Name: Taxation for Decision Makers 2019 Edition by Shirley Dennis-Escoffier
SKU: tb1001354
Price: 28.00 USD
Availability: InStock

Taxation for Decision Makers 2019 Edition by Shirley Dennis-Escoffier

Chapter 6 Summary of Testbank Revisions

2019 Edition Problem Number

2018 Edition Problem Number

2019 Edition Modification

True-False 1

True-False 2

True-False 3

True-False 4

True-False 5

True-False 6

True-False 7

True-False 8

True-False 9

Problem modified

True-False 10

True-False 11

True-False 12

True-False 13

True-False 14

Problem and solution modified

True-False 15

True-False 16

True-False 17

True-False 18

Year updated

True-False 19

True-False 20

New problem

Short Answer 1

Short Answer 2

Short Answer 3

Problem modified

Short Answer 4

Short Answer 5

Short Answer 6

Short Answer 7

Problem and solution modified

Short Answer 8

Short Answer 9

Short Answer 10

Problem and solution modified

Short Answer 11

Short Answer 12

Short Answer 13

Short Answer 14

Short Answer 15

Short Answer 16

Problem 1

Problem and solution modified

Problem 2

Problem 3

Problem 4

Problem and solution modified

Problem 5

Problem and solution modified

Problem 6

Problem 7

Problem 8

Problem 9

Problem and solution modified

Problem 10

Problem modified

Problem 11

Other Objective 1

Other Objective 2

Other Objective 3

Other Objective 4

Other Objective 5

Other Objective 6

Problem and solution modified

Other Objective 7

Other Objective 8

Other Objective 9

Other Objective 10

Problem modified

Other Objective 11

Other Objective 12

Multiple Choice 1

Multiple Choice 2

Problem modified

Multiple Choice 3

Problem modified

Multiple Choice 4

Multiple Choice 5

Multiple Choice 6

Multiple Choice 7

Years updated

Multiple Choice 8

Years updated

Multiple Choice 9

Multiple Choice 10

Multiple Choice 11

Years updated

Multiple Choice 12

Multiple Choice 13

Problem modified

Multiple Choice 14

Multiple Choice 15

Multiple Choice 16

Problem and solution modified

Multiple Choice 17

Problem modified

Multiple Choice 18

Multiple Choice 19

Multiple Choice 20

Problem and solution modified

Multiple Choice 21

Multiple Choice 22

Problem and solution modified

Multiple Choice 23

Problem modified

Multiple Choice 24

Problem modified

Multiple Choice 25

Problem modified

Multiple Choice 26

Problem and solution modified

Multiple Choice 27

Multiple Choice 28

Multiple Choice 29

Problem modified

Multiple Choice 30

Multiple Choice 31

Problem modified

Multiple Choice 32

Multiple Choice 33

Years updated

Multiple Choice 34

Multiple Choice 35

Problem modified

Multiple Choice 36

Multiple Choice 37

Problem and solution modified

Multiple Choice 38

Multiple Choice 39

Multiple Choice 40

Multiple Choice 41

Problem and solution modified

Multiple Choice 42

Multiple Choice 43

Multiple Choice 44

Multiple Choice 45

Multiple Choice 46

Multiple Choice 47

Multiple Choice 48

Multiple Choice 49

Multiple Choice 50

Multiple Choice 51

Multiple Choice 52

Problem modified

Multiple Choice 52

Multiple Choice 53

Problem modified

Multiple Choice 53 Multiple Choice 54

Multiple Choice 54 Multiple Choice 55

Problem modified

Multiple Choice 55

Multiple Choice 56

Multiple Choice 57

Multiple Choice 58

Multiple Choice 59

True-false 20

Problem deleted

Short Answer 15

Problem deleted

Multiple Choice 49

Problem deleted

Multiple Choice 60

Problem deleted

Chapter 6

Business Expenses

True-False: Insert T for True and F for False before the questions.

_____ 1. Expenses must be ordinary, necessary, and reasonable to be fully deductible.

ANSWER: True

LO: 6.1

DIFFICULTY: Easy

_____ 2. Under no circumstances are business deductions allowed for expenses that are not substantiated by a paper trail.

ANSWER: False

LO: 6.1

DIFFICULTY: Easy

_____ 3. A cash basis taxpayer recognizes an expense when the cash is paid or the expense is charged to a credit card.

ANSWER: True

LO: 6.2

DIFFICULTY: Easy

_____ 4. An accrual-basis taxpayer deducts an expense when the cash is paid even if the service for which the money is paid has not been rendered.

ANSWER: False

LO: 6.2

DIFFICULTY: Easy

_____ 5. The all events test is met for an accrual-basis taxpayer when the liability is determined and the service has been performed.

ANSWER: True

LO: 6.2

DIFFICULTY: Easy

_____ 6. A prepaid expense is always capitalized by a cash-basis taxpayer.

ANSWER: False

LO: 6.2

DIFFICULTY: Easy

_____ 7. A taxpayer cannot take a deduction for a disputed amount until the amount in dispute is settled.

ANSWER: False

LO: 6.2

DIFFICULTY: Easy

_____ 8. A taxpayer can elect to expense immediately or amortize all organization costs over a 15-year period.

ANSWER: False

LO: 6.3

DIFFICULTY: Easy

_____ 9. If an employer reimburses an employee for business meal expenses, the employer can only deduct 50 percent of the reimbursement.

ANSWER: True

LO: 6.4

DIFFICULTY: Easy

_____ 10. A temporary assignment cannot exceed one-year.

ANSWER: True

LO: 6.4

DIFFICULTY: Easy

_____ 11. For transportation expenses for foreign travel of less than one week to be fully deductible, the days spent on business must exceed personal days.

ANSWER: False

LO: 6.4

DIFFICULTY: Easy

_____ 12. If a spouse accompanies an employee on a business trip to help entertain customers, the spouse’s travel expenses are deductible.

