AICPA CPA Regulation CPA-Regulation CPA Exam Practice Test

Answer : D

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.

Answer : D

Choice 'd' is correct. Government bonds held by an individual investor are considered capital assets in the hands of the investor. When these types of security investments are sold, the resulting gain or loss is reported as capital.

Choice 'a' is incorrect. In this case, we must assume that the BEST answer is option 'd' (as that option would ALWAYS result in capital gain or loss treatment) and that the examiners are assuming that the equipment is depreciable equipment that has been used in a business for over one year. [If the equipment had been considered a personal asset by the examiners and had sold for a gain, it would also be a capital asset that sold for a capital gain, and there would be two correct answers. Remember that the correct answer is the option that best answers the question.] Depreciable equipment used in a business and held for over one year falls under the category of Section 1245 property. When Section 1245 assets are sold at a gain, all the accumulated depreciation on the asset is recaptured as ordinary income (the same category as the depreciation expense was deducted against), and any remaining gain (typically, in practice, this is not the case, though, as the asset would have had to sell for an amount greater than its purchase price) is capital gain under Code Section 1231. [Note that Section 1245 applies only to gains. If the asset had sold for a loss, the loss would have been ordinary under Section 1231.]

Choice 'b' is incorrect. Real property sold by a dealer is considered inventory and results in ordinary income or ordinary losses upon sale. Inventory is not a capital asset and is not afforded the capital gain benefits.

Choice 'c' is incorrect. Inventory is not a capital asset and is not afforded the capital gain benefits. The sale of inventory results in ordinary income or loss (e.g., gross profit on sales) being reported on the tax return, as inventory is an asset held for sale in the ordinary course of business.

Answer : I

'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.

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.

Answer : A

RULE: In order to file a joint return, the parties must be MARRIED at the end of the year. Exception: If the parties are married but are LEGALLY SEPARATED under the laws of the state in which they reside, they cannot file a joint return (they will file either under the single or head of household filing status).

Choice 'a' is correct. Per the above rule, taxpayers who are married but lived apart during the year are allowed to file a joint return for the year. The fact that they did not live together during the year has no bearing on the issue.

Choice 'b' is incorrect. Per the above rule, taxpayers who are married but lived under a legal separation agreement at the end of the year may not file a joint return. They will generally file either under the single or head of household filing status.

Choice 'c' is incorrect. Per the above rule, taxpayers who were divorced during the year may not file a joint return together, as they are not married at the end of the year. [Note, however, that they may become married again in the year and file a joint return with the new spouse.]

Choice 'd' is incorrect. Per the above rule, taxpayers who were legally separated but lived together for the entire year may not file a joint return. They will generally file either under the single or head of household filing status.

Answer : D

Choice 'd' is correct. Real property includes land and all items permanently affixed to the land (e.g., buildings, paving, etc.)

Choice 'a' is incorrect. Real property includes more than just the land (as per the Explanation: above); it includes all items permanently affixed to land.

Choice 'b' is incorrect. 'All' tangible property could include moveable personal property and is therefore, incorrect.

Choice 'c' is incorrect. 'Intangible property in realized form' is a distracter and a contradiction in terms.

Answer : C

'C' is correct. $900. If a taxpayer has the option of taking a dividend either in stock or in other property (e.g., cash), the dividend is taxable regardless of the option the taxpayer selects.