CPA REG |ACTUAL QUESTIONS AND VERIFIED
ANSWERS|BRAND NEW 2026-2027
UPDATE|GRADED A+
Question 1
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 nontaxable 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
CORRECT ANSWER
a - $1,000
the question is asking about June 30th, or 2nd quarter.
10K x 10% (Lark's ownership of Baltic) = $1K
1
,Question 2
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.
CORRECT ANSWER
c - 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.
Question 3
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
2
,CORRECT ANSWER
d - $13,000
5K (cash) + 12K (basis of land) - 8K (80% of mortgage assumed by partnership) + 4K (20%
of liabilities) = 13K
Question 4
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
CORRECT ANSWER
a - Election of officer
Question 5
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
3
, CORRECT ANSWER
a - 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.
Question 6
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
CORRECT ANSWER
c - $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.
4
ANSWERS|BRAND NEW 2026-2027
UPDATE|GRADED A+
Question 1
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 nontaxable 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
CORRECT ANSWER
a - $1,000
the question is asking about June 30th, or 2nd quarter.
10K x 10% (Lark's ownership of Baltic) = $1K
1
,Question 2
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.
CORRECT ANSWER
c - 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.
Question 3
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
2
,CORRECT ANSWER
d - $13,000
5K (cash) + 12K (basis of land) - 8K (80% of mortgage assumed by partnership) + 4K (20%
of liabilities) = 13K
Question 4
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
CORRECT ANSWER
a - Election of officer
Question 5
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
3
, CORRECT ANSWER
a - 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.
Question 6
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
CORRECT ANSWER
c - $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.
4
