Tax Accounting

Flashcard maker : Lily Taylor
Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life, according to his doctor. Albert had a life insurance policy with a face amount of $100,000. Albert had paid $25,000 of premiums on the policy. The insurance company has offered to pay him $80,000 to cancel the policy, although its cash surrender value was only $55,000. Albert accepted the $80,000. Albert used $15,000 to pay his medical expenses. Albert made a miraculous recovery and lived another 20 years. As a result of cashing in the policy:
Albert is not required to recognize any gross income because of his terminal illness.
Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award:
Tonya is a cash basis taxpayer. In 2013, she paid state income taxes of $8,000. In early 2014, she filed her 2013 state income tax return and received a $900 refund.
If Tonya itemized her deductions in 2013 on her Federal income tax return and her itemized deductions exceeded the standard deduction by more than $900, she must recognize $900 income in 2014 under the tax benefit rule.
The Perfection Tax Service gives employees $12.50 as “supper money” when they are required to work overtime, approximately 25 days each year. The supper money received:
may be excluded from the employee’s gross income as a de minimis fringe benefit.
A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:
tuition, books, and supplies
An employee can exclude from gross income the value of meals provided by his or her employer whenever:
The meals are provided on the employer’s premises for the employer’s convenience.
Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each year, the employer contributes $1,500 to each employee’s health savings account (HSA). Matilda’s employer made the contributions in 2012 and 2013, and the account earned $100 interest in 2013. At the end of 2013, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2013 gross income:
The exclusion of interest on educational savings bonds:
applies to parents who purchase bonds for which the proceeds are used for their child’s education
On January 1, 2003, Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to finance the construction of a new plant. On January 1, 2013, the company acquired the bonds on the open market for $11,500,000. Assuming that Cardinal Corporation is neither bankrupt nor insolvent, the acquisition and retirement of the bonds results in which of the following:
The company must recognize a $500,000 gain
Doug and Pattie received the following interest income in the current year:
Savings account at Greenbacks Bank $4,000
United States Treasury bonds 250
Interest on State of Virginia bonds 200
Interest on Federal tax refund 150
Interest on state income tax refund 75
Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account. What amount of interest income should they report on their joint income tax return?
Tom operates an illegal drug-running operation and incurred the following expenses:
Salaries $75,000
Illegal kickbacks 20,000
Bribes to border guards 25,000
Cost of goods sold 160,000
Rent 8,000
Interest 10,000
Insurance on furniture and fixtures 6,000
Utilities and telephone 20,000
Which of the above reduces his taxable income?
Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2013, the following occur associated with bad debts.
Credit sales $400,000
Collections on credit sales 250,000
Amount added to the reserve 10,000
Beginning balance in the reserve 0
Identifiable bad debts during 2013 12,000
The amount of the deduction for bad debt expense for Petal for 2013 is:
In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax effect of these transactions?
Disallowed loss to Lance of $2,000; gain to James of $1,000.
Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses.
Employee salaries T-200,000 J-200,000
Bribes to police T-25,000 J-25,000
Rent and utilities T-50,000 J-50,000
Cost of goods sold T-0 J-125,000
Which of the following statements is correct?
Terry should report profit for his business of $250,000.
Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby?
All of these choices are relevant factors
Which of the following is correct?
“A personal casualty loss is classified as a deduction from AGI”, “Real estate taxes on a taxpayer’s personal residence are classified as deductions from AGI”, and “An expense associated with rental property is classified as a deduction for AGI”, are correct.
Which of the following may be deductible?
Interest on a loan used in a hobby.
Which of the following is not deductible?
Allowable hobby expenses in excess of hobby income.
If a vacation home is determined to be a personal/rental use residence, which of the following statements is correct?
Only “All rental income is included in gross income” and “Expenses must be allocated between rental and personal use” are correct.
Which of the following is not a related party for constructive ownership purposes under § 267?
The taxpayer’s aunt
For the year 2013, Amber Corporation has taxable income of $880,000, alternative minimum taxable income of $600,000, and qualified production activities income (QPAI) of $640,000. The total W-2 wages paid to employees engaged in qualified domestic production activities are $116,000. Amber’s DPAD for 2013 is:
2. Janice, single, had the following items for the year 2013:
Salary $30,000
Dividend income 8,000
Loss on 1244 small business stock held for three years (45,000) Total itemized deductions (5,000)
Determine Janice’s net operating loss for the year 2013.
