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Exam 9: Business Income,deductions,and Accounting Methods

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Question 1

Multiple Choice

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Clyde operates a sole proprietorship using the cash method.This year Clyde made the following expenditures: $480 to U.S.Bank for 12 months of interest accruing on a business loan from September 1 of this year through August 31 of next year even though only $160 of interest accrued this year. $600 for 12 months of property insurance beginning on July 1 of this year. What is the maximum amount Clyde can deduct this year?

A) $760
B) $600
C) $480
D) $160
E) $360

F) B) and D)
G) A) and B)

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Question 2

Multiple Choice

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Riley operates a plumbing business,and this year the three-year-old van he used in the business was destroyed in a traffic accident.The van was originally purchased for $20,000 and the adjusted basis was $5,800 at the time of the accident.Although the van was worth $6,000 at the time of accident,insurance only paid Riley $1,200 for the loss.What is the amount of Riley's casualty loss deduction?

A) $6,000.
B) $14,000.
C) $5,800.
D) $4,600.
E) $5,300.

F) A) and B)
G) A) and E)

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Question 3

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Ed is a self-employed heart surgeon who lives in Michigan and has incurred the following reasonable expenses.How much can Ed deduct? $1,000 in airfare to repair investment rental property in Colorado. $500 in meals while attending a medical convention in New York. $300 for tuition for an investment seminar,"How to pick stocks." $100 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day. The correct answer is ________.

A business can deduct the cost of uniforms supplied to employees.

This year Clark leased a car to drive between his office and various work sites.Clark carefully recorded that he drove the car 23,000 miles this year and paid $7,200 of operating expenses ($2,700 for gas,oil,and repairs,and $4,500 for lease payments) .What amount of these expenses may Clark deduct as business expenses?

The deduction for business interest expense is limited to the sum of (1)business interest income and (2)30 percent of the adjusted taxable income of the taxpayer for the taxable year.

Which of the following is a true statement?

Joe operates a plumbing business that uses the accrual method and reports on a calendar year.This year Joe signed a $50,000 binding contract with Brian.Under the contract Brian will provide Joe with up to 2,000 hours of vehicle repairs at $25 per hour.This year Brian provided 200 hours of repair services and billed Joe for $5,000.At year-end Joe had not paid Brian for the services.What amount,if any,can Joe deduct for the repair services this year?

Colbert operates a catering service on the accrual method.In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1^st of year 1 through May 31^st of year 3.When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

Big Homes Corporation is an accrual-method calendar-year taxpayer that manufactures and sells modular homes.This year for the first time Big Homes was forced to offer a rebate on the purchase of new homes.At year-end,Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers.What amount of the rebates,if any,can Big Homes deduct this year?

Which of the following is a true statement about travel that has both business and personal aspects?

Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year.Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

Illegal bribes and kickbacks are not deductible as business expenses but fines imposed by a governmental unit are deductible as long as the fines are incurred in the ordinary course of business.

David purchased a deli shop on February 1^st of last year and began to operate it as a sole proprietorship.David reports his personal taxes using the cash method over a calendar year,and he wants to use the cash method and fiscal year for his sole proprietorship.He has summarized his receipts and expenses through January 31^st of this year as follows: What income should David report from his sole proprietorship?

Ralph borrowed $4 million and used the proceeds in his Internet business.The interest on this debt is not subject to an interest limitation if Ralph's business has average annual gross receipts of $26 million or less for the prior three taxable years.

Paris operates a talent agency as a sole proprietorship,and this year she incurred the following expenses in operating her talent agency.What is the total deductible amount of these expenditures? $1,000 dinner and theater with a film producer where no business was discussed $500 lunch with sister Nicky where no business was discussed $700 business dinner with a client but Paris forgot to keep any records (oops!) $900 tickets to the opera with a client following a business meeting

Otto operates a bakery and is on the cash method and calendar year.This year one of Otto's ovens caught fire and was partially destroyed.Otto bought it a few years ago for $20,000 and claimed depreciation of $12,000 up to the fire.Otto was charged $4,400 for repairs to the oven but the insurance company paid Otto $1,500 for the damage.What is Otto's casualty loss deduction?

Colby Motors uses the accrual method and reports on a calendar year.In December of last year,Colby acquired auto repair equipment.As part of the acquisition,Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for three years.Colby paid the cost of the warranty,$15,000,in January of this year.What can Colby deduct for the cost of the warranty on the tax return for last year?

Danny owns an electronics outlet in Dallas.This year he paid $600 to register for a four-day course in management in Chicago.Danny paid $800 in airfare and $1,000 for five nights' lodging.After the course,Danny spent the last day sightseeing.During the trip,Danny also paid $140 a day for meals,and $80 a day for a rental car.What amount of these travel expenditures may Danny deduct as business expenses?