2009 AICPA Newly Released Questions - Regulation
Following are multiple choice questions recently released by the AICPA. These
questions were released by the AICPA with letter answers only. Our editorial board has
provided the accompanying explanation.
Please note that the AICPA generally releases questions that it does NOT intend to use
again. These questions and content may or may not be representative of questions you
may see on any upcoming exams.
1
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
1.
Under which of the following circumstances is trust property with an independent trustee includible in the
grantor's gross estate?
a.
b.
c.
d.
The trust is revocable.
The trust is established for a minor.
The trustee has the power to distribute trust income.
The income beneficiary disclaims the property, which then passes to the remainderman, the grantor's
friend.
Solution:
Choice "a" is correct. If a revocable trust is created by a grantor, the trust assets may be returned to the
grantor upon the grantor's "revocation" of the trust (i.e., no "complete" gift exists); thus, the assets never
left the control (or possible ownership) of the grantor and remain includible in the gross estate of the
grantor.
Choice "b" is incorrect. When a trust is established for a minor, a complete gift is made to the trust, and
the assets are no longer includible in the estate of the grantor.
Choice "c" is incorrect. The trustee typically has the power to distribute trust income in various types of
trusts; thus, this fact alone would not make the assets includible in the gross estate of the grantor.
Choice "d" is incorrect. This type of arrangement has nothing to do with the requirement of assets to be
included in the gross estate of the grantor, as it could exist in an irrevocable trust or a revocable trust.
The beneficiary is simply passing his/her distribution to another party.
2
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2009 AICPA Newly Released Questions - Regulation
2.
Brisk Corp. is an accrual-basis, calendar-year C corporation with one individual shareholder. At year end,
Brisk had $600,000 accumulated and current earnings and profits as it prepared to make its only dividend
distribution for the year to its shareholder. Brisk could distribute either cash of $200,000 or land with an
adjusted tax basis of $75,000 and a fair market value of $200,000. How would the taxable incomes of
both Brisk and the shareholder change if land were distributed instead of cash?
a.
b.
c.
d.
Brisk's
taxable income
No change
Increase
No change
Increase
Shareholder's
taxable income
No change
No change
Decrease
Decrease
Solution:
Rule: The taxable amount of a dividend to a shareholder from a corporation's earnings and profits is the
amount received in cash or the fair market value of the property received.
Rule: The general rule is the payment of a dividend does not create a taxable event, unless the
distribution is appreciated property. When the distribution is of appreciated property, the corporation
recognizes gain as if the property were sold at fair market value.
Choice "b" is correct. If Brisk Corp. were to distribute $200,000 of accumulated earnings and profits in
cash as a dividend, the shareholder would recognize $200,000 in dividend income, and the corporation
would reduce its earnings and profits by $200,000. If, instead, the dividend were the $200,000 FMV land
with a basis of $75,000, the shareholder would still recognize $200,000 of dividend income (the FMV of
the property received, as per the above rule), but the corporation would recognize a gain of $125,000 on
the distribution ($200,000 FMV - $75,000 basis, per the above rule), the corporation's earnings and profits
would increase $125,000, and the corporation would reduce its earnings and profits by the $200,000
dividend distribution. Thus, Brisk's taxable income would increase if the land were distributed, but the
shareholder's taxable income would not change.
Choice "a" is incorrect. Per the above discussion and rules, Brisk's taxable income would increase
$125,000.
Choice "b" is incorrect. Per the above discussion and rules, Brisk's taxable income would increase
$125,000 and the shareholder would have no change in taxable income.
Choice "c" is incorrect. Per the above discussion and rules, Brisk's taxable income would indeed
increase ($125,000), but the shareholder would have no change in taxable income.
3
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2009 AICPA Newly Released Questions - Regulation
3.
Under the Negotiable Instruments Article of the UCC, which of the following parties has secondary liability
on an instrument?
a.
b.
c.
d.
An acceptor of a note.
An issuer of a cashier's check.
A drawer of a draft.
A maker of a note.
Solution:
Choice "c" is correct. The drawer of a draft is secondarily liable. The drawer is liable only after
presentment and notice of dishonor.
Choice "a" is incorrect because an acceptor is primarily liable. When a drawee signs a draft, the drawee
becomes an acceptor and is primarily liable.
Choice "b" is incorrect because with a cashier’s check, the bank is both the drawer and the drawee. As
the issuer the bank would be primarily liable.
Choice "d" is incorrect because the maker of a note is also primarily liable.
4
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2009 AICPA Newly Released Questions - Regulation
4.
Train issued a note payable to Blake in payment of contracted services that Blake was to perform. Blake
endorsed the note "pay to bearer" and delivered it to Reed in satisfaction of a debt owed Reed. Train
refused to pay Reed on the note because Blake had not yet performed the services. Under the
Negotiable Instruments Article of the UCC, must Train pay Reed?
a.
b.
c.
d.
No, Train does not have to pay Reed until the services are performed.
No, Train does not have to pay Reed because the note was issued to Blake.
Yes, Train has to pay Reed because the note was converted into bearer paper.
Yes, Train has to pay Reed because Reed was a holder in due course.
Solution:
Choice "d" is correct. Reed met all the requirements to be a holder in due course. He was the holder of a
negotiable instrument (the note). He gave value (taking a note as payment for debt constitutes value).
He had good faith. He was without notice of Blake's nonperformance of services. Nonperformance of
services is a personal defense and not a real defense. A holder in due course takes free of personal
defenses and is subject only to real defenses. Thus, Train will have to pay Reed.
Choices "a" and "b" are incorrect because both indicate that Train will not have to pay Reed. Train will
have to pay Reed due to Reed's status as a holder in due course.
Choice "c" is incorrect. Train must pay Reed because Reed was a holder in due course, not because the
note was bearer paper.
5
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2009 AICPA Newly Released Questions - Regulation
5.
Assuming appropriate disclosure is made, which of the following fee arrangements generally would be
permitted under the ethical standards of the profession?
a.
b.
c.
d.
A fee paid to the client's audit firm for recommending investment advisory services to the client.
A fee paid to the client's tax accountant for recommending a computer system to the client.
A contingent fee paid to the CPA for preparing the client's amended income tax return.
A contingent fee paid to the CPA for reviewing the client's financial statements.
Solution:
Choice "b" is correct. There is no prohibition against paying a consulting fee to a tax accountant who
recommends a computer system.
Choice "a" is incorrect. A member in public practice shall not for a commission recommend or refer to a
client any product or service when the member or the member's firm also performs for that client an audit
of a financial statement.
Choices "c" and "d" are incorrect. Contingent fees are specifically prohibited for audits and reviews of
financial statements.
6
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2009 AICPA Newly Released Questions - Regulation
6.
Fox, the sole shareholder in Fall, a C corporation, has a tax basis of $60,000. Fall has $40,000 of
accumulated positive earnings and profits at the beginning of the year and $10,000 of current positive
earnings and profits for the current year. At year end, Fall distributed land with an adjusted basis of
$30,000 and a fair market value (FMV) of $38,000 to Fox. The land has an outstanding mortgage of
$3,000 that Fox must assume. What is Fox's tax basis in the land?
a.
b.
c.
d.
$38,000
$35,000
$30,000
$27,000
Solution:
Choice "a" is correct. Absent information to the contrary, we should assume this distribution is in the form
of a dividend (especially because Fox is the sole shareholder). If the shareholder is an individual, the
taxable amount of a property dividend from a corporation's earnings and profits is the fair market value of
the property received (and the property's basis then becomes that fair market value). In this case, the
shareholder is also taking on the responsibility for the mortgage on the property, but this affects only the
amount of taxable income, as the debt is reported as a separate line item and does not affect the basis of
the land. The tax journal entry follows and indicates that the basis of the land is $38,000:
Dr
Land
$38,000
Debt
Taxable income
Cr
$ 3,000
$35,000
Choice "b" is incorrect. This is the amount of the taxable income on the dividend ($35,000), not the basis
in the land, as per the above journal entry.
