Which of the following individuals or couples qualify for the child and dependent-care
credit?
I. Jeff and Marion are married with 2 children ages 5 and 7. Jeff earns $57,000 and
Marion is a part-time graduate student at the local university and also works as a
volunteer for the local hospital. When Marion is in class or working as a volunteer, they
hire their neighbor to care for the children. During the year they paid $1,200 to their
neighbor.
II. Michael is single and earns $75,000. Michael pays $10,000 for a nurse to help care
for his father who is disabled and lives with him. Michael is entitled to the dependency
exemption for his father.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Knox Cable Corporation has the following gains and losses from Section 1231 property
during 2015:
Casualty losses $(14,000)
Casualty gains 5,000
Section 1231 gains 9,000
Section 1231 losses (6,000)
No net Section 1231 losses have been deducted as ordinary losses in prior years. How
will this information affect Knox’s 2015 taxable income?
a. Knox will report a net section 1231 loss of $6,000.
b. Knox will report a capital loss of $9,000 and ordinary income of $3,000.
c. The transactions have no effect on Knox’s 2015 taxable income.
d. Knox will deduct a $3,000 capital loss and have ordinary income of $3,000.
e. Knox will report an ordinary loss of $9,000 and a long-term capital gain of $3,000.
The amount realized equals the gross selling price less any selling expenses.
a. True
b. False
Julia spends her summers away from college as a forest ranger in a remote area near
Mt. McKinley, Alaska. She lives in a remote dormitory where she also receives free
meals. The dormitory’s location permits rangers to be on call in case of an emergency.
I. The value of the lodging is excluded from Julia’s gross income.
II. The value of the meals is excluded from Julia’s gross income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Patti sells a painting that has a fair market value of $9,000 to James for $6,000. Which
of the following statements about the tax effect of the sale is/are correct?
I. If James is an employee of Patti’s, no income is recognized from the sale.
II. If James is Patti’s brother, James does not recognize any income from the sale.
III. If Patti is an art dealer and she sold the painting to James because she needed cash
quickly, James does not recognize any income from the sale.
IV. If James owns 60% of Patti’s company, James does not recognize any income from
the sale.
a. Only statement II is correct.
b. Only statement III is correct.
c. Only statements II, and III are correct.
d. Only statements II, III, and IV are correct.
e. Statements I, II, III, and IV are correct.
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
Drew graduated from business school in December 2014. To honor Drew, on January 3,
2015, his uncle gives him two tickets to the Super Bowl. The uncle paid $1,200 for each
ticket. Because he had to report to work at a brokerage firm in Indianapolis on January
15, 2016, he could not use the tickets. Therefore, he sells them for $2,500 each. How
much income must Drew recognize in 2015 because of these events?
a. $- 0 –
b. $2,000
c. $2,400
d. $2,600
e. $5,000
Generally income tax accounting methods are designed to result in
I. a tax based on the amount of cash available in the current period to pay taxes.
II. a denial of a current deduction for costs that will not have to be paid in the near
future.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Chelsea is an employee of Avondale Company. Chelsea’s adjusted gross income for the
current year is $65,000. Chelsea would like to make the maximum contribution to her
individual retirement account this year. Which of the following statements about
Chelsea’s contribution and deduction amounts is (are) true?
I. If Chelsea is single and is covered by a qualified pension plan, she is allowed to
contribute $5,500 to her IRA account, but she is allowed a deduction for only $3,300 of
the contribution because her adjusted gross income is greater than $61,000.
II. If Chelsea is married and covered by a qualified pension plan and her husband does
not work, they can contribute and deduct $5,500 to two separate IRA accounts (one for
herself and one for her husband).
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Which of the following taxpayers used tax evasion tactics when filing their 2015 tax
return?
I. Fern, a cash basis accountant intentionally billed clients for services on December 31,
2015, to avoid receiving cash payments from clients until 2016.
II. Samual made a mathematical mistake on a schedule in his tax return that resulted in
a $2,000 underpayment of tax. The IRS does not detect the mistake..
