ACCT 3305 Quizzes (Ch. 1-8)

Benita incurred a business expense on December 10, 2018, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2019. Which of the following is correct? a.If Benita is a cash method taxpayer, she cannot deduct the expense until 2019. b.If Benita uses the accrual method, she can choose to deduct the expense in either 2018 or 2019. c.If Benita is an accrual method taxpayer, she can deduct the expense in 2018. d.Only "If Benita is an accrual method taxpayer, she can deduct the expense in 2018" and "If Benita uses the accrual method, she can choose to deduct the expense in either 2018 or 2019" are correct. e."If Benita is a cash method taxpayer, she cannot deduct the expense until 2019", "If Benita is an accrual method taxpayer, she can deduct the expense in 2018", and "If Benita uses the accrual method, she can choose to deduct the expense in either 2018 or 2019" are correct.

c.If Benita is an accrual method taxpayer, she can deduct the expense in 2018. "If Benita is a cash method taxpayer, she cannot deduct the expense until 2019" is incorrect because charging the expense on a bank credit card is treated as a constructive payment. Thus, as a cash method taxpayer, she can deduct the expense in 2018. If Benita uses the accrual method, she deducts the expense in 2018. In any event, she does not merely choose the year in which to deduct the expense ("If Benita uses the accrual method, she can choose to deduct the expense in either 2018 or 2019").

Jerry purchased a U.S. Series EE savings bond for $744. The bond has a maturity value in 10 years of $1,000 and yields 3% interest. This is the first Series EE bond that Jerry has ever owned. a.Jerry can report all of the $256 as a capital gain in the year it matures. b.The interest on the bonds is exempt from Federal income tax. c.Jerry can defer the interest income until the bond matures in 10 years. d.Jerry must report ($1,000 - $744)/10 = $25.60 interest income each year he owns the bond. e.None of these choices are correct.

c.Jerry can defer the interest income until the bond matures in 10 years. The original issue discount (OID) on the Series EE bonds is not subject to the OID rules. However, the income is interest, rather than gain from the sale of a capital asset.

A use tax is imposed by: a.All states and not the Federal government. b.The Federal government and a majority of the states. c.Most of the states and not the Federal government. d.The Federal government and all states. e.None of these choices are correct.

c.Most of the states and not the Federal government. A use tax is a complement to a general sales tax. Consequently, it is imposed by most states because only a few states do not have a general sales tax. At this point, the Federal government has no general sales tax.

Which, if any, is not one of Adam Smith's canons (principles) of taxation? a.Convenience of payment b.Economy in collection c.Simplicity d.Certainty e.Equality

c.Simplicity

Which, if any, of the following taxes are proportional (rather than progressive)? a.Federal individual income tax b.Federal estate tax c.State general sales tax d.Federal gift tax e.All of these choices are correct.

c.State general sales tax Sales taxes are applied at a constant rate that does not progress.

Teal company is an accrual basis taxpayer. On December 1, 2018, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2019. Teal delivered the item on January 4, 2019. Teal included the sale in its 2018 income for financial accounting purposes. a.Teal can elect to recognize the income in either 2018 or 2019. b.Teal must recognize the income in the year title to the goods passed to the customer, as determined under the state laws in which the store is located. c.Teal must recognize the income in 2018. d.Teal must recognize the income in 2019. e.None of these choices are correct.

c.Teal must recognize the income in 2018. An accrual method taxpayer generally obtains no more deferral for tax than is allowed for financial reporting purposes.

Maroon Corporation expects the employees' income tax rates to increase next year. The employees use the cash method. The company presently pays on the last day of each month. The company is considering changing its policy so that the December salaries will be paid on the first day of the following year. What would be the effect on an employee of the proposed change in company policy for paying its salaries beginning December 2018? a.The employee can elect to either include the pay in 2018 or 2019. b.The employee would be required to recognize the income in December 2018 because it is constructively received at the end of the month. c.The employee will not be required to recognize the income until it is received, in 2019. d.The employee would be required to recognize the income in December 2018 because the employee has a claim of right to the income when it is earned. e.None of these choices are correct.

c.The employee will not be required to recognize the income until it is received, in 2019. The cash basis employees do not recognize the income until it is actually or constructively received. If the employer will not pay until January 2019, the employee has not constructively received the income in 2018, nor has the employee received the income under a claim of right in that year.

As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children. The scholarships are paid by the company on behalf of the children of key employees directly to each child's educational institution and are payable only if the student maintains a B average. a.The tuition payments of $30,000 may be excluded from Ollie's gross income because the payments are for the academic achievements of the children. b.The tuition payments of $30,000 may be excluded from Ollie's gross income as a scholarship. c.The tuition payments of $30,000 must be included in Ollie's gross income. d.The tuition payments of $10,000 each must be included in the child's gross income. e.None of these choices are correct.

c.The tuition payments of $30,000 must be included in Ollie's gross income. The tuition payments of $30,000 are compensation to Ollie since the awards are only to children of key employees.

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2018. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2019. Ashley was required to pay the first and last month's rent at the time the lease was signed. Ashley was also required to pay a $1,500 damage deposit. Office Palace must recognize as income for the lease: a.$7,800 in 2019, if Office Palace is a cash basis taxpayer. b.$2,700 in 2018, if Office Palace is a cash or accrual basis taxpayer. c.$0 in 2018, if Office Palace is an accrual basis taxpayer. d.$1,200 in 2018, if Office Palace is a cash or accrual basis taxpayer. e.None of these choices are correct

d.$1,200 in 2018, if Office Palace is a cash or accrual basis taxpayer. The company is required to recognize the $1,200 (January 2018 and December 2021 rent) in 2018 because prepaid income from rents is ineligible for deferral. The damage deposit of $1,500 is not income.

Olaf was injured in an automobile accident and received $25,000 for his physical injury, $50,000 for his loss of income, and $10,000 punitive damages. As a result of the award, the amount Olaf must include in gross income is: a.$60,000. b.$50,000. c.$85,000. d.$10,000. e.None of these choices are correct.

d.$10,000. Punitive damages are never excluded from gross income.

Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2018, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2018, Rex had the following expenses: Operating expenses in conducting bingo games $247,000 Payoff money to state and local police 24,000 Newspaper ads supporting H.R. 93,000 Political contributions to legislators who support H.R. 98,000 Of these expenditures, Rex may deduct: a.$282,000. b.$258,000. c.$250,000. d.$247,000. e.None of these choices are correct.

d.$247,000. Rex can deduct only the $247,000 of operating expenses.

Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award: a.$120,000. b.$0. c.$100,000. d.$270,000. e.None of these choices are correct.

d.$270,000. None of the damages received were the result of a physical personal injury or sickness and therefore the total amount received must be included in gross income. Even if the damages were the result of physical personal injury, the punitive damages would be included in his gross income.

Jena is a full-time undergraduate student at State University and qualifies as a dependent of her parents. Her only source of income is a $10,000 athletic scholarship ($1,000 for books, $5,500 tuition, $500 student activity fee, and $3,000 room and board). Jena's gross income for the year is: a.$10,000. b.$500. c.$4,000. d.$3,000. e.None of these choices are correct.

d.$3,000. The portion included in gross income is $3,000 for room and board. The books ($1,000), tuition ($5,500), and student activity fee ($500) qualify for exclusion. The fact that the scholarship is received for athletic, rather than academic, achievement is irrelevant, because the payments are to further the student's education.

