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ACCT217 - Sample Exam 2
Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. Taupe Corporation is considering deferred compensation plans for its executive employees over age 55. One plan is to allow the employee to make an election at the end of the year to collect his or her bonus when the employee retires, at which time the executive would receive the deferred pay plus 6% interest. a. The interest is original issue discount and must be included in gross income before retirement. b. The employee cannot defer the income (both the bonus and the interest) for tax purposes because it is constructively received each year. c. The employee must recognize the bonus each year, but can defer the interest. d. The bonus and the related interest can be deferred from inclusion in gross income until they are received. e. None of the above. 2. Under the original issue discount (OID) rules as applied to a three-year certificate of deposit: a. The OID will not be included in gross income until the end of the third year. b. The OID will be amortized by the straight-line method (e.g., $75 per year.) c. All of the OID must be recognized as gross income in the first year. d. The interest income for the first year will be less than the interest income for the third year. e. None of the above. 3. Dorothy purchased a certificate of deposit for $10,000 on January 1, 2007. The certificate’s maturity value in two years (December 31, 2008) is $10,816, yielding 4% before-tax interest. a. Dorothy must recognize $400 (.04 $10,000) gross income in 2007. b. Dorothy must recognize $816 gross income in 2008. c. Dorothy must recognize $816 gross income in 2007. d. Dorothy must recognize $408 ($816/2) gross income in 2007 and 2008. e. None of the above. 4. With respect to the prepaid income from services, which of the following is true? a. The treatment of prepaid income is the same for tax and financial accounting. b. A cash basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt. c. An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt. d. An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less. e. None of the above.
Name: ________________________ ____ 5. As a general rule: I. Income from property is taxed to the person who owns the property. II. Income from services is taxed to the person who earns the income. III. The assignee of income from property must pay tax on the income. IV. The person who receives the benefit of the income must pay the tax on the income.
a. Only I and II are true. b. Only III and IV are true. c. I, II, and III are true, but IV is false. d. I, II, III, and IV are true. e. None of the above is true. 6. Marge made a $60,000 interest-free loan to her son, Steve, who used the money to start a new business. Steve’s only sources of income were $25,000 from the business and $250 of interest on his checking account. The relevant Federal interest rate was 5%. Based on the above information: a. Steve’s business net profit will be reduced by $3,000 (.05 $60,000) of interest expense. b. Marge must recognize $3,000 (.05 $60,000) of imputed interest income on the below market loan. c. Steve’s gross income must be increased by the $3,000 (.05 $60,000) imputed interest income on the below market loan. d. Steve’s interest income is $250 and his interest expense is zero. e. None of the above is correct. 7. Our tax laws encourage taxpayers to ____ assets that have declined in value and ____ assets that have appreciated in value. a. sell, sell b. sell, keep c. keep, sell d. keep, keep e. None of the above. 8. Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 5% interest, but she is interested in earning a higher return for comparable risk. a. If she buys a corporate bond that pays 8% interest, her after-tax rate of return will be greater than if she purchased the York County school bond. b. If she buys a U.S. government bond paying 6%, her after-tax rate of return will be less than if she purchased the York County school bond. c. If she buys a common stock paying 6% dividend, her after-tax rate of return will be higher than if she purchased the York County school bond. d. All of the above are correct. e. None of the above are correct.
000 in full payment of the $50. agreed to accept $40. Corp. Corp. The bank had made the loan to Gold when it purchased the real estate from Silver. Gold must: a. The company can amortize the $500. None of the above.000 cash and gave Jewel an 8% note for $80. As a result of the above. On January 1. None of the above. Heber.000. Heber. On June 30.000. b.000 gain and increase the company’s basis in the plant by $500.000 cash from Heber. in final payment of the note principal. 2008.000. As a result of the above: a. Teal.000.000 to $85. Jewel agreed to accept $30. ____ 12. c.000 gain.000.. Inc. b. recognizing income over the remaining life of the bonds. When the balance on the note was $40. but was not bankrupt or insolvent. bought land from Jewel for $100. Teal. Gold Company was experiencing financial difficulties.000. d. Teal. Corp. Corp. should include the $500 in 2008 gross income in accordance with the claim of right doctrine.000 in gross income and reduce its basis in the building by $10. e. deducted the $1. Inc. ____ 11. Teal.000.000 five years ago.000 in gross income. e. None of the above. Heber must recognize $10. c. reduced the principal from $100. should amend its 2007 return and claim $500 less insurance expense. b. In December 2007. The company must recognize a $500. 3 . The note was to be paid over a five-year period. Pink. Teal had $150. d. Jewel began having financial difficulties.000. since it made a gift to Jewel when it paid the debt before it was due. received a $500 refund of the fire insurance premiums. Inc.000 of taxable income that year.000. Heber is not required to recognize income. Teal. e. Include $15. Inc. ____ 10. c.. Include $25. should add the $500 to its sales proceeds from the building. the acquisition and retirement of the bonds results in which of the following: a. d. but must reduce its cost basis in the land to $90. Teal. Assuming that Yellow Corporation is neither bankrupt nor insolvent. The company can make an election to recognize a $500. Jewel must recognize income from discharge of the debt.000 income.000. as a result.000 in gross income and reduce its basis in its assets by $15. The National Bank. The company must recognize a $500. d.000 gain or reduce the company’s basis in the plant by $500. e. paid $1. b. Pink had sold the property to Gold for $150. should include the $500 in 2008 gross income in accordance with the tax benefit rule. Inc. a. the holder of a mortgage on Gold’s building.000 proceeds to finance the construction of a new plant. Include $10. Reduce the basis in its assets by $25.000.000 gain.000 due. paid $20. Corp. On January 1. None of the above.000. 2007. the company acquired the bonds on the open market for $9. To accelerate its cash inflows. c. the corporation sold the building and.500. a cash basis taxpayer. Corp. Heber is not required to recognize income.Name: ________________________ ____ ID: A 9. which held a mortgage on other real estate owned by Gold.200 insurance premiums on its 2007 tax return.200 fire insurance for the calendar year 2008 on a building held for rental income. Yellow corporation issued 6% 25-year bonds at par and used the $10. 1997.
