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AWMA Test Review 1 Questions and Answers – Updated 2024 If ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends, what is its taxable income? A. $0 B. $25,000 C. $50,000 D. $100,000 - Answer-The net profits of a corporation are subject to federal income taxation...

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  • October 16, 2024
  • 33
  • 2024/2025
  • Exam (elaborations)
  • Questions & answers

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  • awma test review 1 questions and answers updated

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EMILLECT 2024/2025 ACADEMIC YEAR ©2024 EMILLECT. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER, 2024




AWMA Test Review 1 Questions and
Answers – Updated 2024

If ABC Corporation has net profits of $100,000 and distributes $50,000 as dividends, what is its

taxable income?




A. $0


B. $25,000


C. $50,000


D. $100,000 - Answer✔✔-The net profits of a corporation are subject to federal income

taxation. This tax is levied on corporate taxable income before payment of dividends to common

and preferred shareholders. Thus, if ABC Corporation has net profits of $100,000 and distributes

$50,000 as dividends, its taxable income is still $100,000. Distribution of profits as dividends

does not reduce taxable income for a corporation


Qualified Plans - Answer✔✔-Meet the stringent requirements of the IRC as well as those of the

ERISA and therefore qualify for favorable tax treatment. In pension and profit sharing plans an

employee is generally not taxed on employer contributions or accumulated earnings until the

funds are actually received from the plan. The employer receives a deduction at the time of

contribution. for qualified stock option plans the employee is not taxed until it is sold.
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,EMILLECT 2024/2025 ACADEMIC YEAR ©2024 EMILLECT. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER, 2024


Nonqualified plans - Answer✔✔-Do not qualify for special tax treatment. They don't permit the

employer to take a deduction for plan contributions until the employee reports income from

the plan, which is often at retirement. Earnings not tax deferred - earnings are taxed to the

employer or employee depending on the plans design


Nonqualified deferred comp plan - Answer✔✔-Do not qualify for the same special tax

treatment. They do not permit the employer to take a deduction for plan contributions until the

employee reports income from the plan, which is often at retirement. Also, the earnings on plan

assets are not tax deferred; instead, earnings are taxed to the sponsor(employer) or to the

participant (employee), depending on the plan design. The irs rules do permit an employee to

agree to defer income to a nonqualified plan and not be taxed on the deferral until some point

in the future if the 3 rules are followed.


Economic Benefit - Answer✔✔-A taxpayer has income when he receives the economic benefit

of the proceeds. This occurs when the employer irrevocably places funds for the benefit of the

employee beyond the reach of the employers creditors. Income is thus received if the employee

does not have actual or even constructive receipt.(applies to funded plans)


Corporate owned life insurance - Answer✔✔-commonly used by employers to informally fund

future benefit obligations such as those promised under a deferred comp plan. As the owner of

the policies the employer is responsible for paying the premiums. The employer is also the

beneficiary of the policies and retains all rights to policy benefits, including the cash value

buildup and the death proceeds.




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,EMILLECT 2024/2025 ACADEMIC YEAR ©2024 EMILLECT. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER, 2024


COLI is attractive to employers because it - Answer✔✔-1. Provides psychological assurance to

deferred comp plan participants that their benefit are secure.


2. reduces strain on the companys cash flow when plan distributions are due


3. provides tax-deferred, and possibly tax free buildup of cash value; and


4. enables the employer to recover some/all of the plan costs.


Changes that have occurred since investment firms changed from private partnerships to

publicly traded companies include all of the following except:




A. risk taking has increased.


B. profits can be privatized (bonuses) and losses socialized (bailouts).


C. there is greater individual accountability.


D. partners no longer share in both the profits and losses of the firm. - Answer✔✔-C. The repeal

of Glass-Steagall accelerated the conversion of investment firms that had been structured as

partnerships into publicly traded companies that took on more risk. This transferred much of

the risk and accountability from general partners to public shareholders


Equity REITS - Answer✔✔-Equity REITs own real estate properties and earn income from rents,

and made up 94.4% of the REIT market (by capitalization) at the end of 2015. Upon the sale of

the properties, a capital gain is earned. Generally, income from rents can be expected to




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, EMILLECT 2024/2025 ACADEMIC YEAR ©2024 EMILLECT. ALL RIGHTS RESERVED FIRST PUBLISH OCTOBER, 2024


increase each year. Equity REITs are appropriate when one objective is to provide an inflation

hedge


Mortgage REITs. - Answer✔✔-Mortgage REITs are similar to bond mutual funds, and make up

approximately 5.6% of the REIT market. No ownership interest in the underlying real estate

property exists. Instead, the fund invests in mortgages used by equity owners of the real estate

properties to finance their acquisition of the properties. Mortgage REITs may also invest in

GNMA. pools or other mortgage backed securities. They generally do not participate in capital

gains on the sale of real estate properties, but their income is higher than that of equity REITs.

Mortgage REITs do not provide inflation


protection.


Which one of the following is an advantage of equity REITs over mortgage REITs? - Answer✔✔-

Equity REITs can participate in the appreciation of the underlying properties.




Equity REITs own the underlying real estate properties, giving the owners an opportunity to

participate in the net cash flows from the operation of the properties and in any appreciation in

the market price of the properties.


- Answer✔✔-The intent of Dodd-Frank was to "harmonize" and blend fiduciary rules that would

pertain to both broker-dealers and investment advisers. Investment advisers are held to a

fiduciary standard and broker-dealers to a suitability standard under the current rules




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