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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.
II.
If Jonathan owns 60% of Elizabeth's company, Jonathan does not recognize any income
from the sale.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
87. Dahlia rents a condo owned by Bonnie. Both individuals are cash basis taxpayers. Dahlia uses the condo as her
personal residence. Dahlia pays Bonnie $1,000 monthly, and pays $1,200 on October 1st and April 1st of each year as part
of the lease agreement. The $1,200 payments are made directly to the county treasurer for real estate property taxes. What
is the income tax treatment of these events?
I.
Bonnie can deduct the $1,200 payments for adjusted gross income as a property tax.
II.
Bonnie includes the $1,000 monthly receipts in her gross income.
III.
Bonnie must include the $1,200 payments in her gross income.
IV.
Dahlia can deduct the $1,000 monthly payments from her adjusted gross income.
a.
Only statement II is correct.
b.
Only statements I, II, and IV are correct.
c.
Only statement III is correct.
d.
Only statements I , II, and III are correct.
e.
Only statements II, III, and IV are correct.
88. Which of the following items is not a capital asset in the hands of the taxpayer?
a.
Taxpayer has a set of wrenches he uses to work on his personal auto.
b.
Taxpayer has a $6,000 wedding dress she keeps as a remembrance of her wedding.
c.
Taxpayer owns city of Topeka bonds.
d.
Taxpayer is an amateur golfer but has a set of championship golf clubs
e.
All of the above items are capital assets.
89. Which of the following items is a capital asset in the hands of the taxpayer?
a.
Taxpayer owns a 10-year old Harley-Davidson motorcycle.
b.
Taxpayer owns a used car lot. He owns a 1962 Cadillac that is for sale on the lot.
c.
Taxpayer owns a notebook computer that he carries to his clients for work purposes.
d.
Taxpayer, a farmer, has a prize winning steer in his herd.
e.
None of the above items are capital assets.
90. Benjamin has the following capital gains and losses for the current year:
Long-term capital loss
$(13,000)
Long-term capital gain
6,000
Short-term capital loss
(10,000)
Chapter 3
Short-term capital gain
12,000
What is Benjamin's net capital gain or loss for the year?
a.
Net long-term capital loss of $7,000.
b.
Net short-term capital gain of $2,000.
c.
Net long-term capital loss of $5,000.
d.
Net short-term capital gain of $1,000.
e.
Net long-term capital loss of $3,000.
91. Helena and Irwin are married taxpayers who file jointly. Their taxable income before considering capital gains and
losses is $120,000. They have long-term capital gains of $8,000, short-term capital losses of $4,000, and short-term
capital gains of $5,000. What are the tax effects of these events?
I.
The short-term capital losses can offset only $3,000 of the short-term capital gains.
II.
The net capital gains will add $1,450 to the couple's tax liability.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
92. Nora receives a salary of $55,000 during the current year. She sells some land that she held as an investment at a loss
of $15,000 and some stock at a gain of $10,000. Nora's adjusted gross income is:
a.
$50,000
b.
$52,000
c.
$55,000
d.
$62,000
e.
$65,000
93. Given below are Mario's capital gains and losses for two consecutive years. What is the effect of the capital gains and
losses on Mario's taxable income for each year?
First
Second
Year
Year
Short-term capital gain
$12,000
$ -0-
Long-term capital gain
11,000
16,000
Short-term capital loss
(9,000)
(2,000)
Long-term capital loss
(23,000)
(5,000)
First Second
Year Year
a.
$(9,000) $ 9,000
b.
$ 3,000 $ 1,000
c.
$(3,000) $ 3,000
d.
$(3,000) $(3,000)
e.
$(3,000) $ -0-
94. Given below are Belinda's capital gains and losses for two consecutive years. What is the effect of the gains and losses
Chapter 3
on Belinda's taxable income for each year?
First
Second
Year
Year
Short-term capital gain
$-0-
$4,000
Long-term capital gain
13,000
6,000
Short-term capital loss
(3,000)
(15,000)
Long-term capital loss
(12,000)
-0-
First Second
Year Year
a.
$10,000 $ 7,000
b.
$(2,000) $ (3,000)
c.
$(3,000) $ (3,000)
d.
$(2,000) $ (5,000)
e.
$1,000 $ 3,000
95. Boris, a single individual, has two sales of stock during the current year. The first sale produces a short-term loss of
$27,000 and the second sale results in a long-term gain of $57,000. Boris's taxable income without considering the gain is
$125,000. Boris's stock transactions will increase his taxable income by:
a.
$-0-
b.
$30,000
c.
$34,000
d.
