Free Certified Public Accountant (CPA) Regulation Questions and Answers — Questions and Answers
Question 1: The Echo Company had the following income during the current year: <br> Operating profit = $110,000 <br> $1,100 in dividends from a 20%-owned, taxed domestic business. <br> How much of the dividends received by the Echo Company should be included in its current year's taxable income?
- Cannot be determined
- $220 (Correct answer)
- $350
- $330
Correct answer: $220
For corporate dividends received, a Dividends Received Deduction (DRD) is allowed. Under pre-Tax Cuts and Jobs Act (TCJA) tax law, if a corporation owned 20% or more but less than 80% of the distributing corporation, it could deduct 80% of the dividends received. Echo Company received $1,100 in dividends from a 20%-owned business, so the DRD is $1,100 * 0.80 = $880. Therefore, the amount included in taxable income is $1,100 - $880 = $220.
Question 2: Jack Snell designated his wife, Angelica, as the beneficiary of a life insurance policy with a face value of $150,000. This policy provided that, in the event of Jack's passing, the money would be given to Angelica with interest throughout her expected life. What amount should Angelica include in her annual gross income if the insurance company paid her $6,100 and determined her life expectancy to be thirty years?
- Cannot be determined
- $1,100 (Correct answer)
- $1,400
- $6,100
- $1,500
Correct answer: $1,100
Life insurance proceeds paid by reason of death are generally excluded from gross income. However, if the proceeds are paid in installments with interest, the interest portion is taxable. To calculate the taxable interest, first determine the annual tax-free principal exclusion by dividing the policy's face value ($150,000) by Angelica's life expectancy (30 years), which is $5,000 per year. The taxable amount is the difference between the annual payment received ($6,100) and the tax-free principal exclusion ($5,000), resulting in $1,100 of taxable income.
Question 3: Suppose the 2015 alternative minimum taxable income of Alpha Corporation was $210,000. Which of the following correctly describes the exempt portion of the 2015 alternative minimum taxable income for Alpha Corporation?
- $25,000 (Correct answer)
- $26,000
- $25,500
- $24,500
- $24,000
Correct answer: $25,000
For 2015, the corporate alternative minimum tax (AMT) exemption was $40,000, but it began to phase out when alternative minimum taxable income (AMTI) exceeded $150,000. The phase-out rate is 25 cents for every dollar of AMTI over $150,000. Alpha Corporation's AMTI of $210,000 exceeds the threshold by $60,000 ($210,000 - $150,000). Therefore, the phase-out amount is $60,000 * 0.25 = $15,000, resulting in an exempt portion of $40,000 - $15,000 = $25,000.
Question 4: Which of the following does not constitute a contract's fundamental component?
- Consideration
- Acceptance
- Offer
- Legality
- Statue of frauds (Correct answer)
Correct answer: Statue of frauds
A contract's fundamental components, often referred to as the elements of a valid contract, include offer, acceptance, consideration, legality of purpose, and capacity of the parties. The Statute of Frauds, however, is not a component required for the formation of a contract. Instead, it is a legal principle that dictates *which* types of contracts must be in writing to be legally enforceable, serving as an evidentiary rule rather than a foundational element.
Question 5: Which of the following must an auditor have an opinion on while auditing an issuer? <br> I. The audit committee's oversight on internal controls <br> II. The audit committee's oversight of financial reporting <br> III. The financial statements <br> IV. The effectiveness of internal controls
- All scenarios
- I and II only
- II and III
- III and IV only (Correct answer)
Correct answer: III and IV only
For an issuer (a public company), the auditor is required by the Sarbanes-Oxley Act (SOX) Section 404 to express an opinion on both the financial statements and the effectiveness of internal controls over financial reporting (ICFR). This integrated audit approach ensures that both the financial results and the processes producing them are reliable. While the audit committee's oversight is crucial for good governance, the auditor's opinion is specifically on the financial statements and the company's internal controls, not directly on the committee's oversight itself.
Question 6: Together with his wife, Charlie Smith is submitting a joint tax return. Under a qualified plan, Charlie Smith's employer covers the entire cost of the employee's group term life insurance. Which of the following options best describes the maximum tax-free coverage that Mr Smith's employer may offer?
- $2,500
- Cannot be determined
- $25,000
- $50,000 (Correct answer)
- $15,000
Correct answer: $50,000
Under IRS regulations, the cost of the first $50,000 of group term life insurance coverage provided by an employer is generally excluded from an employee's gross income and is therefore tax-free. Any coverage exceeding this $50,000 threshold results in the cost of the excess coverage being treated as a taxable fringe benefit to the employee. Thus, Mr. Smith's employer may offer a maximum of $50,000 in group term life insurance coverage without it being considered taxable income to him.
Question 7: True or False: Even if an auditor finds no false statements during an audit, a severe flaw or material weakness may still exist within a corporation.
- TRUE (Correct answer)
- FALSE
Correct answer: TRUE
A material weakness in internal control over financial reporting (ICFR) signifies a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected on a timely basis. It represents a significant deficiency in the company's control system. Therefore, it is entirely possible for a severe flaw or material weakness to exist within a corporation even if no actual material misstatements were found during a particular audit period, as the weakness indicates a *risk* of future misstatement.
Free Certified Public Accountant (CPA) Regulation Questions and Answers
The Echo Company had the following income during the current year:
Operating profit = $110,000
$1,100 in dividends from a 20%-owned, taxed domestic business.
How much of the dividends received by the Echo Company should be included in its current year's taxable income?