The answer is not $0 or $15,000
On September 3, 2012, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000. On December 31, 2012, the stock was worth $85,000. On August 15, 2013, Able was notified that the stock was worthless. How should Able report this item on his 2013 tax return?
None of these choices are correct
4. In 2013, Grant’s personal residence was completely destroyed by fire. Grant was insured for 100% of his actual loss, and he received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of $30,000. Pertinent data with respect to the residence follows:
Cost basis $280,000
Value before casualty 250,000
Value after casualty 0
What is Grant’s allowable casualty loss deduction?
Last year, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah’s insurance company told her that her policy did not cover the theft. Sarah’s other itemized deductions last year were $2,000. She had AGI of $30,000 last year. In August of the current year, Sarah’s insurance company decided that Sarah’s policy did cover the theft of the silverware and they paid Sarah $5,000. Determine the tax treatment of the $5,000 received by Sarah during the current year.
The answer is not last year’s return should be amended to include the $5,000 or $5,000 should be included in gross income.
Mary incurred a $20,000 nonbusiness bad debt last year. She also had an $8,000 long-term capital gain last year. Her taxable income for last year was an NOL of $15,000. During the current year, she unexpectedly collected $12,000 on the debt. How should Mary account for the collection?
$8,000 income
Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $700,000 in 2013. Ivory’s domestic production activities deduction is:
8. Ralph is single and has the following items for the current year:
Nonbusiness capital gains $9,000
Nonbusiness capital losses (3,000)
Interest income 6,000
Itemized deductions (none of the amount resulted from a casualty loss)
In calculating Ralph’s net operating loss, and with respect to the above amounts only, what amount must be added back to taxable income (loss)?
The answer is not $2,000 or $4,000
In the computation of a net operating loss, which of the following items is not added to the negative taxable income?
Deductible alimony payments
10. In 2013, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items:
Loss from damage to rental property ($6,000)
Loss from theft of bonds (3,000)
Personal casualty gain 4,000
Personal casualty loss (after $100 floor) (9,000)
Determine the amount of Morley’s itemized deduction from the losses.
Julie was suffering from a viral infection that caused her to miss work for 90 days. During the first 30 days of her absence, she received her regular salary of $8,000 from her employer. For the next 60 days, she received $12,000 under an accident and health insurance policy purchased by her employer. The premiums on the health insurance policy were excluded from her gross income. During the last 30 days, Julie received $6,000 on an income replacement policy she had purchased. Of the $26,000 she received, Julie must include in gross income:
Heather is a full-time employee of the Drake Company and participates in the company’s flexible spending plan that is available to all employees. Which of the following is correct?
Heather reduced her salary by $1,200, and received only $900 as reimbursement for her actual medical expenses. She is not refunded the $300 remaining balance, but her gross income is reduced by $1,200
Turquoise Company purchased a life insurance policy on the company’s chief executive officer, Joe. After the company had paid $400,000 in premiums, Joe died and the company collected the $1.5 million face amount of the policy. The company also purchased group term life insurance on all its employees. Joe had included $16,000 in gross income for the group term life insurance premiums. Joe’s widow, Rebecca, received the $100,000 proceeds from the group term life insurance policy.
Turquoise Company and Rebecca can exclude the life insurance proceeds of $1,500,000 and $100,000, respectively, from gross income.
Harold bought land from Jewel for $150,000. Harold paid $50,000 cash and gave Jewel an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Jewel began having financial difficulties. To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.
Harold is not required to recognize gross income, but must reduce his cost basis in the land to $130,000.
Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award:
Stuart owns 300 shares of Turquoise Corporation stock and 2,000 shares of Blue Corporation stock. During the year, Stuart received 150 shares of Turquoise as a result of a 1 for 2 stock split. The value of the shares received was $4,800. Stuart also received 100 shares of Blue Corporation stock as a result of a 5% stock dividend. Stuart did not have the option of receiving cash from Blue. The additional shares he received had a value of $7,200. Stuart’s gross income from the receipt of the additional Turquoise and Blue shares is:
The de minimis fringe benefit:
can be provided on a discriminatory basis
Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each. Her husband had paid premiums of $60,000 on the policy. In the first year, Carin collected $17,500 from the insurance company. She must include in gross income:
Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income:
Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2013, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2013, Rex had the following expenses:
Operating expenses in conducting bingo games $247,000
Payoff money to state and local police 24,000
Newspaper ads supporting H.R. 9 3,000
Political contributions to legislators who support H.R. 9 8,000
Of these expenditures, Rex may deduct:
Which of the following must be capitalized by a business?
