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 stock requires that Kathleen remain
with the company for one year after the date of exercise. The option did not have a readily ascertainable fair market value.
Kathleen exercises the option on August 10, 2014, when the fair market value of the stock is $17. She makes a Section 83
(b) election at the exercise date. On August 10, 2015, the fair market value of the stock is $23 per share. How much must
she report as income in 2014 and 2015
2014 2015
a.
$-0- $15,000
b.
$-0- $24,000
c.
$10,500 $4,500
d.
$15,000 $-0-
62. On February 19, 2013, Woodbridge Corporation granted Harvey an option to acquire 200 shares of the company’s
stock for $10 per share. The fair market price of the stock on the date of grant was $16. The stock requires that Harvey
remain with the company for one year after the date of exercise. The option did not have a readily ascertainable fair
market value. Harvey exercises the option on September 23, 2014, when the fair market value of the stock is $19. He
makes a Section 83(b) election at the exercise date. On September 23, 2015, the fair market value of the stock is $25 per
share. How much must he report as income in 2015?
a.
$-0-
b.
$1,200
c.
$1,800
d.
$2,000
e.
$3,000
63. Nestor receives the right to acquire 1,000 shares of Knolls Corporation stock through the company’s incentive stock
option plan. The fair market value of the stock at the date of the grant is $20 and the exercise price of the option is $24 per
share. For the option to qualify as an incentive stock option
I.
Nestor must exercise the option within 10 years of the date of grant.
II.
Nestor must hold the stock for at least 2 years after the date of exercise before selling it.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
64. In 2010, Merlin received the right to acquire 1,200 shares of Noble Corporation stock through the company’s incentive
stock option plan at an exercise price of $17 per share. On January 4, 2015, Merlin exercises the option when the fair
market value of the stock is $22 per share. Which of the following is(are) correct statements?
I.
Noble can deduct $6,000 as compensation expense in 2015.
II.
Merlin does not recognize any income but must include $6,000 as a tax preference item
in computing his alternative minimum taxable income.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
Chapter 15
65. Helen receives the right to acquire 700 shares of Smith Corporation stock through the company’s incentive stock
option plan. The fair market value of the stock at the date of the grant is $8 and the exercise price of the option is $15 per
share. The fair market value of the stock at the date of exercise is $19. Helen will recognize income at the date of grant
and the exercise date of
Date of grant Exercise date
a.
$-0- $-0-
b.
$-0- $2,800
c.
$-0- $4,900
d.
$5,600 $-0-
66. Karen receives the right to acquire 400 shares of Fremont Corporation stock through the company’s incentive stock
option plan. The fair market value of the stock at the date of the grant is $15 and the exercise price of the option is $19 per
share. The fair market value of the stock at the date of exercise is $22. At the date of exercise, the tax consequences to
Karen and the Fremont Corporation are
Karen Fremont
a.
$1,600 $1,600
b.
$1,600 $-0-
c.
$-0- $-0-
d.
$-0- $1,600
67. On October 23, 2015, McIntyre sells 700 shares of stock at $26 per share. McIntyre acquired the stock on June 1,
2014, when he exercised his option to purchase the shares through his company’s incentive stock option plan. The exercise
price was $12 per share and the fair market value of the stock at the date of exercise was $16 per share. For 2015,
McIntyre must report
Ordinary Capital
Income Gain
a.
$-0- $7,000
b.
$-0- $9,800
c.
$9,800 $-0-
d.
$2,800 $7,000
68. On October 2, 2015, Miriam sells 1,000 shares of stock at $20 per share. Miriam acquired the stock on November 12,
2014, when she exercised her option to purchase the shares through her company’s incentive stock option plan. The
exercise price was $11 per share and the fair market value of the stock at the date of exercise was $14 per share. For 2015,
Miriam must report
Ordinary Capital
Income Gain
a.
$3,000 $6,000
b.
$6,000 $3,000
c.
$9,000 $-0-
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d.
$-0- $9,000
69. Patricia and her daughter Sheila each own 50% of Draper, Inc. Patricia is the president and CFO of the corporation
and receives a salary of $125,000. Other individuals with similar responsibilities as Patricia are paid approximately the
same salary. Sheila, who is vice president, is paid a salary of $50,000. However, Sheila is not involved in the business
decisions and rarely visits the office. Which of the following are correct statements?