2007. ($2. $2.000.614. ____ 15. stock investment for a $1. In Lawrence County. Denver. $0. How much of the property taxes may Jackson. b. Shady. 2007 (which is not a leap year). c. c. 4 . b.000 short-term capital loss. $257. e. During the year. ____ 14. Inc.625.000. During 2007. ____ 17. On May 1. Shady. $249. Elk’s taxable income is: a.000. None of the above. d. $281. None of the above.Name: ________________________ ID: A ____ 13.000 2. d. b.000. In addition.000. $0.000.000). has $400.000 operating expenses during the year. The tax is payable on June 1.R.950 for the year ending December 31.000 operating income and $350.R. e. d.000. 9 $247. Inc. Ordinary.000 long-term capital gain and a $52. d. runs a bingo operation which is illegal under state law. Presuming adequate income.000 24. would legitimize bingo games.000 loss. In 2007. d. a C corporation.950. On June 1. None of the above. 9 Political contributions to legislators who support H. $80. $1. None of the above. All of the above. $7. and pleasure yacht for a $1. Reasonable. Inc.000 8. Elk. b. b.000. c.000 loss.000 loss. $28. e. e.000. $50. Inc. Inc. may deduct: a. if enacted. $247.000 Of these expenditures. a cash basis calendar year taxpayer. Which of the following is a required test for the deduction of a business expense? a. a bill designated H. 2007. pays the entire real estate tax of $7. Kim sold the following assets: business auto for a $1. 9 is introduced into the state legislature which. sells an office building to Denver. The real property tax becomes a liability of the owner of real property on January 1 in the current real property tax year. ____ 16. 2007. how much of these losses may Kim claim? a.000. Shady. 2007. Inc.000. the real property tax year is the calendar year. $2. had the following expenses: Operating expenses in conducting bingo games Payoff money to state and local police Newspaper ads supporting H. c. deduct? a. Elk has a $30. Necessary. e. None of the above. $2. $3. Jackson. Inc.. for $250. c.R.
002. None of the above. $10. Determine the cost recovery deduction for the business assets for 2007. c. e.500. $1.000.000. ____ 22.800. $2. $15. Inc. $12. $1. $2. For 2007. $26. None of the above. Inc. $1. On March 10. Inc. Jamestown. Hippo had taxable income of $200.000 is $70. and W-2 wages related to production activities of $23. Determine the cost recovery deduction for 2007.000. for $200. Paz. On October 10.000. $8. $16. d.200. a. Hippo’s domestic production activities deduction for 2007 is: a.000.250.665. a. Determine the cost recovery deduction for 2007.000. $41. e. nor did it elect straight-line cost recovery. b. $0. e. nor did the corporation elect straight-line cost recovery. c. e.600.333. $3. Inc.000.000 new peach trees at a cost of $50.999. d. b.000. 5 .856.Name: ________________________ ID: A ____ 18. None of the above. $33. a calendar year C corporation. at a cost of $50.’s business is raising and harvesting peaches.500.. c. Cream. 2007. e. b. Paz purchased 10. The company did not elect to expense any of the assets under § 179. Hippo.000. The corporation did not elect to expense any of the asset under § 179. purchased an office condominium on September 20. Corp. b. c. $23.428. 2007. a.666. $11. ____ 19. d. purchased a new business asset (three-year property) on July 23. None of the above. ____ 20.000.400.’s taxable income for 2007 before any deduction for an NOL carryforward of $30. Atara.000.000. None of the above. Paz does not elect to expense assets under § 179. $32. c. What is the amount of Cream’s domestic production activities deduction (DPAD) for 2007? a.333. $25. d. manufactures golf gloves. b. $2. the company purchased business assets (seven-year property) for $80. Cream’s qualified production activities income (QPAI) is $60. 2007. qualified domestic production activities income of $250.000. ____ 21. d.