Choice "c" is incorrect. This amount of $30,000 is the basis of the land on the corporation's books. In a
dividend situation, assets are transferred from the corporation using the fair market value of the assets at
the date of distribution.
Choice "d" is incorrect. This amount of $27,000 was arrived at by using the basis of the land on the
corporation's books ($30,000) and subtracting the mortgage assumed by the shareholder ($3,000). As is
discussed in the explanation of the answer for item "a" (above), the fair market value should be used as
the basis, and the debt does not have an effect on basis (debt affects taxable income, as shown in the
journal entry above).
7
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2009 AICPA Newly Released Questions - Regulation
7.
Dart, a C corporation, distributes software over the Internet and has had average revenues in excess of
$20 million dollars per year for the past three years. To purchase software, customers key-in their credit
card number to a secure web site and receive a password that allows the customer to immediately
download the software. As a result, Dart doesn't record accounts receivable or inventory on its books.
Which of the following statements is correct?
a. Dart may use either the cash or accrual method of accounting as long as Dart elects a calendar year
end.
b. Dart may utilize any method of accounting Dart chooses as long as Dart consistently applies the
method it chooses.
c. Dart must use the accrual method of accounting.
d. Dart may utilize the cash basis method of accounting until it incurs an additional $10 million to
develop additional software.
Solution:
Choice "c" is correct. While the cash basis of accounting is used by most taxpayers for tax purposes, the
accrual basis method of accounting for tax purposes is required for the following:
1. The accounting for purchases and sales of inventory,
2. Tax shelters,
3. Certain farming corporations, and
4. C corporations, trusts with unrelated trade or business income, and partnerships having a C
corporation as a partner provided the business has greater than $5 million average annual
gross receipts for the three-year period ending with the tax year.
The information in the facts tells us that Dart does not maintain inventory, so the first item that requires
accrual method of accounting does not apply. However, the facts also tell us that Dart is a C corporation
with average annual gross receipts in excess of $20 million for the last three years (all of its sales are via
credit card, which is turned into cash immediately; thus, gross receipts for the year are over $20 million).
The fourth requirement above indicates that accrual method of accounting for tax purposes is required if a
C corporation has annual average gross receipts in excess of $5 million for the three-year period ending
with the tax year-thus, Dart must use the accrual method of accounting for tax purposes.
Choice "a" is incorrect, per the above explanation.
Choice "b" is incorrect, per the above explanation.
Choice "d" is incorrect, per the above explanation.
8
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2009 AICPA Newly Released Questions - Regulation
8.
Spinner, CPA, had audited Lasco Corp.'s financial statements for the past several years. Prior to the
current-year's engagement, a disagreement arose that caused Lasco to change auditing firms. Lasco
has demanded that Spinner provide Lasco with Spinner's working papers so that Lasco may show them
to prospective auditors to help them prepare their bids for Lasco's audit engagement. Spinner refused
and Lasco commenced litigation. Under the ethical standards of the profession, will Spinner be
successful in refusing to turn over the working papers?
a. Yes, because Spinner is the owner of the working papers.
b. Yes, because Lasco is required to direct prospective auditors to contact Spinner to make
arrangements to view the working papers in Spinner's office.
c. No, because Lasco has a legitimate business reason for demanding that Spinner surrender the
working papers.
d. No, because it was Lasco's financial statements that were audited.
Solution:
Choice "a" is correct. Work papers belong to the accountant that prepares them, not the client. Thus, as
the owner of the workpapers, Spinner does not have to disclose them to the client, Lasco.
Choice "b" is incorrect because it indicates Spinner would have to disclose if Lasko directed the new
auditors to contact Spinner to view the workpapers in Spinner’s office. Spinner does not have to disclose
the workpapers.
Choices "c" and "d" are incorrect. Both indicate that Spinner must disclose to Lasco and Spinner is not
required to disclose the workpapers.
9
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2009 AICPA Newly Released Questions - Regulation
9.
The Simone Trust reported distributable net income of $120,000 for the current year. The trustee is
required to distribute $60,000 to Kent and $90,000 to Lind each year. If the trustee distributes these
amounts, what amount is includible in Lind's gross income?
a.
b.
c.
d.
$0
$60,000
$72,000
$90,000
Solution:
Rule: The income distribution deduction is the LESSER of DNI or the actual amount distributed to the
beneficiary.
Choice "c" is correct. Distributable net income is the maximum amount of income from the trust that may
be taxed (passed through) to the beneficiary and be deductible by the trust as "the income distribution
deduction." [The reason is that the beneficiary will report this amount of taxable income on his/her
personal income tax return.] However, while DNI is the maximum amount of the income distribution
deduction, the income distribution deduction is the LESSER of DNI or the actual amount distributed to the
beneficiary. The amount of the income distribution deduction to the beneficiary is the amount of income
that is taxed to the beneficiary.
Typically, we see a situation in which DNI exceeds the amount distributed to the beneficiary; thus, the
income distribution deduction would be the amount distributed. In this case, the examiners are truly
testing the candidate's ability to understand the concept of DNI, distributions, and the amount that can be
deducted by the trust (and thus taxed to the beneficiary) because actual (and required) distributions
exceed DNI. Further, the examiners are requiring candidates to make a calculation based on the
prorated amount of actual distributions required to be made. Kent is required to receive $60,000 and Lind
is required to receive $90,000 per year (for a total of $150,000). The applicable pro-rata portion of the
income distribution deduction ($120,000 in this case) for Lind and the amount that would subsequently be
includible in Lind's gross income is calculated as follows:
$90,000/$150,000 * $120,000 = $72,000
Choice "a" is incorrect. The amount includible in Lind's gross income is calculated per the above
explanation.
Choice "b" is incorrect. The answer ($60,000) is the amount of actual distributions to Kent. While the
question asks about Lind, we can take this option one step further for illustrative purposes. Kent received
$60,000 in actual distributions, but the maximum income distribution for Kent (and the amount that will
show up on Kent's K-1 from the trust) is $48,000 [$60,000/$150,000 * $120,000].
Choice "d" is incorrect. Lind received $90,000 in actual distributions, but the maximum income
distribution for Lind (and the amount that will show up on Lind's K-1 from the trust) is $72,000
[$90,000/$150,000 * $120,000].
10
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2009 AICPA Newly Released Questions - Regulation
10.
Sands purchased 100 shares of Eastern Corp. stock for $18,000 on April 1 of the prior year. On February
1 of the current year, Sands sold 50 shares of Eastern for $7,000. Fifteen days later, Sands purchased
25 shares of Eastern for $3,750. What is the amount of Sand's recognized gain or loss?
a.
b.
c.
d.
$0
$500
$1,000
$2,000
Solution:
Rule: A loss on a wash sale is disallowed for tax purposes. A wash sale exists when a security is sold for
a loss and is repurchased within 30 days before or after the sale.
Choice "c" is correct. A wash sale exists in this case, but only a partial wash sale. Unfortunately, the
dollar amounts for the recognized loss and wash sale (disallowed) loss are the same in this question (so
the illustration can become somewhat confusing). Let's use 20X1 and 20X2 for illustration. On 4/1/X1,
Sands purchased 100s of Eastern stock for $18,000 ($180/share). On 2/1/X2, Sands sold 50s of the
stock for $7,000 ($140/share), creating a realized loss of $2,000 (50s * ($140 - $180)). Now, if Sands had
stopped there, it would have also had a recognized loss of $2,000. However, on 2/16/X2 Sands
repurchased half of the shares it had sold at a loss (25s/50s), and this was within the 30-day period
indicated in the rule (above). Thus, half of the realized loss is not recognizable in year 2, and it becomes
part of the basis of the 25s of Eastern stock owned by Sands [note that the 50s not initially sold by Sands
has a basis of $180/share, or $9,000]. The calculation follows:
2/1/X2
Sell 50s
Basis 50s
Realized Loss
$ 7,000
(9,000) [$180 * 50 = $9,000, from the initial purchase]
$ (2,000) [$40/share loss]
2/16/X2
Purchase 25s
Add: Wash Sale Loss
Resulting Basis of 25s
$ 3,750 [Repurchased within 30 days of loss sale]
1,000 [($140 - $180) * 25s = $1,000]
$ 4,750
Result: Sands owns 75s of Eastern stock. The first 50 shares (those that were not sold on 2/1X2) has a
basis of $9,000 in total ($180/share), and the 25 shares repurchased on 2/16/X2 has a basis of $4,750
($190/share).
