Question 1

PPQ Inc. wants to change from a hybrid method of accounting to the accrual method of accounting for tax purposes. PPQ can't make this change without receiving permission from the IRS.

Accepted Answer

This is true, as per IRS regulations, a business must receive permission before changing its method of accounting for tax purposes.

Question 2

The after-tax cost of a dollar of meal and entertainment expense is 80 cents for a taxpayer with a 40% marginal tax rate.

Accepted Answer

The after-tax cost of a dollar of meal and entertainment expense for someone with a 40% marginal tax rate would be 60 cents, not 80 cents. This is because the taxpayer can deduct 50% of these expenses from their taxable income, lowering their overall tax burden. Therefore, the statement given in option A is false.

Question 3

A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.

Accepted Answer

A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is required to receive permission from the IRS to make the change. This approval must be obtained before the end of the tax year for which the change is requested.

Question 4

Taxpayers that sell merchandise to their customers must use the accrual method to account for purchases and sales of merchandise.

Accepted Answer

Taxpayers that sell merchandise must use the accrual method of accounting, which requires recognizing revenue and expenses when they are earned or incurred, regardless of when payment is received or made. This is because inventory is considered an asset, and the cost of goods sold must be calculated to determine the taxpayer’s taxable income. The cash method of accounting, which only recognizes transactions when payment is received or made, is not allowed for taxpayers that sell merchandise.

Question 5

A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.

Accepted Answer

A firm's taxable year is usually chosen based on the annual operating cycle of the business, which can include factors such as the seasonality of revenue or the timing of expenses. For example, a business with a busy season in the summer may choose a taxable year that ends in September to better match its revenue and expenses.

Question 6

Taxable income is defined as gross income minus allowable deductions and credits.

Accepted Answer

The answer of Taxable income is defined as gross income...

Question 7

A taxpayer that operates more than one business may use a different method of accounting for each business.

Accepted Answer

This is true according to the IRS. Each business can be treated separately and use its own accounting method, as long as the method used is appropriate for that particular business.

Question 8

Rydel Inc. was incorporated on August 9 and elected to use a calendar year for tax purposes. Rydel must annualize the income reported on its first tax return for the short period from August 9 to December 31.

Accepted Answer

The answer of Rydel Inc. was incorporated on August 9...

Question 9

Federal and state political lobbying expenses are nondeductible.

Accepted Answer

According to the Internal Revenue Code, federal and state political lobbying expenses are nondeductible. This includes expenses incurred in attempting to influence the outcome of elections and legislation at the local, state, and federal levels.

Question 10

Taxpayers that sell merchandise to their customers must use the accrual method as their overall method of accounting.

Accepted Answer

Taxpayers that sell merchandise can use either the accrual method or the cash method as their overall method of accounting, depending on certain conditions such as the size of the business and whether they meet the IRS requirements for their specific type of business.

Question 11

Taxpayers may adopt the cash receipts and disbursements method, the accrual method, or a hybrid method of accounting for tax purposes.

Accepted Answer

The answer of Taxpayers may adopt the cash receipts and...

Question 12

Accurate measurement of taxable income is the only objective of the federal income tax laws.

Accepted Answer

While accurate measurement of taxable income is a primary goal of federal income tax laws, it is not the only objective. Other objectives include promoting social and economic policies, encouraging certain behaviors (such as charitable donations or energy-efficient investments), and collecting revenue to fund government programs and services.

Question 13

For federal tax purposes, gross income from the sale of tangible goods is reduced by the seller's cost of goods sold.

Accepted Answer

This is true according to the IRS, who state that the seller's gross income is reduced by the cost of goods sold when calculating their taxable income.

Question 14

Poole Company, a calendar year taxpayer, incurred $589 of long-distance telephone charges in December 2016 and mailed a check to the telephone company on January 4, 2017. If Poole is a cash basis taxpayer, it reports a $589 tax deduction in 2017.

Accepted Answer

A cash basis taxpayer reports expenses in the year they are paid, not when they are incurred. Since the payment was made in 2017, the deduction is taken in 2017.

Question 15

Marz Services Inc. is a personal service corporation with $60 million average annual gross receipts. Marz must use the accrual method of accounting for tax purposes.

Accepted Answer

The answer of Marz Services Inc. is a personal service...

Question 16

Elcox Company, a calendar year, cash basis taxpayer, paid a $6,340 premium to purchase a casualty insurance policy with a 36-month term. Elcox can deduct $6,340 in the year of payment.

Accepted Answer

As a cash basis taxpayer, Elcox can only deduct the portion of the premium that applies to the current tax year. The rest must be prorated and deducted over the policy's term (36 months).

Question 17

Poole Services, a calendar year taxpayer, billed a client for $1,675 of services on November 30, 2016, and received a check in full payment from the client on January 12, 2017. If Poole is a cash basis taxpayer, it reports $1,675 taxable income in 2016.

Accepted Answer

Since Poole is a cash basis taxpayer, it reports income in the year it is received, not earned. Therefore, the $1,675 payment received on January 12, 2017, should be reported as income in 2017, not 2016.

Question 18

Mr. Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2016. Mr. Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2017. Mr. Stern does not recognize the interest as income in 2016.

Accepted Answer

As a cash basis taxpayer, Mr. Stern must recognize income when it is actually or constructively received, which in this case is when the interest was earned in 2016. The fact that he did not withdraw any funds or receive the notification until 2017 is irrelevant for tax purposes. Therefore, Mr. Stern must recognize the interest as income on his 2016 tax return.

Question 19

A cash basis taxpayer must account for any prepayment of interest expense under the accrual method.

Accepted Answer

A cash basis taxpayer is only required to account for expenses when they are actually paid. However, prepayment of interest expense must be accounted for under the accrual method, regardless of the taxpayer's regular accounting method.

Question 20

Elcox Company, a calendar year, cash basis taxpayer, paid $950 to purchase eight months' worth of office supplies on December 12. Elcox can deduct $950 in the year of payment.

Accepted Answer

As a cash basis taxpayer, Elcox can deduct expenses in the year they are paid, regardless of when they were used or consumed. Therefore, they can deduct the $950 for office supplies in the year of payment, even though it covers eight months' worth of supplies.

Quiz 6: Taxable Income From Business Operations