REG

2015 AICPA Released Questions

Testlet Level: Moderate

Please Note: These questions are released to the CPA Review providers
with the letter answer only (i.e. no explanation given).
This document contains copyrighted material from the American Institute of
Certified Public Accountants and is licensed to NINJA CPA Review for use
by its customers only.
Answers are on Page 11.
1. The partnership of Rodgers & Higgs, CPAs, performed audits of Alt
Corp., a publicly-traded company, for the past several years. After issuing
the current year's audit report, the CFO of Alt confessed to having
committed fraud against Alt. Under which of the following statutes would
the investors most likely bring suit against Rodgers & Higgs?

Securities Act of 1933, if they can prove ordinary negligence.

Securities Act of 1933, if they can prove gross negligence.
Securities Exchange Act of 1934, if they can prove ordinary negligence.
Securities Exchange Act of 1934, if they can prove scienter.

REG 2015: Moderate 1 www.another71.com

2. In which of the following circumstances would a tax return preparer be

prohibited from disclosing a client's tax return information?

The information will be needed for a peer review.

The information will be provided in response to a court order.
The information will be provided to a section 501(c)(3) charity.
The information will be used to prepare state or local tax returns.

3. Under the Statements on Standards for Tax Services, what is a CPA's

responsibility for verifying information furnished by the taxpayer or third
parties?

A CPA need not make additional inquiries if the information furnished

appears to be incorrect, incomplete, or inconsistent with other facts known
to the CPA.
A CPA need not consider implications of information furnished if the
information comes directly from a third party.
A CPA may, in good faith, rely on information furnished by the taxpayer
or by third parties without verification.
A CPA should not refer to the taxpayer's previous tax returns unless
the returns report transactions that affect the current tax period.

REG 2015: Moderate 2 www.another71.com

4. Which of the following contractual assignments is prohibited?

The right to receive royalties.

The right to be insured under a liability insurance policy.
The right to receive installment payments.
The rights under an option contract.

5. Under which of the following circumstances would a promoter be

relieved of personal liability on contracts entered into while engaged in
forming a corporation?

When the bylaws of the corporation expressly adopt all

preincorporation contracts without novation.
When the corporation unknowingly accepts the benefits of the contract.
When the contracting party verbally agrees to relieve the promoter.
When the third party, the corporation, and the promoter enter into an
agreement to substitute the corporation for the promoter.

REG 2015: Moderate 3 www.another71.com

6. Under the Negotiable Instruments Article of the UCC, which of the

following defenses could be successfully asserted by the drawer of a draft
against a holder in due course of that draft?

The drawer issued the draft to the payee because of the payee's
fraudulent representations concerning the value of the property the payee
was transferring to the drawer in return for the draft.
The drawer issued the draft as a gift to the original payee, without the
drawer receiving any consideration or value for it.
The drawer was discharged from the obligation in bankruptcy after the
issuance of the draft.
The drawer issued the draft as bearer paper, and it was transferred by
the original holder to the next holder without an endorsement.

7. The two equal shareholders of a C corporation are thinking of filing an
election to have the company treated as an S corporation. Which of the
following consequences is an advantage of this election?

The corporation's net operating loss carryovers from prior years are
immediately deductible by the shareholders.
The corporation's tax-free fringe benefits for the shareholders will be
deductible by the corporation.
The shareholders of the S corporation will be taxed only on distributions
from the corporation.
The corporation's capital losses can be claimed on the tax returns of
the shareholders.

REG 2015: Moderate 4 www.another71.com

8. Benson exchanged a van, used exclusively for business and with an

adjusted basis of $100,000, for a new van with a fair market value of
$120,000 and received $5,000 in cash. What amount of gain did Benson
recognize from the transaction?

$0
$5,000
$20,000
$25,000

9. Which of the following items qualifies for treatment under Section 1231
(Property Used in the Trade or Business and Involuntary Conversions)?

Copyright used in the business, held for 10 years.

Building used in the business, held for six months.
Machinery used in the business, held for eleven months.
Computer used in the business, held for four years.

REG 2015: Moderate 5 www.another71.com

10. A personal services corporation may deduct payments made to owneremployees only in the year in which the

Corporation is formed.
Expense is accrued on the books and records of the corporation.
Corporation makes a valid S election.
Owner-employee includes it in income.

11. An individual taxpayer reports the following information:

U.S. Treasury bond income

$ 100

Municipal bond income

200

Rental income

500

Investment interest expense

1,000

What amount of investment interest can the taxpayer deduct in the current
year?
$100
$300
$800
$1,000

REG 2015: Moderate 6 www.another71.com

12. As a result of a divorce, a taxpayer received the following during the

current year:
Cash from the property
settlement

$100,000

Child support

12,000

Alimony payments

30,000

What amount, if any, must be included in gross income for the current
year?
$0
$30,000
$130,000
$142,000

13. Thompson's spouse died in year 1. Thompson did not remarry in year 2
and lived alone the entire year. What is Thompson's year 2 filing status?

