Question 1

Match each statement with the correct term below.
-Cash Method

Accepted Answer

A) Taxpayer reports income when received in cash or its equivalent and takes deductions as they are paid. 
B) A deduction taken in one year that is recovered in a later year is reported as income in the year of recovery to the extent that the deduction reduced taxable income. 
C) Taxpayer reports income as earned and deductions as incurred. 
D) The result of an arms-length transaction. 
E) Exclusions and deductions result from specific acts of Congress that must be strictly applied and interpreted.
F)The taxability of a transaction is determined by the reality of the transaction rather than some contrived appearance.
G)The reporting of an item of income or expense on a tax return
H)No income is realized until the taxpayer's invested capital is recovered.
I)All income received is taxable unless some specific provision of the tax law allows exclusion of the item.
J)These taxpayers are not deemed to transact at arms-length.

Question 2

Silvia is a single individual who has income of $80,000. Todd is a single individual who has income of $35,000. Neither of them itemizes their deductions. Both taxpayers will take a standard deduction of $12,000 in 2018. The concept that allows both Silvia and Todd to take this deduction is

Accepted Answer

A) Capital Recovery. 
B) Administrative Convenience. 
C) Entity. 
D) Wherewithal to Pay. 
E) Pay-as-You Go.

Question 3

On November 1, 2018, Milton Consultants Inc., enters into a 2-year lease agreement for the use of a photocopier. The lease agreement requires Milton Consultants to pay a fixed fee of $4,800 on November 1 and one cent for each copy made on a monthly basis. Milton made the $4,800 payment on November 1, 2018. It paid $450 on December 10, 2018 for copies made in November and $560 on January 12, 2019 for copies made in December. Milton Consultants Inc., uses the cash basis of accounting. Explain, in terms of the income tax concepts, the amount of the deduction for the use of the copier that Milton can take in 2018.

Accepted Answer

The answer of On November 1, 2018, Milton Consultants Inc.,...

Question 4

Wanda bought 5 acres of land near Antler Mountain 13 years ago for $5,000. Recently, the U.S. Forest Service announced that a new ski area would be built on Antler Mountain next year. Wanda receives a telephone call from a representative of Omni Ski Corporation offering her $100,000 for the property. She rejected the offer saying she plans to hold onto the property for her grandchildren. What are the tax effects of these events?
I.Wanda will not report income because of the increased value of the property on her tax return for this year.
II.Realization occurs when the offer is given to Wanda.
III.Ability to pay occurred when the offer was extended to Wanda.
IV.Recognition only occurs when a sale is completed because of the realization concept.
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Accepted Answer

A) Statements I and II are correct. 
B) Statements II and III are correct. 
C) Only statement IV is correct. 
D) Statements I and IV are correct. 
E) Statements I, III, and IV are correct.

Question 5

Under the ability-to-pay concept, taxpayers are required to have tax withheld from income or to make estimated tax payments so that the taxpayer avoids a large tax liability at the end of the year.

Accepted Answer

A) True 
 B)False

Question 6

For each of the following tax treatments, explain the application of the income tax concept(s) that form the basis for the treatment.
a.Antonio uses his automobile 60% of the time in his insurance business and 40% of the time for personal purposes. Antonio is only allowed to deduct 60% of the cost of operating the automobile.
b.Teresa is a University student majoring in accounting. Teresa became a friend with her neighbor who owns an electronics store. In return for setting up an accounting system for her neighbor's store, Teresa is given an i-pod worth $600. Teresa must include the value of the i-pod in her gross income.
c.Larry bought 300 shares of Shamrock Common Stock in April for $6 per share. At December 31, Shamrock Common Stock is selling for $8 per share. Larry does not have to recognize any income from the Shamrock Common Stock in the current year.
d.Allan bought $10,000 Par Value of 8% Lake City Water Improvement District bonds for $9,200 several years ago. During the current year, Allan receives $400 in interest on the bonds before selling them for $9,600. Allan's only recognized income from the bonds is the $400 gain on the sale of the bonds.
e.Anita is an author of history books. In 2017, she signs a contract to write a book on the "History of the Tea Party." At that time, she received a $5,000 advance on her royalty payments. The terms of her contract require her to return the advance if she does not complete the book or if her royalties are insufficient to cover the advance. Anita finishes the book in 2017. Her total royalties from sales in 2018 are $12,000. Anita must include $5,000 in income in 2017 and $7,000 in income in 2018.?

