Practice Quiz 2

Question 1

Which of the following statements concerning a PLUS loan is (are) CORRECT?

1. PLUS loans are available to parents of students.
2. PLUS loans are not needs based.
3. The borrower under a PLUS loan must meet federal standards of creditworthiness.

Answer 1

all of these are correct

Question 2

This year, Mary has short-term capital losses of $6,000, short-term capital gains of $11,000, and long-term capital losses of $6,000. How much may Mary deduct against her ordinary income this year?

Answer 2

$1,000

Question 3

Which of the following is NOT a type of unsystematic risk?
A)
Financial risk.
 B)
Country risk.
 C)
Default risk.
 D)
Exchange rate risk.

Answer 3

D

Question 4

Which of the following statements best describes the difference between portfolio and passive income or losses?
A)
Portfolio income/loss is derived from ownership of rental property, while passive income/loss is purely derived from investment activities.
B)
Portfolio income/loss is derived from a combination of investment assets and rental property, while passive income/loss is derived only from rental income.
C)
Portfolio income/loss is derived from investment practices, while passive income/loss is derived from ownership of rental property and activities in which there is no material participation.
D)
Portfolio income/loss is derived from investment activities, while passive income/loss is derived from the active management of businesses.

Answer 4

C

Question 5

All of the following statements regarding Medicare supplement (Medigap) insurance policies are correct EXCEPT:
A)
policies must be guaranteed renewable.
B)
they cover some of the copayments and deductibles imposed by Medicare Part A and Part B.
C)
policies may not exclude preexisting conditions.
D)
the most comprehensive and expensive policy form is Policy A.

Answer 5

D

Question 6

Which of the following statements regarding the Section 410(b) coverage rule is(are) CORRECT?

1. A retirement plan can cover any portion of the workforce, as long as it satisfies 1 of 3 tests under Section 410(b).
2. The coverage tests under Section 410(b) of the Internal Revenue Code are: the percentage test, the ratio test, or the average contribution percentage test.

Answer 6

1 only

Question 7

Which of the following statements regarding index options is NOT correct?
A)
When exercised, index options result only in cash settlement.
B)
Index options allow investors to earn a return associated with the movements in the market.
C)
Investors often buy call index options to hedge against the risk of a decline in the value of their long positions in stocks.
D)
Investors can profit from a decline in the stock market by purchasing a put index option.

Answer 7

C

Question 8

Which of the following statements regarding choosing the most appropriate vesting schedule-restrictive vs. liberal-is(are) CORRECT?

1. Two advantages of choosing a restrictive vesting schedule are that it may be able to cut costs attributable to employee turnover and actually help retain employees.
2. Three advantages of choosing a liberal vesting schedule-to have immediate and full vesting-are that it fosters employee morale, keeps the plan competitive in attracting employees, and can meet the designs of the small employer who desires few encumbrances to participation for the employee family.

Answer 8

Both statements are correct

Question 9

Stuart expects to receive $5,000 at the end of each of the next four years. His opportunity cost is 14% compounded annually. What is this sum worth to Stuart today?

Answer 9

$14,568.56

Question 10

Which of the following statements regarding similarities between Section 401(k) plans and Section 403(b) plans is(are) CORRECT?

1. Both plans permit an employee to defer taxes on current income by allowing pretax contributions to be made to the employee’s individual account.
2. Both plans allow deferrals in the form of an elective deferral chosen by the employee or a contribution made by the employer.

Answer 10

both statements are correct

Question 11

Which of the following definitions best describes a life annuity with period certain?
A)
An annuity whose benefit payments begin one payment interval after the purchase date.
B)
A life annuity that provides no guaranteed minimum number of benefit payments or refund of the purchase price.
C)
A life annuity that provides a guaranteed minimum number of benefit payments whether the annuitant lives or dies.
D)
An annuity specifying that, if the annuitant dies before receiving total benefit payments equal to the purchase price of the annuity, the difference will be refunded in the form of continuing benefit payments.

Answer 11

C

Question 12

Which of the following statements regarding SEP plans are CORRECT?

1. Participants are 100% vested at all times.
2. Withdrawals made prior to age 59½ may be subject to an IRS penalty.
3. Participants cannot take loans from the plan.
4. Distributions are taxed as ordinary income.

