Is Accrued Interest Taxed or Only Paid Interest - DOC

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					                                      Review list ACC261 EXAM 5, 6, 7 & 8


1. Carin, a widow, elected to receive the proceeds of a $100,000 life insurance policy on the life of her deceased
   husband in 10 installments of $15,000 each. Her husband had paid premiums of $75,000 on the policy. In the
   first year, Carin collected $15,000 from the insurance company. She must include in gross income:


2. 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 to pay some medical bills. 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.
3. A scholarship recipient at City University must include in gross income the scholarship proceeds used to pay for:
4. Jena is a full-time student at State University and is claimed by her parents as a dependent. Her only source of
   income is an $8,000 scholarship ($800 for books, $3,800 tuition, $200 student activity fee, and $3,200 room and
   board). Jena’s gross income for the year is:
5. Theresa sued her former employer for age, race, and gender discrimination. She claimed $250,000 in damages for
   loss of income and $500,000 in punitive damages. She settled the claim for $600,000. As a result of the
   settlement, Theresa must include in gross income:
6. Employers of the Family Bowling Alley allow their employees to bowl without charge after the employee’s
   working hours and when there are adequate idle bowling lanes. Tom bowled 12 games during the month at no
   charge when the non-employee charge was $3.00 per game.
7. Kristen’s employer owns its building and provides parking space for its employees. The value of the free parking
   is $150 per month. Karen’s employer does not have parking facilities, but reimburses its employee for the cost of
   parking in a nearby garage, up to $150 per month.
8. A U.S. citizen worked in a foreign country for the period July 1, 2009 through August 1, 2010. Her salary was
   $10,000 per month. Also, in 2009 she received $5,000 in dividends from foreign corporations (not qualified
   dividends). No dividends were received in 2010. Which of the following is correct?
9. Heather’s interest and gains on investments for 2010 were as follows:

        Interest on Bland County school bonds                                                     $500

        Interest on U.S. government bonds                                                          600

        Interest on a Federal income tax refund                                                    100

        Gain on the sale of Bland County school bonds                                              400


    Heather’s gross income from the above is:
10. Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. The National Bank,
    which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000. The
    bank had made the loan to Gold when it purchased the real estate from Silver, Inc. Pink, Inc., the holder of a
    mortgage on Gold’s building, agreed to accept $40,000 in full payment of the $55,000 due. Pink had sold the
    building to Gold for $150,000 that was to be paid in installments over 8 years. As a result of the above, Gold must
    include what in income and how does this affect the basis of the building
11. Saul is single, under age 65, and has gross income of $50,000. His deductible expenses are as follows:

    Alimony                                                                                    $12,000

    Charitable contributions                                                                        2,000

    Contribution to a traditional IRA                                                               5,000

    Expenses paid on rental property                                                                6,000

    Interest on home mortgage and property taxes on personal residence                              7,000

    State income tax                                                                                2,200


    What is Saul’s AGI?
12. Which expenses are classified as a deduction for AGI, which expenses are deductions from AGI?
13. Swan, Inc. is an accrual basis taxpayer. Swan uses the aging approach to calculate the reserve for bad debts.
    During 2010, the following occur associated with bad debts.

  Credit sales                                                                         $300,000

  Collections on credit sales                                                           280,000

  Amount added to the reserve                                                              12,000

  Beginning balance in the reserve                                                           –0–

  Identifiable bad debts during 2010                                                       10,000


    The amount of the deduction for bad debt expense for Swan for 2010 is:
14. Angela, a real estate broker, had the following income and expenses in her business:

       Commissions income                                                                   $100,000

       Expenses:

            Commissions paid to non-brokers for referrals

              (illegal under state law and subject to criminal penalties)                      20,000

            Commissions paid to other real estate brokers for referrals

              (not illegal under state law)                                                    10,000

            Travel and transportation                                                          12,000

            Supplies                                                                            4,000

            Office and phone                                                                    5,000

            Parking tickets                                                                         500
    How much net income must Angela report from this business?
15. Melvin is engaged in an illegal drug-running operation. Which expenses will reduce Melvin’s taxable income?
16. Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to
    expand to other states. During 2010, she spends $14,000 to investigate TV rental stores in South Carolina and
    $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets
    in Georgia. As to these expenses, Iris should:
17. Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is
    $40,000. During the year she sold the bedspreads for $10,000. She incurred expenses as follows:

      Supplies                                                                                   $4,000

      Interest on loan to get business started                                                       500

      Advertising                                                                                  6,500


      Assuming that the activity is deemed a hobby, how should she report these items on her tax return?



18. Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental
    income is $6,000 and the expenses are as follows:

           Mortgage interest                                                                          $9,000

           Real estate taxes                                                                            3,000

           Utilities                                                                                    2,000

           Maintenance                                                                                  1,000

           Insurance                                                                                       500

           Depreciation (rental part)                                                                   4,000


      Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house
      are:
19.   In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value
      of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000.
      What is the tax effect of these transactions?
20.      Jed is an electrician. Jed and his wife are cash basis taxpayers and file a joint return. Jed wired a new house
      for Alison and billed her $15,000. Alison paid Jed $10,000 and refused to pay the remainder of the bill, claiming
      the fee to be exorbitant. Jed took Alison to Small Claims Court for the unpaid amount and was awarded a
      $2,000 judgement. Jed was never able to collect the judgement nor the remainder of the bill from Alison. What
      amount of loss may Jed deduct in the current year?
21.    Five years ago, Tom loaned his son John $20,000 to start a business. A note was executed with an interest rate
      of 8%, which is the Federal rate. The note required monthly payments of the interest with the $20,000 due at
      the end of ten years. John always made the interest payments until last year. During the current year, John
      notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of
      $1,800. Tom is a cash basis taxpayer whose only income is salary and interest income. The proper treatment for
      the nonpayment of the note is:
22.     On September 3, 2009, Able purchased § 1244 stock in Red Corporation for $6,000. On December 31, 2009, the
      stock was worth $8,500. On August 15, 2010, Able was notified that the stock was worthless. How should Able
      report this item on his 2009 and 2010 tax returns?
    23. On July 20, 2008, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock
        is § 1244 small business stock) for $24,000. On November 10, 2009, Matt purchased an additional 1,000 shares
        of Orange Corporation stock for $150,000. On September 15, 2010, Matt sold the 4,000 shares of stock for
        $80,000. How should Matt treat the sale of the stock on his 2010 return?
    24. Jim had a car accident in 2010 in which his car was completely destroyed. At the time of the accident, the car
        had a fair market value of $30,000 and an adjusted basis of $40,000. Jim used the car 100% of the time for
        personal use. Jim received an insurance recovery of 80% of the value of the car at the time of the accident. If
        Jim’s AGI for the year is $50,000, determine his deductible loss on the car.
    25. In 2010, Grant’s personal residence was damaged by fire. Grant was insured for 90% of his actual loss, and he
        received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of
        $30,000. Pertinent data with respect to the residence follows:
    Cost basis                                                                          $170,000

    Value before casualty                                                                 250,000

    Value after casualty                                                                  150,000



        What is Grant’s allowable casualty loss deduction?

    26. In 2010, Juan’s home was burglarized. Juan had the following items stolen:

   Securities worth $15,000. Juan purchased the securities four years ago for $20,000.

   New tools which Juan had purchased two weeks earlier for $6,000. Juan uses the tools in
    making repairs at an apartment house that he owns and manages.

   An antique worth $12,000. Juan inherited the antique (a family keepsake) when the
    property was worth $9,000.

        Juan’s homeowner’s policy had a $50,000 deductible clause for thefts. If Juan’s salary for the year is $60,000,
        determine the amount of his itemized deductions as a result of the theft.

    27. Regarding research and experimental expenditures, which of the following are not qualified expenditures?

    28. Last year, Green Corporation incurred the following expenditures in the development of a new plant process:

    Salaries                                                                            $200,000

    Materials                                                                              80,000

    Utilities                                                                              10,000

    Quality control testing costs                                                          30,000

    Management study costs                                                                  5,000

    Depreciation of equipment                                                              15,000

        During the current year, benefits from the project began being realized in March. If Green Corporation elects a
        60 month deferral and amortization period, determine the amount of the deduction for the current year.
29. Amber operates her business as a sole proprietorship during 2010. Her domestic production activities deduction
    (DPAD) before any effect of the wage expense limitation is $70,000. The total W-2 wages that her sole
    proprietorship pays for the tax year are $110,000. The wages paid to employees not engaged in qualified
    domestic production activities are $20,000. Amber’s DPAD for 2010 is:

30. Janice, single with one dependent child, had the following items for the year 2010:

Salary                                                                                $30,000

Dividend income                                                                           8,000

Loss on § 1244 small business stock held for three years                              (45,000)

Total itemized deductions                                                              (5,000)

    Determine Janice’s net operating loss for the year 2010.

31. Jack, age 30 and married with no dependents, is a self-employed individual. For 2010, his self-employed business
    sustained a net loss from operations of $10,000. The following additional information was obtained from his
    personal records for the year:

Nonbusiness long-term capital gain                                                    $ 2,000

Interest income                                                                           6,000

Itemized deductions—consisting of taxes and interest                                  (12,000)

    Based on the above information, what is Jack’s net operating loss for the current year if he and his spouse file a
    joint return?

32. Tan Company acquires a new machine (ten-year property) on January 15, 2010, at a cost of $200,000. Tan also
    acquires another new machine (seven-year property) on November 5, 2010, at a cost of $40,000. No election is
    made to use the straight-line method. The company does not make the § 179 election. If Congress reenacts
    additional first-year depreciation for 2010, Tan did elect not to take additional first-year depreciation.
    Determine the total deductions in calculating taxable income related to the machines for 2010.

33. Barry purchased a used business asset (seven-year property) on November 30, 2010, at a cost of $200,000. This
    is the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179, nor
    did he elect straight-line cost recovery. Barry sold the asset on July 17, 2011. Determine the cost recovery
    deduction for 2011.

