Which of the following properties that was sold during January 2015 is Section 1231
property for Baylan Toy Manufacturing Corporation?
I. Automobile purchased in 2011.
II. Land used in the business since 2012.
III. Factory building purchased and placed into service in May 2014.
IV. Office building purchased and placed into service in June 2011.
a. Only statement I is correct.
b. Statements I, II, and IV are correct.
c. Statements III and IV are correct.
d. Statements II and III are correct.
e. Statements I, II, III, and IV are correct.
A closely held corporation cannot offset net passive losses against income of the
business.
a. True
b. False
Nanci purchases all of the assets of Michael’s Security Service for $200,000. The assets
are as follows:
Asset Adjusted Basis Fair Market Value
Inventory $25,000 $50,000
Equipment 60,000 40,000
Supplies 20,000 20,000
Building 80,000 95,000
Land 10,000 20,000
$195,000 $225,000
What is Nanci’s basis in the equipment?
a. $17,776
b. $35,556
c. $40,000
d. $60,000
e. $61,538
Cecelia is a loan officer for The Hibernia Street Bank. Her adjusted gross income for
the current year is $85,000.Cecelia incurs the following unreimbursed expenses during
the current year:
Dues to loan officer association $520
Subscriptions to professional journals 475
Parking at work 2,260
Entertaining clients 850
Business clothes 1,400
Tax return preparation fee 950
Legal fees related to tax issue on a prior year tax return 1,650
Safe deposit box rental 80
Investment fees 640
What is Cecelia’s allowable miscellaneous itemized deduction?
a. $1,390
b. $3,040
c. $4,740
d. $7,265
e. $8,965
Virginia owns a business that rents power equipment to construction companies.
Despite maintaining, delivering, and picking up the equipment, Virginia’s business is
passive since it is a rental activity.
a. True
b. False
Tara does not agree with a proposed deficiency of additional tax resulting from an
examination of her individual income tax return. She has not been able to satisfactorily
resolve her case within the administrative processes of the Internal Revenue Service.
Which of the following courts may she petition without first making payment of the
contested deficiency?
a. United States Tax Court.
b. United States District Court.
c. U.S. Court of Federal Claims.
d. Any of the above.
For each of the following situations, determine the amount of gross income that the
taxpayer should recognize. Explain why any amounts are excluded from gross income.
a. Gary is an employee of G&K Electronics. G&K allows all employees to buy goods
from inventory at a 20% discount. Gary purchases a television under the discount plan
for $800. The television, which cost G&K $700, normally sells for $1,000.
b. Carolyn receives an $8,000 National Merit Scholarship and a $2,000 Honors at
Entrance Scholarship to attend State Tech. The scholarships were given based on
national testing scores and high school grades, and require no future services on
Carolyn’s part. Tuition and other fees are $6,500 per year at State Tech. Carolyn also
pays $6,000 for room and board in University housing.
c. Donnie’s employer provides free parking to certain management level employees. In
2014, Donnie’s employer provided parking cost his employer $3,180.
d. Gretchen receives $5,000 of 6% City of Orlando bonds as a graduation present from
her boyfriend on May 1. The bonds pay interest on June 30 and December 31. Gretchen
sells the bonds at a gain of $750 in August.
Shannon is 16 years old and is a qualified dependent of her mother. Shannon earns
$1,500 as a counselor at a church summer camp and receives $2,500 of interest on a
savings account established by her grandparents. Shannon’s 2015 taxable income is:
a. $- 0 –
b. $1,500
c. $2,150
d. $2,500
e. $2,950
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.
Which of the following is/are trade or business expenses?
I. Mahlon incurs expenses related to investing in stocks and bonds. Mahlon is a
Sociology professor at State University but spends 10-15 hours per week on his
investments. Almost 2/3 of Mahlon’s annual income comes from his investments as
dividends and interest.
II. Shaheen has expenses related to managing her portfolio of securities. The short-term
trading of her securities generates most of her annual income. She has no other job.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Determine the proper classification(s) of the asset discussed in the following scenario:
Judge Marshall purchased a new gold-trimmed gavel to decorate his living room.
I. Personal use property. IV. Intangible property.
II. Business use property. V. Real estate.
III. Tangible property. VI. Personal property.
a. Statements I and III are correct.
b. Only statement VI is correct.
c. Statements II and III are correct.
d. Statements II, III, and VI are correct.
e. Statements I, III and VI are correct.
Which of the tax concept(s) allow for the deferral of gains on nonrecognition
transactions?
I. Capital Recovery Concept.
II. Ability to Pay Concept.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
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.
What body has jurisdiction over all tax matters and is responsible for initiating tax
legislation?
a. Joint Conference Committee.
b. Joint Committee on Taxation.
c. House Ways and Means Committee.
d. Judiciary Committee.
e. Senate Finance Committee.
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. $1,000
b. $1,200
c. $2,000
d. $2,400
e. $4,400
When property is transferred, gift and estate taxes are based on the
a. fair market value of the assets on the date of transfer.
b. replacement cost of the transferred property.
c. transferor’s original cost of the transferred property.
d. transferor’s adjusted basis of the transferred property.
e. fair market value less adjusted basis on the date of the transfer.