Choice "a" is incorrect. Sand is allowed to recognize a loss on the shares it did not repurchase. The total
loss on the 50 shares sold is $2,000, but Sands only repurchased 25 shares, so 50% of the $2,000
realized loss (or $1,000) is recognized by Sands in the year sold.
Choice "b" is incorrect. Sand is allowed to recognize a loss on the shares it did not repurchase. The total
loss on the 50 shares sold is $2,000, but Sands only repurchased 25 shares, so 50% of the $2,000
realized loss (or $1,000) is recognized by Sands in the year sold. [Sands sold only 50% of the stock it
initially purchased. Then, it repurchased 50% of the amount it sold.]
Choice "d" is incorrect. A wash sale exists in this situation. The entire $2,000 realized loss is not able to
be recognized in the year sold because 25s of the 50s sold were repurchased in year 2. Only $1,000 of
the realized loss is recognized in the year of sale. The remaining $1,000 loss is a wash sale loss that
becomes part of basis (as shown above).
11
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2009 AICPA Newly Released Questions - Regulation
11.
Under the Negotiable Instruments Article of the UCC, which of the following instruments is classified as a
promise to pay?
a.
b.
c.
d.
A check.
A draft.
A trade acceptance.
A certificate of deposit.
Solution:
Choice "d" is correct. A promissory note is a "promise to pay". A draft is an order for a third party to pay.
A certificate of deposit is a bank promissory note and is therefore a promise to pay.
Choices "a", "b", and "c" are all incorrect because they are drafts and therefore an order for a third party
to pay. They are not a promise to pay.
12
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2009 AICPA Newly Released Questions - Regulation
12.
Under Regulation D of the Securities Act of 1933, what is the maximum time period during which an
exempt offering may be made?
a.
b.
c.
d.
Three months.
Six months.
Twelve months.
Twenty-four months.
Solution:
Choice "c" is correct: twelve months. Under Rule 504, the issuance of securities may not exceed $1
million dollars in a 12-month period. Under Rule 505, the issuance of securities may not exceed $5
million dollars in a 12-month period. Rule 506 permits an unlimited amount of stock to be issued. 506 is
often referred to as a private placement because it excepts transactions not involved in a public offering.
Choices "a", "b", and "d" are incorrect because there are no 3-month, 6-month or 24-month restrictions
found in Rules 504, 505 or 506 of Regulation D.
13
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2009 AICPA Newly Released Questions - Regulation
13.
In April, A and B formed X Corp. A contributed $50,000 cash, and B contributed land worth $70,000 (with
an adjusted basis of $40,000). B also received $20,000 cash from the corporation. A and B each
receives 50% of the corporation's stock. What is the tax basis of the land to X Corp.?
a.
b.
c.
d.
$40,000
$50,000
$60,000
$70,000
Solution:
Rule: There is no gain or loss to the corporation issuing stock in exchange for property for the issuance of
stock. The general rule is that the basis of the property received from the transferor/shareholder is the
greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the
transferor/shareholder or (2) debt assumed by the corporation.
Choice "c" is correct. "A" and "B" form X Corporation so that each receives a 50% interest in the
corporation. "A" contributes $50,000 in cash, and "B" contributes land worth $70,000 and receives
$20,000 from the corporation [note that each has contributed a net $50,000]. X Corporation will record
the basis of the land at the basis of "B" ($40,000) plus any cash it paid to secure the land ($20,000), or
$60,000 total basis. Per the above general rule, the basis of the property received from the
transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any
gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. As there is no
indicated debt on the land nor any gain recognized by "B" on the transfer [because "A" and "B" own at
least 80% of the voting stock immediately after the transaction and there is no taxable boot (no cash
withdrawn and no cancellation of debt) on the transaction], the basis is the adjusted net book value of "B"
($40,000) plus any cash X Corporation pays for the land ($20,000). [Note that we have not addressed
the shareholder consequences in this question.]
Choice "a" is incorrect. The answer includes only "B's" $40,000 basis in the land. X Corporation will
record the basis of the land at the basis of "B" ($40,000) plus any cash it paid to secure the land
($20,000), or $60,000 total basis.
Choice "b" is incorrect. This answer option is the amount of fair market value each shareholder was to
contribute to form the corporation at inception. Because "B" contributed land worth $70,000, the
corporation paid "B" $20,000 in cash to make each shareholder contribute $50,000 in FMV of assets.
Choice "d" is incorrect. This answer option is the amount of the fair market value of the land at the date of
transfer. Per the above general rule, the basis of the property received from the transferor/shareholder is
the greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the
transferor/shareholder or (2) debt assumed by the corporation. Refer to the calculation for answer option
"c."
14
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2009 AICPA Newly Released Questions - Regulation
14.
Which of the following is a capital asset?
a.
b.
c.
d.
Inventory held primarily for sale to customers.
Accounts receivable.
A computer system used by the taxpayer in a personal accounting business.
Land held as an investment.
Solution:
Rule: Capital assets include property (real and personal) held by the taxpayer for investment, such as:
•
Personal automobile of the taxpayer
•
Furniture and fixtures in the home of the taxpayer
•
Stocks and securities of all types (except those held by dealers)
•
Personal property of a taxpayer not used in a trade or business
•
Real property not used in a trade or business
•
Interest in a partnership
•
Goodwill of a corporation
•
Copyrights, literary, musical, or artistic compositions purchased
•
Other assets held for investment
Items that are NOT capital assets include:
•
Property normally included in inventory or held for sale to customers in the ordinary course of
business
•
Depreciable personal property and real estate used in a trade or business
•
Accounts and notes receivable arising from sales or services in the taxpayer's business
•
Copyrights, literary, musical, or artistic compositions held by the original artist (with the exception
of musical compositions held by the original artist)
•
Treasury stock (not an ordinary asset and not subject to capital gains treatment)
Choice "d" is correct. Per the above information and rule, real property not used in a trade or business
(e.g., land held for investment) is a capital asset.
Choice "a" is incorrect. Per the above information, property normally included in inventory or held for sale
to customers in the ordinary course of business is NOT a capital asset.
Choice "b" is incorrect. Per the above information, accounts and notes receivable arising from sales or
services in the taxpayer's business are NOT capital assets.
Choice "c" is incorrect. Per the above information, depreciable personal property and real estate used in
a trade or business (such as a computer system) is NOT a capital asset.
15
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2009 AICPA Newly Released Questions - Regulation
15.
Aviary Corp. sold a building for $600,000. Aviary received a down payment of $120,000 as well as
annual principal payments of $120,000 for each of the subsequent four years. Aviary purchased the
building for $500,000 and claimed depreciation of $80,000. What amount of gain should Aviary report in
the year of sale using the installment method?
a.
b.
c.
d.
$180,000
$120,000
$54,000
$36,000
Solution:
Rule: Under the installment method, revenue is reported over the period in which the cash payments are
received. The amount of cash received is multiplied by the gross profit percentage on the sale to
determine the revenue (which retains its character as capital gain or ordinary income, depending on the
transaction).