Answer 12

All of the statements are correct

Question 13

Frank is selling stock he purchased March 10 last year. He is confused about the holding period rules and wants to make certain the sale is considered long-term to take advantage of favorable income tax rates. He has asked his CFP® professional for guidance on the potential tax treatment of the sale. Which of the following statements made by his CFP® professional regarding the tax treatment of capital gains and losses is NOT correct?
A)
Short-term capital gains are taxed as ordinary income.
B)
The day of disposition is included in the holding period for purposes of determining whether gain is long term or short term.
C)
The day of acquisition is included in the holding period for purposes of determining whether gain is long term or short term.
D)
Assets held more than one year are long term.

Answer 13

C

Question 14

According to the Principle of Confidentiality, a CFP® certificant may disclose confidential client information under which of the following circumstances?

1. If the CFP® certificant believes it is in the client’s best interest.
2. If the CFP® certificant obtains the express consent of the client.
3. To comply with legal requirements or the legal process.
4. To defend the CFP® certificant against charges of wrongdoing.

Answer 14

2,3,4

Question 15

Which of the following are price indexes used to help measure inflation?
A)
Gross Domestic Product (GDP) deflator.
 B)
Producer Price Index (PPI).
 C)
Consumer Price Index (CPI).
 D)
All of these.

Answer 15

D

Question 16

The ABC Partnership has 3 partners, Smith, Jones, and McDougal. The partnership implements a cross-purchase buy-sell agreement funded with life insurance. Which of the following statements regarding this agreement is(are) CORRECT?

1. The partnership will purchase the interest of any partner who dies.
2. Six life insurance policies will be needed to fund the agreement.
3. If one partner dies and the agreement is carried out, the surviving partners’ basis in the partnership will increase.
4. Jones will name himself as beneficiary of the policies he owns as part of the agreement.

Answer 16

2, 3, 4

Statement 1 is incorrect; under a cross-purchase agreement, the surviving owners purchase the interest of an owner who dies. Statement 2 is correct; under a cross-purchase agreement, each of the 3 partners will own a policy on the other 2 , for a total of 6 policies. Statement 3 is correct; when the agreement is carried out, the surviving partners will purchase the interest of the deceased partner, so their basis in the partnership will increase. Statement 4 is also correct; under a cross-purchase agreement, each partner names himself as beneficiary of the policies he owns on the lives of the other partners and uses the proceeds to purchase the interest of a partner who dies.

Question 17

Julie, a CFP® professional, is meeting with Jack and Amy before the end of the year, to review the year’s transactions and discuss any new issues that the couple may have. Jack and Amy have 3 grandchildren who are all under age 5.They want to assist with college funding but their funds for this use are limited to around $7,000 each year. They have considered either depositing the cash into a passbook savings account for each child and splitting the $7,000 evenly or giving the cash directly to each child’s parent. Julie recommends instead, that Jack and Amy contribute to Coverdell Education Savings Accounts (ESAs) for each child. Which of the following statements Julie makes regarding Coverdell Education Savings Accounts (ESAs) is (are) CORRECT?

1. Maximum contribution per account beneficiary is $2,000 per year.
2. Contributions can only be made for an individual younger than 21.
3. When distributed for educational expenses, only the interest earned is taxable.
4. Room and board for a less-than-half-time student is a qualified education expense.

Answer 17

1 only

Statement 1 is correct. The contribution limit to an ESA is $2,000 per account beneficiary annually. Statement 2 is incorrect because the beneficiary must be under age 18. Statement 3 is incorrect because the contribution is nondeductible (but the earnings are tax free if the distribution is used for qualified education expenses). Statement 4 is incorrect. A student must be enrolled at least half time if room and board is to be a qualified expense.

Question 18

Which of the following statements concerning the responsibilities of SEC registered investment advisers is (are) CORRECT?

1. It is unlawful for any person registered as an investment adviser to use the initials ‘RIA’ after her name unless the person also carries the CFP® certification.
2. A registered investment adviser who ceases to practice as an investment adviser must file Form ADV-W as soon as possible.

Answer 18

2 only

Question 19

Which of the following statements regarding deferred annuities is (are) CORRECT?

1. Early withdrawals may be subject to tax penalties.
2. Variable annuities do not offer a guaranteed investment return.
3. Deferred annuities cannot provide an income guaranteed for life.
4. Deferred annuities accelerate savings growth for long-term investment because of their tax-deferred nature.

