Practice Quiz 17

Question 1

Mike and Kim have been married for 20 years. Last year they were able to pay off the remaining balance of the 15-year mortgage on their home, which they own as joint tenants with right of survivorship (JTWROS). Mike does not work and Kim provides financial support for both of them. All mortgage payments have been made possible because of Kim’s income. If Kim died, what percentage of the home’s value would be included in her gross estate?

A)
0%.
 B)
50%.
 C)
25%.
 D)
100%.

Answer 1

B

Question 2

Scott is the fiduciary of the BSB retirement plan. The entity responsible for monitoring his actions as a fiduciary is:
A)
ERISA.
 B)
SPD.
 C)
DOL.
 D)
PBGC.

Answer 2

C

Question 3

The yield to maturity on a zero-coupon bond ($1,000 par value) currently selling at $677 and maturing in four years is approximately:
A)
15%.
 B)
10%.
 C)
4%.
 D)
37.48%.

Answer 3

B

Question 4

To design an effective financial plan, the planner must:

1. Determine the availability of the client’s financial resources.
2. Not ask the client how he feels about abstract situations.
3. Help the client define specific goals.

Answer 4

C

Question 5

In which of the following circumstances is a cafeteria plan appropriate?

1. When the employee mix is comprised mostly of older employees with families who need maximum medical and life insurance benefits.
2. When employers want to choose the benefit package most suited to their individual needs.
3. When an employer seeks to maximize employee satisfaction with the benefit package, thereby maximizing the employer’s benefit from its compensation expenditures.
4. When a small employer does not have much money to spend on benefits.

Answer 5

3 only

A cafeteria plan is appropriate when the employee mix includes young, unmarried people with minimal life insurance and medical benefits needs, as well as older employees with families who need maximum medical and life insurance benefits. A cafeteria plan is also appropriate when employees want to choose the benefit package most suited to their individual needs. Finally, a cafeteria plan is appropriate when the employer is large enough to afford the expense of such a plan.

Question 6

During the year, SAW Furniture purchased the following assets:

Date Asset Cost
February 20 Saws $50,000
October 30 Lathes $100,000

In calculating allowable depreciation of these assets, which of the following conventions must be used?

Mid-quarter.
 B)
Mid-week.
 C)
Mid-month.
 D)
Half-year.

Answer 6

A

For personal property, the mid-quarter convention must be used if more than 40% of the property was placed in service during the last quarter of the year. Here, SAW Furniture placed in service 67% ($100,000 / $150,000) of the property in the last quarter. Therefore, the mid-quarter convention must be used for all personal property placed in service during the year. The mid-month convention only applies to real property. The mid-week convention does not exist.

Question 7

Tom and Samantha have a modified adjusted gross income of $200,000 in 2017 and file a joint tax return. They want to know what combination of available funds and tax benefits they can use to offset their daughter’s higher education expenses. Which of the following choices is CORRECT?

A)
Pell Grant, Coverdell Education Savings Account (CESA), and qualified tuition plan account distribution.
B)
Lifetime Learning Credit, Coverdell Education Savings Account (CESA), and UTMA account distribution.
C)
Coverdell Education Savings Account (CESA) and Section 529 plan.
D)
American Opportunity Tax Credit and Series EE savings bonds.

Answer 7

C

Because of their modified adjusted gross income, Tom and Samantha do not qualify to take the American Opportunity Tax Credit (the MAGI phaseout for joint filers is $160,000−$180,000) or Lifetime Learning Credit for 2017 (the MAGI phaseout for joint filers is $112,000−$132,000). The Pell Grant is awarded on a financial need basis, for which the family would not qualify.

Question 8

Marie, who is single, had an adjusted gross income of $85,000 in the current year. She experienced losses of $30,000 from rental real estate in which she was an active participant. Marie also has a $5,000 loss from a master limited partnership interest. How much of the real estate loss can she deduct against earned income this year?

A)
$3,000.
 B)
$35,000.
 C)
$30,000.
 D)
$25,000.

Answer 8

D

Question 9

Which of the following statements regarding Medicare Part B is (are) CORRECT?

1. Coverage under Part B is mandatory for anyone who is enrolled in Part A.
2. Enrollment in Part B requires payment of a monthly premium.
3. Part B provides coverage for skilled nursing care in a nursing home.
4. Coverage under Part B does not include deductibles or coinsurance.