2008—$7.000 bad debt deduction.000 bad debt deduction. d. b. $51. During the current year. ____ 26. d.000 from Alan. d. for $22. $7. Inc. How much loss can Mary deduct and in which year? a. b. c. an accrual basis taxpayer.147. No election is made to use the straight-line method. e. How should Jones report the bad debt deduction on the tax return? a.000. $10. 2008—$15. None of the above. 2007—zero. b. 2007. Ace sold on account a deluxe widget to Alan. c. White Company acquires a new machine (seven-year property) on January 10. e.147. They are carried back for 1 years. $9. None of the above.000. e. Ace Corporation.. b. 2007—$12. They are carried back for 2 years and forward for 20 years. and Mary received $5. Which of the following is true regarding net operating losses? a.151. $125. sells widgets.000. Determine the total deductions in calculating taxable income related to the machine for 2007 assuming White has taxable income of $500. c.000. 2007—$8. $0. d. Jones Corporation incurred a $10. at a cost of $204. $119. after receiving $3.000. What amount of loss may Ace deduct in the current year? a.Name: ________________________ ID: A ____ 23.000 bad debt in the current year. ____ 25.000. b. At that time. c.000. In March 2008. d.000 bad debt deduction.000. They are carried back for 3 years. None of the above. $4. c. $46. final settlement was made.000. In 2007. e.294. $10.000.000. it was revealed that John’s creditors could expect to receive 60 cents on the dollar. John filed for bankruptcy. White makes the election to expense the maximum amount under § 179. They are carried back for 5 years. 2008—$3. Jones Corporation also had a $6.000 long-term capital gain during the current year. 2006.000. None of the above.000. None of the above. Ace had a basis in the widget of $12. 6 . e.000. On May 1. a. Ace was notified that Alan was bankrupt and no further payments would be received. $3. ____ 27. 2006—$15. Mary loaned John $20. $0 bad debt deduction. ____ 24.000.
Name: ________________________ ID: A ____ 28. The realized gain and the taxable gain are: a. c. d. If Ned participates for 500 hours and the employee participates for 520 hours during the year. She elects not to group them together as a single activity under the “appropriate economic unit” standard. c. $100. In 2007. d. The LLC reported losses of $340. If Ned participates for 95 hours and the employee participates for 5 hours during the year.000 for a 25% interest in a limited liability company (LLC) involved in an activity in which she is a material participant.000 hours during the year. c. who works 125 hours in Activity D. $0 in 2008.000 in 2006 and $0 in 2007. ____ 30.000 in 2006 and $50. d. $0 in 2006 and $0 in 2007. b.000) for $90.000 taxable gain. C. How much of the losses can Cindy deduct? a. b. None of the above.000 in 2007 and $45. $15. $85. and D. Ned qualifies as material participant. C.000. ____ 31.000 realized gain.000 in 2008.000 in 2008. e. $85.000 in 2008 with Cindy’s share being $85. ____ 32. e.000 realized gain. and D are all significant participation activities. $10. Paula owns four separate activities. Suspended losses attributable to this property total $30. She has one employee. Which of the following statements is correct? a. c.000 taxable gain. Samantha sells a passive activity (adjusted basis of $50. None of the above.000 in 2007. b. B. d.000 realized gain. $60. None of the above. None of the above.000 in 2007. Ned. Which of the following statements is correct? a. If Ned participates for 120 hours and the employee participates for 120 hours during the year.000 in 2006 and $50. d. and D. $0 taxable gain. Ned probably does not qualify as material participant. Ned does not qualify as a material participant. Activities A. c. 115 hours in Activity B.000 in 2007.000. Losses from all of the activities can be used to offset Paula’s active income. However. C. e. Ned qualifies as a material participant.000 in 2007. B. Cindy invested $100. None of the above. Nora had passive income from activity B of $40.000 taxable gain. $85. e. Paula is not a material participant with respect to Activities A. ____ 29. $0 in 2007. If Ned participates for 600 hours and the employee participates for 2. $40. $10.000 in 2007 and $180. How much loss is suspended from activity A in each year? a. Nora acquired passive activity A several years ago that until 2006 was profitable.000 in 2007. He has one employee who works part-time in the business. b.000 in 2007. $70. $0 in 2008. a college professor. owns a separate business (not real estate) in which he participates in the current year. B. Paula participates for 130 hours in Activity A.000 in 2006 and $50.000 realized gain. the activity produced losses of $100. Paula is a material participant with respect to Activities A.000 in 2008. $40. 7 . and 100 hours in Activity D. $40. b. $10. 260 hours in Activity C. $45.
