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Exam 1: Business Income, Deductions, and Accounting Methods

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Question 61

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Taffy Products uses the accrual method and reports on a calendar year. On July 1 ^st of this year Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents of its warehouse. The rent and insurance cover the next 12 months. What amount, if any, can Taffy deduct for rent and insurance this year?

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$42,000 = $24,000 + $18,000.
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Question 62

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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 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 $500,000 fora 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?

A) $1 million
B) $500,000
C) $1.5 million
D) $1.5 million only if the professional golf tournament is played before April 15
E) No deduction can be claimed this year

F) C) and D)
G) B) and C)

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Question 63

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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?

According to the Internal Revenue Code §162, deductible trade or business expenses must be which one of the following?

Todd operates a business using the cash basis of accounting. At the end of last year, Todd was granted permission to switch his sales on account to the accrual method. Last year, Todd made $420,000 of sales on account, and $64,000 was uncollected at the end of the year. What is Todd's §481 adjustment for this year?

Which of the following is a true statement?

Holly took a prospective client to dinner, and after agreeing to a business deal, they went to the theater. Holly paid $340 for the meal and separately paid $230 for the theater tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

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?

George operates a business that generated revenues of $50 million and allocable taxable income of $1.25 million. Included in the computation of allocable taxable income were deductible expenses of $240,000 of business interest and $250,000 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

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

Which of the following is likely to be a business expense fully deductible in the current year?

Which of the following is a true statement about the limitation on business interest deductions?

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?

The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount.

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?

Adjusted taxable income is defined as follows for purposes of the business interest limitation:

Sandy Bottoms Corporation generated taxable income (before depreciation, interest expense, and any tax loss carryovers) of $3 million in 2020. Taxable income included $75,016,000 of revenue and $358,000 of interest income. What is Sandy Bottoms's maximum interest expense deduction for the year?

Paris operates a talent agency as a sole proprietorship, and this year she incurred the following expenses in operating her talent agency. What is the total deductible amount of these expenditures? $1,000 dinnerand theater with a film producer where no business was discussed $500 lunch with sister Nicky where no business was discussed $700 business dinner with a client but Paris forgot to keep any records (oops!) $900 tickets to the opera with a client following a business meeting

Manley operates a law practice on the accrual method and calendar year. At the beginning of the year, Manley's firm had an allowance for doubtful accounts with a balance of $18,500. At the end of the year, Manley recorded bad debt expense of $22,300 and the balance of doubtful accounts had increased to $18,700. What is Manley's deduction for bad debt expense this year?

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