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AWMA TEST REVIEW 1 QUESTIONS AND ANSWERS
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AWMA TEST REVIEW 1 QUESTIONS ANDANSWERS
If ABC Corporation has $100,000 in net profits and pays out $50,000 in dividends,
what is its taxable income?
A. $0
B. $25,000
C. $50,000
D. $100,000 - ANSWER: A corporation's net profits are liable to federal income
tax. This tax is placed on a corporation's taxable income prior to the distribution of
dividends to common and preferred shareholders. Thus, if ABC Corporation has
net profits of $100,000 and distributes $50,000 in dividends, its taxable income
remains $100,000. The distribution of profits as dividends does not lower a
corporation's taxable income
Qualified Plans - ANSWER Meet the severe standards of both the IRC and ERISA,
resulting in favorable tax status. In most pension and profit-sharing plans, an
employee is not taxed on employer contributions or cumulative gains until the
funds are collected from the plan. The employer receives a deduction at the time of
contribution. For qualifying stock option programs, the employee is not taxed until
the shares are sold.
ANSWER: Nonqualified plans do not qualify for special tax benefits. They do not
allow the employer to deduct plan contributions until the employee reports income
from the plan, which is often at retirement. Earnings are not tax-deferred; earnings
are taxed to the employer or employee, depending on the plan's design.
ANSWER: Nonqualified deferred compensation plans do not qualify for the same
preferential tax treatment. They do not allow the employer to deduct plan
contributions until the employee reports income from the plan, which is often at
retirement. Furthermore, earnings on plan assets are not tax deferred; rather,
,earnings are taxed to either the sponsor (employer) or the participant (employee),
depending on the plan design. If the three conditions are satisfied, an employee can
agree to defer income to a nonqualified plan without being taxed on the deferral
until a later date.
Economic advantage - ANSWER A taxpayer has income if he derives an economic
advantage from the proceeds. This occurs when the employer irrevocably transfers
funds for the employee's benefit outside the reach of the employer's creditors.
Income is thus received if the employee does not have real or even constructive
receipt (applies to sponsored plans).
Corporate-owned life insurance is widely utilized by companies to informally fund
future benefit obligations, such as those pledged under a deferred compensation
plan. The employer is liable for paying premiums because he or she owns the
policy. The employer is also the policy's beneficiary, with full rights to policy
advantages such as cash value buildup and death profits.
COLI appeals to employers because - ANSWER 1. Provides psychological
confidence to participants in deferred compensation plans that their benefits are
secure.
2. Reduces pressure on the company's cash flow when plan dividends are due.
3. allows a tax-deferred and possibly tax-free accumulation of monetary worth;
4. allows the employer to recoup some or all of the plan costs.
All of the following changes have occurred since investment firms moved from
private partnerships to publicly traded entities, with the exception:
A. Risk-taking has grown.
B. Profits can be privatized (bonuses) while losses are socialized (bailouts).
, C. There is more individual accountability.
D. Partners no longer share the firm's revenues and losses. - ANSWER C. The
removal of Glass-Steagall expedited the conversion of investment businesses that
had previously been formed as partnerships into publicly traded companies that
accepted more risk. This shifted much of the risk and responsibilities from general
partners to public shareholders.
ANSWER: Equity REITs own real estate properties and earn income from rentals,
accounting for 94.4% of the REIT market (by capitalization) at the end of 2015.
Capital gains are realized when the properties are sold. Rent income is often
expected to increase year after year. Equity REITs are excellent for providing an
inflation hedge.
Mortgage REITs. - ANSWER Mortgage REITs are similar to bond mutual funds,
accounting for around 5.6% of the REIT market. There is no ownership stake in the
underlying real estate property. Instead, the fund invests in mortgages utilized by
equity owners to finance the purchase of real estate properties. Mortgage REITs
may also invest in the GNMA. pools and other mortgage-backed securities. They
do not often participate in capital gains on the sale of real estate properties, but
their income exceeds that of equity REITs. Mortgage REITs don't generate
inflation.
protection.
Which of the following are the advantages of equity REITs over mortgage REITs?
- ANSWER Equity REITs can benefit from the appreciation of their underlying
properties.
Equity REITs control the underlying real estate properties, allowing the owners to
participate in the net cash flows from their operations as well as any gain in the
properties' market price.
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