34. On May 30, 2010, Jane signed a 20-year lease on a factory building to use for her business. The lease begins on
    June 1, 2010. In August of 2010, Jane paid $100,000 for leasehold improvements to the building. Determine
    Jane’s cost recovery for the leasehold improvements for 2010.

35. Augie purchased one used asset during the year (five-year property) on November 10, 2010, at a cost of
    $400,000. She made the § 179 election. The income from the business before the cost recovery deduction and
    the § 179 deduction was $100,000. Determine the total cost recovery deduction with respect to the asset for
    2010.
36. The only asset Bill purchased during 2010 was a new seven-year class asset. The asset, which was listed
    property, was acquired on June 17 at a cost of $50,000. The asset was used 40% for business, 30% for the
    production of income, and the rest of the time for personal use. Bill always elects to expense the maximum
    amount under § 179 whenever it is applicable. The net income from the business before the § 179 deduction is
    $100,000. Determine Bill’s maximum deduction with respect to the property for 2010.

37. On June 1, 2010, Irene places in service a new automobile that cost $21,000. The car is used 70% for business
    and 30% for personal use. (Assume this percentage is maintained for the life of the car.) If Congress reenacts
    additional first-year depreciation for 2010, she does elect not to take additional first-year depreciation.
    Determine the cost recovery deduction for 2011.

38. On November 1, 2010, Red Corporation purchased an existing business. With respect to the acquired assets of
    the business, Red allocated $500,000 of the purchase price to a patent. The patent will expire in seven years.
    Determine the total amount that Red may amortize for 2010 for the patent.

39. On July 10, 2010, Ariff places in service a new sports utility vehicle that cost $70,000 and weighed 6,300 pounds.
    The SUV is used 100% for business. Determine Ariff’s maximum deduction for 2010, assuming Ariff’s § 179
    business income is $110,000. If Congress reenacts additional first-year depreciation for 2010, Ariff elects not to
    take additional first-year depreciation.

40. On January 15, 2010, Vern purchased the rights to a mineral interest for $3,500,000. At that time it was
    estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000
    units were sold for $800,000. Vern incurred expenses during 2010 of $500,000. The percentage depletion rate is
    22%. Determine Vern’s depletion deduction for 2010.

41.
                              Review Individual Income Tax exam Chapters 17, 18 & 19

1. White Company acquires a new machine for $35,000 and uses it in White’s manufacturing operations. A few months
   after White places the machine in service, it discovers that the machine is not suitable for White’s business. White
   had fully expensed the machine in the year of acquisition using § 179. White sells the machine for $5,000 in the tax
   year after it was acquired, but held the machine only for a total of 10 months. What was the tax status of the machine
   when it was disposed of and the amount of the gain or loss?

2. Which of the assets held by a retail business are § 1231 asset?


3. Vertical, Inc., has a 2009 net § 1231 gain of $47,000 and had a $24,000 net § 1231 loss in 2008. For 2009, Vertical’s
   net § 1231 gain is treated as:

4. Copper Corporation sold machinery for $27,000 on December 31, 2009. The machinery had been purchased on
   January 2, 2006, for $30,000 and had an adjusted basis of $21,000 at the date of the sale. For 2009, what should
   Copper Corporation report?


5. Which of the real property could be subject to § 1250 depreciation recapture?

6. Kari owns depreciable residential rental real estate which has accumulated depreciation (all from straight-line) of
   $45,000. If Kari sold the property, she would have a $33,000 gain. The initial characterization of the gain would be:


7. When depreciable property is gifted to another individual taxpayer, the depreciation recapture potential

8. When depreciable property is inherited by a taxpayer, the depreciation recapture potential is


9. When corporate depreciable property is distributed as a dividend, the depreciation recapture potential.

10. When depreciable property is contributed to charity, the depreciation recapture potential has


11. An individual has a $10,000 § 1245 gain, a $15,000 § 1231 gain, a $13,000 § 1231 loss, a $4,000 § 1231 lookback
    loss, and a $15,000 long-term capital gain. The net long-term capital gain is:

12. Gold Corporation and Silver Corporation are equal partners in the G&S Partnership, which was formed on July 1,
    2009. Gold uses a calendar tax year, and Silver’s tax year ends September 30. G&S is not a seasonal business. What
    tax year must they use.


13. In the case of a partnership whose partners all use a calendar year, a reason that is acceptable to the IRS for using a
    tax year ending June 30th would be:

14. Which of the following must use the accrual method of accounting?
      a) An incorporated property management company with average annual gross receipts of $50,000,000.
      b) An incorporated law firm with average annual gross receipts of $1,200,000.
      c) An unincorporated grocery store with average annual gross receipts of $900,000

15. Andrew owns 100% of the stock of Crow’s Farm Inc., an S corporation, that raises cattle and corn. The farm’s
    annual gross receipts have never exceeded $3,000,000 and the farm is not considered a tax shelter. Does he have to
    use cash method or the accrual method?
    16. In 2009, Swan Company discovered that it had for the past 10 years capitalized as a production cost certain expenses
        that are properly classified as administrative expenses. The total amount of the expense for 2008 was $200,000, but
        $50,000 of the item was included in the ending inventory that year. How must this be handled.


