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Exam 1: Business Income, Deductions, and Accounting Methods

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Question 1

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 $24,000 and the adjusted basis was $5,300 at the time of the accident. Although the van was worth $6,380 at the time of accident, insurance only paid Riley $1,700 for the loss. What is the amount of Riley's casualty loss deduction?

A) $6,380
B) $17,620
C) $5,300
D) $3,600
E) $4,990

F) A) and D)
G) A) and C)

Correct Answer

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D

Question 2

Multiple Choice

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Brad operates a storage business on the accrual method. On July 1, Brad paid $48,000 for rent on his storage warehouse and $18,000 for insurance on the contents of the warehouse. The rent and insurance cover the next 12 months. What is Brad's deduction for the rent and insurance?

A) $48,000 for the rent and $18,000 for the insurance
B) $24,000 for the rent and $18,000 for the insurance
C) $24,000 for the rent and $9,000 for the insurance
D) $48,000 for the rent and $9,000 for the insurance
E) None of the choices are correct.

F) C) and D)
G) B) and D)

Correct Answer

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B

Question 3

Multiple Choice

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Which of the following is a true statement about impermissible accounting methods?

When does the all-events test under the accrual method require the recognition of income from the sale of goods?

A business generally adopts a fiscal or calendar year by using that year-end on the first tax return for the 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?

Although expenses associated with illegal activities are not deductible, political contributions can be deducted as long as the donation is not made to a candidate for public office.

Which of the following expenditures is NOT likely to be allowed as a current deduction for a landscaping and nursery business?

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

Bill operates a proprietorship using the cash method of accounting, and this year he received the following:$130 in cash from a customer for services rendered this yeara promise from a customer to pay $194 for services rendered this yeartickets to a football game worth $235 as payment for services performed last yeara check for $176 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C?

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

Jones operates an upscale restaurant and he pays experienced cooks $36,000 per year. This year, he hired his son as an apprentice cook. Jones agreed to pay his son $40,800 per year. Which of the following is a true statement about this transaction?

George operates a business thatin 2020 generated revenues of $50 million and allocable taxable income of $560,000. Included in the computation of allocable taxable income were $900,000 of business interest expense, $20,000 of business interest income, and $180,000 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

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.

Murphy uses the accrual method and reports on a calendar year. This year, Murphy signed a binding contract to provide consulting services to Kirby beginning next year. Murphy incurred $15,000 to train his staff for this particular project. In addition, Murphy estimates that he will incur another $60,000 to complete the Kirby contract. What amount, if any, can Murphy deduct this year for the services expected to be rendered next year?

Kip started a wholesale store this year selling bulk peanut butter. In January of this year, Kip purchased an initial five tubs of peanut butter for a total cost of $5,000. In July, Kip purchased three tubs for a total cost of $6,000. Finally, in November Kip bought two tubs for a total cost of $1,000. Kip sold six tubs by year-end. What is Kip's ending inventory under the FIFO cost-flow method?

Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers) of $1 million in 2020. Taxable income was computed on $50 million of revenues and included $50,000 of interest income. The company paid $450,000 in interest expense. What is Rock Island's maximum business interest deduction for the year?

Sandy Bottoms Corporation generated taxable income (before depreciation, interest expense, and any tax loss carryovers) of $3 million this year. Taxable income included $75,020,000 of revenue and $360,000 of interest income. What is Sandy Bottoms's domestic maximum interest expense deduction for the 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.

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