ANSWER: False

LO: 6.4

DIFFICULTY: Easy

_____ 13. Home office expenses that exceed the income from the related business may be carried forward to offset future income.

ANSWER: True

LO: 6.5

DIFFICULTY: Easy

_____ 14. Expenses of a hobby are deductible to the extent of the gross profit from the hobby, but only as miscellaneous itemized deductions before 2018 and after 2025.

ANSWER: True

LO: 6.5

DIFFICULTY: Easy

_____ 15. The UNICAP rules require inventory to include a prorated portion of advertising and distribution expenses.

ANSWER: False

LO: 6.6

DIFFICULTY: Easy

_____ 16. A deferred tax asset is the result of the taxes paid exceeding the tax expense on the financial statements.

ANSWER: True

LO: 6.6

DIFFICULTY: Easy

_____ 17. A deferred tax liability can be the result of both timing and permanent differences between revenue recognition for tax and financial accounting.

ANSWER: False

LO: 6.6

DIFFICULTY: Easy

_____ 18. The information in FAS 109 and the FIN 48 interpretation of FAS 109, have been incorporated into the Accounting Standards Codification Section 740.

ANSWER: True

LO: 6.6

DIFFICULTY: Easy

_____ 18. In 2018, all corporations with at least $10 million in assets will be required to file Form 1120, Schedule UTP with their tax returns.

ANSWER: True

LO: 6.6

DIFFICULTY: Easy

_____ 20. For financial accounting purposes, the future tax savings expected from a net operating loss carryforward is reported as a deferred tax liability.

ANSWER: False

LO: 6.6

DIFFICULTY: Easy

Short-Answer Questions: Provide a brief written answer to each of the following questions.

What are the basic requirements for a business expense to be deductible?

ANSWER The basic requirements for a business expense to be deductible are it must be ordinary, it must be necessary (appropriate and helpful), and it must be reasonable.

LO: 6.1

DIFFICULTY: Easy

What are three types of expenses for which a deduction is denied?

ANSWER Expenditures that are contrary to public policy, are related to tax-exempt income, and are an obligation of another taxpayer cannot be deducted.

LO: 6.1

DIFFICULTY: Easy

What information is required to substantiate a business expense?

ANSWER Substantiation requirements for a business expense include documentation for the amount of the expenditure, the time and place of the expenditure, the date and description of a gift, the business purpose of the expenditure, and the business relationship of the person receiving a gift. Documentation may be in the form of diaries, trip sheets, travel logs, paid bills and receipts, account books, expense reports, and statements of witnesses.

LO: 6.1

DIFFICULTY: Moderate

Explain the all events test for expense recognition.

ANSWER The all events test applies to accrual-basis taxpayers; it requires recognition of an expense when all events have occurred that fix the fact of the liability and the liability can be determined with reasonable accuracy.

LO: 6.2

DIFFICULTY: Easy

What are the restrictions placed on a cash-basis taxpayer in deducting prepaid expenses?

ANSWER Prepaid interest must be allocated to the periods over which the interest accrues. Prepaid rents are deductible in the period they are paid only if the prepaid period does not exceed one year and the taxpayer has a contractual obligation to prepay rent beyond the current tax year. Payments for assets to be consumed by the close of the following tax year are fully deductible in the year of payment. Other than these, prepayments by cash-basis taxpayers generally must be capitalized.

LO: 6.2

DIFFICULTY: Moderate

Contrast business investigation, start-up, and organization expenses.

ANSWER Business investigation expenses are expenses incurred before a decision to enter into a new business has been made, such as expenses for travel, market surveys, feasibility studies, and engineering reports while preparing to enter a business. Startup expenses are expenses incurred after the decision to proceed with a new business is made, but before the beginning of actual operations. Organization costs include the fees for legal and accounting services incident to the formation of a business, fees required for incorporation, and expenses for organization meetings of directors, stockholders, or other business owners.

LO: 6.3

DIFFICULTY: Moderate

What is the difference between a “directly-related” and an “associated with” business expense classified as entertainment? How did the deduction for business entertainment change for 2018?

ANSWER To be directly related to a taxpayer’s business, an active discussion related to that business must take place in a clear business setting as part of the entertainment. Thus, entertainment at certain events at which the noise level would preclude a meaningful discussion does not meet this requirement. An associated with expense results from entertainment that is either preceded or followed by a meaningful business discussion. There must be a clear business purpose for the discussion, it must be substantial in relation to the entertainment, and there must be a clear business benefit expected. As of 2018, no entertainment deductions are allowed.

LO: 6.4

DIFFICULTY: Moderate

What are the rules regarding the deduction for transportation expenses related to foreign business travel?

ANSWER All transportation is deductible for a foreign trip as long as there are no personal days involved. If personal days are involved, all transportation is deductible if the trip does not exceed one week or personal days are less than 25 percent of the total time for the travel. If the trip is primarily personal, none of the transportation is deductible. (The trip is more than one week and the personal days exceed business days.) For all other situations the transportation cost must be apportioned between business and personal days, (the trip is greater than one week and the business days exceed the personal days).

LO: 6.4

DIFFICULTY: Moderate

What is a tax home?

ANSWER The taxpayer’s tax home is the location of the taxpayer’s principal place of employment regardless of where the family residence is maintained.

LO: 6.4

DIFFICULTY: Easy

When may a self-employed individual deduct home office expenses?

ANSWER Expenses of a home office can only be deducted if the home office is used exclusively for that business, on a regular basis, and meets one of the following: a. It is the principal place of business for any business of the taxpayer. b. It is used as a place where clients or customers are regularly met in the normal course of business; c. It is located in a structure separate from the home.

LO: 6.5

DIFFICULTY: Easy

What limitations are placed on the deductibility of expenses incurred in the rental of residential property?

