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.
86. Alexis, a cash basis contractor, builds a storage building for Jones. The building is completed, and the bill is given to
Jones. Jones pays $60,000 in 2015. Subsequently, Jones files suit for damages based on alleged faulty construction. Alexis
required to recognize $60,000 of income in 2015 based upon
I.
II.
a.
Only statement I is correct
b.
Only statement II is correct
c.
Both statements are correct
d.
Neither statement is correct
87. 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.
II.
Donnie is an employee of Holt Corporation. The corporation regularly mails payroll
checks to employees to arrive on or before the last day of each month. Donnie’s check
arrives in the mail at his house on December 31, 2015. However, Donnie was
vacationing in Cancun and did not return until January 8, 2016. Donnie deposited the
check into his account the next day.
III.
In December 2015, Cory signs a contract to play basketball for the Rhythms. He
receives a signing bonus of $2,000,000 to be paid over 5 years beginning in 2016. His
regular salary of $800,000 will be paid monthly during the season that begins in 2016.
a.
Statements I, II, and III are correct.
b.
Statements II and III are correct.
c.
Statements I and II are correct.
d.
Only statement II is correct.
e.
Only statement III is correct.
88. The primary difference(s) between the claim-of-right doctrine and the constructive receipt doctrine is/are
I.
II.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
89. Arnold sells a parcel of investment real estate to Oswald for $600,000 in 2015. Arnold will receive $200,000 annually,
plus interest at 8%, from 2016 through 2018. Arnold will recognize no gross income on this sale in 2015. Which of the
following determines this treatment?
a.
Administrative Convenience Concept
b.
All-inclusive Income Concept.
c.
Ability-To-Pay Concept.
d.
Claim of Right Doctrine.
e.
Wherewithal –to-Pay Concept.
e
90. It was stated in the text that realized gains from certain types of transactions (e.g., like-kind exchanges) are deferred
for recognition in a future period. The basis of this treatment is the
I.
Annual Accounting Period Concept.
II.
Legislative Grace Concept.
III.
Wherewithal-to-Pay Concept.
IV.
Capital Recovery Concept.
a.
Only statement II is correct.
b.
Only statement III is correct.
c.
Statements I and II are correct.
d.
Statements II and III are correct.
e.
Statements I, II, III and IV are correct.
91. Occasionally, realized gains are not recognized for tax purposes. These situations occur because
I.
II.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
92. A corporation is allowed to deduct all of its ordinary and necessary business expenses. Which of the following
Concepts is least helpful in determining this treatment?
a.
All-inclusive Income Concept.
b.
Entity Concept.
c.
Capital Recovery Concept.
d.
Legislative Grace Concept.
e.
Business Purpose Concept.
a
93. Jane owns 100% of the stock of Lacy Corporation. Jane’s son, Lee, is employed by Lacy Corporation as a consultant.
Which of the following concepts or doctrines is least helpful in determining the tax consequences of any payments Lacy
makes to Lee?
Chapter 2
a.
Arm’s-Length Transaction Concept.
b.
Substance Over Form Doctrine.
c.
Assignment of Income Doctrine.
d.
Business Purpose Concept.
e.
Entity Concept.
e
94. Deduction concepts need to resolve certain questions. Some of these are:
I.
How much is deductible?
II.
When can the deduction be taken?
III.
What types of expenditures are deductible?
IV.
What entity is entitled to the deduction?
a.
Statements I and II are correct.
b.
Statements II, III, and IV are correct
c.
Statements I, II, and III are correct.
d.
Only statement II is correct.
e.
Statements I, II, III, and IV are correct.
e
95. Deduction concepts and constructs include which of the following?
I.
II.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
96. Deduction concepts include which of the following?
I.
Capital Recovery Concept.
II.
Legislative Grace Concept.
III.
Business Purpose Concept.
IV.
Ability to Pay Concept.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Statements I and II are correct.
d.
Statements I, II, and III are correct.
e.
Statements I, II, III, and IV are correct.
97. Guzman Corporation has its expenditure of $700,000 for salary to its president and sole shareholder disallowed as a
deduction by the IRS. Comparable salaries for presidents of similarly sized firms in the same industry average $300,000.
The IRS reclassified $400,000 as a nondeductible cash dividend. Which of the following form the basis for the IRS
disallowance?
I.
Lack of Business Purpose.