Choice "d" is correct. The gross profit percentage is calculated as follows:
Sales Price
$ 600,000
Basis in Building
Accumulated Depreciation ( 80,000)
Realized Gain on Sale
$ 500,000
(420,000)
$ 180,000
Gross Profit Percentage = $180,000/$600,000 = 30%
Gain Recognized in Year of Sale:$120,000 [cash received] * 30% = $36,000
Choice "a" is incorrect. The answer option recognizes as income the total realized gain ($180,000) on the
sale. As indicated in the rule above, under the installment method, revenue is reported over the period in
which the cash payments are received. The amount of cash received is multiplied by the gross profit
percentage on the sale to determine the revenue.
Choice "b" is incorrect. This answer option is the total amount of cash received in the year of sale
($120,000). The gross profit percentage must be applied before the amount of revenue is determined. As
indicated in the rule above, under the installment method, revenue is reported over the period in which
the cash payments are received. The amount of cash received is multiplied by the gross profit
percentage on the sale to determine the revenue.
Choice "c" is incorrect. This assumes a gross profit percentage of 45%. The actual gross profit
percentage is 30%, as per the above calculation.
16
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2009 AICPA Newly Released Questions - Regulation
16.
Which of the following payments would require the donor to file a gift tax return?
a.
b.
c.
d.
$30,000 to a university for a spouse's tuition.
$40,000 to a university for a cousin's room and board.
$50,000 to a hospital for a parent's medical expenses.
$80,000 to a physician for a friend's surgery.
Solution:
Rule: Every transfer of money or property, whether real or personal, tangible or intangible, for less than
adequate or full consideration is a gift. There are four items that qualify for unlimited exclusion from gift
tax and qualify to be excluded from being reported on a gift tax return: (1) payments made directly to an
educational institution for a donee's tuition, (2) payments made directly to a health care provider for
medical care (3) charitable gifts, and (4) marital transfers. Relationship of the donee to the donor is not of
consequence.
Choice "b" is correct. While payments made to the university for a cousin's tuition would be excluded
from the requirement to file a gift tax return, the direct payment to the university for room and board is
considered a gift and would require the filing of a gift tax return.
Choice "a" is incorrect. Per the above rule, payments made directly to an educational institution for a
donee's tuition qualify for exclusion from gift tax and from the gift tax return filing requirement.
Choice "c" is incorrect. Per the above rule, payments made directly to a health care provider (e.g., a
hospital) for medical care qualify for exclusion from gift tax and from the gift tax return filing requirement.
Choice "d" is incorrect. Per the above rule, payments made directly to a health care provider (e.g., a
physician) for medical care qualify for exclusion from gift tax and from the gift tax return filing requirement.
17
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
17.
Which of the following groups may elect to file a consolidated corporate return?
a.
b.
c.
d.
A brother/sister-controlled group.
A parent corporation and all more-than-10%-controlled partnerships.
A parent corporation and all more-than-50%-controlled subsidiaries.
Members of an affiliated group.
Solution:
Rule: An affiliated group of corporations may elect to be taxed as a single unit, thereby eliminating
intercompany gains and losses. To be entitled to file a consolidated return, all the corporations in the
group (1) must have been members of an affiliated group at some time during the tax year and (2) must
have filed a consent (the act of filing a consolidated return qualifies as consent). An affiliated group
means that a common parent owns (1) 80% or more of the voting power of all outstanding stock and (2)
80% or more of the value of all outstanding stock of each corporation.
Rule: Not all corporations are allowed the privilege of filing a consolidated return. Examples of those
denied the privilege include S corporations, foreign corporations, most real estate investment trusts
(REITs), some insurance companies, brother-sister corporations where an individual (not a corporation)
owns 80% or more of the stock of two or more corporations, and most exempt organizations.
Choice "d" is correct. An affiliated group of corporations may file a consolidated return (electing to be
taxed as a single unit and eliminating intercompany gains and losses). This answer option comes right
out and defines the entities as an "affiliated group," thereby removing the need to determine if the group is
actually affiliated!
Choice "a" is incorrect. Per the above rule, not all corporations are allowed the privilege of filing a
consolidated return. Examples of those denied the privilege include S corporations, foreign corporations,
most real estate investment trusts (REITs), some insurance companies, brother-sister corporations
where an individual (not a corporation) owns 80% or more of the stock of two or more corporations, and
most exempt organizations.
Choice "b" is incorrect. Per the above rule, an affiliated group means that a common parent owns (1)
80% or more of the voting power of all outstanding stock and (2) 80% or more of the value of all
outstanding stock of each corporation. In this answer option, the parent owns partnerships, not
corporations [and, even if it did own corporations, the percentage ownership is too small at "more than
10%"].
Choice "c" is incorrect. Per the above rule, an affiliated group means that a common parent owns (1)
80% or more of the voting power of all outstanding stock and (2) 80% or more of the value of all
outstanding stock of each corporation. In this answer option, the parent owns only "more than 50%" of
the controlled corporations.
18
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
18.
A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 33%
effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the
withdrawal?
a.
b.
c.
d.
$10,000
$10,500
$13,000
$13,500
Solution:
Rule: Generally, unless an exception applies, retirement money cannot be withdrawn until the individual
reaches the age of 59 ½. If retirement money (without an exception) is withdrawn before the age of 59 ½,
the premature distribution is subject to a 10% penalty tax (in addition to the applicable regular income tax
that applies to all distributions of traditional IRA money).
Choice "d" is correct. The taxpayer is under the age of 59 ½, and the facts do not indicate that an
exception applies; therefore, the taxpayer is subject to the 10% penalty on the IRA distribution in addition
to the regular income tax. The regular income tax that applies is the marginal rate (the rate for the next
dollar of taxable income). The effective tax rate is simply the total tax divided by the total taxable income.
In this case, the taxpayer would have to pay the regular tax on the distribution at the 35% effective rate
PLUS the 10% penalty on early distribution without an exception. The calculation to arrive at the total tax
associated with the withdrawal follows:
Regular Income Tax
35%
$30,000
$10,500
30,000
x 10%
3,000
x
Penalty Tax
Total Tax
$13,500
Choice "a" is incorrect. This answer option assumes the effective income tax rate (rounded, assuming
33.33%) applied to the $30,000 distribution. It uses the incorrect tax rate (the marginal rate should be
used) and omits the inclusion of the applicable 10% penalty tax. [$30,000 * 33.33% = $10,000]
Choice "b" is incorrect. This answer option includes the $30,000 distribution multiplied by the (proper)
marginal tax rate, but it omits the inclusion of the applicable 10% penalty tax. [$30,000 * 35% = $10,500]
Choice "c" is incorrect. This answer option assumes the effective income tax rate (rounded, assuming
33.33%) applied to the $30,000 distribution plus the applicable 10% penalty tax [($30,000 * 33.33%) +
($30,000 * 10%) = $13,000]. It uses the incorrect tax rate (the marginal rate should be used).
19
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
19.
A heavy equipment dealer would like to trade some business assets in a nontaxable exchange. Which of
the following exchanges would qualify as nontaxable?
a.
b.
c.
d.
The company jet for a large truck to be used in the corporation.
Investment securities for antiques to be held as investments.
A road grader held in inventory for another road grader.
A corporate office building for a vacant lot.
Solution:
Rule: Nonrecognition treatment is accorded to a "like-kind" exchange of property used in the trade or
business or held for investment (with the exception of inventory, stock, securities, partnership interests,
and real property in different countries). "Like-kind" means the same type of investment (e.g., realty for
realty or personalty for personalty, assuming the personal property falls within the same "asset class" for
tax depreciation purposes).
Choice "d" is correct. The exchange of a corporate office building for a vacant lot qualifies for like-kind
nonrecognition treatment. It is the exchange of realty for realty of property used in the trade or business
or held for investment.
Choice "a" is incorrect. Although this answer option exchanges personal property used in a trade or
business, the "asset classes" for the corporate jet and the heavy equipment differ. (This is a tricky
question!)
Choice "b" is incorrect. The exchange of investment securities for antiques to be held as investments
does not qualify for nonrecognition treatment. It is one of the exceptions identified in the rule, above.
