[jeff]

Welcome to the Q1 2017 CPA Exam Study Group for REG. 🙂

[cpaMD86]

Where specifically are you getting caught up? I worked out the problem, from the way I see it, down below…I believe it's right?

Jones Tax Basis: (100,000 – 60,000) = 40,000
Carey Tax Basis: (20,000 + 30,000) – (20,000) = 30,000

Jones Gain Realized: (120,000 – 100,000) = 20,000
Carey Gain Realized: (40,000 – 20,0000) = 20,000

Jones Gain Recognized: 10,000 (Because he received 10,000 in Cash)
Carey Gain Recognized: 0

FAR: 9/3

[Teal]

Back in here after getting a 74….moving forward with the new test is going to be difficult. I am pretty bummed 🙁

FAR (66,68) Aug 26
REG (66) July 25
AUD (66) December 1st
BEC - October 3rd

[danko1983]

Question on this MCQ

Hark, CPA, failed to follow generally accepted auditing standards in auditing Long Corp.'s financial statements. Long's management had told Hark that the audited statements would be submitted to several banks to obtain financing. Relying on the statements, Third Bank gave Long a loan. Long defaulted on the loan. In a jurisdiction applying the Ultramares decision, if Third sues Hark, Hark will:

A.
win because there was no privity of contract between Hark and Third.

B.
lose because Hark knew that banks would be relying on the financial statements.

C.
win because Third was contributorily negligent in granting the loan.

D.
lose because Hark was negligent in performing the audit.

In a jurisdiction applying the Ultramares decision, if Third Bank sues Hark CPA, Hark will win because there was no privity of contract between Hark and Third. The key term is the Ultramares decision, referring to the landmark case of Ultramares Corporation v. Touche. In this case, the accountants were found guilty of negligence in performing an audit.

However, the court held that the accountant had no liability to third parties for ordinary negligence even though liability to third parties could be imposed for fraud or gross negligence. Many courts still follow the Ultramares rule that since there is no privity between a third-party user of an audited financial statement and the CPA firm, there is no cause of action by the third party against the CPA firm for negligence.

The Ultramares court ruled that even if a CPA firm knows that the audited financial statements are to be used by a creditor to make lending decisions, the third-party user lacks privity with the CPA firm and cannot recover for negligence.

Why is it not D and the answer is A? Is it assuming the minority view? They weren't in privity with them, however they were in a group of forseen users. I've seen so many questions up to this point that would say D and this has me thrown for a loop now of course, with my test being Thursday and all.

BEC - exp 2/28/13 (crap)
AUD - exp 11/30/13

[cpaMD86]

The reason it's not D is because of the Ultramares reference. Under Ultramares, simple negligence is not enough.
Hark was only in privity of contract with the client, and not the users. Privity of contract would w/ Third would be required if Hark were to be held liable.

D. would be acceptable if the question did not reference the Ultramares case.

FAR: 9/3

[danko1983]

So then I assume if you see Ultramares referred to specifically assume minority view? Majority rule would say otherwise.

Side note, I wish I remembered to come on here more often. Darn ADHD just flat out makes me forget about things like this sometimes. Thank god I was diagnosed though, it's made all the difference in the world when it comes to the exams.

BEC - exp 2/28/13 (crap)
AUD - exp 11/30/13

[Nikki]

Can someone please clarify is social security included or excluded income?

[danko1983]

@nikki87 – up to 85% can be taxed. Single up to $25,000 and MFL $32,000 are tax free. Single at $34,000 and MFJ $44,000 are taxed at 85%. That's all I have in my notes so I'm guessing if they give you anything on it, it's one of those 2 scenarios.

BEC - exp 2/28/13 (crap)
AUD - exp 11/30/13

[CPYay]

Going off of memory here, so please forgive if I don't have the exact details.

I'm getting tripped up on the following sale of personal residence. The exclusion of gain is $250K for single and $500K for MFJ if lived in for 2 of last 5 years.

I had a problem where the person lived in it for 1 year out of 2 years. They moved due to employment. The gain on the property was $250K, so I said they had taxable income of $250K. The problem said this was incorrect and that there is an exception that will allow the taxpayer to deduct (in this instance) $125K (1 out of the 2 years they lived there).

So ok… noted. Then later on, I had a similar problem and guessed the $125K. This time, the answer was the full $250K was counted as income. Does anyone have the specifics for this rule? I'm sure there was a slight difference in the question, but I can't recall since these questions were a couple weeks apart.

[cpaMD86]

@CPYay

What you referenced in your first sentence is how I identify and follow the rule. No gain is recognized if they have lived in the home for 2 out of the last 5 years, 250k single and 500k MFJ.

I've also encountered the problem you mentioned that only allowed the 125k due to the person only living there 1 year, but don't recall any other similar problem.

I also recall an IRA related problem that was affected by thresholds. The married couple fell in between the 98k-118k AGI threshold for IRA contributions. So, because of this they were only allowed to contribute half, $5500k.

FAR: 9/3

[CPYay]

I recall that question too. It got me a couple of times. Some of these questions are pure evil haha

[CPASF1]

Can someone please explain, why we aren't using the donor's basis when calculating this problem since it's a related party transaction, Also, in a related party transaction, we are not allowed to calculate a loss right, in that case the answer would be just 0, right? : Thanks so much!

Gibson purchased stock with a fair market value of $14,000 from Gibson's adult child for $12,000. The child's cost basis in the stock at the date of sale was $16,000. Gibson sold the same stock to an unrelated party for $18,000. What is Gibson's recognized gain from the sale?

A.
$0

B.
$2,000

Incorrect C.
$4,000

D.
$6,000

[cpaMD86]

@CPASF1

Since it is a related party transaction, the child was unable to recognize the $2,000 loss from the sale. (16,000-14,000). The loss though can be used by Gibson within a subsequent sale. Gibson's basis is $12,000, his purchase price. So, when he sells the stock for $18,000 he realizes a $6,000 gain. He can offset this amount with the $2,000 loss the child was unable to use for a net gain of $4,000.

FAR: 9/3

[CPASF1]

Thanks cpaMD86!
could you please clear this one up for me too?
I picked 3000 gain, because I thought again that we use the donors basis, but when I looked at the explanation it says:
Because of the special situation in this gift, neither a gain nor a loss can be computed on the sale of this stock received as a gift. In this situation, the selling price is less than the basis for gain and more than the basis for loss”.

Is it 0 because it's a GIFT,and therefore because it's sold between the donor's basis (32000) and FMV (270000)

Dunn received 100 shares of stock as a gift from Dunn's grandparent. The stock cost Dunn's grandparent $32,000 and it was worth $27,000 at the time of the transfer to Dunn. Dunn sold the stock for $29,000. What amount of gain or loss should Dunn report from the sale of the stock?

[cpaMD86]

@CPASF1

Yes, no gain is recognized because it sold between the Adj. Basis and FMV. If it was sold at a gain you'd use the Adjusted basis; loss the FMV. Just look at it this way…the IRS wants to maximize your liability, so if you're going to sell it at a gain they're going to make sure and get the most they can get by making you use the adj basis.

FAR: 9/3

[CPASF1]

Thanks @cpaMD86!

[Author]

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