Question 1

Harold is a 90% owner of National Homes Construction, an accrual basis S corporation. On December 30, 2017, National Homes accrues a $100,000 bonus to Harold, payable on February 15, 2018.
I.If Harold is an accrual basis taxpayer, National Homes deducts the bonus in 2017 and Harold reports the income in 2018.
II.If Harold is a cash basis taxpayer, National Homes deducts the bonus in 2017 and Harold reports the income in 2018.
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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.E) C) and D)
F) B) and C)

Question 2

During the current year, Paul came down with a serious illness. Paul's uncle paid many of Paul's expenses during the period of rehabilitation. For tax purposes, how are Paul's mortgage interest and real estate property taxes handled?
I.Paul can deduct both items.
II.Paul's uncle can deduct both items.
III.Neither Paul nor his uncle can deduct the expenses.
​

Accepted Answer

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

Question 3

Janine, a cash-basis taxpayer, borrowed $15,000 for her business from a local bank three years ago. To increase her deductions for 2018, she pays December interest of $150 and prepays January and February interest totaling $300. The maturity date of the note is November 30, 2019. How much of the interest is deductible in 2018?

Accepted Answer

A)  $-0-
B)  $150
C)  $300
D)  $450E) All of the above
F) None of the above

Question 4

Generally income tax accounting methods are designed to result in
I.a proper application of the wherewithal-to-pay concept.
II.a proper matching of expenses to the revenues being generated.
​

Accepted Answer

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

Question 5

During 2017, Myca sells her car for $5,000. She acquired the car in 2013 for $11,000 and has used it 60% for business and 40% for personal use. She deducted $5,280 in depreciation. What is the taxable gain or loss from the sale of the car attributable to her business use?

Accepted Answer

A)  $3,680 gain
B)  $432 gain
C)  $720 loss
D)  $2,280 loss
E)  $1,680 gainF) A) and D)
G) A) and E)

Question 6

Richard, a cash basis taxpayer, is an 80% owner and president of WLFI TV. WLFI TV is an S corporation and uses the accrual method of accounting. On December 1, 2018, WLFI TV accrues a bonus of $50,000 to Richard. The bonus is payable on January 31, 2019. In what year does Richard report the income and WLFI TV take the deduction?
Richard WLFI TV

Accepted Answer

A)  2019 2018
B)  2019 2019
C)  2018 2018
D)  2018 2019E) A) and C)
F) A) and B)

Question 7

Which of the following people is currently engaged in a trade or business?
I.Barry spends 4 hours a day 5 days a week managing his investment portfolio. He watches the market and buys and sells securities when he thinks the market is right. His investment strategy is to realize income from dividends and long-term gains from holding investments for appreciation in value.
II.Jennifer is a full-time realtor, and she owns a house that she rents to Barry and his family for $900 a month. Jennifer provides for the repairs and maintenance of the house, and she stops by monthly to collect the rent and visit with Barry and his family.
​

Accepted Answer

A)  Only statement I is correct.
B)  Only statement II is correct.
C)  Both statements are correct.
D)  Neither statement is correct.E) A) and B)
F) All of the above

Question 8

Karen owns a vacation home in Door County, Wisconsin. During the year, she rents it out for two weeks and uses it personally for three weeks. Her expenses directly related to renting out the property were utilities $300, and maid service $150. The portion of taxes allocable to the rental activity is $600 and revenue from the rental is $1,000. Karen will

Accepted Answer

A)  report no income and deduct $50.
B)  report no income and deduct no rental expenses related to the vacation home.
C)  report income of $1,000 and deduct $450 of expenses for adjusted gross income.
D)  report income of $1,000 and $150 of expenses from adjusted gross income.
E)  report income of $1,000 and deduct $1,000 of expenses for adjusted gross income.F) A) and C)
G) D) and E)

Question 9

Which of the following is a currently deductible trade or business expense.

Accepted Answer

A)  $ 5,000 trustee fees paid to a bank to manage tax-exempt securities.
B)  $ 12,000 fee paid to a marketing firm for a market analysis for a new business.
C)  $15,000 fee paid to a TV station to advertise a new product.
D)  $20,000 to an attorney to defend title to a new patent.
E)  All of the above are currently deductible expenses.F) A) and B)
G) C) and D)

Question 10

Which of the following is an example of a business purpose as dominant motive?
I.Darren is a full-time plumber and a part-time Amway salesman. He is taking his family to Disney World and plans to take his Amway products with him so that he may deduct most of his cost of the trip.
II.Larry is a full-time plumber. He is taking his family with him to a convention in Orlando featuring the latest in plumbing products and techniques. He plans to deduct most of his cost of the trip.
​

Accepted Answer

A)  Only statement I is correct.
B)  Only statement II is correct.
C)  Both statements are correct.
D)  Neither statement is correct.E) None of the above
F) All of the above

