REG - 2017 AICPA Released Questions PDF

2017 AICPA Newly Released Questions—Regulation
REGULATION
2017 AICPA Newly
Released MCQs
Page 1 of 40
Registered to Andrea Rosillo (#818104)

2017 AICPA Regulation Newly Released MCQs—Medium (Moderate) Rating
1. CPA-05815
While reviewing a new client's prior-year tax returns, a CPA became aware that the client did not properly
file all required federal income tax returns. Under Treasury Circular 230, what should the CPA do in this
situation?
a. Notify the AICPA of the situation and request a ruling of continuance.
b. Notify the Internal Revenue Service of the client's noncompliance.
c. Resign from the engagement.
d. Advise the client of the consequences of the noncompliance.
Unit & Module to be Assigned To: R-6, M-1

Representative Task: RI-C2.1
Skill Level (Must be R&U or Application Only): R&U
Page Reference: 7
Correct Answer Choice: D
ANSWER:
Choice "d" is correct. Under the provisions of Treasury Circular 230, if a practitioner is aware of any
noncompliance, errors, or omissions in a client's tax returns or other documents, the practitioner must
advise the client of their existence as well as their potential consequences.
Choice "a" is incorrect. Under the provisions of Treasury Circular 230, a practitioner is not required to
notify the AICPA or request a ruling of continuance if the practitioner discovers that a client did not
properly file all required federal income tax returns for a prior year.
Choice "b" is incorrect Under the provisions of Treasury Circular 230, a practitioner is not required to
notify the Internal Revenue Service if the practitioner discovers that a client did not properly file all
required federal income tax returns for a prior year.
Choice "c" is incorrect. Under the provisions of Treasury Circular 230, a practitioner is not required to
resign from an engagement with a client whom the practitioner has discovered has not properly filed all
required federal income tax returns for a prior year.
Page 2 of 40

2. CPA-05817
A tax preparer filed a return for a taxpayer and used the taxpayer's detailed check register containing both
business and personal expenses. If the tax preparer knowingly included personal expenses as deductible
business expenses on the taxpayer's business, then the:
a. Tax preparer will be liable only for penalties for taking an unreasonable position that led to an
understatement.
b. Taxpayer will be liable for penalties for taking an unreasonable position that led to an
understatement.
c. Tax preparer will be liable for penalties arising from an understatement due to willful or reckless
conduct.
d. Taxpayer will be liable for penalties attributable to transactions lacking economic substance.

Representative Task: RI-A2.3
Skill Level (Must be R&U or Application Only): Application
Page Reference: 16
Correct Answer Choice: C
ANSWER:
Choice "c" is correct. A tax preparer is liable for the penalty for "willful or reckless" conduct (which is the
greater of $5,000 or 50 percent of the income derived with respect to the tax return or refund claim on
which the "willful or reckless" conduct exercised) for conduct that is either 1) a willful attempt to
understate the tax liability; or 2) a reckless or intentional disregard of tax rules and regulations. Knowingly
deducting personal expenses as business expenses could constitute such "willful or reckless" conduct.
Choice "a" is incorrect. Although tax preparers can be liable for penalties for taking an unreasonable
position that leads to an understatement of tax, the situation described in the problem is not that of taking
an unreasonable position on an issue in the tax return but instead of "willful or reckless" conduct.
Choice "b" is incorrect. Taxpayers themselves are not subject to an "unreasonable position" penalty per
se (only tax preparers are subject to this penalty), but taxpayers can be subject to negligence penalties
and accuracy-related penalties. However, in this situation the taxpayer was not the one at fault for any
negligence or inaccuracies; instead, it was the tax preparer who knowingly deducted the taxpayer's
personal expenses as business expenses.
Choice "d" is incorrect. This situation does not describe transactions lacking economic substance.
Presumably, all transactions recorded in the taxpayer's check register had economic substance. Instead,
the tax return preparer engaged in "willful or reckless" conduct in deducting personal expenses as
business expenses.
Page 3 of 40

3. CPA-05830
To whom must a CPA pay license fees in order to maintain a CPA license?
a. The Public Company Accounting Oversight Board.
b. The American Institute of Certified Public Accountants.
c. The state board of accountancy of the CPA's state of licensure.
d. The state society of certified public accountants of the CPA's state of licensure.
Unit & Module to be Assigned To: R6, M-2

Representative Task: RI-B.1
Page Reference: 19
ANSWER:
Choice "c" is correct. State boards of accountancy have the sole power to license CPAs; thus, the only
body to which the CPA must pay fees in order to maintain the CPA license is to the state board of
accountancy for the state in which the CPA is licensed.
Choice "a" is incorrect. The Public Company Accounting Oversight Board oversees the audits of public
companies; it is not engaged in the licensing of CPAs.
Choice "b" is incorrect. The American Institute of Certified Public Accountants develops the CPA Exam
and sets auditing standards and ethical standards for CPAs, but it is not involved in the licensing of CPAs.
Choice "d" is incorrect. State societies of CPAs are dedicated to the development and strengthening of
the CPA profession within their states, but they are not engaged in the licensing of CPAs.
Page 4 of 40

4. CPA-05836
Smith entered an oral agreement hiring and authorizing Jones to sell fraudulent identification cards
produced by Smith. Smith and Jones orally agreed to share the proceeds from their enterprise. Later,
Jones claimed that no enforceable agency relationship was created. Jones is correct because:
a. Jones did not have authority.
b. Jones did not have contractual capacity.
c. The purpose of the agency was contrary to public policy.
d. The agreement was a partnership.

Representative Task: RII-A1.2
Page Reference: 3
ANSWER:
Choice "c" is correct. No enforceable agency relationship was created because the purpose of the agency
was contrary to public policy.
Choice "a" is incorrect. Jones did have authority, because a written agency agreement is generally not
required to create an agency relationship.
Choice "b" is incorrect. All that is required to create an agency relationship is a principal with contractual
capacity (i.e., not a minor and not incompetent, plus consent of the parties).
Choice "d" is incorrect. Whether a partnership was established is not relevant to the creation of an
enforceable agency relationship.
Page 5 of 40

5. CPA-05839
Dunlap contracted to work exclusively for Foster during June for $5,000. On May 31, Foster canceled the
contract. Dunlap found another job during June for $3,000. Dunlap filed suit against Foster for breach of
contract. Dunlap should recover what amount of compensatory damages?
a. $8,000
b. $5,000
c. $3,000
d. $2,000

Representative Task: RII-B3.5
Page Reference: 35
ANSWER:
Choice "d" is correct. The goal of contract damages is to put the non-breaching party in the position he or
she would have been in had there been no breach. In this situation, Dunlap and Foster had a contract
providing that Dunlap was to work exclusively for Foster during June for $5,000. Foster canceled. The
facts do not indicate that Foster had any right to cancel, so Foster is liable to Dunlap for damages.
However, Dunlap had a duty to mitigate; Dunlap had to attempt to avoid damages. Dunlap did so by
finding a new job paying $3,000. Thus, Dunlap is entitled to the difference between the contract price
($5,000) and what the substitute job paid ($3,000).
Choice "a" is incorrect. $8,000 would be the sum of what Dunlap made at the substitute job plus what
Dunlap was supposed to make working for Foster. That would put Dunlap in a far better position than
performance, because Dunlap would have the $3,000 pay from the substitute job plus the $8,000 from
Foster ($11,000). Dunlap could have made only $5,000 had Foster not breached, because the contract
required Dunlap to work exclusively for Foster.
Choice "b" is incorrect. Dunlap was required to work exclusively for Foster under the contract and could
have made no more than $5,000 had the contract not been breached. If Dunlap recovered the full
contract price from Foster ($5,000), Dunlap would be in a better position than if the contract had been
performed, because Dunlap also earned $3,000 in a substitute job.
Choice "c" is incorrect. There is no logical basis for recovering $3,000. It is what Dunlap earned at the
substitute job; it was not the contract price ($5,000) or the contract price minus what Dunlap earned in
mitigation ($2,000); this number is a distracter.
Page 6 of 40

