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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 1

True/False

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Only half the cost of a business meal is deductible even if the meal is extravagant.

A) True
B) False

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Question 2

Multiple Choice

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Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?

A) Selling expenditures
B) Cost of manufacturing labor
C) Compensation of managers who supervise production
D) Cost of raw materials
E) All of the choices are subject to capitalization under the UNICAP rules

F) A) and E)
G) C) and D)

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Question 3

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

Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers)of $1 million in 2020. Taxable income was computed on $50 million of revenues and included $50,000 of interest income. The company paid $450,000 in interest expense. What is Rock Island's maximum business interest deduction for the year?

Sandy Bottoms Corporation generated taxable income (before depreciation, interest expense, and any tax loss carryovers)of $3 million this year. Taxable income included $75,008,000 of revenue and $354,000 of interest income. What is Sandy Bottoms's domestic maximum interest expense deduction for the year?

Big Homes Corporation is an accrual-method calendar-year taxpayer that manufactures and sells modular homes. This year, for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year-end, Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

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 that is not properly allocable to a trade or business.

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

Marilyn operates a day care center as a cash-method sole proprietorship. On August 1 ^st 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?

Even a cash-method taxpayer must consistently use accounting methods that "clearly reflect income" for tax purposes.

Shelley is self-employed in Texas and recently attended a two-day business conference in New Jersey. After Shelley attended the conference, she had dinner with an old friend who lived nearby. Shelley documented her expenditures (described below) . What amount can Shelley deduct?

Otto operates a bakery and is on the cash method and calendar year. This year, one of Otto's ovens caught fire and was partially destroyed. Otto bought it a few years ago for $29,500 and claimed depreciation of $13,900 up to the fire. Otto was charged $3,450 for repairs to the oven but the insurance company paid Otto $1,975 for the damage. What is Otto's casualty loss deduction?

Ed is a self-employed heart surgeon who lives in Michigan and has incurred the following reasonable expenses. How much can Ed deduct? $1,000 in airfare to repair investment rental property in Colorado. $500 in meals while attending a medical convention in New York. $300 for tuition for an investment seminar, "How to pick stocks." $100 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day. The correct answer is _____.

Which of the following is a true statement?

Otto operates a bakery and is on the cash method and calendar year. This year, one of Otto's ovens caught fire and was partially destroyed. Otto bought it a few years ago for $20,000 and claimed depreciation of $12,000 up to the fire. Otto was charged $4,400 for repairs to the oven but the insurance company paid Otto $1,500 for the damage. What is Otto's casualty loss deduction?

Joe is a self-employed electrician who operates his business on the accrual method. This year Joe purchased a shop for his business, and for the first time at year-end he received a bill for $4,500 of property taxes on his shop. Joe didn't pay the taxes until after year-end but prior to filing his tax return. Which of the following is a true statement?

Ronald is a cash-method taxpayer who made the following expenditures this year. Which expenditure is completely deductible in this period as a business expense?

Don operates a taxi business, and this year one of his taxis was damaged in a traffic accident. The taxi was originally purchased for $19,000 and the adjusted basis was $1,000 at the time of the accident. The taxi was repaired at a cost of $3,000 and insurance reimbursed Don $760 of this cost. What is the amount of Don's casualty loss deduction?

Riley operates a plumbing business, and this year the three-year-old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $23,200 and the adjusted basis was $5,400 at the time of the accident. Although the van was worth $6,320 at the time of accident, insurance only paid Riley $1,600 for the loss. What is the amount of Riley's casualty loss deduction?

Jones operates an upscale restaurant and he pays experienced cooks $38,000 per year. This year, he hired his son as an apprentice cook. Jones agreed to pay his son $42,400 per year. Which of the following is a true statement about this transaction?