M504 Quiz 6 solutions

M504 Quiz 6 solutions - Name: Class: Date: 1% Mgmt 504 —...

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Unformatted text preview: Name: Class: Date: 1% Mgmt 504 — Quiz 6 — ch 6 - Mar 4, 2010 few 77‘ ’a Short Answer i For each of the following situations, determine whether the item is deductible, how it would be deducted on the taxpayer's return (if there are alternatives possible, discuss the conditions which would determine the . treatment) and any limitations which might be placed on the deduction. a. Roy sells insurance and other financial products for New Norman Life Assurance Company. During the current year, she gives each client who has been with her for three years 2 tickets to a Marilyn Manson concert. The tickets have a face value of $10 each, but Roy has to pay $20 per ticket to obtain a block of 200 tickets. Roy was out of town and did not attend the concert. The tickets do not meet the criteria for deductibility as an entertainment expense. However, you are allowed to deduct business gifts up to a maximum of $25 per donee. Deductions for tickets are limited to the face value of the ticket. Therefore, Roy can deduct $20 (2 tickets pe client X $10 per ticket) per client. Her total deduction is $2,000 ($20 x 100 clients). Because ‘ she is an employee,.she must take the deduction as a miscellaneous itemized deduction, whic is subject to a 2% ol‘adjusted gross income limitation. l b. Randolph was the CEO and chairman of the board of directors of Martindale Inc., until his i retirement 5 years ago. Although he still owns 4% of Martindale's stock, he has no other active ! involvement in the company. While playing golf one day he learns that 4 of the company's biggest customers are coming to town to close a big deal. Randolph had been responsible for bringing 3 of the customers to the business 30 years earlier when he started working for the 5 company. Because he has developed a solid business relationship with them through the years i and to help the company out, he holds a reception for the 4 customers and top executives of the t company at his country club. The cost of the reception is $3,000. Randolph did not ask for, nor 1‘ did Martindale offer, a reimbursement for the reception. l l | W No deduction is allowed. Deductions are allowed for meals and entertainment costs that are related to a trade or business. Since the company no longer employs Randolph, lie is not in a trade or busmess and cannot deduct any of the $3,000. In addition, the expenditure is not ordinary (investors normally do not entertain clients of the company they mm), or necessary (a prudent busmessman would not make such an expenditure). ' ____.._-—-—'"—7 c. Sylvia is an engineer employed by Gerhard Corporation. While having lunch with one of Gerhard's clients, she learns of a new relaxation technique that the client felt had greatly reduced his job—related stress. Sylvia enrolls in a night course at the local community college to learn the new relaxation technique. The cost of the course is $200. employer or by law. Name: W 9. For each of the following situations, determine whether the item is deductible, how it would be deducted on the taxpayer's return (if there are alternatives possible, discuss the conditions that would determine the treatment) and any limitations which might be placed on the deduction. a. Charmine is self-employed. She pays the following taxes during the current year: State income tax $3,000 Federal income tax 4,000 Self—employment tax 3,200 Sales tax on business equipment 200 deductible. b. A customer who owed Larry $5,000 declared bankruptcy last year. At that time, the customer's accountant estimated that only 40% of the customer's debts would be paid. In the current year, Larry receives $1,000 from the bankruptcy court as final payment on the $5,000 debt. If Larry is a cash basis taxpayer, no deduction is allowed. He will include the $1,000 he receives in the current year in his gross income. If Larry is an accrual basis taxpayer, he would deduct $3,000 ($5,000 x 60%) last year a bad debt expense. In the current year, he debt expense. can deduct an additional $1,000 ($2,000 expected payment - $1,000 actual payment) as a ha I Name: W 9. For each of the following situations, determine whether the item is deductible, how it would be deducted on the taxpayer's return (if there are alternatives possible, discuss the conditions that would determine the treatment) and any limitations, which might be placed on the deduction. a. Thomas and Rika are married and file a joint return. Only Thomas is covered by an employee—sponsored pension plan and their adjusted gross income is $171,000. Determine their maximum IRA contribution and deduction for the current year. Both Thomas and Rika are allowed to contribute $5,000 to their IRA accounts. Because Thomas is covered by an employer—sponsored pension plan and their adjusted gross income exceeds $109,000, he is not eligible to deduct his contribution. However, because Rika is not covered by an employer—sponsored pension plan, her contribution is fully deductible if their adjusted gross income is less than $166,000. Since their adjusted gross income is greater than $166,000, the amount that she can deduct must be reduced by 50% [($176,000 - $171,000) + $10,000]. This leaves her with an allowable deduction for adjusted gross Elise Era income of $2,500 [$5,000 - ($5,000 x 50%) as a financial analyst for Simone Fin‘anmal Group. To finance her college education, she borrowed $12,000 from a local bank. In January of 2009, she begins paying back her student loans and pays $2,400 of interest expense during the year. Her adjusted gross income for the year is $ 000. The max1mum amount of student loan interest that can be deducted is phased-out ratabl over a $15,000 range when adjusted gross income exceeds $60,000. Since her adjusted yross ‘ income is greater than $60,000 the amount that she can deduct must be reduced by 20%g [($63,000 - $60,000) + $15,000]. This leaves her with an allowable deduction for adjusted gross income of$l ,920 [$2 400 - ($2 400 x 20%)] The remainin $480 1 . . , 1 i 2 4 _ interest is personal and is not deductible. - g ($ 3 00 $1,920) Off- During’ the current year, Ralph accepts a job as a computer programmer Wit 1 avenport Industries. He incurs the following expenses in moving from East Brunswick, New Jersey to Durham, North CarolinaDavenport Industries reimburses him $4,000 for his move. Transportation of household goods $2,700 Airfare 340 Temporary living: Lodging 430 Meals 120 House—hunting trip: Transportation 330 Lodging 280 Meals 110 Ralph must include the $4,000 in gross income and he can deduct $3,040 of moving ' expenses for adjusted gross income. He can only deduct his direct movmg expenses. Direct moving expenses include the cost of moving household goods ($2,700) and personal effects to the new residence, and airfare to his new residence ($340). The housing hunting expenses and temporary living expenses are considered personal in nature and are not deductible. ...
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This note was uploaded on 05/01/2010 for the course MGMT 504 taught by Professor Hatcher during the Spring '08 term at Purdue University.

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M504 Quiz 6 solutions - Name: Class: Date: 1% Mgmt 504 —...

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