cpa 2014 reg aicpa questions

2014 AICPA DISCLOSED QUESTIONS -- REGULATION

The following pages contain all of the new multiple-choice questions released by the AICPA in2014. Our editors have added correct and incorrect answer explanations and renumbered andorganized the questions to conform to our study units.

These questions are presented in this PDF in our Review book format, with the answers and answerexplanations to the right of each question. Gleim recommends that candidates answer these questionsin our CPA Test Prep instead of via this PDF in order to emulate a more realistic test-taking experience.

Material from Uniform CPA Examination, Selected Questions and Unofficial Answers,Copyright © 1974-2014 by the American Institute of Certified Public Accountants, Inc., is reprintedand/or adapted with permission. Visit the AICPA’s website at www.aicpa.org for more information.

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Study Unit 1, Subunit 2

Shore, a paid tax return preparer, was given threepartnership Schedule K-1 forms by client Fuller. Fulleris a limited partner in each of the partnerships. TheK-1s disclosed small pass-through losses allocated toFuller. Fuller had passive income in excess of theselosses from other partnerships. According to theAICPA Statements on Standards for Tax Services,assuming that no at-risk limitations apply, what isShore’s professional responsibility regarding thereporting of these partnership losses on Fuller’sfederal income tax return?

A. To verify the client’s basis by examiningclient’s records from the initial investment tothe present.

B. To accept the information without furtherinquiry unless Shore has reason to believe thatthe information is incorrect.

C. To verify the initial investment in eachpartnership entity unless Shore has reason tobelieve that the information is incorrect.

D. To request the complete partnership returns ofthe partnership entities unless Shore hasreason to believe that the information isincorrect.

Answer (B) is correct.REQUIRED: The tax preparer’s professional responsibility

under the SSTS for the reporting of partnership losses.DISCUSSION: In good faith, a member may rely, without

verification, on information provided by the taxpayer or thirdparties. Reasonable inquiries should be made if informationappears to be incorrect, incomplete, or inconsistent on its face oron the basis of other facts known, and prior returns should beconsulted whenever feasible (TS 300).

Answer (A) is incorrect. Verification is unnecessary, but themember should make reasonable inquiries if the informationappears to be incorrect, incomplete, or inconsistent. Answer (C)is incorrect. The member should make reasonable inquiries if theinformation appears to be incorrect, incomplete, or inconsistent.Answer (D) is incorrect. Prior returns should be consultedwhenever feasible.


Which of the following bodies has the authority tosuspend or revoke a CPA’s license for actsdiscreditable to the profession?

A. The state society of certified publicaccountants.

B. The state board of accountancy.

C. The Public Company Accounting OversightBoard.

D. The American Institute of Certified PublicAccountants.

Answer (B) is correct.REQUIRED: The body with the authority to suspend or

revoke a CPA’s license for acts discreditable.DISCUSSION: State boards can suspend or revoke

licensure through administrative processes, such as boardhearings.

Answer (A) is incorrect. State CPA societies are voluntary,private entities that can admonish, suspend, or expel their ownmembers, but they cannot suspend or revoke a CPA license.Answer (C) is incorrect. The PCAOB has no injunctive power, butit may initiate administrative proceedings. It may not suspend orrevoke a CPA license. Answer (D) is incorrect. The AICPAProfessional Ethics Division investigates ethics violations.However, it generally imposes sanctions only in less seriouscases. The Joint Trial Board handles more serious infractions.Expulsion from the AICPA does not bar the individual frompractice of public accounting. Thus, violation of a rule establishedby a board of accountancy is more serious than expulsion fromthe AICPA.

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Under Regulation D, Rule 505, of the SecuritiesAct of 1933, which of the following statements iscorrect regarding a $3,000,000 stock offering soldonly to accredited investors?

A. The issuer may sell the stock to only 35accredited investors.

B. The issuer may make the offering through ageneral advertising.

C. The issuer must supply all accredited investorswith financial information.

D. The issuer must notify the SEC within 15 daysafter the first sale of the offering.

Answer (D) is correct.REQUIRED: The true statement about a stock offering sold

only to accredited investors under Rule 505.DISCUSSION: Various procedural rules generally must be

followed to qualify for an exemption under Regulation D, some ofwhich do not apply to certain exemptions. However, arequirement to notify the SEC by filing Form D within 15 days ofthe first offering applies to all 3 exemptions (Rule 504, Rule 505,and Rule 506).

Answer (A) is incorrect. Under Rule 505, the issue may bepurchased by an unlimited number of accredited investors.Answer (B) is incorrect. Under Rule 505, no general solicitationor advertising is permitted. Answer (C) is incorrect. The issuermust supply all nonaccredited (not accredited) investors withmaterial information about the issuer, its business, and thesecurities being offered prior to the sale.


Pick, CPA, was engaged by Edge Corp. to auditEdge’s financial statements. Pick, in performing theaudit and rendering an unmodified opinion,intentionally ignored several material omissions in thefinancial statements. Edge included Pick’s auditor’sreport in its annual filing with the SEC and in itsannual stockholders’ report. Drane purchased sharesof Edge stock based on Drane’s review of the pastperformance of the stock and current-year financialstatements. When the omissions in the financialstatements became known, the value of Edge stockdeclined and Drane suffered a loss. Under theprovisions of Rule 10b-5 of the Securities ExchangeAct of 1934, what will be the result of a suit by Draneagainst Pick?

A. Drane will win because Pick acted with intent.

B. Drane will win because Pick was negligent.

C. Drane will lose because only Edge is liable.

D. Drane will lose because the stock purchasedwas not part of a new issue.

Answer (A) is correct.REQUIRED: The result of a suit under Rule 10b-5 by an

investor against an auditor who intentionally ignored materialomissions in the financial statements of the investee.

DISCUSSION: Rule 10b-5 states that it is illegal for anyperson, directly or indirectly, to use interstate commerce or anational securities exchange to defraud anyone in connectionwith the purchase or sale of any security, whether or not requiredto be registered. It is most often applied to insider trading andcorporate misstatements. A person may violate Rule 10b-5without actively participating in the purchase or sale of thesecurity. All that is required is that the party’s activity beconnected with the purchase or sale. Liability is only to actualpurchasers or sellers. They need not be in privity with thedefendant. The SEC or a private party may sue. A plaintiff mustprove each of the following: (1) an oral or written misstatement oromission of a material fact or other fraud; (2) its connection withany purchase or sale of securities; (3) the defendant’s intent todeceive, manipulate, or defraud (scienter); (4) reliance on themisstatement (but a private plaintiff ordinarily need not provereliance in omission cases); and (5) loss caused by the reliance.Accordingly, the auditor is liable for fraud because (s)heintentionally ignored material omissions in the financialstatements that constituted written misstatements of materialfacts related to a purchase of securities that resulted in loss.

