Federal Tax Accounting I - Ch 1, 2,

Determine the realized income of the taxpayer in each of the following situations. If an amount is zero, enter "0". Monte owns 1,000 shares of Ali, Inc., common stock. During the current year, Ali declares and distributes a 20% stock dividend. As a result, Monte receives an additional 200 shares of stock.

$0.00

Determine the realized income of the taxpayer in each of the following situations. If an amount is zero, enter "0". Alfredo owns a one-third interest in Bayou Partnership. During the current year, Bayou's taxable income is $45,000.

$15,000

Determine the realized income of the taxpayer in each of the following situations. If an amount is zero, enter "0". Rogers Trucking Company owes Big Truck Sales, Inc., $200,000 for the purchase of 3 trucks. Rogers is having a bad year and is unable to make full payment on the debt to Big Truck. Rather than foreclose on Rogers, Big Truck reduces the debt to $170,000 so that Rogers can stay in business.

$30,000

Determine the realized income of the taxpayer in each of the following situations. If an amount is zero, enter "0". Janet owns a pest-control service. She charges customers $50 per month for basic pest control. Alternatively, customers can pay a lump sum of $500 for one year of basic monthly pest control. During the current year, Janet receives $13,000 in monthly payments and $26,000 in 1-year prepayments.

$39,000

Esmeralda is an attorney. Before 2019, she is employed by the law firm of Ellis and Morgan (E&M). Esmeralda is not a partner in E&M; her compensation consists of a fixed salary and a percentage of any fees generated by clients she brings or refers to the firm. In January 2019, she becomes a partner in the law firm of Thomas, Gooch, and Frankel (TGF). As a partner, Esmeralda agrees to turn over to TGF any income from the practice of law from the date of her admittance to the practice. In leaving E&M, it is agreed that she will continue to receive her percentage of fees from clients she referred to E&M during her employment there. In return, Esmeralda agrees that, upon request, she will consult with E&M attorneys regarding those clients. During 2019, she consults with 2 of her former E&M clients and receives $12,000 from E&M per their agreement. The $12,000 consists of $10,000 as a percentage of fees for client referrals after she left E&M and $2,000 as a percentage for work done before she left E&M. Esmeralda turns the $12,000 over to TGF per her partnership agreement. Is Esmeralda taxed on the $12,000 that she receives from E&M? $_____ is taxable to Esmeralda under the _____ and $_____ is reported as income by the TGF partnership.

2,000; assignment-of-income doctrine; 10,000

Concept

A broad principle that provides guidance on the income tax treatment of transactions. Construct - A mechanism that has been developed to implement a concept. Doctrine - A construct that has been developed by the courts.

Which of the following statements regarding a concept is true?

A concept is a broad principle that provides guidance on the income tax treatment of transactions.

Related party provisions include which of the following relationships?

A corporation and a partnership if the same person owns more than 50 percent of both the corporation and the partnership

Which of the following statements regarding tax credits is true?

A tax credit is a direct reduction in the income tax liability.

Which of the following statements regarding tax credits is not true?

A tax credit is less valuable than a deduction of an equal amount.

Determine the concept, construct, or doctrine that provides the rationale for the treatment: Catherine is a city government employee. She often uses the city's photocopier to make personal photocopies and has her secretary type an occasional personal letter. The value of these services for the current year is approximately $55 but is not included in Catherine's gross income.

Administrative convenience concept

Determine the concept, construct, or doctrine that provides the rationale for the treatment: Dante's allowable personal deductions are only $2,800 this year, so he deducts the standard deduction in computing his taxable income.

Administrative convenience concept

Capital asset

Any asset that is not a receivable, inventory, real or depreciable property used in a trade or business, and certain intangible assets, such as copyrights. Common capital assets of individuals include stocks, bonds, and personal use assets.

Which of the following statements is most accurate regarding ethical considerations in tax practice?

Anyone who prepares tax returns for monetary consideration or who is licensed to practice in a tax-related profession is subject to various rules and codes of professional conduct, and all tax practitioners are subject to the provisions of IRS Circular 230.

