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TAX 4001 Final, Tax accounting test 3,
accct, Federal Taxation Exam
"Little Magician" is the name of a painting created by artist Lion-o Messy. The owner recently recognized a $43,500 gain on sale of the figurine. Which of the following statements is false? - ANS-If a commercial art gallery that had held Little Magician in its inventory was the seller, the gain is ordinary. If a private collector who purchased Little Magician from an art gallery was the seller, the gain is capital gain. None of these choices are false. If Lion-o was the seller, the gain is ordinary. Answer: none of these choices are false "Tiny Dancer" is the name of a bronze figurine created by artist Diego Ossa. The owner recently recognized a $43,500 gain on sale of the figurine. Which of the following statements is false? - ANS-none of the above is false A business generates profit of $100,000. The owner has a 37% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed? CH. 12 - ANS-Corporate tax, $21,000; individual tax, $ A business generates profit of $100,000. The owner has a 37% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed? - ANS-Corporate tax, $21,000; individual tax, $ A business generates profit of $100,000. The owner has a 37% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is an S corporation and no income is distributed? CH. 12 - ANS-Corporate tax, $0; individual tax, $37, A business generates profit of $100,000. The owner has a 37% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business
is an S corporation and no income is distributed? - ANS-Corporate tax $0 and individual tax $37, A business generates profits of $150,000. The owner currently has a 32% marginal tax rate. What is the total amount of taxes paid if the business is a regular corporation and $20,000 in dividends is distributed to its sole individual shareholder? - ANS-Corporate tax, $31,500; individual tax, $3, Corporate tax= 150,000 x 21%= 31, Individual= 20,000 x 15%= 3, A corporation that incurs $33,500 organization costs must capitalize the costs and amortize them over 180 months - ANS-False A fire completely destroyed a warehouse owned by Della Company and used for nine years in its shipping business. Della's adjusted basis in the warehouse was $748,200, and its replacement value was $1 million. Unfortunately, the warehouse was uninsured. As a result of the destruction, Della recognizes - ANS-$748,200 ordinary loss A fire completely destroyed a warehouse owned by Della Company and used for nine years in its shipping business. Della's adjusted basis in the warehouse was $748,200, and its replacement value was $1 million. Unfortunately, the warehouse was uninsured. As a result of the destruction, Della recognizes: - ANS-$748,200 ORDINARY loss A fire destroyed furniture and fixtures used in Jock's business. Jock's adjusted basis in the furniture and fixtures was $81,300. Jock received a $100,000 reimbursement from his insurance company and immediately spent $93,000 to purchase new furniture and fixtures. How much gain or loss must Jock recognize on this involuntary conversion? - ANS-$7, A firm can use LIFO for computing cost of goods sold for tax purposes only if it uses LIFO for financial reporting purposes. - ANS-True A firm must capitalize start-up expenditures of a new business in excess of $5,000 but may deduct expansion costs of an existing business - ANS-True A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's
A taxpayer who receives boot in a nontaxable exchange must recognize gain equal to the lesser of the FMV of the boot or the gain realized. T/F CH. 9 - ANS-True A taxpayer who receives boot in a nontaxable exchange must recognize gain equal to the lesser of the FMV of the boot or the gain realized. - ANS-True A taxpayer who receives or pays boot in a nontaxable exchange must recognize gain to the extent of the FMV of the boot. T/F CH. 9 - ANS-False Payment of boot does not trigger gain recognition. A tornado demolished several delivery vans owned for three years by Wadham Company. Wadham's adjusted basis in the vans was $28,400, and Wadham paid $90,000 to purchase new vans. Wadham received a $25,000 settlement from its casualty insurance company. Consequently, Wadham recognizes: - ANS-none of these choices are correct Aaron James has a qualifying home office. The office is 500 square feet and the entire house is 2,500 square feet. Use the following information to determine his allowable home office deduction: Net income from self-employment before home office deduction$ 150,000Expenses from home (100%)Home mortgage interest12,000Property taxes4,000Homeowner's insurance2,500Utilities2,200Depreciation on office portion of home1,100 - ANS-Allowable home deduction= $5, Aaron, Incorporated is a nonprofit corporation that collects and distributes food for needy families. Aaron, Incorporated also operates a small grocery store for profit. Which of the following statements is true? CH. 11 - ANS-Only the income from the grocery store is taxable.
