1.A few years ago, Howard had invested heavily during the real-estate boom. Highly leveraged, he
was unable to make all his debt service payments and recently lost a substantial parcel of land in a
bank foreclosure proceeding. For income tax purposes, Howard is likely indifferent if the underlying
debt was recourse or non-recourse under the applicable state law.
A)True
B)False
2.Susan and Harold, both calendar year taxpayers, were legally married on February 15, 2016. As they
married before the due date of the 2015 tax return (April 18, 2016), they can elect to file married
filing jointly for the tax year ended December 31, 2015.
A)True
B)False
3.The individual alternative minimum tax, while intended to target wealthy individuals with many
investments in tax shelters, can also apply to middle class families with several children.
A)True
B)False
4.Ted received a distribution with respect to his KnightCo. stock of $50,000. The corporation had
neither accumulated nor current earnings and profits. Ted is entitled to recover his basis before he
reports any gain or income because of the distribution.
A)True
B)False
5.After a nontaxable exchange, the deferred gains and losses are usually recognized when the qualifying
property is sold.
A)True
B)False
6.When boot is given in a qualifying like-kind exchange, with respect to the taxpayer giving the boot,
the FMV of the boot is added to the basis of the old property to determine the basis of the new
property.
A)True
B)False
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 1
7.When Stan started his new Big 4 accounting job, he purchased a new automobile. He also sold his
old ASU commuter vehicle (a real mess) through Craig's List for a substantial loss. Losses realized
on the sale of personal use assets, such as Stan's old automobile, are deductible.
A)True
B)False
8.When forming a partnership, in order for the transaction to be tax-deferred, the transferors of
property must own at least 80% of the capital interests in the partnership immediately after the
transfer.
A)True
B)False
9.Charlie is single and provides 95% of the financial support for his dependent mother, Angela, who
lives with Charlie. The other 5% of Angela's support comes from Social Security payments, her only
source of funds. Charlie's filing status is head of household.
A)True
B)False
10.A review of the balance sheet of a corporate taxpayer shows gross assets of $12 million. As this
figure is less than $15 million, the taxpayer is permitted to prepare and file Schedule M-1 in lieu of
Schedule M-3 to Form 1120.
A)True
B)False
11.Mistletoe, Inc. a calendar year taxpayer, incorporated and began business on December 24, 2015.
On February 20, 2016, the four shareholders, Holly, Ivy, Rudolph and Kris, all agreed to elect to be
taxed as an S corporation. As the S election was made prior to the 15th day of the third month of the
current tax year, it will be effective retroactively to include the short taxable year ended December
31, 2015.
A)True
B)False
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 2
12.The federal tax law considers the member corporations of an affiliated group to be a single entity for
federal tax purposes. An example of this is the requirement to share the 15% tax bracket.
A)True
B)False
13.ThunderStick, Inc. is a domestic manufacturer of golf equipment. For its 2015 tax year,
ThunderStick properly computed a domestic production activity deduction (§199) of $1,230,000.
This amount is a permanent difference for purposes of ThunderStick's ASC 740/SFAS 109
computations.
A)True
B)False
14.BigCo sold a large delivery truck at a loss and within 10 days, purchased a new delivery truck as a
replacement. The "wash sale" rules apply to such losses realized on sales of equipment.
A)True
B)False
15.To receive tax-deferred treatment when property is transferred to a corporation, the parties to the
transfer must own at least 50% of corporation's outstanding stock immediately after the transfer.
A)True
B)False
16.Jennifer exchanges a warehouse (subject to a mortgage of $500,000) with Bar X Corporation for an
office building (subject to a mortgage of $450,000). Jennifer's basis in the warehouse is $500,000 and
its FMV is $1,000,000. If the properties are traded subject to the mortgages (each assuming the
mortgage on the property received), Jennifer will recognize a gain of $50,000.
A)True
B)False
17.Most individual taxpayers use the standard deduction rather than itemizing.
A)True
B)False
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 3
18.An individual's taxable income is equal to adjusted gross income less exemptions and the larger of the
standard deduction or itemized deductions.