I.
Draper can deduct $175,000 as salary expense.
II.
Sheila must report $50,000 as income.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
70. Dunn Company bought an old building in downtown Lafayette for $75,000. The land was not purchased; it is being
leased. The building was originally placed into service in 1918. Dunn spends $100,000 to rehabilitate the building with
the intent to develop a microbrewery on the site. The company retained 80% of the external and internal walls and
framework. Assume the amount of the older building rehabilitation credit Dunn can claim is $10,000. What is the basis in
the building for depreciation purposes?
a.
$100,000
b.
$145,000
c.
$105,000
d.
$165,000
e.
$175,000
71. To obtain the rehabilitation expenditures tax credit certain criteria must be satisfied. Which of the following are
correct statements about the credit?
I.
Rehabilitation of business-use, investment-use, and personal-use residential real estate
that is certified as historic qualifies for the historic structures rehabilitation credit.
II.
The rehabilitation work cannot remove more than 25% of the internal walls and
framework.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
72. To obtain the rehabilitation expenditures tax credit certain criteria must be satisfied. Which of the following are
correct statements about the credit?
I.
If the rehabilitated structure is sold before the end of the ten-year period following the
year of the tax credit, recapture occurs.
II.
The amount of the credit can be either 10% or 20% of qualified expenditures, depending
on the classification of the building.
a.
Only statement I is correct.
Chapter 15
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
73. Hillside Group, a partnership, purchased a building for $60,000 that was originally placed in service in 1929. The
partnership incurs $180,000 rehabilitating the building. The building serves as the partnership’s headquarters. The
rehabilitation is completed in November 2015. What amount can the Hillside Group claim on their partnership return as a
rehabilitation tax credit?
a.
$2,000
b.
$3,000
c.
$6,000
d.
$18,000
e.
$24,000
74. Which of the following statements are correct concerning the general business credit?
I.
The general business tax credit only applies to an individual or corporation with a tax
liability in excess of $100,000.
II.
The general business credit only applies to an individual or corporation that has a tax
credit carryover or can claim more than one general business credit during the year.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
75. With regard to the alternative minimum tax (AMT),
I.
the AMT rate equals the highest individual income tax rate.
II.
the AMT is separate and distinct from, yet parallel to, the regular income tax system.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
76. Kelly purchases a warehouse for her sole proprietorship on January 5, 2015 for $1,000,000. She claims MACRS
depreciation of $25,641 for the year. The depreciation under the Alternative Depreciation System (ADS) is $25,000. What
is the amount of Kelly’s AMT adjustment for depreciation on the warehouse?
a.
no adjustment is necessary
b.
a positive $ 641
c.
a negative $ 641
d.
a positive $25,641
e.
a negative $25,641
77. When calculating AMTI, individual taxpayers must add back the following:
I.
The standard deduction amount.
II.
Casualty and theft losses.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
78. When calculating AMTI, individual taxpayers must add back the following:
I.
Charitable contributions.
II.
Qualified home mortgage interest.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
79. Which of the following itemized deductions is not allowed for AMT purposes?
a.
State income taxes.
b.
Qualified housing interest.
c.
Investment interest.
d.
Interest on home equity loan where loan proceeds are used to improve the residence.
e.
Charitable contributions.
80. When calculating AMTI, individual taxpayers must add back the following:
I.
Miscellaneous itemized deductions subject to the 2% limitation.
II.
Personal exemption amounts.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
81. Which of the following is (are) AMT tax preference item(s)?
I.
Tax-exempt interest from private activity bonds.
II.
Percentage depletion in excess of basis.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
82. Which of the following is (are) AMT tax preference item(s)?
I.
Net operating loss deduction.
II.
Exclusion of gain on qualified small business stock.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
83. Which of the following credits can not be used to reduce the alternative minimum tax?
a.
Adoption credit
b.
Foreign tax credit
c.
Child-and dependent-Care credit
d.
Lifetime Learning credit
e.
Research and experimental credit
84. An exemption amount is allowed for the AMT calculation
I.
as a deduction from tentative AMTI.
II.
to provide the average individual taxpayer with the opportunity to not be effected by the
AMT provisions.
III.
through legislative grace for taxpayers with moderate amounts of taxable income and
without significant preferences and/or adjustments.