ANSWER Residential property rented less than 15 days (personal use)—owner ignores the income received and deducts no expenses related to renting except those expenses otherwise deductible such as taxes and interest. Rented more than 14 days and personal use is less than the greater of 15 days or 10 percent of the rental days (rental property)—rental expenses deductible from rental income; expenses related to personal use nondeductible except for taxes. Use between these two parameters: mixed personal and rental use is treated similar to a hobby; thus, expenses related to rental deductible only to the extent of income, but taxes and interest related to personal use (and any that are nondeductible because of the income limitation) are deductible as itemized deductions.

LO: 6.5

DIFFICULTY: Moderate

What effect do the UNICAP rules generally have on business expenses?

ANSWER The UNICAP rules require taxpayers to include in inventory and cost of goods sold a great many indirect expenses incurred that normally are not included in overhead for financial accounting purposes. The inclusion of these additional costs in inventory rather than expensing when incurred, delays their deduction until the goods are sold creating a temporary difference in tax expense.

LO: 6.6

DIFFICULTY: Easy

Differentiate a deferred tax asset from a deferred tax liability.

ANSWER A deferred tax asset arises from timing differences in which a tax expense is smaller or taxable income is greater than that recognized for financial accounting purposes. This results in more tax being paid than is recognized for financial accounting and the balancing entry is a deferred tax asset. A deferred tax liability arises from timing differences in which a tax expense is greater or taxable income is smaller than that recognized for financial accounting purposes. This results in less tax being paid than is recognized for financial accounting and the balancing entry is a deferred tax liability.

LO: 6.6

DIFFICULTY: Moderate

Explain the difference between timing differences and permanent differences as related to tax and financial accounting?

ANSWER The recognition of income and expense is not consistent between financial and tax accounting. Some revenues and expenses are recorded for financial purposes but may be excludible from the determination of taxable income (for example, the proceeds of a life insurance policy on an executive and the premiums on that policy if the business is the beneficiary). Any item that is recorded for financial accounting but is never recorded for tax purposes (or vice versa) gives rise to a permanent difference. If a revenue or expense item is recorded in one period for financial purposes but recorded in another period for tax purposes, a timing difference is the result. Over time, however, both the financial and tax records will record the same total revenue or expense.

LO: 6.6

DIFFICULTY: Moderate

Briefly describe the process that a corporation must complete in order to recognize a tax benefit from an uncertain tax position that reduces a business’s current or future income tax liability,

ANSWER To recognize the tax benefit from an uncertain tax position, a business must first evaluate whether it is more likely than not (more than 50%) that the position would be sustained upon examination, including any administrative appeals and litigation. In addition, each tax position must also stand on its own technical merits and none can be used in bargaining. Once the more-likely-than-not standard has been met, the business must measure the tax benefit that can be recognized. If there is no single amount more likely than not to be realized, a cumulative probability of outcomes is generated with the largest amount that meets a greater than 50% cumulative probability of realization is recorded.

LO: 6.6

DIFFICULTY: Moderate

Problems: Provide numerical solutions for each of the following.

Note to Instructor: No tables should be required for problem solutions.

Carey operates Crib as a sole proprietorship, a cash-basis company, that has $50,000 of expenses it could pay this year or it could postpone payment until next year. What is the effect of postponing the payment, using a 6 percent discount rate, if Carey’s current marginal tax rate is 22 percent but is expected to be 32 percent next year? How would your answer change if the next year’s tax rate is expected to be 10 percent? (The present value of $1 at 6% is .943. Do not consider self-employment tax.

ANSWER $50,000 x (.32 – .22) x .943 = $4,715 reduction in present value of tax liability

$50,000 x (.22 – .10) x .943 = $5,658 increase in the present value of the tax liability

LO: 6.2

DIFFICULTY: Moderate

In year 1, Braid Corporation, a calendar-year cash-basis corporation, bought office supplies for the next six months in October for $4,500, paid $6,000 for a three-year insurance policy beginning November 1, and borrowed $200,000 on a five-year 6 percent note receiving proceeds of $198,000 on December 1. What is Braid Corporation’s total expense deduction in year 1 for these transactions?

ANSWER $4,500 office supplies; 2/36 x $6,000 = $333 insurance premium for November and December; 1/60 x $2,000 = $33 amortization of discount on note for December; total deductions = $4,866.

LO: 6.2

DIFFICULTY: Moderate

George and Jeannie want to open a restaurant. They contribute $3,000 each for a survey to locate an appropriate area for their restaurant and $2,000 each for a real estate agent to locate a suitable building for them to buy. Shortly after this, Jeannie and George have a disagreement and Jeannie walks away from the plan. Although she asks George to reimburse her, he refuses. George then continues the project by himself. He spends $4,000 for legal and accounting fees to set the business up and $8,000 for staff training. What are the tax consequences to George and Jeannie for these expenditures when the restaurant opens in July?

ANSWER Jeannie can do nothing with the money she spent; she has no deduction because she did not enter the business. George can deduct $5,000 of his $13,000 combined business investigation expenses ($5,000) and start-up expenses ($8,000); the remaining $8,000 of the combined investigation and start-up expenses must be amortized over 180 months beginning in the month the restaurant begins business. He is also allowed to deduct the $4,000 of legal and accounting fees as organizational costs. Thus, his initial deduction in the year the restaurant opens is $9,267[$5,000 + ($8,000 x 6/180) + $4,000].

LO: 6.3

DIFFICULTY: Hard

Carl, an employee of a Miami CPA firm, was sent to work in Tampa for eight months on March 1, 2018, on a financial audit. His monthly transportation expenses were $400, his monthly lodging was $1,200, and his meals were $800 per month. At the end of the sixth month, his employer determined that the audit was going to continue for eight more months due to an SEC investigation. Carl’s employer reimburses him for all of the expenses. How are these expenses and reimbursements treated by Carl and his employer?

ANSWER Carl’s employer may deduct the travel expenses for 6 months x [$400 + $1,200 + (½ x $800)] = $12,000 in 2018. Carl’s tax home changed when the assignment was extended to last over one year for the last four months of 2018 and for the four months in 2019. The employer may deduct 4 months x ($400 + $1,200 + $800) = $9,600 in 2018 and 4 months x ($2,400) = $9,600 in 2018 as a compensation deduction. Carl has $9,600 compensation income in 2018 and again in 2019.

