Question 1

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

Accepted Answer

A)  Compensation paid to the taxpayer's spouse in excess of salary payments to other employees. 
B)  Amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations. 
C)  Cost of a meal with a former client when there is no possibility of any future benefits from a relation with that client. 
D)  All of the choices are likely to be unreasonable in amount. 
E)  None of the choices are likely to be unreasonable in amount. 
A)  Compensation paid to the taxpayer's spouse in excess of salary payments to other employees. 
B)  Amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations. 
C)  Cost of a meal with a former client when there is no possibility of any future benefits from a relation with that client. 
D)  All of the choices are likely to be unreasonable in amount. 
E)  None of the choices are likely to be unreasonable in amount.

Question 2

In order to deduct a portion of the cost of a business meal which of the following conditions must be met?

Accepted Answer

A)  A client (not a supplier or vendor) must be present at the meal. 
B)  The taxpayer or an employee must be present at the meal. 
C)  The meal must occur on the taxpayer's business premises. 
D)  None of these choices is a condition for the deduction. 
E)  All of the choices are conditions for a deduction. 
A)  A client (not a supplier or vendor) must be present at the meal. 
B)  The taxpayer or an employee must be present at the meal. 
C)  The meal must occur on the taxpayer's business premises. 
D)  None of these choices is a condition for the deduction. 
E)  All of the choices are conditions for a deduction.

Question 3

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 4

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

Accepted Answer

A)  Transportation costs are always fully deductible. 
B)  Meals are not deductible for this type of travel. 
C)  Only half of the cost of meals and transportation is deductible. 
D)  The cost of lodging and incidental expenditures is limited to those incurred during the business portion of the travel. 
E)  None of the choices are correct. 
A)  Transportation costs are always fully deductible. 
B)  Meals are not deductible for this type of travel. 
C)  Only half of the cost of meals and transportation is deductible. 
D)  The cost of lodging and incidental expenditures is limited to those incurred during the business portion of the travel. 
E)  None of the choices are correct.

Question 5

Beth operates a plumbing firm. In August of last year she signed a contract to provide plumbing services for a renovation. Beth began the work that August and finished the work in December of last year. However, Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full. When should Beth recognize income under the accrual method of accounting?

Accepted Answer

A)  In August of last year 
B)  In December of last year 
C)  In January of this year 
D)  In March of this year 
E)  In April of this year 
A)  In August of last year 
B)  In December of last year 
C)  In January of this year 
D)  In March of this year 
E)  In April of this year

Question 6

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?

Accepted Answer

A)  Jones will be allowed to deduct $40,000 only if his son eventually develops into an expert cook. 
B)  Jones will be allowed to accrue $40,000 only if he pays his son in cash. 
C)  Jones will be allowed to deduct $35,000 as compensation and another $5,000 can be deducted as an employee gift. 
D)  Jones can only deduct $20,000 because an apprentice cook is only worth half as much as an experienced cook. 
E)  None of the choices are True. 
A)  Jones will be allowed to deduct $40,000 only if his son eventually develops into an expert cook. 
B)  Jones will be allowed to accrue $40,000 only if he pays his son in cash. 
C)  Jones will be allowed to deduct $35,000 as compensation and another $5,000 can be deducted as an employee gift. 
D)  Jones can only deduct $20,000 because an apprentice cook is only worth half as much as an experienced cook. 
E)  None of the choices are True.

Question 7

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.

Accepted Answer

$7,500
Uniforms are deductible

Question 8

Ronald is a cash method taxpayer who made the following expenditures this year. Which expenditure is completely deductible in this period as a business expense?

Accepted Answer

A)  $4,000 for rent on his office that covers the next 24 months. 
B)  $3,000 for a new watch for the mayor to keep "good relations" with city hall. 
C)  $2,500 for professional hockey tickets distributed to a customer to generate "goodwill" for his business. 
D)  $55 to collect an account receivable from a customer who has failed to pay for services rendered. 
E)  None of the choices are completely deductible. 
A)  $4,000 for rent on his office that covers the next 24 months. 
B)  $3,000 for a new watch for the mayor to keep "good relations" with city hall. 
C)  $2,500 for professional hockey tickets distributed to a customer to generate "goodwill" for his business. 
D)  $55 to collect an account receivable from a customer who has failed to pay for services rendered. 
E)  None of the choices are completely deductible.

