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Northville Products is changing its credit terms from net 30 to 2/10, net 30. The least likely effect of this change would be a(n)

  • A. Increase in sales.
  • B. Shortening of the cash conversion cycle.
  • C. Increase in short-term borrowings.
  • D. Lower number of days sales outstanding
  • Correct Answer: Option
    Answer (C) is correct. Changing its credit terms to encourage earlier payment by customers increases the firms cash flow and decreases the need for short-term borrowing.

Clauson, Inc., grants credit terms of 1/15, net 30 and projects gross credit sales for the year of $2,000,000. The credit manager estimates that 40% of customers pay on the 15th day, 40% on the 30th day, and 20% on the 45th day. Assuming uniform sales and a 360-day year, what is the projected amount of overdue receivables?

  • A. $50,000
  • B. $16,667
  • C. $150,000
  • D. $400,000
  • Correct Answer: Option
    Answer (A) is correct. The total amount of sales overdue at any time during the year is $400,000 ($2,000,000 gross credit sales 20% received after 30 days). The average collection period for these sales is 45 days. The projected amount of overdue receivables is therefore $50,000 [$400,000 (45 days 360 days)].

Hest Computers believes that its collection costs could be reduced through modification of collection procedures. This action is expected to result in a lengthening of the average collection period from 30 to 35 days; however, there will be no change in uncollectible accounts, or in total credit sales. Furthermore, the variable cost ratio is 60%, the opportunity cost of a longer collection period is assumed to be negligible, the companys budgeted credit sales for the coming year are $45,000,000, and the required rate of return is 6%. To justify changes in collection procedures, the minimum annual reduction of costs (using a 360-day year and ignoring taxes) must be

  • A. $22,500
  • B. $37,500
  • C. $125,000
  • D. $375,000
  • Correct Answer: Option
    Answer (A) is correct. If the change is adopted, Hests average balance in receivables will increase by $625,000 {$45,000,000 [(35 days 30 days 360 days }. The companys additional required investment in receivables is therefore $375,000 ($625,000 60% variable cost ratio), and the incremental pretax cost of this investment is $22,500 ($375,000 6%). Accordingly, the collection costs must be reduced by a pretax minimum of $22,500 to offset the cost of the increased investment in receivables.

Best Computers believes that its collection costs could be reduced through modification of collection procedures. This action is expected to result in a lengthening of the average collection period from 28 days to 34 days; however, there will be no change in uncollectible accounts. The companys budgeted credit sales for the coming year are $27,000,000, and short-term interest rates are expected to average 8%. To make the changes in collection procedures cost beneficial, the minimum savings in collection costs (using a 360-day year) for the coming year would have to be

  • A. $30,000
  • B. $36,000
  • C. $180,000
  • D. $360,000
  • Correct Answer: Option
    Answer (B) is correct. If the change is adopted, Best average balance in receivables will increase by $450,000 {$27,000,000 [(34 days 28 days) 360 days]}. The minimum savings that Best must experience to justify the change is therefore $36,000 ($450,000 8%) .

Parkison Company can increase annual sales by $150,000 if it sells to a new, riskier group of customers. The uncollectible accounts expense is expected to be 16% of sales, and collection costs will be 4 . The companys manufacturing and selling expenses are 75 of sales, and its effective tax rate is 38%. If Parkison accepts this opportunity, its after-tax income will increase by

  • A. $2,850
  • B. $4,650
  • C. $7,500
  • D. $8,370
  • Correct Answer: Option
    Answer (B) is correct. The companys manufacturing and selling costs exclusive of bad debts equal 75 of sales. Hence, the gross profit on the $150,000 increase in sales will be $37,500 ($150,000 25%). The increase in after-tax profit is calculated as follows: Increase in gross profit $37,500 Less: uncollectible accounts ($150,000 16%) (24,000 Less: collection costs ($150,000 4%) (6,000) Increase in pre-tax income $ 7,500 Less: income tax expense ($7,500 38%) (2,850) Increase in after-tax income $ 4,650

Lawson Company has the opportunity to increase annual sales by $100,000 by selling to a new, riskier group of customers. Based on sales, the uncollectible expense is expected to be 15 , and collection costs will be 5 . The companys manufacturing and selling expenses are 70% of sales, and its effective tax rate is 40%. If Lawson accepts this opportunity, the companys after-tax profit will increase by

  • A. $4,000
  • B. $6,000
  • C. $9,000
  • D. $10,000
  • Correct Answer: Option
    Answer (B) is correct. The company manufacturing and selling costs exclusive of bad debts equal 70 of sales. Hence, the gross profit on the $100,000 increase in sales will be $30,000 ($100,000 30%). The increase in after-tax profit is calculated as follows: Increase in gross profit $30,000 Less: uncollectible accounts ($100,000 15%) (15,000 Less: collection costs ($100,000 5%) (5,000) Increase in pre-tax income $10,000 Less: income tax expense ($10,000 40%) (4,000) Increase in after-tax income $ 6,000

Yonder Motors sells 20,000 automobiles per year for $25,000 each. The firms average receivables are $30,000,000 and average inventory is $40,000,000. Yonders average collection period is closest to which one of the following? Assume a 365-day year.

