Professional Documents
Culture Documents
Q.1
(a)
(b)
(c)
(d)
(a)
(b)
(c)
(d)
A domestic company is always a company in which the public are substantially interested
True
False
None of the above
True in some cases.
Q.2
A private limited company can never be a company in which the public are
substantially interested
True
False
True in some cases
None of the above
Q.3
A company registered in the UK and makes arrangement for payment of dividend in
India is not a domestic company
(a) True
(b) False
(c) True in some cases
(d) None of the above
Q.4
A company is said to be resident of a particular company if
(a)Control and management of the affairs of a company is situated wholly in that
particular country.
(b)Control and management of the affairs of a company is situated outside that particular
country
(c) Control and management of the affairs of a company is situated partly in that particular
country and partly outside that particular country.
(d) All of the above
Q.5
X Ltd. a foreign company manages its affairs partly from India and partly outside
India. X Ltd. is said to be
(a) Resident in India
(b) Non-Resident in India.
(c) Resident and Ordinary Resident in India,
(d) Resident but not ordinary Resident in India.
Q.6
Q.7
A company is qualified to claim deduction under section 80-IB. By mistake the
deduction was not claimed in the return in the return of income. However, the company claims
the before the Assessing Officer at the time of assessment under section 143(3)
(a)Deduction will be allowed by the assessing officer.
(b)Deduction will not be allowed by the assessing officer.
(c)Deduction will be allowed by the assessing officer, if the
Commissioner of Income-tax permits.
(d)Deduction will be allowed by the assessing officer, if the
it is permitted by the Chief Commissioner.
Q.8
10B
A Government company cannot claim any deduction under section 10A, 10AA and
(a)True
(b)False
(c)None of the above
(d)True in some cases.
Q.9
A limited liability partnership owns an infrastructure facility. It can claim deduction
under section 80-IA
(a)True
(b)False
(c)True in some cases
(d)None of the above
Q.10
Only a company(not a limited liability partnership) can claim deduction under section
10A, 10AA, and 10B
(a)True
(b)False
(c)True in some cases
(d)None of the above
Q.11
Q.12
Q.13
Q.14 Corporate taxation does not play any significance role in determining the choice between
different sources of finance
(a)True
(b)False
Q.15 A Company want to purchase a plant (cost: Rs. 80 crore).It can out rightly purchase it.
Alternatively, it can take the plant on lease. The following factors are taken into consideration to
find out which one is better
(a) Corporate tax rate;
(b) Corporate rate and depreciation rate;
(c) Corporate tax rate, depreciation rate, lease rent, cost of capital and useful life of
plant;
(d) None of the above.
Q.16
-
If corporate tax rate is reduced the tax saving on account of depreciation will increase
(a) True
(b) False
(c) True in some cases
(d) None of the above
Q.17
increase -
Q.18
If borrowed funds are used for purchase of a plant and tax rates are reduced, the tax
saving will increase (a) True
(b) False
(c) True in some cases
Depreciation is not available in the case of machine acquired under higher purchase
(a) True
(b) False
(c) True in some cases
(d) None of the above
Q.20
X Limited is considering a proposal to manufacture a component itself or purchase
from market. No fresh investment in plant and machinery will be required if it decides to
manufacture the component within its factory. Total Variable Cost of manufacturing is $ 74 per
unit of component. Net fixed cost of use of plant and machinery comes to $ 20 per unit of
component. The component is available in market at $ 79 per unit of component. It is better to
purchase the component from market(a) True
(b) False
(c) True in some cases
(d) None of the above
Q.21
Y Limited has an option to purchase a machine out of own funds or alternatively a
bank can finance it. At the current rate of corporate tax, the tax saving in the later option is
higher. If the corporate tax rate is reduced, the second option will become less attractive(a) True
(b) False
(c) True in some cases
(d) None of the above
Q.22 In case of demerger, accumulated loss and unabsorbed depreciation of the demerged
company will be(a) Carried forward in the hands of demerged companies.
(b) Carried forward and set off in hands of resulting companies.
(c) Set off in the hands of demerged companies.
(d) None of these.
Q.23
Q.24
(a)
(b)
(c)
(d)
A firm is
Not liable to wealth tax
Liable to wealth tax
Not liable to wealth tax but partners share in the value of the assests of the firm
shall be included in the net wealth of the partner
All of the above
Q.28
Q.29
An assessee is one who pays the wealth tax, an assesse belongs to which of the
following category?
(a) A company
(b) HUF
(c ) A dead persons legal representative, the executor or administrator
(d)All of the above
(a)
(b)
(c)
(d)
Q.30
A house is not treated as an asset if
it is meant exclusively for residential purposes
house held as stock-in-trade
house used for own business or profession
all of the above
Q.31 VAT WAS FIRST INTRODUCED AS A TAX IN THE YEAR:(A) 1919
(B) 1921
(C ) 1948
(D) 1954
Q.32 VAT WAS FIRST INTRODUCED BY THE:(A) FRANCE
(B) GERMANY
(C ) USA
(D) UK
Q.33 WHICH IS MOST COMMON VARIANT OF VAT USED WORLD WIDE:(A) GROSS PROFIT VARIANT
(B) CONSUMPTION VARIANT
(C ) GROSS PRODUCT VARIANT
(D) GROSS INCOME VARIANT
Q.34 TIN MEANS:(A) TAX INFORMATION NUMBER
(B) TAX INDIA NUMBER
(C ) TAX IDENTIFICATION NUMBER
(D) TAX INTRODUCTION NUMBER
Q. 35 VAT INTRODUCTION WILL CERTAINLY:(A) MAKE THE REVENUE COLLECTION WORST.
(B) MAKE THE REVENUE COLLECTION BETTER.
(C ) THE REVENUE COLLECTION ARE THE SAME.
(D) REVENUE VOLUME HAS NOTHING TO DO WITH
INTRODUCTION OF VAT
Q.36 THE ACCOUNTING UNDER THE VAT WILL BE:(A) REGULAR AND CHEAP.
(B) REGULAR AND EXPENSIVE
(C) IRREGULAR AND CHEAP.
(D) IRREGULAR AND EXPENSIVE
Q.37 TO CLAIM THE INPUT CREDIT OF TAX PAID WHAT IS MOST IMPORTANT
DOCUMENT:(A) PERMISSION OF THE SALES TAX AUTHORITY.
(B) PROPER VAT INVOICE
(C ) CASH BOOK
(D) LEDGER
Q.38 WHICH IS MOST COMMON VARIANT OF VAT USED WORLD WIDE:(A) GROSS PROFIT VARIANT
A. He must have at least 3 years experience as an adviser before his training can
commence.
B. His firm is allowed to impose a time limit on completion of the qualification.
C. His supervisor must also be suitably qualified.
D. Once qualified, CPD requirements are waived for 12 months.
E. Once qualified, records of his training must be maintained for at least 5 years.
(E) Income received in India in previous year is taxable in the hands of:
(a) Resident;
(b) Not-resident;
D. If loan granted by employer to employee does not exceeds Rs. 20,000 (10,000,
20,000, 50,000, 1,00,000), it is not treated as perquisite to employee for purpose of
income tax.
E. Where an employer gifts a second hand motor car to an employee, the
perquisite value is actual cost less depreciation at 20 % for every completed year
under reducing balance method of computing depreciation.
F. Any commission due or received by a partner of a firm from the firm shall not be
regarded as salary income under section 15;
G. Advance salary is taxable, while advance against salary is not taxable.
7. Distinguish between foregoing of salary and surrender of salary.
Ans. Once salary has been earned by an employee, its subsequent waiver does not
make it exempt from tax liability. Such waiver shall be treated as application of the income. Hence, salary foregone is taxable. However, where an employee opts to surrender
his salary to the Central Government u/s 2 of Voluntary Surrender of Salaries (Exemption from Taxation) Act, 1961, the salary so surrendered shall not be taxable.
8. Multiple Choice Questions
If an assessee earns rent from a sub-tenant in respect to tenanted property let out
as a residence, the said rent is:
(a) Exempt under Section 10.
(b) Taxable under the head income from house property.
(c) Taxable as business income, as the letting out is a commercial activity.
(d) Taxable as income from other sources, unless the assessee is in the business of subletting properties on a regular basis.
Ans. (d) Taxable as income from other sources, unless the assessee is in the
business of subletting properties on a regular basis.
9. Fill in the Blanks
A. Interest on capital borrowed for acquisition or construction of prop erty is
deductible subject to limit of
Rs. 1,50,000 per year, if capital is borrowed
on or after 1-04-1999. This is allowable if acquisition or construction is completed
within 3 years from end of financial year in which loan was taken .
B. For a self-occupied house property occupied on 1.7.2010, for which housing loan
was availed, if the interest up to 31.3.2010 is Rs. 90,000 and thereafter the interest
payable is Rs. 3,000 per month, the deduction available under section 24 in respect
of interest for the year ended 31.3.2011 is Rs. 54,000.
C. An assessee, after sale of house property, receiving arrears of rent is (is\is not)
chargeable to tax; the same computed in the stipulated manner, is chargeable to
tax as income from house property (income from other source/income from
house property).
D. The basis of chargeability under the head 'income from house property' is
Annual Value .
E. Arrear rent is taxable after deducting 30% as per Section 25B of the Income-tax
Act, 1961.
10. Multiple Choice Questions:
(A)X Ltd. has failed to remit the tax deducted at source from annual rent of Rs.
6,60,000 paid to Mr. A for its office building. Said rent is
ness income.
(b) It is taxable as business income in the year of recovery.
(c) It is added back to the income of the year when it was written off and taxed
as business income.
(d)It is taxable as income from other sources in the year of receipt.
Ans. (b) It is taxable as business income in the year of recovery.
(D) Payment of interest to partners of partnership firm assessed as firm is
allowable as deduction under Section 40(b) of the Income Tax Act, 1961.
(a) If the rate of interest does not exceed 8% p.a.
(b) If the interest is paid on the minimum balance of capital account between 10th
and the end of every month.
(c) If it is calculated on quarterly balance.
(d) If it is authorized by and in accordance with the partnership deed, pertains to a
period after the deed and does not exceed 12 percent simple interest per annum.
Ans. (d) If it is authorized by and in accordance with the partnership deed, pertains to a
period after the deed and does not exceed 12 percent simple interest per annum.
(E) The following is not 'plant' u/s 43(3) of the Income-Tax Act, 1961
(a) Books
(b) Know-how
(c) Road in the factory building
(d) Electrical fittings
Ans. (c) Road in the factory building.
(F) Mr. L Singh used it in his business. This is the only asset in the block. 20% of
the usage is for personal purposes. The WDV of the block as on 31.3.2011 is
(a) Rs. 2,70,000;
(a) Rs. 2,55,000;
(b) Rs. 2,10,000;
(c) None of the above.
Ans. (d) None of the above.
12. Fill in the Blanks
A. In case of an existing industrial undertaking, to be eligible for addi tional
depreciation, increase in installed capacity as compared to the installed capacity as
on 31.3.2002 is 10per cent.
[Note: As criteria of increment in installed capacity for allowing additional
depreciation is now omitted]
B. The due date for filling return of net wealth by an individual who is a nonworking partner in a firm whose accounts are audited under Section 44AB of the
Income-tax Act. 1961 is 31st July.
C. A person owns 4 heavy goods vehicles. His estimated annual income U/S. 44AE
is 2,40,000. (16,800, 1,51,000, 1,92v000, 2,40,000).
D. According to Section 44AB, every person, carrying on business shall, if his total
sales, turnover or gross receipts, as the case may be, in business exceed or
exceeds Rs. 60 lakh in any previous year, inter alia, get his accounts of such
previous year audited by a Chartered Accountant.
E. Additional depreciation of 20% of the actual cost of any new machinery or plant
which has been acquired or installed 31.03.2005 is available to an assessee engaged in
the business of manufacture or production of an article of things.
F. According to Section 40A(3), where the assessee incurs any expen diture in
respect of which payment is made in a sum exceeding Rs. 20,000 otherwise than
by a crossed cheque or crossed bank draft. 100 percent of such expenditure shall
not be allowed as a deduction.
G. The additional or accelerated depreciation, for an eligible assessee, for machinery
installed and used after 31.03.2005 is 20% of actual cost of the machinery.
H. Where an Indian company incurs any expenditure in connection with
amalgamation or demerger, the same is allowable as deduction, spread over 5
successive previous years beginning with the in which amalgamation or
demerger taken place .
I. 44BBB(i) of the Income-tax Act, 1961, the presumptive income is taken as 10% of
the eligible receipts in the hands of eligible assessee.
J. The deduction for amortization of preliminary expenses under section 35D is
allowable at 20% of the qualifying expenditure in each of the 5 successive years
beginning with the year in which business commences.
K. Capital Expenses is a non-recurring expenditure whereas revenue expenses is
normally a recurring one.
L. Sec 28 defines various income which are chargeable to tax under the head
"Profits and gains of business or profession".
M. Expenditure incurred towards demerger is deductible in 5 equal annual
installments under Section 35DD of the Income-tax Act, 1961.
13. True and False/Correct And Incorrect
A. Business expenses are allowed to be deducted from" business in come even if
they are in the nature of personal expenditure of the assessee, as long as they are
reasonable.
Ans. False. No personal expenses shall be allowed u/s 37(1).
B.Where business is carried on, on behalf of the assessee's minor child (whose
income is clubbed in assessee's hands), by the assessee, which is besides
assessee's own business , the gross receipts of both should be reck oned for
judging the applicability of section 44AB of the Income-tax Act, 1961.
Ans. False. For the purpose of Sec.44AB, gross receipt or turnover from business
of assessee-individual shall be considered.
C. No disallowance under Section 40A(3) of the Income-tax Act, 1961 arises where
an assessee makes a cash payment exceedings Rs. 20,000 towards purchase of a
capital asset.
Ans. True. Sec.40A(3) deals with expenditure covered u/s 30 to 37. Hence, any
cash payment made for capital expenditure, subject to depreciation, is not cov ered by Sec.40A(3).
D. Depreciation is allowed when it is claimed.
Ans. False. According to explanation 5 to Sec.32, depreciation is allowed even if it
is not claimed by the assessee.
E. In the case of a dealer in shares, Income by way of dividend is taxable under the
heads "Profits and gains of business or profession".
Ans. False. Dividend on shares is specifically covered under the head 'Income from
Other Sources'.
F. An assessee owns 11 trucks. One truck is always kept as a spare vehicle and is
never plied on the road. Since only 10 vehicles are plied on the road at any given
point of time, the provisions of section 44AE of the Income Tax Act, 1961, can be
availed by the assessee.
Ans. False. The benefit u/s 44AE is available only if the assessee does not own more
than 10 trucks. However, in the instant case, assessee is owning more than 10
trucks, hence Sec.44AE is not applicable.
G. Municipal tax in respect of staff quarters is deductible only if it is paid, in
computing business income.
Ans. True. As per Sec. 43B, while computing business income, deduction in
respect of any tax, duty, cess, etc. is allowable on payment basis.
H. Advertisement in any souvenir, brochure, pamphlet or the like published by a
political party is not deductible under Section 37(2B) of the Income-tax Act, 1961.
Ans. True. Expenditure incurred by an assessee on advertisement in any souvenir, brochure, trade, pamphlet or like, published by a political party is disallowed u/s 37(2B).
14.Multiple Choice Questions
A. Long-term capital gains arising on compulsory acquisition of agricultural land
held by a domestic company within specified urban limits is
(a) not exempt under Section 10(37);
(b) exempt under Section 10(37) in full;
(c) 50% of the receipt is exempt under Section 10(37);
(d) 25% of the receipt is exempt under Section 10(37).
Ans. (a) not exempt under Section 10(37).
B. In case of an investor in shares, in respect of shares sold, securities transactions
tax paid (at the time of purchase of the said shares earlier), is
(a) to be added to the cost of acquisition;
(b) to be deducted as an expenditure connected with transfer;
(c) not deductible at all while computing capital gains;
(d) none of the above.
Ans. (c) not deductible at all while computing capital gains.
C. In respect of listed shares held for 10 months sold on 12.8.2010, the rate of tax
in respect of capital gains is
(a) 10%;
(b) 20%;
(a) 15%;
(c) not determinable, as the capital gains will form part of the total income
whose other components are not known.
Ans. (c) 15%
D. Capital gains arising to an individual/HUF is exempt from tax under section
10(37) if the land was being used for agriculture purposes by such HUF or
individual or parent of his during a period of or more immediately preceding the
date of transfer.
(a) 2 years,(c) 12 months,
(b) 36 months,(d) 6 months
Ans. (a) 2 years
E. Long term capital gain arising to an assessee on the sale of a capital asset is
exempt under Section 54EC of the Income-tax Act, 1961
(a) To the extent of investment in specified bonds up to a limit of X 100 lakhs.
(b) To the extent of 50% of investment in certain bonds up to a limit of Rs. 50 lakhs.
(c) To the extent of investment of capital gain in specified bonds not exceeding Rs. 50
lakhs.
(d) Proportionate to the extent of investment of net sale proceeds in specified
bonds, not exceeding Rs. 50 lakhs.
Ans. (c) To the extent of investment of capital gain in specified bonds not exceeding Rs. 50 lakhs.
15. Fill in the Blanks
A. 2010 - The cost of acquisition of 100 bonus shares, where the original shares
(100 nos.) were acquired for Rs.30,000 is Nil.
16. True and False/Correct and Incorrect
A. Long-term capital gains arising from units of debt-oriented equity funds for
which securities transactions tax has been paid in a recognized stock exchange is
exempt.
Ans. False. Long-term capital gains arising from units of equity-oriented equity
funds for which securities transactions tax has been paid in a recognized stock
exchange is exempt u/s 10(38).
B. For computation of capital gains, full value of consideration arising from the
transfer of a capital asset, being land or building or both, shall be the value
adopted by the "Stamp Valuation Authority" for payment of stamp duty or the
consideration accruing or received from the transfer, whichever is less.
Ans. False. As per Sec.50C, in case of transfer of immovable capital asset being
land or building or both, sale consideration shall be higher of the following:
1. Actual consideration received or accrued on such transfer; or
2. The value adopted or assessed or assessable by any authority of a State
Government (i.e. Stamp Valuation Authority) for the purpose of payment of
stamp duty.
