Exam 9: Business Income, Deductions, and Accounting Methods

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

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?

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

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

Which of the following is likely to be a fully deductible business expense?

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

Marilyn operates a day care center as a cash-method sole proprietorship. On August 1ˢᵗ 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?

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 1ˢᵗ of this year through August 31ˢᵗ of next 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?

Manley operates a law practice on the accrual method and calendar year. At the beginning of the year Manley's firm had an allowance for doubtful accounts with a balance of $15,000. At the end of the year, Manley recorded bad debt expense of $23,000 and the balance of doubtful accounts had increased to $18,000. What is Manley's deduction for bad debt expense this year?

A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.

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 three years. 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?

According to the Internal Revenue Code §162, deductible trade or business expenses must be one of the following?

Taffy Products uses the accrual method and reports on a calendar year. On July 1ˢᵗ of this year Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents of their warehouse. The rent and insurance covers the next 12 months. What amount, if any, can Taffy deduct for rent and insurance this year?

Paris operates a talent agency as a sole proprietorship, and this year she incurred the following expenses in operating her talent agency. What is the total deductible amount of these expenditures? $1,000 dinner with a film producer where no business was discussed $500 lunch with sister Nicky where no business was discussed $700 business dinner with a client but Paris forgot to keep any records (oops!) $900 tickets to the opera with a client following a business meeting

Bill operates a proprietorship using the cash method of accounting, and this year he received the following payments:   -$100 in cash from a customer for services rendered this year -a promise to pay $200 from a customer for services rendered this year -tickets to a football game worth $250 as payment for services performed last year -a check for $170 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C?

The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount.

Sole proprietorships must use the same tax year as the proprietor of the business.

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?

Which of the following is a True statement about impermissible accounting methods?

Shelley is employed in Texas and recently attended a two-day business conference at the request of her employer. Shelley spent the entire time at the conference and documented her expenditures (described below). What amount can Shelley deduct if she is not reimbursed by her employer?