Chapter 2
II.
Administrative Convenience Concept.
III.
Capital Recovery Concept.
IV.
Substance over Form Doctrine.
a.
Only statement I is correct.
b.
Only statement IV is correct.
c.
Statements I and IV are correct.
d.
Statements I, II, and IV are correct.
e.
Statements I, II, III, and IV are correct.
c
98. Tyrone sells his personal-use car that had cost $15,000 for $10,000. Why is the loss realized on this transaction
disallowed as a deduction?
I.
Legislative Grace is lacking.
II.
Personal losses are disallowed.
III.
Business purpose is lacking.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Only statement III is correct.
d.
Statements I and II are correct.
e.
Statements I, II, and III are correct.
e
99. Tax law generally disallows deductions for personal expenditures. However, due to legislative grace, there are certain
exceptions to this general provision of tax law. These exceptions include
I.
Itemized Deductions.
II.
Standard Deduction amount.
III.
Personal Exemption amounts.
IV.
Dependency Exemption amounts.
a.
Statements I and IV are correct.
b.
Statements I, II, and III are correct.
c.
Statements I and II are correct.
d.
Statements I, II, III, and IV are correct.
e.
Statements III and IV are correct.
100. Silvia is a single individual who has income of $80,000. Todd is a single individual who has income of $35,000.
Neither of them itemizes their deductions. Both taxpayers will take a standard deduction of $6,300 in 2015. The concept
that allows both Silvia and Todd to take this deduction is
a.
Capital Recovery.
b.
Administrative Convenience.
c.
Entity.
d.
Wherewithal to Pay.
e.
Pay-as-You Go.
101. Laurie’s Lawn Service, Inc., purchases a heavy-duty tri-cut lawn mower on March 17, 2015, for $5,500. Under a
special election, Laurie’s expenses the $5,500 cost of the lawn mower in 2015. In July, a tire on the lawn mower is
repaired at a cost of $450. Maintenance costs on the lawn mower for 2015 total $175. What is Laurie’s basis in the lawn
mower at the end of 2015?
a.
$- 0 –
b.
$450
c.
$5,500
d.
$5,950
e.
$6,125
a
102. Monica’s Lawn Service, Inc., purchases a heavy-duty tri-cut lawn mower on March 17, 2015, for $4,500. The
depreciation on the lawn mower in 2015 was $500. In July, a tire on the lawn mower is repaired at a cost of $650.
Maintenance costs on the lawn mower for 2015 total $175. What is Monica’s basis in the lawn mower at the end of 2015?
a.
$650
b.
$4,000
c.
$4,650
d.
$5,150
e.
$5,325
103. Monterey Developers purchases 10 acres of land for $15,000 on January 14, 2015. They also pay $2,000 in legal and
other fees related to the purchase. Monterey spends $3,000 for legal fees, permit licenses, and city franchise fees to
subdivide the land into 10 one-acre plots. Sewer and utility line easements cost an additional $5,000. Interest paid on the
loan that financed the purchase is $1,200 for 2015. Monterey also pays $800 in property taxes in 2015. What is
Monterey’s adjusted basis in the land at the end of 2015?
a.
$17,000
b.
$25,000
c.
$25,800
d.
$26,200
e.
$27,000
104. James purchased land costing $22,000 in 2014. He paid $2,000 in legal fees and other expenses to complete the
purchase. In 2015, James spends $24,000 subdividing the land and running utilities to the property. Interest paid on the
loan used to finance the purchase and subdividing total $1,750 in 2014 and $3,200 in 2015. James paid $350 of property
taxes in 2014 and $750 of property taxes in 2015. What is James’s basis in the land at the end of 2015?
a.
$24,000
b.
$46,000
c.
$48,000
d.
$50,950
e.
$52,050
c
105. Drew Corporation purchased machinery costing $825,000 in 2014. Drew paid $5,000 for installation and testing of
the machinery. Under a special election, Drew expensed $500,000 of the cost of the machinery in 2014. Drew also
deducted depreciation on the machinery of $46,443 in 2014 and $79,593 in 2015. Drew’s repair and maintenance costs on
Chapter 2
the machinery were $10,200 in 2014 and $13,300 in 2015. What is Drew Corporation’s adjusted basis in the machinery at
the end of 2015?
a.
$175,468
b.
$198,964
c.
$203,964
d.