$50.000 in the current year. She retired from the restaurant at the end of last year and will not participate in the restaurant activity in the future. c.000. None of the above.000 loss against the $150. has been a material participant in the restaurant activity for the last 20 years.000 loss from the restaurant because she is not a material participant. Maria. Josh has investments in two passive activities.000 is suspended under the at-risk rules.000. e. What is the amount of Josh’s suspended passive loss with respect to these activities at the end of the current year? a. None of the above. $50. and Maria’s share of the loss is $80. b. Rita earns a salary of $150. produces income in the current year of $60. ____ 35. 120 hours in Activity B.000 is suspended under the passive loss rules.000. $0. ____ 36. c. None of the above.000 of income from the retail store. she continues to be a material participant in a retail store in which she is a 50% partner.000. D. $36. Activity B.000. who owns a 50% interest in a restaurant. How is her loss characterized? a. $40. d. Dena is a material participant with respect to Activities B.000 for a 20% interest in a passive activity. $100.000 is suspended under the passive loss rules. b.000. All five of Dena’s activities are significant participation activities.000 and $100. d. and 125 hours in Activity E. $40. She participates for 100 hours in Activity A. She does not own interests in any other activities.000. Josh’s at-risk amounts in Activities A and B are $10. 130 hours in Activity C. produces a loss of $100. d. $40. and invests $40. c. At the beginning of this year. ____ 34. c. None of the above. respectively. 140 hours in Activity D.000 is suspended under the at-risk rules and $10. Operations of the activity result in a loss of $250. Which of the following statements is correct? a. Which of the following statements is correct? a. e. b. Dena owns interests in five businesses and has full-time employees in each business.000. Activity A.000 is suspended under the passive loss rules and $10. Maria can offset the $80. and E. Dena is a material participant with respect to all five activities. Dena is not a material participant in any of the activities. e.000.000. C. 8 . d.Name: ________________________ ID: A ____ 33. Her share of the income from the retail store is $150. b. acquired last year. of which Rita’s share is $50. Maria cannot deduct the $80. acquired three years ago. However. The restaurant operations produce a loss for the current year. Maria will not be able to deduct any losses from the restaurant until she has been retired for at least three years.000 is suspended under the at-risk rules.
d. Of the 2.000. Some other amount. e. $30. ____ 40.000 passive loss from a real estate rental activity in which she actively participates. Her modified adjusted gross income is $80.000. Roxanne.000. None of the above. Both the apartment building and the computer consulting business are passive activities.000.000 passive loss from a real estate rental activity in which she actively participates.000 and a suspended passive loss of $80. and a $30. e. $10.000. The computer consulting business is a passive activity but the apartment building is not.000. $10. how much is deductible? a.Name: ________________________ ID: A ____ 37. e. At the end of the current year: a. ____ 38. Of the $26.000 loss. $10.000. Her modified adjusted gross income is $125. $10.000 in income from a limited partnership. Which of the following statements is correct? a. and a $26. $0. b. The apartment building is a passive activity but the computer consulting business is not. d. b. Vic has an at-risk amount in the activity of $120. Carmen may deduct: a. b. a single taxpayer. None of the above.000 and a suspended passive loss of $80.000. His current loss from the activity is $80. 9 . c. ____ 39. Vic has an at-risk amount in the activity of $200.000 loss. $25. who is single. 55% of the time is spent operating the apartment building and 45% of the time is spent in the computer consulting business. Vic has an at-risk amount in the activity of $120. Vic has an at-risk amount in the activity of $200. None of the above. c. b. has $80. c. Vic had no passive activity income during the year.000 hours he spends on these activities during the year. $26.000.000 of salary. Neither the apartment building nor the computer consulting business is a passive activity. e. c. Jon owns an apartment building in which he is a material participant and a computer consulting business. d. Carmen. $25. d.000. Vic’s at-risk amount in a passive activity is $200.000 and no suspended passive loss.000. $0.000 of income from a limited partnership.000 at the beginning of the current year. has $125. Of the $30.000 in salary.000 and no suspended passive loss.
Inc. is a calendar year taxpayer. When the car is received from the manufacturer. In some cases the dealer makes an offer to sell a car at a certain price. the sale is closed. It contracts to provide service to homeowners once a month under a one-.. During the month of September. On April 1 of the current year. two-. how much is taxed in the year the contract is sold and in the following year? Pink. 10 .000 be taxable to Pink? The taxpayer is in the office equipment rental business and uses the accrual basis of accounting. How much of the $120 is taxable in the current year if the company is an accrual basis taxpayer. $6. When will the $6. In December he collected $5.200 subject to tax? b. At the end of the current year. To increase business during the fall and winter months. Purple Corporation. Pink sold passes that would allow the holder to ride “free” during the months of October through March. how much is taxed in the year the contract is sold and in the following year? If the $120 is payment on a three-year contract. the dealer has deposits totaling $8.000 was collected from the sale of passes for the upcoming fall and winter. or three-year contract.000 in rents for the following January. Determine the proper tax year for gross income inclusion in each of the following cases. If the $120 is payment on a two-year contract. the company sold a customer a one-year contract for $120. but often does not have the right combination of body style. an exterminating company. owns an amusement park whose fiscal year ends September 30.200 for cars that have not been received from the manufacturer. and then orders the car from the manufacturer. An automobile dealer has several new cars in inventory.Name: ________________________ ID: A Problem 41. and the dealer receives the balance of the sales price. and accessories. When is the $5. a.000 taxable? c. d. When is the $8. an accrual basis taxpayer. accepts a deposit. color.
her son. on December 2. 2005 for $4. Faye gave Todd. 2007. 2007..Name: ________________________ ID: A 42. On January 1.319.000 and the yield to maturity was 5%. 2007. ABC. a 36-month certificate of deposit she purchased December 31. How much interest and dividends should Todd include in his gross income for 2007? 11 . On November 30.000 shares of ABC. had declared a dividend of $1. Inc. The certificate had a maturity value of $5. Inc. Faye gave Todd 1.00 payable to stockholders of record on December 5th..