C. Surplus on sale of motor car on which depreciation has been allowed for all year
by proprietor of a business will be taxed as long term capital gain.
Ans. False. Surplus on sale of motor car on which depreciation has been allowed for
all year by proprietor of a business will be taxed as short term capital gain.
D. Short-term capital gains arising from sale of listed shares through a recognized
stock exchange, for which security transaction tax has been paid, will be charged to
tax at a concessional rate of 10%.
Ans. False. Short-term capital gains arising from sale of listed shares through a
recognized stock exchange, for which security transaction tax has been paid, will
be charged to tax at a concessional rate of 15%.
Multiple Choice Questions
17. (A)Gift received from one or more unrelated person(s) during the previous year
shall form part of an individual's income, if the aggregate of gifts exceeds
(a) Rs. 50,000
(b) Rs. 1,00,000
(c) Rs. 1,35,000
(d) Rs. 1,65,000
Ans. (a) Rs. 50,000
B. Cash gift received under Section 56(2)(vii) from non relatives are not taxable
upto
(a) Rs. 1,00,000;
(b) 175,000;
(a) Rs. 50,000;
(c) Rs. 25,000
Ans. (c) Rs. 50,000.
C. Mr. X gifts Rs.60,000 to the HUF of which he is member; said amount will be
treated as income of
(a) Mr. X;
(b) The HUF;
(c) None, as it is exempt;
(d) None of the above.
Ans. (b) The HUF.
18. Fill in the Blanks
A. Interest on refund on Income-tax paid in excess is a Taxable receipt.
B. Amount received towards permission for putting up hoarding at the top of the
building is taxable under the head Income from Other Sources.
19. True and False/Correct and Incorrect
A. Mr. A has received gift of Rs. 1,50,000 on 12 th December, 2010 from his close
friend who is assessed to income-tax. The same is taxable at the hands of Mr. A.
Ans. True. Said gift is taxable u/s 56(2)(vii).
B. Gift received from assesssee's grandfather in excess of Rs. 50,000 will be taxed
as income from other sources.
Ans. False. Gift from related person is not taxable.
C. Gift of a diamond necklace worth I 2,00,000 received from a friend by an
individual assessee is not taxable as income from other sources.
Ans. False. Such gift is taxable u/s 56(2)(vii).
D. Mr. Janak has received as gift, gold buillion bars worth Rs. 70,000 from his friend
on his birthday on 15.3.2011. The same is not to be treated as income from other
sources.
Ans. False. Gift of bullions is covered under Sec.56(2)(vii), hence, it is taxable
under the head 'Income from Other Sources'.
E. Mr. Saravanan follows mercantile system of accounting. On 13.3.2011, he has
received from the State Government, in respect of lands acquired, interest on
enhanced compensation of Rs.1,50,000 which includes a sum of 120,000 relatable
to this year. The amount assessable is Rs. 20,000.
Ans. False. As per amended provision of Sec. 145A(2), interest on enhanced
compensation is assessable as income from other source in the year of receipts.
Hence, entire Rs.1,50,000 shall be assessable in the A.Y. 2011-12 subject to standard
deduction available u/s 56(2)(viii).
G. Mr. A has three minor children deriving interest from bank deposits to of the tune
of Rs.2,000, Rs.1,300 and Rs.1,600 respectively. Exemption available under Section
10(32) of the Income-tax Act, 1961 is(a) Rs. 4,900;(c)Rs. 4,500;
(b) Rs. 4,300;(d)None of above
(c) Ans. (b) Rs. 4,300
H. Miss Femina, aged 17, is married to Mr. Masculine. Her mother alone is alive.
Income by way of interest on loans, of Miss Femina will be (a) Assessed to tax in the hands of Mr. Masculine;
the assessment year relevant to the financial year in which such application is
made.]
28.True and False /Correct And Incorrect
A. Under Section 12A of the Income-tax Act, 1961, application for regis tration of
charitable trust can be made within one year form the date of creation of the trust.
Ans. False. A trust is required to apply for registration in Form 10A with the Commissioner of Income tax. It is to be noted that exemption will be available from the
assessment year relevant to the financial year in which such application is made.
B. In case of an artificial judicial person, no surcharge is payable where the total
income exceeds Rs.10,00,000.
Ans. True. Surcharge is applicable only in case of corporate assessee.
C. Political parties governed by Section 13A of the Income-tax Act, 1961 have to
file their returns of income within the time limit prescribed under Section 139(1)
even if there is no income chargeable to tax under the Act. Ans. False. As per
Sec.139(4B), the chief executive officer (whether such chief executive officer is
known as Secretary or by any other designation) of any political party is required to
furnish a return in respect of income of such political party, if the amount of gross
total income before allowing exemption u/s 13A exceeds the maximum amount not
chargeable to tax.
29.Multiple Choice Questions
A. The income of any university or other educational institution existing solely for
educational purposes and not for the purposes of profit is exempt under clause
(iiiad) of Section 10(23C) if the aggregate annual receipts'of such university or
educational institution do not exceed Rs.
(a) Rs.100crores,(c) Rs. 10crores,
(b) Rs.1 crore,(d) Rs. 10 lakhs
Ans. (b) Rs. 1 crore
B. Any income chargeable under the based "Salaries" is exempt from tax under
Section 10(6)(viii), if it is received by any non resident individual as remuneration
for services rendered in connection with his employment in a foreign ship where
his total stay in India does not exceed a period days in that previous year.
(a) 90
(b) 182
(a) 60
(c) 120
Ans. (a) 90 days
C. The following is not a venture capital undertaking for the pur poses of
Sec.10(23F), if engaged in business of(a) Generation of power
(b) Telecommunications
(c) Providing infrastructural facility
(d) Dairy farming whose shares are not listed in a recognized stock exchange
Ans. (d) Dairy farming whose shares are not listed in a recognized stock
exchange.
30. Fill in the Blanks
A. To claim the benefit under Section 10A, SEZ undertaking having a turnover of
rupees two crores, should file the return of income on or before 31st Oct 2011.
B. Exemption under Section 10B of the Income-tax Act, 1961 is available till
assessment year A.Y. 2012-13.
31. True and False /Correct and Incorrect
A. Amount received under Keyman insurance policy is not exempt under Section
10(10D) of the Income-tax Act, 1961.
Ans. True. Amount received under Keyman insurance policy is specifically excluded
from exemption u/s 10(10D).
B. Amount received under Reverse Mortgage Scheme is taxable as income under
the head 'income form other sources'.
Ans. False. Amount received under Reverse Mortgage Scheme is exempted u/s
10(43).
C. In case of assesses other than companies, the following is advance tax rate to
be payable on or before of 15lh September:
(a) 15 per cent(c) 45 per cent
(b) 30 per cent(d) 60 per cent
Ans. (b) 30 per cent.
32. Fill in the Blanks
While effecting the tax deduction at source, education cess and special higher
education cess totalling 3% need not (should/need not) be also deducted from the
amount due or payable to the deductee.
33.True and False/Correct and Incorrect
A. As per Section 194-C of the Income-tax Act, 1961, all Association of Persons and
Body of Individuals are liable to deduct tax at source from specified payments made
to resident contractors.
Ans. False. An association of persons or a body of individuals, whose books of
account are required to audited u/s 44AB (due to turnover or gross receipt criteria)
during the financial year immediately preceding the financial year is liable to deduct
tax at source.
B. The rate of TDS applicable for payment made on 28.2.2011 to non-individual
sub-contractor, as per section 194C, is 2%.
Ans. True. As per Sec. 194C, where payee is a other than individual and HUF, tax
shall be deducted @ 2%.
C. Only in the TDS certificate furnished by the deductor, quoting the PAN of
deductor is compulsory and not in the other correspondences between the
deductor and the deductee.
Ans. False. As per Sec. 206AA, PAN of deductor is required to be quoted on TDS
Statement and other correspondence.
34. Multiple Choice Questions
A. In case of companies deriving loss for any assessment year, filling of return of
income within the due date laid down in Section 139(1) is compulsory
(a) only where the Department issues notice to the assessee-company;
(b) for domestic companies only;
(c) for foreign companies only;
Ans. False. A trust forfeits exemption only in circumstances given in Section 21A of
the Wealth-tax Act.
C. The term 'individual', as a defied in the Wealth-tax, 1957 means only a single
human being.
D. The term 'Individual' as defined in Wealth tax Act, 1957 means only a single
human being.
Ans. False. As per various court decisions, individual includes group of individuals
forming one unit.
E. Under the Wealth Act, 1957 a person who is once treated as a citizen of India,
continues to be treated as a citizen of India for ever.
Ans. False. If a person voluntarily acquired citizenship of another country, he would
cease to be a citizen of India.
F. Is it correct to state that every member of AOP is an assessee for the purpose of
wealth tax?
Ans. Correct. As per Sec. 2(c) read with Sec. 21AA of the Wealth-tax Act, assessee
includes every member of the AOP.
G. A political party is exempt from paying wealth tax.
Ans. True. As per Sec. 45, a political party is exempt from paying wealth tax.
H. The maximum amount of penalty leviable under Section 18(1)(c) of the Wealthtax Act, 1957 for concealing the particulars of any asset chargeable-tax is five times
the amount of tax sought to be evaded.
Ans. True. The maximum amount of penalty leviable u/s 18(1)(c) of the Wealth-Tax
Act, 1957 for concealing the particulars of any asset chargeable-tax is five times the
amount of tax sought to be evaded.
I. An individual himself has to sign the return of wealth and whatever be the
contingency, cannot authorize another persons to sign on his behalf.
Ans. False. As per Sec.15A, where for any reason, if an individual is not in a position
to sign his return, he can authorize another person.
J. A company owns a plot of urban land comprising of area of 500 square metres.
Exemption is not available in respect of this asset under the pro vision to Section
5(vi) of the Wealth Tax Act, 1957.
Ans. False. Exemption u/s 5(vi) is not available to a company-assessee.
K. Vacant side held as stock-in-trade is not liable for wealth tax for 12 years from
the end of the year in which it was acquired.
Ans. False. Vacant side held as stock-in-trade is not liable for wealth tax for 10
years from the end of the year in which it was acquired.
True/False
Question
Income Tax Act, 1961 recognizes Written Down Value (WDV)
method as well as straight line method for the computation of depreciation u/s 32
this act.
Correct
Answer
False
Your Answer
False
to include in
Correct
Answer
Grossed up
Your Answer
Grossed up
True/False
Question
Interest paid on the loan for acquiring a capital asset will be
considered to be a part of cost of acquisition.
Correct
Answer
True
Your Answer
True
Rs. 18,000
True/False
Question
As per section 2(11) of the Income Tax Act, Block of Assets includes
both tangible as well as intangible assets.
Correct
Answer
True
Your Answer
True
Correct
Answer
Residential status
Your Answer
Residential status
Answer
Perquisites which are taxable in case of all types of employees , Perquisites which
are taxable only in the hands of specified employee
Your Answer
Perquisites which are taxable in case of all types of
employees , Perquisites which are taxable only in the hands of specified employee
182
Assessment year
Correct
Answer
of various payments which are allowed as deduction only if they are actually paid
for.
Section 43B Clause No-21
Your Answer
Correct
Answer
Short Term Capital Gains. , Long term Capital Gains
Your Answer
Correct
Answer
Gross total income
Your Answer
Correct
Answer
calendar years :Only one journey can be carried forward to the next block.
Your Answer
to the assessing
House Property
Scrutiny Assessment
True/False
Question
While computing the profits from Business and profession, the
business or profession must be carried out during the previous year.
Correct
Answer
True
Your Answer
True
Retirement , Resignation
Correct
Answer
Standard deduction , Interest on borrowed capital , Municipal taxes
Your Answer
Fully taxable.
Taxable
Question
Correct
Answer
Deduction will be Rs.
20000
Your Answer
20000
B is available for 10
Correct
Answer
consequent assessment years from the year of commencement of production.
10
Your Answer
10
True/False
Question
Correct
Answer
False
Your Answer
False
Correct Answer
Your Answer
Disallowable
Expenditure
Litigation Expenses in connection with recovery of a debt which is not a trading debt
Litigation Expenses in connection with recovery of a debt which is not a trading debt
Business
Includes trade, commerce, or manufacture or any adventure
or concern in the nature of trade, commerce or manufacture
Includes trade, commerce, or manufacture or any adventure or concern in the
nature of trade, commerce or manufacture
Profession
Capital Expenditure
shares
Includes vocation
Includes vocation
True/False
Question
Any recreational facility provided by the employer to a group of
employees (not being restricted to a select few employees) is not exempt from tax.
Correct
Answer
False
Your Answer
False
True/False
Question
In case of deductions for medical treatment under Section 80DDB
the amount of deduction will be reduced by the amount received under an
insurance policy or the amount reimbursed by the employer.
Correct
Answer
True
Your Answer
True
True/False
Question
Any advance tax paid before 31st March is treated as advance tax
paid during the previous year.
Correct
Answer
True
Your Answer
True
Correct
Answer
Gross annual value
Your Answer
True/False
Question
Entertainment Allowance received by the employees from the
private sector is taxable in the hands of the employee.
Correct
Answer
True
Your Answer
True
Correct Answer
Your Answer
RS.12,500
Rs. 1,000
of Rs. 1,45,000 including the dividend from Indian companies amounting to Rs.
10,000. She invests Rs. 50,000 in PPF during the said Assessment Year. her tax
liabilit is
Any contribution made
88
88
Correct
Answer
Capital gains , Other income , House property
Your Answer
True/False
Within six months from the date of transfer of the long-term capital
Registration
Number:
Name:
s As On:
200425352
Sarada J.H Subject:
12/02/2006
True/False
Question
Income Tax Act, 1961 recognizes Written Down Value (WDV) method as
well as straight line method for the computation of depreciation u/s 32 this act.
Correct Answer
False
Your Answer
False
to include in income
Correct Answer
Grossed up
Your Answer
Grossed up
True/False
Question
Interest paid on the loan for acquiring a capital asset will be considered to be a part
of cost of acquisition.
Correct Answer
True
Your Answer
True
True/False
Question
As per section 2(11) of the Income Tax Act, Block of Assets includes both tangible as
well as intangible assets.
Correct Answer
True
Your Answer
True
182
Correct Answer
Supervision , Control , Encouragement
Your Answer
Supervision , Control , Encouragement
True/False
Question
While computing the profits from Business and profession, the business or
profession must be carried out during the previous year.
Correct Answer
True
Your Answer
True
Your Answer
Retirement , Resignation
Your Answer
80 G Donations , 80 IA profits and gains of infrastructure companies
True/False
Question
Income from subletting is treated as income from house property.
Correct Answer
False
Your Answer
False
Disallowable Expenditure
Litigation Expenses in connection with recovery of a debt which is not a
trading debt
Litigation Expenses in connection with recovery of a debt which is not a trading debt
Business
Includes trade, commerce, or manufacture or any adventure or concern in the
nature of trade, commerce or manufacture
Includes trade, commerce, or manufacture or any adventure or concern
in the nature of trade, commerce or manufacture
Capital Expenditure
Expenditure incurred by a company with the issue of rights shares
Premium on redemption of Debentures
True/False
Question
Any recreational facility provided by the employer to a group of employees (not
being restricted to a select few employees) is not exempt from tax.
Correct Answer
False
Your Answer
False
True/False
Question
In case of deductions for medical treatment under Section 80DDB the
amount of deduction will be reduced by the amount received under an insurance
policy or the amount reimbursed by the employer.
Correct Answer
True
Your Answer
True
True/False
Question
Any advance tax paid before 31st March is treated as advance tax paid during the
previous year.
Correct Answer
True
Your Answer
True
True/False
Question
Entertainment Allowance received by the employees from the private sector is
taxable in the hands of the employee.
Correct Answer
True
Your Answer
True
Mr. A, a 70 years old Senior Citizen, has the Gross Total Income of Rs.
2,50,000 during the Assessment Year 2005-2006. He invested Rs.
50,000 in the tax saving bonds of ICICI on 10th June 2004. His tax liability for the A
Y 2005-2006.
RS.12,500
RS.12,500
During the Assessment Year 2005-2006, Mrs. A, age 58 years, has the Gross Total
Income of Rs. 1,45,000 including the dividend from Indian companies amounting to
Rs. 10,000. She invests Rs. 50,000 in PPF during the said Assessment Year. her tax
liabilit is
Rs. 1,000
Rs. 1,000
Correct Answer
Within six months from the date of transfer of the long-term capital asset
Your Answer
Within six months from the date of transfer of the long-term capital asset
True/False
Question
Income from partnership firms is exempt from taxation for the partners
Correct Answer
True
Your Answer
False
Registration
Number:
Name:
As On:
200425352
Sarada J.H Subject:
12/02/2006
Assignment Date
11/02/2006
Result
Pass
Taxation
------------LIST OF ATTEMPTED QUESTIONS AND ANSWERS
Select The Blank
Question The basic advantage of having an agent in the export market is
Correct Answer He is knowledgeable of the marketing condition
Question Why should a market researcher check a country's import tariffs when he
is
investigating it as an export market?
Correct Answer It can affect the competitiveness of product against products made
within the market
Your Answer It can affect the competitiveness of product against products made
within the market
Multiple Choice Multiple Answer
Question This question is based on the case study "Oriental Silk Pvt. Ltd.". What are
the distribution channels used for imports of silk products into USA market?
Correct Answer Merchant intermediaries , Departmental stores
Your Answer Merchant intermediaries , Departmental stores
True/False
Question This question is based on the case study "Oriental Silk Pvt. Ltd.". Oriental
entered the
US market in 1970 with a moderate export of Rs.20 million. Correct Answer False
Your Answer False
Match The Following
Question Correct Answer Your Answer
Indirect exporting Home-based merchant Copyright Business dimensions Channel
network Channel network Legal dimensions Copyright Use of patent
Licensing arrangement Use of patent Home-based merchant
. Correct Answer
True/False
Question Strategies suggested in the Medium Term Export Plan include productmarket penetration strategy for existing products, product-market, diversification
for new products & new markets.
Correct Answer True
Your Answer True
Multiple Choice Multiple Answer
Question Why is packaging so important for product planning?
Correct Answer As it enhances protection , As it gives shelf life for a product
Your Answer As it enhances protection , As it gives shelf life for a product
True/False
Question If foreign retailers are used, the products in question are industrial
products rather than consumer products.
