LeRoy has the following capital gains and losses for the current year:
Short-term capital gain $10,000
Collectible loss (3,000)
Long-term capital gain 5,000
If LeRoy is single and has taxable income from other sources of $52,000, what is the
tax on his capital gains?
a. $1,800
b. $2,800
c. $2,910
d. $3,000
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. $6,378
b. $6,778
c. $6,850
d. $7,030
e. $7,310
Bowen is planning to quit his job as a plumber and open a paint store. He has incurred
expenses of $8,000 dealing with the opening of the store and will be able to deduct all
of these expenses.
a. True
b. False
Mario paints landscape portraits, and he treats the activity as a hobby. During the
current year, Mario incurred the following expenses while earning $2,500 from sales of
paintings:
Paints and supplies $2,200
Utilities expenses for his studio 1,000
Advertising 300
Insurance on his studio and equipment 700
Mario uses the standard deduction and never itemizes his deductions. How should
Mario report all of the items related to his hobby on his tax return?
a. Hobby losses are not allowed so he couldn”t deduct anything whether or not he
itemizes anyway.
b. Report a $400 loss as a deduction for AGI.
c. Include $2,500 in gross income and deduct $2,500 for AGI.
d. Include $2,500 in gross income and deduct nothing for AGI.
e. Include $2,500 in gross income and deduct $1,700 for studio expenses.
On September 15, 2015, Spiral Corporation grants Jay an option to acquire 250 shares
of the company’s stock for $10 per share. The fair market price of the stock on the date
of grant is $14. The option does not have a readily ascertainable fair market value. How
much must Jay report as income at the date of grant?
a. $-0-
b. $1,000
c. $2,500
d. $3,500
Danube Corporation operates a theatrical costume shop. Taxable income for the current
year is $1,000,000. What is Danube’s income tax liability?
a. $- 0 –
b. $340,000
c. $373,250
d. $390,000
Gilberto is a Spanish citizen living in Canada working as a computer programmer for
Excel Designs, Inc., a U.S. company.
I. Gilberto is a nonresident alien for U.S. tax purposes.
II. If Gilberto earns $10,000 for a consulting job in Detroit, this income will be subject
to U.S. tax.
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 qualify for the medical expense deduction?
I. Over-the-counter cough medicine.
II. Chiropractic treatments.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
According to the entity concept
I. a sole proprietorship is similar to a conduit entity.
II. a sole proprietor cannot convert nondeductible personal items into deductible
business items by commingling expenditures.
III. a partnership is an example of a mixture of a taxable and a conduit entity.
IV. an S corporation is a tax paying entity.
a. Statements I and II are correct.
b. Statements II and III are correct.
c. Only statement IV is correct.
d. Statements I, II, and III are correct.
e. Statements I, II, and IV are correct.
Hammond Inc., sells a building that it purchased in 2001 for $1,500,000. The building
cost $1,000,000 and had an adjusted basis of $700,000 at the date of the sale.
I. Hammond has an $800,000 Section 1231 gain on the sale.
II. Hammond must report $300,000 of Unrecaptured Section 1250 gain.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The mid-year convention under MACRS provides that
a. Depreciation is allowable in the year of acquisition of qualified property only if the
property is placed in service in the first one-half of that year.
b. One half of the year-of-acquisition depreciation is allowed regardless of when the
property is placed in service during the year. One-half year’s depreciation is allowable
for the year of disposition.
c. Depreciation is allowable in the year of disposition only if the property is disposed of
in the last one-half of that year.
d. The cost recovery deduction is based on the number of months the property was in
service in the year of acquisition. Therefore, one-half month’s cost recovery is allowable
for the month in which the property is place in service and for the month of disposition.
Personal property consists of any property that is held by an individual.
a. True
b. False
Advantages of hiring one’s own children to work in her/his business enterprise include
which of the following?
I. The corporation can deduct wages paid to the children for work performed.
II. The corporation is required to pay Social Security taxes on the children’s earnings.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Thomas changes jobs during the year and moves from Philadelphia to El Paso. Which
of the following expenses relating to the move can Thomas deduct?
I. Prior to the move, Thomas flies to El Paso to find an apartment.
II. The cost of meals while driving his household goods to El Paso.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Barrett and Betina are planning to be married on December 26, 2015. Barrett’s salary
for 2015 is $42,000 and Betina’s is $40,000. Barrett pays mortgage interest of $7,200
and property taxes of $1,800; Betina has $400 of charitable contributions. Barrett earns
interest of $1,450 on a savings account and makes a deductible for AGI contribution to
his IRA of $2,000. Betina makes a $1,000 deductible contribution to her IRA. Amounts
withheld for State taxes are $1,900 for Barrett and $1,800 for Betina. Based on the
above information, answer the following questions to help Barrett and Betina prepare
their 2015 tax return (they will file jointly and have no other dependents):
a. What is their Adjusted Gross Income (AGI) for 2015?
b. What is their taxable income and tax liability?
c. If Barrett and Betina don’t get married until January 2016, what is Barrett’s taxable
income and tax liability?
d. If Barrett and Betina don’t get married until January 2016, what is Betina’s taxable
income and tax liability?
e. From a purely tax standpoint, should Barrett and Betina get married in December or
January?
A fiscal year can be
I. a period of 12 months ending on any day during the month other than a Sunday.
II. a period of 12 months ending on the last day of any month other than January
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Any structure over 100 years old is eligible for the rehabilitation tax credit.
a. True
b. False
Margie is single and is an employee of the Stitch Corporation. She is an active
participant in the company’s pension plan. Margie’s adjusted gross income is $65,000
and she contributes the maximum amount allowable as a deduction to her IRA account
during the current year. How much can Margie contribute to her Roth IRA?
a. $- 0 –
b. $1,000
c. $2,200
d. $4,000
e. $5,500
Deduction concepts include which of the following?