    17. The taxpayer has consistently, but incorrectly, used an allowance for bad debts. At the beginning of the year, the
        balance in the allowance account is $90,000. How is the change to the correct method handled if it is voluntary or if
        it is required by the IRS?

    18. When the IRS requires a taxpayer to change accounting methods what happens? Are there penalties?


    19. The installment method applies to which of the following sales with payments being made in the year following the
        year of sale?
        a) An automobile dealer’s sale of an SUV.
        b) A cash basis individual’s sale of General Electric common stock.
        c) A manufacturer’s sale of fully-depreciated equipment.

20. Abby sold property and reported the gain by the installment method. Her basis in the property was $120,000 and it was
    subject to $30,000 of depreciation recapture. Abby sold the property for $80,000 cash on the date of sale, June 30, 2009,
    and a note for $170,000 (plus interest at the Federal rate) due on June 30, 2010. Abby’s gain to be reported in 2009
    (exclusive of interest) is:

21. Charlotte sold her unincorporated business for $360,000 in 2009. The sales contract allocated $150,000 to equipment,
    $110,000 to land, and $100,000 to goodwill. Charlotte had a $0 basis in the goodwill, the land cost $60,000, and the
    equipment originally cost $250,000 but it was fully depreciated. What is the amount of the gain eligible for installment
    sales treatment?


22. In 2009, Norma sold Zinc, Inc., common stock for $100,000 cash and a note receivable for $900,000. The note was due
    in 2010 with accrued interest at the Federal rate. Norma’s basis in the stock was $250,000. This was Norma’s only
    installment sale transaction. Can she use the installment method? How is the gain reported?

23. Taylor sold a capital asset on the installment basis and did not charge interest on the deferred payment due in three years.
    How will interest be reported on this?


24. In 2009, Father sold land to Son for $75,000 cash and an installment note for $225,000. Father’s basis was $120,000. In
    2010, after paying $24,000 interest but nothing on the principal, Son sold the land for $300,000 cash. As a result of the
    second disposition, what gain must Father recognize in 2010?

25. Which of the following is (are) a taxable disposition of an installment obligation?

       a. (1)      Transfer to a relative as a gift.
       b. (2)      Transfer to the transferor’s 100% owned corporation.
       c. (3)      Transfer to a partnership for an interest in partnership capital and profits.

26. In the case of a small home construction company that builds under long-term contracts, generally do they use percentage
    of completion or completed contract

27. Robin Construction Company began a long-term contract in 2009. The contract price was $750,000. The estimated cost
    of the contract in 2009 was $600,000. The actual cost incurred in 2009 was $300,000. The contract was completed in
    2010 and the cost incurred that year was $400,000. Under the percentage of completion method how much is reported
    each year how is interest on overpaid or on underpaid taxes treated
28. A manufacturer must capitalize which of the following costs relative to inventories:
      a. I.      Real estate taxes on the factory building.
      b. II.     Vacation pay for production workers.
      c. III.    Pension costs for production workers.

29. Danielle, who is retired, reaches age 70 1/2 in 2009, and she will also be age 71 in 2009. She has a $150,000 balance in
    her traditional IRA. If her life expectancy is 15.3 years, what distribution, if any, must be made by April 1, 2010?

30. Jermaine is a self-employed accountant with gross earned income of $130,000 for the tax year (after the deduction for
    one-half of any self-employment tax). He has a profit sharing plan (e.g., defined contribution plan). What is the
    maximum amount Jermaine can contribute to his retirement plan?

31. Susan is a self-employed accountant with a qualified defined contribution plan (a Keogh plan). She has the following
    income items for the year:
                            Earned income from self-employment                                       $50,000

                                       Dividend income                                                   8,000

                                       Interest income                                                   2,000

                                  Net short-term capital gain                                           12,000

                                    Adjusted gross income                                               72,000


What is the maximum amount Susan can deduct as a contribution to her retirement plan in 2009, assuming the self-
  employment tax rate is 15.3%?



32. Donna, age 27 and unmarried, is an active participant in a qualified retirement plan. Her AGI is $108,000. What amount,
    if any, may Donna contribute to a Roth IRA in 2009?