Barney is a full-time graduate student at State University. He serves as a teaching assistant for which he is paid $700 per month for 9 months and his $5,000 tuition is waived. The university waives tuition for all of its employees. In addition, he receives a $1,500 research grant to pursue his own research and studies. Barney's gross income from the above is: a.$0. b.$12,800. c.$11,300. d.$6,300. e.None of these choices are correct.

d.$6,300. The monthly stipend of $700 (for 9 months = $6,300) for teaching is taxable compensation. The research grant of $1,500 is to assist him in his education and is not in exchange for services; therefore, the grant is a nontaxable scholarship. The tuition waiver is excluded as a qualified tuition reduction program.

A qualifying child cannot include: a.A brother who is 28 years of age and disabled. b.A daughter who is away at college. c.A married son who files a joint return. d.A grandmother. e.A nonresident alien.

d.A grandmother. A grandmother does not meet the relationship test ("A grandmother"). A qualifying child can be a nonresident alien under the adopted child exception ("A nonresident alien"). The filing of a joint return is not fatal if filing is not required and its purpose is to obtain a tax refund ("A married son who files a joint return"). A temporary absence is permissible under the domicile test ("A daughter who is away at college"). A brother meets the relationship test, and disability waives the age test ("A brother who is 28 years of age and disabled").

Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each year, the employer contributes $1,500 to each employee's health savings account (HSA). Matilda's employer made the contributions in 2017 and 2018, and the account earned $100 interest in 2018. At the end of 2018, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2018 gross income: a.$0. b.$3,100. c.$100. d.$1,600. e.None of these choices are correct.

a.$0. With a health savings account (HSA), the employee is not taxed when the money is contributed, as income is earned in the account, or when amounts are withdrawn to pay for medical expenses.

Christie sued her former employer for a back injury she suffered on the job in 2018. As a result of the injury, she was partially disabled. In 2019, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2018 return, reducing her taxable income by $12,000. Christie's 2019 gross income from the above is: a.$172,000. b.$175,000. c.$255,000. d.$415,000. e.$412,000.

a.$172,000. Christie must include in gross income the $160,000 of punitive damages received and the $12,000 for the previously deducted medical expenses. The medical expense recovery is included in gross income under the tax benefit rule.

Julie was suffering from a viral infection that caused her to miss work for 90 days. During the first 30 days of her absence, she received her regular salary of $8,000 from her employer. For the next 60 days, she received $12,000 under an accident and health insurance policy purchased by her employer. The premiums on the health insurance policy were excluded from her gross income. During the last 30 days, Julie received $6,000 on an income replacement policy she had purchased. Of the $26,000 she received, Julie must include in gross income: a.$20,000. b.$6,000. c.$14,000. d.$8,000. e.$0.

a.$20,000. The $6,000 received under the accident and income replacement policy Julie purchased is excluded from her gross income.

Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($600 per year), or two years in advance ($960). In September 2018, the company collected the following amounts applicable to future services: October 2018-September 2020 services (200 two-year contracts): $192,000 October 2018-September 2019 services (200 one-year contracts): $120,000 Total: $312,000 As a result of the above, Orange Cable should report as gross income for 2019: a.$258,000. b.$312,000. c.$54,000. d.$78,000. e.None of these choices are correct.

a.$258,000. For financial reporting purposes, Orange will report 3 months of each of these contracts in 2018: Two-year contracts: 200 x 3 months x $40 $24,000 One-year contracts: 200 x 3 months x $50 30,000 Total revenue for 2018 $54,000 Under the income deferral rule for an accrual method taxpayer (Rev. Proc. 2004-34; replaced by § 451(c) by the TCJA of 2017), the balance of the prepaid income must be reported in the subsequent year ($312,000 - $54,000 = $258,000).

During 2018, Sandeep had the following transactions: Salary$ 80,000 Interest income on City of Baltimore bonds1,000 Damages for personal injury (car accident)100,000 Punitive damages (same car accident)200,000Cash dividends from Chevron Corporation stock7,000 Sandeep's AGI is: a.$287,000. b.$187,000. c.$285,000. d.$387,000. e.$185,000.

a.$287,000. $80,000 (salary) + $200,000 (punitive damages) + $7,000 (cash dividends) = $287,000. The damages from personal injury and the municipal bond interest are nontaxable exclusions.

Ron, age 19, is a full-time graduate student at City University. During 2018, he received the following payments: Cash award for being the outstanding resident adviser $ 1,500 Resident adviser housing 2,500 State scholarship for ten months (tuition and books) 6,000 State scholarship (meals allowance) 2,400 Loan from college financial aid office 3,000 Cash support from parents 2,000 $17,400 Ron served as a resident adviser in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied. What is Ron's adjusted gross income for 2018? a.$3,900. b.$9,000. c.$15,400. d.$1,500. e.None of these choices are correct.

a.$3,900. The $1,500 award for being the outstanding resident adviser is included in Ron's gross income. The $2,400 meal allowance must also be included in Ron's gross income. The $2,500 waiver for housing is not included in Ron's gross income because the housing is provided for the convenience of his employer. The $6,000 scholarship for tuition and books is excluded from his gross income. The loan of $3,000 is not income.

The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has received 40 hours of services, Green charges $500 per hour. Green Company allocates the retainer to income based on the number of hours worked on the contract. At the end of the tax year for contracts entered into for the current year, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received this year from excess office space leased to other companies. Based on the above, Green must include in gross income for the subsequent tax year: a.$50,000. b.$10,000. c.$60,000. d.$0. e.None of these choices are correct.

a.$50,000. The prepaid income from services not reported in the year received must all be reported in the next year for tax purposes. The prepaid income from rents is not eligible for deferral.

Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income: a.$700,000. b.$500,000. c.$490,000 [($700,000/$1,000,000) × $700,000]. d.$0. e.None of these choices are correct.

a.$700,000. The damages did not arise out of a physical personal injury; therefore, none of the amount received can be excluded from gross income.

The Maroon & Orange Gym, Inc., uses the accrual method of accounting. The corporation sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $480 ($480/12 = $40 per month); a two-year membership costs $720 ($720/24 = $30 per month). Cash payment is required at the beginning of the membership period. On July 1, 2018, the company sold a one-year membership and a two-year membership. For financial reporting purposes, Maroon reports the membership income ratably over the number of months involved. The company should report as gross income from the two contracts: a.$780 in 2019. b.$960 in 2018. c.$1,200 in 2018. d.$180 in 2020. e.None of these choices are correct.

a.$780 in 2019. The accrual basis taxpayer can prorate the income from services in the first year, but must include the balance of the income on the contract in the following year. For the one-year membership, $240 was reported in 2018 ($40 x 6). For the two-year membership, $180 was reported in 2018 ($30 x 6). The balance of the contracts is reported in 2019 ($480 + $720 - $240 - $180 = $780).

In 2018, Nai-Yu had the following transactions: Salary$90,000 Short-term capital gain from a stock investment4,000 Moving expense to change jobs(11,000) Received repayment of $20,000 loan she made to her sister in 2014 (includes no interest)20,000 State income taxes(5,000) Nai-Yu's AGI is: a.$94,000. b.$83,000. c.$98,000. d.$103,000. e.$114,000.

a.$94,000. $90,000 (salary) + $4,000 (gain on stock investment) = $94,000. The loan repayment of $20,000 is a return of capital and has no effect on gross income. The moving expenses are not deductible. State income taxes paid are a deduction from AGI (or a standard deduction) and has no impact on the determination of AGI.