Determine the concept, construct, or doctrine that provides the rationale for the treatment: Kuri sells land for $30,000; its cost was $20,000. Under the sales agreement, the buyer is to pay Kuri's son $10,000 of the sales price. Kuri must recognize a gain of $10,000 on the sale

Assignment-of-Income Doctrine

Ed runs an auto repair business out of the garage attached to his personal residence. How should he account for each of the following items? Advertising in the local newspaper, $800.

Business expense

Ed runs an auto repair business out of the garage attached to his personal residence. How should he account for each of the following items? Checks received from customers that were returned by his bank, $1,600. The bank charged Ed's account $35 for processing the bad checks.

Business expense

Ed runs an auto repair business out of the garage attached to his personal residence. How should he account for each of the following items? Power jack hoist purchased at a cost of $12,000.

Business expense

Ed runs an auto repair business out of the garage attached to his personal residence. How should he account for each of the following items? Telephone bill for phone in the garage, $420. (Ed has a separately listed phone in his house.)

Business expense

Ed runs an auto repair business out of the garage attached to his personal residence. How should he account for each of the following items? Cash received from repair services, $28,000.

Business income

Determine the proper year for recognition of the income or deduction if the taxpayer is (1) a cash basis taxpayer and (2) an accrual basis taxpayer: e. Barnie's Paint Barn purchases new spray painters on January 15, 2019, at a cost of $3,000. The spray painters have an estimated useful life of 10 years, but the tax life is 5 years. The cost of the spray painters is _____.

Capitalized and depreciated over its tax life

Determine the proper year for recognition of the income or deduction if the taxpayer is (1) a cash basis taxpayer and (2) an accrual basis taxpayer: b. Raashan pays his employee, Sara, $22,450 in salary up to December 23, 2019. As of December 31, 2019, Raashan owes Sara $560 for the period of December 23 through December 31. The $560 is to be paid on the next pay date, which is January 5, 2020. As a cash basis taxpayer, the $23,010 salary expense is deductible by Raashan how? _____ As an accrual basis taxpayer, the $23,010 salary expense is deductible by Raashan how? _____

Cash basis: $22,450 in 2019; $560 in 2020 Accrual basis: $23,010 in 2019

Determine the proper year for recognition of the income or deduction if the taxpayer is (1) a cash basis taxpayer and (2) an accrual basis taxpayer: a. Tindle Corporation purchases office supplies costing $600 on December 21, 2019. Tindle pays for the office supplies on January 18, 2020. As a cash basis taxpayer, Tindle can deduct the $600 in _____. As an accrual basis taxpayer, Tindle can deduct the $600 in _____.

Cash basis: 2020 Accrual basis: 2019

Determine the proper year for recognition of the income or deduction if the taxpayer is (1) a cash basis taxpayer and (2) an accrual basis taxpayer: d. Devi sells Aaron a car on August 1, 2019, for $36,000. The terms of the sale call for Aaron to pay Devi $18,000 on August 1, 2019, and $9,000 on August 1 of 2020 and 2021. As a cash basis taxpayer, Devi will recognize the income from the sale of the car when _____. As an accrual basis taxpayer, Devi will recognize the income from the sale of the car when _____.

Cash basis: received in 2019, 2020, and 2021. Accrual basis: earned in 2019.

Determine the proper year for recognition of the income or deduction if the taxpayer is (1) a cash basis taxpayer and (2) an accrual basis taxpayer: c. Jerri paints Roland's house in December 2019. Roland pays Jerri's bill in January 2020. As a cash basis taxpayer, Jerri will recognize the income from painting the house when _____. As an accrual basis taxpayer, Jerri will recognize the income from painting the house when _____.

Cash basis: received in 2020 Accrual basis: earning in 2019

Shannon signs a $100,000 contract to develop a plan for integrating the computer operations of State University in December. Under the contract, she receives a $30,000 advance against future payments on the contract upon signing the contract. The contract stipulates that if Shannon does not produce an acceptable plan, she must repay any portion of the advance not earned to date. Does Shannon have any income from the receipt of the advance? Under the _____, she _____ recognize the receipt of the advance as income. Shannon _____ recognition until it is earned.

Claim-of-right doctrine; does; cannot defer

Determine the concept, construct, or doctrine that provides the rationale for the treatment: Jevon owns 20% of the stock of Cowdery, Inc., an S corporation. During the current year, Cowdery reports income of $45,000 and pays no dividends. Jevon must include $9,000 in gross income.

