Practice Quiz 3

Question 1

Rick sells his ski resort condominium to Julie for $100,000. His basis in the property is $25,000. Julie gives Rick $25,000 cash as a down payment and proposes an installment sale of five $15,000 annual payments, plus 9% annually compounded interest on the unpaid balance. If Rick were to die during the period of the installment term, how much would be included in his gross estate?
A)
$0.
 B)
The entire $100,000.
 C)
$75,000.
 D)
The unpaid principal balance due on the installment note plus interest accrued from the date of the last payment until the date of Rick's death.

Answer 1

D

The unpaid principal balance due on the installment note plus interest accrued from the date of the last payment until the date of Rick’s death would be included in Rick’s gross estate. If Rick were to survive the five-year installment term, none of condominium’s value would be included in the estate.

Question 2

Which of the following statements concerning potential costs and benefits of consumer debt are CORRECT?

1. The cost of consumer debt includes interest charges and fees.
2. One of the costs of consumer debt is convenience.
3. Consumer debt has increased in recent years.
4. Consumer debt allows for an immediate purchase of products and services.

Answer 2

1, 3, 4

Question 3

Place the phases of a typical business cycle in the correct order.
A)
Peak, contraction, expansion, trough.
 B)
Contraction, peak, expansion, trough.
 C)
Trough, peak, expansion, contraction.
 D)
Trough, expansion, peak, contraction.

Answer 3

D

Question 4

Why would the owners of a business entity prefer that the entity be taxed as a partnership rather than a regular (C) corporation?

A)
Partnerships are pass-through entities for income tax purposes.
B)
They can shelter personal capital losses in the partnership.
C)
Their liability for taxation is limited under a partnership.
D)
They can shelter personal capital gains in the partnership.

Answer 4

A

Partnerships are pass-through entities and and all items of income and loss are passed through to the individual partners via the Form K-1 issued by the partnership. Profits earned by a partnership are only taxed once, whereas profits earned by a regular (C) corporation may be subject to double taxation (once to the corporation and then to the shareholders who receive dividends).

Question 5

What is the self-employment tax rate applicable to the amount of income less than or equal to the Social Security taxable wage base in 2017?

A)
15.3%.
 B)
6.2%.
 C)
7.65%.
 D)
12.4%.

Answer 5

A

The self-employment tax rate is 15.3% of income that is less than or equal to the Social Security taxable wage base and consists of 12.4% for Old Age and Survivors Disability Insurance tax (OASDI) and a 2.9% Medicare tax. All earnings above the Social Security wage base continue to be subject to the 2.9% Medicare tax.

Question 6

Lisa and William are married and file jointly. William was recently transferred across the country by his employer. Lisa is employed by a large corporation but works from her home office via the internet and her ability to work from home is unaffected by the move. Lisa makes a $5,000 deductible IRA contribution and is not an active participant. William is covered by his employer’s Section 401(k) plan and does not make an IRA contribution. William does pay $15,000 each year in alimony to his ex-wife. Which of the following can be deducted from the couple’s gross income to arrive at adjusted gross income (AGI)?

1. 100% of allowable moving expenses.
2. Alimony.
3. $1,000 gift from Lisa’s uncle.
4. Deductible contributions to an IRA.

Answer 6

1, 2, 4

Statements 1, 2, and 4 can be deducted from gross income to arrive at AGI. Statement 3 does not affect AGI because the gifts are an exclusion from gross income and are not deducted from AGI.

Question 7

Which of the following statements comparing a C corporation and a general partnership is (are) CORRECT?

1. Both a C corporation and general partnership can have more than one owner.
2. Both a C corporation and general partnership are regarded as distinct entities for tax purposes.
3. Profits are divided equally in both business forms.
4. A C corporation and general partnership both pay no federal tax on income.

Answer 7

1 only

One similarity of a partnership and a C corporation is that they may both have more than one owner. However, only a C corporation is regarded as a distinct, separate entity for tax purposes. Partnerships are flow-through entities. C corporations may retain profits. Partnerships are not required to distribute profits equally. C corporations pay tax on income.

Question 8

The chance of becoming disabled is:
A)
less than the chance of premature death during middle age.
B)
less than the chance of death at any age.
C)
greater than the chance of premature death during the working years.
D)
approximately equal to the chance of premature death.

Answer 8

C

Question 9

Which of the following qualified plans can a C corporation implement?

1. Profit-sharing plan.
2. Stock bonus plan.
3. Money purchase pension plan.

Answer 9

All of these can be implemented

Question 10

Which of the following statements concerning active bond management strategies is (are) CORRECT?

