CIMA Business Law and Taxation 1 — Questions and Answers
Question 1: In contract law, which element is described as 'something of value exchanged between parties to a contract'?
- Offer
- Acceptance
- Consideration (Correct answer)
- Intention to create legal relations
Correct answer: Consideration
Consideration is the element of contract law requiring that something of value be exchanged between the parties, making the agreement legally binding.
Question 2: What is the primary purpose of the Sarbanes-Oxley Act (SOX) in the US?
- Regulating international trade practices
- Improving corporate governance and financial reporting accuracy following major accounting scandals (Correct answer)
- Setting environmental standards for public companies
- Regulating banking and financial services
Correct answer: Improving corporate governance and financial reporting accuracy following major accounting scandals
SOX was enacted to improve corporate governance, financial reporting accuracy, and accountability following the Enron and WorldCom accounting scandals.
Question 3: What does 'limited liability' mean for shareholders of a corporation?
- Shareholders are personally liable for all corporate debts
- Shareholders' losses are limited to the amount they invested in the company (Correct answer)
- Shareholders have no rights in the event of corporate insolvency
- Directors are personally liable for company debts but not shareholders
Correct answer: Shareholders' losses are limited to the amount they invested in the company
Limited liability means shareholders can only lose the amount they invested; their personal assets are protected from the company's debts and liabilities.
Question 4: In US taxation, what is 'depreciation recapture'?
- The deduction of depreciation from taxable income
- The inclusion in taxable income of gains attributable to previously claimed depreciation deductions when an asset is sold (Correct answer)
- The recovery of an asset's cost over its useful life
- A penalty for over-claiming depreciation deductions
Correct answer: The inclusion in taxable income of gains attributable to previously claimed depreciation deductions when an asset is sold
Depreciation recapture requires that gains on the sale of an asset, to the extent they reflect previously deducted depreciation, be recognized as ordinary income.
Question 5: Which legal structure provides owners with limited liability while avoiding the double taxation typical of C-corporations in the US?
- Sole proprietorship
- Partnership
- S-Corporation (or LLC) (Correct answer)
- C-Corporation
Correct answer: S-Corporation (or LLC)
S-Corporations and LLCs (with pass-through election) provide limited liability to owners while allowing income to pass through to personal tax returns, avoiding double taxation.
Question 6: What is a 'fiduciary duty' in the context of business law?
- A contractual obligation to make regular payments
- A legal obligation to act in the best interests of another party (Correct answer)
- A duty to report financial information to regulators
- An obligation to pay taxes on time
Correct answer: A legal obligation to act in the best interests of another party
A fiduciary duty is a legal obligation requiring one party to act in the best interests of another, applicable to directors, trustees, and agents.
CIMA Business Law and Taxation 1
In contract law, which element is described as 'something of value exchanged between parties to a contract'?