AWMA Practice Exam 1 Questions
and Correct Detailed Answers
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All of the following are potential personal security risks except
A) serving on a board.
B)kidnapping.
C)extortion.
D)home invasion. - Answer ✔ A) Home invasion, kidnapping, and extortion are all
personal security risks that high net worth people need to be concerned with. Serving
on a board presents personal liability risks, but not to one's security merely from serving
on the board. Mod 4
Even if the host is not held liable for the damages as a result of entertaining guests,
there can still be significant expense due to
A)out-of-court settlements.
B)event preparation.
C)defense costs.
D)insurance premiums. - Answer ✔ C) Most people occasionally entertain guests.
People who host events have a risk of lawsuits from guests who may be injured or may
injure others. While most of the time everyone has a wonderful time and no one gets
hurt, all it takes is one person who is careless or intoxicated and a significant liability
exposure occurs. Even if the host is not held liable for the damages, the defense costs
can be quite high. Mod 4
Perhaps the best preventive measure high net worth clients can take to reduce the
likelihood of personal and security losses is to
A)get highly trained guard dogs to protect the property.
B)purchase appropriate insurance policies.
C)keep a top-notch legal team on retainer to represent the client when needed.
D)educate themselves as to how, when, and where threats can materialize. - Answer ✔
D) Insurance policies can only respond to claims, not prevent them. The same goes for
a crack legal team on retainer. Guard dogs may prevent some risks, but the best option
is to be educated about what threats can materialize and how. Security specialists can
,develop a comprehensive security plan that involves home protection and security,
protection while traveling, and prevention of identity theft and other cyberattacks. Mod 4
All the things that make a high net worth business owner's business unique, including
the knowledge, experience, relationships, and human resources that create value can
be categorized as their
A)trade secrets.
B)intellectual capital.
C)business secrets.
D)inventions. - Answer ✔ B) Intellectual capital consists of all the things that make the
business owner's business unique, including the knowledge, experience, relationships,
and human resources that create value. It may also consist of trademarks and patents
as well as brand names that the business has developed. If a business owner client has
invented a product or a process that is unique, it may be the business's most valuable
asset. Mod 4
Partnership income is taxed at the
A)personal tax rates of the individual partners.
B)C corporation rate.
C)estates and trusts rate.
D)S corporation rate. - Answer ✔ A) Partnership income is taxed at the personal income
tax rates of the individual partners, because it is taxed to the partners. Mod 4
Which one of the following currently is the most common form of business organization?
A)Partnership
B)Sole proprietorship
C)Limited liability company
D)C corporation - Answer ✔ B) The sole proprietorship is the most common form of
business organization, with over 70% of U.S. businesses filing income tax returns
indicating they are sole proprietorships. Partnerships account for less than 10% of all
U.S. businesses, and approximately 20% of all U.S. businesses are corporations. Mod 4
XYZ Inc., a C corporation, has $200,000 in taxable income this tax year. It distributes
half to its shareholders in the form of cash dividends. As far as XYZ Inc. is concerned,
which one of the following amounts, if any, is subject to the corporate income tax?
A)$150,000 (Half of corporate dividends are deductible.)
B)$100,000 (This is $200,000 less the dividend distribution.)
C)$0 (C corporations do not pay income tax.)
D)$200,000 (None of the corporate dividends are deductible.) - Answer ✔ D) Since XYZ
Inc. has taxable income of $200,000, that is the amount subject to tax. Dividends are
not deductible. Mod 4
, Bill Dunston is the sole shareholder of Dunston Press, a small publishing company. All
of the employees of Dunston Press are considerably younger than Bill, turnover is
relatively high, and 12 of his 20 employees are part time. He is considering
implementing a retirement plan for the company and wants to avoid fixed contribution
obligations. He also wants to receive the maximum benefit possible. Which one of the
following plans would be most appropriate, considering Bill wants to maximize
contributions on his behalf relative to those of the other employees?
A)Cross-tested profit sharing plan
B)Salary reduction SEP plan
C)Age-weighted profit sharing plan
D)Money purchase pension plan - Answer ✔ C) An age-weighted profit sharing plan
allocates contributions on the basis of age, which would work to Bill's advantage since
he is the oldest employee. Money purchase plans and SARSEPs require the same
contribution percentage for all employees. A cross-tested profit sharing plan is used to
allocate contributions on the basis of compensation. Mod 4
With a profit sharing plan, the employer
A)need not make contributions each year, but must make substantial and recurring
contributions.
B)has a defined benefit plan.
C)must make contributions each year.
D)may contribute no more than 15% of covered payroll. - Answer ✔ A) One advantage
of a profit sharing plan for the employer is that the employer need not make
contributions each year. With a profit sharing plan, the employer may contribute up to
25% of covered payroll. Mod 4
Which one of the following is NOT an allowable itemized deduction in computing the
alternative minimum taxable income?
A)Investment interest expense
B)State and local income taxes
C)Qualified housing interest
D)Charitable contribution deduction - Answer ✔ B) State and local income taxes are not
an allowable itemized deduction for the AMT. Thus, clients in states with high income
taxes (and property taxes) are more likely to be affected by the AMT than those in
states with lower taxes. Remember that only $10,000 of taxes may be deducted as an
itemized deduction. Mod 5
Which one of the following statements is true with regard to self-employment taxes?
A)Net earnings from self-employment must be calculated under the accrual method of
accounting.
B)Self-employment tax is the government's way of discouraging entrepreneurship and
innovation.