Conduit Entity

Which of the following are interpretive devices necessary to apply a concept?

Constructs and doctrines

Which of the following is not a general method the IRS uses (or has used) to verify that taxpayers are properly self-assessing their taxes?

Correspondence examinations

Which of the following is not a basic type of IRS examination?

Court-approved examinations

George purchases stock in Dodo Corporation in 2015 at a cost of $52,800. In 2019, he sells the stock for $31,400. By assuming that George sells no other assets in 2019, the effect of the sale of stock on George's taxable income is it will _____ by $_____ in 2019.

Decrease; 3,000

Which of the following statements regarding deductions is true?

Deductions are amounts that the tax law specifically allows as subtractions from gross income.

Tim has state income taxes of $4,500 withheld from his salary during 2018. On his 2018 federal income tax return, Tim properly deducts the $4,500 as state taxes paid. Upon filing his 2018 state income tax return, he determines that his actual state income tax for 2018 is only $3,900, and the state sends him a $600 refund. b. The annual accounting period concept ____ allow Tim to amend his 2018 return for the refund.

Does not

IRC violations with penalties for tax return preparers include which of the following?

Failure to furnish a copy of the return to the taxpayer

Postum Partnership purchases a building in 2016 for $275,300. It deducts $6,230 in depreciation on the building in 2016, $7,120 in 2017, $7,120 in 2018, and $3,560 in 2019. It sells the building in 2019 for $285,800. What is the partnership's gain or loss on the sale of the building? The partnership's _____ on the sale of the building is $_____.

Gain; 34,530

Which of the following statements regarding Treasury regulations is not true?

IRS rulings are given more weight as an authority than a Treasury regulation.

In 2019, ABC Company took a bad debt deduction of $1,000. In 2020, ABC Company collected the $1,000. Under the tax benefit rule, which of the following would be the proper tax treatment?

Include $1,000 in income from the transaction for 2020.

Which of the following statements regarding income shifting in tax planning is true?

Income shifting involves moving income among related taxpayers to achieve the lowest marginal taxes on the entire income of the related taxpayers.

Chelsea, who is single, purchases land for investment purposes in 2014 at a cost of $22,000. In 2019, she sells the land for $38,000. Chelsea's taxable income without considering the land sale is $100,000. What is the effect of the sale of the land on her taxable income, and what is her tax liability? Refer to the tax rate schedule for calculations. Round all calculations to two decimal places. Assume a long-term capital gains tax rate of 15%. The effect of the sale of land is that it _____ her taxable income by the amount of the _____. Her taxable income is $_____ and her tax liability is $_____.

Increases; capital gain; 116,000; ???????

An income tax is levied on which of the following?

Individuals, corporations, estates, and trusts

The allowable deductions FOR adjusted gross income (AGI) include which of the following?

Items related to the earning of other forms of income

The allowable deductions for adjusted gross income (AGI) include which of the following?

Items related to the earning of other forms of income

Primary sources of tax law include which of the following?

Legislative sources, administrative sources, and judicial sources

According to Adam Smith in The Wealth of Nations, which of the following is not identified as one of the four basic requirements for a good tax system?

Maximization

Which of the following are based on an ability to pay? Select either "yes" or "no" to denote which apply to this concept. a. State Y collects a sales tax of 5% on all purchases of goods and services.

No

Which of the following are based on an ability to pay? Select either "yes" or "no" to denote which apply to this concept. c. Students at State University are given free parking in designated lots. Faculty and staff members must pay $125 per year for parking at State University.

No

Which of the following are based on an ability to pay? Select either "yes" or "no" to denote which apply to this concept. d. Barton City charges all customers a flat monthly rate of $10 for garbage pickup.

No

Binh owns several businesses. The total income generated by all his businesses puts him in the highest marginal tax bracket. Seeking to lower the overall tax on his business income, Binh is thinking of creating two S corporations and putting half his business interests in each. Will this arrangement lower his overall tax? _____, because the income from each S corporation _____ flow through the corporation and _____ be taxed to Binh. Therefore, Binh's taxable income will _____.