$325,000
e.
$698,964
106. Lauren owns an annuity that pays her $400 per month until she dies. Which of the following income tax concepts
provides for the tax treatment of the annuity payments Lauren receives?
I.
Annual Accounting Period Concept.
II.
All-inclusive Income Concept.
III.
Constructive Receipt Doctrine.
IV.
Capital Recovery Concept.
a.
Statements I and II are correct.
b.
Statements II and III are correct.
c.
Statements I and IV are correct.
d.
Statements II, III, and IV are correct.
e.
Only statement IV is correct.
107. Mandy is a self-employed plumber. She spends $24,000 of her personal savings to buy an Airstream camper to use
on camping trips. Why is this expenditure not currently deductible?
I.
II.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
108. On March 3, 2012, Craig bought a business-use vehicle for $20,000. He used the vehicle for three years and properly
deducted a total of $12,000 as depreciation expense during this period. At the end of 2015, Craig sells the vehicle for
$7,500. Why is Craig’s deductible loss $500?
I.
Craig has already recovered $12,000 of his investment through the depreciation
deduction.
II.
The adjusted basis of the vehicle was $12,000 at the date of sale.
III.
$7,500 of the adjusted basis was recovered because of the sale.
IV.
The realized loss is recognized because it was incurred with business-use property.
a.
Statements I and III are correct.
b.
Statements I, III and IV are correct.
c.
Statements II and III are correct.
d.
Only statement IV is correct.
e.
Statements I, II, III, and IV are correct.
Chapter 2
109. For each tax treatment described below, indicate which tax concept(s) that is (are) responsible for the treatment.
a.
Kimberly, an accrual basis taxpayer, validly took a bad debt deduction of $850 in 2013 for
an account receivable due from Cathy. In 2015, Cathy sent Kimberly a check for $500.
Kimberly must include the $500 in her 2015 taxable income.
b.
Randall, a cash basis taxpayer, receives $1,400 from Craig in December 2015. The $1,800
was for payment of the first and last month’s rent ($700 per month) and a $400 cleaning
deposit on a building Craig rented from Randall. Randall includes $1,400 in his 2015
taxable income.
c.
Matt pays $14,000 rent on the office he uses in his computing firm. Matt is allowed to
deduct the $14,000 on his tax return.
d.
Samantha sells stock for $9,000 that she purchased two years earlier for $8,000. Samantha
must report a capital gain of $1,000 on the sale.
e.
Rosanne sells jewelry and some old clothes during the year. The jewelry cost $750 and is
sold for $800. The clothes cost $500 and are sold for $150. Rosanne must include the $50
gain on the sale of her jewelry in her taxable income, but is not allowed to deduct the loss.
a.
Tax Benefit Rule, Annual Accounting Period Concept.
Claim of Right Doctrine, Accounting Method, All-inclusive Income.
c.
Business Purpose Concept, Capital Recovery Concept, Legislative Grace Concept.
e.
All-inclusive Income Concept, Legislative Grace Concept, Capital Recovery Concept.
110. For each of the following tax treatments, explain the application of the income tax concept(s) that form the basis for
the treatment.
a.
Antonio uses his automobile 60% of the time in his insurance business and 40% of the
time for personal purposes. Antonio is only allowed to deduct 60% of the cost of operating
the automobile.
b.
Teresa is a University student majoring in accounting. Teresa became a friend with her
neighbor who owns an electronics store. In return for setting up an accounting system for
her neighbor’s store, Teresa is given an i-pod worth $600. Teresa must include the value of
the i-pod in her gross income.
c.
Larry bought 300 shares of Shamrock Common Stock in April for $6 per share. At
December 31, Shamrock Common Stock is selling for $8 per share. Larry does not have to
recognize any income from the Shamrock Common Stock in the current year.
d.
Allan bought $10,000 Par Value of 8% Lake City Water Improvement District bonds for
$9,200 several years ago. During the current year, Allan receives $400 in interest on the
bonds before selling them for $9,600. Allan’s only recognized income from the bonds is
the $400 gain on the sale of the bonds.
e.
Anita is an author of history books. In 2014, she signs a contract to write a book on the
Chapter 2
“History of the Tea Party.” At that time, she received a $5,000 advance on her royalty
payments. The terms of her contract require her to return the advance if she does not
complete the book or if her royalties are insufficient to cover the advance. Anita finishes
the book in 2014. Her total royalties from sales in 2015 are $12,000. Anita must include
$5,000 in income in 2014 and $7,000 in income in 2015.