$54,000
96. Chip, a single individual has two sales of stock during the current year. The first sale produces a short-term loss of
$10,000 and the second sale results in a long-term gain of $40,000. Chip's taxable income without considering the gain is
$150,000. Chip's stock transactions will increase his income tax liability by:
a.
$3,200
b.
$4,500
c.
$6,000
d.
$8,000
e.
$8,400
97. Ira sells two of his personal automobiles, a Dodge and an Edsel, during the current tax year. The Dodge cost Ira
$8,000, and the Edsel's cost was $3,000 when they were acquired five years ago. The Dodge is sold for $1,000 on April
20, and the Edsel is sold for $15,000 on July 15. What is the tax treatment of these sales?
I.
Both cars are capital assets.
II.
The net income tax effect of these sales is zero.
III.
Ira must recognize a long-term capital gain of $12,000.
IV.
Ira must recognize a net long-term capital gain of $5,000.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Only statements I and III are correct.
d.
Only statements I and IV are correct.
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e.
Only statements I, II, and IV correct.
98. Anna receives a salary of $42,000 during the current year. She sells some land that she held as an investment at a loss
of $7,000 and some stock at a gain of $11,000. Anna's adjusted gross income is:
a.
$42,000
b.
$46,000
c.
$50,000
d.
$53,000
99. Andrea has the following capital gains and losses during the current year:
Short-term capital loss
$(4,000)
Collectibles gain
6,000
Long-term capital gain
2,000
For tax calculation purposes, the net result of the above is:
a.
Long-term gain $8,000; short-term capital loss $4,000.
b.
Net long-term capital gain $4,000.
c.
Collectibles gains $2,000; long-term capital gain $2,000
d.
Collectibles gains $6,000; short-term capital loss $2,000.
100. Shasta has the following capital gains and losses and Qualified dividend income during the current year:
Short-term capital loss
$(4,000)
Collectibles gain
6,000
Long-term capital gain
2,000
Qualified dividend income
3,000
If Shasta's marginal tax rate is 33%, what is the effect of the above on her taxable income and income tax liability?
Income Tax Liability
a.
$7,000 increase $1,050 increase
b.
$7,000 increase $1,310 increase
c.
$8,000 increase $1,590 increase
d.
$7,000 increase $1,960 increase
e.
$9,000 increase $1,850 increase
101. Allen has the following capital gains and losses and Qualified dividend income during the current year:
Short-term capital gain
$4,000
Collectibles loss
(5,000)
Long-term capital gain
1,000
Qualified dividend income
3,000
Allen's capital gain/loss position for the year is:
a.
Long-term gain $1,000; short-term capital gain $2,000.
b.
Net short-term capital gain $1,000.
c.
Short-term capital gain $4,000; long-term capital loss $1,000
d.
Net short-term capital gain $3,000.
e.
Net capital gain $-0-
Chapter 3
102. Sanderson has the following capital gains and losses and Qualified dividend income during the current year:
Short-term capital gain
$6,000
Collectibles loss
(5,000)
Long-term capital gain
1,000
Qualified dividend income
3,000
If Sanderson's marginal tax rate is 33%, what is the effect of these transactions on his taxable income and income tax
liability?
Taxable Income Tax Liability
a.
$7,000 increase $1,770 increase
b.
$5,000 increase $ 633 increase
c.
$5,000 increase $1,650 increase
d.
$5,000 increase $ 750 increase
e.
$5,000 increase $1,110 increase
103. Andy has the following capital gains and losses during the current year:
Short-term capital gain
$4,000
Short-term capital loss
(9,000)
Collectibles loss
(2,000)
Long-term capital gain
1,000
Andy's capital gains and losses will
a.
Increase taxable income by $2,000.
b.
Decrease taxable income by $6,000.
c.
Decrease taxable income by $3,000.
d.
Decrease taxable income by $4,000.
104. Alan has the following capital gains and losses during the current year:
Short-term capital loss
$(4,000)
Collectibles gain
3,000
Long-term capital gain
8,000
Alan's capital gain/loss position for the year is:
a.
Long-term gain $8,000; short-term capital loss $1,000.
b.
Net long-term capital gain $7,000.
c.
Short-term capital loss $4,000; long-term capital gain $11,000
d.
Collectibles gain $3,000; long-term capital gain $4,000
105. Alan has the following capital gains and losses during the current year:
Short-term capital loss
$(4,000)
Collectibles gain
3,000
Long-term capital gain
8,000
If Alan's marginal tax rate is 33%, what is the effect of the capital gains and losses on his taxable income and income tax
liability?
