Practice Quiz 12 (REVIEW MORE)

Question 1

The process of gathering data concerning the client’s cash flow situation, presenting the data in an organized format, and identifying strengths, weaknesses, and important patterns is:

1. Cash flow analysis.
2. Revenue and expense analysis.
3. Net worth planning.
4. Capital consolidation.

Answer 1

1 and 2

Question 2

Which of the following statements regarding replacement property in a Section 1033 exchange is (are) CORRECT?

1. In the taxpayer-use test, the taxpayer’s use of the replacement property and of the involuntarily converted property must be the same.
2. For the functional-use test, the owner-investor’s properties must be used in similar endeavors as the previously held properties.

Answer 2

neither are correct

In the functional-use test, the taxpayer’s use of the replacement property and of the involuntarily converted property must be the same. In the taxpayer-use test, the owner-investor’s properties must be used in similar endeavors as the previously held properties.

Question 3

Several years ago, Stan purchased a $400,000 whole life insurance policy on his life. He has paid cumulative premiums over the years of $20,000, and has accumulated a cash value of $25,000. This year, he was diagnosed with a rare liver disease, and as a result his life expectancy is only 6 months. Because of his large medical costs, he is considering selling his policy to a viatical settlement company. They have offered him $250,000 for the policy. He would also like to explore other ways to generate cash from the policy. Which of the following statements regarding Stan’s situation are CORRECT?

1. If Stan sells his policy to the viatical settlement company, he will be taxed on any gain from the sale if he dies more than 2 years later.
2. If the viatical company collects the death benefit as a result of Stan’s death, the proceeds will be tax free to the company.
3. If Stan sold the policy to his cousin for $250,000, his cousin would be subject to ordinary income tax on a portion of the life insurance benefit when Stan dies.
4. If Stan takes a loan from the policy, some or all of the loan will be subject to ordinary income tax if the policy is classified as a modified endowment contract.

Answer 3

3 and 4

Question 4

Steve and Haley, ages 48 and 45 respectively, invest in large-cap stocks, international stock mutual funds, and real estate. They consider themselves moderately aggressive investors. Their investment portfolio is subject to which of the following investments risks?

1. Investment manager risk.
2. Financial risk.
3. Exchange rate risk.
4. Default risk.

Answer 4

1, 2, and 3

Question 5

Which of the following individuals qualify for long-term care benefits under a qualified long-term care insurance policy?

1. Frank, who has been unable to perform 2 of the 6 ADLs for 90 days.
2. Julie, who has a substantial cognitive impairment requiring substantial assistance.

Answer 5

both statements are correct

Question 6

Which of the following is NOT a characteristic of a zero-coupon bond?
A)
A zero-coupon bond will always have a duration equal to its term to maturity.
B)
A zero-coupon bond sells at a deep discount to par value.
C)
The investor must recognize annual interest accumulation as taxable income, even though no money is actually received.
D)
An increase in market interest rates will not negatively affect a zero-coupon bond’s value.

Answer 6

D

Question 7

Bradley, Inc., sold some land on June 30 of the current year for a $15,000 gain. The land was originally purchased 3 years ago and was classified as a Section 1231 asset. This was the only asset sale for this year. In the previous year, Bradley, Inc. had an $8,000 net Section 1231 loss. For the current year, Bradley’s net Section 1231 gain is treated as:
A)
A $8,000 long-term capital gain and a $7,000 ordinary loss.
B)
A $7,000 long-term capital gain and a $8,000 ordinary gain.
C)
A $15,000 ordinary gain.
D)
A $15,000 ordinary loss.

Answer 7

B

Question 8

A flexible spending account:
A)
can stand alone or be incorporated within a cafeteria plan.
 B)
is funded by the employer.
 C)
is a type of defined benefit retirement plan.
 D)
None of these.

Answer 8

A

Question 9

John is a Ph.D. and the founder of Merryweather Industries Inc., a closely-held company which specializes in storm chasing and weather reports. He owns 85% of the stock. His wife, a registered nurse, and his son who has just entered the business, hold the balance of the stock. Which of the following discounts might apply to transactions involving the Merryweather stock?

1. Key person discount if John dies.
2. Blockage discount if John dies.
3. Lack of marketability discount if John gifts stock to his son.
4. Minority discount if John gifts a small amount of stock to his son.

Answer 9

1, 3, and 4

Question 10

Which of the following statements are CORRECT with regards to budgeting?

1. Budgeting requires planning for the expected, the recurring, and the unexpected.
2. Budgeting is the process of projecting, monitoring, adjusting, and controlling future income and expenditures.
3. Budgeting may be used to determine the wage replacement ratio for retirement capital needs analysis.

Answer 10

all statements are correct

Question 11

Which of the following characteristics must be present for a risk to be insurable?

1. The loss must be intentional.
2. The loss must be uncertain.
3. The loss cannot be catastrophic to society.
4. The loss must be measurable.

Answer 11

3 and 4

Question 12

What is the intrinsic value of a put option with an exercise price of $45, when the stock is selling for $40?
A)
$1.
 B)
$50
 C)
$5.
 D)
$4.50.

Answer 12

C

Question 13

The pairs and sets option of loss settlement under a homeowners policy allows the insurance company to:
A)
pay the full replacement cost of the pair or set.
B)
sell the pair or set for its salvage value.
C)
repair or replace any part of the pair or set to its value before the loss.
D)
sell the damaged property as a pair or set only.

Answer 13

C

Question 14

Under the Social Security system, immediate survivor income benefits based on a deceased worker’s primary insurance amount (PIA) and coverage is available to which of the following persons?

