Exam 9: Business Income, Deductions, and Accounting Methods

Colby Motors uses the accrual method and reports on a calendar year. In December of last year, Colby acquired auto repair equipment. As part of the acquisition, Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for threeyears. Colby paid the cost of the warranty, $15,000, in January of this year. What can Colby deduct for the cost of the warranty on the tax return for last year?

Which of the following expenditures is most likely to be deductible for a construction business?

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 year 3. When must Colbert recognize theincome if his accounting methods are selected to minimize income recognition?

Werner is the president and CEO of Acme, Inc. and this year he took a prospective client to dinner.During the dinner the President and the client discussed a proposed contract for over $6 million and personal matters. After dinner the CEO took the client to a football game and no business wasdiscussed. The CEO paid $1,220 for an expensive dinner and spent $600 for tickets to the game.What is the deductible amount of these expenses?

David purchased a deli shop on February 1st of last year and began to operate it as a soleproprietorship. 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?

After a business meeting with a prospective client Holly took the client to dinner and the theatre. Holly paid $290 for the meal and $250 for the theatre tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Hollydeduct as a business expense?

Smith operates a roof repair business. This year Smith's business generated cash receipts of $32,000 andSmith made the following expenditures associated with his business: The education expense was for a two-week, nighttime course in business management. Smith believes the expenditure should qualify as an ordinary and necessary business expense. What net incomeshould Smith report from his business? Smith is on the cash method and calendar year.

The full-inclusion method requires cash basis taxpayers to include prepayments for goods or services into realized income.

Business activities are distinguished from personal activities in that business activitiesare motivated by the pursuit of profits.

Kip started a wholesale store this year selling bulk peanut butter. In January of this year Kip purchased an initial five tubs of peanut butter for a total cost of $5,000. In July Kip purchased three tubs for a total cost of $6,000. Finally, in November Kip bought two tubs for a total cost of $1,000. Kip sold six tubs by year end. What is Kip's ending inventory under the FIFO cost-flow method?

Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year.This year he hired his son as an apprentice cook. Jones agreed to pay his son $40,000 per year. Which of the following is a true statement about this transaction?

Which of the following expenses are completely deductible?

A short tax year can end on any day of any month other than December.

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

Which of the following business expense deductions is most likely to be unreasonable in amount?

Shadow Services uses the accrual method and reports on a calendar year. This year Shadow agreed to a uniform cleaning contract with Odie Cleaning. Under the contract Odie bills Shadow forcleaning services as the services are provided. At year end Shadow paid Odie $2,350 for the services rendered during the year. In addition, Shadow paid Odie $700 for cleaning services expected in January of next year. What amount, if any, can Shadow deduct for the cleaning services this year?

Jim operates his business on the accrual method and this year he received $4,000 forservices that he intends to provide to his clients next year. Under what circumstances canJim defer the recognition of the $4,000 of income until next year?

When does the all-events test under the accrual method require the recognition of income from the sale of goods?

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 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.

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?