2014 AICPA Newly Released Questions - Regulation 2014 AICPA Regulation Newly Released MCQs — Medium Rating 1. CPA-08406 ‘Shore, a paid tax return preparer, was given three partnership Schedule K-1 forms by client Filler. Fulle is a limited partner in each of the partnerships. The K-ts disclosed small pass- through losses allocated to Fuller. Fuller had passive income in excess of these losses from other partnerships. According to the AICPA Statements on Standards for Tax Services, assuming that no at-risk limitations apply, what is Shore's professional responsiblity regarding the reporting of these partnership losses on Fuller's federal income tax return? ‘a. Tovverify the client's basis by examining client's records from the present. b. _Toaccept the information without further inquiry unless Shore has reason to believe that the information is incorrect. ©. Toverty the initial investment in each partnership entity unless Shore has reason to believe that the information is incorrect. d. —Torequest the complete partnership returns of the partnership entities unless Shore has reason to believe that the information is incorrect. tial investment to the AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-2 Topic to be assigned to: AICPA Standards On Tax services 5 Page reference (page # and outline point): R2-59, Il, E. 1. ANSWER: Choice “b* is correct. Without obtaining verification, a tax preparer may in good faith rely on information furnished by a taxpayer or third parties when preparing a tax return. The tax preparer should, however, make reasonable inquiries ifthe information appears to be incomplete, incorrect, or inconsistent. Choices "a", “c’, and "d" are incorrect, per the above rule.2014 AICPA Newly Released Questions - Regulation 2. CPA-08407 Which of the following bodies has the authority to suspend or revoke a CPA's license for acts discreditable to the profession? a. The state society of certilied public accountants, b. The state board of accountancy. The Public Company Accountancy Oversight Board. 4d. The American Institute of Certified Public Accountants. AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-5 Topic to be assigned to: Role of State Boards of Accountancy 1 Page reference (page # and outline point): R5-18, Il. B. 3. ANSWER: Choice "b" is correct. A suspension or revocation of a CPA's license may only be imposed by a state board of accountancy. Choices "a’, "c", and "d" are incorrect, per the above rule.2014 AICPA Newly Released Questions - Regulation 3, CPA-08433 Under the common law, which of the following defenses, if used by a CPA, would best avoid liability in an action for negligence brought by a client? a The client was contributorily negligent. b, The client was comparatively negligent ¢. The accuracy of the CPA's report was not guaranteed. d. The CPA's negligence was not the proximate cause of the client's losses. AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-5 Topic to be assigned to: CPA Legal Liability 4 Page reference (page # and outline point): R5-39, Il. B. 1. ANSWER: Choice "d*is correct. A plaintiff must show four elements to make a case for negligence against a CPA. The plaintiff must show the defendant owed a duty of care to the plaintiff, the defendant breached that duty by failing to act with due care, the breach caused the plaintif’s injury, and damages. A defense that the negligence was not the proximate cause of plaintif’s losses would be a valid defense, as the third element would not exist. Choices "a’, "b", and "c* are incorrect, per the above rule.2014 AICPA Newly Released Questions - Regulation 4, CPA-08434 Hall forged Crandall’s signature on a promissory note dated April 1, Year 3. The note was for {$5,000 and was payable to bearer on demand. Hall offered to sell the note to Corn for $4,000. ‘Corn knew that Crandall had been out of the country since Year 1. In addition, Corn knew that Crandall’s name and signature were misspelled, and that Hall had a questionable reputation. Despite this, Corn purchased the note for $4,000, Under the Negotiable Instruments Article of the UGC, what are Com's rights under the note? a. Commis a holder in due course and may enforce the note against Hall and Crandall b. Comm is a holder in due course under the shelter rule and may enforce the note only against Hall Corn is a holder and may enforce the note against Hall. Corn is a holder and may enforce the note against Crandall AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-7 Topic to be assigned to: Commercial Paper, Negotiation 1 Page reference (page # and outline point): R7-16, Il. C. ANSWER: Choice "c*is correct. A holder will take commercial paper as a holder in due course (HDC) to the extent that he or she takes the paper for value, in good faith, and without notice of any defenses or claims of ownership. Com is not a HDC because he has knowledge that Crandall has a dofense against this instrument, Therefore, Corn is simply a holder. The note can be enforced against Hall, who has no defense. Choice “a"is incorrect. Corn is not a holder in due course because he has knowledge that Crandall has a defense against this instrument. Choice "b* is incorrect. Corn is not a holder in due course because he has knowledge that Crandall has a defense against this instrument Choice "d"is incorrect. The instrument cannot be enforced against Crandall, who has the real defense of forgery.2014 AICPA Newly Released Questions - Regulation 5, CPA-08435 Under the Secured Transactions Article of the UCC, if a secured creditor rightfully repossesses and sells 2 debtor's collateral, which of the following obligations is the first o be paid from the proceeds of the sale? a. The debt owed any creditor with a subordinate security interest in the collateral b, The balance of the debt owed the primary secured creditor. ©. Tho reasonable expenses incurred by the sale. d, The refund of the debtor's payments made prior to the date of the sale. AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-7 Topic to be assigned to: Secured Transactions, Rights of Default 2 Page reference (page # and outline point): R7-40, V. A. 2.e. ANSWER: Choice "c* is correct. The proceeds of a default sale are distributed in the following order. First, to pay expenses of the repossession and sale; second, to pay creditors with a security interest in the collateral in order of priority; and third, any surplus is paid to the debtor. Choices *a’, "b", and “d" are incorrect, per the above rule.2014 AICPA Newly Released Questions - Regulation 6. CPA-08436 ‘Taso Corp. sells laptop computers to the public. Taso sold and delivered a laptop to Cara on credit. Cara gave Taso a purchase money security interest in the laptop by executing and delivering to Taso a promissory note for the purchase price and a security agreement covering the laptop. Cara purchased the laptop for personal use. Taso did not file a financing statement. Under the Secured Transactions Article of the UCC, is Taso's security interest perfected? ‘a. No, because the laptop is a consumer good. b. No, because Taso failed to file a financing statement. cc. Yes, because it was perfected at the time of attachment, d. Yes, because Taso retained possession of the collateral. AICPA Difficulty Rating: MEDIUM ‘Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-7 Topic to be assigned to: Secured Transactions, Perfection of the Security Interest. 