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Exam 8: Business Income, deductions, and Accounting Methods

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Question 31

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All taxpayers must account for taxable income using a calendar year.

A) True
B) False

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Question 32

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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) A) and C)

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Question 33

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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: $\begin{array}{l}\begin{array}{lll}\text { Advertising}\\\text { Car and truck expenses}\\\text { Depreciation}\\\text { Employee compensation}\\\text { Education}\\\end{array}\begin{array}{lll}\$500 \\1,360 \\3,200 \\5,000 \\1,000\end{array}\end{array}$ The education expense was for a two-week,night time 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.

Riley operates a plumbing business and this year the 3-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?

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 for book 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?

A short tax year can end on any day of any month other than December.

Taxpayers must maintain written contemporaneous records of business purpose when traveling in order to claim a deduction for the expenditures.

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:   $\begin{array} { l r r } & \text { Receipts } & \text { Expenses } \\\text { February thrs. Decernber lastyear } & \$ 112,000 & \$ 84,500 \\\text { Janury this year } & 10,400 & 6,200\end{array}$ What income should David report from his sole proprietorship?

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

Which of the following is a true statement?

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

Which of the following expenditures is NOT likely to be allowed as a current deduction for a landscaping and nursery business?

Adjusted taxable income for calculating the business interest limitation is defined as taxable income of the taxpayer computed without regard to any item of income,gain,deduction,or loss which is not properly allocable to a trade or business.

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: $\begin{array}{l}\begin{array}{lll}\text { Course Tuition } \\\text { Air Fare } \\\text { Hotel ( } 10 \text { nights) } \\\text { Rental car ( } 10 \text { days) } \\\text { Meals ( } 10 \text { days) }\end{array}\begin{array}{lll}\$2,500 \\800 \\1,200 \\900 \\1,500\end{array}\end{array}$ What amount of travel expenditures can Sam deduct?

The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary."

Which of the following is a true statement about the limitation on business interest deductions?

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

Marilyn operates a day care center as a cash-method sole proprietorship.On August 1ˢᵗ of this year Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months.How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

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

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