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 business purpose.
a.
True
b.
False
True
2. The Big Easy Company leases a luxury box and purchases 20 tickets to the New Orleans Saints home games. The entire
amount is deductible as an entertainment expense as long as all the requirements are met.
a.
True
b.
False
False
3. A taxpayer may use either the actual cost method or the standard mileage rate for deducting auto expenses.
a.
True
b.
False
True
4. The actual cost method is a more-flexible way to compute the auto expense deduction and often results in a larger tax
savings.
a.
True
b.
False
True
5. To be away overnight requires the taxpayer to be away from their tax home for more than 24 hours.
a.
True
b.
False
False
6. A taxpayer can deduct multiple gifts to a single customer as long as the total value of all gifts to that customer does not
exceed $25.
a.
True
b.
False
True
7. To be deductible, employee compensation must be for services actually performed by the employee and the amount
must be reasonable.
a.
True
b.
False
True
8. Business and nonbusiness bad debts are both deductible as a short-term capital loss.
a.
True
b.
False
False
9. Discovery, Inc., a cash-basis consulting firm, can deduct a twelve-month insurance premium in the year the premium is
paid even though the policy remains in effect into the following year.
Chapter 6
a.
True
b.
False
True
10. Legal expenses are generally deductible if they have a business purpose; they are generally not deductible if they
originate from a personal transaction.
a.
True
b.
False
True
11. If an employer reimbursement plan is an accountable plan, for an expense that is fully reimbursed the employee does
not have to report either the expense or the reimbursement .
a.
True
b.
False
True
12. 50% of the self-employment tax is deductible as a miscellaneous itemized deduction from adjusted gross income.
a.
True
b.
False
False
13. In 2015, a husband and wife who are less than 50 and qualify may contribute $12,000 to two separate IRA accounts as
long as their total income exceeds $12,000. The total amount contributed to each account cannot exceed $6,000.
a.
True
b.
False
False
14. Danielle graduated from State University in 2014. She paid $2,100 of interest during 2015 on her qualified educational
loan. The full amount is deductible.
a.
True
b.
False
True
15. For moving expenses to be deductible the distance test must be met, which requires that the commuting distance from
the old residence to the new job must be 50 miles further than the commuting distance was to the old job.
a.
True
b.
False
True
16. Donald had a party to publicize the opening of his new accounting office. He invited community and business leaders
to his office where food and beverage of $4,000 was served along with $1,000 of entertainment. How much of the total
cost can Donald deduct?
a.
b.
c.
d.
e.
Chapter 6
17. Larry is a self-employed insurance salesperson. He decides to take his best customer to a Pacers basketball game.
Larry is able to buy two floor seat tickets for $500 each. The face amount of the tickets is $200 each. How much of the
total cost can Larry deduct?
a.
b.
c.
d.
e.
18. The Wondercress Advertising agency rents a skybox at the Metrodome where the Minnesota Vikings plays its home
games. The cost of the skybox for the season is $60,000 and includes ten tickets to each game. The team plays 8 games a
year at the arena. The most expensive non-luxury box seat is $125. After acquiring a new advertising client, the president
of the agency invites 9 business associates to watch a game in the company skybox. Food and drinks cost $900. What
amount can Wondercress deduct as meal and entertainment expense?
a.
b.
c.
d.
e.
19. The Crown Howe Accounting firm rents a skybox at Lucas Oil Field where the Indianapolis Colts play their home
games. The cost of the skybox for the season is $80,000 and includes 8 tickets to each game. The team plays 10 games a
year at the arena. The most expensive non-luxury box seat is $200. After acquiring a new accounting client, the Managing
partner invites 5 business associates to watch a game in the firm skybox. Food and drinks cost $800. What amount can
Crown Howe deduct as meal and entertainment expense?
a.
b.
c.
d.
e.
20. After negotiating a new supply contract with Jim, Beth takes him to dinner at the Magnolia Cafe. The dinner costs
$94. The amount includes tip ($15) and sales tax ($5). Cab fare to and from the restaurant is $20. How much can Beth
deduct for the evening’s expenditures?
a.
