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Exam 8: 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 1st of this year through August 31st of next 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 C)
G) C) and E)

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Question 2

Multiple Choice

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Which of the following is a payment liability?

A) Tort claims
B) Refunds
C) Insurance premiums
D) Real estate taxes
E) All of these

F) C) and D)
G) D) and E)

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Question 3

True/False

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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.

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?

Joe is a self employed electrician who operates his business on the accrual method. This year Joe purchased a shop for his business and 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. Which of the following is a true statement?

A short tax year can end on any day of any month other than December.

The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount.

Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

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?

The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary."

Blackwell Manufacturing uses the accrual method and reports on a calendar year. This year a customer was injured when visiting the Blackwell factory. The customer sued the company for $500,000, and the case is still being litigated. However, Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim. What amount, if any, can Blackwell deduct for the expected claim settlement this year?

Which of the following is a true statement?

Which of the following expenses are completely deductible?

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 fiscal tax year can end on the last day of any month other than December.

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

Mike operates a fishing outfitter as an accrual-method sole proprietorship. On March 1st of this year Mike received $15,000 for three outfitting trips. This is the first time Mike agreed to such a payment and he is obligated to outfit one trip per year for the next three summers beginning this year. How much income must Mike recognize in each of the next three years if he is attempting to minimize his tax burden?

Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year. This year he hired his son as an apprentice cook. Jones agreed to pay his son $40,000 per year. Which of the following is a true statement about this transaction?

Taffy Products uses the accrual method and reports on a calendar year. On July 1st 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?

Which of the following is a true statement?