Which, if any, of the following transactions will increase a taxing jurisdiction's revenue from the ad valorem tax imposed on real estate? a.A tax holiday issued 10 years ago has expired. b.A resident dies and leaves his farm to his church. c.A bankrupt motel is acquired by the Red Cross and is to be used to provide housing for homeless persons. d.A large property owner issues a conservation easement as to some of her land. e.None of these choices are correct.

a.A tax holiday issued 10 years ago has expired. Although a farm was probably subject to reduced valuation (due to its agricultural use), it will now be fully exempt since it is owned by a church ("A resident dies and leaves his farm to his church"). Property that is subject to a conservation easement is usually appraised at a lower value ("A large property owner issues a conservation easement as to some of her land"). The expiration of a tax holiday means that the property involved can now be taxed ("A tax holiday issued 10 years ago has expired"). The motel has been converted from business property to exempt charitable use ("A bankrupt motel is acquired by the Red Cross and is to be used to provide housing for homeless persons").

On November 1, 2018, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2018, the corporation had declared the dividend payable to shareholders of record as of November 22, 2018. The dividend was paid on December 15, 2018. The corporation has paid the $1,200 dividend once each year for the past ten years, during which Bob owned the stock. When Dave collected the dividend on December 15, 2018: a.Bob must include all of the dividend in his gross income. b.Bob must include $1,000 (10/12 x $1,200) of the dividend in his gross income. c.Dave must include all of the dividend in his gross income. d.Dave should treat the $1,200 as a recovery of capital. e.None of these choices are correct.

a.Bob must include all of the dividend in his gross income. Dave received the stock as a gift. According to the Tax Court, when the donor makes the gift after the declaration but prior to the record date, the dividend is included in the gross income of the donor.

The exclusion for health insurance premiums paid by the employer applies to: a.Current employees, retired former employees, and their spouses and dependents. b.Only current employees and their spouses. c.Only current employees and their disabled spouses. d.Only current employees and their spouses and dependents. e.None of these choices are correct.

a.Current employees, retired former employees, and their spouses and dependents.

Daniel purchased a bond on July 1, 2018, at par of $10,000 plus accrued interest of $300. On December 31, 2018, Daniel collected the $600 interest for the year. On January 1, 2019, Daniel sold the bond for $10,200. a.Daniel must recognize $300 interest income for 2018 and a $200 gain on the sale of the bond in 2019. b.Daniel must recognize $600 interest income for 2018 and a $200 gain on the sale of the bond in 2019. c.Daniel must recognize $600 interest income for 2018 and a $100 loss on the sale of the bond in 2019. d.Daniel must recognize $300 interest income for 2018 and a $100 loss on the sale of the bond in 2019. e.None of these choices are correct.

a.Daniel must recognize $300 interest income for 2018 and a $200 gain on the sale of the bond in 2019. The $600 collected consists of $300 of gross income for the interest earned from July 1 through December 31 and $300 of accrued interest that was purchased. The cost of the bond was $10,000; thus Daniel has a $200 gain ($10,200 - $10,000) on the sale.

Harpreet, whose husband died in December 2017, maintains a household in which her dependent mother lives. Which (if any) of the following is her filing status for the tax year 2018? (Note: Harpreet is the executor of her husband's estate.) a.Head of household b.Married, filing jointly c.Single d.Surviving spouse e.Married, filing separately

a.Head of household She does not qualify for surviving spouse status in 2018.

Ben was diagnosed with a terminal illness. His physician estimated that Ben would live no more than 18 months. After he received the doctor's diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died. Ben had paid $12,000 in premiums on the policy, and he collected $50,000, the cash surrender value of the policy. Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home. He had paid premiums of $12,000 and collected $50,000 from the insurance company. a.Henry must recognize $38,000 ($50,000 - $12,000) of gross income, but Ben does not recognize any gross income. b.Neither Ben nor Henry is required to recognize gross income. c.Ben must recognize $38,000 ($50,000 - $12,000) of gross income, but Henry does not recognize any gross income. d.Both Ben and Henry must recognize $38,000 ($50,000 - $12,000) of gross income. e.None of these choices are correct.

a.Henry must recognize $38,000 ($50,000 - $12,000) of gross income, but Ben does not recognize any gross income. The redemption of the policy by Ben qualifies as an accelerated death benefit paid to a terminally ill policy holder. The exclusion applies regardless of how the insurance proceeds are used. Thus, the realized gain of $38,000 is excluded from Ben's gross income.

During 2017, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2018. What is the amount of the deduction for salary expense? a.If Silver uses the accrual method, $195,000 in 2017 and $0 in 2018. b.If Silver uses the cash method, $0 in 2017 and $195,000 in 2018. c.If Silver uses the accrual method, $175,000 in 2017 and $20,000 in 2018. d.If Silver uses the cash method, $175,000 in 2017 and $0 in 2018. e.None of these choices are correct.

a.If Silver uses the accrual method, $195,000 in 2017 and $0 in 2018.

A VAT (value added tax): a.Is regressive in its effect. b.Is used exclusively by third world (less developed) countries. c.Is not a tax on consumption. d.Has not proved popular outside of the U.S. e.None of these choices are correct.

a.Is regressive in its effect. Both the VAT and a general sales tax are taxes on consumption ("Is not a tax on consumption") and are regressive in effect ("Is regressive in its effect"). The VAT has been adopted by many countries ("Has not proved popular outside of the U.S."), many of which (e.g., Japan, Denmark) are not third world countries ("Is used exclusively by third world (less developed) countries").

On January 5, 2018, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2018, he gave the bond to Jane. The bond pays $1,800 interest on December 31. Tim and Jane are cash basis taxpayers. When Jane collects the interest in December 2018: a.Jane reports $1,350 of interest income in 2018, and Tim reports $450 of interest income in 2018. b.Tim must include all of the interest in his gross income. c.Jane must report $1,800 gross income for 2018. d.Jane reports $450 of interest income in 2018, and Tim reports $1,350 of interest income in 2018. e.None of these choices are correct.

a.Jane reports $1,350 of interest income in 2018, and Tim reports $450 of interest income in 2018. Tim held the bond for 3 months before he gave it to Jane, who held the bond for the other 9 months that the interest accrued. Therefore, Tim must recognize $450 (3/12 × $1,800), and Jane must recognize $1,350 (9/12 × $1,800).

Payments by a cash basis taxpayer of capital expenditures: a.Must be deducted over the actual or statutory life of the asset. b.Must be expensed by the end of the first year after the asset is acquired. c.Can be deducted in the year the taxpayer chooses. d.Must be expensed at the time of payment. e.None of these choices are correct.

a.Must be deducted over the actual or statutory life of the asset. Both cash basis and accrual basis taxpayers are required to recover the cost of capital assets through amortization, depletion, or depreciation over the actual or statutory life of the asset.