A)True
B)False
19.As a general rule, taxability of most fringe benefits is dependent on whether the recipient-worker is
an employee of a corporation, a partner in a partnership, a shareholder in an S corporation, or self-
employed.
A)True
B)False
20.The FICA taxes authorized by the Federal Insurance Contribution Act will be imposed upon all of the
employee's wages for the year.
A)True
B)False
21.For calendar 2015, Stephanie (age 42 and unmarried) had the following tax information:
Wages
$65,000
Itemized deductions
3,350
Stephanie also provided about 80% of the support for her elderly aunt Emily who had no gross
income. Due to health concerns, Emily did not live with Stephanie but instead lived in an assisted
living facility (state and federal aid to the elderly paid for Emily's medical care at the facility - the
other 20% of her support). Given these facts, Stephanie's taxable income for the year is: (Note - use
your textbook/slides to obtain any relevant figures for this problem. On the final, any such figures
will be provided in a table, etc.).
A)$61,000
B)$54,700
C)$53,650
D)$50,700
E) $65,000
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 4
22.Which of the following is one of the primary legal characteristics of the corporate form of business?
A)The management of the business is centered in a Board of Directors elected by the owner-
shareholders.
B)A shareholder must seek permission to sell his stock.
C)The life of the corporation will terminate when a majority of the shareholders die or cease to
exist.
D)A shareholder is personally liable for the debts of the corporation.
23.Which of the following statements is true, assuming that the corporation has a 34% marginal tax rate
(MTR) at all times?
A)Jacky, Inc. borrowed $ 500,000 and paid interest of $48,000; the after-tax cost of the interest
paid was $31,680.
B)Jacky, Inc issued 1,000 shares of 7%, $100 par preferred stock for $100,000. The after-tax cost
of the $7,000 in dividends paid was $4,620.
C)Jacky, Inc issued 1,000 shares of 7%, $100 par preferred stock for $100,000. The after-tax cost
of the $7,000 in dividends paid was $2,380.
D)Jacky, Inc. borrowed $500,000. The interest cost on such borrowing was $48,000; the after-tax
cost of the interest paid was $16,320.
E) All of these statements are false.
24.Which of the following statements concerning the differences in operating a business as a partnership
or as an S corporation is true?
A)The S corporation form offers greater flexibility in allocating the income or loss among the
owners.
B)The owners of an S corporation have unlimited personal liability for the debts of the business.
C)The owners of a general partnership have unlimited personal liability for the debts of the
business.
D)All of the above are true statements.
25.Which of the following is a true statement for a corporate taxpayer?
A)Capital losses can be deducted only to the extent of capital gains plus $3,000.
B)Net capital losses can be carried back three years and forward five.
C)Net capital losses can be deducted against ordinary income.
D)Net capital gains are taxed at a preferential rate not to exceed 15%.
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 5
26.Leo died on August 23, 2014, and his wife Greenlee did not remarry. During 2014 and 2015, their
daughter Erica lived with Greenlee in the family home in Peoria. Erica was a full-time student at
ASU West and had no gross income in either year. She took all her meals at home (aside from the
occasional Starbucks at Fletcher) and received a monthly stipend from Greenlee to cover
miscellaneous educational expenses not covered by her tuition, which is also paid by Greenlee. Erica
turned 26 in 2015. Which of the following statements correctly describes Greenlee's filing status in
2015?
A)Surviving Spouse
B)Married Filing Deceased
C)Head of Household
D)Single
27.Mandrake, Inc. has book income of $569,300. This includes a bad debt expense, determined by the
allowance method of $50,700. Actual write offs this year were $48,000. What amount of taxable
income would be shown on the Schedule M-1?
