Missed Questions Flashcards
Mr. and Mrs. Able want to set up a 529 for their 4 grandchildren. What is the maximum amount he can contribute in 1 year without making a taxable gift in 2013 NOTE use $14,000
14000X5 - 70,000. 70,000 x4 kids = 280,000
In regards to the CFP(r) marks, which of the following can be used?
Certified Financial Planner (TM) NO, need caps
CFP(TM) proactitioner NO
C.F.P.(r) designee NO
CFP(r) certificant YES!
Bonnie will have to make payments of 10,000 per year 6 years from now. She will have to make payments at the beginning of the 6th year. She believes she can make 10% after-tax return on a fund she set aside now. How much does she have to put into the fund TODAY to make future payments?
"how much does she have to put in the fund today"= lump = pv PV = ? = 41,699 I = 10 N = 5 pmt = -10,000
FV= 41699 I = 10 N= 5 PV = ? 25,892
Which of the following retirement plans is not covered under the new unlimited bankruptcy protection
SEP-IRA
IRA contributions - ANSWER =only 1 million
SIMPLE IRA
Solo 401K
Mr. and Mrs Lawson are very wealth. Their children (minors) will never qualify for grants or loans for college expenses. even through they are in the highest tax bracket, they trigger AMT. Tey set up maximum 529 plan 6 years ago, any they want to take any tax advantage and graduate school costs. What else could they do?
Set up a UTMA account and gift some of their low basis stock? answer, no income limit
Not claim their children as dependents = answer
Buy EE bonds in an UTMA and have the interest declared annually = answer
Buy EE educational bonds for the children
Which of the following is NOT true about ESAs Coverdells
account gain are tax-free if the funds are used for qualified education purposes
Contributions are considered to be a gift of a future interest = answer this is false
the custodian cannot prevent the beneficiary from taking a distribution even if it is not to be used for qualified education expenses
the funds must be distributed by the time the beneficiary reaches age 30 or rolled to a new beneficiary.
College Savings Plans (QTPs) do not cover which of the following?
room and board
books
computer (if required)
Locked-in tuition prices = answer = prepaid one type of 529
Which of the following agencies does not monitor or oversee commercial banks?
FDIC
Federal Reserve
Comptroller of Currency
Department of Treasury = answer
Which of the following is NOT considered a leading economic indicator?
money supply stock prices industrial production = answer new manufacturing orders initial claims for unemployment
The Investment Company Act of 1940 regulates the functions of investment companies. What types of company does it regulate?
Mutual Funds Publicly Traded Funds Fixed Trusts UITs answer all the above
Brian Campbell, CFP(r) is ready to implement the client’s financial planning with an attorney. Brian is in what practice standard of the financial planning process?
300 400 500 - answer note Practice Standard is diff from 600 700
Mr. and Mrs. Newsome plan to send their son to a religious elementary school. Some years ago they set up various education savings programs for their son. Out of which of the follwoing accounts could they pay expense for tuition?
prepaid tuition
529 plan
Coverdell ESA = elementary
None of the above
Mr. and Mrs. Tice want to fund for their daughter’s education. Their daughter is in the 1st grade and will need a computer with software in 2 years. How should they fund the computer (tax wise) and other elementary education expenses if they are in a 28% marginal income tax bracket?
use cash flow
set up a Coverdell ESA = elementary ed
set up a UTMA account
Invest in a money market account
the “Fed” does NOT use which of the following tools to control the money supply
setting the fed funds rate = answer
setting the discount rate
establishing open market operations
setting reserve requirements
FYI
$50 for stolen cc responsibility
simply add number of cc and if under $50, don't add in more 500 50 500 25 =175 resp
Mutual funds regulated by which of the following?
NYSE FINRA SEC = ANSWER Comptroller of Currency investors
The provisions of the Securities and Exchange Act of 1934 do NOT apply to which of the following securities?
A. Issuance of municipal bonds
B. Trading of corporate bonds
C. trading of municipal bonds
D. Issuance of corporate financial statements
A. issuance of municipal bonds
Does the Code of Ethics Apply to candidates for CFP(r) Certification (have NOT passed the test yet)?
A. no
B. yes
C. no, they have not taken or passed the test yet
D. yet, it applies to candidats who are register as such with the CFP Board
C: No, they have not taken or passed the test yet.
A parent with one child in the first year of college SHOULD choose which of the following credit if he/she paid tuition
a) a Hope credit of $1800
b) American Opportunity Credit of $2500
c) a lifetime learning credit $800
d) a hope credit of $1000 and a lifetime learning credit of $1000
B. American Opportunity Credit of $2500
What is Practice Standard 600 of the financial planning process?
a) implementing the plan
b) monitoring the plan
c) presenting financial planning recommendations
d) selling the clients products
b. Monitoring the plan
FHA mortgages are guaranteed by which of the following?
a) federal government
b) department of treasury
c) FNMA
d) FDMAC
A) Federal Government
Fiscal policy activities of the federal government include which of the following? 1. expenditures 2. taxation 3 the money supply 4. open market operations
taxation
the money supply
in regards to the lifetime learning credit, all the following are true except which of the following? (the false one)
a. the credit is a per-period rather than a per student
b. the credit is based on 20% of the first $10,000 of qualified expenses
c. only the first 2 years of post-secondary expenses apply
d. qualifying expenses do not include room and board
only the first 2 years of post-secondary expenses apply
Which of the following is NOT included in the ADV part II of a SEC investment adviser filling?
a. form of business entity
b. fee structure
c. investment strategies
d. investment discretion
A. form of business entity
The IAA is an acronym for which of the following?
a. institute of Acturial Accounting
b. implied actual analysis
c. investment advisers act
d. investment accountability act
Investment Advisors Act
How is fiscal policy set?
a. federal reserve action
b. congressional action
c. presidential action
d. inflation
congressional action
when is a contraction a recession? a 3 mo b 6 mo c 2 consecutive quarters of decline in GDP d 2 years
2 consecutive quarters of decline in real GDP
Which of the following is true concerning EE education bonds?
1) they are normally purchased in the parents name
2) they are tax-free if redeemed for tuition if parent’s MAGI is uner certain thresholds
3) they are normally purchased in a UTMA account
4) they are normally issued in the name of the child
1&2
1) they are normally purchased in the name of the parent
2) they are tax free if redeemed for tuition if the parent’s magi is under certain thresholds
A small company wants to retire $10,000,000 of bonds at the end of 10 years. How much should the company set aside in semiannual deposits starting today to reach its target They feel they can earn 4% on the deposited money.
2 p/yr, begin mode fv = 10,000,000 g-n= 10 i = 4 pmt = ? 403,497.23
NOTE! if question doesn’t say “in today’s dollars” then keep the TVM calculation simple “she needs $40,000 available at age 18”
FV = 40,000 I = 8 = after tax return N= 16 years PV? beg mode
Can a financial planner be sued for failing to deliver services or plans required by a written agreement with a client?
Yes
Sandy has her Series 6 and all applicable state licenses. She may not sell which of the following investments?
a) variable annuity
b) variable life insurance
c) mutual fund traded on a major exchange
d) UIT
mutual fund traded on a major exchange
which of the following is true about budgeting?
- cash flow management is a form of budgeting
- budgeting provides a guideline to measure actual performance
- budgeting is creating a plan for spending and investing client resources
- budgeting should indicate the actual results
cash flow mgment is a form of budgeting
budgeting provides a guideline to measure actual performance
budgeting is creating a plan for spending and investing client resources.
The CFP Board Code of Ethics defines STANDARDS OF PROFESSIONAL CONDUCT of the CFP(r) certificate for the purpose of civil liablity
The Code of Ethic does not address civil liability
American Opportunity Credit coordinate (same dollars claimed) with which of the following? Lifetime Learning Credit 529 plans coverdell esas pell grants
Lifetime learning credit
529 plans
coverdell ESAs
Ted purchased a home. He took out a $300,000 (30 year at 8%) when mortgage rates declined 2 years later, he re-financed the remaining principal. To refinance at 6% for 30 years a fee of $1000 was added to the new loan. What principal will be remaining after the 6th year of the new loan?
think amortize
1) click on amortize button and plug in variables for 2 loans.
question 119 on test bank 1
Bob and Alice Green rent an apartment. They want to purchase a home for 200,000. They want to make a 20% down payment on the home. They have already earmarked $5000 of their savings as a down payment. They feel they can save $500 per month (end). Approximately how many months do they need to save to fund the down payment on the home if they can make 6% on their money?
20% of 200,000 = FV = 40,000 PV= -5000 (lump) pmt = -500 I = 6 N = ?
a young couple purchased their home 2 years ago. they used a 30 year arm and put 20% down on their home. The interest rate was 6% annually for the first and second year. The principal remaining after the second year is 155,948. The ARM just increased to 8%. They are thinking of re-financing. WHAT WAS THE ORIGIONAL COST OF THE LOAN? think 30 year 2year of payment 20% down
200,000
Jill wants to fund her daughters college needs. She needs $40,000 available at age 18. Her daughter is age 2. She feels that she can make an 8% after tax return and that inflation will be 3% over the pre-college years. How much does Jill need to deposit today to meet her goal?
