ACCT 218 | Chapter 3 & 4 | Test

Stone Pine Corporation, a calendar year taxpayer, has ending inventory of $150,000 on December 31, 2015. During the year, the corporation purchased additional inventory of $375,000. If cost of goods sold for 2015 is $470,000, what was the beginning inventory at January 1, 2015?

$245,000 Math: ($470,000 - $375,000 + $150,000)

During 2015, Harry, a self-employed accountant, travels from Kansas City to Miami for a 1-week business trip. While in Miami, Harry decides to stay for an additional 5 days of vacation. Harry pays $600 for airfare, $200 for meals, and $500 for lodging while on business. The cost of meals and lodging while on vacation was $300 and $500, respectively. How much may Harry deduct as travel expenses for the trip?

$1,200 Math: $600 + (50% × $200) + $500

Richard operates a hair styling boutique out of his home. The boutique occupies 420 of the home's 1,200 square feet of floor space. Other information is as follows: Gross income from the boutique $10,000 Supplies for the boutique $ 2,400 Depreciation on total residence $12,000 Utilities for total residence $ 6,000 What amount of income or loss from the boutique should Richard show on his return?

$1,300 income Math: [$10,000 - $2,400 - 35% × ($12,000 + $6,000)]

Joan is a self-employed attorney in New York City. Joan took a trip to San Diego, CA, primarily for business, to consult with a client and take a short vacation. On the trip, Joan incurred the following expenses: Airfare to and from San Diego $ 975.00 Hotel charges while on business 425.00 Meals while on business 285.00 Car rental while on business 120.00 Hotel charges while on vacation 595.00 Meals while on vacation 313.50 Car rental while on vacation 180.00 Total $2,893.50 Calculate Joan's travel expense deduction for the trip, assuming the trip was made in 2015. Round your final answer to the nearest whole dollar.

$1,663 Math: $975 (flight) + $425 (business hotel) + $142.50 (business meals $285 x 50%) + $120 (business car) = $1,662.50 Note: Travel expenses are defined as ordinary and necessary expenses incurred in traveling away from home in pursuit of the taxpayer's trade or business. These expenses are deductible as long as they can be substantiated and are not lavish or extravagant. Note (2): Travel expenses are defined as ordinary and necessary expenses incurred in traveling away from home in pursuit of the taxpayer's trade or business. These expenses are deductible as long as they can be substantiated and are not lavish or extravagant. Taxpayers who make a combined business and pleasure trip within the United States may deduct all of the costs incurred in traveling to and from the business destination provided the trip is primarily for business. Once at the destination, only the business portion of the travel costs for meals, lodging, local transportation, and incidental expenses may be deducted; any costs which are not associated with the taxpayer's business are not deductible. Most travel expenses are fully deductible, but Congress decided that a portion of the cost of meals is a personal expense. Therefore, only 50 percent of the cost of meals is deductible.

Acacia Company had inventory of $300,000 on December 31, 2015. Other information is as follows: Purchases $1,500,000 Sales 1,800,000 Inventory 1/1/2015 500,000 What is the amount of Acacia's cost of goods sold for 2015?

$1,700,000 Math: ($500,000 + $1,500,000 - $300,000)

Tim loaned a friend $4,000 to buy a used car. In the current year, Tim's friend declares bankruptcy and the debt is considered totally worthless. What amount may Tim deduct on his individual income tax return for the current year as a result of the worthless debt, assuming he has no other capital gains or losses for the year?

$3,000 short-term capital loss

Jack is a lawyer who is a member at Ocean Spray Country Club where he spends $7,200 in dues, $4,000 in meals, and $2,000 in green fees to entertain clients. He is also a member of the local Rotary club where he meets potential clients. The dues for the Rotary club are $1,200 a year. How much of the above expenses can Jack deduct as business expenses?

$4,200 Math: [50% × ($4,000 + $2,000)] + $1,200

Donald owns a two-family home. He rents out the first floor and resides on the second floor. The following expenses attributable to the total building were incurred by Donald for the year ended December 31, 2015: Real estate taxes $ 1,800 Mortgage interest 1,600 Utilities 1,200 Repairs (first floor) 1,400 Painting (second floor) 400 In addition, the depreciation attributable to the entire building would be $2,000. What is the total amount of the expenses that Donald can deduct on Schedule E of Form 1040 (before any limitations)?

