CPA Regulation (REG) : Taxable Income Items

Study concepts, example questions & explanations for CPA Regulation (REG)

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Example Questions

Example Question #1 : Taxable Income Items

On January 1, Smith sold land to Baker for $100,000 cash plus a note for $200,000 plus adequate interest with a $30,000 principal payment due in the second year. Smith's basis in the property was $100,000. What is the amount of the gain recognized in the second year under the installment method?

Possible Answers:

$200,000

$100,000

$20,000

$30,000

Correct answer:

$20,000

Explanation:

Smith’s basis in the land was $100,000, and he sold the land for $300,000 (cash plus the note). As a result, under the installment method, 2/3 of all cash received is treated as a gain (with the other 1/3 a return of Smith’s original basis in the land). With the receipt of $30,000 in the second year, 2/3 (=$20,000) is treated as a gain. 

Example Question #2 : Taxable Income Items

Which of the following is taxable as gross income?

Possible Answers:

Alimony received based on a divorce agreement executed in 2015.

Child support received based on a divorce agreement executed in 2015.

Child support received based on a divorce agreement executed in 2019.

Alimony received based on a divorce agreement executed in 2019.

Correct answer:

Alimony received based on a divorce agreement executed in 2015.

Explanation:

 For a divorce finalized on or before Dec. 31, 2018, alimony received is included in gross income. For divorces finalized after this date, alimony is not included in gross income. Child support is never included in gross income.

Example Question #2 : Taxable Income Items

Dot, an employee of Acme C Corporation, is not a shareholder. Which of the following would be included in a taxpayer’s gross income?

Possible Answers:

Employer-provided medical insurance coverage under a health plan.

A $9,000 gift from the taxpayer’s grandparents.

The dividend income on shares of stock that the taxpayer received for services rendered.

The fair market value of a vehicle that the taxpayer inherited from an uncle.

Correct answer:

The dividend income on shares of stock that the taxpayer received for services rendered.

Explanation:

Gifts, inheritance, and medical insurance are not included in gross income. Dividend income is the only item that is regularly included in gross income.

Example Question #4 : Taxable Income Items

Which of the following costs is not included in inventory under the Uniform Capitalization rules for goods created by the taxpayer?

Possible Answers:

Warehousing costs

Quality control

Research

Taxes excluding income taxes

Correct answer:

Research

Explanation:

Uniform Capitalization rules provide guidelines with respect to capitalizing or expensing certain costs. With regard to inventory, direct materials, direct labor, and factory overhead should be capitalized as part of the cost of inventory.

Example Question #5 : Taxable Income Items

Which of the following costs are subject to the Uniform Capitalization Rules of Code Sec 263A for manufactured tangible personal property?

Possible Answers:

Advertising

Research

Off-site storage

Marketing

Correct answer:

Off-site storage

Explanation:

Costs required to be capitalized under the uniform capitalization rules include direct materials, direct labor, and applicable indirect costs. Applicable indirect costs include utilities, warehousing costs, repairs, maintenance, indirect labor, rents, storage, depreciation, and others.

Example Question #6 : Taxable Income Items

If a partnership’s business and financial operations are discontinued, would it be considered terminated for income tax purposes?

Possible Answers:

Yes

If 60% of the total interest is sold within 12 months

No

More information needed

Correct answer:

Yes

Explanation:

A partnership is considered terminated under a few circumstances, one being if the operations of it are ceased.

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