Married filing jointly.

Surviving spouse.
Head of household.
Single.

REG 2015: Moderate 7 www.another71.com

14. Paige, a 25% shareholder in an S corporation, had a stock basis of

$10,000 at the beginning of the year. The corporation had ordinary income
of $200,000 for the year. There were no separately stated items. Paige
received wages from the corporation of $25,000 and a distribution of
$30,000. What was Paige's basis in the stock at year end?

$0
$5,000
$30,000
$35,000

15. Kline and Salomon form the KS Partnership as 50/50 partners. Kline
contributes equipment that has a fair market value of $60,000 and an
adjusted basis of $45,000. In addition, the equipment is subject to a
$10,000 loan that KS Partnership is assuming. What amount represents
Kline's initial basis in the partnership?

$35,000
$40,000
$45,000
$60,000

REG 2015: Moderate 8 www.another71.com

16. Parent company X and subsidiary company Y file a calendar year

consolidated federal income tax return. Company X reported a $120,000
tax loss, which included a $10,000 dividend from Y. Company Y reported
$140,000 of taxable income, which included $30,000 of dividends received
from less than 20% owned stock investments. Neither company took into
account any applicable dividends received deduction. What is the group's
consolidated tax loss for the year?

($1,000)
($4,000)
($11,000)
($20,000)

17. Which of the following is a disadvantage of a revocable trust?

The grantor will be subject to gift taxes on the transfer of property to the
trust.
The trust assets are subject to being probated upon the death of the
grantor.
The grantor loses power to control the trust funds for federal estate tax
purposes.
The trust is included in the gross estate of the grantor.

REG 2015: Moderate 9 www.another71.com

18. IRC Section 263A requires the capitalization of certain indirect costs
related to inventory when a qualifying business is manufacturing tangible
personal property. Which of the following costs is not required to be
capitalized as part of this adjustment?

Marketing.
Recruiting.
Payroll.
Securities services.

19. A company terminated its S corporation status for the current tax year.
When can the company reelect S status?

Immediately.
Third year from the current tax year.
Fifth year from the current tax year.
Cannot reelect in future.

REG 2015: Moderate 10

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20. The CPA was preparing the financial statement for a limited liability
company. To which of the following would the CPA's report be addressed?

Member.
Shareholder
General partner.
Limited partner.

Answers:
1. The partnership of Rodgers & Higgs, CPAs, performed audits of Alt
Corp., a publicly-traded company, for the past several years. After issuing
the current year's audit report, the CFO of Alt confessed to having
committed fraud against Alt. Under which of the following statutes would
the investors most likely bring suit against Rodgers & Higgs?

Securities Act of 1933, if they can prove ordinary negligence.

Securities Act of 1933, if they can prove gross negligence.
Securities Exchange Act of 1934, if they can prove ordinary negligence.
Securities Exchange Act of 1934, if they can prove scienter.

REG 2015: Moderate 11

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2. In which of the following circumstances would a tax return preparer be

prohibited from disclosing a client's tax return information?

The information will be needed for a peer review.

The information will be provided in response to a court order.
The information will be provided to a section 501(c)(3) charity.
The information will be used to prepare state or local tax returns.

3. Under the Statements on Standards for Tax Services, what is a CPA's

responsibility for verifying information furnished by the taxpayer or third
parties?

A CPA need not make additional inquiries if the information furnished

appears to be incorrect, incomplete, or inconsistent with other facts known
to the CPA.
A CPA need not consider implications of information furnished if the
information comes directly from a third party.
A CPA may, in good faith, rely on information furnished by the
taxpayer or by third parties without verification.
A CPA should not refer to the taxpayer's previous tax returns unless
the returns report transactions that affect the current tax period.

REG 2015: Moderate 12

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4. Which of the following contractual assignments is prohibited?

The right to receive royalties.

The right to be insured under a liability insurance policy.
The right to receive installment payments.
The rights under an option contract.

5. Under which of the following circumstances would a promoter be

relieved of personal liability on contracts entered into while engaged in
forming a corporation?

When the bylaws of the corporation expressly adopt all

preincorporation contracts without novation.
When the corporation unknowingly accepts the benefits of the contract.
When the contracting party verbally agrees to relieve the promoter.
When the third party, the corporation, and the promoter enter into
an agreement to substitute the corporation for the promoter.

REG 2015: Moderate 13

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6. Under the Negotiable Instruments Article of the UCC, which of the

following defenses could be successfully asserted by the drawer of a draft
against a holder in due course of that draft?

