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Free Questions › CPA › Taxation and Regulation
Free CPA Taxation and Regulation Practice Questions & Answers
500 exam-style Taxation and Regulation questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 91
The DRAWER of a cheque is:
Select an option first.
Correct answer: A — The person who WRITES the cheque, ordering their bank (the drawee) to pay the payee
Explanation: On a cheque: the DRAWER writes it; the DRAWEE is the bank ordered to pay; the PAYEE is the person to be paid. A cheque is a DRAFT (a three-party order to pay), whereas a NOTE is a two-party PROMISE to pay (maker and payee).
Question 92
A blank endorsement:
Select an option first.
Correct answer: D — Consists of the endorser's SIGNATURE ALONE, converting the instrument to BEARER paper negotiable by delivery
Explanation: A BLANK endorsement is a mere signature, making the instrument BEARER paper negotiable by DELIVERY alone (and therefore risky if lost). A SPECIAL endorsement names a specific transferee ('Pay to X'), keeping it ORDER paper. A RESTRICTIVE endorsement ('For deposit only') limits its use.
Question 93
A CPA's liability to a THIRD PARTY for ordinary negligence, under the RESTATEMENT approach, extends to:
Select an option first.
Correct answer: D — A LIMITED CLASS of FORESEEN users the CPA knew would rely on the work
Explanation: Three approaches exist. PRIVITY (Ultramares) — only the client and intended third-party beneficiaries. RESTATEMENT (the majority rule) — a LIMITED CLASS of FORESEEN users. FORESEEABILITY (the minority rule) — ANY reasonably foreseeable user. The Restatement middle ground is the most commonly adopted.
Question 94
For FRAUD, a CPA is liable to:
Select an option first.
Correct answer: C — ANY party who reasonably and foreseeably relied on the misstatement — privity is NOT required for fraud
Explanation: For FRAUD (or constructive fraud/gross negligence), PRIVITY is NOT required — the CPA is liable to ANY reasonably foreseeable user who relied. The privity limitations apply only to ORDINARY NEGLIGENCE. That is why plaintiffs so often plead fraud: it dissolves the privity barrier.
Question 95
A contract for the sale of goods is modified. Under the UCC, the modification:
Select an option first.
Correct answer: A — Requires NO new consideration — good faith is enough
Explanation: The UCC (§2-209) permits modification WITHOUT new consideration, provided it is made in GOOD FAITH. This contrasts sharply with the COMMON LAW pre-existing duty rule, under which a modification generally REQUIRES fresh consideration. Note the modified contract may need to satisfy the Statute of Frauds.
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Question 96
A voidable preference defence exists where the transfer was made:
Select an option first.
Correct answer: D — In the ORDINARY COURSE of business, or was a CONTEMPORANEOUS EXCHANGE for new value, or a PMSI perfected within 30 days
Explanation: Even where the five preference elements are met, the trustee cannot avoid a transfer that falls within an EXCEPTION: an ORDINARY COURSE of business payment; a CONTEMPORANEOUS EXCHANGE for new value; a PMSI perfected within 30 days; a subsequent advance of NEW VALUE; or a domestic support obligation.
Question 97
Under agency law, an agent's duty to the principal includes:
Select an option first.
Correct answer: B — LOYALTY, obedience, reasonable care, accounting, and notification
Explanation: An AGENT owes the principal: LOYALTY (no self-dealing, no secret profits, no conflicting interests); OBEDIENCE to lawful instructions; reasonable CARE and skill; a duty to ACCOUNT for money and property; and a duty to NOTIFY the principal of material facts. The PRINCIPAL owes the agent compensation, reimbursement and INDEMNIFICATION.
Question 98
An LLP (limited liability partnership) differs from a general partnership in that partners:
Select an option first.
Correct answer: D — Are SHIELDED from personal liability for the malpractice and negligence of OTHER partners
Explanation: An LLP shields each partner from PERSONAL liability arising from the malpractice, negligence or misconduct of OTHER partners and of the firm. A partner remains personally liable for their OWN wrongful acts and for those they supervised. LLPs are the standard structure for professional firms.
Question 99
A general partner's apparent authority binds the partnership when:
Select an option first.
Correct answer: A — They apparently carry on the partnership business in the ORDINARY COURSE — unless the third party KNEW of the limitation
Explanation: Each partner is an AGENT of the partnership. An act APPARENTLY carrying on the ordinary business BINDS the partnership — EVEN IF the partner lacked actual authority — UNLESS the third party KNEW or had notice of the restriction. An act OUTSIDE the ordinary course binds only if actually authorised.
Question 100
The doctrine of respondeat superior does NOT apply to:
Select an option first.