$ 47
b.
$ 52
c.
$ 67
d.
$ 94
e.
$114
c
21. Olga is a technical sales consultant for Interactive Systems Corporation (ISC) based in San Diego. While on business
Chapter 6
in Boise, she entertains several clients at a cost of $600. When she returns to San Diego, Olga gives ISC receipts and other
information to account for the entertainment expense. ISC reimburses Olga $600. How much can Olga and ISC deduct?
Olga ISC
a.
$- 0 – $- 0 –
b.
$- 0 – $300
c.
$- 0 – $600
d.
$300 $- 0 –
e.
$600 $300
22. Sandra, who owns a small accounting firm, pays $1,500 to the local country club for food and entertainment for her
annual employee Christmas party. How much of the $1,500 in meals and entertainment cost can Sandra deduct?
a.
b.
c.
d.
e.
e
23. Rodrigo works as a salesperson for a auto parts manufacturer. His job requires that he spend most of his time outside
the office calling on customers. In addition, to supplement his income he works 1 night a week and on weekends as a
waiter at an exclusive seafood restaurant in the city. During the year, he keeps the following record of his travel:
Miles
Home to office
850
Office to home
425
Office to restaurant
300
Restaurant to home
1,200
Home to restaurant
725
Office to customers to office
7,100
Customers to restaurant
400
Total miles
11,000
If he uses the standard mileage rate, what amount can she deduct as a business automobile expense?
a.
b.
c.
d.
e.
24. Donna is an audit supervisor with the IRS and on January 4, 2015 she uses her car in the following manner.
Personal residence to her office at the IRS.
8 miles
IRS office to X Corp to supervise new audit activities.
10 miles
X Corp to Y Corp to supervise ongoing audit activities
6 miles
From Y Corp. to personal residence
7 miles
What amount of Donna’s mileage for this day is qualified business mileage?
a.
10 miles.
Chapter 6
b.
16 miles.
c.
17 miles.
d.
23 miles.
e.
31 miles.
25. Walker, an employee of Lakeview Corporation, drives his automobile 18,000 business miles during 2015. He pays
tolls of $145 while traveling on business. What amount can Walker deduct as unreimbursed transportation expenses
before considering any limitations on itemized deductions?
a.
$10,350 for AGI.
b.
$10,495 for AGI.
c.
$10,350 from AGI.
d.
$10,495 from AGI.
26. Penny owns her own business and drives her car 12,000 miles a year for business and 3,000 miles a year for
commuting and personal use. She wants to claim the largest tax deduction possible for business use of her car. Her total
expenses related to her auto for 2015 are as follows:
Gas, oil, and maintenance
$4,050
Insurance
720
Interest on car loan
500
Depreciation
2,960
License
80
Parking fees and tolls (100% business)
130
Penny’s total deduction for business use of the auto in 2015 is:
a.
b.
c.
d.
e.
27. Mercedes is an employee of MWH company and drives her car 12,000 miles a year for business and 3,000 miles a
year for commuting and personal use. She is not reimbursed by her employer. She wants to claim the largest tax deduction
possible for business use of her car, before any limitations on itemized deductions. Her total auto expenses for 2015 are as
follows:
Gas, oil, and maintenance
$4,600
Insurance
720
Interest on car loan
500
Depreciation
2,960
License
80
Parking fees and tolls (100% business)
130
Mercedes’s total 2015 deduction for automobile use is:
a.
b.
c.
d.
Chapter 6
e.
e
28. Alfred uses his personal automobile in his business of selling party supplies to local businesses. He bought a new car
in 2015 and drove it a total of 20,000 miles of which 2,000 miles were for commuting and other personal uses. Actual gas,
oil, repairs, licensing, insurance, and depreciation totaled $11,000 for 2015. Actual parking expenses for business were
$200. What is the maximum amount Alfred can deduct for 2015?
a.
$9,750
b.
$10,100
c.
$10,170
d.
$10,550
e.
