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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 51

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All taxpayers must account for taxable income using a calendar year.

A) True
B) False

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Question 52

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Blackwell Manufacturing uses the accrual method and reports on a calendar year. This year a customer was injured when visiting the Blackwell factory. The customer sued the company for $500,000, and the case is still being litigated. However, Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim. What amount, if any, can Blackwell deduct for the expected claim settlement this year?

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Zero
Explanation: Because tort...

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Question 53

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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?

Shelley is employed in Texas and recently attended a two-day business conference in New Jersey. Shelley spent the entire time at the conference and documented her expenditures (described below) . What amount can Shelley deduct as an employee business expense (before considering any miscellaneous itemized deduction limitations) ?

Ed is a self-employed heart surgeon who 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 _________.

Which of the following is a true statement about the domestic production activities deduction?

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?

Which of the following business expense deductions is most likely to be unreasonable in amount?

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

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

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

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 their warehouse. The rent and insurance covers the next 12 months. What amount, if any, can Taffy deduct for rent and insurance this year?

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?

The all-events test for income determines the period in which income will be recognized for tax purposes.

Which of the following expenses are completely deductible?

Alvin is a self-employed sound technician who reports on the cash method and calendar year. Alvin has a shop in Austin, Texas, but he spends much of his time away from his shop traveling to and from various concerts around the country. Alvin leases a truck to move his equipment around the country and this year he spent $12,000 in lease payments and paid $18,000 for gas, oil, and repairs. Alvin keeps records of his personal use of the truck and he estimates that 6,000 of the total 36,000 miles put on the truck this year were for personal trips. What amount of these expenses may Alvin deduct as business expenses?

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

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

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?