Professional Tax Preparer, Module 3 Practice Exam Questions and Answers
1. Retained earnings are ANSWERS Corporate income that has not been distributed to shareholders
2. As a characteristic of corporations, the 'continuity of life' concept refers to
ANSWERS -
When a corporation is dissolved or insolvent
3. Arthur purchased a business for $250,000 which included $100,000 in good-
will. How long a period is Arthur authorized to amortize the goodwill over?
ANSWERS - Straight-line depreciation over 180 months.
4. Francis and Samantha are owners of separate commercial office buildings
in different cities. Through a third party commercial real estate agency, each
learned that the other had an interest in swapping office buildings. Francis
agreed to pay Samantha an additional $100,000 for her building. Before the
swap, Francis's basis in her building was $150,000, and Samantha's basis in her
building was $225,000. What will Francis's basis be in her new building?
ANSWERS $250,000
5. A corporation should file which of the following forms? ANSWERS Form 1120
6. Taxpayers are allowed to recover the cost of goodwill and copyrights acquired
after August 10, 1993, through ANSWERS Amortization over 15 years
7. The term "boot" as it pertains to like-kind exchanges refers to what?
ANSWERS The cash paid by one party to the other
8. Ida and Susan formed a corporation to begin a tanning business. Ida invested
$100,000 of her own money, and Susan invested a building for which she had
a tax basis of $75,000, and which had a fair market value of $150,000. Each
received 50,000 shares of stock and Susan also received $25,000 in cash. What
is Susan's basis in her 50,000 shares? ANSWERS $50,000
9. Richard paid $6,800 in legal fees to start his new S corporation. How much of
this investment may he deduct in the first year as organizational costs?
ANSWERS $5,120
10. Which of the following is a characteristic of a like-kind exchange?
ANSWERS Both the surrendered and replacement property must be held for productive use in a
trade or business or for investment
11. Which of the following items should NOT be included in the cost of goods
sold for a manufacturer whose annual sales are $28 million? ANSWERS Items
,Professional Tax Preparer, Module 3 Practice Exam Questions and Answers
withdrawn for personal use
12. The balance sheet provides which of the following account balances?
ANSWERS Assets
13. TRUE OR FALSE ANSWERS A sole proprietorship is an unincorporated
organization composed of one or more persons who carries on a trade or
business. ANSWERS False -
,Professional Tax Preparer, Module 3 Practice Exam Questions and Answers
By definition, a sole proprietorship is composed of only one person. A similar entity with two or more persons would
be a partnership.
14. Which of the following is not a characteristic of a sole proprietorship?
ANSWERS A) Sole
proprietorships are taxed only on their net profits. Sole proprietors, as individual taxpayers, pay income taxes on the net
profits of their business. But the proprietorship itself does not exist as a separate entity from its owner, and therefore
has no tax liability.
15. TRUE OR FALSE ANSWERS If a husband and wife wish to operate a busines
together,
they may form a Qualified Joint Venture, or QJV, instead of a partnership.
ANSWERS True - Current tax law allows husbands and wives to elect not to form a partnership. Instead,
they declare themselves a QJV and file two separate Schedule Cs or Schedule Fs to report their shares of income and
expenses (as long as the entity is not an LLC).
16. Partnerships must file which tax form to report their net profit or loss?
ANSWERS Form
1065 - Correct. However, Form 1065 is an information-only return, and each partner must include his share of
partnership profit or loss on his individual Form 1040.
17. TRUE OR FALSE ANSWERS A partnership can elect to be taxed as an S
corporation. ANSWERS True
- Like LLCs, partnerships can use check-the-box regulations to elect S corporation tax status.
18. LLCs with multiple members may file which of the following tax forms?
ANSWERS A) Form 1120 - Form 1120 is for entities taxed as C corporations.
B) Form 1120S - Form 1120S is for entities with S corporation status.
C) Form 1065 - Form 1065 is primarily for partnerships, but most LLCs use it, too.
D) Both b) and c) - No. All of the above answers are correct, not just b) and c).
E) All of the above. LLCs have the right, to elect to be taxed as either a C or S corporation. Otherwise, they usually file
Form 1065.
19. Of the following statements, which does NOT apply to a Limited Liability
Company (LLC) with multiple members? ANSWERS A) All members of an LLC enjoy protection
from individual risk related to company debts and other liabilities. It is true that LLCs provide limited personal liability
for all entity owners.
B) LLCs are pass-through tax entities, just like partnerships. Usually. Most LLCs file Form 1065 to report profits or losses.
, Professional Tax Preparer, Module 3 Practice Exam Questions and Answers
If the company has elected S corporation taxation, they will file Form 1120S instead. Either way, individual members
report their share of company profits on their own Form 1040. However, it is possible, though rare, for an LLC to elect
C corporation tax status.
C) LLCs can designate one member as the general partner to assume personal responsibility for company liabilities.