Able Inc. paid a $25,000 legal fee to the attorney who resolved a dispute over Able's title to investment land. Able's auditors required the corporation to expense the payment for financial statement purposes. The tax law required Able to capitalize the payment to the basis of the land. This difference in accounting treatment results in a - ANS-Deferred tax asset Acme Incorporated and Beamer Company exchanged like-kind assets. Acme's asset had a $240,000 FMV and $117,300 adjusted tax basis, and Beamer's asset had a $225,000 FMV and a $168,200 adjusted tax basis. Beamer paid $15,000 cash to Acme as part of the exchange. Which of the following statements is true? - ANS-Acme's basis in its newly acquired asset is $117,300. After 2017, a 100% dividends-received deduction is permitted for any dividends received from a foreign corporation. T/F CH. 11 - ANS-False Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax? CH. 10 - ANS-$50,000 ordinary business income and $22,000 guaranteed payment Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax? CH. 10 - ANS-$50,000 ordinary business income and $22,000 guaranteed payment Alex is a partner in a calendar year partnership. His partnership Schedule K-1 for the current tax year showed the following: Ordinary business income$ 41,000Short-term capital loss1, Alex has a $7,000 loss carryforward from the partnership last year, which he could not deduct because of the basis limitation. What is his tax basis in his partnership interest at the end of the current tax year? - ANS-$32,
b) $42,000 expense - $12,600 tax savings from deduction = $29, c) $8,050 nondeductible expense At the beginning of year 1, Paulina purchased a 25% general partner interest in Gamma Partnership for $25,000. Paulina's partnership Schedule K-1 for year 1 reported that her share of Gamma's debt at year-end was $10,000 and her share of ordinary loss was $5,000. On January 1, year 2, Paulina sold her interest to another partner for $22, cash (including relief of liabilities). Compute Paulina's gain or loss on the sale of her partnership interest. - ANS-$2,000 gain B&B Inc.'s taxable income is computed as follows. Book income before tax $9,882, Net permanent differences 447, Net temporary differences(802,100) Taxable income $9,528, B&B's tax rate is 34%. Which of the following statements is true? - ANS-The temporary differences caused a $272,714 net increase in B&B's deferred tax liabilities. B&B Inc.'s taxable income is computed as follows. Book income before tax $9,882, Net permanent differences 447, Net temporary differences(802,100) Taxable income $9,528, Using a 34% rate, compute B&B's tax expense per books and tax payable. - ANS-Tax expense per books $3,512, Tax payable $3,239, $9,882,590 + $447,600 permanent differences) * 34% = $3,512, $9,882,090 + $447,600 permanent differences) * 34% = $3,239,551 (based on taxable income) B&I Incorporated sold a commercial office building used in the corporate business for $862,000. B&I purchased the building in 2011 for a cost of $700,000 and had deducted $167,200 MACRS depreciation through date of sale. B&I should characterize the $329,200 gain recognized on sale as: - ANS-Capital gain None of these choices are correct Section 1231 gain $167,200 ordinary gain and $162,000 Section 1231 gain
Answer: None of these are correct B&P Inc., a calendar year corporation, purchased only one operating asset during 2019: $599,900 of used computer equipment (5-year recovery property) placed in service on March 18. Assuming that B&P makes a Section 179 election, compute B&P's adjusted tax basis in the property at the end of 2019. - ANS- Babex Incorporated and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged. BabexOMG FMV $ 1,000,000 $ 825, Adjusted tax basis 768,000 514,500 Mortgage 175,000 -0- Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute Babex's gain recognized on the exchange and its tax basis in the property received from OMG. CH. 9 - ANS-$175,000 gain recognized; $768,000 basis in OMG property. Explanation: Babex treats the $175,000 relief of debt as boot received. Babex Incorporated and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged. BabexOMGFMV$ 1,000,000$ 825,000Adjusted tax basis768,000514,500Mortgage175,000-0- Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute OMG's gain recognized on the exchange and its tax basis in the property received from Babex. - ANS-No gain recognized; $689,500 basis in Babix property BB Company, a calendar year taxpayer, paid $3,350,000 for a residential apartment complex and allocated $350,000 of the cost to the land and $3,000,000 of the cost to the building. BB placed the realty in service on September 29. Refer to the appropriate MACRS Table in Chapter 7 to compute BB's first-year depreciation on the realty - ANS-$3,000,000 * 1.061% = $31, Bendom Inc, a calendar year, accrual basis corporation, hired Rukel Company to provide
