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ACC_4301_Solutions_to_Problems_(Chapter_6)

ACC_4301_Solutions_to_Problems_(Chapter_6) - PROBLEMS 33...

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PROBLEMS 33. Since these expenses relate to Sandra’s law practice, all are deductible in calculating her AGI. Therefore, they reduce AGI by \$4,225. Conference registration (\$800 + \$800) \$1,600 Airline tickets (\$900 + \$400) 1,300 Lodging (\$650 + \$350) 1,000 Rental car in San Francisco 325 \$4,225 p. 6-4 34. a. Gross income: Salary income \$60,000 Net rent 6,000 Dividend income 3,500 \$ 69,500 Deductions for AGI: Alimony paid \$12,000 Contribution to traditional IRA 5,000 Loss on sale of real estate 2,000 (19,000) Adjusted gross income \$50,500 b. Itemized deductions: Mortgage interest on residence \$ 4,900 Property tax on residence 1,200 Contribution to church 2,100 State income tax 300 Medical expenses [\$3,250 – (\$50,500 × 7.5%)] –0– Total itemized deductions \$ 8,500 Since the standard deduction for 2009 (\$5,700) is less than Daniel’s itemized deductions (\$8,500), Daniel should itemize his deductions from AGI. The Federal income tax of \$7,000 is not deductible. pp. 6-3 to 6-5 35. With IRA Without IRA Contribution Contribution Gross income \$9,000 \$9,000 Contribution to IRA (1,000) (–0–) AGI \$8,000 \$9,000 Itemized deductions: Charitable contribution \$1,950 \$1,950 Medical expenses [\$2,700 – (7.5% × AGI)] 2,100 2,025 Casualty loss [(\$3,500 – \$500) – (10% × AGI)] 2,200 2,100 Total itemized deductions \$6,250 \$6,075 Thus, the \$1,000 traditional IRA contribution would increase Julie’s itemized deductions by \$175 (\$6,250 – \$6,075). Example 2

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36. a. Drew and Cassie are trying to use the salaries to reduce the taxable income of Thrush to zero (\$800,000 – \$400,000 – \$300,000 – \$100,000). By so doing, they can avoid the potential for double taxation. b. If the salaries paid to the children are deemed reasonable, Thrush’s taxable income is reduced to zero. Each child will report gross income of \$25,000. The more likely result is that a substantial portion of the \$100,000 salary payments will be labeled as unreasonable compensation. In this case, Thrush’s taxable income will be increased by the amount of unreasonable compensation. Each of the children will report gross income equal to the amount labeled reasonable compensation. Drew and Cassie will have additional dividend income equal to the amount of the unreasonable compensation. p. 6-7 37. Mary’s deductible losses are as follows: Sale of Green Corporation stock \$3,000 Sale of City of York bonds 4,500 Theft of uninsured business use notebook computer 2,000 \$9,500 The losses on the sale of the bedroom suite, car, and personal residence are all losses on the sale of personal use assets—none are deductible. While the interest on the City of York bonds is excludible from gross income, the loss can be deducted. p. 6-8 38. a. and b. Accrual Cash method method Sales revenue \$ 95,000 \$ 76,000 Less: Wage expense (29,000) (26,000) Office expense (2,000) (2,000) Bad debt expense (500) (–0–) Utilities and telephone expense (5,400) (5,400) Insurance expense (4,000) (4,000) Rent expense (9,000) (9,750) AGI \$ 45,100 \$ 28,850 pp. 6-9 to 6-11 39. Doris can deduct only \$10,000 (\$90,000 × 2/18) in 2009 for the rent for November and December. She does not qualify under the one-year rule for prepaid expenses since the period for which prepayments have been made extends past December 31, 2010.
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