1. Retained earnings are ANSWERS Corporate income that has not been distributed to shareholders
2. As a characteristic of corporations, the 'continuity of life' concept refers to
ANSWERS -
When a corporation is dissolved or insolvent
3. Arthur purchased a business for $250,000 which included $100,000 in good-
will. How long a period is Arthur authorized to amortize the goodwill over?
ANSWERS - Straight-line depreciation over 180 months.
4. Francis and Samantha are owners of separate commercial office buildings
in different cities. Through a third party commercial real estate agency, each
learned that the other had an interest in swapping office buildings. Francis
agreed to pay Samantha an additional $100,000 for her building. Before the
swap, Francis's basis in her building was $150,000, and Samantha's basis in her
building was $225,000. What will Francis's basis be in her new building?
ANSWERS $250,000
5. A corporation should file which of the following forms? ANSWERS Form 1120
6. Taxpayers are allowed to recover the cost of goodwill and copyrights acquired
after August 10, 1993, through ANSWERS Amortization over 15 years
7. The term "boot" as it pertains to like-kind exchanges refers to what?
ANSWERS The cash paid by one party to the other
8. Ida and Susan formed a corporation to begin a tanning business. Ida invested
$100,000 of her own money, and Susan invested a building for which she had
a tax basis of $75,000, and which had a fair market value of $150,000. Each
received 50,000 shares of stock and Susan also received $25,000 in cash. What
is Susan's basis in her 50,000 shares? ANSWERS $50,000
9. Richard paid $6,800 in legal fees to start his new S corporation. How much of
this investment may he deduct in the first year as organizational costs?
ANSWERS $5,120
10. Which of the following is a characteristic of a like-kind exchange?
ANSWERS Both the surrendered and replacement property must be held for productive use in a
trade or business or for investment
11. Which of the following items should NOT be included in the cost of goods
sold for a manufacturer whose annual sales are $28 million? ANSWERS Items
,Professional Tax Preparer, Module 3 Practice Exam Questions and Answers
withdrawn for personal use
12. The balance sheet provides which of the following account balances?
ANSWERS Assets
13. TRUE OR FALSE ANSWERS A sole proprietorship is an unincorporated
organization composed of one or more persons who carries on a trade or
business. ANSWERS False -
,Professional Tax Preparer, Module 3 Practice Exam Questions and Answers
By definition, a sole proprietorship is composed of only one person. A similar entity with two or more persons would
be a partnership.
14. Which of the following is not a characteristic of a sole proprietorship?
ANSWERS A) Sole
proprietorships are taxed only on their net profits. Sole proprietors, as individual taxpayers, pay income taxes on the net
profits of their business. But the proprietorship itself does not exist as a separate entity from its owner, and therefore
has no tax liability.
15. TRUE OR FALSE ANSWERS If a husband and wife wish to operate a busines
together,
they may form a Qualified Joint Venture, or QJV, instead of a partnership.
ANSWERS True - Current tax law allows husbands and wives to elect not to form a partnership. Instead,
they declare themselves a QJV and file two separate Schedule Cs or Schedule Fs to report their shares of income and
expenses (as long as the entity is not an LLC).
16. Partnerships must file which tax form to report their net profit or loss?
ANSWERS Form
1065 - Correct. However, Form 1065 is an information-only return, and each partner must include his share of
partnership profit or loss on his individual Form 1040.
17. TRUE OR FALSE ANSWERS A partnership can elect to be taxed as an S
corporation. ANSWERS True
- Like LLCs, partnerships can use check-the-box regulations to elect S corporation tax status.
18. LLCs with multiple members may file which of the following tax forms?
ANSWERS A) Form 1120 - Form 1120 is for entities taxed as C corporations.
B) Form 1120S - Form 1120S is for entities with S corporation status.
C) Form 1065 - Form 1065 is primarily for partnerships, but most LLCs use it, too.
D) Both b) and c) - No. All of the above answers are correct, not just b) and c).
E) All of the above. LLCs have the right, to elect to be taxed as either a C or S corporation. Otherwise, they usually file
Form 1065.
19. Of the following statements, which does NOT apply to a Limited Liability
Company (LLC) with multiple members? ANSWERS A) All members of an LLC enjoy protection
from individual risk related to company debts and other liabilities. It is true that LLCs provide limited personal liability
for all entity owners.
B) LLCs are pass-through tax entities, just like partnerships. Usually. Most LLCs file Form 1065 to report profits or losses.
, Professional Tax Preparer, Module 3 Practice Exam Questions and Answers
If the company has elected S corporation taxation, they will file Form 1120S instead. Either way, individual members
report their share of company profits on their own Form 1040. However, it is possible, though rare, for an LLC to elect
C corporation tax status.
C) LLCs can designate one member as the general partner to assume personal responsibility for company liabilities.
