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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 41

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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 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?

A) $100.
B) $300.
C) $350.
D) $270.
E) $520.

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

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Question 42

Multiple Choice

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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?

A) $7,200
B) Clark cannot deduct these costs because taxpayers must use the mileage method to determine any transportation deduction.
C) $4,500
D) $2,700
E) Clark is not entitled to any deduction if he used the car for any personal trips.

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

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Question 43

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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.

Alvin is a self-employed sound technician who reports on the cash method and calendar year.Alvin has a shop in Austin,Texas,but he spends much of his time away from his shop traveling to and from various concerts around the country.Alvin leases a truck to move his equipment around the country and this year he spent $12,000 in lease payments and paid $18,000 for gas,oil,and repairs.Alvin keeps records of his personal use of the truck and he estimates that 6,000 of the total 36,000 miles put on the truck this year were for personal trips.What amount of these expenses may Alvin deduct as business expenses?

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

Qualified production activity income for calculating the domestic production activities deduction is limited to taxable income for a business or modified AGI for an individual.

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

Taffy Products uses the accrual method and reports on a calendar year.On July 1ˢᵗ of this year Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents of their warehouse.The rent and insurance covers the next 12 months.What amount,if any,can Taffy deduct for rent and insurance this year?

Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year.Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

The full-inclusion method requires cash basis taxpayers to include prepayments for goods or services into realized income.

David purchased a deli shop on February 1ˢᵗ of last year and began to operate it as a sole proprietorship.David reports his personal taxes using the cash method over a calendar year,and he wants to use the cash method and fiscal year for his sole proprietorship.He has summarized his receipts and expenses through January 31ˢᵗ of this year as follows: $\begin{array} { l r r } & \text { Receipts } & \text { Expenses } \\\text { February thri. Decermber lastyear } & \$ 112,000 & \$ 84,500 \\\text { Jarnury this year } & 10,400 & 6,200\end{array}$ What income should David report from his sole proprietorship?

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: Advertisirig 5 500 Car ad truck expenses Depreciation Employee compensation Education 1000 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.

Individual proprietors report their business income and deductions on:

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 as business expenses?

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.

Which of the following is a true statement about the domestic production activities deduction?

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: CourseTuition                $2,500 Air Fare                           800 Hotel (10 nights)            1,200 Rental car ( 10 days)           900 Meals ( 10 days)              1,500 What amount of travel expenditures can Sam deduct?

A business generally adopts a fiscal or calendar year by using that year end on the first tax return for the business.

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