Exam 9: Business Income, Deductions, and Accounting Methods

Judy is a self-employed musician who performs for a variety of events. This year Judy was fined $250 by the city for violating the city's noise ordinance with a relatively loud performance. As a consequence, Judy contributed $1,000 to a campaign committee formed to recall the city's mayor. Judy normally hires three part-time employees to help her schedule events and transport equipment. Judy paid a total of $33,000 to her employees through June of this year. In June Judy fired her part-time employees and hired her husband to replace them. However, Judy paid him $55,000 rather than $33,000. Judy is on the cash method and calendar year, and she wants to know what amount of these expenditures is deductible as business expenses.

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?

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

The IRS would most likely apply the arm's length transaction test to determine which of the following?

Uniform capitalization of indirect inventory costs is required for most large taxpayers.

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

Which of the following is a payment liability?

George operates a business that generated adjusted gross income of $250,000 and taxable income of $170,000 this year (before the domestic production activities deduction). Included in income was $70,000 of qualified production activities income. George paid $60,000 of wages to employees engaged in domestic manufacturing. What domestic production activities deduction will George be eligible to claim this year?

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

Colbert operates a catering service on the accrual method. In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1^st of year 1 through May 31^st year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

Werner is the president and CEO of Acme, Inc. and this year he took a prospective client to dinner. During the dinner the President and the client discussed a proposed contract for over $6 million and personal matters. After dinner the CEO took the client to a football game and no business was discussed. The CEO paid $1,220 for an expensive dinner and spent $600 for tickets to the game. What is the deductible amount of these expenses?

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?

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

The domestic production activities deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic manufacturing activities during the year.

Joe operates a plumbing business that uses the accrual method and reports on a calendar year. This year Joe signed a $50,000 binding contract with Brian. Under the contract Brian will provide Joe with up to 2,000 hours of vehicle repairs at $25 per hour. This year Brian provided 200 hours of repair services and billed Joe for $5,000. At year end Joe had not paid Brian for the services. What amount, if any, can Joe deduct for the repair services this year?

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

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?

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^st of this year through August 31^st 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?

Rock Island Corporation generated taxable income (before the domestic production activities deduction) of $10 million this year. The total income included $4,500,000 of qualified production activities income. The company paid $500,000 in W-2 wages to generate the qualified production activity income. What is Rock Island's domestic production activities deduction for the year?

Qualified production activity income for calculating the domestic production activities deduction is limited to taxable income for a business or modified AGI for an individual.