Practice Quiz 5

Question 1

Which of the following statements concerning social insurance programs is (are) CORRECT?

1. Most workers in the United States are in covered employment under the Social Security program.
2. Part A of Medicare is financed by a combination of monthly premiums paid by persons eligible for benefits and contributions from the federal government.
3. Part B of Medicare and all the benefits of the Social Security program are financed through a system of payroll and self-employment taxes paid by all persons covered under the programs.

Answer 1

1 only

Question 2

What, if any, is the primary difference in tax treatment between a general partnership and a limited partnership?
A)
None of these.
B)
The limited partners are treated only as capital investors, whereas the active partners receive both ordinary and capital distributions.
C)
Limited partnerships are taxed as corporations, while general partnerships are taxed as partnerships.
D)
The limited partners only receive capital distributions, while the general partners receive only ordinary income distributions.

Answer 2

A - none of these

Question 3

Which of the following statements concerning the tax treatment of qualified long-term care insurance is (are) CORRECT?
1. Self-employed persons may not deduct premiums paid for qualified long-term care insurance policies.

2. Persons who itemize deductions can deduct the premiums for qualified long-term care policies, subject to certain limits.

Answer 3

2 only

Question 4

Scott, age 22, is a full-time student at State University and a candidate for a bachelor’s degree. During the current year, he received the following payments:

State scholarship for 10 months (tuition and books) $5,000
Loan from college financial aid office $2,000
Cash support from parents $5,000
Cash dividends $500

What is Scott’s adjusted gross income (AGI) for the current year?

A)
$800.
 B)
$5,800.
 C)
$500.
 D)
$12,800.

Answer 4

C

Question 5

Which of the following statements regarding lifetime gifts are CORRECT?

1. Annual exclusion gifts will escape gift taxation and will not be included in the donor’s gross estate.
2. Future appreciation in the value of gifted property will escape estate taxation in the donor’s estate.
3. Income from gift property will generally be taxed to the donee for income tax purposes.
4. Generation-skipping transfer taxes do not apply to lifetime gifts.

Answer 5

1, 2, and 3

Question 6

Which of the following statements concerning the categories of persons and vehicles that are eligible for personal auto policies (PAPs) are CORRECT?

1. The automobile must be owned by an individual.
2. The vehicle must be a private passenger automobile.
3. The vehicle must not be used as a delivery vehicle.
4. The vehicle must not be used for commercial purposes.

Answer 6

All statements are correct

Question 7

Which of the following are liability exclusions applicable to a comprehensive personal liability (CPL) policy?

1. Business and professional pursuits.
2. Workers’ compensation.
3. Injuries to insured persons.
4. Intentional injuries.

Answer 7

these are all exclusions

Question 8

The economic benefit doctrine (Section 83) requires
A)
restricted stock to be included as employee income if there is no longer a substantial risk of forfeiture
B)
that the present value of not to compete restriction be currently included as employee income
C)
future consulting fees to be paid after retirement to be currently included as employee income
D)
that stock options are deductible by the employer in the year granted

Answer 8

A

Question 9

Medicare Part C (Medicare Advantage Plans) is:
A)
health care for the indigent.
B)
prescription drug coverage.
C)
an alternative to Medicare, which allows participants to enroll in Medicare HMOs, PPOs, and other alternative plans.
D)
a variety of Medicare supplement (Medigap) coverage.

Answer 9

C

Question 10

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

1. ESOPs and stock bonus plans allow employees to defer all income taxes on distributed stock until the stock is sold.
2. They can be costly and administratively cumbersome.
3. They always decrease corporate cash flows.
4. They create a market for employer stock.

