ACCT 401 - Chapter 9

Alex purchased a personal lawn mower to use for mowing his lawn and the lawns at his rental properties. The depreciation expense for the mower was $300. At the end of the season, he documents that he used the mower 70% for his rental properties and 30% for personal purposes. How much can he deduct as a business expense?

$210 Reason: Only the business portion is deductible ($300 x .70 = $210).

On December 1 of the current year, Rhianna pays $2,400 for a 12-month advertising contract that will begin on March 1 of next year. Rhianna uses the cash method of accounting for her business. How much will Rhianna be able to deduct in the current year?

$0 Reason: Since the contract extends beyond the end of the following year and the effective date doesn't start until March, she can't deduct anything in the current year.

Which of the following statements is INCORRECT regarding the requirements to meet the economic performance test under the various ways a liability can arise?

Certain liabilities, such as rebates, refunds, and workers compensation payments, can be deducted when incurred regardless of when payment is made.

Chester and Co.'s tax reporting year end is on the last Friday in June every year. This year end schedule is known as which of the following?

A 52/53 week year end

Which of the following choices are tests that need to be met in order to deduct an expense under the accrual method? (Check all that apply.)

All-events test Economic performance test

Which of the following expenses is NOT included with deductible business travel expenses?

Charlie paid $50 to attend a play during his 3-day business trip.

Which of the following accounting methods is NOT acceptable for tax reporting?

Credit method

On December 1 of the current year, Jonathon pays $2,400 for a 12-month advertising contract that begins immediately. If Jonathon uses the cash method of accounting for his business, he will be able to deduct $ in the current year.

Blank 1: 2,400

Taxpayers are generally limited to deducting no more than percent of their adjusted taxable income, plus their business interest income, as a business interest deduction.

Blank 1: 30 or thirty

Due to the personal enjoyment element involved with meals, taxpayers may only deduct % of the actual cost.

Blank 1: 50 or fifty

Larger businesses that generate a material portion of their income by selling products they acquire for resale or products they manufacture generally must account for gross profit using the method, regardless of the method used for tax reporting.

Blank 1: accrual

The -method of tax reporting provides a better matching of revenues and expenses.

Blank 1: accrual

The tax laws do not allow a(n) -method business to deduct accrued expenses for a liability owed to a related party using the -method until the related party recognizes the related income from the transaction.

Blank 1: accrual Blank 2: cash

The -method of tax reporting provides more flexibility to time income and deductions by accelerating or deferring payments.

Blank 1: cash

The method of accounting recognizes revenues when property is received and recognizes deductions when the expense is paid.

Blank 1: cash

The accounting methods that can be chosen for tax reporting include the method, the method, and the method.

Blank 1: cash or cash basis Blank 2: accrual Blank 3: hybrid or mixed

In the year that a business changes its accounting method, it must make an adjustment to taxable income that represents the difference for the amount that would have been taxed or deducted in prior years. If the adjustment increases taxable income, the taxpayer includes % of the addition in the current year. If the adjustment decreases taxable income, the taxpayer includes % of the deduction in the current year.

Blank 1: cumulative or accumulated Blank 2: 25 or twenty-five Blank 3: 100 or one hundred

In order to deduct the business portion of mixed motive expenses, taxpayers must have sufficient to prove the business use of the asset.

Blank 1: documentation, records, evidence, support, record-keeping, substantiation, record, documents, document, record keeping, or proof

In addition to the all-events test, an accrual-basis business must meet a(n) test with respect to a liability before the corresponding expense can be deducted for tax purposes.

Blank 1: economic Blank 2: performance

The allowance method of recognizing bad debt expense is used for reporting, while the direct write-off method is used for reporting.

Blank 1: financial, GAAP, or book Blank 2: tax

A business may have a tax year that is shorter than a full 12 months during its year in business or its year in business.

Blank 1: first or initial Blank 2: final or last

Accrual methods for tax tend to overstate and understate relative to accrual methods for financial accounting. (Enter only one word per blank.)

Blank 1: income or revenue Blank 2: deductions or expenses

In reporting financial statement income, businesses have incentives to select accounting methods that accelerate and defer . In reporting taxable income, businesses have incentives to select accounting methods that accelerate and defer .