6. CPA-05840
A married couple abandoned their principal residence in May. They had purchased the house five years
ago for $350,000. The house had a current fair market value of $300,000. What is the maximum loss, if
any, that they are allowed to deduct on the current-year's tax return for the abandoned property?
a. $0
b. $50,000
c. $300,000
d. $350,000

Representative Task: RIII-A2.3
Page Reference: 27
Correct Answer Choice: A
ANSWER:
Choice "a" is correct. No deduction is allowed for the loss on disposal of a personal-use asset.
Choice "b" is incorrect. This is not correct because a deduction is not allowed for the abandonment of a
principal residence.
Choice "c" is incorrect. This is the fair market value of the house, but cannot be deducted as a loss
because no deduction is allowed for the loss on a nonbusiness disposal or loss.
Choice "d" is incorrect. This is the basis of the residence, but may not be deducted as a loss because a
deduction is not allowed for the loss on abandoned personal property.
Page 7 of 40

7. CPA-05845
Lobster, Inc. purchased the following assets during Year 1:
Computers $35,000
Computer desks 22,000
Office furniture 4,000
Delivery trucks 25,000
Building 425,000
What should be reported as the cost basis for a MACRS seven-year property?
a. $26,000
b. $86,000
c. $451,000
d. $511,000

Page Reference: 51
ANSWER:
Choice "a" is correct. MACRS seven-year property includes assets such as office furniture, fixtures, and
equipment. This would include the computer desks costing $22,000 and the office furniture costing
$4,000, for a total of $26,000. The computers and the delivery trucks would be classified under MACRS
as five-year property, whereas the building would be classified as 39-year property if it were
nonresidential real property and 27.5-year property if it were residential real property.
Choice "b" is incorrect. The $86,000 incorrectly includes the computers and the delivery trucks, both of
which would be classified under MACRS as five-year property, not seven-year property.
Choice "c" is incorrect. The $451,000 incorrectly includes the building, which would be classified under
MACRS as 39-year property if it were nonresidential real property and as 27.5-year property if it were
residential real property.
Choice "d" is incorrect. The $511,000 incorrectly includes the computers and the delivery trucks, which
would be classified under MACRS as five-year property as well as the building, which would be classified
under MACRS as 39-year property if it were nonresidential real property and as 27.5-year property if it
were residential real property.
Page 8 of 40

8. CPA-05881
This year, Beck gave $5,000 cash to a nephew, canceled $3,000 of the same nephew's indebtedness,
donated $1,500 to a political party, and gave $1,200 of municipal bonds to a parent. What is the amount
of Beck's gifts before considering the gift tax annual exclusion?
a. $5,000
b. $8,000
c. $9,200
d. $10,700

Representative Task: RIII-C2.3
Page Reference: 82
ANSWER:
Choice "c" is correct. In general, taxable gifts include every transfer of property for less than full
consideration. This would include the gift of $5,000 of cash to the nephew, the cancellation of the
nephew's $3,000 indebtedness, and the $1,200 of municipal bonds given to the parent ($5,000 + $3,000
+ $1,200 = $9,200). However, certain transfers are excluded from being considered taxable gifts,
including donations to political parties.
Choice "a" is incorrect. The $5,000 incorrectly excludes the cancellation of the nephew's $3,000
indebtedness and the $1,200 of municipal bonds given to the parent (note that although interest on a
municipal bond is not subject to income tax, the transfer of a municipal bond for less than full
consideration is still subject to the gift tax).
Choice "b" is incorrect. The $8,000 incorrectly excludes the $1,200 of municipal bonds given to the parent
(note that although interest on a municipal bond is not subject to income tax, the transfer of a municipal
bond for less than full consideration is still subject to the gift tax).
Choice "d" is incorrect. The $10,700 incorrectly includes the $1,500 donated to a political party. Donations
to political parties are specifically excluded from being considered taxable gifts.
Page 9 of 40

9. CPA-05884
Sanderson has made deductible contributions to his traditional IRA for many years. Sanderson recently
retired at age 60 and received a distribution of $150,000. In which way, if any, will the distribution be
taxed?
a. As a capital gain.
b. As ordinary income.
c. Subject to a 10 percent penalty.
d. It will not be taxed.

Representative Task: RV-A1.1
Page Reference: 26
Correct Answer Choice: B
ANSWER:
Choice "b" is correct. Withdrawals from traditional IRAs (i.e., IRAs for which the contributions were
deducted) are taxed as ordinary income. Withdrawals prior to age 59½ are also subject to a 10 percent
penalty tax (unless an exception applies). Because Sanderson is over 59½, the withdrawal is not subject
to the 10 percent penalty tax.
Choice "a" is incorrect. Withdrawals from traditional IRAs are taxed as ordinary income, not capital gains.
Choice "c" is incorrect. Withdrawals from traditional IRAs prior to age 59½ are subject to a 10 percent
penalty tax (unless an exception applies). Because Sanderson is over 59½, the withdrawal is not subject
to the 10 percent penalty tax.
Choice "d" is incorrect. Although withdrawals from Roth IRAs are not taxed provided certain rules are met,
withdrawals from traditional IRAs are always taxed.
Page 10 of 40

10. CPA-05893
Which of the following would qualify as a deductible charitable contribution in Year 1 for an individual
taxpayer?
a. A $200 contribution to the taxpayer's church charged by credit card on December 31, Year 1.
b. A $450 contribution to a senator's campaign on December 31, Year 1.
c. A $1,000 contribution to a foreign charity on December 31, Year 1.
d. A contribution on December 31, Year 1, of $500 worth of clothing to the Salvation Army for which
substantiation was not obtained.

