Exam 2: Income Tax Concepts

Hank bought a small ranch for $300,000 in 2010. In 2018, oil is discovered on neighboring property. The county assessor re-valued Hank's property at $1,550,000. Hank does not recognize any income due to the

Drew Corporation purchased machinery costing $825,000 in 2017. Drew paid $5,000 for installation and testing of the machinery. Under a special election, Drew expensed $500,000 of the cost of the machinery in 2017. Drew also deducted depreciation on the machinery of $46,443 in 2017 and $79,593 in 2018. Drew's repair and maintenance costs on the machinery were $10,200 in 2017 and $13,300 in 2018. What is Drew Corporation's adjusted basis in the machinery at the end of 2018?

The taxpayer will be able to benefit from capital recovery on business equipment over the life of the asset and any remaining capital will be recovered when the asset is sold.

Match each term with the correct statement below. -Calendar year

Sandra directed her employer to withhold $500 of her wages each month for deposit to her mother's checking account. Which of the following concepts, constructs, or doctrines is the least helpful in determining how Sandra should report the arrangement for tax purposes?

According to the entity concept I.a sole proprietorship is similar to a conduit entity. II.a sole proprietor cannot convert nondeductible personal items into deductible business items by commingling expenditures. III.a partnership is an example of a mixture of a taxable and a conduit entity. IV.an S corporation is a tax paying entity. ​

Carter sold 100 shares of Mitsui, Inc. for $8,000 but he only recognized $2,000 as income because the original purchase price was $6,000. This is due to the

Match each statement with the correct term below. -Recognition

All deductions are allowed because of the legislative grace concept.

Under the Wherewithal to Pay concept, income should be recognized and a tax paid on the income when the taxpayer has the resources to pay the tax.

Capital assets include which of the following? I.Depreciable equipment used in Robbie's business. II.A new car held for resale by Andrews Auto Sales. III.Accounts receivable held by Jessica because of sales on credit while operating her store. IV.A set of golf clubs, belonging to a surgeon. ​

Match each term with the correct statement below. -Annual Accounting Period Concept

The rules that limit self-dealing through the related party provisions is a result of the

Tax law generally disallows deductions for personal expenditures. However, due to legislative grace, there are certain exceptions to this general provision of tax law. These exceptions include I.Itemized Deductions. II.Standard Deduction amount. III.Personal Exemption amounts. IV.Dependency Exemption amounts. ​

Tyrone sells his personal-use car that had cost $15,000 for $10,000. Why is the loss realized on this transaction disallowed as a deduction? I.Legislative Grace is lacking. II.Personal losses are disallowed. III.Business purpose is lacking. ​

Mandy is a self-employed plumber. She spends $24,000 of her personal savings to buy an Airstream camper to use on camping trips. Why is this expenditure not currently deductible? I.It is a capital expenditure. II.It is a personal expenditure. ​

For each tax treatment described below, explain the income tax concept(s) which is (are) responsible for the treatment. a.Atlas Construction Inc., an accrual basis taxpayer, billed a client $12,000 for services performed in December 2018. In March 2019, Atlas Construction receives a check from the client for $10,000. Included with the check is a letter indicating that some of the services had not been performed to specifications. After investigating the matter, Atlas Construction determined that the customer was right and corrected its account receivable with the client. Atlas Construction must include $12,000 in its 2018 income and takes a deduction for $2,000 in 2019. b.Katie is the Mayor of Coal Creek. During the current year, she accepts $5,000 from a local banker for her promise that the banker would receive the contract for a new city bond issue. The payment is illegal under state law and will have to be returned if discovered. Katie must include the $5,000 in her gross income. c.Little Company purchased machinery in 2013 at a cost of $40,000. In 2013 through 2018, Little properly deducts $14,000 in depreciation on the machinery. In 2018, the machinery is sold for $20,000. Little is allowed to deduct a $6,000 loss on the sale of the machinery. d.In 2017 Raptor Corporation properly deducted a $5,000 expense it paid to Colfax Inc. In 2018 Raptor receives a $500 check from Colfax. A letter accompanying the check indicates that Colfax overcharged Raptor and the $500 refund was made to correct the overcharge. Raptor must include the $500 in its 2018 gross income.?

For each of the following tax treatments, explain the income tax concept(s) which is/are responsible for the treatment indicated. a.Dorine purchased 500 shares of Russell Corporation common stock in June 2017 for $11,000. In November 2017, Dorine received 50 shares of Russell Corporation stock as a stock dividend when the stock was selling for $22 per share. At December 31, 2017, the 550 Russell Corporation shares were worth $13,000. In March 2018, Dorine sells the 550 shares for $13,500. Dorine recognizes no income in 2017 and $2,500 of income in 2018 from her investment in Russell Corporation stock. b.Steven is the sole owner of Moray Corporation. Steven sells land to Moray that cost him $33,000 for $22,000. Steven is not allowed to deduct the $11,000 loss on the sale. c.Danielle is the owner of Larson Company. In April, she attends a trade show in New York. She takes her daughter with her on the trip so she can go to museums and see some Broadway shows. The cost of Danielle's trip is deductible, but her daughter's costs are not deductible. d.Earl is a vice-president of Laddy Corporation. In December 2018, the board of directors voted to give Earl a $20,000 bonus, payable on December 30, 2018. Earl tells the payroll clerk to delay processing the bonus check until January 4, 2019. Earl must include the $20,000 bonus in his 2018 gross income.?

In 2007, Gaylord purchased 100 shares of stock of Chisel Corporation for $200 per share. In 2018, Gaylord sells all of the shares for $19,000. What are the effects of these events? I.The capital recovery concept prevents the recognition of any income. II.Gaylord reports $1,000 of ordinary income for tax year 2018. ​

After buying books at the beginning of the semester, Iris finds a $50 bill outside the door of the bookstore. The $50 is considered gross income. Which of the following supports this treatment?