Question 11

Match each statement with the correct term below.
-Economic Performance

Accepted Answer

A)  Specifically disallowed.
B)  Appropriate and helpful.
C)  Considered a trade or business.
D)  Not considered a trade or business.
E)  Problems with this generally arise with related parties.F) This is met when services or property are provided to the taxpayer.G) Normal, common, and accepted but not necessarily regularly recurring.H) This is met when the existence and the amount of a liability have been established.I) A) and B)
J) B) and C)

Question 12

Using the tests for deductibility discussed in Chapter 5, explain why the following expenses may not be fully deductible in the current year.
a.Antonio is the owner of a restaurant. His business has been growing, and Antonio determines that he needed to add more seating capacity. He builds a patio garden section onto the back of the restaurant at a cost of $70,000.
b.Tina owns a construction company. Because she is behind schedule on a project, she pays a city building inspector $500 to get him to come out and do his inspection a week before he had scheduled the inspection.
c.Claude is a graduate of State University and an avid supporter of the school's athletic program. During the summer he employed State's star running back in his pool cleaning business. He paid the football player $15 an hour, although other employees doing similar work are only paid $10 per hour.
d.Melody owns a chain of coffeehouses. When she opened a coffeehouse in a new city this year, she spent $20,000 advertising the new store. Even though this is much more than she typically spends on advertising, she felt that it was reasonable because the new coffeehouse has the potential to be a very profitable venture for many years.

Accepted Answer

a. The addition of the patio garden sect...

Question 13

Which of the following payments are currently deductible?
I.Sweeney Corporation pays tuition to an MBA program for Phyllis, the controller.
II.Amber's Construction Company pays the tuition for Karl's son. Karl is a local building inspector and has no other relationship with the company.
​

Accepted Answer

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

Question 14

Mario paints landscape portraits, and he treats the activity as a hobby. During the current year, Mario incurred the following expenses while earning $2,500 from sales of paintings:
?
  Paints and supplies $2,200 Utiliti es expenses for his studio 1,000 Advertising 300 Insurance on his studio and equipment 700\begin{array} { l r } 	ext { Paints and supplies } & \$ 2,200 \	ext { Utiliti es expenses for his studio } & 1,000 \	ext { Advertising } & 300 \	ext { Insurance on his studio and equipment } & 700\end{array} Paints and supplies  Utiliti es expenses for his studio  Advertising  Insurance on his studio and equipment ​$2,2001,000300700​ 
Mario uses the standard deduction and never itemizes his deductions. How should Mario report all of the items related to his hobby on his tax return?

Accepted Answer

A)  Report no income and no deductions.
B)  Report a $400 loss as a deduction for AGI.
C)  Include $2,500 in gross income and deduct $2,500 for AGI.
D)  Include $2,500 in gross income and deduct nothing.
E)  Include $2,500 in gross income and deduct $1,700 for studio expenses. F) A) and B)
G) C) and D)

Question 15

Which of the following is/are trade or business expenses?
I.Solly incurs legal expenses related to real estate he leases to Bucko Burger Hamburger Haven for a parking lot. Solly does little but negotiate the lease every year..
II.Susan owns several rental apartments. She negotiates new rental contracts, arranges for repairs and maintenance, and handles all leasing activities.
​

Accepted Answer

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

Question 16

An accrual basis taxpayer may deduct expenses in the year in which certain tests are met. These tests include
I.when services or property are provided to the taxpayer or when the taxpayer uses the property.
II.when the "all-events test" is met.
III.when "economic performance" has occurred.
IV.when all events have occurred to determine that a liability exists and the amount of the liability can be determined with reasonable accuracy.
​

Accepted Answer

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

Question 17

Bonnie's sister, Diane, wants to open a restaurant. Because Diane is short of funds, Bonnie purchases the building and leases it to Diane. No agreement is signed, and Bonnie tells Diane not to worry about paying rent until the cash flow can support it. Also, Bonnie promises not to sell the property to anyone other than Diane.
I.Any expenditures Bonnie makes regarding the building would be classified as production of income expenses.
II.The building rental has the characteristics of a gift.
III.The dominant motive in acquiring the building is to earn an economic benefit (profit) .
IV.Bonnie's property tax expenses related to the property are deductible.
​

Accepted Answer

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

Question 18

Dustin, Dan, and Dennis operate Heritage Hills dry cleaners as an S corporation. Dustin owns 50% of the business, Dan 30%, and Dennis 20%. For the current year, Heritage Hills reports the following:
How must Heritage Hills report its results to each of the owners?
 $$\begin{array} {| l | r | } 
\hline\text { Sales revenues } & \$ 400,000 \
\hline \text { Trade and business expenses } & ( 185,000 ) \
\hline \text { Charitable contributions } & ( 5,000 ) \
\hline \text { Short-term capital losses } & ( 4,000 ) \
\hline \text { Long-term capital gains } & 12,000 \
\hline \text { Taxable income } & \$ 218,000 \
\hline
\end{array}$$

Accepted Answer

Because capital gains and losses, and ch...

