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Unformatted text preview: Becker Professional Education Registered to: Question CPA-01387 Darr, an employee of Sorce C Corporation, is not a shareholder. Which of the following would be included in a taxpayer's gross income? a. b. c. d. Employer-provided medical insurance coverage under a health plan. A $10,000 gift from the taxpayer's grandparents. The fair market value of land that the taxpayer inherited from an uncle. The dividend income on shares of stock that the taxpayer received for services rendered. Explanation Choice "d" is correct. An individual receiving common stock for services rendered must recognize the fair market value as ordinary income. Any dividends received on that stock would also result in income recognition. Choice "a" is incorrect. Employer-provided medical insurance is a tax-free fringe benefit. Choices "b" and "c" are incorrect. Gifts and inheritances are both tax-free to the recipient. (Remember, tax is often paid by the person giving the gift or the estate at death.) 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01404 Which of the following is (are) among the requirements to enable a taxpayer to be classified as a "qualifying widow(er)"? I. A dependent has lived with the taxpayer for six months. II. The taxpayer has maintained the cost of the principal residence for six months. a. b. c. d. I only. II only. Both I and II. Neither I nor II. Explanation Choice "d" is correct. The requirements that enable a taxpayer to be classified as a "qualifying widow(er)" are: 1) The taxpayer's spouse died in one of the two previous years and the taxpayer did not remarry in the current tax year, 2) The taxpayer has a child who can be claimed as a dependent, 3) This child lived in the taxpayer's home for all of the current tax year, 4) The taxpayer paid over half the cost of keeping up a home for the child, 5) The taxpayer could have filed a joint return in the year the spouse died. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01409 In Year 1, Smith, a divorced person, provided over one half the support for his widowed mother, Ruth, and his son, Clay, both of whom are U.S. citizens. During Year 1, Ruth did not live with Smith. She received $9,000 in Social Security benefits. Clay, a 25 year-old full-time graduate student, and his wife lived with Smith. Clay had no income but filed a joint return for Year 1, owing an additional $500 in taxes on his wife's income. How many exemptions was Smith entitled to claim on his Year 1 tax return? a. b. c. d. 4 3 2 1 Explanation Choice "c" is correct. Smith is entitled to an exemption for himself. He is also entitled to an exemption for his mother Ruth (qualifying relative). Ruth has $9,000 in Social Security payments during Year 1, but because that is her only income, the Social Security is not taxable, and nontaxable income does not count in calculating whether an exemption can be taken for a dependent. Clay cannot be taken as a dependent because he filed a joint return with his wife. Because the joint return was filed for a purpose other than simply claiming a refund, the joint return prevents Smith from claiming an exemption for Clay. An exemption cannot be taken for Clay's wife because she filed a joint return with Clay. Smith is entitled to two exemptions. Choice "a" is incorrect. Clay cannot be taken as a dependent because he filed a joint return with his wife. Because the joint return was filed for a purpose other than simply claiming a refund, the joint return prevents Smith from claiming an exemption for Clay. An exemption cannot be taken for Clay's wife because she filed a joint return with Clay. Choice "b" is incorrect. Clay cannot be taken as a dependent because he filed a joint return with his wife. Because the joint return was filed for a purpose other than simply claiming a refund, the joint return prevents Smith from claiming an exemption for Clay. An exemption cannot be taken for Clay's wife because she filed a joint return with Clay. Choice "d" is incorrect. Smith is entitled to an exemption for his mother, Ruth. Ruth has $9,000 in Social Security payments during Year 1, but because that is her only income, the Social Security income is not taxable, and nontaxable income does not count in calculating whether an exemption can be taken for a dependent. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01415 Jim and Kay Ross contributed to the support of their two children, Dale and Kim, and Jim's widowed parent, Grant. For Year 27, Dale, a 19-year old full-time college student, earned $4,500 as a baby-sitter. Kim, a 23year old bank teller, earned $12,000. Grant received $5,000 in dividend income and $4,000 in nontaxable Social Security benefits. Grant and Kim are U.S. citizens and were over one-half supported by Jim and Kay, but neither of the two currently reside with Jim and Kay. Dale's main place of residence is with Jim and Kay, and he is currently on a temporary absence to attend school. How many exemptions can Jim and Kay claim on their Year 27 joint income tax return? a. b. c. d. Two Three Four Five Explanation Choice "b" is correct. Taxpayers are now entitled to an exemption for each qualifying child and qualifying relative (two tests are "CARES" or "SUPORT"). For Dale, he does meet the residency requirement because there is an exception for a temporary absence while attending school. Therefore, he is a qualifying child under the CARES test. Kim does not qualify as a qualifying child (CARES test) because, although she is under age 24, she is not a full-time student. Therefore, the income limitations of the SUPORT test apply, and she does not qualify under that test either. Likewise, Grant's taxable income of $5,000 exceeds the minimum. Thus, 3 total exemptions can be claimed (Jim, Kay, and Dale). 