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Exam 8: Business Income, deductions, and Accounting Methods

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Question 1

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Rock Island Corporation generated taxable income (before deductions for depreciation,interest expense and net operating loss carryovers)of $1 million this year.Taxable income was computed on $50 million of revenues and included $50,000 of interest income.The company paid $450,000 in interest expense.What is Rock Island's maximum business interest deduction for the year?

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$335,000 = $50,000 + [30% × ($1,000,000 ...

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Question 2

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Big Homes Corporation is an accrual method calendar year taxpayer that manufactures and sells modular homes.This year for the first time Big Homes was forced to offer a rebate on the purchase of new homes.At year-end,Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers.What amount of the rebates,if any,can Big Homes deduct this year?

A) $12,000 because rebates are payment liabilities.
B) $19,500 because Big Homes is an accrual method taxpayer.
C) $19,500 if this amount is not material,Big Homes expects to continue the practice of offering rebates in future years,and Big Homes expects to pay the accrued rebates before filing their tax return for this year.
D) $12,000 because the $7,500 liability is not fixed and determinable.
E) Big Homes is not entitled to a deduction because rebates are against public policy.

F) B) and C)
G) A) and E)

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Question 3

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A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.

Don operates a taxi business,and this year one of his taxis was damaged in a traffic accident.The taxi was originally purchased for $32,000 and the adjusted basis was $2,000 at the time of the accident.The taxi was repaired at a cost of $2,500 and insurance reimbursed Don $700 of this cost.What is the amount of Don's casualty loss deduction?

Alvin is a self-employed sound technician who reports on the cash method and calendar year.Alvin has a shop in Austin,Texas,but he spends much of his time away from his shop traveling to and from various concerts around the country.Alvin leases a truck to move his equipment around the country and this year he spent $12,000 in lease payments and paid $18,000 for gas,oil,and repairs.Alvin keeps records of his personal use of the truck and he estimates that 6,000 of the total 36,000 miles put on the truck this year were for personal trips.What amount of these expenses may Alvin deduct as business expenses? 

Joe operates a plumbing business that uses the accrual method and reports on a calendar year.This year Joe signed a $50,000 binding contract with Brian.Under the contract Brian will provide Joe with up to 2,000 hours of vehicle repairs at $25 per hour.This year Brian provided 200 hours of repair services and billed Joe for $5,000.At year end Joe had not paid Brian for the services.What amount,if any,can Joe deduct for the repair services this year?

Which of the following expenses are completely deductible?

Shadow Services uses the accrual method and reports on a calendar year.This year Shadow agreed to a uniform cleaning contract with Odie Cleaning.Under the contract Odie bills Shadow for cleaning services as the services are provided.At year end Shadow paid Odie $2,350 for the services rendered during the year.In addition,Shadow paid Odie $700 for cleaning services expected in January of next year.What amount,if any,can Shadow deduct for the cleaning services this year?

John is a self-employed computer consultant who lives and works in Dallas.John paid for the following activities in conjunction with his business.Which is not deductible in any amount? 1) Dinner with a potential client where the client's business was discussed. 2) A trip to Houston to negotiate a contract. 3) A seminar in Houston on new developments in the software industry. 4) A trip to New York to visit a school chum who is also interested in computers.

Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year.This year he hired his son as an apprentice cook.Jones agreed to pay his son $40,000 per year.Which of the following is a true statement about this transaction?

The phase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business.

Which of the following cannot be selected as a valid tax year end?

Which of the following is a true statement about a request for a change in accounting method?

Kip started a wholesale store this year selling bulk peanut butter.In January of this year Kip purchased an initial five tubs of peanut butter for a total cost of $5,000.In July Kip purchased three tubs for a total cost of $6,000.Finally,in November Kip bought two tubs for a total cost of $1,000.Kip sold six tubs by year end.What is Kip's ending inventory under the FIFO cost-flow method?

Otto operates a bakery and is on the cash method and calendar year.This year one of Otto's ovens caught fire and was partially destroyed.Otto bought it a few years ago for $20,000 and claimed depreciation of $12,000 up to the fire.Otto was charged $4,400 for repairs to the oven but the insurance company paid Otto $1,500 for the damage.What is Otto's casualty loss deduction?

Colby Motors uses the accrual method and reports on a calendar year.In December of last year,Colby acquired auto repair equipment.As part of the acquisition,Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for three years.Colby paid the cost of the warranty,$15,000,in January of this year.What can Colby deduct for the cost of the warranty on the tax return for last year?

Employees cannot deduct the cost of uniforms if the uniforms are also appropriate for normal wear.

Which of the following types of transactions may not typically be accounted for using the cash method for small proprietorships?

Danny owns an electronics outlet in Dallas.This year he paid $600 to register for a four-day course in management in Chicago.Danny paid $800 in airfare and $1,000 for five nights lodging.After the course,Danny spent the last day sightseeing.During the trip,Danny also paid $140 a day for meals,and $80 a day for a rental car.What amount of these travel expenditures may Danny deduct as business expenses?

Holly took a prospective client to dinner,and after agreeing to a business deal,they went to the theater.Holly paid $290 for the meal and $250 for the theatre tickets,amounts that were reasonable under the circumstances.What amount of these expenditures can Holly deduct as a business expense?