Answer (B) is incorrect. The defendant-auditor intentionallyignored material omissions in the financial statements. Thus, theauditor’s actions are fraudulent, not negligent. Answer (C) isincorrect. The defendant-auditor is liable for intentionalconcealment of material misstatement of the financialstatements. The auditor is therefore liable for fraud. Answer (D) isincorrect. Rule 10b-5 applies to the purchase or sale of anysecurity, whether or not required to be registered.

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Under the common law, which of the followingdefenses, if used by a CPA, would best avoid liabilityin an action for negligence brought by a client?

A. The client was contributorily negligent.

B. The client was comparatively negligent.

C. The accuracy of the CPA’s report was notguaranteed.

D. The CPA’s negligence was not the proximatecause of the client’s losses.

Answer (D) is correct.REQUIRED: The best defense by a CPA against a client’s

negligence claim.DISCUSSION: A plaintiff-client must prove all of the following

elements of negligence: (1) the accountant owed the client aduty, (2) the accountant breached this duty, (3) the accountant’sbreach actually and proximately caused the client’s injury, and(4) the client suffered damages. Proximate cause is a chain ofcausation that is not interrupted by a new, independent cause.Moreover, the injury would not have occurred without theproximate cause. However, actual causation is insufficient. Theinjury also must have been reasonably foreseeable. Thus, theconcept of proximate cause limits liability to foreseeabledamages. Accordingly, lack of proof of proximate causeprecludes any recovery of damages.

Answer (A) is incorrect. Contributory negligence is notrecognized as a defense in a substantial majority of states. Moststates have adopted a comparative negligence approach thatallows a contributorily negligent plaintiff to recover a percentageof the damages. Answer (B) is incorrect. The client is liable forhis or her percentage of the damages in a state that applies thecomparative negligence rule. Answer (C) is incorrect. A CPA’sreport offers reasonable assurance, not a guarantee.

Which of the following pairs of elements must aclient prove to hold an accountant liable for commonlaw negligence?

A. Freedom from contributory negligence andprivity.

B. Breach of the accountant’s duty of care andloss.

C. Willful misrepresentation and breach of theaccountant’s duty of care.

D. Scienter and a violation of GAAP.

Answer (B) is correct.REQUIRED: The elements to be proved to hold an

accountant liable for negligence.DISCUSSION: To hold an accountant liable for negligence,

the plaintiff-client must prove all of the following elements ofnegligence: (1) the accountant owed the client a duty ofreasonable care and diligence, (2) the accountant breached thisduty, (3) the accountant’s breach actually and proximatelycaused the client’s injury, and (4) the client suffered damages(loss).

Answer (A) is incorrect. Comparative, not contributory,negligence is recognized in most states. It is a defense to liability,not an element of the tort of negligence. Moreover, in moststates, privity of contract no longer is required for a plaintiff tohold an accountant liable for negligence. The majority rule is thatan accountant is liable to foreseen users and users within a classof foreseen users. Answer (C) is incorrect. Willfulmisrepresentation is an element of fraud, not negligence.Answer (D) is incorrect. Scienter is actual or implied knowledgeof fraud. It is an element of fraud, not common law negligence.Compliance with GAAP is a defense to negligence.

American Corp. retained Baker, CPA, to conductan audit of its financial statements to obtain a bankline of credit. American signed an engagement letterdrafted by Baker that included a disclaimer provision.As a result of Baker’s failure to detect a materialmisstatement in American’s financial statements, theaudit report contained an unmodified opinion. Basedon American’s audited financial statements, Nationalextended credit to American. American filed a petitionin bankruptcy shortly thereafter. National sued Bakerfor damages based on common law fraud. Whatwould be Baker’s best defense?

A. Baker acted with due diligence in conductingthe audit.

B. Baker included a disclaimer provision in theengagement letter with American.

C. National was not in privity with Baker.

D. Baker lacked the intent to deceive.

Answer (D) is correct.REQUIRED: The auditor’s best defense to a claim of fraud

made by a third-party user of the audited financial statementswho relied on them to extend credit to the client.

DISCUSSION: A finding of fraud requires proof that themisrepresentation was made with knowledge of, or recklessdisregard for, its falsity. Thus, proving that the accountant lackedthe intent to deceive is the best defense to a claim of fraud.

Answer (A) is incorrect. Because failure to exercise due careis not an element of fraud, proof that the accountant acted withdue diligence is not the best defense. Answer (B) is incorrect.Liability for fraud cannot be disclaimed. Answer (C) is incorrect.Liability for fraud is to all reasonably foreseeable users.A foreseeable user is any person the accountant should haveforeseen would be injured by justifiable reliance on themisrepresentation. Privity is not required. National is aforeseeable user because Baker should have reasonablyforeseen that American’s financial statements would be used toobtain credit from a bank.

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Baker, an unmarried individual, sold a personalresidence, which has an adjusted basis of $70,000,for $165,000. Baker owned and lived in the residencefor 7 years. Selling expenses were $10,000. Fourweeks prior to the sale, Baker paid a handyman$1,000 to paint and fix-up the residence. What is theamount of Baker’s recognized gain?

A. $0

B. $84,000

C. $85,000

D. $95,000

Answer (A) is correct.REQUIRED: The amount of gain recognized on sale of a

principal residence.DISCUSSION: While the correct amount of realized gain is

$85,000, IRC Sec. 121 excludes the gain on the sale of aprincipal residence, up to $250,000 per taxpayer, subject tocertain rules and limitations. As none of the facts would lead usto reduce this exclusion, no gain is recognized on the dispositionof the home.

Answer (B) is incorrect. The costs incurred to paint andrepair the home are not capital improvements and would notincrease the basis of the home. Answer (C) is incorrect. While$85,000 is the correct amount of realized gain ($165,000 amountrealized, less $10,000 selling expenses, less $70,000 adjustedbasis), the amount of recognized gain differs due to the exclusionamount on the sale of a principal residence. Answer (D) isincorrect. Selling expenses are treated as a reduction in theamount realized to the seller of property and would decrease thegain realized on the disposition of the home.