All-inclusive Income Concept. Teresa provided a service and was compensated with
The Realization Concept provides that no income is recognized until realization (sale of
The Realization Concept provides for the gain recognition on the sale of the bonds. The
All-Inclusive-Income Concept provides for including income from the sale. The Capital
Legislative Grace provides for the exclusion from gross income of the interest from
e.
Under the Claim of Right Doctrine, income is recognized when it is received and there is
does not negate her claim of right or her ability to control the $5,000 advance. The Capital
111. For each of the following tax treatments, explain the income tax concept(s) which is/are responsible for the treatment
indicated.
a.
Dorine purchased 500 shares of Russell Corporation common stock in June 2014 for
$11,000. In November 2014, Dorine received 50 shares of Russell Corporation stock as a
stock dividend when the stock was selling for $22 per share. At December 31, 2014, the
550 Russell Corporation shares were worth $13,000. In March 2015, Dorine sells the 550
shares for $13,500. Dorine recognizes no income in 2014 and $2,500 of income in 2015
from her investment in Russell Corporation stock.
b.
Steven is the sole owner of Moray Corporation. Steven sells land to Moray that cost him
$33,000 for $22,000. Steven is not allowed to deduct the $11,000 loss on the sale.
c.
Danielle is the owner of Larson Company. In April, she attends a trade show in New York.
She takes her daughter with her on the trip so she can go to museums and see some
Broadway shows. The cost of Danielle’s trip is deductible, but her daughter’s costs are not
deductible.
d.
Earl is a vice-president of Laddy Corporation. In December 2015, the board of directors
voted to give Earl a $20,000 bonus, payable on December 30, 2015. Earl tells the payroll
clerk to delay processing the bonus check until January 4, 2016. Earl must include the
$20,000 bonus in his 2015 gross income.
112. For each tax treatment described below, explain the income tax concept(s) which is (are) responsible for the
treatment.
a.
Leon sells stock to his sister Margie at a loss of $3,000. Leon is not allowed to deduct the
$3,000 loss.
b.
Jorge owns an appliance repair business. During the current year, he pays $5,000 of
interest on the van he uses to call on customers and $5,000 of interest on his personal
automobile. Jorge can deduct $5,000 of the interest.
c.
Pepper Corporation, an accrual basis taxpayer, rents lawn equipment. In May of the
current year, Pepper receives $4,000 from the rental of lawn equipment on 2-year rental
contracts. Pepper must recognize the $4,000 income from the contracts in the current year.
d.
Todd sells stock for $2,000 that he paid $3,500 for several years ago. After remodeling his
residence, he sells all of his old furniture at a garage sale for $800. The furniture cost
$4,000. Todd can deduct the $1,500 loss on the sale of the stock, but cannot deduct the
loss on the furniture sale.
e.
Marsha is single and earns $80,000 per year in her job as an executive vice-president for
County Bank. Hasid is married, has two dependent children and earns $80,000 per year as
a professor of history. Marsha’s tax liability is $14,470. Hasid’s tax liability is $7,780.
arms-length are given their intended tax effect. Related Parties are deemed not to transact
arm’s length and the loss is disallowed.
interest does not have a Business Purpose and is not deductible. The Entity Concept
purposes. The Capital Recovery Concept limits the deductible amount to the $4,000 cost.
All-inclusive Income Concept. The Capital Recovery Concept provides for the recovery of
c.
Danielle’s costs are deductible because they have a Business Purpose – they are related to
Earl is in Constructive Receipt of the bonus in 2015. The bonus was available for his use
113. For each tax treatment described below, explain the income tax concept(s) which is (are) responsible for the
treatment.
a.
Atlas Construction Inc., an accrual basis taxpayer, billed a client $12,000 for services
performed in December 2015. In March 2016, Atlas Construction receives a check from
the client for $10,000. Included with the check is a letter indicating that some of the
services had not been performed to specifications. After investigating the matter, Atlas
Construction determined that the customer was right and corrected its account receivable
with the client. Atlas Construction must include $12,000 in its 2015 income and takes a
deduction for $2,000 in 2016.
b.
