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CPA Exam — REG (Regulation) practice questions

209 free questions with answers and explanations.

Practice test
  1. 1.A principal hires an agent to negotiate the sale of a commercial property. The agency agreement explicitly states that the agent has the authority to list the property, show it to potential buyers, and present offers, but *not* to sign any sales contracts on behalf of the principal. The agent, believing they found a great deal, signs a sales contract with a buyer, representing themselves as having full authority. The principal later refuses to honor the contract. What type of authority did the agent *lack* when signing the contract?Business Law
  2. 2.A homeowner hires a contractor to build an addition to their house. The contract specifies that the contractor will complete the work by October 1st. On September 15th, a major hurricane unexpectedly causes significant damage to the existing structure and the partially completed addition, making further construction impossible until extensive repairs are made to the original house. The contractor informs the homeowner that they cannot meet the October 1st deadline and the project will be significantly delayed. Which of the following legal concepts would most likely excuse the contractor's delay in performance?Business Law
  3. 3.A principal hires an agent to negotiate the sale of a commercial property. The agency agreement explicitly grants the agent the authority to list the property, show it to potential buyers, and accept offers within a specific price range. The agreement, however, does not mention signing a final sales contract. The agent receives an offer within the specified price range and signs a sales contract on behalf of the principal. Is the principal bound by the agent's signing of the sales contract?Business Law
  4. 4.A debtor files for Chapter 7 bankruptcy. Among their debts are $50,000 in student loans, $10,000 in credit card debt for luxury goods incurred 3 months prior to filing, $5,000 in unpaid child support, and $2,000 in utility bills. Which of these debts is generally NOT dischargeable under Chapter 7 bankruptcy?Business Law
  5. 5.A client, 'Green Leaf Nurseries', contracts with 'AquaFlow Irrigation' to install a new irrigation system. The contract specifies a payment of $15,000 upon completion. AquaFlow completes the installation, but due to a minor, easily fixable calibration error, the system initially waters 5% more than intended. Green Leaf Nurseries refuses to pay, claiming a complete breach. AquaFlow sues for payment. What is the most likely outcome regarding AquaFlow's right to payment?Business Law
  6. 6.A homeowner hires a contractor to build an addition to their house. The contract specifies that the contractor must use a particular type of imported Italian marble for the flooring. Before construction begins, a sudden and severe trade embargo is imposed, making it impossible to import the specified marble from Italy. The contractor can source a similar quality marble domestically, but it is 300% more expensive. The contractor notifies the homeowner of the situation. Which of the following legal doctrines is most applicable to this scenario?Business Law
  7. 7.A consumer purchases a new refrigerator from a department store. The sales contract includes a prominent clause stating, 'SELLER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.' The refrigerator fails to cool properly within a week of purchase. Can the consumer successfully sue the store for breach of implied warranty of merchantability?Business Law
  8. 8.A small manufacturing company, MicroTech Inc., is seeking to expand its operations and obtains a loan from First Bank. To secure the loan, MicroTech grants First Bank a security interest in all of its current and after-acquired equipment. First Bank promptly files a financing statement with the appropriate state office. MicroTech later obtains a second loan from Capital Credit, which also takes a security interest in MicroTech's equipment and files a financing statement. If MicroTech defaults on both loans, which lender has priority over the equipment?Business Law
  9. 9.A small business owner, Sarah, enters into a contract to purchase a specialized piece of machinery from Manufacturer Inc. The contract specifies that the machinery must be delivered by October 15th. On October 1st, Sarah receives a letter from Manufacturer Inc. stating that due to unforeseen production issues, they will be unable to deliver the machinery until December 1st. Sarah needs the machinery by October 15th to fulfill a major client order. Which of the following is Sarah's best course of action under contract law?Business Law
  10. 10.A debtor files for Chapter 7 bankruptcy. Among their debts are $50,000 in student loans, $10,000 in credit card debt, and $5,000 for a recently purchased luxury item. The debtor successfully argues that due to severe medical conditions and limited future earning capacity, repaying the student loans would impose an 'undue hardship.' Which of the following debts is most likely to be dischargeable in this Chapter 7 proceeding?Business Law
  11. 11.A buyer enters into a contract with a seller for the purchase of 500 widgets, with delivery specified as 'FOB Seller's Place of Business.' During transit from the seller's warehouse to the buyer's location, the truck carrying the widgets is involved in an accident, and all 500 widgets are destroyed. Assuming no fault on the part of either party, who bears the risk of loss for the destroyed widgets?Business Law
