Review Flashcards
On January 1, 2017, James Davis was awarded a postdoctorate fellowship grant of $30,000 by a tax-exempt educational organization. Davis is not a candidate for a degree and was awarded the grant to continue his research. The grant was awarded for the period March 1, 2017 through May 31, 2018. On March 1, 2017, Davis elected to receive the full amount of the grant. What amount should be included in his gross income for 2017?
$30000
A degree candidate can exclude scholarships and fellowships that are used for tuition and course-related fees, books, supplies, and equipment. Since Davis is not a candidate for a degree, the entire amount of fellowship grant must be included in gross income in the year received.
Pool installation, which qualified as a medical expense and increased the value of the home by $25,000 $100,000
Widening doorways to accommodate Drake’s wheelchair. The improvement did not increase the value of his home 10,000
For regular income tax purposes and without regard to the adjusted gross income percentage threshold limitation, what maximum would be allowable as a medical expense deduction in the current year?
$85,000
The installation of the pool qualifies as a deductible medical expense to the extent that it does not increase the value of the home, $100,000 − $25,000 = $75,000. Additionally, the $10,000 cost of widening doorways to accommodate Drake’s wheelchair is deductible as a medical expense since expenses incurred by a physically handicapped individual for the removal of structural barriers in a residence to accommodate a handicapped condition is deductible as a medical expense.
Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $7,250, consisting solely of $7,250 of state income taxes paid last year. Robbe’s itemized deduction amount, which exceeded the standard deduction available to single taxpayers for last year by $1,150, was fully deductible and it was not subject to any limitations or phase-outs. In the current year, Robbe received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund?
$1150
A state income tax refund must be included in gross income for the current year under the tax benefit rule to the extent that the refunded amount was deducted in a prior year and the deduction provided a benefit by reducing the taxpayer’s federal income tax for the prior year.
The Browns borrowed $20,000, secured by their home, to purchase a new automobile. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as
Deductible qualified residence interest.
Which of the following is not included in determining the total support of a dependent?
Life insurance premiums paid on behalf of the dependent.
Support includes food, clothing, FMV of lodging, medical, recreational, educational, and certain capital expenditures made on behalf of a dependent. Excluded from support are life insurance premiums, funeral expenses, nontaxable scholarships, and income and Social Security taxes paid from a dependent’s own income.
What amount can the Zimmers deduct as taxes in calculating itemized deductions for 2017?
The property taxes on the residence and the land held for appreciation, together with the personal property taxes on the auto are deductible. The special assessment is not deductible, but would be added to the basis of the residence.
Which one of the following statements concerning the deduction for interest on qualified education loans is correct?
An individual is allowed to deduct up to $2,500 for interest on qualified education loans in arriving at AGI. The deduction is reduced by adjusted gross income in excess of specified levels and loan proceeds must have been used to pay for the qualified higher education expenses (e.g., tuition, fees, room, board) of the taxpayer, spouse, or a dependent (at the time the debt was incurred). The education expenses must relate to a period when the student was enrolled on at least a half-time basis.
How many public company audits per year does a CPA firm that is registered with the Public Company Accounting Oversight Board (PCAOB) have to perform before it receives an annual inspection from the PCAOB?
CPA firms that audit more than 100 issuers must have an annual inspection by the PCAOB.
With regard to an agreement for the sale of real estate, the Statute of Frauds
Does not require that the agreement be signed by all parties.
The Statute of Frauds requires only that the written contract be signed by the party to be charged, not by all parties to the contract.
Ozgood is a principal and Flood is his agent. Ozgood is totally dissatisfied with the agency relationship and wishes to terminate it. In which of the following situations does Ozgood not have the power to terminate the relationship?
Flood is an agent coupled with an interest.
This answer is correct because normally a principal has the power to terminate an agency relationship even though it would constitute a breach to do so. However, where the agency is an agency coupled with an interest (i.e., where the agent owns part of the subject matter, the principal does not have the power to terminate the relationship).
Which one of the following, if present, would support a finding of constructive fraud on the part of a CPA?