$4,700 Math: [$1,400 + 50% × ($1,800 + $1,600 + $1,200 + $2,000)]

In June of 2015, Keith accepts a new job with the same employer in San Diego. He formerly commuted 12 miles to a job in Canton, OH; San Diego is 2,150 miles from his old home. He incurs the following expenses in his move from Ohio in 2015: Moving and packing charges $4,400 Travel during the move (includes mileage at $0.23 per mile) $880 Lodging during the move $660 Meals during the move $440 Total $6,380 Keith is not reimbursed for any of these expenses by his employer. What is the amount of Keith's moving expense deduction?

$5,940 Math: $4,400 (moving & packing) + $880 (travel) + $660 (lodging) = $5,940 Note: Congress, recognizing the importance of having a mobile work force, felt taxpayers should not be penalized if forced to move to cities where better employment opportunities exist. Thus, the tax law provides a deduction for moving expenses to help relieve taxpayers of a portion of the financial burden of moving from one job location to another. Note (2): To qualify for the moving expense deduction, three general tests must be met. These tests are: 1. The taxpayer must change job sites. The taxpayer does not have to change employers. A job transfer with the same employer meets this test. 2. The taxpayer must move a certain minimum distance. The distance from the taxpayer's former residence to the new job location must be at least 50 miles more than the distance from the former residence to the former job location. 3. The taxpayer must remain at the new job location for a certain period of time. Generally, employees must work at least 39 weeks at the new job location during the 12 months following the move. Taxpayers who are self-employed must work at least 78 weeks at the new location during the 24 months after the move. Taxpayers who are in the military or employees who are involuntarily transferred are still allowed the moving expense deduction even if the time or distance test is not met. Qualified moving expenses fall into two categories. These two categories are: 1. Moving household goods and personal effects. 2. Traveling from the former residence to the new place of residence. For purposes of the moving expense deduction, traveling includes lodging, but not meals, for the taxpayer and household members. Moving expenses must be reasonable to be deductible. Qualified moving expenses reimbursed by an employer are not reported as part of the gross income of the employee. However, non-qualified moving expense reimbursements (e.g., employer reimbursement for meals during a move) are included in the gross income of an employee.

Nancy owns a small dress store. During 2015, Nancy gives business gifts having the indicated cost to the following individuals: Mrs. Johns (a customer) $37 plus $3 shipping Mr. Johns (nonclient husband of Mrs. Johns) $10 Ms. Brown (a customer) $22 What is the amount of Nancy's deduction for business gifts?

$50 Math: $25 limit + $3 + $22

Norm is a real estate professional with a real estate trade or business as defined in the tax law. He has $150,000 of business income and $50,000 of losses from actively managed real estate rentals. How much of the $50,000 in losses is he allowed to claim on his tax return?

$50,000

Contributions by a self-employed individual to a SEP plan for 2015 are limited to the lesser of a percent of net earned income or:

$53,000

Problem 3-5 (Algorithmic) Inventories (LO 3.2) Kevin owns a retail store, and during the current year he purchased $811,600 worth of inventory. Kevin's beginning inventory was $81,160, and his ending inventory is $97,392. During the year, Kevin withdrew $16,232 in inventory for his personal use. Assume that he uses the cost method to value the inventory. Use Part III of Schedule C below to calculate Kevin's cost of goods sold for the year. If an amount box does not require an entry, leave it blank.