Blank 1: income, revenue, or revenues Blank 2: deductions, expenses, deduction, or expense Blank 3: deductions, expenses, deduction, or expense Blank 4: income, revenues, or revenue

For financial reporting purposes, an advance payment for services is NOT recorded as a revenue, but rather recorded as a(n) . It will be recognized as a revenue when it is earned. For tax reporting purposes, an advance payment is taxed immediately because the payment meets the - test. However, there is an exception which allows the prepaid income to be recognized in the following the receipt if certain conditions are met.

Blank 1: liability Blank 2: all, fixed, or All Blank 3: events, determinable, event, or Events Blank 4: year or Year

The term is used to describe an expense that is helpful or conducive to a business activity.

Blank 1: necessary or necessary expense

A business is deemed to have adopted a permissible accounting method if it has used the method for year(s), but is not deemed to have adopted an impermissible accounting method unless it has used the method for consecutive years.

Blank 1: one or 1 Blank 2: two or 2

All and expenses that are reasonable in amount and incurred in carrying on a trade or business are deductible for tax purposes.

Blank 1: ordinary Blank 2: necessary

The objective of business activities is to make a(n) . When a taxpayer's activity is pursued for personal pleasure, that activity is treated as a(n) when revenues and expenses are incurred.

Blank 1: profit Blank 2: hobby or hobbies

Ordinary and necessary business expenses are deductible only to the extent they are in amount.

Blank 1: reasonable

For 2020, taxpayers with average annual gross during the prior 3 years of million dollars are not subject to the business interest deduction limitation.

Blank 1: receipts, sales, revenue, or receipt Blank 2: 26 or twenty-six

Which of the following choices are advantages to the taxpayer of choosing the cash-method of tax reporting rather than the accrual-method? (Check all that apply.)

Bookkeeping is easier. There is more flexibility to time the recognition of income and deductions.

What are the rules concerning reporting periods for tax purposes?

Business must report their income and deductions for a full 12 month year, unless special circumstances apply.

Which of the following statements is correct when describing the accounting methods used for tax versus financial reporting?

Businesses have an incentive to maximize financial reporting income, but minimize taxable income.

Form 1120

C corporation

Partnership

Entity files a tax return but the profit or loss flows through to owners' individual income tax returns.

Which of the following statements is correct regarding the deductibility of meals when a taxpayer is traveling for business?

Fifty percent of the cost of meals is deductible if the taxpayer is going to be away from home overnight.

True or false: In order to deduct travel expenses (as opposed to transportation expenses), the taxpayer must be away from home on a trip of sufficient duration to require sleep or rest.

True

Which of the following statements is INCORRECT concerning the uniform cost capitalization (UNICAP) rules?

Under the UNICAP rules, only costs incurred inside the production facility are allocated to inventory.

In order to defer deductions for manufacturing costs until the finished products are sold, Congress enacted rules specifying that the cost of raw materials, shipping costs, and any other indirect costs of manufacturing must be added to the cost of inventory. What are these rules called?

Uniform cost capitalization rules

Which of the following methods is NOT a primary inventory cost-flow method used for tax purposes?

Weighted average cost

What two events must have occurred to meet the all-events test? (Check all that apply.)

When all events have occurred that determine or fix the business's right to receive the income When the amount of the income can be determined with reasonable accuracy

When is a business expense deemed to be reasonable in amount?

When it is not extravagant

Businesses using the accrual method of accounting generally recognize income when they meet the - test.

all-events

For accrual-method businesses, bad debt expense is recognized using the ______ method for financial accounting and is deducted using the ______ method for tax purposes.

allowance; direct write-off

Which of the following choices is INCORRECT when defining the gross income of a business?

Gross income for a business may be calculated as sales less returns and discounts.

Which of the following describes the difference between business activities and hobbies?

Hobbies are not primarily profit-motivated.

Which of the following statements are correct regarding the recognition of the cumulative difference in taxable income due to a change in accounting method? (Check all that apply.)

If the adjustment decreases taxable income, it is recognized in its entirety in the year of the change. If the adjustment increases taxable income, it is recognized over 4 years by adding 25% of the increase each year.

Which of the following choices constitutes gross income from a business? (Check all that apply.)

Income from renting property Gross profit from inventory sales Income from services provided

C corporation

Income is taxed at the entity level rather than flowing through to the owner(s).

Which of the following business expenses are deductible for tax purposes? (Check all that apply.)

Legal fees incurred to defend the business in a lawsuit Depreciation expense on a building used to store company vehicles Advertising cost for ads placed in the local newspaper

Which one of the following terms does the Internal Revenue Code use to describe deductible business expenses?