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01421 Joe and Barb are married, but Barb refuses to sign a Year 12 joint return. On Joe's separate Year 12 return, an exemption may be claimed for Barb if: a. Barb was a full-time student for the entire Year 12 school year. b. Barb attaches a written statement to Joe's income tax return, agreeing to be claimed as an exemption by Joe for Year 12. c. Barb was under the age of 19. d. Barb had no gross income and was not claimed as another person's dependent in Year 12. Explanation Choice "d" is correct. If a married individual files a separate return, a personal exemption may be claimed for his or her spouse if the spouse has no gross income and is not claimed as a dependent of another taxpayer. Choice "a" is incorrect. The spouse does not have to be a full-time student. Choice "b" is incorrect. The wife does not have to attach a written statement agreeing to be claimed by her husband. Choice "c" is incorrect. The spouse does not have to be under the age of 19. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01428 Adams owns a second residence that is used for both personal and rental purposes. During the current year, Adams used the second residence for 50 days and rented the residence for 200 days. Which of the following statements is correct? a. b. c. d. Depreciation may not be deducted on the property under any circumstances. A rental loss may be deducted if rental-related expenses exceed rental income. Utilities and maintenance on the property must be divided between personal and rental use. All mortgage interest and taxes on the property will be deducted to determine the property's net income or loss. Explanation Choice "c" is correct. Because the second property was personally used more than 14 days, any net loss from the rental of the property will be disallowed. All related expenses must be prorated between the personal use portion and the rental activity portion. Prorated depreciation is permitted for the rental activity. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01433 Which of the following conditions must be present in a post-1984 divorce agreement for a payment to qualify as deductible alimony? I. Payments must be in cash or its equivalent. II. The payments must end at the recipient's death. a. b. c. d. I only. II only. Both I and II. Neither I nor II. Explanation Choice "c" is correct. Among the requirements for payments to be classified as alimony are the following two: 1. Payment must be in cash or its equivalent. 2. Payments cannot extend beyond the death of the payee-spouse. Note: The requirements for payments to be considered alimony (income) are the same as for payments to be alimony (deductions). 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01438 Which of the following costs is not included in inventory under the Uniform Capitalization rules for goods manufactured by the taxpayer? a. b. c. d. Research. Warehousing costs. Quality control. Taxes excluding income taxes. Explanation Choice "a" is correct. Uniform Capitalization rules provide guidelines with respect to capitalizing or expensing certain costs. With regard to inventory, direct materials, direct labor, and factory overhead should be capitalized as part of the cost of inventory. Warehousing costs, quality control and taxes, excluding income taxes, are all considered factory overhead items. The research should be expensed. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01442 During Year 9, Ash had the following cash receipts: Wages Interest income from U.S. Treasury bonds Workers' compensation following a job-related injury $13,000 350 8,500 What is the total amount that must be included in gross income on Ash's Year 9 income tax return? a. b. c. d. $13,000 $13,350 $21,500 $21,850 Explanation Choice "b" is correct. The total amount that must be included in gross income is $13,350 ($13,000 in wages plus $350 in interest income on U.S. Treasury bonds). Rule: Wages and interest on U.S. Treasury bonds are includible in gross income and must be reported as part of gross income on a taxpayer's income tax return. Rule: Damages for personal injury (i.e., workers' compensation for a job-related injury) are specifically excluded from gross income. Choices "a", "c", and "d" are incorrect, per the above rules. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01451 Baum, an unmarried optometrist and sole proprietor of Optics, buys and maintains a supply of eyeglasses and frames to sell in the ordinary course of business. In the current year, Optics had $350,000 in gross business receipts and its year-end inventory was not subject to the uniform capitalization rules. Baum's current year adjusted gross income was $90,000 and Baum qualified to itemize deductions. During the year, Baum recorded the following information: Business expenses: Optics cost of goods sold Optics rent expense Liability insurance premium on Optics Other expenditures: Baum's self-employment tax Baum's self-employment health insurance Insurance premium on personal residence. In the current year, Baum's home was totally destroyed by fire. The furniture had an adjusted basis of $14,000 and a fair market value of $11,000. During the year, Baum collected $3,000 in insurance reimbursement and had no casualty gains during the year. Qualified mortgage interest on a loan to acquire a personal residence Annual interest on a $70,000, 5-year home equity loan. The loan was secured by Baum's home, obtained January 2, of the current year. The fair market value of the home exceeded the mortgage and the home equity loan by a substantial amount. The proceeds were used to purchase a car for personal use. Points prepaid on January 2, of the current year to acquire the home equity loan Real estate taxes on personal residence Estimated payments of current year federal income taxes Local property taxes on the car value, used exclusively for personal use $ 35,000 $ 28,000 $ 5,250 $ 29,750 $ 8,750 $ 2,625 $ 52,500 $ $ $ $ $ 3,500 1,400 2,200 13,500 300 What amount should Baum report as current year net earnings from self-employment? a. b. c. d. $243,250 $252,000 $273,000 $281,750 