!!!! problem gives information to calculate inflation adjusted, but doesn’t ask for it!!!
“does not say in todays dollars = don’t bite”
FV = 40,000
I= 8
N= 16
PV ? answer
Kate wants to save $50,000 in “todays dollars” for a future goal. She will need that sum by the end of 10 years. She plans to fund this goal by investing yearly at the end of each year. Kate believes that her after-tax earnings on investment will be 7% annually and that inflation will average 4% over the long term. How much does she need to save each year? = 2 steps right?
PV = 50,000
10 = N
4 = I
FV ? = 74,012.21
FV = 74,012,21
N = 10
7 = I
PMT
Todd purchased equipment worth 50,000 for the use in their business. It had to be modified for 10,000 cost. (the kick off) CF (-60,000) the rest of the game = 1 year cf 15,000 + 30,000+35,000 over 3 year period. the equipment it then worthless. If required rate of return is 8% what is the NPV
-60,000 cf0 \+15,000 \+30,000 \+35,000 I= 8 NPV
Jane is injured in a car accident. She has a personal disability policy that will replace all of her lost income. Sine she has been indemnified why can she also collect from the person at fault?
a) collateral source rules
b) negligence
c) Res ispa loquitur
d) Suborgation
e) absolute liability
Collateral source rule
Mr quinn has been suffering with Alzheimer’s disease for some time. Various family members take turns taking care of him. Yesterday, he fell down, and they had trouble lifting him up. The family feels they are unable to continue caring for him. If they put him in a skilled nursing facility, will he be covered by Medicare?
a) yes he has Alzheimers
b) yes, he fell down
c) no he has to have been in the hospital at least 3 days, and his condition must be expected to improve
d) no, he will be covered by Medicaid
No, he has to be have been in a hospital at least 3 days, and his condition must be expected to improve.
Uninsured motorist (UM) coverage does NOT apply to claims for which of the following.
a) medical expenses
b) lost wages
c) punitive damages
d) pain and suffering
Punitive damages
Jay, a 57 year old employee, is provided with $250,000 group term life insurance policy. For this coverage, Jay contributes $ .20 per $1000 of coverage ($250,000) per month. What amount is included in Jay’s income for the year of the table 1 rate is $.43 per $1000 of coverage per month?
.43 X 200 (b/c 50 tax free) = 86
.20 X 250 = -50
so = 36x12 = 432
Medicare Part A is available to whom?
a person age 65 who is entitles to SS cash benefits
a person age 65 who is entitle to monthly cash benefits from the Railroad retirement program
a disabled beneficiary receiving benefits for at least 2 years any age
all the above
What is the maximum fax free reimbursement for department care FSA?
$5000 per year
Toby Smith, age 65, bought whole life policy some years ago. He decides to SURRENDER the policy. The current values are as follows:
CV: 50,000
premium billed: 35,000
existing loan: 30,000
dividend reducing premium: 15,000
How much of the surrender value will be subject to income tax
What is the basis?
Billed - Dividend =
35-15= 20
CV - base =
50 - 20 = 30,000
Tim Johnson exchanges a $100,000 ordinary life insurance contract for an annuity contract. Tim paid $20,000 of premium over the life of the contract. The cash value of the contracts is $19,000. What is the basis of the annuity contract at issue?
What did he pay for it = 20,000
Cathy Thomas and Beth Adams own CB Inc. They are considering adopting a cross-purchase buy-sell arrangement using life insurance. Cathy’s husband is Bell, and beth’s husband is Tom. Who should own and be the beneficiary of the Beth’s policy?
Cathy should own the policy and be the beneficiary.
John, while driving his car during a violent storm, hit a prize bull which had wandered on the road. John’s car was destroyed, he was badly hurt, and the bull died. The farmer is suing John for negligent driving. Under which section of his PAP policy will he be covered?
BIPD = Liability = Bull = property damage.
Is severity of the loss more important than the probability of the loss?
SEVERITY is more important (think loss of my home)
Which of the following is a benefit provided by Medicare B
coverage for prescription drugs that can be self-administered = no
coverage for skilled care
routine physical care
hospital care beyond 150 days of one stay
routine physical care
Beth, age 45, earns $100,000. She is eligible for 5 times annual income in group life insurance. Non-key employees are only eligible for 1 times annual income. If the Table 1 rate $.15 per 1000 per month, how much income is she charged for this benefit?
.15X500X12 = $900
Tricky! She is a key employee, so the first 50,000 exemption is lost
In a corporation liquidation, when are common stockholders paid?
before all creditors
before bondholders and preferred stockholders
after bondholders and preferred stockholders
after creditors
after bondholders and preferred stockholders
HPR (taxes)
Beth (35% tax bracket) bought 1000 shares of Tech over 8 months for $40,000. It paid $1000 of dividends over the time she owned it. She just sold it for 60,000. What was her after-tax holding period return?
60,000-40,000+ 1000= 21,000
21,000X .35 = 13,650
13650/40,000 = 34.13%
Technical approaches include which of the following? Ratio analysis Profitability ratio debt ratio investment advisor opinions
Investment advisor opinions = technical analysis
ratios = fundamental
A stock with a beta of 1.5 is how much more volatile than an average stock?
50% more volatile
1 =1 exact
.5 = 1/2 as volatile
HPR margin
Bob Roberts bought PDQ stock at $100 per share (100 shares) on margin (50%). The Margin interest was 12% annually. After exactly 3 months, he sold teh shares for $150 per share. What is the HPR?
15,000 - (5,000 + 150) -5,000 / 5000 = 97%
1st 5000, = 10,000 * .5 (how much spent?) = 5000
150 = 5,000X.12 = $600/.25 = 150.
What tools can help client planner determine an optimal portfolio? a Monte Carlo Martkowitz efficient frontier strategic asset allocation tactical asset allocation
all of them can help
Which of the following is true concerning a new issue offering to a maximum of 35 non-accredited investors that has not been registered with the SEC? it is registered with the FINRA it is exempt under reg A it is exempt under reg D it is exempt under reg T
It is exempt under Reg D
Louie buys 100 shares of XYZ preferred stock at $80 per share. The par value is $100 per share. The dividend rate is 5%, with dividends paid semiannually. How much will Louie receive when the dividends are paid?
use the PAR to calculate interest
100X100 = 10,000 * .05 = 500/2 = $250 b/c semi annual
Which of the following are non diversifiable risks? industry risk unsystematic market risk interest rate
Market risk
Interest rate risk
Risk that hits the entire system
What does a correlation coefficient of -1 mean?
an increased variability of the portfolio return
an increased standard deviation
a possible risk-free portfolio construction
a changed weighted return of the portfolio
a possible risk free portfolio construction
tan oil and umbrellas, move opposite, no impact on each other.
Which of the following statements is NOT true about ADRs?
ADRs holders cannot vote for the Board of Directors
ADRs are listed on stock exchanges
ADRs declare dividends in U.S. Dollars
ADR dividends are eligible for the for the foreign tax credit
ADRs declare dividends in U.S. dollars
Which of the following risks can be GREATLY reduced through diversification? systematic risk market risk unsystematic risk PRIME
unsystematic risk
In regards to the EMH, which of the following is/are true?
the semi-strong form of EMH states that stock prices reflect all public and nonpublic information = no this is the strong
answers are 2,3,4
a market that is semi-strong form efficient is also weak-form efficient.
the weak form of the EMH refutes technical analysis but supports fundamental analysis
the strong form of EMH states the stock prices reflect all public and non public information
compare corp bond to muni, pick the muni and work it
Mrs. Summer is in the 28% tax bracket. She is considering the purchase of a municipal bond yielding 5% or a corporate bond yielding 7%. Both bonds have similar maturities and credit ratings. Which statement is true?
the effective yield on the corporate bond is higher…why?
Corporate bond yield is 7%
Muni - .05 / 1-.28 = 6.9%
Which of the following is trust about ADRs?
they eliminate currency risk (no - dividends paid foreign currency)
the dividends are declared in U.S. dollars (nope, se above)
they generally have low correlations with the U.S. securities
they allow the investor to sell the U.S. securities in overseas mkt
They generally have low correlations with the U.S. securities
your client wants you to analyze 2 funds based on the information below. If the risk free rate is 6% which fund should the client purchase and why? Q 39
note: Low r2 for both funds. alpha is eliminated, sharp or treynor. do i want a high or low sharp?
Fund X because it has the highest sharpe ratio
Ted Burns sell short 100 shares of LMN at $50 and sells LMN 50 put at $5. When will Ted make money?
when the market is stable
when the market falls
when the market rises
when the market is stable, the put he sold will expire and he gets to keep the premium. when the market falls, he sells short.