Ordinary Necessary

If a company uses a cash method of accounting, which of the following statements will be true? (Check all that apply.)

Prepaying expenses other than interest can result in an immediate tax deduction if the prepayment will be used up within 12 months. Revenue is recognized when cash is received no matter when the sale actually took place.

Which of the following criteria is NOT required for a business expense to be considered ordinary and necessary?

Repetitive in nature

Sole proprietorship

Revenues and expenses are reported directly on the owner's tax return and the profit (or loss) is subject to both individual income and self employment taxes.

Schedule C

sole proprietorship

Sonny incurred the following expenses last month in his self-employment business: Khaki pants and a blue button-down shirt to wear to work; tuition for a course in marketing to improve his current job skills as a fashion designer; and groceries so that he could take his lunch to work. Which of these expenses is/are deductible business expenses?

tuition for the marketing course

Form 1120S

S corporation

Allison purchased equipment that cost $100,000 for use in her business. She expects the equipment to be useful for the business for the next 8 years. Which of the following choices correctly describes the tax treatment of the cost of the equipment?

The equipment should be capitalized and depreciated according to the tax code.

Which of the following criteria is NOT required for a meal to be considered a tax-deductible business meal?

The meal must be eaten on the business premises.

Which of the information listed below is NOT a requirement of the documentation needed to substantiate the business portion of mixed motive expenses?

The records should include written evidence of personal use.

How does the accrual method for tax reporting differ from the accrual method for financial reporting?

The reporting rules tend to be structured to recognize less accrued expenses for tax purposes than for financial accounting purposes.

The all-events test generally requires businesses receiving advance payments for services to recognize the income when they receive the payment, rather than when they perform the service. Which of the following statements is INCORRECT regarding this rule?

The tax authorities give the business the option to report the income in the current year or defer it to the period in which the revenue is earned.

Which of the following choices is NOT correct regarding deductible transportation expenses for a taxpayer using her personal vehicle for business purposes?

The taxpayer can deduct the business portion of the vehicle operating costs, plus depreciation, plus a standard mileage rate based on business miles.

Lesa drives her car approximately 18,000 miles per year. During the most recent year, she drove 7,000 miles commuting to and from work, 4,500 miles for business-related conferences and client visits, and 6,500 miles for personal trips. How many miles are considered business miles and can be used to determine the tax deduction for transportation expenses?

4,500

Andrews and Co.'s tax reporting year end is on March 31 every year. This year end schedule is known as which of the following?

A fiscal year end

When is a business deemed to have adopted an impermissible accounting method?

After it has used the method for two consecutive years

Danielle's Diamonds is a jewelry store that is owned and operated as a sole proprietorship by Danielle Dawkins that averages $40 million in gross receipts. Danielle uses the cash method of accounting for tax reporting. Which of the following statements is correct for Danielle's business?

Danielle must use the accrual method for reporting gross profit even though she uses the cash method of accounting for everything else.

Josh and Michael are related for tax purposes. Josh is self-employed and has an accrual-basis sole proprietorship. Michael is a cash-method taxpayer. Josh hired Michael to help him complete a construction project. At the end of the year, Josh owed Michael $700 for work performed during December. Josh paid Michael the $700 on January 2. When will Josh be able to deduct the wage expense and when will Michael have to include the $700 in gross income?

Josh must wait to deduct the expense until Michael includes it in gross income. Michael will include the $700 in the year he receives it.

Which of the following methods are the primary inventory cost-flow methods used for tax purposes? (Check all that apply.)

Last-in, first-out Specific identification First-in, first-out

Form 1065

Partnership

Which of the following choices is NOT considered deductible transportation expenses?

The cost of driving from home to work

Evan incurred education-related expenditures related to his self-employment job. Under which of the following circumstances will Evan NOT be allowed to deduct these expenditures as a BUSINESS expense?

The course or courses qualify Evan for a new trade or business.

Which one of the following statements is correct regarding an asset that is used for both business and personal purposes?

The deductible business expense is determined by prorating the expenses based on the percentage of time it is used for business.

Which of the following statements are correct regarding the requirements to meet the economic performance test under the various ways a liability can arise? (Check all that apply.)

When a business agrees to pay another party for services, the deduction is taken as the other party provides the services. Certain liabilities, such as rebates, refunds, and workers compensation payments, must be deducted when paid regardless of when the liability arises.