Correct Answer False
Your Answer True
Multiple Choice Multiple Answer
Question How is the nature of international strategy?
Correct Answer Depends on company's objectives , Varies from country to country
Your Answer Depends on company's objectives , Varies from country to country
Select The Blank
Question "make site booking" is a point of checklist of _
Before the fair
Your Answer Before the fair
Correct
Answer
from home
country
True/False
Question In marginal cost pricing for export, competition in foreign markets requires
quotation of a lower price
Correct Answer True
Your Answer True
True/False
Question Policies or regulations regarding quality control & inspection vary
considerably between nations.
Correct Answer True
Your Answer True
Select The Blank
Question This question is based on the case study "Oriental Silk Pvt. Ltd.". Oriental
Silk Private
Limited, is a
_ unit, was one of the leading Indian manufacturers &
exporters of silk fabrics & made-ups
Correct Answer 100% export oriented
Your Answer 100% export oriented
Select The Blank
Question This question is based on the case study "Oriental Silk Pvt. Ltd.". The bulk
of the trade
was handled by
Correct Answer Central buying organizations
True/False
Question Catalogues contain a list of all competitors with product details. Correct
Answer False
Your Answer False
Multiple Choice Multiple Answer
Question What is correct according to geocentric orientation?
Correct Answer Companies view the entire world as a single market , Uniform
inventory management & training
Your Answer Companies view the entire world as a single market , Uniform inventory
management & training
True/False
Question The area of change relates to product adaption requires upgradation of
technology and huge investment in brands.
Correct Answer True
Your Answer True
Select The Blank
Question This question is based on the case study "Chow Flowers Co. Ltd.".
_ was
Thailand's second largest export market for artificial flowers, mostly polyester or
hand-wrapped. Correct Answer Canada
Your Answer Canada
Multiple Choice Single Answer
Question What are the similarities between domestic & international marketing?
Correct Answer Satisfying consumers need
Your Answer Satisfying consumers need
Multiple Choice Single Answer
Question What is the need of marketing research for export-import trade?
Correct Answer To reduce the distance between an exporter & his customers in
terms of marketing
Your Answer To reduce the distance between an exporter & his customers in terms
of marketing
Multiple Choice Single Answer
Question What is the avenue of entry into foreign markets? Correct Answer Contract
manufacturing
Your Answer Contract manufacturing
Multiple Choice Single Answer
Question What is the principal functional division of ministry of commerce &
industry? Correct Answer Export Industries Division
Your Answer Export Industries Division
True/False
Question In regression analysis, dependent variables can be expressed as a linear
function of impendent variables.
Correct Answer True
Your Answer True
True/False
type of question.
True/False
Question The person conducting pharma research should be well qualified so that
not to waste
Doctors time.
Correct Answer True
Your Answer True
True/False
Question The limitations with regression forecasting is that independent variables
must be forecasted before forecasting the dependent variables.
Correct Answer True
Your Answer True
Multiple Choice Multiple Answer
Question Main features of Technical Report are :Correct Answer Minute details of planning data collection , Analysis , Interpretation
Your Answer Minute details of planning data collection , Analysis , Interpretation
Multiple Choice Single Answer
Question How people allocate their time and money to certain products and factors
is depicted by
Correct Answer Psychographic Variable
Your Answer Psychographic Variable
True/False
Question Question phrasing and structure are eliminated in Semantic differential
scale. Correct Answer True
Your Answer True
True/False
Question The popularity of Likert scale is due to its ease of construction and
administration. Correct Answer True
Your Answer True
Multiple Choice Multiple Answer
Question Which are the Export Promotion Councils?
Correct Answer Cashew Export Promotion Council , Handloom Export Promotion
Council , Gem
& Jewellery Export Promotion Council
Your Answer Cashew Export Promotion Council , Handloom Export Promotion Council
, Gem & Jewellery Export Promotion Council
True/False
Question The written contract of a research should cover the penalty clause
covering deficits such
as delays, inadequate data. Correct Answer True
Your Answer True
Multiple Choice Single Answer
Question The producers in the sellers' market are also forced to take decisions
based on the market information because
Correct Answer The resources are scarce
Your Answer The resources are scarce
Multiple Choice Single Answer
Question Scale Intervals can be used for
Correct Answer Age
Your Answer Age
Select The Blank
Question Bibliography contains
.
Correct Answer Information of references and secondary data
Your Answer Information of references and secondary data
Multiple Choice Multiple Answer
Question Online survey methods include :-
at
given
junction
is
45.
Any loans or deposits borrowed or repaid under section 269SS of the Act
provides that the said provisions will not apply to the loans or deposits accepted
by :a)
Government
Government company
b)
Banking company including cooperative bank and post office savings bank
c)
Insurance company
d)
Marks : 2
49.
Any amount paid by an individual as tuition fees to any educational
institution in India for the purpose of full time education of the individual's children.
The maximum allowable limit is :a)
Rs. 12,000 per child per annum
b)
d)
Marks : 2
50.
a)
Gross total income
d)
Question
Condition for deduction from Capital Gains arising from transfer of House property
under Section 54 is :Correct Answer
Assessee must have purchased another residential property one year before or
within two years after the date on which transfer took place , Assessee must
have constructed another residential property within, three years after the date on
which the transfer took place.
Your Answer
Assessee must have purchased another residential property one year before or
within two years after the date on which transfer took place , Assessee must
have constructed another residential property within, three years after the date on
which the transfer took place.
True/False
Question
Rebates as per the provisions of Section 88B of the Act are not available from the
tax on long-term capital gains.
Correct Answer
False
Your Answer
True
Operation of Ship , Hotels situated in hilly area, rural area or place of pilgrimage ,
Company engaged in scientific and industrial research
Your Answer
Repairs & maintenance , Insurance premium , Ground rent
True/False
Question
Loss under the head Profits from Business or Profession can be adjusted against the
Income from Salaries.
Correct Answer
False
Your Answer
False
True/False
Question
If assessee owns more than one house properties, for his self occupation, annual
value of any one of the house property of his own choice is treated as nil & another
house as rented out.
Correct Answer
True
Your Answer
True
Your Answer
Wealth Tax , Revenue expenditure , Personal expenditure
True/False
Question
Any Employer's Contribution payable by the assessee towards any provident fund or
superannuation fund or gratuity fund or any other fund for the welfare of the
employees, if they are actually paid, allowed as deduction.
Correct Answer
True
Your Answer
True
True/False
Question
For being resident of India, a person must be citizen of India.
Correct Answer
False
Your Answer
True
True/False
Question
Sales tax and expenses in connection with the proceedings for the assessment
of sales tax are allowed as business expenditure.
Correct Answer
True
Your Answer
True
Perquisites
Indicate benefits or
free of cost or at the
Indicate benefits or
free of cost or at the
Retrenchment Compensation
Compensation received by a worker at the time of retrenchment
Compensation received by a worker at the time of retrenchment
Traveling Allowance
Any allowance granted to meet the cost of travel on tour or on transfer of duty.
assistance received or due to an assessee from his employer, for himself and his
family for proceeding on leave to any place in India or to any place in India after the
retirement or termination of his service
Question
Annual value of any one palace in possession of a former ruler is :Correct Answer
Exempt
Your Answer
Reduced from income from house property
True/False
Question
Income tax paid is allowed as deduction while calculating profit from business or
profession.
Correct Answer
False
Your Answer
True
Correct Answer
Rs. 50000
Your Answer
Rs.100000
Question
Section 80U allows the deduction in respect of the ________ .
Correct Answer
Permanent physical disability
Your Answer
Permanent physical disability
Question
Any premium paid by the assessee by Cheque as an employer to effect or keep in
force an insurance on the health of his employees is :Correct Answer
Allowed as expenses while calculating profits from business and profession
Your Answer
Allowed as expenses while calculating profits from business and profession
True/False
Question
Rebates as per the provisions of Section 88 of the Act are not available from the tax
on long-term capital gains.
Correct Answer
True
Your Answer
False
True/False
Question
Jewellery held by the assessee is not a Capital Asset.
Correct Answer
False
Your Answer
False
Question
Salary paid by any partnership firm to its working partners is taxable as :Correct Answer
Income from Business and Profession
Your Answer
Income from Business and Profession
True/False
Question
The payments made u/s 43B of the Income Tax Act are allowed as deductions only if
they are actually paid.
Correct Answer
True
Your Answer
True
All intangible assets like Patents, Trademarks, Copy Rights, Licenses etc. Rate of
depreciation is 25%
Rate of depreciation is 25%
Temporary Structures
Rate of depreciation is 100% Rate of depreciation is 100%
Computers
Rate of depreciation is 60% Rate of depreciation is 60%
Score Card
Registration
Number:
Name:
Subject:
Assignment Statu
s As On:
200404214
Manpreet Malhotra
Taxation
19/03/2006
Assignment Date
18/03/2006
69 Out of 100.
Result
Pass
True/False
Question
For being resident of India, a person must be citizen of India.
Correct Answer
False
Your Answer
False
True/False
Question
A person who is a Senior Citizen who has attained the age of 65 years is not entitled
to the rebate u/s 88 of the Act.
Correct Answer
False
Your Answer
False
True/False
Question
True/False
Question
Clause N0-30 of the Tax Audit requires that, if the cost Audit of the company carried
out, the report of such audit should be enclosed to the Tax Audit Report.
Correct Answer
True
Your Answer
True
Deductions of Rent, Rates, Repairs, Taxes and Insurance on Buildings are available
u/s 30 u/s 30
Deductions of Repairs & maintenance of machinery, plant & furniture are available
u/s 31
u/s 31
Correct Answer
The maximum allowable limit is Rs. 10,000
Your Answer
The maximum allowable limit is Rs. 10,000
True/False
Question
The value of benefit resulting from the payment made by the employer in a club for
any expenditure incurred by the employee shall be taken as perquisites unless the
said expenses are incurred wholly and exclusively for official purposes.
Correct Answer
True
Your Answer
True
True/False
Question
Rebates as per the provisions of Section 88 of the Act are not available from the tax
on longterm capital gains.
Correct Answer
True
Your Answer
True
Your Answer
Winning from betting , Interest on securities of local authority
True/False
Question
Deductions available as per the provisions of Chapter VI of the Act are not available
for the long-term capital gains.
Correct Answer
True
Your Answer
True
True/False
Question
Income earned & received outside India & remitted to India is taxable for resident &
ordinary resident
Correct Answer
True
Your Answer
True
Correct Answer
0.35
Your Answer
0.2
True/False
Question
Interest is payable by the assessee for not paying the Advance tax or if the Advance
tax paid by the assessee is less than 80% of the Assessed tax after adjusting the
amount of TDS and Advance tax Paid
Correct Answer
False
Your Answer
True
True/False
Question
Dividend received from domestic company to its shareholders is taxable in the
hands of the shareholder.
Correct Answer
False
Your Answer
False
Company.
Correct Answer
Indian
Your Answer
Domestic Company
Your Answer
Expenditure in connection with the preparation of feasibility/project report,
engineering services, or conducting market survey , Legal charges and fees for
registering the company as per the provisions of company Act, 1956 , Charges in
connection with drafting and printing of memorandum of association and Articles of
Association
True/False
Question
The amount of telephone bills (including the mobile phone bills) of the employee
reimbursed by the employer is exempt from tax.
Correct Answer
True
Your Answer
True
True/False
Question
The amount of expenses including membership fees and annual fees incurred by
the employee on credit card and which are paid by the employer shall be added as
the perquisites unless the said expenses are incurred wholly and exclusively for
official purposes.
Correct Answer
True
Your Answer
True
Disallowable Expenditure
Litigation Expenses in connection with recovery of a debt which is not a trading debt
Litigation Expenses in connection with recovery of a debt which is not a trading debt
Business
Includes trade,
nature of trade,
Includes trade,
nature of trade,
Capital Expenditure
Expenditure incurred by a company with the issue of rights shares
Expenditure incurred by a company with the issue of rights shares
Question
From annual value, following deductions are allowed :Correct Answer
Standard deduction , Interest on borrowed capital , Municipal taxes
Your Answer
Standard deduction , Interest on borrowed capital , Municipal taxes
Taxation-Saroj2
Your Answer The person who is director of a company , The employee who has
substantial interest in the company by having 20% or more of the voting power ,
The employee whose income under the head salaries (including all the taxable
monetary payments of salary but excluding the value of any
non-monetary benefits or perquisites), after allowing deductions under Section
16, exceeds Rs. 50,000
True/False
Question Deduction u/s 80E for repayment of loan taken for higher education is
available if the loan must have borrowed by the assessee himself or his Father
True/False
Question
The consideration for transfer of Capital Asset is received by the
transferor is not material while Capital gain chargeable to tax.
Correct Answer
Banking company including cooperative bank and post office
savings bank , Government , Government company
Your Answer
Government , Government company , Banking company including
cooperative bank and post office savings bank
ESOPS
ESOPS
Commuted Pension
Indicates the lump sum received in lieu of the periodical
Indicates the lump sum received in lieu of the periodical
Treatment of Perquisite
Taxed in the hands of employee as taxable salary
Taxed in the hands of employee as taxable salary
True/False
Question A person who is a Senior Citizen who has attained the age of 65 years is
not entitled to the rebate u/s 88 of the Act.
Correct Answer Within six months from the date of transfer of the long-term capital
asset
Your Answer Within six months from the date of transfer of the long-term capital
asset
Correct Answer 8
Your Answer 3
By an individual or a
Mr. A, a 70 years old Senior Citizen, has the Gross Total Income of Rs.
2,50,000 during the Assessment Year 2005-2006. He invested Rs. 50,000 in the tax
saving bonds of ICICI on 10th June 2004. His tax liability for the A Y
2005-2006.
RS.12,500
RS.12,500
During the Assessment Year 2005-2006, Mrs. A, age 58 years, has the Gross Total
Income of Rs. 1,45,000 including the dividend from Indian companies amounting to
Rs. 10,000. She invests Rs. 50,000 in PPF during the said Assessment Year. her tax
liabilit is
Rs. 1,000
Rs. 1,000
Correct Answer 15
Your Answer 15
True/False
Question Rebates as per the provisions of Section 88 of the Act are not available
from the tax on long-term capital gains.
Question
What is the treatment of principal amount of loan borrowed for the
purchase or construction of a residential house?
Correct Answer Rebate u/s 88 for such amount not exceeding Rs. 20,000
Your Answer Rebate u/s 88 for such amount not exceeding Rs. 20,000
Correct Answer
The amount of gratuity has actually become payable to the
employees during the previous year , The provision has been made for the payment
of a sum by way of contribution to an approval gratuity , The other
than the above two situations, any provision made for the payment of gratuity is not
allowed as deduction
Your Answer
The amount of gratuity has actually become payable to the
employees during the previous year , The provision has been made for the payment
of a sum by way of contribution to an approval gratuity
True/False
Question If assessee owns more than one house properties, annual value of any
one of the house property can be treated as nil, and such option can be changed
year on year basis.
True/False
Question Income from subletting is treated as income from house property. Correct
Answer False
Your Answer False
Correct Answer 65
Your Answer 65
Correct Answer
Employee's contribution to PF is exempt from tax , Interest on
employee's contribution is taxable as "Income from Other Sources" , Employer's
Contribution to PF and interest thereon is taxable as "Income from salaries"
Your Answer
Employee's contribution to PF is exempt from tax , Interest on
employee's contribution is taxable as "Income from Other Sources" , Employer's
Contribution to PF and interest thereon is taxable as "Income from salaries"
True/False
Question Any advance tax paid before 31st March is treated as advance tax paid
during the previous year.
Correct Answer True
Your Answer True
True/False
Question A woman assessee below the age of 65 years is also entitled to rebate
u/s 88.
Correct Answer True
Your Answer True
Allowance received.
True/False
Question Loss from house property can be adjusted against the income from
any other house property. Correct Answer True Your Answer True
True/False
Question Annual premium paid by the employer for the accident insurance policy
taken by the employer in the name of the employee is chargeable to tax.
Question
Income earned in previous year is subjected to tax in :Correct Answer
Assessment year
Your Answer
Assessment year
True/False
Question
Any sum payable by the assessee by way of tax, duty, cess or fee is allowed as
deduction even though they are not actually paid.
Correct Answer
False
Your Answer
True
True/False
Question
As per section 2(11) of the Income Tax Act, Block of Assets includes both tangible as
well as intangible assets.
Correct Answer
True
Your Answer
True
Question
Combined total of five heads of income equals :Correct Answer
Gross total income
Your Answer
Gross total income
Your Answer
31st March
Your Answer
Gross total income
Your Answer
He can carry over the exemption to the next block of four years i.e. 2002-2005
provided that he avails the exemption of LTC in the first calendar year of the next
block i.e. 2002.
True/False
Question
Loss under the head Profits from Business or Profession can be adjusted against the
Income from Salaries.
Correct Answer
False
Your Answer
False
182
True/False
Question
Bad Debts recovered not allowed as deduction in earlier years is not taxable in any
year.
Correct Answer
True
Your Answer
False
Multiple Choice Multiple Answer
Question
Short Term Capital Loss can be adjusted against :Correct Answer
Short Term Capital Gains. , Long term Capital Gains
Your Answer
Long term Capital Gains , Short Term Capital Gains.
Multiple Choice Single Answer
Question
The amount of advance tax payable by non corporate assessees before 15th
March of Previous year is :Correct Answer
100% of advance tax payable
Your Answer
100% of advance tax payable
Multiple Choice Multiple Answer
Question
An assessee can claim deduction under section 35 in relation to the expenditure
incurred on scientific research in the field of natural gas or applied sciences if :Correct Answer
Any revenue expenses incurred by the assessee for carrying out the scientific
research provided that such research is related to his business , Any capital
expenses incurred by the assesse himself for carrying out the scientific research
provided that such research is related to his business , The assesse is a company
share capital of
Correct Answer
Authorized
Your Answer
Issued
True/False
Question
If a person is required to quote the PAN and he quotes or intimates a false number
then he may be liable to pay a penalty of Rs. 25000.
Correct Answer
False
Your Answer
False
What is the tax treatment of the Lump sum received from unrecognized provident
fund on the retirement or resignation or death of the employee?
