Test Prep CPA-REGULATION Online Practice Questions and Exam Preparation

Test Prep CPA-REGULATION Online Questions & Answers

• Question 21:

  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 had no capital loss carryovers from prior years. During 1994, the Moores had the following stock transactions, which resulted in a net capital loss:

  

  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
  J. $3,000

  ---

  "J" is correct. $3,000. The capital loss on Revco ($10,000 loss) is added to the capital gain on Abbco ($4,000) to produce a net capital loss of ($6,000). The Moores can claim $3,000 of the loss on their 1994 income tax return and carry the balance forward to 1995.

• Question 22:

  In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?

  A. Internal Revenue Code.
  B. IRS regulations.
  C. Tax court decisions.
  D. IRS agents' reports.
  A. Internal Revenue Code.

  ---

  Note: This question is addressed in your Appendix D text materials. We are confident that our students would be able to respond correctly over 85% of the time without any guidance on this topic. The answer is rather obvious. Just by looking

  at the answer options, you will immediately notice that Option A is presented in title case. This would be a quick sign that it may be the correct response. Further, we suspect that most students would narrow the options down to "a" or "b" by

  simply using common sense.

  While we are confident that our students would fare well on this question if it appeared on their exams, we present the following detailed explanation of the answer options.

  Choice "a" is correct. According to the IRS's website under Tax Code, Regulations and Official Guidance, the "federal tax law begins with the Internal Revenue Code (IRC), [which was] enacted by Congress in Title 26 of the United States

  Code (26 U.S.C.)." The IRC holds the most authoritative value.

  Choice "b" is incorrect. According to the IRS's website under Tax Code, Regulations and Official Guidance, the IRS regulations or "Treasury regulations (26 C.F.R.)-commonly referred to as Federal tax regulations-pick up where the Internal

  Revenue Code (IRC) leaves off by providing the official interpretation of the IRS by the U.S. Department of Treasury." Regulations give directions on how to apply the law outlined in the Internal Revenue Code. Regulations have the second

  most force and effect, second only to the IRC.

  Choice "c" is incorrect. Tax court decisions interpret the Internal Revenue Code. They do not have the authority of the IRC.

  Choice "d" is incorrect. The reports of IRS agents are used to report on specific taxpayer situations. IRS agents' reports apply the Internal Revenue Code, IRS regulations, and other forms of authoritative literature, but they do not hold the

  value that the IRC, the IRS regulations, or even tax court decisions have.

• Question 23:

  On February 1, 1993, Hall learned that he was bequeathed 500 shares of common stock under his father's will. Hall's father had paid $2,500 for the stock in 1990. Fair market value of the stock on February 1, 1993, the date of his father's death, was $4,000 and had increased to $5,500 six months later. The executor of the estate elected the alternate valuation date for estate tax purposes. Hall sold the stock for $4,500 on June 1, 1993, the date that the executor distributed the stock to him. How much income should Hall include in his 1993 individual income tax return for the inheritance of the 500 shares of stock, which he received from his father's estate?

  A. $5,500
  B. $4,000
  C. $2,500
  D. $0
  D. $0

  ---

  Choice "d" is correct. There is no income tax on the value of inherited property. The gain on the sale is the difference between the sales price of $4,500 and Hall's basis. Hall's basis is the alternate valuation elected by the executor. This is the

  value 6 months after date of death or date distributed if before 6 months. The property was distributed 4 months after death and the value that day ($4,500) is used for the basis. $4,500 - $4,500 = 0.

  Choice "a" is incorrect. There is no income tax on the value of inherited property.

  Choice "b" is incorrect. This is the basis of the stock if the alternate date had not been used. Heirs are not taxed on inheritances. The income or loss results when inherited property is sold. Choice "c" is incorrect. There is no income tax on the

  value of inherited property. The gain on the sale is the difference between the sales price of $4,500 and Hall's basis. Hall's basis is the alternate valuation elected by the executor.

• Question 24:

  Baum, an unmarried optometrist and sole proprietor of Optics, buys and maintains a supply of eyeglasses and frames to sell in the ordinary course of business. In 1999, Optics had $350,000 in gross business receipts and its year-end

  inventory was not subject to the uniform capitalization rules. Baum's 1999 adjusted gross income was $90,000 and Baum qualified to itemize deductions. During 1999, Baum recorded the following information:

  Business expenses:

  

  What amount should Baum report as 1999 net earnings from self-employment?

  A. $243,250
  B. $252,000
  C. $273,000
  D. $281,750
  D. $281,750

  ---

  Choice "d" is correct. Baum should report $281,750 as 1999 net earnings from self-employment (line 12 of the Form 1040), calculated as follows:

  

  Choices "a", "b", and "c" are incorrect. Self-employment tax and self-employment health insurance expenses are adjustments from total gross income. They are not deducted from self-employment earnings (i.e., not reported net on line 12 of

  the Form 1040).

  Note: There are many distracters in this question, all relating to items that are either deductible as part of itemized deductions or not deductible. Be careful to read the requirement of the question before spending unnecessary time on the

  question. The statement that Baum's year-end inventory was not subject to the uniform capitalization rules is a distracter as well. There is not enough information given in the facts to apply the rules if he had been subject to them.

• Question 25:

  Rich is a cash basis self-employed air-conditioning repairman with 1993 gross business receipts of $20,000. Rich's cash disbursements were as follows:

  

  What amount should Rich report as net self-employment income?

  A. $15,100
  B. $14,900
  C. $14,100
  D. $13,900
  A. $15,100

  ---

  Choice "a" is correct. Deductions to arrive at net self-employed income include all necessary and ordinary expenses connected with the business. Estimated federal income tax payments are not an expense. Charitable contributions by an individual are only deductible as an itemized deduction on Schedule A. This assumes the contribution was not made with the "expectation of commensurate financial return."

