Sample CPA REG Practice Questions

Like all 4 sections of the CPA exam, passing or failing comes down to how well prepared you are. For the REG exam, make sure you are hitting entity, individual and property tax hard and learning your pneumonics and calculations. But keep an eye on business law, accounting and federal tax procedures and ethics, professional and legal responsibility. These are areas that require more memorization than calculation and can lead to easy points. For a more thorough breakdown of the REG exam, check out this post.

To get you started on the right foot, we’ve compiled sample CPA REG practice questions pertaining to each section of the REG exam as noted by the AICPA.

Sample CPA REG Practice Questions

Business Law

Under the Sales Article of the UCC, which of the following statements is correct?

  1. The obligations of the parties to the contract must be performed in good faith.
  2. Merchants and non-merchants are treated alike.
  3. The contract must involve the sale of goods for a price of more than $800.
  4. None of the provisions of the UCC may be disclaimed by agreement.

Accounting and Federal Tax Procedures

Mr. Lupin has asked a CPA to prepare his tax return for Year 4. In gathering the information for this year, the CPA discovers that Lupin claimed his son as a dependent in Year 3 when the son no longer qualified. What action should the CPA take?

  1. File an amended return to correct the error in Year 3.
  2. Refuse to take the job until the error has been corrected.
  3. Notify Mr. Lupin of the problem and advise that an amended return be filed immediately.
  4. Notify the Internal Revenue Service of the mistake.

Ethics, Professional and Legal Responsibility

Under the provisions of Section 10(b) and Rule 10(b)(5) of the Securities Exchange Act of 1934, which of the following activities must be proven by a stock purchaser in a suit against a CPA?

I. Intentional conduct by the CPA designed to deceive investors.
II. Negligence by the CPA.

  1. Neither I nor II.
  2. Both I and II.
  3. I only.
  4. II only.

Federal Taxation on Entities

During year one, Hogwarts Corp. exchanged 8,000 shares of its own $8 par common stock for land with a fair market value of $150,000. As a result of this exchange, Hogwarts should report in its year one tax return:

  1. $150,000 Section 1231 gain.
  2. $150,000 Section 1245 gain.
  3. No gain.
  4. $150,000 ordinary income.

Federal Taxation on Individuals

Ron and Hermione are married cash-basis taxpayers. They had interest income this taxable year as follows:

$500 interest on federal income tax refund.
$600 interest on state income tax refund.
$800 interest on federal government obligations.
$1,000 interest on state government obligations.

What amount of interest income is taxable on Don and Elizabeth’s joint income tax return for this taxable year?

  1. $500
  2. $1,100
  3. $1,900
  4. $2,900

Federal Taxation on Property

Dumby owns land that is operated as a parking lot. A shed was erected on the lot for the related transactions with customers. With regard to capital assets and Section 1231 assets, how should these assets be classified? 

                                     Land                                                    Shed

a. Capital asset Capital asset
b. Section 1231 asset Capital asset
c. Capital asset Section 1231 asset
d. Section 1231 asset Section 1231 asset

Sample CPA REG Practice Question’s Solutions

Business Law

Under the Sales Article of the UCC, which of the following statements is correct?

  1. The obligations of the parties to the contract must be performed in good faith.
  2. Merchants and non-merchants are treated alike.
  3. The contract must involve the sale of goods for a price of more than $800.
  4. None of the provisions of the UCC may be disclaimed by agreement.

Why? UCC Sales requires all parties to act in good faith.

Accounting and Federal Tax Procedures

Mr. Lupin has asked a CPA to prepare his tax return for Year 4. In gathering the information for this year, the CPA discovers that Lupin claimed his son as a dependent in Year 3 when the son no longer qualified. What action should the CPA take?

  1. File an amended return to correct the error in Year 3.
  2. Refuse to take the job until the error has been corrected.
  3. Notify Mr. Lupin of the problem and advise that an amended return be filed immediately.
  4. Notify the Internal Revenue Service of the mistake.

Why? The Year 3 tax return is the property of the taxpayer. Therefore, the CPA should explain the mistake that was made and advise the client to correct the error as promptly as possible. If the client does not follow that advice, the CPA should strongly consider resigning from the engagement.

Ethics, Professional and Legal Responsibility

Under the provisions of Section 10(b) and Rule 10(b)(5) of the Securities Exchange Act of 1934, which of the following activities must be proven by a stock purchaser in a suit against a CPA?

I. Intentional conduct by the CPA designed to deceive investors.
II. Negligence by the CPA.

  1. Neither I nor II.
  2. Both I and II.
  3. I only.
  4. II only.

Why? Under Section 10(b) of the Securities Exchange Act of 1934, a plaintiff must show acquisition of the stock, a loss, a material misrepresentation or omission of fact, scienter (or a reckless disregard for the truth), and reliance. Intentional conduct by the CPA designed to defraud (scienter) must be proven. There is no requirement to prove negligence of the CPA under 10(b).

Federal Taxation on Entities

During year one, Hogwarts Corp. exchanged 8,000 shares of its own $8 par common stock for land with a fair market value of $150,000. As a result of this exchange, Hogwarts should report in its year one tax return:

  1. $150,000 Section 1231 gain.
  2. $150,000 Section 1245 gain.
  3. No gain.
  4. $150,000 ordinary income.

Why? No gain or loss is recognized by a corporation on the sale or exchange of its own stock.

Federal Taxation on Individuals

Ron and Hermione are married cash-basis taxpayers. They had interest income this taxable year as follows:

$500 interest on federal income tax refund.
$600 interest on state income tax refund.
$800 interest on federal government obligations.
$1,000 interest on state government obligations.

What amount of interest income is taxable on Don and Elizabeth’s joint income tax return for this taxable year?

  1. $500
  2. $1,100
  3. $1,900
  4. $2,900

Why? Only interest on the state obligation is excluded from income.

Federal Taxation on Property

Dumby owns land that is operated as a parking lot. A shed was erected on the lot for the related transactions with customers. With regard to capital assets and Section 1231 assets, how should these assets be classified?
                                     Land                                                 Shed

a. Capital asset Capital asset
b. Section 1231 asset Capital asset
c. Capital asset Section 1231 asset
d. Section 1231 asset Section 1231 asset

 

Why? Section 1231 property includes all depreciable personal property and real property, whether depreciable or not, used in a business. As a result, land operated as a parking lot and a shed erected on the land for related transactions would both be classified as Section 1231 property. Capital assets include personal use assets and most other assets, with the exception of the following; inventory/property held for resale, accounts/notes receivable, depreciable property or real estate used in a business, certain copyrights, and supplies consumed in a business.

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