$11,200
29. Lester uses his personal automobile in his business of selling insurances. He bought a new car in 2015 and drove it a
total of 30,000 miles of which 3,000 miles were for commuting and other personal uses. Actual gas, oil, repairs, licensing,
insurance, and depreciation totaled $16.500 for 2015. Actual parking expenses for business were $200. What is the
maximum amount Lester can deduct for 2015?
a.
$13,050
b.
$13,970
c.
$14,850
d.
$15,050
e.
$15,725
e
30. 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 miles
Marsha’s 2015 records show that her car expenses totaled $14,320. The details of the expenses are as follows:
Gas, oil, and repairs
9,260
Insurance and licensing
1,500
Depreciation
2,960
Interest on car loan
400
Tolls and parking at clients’ offices
200
What is the amount of her deduction for her use of the car?
a.
$9,000
b.
$9,990
c.
$10,490
d.
$10,670
e.
$10,790
e
31. In 2015, Eileen, a self-employed nurse, drives her car 20,000 miles, of which 12,000 miles pertain to business.
Expenses concerning the car include the following:
Chapter 6
Gas and oil
$5,720
Auto license tag
90
Insurance
900
Repairs
700
Tires
400
Parking during business use
300
Tolls during business use
150
Depreciation
2,960
Assuming Eileen purchases the car in 2015 and she wants to use the most advantageous method to determine her 2015
deduction for automobile expense, what amount can Eileen deduct as auto expenses?
a.
$5,964
b.
$6,780
c.
$6,912
d.
$7,350
e.
$11,220
32. Which of the following business expenses is/are subject to a 50% deduction limit for 2015?
I.
Meals while traveling
II.
Lodging while traveling
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
33. Which of the following business expenses is/are subject to a 50% deduction limit for 2015?
I.
Gifts
II.
Incidental expenses while traveling
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
34. Arlene, a criminal defense attorney inherits $500,000 from her grandmother. Unsure of how to invest the money,
Arlene attends a three-day investment seminar in New York. Arlene attends all the sessions and receives a certificate for
successfully completing the seminar. Her expenses to attend the seminar are as follows:
Airfare
$450
Hotel daily rate
110
Meals @ $40 per day
40
Incidentals @ $15 per day
15
Entertainment
140
What amount may she deduct as travel expenses for the seminar?
a.
$- 0 –
b.
$780
Chapter 6
c.
$825
d.
$885
e.
$955
a
35. Julie travels to Mobile to meet with a client. While in Mobile, she spends 4 days meeting with the client and one-day
sightseeing. Her husband Harry goes with her and spends all 5 days sightseeing and playing golf. The cost of the trip is as
follows:
Airfare
$540 for each person.
Lodging at hotel
$150/day (Single Occupancy Rate = $125).
Meals
$75/day for each person.
Incidental expenses
$20/day for Julie. $15/day for Harry.
If Julie is self-employed, what is the amount of the deduction she may claim for the trip?
a.
b.
c.
d.
e.
36. Carlotta pays $190 to fly from Santa Fe to Denver. She spends three days finalizing a contract with the management of
El Rancho Restaurant for the delivery of green chili in the upcoming year. Because she finalized the contract, Carlotta
spends two-days attending the National Western Stock Show. Hotel costs are $108 per night and meals are $22 per day.
How much can Carlotta deduct as business expenses from her trip?
a.
$190
b.
$514
c.
$547
d.
$580
e.
$763
c
37. Jason travels to Miami to meet with a client. While in Miami, he spends 2 days meeting with his client and 3 days
sightseeing. Mary, his wife, goes with him and spends all 5 days sightseeing and shopping. The cost of the trip is as
follows:
Airfare
$540 for each person.
Lodging at hotel
$150 per day (same rate for single and double rooms).
Meals
$75 per day for each person.
Incidental expenses
$20 per day for Jason. Mary kept no records.
If Jason is self-employed, what is the amount of the deduction he may claim for the trip?
a.
b.
c.
d.
e.
38. Ernest went to Boston to negotiate several new contracts with clients. His airfare was $400 and he spent $150 per day
on lodging, $40 per day on meals, and a total of $60 on cab fare.