  • A. 17 days.
  • B. 22 days.
  • C. 29 days.
  • D. 61 days.
  • Correct Answer: Option
    Answer (B) is correct. The average collection period, also called the days sales outstanding in receivables, is calculated as the number of days in the year over the receivables turnover ratio. Yonder can be thus calculated as follows: Average collection period = Days in year Accounts receivable turnover = 365 (Net credit sales Average net receivables) = 365 [(20,000 $25,000) $30,000,000] = 365 ($500,000,000 $30,000,000) = 365 16.667 = 21.9 days

Flyn Companys budgeted sales for the coming year are expected to be $50,000,000, of which 75% are expected to be credit sales at terms of n/30. Flyn estimates that a proposed relaxation of credit standards will increase credit sales by 25% and increase the average collection period from 20 days to 30 days. Based on a 360-day year, the proposed relaxation of credit standards will result in an expected increase in the average accounts receivable balance of

  • A. $520,833
  • B. $1,822,917
  • C. $2,083,333
  • D. $3,906,250
  • Correct Answer: Option
    Answer (B) is correct. Projected credit sales for the year under the old credit policy were $37,500,000 ($50,000,000 75%), resulting in an average balance in receivables of $2,083,333 [$37,500,000 (20 days 360 days)]. Under the new policy, credit sales will be $46,875,000 ($37,500,000 1.25), resulting in an average receivables balance of $3,906,250 [$46,875,000 (30 days 360 days)]. Hence, the expected increase in the balance is $1,822,917 ($3,906,250 $2,083,333 .

A company plans to tighten its credit policy. The new policy will decrease the average number of days in collection from 75 to 50 days and will reduce the ratio of credit sales to total revenue from 70% to 60%. The company estimates that projected sales will be 5% less if the proposed new credit policy is implemented. If projected sales for the coming year are $50 million, calculate the dollar impact on accounts receivable of this proposed change in credit policy. Assume a 360-day year.

  • A. $6,500,000 decrease.
  • B. $3,819,445 decrease.
  • C. $3,333,334 decrease.
  • D. $18,749,778 increase.
  • Correct Answer: Option
    Answer (C) is correct. Projected credit sales for the year under the old credit policy were $35 million ($50,000,000 70%). The level of average receivables was calculated as follows: Receivables turnover = Days in year Average collection period = 360 days 75 days = 4.8 times per year Average receivables = Net credit sales Receivables turnover = $35,000,000 4.8 times = $7,291,667 Under the new policy, total sales will be $47.5 million ($50,000,000 95%), and credit sales will be $28.5 million ($47,500,000 60%). The new level of average receivables is calculated as follows: Receivables turnover = Days in year Average collection period = 360 days 50 days = 7.2 times per year Average receivables = Net credit sales Receivables turnover = $28,500,000 7.2 times = $3,958,333 The average receivables balance will therefore be reduced by $3,333,334 ($7,291,667 $3,958,333 .

Dartmoor Companys budgeted sales for the coming year are $40,500,000, of which 80 are expected to be credit sales at terms of n/30. Dartmoor estimates that a proposed relaxation of credit standards will increase credit sales by 20% and increase the average collection period from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit standards will result in an expected increase in the average accounts receivable balance of

  • A. $540,000
  • B. $900,000
  • C. $1,620,000
  • D. $2,700,000
  • Correct Answer: Option
    Answer (C) is correct. Projected credit sales for the year under the old credit policy were $32,400,000 ($40,500,000 80%). The projected average balance in receivables was therefore $2,700,000 [$32,400,000 (30 days 360 days)]. Under the new policy, projected credit sales will be $38,880,000 ($32,400,000 1.2), resulting in a new average receivables balance of $4,320,000 [$38,880,000 (40 days 360 days)]. Hence, the expected increase in the balance is $1,620,000 ($4,320,000 $2,700,000 .

A firm averages $4,000 in sales per day and is paid, on an average, within 30 days of the sale. After they receive their invoice, 55% of the customers pay by check, while the remaining 45% pay by credit card. Approximately how much would the company show in accounts receivable on its balance sheet on any given date?