Accepted Answer

The answer of For each of the following tax treatments,...

Question 7

Allowing individuals to deduct a standard deduction amount in lieu of itemizing their allowable personal deductions is an application of the

Accepted Answer

A) Administrative Convenience Concept. 
B) Wherewithal-to-Pay Concept. 
C) Annual Accounting Period Concept 
D) Capital Recovery Concept. 
E) Business Purpose Concept.

Question 8

Carl purchased a building costing $120,000 in 2001 for use in his landscape business. In 2010, he built an addition to the building at a cost of $30,000. In 2013, a tornado damaged the building. The cost of repairing the building was $22,000 and Carl's insurance company paid $16,000 of the cost of the repairs. Depreciation deducted on the building for 2001 through 2018 totaled $18,000. What is Carl's adjusted basis in the building at the end of 2018? Explain.

Accepted Answer

The answer of Carl purchased a building costing $120,000 in...

Question 9

Deduction concepts and constructs include which of the following?
I.Legislative Grace Concept.
II.Business Purpose Concept.
​

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 10

Deduction concepts need to resolve certain questions. Some of these are:
I.How much is deductible?
II.When can the deduction be taken?
III.What types of expenditures are deductible?
IV.What entity is entitled to the deduction?
​

Accepted Answer

A) Statements I and II are correct. 
B) Statements II, III, and IV are correct 
C) Statements I, II, and III are correct. 
D) Only statement II is correct. 
E) Statements I, II, III, and IV are correct.

Question 11

Match each statement with the correct term below.
-Personal Expense

Accepted Answer

A) Income is subject to tax when it is received without restrictions as to its use or disposition. 
B) Income is considered received when it is credited to the taxpayer's account or made unconditionally available to the taxpayer. 
C) A concept that is fundamental to the progressive tax rate structure. 
D) To be deductible, an expenditure must be made for a business or economic purpose that is greater than any tax avoidance motive of the taxpayer. 
E) The amount of a deduction may not exceed its cost.
F)Income should be recognized and a tax paid when the taxpayer has the resources to pay the tax.
G)A type of deductible expenditure that embodies the profit motive requirement.
H)Allows the omission of items from the tax base for which the costs of compliance exceeds the revenue generated.
I)A category of expenses that is specifically disallowed.

Question 12

Television station Channel 2 receives $200,000 from Harry's Auto Parts, Inc., to air Harry's commercials during a local automotive repair talk show in December 2018. December's ratings drop sharply when the show's star quits to work as a mechanic with a NASCAR team. Shortly thereafter, Harry contacts Channel 2 indicating that he wants to discontinue his sponsorship and requests return of $125,000 of the payment. The station continues to air the commercials and keeps the $200,000. Harry initiates a legal suit to recover the $125,000. Which of the following dictate that the $200,000 be included in Channel 2's 2018 gross income?
I.Capital Recovery Concept.
II.Claim of Right Doctrine.
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Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 13

Any deduction taken in a prior year that is recovered in a subsequent year is reported as income in the year it is recovered, to the extent that a tax benefit was received from the deduction.

Accepted Answer

A) True 
 B)False

Question 14

Jane owns 100% of the stock of Lacy Corporation. Jane's son, Lee, is employed by Lacy Corporation as a consultant. Which of the following concepts or doctrines is least helpful in determining the tax consequences of any payments Lacy makes to Lee?

Accepted Answer

A) Arm's-Length Transaction Concept. 
B) Substance Over Form Doctrine. 
C) Assignment of Income Doctrine. 
D) Business Purpose Concept. 
E) Entity Concept.

Question 15

Joanne, a single individual, has $2,000 in state taxes withheld from her salary in 2018. Her total itemized deductions are $12,200. She claims the $2,000 as an itemized deduction on her 2018 tax return. In 2019 she receives a state income tax refund of $700. Under the tax benefit rule she has to report income in 2019 of

Accepted Answer

A) $2,000 
B) $ 700. 
C) $ 200. 
D) $ -0-. 
E) $ -0-, but Joanne must file an amended 2018 tax and reduce her itemized deductions by $700.