Income Tax Liability
Chapter 3
a.
$7,000 increase $2,310 increase
b.
$8,000 increase $1,840 increase
c.
$7,000 increase $1,400 increase
d.
$8,000 increase $1,200 increase
e.
$7,000 increase $1,050 increase
106. Ellie has the following capital gains and losses and qualified dividend income during the current year:
Short-term capital loss
$(10,000)
Collectibles loss
(4,000)
Long-term capital gain
5,000
Qualified dividend income
10,000
The tax effect of the above is:
a.
Long-term gain $3,000; short-term capital loss $10,000,
b.
Long-term capital gain $7,000; short-term capital loss $14,000.
c.
Collectibles loss $1,000; net short-term capital loss $5,000; qualified dividend income $10,000.
d.
Net short-term capital loss $9,000; qualified dividend income $10,000.
e.
Net capital loss $3,000, qualified dividend income $10,000.
107. Angelica has the following capital gains and losses during the current year:
Short-term capital loss
$(10,000)
Collectibles loss
(4,000)
Long-term capital gain
5,000
Qualified dividend income
10,000
If Angelica's marginal tax rate is 33%, what is the effect of the above transactions on her taxable income and income tax
liability?
Income Tax Liability
a.
$1,000 increase $ 510 increase
b.
$7,000 increase $ 510 increase
c.
$1,000 increase $1,050 increase
d.
$7,000 increase $1,050 increase
e.
$1,000 increase $ 150 increase
108. Dunbar, a single taxpayer, purchased 300 shares of Sweetwater, Inc., stock on October 14, 2013, for $3,000. He sells
the stock on August 22, 2015, for $4,000. Dunbar has no other capital asset transactions in 2015.
I.
If Dunbar's taxable income without considering the stock sale is $93,000, the sale of the stock
will increase his income tax liability by $250.
II.
If Dunbar's taxable income without considering the stock sale is $13,000, the sale of the stock
will not increase his income tax liability.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
Chapter 3
109. Ronald, a single taxpayer, purchased 300 shares of Jasmine Inc., stock on October 14, 2013, for $4,000. He sells the
stock on August 22, 2015, for $2,000. Ronald has no other capital asset transactions in 2015.
I.
If Ronald's taxable income without considering the stock sale is $93,000, the sale of the stock
will decrease his income tax liability by $560.
II.
If Ronald's taxable income without considering the stock sale is $13,000, the sale of the stock
will decrease his income tax liability by $300.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
110. Which of the following tax rates applies to an individual taxpayer in the 33% marginal tax rate bracket?
Type of gain/loss Tax Rate
a.
Collectibles loss 28%
b.
Short-term gain 28%
c.
Long-term gain 15%
d.
Long-term loss 15%
e.
Collectibles gain 33%
111. Donna owns a cleaning service. Reed, a customer, receives Donna's bill for October 2015 services of $65 on October
31, 2015. Reed pays the $65 on January 4, 2016.
I.
If Donna is a cash-basis taxpayer, she recognizes the income in 2016.
II.
If Donna is an accrual-basis taxpayer, she will recognize the $65 in 2015.
III.
Donna will recognize the $65 in 2015 regardless of accounting method, because that is
when she earned the income.
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 and III are correct.
112. Willis is a cash basis taxpayer who is in the commercial lending business. Which of the following statements
regarding loans that he made in the current year is/are correct?
I.
A $10,000 one-year loan with interest at 12% made on April 1. The principal and interest
are due at maturity. Willis must recognize $900 of interest income this year.
II.
A $10,000 one-year loan discounted at 12% made on April 1. Willis gave the borrower
$8,800. The borrower will repay the $10,000 principal at maturity. Willis does not have to
recognize any interest income in the current year.
III.
A $50,000 two-year loan discounted at 10% made on July 1. Willis gave the borrower
$41,300 on July 1. The borrower will repay the $50,000 principal at maturity. Willis does
not have to recognize any interest income in the current year.
IV.
A $70,000 two-year loan with interest at 10% made on July 1. The interest payments on the
Chapter 3
loan are due annually on July 1 and the principal is due at maturity. Willis does not have to
recognize any interest income in the current year.
a.
Only statements I and III are correct.
b.
Only statements I and IV are correct.
c.
Only statements II, III, and IV are correct.
d.
Only statements II and III are correct.
e.
Only statements I and IV are correct.
113. Franco is owner and operator of a cleaning service who uses the accrual method of accounting. He receives the
following payments on December 31, 2015, the last business day of his tax year:
$5,000 -
Checks received from customers for services rendered during November and
December 2015. The checks are deposited in his bank account on January 4, 2016.