Correct Answer
Employee's contribution to PF is exempt from tax , Interest on employee's
contribution is taxable as "Income from Other Sources" , Employer's Contribution to
PF and interest thereon is taxable as "Income from salaries"
Your Answer
Employee's contribution to PF is exempt from tax , Interest on employee's
contribution is taxable as "Income from Other Sources"
True/False
Question
If the capital asset becomes the property of the assessee by virtue of gift or will, the
period for which the capital asset is held by the previous owner should be excluded
while deciding the holding period.
Correct Answer
False
Your Answer
True
True/False
Question
Amount paid by the employer in respect of any leave standing to the credit of the
employee after the date of furnishing return of income, this sum was payable in the
previous year is allowed as deduction.
Correct Answer
False
Your Answer
False
True/False
Question
A woman assessee below the age of 65 years is also entitled to rebate u/s 88.
Correct Answer
True
Your Answer
True
Perquisites
Indicate benefits or amenities provided by the employer to the employee, either
free of cost or at the concessional rate
Indicate benefits or amenities provided by the employer to the employee,
either free of cost or at the concessional rate
Retrenchment Compensation
Compensation received by a worker at the time of retrenchment
Compensation received by a worker at the time of retrenchment
Traveling Allowance
Any allowance granted to meet the cost of travel on tour or on transfer of duty.
Any allowance granted to meet the cost of travel on tour or on transfer of duty.
True/False
Question
Income from subletting is treated as income from house property.
Correct Answer
False
Your Answer
False
Question
In case of Payment of Interest on Securities no tax is required to be deducted under
the following circumstances :Correct Answer
If the debentures are issued by a widely held company and the debentures are
listed on a stock exchange and if the amount of interest does not exceed Rs.
2,500 during the financial year. , If the interest paid is on State or Central
Government Securities , If the debentures are issued by an institution, authority,
Public Sector Company or cooperative society as the Central Government may
notify.
Your Answer
If the interest paid is on State or Central Government Securities , If the debentures
are issued by a widely held company and the debentures are listed on a stock
exchange and if the amount of interest does not exceed Rs.5,000 during the
financial year.
)
Match The Followi ng
Question Correct Answer Your Answer
Intangible Capital Asset Tenancy Rights Equity Shares held for a period of Less than
36 months
Excluded from ambit of term Capital Asset Stock in Trade Land
Short Term Capital Asset Equity Shares held for a period of Less than 36 months
Stock in Trade
Long Term Capital Asset Land held for a period of 36 months or more Land held for a
period of 36 months or more
True/False
Question Professional Tax paid by a person carrying on the business is allowed as
business expenditure. Correct Answer True
Your Answer True
Match The Followi ng
Question Correct Answer Your Answer
Retrenchment Compensation Exemption can be claimed u/s 10(10B) of the Income
Tax Act Terminal
Compensation
Salary or wages for the purpose of calculating Death-Cum -Retirement Gratuity.
Basic Salary plus Dearness all owance Basic Salary plus Dearness allowance
Any amount of compensation received or receivable by the employee from the
employer at the time of termination of his employment or at the time of
modification of terms and conditions in connection wi th the employment. Terminal
Compensation Treated as income from other sources.
Any Death-Cum-Retirement Gratuity received Treated as income from salary Treated
as income from salary
True/False
Question Di vidend received by the shareholder is treated as income chargeable to
tax u/s 10(34) of the IT
Act.
Correct Answer False
Your Answer False
Question For fi ling the returns of income, Form No. 2C is to be fi lled in by :- Correct
Answer Persons falli ng under One by Six Scheme
Multi ple Choice Multi ple Answer
Question For the purpose of Section 40 A (2) of the IT Act, if assessee is a firm, the
term "Specified
Persons" may include :Correct Answer Any partner of the fi rm or his relative , Any person having the
substantial interest in the business or profession of the firm or any director or
partner of such company or firm or any relative of such person. , Any person who
carries on business or profession and in his business or profession the assessee or
any partner of such firm or relative of such partner has substantial interest.
True/False
Question Refund of Income tax is taxable as Income from other sources. Correct
Answer False
to the date
Question Capital Gains are chargeable to Income Tax if there is any profit or gain
arising from the transfer of a :Correct Answer Capital Asset
1.
The Uniform Capitalization Rules of Code Sec. 263A apply to retailers whose
average gross receipts for the preceding three years exceed what amount?
a.
b.
c.
d.
$1,000,000
$2,500,000
$5,000,000
$10,000,000
Solution:
Choice "d" is correct. The uniform capitalization rules do not apply to inventory
acquired for resale if the taxpayer's average gross receipts for the preceding three
tax years do not exceed $10,000,000.
Choices "a", "b", and "c" are incorrect per the above rule.
2.
An individual taxpayer reports the following items for the current year:
Ordinary income from partnership A, operating a movie theater
in
which
the
taxpayer
materially
$70,000
Net loss from partnership B, operating an equipment rental business
in which the taxpayer does not materially participate
(9,000)
Rental income from building rented to a third party 7,000
Short-term capital gain from sale of stock
4,000
What is the taxpayer's adjusted gross income for the year?
a.
b.
c.
d.
participates
$70,000
$72,000
$74,000
$77,000
Solution:
Choice "c" is correct. Except in the year in which an individual, estate, trust, or
closely-held C corporation disposes of an entire interest in a passive activity
investment, such taxpayers cannot deduct passive activity expenses and losses
against income and gain attributable to non-passive activities. A passive activity is
(i) any activity in which such taxpayers do not materially participate and (ii) as a
general rule, such taxpayers' rental real estate investments regardless of the
extent of such taxpayers' involvement with the rental real estate operations. A
limited exception (the "Mom and Pop Exception") regarding
rental real estate activities is available to individuals, but the facts of this question
do not provide any information which would entitle the taxpayer to the benefits of
this exception.
Hence, the taxpayer can deduct, against the profit from the taxpayer's $7,000
passive activity rental income from the building rented to a third party, only $7,000
of the $9,000 net loss from partnership B which is operating an equipment rental
business in which the taxpayer does not materially participate.
Computation of adjusted gross income for the year:
Ordinary income from partnership A, operating a movie theater
in which the taxpayer materially participates $70,000
Rental income from building rented to a third party (a passive activity) 7,000
Net loss from partnership B, operating an equipment rental business in which the
taxpayer does not materially participate (per the above rule the taxpayer can
deduct only $7,000 of the $9,000
passive activity loss)
(7,000)
Short-term capital gain from sale of stock (fully taxable) 4,000
Adjusted gross income for the year
$74,000
Choices "a", "b", and "d" are incorrect per the above rule and per the above
computations.
3.
On February 1, year 1, a taxpayer purchased an option to buy 1,000 shares of XYZ
Co. for $200 per share. The taxpayer purchased the option for $50,000, which was
to remain in effect for six months. The market declined, and the taxpayer let the
option lapse on August 1, year 1. The taxpayer would report which of the following
as a capital loss on the year 1 income tax return?
a.
$50,000 long term. b.
$200,000 short term.
Solution:
Choice "b" is correct. An option held by an investor is a capital asset. A capital asset
which is sold or exchanged within one year of acquisition will generate either a
short-term capital gain (if the capital asset is sold at a price greater than acquisition
cost) or a short-term capital loss (if the capital asset is sold at a price less than the
acquisition cost). The cost (or other basis) of worthless stock or securities is treated
as a capital loss as if they were sold on the last day of the taxable year in which
they became totally worthless. The option's exercise price is irrelevant with respect
to determining loss on account of the lapse of the options.
In this question, the options, which were capital assets purchased for $50,000 on
February 1, Year 1, became worthless on the lapse date, August 1, Year 1. Thus, the
$50,000 capital loss is treated as having occurred on December 31, Year 1, the last
day of the taxable year in which the options became totally worthless. Because, as
of December 31, Year 1, the options had not been held for more than a year, the
$50,000 capital loss will be reported on the income tax return as a short-term
capital loss.
Choices "a", "c", and "d" are incorrect per the above rules.
4.
A taxpayer lived in an apartment building and had a two-year lease that began 16
months ago. The taxpayer's landlord wanted to sell the building and offered the
taxpayer $10,000 to vacate the apartment immediately. The taxpayer's lease on the
apartment was a capital asset but had no tax basis. If the taxpayer accepted the
landlord's offer, the gain or loss would be which of the following?
a. An ordinary gain.
b. A short-term capital loss. c.
gain.
A short-term capital
Solution:
Choice "c" is correct. A capital asset which is sold or exchanged more than one year
after the date of acquisition will generate either a long-term capital gain (if the
capital asset is sold at a price greater than acquisition cost) or a long-term capital
loss (if the capital asset is sold at a price less than the acquisition cost). In this
question, the lease-hold interest, which is a capital asset, was acquired more than a
year ago, and the basis (acquisition cost) in that capital asset is -0-. So, the receipt
of $10,000 to vacate the apartment will generate a $10,000 long-term capital gain.
Choices "a", "b", and "d" are incorrect per the above rules.
5.
In year 1, a taxpayer sold real property for $200,000, receiving $100,000 at closing
and $100,000 plus accrued interest at the prime rate in the next year. The buyer
also assumed a $50,000 mortgage on the property. The taxpayer's adjusted basis
was $75,000, and the taxpayer incurred $10,000 of selling expenses. If this
transaction qualifies for installment sale treatment, what is the gross profit on the
sale?
a.
b.
c.
d.
$115,000
$125,000
$165,000
$175,000
Solution:
Choice "c" is correct. Unless the taxpayer elects not to use the installment sales
method, the taxpayer generally will recognize gain (but not loss) over the period
during which the taxpayer receives cash payments (other than interest income)
from the sale of noninventory assets. Note that this method is not available for the
sale of stocks and securities traded on an established securities market.
The gross profit will be the amount realized less selling costs less the adjusted basis
of the property sold (note: IRS forms require the taxpayer (i) to increase the
adjusted basis by the amount of the selling costs and (ii) not reduce the amount
realized by the selling costs. This requirement does not change the amount of
gain/gross profit.
If the contract requires that payments be made in a subsequent year and if the
contract requires little or no interest, the taxpayer may have to reduce the amount
realized by the amount of unstated interest. This rule does not apply here because
the contract requires that the buyer pay accrued interest at the prime rate in the
next year.
Amount realized:
Cash to be received, excluding interest income
$200,000
Related debt assumed by the buyer
50,000
Less: selling expenses
(10,000)
Amount realized
$240,000
Less: Adjusted basis
(75,000)
Gain realized/gross profit $165,000
Choices "a", "b", and "d" are incorrect per the above rule and per the above
computations.
6.
Upon her grandfather's death, Jordan inherited 10 shares of Universal Corp. stock
that had a fair market value of $5,000. Her grandfather acquired the shares in 1995
for $2,500. Four months after her grandfather's death, Jordan sold all her shares of
Universal for $7,500. What was Jordan's recognized gain in the year of sale?
a. $2,500 long-term capital gain. b. $2,500 short-term capital gain. c.
long-term capital gain. d. $5,000 short-term capital gain.
$5,000
Solution:
Choice "a" is correct. Unless the executor elects the "alternative valuation date"
method (not applicable to this question), the basis of property acquired by bequest
or by inheritance is the property's fair market value on the date of the decedent's
death. The decedent's basis is irrelevant. Additionally, such acquired property is
always considered to be "long-term" property, regardless of how long it has been
held by the decedent and by the beneficiary or heir.
Calculation of gain realized and recognized:
Amount realized
$7,500
Less: Basis (date-of-death fair market value) (5,000)
Long-term capital gain realized and recognized
Choices "b", "c", and "d" are incorrect per the above rule. $2,500
7.
Davidson was transferred from Chicago to Atlanta. In connection with the transfer,
Davidson incurred the following moving expenses:
Moving the household goods
$2,000
400
100
40
What amount may Davidson deduct if the employer reimbursed Davidson $2,000
(not included in form W2) for moving expenses?
a.
b.
c.
d.
$100
$120
$500
$520
Solution:
Choice "a" is correct. The moving expense deduction is allowable only for direct
moving expenses: (i) travel and along-the-way lodging of the taxpayer and the
taxpayer's family and (ii) transportation, to the new location, of the taxpayer's
household goods and personal effects. Deductible expenses must be reduced by the
amount of employer reimbursements not properly included on IRS form W-2. No
longer is there a deduction for either (i) temporary living expenses at the new
location or (ii) along-the-way meal expenses.
Moving the household goods
$ 2,000
Lodging on the way to Atlanta 100
Less: employer reimbursement not included on IRS form W-2
(2,000)
Deduction (adjustment) for (towards) AGI
$ 100
Choices "b", "c", and "d" are incorrect per the above rule: The $400 temporary living
expenses in Atlanta and the $40 meal expense are not deductible.
8.
Which of the following statements is correct regarding the deductibility of an
individual's medical expenses?
a. A medical expense paid by credit card is deductible in the year the credit card
bill is paid.
b. A medical expense deduction is allowed for payments made in the current year
for medical services received in earlier years.
c.
Medical expenses, net of insurance reimbursements, are disregarded in the
alternative minimum tax calculation.
d. A medical expense deduction is not allowed for Medicare insurance premiums.
Solution:
Choice "b" is correct. A medical expense deduction is allowed for payments made in
the current year for medical services received in earlier years.
Choice "a" is incorrect. A medical expense paid by credit card is deductible in the
year the amount is charged to credit card (rather than in a subsequent year when
the credit card bill is paid).
Choice "c" is incorrect. Medical expenses, net of insurance reimbursements, are not
disregarded in the alternative minimum tax calculation. However, the allowable
amount for AMT purposes is the net amount in excess of 10% of adjusted gross
income (for regular tax purposes, the allowable amount is the net amount in excess
of 7.5% of adjusted gross income).
Choice "d" is incorrect. A medical expense deduction is allowed for Medicare
insurance premiums.
9.
An individual taxpayer earned $10,000 in investment income, $8,000 in noninterest
investment expenses, and $5,000 in investment interest expense. How much is the
taxpayer allowed to deduct on the current- year's tax return for investment interest
expenses?
a.
b.
c.
d.
$0
$2,000
$3,000
$5,000
Solution:
Choice "b" is correct. The deduction for investment interest expenses is limited to
net taxable investment income which is defined as taxable investment income
minus all related investment expenses (other than investment interest expense). If
the investment expense is an itemized deduction, then only those expenses
exceeding 2% of AGI are considered.
Taxable investment income includes: (i) interest and dividends, (ii) rents (if the
activity is not a passive activity), (iii) royalties (in excess of related expenses), (iv)
net short-term capital gains, and (v) net long- term capital gains if the taxpayer
elects not to claim the net capital gains reduced tax rate.
Calculation:
Investment income $10,000
Less: Related investment expenses other than investment interest expenses
(8,000)
Net investment income $ 2,000
The taxpayer's deduction for investment interest expense is $2,000: the lesser of (i)
$2,000 net investment income or (ii) $5,000 investment interest expense.
Choices "a", "c", and "d" are incorrect per the above rule and per the above
computations.
10.
Brenda, employed full time, makes beaded jewelry as a hobby. In year 2, Brenda's
hobby generated
$2,000 of sales, and she incurred $3,000 of travel expenses. What is the proper
reporting of the income and expenses related to the activity?
a.
Sales of $2,000 are reported in gross income, and $2,000 of expenses is
reported as an itemized deduction subject to the 2% limitation.
b.
Sales of $2,000 are reported in gross income, and $3,000 of expenses is
reported as an itemized deduction subject to the 2% limitation.
c. Sales and expenses are netted, and the net loss of $1,000 is reported as an
itemized deduction not
subject to the 2% limitation.
d. Sales and expenses are netted and deducted for AGI.
Solution:
Choice "a" is correct. Based upon the facts presented ("Brenda makes jewelry as a
hobby . . ."), this activity is not a trade or business activity but is an activity not
engaged in for profit. As such, the taxpayer can only deduct as itemized deductions
on Schedule A of IRS form 1040 the following: (i) expenses, such as state and local
income taxes and property taxes, which would be allowed regardless of whether or
not the activity were engaged in for profit and (ii) all other expenses that would be
allowed if such activity
were engaged in for profit. However, the amount of these "other expenses" cannot
exceed gross income reduced by the expenses described in "(i)," above.
Furthermore, the allowable "other expenses" are subject to the "2% of AGI"
limitation.
Because Brenda had only $2,000 of gross income, the most she can deduct is
$2,000 of the $3,000 travel expenses she incurred. Because the travel expenses
constitute "all other expenses" (see "(ii)," above), this amount is subject to the "2%
of AGI" limitation.
Note that the activity-is-engaged-in-for-profit statutory presumption does not apply.
Reason: that presumption applies only if the activity shows a profit for at least three
taxable years during the five consecutive taxable year period ending with the year
in question (year #2 for this question). Because the facts do not state that during
the five year period ending with year 2 Brenda had a profit in at least three
of those five years, the presumption is not available to Brenda. If the presumption
would have been available to her and if she had had a profit in at least three of the
five consecutive, ending with year #2, then the sales and expenses would have
been netted and deducted for AGI (and choice "d" would have been correct).
Choices "b", "c", and "d" are incorrect per the above rules.
11.
On their joint tax return, Sam and Joann had adjusted gross income (AGI) of
$150,000 and claimed the following itemized deductions:
Interest of $15,000 on a $100,000 home equity loan to purchase a motor home
Real estate tax and state income taxes of $18,000
Unreimbursed medical expenses of $15,000 (prior to AGI limitation) Miscellaneous
itemized deductions of $5,000 (prior to AGI limitation)
Based on these deductions, what would be the amount of AMT add-back adjustment
in computing alternative minimum taxable income?
a.
b.
c.
d.
$21,750
$23,750
$35,000
$38,750
Solution:
Choice "d" is correct. Per the mnemonic PANIC TIMME, for purposes of calculating
alterative minimum taxable income, the taxpayer must add back, among other
things, the following itemized deductions:
- Taxes reduced by taxable refunds,
- Home mortgage interest when the mortgage loan proceeds were not used to buy,
build, or improve the taxpayers qualified dwelling (house, condominium,
apartment, or mobile home not used on a transient basis),
- Medical expenses not exceeding 10% of AGI, and
- Miscellaneous deductions subject to the 2% of AGI floor. The PANIC TIMME addback is as follows:
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . $18,000
Home mortgage interest not used to buy, build, or improve a qualified dwelling (the
motor
home
is
not
a
qualified
dwelling) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Medical expenses in excess of 7.5% AGI but not in excess of 10% of AGI . . . . . . . . . .