Name: ________________________ ID: A 43. Roy has other investments that earn a 8% before-tax rate of return. but will pay $21. Roy is in the 40% (combined Federal and State) marginal tax bracket. The bond does not pay any annual interest. which alternative should Roy choose? 12 . Given that the compound interest factor at 8% is 2.5981. Roy is considering purchasing land for $10.589 at maturity in 10 years.1589. He expects the land to appreciate in value 8% each year (compounded) and he will sell it at the end of 10 years. and at 4. He also is considering purchasing a bond for $10. The before-tax rate of return on the bond is 8%.000.8% the factor is 1.000.
000 140. If Ostrich were a proprietorship. d. Prior years’ transactions included the following: 2003 Net short-term capital gains 2004 Net long-term capital gains 2005 Net short-term capital gains 2006 Net long-term capital gains a. c. and indicate the years to which the loss may be carried.Name: ________________________ ID: A 44. the owner. Ostrich Corporation has net short-term capital gains of $60. how would Ellen.000 during 2007.000 and net long-term capital losses of $380. Ostrich had taxable income from other sources of $1 million.000 60.000 80.000 How are the capital gains and losses treated on Ostrich’s 2007 tax return? Determine the amount of the 2007 capital loss that is carried back to each of the previous years. b. $200. Compute the amount of capital loss carryover. report these transactions on her 2007 tax return? 13 . if any.
000 to his mother. Sybil. Sybil holds the land for one year and a day and sells it in the marketplace for $45. Alex sells land with an adjusted basis of $48. Determine the tax consequences to Alex. a.000 and a fair market value of $40. 14 . b.000.000. for $40. Determine the tax consequences to Sybil.Name: ________________________ ID: A 45.
Name: ________________________ ID: A 46. determine the amount and year of the deduction. Robin Corporation incurred the following expenditures in connection with the development of a new product: Salaries Supplies Market survey Depreciation $50.000 20.000 In October 2007. If Robin elects to expense research and experimental expenditures. Robin began receiving benefits from the project.000 17. Robin incurred the following additional expenditures in connection with the development of the product: Salaries Supplies Depreciation Advertising $75.000 15.000 8. In 2006.000 15.000 10. 15 .000 In 2007.
2007. 16 . Hugh has four passive activities.000 ($80. The car was used 60% for business and 40% for personal use. the car was used 30% for business and 70% for personal use.000) How much of the $80.Name: ________________________ ID: A 47. 48. for $29. Determine the cost recovery recapture and the cost recovery deduction for 2008.000) (10. Nora purchased a new automobile on July 20.000 net passive loss can Hugh deduct this year? Calculate the suspended losses (by activity).000) (20.000.000) 10. The following income and losses are generated in the current year. Activity A B C D Total Gain (Loss) ($60. In 2008.
can be deducted on her final income tax return? 17 . In addition.000 from an investment in a passive activity. Faye dies owning an interest in a passive activity property (adjusted basis of $150.000. What is Orange’s income for the year after considering the passive investment? 50.000 in the current year. and a fair market value of $180. earns active income of $300.Name: ________________________ ID: A 49. What.000 in dividends during the year. Orange incurs a loss of $50. if any. The corporation also receives $35. a closely held (non-personal service) C corporation.000.000). suspended losses of $52. Orange Corporation.
4-12 5. ANS: C Answer a. Because the principal amount is increased each year by the amount of the OID which is amortized. the assignee of income receives the benefit. and d. basis is less than fair market value) and. ANS: A III is false because a person who has the right to income (the assignor) but assigns the rights to another must pay the tax on the income. The taxpayer should hold the appreciated assets (i. are incorrect because these answers assume a method of allocating the income that differs from the effective interest method... for example. 4-11 4. PTS: 1 REF: p. whereas the financial accounting treatment is based on generally accepted accounting principles. 4-8 to 4-10 2. thus. basis exceeds fair market value) and deduct any loss.e. is incorrect because the tax treatment is based on the income tax provisions. is correct because under Revenue Procedure 2004-34 any unearned income at the end of the first tax year must be included in the gross income of the second tax year. ANS: B Because gains and losses are not recognized until realization has occurred.e. Answer c. PTS: 1 REF: p. the taxpayer should sell depreciated assets (i. PTS: 1 REF: p. c.ID: A ACCT217 .. PTS: 1 REF: p. 4-5 1 .Sample Exam 2 Answer Section MULTIPLE CHOICE 1. ANS: D The OID is amortized using the effective interest rate method. Answer b. but the assignor has the right to the income and therefore must pay the tax on that income. is incorrect because there is no three-year provision. Answers b. PTS: 1 REF: p. ANS: A The 4% interest rate is applied to the $10. ANS: E The $100. Steve does not recognize any imputed interest expense.. IV is false because. 4-19 | p. The deferral possibilities for services to be provided exist only in the case of accrual basis taxpayers who satisfy the requirements of Revenue Procedure 2004-34.000 exception would apply.000 4% = $400). 4-13 6. PTS: 1 REF: p. ANS: C The bonus is due at the end of the year and therefore an employee who elects the deferral has turned his or her back on the income.000. Answer d.000 original investment in the first year ($10. the total interest income increases each year. is incorrect because the cash basis taxpayer recognizes the income in the year of receipt. 4-11 | Example 13 3. Marge is not required to recognize imputed interest income because Steve’s investment income is less than $1. PTS: 1 REF: p. defer gain. 4-20 7.