2 Page reference (page # and outline point): R7-33, Il, E. 1. ANSWER: Choice "c” is correct. Taso sold the laptop to Cara on credit and received a purchase money security interest (PMSI) in the laptop, which resulted in an attachment. This PMS! is, automatically perfected because the item purchased is a consumer good. The filing of a financing statement is not required, Choices "2", "b", and “d" are incorrect, per the above rule.2014 AICPA Newly Released Questions - Regulation 7, CPA-08437 Under Regulation D, Rule 505, of the Securities Act of 1983, which of the following statements is correct regarding a $3,000,000 stock offering sold only to accredited investors? a. The issuer may sell the stock to only 35 accredited investors. b. The issuer may make the offering through a general advertising. ¢. The issuer must supply all accredited investors with financial information. d. The issuer must notiy the SEC within 15 days after the first sale of the offering AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-5 Topic to be assigned to: Securities Regulation, The Securities Act of 1933 5 Page reference (page # and outline point): R5-48, Il D. 2. fand h. ANSWER: Choice "d*is correct. This is a private offering because itis offered only to accredited investors, Therefore, Rules 504, 505, and 506 will apply. A general condition that applies to Rules 504, '505, and 506 is that the issuer must notify the SEC within 15 days after the first sale of the offering, Choice ‘a"is incorrect. Rule 505 requires that the offering be made to no more than 35 lunaccredited investors. There is no limit on the number of accredited investors in the offering Choice "b*is incorrect. General advertising is prohibited under Rules 504, 505, and 506. Choice "o"is incorrect. The issuer does have to supply all investors with financial information it there are any unaccredited investors in the offering. When the offering is made only to accredited investors, no disclosures are required.2014 AICPA Newly Released Questions - Regulation 8. CPA-08438 ‘A taxpayer has had one issue under audit by the Internal Revenue Service for several years. Uniess the taxpayer agrees otherwise, the IRS has at most how many years to assess taxes atter the taxpayer's return was filed? a. Three. b. Four. c. Five, d. Seven. AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-2 Topic to be assigned to: Individual Taxation, Statute of Limitations 4 Page reference (page # and outline point): R2-53, 1. A. 1. ANSWER: Choice "a" is correct. The statute of limitation on assessments is the statutory period during which the government can assess an additional tax. The statute of limitations applies to all taxable entities. Absent fraud, a 25 percent understatement of gross income, or agreement from the taxpayer, the statute of limitations is three years from the later of the original due date of the return or the date the return is filed. Choices "b”, "c’, and "d" are incorrect, per the above rule.2014 AICPA Newly Released Questions - Regulation 9, CPA-08439 Which of the following types of costs are required to be capitalized under the Uniform Capitalization Rules of Code Seo. 263A? a. Marketing. b. Distribution Warehousing d. Office maintenance. AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-1 Topic to be assigned to: individual Taxation, Gross Income 3 Page reference (page # and outline point): 1-30, Il. F. 6. ANSWER: Choice "c*is correct. The Uniform Capitalization Rules require the capitalization of certain costs related to inventory. They include direct materials, direct labor, and indirect overhead costs, including warehousing. Choice "a" is incorrect. Marketing is a selling expense, which is not required to be capitalized under the Uniform Capitalization Rules. Choice "b" is incorrect. Distribution is a selling expense, which is not required to be capitalized under the Uniform Capitalization Rules. Choice "d*is incorrect. Otfice maintenance is a general and administrative expense, which is not required to be capitalized under the Uniform Capitalization ules.2014 AICPA Newly Released Questions - Regulation 10. CPA-08440 Baker, an unmarried individual, sold a personal residence, which has an adjusted basis of $70,000, for $165,000. Baker owned and lived in the residence for seven years. Selling ‘expenses were $10,000. Four weeks prior to the sale, Baker paid a handyman $1,000 to paint and fix up the residence. What is the amount of Baker's recognized gain? a $0 b. $84,000 c. $85,000 d. $95,000 AICPA Difficulty Rating: MEDIUM ‘Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-4 Topic to be assigned to: Property Taxation 1 Page reference (page # and outline point): R4-13, Il. C. 1. ‘ANSWER: Choice “a” is correct. This is a principal residence that the taxpayer has owned and lived in for the last seven years. This exceeds the requirement of at least two ofthe last five years. Baker may therefore exclude up to $250,000 of gain. The realized gain is $84,000 ($165,000 selling price ~ $70,000 adjusted basis ~ $10,000 selling expenses ~ $1,000 fix-up expenses incurred within 20 days of the sale). All of the realized gain is excluded, and none ofits recognized Choice "b* is incorrect. $84,000 is the correct realized gain. But none of the gain is recognized, due to the homeowner's exclusion Choice "c"is incorrect. $85,000 is the realized gain before considering the fix-up expenses of $1,000. But none of the gain is recognized, due to the homeowner's exclusion. Choice "a" is incorrect. $95,000 is the realized gain before considering the selling expenses and fix-up expenses. But none of the gain is recognized, due to the homeowner's exclusion. 102014 AICPA Newly Released Questions - Regulation 11. CPA-08441 ‘An individual reports the following capital transactions in the current year: Short-term capital gain $ 1,000 Short-term capital loss $ (11,000) Long-term capital gain $ 10,000 Long-term capital loss $ (6,000) What amount is deducted in arriving at adjusted gross income? a. $10,000 b. $6,000 ce. $3,000 d $0 AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-4 Topic to be assigned to: Property Taxation, Calculation Rules 1 Page reference (page # and outline point): R4-28, Il. E. 2. And 3. ANSWER: Choice "c"is correct. First, the long-term capital gains and losses are netted to arrive at a not long-term capital gain of $4,000. Next, the short-term capital gains and losses are netted to arrive at a net short-term capital loss of $10,000. The next step is to net the net long-term capital gain of $4,000 with the net short-term capital loss of $10,000. This results in a net Capital loss of $6,000. Only $3,000 of that loss is currently deductible against ordinary income. The remaining loss of $3,000 is carried forward indefinitely Choice "a" is incorrect. $10,000 is the net short-term capital loss before considering any of the long-term items, Choice "b"is incorrect. $6,000 is the net capital loss, but the deduction is limited to $3,000. Choice "dis incorrect. The rules do allow for a net capital loss of up to $3,000 to be deducted against ordinary income. 