Question 1

Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?

Accepted Answer

A)  Spouse when the taxpayer is an individual. 
B)  A partner when the taxpayer is a partnership. 
C)  Brother when the taxpayer is an individual. 
D)  A minority shareholder when the taxpayer is a corporation. 
E)  All of these are related parties. 
A)  Spouse when the taxpayer is an individual. 
B)  A partner when the taxpayer is a partnership. 
C)  Brother when the taxpayer is an individual. 
D)  A minority shareholder when the taxpayer is a corporation. 
E)  All of these are related parties. D

Question 2

Murphy uses the accrual method and reports on a calendar year. This year Murphy signed a binding contract to provide consulting services to Kirby beginning next year. Murphy incurred $15,000 to train his staff for this particular project. In addition, Murphy estimates that he will incur another $60,000 to complete the Kirby contract. What amount, if any, can Murphy deduct this year for the services expected to be rendered next year?

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Question 2

Correct Answer:

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$15,000.
Unless the services are rendered, Murphy can only deduct costs actually incurred, $15,000. The remainder is not deductible until next year because of economic performance.

Accepted Answer

$15,000.
Unless the services are rendered, Murphy can only deduct costs actually incurred, $15,000. The remainder is not deductible until next year because of economic performance.

Question 3

The deduction for business interest expense is limited to the sum of (1) business interest income and (2) 30 percent of the adjusted taxable income of the taxpayer for the taxable year.

Accepted Answer

A) True 
 B)False  True

Question 4

Joe is a self-employed electrician who operates his business on the accrual method. This year Joe purchased a shop for his business, and for the first time at year-end he received a bill for $4,500 of property taxes on his shop. Joe didn't pay the taxes until after year-end but prior to filing his tax return. Which of the following is a true statement?

Accepted Answer

A)  If he elects to treat the taxes as a recurring item, Joe can accrue and deduct $4,500 of taxes on the shop this year. 
B)  The taxes are a payment liability. 
C)  The taxes would not be deductible if Joe's business was on the cash method. 
D)  Unless Joe makes an election, the taxes are not deductible this year. 
E)  All of the choices are true. 
A)  If he elects to treat the taxes as a recurring item, Joe can accrue and deduct $4,500 of taxes on the shop this year. 
B)  The taxes are a payment liability. 
C)  The taxes would not be deductible if Joe's business was on the cash method. 
D)  Unless Joe makes an election, the taxes are not deductible this year. 
E)  All of the choices are true.

Question 5

Werner is the president and CEO of Acme, Inc., and this year he took a prospective client to dinner. During the dinner Werner and the client discussed a proposed contract for over $6 million as well as personal matters. After dinner Werner took the client to a football game and no business was discussed. Werner paid $1,220 for an expensive (but not extravagant) dinner and spent $600 for tickets to the game. What is the deductible amount of these expenses?

Accepted Answer

$610 = 50% × ($1,220

Question 6

Crystal operates a business that provides typing and delivery services. This year Crystal spent $2,500 to purchase special shirts that identify her employees and provide some notoriety for her business. The shirts are especially colorful and include logos on the front pocket and the back. Besides salary payments, Crystal also compensates her employees by offering to pay whole life insurance premiums for any that want to provide insurance coverage for their beneficiaries. This year Crystal paid $5,000 in life insurance premiums. What amount of these payments can Crystal deduct? Crystal is on the cash method and calendar year.

Accepted Answer

$7,500.
Uniforms are deductible if not a

Question 7

David purchased a deli shop on February 1st of last year and began to operate it as a sole proprietorship. David reports his personal taxes using the cash method over a calendar year, and he wants to use the cash method and fiscal year for his sole proprietorship. He has summarized his receipts and expenses through January 31st of this year as follows:
   What income should David report from his sole proprietorship?

Accepted Answer

$27,500 = $112,000 − $84,500.

Question 8

A business generally adopts a fiscal or calendar year by using that year-end on the first tax return for the business.