I.
If Ernest spends 2 days on business and 3 days on personal activities, he can deduct $160 of
his airfare.
II.
If Ernest spends 3 days on business and 2 days on personal activities, he can deduct $120 of
the meal costs.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
39. Caroline is a doctor in Little Rock. She travels to Atlanta to attend a two-day seminar for health professionals about
investing in real estate. Transportation expenses are $400, the hotel cost $104/day, and meals cost $50/day. How much
can Caroline deduct for travel to the seminar?
a.
$- 0 –
b.
$258
c.
$308
d.
$658
e.
$708
40. Carter is a podiatrist in Minneapolis. He travels to Milwaukee to attend a two-day seminar for health professionals
about investing in commodities. Transportation expenses are $140, the hotel cost $125/day, and meals cost $60/day. How
much can Carter deduct for travel to the seminar?
a.
$- 0 –
b.
$140
c.
$390
d.
$450
e.
$510
41. Francine operates an advertising agency. To show her appreciation to her 10 best customers, she sends a box of fancy
chocolate, costing $75 a box, to each of them. How much of the cost of the chocolates can Francine deduct as a business
gift?
a.
$- 0 –
b.
$125
c.
$250
d.
$375
e.
$750
42. Kadian purchases a block of 10 tickets to next Saturday’s basketball game. The tickets cost $45 each. He keeps two
tickets for himself and gives the remaining tickets to his business customers. Each customer receives two tickets, and
Kadian told all of them he would see them Saturday night. How much can Kadian deduct?
a.
$- 0 –
Chapter 6
b.
$180
c.
$200
d.
$360
e.
$450
c
43. Which of the following information is not required for substantiation of business entertainment expenditures?
a.
Time and place of event.
b.
Specific business purpose of the event.
c.
Receipt to provide evidence of amount of expenditure.
d.
Identity of, and business relationship to, those persons attending the event.
e.
All of the above information is required to substantiate business entertainment.
e
44. Entertainment, auto, travel, and gift expenses are subject to strict documentation requirements. Taxpayers are required
to keep records that show
I.
The business purpose of the event.
II.
The time and place of the event.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
45. George is a full-time student at Indiana State University majoring in accounting. He works 12 to 20 hours per week at
a local CPA firm inputting data for spreadsheets to prepare monthly financial statements for the firm’s clients. George’s
tuition, fees, books, and supplies related to his education are $3,000 for the current year.
I.
The educational costs are deductible from AGI because they prepare him for a new trade or
business.
II.
The education costs are deductible because it is part of a program that will qualify George
to become a CPA.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
46. Safina, a single taxpayer with adjusted gross income of $100,000, works as an engineer for the Wabash Corporation.
The corporation reimburses all its employees 80% of tuition, fees and books for courses taken at the local university.
Safina incurs $8,000 of expenses and can deduct the remaining 20% of the education expense
I.
Only if the course improves her skills as an engineer.
II.
Is not a deduction for adjusted gross income.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
Chapter 6
d.
Neither statement is correct.
c
47. Matthew, a single taxpayer with adjusted gross income of $90,000, works as a computer programmer for the Novak
Corporation. The corporation reimburses all its employees 50% of tuition, fees and books for courses taken at the local
university. Matthew incurs $6,000, is reimbursed $3,000, and can deduct the remaining $3,000 of the education expense
I
As a deduction for adjusted gross income.
II.
Only if the course is required by state law to continue in his current job.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
48. Nora is the CEO of the publicly traded Micro Tech Corporation. The company paid her a salary of $1,030,000 and
made mortgage payments of $30,000 on her behalf. How much is deductible as compensation expense?
a.
$- 0 –
b.
$ 510,000
c.
$1,000,000
d.
$1,060,000
e.
$1,030,000
c
49. Which of the following taxpayers can claim a business bad debt deduction for the current year?
I.
Johnson is a dentist using the cash basis of accounting. He has accounts receivable from
patients totaling $7,800 that are more than 90 days past due.