No; will; will; remain the same

Ed runs an auto repair business out of the garage attached to his personal residence. How should he account for each of the following items? Interest paid on home furniture loan, $600.

Nondeductible personal expense

Jie owns a lawn mower repair business. Her repair shop is in a building she constructed on the lot on which her personal residence is located. How should Jie account for each of the following? Cost of remodeling the kitchen, $3,200.

Nondeductible personal expense

Determine whether the taxpayer has realized income or not in each of the following situations. Ramrod Development Company purchases land costing $230,000. Ramrod subdivides the land into 100 lots, incurring legal fees of $20,000. It also spends $50,000 to install utility and sewer connections to each lot. The lots are priced to sell at $50,000 each, but none sold during the year.

Not realized

Which are related and which are not related parties. Harvey and Noti Corporation. Harvey owns 40% of Noti Corporation. Three unrelated parties own 20% each.

Not related parties

Which are related and which are not related parties. Harvey and his uncle Elmer.

Not related parties

Determine the concept, construct, or doctrine that provides the rationale for the treatment: During the current year, Trafalger Corporation pays $475,000 in estimated tax payments. Trafalger determines that its actual tax liability is $490,000, so it pays only $15,000 with its tax return.

Pay-as-you-go concept

Jie owns a lawn mower repair business. Her repair shop is in a building she constructed on the lot on which her personal residence is located. How should Jie account for each of the following? Interest paid on her home mortgage, $9,200. Interest of $4,000 is paid on a separate loan that she used to construct the repair shop.

Partial business expense, partial personal expense

Jie owns a lawn mower repair business. Her repair shop is in a building she constructed on the lot on which her personal residence is located. How should Jie account for each of the following? Property taxes, $1,800.

Partial business expense, partial personal expense

Jie owns a lawn mower repair business. Her repair shop is in a building she constructed on the lot on which her personal residence is located. How should Jie account for each of the following? Cost of operating her van for one year, $7,800. Jie uses the van in her repair business and for personal use.

Partial business expense, partial personal nondeductible expense

Jie owns a lawn mower repair business. Her repair shop is in a building she constructed on the lot on which her personal residence is located. How should Jie account for each of the following? Electricity bills, $3,800. (Jie is not billed separately for electricity service to her repair shop.)

Partial business expense, partial personal nondeductible expense

Jie owns a lawn mower repair business. Her repair shop is in a building she constructed on the lot on which her personal residence is located. How should Jie account for each of the following? Telephone bills, $970. Jie uses one telephone number for her residence and her business. The cost of having an extra line to the shop is $30 per month. The $970 includes a charge of $250 for an ad in the business section of the telephone directory.

Partial business expense, partial personal nondeductible expense

Ed runs an auto repair business out of the garage attached to his personal residence. How should he account for each of the following items? Interest paid on his home mortgage, $7,300.

Partial business, partial personal expense

Ed runs an auto repair business out of the garage attached to his personal residence. How should he account for each of the following items? Electricity bills, $3,600. (Ed does not have separate electricity service to the garage.)

Partial business, partial personal nondeductible expense

Determine the concept, construct, or doctrine that provides the rationale for the treatment: Kerry is an employee of Ross Company. During the year, Ross withholds federal income taxes of $3,500 from her salary. Her tax liability for the year is only $3,200, so she receives a refund of $300.

Pay-as-you-go concept

Which of the following is considered a tax according to the IRS definition?

Payment of property taxes, which are used to fund the local school system

Determine the concept, construct, or doctrine that provides the rationale for the treatment: Lester purchases some stock for a total cost of $2,500. On December 31, 2018, the stock is worth $2,800. In August 2019, he sells the stock to his brother Rufus for $2,000. Lester has no income from the stock in 2018, and he is not allowed to deduct the $500 loss on the sale of the stock to Rufus in 2019.

Realization concept

Determine whether the taxpayer has realized income or not in each of the following situations. Eugene is a computer consultant. Rashid is an accounting professor. Rashid needs help installing new software on his home computer. Eugene offers to install the software if Rashid will help him set up the books for a new company he is forming. Eugene installs the software in December. Rashid sets up the books in February.

