Practice Quiz 14

Question 1

Which of the following statements regarding the various performance measures are CORRECT?

1. A positive alpha indicates that the manager consistently underperformed the market on a risk-adjusted basis.
2. Jensen’s alpha indicates how much the realized return differs from the required return, as per the capital asset pricing model (CAPM).
3. The Sharpe ratio is not useful for evaluating the performance of non-diversified portfolios.
4. The Treynor ratio does not indicate whether a portfolio manager outperformed or underperformed the market portfolio.

Answer 1

2 and 4

Question 2

To avoid the coverage requirements in a retirement plan, some employers may try to segregate their management employees from the rank-and-file employees by creating a related or subsidiary corporation. To close this loophole, which of the following aggregation rules contained in the Internal Revenue Code (IRC) must employers adhere to?
A)
Leased employee rules.
 B)
Controlled group rules.
 C)
Affiliated service group rules.
 D)
All of these.

Answer 2

D

Question 3

Which of the following compensation arrangements are based upon the earnings of the client’s investment portfolio?

1. Performance.
2. Incentive.
3. Commission.
4. Fee-for-service.

Answer 3

1 and 2

Question 4

Which of the following questions must be answered when applying the top-heavy test?

1. What percentage of employees are rank-and-file?
2. Who is a key employee?
3. Which employers will be treated as single employers for purposes of the top-heavy test?

Answer 4

2 and 3

Question 5

A capital asset was acquired on March 15, 2017. To meet the long-term holding period, what is the earliest date the asset could be sold?

A)
March 16, 2018.
 B)
March 15, 2018.
 C)
August 16, 2017.
 D)
December 31, 2017.

Answer 5

A

Question 6

Which of the following charitable contributions is NOT deductible on Mary’s 2017 income tax return?

A)
A contribution charged to her credit card October 10, 2017, which she did not pay until the end of 2017.
B)
A contribution charged to her credit card on December 10, 2017, even though she did not pay the bill until January 2018.
C)
A pledge on December 31, 2017 to pay the United Way $50 before April 15, 2018.
D)
All of these.

Answer 6

C

One requirement for a charitable contribution deduction is that the gift must be paid in cash or property before the end of the tax year. Contributions made by credit cards are deductible the year in which the credit card is actually charged, regardless of when the taxpayer pays the credit card bill.

Question 7

William is in the market for a new automobile. He is weighing the choice between leasing and buying. Which of the following is (are) reasons he should consider leasing rather than buying?

1. Drives fewer than 15,000 miles per year.
2. Uses the car mostly for business purposes.
3. Keeps a car for five years or longer.

Answer 7

1 and 2

Question 8

Sam and Sue paid $100,000 for their home 5 years ago. Its fair market value was $150,000 when Sam died. What was Sue's basis in the home after Sam's death if the home was held as community property? 
A)
$50,000.
 B)
$150,000.
 C)
$100,000.
 D)
$75,000.

Answer 8

B

Both halves of community property receive a stepped-up basis equal to the to fair market value at the death of the first spouse.

Question 9

Linda, a New Jersey resident, just purchased a New Jersey municipal bond. The bond has a coupon rate of 5% and will mature in 5 years. Which of the following statements regarding the municipal bond is CORRECT?
A)
Linda will pay federal income tax on the municipal bond’s interest.
B)
If the bond is a general obligation bond, it will be repaid through taxes collected by the State of New Jersey.
C)
Municipal bonds are not subject to default risk.
D)
If the bond is a revenue bond, it will be secured by the taxing power of the State of New Jersey.

Answer 9

B

General obligation bonds are supported by the taxing power of the state. Revenue bonds are supported by the revenue from the specific project. Interest on municipal bonds is free from federal income tax. Municipal bonds are subject to default risk.

Question 10

Which of the following companies might NOT be allowed to have a Keogh (self-employed) plan?
A)
Limited liability partnership.
 B)
Partnership.
 C)
Limited liability company.
 D)
Limited partnership.

Answer 10

C

Question 11

Which of the following statements concerning the rules that relate to the Principle of Competence in CFP Board Code of Ethics is(are) CORRECT?

1. A CFP® certificant may not assist clients with areas in which he is not professionally competent; he should refer clients to such parties.
2. A CFP® certificant shall keep informed of developments in the field of financial planning and participate in continuing education throughout the certificant’s professional career.

Answer 11

both are correct

Question 12

Mary Sue died during the current year. Which of the following would be included in Mary Sue’s gross estate at the full date-of-death value?

1. A gift of property worth $80,000 given by Mary Sue to her cousin 4 years ago. Mary Sue retained a life estate in the gifted property.
2. A residence Mary Sue purchased and titled as joint tenants with rights of survivorship (JTWROS) with her daughter several years ago.
3. A gift of $30,000 cash from Mary Sue to her son, given last year.
4. Death benefits from a life insurance policy on Mary Sue’s life that Mary Sue transferred to an irrevocable life insurance trust (ILIT) 2 years ago.

Answer 12

1, 2, and 4

Question 13

In 2017, George decided to begin a program of lifetime giving to his 5 grandchildren and 3 great-grandchildren. He wants to control the amount of annual gifts to avoid the imposition of federal gift tax, and he does not desire to use any of his or his wife’s, Sue, applicable credit amount. However, Sue is willing to split each gift over a period of 10 years. Over the 10-year period, George can give a total amount of gifts (ignoring future indexing of the annual exclusion), including the gift splitting, of:

A)
$140,000.
 B)
$280,000.
 C)
$1,120,000.
 D)
$2,240,000.

Answer 13

D

Question 14

What is the minimum number of employees that must be covered in a defined benefit pension plan to conform to ERISA requirements for a company having 200 eligible employees?
A)
50.
 B)
200.
 C)
40.
 D)
140.

