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Chapter 1 ANSWER: b 79. How long does a taxpayer have to file a petition with the U.S. Tax Court after receiving a Statutory Notice of Deficiency? a. 10 days b. 30 days c. 90 days d. 120 days e. […]

Chapter 1 1. A tax is an enforced contribution used to finance the functions of government. a. True b. False ANSWER: True 2. Adam Smith identified efficient, certainty, convenience, and economy as the four basic requirements for a good tax […]

Chapter 10 Computers Feb 6 5 years $60,000 Office furniture June 24 7 years $110,000 Fax machine Aug 3 5 years $100,000 Sidewalk Dec 11 15 years $50,000 Boatright wants to obtain the maximum possible first year depreciation deduction for […]

Chapter 10 1. The earlier the depreciation deduction can be taken, the greater the present value of the tax savings will be to the taxpayer. a. True b. False ANSWER: True 2. While Congress has enacted several different depreciation methods, […]

Chapter 11 1. The amount realized equals the gross selling price less any selling expenses. a. True b. False ANSWER: True 2. A buyer’s assumption of the seller’s debt increases the gross sales price and any debt of the buyer […]

Chapter 11 No net Section 1231 losses have been deducted as ordinary losses in prior years. How much of the 2015 Section 1231 gains and losses are recognized as long-term capital gains? a. $- 0 – b. $1,000 c. $3,000 […]

Chapter 12 c. $3,828 Section 1245 ordinary income. d. $6,000 Section 1245 ordinary income e. $9,828 section 1245 ordinary income and $6,000 Section 1231 loss. ANSWER: c 66. Which of the following statements is/are correct? I. The carryover-holding period only […]

Chapter 12 1. Classification of a nonrecognition transaction as a continuation of an investment requires a qualified replacement asset. a. True b. False ANSWER: True 2. The basis of replacement property in a nonrecognition transaction is the adjusted basis of […]

Chapter 13 1. Continuity of life refers to whether an entity continues to operate or technically dissolves and ceases to exist in its present form when a change occurs in the ownership structure. a. True b. False ANSWER: True 2. […]

Chapter 13 II. Based on the wherewithal-to-pay concept, each owner is taxed on the cash they contributed to the corporation. III. Sergio will recognize a $70,000 gain and Chris will recognize a $20,000 gain. IV. No gain or loss is […]

Chapter 14 include the amount it realized on the sale of a building for $330,000. The building was purchased in 2004 for $250,000 and $20,000 in straight-line depreciation had been taken on the building up to the date of its […]

Chapter 14 1. A sole proprietor may deduct investment interest and investment expense without limitations if investments are made in the name of the business. a. True b. False ANSWER: False 2. If a sole proprietorship has a net operating […]

Chapter 15 61. On January 22, 2013, Dalton Corporation granted Kathleen an option to acquire 1,500 shares of the company’s stock for $7 per share. The fair market price of the stock on the date of grant was $13. The […]

Chapter 15 1. Tim has a 25% interest in Hill and Associates, a partnership. Tim is eligible for coverage as an employee under the firm’s qualified pension plan. a. True b. False ANSWER: False 2. The employee’s contribution to a […]

Chapter 16 1. A tax treaty with a foreign country negotiated by the president is considered a legislative source of tax law. a. True b. False ANSWER: True 2. Title 26 of the United States Code is commonly referred to […]

Chapter 2 arrangement for tax purposes? a. Assignment of Income Doctrine. b. Claim of Right Doctrine. c. All-inclusive Income Concept. d. Ability-to-pay Concept. e. Constructive Receipt Doctrine. ANSWER: d 86. Alexis, a cash basis contractor, builds a storage building for […]

Chapter 2 1. Under the pay-as–you–go concept, the tax base used to compute the taxpayer’s income tax liability is a net income number. a. True b. False ANSWER: False 2. The administrative convenience concept explains why some items are not […]

Chapter 3 1. Connie was walking her dog when she came across a paper bag with $20,000 in it. She turned the money into the police. After the appropriate period of time, no one claimed the money and the police […]

Chapter 3 statements about the tax effect of the sale is/are correct? I. If Elizabeth is an art dealer and she sold the painting to Jonathan because she needed cash quickly, Jonathan does not recognize any income from the sale. […]

Chapter 3 throw it away. However, she noticed what appeared to be another painting behind the one she bought. Curious, she took the painting to a friend who is a local art expert. The friend thought the second painting was […]

Chapter 4 1. Gifts received are not subject to income taxation; however the donor is subject to the gift tax rules on the making of a gift. a. True b. False ANSWER: True 2. Any income earned subsequent to the […]