  • A. $4,000
  • B. $48,000
  • C. $54,000
  • D. $120,000
  • Correct Answer: Option
    Answer (D) is correct. The average balance of receivables is $120,000 ($4,000 30 days). Whether customers pay by credit card or check, collection requires 30 days.

Jackson Distributors sells to retail stores on credit terms of 2/10, net 30. Daily sales average 150 units at a price of $300 each. All sales are on credit and 60% of customers take the discount and pay on day 10 while the rest of the customers pay on day 30. The amount of Jacksons accounts receivable that is paid within the discount period is

  • A. $1,350,000
  • B. $990,000
  • C. $900,000
  • D. $810,000
  • Correct Answer: Option
    Answer (D) is correct. The firm has daily sales of $45,000 consisting of 150 units at $300 each. For 30 days, sales total $1,350,000. Of these sales, 40%, or $540,000 ($1,350,000 40%), will be uncollected because customers do not take their discounts. The remaining $810,000 ($1,350,000 60%) will be paid within the discount period.

The one item listed below that would warrant the least amount of consideration in credit and collection policy decisions is the

  • A. Quality of accounts accepted.
  • B. Quantity discount given.
  • C. Cash discount given.
  • D. Level of collection expenditures.
  • Correct Answer: Option
    Answer (B) is correct. A quantity discount is an attempt to increase sales by reducing the unit price on bulk purchases. It concerns only the price term of an agreement, not the credit term, and thus is unrelated to credit and collection policy.

Which one of the following statements is most likely to be true if a seller extends credit to a purchaser for a period of time longer than the purchasers operating cycle? The seller

  • A. Will have a lower level of accounts receivable than those companies whose credit period is shorter than the purchasers operating cycle.
  • B. Is, in effect, financing more than just the purchasers inventory needs.
  • C. Can be certain that the purchaser will be able to convert the inventory into cash before payment is due.
  • D. Has no need for a stated discount rate or credit period.
  • Correct Answer: Option
    Answer (B) is correct. The normal operating cycle is the period from the acquisition of inventory to the collection of the account receivable. If trade credit is for a period longer than the normal operating cycle, the seller must be financing more than just the purchase of inventory.

Vince, Inc. has developed and patented a new laser disc reading device that will be marketed internationally. Which of the following factors should Vince consider in pricing the device? I. Quality of the new device. II. Life of the new device. III. Customers’ relative preference for quality compared to price.

  • A. I and II only
  • B. I and III only
  • C. II and III only
  • D. I, II, and III
  • Correct Answer: Option
    (d) To determine the price at which expected product sales will yield the greatest profits, many factors such as customer preferences, competitors’ reactions, cost structures, etc. must be considered. A customer’s perception of the quality and durability (life) of a product affects how much s/he is willing to pay for that product. However, in some cases a customer may prefer to pay less money and receive a product of lesser quality. Therefore, Vince should consider the quality and life of the new device as well as customers’ relative preference for quality compared to price.

Briar Co. signed a government construction contract providing for a formula price of actual cost plus 10%. In addition, Briar was to receive one-half of any savings resulting from the formula price being less than the target price of $2,200,000. Briar’s actual costs incurred were $1,920,000. How much should Briar receive from the contract?

  • A. $2,060,000
  • B. $2,112,000
  • C. $2,156,000
  • D. $2,200,000
  • Correct Answer: Option
    (c) The requirement is to determine the amount that Briar should receive from the contract. This amount can be computed as follows: Actual costs incurred $1,920,000 Multiply by 110% (cost + 10%) × 1.10 Formula price $2,112,000 The target price of $2,200,000 exceeds the formula price of $2,112,000 by $88,000. Briar is to receive 50% of this amount, or $44,000, in addition to the formula price. Therefore, Briar is to receive a total of $2,156,000 ($2,112,000 + $44,000).

To qualify as an exempt organization other than a church or an employees qualified pension or profit-sharing trust, the applicant

  • A. Cannot operate under the lodge system under which payments are made to its members for sick benefits.
  • B. Need not be specifically identified as one of the classes on which exemption is conferred by the Internal Revenue Code, provided that the organizations purposes and activities are of a nonprofit nature.
  • C. Is barred from incorporating and issuing capital stock.
  • D. Must file a written application with the Internal Revenue Service
  • Correct Answer: Option
    (d) Organizations that can qualify as exempt organizations are listed in Sec. 501 of the Internal Revenue Code, and can take the form of a trust or corporation. To receive exempt status, the organization must file a written application with the IRS. In no event will exempt status be conferred upon an organization unless the organization is one of those types of organizations specifically listed in the Code. A fraternal benefit society must operate under the lodge system. An organization operating under the lodge system carries on its activities under a form of organization that comprises local branches chartered by a parent organization and can be established to provide its members with sick benefits.