Nan, a cash basis taxpayer, borrowed money froma bank and signed a 10-year interest-bearing note onbusiness property on January 1 of the current year.The cash flow from Nan’s business enabled Nan toprepay the first three years of interest attributable tothe note on December 31 of the current year. Howshould Nan treat the prepayment of interest for taxpurposes?

A. Deduct the entire amount as a currentexpense.

B. Deduct the current year’s interest and amortizethe balance over the next two years.

C. Capitalize the interest and amortize thebalance over the 10-year loan period.

D. Capitalize the interest as part of the basis ofthe business property.

Answer (B) is correct.REQUIRED: Nan’s appropriate treatment for the prepayment

of interest on business property.DISCUSSION: Despite being a cash-basis taxpayer, the

interest expense must be apportioned to the periods to which it isattributable. As the first three years’ portion is paid in Year 1, theYear 1 portion is currently deductible. The remainder must bededucted in the year to which it is attributable (Year 2 in Year 2,and Year 3 in Year 3), regardless of when paid.

Answer (A) is incorrect. The interest expense must beallocated to the period which it benefited and may not be entirelydeducted presently. Answer (C) is incorrect. As the prepaymentof interest does not benefit the periods after the end of Year 3, itis not reasonable to allocate the interest to periods beyondYear 3. Answer (D) is incorrect. The appropriate treatment for theprepayment of interest on business property is to capitalize andamortize the interest in the period to which it applies.


Which of the following statements is correctregarding the deductibility of donations made toqualifying charities by a cash-basis individualtaxpayer?

A. A contemporaneous written acknowledgmentis required for donations of $100.

B. A charitable contribution deduction is notallowed for the value of services rendered to acharity.

C. A qualified appraisal for real propertydonations is not required to be attached to thetax return unless the property value exceeds$10,000.

D. The charitable contribution deduction forlong-term appreciated stock is limited to 50%of adjusted gross income.

Answer (B) is correct.REQUIRED: The correct statement regarding charitable

contributions.DISCUSSION: The costs of services rendered to a charity

(such as legal advice, accounting assistance, or volunteeringtime) as a donation are not deductible as a charitablecontribution. However, any expenses incurred in the rendering ofthose services (such as travel costs, mileage, supplies, etc.) aredeductible.

Answer (A) is incorrect. Donations of $250 or more continueto require substantiation by a written receipt from theorganization (the bank record alone is not sufficient). Answer (C)is incorrect. A qualified appraisal for real property donations isrequired to be attached to the tax return for property valued over$5,000. Answer (D) is incorrect. Donations of appreciated capitalgain property are limited to 30% of AGI, assuming they are madeto 50% limit organizations. Otherwise, the donation may belimited to 20%.

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Pat, a single taxpayer, has adjusted grossincome of $40,000 in the current year. During theyear, a hurricane causes $4,100 damage to Pat’spersonal use car on which Pat has no insurance. Patpurchased the car for $20,000. Immediately beforethe hurricane, the car’s fair market value was $11,000and immediately after the hurricane its fair marketvalue was $6,900. What amount should Pat deduct asa casualty loss for the current year after all thresholdlimitations are applied?

A. $4,100

B. $4,000

C. $100

D. $0

Answer (D) is correct.REQUIRED: The current-year deduction amount for the

casualty loss.DISCUSSION: Only casualty losses in excess of 10% of AGI

may be deducted after applying the $100 floor. Generally,casualty losses are deductible to the extent of the lesser of thedecline in FMV or adjusted basis (less insurancereimbursements) due to the event. In this case, both the amountof the damage and the decline in FMV are $4,100. After applyingthe $100 floor, the remaining casualty loss is $4,000. Subject tothe 10% AGI limitation, the loss is reduced by $4,000 ($40,000 ×10%) to $0.

Answer (A) is incorrect. The amount of $4,100 is the declinein fair market value as well as the amount of the casualty lossbefore application of the $100 floor. Answer (B) is incorrect. Theamount of $4,000 is the decline in fair market value as well as theamount of the casualty loss after the application of the $100 floor,but before the application of the 10% of AGI limitation.Answer (C) is incorrect. The amount of $100 is the casualty lossfloor that must be subtracted from each casualty loss beforeapplying any other limitations.


Which of the following is not a deduction to arriveat adjusted gross income?

A. Alimony payments.

B. Trade or business expenses.

C. Capital losses in excess of capital gains.

D. Unreimbursed employee business expenses.

Answer (D) is correct.REQUIRED: The below-the-line (from AGI) deduction.DISCUSSION: Unreimbursed employee expenses are a

deduction from AGI, as an itemized deduction (below-the-line).Answer (A) is incorrect. Alimony is an above-the-line

deduction (for AGI). Answer (B) is incorrect. Trade or businessexpenses are deducted on Schedule C, which is listedabove-the-line (a deduction for AGI). Answer (C) is incorrect.Capital losses in excess of capital gains are deducted onSchedule D, which is listed above-the-line (a deduction for AGI).


When computing alternative minimum tax, theindividual taxpayer may take a deduction for which ofthe following items?

A. State income taxes.

B. Personal and dependency exemptions.

C. Miscellaneous itemized deductions in excessof 2% of adjusted gross income floor.

D. Casualty losses.

Answer (D) is correct.REQUIRED: The allowable deduction for an individual

against alternative minimum taxable income.DISCUSSION: Casualty losses are allowed as deductions

against alternative minimum taxable income (AMTI), subject tolimitations.

Answer (A) is incorrect. State income taxes are not permittedas a deduction against alternative minimum taxable income(AMTI). Answer (B) is incorrect. Personal and dependencyexemptions must be added back in the computation of alternativeminimum taxable income (AMTI). Answer (C) is incorrect.Miscellaneous itemized deductions subject to the 2% floor arenot permitted as deductions against alternative minimum taxableincome (AMTI), subject to limitations.

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Dietz is a passive investor in three activitieswhich have been profitable in previous years. Theprofit and losses for the current year are as follows:

Gain (Loss)Activity X $(30,000)Activity Y (50,000)Activity Z 20,000Total $(60,000)What amount of suspended loss should Dietz allocateto Activity X?

A. $18,000

B. $20,000

C. $22,500

D. $30,000

Answer (C) is correct.REQUIRED: The allocable amount of suspended passive

losses to Activity X.DISCUSSION: The passive activity income is allocated pro

rata between the two activities with passive losses. As Activity Xaccounts for 37.5% ($30,000 ÷ $80,000 total loss) of the passivelosses, it is allocated $7,500 ($20,000 × 37.5%) of the passiveactivity income. This results in a net $22,500 ($30,000 – $7,500)passive activity loss allocable to Activity X.