Choice "c" is incorrect. The exchange of a road grader held in inventory for another road grader does not
qualify for nonrecognition treatment. It is one of the exceptions identified in the rule, above.
20
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
20.
According to the AICPA Code of Professional Conduct, which of the following financial interests in the
client during the period of the engagement impairs a CPA's independence?
a.
b.
c.
d.
All direct and indirect financial interests.
Only direct financial interests.
Only direct and material indirect financial interests.
Only material financial interests.
Solution:
Choice "c" is correct. Independence shall be considered to be impaired if, during the period of the
professional engagement, the CPA had a direct or material indirect financial interest in the client.
Choices "a", "b", and "d" are incorrect, based on the above explanation.
21
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
21.
Which of the following actions by a CPA most likely violates the profession's ethical standards?
a.
b.
c.
d.
Using a records-retention agency to store confidential client records.
Retaining client records after the client has demanded their return.
Arranging with a financial institution to collect notes issued by a client in payment of fees due.
Compiling the financial statements of a client that employed the CPA's spouse as a bookkeeper.
Solution:
Choice "b" is correct. Failure to return records to a client after the client makes a demand is considered
to be an act discreditable to the profession, and as such violates the profession’s ethical standards.
Choice "a" is incorrect. There is no prohibition against using a records-retention agency to store
confidential client records.
Choice "c" is incorrect. Arranging with a financial institution to collect notes issued by a client in payment
of fees due does not violate the profession’s ethical standards.
Choice "d" is incorrect. A compilation of financial statements does not require the auditor to be
independent (although the lack of independence should be disclosed).
22
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
22.
Under the liability provisions of Section 11 of the Securities Act of 1933, a CPA who certifies financial
statements included in a registration statement generally will not be liable to a purchaser of the security:
a.
b.
c.
d.
Unless the purchaser can prove scienter on the part of the CPA.
Unless the purchaser can prove privity with the CPA.
If the CPA can prove due diligence.
If the financial statements were materially misstated.
Solution:
Choice "c" is correct. Under Section 11 of the Securities Act of 1933, a CPA who certifies financial
statements is generally liable if the purchaser can prove he acquired the stock, he suffered a loss and
there was a material misrepresentation or material omission of fact in the registration. The purchaser
does not have to prove scienter or negligence on the part of the CPA. The purchaser does not have to
prove reliance. However, the CPA is not liable if the CPA can prove "due diligence."
Choice "a" is incorrect because it states the purchaser must prove scienter.
Choice "b" is incorrect because there is no privity defense in the securities acts. Privity is only a defense
to negligence actions by third parties against an accountant. Privity is not a defense to a '33 action, a '34
action or fraud.
Choice "d" is incorrect. The purchaser must prove the financial statements were materially misstated.
Materially misstated financial statements would never be a defense of a CPA.
23
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
23.
Camp orally guaranteed payment of a loan Camp's cousin Wilcox had obtained from Camp's friend Main.
The loan was to be repaid in 10 monthly payments. After making six payments, Wilcox defaulted on the
loan and Main demanded that Camp honor the guaranty. Regarding Camp's liability to Main, Camp is:
a. Liable under the oral guaranty because the loan would be paid within one year.
b. Liable under the oral guaranty because Camp benefitted by maintaining a personal relationship with
Main.
c. Not liable under the oral guaranty because Camp's guaranty must be in writing to be enforceable.
d. Not liable under the oral guaranty because of failure of consideration.
Solution:
Choice "c" is correct. A promise to pay the debt of another must be evidenced by some type of writing to
be enforceable. Camp's oral promise to pay the debt of Wilcox is not enforceable without some type of
writing.
Choices "a" and "b" are incorrect because they state Camp is liable. Camp is not liable due to the lack of
a writing.
Choice "d" is incorrect. Consideration is present. Each of the parties promised to do something of legal
value. Main promised to loan Wilcox money. Wilcox promised to repay the loan. Camp promised to pay
if Wilcox defaulted. Each of the promises services to bind the others.
24
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
24.
During the current year, Mann, an unmarried U.S. citizen, made a $5,000 cash gift to an only child and
also paid $25,000 in tuition expenses directly to a grandchild's university on the grandchild's behalf.
Mann made no other lifetime transfers. Assume that the gift tax annual exclusion is $12,000. For gift tax
purposes, what was Mann's taxable gift?
a.
b.
c.
d.
$30,000
$25,000
$18,000
$0
Solution:
Rules: Every transfer of money or property, whether real or personal, tangible or intangible, for less than
adequate or full consideration is a gift. A donor may exclude the maximum allowable amount of gifts
according to the tax law each year made to each donee. In addition, there are four items that qualify for
unlimited exclusion from gift tax: (1) payments made directly to an educational institution for a donee's
tuition, (2) payments made directly to a health care provider for medical care, (3) charitable gifts, and (4)
marital transfers. Relationship of the donee to the donor is not of consequence.
Choice "d" is correct. The information in the fact pattern tells us that the annual exclusion for the year in
question is $12,000. Mann has gifted less than this amount (the $5,000 in the question), so the entire
$5,000 is exempt from gift tax. The information in the fact pattern also tells us that Mann has paid
$25,000 in tuition expenses directly to a grandchild's university on the grandchild's behalf. Per the above
rule, payments made directly to an educational institution for a donee's tuition are excluded from gift tax.
Therefore, zero gift tax applies to the transfers made by Mann.
Choice "a" is incorrect. This answer option assumes that both the $5,000 and the $25,000 transfers
qualify as taxable gifts. Neither one of them qualify, per the above rules.
Choice "b" is incorrect. This answer option assumes that the $25,000 transfer qualifies as a taxable gift.
Per the above rule, payments made directly to an educational institution for a donee's tuition are excluded
from gift tax.
Choice "c" is incorrect. This answer option incorrectly subtracts the $12,000 annual exclusion from the
total transfers of $30,000 transfer [$25,000 + $5,000 - $12,000 = $18,000]. As discussed above, Mann
has no taxable transfers in the year.
25
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
25.
Wynn, a single individual age 60, sold Wynn's personal residence for $450,000. Wynn had owned
Wynn's residence, which had a basis of $250,000, for six years. Within eight months of the sale, Wynn
purchased a new residence for $400,000. What is Wynn's recognized gain from the sale of Wynn's
personal residence?
a.
b.
c.
d.
$0
$50,000
$75,000
$200,000
Solution:
Rule: The sale of a taxpayer's primary residence is subject to an exclusion from gross income for gain. A
maximum of $250,000 gain exclusion is provided for all taxpayers other than married couples filing jointly.
To qualify for the full exclusion, the taxpayers must have owned and used the property as a primary
residence for two years or more during the five-year period ending on the date of the sale or exchange.
There is no age requirement to receive the exclusion, and no roll-over to another house is required [these
applied to an older tax law].
Choice "a" is correct. Wynn's realized gain on the sale of the home is $200,000 [$450,000 - $250,000].
Wynn has owned and used the residence as his primary residence for the last 6 years. [Note that the
purchase of the new home is of no consequence to the recognizable gain on the sale of the old home.]
As the realized gain is less than the maximum excludable gain of $250,000 and Wynn has owned and
used the property for more than two out of the last five years, Wynn has zero recognized gain on the sale
of his residence.
Choice "b" is incorrect. This answer option incorrectly assumes that the gain is recognized to the extent
the proceeds from the sale of the old house were not reinvested in the new house [$450,000 - $400,000 =
$50,000]. Per the above rule, no roll-over to another house is required [these applied to an older tax law].
Choice "c" is incorrect. Wynn's realized gain on the sale of the home is $200,000 [$450,000 - $250,000].
Wynn has owned and used the residence as his primary residence for the last 6 years. [Note that the
purchase of the new home is of no consequence to the recognizable gain on the sale of the old home.]
As the realized gain is less than the maximum excludable gain of $250,000 and Wynn has owned and
used the property for more than two out of the last five years, Wynn has zero recognized gain on the sale
of his residence.