1"2014 AICPA Newly Released Questions ~ Regulation 12. CPA-08442 (On March 1 of the previous year, a parent sold stock with a cost of $8,000 to their child, for $6,000, its fair market value. On September 30 of the current year, the child sold the same stock fot $7,000 to Hancock, who is unrelated to the parent and child. What is the proper treatment for these transactions? a, Parent has a $2,000 recognized loss and child has $1,000 recognized gain. b, Parent has $2,000 recognized loss and child has $0 recognized gain. ©. Parent has $0 recognized loss and child has $1,000 recognized gain. 4d. Parent has $0 recognized loss and child has $0 recognized gain AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-4 Topic to be assigned to: Property Taxation, Calculation Rules 1 Page reference (page # and outline point): 4-26, Il. D. 2. ANSWER: Choice "dis correct. The parent has a realized loss of $2,000 ($6,000 sale less $8,000 cost) However, none of this loss is recognized, because itis disallowed under the related party transaction rules. The child has a realized gain of $1,000 ($7,000 sale loss $6,000 cost). This gain can be reduced (but not below zero) by the disallowed loss of the parent, Therefore, the recognized gain to the child is zero. Choices "2", "b", and “c* are incorrect, per the above rule. 122014 AICPA Newly Released Questions ~ Regulation 13. CPA-08443, Which of the following statements is correct regarding the deductibility of donations made to ualfying charities by a cash-basis individual taxpayer? 2. Accontemporaneous written acknowledgement is required for donations of $100. b. _Acharitable contribution deduction is not allowed for the value of services rendered to a charity. cA qualified appraisal for real property donations is not required to be attached to the tax return unless the property value exceeds $10,000. d. The charitable contribution deduction for long-term appreciated stock is limited to 50% of adjusted gross income. AICPA Difficulty Rating: MEDIUM ‘Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-2 Topic to be assigned to: Adjustments and Itemized Deductions, Deductions From AGI 1 Page reference (page # and outline point): 2-23, Il. B. 5. ANSWER: Choice “b"is correct. A charitable contribution is not allowed for the value of services rendered toa charity Choice "a" is incorrect. A contemporaneous written acknowledgement is required for donations of $250 or more. Choice “c"is incorrect. A qualified appraisal for real property donations is not required to be allached to the tax return unless the property value exceeds $5,000. Choice "d"is incorrect. The charitable contribution deduction for long-term appreciated stock is. limited to 30% of adjusted gross income. 132014 AICPA Newly Released Questions ~ Regulation 14. CPA-08444 Pat, a single taxpayer, has adjusted gross income of $40,000 in the current year. During the year, a hurricane causes $4,100 damage to Pat's personal use car on which Pat has no insurance. Pat purchased the car for $20,000. immediately before the hurricane, the car's fair market value was $11,000 and immediately after the hurricane its fair market value was $6,900. What amount should Pat deduct as a casually loss fr the current year afterall threshold limitations are applied? a, $4,100 b. $4,000 ce. $100 d $0 AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-2 Topic to be assigned to: Adjustments and Itemized Deductions, Deductions From AGI. 1 Page reference (page # and outline point): R2-26, Il B. 6. ANSWER: Choice “a” is correct. The calculation starts with the lesser of adjusted basis or decrease in FMV. That is $4,100. This amount is then reduced by $4,000 (10% of AGI) and the $100 per casualty. The result is zero ($4,100 — $4,000 - $100). Choice ‘a"is incorrect. $4,100 is the starting point of the calculation. Itis before the 10% of AGI and $100 reductions, Choice "b" is incorrect. $4,000 is the amount after the $100 reduction but betore the 10% of AGI reduction. Choice *c*is incorrect. $100 is merely the amount of the reduction per casualty. 142014 AICPA Newly Released Questions ~ Regulation 15. CPA-08445 Which of the following is not a deduction to arrive at adjusted gross income? a. Alimony payments. b. Trade or business expenses. c. Capital losses in excess of capital gains. 4. Unreimbursed employee business expenses. AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-2 Topic to be assigned to: Adjustments and Itemized Deductions 1 Page reference (page # and outline point): R2-3, 1. A. ANSWER: Choice "a! is correct. Unreimbursed employee business expenses are not a deduction to arrive at adjusted gross income. They are an itemized deduction from adjusted gross income. Choice "a" is incorrect. Alimony payments are an adjustment, which is a deduction to arrive at adjusted gross income. Choice "bis incorrect. Trade or business expenses are deducted on Schedule C. This is before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income. Choice "c" is incorrect. Capital losses in excess of capital gains are deducted (up to $3,000) on Form 1040 before the calculation of adjusted gross income. Accordingly, this is a deduction to arrive at adjusted gross income. 152014 AICPA Newly Released Questions ~ Regulation 16. CPA-08446 Anderson and Decker are equal members in Andek, an LLC, which has not elected to be treated as a corporation. Anderson contributes $7,000 cash, and Decker contributes a machine with an adjusted basis of $5,000 and fair market value of $10,000, subject to a liability of $3,000. What is Decker's basis in Andek? a. $2,000 b. $3,500 c. $5,000 d. $10,000 AICPA Ditficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-4 Topic to be assigned to: LLC Taxation 3 Page reference (page # and outline point): R4-59, |. B. ANSWER: Choice "b"is correct. This LLC has not elected to be treated as a corporation. Therefore, it wll be treated as a partnership by default. Decker’s basis will be the adjusted basis of the property contributed less 50% of the liability, which is assumed by the other partner. $5,000 ~ $1,500 = $3,500. Choice liability. Choice "e" is incorrect. $5,000 would be Deckers basis if it were not reduced by any of the liability. Choice is incorrect. $2,000 would be Decker's basis if it were reduced by the entire $3,000 is incorrect. $10,000 is the FMV of the property contributed. 