Answer 10

2 and 4

Statements 2 and 4 are correct. Both ESOPs and stock bonus plans give employees a stake in the company through stock ownership. Statement 1 is incorrect. Employees must pay income tax on the value of the stock contributed to the plan at the time of distribution. Gain on the stock prior to a lump sum distribution is net unrealized appreciation (NUA) and is not taxed until the employee-participant sells the stock. Statement 3 is incorrect. They may increase company cash flow because employers make cashless contributions to the retirement plan and create a market for employer stock. In addition, they both limit the availability of retirement funds to employees if an employer’s stock falls drastically in value and 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.

Question 11

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)
The day of acquisition is included in the holding period for purposes of determining whether gain is long term or short term.
B)
The day of disposition is included in the holding period for purposes of determining whether gain is long term or short term.
C)
Short-term capital gains are taxed as ordinary income.
D)
Assets held more than one year are long term.

Answer 11

A

Question 12

Two months ago, an investor purchased a call option trading for $3 with an exercise price of $30. The stock's market price was $32. What was the time value of the call option?
A)
$1.
 B)
$2.
 C)
$6.
 D)
$3.

Answer 12

A

Time value = option premium − intrinsic value
or
option premium − (stock’s market price − exercise price)

Question 13

For the premiums paid on a long-term care policy to be tax deductible, the policy must be considered a qualified long-term care policy. Which of the following is NOT a requirement for a qualified long-term care policy?
A)
The policy must be guaranteed renewable.
B)
The policy cannot pay for expenses reimbursable under Medicare.
C)
The policy must not have a cash value.
D)
The policy must have an elimination period that does not exceed 60 days.

Answer 13

D

Question 14

Which of the following statements regarding the qualified preretirement survivor annuity (QPSA) and the qualified joint and survivor annuity (QJSA) provisions for qualified plans is(are) CORRECT?

1. Both QPSA and QJSA are typically associated with qualified pension plans.
2. Typically, profit-sharing plans are designed in such a manner that QPSA and QJSA provisions are not required.

Answer 14

1 and 2 are both correct

Question 15

Which of the following taxes potentially apply to a C corporation?

1. Personal service corporation tax.
2. Accumulated earnings tax.
3. LIFO recapture tax.
4. Personal holding company tax.

Answer 15

1, 2, and 4

LIFO recapture tax applies only to S corporations. All the other listed taxes could apply to C corporations.

Question 16

Which of the following statements regarding Social Security plan integration is(are) NOT correct?

1. Because there is a disparity in the Social Security system, all retirement plans are allowed to integrate with Social Security.
2. Only the excess method can be used by a defined benefit pension plan.
3. Under the offset method of integration a fixed or formula amount reduces the plan formula.
4. The maximum increase in benefits for earnings above covered compensation level is 5.7% for a defined benefit pension plan.

Answer 16

1, 2, and 4

Statement 1 is incorrect because not all retirement plans are allowed to integrate with Social Security. For example, ESOPs and SARSEPs are not permitted to use integration. Statement 2 is incorrect because the defined benefit pension plan can use either the excess or offset method in integrating with Social Security. Only the excess method can be used with defined contribution plans. Statement 4 is incorrect because the permitted disparity limit for a defined benefit pension plan is 26.25% above the covered compensation level.

Question 17

Anna is a 4% shareholder and an employee of Powers Enterprises, an S corporation. Which of the following items is deductible by Powers on its tax return?

1. A reasonable salary paid to Anna.
2. Group health insurance.
3. Entertainment expense reimbursements paid to Anna.
4. Premiums for up to $50,000 of group term life insurance benefits.

Answer 17

None of these

Powers is an S corporation which is a pass-through entity. None of the listed expenses are deductible by the corporation as Powers Enterprises furnishes K-1s to the shareholders who then report items of revenue and expense on their personal income tax returns. It should be noted that partners, proprietors, and greater than 2% S corporation owners are not considered employees and are ineligible for the employer paid group term life insurance of $50,000.