Katie is the Mayor of Coal Creek. During the current year, she accepts $5,000 from a local
banker for her promise that the banker would receive the contract for a new city bond
issue. The payment is illegal under state law and will have to be returned if discovered.
Katie must include the $5,000 in her gross income.
c.
Little Company purchased machinery in 2011 at a cost of $40,000. In 2011 through 2015,
Little properly deducts $14,000 in depreciation on the machinery. In 2015, the machinery
is sold for $20,000. Little is allowed to deduct a $6,000 loss on the sale of the machinery.
d.
In 2015 Raptor Corporation properly deducted a $5,000 expense it paid to Colfax Inc. In
2016 Raptor receives a $500 check from Colfax. A letter accompanying the check
indicates that Colfax overcharged Raptor and the $500 refund was made to correct the
overcharge. Raptor must include the $500 in its 2016 gross income.
Concept, each tax year stands separate and apart from all other tax years. Events of each
b.
The All-Inclusive Income Concept requires all increases in wealth to be included in
The Legislative Grace Concept requires Congress to approve of any form of tax relief. To
investment asset and the loss derives from a business purpose. The furniture is a personal
taxpayers are allowed to recover their investment before any income is recognized. Todd’s
loss on the stock represents his unrecovered capital investment.
The Ability to Pay Concept requires the tax to be based on the taxpayer’s ability to pay the
Marsha’s (who has the same income and supports only herself). This is accomplished
through Progressive Tax Rate Schedules for varying classes of taxpayers, different
114. For each tax treatment described below, explain the income tax concept(s), which is (are) responsible for the
treatment.
a.
Amelia owns a 1/4 royalty interest in a uranium mine. Amelia has the owner of the mine
pay 1/3 of her royalties to her son, Joel. During the current year, Amelia receives $18,000
and Joel receives $9,000 in royalty payments. Amelia has $27,000 of gross income from
the royalty payments. Joel has no income.
b.
Mark owns a weekend barbecue business. During the year, he purchases $900 of wood
that he uses in his barbecue operation and in his personal fireplace. Mark can only deduct
$550 of the wood cost as an expense of his barbecue business.
c.
Andre is the sole owner of Woods Corporation. Woods sells Andre a parcel of land that it
owned for $30,000. Woods had paid $45,000 for the land. Woods Corporation cannot
deduct the $15,000 loss on the sale.
d.
On February 20, 2014, Constance purchases 100 shares of Paris stock for $4,500. At
December 31, 2014, the stock is worth $5,200. On November 8, 2015, Constance sells the
stock for $5,800. Constance has no income from the stock in 2014 and a capital gain of
$1,300 in 2015.
e.
Barney is a consultant and is a cash basis taxpayer. On December 31, 2015, a client calls
and offers to drop off a check for $1,000 in payment of his account on his way to lunch.
Barney tells the client not to bother delivering it in person and instructs him to mail the
check. Barney must include the $1,000 in his 2015 gross income.
Under the Assignment of Income Doctrine, income is taxed to the entity that earns the
interest, she cannot avoid taxation on the royalties by having them paid to her son.
cost of the wood used in his barbecue business because it has a business purpose. The
that is not made at arm’s length is generally disregarded. Related parties do not transact at
ownership by Andre) and the corporation is not allowed to deduct the loss on the sale.
the stock is sold, a gain is realized. Under the Capital Recovery Concept, Constance is
$5,800 selling price is not taxable).
$26,000). The $6,000 loss is unrecovered capital investment. Because Little is a trade or
115. Determine whether the taxpayer has realized income in each of the following cases. Explain why there has (or has
not) been a realization and when the income will be realized if there is not a current realization.
a.
Jaime appears on a TV game show in December 2015. She wins $25,000 in cash and a
new sailboat worth $12,000. She receives a check for the cash she won on December 28,
2015. However, the sailboat was not ready for her to pick up until the following February.
b.
Barry owns 30% of Thurman Corporation. Thurman, an S corporation, reports a taxable
income of $2,000,000 and pays cash dividends of $1,000,000 in 2015.
c.
Yolanda signs a contract to be Athletic Director of Higgins University for 5 years. Upon
signing the contract she receives a $50,000 bonus. The terms of the contract provide that
Yolanda will have to repay the bonus if she terminates her relationship with the University
before the end of the contract.
d.