IV.
In the amount of $53,600 for married taxpayers filing jointly.
a.
Only statement I is correct.
b.
Only statement IV is correct.
c.
Statements II and III are correct.
d.
Statements I, II, and III are correct.
e.
Statements I, II, III, and IV are correct.
85. Ortiz Corporation determined its AMTI to be $120,000 for 2015. If the regular income tax liability is $15,000, what is
the amount of the alternative minimum tax for 2015?
a.
$- 0 –
b.
$1,000
c.
$9,000
d.
$16,000
e.
$24,000
86. For the current year, Steven’s tentative alternative minimum tax is $24,360. His regular tax liability is $23,000. Steven
has $24,000 in taxes withheld from his salary.
I.
Steven’s alternative minimum tax is $1,360
II.
Steven’s tax liability is $23,000.
III.
Steven will have to pay an additional $360 in tax.
IV.
Steven’s total tax liability is $24,360
Chapter 15
a.
Only statement I is correct.
b.
Statements II and III are correct.
c.
Statements I and IV are correct.
d.
Statements I, III, and IV are correct.
e.
None of the above are correct.
87. 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.
III.
Salvador has a tax due of $2,750.
IV.
Salvador’s total tax liability is $19,000
a.
Statements I and II are correct.
b.
Statements II and III are correct.
c.
Statements I, II and IV are correct.
d.
Statements III and IV are correct.
e.
Statements II, III and IV are correct
88. Gilberto is a Spanish citizen living in Canada working as a computer programmer for Excel Designs, Inc., a U.S.
company.
I.
Gilberto is a nonresident alien for U.S. tax purposes.
II.
If Gilberto earns $10,000 for a consulting job in Detroit, this income will be subject to
U.S. tax.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
89. Sylvester is a U.S. citizen living in Canada working as a computer programmer for Excel Designs, Inc., a U.S.
company.
I.
Sylvester is a nonresident alien for U.S. tax purposes.
II.
If Sylvester earns $10,000 for a consulting job in London, this income will be subject to
U.S. tax.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
90. Coffin Corporation (a domestic corporation) has $200,000 of U.S. source taxable income and $600,000 of foreign
source taxable income from operations in Latvia. Latvia levied $67,000 in taxes on the foreign source income. U.S. taxes
before credits are $280,000. The foreign tax credit limitation is
Chapter 15
a.
$67,000
b.
$70,000
c.
$159,750
d.
$210,000
e.
$280,000
91. Grand Corporation has $100,000 of U.S. source taxable income and $200,000 of foreign source taxable income from
operations in Poland. Poland levied $80,000 in taxes on the foreign source income. U.S. taxes before credits are $105,000.
The overall foreign tax credit limitation is
a.
$35,000
b.
$53,334
c.
$70,000
d.
$80,000
e.
$105,000
92. A U.S. formed multinational corporation
I.
Can avoid the payment of tax on appreciated property by transferring the appreciated
property to a controlled foreign corporation and then selling the property.
II.
Is not subject to the transfer pricing rules that a foreign multinational must observe.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
93. Roland is an employee with the Belmont Corporation. Belmont maintains a money purchase plan for all its employees.
Determine the maximum deductible contribution Belmont can make to the pension plan in each of the following
situations:
a.
Roland’s salary is $100,000.
b.
Roland’s salary is $225,000.
$56,250 ($225,000 × 25%) exceeds the maximum allowable contribution limit.
94. Cary is an employee with the Bayview Corporation. Bayview maintains a defined contribution plan for all its
employees. Determine the maximum deductible contribution Bayview can make to the pension plan in each of the
following situations:
a.
Cary’s salary is $90,000.
b.
Cary’s salary is $220,000.
$22,500.
95. 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 is $80,000.
b.
Jane’s net self-employment income is $280,000.
($80,000 × 20%) to her Keogh account.
96. Drew is a partner with Peyton LLP. Peyton maintains a money purchase Keogh plan for its partners and employees.
Drew owns a 30% partnership interest in Peyton. Determine the maximum deductible contribution Drew can make to the
plan in each of the following situations:
a.
Drew ‘s net self-employment income is $85,000.
b.
Drew’s net self-employment income is $270,000.
($85,000 × 20%) to his Keogh account.
