Tax Accounting Final

1) Liz, who is single, lives in a single family home and owns a second single family home that she rented for the entire year at a fair rental rate. Liz had the following items of income and expense during the current year.

Income:

Gross salary and commissions from Ace Corporation            $50,000

Rent received from tenant in Liz's rental house            13,000

Dividends received on her portfolio of stocks 5,000

Expenses:

Unreimbursed professional dues         200

Subscriptions to newsletters recommending stocks     900

Taxes, interest and repair expenses on rental house     3,500

Depreciation expense on rental house 2,300

What is her adjusted gross income for the year?

A) $52,700

B) $61,100

C) $62,200

D) $68,000

Page Ref.: I:6-4

2) Pamela was an officer in Green Restaurant which subsequently went bankrupt. Pamela started a new restaurant and, to establish goodwill, paid off the debts of $100,000 of Green Restaurant. She was under no obligation to do so. The $100,000 is

A) deductible currently as an itemized deduction.

B) capitalized because the expenses are not ordinary.

C) deductible currently as a trade or business expense since the expenses are considered ordinary and necessary business expenses.

D) None of the above.

Page Ref.: I:6-8; Example I:6-6

3) Carole owns 75% of Pet Foods, Inc. As CEO, Carole must travel extensively and does so on the company jet. In addition, she also uses the jet to take several personal vacations. Carole reports the value of the personal use of the jet, $140,000, as additional compensation. Which of the following is true in terms of the corporation?

A) The corporation includes $140,000 as miscellaneous income.

B) The $140,000 has no impact on the corporation's income tax.

C) The corporation takes a deduction of $140,000 for compensation expense.

D) The corporation takes a deduction of $140,000 for dividend expense.

Page Ref.: I:6-9; Example I:6-10

4) Emeril borrows $340,000 to finance taxable and tax-exempt investments. He incurs $18,000 investment interest expense, allocated equally between the taxable and tax-exempt investments. Ignore any possible investment interest expense limitation. How much of the interest expense is deductible, and where is it deductible?

A) $18,000 for AGI

B) $18,000 from AGI

C) $9,000 for AGI

D) $9,000 from AGI

Page Ref.: I:6-12; Example I:6-14

5) Jimmy owns a trucking business. During the current year he incurred the following:

Gasoline and Oil         $ 100,000

Maintenance    $ 15,000

Fines for Speeding and Illegal parking            $ 8,000

Bribes to Government Inspection Officials     $ 21,000

What is the total amount of deductible expenses?

A) $115,000

B) $123,000

C) $108,000

D) $144,000

Page Ref.: I:6-14

6) Toby, owner of a cupcake shop in New York, is considering opening a similar business (i.e., a cupcake shop) in Phoenix. After spending $4,200 investigating such possibilities in Phoenix, Toby decides against opening the store. What is the maximum amount of deduction for the current year attributable to these expenditures?

A) $-0-

B) $420

C) $840

D) $4,200

Page Ref.: I:6-16

7) Ashley, a calendar year taxpayer, owns 400 shares of Yale Corporation stock that she purchased two years ago for $4,000. In the current year Ashley sells all 400 shares of the Yale Corporation stock for $2,400 on December 27. On January 4 of the following year, Ashley purchases 300 shares of Yale Corporation stock for $800. Ashley's recognized loss and her basis in the newly purchased 300 shares of Yale Corporation stock are

A)

Recognized Loss         Basis

$0        $3,200.

B)

Recognized Loss       Basis

$400    $2,000.

C)

Recognized Loss         Basis

$1,200 $2,000.

D)

Recognized Loss         Basis

$1,600 $ 800.

Page Ref.: I:6-24 and I:6-25; Example I:6-31 and I:6-32

8) Which of the following individuals is not considered a relative for purposes of the loss disallowance rules under Sec. 267?

A) brother

B) husband

C) sister-in-law

D) grandfather

Page Ref.: I:6-26

9) Donald sells stock with an adjusted basis of $38,000 to his son, Kiefer, for its fair market value of $30,000. Kiefer sells the stock three years later for $32,000. Kiefer will recognize a gain on the subsequent sale of

A) $-0-.

B) $2,000.

C) ($6,000).

D) ($8,000).

Page Ref.: I:6-28; Example I:6-35

10) Alan, who is a security officer, is shot while on the job. As a result, Alan suffers from a chronic leg injury and must use a wheelchair and undergo therapy to regain and retain strength. Alan's physician recommends that he install a whirlpool bath in his home for therapy. During the year, Alan makes the following expenditures:

Wheelchair      $ 1,200

Whirlpool bath            2,000

Maintenance of the whirlpool  250

Increased utility bills associated with whirlpool           450

Entrance ramp, various home modifications    7,200

A professional appraiser tells Alan that the whirlpool has increased the value of his home by $1,000. Alan's deductible medical expenses (before considering limitations based on AGI) will be

A) $6,000.