Choice "d" is incorrect. Wynn's realized gain on the sale of the home is $200,000 [$450,000 - $250,000],
but the recognized gain is zero. Wynn has owned and used the residence as his primary residence for
the last 6 years. As the realized gain is less than the maximum excludable gain of $250,000 and Wynn
has owned and used the property for more than two out of the last five years, Wynn has zero recognized
gain on the sale of his residence.
26
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
26.
George and Suzanne have been married for 40 years. Suzanne inherited $1,000,000 from her mother.
Assume that the annual gift-tax exclusion is $12,000. What amount of the $1,000,000 can Suzanne give
to George without incurring a gift-tax liability?
a.
b.
c.
d.
$12,000
$24,000
$500,000
$1,000,000
Solution:
Rules: Every transfer of money or property, whether real or personal, tangible or intangible, for less than
adequate or full consideration is a gift. A donor may exclude the maximum allowable amount of gifts
according to the tax law each year made to each donee. In addition, there are four items that qualify for
unlimited exclusion from gift tax: (1) payments made directly to an educational institution for a donee's
tuition, (2) payments made directly to a health care provider for medical care, (3) charitable gifts, and (4)
marital transfers. Relationship of the donee to the donor is not of consequence.
Choice "d" is correct. Per the above rule, marital transfers are excluded from gift tax. In this case,
Suzanne inherited $1,000,000. Suzanne can give the entire $1,000,000 to George without incurring a gift
tax liability.
Choice "a" is incorrect. The answer option is the annual exclusion amount given in the question of
$12,000. As per the above rule, marital transfers are excluded from gift tax.
Choice "b" is incorrect. This answer option incorrectly assumes a gift-split of the two spouses (using the
$12,000 annual exclusion amount). [$12,000 * 2 = $24,000.] Per the above rule, marital transfers are
excluded from gift tax.
Choice "c" is incorrect. This answer option incorrectly assumes that 50% of the $1,000,000 (probably
trying to trick you into applying the "joint" property rules) is the maximum amount that can be transferred
to George without Suzanne incurring gift tax liability. Per the above rule, marital transfers are excluded
from gift tax.
27
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
27.
Kant, a cash-basis individual, owns and operates an office building. Kant received the following
payments during the current year:
Current rents
Advance rents for the next year
Security deposits held in a segregated account
Lease cancellation payments
$30,000
10,000
5,000
15,000
What amount is included in gross income?
a.
b.
c.
d.
$30,000
$40,000
$55,000
$60,000
Solution:
Rule: The basic formula for determination of net rental income or loss follows:
Gross rental income
Prepaid rental income
Rent cancellation payments
Improvements in lieu of rent
<Rental Expenses>
Net rental income <loss>
If security deposits are held separately and not available to be applied to last month's rent (as in a
segregated account), they are a liability of the taxpayer and not included in income in the year received.
Choice "c" is correct. The calculation of gross income for the year follows:
Current rents
Advance rents for the next year
Security deposits held in a segregated account
Lease cancellation payments
$30,000
10,000
-15,000
Gross income from the rental activity
$55,000
Choice "a" is incorrect. This answer option incorrectly includes only the current rents as part of gross
income, when advance rents and lease cancellation payments also must be included.
Choice "b" is incorrect. This answer option incorrectly includes only the current rents and the advance
rents as part of gross income, when lease cancellation payments also must be included.
Choice "d" is incorrect. This answer option incorrectly includes all of the payments collected for the rental
activity in the year, when the security deposits that are held in a segregated account are excluded from
gross income.
28
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
28.
Webster, a C corporation, has $70,000 in accumulated and no current earnings and profits. Webster
distributed $20,000 cash and property with an adjusted basis and fair market value of $60,000 to its
shareholders. What amount should the shareholders report as dividend income?
a.
b.
c.
d.
$20,000
$60,000
$70,000
$80,000
Solution:
Rules: Distributions from corporations to shareholders are taxable to such shareholders if the
distributions are classified as dividends. A dividend is defined by the IRC as a distribution of property by
a corporation out if its earnings and profits. An individual shareholder will be taxed on dividends in cash
for the amount received and on dividends of property for the fair market value of the property received.
Distributions are deemed to come from earnings and profits first. Any distribution in excess of earnings
and profits ("E&P," accumulated and current) is treated as a nontaxable return of capital that reduces the
shareholder's basis in the stock. Distributions in excess of basis are capital gain distributions taxable as
capital gains instead of dividends.
Choice "c" is correct. Per the above rules, an individual shareholder will be taxed on dividends in cash for
the amount received and on dividends of property for the fair market value of the property received, but
any distribution in excess of earnings and profits (accumulated and current) is treated as a nontaxable
return of capital that reduces the shareholder's basis in the stock. The corporation has $70,000 in current
and accumulated earnings and profits. Therefore, the shareholders will be taxed on the $20,000 in cash
received plus the $60,000 in FMV of the property received ($80,000), but only to the extent there is E&P,
and that means a taxable amount of dividends of $70,000. The remaining $10,000 will either be a
nontaxable return of capital (assuming basis exists), a taxable capital gain (assuming no basis exists), or
something in between (assuming basis is positive but less than $10,000).
[Note: The question indicates that the basis of the property equals the fair market value. This avoids the
impact on the E&P on the corporation's books for the gain on the dividend to the shareholders and keeps
the E&P at $70,000.]
Choice "a" is incorrect. This answer option incorrectly includes only the cash received ($20,000) as the
dividend and excludes the property received.
Choice "b" is incorrect. This answer option incorrectly includes only the fair market value of the property
received ($60,000) as the dividend and excludes the cash received.
Choice "d" is incorrect. This answer option includes both the $20,000 cash received and the $60,000 fair
market value of the property received [$20,000 + $60,000 = $80,000], but it (incorrectly) does not limit the
dividend income to the total amount of corporate E&P, which is $70,000.
29
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
29.
Under the Secured Transactions Article of the UCC, for which of the following types of collateral must a
financing statement be filed in order to perfect a purchase money security interest?
a.
b.
c.
d.
Stock certificates.
Promissory notes.
Personal jewelry.
Inventory.
Solution:
Choice "d" is correct. By definition a purchase money security interest in inventory can only occur in two
ways. First, the creditor sells inventory to the debtor on credit and retains a security interest for the
purchase price. Second, the creditor loans money to the creditor to purchase the inventory. In either the
case, filing is the only way to perfect. The debtor has possession of the inventory, not the creditor. Thus,
the creditor cannot perfect by possession or control. The creditor cannot be automatically perfected with
a purchase money security interest in inventory. Only a purchase money security interest in consumer
goods is automatically perfected. Thus, the only way to perfect a purchase money security interest in
inventory is to file a financing statement.
Choices "a" and "b" are incorrect. With stocks, bonds and negotiable instruments (like promissory notes),
the creditor can only perfect by possession or control.
Choice "c" is incorrect because personal jewelry is owned by the debtor. It was not purchased with the
creditor's money or creditor's credit as is required for it to be a purchase money security interest.
30
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
30.
Under the Secured Transactions Article of the UCC, what secured transaction document must be signed
by the debtor?
a.
b.
c.
d.
Statement of assignment.
Security agreement.
Release of collateral.
Termination statement.
Solution:
Choice "b" is correct. The security agreement must be signed or authenticated by the debtor.
Choice "a" is incorrect. The Secured Transaction Article permits a creditor to assign all or part of his
rights under a financing statement. A statement of assignment must be signed by the creditor, not the
debtor.
Choice "c" is incorrect. The Secured Transaction Article permits a creditor to release all or part of his
rights to collateral described in a financing statement. A release of collateral must be signed by the
creditor, not the debtor.
Choice "d" is incorrect. A termination statement terminates a security interest in collateral. It must be
signed by the creditor, not the debtor.
31
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
31.
Ames and Roth form Homerun, a C corporation. Ames contributes several autographed baseballs to
Homerun. Ames purchased the baseballs for $500, and they have a total fair market value of $1,000.
