Get All CPA Regulation Exam Questions with Validated Answers
| Vendor: | AICPA |
|---|---|
| Exam Code: | CPA-Regulation |
| Exam Name: | CPA Regulation |
| Exam Questions: | 69 |
| Last Updated: | March 5, 2026 |
| Related Certifications: | Certified Public Accountant |
| Exam Tags: | AICPA Managment |
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An individual had the following capital gains and losses for the year:
What will be the net gain (loss) reported by the individual and at what applicable tax rate(s)?
Choice 'a' is correct. Specific netting procedures for capital gains and losses are outlined in the Internal Revenue Code for non-corporate taxpayers.
Gains and losses are netted within each tax rate group (e.g., the 15% rate group). The facts of this question have already performed this step for us.
Short-term Capital Gains and Losses
1. If there are any short-term capital losses (this includes any short-term capital loss carryovers), they are first offset against any short-term gains that would be taxable at the ordinary income rates.
2. Any remaining short-term capital loss is used to offset any long-term capital gains from the 28% grate group (e.g., collectibles).
3. Any remaining short-term capital loss is then used to offset any long-term gains from the 25% group (e.g., un-recaptured Section 1250 gains).
4. Any remaining short-term capital loss is used to offset any long-term capital gains applicable at the lower (e.g., 15%) tax rate.
Long-term Capital Gains and Losses
1. If there are any long-term capital losses (this includes any long-term capital loss carryovers) from the 28% rate group, they are first offset against any net gains from the 25% rate group and then against net gains from the 15% rate group.
2. If there are any long-term capital losses (this includes any long-term capital loss carryovers) from the 15% rate group, they are offset first against any net gains from the 28% rate group and then against net gains from the 25% rate group.
In this case, we are given net short-term capital losses of $70,000 to start with. Following the rules above, this first goes to offset any short-term gains at the ordinary income rates, but there are none in the facts. So, the next step is to offset the losses against any 28% rate gain long-term capital gains. The facts provide that there is $10,000 in gains from collectibles (taxable at the 28% rate). The remaining short-term loss ($60,000) is next used to offset the long-term capital gains at the 25% rate. The facts give us un-recaptured Section 1250 gains of $56,000 (taxed at the 25% tax rate). The remaining short-term capital loss is $4,000 ($70,000 - $10,000 - $56,000 = $4,000). The balance of the short-term capital losses is finally used to offset any capital gains taxed at the 15% tax rate, which the facts give us as $20,000. Therefore, after the $4,000 remaining short-term capital loss is applied to offset the $20,000 long-term capital gain taxed at the 15% tax rate, there is an amount of $16,000 remaining of long-term capital losses to be taxed at the 15% tax rate.
Choices 'b', 'c', and 'd' are incorrect, per the ordering rules discussed above.
Supplemental Questions
Allen owns 100 shares of Prime Corp., a publicly-traded company, which Allen purchased on January 1, 2001, for $10,000. On January 1, 2003, Prime declared a 2-for-1 stock split when the fair market value (FMV) of the stock was $120 per share. Immediately following the split, the FMV of Prime stock was $62 per share. On February 1, 2003, Allen had his broker specifically sell the 100 shares of Prime stock received in the split when the FMV of the stock was $65 per share. What amount should Allen recognize as long-term capital gain income on his Form 1040, U.S. Individual Income Tax Return, for 2003?
Choice 'c' is correct. The receipt of a nontaxable stock dividend will require the shareholder to spread the basis of his original shares over both the original shares and the new shares received, resulting in the same total basis but a lower basis per share of stock helD. Therefore, Allen's total basis remains the same, $10,000, but is now split between 200 shares (a 2-for-1 split and he originally owned 100 shares).
Therefore, his basis per share goes from $100/share ($10,000/100) to $50/share ($10,000/200).
Consequently, his basis in the 100 shares sold is 100 x $50 = $5,000. Calculate his gain as follows:
Choices 'a', 'b', and 'd' are incorrect.
In the current year Jensen had the following items:
What is Jensen's AGI for the current year?
Choice 'b' is correct. The question asks for AGI, but all of the items in the list are items of potential gross income. There are no adjustments included in the list; therefore, in this case, AGI is the same as gross income. The calculation is as follows:
Choices 'a', 'c', and 'd' are incorrect, per the above calculation.
Capital assets include:
Choice 'c' is correct. Investment assets of a taxpayer that are not inventory are capital assets. The manufacturing company would have capital assets including an investment in U.S. Treasury bonds.
Choice 'a' is incorrect. Accounts receivable generated from the sale of inventory are excluded from the statutory definition of capital assets.
Choice 'b' is incorrect. Depreciable property used in a trade or business is excluded from the statutory definition of capital assets.
Choice 'd' is incorrect. Land is usually a capital asset, but when it is effectively inventory, as when it is used by a developer to be subdivided, it is excluded from the statutory definition of capital assets.
DAC Foundation awarded Kent $75,000 in recognition of lifelong literary achievement. Kent was not required to render future services as a condition to receive the $75,000. What condition(s) must have been met for the award to be excluded from Kent's gross income?
I Kent was selected for the award by DAC without any action on Kent's part.
II Pursuant to Kent's designation, DAC paid the amount of the award either to a governmental unit or to a charitable organization.
Choice 'c' is correct. Generally, the fair market value of prizes and awards is taxable income. However, an exclusion from income for certain prizes and awards applies where the winner is selected for the award without entering into a contest (i.e., without any action on their part) and then assigns the award directly to a governmental unit or charitable organization. Therefore, conditions 'I' and 'II' must be met in order for Ken to exclude the award from his gross income.
Choice 'a' is incorrect. 'II' is a necessary condition as well. See Explanation: above.
Choice 'b' is incorrect. 'I' is a necessary condition as well. See Explanation: above.
Choice 'd' is incorrect. 'I' and 'II' are both necessary conditions. See Explanation: above.
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