Randy was arrested for reckless driving. Because it was his third offense, his fine was set
at $1,000. Randy’s employer needed Randy at work, so he paid the fine. He told Randy
that he would not have to repay the $1,000 if he was not arrested again.
tax because it is deemed to be a Capital Recovery of his investment in Thurman.
Yolanda has realized the $50,000 bonus when it is received. She has a Claim of Right to
d.
Randy has realized income from the payment of the fine by his employer. He is in
116. Explain why the taxpayer in each of the following situations either does or does not have a Claim of Right to the
income received.
a.
Thomas works as a purchasing agent for Local City Government. During the current year,
he takes a $5,000 kickback from a supplier seeking a lucrative contract with Local City.
The kickback is illegal under State law and will have to be repaid to Local City if it is ever
discovered.
b.
Bernice is an agent for Drew, quarterback of the LA Tigers. During the current year,
Bernice negotiates a new contract for Drew that includes a $5,000,000 signing bonus.
Bernice receives the signing bonus from the Tigers and places it in her business account.
As per her contract agreement with Drew, Bernice writes a check for $600,000 to Drew’s
Barney is in constructive receipt of the $1,000 because it was made available to him on
Chapter 2
mother, gives Drew a check for $3,900,000 and retains the remaining $500,000 as her
standard 10% fee.
c.
Karl, an attorney, is hired by Dominic Manufacturing Company to represent it in a lawsuit.
Because the lawsuit will likely drag out for a number of years, Karl requests that Dominic
Manufacturing pay him a retainer representing two years of services. Dominic
Manufacturing agrees to pay the $150,000 retainer; however, Dominic insists that Karl
agree to refund, pro-rata, any of the retainer fee not yet earned should Dominic decide to
terminate their relationship.
$5,000 if discovered, it has yet to be discovered. Therefore, there is no definitive
Karl has a Claim-of-Right to the retainer. Although he may have to repay part of it, no
117. Explain the similarities and differences of the Claim of Right doctrine and the Constructive Receipt doctrine.
118. 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
short of cash, Derek agreed to accept payment of the remaining $3,000 when she receives her tax refund in 2016. Derek
completed the work on the contract in December. Helen dies in May 2016 before she had paid Derek. Because Helen was
heavily in debt when she died, the executor of Helen’s estate told Derek that he would be lucky to get $1,000 when the
estate was settled.
a.
Derek Builders uses the accrual method of accounting. Based on the income tax concepts,
explain how Derek should account for the contract.
b.
In 2017, Derek Builders receives $1,500 from Helen’s estate as final payment on the
$3,000 amount owed. Based on the income tax concepts, explain how Derek should treat
the $1,500 receipt in 2017.
Accounting Period Concept, each tax year stands alone, separate and apart from other tax
account for the transaction in 2017. In 2017, Derek now knows that the correct amount of
119. Robin owns an appliance store. Robin gives Tim a stereo unit to paint the front of her store building. The stereo unit,
included in Robin’s inventory at a cost of $400, normally retails for $700. If Tim had billed Robin for his work like he
charged other customers, he would have sent Robin a bill for $600. Does Tim have income from the receipt of the stereo
unit? If so, what amount should Tim report as gross income? Explain in terms of the Income Tax Concepts.
120. Fran Holloway is an active dealer in used automobiles. While preparing her income tax return, you notice that she
purchased one automobile for $7,000 and sold it one month later for $5,800 to Brian Holloway Enterprises. Explain, in
terms of the income tax concepts, why the $1,200 loss on the sale of the automobile may not be deductible.
121. At what three points in time might a given expenditure be deductible?
a. ______________________
b. ______________________
c. ______________________
Over the life of the asset.
122. Belinda purchases a computer system costing $6,000. During the current year, 70% of the use of the computer is for
keeping the books and records of her Plasticware business, 20% of the use is for tracking her investments, and 10% of the
use is personal. Explain the treatment of the computer according to the income tax concepts.
123. Carl purchased a building costing $120,000 in 2000 for use in his landscape business. In 2009, he built an addition to
the building at a cost of $30,000. In 2012, a tornado damaged the building. The cost of repairing the building was $22,000
and Carl’s insurance company paid $16,000 of the cost of the repairs. Depreciation deducted on the building for 2000
Chapter 2
through 2015 totaled $18,000. What is Carl’s adjusted basis in the building at the end of 2015? Explain.
