CPA MCQ Practice Questions and
Answers.
Lark owns 10% of Baltic Corp., a calendar year-end C corporation. On June 30, year 2, Baltic made a
$250,000 pro-rata cash distribution to its stockholders. Baltic had a $40,000 deficit in accumulated
earnings and profits on January 1, year 2, and current earnings and profits for year 2 as follows:
1st quarter $110,000
2nd quarter (10,000)
3rd quarter 80,000
4th quarter 60,000
= $240,000
What portion of Lark's June 30 distribution would be classified as a non-taxable return of capital,
assuming that Lark's tax basis in Baltic stock is $20,000?
a - $1,000
B - $5,000
C - $15,000
D - $19,000 - Answer - $1,000
The question is asking about June 30th, or 2nd quarter.
10K x 10% (Lark's ownership of Baltic) = $1K
A client suing a CPA for negligence must prove each of the following factors except:
a - breach of duty of care.
b - Proximate cause.
c - Reliance.
d - Injury. - Answer - reliance.
To establish negligence, a client must show that:
- The CPA owed a legal duty,
,- The CPA breached that duty,
- The CPA's action was the proximate cause of the resulting injury to the client, and
- The CPA's actions caused the damage or loss.
The client does not have to prove reliance on the CPA's advice.
In return for a 20% partnership interest, Skinner contributed $5,000 cash and land with a $12,000
basis and a $20,000 fair market value to the partnership. The land was subject to a $10,000
mortgage that the partnership assumed. In addition, the partnership had $20,000 in recourse
liabilities that would be shared by partners according to their partnership interests. What amount
represents Skinner's basis in the partnership interest?
a - $27,000
B - $21,000
C - $19,000
D - $13,000 - Answered - $13,000
5K (cash) + 12K (basis of land) - 8K (80% of mortgage assumed by partnership) + 4K (20% of
liabilities) = 13K
Which of the following corporate actions is subject to shareholder approval?
a - Election of officers
b - Removal of officers
c - Declaration of cash dividends
d - Removal of directors - Answer - Election of officer
On dissolution of a general partnership, distributions will be made to satisfy partner's claims in the
following order:
I) Partners' capital accounts
II) Amounts owed partners with respect to profits
III) Amounts owed partners for loans to the partnership
a - III, I, II
b - I, II, III
c - II, III, I
,d - III, II, I - Answer - III, I, II
On dissolution of a general partnership, distributions will be made first to satisfy amounts owed
partners for loans to the partnership, then to satisfy partners' capital accounts, and finally each
partner will receive his or her share of the profits. This distribution scheme is consistent with the
general business philosophy of paying creditors before distributing profits to the owners of a
business. In this case, the creditors happen to be the partners.
Carter incurred the following expenses in the current year: $500 for the preparation of a personal
income tax return, $100 for custodial fees on an IRA, $150 for professional publications, and $2,000
for union dues. Carter's current-year adjusted gross income is $75,000. Carter, who is not self-
employed, itemizes deductions. What will Carter's deduction be for miscellaneous itemized
deductions after any limitations in the current year?
a - $750
B - $1,250
C - $0
D - $2,750 - Answer - $0
Under the Tax Cuts and Jobs Act of 2017 (TCJA), the deduction for itemized miscellaneous
deductions subject to the 2% floor was suspended until 2025; therefore, Carter's total deduction will
be $0.
Which of the following statements related to a traditional IRA is not correct?
a - The maximum deduction is generally $6,000 per individual.
b - An individual at least age 50 may deduct up to $7,000.
c - A 10% penalty tax applies to any withdrawal made prior to age 59-1/2.
d - The $6,000 maximum deduction is phased out for taxpayers with adjusted gross income over
certain amounts. - Answer - A 10% penalty tax applies to any withdrawal made prior to age 59-1/2.
Rules of accountancy differ from state to state and may be difficult to understand. Where can a
candidate find information that will allow him or her to maintain licensure records and view
requirements for multiple jurisdictions?
a - Each state will list requirements for all state licensing programs.
b - The National Clearinghouse of CPAs
c - The Federal CPA Exam Centre
, d - NASBA tools for accounting compliance - Answered - NASBA tools for accounting compliance
Each state has different rules and regulations as they apply to licensing requirements, but the NASBA
Tools for Accounting Compliance (www.nasbatools.com)allow a candidate to view a CPE registry,
compile credentials in one convenient location, and search jurisdictional requirements.
The Jacksons, who file a joint return, actively participate in a solely-owned rental real estate activity
that produces a $30,000 loss during the current year. Their adjusted gross income was $120,000
before considering the rental activity. How much of the rental loss, if any, are the Jacksons entitled
to deduct?
a - $0
B - $15,000
C - $25,000
D - $30,000 - Answer - $15,000
Step 1: Calculate the amount in excess of $100,000:$120,000 (AGI) − $100,000 = $20,000
Step 2: Multiply the amount in excess of step 1 by 50%:$20,000 × 50% = $10,000
Step 3: Subtract the maximum by the excess calculated in step 2:$25,000 − $10,000 = $15,000
Which of the following assets generally will be distributed outside of the probate estate and
regardless of intestacy laws, provided the estate is not the named beneficiary?
A) Totten trusts
B) Proceeds from insurance policies
a - A Only
b - Both A and B
c - Neither A nor B
d - B Only - Answer - Both A and B
A Totten trust is not actually a trust; it is an account that is payable on demand. Individuals may style
financial instruments such as a bank account or an asset as "Owner A in trust for Beneficiary B."