Answer 19

1, 2 , 4

Question 20

Joe purchased 100 shares of an aggressive growth mutual fund at $90 per share seven years ago. Today he sold all 100 shares for $45,000. What was his average annual compound rate of return on this investment before tax?

A)
25.85%.
 B)
19.58%.
 C)
17.46%.
 D)
21.73%.

Answer 20

A

Question 21

Joe has a vacation home in Florida which he rents out periodically. He furnishes you with the following information related to the vacation home for the tax year:

$14,000 Rental income

Allocated mortgage interest and property taxes $5,000
Allocated utilities and other expenses 4,000
Depreciation expense 6,000
Total expenses ($15,000)
($1,000) Net rental loss
Number of days rented at fair market value = 147
Number of days Joe used = 13

How would the rental income and expenses be treated on Joe’s federal tax return?
A)
Interest expense and taxes and should be reported on schedule A as an itemized deduction.
B)
A $1,000 loss should be reported on schedule E.
C)
The $1,000 loss will be reduced due to Joe’s personal use.
D)
No rental income or expenses will be reported.

Answer 21

B

When a vacation home is used as a residence in any tax year, there are limitations on the deductions attributable to the rental use. The owner’s use for personal reasons can’t exceed the longer of 14 days or 10% of the period of rental use for the vacation home to be considered to be primarily for rental use. The entire $1,000 loss is deductible. The income and expenses for the rental property would be reported on schedule E.

Question 22

Which phase of the financial life cycle typically begins when a client is age 45-60 and is characterized by an increase in cash flow, assets, and net worth, with some decrease in the proportional use of debt?

A)
Distribution/gifting phase.
 B)
Estate phase.
 C)
Conservation/protection phase.
 D)
Asset accumulation phase.

Answer 22

C

The conservation/protection phase of the financial life cycle is characterized by an increase in cash flow, assets, and net worth, with some decrease in the proportional use of debt. The asset accumulation phase is incorrect because this phase typically begins at age 20-25, and the beginning of this phase is characterized by limited excess funds for investing, a high degree of debt, and low net worth. The distribution/gifting phase is the final phase of the financial life cycle.

Question 23

The Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA):

1. Provides former employees with continuation of group health insurance for a maximum of 12 months.
2. Allows the premium for continuation of group health insurance coverage to be as high as 102% of the existing group rate.
3. Applies to covered employees, their spouses, and dependents.
4. Requires employers with 20 or more employees to provide for the continuation of group health insurance, in the event of termination or other ‘qualifying events’.

Answer 23

2, 3, 4

COBRA provides for the continuation of group health insurance coverage for employees in the event of termination or other ‘qualifying events’ for 18-36 months, assuming the employee pays the premium, which can be as high as 102% of the current group rate.

Question 24

Charlie is a 30-year-old CPA with his own tax practice. For most of the year, he works by himself, preparing and reviewing income tax returns. For the last 5 years, he has hired 3 part-time employees to assist him during the busy season. Each of these employees works approximately 200 hours, earning an average salary of $4,000. Charlie would like to establish a retirement plan that would allow him to save for his retirement, without significant administrative costs. Which of the following plans would be best suited for Charlie?

A)
Section 401(k) plan.
 B)
Cash balance pension plan.
 C)
SIMPLE IRA.
 D)
Simplified employee pension (SEP) plan

Answer 24

C

SIMPLE IRA is the correct answer because a SIMPLE IRA involves very little administrative cost and would allow Charlie to exclude the part-time employees. To be eligible for a SIMPLE, an employee must have earned at least $5,000 in compensation for the employer in any 2 prior years and expect to earn at least $5,000 in compensation in the current year.

The other plans are incorrect:

• A cash balance pension plan is a defined benefit pension plan that would involve actuarial costs, as well as qualified plan filing requirements.
• All of Charlie’s part-time employees would be eligible to receive a contribution to the SEP plan. An employee is eligible for a SEP plan if she has attained age 21, earned at least $600 (2017), and has worked at least 1 hour for the employer for 3 of the last 5 years. Charlie could not legally exclude any of his part-time employees from the SEP plan.
• A Section 401(k) plan would involve nondiscrimination testing and annual filing of Form 5500.