property during 1994. The expenses for the residential rental property were:

  A. $0
  B. $500
  C. $900
  D. $1,000
  E. $1,250
  F. $1,300
  G. $1,500
  H. $2,000
  I. $2,500
  J. $3,000
  I. $2,500

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  "I" is correct. $2,500. Rental activity net income is reported on page one; the gross income ($8,400) is fully reportable; and all deductions listed (total = $5,900) are fully deductible for a net of $2,500.

• 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.
  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.

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  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:

  Under a $150,000 insurance policy on her deceased father's life, May Green is to receive $12,000 per year for 15 years. Of the $12,000 received in 1987, the amount subject to income tax is:

  A. $0
  B. $1,000
  C. $2,000
  D. $12,000
  C. $2,000

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  Choice "c" is correct. $2,000.

  

• Question 14:

  Which payment(s) is(are) included in a recipient's gross income?

  I. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree.

  II.

  A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university.

  A. I only.
  B. II only.
  C. Both I and II.
  D. Neither I nor II.
  I. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree. II. A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university.
  C. Both I and II.

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  Choice "c" is correct.

  I. A payment to a student for a part-time teaching assignment is taxable income just as a payment for any other campus job would be. This is not a scholarship or fellowship. II. There is no exclusion in the tax law for amounts paid to a degree candidate for participation in university-sponsored research.

• Question 15:

  Leker exchanged a van that was used exclusively for business and had an adjusted tax basis of $20,000 for a new van. The new van had a fair market value of $10,000, and Leker also received $3,000 in cash. What was Leker's tax basis in the acquired van?

  A. $20,000
  B. $17,000
  C. $13,000
  D. $7,000
  B. $17,000

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  Choice "b" is correct. $17,000 is the tax basis in the van. The basis for like-kind exchanges is computed as follows:

  

  The general rule is the gain is recognized to the extent boot is received. As the transaction results in a loss to Leker (he received an asset worth $10,000 plus $3,000 cash less a $20,000 tax basis equals $7,000 loss) no gain is recognized

  and the $3,000 received reduces his basis in the new asset.

  Choice "a" is incorrect. Basis must be reduced by non-like-kind assets (boot) received.

  Choice "c" is incorrect. For non-like-kind exchanges, the basis would be the FMV of the assets received ($10,000 FMV plus $3,000 Boot). However, because both assets have similar use, this is a like-kind exchange, which follows the rule

  above.

  Choice "d" is incorrect. The basis of the old property is used to calculate the basis of the new property, less any boot received.

• Question 16:

  In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified U.S. Series EE Bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate bond proceeds in excess of qualified higher education expenses. Which of the following is (are) true?

  I. The exclusion applies for education expenses incurred by the taxpayer, the taxpayer's spouse, or any person whom the taxpayer may claim as a dependent for the year.

  II.

  "Otherwise qualified higher education expenses" must be reduced by qualified scholarships not includible in gross income.

  A. I only.
  B. II only.
  C. Both I and II.
  D. Neither I nor II.
  I. The exclusion applies for education expenses incurred by the taxpayer, the taxpayer's spouse, or any person whom the taxpayer may claim as a dependent for the year. II. "Otherwise qualified higher education expenses" must be reduced by qualified scholarships not includible in gross income.
  C. Both I and II.

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  Choice "c" is correct. Interest earned on Series EE bonds issued after 1989 may qualify for exclusion. One requirement is that the interest is used to pay tuition and fees for the taxpayer, spouse, or dependent enrolled in higher education. The interest exclusion is reduced by qualified scholarships that are exempt from tax and other nontaxable payments received for educational expenses (other than gifts and inheritances).

• Question 17:

  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
  B. $250,000

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  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 18:

  Parker, whose spouse died during the preceding year, has not remarried. Parker maintains a home for a dependent child. What is Parker's most advantageous filing status?

  A. Single.
  B. Head of household.
  C. Married filing separately.
  D. Qualifying widow(er) with dependent child.
  D. Qualifying widow(er) with dependent child.

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  Choice "d" is correct. A qualifying widow (er) is a taxpayer who may use the joint tax return standard deduction and rates (but not the exemption for the deceased spouse) for each of two taxable years following the year of death of his or her spouse, unless he or she remarries. The surviving spouse must maintain a household that, for the whole entire taxable year, was the principal place of abode of a son, stepson, daughter, or stepdaughter (whether by blood or adoption). The surviving spouse must also be entitled to a dependency exemption for such individual. Parker may file as a qualifying widow (er) since her spouse died in the previous tax year, she did not remarry and she maintained a home for a dependent child. Since, qualifying widow (er) is the most advantageous status and Parker qualifies, Parker would file as a qualifying widow (er). Choice "a" is incorrect. Even though Parker would qualify as single, filing single would give Parker a high tax liability than the qualifying widow (er) status and therefore is not most advantageous. Choice "b" is incorrect. Parker would not qualify as head of household for the first two years after the death of Parker's spouse because one of the requirements for Head of Household status is that the taxpayer is NOT a surviving spouse. (Also, note that the likely reason for this requirement is that filing as Head of Household status would give the qualifying surviving spouse taxpayer a higher tax liability than the Qualifying Widow(er) status, which would be less advantageous.) Choice "c" is incorrect. Parker would not qualify to file married filing separately.

• Question 19:

  The rule limiting the allowability of passive activity losses and credits applies to:

  A. Partnerships.
  B. S corporations.
  C. Personal service corporations.
  D. Widely-held C corporations.
  C. Personal service corporations.

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  Choice "c" is correct. The rule limiting the allowability of passive activity losses and credits applies to personal service corporations. Choice "a" is incorrect. The passive activity limitations apply to the various partners in the partnership as

  opposed to the partnership itself. Choice "b" is incorrect. The passive activity limitations apply to the various shareholders in the S corporation as opposed to the corporation itself.

  Choice "d" is incorrect. The passive activity rules do not apply to widely-held C corporations.

• Question 20:

  During 2001, Adler had the following cash receipts:

  

  What is the total amount that must be included in gross income on Adler's 2001 income tax return?

  A. $18,000
  B. $18,400
  C. $19,500
  D. $19,900
  C. $19,500

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  Choice "c" is correct. The wages of $18,000 and unemployment compensation are both includable in gross income on Adler's 2001 income tax return.

  Choice "a" is incorrect. The unemployment compensation must be included in gross income.

  Choice "b" is incorrect. Municipal bond interest income is excluded from gross income and the unemployment compensation must be included in gross income.

  Choice "d" is incorrect. Municipal bond interest income is excluded from gross income.