1. Once an investor has a forecast of interest rates, the bond portfolio’s maturity can be lengthened when interest rates are expected to decline, or shortened when interest rates are expected to rise.
2. Short maturities sacrifice price appreciation opportunities and usually offer lower coupons, but serve to protect the investor if rates are expected to rise.

Answer 10

Both statements are correct

Question 11

When purchasing a PAP, which of the following coverages is (are) required?

1. Liability coverage.
2. Comprehensive and collision.
3. Uninsured motorists.
4. Medical payments.

Answer 11

1 only

Question 12

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)
200.
 B)
40.
 C)
140.
 D)
50.

Answer 12

D

According to the 50/40 rule, defined benefit pension plans must cover the lesser of 50 employees or 40% of all eligible employees.

Question 13

Tony, age 65, is a nonowner employee of Widget, Inc. He wants to defer his retirement from Widget, Inc. until age 75 and continue to work. Tony contributes 6% of his pay to the Section 401(k) plan, and his employer matches 100%. Which of the following statements is CORRECT?
A)
Tony will be required to take minimum distributions from his Section 401(k) plan beginning April 1 of the year after he attains age 70½.
B)
Tony will be subject to a 10% early withdrawal penalty on distributions received from his Section 401(k) plan.
C)
Tony will be required to take minimum distributions from his Section 401(k) plan beginning April 1 of the year after he retires if he does retire after age 70½.
D)
Tony cannot contribute to his Section 401(k) plan after age 70½.

Answer 13

C

Generally, an individual must receive his first minimum distribution by April 1 following the year the individual attains age 70½. However, if the individual remains employed beyond age 70½, he may defer minimum distributions until April 1 of the year following the year of retirement. This exception to the general rule only applies to the employer’s qualified plan (not IRAs). Therefore, the other choices are incorrect. Also, this exception is not available if the individual is a greater than 5% owner of the company sponsoring the retirement plan.

Question 14

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 14

1 and 4

The income from an S corporation is not considered self-employment income. Therefore, the shareholders cannot establish a self-employed retirement plan. Note that a shareholder with self-employment income from another source can establish a self-employed (Keogh) retirement plan. Dividends from a C (not S) corporation are subject to double taxation.

Question 15

Which of the following statements regarding an investment adviser is (are) CORRECT?

1. An investment adviser is any person who, for compensation, engages in the business of advising others as to the valuation of securities, either directly or through publications or writing.
2. An investment adviser is any person who, for compensation, advises others in purchasing or selling securities.
3. An investment adviser, who is registered with the SEC, must be competent.
4. An individual who wants to be an investment adviser must be sponsored by a broker/dealer prior to registration.

Answer 15

1 and 2 only

Question 16

Brian, an employee of Duff Corporation, died on July 25 of the current year. Under the terms of Duff Corporation’s death-benefit-only (DBO) plan, Duff made payments of $10,000 to Brian’s widow and $10,000 to his 17-year-old son. What amounts should be excluded from the gross income of the widow and son on their respective tax returns for the current year?

             Widow	Son
A)
             $7,500	$7,500
 B)
          $10,000	$10,000
 C)
                  $0	       $0
 D)
             $5,000	$5,000

Answer 16

C

The entire payment from a DBO plan is included in the gross income of the recipient.

Question 17

John originally purchased 100 shares of XYZ stock for $45 per share. The stock is currently trading at $60 per share. The stock paid dividends of $2 per share in year 1 and $2.30 per share in year 2 (all paid at year end). If John has held the stock for 2 years, what is his holding period return?
A)
22.0%.
 B)
42.9%.
 C)
19.0%.
 D)
23.5%.

Answer 17

B

Question 18

The actual deferral percentage (ADP) test is generally applicable to which of the following?

1. Traditional Section 401(k) plans.
2. Money purchase pension plans.
3. SIMPLE 401(k) plans.

Answer 18

1 only

Question 19

Dennis is an attorney. At the end of the year, he sends his best clients a gift. This year, he is considering sending each client a $50 gift basket. Which of the following statements regarding these gifts is CORRECT?
A)
Dennis must deliver the baskets during business hours for their cost to be deductible.
B)
If Dennis serves two different clients, both of whom happen to work for the same firm, only the cost of one basket will be deductible, and then only the first $25 of that basket will be deductible.
C)
If Dennis addresses the basket to his client and spouse, the total cost of the basket will be deductible.
D)
Only $25 of the cost of each basket gift will be deductible, regardless of the total number of baskets Dennis sends.