Answer (A) is incorrect. The passive activity income must beused to offset some of the passive activity loss from Activity X.Answer (B) is incorrect. The amount of $20,000 is the passiveactivity income, not the amount of the loss allocable to Activity X.Answer (D) is incorrect. A portion of the passive activity incomemust be used to offset the passive losses from Activity X.

The Jacksons, who file a joint return, activelyparticipate in a solely-owned rental real estate activitythat produces a $30,000 loss during the current year.Their adjusted gross income was $120,000 beforeconsidering the rental activity. How much of the rentalloss, if any, are the Jacksons entitled to deduct?

A. $0

B. $15,000

C. $25,000

D. $30,000

Answer (B) is correct.REQUIRED: The amount of deductible rental loss on rental

real estate.DISCUSSION: Generally, an active participant in rental real

estate may deduct up to $25,000 per year in rental real estatelosses. For taxpayers whose MAGI exceeds $100,000, theamount of the active real estate loss deduction is reduced for50% of the excess of MAGI over $100,000. For the Jacksons,this means the currently deductible portion of real estate losses is$15,000 {$25,000 – [($120,000 MAGI – $100,000 base amount)× 50% limitation]}.

Answer (A) is incorrect. A portion of the rental real estateloss is deductible. Answer (C) is incorrect. This is the correctgeneral amount for active real estate loss deduction. However,the Jacksons are subject to high-income limitations. Answer (D)is incorrect. The full amount of the loss is not deductible.


Which of the following types of costs are requiredto be capitalized under the Uniform CapitalizationRules of Code Sec. 263A?

A. Marketing.

B. Distribution.

C. Warehousing.

D. Office maintenance.

Answer (C) is correct.REQUIRED: Expense required to be capitalized for UNICAP.DISCUSSION: UNICAP rules require the capitalization of all

expenses necessary to bring the asset to its intended use.Storage of an asset prior to its intended use would qualify as acost incurred to bring it to its full use and should be capitalizedunder UNICAP.

Answer (A) is incorrect. UNICAP rules require thecapitalization of all expenses necessary to bring the asset to itsintended use. Marketing expenses would be an expense incurredin the sale of goods or services, not in the implementation of theasset. Answer (B) is incorrect. UNICAP rules require thecapitalization of all expenses necessary to bring the asset to itsintended use. Distribution costs would be attributable to the saleof goods and services, not to the acquisition and implementationof an asset. Answer (D) is incorrect. UNICAP rules require thecapitalization of all expenses necessary to bring the asset to itsintended use. Office maintenance is an indirect expenseallocable to all of the operations of the business equally, not aparticular asset.

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An individual reports the following capitaltransactions in the current year:Short-term capital gain $ 1,000Short-term capital loss 11,000Long-term capital gain 10,000Long-term capital loss 6,000What amount is deducted in arriving at adjusted grossincome?

A. $10,000

B. $6,000

C. $3,000

D. $0

Answer (C) is correct.REQUIRED: The amount of net capital loss from multiple

transactions.DISCUSSION: The net short-term capital loss for the year is

$6,000. This is partially deductible in the current year, asindividuals are permitted to use up to $3,000 of capital losses tooffset ordinary income each year.

Answer (A) is incorrect. The short-term losses for the yearmust first be used to offset long-term capital gain. Answer (B) isincorrect. This is the correct amount of net short-term capitalloss. However, the full amount is not deductible against ordinaryincome during the year. Answer (D) is incorrect. Whilecorporations are not permitted to offset ordinary income withcapital losses, individuals are permitted to deduct a portion oftheir short-term capital loss carryforward against ordinary incomeeach year.


On March 1 of the previous year, a parent soldstock with a cost of $8,000 to their child for $6,000, itsfair market value. On September 30 of the currentyear, the child sold the same stock for $7,000 toHancock, who is unrelated to the parent and child.What is the proper treatment for these transactions?

A. Parent has a $2,000 recognized loss and childhas $1,000 recognized gain.

B. Parent has $2,000 recognized loss and childhas $0 recognized gain.

C. Parent has $0 recognized loss and child has$1,000 recognized gain.

D. Parent has $0 recognized loss and child has$0 recognized gain.

Answer (D) is correct.REQUIRED: The proper treatment for related party stock

sales.DISCUSSION: With a related party stock sale, the original

related seller is not permitted to recognize any realized loss onthe disposition. However, if the recipient of that stocksubsequently disposes of it at a gain, they are permitted toreduce any gain realized by the amount of the disallowed loss. Inthis case, $2,000 ($6,000 amount realized, less $8,000 adjustedbasis) of loss is realized to the parent on the initial disposition.The child takes a $6,000 fair market value basis. Uponsubsequent disposition, the child realizes a $1,000 gain on thesale of the shares ($7,000 amount realized, less $6,000 adjustedbasis). However, this is reduced to $0 by the disallowed loss tothe parent. The remaining $1,000 loss ($2,000 disallowed loss,less $1,000 used to offset the child’s gain) is permanently lost.

Answer (A) is incorrect. The recognition of losses on relatedparty stock sales is not permitted, and the child’s gain should notbe fully recognized. Answer (B) is incorrect. The recognition oflosses on related party stock sales is not permitted. Answer (C) isincorrect. The parent’s disallowed loss is allowed to offset thechild’s subsequently realized gain.


Prime Corporation’s building was destroyed by atornado. The fair market value of the building at thetime of the tornado was $400,000, and its adjustedbasis was $350,000. The insurance proceeds totaled$500,000 as follows:

$400,000 for the building.

$100,000 for lost profits during rebuilding.

Prime does not defer any gain under the involuntaryconversion provisions of Code Sec. 1033. Whatamount of the insurance proceeds is taxable toPrime?

A. $0

B. $50,000

C. $100,000

D. $150,000

Answer (D) is correct.REQUIRED: The amount of insurance proceeds taxable due

to an involuntary conversion.DISCUSSION: The lost profits during rebuilding would be

taxable whether received from customers or insurance proceeds,as they represent business income (or a replacement thereof).As Prime does not elect involuntary conversion treatment, theconversion of the building to cash is treated as a sale of theproperty. The amount realized on the disposition (the insuranceproceeds) is $400,000, less the $350,000 adjusted basis on theproperty. Accordingly, the taxable income from insuranceproceeds is equal to $150,000 ($100,000 lost profits + $50,000gain on building).