  12. 12.A debtor files for Chapter 7 bankruptcy. Among the debtor's assets is a fully paid-for, non-exempt classic car valued at $75,000. The debtor also has unsecured debts totaling $100,000. The bankruptcy trustee sells the car. After administrative expenses of $5,000 are paid, how much will be distributed to the unsecured creditors from the sale of this car?Business Law
  13. 13.A general contractor, Builder Inc., hires a subcontractor, Electric LLC, to handle all electrical work for a new commercial building project. During the project, an employee of Electric LLC negligently installs wiring, causing a fire that damages a portion of the building. The property owner sues Builder Inc. for the damages. Under which legal doctrine might Builder Inc. be held liable for the actions of Electric LLC's employee?Business Law
  14. 14.A secured creditor takes a security interest in a debtor's inventory. The security agreement includes an after-acquired property clause. The creditor properly files a financing statement on January 15, 2023. On March 1, 2023, the debtor acquires new inventory. On April 1, 2023, another creditor obtains a judgment lien against the debtor and levies on the new inventory. Which creditor has priority over the new inventory?Business Law
  15. 15.A secured creditor takes a security interest in a debtor's inventory. The security agreement includes a clause stating that the security interest also applies to 'all inventory acquired by the debtor in the future.' The debtor subsequently acquires new inventory from a different supplier. Does the creditor's security interest extend to this newly acquired inventory?Business Law
  16. 16.A small manufacturing company, 'Precision Parts Inc.', enters into a contract to produce 1,000 specialized components for 'Tech Innovations Corp.' The contract specifies that Precision Parts will deliver the components to Tech Innovations' facility. Before the delivery date, Precision Parts' factory is completely destroyed by an unexpected, unpreventable earthquake, making it impossible to produce the components. Tech Innovations sues Precision Parts for breach of contract. What is Precision Parts' most likely defense?Business Law
  17. 17.A debtor, 'Financially Strained LLC,' is facing severe financial difficulties and is considering filing for bankruptcy. Its assets include real estate, equipment, and inventory, all subject to various security interests. The debtor wants to continue operating its business and eventually reorganize its debts. Which chapter of the U.S. Bankruptcy Code is most appropriate for Financially Strained LLC?Business Law
  18. 18.A consumer purchases a new smart television from an electronics retailer. The retailer, a merchant, sells the television in its usual course of business. There are no express warranties made by the retailer. Within a month, the television develops a major display defect, rendering it unusable. The consumer seeks to return the television for a refund, claiming a breach of warranty. Under the Uniform Commercial Code (UCC), which implied warranty would the consumer most likely assert?Business Law
  19. 19.A general partnership, 'Alpha & Beta,' has two partners, Alpha and Beta. Alpha performs an act that is within the ordinary course of the partnership's business, but Beta had expressly told Alpha not to perform that specific act. A third party, unaware of Beta's instruction, reasonably believes Alpha has the authority to act for the partnership and contracts with Alpha on behalf of Alpha & Beta. Is the partnership bound by Alpha's act?Business Law
  20. 20.A general partnership, 'Alpha & Beta,' has two partners, Alpha and Beta. Alpha performs an act that is clearly outside the ordinary course of the partnership's business, without Beta's knowledge or consent. A third party, unaware of Alpha's lack of authority, reasonably believes Alpha has the authority to act on behalf of the partnership due to previous interactions where Alpha routinely handled similar, though not identical, transactions. Is the partnership bound by Alpha's act?Business Law
  21. 21.A creditor holds a perfected security interest in a debtor's equipment. The debtor defaults on the loan. The creditor repossesses the equipment and decides to sell it to satisfy the debt. Under UCC Article 9, which of the following is generally required for the disposition of the collateral?Business Law
  22. 22.A consumer purchases a new smart television from an electronics retailer. The retailer, a merchant, sells the TV in its usual course of business. After two weeks, the TV's screen malfunctions, displaying only static. There was no extended warranty purchased, and the sales contract was silent on specific warranties. Under UCC Article 2, which implied warranty has the retailer most likely breached?Business Law
  23. 23.A buyer, 'Retail Ventures Inc.', contracts to purchase 1,000 units of a new electronic gadget from 'Innovate Electronics Corp.' The contract states, 'Goods to be shipped F.O.B. destination, Retail Ventures' warehouse.' Innovate Electronics properly packages and ships the goods. While en route, and before reaching Retail Ventures' warehouse, the truck carrying the goods is involved in an accident, and all 1,000 units are destroyed. Who bears the risk of loss for the destroyed goods?Business Law
  24. 24.A principal, 'Alex', orally authorizes an agent, 'Beth', to sell his personal car for a minimum price of $15,000. Beth finds a buyer, 'Chris', who offers $16,000. Beth accepts Chris's offer on Alex's behalf. Later, Alex decides he no longer wants to sell the car and attempts to revoke Beth's authority. Chris insists on purchasing the car. What type of authority did Beth have to sell the car?Business Law