Explanation Choice "d" is correct. Baum should report $281,750 as current year net earnings from self-employment (line 12 of the Form 1040), calculated as follows: Gross business receipts Cost of goods sold Rent expense Liability insurance premium Net earnings on Schedule C $350,000 (35,000) (28,000) (5,250) $281,750 Choices "a", "b", and "c" are incorrect. Self-employment tax and self-employment health insurance expenses are adjustments from total gross income. They are not deducted from self-employment earnings (i.e., not reported net on line 12 of the Form 1040). Note: There are many distracters in this question, all relating to items that are either deductible as part of itemized deductions or not deductible. Be careful to read the requirement of the question before spending unnecessary time on the question. The statement that Baum's year-end inventory was not subject to the uniform capitalization rules is a distracter as well. There is not enough information given in the facts to apply the rules if he had been subject to them. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01472 Baker, a sole proprietor CPA, has several clients that do business in Spain. While on a four-week vacation in Spain, Baker took a five-day seminar on Spanish business practices that cost $700. Baker's round-trip airfare to Spain was $600. While in Spain, Baker spent an average of $100 per day on accommodations, local travel, and other incidental expenses, for total expenses of $2,800. What amount of educational expense can Baker deduct on Form 1040 Schedule C, "Profit or Loss From Business"? a. b. c. d. $700 $1,200 $1,800 $4,100 Explanation Choice "b" is correct. Baker can deduct $1,200 as educational expenses on Baker's Form 1040 Schedule C, calculated as follows: Direct educational expenses Daily expenses for 5-day seminar Total educational expenses $ 700 [cost of the course] 500 [$100 per day x 5] $1,200 Rule: If foreign travel is primarily for personal in nature (e.g., a vacation), none of the travel expenses (e.g., round trip airfare) incurred will be allowable business deductions, even if the taxpayer was involved in business activities while in the foreign country. Note: It does not appear that the examiners are attempting to trick candidates on the classification of the business expenses as travel or educational. It appears that the purpose of the question is to test the candidate's ability to recognize when expenses are deductible and when they are not deductible business expenses. Choice "a" is incorrect, as the expenses for the 5-day period Baker attended the seminar were directly related to being in Spain for the additional period of time and are allowable business deductions. Choices "c" and "d" are incorrect, per the above rule. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01479 On December 1 of the current taxable year, Krest, a self-employed cash basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30 of the following year. Krest paid the entire interest amount of $24,000 on December 1 of the current year. What amount of interest was deductible on Krest's current year income tax return? a. b. c. d. $0 $2,000 $22,000 $24,000 Explanation Choice "b" is correct. Cash basis taxpayers deduct interest in the year paid or the year to which the interest relates, whichever is later. Even though all of the interest on this loan was paid on December 1, of the current year, only the interest relating to December of the current year can be deducted in the current year. The question does not give an interest rate, but because the loan is to be repaid in a lump sum at maturity, 1/12 of the interest, or $2,000 applies to each month. Choice "a" is incorrect. Because $2,000 of the interest relates to the current year, this amount is deductible in the current year. Choice "c" is incorrect. This is the amount that cannot be deducted until the following year, the year to which the interest relates. Be sure to read questions like this very carefully, because if you had simply misread the question as seeking the amount deductible in the following year, you would get the question wrong despite understanding the rule. Choice "d" is incorrect. Cash basis taxpayers can deduct interest in the year paid or the year to which the interest relates, whichever is later, thus 11 months of the interest will not be deductible until next year. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01482 Klein, a master's degree candidate at Briar University, was awarded a $12,000 scholarship from Briar in Year 8. The scholarship was used to pay Klein's Year 8 university tuition and fees. Also in Year 8, Klein received $5,000 for teaching two courses at a nearby college. What amount is includible in Klein's Year 8 gross income? a. b. c. d. $0 $5,000 $12,000 $17,000 Explanation Choice "b" is correct. Scholarships are nontaxable for degree seeking students to the extent that the proceeds are spent on tuition, fees, books and supplies. The $5,000 for teaching courses is taxable compensation for services delivered. Choice "a" is incorrect. The $5,000 for teaching courses is taxable compensation for services delivered. Choice "c" is incorrect. The scholarship is not taxable because Klein is a degree seeking student and used the proceeds for tuition and fees. Furthermore, the $5,000 for teaching courses is taxable compensation for services delivered. Choice "d" is incorrect. The scholarship is not taxable because Klein is a degree seeking student and used the proceeds for tuition and fees. 2011 Edition. Distributed by DeVry/Becker Educational Development Corp. Copyright ?2010 DeVry/Becker Educational Development Corp. All rights reserved. Becker Professional Education Registered to: Question CPA-01485 Which payment(s) is(are) included in a recipient's gross income? I. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree. II. A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the univers...
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