Realized in some form

Determine whether the taxpayer has realized income or not in each of the following situations. In November, Ira wins an all-expense-paid trip for two to the Super Bowl in January. He plans to take his best friend to the game. The estimated value of the trip is $4,300.

Realized in some form

Determine whether the taxpayer has realized income or not in each of the following situations. Sasha is an employee of Chasteen Hair Products. Chasteen provides all employees with free medical coverage. During the current year, the cost of Sasha's coverage is $1,900.

Realized in some form

Which are related and which are not related parties. Harvey and his grandfather Maurice

Related parties

Which are related and which are not related parties. Harvey and his sister Janice.

Related parties

Which are related and which are not related parties. Harvey and the Madison Partnership. Harvey owns a 60% interest in the partnership. Three of Harvey's friends own the remaining partnership interest.

Related parties

Which of the following statements regarding income taxes is true?

Taxpayers pay income taxes on a pay-as-you-go basis.

Tim has state income taxes of $4,500 withheld from his salary during 2018. On his 2018 federal income tax return, Tim properly deducts the $4,500 as state taxes paid. Upon filing his 2018 state income tax return, he determines that his actual state income tax for 2018 is only $3,900, and the state sends him a $600 refund. a. How should the $600 refund be treated?

Report the refund on the 2019 tax return.

Which of the following statements regarding sales tax is not true?

Sales tax is paid by the business where the goods or service are purchased.

Which of the following is a major type of tax in the United States?

Sales/excise tax

Andrew and Barbara each receive a salary of $80,000. Neither Andrew nor Barbara has any other source of income. During the current year, Barbara paid $800 more in tax than Andrew. What might explain why Barbara paid more tax than Andrew when they both have the same income? Respond to each of the following statements. a. Barbara's filing status may be _____, while Andrew's filing status may be _____.

Single; married filing jointly

Andrew and Barbara each receive a salary of $80,000. Neither Andrew nor Barbara has any other source of income. During the current year, Barbara paid $800 more in tax than Andrew. What might explain why Barbara paid more tax than Andrew when they both have the same income? Respond to each of the following statements. b. Barbara may not be able to exceed her _____, while Andrew has _____.

Standard deduction amount; itemized deductions

Tim has state income taxes of $4,500 withheld from his salary during 2018. On his 2018 federal income tax return, Tim properly deducts the $4,500 as state taxes paid. Upon filing his 2018 state income tax return, he determines that his actual state income tax for 2018 is only $3,900, and the state sends him a $600 refund. How would your answer change if Tim's actual state income tax is $4,900 and he has to pay $400 with his state return? a. How should the $400 be treated? _____ b. The additional taxes should be deducted in _____.

Take the deduction in the year paid.; 2019

Determine the concept, construct, or doctrine that provides the rationale for the treatment: The Parsnip Partnership is an accrual basis taxpayer. During 2018, Parsnip deducted as a bad debt expense a $5,000 account receivable that it determined it could not collect. In 2019, Parsnip receives a $1,000 payment on the account. Parsnip must include the $1,000 in its 2019 gross income.

Tax Benefit Rule

Tim has state income taxes of $4,500 withheld from his salary during 2018. On his 2018 federal income tax return, Tim properly deducts the $4,500 as state taxes paid. Upon filing his 2018 state income tax return, he determines that his actual state income tax for 2018 is only $3,900, and the state sends him a $600 refund. c. Under the _____, if Tim's itemized deductions in 2018 did not exceed his standard deduction, he would _____ his refund.

Tax benefit rule; not have to report

Andrew and Barbara each receive a salary of $80,000. Neither Andrew nor Barbara has any other source of income. During the current year, Barbara paid $800 more in tax than Andrew. What might explain why Barbara paid more tax than Andrew when they both have the same income? Respond to each of the following statements. c. Andrew may be better able to reduce his tax liability through qualifying _____ than Barbara.

Tax credits

Which of the following statements regarding tax planning and tax evasion is true?

Tax evasion is illegal and is subject to substantial penalties.

Which of the following statements regarding the AICPA's Statements on Standards for Tax Services is true?

The AICPA's Statements on Standards for Tax Services provides useful guidance for all tax preparers, even those who are not members of the AICPA.

When analyzing a transaction for its tax implications, the rate that applies to the next dollar of income is very important. Which of the following describes this rate?