Question 9

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 10

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

Question 11

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

Accepted Answer

$20,940 = $32,000 −

Question 12

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?

Accepted Answer

$15,000
Unless performance occ

Question 13

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

Accepted Answer

A)  Salaries in excess of the industry average paid to attract talented employees. 
B)  The cost of employee uniforms that can be adapted to ordinary personal wear. 
C)  A speeding fine paid by a trucker who was delivering a rush order. 
D)  The cost of a three-year subscription to a business publication. 
E)  None of the choices are likely to be deductible. 
A)  Salaries in excess of the industry average paid to attract talented employees. 
B)  The cost of employee uniforms that can be adapted to ordinary personal wear. 
C)  A speeding fine paid by a trucker who was delivering a rush order. 
D)  The cost of a three-year subscription to a business publication. 
E)  None of the choices are likely to be deductible.

Question 14

Which of the following is a True statement?

Accepted Answer

A)  Meals, lodging, and incidental expenditures are only 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. 
A)  Meals, lodging, and incidental expenditures are only 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.

Question 15

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 16

Danny owns an electronics outlet in Dallas. This year he paid $600 to register for a four-day course in management in Chicago. Danny paid $800 in airfare and $1,000 for five nights lodging. After the course, Danny spent the last day sightseeing. During the trip, Danny also paid $140 a day for meals, and $80 a day for a rental car. What amount of these travel expenditures may Danny deduct as business expenses?

Accepted Answer

$2,800 = $600 + $800 + (4 nights × $200)

Question 17

Riley operates a plumbing business and this year the 3-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?

Accepted Answer

A)  $6,000. 
B)  $14,000. 
C)  $5,800. 
D)  $4,600. 
E)  $5,300. 
A)  $6,000. 
B)  $14,000. 
C)  $5,800. 
D)  $4,600. 
E)  $5,300.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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?

Accepted Answer

A)  $12,000 
B)  $6,000 
C)  $5,000 
D)  $2,500 
E)  $1,000 
A)  $12,000 
B)  $6,000 
C)  $5,000 
D)  $2,500 
E)  $1,000

Question 20

Which of the following is a True statement?

Accepted Answer

A)  Interest expense is not deductible if the loan is used to purchase municipal bonds. 
B)  Insurance premiums are not deductible if paid for "key man" life insurance. 
C)  One half of the cost of business meals is not deductible. 
D)  All of these choices are True. 
E)  None of the choices are True. 
A)  Interest expense is not deductible if the loan is used to purchase municipal bonds. 
B)  Insurance premiums are not deductible if paid for "key man" life insurance. 
C)  One half of the cost of business meals is not deductible. 
D)  All of these choices are True. 
E)  None of the choices are True.

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

In order to deduct a portion of the cost of a business meal which of the following conditions must be met?

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

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?

Ronald is a cash method taxpayer who made the following expenditures this year. Which expenditure is completely deductible in this period as a business expense?

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 likely to be a fully deductible business expense?

Which of the following is a True statement?

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

Which of the following is a True statement?

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 U.S. Taxation of Multinational Transactions

Transfer Taxes and Wealth Planning

Filters

Exam 1: Business Income, Deductions, and Accounting Methods

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

In order to deduct a portion of the cost of a business meal which of the following conditions must be met?

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

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?

Ronald is a cash method taxpayer who made the following expenditures this year. Which expenditure is completely deductible in this period as a business expense?

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 likely to be a fully deductible business expense?

Which of the following is a True statement?

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

Which of the following is a True statement?

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 U.S. Taxation of Multinational Transactions

Transfer Taxes and Wealth Planning

Filters