Question 19

Landis is a single taxpayer with an adjusted gross income of $280,000. In addition to his personal residence, Landis owns a vacation home in Beaver Creek, Colorado. He uses the vacation home for 21 days during the current year and rents it out to unrelated parties for 63 days. After making the appropriate allocation between rental and personal use, the following rental loss is determined:
?
  Rental income $14,000 Mortgage interest and property taxes (3,200)  Utilities, maintenance, and repairs (6,000)  Depreciation (8,000)  Rental loss $(3,200) \begin{array} { l r } 	ext { Rental income } & \$ 14,000 \	ext { Mortgage interest and property taxes } & ( 3,200 )  \	ext { Utilities, maintenance, and repairs } & ( 6,000 )  \	ext { Depreciation } & ( 8,000 )  \	ext { Rental loss } & \$ ( 3,200 ) \end{array} Rental income  Mortgage interest and property taxes  Utilities, maintenance, and repairs  Depreciation  Rental loss ​$14,000(3,200) (6,000) (8,000) $(3,200) ​ 
What is the correct reporting of the rental income and expenses?
I.Because the rental shows a loss, Landis reports no income and deducts the mortgage interest and property taxes as an itemized deduction.
II.Landis must report the $14,000 in rental income but he can deduct only $14,000 of the expenses.
III.Landis's depreciation deduction is limited to $4,800.
IV.Because the vacation home is a qualified second residence, Landis can deduct the $1,600 loss for adjusted gross income.
?

Accepted Answer

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

Question 20

The all-events test requires that
I.All events have occurred that determine a liability exists
II.The due date for payment of the liability has been established
III.The amount of a liability is determined with reasonable accuracy.
​

Accepted Answer

A)  Only statement I is correct.
B)  Statement I and II are correct.
C)  Statement I and III are correct
D)  Statements I, II, and III are correct.
E)  Only statement III is correctF) None of the above
G) A) and B)

Exam 5: Introduction to Business Expenses

Correct Answer
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Which of the following payments are currently deductible? I.Sweeney Corporation pays tuition to an MBA program for Phyllis, the controller. II.Amber's Construction Company pays the tuition for Karl's son. Karl is a local building inspector and has no other relationship with the company.

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Because capital gains and losses, and ch...
View Answer

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Which of the following is a currently deductible trade or business expense.

Correct Answer
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Correct Answer
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a. The addition of the patio garden sect...
View Answer

Match each statement with the correct term below. -Economic Performance

Correct Answer
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Generally income tax accounting methods are designed to result in I.a proper application of the wherewithal-to-pay concept. II.a proper matching of expenses to the revenues being generated.

Correct Answer
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Correct Answer
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The all-events test requires that I.All events have occurred that determine a liability exists II.The due date for payment of the liability has been established III.The amount of a liability is determined with reasonable accuracy.

Correct Answer
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During 2017, Myca sells her car for $5,000. She acquired the car in 2013 for $11,000 and has used it 60% for business and 40% for personal use. She deducted $5,280 in depreciation. What is the taxable gain or loss from the sale of the car attributable to her business use?

Correct Answer
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Exam 5: Introduction to Business Expenses

Correct AnswerverifiedShow Answer

Which of the following payments are currently deductible? I.Sweeney Corporation pays tuition to an MBA program for Phyllis, the controller. II.Amber's Construction Company pays the tuition for Karl's son. Karl is a local building inspector and has no other relationship with the company. ​

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedBecause capital gains and losses, and ch...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Which of the following is a currently deductible trade or business expense.

Correct AnswerverifiedShow Answer

Correct Answerverifieda. The addition of the patio garden sect...View AnswerShow Answer

Match each statement with the correct term below. -Economic Performance

Correct AnswerverifiedShow Answer

Generally income tax accounting methods are designed to result in I.a proper application of the wherewithal-to-pay concept. II.a proper matching of expenses to the revenues being generated. ​

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The all-events test requires that I.All events have occurred that determine a liability exists II.The due date for payment of the liability has been established III.The amount of a liability is determined with reasonable accuracy. ​

Correct AnswerverifiedShow Answer

During 2017, Myca sells her car for $5,000. She acquired the car in 2013 for $11,000 and has used it 60% for business and 40% for personal use. She deducted $5,280 in depreciation. What is the taxable gain or loss from the sale of the car attributable to her business use?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Which of the following payments are currently deductible? I.Sweeney Corporation pays tuition to an MBA program for Phyllis, the controller. II.Amber's Construction Company pays the tuition for Karl's son. Karl is a local building inspector and has no other relationship with the company.

Correct Answer
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Correct Answer
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Correct Answer
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Because capital gains and losses, and ch...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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a. The addition of the patio garden sect...
View Answer

Correct Answer
verified

Generally income tax accounting methods are designed to result in I.a proper application of the wherewithal-to-pay concept. II.a proper matching of expenses to the revenues being generated.

Correct Answer
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Correct Answer
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The all-events test requires that I.All events have occurred that determine a liability exists II.The due date for payment of the liability has been established III.The amount of a liability is determined with reasonable accuracy.

Correct Answer
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Correct Answer
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