owned 53% of Zeta's outstanding stock. Compute gain recognized by Bill and by Zeta on this exchange. CH. 9 - ANS-Bill $262,000; Zeta $ Blitza Incorporated owned real property used for 12 years in its business that was subject to a $294,500 nonrecourse mortgage. Blitza failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Blitza's basis in the property was $300,000, and the property's appraised FMV was $260,000. Which of the following statements is true? - ANS-Both Blitza has no legal obligation to settle the $34,500 unpaid balance of the mortgage and Blitza recognizes a $5,500 Section 1231 loss is true. Boeing Incorporated generated a $77,050 ordinary loss from operations this year. It also recognized $5,920 recaptured ordinary income, $55,000 net Section 1231 loss, and $7,840 net capital loss on the sale of assets. Compute Boeing's net operating loss. - ANS-NOT: (132,050) Bolton Inc., a calendar year taxpayer, generated a $296,400 net operating loss this year. Bolton can carry the loss back five years and forward 20 years for tax purposes. - ANS-False Both corporate and individual taxpayers can deduct capital losses to the extent of capital gains. - ANS-true Brace, Incorporated owns 90% of West common stock. This year, Brace generated $50,000 operating income and received $10,000 dividends from West. Brace's taxable income is: CH. 11 - ANS-$50, Explanation: Brace is entitled to a 100% DRD. Brace, Incorporated owns 90% of West common stock. This year, Brace generated $50,000 operating income and received $10,000 dividends from West. Brace's taxable income is: - ANS-$50,
Brenda sold investment land for $200,000 in June. Her basis in the land was $75,000. The purchaser paid Brenda $40,000 cash and gave her his 5-year, interest-bearing note for the $160,000 remaining contract price. In December, Brenda received a $20, principal payment on the note. Brenda's recognized gain this year is: - ANS-37, Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is Bryan's after-tax cash flow from the corporation if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 37%? - ANS-$126, BugLess Inc, a calendar year, accrual basis corporation, provides pest extermination services to its customers. In October 2019, BugLess contracted with Mr. Cass to provide monthly service calls for 24 months. Each service call costs $60, and Mr. Cass prepaid $1,440 when he signed the contract. BugLess made three service calls to Mr. Cass' home in 2019. As a result of the contract, BugLess should report: - ANS-$ taxable income in 2019, and $1,260 taxable income in 2020. Burton Company acquired new machinery by performing professional services worth $8,250 for the seller of the machinery. Burton's tax basis in the machinery is $8,250. - ANS-True Cactus Company is a calendar year S corporation with the following current year information: Operating loss$ (120,000) Liabilities: Notes payable, City Bank20, Notes payable, Jake Crow20, On January 1, John James bought 50% of Cactus Company stock for $30,000. How much of the operating loss may John deduct on his Form 1040? Assume the excess business loss limitation does not apply. - ANS-$30, Cannon Inc. incurred a $32,000 net operating loss in 2014. Cannon's 2012 taxable income was $28,000, and its 2013 taxable income was $149,200. Use the corporate tax rates included in Appendix C to compute Cannon's refund from an NOL carryback deduction.
- ANS-$5,750 ($28,000 * 15%) + ($4,000 * 39%) = $5, Carman wishes to exchange 10 acres of Iowa farm land in a like-kind exchange. Which of the following properties will qualify for like-kind exchange treatment?
Explanation: $538,000 = $152,000 nonrefundable minimum tax credit + $386,000 refundable minimum tax credit [($924,000 − $152,000) × 50%] Debbie is a limited partner in ADK Partnership. Her partnership Schedule K-1 reports $19,000 ordinary business income, $2,000 long-term capital gain, and $830 dividend income. Which of these items are subject to self-employment tax? CH. 10 - ANS-None of the items are subject to SE tax because Debbie is a limited partner. Declining Company, a calendar year, accrual basis taxpayer, did not pay the $56, December rent on its commercial office space until January 8. As result, Declining's accountant made a routine year-end accrual of $56,500 rent expense. Which of the following statements is true? - ANS-Declining can deduct the $56,500 accrued rent expense. DEF, a calendar year, accrual basis taxpayer, is involved in a legal dispute over an alleged patent violation. At the end of the year, DEF's accountant recorded a $450,000 accrued expense for the estimated settlement cost of the dispute. Which of the following statements is true? - ANS-DEF can't deduct the $450,000 accrued expense because the liability fails the all-events test. Delour Incorporated was incorporated in 2015 and adopted a calendar year. Here is a schedule of Delour's net Section 1231 gains and (losses) reported on its tax returns through 2020. 