Answer 14

A

Question 15

In 2000, Zachary began making contributions to an IRA. He made his sister, Kayla, beneficiary of his IRA. In 2017, Zachary died at age 73. What is the maximum IRA distribution period?

A)
Kayla’s remaining life expectancy in 2018, reduced by one each subsequent year.
B)
Five years.
C)
Kayla’s remaining life expectancy for 2018 and subsequent years.
D)
Life expectancy for a man age 73 in 2018, reduced by one each subsequent year.

Answer 15

A

Because Zachary died at age 73, he would have started receiving distributions from his IRA. (Distributions were required to begin by April 1 of the year after Zachary turned 70½.) If death of the IRA owner occurs after the required beginning date, the distribution period for a nonspouse beneficiary is the beneficiary’s remaining life expectancy in the year following the year of death, reduced by one each subsequent year.

Question 16

Which of the following statements regarding bond price behavior is CORRECT?
A)
The price of riskier bonds moves less than the price of low-risk bonds.
B)
The price of low-coupon bonds moves less than the price of high-coupon bonds.
C)
The price of bonds with long maturities moves less than the price of short-term bonds.
D)
Bond prices move inversely with interest rates.

Answer 16

D

Question 17

Which of the following statements concerning gifts of appreciated property is(are) CORRECT?

1. The donor’s holding period carries over to the donee.
2. Generally, the donor’s basis carries over to the donee.
3. If the donor paid gift tax on the gift, the donee’s basis is increased by a portion of the gift tax paid.

Answer 17

all are correct

Question 18

Which of the following exchanges is NOT a tax-free exchange under IRC Section 1035?
A)
Exchange a variable life insurance policy for a variable annuity.
B)
Exchange a variable annuity for a whole life insurance policy.
C)
Exchange a variable annuity for a qualified long-term care contract.
D)
Exchange a universal life insurance policy for a variable life insurance policy.

Answer 18

B

Question 19

Bill gifts his daughter bonds with a fair market value of $1,000. Bill’s basis in the bonds is $1,800. Bill’s daughter subsequently sells the bonds for $2,000. What is her recognized gain or loss?

A)
$2,000 gain.
 B)
No gain or loss.
 C)
$200 gain.
 D)
$1,000 gain.

Answer 19

C

Question 20

Michael was divorced after 12 years of marriage. He had 2 dependent children, ages 4 and 6, who are cared for by their mother. He was currently, but not fully, insured under Social Security at the time of his death. The benefits that his survivors are entitled to include:

1. A lump sum death benefit of $255.
2. A children’s benefit.
3. A divorced spouse’s benefit.
4. A parent’s benefit for deceased workers’ parents who are over the age of 62.

Answer 20

1 and 2

Question 21

Alex, a CFP® professional, is in the process of preparing a written financial plan for his client, Margaret. As he does this, Alex has which of the following obligations to Margaret?

1. A fiduciary duty of care
2. A duty to charge the lowest fees possible
3. A duty to put Margaret’s interests ahead of his own
4. A duty to act in a manner he believes is in Margaret’s best interests, which are dependent on her unique circumstances

Answer 21

1, 3, and 4

Question 22

Only certain types of bad debts are allowed as tax deductions. Which of the following would most likely be allowed as a deduction, assuming the borrower defaulted on the loan?
A)
A woman loans her homeless, unemployed brother $1,000 to get an apartment.
B)
Jim guarantees a $5,000 loan to his brother made by Jim’s son.
C)
A man loans his best friend $5,000 to buy a car with a written agreement that the loan will be repaid without interest within 12 months.
D)
A mother lends her daughter $2,000 to start a business with an agreement that the loan will be repaid if the business succeeds.

Answer 22

C

A defaulted loan is only deductible as a bad debt if the loan consists of a legal obligation for repayment and if it is made with the reasonable expectation of obtaining repayment. Lending money with repayment contingent upon some other event is not a bona-fide loan. Lending money to a relative with no collateral or agreement to repay is not considered a loan for tax purposes. When taxpayers guarantee loans for personal reasons, such as loans between family members, the loans are treated as gifts and are not deductible as bad debts. Lending money for a purely personal nature and having a bona-fide agreement for repayment is most likely allowable as a deduction upon default.

Question 23

Which of the following statements regarding buy-sell agreements is CORRECT?
A)
They may be used to establish valuation of a closely held business when an owner dies.
B)
They may be structured only as a cross-purchase plan.
C)
They are used with both closely held stock and publicly traded stock.
D)
They are useful only for publicly traded corporations.

Answer 23

A

Buy-sell agreements may be used to establish closely held business valuation at DOD and can be either entity or cross-purchase agreements. They are useful for both closely held corporations and partnerships. Publicly traded stock already has an established market. Therefore, a buy-sell agreement is not needed.

Question 24

Which of the following statements regarding an S corporation is (are) CORRECT?

1. Shareholders of S corporations receive an IRS Schedule K-1 each year.
2. S corporation shareholders can establish a self-employed (Keogh) retirement plan as a result of the S corporation income.
3. One of the disadvantages of an S corporation is that the dividends paid to shareholders are subject to double taxation.
4. Capital losses incurred by an S corporation will flow through to the shareholders and will be reported on the shareholder’s personal income tax return.

Answer 24

1 and 4

Question 25

All of the following are forms of discipline that may be imposed by CFP Board's Disciplinary and Ethics Commission upon a Respondent charged with misconduct EXCEPT:
A)
Private censure.
 B)
Public letter of admonition.
 C)
Revocation of the right to use the certification marks.
 D)
Suspension up to a maximum of 10 years.

Answer 25

D

Suspension is only allowed up to a maximum of 5 years (not 10 years).