Chapter 4 89. Items that are excluded from gross income include all of the following with the exception of: a. gifts. b. inheritances. c. life insurance proceeds. d. municipal bond interest. e. U.S. Treasury Bills interest. ANSWER: e 90. Norma […]

Chapter 5 1. In order for a taxpayer to reduce taxable income with a deduction, the tax law must allow it, and it must meet all statutory requirements. a. True b. False ANSWER: True 2. In order to take a […]

Chapter 5 What is James’ income or loss from the rental property? a. $- 0 – b. $1,000 loss c. $1,250 loss d. $1,000 income e. $1,200 income ANSWER: c 89. Girardo owns a condominium in Key West. During the […]

Chapter 6 1. To be deductible, meals and entertainment must be both an ordinary and necessary business expense and must be either directly related to or associated with the active conduct of an activity for which the taxpayer has a […]

Chapter 6 b. Only statement II is correct. c. Both statements are correct. d. Neither statement is correct. ANSWER: c 89. Joline works as a sales manager for the Washington Manufacturing Company. Although the company has an accountable reimbursement plan, […]

Chapter 7 1. An operating loss occurs when an entity’s deductions exceeds the income generated for the period. a. True b. False ANSWER: True 2. A transaction loss occurs when an asset is disposed of at less than its basis. […]

Chapter 7 ANSWER: a 74. Which of the following is true concerning capital losses and net operating losses for corporations: Capital loss Net operating loss a. Carried back 5 years Carried back 2 years b. Carried back 5 years Carried […]

Chapter 8 Legitimate business entertainment of clients $8,000 Hotels accommodations while on business travel $3,000 Meals while away from home on business travel $2,000 Subscription fees for publications directly related to his employment $1,000 Cost of professional wardrobe $7,000 What […]

Chapter 8 1. To recognize such basic personal living costs as food and clothing, each individual taxpayer is allowed a personal exemption of $3,950 in 2014. a. True b. False ANSWER: True 2. To qualify as a qualifying child, an […]

Chapter 9 58. Sonya inherits 1,000 shares of Big Red Airline Corporation stock from the estate of her Uncle Tony. Tony died on August 4, 2015. The stock’s value on August 4, 2015, is $2,000. Tony purchased the stock for […]

Chapter 9 1. Intangible property lacks a physical existence; the rights exist only because of economic rights the property possesses. a. True b. False ANSWER: True 2. Personal property consists of any property that is held by an individual. a. […]

Louise is the marketing manager and a 30% owner of Walker Company. At the beginning of the current year, Louise’s basis in Walker Company is $22,000. During the year, Walker borrows $50,000 to finance the construction of a new building. […]

Troy Company purchased a printing press on April 13, 2012 at a cost of $30,000. Troy sells the printing press on January 3, 2015 for $16,000. Regular MACRS depreciation on the printing press would be $18,500, while straight-line MACRS depreciation […]

Gross selling price includes I. the amount of a seller’s debt assumed by the buyer. II. the fair market value of services received by the seller from the buyer. a. Only statement I is correct. b. Only statement II is […]

Which of the following is (are) secondary sources of tax law? I. Revenue Ruling. II. The Tax Adviser. III. Murphy and Higgins’ Concepts in Federal Taxation. IV. Tax Treaty with Denmark. a. Statements I, II, and III are correct. b. […]

Larry and Louise are both 49 years of age and file a joint return. They provide all of the support for their son, Dylan, who is 20 years old and is at home until he gets called into the army. […]

Unreimbursed medical costs are deductible only to the extent that they exceed 3.0% of the taxpayer’s adjusted gross income. a. True b. False Classification of a nonrecognition transaction as a continuation of an investment requires a qualified replacement asset. a. […]

Ross and Reba are both in their 30’s and they are married. Reba earns $64,000 annually, and Ross earns $1,800 annually working part time. Their adjusted gross income is $81,500. Reba participates in an employer-sponsored retirement plan. Ross and Reba […]

Sandi and Jodie are partners who operate Household Humanities. Sandi owns 60% and Jodie owns 40% of Household. During the current year, Household has the following results: Revenues $165,000 Operating expenses 45,000 Sandi’s salary 50,000 Jodie’s salary 45,000 Municipal bond […]

Generally income tax accounting methods are designed to result in I. a proper matching of expenses to the revenues being generated. II. a denial of a current deduction for costs that will not have to be paid in the near […]

When a partnership distributes property that has a fair market value greater than its basis, the partnership must recognize the income as if it sold the property. a. True b. False Using the tests for deductibility discussed in Chapter 5, […]

Which of the following individuals or couples qualify for the child and dependent-care credit? I. Jeff and Marion are married with 2 children ages 5 and 7. Jeff earns $57,000 and Marion is a part-time graduate student at the local […]