Accepted Answer

A) True 
 B)False

Question 9

When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt will not be deductible.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is a true statement?

Accepted Answer

A)  Meals, lodging, and incidental expenditures are deductible if the taxpayer is away from home overnight while traveling. 
B)  Meals are deductible for an employee who is forced to work during the lunch hour. 
C)  When a taxpayer travels solely for business purposes, only half of the costs of travel are deductible. 
D)  If travel has both business and personal aspects, the cost of transportation is always deductible but the deductibility of lodging depends upon whether business is conducted that day. 
E)  None of the choices are true because business travel is not deductible. 
A)  Meals, lodging, and incidental expenditures are deductible if the taxpayer is away from home overnight while traveling. 
B)  Meals are deductible for an employee who is forced to work during the lunch hour. 
C)  When a taxpayer travels solely for business purposes, only half of the costs of travel are deductible. 
D)  If travel has both business and personal aspects, the cost of transportation is always deductible but the deductibility of lodging depends upon whether business is conducted that day. 
E)  None of the choices are true because business travel is not deductible.

Question 11

Ranger Athletic Equipment uses the accrual method and reports on a calendar year. Ranger provides two-year warranties on all sales of equipment. This year Ranger estimated warranty expense for book purposes, and he accrued $1 million of warranty expenses. However, during the year Ranger only spent $400,000 repairing equipment under the warranty. What can Ranger deduct for warranty expense on the tax return for this year?

Accepted Answer

$400,000
The accrued $1 million warranty

Question 12

Although expenses associated with illegal activities are not deductible, political contributions can be deducted as long as the donation is not made to a candidate for public office.

Accepted Answer

A) True 
 B)False

Question 13

Uniform capitalization of indirect inventory costs is required for most very large taxpayers.

Accepted Answer

A) True 
 B)False

Question 14

This year Clark leased a car to drive between his office and various work sites. Clark carefully recorded that he drove the car 23,000 miles this year and paid $7,200 of operating expenses ($2,700 for gas, oil, and repairs, and $4,500 for lease payments). What amount of these expenses may Clark deduct as business expenses?

Accepted Answer

A)  $7,200 
B)  Clark cannot deduct these costs because taxpayers must use the mileage method to determine any transportation deduction. 
C)  $4,500 
D)  $2,700 
E)  Clark is not entitled to any deduction if he used the car for any personal trips. 
A)  $7,200 
B)  Clark cannot deduct these costs because taxpayers must use the mileage method to determine any transportation deduction. 
C)  $4,500 
D)  $2,700 
E)  Clark is not entitled to any deduction if he used the car for any personal trips.

Question 15

A fiscal tax year can end on the last day of any month other than December.

Accepted Answer

A) True 
 B)False

Question 16

Colbert operates a catering service on the accrual method. In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1st of year 1 through May 31st of year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

Accepted Answer

A)  $500 is recognized in year 1, $6,000 in year 2, and $2,500 in year 3. 
B)  $500 is recognized in year 1 and $8,500 in year 2. 
C)  $9,000 is recognized in year 3. 
D)  $2,500 is recognized in year 1 and $6,500 in year 2. 
E)  $9,000 is recognized in year 1. 
A)  $500 is recognized in year 1, $6,000 in year 2, and $2,500 in year 3. 
B)  $500 is recognized in year 1 and $8,500 in year 2. 
C)  $9,000 is recognized in year 3. 
D)  $2,500 is recognized in year 1 and $6,500 in year 2. 
E)  $9,000 is recognized in year 1.

Question 17

Bob operates a clothing business using the accrual method over a calendar year. In October of last year, Bob contracted with his father, Tim, for consulting advice. Tim is a cash-basis calendar-year taxpayer and he billed Bob for $6,000 of consulting fees. This amount was comparable to amounts charged by other consultants (a reasonable amount). Bob paid $2,500 of the consulting fee by December 31st of last year, but the remaining $3,500 was not paid until January of this year. When can Bob deduct the consulting fee?

