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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 31

True/False

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

A) True
B) False

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Question 32

Multiple Choice

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Todd operates a business using the cash basis of accounting. At the end of last year, Todd was granted permission to switch his sales on account to the accrual method. Last year Todd made $420,000 of sales on account and $64,000 was uncollected at the end of the year. What is Todd's §481 adjustment for this year?

A) increase expenses by $64,000.
B) increase expenses by $420,000.
C) increase income by $16,000.
D) increase income by $420,000.
E) Todd has no §481 adjustment this year.

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

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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 abalance 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?

Don operates a taxi business, and this year one of his taxis was damaged in a traffic accident. The taxi was originally purchased for $32,000 and the adjusted basis was$2,000 at the time of the accident. The taxi was repaired at a cost of $2,500 andinsurance reimbursed Don $700 of this cost. What is the amount of Don's casualty loss deduction?

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

Rock Island Corporation generated taxable income (before the domestic production activitiesdeduction) of $10 million this year. The total income included $4,500,000 of qualified production activities income. The company paid $500,000 in W-2 wages to generate the qualified production activity income. What is Rock Island's domestic production activities deduction for the year?

Joe operates a plumbing business that uses the accrual method and reports on a calendar year. This year Joe signed a $50,000 binding contract with Brian. Under the contract Brian will provide Joe with up to 2,000 hours of vehicle repairs at $25 per hour. This year Brian provided 200 hours ofrepair services and billed Joe for $5,000. At year end Joe had not paid Brian for the services. What amount, if any, can Joe deduct for the repair services this year?

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?

Joe is a self-employed electrician who operates his business on the accrual method. This year Joe purchased a shop for his business, and for the first time 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 but prior to filing his tax return. Which of the following is a true statement?

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?

Qualified production activity income for calculating the domestic production activities deduction is limited to taxable income for a business or modified AGI for an individual.

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?

Bryon operates a consulting business and he usually works alone. However, during the summer Bryon will sometimes hire undergraduate students to collect data for his projects. This past summer Bryon hired Fred, the son of a prominent businessman, for a part-time summer job. The summer job usually pays about $17,000, but Bryon paid Fred $27,000 to gain favor with Fred's father. Whatamount of Fred's summer wages can Bryon deduct for tax purposes? Bryon is on the cash method and calendar year.

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

Which of the following is a true statement?

Which of the following is a true statement about accounting for business activities?

Dick pays insurance premiums for his employees. What type of insurance premium is not deductible as compensation paid to the employee?

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

Marilyn operates a day care center as a cash-method sole proprietorship. On August 1st of this yearMarilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next20 months. How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

Which of the following is a true statement?