Question 1

Mr. Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2015. Mr. Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2016. Mr. Stern does not recognize the interest as income in 2015.

Accepted Answer

As a cash basis taxpayer, Mr. Stern must recognize income when it is actually or constructively received, regardless of when he was notified. The interest was credited to his account in 2015, so it is considered received in that year.

Question 2

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. According to IRS rules, a business can't change their accounting method without permission from the IRS.

Question 3

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

Generally, the cost of insurance premiums for casualty insurance must be amortized over the coverage period of the policy. In this case, the coverage period is 36 months, so Elcox Company can only deduct 1/36 of the premium each month for the next three years. Therefore, the deductible amount for the current year would be $1,761.11 ($6,340/36 = $176.11 per month x 10 months in the year).

Question 4

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 5

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

Accepted Answer

A cash basis taxpayer must recognize and account for prepayment of interest expense as it accrues, instead of deducting it all at once in the year when the payment is made. This is because the accrual method matches expenses to the period in which they are incurred, providing a more accurate representation of the taxpayer's financial circumstances.

Question 6

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 wishing to change its taxable year from a fiscal year to a calendar year needs permission from the IRS to make the change. The permission is granted by submitting Form 1128, Application To Adopt, Change, or Retain a Tax Year, to the IRS.

Question 7

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

Accepted Answer

A firm typically chooses its taxable year based on its annual operating cycle, which is the period of time it takes to complete its normal business functions. For example, a retail business may choose a taxable year that coincides with the calendar year because its busiest operating cycle is during the holiday season at the end of the year. However, there may be other factors that influence a firm's choice of taxable year, such as tax planning strategies or financial reporting requirements.

Question 8

Federal and state political lobbying expenses are nondeductible.

Accepted Answer

Both federal and state political lobbying expenses are nondeductible according to the IRS.

Question 9

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

Accepted Answer

This is true, as the accrual method matches expenses and revenue in the same period, which is important for businesses that sell merchandise. This allows for more accurate tracking of inventory, cost of goods sold, and profits.

Question 10

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 11

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 12

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

Accepted Answer

A taxpayer with multiple businesses may use different accounting methods for each of them as long as each method clearly reflects income and conforms to IRS regulations.

Question 13

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 a taxpayer with a 40% marginal tax rate is 60 cents, not 80 cents. This is because they can deduct 50% of the expense on their tax return, reducing their taxable income by 50 cents, and thus reducing their tax liability by 20 cents (40% of 50 cents). So the net cost of a dollar of expense is 50 cents - 20 cents = 30 cents, which means the after-tax cost is 70 cents (100 cents - 30 cents), not 80 cents.

Question 14

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 the expense in the year that it was paid, which was in December. The fact that the supplies cover eight months' worth does not affect the deduction.

Question 15

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

Accepted Answer

While accurate measurement of taxable income is certainly a major objective of the federal income tax laws, it is not the only objective. Other objectives include fairness, simplicity, and promoting certain social and economic policy goals.

Question 16

Poole Services, a calendar year taxpayer, billed a client for $1,675 of services on November 30, 2015, and received a check in full payment from the client on January 12, 2016. If Poole is a cash basis taxpayer, it reports $1,675 taxable income in 2015.

Accepted Answer

As a cash basis taxpayer, Poole would report the income when received, which is in 2016 when the check was received, not in 2015 when the services were billed.

Question 17

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. Cost of goods sold represents the direct costs associated with producing or acquiring goods that are sold by a business. The cost of goods sold is subtracted from a business's revenue to determine its gross profit.

Question 18

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 19

Poole Company, a calendar year taxpayer, incurred $589 of long-distance telephone charges in December 2015 and mailed a check to the telephone company on January 4, 2016. If Poole is a cash basis taxpayer, it reports a $589 tax deduction in 2016.

Accepted Answer

Cash basis taxpayers report expenses in the year they are paid, so Poole Company would deduct the expense in 2016 when the payment was made.

Question 20

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...

Quiz 6: Taxable Income From Business Operations