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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 51

Multiple Choice

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Colbert operates a catering service on the accrual method.In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1^st of year 1 through May 31^st of year 3.When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

A) $500 is recognized in year 1, $6,000 in year 2, and $2,500 in year 3.
B) $500 is recognized in year 1 and $8,500 in year 2.
C) $9,000 is recognized in year 3.
D) $2,500 is recognized in year 1 and $6,500 in year 2.
E) $9,000 is recognized in year 1.

F) C) and D)
G) A) and E)

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Question 52

Multiple Choice

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Which of the following is a true statement?

A) Meals, lodging, and incidental expenditures are deductible if the taxpayer is away from home overnight while traveling.
B) Meals are deductible for an employee who is forced to work during the lunch hour.
C) When a taxpayer travels solely for business purposes, only half of the costs of travel are deductible.
D) If travel has both business and personal aspects, the cost of transportation is always deductible but the deductibility of lodging depends upon whether business is conducted that day.
E) None of the choices are true because business travel is not deductible.

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

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Question 53

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Business activities are distinguished from personal activities in that business activities are motivated by the pursuit of profits.

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

Ralph borrowed $4 million and used the proceeds in his Internet business.The interest on this debt is not subject to an interest limitation if Ralph's business has average annual gross receipts of $26 million or less for the prior three taxable years.

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

Brad operates a storage business on the accrual method.On July 1 Brad paid $48,000 for rent on his storage warehouse and $18,000 for insurance on the contents of the warehouse.The rent and insurance cover the next 12 months.What is Brad's deduction for the rent and insurance?

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?

Which of the following cannot be selected as a valid tax year-end?

Riley operates a plumbing business, and this year the three-year-old van he used in the business was destroyed in a traffic accident.The van was originally purchased for $20,000 and the adjusted basis was $5,800 at the time of the accident.Although the van was worth $6,000 at the time of accident, insurance only paid Riley $1,200 for the loss.What is the amount of Riley's casualty loss deduction?

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

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

Which of the following is a true statement about impermissible accounting methods?

Illegal bribes and kickbacks are not deductible as business expenses but fines imposed by a governmental unit are deductible as long as the fines are incurred in the ordinary course of 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 its warehouse.The rent and insurance cover the next 12 months.What amount, if any, can Taffy deduct for rent and insurance 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?

Mike started a calendar-year business on September 1^st of this year by paying 12 months of rent on his shop at $1,000 per month.What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

Which of the following expenditures is most likely to be deductible for a construction business?

Sandy Bottoms Corporation generated taxable income (before depreciation, interest expense, and any tax loss carryovers)of $3 million this year.Taxable income included $75,000,000 of revenue and $350,000 of interest income.What is Sandy Bottoms's domestic maximum interest expense deduction for the year?