AWMA Test Review 1 Questions with Correct Answers

AWMA Test Review 1 Questions with Correct Answers If ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends, what is its taxable income? A. $0 B. $25,000 C. $50,000 D. $100,000 - Answer-The net profits of a corporation are subject to federal income taxation. This tax is levied on corporate taxable income before payment of dividends to common and preferred shareholders. Thus, if ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends, its taxable income is still $100,000. Distribution of profits as dividends does not reduce taxable income for a corporation Qualified Plans - Answer-Meet the stringent requirements of the IRC as well as those of the ERISA and therefore qualify for favorable tax treatment. In pension and profit sharing plans an employee is generally not taxed on employer contributions or accumulated earnings until the funds are actually received from the plan. The employer receives a deduction at the time of contribution. for qualified stock option plans the employee is not taxed until it is sold. Nonqualified plans - Answer-Do not qualify for special tax treatment. They don't permit the employer to take a deduction for plan contributions until the employee reports income from the plan, which is often at retirement. Earnings not tax deferred - earnings are taxed to the employer or employee depending on the plans design Nonqualified deferred comp plan - Answer-Do not qualify for the same special tax treatment. They do not permit the employer to take a deduction for plan contributions until the employee reports income from the plan, which is often at retirement. Also, the earnings on plan assets are not tax deferred; instead, earnings are taxed to the sponsor(employer) or to the participant (employee), depending on the plan design. The irs rules do permit an employee to agree to defer income to a nonqualified plan and not be taxed on the deferral until some point in the future if the 3 rules are followed. Economic Benefit - Answer-A taxpayer has income when he receives the economic benefit of the proceeds. This occurs when the employer irrevocably places funds for the benefit of the employee beyond the reach of the employers creditors. Income is thus received if the employee does not have actual or even constructive receipt.(applies to funded plans) Corporate owned life insurance - Answer-commonly used by employers to informally fund future benefit obligations such as those promised under a deferred comp plan. As the owner of the policies the employer is responsible for paying the premiums. The employer is also the beneficiary of the policies and retains all rights to policy benefits, including the cash value buildup and the death proceeds. COLI is attractive to employers because it - Answer-1. Provides psychological assurance to deferred comp plan participants that their benefit are secure. 2. reduces strain on the companys cash flow when plan distributions are due 3. provides tax-deferred, and possibly tax free buildup of cash value; and 4. enables the employer to recover some/all of the plan costs. Changes that have occurred since investment firms changed from private partnerships to publicly traded companies include all of the following except: A. risk taking has increased. B. profits can be privatized (bonuses) and losses socialized (bailouts). C. there is greater individual accountability. D. partners no longer share in both the profits and losses of the firm. - Answer-C. The repeal of Glass-Steagall accelerated the conversion of investment firms that had been structured as partnerships into publicly traded companies that took on more risk. This transferred much of the risk and accountability from general partners to public shareholders Equity REITS - Answer-Equity REITs own real estate properties and earn income from rents, and made up 94.4% of the REIT market (by capitalization) at the end of 2015. Upon the sale of the properties, a capital gain is earned. Generally, income from rents can be expected to increase each year. Equity REITs are appropriate when one objective is to provide an inflation hedge Mortgage REITs. - Answer-Mortgage REITs are similar to bond mutual funds, and make up approximately 5.6% of the REIT market. No ownership interest in the underlying real estate property exists. Instead, the fund invests in mortgages used by equity owners of the real estate properties to finance their acquisition of the properties. Mortgage REITs may also invest in GNMA. pools or other mortgage backed securities. They generally do not participate in capital gains on the sale of real estate properties, but their income is higher than that of equity REITs. Mortgage REITs do not provide inflation protection. Which one of the following is an advantage of equity REITs over mortgage REITs? - Answer-Equity REITs can participate in the appreciation of the underlying properties. Equity REITs own the underlying real estate properties, giving the owners an opportunity to participate in the net cash flows from the operation of the properties and in any appreciation in the market price of the properties. - Answer-The intent of Dodd-Frank was to "harmonize" and blend fiduciary rules that would pertain to both broker-dealers and investment advisers. Investment advisers are held to a fiduciary standard and broker-dealers to a suitability standard under the current rules One of the most important financial goals of wealthy individuals is - Answer-The moststated life goals for wealthy individuals are having good health, travelling the world, and achieving financial success. To achieve financial success, the most common financial goals are protecting wealth, assuring retirement lifestyle, minimizing taxes, and leaving an estate to their heirs. There are several kinds of strategies hedge funds use, and some approaches can be categorized. The CAIA divides hedge funds into four main categories: - Answer-1. market directional, 2. corporate restructuring, 3. convergence trading, and 4. opportunistic.