II.
George owns and operates a sporting goods store and uses the accrual method of
accounting. He has several customers who have owed him money for more than 10 months.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
50. Which of the following taxpayers can claim a business bad debt deduction for the current year?
I.
Sylvia lent her neighbor $4,000 to put a new roof on his home. Because they have been
friends for over 15 years, Sylvia trusted her neighbor to pay her back and didn’t make him
sign a note with interest. The neighbor has left town and Sylvia will not get any of her
money back. Her loss is properly related to this year using the cash basis of accounting.
II.
Saul is an attorney using the cash basis of accounting. One of his clients is short of money to
pay the utilities in the office building Saul rents from him. Saul advances the client $5,000.
Saul has just learned that the client has filed bankruptcy and that Saul will not be repaid for
any part of the loan.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
Chapter 6
d.
Neither statement is correct.
51. 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
bankruptcy and that non-secured creditors will receive only $0.60 on the dollar. Peter actually receives nothing until
February 24, 2015. On that date, Peter receives a check for $1,000 from Jessie’s bankruptcy proceedings in final
settlement of the loan. How should Peter account for the loan to Jessie?
a.
$1,600 short-term capital loss in 2014; and $1,400 short-term capital loss in 2015.
b.
$3,000 ordinary loss in 2014.
c.
$2,400 ordinary loss in 2014.
d.
$1,600 ordinary loss in 2014; and $1,400 ordinary loss in 2015.
e.
$3,000 short-term capital loss in 2015.
52. Garcia is a self-employed chiropractor and a cash basis taxpayer. During the most recent tax year, he provides patient
services totaling $400,000. Of that total amount, he estimates $20,000 will never be collected. How much can Garcia
deduct as a bad debt expense in the current tax year?
a.
$- 0 –
b.
$6,000
c.
$10,000
d.
$14,000
e.
$20,000
a
53. In July of this year, Sam performs financial consulting services for William. On August 1, Sam sends William a bill
for $1,200. As of September 30, Sam had not heard from William. After repeated efforts to collect the fee, Sam discovers
in November that William has left the state and cannot be found. If Sam is an accrual basis taxpayer, for the current year
he can deduct
a.
$- 0 –
b.
A $800 ordinary loss
c.
A $1,200 ordinary loss
d.
A $1,200 short-term capital loss
e.
A $1,200 long-term capital loss
c
54. During 2014, Wendy, a biologist, made a bona fide $10,000 loan to her friend Ben when he was in a time of need. Ben
dies in 2015. Wendy has been informed by Ben’s estate that creditors can expect to receive 40% of amounts owed to them.
No payments to creditors are made from Ben’s estate in 2015. Wendy’s maximum deduction in 2015 is
a.
b.
c.
d.
a
55. Which of the following best describes the tax treatment of losses from uncollectible business debts?
a.
Such losses are not deductible.
Chapter 6
b.
Such losses are limited to $3,000 per year.
c.
Such losses are treated as short-term capital losses.
d.
Such losses are deductible without limitation as an ordinary loss.
56. Byron loaned $5,000 to his friend Alan in 2011. They drew up a formal loan agreement that called for a reasonable
rate of interest. Alan used the loan proceeds to pay expenses during his last year in college. Byron was recently informed
that his friend Alan was struck by lightning and died. Byron will never be able to collect the proceeds of this loan because
Alan died with no assets. What tax benefit, if any, will Byron will be able to claim in 2015, the year that the loan became
worthless.
a.
$5,000 tax credit.
b.
$5,000 ordinary loss.
c.
$5,000 short-term capital loss.
d.
This is a personal non-deductible loss.
c
57. During 2014, Virginia, an architect, made a bona fide $7,500 loan to her friend Joe when he was in a time of need. Joe
died in 2015. Virginia has been informed by Joe’s estate that he was insolvent. Virginia should record the nonpayment of
the loan as
a.
An ordinary loss.
b.
An itemized deduction.
c.
A short-term capital loss.
d.
A long-term capital loss.
e.
Nothing. It cannot be deducted.