Alli is 23 years old, a full time student, and a dependent of her parents. She earns $2,000 from her job as a waitress and receives $3,000 of interest on a savings account established by her grandparents. a. What is […]

Isabel is a self-employed electrician. All cash payments she receives from customers are deposited into a bank account held in the name of her son. Isabel does not have use of the funds. Therefore, she does not think she needs […]

Fillmore’s net Section 1231 gains and losses reported for the past five years is presented below. 2010 $15,000 2011 12,000 2012 5,000 2013 (28,000) 2014 (13,000) In 2015, Fillmore has a $15,000 net Section 1231 gain. What amounts and character […]

Chance Corporation has a $20,000 deficit in earnings and profits as of January 1, 2015. During 2015, the corporation has current earnings and profits of $40,000 and makes a $70,000 cash distribution to its shareholders. What part of the distribution […]

Francisco’s employer establishes Health Savings Accounts (HSA’s) for its employees. The plan provides for his employer to pay $1,000 into Francisco’s HSA, and Francisco to also contribute $1,000 to his HSA. During the year, the plan pays for $1,500 of […]

Brad, an engineering consultant, was given stock valued at $3,000 for services rendered. His basis in the stock he received for the services is zero since he received no cash. a. True b. False Gary won the Nobel Prize in […]

Janelle receives a sterling silver tea set valued at $500 from her employer during her retirement dinner for her long years of service. The employer has a tradition of giving awards to some retiring employees, but has no qualified plan. […]

Chestnut Furniture Company purchases a delivery van on June 14, 2015, at a cost of $30,000. The delivery van has a 5-year MACRS life and an ADS recovery period of 5 years. What is Chestnut’s minimum cost recovery deduction on […]

Which of the following statements related to the Section 179 election to expense is (are) true? I. A Section 179 deduction can be claimed on tangible personal property II. A Section 179 deduction can be claimed on property held for […]

During 2015, Marsha, an employee of G&H CPA firm, drove her car 24,000 miles. The detail of the mileage is as follows: Personal Use 3,000 miles Transportation between home and office 3,000 miles Transportation to and from clients’ offices 18,000 […]

Winston is the sole shareholder of Winston Inc, an S corporation. In 2014, he paid $50,000 for his shares of stock. During the current year, he contributes a building and land to the corporation. No additional shares of stock are […]

For the current year, Salvador’s regular tax liability is $17,000, and his tentative alternative minimum tax is $19,000. Salvador has $16,250 withheld from his salary. I. Salvador has a tax due of $750. II. Salvador’s alternative minimum tax is $0. […]

Connie was walking her dog when she came across a paper bag with $20,000 in it. She turned the money into the police. After the appropriate period of time, no one claimed the money and the police returned the money […]

Fay “hires” her four-year-old son to be the office manager of her real estate firm. She deducts his $20,000 annual salary as a business expense. The IRS disallows the deduction upon examination of Fay’s tax return. Which of the following […]

Paul, age 40 and single, has an 8-year-old son, Larry. Larry resides with his mother, Susan, in her home. Pursuant to the terms of their divorce, Paul properly claims Larry as a dependent on his income tax return. Paul pays […]

Richard, a cash basis taxpayer, is an 80% owner and president of WLFI TV. WLFI TV is an S corporation and uses the accrual method of accounting. On December 1, 2015, WLFI TV accrues a bonus of $50,000 to Richard. […]

A tax provision has been discussed that would add an additional marginal tax rate of 42% to be applied to an individual’s taxable income in excess of $800,000. If this provision were to become law, what overall distributional impact would […]

Thomas has adjusted gross income of $228,000, total itemized deductions of $39,000 and claims 2 personal and 2 dependency exemptions. Which is his filing status? a. Single. b. Head of household. c. Married filing a joint return. d. Married filing […]

The Ottomans own a winter cabin in Durango, Colorado. They purchased the cabin in 2004 for $65,000. During the current year, a blizzard partially destroys the cabin. The fair market value of the cabin after the blizzard is $70,000. The […]

In which of the following circumstances will income of the child be taxed at the marginal tax rate of the child’s parent? I. Nicole, age 17, has $4,000 of interest income from Microsoft bonds. II. Catherine, age 19, has $2,300 […]

Which of the following best describes the tax treatment of a taxpayer’s net Section 1231 loss that resulted from the sale of depreciable equipment used in a business activity? a. Such losses are not deductible. b. Such losses are deducted […]

Peter, proprietor of Peter’s Easy Loan Company, loaned Jessie $4,000 on December 1, 2013. The loan is to be repaid on December 1, 2014, along with $600 interest. On July 10, 2014, Peter learns that Jessie has filed for personal […]