LO: 6.4

DIFFICULTY: Moderate

George took a customer to dinner where they discussed business and then went to see a play. He spent $120 for the meal and left a $25 tip. Cab fare to the theater was $10 and George paid a scalper $200 for the two play tickets with a face value of $80 each. What is George’s allowable deduction for these expenses if the expenses were incurred in 2017? How would your answer change if these expenses were incurred in 2018?

ANSWER ($120 + $25) x .5 dinner + $10 cab fare + .5 ($160) tickets = $72.50 + $10 + $80 = $162.50 total for 2017. No deduction for entertainment in 2018.

LO: 6.4

DIFFICULTY: Easy

Sarah has a three-day meeting in Berlin. She takes an overnight flight arriving early Sunday morning. After resting several hours, she spends the rest of the day sightseeing. She attends the meetings on Monday, Tuesday, and Wednesday. She spends Thursday sightseeing and returns home on Friday. Her transportation cost $1,200 and her five night’s hotel cost $1,250. Her meals were $50 per day from Monday through Thursday and $30 each on Sunday and Friday. How much can Sara deduct for this business trip?

ANSWER This is less than seven days; thus, all transportation is deductible. Thursday is her only nonbusiness day. $1,200 + 4/5 x $1,250 hotel expense + .5 (2 x $30) + .5 (3 x $50) meals = $1,200 + $1,000 + $30 + $75 = $2,305.

LO: 6.4

DIFFICULTY: Moderate

Sam owns a vacation villa in Hawaii. This year he used the villa for 25 days and rented out the villa for 125 days earning $14,000 from the rentals. His total expenses for the year for the vacation home were: mortgage interest = $9,000; taxes = $4,000; utilities = $2,000; repairs and maintenance = $1,500; and depreciation = $12,000. How much can Sam deduct in total for the expenses related to the villa?

ANSWER Rental days = 125/150 of total usage. Rental expense: interest = 125/150 x $9,000 = $7,500; taxes = 125/150 x $4,000 = $3,333; utilities = 125/150 x $2,000 = $1,667; repairs = 125/150 x $1,500 = $1,250. Total rental expense before depreciation = $13,750; depreciation limited to $250 ($14,000 total income – $13,750). Total deduction = $14,000 of rental expenses allocated + $1,500 balance of interest and $667 balance of taxes as itemized deductions = $16,167.

LO: 6.5

DIFFICULTY: Hard

Shelley has a small photographic studio in her home where she takes portraits of a variety of pets for her clients and develops and prints the photos. Last year she earned only $5,500 and had expenses for supplies and film of $2,500. The studio takes up 300 square feet of her 1,500 square foot home. Total relevant home expenses are: Taxes = $2,100; Interest = $9,000; Utilities = $1,500; Repairs and maintenance = $600. Depreciation for the studio portion of the home = $1,000. How much of each expense can Shelley deduct for her photo studio?

ANSWER 300/1,500 = 1/5 floor space used for studio. Studio expenses: interest = 1/5 x 9,000 = $1,800; taxes = 1/5 x $2,100 = $420; utilities = 1/5 x $1,500 = $300; repairs = 1/5 x $600 = $120. Total studio expenses before depreciation = $2,640; depreciation limited to $360 ($5,500 – $2,500 – $2,640). (Total deductible taxes = $2,100 as the remaining $1,680 are deductible as an itemized deduction; total interest that is deductible is $9,000 as the remaining $7,200 is deductible as an itemized deduction.)

LO: 6.5

DIFFICULTY: Hard

Allison Corporation (marginal tax rate of 21%) has $44,000 of tax depreciation in the current year. It also has a $40,000 bad debt deduction. For financial accounting, it has a total depreciation deduction of $28,000 and adds $50,000 to its bad debt reserve, the first year it has established a reserve. Determine if the corporation has a deferred tax asset or a deferred tax liability and its amount.

ANSWER Tax Expenses = $84,000 ($44,000 + $40,000). Book expenses = $78,000 ($28,000 + $50,000). Thus, book income is $6,000 more than taxable income; and there is a deferred tax liability of $1,260 ($6,000 x .21).

LO: 6.6

DIFFICULTY: Moderate

Taylor Corporation manufactures lawn mowers. Its annual gross receipts are in excess of $25 million. It has 200 factory personnel, 25 office employees, and 10 sales persons. The cost of office staff is $1,000,000. How much of the cost of the office staff must be allocated to inventory.

ANSWER 200/210 x $1,000,000 = $952,381 must be allocated to inventory.

LO: 6.6

DIFFICULTY: Easy

Jensen Corporation plans to take a deduction on its tax return that it believes it is more likely than not that it will be sustained. It is not sure, however, of the exact amount that will be realized. It has established the following amounts and probabilities:

Possible Deduction

Probability of Occurrence

$40,000

.20

$35,000

.30

$30,000

.30

$20,000

.20

What deduction should Jensen record on its financial statement?

ANSWER $30,000 is the largest amount that is more than 50% (cumulative probability of .20+.30+.30) likely to be sustained.

LO: 6.6

DIFFICULTY: Easy

Multiple Choice: Select the best answer for each of the following questions.

Note to Instructor: No tables should be required for the answers to these questions.

Which of the following is not required to deduct an expenditure as a business expense?
ordinary and necessary
reasonable in amount
incurred by the taxpayer
recurring every year

ANSWER d

LO: 6.1

DIFFICULTY: Easy

Stephanie, a taxpayer in the 24% marginal tax bracket, borrows $100,000 at 7% interest to invest in 6% tax-exempt municipal bonds (annual loan interest expense is $7,000). What is Stephanie’s interest expense deduction?
$0
$1,000
$6,000
$7,000

ANSWER a

Expenses incurred to invest in tax-exempt securities are not deductible.