Which of the following exempt organizations would be eligible to satisfy its annual filing requirement by filing Form 990-N (e-Postcard)?

  • A. Church
  • B. Private foundation.
  • C. An exempt organization with $20,000 of gross receipts.
  • D. An exempt organization with $3,500 of gross income from an unrelated business.
  • Correct Answer: Option
    (c) The requirement is to determine which exempt organization would be eligible to satisfy its annual filing requirement by filing Form 990-N (e-Postcard). Small exempt organizations whose gross receipts are $50,000 or less are generally eligible to annually file an electronic form 990-N (e-Postcard) listing the organizations legal name, mailing address, and employer identification number. Exceptions apply to churches and exempt organizations that are required to file a different form. Churches do not have to file an annual information return. A private foundation must annually file Form 990-PF Return of Private Foundation. An exempt organization having gross income of $1,000 or more from an unrelated business must file Form 990-T Exempt Organization Business Income Tax Return.

The private foundation status of an exempt organization will terminate if it

  • A. Becomes a public charity.
  • B. Is a foreign corporation.
  • C. Does not distribute all of its net assets to one or more public charities.
  • D. Is governed by a charter that limits the organizations exempt purposes.
  • Correct Answer: Option
    (a) The requirement is to determine what will terminate the private foundation status of an exempt organization. The private foundation status of an exempt organization will terminate if it becomes a public charity. Answer (b) is incorrect because a private foundation can be organized as a foreign corporation. Answer (c) is incorrect because private foundations are not required to distribute their assets to public charities. Answer (d) is incorrect because a private foundations exempt purposes are already severely restricted by the Code.

For income tax purposes, the estates initial taxable period for a decedent who died on October 24

  • A. May be either a calendar year, or a fiscal year beginning on the date of the decedents death.
  • B. Must be a fiscal year beginning on the date of the decedents death.
  • C. May be either a calendar year, or a fiscal year beginning on October 1 of the year of the decedents death.
  • D. Must be a calendar year beginning on January 1 of the year of the decedents death.
  • Correct Answer: Option
    (a) The requirement is to determine the correct statement for income tax purposes regarding the initial taxable period for the estate of a decedent who died on October 24. For income tax purposes, a decedents estate is allowed to adopt a calendar year or any fiscal year beginning on the date of the decedents death. Answer (b) is incorrect because an estate may adopt a calendar year and is not restricted to a fiscal year. Answer (c) is incorrect because the estates first tax year would begin on October 24, not October 1. Answer (d) is incorrect because an estate is not restricted to a calendar year, and if it adopted a calendar year, its initial year would begin with the date of the decedents death (October 24).

On January 2, 2013, Carlt created a $300,000 trust that provided his mother with a lifetime income interest starting on January 2, 2013, with the remainder interest to go to his son. Carlt expressly retained the power to revoke both the income interest and the remainder interest at any time. Who will be taxed on the trusts 2013 income?

  • A. Carlts mother.
  • B. Carlts son.
  • C. Carlt.
  • D. The trust.
  • Correct Answer: Option
    (c) The requirement is to determine who will be taxed on the trusts 2013 income. During 2013, Carlt created a trust providing a lifetime income interest for his mother, with a remainder interest to go to his son, but he expressly retained the power to revoke both the income interest and remainder interest at any time. When the grantor of a trust retains substantial control over the trust, such as the power to revoke the income and remainder interests, the trust income will be taxed to the grantor and not to the trust or beneficiaries.

The charitable contribution deduction on an estates fiduciary income tax return is allowable

  • A. If the decedent died intestate.
  • B. To the extent of the same adjusted gross income limitation as that on an individual income tax return.
  • C. Only if the decedents will specifically provides for the contribution.
  • D. Subject to the 2% threshold on miscellaneous itemized deductions.
  • Correct Answer: Option
    (c) The requirement is to determine the correct statement regarding the charitable contribution deduction on an estates fiduciary income tax return (Form 1041). An estate is allowed a deduction for a contribution to a charitable organization if (1) the decedents will specifically provides for the contribution, and (2) the recipient is a qualified charitable organization. The amount allowed as a charitable deduction is not subject to any percentage limitations, but must be paid from amounts included in the estates gross income for the year of contribution.