Answer (A) is incorrect. A portion of the insurance proceedsis taxable to Prime. Answer (B) is incorrect. This is the correctamount of insurance proceeds recognized on the building astaxable income. However, the lost profits during rebuilding mustalso be considered. Answer (C) is incorrect. The lost profitsduring rebuilding would be taxable whether received fromcustomers or insurance proceeds. However, a portion of thebuilding’s proceeds is also taxable.

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A sole proprietor of a farm implement store sold atruck for $15,000 that had been used to make servicecalls. Three years ago, the truck cost $30,000, and$21,360 depreciation was taken. What is theappropriate classification of the $6,360 gain for taxpurposes?

A. Ordinary gain.

B. Section 1231 (Property Used in the Trade orBusiness and Involuntary Conversions) gain.

C. Long-term capital gain.

D. Short-term capital gain.

Answer (A) is correct.REQUIRED: The appropriate characterization of an amount

received on disposition of business property.DISCUSSION: As the property is depreciable, personal,

trade or business property, it is subject to the Section 1245recapture rules. These rules provide that any gain realized, to theextent of the lesser of gain realized or depreciation taken, ischaracterized as ordinary income. In this case, depreciationexceeds the realized gain, so the entire portion should becharacterized as ordinary income.

Answer (B) is incorrect. While it is correct that the property isSection 1231 property (if not subject to other characterizationrules), the recapture provisions must be applied to determine ifany take priority. Answer (C) is incorrect. Capital assets explicitlyexclude trade or business property. Answer (D) is incorrect. Thedefinition of a capital asset expressly excludes trade or businessproperty.


Which of the following corporations would betaxed as a personal service corporation?

A. A real estate brokerage.

B. A catering service.

C. An architecture and engineering firm.

D. A groundskeeping firm.

Answer (C) is correct.REQUIRED: The activity that would qualify a corporation as

a personal service corporation.DISCUSSION: Personal service corporations are

corporations that derive substantially all (roughly 95%) of theirgross receipts from personal service activities (health, law,engineering, accounting, actuarial science, consulting, orperforming arts). Accordingly, an architecture and engineeringfirm would be classified as a personal service corporation.

Answer (A) is incorrect. A real estate brokerage is notconsidered a personal service activity when determining personalservice corporation status. Answer (B) is incorrect. A cateringservice is not considered a personal service activity for the PSCrules. Answer (D) is incorrect. Groundskeeping is not one of theactivities that would subject a corporation to personal servicecorporation rules.


What is the maximum amount of capital losses inexcess of capital gains that a C corporation maydeduct in a year?

A. $0

B. $3,000

C. $5,000

D. $10,000

Answer (A) is correct.REQUIRED: The maximum recognizable amount of

C corporation capital losses.DISCUSSION: Unlike individuals, a corporation is not

permitted to offset ordinary income with net short-term capitallosses. Instead, they are suspended and carried forward.

Answer (B) is incorrect. Unlike individuals, a deduction fornet capital losses is not allowed to offset ordinary income.Answer (C) is incorrect. A corporation may not deduct net capitallosses against ordinary income. Answer (D) is incorrect. Acorporation is not permitted a deduction for capital losses inexcess of capital gains against ordinary income.

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A corporate taxpayer’s capital gains and lossesare as follows:Short-term capital gain $ 7,000Short-term capital loss (43,000)Long-term capital gain 9,000Long-term capital loss (21,000)What amount of capital loss deduction is the taxpayerentitled to use to offset against ordinary income?

A. $0

B. $3,000

C. $12,000

D. $48,000

Answer (A) is correct.REQUIRED: The amount of capital loss deduction for a

corporate taxpayer.DISCUSSION: Corporate taxpayers are not permitted to

deduct net capital loss against ordinary income.Answer (B) is incorrect. Unlike an individual, a corporate

taxpayer is not permitted a deduction of capital loss againstordinary income. Answer (C) is incorrect. A corporate taxpayer isnot permitted to deduct capital loss against ordinary income.Answer (D) is incorrect. Capital loss may not be used to offsetordinary income for corporate taxpayers.


Porter, the sole shareholder of Preston Corp.,transferred property to the corporation as acontribution to capital. Two years later, Corleytransferred property to the corporation in exchange fora 10% interest in corporate stock. The propertytransferred was valued as follows:

Porter’stransfer

Corley’stransfer

Basis $ 50,000 $250,000Fair market value 200,000 500,000What amount represents the corporation’s basis in theproperty received?

A. $700,000

B. $550,000

C. $450,000

D. $300,000

Answer (B) is correct.REQUIRED: The basis to the corporation in property

received upon contribution.DISCUSSION: Under Sec. 351, a shareholder or

shareholders who control more than 80% of a corporation maycontribute property to a corporation without recognition of gain orloss by either party. The corporation takes a carryover basis inthe property, and the taxpayer takes a substituted (equal to thebasis given up) basis in the shares of the corporation received.However, the contribution by a shareholder who does not qualifyunder Sec. 351 would trigger recognition of gain to theshareholder, and the corporation would take a FMV basis in theproperty. In this question, the first contribution would result in acarryover (AB) basis to the corporation of $50,000, and thesecond would be at a FMV of $500,000. Accordingly, the total is$550,000 of basis held by the corporation after contributions.

Answer (A) is incorrect. The amount of the basis to thecorporation is not simply the fair market value. Answer (C) isincorrect. The basis amount on the contribution of property uponformation (or as the sole shareholder) is not fair market value.Answer (D) is incorrect. The basis to the corporation is not simplythe amount of the adjusted basis in the hands of theshareholders.


At the beginning of the year, Data, aC corporation, had a $45,000 deficit in accumulatedearnings and profits. For the current year, Datareported earnings and profits of $15,000. Datadistributed $18,000 to its shareholders during thecurrent year. What amount of the distribution istreated as a taxable dividend?

A. $0

B. $3,000

C. $15,000

D. $18,000

Answer (C) is correct.REQUIRED: The amount of the taxable dividend from Data

Corporation.DISCUSSION: A distribution is taxable as a dividend to the

extent of earnings and profits. In this case, the C corporation has$15,000 of current E&P to use in characterizing a distribution asa dividend. The remaining $3,000 is treated as a return of basisto the extent that the shareholder has stock basis remaining. Anyexcess over the shareholder’s stock basis is treated as capitalgain. Note that the treatment indicated here ignores the deficit inaccumulated E&P. Depending on whether accumulated E&P ispositive or negative and current E&P is positive or negative,different ordering rules apply in determining the amount of ataxable dividend and the remaining distribution’s character.