33. Sammy, age 31, is unmarried and is not an active participant in a qualified retirement plan. His modified AGI is $55,000
    in 2009. The maximum amount that Sammy can deduct for a contribution to a traditional IRA is:
                                     Review list ACC261 EXAM 5, 6, 10 & 13


42. The taxpayer's marginal tax bracket is 35% what would the taxpayer prefer between taxable income and tax
    exempt interest?
43. Carin, a widow, elected to receive the proceeds of a $100,000 life insurance policy on the life of her deceased
    husband in 10 installments of $15,000 each. Her husband had paid premiums of $75,000 on the policy. In the
    first year, Carin collected $15,000 from the insurance company. She must include in gross income:


44. 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 to pay some medical bills. 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.
45. A scholarship recipient at City University must include in gross income the scholarship proceeds used to pay for:
46. Jena is a full-time student at State University and is claimed by her parents as a dependent. Her only source of
    income is an $8,000 scholarship ($800 for books, $3,800 tuition, $200 student activity fee, and $3,200 room and
    board). Jena’s gross income for the year is:
47. Theresa sued her former employer for age, race, and gender discrimination. She claimed $250,000 in damages for
    loss of income and $500,000 in punitive damages. She settled the claim for $600,000. As a result of the
    settlement, Theresa must include in gross income:
48. Employers of the Family Bowling Alley allow their employees to bowl without charge after the employee’s
    working hours and when there are adequate idle bowling lanes. Tom bowled 12 games during the month at no
    charge when the non-employee charge was $3.00 per game.
49. Kristen’s employer owns its building and provides parking space for its employees. The value of the free parking
    is $150 per month. Karen’s employer does not have parking facilities, but reimburses its employee for the cost of
    parking in a nearby garage, up to $150 per month.
50. A U.S. citizen worked in a foreign country for the period July 1, 2009 through August 1, 2010. Her salary was
    $10,000 per month. Also, in 2009 she received $5,000 in dividends from foreign corporations (not qualified
    dividends). No dividends were received in 2010. Which of the following is correct?
51. Heather’s interest and gains on investments for 2010 were as follows:

        Interest on Bland County school bonds                                                     $500

        Interest on U.S. government bonds                                                          600

        Interest on a Federal income tax refund                                                    100

        Gain on the sale of Bland County school bonds                                              400


    Heather’s gross income from the above is:
52. Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. The National Bank,
    which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000. The
    bank had made the loan to Gold when it purchased the real estate from Silver, Inc. Pink, Inc., the holder of a
    mortgage on Gold’s building, agreed to accept $40,000 in full payment of the $55,000 due. Pink had sold the
    building to Gold for $150,000 that was to be paid in installments over 8 years. As a result of the above, Gold must
    include what in income and how does this affect the basis of the building
53. Saul is single, under age 65, and has gross income of $50,000. His deductible expenses are as follows:

    Alimony                                                                                    $12,000

    Charitable contributions                                                                        2,000

    Contribution to a traditional IRA                                                               5,000

    Expenses paid on rental property                                                                6,000

    Interest on home mortgage and property taxes on personal residence                              7,000

    State income tax                                                                                2,200


    What is Saul’s AGI?
54. Which expenses are classified as a deduction for AGI, which expenses are deductions from AGI?
55. Swan, Inc. is an accrual basis taxpayer. Swan uses the aging approach to calculate the reserve for bad debts.
    During 2010, the following occur associated with bad debts.

  Credit sales                                                                         $300,000

  Collections on credit sales                                                           280,000

  Amount added to the reserve                                                              12,000

  Beginning balance in the reserve                                                           –0–

  Identifiable bad debts during 2010                                                       10,000


    The amount of the deduction for bad debt expense for Swan for 2010 is:
56. Angela, a real estate broker, had the following income and expenses in her business:

       Commissions income                                                                   $100,000

       Expenses:

            Commissions paid to non-brokers for referrals

              (illegal under state law and subject to criminal penalties)                      20,000

            Commissions paid to other real estate brokers for referrals

              (not illegal under state law)                                                    10,000

            Travel and transportation                                                          12,000

            Supplies                                                                            4,000

            Office and phone                                                                    5,000

            Parking tickets                                                                         500
    How much net income must Angela report from this business?
57. Melvin is engaged in an illegal drug-running operation. Which expenses will reduce Melvin’s taxable income?
58. Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to
    expand to other states. During 2010, she spends $14,000 to investigate TV rental stores in South Carolina and
    $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets
    in Georgia. As to these expenses, Iris should:
59. Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is
    $40,000. During the year she sold the bedspreads for $10,000. She incurred expenses as follows:

    Supplies                                                                                    $4,000

    Interest on loan to get business started                                                        500

    Advertising                                                                                   6,500


    Assuming that the activity is deemed a hobby, how should she report these items on her tax return?



60. Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental
    income is $6,000 and the expenses are as follows:

         Mortgage interest                                                                           $9,000

         Real estate taxes                                                                             3,000

         Utilities                                                                                     2,000

         Maintenance                                                                                   1,000

         Insurance                                                                                        500

         Depreciation (rental part)                                                                    4,000


    Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house
    are:
61. In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value
    of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000.
    What is the tax effect of these transactions?
62. Rosita is employed as a systems analyst. For calendar year 2010, she had AGI of $120,000 and paid the
    following medical expenses:

