Income Tax Accounting

ACCT 323 7980 INCOME TAX I (SPRING 2018)

QUIZ II

(1) Lauren is a sole proprietor. She owns, leases, and manages apartment buildings. During the

current year, Lauren incurred the following costs. Which of these costs are deductible? If so, are

they for AGI or from AGI deductions?

(a) Attorney’s fees of $350 for title searches on new property Lauren acquired.

(b) Legal fees of $600 to collect unpaid rent.

(c) CPA fees of $450 to prepare Lauren’s 2015 federal income tax return, $350 of which

involved preparation of her Schedule C.

(d) Legal fees Lauren paid for an attorney to prepare her will.

(e) Legal fees Lauren paid for an unsuccessful challenge a county rezoning ordinance

that adversely affected her business.

2) Lamont uses the accrual method of accounting for his calendar-year computer sales and

repair business. For tax purposes, (a) how should Lamont account for the following transactions;

and (b) would your answers change if Lamont were a cash basis taxpayer?

(i) During 2017, Lamont hired a contractor to remodel his store. The remodeling was

completed on November 28. On December 13, Lamont received a $20,000 bill from the

contractor. He immediately contacted the contractor to contest the $7,000 labor charge

included in the bill, which Lamont claims should only be $5,000. Lamont did not pay

any amount to the contractor.

(ii) Lamont provides a one-year warranty on all of its computers. For computer sales

during 2017, he paid $12,500 to service warranties during 2017, and he expects to pay

$14,000 to fulfill the remaining 2017 warranty obligations in 2018.

3) Joe Smith, a cash-basis taxpayer, earned an annual salary of $80,000 at Resolute Corp. in

2017, but he elected to take only $50,000. Resolute, which was financially able to pay Smith's

full salary, credited the unpaid balance of $30,000 to Smith’s account on the corporate books in

2017, and actually paid this $30,000 to Smith on January 30, 2018. How much of the salary is

taxable to Smith in 2017? Explain.

4) In the current year, Owens sold land with a basis of $80,000 to Yancey for $100,000. Yancey

paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next five years,

beginning in the second year. Under the installment method, what gain should Owens include in

gross income for the year of sale?

5) In the current tax year, Gunther earned $125,000 from his job as a civil engineer. In addition,

he received $30,000 of income from Activity A, and lost $40,000, and 20,000 from Activities B

and C respectively. Activities A, B, and C are passive activities that Gunther acquired in the

current year. What amount of loss may Gunther deduct on his current year taxes? What amount

of loss, if any, must be carried over to the subsequent year for each activity?

6) In the current tax year, Neil’s personal automobile was totaled in a traffic accident. Neil had

purchased the automobile two years earlier for $28,000. The FMV of the automobile just prior

to the accident was $18,000. The automobile is now worthless. Neil received a $14,000

insurance check in settlement of his accident claim. Later that same year, a thief broke into

Neil’s home and took several antiques purchased several years ago for $8,000. Their current

FMV at the date of the theft was $12,000. The antiques were not insured. Neil’s AGI for the

current year is $60,000. What is the amount of Neil’s deductible casualty loss in the current

year?

7) For 2017, Travis and Bonnie White (both age 40) filed a joint return. Travis earned $55,000

in wages and was covered by his employer's qualified pension plan. Bonnie was unemployed and

received $4,000 in alimony payments for the first four months of the year before remarrying. The

couple had no other income. Each contributed $5,000 to an IRA account. What is the maximum

allowable IRA deduction on their 2017 joint tax return?

8) Which of the following types of costs are required to be capitalized under the Uniform

Capitalization Rules of Code Sec. 263A? Only one option is correct.

a. Marketing.

b. Distribution.

c. Warehousing.

d. Office maintenance.

9) On March 1 of the previous year, a parent sold stock with a cost of $8,000 to her child, for

$6,000, its fair market value. On September 30 of the current year, the child sold the same stock

for $7,000 to Smith, who is unrelated to the parent and child. What is the proper treatment for

these transactions?

a. Parent has a $2,000 recognized loss and child has $1,000 recognized gain.

b. Parent has $2,000 recognized loss and child has $0 recognized gain.

c. Parent has $0 recognized loss and child has $1,000 recognized gain.

d. Parent has $0 recognized loss and child has $0 recognized gain.

10) Robert Corp. granted an incentive stock option for 200 shares to Beverly, an employee, on

March 14, Year 12. The option price and FMV on the date of grant was $150. Beverly exercised

the option on August 2, Year 14, when the FMV was $180 per share. She sold the stock on

September 20, Year 15, for $250 per share. How much gross income did Beverly recognize in

Year 12?

a. $30,000

b. $150

c. $0

d. $20,000