Free CPA-Regulation Practice Test Questions and Answers (2026) | Cert Empire Practice Questions

"I" is correct. $2,500. Rental activity net income is reported on page one; the gross income ($8,400) is fully reportable; and all deductions listed (total = $5,900) are fully deductible for a net of $2,500.

Choice "c" is correct. Generally, the fair market value of prizes and awards is taxable income. However, an exclusion from income for certain prizes and awards applies where the winner is selected for the award without entering into a contest (i.e., without any action on their part) and then assigns the award directly to a governmental unit or charitable organization. Therefore, conditions "I" and "II" must be met in order for Ken to exclude the award from his gross income. Choice "a" is incorrect. "II" is a necessary condition as well. See explanation above. Choice "b" is incorrect. "I" is a necessary condition as well. See explanation above. Choice "d" is incorrect. "I" and "II" are both necessary conditions. See explanation above.

Choice "a" is correct. Direct material, direct labor, and factory overhead (applicable indirect costs) are

capitalized with respect to inventory under the uniform capitalization rules for property acquired for

resale. Applicable indirect costs include depreciation and amortization, insurance, supervisory

wages, utilities, spoilage and scrap, design expenses, repair and maintenance and rental of

equipment and facilities (including offsite storage), some administrative costs, costs of bonus and

other incentive plans, and indirect supplies and other materials (including repackaging costs).

Choices "b", "c", and "d" are incorrect, per the above discussion.

Individual Taxation - Capital Gains and Losses

Choice "d" is correct. Under the uniform capitalization rules, purchasers of inventory for resale may

deduct their marketing costs but must capitalize their off-site storage costs.

Choices "a", "b", and "c" are incorrect. Marketing costs are deductible, but off-site storage must be

capitalized.

Choice "b" is correct. Prepaid interest must be prorated over the time for which payment is made.

This is true for both cash and accrual basis taxpayers. The loan is for 1 month in 1992 and 11 months

in 1993. Therefore, 1/12 of the interest is deductible in 1992 and 11/12, or $11,000 is deductible in

1993.

Choices "a", "c", and "d" are incorrect. Prepaid interest must be prorated over the time for which

payment is made. This is true for both cash and accrual basis taxpayers.

Choice "d" is correct. Baum should report $281,750 as 1999 net earnings from self-employment (line

12 of the Form 1040), calculated as follows:

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Choices "a", "b", and "c" are incorrect. Self-employment tax and self-employment health insurance

expenses are adjustments from total gross income. They are not deducted from self-employment

earnings (i.e., not reported net on line 12 of the Form 1040).

Note: There are many distracters in this question, all relating to items that are either deductible as

part of itemized deductions or not deductible. Be careful to read the requirement of the question

before spending unnecessary time on the question. The statement that Baum's year-end inventory

was not subject to the uniform capitalization rules is a distracter as well. There is not enough

information given in the facts to apply the rules if he had been subject to them.

"C" is correct. $900. If a taxpayer has the option of taking a dividend either in stock or in other property (e.g., cash), the dividend is taxable regardless of the option the taxpayer selects.

Choice "c" is correct. The bond's basis is reduced by the amortization of the premium.

Choice "a" is incorrect. For bonds acquired after 12/31/87, the amortization of the premium is an

offset to interest income on the bond rather than a separate interest deduction.

Choice "b" is incorrect. The amortization of the premium will reduce taxable income.

Choice "d" is incorrect. The bond's basis will be decreased by the amortization.

Choice "a" is correct. Deductions to arrive at net self-employed income include all necessary and

ordinary expenses connected with the business. Estimated federal income tax payments are not an

expense. Charitable contributions by an individual are only deductible as an itemized deduction on

Schedule A. This assumes the contribution was not made with the "expectation of commensurate

financial return."

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Choice "b" is incorrect. Charitable contributions are an itemized deduction unless there is an

expectation of commensurate financial return.

Choice "c" is incorrect. Federal income taxes paid are not a deductible expense.

Choice "d" is incorrect. Charitable contributions are an itemized deduction unless there is an

expectation of commensurate financial return. Federal income taxes paid are not a deductible

expense.

Choice "d" is correct. $90,200 is Berk's basis in the land.

Rule: The basis of the property acquired will be the property's cost consisting of the amount of cash

paid plus any amount of related debt assumed. Cost will be adjusted to reflect any additional costs

incurred in purchasing the property.

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Choices "a", "b", and "c" are incorrect, per the above rule.

Choice "b" is correct. $250,000 maximum exclusion from taxable income.

Rule: An individual may exclude from income up to $250,000 gain provided that the property was the

taxpayer's primary residence for 2 of the last 5 years. Married taxpayers may exclude gains up to

$500,000.

Choice "a" is incorrect. $320,000. Ryan, age 57, was not married. Thus, his exclusion was limited to

$250,000.

Choice "c" is incorrect. The $125,000 exclusion was old law and eliminated for sales after 5/6/97.

Choice "d" is incorrect, per the above rule.

Choice "a" is correct. Trade date.

Gain or loss on a year-end sale of listed stock arises on the trade date.

Rule: Whether on the cash or accrual method of accounting taxpayers who sell stock or securities on

an established securities market must recognize gains and losses on the trade date, rather than on

the settlement date.

Choices "b", "c", and "d" are incorrect, per the above rule.

Choice "c" is correct. Wolf's passive loss for 1989 is $5,000 ($100,000 operating loss × 5% interest in

partnership).

Choice "a" is incorrect. Wolf did not materially participate in the partnership, so the loss was passive.

Choice "b" is incorrect. Wolf's passive loss of $5,000 could not be reduced by his distributive share of

the partnership's "interest income" totaling $1,000. Interest income is considered "portfolio income,"

and neither the partnership nor a partner can offset it against passive losses.

Choice "d" is incorrect. No items of income or deduction from portfolio income or activities in which

the taxpayer materially participates may be combined or offset with passive losses unless the activity

generating the loss is completely disposed of in a taxable transaction.

"E" is correct. $1,250. The Moores itemized deductions in 1993 because such deductions were $1,450 in excess of the standard deduction. The amount of state taxes deducted in 1993 was $2,000, which (along with the fact that the Moores were not subject to alternative minimum tax, which may have reduced their tax benefit) indicates that the Moores received a tax benefit in 1993 from deducting the $1,250 state tax refund they received in 1994. The $1,250 is taxable in 1994.

Choice "c" is correct. $2,000.

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