LO: 6.1

DIFFICULTY: Easy

Which of the following expenditures would not be deductible as a business expense?
Costs of holding a business training session at a local hotel
The fare for flying business class to an overseas meeting
Paying the interest on a loan for the owner’s grandfather
Paying the owner’s 17 year old son a salary of $9 per hour for cleaning and janitor services

ANSWER: c

LO: 6.1

DIFFICULTY: Easy

Carlos, a self-employed construction contractor, contributed $5,000 to the re-election campaign of the local mayor in the hopes that his planned construction project will be approved. How much is Carlos’s deduction for this political contribution?
$0
$25
$2,500
$5,000

ANSWER a

LO: 6.1

DIFFICULTY: Easy

A taxpayer may deduct a fine for illegal parking if:
No parking spaces are available
Persons making deliveries to this business regularly receive parking tickets
The fine does not exceed $50
Fines are not deductible

ANSWER d

LO: 6.1

DIFFICULTY: Easy

Chico Corporation, a calendar-year accrual-basis corporation, paid $3,000 on April 1 for a property insurance policy for the next three years, prepaid six months interest of $450 on November 1, and paid $2,000 rent for December and January on December 1. What is his deduction in the current year for these expenses?
$1,900
$2,450
$2,600
$5,450

ANSWER a; [(9 x $3,000/36) + (2/6 x $450) + (1/2 x $2,000)]

LO: 6.2

DIFFICULTY: Moderate

On November 1, 2018, Hernandez Corporation (a cash-basis, calendar-year taxpayer) signed a 36-month lease with Taylor Realty Corporation for rental office space. The market rental rate for this office space is $2,000 per month but Hernandez was able to rent it for $1,900 per month by agreeing to prepay the rent for the entire 36-month period. How much can Hernandez deduct in 2018 rent expense?
$68,400
$22,800
$4,000
$3,800

ANSWER d; 2 x $1,900 = $3,800.

LO: 6.2

DIFFICULTY: Easy

On October 1, 2018, Fine Brands Corporation (a cash-basis, calendar-year taxpayer) borrowed $200,000 from the bank at 9% annual interest. On December 30, 2018, Fine Brands paid $18,000 to the bank for the first year’s interest on the loan. How much can Garcia deduct in 2018 for interest expense?
$1,500
$1,620
$4,500
$18,000

ANSWER c; [($18,000/12) x 3 months = $4,500

LO: 6.2

DIFFICULTY: Easy

Cleo spent $4,000 on organization costs for her business and $13,000 training staff. If the business is a calendar-year cash-basis business that starts operations on June 1, what is the current year’s deduction for these expenses?
$17,000
$9,311
$9,000
$611

ANSWER b; [(7/180 x $8,000) + $4,000 + $5,000]

LO: 6.3

DIFFICULTY: Easy

John, a rental car dealer on Miami Beach, is considering opening a beauty salon in San Francisco. After spending $8,000 investigating such possibilities in San Francisco, John decides not to open the salon. As a consequence, the $8,000 is:
Capitalized and amortized over 189 months
Capitalized and deductible over the life of the business
Deduct $5,000 and amortize the balance over 180 months
Not deductible

ANSWER d

LO: 6.3

DIFFICULTY: Moderate

Matthew, a car dealer in Atlanta, wants to open a restaurant in Miami. He spends $8,000 investigating the location and feasibility of opening the restaurant in 2018, Matthew opens the restaurant in Miami in November and spends an additional $7,000 in start-up costs. In 2018 Matthew can:
Deduct the entire $15,000
Deduct $8,000 with the remaining $7,000 amortized over 15 years
Deduct $5,000 with the remaining $10,000 amortized over 15 years
Only amortize the entire $15,000 over 15 years

ANSWER c; Matthew is not in same business; he can only expense $5,000 and amortize the balance.

LO: 6.3

DIFFICULTY: Moderate

John and his family were living in New Jersey when he accepted a full-time job in Philadelphia. During the week, John lives in a rental apartment in Philadelphia that is within walking distance of his office; on weekends he drives home to be with his family in New Jersey where he also does a few hours of consulting work. Where is John’s tax home?
Philadelphia
New Jersey
He can choose either Philadelphia or New Jersey
Clay has no tax home.

ANSWER a; Philadelphia is his tax home, where he works his primary job.

LO: 6.4

DIFFICULTY: Moderate

Perez Corporation paid the following expenses: $14,000 country club dues and $8,000 business meals. How much can Perez deduct for these expenses?
$18,000
$11,000
$4,400
$4,000

ANSWER d; $8,000 x .5 = $4,000; club dues are not deductible.

LO: 6.4

DIFFICULTY: Moderate

Which of the following taxes cannot be deducted by a business?
Sales taxes on supplies
Property taxes on real property
FICA taxes on employees’ wages
All of these taxes are deductible

ANSWER d

LO: 6.4

DIFFICULTY: Easy

To deduct a bad debt expense for tax purposes, the taxpayer must use:
The specific charge-off method
The aging of receivables method
The reserve method
Any other method permitted for financial accounting

ANSWER a

LO: 6.4

DIFFICULTY: Easy

In April 2018, Tobias, a sole proprietor, worked for a new client in the next county for the day. He drove 75 miles each way for the job, paid $4 in tolls, $7 for parking and $9 for lunch. What is his allowable business expense deduction?
$56
$81.75
$92.75
$93.50

ANSWER c; [(150 x .545) + $4 + $7] = $92.75; Lunch is not deductible.