III. Beverly accidentally underreported $800 of income she earned providing childcare
in her home.
IV. Bo, a cattle rancher, deducted the cost of raising 7 steers that were used by his
family and relatives for food during 2015.
a. Statements I and III are correct.
b. Only statement II is correct.
c. Statements II and III are correct.
d. Statemenst III and IV are correct.
e. Only statement IV is correct.
Willie sells the following assets and realizes the following gains (losses) during the
current year:
Personal auto $(5,000)
Municipal bonds (7,000)
Stamp collection 4,000
Furniture (6,000)
1% interest in oil well (8,000)
As a result of these sales, Willie’s adjusted gross income will:
a. Decrease by $3,000.
b. Decrease by $4,000.
c. Decrease by $11,000.
d. Decrease by $15,000.
e. Not change.
Larry gives Linda 300 shares of stock he had purchased several years ago for $8,000.
On the date of the gift, the stock has a fair market value of $6,000. Linda sells the 300
shares for $5,500 one month after the gift, Linda realizes a
a. $- 0 – gain or loss
b. $500 short-term capital loss
c. $500 long-term capital loss
d. $2,500 short-term capital loss
e. $2,500 long-term capital loss
Raymond, a single taxpayer, has taxable income of $155,000 from all sources except
capital gains. He has a $10,000 gain from the sale of qualified small business stock he
acquired in 1995. What is the total tax saving Raymond receives because of any special
treatment of his $10,000 long-term capital gain on small business stock?
a. $700
b. $1,150
c. $1,400
d. $2,100
e. $2,800
Rosilyn trades her old business-use car with an adjusted basis of $13,000 and an
outstanding loan liability balance of $2,000 for a new business-use car valued at $9,000
plus $3,000 cash from Bob’s Auto Sales and Loan Company. Bob assumes Rosilyn’s
loan balance. What is Rosilyn’s recognized gain on the transaction?
a. $- 0 –
b. $1,000
c. $2,000
d. $3,000
e. $5,000
In 2005, Victor acquires an Andy Warhol painting for $32,000. During the current year
he donates the painting to the city museum. Its fair market value at the date of the
contribution is $38,000. If Victor’s adjusted gross income is $66,000 and he elects to
reduce the contribution to its basis, his deductible contribution is
a. $18,000
b. $19,800
c. $32,000
d. $33,000
e. $38,000
Business expenses include
I. expenditures that have a business purpose
II. expenditures that are incurred for the production of income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Karl paid $200,000 for business-use equipment. Using straight-line depreciation, his
deduction would have been $22,000, but Karl uses MACRS depreciation and deducts
$37,500 for the first two years of usage. At the beginning of the third year, Karl sells the
equipment for $190,000. How much of the gain is recaptured under Section 1245 as
ordinary income?
a. $- 0 –
b. $5,500
c. $22,000
d. $27,500
e. $37,500
Indicate which of the following statements is/are correct:
I. A cash basis taxpayer may deduct prepaid rent if it will be used-up within one year of
prepayment and the payment is required to be made.
II. An accrual basis taxpayer must satisfy an all-events test and an economic
performance test to claim a deduction.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The calculation of an individual’s income tax includes certain deductions for adjusted
gross income. The following are examples of this class of deductions:
I. Trade or business expenses
II. Rental expenses
III. Interest on student loans
IV. Investment interest
a. Statements I and II are correct.
b. Statements I, II, and III are correct.
c. Only statement I is correct.
d. Only statement III is correct.
e. Statements I, II, III, and IV are correct.