Roth contributes several autographed baseball bats to Homerun. Roth purchased the bats for $5,000,
and they have a fair market value of $7,000. What is Homerun's basis in the contributed bats and balls?
a.
b.
c.
d.
$0
$5,500
$6,000
$8,000
Solution:
Rules: There is no gain or loss to the corporation issuing stock in exchange for property for the issuance
of stock. The general rule is that the basis of the property received from the transferor/shareholder is the
greater of: (1) adjusted net book value of the transferor/shareholder plus any gain recognized by the
transferor/shareholder or (2) debt assumed by the corporation. A shareholder recognizes gain when at
least 80% of the voting stock is not owned by the shareholders immediately after the transaction and
there is no taxable boot (cash is withdrawn or cancellation of debt exists) on the transaction.
Choice "b" is correct. The general rule is that the basis of the property received from the
transferor/shareholder is the greater of: (1) adjusted net book value of the transferor/shareholder plus any
gain recognized by the transferor/shareholder or (2) debt assumed by the corporation. Applying the
information in the fact pattern and that above rules, there is no "shareholder gain" on this transaction.
Further, there is not indication of any debt being assumed by the corporation. Thus, Homerun's basis in
the contributed bats and balls is $5,500 [$500 for the baseballs plus $5,000 for the bats], which is the
adjusted net book value of the transferors.
Choice "a" is incorrect. Homerun's basis in the contributed bats and balls is $5,500 [$500 for the
baseballs plus $5,000 for the bats], which is the adjusted net book value of the transferors.
Choice "c" is incorrect. This answer option incorrectly adds the fair market value of the baseballs
($1,000) to the basis of the bats ($5,000). Homerun's basis in the contributed bats and balls is $5,500
[$500 for the baseballs plus $5,000 for the bats], which is the adjusted net book value of the transferors.
Choice "d" is incorrect. This answer option incorrectly adds the fair market value of the baseballs
($1,000) to the fair market value of the bats ($7,000). Homerun's basis in the contributed bats and balls is
$5,500 [$500 for the baseballs plus $5,000 for the bats], which is the adjusted net book value of the
transferors.
32
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
32.
Sandy is the sole shareholder of Swallow, an S corporation. Sandy's adjusted basis in Swallow stock is
$60,000 at the beginning of the year. During the year, Swallow reports the following income items:
Ordinary income
Tax-exempt income
Capital gains
$30,000
5,000
10,000
In addition, Swallow makes a nontaxable distribution to Sandy of $20,000 during the year. What is
Sandy's adjusted basis in the Swallow stock at the end of the year?
a.
b.
c.
d.
$60,000
$70,000
$80,000
$85,000
Solution:
Rules: The rules for determining a shareholder's basis in S corporation stock follow:
+
+
-
Initial basis (or beginning of year)
Income items (separately and non-separately stated items)
Additional shareholder investments in corporation stock
Distributions to shareholders
Loss or expense items
Ending basis
Choice "d" is correct.
Initial basis (or beginning of year amount)
Income items (separately and non-separately stated items)
Additional shareholder investments in corporation stock
Distributions to shareholders
Loss or expense items
Ending basis
$ 60,000
45,000
-(20,000)
$ 85,000
Choice "a" is incorrect. This is only the amount of Sandy's basis at the beginning of the year ($60,000).
The income items and distributions also affect Sandy's basis as of the end of the year.
Choice "b" is incorrect. This answer option includes the $60,000 basis at the beginning of the year plus
the $10,000 in capital gains during the year, but it incorrectly excludes the ordinary and tax-exempt
income from the year and the effect of the distributions during the year.
Choice "c" is incorrect. This answer option incorrectly excludes the $5,000 of tax-exempt income
received by Swallow during the year.
33
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
33.
A $100,000 increase in partnership liabilities is treated in which of the following ways?
a.
b.
c.
d.
Increases each partner's basis in the partnership by $100,000.
Increases the partners' bases only if the liability is nonrecourse.
Increases each partner's basis in proportion to their ownership.
Does not change any partner's basis in the partnership regardless of whether the liabilities are
recourse or nonrecourse.
Solution:
Rule: The partner's original basis is increased by the portion of the liabilities assumed by the partner, and
this amount is equal to the partner's percentage ownership in the partnership.
Choice "c" is correct. A $100,000 increase in partnership liabilities generally increases each partner's
basis in proportion to their ownership percentage. [Thus, a 25% partner will generally have a basis
increase of $25,000 for an increase in partnership debt of $100,000.]
Choice "a" is incorrect. This incorrectly says that each partner will have a basis increase of $100,000 for
a total partnership debt increase of $100,000. A partner is only responsible for debt in the proportion of
his/her ownership interest.
Choice "b" is incorrect. Partnership basis will increase in proportion to the partner's economic loss
percentage (risk) if the debt is recourse. Partnership basis may increase if the debt in nonrecourse, but
there are limitations (beyond the scope of the exam).
Choice "d" is incorrect. A $100,000 increase in partnership liabilities generally increases each partner's
basis in proportion to their ownership percentage. Partnership basis will increase in proportion to the
partner's economic loss percentage (risk) if the debt is recourse. Partnership basis may increase if the
debt in nonrecourse, but there are limitations (beyond the scope of the exam).
34
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
34.
Under the Secured Transactions Article of the UCC, all of the following are needed to create an
enforceable security interest, except:
a.
b.
c.
d.
A security agreement must exist.
The secured party must give value.
The debtor must have rights in the collateral.
A financing statement must be filed.
Solution:
Choice "d" is correct. Attachment is the process whereby a security interest is created giving the creditor
rights against the debtor. There are three requisites for attachment. First, there must be an agreement
between the creditor and the debtor. Second, the creditor must give value. Third, the debtor must have
rights in the collateral. Filing a financing statement is not a requirement for creating a security interest.
Filing is one of the methods of perfecting a security interest against third parties.
Choices "a", "b", and "c" are incorrect because they are all requisites for attachment.
35
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
35.
An individual received $50,000 during the current year pursuant to a divorce decree. A check for $25,000
was identified as annual alimony, checks totaling $10,000 as annual child support, and a check for
$15,000 as a property settlement. What amount should be included in the individual's gross income?
a.
b.
c.
d.
$50,000
$40,000
$25,000
$0
Solution:
Rules: Payments for the support of a spouse are income to the spouse receiving the payments and are
deductible to arrive at adjusted gross income by the contributing spouse. Child support is not taxable.
Property settlements are not taxable.
Choice "c" is correct. Only the $25,000 in alimony is included in the gross income of the receiving
spouse.
Choice "a" is incorrect. This answer option incorrectly includes all of the payments received in the year.
The child support ($10,000) and the property settlement ($15,000) are NOT included in the gross income
of the receiving spouse.
Choice "b" is incorrect. This answer option incorrectly includes the payments received in the year for
alimony and property settlement for the year [$25,000 + $15,000 = $40,000]. The property settlement
($15,000) is NOT included in the gross income of the receiving spouse.
Choice "d" is incorrect. The amount received for alimony ($25,000) is included in the gross income of the
receiving spouse.
36
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
36.
Bluff purchased equipment for business use for $35,000 and made $1,000 of improvements to the
equipment. After deducting depreciation of $5,000, Bluff gave the equipment to Russett for business use.
At the time the gift was made, the equipment had a fair market value of $32,000. Ignoring gift tax
consequences, what is Russett's basis in the equipment?
a.
b.
c.
d.
$31,000
$32,000
$35,000
$36,000
Solution:
Rule: Property acquired as a gift generally retains the rollover cost basis as it had in the hands of the
donor at the time of the gift. Basis is increased by any gift tax paid attributable to the appreciation in the
value of the gift (but the facts in this case indicate to ignore gift tax consequences). There is an exception
to the general rule: if the fair market value at the date of gift is greater than the roll-over cost basis from
the donor, the basis for the donee depends upon the donee's future selling price of the asset.
