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Exam 9: Business Income,deductions,and Accounting Methods

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Question 21

Multiple Choice

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

A) Sales of inventory
B) Services
C) Sales of securities by an investor
D) Payments of debt
E) All of the choices can be accounted for using the cash method.

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

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Question 22

Multiple Choice

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Which of the following expenditures is NOT likely to be allowed as a current deduction for a landscaping and nursery business?

A) Cost of fertilizer
B) Accounting fees
C) Cost of a greenhouse
D) Cost of uniforms for employees
E) A cash settlement for trade name infringement

F) All of the above
G) A) and D)

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Question 23

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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?

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?

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

Ranger Athletic Equipment uses the accrual method and reports on a calendar year.Ranger provides two-year warranties on all sales of equipment.This year Ranger estimated warranty expense for book purposes,and he accrued $1 million of warranty expenses.However,during the year Ranger only spent $400,000 repairing equipment under the warranty.What can Ranger deduct for warranty expense on the tax return for this year?

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?

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

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 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?

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.

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

Only half the cost of a business meal is deductible even if the meal is extravagant.

The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount.

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?

Adjusted taxable income is defined as follows for purposes of the business interest limitation:

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

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?

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.

Taxpayers must maintain written contemporaneous records of business purpose when traveling in order to claim a deduction for the expenditures.