Ch7 - 1 James is in the business of debt collection He purchased a $20,000 account receivable from Green Corporation for $15,000 During the year

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1. James is in the business of debt collection. He purchased a $20,000 account receivable from Green Corporation for $15,000. During the year, James collected $12,000 in final settlement of the account. James can take a $3,000 bad debt deduction in the current year. *a. True b. False 2. If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not previously deducted can be deducted this year. *a. True b. False 3. Last year, taxpayer had a $10,000 business loan that was written off. Last year, taxpayer also had an NOL which taxpayer carried back two years and used in its entirety. If taxpayer collects the entire $10,000 during the current year, $10,000 needs to be included in gross income. *a. True b. False 4. A cash basis taxpayer can deduct the cost of a product sold even though the purchaser of the product ultimately does not pay the purchase price. *a. True b. False 5. If an account receivable written off during the current year is subsequently collected during the current year, the write-off entry is reversed. *a. True b. False 6. A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless. a. True *b. False 7. 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. *a. True b. False
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8. In determining whether a debt is a business or nonbusiness bad debt, the debtor’s use of the borrowed funds is not important. *a. True b. False 9. A corporation which makes a loan to a shareholder cannot have a nonbusiness bad debt deduction. *a. True b. False 10. A business bad debt can offset an unlimited amount of ordinary income. *a. True b. False 11. The amount of complete worthlessness on a nonbusiness bad debt is deducted at final settlement. *a. True b. False 12. A bona fide debt cannot arise on a loan between father and son. a. True *b. False 13. A bond held by an investor that is uncollectible will be treated as a worthless security and hence, produce a bad debt. a. True *b. False 14. A loss from a worthless security is always treated as a long-term capital loss. a. True *b. False 15. A loss is not allowed for a security that declines in value. *a. True b. False
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16. Several years ago, John purchased 2,000 shares of § 1244 stock from Red Corporation for $40,000. Last year, John sold one-half of his Red Corporation stock to Mike for $12,000. During the current year, John sold the remaining Red Corporation stock for $3,000. John has a $17,000 ($3,000 – $20,000) ordinary loss for the current year. *a. True b. False 17. Taxpayers must sell or exchange their § 1244 stock in order to recognize an ordinary loss (does not apply to stock becoming worthless). a. True
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This note was uploaded on 04/02/2012 for the course ECON 101 taught by Professor Sing during the Spring '12 term at CUNY Hunter.

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Ch7 - 1 James is in the business of debt collection He purchased a $20,000 account receivable from Green Corporation for $15,000 During the year

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