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Exam 1: Business Income,Deductions,and Accounting Methods

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Question 1

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Riley operates a plumbing business and this year the 3-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) B) and C)
G) C) and D)

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Question 2

Multiple Choice

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Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?

A) Selling expenditures.
B) Cost of manufacturing labor.
C) Compensation of managers who supervise production.
D) Cost of raw materials.
E) All of the choices are subject to capitalization under the UNICAP rules.

F) D) and E)
G) B) and E)

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Question 3

Multiple Choice

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Manley operates a law practice on the accrual method and calendar year.At the beginning of the year Manley's firm had an allowance for doubtful accounts with a balance of $15,000.At the end of the year,Manley recorded bad debt expense of $23,000 and the balance of doubtful accounts had increased to $18,000.What is Manley's deduction for bad debt expense this year?

Business activities are distinguished from personal activities in that business activities are motivated by the pursuit of profits.

Joe is a self-employed electrician who operates his business on the accrual method.This year Joe purchased a shop for his business,and for the first time at year end he received a bill for $4,500 of property taxes on his shop.Joe didn't pay the taxes until after year end but prior to filing his tax return.Which of the following is a true statement?

Which of the following is an explanation for why insurance premiums on a key employee are not deductible?

Werner is the president and CEO of Acme,Inc.and this year he took a prospective client to dinner.During the dinner the President and the client discussed a proposed contract for over $6 million and personal matters.After dinner the CEO took the client to a football game and no business was discussed.The CEO paid $1,220 for an expensive dinner and spent $600 for tickets to the game.What is the deductible amount of these expenses?

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

Marilyn operates a day care center as a cash-method sole proprietorship.On August 1^st of this year Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months.How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

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?

Gabby operates a pizza delivery service.This year she paid delivery personnel $18,000 in salary.She carefully documented the business use of the auto (11,700 miles this year)and her $7,350 of vehicle expenses (for gas,oil,repairs,and auto lease payments).What amount of these expenses may Gabby deduct as business expenses? Gabby is on the cash method and calendar year.

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?

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?

Ed is a self-employed heart surgeon who 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 _________.

Taffy Products uses the accrual method and reports on a calendar year.On July 1^st of this year Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents of their warehouse.The rent and insurance covers the next 12 months.What amount,if any,can Taffy deduct for rent and insurance this year?

Beth operates a plumbing firm.In August of last year she signed a contract to provide plumbing services for a renovation.Beth began the work that August and finished the work in December of last year.However,Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full.When should Beth recognize income under the accrual method of accounting?

Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?

The domestic production activities deduction is a deduction for the incremental cost of manufacturing tangible assets in the United States.

Which of the following expenditures is most likely to be deductible for a construction business?

After a business meeting with a prospective client Holly took the client to dinner and the theatre.Holly paid $290 for the meal and $250 for the theatre tickets,amounts that were reasonable under the circumstances.What amount of these expenditures can Holly deduct as a business expense?