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com/doc/39557228/Accounting-305-1 37 ACCOUNTING 305EXAM II REVIEWQUESTIONS True/False

Indicate whether the statement is true or false. ____1.A gift made by an employer to the employee can be excluded from the employees gross income. ____2.Ed died while employed by Violet Company. His wife collected $50,000 on a group-term life insurance policy that Violet provided its employees, and $5,000 of accrued salary Ed had earned prior to his death. Eds wife is not required to recognize any income from the receipt of the $55,000. ____3.Amber received an academic scholarship that was to pay her tuition, room and board, and books. Amber is required to recognize gross income from the scholarship proceeds. ____4.In December 2006, Tonya, a cash basis taxpayer, received a $3,000 cash scholarship for the spring semester of 2007. In January 2007, she used the $3,000 to pay her college tuition. Tonya must include the $3,000 in her 2006 gross income, but she is allowed a $3,000 deduction in 2007. ____5.Graduate teaching assistantships are generally scholarships and therefore are excluded from gross income ____6.In 2006 , Joyce was in an automobile accident and suffered physical injuries. The accident was caused by Ramons negligence. In 2007, Joyce collected from the insurance company. She received $15,000 for loss of income, $5,000 punitive damages, and $8,000 for medical expenses which she had not deducted on her 2006tax return. As a result of the above, Joyces 2007 gross income is increased by $28,000. ____7.Workers compensation benefits are excluded from gross income. ____8.Sam received $25,000 of salary, interest, and dividends in 2006. He also received $10,000 as workers compensation benefits. Sam must include either 50% or 85% of the workers compensation benefits in gross income for 2006. ____9.Sarahs employer pays the hospitalization insurance premiums for a policy that covers all employees and their family members. The premiums for Sarahs medical coverage can be excluded from her gross income, but the premiums for her family members must be included in her gross income. ____10.Megs employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness. Meg was absent from work for two months as a result of a kidney infection. Megs employers insurance company paid Megs regular salary of $8,000 while she was away from work. Meg is required to include the sick pay in her gross income. ____11.Alberta works for a company with only 25 employees. Her employer contributed to her health savings account (HSA). Alberta is not required to include the employers contribution in gross income, but with drawls to pay medical expenses are taxable. ____12.Members of a research team can exclude from gross income the value of their lodging furnished at the research base located at the South Pole. ____13.Rogers employer has created a flexible spending account for medical and dental expenses that are not covered by the companys health insurance plan. Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan. However,

Roger incurred only $1,100 in actual expenses for which he was reimbursed. Roger can receive the remaining $100 without recognition of income. ____14.The value of an employees occasional, personal use of the employers copying machine must be included inthe employees gross income. ____15.Fresh Bakery often has unsold donuts at the end of the day. The bakery allows employees to take the left overs home. The employees are not required to recognize gross income because the bakery does not incur any additional cost. ____16.Kays employer pays her $100 per month towards the cost of parking near a railway station where Kay catches the train to work. The employer also pays the cost of the rail pass, $90 per month. Kay can exclude both of these payments from gross income. ____17.Mother participated in a qualified state tuition program for the benefit of her son. She contributed $14,000.When the son entered college, the balance in the fund satisfied the tuition charge of $20,000. When the funds were withdrawn to pay the college tuition for her son, the son must include $6,000 in his gross income ____18.The earnings of a qualified state tuition program are deferred until they are used for qualified higher education expenses. When used, they are included in gross income. ____19.A debtor undergoing reorganization under the bankruptcy laws who receives a reduction or a forgiveness of his or her liabilities can exclude the debt reduction from gross income. ____20.Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000.One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage. Ted reduced the amount owed by Amber to $600,000. This reduced the monthly payments to a level that Amber could pay. Amber must reduce its basis in the building by $125,000, but Amber is not required to recognize income from the reduction in the debt by Ted. ____21.Expenses incurred in a trade or businesses are deductible for AGI. ____22.All employment related expenses are classified as deductions for AGI. ____23.The only 212 expenses that are deductions for AGI are those related to rent and royalty income. ____24.A moving expense that is reimbursed by the employer is a deduction for AGI, whereas an unreimbursed moving expense is classified as an itemized deduction. ____25.Insurance premiums that are paid to insure against casualty losses of personal use property are deductions for AGI. ____26.Ralph, a shareholder-employee of Warbler, Inc., receives a $250,000 salary. The IRS classifies $80,000 of this amount as unreasonable compensation. The effect of this reclassification is to increase Ralphs gross income by $80,000. ____27.The portion of a shareholder-employees salary that is classified as unreasonable has no effect on the shareholder-employees gross income, but results in an increase in the taxable income of the corporation. ____28.Generally, a closely-held family corporation can take a deduction for a salary paid to a family member. ____29.Bonnie sells her personal use SUV for $22,000 (adjusted basis of $38,000). Her realized loss of $16,000($22,000 $38,000) can be recognized for income tax purposes.