Natalie is married to Chad, who abandoned her in early June of 2018. She has not seen or communicated with him since then. She maintains a household in which she and her two dependent children live. Which of the following statements about Natalie's filing status in 2018 is correct? a.Natalie can file as a head of household. b.Natalie can use the rates for single taxpayers. c.Natalie can file as a surviving spouse. d.Natalie can file a joint return with Chad. e.None of these statements is appropriate.

a.Natalie can file as a head of household. Natalie meets the "abandoned spouse" rules. Therefore, she can file as a head of household.

State income taxes generally can be characterized by: a.The same date for filing as the Federal income tax. b.Allowance of a deduction for Federal income taxes paid. c.Applying only to individuals and not applying to corporations. d.No provision for withholding procedures. e.None of these choices are correct.

a.The same date for filing as the Federal income tax.

Which, if any, of the following is a typical characteristic of an ad valorem tax on personalty? a.The tax on automobiles sometimes considers the age of the vehicle. b.Taxpayer compliance is greater for personal use property than for business use property. c.Most states impose a tax on intangibles. d.The tax on intangibles generates considerable revenue since it is difficult for taxpayers to avoid. e.None of these choices are correct.

a.The tax on automobiles sometimes considers the age of the vehicle. Taxpayer compliance is greater with business use property ("Taxpayer compliance is greater for personal use property than for business use property"). Very few states impose a tax on intangibles ("Most states impose a tax on intangibles") because it is easily avoided and does not generate much revenue ("The tax on intangibles generates considerable revenue since it is difficult for taxpayers to avoid").

Regarding the rules applicable to filing of income tax returns, which, if any, of the following is an incorrect statement: a.The usual test as to when a taxpayer must file a return is based on the total of the following: personal exemption + basic standard deduction + both additional standard deductions. b.Married persons who file separate returns can later (after the due date of the return) substitute a joint return. c.Special filing requirement rules exist for taxpayers who are claimed as dependents of another. d.Married persons who file joint returns cannot later (after the due date of the return) substitute separate returns. e.None of these choices are correct.

a.The usual test as to when a taxpayer must file a return is based on the total of the following: personal exemption + basic standard deduction + both additional standard deductions. "The usual test as to when a taxpayer must file a return is based on the total of the following: personal exemption + basic standard deduction + both additional standard deductions" would be correct if it included only the additional standard deduction for age, as that for blindness is not considered.

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2014, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2018, she sold the bond for $9,800, which included $200 of accrued interest. a.Theresa has $200 interest income and a $400 loss from the bond in 2018. b.Theresa has a $100 loss from the sale of the bond and no interest income. c.Theresa has $200 interest income and a $200 gain from the bond in 2018. d.Theresa's loss on the sale of the bond is $600. e.None of these choices are correct.

a.Theresa has $200 interest income and a $400 loss from the bond in 2018. The cost of the bond was $10,000 and the proceeds from the sale were $9,600 ($9,800 - $200 accrued interest). Therefore, Theresa had a $400 ($9,600 - $10,000) loss from the sale, and $200 of interest income.

Property can be transferred within the family group by gift or at death. One motivation for preferring the gift approach is: a.To take advantage of the per donee annual exclusion. b.To shift income to higher bracket donees. c.To avoid a future decline in value of the property transferred. d.To take advantage of the higher unified transfer tax credit available under the gift tax. e.None of these choices are correct.

a.To take advantage of the per donee annual exclusion. The per donee annual exclusion is only available for gift tax purposes ("To take advantage of the per donee annual exclusion"). Ideally, gifts should involve property that is expected to appreciate in value ("To avoid a future decline in value of the property transferred"). A higher unified tax credit is not available for gift tax purposes ("To take advantage of the higher unified transfer tax credit available under the gift tax"). Usually the donor is trying to shift future income to lower bracket donees ("To shift income to higher bracket donees").

Turquoise Company purchased a life insurance policy on the company's chief executive officer, Joe. After the company had paid $400,000 in premiums, Joe died and the company collected the $1.5 million face amount of the policy. The company also purchased group term life insurance on all its employees. Joe had included $16,000 in gross income for the group term life insurance premiums. Joe's widow, Rebecca, received the $100,000 proceeds from the group term life insurance policy. a.Turquoise Company and Rebecca can exclude the life insurance proceeds of $1,500,000 and $100,000, respectively, from gross income. b.Turquoise Company can exclude $1,100,000 ($1,500,000 - $400,000) from gross income, but Rebecca must include $84,000 in gross income. c.Rebecca can exclude the life insurance proceeds of $100,000, but Turquoise Company must include $1,100,000 ($1,500,000 - $400,000) in gross income. d.Turquoise Company must include $1,100,000 ($1,500,000 - $400,000) in gross income and Rebecca must include $100,000 in gross income. e.None of these choices are correct.

a.Turquoise Company and Rebecca can exclude the life insurance proceeds of $1,500,000 and $100,000, respectively, from gross income. All of the proceeds qualify for the life insurance exclusion because the payments were received as a result of the death of the insured.

Millie, age 80, is supported during the current year as follows: Percent of Support Weston (a son) 20% Faith (a daughter) 35% Jake (a cousin) 25% Brayden (unrelated close family friend) 20% During the year, Millie lives in an assisted living facility. Under a multiple support agreement, indicate which parties can qualify to claim Millie as a dependent. a.Weston and Faith. b.Faith. c.Weston, Faith, Jake, and Brayden. d.Faith, Jake, and Brayden. e.None of these choices are correct.

a.Weston and Faith. Weston and Faith are the only persons who appear to qualify ("Weston and Faith"). They qualify because they contribute more than 10% of the support. Jake does not qualify because he satisfies neither the relationship nor member of the household tests. (This eliminates "Weston, Faith, Jake, and Brayden" and "Faith, Jake, and Brayden") Brayden does not meet the relationship test, and he does not satisfy the member of the household test. For a multiple support agreement to be effective, the qualifying individuals collectively must provide greater than 50% of the support.

Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2018, the following occur associated with bad debts. Credit sales $400,000 Collections on credit sales 250,000 Amount added to the reserve 10,000 Beginning balance in the reserve -0- Identifiable bad debts during 2018 12,000 The amount of the deduction for bad debt expense for Petal for 2018 is: a.$10,000. b.$12,000. c.$140,000. d.$22,000. e.None of these choices are correct.

b.$12,000. Only the specific charge-off method can be used. Reserves for estimated expenses are not allowed for tax purposes because the economic performance test cannot be satisfied.

Burt and Lisa are married and live in a common law state. Burt wants to make gifts to their four children in 2018. What is the maximum amount of the annual exclusion they will be allowed for these gifts? a.$15,000. b.$120,000. c.$60,000. d.$30,000. e.None of these choices are correct.

b.$120,000. 4 (number of donees) × $15,000 (annual exclusion) × 2 (number of donors) = $120,000. It is assumed that Lisa will make the election to split the gifts.

Ayla, age 17, is claimed by her parents as a dependent. During 2018, she had interest income from a bank savings account of $2,000 and income from a part-time job of $4,200. Ayla's taxable income is: a.$4,200 - $4,550 = $0. b.$6,200 - $4,550 = $1,650. c.$6,200 - $1,000 = $5,200. d.$6,200 - $5,700 = $500. e.None of these choices are correct.

b.$6,200 - $4,550 = $1,650. Ayla's standard deduction is $4,200 (earned income) + $350 = $4,550. Thus, her taxable income is $1,650 ($6,200 - $4,550).

