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Exam 1: Business Income,Deductions,and Accounting Methods

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Question 51

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Smith operates a roof repair business.This year Smith's business generated cash receipts of $32,000 and Smith made the following expenditures associated with his business: The education expense was for a two-week,nighttime course in business management.Smith believes the expenditure should qualify as an ordinary and necessary business expense.What net income should Smith report from his business? Smith is on the cash method and calendar year.

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$20,940 = $32,000 − ...

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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
Because tort liabilities ...

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Question 53

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

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 to pay $200 from a customer 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?

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

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?

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

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.

Which of the following is a true statement?

This year Clark leased a car to drive between his office and various work sites.Clark carefully recorded that he drove the car 23,000 miles this year and paid $7,200 of operating expenses ($2,700 for gas,oil,and repairs,and $4,500 for lease payments) .What amount of these expenses may Clark deduct as business expenses?

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.

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 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.

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

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 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.

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

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?

Colby Motors uses the accrual method and reports on a calendar year.In December of last year,Colby acquired auto repair equipment.As part of the acquisition,Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for three years.Colby paid the cost of the warranty,$15,000,in January of this year.What can Colby deduct for the cost of the warranty on the tax return for last year?

Which of the following expenses are completely deductible?

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