____30.The income of a sole proprietorship is reported on Schedule C (Profit or Loss from Business). ____31.The cash method can be used even if inventory and cost of goods sold is involved in the business. ____32.Because it has only one owner, any sole proprietorships is permitted to elect the cash method of accounting. ____33.Under the one-year rule for the current period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment. ____34.The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance test. ____35.The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes. ____36.Fines paid in the course of carrying on a trade or business generally is deductible if there is a related business purpose. ____37.Susan is a sales representative for a U.S. weapons manufacturer. She makes a $100,000 grease payment to a U.S. Government official associated with a weapons purchase by the U.S. Army. She makes a similar payment to a Saudi Arabian government official associated with a similar sale. Neither of these payments is deductible by Susans employer. ____38.The cost of legal advice associated with the preparation of an individuals Federal tax return is not deductible because it is a personal expense. ____39.A portion of treble damage payments under the antitrust law is deductible. ____40.Legal expenses incurred in connection with rental property are deductions for AGI. ____41.Clark operates a gambling operation, which is an illegal business under the laws of Texas. Therefore, none of the expenses of the business are deductible. ____42.Jacques, who is not a U.S. citizen, makes a contribution to the campaign of a candidate for governor. A contribution by a noncitizen is illegal under state law. Cassie, a U.S. citizen, makes a contribution to the same campaign fund. The contribution by Cassie is deductible, while the contribution by Jacques is not. . ____43.The expenses incurred to investigate the expansion of ones present business are deductible even if the expansion is not accomplished. ____44.In distinguishing between an activity being classified as a business rather than as a hobby, the satisfaction of the presumption rule (i.e., profit in at least 3 out of 5 years) ensures the activity being treated as a business. ____45.If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of 183. ____46.A hobby activity can result in all of the hobby income being included in AGI and no deductions being allowed. ____47.If an item such as property taxes exceeds the income from a hobby; the excess amount of this item over the hobby income cannot be deducted.

____48.Theo owns a vacation home that is classified in the personal use/rental use category. Rent income is $9, 000, while property taxes and mortgage interest allocated to the rental use part are $12,000. Only $9,000 of the$12,000 expenses can be deducted. ____49.A vacation home rented for 180 days and used personally for 16 days is classified as primarily rental use. ____50.Beulahs personal residence has an adjusted basis of $190,000 and a fair market value of $175,000. Beulah converts the property to rental use on December 1, 2006. The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $175,000. ____51.Ralph wants to give his daughter $1,000 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence. If Ralph pays the property taxes, he cannot deduct them but his daughter can. ____52.Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is$25,000. Marges recognized loss is $0 and Jasons adjusted basis for the land is $25,000 ($20,000 cost +$5,000 disallowed loss of Marge). ____53.The non repayment of a non business loan made by a cash basis taxpayer will result in a short-term capital loss. ____54.Accrual basis taxpayers can use the reserve method for computing deductions for bad debts. ____55.If a bad debt arose from the sale of a product, the bad debt deduction is limited to the sellers basis in the product. ____56.A non business bad debt is a debt unrelated to the taxpayers trade or business either when it was created or when it became worthless. ____57.In determining whether a debt is a business or non business bad debt, the debtors use of the borrowed funds is not important. ____58.A business bad debt can offset an unlimited amount of capital gain with any excess non business bad debt than offsetting ordinary income. ____59.An account receivable that is uncollectible will be treated as a worthless security and hence, produce a capital loss. ____60.Any taxpayer is eligible to deduct 1244 small business stock losses ($50,000 or $100,000) as an ordinary loss. ____61.An individual may deduct a loss incurred in a trade or business even though it is a loss that does not meet the definition of a casualty loss. ____62. Other casualty means casualties similar to those associated with fires, storms, or shipwrecks. ____63.The term other casualty may include accidental loss of property. ____64.If the amount of the insurance recovery for a theft loss is greater than the assets adjusted basis but less than its fair market value, no gain is recognized. ____65.If a taxpayer receives reimbursement for a casualty loss sustained and deducted in a previous year, the total reimbursement must be included in gross income on the return for the year in which the reimbursement is received. ____66.If rental property is completely destroyed; the amount of the loss is the lesser of the fair market value of the property or the adjusted basis of the property at the time of the destruction.