58. During 2014, Wan-Ying, a lawyer, made a bona fide $5,750 loan to her friend Bill when he was in a time of need. Bill
died in 2015. Wan-Ying has been informed by Bill’s estate that he was insolvent. What is her deduction ton her 2015 tax
return (she has no other capital transactions)?
a.
b.
c.
d.
e.
c
59. Three years ago Edna loaned Carol $80,000 to help her get started in the TV repair business. Carol gave Edna a 5-
year, 9% note with semiannual repayment terms. Edna and Carol have been friends for over 35 years. Edna is a recently
retired college professor with a significant portfolio of investments. During the current year, Carol became ill and couldn’t
continue operating the business. She has repaid $10,000 of the debt owed Edna. Because Carol has no remaining assets,
no additional payments will be made to any of her creditors. For the current year, Edna realizes a
a.
$- 0 –
b.
$70,000 ordinary loss
c.
$70,000 long-term capital loss
d.
$70,000 short-term capital loss
e.
$80,000 ordinary loss
60. Marsh Harbor Company manufactures fishing gear. Its taxable income in 2015 before the Qualifying Production
Activities Deduction (QPAD) is $4,000,000 and its qualified production activities income is $3,500,000. Its qualifying W-
2 wages paid are $300,000. How much may Marsh Harbour claim as its QPAD deduction in 2015?
a.
$150,000
b.
$175,000
c.
$210,000
d.
$300,000
e.
$315,000
a
61. 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 it QPAD deduction in 2015?
a.
$100,000
b.
$180,000
c.
$200,000
d.
$225,000
e.
$280,000
62. Which of the following is true regarding the Qualified Production Activities Deduction (QPAD)?
I.
The QPAD deduction is limited to 9% of the lessor of taxable income before the QPAD
deduction or qualified production activities income
II.
The QPAD deduction cannot exceed 50% of W-2 wages allocated to QPAD activities.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
63. Raisor Corporation pays an annual premium of $12,000 on the whole life insurance policy on the life of Wilson, the
founder and CEO of the corporation. The corporation is the beneficiary of the multi-million dollar policy.
I.
The corporation can deduct the premiums.
II.
If Wilson dies, the corporation will receive the policy proceeds tax-free.
III.
If Wilson’s wife is the beneficiary instead of the corporation, the amount of the premiums
paid is a tax-free fringe benefit for Wilson.
IV.
If Wilson’s wife is the beneficiary instead of the corporation, the corporation can deduct the
amount of premiums paid as compensation.
a.
Statements I, II, and III are correct.
b.
Statements I and II are correct.
c.
Only statement II is correct.
d.
Statements II and IV are correct.
e.
Statements I, II, and IV are correct.
64. During the current year, Hope Corporation paid a $3,250 premium for a life insurance policy on the life of the chief
executive officer, Joel. Determine the deductibility of the $3,250.
I.
Hope could deduct the premium as compensation if Joel’s daughter is the stated beneficiary
of the policy.
II.
The premium is not deductible if Hope Corporation is the beneficiary.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
65. Which of the following taxes paid by the Sill Engineering Company can be deducted during 2015?
I.
Federal taxes withheld from employees.
II.
Sill Engineering’s share of employee’s Social Security taxes.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
66. Which of the following taxes paid by the Fowlers Company can be deducted during 2015?
I.
State sales tax on utilities.
II.
Federal income tax paid in 2015 when filing Fowlers’ 2014 corporate tax return.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
67. Which of the following taxes paid by Woodhaven Inc. can be deducted during 2015?
I.
Special real estate tax assessment for upgrading the sewer.
II.
State income taxes paid in 2015 when filing Woodhaven’s 2014 corporate return tax
return.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
68. Which of the following taxes paid by Trevor Products, Inc. can be deducted during 2015?
I.
Real estate taxes.
II.
Sales tax on purchase of new equipment.
a.
Only statement I is correct.
b.
Only statement II is correct.
Chapter 6
c.
Both statements are correct.
d.
