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AICPA CPA-Regulation Exam Questions
CPA Regulation (Page 5 )

Updated On: 24-Feb-2026
Page 3 of 15
PDF with 69 Questions

Darr, an employee of ABC corporation, is not a shareholder. Which of the following would be included in a taxpayer's gross income?

  1. Employer-provided medical insurance coverage under a health plan.
  2. A $10,000 gift from the taxpayer's grandparents.
  3. The fair market value of land that the taxpayer inherited from an uncle.
  4. The dividend income on shares of stock that the taxpayer received for services rendered.

Answer(s): D

Explanation:

Choice "d" is correct. An individual receiving common stock for services rendered must recognize the fair market value as ordinary income. Any dividends received on that stock would also result in income recognition. Choice "a" is incorrect. Employer-provided medical insurance is a tax-free fringe benefit.
Choices "b" and "c" are incorrect. Gifts and inheritances are both tax-free to the recipient. (Remember tax is often paid by the person giving the gift or the estate at death.)



Adams owns a second residence that is used for both personal and rental purposes. During 2001,
Adams used the second residence for 50 days and rented the residence for 200 days. Which of the following statements is correct?

  1. Depreciation may not be deducted on the property under any circumstances.
  2. A rental loss may be deducted if rental-related expenses exceed rental income.
  3. Utilities and maintenance on the property must be divided between personal and rental use.
  4. All mortgage interest and taxes on the property will be deducted to determine the property's net income or loss.

Answer(s): C

Explanation:

Choice "c" is correct. Because the second property was personally used more than 14 days, any net loss from the rental of the property will be disallowed.
All related expenses must be prorated between the personal use portion and the rental activity portion. Prorated depreciation is permitted for the rental activity.



Baum, an unmarried optometrist and sole proprietor of Optics, buys and maintains a supply of eyeglasses and frames to sell in the ordinary course of business. In 1999, Optics had $350,000 in gross business receipts and its year-end inventory was not subject to the uniform capitalization rules. Baum's 1999 adjusted gross income was $90,000 and Baum qualified to itemize deductions. During 1999, Baum recorded the following information: Business expenses:



What amount should Baum report as 1999 net earnings from self-employment?

  1. $243,250
  2. $252,000
  3. $273,000
  4. $281,750

Answer(s): D

Explanation:

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:


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.



On December 1, 1997, Krest, a self-employed cash basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30, 1998. Krest paid the entire interest amount of $24,000 on December 1, 1997. What amount of interest was deductible on Krest's 1997 income tax return?

  1. $0
  2. $2,000
  3. $22,000
  4. $24,000

Answer(s): B

Explanation:

Choice "b" is correct. Cash basis taxpayers deduct interest in the year paid or the year to which the interest relates, whichever is later. Even though all of the interest on this loan was paid on December 1, 1997, only the interest relating to December 1997 can be deducted in 1997. The question does not give an interest rate, but because the loan is to be repaid in a lump sum at maturity, 1/12 of the interest, or $2,000 applies to each month.

Choice "a" is incorrect. Because $2,000 of the interest relates to 1997, this amount is deductible in 1997. Choice "c" is incorrect. This is the amount that cannot be deducted until 1998, the year to which the interest relates. Be sure to read questions like this very carefully, because if you had simply misread the question as seeking the amount deductible in 1998, you would get the question wrong despite understanding the rule.

Choice "d" is incorrect. Cash basis taxpayers can deduct interest in the year paid or the year to which the interest relates, whichever is later, thus 11 months of the interest will not be deductible until 1998.



Which payment(s) is(are) included in a recipient's gross income?

I). Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree.
II). A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university.

  1. I only.
  2. II only.
  3. Both I and II.
  4. Neither I nor II.

Answer(s): C

Explanation:

Choice "c" is correct.

I. A payment to a student for a part-time teaching assignment is taxable income just as a payment for any other campus job would be. This is not a scholarship or fellowship.
II. There is no exclusion in the tax law for amounts paid to a degree candidate for participation in university- sponsored research.






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