Accepted Answer

$2,500 is deductible last year and $3,50

Question 18

The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is a true statement?

Accepted Answer

A)  Meals are never deductible as a business expense. 
B)  An employer can only deduct half of any meals provided to employees as compensation. 
C)  The cost of business meals must be reasonable. 
D)  A taxpayer can only deduct a meal for a client if business is discussed during the meal. 
E)  None of the choices are true. 
A)  Meals are never deductible as a business expense. 
B)  An employer can only deduct half of any meals provided to employees as compensation. 
C)  The cost of business meals must be reasonable. 
D)  A taxpayer can only deduct a meal for a client if business is discussed during the meal. 
E)  None of the choices are true.

Question 20

Which of the following is an explanation for why insurance premiums on a key employee are not deductible?

Accepted Answer

A)  A deduction for the insurance premium would offset taxable income without the potential for the proceeds generating taxable income. 
B)  The federal government does not want to subsidize insurance companies. 
C)  It is impractical to trace insurance premiums to the receipt of proceeds. 
D)  Congress presumes that all expenses are not deductible unless specifically allowed in the Internal Revenue Code. 
E)  This rule was grandfathered from a time when the Internal Revenue Code disallowed all insurance premiums deductions. 
A)  A deduction for the insurance premium would offset taxable income without the potential for the proceeds generating taxable income. 
B)  The federal government does not want to subsidize insurance companies. 
C)  It is impractical to trace insurance premiums to the receipt of proceeds. 
D)  Congress presumes that all expenses are not deductible unless specifically allowed in the Internal Revenue Code. 
E)  This rule was grandfathered from a time when the Internal Revenue Code disallowed all insurance premiums deductions.

Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?

The deduction for business interest expense is limited to the sum of (1) business interest income and (2) 30 percent of the adjusted taxable income of the taxpayer for the taxable year.

A business generally adopts a fiscal or calendar year by using that year-end on the first tax return for the business.

When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt will not be deductible.

Which of the following is a true statement?

Although expenses associated with illegal activities are not deductible, political contributions can be deducted as long as the donation is not made to a candidate for public office.

Uniform capitalization of indirect inventory costs is required for most very large taxpayers.

A fiscal tax year can end on the last day of any month other than December.

The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

Which of the following is a true statement?

Which of the following is an explanation for why insurance premiums on a key employee are not deductible?

Property Acquisition and Cost Recovery

Property Dispositions

Entities Overview

Corporate Operations

Accounting for Income Taxes

Corporate Taxation: Nonliquidating Distributions

Corporate Formation, Reorganization, and Liquidation

Forming and Operating Partnerships

Dispositions of Partnership Interests and Partnership Distributions

S Corporations

State and Local Taxes

The Us Taxation of Multinational Transactions

Transfer Taxes and Wealth Planning

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Exam 1: Business Income, Deductions, and Accounting Methods

Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?

The deduction for business interest expense is limited to the sum of (1) business interest income and (2) 30 percent of the adjusted taxable income of the taxpayer for the taxable year.

A business generally adopts a fiscal or calendar year by using that year-end on the first tax return for the business.

When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt will not be deductible.

Which of the following is a true statement?

Although expenses associated with illegal activities are not deductible, political contributions can be deducted as long as the donation is not made to a candidate for public office.

Uniform capitalization of indirect inventory costs is required for most very large taxpayers.

A fiscal tax year can end on the last day of any month other than December.

The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

Which of the following is a true statement?

Which of the following is an explanation for why insurance premiums on a key employee are not deductible?

Property Acquisition and Cost Recovery

Property Dispositions

Entities Overview

Corporate Operations

Accounting for Income Taxes

Corporate Taxation: Nonliquidating Distributions

Corporate Formation, Reorganization, and Liquidation

Forming and Operating Partnerships

Dispositions of Partnership Interests and Partnership Distributions

S Corporations

State and Local Taxes

The Us Taxation of Multinational Transactions

Transfer Taxes and Wealth Planning

Filters