Question 1

Which one of the following entities cannot use the cash method for tax purposes?

Accepted Answer

The answer of Which one of the following entities cannot...

Question 2

Mark the correct answer.In cash basis accounting,for tax purposes:

Accepted Answer

The answer of Mark the correct answer.In cash basis accounting,for...

Question 3

If actual business use of an automobile is less than 100 percent,the annual automobile depreciation limitations must be reduced to reflect the actual business use only.

Accepted Answer

This is true according to IRS guidelines. If the business use of an automobile is less than 100%, the depreciation limitations must be reduced to reflect the actual business use. For example, if a vehicle is used 50% for business and 50% for personal use, the depreciation deduction for the business use would be limited to 50% of the annual depreciation amount.

Question 4

The tax law imposes restrictions on the depreciation of "listed" property such as automobiles and computers.

Accepted Answer

This is true. Listed property, which includes automobiles and computers among other things, is subject to more restrictive depreciation schedules and record-keeping requirements than other types of property.

Question 5

Goodwill is considered to be a Section 197 asset amortized over 15 years for tax purposes.

Accepted Answer

Goodwill is considered to be a Section 197 asset and is amortized over 15 years for tax purposes. This means that the cost of acquiring goodwill can be deducted over 15 years, rather than being deducted all at once in the year of acquisition.

Question 6

Amy is a calendar year taxpayer reporting on the cash basis.Indicate which of the following income or expense items should not be included in her 2013 tax return.

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Question 7

Which of the following is not an acceptable method of accounting under the tax law?

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Question 8

Becky is a cash basis taxpayer with the following transactions during her calendar tax year: $\begin{array}{l}
\text { Cash basis revenue}&\$ 54,000\
\text {Cash basis expenses, except rent  }& \$ 25,000\\text { Rent expense (paid on December } 1 \text { ) for use of a building for } 18 \text { months }&\$36,000
\end{array}$
 What is the amount of Becky's taxable income from her business for this tax year?

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Question 9

William,a cash-basis sole proprietor,had the following receipts and disbursements for 2013: $\begin{array}{ll}
\text { Gross receipts } & \$ 60,000 \
\text { Cost of sal es } & \$ 30,000\
\text { Other operating expenses }&\$6,000\
\text { Medical expenses }&\$600
\end{array}$ For 2013,what amount should William report as net earnings from self-employment?

Accepted Answer

Net earnings from self-employment are calculated as gross receipts minus cost of sales and other operating expenses. Therefore, $60,000 - $30,000 - $6,000 = $24,000. Medical expenses are not deducted in this calculation.

Question 10

Choose the incorrect statement.

Accepted Answer

The incorrect statement is A) because for tax purposes, the IRS requires that the books and records be kept consistent with the tax year-end basis used for filing. This ensures that the financial information accurately reflects the taxpayer's income and deductions for the specific period being reported.

Question 11

From the records of Tom,a cash basis sole proprietor,the following information was available: $\begin{array}{ll}\text { Gross receipts }&\$30,000\
\text { Dividend income (on personal investments) }&\$200\
\text { Cost of sales }&\$15,000\
\text { Other operating expenses }&\$ 3,000\
\text {State business taxes paid }&\$300\
\end{array}$
 What amount should Tom report as net earnings from self-employment?

Accepted Answer

Net earnings from self-employment are calculated as gross receipts minus cost of sales and other operating expenses. Dividend income and state business taxes are not included. Thus, $30,000 - $15,000 - $3,000 = $12,000. However, for self-employment tax purposes, 92.35% of this amount is considered, which is $12,000 * 0.9235 = $11,082. Since none of the options match this exactly, the closest option is $11,700.

Question 12

The Dot Corporation has changed its year-end from a calendar year-end to July 31.The income for its short period from January 1 to July 31 is $35,000.The tax for this short period is:

Accepted Answer

The tax for a corporation with taxable income of $35,000 is $5,250 for a full year. Since the short period is 7 months, the tax for this period would be approximately $3,638 ($5,250 x 7/12). However, the tax for the short period is likely to be higher than this amount because of differences in the tax rates for different portions of the year. Based on this, option B is the closest estimate to the actual tax liability for the short period.

Question 13

If listed property is used more than 50 percent in a qualified business use,depreciation must be calculated using the straight-line method.

Accepted Answer

If listed property is used more than 50% in a qualified business use, the taxpayer can choose either the Modified Accelerated Cost Recovery System (MACRS) method, which allows for faster depreciation in the early years of the property's life, or the straight-line method, which spreads the depreciation evenly over the useful life of the property.

Question 14

Cork Oak Corporation purchased a heavy-duty truck not considered a passenger automobile for purposes of the listed property and luxury automobile limitations)on June 1,2013 for use in its business.The truck,with a cost basis of $18,000,has a 5-year estimated life.It also is 5-year recovery property.How much depreciation should be taken on the truck for the 2013 calendar tax year using the conventional for financial accounting purposes)straight-line depreciation method?

Accepted Answer

The straight-line depreciation method divides the cost basis by the estimated life of the asset, and does not take into consideration salvage value. Therefore, the annual depreciation for Cork Oak Corporation's truck would be $18,000/5 years = $3,600 per year. Since the truck was purchased on June 1, 2013, the company can only take half-year depreciation for the 2013 calendar tax year, which would be $3,600/2 = $1,800. Therefore, the correct answer is (B) $1,800.

Question 15

Vernon is a cash basis taxpayer with a calendar tax year.On November 1,2013,Vernon entered into a lease to rent a building for use in his business at $4,000 a month.On that day Vernon paid 18 months rent on the building,a total of $72,000 $4,000 * 18 months).How much may Vernon deduct for rent expense on his 2013 tax return?

Accepted Answer

As a cash basis taxpayer, Vernon can deduct expenses in the year they are paid. Since he paid for November and December 2013 rent in 2013, he can deduct $8,000 ($4,000 per month for 2 months) on his 2013 tax return.

Question 16

The election to expense is not permitted where listed property does not meet the qualified business use test.

Accepted Answer

The qualified business use test requires that listed property is used for more than 50% business or work-related purposes in order to be eligible for the election to expense under Section 179 of the IRS code. If the property does not meet this test, the election to expense is not permitted.

Question 17

The annual automobile depreciation limitations apply only to the first four years of the asset's recovery period.

Accepted Answer

The annual automobile depreciation limitations apply to all years of the asset's recovery period. However, the amount of depreciation may vary based on the year of the recovery period.

Question 18

If an automobile is purchased for 100 percent use in the taxpayer's business,the annual automobile depreciation limitations do not apply.

Accepted Answer

The annual automobile depreciation limitations apply to all cars used in a taxpayer's business, regardless of the percentage of business use. These limitations cap the amount of depreciation that can be claimed each year.

Question 19

Kate is an accrual basis,calendar-year taxpayer.On November 1,2013,Kate leased out a building for $4,000 a month.On that day Kate received 6 months rental income on the building,a total of $24,000 $4,000 *6 months).How much income must Kate include on her 2013 tax return as a result of this transaction?

Accepted Answer

Kate must include the entire $24,000 on her 2013 tax return because she is an accrual basis taxpayer. Under the accrual method of accounting, income is recognized when it is earned, regardless of when it is received. In this case, Kate earned the $24,000 in rent on November 1, 2013, even though she did not receive it until later.

Question 20

Sales of property at a gain may be restricted under the related party rules of the Internal Revenue Code.

Accepted Answer

The answer of Sales of property at a gain may...

Quiz 7: Accounting Periods and Methods and Depreciation