Answer 19

D

The deduction for business gifts is limited to $25 per donee. A husband and wife are considered one donee, unless they are both business clients of the taxpayer.

Question 20

John died last month with a gross estate valued at $10 million. His will created a bypass trust and transferred assets equal to the applicable exclusion amount into the trust. Assets not transferred to the bypass trust were transferred to John’s surviving spouse, Margaret. What is the result of these actions?

A)
The assets transferred to the bypass trust will be eligible for the estate tax marital deduction.
B)
Income from the bypass trust must be paid to Margaret each year for the remainder of her life.
C)
The assets in the bypass trust will not be included in Margaret’s gross estate upon her death.
D)
John has overqualified his estate because of the bypass trust.

Answer 20

C

Overqualification of the estate occurs when the decedent fails to utilize the applicable credit amount. A bypass trust (which does not qualify for the marital deduction) allows the decedent to take advantage of the applicable credit amount. A bypass trust does not qualify for the marital deduction. Although income can be paid to the surviving spouse from the bypass trust, there is no requirement that it must be paid.

Question 21

Jonathan wants to use $10,000 from his traditional IRA as collateral for a business loan. All of his contributions to the IRA were deductible. As his financial planner, you advise him that:
A)
the transaction incurs no tax consequences but may incur a penalty.
B)
using the IRA as collateral for the loan is a permitted transaction and Jonathan will not incur a penalty.
C)
the $10,000 will be considered a taxable distribution, even though he does not remove it from the IRA.
D)
the $10,000 will not be a taxable distribution to Jonathan if it is only used as collateral.

Answer 21

C

Whenever any portion of an IRA is used as security or collateral for a loan, it is considered a taxable distribution, even though the money is not actually removed from the account.

Question 22

The Franklins, an elderly couple, have scheduled a follow-up meeting with their new financial planner, Jack. He has prepared an estate plan and is ready to present the plan to the couple. After 20 minutes into the presentation, Jack notices that Mrs. Franklin is sitting back in her chair with her arms folded appearing to be disengaged from the conversation. Also, he has been doing the majority of the talking during this period. Which of the following actions is (are) appropriate for Jack?

1. Ask Mrs. Franklin about her thoughts regarding the estate plan.
2. Engage in active listening to understand his client’s feelings and concerns.
3. Make the discussion more of a conversation rather than a presentation.
4. Because this is a serious matter, tell the Franklins they need to pay more attention.

Answer 22

1, 2, and 3

Question 23

Bill has a paid-up life insurance policy in which he has paid $12,000 in total premiums. The cash value of the policy is $30,000 with a death benefit of $50,000. This year, he received a cash dividend of $500 from the insurer. This is the first such dividend he has ever received under the policy. Which of the following statements regarding Bill’s situation is CORRECT?
A)
The $500 payment is not taxable.
B)
The $500 payment must be treated as a capital gain.
C)
The $500 payment is taxable as dividend income.
D)
The $500 payment must be treated as ordinary income.

Answer 23

A

Dividends from a life insurance policy are not taxable income unless the aggregate dividends received exceed the taxpayer’s basis in the contract. Because this is the first dividend Bill has received and it does not exceed his basis of $12,000, the dividend payment is not taxable and is considered a return of $500 of his basis.

Question 24

Which of the following statements regarding the Section 72(t) early distribution penalty is NOT correct?
A)
The tax does not apply to any distribution from a Roth IRA.
B)
A 10% penalty is imposed on the taxable amount of a distribution made to a participant that has not yet attained age 59½, unless a specific exception applies. Taxpayers must include the appropriate amount of the distribution in their taxable income.
C)
The 10% tax applies only to the taxable portion of the distribution. If a distribution includes amounts that have been previously subject to tax, such as after-tax employee contributions, the nontaxable portion of the distribution is exempt from the 10% penalty tax.
D)
The 10% penalty applies to distributions that are made from a qualified plan, a Section 403(b) plan, a traditional IRA, or a SEP plan.

Answer 24

A

Question 25

If a trust is structured as a grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT), the amount that is considered a current gift for gift tax purposes is:

A)
the fair market value of assets transferred to the trust.
B)
the fair market value of assets transferred to the trust less the present value of the remainder interest.
C)
the present value of the income interest retained by the grantor.
D)
the fair market value of the assets transferred to the trust less the present value of the income interest retained by the grantor.

Answer 25

D

The current value of the gift in the case of a GRAT or GRUT is the fair market value of the assets transferred less the present value of the income interest retained by the grantor.