Exam 1: Business Income,Deductions,and Accounting Methods

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?

Brad operates a storage business on the accrual method.On July 1 Brad paid $48,000 for rent on his storage warehouse and $18,000 for insurance on the contents of the warehouse.The rent and insurance covers the next 12 months.What is Brad's deduction for the rent and insurance?

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

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?

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

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?

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

Employees cannot deduct the cost of uniforms if the uniforms are also appropriate for normal wear.

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

Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

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.

Ajax Computer Company is an accrual method calendar year taxpayer.Ajax has never advertised in the national media prior to this year.In November of this year,however,Ajax paid $1 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year.In addition,in November of this year the company paid $500,000 for advertising time during a professional golf tournament which will occur once in April of next year.What amount of these payments,if any,can Ajax deduct this year?

Qualified production activities income is defined as follows for purposes of the domestic production activities deduction:

Big Homes Corporation is an accrual method calendar year taxpayer that manufactures and sells modular homes.This year for the first time Big Homes was forced to offer a rebate on the purchase of new homes.At year end,Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers.What amount of the rebates,if any,can Big Homes deduct this year?

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

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

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

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

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?

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?