2007 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 explanations 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 2007 AICPA Newly Released Questions – Regulation CPA-05515 The Securities Act of 1933 provides an exemption from registration for: a b c d Bonds issued by a municipality for governmental purposes Yes Yes No No Securities issued by a not-for-profit charitable organization Yes No Yes No ANSWER: Choice "a" is correct The 1933 Act generally requires issuances of securities to be registered unless a securities or transaction exemption applies The 1933 Act includes a securities exemption for bonds issued by a municipality for governmental purposes and securities issued by a not-for-profit charitable organization Choice "b" is incorrect The 1933 Act includes an exemption for not-for-profit charitable organizations Choice "c" is incorrect The 1933 Act includes an exemption for bonds issued by a municipality for governmental purposes Choice "d" is incorrect The 1933 Act generally requires issuances of securities to be registered unless a securities or transaction exemption applies The 1933 Act includes a securities exemption for bonds issued by a municipality for governmental purposes and securities issued by a not-for-profit charitable organization 2007 AICPA Newly Released Questions – Regulation CPA-05516 Wilson, CPA, uses a commercial tax software package to prepare clients' individual income tax returns Upon reviewing a client's computer-generated year itemized deductions, Wilson discovers that the schedule's deductible investment interest expense is less than the amount paid by the taxpayer and the amount that Wilson entered into the computer After analyzing the entire tax return, Wilson determines that the computer-generated investment interest expense deduction is correct Why is the computergenerated investment interest expense deduction correct? I The client's investment interest expense exceeds net investment income II The client's qualified residence interest expense reduces the deductible amount of investment interest expense a b c d I only II only Both I and II Neither I nor II ANSWER: Choice "a" is correct The computer-generated investment interest expense deduction will be limited to the net investment income of the taxpayer Any excess amount will be carried forward indefinitely For example, assume the taxpayer had $5,000 of investment interest for a year but had investment income of only $3,000 The tax preparer would enter the $5,000 paid as investment interest, and the computer would then allow only a $3,000 deduction for investment interest in the year The remaining $2,000 of expense would be carried forward indefinitely to be applied to investment income in future years Qualified residence interest is NOT investment interest and would not affect investment interest income in any manner Choices "b", "c", and "d" are incorrect, per the above discussion 2007 AICPA Newly Released Questions – Regulation CPA-05517 Which of the following requirements must be met, by any type of deed, in order for title to real property to be transferred? a b c d The deed must be delivered to the purchaser of the property The deed must be recorded by the seller of the property The deed must include a statement of the property's value The deed must include a general warranty of title ANSWER: Choice "a" is correct To be effective, a deed must be in a writing signed by the grantor, it must describe the premises, and it must be delivered Thus, choice "a" is correct Choice "b" is incorrect Recording fixes the rights of the grantee against all third parties by giving them constructive notice of the grant; it is not required to make a deed effective between the grantor and grantee Choice "c" is incorrect To be effective, a deed must be in a writing signed by the grantor, it must describe the premises, and it must be delivered It need not include a statement of the property's value Choice "d" is incorrect To be effective, a deed must be in a writing signed by the grantor, it must describe the premises, and it must be delivered A deed may include a general warranty (i.e., a general warranty deed) but it need not include any warranty at all (i.e., a bargain and sale deed) 2007 AICPA Newly Released Questions – Regulation CPA-05518 Walker transferred property used in a sole proprietorship to the WXYZ partnership in exchange for a onefourth interest The property had an original cost of $75,000, an adjusted tax basis to Walker of $20,000, and fair market value of $50,000 The partnership has no liabilities What is Walker's basis in the partnership interest? a b c d $0 $20,000 $50,000 $75,000 ANSWER: Choice "b" is correct Generally, no gain or loss is recognized on a contribution of property to a partnership in return for a partnership interest The partner's original basis for a partnership interest acquired by contribution of property is the adjusted tax basis of the property (unless the property is subject to excess liability, which is not the case in this question) Choice "a" is incorrect Walker's adjusted tax basis in the property is $20,000 There are no partnership liabilities, and the facts not indicate that the property was subject to excess liability The facts in the question not support a zero basis in the partnership interest Choice "c" is incorrect The $50,000 fair market value is not used to determine the initial basis in the partnership interest; however, upon the sale of the property, the fair market value will be used in the calculation of the special allocation to the contributing partner of the built-in gain on the sale Choice "d" is incorrect The $75,000 original cost of the property is not used to determine the contributing partner's basis The amount to use is the adjusted tax basis (cost less depreciation or other basis reduction) upon contribution 2007 AICPA Newly Released Questions – Regulation CPA-05519 Olson, Wayne, and Hogan are equal partners in the OWH partnership Olson's basis in the partnership interest is $70,000 Olson receives a liquidating distribution of $10,000 cash and land with a fair market value of $63,000, and a basis of $58,000 What is Olson's basis in the land? a b c d $58,000 $60,000 $63,000 $70,000 ANSWER: Choice "b" is correct In a liquidating distribution, the partner's basis for the distributed property is the same as the adjusted basis of his partnership interest (as the partner is simply exchanging his partnership interest for the distributed assets), reduced by any monies received in the same transaction Olson's basis before distribution Less: Cash received Remaining basis in partnership Less: Allocate basis to land Liquidated partnership basis $70,000 (10,000) 60,000 (60,000) $ Choice "a" is incorrect This would be the answer if the distribution were a non-liquidating distribution (which would then mean that partner would still have a partnership interest with a basis of $2,000 ($60,000 - $58,000 land basis) Choice "c" is incorrect The fair market value of the asset is not considered in a liquidation Choice "d" is incorrect The allocable basis must first be reduced by the amount of cash received 2007 AICPA Newly Released Questions – Regulation CPA-05520 Cassidy, an individual, reported the following items of income and expense during the current year: Salary Alimony paid to a former spouse Inheritance from a grandparent Proceeds of a lawsuit for physical injuries $50,000 10,000 25,000 50,000 What is the amount of Cassidy's adjusted gross income? a b c d $40,000 $50,000 $115,000 $125,000 ANSWER: Choice "a" is correct Gross income includes salary, but it excludes inheritance and proceeds from a lawsuit for physical injuries Alimony paid is an adjustment from gross income to arrive at Adjusted Gross Income, as follows: Gross Income: Salary Inheritance Proceeds from physical injury lawsuit Adjustments: Alimony paid Adjusted gross income $50,000 0 (10,000) $40,000 Choice "b" is incorrect Although salary is the only item of taxable gross income on the list, alimony is an allowable adjustment to arrive at adjusted gross income Choice "c" is incorrect This answer choice includes all items of income given and deducts the alimony paid Inheritance and proceeds from a lawsuit for physical injuries are NOT items of taxable gross income Choice "d" is incorrect This answer choice includes all items of income given and does not deduct the alimony paid Inheritance and proceeds from a lawsuit for physical injuries are NOT items of taxable gross income, and alimony IS an allowable deduction from gross income 2007 AICPA Newly Released Questions – Regulation CPA-05521 Taylor owns 1,000 shares of Media Corporation common stock with a basis of $22,000 and a fair market value of $33,000 Media paid a nontaxable 10% common stock dividend What is the basis for each share of Media common stock owned by Taylor after receipt of the dividend? a b c d $20 $22 $30 $33 ANSWER: Choice "a" is correct A stock dividend is a distribution by a corporation of its own stock to its shareholders Stock dividends are generally not taxable unless the shareholder has a choice of receiving cash or other property, and the facts indicate that this is a nontaxable 10% dividend The basis of a nontaxable stock dividend, where old and new shares are identical, is determined by dividing the basis of the old stock by the number of new shares The calculation is as follows: Original basis of 1,000 shares Divided by new # of shares [1000 * 1.1] Basis per share after 10% stock dividend $22,000 / 1,100 shares $ 20.00/share Choice "b" is incorrect This choice divides the original basis of $22,000 by the old number of shares, without considering the 10% stock dividend [$22,000 / 1,000 = $22/share] Choice "c" is incorrect This choice uses the fair market value rather than the proper basis as the allocation base for the stock, but it does use the proper (new) amount of shares after the stock dividend [$33,000 / 1,100 shares = $30/share] Choice "d" is incorrect This answer choice uses the fair market value rather than the proper basis as the allocation base for the stock, and it also improperly uses the old number of shares, without considering the stock dividend [$33,000 / 1,000 shares = $33/share] 2007 AICPA Newly Released Questions – Regulation CPA-05522 Beta, a C corporation, reported the following items of income and expenses for the year: Gross income Dividend income from a 30% owned domestic corporation Operating expenses $600,000 100,000 400,000 What is Beta's taxable income for the year? a b c d $200,000 $220,000 $230,000 $300,000 ANSWER: Choice "b" is correct Corporate taxable income is calculated as follows for a corporation: Gross income Dividend income Operating expenses Dividends received deduction Taxable income $600,000 100,000** (400,000) (80,000) [80% DRD] $220,000 ** Note that the "gross income" amount for the calculation of taxable income should include dividend income; however, it does not appear that the $100,000 of dividends is included in the $600,000 gross income amount given If it were, the answer options would be $100,000 less than they are Choice "a" is incorrect The dividends received deduction allows for a special deduction of 80% of the dividends received from a 20% to