Representative Task: RIV-C1.1
Page Reference: 26
ANSWER:
Choice "a" is correct. Contributions to charitable entities (including churches) are deductible. When the
contribution is charged to a credit card, the contribution is deductible in the year the charge is made, even
if payment to the credit card issuer is made in a later year.
Choice "b" is incorrect. Political contributions are not deductible as charitable contributions.
Choice "c" is incorrect. Contributions to foreign charities are not deductible as charitable contributions.
Choice "d" is incorrect. In order to be deductible, all charitable contributions must be substantiated (e.g.,
by a canceled check, receipt, etc.). A contribution that is not substantiated is not deductible.
Page 11 of 40

11. CPA-05898
Bartlet owns a manufacturing business and participates in the business. Which of the following conditions
would cause the business to be considered a nonpassive activity for Bartlet?
a. Bartlet participates in the business for more than 500 hours during a year.
b. The business made a profit in any three of the last five years that preceded the current year.
c. The business has at least 10 employees who, individually or collectively, work for the business
more than 1,000 hours in a year.
d. Bartlet files an election with the IRS postponing nonpassive activity classification.
Unit & Module to be Assigned To: R-1, M4

Representative Task: RIV-D1.1
Page Reference: 55
ANSWER:
Choice "a" is correct. Bartlet's participation in the business would be considered nonpassive if he is
considered to materially participate in the business. One test used for determining material participation in
a business is if the individual participates in the activity for more than 500 hours during the year.
Choice "b" is incorrect. Whether an activity made a profit in any three of the last five years preceding the
current year is a test for determining if the activity is a business as compared to a hobby.
Choice "c" is incorrect. This is not a test that would be used to determine if the activity is a nonpassive
activity for Bartlet.
Choice "d" is incorrect. This is not a test to determine whether an individual materially participates in a
business.
Page 12 of 40

12. CPA-05902
Talbot purchased a laptop for $1,500 and a television for $1,300. The laptop is used solely for business
and the television solely for personal entertainment. During the same year, Talbot experienced serious
financial difficulty and sold the television for $300 and the laptop for $1,000. What amount, if any, is
Talbot entitled to deduct as a loss relating to the sale of the television and laptop?
a. $0
b. $500
c. $1,000
d. $1,500

Page Reference: 27
ANSWER:
Choice "b" is correct. The loss on the disposal of business-use assets is deductible, but the loss on the
disposal of personal-use assets is not deductible. Because the laptop was used for business purposes,
the $500 loss (calculated as the sales price of $1,500 minus the cost of $1,000) on the sale of the laptop
is deductible. However, because the television was used for personal purposes, the loss on the sale of
the television is not deductible.
Choice "a" is incorrect. This answer incorrectly excludes the $500 loss on the sale of the laptop. Losses
on the disposal of business-use assets are deductible. Because the laptop was used for business
purposes, the $500 loss (calculated as the sales price of $1,500 minus the cost of $1,000) on the sale of
the laptop is deductible.
Choice "c" is incorrect. This answer incorrectly includes the $1,000 loss on the sale of the television and
incorrectly excludes the $500 loss on the sale of the laptop. Losses on the sale of personal-use assets
are not deductible. Because the television was used for personal purposes, the loss on the sale of the
television is not deductible. On the other hand, losses on the disposal of business-use assets are
deductible. Because the laptop was used for business purposes, the $500 loss (calculated as the sales
price of $1,500 minus the cost of $1,000) on the sale of the laptop is deductible.
Choice "d" is incorrect. This answer incorrectly includes the $1,000 loss on the sale of the television.
Losses on the sale of personal-use assets are not deductible. Because the television was used for
personal purposes, the loss on the sale of the television is not deductible.
Page 13 of 40

13. CPA-05903
Juan recently started operating a flower shop as a proprietorship. In its first year of operations, the shop
had a taxable income of $60,000. Assuming that Juan had no other employment-related earnings:
a. The flower shop must withhold FICA taxes from Juan's earnings.
b. Juan must pay self-employment tax on the earnings of the business.
c. Juan will be exempt from self-employment taxes for the first three years of operations.
d. Juan will be exempt from the Medicare tax because the business earnings are below the threshold
amount.

Representative Task: RIV-G1.2
Page Reference: 37
ANSWER:
Choice "b" is correct. Earnings from self-employment are subject to the income tax as well as to the
federal self-employment tax. Thus, Juan must pay self-employment tax on the earnings of the business.
Choice "a" is incorrect. Because Juan is the proprietor of a sole proprietorship (as opposed to an
employee of an employer), the flower shop will not pay Juan a wage, and thus will not withhold either
income taxes or FICA taxes from that wage.
Choice "c" is incorrect. There is no provision exempting a proprietorship from self-employment taxes for
its first three years of operations.
Choice "d" is incorrect. No self-employment tax is owed if self-employment income, after multiplying by
92.35 percent, is less than $400. However, Juan's self-employment income exceeds this threshold, and
thus Juan is not exempt from either of the two components of the self-employment tax (the Medicare tax
and the Social Security tax).
Page 14 of 40

14. CPA-05954
When should a corporate taxpayer elect to forgo carryback of a net operating loss and instead carry the
net operating loss forward?
a. When the taxpayer expects net operating losses in the future.
b. When the taxpayer has high marginal tax rates in carryback years and expects to be in lower
marginal rates in the future.
c. When the taxpayer expects lower rates in the future.
d. When the taxpayer has low marginal tax rates in carryback years and expects to be in higher
marginal rates in the future.

Representative Task: RV-C2.4
Page Reference: 50
ANSWER:
Choice "d" is correct. Absent any special election, a net operating loss is carried back two years and then
forward 20 years. However, taxpayers can elect to forgo the two-year carryback period and just carry the
loss forward for 20 years. Usually, taxpayers do not make this election because taxpayers would rather
get the cash refund resulting from carrying back the loss than wait for the benefit of a lower tax in the
future resulting from carrying the loss forward. However, if tax rates in the future will be higher than they
were in the carryback years, the benefit from deducting the loss in the future will be larger than the refund
obtained by carrying the loss back to the past. Thus, in that situation, the taxpayer should elect to forgo
the carryback and instead carry the net operating loss forward.
Choice "a" is incorrect. In order to deduct the net operating loss in the future, the taxpayer must generate
taxable income in the future. If the taxpayer expects net operating losses in the future, the taxpayer will
not be able to deduct the existing net operating loss carried forward.
Choice "b" is incorrect. If the taxpayer has high tax rates in the carryback years and expects low tax rates
in the future, carrying the net operating loss to the carryback years will result in a larger refund than the
tax savings obtained by carrying the net operating loss forward.
Choice "c" is incorrect. If the taxpayer expects low tax rates in the future, carrying the net operating loss
to the carryback years will result in a larger refund than the tax savings obtained by carrying the net
operating loss forward (assuming that the tax rates in the carryback years are higher than the tax rates
expected in the future).
Page 15 of 40

15. CPA-05959
A corporation distributed land with a basis of $20,000 and a fair market value of $60,000, but was subject
to a nonrecourse liability of $70,000 to its sole shareholder. What amount represents the corporation's
recognized gain?
a. $20,000
b. $50,000
c. $60,000
d. $70,000

Page Reference: 63
ANSWER:
Choice "b" is correct. If a property's fair market value is less than the amount of the liability assumed, the
property's fair market value is assumed to be the amount of the liability assumed by the shareholder, so in
this case the fair market value is assumed to be $70,000. The recognized gain is calculated as $70,000
less $20,000, which equals $50,000.
Choice "a" is incorrect. The basis in the land distributed will not be the gain recognized by the corporation.
Choice "c" is incorrect. This is the fair market value of the land distributed but will not be the amount of
gain recognized by the corporation.
Choice "d" is incorrect. The gain recognized by the corporation is not the amount of the nonrecourse
liability distributed to the shareholder.
Page 16 of 40

16. CPA-06056
On January 1 of the first year of operation, an investor paid $10,000 for a 20 percent interest in Biga, an S
corporation. During the same year, Biga earned $10,000 taxable income and $2,000 tax-exempt interest.
Biga paid dividends totaling $1,000 to its shareholders during the same year. What is the investor's tax
basis in the shares of Biga at the end of the year?
a. $4,200
b. $10,000
c. $12,200
d. $12,400