LO: 6.4

DIFFICULTY: Moderate

Claudia went to the West Coast to attend several business meetings with clients. She flew out on Wednesday afternoon, spent all day Thursday, Friday, Monday and Tuesday attending meetings, and then spent the rest of the week touring the area, returning home on Saturday. She spent $800 on airfare, $1,600 on hotels (10 nights at $160 per night), $400 for a rental car ($40 per day from Wednesday night through Saturday of the following week), and $300 for meals ($30 per day from Thursday through the following Friday and $15 on each of her travel days). What is her allowable deduction for travel away from home?
$1,505
$1,610
$2,305
$2,410

ANSWER c; $800 + (7 x $160) + (7 x $40) + .5(6 x $30) + .5(2 x $15) = $2,305

LO: 6.4

DIFFICULTY: Moderate

Attendance at business-related seminars or meetings would be deductible for all of the following except:
Political conventions
Trade shows
Continuing education
Research seminars

ANSWER a

LO: 6.4

DIFFICULTY: Easy

Travel away from home on business is defined as being away from home for:
At least 8 hours
A period of time that requiring rest would be reasonable
No less than 24 hours
More than one day and night

ANSWER b

LO: 6.4

DIFFICULTY: Easy

Tickets to attend a hockey game with a client would be deductible in 2018 if:
Some business was discussed on the phone when plans were made to meet for the game
Business was discussed for about a minute while in the restroom
Business is not require to be discussed as long as this was to secure the client’s goodwill
Entertainment expenses are not deductible in 2018.

ANSWER d

LO: 6.4

DIFFICULTY: Easy

Which of the following may qualify as a deductible business expense?
Membership in the local Chamber of Commerce
Athletic Booster Club membership
Country Club dues
Admiral’s Club of American Airlines membership

ANSWER a

LO: 6.4

DIFFICULTY: Easy

Which of the following employee meals is fully deductible by the employer?
Meals charged directly on the corporate credit card by employees traveling on business
A meal reimbursement treated as compensation to the recipient
Meals at a business convention for which the employee is reimbursed
Food provided to employees in an on-premises cafeteria

ANSWER b

LO: 6.4

DIFFICULTY: Easy

All of the following expenses are deductible except:
Cost of investigating a new business similar in nature to the taxpayer’s existing business
A paid bill by a business that is now being disputed
Interest incurred to purchase and hold corporate bonds
Costs of locating an apartment prior to moving on a job transfer.

ANSWER d

LO: 6.4

DIFFICULTY: Easy

Waldo bought two tickets for a Packers game on Ebay for $400. The tickets had a face value of $50 each. He took a client to the game and they had a dinner afterwards where they discussed business. The cost of the dinner was $70. What is Waldo’s deduction for these expenses if they were incurred in 2017?
$470
$235
$170
$85

ANSWER d; [.5 x ($70 + $50 + $50)]

LO: 6.4

DIFFICULTY: Moderate

Bob works for Brandon Corporation. Brandon reimburses Bob for the following expenses in 2017 but does not include the reimbursement in his income: $800 country club dues, $1,200 business meals at the country club, and $200 transportation costs to out-of-town meetings. What is Brandon Corporation’s travel and entertainment deduction for these reimbursed expenses for 2017?
$2,200
$1,100
$800
$700

ANSWER c; [(.5 x $1,200) + $200)]

LO: 6.4

DIFFICULTY: Moderate

Donald, a sole proprietor, worked in Chicago but had to go to Rockford in March for the day on a business assignment. He drove 55 miles each way. Tolls were $4 and parking $6. He had lunch while there at a cost of $12. How much are Donald’s deductible expenses in 2018?
$75.60
$71.25
$69.95
$67.25

ANSWER c; .545 (55 + 55) + $4 + $6] = $69.95. These qualify as transportation expenses.

LO: 6.4

DIFFICULTY: Moderate

Tom flew to Madrid on Wednesday; he had business meetings on Thursday and Friday. He visited museums on Saturday and Sunday and had meetings on Monday through Thursday and flew home on Friday. How many business days does Tom have for this trip for tax purposes?
10
8
7
6

ANSWER a

LO: 6.4

DIFFICULTY: Easy

Which of the following business expenses is not deductible?
Business seminar on a Canadian cruise ship
Business meeting in China
Product sales seminar in Las Vegas
Continuing professional education (CPE) course at Oxford University

ANSWER a

LO: 6.4

DIFFICULTY: Easy

Gigi’s legal expenses for the year included $800 for writing her will, $300 for making a change to her partnership agreement, $6,000 to defend a liability claim against the partnership, and $900 to clear the title to her home when a dispute arose with a previous owner. Which of her legal expenses qualify as deductible?
$8,000
$7,200
$6,300
$6,000

ANSWER c; ($6,000+ $300)

LO: 6.4

DIFFICULTY: Easy

Gina flew from Miami to San Diego for a business meeting. The meeting lasted four days and she stayed in San Diego for two additional days to do some sightseeing. With respect to the expenses of the trip, Gina should:
Prorate the airfare based on the time devoted to business and personal activities and deduct the business portion.
Prorate the airfare equally between business and personal activities and deduct the business portion.
Deduct the entire airfare.
Deduct none of the airfare.

ANSWER c

LO: 6.4

DIFFICULTY: Moderate

Nicholas wanted to take an important customer to a hockey game in 2017. Although the face value of a ticket was only $50, the only way he could get tickets was by paying a scalper $160 for each ticket. Assuming all other deductibility requirements are met, how much could Nicholas deduct for each ticket in 2017?
$0
$25
$50
$80
$160

ANSWER b

LO: 6.4

DIFFICULTY: Easy

Nick owns a home in Daytona Beach, Florida where his wife and children live. He recently accepted a full-time job in Tampa. During the week, Nick lives in a rental apartment in Tampa and on weekends he drives home to be with his family in Daytona Beach. If Nick continues to maintain and pay all of the expenses of the residence in Daytona, where is Nick’s tax home?
Daytona Beach
Tampa
He can choose either Daytona Beach or Tampa
Nick has no tax home.