____67.The amount of the loss for property that is completely destroyed is always the fair market value of the property prior to the destruction. ____68.If personal casualty losses (after deducting the $100 floor) exceed personal casualty gains, the itemized deduction is always equal to the losses, to the extent they exceed 10% of adjusted gross income. ____69.The amount of a casualty loss on insured business use property is not reduced by the insurance coverage if no claim is made against the insurer. ____70.A theft loss of investment property is a miscellaneous itemized deduction subject to the 2%-of-AGI floor. ____71.An election to expense, rather than capitalize, research and experimental expenditures can be made each year. ____72.For tax years beginning in 2006, the production activities deduction (PAD) is calculated by multiplying 3%times the lesser of (1) qualified production activities income (QPAI) or (2) taxable (or modified adjusted gross) income or alternative minimum taxable income. ____73.One indicia of independent contractor (rather than employee) status is when the individual performing the services is paid based on tasks performed (rather than time spent). ____74.In some cases it may be appropriate for a taxpayer to report work-related expenses by using both Form 2106and Schedule C. ____75.After he finishes working at his main job, Martin returns home, has dinner, then drives to his second job. Martin may deduct the mileage between his first job and the second job. ____76.Under the automatic mileage method, depreciation is not taken into account in the mileage rate allowed. ____77.In choosing between the actual expense method and the automatic mileage method, a taxpayer should consider the cost of insurance on the automobile. ____78.Once the automatic mileage method is used, a taxpayer cannot for a later year change to the actual cost method. ____79.The tax law specifically provides that a taxpayer cannot be temporarily away from home for any period of employment that exceeds one year. ____80.In determining whether someone is away from their tax home, the key consideration involves the need to duplicate certain living expenses. ____81.Horton lives and works in Savannah, GA. He travels to Madrid for a two-day business trip, and then spends four days touring Spain. Only one-third of Hortons airfare is deductible. ____82.Ashley lives and works in Pittsburgh. She travels to Oslo for an eight-day business meeting, after which she spends two days touring Norway. All of Ashleys airfare is deductible. ____83.Daniel just graduated from college. The cost of moving his personal belongings from his parents home to his first job site can qualify for the moving expense deduction. ____84.Tired of her 60 mile daily commute, Margaret purchases a condo that is only five miles from her job. Margarets moving expenses to her new condo are allowed and can be claimed by her as a deduction for AGI. ____85.In order to save his job, Lucius accepted a transfer from the Dallas office to the Fargo office of his employer. After 38 weeks, Lucius loses his job when his employer declares

bankruptcy. Any moving expenses incurred by Lucius are nondeductible due to his failure to satisfy the time test. ____86.For the tax year 2005, Rod properly deducted his job-related moving expenses. In June 2006, Rod is fired from his job for assaulting a customer and, as a result, fails to meet the 39week time test. One of Rods options is to file an amended return for 2005 that does not claim the moving expense deduction. ____87.Gavin, an unemployed computer program designer, moves from Sacramento to Philadelphia to accept a job as a chef at a restaurant. Gavins moving expenses are not deductible because his new job is in a different trade or business. ____88.Alexis (a CPA and JD) sold her public accounting practice in Des Moines and accepted a job with the Seattle office of a national law firm. Her moving expenses are not deductible because she has changed employment status (i.e., went from self-employed to employee) and changed occupations (i.e., practice of public accounting to practice of law). ____89.An education expense deduction is not allowed if the education results in a promotion or pay rise for the employee. ____90.The maximum tuition deduction that can be claimed under 222 for qualified tuition expenses is $4,000 for 2006. ____91.Penguin Corporation pays for a trip to Bermuda for its five top salespersons. This expense is subject to the cutback adjustment. ____92.Every year, Teal Corporation gives each employee a turkey and a bottle of wine at Christmas. These gifts are subject to the cutback adjustment. ____93.Ethan, a bachelor with no immediate family, uses the Pine Shadows Country Club exclusively for his business entertaining. Ethans annual dues for his club membership, subject to the cutback adjustment, are deductible. ____94.A deduction is not allowed for a $25 gift a taxpayer gives to his supervisor on her birthday. ____95.The major advantage of a traditional deductible IRA is that plan distributions (at retirement) will be nontaxable. ____96.By itself, credit card receipts will constitute adequate substantiation for travel expenses. ____97.Unlike self-employed taxpayers, the unreimbursed travel expenses of employees are subject to the 2%-of-AGI floor. ____98.The 222 deduction for qualified tuition and related expenses can be claimed by parents that pay the tuition on behalf of a dependent daughter they enroll in college. ____99.Employees who render an adequate accounting to the employer and are fully reimbursed will shift the 50%cutback adjustment to their employer. ____100.In certain cases involving married persons, one way to eliminate the 2%-of-AGI floor on miscellaneous itemized deductions is to file separate (rather than joint) returns.