Representative Task: RV-D3.1
Page Reference: 13
ANSWER:
Choice "c" is correct. The basis of S corporation stock is computed as follows:
Initial basis (generally, the amount paid for the stock)
+ Shareholder's share of S corporation income (whether it is taxable or tax-exempt)
+ Additional shareholder investments in corporation stock
– Distributions to shareholder
– Shareholder's share of S corporation losses/expenses
= Ending basis
The above formula is applied to this question as follows:

Initial basis (amount paid for the stock) $10,000
+ Shareholder's 20% share of $12,000 of total S corporation income (taxable + tax-exempt) 2,400
– Shareholder's 20% share of $1,000 of S corporation distributions (200)
= Ending basis $12,200
Choice "a" is incorrect. This answer incorrectly includes only 20 percent of the $10,000 that the
shareholder originally paid for the stock. The $10,000 that was paid for the stock was all paid by this
shareholder and thus this shareholder's basis would include the entire $10,000.
Choice "b" is incorrect. This answer incorrectly considers only the $10,000 that the shareholder originally
paid for the stock and ignores the effect of the S corporation's income and distributions during the year.
Choice "d" is incorrect. This answer fails to reduce the shareholder's basis for the shareholder's 20
percent share of the S corporation's $1,000 of distributions during the year.
Page 17 of 40

17. CPA-06071
Two partners each own an equal interest in a general partnership. One partner contributes to the
partnership a building that has an adjusted basis of $40,000 and a fair market value of $60,000. The
asset is subject to a mortgage of $30,000, which is assumed by the partnership. What is the contributing
partner's share of liabilities in the partnership?
a. $0
b. $15,000
c. $30,000
d. $40,000

Representative Task: RV-E5.2
Page Reference: 20
ANSWER:
Choice "b" is correct. When a partner's liability is assumed by the partnership, the partner maintains a
share in the liability equal to the partner's share of the partnership as a whole. Because the contributing
partner contributed $30,000 of liabilities and has a 50 percent share in the partnership (and because the
facts do not indicate that the partnership has other liabilities), the contributing partner's share of the
partnership's liabilities is $15,000 ($30,000 x 50%).
Choice "a" is incorrect. When a partner's liability is assumed by the partnership, the partner still maintains
a share in the liability equal to the partner's share of the partnership as a whole.
Choice "c" is incorrect. When a partner's liability is assumed by the partnership, the partner's share of the
liability is reduced by the percentage of the liability that is attributable to the other partners in the
partnership.
Choice "d" is incorrect. The basis of property subject to a liability assumed by a partnership is irrelevant in
determining the share of the liability that is retained by the contributing partner.
Page 18 of 40

18. CPA-06083
Which of the following items is not normally taken into account in determining distributable net income of
a simple trust?
a. Tax-exempt interest.
b. Fiduciary fee.
c. Taxable interest income.
d. Personal exemption.

Representative Task: RV-G2.2
Page Reference: 68
ANSWER:
Choice "d" is correct. The computation of distributable net income includes all of a trust's gross income
(even tax-exempt income) except capital gains attributable to corpus, and is reduced by all of a trust's
deductions except the exemption. Thus, tax-exempt interest, the fiduciary fee, and taxable interest
income would all be taken into account in determining the distributable net income of a trust, but the
trust's exemption would not be.
Choice "a" is incorrect. Tax-exempt interest is included in the computation of a trust's distributable net
income. For purposes of determining the limitation on how much of a trust's distribution is deductible,
distributable net income is reduced by "adjusted tax-exempt interest," which is tax-exempt interest
reduced by any expenses related to that tax-exempt interest. However, distributable net income itself
does include tax-exempt interest.
Choice "b" is incorrect. All trust deductions, including the deduction for fiduciary fees, are taken into
account in determining a trust's distributable net income.
Choice "c" is incorrect. All trust gross income, including taxable interest income, is taken into account in
determining a trust's distributable net income.
Page 19 of 40

19. CPA-06087
A simple trust had $25,000 in capital gains, $10,000 in municipal interest, $5,000 in corporate bond
interest, and $2,000 in accounting and trustee fees. According to the trust agreement, capital gains are to
be distributed to the beneficiary. What is the distributable net income for this trust?
a. $28,000
b. $30,000
c. $38,000
d. $40,000

Page Reference: 68
ANSWER:
Choice "c" is correct. The computation of distributable net income includes all of a trust's gross income
(even tax-exempt income, such as municipal interest) except capital gains attributable to corpus and is
reduced by all of a trust's deductions except the exemption. Thus, distributable net income for this trust is
calculated as follows:
Capital gains attributable to the beneficiary $25,000
Municipal interest income 10,000
Corporate bond interest income 5,000
Accounting and trustee fees (2,000)
Distributable net income $38,000
Choice "a" is incorrect. This answer incorrectly excludes the municipal interest income. The computation
of distributable net income includes all of a trust's gross income, even tax-exempt income such as
municipal interest income.
Choice "b" is incorrect. This answer incorrectly excludes the municipal interest income and the accounting
and trustee fees. The computation of distributable net income includes all of a trust's gross income, even
tax-exempt income such as municipal interest income, and is reduced by all of a trust's deductions,
including the deduction for accounting and trustee fees.
Choice "d" is incorrect. This answer incorrectly excludes the accounting and trustee fees. The
computation of distributable net income is reduced by all of a trust's deductions, including the deduction
for accounting and trustee fees.
Page 20 of 40

2017 AICPA Regulation Newly Released MCQs—Difficult (Hard) Rating
20. CPA-06088
With respect to any given tax return, which of the following statements is correct?
a. More than one person may be deemed to be a preparer of a tax return.
b. The final reviewer of a tax return is automatically considered the preparer of the return.
c. Only one person may be deemed to be a preparer of a tax return.
d. The two individuals who have done the most work in preparing the return will be deemed to be the
only preparers.

Representative Task: RI-A2.1
Page Reference: 13
ANSWER:
Choice "a" is correct. More than one person can be deemed to be a preparer of a tax return because
anyone who prepares a substantial portion of a return will be treated as a preparer.
Choice "b" is incorrect. The final reviewer is not automatically considered the preparer of a tax return.
Choice "c" is incorrect. It is not true that only one person can be deemed to be a preparer of a tax return.
Choice "d" is incorrect. It is not true that the two individuals who have done the most work in preparing the
return will be deemed to be the only preparers.
Page 21 of 40

21. CPA-06121
Which agency is responsible for determining the continuing professional education requirements for
licensed CPAs?
a. The Securities and Exchange Commission.
b. The board of accountancy for the state in which the licensed CPA practices.
c. The American Institute of Certified Public Accountants.
d. The National Association of State Boards of Accountancy.