Answer (A) is incorrect. A portion of the distribution is taxableas a dividend. Answer (B) is incorrect. Earnings and profits isused to determine the amount of a distribution taxable as adividend, not the amount excluded from dividend treatment.Answer (D) is incorrect. The whole distribution is not taxable as adividend, after E&P calculations.

10



Beech Corp., an accrual-basis, calendar-yearS corporation, has been an S corporation since itsinception. At the beginning of the current year, Goldowned 50% of the 100 issued shares of Beech stock,and had a $3,000 tax basis in the Beech stock. Duringthe current year, Beech had $200,000 in net businessincome and $4,000 in Oak County municipal bondinterest income. Beech made no distributions to itsshareholders. What was Gold’s tax basis in Beechstock at year end?

A. $102,000

B. $103,000

C. $104,000

D. $105,000

Answer (D) is correct.REQUIRED: Gold’s tax basis in Beech stock.DISCUSSION: The shareholder’s stock basis would be

$105,000 [$3,000 beginning basis + $100,000 income allocation($200,000 × 50% ownership interest) + $2,000 municipal interest($4,000 × 50% ownership interest)]. The stock basis is increasedfor the portion of the municipal interest in order for that income tonever be subject to taxation. If the basis was not increased, whenthe interest was later sold, gain would be realized on the portionof the business attributable to that income.

Answer (A) is incorrect. The shareholder’s stock basis mustbe increased for their portion (50%) of the municipal bondinterest. Answer (B) is incorrect. The shareholder’s stock basismust be adjusted for the municipal interest. Answer (C) isincorrect. The shareholder’s stock basis must be adjusted fortheir portion (50%) of the municipal bond interest.


Which of the following increases the accumulatedadjustments account of an S corporation?

A. Capital contributions by the shareholders.

B. Distribution to shareholders.

C. Interest and dividends.

D. Charitable contributions.

Answer (C) is correct.REQUIRED: The amounts that increase the accumulated

adjustments account of an S corporation.DISCUSSION: Interest and dividends received by an S

corporation increase the accumulated adjustments account(AAA) of the S corporation.

Answer (A) is incorrect. The capital contribution to an Scorporation by a shareholder would not increase the accumulatedadjustments account (AAA) of an S corporation. Answer (B) isincorrect. Distributions to a shareholder would not increase theaccumulated adjustments account (AAA) of an S corporation.Answer (D) is incorrect. Charitable contributions made do notincrease the accumulated adjustments account (AAA) of an Scorporation.


Anderson and Decker are equal members inAndek, an LLC, which has not elected to be treatedas a corporation. Anderson contributes $7,000 cash,and Decker contributes a machine with an adjustedbasis of $5,000 and fair market value of $10,000,subject to a liability of $3,000. What is Decker’s basisin Andek?

A. $2,000

B. $3,500

C. $5,000

D. $10,000

Answer (B) is correct.REQUIRED: Decker’s basis in a partnership from capital

contributions.DISCUSSION: As Decker contributed property to a

non-electing LLC, it is treated as a general partnership for federaltax purposes. The beginning basis in a partner’s partnershipinterest is the basis of property contributed, less any liabilities towhich the property is subject, plus the partner’s share ofpartnership liabilities. In this case, Decker’s basis is $3,500[$5,000 contributed property basis – $3,000 associated liability +$1,500 liability assumed (50% partnership interest × $3,000partnership liability contributed)].

Answer (A) is incorrect. Decker’s basis is increased for hisproportionate share of partnership liabilities, including those hecontributes. Answer (C) is incorrect. The liability associated withthe property will also affect the basis Decker takes in his AndekLLC interest. Answer (D) is incorrect. The basis, not FMV, ofproperty contributed is the starting number for the basiscalculation. The liability must also be considered.

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Johnson, an individual, has a 50% interest inDEF Partnership. Johnson’s adjusted basis at thebeginning of the year was $14,000. The partnership’sordinary income for the current year was $6,000.Johnson received a non-liquidating distribution of$8,000 cash and property with an adjusted basis of$12,000 and a fair market value of $15,000. What isthe basis of the distributed property, other than cash,to Johnson?

A. $6,000

B. $9,000

C. $12,000

D. $15,000

Answer (B) is correct.REQUIRED: Johnson’s basis in distributed property from

DEF partnership.DISCUSSION: The basis of the property distributed in a

non-liquidating distribution is the lesser of remaining basis in thepartner's partnership interest (after cash is distributed) and theadjusted basis of the property. In this case, the basis in thepartnership interest is $9,000 [$14,000 beginning + $3,000ordinary income allocation ($6,000 ordinary income × 50%partnership interest) – $8,000 cash distributed]. In the event thatthe cash exceeded the adjusted basis of the partnership interest,gain may have been recognized and the partner's basis in theproperty would increase to $0.

Answer (A) is incorrect. This is the amount of the ordinaryincome of the partnership for the year and does not directlyimpact the basis in the property distributed. Answer (C) isincorrect. The basis of the property is the lesser of remainingbasis in the partner’s partnership interest (after cash isdistributed) and the adjusted basis of the property. The remainingpartnership basis is not $12,000. Answer (D) is incorrect. Thebasis of the property is not FMV when distributed.

Able, an individual, is a partner in CD Partnershipwith an adjusted basis of $30,000 for Able’spartnership interest. Able received a non-liquidatingdistribution of $25,000 cash and property with anadjusted basis of $7,000 and a fair market value of$10,000. What amount of gain should Ablerecognize?

A. $0

B. $2,000

C. $5,000

D. $12,000

Answer (A) is correct.REQUIRED: The gain recognized by Able on the

non-liquidating distribution of property.DISCUSSION: Gain would be recognized if the FMV of cash

exceeded Able’s basis in the partnership interest. However, thisis not the case. Instead, the cash is distributed at FMV and thebasis in the partnership interest is reduced by the amount of thecash. Then, any remaining basis in the partnership interest isallocated to the property distributed, up to the lesser of theadjusted basis of the property in the hands of the partnership orthe amount of partnership interest basis to be allocated. In thiscase, $5,000 of partnership interest basis is allocated to theproperty distributed.