162014 AICPA Newly Released Questions ~ Regulation 17. CPA-08447 Johnson, an individual, has a 50% interest in DEF Partnership. Johnson's adjusted basis at the beginning of the year was $14,000. The partnership's ordinary income for the current year was $6,000. Johnson received a nonliquidating distribution of $8,000 cash, and property with an adjusted basis of $12,000 and a fair market value of $15,000. What is the basis of the distributed property, other than cash, to Johnson? a. $6,000 b. $9,000 $12,000 d. $15,000 AICPA Difficulty Rating: MEDIUM ‘Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-4 Topic to be assigned to: Partnership Taxation, Nonliquidating Distributions 2 Page reference (page # and outline point): R4-55, V. ANSWER: Choice "b" is correct. The general rule is that the basis of property received in a nonliquidating distribution is the same as the basis in the hands of the partnership immediately prior to the distribution. However, itis limited to the partner's basis in the partnership. This property has an adjusted basis to the partnership of $12,000. Johnson's basis in the partnership at the beginning of the year is $14,000. This is increased by 50% of the ordinary income of $6,000 and reduced by the cash distribution of $8,000. Basis in the partnership is therefore $9,000 ($14,000 + $3,000 ~ $8,000) before the property distribution. The basis of the property received is limited to the $9,000 partnership basis. Note: This results in Johnson having a zero basis in the partnership after the property distribution. Choice "a" is incorrect. $6,000 is simply the net income of DEF partnership for the year. Choice “c"is incorrect. $12,000 would be the adjusted basis of the property if it were not limited to Johnson's resulting $9,000 basis in the partnership. Choice "d! is incorrect. $15,000 is the FMV of the property. 72014 AICPA Newly Released Questions ~ Regulation 18. CPA-08448 {At the beginning of the year, Data, a C corporation, had a $45,000 deficit in accumulated eamings and profits. For the current year, Data reported earings and profits of $15,000. Data distributed $18,000 to its shareholders during the current year. What amount ofthe distribution is treated as a taxable dividend? a $0 b. $3,000 ce. $15,000 d. $18,000 AICPA Ditficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-3 Topic to be assigned to: C Corporations, Corporate Distributions 1 Page reference (page # and outline point): R3-42. V. A. 1. ANSWER: Choice "c”is correct. Corporate distributions are taxable dividends fist to the extent of current ceamings and profits (E&P) and then to the extent of accumulated E&P. Current and accumulated E&P are not netted. Current E&P is $15,000 and there is no accumulated E&P. So only $15,000 of the $18,000 distribution is a taxable dividend. Note that the remaining $3,000 distribution is a nontaxable return of capital up to shareholder basis. After that, itis a taxable capital gain distribution, Choice "a is incorrect. $0 would only be correct if there were not any current or accumulated Esp. Choice "bis incorrect. $3,000 is the amount of the distribution in excess of current E&P. This is the amount of the distribution that is not a taxable dividend, Choice "a! is incorrect. $18,000 is the entire distribution. However, itis only a taxable distribution to the extent of current and accumulated E&P. 182014 AICPA Newly Released Questions ~ Regulation 19. CPA-08449, Beech Corp., an acerual-basis, calendar-year S corporation, has been an S corporation since its inception. At the beginning of the current year, Gold owned 50% of the 100 issued shares of Beech stock, and had a $3,000 tax basis in the Beech stock. During the current year, Beech. ‘had $200,000 in net business income and $4,000 in Oak County municipal bond interest income. Beech made no distributions to its shareholders. What was Gold's tax basis in Beech stock at year end? a. $102,000 b. $103,000 cc. $104,000 d. $105,000 AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-3 Topic to be assigned to: Small Business Corporations, 2 Page reference (page # and outline point): 3-55, IV. B. ANSWER: Choice “a” is correct. A shareholder's basis in an S corporation is increased by his or her proportionate share of all income, including tax-free income. Gold's ending basis in Beech is $105,000. $3,000 beginning basis + $100,000 (50% of net business income) + $2,000 (50% of ‘municipal bond interest income). Choices "2", "b", and "c* are incorrect, per the above explanation. 192014 AICPA Newly Released Questions ~ Regulation 20. CPA-08450 What is the maximum amount of capital losses in excess of capital gains that aC corporation ‘may deduct ina year? a $0 b. $3,000 ce. $5,000 d. $10,000 AICPA Difficulty Rating: MEDIUM Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-3 Topic to be assigned to: C Corporations, Operations 1 Page reference (page # and outline point): 3-19, Il. B. 2. p. ANSWER: Choice "a" is correct. Unlike individuals, corporations may not deduct any capital losses in ‘excess of capital gains in a year. Choices "b", "c", and "a" are incorrect, per the above rule. 202014 AICPA Newly Released Questions ~ Regulation 2014 AICPA Regulation Newly Released MCQs — Difficult Rating 21. CPA-08451 Which of the following pairs of elements must a client prove to hold an accountant liable for ‘common law negligence? a. Freedom from contributory negligence and privity b. Breach of the aecountant's duty of care and loss. c. _ Willful misrepresentation and breach of the accountants duty of care. d.—Scienter and a violation of GAAP. AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-S Topic to be assigned to: CPA Legal Liability 4 Page reference (page # and outline point): pg 39, Il, B ANSWER: Choice "b"is correct. A plaintiff must show four elements to make a case for negligence against CPA. The plaintiff must show that the defendant owed a duty of care to the plaintiff, the defendant breached that duty by failing to act with due care, the breach caused the plaintit’s injury, and damages. Choices "a", "c", and "a" are incorrect, per the above rule. 212014 AICPA Newly Released Questions ~ Regulation 22. CPA-08452 ‘American Corp. retained Baker, CPA, to conduct an audit ofits financial statements to obtain a bank line of creait. American signed an engagement letter drafted by Baker that included a disclaimer provision. As a result of Baker's failure to detect a material misstatement in ‘American's financial statements, the audit report contained an unmodified opinion. Based on ‘American's audited financial statements, National extended credit to American. American filed a petition in bankruptcy shortly thereafter. National sued Baker for damages based on common law fraud, What would be Baker's best defense? a. Baker acted with due diligence in conducting the audit, b. Baker included a disclaimer provision in the engagement letter with American . National was notin privity with Baker. d. Baker lacked the intent to deceive AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 (Adapted) Lecture to be assigned to: R-5 Topic to be assigned to: CPA Legal Liability 4 Page reference (page # and outline point): R5-40 C ANSWER: Choice "a! is correct. In order to prove fraud, National must prove the five elements of fraud. ‘These are a misrepresentation of a material fact, intent to deceive, actual and justifiable reliance (on the misrepresentation, an intent to induce that reliance, and damages. A defense by Baker that there was no intent to deceive would be a valid defense against a claim of fraud. Choice " Choice is incorrect. Cond is incorrect. A disclaimer in the engagement letter is not a defense to fraud. Choice "o" is incorrect. A lack of privity is not a defense to frau. 1g an audit with due diligence is not the best defense to fraud. 222014 AICPA Newly Released Questions ~ Regulation 23. CPA-08453 After which of the following situations would it usually not be necessary to notify third parties of the termination of an agency's existence? a. The achieving of the agency's purpose. b. The destruction of the subject matter of the agency. c.