Answer 9

2 only

Statements 1, 3, and 4 are incorrect. Enrollment in Part B is optional. Part B does not cover skilled nursing care in a nursing home. Part B does have deductibles and coinsurance.

Question 10

The term ‘breakpoint’ in relation to a health insurance policy refers to:

1. The deductible portion of the policy which is paid by the insured.
2. The dollar amount above which the insurance company begins paying 100% of covered costs.
3. The sum of the deductible and the stop-loss limit.
4. A schedule of maximum amounts paid for various medical procedures.

Answer 10

2 and 3

Question 11

Which of the following statements accurately list items that will increase or decrease a partner’s basis in the partnership?

1. A partner’s basis is increased by his or her capital contributions, his or her distributive share of partnership income, and his or her share of liabilities assumed.
2. A partner’s basis is reduced by his or her share of losses, his or her distributions or draws, and his or her share of liabilities relieved.

Answer 11

both statements are correct

Question 12

Which of the following dwellings is (are) eligible for an HO-3 homeowners policy?

1. A single-family home occupied by a family who rents the home from its owner.
2. A single-family home occupied by its owner; the owner rents the upstairs apartment to a boarder.
3. A home occupied by 3 families, one of whom owns the home; none of the families has any boarders.
4. A home occupied by 2 families, one of whom owns the home; one of the families rents out a room to a boarder.

Answer 12

2 and 4

Statements 2 and 4 describe dwellings that are eligible for a homeowners policy. A dwelling must be owner-occupied to qualify, and no more than two families may occupy the dwelling. Each family within the dwelling may have up to two roomers or boarders.

Question 13

Which of the following statements regarding stock bonus plans and employee stock ownership plans (ESOPs) are CORRECT?

1. They both give employees a stake in the company through stock ownership; allow taxes to be delayed on stock distribution gains; enhance cash flow because employers make cashless contributions to the retirement plan; and create a market for employer stock.
2. They both limit availability of retirement funds to employees if an employer’s stock falls drastically in value.
3. They both decrease the company’s cash flow because of the cost to the employer to purchase the stock before contributing it to the plan.
4. They may both create an administrative and cash-flow problem for employers by requiring them to offer a repurchase option (put option) if their stock is not readily tradable on an established market.

Answer 13

1, 2, and 4

Question 14

Which of the following retirement plans, maintained by an employer, if any, would also permit the employer to establish a SIMPLE?
A)
None of these.
 B)
Section 457 plan.
 C)
SEP.
 D)
Section 403(b) plan.

Answer 14

B

To establish a SIMPLE, an employer cannot maintain another qualified or tax-advantaged plan. However, a Section 457 plan is a nonqualified deferred compensation plan and, therefore, does not constitute a prohibited plan for purposes of also establishing a SIMPLE.

Question 15

All of the following are considerations for converting distributions from qualified plans or a traditional IRA to a Roth IRA EXCEPT:

A)
one advantage of a conversion to the Roth IRA is that the Roth IRA will not be subject to required minimum distributions (RMD) during the life of the original owner.
B)
the Roth IRA conversion is more appropriate when the income tax rate is lower at the time of distribution than at the time of conversion.
C)
any portion of an IRA can be converted to a Roth IRA.
D)
the Roth IRA conversion becomes more appropriate the longer the period of distributions.

Answer 15

B

Question 16

A correct statement regarding the use of a Grantor Retained Annuity Trust (GRAT) as an estate-planning technique is that such a strategy:

A)
saves estate taxes only if the grantor lives beyond the trust term.
B)
is generally inappropriate if the trust corpus consists of income-producing assets.
C)
guarantees that the trust property will receive a stepped-up basis at the grantor’s death.
D)
is appropriate only if the remainder beneficiary is the grantor’s spouse.

Answer 16

A

A GRAT is effective only if the grantor survives the GRAT term. If the grantor does not outlive the GRAT term, then a portion of the assets in the GRAT are brought back into the gross estate.