  

  Choice "b" is incorrect. Charitable contributions are an itemized deduction unless there is an expectation of commensurate financial return.

  Choice "c" is incorrect. Federal income taxes paid are not a deductible expense.

  Choice "d" is incorrect. Charitable contributions are an itemized deduction unless there is an expectation of commensurate financial return. Federal income taxes paid are not a deductible expense.

• Question 26:

  Porter was unemployed for part of the year. Porter received $35,000 of wages, $4,000 from a state unemployment compensation plan, and $2,000 from his former employer's company-paid supplemental unemployment benefit plan. What is the amount of Porter's gross income?

  A. $35,000
  B. $37,000
  C. $39,000
  D. $41,000
  D. $41,000

  ---

  RULE: Gross income includes all income unless it is specifically excluded in the tax code.

  Choice "d" is correct. Wages and all unemployment compensation are not excluded from being taxable; therefore, there are included in the taxpayer's gross income for tax purposes.

  

  Choice "a" is incorrect. All forms of unemployment compensation are included as part of gross income. Choice "b" is incorrect. The $4,000 of state unemployment compensation received is included as part of gross income. Choice "c" is incorrect. The $2,000 of his former employer's company-paid supplemental unemployment benefit plan is included as part of gross income.

• Question 27:

  Dale received $1,000 in 1990 for jury duty. In exchange for regular compensation from her employer during the period of jury service, Dale was required to remit the entire $1,000 to her employer in 1990. In Dale's 1990 income tax return, the $1,000 jury duty fee should be:

  A. Claimed in full as an itemized deduction.
  B. Claimed as an itemized deduction to the extent exceeding 2% of adjusted gross income.
  C. Deducted from gross income in arriving at adjusted gross income.
  D. Included in taxable income without a corresponding offset against other income.
  C. Deducted from gross income in arriving at adjusted gross income.

  ---

  Choice "c" is correct. The $1,000 jury duty fee that was required to be remitted to the employer may be deducted from gross income in arriving at adjusted gross income. This, in effect, washes out the $1,000 income she will have to report as

  part of gross income for the jury duty fees paid to her.

  Choices "a" and "b" are incorrect. The amount remitted is allowed as an adjustment in arriving at AGI, not as an itemized deduction.

  Choice "d" is incorrect. A corresponding offset is allowed against other income as an adjustment in arriving at AGI.

• Question 28:

  Smith, an individual calendar-year taxpayer, purchased 100 shares of Core Co. common stock for $15,000 on December 15, 1992, and an additional 100 shares for $13,000 on December 30, 1992. On January 3, 1993, Smith sold the shares purchased on December 15, 1992, for $13,000. What amount of loss from the sale of Core's stock is deductible on Smith's 1992 and 1993 income tax returns?

  

  A. Option A
  B. Option B
  C. Option C
  D. Option D
  A. Option A

  ---

  Choice "a" is correct. In 1992, no sale of stock occurred so there would be no loss. In 1993, there is a $2,000 loss realized ($15,000 basis less $13,000 received), but it is not deductible because it is a wash sale. A wash sale occurs when a

  taxpayer sells stock at a loss and invests in substantially identical stock within 30 days before or after the sale. In this case, Smith reinvested in an additional 100 shares four days prior to selling 100 shares of the same stock at a loss. The

  $2,000 disallowed loss would, however, increase the basis of the new shares by $2,000.

  Choice "b" is incorrect. The $2,000 loss realized in 1993 is disallowed under the wash sale rules.

  Choice "c" is incorrect. In 1992, there is no loss since no shares were sold. In 1993, the $2,000 loss is disallowed under the wash sale rules.

  Choice "d" is incorrect. In 1992, there is no possible loss since no shares were sold.

• Question 29:

  Greller owns 100 shares of Arden Corp., a publicly-traded company, which Greller purchased on January 1, 2001, for $10,000. On January 1, 2003, Arden declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Arden stock was $62 per share. On February 1, 2003, Greller had his broker specifically sell the 100 shares of Arden stock received in the split when the FMV of the stock was $65 per share. What is the basis of the 100 shares of Arden sold?

  A. $5,000
  B. $6,000
  C. $6,200
  D. $6,500
  A. $5,000

  ---

  Choice "a" is correct. The receipt of a nontaxable stock dividend will require the shareholder to spread the basis of his original share over both the original shares and the new shares received resulting in the same total basis, but a lower basis

  per share of stock held. Therefore, Greller total basis remains the same, $10,000, but is now split between 200 shares (a 2-for-1 split and he originally owned 100 shares).

  Therefore, his basis per share goes from $100/share ($10,000/100) to $50/share ($10,000/200).

  Consequently, his basis in 100 share is 100 x $50 = $5,000.

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

• Question 30:

  Adams owns a second residence that is used for both personal and rental purposes. During 2001,

  Adams used the second residence for 50 days and rented the residence for 200 days. Which of the following statements is correct?

  A. Depreciation may not be deducted on the property under any circumstances.
  B. A rental loss may be deducted if rental-related expenses exceed rental income.
  C. Utilities and maintenance on the property must be divided between personal and rental use.
  D. All mortgage interest and taxes on the property will be deducted to determine the property's net income or loss.
  C. Utilities and maintenance on the property must be divided between personal and rental use.

  ---

  Choice "c" is correct. Because the second property was personally used more than 14 days, any net loss from the rental of the property will be disallowed.

  All related expenses must be prorated between the personal use portion and the rental activity portion.

  Prorated depreciation is permitted for the rental activity.