Question 18

Which Financial Planning Practice Standard states, “a financial planning practitioner shall analyze the information to gain an understanding of the client’s financial situation and then evaluate to what extent the client’s goals, needs, and priorities can be met by the client’s resources and current course of action”?
A)
400-1-Identifying and Evaluating Financial Planning Alternatives.
B)
200-2-Obtaining Quantitative Information and Documents.
C)
500-1-Agreeing on Implementation Responsibilities.
D)
300-1-Analyzing and Evaluating the Client’s Information.

Answer 18

D

Question 19

Which of the following statements regarding participating and nonparticipating life insurance is CORRECT?
A)
Participating life insurance is a policy in which no annual dividends are paid to the policyowners.
B)
Nonparticipating life insurance is a policy in which dividends are paid only on the excess of premium.
C)
Stock companies are owned by the stockholders and usually offer nonparticipating policies.
D)
Mutual companies are owned by their stockholders and usually offer nonparticipating policies.

Answer 19

C

Dividends are not paid on nonparticipating life insurance policies. Mutual companies are owned by their policyholders and offer participating policies.

Question 20

Which of the following is NOT considered a constraint when developing an investment policy statement?
A)
Market conditions.
 B)
Taxes.
 C)
Liquidity needs.
 D)
Time horizon.

Answer 20

A

Question 21

Under the Investment Adviser Act of 1940, an investment adviser may not use the term “investment counsel” or hold himself/herself out to be an investment counsel unless:

1. The primary business is providing investment advice.
2. The major portion of the business is providing investment supervisory services.
3. Investments are limited to mutual funds only.
4. Insurance products are recommended.

Answer 21

1 and 2

Question 22

Build Corporation communicated several goals to their financial advisor when they decided to implement a qualified retirement plan for their company. After reviewing these goals, their adviser recommended Build Corporation implement a defined benefit pension plan. Which of the following statements regarding employers who are candidates for a defined benefit pension plan are CORRECT?

1. Typically they have the objective of instituting a plan with highly predictable costs.
2. They indicate that the desire to provide a tax shelter for key employees outweighs the need for an administratively convenient plan.
3. They want benefit levels guaranteed.
4. They want a simple and inexpensive plan.

Answer 22

2 and 3

Employers who sponsor defined benefit pension plans typically do not have highly predictable costs, because funding is subject to an annual actuarial determination. Highly paid employees receive a tax shelter with a defined benefit plan in the sense that their compensation includes large contributions to the defined benefit and they are not subject to current income tax on this compensation. The Pension Benefit Guaranty Corporation (PBGC) and the employer guarantee benefit levels. Defined benefit pension plans are complex to design and expensive to install and maintain.

Question 23

To qualify for Social Security disability benefits, which of the following definitions of disability must be met?
A)
The inability to perform substantially all duties required of the prior occupation, and the inability is caused by a disability expected to last 12 months or result in death.
B)
The inability to perform the complete duties of the occupation engaged in before the disability.
C)
The inability to engage in any substantial gainful activity by reason of disability expected to last at least 12 months or result in death.
D)
The inability to engage in any occupation for which one is reasonably suited by training, education, or experience.

Answer 23

C

Question 24

Which of the following are applicable FINRA examinations for registered investment advisers (RIAs)?

1. Series 65: Uniform Registered Investment Advisor Examination.
2. Series 7: General Securities Registered Representative.
3. Series 66: Uniform Combined State Law Examination.
4. Series 63: Uniform Securities Agent State Law Exam.

Answer 24

All of them

Question 25

Which of the following statements regarding bond portfolio immunization is (are) CORRECT?

1. Immunization allows an investor to ensure that the value of his bond portfolio remains the same, regardless of whether interest rates increase or decrease.
2. Immunization is accomplished by creating a portfolio whose duration is equal to the investor’s investment time horizon.
3. Immunization allows investors to earn a current yield that is equal to the yield to maturity.
4. Immunization allows an investor to earn a specific rate of return, regardless of whether interest rates increase or decrease.

Answer 25

2 and 4