124. Baron pays $4,000 in legal fees. Under what conditions can Baron deduct the legal fees?
125. On November 1, 2015, Milton Consultants Inc., enters into a 2-year lease agreement for the use of a photocopier.
The lease agreement requires Milton Consultants to pay a fixed fee of $4,800 on November 1 and one cent for each copy
made on a monthly basis. Milton made the $4,800 payment on November 1, 2015. It paid $450 on December 10, 2015 for
copies made in November and $560 on January 12, 2016 for copies made in December. Milton Consultants Inc., uses the
cash basis of accounting. Explain, in terms of the income tax concepts, the amount of the deduction for the use of the
copier that Milton can take in 2015.
126. Kiki fell asleep one night while driving home from work and severely damaged her car. Repairs to the car cost
$4,600. Her insurance company reimbursed her for $4,100 of the repairs. Has Kiki realized a loss? Under what conditions
can she deduct the loss?
127. Sidney owns unimproved land in Chicago, Illinois. In 2006, Sidney leased the land for 10 years to the U-Store-It
Storage Company. The lease terms require annual lease payments of $12,000 that are paid at the beginning of each year.
U-Store-It immediately constructed a storage facility on the leased land. The storage facility building was worth $105,000
when it was constructed. In 2015, the lease expires and legal ownership of the building reverts to Sidney. The building is
worth $125,000 when the lease expires. Sidney has reported the lease income annually, but will not report any income
from the improvements the lessee made to the building. Explain in terms of the income tax concepts why Sidney has
reported his income in this manner.
Match each term with the correct statement below.
Chapter 2
a.
Allocates income, losses, and deductions to its owners for inclusion in their personal returns.
b.
Each tax unit must keep separate records and report the results of its operations separate and apart from other tax
units.
c.
Income from services must be taxed to the taxpayer rendering the service and income from property must be taxed
to the owner of the property.
d.
Any tax year that ends on the last day of a month other than December.
e.
All taxpayers must report the results of their operations on an annual basis.
f.
A tax year that ends on December 31.
g.
A tax entity that is liable for the payment of tax.
128. Annual Accounting Period Concept
129. Assignment of Income
130. Calendar year
131. Conduit entity
132. Entity Concept
133. Fiscal year
134. Taxable entity
Match each statement with the correct term below.
a.
Taxpayer reports income when received in cash or its equivalent and takes deductions as they are paid.
b.
A deduction taken in one year that is recovered in a later year is reported as income in the year of recovery to the
extent that the deduction reduced taxable income.
c.
Taxpayer reports income as earned and deductions as incurred.
d.
The result of an arms-length transaction.
e.
Exclusions and deductions result from specific acts of Congress that must be strictly applied and interpreted.
f.
The taxability of a transaction is determined by the reality of the transaction rather than some contrived
appearance.
g.
The reporting of an item of income or expense on a tax return
h.
No income is realized until the taxpayer’s invested capital is recovered.
i.
All income received is taxable unless some specific provision of the tax law allows exclusion of the item.
j.
These taxpayers are not deemed to transact at arms-length.
135. Accrual Method
136. All-Inclusive Income Concept
137. Capital Recovery Concept
138. Cash Method
139. Legislative Grace Concept
140. Realization
141. Recognition
142. Related party
143. Substance Over Form Doctrine
144. Tax Benefit Rule
Match each statement with the correct term below.
a.
Income is subject to tax when it is received without restrictions as to its use or disposition.
b.
Income is considered received when it is credited to the taxpayer’s account or made unconditionally available to the
taxpayer.
c.
A concept that is fundamental to the progressive tax rate structure.
d.
To be deductible, an expenditure must be made for a business or economic purpose that is greater than any tax
avoidance motive of the taxpayer.
e.
The amount of a deduction may not exceed its cost.
f.
Income should be recognized and a tax paid when the taxpayer has the resources to pay the tax.
g.
A type of deductible expenditure that embodies the profit motive requirement.
h.
Allows the omission of items from the tax base for which the costs of compliance exceeds the revenue generated.
i.
A category of expenses that is specifically disallowed.
145. Administrative Convenience
146. Claim of Right Doctrine
147. Constructive Receipt Doctrine
148. Ability-to-Pay Concept
149. Business Purpose Concept
150. Capital Recovery Concept
151. Wherewithal-to-Pay Concept
152. Investment Expense
153. Personal Expense