What is the macro aspect of the CAPM?
that pricing of securities in different markets cannot differ for any significant time
the specification of the relationship between risk and return for the individual assets
an alternative to the Black-Scholes option-pricing model
The development of the Captial market line
Which of the following is true concerning the beta of a portfolio?
it is greater than the weighted beta
it is equal to the weighted beta
it is less than the wighted beta
it is less than or equal to the weighted beta
the weighted beta is equal to the beta of the portfolio
In regards to charting, when a stock break through a resisance level, how is it considered? overpriced over bought Bullish bearish
bullish
Ted bought 100 shares of stock at $50 on Jan 1st. A year later, he wrote a 9 month call option when the stock was $60 option premium was $5. The price of the stock continued to rise, and the option was exercised. What amount of gain will he have to report, and is it long-term or short term?
100X50 = 5000 6000-5000 = 1000
sold call, premium was $5 = 500
1000+500= 1500 LTG, sale proceeds are lumped together.
Which of the following statements regarding EE bond and I bonds is/are true?
EEs are issued at full face value, I bonds are issued at full face value = T
EEs may qualify for tax benefits upon redemption when used for qualified education expenses; I bonds cannot be used for qualified education expenses = False
Both EEs and I bonds are backed by the full faith and credit of the US = True
EEs are fixed income securities; I bonds are an inflation-indexed accrual security = True
see answer
Mr and mrs steele are both professionals in their mid-40s. after putting their kids through college, they desperately need to save for retirement. Both make excellent income, but their employers do not provide retirement plans. They are concerned about taxes and AMT. Which of the following assets allocations do you recommend?
50% global 50% S&P 500 index = True
50% international; 50% muni bonds
50 % large cap; 50% s&p 500 index
50 % growth; 50 % GNMA
Which of the following statements are true about Eurodollar bonds?
the bonds are issued outside the U.S. = True
The bonds are issued in the U.S. = False
The purchaser are foreign residence = True
The purchaser are U.S. residence = fale
sdfad
Harry, age 35 and single, has a small money marekt account with $4500 in it he recently rented a vacant lot for 10,000 he has 30,000 in an IRA 10,000 corp bonds. he borrowed 5000 on a30 day note and has 2000 in credit card debt. What is his current ratio
4500 +10,000 (Accts receivable) + 10,000 bonds / CC and loan
3.5
Which sources of income are counted toward the 75% test requirement to qualify as a REIT?
property rental = yes
gains on real estate property sales = yes
interest income from mortgages = yes
GNMA Income = no
dldajsfvsdnl
Which of the following securities faces the greatest investment rate risk?
Zero coupon bond
BB, 8% coupon, 10 year maturity corporate
GNMA
STRIP
Reinvestment risk = GNMA, pay off early, int+principal
Which of the following terms des not apply to open-end funds? tradeable = answer, they are not continuously issued = yes redeemable = yes non-negotiable = yes
ddklvklxk
Regulation T of the Federal Reserve Board controls credit from the broker to the customer (margin money). The act only applies to non-exempt securities. When of the following securities are not marginable? Securities listed on the AMEX NASDAQ National Market System issues Preferred stocks traded over the counter Call options = no
call options have no lending power, nothing to pledge
Which of the following is an OID obligation?
Original Issue Discount = like a zero = no interest until maturity
Treasury Bills
GNMA Certificate
FNMA bonds
U.S. Government bonds
None of the above
t-bills
Albert Livingston is a very conservative investor. He wants to buy some high-quality long term municipal bonds. How would you define the investment characteristics of the bonds? low return, TOTALLY tax free high inflation risk, low default risk low inflation risk; high market risk small duration; low interest rate risk
high inflation risk; low default risk
An investment in a STRIP would be for which type of account IRA VA Profit Sharing plan SEP
all selections
Which bond would be the most affected by an interest rate change? short duration bond long maturity bond low coupon bond large duration bond
Large DURATION bond
maturity= when it is over
duration = what is the time needed to get back the $
The Black-Scholes model uses 5 variables to value the option of a non-dividend paying stock. In regard to call options, which of the following is NOT correct?
an increase in the price of the underlying stock increases the call’s value T
an increase in the exercise price of a call, increase the call’s value = F
an increase in the the time remaining to the expiration of the option increases the call’s value =T
an increase in the interest rate increases the call’s value = T
an increase in the volatility of the underlying stock increases the call’s valueT
see the false
bob and mary anticipate having 300,000 in retirement funding when they retire in 15 years (assuming a 7% growth rate on current assets). When they retire, they expect to need $22,000 per year which will increase with inflation 3%. they can make 8.5% after-tax return no their money. They expect their joint life expectancy to be 21 years after retirement. What would you tell them?
Begin mode!
PV = ? PMT = 22,000 pmt I = 5.34 N= 21 pv = 288,081= they need
expected 300,000 = they are ok by 11,918
Which investment situation exposes the client to greater risk? buying a call buying a put selling a covered call selling a covered put selling stock short
sell stock short
a $1000 bond orginally issued at part matures in exactly 10 years bears a coupon rate of 8% (payable semi-annually) and a market price of $1150. The indenture agreement provides that the bond may be called after 5 years for 1050. What is the yield t call?
PV = -1150 (this is the trick, use Market value not par here) G-N = 5 (note semi annual pmts) pmt = $40 FV= $1050 I= ?
Dixie Home Products is trading at $50 and pays a dividend of $1.50. Due to outstanding product development, analysis predict a dividend growth rate of 8%. Mr. Conservative wants to know if he should purchase Dixie if he has required rate of return of 10%
Yes buy it, it is undervalued.
1.50 (1+.08) / .1-.08
= $81
Yoto, a Japanese exporter to the U.S., will receive payments in U.S. Dollars 2 months after shipment. To hedge agains a fall in the dollar, what should Yoto do? Buy yen calls buy yen puts sell yen calls sell yen puts
Buy yen calls why? He is receiving U.S. $so for protection buy Yen call .
They dollar could fall so buy his currency calls, he could make back the loss.
What is the price (or intrinsic value) of a bond originally sold at par with a 7% coupon with 5 years remaining until maturing if comparable bonds of the same maturity and grade are yielding 8%? This is a PV question
PV = ? FV = 1000 PMT = $35 I = 8 G-N = 5, 2 pmt/yr
PV = 959.45
CMO's has separate classes of security called tranches. Which tranche bears no coupon? a tranche aaa tranche z tranche zero tranche
z tranche
Which of the following statements about preferred stock is correct?
I. preferred stockholder’s claims to corporate assets receive the lowest priority.
II. the dividend is fixed
III the payment of preferred stock dividends is required before common stock dividends can be paid
IV. preferred stocks have more price variability than bonds do
II, III, IV
a stock has earning this year of 2.00 and earning are estimated to be 2.50 next year. The industry P/E is 20, and the stock historically trades at a 10% discount to the industry P/E. Based on next year’s earnings, what is the stock value?
20 x .1 = 2
20-2 = 18
18 x 2.5 = 45
Which of the following is/are true about TIPS?
1) TIPS are issued at a discount
2) TIPS are issued with a stated coupon rate
3) TIPS are marketable securities
4) TIPS interest payments vary as the principal is adjusted for inflation and deflation
II, III, IV
Alice Rogers bought 5 puts for $2 per share ($1000). The exercise price is $50. If the stock price drops t $47, what is the intrinsic value of the puts?
50-47 = 3 3X100x5 = 1500
Which statements are true regarding Treasury STRIPs?
I. Interest earned is subject to reinvestment risk (note - no int until maturity, not reinvesting, so inv rate eliminated)
II. Interest is paid semiannually
III. The bonds are issued at a discount
IV Interest income is accreted and taxed annually.
III, IV
What is the effective “Fed” Funds Rate
Rate charged by the member banks Reserve system
Average rate of the member banks throughout the U.S.
Rate charge by the U.S. Treasury
Average rate of the member banks throughout the U.S.
A publicly traded company would most likely not sell new bonds in which of the following situations?
When existing bonds are selling at a premium
When existing bonds are selling at a discount
When interest rates are expected to rise
When interest rates have fallen
When existing bonds are selling at a discount = interest rates have risen right!!!
Which of the following securities is NOT EXEMPT from state and local taxes. t-bills t-notes t-bonds GNMA *** test
GNMA
Lance purchased 10 listed bonds xyz 8s maturing 10/1/22 on july 1st of this year for $10,500. Lance’s transaction cost for the trade was $200. He paid the broker 10,900 for the bonds. How munch interest will he be paid and how much will be subject to income taxes this year?
400 interest received, $200 taxable interest
400 comes from the 1/2 year bond interest, 200 from 10,900-10,500+200
Bill Barnes lives in NYC, Bill federal tax rate is 31%; his NY state tax rate is 7%, and his NY city tax rate is 2%. Bill bought U.S. TREASURY BONDS with a 6% coupon. What is his after tax yield?
.06 (1-.31) = 4.14%
The PE ratio is current market price divided by earning per share.
What is the curent market price of stock if estimated earnings are $3 share and if it has a P/E ratio of 15?
PE = MP / Earnings per share
15= X/3 = 3x15 = $45
A REMIC is established as a corporation. How is its income taxed
at the corporate level (separate tax entity)
as capital gain
as pass through income
Real Estate Mortgage Investment Conduit
C = a pass through income
Which of the following is true about political risk?