$4,000 -
Checks received from customers for services to be rendered during 2016. The
checks are received in the morning mail and deposited in his bank account on
December 31, 2015.
$2,400 -
A check received from a customer for a service contract. The services under the
contract are to be rendered in 2016. The customer met Franco at the New Year's
Eve party and gives Franco the check at 11:30 p.m. The check is deposited in his
bank account on January 4, 2016.
How much of the $11,400 collected by Franco on December 31 must be included in his 2015 gross income?
a.
$5,000
b.
$6,400
c.
$7,400
d.
$9,000
e.
$11,400
114. Brandon is the operator and owner of a cleaning service who uses the cash method of accounting. He receives the
following payments on December 31, 2015, the last business day of his tax year:
2015.
$2,400 -
A check received from a customer for a service contract. The services under the
contract are to be rendered over 24 months, beginning in January 2016. The customer
met Brandon at a New Year's Eve party and gives Brandon the check at 11:30 p.m.
The check is deposited in his bank account on January 4, 2016
How much of the $9,400 collected by Brandon on December 31 must be included in his 2015 gross income?
a.
$2,400
b.
$3,000
c.
$5,400
d.
$7,000
e.
$9,400
115. Which of the following payments received on December 31, 2015, would be recognized by a cash basis taxpayer in
2014, but would not be recognized in 2015 by an accrual basis taxpayer?
I.
Checks received from customers for services rendered during November and December
2015. The checks are deposited in the bank account on January 4, 2016.
II.
Checks received from customers for services to be rendered during 2016. The checks are
received in the morning mail and deposited in the bank account on December 31, 2015.
III.
A check received from a customer for a service contract. The services under the contract
are to be rendered over 24 months, beginning in January 2016. The check is deposited in
the bank account on January 4, 2015.
a.
Only statement I is correct.
b.
Only statements I and II are correct
c.
Only statement III is correct.
d.
Only statements II and III are correct.
e.
Only statement II is correct.
116. Chicago Cleaning Services provides nightly janitorial services at a monthly rate of $300. Customers have three
payment options:
Month-by-month payments
$300
One year advance payment
3,360 ($280 per month)
Two year advance payment
6,480 ($270 per month)
If Chicago Cleaning is an accrual basis taxpayer:
I.
All cash payments are taxable when they are received.
II.
One-year advance payments must be included in income in the year they are received.
III.
Two-year advance payments attributable to service in two years; hence, must be included in
income in the year they are received.
IV.
One-year advance payments may be deferred: $280 would be included in income for each
month of service provided.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Only statement III is correct.
d.
Only statements II and III are correct.
e.
Only statement IV is correct.
117. Chicago Cleaning Services provides nightly janitorial services at a monthly rate of $300. Customers have three
payment options:
Month-by-month payments
$300
One year advance payment
3,360 ($280 per month)
Two year advance payment
6,480 ($270 per month)
If Chicago Cleaning is a cash basis taxpayer:
I.
All cash payments are taxable when they are received.
II.
One-year advance payments may be deferred: $280 would be included in income for each
month of service provided.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
Chapter 3
d.
Neither statement is correct.
118. Under the deferral method of accounting for advance receipt of revenues, which of the following statements is/are
correct?
I.
Receipts of service revenue colleted in advance are included in gross income in the
current year to the extent they included in revenue for financial accounting purposes.
II.
Receipts of rents and interest collected in advance are included in gross income in the
current year to the extent they are included in revenue for financial accounting purposes.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
119. The cash method of accounting for income tax purposes
I.
is allowed for interest received from Series EE savings bonds.
II.
requires a taxpayer who receives services from another taxpayer in exchange for property
to include the value of the services in income.
III.
is allowed for taxpayers who receive interest income from the issuance of original issue
discount securities with a term of more than one year.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Only statement III is correct.
d.
Only statements I and II are correct.
e.
Statements I, II, and III are correct.
120. The accrual method
I.
is permitted for the advance receipt of rent income.
II.
is never permitted under the deferral method.
III.
is permitted for the advance receipt of payments for goods to be delivered within the next
tax year if the payment is less than the cost of goods sold and the payment is deferred for
financial accounting purposes.
IV.
is permitted for the advance receipt of interest income.
a.
Only statement I is correct.
b.
Only statement III is correct.
c.
Only statements I and II are correct.
d.
Only statements II and III are correct.
e.
Only statements II, III, and IV are correct.
121. Dan is the owner of VHS Video's Inc. VHS rents videos for overnight use and also sells videos from stock. In
accounting for VHS transactions, Dan
I.