In which, if any, of the following situations may the individual not be claimed as a dependent of the taxpayer? a.A stepmother who does not live with the taxpayer. b.A married daughter who lives with the taxpayer. c.A former spouse who lives with the taxpayer (divorce took place last year). d.A half-brother who does not live with the taxpayer and is a citizen and resident of Honduras. e.A cousin who lives with the taxpayer.

d.A half-brother who does not live with the taxpayer and is a citizen and resident of Honduras. Except in the year of divorce, a former spouse can qualify under the member of the household test ("A former spouse who lives with the taxpayer (divorce took place last year)"). The stepmother meets the relationship test ("A stepmother who does not live with the taxpayer"). A married daughter can be claimed as long as she does not violate the joint return test ("A married daughter who lives with the taxpayer"). In the case of the half brother, only being a citizen or resident of the U.S. can satisfy the residency test ("A half-brother who does not live with the taxpayer and is a citizen and resident of Honduras"). A cousin does not satisfy the relationship test so must be a member of the household ("A cousin who lives with the taxpayer").

Which of the following is a required test for the deduction of a business expense? a.Necessary b.Reasonable c.Ordinary d.All of these choices are correct. e.None of these choices are correct.

d.All of these choices are correct.

Regarding the Tax Tables applicable to the Federal income tax, which of the following statements is correct? a.The Tax Tables can be used by an estate but not by a trust. b.Taxpayers can elect as to whether the use the Tax Tables or the Tax Rate Schedules. c.The Tax Tables will always yield the same amount of tax as the Tax Rate Schedules. d.For any one year, the Tax Tables are issued by the IRS after the Tax Rate Schedules. e.No correct answer given.

d.For any one year, the Tax Tables are issued by the IRS after the Tax Rate Schedules. In any one year, the Tax Rate Schedules are issued after the Tax Tables ("For any one year, the Tax Tables are issued by the IRS after the Tax Rate Schedules"). Because of the way the Tables are structured, a minor variation in the tax can occur ("The Tax Tables will always yield the same amount of tax as the Tax Rate Schedules"). Where applicable, the Schedules must be used and taxpayers do not have an election ("Taxpayers can elect as to whether the use the Tax Tables or the Tax Rate Schedules"). The Tax Tables cannot be used by either an estate or trust ("The Tax Tables can be used by an estate but not by a trust").

All employees of United Company are covered by a group hospitalization insurance plan, but the employees must pay the premiums ($8,000 for each employee). None of the employees has sufficient medical expenses to deduct the premiums. Instead of giving raises next year, United is considering paying the employee's hospitalization insurance premiums. If the change is made, the employee's after-tax and insurance pay will: a.Decrease by the same amount for all employees. b.Increase more for the lower paid employees (10% and 12% marginal tax bracket). c.Increase by the same amount for all employees. d.Increase more for the higher income (35% marginal tax bracket) employees. e.None of these choices are correct.

d.Increase more for the higher income (35% marginal tax bracket) employees. Each employee's income, less taxes and insurance, would increase by the cost of insurance times the employee's marginal tax rate. The employees who are in the higher tax brackets will benefit more from the change than the employees in the lower tax brackets.u

The proposed flat tax: a.Would increase the number of deductions available to individuals. b.Would not require individuals to file returns. c.Would tax the increment in value as goods move through the production and manufacturing stages to the marketplace. d.Is a type of consumption tax. e.None of these choices are correct.

d.Is a type of consumption tax. There is only a single rate. The tax base is simplified by taxing only limited types of income. Many deductions and credits would be eliminated, which results in the tax being more of a form of consumption tax when considering how the individual and business tax systems operate.

The annual increase in the cash surrender value of a life insurance policy: a.Is exempt because it is life insurance proceeds. b.Is taxed according to the original issue discount rules. c.Reduces the deduction for life insurance expense. d.Is not included in gross income because the policy must be surrendered to receive the cash surrender value. e.None of these choices are correct.

d.Is not included in gross income because the policy must be surrendered to receive the cash surrender value. The substantial restrictions on gaining access to the policy, the fact the taxpayer must cancel the policy means that the increase in value is not actually or constructively received.

Mike contracted with Kram Company, Mike's controlled corporation. Mike was a medical doctor and the contract provided that he would work exclusively for the corporation. No other doctor worked for the corporation. The corporation contracted to perform an operation for Rosa for $8,000. The corporation paid Mike $6,500 to perform the operation under the terms of his employment contract. a.Mike must recognize the $8,000 gross income because he provided the service. b.Mike must recognize $8,000 gross income since the patient obviously wanted him to perform the operation. c.The Kram Company corporation's gross income is $1,500. d.Mike's gross income is $6,500. e.None of these choices are correct.

d.Mike's gross income is $6,500. Mike is an employee of Kram Company. Thus, Kram Company is taxed on the $8,000 income from the services provided by Mike to the patient. Mike is taxed on the $6,500 of compensation received from Kram.

Which of the following legal expenses are deductible for AGI in 2018? a.Incurred in connection with a trade or business. b.Incurred for tax advice relative to the preparation of an individual's income tax return. c.Incurred in connection with rental or royalty property held for the production of income. d.Only "Incurred in connection with a trade or business" and "Incurred in connection with rental or royalty property held for the production of income" qualify. e."Incurred in connection with a trade or business", "Incurred in connection with rental or royalty property held for the production of income", and "Incurred for tax advice relative to the preparation of an individual's income tax return" qualify.

d.Only "Incurred in connection with a trade or business" and "Incurred in connection with rental or royalty property held for the production of income" qualify. Expenses paid in 2018 for tax advice relative to the preparation of an individual's income tax return are not deductible.

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit: a.The OID will be included in gross income for the year of purchase. b.All of the income must be recognized in the year of maturity by a cash basis taxpayer. c.The interest income will be the same each year. d.The interest income will be greater in the third year than in the first year. e.None of these choices are correct.

d.The interest income will be greater in the third year than in the first year. The OID is amortized using the effective interest rate method. Because the principal amount is increased each year by the amount of the OID which is amortized, the total interest income increases each year. Thus, "All of the income must be recognized in the year of maturity by a cash basis taxpayer", "The OID will be included in gross income for the year of purchase", "The interest income will be the same each year" are incorrect.

Evan and Eileen Carter are husband and wife and file a joint return for 2018. Both are under 65 years of age. They provide more than half of the support of their daughter, Pamela (age 25), who is a full-time medical student. Pamela receives a $5,000 scholarship covering her tuition at college. They furnish all of the support of Belinda (Evan's grandmother), who is age 80 and lives in a nursing home. They also support Peggy (age 66), who is a friend of the family and lives with them. How many dependents may the Carters claim? a.One b.Two c.None d.Three

d.Three Three (Pamela, Belinda, and Peggy). Pamela is not a qualifying child—although a full-time student, she is not under age 24. Pamela does meet the qualifying relative category as the type of scholarship aid she receives is nontaxable (the gross income test is satisfied). Belinda is not a member of the household but satisfies the relationship test. Peggy does not satisfy the relationship test but is a member of the household.

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for: a.Tuition, books, supplies, meals, and lodging. b.Meals and lodging. c.Only tuition. d.Tuition, books, and supplies. e.None of these choices are correct.

d.Tuition, books, and supplies.