—Atermination by mutual agreement. d._ Atermination by the principal. AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-8 Topic to be assigned to: Agency 2 Page reference (page # and outline point): R8-16, Il. B. 3.c. ANSWER: Choice "b"is correct. Notification to third parties is not required when actual authority of an. agency relationship terminates as an operation of law. These include death of either the principal or the agent, incapacity of the principal, discharge in bankruptcy of the principal, failure to acquire a necessary license, destruction of the subject matter, or subsequent illegality. Choices "2", "c", and "d" are incorrect, per the above rule. 232014 AICPA Newly Released Questions ~ Regulation 24. CPA-08454 Under the Secured Transactions Article of the UCC, a financing staternent generally must contain: ‘a. The signature of a witness to the execution of the financing statement. b. The dollar amount of the consideration provided by the secured party. The date the underlying debt will be paid. d. The address of the debtor. AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-7 Topic to be assigned to: Secured Transactions, Perfection of the Security Interest. 2 Page reference (page # and outline point): 31, B, 1 ANSWER: Choice "dis correct. Under the Secured Transactions Article of the UCC, a financing statement must contain the name and mailing address of the debtor and secured party, an indication of the collateral covered by the financing statement, and, if the financing statement covers collateral related to real property, a description of that real property. Choices "2", "b", and “c” are incorrect, per the above rule. 242014 AICPA Newly Released Questions ~ Regulation 25. CPA-08455 Roland applied to Berkley Bank for a $100,000 loan. As a condition to granting the loan, Berkley requested a document of title evidencing Roland's ownership of several paintings Roland had in storage. Under the Documents of Title Article of the UCC, which of the following documents would be a document of ttle evidencing Roland's current ownership of the paintings? a. Awarehouse receipt. b. Abillof lacing, An appraisal. 4. The receipt for the purpose of the paintings. AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-8 Topic to be assigned to: Documents of Title 7 Page reference (page # and outline point): R8-71, 1. A. ANSWER: Choice "a" is correct. A warehouse receipt is the proper document of tile for items held in storage. Choice "b"is incorrect. bill of lading is the proper document of ttle for items being transported by a carrier Choice "cis incorrect. An appraisal is a document that represents fair market value of an item. Itis not a document of title. Choice "A! is incorrect. A receipt for purpose is not a document of ttle, 252014 AICPA Newly Released Questions ~ Regulation 26. CPA-08456 Which of the following correctly lists the order, from earliest to latest, that U.S, legislative bodies consider new tax legistation? ‘a. House of Representatives, U.S. Senate, Joint Conference Committee. b. Joint Conference Committee, House of Representatives, Senate Finance Committee. US. Senate, Joint Conference Committee, House of Representatives. d. House of Representatives, Joint Conference Committee, U.S. Senate. AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-5 Topic to be assigned to: Federal, Legislative, and Judicial Processes 3 Page reference (page # and outline point): R5-26, |. ANSWER: Choice "a" is correct. The correct order for all new tax legislation is the House of Representatives, the Senate, the Joint Conference Committee to resolve differences (if necessary), and presidential action. Choices "b", ‘c', and "d” are incorrect, per the above rule. 262014 AICPA Newly Released Questions ~ Regulation 27. CPA-08457 Nan, a cash basis taxpayer, borrowed money from a bank and signed a 10-year interest-bearing note on business property on January 1 of the current year. The cash flow from Nan’s business enabled Nan to prepay the first three years of interest attributable to the note on December 31 of the current year. How should Nan treat the prepayment of interest for tax purposes? a, Deduct the entire amount as a current expense. b, Deduct the current year’s interest and amortize the balance over the next two years. ©. Capitalize the interest and amortize the balance over the 10-year load period. 4. Capitalize the interest as part of the basis of the business property. AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-1 Topic to be assigned to: Individual Taxation, Gross Income 3 Page reference (page # and outline point): R2-28, Il. F. 2. h. ANSWER: Choice "b"is correct. Interest paid in advance by a cash basis taxpayer on business loans cannot be deducted until the tax period to which the interest relates. In other words, the interest ‘must be both paid and incurred in order to be deducted. Choices "a", "c", and "d* are incorrect, per the above rule. 272014 AICPA Newly Released Questions ~ Regulation 28. CPA-08458 sole proprietor of a farm implement store sold a truck for $15,000 that had been used to make service calls. The truck cost $30,000 three years ago, and $21,360 depreciation was taken. What is the appropriate classification of the $6,360 gain for tax purposes? @ Ordinary gain b, Section 1281 (Property Used in the Trade or Business and Involuntary Conversions) gain. ©. Long-term capital gain, d, Short-term capital gain. AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-4 Topic to be assigned to: 1 Property Transactions, Summary of 1231, 1245, and 1250 1 Assets Page reference (page # and outline point): R. , VIL B. ANSWER: Choice "a" is correct. The truck is a depreciable asset used in a trade or business. Therefore, it is a Section 1231 asset. It is also personal property, so the recapture rules of Section 1245 will apply to any gains. The truck was sold at a gain. However, that gain is less than the accumulated depreciation. Under the rules of Section 1245, the gain is all recaptured as an ordinary gain, Choices " and are incorrect, per the above rule. 282014 AICPA Newly Released Questions ~ Regulation 29. CPA-08459 Prime Corporation's building was destroyed by a tornado. The fair market value of the building at the time of the tornado was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows: $400,000 for the building $100,000 for lost profits during rebuilding Prime does not defer any gain under the involuntary conversion provisions of Code Sec. 1033. ‘What amount of the insurance proceeds is taxable to Prime? a $0 b. $50,000 c. $100,000 d. $150,000 AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-3 Topic to be assigned to: C Corporations, Operations 1 Page reference (page # and outline point): 3-17, Il. B. 2. g. ANSWER: Choice “d" is correct. The building had an adjusted basis of $350,000 and $400,000 proceeds were received for i. That results in a taxable gain of $50,000, because none of it was deferred. The $100,000 received for lost profits is taxable as well. The total taxable amount is $150,000 ($50,000 + $100,000). Choice a" is incorrect. $0 would be the taxable amount just on the building if the gain were deferred. Choice "b" is incorrect. $50,000 is the taxable amount of the proceeds for the building only. Choice "cis incorrect. $100,000 is the taxable amount of the proceeds for lost profits only. 292014 AICPA Newly Released Questions ~ Regulation 30. CPA-08460 A corporate taxpayer's capital gains and losses are as follows: Short-term capital gain $ 7,000 Short-term capital loss $ (43,000) Long-term capital gain $ 9,000 Long-term capital loss $8 (21,000) What amount of capital loss deduction is the taxpayer entitled to use to offset against ordinary income? a $0 b. $3,000 $12,000 d. $48,000 AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-3 Topic to be assigned to: C Corporations, Operations 1 Page reference (page # and outline point): R3-19, Il. 8. 