A)$ 569,300
B)$ 572,000
C)$ 566,600
D)$ 528,600
28.MegaCo. is a calendar year corporate taxpayer. A review of the Form 1120 working papers reveals
the following information:
Using the above information, compute Net Book Income. (on the actual final, you would need to
show your work for a problem like this):
A)$15,026,000
B)$10,965,000
C)$10,290,000
D)$10,212,000
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 6
Political Contributions 120,000
Dividends Received Deduction 100,000
Charitable Contribution Carryforward Deduction. 78,000
Net Taxable Income 12,658,000
Depreciation - Tax > Book 1,654,000
Meals & Entertainment - (Book total) 1,350,000
Gain on asset sales - Tax > Book 3,265,000
Book Bad Debt Reserve Additions 890,000
Actual Bad Debts Written Off 750,000
29.Jerry's office was struck by lightning and equipment with a $300,000 adjusted tax basis was
destroyed. Within 2 months, Jerry received $390,000 from the insurance company. Jerry immediately
purchased qualifying replacement property for $450,000. What is his basis in the new equipment?
A)$ 450,000
B)$ 390,000
C)$ 360,000
D)$ 90,000
E) $ 300,000
30.Which of the following is a FALSE statement pertaining to S Corporations?
A)An S Corporation is a flow-through entity and generally does not pay tax at the corporate level.
B)The initial election to be taxed as an S corporation must be approved by shareholders owning at
least 50% of the corporation’s outstanding stock on the date of the election.
C)Items of corporate income and loss are allocated to shareholders in proportion to the percentage
of stock they own in the corporation.
D)An S corporation cannot have a partnership as a shareholder.
31.Greasy Spoon is a calendar year general partnership operating several fast-food outlets. The
following information is from its 2015 books and records:
Operating
Loss
$ 300,000
Liabilities -
Notes Payable, BigBank $ 30,000
Notes Payable, June Cross
$ 20,000
On January 1, 2015, June Cross (a calendar year individual) bought a 60% interest in Greasy Spoon
for $45,000. She then loaned the partnership $20,000 (the note shown above) on August 1, 2015.
How much of the operating loss may June deduct in her 2015 tax return? Ignore any possible "at
risk" or "passive activity" limitations in formulating your answer.
A)$ 57,000
B)$ 180,000
C)$ 65,000
D)$ 45,000
E) $ 75,000
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 7
32.Westside, Inc. owns 15% of Innsbrook's common stock. Innsbrook is a Utah corporation operating a
ski resort near Salt Lake City. During the current tax year, Westside had income before dividends of
$150,000 and received dividends from Innsbrook of $20,000. Westside's taxable income is
A)$ 156,000.
B)$ 166,000.
C)$ 150,000.
D)$ 154,000.
E) $ 164,000.
33.In a qualifying like-kind exchange, Adam exchanges equipment with an adjusted basis of $430,000
(fair market value of $400,000) for $3,000 in cash and other equipment. What is his basis in the new
equipment?
A)$ 430,000
B)$ 427,000
C)$ 400,000
D)$ 433,000
34.On January 21, 2011, Ron purchased 100 shares of Bad Company common stock for $54,500. Ron
sold all of the Bad Company stock on May 18, 2013 for $24,250. On June 30, 2013, Ron
repurchased 100 shares of Bad Company stock for $5,000. The new shares are sold on July 31, 2014
for $15,500. How much gain/loss does Ron recognize in 2013 with respect to the Bad Company
stock?
A)$ 9,750 loss
B)$ 11,250 loss
C)$ 10,500 gain
D)$ 30,250 loss
E) No gain or loss
35.Which of the following is true of a like-kind exchange?
A)Like-kind exchanges do not apply to exchanges of partnership interests even if they have the
same kind of underlying business.
B)Losses are recognized on a like-kind exchange even if boot is received.
C)All vehicles are not considered to be like kind even if used in a trade or business.
D)Virtually all types of business and investment real estate are not considered like kind.
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 8
36.The tax law is not neutral if a taxpayer receives 80% ownership in a corporation in exchange for
A)personal services.
B)cash.
C)screen rights to a famous novel.
D)machinery.
37.During the year, Elsa had taxable income of $10,000 before considering the following:
Schedule E $24,500
Schedule SE $ 3,748
What is her taxable income?