Amount paid for a covenant not to compete
Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income is $6,000 and the expenses are as follows:
Mortgage interest $9,000
Real estate taxes 3,000
Utilities 2,000
Maintenance 1,000
Insurance 500
Depreciation (rental part) 4,000
Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:
Trade and business expenses should be treated as:
deductible for AGI
Evaluate the following statements:
I.De minimis fringe benefits are those that are so immaterial that accounting for them is impractical.
II.De minimis fringe benefits are subject to strict anti-discrimination requirements.
III.Generally, a fringe benefit of less than $50 is considered de minimis and can be excluded from gross income.
Only I is true
Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. The National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000. The bank had made the loan to Gold when it purchased the real estate from Silver, Inc. Pink, Inc., the holder of a mortgage on Gold’s building, agreed to accept $40,000 in full payment of the $55,000 due. Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years. As a result of the above, Gold must:
include $25,000 in gross income and reduce its basis in its assets by $15,000
Employees of the Valley Country Club are allowed to use the golf course without charge before and after working hours on Mondays, when the number of players on the course is at its lowest. Tom, an employee of the country club played 40 rounds of golf during the year at no charge when the non-employee charge was $20 per round.
Tom is not required to include anything in gross income because this is a “no-additional cost service” fringe benefit
Iris collected $150,000 on her deceased husband’s life insurance policy. The policy was purchased by the husband’s employer under a group policy. Iris’s husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer. She elected to collect the policy in 10 equal annual payments of $18,000 each
For each $18,000 payment that Iris receives, she can exclude $15,000 ($150,000/$180,000 × $18,000) from gross income.
The exclusion for health insurance premiums paid by the employer applies to:
present employees, retired former employees, and their spouses and dependents
Adam repairs power lines for the Egret Utilities Company. He is generally working on a power line during the lunch hour. He must eat when and where he can and still get his work done. He usually purchases something at a convenience store and eats in his truck. Egret reimburses Adam for the cost of his meals.
Adam must include the reimbursement in his gross income.
Olaf was injured in an automobile accident and received $25,000 for his physical injury, $50,000 for his loss of income, and $10,000 punitive damages. As a result of the award, the amount Olaf must include in gross income is:
Marsha is single, had gross income of $50,000, and incurred the following expenses:
Charitable contribution $2,000
Taxes and interest on home 7,000
Legal fees incurred in a tax disput 1,000
Medical expenses 3,000
Penalty on early withdrawal of savings 250
Her AGI is:
Which of the following is a deduction for AGI (itemized deduction)?
Contribution to a traditional IRA
For an activity classified as a hobby, the expenses are categorized as follows:
(1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit (e.g., depreciation, amortization, and depletion).
(2) Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxes and home mortgage interest.
(3) Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect adjusted basis (e.g., maintenance, utilities, and supplies).
If these expenses exceed the gross income from the activity and are thus limited, the sequence in which they are deductible is:
2, 3, 1
Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows:
Alimony $20,000
Charitable contributions 4,000
Contribution to traditional IRA 5,000
Expenses paid on rental property 7,500
Interest on home mortgage and property taxes on personal residence 7,200
State income tax 2,200
What is Al’s AGI?
For a president of a publicly held corporation, which of the following are not subject to the $1 million limit on executive compensation?
“Contribution to medical insurance plan”, “Contribution to pension plan”, and “Premiums on group term life insurance of $50,000”, are not subject to the limit.
Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides not to acquire the fast food franchise, any investigation expenses are:
not deductible
Cory incurred and paid the following expenses:
Tax return preparation fee 600
Moving expenses 2,000
Investment expenses 500
Expenses associated with rental property 1,500
Interest expense associated with loan to finance tax-exempt bonds 400
Calculate the amount that Cory can deduct (before any percentage limitations).
