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305examIIreviewquestions

305examIIreviewquestions - ACCOUNTING 305 EXAM II...

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ACCOUNTING 305 EXAM II REVIEWQUESTIONS True/False Indicate whether the statement is true or false. ____ 1. A gift made by an employer to the employee can be excluded from the employee’s gross income. ____ 2. Ed died while employed by Violet Company. His wife collected $50,000 on a group-term life insurance policy that Violet provided its employees, and $5,000 of accrued salary Ed had earned prior to his death. Ed’s wife is not required to recognize any income from the receipt of the $55,000. ____ 3. Amber received an academic scholarship that was to pay her tuition, room and board, and books. Amber is required to recognize gross income from the scholarship proceeds. ____ 4. In December 2006, Tonya, a cash basis taxpayer, received a $3,000 cash scholarship for the Spring semester of 2007. In January 2007, she used the $3,000 to pay her college tuition. Tonya must include the $3,000 in her 2006 gross income, but she is allowed a $3,000 deduction in 2007. ____ 5. Graduate teaching assistantships are generally scholarships and therefore are excluded from gross income. ____ 6. In 2006, Joyce was in an automobile accident and suffered physical injuries. The accident was caused by Ramon’s negligence. In 2007, Joyce collected from the insurance company. She received $15,000 for loss of income, $5,000 punitive damages, and $8,000 for medical expenses which she had not deducted on her 2006 tax return. As a result of the above, Joyce’s 2007 gross income is increased by $28,000. ____ 7. Worker’s compensation benefits are excluded from gross income. ____ 8. Sam received $25,000 of salary, interest, and dividends in 2006. He also received $10,000 as worker’s compensation benefits. Sam must include either 50% or 85% of the worker’s compensation benefits in gross income for 2006. ____ 9. Sarah’s employer pays the hospitalization insurance premiums for a policy that covers all employees and their family members. The premiums for Sarah’s medical coverage can be excluded from her gross income, but the premiums for her family members must be included in her gross income. ____ 10. Meg’s employer carries insurance on its employees that will pay an employee his or her regular salary while the employee is away from work due to illness. Meg was absent from work for two months as a result of a kidney infection. Meg’s employer’s insurance company paid Meg’s regular salary of $8,000 while she was away from work. Meg is required to include the sick pay in her gross income. ____ 11. Alberta works for a company with only 25 employees. Her employer contributed to her health savings account (HSA). Alberta is not required to include the employer’s contribution in gross income, but withdrawals to pay medical expenses are taxable. ____ 12. Members of a research team can exclude from gross income the value of their lodging furnished at the research base located at the South Pole. ____ 13. Roger’s employer has created a flexible spending account for medical and dental expenses that are not covered by the company’s health insurance plan. Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan. However, Roger incurred only $1,100 in actual expenses for which he was reimbursed. Roger can receive the remaining $100 without recognition of income. ____ 14. The value of an employee’s occasional, personal use of the employer’s copying machine must be included in the employee’s gross income.
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____ 15. Fresh Bakery often has unsold donuts at the end of the day. The bakery allows employees to take the leftovers home. The employees are not required to recognize gross income because the bakery does not incur any additional cost. ____ 16. Kay’s employer pays her $100 per month towards the cost of parking near a railway station where Kay catches the train to work. The employer also pays the cost of the rail pass, $90 per month. Kay can exclude both of these payments from gross income. ____ 17. Mother participated in a qualified state tuition program for the benefit of her son. She contributed $14,000. When the son entered college, the balance in the fund satisfied the tuition charge of $20,000. When the funds were withdrawn to pay the college tuition for her son, the son must include $6,000 in his gross income. ____ 18. The earnings of a qualified state tuition program are deferred until they are used for qualified higher education expenses. When used, they are included in gross income. ____ 19. A debtor undergoing a reorganization under the bankruptcy laws who receives a reduction or a forgiveness of his or her liabilities can exclude the debt reduction from gross income. ____ 20. Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000. One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage. Ted reduced the amount owed by Amber to $600,000. This reduced the monthly payments to a level that Amber could pay. Amber must reduce its basis in the building by $125,000, but Amber is not required to recognize income from the reduction in the debt by Ted. ____ 21. Expenses incurred in a trade or business are deductible for AGI. ____ 22. All employment related expenses are classified as deductions for AGI. ____ 23. The only § 212 expenses that are deductions for AGI are those related to rent and royalty income. ____ 24. A moving expense that is reimbursed by the employer is a deduction for AGI, whereas an unreimbursed moving expense is classified as an itemized deduction. ____ 25. Insurance premiums that are paid to insure against casualty losses of personal use property are deductions for AGI. ____ 26. Ralph, a shareholder-employee of Warbler, Inc., receives a $250,000 salary. The IRS classifies $80,000 of this amount as unreasonable compensation. The effect of this reclassification is to increase Ralph’s gross income by $80,000. ____ 27. The porion of a shareholder-employee’s salary that is classified as unreasonable has no effect on the shareholder-employee’s gross income, but results in an increase in the taxable income of the corporation. ____ 28. Generally, a closely-held family corporation can take a deduction for a salary paid to a family member. ____ 29. Bonnie sells her personal use SUV for $22,000 (adjusted basis of $38,000). Her realized loss of $16,000 ($22,000 – $38,000) can be recognized for income tax purposes. ____ 30. The income of a sole proprietorship are reported on Schedule C (Profit or Loss from Business). ____ 31. The cash method can be used even if inventory and cost of goods sold is involved in the business. ____ 32. Because it has only one owner, any sole proprietorships is permitted to elect the cash method of accounting. ____ 33. Under the “one-year rule” for the current period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment.
