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.
Television station Channel 2 receives $200,000 from Harry’s Auto Parts, Inc., to air
Harry’s commercials during a local automotive repair talk show in December 2015.
December’s ratings drop sharply when the show’s star quits to work as a mechanic with
a NASCAR team. Shortly thereafter, Harry contacts Channel 2 indicating that he wants
to discontinue his sponsorship and requests return of $125,000 of the payment. The
station continues to air the commercials and keeps the $200,000. Harry initiates a legal
suit to recover the $125,000. Which of the following dictate that the $200,000 be
included in Channel 2’s 2015 gross income?
I. Capital Recovery Concept.
II. Claim of Right Doctrine.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
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
Which of the following constitutes a realization?
I. Frank’s lakeside cottage is damaged in a violent storm. The cost of repairs totaled
$4,000. However, the insurance company gives Frank only $2,500 for the repairs.
II. McDonald’s cow gives birth. The calf will become a member of McDonald’s feeder
cattle herd.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Rationale for nonrecognition of property transactions exists because of which
concept(s) of taxation?
I. Wherewithal-to-Pay Concept.
II. Constructive receipt Doctrine.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Al and Peggy divorce in the current year. As part of their divorce agreement, Peggy is
to pay Al $70,000 for his share of their home (the home’s fair market value is
$140,000). Also, Peggy agrees to pay Al $1,000 monthly. The payment represents the
financial support for their 15-year-old son, Bud. It will cease upon Bud’s 23rd birthday
or college graduation-whichever comes first. Which of the following explain(s) the tax
effects of these events?
I. Peggy can deduct $12,000 annually for the monthly payments made this year.
II. Al does not recognize the $1,000 monthly payments as income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
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
Roberto is a furniture salesman for Gerald’s Furniture Mart. Roberto purchases a
bedroom suite from Gerald’s for $8,000. The sticker price is $11,000. Gerald’s policy is
to “discount” all customer purchases for up to $1,000 off of the sticker price for
purchases over $10,000. What is the tax treatment of Roberto’s furniture purchase?
I. Roberto must include $3,000 in his gross income.
II. Gerald’s Furniture Mart can deduct $2,000 as compensation expense in addition to
properly accounting for the sale of the furniture.
III. Roberto does not need to account for the furniture purchase since it is for his
personal use.
IV. Roberto has imputed income because of the nature of the furniture purchase.
a. Only statement I is correct.
b. Only statement III is correct.
c. Only statements I and IV are correct.
d. Only statement IV is correct.
e. Only statements II, and IV are correct.
Leonor is the financial vice-president and owns 60% of Ruston Co. Ruston is an S
corporation and reports taxable income of $200,000, before Leonor’s salary. Leonor
receives a $50,000 salary. What is Leonor’s income from Ruston?
a. $50,000
b. $120,000
c. $140,000
d. $170,000
Maria owns 30% of the stock of Marshmallow Inc., an electing S corporation.
Marshmallow reports taxable income of $100,000 and pays $80,000 in dividends to
shareholders. What is Maria’s income from Marshmallow?
a. $-0-
b. $24,000
c. $30,000
d. $54,000
e. $80,000
Robbie is 18, and a dependent on his parent’s return. His income consists of interest of
$1,300, and $2,500 from being a lifeguard. If his parent’s taxable income is $75,000,
what is Robbie’s 2015 tax liability?
a. $-0-
b. $95
c. $130
d. $250
e. $295
In general, qualified replacement property for an involuntary conversion must be
purchased within one year after the close of the tax year in which the involuntary
conversion occurred.
a. True
b. False
During the current year, Trane invests $35,000 in each of two separate corporations.
Each investment gives him a 20% ownership interest. Brazil Corporation is a regular
corporation that has taxable income of $200,000 and pays dividends totaling $50,000.
China Corporation is an S corporation that has taxable income of $100,000 and pays
$50,000 of dividends. As a result of these two investments, Trane
I. Has $40,000 of taxable income from Brazil Corporation.
II. Has $20,000 of taxable income from China Corporation.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
For purposes of the relationship test for dependents, which of the following does not
qualify as a relative?
a. Mother.
b. Nephew.
c. Cousin.
d. Grandfather.
e. Stepbrother.
Marshall and Michelle are married with salaries of $80,000 and $64,000, respectively.
Their combined AGI is $183,000. Michelle is an active participant in her company’s
qualified pension plan while Marshall is not. Determine the maximum combined IRA
contribution and deduction amounts?
Maximum Maximum
Contribution Deduction
a. $5,500 $2,750
b. $11,000 $5,500
c. $5,500 $5,500
d. $11,000 $7,500
e. $ 11,000 $ 11,000
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.
d. Neither statement is correct.
Mavis is injured in an automobile accident and sues the driver of the truck that struck
her car. The court finds the driver liable and awards Mavis $10,000 to pay her medical
expenses, $20,000 for her pain and suffering, and $5,000 for loss of income while she
was unable to work. The court also finds the truck driver negligent and awards Mavis
$50,000 in punitive damages. Which of the following statements concerning the receipt
of these payments is/are correct?
I. Mavis is not taxed on any of the payments because they relate to a personal physical
injury.
