Test Prep CPA-REGULATION Online Practice Questions and Exam Preparation

Test Prep CPA-REGULATION Online Questions & Answers

• Question 61:

  DAC Foundation awarded Kent $75,000 in recognition of lifelong literary achievement. Kent was not required to render future services as a condition to receive the $75,000. What condition(s) must have been met for the award to be excluded from Kent's gross income?

  I. Kent was selected for the award by DAC without any action on Kent's part.

  II.

  Pursuant to Kent's designation, DAC paid the amount of the award either to a governmental unit or to a charitable organization.

  A. I only.
  B. II only.
  C. Both I and II.
  D. Neither I nor II.
  I. Kent was selected for the award by DAC without any action on Kent's part. II. Pursuant to Kent's designation, DAC paid the amount of the award either to a governmental unit or to a charitable organization.
  C. Both I and II.

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  Choice "c" is correct. Generally, the fair market value of prizes and awards is taxable income. However, an exclusion from income for certain prizes and awards applies where the winner is selected for the award without entering into a contest

  (i.e., without any action on their part) and then assigns the award directly to a governmental unit or charitable organization. Therefore, conditions "I" and "II" must be met in order for Ken to exclude the award from his gross income.

  Choice "a" is incorrect. "II" is a necessary condition as well. See explanation above.

  Choice "b" is incorrect. "I" is a necessary condition as well. See explanation above.

  Choice "d" is incorrect. "I" and "II" are both necessary conditions. See explanation above.

• Question 62:

  Conner purchased 300 shares of Zinco stock for $30,000 in 1980. On May 23, 1994, Conner sold all the stock to his daughter Alice for $20,000, its then fair market value. Conner realized no other gain or loss during 1994. On July 26, 1994,

  Alice sold the 300 shares of Zinco for $25,000.

  What was Alice's recognized gain or loss on her sale?

  A. $0
  B. $5,000 long-term gain.
  C. $5,000 short-term loss.
  D. $5,000 long-term loss.
  A. $0

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  Choice "a" is correct. Alice has a realized gain of $5,000 on the transaction: $25,000 sales price less $20,000 purchase price. However, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her. Thus, Alice can reduce her gain by up to $10,000, but not below zero. Here, the gain is $5,000, so it is reduced to zero. Conner should have sold the stock in the open market so that he could deduct the entire loss. Alice could then have purchased the stock in the open market. Choice "b" is incorrect. $5,000 is Alice's realized long-term gain on the sale. However, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her. Choice "c" is incorrect. Alice has a realized gain of $5,000 on the sale. However, since she is related to Conner, her holding period includes his holding period. Therefore, her realized gain is long-term. In addition, she can reduce the gain, but not below zero, by the amount of loss her father could not deduct on the sale to her. Choice "d" is incorrect. Alice can reduce the gain by the amount of loss her father could not deduct on the sale to her. However, she cannot reduce the gain below zero.

• Question 63:

  Barkley owns a vacation cabin that was rented to unrelated parties for 10 days during the year for $2,500. The cabin was used personally by Barkley for three months and left vacant for the rest of the year. Expenses for the cabin were as follows:

  Real estate taxes $1,000 Maintenance and utilities $2,000

  How much rental income (loss) is included in Barkley's adjusted gross income?

  A. $0
  B. $500
  C. $(500)
  D. $(1,500)
  A. $0

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  RULE: If a vacation residence is rented for less than 15 days per year, it is treated as a personal residence. The rental income is excluded from income, and mortgage interest (first or second home) and real estate taxes are allowed as

  itemized deductions. Depreciation, utilities, and repairs are not deductible.

  Choice "a" is correct. Applying the rule above, if a vacation residence is rented for less than 15 days per year, it is treated as a personal residence. The rental income ($2,500 in this case) is excluded from income. A Schedule E is not filed for

  this property (i.e., no income is reported, the taxes are reported as itemized deductions, and the maintenance and utilities are not deductible), so the effect on AGI is zero. Choice "b" is incorrect. This assumes that the property taxes are

  reported as itemized deductions but that the rental income ($2,500) less the maintenance and utilities ($2,000) are reported net on Schedule E.

  Per the above RULE, the rental income is excluded from income, and the maintenance and utilities are not deductible.

  Choice "c" is incorrect. This assumes that all of the items shown are reported net on the Schedule E-$2,500 - $1,000 - $2,000 = ($500). Per the above RULE, the rental income is excluded from income, the maintenance and utilities are not

  deductible, and the property taxes are reported on Schedule A as an itemized deduction.

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

• Question 64:

  Clark bought Series EE U.S. Savings Bonds after 1989. Redemption proceeds will be used for payment of college tuition for Clark's dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that the:

  A. Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).
  B. Bonds must be bought by a parent (or both parents) and put in the name of the dependent child.
  C. Bonds must be bought by the owner of the bonds before the owner reaches the age of 24.
  D. Bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.
  A. Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).

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  Choice "a" is correct. One of the conditions that must be met for tax exemption of accumulated interest on the bonds is that the purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse). Choice "b" is

  incorrect. The bonds must be bought and put in the name of the owner or co-owner, not in the name of the dependent child.

  Choice "c" is incorrect. The owner must be at least 24 years old before the bonds issue date.

  Choice "d" is incorrect. There is no requirement that the bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

• Question 65:

  Darr, an employee of Sorce C corporation, is not a shareholder. Which of the following would be included in a taxpayer's gross income?

  A. Employer-provided medical insurance coverage under a health plan.
  B. A $10,000 gift from the taxpayer's grandparents.
  C. The fair market value of land that the taxpayer inherited from an uncle.
  D. The dividend income on shares of stock that the taxpayer received for services rendered.
  D. The dividend income on shares of stock that the taxpayer received for services rendered.

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  Choice "d" is correct. An individual receiving common stock for services rendered must recognize the fair market value as ordinary income. Any dividends received on that stock would also result in income recognition.

  Choice "a" is incorrect. Employer-provided medical insurance is a tax-free fringe benefit.

  Choices "b" and "c" are incorrect. Gifts and inheritances are both tax-free to the recipient. (Remember tax is often paid by the person giving the gift or the estate at death.)

• Question 66:

  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
  A. $5,000

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  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 67:

  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.
  D. $17,000 capital gain.

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  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 68:

  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
  B. $530,000

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

  

• Question 69:

  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.
  C. Grandfather and granddaughter.

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  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."