An executor of a decedents estate that has only US citizens as beneficiaries is required to file a fiduciary income tax return, if the estates gross income for the year is at least

  • A. $ 400
  • B. $ 500
  • C. $ 600
  • D. $1,000
  • Correct Answer: Option
    (c) The requirement is to determine when a fiduciary income tax return for a decedents estate must be filed. The executor of a decedents estate that has only US citizens as beneficiaries is required to file a fiduciary income tax return (Form 1041) if the estates gross income is $600 or more. The return is due on or before the 15th day of the fourth month following the close of the estates taxable year.

Ordinary and necessary administration expenses paid by the fiduciary of an estate are deductible

  • A. Only on the fiduciary income tax return (Form 1041) and never on the federal estate tax return (Form 706).
  • B. Only on the federal estate tax return and never on the fiduciary income tax return.
  • C. On the fiduciary income tax return only if the estate tax deduction is waived for these expenses.
  • D. On both the fiduciary income tax return and on the estate tax return by adding a tax computed on the proportionate rates attributable to both returns.
  • Correct Answer: Option
    (c) The requirement is to determine the proper treatment for ordinary and necessary administrative expenses paid by the fiduciary of an estate. Ordinary and necessary administrative expenses paid by the fiduciary of an estate can be deducted on either the estates fiduciary income tax return, or on the estates federal estate tax return. Although the expenses cannot be deducted twice, they can be allocated between the two returns in any manner that the fiduciary sees fit. If the administrative expenses are to be deducted on the fiduciary income tax return, the potential estate tax deduction must be waived for these expenses.

The 2012 standard deduction for a trust or an estate in the fiduciary income tax return is

  • A. $0
  • B. $650
  • C. $750
  • D. $800
  • Correct Answer: Option
    (a) The requirement is to determine the amount of standard deduction for a trust or an estate in the fiduciary income tax return (Form 1041). No standard deduction is available for a trust or an estate on the fiduciary income tax return. On the other hand, a personal exemption is allowed for an estate or trust on the fiduciary income tax return. The personal exemption is $600 for an estate, $300 for a trust required to distribute all income currently, and $100 for all other trusts.

A complex trust is a trust that

  • A. Must distribute income currently, but is prohibited from distributing principal during the taxable year.
  • B. Invests only in corporate securities and is prohibited from engaging in short-term transactions.
  • C. Permits accumulation of current income, provides for charitable contributions, or distributes principal during the taxable year.
  • D. Is exempt from payment of income tax since the tax is paid by the beneficiaries.
  • Correct Answer: Option
    (c) The requirement is to determine the correct statement regarding a complex trust. A simple trust is one that (1) is required to distribute all of its income to designated beneficiaries every year, (2) has no beneficiaries that are qualifying charitable organizations, and (3) makes no distributions of trust corpus (i.e., principal) during the year. A complex trust is any trust that is not a simple trust. Answer (a) is incorrect because a complex trust is not required to distribute income currently, nor is it prohibited from distributing trust principal. Answer (b) is incorrect because there are no investment restrictions imposed on a complex trust. Answer (d) is incorrect because an income tax is imposed on a trusts taxable income.

With regard to estimated income tax, estates

  • A. Must make quarterly estimated tax payments starting no later than the second quarter following the one in which the estate was established.
  • B. Are exempt from paying estimated tax during the estates first two taxable years.
  • C. Must make quarterly estimated tax payments only if the estates income is required to be distributed currently.
  • D. Are not required to make payments of estimated tax.
  • Correct Answer: Option
    (b) The requirement is to determine the correct statement regarding an estates estimated income taxes. Trusts and estates must make quarterly estimated tax payments, except that an estate is exempt from making estimated tax payments for taxable years ending within two years of the decedents death.

A distribution from estate income, that was currently required, was made to the estates sole beneficiary during its calendar year. The maximum amount of the distribution to be included in the beneficiarys gross income is limited to the estates

  • A. Capital gain income.
  • B. Ordinary gross income.
  • C. Distributable net income.
  • D. Net investment income.
  • Correct Answer: Option
    (c) The requirement is to determine the maximum amount to be included in the beneficiarys gross income for a distribution from estate income that was currently required. Distributable net income (DNI) is the maximum amount of distributions that can be taxed to beneficiaries as well as the maximum amount of distributions deduction for an estate.

Under the terms of the will of Melvin Crane, $10,000 a year is to be paid to his widow and $5,000 a year is to be paid to his daughter out of the estates income during the period of estate administration. No charitable contributions are made by the estate. During 2012, the estate made the required distributions to Cranes widow and daughter and for the entire year the estates distributable net income was $12,000. What amount of the $10,000 distribution received from the estate must Cranes widow include in her gross income for 2012?