Representative Task: RI-B1.1
Page Reference: 20
ANSWER:
Choice "b" is correct. State boards of accountancy have the sole power to license certified public
accountants and thus have the sole responsibility for determining the continuing professional education
requirements for certified public accountants practicing in their states.
Choice "a" is incorrect. The Securities and Exchange Commission may censure, suspend, or revoke an
accountant's right to practice before the Securities and Exchange Commission, but it cannot censure,
suspend, or revoke an accountant's right to practice for clients who are not under the jurisdiction of the
Securities and Exchange Commission. Furthermore, the Securities and Exchange Commission does not
determine the continuing professional education requirements for certified public accountants.
Choice "c" is incorrect. The American Institute of Certified Public Accountants develops the CPA Exam
and sets auditing standards and ethical standards for CPAs, but it is not involved in the licensing of CPAs
nor is it engaged in the determination of the continuing professional education requirements for certified
public accountants.
Choice "d" is incorrect. The National Association of State Boards of Accountancy is an association that
represents the various state boards of accountancy, but all licensing requirements, including continuing
professional education requirements, are determined by the various state boards, not the national
association.
Page 22 of 40

22. CPA-06129
A husband prepared his own tax return as married filing separately. His wife hired a CPA to prepare her
tax return as married filing separately and asked the CPA not to disclose the information to anyone. The
CPA was not retained by the husband for any tax work. The husband believed that his wife's tax return
was negligently prepared and that he was financially harmed. He hired an attorney, without his wife's
consent, to pursue a negligence claim against the CPA. The CPA hired an attorney to defend against the
negligence claim. To which party, if any, may the CPA disclose the wife's tax return information without
the wife's consent?6121
a. The husband, for the evaluation of the negligence claim.
b. The CPA's attorney, for the evaluation of the negligence claim.
c. The husband's attorney, for the evaluation of the negligence claim.
d. No one, because all disclosures must be made with the wife's consent.

Representative Task: RI-D2.2
Page Reference: 41
ANSWER:
Choice "b" is correct. The accountant is prohibited from showing the workpapers to anyone without the
client's permission except in certain situations. One of those situations is to the accountant's attorney in
defense of a lawsuit brought by a client.
Choice "a" is incorrect. The accountant cannot show the tax return information to the husband for the
evaluation of the negligence claim.
Choice "c" is incorrect. The accountant cannot show the tax return information to the husband's attorney
for the evaluation of the negligence claim.
Choice "d" is incorrect. There are limited situations in which an accountant can show client workpapers to
other parties without the wife's consent.
Page 23 of 40

23. CPA-06136
Which of the following duties is owed by a principal to an agent?
a. Accountability.
b. Performance.
c. Ratification.
d. Indemnification.

Representative Task: RII-A2.1
Page Reference: 5
ANSWER:
Choice "d" is correct. A principal has an implied duty to reimburse (that is, indemnify) the agent for all
expenses incurred by the agent in carrying out the agency.
Choice "a" is incorrect. The duty of accountability is a duty the agent owes the principal. The agent has a
duty to account to the principal for all property and money received or paid out when acting on behalf of
the principal.
Choice "b" is incorrect. There is no duty of performance, per se, under agency law. An agent bound by
contract would have a duty to perform under the contract, but not otherwise.
Choice "c" is incorrect. Ratification is not a duty but rather is the name of the process by which a principal
can adopt or accept an unauthorized act of an agent.
Page 24 of 40

24. CPA-06145
Which of the following statements is correct regarding the parol evidence rule?
a. It applies only in cases involving an oral contract.
b. It applies only to subsequent written modifications to a written contract.
c. It applies to subsequent oral agreements that contradict the terms of a final written agreement.
d. It applies to prior or contemporaneous oral agreements that contradict the terms of final written
agreements.

Representative Task: RII-B2.1
Page Reference: 34
ANSWER:
Choice "d" is correct. The parol evidence rule prohibits a party in a lawsuit involving a fully integrated
written contract (that is, a written contract that appears to be intended to reflect the entire agreement
between the parties) from introducing at trial evidence of prior or contemporaneous oral agreements that
contradict the terms of final written agreements.
Choice "a" is incorrect. It is just the opposite; the parol evidence rule applies only to fully integrated written
contracts.
Choice "b" is incorrect. The parol evidence rule does not prohibit introduction of subsequent written
modifications; such modification is allowed under the rule.
Choice "c" is incorrect. The parol evidence rule does not prohibit introduction of subsequent oral
modifications; whether such modifications are effective turns largely on whether the Statute of Frauds
applies.
Page 25 of 40

25. CPA-06146
Two individuals are planning to start a business and need advice on selecting the appropriate form of
entity. Their long-term business plan contemplates receiving future in-kind property distributions. Which of
the following is a pair of business entities each of which can make a distribution of appreciated property to
its owners that would not be taxable to the business entity or to its owners?
a. C corporation and a limited liability company.
b. Limited liability company and an S corporation.
c. S corporation and a general partnership.
d. General partnership and a limited liability partnership.

Page Reference: 39
ANSWER:
Choice "d" is correct. In general, a nonliquidating distribution in a partnership—whether a general
partnership or a limited liability partnership—is nontaxable, both as to the partnership and as to the
partner.
Choice "a" is incorrect. A C corporation is an entity apart from its owners. When it makes a distribution to
an owner (shareholder), that is a taxable event. A limited liability company with more than one owner
(member) typically is taxed like a partnership and so could make a nontaxable distribution to its owners.
Choice "b" is incorrect. A limited liability company might be a sufficient entity for the individuals, but an S
corporation would not be sufficient in all situations. Although typically profits and losses flow through an S
corporation to its shareholders and so distributions are not taxable, they are taxable if the S corporation
has earnings and profits that were carried over from a former C corporation.
Choice "c" is incorrect. Whereas a general partnership will provide the desired results, an S corporation
will not be a good choice because distributions from an S corporation may be taxable in certain
circumstances.
Page 26 of 40

26. CPA-06147
An individual taxpayer reported the following net long-term capital gains and losses:
Year Gain (loss)
1 $(5,000)
2 1,000
3 4,000
The amount of capital gain that the individual taxpayer should report in Year 3 is:
a. $0
b. $1,000
c. $3,000
d. $4,000

Page Reference: 34
ANSWER:
Choice "d" is correct. In Year 1, the taxpayer deducts $3,000 of the net long-term capital loss against
other types of gross income and carries forward $2,000 of net long-term capital loss to Year 2. In Year 2,
the taxpayer deducts $2,000 of a long-term capital loss carryforward against Year 2's $1,000 long-term
capital gain, which yields a $1,000 net long-term capital loss. The taxpayer deducts Year 2's $1,000 net
long-term capital loss against other types of gross income in Year 2. In Year 3, no long-term capital loss
remains; therefore, the taxpayer reports $4,000 of net long-term capital gain.
Choice "a" is incorrect. Individual taxpayers are eligible to deduct up to $3,000 of net capital loss against
other types of gross income each year. Annual net capital losses in excess of $3,000 are carried forward
indefinitely.
Choice "b" is incorrect. Capital losses may only reduce capital gains if they are realized in the current year
or if a net capital loss carryforward exists.
Choice "c" is incorrect. Individual taxpayers are eligible to deduct up to $3,000 of net capital loss against
other types of gross income in the year the capital loss is realized as well as in a year of carryforward.
Page 27 of 40

27. CPA-06148
A calendar-year taxpayer purchases a new business on July 1. The contract provides the following price
allocation: customer list, $100,000; trade name, $50,000; goodwill, $90,000. What is the amortization
deduction for the current year?
a. $3,000
b. $6,000
c. $8,000
d. $16,000

Representative Task: RIII-B1.1
Page Reference: 57
ANSWER:
Choice "c" is correct. Customer lists, trade names and goodwill are purchased intangible assets, which
taxpayers amortize over 180 months using the full-month convention. [($100,000 + $50,000 +
$90,000)/180] × 6 = $8,000
Choice "a" is incorrect. Customer lists and trade names are purchased intangible assets eligible for
amortization.
Choice "b" is incorrect. Customer lists, trade names, and goodwill are purchased intangible assets eligible
for amortization.
Choice "d" is incorrect. Taxpayers amortize purchased intangible assets over 180 months using the full-
month convention. The taxpayer purchases the business on July 1, thus only six months of amortization
is allowed rather than a full year.
Page 28 of 40

28. CPA-06151
Parents lend $2,000,000 to their child to start a business. The loan is interest-free and is payable on
demand. The imputed interest is subject to:
a. The gift tax only in the year the parents lend the money.
b. The generation-skipping transfer tax, but not the gift tax.
c. The gift tax each year the loan is outstanding.
d. An excise tax.