B) $10,100.

C) $7,000.

D) $7,700.

Page Ref.: I:7-6; Example I:7-4

11) Caleb's medical expenses before reimbursement for the year include the following:

Medical premiums       $11,000

Doctors, hospitals        3,500

Prescriptions   600

Caleb's AGI for the year is $50,000. Caleb also receives a reimbursement for medical expenses of $1,000. Caleb's deductible medical expenses that will be added to the other itemized deduction will be

A) $10,350.

B) $11,350.

C) $14,500.

D) $15,100.

Page Ref.: I:7-7

12) Mr. and Mrs. Gere, who are filing a joint return, have adjusted gross income of $50,000. During the tax year, they paid the following medical expenses for themselves and for Mrs. Gere's mother, Mrs. Williams. The Gere's could claim Mrs. Williams as their dependent, but she has too much gross income.

Insulin for Mr. Gere    $1,000

Health insurance premiums for Mrs. Gere      $3,100

Hospital bill for Mrs. Williams           $5,200

Doctor bill for Mrs. Gere        $4,000

Mr. and Mrs. Gere received no reimbursement for the above expenditures. What is the amount of their deductible itemized medical expenses?

A) $6,450

B) $9,550

C) $5,550

D) $13,300

Page Ref.: I:7-2 through I:7-7

13) In February of the current year (assume a non-leap year), Ken and Kelsey received their property tax statement for last calendar-year taxes of $1,600, which they paid to the taxing authority on March 1 of the current year. They had purchased their home on May 1 last year. What amount of property tax on this statement may they claim as an itemized deduction this year?

A) $0

B) $1,069

C) $1,074

D) $1,600

Page Ref.: I:7-11

14) Riva borrows $10,000 that she intends to use for purchasing supplies for her business. She temporarily deposits the funds in her personal checking account. Prior to the deposit, the checking account held $40,000 of personal funds. Riva books a vacation for $6,000 and writes a check to the travel agency from her personal account. Later in the month, the business supplies bill arrives and Riva writes a check for $10,000 from the personal account. With respect to the interest expense on the $10,000 loan,

A) it will all be treated trade or business expense.

B) 60 percent will be treated as personal interest expense and 40 percent as trade or business expense.

C) it will all be treated as personal expense.

D) 20 percent will be treated trade or business expense.

Page Ref.: I:7-13 and I:7-14

15) Wayne and Maria purchase a home on April 1 of the current year. In order to obtain a thirty-year mortgage, they are required to pay $7,200 in points at closing. Charging points is a customary business practice in the area. In addition, they pay $4,400 of interest during the year. What is their current year deduction related to their home?

A) $4,400

B) $4,580

C) $7,200

D) $11,600

Page Ref.: I:7-18; Example I:7-19

16) Erin's records reflect the following information:

1. Paid $200 dues to a fraternal organization (such as the Elks Club)

2. Donated stock having a fair market value of $3,500 to a qualified charitable organization. She purchased the stock 2 years earlier for $3,000.

3. Paid $1,600 cash to qualified public charitable organizations

Erin's adjusted gross income for this year was $50,000. What is the amount of her charitable contribution deduction for the year?

A) $4,600

B) $4,800

C) $5,100

D) $5,300

Page Ref.: I:7-22 through I:7-25

17) Carl purchased a machine for use in his trade or business two years ago for $30,000. During the current year, Carl donates the machine to the local community college. At the time of the contribution, the machine's adjusted basis is $10,000 and its FMV is $15,000. Carl's AGI for the year is $48,000. What is the amount of his charitable contribution deduction?

A) $10,000

B) $14,000

C) $15,000

D) $25,000

Page Ref.: I:7-24; Example I:7-28

18) Juan has a casualty loss of $32,500 on investment property after receiving an insurance settlement. This is Juan's only casualty transaction this year. Juan's loss is

A) an ordinary loss.

B) a capital loss.

C) a Sec. 1231 loss.

D) a Sec. 1244 loss.

.

Page Ref.: I:8-5; Example I:8-4

19) Amy, a single individual and sole shareholder of Brown Corporation, sold all of the Brown stock for $30,000. The stock basis was $150,000. Amy had owned the stock for 3 years. Brown Corporation meets the Section 1244 requirements. Amy has

A) a $50,000 ordinary loss and $70,000 LTCL.

B) a $50,000 STCL and a $70,000 LTCL.