. . . . 3,750
Deductible
miscellaneous
expenses
AGI . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
in
excess
of
2%
of
12.
On January 1 of the current year, Locke Corp., an accrual-basis calendar-year C
corporation, had
$30,000 in accumulated earnings and profits. For the current year, Locke had
current earnings and profits of $20,000, and made two $40,000 cash distributions to
its shareholders, one in April and one in September. What amount of the
distributions is classified as dividend income to Locke's shareholders?
a.
b.
c.
d.
$0
$20,000
$50,000
$80,000
Solution:
Choice "c" is correct. The general rule is that distributions are taxable dividends to
the extent of current earnings and profits (E&P) by year end and to the extent of
accumulated E&P as of the distribution date. If both are positive and if distributions
exceed the sum of current E&P and accumulated E&P, then the distributions in
excess of the sum are treated as a return of capital. In this example, both current
E&P and accumulated E&P are positive (the total is $50,000), and total distributions
during the year are
$80,000; so, $50,000 of the total distributions will be taxable dividends. Choices
"a", "b", and "d" are incorrect per the above rule.
13.
Gem Corp. purchased all the assets of a sole proprietorship, including the following
intangible assets: Goodwill
$50,000
Covenant not to compete
13,000
For tax purposes, what amount of these purchased intangible assets should Gem
amortize over the specific statutory cost recovery periods?
a.
b.
$63,000
$50,000
c.
d.
$13,000
$0
Solution:
Choice "a" is correct. Post-August 10, 1993, acquisitions of goodwill, covenants notto-compete, franchises, trademarks, and trade names must be amortized on a
straight-line basis over a fifteen-year period (180 months) beginning with the month
of acquisition. So, both the $50,000 acquisition of the goodwill and the $13,000
acquisition of the covenant not-to-compete for a total cost of $63,000 -- are
amortized over the fifteen-year period statutory cost recovery period.
Choices "b", "c", and "d" are incorrect per the above rule.
14.
For year 2, Quest Corp., an accrual-basis calendar-year C corporation, had an
$8,000 unexpired charitable contribution carryover from year 1. Quest's year 2
taxable income before the deduction for charitable contributions was $200,000. On
December 12, year 2, Quest's board of directors authorized a
$15,000 cash contribution to a qualified charity, which was made on January 6, year
3. What is the maximum allowable deduction that Quest may take as a charitable
contribution on its year 2 income tax return?
a.
b.
c.
d.
$23,000
$20,000
$15,000
$8,000
Solution:
Choice "b" is correct. C corporations are allowed a maximum charitable contribution
deduction of 10% of taxable income computed before the following deductions:
Accrued charitable contributions not paid by the end of the year are deductible in
the year of accrual if (i) the board of directors authorizes the contribution during the
tax year and (ii) the accrual-basis corporation pays the accrued amount by the
fifteenth day of the third month (generally 2 months) following the end of the tax
year.
Any amount in excess of the "10% limitation" may be carried forward for five years.
In this question, the corporation has: (i) an $8,000 unexpired charitable contribution
carryover from the previous year, (ii) -0- charitable contributions paid during the
current year, and (iii) a $15,000 contribution which the board of directors authorized
by the end of the year and which the corporation paid by the fifteenth day of the
third month following the end of the tax year. Hence, the deduction before
application of the "10% limit" is $23,000: $8,000 + 0 + $15,000. However, the
taxable income before the five deductions listed above is $200,000. So, the
deduction is limited to $20,000: the lesser of (i) the $23,000 amount before
application of the "10% limit" or (ii) $20,000 which is 10% of the $200,000 taxable
income before the five deductions listed above.
Choices "a", "c", and "d" are incorrect per the above rule and per the above
computations.
15.
Nichol Corp. gave gifts to 15 individuals who were customers of the business. The
gifts were not in the nature of advertising. The market values of the gifts were as
follows:
5 gifts @ $15 each
9 gifts @ $30 each
1 gift @ $100
What amount is deductible as business gifts?
a.
b.
c.
d.
$0
$75
$325
$445
Solution:
Choice "c" is correct. Business gifts are deductible up to a maximum deduction of
$25 per recipient per year.
Computation:
5 x lesser of (i) $15 value of each gift or (ii) $25 maximum per recipient per year
$ 75
9 x lesser of (i) $30 value of each gift or (ii) $25 maximum per recipient per year
$225
1 x lesser of (i) $100 value of the gift or (ii) $25 maximum per recipient per year
$ 25
Amount deductible for business gifts $325
Choices "a", "b", and "d" are incorrect per the above rule and per the above
computations.
16.
In the current year, Fitz, a single taxpayer, sustained a $48,000 loss on Code Sec.
1244 stock in JJJ Corp., a qualifying small business corporation, and a $20,000 loss
on Code Sec. 1244 stock in MMM Corp., another qualifying small business
corporation. What is the maximum amount of loss that Fitz can deduct for the
current year?
a. $50,000 capital loss. b. $68,000 capital loss.
c. $18,000 ordinary loss and $50,000 capital loss. d.
$18,000 capital loss.
Solution:
Choice "d" is correct. The stock in each corporation is a capital asset. The general
rule is that a loss on the sale or exchange of a capital asset will be a capital loss
(either a short-term capital loss or a long-term capital loss depending upon the
holding period). However, a special rule applies to section 1244 small business
stock): when a corporations stock is sold or becomes worthless, an original
stockholder can be treated as having an ordinary loss (fully deductible), instead of a
capital loss, up to $50,000 ($100,000 if married filing jointly) for the year. Any
loss(es) in excess of this amount is (are) a capital loss.
In this question the taxpayer, who is not married, during the year has $68,000 of
losses from the sale of section 1244 small business stock. As such, the taxpayer will
treat as an ordinary loss $50,000 of the total loss; the taxpayer will treat as a
capital loss the remaining $18,000 of the total loss.
Choices a, b, and c are incorrect per the above rule.
17.
A sole proprietorship incorporated on January 1 and elected S corporation status.
The owner contributed the following assets to the S corporation:
Basis
Fair market value
Machinery $7,000
$8,000
Building
11,000
100,000
Cash 1,000 1,000
Two years later, the corporation sold the machinery for $4,000 and the building for
$110,000. The machinery had accumulated depreciation of $2,000, and the building
had accumulated depreciation of
$1,000. What is the built-in gain recognized on the sale?
a.
b.
c.
d.
$100,000
$99,000
$6,000
$0
Solution:
Choice "d" is correct. An S corporation is subject to the "built-in gains" tax (as well
as the "LIFO Recapture" tax and the "Passive Investment Income" tax) only if the S
corporation had previously been a C corporation. In this question, the corporation
elected "S" status on the day or incorporation; hence, the corporation was never a C
corporation. So, the "built-in gains" tax doesn't apply to the facts presented.
Choices "a", "b", and "c" are incorrect per the above rule.
18.
Which of the following items must be separately stated on Form 1120S, U.S. Income
Tax Return for an S Corporation, Schedule K-1?
a. Mark-to-market income. b. Unearned revenue.
c. Section 1245 Gain.
d. Gain or loss from the sale of collectibles.
Solution:
Choice "d" is correct. Gain or loss from the S corporation's sale of collectibles is
separately reported on the Schedule K-1 of IRS form 1120S.
Choice "a" is incorrect. The S corporation's mark-to-market income is part of
"ordinary business income (loss)," which is separately stated on the Schedule K-1 of
IRS form 1120S. However, the various components of "ordinary business income,"
such as mark-to-market income, are not separately stated on the K-1 of IRS form
1120S.
Choice "b" is incorrect. The S corporation's unearned revenue is not separately
stated but is a component of "ordinary business income" or "net rental real estate
income (loss)" or "other net rental income (loss)," each of which is separately stated
on the Schedule K-1 of IRS form 1120S. However, the various components (such as
unearned revenue) of "ordinary business income," "net rental real estate income
(loss)," and "other net rental income (loss)" are not separately stated on the K-1 of
IRS form
1120S.
Choice "c" is incorrect. The S corporation's section 1245 gain (and section 1250
gain) is not separately stated but is a component of "ordinary business income" or
"net rental real estate income (loss)" or "other net rental income (loss)," each of
which is separately stated on the Schedule K-1 of IRS form 1120S. However, the
various components (such as section 1245 gain) of "ordinary business income," "net
rental real estate income (loss)," and "other net rental income (loss)" are not
separately stated on the K-1 of IRS form 1120S.
19.
For which of the following entities is the owner's basis increased by the owner's
share of profits and decreased by the owner's share of losses but is not affected by
the entity's bank loan increases or decreases?
a. S corporation. b. C corporation. c. Partnership.
d. Limited liability company.
Solution:
Choice "a" is correct. The owner's basis in an S Corporation is increased by the
owner's share of profits and decreased by the owner's share of losses. It is not
affected by any bank loans increased or decreased by the corporation. It is only
increased by direct loans made to the corporation by the owner.
Choice "b" is incorrect. C Corporations are not flow through entities and the owner's
basis is not affected by profits, losses, or loans made by the corporation.
Choice "c" is incorrect. The owner's basis in a partnership is increased by the
owner's share of profits and decreased by the owner's share of losses. For a
partnership, the basis is also affected by increases and decreases of bank loans.
Choice "d" is incorrect. Limited Liability Companies are taxed as C corporations or
partnerships, which are both incorrect as per above.
20.
Turner, Reed, and Sumner are equal partners in TRS partnership. Turner contributed
land with an adjusted basis of $20,000 and a fair market value (FMV) of $50,000.
Reed contributed equipment with an adjusted basis of $40,000 and an FMV of
$50,000. Sumner provided services worth $50,000. What amount of income is
recognized as a result of the transfers?
a.
b.
c.
d.
$50,000
$60,000
$90,000
$150,000
Solution:
Choice "a" is correct. Generally, no gain or loss is recognized on a contribution of
property to a partnership in return for a partnership interest (note: when
contributed property is subject to a liability, if the decrease in the contributing
partner's individual basis exceeds the partner's partnership basis, the excess
amount is treated like taxable boot and is a gain to that partner). So, given the facts
in this question, Turner and Reed will recognize no income or gain.
On the other hand, the value of a partnership acquired for services is ordinary
income to the partner rendering those services. So, Summer must recognize
$50,000 of ordinary income on account of Summer's rendering to the partnership
$50,000 worth of services in exchange for a partnership interest.
Choices "b", "c", and "d" are incorrect per the above rules.
21.
While preparing a partnership tax return, the accountant discovered that ABC
Partnership distributed property to Anne, a partner, in a nonliquidating transfer. No
money was distributed to Anne during the year, the property was in the partnership
for over five years, and no debt was attached to the property. Anne had a basis in
her partnership interest of $10,000. The partnership had an adjusted basis of
$20,000 in the property distributed to Anne. Which of the following are the tax
consequences to Anne?
a. $0 gain, basis in the partnership is reduced to $0, and basis in the property
received is $10,000. b. $0 gain, basis in the partnership is reduced to $0, and basis
in the property received is $20,000.
c.
$10,000 gain, basis in the partnership is reduced to $0, and basis in the
property received is $20,000. d.
$10,000 gain, basis in the partnership is
unchanged, and basis in the property received is $20,000.
Solution:
Choice "a" is correct. General rules:
1. A nonliquidating distribution to a partner is nontaxable.
2. In nonliquidating distribution to a partner, the basis of property received will be
the same as the basis in the hands of the partnership immediately prior to the
nonliquidating distribution.
3. Distributions to a partner reduce the partner's basis by the cash the partner
receives and by the partnership's adjusted basis in property which the partner
receives.
Exception to the general rule (the exception does not apply to the facts set forth in
the question): Gain is recognized only to the extent that cash (including the
partner's share of partnership liabilities are assumed by other partners) distributed
exceeds the adjusted basis of the partner's interest in the partnership immediately
before the distribution.
In this question, the partner received no cash, and the partner's share of
partnership liabilities did not change. So, the partner will recognize no gain with
respect to the distribution. Although the partnership's adjusted basis in the
distributed property was $20,000, because the partner's basis in the partner's
partnership interest was only $10,000, the adjusted basis of the property which the
partner received will be limited to $10,000. The new basis in the partnership
interest will be reduced from $10,000 to -0-.
Choices "b", "c", and "d" are incorrect per the above rules.
22.
Able and Baker are equal members in Apple, an LLC. Apple has elected not to be
treated as a corporation. Able contributes $7,000 cash and Baker contributes a
machine with a basis of $5,000 and a fair market value of $10,000, subject to a
liability of $3,000. What is Apple's basis for the machine?
a.
b.
c.
d.
$2,000
$5,000
$8,000
$10,000
Solution:
Choice "b" is correct. This LLC has elected not to be treated as a corporation.
Therefore, the rules for partnerships will apply. The general rule is that the
partnership's basis in the contributed property is the carryover basis of the
contributor. So the $5,000 basis to Baker becomes the carryover $5,000 basis to
Apple.
Choices "a", "c", and "d" are incorrect per the above rule and per the above
computations.
23.
The answer to each of the following questions would be irrelevant in determining
whether a tuition payment made on behalf of another individual is excludible for gift
tax purposes, except:
a. Was the tuition payment made for a part-time student?
Solution:
Choice "c" is correct. This question asks the reader to identify the listed question
whose answer is relevant. The answer to each of listed questions "a", "b", and "d" is
irrelevant. Only the answer to listed question "c" is relevant. Tuition payments made
directly to a qualifying foreign or domestic educational organization qualify for an
unlimited exclusion from the gift tax. The payments can be for the benefit of any
student (not just the donor's family members), and the student can be enrolled
either full-time or part- time (per the next to the last sentence of U.S. Treasury
Regulation section 25.2503-6(b)(2)).
24.
Which of the following is not considered a primary authoritative source when
conducting tax research?
a. Internal Revenue Code. b. Tax Court cases.
c. IRS publications.
d. Treasury regulations.
Solution:
Choice "c" is correct. IRS publications are not considered a primary authoritative
source when one is conducting tax research
Choices "a", "b", and "d" are incorrect. The Internal Revenue Code, tax court cases,
and Treasury regulations, respectively, are considered primary authoritative sources
when one is conducting tax research; hence they are incorrect choices (the question
asks which item is not considered a primary authoritative source).
25.
Under Treasury Circular 230, which of the following actions of a CPA tax advisor is
characteristic of a best practice in rendering tax advice?
a. Requesting written evidence from a client that the fee proposal for tax advice
has been approved by the board of directors.
b. Recommending to the client that the advisor's tax advice be made orally instead
of in a written memorandum.
c.
Establishing relevant facts, evaluating the reasonableness of assumptions
and representations, and arriving at a conclusion supported by the law and facts in
a tax memorandum.
Solution:
Choice "c" is correct. Characteristic of a best practice in rendering tax advice is
establishing in a tax memorandum relevant facts, evaluating the reasonableness of
assumptions and representations, and arriving at a conclusion supported by the law
and facts.
Choice "a" is incorrect. Circular 230's "Best Practices" do not include the tax
advisor's requesting written evidence from a client that the fee proposal for tax
advice has been approved by the board of directors.
Choice "b" is incorrect. Circular 230's "Best Practices" do not include the tax
advisor's recommending to the client that the advisor's tax advice be made orally
instead of in a written memorandum.
Choice "d" is incorrect. Circular 230's "Best Practices" do not include the tax
advisor's requiring the client to supply a written representation, signed under
penalties of perjury, concerning the facts and statements provided to the CPA for
preparing a tax memorandum.
26.
A CPA prepared a tax return for a client who will receive a refund check. The client is
traveling abroad and asked the CPA to pick up the check at the client's home
address. Under Treasury Circular 230, any of the following actions, if taken by the
CPA relating to the refund check, would be a violation of the rules of practice before
the Internal Revenue Service, except:
a. Endorsing the check and depositing it into the client's bank account. b. Holding
the check for safe keeping and awaiting the client's return.
c. Holding the check until the client is billed, then endorsing and depositing the
check into the CPA's account as payment for the bill.
d. Endorsing the check and depositing it into an escrow account for the client's
benefit.
Solution:
Choice "b" is correct. Circular 230 does not prohibit a practitioner's holding the
check for safe keeping and awaiting the client's return.
Choice "a" is incorrect. Circular 230 prohibits a practitioner's endorsing the check.
So, endorsing the check and depositing it into the client's bank account is a
violation of Circular 230.
Choice "c" is incorrect. Circular 230 prohibits a practitioner's endorsing the check.
So, holding the check until the client is billed, then endorsing and depositing the
check into the CPA's account as payment for the bill is a violation of Circular 230.
Choice "d" is incorrect. Circular 230 prohibits a practitioner's endorsing the check.
So, endorsing the check and depositing it into an escrow account for the client's
benefit is a violation of Circular 230.
27.
In which of the following circumstances does the three-year statute of limitations on
additional tax assessments apply?
a. A taxpayer willfully attempts to evade tax in filing income tax returns.
b. A taxpayer inadvertently omits from gross income an amount in excess of 25%
of the gross income stated on the income tax return.
c. A taxpayer inadvertently overstates deductions equal to 15% of gross income.
d. The IRS files a substitute income tax return when it learns that a taxpayer failed
to file a return.
Solution:
Choice "c" is correct. With respect to a timely filed return, the general rule is that
the IRS can assess additional tax within three years from the later of the return's
due date (plus extensions, if any) or the date the return was filed. A taxpayer's
inadvertently overstating deductions in an amount equal to 15% of
gross income will not trigger any of the exceptions to the general rule.
Choice "a" is incorrect. There is no statute of limitations when a taxpayer willfully
attempts to evade tax in filing income tax returns.
Choice "b" is incorrect. A six year statute of limitations applies when a taxpayer
omits from gross income an amount in excess of 25% of the gross income stated on
the income tax return. For purposes of the "six year" statute, gross income is not
reduced by cost of goods sold.
Choice "d" is incorrect. There is no statute of limitations when the IRS files (actually,
"executes") a substitute income tax return when the IRS learns that a taxpayer
failed to file a return.
28.
Tax return preparers can be subject to penalties under the Internal Revenue Code
for failure to do any of the following, except:
Solution:
Choice "b" is correct. With respect to a tax return preparer's failure to disclose a
conflict of interest, the
Internal Revenue Code does not set forth any penalty.