Which of the following taxpayers may file as a head of household in 2018? Marco provides all the support for his mother, Sienna, who lives by herself in an apartment in Fort Lauderdale. Marco pays the rent and other expenses for the apartment and properly claims his mother as a dependent. Tammy provides over one-half the support for her 18-year old brother, Dan. Dan earned $4,200 in 2018 working at a fast food restaurant and is saving his money to attend college in 2019. Dan lives in Tammy's home. Juan's wife left him late in December of 2017. No legal action was taken and Juan has not heard from her in 2018. Juan supported his 6-year-old son, who lived with him throughout 2018. a.Juan only b.Tammy only c.Marco only d.Marco and Juan only e.Marco, Tammy, and Juan

e.Marco, Tammy, and Juan Marco may file as a head of household. His mother is not required to live in his household in order for him to qualify as a head of household. Tammy can claim Dan as a dependent because Dan is a qualifying child and is not subject to the gross income requirement. Juan can file as a head of household under the abandoned spouse rules.

With respect to the prepaid income from services, which of the following is true? a.An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less. b.A cash basis taxpayer must report all of the income in the year received. c.The treatment of prepaid income is the same for tax and financial accounting for both cash and accrual basis taxpayers. d.An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed within three years following the year of receipt. e.None of these choices are correct.

b.A cash basis taxpayer must report all of the income in the year received. "The treatment of prepaid income is the same for tax and financial accounting for both cash and accrual basis taxpayers" is incorrect because the tax treatment is based on the income tax provisions, whereas the financial accounting treatment is based on generally accepted accounting principles. "An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed within three years following the year of receipt" and "An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less" are incorrect. An accrual method taxpayer may adopt a method for prepaid service income to report the same amount on its tax return as is reported on its financial statements for the year of receipt with the balance reported on the subsequent year's tax return (§ 451(c)).

Jeremy is married to Amy, who abandoned him in 2017. He has not seen or communicated with her since April of that year. He maintains a household in which their son, Evan, lives. Evan is age 25 and earns over $6,000 each year. For tax year 2018, Jeremy's filing status is: a.Single. b.Head of household. c.Married, filing jointly. d.Surviving spouse. e.Married, filing separately.

e.Married, filing separately. Because Jeremy is still treated as being married, his only option is married, filing separately. Jeremy cannot file jointly without Amy's consent ("Married, filing jointly"). He is not an abandoned spouse since Evan is not a dependent child. Evan cannot be claimed as a qualifying child (age test) and is not a qualifying relative (gross income test).

Federal excise taxes that are no longer imposed include: a.Tax on the manufacture of sporting equipment. b.Tax on wagering. c.Tax on alcohol. d.Tax on air travel. e.None of these choices are correct.

e.None of these choices are correct.

Which of the following may be deductible in 2018? a.Fines paid for violations of the law. b.Interest on a loan used in a hobby. c.Bribes that relate to a U.S. business. d.All of these choices are correct. e.None of these choices are correct.

e.None of these choices are correct. "Bribes that relate to a U.S. business" and "Fines paid for violations of the law" are not deductible. Interest incurred in connection with a hobby is no longer deductible since 2% miscellaneous itemized deductions are no longer allowed.

Taxes levied by both states and the Federal government include: a.Hotel occupancy tax. b.General sales tax. c.Custom duties. d.Franchise tax. e.None of these choices are correct.

e.None of these choices are correct. "General sales tax", "Hotel occupancy tax", and "Franchise tax" are levied at the state or local level. "Custom duties" is strictly a Federal levy.

Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life, according to his doctor. Albert had a life insurance policy with a face amount of $100,000. Albert had paid $25,000 of premiums on the policy. The insurance company has offered to pay him $80,000 to cancel the policy, although its cash surrender value was only $55,000. Albert accepted the $80,000. Albert used $15,000 to pay his medical expenses. Albert made a miraculous recovery and lived another 20 years. As a result of cashing in the policy: a.Albert must recognize $55,000 of gross income, but he has $15,000 of deductible medical expenses. b.Albert is not required to recognize any gross income because of his terminal illness. c.Albert must recognize $40,000 ($80,000 - $25,000 - $15,000) of gross income. d.Albert must recognize $65,000 ($80,000 - $15,000) of gross income. e.None of these choices are correct.

b.Albert is not required to recognize any gross income because of his terminal illness. Albert's realized gain is $55,000 ($80,000 - $25,000). However, Albert was terminally ill and, therefore, can qualify for the accelerated death benefit exclusion for his life insurance policy.

Ellen, age 12, lives in the same household with her father, grandfather, and uncle. The cost of maintaining the household is provided by her grandfather (40%) and her uncle (60%). Disregarding tie-breaker rules, Ellen is a qualifying child as to: a.Only her father. b.All parties involved (i.e., father, grandfather, and uncle). c.Only her uncle. d.Only her grandfather and uncle. e.None of these choices are correct.

b.All parties involved (i.e., father, grandfather, and uncle). Under the abode and relationship tests, Ellen is a qualifying child as to all parties. The amount of support provided by each person is not relevant.

During the current year, Khalid was in an automobile accident and suffered physical injuries. The accident was caused by Rashad's negligence. Khalid threatened to file a lawsuit against Amber Trucking Company, Rashad's employer, claiming $50,000 for pain and suffering, $90,000 for loss of income, and $70,000 in punitive damages. Amber's insurance company will not pay punitive damages; therefore, Amber has offered to settle the case for $100,000 for pain and suffering, $90,000 for loss of income, and nothing for punitive damages. Khalid is in the 35% marginal tax bracket. What is the after-tax difference to Khalid between Khalid's original claim and Amber's offer? a.Amber's offer is $20,000 less. ($50,000 + $90,000 + $70,000 - $100,000 - $90,000). b.Amber's offer is $4,500 more. {$190,000 - ($50,000 + $90,000) + [$70,000 × (1 - .35)]}. c.Amber's offer is $7,000 less. [($50,000 + $90,000 + $70,000 - $100,000 - $90,000) × .35)]. d.Amber's offer is $22,000 more. [($190,000 - $210,000) + ($120,000 × .35)]. e.None of these choices are correct.

b.Amber's offer is $4,500 more. {$190,000 - ($50,000 + $90,000) + [$70,000 × (1 - .35)]}. Only the punitive damages are taxable. The after-tax proceeds from the amount of punitive damages claimed, (1 - .35) × $70,000 = $45,500.

Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance. If a customer dies, the company receives from the insurance company the balance due on the customer's loan. Ali, a customer, died owing Swan $1,500. The balance due included $200 accrued interest that Swan has included in income. When Swan collects $1,500 from the insurance company, Swan: a.Must recognize $1,500 income from the life insurance proceeds. b.Does not recognize income from the life insurance because the entire amount is a recovery of capital. c.Must recognize $1,300 income from the life insurance proceeds. d.Does not recognize income because life insurance proceeds are tax-exempt. e.None of these choices are correct.

b.Does not recognize income from the life insurance because the entire amount is a recovery of capital. Swan has a basis in the receivable of $1,500, since it is an accrual method taxpayer.