Jason purchases a patent at a cost of $24,000. The patent has 8 years of legal life remaining from the date of purchase. I. If the patent is the only asset Jason purchased, he must amortize the patent over 15 […]

Jane is a partner with Smithstone LLP. Smithstone maintains a profit-sharing Keogh plan for its partners and employees. Determine the maximum deductible contribution Jane can make to the plan in each of the following situations: a. Jane’s net self-employment income […]

Which of the following taxes is deductible from adjusted gross income when paid by an individual taxpayer? I. State income tax. II. State excise tax on gasoline. a. Only statement I is correct. b. Only statement II is correct. c. […]

Derek Builders, LLC, entered into a contract to do extensive remodeling work on Helen’s house in October 2014. The bid cost of the job was $5,000 and Helen made a down payment of $2,000 in November 2015. Because Helen was […]

Helen receives stock worth $1,000 from her grandfather as a graduation gift in May 2015 (her grandfather paid $100 for the stock many years ago). In December 2015, she receives a $100 cash dividend on the stock. Helen is not […]

LeRoy has the following capital gains and losses for the current year: Short-term capital gain $10,000 Collectible loss (3,000) Long-term capital gain 5,000 If LeRoy is single and has taxable income from other sources of $52,000, what is the tax […]

In July 2015, Harriet sells a stamp from her stamp collection at a gain of $500. Harriet purchased the stamp in 2009. If Harriet is in the 33% marginal tax rate bracket and has no other capital asset sales in […]

During 2015, Jimmy incorporates his data processing business. Jimmy is the sole shareholder. The following assets are transferred to the corporation: Cash $2,000 Computer Equipment: Fair market value 20,000 Adjusted basis 12,000 Original cost 24,000 Furniture: Fair market value 20,000 […]

Marie earns $80,000 as a sales manager for Household Books. How much Social Security and medicare tax does Marie have to pay for 2015? a. $4,960.00 b. $6,120.00 c. $6,400.00 d. $2,240.00 Rosie inherits 1,000 shares of Northern Skies Airline […]

Kevin, single, is an employee of the Colonial Company and is an active participant in its pension plan. Kevin’s adjusted gross income for the current year is $59,000. Kevin contributes $1,000 to his conventional individual retirement account. Which of the […]

Dustin buys 200 shares of Monroe Corporation common stock on December 1, 2014, for $2,000. He buys an additional 200 shares for $1,800 on December 23, 2015. On December 28, 2015, Dustin sells the first 200 shares for $1,700. He […]

Mario’s delivery van is completely destroyed when a tree fell on it. Mario’s insurance company pays him $11,000 for the accident. The van cost $20,000 three years ago. Tax depreciation deductions of $6,000 have been taken to date. The “Blue […]

A guaranteed payment is a payment made to a partner for specific services performed by the partner and is made without regard to the partnership’s income. a. True b. False Wayne purchases a new home during the year, borrowing $725,000 […]

Adjustments to gross selling price include I. the amount of a seller’s expenses paid by the buyer. II. the amount of the buyer’s debt assumed by the seller. a. Only statement I is correct. b. Only statement II is correct. […]

In which of the following will the Constructive Receipt Doctrine require reporting income in 2015? I. Cornell’s December 2015 salary check is withheld until January 15, 2016, because the employer does not have sufficient cash to cover its December payroll. […]

Lynne is a 15% partner with Webb Brothers and has net self-employment income of $100,000 in 2015. The maximum amount that Lynne can contribute to a Keogh profit sharing plan is a. $5,000 b. $13,045 c. $15,000 d. $20,000 e. […]

Oliver pays sales tax of $7.20 on the purchase of a lamp for $120. Michelle paid sales tax of $9 on the purchase of a similar lamp for $150. Oliver’s taxable income for the current year is $40,000. Michelle’s taxable […]

Grant exchanges an old pizza oven from his business for a new oven. In addition to the old oven, which had a basis of $10,000, Grant pays $4,000 cash and takes out a loan on the new oven for $6,000. […]

Ted purchases some forest land in 2013 with the intention of building a log cabin to use as a vacation home. To obtain the land, Ted pays $10,000 cash, assumes the seller’s $19,000 mortgage on the land and pays $3,000 […]

Which of the following properties that was sold during January 2015 is Section 1231 property for Baylan Toy Manufacturing Corporation? I. Automobile purchased in 2011. II. Land used in the business since 2012. III. Factory building purchased and placed into […]

Milroy Company manufactures steering wheels. Its taxable income in 2015 before the Qualifying Production Activities Deduction (QPAD) is $2,000,000 and its qualified production activities income is $2,500,000. Milroy’s qualifying W-2 wages paid are $400,000. How much may Milroy take as […]