201520162017201820192020$(4,900)$-0-$-0-$-0-$(12,000)$-0- In 2021, Delour recognized a $50,000 gain on the sale of business land. How is this gain characterized on Delour's tax return? - ANS-12,000 ordinary gain; 38 section 1231 gain Delta Inc. generated $668,200 ordinary income from operations this year. It also recognized $3,910 recaptured ordinary income, $5,000 net Section 1231 gain, and $14,600 net capital loss on the sale of assets. Compute Delta's taxable income. - ANS-$672,
Delta Inc. sold an asset with a $78,300 adjusted tax basis for $100,000. The purchaser paid $30,000 in cash and assumed Delta's $70,000 mortgage on the asset. Compute Delta's net cash flow from the sale assuming a 21% tax rate. - ANS-$25, Denali, Incorporated exchanged realty with a $230,000 adjusted basis for like-kind realty with a $200,000 FMV and $5,000 cash. How much loss may Denali recognize? CH. 9 - ANS-$ Loss is never recognized in a qualifying nontaxable exchange. DIE Inc., a calendar year corporation, purchased $875,000 of equipment on November
- This was DIE's only purchase of tangible personal property this year. DIE must use a midquarter convention to compute MACRS depreciation on the equipment - ANS-True DiLamer Inc. paid $300,000 to purchase 30-year bonds issued by a publicly held foreign corporation. The foreign government recently privatized the corporation and declared that all outstanding corporate debt obligations would not be honored. What is the tax consequence to DiLamer of this bad news? - ANS-$300,000 capital loss Dolzer Inc. sold a business asset with a $474,000 adjusted book and tax basis for $775,000. The purchaser paid $100,000 in cash and gave Dolzer a note for the $675,000 balance of the price. Dolzer will not receive a payment on the note until next year. Assuming that Dolzer uses the installment sale method, compute Dolzer's book and tax gain in the year of sale. - ANS-Book gain $301,000; tax gain $38, $100,000 cash payment × ($301,000 gain/$775,000 contract price) = $38,839 tax gain. Dolzer Inc. sold a business asset with a $474,000 adjusted book and tax basis for $775,000. The purchaser paid $100,000 in cash and gave Dolzer a note for the $675,000 balance of the price. Dolzer will not receive a payment on the note until next year. Assuming that Dolzer uses the installment sale method, compute Dolzer's book and tax gain in the year of sale. - ANS-Book gain $301,000; tax gain $38, $775,000- $474,000 = 301, $100,000 cash payment * ($301,000 gain/$775,000 contract price) = $38,839 tax gain Doppia Company transferred an old asset with a $68,750 adjusted tax basis in exchange for a new asset worth $90,000 and $10,000 cash. Which of the following statements is false?
Beginning allowance for bad debts $950, Actual write-offs of accounts receivable during the year (899,600) Addition to allowance 845, Ending allowance for bad debts $895, Because of the difference between the GAAP rules and the tax rules for accounting for bad debts, Earl Company has a: - ANS-$54,600 temporary excess of book income over taxable income. Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year. Beginning allowance for bad debts $950, Actual write-offs of accounts receivable during the year (899,600) Addition to allowance 845, Ending allowance for bad debts $895, Which of the following statements is true? - ANS-Bad debt expense per books is $845,000, and the deduction for bad debts is $899,600. Easy Inc. is a calendar year, cash basis taxpayer. On October 1, 2014, Easy paid $4,800 to a security firm for night-time and weekend security services for the 24-month period beginning with October. Which of the following is true? - ANS-Easy can deduct $600 in 2014, $2,400 in 2015, and $1,800 in 2016. Eaton Inc. is a calendar year, cash basis taxpayer. On October 1, 2019, Eaton paid $4,800 to a security firm for night-time and weekend security services for the 24-month period beginning with October. Which of the following is true? - ANS-Eaton can deduct $600 in 2019, $2,400 in 2020, and $1,800 in 2021. Elcox Company, a calendar year, cash basis taxpayer, paid $950 to purchase eight months' worth of office supplies on December 12. Elcox can deduct $950 in the year of payment.
