CPA Exam : Regulation

Study concepts, example questions & explanations for CPA Exam

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Example Questions

Example Question #1 : Business Law

Which of the following is not an essential element of a contract?

Possible Answers:

Consideration

Offer

Statute of frauds

Legality

Acceptance

Correct answer:

Statute of frauds

Explanation:

Contracts form the foundation of many law topics; furthermore, a contract is made up of several essential elements that include the following: offer, acceptance, consideration, legal capacity, and legality. It is important to note that acceptance refers to an agreement or mutual assent between the parties initiating a contract. On the other hand, a statute of frauds is not an essential element. Statutes of frauds are applied on a case-by-case basis depending on the factual situation of each contract. 

Example Question #2 : Regulation

An individual may exclude from income up to __________ of gain that is realized on the sale or exchange of a residence, if the individual owned and occupied the residence as a principle residence for an aggregate of at least __________ of the five years __________ the sale.

Possible Answers:

Correct answer:

Explanation:

The following choice is the correct answer:

This means that an individual may exclude from income up to two hundred and fifty thousand dollars of gain that is realized on the sale or exchange of a residence, if the individual owned and occupied the residence as a principle residence for an aggregate of at least two of the five years preceding the sale. The amount can be increased to five hundred thousand if married individuals file jointly. This applies if either spouse meets the ownership requirement and both spouses meet the use requirement. 

Example Question #6 : Cpa

Jack Snell named his wife—Angelica—the beneficiary of a  (face amount) life insurance policy. According to this policy, upon Jack's death, the proceeds would be paid to Angelica with interest over her current life expectancy. If Angelica's life expectancy was was calculated to be thirty years and she received a payment of  from the insurance company, then what amount should she include in her gross income for that year?

Possible Answers:

Cannot be determined

Correct answer:

Explanation:

We need to find the amount of the life insurance payments that need to be included in Angelica's gross income. It is important to note that life insurance payments paid by reason of death are excluded from income if they are paid in lump sums or installments. If the payments are received in installments, then then the principle amount of the policy divided by the number of annual payments is excluded each year. 

Let's start by calculating the principle amount of the policy to be received every year. 

In order to calculate the gross income to be reported, subtract this amount from the annual installment.

Example Question #7 : Cpa

Charlie Smith is filing a joint tax return with his wife. Charlie Smith's employer pays the entire cost of all the employee's group-term life insurance under a qualified plan. Under this plan, which of the following choices identifies the maximum amount of tax-free coverage that may be provided for Mr. Smith by his employer?

Possible Answers:

Cannot be determined 

Correct answer:

Explanation:

This question asks us to identify the maximum amount of tax-free group-term life insurance that can be provided to an employee by an employer. The cost of the first  of employer provided group-term life insurance coverage can be excluded from an employee's income.

Example Question #1 : Federal Taxation Of Entities

If the Alpha Corporation's 2015 alternative minimum taxable income was . Which of the following properly identifies the exempt portion of the Alpha Corporation's 2015 alternative minimum taxable income? 

Possible Answers:

Correct answer:

Explanation:

This problem asks us to determine the exempt portion of the Alpha Corporation's alternative minimum taxable income (AMTI). A corporation is allowed an exemption of up to  in computing it AMTI; however, this exemption is reduced by twenty-five percent of the corporation's AMTI in excess of . We can write this by using the following equation:

Substitute and solve.

Example Question #2 : Federal Taxation Of Entities

For the current year, The Echo Company possessed the following income:

In the Echo Company's current year taxable income, how much should be included for dividends received? 

Possible Answers:

Cannot be determined 

Correct answer:

Explanation:

This problem is asking us to determine the amount of dividends to be included in the Echo Company's taxable income for the current year. The dividends were received from 20%-owned taxable domestic corporations; therefore, they are eligible for an 80% dividends received deduction. We can compute this value using the following formula:

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