[jeff]

Welcome to the Q2 2016 CPA Exam Study Group for REG.

Some BLITZ videos to help your exams: https://www.another71.com/ninja-blitz

Jeff Elliott, CPA (KS) | Another71 | NINJA CPA | NINJA CMA | NINJA CPE

[Spartans92]

For those that have purchased ninja are there a decent amount of C-corp questions on there? 3 days and I am still working on those C-corp questions in becker and not to mention I am struggling badly.. planning to get the Ninja MCQ to get extra practice later. Thanks.

BEC- PASS

[Anonymous]

re: the stolen warehouse receipts from last page

warehouse receipts and bills of lading are documents of title and are governed by UCC Article 7, not UCC Article 3 for Negotiable Instruments

Article 7-507 (https://www.law.cornell.edu/ucc/7/7-507) is “Warranties on Negotiation” and says the transferor warrants that the document is genuine, so the forgery would make the negotiation invalid? that's my guess anyway

[csvirk]

@Spartan There are about 115 questions in C-corp section.

FAR: 71, 77!
AUD: 69, 80
BEC: 72
REG: 84

[Spartans92]

Thanks csvirk!

BEC- PASS

[Just3Letters]

I got this question right just because I know that marketing is a normal business function that has to occur regardless of inventory. However, how is recruiting capitalized to inventory?

IRC Section 263A requires the capitalization of certain indirect costs related to inventory when a qualifying business is manufacturing tangible personal property. Which of the following costs is not required to be capitalized as part of this adjustment?

Correct A.
Marketing

B.
Recruiting

C.
Payroll

D.
Securities services

FAR- 81
REG- 81
BEC- Aug 22, 2016
AUD- TBD

[Anonymous]

All three of the other choices are examples of capitalizable service costs. Marketing is a deductible service cost (which are the marketing, selling, advertising type costs)

Recruiting is a capitalizable service cost under 263A because it is directly related to production/resale activities (e.g., recruiting and hiring factory workers)

looks like the question was taken straight from this part of 263A:

(iii) Examples of capitalizable service costs. Costs incurred in the following departments or functions are generally allocated among production or resale activities:

(A) The administration and coordination of production or resale activities (wherever performed in the business organization of the taxpayer).
(B) Personnel operations, including the cost of recruiting, hiring, relocating, assigning, and maintaining personnel records or employees.
(C) Purchasing operations, including purchasing materials and equipment, scheduling and coordinating delivery of materials and equipment to or from factories or job sites, and expediting and follow-up.
(D) Materials handling and warehousing and storage operations.
(E) Accounting and data services operations, including, for example, cost accounting, accounts payable, disbursements, and payroll functions (but excluding accounts receivable and customer billing functions).
(F) Data processing.
(G) Security services.
(H) Legal services.

(iv) Examples of deductible service costs. Costs incurred in the following departments or functions are not generally allocated to production or resale activities:

(A) Departments or functions responsible for overall management of the taxpayer or for setting overall policy for all of the taxpayer's activities or trades or businesses, such as the board of directors (including their immediate staff), and the chief executive, financial, accounting, and legal officers (including their immediate staff) of the taxpayer, provided that no substantial part of the cost of such departments or functions benefits a particular production or resale activity.
(B) Strategic business planning.
(C) General financial accounting.
(D) General financial planning (including general budgeting) and financial management (including bank relations and cash management).
(E) Personnel policy (such as establishing and managing personnel policy in general; developing wage, salary, and benefit policies; developing employee training programs unrelated to particular production or resale activities; negotiating with labor unions; and maintaining relations with retired workers).
(F) Quality control policy.
(G) Safety engineering policy.
(H) Insurance or risk management policy (but not including bid or performance bonds or insurance related to activities associated with property produced or property acquired for resale).
(I) Environmental management policy (except to the extent that the costs of any system or procedure benefits a particular production or resale activity).
(J) General economic analysis and forecasting.
(K) Internal audit.
(L) Shareholder, public, and industrial relations.
(M) Tax services.
(N) Marketing, selling, or advertising.

[Just3Letters]

Thanks Dr Cash a Milli!

I guess I just thought recruiting sounded very unrelated but I get it if they are recruiting for the people creating the inventory!

Another one:

I typically think for these types of problems, you only have to prove that you are harmed to win a lawsuit for negligence. I think this is the first time I've seen where you actually have to prove negligence. Correct answer is C. But why?