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____ 34. The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance test. ____ 35. The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes. ____ 36. Fines paid in the course of carrying on a trade or business generally are deductible if there is a related business purpose. ____ 37. Susan is a sales representative for a U.S. weapons manufacturer. She makes a $100,000 “grease” payment to a U.S. government official associated with a weapons purchase by the U.S. Army. She makes a similar payment to a Saudi Arabian government official associated with a similar sale. Neither of these payments is deductible by Susan’s employer. ____ 38. The cost of legal advice associated with the preparation of an individual’s Federal tax return is not deductible because it is a personal expense. ____ 39. A portion of treble damage payments under the antitrust law is deductible. ____ 40. Legal expenses incurred in connection with rental property are deductions for AGI. ____ 41. Clark operates a gambling operation, which is an illegal business under the laws of Texas. Therefore, none of the expenses of the business are deductible. ____ 42. Jacques, who is not a U.S. citizen, makes a contribution to the campaign of a candidate for governor. A contribution by a noncitizen is illegal under state law. Cassie, a U.S. citizen, makes a contribution to the same campaign fund. The contribution by Cassie is deductible, while the contribution by Jacques is not. ____ 43. The expenses incurred to investigate the expansion of one’s present business are deductible even if the expansion is not accomplished. ____ 44. In distinguishing between an activity being classified as a business rather than as a hobby, the satisfaction of the presumption rule (i.e., profit in at least 3 out of 5 years) ensures the activity being treated as a business. ____ 45. If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183. ____ 46. A hobby activity can result in all of the hobby income being included in AGI and no deductions being allowed. ____ 47. If an item such as property taxes exceeds the income from a hobby, the excess amount of this item over the hobby income cannot be deducted. ____ 48. Theo owns a vacation home that is classified in the personal use/rental use category. Rent income is $9,000, while property taxes and mortgage interest allocated to the rental use part are $12,000. Only $9,000 of the $12,000 expenses can be deducted. ____ 49. A vacation home rented for 180 days and used personally for 16 days is classified as primarily rental use. ____ 50. Beulah’s personal residence has an adjusted basis of $190,000 and a fair market value of $175,000. Beulah converts the property to rental use on December 1, 2006. The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $175,000. ____ 51. Ralph wants to give his daughter $1,000 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence. If Ralph pays the property taxes, he cannot deduct them but his daughter can. ____ 52. Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000. Marge’s recognized loss is $0 and Jason’s adjusted basis for the land is $25,000 ($20,000 cost + $5,000 disallowed loss of Marge).
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____ 53. The nonrepayment of a nonbusiness loan made by a cash basis taxpayer will result in a short-term capital loss. ____ 54. Accrual basis taxpayers can use the reserve method for computing deductions for bad debts. ____ 55. If a bad debt arose from the sale of a product, the bad debt deduction is limited to the seller’s basis in the product. ____ 56. A nonbusiness bad debt is a debt unrelated to the taxpayer’s trade or business either when it was created or when it became worthless. ____ 57. In determining whether a debt is a business or nonbusiness bad debt, the debtor’s use of the borrowed funds is not important. ____ 58. A business bad debt can offset an unlimited amount of capital gain with any excess nonbusiness bad debt then offsetting ordinary income. ____ 59. An account receivable that is uncollectible will be treated as a worthless security and hence, produce a capital loss. ____ 60. Any taxpayer is eligible to deduct § 1244 small business stock losses ($50,000 or $100,000) as an ordinary loss. ____ 61. An individual may deduct a loss incurred in a trade or business even though it is a loss that does not meet the definition of a casualty loss. ____ 62. “Other casualty” means casualties similar to those associated with fires, storms, or shipwrecks. ____ 63. The term “other casualty” may include accidental loss of property. ____ 64. If the amount of the insurance recovery for a theft loss is greater than the asset’s adjusted basis but less than its fair market value, no gain is recognized. ____ 65. If a taxpayer receives reimbursement for a casualty loss sustained and deducted in a previous year, the total reimbursement must be included in gross income on the return for the year in which the reimbursement is received. ____ 66. If rental property is completely destroyed, the amount of the loss is the lesser of the fair market value of the property or the adjusted basis of the property at the time of the destruction. ____ 67. The amount of the loss for property that is completely destroyed is always the fair market value of the property prior to the destruction. ____ 68. If personal casualty losses (after deducting the $100 floor) exceed personal casualty gains, the itemized deduction is always equal to the losses, to the extent they exceed 10% of adjusted gross income. ____ 69. The amount of a casualty loss on insured business use property is not reduced by the insurance coverage if no claim is made against the insurer. ____ 70. A theft loss of investment property is a miscellaneous itemized deduction subject to the 2%-of-AGI floor. ____ 71. An election to expense, rather than capitalize, research and experimental expenditures can be made each year. ____ 72. For tax years beginning in 2006, the production activities deduction (PAD) is calculated by multiplying 3% times the lesser of (1) qualified production activities income (QPAI) or (2) taxable (or modified adjusted gross) income or alternative minimum taxable income. ____ 73. One indicia of independent contractor (rather than employee) status is when the individual performing the services is paid based on tasks performed (rather than time spent).
