 Hello, and welcome to this session. This is Professor Fohath and this session we would look at previously used CPA questions. Those questions were released by the AICPA. AICPA is the organization that administered the CPA exam. Those questions are the real deal. Now they may or may not appear word for word on future exam, but I could assure you the concepts, the format will be tested again and again and again. You can bet on that. We're going to be covering a few regulation 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 1,500 plus accounting, auditing, finance and tax lectures. This is a list of all the courses that I cover, including income tax and CPA questions. On my website, you will have access to additional information and resources such as PowerPoint slides, True, False, Multiple Choice, Notes, CPA questions, 2,000 plus CPA questions and hundreds of exercises that are considered quasi-CPA simulations. Take a look at the first question. Parent gave securities with an adjusted basis of $10,000 and a fair market value of 9,000 to a child. Fair enough. Later, the child sold the securities for 7,000. What is the child's basis for the securities? So the parent gave it to them. The parents had a basis of 10. When they gave it to the child, it was at 9,000. What's going to happen is this. When you have a gift situation and I have plenty of lecture, I have one whole course, one whole lecture, 24 minutes about basis of gift. You have to know those bases very well. So what do you have to know? You have to know that you don't know the basis until you sell the asset. So simply put, here's what happened. This is the 10,000, which is the fair market value. I'm sorry, the 10,000 was the adjusted basis. The 9,000 was the fair market value. This is what we know. Now we sold the securities for 7. Now here's what's going to happen. When we sell the securities, we sell the securities right here. Guess what? The line that's going to be closest to this line will be the basis. Which line is the closest? This is the line that's the closest. Therefore the basis is 9,000. Simply put, if they told you the asset was sold for 12,000, so instead of 7,000, and I can assure you this question is very common. If they told you the asset was sold for 12, which line is the closest to 10? 12 is 10. So the basis will be 10. Now let's see what happened if they told you it was sold something in between. What do we mean something in between? The child sold the asset between 9,000 and 10,000. So it sold at 9,300 or 9,700. In between 9,000 and 10,000, then the basis equal to the sale. The basis will be equal to 7,000. The basis equal to the sale. Whatever the sale is, if we sold it for 9,300, the basis is 9,300. If we sold it for 9,700, the basis is 9,700. Simply put, if we sell it in this orange area, we have zero gain, zero loss. That's the whole point. And again, I have 24-minute lecture about gift basis. It's very important that you need to know for the exam. Let's take a look at this question. In the current year, V exchange, unimproved land for an apartment building. The land has a basis of 300,000, a fair market value of 420, and was encumbered by a $100,000 mortgage. The apartment building had a fair market value of 550, and was encumbered by $230,000 mortgage. Each party assumed the other's mortgage, what's V's basis in the office building. So V gave up the land, gave up the land, and received the building. Now, this topic is extremely important on the exam. And by the way, what do I mean by chapter 13 income tax course? It means this is where I cover the material. So this is called like-kind property exchange, like-kind, which is non-taxable transaction. It's very important that you are familiar with this. This is chapter 13, and I have a 15-minute lecture. Actually I have more than 15-minute lecture about this topic. But, you know, 15 minutes just to kind of get you used to it, then we work two or three more examples. So the point is you have to be very familiar with this. Now, there's two formulas that you can use to solve this question. One I call the fair value formula, and the other one is called the cost basis formula. Whatever you want to use, it's up to you. So I'm going to give you both formulas and show you how you can solve this question to find the basis in a non-exchange property. So here's what's going to happen. So if we're using the code method, so we're going to go with the adjusted basis of the new, which is what we're looking for, equal to the adjusted basis of the old, should the spend works properly, the adjusted basis of the old, plus the adjusted basis of boot given. We're going to explain those. Okay. Plus any recognized gain, so if you're recognized gain, you're going to add to your basis, minus fair market value of boot received, minus any recognized loss. So this is not the long formula, this is called the code approach or the basis approach. So let's take a look, see what we have. Well, the adjusted basis of the old, we are given an asset that's worth $300,000, plus the adjusted basis of boot giving. Are we giving any boot? This is the question here. Are we giving any boot? And the answer is yes. Boot is when we give cash. Hold on a second. We didn't give any cash, but in the problem they told you, assume the mortgage of the other party. Assume the mortgage of the other party. It means you gave them cash. So you're going to add 230,000, plus any recognized gain. We're not going to recognize any gain, although we do have a gain, which is the gain is if they ask you about the realized gain, the realized gain is 120, which is 420 minus 300,000, but they're not asking us about this. So we did not recognize any gain, minus fair market value of boot received. Did we receive any boot here in this example? And the answer is yes. If they relieved us of the $100,000, technically we received the boot, but it's not taxable. $100,000 minus the recognized loss. There is no recognized loss. So all in all, let's take a look to see what we have. So we subtract the fair market value of the boot received. So we have 300,000 plus 230 minus 100,000. So that's 530 minus 100 is 430. So the basis of the new property is 430,000. Now this is one method. Let's take a look at the fair market value approach. So under the fair market value approach, you're going to take the fair market value of the asset received, fair market value of asset received, which is 550, and you're going to deduct from it minus gain the third, and you're going to add to it loss the third. Now, if you don't