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Income Tax Fundamentals 2017 35th Edition by Gerald E. Whittenburg – Test Bank

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Income Tax Fundamentals 2017 35th Edition by Gerald E. Whittenburg – Test Bank

Chapter 10 Partnership Taxation

1. If Margo and Bruce purchase and operate an ice cream store, for tax purposes they have formed a partnership.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

True / False

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-01 – LO:10-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

2. Income from a partnership is taxed to the partner only if the partner receives the income as a distribution during the year.

a.

True

b.

False

ANSWER:

False

RATIONALE:

Partnership income is taxable to the partner even if he or she does not actually receive it in cash.

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

True / False

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-01 – LO:10-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

3. Because a partnership does not pay taxes, a partnership is not recognized as a legal entity under civil law.

a.

True

b.

False

ANSWER:

False

RATIONALE:

Partnerships are legal entities under civil law.

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

True / False

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-01 – LO:10-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

4. Which one of the following is not true about partnerships?

a.

There must be two or more owners.

b.

General partners assume more risk of legal liability than limited partners.

c.

An LLC limits certain liability risks.

d.

A partnership is taxed like a corporation.

e.

All of the above are true.

ANSWER:

d

RATIONALE:

A corporation is taxed as a separate entity while partnership income flows through to the partners.

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-01 – LO:10-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

5. Which of the following statements is true about partnerships?

a.

The formation of a partnership must be documented in writing.

b.

An LLC is generally treated as a partnership for tax law purposes.

c.

General partners have no liability for partnership obligations beyond their capital contributions.

d.

When Sue and Billy Bob invest in land together, they are considered to have formed a partnership.

ANSWER:

b

RATIONALE:

a. Partnerships can be formed without a written agreement

b. Correct

c. General partners can be responsible for the partnership’s liabilities.

d. Mere co-ownership of an investment does not necessarily rise to the level of a partnership.

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-01 – LO:10-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

6. For the following separate, independent situations indicate with a “Yes” if a partnership return needs to be filed. Mark with a “No” if a partnership return is not required.

a. Tony and Gina form a joint venture to import goods from South Korea.
b. Nancy decided to start her own private investigative business.
c. Uncle Pennybag’s estate assets are pooled together until they can be distributed
to the beneficiaries.
d. Howie, Dewey, and Cheatem form an LLC.
e. Flora, Fauna, and Merryweather start a child care business. No official documents
are drawn up.

ANSWER:

a. Yes
b. No
c. No
d. Yes
e. Yes

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

Subjective Short Answer

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-01 – LO:10-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

7. Jack and Jill decided to pool their money and start a water delivery business. Since they trust each other so much, they did not draw up any legal documents for the business. During the first year of business, they earned $50,000 which was net of $10,000 paid to Jill as a guaranteed payment. During the second year of business, they decided to limit their liability exposure by forming an LLC.

a. Was a partnership formed during the first year?

b. If a partnership was formed, how much income will be taxed at the partnership level?

c. For the second year, do they need to file a partnership tax return?

ANSWER:

a. Yes.

b. $0. There is no tax at the partnership level. The partnership income and other items

are passed through to the partners and taxed at the individual level.

c. Yes. An LLC is generally treated as a partnership for tax law purposes.

POINTS:

1

DIFFICULTY:

Moderate

QUESTION TYPE:

Subjective Short Answer

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-01 – LO:10-01

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

8. In general, income is recognized by the partner when a partnership interest is received in exchange for services rendered to the partnership.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

True / False

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-02 – LO:10-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

9. The holding period of property contributed to a partnership includes the period of time that the contributor has held the property.

a.

True

b.

False

ANSWER:

True

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

True / False

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-02 – LO:10-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

10. The basis of a partner’s interest in a partnership is increased by losses of the partnership allocated to the partner.

a.

True

b.

False

ANSWER:

False

RATIONALE:

A partner’s basis in a partnership is decreased by the partner’s share of losses from the partnership.

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

True / False

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-02 – LO:10-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

11. On July 1 of the current year, Bertram acquired a 25 percent interest in Sycamore Company, a partnership, by contributing property with an adjusted basis of $7,000 and a fair market value of $12,000. The property was subject to a mortgage of $8,000, which was assumed by Sycamore Company. What is Bertram’s basis in his partnership interest in Sycamore Company immediately after the partnership contribution?

a.

$0

b.

$1,000

c.

$7,000

d.

$12,000

e.

None of the above

ANSWER:

b

RATIONALE:

$7,000 – 75% x $8,000

POINTS:

1

DIFFICULTY:

Moderate

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-02 – LO:10-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

12. On July 1 of the current year, Ambrose was admitted to the partnership of Ambrose and Nectar. His contribution to capital consisted of 500 shares of stock in Paniculata Corporation, which he bought in 2010 for $10,000 and which had a fair market value of $50,000 on July 1 of the current year. Ambrose’s interest in the partnership’s capital and profits is 25 percent. On July 1 of the current year, the fair market value of the partnership’s net assets (after Ambrose was admitted) was $200,000. What is Ambrose’s taxable gain in the current on the exchange of stock for his partnership interest?

a.

$0 gain or loss

b.

$40,000 ordinary income

c.

$40,000 long-term capital gain

d.

$40,000 Section 1231 gain

e.

None of the above

ANSWER:

a

RATIONALE:

Gain or loss is not generally recognized on the contribution of property in exchange for a partnership interest.

POINTS:

1

DIFFICULTY:

Moderate

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-02 – LO:10-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

13. During the current year, Norman contributed investment property held for over one year to the Mary Ann Partnership for a 40 percent interest in partnership capital and profits. His tax basis in the property contributed was $8,000, and the property had a fair market value of $10,000 on the date of the contribution to the partnership. What gain or loss should Norman report as a result of the contribution of the property to the partnership in exchange for the 40 percent partnership interest?

a.

No gain or loss

b.

$2,000 long-term capital gain

c.

$2,000 ordinary income

d.

$10,000 long-term capital gain

e.

None of the above

ANSWER:

a

RATIONALE:

Gain or loss is not generally recognized on the contribution of property in exchange for a partnership interest.

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-02 – LO:10-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

14. Leslie contributes a building worth $88,000, with an adjusted basis of $40,000, to a partnership in exchange for a 50 percent interest in the partnership’s capital and profits. What is the amount of Leslie’s basis in her partnership interest immediately after the contribution?

a.

$20,000

b.

$40,000

c.

$44,000

d.

$88,000

e.

None of the above

ANSWER:

b

RATIONALE:

The basis of the partnership interest is generally equal to the basis of the property contributed to the partnership.

POINTS:

1

DIFFICULTY:

Easy

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-02 – LO:10-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

15. An equal partnership is formed by Rita and Gerry. Rita contributes cash of $10,000 and a building with a fair market value of $150,000, adjusted basis of $55,000, and subject to a liability of $60,000. Gerry contributes cash of $100,000. What amount of gain must Rita recognize as a result of this transaction?

a.

$95,000

b.

$35,000

c.

$5,000

d.

$0

e.

None of the above

ANSWER:

d

RATIONALE:

Gain or loss is not generally recognized on the contribution of property in exchange for a partnership interest.

POINTS:

1

DIFFICULTY:

Moderate

QUESTION TYPE:

Multiple Choice

HAS VARIABLES:

False

LEARNING OBJECTIVES:

ITF.WABG.16.LO:10-02 – LO:10-02

NATIONAL STANDARDS:

United States – BUSPROG: Analytic

STATE STANDARDS:

United States – AK – AICPA: FN-Reporting

KEYWORDS:

Bloom’s: Knowledge

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