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Exam 9: Business Income,deductions,and Accounting Methods

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Question 41

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

A) True
B) False

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Question 42

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Which of the following is likely to be a fully deductible business expense?

A) Salaries in excess of the industry average paid to attract talented employees.
B) The cost of employee uniforms that can be adapted to ordinary personal wear.
C) A speeding fine paid by a trucker who was delivering a rush order.
D) The cost of a three-year subscription to a business publication.
E) None of the choices are likely to be deductible.

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

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Question 43

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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?

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?

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?

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?

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

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?

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 $420,000 of sales on account and $64,000 was uncollected at the end of the year.What is Todd's §481 adjustment for this year?

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

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.

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?

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

Shelley is self-employed in Texas and recently attended a two-day business conference in New Jersey.After Shelley attended the conference,she had dinner with an old friend who lived nearby.Shelly documented her expenditures (described below) .What amount can Shelley deduct?

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

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

The phase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business.

Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year.This year he hired his son as an apprentice cook.Jones agreed to pay his son $40,000 per year.Which of the following is a true statement about this transaction?

The IRS would most likely apply the arm's length transaction test to determine which of the following?

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