- ANS-True Elcox Company, a calendar year, cash basis taxpayer, paid a $6,340 premium to purchase a casualty insurance policy with a 36-month term. Elcox can deduct $6,340 in the year of payment. - ANS-False
Eliot Inc. transferred an old asset with a $53,100 adjusted tax basis plus $5,000 cash in exchange for a new asset worth $75,000. Which of the following statements is false? - ANS-f the exchange is nontaxable, Eliot's recognized gain is $5, Enough Corporation engaged in a transaction that generated $100,000 book income but only $75,000 taxable income. Which of the following is true? - ANS-If the $25,000 excess of book income over taxable income is permanent, the transaction has no effect on Enough's deferred tax accounts. Felix Incorporated generated $1,349,600 ordinary income this year. Felix also recognized $29,200 recaptured ordinary income, $21,000 net Section 1231 gain, and $14,900 net capital loss on the sale of assets. Compute Felix's taxable income. - ANS-$1,384, Ficia Inc. owned investment land subject to a $294,500 recourse mortgage. Ficia failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Ficia's basis in the land was $300,000, and the land's appraised FMV was $260,000. The creditor informed Ficia that it would not pursue collection of the $34,500 unpaid balance of the mortgage. Which of the following statements is true? - ANS-Ficia recognizes $34,500 ordinary income and a $40, capital loss. Loss = $260,000 (fmv) - $300,000 (basis since they included the $34,500 as income) Ficia Incorporated owned investment land subject to a $294,500 recourse mortgage. Ficia failed to make timely mortgage payments, so the creditor foreclosed. At date of foreclosure, Ficia's basis in the land was $300,000, and the land's appraised FMV was $260,000. The creditor informed Ficia that it would not pursue collection of the $34, unpaid balance of the mortgage. Which of the following statements is true? - ANS-Ficia recognizes 34,500 ordinary income and a 40,000 capital loss Firm F purchased a commercial office building for business use in 2004 for $965,000. This year, the firm sold the building for $1 million. Accumulated MACRS depreciation through date of sale was $275,000. Which of the following statements is true? - ANS-If Firm F is a corporation, it recognizes $62,000 ordinary income and $248,000 Section 1231 gain. and If Firm F is a non-corporate taxpayer, it recognizes $310,000 Section 1231 gain.
Book income + net long term capital gains + charitable contributions less 10% of total income Fox Company, a calendar year taxpayer, paid $6,400,000 for a commercial office building and allocated $400,000 of the cost to the land and $6,000,000 of the cost to the building. Fox placed the realty in service on May 11. Refer to the appropriate MACRS Table in Chapter 7 to compute Fox's first-year depreciation on the realty. - ANS-6,000,000 * 1.605%= $96, Frederick Tims, a single individual, sold the following investment assets this year. AssetDate purchasedDate soldTax basisSales price100 shares Gamma Incorporated01/04/0905/07/21$ 5,000$ 15,00030 shares Land Incorporated12/31/9110/01/21$ 75,000$ 100,00050 shares Down Corporation05/10/1311/01/21$ 12,000$ 8,00010 shares Extel Incorporated03/25/0802/19/21$ 17,000$ 5, If Frederick's preferential tax rate on adjusted capital gain is 15%, compute his tax attributable to the above sales. - ANS-$2, Funky Chicken is a calendar year general partnership with the following current year information: Operating loss$ (300,000)Liabilities:Note payable, Big Bank30,000Note payable, June Cross20, On January 1 June Cross bought 60% of Funky Chicken for $45,000. How much of the operating loss may Cross deduct currently? Assume the excess business loss limitation does not apply. - ANS-$75, Funky Chicken is a calendar year S corporation with the following current year information: Operating loss$ (300,000)Liabilities:Note payable, Big Bank30,000Note payable, June Cross20, On January 1 June Cross bought 60% of Funky Chicken for $45,000. She then loaned the company $20,000. How much of the operating loss may Cross deduct on her Form 1040? Assume the excess business loss limitation does not apply. - ANS-$65, G&G Inc. transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000. Which of the following statements is false? - ANS-The old asset's FMV is $150,000. The old asset's FMV is $130,000 ($150,000 - $20,000-boot)
G&G Inc. transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000. Which of the following statements is false? - ANS-The old asset's FMV is $150,000. The old asset's FMV is $130,000. G&G Incorporated transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000. Which of the following statements is false? CH. 9 - ANS-Answer: The old asset's FMV is $150,000. The old asset's FMV is $130,000. If the exchange is nontaxable, G&G's recognized gain is -0-. If the exchange is nontaxable, G&G's tax basis in the new asset is $130,300. G&G Incorporated transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000. Which of the following statements is false? - ANS-The old asset's FMV is $150, Gain realized on a property exchange that is not recognized is deferred. T/F CH. 9 - ANS-True Gavin owns a 50% interest in London Partnership. His tax basis in his partnership interest at the beginning of the year was $20,000. His partnership Schedule K-1 showed the following: Ordinary business income $ 60, Share of partnership debt, beginning of year 10, Share of partnership debt, end of year 15,