The drawer issued the draft to the payee because of the payee's
fraudulent representations concerning the value of the property the payee
was transferring to the drawer in return for the draft.
The drawer issued the draft as a gift to the original payee, without the
drawer receiving any consideration or value for it.
The drawer was discharged from the obligation in bankruptcy
after the issuance of the draft.
The drawer issued the draft as bearer paper, and it was transferred by
the original holder to the next holder without an endorsement.

7. The two equal shareholders of a C corporation are thinking of filing an
election to have the company treated as an S corporation. Which of the
following consequences is an advantage of this election?

The corporation's net operating loss carryovers from prior years are
immediately deductible by the shareholders.
The corporation's tax-free fringe benefits for the shareholders will be
deductible by the corporation.
The shareholders of the S corporation will be taxed only on distributions
from the corporation.
The corporation's capital losses can be claimed on the tax returns
of the shareholders.

REG 2015: Moderate 14

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8. Benson exchanged a van, used exclusively for business and with an

adjusted basis of $100,000, for a new van with a fair market value of
$120,000 and received $5,000 in cash. What amount of gain did Benson
recognize from the transaction?

$0
$5,000
$20,000
$25,000

9. Which of the following items qualifies for treatment under Section 1231
(Property Used in the Trade or Business and Involuntary Conversions)?

Copyright used in the business, held for 10 years.

Building used in the business, held for six months.
Machinery used in the business, held for eleven months.
Computer used in the business, held for four years.

REG 2015: Moderate 15

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10. A personal services corporation may deduct payments made to owneremployees only in the year in which the

Corporation is formed.
Expense is accrued on the books and records of the corporation.
Corporation makes a valid S election.
Owner-employee includes it in income.

11. An individual taxpayer reports the following information:

U.S. Treasury bond income

$ 100

Municipal bond income

200

Rental income

500

Investment interest expense

1,000

What amount of investment interest can the taxpayer deduct in the current
year?
$100
$300
$800
$1,000

REG 2015: Moderate 16
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12. As a result of a divorce, a taxpayer received the following during the

current year:
Cash from the property
settlement

$100,000

Child support

12,000

Alimony payments

30,000

What amount, if any, must be included in gross income for the current
year?
$0
$30,000
$130,000
$142,000

13. Thompson's spouse died in year 1. Thompson did not remarry in year 2
and lived alone the entire year. What is Thompson's year 2 filing status?

Married filing jointly.

Surviving spouse.
Head of household.
Single.

REG 2015: Moderate 17

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14. Paige, a 25% shareholder in an S corporation, had a stock basis of

$10,000 at the beginning of the year. The corporation had ordinary income
of $200,000 for the year. There were no separately stated items. Paige
received wages from the corporation of $25,000 and a distribution of
$30,000. What was Paige's basis in the stock at year end?

$0
$5,000
$30,000
$35,000

15. Kline and Salomon form the KS Partnership as 50/50 partners. Kline
contributes equipment that has a fair market value of $60,000 and an
adjusted basis of $45,000. In addition, the equipment is subject to a
$10,000 loan that KS Partnership is assuming. What amount represents
Kline's initial basis in the partnership?

$35,000
$40,000
$45,000
$60,000

REG 2015: Moderate 18
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16. Parent company X and subsidiary company Y file a calendar year

consolidated federal income tax return. Company X reported a $120,000
tax loss, which included a $10,000 dividend from Y. Company Y reported
$140,000 of taxable income, which included $30,000 of dividends received
from less than 20% owned stock investments. Neither company took into
account any applicable dividends received deduction. What is the group's
consolidated tax loss for the year?

($1,000)
($4,000)
($11,000)
($20,000)

17. Which of the following is a disadvantage of a revocable trust?

The grantor will be subject to gift taxes on the transfer of property to the
trust.
The trust assets are subject to being probated upon the death of the
grantor.
The grantor loses power to control the trust funds for federal estate tax
purposes.
The trust is included in the gross estate of the grantor.

REG 2015: Moderate 19

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18. IRC Section 263A requires the capitalization of certain indirect costs
related to inventory when a qualifying business is manufacturing tangible
personal property. Which of the following costs is not required to be
capitalized as part of this adjustment?

Marketing.
Recruiting.
Payroll.
Securities services.

19. A company terminated its S corporation status for the current tax year.
When can the company reelect S status?

Immediately.
Third year from the current tax year.
Fifth year from the current tax year.
Cannot reelect in future.

REG 2015: Moderate 20

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20. The CPA was preparing the financial statement for a limited liability
company. To which of the following would the CPA's report be addressed?

Member.
Shareholder
General partner.
Limited partner.

REG 2015: Moderate 21

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