900% York County Bond 5.200 – $500).800% 2. therefore. 4-20 10. ANS: C As a cash basis taxpayer. 4-27 | Example 45 | Example 46 14. PTS: 1 REF: p. Teal can deduct the one-year prepayment for insurance in the year it was paid.200 and its net cost was only $700 ($1. If the capital loss is not used in the carryback. ANS: D The $10. 4-26 11. 4-26 12. ANS: C The loss on the business auto of $1.000 is an ordinary loss. Teal should include the $500 refund in gross income for 2008 under the tax benefit rule. PTS: 1 REF: p.15* 2. The net loss can be carried back for three years and offset against capital gain in the carryback years. Capital gains of corporations are included in taxable income and are not subject to the favorable rates applicable to individuals. PTS: 1 REF: p.000 (operating income) – $350.00% 6.00% 6.000 is a capital loss. PTS: 1 REF: p. ANS: D PTS: 1 REF: p. PTS: 1 REF: p.000 reduction by the bank is includible in gross income.100% . The loss on the yacht of $1.35. ANS: B The debt reduction of $10.000 taxable income.000 (operating expenses) = $50. 5-2 | p. PTS: 1 REF: Example 11 2 .200% 3. ANS: A PTS: 1 REF: p.0% 5.100% *The dividend is taxed at 15%.ID: A 8.00% After-tax 5. cannot be deducted. 4-21 | p. ANS: A Shady.000 reduction in the mortgage is an adjustment to the cost of the building. can deduct only the $247. Before Tax 8. The $15. 4-25 13. 5-3 16. PTS: 1 REF: p.000 is treated as an adjustment to the basis of the land. Because it deducted $1.000 of operating expenses. b.900% 5. it can be carried forward for five years. c.0% 5. while the loss on the stock investment of $1. 2007. . Inc.0% a. $400. ANS: D See the table below: Tax @ 0. No capital loss deduction is allowed.000 is personal and. 4-28 15. 4-22 9. ANS: C A corporation cannot deduct a net capital loss in the year incurred.
PTS: 1 REF: p. 5-30 | p. 120/365 (January 1 .000 – $112.3333) PTS: 1 REF: p.000 $12.000 loss. This results in a $7.400 [($70. 6-3 3 . Under § 164(d). PTS: 1 REF: p. PTS: 1 REF: p.147 $125.000 = $2. ANS: C Taxable income for purposes of calculating the DPAD is reduced by any NOL carryforward.950 = $2. 5-19 | p. 5-21 to 5-25 | Table 5-1 21. Regular MACRS ($80.614. 5-19 | Example 31 18.000 – $30. PTS: 1 REF: p.856 $16.665 $112.614 is apportioned to Jackson.000 taxable income qualified production activities income of $250. the amount of the DPAD is $2. Therefore.ID: A 17.147 PTS: 1 REF: p.000) 6%]. ANS: B $2. the wage limitation applies ($23. ANS: B The loss is limited to the amount Ace included in gross income ($10.000). ANS: A The mid-quarter convention applies in this case for the personalty. 2007) $7. 5-21 to 5-26 | Table 5-2 22.0357) PTS: 1 REF: p.000) .500).000 13.000 50% = $11.05 $50. Thus. Inc. ANS: B Regular MACRS ($50.April 30.000) less any recovery ($3..000 Although the tentative deduction is $12.000 . 5-20 19.1429] Total deduction $2. ANS: C . ANS: D § 179 deduction Regular MACRS [($204.000 . 5-20 20.500.000 ($200. 5-18 | p.000 6%). 5-31 | Table 5-1 24. ANS: A Hippo’s tentative domestic production activities deduction for 2007 is 6% of the lesser of: $200. Hippo’s production activities deduction is $11. 5-28 | Table 5-4 23.500.000 $15. PTS: 1 REF: p.
