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Total 69 questions
AICPA CPA Regulation CPA-Regulation CPA Exam Practice Test
Question 1
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:
Answer : J
'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 2
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?
Answer : A
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 3
In the current year Jensen had the following items:
What is Jensen's AGI for the current year?
Answer : B
Choice 'b' is correct. The question asks for AGI, but all of the items in the list are items of potential gross income. There are no adjustments included in the list; therefore, in this case, AGI is the same as gross income. The calculation is as follows:
Choices 'a', 'c', and 'd' are incorrect, per the above calculation.
Question 4
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 a $500 security deposit on their rental property in 1994. They are required to return the amount to the tenant.
Answer : A
'A' is correct. $0. The security deposit is not taxable income because the Moores are required to return it when the tenant leaves. If the deposit is applied to damages in a later tax year, the portion the Moores retain would be income to them in the year they retain the deposit, and the money they spend to repair the damage would be a deduction to them.
Question 5
In evaluating the hierarchy of authority in tax law, which of the following carries the greatest authoritative value for tax planning of transactions?
Answer : A
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.
Individual Taxation - Exemptions
Question 6
Mosh, a sole proprietor, uses the cash basis of accounting. At the beginning of the current year, accounts receivable were $25,000. During the year, Mosh collected $100,000 from customers. At the end of the year, accounts receivable were $15,000. What was Mosh's gross taxable income for the current year?
Answer : C
Choice 'c' is correct. The facts state that cash collections from customers were $100,000 and as a cash basis taxpayer this is the amount of Mosh's gross taxable income for the year. Note that according to the formula BASE - we can determine the amount of sales = $90,000, but that would give us accrual, not cash basis, income.
Choice 'a' is incorrect. See Explanation: above.
Choice 'b' is incorrect. $90,000 is the amount of sales that would be Mosh's taxable income if Mosh were an accrual basis taxpayer.
Choice 'd' is incorrect. See Explanation: above.
Question 7
Don Wolf became a general partner in Gata Associates on January 1, 1989, with a 5% interest in Gata's profits, losses, and capital. Gata is a distributor of auto parts. Wolf does not materially participate in the partnership business. For the year ended December 31, 1989, Gata had an operating loss of $100,000.
In addition, Gata earned interest of $20,000 on a temporary investment. Gata has kept the principal temporarily invested while awaiting delivery of equipment that is presently on order. The principal will be used to pay for this equipment. Wolf's passive loss for 1989 is:
Answer : C
Choice 'c' is correct. Wolf's passive loss for 1989 is $5,000 ($100,000 operating loss 5% interest in partnership).
Choice 'a' is incorrect. Wolf did not materially participate in the partnership, so the loss was passive.
Choice 'b' is incorrect. Wolf's passive loss of $5,000 could not be reduced by his distributive share of the partnership's 'interest income' totaling $1,000. Interest income is considered 'portfolio income,' and neither the partnership nor a partner can offset it against passive losses.
Choice 'd' is incorrect. No items of income or deduction from portfolio income or activities in which the taxpayer materially participates may be combined or offset with passive losses unless the activity generating the loss is completely disposed of in a taxable transaction.
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