  • A. $0
  • B. $ 4,000
  • C. $ 8,000
  • D. $10,000
  • Correct Answer: Option
    (c) The requirement is to determine the amount of the estates $10,000 distribution that must be included in gross income by Cranes widow. The maximum amount that is taxable to beneficiaries is limited to the estates distributable net income (DNI). Since distributions to multiple beneficiaries exceed DNI, the estates $12,000 of DNI must be prorated to distributions to determine the portion of each distribution that must be included in gross income. Since distributions to the widow and daughter totaled $15,000, the portion of the $10,000 distribution that must be included in the widow gross income equals ($10,000/$15,000) $12,000 = $8,000.

For 2013, the generation-skipping transfer tax is imposed

  • A. Instead of the gift tax.
  • B. Instead of the estate tax.
  • C. At the highest tax rate under the transfer tax rate schedule.
  • D. When an individual makes a gift to a grandparent.
  • Correct Answer: Option
    (c) The requirement is to determine the correct statement regarding the generation-skipping transfer tax. The generation-skipping transfer tax is imposed as a separate tax in addition to the federal gift and estate taxes, and is designed to prevent an individual from escaping an entire generation of gift and estate taxes by transferring property to a person that is two or more generations below that of the transferor. The tax is imposed at the highest tax rate (40% for 2013) under the transfer tax rate schedule.

In 2006, Edwin Ryan bought 100 shares of a listed stock for $5,000. In June 2012, when the stock fair market value was $7,000, Edwin gave this stock to his sister, Lynn. No gift tax was paid. Lynn died in October 2012, bequeathing this stock to Edwin, when the stocks fair market value was $9,000. Lynns executor did not elect the alternate valuation. What is Edwins basis for this stock after he inherits it from Lynns estate?

  • A. $0
  • B. $5,000
  • C. $7,000
  • D. $9,000
  • Correct Answer: Option
    (b) The requirement is to determine Edwins basis for the stock inherited from Lynns estate. A special rule applies if a decedent (Lynn) acquires appreciated property as a gift within one year of death, and this property passes to the donor (Edwin) or donors spouse. Then the donors (Edwins) basis is the basis of the property in the hands of the decedent (Lynn) before death. Since Lynn had received the stock as a gift, Lynns basis before death ($5,000) becomes the basis of the stock to Edwin.

In 2006, Edwin Ryan bought 100 shares of a listed stock for $5,000. In June 2012, when the stocks fair market value was $7,000, Edwin gave this stock to his sister, Lynn. No gift tax was paid. Lynn died in October 2012, bequeathing this stock to Edwin, when the stocks fair market value was $9,000. Lynns executor did not elect the alternate valuation. What is Edwins basis for this stock after he inherits it from Lynns estate?

  • A. $0
  • B. $5,000
  • C. $7,000
  • D. $9,000
  • Correct Answer: Option
    (b) The requirement is to determine Edwins basis for the stock inherited from Lynns estate. A special rule applies if a decedent (Lynn) acquires appreciated property as a gift within one year of death, and this property passes to the donor (Edwin) or donors spouse. Then the donors (Edwins) basis is the basis of the property in the hands of the decedent (Lynn) before death. Since Lynn had received the stock as a gift, Lynns basis before death ($5,000) becomes the basis of the stock to Edwin.

Alan Curtis, a US citizen, died on March 1, 2013, leaving an adjusted gross estate with a fair market value of $5,400,000 at the date of death. Under the terms of Alans will, $3,000,000 was bequeathed outright to his widow, free of all estate and inheritance taxes. The remainder of Alans estate was left to his mother. Alan made no taxable gifts during his lifetime. In computing the taxable estate, the executor of Alans estate should claim a marital deduction of

  • A. $ 450,000
  • B. $ 780,800
  • C. $ 900,000
  • D. $3,000,000
  • Correct Answer: Option
    (d) The requirement is to determine the amount of marital deduction that can be claimed in computing Alans taxable estate. In computing the taxable estate of a decedent, an unlimited marital deduction is allowed for the portion of the decedents estate that passes to the decedents surviving spouse. Since $3,000,000 was bequeathed outright to Alans widow, Alans estate will receive a marital deduction of $3,000,000.

Alan Curtis, a US citizen, died on March 1, 2013, leaving an adjusted gross estate with a fair market value of $5,400,000 at the date of death. Under the terms of Alans will, $3,000,000 was bequeathed outright to his widow, free of all estate and inheritance taxes. The remainder of Alans estate was left to his mother. Alan made no taxable gifts during his lifetime. Disregarding extensions of time for filing, within how many months after the date of Alans death is the federal estate tax return due?