II. Mavis must include the loss of income payment in her gross income.
III. The punitive damage payment is taxable.
a. Only statement I is correct.
b. Only statement III is correct.
c. Statements II and III are correct.
d. Only statement II is correct.
During 2015, Stephanie earns $2,700 from a summer job. She also has interest income
of $400. Stephanie, age 19, is a full-time student at Omega College. Her parents claim
her as a dependent. What is the amount of Stephanie’s taxable income for 2015?
a. $- 0 –
b. $50
c. $400
d. $2,150
e. $2,700
Which of the following is/are currently deductible trade or business expenses?
I. Personal property taxes on a hot air balloon operated as a hobby.
II. Interest paid on the mortgage note on a business warehouse.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Tim has a 25% interest in Hill and Associates, a partnership. Tim is eligible for
coverage as an employee under the firm’s qualified pension plan.
a. True
b. False
Jose, Mahlon, and Eric are partners in New Communications Partnership. Jose owns a
50% interest, Mahlon owns a 35% interest, and Eric owns a 15% interest. During the
current year (the first year of operation for the enterprise), the business has a loss.
Although the partnership is established as a general partnership, Jose functions as the
manager and performs all of the day-to-day duties of a chief operating officer. Mahlon
and Eric are merely investors who receive monthly reports about the business. At the
close of the current tax year, each partner will receive a share of the partnership loss.
Which of the partners will be able to deduct his (their) share of the partnership loss?
I. Jose
II. Mahlon
III. Eric
a. Mahlon
b. Jose, Mahlon, and Eric
c. Jose
d. Jose and Mahlon
e. Mahlon and Eric
Terry receives investment property from her mother as a gift in 2015. Her mother paid
$15,000 for the property in 2011, and it is valued at $18,000 on the date of the gift.
Terry sells the property eight months later for $16,000. Terry’s gain or loss is
a. Short-term ordinary loss.
b. Short-term capital gain.
c. Short-term capital loss.
d. Long-term ordinary gain.
e. Long-term capital gain.
Harry is a CPA employed as a manager by a regional accounting firm. The firm pays
Harry’s dues to professional organizations and $175 monthly for her personal parking
place at the office. Only managers and partners receive these benefits.
I. Both payments are working condition fringe benefits.
II. These benefits are excludable for Harry even though they discriminate in favor of
higher-paid employees.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
A transaction loss occurs when an asset is disposed of at less than its basis.
a. True
b. False
In addition to the regular standard deduction taxpayers who are blind qualify for a
second standard deduction of the same amount.
a. True
b. False
A sole proprietor may deduct investment interest and investment expense without
limitations if investments are made in the name of the business.
a. True
b. False
During 2015, Ester recognizes a $10,000 Section 1231 gain, a $25,000 Section 1231
loss, and ordinary income of $20,000. What are the results of Ester’s netting of these
items?
a. $5,000 capital loss.
b. $5,000 Section 1231 gain.
c. $5,000 ordinary income.
d. $17,000 ordinary income and $12,000 capital loss.
e. $20,000 ordinary income and $15,000 capital loss.
Linc, age 25, is single and makes an annual contribution to his church of $2,000. Linc
always uses the standard deduction when filing his income tax return. Determine the
amount of Linc’s deduction for charitable contributions.
a. $- 0 –
b. $200
c. $560
d. $1,000
e. $2,000
Julius is an employee of a large consulting firm. During the year he incurs the following
expenses in his job, none of which are reimbursed by his employer. Julius’s adjusted
gross income is $100,000 before considering these expenses.
Commuting between his home and office $3,000
Local travel to and from his office to visit clients $4,000
Local travel to and from his home to visit clients $3,000
Legitimate business entertainment of clients $8,000
Hotels accommodations while on business travel $3,000
Meals while away from home on business travel $2,000
Subscription fees for publications directly related to his employment $1,000
Cost of professional wardrobe $7,000
What is Julius’s miscellaneous itemized deduction?
a. $14,000
b. $16,000
c. $21,000
d. $22,000
e. None of the above
Angela is an accrual basis taxpayer. On September 1 of the current year, she prepays the
annual premium of $4,800 for a one-year fire insurance policy on the contents of her
business warehouse. The expense is not material for either financial or tax purposes.
The prepayment is necessary to activate the insurance coverage and maintain annual
renewals. How much may Angela deduct in the current year?
a. $- 0 –
b. $ 400
c. $1,600
d. $2,400
e. $4,800
Systech offered its stockholders a choice between stock and cash for their annual
dividend. Since Carol has chosen stock, she does not have to include the dividend in
income.
a. True
b. False
Gains on the sale of certain types of business assets, referred to as Section 1231
property, are always treated as capital gains.
a. True
b. False
The exclusion of a percentage of the capital gain realized on the sale of qualified small
business stock acquired after February 17, 2009, and before September 27, 2010, results
in an effective tax rate on these capital gains of
a. 7.0%
b. 14.0%
c. 15.0%
d. 27.0%
e. 30.0%
The Federal income tax is a
a. revenue neutral tax.
b. regressive tax.
c. value-added tax.
d. progressive tax.
e. form of sales tax.