33 Method(s) used to value closing inventory: Cost 34 Was there any change in determining quantities, costs, or valuations between opening and closing inventory? If "Yes," attach explanation: No 35 Inventory at beginning of year. If different from last year's closing inventory, attach explanation: $81,160 36 Purchases less cost of items withdrawn for personal use: $795,368 37 Cost of labor. Do not include any amounts paid to yourself: 38 Materials and supplies: 39 Other costs: 40 Add lines 35 through 39: $876,528 41 Inventory at end of year: $97,392 42 Cost of goods sold. Subtract line 41 from line 40. Enter the result here and on line 4: $779,136 Note: The cost of inventory a taxpayer owns has a significant impact on the taxable income of the taxpayer. The deduction for the cost of goods sold of a retail business is a direct function of the amount of the beginning and ending inventories. Note (2): The calculation of cost of goods sold is reported in Part III (Figure 3.5) of Schedule C. In Part III lines 33 and 34, taxpayers must answer questions about the methods used to calculate inventory. Cost of goods sold is equal to the beginning inventory (line 35) plus purchases (line 36), labor (line 37), materials and supplies (line 38), and other costs (line 39) less ending inventory (line 41). Valuation of inventories used in calculating the cost of goods sold is necessary to reflect clearly the income of the taxpayer. To calculate cost of goods sold, the taxpayers must value the beginning and ending inventories of the business as well as any purchases made throughout the year. Note that purchases must be reduced for the cost of items withdrawn for personal use. Once the inventory components are valued, the cost of goods sold is calculated as shown below: Beginning Inventory $ Add: Purchases $ Equals: Costs of Goods Available for Sale $ Less: Ending Inventory ($) Equals: Cost of Goods Sold $

Gary is a self-employed accountant who pays $2,000 for business meals. How much of a deduction can he claim for the meals and where should the deduction be claimed?

50 percent, Schedule C deduction

Jim lives in California. What is Jim's deadline for making a contribution to traditional IRA or a Roth IRA for 2015?

April 18, 2016

Patrick owns a home on the beach in Daytona. He lives in the house for most of the year but leaves town during the popular motor sports race that comes through every year. During that time, he rents his home out for 3 weeks to race fans for $5,000. Which of the following is true?

Because Patrick rented the home for more than 14 days, he must report the income. He is also allowed to deduct a percentage of expenses such as utilities and depreciation to the extent of the income.

Martin has a home office for his business as an agent for rock-and-roll bands. The business shows a loss of $2,000 before home office expenses. How should the home office expenses be treated?

Because of the business loss, home office expenses (other than mortgage interest and property taxes allocated to the office) cannot be deducted in the current year but can be carried forward to the next year.

Which of the following items incurred while on travel is not considered a travel expense?

Cost of entertaining clients

Deductible transportation expenses:

Do not include the normal costs of commuting. False: -Do not include daily expenses for transportation between the taxpayer's home and temporary work locations if the taxpayer has a regular place of business. -Include meals and lodging. -Include only costs incurred while away from home.

Dividend income is considered "passive income."

False Note: Dividend income is considered as "portfolio income."

If an employer makes a contribution to a qualified retirement plan on behalf of an employee, the amount is currently deductible by the employer, and the employee must include the amount in gross income at the time the contribution is made.

False Note: Employers may claim a deduction in the current year for contributions to qualified retirement plans on the employees' behalf, while the employees do not include the contributions in income until the contributed amounts are distributed.

In a distribution rollover from an IRA, the recipient must contribute 80 percent of the distributed amount to the new trustee in order for the rollover to be tax free.

False Note: In a distribution rollover, the recipient must contribute 100 percent of the amount in the old plan to the new trustee in order for the rollover to be tax free.

Passive losses of one activity may not be used to offset passive income from another activity.

False Note: Income from passive investments can be used by taxpayers to offset passive losses

The standard mileage rate for automobiles in 2015 is 56 cents per mile.

False Note: The standard mileage rate in 2015 is $0.575 per mile.

The expenses associated with the rental of a residence used for both personal and rental purposes are subject to three possible tax treatments. Which of the following is not included as one of the three?

If the residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or 10 percent of the days rented, whichever is greater, the residence is treated as a personal residence for tax purposes. True: -If the residence is rented for 15 days or more and is used for personal purposes for more than 14 days or 10 percent of the days rented, whichever is greater, allocable rental expenses are allowed only to the extent of rental income. -If the residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or 10 percent of the days rented, whichever is greater, the residence is treated as rental property. -If a residence is rented for fewer than 15 days during the year the rental period is disregarded and the residence is regarded as a personal residence for tax purposes.