Ned participates for more than 100 hours and this is not less than the participation of any other individual (Test 3).000 suspended loss = $10. an individual who participates for more than 500 hours is a material participant regardless of how much others participate (Test 1). is incorrect. PTS: 1 REF: p.000 adjusted basis = $40. PTS: 1 REF: p. is incorrect. Option d.000 in 2008). PTS: 1 REF: p.000 loss on the bad debt is classified as an ordinary loss. PTS: 1 REF: Example 23 31. 6-16 29. to be correct (Test 1).000 in 2007 and $15.000 amount realized – $50. the at-risk rules limit her losses to $100. even though Ned’s participation is less than 100 hours (Test 2). 6-2 to 6-4 26. Option b. 6-24 4 . Option c.13 28. 6-18 | p.000 realized gain – $30. ANS: B This debt was not incurred in connection with a trade or business.ID: A 25. 2007—zero. ANS: D Option a. 2008—$15. 6-19 30. ANS: A $60. However.000 (proceeds)]. ANS: C Net operating losses are carried back for 2 years and forward for 20 years.000 (loan) – $5.000 loss – $40. is incorrect.000 taxable gain. ANS: C Cindy’s losses are not subject to the passive activity loss rules in either year because she is a material participant. is correct. 6-15 | p.000 is suspended from 2006 ($100. PTS: 1 REF: p. PTS: 1 REF: p. ANS: D The entire $10. 6-4 27. 6. Ned’s participation constitutes substantially all of the participation.000 is suspended from 2007 (no passive income to absorb any of the loss). Therefore. Mary can claim a bad debt deduction in the following years: 2006—zero.000 over the period ($85.000 used to offset passive income) and $50. Ned would have to participate for more than 500 hours for statement c. ANS: D $90.000 [$20. PTS: 1 REF: p. 6-23 | p.
The $40. ANS: A The $80. She is not a material participant with respect to Activity A because this activity is not a significant participation activity.000. ANS: B Statement b.000 loss is suspended under the passive loss rules. ANS: E Activities A. Thus. it also is not a passive activity. PTS: 1 REF: Example 36 | Example 37 34.000 net passive loss is deductible in the current year.000 of passive income from Activity A is offset by $60. She is a material participant in Activities B. ANS: C The $60.000 net passive loss is suspended. 6-19 36. 6-23 | p. leaving a potential deduction of $40. PTS: 1 REF: Example 44 to 47 38. but Activity D is not. Therefore. The passive loss is suspended because Vic has no passive income. PTS: 1 REF: Example 36 | Example 37 33. ANS: D Statement d. The $40. is correct. The material participation standards are met with respect to Activities A. she is still considered an active participant in the activity. PTS: 1 REF: p. and the time spent exceeds 750 hours. and C are all significant participation activities. and C because total participation in significant participation activities (130 + 115 + 260) exceeds 500 hours. PTS: 1 REF: p. 6-18 | p.000 of Rita’s loss is suspended under the at-risk rules. D.000. her loss is an active loss that can be offset against her active income from the retail store. leaving a net passive loss of $40. PTS: 1 REF: Example 39 35. ANS: A $10. A significant participation activity is one in which the individual’s participation exceeds 100 hours during the year.000.000 of the passive loss from Activity B. C. the apartment building is not a passive activity. Because Maria materially participated in the restaurant activity for at least five of the last ten taxable years before the current year (Test 5).000 passive loss reduces the at-risk amount to $120. Because Jon participates for more than 500 hours in the computer consulting business. 6-29 5 . is correct.ID: A 32. Activity A is not a significant participation activity because Dena does not participate for more than 100 hours. and E under the significant participation test (Test 4). None of the $40. ANS: D More than half of Jon’s personal services are spent in a real property trade or business in which he materially participates. B. PTS: 1 REF: Example 44 to 47 37. B.
of the remaining $16. and the remaining balance (3/12) in the following year. PTS: 1 6 . Revenue Procedure 2004-34 is not applicable to prepaid rent income. the balance of the unearned income must be recognized in the tax year following the year of receipt. $12. REF: p.000 offset for rental real estate is reduced to $12.200 would not be includible in the gross income of the dealer for the current year and would be includible in gross income at the time the sale is consummated upon delivery of the car. In the case of a contract sold on April 1 that was for services over the 24-month period beginning on that date. PTS: 1 PROBLEM 41. the taxpayer would recognize 9/36 of the income in the year of sale and the remaining balance (27/36) in the following year. 6-30 | p. In the case of a contract sold on April 1 that was for services over the twelve-month period beginning on that date.500 is deducted in the current year. 4-13 REF: p. However. the taxpayer would recognize 9/12 of the income in the year of sale. 4-12 | p.000 – $100. ANS: a. 6-30 | Example 49 40. § 1.ID: A 39. only $12. ANS: D The entire loss may be deducted: $10.500 [$25. Prepaid rent is taxable in the year of receipt to both the accrual and cash basis taxpayers.500 is deducted against Roxanne’s salary because she actively participates in the activity. Revenue Procedure 2004-34 would permit deferral of $6.000 real estate rental loss. Of the remaining $16. b.451-5 specifies that accrual basis taxpayers may defer the recognition of income from advance payments for the future sale of inventories that are not on hand the last day of the year and the amount collected is less than the seller’s cost of the goods.500. 6-31 c.000)]. PTS: 1 REF: p. d.000 is deducted against the passive income from the limited partnership interest.000 loss.000 from income until the following tax year since all services will be performed by the end of the tax year following the year of receipt. Revenue Procedure 2004-34 permits the accrual basis taxpayer to amortize the prepaid income for the first year under the contract.000 is deducted against the income from the limited partnership (i. In the case of a contract sold on April 1 that was for services over the 36-month period beginning on that date.000 – 50%($125. Reg. The special $25. A loss of $10. ANS: E $22. The $8. the taxpayer would recognize 9/24 of the income in the year of sale and the remaining balance (15/24) in the following year. passive income) and the remaining $20.000 is deducted against Carmen’s salary because she actively participates in the real estate activity.e.. Therefore.