Question 16

Joline is a cash basis taxpayer. A renter pays Joline the January 2018 rent in December 2017. What are the tax effects of this transaction?
I.Joline will recognize rent income for tax purposes in 2018.
II.The wherewithal-to-pay concept is the basis for Joline's recognition of the income in 2018.
​

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 17

Roseanne sells her personal automobile for $1,000. The car cost her $12,000 nine years ago. What are the tax effects of the current sale?
I.Roseanne recognizes a deductible loss of $11,000 on her current-year tax return due to the capital recovery concept.
II.Roseanne recognizes no loss on her tax return due to lack of business purpose with the automobile.
​

Accepted Answer

A) Only statement I is correct. 
B) Only statement II is correct. 
C) Both statements are correct. 
D) Neither statement is correct.

Question 18

For each tax treatment described below, explain the income tax concept(s) which is (are) responsible for the treatment.
a.Leon sells stock to his sister Margie at a loss of $3,000. Leon is not allowed to deduct the $3,000 loss.
b.Jorge owns an appliance repair business. During the current year, he pays $5,000 of interest on the van he uses to call on customers and $5,000 of interest on his personal automobile. Jorge can deduct $5,000 of the interest.
c.Pepper Corporation, an accrual basis taxpayer, rents lawn equipment. In May of the current year, Pepper receives $4,000 from the rental of lawn equipment on 2-year rental contracts. Pepper must recognize the $4,000 income from the contracts in the current year.
d.Todd sells stock for $2,000 that he paid $3,500 for several years ago. After remodeling his residence, he sells all of his old furniture at a garage sale for $800. The furniture cost $4,000. Todd can deduct the $1,500 loss on the sale of the stock, but cannot deduct the loss on the furniture sale.
e.Marsha is single and earns $80,000 per year in her job as an executive vice-president for County Bank. Hasid is married, has two dependent children and earns $80,000 per year as a professor of history. Marsha's tax liability is $10,900. Hasid's tax liability is $2,339.

Accepted Answer

The answer of For each tax treatment described below, explain...

Question 19

Frank rents an apartment to Pete and collects a cleaning deposit to be repaid at the end of the lease. Under the claim-of-right doctrine, Frank includes the deposit in income when collected.

Accepted Answer

A) True 
 B)False

Question 20

Fay "hires" her four-year-old son to be the office manager of her real estate firm. She deducts his $20,000 annual salary as a business expense. The IRS disallows the deduction upon examination of Fay's tax return. Which of the following supports the IRS position?

Accepted Answer

A) All-Inclusive Income Concept. 
B) Annual Accounting Period Concept. 
C) Entity Concept. 
D) Realization Concept. 
E) Business Purpose Concept

Exam 2: Income Tax Concepts

Match each statement with the correct term below. -Cash Method

Silvia is a single individual who has income of $80,000. Todd is a single individual who has income of $35,000. Neither of them itemizes their deductions. Both taxpayers will take a standard deduction of $12,000 in 2018. The concept that allows both Silvia and Todd to take this deduction is

Under the ability-to-pay concept, taxpayers are required to have tax withheld from income or to make estimated tax payments so that the taxpayer avoids a large tax liability at the end of the year.

Allowing individuals to deduct a standard deduction amount in lieu of itemizing their allowable personal deductions is an application of the

Deduction concepts and constructs include which of the following? I.Legislative Grace Concept. II.Business Purpose Concept. ​

Deduction concepts need to resolve certain questions. Some of these are: I.How much is deductible? II.When can the deduction be taken? III.What types of expenditures are deductible? IV.What entity is entitled to the deduction? ​

Match each statement with the correct term below. -Personal Expense

Any deduction taken in a prior year that is recovered in a subsequent year is reported as income in the year it is recovered, to the extent that a tax benefit was received from the deduction.

Jane owns 100% of the stock of Lacy Corporation. Jane's son, Lee, is employed by Lacy Corporation as a consultant. Which of the following concepts or doctrines is least helpful in determining the tax consequences of any payments Lacy makes to Lee?

Frank rents an apartment to Pete and collects a cleaning deposit to be repaid at the end of the lease. Under the claim-of-right doctrine, Frank includes the deposit in income when collected.

Fay "hires" her four-year-old son to be the office manager of her real estate firm. She deducts his $20,000 annual salary as a business expense. The IRS disallows the deduction upon examination of Fay's tax return. Which of the following supports the IRS position?

Deduction concepts and constructs include which of the following? I.Legislative Grace Concept. II.Business Purpose Concept.

Deduction concepts need to resolve certain questions. Some of these are: I.How much is deductible? II.When can the deduction be taken? III.What types of expenditures are deductible? IV.What entity is entitled to the deduction?