I. it is risk of loss in value due to fluctuation in exchange rate
II. It is the risk from events that come from operating in a foreign country
III. It includes the effect of trades disputes, tariffs, corruption, and expropriation.
IV. The best way to deal with the risk is through diversification
II, III, IV
What is an ADR?
a) An instrument used to affect payment in import-export transactions
b) a receipt for shares of a foreign-based corporation
c) an instrument that contracts in the futures market for a foreign currency
d) a corporation organized under the laws of a foreign country
B a receipt for shares of a foreign based corporation
ADR vs Bankers Acceptance!
BA = shorter than 270 days maturity, facility foreign trade
Guarantee investment contracts GICs are not subject to which of the following?
purchasing power
inflation risk
reinvestment risk
interest rate risk
Interest rate risk - no, because they mature 2,3,5, years
By matching the duration of a bond or bond portfolio to the client’s investment horizon, the client can offset which risk?
Purchasing power risk
Financial risk
Interest rate risk
Market risk
Interest rate risk
Helen is in a 15% federal marginal tax bracket and pays 6% state income tax. She has $20,000 to invest. What is her best bond choice?
I. Corporate bond paying 8%
II. another state’s municipal paying 7%
III Her state’s municipal paying 6.5%
I tax exempt yield = 8%(1-.21) = 6.32
II tax exempt yield = 7%(1-.06) = 6.58
III 6.5% = no calculation
Assume a bond fund has a duration of 6.6 an average-weighted maturity of 5, (N/A) and a beta of 9 (N/A). If interest rates increase by 1.5, what is the expected change in price for this fund?
duration x rate change
6.6 X 1.5
9.9 decrease in portfolio
Johnny Comelately is interested in Google. However, the stock is currently priced at $500. He wants to buy 100 shares of the stock and lock in the price should price of the shares drop. What else should he do?
Buy a $500 put option = buy a put
EMH = efficient market hypothesis
Strong = can’t do squat to outperform the mkt
semi strong- can’t do squat to outperform ….maybe insider trading
weak - maybe fundamental
Technical analysis never helps
The bond indenture agreement does NOT cover which of the following?
A. the amount of the issue B. the premium paid over par C. the property pledged D. the call premium E. the current ratio
B.
ABC Corporation has declared a 5:2 stock split to stockholder of record with 100 shares will receive how many additional shares?
500/200 X 100 = 250
additional = 250-100 = 150
150
The following defines what investment technique? This technique is a “method in which an investor first looks at trends in the general economy and next selects industries and then companies that should benefit from those trends”
a. fundamental analysis
b. technical analysis
c. top-down method
d. bottom-up method
Top down method
Considering the following information on XYZ Utilities, Inc.
book value: $50 per share
preferred div paid: 2/share
common div paid: 1.5/share
EPS (after preferred dividends): $3/share
What is the ROE of XYZ?
ROE = EPS / book value per share
3/50 = 6%
The clients wants all bonds to mature in 10 years, but he wants to reduce the interest risk. What is it called if he buys the bonds over 4 years.
a. bullets
b. barbells
c. immunization
d. duration
bullets
note question number 198 test bank 3
current yield use market value to calculate
current yield = income / Market value
gross profit = total basis - Market value
gain/total basis
Which of the following bonds produces the most income per initial cost using an annual coupon?
a) 6.5% coupon purchased for $800 = 65/800
b) 7.5% coupon purchased for $850 = 75/850
c) 10% coupon purchased for $1,100 = 100/1100
d) 11% coupon purchased for 1,200 = 110/1200
D = 9.17
Barry Unger is age 72. His second wife Sally is age 62. Sally is receiving Social Security disability benefits. She is blind. How many exemptions do they get?
Just 2. exemptions vs
Which of the following propety purchases is eligible for a 179 election? rental real estate commercial real estate a franchise a computer
a computer
Bob Timmons exchanges 10 acres of lan (gain property) with his brother, Frank Timmons. In the exchange, bob gets 15 acres (gain property) of land from Frank. After one year Frank sells the 10 acres of lan to a developer. What will be the result?
no gain will have to recognized by either bob or frank
both bob and frank will have to recognize the gain
frank will have to recognize gain
bob will have to recognize gain
both bob an frank will have to recognize the gain
Mr. and Mrs. Patrick purchased a a home some years ago for $100,000. They sold the home this year for $700,00. They used the money to buy to smaller home for $400,000. What is the maximum amount of gain they must realize? !!!! note nathan REALIZE!!! …how much did he make?
700,000
-100,000
————
600,000 = realized
- ## 500,000100,000 = recognized
Which type of life policies can affect corporate AMT? I. entity purchase buy sell II. Nonqualified deferred compensation III. key person IV. endorsement method split dollar
All of the above
What is the penalty for a tax return that is based on the taxpayer’s desire to impede the collection of income tax?
A. 20% of the portion of the underpayment
B. 75% of the portion of the underpayment
C. $5000
D. $10,000
Frivolous- $5,000
Corporation X generated a $500,000 loss the year Y. How much of the loss may be carried back to prior years?
y-4 50,000
y-3 100,000
y-2 100,000
y-1 250,000
350,000
Which of the following itemized deduction have no limitation?
1) property taxes
2) home mortgage interest
3) investment interest expense
4) charitable gifts
5) casualty losses
Property taxes
Tim Foley is self employed. He files a Schedule C. He made net income of 65,000. He paid $8,000 for health insurance. How much is his adjustment to income?
.07065 X 65,000 = $4,592.25 + 80000
12,592.25
Cathy Adams Operates her business from her home. Her gross business income is $50,000. Expenses associated with her business are $20,000. What is the maximum she can deduct for home office expense?
gross income 50,000-20,00 = up to $30,000
Which of the following is true concerning Congressional Committee reports.
they may not be cited as precedent
Mr. and Mrs. Apple have active income of $100,000. They have portfolio income of $5000 (interest), $7,500 (long-term gains), and $22,500 (short term gains). They have been margining their portfolio and have incurred $40,000 of investment interest expense. How much can they deduct?
look for the short term taxable 5,000 22,500 ---------- 27,500
How can Section 179 be used?
For TANGIBLE personal property used in a trade or business
Which of the following is a deduction FROM AGI short term cap loss alimony paid real estate taxes sep contribution
real estate taxes
Which of the following fringe benefit is taxable?
occasional sporting ticket
company car for to and from office
50,000 group life policy
200 per month employer provided parking space
employer paid health plan
Company car for to and from office
Toby Andrews purchased a car for use in his business at a cost of $20,000. He took cost recovery deductions of $7,392. He sold the car for $10,000. What is the amount of cost recovery deduction, if any that must be recaptured as 1245 gain?
$0
Which of the following is a deduction FROM AGI itemized deduction IRA contributions long term capital loss self-employed business loss
Itemized deductions
Which of the following are true about deductions available to a trust?
a charitable deduction is only allowed for complex trusts
depreciation and cost recovery deductions are calculated in the same manner as individuals
NOLs net operating losses are not allowed
a deduction is allowed for all income that the trust is required to be distributed (whether or not it is actually distributed)
a charitable deduction is only allowed for complex trusts
depreciation and cost recovery deductions are calculated in the same manner as individuals
a deduction is allowed for all income that the trust is required to the distributed (regardless if it is actually distributed)
An NOL (net operating loss) can be used by all the following entities EXCEPT trusts regular c corporation s corporations self-employed persons
S corporations
Which of the following correctly describe a cross purchase buy sell agreement?
in a cross purchase buy-sell agreement, the ins. policies are owned by the business owners (YES!)
the buy sell agreement establishes a method for determining the purchase price in the event of a sale (YES!)
the insurance policies are owned by the business ..nope
the agreement will state a method for determining a purchase price - YES
see above
Which of the following expenses is/are subject to the 2% miscellaneous deduction rule?
I fees to investment counselors
II unreimbursed employee business expense
III schedule C expenses
IV tax preparation fees
V qualified LTC expenses
2%
fees to investment counselors
unreimbursed employee business expenses
tax preparation fees
Bob Yates has $250,000 of regular income. If Bob’s regular tax (1040) is $40,000 and has tentative alternative minimum tax is $42,000, then what is his alternative minimum tax payable?
2000
Jack Jones established a S corporation with $100,000 in cash. After some business reversals, he lends the corporation $50,000. At year end, the corporation loses $95,000. He decides t take the loss at year end. What will be his basis in the corporation at year en after he takes the losses?
150,000
- 95,000
———-
55,000
Sandra Hillman completed several security transactions that produces the following 5000 LTG 3000 LTL 4000 STG 9500 STL
answer to math is 3500
answer to the question is 3000 because only take max 3000/ yr
Mr and Mrs Wealthy have an AGI of $1,200,000. What happens to their standard deduction and personal exemptions in 2013.
i. Their standard deduction is subject to phaseout based on AGI
II. Their personal exemptions are subject to phaseout based on AGI
2 only. standard deduction isn’t a phaseout item.
Corporation can not deduct which of the following a business interest b business expense c dividends d 50 % entertainment expenses
dividends
Sara Jane set up a revocable living trust. She placed all her income producing assets in the trust. How will the income be treated for tax purposes?