Answers.
Lark owns 10% of Baltic Corp., a calendar year-end C corporation. On June 30, year 2, Baltic made a
$250,000 pro-rata cash distribution to its stockholders. Baltic had a $40,000 deficit in accumulated
earnings and profits on January 1, year 2, and current earnings and profits for year 2 as follows:
1st quarter $110,000
2nd quarter (10,000)
3rd quarter 80,000
4th quarter 60,000
= $240,000
What portion of Lark's June 30 distribution would be classified as a non-taxable return of capital,
assuming that Lark's tax basis in Baltic stock is $20,000?
a - $1,000
B - $5,000
C - $15,000
D - $19,000 - Answer - $1,000
The question is asking about June 30th, or 2nd quarter.
10K x 10% (Lark's ownership of Baltic) = $1K
A client suing a CPA for negligence must prove each of the following factors except:
a - breach of duty of care.
b - Proximate cause.
c - Reliance.
d - Injury. - Answer - reliance.
To establish negligence, a client must show that:
- The CPA owed a legal duty,
,- The CPA breached that duty,
- The CPA's action was the proximate cause of the resulting injury to the client, and
- The CPA's actions caused the damage or loss.
The client does not have to prove reliance on the CPA's advice.
In return for a 20% partnership interest, Skinner contributed $5,000 cash and land with a $12,000
basis and a $20,000 fair market value to the partnership. The land was subject to a $10,000
mortgage that the partnership assumed. In addition, the partnership had $20,000 in recourse
liabilities that would be shared by partners according to their partnership interests. What amount
represents Skinner's basis in the partnership interest?
a - $27,000
B - $21,000
C - $19,000
D - $13,000 - Answered - $13,000
5K (cash) + 12K (basis of land) - 8K (80% of mortgage assumed by partnership) + 4K (20% of
liabilities) = 13K
Which of the following corporate actions is subject to shareholder approval?
a - Election of officers
b - Removal of officers
c - Declaration of cash dividends
d - Removal of directors - Answer - Election of officer
On dissolution of a general partnership, distributions will be made to satisfy partner's claims in the
following order:
I) Partners' capital accounts
II) Amounts owed partners with respect to profits
III) Amounts owed partners for loans to the partnership
a - III, I, II
b - I, II, III
c - II, III, I
,d - III, II, I - Answer - III, I, II
On dissolution of a general partnership, distributions will be made first to satisfy amounts owed
partners for loans to the partnership, then to satisfy partners' capital accounts, and finally each
partner will receive his or her share of the profits. This distribution scheme is consistent with the
general business philosophy of paying creditors before distributing profits to the owners of a
business. In this case, the creditors happen to be the partners.
Carter incurred the following expenses in the current year: $500 for the preparation of a personal
income tax return, $100 for custodial fees on an IRA, $150 for professional publications, and $2,000
for union dues. Carter's current-year adjusted gross income is $75,000. Carter, who is not self-
employed, itemizes deductions. What will Carter's deduction be for miscellaneous itemized
deductions after any limitations in the current year?
a - $750
B - $1,250
C - $0
D - $2,750 - Answer - $0
Under the Tax Cuts and Jobs Act of 2017 (TCJA), the deduction for itemized miscellaneous
deductions subject to the 2% floor was suspended until 2025; therefore, Carter's total deduction will
be $0.
Which of the following statements related to a traditional IRA is not correct?
a - The maximum deduction is generally $6,000 per individual.
b - An individual at least age 50 may deduct up to $7,000.
c - A 10% penalty tax applies to any withdrawal made prior to age 59-1/2.
d - The $6,000 maximum deduction is phased out for taxpayers with adjusted gross income over
certain amounts. - Answer - A 10% penalty tax applies to any withdrawal made prior to age 59-1/2.
Rules of accountancy differ from state to state and may be difficult to understand. Where can a
candidate find information that will allow him or her to maintain licensure records and view
requirements for multiple jurisdictions?
a - Each state will list requirements for all state licensing programs.
b - The National Clearinghouse of CPAs
c - The Federal CPA Exam Centre
, d - NASBA tools for accounting compliance - Answered - NASBA tools for accounting compliance
Each state has different rules and regulations as they apply to licensing requirements, but the NASBA
Tools for Accounting Compliance (www.nasbatools.com)allow a candidate to view a CPE registry,
compile credentials in one convenient location, and search jurisdictional requirements.
The Jacksons, who file a joint return, actively participate in a solely-owned rental real estate activity
that produces a $30,000 loss during the current year. Their adjusted gross income was $120,000
before considering the rental activity. How much of the rental loss, if any, are the Jacksons entitled
to deduct?
a - $0
B - $15,000
C - $25,000
D - $30,000 - Answer - $15,000
Step 1: Calculate the amount in excess of $100,000:$120,000 (AGI) − $100,000 = $20,000
Step 2: Multiply the amount in excess of step 1 by 50%:$20,000 × 50% = $10,000
Step 3: Subtract the maximum by the excess calculated in step 2:$25,000 − $10,000 = $15,000
Which of the following assets generally will be distributed outside of the probate estate and
regardless of intestacy laws, provided the estate is not the named beneficiary?
A) Totten trusts
B) Proceeds from insurance policies
a - A Only
b - Both A and B
c - Neither A nor B
d - B Only - Answer - Both A and B
A Totten trust is not actually a trust; it is an account that is payable on demand. Individuals may style
financial instruments such as a bank account or an asset as "Owner A in trust for Beneficiary B."