Neither statement is correct.
a
69. Drew incurs the following expenses in his grocery store business. Drew can deduct the following as business expenses
in the current year
I.
$3,750 for advertising on the web.
II.
$2,000 of interest expense related to the purchase of a new delivery truck.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
70. Winslow owns a residential rental property with an adjusted basis of $200,000 at the beginning of the current year.
The county treasurer sends Winslow a tax bill payable by December 31. The bill is for real estate property taxes of $1,200
for the current calendar year and for a $6,000 special assessment for a new sewer line. On November 1, Winslow sells the
property to Edwin for $225,000. As part of the sale contract, Winslow will pay the special assessment at closing and
Edwin agrees to pay the realty taxes on the due date. What is Winslow’s gain on the sale?
a.
$19,000
b.
$20,000
c.
$21,000
d.
$25,000
e.
$26,000
71. Sidney owns a residential rental property with an adjusted basis of $200,000 at the beginning of the current year. The
county treasurer sends Sidney a tax bill payable by December 31. The bill is for real estate property taxes of $1,200 for
the current calendar year and for a $6,000 special assessment for a new sewer line. On November 1, Sidney sells the
property to Donald for $225,000. As part of the sale contract, Sidney will pay the real estate taxes of $1,200 at closing and
Donald agrees to pay the special assessment of $6,000 on the due date. What is Sidney’s gain on the sale?
a.
$19,800
b.
$20,000
c.
$21,000
d.
$24,800
e.
$29,800
e
72. On May 1, 2015, Linda sells her rental property for $125,000. Her basis in the property at the beginning of the year is
$75,000. As part of the sales contract, the buyer agrees to pay the real property taxes of $1,500 for the current year when
they come due on December 31, 2015.
I.
Linda has a gain on the sale of the rental property of $50,000.
II.
Linda can deduct $500 in real estate taxes.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
Chapter 6
d.
Neither statement is correct.
73. Which of the following legal expenses paid by the Kerr Corporation can be deducted in the current year?
I.
Legal fees to resolve a tax dispute with the Internal Revenue Service.
II.
Legal fees to purchase land that will be used to expand its warehouse.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
74. Which of the following legal expenses paid by the Sutton Corporation can be deducted in the current year?
I.
Legal fees to initiate a lawsuit against a competitor who is using its patent.
II.
Legal fees to settle a lawsuit filed by a delivery person who slipped on the ice delivering a
package to Sutton’s office.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
c
75. Gary, a sole proprietor, incurs the following expenses in his record store business. Gary can deduct the following as
business expenses in the current year
I.
$3,000 in legal fees to acquire a competing record store.
II.
$500 to the local police chief to not write parking tickets to his customers whose time ran-
out on parking meters in front of his store.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
76. Walter recently received a notice of an income tax deficiency of $21,000 from the IRS. He hires an attorney to handle
his IRS problems. Walter’s legal expenses are $4,000. Can Walter deduct the legal expenses?
I.
He can deduct the full amount if the tax deficiency relates to his business.
II.
He can deduct the full amount if the tax deficiency relates to income other than business
income.
III.
He can deduct the legal fees if the income tax deficiency is personal in nature.
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.
77. Which of the following expenses is not deductible for AGI?
a.
Alimony paid.
b.
Contributions to an IRA.
c.
Moving expenses.
d.
Interest on qualified student loans.
e.
Interest expense related to an investment.
e
78. Deductions for adjusted gross income include
I.
Contribution to a Roth IRA.
II.
Contribution to conventional IRA
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
79. Deductions for adjusted gross income include
I.
Transportation of household goods for a qualified move.
II.
Unreimbursed employee business expenses for a nonaccountable plan.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
80. Melissa is a corporate sales representative for Computer City. Melissa receives a monthly travel allowance from
Computer City to cover her travel costs (transportation, food, lodging, entertainment, etc.). If Melissa is required to
account to Computer City for the use of the travel advance and to return any excess travel advance
I.
Melissa will not have to show any aspect of the travel reimbursement or expenses incurred
if she spends all of the reimbursement on valid travel expenses.
II.