Which of the following is a taxable entity?
a. Sole Proprietorship.
b. Partnership.
c. S Corporation.
d. C Corporation.
Norton’s spouse died in 2015. Norton has one child, age 7, living at home. Norton
provides all of the support for the child. The child lives with Norton during 2015, 2016,
2017, and 2018 Norton’s most advantageous filing status is
a. Married filing jointly in 2015, single in 2016, 2017, 2018.
b. Head of household for all four years.
c. Head of household in 2015, surviving spouse in 2016, 2017, 2018.
d. Married filing jointly in 2015, surviving spouse in 2016 and 2017, head of household
in 2018.
Cisco and Carmen are both in their 30’s and are married. Carmen earns $69,000 and
Cisco earns $28,000. Their adjusted gross income is $104,000. Carmen is an active
participant in her company’s pension plan. Cisco’s employer does not have a pension
plan. What are Carmen and Cisco’s maximum combined IRA contribution and
deduction amounts?
Contribution Deduction
a. $-0- $-0-
b. $11,000 $5,500
c. $11,000 $9,350
d. $11,000 $11,000
The hybrid method of accounting provides that taxpayers will account for sales of
merchandise and the related cost of goods sold on the accrual basis and all other items
of income and expense on the cash basis.
a. True
b. False
Dontrell sells a building used in his business at a gain of $20,000. The building was
purchased in 2006, and $15,000 of depreciation had been deducted on the building to
the date of sale. Dontrell’s only other property transaction resulted in a $5,000 loss on
the sale of equipment used in his business. Dontrell’s marginal tax rate is 33% without
considering these two transactions. As a result of these transactions
I. Dontrell will pay additional tax of $2,850.
II. Dontrell can only deduct $3,000 of the loss on the sale of the equipment and pays a
tax of $3,750 on the sale of the building.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Harold is a 90% owner of National Homes Construction, an accrual basis S corporation.
On December 30, 2014, National Homes accrues a $100,000 bonus to Harold, payable
on February 15, 2015.
I. If Harold is an accrual basis taxpayer, National Homes deducts the bonus in 2014 and
Harold reports the income in 2015.
II. If Harold is a cash basis taxpayer, National Homes deducts the bonus in 2014 and
Harold reports the income in 2015.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Marybelle paid $400,000 for a warehouse. Using 39-year straight-line depreciation,
Marybelle deducts $24,868 for the first two years of usage. At the beginning of the third
year, Marybelle sells the warehouse for $380,000. What is the character of the gain.
a. Long-term capital gain.
b. Section 1250 gain.
c. Ordinary income.
d. Unrecaptured section 1250 gain.
e. Section 1245 gain.
An accrual basis taxpayer does not have income until there is an actual or constructive
receipt of income earned.
a. True
b. False
Ed’s adjusted basis in his partnership interest at the beginning of the tax year is $35,000.
The partnership has operating income of $20,000 for the current year. Ed is a 50%
partner, and he receives a current distribution of $40,000 cash this year. What is (are)
the tax effect of these events?
I. Ed recognizes $10,000 of ordinary income from the partnership for the year.
II. Ed recognizes $40,000 of ordinary income due to the distribution.
III. Ed’s adjusted basis in his partnership interest at the close of the tax year is zero.
a. Statements II and III are correct.
b. Only statement I is correct.
c. Statements I, II, and III are correct.
d. Only statement III is correct.
e. Statements I and III are correct.
Kyle is 31 years old, single, self-employed, and has no qualified pension plan. His net
self-employment income is $35,000 and he contributes the maximum amount to his
IRA account during the current year. How much can Kyle deduct for AGI this year?
a. $- 0 –
b. $1,500
c. $3,000
d. $4,000
e. $5,500
Items that are excluded from gross income include all of the following with the
exception of:
a. gifts.
b. inheritances.
c. life insurance proceeds.
d. municipal bond interest.
e. U.S. Treasury Bills interest.
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.
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
If more than 40% of the depreciable basis of personal property is placed in service
during the last three months of the tax year, the taxpayer must use the mid-quarter
convention.
a. True
b. False
No-additional-cost services and employee discounts must be made available to
employees on a nondiscriminatory basis and must also be in the same line of business in
which the employee works to be excluded from the employee’s income.
a. True
b. False
An expense that is incurred for the production of rent will be deducted for adjusted
gross income.
a. True
b. False
Reiko buys 200 shares of Saratoga Corporation common stock on December 10, 2014,
for $2,000. He buys an additional 200 shares for $1,800 on December 23, 2015. On
December 28, 2015, Reiko sells 100 of the first 200 shares for $800. He sells the
remaining 300 shares for $2,500 on November 15, 2016. What is(are) the amount(s)
and the year of recognition of losses that Reiko can recognize?
2015 2016
a. – 0 – $300
b. – 0 – $500
c. $200 $500
d. $200 $300