Conduit to her
accumulated in the trust
taxed at trust income tax rules
deferred until distribution to the ultimate (remainder) beneficiaries
Conduit to her
Key word in the question is REVOCABLE = tax neutral event
Julie Thomas (annual salary of 60,000) had the following financial transactions during the current tax year.
- received GIFT of $12,000 from her mother
- received $24,000 in alimony
- had a short-term capital loss of $5000
What is Julie’s total Gross income for the current tax year?
60,000 \+24,000 -5,000 NOOOO! only 3000, 2000 carry forward ---------- 81,000
The second step in the 1040 calculation is to subtract adjustments to income. Which of the following are adjustments to TO income?
IRA contribution 1/2 self employment tax ira distributions alimony received student loan interest
ira contribution
1/2 self emp tax
student loan
others also on front but considered income
Mr. Dell sell land that he purchased for $125,000. The sale price is 508,000. He receives $25,000 as a drown-payment this year. He will be paid $4025 per month for 10 years. In addition the down payment, he receives 10 monthly payments this year. Calculate his taxable gain for the current year.
1) how much did he make? 508-125 = 383.
2) what is the % 383/508 = 75%
3) payments (down pmt + monthly) 65,250
65,250x.75 = taxable gain this year
Karen Crane is supporting her mother. Karen’s mother receives 500 per month from pension and 500 per month from SS. Karen need to give her mother 1200-1500 per month. Can Karen claim mom as a depentent?
no, her mother make 6000 of taxable income .. limit is 3900
Mr and mrs Adamson own a NC rental condo rented 120 days per year. how many days can it be rented without reporting the income?
10% or 14 days, what ever is greater.
Bob owns a 4 unit apartment complex. (active participant). Because of rehabilitation construction costs, the complex generates losses of $27,000. If he has 62,00 of employment income, what is his AGI?
62,000 - ? not 27,000! the max that can be taken is 25,000
Robert Mitchum own RUM inc. The corp is very profitable. Robert takes a salary of $10,00 per month. He lives lavishly. He company loans him money that he does not intent to repay. What is roberts potential tax trap?
Substance over form.
Which of the following are preference items for purpose of the alternative minimum tax?
qualified housing interest
investment interest expense in excess of net investment income
qualified private activity municipal interest income
the excesss of depletion over the property’s adjusted basis
IPOD
qualified private activity municipal interest income
the excess depletion over the properties adj basis.
which is the best source for obtaining information about the intent of a very recent change in the tax law?
intent = what are they looking to accomplish
RIA Federal Tax Coordinator
Congressional Committee Reports
Treasury Regulations
Tax court reporters
congressional committee reports
Michelle has the following income for the current year.
Net Schedule C income for $40,000
travel and ent expense 10,000
k-1 income and a general partnership of 5,858
k-1 Inocme from an S corporation of $20,000 distributed
current income +income from general partnership = 45,858
now
self employment tax = 14.13%
45,858X 14.13% = 6480
What is the exemption dollar amount for a complex trust that is required to distribute all of its income?
300
A widow inherits stock with a date of death FMV of $70,000. She and her husband held the stock jointly before his death (basis 20,000) she sell it 9 months later for 80,000. what is the amount of the capital gain?
His Her
35K = basis after step up. Hers + His = new basis of 45,000
10K 10K = basis at beginning
80K - 45K = 35K of LTCG basis after death is always LT
Ted owned real estate property which had an adjusted basis of 150,000 an was subject to a 105,000 loan. He exchanged it for a like kind property which had a fair market value of 150,000 and was subject to a 75,000 loan. What was his RECOGNIZED gain?
debt relief is cash
105,000-75,000 = 30,000
What is the main problem with personal service corporations (PSC)
income is subject to tax and losses are not deductible
any income retained by the psc is taxed at a flat 35%
there is no limited liability
only certain individuals who perform services can own them
any income retained by PSC is taxes at a flat 35%
Founders income Health Attorrney accountant Law engineer
Mr. and Mrs. patrick purchased a home some years ago for 100,000. They sold the home for 750,000. they used the money to buy a smaller home for 250,000 (we don’t care). What is the max amount of of gain they must … RECOGNIZE
750,000
100,000
———-
650,000 = realize
650,000
500,000
———–
150,000 recognize
Mr. A wants to exchange his 100 acres of land worth 1,000,000 with a basis of 250,000 for mr z land. mr z land is worth 950,000, but has a basis of 500,000. what will be thebasis of the50 acres after the exchange
= if the there is no boot the basis is the same = 250,000, it is an exchange.
Which of the following provides UNLIMITED interest deductibility on a personal tax return?
home equity loan on a primary home
mortgage interest on a primary home
margin interest expense
self-employment business investment interest paid (or expenses)
self employment business investment interest paid = no limit
Mary is a self-employed financial planner. she reported 90,000 on her schedule c. she PAID the following during the year. 12,000 in alimony 10,000 in child support 6,000 in medical insurance premiums 4,000 in IRA contribution (deductible)
90,000 -12,000 - 6,000 - 4,000 - self emp tax = 90,000 x .07065 = 6,358.50 ----------- 28,358.50 calculate all of the deductions to arrive at the AGI
Self employment income does NOT include which of the following? net schedule C income board of director fees wages from an s corp part time earnings 1099
wages from an s corp
During the current tax year Ken sold several securities that left him with the following types of gains and losses. LGCG = 6700 LTCL = 1900 STCG = 7000 STCL = 9200
net long term gain of 2600
Bill had $300,000 of earned income. He trades heavily in the market. He has $40,000 of LTCG and 30,000 of STCL. in addition, he was paid 5,000 of ordinary dividends. He incurred $50,000 of margin interest. How much of the margin interest is deductible?
5000 why? = taxed only to the extent of investment income 40,000 = ltcg n/a 30,000 = stcL na dividend = 5000 end of story 50,000 margin in can be ded by 5000
A business owner (sole proprietor) must issue a 1099 for which of the following?
A check from his business account totalling 2500 to his cpa for tax service provided = YES
a check from his personal account to his cfp
a check from his business account to Office Depot for office supplies
a check from his busienss account to consultant for personal services rendered
CPA services is for the business
Which of the following is/are not pubic charities
Duke university (private U)
St. Thomas Church
War veterans organization
The RED Cross
War Vet organization
Under low income housing programs, how does deduction-equivalent tax credit work?
multiply the dollar amount times the maximum marginal tax bracket available each year
multiply the dollar amount (up to 25,000) time the clients maximum marginal tax bracket
subtract the dollar amount from the client’s taxable income
subtract the dollar amount from the client’s taxable income AMT due
Multiply the dollar amount (up to $25,000) time the clients maximum marginal tax bracket
Which of the following are deduction for calculating taxable income? BACK OF 1040 capital losses ira contributions home mortgage interest alimony paid personal property taxes
For calculating taxable income = everything considered capital losses ira contribution home mortgage interest alimony paid personal property tax
A family limited partnership
1) has both general interests and limited interest
2) has a general partner
3) has limited partners
4) limits liability to the general partner
family limited partnership = the general partner has unlimited personal liability.
Limited partnership is limited to the risk of their investment
answer: has both general interests and limited interests, has a general partner, has limited partners
Which of the following is true about a NOL (net operating loss)
it can be carried back 5 year and forward 15 years
it canbe carried back 2 years and forward 20 years
it can be carried forward 5 years (nope, that is charitable gift)
NOL can be carried back 2 years and forward 20
Which of the following expenses is subject to the 2% miscellaneous deduction rule? LTC insurance premium employee home office expenses gambling losses up to gambling winning theft losses
Employee home office expense = 2%
What is CCH?
a primary source of all tax law -no
a tax reference source that may be cited - no cant cite it
a research source - yes, carla uses
congressional committee house rules
c = research
Think wash sale!
Alice Matthews bought 100 shares of DieTech, inc. on 6/15 of last year for $100 per share. Unfortunately, the stock has poor earnings during the year. On 12/1 of last year, she bought another 100 shares of DieTech, inc. at $50 per share. On 12/15 of last year, she sold the 6/15 dietech, inc shares for $55 per share. What is the result?
because she bought the stock again on 12/1 and then sold it on 12/15, it created a wash sale even though she sold the 6/15 shares
no loss deduction is allowed
Mr. Hightower has 1,000,000 of regular income. If his regular (1040) is $300,000 and his tentative alternative minimum tax is $260,000, then what is his alternative minimum tax payable? $0 $40,000 260,000 300,000
40,000
Terry and Debra own a consignment store for new artists. The store has an extensive inventory of paintings. Whataccoutning method is most appropriate?
Cash, consignment store
Self employment included which of the following?
Distributed share of income to a limited partner
real estate income
general partnership income
board of directors fees
self employed does not equal limited partner, so read the question
general partner income and board of director fees are included in self employment income
Which of the following is NOT a benefit of tax advantage investments? tax credits depreciation recapture = NO, bad gives us more tax depletion accumulation
recapture
Mr and MRs. Winslow are both over age 65. They rent a condo. Their only itemized deduction are $10,000 to charity and $5000 of property tax. Should they itemize?