Choice "a." is incorrect. With respect to a tax return preparer's failure to sign a tax
return as a preparer, the Internal Revenue Code sets forth a penalty of $50 for each
failure (maximum $25,000 per calendar year).
Choice "c." is incorrect. With respect to a tax return preparer's failure to provide a
client with a copy of the tax return, the Internal Revenue Code sets forth a penalty
of $50 for each failure (maximum $25,000 per calendar year).
Choice "d" is incorrect. With respect to a tax return preparer's failure to keep a
record of returns prepared, the Internal Revenue Code sets forth a penalty of $50 for
each failure (maximum $25,000 per calendar year).
29.
A CPA assists a taxpayer in tax planning regarding a transaction that meets the
definition of a tax shelter as defined in the Internal Revenue Code. Under the AICPA
Statements on Standards for Tax Services, the CPA should inform the taxpayer of
the penalty risks unless the transaction, at the minimum, meets which of the
following standards for being sustained if challenged?
a. More likely than not. b. Not frivolous.
c. Realistic possibility.
d. Substantial authority.
Solution:
Choice "a" is correct. The CPA should inform the taxpayer of the penalty risks with
respect to the tax effects (tax return position) of a transaction unless the
transaction, at the minimum, meets the more- likely-than-not standard.
Choices "b", "c", and "d" are incorrect.
Reason: "Not frivolous," "realistic possibility," and "substantial authority" are lesser
standards than the more-likely-than-not standard. So, if the transaction meets only
one of these lesser standards, the CPA must inform the taxpayer of the penalty risks
with respect to the tax effects (tax return position) of a transaction.
30.
Which Senate committee considers new tax legislation?
a. Budget. b. Finance.
c. Appropriations.
d. Rules and Administration.
Solution:
Choice "b" is correct. Most tax legislation begins in the House Ways and Means
Committee of the U.S. House of Representatives. Tax legislation goes from the U.S.
House of Representatives to the U.S. Senate Finance Committee.
Choices "a", "c", and "d" are incorrect per the above rule.
31.
An IRS agent has just completed an examination of a corporation and issued a "no
change" report. Which of the following statements about that situation is correct?
a. The taxpayer may not amend the tax return for that taxable year.
b. The IRS generally does not reopen the examination except in cases involving
fraud or other similar misrepresentation.
c. The IRS may not reopen the examination.
d. The IRS may not examine any other tax return of the corporation for a period of
one year.
Solution:
Choice "b" is correct. The IRS generally does not reopen the examination except in
cases involving fraud or other similar misrepresentation.
Choice "a" is incorrect. The taxpayer may timely amend the tax return for that
taxable year.
Choice "c" is incorrect. The IRS generally may not reopen the examination except in
cases involving fraud or other similar misrepresentation.
Choice "d" is incorrect. The IRS may examine any other tax return of the corporation
for that same year.
32.
Under the Sales Article of the UCC, which of the following requirements must be met
for a writing to be an enforceable contract for the sale of goods?
a. The writing must contain a term specifying the price of the goods.
b. The writing must contain a term specifying the quantity of the goods. c. The
writing must contain the signatures of all parties to the writing.
d.
The writing must contain the signature of the party seeking to enforce the
writing.
Solution:
Choice "b" is correct. Under the Sales Article, if parties' contracts are incomplete,
the Article has many gap filling provisions through which the contract may be
completed. However, the courts will not enforce a contract that does not state the
quantity of the goods bought and sold, either specifically or in terms of output of
the seller or requirements of the buyer.
Choice "a" is incorrect. If the price term is missing from a contract, the Sales Article
provides that the price shall be a reasonable one.
Choice "c" is incorrect. Generally, a contract for the sale of goods need not be in
writing to be enforceable, so no signature is required. If the contract is for the sale
of goods for $500 or more (i.e., it is within the Statute of Frauds), the contract is
unenforceable unless its material terms are evidenced by a writing signed by the
party "to be charged" (i.e., the party being sued).
Choice "d" is incorrect. As explained above, generally a writing and signature are
not required at all. And even if the contract is within the Statute of Frauds, the
signature needed is the partying being sued, not the party seeking to enforce the
contract.
33.
When do title and risk of loss for conforming goods pass to the buyer under a
shipment contract covered by the Sales Article of the UCC?
a. When the goods are identified and designated for shipment. b. When the goods
are given to a common carrier.
c. When the goods arrive at their destination.
d. When the goods are tendered to the buyer at their destination.
Solution:
Choice "b" is correct. In a shipment contract, risk of loss and title pass to the buyer
when the goods are placed in the hands of the carrier.
Choice "a" is incorrect. At identification, the buyer gains some rights in the goods
(e.g., an insurable interest), but title and risk of loss do not pass at that time.
Choices "c" and "d" are incorrect. Risk of loss and title pass to the buyer when the
goods reach their destination and are tendered only in a destination contract. The
question here asks about a shipment contract, which is governed by a different rule.
34.
Ashley needs to endorse a check that had been endorsed by two other individuals
prior to Ashley's
receipt of the check. Ashley does not want to have surety liability, so Ashley
endorses the check "without recourse." Under the Negotiable Instruments Article of
the UCC, which of the following types of endorsement did Ashley make?
a.
b.
c.
d.
Blank.
Special.
Qualified.
Restrictive.
Solution:
Choice "c" is correct. An endorsement that includes the words "without recourse" is
called a "qualified" endorsement. When an endorser signs without recourse, the
endorser does not undertake the contract liability of an endorser.
Choice "a" is incorrect. A blank endorsement is one that does not name a person to
be paid. Such an endorsement makes the check bearer paper, which can be
transferred simply by delivery.
Choice "b" is incorrect. A special endorsement is a check that names a new payee.
It makes the check order paper. Further transfer requires delivery and the signature
of the named payee.
Choice "d" is incorrect. A restrictive endorsement is one that purports to limit
further transfers of the check. Such endorsements generally are not effective
except to the extent that they limit the transfer to the collection system (e.g., for
deposit only).
35.
Under the Secured Transactions article of the UCC, when does a security interest
become enforceable?
a. A contract is executed between a debtor and a secured party under which the
debtor gives the secured party rights in collateral if the debtor violates any of the
terms contained in the contract.
b. The debtor and the secured party execute a security agreement describing the
transfer of the collateral and, after doing so, the secured party files it with the
requisite agency.
c.
The debtor and the secured party execute a security agreement describing
the transfer of collateral from seller to buyer and the secured party retains
possession of the agreement.
d.
The value has been given, the secured party receives a security agreement
describing the collateral authenticated by the debtor, and the debtor has rights in
the collateral.
Solution:
Choice "d" is correct. For a security interest to be enforceable, it must attach to the
collateral. There are three prerequisites to attachment, and all three must be
satisfied for an interest to attach: (i) the parties have to agree to create a security
interest and this agreement must be evidenced by the creditor taking possession of
the collateral or by a written security agreement describing the collateral and
authenticated (e.g., signed) by the debtor, (ii) the secured party must have given
value in exchange for the security interest, and (iii) the debtor must have rights in
the collateral.
Choice "a" is incorrect. All three prerequisites are required in order for a security
interest to be enforceable. A contract granting a security interest in collateral is not
sufficient.
Choice "b" is incorrect. As stated above, all three prerequisites are required. This
choice mentions the security agreement (one prerequisite) and filing, which is a
method of perfection but is not a prerequisite to attachment.
Choice "c" is incorrect. Again, all three prerequisites are required. This choice
mentions the existence of only one requirementthe security agreement. Thus,
choice "d" is the better choice.
36.
Under the Secured Transactions Article of the UCC, which of the following security
agreements does not
need to be in writing to be enforceable?
a. A security agreement collateralizing a debt of less than $500.
b. A security agreement where the collateral is highly perishable or subject to wide
price fluctuations. c. A security agreement where the collateral is in the possession
of the secured party.
d. A security agreement involving a purchase money security interest.
Solution:
Choice "c" is correct. Attachment of a security interest requires an agreement to
create the security interest evidenced by either a written security agreement
describing the collateral and authenticated (e.g., signed) by the debtor or by the
debtor's taking possession of the collateral. When a debtor takes possession, no
written security agreement is required.
Choice "a" is incorrect. In all cases, attachment of a security interest requires a
written security agreement or the debtor's taking possession of the collateral. The
value of the obligation being collateralized is irrelevant. The examiners are trying to
trick you here with the dollar threshold for the writing requirement under the
Statute of Frauds for a contract for the sale of goods.
Choices "b" and "d" are incorrect. In all cases, attachment of a security interest
requires a written security agreement or the debtor's taking possession of the
collateral. It does not matter that the collateral is
highly perishable, subject to price fluctuations, or subject to a purchase money
security interest.
37.
Under the Secured Transactions Article of the UCC, which of the following items can
usually be excluded
from a filed original financing statement?
a.
b.
c.
d.
Solution:
Choice "d" is correct. A security agreement need not include the amount of the
obligation secured. It must include the name and address of the debtor, a
description of the collateral (by type is sufficient), and the debtor's authentication
(e.g., a signature or electronic substitute). Since choices "a", "b", and "c" all are
required, they cannot be excluded and are incorrect choices.
38.
Which of the following statements is correct regarding the liability of a CPA for
services performed?
a. A CPA's work is not guaranteed to be accurate even though the CPA acted in a
reasonably competent and professional manner.
b.
A CPA is negligent for exercising only that degree of care a reasonably
competent CPA would exercise under the circumstances.
c. A CPA's liability for negligence extends only to the client and no further.
d. A CPA's liability for fraud extends only to the client and no further.
Solution:
Choice "a" is correct. A CPA does not guarantee everything to be accurateonly
that the work was performed in a competent and professional manner.
Choice "b" is incorrect. A CPA who exercises the degree of care that a reasonably
competent CPA would exercise under the circumstances has met his or her duty of
care and would not be found negligent.
Choice "c" is incorrect. In most states, a CPA's duty of care extends not only to the
client, but also to all persons whom the CPA knows will be relying on the CPA's work.
Choice "d" is incorrect. A CPA's liability with regard to fraud is very broadit
extends to all persons who rely on the fraud.
39.
Which of the following statements is correct regarding disclosure of client working
papers prepared by a
CPA?
a.
Working papers may not be transferred to another accountant without the
client's permission.
b. Working papers may not be turned over to a CPA quality review team without
the client's permission. c. Working papers may not be disclosed under a federal
court subpoena without the client's permission. d.
Working papers may not be
disclosed to any third parties without the client's permission.
Solution:
Choice "a" is correct. As a general rule, although a CPA owns his or her working
papers, because of confidentiality issues, they cannot be turned over to another
accountant without the client's permission.
Choice "b" is incorrect. A CPA may turn over working papers to a CPA quality review
team without the client's permission.
Choice "c" is incorrect. A CPA must turn over working papers when they are
subpoenaed by a federal court, even without the client's permission.
Choice "d" is incorrect. As noted above, a CPA must turn over working papers to a
court when they are subpoenaed and may turn working papers over to a CPA quality
review team without the client's permission. Always be suspect of broad answer
choices (e.g., those with words like always, never, any, etc.).
40.
Which of the following statements is correct regarding a limited liability company's
operating agreement?
a. It must be filed with a central state agency. b. It must be in writing.
c.
It is designed to forestall and resolve disputes among the owners. d.
necessary for a limited liability company to exist.
It is
Solution:
Choice "c" is correct. An operating agreement is an optional agreement among
members of a limited liability company (LLC) setting out the details of how the LLC
will be run.
Choice "a" is incorrect. Articles of organization must be filed with the state in order
to form an LLC. An operating agreement is an agreement among the members and
need not be filed.
Choice "b" is incorrect. In most states, operating agreements must be in writing to
be enforceable, but this is not true in some states.
Choice "d" is incorrect. As indicated above, the articles of organization are required
for formation; an operating agreement is optional.
Under the provisions of the Employee Retirement Income Security Act of 1974
(ERISA), which of the following statements is(are) correct regarding employee
rights?
I.
Employers are required to establish either a contributory or noncontributory
employee pension plan. II.
Employers are required to include employees as
pension-plan managers.
a. I only. b. II only.
c. Both I and II.
d. Neither I nor II.
ANSWER:
Choice "d" is correct. The Employment Retirement Income Security Act (ERISA) does
not require employers to have retirement plans or require contributions to existing
retirement plans. ERISA does not mandate that employers are required to include
employees as pension-plan managers. ERISA does establish standards for funding
and investing and imposes fiduciary duties on pension fund managers.
Only choice "d" reflects that employers are not required to establish a pension plan
and employees do not need to be included as pension-plan managers.
The Rites are married, file a joint income tax return, and qualify to itemize their
deductions in the current year. Their adjusted gross income for the year was
$55,000, and during the year they paid the following taxes:
Real estate tax on personal residence $2,000
Ad valorem tax on personal automobile
500
Current-year state and city income taxes withheld from paycheck
1,000
What total amount of the expense should the Rites claim as an itemized deduction
on their current-year joint income tax return?
a.
$1,000
b.
$2,500
c.
$3,000
d.
$3,500
ANSWER:
Choice "d" is correct. In answering this question, we must assume that the
examiners mean to ask, "What total amount of the tax expense should the Rites
claim as an itemized deduction?" Obviously, the Rites have more deductions than
just those tax deductions above, or they would tax advantage of the standard
deduction. In any case, for cash-basis taxpayers, deductible taxes are generally
deductible in the year paid, and real estate taxes, income taxes, and personal
property taxes (e.g., ad valorem taxes on personal automobile) are allowable
deductions. The total amount of deductions for tax expense is calculated as follows:
Real estate tax on personal residence $2,000
Ad valorem tax on personal automobile
500
Current-year state and city income taxes withheld
1,000
Total deduction for taxes $3,500
Choice "a" is incorrect. Real estate taxes and personal property taxes are allowable
itemized deductions.
Choice "b" is incorrect. Current-year state and city income taxes withheld from a
paycheck are allowable itemized deductions.
Choice "c" is incorrect. Personal property taxes (e.g., ad valorem taxes paid) are
allowable itemized deductions.
ANSWER:
Choice "b" is correct. Under the Negotiable Instruments Article of the UCC, an
instrument is not negotiable if it states that it is "subject to" or "contingent upon"
another agreement.
Choice "a" is incorrect. A negotiable instrument is not required to state the place of
payment.
Choice "c" is incorrect. Consideration is not required for an instrument to be
negotiable. We frequently make gifts by check. The check can be negotiable even
though no consideration is given for the gift.
Choice "d" is incorrect. Failure to date an instrument will not destroy negotiability.
An undated instrument is counted as being payable on demand.
Porter was unemployed for part of the year. Porter received $35,000 of wages,
$4,000 from a state unemployment compensation plan, and $2,000 from his former
employer's company-paid supplemental unemployment benefit plan. What is the
amount of Porter's gross income?
a.
$35,000
b.
$37,000
c.
$39,000
d.
$41,000
ANSWER:
RULE: Gross income includes all income unless it is specifically excluded in the tax
code.
Choice "d" is correct. Wages and all unemployment compensation are not excluded
from being taxable;
therefore, there are included in the taxpayer's gross income for tax purposes.
Wages received
$35,000
State unemployment compensation
4,000
Under the ethical standards of the profession, which of the following business
relationships would generally not impair an auditor's independence?
a. Promoter of a client's securities.
b. Member of a client's board of directors. c. Client's general counsel.
d. Advisor to a client's board of trustees.
ANSWER:
Choice "d" is correct. Rule 101 of the Code of Conduct requires that members be
independent in fact and appearance in audits and attestation services.
Independence is impaired if an auditor is an employee of an audit client or is able to
make management decisions on behalf of an audit client. An advisor of an audit
client's board of directors is not an employee, nor is the advisor able to make
management
decisions for the audit client. The advisor does not make decisions, the advisor
simply gives advice that the client is free to accept or reject.
Choice "a" is incorrect. A promoter of the audit client's securities has a direct
relationship with the client. A promoter is a business relationship that would impair
independence.
Choice "b" is incorrect. A member of the board of directors of the audit client is able
to make management decisions for the client. A member of the board is a business
relationship that would impair independence.
Choice "c" is incorrect. A client's general counsel is an employee. A general counsel
is a business relationship that would impair independence.
Under the Securities Exchange Act of 1934, which of the following penalties could
be assessed against a
CPA who intentionally violated the provisions of Section 10(b), Rule 10b-5 of the
Act?
Civil liability of
a.
Yes
Yes
d.
No
of a fine
No c.
No
No
ANSWER:
Choice "a" is correct. Violation of Rule 10b-5 of the Securities Exchange Act of 1934
can result in civil damages, an SEC injunctive action and or criminal fines and
penalties.
Only choice "a" reflects that both civil and criminal liability can be assessed against
a CPA who intentionally violates the provisions of Rule 10b-5 of the Securities
Exchange Act of 1934.
All of the following statements regarding compliance with the statute of frauds are
correct, except:
a. Any necessary writing must be signed by all parties against whom enforcement
is sought. b. Contracts involving the sale of goods in an amount greater than $500
must be in writing. c. Contract terms must be contained in only one document.
d.
Contracts for which it is improbable to assume that performance will be
completed within one year must be in writing.
ANSWER:
Choice "c" is correct. Under the Statute of Frauds, there is no requirement that the
terms be stated in a single document. Terms can be stated in more than one
document.
Choice "a" is incorrect. The Statute of Frauds does require that the party or parties
against whom enforcement is sought sign certain specified contracts.
Choice "b" is incorrect. Contracts for the sale of goods for $500 or more are one of
the specified contracts requiring some kind of writing under the Statute of Frauds.
Choice "d" is incorrect. Contracts which by there terms can not be performed within
a year are one of the specified contracts requiring some kind of writing under the
Statute of Frauds.
ParentCo, SubOne, and SubTwo have filed consolidated returns since their inception.
The members reported the following taxable incomes (losses) for the year.
ParentCo
$50,000
SubOne
($60,000)
SubTwo
($40,000)
No member reported a capital gain or loss or charitable contributions. What is the
amount of the consolidated net operating loss?
a.
$0
b.
$30,000
c.
$50,000
d.
$100,000
ANSWER:
Choice "c" is correct. Net capital losses are not allowable deductions for
corporations. A corporation can only use capital losses to offset capital gains.