Correct answer: A — INTENTIONAL torts committed for purely PERSONAL motives, unrelated to the employer's business
Explanation: Respondeat superior covers acts within the SCOPE of employment. An INTENTIONAL tort committed for purely PERSONAL reasons (a bar fight over a private grievance) falls outside that scope. But an intentional tort committed to SERVE the employer (a bouncer using excessive force) may well be within it.
Question 101
A shipment contract requires the seller to:
Select an option first.
Correct answer: A — Deliver conforming goods to a CARRIER and make a reasonable contract for their transport — risk then passes to the buyer
Explanation: A SHIPMENT contract (FOB shipping point) requires the seller to deliver to a CARRIER, make a reasonable contract for transport, and notify the buyer. Risk of loss then passes to the BUYER. A DESTINATION contract (FOB destination) requires tender AT the destination, with risk passing only there.
Question 102
Under the UCC, an entrusting of goods to a merchant who deals in goods of that kind gives the merchant power to:
Select an option first.
Correct answer: B — Transfer ALL RIGHTS of the entruster to a BUYER IN THE ORDINARY COURSE of business
Explanation: ENTRUSTMENT: if you leave your watch with a jeweller who SELLS watches, and the jeweller wrongfully sells it to a buyer in the ordinary course, THE BUYER GETS GOOD TITLE. Your remedy is against the jeweller, not the buyer. The rule protects the flow of commerce over the original owner's title.
Question 103
A void contract differs from a voidable one in that a VOID contract:
Select an option first.
Correct answer: D — Has NO legal effect from the outset and cannot be enforced by EITHER party
Explanation: A VOID contract has no legal effect whatever — it cannot be ratified or enforced by anyone (an agreement to commit a crime). A VOIDABLE contract is valid until DISAFFIRMED by the protected party (a minor's contract, one induced by fraud). The distinction determines who, if anyone, can enforce it.
Question 104
A guarantor of collection (as opposed to a surety) may be pursued:
Select an option first.
Correct answer: A — ONLY AFTER the creditor has exhausted remedies against the principal debtor
Explanation: A GUARANTOR OF COLLECTION is SECONDARILY liable — the creditor must first exhaust remedies against the principal debtor (obtain a judgement, attempt execution). A SURETY (or guarantor of payment) is PRIMARILY liable and may be pursued IMMEDIATELY on default, without first suing the debtor.
Question 105
A CPA's workpapers are generally owned by:
Select an option first.
Correct answer: C — The CPA — though the CLIENT'S OWN RECORDS must be returned on request
Explanation: WORKPAPERS belong to the CPA. The CLIENT'S OWN RECORDS (documents the client provided) must be RETURNED on request, regardless of any fee dispute. Withholding the client's own records to compel payment is an act discreditable to the profession, though the CPA may withhold its own work product in some jurisdictions.
Question 106
Under Rule 10b-5, a plaintiff's reliance may be PRESUMED where:
Select an option first.
Correct answer: A — The FRAUD-ON-THE-MARKET theory applies — the security trades in an efficient market and the misstatement was public
Explanation: FRAUD ON THE MARKET presumes RELIANCE where the security trades in an EFFICIENT MARKET, on the theory that public misinformation is impounded into the price — so any purchaser relies on the integrity of the market price. This presumption is what makes securities CLASS ACTIONS viable; without it, individual reliance would defeat certification.
Question 107
A partnership's dissolution is followed by:
Select an option first.
Correct answer: C — WINDING UP (liquidating assets, paying creditors) and then TERMINATION — the partnership continues for the limited purpose of winding up
Explanation: DISSOLUTION is the beginning of the end, not the end. It is followed by WINDING UP (collecting assets, paying creditors, distributing the remainder) and only then TERMINATION. During winding up, a partner's apparent authority is limited to acts appropriate to winding up.
Question 108
On dissolution, partnership assets are distributed FIRST to:
Select an option first.
Correct answer: A — CREDITORS (including partners who are creditors), before any distribution to partners as partners
Explanation: The distribution order: (1) CREDITORS — outside creditors AND partners who are creditors (e.g. who made loans); (2) partners' CAPITAL contributions; (3) partners' PROFITS. Partners take last, which is the essence of residual ownership.
Question 109
A cheque presented to a bank more than 6 months after its date:
Select an option first.
Correct answer: C — May be dishonoured — the bank is NOT obligated to pay a STALE cheque, though it may in good faith
Explanation: A bank is NOT OBLIGED to pay a cheque presented more than SIX MONTHS after its date (a STALE cheque), though it MAY do so in good faith. A CERTIFIED cheque, by contrast, has been accepted by the bank and the bank IS obliged to pay.