Paula is the sole shareholder of Violet, Inc. For 2018, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet's taxable income for 2018 is $500,000. On audit, the IRS treats $100,000 of Paula's salary as unreasonable. Which of the following statements is correct? a.Violet's taxable income will not be affected by the IRS adjustment. b.Violet's taxable income will decrease by $100,000 as a result of the IRS adjustment. c.Paula's gross income will decrease by $100,000 as a result of the IRS adjustment. d.Paula's gross income will increase by $100,000 as a result of the IRS adjustment. e.None of these choices are correct.

e.None of these choices are correct. $100,000 of salary is reclassified as a dividend. Thus, Violet's taxable income increases by $100,000 because dividends are not deductible. Paula's gross income remains the same. Her salary income decreases by $100,000, but her dividend income increases by $100,000.

Hannah, age 70 and single, is claimed as a dependent by her daughter. During 2018, she had interest income of $2,550 and $800 of earned income from babysitting. Hannah's taxable income is: a.$700. b.$2,550. c.$2,250. d.$900. e.None of these choices are correct.

e.None of these choices are correct. $3,350 gross income - greater of $1,050 or ($800 earned income + $350) - $1,600 (additional standard deduction for age 65 and older) = $600.

Freddy purchased a certificate of deposit for $20,000 on July 1, 2018. The certificate's maturity value in two years (June 30, 2020) is $21,218, yielding 3% before-tax interest. a.Freddy must recognize $600 (.03 × $20,000) gross income in 2020. b.Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2018. c.Freddy must recognize $1,218 gross income in 2020. d.Freddy must recognize $1,218 gross income in 2018. e.None of these choices are correct.

b.Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2018. The 3% interest rate is applied to the $20,000 original investment in the first year $600 ($20,000 × 3%). The certificate was held for only 6 months in 2018; therefore, the interest income for 2018 is $300 ($600 × 6/12). "Freddy must recognize $1,218 gross income in 2018", "Freddy must recognize $1,218 gross income in 2020", and "Freddy must recognize $600 (.03 × $20,000) gross income in 2020" are incorrect because these answers assume a method of allocating the income that differs from the effective interest method.

Kyle, whose wife died in December 2015, filed a joint tax return for 2015. He did not remarry, but has continued to maintain his home in which his two dependent children live. What is Kyle's filing status in 2018? a.Surviving spouse b.Head of household c.Married filing separately d.Single e.None of these choices are correct.

b.Head of household Kyle, who filed a joint return in 2015, was entitled to file as a surviving spouse in 2016 and 2017. In 2018, he will be entitled to file as a head of household.

A characteristic of FICA is that: a.It does not apply when one spouse works for the other spouse. b.It is administered by both state and Federal governments. c.It provides a modest source of income in the event of loss of employment. d.It is imposed only on the employer. e.None of these choices are correct.

e.None of these choices are correct. FICA is imposed on both the employer and the employee ("It is imposed only on the employer"). Spouses who work for each other are not exempt from the tax ("It does not apply when one spouse works for the other spouse"). Its objective is retirement income, not loss of employment ("It provides a modest source of income in the event of loss of employment"). It is administered only by the Federal government ("It is administered by both state and Federal governments").

With respect to income from services, which of the following is true? a.If an accrual basis taxpayer sells a 24-month service contract on July 1, 2018, one-half (12/24) the income is recognized in 2019. b.If an accrual basis taxpayer sells a 36-month service contract on July 1, 2018 for $3,600, the taxpayer's 2018 gross income from the contract is $600. c.The income is always amortized over the period the services will be rendered by an accrual basis taxpayer. d.A cash basis taxpayer can spread the income from a 24-month service contract over the contract period. e.None of these choices are correct.

b.If an accrual basis taxpayer sells a 36-month service contract on July 1, 2018 for $3,600, the taxpayer's 2018 gross income from the contract is $600. "A cash basis taxpayer can spread the income from a 24-month service contract over the contract period" is incorrect because the special method for deferral of prepaid income does not apply to cash basis taxpayers. "The income is always amortized over the period the services will be rendered by an accrual basis taxpayer" and "If an accrual basis taxpayer sells a 24-month service contract on July 1, 2018, one-half (12/24) the income is recognized in 2019" are incorrect because they are not in accordance with § 451(c) (previously Revenue Procedure 2004-34).

Turner, a successful executive, is negotiating a compensation plan with his potential employer. The employer has offered to pay Turner a $600,000 annual salary, payable at the rate of $50,000 per month. Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in 5 years when Turner will be age 65. a.If the employer accepts Turner's counteroffer, Turner will recognize as gross income $55,000 per month [($480,000 + $180,000)/12]. b.If the employer accepts Turner's counteroffer, Turner will recognize $40,000 income each month for the year and $180,000 in year 5. c.If the employer accepts Turner's counteroffer, Turner will recognize $660,000 at the time the offer is accepted. d.If the employer accepts Turner's counteroffer, Turner must recognize imputed interest income on the $180,000 to be received in 5 years. e.None of these choices are correct.

b.If the employer accepts Turner's counteroffer, Turner will recognize $40,000 income each month for the year and $180,000 in year 5. The constructive receipt doctrine does not apply to the negotiations. Therefore, Turner will include the salary and bonus in his gross income in the tax year received in accordance with the negotiated contract.

As a general rule:I.Income from property is taxed to the person who owns the property.II.Income from services is taxed to the person who earns the income.III.The assignee of income from property must pay tax on the income.IV.The person who receives the benefit of the income must pay the tax on the income. a.I, II, III, and IV are true. b.Only I and II are true. c.Only III and IV are true. d.I, II, and III are true, but IV is false. e.None of these choices are true.

b.Only I and II are true. III is false because a person who has the right to income (the assignor) but assigns the rights to another must pay the tax on the income. IV is false because, for example, the assignee of income receives the benefit, but the assignor has the right to the income and therefore must pay the tax on that income.

axes not imposed by the Federal government include: a.Customs duties (tariffs on imports). b.Tax on rental cars. c.Tobacco excise tax. d.Gas guzzler tax. e.None of these choices are correct.

b.Tax on rental cars. The Federal government imposes an excise tax on tobacco ("Tobacco excise tax"), customs duties ("Customs duties (tariffs on imports)"), and a gas guzzler tax ("Gas guzzler tax"). It does not impose a tax on rental cars ("Tax on rental cars").

The taxpayer is a Ph.D. student in accounting at City University. The student is paid $1,500 per month for teaching two classes. The total amount received for the year is $13,500. a.The $13,500 is excludable if the money is used to pay for tuition and books. b.The $13,500 is taxable compensation. c.The $13,500 is considered a scholarship and, therefore, is excluded. d.The $13,500 is excluded because the total amount received for the year is less than her standard deduction and personal exemption. e.None of these choices are correct.

b.The $13,500 is taxable compensation. The $13,500 represents compensation for services rendered and must be included in the student's gross income.

Which, if any, of the following statements best describes the history of the Federal income tax? a.It did not exist during the Civil War. b.The Federal income tax on corporations was held by the U.S. Supreme Court to be allowable under the U.S. Constitution. c.The Federal income tax on individuals was held by the U.S. Supreme Court to be allowable under the U.S. Constitution. d.Both the Federal income tax on individuals and on corporations was held by the U.S. Supreme Court to be contrary to the U.S. Constitution. e.None of these choices are correct.

b.The Federal income tax on corporations was held by the U.S. Supreme Court to be allowable under the U.S. Constitution.

