Professional Tax Preparer, Module 3 practice exam
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1. Retained earnings are: Corporate income that has not been distributed to shareholders
2. As a characteristic of corporations, the 'continuity of life' concept refers to: -
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?: -
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?: $250,000
5. A corporation should file which of the following forms?: Form 1120
6. Taxpayers are allowed to recover the cost of goodwill and copyrights acquired
after August 10, 1993, through: Amortization over 15 years
7. The term "boot" as it pertains to like-kind exchanges refers to what?: 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?: $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?: $5,120
10. Which of the following is a characteristic of a like-kind exchange?: 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sold for a manufacturer whose annual sales are $28 million?: Items withdrawn for
personal use
12. The balance sheet provides which of the following account balances?: Assets
13. TRUE OR FALSE: A sole proprietorship is an unincorporated organization
composed of one or more persons who carries on a trade or business.: False -
, Professional Tax Preparer, Module 3 practice exam
Study online at https://quizlet.com/_dbfk0d
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?: 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: If a husband and wife wish to operate a business together,
they may form a Qualified Joint Venture, or QJV, instead of a partnership.: 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?: 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: A partnership can elect to be taxed as an S corporation.: 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?: 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?: A) All members of an LLC enjoy protection from individua
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.
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.
, Professional Tax Preparer, Module 3 practice exam
Study online at https://quizlet.com/_dbfk0d
This rule applies to partnerships, but not to LLCs.
D) An LLC can file Form 2553 in lieu of Form 8832 to elect to be taxed as a corporation. True. Filing Form 2553 is also
treated as filing Form 8823 if Form 2553 is properly filed.
20. TRUE OR FALSE: S status combines the legal protection of C corporations with
taxation similar to that of partnerships.: True - S corporations are recognized as a separate legal
entity and provide shareholders with the same liability protection enjoyed by C corporations, but with the pass-through
of income and expenses to the shareholders, like a partnership.
21. Which of the following statements about C corporations is NOT true?: A) C
corporations are managed by a board of directors. All management responsibility in a corporation is assigned to a
board of directors, which appoints officers to carry out the corporation's business.
B) C corporations are the only business structures that typically pay taxes at an entity level. This is true; all other entities,
regardless of the forms they file, pass profits through to their owners to be taxed. On rare occasions S corporations
may also pay tax.
C) Double-taxation refers to the taxation of C corporation profits at the entity level, and again as dividends when paid
to shareholders. True. C corporations are the only entities to which this form of taxation applies.
D) Shareholders cannot be held responsible for the actions or liabilities of the corporation. Individual liability is generally
limited to stock ownership, except where fraud is involved. A shareholder could also have liability if a loan is guaranteed
by that shareholder.
22. TRUE OR FALSE: A corporation is created at a state level by filing Articles of
Organization.: False - While it is true that corporations are created under state law, they do so by filing Articles
of Incorporation. Articles of Organization apply to LLCs.
23. What kind of partner is only at risk for the amount of money invested in the
partnership, even if the business fails?: A) General Partner - Each partnership must have at least
one general partner, who is personally responsible for the debts and liabilities of the partnership.
B) Unlimited Partner - There is no such thing as an "unlimited partner."
C) Limited Partner - Correct. The term "limited partner" refers to the fact that their liability for partnership obligations
is limited to the amount of their investment.
D) Stockholder - Stockholders are only at risk for their own investment, and in any case they participate in corporations,
not partnerships.
24. Which form of business has one single owner, who receives all of the profits
and losses of the business?: A) Sole Proprietorship - As the name implies, this form of business has a
sole, individual owner.
Study online at https://quizlet.com/_dbfk0d
1. Retained earnings are: Corporate income that has not been distributed to shareholders
2. As a characteristic of corporations, the 'continuity of life' concept refers to: -
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?: -
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?: $250,000
5. A corporation should file which of the following forms?: Form 1120
6. Taxpayers are allowed to recover the cost of goodwill and copyrights acquired
after August 10, 1993, through: Amortization over 15 years
7. The term "boot" as it pertains to like-kind exchanges refers to what?: 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?: $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?: $5,120
10. Which of the following is a characteristic of a like-kind exchange?: 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?: Items withdrawn for
personal use
12. The balance sheet provides which of the following account balances?: Assets
13. TRUE OR FALSE: A sole proprietorship is an unincorporated organization
composed of one or more persons who carries on a trade or business.: False -
, Professional Tax Preparer, Module 3 practice exam
Study online at https://quizlet.com/_dbfk0d
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?: 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: If a husband and wife wish to operate a business together,
they may form a Qualified Joint Venture, or QJV, instead of a partnership.: 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?: 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: A partnership can elect to be taxed as an S corporation.: 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?: 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?: A) All members of an LLC enjoy protection from individua
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.
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.
, Professional Tax Preparer, Module 3 practice exam
Study online at https://quizlet.com/_dbfk0d
This rule applies to partnerships, but not to LLCs.
D) An LLC can file Form 2553 in lieu of Form 8832 to elect to be taxed as a corporation. True. Filing Form 2553 is also
treated as filing Form 8823 if Form 2553 is properly filed.
20. TRUE OR FALSE: S status combines the legal protection of C corporations with
taxation similar to that of partnerships.: True - S corporations are recognized as a separate legal
entity and provide shareholders with the same liability protection enjoyed by C corporations, but with the pass-through
of income and expenses to the shareholders, like a partnership.
21. Which of the following statements about C corporations is NOT true?: A) C
corporations are managed by a board of directors. All management responsibility in a corporation is assigned to a
board of directors, which appoints officers to carry out the corporation's business.
B) C corporations are the only business structures that typically pay taxes at an entity level. This is true; all other entities,
regardless of the forms they file, pass profits through to their owners to be taxed. On rare occasions S corporations
may also pay tax.
C) Double-taxation refers to the taxation of C corporation profits at the entity level, and again as dividends when paid
to shareholders. True. C corporations are the only entities to which this form of taxation applies.
D) Shareholders cannot be held responsible for the actions or liabilities of the corporation. Individual liability is generally
limited to stock ownership, except where fraud is involved. A shareholder could also have liability if a loan is guaranteed
by that shareholder.
22. TRUE OR FALSE: A corporation is created at a state level by filing Articles of
Organization.: False - While it is true that corporations are created under state law, they do so by filing Articles
of Incorporation. Articles of Organization apply to LLCs.
23. What kind of partner is only at risk for the amount of money invested in the
partnership, even if the business fails?: A) General Partner - Each partnership must have at least
one general partner, who is personally responsible for the debts and liabilities of the partnership.
B) Unlimited Partner - There is no such thing as an "unlimited partner."
C) Limited Partner - Correct. The term "limited partner" refers to the fact that their liability for partnership obligations
is limited to the amount of their investment.
D) Stockholder - Stockholders are only at risk for their own investment, and in any case they participate in corporations,
not partnerships.
24. Which form of business has one single owner, who receives all of the profits
and losses of the business?: A) Sole Proprietorship - As the name implies, this form of business has a
sole, individual owner.