  25. 25.A creditor holds a perfected security interest in a debtor's equipment. The debtor defaults on the loan. The creditor repossesses the equipment and decides to sell it to satisfy the debt. Under UCC Article 9, which of the following is generally required for the creditor's disposition of the collateral?Business Law
  26. 26.A debtor files for Chapter 7 bankruptcy. Among the debtor's assets is a fully paid-for, non-exempt classic car valued at $75,000. The debtor has two unsecured creditors: Creditor A is owed $60,000, and Creditor B is owed $30,000. After administrative expenses of $5,000 and priority claims of $10,000 are paid from the sale of the car, how much will Creditor B receive from the remaining proceeds?Business Law
  27. 27.A general contractor, Builder Inc., hires a subcontractor, Electric LLC, to handle all electrical work for a new commercial building project. The contract between Builder Inc. and Electric LLC contains a clause stating, 'Electric LLC is an independent contractor and not an employee of Builder Inc.' During the project, an Electric LLC employee negligently causes significant damage to the building's plumbing system. A third party sues Builder Inc. for the damages. Under the doctrine of *respondeat superior*, is Builder Inc. likely liable for the Electric LLC employee's negligence?Business Law
  28. 28.A small manufacturing company, MicroTech Inc., is seeking to expand its operations and obtains a loan from First Bank, securing the loan with all of its current and after-acquired inventory. First Bank properly perfects its security interest on January 15. On February 1, MicroTech Inc. obtains a second loan from Second Bank, securing it with the same inventory. Second Bank also properly perfects its security interest on February 1. MicroTech Inc. defaults on both loans. Assuming no purchase money security interest (PMSI) is involved, which bank has priority over the inventory?Business Law
  29. 29.A buyer enters into a contract with a seller for the purchase of 500 widgets, with delivery 'FOB Shipping Point, Seller's Warehouse.' During transit from the seller's warehouse to the buyer's location, 50 widgets are damaged in an accident. Who bears the risk of loss for the damaged widgets?Business Law
  30. 30.A client, a small business owner, enters into a contract to purchase custom-made equipment from a manufacturer. The contract specifies the equipment will be delivered in 90 days. After 30 days, the manufacturer informs the client that they have decided to cease production of that particular equipment line and will not be able to fulfill the order. Which of the following best describes the manufacturer's action?Business Law
  31. 31.A publicly traded company, Innovate Corp., is subject to the Securities Exchange Act of 1934. Which of the following statements regarding its filing obligations is correct?Business Law
  32. 32.A client, a small business owner, enters into a contract to purchase custom-made equipment from a manufacturer. The contract specifies the equipment will be delivered in 90 days. Before delivery, the manufacturer informs the client that due to unforeseen material shortages, they will be unable to deliver the equipment for at least 150 days. The client, needing the equipment sooner, wishes to terminate the contract immediately without penalty. Under what legal doctrine can the client achieve this outcome?Business Law
  33. 33.A publicly traded company, Innovate Corp., is subject to the Securities Exchange Act of 1934. Innovate Corp. is preparing its quarterly financial statements. Which of the following forms is Innovate Corp. required to file with the SEC for its quarterly financial report?Business Law
  34. 34.A tax practitioner uses a software program to prepare a client's tax return. The software contains a known bug that, under certain circumstances, incorrectly calculates a specific deduction, resulting in a material understatement of tax. The practitioner is aware of the bug but believes it is unlikely to be detected by the IRS. Under Circular 230, what is the practitioner's ethical obligation?Ethics, Professional Responsibilities, and Federal Tax Procedures
  35. 35.A CPA firm has been retained by a large corporate client to provide tax planning advice for a complex international transaction. The transaction is structured in a way that, while potentially aggressive, the firm believes has a 'more likely than not' chance of being sustained if challenged. However, the firm previously advised another client on a similar transaction where the IRS successfully challenged the position. Under Circular 230, which of the following is the MOST critical factor the CPA firm must consider before providing this advice to the new client?Ethics, Professional Responsibilities, and Federal Tax Procedures
  36. 36.A tax practitioner discovers an error in a client's previously filed tax return that resulted in a material understatement of tax liability. The client is unaware of the error. Under Circular 230, which of the following actions is the practitioner REQUIRED to take?Ethics, Professional Responsibilities, and Federal Tax Procedures
  37. 37.A CPA prepares a federal income tax return for a client. The CPA, in good faith, relies on information provided by the client, which the CPA believes to be accurate. Later, it is discovered that the client provided fraudulent information, leading to an understatement of tax. Assuming the CPA had no reason to doubt the information and conducted no independent verification beyond what is typical for tax preparation, what is the CPA's liability for preparer penalties under IRC Sec. 6694?Ethics, Professional Responsibilities, and Federal Tax Procedures