A)$ 34,500
B)$ 24,500
C)$ 30,752
D)$ 32,626
38.Which of the following taxpayers can't use the tax rates for married filing jointly in 2015?
A)Mr. Lane died on August 10, 2015. Mrs. Lane has not remarried and has no dependent children.
B)Mrs. Holden died on January 15, 2014. Mr. Holden has not remarried and maintains a home for
two dependent children.
C)Mr. and Mrs. West were legally divorced on December 21, 2015. Mrs. West has not remarried
and maintains a home for three dependent children.
D)All of the above taxpayers qualify for married filing jointly filing status.
39.John Montgomery is a limited partner in Red, White and Blue partnership. His Form 1040 shows a
profit of $65,000 from his interest in the partnership (taken from the Schedule K-1 John received
from Red, White and Blue). How much self-employment tax related to the partnership income will he
be able to deduct against his taxable income?
A)$ 9,184
B)$ 9,945
C)$ 4,592
D)$ -0-
E) $ 4,973
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 9
40.Jackie contributed $60,000 in cash to a partnership for a 50% interest. During the year the
partnership had a $200,000 net profit, made a $20,000 contribution to the United Way, and made
cash distribution (draw) to Jackie of $15,000. During the year, Jackie also received a $5,000
guaranteed payment from the partnership. Her basis in the partnership at year end is
A)$ 215,000
B)$ 85,000
C)$ 155,000
D)$ 110,000
E) $ 135,000
41.TJ owns 100% of the stock in an S corporation. Use the following information for the current tax
year to answer this question.
Ordinary income
$ 70,000
Dividend Income
$ 16,000
Cash distribution (not W2) $ 30,000
Salary income (W2) $ 25,000
TJ’s beginning basis
$ 8,700
In addition, the corporation borrowed $10,000 from The River Bank on September 1 of the current
tax year. TJ was required to personally guarantee the loan. What is TJ's tax basis in her stock on
December 31, after all adjustments?
A)$ 8,700
B)$ 66,600
C)$ 64,700
D)$ 89,700
E) $ 74,700
42.Short Answer - Briefly discuss the general rules for determining whether property qualifies for "like-
kind" tax deferred exchange treatment. Please include appropriate examples.
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 10
43.Short Answer - Heidi owns 10% of a partnership and 10% of a corporation. Heidi also owns a piece
of investment land (FMV = $450,000; basis = $145,000). Both the partnership and the corporation
would like to acquire the land in exchange for increasing Heidi's ownership to 50%. All other things
being equal, briefly evaluate the tax implications of the two potential transfers.
44.Short Answer - Mr. & Mrs. J. Jeffers have been married for thirty years. Mr. Jeffers is employed
outside the home. Mrs. Jeffers is a full-time homemaker/mother. The couple has three children living
with them - Debbie, Dick, and Denise. Debbie and Dick are the couple's natural children. Denise is
the daughter of Mr. Jeffers' first cousin, Deirdre. Deirdre is presently serving a prison sentence for
drug dealing. All three children received over one-half of their financial support from Mr. & Mrs.
Jeffers. Debbie is a 26-year-old full-time graduate student at a local university. She earned $6,400
from employment as a part-time waitress at Mel's Diner. Dick is a 17-year-old senior in high school.
He earned $7,000 from part-time employment at a local amusement park. Denise is a 6-year-old and
has no income. All taxpaying parties wish to select the most favorable filing status available to them.
Determine the filing status and the total number of exemptions applicable to each taxpayer listed for
the 2015 tax year (ignore Deirdre).
Taxpayer
Filing Status
# of Exemptions
Mr. & Mrs. Jeffers
Debbie
Dick
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 11
Answer Key
1.B
False
Response:
Howard should care. If the debt was recourse and the bank forgives any shortfall (e.g. - he is
otherwise insolvent), he may have CODI and ordinary income. If the debt was non-recourse, it is not
generally possible for him to recognize any CODI. The nature of the underlying debt can result in
very different tax consequences in this situation.
2.B
False
Response:
False - marital status is generally determined as of the last day of the tax year, namely
December 31 2015.