2. p. ANSWER: Choice ‘a" is correct. First, the long-term capital gains and losses are netted to arrive at a net long-term capital loss of $12,000. Next, the short-term capital gains and losses are netted to arrive at a net short-term capital loss of $36,000. The next step is to net the net long-term capital loss of $12,000 with the net short-term capital loss of $36,000. This results in a net Capital loss of $48,000. None of that loss is currently deductible against ordinary income. It can be carried back three years and forward five years. Choice "b" is incorrect. $3,000 is the deductible amount of capital loss against ordinary income for an individual, not a corporation. Choice "c" is incorrect. $12,000 is just the net long-term capital loss. Choice "A! is incorrect. $48,000 is the net capital loss, but itis not deductible against ordinary income. 302014 AICPA Newly Released Questions ~ Regulation 31. CPA-08461 Dietz is a passive investor in three activities which have been profitable in previous years. The profit and losses for the current year are as follows: Gaini(Loss: ‘Activity $ (30,000) Activity ¥ (50,000) Aativty Z. 20.000 Total $ (60,000) What amount of suspended loss should Dietz allocate to Activity X? a $18,000 b. $20,000 ©. $22,500 4. $30,000 AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-1 Topic to be assigned to: Individual Taxation, Gross Income 3 Page reference (page # and outline point): 1-43, Il. K. 3. ANSWER: Choice "c"is correct. For the current year, there is a net passive loss of $60,000. This should be allocated to the two activities with passive losses in the ratio of thelr losses to total losses. Aativty X will receive an allocation of $22,500 of the net loss [$60,000 x ($30,000 / $80,000)]. Choices and “d” are incorrect, per the above explanation. 312014 AICPA Newly Released Questions ~ Regulation 32. CPA-08462 ‘The Jacksons, who file a joint return, actively participate in a solely-owned rental real estate activity that produces 2 $30,000 loss during the current year. Their adjusted gross income was $120,000 before considering the rental activity. How much of the rental loss, if any, are the Jacksons entitled to deduct? a $0 b. $15,000 ce. $25,000 d. $30,000 AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-1 Topic to be assigned to: Individual Taxation, Gross Income 3 Page reference (page # and outline point): 1-43, Il. K. 3. ANSWER: Choice "b" is correct. Generally, passive losses are only deductible against other passive income, and there is no passive income in the facts ofthis question. However, the "mom and pop” exception will apply because the Jacksons actively participate in the activity. This ‘exception allows up to $25,000 of passive losses to be deducted against other nonpassive income. There is a phase-out over an adjusted gross income (AGI) range of $100,000 to $150,000. The Jacksons’ AGI is $120,000, and that is 40% into the phase-out range ‘Therefore, 40% of the $25,000 exception amount is phased out, and the deduction is $15,000 [825,000 ~ ($25,000 x 40%)] Choice "a" is incorrect. $0 would be correct ifthe “mom and pop" exception did not apply or was completely phased out. Choice "cis incorrect. $25,000 would be the correct answer if the entire "morn and pop" exception applied. Choice “dis incorrect. $30,000 would only be correct tat least that amount of other passive income existed 322014 AICPA Newly Released Questions ~ Regulation 33. CPA-08463 ‘When computing alternative minimum tax, the individual taxpayer may take a deduction for which of the following items? a. State income taxes. b. Personal and dependency exemptions, c. Miscollaneous itemized deductions in excess of 2% of adjusted gross income floor. d. Casualty losses. AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-2 Topic to be assigned to: Individual Taxation, other Taxes 3 Page reference (page # and outline point): R2-45, |. ANSWER: Choice "a" is correct. Casualty losses are not added back in the alternative minimum tax (AMT) calculation. Therefore, they are allowed as a deduction, Choice "a" is incorrect. State income taxes are added back in the AMT calculation. Therefore, they are not allowed as a deduction. Choice "b"is incorrect. Personal and dependency exemptions are added back in the AMT calculation. Therefore, they are not allowed as a deduction, Choice "c" is incorrect. Miscellaneous itemized deductions in excess of 2% of AGI are added back in the AMT calculation. Therefore, they are not allowed as a deduction, 332014 AICPA Newly Released Questions ~ Regulation 34. CPA-08464 Which of the following corporations would be taxed as a personal service corporation? a, Areal estate brokerage. b. Acatering service. ©. Anarchitecture and engineering firm, dA groundskeeping firm AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-3 Topic to be assigned to: C Corporations, Taxation of aC Corporation 1 Page reference (page # and outline point): R3-39, Il. H. ANSWER: Choice *o" is correct. A personal service corporation (PSC) is primarily involved in the Performance of one of the following fields: accounting, law, consulting, engineering architecture, health, and actuarial science. Choices "2", "b", and “d" are incorrect, per the above rule.2014 AICPA Newly Released Questions ~ Regulation 35. CPA-08465 Porter, the sole shareholder of Preston Corp., transferred property to the corporation as a contribution to capital. Two years later, Corley transferred property to the corporation in ‘exchange for a 10% interest in corporate stock. The property transferred was valued as follows: Porter's transfer Corley's transfer Basis $50,000 {$250,000 Fair market value 200,000 500,000 What amount represents the corporation's basis in the property received? a. $700,000 b. $550,000 ce. $450,000 d. $300,000 AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-3 Topic to be assigned to: C Corporations, Formation 1 Page reference (page # and outline point): R3-3, 1. ANSWER: Choice "b" is correct. Porter's transfer is not taxable because the 80% contol testis met. The corporation's basis in the property is the basis of $50,000. Corley's transfer is taxable because the 80% control testis not met. The corporation's basis in the property is $500,000. The corporation's total basis in the properties is $550,000 ($50,000 + $500,000}. Choice "a" is incorrect. $700,000 would be correct ifthe basis of both properties used fair market value. Choice "o" is incorrect. $450,000 would be correct it Porter's property used fair market value and Gorley's property used carryover basis. Choice "dis incorrect. $300,000 would be correct if the basis of both properties used carryover basis. 