  • A. 2 1/2
  • B. 3 1/2
  • C. 9
  • D. 12
  • Correct Answer: Option
    (c) The requirement is to determine within how many months after the date of Alans death his federal estate tax return should be filed. The federal estate tax return (Form 706) must be filed and the tax paid within nine months of the decedents death, unless an extension of time has been granted.

Ross, a calendar-year, cash-basis taxpayer who died in June 2012, was entitled to receive a $10,000 accounting fee that had not been collected before the date of death. The executor of Ross estate collected the full $10,000 in July 2012. This $10,000 should appear in

  • A. Only the decedents final individual income tax return.
  • B. Only the estates fiduciary income tax return.
  • C. Only the estate tax return.
  • D. Both the fiduciary income tax return and the estate tax return.
  • Correct Answer: Option
    (d) The requirement is to determine the proper income and estate tax treatment of an accounting fee earned by Ross before death, that was subsequently collected by the executor of Ross estate. Since Ross was a calendar-year, cash-method taxpayer, the income would not be included on Ross final individual income tax return because payment had not been received. Since the accounting fee would not be included in Ross final income tax return because of Ross cash method of accounting, the accounting fee would be income in respect of a decedent. For estate tax purposes, income in respect of a decedent will be included in the decedents gross estate at its fair market value on the appropriate valuation date. For income tax purposes, the income tax basis of the decedent (zero) transfers over to the estate or beneficiary who collects the fee. The recipient of the income must classify it in the same manner (i.e., ordinary income) as would have the decedent. Thus, the accounting fee must be included in Ross� gross estate and must also be included in the estates fiduciary income tax return (Form 1041) because the fee was collected by the executor of Ross estate.

Proceeds of a life insurance policy payable to the estates executor, as the estates representative, are

  • A. Includible in the decedents gross estate only if the premiums had been paid by the insured.
  • B. Includible in the decedents gross estate only if the policy was taken out within three years of the insureds death under the contemplation of death rule.
  • C. Always includible in the decedents gross estate.
  • D. Never includible in the decedents gross estate.
  • Correct Answer: Option
    (c) The requirement is to determine when the proceeds of life insurance payable to the estates executor, as the estates representative, are includible in the decedents gross estate. The proceeds of life insurance on the decedents life are always included in the decedents gross estate if (1) they are receivable by the estate, (2) the decedent possessed any incident of ownership in the policy, or (3) they are receivable by another (e.g., the estates executor) for the benefit of the estate.

With regard to the federal estate tax, the alternate valuation date

  • A. Is required to be used if the fair market value of the estates assets has increased since the decedents date of death.
  • B. If elected on the first return filed for the estate, may be revoked in an amended return provided that the first return was filed on time.
  • C. Must be used for valuation of the estates liabilities if such date is used for valuation of the estates assets.
  • D. Can be elected only if its use decreases both the value of the gross estate and the estate tax liability.
  • Correct Answer: Option
    (d) The requirement is to determine the correct statement regarding the use of the alternate valuation date in computing the federal estate tax. An executor of an estate can elect to use the alternate valuation date (the date six months after the decedents death) to value the assets included in a decedents gross estate only if its use decreases both the value of the gross estate and the amount of estate tax liability. Answer (a) is incorrect because the alternate valuation date cannot be used if its use increases the value of the gross estate. Answer (b) is incorrect because the use of the alternate valuation date is an irrevocable election. Answer (c) is incorrect because the alternate valuation date is only used to value an estates assets, not its liabilities.

Eng and Lew, both US citizens, died in 2013. Eng made taxable lifetime gifts of $400,000 that are not included in Engs gross estate. Lew made no lifetime gifts. At the dates of death, Engs gross estate was $3,600,000, and Lews gross estate was $4,800,000. A federal estate tax return must be filed for Eng Lew

  • A. No No
  • B. No Yes
  • C. Yes No
  • D. Yes Yes
  • Correct Answer: Option
    A

Which one of the following is a valid deduction from a decedents gross estate?

