Test Prep Test Prep Certifications CPA-REGULATION Questions & Answers

• Question 51:

  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

  Correct Answer: C

  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.

• Question 52:

  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 a S corporation $20,000

  What amount of Freeman's income is subject to self-employment tax?

  A. $0

  B. $20,000

  C. $50,000

  D. $70,000

  Correct Answer: C

  Choice "c" 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 selfemployment tax. Payments not guaranteed are merely another way to distribute partnership profits. The ordinary income reported from an S corporation are taxable income to the individual or 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 53:

  John and Mary were divorced in 1991. The divorce decree provides that John pay alimony of $10,000 per year, to be reduced by 20% on their child's 18th birthday. During 1992, John paid $7,000 directly to Mary and $3,000 to Spring College for Mary's tuition. What amount of these payments should be reported as income in Mary's 1992 income tax return?

  A. $5,600

  B. $8,000

  C. $8,600

  D. $10,000

  Correct Answer: B

  Choice "b" is correct. Alimony would be income to Mary while child support would not. Funds qualify as

  child support only if 1) a specific amount is fixed or is contingent on the child's status (e.g., reaching a

  certain age), 2) it is paid solely for the support of minor children, and 3) it is payable by decree, instrument

  or agreement. The actual use of the funds is irrelevant to the issue. In this case, $2,000 (20% ?$10,000)

  qualifies as child support. The other $8,000 is alimony, which would be income to Mary.

  Choice "a" is incorrect. Take 80% of the $10,000 paid, not 80% of the $7,000 received by Mary.

  Choice "c" is incorrect. Only $8,000 would be alimony per the divorce decree (80% ?$10,000).

  Choice "d" is incorrect. The 20% reduction when the child turns 18 makes 20% of the $10,000 payment, or

  $2,000, child support, which is nontaxable to Mary.

• Question 54:

  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

  Correct Answer: D

  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 55:

  On December 1, 1992, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30, 1993. Michaels paid the entire interest of $12,000 on December 1, 1992. What amount of interest was deductible on Michaels' 1993 income tax return?

  A. $12,000

  B. $11,000

  C. $1,000

  D. $0

  Correct Answer: B

  Choice "b" is correct. Prepaid interest must be prorated over the time for which payment is made. This is

  true for both cash and accrual basis taxpayers. The loan is for 1 month in 1992 and 11 months in 1993.

  Therefore, 1/12 of the interest is deductible in 1992 and 11/12, or $11,000 is deductible in 1993.

  Choices "a", "c", and "d" are incorrect. Prepaid interest must be prorated over the time for which payment

  is made. This is true for both cash and accrual basis taxpayers.

• Question 56:

  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

  Correct Answer: A

  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 57:

  During 1993 Kay received interest income as follows:

  On U.S. Treasury certificates $4,000 On refund of 1991 federal income tax 500

  The total amount of interest subject to tax in Kay's 1993 tax return is:

  A. $4,500

  B. $4,000

  C. $500

  D. $0

  Correct Answer: A

  Choice "a" is correct. Interest income from U.S. obligations is generally taxable. Interest income on a

  federal tax refund is taxable, even though the refund itself is not taxed.

  Choice "b" is incorrect. Interest income on a federal tax refund is taxable, even though the refund itself is

  not taxed.

  Choice "c" is incorrect. Interest income from U.S. obligations is generally taxable.

  Choice "d" is incorrect. Interest income from U.S. obligations is generally taxable. Interest income on a

  federal tax refund is taxable, even though the refund itself is not taxed.

• Question 58:

  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.

  Correct Answer: C

  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 59:

  Under the uniform capitalization rules applicable to property acquired for resale, which of the following costs should be capitalized with respect to inventory if no exceptions are met?

  

  A. Option A

  B. Option B

  C. Option C

  D. Option D

  Correct Answer: D

  Choice "d" is correct. Under the uniform capitalization rules, purchasers of inventory for resale may deduct

  their marketing costs but must capitalize their off-site storage costs.

  Choices "a", "b", and "c" are incorrect. Marketing costs are deductible, but off-site storage must be

  capitalized.

• Question 60:

  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.

  Correct Answer: C

  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.