Tillman is building a warehouse for use in his business. The construction costs include
the following:
Direct labor $35,000
Direct materials 20,000
Architect fees 5,000
Interest on construction loan 3,000
Depreciation of equipment used in construction 1,500
Indirect Administrative costs during construction 2,000
What is Tillman’s basis in the warehouse?
a. $60,000
b. $61,500
c. $63,500
d. $64,500
e. $66,500
Pedro purchased used delivery equipment costing $80,000 and used computers costing
$90,000 (the only assets purchased) that are used in his business. He may allocate his
section 179 deduction to either or both assets.
a. True
b. False
Victor is single and graduated from Wabash College in May of 2014. In January of
2015, he begins to repay his student loans. During the year he pays $1,500 of interest on
the loans. His adjusted gross income for the year is $65,000. Victor can deduct student
loan interest of
a. $- 0 –
b. $800
c. $1,000
d. $1,200
e. $1,500
Henry owns a hardware store in Indianapolis. He has decided to expand his business
interests and is considering opening a golf store in a neighboring town. He has incurred
$12,000 of expenses investigating whether to open the new golf store. In July of the
current year he finds the perfect location and opens the golf store on October 1. What
amount of the investigation expenses can he deduct in the current year?
a. $- 0 –
b. $600
c. $5,117
d. $5,540
e. $12,000
To qualify as a qualifying relative, an individual must meet three of five tests. These are
the gross income test; the support test; the relationship or member of the household test;
the citizen or residency test; and the joint return test.
a. True
b. False
Cathy owns property subject to a mortgage of $5,000. Annual real estate taxes are $800
and are due and payable on December 31. Cathy sells her property on July 1 of the
current year. The buyer assumes her $5,000 mortgage, and Cathy agrees to finance the
sale by taking a mortgage note of $50,000 and property valued at $7,500. The buyer
agrees to pay the seller’s portion of the property taxes. What is Cathy’s amount realized?
a. $50,000
b. $57,500
c. $62,500
d. $62,900
e. $63,300
Deduction concepts and constructs include which of the following?
I. Legislative Grace Concept.
II. Business Purpose Concept.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Carlotta is the director of golf for Birck Enterprises, an electing S corporation. Carlotta
owns a 20% interest in Birck. She receives a salary of $60,000 and fringe benefits
costing $6,000. Birck’s taxable income before considering the payments to and on
behalf of Carlotta is $250,000. Birck’s distributes a $50,000 dividend to its
shareholders. How much income does Carlotta have from Birck?
a. $66,000
b. $70,000
c. $96,800
d. $98,000
e. $102,800
Rand Company purchases and places into service a company automobile costing
$40,000 in April 2014. What is the 2014 depreciation deduction on the auto?
a. $2,960
b. $7,200
c. $8,000
d. $11,160
e. $40,000
Any deduction taken in a prior year that is recovered in a subsequent year is reported as
income in the year it is recovered, to the extent that a tax benefit was received from the
deduction.
a. True
b. False
How much gross income does Faith have from the following items of economic
income?
” Received cash gift of $6,000 from parents.
” Received $12,000 in alimony payments from former spouse.
” Received $18,000 in child support payments from former spouse.
” Won $6,000 in a slot machine in Las Vegas.
” Faith’s vacation home on Lake Tahoe increased in value by $15,000.
” Collected $14,000 in unemployment benefits.
a. $18,000
b. $30,000
c. $32,000
d. $38,000
e. $50,000
Which of the following is/are correct concerning a principal residence?
I. The maximum amount of gain a single taxpayer can exclude on the sale of a principal
residence is $500,000.
II. To qualify for a $250,000 exclusion, a single taxpayer must have owned and used the
property as a principal residence for at least 2 of the previous 5 years.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Title 26 of the U.S. Code includes
a. Alcohol and tobacco tax legislation only.
b. Gift tax and estate tax legislation only.
c. Income Tax legislation only.
d. Self employment tax legislation only.
e. All of the tax legislation mentioned above.
Cathy, an attorney, bills a client $12,000 for services rendered in November 2015. The
client is having cash flow problems and Cathy accepts 1,000 shares of Petrol
Corporation common stock in full satisfaction of the account on July 5, 2016. On July
5, 2016, the Petrol stock is selling for $10 per share. Cathy sells the Petrol stock on
August 10, 2016, for $11 per share. What is the effect of the transactions on Cathy’s
2016 taxable income if
a. Cathy is a cash basis taxpayer?
b. Cathy is an accrual basis taxpayer?