Constructive fraud requires the following elements: (1) misrepresentation of a material fact, (2) reckless disregard for the truth, (3) reasonable reliance by the injured party, and (4) injury.
Quick Corp. has $270,000 of outstanding accounts receivable. On March 10, Quick assigned a $30,000 account receivable due from Pine, one of Quick’s customers, to Taft Bank for value. On March 30, Pine paid Quick the $30,000. On April 5, Taft notified Pine of the March 10 assignment from Quick to Taft. Taft is entitled to collect $30,000 from
Quick only
A debtor who does not have knowledge of a creditor’s assignment of his/her right to receive payment can extinguish all of his/her liability regarding the debt by paying the assignor. It is the duty of the assignee to notify the debtor of the assignment
Kirk Corp. sold Nix an Ajax freezer, Model 24, for $490. The contract required delivery to be made by June 23. On June 12, Kirk delivered an Ajax freezer, Model 52, to Nix. Nix immediately notified Kirk that the wrong freezer had been delivered and indicated that the delivery of a correct freezer would not be acceptable. Kirk wishes to deliver an Ajax freezer, Model 24, on June 23. Which of the following statements is correct?
Kirk may deliver the freezer on June 23 if it first seasonably notifies Nix of its intent to do so.
A seller has the right to “cure” nonconforming performance when there is still time left for performance under the contract. To do so a seller must seasonably notify the buyer of his intention to cure, and must tender conforming goods within the original time specified by the contract.
The principle that protects corporate directors from personal liability for acts performed in good faith on behalf of the corporation is known as
The business judgment rule.
What term is used to describe a partnership without a specified duration?
A partnership at will.
Hart and Ruck formed a limited partnership in which Hart was a general partner and Ruck was a limited partner. A certificate of limited partnership was filed with the secretary of state. Which of the following is correct under the Revised Uniform Limited Partnership Act?
The certificate of limited partnership requires the names of the general partners, but not the limited partners.
Would the following expense items be reported on Schedule M-1 of the corporate income tax return (Form 1120) showing the reconciliation of income per books with income per return?
Deduction for a net capital loss
Business meals for executive out-of-town travel
BOTH
Since a net capital loss per books would not be deductible for tax purposes, the net capital loss would be added back to book income on Schedule M-1. Since only 50% of business meals is deductible for tax purposes, 50% of business meals would be added back to book income to arrive at taxable income on Schedule M-1.
In a jurisdiction having an accountant-client privilege statute, to whom may a CPA turn over workpapers without a client’s permission?
State CPA society quality control panel.
Marglow Supplies, Inc. mailed a letter to Wilson Distributors on September 15, offering a 3-year franchise dealership. The offer stated the terms in detail and at the bottom stated that the offer would not be withdrawn prior to October 1. Which of the following is correct?
The offer cannot be assigned to another party by Wilson if Wilson chooses not to accept.
This answer is correct because offers to contract may only be accepted by the person to whom they were made.
Under which of the following circumstances is a shareholder who receives an illegal dividend not obligated to repay the dividend?
The shareholder was not aware the dividend was improper and the corporation was solvent at the time of payment
Which of the following partners of a limited liability partnership (LLP) may avoid personal liability when a partner commits a negligent act?
All the partners other than the supervisor of, and the negligent partner.
This answer is correct because partners are fully liable only for their own negligent acts and for wrongful acts of those they supervise or have control over.
A typewriter, which was subject to a prior UCC security interest, was delivered to Ed Fogel for repair. Fogel is engaged in the business of repairing typewriters. Fogel repaired the typewriter. However, the owner of the typewriter now refuses to pay for the services performed by Fogel. The state in which Fogel operates his business has a statute which gives Fogel an artisan’s lien on the typewriter. Fogel’s artisan’s lien
Takes priority over a prior perfected security interest unless the statute expressly provides otherwise.
The amount of long-term capital loss that Lydia recognized in 2017 on the sale of this stock was
Although gains and losses incurred in sales transactions between a partnership and its partners are generally recognized, a loss is disallowed if incurred in a transaction between a partnership and a partner owning (directly or constructively) more than a 50% capital or profits interest. Since Lydia’s partnership interest does not exceed 50%, she realizes and recognizes a long-term capital loss of $9,000 − $4,000 = $5,000 from the sale of stock.