          Medical insurance premiums                                              $3,900

          Doctor and dentist bills for José

          and Carmen (Rosita’s parents)                                            8,250

          Doctor and dentist bills for Rosita                                      6,750

          Prescribed medicines for Rosita                                            300

          Nonprescribed insulin for Rosita                                           825
    José and Carmen would qualify as Rosita’s dependents except that they file a joint return. Rosita’s medical
    insurance policy does not cover them. Rosita filed a claim for $3,150 of her own expenses with her insurance
    company in December 2010 and received the reimbursement in January 2011. What is Rosita’s maximum
    allowable medical expense
63. Phil is advised by his family physician that his dependent son, Tony, needs surgery for a benign tumor in his leg.
    Phil and his son travel to Rochester, Minnesota, for in-patient treatment at the Mayo Clinic, which specializes in
    this type of surgery. Phil incurred the following costs:

           Round-trip airfare ($375 each)                                          $ 750

           Phil’s hotel in Rochester for four nights ($105 per night)                 420

           Phil’s meals while in Rochester                                            150

           Tony’s medical treatment                                                 1,500

           Tony’s prescription medicine                                               300


    Compute Phil’s medical expenses for the trip (before the 7.5% floor).
64. Pedro’s child attends a school operated by the church the family attends. Pedro made a donation of $1,000 to the
    church in lieu of the normal registration fee of $200. In addition, Pedro paid the regular tuition of $6,000 to the
    school. Based on this information, what is Pedro’s charitable contribution?
65. Emily, who lives in Indiana, volunteered to travel to Louisiana in March to work on a home-building project for
    Habitat for Humanity (a qualified charitable organization). She was in Louisiana for three weeks. She normally
    makes $500 per week as a carpenter’s assistant and plans to deduct $1,500 as a charitable contribution. In
    addition, she incurred the following costs in connection with the trip: $600 for transportation, $1,200 for lodging,
    and $400 for meals. What is Emily’s deduction associated with this charitable activity?
66. For constructive ownership purposes, which of the following are related parties under § 267?

    I.         Taxpayer’s nephew.

    II.        Taxpayer’s aunt.

    III.       Taxpayer’s 55% owned corporation.

    IV.        Taxpayer’s sister.


67. Refundable tax credits include which tax credit:
68. The components of the general business credit include which tax credits and which credits are not part of the
    general business credit:
69. Several years ago, Sarah purchased a structure for $300,000 that was originally placed in service in 1929. In the
    current year, she incurred qualifying rehabilitation expenditures of $400,000. The amount of the tax credit for
    rehabilitation expenditures, and the amount by which the building’s basis for cost recovery would increase as a
    result of the rehabilitation expenditures are the following amounts:
70. Correctly describe the research activities credit?
71. Correctly describe the earned income credit?
72. Cheryl is single, has one child (age 6), and files as head of household during 2010. Her salary for the year is
    $19,000. She qualifies for an earned income credit of the following amount:
73. George and Martha are married and file a joint tax return claiming their two children, ages 10 and 8 as
    dependents. Assuming their AGI is $123,450, George and Martha’s child tax credit is:
74. Which of the following statements concerning the credit for child and dependent care expenses is correct and
    what is not correct?
75. Which of the following statements is true regarding the education tax credits?
   76. During 2010, Eleanor earns $146,000 in wages as an employee of an accounting firm. She also earns $26,000 in
       gross income from an outside consulting service she operates. Deductible expenses paid in connection with the
       consulting service amount to $6,000. Eleanor also has a recognized long-term capital gain of $1,000 from the sale
       of a stock investment. She must pay a self-employment tax on:




REVIEW LIST EXAM Chapters 1to 4
  Textbook                             Test item
Page # Example #

ch 1      Example 1      Which taxes are proportional which are progressive?
                         Peter and Eileen are married and live in a common law state. Peter wants to make gifts
page 1-                  to their five children in 2009. What is the maximum amount of the annual exclusion they
13        example 9      will be allowed for these gifts?
page 1-
18                       What would be the effect of a proposed flat tax? Simplie taxes? Eliminate taxes? What?
page 1-
20        page 1-21      What are the characteristics of the audit process? What are the steps, types?
                         Bill files his tax return 65 days after the due date. Along with the return, Bill remits a
chapter                  check for $20,000 which is the balance of the tax owed. Disregarding the interest
1         example 15     element, Bill’s total failure to file and to pay penalties are:
page 1-                  Provisions in the tax law that promote energy conservation and more use of alternative
26                       (non-fossil) fuels can be justified by:
page 2-
3                        Federal tax legislation generally originates in what body
page 2-                  What are the administrative sources of tax law and what are not administrative sources
7         Exhibit 2.1    of tax law
page 2-
9         Exhibit 2.1    What has more weight the tax Code or a regulation
page 2-                  What administrative release deals with a proposed transaction rather than a completed
10                       transaction
          summary
          2.1            which trial court hears only tax disputes
          Summary
          2.2            Which trial court decisions are more authoratative
                         what is a tax treaty, what happens when a tax treaty and the Code conflict, what
page 2-                  disclosures are required on tax treaties, are there any fines associated with not
20                       reporting a conflicting tax treaty
page 2-
23                       What are the primary sources of tax law and how are they referenced
          exhibit 3.3    what are the deductions from AGI
page 3-
10                       Describe the 2009 increase to the standard deduction allowed for property taxes

          example 1      During 2009, Marie had the following transactions:
          exhibit 3.1
                         Salary
                         Bank loan (proceeds used to buy personal auto)
                        Alimony received
                        Child support received
                        Inheritance from deceased aunt
                        Calculate Marie's AGI

          example 1     During 2009, Colin had the following transactions:
          exhibit 3.1
                        Salary
                        Interest income on City of Denver bonds
                        Damages for personal injury (car accident)
                        Punitive damages (same car accident)
                        Cash dividends from General Motors Corporation stock
                        Calculate Colin's AGI