12,200 MFJ
2,400 (2 over 65 of 1200)
———
14,600 standard deduction
10,000 + 5000 = 15,000 they should itemize
They xyz corporation sells property to an unrelated purchaser who subsequently resells the property to a wholly owned subsidiary of xyz. This is an example of what tax law doctrine?
step transaction
sham transaction - more of absolutely no economic benefit
substance over form
assignment of interest
step transaction
xyz sells to 3rd party just to turn around to sell it back to xyz.
Tom purchased a parcel of land on an installment sale. He paid 15,000 per year for 10 years (he bought on installment = 150,000) and the sold the land for 600,000 in an installment sales. he will receive 60,000 as the1st year payment. How much profit must Tom recognize for the current year?
600,000 - 150,000 - 450,000 = his profit
450,000/600,000 = .75 X 60,000= 45,000
When are oil and gas programs exempt from the passive activity rules?
when the client elects to be a limited partner
when the client elects to be a general partner (working interest)
when the client elects to be llc member
when the client puts up 100% cash
a limited partner is always passive. GP is not passive = working interest
Which of the following is an inventory costing convention?
accrual hybrid cash lifo cost recovery
Lifo and Fifo are correct
Regular C corporations average with gross receipts in excess of $7.5 million may be subject to corporate AMT. Life insurance proceed received by a corporation may be subject to corporate AMT. Which of the following life insurance policies could trigger AMT?
cross purchase buy sell policies = ee owns so nope
collateral assignment split dollar policies = EE owns
key person policies = ER buys no deduction but get benefit
group life in excess if 50,000 = ER no economic benefit
Key policies
TQ: Ted and Jack plan to open a restaurant. They expect to lose money establishing the business in the first year. They plan to EACH put up $250,000 in cash. They plan to borrow the remainder from the bank (250,000) . What ill be their basis for their losses.
comparing S corp and partnership
For the S corp = just their personal dollars, no 3rd party loans considered in basis = 500,000
For the Partnership = 3rd party loans considered = 750,000 for their basis for losses = why everyone through the LLC is was so great.
Which of the following is NOT a qualified adoption expense allowable for the adoption income tax credit?
court costs
attorney fees
surrogate parenting arrangements
cost of going abroad to adopt a foreign child
surrogate parenting arrangements (no sperm donors)
Which of the following types of investments produce “phantom income”?
K-1 income from an S Corporation (no corresponding check is issued)
Sale of equipment causing a 1245 recapture
EE bond interest
inputted interest from zero coupon
all but EE bonds.
The way EE bonds work is not to accrete interest over time, but rather at the sale
Gloria Elmore town house was robbed. Her jewelry (basis 100,000) was stolen. She has purchased some insurance ($50,000). At the time of the theft, the jewelry was worth $150,000. What is the amount, if any, of Gloria’s deductible casualty loss if her AGI is $150,000?
Trick - look for the answer that is -100, b/c of the floor calculation
Steps, Use the lessor of Basis or FMV.
100,000
- 50,000 = ins
------------
50,0000
-100 = floor
-15,000 = 10 of AGI
-----------
34,900 = deductible casualty lossBob Unger owns a 4 unit apartment complex (active participation). The complex needed rehabilitation this year. As a result, the complex lost $30,000. If Bob has $92,000 f other income, what is his AGI?
Note: this is a very detailed question… Under 100,000 AGI max ded is $25,000
25,000
TQ: Mr and Mrs. Samuel Thomas bought $100,000 of stock several years ago in joint tenancy. Same died this year. The date of death value was $300,000. If Mrs. Thomas sells the stock 3 months after the date of death for $330,000 what is the amount of capital gain?
Him Her
50 50
150
New basis = 150+50 = 200. 330,000 - 200,000 = 130,000 in LTCG
Mr. and Mrs. Smithfield purchased a home together for 100,000 many years ago. Mr. Smithfield died 9 months ago. The date of death value was $600,000. If they live in a COMMUNITY PROPERTY state and Mrs. Smithfield sells the home for $800,000, how much gain must she recognize?
All is stepped up for 2 years after death of spouse MFJ.
realized gain 800,000 - 600,000 = 200,000
recognized gain = 200,000 - 500,000 = $0
Tommy Thornton, age 14, has interest and dividend income of $400. He has earned income of $4500 from a paper route. Tommy is eligible to be claimed as a depended on his parent tax return. What is the amount of Tommy’s standard deduction?
a dependent standard deduction is… the GREATER of the limited deduction of $1000 or
earned income plus $350
so 4500 + 350 = 4850.
If the low income housing credit is allowed annually over a 10 year credit period and depreciation uses straight line, over how many years is the depreciation spread?
know it
27.5 years residential = answer
39 year is commercial
Which itemized deductions is not an allowable deduction (an add back item) for calculation of the AMT?
property tax
charitable deduction
investment interest expense
casualty loss
Property tax, not for AMT
Is an irrevocable trust always a complex trust?
Yes, it is a separate tax entity
Yes, the corpus cannot be distributed
No, the trust document can give the trustee the right to accumulate income or income distributed to the beneficiary.
No, the corpus cannot be distributed
No the trust document can give the trustee the right to accumulate income or income distributed to the beneficiary.
QDRO’s only apply to
qualified pension plans
all retirement plans
iras
Qualified retirement plan
When life insurance is purchased in a plan to provide death benefits, the current cost of the “pure insurance” protection is subject to taxation. The cost attributable to this pure life protection will be the lower of which of the following?
ps58 cost and table 2001
table 2001 and the employee’s cost basis
actual cost as provided by the carrier or table 2001
ps 58 and the employee’s cost basis
actual cost as provided by the carrier or table 2001
What is the disadvantage of an “unfunded” deferred compensation plan?
the benefits are not current income until they are actually received
The promise is not secured or guaranteed in any way
it is neer funded until the employee actually retires
it is taxes as wages (DC) when the employee retires
The promise is not secured or guaranteed in any way.
What is the maximum contribution amount for a defined benefit plan ? 55000 205,000 255,000 383,333 none
383,333
A stock bonus plan and an ESOP are variation of profit-sharing plans. How is the stock bonus plan or the ESOP different from profit-sharing plans?
contributions must be substantial and recurring
the plan favors younger employees
employers may deduct dividends with respect to stock held in an esop
contributions are discretionary.
employers may deduct dividends with respect to stock held in an esop.
Under the final average method defined benefit formula, what is the maximum benefit an employee could get if his/her last 3 years of compensation prior to retirement where the following? note all are under the max of
245,000
230,00
190,000
add and divide by 3 = 221,660, but max is 205,000.
Cross-testing in defined contribution plans does which of the following? (cross testing is age weighted- 255,000 x 20% = 51,000 trying to get for the owners 1/3 for others, 5000 for 5%
1) resulting in higher contributions rates for older employee
2) maximizes benefits to highly compensated employees
3) tests the plan’s ultimate benefits for nondiscrimination although the plan is a defined contribution plan
4) Provides a benefit of 3% for NHCEs
1, 2, 3,
John Long has been promised a deferred compensation plan. The following plans have been proposed. Which one should he select that will defer taxation?
an employer established secular trust
a plan that is municipal bonds in his name an allows him to access the bonds in case of a financial emergency
an employer established rabbi trust
a plan that places funds in an irrevocable trust that is for the benefit of John and beyond the reach of the company creditors.
employer sponsored rabbi trust, it is considered the companies and has substantial risk
Mrs. John Smith received a 40,000 lump sum life insurance benefit from her deceased husband’s pension plan in addition to a lump sum cash benefit. The cash value of the policy prior to death was $10,000. How will the $40,000 life insurance payment be taxed?
The 40,000 will be tax free
The 50,000 will be tax free
The pure death benefit 30,000 will be tax free , but the cash value 10,000 will be subject to income tax
the death benefit 40,000 will be tax free, but the cash value 10,000 will be subject to income tax and 10% penalty
The death benefit 30,000 is tax free and the 10,000 is taxed as income.
Beverly is married to Jim. Which of the following plans will require Beverley to get survivor annuity benefits?
Money purchase plan
Profit sharing plan
Stock bonus plan
Defined contribution plans
Money purchase plan is the only pension selection
Kathy Simmons is age 58. She wants to retire early. Seh needs to take distribution from her IRA without paying the 10% penalty tax on premature distributions. Which of the following statements is not correct?
She should work until age 59… it is 59 1/2
Mrs. Kittel was a fully insured worker. She was survived by the following persons. Who will get Social Security benefits?
her 19 year old son in college = if I see SS and college think NO
her 15 year old daughter in high school
mr kittle, age 55
ex husband age 62 married for more than 10 years
15 year old, husband, and ex husband.
Dr. Adams and Dr. Walters enter into an equal partnership for te practice of medicine. The partnership then forms a separate service organization to provide all support the support employees. Each fo the doctors owns just 50% of the service organization. The doctors try to adopt a qualifying plan covering only themselves and none of the regular employees. Which of the followign rules eliminate this type of planning?
