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.
The mythical country of Traviola imposes a tax based on the number of gold Tokens
each taxpayer owns at the end of each year per the following schedule:
Number of Tokens Tax
0 ” 200 $100 + $5 per Token
201 ” 500 $1,000 + $6 per Token
> 500 $4,000 + $7 per Token
Traviola’s Token tax is a
a. proportional tax.
b. regressive tax.
c. progressive tax.
d. value-added tax.
During 2006, Charles purchased 1,000 shares of Ryan Corporation stock for $12,000.
On February 22, 2015, he sells all the shares for $9,000. On March 15, 2015, he
repurchases 1,000 shares of Ryan for $8,000 and holds them until May 29, 2015, when
he sells them for $10,000. What is Charles’ recognized gain or loss on the May 29,
2015, sale?
a. $1,000 loss.
b. $2,000 gain.
c. $2,000 loss.
d. $1,000 gain.
e. No gain or (loss) recognized
Mathew works for Levitz Mortgage Company. The company has an accountable
reimbursement plan. During the year Levitz reimburses Mathew $5,400 for his business
expenses. Mathew’s adjusted gross income for the year is $45,000. His business
expenses are as follows:
Airfare $2,900
Hotel 1,900
Meals 1,400
Entertainment 1,000
What amount will Mathew be able to deduct as a miscellaneous itemized deduction?
a. $- 0 –
b. $600
c. $1,200
d. $1,500
e. $1,800
Pedro purchased all of the stock of Regis Corporation. Since he purchased all of the
stock the basis in all of the corporation’s assets must be restated to fair market value.
a. True
b. False
A regressive tax rate structure is defined as a tax in which the average tax rate decreases
as the tax base increases.
a. True
b. False
All of the following are advantages of computer-assisted tax research (CATR), except
a. CATR sources use search engines that allow quick retrieval of sources.
b. CATR sources are available on the Internet.
c. CATR sources contain only secondary sources of tax law.
d. CATR sources require less space and maintenance than print services.
Girardo owns a condominium in Key West. During the year, Girardo uses the condo a
total of 22 days. The condo is also rented to vacationers for a total of 78 days and
generates rental income of $24,000. Girardo incurs the following expenses before
allocation:
Mortgage interest $8,000
Property taxes 3,600
Utilities 4,000
Insurance 2,400
Depreciation 22,000
The amount of depreciation that Girardo may deduct with respect to the rental property
is
a. $7,300
b. $9,960
c. $14,040
d. $17,160
e. $22,000
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 –
b. $180
c. $200
d. $360
e. $450
Oliver owns Wifit, an unincorporated sports store. In 2015 Wifit earned $100,000,
before Oliver drew out a salary of $60,000. What is Oliver’s 2015 deduction for
self-employment taxes?
a. $2,826
b. $7,065
c. $7,650
d. $14,130
e. $15,300
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.
Darlene and Joseph are married and have two children ages 17 and 15. Their adjusted
gross income for 2015 is $108,000. What amount can they claim for the child tax
credit?
a. $- 0 –
b. $600
c. $1,000
d. $1,200
e. $2,000
Nancy is the owner of an apartment complex. She actively participates in the
management of the building. During the current year, it generates a taxable loss of
$27,000. Nancy’s other sources of income are salary of $52,000 and interest of $21,000.
What is Nancy’s allowable loss from the apartment?
a. $- 0 –
b. $18,000
c. $25,000
d. $27,000
e. None of the above.
Sarah owns a passive activity that has a suspended loss of $18,000. The activity has a
fair market value of $35,000 and her adjusted basis in the activity is $20,000.
I. If Sarah sells the activity, she is allowed to deduct the $18,000 suspended loss.
II. If Sarah gifts the activity, she is only be allowed to deduct $15,000 of the suspended
loss.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Rodrigo has $5,000 of state income taxes withheld from his salary during 2014. On his
2014 income tax return, Rodrigo properly deducts the $5,000 as state taxes paid. Upon
filing his 2014 state tax return on April 15, 2015, he determines that his actual State
income tax for 2014 is only $4,100. He receives a $900 refund on May 25, 2015 from
the amounts withheld by the state. What concept(s), construct(s), or doctrine(s) dictate
that the $900 is included in Rodrigo’s 2015 income?
