Question 1

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

Accepted Answer

False

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 is 60 cents for a taxpayer with a 40% marginal tax rate, not 80 cents. The calculation is: $1 expense x (1 - 0.4 tax rate) = $0.60 after-tax cost.

Question 3

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 known as the cost of goods sold deduction and it is allowed under the Internal Revenue Code to determine the net income of a business for tax purposes.

Question 4

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 must receive permission from the IRS to make the change. This is done by filing Form 1128, Application to Adopt, Change, or Retain a Tax Year.

Question 5

Poole Services, a calendar year taxpayer, billed a client for $1,675 of services on November 30, 2013, and received a check in full payment from the client on January 12, 2014. If Poole is a cash basis taxpayer, it reports $1,675 taxable income in 2013.

Accepted Answer

As a cash basis taxpayer, Poole Services would report the $1,675 taxable income in 2014 when the payment was received, not in 2013 when the services were billed.

Question 6

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

Accepted Answer

A cash basis taxpayer must account for any prepayment of interest expense under the accrual method because the prepayment represents a future expense that should be allocated over the period of time to which it relates.

Question 7

Poole Company, a calendar year taxpayer, incurred $589 of long-distance telephone charges in December 2013 and mailed a check to the telephone company on January 4, 2014. If Poole is a cash basis taxpayer, it reports a $589 tax deduction in 2014.

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 2014, the deduction is taken in 2014.

Question 8

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 have its own unique accounting method, as long as it is consistent within that business.

Question 9

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 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

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

Accepted Answer

While accurate measurement of taxable income is important, it is not the only objective of the federal income tax laws. Other objectives include promoting social and economic policies, encouraging certain behaviors, and generating revenue to fund government programs.

Question 12

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 13

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

Accepted Answer

The IRS requires businesses that sell merchandise to use the accrual method of accounting for purchases and sales of inventory. This method records revenue and expenses when they are earned or incurred, regardless of when payment is actually received or made.

Question 14

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

The statement is true. According to IRS rules, a business can't change its accounting method without obtaining consent from the IRS.

Question 15

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 16

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 choice of taxable year is usually based on its annual operating cycle, which is the period in which it conducts its business operations. This cycle can be influenced by factors such as seasonality, sales patterns, and production schedules. Therefore, it is common for firms to choose a taxable year that matches their operating cycle.

Question 17

Federal and state political lobbying expenses are nondeductible.

Accepted Answer

Federal and state political lobbying expenses are nondeductible under the Internal Revenue Code.

Question 18

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 19

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

Because Elcox is a cash basis taxpayer and pays for the office supplies in the current year, they can deduct the full $950 in the year of payment. It does not matter that the supplies will be used over the next eight months.

Question 20

Mr. Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2013. Mr. Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2014. Mr. Stern does not recognize the interest as income in 2013.

Accepted Answer

A cash basis taxpayer recognizes income when it is received or made available, not necessarily when it is withdrawn. The interest was credited to Mr. Stern's account in 2013, making it taxable in that year, regardless of when he was notified.

Quiz 6: Taxable Income From Business Operations