3.A
True
Response:
Often applies to middle class folk with many kids and no significant shelters.
4.A
True
Response:
A) Under the statutory scheme, distributions are first considered to be from current or accumulated earnings and profits,
and taxable as ordinary income to the extent thereof. Distributions exceeding earnings and profits are considered to be
a return of capital that is taxable only to the extent the distribution exceeds the shareholder’s basis.
5.A
True
Response:
Recall the common theme is these are deferral events, not for the most part permanent tax
exemptions.
6.A
True
7.B
False
Response:
Gains on sale are taxable but personal losses are not.
8.B
False
Response:
No 80% test under §721 (it is a 351 concept)
9.A
True
Response:
Angela's Social Security payments are not part of her gross income so she cannot exceed the
exemption amount. As Charlie can claim his Mother as a dependent and he maintains a household
for her, he qualifies as H of H..
10.B
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 12
False
Response:
Nope - the threshold above which M-3 is required is $10 million in gross assets. At $12 million, the
taxpayer is required to prepare the M-3, not the M-1.
11.B
False
Response:
S election made by 15th day of third month of current tax year is effective for current tax year - not
retroactive. Mistletoe will be taxed as a C corp. for the short period beginning 12/24/15 and ending
12/31/15. However, they can make an election with respect to the short tax year but it will have a
somewhat different due date (beyond our scope here).
12.A
True
Response:
Recall there are different types of affiliated groups - some are consolidated, others are brother/sister,
etc.
13.A
True
Response:
As there is no analog in GAAP for the §199 deduction, it is a permanent difference.
14.B
False
Response:
Wash sale rules (§1091) apply to stock or securities only - not equipment.
15.B
False
Response:
It's 80% or more of vote and value. This question refers to a §351 transaction.
16.A
True
Response:
Net the mortgages - the party with net debt relief (Jennifer) has boot.
17.A
True
Response:
A)Recent IRS stats show more than 66% use the standard deduction.
18.A
True
19.A
True
Response:
Recall the 2% shareholder rule for S corps....
20.B
False
Response:
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 13
Recall there is an annual wage cap for the Social Security portion of FICA - only the Medicare
portion of FICA is imposed on all wages.
21.D
$50,700
Response:
:
65,000 AGI
- 8,000 Exemptions (Stephanie and Emily)
- 6,300 Standard deduction (single - larger than itemized)
= $50,700
Not head of household unless dependent aunt lives with her - the outside the home rule only applies
to parents.
22.A
The management of the business is centered in a Board of Directors elected by the owner-
shareholders.
23.A
Jacky, Inc. borrowed $ 500,000 and paid interest of $48,000; the after-tax cost of the interest paid
was $31,680.
Response:
After Tax Cost associated with deductible interest expense (dividends are not deductible) is measured
by 1-the MTR. So 1- .34 = .66 * 48,000 = $31,680.
24.C
The owners of a general partnership have unlimited personal liability for the debts of the business.
Response:
A)Recall in an S corp income/loss is strictly allocated based on share holdings (no special allocations).
25.B
Net capital losses can be carried back three years and forward five.
26.A
Surviving Spouse
Response:
To be a surviving spouse, the taxpayer must have a dependent child living with her. As the daughter
has no income, her age/student status is not relevant so she can be claimed as a dependent child. You
have to think about this one and try not to jump to what appears a more obvious answer (just like in
the real world).
27.B
$ 572,000
Response:
Since $48,000 is allowed for tax, income is increased by $2,700.
28.C
$10,290,000
Response:
12,658,000+1,654,000-(50%*1,350,000)-3,265,000-890,000+750,000-120,000+100,000+78,000=
$10,290,000.
29.C
$ 360,000
Response:
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 14
Gain realized is $90,000; gain recognized is $-0-; gain deferred is $90,000. The purchase price of
$450,000 is reduced by $90,000 deferred. Another way to look at this is he spent $60,000 more than
what he received from the insurer ($450,000 - 390,000) so he can add that $60,000 to his old
(substituted) basis of $300,000 = $360,000.