Page Reference: 82
ANSWER:
Choice "c" is correct. Imputed interest on an interest-free loan is subject to gift tax for each year the loan
is outstanding.
Choice "a" is incorrect. Imputed interest on an interest-free loan is subject to gift tax for years other than
only the year the parents loaned the money.
Choice "b" is incorrect. The generation-skipping tax does not apply to gifts between parent and child.
Choice "d" is incorrect. An excise tax does not apply to imputed interest on an interest-free loan.
Page 29 of 40

29. CPA-06153
Jensen reported the following items during the current year:
Fair rent value of a condominium owned by Jensen's employer $ 1,400
Cash found in a desk purchased for $30 at a flea market 400
Inheritance 11,000
The employer allowed Jensen to use the condominium for free in recognition of outstanding achievement.
Based on this information, what is Jensen's gross income for the year?
a. $1,400
b. $1,770
c. $1,800
d. $12,400

Representative Task: RIV-A1.1
Page Reference: 17
ANSWER:
Choice "c" is correct. Gross income includes employee achievement awards not in the form of tangible
personal property. Gross income also includes treasure troves to the extent of its value in United States
currency.
Choice "a" is incorrect. Gross income includes treasure troves.
Choice "b" is incorrect. Gross income includes treasure troves to the extent of its value in United States
currency.
Choice "d" is incorrect. Gross income does not include inheritances.
Page 30 of 40

30. CPA-06154
Dr. Merry, a self-employed dentist, incurred the following expenses:
Investment expenses $ 700
Custodial fees related to Dr. Merry's Keogh plan 40
Work uniforms for Dr. Merry and Dr. Merry's employees 320
Subscriptions for periodicals used in the waiting room 110
Dental education seminar 1,300
What is the amount of expenses the doctor can deduct as business expenses on Schedule C, Profit or
Loss from Business?
a. $1,620
b. $1,730
c. $1,770
d. $2,430

Representative Task: RIV-C1.1
Page Reference: 33
ANSWER:
Choice "b" is correct. Business expenses include work uniforms for the taxpayer and taxpayer's
employees, subscriptions for periodicals for patient use, and continuing education expenses.
Choice "a" is incorrect. Business expenses include subscriptions for periodicals for patient use.
Choice "c" is incorrect. Business expenses do not include custodial fees for retirement accounts.
Choice "d" is incorrect. Business expenses do not include investment expenses.
Page 31 of 40

31. CPA-06161
The term active participation for a passive activity loss is relevant in relation to:
a. Rental real estate activities.
b. Working interests in oil and gas properties.
c. Passive activities in which the taxpayer materially participates.
d. Passive activities in which the taxpayer does not materially participate.

Representative Task: RIV-D1.1
Page Reference: 56
ANSWER:
Choice "a" is correct. Active participation in rental real estate activities allows the taxpayer to deduct
losses from the rental activities against other income, subject to limitation.
Choice "b" is incorrect. Active participation is not relevant to working interests in oil and gas properties.
Choice "c" is incorrect. Material participation requires a higher level of taxpayer involvement than required
by active participation.
Choice "d" is incorrect. Active participation is not relevant to all passive activities.
Page 32 of 40

32. CPA-06162
Anderson, a computer engineer, and spouse, who is unemployed, provide more than half of the support
for their child, age 23, who is a full-time student and who earns $7,000. They also provide more than half
of the support for their older child, age 33, who earns $2,000 during the year. How many exemptions may
the Andersons claim on their joint tax return?
a. One personal and two dependency.
b. One personal and one dependency.
c. Two personal and one dependency.
d. Two personal and two dependency.

Representative Task: RIV-F1.4
Page Reference: 10
ANSWER:
Choice "d" is correct. Married taxpayers with the filing status "married filing jointly" may claim two
personal exemptions. The Andersons may claim two personal exemptions because they file a joint tax
return. Taxpayers may claim a dependency exemption for a child who meets the qualifying child tests.
Taxpayers may also claim a dependency exemption for a child who meets the qualifying relative tests.
The Andersons' 23-year-old child meets the qualifying child tests and their 33-year-old child meets the
qualifying relative tests; thus, the Andersons may claim two dependency exemptions.
Choice "a" is incorrect. Each married taxpayer claims his or her own personal exemption on the joint
return.
Choice "b" is incorrect. Each married taxpayer claims his or her own personal exemption on the joint
return. The qualifying child test allows a personal exemption to be claimed for a 23-year-old child who is a
full-time student, if the child does not provide more than one half of his or her own support. The qualifying
relative test allows a personal exemption to be claimed for a child for whom the taxpayer provides more
than one half of the support assuming the child's gross income is less than the exemption amount.
Choice "c" is incorrect. The qualifying child test allows a personal exemption to be claimed for a 23-year-
old child who is a full-time student, if the child does not provide more than one half of his or her own
support. The qualifying relative test allows a personal exemption to be claimed for a child for whom the
taxpayer provides more than one half of the support assuming the child's gross income is less than the
exemption amount.
Page 33 of 40

33. CPA-06163
A C corporation had a federal income tax liability of $40,000 for each of the last five years, each covering
a 12-month period. The tax for the current year is $48,000. What is the lowest amount that must have
been paid as estimated taxes for the current year so that no penalty for underpayment is applicable?
a. $40,000
b. $44,000
c. $48,000
d. $52,800

Page Reference: 35
ANSWER:
Choice "a" is correct. The required annual estimated tax payment for a C corporation is the least of: 1)
100 percent of the tax liability of the prior year's return, assuming a positive tax liability; 2) 100 percent of
the current year tax liability; or 3) 100 percent of estimated current year tax liability according to the
annualized income method. Because the corporation's prior year tax liability is the least of these amounts,
$40,000 is the minimum amount of estimated tax payments required to avoid an underpayment penalty.
Choice "b" is incorrect. The least amount of required annual estimated tax payment for a C corporation is
not calculated using 110 percent of the prior year tax liability.
Choice "c" is incorrect. The C corporation's least amount of required annual estimated tax payment is not
the current year tax liability.
Choice "d" is incorrect. The least amount of required annual estimated tax payment for a C corporation is
not calculated using 110 percent of the current year tax liability.
Page 34 of 40

34. CPA-06164
A corporation that intends to make an election to become an S corporation seeks advice. An accountant
would most appropriately make which of the following recommendations?
a. Limit the number of shareholders to 120 unrelated individuals.
b. Limit the issuance of stock to common and preferred.
c. Ensure that no shareholders are resident aliens.
d. Evaluate the eligibility of all shareholders.