May use either the cash or the accrual method.
II.
Must use the cash method to account for video rentals.
Chapter 3
III.
Must use the accrual method for video sales and purchases.
IV.
May elect to use the accrual method for all sales and rental revenues and the cash method
for purchases of videos and all other business expenses.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Only statement III is correct.
d.
Only statements II and III are correct.
e.
Only statement IV is correct.
122. An installment sale
I.
occurs whenever property is sold and at least one payment is received in a tax year
subsequent to the year of sale.
II.
may be disregarded by a taxpayer who elects to recognize the entire gain in the year of sale.
III.
triggers a method of income recognition based upon the wherewithal-to-pay concept.
IV.
allows businesses that sell inventory on credit to defer recognition of income until payment
is received.
a.
Only statement I is correct.
b.
Only statements I, and II are correct.
c.
Only statements I, II, and III are correct.
d.
Only statements I and IV are correct.
e.
Only statements II, III, and IV are correct.
123. The income tax concept that is primarily responsible for the treatment of installment sales of property is the:
a.
Administrative Convenience Concept.
b.
Arm's-Length Transaction Concept.
c.
Entity Concept.
d.
Realization Concept.
e.
Wherewithal-to-Pay Concept.
124. Pedro sells land that he held as an investment with a basis of $40,000 for $50,000. The terms of the sale require the
buyer to pay Pedro $10,000 at the closing of the sale and $20,000 per year for the next 2 years with interest at 7% on the
unpaid balance. What is the proper amount of gain to be reported from the sale during each year Pedro receives payments?
Current First Second
Year Year Year
a.
$2,000 $4,000 $4,000
b.
$10,000 $-0- $ -0-
c.
$ -0- $4,000 $6,000
d.
$ 3,333 $3,333 $3,334
e.
$-0- $ -0- $10,000
125. Southview Construction Company enters into a contract to build a 30 mile cross country ski trail for $36,000 in the
Chapter 3
current year. Southview estimates the cost of building the trail to be $12,000. During the first year, Southview completes
10 miles of trail at a cost of $5,000. Southview receives $13,000 in advanced payments on the contract price in the first
year. How much gross income must Southview recognize from the construction project in the first year?
a.
$- 0 -
b.
$5,000
c.
$12,000
d.
$13,000
e.
$15,000
126. Boomtown Construction, Inc. enters into a contract to build a new football stadium for the Maine Lobster's football
team. The contract price is $6,000,000 and Boomtown estimates the total cost of the contract to be $5,000,000. During the
first year of work on the contract, Boomtown completes 40% of the work on the stadium at a cost of $2,000,000.
Boomtown receives $1,000,000 when it signed the contract and an additional $1,800,000 payment in the first year based
on the degree of completion. Which of the following statements concerning the income to be recognized from the contract
is/are correct?
I.
Boomtown must include the $2,800,000 payment it received in gross income.
II.
Because the work is not yet completed, Boomtown has the option of not recognizing any
income from the contract.
III.
Boomtown includes the $1,800,000 payment in gross income based on the degree of
completion because it does not have a claim of right to the $1,000,000.
IV.
Boomtown must include $2,400,000 in gross income.
a.
Only statement I is correct.
b.
Only statements I and IV are correct.
c.
Only statement III is correct.
d.
Only statement IV is correct.
e.
Only statements II and III are correct.
127. Determine the amount of income that must be recognized by the taxpayer(s) in the current year for each of the
following situations. Explain how you determined the amount that was taxable.
a.
Tien sells a parcel of land she held as an investment for $50,000. Tien purchased the land four
years ago for $28,000. She spent $2,000 grading the land and $6,000 putting in utility lines.
Tien receives $16,000 upon closing the sale. The remaining $40,000 is to be received in four
annual payments of $10,000 over the next four years, with interest at 8% on the outstanding
balance.
b.
Randy receives a $10,000, 6%, bond from his grandfather, Kenneth, for his birthday on
September 30. Annual interest is paid on December 31. Randy receives the $600 payment on
December 31.
c.
David is an employee of Fern Leaf Company. David is robbed and knocked unconscious while
coming out of a basketball game on December 29. His $550 paycheck is available to be picked
up at Fern Leaf on December 30, but David does not regain consciousness until January 3. He
picks up the check and deposits it on January 8.
d.
Angie was shopping at a "flea market" when she saw a painting with a frame that appeared to
be quite old. Although the painting was uninteresting, she paid the $35 asking price just to get
the frame. When she returned home, she took the old painting out of the frame, intending to