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____ 74. In some cases it may be appropriate for a taxpayer to report work-related expenses by using both Form 2106 and Schedule C. ____ 75. After he finishes working at his main job, Martin returns home, has dinner, then drives to his second job. Martin may deduct the mileage between his first job and the second job. ____ 76. Under the automatic mileage method, depreciation is not taken into account in the mileage rate allowed. ____ 77. In choosing between the actual expense method and the automatic mileage method, a taxpayer should consider the cost of insurance on the automobile. ____ 78. Once the automatic mileage method is used, a taxpayer cannot for a later year change to the actual cost method. ____ 79. The tax law specifically provides that a taxpayer cannot be temporarily away from home for any period of employment that exceeds one year. ____ 80. In determining whether someone is away from their tax home, the key consideration involves the need to duplicate certain living expenses. ____ 81. Horton lives and works in Savannah, GA. He travels to Madrid for a two-day business trip, then spends four days touring Spain. Only one-third of Horton’s airfare is deductible. ____ 82. Ashley lives and works in Pittsburgh. She travels to Oslo for an eight-day business meeting, after which she spends two days touring Norway. All of Ashley’s airfare is deductible. ____ 83. Daniel just graduated from college. The cost of moving his personal belongings from his parents’ home to his first job site can qualify for the moving expense deduction. ____ 84. Tired of her 60 mile daily commute, Margaret purchases a condo that is only five miles from her job. Margaret’s moving expenses to her new condo are allowed and can be claimed by her as a deduction for AGI. ____ 85. In order to save his job, Lucius accepted a transfer from the Dallas office to the Fargo office of his employer. After 38 weeks, Lucius loses his job when his employer declares bankruptcy. Any moving expenses incurred by Lucius are nondeductible due to his failure to satisfy the time test. ____ 86. For the tax year 2005, Rod properly deducted his job-related moving expenses. In June 2006, Rod is fired from his job for assaulting a customer and, as a result, fails to meet the 39-week time test. One of Rod’s options is to file an amended return for 2005 that does not claim the moving expense deduction. ____ 87. Gavin, an unemployed computer program designer, moves from Sacramento to Philadelphia to accept a job as a chef at a restaurant. Gavin’s moving expenses are not deductible because his new job is in a different trade or business. ____ 88. Alexis (a CPA and JD) sold her public accounting practice in Des Moines and accepted a job with the Seattle office of a national law firm. Her moving expenses are not deductible because she has changed employment status (i.e., went from self-employed to employee) and changed occupations (i.e., practice of public accounting to practice of law). ____ 89. An education expense deduction is not allowed if the education results in a promotion or pay raise for the employee. ____ 90. The maximum tuition deduction that can be claimed under § 222 for qualified tuition expenses is $4,000 for 2006. ____ 91. Penguin Corporation pays for a trip to Bermuda for its five top salespersons. This expense is subject to the cutback adjustment.
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____ 92. Every year, Teal Corporation gives each employee a turkey and a bottle of wine at Christmas. These gifts are subject to the cutback adjustment. ____ 93. Ethan, a bachelor with no immediate family, uses the Pine Shadows Country Club exclusively for his business entertaining. Ethan’s annual dues for his club membership, subject to the cutback adjustment, are deductible. ____ 94. A deduction is not allowed for a $25 gift a taxpayer gives to his supervisor on her birthday. ____ 95. The major advantage of a traditional deductible IRA is that plan distributions (at retirement) will be nontaxable. ____ 96. By itself, credit card receipts will constitute adequate substantiation for travel expenses. ____ 97. Unlike self-employed taxpayers, the unreimbursed travel expenses of employees are subject to the 2%-of-AGI floor. ____ 98. The § 222 deduction for qualified tuition and related expenses can be claimed by parents that pay the tuition on behalf of a dependent daughter they enroll in college. ____ 99. Employees who render an adequate accounting to the employer and are fully reimbursed will shift the 50% cutback adjustment to their employer. ____ 100. In certain cases involving married persons, one way to eliminate the 2%-of-AGI floor on miscellaneous itemized deductions is to file separate (rather than joint) returns. Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 101. The taxpayer’s marginal tax bracket is 40% (combined Federal and state rates). Which would the taxpayer prefer? a. $1.41 taxable income rather than $1.00 tax-exempt income. b. $.59 tax-exempt income rather than $1.00 taxable income. c. $1.75 taxable income rather than $1.00 tax-exempt income. d. $1.60 taxable income rather than $1.00 tax-exempt income. e. None of the above.
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