Question 1

Leker exchanged a van that was used exclusively for business and had an adjusted tax basis of
$20,000 for a new van. The new van had a fair market value of $10,000, and Leker also received
$3,000 in cash. What was Leker's tax basis in the acquired van?

Accepted Answer

B

Explanation: Choice "b" is correct. $17,000 is the tax basis in the van. The basis for like-kind exchanges is computed as follows: https://kxbjsyuhceggsyvxdkof.supabase.co/storage/v1/object/public/file-images/AICPA_CPA-Regulation/page_19_img_1.jpg The general rule is the gain is recognized to the extent boot is received. As the transaction results in a loss to Leker (he received an asset worth $10,000 plus $3,000 cash less a $20,000 tax basis equals $7,000 loss) no gain is recognized and the $3,000 received reduces his basis in the new asset. Choice "a" is incorrect. Basis must be reduced by non-like-kind assets (boot) received. Choice "c" is incorrect. For non-like-kind exchanges, the basis would be the FMV of the assets received ($10,000 FMV plus $3,000 Boot). However, because both assets have similar use, this is a like-kind exchange, which follows the rule above. Choice "d" is incorrect. The basis of the old property is used to calculate the basis of the new property, less any boot received.

Question 2

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:
CPA-Regulation practice exam questions

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?

Accepted Answer

B

Explanation: Choice "b" is correct. $530,000 basis of involuntary converted building. https://kxbjsyuhceggsyvxdkof.supabase.co/storage/v1/object/public/file-images/AICPA_CPA-Regulation/page_33_img_3.jpg

Question 3

Which of the following statements is the best definition of real property?

Accepted Answer

D

Explanation: 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.

Question 4

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? https://kxbjsyuhceggsyvxdkof.supabase.co/storage/v1/object/public/file-images/AICPA_CPA-Regulation/page_9_img_1.jpg

Accepted Answer

D

Explanation: 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 5

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: https://kxbjsyuhceggsyvxdkof.supabase.co/storage/v1/object/public/file-images/AICPA_CPA-Regulation/page_10_img_1.jpg What amount should Rich report as net self-employment income?

Accepted Answer

A

Explanation: 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." https://kxbjsyuhceggsyvxdkof.supabase.co/storage/v1/object/public/file-images/AICPA_CPA-Regulation/page_11_img_1.jpg 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 6

Which of the following sales should be reported as a capital gain?

Accepted Answer

D

Explanation: 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.

Question 7

Which one of the following will result in an accruable expense for an accrual-basis taxpayer?

Accepted Answer

B

Explanation: RULE: An accruable expense is one is which the services have been received/performed but have not been paid for by the end of the reporting period. Choice "b" is correct. The facts indicate that a repair was completed prior to year end but not yet invoiced. If it has not yet been invoiced, it is assumed that it has also not yet been paid for. Therefore, this is a situation in which the repair expense would be accrued at year end. Services have been performed, but they have not been paid for, as they have not even been invoiced yet. Choice "a" is incorrect. If the repair was completed after year end, then the expense is not accruable, as the benefit of the services hasn't been received as of year end. The fact that the repair was invoiced prior to year end does not impact the situation. Choice "c" is incorrect. If a repair was completed and paid for prior to year end, no accrual is appropriate. On the accrual basis, the expense is taken in the year the repair is completed and the benefit is received. In this case, the account payable was also paid in the same year, but this has no effect on the expense. Choice "d" is incorrect. The facts indicate that the work is to be completed at a date later than year end. Therefore, the expense is not accruable at year end, as the benefit of the repair hasn't been received as of year end. It is reasonable that a signed contract for the repair work exists, but this has no effect on the accrual.

Question 8

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:

Accepted Answer

C

Explanation: 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.

Question 9

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?

Accepted Answer

C

Explanation: 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. https://kxbjsyuhceggsyvxdkof.supabase.co/storage/v1/object/public/file-images/AICPA_CPA-Regulation/page_14_img_1.jpg 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 10

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?

Accepted Answer

C

Explanation: 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 11

Gibson purchased stock with a fair market value of $14,000 from Gibson's adult child for $12,000.
The child's cost basis in the stock at the date of sale was $16,000. Gibson sold the same stock to an
unrelated party for $18,000. What is Gibson's recognized gain from the sale?

Accepted Answer

B

Explanation: Choice "b" is correct. Losses are disallowed on most related party sales transactions even if they were made at an arm's length (FMV) price. The basis (and related gain or loss) of the (second) buying relative depends on whether the second relative's resale price is higher, lower, or between the first relative's basis and the lower selling price to the second relative. In this case, the $4,000 capital loss on the sale by Gibson's adult child to Gibson [$12,000 SP - $16,000 Basis] is disallowed. Gibson's basis is determined by his selling price to a third party. In this case, the selling price is $18,000, which is HIGHER than the original basis of Gibson's adult child. Gibson's basis in the stock is, therefore, his adult child's basis of $16,000. Gibson's recognized basis is calculated as follows: https://kxbjsyuhceggsyvxdkof.supabase.co/storage/v1/object/public/file-images/AICPA_CPA-Regulation/page_26_img_1.jpg Choice "a" is incorrect. There would be a zero gain or loss if the selling price were between the adult child's basis and Gibson's purchase price, but this is not the case in the facts. Choice "c" is incorrect. This answer option uses the fair market value of the stock at the date of purchase as the basis. As is discussed above, the rules do not provide for this treatment. [$18,000 SP - $14,000 FMV = $4,000] Choice "d" is incorrect. This would be the answer if the basis were Gibson's purchase price of $12,000; however, because the stock sold for more than Gibson's child's basis and the child had a disallowed loss on the sale to Gibson, Gibson is allowed to use his child's original basis of $16,000 as his basis for the stock on the date of the second sale. [$18,000 SP - $12,000 PP = $6,000]

Question 12

A cash basis taxpayer should report gross income:

Accepted Answer

D

Explanation: Choice "d" is correct. A cash basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property. Choice "a" is incorrect. Income also be constructively received in property - not only actually in cash. Choice "b" is incorrect. Income also be constructively received - not only actually. Choice "c" is incorrect. Income also be received in property - not only cash.

Question 13

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 $8,400 in gross receipts from their rental property during 1994. The expenses for the residential rental property were: https://kxbjsyuhceggsyvxdkof.supabase.co/storage/v1/object/public/file-images/AICPA_CPA-Regulation/page_42_img_1.jpg

Accepted Answer

I

Explanation: "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.

Question 14

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:

Accepted Answer

A

Explanation: 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 15

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.

Accepted Answer

C

Explanation: 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).

Free AICPA CPA-Regulation Actual Exam Questions s