352014 AICPA Newly Released Questions — Regulation 36. CPA-08466 Which of the following increases the accumulated adjustments account of an S corporation? a. Capital contributions by the shareholders, b. Distribution to shareholders. ¢. Interest and dividends. d. Charitable contributions. AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-3 Topic to be assigned to: Small Business Corporations 2 Page reference (page # and outline point): R3-52, IV. A. 7. ANSWER: Choice "o"is correct. The accumulated adjustments account (AAA) is increased by separately stated and non-separately stated income and gains (except tax-exempt income and certain life insurance proceeds) Choice "a" is incorrect. Capital contributions by shareholders do not increase AAA, Choice "bis incorrect. Distributions to shareholders would decrease AAA, not increase AAA. Choice "d! is incorrect. Charitable contributions would decrease AAA, not increase AAA. 362014 AICPA Newly Released Questions — Regulation 37. CPA-08467 Able, an individual, is a partner in CD Partnership with an adjusted basis of $30,000 for Able’s, partnership interest. Able received a non-liquidating distribution of $25,000 cash and property with an adjusted basis of $7,000, and a fair market value of $10,000. What amount of gain should Able recognize? a $0 b. $2,000 c. $5,000 d. $12,000 AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-4 Topic to be assigned to: Partnership Taxation, Nonliquidating Distributions 2 Page reference (page # and outline point): R4-56, V. E. ANSWER: Choice "a" is correct. Gain is recognized only to the extent that cash distributed exceeds the adjusted basis of the partner's interest in the partnership immediately before the distribution. ‘Able's basis in the partnership immediately before the distribution is $30,000. The cash distribution is $25,000. This is not in excess of basis and there is a $5,000 basis remaining Able's basis in the distributed property is the $5,000 remaining partnership basis, Choices "b", "c", and "d” are incorrect, per the above explanation, 372014 AICPA Newly Released Questions — Regulation 38. CPA-08468 Belson and Forman decided to terminate North partnership. On the date of termination, North's balance sheet was as follows: Adlusted basis Cash $2,000 Equipment (fair market value $4,000) 6,000 Capital—Belson 4,000 Capitat—Forman 4,000 Forman’s outside basis is $2,000. The partnership assets were distributed equally between the partners. What is Forman’s tax basis in the property received? a. $1,000 b. $4,000 ©. $6,000 d. $10,000 AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-4 Topic to be assigned to: Partnership Taxation, Liquidating Distributions. 2 Page reference (page # and outline point): R4-56, VI. A. ANSWER: Choice *a" is correct. Forman's basis in the partnership is $2,000 immediately before the liquidating distributions, The assets are divided equally. Forman receives $1,000 of the cash. This reduces the partnership basis to $1,000. Then we "zero out fo get out.” Forman's share of the property will receive a basis of $1,000. This essentially zeroes out the partnership interest Choices "b", "c", and "d" are incorrect, per the above explanation. 382014 AICPA Newly Released Questions ~ Regulation 39. CPA-08469 Pick, CPA, was engaged by Edge Corp. to audit Edge's financial statements. Pick, in performing the aucit and rendering an unmodified opinion, intentionally ignored several material omissions. in the financial statements. Edge included Pick’s audit report in its annual filing with the SEC and in its annual stockholders’ report. Drane purchased shares of Edge stock based on Drane's review of the past performance of the stock and current-year financial statements, When the ‘omissions in the financial statements became known, the value of Edge stock declined and Drane suffered a loss. Under the provisions of Rule 10b-5 of the Securities Exchange Act of 1934, what will be the result of a suit by Drane against Pick? a. _ Drane will win because Pick acted with intent. b. rane will win because Pick was negligent. . Drane will lose because only Edge is liable. d. _ Drane will lose because the stock purchased was not part of anew issue. AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 (Adapted) Lecture to be assigned to: R-5 Topic to be assigned to: Securities Regulation, The Securities Exchange Act of 1934 5 Page reference (page # and outline point): R5-54, Il. D. 2. ANSWER: Choice "a" is correct. To recover damages for violation of Rule 10b-5, a plaintitf must prove all Of the following: the plaintiff bought or sold the securities, the plaintif suffered a loss, there was ‘a material misrepresentation or material omission of fact, scienter (intent to deceive or reckless disregard for the truth), the plaintiff relied on the misrepresentation, and interstate commerce was involved. Choices "b", "c", and "d* are incorrect, per the above rule. 392014 AICPA Newly Released Questions ~ Regulation 40. CPA-08470 Under the Negotiable Instruments Article of the UCC, which of the following defenses by the ‘maker of a negotiable instrument can be successfully asserted against a holder in due course? a. Fraud in the execution, b. Fraud in the inducement Breach of the underlying contract d. Lack of consideration by the original payee. AICPA Difficulty Rating: DIFFICULT Question Title: AICPA Newly Released 2014 Lecture to be assigned to: R-7 Topic to be assigned to: Commercial Paper, Claims and Defenses of the Instrument 1 Page reference (page # and outline point): R7-19, IV. B. ANSWER: Choice "a" is correct. The defenses against a holder in due course are the following: fraud in the execution, forgery, adjudicated insanity, material alteration, infancy, illegality, duress, discharge in bankruptcy, suretyship defenses, and statute of limitations. Choices " ‘c', and "d” are incorrect, per the above rule. 40REGULATION 2014 AICPA Newly Released SimsPartnership, Estate, and Trust Taxation (780) im 2, ins n existing #7 an Title: Valuation (AICPA TelhimcPABenidin Proven G3) 3] £0))) 1) F]) @ | ‘Scroll down to complete alparts ofthis task, “The executor of Munson’ esate made the section to adctihe arate vauten date ere eta’ asst Aisin these esses ond eld acto re lo:sodit be Ese CCecontne shaded alin cobra andr th vai ofeach ceetthat wou be reper one feral ‘tats tac ream ung he oma vuobon SF arespense Isao, ete 2270 (0), 2000 shares of Bartet Cop soc isreted 7) 1,00 share of Barletta (said 10). 