At the end of 10 years. and 2012. ANS: Roy should select the investment in the land.000 (380.000 ($380.8% after-tax rate of return.05 $4. The certificate of deposit is an original issue discount instrument.000) STCL carryover to 2008. Net short-term capital gain Net long-term capital loss Excess net long-term loss $ 60. 4-12 43. in that order. 2011. 4-6 to 4-11 44.000 of capital losses against the capital gains and deduct an additional $3.000 c. Roy will have accumulated $15. Assuming these were her only capital transactions in 2007. 4-28 d. Such long-term capital losses are carried back or forward as short-term capital losses.535).319 + $216). PTS: 1 7 . 4-27 | p.981 amount accumulated with the bond. 2005. The tax on the original issue discount must be paid each year.000) which exceeds the $15.000 60. applying them to 2004. she would offset $60. The investment in the bond earns a 4. therefore.981 (1. the income belongs to Faye since she was the owner of the stock when the dividend was declared and she assigned to Todd the right to receive it.589 (2. The dividends had been declared before Todd received the stock.000 are not deductible on the 2007 return. REF: p. ANS: Todd must report $216 of interest income and no dividends.000 – $60. $40. and 2006.05 $4.000 – $3. owning the bond is equivalent to owning an investment that appreciates at an after-tax rate of 4. 2009. The remaining $317.535 ($4. Faye should have reported $216 (.000).000 $280. ANS: a. PTS: 1 REF: p. PTS: 1 REF: p.000 – $280.000 ($320. According to the IRS in this case.000) would be carried forward indefinitely.1589 $10. and thus the adjusted basis of the CD is $4. but must be carried back to the three preceding years. in that order. Roy’s investment will appreciate to $21.5981 $10. With the land. 2010. Therefore. 2007 excess loss Offset against— 2004 net long-term capital gains 2005 net short-term capital gains 2006 net long-term capital gains Total carrybacks ($320.319) of interest income in 2006.ID: A 42.000 in capital losses on her return.8%.000) $ 80. Ellen would net these transactions with all other capital transactions for 2007. b. Todd must report interest income for 2007 calculated as follows: $227 (.000) The excess capital losses of $320.000) ($320.000 140. 4-11 | p.
Amount realized Adjusted basis Realized loss $40.000 ($8.000 $107. 2006 Salaries Supplies Depreciation Deductible expenses The market survey is not a research and experimental expenditure. 2007 Salaries Supplies Depreciation Deductible expenses The advertising is not a research and experimental expenditure PTS: 1 REF: p. ANS: Deductibility of research and experimental expenditures is permitted in the year of incurrence.000) Alex’s realized loss of $8.000 $85.000 15.000 (48.000 (40.ID: A 45.000) $ 5. 5-11 46. b.000 8 .000) $ -0- Sybil may use as much of Alex’s disallowed loss as she needs to reduce her realized gain (i. 5-16 | p. Sybil’s recognized gain is $0 and the $3.000 15..000 20.000 – $5.000) ($ 8. Thus.000 (5. $5.000 $ 75.000 17.000) to $0. Amount realized Adjusted basis Realized gain Alex’s disallowed loss needed to reduce Sybil’s gain to zero Recognized gain $45.000) of Alex’s disallowed loss that is not used by Sybil is permanently lost. ANS: a.000 is disallowed because Alex and Sybil are related parties. 5-17 $50. PTS: 1 REF: p.e.
960*) $2. Therefore.000 Total suspended loss Suspended Loss $53.000 (150.000 is allowed.000 C $10.000 $80.20) = $5.000 portfolio income].900 60% Cost recovery recapture in 2008 Cost recovery in 2008: Straight-line ($29.776 (1.800*) $4. Orange’s income is $285.889 $80.960*) $2.000 passive loss) + $35.800 (limited to $4. ANS: Cost recovery in 2007: MACRS ($29.000) $ 30. 5-31 to 5-34 | Table 5-1 | Table 5-4 48.000 $1.000 . ANS: A closely held (non-personal service) C corporation can offset passive losses against active.800 . PTS: 1 REF: p.778 8.000 $80. The suspended losses of $80.10) = $2.000 ($22.960 60% Straight-line ($29.000 $80. PTS: 1 REF: Example 31 50. but not portfolio income.000/$90. determined as follows: FMV of property at death Adjusted basis of property Increase (step-up) in basis Suspended loss Increase in basis Suspended loss allowable on Faye’s final income tax return PTS: 1 REF: Example 53 $180.000/$90.30 *These depreciation limits are indexed annually. a deduction of $22.000 .000 are allocated as follows: Activity A $60.440 PTS: 1 REF: Example 25 49.000 [($300.000 B $20.ID: A 47.000 .740) $ 36 $1.000/$90.000) 30.800 (limited to $2.20) = $5.000 ($52.900 (limited to $2. ANS: On Faye’s final income tax return.000 active income – $50.333 17.000) 9 . ANS: None.
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