Melissa will have gross income to the extent her travel allowance used for travel expenses
reimbursed.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
81. Sally is a corporate sales representative for Computer City. Sally receives a monthly travel allowance from Computer
City to cover her travel costs (transportation, food, lodging, entertainment, etc.). If Sally is not required to account to
Computer City for the use of the travel advance
I.
Sally will not have to show any aspect of the travel reimbursement or expenses incurred if
she spends all of the reimbursement on valid travel expenses.
II.
Sally will only have gross income to the extent her travel allowance exceeds her actual
Chapter 6
costs.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
82. Victor is a sales representative for Valley Winery. Victor receives a monthly travel allowance from Valley to cover his
travel costs (transportation, food, lodging, entertainment, etc.). If Victor is required to account to Valley for the use of the
travel advance and to return any excess travel advance
I.
To the extent Victor is reimbursed for less than his costs, part of his expenses are deducted
for AGI and part are deducted from AGI.
II.
Victor must include the travel allowance in his gross income. His actual costs are
deductible from AGI, subject to all applicable limits on such deductions.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
a
83. Richard is a sales person for Publix Company. Every month Richard fills out an expense account report, documenting
all his expenses and submits it for reimbursement. During the current year, Richard submitted documentation and receives
$12,500 of reimbursements. All his claims are reimbursed. How will these expenses and reimbursements affect Richard’s
income tax calculation?
I.
Expense amounts are deductible from AGI.
II.
Reimbursed amounts are excluded from gross income.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
84. Lynn is a sales representative for Textbook Publishing Company. He receives a monthly travel allowance from
Textbook to cover his travel costs (transportation, food, lodging, entertainment, etc.). If Lynn is not required to account to
Textbook for the use of the travel advance
I.
Lynn will not have to show any aspect of the travel reimbursement or expenses incurred if
he spends all of the reimbursement on valid travel expenses.
II.
To the extent Lynn is reimbursed for his costs he will get a deduction for AGI.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
85. Ester is a sales representative for a pharmaceutical company. She receives a monthly travel allowance from the
Chapter 6
company to cover her travel costs (transportation, food, lodging, entertainment, etc.). If Ester is not required to account to
the company for the use of the travel advance
I.
Ester will only have gross income to the extent her travel allowance exceeds her actual
costs.
II.
Ester must include the travel allowance in her gross income. Her actual costs are deductible
from AGI, subject to all applicable limits on such deductions.
a.
Only statement I is correct.
b.
Only statement II is correct.
c.
Both statements are correct.
d.
Neither statement is correct.
86. Natasha is an employee of The Johnson Company. She incurs a total of $7,500 in business expenses as follows:
Lodging
$2,500
Transportation (no commuting)
3,500
Dues and subscriptions
1,500
Natasha receives reimbursement of $5,600 after an adequate accounting to her employer. Natasha’s itemized deductions
before any limitations would be:
a.
b.
c.
d.
e.
c
87. Eloise is a sales representative for a video production company. While at an exposition, she incurs $2,000 in
entertainment expenses and $1,200 for meals. The expenses occur while she is discussing business and Eloise makes an
adequate accounting to her employer and is reimbursed $1,200. How much may Eloise deduct if her AGI is $40,000?
a.
$- 0 –
b.
$1,200 for AGI and $200 from AGI.
c.
$1,200 for AGI and $2,000 from AGI.
d.
$- 0 – for AGI and $200 from AGI.
e.
$- 0 – for AGI and $1,000 from AGI.
88. Brees Co. requires its employees to adequately account for all reimbursed business expenses. Tracy, an employee of
Brees Co. has AGI of $50,000 and submitted for reimbursement the following valid business expenses:
Transportation costs
$1,000
Meals
700
Entertainment costs
500
Hotel costs
800
What are the tax consequences if Brees reimburses Tracy $2,400?
I.
Tracy must report $2,400 of income.
II.
Tracy can deduct $2,400 of the expenses for AGI and $-0- as miscellaneous itemized
deductions, after limitations.
a.
Only statement I is correct.