I. Annual Accounting Period Concept.
II. Tax Benefit Rule.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Simone and Fillmore were divorced last year. Fillmore has custody of their two
children. Simone pays $9,600 in child support payments during the current year. The
total cost of supporting the children is $12,500. Fillmore and Simone do not have any
special agreement about dependency exemptions. How many total exemptions may
Simone claim for the current year?
a. 0
b. 1
c. 2
d. 3
e. 4
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. How much boot does Rosilyn receive in the transaction?
a. $- 0 –
b. $1,000
c. $2,000
d. $3,000
e. $5,000
The Section 179 expense deduction is allowed on all depreciable and tangible property
used in a trade or business.
a. True
b. False
Which of the following can be deducted as a trade or business expense?
a. Lobbying expenses to influence taxpayers.
b. Political contribution to elect a local Congressman.
c. Illegal bribes to government
d. Rent paid on a office to run an illegal gambling operation.
e. None of the above can be deducted.
When a corporation pays a dividend, it is nontaxable if it is in excess of earnings and
profits.
a. True
b. False
Teresa, Terri, and Tricia operate Sassy Solutions, an exclusive boutique. Based on
advice from Teresa’s sister, a CPA, the three form a partnership. Teresa owns 50% and
Terri and Tricia each own 25%. For the year, Sassy Solutions reports the following:
Sales revenues $600,000
Business expenses (320,000)
Investment expenses (4,000)
Short-term capital gains 26,000
Long-term capital losses (14,000)
Taxable income $288,000
For tax purposes, what amount will Sassy Solutions report to Teresa as her ordinary
income from the partnership?
a. $144,000
b. $146,000
c. $148,000
d. $138,000
e. $140,000
Mary Lou is a 22-year old student at Wilson College. She earned $4,300 at a summer
job, which is less than half of her support.
I. Mary Lou can claim a personal exemption for herself even if her parents claim her as
a dependent.
II. Because Mary Lou is a full-time college student, and she provides less than half of
her own support, her parents can claim her as a dependent on their return.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Natalie is the owner of an apartment complex. She actively participates in the
management of the building. During the current year, it generates a taxable loss of
$33,000. Natalie’s other sources of income are salary of $114,000 and interest of
$16,000. What is Natalie’s allowable loss from the apartment in the current year?
a. $-0-
b. $10,000
c. $15,000
d. $16,000
e. $25,000
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.
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)
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.
Margaret is single and is a self-employed proprietor of a convenience store near the
mall. During the current year, Margaret paid $4,000 for health insurance coverage for
herself. She paid another $500 for coverage for her unrelated employee, Corky. How
should Margaret deduct the health insurance cost?
I. Margaret takes $500 as a business expense.
II. Margaret takes the $4,000 as 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.
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.
Melinda and Riley are married taxpayers. During the year, they completed a single
capital asset sale in which a loss of $120,000 is realized on the sale ($15,000 amount
realized, less $135,000 adjusted basis) of qualified small business stock. How much of
the loss can the taxpayers deduct?
a. $3,000
b. $53,000
c. $100,000
d. $103,000
e. $120,000
A Keogh plan is a type of qualified pension for self-employed individuals. An
individual or entity that establishes a Keogh plan can
I. Only establish a defined contribution profit sharing pension plan.
II. Have both employees and self-employed individuals as participants.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sidney, a single taxpayer, has taxable income of $45,000 from all sources except capital
gains. He has a long-term capital gain of $1,000. What is the actual tax savings Sidney
receives because of any special treatment of his $1,000 long-term capital gain?
a. $-0-
b. $50
c. $100
d. $150
e. $250
Frank and Fran are married and have a 2015 taxable income of $280,000. They also
received $20,000 of tax-exempt income. Their average tax rate is:
a. 23.1%
b. 24.3%
c. 25.3%
d. 33.0%
e. 35.0%