97. Abraham establishes a Roth IRA at age 45 and contributes $5,500 per year for the next 25 years. Assume he meets the
income limits during this period. The account balance is now $364,500 ($137,500 contributions, $227,000 earnings).
Abraham would like to draw out the entire amount this year. How much tax would Abraham have to pay as a result of this
decision?
98. On January 3, 2015, Great Spirit Inc., grants Jordan a nonqualified stock option to acquire 1,000 shares of the
company’s stock for $12 per share. The fair market price of the stock on the date of grant is $15. The option does not have
a readily ascertainable fair market value. On October 1, 2015, when the fair market value of the stock is $18, Jordan
exercises the stock option. Determine the tax consequences for Jordan and Great Spirit Inc., on the grant date of the option
and the exercise date.
Bayview can contribute $53,000 on her behalf to the pension plan.
99. On May 1, 2014, Peyton is granted the right to acquire 500 shares of the Simon Corporation for $18 per share. The
option qualifies under the company’s incentive stock option plan. The current fair market value of the stock is $10. On
September 18, 2015 when the stock is selling for $20 per share, Peyton exercises his option to purchase the stock. Peyton
sells the shares on November 15, 2016, for $30 per share. Determine the tax consequences for Peyton and the Simon
Corporation on the
a.
Date of grant
b.
Date of exercise
c.
Date of sale
100. Eileen is a single individual with no dependents. Her adjusted gross income for 2015 is $60,000. She has the
following items that qualify as itemized deductions. What is the amount of Eileen’s AMT adjustment for itemized
deductions for 2015?
Medical expenses (before limitations)
$12,000
Mortgage interest on a qualified residence
8,000
Charitable contribution of a Rockwell portrait
($12,000 FMV; $10,000 basis)
12,000
State income taxes paid and withheld
3,000
Real estate taxes paid
1,500
Unreimbursed employee expenses (before limitation)
2,400
Income tax return preparation fee (before limitation)
400
1.
Charitable contributions.
2.
Casualty and theft losses.
3.
Qualified housing interest.
4.
Investment interest.
5.
Miscellaneous itemized deductions, not subject to 2% of AGI.
6.
Unreimbursed medical expenses in excess of 10% of AGI.
State income taxes
Real estate taxes
compensation deduction of $6,000.
101. Rodrigo and Raquel are married with 2 dependent children, age 18 and 20, and reported the following items on their
2015 tax return:
Adjusted gross income
$190,000
Less: Deductions from adjusted
gross income
Home mortgage interest
$9,500
Home equity loan interest (for
college education)
5,000
State income taxes
12,000
Property taxes
6,800
Charitable contributions
4,400
Miscellaneous itemized
deductions
$4,800
Less: 2% × $190,000
(3,800)
1,000
(38,700)
Less: Exemptions (4 × $4,000)
(16,000)
Determine Rodrigo and Raquel’s regular tax liability and, if applicable, the amount of their alternative minimum tax.
Regular tax calculation:
Adjusted gross income
Itemized deductions
Exemptions
Taxable income
Tax {$10,312.50 + [25% × ($135,300 – $74,900)]}
Alternative minimum tax:
Regular taxable income
Add:
State income taxes
Property taxes
Home equity loan interest
Miscellaneous itemized deductions
Exemptions
Tentative AMTI
Less: AMT exemption (married filing jointly)
Equals: AMTI
Tentative minimum tax liability (26% × $92,500)
Regular tax liability
Alternative minimum tax liability
Match each statement with the correct term below.
a.
A separate, parallel tax system designed to ensure a taxpayer pays some tax.
b.
A compensation tool that is based on potential price increases of the company’s stock.
c.
An individual trust account maintained for the exclusive benefit of an individual or beneficiary.
d.
A type of defined contribution pension plan in which the company and the employee contribute a fixed percentage
of the employee’s salary to the plan.
e.
A pension plan in which the benefits are based on the number of years an employee has worked for a company and
Chapter 15
on the employee’s annual salary.
f.
A pension plan whose benefits are determined by the amount of contributions the employee and the company
contribute to the plan and the earnings of the plan.
102. Alternative minimum tax
103. Money purchase plan
104. Defined benefit plan
105. Defined contribution plan
106. Incentive stock option
107. IRA