Affiliated service group rules
Which of the following characteristics of a SEP are FALSE
loans and hardship w/d are not available
age weighted or cross testing is not permitted
Social Security integration is not permitted -IT IS! (esop and simple)
employee matching is not permitted
SS integration is permitted
Which of the following IRA are not subject to RMD rules?
a Roth IRA
a roth inherited by a spouse rolle dinto hi/her own Roth IRA
a roth inherited by a child of the owner (death before RBD)
a roth inherited by a child or the owner (death after rbd)
Think OWNERS life.
1,2, and 3
Tommy Manning, a qualified individual, recently received a golden parachute payment of 1.5 million. Tommy’s applicable base amount is 400,000 (3 years). Tommy must pay 20% excise tax equal to which one of the following amount…excise tax on cfp exam… not likely.
1,500,000
-1,200,000
————–
300,0000 x 20% = 60,000
A pure deferred compensation plan is sometimes called a ____ plan?
“in lieu of”
Which of the following is an advantage to employees when their employer does a profit-sharing plan?
employees get a predictable level of funding under the plan - NO
employees may get forfeitures from other employee accounts -YES!
employees bear no investment risk under the plan = NO
employees of all ages get adequate levels of retirement benefits = NO!
read it
Cathy is married to Tom. Tom’s PIA benefit at age 66+ (NRA) is $1200. Cathy did complete her 40 quarters many years ago, but her PIA benefit is only $200. If she is also age 66+ (NRA), what benefit is she eligible for?
greater of hers or 1/2 of hers
600
Which of the following apply to ESOPs with debt interest?
Note: it is a LESOP which borrows money to make the contribution.
they cannot be integrated with SS - YES
the mandatory 20% income tax withholding requirement does not apply when the only distribution is company stock - YES
There is no limit on amounts used to pay interest on ESOP debt (doesn’t affect contributions) = YES
diversification is permitted after a participant reaches age 55 and has at least 10 year of service = yes
all the above
Which of the following is a correct statement about a rabbi trust?
deductions are take in the year the contribution is made to the trust = NO, not the rabbi’s money at this point
The employer sponsor that hold the plan assets will receive earnings and dividends paid on the plan assets as taxable income = yes!
the employer must offer the plan to all key employees - no
the rabbi trust is not subject to the creditors of the company -false it is
see above
According to the Treasury Regulation, life insurance benefits must be merely “incidental” to the primary purpose of the plan. The aggregate premiums paid for a participant’s insured death benefit are at all time less than which of the following percentage of the plan cost for that participant?
Ordinary life insurance (= whole life) 50% = yes!
UL ins = 50% = false 25%
Term = 50% - false 25%
Variable UL 50 = false = 25%
Ordinary life = Whole life = 50%
Why would a company adopt a money purchase plan over a profit sharing plan?
To be able to contribute 25% for all employers = no
to ahve a plan that is simple to administer and explain - yes
to benefit employees who are relatively young and well paid (both do this)
to be able to contribute 100% of salary or 51,000 (both do this)
simple to admin
a 35 year old employee’s elective deferrals to a simple cannot exceed with of the following?
10,000 as index for inflation for 2013 (this is 12,000) yes!
17,500
25%
23,000 -
see above
Distributions form a 403 b tax deferred annuities are which of the following?
100% tax free
partial tax free return of basis and partial taxable income
100% taxable
100% taxable plus a potential 10% penalty Yes -don’t kiss the girl too quick read all the answers before
look
What makes a defined contribution plan more appropriate than a defined benefit plans?
The age of the owner (young) = yes
the uncertainty of available future cash = yes
ability to attract new employees who are older - NO, older no like
Retirement needs based on 30,000 to 40,00 yearly contributions = yes
above
Which of the following deferrals are not subject to FICA and FUTA?
To a 401K plan - they are
sar-sep- they are
simple plan - they are
to a section 125 plan - think HSA, make this election be fore you earn money
see above
Which of the following does not describe the different characteristics of Qualified and non qualified plans?
Qualified plans can deduct the contribution immediately where non-qualified plan contribution are deducted when the compensation is actually paid.
qualified plans defer employee tax liability until retirement whereas non-qualified plan contributions are taxed immediately -NO! Both defer - right think about it NQ still has tax deferral
weird wording on the rest -
John has just joined his grandfather’s firm. (His grandfather is CEO, and his father is president.) John has extensive experience as sales manager for a competitor and has been made V.P. of sales. The firm has established a NQ restricted stock grand for John. He will qualify if he stays with the firm for 10 years. Are the benefits taxable income now or in the future?
Now= there is no substantial risk of forfeiture; the stock grant is taxable now. grandpa and dad are not going to fire him
What is the GST called? progressive tax flat tax regressive tax secondary tax
flat tax
Bill barns transfers stock to a GRAT with a 10 year term. 9 years later, unfortunately, he dies. What are the estate tax implicatin to bill barns?
the trust assets will be included in his estate at ate of death value.
Mrs. Tim make death bed gifts to various family members. Before the check can be mailed, mrs. tim dies. ar the checks completed gifts
no
Mrs. Carlson is considering placing 1,000,000 in a revocable trust or an irrevocable trust for HER benefit. Which f the following would NOT be true?
IF the Income were accumulated in the irrevocable trust, the income taxation would be at the trust tax rates not Mrs. Carlson’s personal tax rates , think …her benefit = her tax rate
What are some of the uses of an inter vivos trust?
to avoid ancillary probate
to be the primary beneficiary of your pension plan
to avoid will contests
see above
Inclusions into the gross estate of a decedent include which of the following?
One 1/2 of spousal joint tenancy
not gifts of CASH!!! within 3 years of death
see above
Adjusted taxable gifts are added to which of the following
The taxable estate
see above
Which of the following gifts is a gift of FUTURE interest?
NOT, 2503c, ILIT with CRUMMEY provision, 529 plan
YES… a trust in which income will be accumulated for a period fo years, NO CRUMMEY
see above
Jill Thomas lives with Sam Livingston. Jill opens a security account JTWROS showing Jill and Sam as joint owners. Which of the following is NOT a true statement
Checks can be drawn in the name of either party
see above
Mr. and Mrs Lawson have accumulated various investments JTWROS totaling 6,000,000. How must is in Mrs. Lawsons gross estate if she dies first?
3,000,000
see
Ted insured-owner of a 1,000,000 life insurance policy. What can he do to remove it from his estate?
gift to his wife, she is the owner bene
he can gift to his mature daughter. she will be the owner bene
gift to the ILIT. the trust will be the owner-bene
sell to viatical co
he could do them all.
What is the “guardian of the property” called?
the conservator
Which of the following are examples of income in respect to decedent (IRD)?
Insurance renewal commission due
monthly pension payments to a deceased employee’s widow
S corporation unearned income
gain still to be recognized on an installment sale
trick = s corp, think pass through
Mrs. Bell, a grandmother gave 1.5 million to an irrevocable trust 17 years ago. she dies this year. under what circumstance will this trust not be part of her gross estate… think incidence of ownership
she received income for 15 years…, now the income goes to the children. she had nothing to do with it for 2 years.
Which of the following is not a transfer by contract?
NOT property transferred by will = state law and statue …picky
see above
Which of the following are qualifying marital deduction transfers at death?
Tenancy by the entirety property
JTWROS property with spouse
property that transfers outright by will to the spouse
…a bypass is not a traditional MD .. so not that own
above
Harvey Lopez, a U.S. citizen, is married to Tina, a non-citizen. He dies with a QDT and an estate of 8.25 million. How canTina structure the estate transfer so that no tax will be due in 2013.
- 25 million to her, 3,000,000 into a QDT (= MD)
- 25 million into her QDT
- 25 million into a bypass trust, 4,000,000 into a qdt
see
what is a simple trust ?
a separate entity
see
Mrs. Falk purchased stock for 514,000. At the time of the gift, the stock was worth 314,000. if she gifts the stock to her son, what will be the amount of the taxable gift?
14,000 pass tax free
300,000 reportable gift
Given a choice on the exam, which of the following financial planning deficiencies would be the most important?
There is no guardian for minor children
see
A family limited partnership (FLP) is a technique use as a means to shift assets and income from parents to children. They want to transfer 4,500,000 in assets to 10 family members. Attorney said using 50% discount was ok. How many years could they give away 4,480,000?
14,000 X 10 family members = 140,000.
140,000 x 2 for gift split = 280,000
discounted = 280,000 x 2 = 560,000
4,480,000 / 560,000 = 8
Mrs Thomasville sets up a UTMA account for her grandson. Mrs. Thomasville named her son William the custodian of the account. Which of the following are TRUE?
If the grandson dies before he reaches the age of majority, the custodial property passes to the administrator or executor of the minor estate
see
What is the primary characteristic of the transfer tax system?
It is CUMULATIVE
see
Mr Harper has been working with his attorney on writing a new will for himself before he gets married. The attorney has hand written requirements signed by Mr. Harper in his file. What happens if Mr. Harper dies on the way to sign the new will?
Both old will and the unsigned will can be admitted to probate
see
Which of the following is true about the applicable gift exemption?
The credit amount is LESS than 5,250,000
see
Which is a marital trust?