C) a $100,000 ordinary loss and a $20,000 LTCL.

D) a $100,000 LTCL and a $20,000 ordinary loss.

Page Ref.: I:8-5

20) Jeff owned one passive activity. Jeff sold the activity and realized a $2,000 gain on the sale. Prior to the sale, he realized a current year loss from the activity of $6,000. In addition, he has suspended losses from prior years of $7,000. What is the net impact on Jeff's AGI this year due to the passive activity?

A) Increase of $2,000.

B) No net change.

C) Decrease of $4,000.

D) Decrease of $11,000.

Page Ref.: I:8-8

21) Charlie owns activity B which was considered a passive activity and generated a $17,000 suspended loss. Charlie increases his involvement with activity B so that this year activity B is not considered passive for Charlie. During this year, activity B produces a $9,000 loss. In addition, Charlie acquires an investment in activity X, a passive activity, this year. Charlie's share of activity X's income is $13,000. Charlie's salary this year is $70,000. As a result, this year Charlie must

A) offset B's loss carryover against X's current income and carry over $9,000 loss from activity B to next year.

B) offset B's carryover loss and current loss against X's income first and then offset any remaining loss against salary.

C) offset B's $9,000 loss against X's $13,000 income and offset B's loss carryover against the remaining $4,000 of X's income.

D) offset B's current $9,000 loss against his salary and offset B's loss carryover against X's income and carry over $4,000 of loss to next year.

Page Ref.: I:8-9; Example I:8-9

22) Which of the following is most likely not considered a casualty?

A) fire loss

B) water damage caused by a busted water heater

C) death of a pine tree due to a two-day infestation of pine beetles

D) water damage to the walls and ceiling of a taxpayer's personal residence as the result of gradual deterioration of the roof

Page Ref.: I:8-17

23) Nicole has a weekend home on Pecan Island that she purchased in 2005 for $250,000. Recently, the home was appraised at $260,000. After the appraisal, a hurricane hit Pecan Island, severely damaging Nicole's home. An appraisal placed the value of the home at $140,000 after the hurricane. Because of its prohibitive cost, Nicole had no hurricane insurance. Before any reductions or limitations, Nicole's casualty loss amount is

A) $0.

B) $10,000.

C) $120,000.

D) $140,000.

Page Ref.: I:8-19; Example I:8-21

24) In the current year, Marcus reports the following casualty gains and losses on personal-use property. Assets X and Y are destroyed in the first casualty while Z is destroyed in a second casualty.

Asset   Reduction

in FMV           Adjusted Basis            Insurance         Holding Period

X         $8,000 $2,000 $7,000 2 years

Y          3,000   5,000   2,000   10 months

Z          2,500   1,300   1,000   8 months

As a result of these losses and insurance recoveries, Marcus must report

A) a net gain of $3,700.

B) a long-term gain of $4,900 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $200 on asset Z.

C) a long-term capital gain of $5,000 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $200 on asset Z.

D) a long-term capital gain of $5,000 on asset X; a short-term capital loss of $900 on asset Y; and a short-term capital loss of $300 on asset Z.

Page Ref.: I:8-21; Example I:8-25

25) Constance, who is single, is in an automobile accident in 2012, and her car sustains $6,200 in damages. Because both drivers received tickets in the accident, Constance does not expect to recover any of the loss from her insurance company. Constance's 2012 AGI is $31,000. Her casualty loss is $3,000; she has other itemized deductions of $1,200. In 2013, Constance's insurance company reimburses her $2,800. Constance's 2013 AGI is $28,000. As a result, Constance must

A) amend the 2012 return to show the $200 loss.

B) do nothing and simply keep the $2,800.

C) amend the 2012 return to show $0 loss and file her 2013 return to show $200 loss.

D) do nothing to the 2012 return but report $2,800 of income on her 2013 return.

Page Ref.: I:8-23; Example I:8-30

26) In 2011 Grace loaned her friend Paula $12,000 to invest in various stocks. Paula signed a note to repay the principal with interest. Unfortunately the market for that industry sector plunged, and Paula incurred large losses. In 2012 Paula declared personal bankruptcy and Grace was unable to collect any of her loan. Grace had no other gains or losses last year or this year. The result is

A) Grace deducts a business bad debt of $12,000 in 2012.

B) Grace deducts a $12,000 nonbusiness bad debt as a short-term capital loss in 2012.

C) Grace deducts a $3,000 nonbusiness bad debt as a short-term capital loss in 2012 and carries $9,000 over to subsequent years.

D) Grace deducts a business bad debt of $3,000 in 2012 and carries $9,000 over to subsequent years.

Page Ref.: I:8-27; Example I:8-36