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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 21

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In order to deduct a portion of the cost of a business meal, which of the following conditions must be met?

A) A client (not a supplier or vendor) must be present at the meal.
B) The taxpayer or an employee must be present at the meal.
C) The meal must occur on the taxpayer's business premises.
D) None of these choices is a condition for the deduction.
E) All of the choices are conditions for a deduction.

F) B) and E)
G) A) and B)

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Question 22

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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?

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$1,440 = $840 interest ($120 × 7 months-...

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Question 23

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Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers)of $3 million in 2020. Taxable income was computed on $50 million of revenues and included $140,000 of interest income. The company paid $454,500 in interest expense. What is Rock Island's maximum business interest deduction for the year?

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?

Mike started a calendar-year business on September 1^st of this year by paying 12 months of rent on his shop at $600 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

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?

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

Which of the following types of transactions may not be accounted for using the cash method for small proprietorships?

Which of the following is a true statement about a request for a change in accounting method?

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

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?

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?

Crystal operates a business that provides typing and delivery services. This year, Crystal spent $2,530 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 $5,150 in life insurance premiums. What amount of these payments can Crystal deduct? Crystal is on the cash method and calendar year.

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

All taxpayers must account for taxable income using a calendar 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?

Sam operates a small chain of pizza outlets in Fort Collins, Colorado. In November of this year, Sam decided to attend a two-day management training course. Sam could choose to attend the course in Denver or Los Angeles. Sam decided to attend the course in Los Angeles and take an eight-day vacation immediately after the course. Sam reported the following expenditures from the trip: What amount of travel expenditures can Sam deduct?

Crystal operates a business that provides typing and delivery services. This year, Crystal spent $2,500 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 and the 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 $5,000 in life insurance premiums. What amount of these payments can Crystal deduct? Crystal is on the cash method and calendar year.

Which of the following expenditures is completely deductible?

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 31 ^st of last year, but the remaining $3,500 was not paid until January of this year. When can Bob deduct the consulting fee?