  • A. Foreign death taxes.
  • B. Income tax paid on income earned and received after the decedents death.
  • C. Federal estate taxes.
  • D. Unpaid income taxes on income received by the decedent before death.
  • Correct Answer: Option
    D

Following are the fair market values of Walds assets at the date of death: Personal effects and jewelry $1,750,000 Land bought by Wald with Walds funds five years prior to death and held with Walds sister as joint tenants with right of survivorship 3,800,000 The executor of Walds estate did not elect the alternate valuation date. The amount includible as Walds gross estate in the federal estate tax return is

  • A. $1,750,000
  • B. $3,800,000
  • C. $5,000,000
  • D. $5,550,000
  • Correct Answer: Option
    D

In connection with a buy-sell agreement funded by a cross-purchase insurance arrangement, business associate Adam bought a policy on Burrs life to finance the purchase of Burrs interest. Adam, the beneficiary, paid the premiums and retained all incidents of ownership. On the death of Burr, the insurance proceeds will be

  • A. Includible in Burrs gross estate, if Burr owns 50% or more of the stock of the corporation.
  • B. Includible in Burrs gross estate only if Burr had purchased a similar policy on Adams life at the same time and for the same purpose.
  • C. Includible in Burrs gross estate, if Adam has the right to veto Burrs power to borrow on the policy that Burr owns on Adams life.
  • D. Excludible from Burrs gross estate.
  • Correct Answer: Option
    D

Fred and Amy Kehl, both US citizens, are married. All of their real and personal property is owned by them as tenants by the entirety or as joint tenants with right of survivorship. The gross estate of the first spouse to die

  • A. Includes 50% of the value of all property owned by the couple, regardless of which spouse furnished the original consideration.
  • B. Includes only the property that had been acquired with the funds of the deceased spouse.
  • C. Is governed by the federal statutory provisions relating to jointly held property, rather than by the decedents interest in community property vested by state law, if the Kehls reside in a community property state.
  • D. Includes one-third of the value of all real estate owned by the Kehls, as the dower right in the case of the wife or curtesy right in the case of the husband.
  • Correct Answer: Option
    A

Which of the following credits may be offset against the gross estate tax to determine the net estate tax of a US citizen dying during 2013? Applicable credit Credit for gift taxes paid on gifts made after 1976

  • A. Yes Yes
  • B. No No
  • C. No Yes
  • D. Yes No
  • Correct Answer: Option
    D

What amount of a decedents taxable estate is effectively taxfree if the maximum basic exclusion amount is taken during 2013?

  • A. $1,000,000
  • B. $1,455,800
  • C. $3,500,000
  • D. $5,000,000
  • Correct Answer: Option
    D

If the executor of a decedents estate elects the alternate valuation date and none of the property included in the gross estate has been sold or distributed, the estate assets must be valued as of how many months after the decedents death?

  • A. 12
  • B. 9
  • C. 6
  • D. 3
  • Correct Answer: Option
    C

Bell, a cash-basis calendar-year taxpayer, died on June 1, 2012. In 2012, prior to her death, Bell incurred $2,000 in medical expenses. The executor of the estate paid the medical expenses, which were a claim against the estate, on July 1, 2012. If the executor files the appropriate waiver, the medical expenses are deductible on

  • A. The estate tax return.
  • B. Bells final income tax return.
  • C. The estate income tax return.
  • D. The executors income tax return.
  • Correct Answer: Option
    B

Fred and Ethel (brother and sister), residents of a noncommunity property state, own unimproved land that they hold in joint tenancy with rights of survivorship. The land cost $100,000 of which Ethel paid $80,000 and Fred paid $20,000. Ethel died during 2013 when the land was worth $300,000, and $240,000 was included in Ethels gross estate. What is Freds basis for the property after Ethels death?

  • A. $140,000
  • B. $240,000
  • C. $260,000
  • D. $300,000
  • Correct Answer: Option
    C

Raff created a joint bank account for himself and his friends son, Dave. There is a gift to Dave when

  • A. Raff creates the account.
  • B. Raff dies.
  • C. Dave draws on the account for his own benefit.
  • D. Dave is notified by Raff that the account has been created.
  • Correct Answer: Option
    C

When Jim and Nina became engaged in April 2012, Jim gave Nina a ring that had a fair market value of $50,000. After their wedding in July 2012, Jim gave Nina $75,000 in cash so that Nina could have her own bank account. Both Jim and Nina are US citizens. What was the amount of Jim�s 2012 marital deduction?

  • A. $ 63,000
  • B. $ 75,000
  • C. $113,000
  • D. $125,000
  • Correct Answer: Option
    B

On July 1, 2012, Vega made a transfer by gift in an amount sufficient to require the filing of a gift tax return. Vega was still alive in 2013. If Vega did not request an extension of time for filing the 2012 gift tax return, the due date for filing was

  • A. March 15, 2013.
  • B. April 15, 2013.
  • C. June 15, 2013.
  • D. June 30, 2013.
  • Correct Answer: Option
    B