The asset may sell for (1) greater than the donor's basis, (2) between the donor's basis and the lower
FMV at the date of gift, and (3) less than the FMV at the date of gift.
Choice "a" is correct. The first step is to determine the donor's basis in the asset at the gift date. In this
case, the basis is $31,000 ($35,000 + $1,000 - $5,000). The fair market value of the asset is $32,000 at
the date of gift, which is greater than the donor's basis, so the general rule applies. Property acquired as
a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift.
Thus, Russett's basis in the equipment is $31,000.
Choice "b" is incorrect. The first step is to determine the donor's basis in the asset at the gift date. In this
case, the basis is $31,000 ($35,000 + $1,000 - $5,000). The fair market value of the asset is $32,000 at
the date of gift, which is greater than the donor's basis, so the general rule applies. Property acquired as
a gift generally retains the rollover cost basis as it had in the hands of the donor at the time of the gift.
Thus, Russett's basis in the equipment is $31,000 (the cost basis of the donor), not the $32,000 fair
market value at the date of gift.
Choice "c" is incorrect. This answer option incorrectly assumes the basis is only the $35,000 purchase
price of the asset and ignores the $1,000 in improvements and the basis reduction for the $5,000 in
accumulated depreciation.
Choice "d" is incorrect. This answer option incorrectly assumes the basis is only the $35,000 purchase
price of the asset plus the $1,000 in improvements and ignores the basis reduction for the $5,000 in
accumulated depreciation.
37
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
37.
Dale was a 50% partner in D&P Partnership. Dale contributed $10,000 in cash upon the formation of the
partnership. D&P borrowed $10,000 to purchase equipment. During the first year of operations, D&P
had $15,000 net taxable income, $2,000 tax-exempt interest income, a $3,000 distribution to each
partner, and a $4,000 reduction of debt. At the end of the first year of operation, what amount would be
Dale's basis?
a.
b.
c.
d.
$16,500
$17,500
$18,500
$21,500
Solution:
Rule: The partnership basis formula follows:
Basis = Capital Account + Partner's Share of Liabilities
Choice "c" is correct. Dale's basis at the end of the first year of operations is calculated as follows:
Initial contribution at formation
Net taxable income
Tax exempt income
Distributions
Increase in debt responsible for
Reduction in debt responsible for
Basis at year end
$ 10,000
7,500
1,000
(3,000)
5,000
(2,000)
$ 18,500
[$15,000 * 50%]
[$2,000 * 50%]
[to each partner]
[$10,000 * 50%]
[$4,000 * 50%]
Choice "a" is incorrect. There are a few ways to have miscalculated the basis by $2,000. The proper
calculation of the basis at year end is shown above.
Choice "b" is incorrect. The most likely error made if this answer option were chosen is that the tax
exempt income of $1,000 was omitted from being an increase in the partner's basis in the partnership. All
income (including tax free income) increases a partner's basis.
Choice "d" is incorrect. The most likely error made if this answer option were chosen is that the
distributions of $3,000 were omitted from being a decrease in the partner's basis in the partnership;
although, several other miscalculations could have been made. The proper calculation of the basis at
year end is shown above.
38
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
38.
The adjusted basis of Smith's interest in EVA partnership was $230,000 immediately before receiving the
following distribution in complete liquidation of EVA:
Cash
Real estate
Basis to EVA
$150,000
120,000
Fair market value
$150,000
146,000
What is Smith's basis in the real estate?
a.
b.
c.
d.
$146,000
$133,000
$120,000
$80,000
Solution:
Rule: In a complete liquidation of a partnership, the partner's basis in the distributed property is the same
as the adjusted basis of his partnership interest (the partner is essentially exchanging his partnership
interest for assets of the partnership), reduced by any monies received. The partner recognizes gain only
to the extent that money received exceeds the partner's basis in the partnership.
Choice "d" is correct. Smith's basis in the real estate is calculated as follows:
Smith's basis in EVA before liquidation
$ 230,000
Cash received
(150,000)
Smith's basis in the real estate
$ 80,000
Choice "a" is incorrect. This answer option incorrectly uses the fair market value of the land ($146,000) at
the date of distribution in complete liquidation. In a complete liquidation of a partnership, the partner's
basis in the distributed property is the same as the adjusted basis of his partnership interest (the partner
is essentially exchanging his partnership interest for assets of the partnership), reduced by any monies
received.
Choice "b" is incorrect. This answer option incorrectly uses the average of the basis and the fair markets
value of the real estate at the date of distribution [($120,000 + $146,000)/2 = $133,000]. In a complete
liquidation of a partnership, the partner's basis in the distributed property is the same as the adjusted
basis of his partnership interest (the partner is essentially exchanging his partnership interest for assets of
the partnership), reduced by any monies received.
Choice "c" is incorrect. This answer option incorrectly uses EVA's basis of the land ($120,000) at the
date of distribution in complete liquidation. In a complete liquidation of a partnership, the partner's basis
in the distributed property is the same as the adjusted basis of his partnership interest (the partner is
essentially exchanging his partnership interest for assets of the partnership), reduced by any monies
received.
39
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
39.
A CPA in public practice may not disclose confidential client information regarding auditing services
without the client's consent in response to which of the following situations?
a.
b.
c.
d.
A review of the CPA's professional practice by a state CPA society.
A letter to the client from the IRS.
An inquiry from the professional ethics division of the AICPA.
A court-ordered subpoena or summons.
Solution:
Choice "b" is correct. A CPA is required to disclosed confidential client information if the information is
subpoenaed and relevant to a court case. The IRS would have to do more than request the information
in a letter. The IRS would have to subpoena the information and show that it was relevant to a court
matter.
Choice "a" is incorrect because a CPA is required to reveal confidential client information to a state CPA
society voluntary quality control review panel when requested.
Choice "c" is incorrect because a CPA is required to reveal confidential information in an official
investigation of the AICPA/state trial board.
Choice "d" is incorrect because a CPA is required to reveal confidential client information if it is
subpoenaed and relevant to a court case.
40
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.
2009 AICPA Newly Released Questions - Regulation
40.
An S corporation engaged in manufacturing has a year end of June 30. Revenue consistently has been
more than $10 million under both cash and accrual basis of accounting. The stockholders would like to
change the tax status of the corporation to a C corporation using the cash basis with the same year end.
Which of the following statements is correct if it changes to a C corporation?
a.
b.
c.
d.
The year end will be December 31, using the cash basis of accounting.
The year end will be December 31, using the accrual basis of accounting.
The year end will be June 30, using the accrual basis of accounting.
The year end will be June 30, using the cash basis of accounting.
Solution:
Rule: While the cash basis of accounting is used by most taxpayers for tax purposes, the accrual basis
method of accounting for tax purposes is required for the following:
1. The accounting for purchases and sales of inventory,
2. Tax shelters,
3. Certain farming corporations, and
4. C corporations, trusts with unrelated trade or business income, and partnerships having a C
corporation as a partner provided the business has greater than $5 million average annual
gross receipts for the three-year period ending with the tax year.
Choice "c" is correct. The facts tell us that the shareholders would like to change the status to a C
corporation using the same year end as the S corporation (June 30). Per the above rule, C corporations
with greater than $5 million average annual gross receipts must use the accrual basis of accounting for
tax purposes. When this corporation changes to a C corporation status, therefore, it must report on the
accrual basis of accounting for tax purposes. It will be able to stay on the June 30 year end, as the
shareholders desire.
Choice "a" is incorrect. The year will be June 30 (not December 31) with the accrual (not cash) basis of
accounting.
Choice "b" is incorrect. The year will be June 30 (not December 31), but the accrual basis of accounting
will be used.
Choice "d" is incorrect. The year will be June 30, but the accrual (not cash) basis of accounting will be
used.
41
© 2009 DeVry/Becker Educational Development Corp. All rights reserved.