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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 51

Multiple Choice

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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?

A) $12,000
B) $6,000
C) $5,000
D) $2,500
E) $1,000

F) A) and C)
G) None of the above

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Question 52

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 the choices are correct

F) A) and B)
G) All of the above

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Question 53

True/False

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The full-inclusion method requires cash-basis taxpayers to include prepayments for goods or services into realized income.

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?

Holly took a prospective client to dinner, and after agreeing to a business deal, they went to the theater. Holly paid $290 for the meal andseparately paid $250 for the theater tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

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?

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

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

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 dinnerand 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

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?

Even a cash-method taxpayer must consistently use accounting methods that "clearly reflect income" for tax purposes.

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.

Danny owns an electronics outlet in Dallas. This year, he paid $685 to register for a four-day course in management in Chicago. Danny paid $715 in airfare and $660 for five nights' lodging. After the course, Danny spent the last day sightseeing. During the trip, Danny also paid $310 a day for meals, and $250 a day for a rental car. What amount of these travel expenditures may Danny deduct as business expenses?

Anne is a self-employed electrician who reports her business income using the accrual method over a calendar year. On September 1 ^st of this year, Anne paid $2,280 of interest on a loan. The interest accrues evenly over 19 months ($120 per month)from June 1 ^st of this year through December 31 ^st of next year. In addition, on September 1 ^st Anne also paid $2,700 for 18 months of professional liability insurance ($150 per month). What amount of interest and insurance can Anne deduct this year?

Which of the following is a true statement?

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

The phrase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business.

All taxpayers must account for taxable income using a calendar year.

Sole proprietorships must use the same tax year as the proprietor of the business.

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 ^stof year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?