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2018. Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years. Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th. The daughter received the $2,000 dividend on October 18, 2018. a.Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year. b.The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000. c.Darryl must recognize the income of $2,000 because the purpose of the gift was to avoid taxes. d.Darryl must recognize the $2,000 dividend as his income because he constructively received the dividend. e.None of these choices are correct.

b.The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000. The gift of the stock is made prior to the declaration date.

During 2018, Lisa (age 66) furnished more than 50% of the support of the following persons: ∙Lisa's current husband who has no income and is not claimed by someone else as a dependent. ∙Lisa's stepson (age 19) who lives with her and earns $6,000 as a dance instructor. He dropped out of school a year ago. ∙Lisa's ex-husband who does not live with her. The divorce occurred two years ago. ∙Lisa's former brother-in-law who does not live with her. Presuming all other dependency tests are met, on a separate return how many dependents may Lisa claim? a.Four b.Three c.Five d.Two e.None of these choices are correct.

b.Three All of the persons listed except the ex-husband meet either the relationship or member of the household tests. The current husband qualifies as he has no income and is not claimed as a dependent by someone else. The stepson does not avoid the gross income limitation of a qualifying relative. He is not a qualifying child under 19 years of age.

Taxes levied by all states include: a.Individual income tax. b.Tobacco excise tax. c.General sales tax. d.Inheritance tax. e.None of these choices are correct.

b.Tobacco excise tax. All states impose a tobacco excise tax. Most states impose individual income taxes and general sales taxes, and only some states impose inheritance taxes.

The Hutters filed a joint return for 2018. They provide more than 50% of the support of Carla, Ellie, and Aaron. Carla (age 18) is a cousin and earns $2,800 from a part-time job. Ellie (age 25) is their daughter and is a full-time law student. She received a $7,500 scholarship for tuition from her law school. Aaron is a brother who is a citizen of Israel but resides in France. Carla and Ellie live with the Hutters. How many dependents can the Hutters claim? a.Three b.Two c.One d.None

b.Two The Hutters can claim two dependents. Carla is a qualifying relative and passes the gross income test. Ellie is not a qualifying child due to age (not under 24) but is a qualifying relative. Ellie also meets the gross income test since this type of scholarship is nontaxable. Aaron meets neither the residency nor citizenship requirement.

Kyle and Liza are married and under 65 years of age. During 2018, they furnish more than half of the support of their 19-year old daughter, Kendra, who lives with them. She graduated from high school in May 2017. Kendra earns $15,000 from a part-time job, most of which she sets aside for future college expenses. Kyle and Liza also provide more than half of the support of Kyle's cousin who lives with them. Liza's father, who died on January 3, 2018, at age 90, has for many years qualified as their dependent. How many dependents can Kyle and Liza claim? a.Three b.Two c.One d.None

b.Two Two (Kyle's cousin, and Liza's father). Kendra cannot be claimed because she is not a qualifying child and is subject to the gross income test. Kyle's cousin does not meet the relationship test but is a member of their household. It is assumed that Liza's father, as was true in the past, qualified as a dependent up to the point of death.

Early in the year, Marion was in an automobile accident during the course of his employment. As a result of the physical injuries he sustained, he received the following payments during the year: Reimbursement of medical expenses Marion paid by a medical insurance policy he purchased $10,000 Damage settlement to replace his lost salary 15,000 What is the amount that Marion must include in gross income for the current year? a.$15,000. b.$12,500. c.$0. d.$25,000. e.$10,000.

c.$0 The medical expenses of $10,000 that were reimbursed by Marion's medical insurance policy can be excluded from gross income. The $15,000 Marion received for the physical personal injury damage settlement can be excluded from gross income even though the payment replaces his salary.

Andrew, who operates a laundry business, incurred the following expenses during the year. ∙Parking ticket of $250 for one of his delivery vans that parked illegally. ∙Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa. ∙DUI ticket of $500 while returning from the rock concert. ∙Attorney's fee of $600 associated with the DUI ticket. What amount can Andrew deduct for these expenses? a.$250. b.$1,425. c.$0. d.$600. e.None of these choices are correct.

c.$0. None of these expenses are deductible. The $75 parking ticket, the $500 DUI ticket, and the $600 attorney fee are all personal expenses. The $250 parking ticket, although related to his laundry business, is not deductible because it is a violation of public policy.

Tony, age 15, is claimed as a dependent by his grandmother. During 2018, Tony had interest income from Boeing Corporation bonds of $1,000 and earnings from a part-time job of $800. Tony's taxable income is: a.$1,800. b.$1,800 - $800 - $1,050 = ($50). c.$1,800 - $1,150 = $650. d.$1,800 - $1,050 = $750. e.None of these choices are correct.

c.$1,800 - $1,150 = $650. Tony's standard deduction of $1,150 ($800 + $350) partially offsets his gross income of $1,800, resulting in taxable income of $650.

Which, if any, of the following transactions will decrease a taxing jurisdiction's ad valorem tax revenue imposed on real estate? a.A local university sells a dormitory that will be converted for use as an apartment building. b.An abandoned church is converted to a restaurant. c.A tax holiday is granted to an out-of-state business that is searching for a new factory site. d.A public school is razed and turned into a city park. e.None of these choices are correct.

c.A tax holiday is granted to an out-of-state business that is searching for a new factory site. "A tax holiday is granted to an out-of-state business that is searching for a new factory site" has an effect since the tax holiday was granted. "An abandoned church is converted to a restaurant" will increase taxes as the church was abandoned and previously exempt. "A public school is razed and turned into a city park" converts one tax-exempt property (i.e., school) into another (i.e., public park). "A local university sells a dormitory that will be converted for use as an apartment building" probably places the building on the tax rolls because it is no longer owned by a tax-exempt institution.

Indicate which, if any, statement is incorrect. State income taxes: a.Can provide occasional amnesty programs. b.Can decouple from the Federal version. c.Cannot apply to visiting nonresidents. d.Can piggyback to the Federal version. e.None of these choices are correct.

c.Cannot apply to visiting nonresidents. Many states piggyback to the Federal system ("Can piggyback to the Federal version"). Some states, due to revenue shortfalls, have decoupled from various provisions of the Federal version ("Can decouple from the Federal version"). The "jock tax," although much criticized, is very much in being ("Cannot apply to visiting nonresidents"). Some states have had more than one amnesty period ("Can provide occasional amnesty programs").

A characteristic of FUTA is that: a.It is imposed solely on the employee. b.It is imposed on both employer and employee. c.Compliance requires following guidelines issued by both state and Federal regulatory authorities. d.It is applicable to spouses of employees but not to any children under age 18. e.None of these choices are correct.

c.Compliance requires following guidelines issued by both state and Federal regulatory authorities. FUTA is imposed only on the employer ("It is imposed on both employer and employee" and "It is imposed solely on the employee"). "It is applicable to spouses of employees but not to any children under age 18" refers to FICA. Because the administration of FUTA is shared by Federal and state governments, employers must comply with the rules issued by each ("Compliance requires following guidelines issued by both state and Federal regulatory authorities").

The U.S. (either Federal, state, or local) does not impose: a.Custom duties. b.Franchise taxes. c.Export duties. d.Severance taxes. e.Occupational fees.

c.Export duties.