The CSU partnership distributed to each partner cash of $4,000, inventory with a basis of $4,000 and a fair market value (FMV) of $6,000, and land with an adjusted basis of $5,000 and an FMV of $3,000 in a liquidating distribution. Partner Chang had an outside basis in Chang’s partnership interest of $12,000. In the second year after receiving the liquidating distribution, Chang sold the inventory for $5,000 and the land for $3,000. What income must Chang report upon the sale of these assets?
$1,000 ordinary gain and $1000 capital loss.
In 2015, Celia Mueller bought a $1,000 bond issued by Disco Corporation for $1,100. Instead of paying off the bondholders in cash, Disco issued 100 shares of preferred stock in 2017 for each bond outstanding. The preferred stock had a fair market value of $15 per share. What is the recognized gain to be reported by Mueller in 2017?
The issuance by Disco Corporation of its preferred stock in exchange for its bonds is a nontaxable “Type E” reorganization (i.e., a recapitalization). Since Mueller did not receive any boot, no part of her $400 realized gain is recognized.
Foster offered to sell Lebow his garage for $27,000. The offer was in writing and signed by Foster. Foster gave Lebow 5 days to decide. On the fourth day Foster accepted a better offer from Dilby, who was unaware of the offer to Lebow. Foster subsequently conveyed the property to Dilby. Unaware of the sale to Dilby, Lebow telephoned Foster on the fifth day and unconditionally accepted the offer. Under the circumstances, Lebow
Is entitled to damages.
This answer is correct because Lebow’s acceptance created a contract due to the fact Foster had not revoked the offer prior to acceptance. Since the offer did not qualify as a firm offer (i.e., did not involve the sale of goods) or an option (i.e., no consideration was given), Foster had the power to revoke the offer. However, a revocation must be communicated to the offeree to terminate the offer.
Under the Bankruptcy Code, one of the elements that must be established in order for the trustee in bankruptcy to void a preferential transfer to a creditor who is not an insider is that
The transferee-creditor received more than he would have received in a liquidation proceeding under the Bankruptcy Code.
Macy agreed orally to repaint Rich’s home for $2,000. Rich required that it be done in 16 months although Macy said he might have it done in 10 months. The work actually took 14 months. Does this contract fall within the Statute of Frauds?
No, because the work could have been completed within 1 year.
Which of the following corporate shareholder rights is enforceable by means of a derivative suit?
Recovering damages to the corporation from a third party.
This is a derivative suit because the shareholder is suing on behalf of the corporation.
On May 1, Dix and Wilk entered into an oral agreement by which Dix agreed to purchase a small parcel of land from Wilk for $450. Dix paid Wilk $100 as a deposit. The following day, Wilk received another offer to purchase the land for $650, the fair market value. Wilk immediately notified Dix that Wilk would not sell the land for $450. If Dix sues Wilk for specific performance, Dix will
Lose, because the agreement was not in writing and signed by Wilk.
This answer is correct because in order to conform with the Statute of Frauds, and therefore be enforceable, any contract for the sale of an interest in real property (regardless of price) must be in writing and signed by the party to be charged.
The registration requirements of the Securities Act of 1933 apply to
The issuance of stock warrants.
In deciding whether consideration necessary to form a contract exists, a court must determine whether
There is mutuality of consideration.
Rey Corp.’s management intends to solicit proxies relating to its annual meeting at which directors will be elected. Rey is subject to the registration and reporting requirements of the Securities Exchange Act of 1934. As a result, Rey must furnish its shareholders with
An annual report containing its audited balance sheets for the 2 most recent years.
If a contract for the sale of goods includes a C&F shipping term and the seller has fulfilled all of its obligations, the
Risk of loss will pass to the buyer upon delivery of the goods to the carrier.
