Ch 9

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.

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?

4500

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?

52/53

Which of the following may qualify as a deductible business expense:

Cost of uniforms that include a company logo Protective clothing for a self-employed construction worker

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

Credit method

Under which of the following conditions may a taxpayer use the cash method to account for inventory?

Annual gross receipts for the three-year period prior to the current year do not exceed $27 million.

For tax purposes, when a business wants to adopt a new accounting method, it must get permission from the IRSBlank 1Blank 1 IRS , Correct Unavailable.

Blank 1: IRS, Commissioner, or Internal Revenue Service

In order to meet the ______ ________ test for deducting an expense, everything necessary to establish the liability giving rise to the deduction must have occurred, and the business must be able to determine the _________ of the liability with reasonable accuracy.

Blank 1: all or fixed Blank 2: events, determinable, or event Blank 3: amount or value

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.

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.

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

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

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.

accrual cash

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

cash

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.

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

cash

When a business wants to change an accounting method for tax reporting, such as the cost-flow method used for inventory, what body must give permission for the change?

IRS

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

Ordinary

The economic ________ _____________ test specifies that businesses may NOT recognize a deduction for an expense until the underlying activity generating the associated liability has occurred.

economic performance

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

economic performance

True or false: Taxpayers that report average gross receipts of $27 million or less for the three-tax year period ending with the prior tax year must use the accrual method to account for inventory even if they are a cash method taxpayer.

f

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

financial tax

A business may have a tax year that is shorter than a full 12 months during its firstBlank 1Blank 1 first , Correct Unavailable year in business or its lastBlank 2Blank 2 last , Correct Unavailable year in business.

first last

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.

one two

The term _______________is used to describe an expense that is normal or appropriate for the business under the circumstances.

ordinary

Unless "expressly" authorized by a provision in the law, __________ _________ are nondeductible.

personal expenses

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.

profit hobby

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

reasonable

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

records

For 2022, taxpayers with average annual gross incomeBlank 1Blank 1 income , Incorrect Unavailable during the prior 3 years of 27Blank 2Blank 2 27 , Correct Unavailable million dollars are not subject to the business interest deduction limitation.

revenue 27

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

Repetitive in nature

True or false: The economic performance test generally requires that underlying activity generating the liability has occurred in order for the associated expense to be deductible.

true

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

weighted average cost

Which of the following statements are CORRECT when requesting permission to change accounting methods? (Check all that apply.)

The IRS automatically approves certain types of accounting method changes. The business may have to pay a fee and provide a good business reason for making the change.

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.

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.

Although there are exceptions, a taxpayer or business using the cash method of accounting recognizes revenue when property or services are actually or______received and recognizes deductions when the expense is _______.

constructively paid

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

The cost of driving from home to work

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.

Montgomery & Company are accounting for their bad debts. The company uses the accrual method of accounting. During the current year, M&C has $42,000 in accounts receivable. The estimated bad debts for the period is $2,000 using the allowance method of accounting for uncollectible accounts. The amount of accounts actually written off during the period is $1,700. What is the amount of bad debt expense that can be deducted for tax purposes?

1700

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.

2400

Taxpayers with substantial gross receipts are generally limited to deducting no more than 30Blank 1Blank 1 30 , Correct Unavailable percent of their adjusted taxable income, plus their business interest income, as a business interest deduction.

30

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

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

The accounting methods that can be chosen for tax reporting include the cashBlank 1Blank 1 cash , Correct Unavailable method, the accrualBlank 2Blank 2 accrual , Correct Unavailable method, and the inventory-costBlank 3Blank 3 inventory-cost , Incorrect Unavailable 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 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

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

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

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

For 2022, 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: 27 or twenty-seven

In addition to finished goods, under the__________ ________________ _________ rules, inventory costs include the purchase price of any raw materials, shipping costs, and any indirect costs the business allocates to inventory.

Blank 1: uniform Blank 2: cost Blank 3: capitalization

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.

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

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

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

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

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

Which of the following statements is INCORRECT when requesting permission to change accounting methods?

It is NOT necessary to request permission to change from an impermissible method to a permissible method.

Under what circumstances may a cash-method business be allowed to use the cash method to account for inventory? (Check all that apply.)

It is primarily a retail business and average gross receipts for the past three years have NOT exceeded $27 million annually. It is primarily a service business and average gross receipts for the past three years have NOT exceeded $27 million annually.

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

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

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.

Match the entity with the statement that describes the tax treatment of that entity.

Sole proprietorship matches Choice 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. Partnership matches Choice Entity files a tax return but the profit or loss flows through to owners' individual income tax returns. C corporation matches Choice Income is taxed at the entity level rather than flowing through to the owner(s).

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

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

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.

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.

Which of the following statements are correct regarding inventory capitalization rules? (Check all that apply.)

Under UNICAP, businesses generally capitalize the inventory costs in one period and deduct them in a subsequent period. Under UNICAP rules, businesses capitalize in inventory a portion of the compensation paid to employees in production supporting departments. UNICAP rules require businesses to capitalize more costs to inventory for tax purposes than they do for financial reporting.

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 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.

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

after it has adopted the method for 2 years

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 Blank______ method for financial accounting and is deducted using the Blank______ method for tax purposes.

allowance; direct write-off