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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 41

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 $290 for the meal and separately paid $250 for the theater tickets, amounts that were reasonable under the circumstances.What amount of these expenditures can Holly deduct as a business expense?

A) $540
B) $270
C) $145
D) $125
E) None-the meals and entertainment are not deductible except during travel.

F) B) and C)
G) B) and E)

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Question 42

Multiple Choice

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John is a self-employed computer consultant who lives and works in Dallas.John paid for the following activities in conjunction with his business.Which of the following expenditures is not deductible in any amount? 1.Dinner with a potential client where the client's business was discussed. 2) A trip to Houston to negotiate a contract. 3) A seminar in Houston on new developments in the software industry. 4) A trip to New York to visit a school chum who is also interested in computers.

A) 1 only.
B) 2 only.
C) 3 only.
D) 4 only.
E) None of the choices are correct.

F) B) and D)
G) A) and D)

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Question 43

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

Kip started a wholesale store this year selling bulk peanut butter.In January of this year Kip purchased an initial five tubs of peanut butter for a total cost of $5,000.In July Kip purchased three tubs for a total cost of $6,000.Finally, in November Kip bought two tubs for a total cost of $1,000.Kip sold six tubs by year-end.What is Kip's ending inventory under the FIFO cost-flow method?

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

Which of the following expenditures is completely deductible?

The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

George operates a business that generated revenues of $50 million and allocable taxable income of $1.25 million.Included in the computation of allocable taxable income were deductible expenses of $240,000 of business interest and $250,000 of depreciation.What is the maximum business interest deduction that George will be eligible to claim this year?

Shadow Services uses the accrual method and reports on a calendar year.This year Shadow agreed to a uniform-cleaning contract with Odie Cleaning.Under the contract Odie bills Shadow for cleaning services as the services are provided.At year-end Shadow paid Odie $2,350 for the services rendered during the year.In addition, Shadow paid Odie $700 for cleaning services expected in January of next year.What amount, if any, can Shadow deduct for the cleaning services this 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 of repair 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?

Which of the following is a true statement about the limitation on business interest deductions?

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: $\begin{array}{llcc} \text { Cowrse Tuition} & \$2,500\\ \text {Airfare } &800\\ \text { Hotel (10 nights) } &1,200\\ \text {Rerital car (10 days) } &900\\ \text {Meals (10 days) } &1,500\\\end{array}$ What amount of travel expenditures can Sam deduct?

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.What amount of Fred's summer wages can Bryon deduct for tax purposes? Bryon is on the cash method and calendar year.

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

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

Beth operates a plumbing firm.In August of last year she signed a contract to provide plumbing services for a renovation.Beth began the work that August and finished the work in December of last year.However, Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full.When should Beth recognize income under the accrual method of accounting?

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

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

Mike operates a fishing outfitter as an accrual-method sole proprietorship.On March 1^st of this year Mike received $15,000 for three 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 three summers, beginning this year.How much income must Mike recognize in each of the next three years if he is attempting to minimize his tax burden?

Paris operates a talent agency as a sole proprietorship, and this year she incurred the following expenses in operating her talent agency.What is the total deductible amount of these expenditures? $1,000 dinner and theater with a film producer where no business was discussed $500 lunch with sister Nicky where no business was discussed $700 business dinner with a client but Paris forgot to keep any records (oops!) $900 tickets to the opera with a client following a business meeting