Question 17

Savannah owns a 10-year period certain annuity that currently pays her $300 per month. She dies after receiving 5 years of payments. Her beneficiary is Jim. Which of the following statements regarding this situation is CORRECT?
A)
Savannah’s exclusion ratio prior to death was 33.3%.
B)
Because the remaining annuity payments represent income in respect of a decedent (IRD), the annuity payments retain the same character to Jim as they did to Savannah for the remaining life of the annuity contract.
C)
Jim will receive all remaining payments under the annuity on a tax-free basis.
D)
Jim must pay income tax on the full amount of all remaining payments he receives from the annuity.

Answer 17

B

The law allows the entire investment in the contract to be recovered free of income taxes. Once the amount that has been received by Savannah and her beneficiary on a tax-free basis equals the investment in the contract, any remaining amounts received are taxable as income. We can not say that Savannah’s exclusion ratio prior to death was 33.3% because we do not know the amount of the investment in the contract.

Question 18

Which of the following statements regarding the capital asset pricing model (CAPM) is NOT correct?
A)
The CAPM is based on a market portfolio containing all possible assets.
B)
The CAPM can be used to find the required rate of return of an investment.
C)
The CAPM assumes capital markets are in constant equilibrium establishing a baseline by which to evaluate the suitability of any investment.
D)
The CAPM assumes that the only pertinent risks are market risk and unsystematic risk.

Answer 18

D

Question 19

In which of the following situations must the donor file a gift tax return (IRS Form 709)?
A)
A father gives his son $15,000 in cash and his spouse agrees to gift splitting.
B)
An uncle gives his niece $5,000 in cash.
C)
A husband gives his wife a house with a fair market value of $3 million.
D)
A man pays $100,000 directly to a hospital to pay the medical expenses of his best friend.

Answer 19

A

Any split-gift election requires the filing of a gift tax return, even when there is no tax due, unless the gift is community property and less than twice the annual exclusion amount.

Question 20

Stan died recently, and his will left his investment real estate to his 35-year-old son, Oscar. Oscar executed a valid disclaimer refusing acceptance of the real estate. Stan’s will leaves all residual property to his spouse, Della. Which of the following statements regarding this arrangement is CORRECT?
A)
Oscar has made a taxable gift to Della.
B)
The investment real estate will be included in Oscar’s gross estate upon his death.
C)
Oscar could retain the income from the investment real estate, while disclaiming the actual property.
D)
The investment real estate will qualify for the marital deduction.

Answer 20

D

Because the disclaimed property will be transferred to the surviving spouse, it will qualify for the marital deduction. When Oscar disclaimed the property, he could not direct to whom the property would pass and he has not made a taxable gift. A disclaimant cannot benefit from the disclaimed property. Because Oscar disclaimed the property, it will not be included in his gross estate at his death.

Question 21

Which of the following statements concerning technical analysis as an approach to selecting securities is NOT correct?
A)
The emphasis of technical analysis is on internal factors that help to detect supply and demand conditions in the market.
B)
Price and volume are the primary tools of the technical analyst.
C)
Technical analysis is only applied to the aggregate market, not to individual stocks.
D)
The rationale for technical analysis is that stock prices require time to adjust to changes in supply and demand.

Answer 21

C

Question 22

Bill’s employer maintains a target benefit pension plan. Bill is age 59. The plan was originally designed to benefit a 38-year-old key employee. There is also substantial turnover at Bill’s company. Which of the following statements is(are) CORRECT?

1. Bill knows exactly what retirement benefit to expect.
2. Bill’s retirement benefit is funded through elective deferrals.
3. Forfeitures are likely to be allocated equally to Bill and the 38-year-old employee.
4. Contributions to the plan are certain.

Answer 22

4 only

Question 23

All of the following statements concerning portfolio return and risk are correct EXCEPT:
A)
portfolio risk (as measured standard deviation) is not a weighted average of the risk of the individual securities in the portfolio.
B)
adding one more security to a large portfolio will significantly reduce portfolio risk.
C)
random or naive diversification refers to the act of randomly diversifying without regard to relevant investment characteristics such as expected return and industry classification.
D)
diversification is the key to the management of portfolio risk because it allows investors to minimize risk without adversely affecting return.

Answer 23

B

Question 24

Which of the following statements concerning bond duration and price volatility is (are) CORRECT?

1. Bonds with short durations are considered less risky than those with long durations.
2. Bond price volatility is directly related to time to maturity and inversely related to bond coupons.

Answer 24

both statements are correct