Power of appointment trust
see
Which of the following is a general powers?
Power that can b e exercised in favor of the holder for the holder’s health, maintenance, and well being. YES!
Power that can be exercised in favor of the holder, YES
see
IF the alternative valuation date is selected and if the property is distributed early (after 3 months after the decedent’s death) how will the property be valued?
At the ..DATE OF DISTRIBUTION
see
Which of the following are some differences between a pooled income fund and a CRUT?
1) the property transferred into the pooled Income fund cannot be invested in tax exempt securities
2) upon death of the life income beneficiary, the remainder interest in the pooled income fund vests with pooled income charity.
3) the donor cannot be a trustee of the pooled income fund
see
What is the Inocme tax treatment of IRD?
if estate tax is paid, the recipient of IRD is allowed an income tax deduction for the estate tax that is attributable to the IRD.
see
Mr. Tee places 6,514,000 of property into a trust with income to Mr. Tee’s daughter for life. After Mr. Tee’s daughter dies, the remainder is paid to Mr. Tee’s grandchildren. Who pays the GST tax when Mr. Tee’s daughter dies?
The Trust does , this is called a taxable termination
see
Which of the following are true regarding gifts and the donor’s estate?
generally, gifts given are simply “adjusted taxable gifts” to the extent such gifts exceed the annual exclusion.
Adjusted taxable gifts are added to the taxable estate
gift taxes paid (or payable) are generally allowed as a credit against the tentative tax
gifts taxes paid on any gifts within 3 years of death are added to the gross estate
see
In which of the following circumstances would the date of value of gifted property not be included in the donor’s gross estate?
The donor gives more than $14,000 to 1 donee in 1 year
see
What is the main advantage of a QTIP?
It allows the decedent to have postmortem control over the property when the surviving spouse dies
see
In the 2503 C trust, how is accumulated taxable income taxed?
At the trust’s tax rates!!
see
In valuation of a gift, which of the following statements are true?
for gifts of appreciated property, the value of the gift for gift tax purposes is a FMV at the date of the gift
if the FMV on the date of gift is greater than the donor’s adjusted basis, then use the donor’s adjusted basis for income tax purposes
if the FMV on the date of gift is less than the donors adjusted basis in the gift, then an income tax loss is measured using the FMV on the date of the gift
if the FMV on the date of the gift is less than the donor’s adjusted bases in the gift, then an income tax gain is measured using the donor’s basis
good grief
What is the corporate Section 2701 recap?
= a freezing technique
start a bus for 100,000. Now worth 10,000,000 will be worth 50,000,000 gift the future appreciation out estate. no tax consequences. Preferred Div Paying Shares and common shares = no control.
see
Mrs. Dillard sets up a crummy trust for her grandson. During the first year, she deposits $124,000. In the second year, Mrs. Dillard decided to forgo any deposits because her grandson waived the crummey right in the 1st year and the trust generated $10,000 of income and grew to 136,000. How much can her grandson withdraw from the trust in the second year ?
0 = lessor of the 14,000 or the annual addition
In a CLAT (charitable lead trust), the donor donates a gift of a ____ value
Present = charity gets income now
Which of the following are sources of estate liquidity?
Life insurance on the decedent
Section 6166 = Interest 1st 4 years, 10 year payments = 14 years t pay
Sale of estate appreciated assets
see
Mrs. Tellman gifts 6,634,000 to a grandchild in 2013. She has not used her 5,250,000 GSTT exclusion. Which of the following is true in 2013?
1,370,000 is subject to GSTT = diff in gifts-exclusion-exemption
The GSTT due will be paid by Mrs. Tellman
The 14,000 annual exclusion is only available for direct lifetime skips.
see
Mr. Hightower wants to set up a tax-deductible fund to be used to support young talented individuals to enhance their abilities. What can Mr. Hightower do?
Set up a private foundation
see
Joe and his wife want to put 120,00 into a irrevocable trust to benefit their daughter. The trust has Crummey provisions. Which of the following is true?
A gift of 28,000 per year from Joe and his wife will qualify for the annual exclusion
see
Mr. Pierce is 93 year old and incapacitated. Mrs. Pierce is 88. She ants some kind of plan in place is she becomes incapacitated or dies, but she does not want to lose control of their assets until that time. What is the best idea?
REVOCABLE TRUST. Note, springing is a good answer, only answer if Revocable trust is not there.
see
Which of the following is true abut the grantor of a trust?
The grantor must be legally competent
see
What type of wording in a trust will change an ascertainable standard to a general power = HEMS
Expense convalescence
maintenance
see
What is the major difference between a private foundation and a supporting organization
The supporting organization cannot e controlled by the donor or the donor’s family whereas the donor controls the private foundation
s
Which of the following is true about DNI?
It provides the trust with a deduction for the amount distributed
= it is a simple trust, must distribute income = conduit DNI = deduction
s
Mr. Timothy decided t give 6,250,000 int an irrevocable trust for his daughter. Mr. Timothy appointed an independent trustee who would have distributed all the the trust income to Mr. Timothy’s daughter while living. After Mr. Timothy’s daughter dies, the reminder will be distributed to Mr. Timothy’s grandchild. Which fo the following are true?
a GSTT will be due
a gift tax of 400,000 is due 6,250,000 - 5,250,000 = 1,000,000 X .4
This is called a taxable termination
The trust is a simple trust
s
Taxable gifts use the same tax rate schedule as testamentary transfers = YES! give and estate = 40%
True
yes
What is a dynasty trust
a simple trust
s
Which of the following intra-family technique will work if the property owner needs income?
Private annuity
GRAT
j
In a revocable trust, the grantor can be which of the following
Trustee and the beneficiary = both
s
Which of the following is false about UGMA and UTMA?
a custodianship is a separate legal entity, No it isn’t! custodian and owner are the same
s
Trish Elmwood was an income beneficiary of a trust her grandfather set up for her. She also was given a 5 or 5 power. The trust originally was established with $500,000 but it is now worth $900,000. Trish died recently and HAD EXERCISE her 5 or 5 right for the year. How much of the trust is included in her estate?
$0
s
Mrs. Teal sell a parcel of undeveloped land 100,000 for 1,000,000 t her 2 daughters using a 10 year installment sale. Only 1 payment was made by her daughters when they sold the property to a developer for 2,00,000. What will be the taxable event to Mrs. TEAL
Mrs. Teal’s gain for income tax purposes is accelerated (as if it were paid in full) ,no installment so the 1,000,000
s
The primary purpose of the ____ is to “catch” any assets that the client owns but are not controlled by the revocable trust.
Pour over TRUST
trust
When will the spouse qualify for the unlimited marital deduction?
When the property actually passes to the surviving spouse
when the interest passing to the surviving spouse is in the form a QTIP
s
What is DNI?
DISTRIBUTED NET INCOME
s
What are terminal interest exceptions?
QTIP property
QDOT (QDT) porperty
n
Which of the following will be deductible FROM the estate to arrive at the adjusted gross estate
unpaid federal gift tax of 10,000
a lien of 20000 on an auto own by the decedent
an accountant fee to prepare the estate tax return
an utility bill for the decedent’ residence during estate administration
fire damage (no covered by insurance) to the decedent’s residence during estate administration
s
How is a Totten Trust used?
to avoid probate of a bank account at the death of the account owner
s
Which of the following escapes gift tax liability?
a man agree t give his wife a lump settlement of 10,000,000 up their divorce. In turn, his wife agrees to give up all marital rights she has in the estate.
s
Which of the following is true about Medicaid planning?
a single individual will not qualify unless he/shee has less than 2000 in countable assets in most states
people are ineligible if they have more than 500,000 in home equity
medicaid recipients who have annuities must name the state as remainder beneficiary to cover expense
People must be age 65!!! NO! this is medicare
s
What is the only exception to transfer with a retained interest?
A gift to an irrevocable trust in the gross estate unless the donor contributed 70,000 to a 529.
other choices has incidencts of ownership
s
In the inter-vivos trust, the _____ has legal title, and the ____ has/have equitable title.
Trustee, beneficiaries
s
Which of the following is/are deductible from the decedent’s adjusted gross estate to arrive at the taxable estate?
an insurance policy on the decedent with the spouse names as the primary beneficiary
property held by entirety
a
Phillip Gray gifted extensively to his son this year. He gifted 3,014,000 of gifts. He died this year with a gross estate of $5,000,000. Phillip was not married. How much is his taxable estate.
The only think I need to realize is that gifts are out of his estate.. right? yes = 5,000,000 = taxable estate
s
Gloria Hampton married Ralph Richardson. It was a second marriage for both. She signed a prenuptial agreement waiving all her right to elective share to Ralph’s assets. He signed nothing. Which of the following is true?
IF she dies, he can claim elective share = he never signed anything. really only valid if both sign
s
Mr. Todd (married) has an interest in the following assets.
100,000 in stock (his name)
land worth 200,000 (in tenancy in common with his sister 50/50%)
$350,000 in a home (in tenancy with rights of survivorship with his wife)
250,000 in trust (with a general power) = retain it
100K 100K 175K 250K 625K = total
