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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 61

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Taffy Products uses the accrual method and reports on a calendar year. On July 1 ^st of this year Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents of its warehouse. The rent and insurance cover the next 12 months. What amount, if any, can Taffy deduct for rent and insurance this year?

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$42,000 = $24,000 + $18,000.Economic per...

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Question 62

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Crystal operates a business that provides typing and delivery services. This year, Crystal spent $2,640 to purchase special shirts that identify her employees and provide some notoriety for her business. The shirts are especially colorful and include logos on the front pocket andthe back. Besides salary payments, Crystal also compensates her employees by offering to pay whole life insurance premiums for any that want to provide insurance coverage for their beneficiaries. This year, Crystal paid $5,700 in life insurance premiums. What amount of these payments can Crystal deduct? Crystal is on the cash method and calendar year.

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Uniforms are deductib...

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Question 63

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The IRS would most likely apply the arm's length transaction test to determine which of the following?

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?

Judy is a self-employed musician who performs for a variety of events. This year, Judy was fined $290 by the city for violating the city's noise ordinance with a relatively loud performance. As a consequence, Judy contributed $920 to a campaign committee formed to recall the city's mayor. Judy normally hires three part-time employees to help her schedule events and transport equipment. Judy paid a total of $33,800 to her employees through June of this year. In June, Judy fired her part-time employees and hired her husband to replace them. However, Judy paid him $54,200 rather than $33,800. Judy is on the cash method and calendar year, and she wants to know what amount of these expenditures is deductible as business expenses.

Ajax Computer Company is an accrual-method calendar-year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1.7 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $1,200,000 for a one-time advertising blitz during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?

Ajax Computer Company is an accrual-method calendar-year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $500,000 fora one-time advertising blitz during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?

Mike started a calendar-year business on September 1 ^st of this year by paying 12 monthsof rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

Which of the following expenditures is completely deductible?

Mike operates a fishing outfitter as an accrual-method sole proprietorship. On March 1^st of this year, Mike received $20,700 for five outfitting trips. This is the first time Mike agreed to such a payment and he is obligated to outfit one trip per year for the next five summers, beginning this year. How much income must Mike recognize in each of the next five years if he is attempting to minimize his tax burden?

Bill operates a proprietorship using the cash method of accounting, and this year he received the following:$100 in cash from a customer for services rendered this yeara promisefrom a customer to pay $200 for services rendered this yeartickets to a football game worth $250 as payment for services performed last yeara check for $170 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C?

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?

Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers)of $1 million this year. 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?

According to the Internal Revenue Code §162, deductible trade or business expenses must be which one of the following?

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 $23,800 and the adjusted basis was $5,325 at the time of the accident. Although the van was worth $6,380 at the time of accident, insurance only paid Riley $1,675 for the loss. What is the amount of Riley's casualty loss deduction?

Uniform capitalization of indirect inventory costs is required for mostvery large taxpayers.

Which of the following is likely to be a business expense fully deductible in the current year?

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

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 $55,000 of interest income. The company paid $450,250 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 in 2020. Taxable income included $75,000,000 of revenue and $350,000 of interest income. What is Sandy Bottoms's domestic maximum interest expense deduction for the year?