Further, the deduction for charitable contributions may be limited in some cases,
and no charitable contribution deduction is allowed in calculating the NOL. The facts
of this question indicate that there are no reported capital gains or losses or
charitable contributions for any of the consolidated entities; therefore, we know that
we are able to use the total income (loss) identified in the facts to calculate the net
operating loss. When entities file consolidated income tax returns, 100% if their net
income (losses) is consolidated. The facts do not indicate that any inter- company
transactions exist; therefore, there are no elimination entries to make before
consolidating the net income (loss). The consolidated net operating loss is
calculated as follows:
Parent Co.
$ 50,000
Sub One
(60,000) Sub Two
(40,000) NOL
$(50,000)
Choice "a" is incorrect. A consolidated net loss of $50,000 exists, as calculated
above. Choice "b" is incorrect. A consolidated net loss of $50,000 exists, as
calculated above.
Choice "d" is incorrect. The income from Parent Co. ($50,000) is netted with the
losses from the subsidiaries ($100,000) to arrive at the consolidated net operating
loss of $50,000.
ANSWER:
Wallace purchased 500 shares of Kingpin, Inc., 15 years ago for $25,000. Wallace
has worked as an owner/employee and owned 40% of the company throughout this
time. This year, Kingpin, which is not an S corporation, redeemed 100% of Wallace's
stock for $200,000. What is the treatment and amount of income or gain that
Wallace should report?
a. $0
b. $175,000 long-term capital gain. c. $175,000 ordinary income.
d. $200,000 long-term capital gain.
ANSWER:
Choice "b" is correct. An investment in a capital asset (e.g., stock) results in the
income being capital (either a capital loss or a capital gain). Ownership percentage
is not a factor in the calculation, and, in this question, nor is the fact that the
corporation is not an S corporation. The calculation is simple: Wallace invested
$25,000 in the stock and received $200,000 for 100% of his investment 15 years
later. The capital gain is $175,000 ($200,000 - $25,000), and it is considered longterm because the stock was held for greater than one year.
Choice "a" is incorrect. There is $175,000 of gain on the transaction ($200,000 $25,000). This type of transaction is not a transaction that is excluded from tax in
the tax code.
Choice "c" is incorrect. An investment in a capital asset (e.g., stock) results in the
income being capital (either a capital loss or a capital gain). Although the
calculation of the income is correct (i.e., $175,000), ordinary income is not the
proper treatment for this transaction.
Choice "d" is incorrect. Although this transaction does result in a long-term capital
gain, Wallace has basis in the stock ($25,000), and the gain is calculated as the
proceeds from the sale ($200,000) less the basis in the stock.
Carter purchased 100 shares of stock for $50 per share. Ten years later, Carter died
on February 1 and bequeathed the 100 shares of stock to a relative, Boone, when
the stock had a market price of $100 per share. One year later, on April 1, the stock
split 2 for 1. Boone gave 100 shares of the stock to another of Carter's relatives,
Dixon, on June 1 that same year, when the market value of the stock was $150 per
share. What was Dixon's basis in the 100 shares of stock when acquired on June 1?
a.
$5,000
b.
$5,100
c.
$10,000
d.
$15,000
ANSWER:
Choice "a" is correct. This question combines the rules of estate taxation and gift
taxation. Carter's investment in the stock was $50 per share when he died. Upon
Carter's death, the stock received a step- up in basis to the fair market value at the
date of death (or six months later, if the alternate lower valuation data was
elected). Therefore, the stock's basis was $100 per share when it was transferred to
Boone. [Note that no capital gain was reportable for the step-up in basis from $50 to
$100; however, Carter's estate included the stock at its fair market value of
$100/share for estate tax purposes and likely paid a large amount of estate tax on
that.] Further, regardless of how long Carter owned the stock (i.e., it could have
only been owned for one day), it was automatically deemed long-term property
upon Carter's death. So, Boone had 100 shares of stock at a basis of $100/share
when Boone received the inheritance. Then, there was a 2-for-1 stock split on April 1
of the following year. This transaction caused Boone to now
have double the amount of shares (or, 200 shares) at half the basis per share (or,
$50/share). [Note that the total basis remains unchanged (i.e., $100 x 100 shares =
$10,000 and $50 x 200 shares = $10,000).] When Boone gifted the stock to Dixon
(note: it would not have mattered if Dixon had not been a relative), the donee
(Dixon) received the stock at the carryover basis of the donor (Boone). The 100
shares gifted to Dixon were shares from after the stock split; therefore, they have a
basis of $50 per share, or a total basis of $5,000 for the 100 shares. [Note that
Boone still has 100 shares at a basis of $50 as well.]
Choice "b" is incorrect, per the above discussion. Choice "c" is incorrect, per the
above discussion. Choice "d" is incorrect, per the above discussion.
a. Sale of equipment.
b. Real property subdivided and sold by a dealer. c. Sale of inventory.
d. Government bonds sold by an individual investor.
ANSWER:
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.
A partnership had four partners. Each partner contributed $100,000 cash. The
partnership reported income for the year of $80,000 and distributed $10,000 to
each partner. What was each partner's basis in the partnership at the end of the
current year?
a.
$170,000
b.
$120,000
c.
$117,500
d.
$110,000
ANSWER:
RULE: The basis in a partnership is increased by investment, pro-rata share of
income, and liabilities for which the partner is personally liable. The basis of a
partnership is decreased by distributions, pro-rata share of losses, and liabilities for
which the partner is personally relieved of.
Choice "d" is correct. Per the above RULE, each partner's basis in the partnership is
$110,000 at the end of the current year, calculated as follows:
Contributions
Pro-rata income allocation
Distributions received
Basis at year-end
$100,000
20,000 [$80,000 / 4 partners]
( 10,000)
$110,000
Choice "a" is incorrect. The partnership reported income of $80,000, and this
amount must be allocated pro-rata to each partner. The mistake made here is that
the entire $80,000 was included for each partner as an increase in basis when it
should only have been of that amount (or $20,000). Applying all other facts
correctly, this answer was calculated as $100,000 + $80,000 - $10,000 = $170,000.
Choice "b" is incorrect. The distribution of $10,000 must be deducted from the basis
of each partner. Applying all other facts correctly, this answer was calculated as
$100,000 + $20,000 = $120,000.
Choice "c" is incorrect. Each partner received a distribution of $10,000. Therefore,
the total distributions for the partnership were $40,000. The mistake made here
was that the $10,000 distribution was incorrectly assumed to be the total
distribution made by the partnership. $10,000 divided by 4 = $2,500. Applying all
the other facts correctly, this answer was calculated as $100,000 + $20,000 $2,500 =
$117,500.
b. Can sue the accounting firm for the loss of the loan because of negligence. c.
Cannot sue the accounting firm because there was no privity of contact.
d.
Can sue the accounting firm for the loss of the loan because of the rule of
privilege.
ANSWER:
Choice "b" is correct. The bank can certainly sue the accountant for negligence.
Whether the bank would be successful or not is another question. The accounting
firm may be able to raise the "privity defense." Under this defense, the accounting
firm is only liable to clients and to those the accounting firm has
reason to know will rely on their work. Whether or not the privity defense is
successful, the bank can obviously sue the accounting firm for negligence. The
privity defense does not preclude the lawsuit. The defense determines whether or
not the lawsuit will be successful.
Choice "a" is incorrect. The statute of limitations requires that a lawsuit be brought
within a specified period of time. Although states vary as to the time in which
lawsuits must be commenced, no state would preclude a lawsuit brought within
fifteen months.
Choice "c" is incorrect. Lack of privity would not preclude the lawsuit. However, the
privity defense might preclude the lawsuit from being successful. Additionally,
although the accounting firm only has privity of contract with the client, the firm
owes a duty of care to parties the firm has reason to know will rely on
their work. Although not clear from the facts, it is likely that the bank can show the
accountant had reason to know it would rely on the accountant's work.
Choice "d" is incorrect. There is no rule of privilege in the law concerning lawsuits
between accountants and banks.
In evaluating the hierarchy of authority in tax law, which of the following carries the
greatest authoritative value for tax planning of transactions?
a. Internal Revenue Code. b. IRS regulations.
c. Tax court decisions. d. IRS agents' reports.
ANSWER:
Note: This question is not specifically addressed in your text materials, as the topic
has yet to show up on the exam as far as we are aware, and if it ever did, we are
confident that our students would be able to respond correctly over 85% of the time
without any guidance. The answer is rather obvious. Just by looking at the answer
options, you will immediately notice that Option A is presented in title case. This
would be a quick sign that it may be the correct response. Further, we suspect that
most students would narrow the options down to "a" or "b" by simply using common
sense. While we are confident that our students would fare well on this question if it
appeared on their exams, we present the following detailed explanation of the
answer options.
Choice "a" is correct. According to the IRS's website under Tax Code, Regulations
and Official Guidance, the "federal tax law begins with the Internal Revenue Code
(IRC), [which was] enacted by Congress in Title 26 of the United States Code (26
U.S.C.)." The IRC holds the most authoritative value.
Choice "b" is incorrect. According to the IRS's website under Tax Code, Regulations
and Official Guidance, the IRS regulations or "Treasury regulations (26 C.F.R.)
commonly referred to as Federal tax regulationspick up where the Internal
Revenue Code (IRC) leaves off by providing the official interpretation of the IRC by
the U.S. Department of Treasury." Regulations give directions on how to apply the
law outlined in the Internal Revenue Code. Regulations have the second most force
and effect, second only to the IRC.
Choice "c" is incorrect. Tax court decisions interpret the Internal Revenue Code.
They do not have the authority of the IRC.
Choice "d" is incorrect. The reports of IRS agents are used to report on specific
taxpayer situations. IRS agents' reports apply the Internal Revenue Code, IRS
regulations, and other forms of authoritative literature, but they do not hold the
value that the IRC, the IRS regulations, or even tax court decisions have.
Which of the following items should be included on the Schedule M-1, Reconciliation
of Income (Loss) per Books With Income per Return, of Form 1120, U.S. Corporation
Income Tax Return to reconcile book income to taxable income?
a. Cash distributions to shareholders.
b. Premiums paid on key-person life insurance policy. c. Corporate bond interest.
d. Ending balance of retained earnings.
ANSWER:
Choice "b" is correct. The Schedule M-1 reports the reconciliation of income (loss)
per books to income (loss) per the tax return. [Note: It reports both permanent and
temporary differences that are discussed in the Financial textbook for deferred
taxes.]. Items that are included on this schedule are those that are (1) reported as
income for book purposes but not for tax purposes; (2) reported as an expense for
book purposes but not for tax purposes; (3) reported as taxable income for tax
purposes but not as income for book purposes; and (4) reported as deductible for
tax purposes but not as an expense for book purposes. The only option above that
falls into one of these four categories is option b. Premiums paid on a key- person
life insurance policy are proper GAAP expenses for book purposes, but they are not
allowable deductions for tax purposes.
Choice "a" is incorrect. Cash distributions to shareholders are not reported on the
income statement for book purposes and are not deductible as an expense for tax
purposes. They do not enter into the calculation of income in either case and are
not reported on the Schedule M-1. Cash distributions actually are reported on
Schedule M-2, which is a reconciliation of unappropriated retained earnings.
Choice "c" is incorrect. Corporate bond interest is not reported differently for GAAP
and Tax purposes. It is included as income for GAAP purposes and for tax purposes.
Therefore, no reconciliation of book income to taxable income is required for this
item.
Choice "d" is incorrect. The ending balance of retained earnings is not reported on a
GAAP income statement, nor is it included as part of taxable income. Therefore, it is
not part of the Schedule M-1. Unappropriated retained earnings are reconciled on
Schedule M-2 of the Form 1120.
In which of the following situations may taxpayers file as married filing jointly?
a. Taxpayers who were married but lived apart during the year.
b. Taxpayers who were married but lived under a legal separation agreement at
the end of the year. c. Taxpayers who were divorced during the year.
d. Taxpayers who were legally separated but lived together for the entire year.
ANSWER:
RULE: In order to file a joint return, the parties must be MARRIED at the end of the
year. Exception: If the parties are married but are LEGALLY SEPARATED under the
laws of the state in which they reside, they cannot file a joint return (they will file
either under the single or head of household filing status).
Choice "a" is correct. Per the above rule, taxpayers who are married but lived apart
during the year are allowed to file a joint return for the year. The fact that they did
not live together during the year has no bearing on the issue.
Choice "b" is incorrect. Per the above rule, taxpayers who are married but lived
under a legal separation agreement at the end of the year may not file a joint
return. They will generally file either under the single or head of household filing
status.
Choice "c" is incorrect. Per the above rule, taxpayers who were divorced during the
year may not file a joint return together, as they are not married at the end of the
year. [Note, however, that they may become married again in the year and file a
joint return with the new spouse.]
Choice "d" is incorrect. Per the above rule, taxpayers who were legally separated
but lived together for the entire year may not file a joint return. They will generally
file either under the single or head of household filing status.
Which one of the following will result in an accruable expense for an accrual-basis
taxpayer?
a. An invoice dated prior to year end but the repair completed after year end. b. A
repair completed prior to year end but not invoiced.
c. A repair completed prior to year end and paid upon completion.
d. A signed contract for repair work to be done and the work is to be completed at
a later date.
ANSWER:
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.
At a confidential meeting, an audit client informed a CPA about the client's illegal
insider-trading actions. A year later, the CPA was subpoenaed to appear in federal
court to testify in a criminal trial against the client. The CPA was asked to testify to
the meeting between the CPA and the client. After receiving immunity, the CPA
should do which of the following?
ANSWER:
Choice "c" is correct. A CPA can be compelled to disclose confidential client
information if he is subpoenaed and the information is relevant to the court case.
The CPA's information regarding illegal insider trading would be relevant in a
criminal case.
Choice "a" is incorrect. The Fifth Amendment only applies to self-incriminating
evidence. Here the evidence does not relate to wrongdoing by the CPA, but rather to
wrongdoing by the client.
Choice "b" is incorrect. The privileged communication rule for accountants does not
apply at the federal level.
Choice "d" is incorrect. Since there is no privilege communication rule in federal
courts, the CPA must reveal all relevant information if subpoenaed.
Which of the following types of entities is entitled to the net operating loss
deduction?
a. Partnerships.
b. S corporations.
c. Trusts and estates.
d. Not-for-profit organizations.
ANSWER:
RULE: A Net Operating Loss (NOL) exists if there is a net loss on the following tax
returns:
Choice "c" is correct. Per the above rule, trusts and estates are entitled to a net
operating loss deduction. Trusts and estates can be taxable entities, even though, at
times, they may also have pass-through effects.
Choice "a" is incorrect. Partnerships are pass-through entities; thus, they do not pay
tax at the entity level. Therefore, NOLs are not allowed at the partnership level.
[Note: If the partnership has a pass- through loss, however, an NOL may exist, for
example, on the personal tax return of an individual partner.]
Choice "b" is incorrect. S Corporations are pass-through entities; thus, they do not
pay tax at the entity level. Therefore, NOLs are not allowed at the S Corporation
level. [Note: If the S Corporation has a pass-through loss; however, an NOL may
exist, for example, on the personal tax return of an individual shareholder.]
Choice "d" is incorrect. Not-for-profit organizations are not taxable entities (although
they may generate some taxable income, called unrelated business taxable
income); therefore, they cannot generate net operating losses.
Jans, an individual, owns 80% and 100% of the total value and voting power of A
and B Corps., respectively, which in turn own the following (both value and voting
power).
Ownership
Property
A Corp.
B Corp.
C Corp.
80% D Corp.
100%
All companies are C corporations, except B Corp., which had elected S status since
inception. Which of the following statements is correct with respect to the
companies' ability to file a consolidated return?
a. A, C, and D may file as a group.
b. A and C may not file as a group, and B and D may not file as a group. c. A and
C may file as a group, and B and D may file as a group.
d. A and C may file as a group, but B and D may not file as a group.
ANSWER:
RULE: Filing a consolidated return is a privilege afforded to affiliated groups of
corporations (Code Sections 1501 and 1504(b)), and it can only be filed if all of the
affiliated corporations consent to such a filing. An affiliated group has ownership
through a common parent. The common parent must directly own at least 80% of
the voting power of at least one of the affiliated (includible) corporations and at
least
80% of the value of the stock of that corporation, and the other corporations not
controlled by the parent must be controlled under the 80% ownership test by an
includible corporation. Not all corporations are allowed the privilege of filing a
consolidated return.
Examples of those that are denied the privilege include: (1) S Corporations,
(2) Foreign corporations,
(3) Most real estate investment trusts (REITs), (4) Some insurance companies, and
(5) Most exempt organizations.
Choice "d" is correct. To summarize the facts in the question, the ownership
percentage rules are met for all corporations. A, C, and D are all C corporations, and
B Corp is an S corporation. Jans owns A and B; A owns C; and B owns D. Per the
rules above, S corporations are denied the privilege of filing a consolidated return.
Therefore, B Corp. cannot file a consolidated return. A and C may file a consolidated
return, as Jans controls A, and A controls C in the required percentages and both are
includible corporations. However, the control of D rests with B, an S corporation.
Therefore, D cannot be consolidated with A or C, and because B cannot file a
consolidated return (as it is an S corporation), D cannot file consolidated with B.
Therefore, A and C may file as a group, but B and D may not file as a group.
Choice "a" is incorrect. Per the above rules, D cannot file as a group with A and C, as
the control of D
rests with B, an S corporation that is not deemed an includible corporation.
Choice "b" is incorrect. A and C may file a consolidated return, as Jans controls A,
and A controls C in the required percentages and both are includible corporations.
The control of D rests with B, an S corporation. Therefore, D cannot be consolidated
with A or C, and because B cannot file a consolidated return (as it is an S
corporation), D cannot file consolidated with B. Therefore, A and C may file as a
group, but B and D may not file as a group.
Choice "c" is incorrect. A and C may file a consolidated return, as Jans controls A,
and A controls C in the required percentages and both are includible corporations.
The control of D rests with B, an S corporation. Therefore, D cannot be consolidated
with A or C, and because B cannot file a consolidated return (as it is an S
corporation), D cannot file consolidated with B. Therefore, A and C may file as a
group, but B and D may not file as a group.
In the current year, an unmarried individual with modified adjusted gross income of
$25,000 paid $1,000 interest on a qualified education loan entered into on July 1.
