Exam 3 - Practice Answers (Summer 2016).pdf - ACCT 308...

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1 ACCT 308 Summer 2016 Exam 3 Review This exam review is intended to give you an idea of the types of numerical questions that may be tested on the exam. There actual exam may vary in length and format and will contain conceptual questions in addition to numerical answer questions. Refer to the Exam Review handout for specifics regarding the number of questions and format of the actual exam format. Chapter 16 Questions Method of Accounting 1. Which of the following taxpayers is required to use the accrual method of accounting? A. A retail business with average annual gross receipts of $800,000. B. A medical doctor with average annual gross receipts of $2 million. C. An insurance agency with average annual gross receipts of $2 million. D. All of the above are required to use the accrual method. E. None of the above is required to use the accrual method. Generally, sales and cost of goods sold for a retail business must be reported by the accrual method because inventories are material. However, the small business exception applies to choice (A). The medical doctor and insurance agency are service entities (do not have inventory), and therefore can use the cash method.
2 Chapter 17 Questions Corporations v. Individuals (Gross Income) 2. True/False: Thomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation. In the current year both businesses make a net profit of $60,000. Neither business distributes any funds to the owners in the year. For the current year, Thomas must report $60,000 of income on his individual tax return, but Lucy is not required to report any income from the corporation on her individual tax return. A. True B. False Proprietorship profits flow through to the owner and are reported on the owner’s individual income tax return. It does not matter how much of the profit is withdrawn from the proprietorship. Thus, Tomas must report the net profit of $60,000 on his Form 1040 (Schedule C). Shareholders are required to report income from a C corporation only to the extent of dividends received. Since no dividends were distributed, Lucy has no income to report from the corporation for the current year. Corporations v, Individuals Capital Gains 3. Albatross, a C corporation, had $260,000 income from operations, $120,000 operational expenses, and a $25,000 short-term capital loss in 2015. Determine Albatross Co rporation’s taxable income for 2015. Albatross has taxable income of $140,000 [$260,000 income less $120,000 expenses]. A corporation may only offset capital losses only against capital gains. Since there were no capital gains, Albatross may not deduct any portion of the $25,000 short-term capital loss. Rather, the net capital loss must be carried back three years and forward five years and be offset against capital gains in the carryback/forward years.
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