Page Reference: 4
ANSWER:
Choice "d" is correct. Shareholders must meet specific eligibility rules for the corporation to be permitted
to make an election to become an S corporation.
Choice "a" is incorrect. S corporations are permitted to have no more than 100 shareholders.
Choice "b" is incorrect. S corporations are permitted to have only one class of stock.
Choice "c" is incorrect. Resident aliens are eligible to be shareholders of an S corporation.
Page 35 of 40

35. CPA-06167
A taxpayer owns 50 percent of the stock of an S corporation and materially participated in the
corporation's activities. At the beginning of the year, the taxpayer had an adjusted basis in the stock of
$25,000 and made a loan to the corporation of $13,000. During the year, $3,000 of the loan was repaid,
and the taxpayer's share of the corporation's loss for the year was $40,000. What is the amount of the
loss that may be deducted on the taxpayer's tax return?
a. $25,000
b. $35,000
c. $38,000
d. $40,000

Page Reference: 13
ANSWER:
Choice "b" is correct. A taxpayer can deduct loss from an S corporation equal to the taxpayer's stock
basis and debt basis in the S corporation. At the end of the year, the taxpayer's stock basis is $25,000
and debt basis is $10,000 ($13,000 – $3,000). The taxpayer can deduct $35,000 ($25,000 + $10,000) of
the $40,000 loss.
Choice "a" is incorrect. A taxpayer may use his or her debt basis in an S corporation to deduct loss from
an S corporation.
Choice "c" is incorrect. Debt repayments reduce a taxpayer's debt basis in an S corporation.
Choice "d" is incorrect. Loss from an S corporation are limited to the taxpayer's tax basis in the S
corporation.
Page 36 of 40

36. CPA-06168
Partnership P has an operating loss of $10,000 for the year. Partner A had a 50 percent interest in the
partnership, with a basis of $5,000 at the beginning of the year. P distributed $2,000 to A during the year.
What amount of loss is deductible by A?
a. $2,000
b. $3,000
c. $5,000
d. $7,000

Page Reference: 38
ANSWER:
Choice "b" is correct. A taxpayer can deduct loss from a partnership equal to the taxpayer's basis in the
partnership after distributions reduce basis. At the end of the year, Partner A's basis prior to loss is
$3,000 ($5,000 – $2,000). Partner A can deduct $3,000 of the $5,000 loss allocated to A.
Choice "a" is incorrect. Distributions decrease a partner's basis in his or her partnership interest, which
affects the amount of deductible loss but does not determine the amount of deductible loss.
Choice "c" is incorrect. A partner's basis is reduced by distributions prior to the reduction for loss.
Choice "d" is incorrect. Distributions decrease a partner's basis in their partnership interest.
Page 37 of 40

37. CPA-06171
A partner received a partnership interest with a fair market value (FMV) of $55,000 in exchange for the
following items:
Basis FMV
Cash $20,000 $20,000
Property 10,000 30,000
Services rendered 0 5,000
What is the partner's basis in the partnership interest?
a. $55,000
b. $50,000
c. $35,000
d. $30,000

Page Reference: 20
ANSWER:
Choice "c" is correct. A partner's basis in his partnership interest equals the basis of assets contributed,
plus the value of the partnership interest received in exchange for services rendered. The partner's basis
is $35,000 ($20,000 + $10,000 + $5,000).
Choice "a" is incorrect. A partner's basis in his partnership interest does not equal the fair market value of
assets contributed.
Choice "b" is incorrect. A partner's basis in his partnership interest does not equal the fair market value of
assets contributed. A partner's basis includes the value of the partnership interest received in exchange
for services rendered.
Choice "d" is incorrect. A partner's basis includes the value of the partnership interest received in
exchange for services rendered.
Page 38 of 40

38. CPA-06189
At the close of the prior year, an individual taxpayer transferred assets into an irrevocable trust, retaining
the right to the income from the trust for life. During the year, the assets earned ordinary dividends and
interest income. The tax liability on the income earned will be paid:
a. Entirely by the trust.
b. Entirely by the individual taxpayer.
c. By the trust on the interest income only, and by the individual taxpayer for the dividend income.
d. By the trust on the dividend income only, and by the individual taxpayer for the interest income.

Page Reference: 71
ANSWER:
Choice "b" is correct. A taxpayer will pay the tax liability of income earned by a trust in which the taxpayer
retains the right to income. The ordinary dividends and interest income will be taxable to the taxpayer.
Choice "a" is incorrect. The tax liability on the income earned is not paid by the trust.
Choice "c" is incorrect. The type of income does not determine which taxpayer is required to pay the tax
liability on such income.
Choice "d" is incorrect. The type of income does not determine which taxpayer is required to pay the tax
liability on such income.
Page 39 of 40

39. CPA-06190
Which of the following types of business may not qualify for a 501(c)(3) exemption from federal income
taxes?
a. A foundation.
b. A fund.
c. A corporation.
d. A partnership.

Representative Task: RV-H2.1
Page Reference: 93
ANSWER:
Choice "d" is correct. Partnerships are not referred to in IRC Section 501(c)(3), which provides for
corporations, community chests, funds, and foundations to be organizations eligible for exemption from
federal income taxes.
Choice "a" is incorrect. Foundations are expressly provided for in IRC Section 501(c)(3).
Choice "b" is incorrect. Funds are expressly provided for in IRC Section 501(c)(3).
Choice "c" is incorrect. Corporations are expressly provided for in IRC Section 501(c)(3).
Page 40 of 40

2017 AICPA Newly Released Simulations—Regulation
REGULATION
2017 AICPA Newly
Released Sims
Page 1 of 9

Task 80877_01
Unit & Sim # / Task Position R4_Sim 2 (147) / Task 5

Sim Task Name: Debt vs. Equity Capitalization (AICPA R-2017)
Skill Level: Application
Representative Task: RV-A1.1
Web Repo ID: 2094
Page 2 of 9

Task 80877_01 (Plan Options)
Page 3 of 9

Task 80877_01 (Solution)
Chen's after-tax cash flow in Year 1 under Plan 1:

Chen's after-tax cash flow in Year 1 under Plan 1 is calculated as follows:
Dividend payment: $100,000

Less: 15% tax on $100,000 of dividend income (15,000)
After-tax cash flow from dividend $ 85,000
Chen's after-tax cash flow in Year 1 under Plan 2:

Chen's after-tax cash flows in Year 1 under Plan 2 are calculated as follows:
Dividend payment:
Total shareholder distribution $100,000
Less: amount attributable to loan payment (70,000)
Shareholder distribution treated as dividend $ 30,000
Less: 15% tax on $30,000 of dividend income (4,500)
After-tax cash flow from dividend $ 25,500
Interest payment:
$480,000 loan x 5% interest rate $ 24,000
Less: 30% ordinary tax on $24,000 of interest income (7,200)
After-tax cash flow from interest $ 16,800
Principal payment:
Total loan payment $70,000
Less: amount attributable to interest ($480,000 x 5%) (24,000)
Loan payment attributable to principal $46,000*
*Note that principal repayments are not taxable as they do not represent income; instead, they are a return of capital.
Thus, the after-tax cash flow from the principal payment is equal to the principal payment of $46,000.
ABC Corp.'s anticipated taxable income for Year 1 under Plan 1:

ABC Corp.'s anticipated taxable income for Year 1 under Plan 1 is simply the $200,000 of projected taxable income. The
$100,000 dividend distribution under Plan 1 is not deductible.
ABC Corp.'s anticipated federal tax liability for Year 1 under Plan 1:
ABC Corp.'s anticipated federal tax liability for Year 1 under Plan 1 is calculated as follows:
Projected taxable income $200,000

Corporate tax rate × 35%
ABC Corp.'s anticipated federal tax liability for Year 1 $ 70,000
ABC Corp.'s anticipated taxable income for Year 1 under Plan 2:

ABC Corp.'s anticipated taxable income for Year 1 under Plan 2 is calculated as follows:
Projected taxable income $200,000

Less: interest deduction on loan from shareholder:
$480,000 loan x 5% interest rate (24,000)
ABC Corp.'s anticipated taxable income for Year 1 $176,000
ABC Corp.'s anticipated federal tax liability for Year 1 under Plan 2:
ABC Corp.'s anticipated federal tax liability for Year 1 under Plan 2 is calculated as follows:
ABC Corp.'s anticipated taxable income for Year 1 (from above) $176,000
Corporate tax rate × 35%
ABC Corp.'s anticipated federal tax liability for Year 1 $ 61,600
Page 4 of 9

Task 85550_01

Sim Task Name: Gift Transactions (AICPA R-2017)
Web Repo ID: 2095
Page 5 of 9

Task 85550_01 (Solution)

1. Year 2 gift amount subject to tax:
Zero. Transfers between spouses are not subject to the gift tax.
Year 2 gain (loss) recognized on transaction:
$5,700. The basis of inherited property is its fair market value as of the date of death (or as of the alternative
valuation date, if the alternate valuation date is elected for estate tax purposes). So, Joe's basis in the necklace is
$8,500. In general, the basis of gifted property is the basis of that property in the hands of the donor. Since Joe's
basis in the necklace was $8,500, Dale's basis in the necklace is also $8,500. Thus, when Dale sells the necklace
for $14,200, she recognizes a gain of $5,700 ($14,200 – $8,500).
$200,000. The amount of a taxable gift (before considering the annual gift exclusion) is the excess of the fair
market value of the property transferred over the fair market value of the property received in return (if any). In
this case, the fair market value of the property transferred was $200,000 and no property was received in return.
$76,680. In general, the basis of gifted property is the basis of that property in the hands of the donor. However, if
a gift tax is paid on the gift, the recipient's basis is increased by any gift tax that is attributable to the appreciation
in the value of the gift. In this case, the amount of gift tax attributable to the appreciation in the value of the gift
was $13,320, calculated as follows:
Fair market value of the property at the time of the gift $200,000
Less Todd’s basis in the property (160,000)
Appreciation of the property while owned by Todd $ 40,000
Divided by fair market value of the property at the time of the gift ÷ 200,000
Percent of fair market value of the property attributable to appreciation 20%
Multiplied by total gift tax paid × 66,600
Gift tax attributable to appreciation $ 13,320
Sara's basis in the property is $173,320, calculated as follows:
Basis of gifted property in Todd's hands $160,000

Plus gift tax attributable to appreciation (from above) + 13,320
Basis of property to Sara $173,320
Sara's recognized gain on the sale of the property is $76,680, calculated as follows:
Sale price $250,000

Less Sara's basis in the property (from above) (173,320)
Recognized gain $ 76,680
Page 6 of 9

Task 85550_01 (Solution), continued

market value of the property transferred over the fair market value of the property received in return, if any. In this
case, the fair market value of the property transferred was $90,000 and no property was received in return.
$35,000. In general, the basis of gifted property is the basis of that property in the hands of the donor. Since
Ruby's basis in the land was $80,000, Mark's basis in the land is also $80,000. Thus, when Mark sells the land for
$115,000, he recognizes a gain of $35,000 ($115,000 – $80,000).
market value of the property transferred over the fair market value of the property received in return, if any. In this
case, the fair market value of the property transferred was $15,000 (1,000 shares x $15 per share) and no
property was received in return.
($800). In general, the basis of gifted property is the basis of that property in the hands of the donor. However, if
the fair market value at the date of the gift is lower than the donor's basis, the basis to the recipient depends on
the recipient's future selling price of the gifted property. Specifically, if the recipient's future selling price is more
than the donor's basis, the recipient's basis in the gifted property is the donor's basis (as usual). However, if the
recipient's future selling price is less than the donor's basis, the recipient's basis in the gifted property is the fair
market value of the property at the time of the gift.
In this case, Jeff’s future selling price of the 400 shares that were sold was $13 per share, or a total of $5,200.
Johann's basis of those 400 shares was $22 per share ($22,000 basis divided by 1,000 shares equals $22 per
share), or a total of $8,800. Since Jeff's future selling price was less than Johann's basis, Jeff's basis for the 400
shares sold is the fair market value of those shares at the time of the gift, which was $15 per share, or a total of
$6,000. Therefore, Jeff recognizes an $800 loss on the sale of the shares, as follows:
Sale price (400 shares x $13 per share) $5,200

Less basis (400 shares x $15 per share, from above) (6,000)
Loss recognized on sale ($800)
There are two important points to note. First, the basis of the remaining shares (the 600 shares that were not
sold) is not necessarily $15 per share; instead, the basis of those shares will depend on the amount for which
those shares are eventually sold. Second, if at the date of a gift, the fair market value of the gifted property is
lower than the donor's basis (as was the case in this situation) and that property is then sold at a price that is
lower than the donor's basis but higher than the fair market value at the date of the gift, neither gain nor loss is
recognized on the sale.
Page 7 of 9

Task 4021_01_Research

Sim Task Name: Research (AICPA R-2017)
Web Repo ID: 2097
Page 8 of 9

Task 4021_01_Research (Solution)

Source of answer for this question:
IRC Section 453, subsection (d)
Keyword: Election out of installment method
Page 9 of 9

REG - 2017 AICPA Released Questions PDF

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

REG - 2017 AICPA Released Questions PDF

Încărcat de

Drepturi de autor:

Formate disponibile

2017 AICPA Newly Released Questions—Regulation

Registered to Andrea Rosillo (#818104)

2017 AICPA Regulation Newly Released MCQs—Medium (Moderate) Rating

Unit & Module to be Assigned To: R-6, M-1

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-6, M-2

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R6, M-2

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-7, M-3

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-7, M-3

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-3, M-2

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R3, M-5

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R5, M-7

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R1, M-2

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-2, M-2

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-1, M4

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-3, M-2

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-1, M-3

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-1, M-3

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-4, M-8

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-5, M-1

The above formula is applied to this question as follows:

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-5, M-2

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R5, M-6

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-5, M-6

Registered to Andrea Rosillo (#818104)

2017 AICPA Regulation Newly Released MCQs—Difficult (Hard) Rating

Unit & Module to be Assigned To: R-6, M-2

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-6, M-2

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-6, M4

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-7, M-1

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R7, M-3

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R5, M-3

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-3, M3

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-3, M-5

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-5, M-7

Registered to Andrea Rosillo (#818104)

Unit & Module to be Assigned To: R-1, M-2

Registered to Andrea Rosillo (#818104)