ACCT323 Final exam

1.  Which of the following represents the largest percentage of state tax revenue?

Sales tax

Individual income tax

Other

Property tax

None of these

2. Congress recently approved a new, bigger budget for the IRS. What taxation concept evaluates the cost of administering our tax law?

Convenience

Economy

Certainty

Equity

None of these

3.  The city of Granby, Colorado recently enacted a 1.5% surcharge on vacation cabin rentals that will help pay for the city’s new elementary school. This surcharge is an example of _______.

A sin tax to discourage undesirable behavior

A government fine

An earmarked tax

Both A and C

None of these

4.  If Susie earns $750,000 in taxable income, how much tax will she pay as a single taxpayer for year 2012?

$231,639.50

$262,500.00

$239,261.00

$236,435.00

None of these

5.  Which of the following is not considered a primary authority?

Tax Court case.

Regulation.

Revenue Ruling.

Tax service.

None of these.

6. Which of the following is not a factor that determines whether a taxpayer is required to file a tax return?

Filing status.

Taxpayer’s gross income.

Taxpayer’s occupation.

Taxpayer’s age.

None of these.

7. Corporations are required to file a tax return only if their taxable income is greater than:

$0.

$1,000.

$600.

$750.

None of these. Corporations are always required to file a tax return.

 8. Lavonda discovered that the U.S. Circuit Court of Appeals for the Federal Circuit has recently issued a favorable opinion with respect to an issue that she is going to litigate with the IRS. Lavonda should choose which of the following trial courts to hear her case:

Tax Court only.

U.S. Court of Federal Claims only.

U.S. District Court only.

Tax Court or the U.S. District Court.

Tax Court or the U.S. Court of Federal Claims.

9. Jason’s employer pays year-end bonuses each year on December 31. Jason, a cash basis taxpayer, would prefer to not pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus). So, he leaves town on December 31, 2011 and has his daughter, Julie, pick up his check on January 2nd, 2012. Who reports the income and when?

Julie in 2011

Julie in 2012

Jason in 2011

Jason in 2012

None of these

10. Investing in municipal bonds to avoid paying tax on interest earned and to earn a higher after-tax yield is an example of:

conversion

tax evasion

timing

income shifting

None of these

11.  Which of the following increases the benefits of income deferral?

increasing tax rates

smaller after-tax rate of return

larger after-tax rate of return

smaller magnitude of transactions

None of these

12.  Which of the following is an example of the timing strategy?

A corporation paying its shareholders a $20,000 dividend

A parent employing her child in the family business

A taxpayer gifting stock to his children

A cash-basis business delaying billing its customers until after year end

None of these

13.  Which of the following shows the correct relationship among standard deduction amounts for the respective filing statuses?

Single > Head of Household > Married Filing Jointly

Married Filing Jointly > Married Filing Separately > Head of Household

Married Filing Jointly > Head of Household > Single

Head of Household > Married Filing Separately > Married Filing Jointly

14. Which of the following is NOT a from AGI deduction?

Standard deduction

Itemized deduction

Personal exemption

None of these. All of the above are from AGI deductions

15.  Jamison’s gross tax liability is $7,000. Jamison had $2,000 of available credits and he had $4,000 of taxes withheld by his employer. What is Jamison’s taxes due (or taxes refunded) with his tax return?

$5,000 taxes due.

$1,000 taxes due.

$1,000 tax refund.

$3,000 taxes due.

 16.  All of the following are for AGI deductions except

Moving expenses.

Rental and royalty expenses.

Business expenses.

Charitable contributions.

17.  This year Henry realized a gain on the sale of an antique car that he inherited from his uncle. The buyer has promised to pay Henry in installment payments over the next few years. Identify the principle that will determine when Henry should be taxed on the gain from the sale:

Assignment of income

Constructive receipt

Return of capital principle

Wherewithal to pay

All of these

18.  Ben’s employer offers employees the following benefits. What amount must Ben include in his gross income?

$9,400

$11,070

$10,600

$7,000

Zero – None of these benefits is included in gross income

19.  Charles and Camilla are getting divorced. Under the terms of the decree Charles will pay Camilla $50,000 in cash in each of the next five years (or until Camilla’s death or remarriage). In addition, Charles will transfer a castle worth $2,000,000 to Camilla and pay $12,000 per year to support their son, Clyde, until he turns 19 years old. What amount (if any) is included in Camilla’s gross income this year?

$2,062,000

$12,000

$50,000

$2,050,000

None of the payments are included in gross income

20.  Frank received the following benefits from his employer this year. What amount must Frank include in his gross income?

$54,450

$57,350

$56,250

$59,150

Zero – these benefits are excluded from gross income

 21.  Congress allows self-employed taxpayers to deduct the cost of health insurance above the line (for AGI) because:

employers are allowed to deduct social security (FICA) taxes as a business expense.

self-employed taxpayers need an alternate mechanism for reducing the cost of health care.

this deduction provides a measure of equity between employees and the self-employed.

health insurance premiums cannot be deducted otherwise.

