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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 typically be accounted for using the cash method?

A) sales of inventory.
B) payments of debt.
C) services.
D) purchases of machinery.
E) sales of securities by an investor.

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

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Question 22

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

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

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

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Question 23

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Mike operates a fishing outfitter as an accrual-method sole proprietorship. On March 1st 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 minimizehis tax burden?

Clyde operates a sole proprietorship using the cash method. This year Clyde made the follow5i5n) g expenditures:$480 to U.S. Bank for 12 months of interest accruing on a business loan from September 1st of this year through August 31st of next year.$600 for 12 months of property insurance beginning on July 1 of this year.What is the maximum amount Clyde can deduct this year?

Qualified production activities income is defined as follows for purposes of the domestic production activities deduction:

Paris operates a talent agency as a sole proprietorship, and this year she incurred the followingexpenses in operating her talent agency. What is the total deductible amount of these expenditures?$1,000 dinner 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.

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 thecompany will pay at least $250,000 to settle the claim. What amount, if any, can Blackwell deduct for the expected claim settlement this year?

The domestic production activities deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic manufacturing activities during the year.

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

Mike started a calendar year business on September 1st of this year by paying 12 months 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?

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 advertising time during a professional golftournament which will occur once in April of next year. What amount of these payments, if any, can Ajax deduct this year?

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

Danny owns an electronics outlet in Dallas. This year he paid $600 to register for a four-day course in management in Chicago. Danny paid $800 in airfare and $1,000 for five nights lodging. After the course, Danny spent the last day sightseeing. During the trip, Danny also paid $140 a day for meals, and $80 a day for a rental car. What amount of these travel expenditures may Danny deduct asbusiness expenses?

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

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 forbook 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?

Which of the following is a true statement about travel that has both business and personal aspects?

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

Gabby operates a pizza delivery service. This year she paid delivery personnel $18,000 in salary.She carefully documented the business use of the auto (11,700 miles this year) and her $7,350 of vehicle expenses (for gas, oil, repairs, and auto lease payments). What amount of these expenses may Gabby deduct as business expenses? Gabby is on the cash method and calendar year.

Big Homes Corporation is an accrual method calendar year taxpayer that manufactures and sells modular homes. This year for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year end, Big Homes had paid $12,000 inrebates and was liable for an additional $7,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

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