Which of the following is not a “trade or business” expense?
parking ticket paid on business auto
Jim had a car accident in 2013 in which his car was completely destroyed. At the time of the accident, the car had a fair market value of $30,000 and an adjusted basis of $40,000. Jim used the car 100% of the time for business use. Jim received an insurance recovery of 70% of the value of the car at the time of the accident. If Jim’s AGI for the year is $60,000, determine his deductible loss on the car
none of these choices are correct
Elizabeth has the following items for the current year
Three years ago, Sharon loaned her sister $30,000 to buy a car. A note was issued for the loan with the provision for monthly payments of principal and interest. Last year, Sharon purchased a car from the same dealer, Hank’s Auto. As partial payment for the car, the dealer accepted the note from Sharon’s sister. At the time Sharon purchased the car, the note had a balance of $18,000. During the current year, Sharon’s sister died. Hank’s Auto was notified that no further payments on the note would be received. At the time of the notification, the note had a balance due of $15,500. What is the amount of loss, with respect to the note, that Hank’s Auto may claim on the current year tax return?
Blue Corporation incurred the following expenses in connection with the development of a new product:
Salaries $100,000
Utilities 18,000
Materials 25,000
Advertising 5,000
Market survey 3,000
Depreciation on machine 9,000
Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for the current year.
Five years ago, Tom loaned his son John $20,000 to start a business. A note was executed with an interest rate of 8%, which is the Federal rate. The note required monthly payments of the interest with the $20,000 due at the end of ten years. John always made the interest payments until last year. During the current year, John notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800. Tom is an accrual basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is:
$3,000 deduction
The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes, provided the privilege is not abused. Ed is the president of a civic organization and uses the copier to make several copies of the organization’s agenda for its meetings. The copies made during the year would have cost $150 at a local office supply
Ed may exclude the cost of the copies as a de minimis fringe benefit.
Ben was diagnosed with a terminal illness. His physician estimated that Ben would live no more than 18 months. After he received the doctor’s diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died. Ben had paid $12,000 in premiums on the policy, and he collected $50,000, the cash surrender value of the policy. Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home. He had paid premiums of $12,000 and collected $50,000 from the insurance company
Henry must recognize $38,000 ($50,000 – $12,000) of gross income, but Ben does not recognize any gross income.
Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income
Sharon had some insider information about a corporate takeover. She unintentionally informed a friend, who immediately bought the stock in the target corporation. The takeover occurred and the friend made a substantial profit from buying and selling the stock. The friend told Sharon about his stock dealings, and gave her a pearl necklace because she “made it all possible.” The necklace was worth $10,000, but she already owned more jewelry than she desired.
The value of the necklace must be included in Sharon’s gross income for the tax year it was received by her.
Which of the following statements is correct in connection with the investigation of a business
If the business is acquired, the expenses may be deducted immediately by a taxpayer engaged in a similar trade or business regardless of whether the business being investigated is acquired.
On January 2, 2013, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill.
Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2013?
Which of the following are deductions for AGI
Mortgage interest on a building used in a business.
Regarding research and experimental expenditures, which of the following are not qualified expenditures
NotCosts of ordinary testing of materials
John had adjusted gross income of $60,000. During the year his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows:
Cost basis $260,000
Value before the fire 400,000
Value after the fire 100,000
Insurance recovery 270,000
John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows:
Cost basis $80,000
Value before the accident 56,000
Value after the accident 20,000
Insurance recovery 18,000
What is John’s itemized casualty loss deduction?
Not 18,000
In 2013, Mary had the following items:
Salary 30,000
Personal use casualty gain 10,000
Personal use casualty loss (after 100 floor) 17,000
Other itemized deductions 4,000
Not 14,300
Khalid, who is single, had the following items for 2013:
Salary 40,000
Interest income on US Treasure bonds 8,000
Loss on theft of securities (60,000)
Interest income on New York state bonds 12,000
What is Khalid’s NOL for 2013?
Bruce, who is single, had the following items for the current year:
Determine Bruce’s AGI for the current year
Not 38,000 or 42,000
Wu, who is single, has the following items for 2013:
Salary 25,000
Interest income 8,000
Itemized deductions (27,000 attributable to casualty loss) (32,000)
What is Wu’s NOL for 2013?

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