ANSWER b

LO: 6.4

DIFFICULTY: Moderate

In 2017, Jasmin loaned her friend Janelle $5,000 to invest in various stocks. Janelle signed a note to repay the principal with interest. In 2018, Janelle made risky stock investments and incurred large losses. In late 2018, Janelle declared personal bankruptcy and Jasmin was unable to collect any of her loan. Jasmin had no other gains or losses in 2017 or 2018. Her income from wages in both 2017 and 2018 was $50,000. The result is:
Jasmin deducts a business bad debt of $5,000 in 2018.
Jasmin deducts a $5,000 capital loss in 2018.
Jasmin deducts a business bad debt of $3,000 in 2018 and carries $2,000 over to subsequent years.
Jasmin deducts a $3,000 capital loss in 2018 and carries $2,000 over to subsequent years.
Jasmin must amend her 2017 tax return to deduct the loss.

ANSWER d

LO: 6.4

DIFFICULTY: Moderate

Fabricio, Inc. is an accrual-basis corporation. It ages its receivables to calculate the addition to its reserve for bad debts. The following were reported during the current year:

Credit sales

$300,000

Collections on credit sales

260,000

Amount added to the reserve for bad debts

25,000

Beginning balance in the reserve

Identifiable bad debts written off during the current year

18,000

The amount deductible for bad debt expense on Fabricio’s tax return for the current year is:

$18,000
$25,000
$40,000
$43,000

ANSWER a

LO: 6.4

DIFFICULTY: Easy

Jordan is a self-employed tax attorney who frequently entertains his clients at his country club. Jordan’s club expenses include the following:

$ 6,000

Annual dues

1,000

Initiation fees

2,000

Charges for personal meals with his family

4,000

Business meal expenses

How much can Jordan deduct?

$2,000
$5,000
$8,000
$9,000

ANSWER a; $4,000 x .5 = $2,000. No deduction for club dues or initiation fees.

LO: 6.4

DIFFICULTY: Easy

Cailey incurs $3,600 for business meals while traveling for her employer, Lewis Corporation. Cailey is reimbursed in full by Lewis under an accountable plan. What amounts can Cailey and Lewis deduct?

zero for Cailey and $3,600 for Lewis
zero for Cailey and $1,800 for Lewis
$1,800 for Cailey and $1,800 for Lewis
$3,600 for Cailey and zero for Lewis

ANSWER b; $3,600 x .5 = $1,800 deductible by corporation

LO: 6.4

DIFFICULTY: Easy

Haley, a self-employed individual, drove her automobile a total of 20,000 business miles in 2018. This represents about 75% of the auto’s use. She has receipts as follows:

Parking (business only)

$500

Tolls (business only)

$200

Total repairs

$1,000

If Haley uses the standard mileage rate method, how much can she deduct as a business expense?

$12,500
$11,600
$11,200
$11,000

ANSWER b; (20,000 miles x .545¢) + $500 + $200 = $11,600; repairs cannot be added when using standard mileage rate

LO: 6.4

DIFFICULTY: Moderate

Deductible home office expenses include the following expenses except:
Allocated rent or mortgage interest
Depreciation in excess of income from the business
Office telephone and fax machine costs
Supplies related to the home office

ANSWER b

LO: 6.5

DIFFICULTY: Easy

Corinne’s primary business is writing music. She uses one room in her home exclusively and regularly for the activity. The office occupies 300 of the 1,500 square feet in her apartment. She earned $2,100 this last year from her music. Her expenses for the entire home were $9,000 for rent and $2,000 for utilities. What is her home office expense deduction this year?
$1,800
$2,100
$2,200
$4,000

ANSWER b; [300/1,500 ($9,000 + $2,000)] = $2,200 but limited to $2,100 income.

LO: 6.5

DIFFICULTY: Moderate

Which of the following would not be used to determine if an activity is a business or a hobby?
The time spent by the taxpayer in the business
The number of relatives employed by the taxpayer
The actual profits of the business
The expertise of the taxpayer’s consultants

ANSWER b

LO: 6.5

DIFFICULTY: Easy

Andrew’s hobby is painting. During 2018, Andrew sold three of his paintings for a total of $2,200. His related expenses include $800 utilities, $1,200 supplies, and $400 in depreciation. Of these expenses incurred, how much can Andrew deduct in the current year?
$0
$2,000
$2,200
$2,400

ANSWER a; Prior to 2018 the deduction was limited to income. For years 2018 through 2025, Andrew would be required to include the income from his hobby but would not be allowed any offsetting expense deductions.

LO: 6.5

DIFFICULTY: Easy

Isabel owns a vacation home in Hawaii. During the year she rented it out for one week and used it for personal purposes three weeks. Her expenses directly related to renting out the property were: rental commission ($30) and maid service ($25). The allocated portion of taxes and interest was $400. Income from the rental was $300. Isabel should:
Report income of $300 and deduct $300 in expenses
Report income of $300 and deduct $455 in expenses
Report $300 of income and deduct no expenses
Report no income and deduct $400 along with her other itemized interest and taxes

ANSWER d

LO: 6.5

DIFFICULTY: Easy

Ashley runs a business out of her rental apartment. She uses part of her home exclusively and regularly for this business, her only office space. The office occupies 400 of the 1,600 square feet in her apartment. She earned $3,200 for the year from this business. Her expenses for the entire apartment were $12,000 for rent and $2,200 for utilities. How much is the maximum she can deduct this year for her home office expenses?
$2,450
$3,000
$3,200
$3,550

ANSWER c; 400/1,600 x ($12,000 + $2,200) = $3,550 but limited to $3,200 income.

LO: 6.5

DIFFICULTY: Moderate

Jonathan is a self-employed consultant with a qualifying office in his home. The gross income from his business is $18,000 and he has $14,000 of business expenses other than those for his home office. His home office occupies 20% of the square footage of his home and the total expenses for his home include: $12,000 for mortgage interest, $4,000 for property taxes, $3,600 for utilities, and $1,500 for homeowner’s insurance. Depreciation for the business portion of his home is $500. How much can Jonathan deduct for his home office expenses?
$0
$4,000
$4,220
$4,720

ANSWER b; [($12,000 + $4,000 + $3,600 + $1,500) x .2] + $500 = $4,720 but limited to his $4,000 ($18,000 – $14,000) net income before home office expenses.