30.B
The initial election to be taxed as an S corporation must be approved by shareholders owning at least
50% of the corporation’s outstanding stock on the date of the election.
Response:
Initial election must be unanimous (100%).
31.E
$ 75,000
Response:
For a general partner, basis includes a pro rata share of all debt. Therefore, June gets basis for her
cash and 60% of all the partnership debt. So her basis is $45,000 + (60% * 50,000) = $75,000. Her
60% share of the partnership loss is ($180,000) - however, her deductible loss is limited to her
partnership tax basis.
32.A
$ 156,000.
Response:
: Corporation is entitled to a 70% DRD, so income is $150,000 + 20,000-(70% * 20,000) =
$156,000.
33.B
$ 427,000
Response:
i) The FMV of the qualifying property received ($397,000) plus the loss not recognized ($30,000). -
or - ii) Basis in old equipment of $430,000 less boot received of $3,000. The value of the new
equipment ($397,000) must be the FMV of the old less the boot he receives (FMVs will match).
Note the receipt of the boot does not result in any gain recognition as there is an overall realized loss
on the deal.
34.D
$ 30,250 loss
Response:
: This is not a wash sale since the replacement stock was not acquired within +/- 30 days of the
original sale. $54,500 - $24,250.
35.A
Like-kind exchanges do not apply to exchanges of partnership interests even if they have the same
kind of underlying business.
36.A
personal services.
Response:
Services are not property
37.D
$ 32,626
Response:
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 15
: 10,000 + 24,500 - (50% * 3,748) = $32,626. One-half of self employment tax is a deduction for
AGI. Recall Schedule E pertains to income from rental properties, certain partnerships and/or
distributions from estates/trusts. Schedule SE is the computation of self-employment tax.
38.C
Mr. and Mrs. West were legally divorced on December 21, 2015. Mrs. West has not remarried and
maintains a home for three dependent children.
Response:
Mrs. West is a head of household for 2015.
39.C
$ 4,592
Response:
A limited partner is not liable for SE tax on his/her share of partnership earnings. Read the
questions carefully!
40.E
$ 135,000
Response:
: 60,000 + (200,000 * .50) - (20,000 x .5) - 15,000 = $135,000. As the guaranteed payment was
already deducted in arriving at partnership net income, you should ignore it in computing her tax
basis (don't double-count).
41.C
$ 64,700
Response:
: Beginning Basis 8,700 + 70,000 + 16,000 - 30,000 distribution. TJ receives no basis for the loan
even though she has personally guaranteed it. W-2 earnings already part of company net income so
don't double count.
42.There are two general rules for determining whether property qualifies for like-kind treatment. First,
both the property given up and the property received must be held by the taxpayer, either for
investment or in a trade or business. Second, the correct types of property must be given up and
received. Real estate can only be exchanged for real estate. The rules for exchanging equipment are
even more restrictive and follow a detailed classification system. A reference to Rev Proc 87-56 here
is a plus!
43.Heidi will have a realized gain of $305,000 on either transfer ($450,000 -$145,000). Only the transfer
to the partnership will receive deferral of gain recognition under IRC §721. To defer gain on
transfers to a corporation, §351 requires the parties to the property transfer must have 80% control
immediately after the transfer. As described, Heidi is the only transferor of property so she will not
satisfy the 80% test.
44. The Jeffers: MFJ and 4 exemptions (they can't claim Debbie but can claim Dick and Denise + the
couple gets 2). Debbie is not a "qualifying child" as since she is > 24, she must be meet the gross
income test (for 2015, income must be less than $4,000). Again, being a full-time student doesn't
really help due to her age (the gross income test is not waived at this point).
Debbie: Single and 1 exemption. She is on her own at this point.
Dick: Single and 0 exemption (dependency exemption claimed by his parents but he must still file a
return to report his income). His gross income does not prevent his parents from claiming his as a
dependent as his is still a qualifying child (under 19).
Denise: no filing requirement (no income)
ACC 430 - Spring 2016 (LEC 15314 - West) Practice Final Exam - New Material Only Page 16