None of these.

22.  Generally, which of the following does not correctly categorize the type of income?

rental real estate – passive income/loss

salary – active income/loss

dividends – portfolio income/loss

capital losses – passive income/loss

All of these

23.  Brice is a single, self-employed electrician who earns $60,000 per year in self-employment income. Brice paid the following expenses this year. Which of the expenses are deductible for AGI?

1. The cost of health insurance

2. The employer portion of self-employment tax paid

3. Penalty on early withdrawal of funds from a certificate of deposit

Numbers 1 and 2 only.

Numbers 1 and 3 only.

Numbers 2 and 3 only.

None of these is deductible for AGI.

All of these are deductible for AGI.

24.  Which of the following is a true statement?

Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax.

To deduct expenses associated with any profit motivated activity taxpayers must maintain a high level of involvement or effort in the activity throughout the year.

Business activities never require a relatively high level of involvement or effort from the taxpayer.

All business expenses are deducted for AGI.

All of these are true.

25.  Glenn is an accountant who races stock cars as a hobby. This year Glenn was paid a salary of $80,000 from his employer and won $2,000 in various races. What is the effect of the racing activities on Glenn’s taxable income if Glenn has also incurred $4,200 of hobby expenses this year? Assume that Glenn itemizes his deductions but has no other miscellaneous itemized deductions.

increase in taxable income of $2,000

increase in taxable income of $1,640

no change in taxable income

decrease in taxable income of $560

decrease in taxable income of $2,200

26.  Which of the following is a true statement?

The standard deduction is increased for taxpayers who are blind or deaf at year end.

A married couple is only entitled to one addition to their standard deduction even if both spouses are both over age 65.

Bunching itemized deductions is an illegal method of tax avoidance.

The deduction for personal and dependency exemptions is $3,800 times the number of exemptions.

All of these are true.

27.  Which of the following is a true statement?

Expenses associated with a “hobby” are never deductible.

The deductibility of an activity’s expenses in excess of revenues depends upon whether the activity is primarily profit-motivated or a hobby as determined by facts and circumstances.

Taxpayers engaged in a “hobby” are always presumed to be motivated by profit.

The regulations do not provide any guidance for determining whether an activity is profit motivated.

All of these are true.

28.  Which of the following is a true statement?

A casualty loss can only occur from storm damage.

Personal casualty losses can only be deducted to the extent that aggregate casualty losses exceed 10 percent of AGI.

Individual casualty losses are only deductible if each individual loss exceeds $5,000.

Uninsured thefts of personal assets are not included with casualty losses.

All of these are true.

29.  Which of the following could explain why an increasing number of taxpayers are subject to (or could become subject to) AMT?

Decreasing regular tax rates

The AMT exemption amount is indexed to increase with inflation

Property values are decreasing

The personal and dependency exemption amounts are not increasing as fast as the AMT exemption is decreasing

30.  Harmony reports a regular tax liability of $15,000 and tentative minimum tax of $17,000. Given just this information, what is her alternative minimum tax liability for the year?

$0

$2,000

$15,000

$17,000

31.  If an employer withholds taxes from an employee, in general, when are these taxes treated as paid to the IRS?

As withheld

As the employee requests on his/her W – 4 form

Evenly throughout the year

On April 15

32.  Hestia (age 17) is claimed as a dependent by her parents, Rhea and Chronus. In 2012, Hestia received $1,000 of interest income from a bond that she owns. In addition, she has earned income of $200. What is her taxable income for 2012?

$0

$250

$700   

$1,200

33.  Which of the following is a true statement about impermissible accounting methods?

An impermissible method is adopted by using the method to report results for two consecutive years.

An impermissible method may never be used by a taxpayer.

Cash method accounting is an impermissible method for partnerships and Subchapter S electing corporations.

There is no accounting method that is impermissible.

None of these is true.

34.  Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

Jim can defer the recognition of the income if he absolutely promises not to provide the services until next year.

Jim must defer the recognition of the income until the income is earned.

Jim can defer the recognition of the income if he has requested that the client not pay for the services until the services are provided.

Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes.

Jim can never defer the recognition of the prepayments of income.

35.  Which of the following is a true statement?

Meals are never deductible as a business expense.

An employer can only deduct half of any meals provided to employees.

The cost of business meals must be reasonable.

A taxpayer can only deduct a meal for a client if business is discussed during the meal.

None of these is true.

36.  Kip started a wholesale store this year selling bulk peanut butter. In January of this year Kip purchased an initial five tubs of peanut butter for a total cost of $5,000. In July Kip purchased three tubs for a total cost of $6,000. Finally, in November Kip bought two tubs for a total cost of $1,000. Kip sold six tubs by year end. What is Kip’s ending inventory under the FIFO cost-flow method?