3000 shares o Barat Cop. soak ree fists) Dovdendpaidon art Cop sock (10) Zenon Cop. s8bond Vis Cop S6bend Accrued rest on anon Cop. 2% bond cred reeeston vison Cam, 5% “otal estate vate@ voimertenida — rovew | ES) 2) LD) | | ‘The estate ct nsonreerencedin in Asset Vain tabs cogrisd the fong assets Fair market value Toa yor 2 : (ate cfoeany | amber year? 5.000 shares ct art Cor commen stock 800900 882000 $200,000 Zanon Cop. 3, 2:yar bona, ue year 16 ees aytle cuasty on esas Peony 1, Moy 1, Aigist 1 snd Noverber 4 $320,000 vison Comp. 5%, 15yar bonds, ue yee 1. reerest aye quay on mary 1 Api ay end Gcober 1 “he execu roves te cboing iteration relzng othe aston tte estate ‘gre xno Zoonbonts omen 1 A. year 2. eos acon Fee e cen ercon ey Vt ere act mc Ese tenon canoe ten our pet {Serato apace Spiga Sup acre an AA alamo At fs ne meeemere reece ipa ig REAR EREN AEnemnatmonm Sa {re ison bonds on teeming 3000 shes of Bat ee not olor dsposedct in si moths ‘blovng dae aid remaedin to esteRule: The alternate valuation amount is the fair market value (FMV) on the alternate valuation date (AVD) or date of sale or distribution, if earlier. 2. $192,000 The 2,000 shares of Bartlet were distributed on 7/1, before the AVD. The FMV on the date of distribution was $96 per share. 2,000 shares x $96 = $192,000. 3. $97,000 The 1,000 shares of Bartlet were sold on 7/31, before the AVD. The selling price was $97 per share. 1,000 x $97 = $97,000. 4. $276,000 The remaining 3,000 shares of Bartlet are valued on the AVD. The value on that date is $92 per share. 3,000 x $92 = $276,000. Note: The full value given for all 6,000 shares (on the AVD is $552,000. So $552,000 / 6,000 = $92 per share. 5. $12,000 The dividend paid was $2 per share on 6,000 shares owned ($2 x 6,000 = $12,000). Note that this dividend was paid in cash before the AVD. So the value on the AVD is. the same, as the value of cash does not change. 6. $194,000 ‘The Zenon Bonds were distributed on 8/15 before the AVD. The FMV on the date of distribution was $194,000. 7. $310,000 The Vison Bonds are valued on the AVD. The FMV given on the AVD is $310,000. 8. $1,000 The accrued interest on the Zenon Bonds was $1,000 ($200,000 x 3% x 2 months / 12 months). Note that this interest was paid in cash prior to the AVD. So the value on the AVD is the same, as the value of cash does not change.9. $4,000 The accrued interest on the Vison Bonds was $4,000 ($320,000 x 5% x 3 months / 12, months). Note that this interest was paid in cash prior to the AVD. So the value on the AVD is the same, as the value of cash does not change.Partnership, Estate, and Trust Taxation (780) im 2, ins n curt 4. Title: Partnershiy ions (AICPA Ac @ wetiincrtandn eon BI) 2) 9| {penn is tia | “ho [cer item | Scrolldownto complete al pars ofthis task ‘ABC Assos. LLP. pastes tht roids computer corsa services on calendar yer occ bass AB, and Cae ogi paras and ae calnarjer cash esis, rv panes Each pate as Siicenibastc inti paterspto cover al asbunen an wOdrawais made ing Ue oar Parte is ste fate. Parner Cisrctrelatedto eter pate Fo ech ote carersipransactons ‘town below, doee-cck ie appropriate tat veaenl om ty seecion Is. At Peahet hay be selected onc, mre han eco, oF ot Pamersnp recov munca bond rerest Parwersp sald an ivesimert Pld or more han oneyeor et agan Parmersip 2 equpmertiopanner Aste $5:000}98 Panersip paid fines and peratios Parnersiprecoved dvdends tem demesic estporstons Parnersip mae a cash dsbutonto pamer Parnersip paid employee sales and wages Porersip cured most expanse co atersipivestmertindebtecressSelection List Partners do not include the income, but increase their basis in the Partnership. Deductible by the partnership and included as ordinary income by the partner. Related party rules result in current nonrecognition of transaction Partners do not include the cash as. income, but must reduce their basis in the partnership. Includable by the partnership in arriving at partnership ordinary business income Treated as a separately stated deduction by the partnership and potentially deductible by the partners. Treated partly as a separately stated section 1231 gain and partly @s partnership ordinary business income Treated as separately stated income by the partnership, taxable to the partner. Partners are not entitled to a deduction and decrease their basis. in the partnership, Deductible by the partnership in arriving at partnership ordinary business income OK | CancerTitle: Partnership Operations (AICPA Adapted) Solution 2. Partners do not include the income, but increase their basis in the partnership Municipal bond interest income is tax-exempt, and therefore, not taxable to the partners. A partner's basis in a partnership is increased for all items of income, including tax- ‘exempt income. 3. Treated as separately stated income by the partnership, taxable to the partner This transaction would be recorded as a long-term capital gain, which is a separately stated item to the partnership. The long-term capital gain flows through to the partners and is taxable to the partners. 4, Related party rules result in current nonrecognition of transaction ‘The partnership sold equipment to partner A at a loss. This is a related party transaction because partner A owns directly or indirectly more than 50% of ABC. Partner A owns one third, and is the father of partner B, who also owns a third. Thus, partner A owns directly or indirectly two thirds of ABC. The loss is disallowed based on the related party transaction rules. 5. Partners are not entitled to a deduction and decrease their basis in the partnership Fines and penalties are not tax-deductible. Partners reduce their partnership basis for allitems of expense or loss, including nondeductible items 6. Treated as separately stated income by the partnership, taxable to the partner Dividends are treated as separately stated income. The dividends flow through to the partners separately and are taxed at the partner level. 7. Partners do not include the cash as income, but must reduce their basis in the partnership Partners are generally taxed on all flow-through income, whether received in cash or not. The actual cash distribution is not taxable, but will reduce basis in the partnership. Note: This distribution might be taxable if itis in excess of a partner's basis in the partnership. 8, Deductible by the partnership in arriving at partnership ordinary business income Salaries and wage expense is an ordinary business deduction. This is not a separately stated item and will reduce partnership ordinary business income.9. Treated as a separately stated deduction by the partnership and potentially deductible by the partners Investment interest expense is a separately stated item that flows through to the partners. Based upon investment income limitations at the partner level, this may be deductible by the partner.Simulation: Corporate Taxation (772) R3, Sim 3, add at the end as tab 7 Title: Research (AICPA Adapted) AB eltiomcrrtriin Proview | Et] £01) 1) F]) | 1 res ti nan | oaty fr Lito an organzason commits excuse reecuing cliente a heathy Hose. The (ganization provides ater-sctoo programs yah oy accesso as racearonal faces Wrote clin con ‘tris and pay. The orgarizaon|sunded penny rou crprao denasos, and fed by VlreersFom fre conmunty uch seston and seston ct he rena Revenia Code powces gudants er etersning vector be ofgaaaon quis eta exam SUS? Emer your resperce the answers bow Gudance on comely stucang you espenseappses above and ‘one ara ts “ype me sbsecton here. A cooct fomatedIRC subsections slower caselate, Fegs[—7 —[e) Cmrecty mated response wows Dt 908 ting | et Title: Research (AICPA Ac tion IRC Section 501, subsection (c) Keywords: "Tax-exempt organizations” 10