How may the individual treat the interest for income tax purposes?
a. As a $500 deduction to arrive at AGI for the year.
b. As a $1,000 deduction to arrive at AGI for the year. c. As a $1,000 itemized
deduction.
d. As a nondeductible item of personal interest.
ANSWER:
RULE: The adjustment for education loan interest (an above-the-line deduction to
arrive at AGI) is limited to the amount paid or $2,500 (whichever is lower), and all
qualified education loan interest is allowed as part of the adjustment. The
adjustment is phased-out for single taxpayers with modified AGI between
$50,000 and $65,000 (2005 tax lawthe amounts are indexed annually for inflation
and the 2006 amount is not available at this time).
Choice "b" is correct. Per the above rule, the $1,000 of qualified education loan
interest paid in the year is reported as a deduction to arrive at AGI for the year.
Choice "a" is incorrect. The adjustment for education loan interest (an above-theline deduction to arrive at AGI) is limited to the amount paid or $2,500 (whichever is
lower), and all qualified education loan interest is allowed as part of the adjustment.
Therefore, the total amount paid of $1,000 is an allowable adjustment. (The $500
limit likely refers to an older education tax law that is no longer in effect.)
Choice "c" is incorrect. Allowable education loan interest paid is deductible as an
adjustment, which is an above-the-line deduction to arrive at AGI. It is not reported
as the less-advantageous itemized deduction.
Choice "d" is incorrect. Allowable education loan interest paid is deductible as an
adjustment, which is an above-the-line deduction to arrive at AGI. Only the
disallowed portion (in this case there is no disallowed portion) is a nondeductible
item of personal interest.
Page, CPA, has T Corp. and W Corp. as audit clients. T Corp. is a significant supplier
of raw materials to W Corp. Page also prepares individual tax returns for Time, the
owner of T Corp. and West, the owner of W Corp. When preparing West's return,
Page finds information that raises going-concern issues with respect to W Corp. May
Page disclose this information to Time?
a. Yes, because Page has a fiduciary relationship with Time.
b. Yes, because there is no accountant-client privilege between Page and West.
c. No, because the information is confidential and may not be disclosed without
West's consent.
d. No, because the information should only be disclosed in Page's audit report on
W Corp.'s financial statements.
ANSWER:
Choice "c" is correct. Under Rule 301, a member in public practice cannot disclose
its client's confidential information without permission from the client. In this case,
West is an individual with his/her own confidential relationship with tax preparer
Page, CPA. Information discovered during the preparation of West's individual tax
return is confidential and cannot be disclosed without West's permission.
Additionally, tax preparers are prohibited from disclosure of a client's information
without client permission.
Choice "a" is incorrect. Page's relationship to Time is not one of the exceptions to
the confidentiality rules.
Choice "b" is incorrect. Page is a CPA subject to the Professional Rules of Conduct,
Rule 301, and West is Page, CPA's client.
Choice "d" is incorrect. Page CPA should discuss the going concern with West to
determine its significance to the audit of W Corp.'s financial statements and to seek
permission to disclose the taxpayer's information. There is potential for a conflict of
interest in doing the audit that should be considered.
Part agreed to act as Young's agent to sell Young's land. Part was instructed to
disclose that Part was acting as an agent but not to disclose Young's identity. Part
contracted with Rice for Rice to purchase the land. After Rice discovered Young's
identity, Young refused to fulfill the contract. Who does Rice have a cause of action
against?
Part Young
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
ANSWER:
Choice "a" is correct. Once an undisclosed principal becomes known to the third
party, the third party can elect to hold either the agent or the principal liable for
breach of contract.
Choice "b" is incorrect, per the above explanation. Choice "c" is incorrect, per the
above explanation. Choice "d" is incorrect, per the above explanation.
Tana's divorce decree requires Tana to make the following transfers to Tana's former
spouse during the current year:
Alimony payments of $3,000. Child support of $2,000.
Property division of stock with a basis of $4,000 and a fair market value of $6,500.
$3,000
$7,000
$9,500
$11,500
ANSWER:
RULE: Alimony payments to a former spouse are adjustments to arrive at AGI. Child
support payments are NOT alimony and are NOT deductible. Property settlements
are NOT alimony and are NOT deductible.
Choice "a" is correct. Only the amount of alimony ($3,000) is allowed as Tana's
alimony deduction. Choice "b" is incorrect. The basis of property division of stock
($4,000) is NOT alimony and is NOT
deductible, but the $3,000 in alimony paid is deductible.
Choice "c" is incorrect. The fair market value of property division of stock ($6,500) is
NOT alimony and is
NOT deductible, but the $3,000 in alimony paid is deductible.
Choice "d" is incorrect. The fair market value of property division of stock ($6,500)
and the child support
($2,000) are NOT alimony and are NOT deductible, but the $3,000 in alimony paid is
deductible.
Ball borrowed $10,000 from Link. Ball, unable to repay the debt on its due date,
fraudulently induced Park to purchase a piece of worthless costume jewelry for
$10,000. Ball had Park write a check for that
amount naming Link as the payee. Ball gave the check to Link in satisfaction of the
debt Ball owed Link. Unaware of Ball's fraud, Link cashed the check. When Park
discovered Ball's fraud, Park demanded that Link repay the $10,000. Under the
Negotiable Instruments Article of the UCC, will Link be required to
repay Park?
a. No, because Link is a holder in due course of the check.
b. No, because Link is the payee of the check and had no obligation on the check
once it is cashed. c.
Yes, because Link is subject to Park's defense of fraud in
the inducement.
d. Yes, because Link, as the payee of the check, takes it subject to all claims.
ANSWER:
Choice "a" is correct. A Holder in Due Course takes free of personal defenses.
Fraudulent inducement is a personal defense. Park should have verified the worth of
the jewelry before giving Ball the check. Link is a holder in due course because Link
gave the transferor Ball value (the $10,000) without notice of any defenses and in
good faith.
Choice "b" is incorrect. Even though the check was cashed, payees and endorser's
remain secondarily liable. The drawee bank was primarily liable on the instrument.
This choice is not the reason why Link is not liable on the instrument to Park.
Choice "c" is incorrect, per the above explanation in choice "a".
Choice "d" is incorrect. Link is a holder in due course and does not take subject to
"all" claims. An HDC
does take subject to real defenses.
ANSWER:
Choice "d" is correct. The rules for depreciable basis in tax are generally the same
as the GAAP rules for capitalizing an asset. The depreciable basis is the cost
associated with the purchase of the asset and with getting the asset ready for its
intended use. Further improvements are also capitalized, and the
basis is reduced for any accumulated depreciation. In this case, the cost of
obtaining the equipment and getting the equipment ready for its intended use
includes all the items shown above, as follows:
Purchase price
$55,000
Delivery charges 725
Installation fees
300
Sales tax
3,400
Total depreciable basis
$59,425
Choice "a" is incorrect. The costs of delivery charges, installation, and sales tax are
all part of the cost of obtaining the asset and getting the asset ready for its
intended use. All of these charges are included in the depreciable basis of the
equipment.
Choice "b" is incorrect. The costs of delivery charges and installation are both part
of the cost of obtaining the asset and getting the asset ready for its intended use.
These charges are included in the depreciable basis of the equipment.
Choice "c" is incorrect. The cost of installation is part of the cost getting the asset
ready for its intended use. This charge is included in the depreciable basis of the
equipment.
Which of the following securities is exempt from registration under the Securities
Act of 1933?
a. Municipal bonds.
b. Securities sold by a discount broker.
c. Pre-incorporation stock subscriptions.
d. One-year notes issued to raise working capital.
ANSWER:
Choice "a" is correct. Municipal bonds are securities issued by the government and
are generally exempt from registration.
Choice "b" is incorrect. Securities issued by discount brokers are required to be
registered and do not fall within the exempt securities of section 3 of the 1933 Act.
Choice "c" is incorrect. Pre-incorporation stock subscriptions are required to be
registered and do not fall within the exempt securities of section 3 of the 1933 Act.
Choice "d" is incorrect. One-year notes are securities that are required to be
registered and do not fall within the exempt securities of section 3 of the 1933 Act.
ANSWER:
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.
Which of the following is correct concerning the LIFO method (as compared to the
FIFO method) in a period when prices are rising?
a. Deferred tax and cost of goods sold are lower.
b. Current tax liability and ending inventory are higher.
c. Current tax liability is lower and ending inventory is higher.
d. Current tax liability is lower and cost of goods sold is higher.
ANSWER:
NOTE: This question was released by the AICPA as a Regulation question, and while
it relates to tax, it is actually more of a question related to financial accounting.
Therefore, the reference to the Becker textbooks is to the Financial textbook.
Choice "d" is correct. Under LIFO, the last costs inventoried are the first costs
transferred to cost of goods sold. Ending inventory, thus, includes the oldest costs.
The ending balance of inventory will typically not approximate replacement cost, as
it will under FIFO. Further, LIFO generally does not reflect the actual flow of goods in
a company because most companies sell their oldest goods first to prevent holding
old or obsolete items. This question asks about current and deferred income tax
expenses and about current tax liability. Therefore, it is focusing on the effects of
LIFO vs. FIFO on the income statement for tax expense. It further asks about the
impact on the balance sheet. As discussed above, LIFO tends to match current
revenues with current costs because (in a period of rising prices, as in this case) the
cost of goods sold under LIFO tends to be higher than the cost of goods sold under
FIFO. The ending inventory under LIFO, however, tends to be lower than the ending
inventory under FIFO, as the oldest goods are the ones still in inventory under LIFO.
So, cost of goods sold is higher under LIFO than under FIFO in a period of rising
prices. If the expense is higher on the tax return, then, the related income tax
expense is lower. Therefore, the current tax liability would be lower.
Choice "a" is incorrect. As discussed above, LIFO tends to match current revenues
with current costs because (in a period of rising prices, as in this case) the cost of
goods sold under LIFO tends to be higher than the cost of goods sold under FIFO,
not lower. Also, the effect on deferred tax really depends on if ending inventory is
ANSWER:
Choice "b" is correct. For IRAs, the adjustment is allowed for a year ONLY if the
contribution is made by the due date of the tax return for individuals (April 15). The
due date for filing the tax return under a filing extension is NOT allowed (i.e., filing
extensions are NOT considered).
Choice "a" is incorrect, per the above explanation. Choice "c" is incorrect, per the
above explanation. Choice "d" is incorrect, per the above explanation.
Barkley owns a vacation cabin that was rented to unrelated parties for 10 days
during the year for $2,500. The cabin was used personally by Barkley for three
months and left vacant for the rest of the year. Expenses for the cabin were as
follows:
Real estate taxes
Maintenance and utilities
$1,000
$2,000
How much rental income (loss) is included in Barkley's adjusted gross income?
a.
b.
c.
d.
$0
$500
$(500)
$(1,500)
ANSWER:
RULE: If a vacation residence is rented for less than 15 days per year, it is treated as
a personal residence. The rental income is excluded from income, and mortgage
interest (first or second home) and real estate taxes are allowed as itemized
deductions. Depreciation, utilities, and repairs are not deductible.
Choice "a" is correct. Applying the rule above, if a vacation residence is rented for
less than 15 days per year, it is treated as a personal residence. The rental income
($2,500 in this case) is excluded from income. A Schedule E is not filed for this
property (i.e., no income is reported, the taxes are reported as itemized deductions,
and the maintenance and utilities are not deductible), so the effect on AGI is zero.
Choice "b" is incorrect. This assumes that the property taxes are reported as
itemized deductions but that the rental income ($2,500) less the maintenance and
utilities ($2,000) are reported net on Schedule E.
Per the above RULE, the rental income is excluded from income, and the
maintenance and utilities are not deductible.
Choice "c" is incorrect. This assumes that all of the items shown are reported net on
the Schedule E
$2,500 - $1,000 - $2,000 = ($500). Per the above RULE, the rental income is
excluded from income, the maintenance and utilities are not deductible, and the
property taxes are reported on Schedule A as an itemized deduction.
Choice "d" is incorrect, per the above rule and discussion.
In the current year, Brown, a C corporation has gross income (before dividends) of
$900,000 and deductions of $1,100,000 (excluding the dividends-received
deduction). Brown received dividends of
$100,000 from a Fortune 500 corporation during the current year. What is Brown's
net operating loss?
a.
b.
c.
d.
$100,000
$130,000
$170,000
$200,000
ANSWER: RULES:
A net operating loss (NOL) for corporations is the excess of deductions over gross
income; however, the dividends received deduction is allowed to be deducted
before calculating the NOL.
The dividends received deduction (DRD) for entities that are controlled 0% to <20%
(which is how a Fortune 500 corporation would be controlled) is the LESSER of 70%
of dividends received or 70% of taxable income computed without regard to the
DRD, and NOL deduction, or any capital loss carryback (but this does not apply in
the case when deducting the full DRD results in an NOL).
Choice "c" is correct. Applying the rules above, Brown's net operating loss is
calculated as follows:
Gross income before dividends $900,000
Add: Dividends received 100,000
Less: Deductions (excluding DRD)
(1,100,000)
Less: DRD
(70,000) [$100,000 x 70%]
NOL $(170,000)
Choice "a" is incorrect. The dividends received deduction ($70,000 in this case) is
allowed to be deducted before calculating the NOL[$900,000 + $100,000 $1,100,000 = ($100,000)].
Choice "b" is incorrect. The DRD is 70% of the dividends received ($70,000), not
30% (or, $30,000) [$900,000 + $100,000 - $1,100,000 - $30,000 = ($130,000)].
Choice "d" is incorrect. The DRD for ownership of a Fortune 500 company is 70% of
the dividends received, not 100%[$900,000 + $100,000 - $1,100,000 - $100,000
= ($200,000)].
Kerr and Marcus form KM Partnership with a cash contribution of $80,000 from Kerr
and a property contribution of land from Marcus. The land has a fair market value
of $80,000 and an adjusted basis of
$50,000 at the date of the contribution. Kerr and Marcus are equal partners. What
is Marcus's basis immediately after formation?
a.
$0
b.
$50,000
c.
$65,000
d.
$80,000
ANSWER:
RULE: Generally, no gain or loss is recognized on the contribution of property to a
partnership in return for partnership interest. The basis of the partnership interest is
the basis of the property in the hands of the partner upon contribution. The
partnership takes on the contributor's basis of the contributed property; however, if
the fair market value of the property differs from the basis, the amount of the
unrealized gain or loss at the date of contribution is specially-allocated to the
contributing partner upon the sale of that contributed property.
Choice "b" is correct. Per the above rule, Marcus's basis in the partnership
immediately after formation is
$50,000which is Marcus's basis in the land at the date of contribution.
Choice "a" is incorrect. Marcus has basis in the partnership in the amount of
Marcus's basis in the property upon contribution.
Choice "c" is incorrect. Per the above rule, the Marcus's basis in the partnership
immediately after formation is $50,000which is Marcus's basis in the land at the
date of contribution.
Choice "d" is incorrect. Per the above rule, the Marcus's basis in the partnership
immediately after formation is $50,000which is Marcus's basis in the land at the
date of contribution. The basis is not the fair market value at the date of
contribution.
ANSWER:
Choice "b" is correct. Generally, one can assign rights to receive under a contract
with the exception of personal services or when the assignment increases the
obligor's risk. The right to receive money is a very common right that is assignable.
Choice "a" is incorrect, per the above explanation.
Choice "c" is incorrect. Insurance policies are contracts involving the assessment of
risk. Coverage rights under these contracts are not assignable.
Choice "d" is incorrect. Legal prohibition of a right prevents lawful assignment.
Which of the following entities may adopt any tax year end?
a. C corporation. b. S corporation.
c. Limited liability company. d. Trust.
ANSWER:
Choice "a" is correct. C corporations may adopt any year end, provided the year end
is approved by the
IRS.
Choice "b" is incorrect. S corporations must generally adopt a calendar year end;
however, certain S corporations may establish a valid business purpose for a
different fiscal year by filing an election using Form 8716.
Choice "c" is incorrect. Limited liability companies generally elect to be taxed as
partnerships. Partnerships must generally use the year end or the majority of its
partners. If there is no majority, then the partnership must generally use a calendar
year end.
ANSWER:
RULE: Generally, no gain or loss is recognized on the contribution of property to a
partnership in return for partnership interest. The basis of the partnership interest is
the basis of the property in the hands of the partner upon contribution. The
partnership takes on the contributor's basis of the contributed property; however, if
the fair market value of the property differs from the basis, the amount of the
unrealized gain or loss at the date of contribution is specially-allocated to the
contributing partner upon the sale of that contributed property.
Choice "b" is correct. Applying the rule above, Smith's basis in the partnership upon
contribution is calculated as follows:
Cash contributed $3,000
Basis of stock contributed 2,000
Basis of computer contributed
2,500
Basis in partnership
$7,500
Choice "a" is incorrect. This answer assumes that the fair market value of the stock
($5,000) is used to calculate the basis of the partnership, but this is an incorrect
assumption (the basis of $2,000 is used).
Choice "c" is incorrect. This answer neglected to include in the basis of the
partnership the $2,000 basis of the stock contributed.
Choice "d" is incorrect. This answer neglected to include in the basis of the
partnership ant property contributed to the partnership and only considered the
cash contributed, which is incorrect (per the above rule).
While preparing a client's individual federal tax return, the CPA noticed that there
was an error in the previous year's tax return that was prepared by another CPA.
The CPA has which of the following responsibilities to this client?
a. Inform the client and recommend corrective action.
b. Inform the client and the previous CPA in writing, and leave it to their discretion
whether a correction should be made.
c. Discuss the matter verbally with the former CPA and suggest that corrective
action be taken for the client.
d. Notify the IRS if the error could be considered fraudulent or could involve other
taxpayers.
ANSWER:
Choice "a" is correct. When a tax preparer becomes aware of an error in a
previously filed return, he should promptly notify the taxpayer.
Which of the following is an advantage of forming a limited liability company (LLC)
as opposed to a partnership?
a. The entity may avoid taxation.
b. The entity may have any number of owners.
c. The owner may participate in management while limiting personal liability.
d. The entity may make disproportionate allocations and distributions to members.
ANSWER:
Choice "c" is correct. A member in a limited liability company has limited liability
and the ability to manage, while a partner in a general partnership has full liability
and the ability to manage.