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Exam 8: Business Income, Deductions, and Accounting Methods

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Question 31

Multiple Choice

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George operates a business that generated adjusted gross income of $250,000 and taxable income of $170,000 this year (before the domestic production activities deduction) . Included in income was $70,000 of qualified production activities income. George paid $60,000 of wages to employees engaged in domestic manufacturing. What domestic production activities deduction will George be eligible to claim this year?

A) $5,400
B) $6,300
C) $7,200
D) $15,300
E) $22,500

F) C) and D)
G) All of the above

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Question 32

Multiple Choice

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This year Clark leased a car to drive between his office and various work sites. Clark carefully recorded that he drove the car 23,000 miles this year and paid $7,200 of operating expenses ($2,700 for gas, oil, and repairs, and $4,500 for lease payments) . What amount of these expenses may Clark deduct as business expenses?

A) $7,200
B) Clark cannot deduct these costs but he must use the mileage method to determine any deduction.
C) $4,500
D) $2,700
E) Clark is not entitled to any deduction if he used the car for any personal trips.

F) A) and B)
G) A) and C)

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Question 33

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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?

Individual proprietors report their business income and deductions on:

John is a self-employed computer consultant who lives and works in Dallas. John paid for the following activities in conjunction with his business. Which is not deductible in any amount? 1. Dinner with a potential client where the client's business was discussed. 2) A trip to Houston to negotiate a contract. 3) A seminar in Houston on new developments in the software industry. 4) A trip to New York to visit a school chum who is also interested in computers.

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?

A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.

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

Colby Motors uses the accrual method and reports on a calendar year. In December of last year, Colby acquired auto repair equipment. As part of the acquisition, Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for three years. Colby paid the cost of the warranty, $15,000, in January of this year. What can Colby deduct for the cost of the warranty on the tax return for last 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?

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

Anne is a self-employed electrician who reports her business income using the accrual method over a calendar year. On September 1st of this year Anne paid $2,280 of interest on a loan. The interest accrues evenly over 19 months ($120 per month) from June 1st of this year through December 31st of next year. In addition, on September 1st 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 about accounting for business activities?

The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

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

Marilyn operates a day care center as a cash-method sole proprietorship. On August 1st 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?

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

Bob operates a clothing business using the accrual method over a calendar year. In October of last year, Bob contracted with his father, Tim, for consulting advice. Tim is a cash basis calendar year taxpayer and he billed Bob for $6,000 of consulting fees. This amount was comparable to amounts charged by other consultants (a reasonable amount). Bob paid $2,500 of the consulting fee by December 31st of last year, but the remaining $3,500 was not paid until January of this year. When can Bob deduct the consulting fee?

Only half the cost of a business meal is deductible even if the meal is associated with the active conduct of business.

Ranger Athletic Equipment uses the accrual method and reports on a calendar year. Ranger provides two-year warranties on all sales of equipment. This year Ranger estimated warranty expense for book purposes, and he accrued $1 million of warranty expenses. However, during the year Ranger only spent $400,000 repairing equipment under the warranty. What can Ranger deduct for warranty expense on the tax return for this year?