  38. 38.A tax preparer has a reasonable belief that a client's tax return position, if challenged, would more likely than not be sustained on its merits. However, the position involves a complex interpretation of a new tax law provision with no clear IRS guidance. Under Circular 230, what is the MOST appropriate reporting standard for this position?Ethics, Professional Responsibilities, and Federal Tax Procedures
  39. 39.A tax preparer discovers that a client has deliberately failed to report significant income for the past three years. The client insists on continuing this practice for the current year's return and refuses to amend prior returns. Under IRC Sec. 6694, what is the MOST likely penalty the preparer would face if they prepare and sign the current year's return omitting this income?Ethics, Professional Responsibilities, and Federal Tax Procedures
  40. 40.A tax preparer has been assessed a penalty under IRC Sec. 6694 for an understatement of tax liability due to an unreasonable position taken on a client's return. The preparer believes the penalty was unjustly imposed. What is the MOST appropriate first step for the preparer to challenge this penalty?Ethics, Professional Responsibilities, and Federal Tax Procedures
  41. 41.A tax preparer is engaged by a client to prepare their federal income tax return. During the preparation, the client informs the preparer about significant cash income from a side business that was not recorded in their accounting software. The client insists on not reporting this income, stating it's 'too small' for the IRS to notice. Under Circular 230, what is the preparer's MOST appropriate course of action?Ethics, Professional Responsibilities, and Federal Tax Procedures
  42. 42.A tax practitioner is preparing a tax opinion for a client regarding a complex transaction. The opinion concludes that there is a 'more likely than not' chance that the tax treatment will be sustained. However, the practitioner knows that the client intends to use this opinion to avoid accuracy-related penalties on an understatement of tax. Under Circular 230, what is a key requirement for this opinion to be considered a 'reliance opinion' and protect the client from penalties?Ethics, Professional Responsibilities, and Federal Tax Procedures
  43. 43.A tax practitioner is suspended from practicing before the IRS under Circular 230. Which of the following activities is the suspended practitioner PROHIBITED from performing?Ethics, Professional Responsibilities, and Federal Tax Procedures
  44. 44.Under Circular 230, if a practitioner wishes to charge a contingent fee for services rendered in connection with the preparation of an original tax return, which of the following scenarios is permissible?Ethics, Professional Responsibilities, and Federal Tax Procedures
  45. 45.A CPA is preparing a tax return for a client who operates a cash-intensive business. The client provides summary financial data but lacks detailed underlying records for certain expenses. The CPA makes reasonable inquiries and obtains substantiation for some expenses, but others remain unsubstantiated. The CPA believes, based on professional judgment and industry averages, that the unsubstantiated expenses are legitimate but cannot be fully proven. Under the 'reasonable basis' standard, what is the CPA's MOST appropriate course of action to avoid preparer penalties for an undisclosed position?Ethics, Professional Responsibilities, and Federal Tax Procedures
  46. 46.A tax practitioner is suspended from practicing before the IRS under Circular 230 due to a violation of professional conduct rules. During the period of suspension, which of the following activities is the practitioner prohibited from performing?Ethics, Professional Responsibilities, and Federal Tax Procedures
  47. 47.A tax preparer discovers an error in a client's previously filed tax return that resulted in a material understatement of tax liability. The client is unaware of the error. Under Circular 230, what is the preparer's responsibility?Ethics, Professional Responsibilities, and Federal Tax Procedures
  48. 48.A tax preparer has been assessed a penalty under IRC Sec. 6694(b) for willful or reckless conduct related to an understatement of tax on a client's return. The preparer believes the penalty was incorrectly applied. Which of the following is the first step the preparer should take to challenge the penalty?Ethics, Professional Responsibilities, and Federal Tax Procedures
  49. 49.A tax preparer is engaged by a client to prepare their federal income tax return. The client provides the preparer with a detailed spreadsheet of expenses, including several large, undocumented cash expenditures for business meals. The preparer questions the client, who states, "Those were legitimate business expenses, I just don't have the receipts anymore." What is the preparer's most appropriate course of action under Circular 230?Ethics, Professional Responsibilities, and Federal Tax Procedures
  50. 50.A CPA is preparing a federal income tax return for a client. The client informs the CPA that they received a Form 1099-DIV for dividend income but has lost the form and cannot recall the exact amount. The client estimates the dividend income to be approximately $500. What is the CPA's most appropriate course of action under Circular 230?Ethics, Professional Responsibilities, and Federal Tax Procedures