Exam 1: Business Income, Deductions, and Accounting Methods

Anne is a self-employed electrician who reports her business income using the accrual method over a calendar year. On September 1st of this year, Anne paid $2,394 of interest on a loan. The interest accrues evenly over 19 months ($126 per month) from June 1st of this year through December 31st of next year. In addition, on September 1st Anne also paid $2,808 for 18 months of professional liability insurance ($156 per month). What amount of interest and insurance can Anne deduct this year?

Alvin is a self-employed sound technician who reports on the cash method and calendar year. Alvin has a shop in Austin, Texas, but he spends much of his time away from his shop traveling to and from various concerts around the country. Alvin leases a truck to move his equipment around the country, and this year, he spent $12,000 in lease payments and paid $18,000 for gas, oil, and repairs. Alvin keeps records of his personal use of the truck and he estimates that 6,000 of the total 36,000 miles put on the truck this year were for personal trips. What amount of these expenses may Alvin deduct as business expenses?

Otto operates a bakery and is on the cash method and calendar year. This year, one of Otto's ovens caught fire and was partially destroyed. Otto bought it a few years ago for $20,000 and claimed depreciation of $12,000 up to the fire. Otto was charged $4,400 for repairs to the oven but the insurance company paid Otto $1,500 for the damage. What is Otto's casualty loss deduction?

Mike started a calendar-year business on September 1^st of this year by paying 12 months of rent on his shop at $1,200 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

Sam operates a small chain of pizza outlets in Fort Collins, Colorado. In November of this year, Sam decided to attend a two-day management training course. Sam could choose to attend the course in Denver or Los Angeles. Sam decided to attend the course in Los Angeles and take an eight-day vacation immediately after the course. Sam reported the following expenditures from the trip: What amount of travel expenditures can Sam deduct?

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.

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.

Which of the following is a true statement about travel that has both business and personal aspects?

Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers) of $2 million in 2020. Taxable income was computed on $50 million of revenues and included $75,000 of interest income. The company paid $451,250 in interest expense. What is Rock Island's maximum business interest deduction for the year?

Riley operates a plumbing business, and this year the three-year-old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $20,000 and the adjusted basis was $5,800 at the time of the accident. Although the van was worth $6,000 at the time of accident, insurance only paid Riley $1,200 for the loss. What is the amount of Riley's casualty loss deduction?

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?

Mike started a calendar-year business on September 1 ^st of this year by paying 12 monthsof rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

Clyde operates a sole proprietorship using the cash method. This year, Clyde made the following expenditures: $480 to U.S. Bank for 12 months of interest accruing on a business loan from September 1 of this year through August 31 of next year even though only $160 of interest accrued this year. $600 for 12 months of property insurance beginning on July 1 of this year. What is the maximum amount Clyde can deduct this year?

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

For purposes of the business interest limitation, adjusted taxable income is defined as taxable income allocable to the business computed without regard to which of the following:

Marilyn operates a day care center as a cash-method sole proprietorship. On August 1 ^st of this year, Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months. How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

The all-events test for income determines the period in which income will be recognized for tax purposes.

Only half the cost of a business meal is deductible even if the meal is extravagant.

All taxpayers must account for taxable income using a calendar year.

Which of the following is a true statement about accounting for business activities?