The marginal tax rate

Taxable income

The tax base for the federal income tax. The difference between the total income of a taxpayer and the deductions allowed that taxpayer.

The Social Security tax is imposed on employees and self-employed individuals, with a current year cap for Medical Health Insurance (MHI) of

There is no cap for MHI.

Which of the following statements regarding tax planning with respect to timing and income shifting is true?

To make decisions involving timing, it is necessary to compare the tax effects of changes in marginal tax rates and the time value of money.

The business purpose concept allows deductions for which of the following type(s) of expenses?

Trade or business

The allowable deductions for adjusted gross income (AGI) include which of the following?

Trade or business expenses

Which of the following statements regarding tax planning and tax evasion is true?

Unintentional errors, such as a mathematical error on a tax return, are generally not considered to be tax evasion.

Which of the following statements regarding the IRS tax return selection process for audits is true?

Virtually all returns are checked for mathematical, calculation, and clerical errors during the initial processing of the returns.

Which of the following statements is not true?

When given an option, taxpayers must choose a method that will result in the highest tax liability.

Christie purchases a one-third interest in the Corporate Capital Partnership (CCP) in 2018 for $38,300. During 2018, CCP earns an income of $95,400, and Christie withdraws $28,400 in cash from the partnership. In 2019, CCP suffers a loss of $33,000, and Christie withdraws $10,800. What are the tax consequences for Christie of this investment in 2018 and 2019? Christie _____ her share of the partnership income, $_____ in 2018 and deduct her share of the partnership _____, $_____ in 2019.

Will include; 31,800; loss; 11,000

Which of the following are based on an ability to pay? Select either "yes" or "no" to denote which apply to this concept. b. State X collects a sales tax of 5% on all purchases of goods and services but gives low-income families a tax credit for sales taxes.

Yes

Aiko, Lani, and Charlie own the 3-Star Partnership, sharing profits and losses 19:45:36. During the current year, 3-Star has total gross income of $451,900 and total allowable deductions of $303,500. What is the reportable income for each of the taxpayers listed? a. 3-Star Partnership b. Aiko c. Lani d. Charlie

a. 3-Star Partnership $148,400 b. Aiko $ 28,196 c. Lani $ 66,780 d. Charlie $ 53,424

Wendy owns 20% of the common stock of Britton Company. During the current year, Britton reported a taxable income of $104,600 and paid $39,800 in cash dividends. What are the income tax effects for Wendy of her investment in Britton Company if Britton is organized as a. A corporation? b. An S corporation?

a. A corporation? $7,960 of taxable income b. An S corporation? $20,920 of taxable income, $7,960 nontaxable income

The annual accounting period states that

all entities must report the results of their operations on an annual basis and that each taxable year is to stand on its own, apart from other years.

The all-inclusive income concept states that

all income received is considered taxable unless some specific provision can be found in the tax law that excludes the item in question from taxation.

Under the business purpose concept,

an expenditure that is made for some business or economic purpose that exceeds any tax avoidance motive is allowed as a deduction.

The wherewithal-to-pay concept

applies to both cash basis and accrual basis taxpayers.

The administrative convenience concept

applies to items of income and deductions.

A doctrine is a(n)

construct that has been developed by the courts.

Medical expenses are

deductible in excess of 7.5% of AGI.

Under the legislative grace concept,

deductions are allowed only if Congress can grant an exclusion from income, and the exclusion must be taken in its narrowest sense.

Tax return preparers may be penalized for all of the following except

disclosure of relevant facts concerning the tax treatment of a transaction.

The entity concept states that

each tax unit must keep separate records and report the results of its operations separate and apart from other tax units.

For capital assets, gains or losses are recognized

only after determining the asset basis.

The four general rules of thumb when planning the timing of income and deductions include all of the following except

put income into the year with the highest expected marginal tax rate.

Deductions from adjusted gross income (AGI) are

referred to as itemized deductions.

The pay-as-you-go concept

requires that taxpayers pay tax as they generate income.

The legislative grace concept

states that Congress can provide tax relief in the form of exclusions from income.

Allowable deductions FROM adjusted gross income (AGI) include

the greater of the standard deduction or the itemized deduction.