CPA-REGULATION Practice Questions

Choice "b" is correct. $17,000 is the tax basis in the van.

The basis for like-kind exchanges is computed as follows:

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The general rule is the gain is recognized to the extent boot is received. As the transaction results in a

loss to Leker (he received an asset worth $10,000 plus $3,000 cash less a $20,000 tax basis equals

$7,000 loss) no gain is recognized and the $3,000 received reduces his basis in the new asset.

Choice "a" is incorrect. Basis must be reduced by non-like-kind assets (boot) received.

Choice "c" is incorrect. For non-like-kind exchanges, the basis would be the FMV of the assets

received ($10,000 FMV plus $3,000 Boot). However, because both assets have similar use, this is a

like-kind exchange, which follows the rule above.

Choice "d" is incorrect. The basis of the old property is used to calculate the basis of the new

property, less any boot received.

Choice "b" is correct. $530,000 basis of involuntary converted building.

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Choice "d" is correct. Real property includes land and all items permanently affixed to the land (e.g.,

buildings, paving, etc.)

Choice "a" is incorrect. Real property includes more than just the land (as per the explanation above);

it includes all items permanently affixed to land.

Choice "b" is incorrect. "All" tangible property could include moveable personal property and is

therefore, incorrect.

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

terms.

Choice "d" is correct. Under the uniform capitalization rules, purchasers of inventory for resale may

deduct their marketing costs but must capitalize their off-site storage costs.

Choices "a", "b", and "c" are incorrect. Marketing costs are deductible, but off-site storage must be

capitalized.

Choice "a" is correct. Deductions to arrive at net self-employed income include all necessary and

ordinary expenses connected with the business. Estimated federal income tax payments are not an

expense. Charitable contributions by an individual are only deductible as an itemized deduction on

Schedule A. This assumes the contribution was not made with the "expectation of commensurate

financial return."

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Choice "b" is incorrect. Charitable contributions are an itemized deduction unless there is an

expectation of commensurate financial return.

Choice "c" is incorrect. Federal income taxes paid are not a deductible expense.

Choice "d" is incorrect. Charitable contributions are an itemized deduction unless there is an

expectation of commensurate financial return. Federal income taxes paid are not a deductible

expense.

Choice "d" is correct. Government bonds held by an individual investor are considered capital assets

in the hands of the investor. When these types of security investments are sold, the resulting gain or

loss is reported as capital.

Choice "a" is incorrect. In this case, we must assume that the BEST answer is option "d" (as that

option would ALWAYS result in capital gain or loss treatment) and that the examiners are assuming

that the equipment is depreciable equipment that has been used in a business for over one year. [If

the equipment had been considered a personal asset by the examiners and had sold for a gain, it

would also be a capital asset that sold for a capital gain, and there would be two correct answers.

Remember that the correct answer is the option that best answers the question.] Depreciable

equipment used in a business and held for over one year falls under the category of Section 1245

property. When Section 1245 assets are sold at a gain, all the accumulated depreciation on the asset

is recaptured as ordinary income (the same category as the depreciation expense was deducted

against), and any remaining gain (typically, in practice, this is not the case, though, as the asset would

have had to sell for an amount greater than its purchase price) is capital gain under Code Section

1231. [Note that Section 1245 applies only to gains. If the asset had sold for a loss, the loss would

have been ordinary under Section 1231.]

Choice "b" is incorrect. Real property sold by a dealer is considered inventory and results in ordinary

income or ordinary losses upon sale. Inventory is not a capital asset and is not afforded the capital

gain benefits.

Choice "c" is incorrect. Inventory is not a capital asset and is not afforded the capital gain benefits.

The sale of inventory results in ordinary income or loss (e.g., gross profit on sales) being reported on

the tax return, as inventory is an asset held for sale in the ordinary course of business.

RULE: An accruable expense is one is which the services have been received/performed but have not

been paid for by the end of the reporting period.

Choice "b" is correct. The facts indicate that a repair was completed prior to year end but not yet

invoiced. If it has not yet been invoiced, it is assumed that it has also not yet been paid for. Therefore,

this is a situation in which the repair expense would be accrued at year end. Services have been

performed, but they have not been paid for, as they have not even been invoiced yet.

Choice "a" is incorrect. If the repair was completed after year end, then the expense is not accruable,

as the benefit of the services hasn't been received as of year end. The fact that the repair was

invoiced prior to year end does not impact the situation.

Choice "c" is incorrect. If a repair was completed and paid for prior to year end, no accrual is

appropriate. On the accrual basis, the expense is taken in the year the repair is completed and the

benefit is received. In this case, the account payable was also paid in the same year, but this has no

effect on the expense.

Choice "d" is incorrect. The facts indicate that the work is to be completed at a date later than year

end. Therefore, the expense is not accruable at year end, as the benefit of the repair hasn't been

received as of year end. It is reasonable that a signed contract for the repair work exists, but this has

no effect on the accrual.

Choice "c" is correct. Wolf's passive loss for 1989 is $5,000 ($100,000 operating loss × 5% interest in

partnership).

Choice "a" is incorrect. Wolf did not materially participate in the partnership, so the loss was passive.

Choice "b" is incorrect. Wolf's passive loss of $5,000 could not be reduced by his distributive share of

the partnership's "interest income" totaling $1,000. Interest income is considered "portfolio income,"

and neither the partnership nor a partner can offset it against passive losses.

Choice "d" is incorrect. No items of income or deduction from portfolio income or activities in which

the taxpayer materially participates may be combined or offset with passive losses unless the activity

generating the loss is completely disposed of in a taxable transaction.

Choice "c" is correct. The facts state that cash collections from customers were $100,000 and as a

cash basis taxpayer this is the amount of Mosh's gross taxable income for the year. Note that

according to the formula BASE - we can determine the amount of sales = $90,000, but that would

give us accrual, not cash basis, income.

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Choice "a" is incorrect. See explanation above.

Choice "b" is incorrect. $90,000 is the amount of sales that would be Mosh's taxable income if Mosh

were an accrual basis taxpayer.

Choice "d" is incorrect. See explanation above.

Choice "c" is correct. Guaranteed payments are reasonable compensation paid to a partner for

services rendered (or use of capital) without regard to his ratio of income. Earned compensation is

subject to selfemployment tax. Payments not guaranteed are merely another way to distribute

partnership profits. The ordinary income reported from an S corporation are taxable income to the

individual or their own individual tax return but is not subject to self-employment tax. The ordinary

income reported from a partnership may be subject to self-employment tax (if to a general partner).