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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 71

Multiple Choice

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Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?

A) Spouse when the taxpayer is an individual.
B) A partner when the taxpayer is a partnership.
C) Brother when the taxpayer is an individual.
D) A minority shareholder when the taxpayer is a corporation.
E) All of these are related parties.

F) A) and E)
G) All of the above

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Question 72

True/False

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Illegal bribes and kickbacks are not deductible as business expenses but fines imposed by a governmental unit are deductible as long as the fines are incurred in the ordinary course of business.

A) True
B) False

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Question 73

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Werner is the president and CEO of Acme, Incorporated, and this year, he took a prospective client to dinner. During the dinner, Werner and the client discussed a proposed contract for over $6 million as well as personal matters. After dinner, Werner took the client to a football game and no business was discussed. Werner paid $1,220 for an expensive(but not extravagant)dinner and spent $600 for tickets to the game. What is the deductible amount of these expenses?

The 12-month rule allows taxpayers to deduct the entire amount of certain prepaid business expenses.

Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

Uniform capitalization of indirect inventory costs is required for mostvery large taxpayers.

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?

Mike operates a fishing outfitter as an accrual-method sole proprietorship. On March 1^st of this year, Mike received $19,500 for four outfitting trips. This is the first time Mike agreed to such a payment and he is obligated to outfit one trip per year for the next four summers, beginning this year. How much income must Mike recognize in each of the next four years if he is attempting to minimize his tax burden?

Ajax Computer Company is an accrual-method calendar-year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1.8 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $1,300,000 for a one-time advertising blitz during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?