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Exam 1: Business Income, Deductions, and Accounting Methods

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Question 1

Multiple Choice

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Ed is a self-employed heart surgeon wholives in Michigan and has incurred the following reasonable expenses. How much can Ed deduct? $1,340 in airfare to repair investment rental property in Colorado. $650 in meals while attending a medical convention in New York. $375 for tuition for an investment seminar, "How to pick stocks." $142 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day. The correct answer is _____.

A) $1,665 "for AGI"
B) $1,715 "for AGI" and $396 "from AGI"
C) $576 "for AGI"
D) $122 "for AGI" and $1,715 "from AGI"
E) None of the choices are correct.

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

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Question 2

Multiple Choice

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Holly took a prospective client to dinner, and after agreeing to a business deal, they went to the theater. Holly paid $340 for the meal and separately paid $230 for the theater tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

A) $570
B) $285
C) $170
D) $115
E) None-the meals and entertainment are not deductible except during travel.

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

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Question 3

Short Answer

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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 $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?

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?

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

Which of the following expenditures is completely deductible?

Ralph borrowed $4 million and used the proceeds in his Internet business. The interest on this debt is not subject to an interest limitation if Ralph's business has average annual gross receipts of $26 million or less for the prior three taxable years.

Ed is a self-employed heart surgeon who lives in Michigan and has incurred the following reasonable expenses. How much can Ed deduct? $1,000 in airfare to repair investment rental property in Colorado. $500 in meals while attending a medical convention in New York. $300 for tuition for an investment seminar, "How to pick stocks." $100 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day. The correct answer is _____.

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?

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

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

Which of the following cannot be selected as a valid tax year-end?

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 $423,500 of sales on account, and $65,400 was uncollected at the end of the year. What is Todd's §481 adjustment for this year?

George operates a business that generated revenues of $60 million and allocable taxable income of $1.35 million. Included in the computation of allocable taxable income were deductible expenses of $245,000 of business interest and $255,000 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt will not be deductible.

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?

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

Murphy uses the accrual method and reports on a calendar year. This year, Murphy signed a binding contract to provide consulting services to Kirby beginning next year. Murphy incurred $15,000 to train his staff for this particular project. In addition, Murphy estimates that he will incur another $60,000 to complete the Kirby contract. What amount, if any, can Murphy deduct this year for the services expected to be rendered next year?

Ronald is a cash-method taxpayer who made the following expenditures this year. Which expenditure is completely deductible in this period as a business expense?