$12,000

$6,000

$5,000

$2,500

$1,000

37.  Which of the allowable methods allows the most accelerated depreciation?

150 percent declining balance

200 percent declining balance

Straight line

Sum of the years digits

None of these allow accelerated depreciation

38.  Bonnie Jo purchased a used computer (5-year property) for use in her sole proprietorship. The basis of the computer was $2,400. Bonnie Jo used the computer in her business 60 percent of the time and used it for personal purposes the rest of the time during the first year. Calculate Bonnie Jo’s depreciation expense during the first year assuming the sole proprietorship had a loss during the year (Bonnie did not place the property in service in the last quarter):

$240

$288

$480

$2,400

None of these

39.  Sairra, LLC purchased only one asset during the current year. It placed in service furniture (7-year property) on April 16 with a basis of $25,000. Calculate the maximum depreciation expense for the current year, rounding to a whole number (ignoring §179 and bonus depreciation):

$1,786

$3,573

$4,463

$5,000

None of these

 40.  Assume that Brittany acquires a competitor’s assets on September 30th of the prior year. The purchase price was $350,000. Of that amount, $300,000 is allocated to tangible assets and $50,000 is allocated equally to two §197 intangible assets (goodwill and a 1-year non-compete agreement). Given, that the non-compete agreement expires on September 30th of year 2, what is Brittany’s amortization expense for the second year, rounded to the nearest whole number?

$0

$1,667

$2,917

$3,333

None of these

41.  Bozeman sold equipment that it uses in its business for $80,000. Bozeman bought the equipment two years ago for $75,000 and has claimed $20,000 of depreciation expense. What is the amount and character of Bozeman’s gain or loss?

$25,000 §1231 gain.

$20,000 ordinary gain, and $5,000 §1231 gain.

$5,000 ordinary gain, and $20,000 §1231 gain.

$25,000 capital gain.

None of these.

42.  Leesburg sold a machine for $2,200 on November 10th of the current year. The machine was purchased for $2,600. Leesburg had taken $1,200 of depreciation deductions. What is Leesburg’s gain or loss realized on the machine?

$800 gain.

$1,000 gain.

$1,200 loss.

$1,400 loss.

None of these.

43.  Which of the following is not true regarding §1239?

It only applies to related taxpayers.

It only applies to gains on sales of depreciable property.

It only applies to gains on sales of non-residential real property.

It does not apply to losses.

None of these.

 44.  Alpha sold machinery to Beta, a related entity, which it used in its business for $40,000. Beta used the machinery in its business. Alpha bought the equipment a few years ago for $50,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Alpha’s gain?

$20,000 ordinary income under §1239.

$10,000 ordinary gain and $10,000 §1231 gain.

$20,000 ordinary gain.

$20,000 capital gain.

None of these.

45.  Mary traded furniture used in her business to a furniture dealer for some new furniture. Mary originally purchased the furniture for $45,000 and it had an adjusted basis of $20,000 at the time of the exchange. The new furniture had a fair market value of $40,000. Mary also gave $4,000 to the dealer in the transaction. What is Mary’s adjusted basis in the new furniture after the exchange?

$20,000.

$24,000.

$36,000.

$40,000.

None of these.

 46.  If an individual forms a sole proprietorship, which nontax factor will be of greatest benefit to the sole proprietor?

Liability protection

Legal flexibility in defining rights and responsibilities of owners

Facilitates initial public offerings

Minimal time and cost to organize

47.  Which of the following is most effective in mitigating the double tax?

Shift income from high tax rate shareholders to low tax rate corporations

Shift income from low tax rate shareholders to high tax rate corporations

Shift income from high tax rate corporations to low tax rate shareholders

Shift income from low tax rate corporations to high tax rate shareholders

48.  From a tax perspective, which entity choice is preferred when a liquidating distribution occurs and the entity has appreciated assets?

Partnership

S corporation

LLC

Partnership and LLC

S corporation and LLC

 49.  Logan, a 50 percent shareholder in Military Gear Inc., is comparing the tax consequences of losses from C corporations compared with losses from S corporations. Assume Military Gear Inc has a $100,000 loss for the year, Logan’s tax basis in his Military Gear Inc. stock was $150,000 at the beginning of the year, and he received $75,000 ordinary income from other sources during the year. Assuming Logan’s marginal income tax rate is 15%, how much more tax will Logan pay currently if Military Gear Inc. is a C corporation compared to the tax he would pay if it were an S corporation?

$0

$3,750

$7,500

$11,250

50.  Roberto and Reagan are both 25 percent owner/managers for Bright Light Inc. Roberto runs the retail store in Sacramento, CA, and Reagan runs the retail store in San Francisco, CA. Bright Light Inc. generated a $125,000 profit companywide made up of a $75,000 profit from the Sacramento store, a ($25,000) loss from the San Francisco store, and a combined $75,000 profit from the remaining stores. If Bright Light Inc. is an S corporation, how much income will be allocated to Roberto?

$31,250

$62,500

$75,000

$125,000