                        Merle, age 17, is claimed by her parents as a dependent. During 2009, she had interest
                        income from a bank savings account of $2,000 and income from a part-time job of
          example 11    $4,200. Merle’s taxable income is:


                        Troy and Edie are married and under 65 years of age. During 2009, they furnish more
                        than half of the support of their 18-year old daughter, Jobeth, who lives with them.
                        Jobeth earns $15,000 from a part-time job, most of which she sets aside for future
                        college expenses. Troy and Edie also provide more than half of the support of Troy’s
                        cousin who does not live with them. Edie’s father, who died on January 3, 2009, at age
page 3-                 80, has for many years qualified as their dependent. How many personal and
12                      dependency exemptions should Troy and Edie claim?

page 3-                 who can be claimed as a dependent and who cannot be claimed as a dependent, can a
15        page 3-18     divorced spouse be claimed as a dependent

page 3-
13        page 3-18     Who cannot be claimed as a qualifying child, nonresident alien, married son, etc.

          summary
          3.1           what are the requirements for a qualifying relative to be a dependent

page 3-
27        page 3-28     Which of the following taxpayers may file as a head of household in 2009?


                        Ron provides all the support for his mother, Betty, who lives by herself in an apartment
                        in Fort Lauderdale. Ron 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 2009 working at a fast food restaurant and is saving his money to attend
                        college in 2010. Dan lives in Tammy’s home.
                       Joe’s wife left him late in December of 2008. No legal action was taken and Joe has not
                       heard from her in 2009. Joe supported his 6-year-old son, who lived with him
                       throughout 2009.


                       Arnold is married to Sybil, who abandoned him in 2007. He has not seen or
                       communicated with her since April of that year. He maintains a household in which their
page 3-                son, Evans, lives. Evans is age 25 and earns over $20,000 each year. For tax year 2009,
26        page 3-28    Arnold’s filing status is:

                       Perry is in the 33% tax bracket. During 2009, he had the following capital asset
                       transactions:

                       Gain from the sale of a stamp collection (held for 10 years)
                       Gain from the sale of an investment in land (held for 4 years)
                       Gain from the sale of stock investment (held for 8 months)

                       Perry’s tax consequences from these gains are as follows:



page 4-
8                      How does the claim of right rule apply to the reporting of gross income


                       Dorothy purchased a certificate of deposit for $10,000 on January 1, 2010. The
page 4-                certificate’s maturity value in two years (December 31, 2011) is $10,816, yielding 4%
12                     before-tax interest.
                       what must be reported in gross income in 2010 and 2011


                       Jerry purchased a U.S. Series EE savings bond for $279. The bond has a maturity value in
page 4-                10 years of $500 and yields 6% interest. This is the first Series EE bond that Jerry has
13                     ever owned.


                       Home Office, Inc., leased a copying machine to a new customer on December 27, 2010.
                       The machine was to rent for $500 per month for a period of 36 months beginning
                       January 1, 2011. The customer was required to pay the first and last month’s rent at the
page 4-                time the lease was signed. The customer also was required to pay an $800 damage
14        example 17   deposit. Home Office must recognize as income for the lease:
                       what must be reported in gross income in each year if there are a cash basis taxpayer
                       what must be reported in gross income in each year if there are an accrual basis
                       taxpayer

page 4-                How is prepaid income from services handled on the tax return and how is this different
14                     from financial reporting.
                       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 $400 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, the
                       company had $40,000 of unearned revenues from these contracts. The company also
                       had $10,000 in unearned rent income received from excess office space leased to other
page 4-                companies. Based on the above, Green must include in gross income for the current
14                     year:

page 4-
16        example 22   As a general rule which are true and which are false.

                       Income from property is taxed to the person who owns the property.
                       Income from services is taxed to the person who earns the income.
                       The assignee of income from property must pay tax on the income.
                       The person who receives the benefit of the income must pay the tax on the income.


                       Daniel purchased a bond on July 1, 2010, at par of $10,000 plus accrued interest of $400.
page 4-                On December 31, 2010, Daniel collected the $800 interest for the year. On January 1,
16        example 22   2011, Daniel sold the bond for $10,200.
                       When must the interest income be reported and how much and when must the gain be
                       reported and how much.