1. A surviving spouse caring for a child under the age of 16.
2. Unmarried children under the age of 18 who are dependents.
3. Unmarried disabled children who became disabled before age 22.
4. Any surviving divorced spouse age 50 or over, with no children who was married to the decedent/worker for over 10 years and who is disabled.

Answer 14

all persons are covered

Question 15

Which of the following statements concerning insurable interest is (are) CORRECT?

1. In life insurance, insurable interest must exist at the time of death.
2. In life insurance, insurable interest must exist at the inception of the contract.
3. In property insurance, insurable interest must exist at the time of loss but not when the policy was purchased.
4. In property insurance, insurable interest must exist at the time the contract was purchased and at the time of loss.

Answer 15

2 and 4

Question 16

Which of the following statements concerning the effect of income taxes on time value of money problems is (are) CORRECT?

1. The rate of return nominally realized on most investments should be adjusted downward to an after-tax basis.
2. The nominal size of a payment or interest rate on a loan should be adjusted downward by the borrower if the payments are deductible for income tax purposes.

Answer 16

both are correct

Question 17

Ruth and Doug divorced last year. They have 2 children ages 7 and 9. Their divorce decree states that Ruth has custody of both children. There is no written agreement for dependency exemption. However, Doug provides 75% of the child support, amounting to $15,000 per year. Based on this information, which parent is entitled to the dependency exemptions for the children?
A)
Ruth because she has custody and there is no written agreement that Doug would receive the exemptions.
B)
Ruth because the court awarded her custody of the children.
C)
Doug because he provides over one-half of the child support.
D)
Doug because he provides at least $1,200 per year for the children’s support and Ruth cannot not prove she contributes more than this amount.

Answer 17

A

Question 18

Which plans are exempt from the 10% limit on investing in employer securities?

1. Profit-sharing plans.
2. Thrift/savings plans.
3. Traditional defined benefit pension plans.
4. Cash balance pension plans.

Answer 18

1 and 2

Question 19

Nonqualified plans:

1. Give an employer an immediate tax deduction.
2. Give an employee a deferral of income taxes.
3. Have lower administrative costs than qualified plans.
4. Have Employee Retirement Income Security Act (ERISA) protection such as vesting, fiduciary, and funding requirements.

Answer 19

2 and 3

A qualified plan gives an employer and employees tax advantages. Administration costs are much lower for a nonqualified plan because of simplicity and lack of reporting requirements. Most ERISA requirements are not applicable to the typical nonqualified plan.

Question 20

Gary received an inheritance of $200,000. He wants to withdraw equal periodic payments at the beginning of each month for the next five years. He expects to earn a 12% annual rate of return, compounded monthly on his investments. How much can he receive each month?

A)
$4,404.84.
 B)
$55,481.95.
 C)
$4,448.89.
 D)
$49,537.45.

Answer 20

A

BEG mode		
PV	=	200,000
i	=	1 (12 ÷ 12)
n	=	60 (5 × 12)
FV	=	0
PMT =	(4,404.84), or $4,404.84

Question 21

On October 15, 2016, Erin purchased stock in Glennan Irish Ale Corporation (the stock is not small business stock) for $2,000. On June 15, 2017, the stock became worthless. How should Erin treat the loss in 2017?

A)
$2,000 short-term capital loss.
 B)
$2,000 long-term capital loss.
 C)
$1,000 short-term capital loss.
 D)
$1,000 long-term capital loss.

Answer 21

B

Worthless securities are treated as becoming worthless at year end. Therefore, the loss is a long-term capital loss even though the stock became worthless after only 8 months.

Question 22

If the insured makes an absolute assignment of a paid up life insurance policy, the value of the gift equals:
A)
The face value of the policy, less any loans outstanding against the policy.
B)
The replacement cost of the policy.
C)
The face value of the policy.
D)
The face value minus the cash surrender value of the policy.

Answer 22

B

Question 23

A financial planner’s client has an IRA with a balance of $140,000 as of January 1. On April 15 of the same year, the client withdraws the entire amount from the IRA and places it in a non-IRA CD for 60 days, earning 9% interest. On the 60th day, the client promptly and timely reinvests the principal of the CD in an IRA containing an aggressive growth fund. On September 15 of the same year, the client becomes dissatisfied with the return and the variability of the investment. The client wants a less risky investment and wants assurance that any IRA distribution will not be taxed at the time of the change. Which of the following is (are) acceptable alternatives for the client?

1. Withdraw the funds and reinvest them within 60 days in an IRA that invests exclusively in Treasury instruments.
2. Direct the trustee of the IRA to transfer the funds to another IRA that invests exclusively in Treasury instruments.
3. Withdraw the funds and reinvest within 60 days in an IRA that is an index mutual fund holding common stocks with portfolio risk equal to the S&P 500.

Answer 23

2 only

Question 24

A correct statement regarding the use of a Grantor Retained Annuity Trust (GRAT) as an estate-planning technique is that such a strategy: (CFP® Certification Examination, released 12/96)
A)
is generally inappropriate if the trust corpus consists of income-producing assets.
B)
is appropriate only if the remainder beneficiary is the grantor’s spouse.
C)
guarantees that the trust property will receive a stepped-up basis at the grantor’s death.
D)
saves estate taxes only if the grantor lives beyond the trust term.

Answer 24

D

Question 25

A beneficiary designation that may be changed by the policyowner without the consent or notification of the beneficiary is known as a:
A)
contingent beneficiary.
 B)
primary beneficiary.
 C)
irrevocable beneficiary.
 D)
revocable beneficiary.

Answer 25

D