Answer (B) is incorrect. Gain is not recognized whenproperty is distributed in excess of partnership basis. The basis inthe hands of the recipient is simply computed with respect to theremaining basis in the partnership interest. Answer (C) isincorrect. Gain is not computed as the excess of partnershipbasis over cash distributed. Answer (D) is incorrect. The amountof $12,000 is not the correct amount of gain recognized on thedistribution of the property.


Belson and Forman decided to terminate Northpartnership. On the date of termination, North’sbalance sheet was as follows:

AdjustedBasis

Cash $2,000Equipment (fair market value $4,000) 6,000Capital — Belson 4,000Capital — Forman 4,000Forman’s outside basis is $2,000. The partnershipassets were distributed equally between the partners.What is Forman’s tax basis in the property received?

A. $1,000

B. $4,000

C. $6,000

D. $10,000

Answer (A) is correct.REQUIRED: Forman’s tax basis in the property received on

the termination of the partnership.DISCUSSION: After the cash is distributed, Forman has

$1,000 ($2,000 beginning basis – $1,000 cash received) in basisremaining. This is allocated to the property distributed, up to theadjusted basis of the property in the hands of the partnership.

Answer (B) is incorrect. The basis of the property is not set tothe FMV of the property in the hands of the partnership.Answer (C) is incorrect. The basis of the property is limited to thelesser of basis in the partnership interest or the adjusted basis inthe hands of the partnership. Answer (D) is incorrect. The basisin the property is not the sum of the fair market value and theadjusted basis in the hands of the partnership.

12



Which of the following correctly lists the order,from earliest to latest, that U.S. legislative bodiesconsider new tax legislation?

A. House of Representatives, U.S. Senate, JointConference Committee.

B. Joint Conference Committee, House ofRepresentatives, Senate Finance Committee.

C. U.S. Senate, Joint Conference Committee,House of Representatives.

D. House of Representatives, Joint ConferenceCommittee, U.S. Senate.

Answer (A) is correct.REQUIRED: The correct order, from earliest to latest, that

U.S. legislative bodies consider new tax legislation.DISCUSSION: Tax bills are reviewed in the House Ways

and Means Committee before being considered by the fullHouse. The House version is referred to the Senate FinanceCommittee before being considered by the full Senate. If theSenate approves the House version as is, the bill is nextpresented to the President. However, the Senate often revisesthe House version, which requires a review by a jointHouse-Senate committee. The joint committee version must beapproved first by the House and then by the Senate, beforereaching the President.

Answer (B) is incorrect. Bills for raising revenue do notoriginate in the Joint Conference Committee. Answer (C) isincorrect. Bills for raising revenue do not originate in the U.S.Senate. Answer (D) is incorrect. Tax bills do not go before theJoint Conference Committee before they go before the U.S.Senate.


A taxpayer has had one issue under audit by theInternal Revenue Service for several years. Unlessthe taxpayer agrees otherwise, the IRS has at mosthow many years to assess taxes after the taxpayer’sreturn was filed?

A. Three.

B. Four.

C. Five.

D. Seven.

Answer (A) is correct.REQUIRED: The statute of limitations for assessment of tax

liability by the IRS.DISCUSSION: The statute of limitations for assessment of

tax liability (except in the case of fraud or other specialexceptions) is generally 3 years from the date the return is filed.Note that an early return is treated as filed on the due date.

Answer (B) is incorrect. Under normal circumstances, theIRS does not have 4 years to assess liability. Answer (C) isincorrect. Five years is not the correct statute of limitations toassess tax liability. Answer (D) is incorrect. Under normalcircumstances, the IRS has fewer than 7 years to assess liability.


After which of the following situations would itusually not be necessary to notify third parties of thetermination of an agency’s existence?

A. The achieving of the agency’s purpose.

B. The destruction of the subject matter of theagency.

C. A termination by mutual agreement.

D. A termination by the principal.

Answer (B) is correct.REQUIRED: The situation in which notice to third parties of

termination of an agency’s existence is not necessary.DISCUSSION: Destruction of the subject matter of the

agency makes fulfilling the purpose of the agency impossible.Thus, it terminates the agency by operation of law. Because mostterminations by operation of law terminate apparent authority,notice to third parties of termination of the agency’s existence isusually not necessary.

Answer (A) is incorrect. Achieving the agency’s purposeresults in termination by an act of the parties. Because theapparent authority of the agent continues to exist until the thirdparty receives notice of the termination, notice to third parties ofthe agency’s existence may be necessary. Answer (C) isincorrect. Termination by mutual agreement is by an act of theparties. Because the apparent authority of the agent continues toexist until the third party receives notice of the termination, noticeto third parties of the agency’s termination may be necessary.Answer (D) is incorrect. Termination by the principal would resultin termination by an act of the parties. Because the apparentauthority of the agent continues to exist until the third partyreceives notice of the termination, notice to third parties of theagency’s termination may be necessary.

13



Taso Corp. sells laptop computers to the public.Taso sold and delivered a laptop to Cara on credit.Cara gave Taso a purchase money security interest inthe laptop by executing and delivering to Taso apromissory note for the purchase price and a securityagreement covering the laptop. Cara purchased thelaptop for personal use. Taso did not file a financingstatement. Under the Secured Transactions Article ofthe UCC, is Taso’s security interest perfected?

A. No, because the laptop is a consumer good.

B. No, because Taso failed to file a financingstatement.

C. Yes, because it was perfected at the time ofattachment.

D. Yes, because Taso retained possession of thecollateral.

Answer (C) is correct.REQUIRED: The reason, if any, that a purchase money

security interest in goods sold to a consumer is perfected.DISCUSSION: A PMSI in consumer goods ordinarily is

automatically perfected without filing or possession. Thus, itbecomes effective at the time of attachment.

Answer (A) is incorrect. Because the laptop is a consumergood, the PMSI is perfected upon attachment. Answer (B) isincorrect. Filing is not necessary for the perfection of a PMSI inconsumer goods. Answer (D) is incorrect. Possession is notnecessary for the perfection of a PMSI in consumer goods.

Under the Secured Transactions Article of theUCC, a financing statement generally must contain

A. The signature of a witness to the execution ofthe financing statement.

B. The dollar amount of the considerationprovided by the secured party.

C. The date the underlying debt will be paid.

D. The name of the debtor.

Answer (D) is correct.REQUIRED: The content of a financing statement.DISCUSSION: The financing statement must contain (1) the

name of the debtor, (2) the name of the secured party (orrepresentative), and (3) an indication of the covered collateral(UCC 9-502).

