SM03 - Solutions for Questions and Problems Chapter 3 51...

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CHAPTER 3 BUSINESS EXPENSES AND RETIREMENT PLANS Group 1 - Multiple Choice Questions 1. E (Section 3.1) 14. A (Section 3.6) 2. D (Section 3.8) 15. B (Section 3.7) 3. D (Section 3.8) 16. B (Section 3.7) 4. D (Section 3.4) 17. B (Section 3.8) 5. D (Section 3.6) 18. C (Section 3.5) 6. D (Section 3.1) 19. B (Section 3.5) 7. B (Section 3.2) 20. A (Section 3.9) 8. C (Section 3.3) 21. C (Section 3.9) 9. B (25,000 + 185,000 – 30,000) 22. A (Section 3.9) (Section 3.4) 23. D (Section 3.10) 10. E (Section 3.6) 24. B (Section 3.10) 11. D (Section 3.6) 25. C (Section 3.10) 12. B (Section 3.6) 26. D (Section 3.10) 13. A (Section 3.6) Group 2 - Problems 1. Rental income ($750 x 12 months) $9,000 Expenses: Real estate taxes $1,250 Mortgage interest 1,500 Insurance 375 Repairs 562 Depreciation ($48,000/30 years) 1,600 –5,287 Net rental income $ 3,713 (Section 3.1) 2. Step 1: Gross income $4,000 Less expenses: Rental portion of taxes ($950 x 6/12) –475 Rental portion of interest ($3,000 x 6/12) –1,500 Balance to utilities, maintenance and depreciation $2,025 Step 2: Utilities and maintenance ($1,800 x 6/12) –900 Balance to depreciation $1,125 Step 3: Depreciation ($4,500 x 6/12) = $2,250, but limited to $1,125 –1,125 Net income $ 0 (Section 3.1) 51
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52 Chapter 3 – Business Expenses and Retirement Plans 3. a. $15,000 = $25,000 – (.50 x ($120,000 – 100,000)). b. $0 , no loss is allowed since the amount is a passive loss and the actively managed rental real estate exception does not apply. c. The unused losses may be carried forward to future tax years to reduce passive income in those years. Any loss not previously utilized may be deducted when the taxpayer’s interest in the activity is sold. (Section 3.2) 4. See Form 8582 on page 53. (Section 3.2) 5. $10,800, the lesser of the annual dollar limitation of $15,000, or $10,800, 12% x $90,000. (Section 3.8) 6. a. $3,000 . The loan was not for business purposes. b. The remaining $6,500 can be carried forward and deducted in future years, subject to the $3,000 annual limitation. (Section 3.3) 7. a. FIFO inventory valuation: 10,000 boxes at $1.75 per box $ 17,500 5,000 boxes at $1.60 per box 8,000 Ending inventory $ 25,500 Cost of goods sold: Beginning inventory $ 15,000 Add: Purchases ($16,000 + 32,000 + 17,500) 65,500 Cost of goods available for sale $ 80,500 Less: Ending inventory –25,500 Cost of goods sold $ 55,000 b. LIFO inventory valuation: 10,000 boxes at $1.50 per box $ 15,000 5,000 boxes at $1.60 per box 8,000 Ending inventory $ 23,000 Cost of goods sold: Beginning inventory $ 15,000 Add: Purchases ($16,000 + 32,000 + 17,500) 65,500 Cost of goods available for sale $ 80,500 Less: Ending inventory –23,000 Cost of goods sold $ 57,500 (Section 3.4)
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Problem 4 D r a f t s o 0 6 / 1 5 2 Caution: Complete Worksheets 1, 2, and 3 on page 2 before completing Part I. Rental Real Estate Activities With Active Participation (For the definition of active participation see Special Allowance for Rental Real Estate Activities on page 3 of the instructions.) Combine lines 3a, 3b, and 3c Combine lines 1d, 2c, and 3d. If the result is net income or zero, all losses are allowed, including any prior year unallowed losses entered on line 1c, 2b, or 3c. Do not complete Form 8582. Report the losses on the forms and schedules normally used Note: Enter all numbers in Part II as positive amounts. See page 8 of the instructions for an example.
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SM03 - Solutions for Questions and Problems Chapter 3 51...

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