                       Joe and Bonnie were divorced. Their only marital property consisted of a personal
                       residence (fair market value of $400,000, cost of $200,000), and publicly-traded stocks
                       (fair market value of $800,000, cost basis of $500,000). Under the terms of the divorce
page 4-                agreement, Bonnie received the personal residence and Joe received the stocks. In
21        page 4-24    addition, Bonnie was to receive $50,000 for eight years
                       what is the alimony, what if any is the taxable gain that must be reported, what would
                       be the consequences if the stocks are sold



page 4-                In the case of a below-market loan between family members, if the imputed interest
25        page 4-28    rules apply what are the tax consequences, who has income, who has a gift if any


                       In 2010, Todd purchased an annuity for $180,000. The annuity is to pay him $2,000 per
page 4-                month for the rest of his life. His life expectancy is 150 months. Which of the following is
28        page 4-30    correct
                       How much income would need to be reported each year, what would happen if Tod died
                       before all the purchase price was recovered.


                       Ted is age 67 and unmarried and his only sources of income are $230,000 in taxable
page 4-                interest and $15,000 of Social Security benefits. Ted’s adjusted gross income for the year
34        page 4-35    is:
Review list exam Exam 13, 14 & 1
What are the characteristics of Section 1231 property
When is livestock considered Section 1231 property
When is an involuntary conversion treated as a Section 1231 gain or loss, or an ordinary gain or loss
What is Section 1245 property and what does it apply to and how is it applied
Who are considered related parties for Section 1239
*Caculate the gain/loss on equipment and determine if is it Section 1239, ordinary, or Captial Gain/loss
*Calculate the Section 1231 Gain for Buildings were ACRS depreciation and Straight Line depreciation was
used
What deduction are and are not allowed for Alternative Minimum Taxable Income
What are the adjustments allowed for Alternative Minimum Taxable income
What is self employment tax, how is it reported on the 1040
How are nonrefundable tax credits treated on the tax return
How are refundable tax credits treated
*Calculate the child tax credit with AGI in excess of the threshold
*Calculate the HOPE credit with AGI in excess of the threshold
*Calculate Lifetime Learning Credit determine if need phase out
*calculate the Foreign tax credit
*Calculate the Child and Dependent Care credit determine if need phase out
What are the qualifications to take the Earned Income Credit
How can someone avoid paying penalties for underpayment of estimated taxes, how is this affected by AGI
Review list for exam 5, 6 & 7



book book

page   example                                                           item

5-3    5-2       calculate realized gain or loss on property disposed of and/or condemnation

5-3    5-4       calculate amount realized on exchange of property

5-8              calculate basis in inherited property, holding period and gain or loss on disposition

5-9    5-24      calculate basis in inherited property, holding period and gain or loss on disposition

5-9              what is the basis in property in a community property state upon death of a spouse

                 what is the basis in property in a common law state upon death of a spouse and calculate

5-9              gain/loss upon sale

5-10   5-28      calculate gain/loss on residence converted to business use and then sold.

                 how are stock dividends handled on the tax return, what if the stock dividend is not the same

5-11             type of stock

5-13             what is a capital asset, be able to give examples of capital assets and determine what is not a capital asset

5-18             what are the tax rates applicable to capital gains and what rates apply to which type of capital asset

6-3              what are the deductions for AGI, how is self employment tax treated in calculating AGI

6-3              what are the deductions for AGI on the 1040

6-4    6-1       calculate taxable income for a single taxpayer with business income, dividends and interest income

6-4              where are all the of deductions for AGI report, which supporting forms and schedules

6-5              what are the requirements for an expense to be tax deductible, what expenses are deductible

6-7    6-4       what legal and accounting fees are deductions for AGI be able to calculate them

6-14             calculate deductible business expenses and determine how to handle fines and penalties, bribes

6-24   6-31      calculate the recognized loss on a wash sale

6-25   6-32      calculate the basis for the new stock on a wash sale

6-33   6-42      allocate expenses for a vacation home and determine what expenses can be taken as rental property expense

6-29             how do you determine if a activity is a hobby or a business, what hobby expenses are deductible

6-37             what documentation is required to substantiate travel and entertainment expenses
7-11          how are assessments for street improvements treated and handled on the tax return

7-12          which interest expenses are deductible

7-28          what are the miscellaneous itemized deductions and which are not subject to the 2% of AGI reduction

7-4           determine what are and aren't qualified medical expenses that can be deducted

7-3           calculate the amount of medical expenses that can be deducted

7-6    7-4    determine what amount of improvements to a home can be deducted as a medical expense

7-7           for who can be take medical expenses, be able to calculate medical expenses

7-9    7-10   what taxes are deductible, be able to calculate the amount of deductible taxes

7-11   7-10   allocate the taxes on a property purchased midyear between the buyer and the seller

7-10   7-9    determine the amount of personal property tax on a car that is deductible as a tax expense

7-14          what is net investment income, what are investment expenses and how is investment interest handled

7-14   7-14   Calculate the amount of deductible investment interest

7-19          calculate the amount of student loan interest that is deductible, how is this affected by AGI

7-22          what are deductible charitable contributions

7-22          calculate the deductible charitable contributions taking into consideration AGI

				
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