Ned has active modified adjusted gross income before passive losses of $160,000. He has a loss of $15,000 on rental property he actively manages. How much of the loss is he allowed to deduct against his other income?

None Note: Ned's AGI is $160,000 which is over the phase-out maximum threshold of $150,000; thus he may not deduct any of his passive loss against non-passive income.

Lester rents his vacation home for 6 months and lives in the home during the other 6 months of 2015. The gross rental income from the home is $4,500. For the entire year, real estate taxes are $800, interest is $3,000, utilities and maintenance expenses are $2,200, and depreciation expense on the entire home would be $4,000. What is Lester's allowable net loss from renting his vacation home? a) $3,000 loss b) $250 loss c) $5,500 loss d) $500 loss e) None of these choices are correct.

None of these choices are correct. Lester's calculated loss is: Gross income = $4,500 Real estate taxes (50% x $800) = ($400) Interest (50% x $3,000) = ($1,500) Utilities (50% x $2,200) = ($1,100) Depreciation (50% x $4,000) = ($2,000) Net rental loss = ($500) Because the home is classified as a vacation home which has both rental and personal use, expenses are only deductible to the extent of rental income.

What income tax form does a self-employed sole proprietor usually use to report business income and expense?

Schedule C

Which of the following is not deductible as a moving expense?

The cost of a pre-move house-hunting trip

Mikey is a self-employed computer game software designer. He takes a week-long trip to Maui, primarily for business. He takes 2 personal days at the beach. How should he treat the expenses related to this trip?

The cost of all of the airfare and the expenses related to the business days should be deducted, while the expenses related to the personal days are not deductible.

In most cases, an individual taxpayer reports rental income and the related expenses on Schedule E.

True

Wages are considered "active income."

True

Which of the following is not a factor that the IRS looks at to determine if a loss is from a hobby or from a business?

Whether the activity is owned and run by the taxpayer alone IS a factor: -Whether the losses are due to circumstances beyond a person's control -The financial status of the taxpayer -The history of the income and loss from the activity

Problem 4-3 (Algorithmic) Passive Loss Limitations (LO 4.2) Walter, a single taxpayer, purchased a limited partnership interest in a tax shelter in 1985. He also acquired a rental house in 2015, which he actively manages. During 2015, Walter's share of the partnership's losses was $22,000, and his rental house generated $38,000 in losses. Walter's modified adjusted gross income before passive losses is $142,500. If an amount is zero, enter "0". a. Calculate the amount of Walter's allowable deduction for rental house activities for 2015. b. Calculate the amount of Walter's allowable deduction for the partnership losses for 2015. c. What may be done with the unused losses, if anything? The unused losses may be carried ____ tax years to reduce ____ income in those years.

a. $ b. $ c. blank 1: blank 2:

Telly, age 38, has a $193,000 IRA with Blue Mutual Fund. He has read good things about the management of Green Mutual Fund, so he opens a Green Fund IRA. Telly asked for and received his balance from the Blue Fund on May 1, 2015. a. What is the total amount Telly will receive from the Blue Fund IRA? b. What amount must Telly contribute to the Green Fund IRA to avoid having taxable income and penalties for early withdrawal? c. When is the last day Telly can roll over the amount received into the Green Fund IRA and avoid taxation in the current year, assuming no unusual circumstances? d. What amount will Telly initially receive if the distribution were from his employer's qualified retirement plan?

a. $193,000 b. $193,000 c. June 30, 2015 d. $154,400 Note: In a distribution rollover, the taxpayer receives a distribution of funds from a retirement plan and then transfers part or all of the funds to the new retirement plan trustee. The taxpayer has a maximum of 60 days in which to transfer funds to the new plan and avoid taxes and penalties. The 60-day rollover period may be waived in cases of casualty, disaster, and other events beyond the reasonable control of the taxpayer such as death, disability, incarceration, and postal error. The 60-day time limit is extended to 120 days for first-time home buyers. For Telly, May 2nd through May 31 equals 30 days and June 1 through June 30 (another 30 days) is added making June 30, 2015 Telly's last day to rollover.