I. Capital Recovery Concept.
II. Legislative Grace Concept.
III. Business Purpose Concept.
IV. Ability to Pay Concept.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements I and II are correct.
d. Statements I, II, and III are correct.
e. Statements I, II, III, and IV are correct.
Unrecaptured Section 1250 gain is the amount of gain on the sale of personal assets by
individuals not otherwise treated as ordinary income.
a. True
b. False
Sanchez Company allows its employees to make personal copies without charge on the
company copy machines. What concept, construct, or doctrine helps explain why the
benefit received is not taxable to Sanchez employees?
a. Administrative Convenience Concept.
b. Assignment of Income Doctrine.
c. Arms-length Transaction Concept.
d. Ability To Pay Concept.
e. Pay As You Go Concept.
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. $- 0 –
b. $2,500
c. $3,000
d. $4,500
e. $5,000
In April of the current year, Speedy Printing Company’s delivery van is stolen. The van
was originally purchased in 2011 for $13,000, and its fair market value at the time of
the theft is $4,000. The van has a zero adjusted basis on the books of Speedy. The
previous year, Speedy dropped theft insurance on the van, so it receives no
compensation for the loss from its insurance company. What amount of loss can Speedy
deduct?
a. $- 0 –
b. $ 4,000
c. $10,900
d. $12,900
e. $13,000
Harold purchases land and a building by paying cash of $35,000, and assuming the
seller’s $82,000 mortgage. In addition, Harold pays $3,000 of legal fees related to the
purchase. For property tax purposes, the land is valued at $17,000 and the building at
$34,000. Harold’s basis in the building is
a. $17,000
b. $34,000
c. $40,000
d. $80,000
e. $120,000
Hurst Company purchased a commercial building in 2001 for $700,000. The building is
sold in 2015 for $900,000. The actual depreciation deducted on the building as of the
sale date was $600,000. Straight-line depreciation for the same period would have been
$400,000. What is the amount and character of the gain recognized on the sale?
a. $900,000 Section 1231 gain.
b. $200,000 ordinary income, and $100,000 Section 1231 gain.
c. $400,000 ordinary income, and $400,000 Section 1231 gain.
d. $200,000 ordinary income, and $400,000 long-term capital gain.
e. $200,000 ordinary income, and $600,000 Section 1231 gain.
In 2015, Sanford Corporation purchases and places in service $210,000 of equipment
for its manufacturing business. What portion of the $210,000 may Sanford elect to treat
as a Section 179 expense?
a. $-0-
b. $15,000
c. $20,000
d. $25,000
e. $200,000
Irene is 47 years old, unmarried, and has no children. Irene’s mother lives in a nursing
home.
I. Irene can file as head of household because her mother lives in a nursing home.
II. Because Irene’s mother is a lineal descendent, Irene automatically qualifies for head
of household status.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Electronic City sells various electronic products. With each of its products, Electronic
City offers customers the option of purchasing a repair contract. Under the contracts,
Electronic City will make repairs anytime during the term of the contract. Electronic
City estimates that repair costs related to this year’s sales will be $39,000. During the
current year, Electronic City incurs repair costs of $37,000 related to prior year’s
contracts and $4,000 on contracts sold this year.
I. If Electronic City accounts for the contracts using the accrual method of accounting,
its repair cost deduction is $39,000.
II. If Electronic City accounts for the contracts using the cash method of accounting, its
repair cost deduction is $41,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Barry owns all of the stock of Jerrico Corporation; an internet based gaming firm. Barry
is also the President of and works full-time for Jerrico. During the current year, Jerrico
has a loss of $125,000 from its operations.
I. If Jerrico is an S Corporation, Barry may deduct the loss on his personal tax return as
a deduction for AGI.
II. If Jerrico is a regular corporation, the corporation can elect to carryforward the loss
to reduce taxable income during the next 20 years.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Explain why the taxpayer in each of the following situations either does or does not
have taxable income and determine the amount, if any, that the taxpayer would have to
recognize.
a. Leon works for Golfshop America, a large retailer of golf items. Golfshop allows all
employees to purchase golf items at a 40% discount. Leon purchases a set of golf clubs
for $700 that normally sells for $1,000 (cost of the golf clubs to Golfshop was $600). In
addition, Leon is selected as salesman of the year and receives a gold putter worth
$900.
b. Brenda is a student at Atlantic University. Brenda pays the $15,000 cost ($10,000 for
tuition and books; $5,000 for living expenses) of attending Atlantic University with a
$5,000 general scholarship from the college of economics, a $5,000 student loan, and
$3,000 from her parents.
c. Becky pays off the loan on her son’s car while he is a student at State University. The
son, Daryl, owed $5,400 before Becky made the payment.
d. Leona is injured while on the job. She receives $4,000 from workers’ compensation
during the time she was away from her job.
During the legislative process, several groups of lawmakers become part of the system.
Those groups include the
I. House Ways and Means Committee
II. Joint Conference Committee
III. U.S. Supreme Court
IV. Joint Committee on Taxation
V. U.S. Senate
a. Statements II and III are correct.
b. Statements I, IV, and V are correct.
c. Statements I, II, and V are correct.
d. Only statement I is correct.
e. Only statement V is correct.
Continuity of life refers to whether an entity continues to operate or technically
dissolves and ceases to exist in its present form when a change occurs in the ownership
structure.
a. True
b. False
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