Beckler & Associates, CPAs, audited and gave an unmodified opinion on the financial statements of Queen Co. The financial statements contained misstatements that resulted in a material overstatement of Queen's net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to recover for its losses associated with Queen's default. Which of the following must Mac prove in order to recover?

1. Beckler was negligent in conducting the audit.
2. Mac relied on the financial statements.

A.
I only

B.
II only

C.
Both I and II

Incorrect
Neither I nor II

FAR- 81
REG- 81
BEC- Aug 22, 2016
AUD- TBD

[Bear-Bear]

Hi, I'm Bear-Bear, and I'm tired of studying.

[CPA2BEE]

@Just3

I know that problem and the wording of it really sucks. Choice I is correct because in this case, Mac (the 3rd party) is suing Beckler for negligence, therefore that must be proven to be successful in the case. Choice II is correct because in negligence cases 3rd parties must prove reliance, but a CPA's client does not have to prove reliance if they are suing for negligence as privity is assumed in the contract between the CPA and client.

So what needs to be proved to be successful in a negligence case is a bit different for 3rd parties vs. clients

FAR - 80
AUD - 82
BEC - 80
REG - 85

ETHICS - 90
EXPERIENCE - COMPLETE
Application for California license mailed 8/4/2016

[csvirk]

Danielson invested $2 million in DEC, a qualified small business corporation. Six years later, Danielson sold all of the DEC stock for $16 million and purchased an office building with the proceeds. Danielson had not previously excluded any gain on the sale of small business stock. What is Danielson's taxable gain after the exclusion?

A.
$0

Incorrect B.
$6 million

C.
$7 million

D.
$9 million

Correct answer is C. What is the concept behind this question.

FAR: 71, 77!
AUD: 69, 80
BEC: 72
REG: 84

[CPA2BEE]

Only 50% of the gain is taxable after the exclusion.

16 mil – 2 mil = 14 mil x 50% = $ 7 mil gain

FAR - 80
AUD - 82
BEC - 80
REG - 85

ETHICS - 90
EXPERIENCE - COMPLETE
Application for California license mailed 8/4/2016

[csvirk]

@CPA2BEE Thank you. here is another one.

In the current year Tantrum exchanged farmland for an office building. The farmland had a basis of $240,000, a fair market value (FMV) of $390,000, and was encumbered by a $110,000 mortgage. The office building had an FMV of $340,000 and was encumbered by a $60,000 mortgage. Each party assumed the other’s mortgage. What is the amount of Tantrum’s recognized gain?

A.
$0

Correct B.
$50,000

C.
$100,000

D.
$150,000

I got the answer correct by subtracting 120-70. what is the concept here?

FAR: 71, 77!
AUD: 69, 80
BEC: 72
REG: 84

[Just3Letters]

Csvrik, that is just a like-kind exchange. Realty for Realty. In like-kind exchanges, the only taxable portion is any boot received. The boot in this case is the net subtraction in mortgage that Tantrum experiences. Tantrum had 110,000 mortgage but gave that up in exchange for a 60,000 mortgage. The difference is boot because it is an additional piece of the exchange. That amount is 50,000

🙂

FAR- 81
REG- 81
BEC- Aug 22, 2016
AUD- TBD

[CPA2BEE]

For like-kind exchanges the recognized is the lesser of the realized gain or boot received in the transaction. You must calculate both the realized gain and boot received, then take the lesser amount as gain recognized. Liability relief is considered boot and is netted to the amount taken on by the new property to calculate boot.

Gain realized = 340,000 FMV building + 110,000 liability relief – 240,000 farmland basis – 60,000 liability taken on = $150,000

Boot received = 110,000 liability relief – 60,000 liability taken on = $50,000

Gain recognized = $50,000 = the lesser of the two options above

FAR - 80
AUD - 82
BEC - 80
REG - 85

ETHICS - 90
EXPERIENCE - COMPLETE
Application for California license mailed 8/4/2016

[Just3Letters]

General question that's been bugging me for about 6 weeks…

So schedule A has a deduction for Mortgage/Equity interest and there is an AMT adjustment for Mortgage interest right….

So am I correct that the Schedule A deduction is for mortgage interest related to the home or additions (equity stuff) and the AMT adjustment is for non-mortgage/equity stuff (example: you take out home equity loan to buy a ninja sword)

Is this the correct distinction between the two?

FAR- 81
REG- 81
BEC- Aug 22, 2016
AUD- TBD

[Author]

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