Question 110
A forged DRAWER'S signature on a cheque means the loss falls on:
Select an option first.
Correct answer: C — The BANK that paid it — a bank pays a forged drawer's signature at its own peril, unless the customer's negligence contributed
Explanation: A bank that pays over a FORGED DRAWER'S signature must RECREDIT the customer's account — it pays at its peril. EXCEPTIONS: the customer's own NEGLIGENCE substantially contributed to the forgery, or the customer failed to examine statements and report promptly. The bank may then pursue the forger.
Question 111
Under the Uniform Partnership Act, profits are shared:
Select an option first.
Correct answer: D — EQUALLY, absent an agreement to the contrary — and LOSSES follow the PROFIT-sharing ratio
Explanation: Absent agreement, PROFITS are shared EQUALLY, regardless of unequal capital contributions. LOSSES follow the PROFIT ratio. This surprises partners who contributed unequal capital — which is exactly why partnership agreements exist.
Question 112
A close corporation may:
Select an option first.
Correct answer: A — Dispense with a board of directors and be managed directly by shareholders, via a SHAREHOLDER AGREEMENT
Explanation: A CLOSE (statutory close) corporation may dispense with a BOARD and be managed directly by the SHAREHOLDERS under a shareholder agreement, and may relax other formalities. In exchange, share transfers are typically restricted and the number of shareholders is capped.
Question 113
A CPA who is not independent may still perform:
Select an option first.
Correct answer: C — A COMPILATION (with the lack of independence disclosed) or a tax engagement — but NOT an audit or a review
Explanation: Independence is REQUIRED for an AUDIT and for a REVIEW. It is NOT required for a COMPILATION (though the lack of independence must be DISCLOSED in the report), nor for a PREPARATION engagement, nor for tax or consulting services.
Question 114
The federal corporate income tax rate is:
Select an option first.
Correct answer: A — 21% flat
Explanation: The corporate rate is a FLAT 21% (TCJA, permanent). The old graduated structure topping out at 35% is gone. Corporations have no preferential capital gains rate — capital gains are taxed at the same 21%.
Question 115
Under §351, no gain is recognised on the transfer of property to a corporation if the transferors:
Select an option first.
Correct answer: D — Own at least 80% of the voting stock AND at least 80% of each other class IMMEDIATELY AFTER the exchange
Explanation: §351 requires CONTROL immediately after the exchange: at least 80% of the total combined voting power AND at least 80% of the total number of shares of each other class. Stock issued for SERVICES does NOT count toward the 80% test, and the service provider recognises ORDINARY INCOME.
Question 116
Under §721, a contribution of property to a PARTNERSHIP:
Select an option first.
Correct answer: C — Results in NO gain or loss — and there is NO control test
Explanation: §721 provides NO gain or loss on a contribution of property for a partnership interest, and — unlike §351 — there is NO CONTROL TEST. This is the headline difference: you can contribute for a 1% partnership interest and still defer. Watch for the DISGUISED SALE rule if cash is returned within 2 years.
Question 117
A partner's OUTSIDE basis INCLUDES:
Select an option first.
Correct answer: A — The partner's share of PARTNERSHIP LIABILITIES
Explanation: A partner's outside basis includes cash contributed, the adjusted basis of property contributed, the partner's SHARE OF PARTNERSHIP LIABILITIES, plus allocated income, less allocated losses and distributions. The inclusion of entity-level DEBT is the single biggest structural difference from an S corporation.
Question 118
An S corporation shareholder's basis:
Select an option first.
Correct answer: C — Does NOT include entity-level debt — only DIRECT loans from the shareholder to the corporation create debt basis
Explanation: S corporation shareholders get basis from stock and from DIRECT SHAREHOLDER LOANS only. Entity-level debt owed to third parties creates NO basis — even if the shareholder guarantees it. PARTNERS, by contrast, DO get basis from partnership debt. This contrast is tested relentlessly.
Question 119
An S corporation may have no more than:
Select an option first.
Correct answer: D — 100 shareholders
Explanation: An S corporation is limited to 100 SHAREHOLDERS. Other eligibility requirements: a domestic corporation; only individuals, estates and certain trusts as shareholders (NO corporations or partnerships); no non-resident alien shareholders; and only ONE CLASS OF STOCK (differences in voting rights alone are permitted).
Question 120
An S corporation may have:
Select an option first.
Correct answer: D — Only ONE class of stock (though differences in VOTING rights are permitted)
Explanation: An S corporation may have only ONE CLASS OF STOCK — all shares must confer identical rights to distributions and liquidation proceeds. Differences in VOTING rights ARE permitted (voting and non-voting common is fine). Issuing preferred stock would terminate the S election.
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