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Quiz Chapter 6 and 7 Solution

Quiz Chapter 6 and 7 Solution

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Published by: Karina Leakes on Mar 22, 2012
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Business 123C Spring 2012 Quiz Chapters 6 and 7 1.

Deductions for adjusted gross income include all of the following except a. contributions to individual retirement arrangements. b. alimony. c. expenses attributable to production of rental income. d. unreimbursed employee business expenses. e. None of the above. Answer: d Explanation: d All except unreimbursed employee business expenses, deductible only as an itemized deduction, are specifically included as "For AGI" deductions. Page Ref.: I:6-3 2. In 2011, Sean, who is single and age 44, received $55,000 of gross income and had $4,000 of deductions for AGI and $4,600 of itemized deductions. Sean's taxable income is a. $40,650. b. $41,500. c. $46,400. d. $47,350. e. None of the above Answer: b Gross income Deductions for AGI Adjusted gross income Standard deduction Exemption Taxable income Page Ref.: I:6-3 and I:6-4 $55,000 ( 4,000) $51,000 ( 5,800) ( 3,700) $41,500

3. Liz, who is single, lives in a single family home and owns a second single family home that she rented for the entire year at a fair rental rate. Liz had the following items of income and expense during the current year. Income: Gross salary and commissions from Ace Corporation $50,000 Rent received from tenant in Liz's rental house 13,000 Dividends received on her portfolio of stocks 5,000 Expenses: Unreimbursed professional dues 200 Subscriptions to newsletters recommending stocks 900 Taxes, interest and repair expenses on rental house 3,500 Depreciation expense on rental house 2,300 What is her adjusted gross income for the year? a. $53,750 b. $61,100 c. $62,200 d. $68,000 e. None of the above. Answer: C Explanation: C) Gross salary and commissions from Ace Corporation Rent received from tenant in Liz's rental house Dividends received on her portfolio of stocks Gross income $50,000 13,000 5,000 $68,000

How much of these expenses can Martin deduct (before any limitations) on his current tax return? a. Martin purchases undeveloped land as an investment.000.400 c.000 Minus: Cost (30. the IRS may prove it is a hobby. d. allocate equally between the taxable and tax-exempt investments. Example I:6-35 7. ($8.: I:6-28.000). In 2010 and 2011.200 e.: I:6-4 ( 3. The activity is presumed to be a business.000 . Mary cannot prove it is a business. Answer: A Explanation: A) Selling Price $32.: I:6-7.000 to finance taxable and tax-exempt investments. $2. 2008 and 2009 her income exceeded the expenses from the activity. Kiefer sells the stock three years later for $32. Ignore any possible investment interest expense limitation. Kiefer will recognize a gain on the subsequent sale of a. c. Which statement is correct? a.300) $62. 2 . Answer: D Explanation: D) Interest incurred to acquire tax-exempt investments is not deductible. ($6. mortgage interest of $900 and liability insurance of $500. $-0-.000 from AGI e. d.700 d. The IRS cannot prove it is a hobby. How much of the interest expense is deductible.800.200 4. $18.800 + $900 + 500 = $4. $1. The activity is a hobby. for its fair market value of $30. has been involved in operating an antique store. and where is it deductible? a.200.$38. c.000 for AGI d. e. Example I:6-14 6. $9. a a best-selling author. Example I:6-5 5. The activity is presumed to be a hobby.000) ( 2. $0 b. Answer: D Explanation: D) $2.000 Minus: Previously disallowed loss ($30.For AGI Deductions: Taxes. During the current year. Donald sells stock with an adjusted basis of $38.000 investment interest expense.000 from AGI c. The activity is a business. None of the above. Martin receives no rent but he does pay taxes of $2. interest and repair expenses on rental house Depreciation expense on rental house Adjusted Gross Income Page Ref. Emeril borrows $340.000) Gain $2.500) ( 2. In the current year. Mary may prove it is a business. However. For the years 2007 through 2011 (inclusive) Mary. $9.: I:6-12. Page Ref. $3.000 for AGI b.000.000 to his son. Martin intends to rent the land as pastureland and hopefully sell it later for a profit. None of the above. Page Ref. None of the above. b. Page Ref. $18. However. Kiefer.000) Taxable gain $ -0The previously disallowed loss cannot reduce the gain below zero. He incurs $18.000). b.000. $4. In 2007. the antique store generated a loss.

operates a small pottery business in her spare time.000 15.000 4. after receiving an insurance settlement.000 Goods Personal 20.000.000) Property taxes on shed where she does work ( 1. Page Ref. Juan's loss is a.000.100) Supplies used such as clay.000 0 10. she reported the following income and expenses from this activity which is classified as a hobby: Revenue from sale of pottery $ 4. the stock was worth $32.000 and itemized deductions.000. Juan has a casualty loss of $32. if an activity results in income in 3 of 5 years. Margaret purchased § 1244 stock in White Corporation for $9. Example I:8-4 Problems: 1. a capital loss. e. None of the above are correct.500) In addition.000 computers and TV Compute her 2011 taxable income. Margaret. and interest income of $6. In addition Margaret suffered a burglary and had the following items stolen and made the following insurance claims: Fair Market Value Insurance Asset Adjusted Basis Before After Recovery Investment $8. 2010. etc. Margaret was notified that the stock was worthless.000 Depreciation on potter's wheel ( 3. a single taxpayer. the burden of proof falls to the IRS to prove that the activity is a hobby rather than a trade or business. On August 15. On December 31. not including those listed above. a Sec. During the current year. Answer: A Explanation: A) Although real estate is a capital asset. she had a salary of $99. 2011. ( 6. a Sec.: I:8-5.000 $0 $0 Stock Household 15.e. 1231 loss.000. On September 3. Page Ref. 99000 Salary 6000 Interest Income 4000 HOBBY not net against any expenses (9000) 1244 6000 casualty gain (6000) casualty loss 100000 AGI 8000 THEFT OF INV ASSET 1000 other itemized . c.000 $12. b. 1244 loss. This is Juan's only casualty transaction this year. the $32.000 0 6.500 loss is ordinary since a casualty is not a sale or exchange. 2010.500 on investment property. None of the above.: I:6-29 8. of $1. an ordinary loss. d. Answer: C Explanation: C) Under the presumption rule.

$100 = 2900 – 10% of AGI $10.500 8500 X 86/365 = 2003 4 .1100 HOBBY 2900 HOBBY (2000) 2% of AGI 2% X 100. She pays $8. Mackensie owns a condominium in the Rocky Mountains.000 3.000 child support to Steve for the care of their son.000.000 3000 remaining casualty loss .000 but limited so not a loss LIMITED TO ZERO 90000 AGI 6497 remaining property tax and interest 8500 – 2003 allocated to rental 3700 79803 taxable income Mortgage interest Property taxes $ 5. 90000 10900 (2003) 8500 X 86/365 1st tier (3108) 4300 X 86/119 2nd tier (5789) total $11.500 Insurance 1.000 Use the court's method of allocating expenses.000 loss is too small no benefit 3700 personal exemption 85300 TAXABLE INCOME 2. Compute her taxable income for 2011. She earns a salary of $90.900. During the year.800 Depreciation 11.000 Property taxes 3.500 Utilities 2. Mackensie uses the condo a total of 33 days. William. The condo is also rented to tourists for a total of 86 days and generates rental income of $10. Mackensie incurs the following expenses in the condo: Expense Amount Mortgage interest $ 5.


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