LO: 6.5

DIFFICULTY: Moderate

Rachel owns a vacation condo in Colorado. During the year she rented it for 14 days for $2,800. Rachel and her family members used the condo for 65 days during the year and it was vacant the rest of the year. The total expenses for the year were: $8,000 interest expense, $2,000 property taxes, and $1,800 utilities. How much net rental income must Rachel report on her tax return for the year?
$0
$711
$2,347
$2,800

ANSWER a: No rental income is reported when a vacation home is rented for 14 days or less.

LO: 6.5

DIFFICULTY: Easy

If FIFO is used for inventory valuation instead of LIFO when prices are falling:
Cost of goods sold will be less under FIFO than LIFO.
Cost of goods sold will be more under FIFO than LIFO.
Inventory value will be less under FIFO than LIFO.
There is no difference in inventory or cost of goods sold.

ANSWER b

LO: 6.6

DIFFICULTY: Easy

Inventory valuation under UNICAP does not include costs for
spoilage.
warehousing.
property taxes.
d. income taxes.

ANSWER d

LO: 6.6

DIFFICULTY: Easy

Jacob Corporation decides to use the LIFO method of inventory valuation. Which of the following is true?
Jacob can change to FIFO whenever it wishes.
Jacob must use LIFO in its financial statements.
Jacob will have higher taxable income if prices are rising.
Jacob can include FIFO information on the face of the income statements.

ANSWER b

LO: 6.6

DIFFICULTY: Easy

Tachibana Corporation has income per books before tax of $286,000. In computing income per books, Tachibana deducted $20,000 for meals and entertainment expenses, $3,000 for premiums on officers’ life insurance policies (the corporation is the beneficiary for these policies), and $100 for fines. What is Tachibana Corporation’s taxable income?
$286,100
$289,000
$289,100
$299,100
$303,100

ANSWER d; [$286,000 + (.5 x $20,000) + $3,000 + $100] = $299,100.

LO: 6.6

DIFFICULTY: Moderate

Lopez Corporation has income per books before tax of $323,000. In computing income per books, Lopez deducted $20,000 for meals and entertainment expenses, $3,000 for premiums on officers’ life insurance policies (the corporation is the beneficiary for these policies), and $100 for fines. What is Lopez Corporation’s taxable income?
$340,100
$333,100
$336,100
$323,100

ANSWER c; $323,000 + ($20,000 x .5) + $3,000 + $100 = $336,100

LO: 6.6

DIFFICULTY: Moderate

Robinson Corporation has income per books before tax of $2,000,000. In computing income per books, Robinson included $8,000 interest income from tax-exempt municipal bonds and $500,000 life insurance proceeds it received as the beneficiary on a policy for the corporate vice president who was killed in a plane crash while on company business, and it deducted $50,000 for business meal expenses, $4,000 for premiums on officers’ life insurance policies (the corporation is the beneficiary for these policies), $40,000 for a series of advertisements on current products, and $500 for fines. What is Robinson Corporation’s taxable income?
$1,467,500
$1,471,500
$1,521,500
$1,975,500

ANSWER c; $2,000,000 – $8,000 – $500,000 + ($50,000 x .5) + $4,000 + $500 = $1,521,500

LO: 6.6

DIFFICULTY: Moderate

Clark Corporation has income per books before tax of $1,500,000. In computing income per books, Clark included $7,000 interest income from tax-exempt municipal bonds and deducted $10,000 for business meal expenses, $50,000 for depreciation expense using the straight-line method and $15,000 accrued for bad debt expense using the allowance method. It actually wrote off only $9,000 in bad debts this year and its tax depreciation expense was $80,000. What is Clark Corporation’s taxable income?
$1,493,000
$1,474,000
$1,463,000
$1,458,000

ANSWER b

$1,500,000 – $7,000 + ($10,000 x .5) – ($80,000 – $50,000) + ($15,000 – $9,000) = $1,474,000

LO: 6.6

DIFFICULTY: Moderate

All of the following would normally result in timing (temporary) differences between tax and financial accounting except:
Amortization of start-up expenses
Prepaid income
Penalty for late payment of taxes
Installment sales

ANSWER c

LO: 6.6

DIFFICULTY: Easy

All of the following would normally result in permanent differences between tax and financial accounting except:
Business meal expenses
Depreciation expense
Interest income on municipal bonds
Government fines

ANSWER b

LO: 6.6

DIFFICULTY: Easy

A deferred tax liability
causes a business’s effective tax rate to differ from the statutory rate.
can result from financial accounting revenues exceeding those recognized for tax purposes.
is effectively an interest-free loan from the government.
All of the above
(a) and (b) only

ANSWER d

LO: 6.6

DIFFICULTY: Easy

If an expense is reported on the tax return before it is reported on the financial accounting books
the result is a deferred tax asset
the result is a deferred tax liability
there could be either a deferred tax asset or liability
there is no effect as this is not a timing difference

ANSWER b

LO: 6.6

DIFFICULTY: Easy

The more-likely-than-not standard
is based on a more-than 50 percent probability.
applies only to contested liabilities
is used to determine if a deferred tax liability should be recognized.
is spelled out in APB 23.

ANSWER a

LO: 6.6

DIFFICULTY: Easy

Which of the following is not included as part of ASC 740?
UNICAP Rules
ABP 23
FIN 48
FAS 109

ANSWER a

LO: 6.6

DIFFICULTY: Moderate

TESTBANK CAPITAL

TESTBANK CAPITAL

Taxation for Decision Makers 2019 Edition by Shirley Dennis-Escoffier

Taxation for Decision Makers 2019 Edition by Shirley Dennis-Escoffier

Other Objective Questions

Multiple Choice: Select the best answer for each of the following questions.

Reviews

Information

our services

My Account

Contact us

© 2022 TestBankCapital.com. All Rights Reserved