Answer (A) is incorrect. The financing statement is notrequired to be witnessed. Answer (B) is incorrect. The financingstatement is not required to state the consideration provided bythe secured party. Answer (C) is incorrect. The financingstatement is not required to contain the date the underlying debtwill be paid.


Under the Secured Transactions Article of theUCC, if a secured creditor rightfully repossesses andsells a debtor’s collateral, which of the followingobligations is the first to be paid from the proceeds ofthe sale?

A. The debt owed any creditor with a subordinatesecurity interest in the collateral.

B. The balance of the debt owed the primarysecured creditor.

C. The reasonable expenses incurred by the sale.

D. The refund of the debtor’s payments madeprior to the date of the sale.

Answer (C) is correct.REQUIRED: The first obligation to be paid from the proceeds

of the sale of rightfully repossessed collateral.DISCUSSION: After repossession, the secured party may

dispose of the collateral by public or private proceedings. Theproceeds of collection or enforcement are applied in the followingorder: (1) payment of reasonable expenses of collection orenforcement, (2) satisfaction of the debt owed to the securedparty under whose security interest the collection or enforcementis made, (3) satisfaction of the debts owed to subordinatesecured parties, and (4) payment of any surplus to the debtor.

Answer (A) is incorrect. Creditors with subordinate interestshave claims inferior to (1) the reasonable expenses incurred bythe sale and (2) the interest of the secured creditor. Answer (B) isincorrect. The balance of the debt owed the primary securedcreditor is paid only after the reasonable expenses incurred bythe sale. Answer (D) is incorrect. The debtor receives onlypayment of any surplus proceeds after the sale.

14



Hall forged Crandall’s signature on a promissorynote dated April 1, Year 3. The note was for $5,000and was payable to bearer on demand. Hall offered tosell the note to Corn for $4,000. Corn knew thatCrandall had been out of the country since Year 1. Inaddition, Corn knew that Crandall’s name andsignature were misspelled, and that Hall had aquestionable reputation. Despite this, Corn purchasedthe note for $4,000. Under the Negotiable InstrumentsArticle of the UCC, what are Corn’s rights under thenote?

A. Corn is a holder in due course and mayenforce the note against Hall and Crandall.

B. Corn is a holder in due course under theshelter rule and may enforce the note onlyagainst Hall.

C. Corn is a holder and may enforce the noteagainst Hall.

D. Corn is a holder and may enforce the noteagainst Crandall.

Answer (C) is correct.REQUIRED: The rights of a purchaser of a bearer

promissory note with a forged payor’s signature.DISCUSSION: Corn is a holder as a person in possession of

a bearer negotiable instrument. The note presumably wasnegotiated by Hall to Corn by transfer of possession without anendorsement. However, Corn is not a holder in due coursebecause Corn had notice of an unauthorized signature and othercircumstances that established a defense to the instrument(e.g., misspellings and purchase at a deep discount).Accordingly, Corn only has the rights of a holder, but Hall hascontractual liability to Corn as a signer of the promissory note.An unauthorized signature operates as the signature of theunauthorized signer in favor of a person who pays in good faithor takes for value. Moreover, the transferor of an instrument forconsideration but without an endorsement is liable for breach oftransfer warranties to the immediate transferee. The transferorwarrants that (1) the warrantor (Hall) is entitled to enforce theinstrument, (2) all signatures are authentic and authorized,(3) the instrument has not been altered, (4) no defense or claimof any party is good against the warrantor, and (5) the warrantorhas no knowledge of insolvency proceedings against the makerof the note.

Answer (A) is incorrect. Corn was aware of Hall’s forgery andcannot be a holder in due course. Also, because the signaturewas a forgery, Crandall is not liable. Answer (B) is incorrect. Corndid not obtain the note from a holder in due course and istherefore not a holder in due course under the shelter rule.Answer (D) is incorrect. Crandall is not liable because thesignature was forged.

Under the Negotiable Instruments Article of theUCC, which of the following defenses by the maker ofa negotiable instrument can be successfully assertedagainst a holder in due course?

A. Fraud in the execution.

B. Fraud in the inducement.

C. Breach of the underlying contract.

D. Lack of consideration by the original payee.

Answer (A) is correct.REQUIRED: The defense effective against a holder in due

course.DISCUSSION: Fraud in the execution is a real defense. It is

committed against the signer of the instrument when (s)he isinduced to sign without knowledge and a reasonable opportunityto learn its character and essential terms. Real defenses areeffective against a holder in due course.

Answer (B) is incorrect. Fraud in the inducement is apersonal defense. It occurs when, although the defrauded partyis aware of entering into a contract and its terms, the underlyingconsideration is misrepresented. Personal defenses are noteffective against a holder in due course. Answer (C) is incorrect.Traditional contract defenses, such as breach of contract, arepersonal defenses. Personal defenses are not effective against aholder in due course. Answer (D) is incorrect. Traditional contractdefenses, such as lack of consideration, are personal defenses.Personal defenses are not effective against a holder in duecourse.

15



Roland applied to Berkley Bank for a $100,000loan. As a condition to granting the loan, Berkleyrequested a document of title evidencing Roland’sownership of several paintings Roland had in storage.Under the Documents of Title Article of the UCC,which of the following documents is not a documentof title evidencing Roland’s current ownership of thepaintings?

A. A warehouse receipt.

B. A bill of lading.

C. An appraisal.

D. An electronic document of title.

Answer (C) is correct.REQUIRED: The item not a document of title evidencing

current ownership.DISCUSSION: A document of title has three functions: (1) it

is a receipt for goods, (2) it is a contract for the storage ortransport of goods between a bailor (one who entrusts personalproperty to another) and a bailee (one who receives suchproperty to hold in trust), and (3) it is evidence of title to thegoods. An appraisal is an indication of value, not proof ofownership.

Answer (A) is incorrect. A warehouse receipt is a documentof title issued by a warehouser to the person who deposits goodsfor storage. Thus, a warehouse receipt evidences ownership.Answer (B) is incorrect. A bill of lading is a document of titleissued by a person engaged in the business of carrying goods.Thus, a bill of lading evidences ownership. Answer (D) isincorrect. A document of title may be in electronic or tangibleform. An electronic document of title is evidenced by a record ofinformation shared in an electronic medium, not inscribed on atangible medium.

16
