[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

[Just3Letters]

This question is the epitome of why I hate REG:

Mock operates a retail business selling illegal narcotic substances. Which of the following items may Mock deduct in calculating business income?

i. Cost of merchandise
ii. Business expenses other than the cost of merchandise

The answer is Cost of Merchandise. How the hell do you deduct any expenses related to an illegal business. This is saying that you can deduct expenses for cocaine!!!

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

[csvirk]

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?

Correct A.
$0

B.
$2,000 gain

C.
$3,000 gain

D.
$3,000 loss

there was no mathematical explanation for this question. please help

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

[Spartans92]

LOL Just3, any gain from illegal activities is considered income. Therefore, to calculate gains/losses u need to know the cost of the product. Whereas other business expenses other than cost of merchandise is irrelevant.

Note: this was what caused Al Capone to land in jail 🙂

BEC- PASS

[csvirk]

@just3 As per IRS you can only deduct cost of inventory if you have illegal drug business. Other expenses are not allowed to deduct if the business is illegal.

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

[Spartans92]

Csvirk, I thought it would be a loss of 3k. Ugh. Is it because it was a gift? This is driving me nuts.

BEC- PASS

[csvirk]

@Spartan I have no idea. As per explanation this is a sepical case and thats why its zero. I am lost!

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

[csvirk]

Here what i found after a google search,
“Choice “a” is correct. To determine the amount of gain or loss that should be reported on the sale of gifted property, a determination must be made as to whether the property is sold at a gain or a loss. The stock in this question has a $27,000 value which is less than its $32,000 cost.The basis for gain is the adjusted basis of the donor on the date of gift,or $32,000. However, the stock is sold for $29,000, which is not at again. The basis for loss is the lower of the adjusted basis or the fair market value on the date of gift, or $27,000. However, the stock is not sold at a loss. In this situation, neither gain nor loss is recognized, and the “middle” basis of the subsequent sales price is used”

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

[Spartans92]

Ugh..I have no idea what that whole explanation is saying LMAO! Anyone can simplify it would be awesome! HAHA

BEC- PASS

[Bear-Bear]

I'm glad that's not confusing or anything!

[Anonymous]

here's a little chart i made to help visualize G/L when the gift has a lower FMV than the donor's basis at the date of the gift:

Sell higher → Use “Donor’s Basis” to determine gain
————————————————————
Donor’s Basis
————————————————————
Sell Between → No Gain/Loss
————————————————————
Lower FMV at date of gift
————————————————————
Sell lower → Use “Lower FMV at date of gift” to determine loss

[CPA2BEE]

@Dr Cash that is a nice summary, very helpful

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

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

[csvirk]

@CPA2BEE I can see you are retaking the exam. Was the time enough when you took the exam? 3 hours seems less to me.

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

[CPA2BEE]

@csvirk The time was definitely enough. I think I left 1 hr 45 mins for the SIMS and finished with about 10 mins left. BUT, note that I spent literally 45 mins on the research question alone – would not advise this but I had the time to do it and even if I would've spent less time on it, I don't know if changing any of my posted answers would've improved my score any more. So having said all that, had I spent normal time on the research, I prob couldve finished with 30 mins or so to spare. I think there is plenty of time for this test.

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

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

[InkedAcct]

In response to the illegal drug deduction. I did some additional digging and it is common for people who are caught to expense only the cost of good sold from the illegal activity, the government then taxes the income before it is seized.

[CPA2BEE]

Its a nice little way of the government taking their piece of your illegal pie, and then coming back for seconds and eating the whole pie!

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

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

[Author]

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