know, I mean, if you're not sure what's the logic behind those, you can go to my, again, I showed you my lesson, you can go there and I show you in details why you deduct the gain, the third, and add the loss, the third. But I'm just going to go ahead and solve the problem now. Always you can go to my chapter 13. So what is the third gain? I told you that we have a realized gain of 120. I told you we have a realized gain of 120, which is 420 minus 300,000. We have a realized gain of 120. This is realized. How much of that was recognized? Just a second ago, I told you none of it is recognized. Therefore, all of it is the third. Therefore, I subtracted the third gain, and there is no third loss. 550 minus 120 equal to 430, which is the fair market value approach. You want to make sure you are comfortable with this problem like this. I can assure you, you will see this problem on the CPA exam day, either in a multiple choice format or a simulation. I'll bet with you that's the case. So make sure you know this. Otherwise, go to my chapter 13, subscribe to my website, and there's plenty of exercises to help you master this. Let's take a look at this exercise. Lemon owned 2,000 shares of spectral corporation common stock. They were purchased year one at 1050 per share. In year four, lemon received a 5% non-taxable dividend. In year five, the stock split to 4.1. In the current year, lemon sold 800 shares. What's the basis of the 800 shares? Fair enough. So here's what's going to happen. We originally paid $2,000 times 1050. So that's, I believe, that's 21,000. If my math is right, that's equal to 21,000. That's equal to 20,000. So this is what we paid for. This is what we paid for. We paid 21,000 for 2,000 shares. Then we received a 5% stock dividend. So 5,000 times, let's say 5% first, and add it times 5%. 5% 50 plus 50 equal to 100. 100 new shares. Now we have 2,100 shares. Then we got a stock split in year 5, 2,4,1. It means they double our shares. That's 4,200 shares. So what's happening is what we originally paid 1050 per share, our basis now is way less than 1050. So how do we know the basis per share we take 21,000, divided by 4,200. Let's do the math. Let's do the math real quick. So we invested originally $21,000. We invested, we invested $21,000 and we have 4,200 shares. So our basis per stock, our basis per share is $5 per share. If we sold 800, well, we're going to take this, $5 times 800 shares equal to 4,000. Therefore the answer is 4,000. The answer is 4,000. So simply put, you invested the original amount and you received more shares. As a result, your basis goes down. Actually your basis are, they're going to be less than half. Why less than half? Because you double the shares and you receive a 5% extra. So yes, so that makes sense. And then this is the right answer. Let's take a look at this question. Again, this is from chapter 13. It seems those questions appear from chapter 13, which is basis for property. Dekker, a 62-year-old single individual, sold his principal residence for the net amount of half a million after selling expenses. If there's any selling expenses, you can deduct. Dekker bought the house 15 years ago and occupied it until it was sold. On the date of the sale, the house had a cost basis of 200,000. Last month, Dekker purchased a new house for 600,000. What amount of gain should Dekker recognize from the sale of the house? So first of all, here you have to know simple rule section 121. Basically, what does that mean? If you're single, you sell your principal residence. And if you lived there within the past two years, within the past five years, you can wave, you cannot have taxable 250,000 if you are single. If you're married, filing jointly, you can have up to half a million. So we're not married filing jointly. We're dealing with a single individual. So they sold it for 500,000. And here they told you within six months Dekker purchased a new house, you can ignore all of this. This used to be the old rules. They're trying to confuse you. So they received 500,000. The house has a cost basis of 200,000. The realized gain is 300,000. Now 300,000 is here, but they're not asking about the realized. This is the realized. They're not asking about this. If you realize what's asked, you'll be, yeah, 300,000. They're asking about the recognized. What the recognize is if you realize 300,000, you're going to able to wave or deduct or, you know, get it, get a waiver for 250. What you're left with is 100,000. I'm sorry, 50,000. And the answer is 50,000. So be careful. It's not zero because it's only you can wave or have tax free 250,000 a single. Therefore, it's not zero. Immediately you can cross out zero because it's more than 250. I don't know how they came up with 175. I'm not going to confuse you, but yes, that's out. So the answer is 50,000. Let's take a look at this question. This question from chapter 21 seems from partnership, I assume. Chapter 21. V, a 50% partner in both partnership. V tax basis involves January 2nd, year 1 and 60,000. Ball did not have any unrealized receivable, appreciated property or property that has been contributed by its partners. That's fine. On December 31st, year 1, Ball made a 10,000 non-liquidating cash distribution to each partner. So this should be a 10,000 dollar non-liquidating the ball partnership income tax reported the following items for year 1. Tax exempt interest income 80,000 dividend income 12,000. And the question is what are total amount of gross income from ball should be included in vales year 1 adjusted gross income? Well, it seems there are three things. There's cash distribution. Cash distribution you have to know it's not taxable. So that's out. Tax exempt interest income. Well, it's telling you it's tax exempt interest income. It's not included. Dividend income. Is dividend deductible? Yes, it is. Do we have 12,000? No, we don't because we're a 50% owner. You're going to get 50% of the dividend because you're a 50% owner. Therefore, 6,000 will be included in your gross income for vales gross income, not in your gross income. So basically this is how you compute this questions like these. I can I'll bet with you. You will see those on the regulation exam. So make sure you are familiar with this. In the next session we will work additional questions as usual. I would like to remind you to visit my website, subscribe. You're going to study for your CPA exam only once in your lifetime. Invest. Take the time to do it. Okay? If you have any questions, I'm always here to help you and good luck.