 Welcome to this session. This is Professor Farhad and this session we look at actual CPA Greg question. The reason I say actual because those questions are released from the AI CPA. Those questions are the real deal. So it's very important that you familiarize yourself with the type of questions that you might see on the exam day and how to approach these questions. As always I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1600 plus accounting, auditing, tax and finance lectures. This is a list of all the courses that I cover including hundreds of CPA questions. Please like my YouTube, share them, put them in playlists, let the world know about them. If they're benefiting you, they might benefit other people. Also you can connect with me on Instagram as well as Facebook. On my website you will find additional resources such as true, false, multiple choice, exercises, note and if you're studying for your CPA exam, 2000 plus CPA question. So let's take a look at the first question. So it's very important that you get comfortable with these type of screens because this is what you will see on the actual CPA exam. So let's take a look at this first question. Some acquired a 25% interest in ACE partnership by contributing a land having an adjusted basis of 16,000 and a fair market value of 50,000. Okay, technically we ignore the fair market value. The land was subject to a 24,000 mortgage which was assumed by ACE. No other liabilities exist at the time of the contribution. What was Storm's basis in ACE? So simply put Storm. Contributed land. Storm's basis. So here's what we need to know here. First of all, the adjusted fair market value transferred from the partner to the partnership. So we ignore, as I told you, we ignore the fair market value. So what happened now we have adjusted basis starting at 16,000. However, however, the land was subject to a mortgage. Well if you contribute the land and they gave you $24,000, you gave up $24,000 of mortgage, it's as if they paid you $24,000 because you are no longer responsible for that mortgage. So what's going to happen is this, the mortgage is going to reduce your basis by 24,000. So simply put here you have a negative basis and we know, we should know from my lecture and we should know that there is no such thing as negative basis of 8,000. Negative basis of 8,000. Why? Because there's no negative basis. So simply put, the basis is zero here. But what we have to know is this. Since you contributed 25,000 of that as a partner, you would be responsible for 25% of this. In other words, since you are 25% owner, you are responsible for 25% of the debt. So what does that mean? It means if we take 24,000 times 0.25, that's your share of the debt. And this share of the debt will increase your basis by 6,000. You would still be at negative 2,000. I mean you're going to be at negative, therefore your basis is zero. But the point I'm trying to show you is you have negative of 2,000 net because your basis will go back and increase by your portion of the debt. So your portion of the debt that you are responsible for as a 25% partner is 25,000. Now this might be a capital gain for you, the $2,000. So make sure you know these rules. I can assure you those rules are tested on the CPA exam. Therefore, the answer is zero. Long was a purchasing agent for Frost, a sole proprietor. Long had express authority to place purchase order with Frost's suppliers, so far so good. Long conducted business on the internet and had little contact with Frost, okay? After Frost was declared incompetent, this is important. In a judicial proceeding, Long placed an order with Grant on Frost's behalf. Both Long and Grant were unaware of Frost's incompetence. Will Frost or Frost's legal representative be liable to Grant? Now here's what you need to know for this question. Once you are declared incompetent, once you are declared incompetent, and in this situation Frost was declared incompetent, simply put the purchasing agent relationship with Long is no longer valid. Therefore, they're not responsible. That's simply, it's as simple as that. Once you are declared incompetent, basically, you know, simply put, you cannot have a mutual agreement. You cannot, you can not, between an offerer and an offeree, or you know, it's basically gone. That relationship, that authority is gone because there's no longer a purchasing agent relationship. Therefore, no, because Long did not have the authority to enter into the contract. That's it, you longer have the authority, simply put, okay? A taxpayer purchases and is the owner of an insurance contract on his life and designates his two children as eco-beneficiaries. The taxpayer makes all the premium. How many gift of property, if any, had been made for gift tax purposes? Well, the taxpayer purchased the life insurance policy and he designated his two children. Well, the first question is this. Did his two children receive anything? And the answer is no. The second question, did he gave up his control over the, over the policy? And the answer is no, because he can change the beneficiaries, he can always change the beneficiaries. Therefore, how many gift do we have here? We don't have any gift. We have zero gift. So the point here is, do you know what a gift is for tax purposes? Well, they did not receive any value and you did not give up the control of the asset. Well, it's not a gift, okay? Zero gift. To which of the following rights is the holder of public corporation, cumulative preferred stock always entitled to? So here we have a cumulative preferred stock. Well, is it conversion of the preferred stock into common stock? No, that's if you have a converted preferred stock, you will have this conversion feature. So A is not right or number one is not right. Is it voting right? Well, no way. You need to know about preferred stock. They cannot vote. They're not like common stock. They're not really true owners of the company. They're not true owners. Therefore, they're not entitled to voting right. Dividend carry over from years in which dividend were not paid. Perfect. This is what cumulative preferred stock. It means that if they don't pay you past dividend, you are entitled to that past dividend. I will definitely take this answer and move on. Guaranteed dividend, there's no guaranteed dividend. Nothing is guaranteed in life, especially dividend. Therefore, the answer is C. Crate is unmarried taxpayer with income exclusively from wages. By December 31st, year one, Crate's employer has what held 16,000 in federal income taxes and Crate has made no estimated tax payment. On April 15 year two, Crate timely filed for an extension request to file her individual income tax and paid $300 of additional taxes. Crate's year one tax liability was 16,500 when she timely filed her return on April 30th, which is 15 days past the original due date and paid the remaining tax liability. What amount would be subject to the penalty for underpayment of estimated taxes? Now, just want to kind of, I like to kind of go over this question a little bit in detail, just because you need to understand those. They ask a lot of questions about this. Okay, you're supposed to file your taxes on April 15th. Now you can file for an extension. You can file an extension and basically it's a simple form, just file an extension. And once you file an extension, you have till 10, 15 to file. Now, if I have an extension, you have to pay your taxes. So although you filed your extension, you have to pay your taxes. So the extension is only for filing. So this is only to file. So you have some time to file your taxes, but you still have to pay your taxes. Now the question is, did Crate paid her taxes? Well, her total taxes was 16,500. We don't know what was her prior year taxes, but what we need to know is if she is responsible for 16,500 to avoid any penalties, she should have paid 90%. That's, you need to know this, that if you're looking at your current taxes, you don't wanna be getting any penalties. You have to pay 90%. Simply put, you have to pay 14,850. 14,850, so you don't have any underpayment of penalty. And only from her wages, she would help 16,000. There's no taxes. She paid an additional 300. All what she had to do is to write a check for $200 to the IRS. So Crate doesn't owe any underpayment of estimated taxes. So she was in good shape. Those questions are very common on the exam. Remember, when you file for an extension, you don't file for an extension of payment, you file for an extension to file. Therefore, if you have any taxes, you have to pay. With the request to extend the filing, that's all what it is. And you have, if you have the current year taxes, if you know how much you have to pay to avoid the penalty, pay at least 90% of current year taxes. And you should be in good shape or the lesser of this amount or 100% of prior year taxes or 110. If your AGI is more than 150, you have to know, make sure you have to know those rules. Now, all these rules and every question that I cover here basically covered on my website, farhatlectures.com, I strongly suggest you go there, you study for your CPA once in your lifetime. Sign up, subscribe. It's an investment in your career. Good luck and I'm always here to help you.