This answer is correct because the shipping term “C&F” (cost and freight) means that the purchase price includes both the cost of the goods and the cost of delivering the goods to the shipper. Under such agreements, the risk of loss and title to the goods pass when the seller places the goods in the appropriate carrier’s hands.
Grill deals in the repair and sale of new and used clocks. West brought a clock to Grill to be repaired. One of Grill’s clerks mistakenly sold West’s clock to Hone, another customer. Under the Sales Article of the UCC, will West win a suit against Hone for the return of the clock?
No, because Grill is a merchant to whom goods had been entrusted.
This answer is correct because if a person entrusts possession of goods to a merchant, or to his/her agent, who deals in those goods, a good-faith purchaser for value obtains title to those goods unless s/he knew the merchant or agent did not own the goods.
Haplow engaged Turnbow as his attorney when threatened by several creditors with a bankruptcy proceeding. Haplow’s assets consisted of $85,000 and his debts were $125,000. A petition was subsequently filed and was uncontested. Several of the creditors are concerned that the suspected large legal fees charged by Turnbow will diminish the size of the distributable estate. What are the rules of limitation which apply to such fees?
Turnbow must file with the court a statement of compensation paid or agreed to for review as to its reasonableness.
Park purchased from Derek Truck Sales a truck which had serious mechanical problems. Park learned of the defects 6 months after the date of sale. Five years after the date of sale Park commenced an action for breach of warranty against Derek. Derek asserts the statute of limitations as a defense. Which of the following statements made by Derek is correct?
Park was required to bring the action within the statute of limitations as measured from Derek’s tender of delivery.
when a warranty explicitly extends to the future performance of the goods, a cause of action for breach of that warranty must be brought within the statute of limitations period as measured from the time the breach was discovered or should have been discovered. If the warranty does not explicitly extend to future performance, a cause of action for breach accrues at tender of delivery. Derek Truck Sales, a merchant, has sold a truck with serious mechanical problems, thereby breaching the implied warranty of merchantability. An implied warranty by definition, is not explicit; and, therefore, Park’s cause of action for breach of the implied warranty of merchantability accrued when delivery of the truck was tendered
Which of the following requires consideration in order to be binding on the parties?
Material modification of a contract involving the sale of real estate.
This answer is correct because under common law, which applies to the sale of real property, the modification of an existing contract must be supported by consideration. Under the UCC, however, a contract for the sale of goods may be modified either orally or in writing without consideration.
Samm, a plumber, entered into a contract for $75,000 with Orr, Inc. to perform certain plumbing services in a building owned by Orr. After Samm had satisfactorily performed the work, Orr discovered that Samm had violated the state licensing statute by failing to obtain a plumbing license. The licensing statute was enacted merely to raise revenue for the state. An independent appraisal of Samm’s work indicated the building’s fair market value increased by $70,000 as a result of Samm’s work. The cost of the materials which Samm supplied was $35,000. If Samm sues Orr, Samm will be entitled to recover
75K
In general, an agreement that violates a statute is illegal, making such agreement unenforceable. However, if the statute in question is a revenue-seeking licensing statute (in contrast to a regulatory licensing statute), the agreement would still be enforceable. This is an exception to the general rule. The plumbing licensing statute is a revenue-seeking licensing statute; thus, the contract violating the statute will still be enforceable for its full amount of $75,000.
Which of the following is an attribute of a complex trust?
It distributes corpus.
A complex trust is one in which the trustee (1) has the discretion whether to distribute or accumulate income, (2) may make charitable contributions, and (3) may distribute trust corpus.
In 2017, Roe Corp. purchased and placed in service a used machine to be used in its manufacturing operations. This machine cost $2,230,000. What portion of the cost may Roe elect to treat as an expense rather than as a capital expenditure?
For 2017, Sec. 179 permits a taxpayer to elect to treat up to $510,000 of the cost of qualifying depreciable personal property as an expense rather than as a capital expenditure. However, the $510,000 maximum is reduced dollar for dollar by the cost of qualifying property placed in service during the taxable year that exceeds 2,030,000 million. Here, the maximum amount that can be expensed is [$510,000 – ($2,230,000 – $2,030,000)] = $310,000.
