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Home work-Chapter 2. Prepare your solutions for this homework before the chapter is covered in class. Note:
answers may be rounded to nearest dollar. The current year is 2009. (Congress is expected to make many changes to
the law in 2010. We don't know what rules will be changed - it is easier to focus on 2009).

Part 1. General Concepts (ability to pay, administrative convenience, arms-length, pay-as-you-go).
1. The allowance of deductions in calculating taxable income and the use of a progressive tax rate
structure are a direct application of the
 a. Ability to Pay Concept.                       b. Administrative Convenience Concept.
 c. Arm’s-Length Transaction Concept.             d. Capital Recovery Concept.
 e. Pay-as-You-Go Concept.
2. Michael coaches a little league baseball team. He makes 15 copies of the team’s schedule to give to the
players on his employer’s copy machine (with his consent). The cost of the copies is not income to
Michael due to the
 a. Ability to Pay Concept.                        b. Administrative Convenience Concept.
 c. Arm’s-Length Transaction Concept.              d. Capital Recovery Concept.
 e. Pay-as-You-Go Concept.
3. Allowing individuals to deduct a standard deduction amount in lieu of itemizing their allowable
personal deductions is an application of the
 a. Ability to Pay Concept.                      b. Administrative Convenience Concept.
 c. Arm’s-Length Transaction Concept.            d. Capital Recovery Concept.
 e.   Pay-as-You-Go Concept.
4. Susan purchased a lot for investment purposes. She paid $10,000 for the lot. Three years later she sold
the lot to her daughter for its current value of $8,000. Susan cannot deduct the loss due to
 a. Ability to Pay Concept.                          b. Administrative Convenience Concept.
 c. Arm’s-Length Transaction Concept.                d. Capital Recovery Concept.
 e. Pay-as-You-Go Concept.
5. Withholding of taxes from the taxpayers wages and quarterly estimated tax payments are a result of the
 a. Ability to Pay Concept.                     b. Administrative Convenience Concept.
 c. Arm’s-Length Transaction Concept.           d. Capital Recovery Concept.
 e. Pay-as-You-Go Concept.

6. Thomas had $8,500 withheld from his paycheck, but since he has a large amount of interest and
dividends, he is required to make quarterly estimated tax payments due to the
 a. Ability to Pay Concept.                       b. Administrative Convenience Concept.
 c. Arm’s-Length Transaction Concept.             d. Capital Recovery Concept.
 e. Pay-as-You-Go Concept.
Part 2. Accounting Concepts (entity, assignment of income, annual accounting period, accounting
method, tax benefit rule, substance-over-form).

7. Which of the following is a taxable entity?
 a. Sole Proprietorship.                                b. Partnership.
 c. S Corporation.                                      d. C Corporation.
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8. Barbara earns a salary from Big Corporation of $100,000 per year.
She is also a 25% partner in a partnership that owns rental property.
During the year, the partnership had revenue of $90,000 and expenses of $50,000.
No salary or guaranteed payment was made to any partner.
Barbara did withdraw $4,000 from the partnership during the year.
What is Barbara’s adjusted gross income, assuming she has no deduction “for AGI?”
 a. $100,000 b $104,000 c. $110,000 d. $114,000

9. Bum is single and earns a salary from Big Corporation of $100,000 per year.
On 1-1-2010, he invested $250,000 in a new corporation [“Local Corporation”] that sells toys.
Bum owns 100% of the stock of Local Corporation.
Bum does not receive a salary from Local Corporation.
The company does not elect S status.
In 2010, Local Corporation had the following transactions:
   Transactions of “Local Corporation”                                C Corporation
   Gross revenue from business operations                                    $200,000
   Cost of sales and other routine business operating expenses                 140,000
   Dividends paid by Local Corporation to Bum                                   10,000
What is the tax liability for Local Corporation for 2010?
 a. $10,000        b $12,500 c. $15,000 d. $16,667

10. Repeat the preceding question. What is Bum’s gross income for the year, assuming he has no other
income generating activities?
 a. $160,000 b $150,000 c. $110,000 d. $100,000

11. Repeat the preceding question, except assume the corporation did elect S status on 1-1-2009. What is
Bum’s gross income for the year, assuming he has no income other than that which is identified in the
information given above?
 a. $160,000 b $150,000 c. $120,000 d. $110,000

12. Wendy owns 20% of the common stock of Britton Company. During the current year, Britton
reported a taxable income of $90,000 and paid $40,000 in cash dividends. What are the income tax
effects for Wendy of her investment in Britton Company?
         Tax Treatment         If an S or C Corporation
  a.         $8,000         If Britton is a C Corporation
  b.         $8,000         If Britton is an S Corporation
  c.         $26,000        If Britton is an S Corporation
  d.         $26,000        If Britton is an S Corporation
13. Sue owns land that she rents for $500 per month to a farmer. She received the monthly rental of $500
for each of the first ten months of the year. She assigned the income for the last two months to her
mother, and instructed the farmer to send the last two month's rent to her mother. How much rental
income should Sue report for the year?
  a. $5,000             b. $6,000            c. Other

14. Wintrop has $4,000 of state income taxes withheld from his salary during 2009.
Wintrop properly deducted $4,000 for state income taxes on his Federal Form 1040 for 2009.
His total federal itemized deductions were $15,000 for 2009. His state income tax return for 2009
showed a $700 refund, which he received on May 25, 2010. Winthrop should:
 a. Ignore the state income tax refund – do not report it to the IRS
 b. Amend the federal income return for 2009 and report the corrected amount of state income tax
      for 2009
 c. Include the state income tax refund in income on the 2010 federal income tax return
 d. Other
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Part 3. Income Concepts (all inclusive, legislative grace, capital recovery, realization, claim of right,
constructive receipt, wherewithal to pay).
15. After buying books at the beginning of the semester, Dolly finds a $100 bill outside the door of the
bookstore. The $100 is considered gross income. Which of the following supports this treatment?
 a. All-inclusive Income Concept.                b. Capital Recovery Concept.
 c. Wherewithal-To-Pay Concept.                  d. Administrative Convenience.
 e. Constructive Receipt Doctrine.
16. Capital assets include which of the following?
 a. Depreciable equipment used in Robbie's business.
 b. A bag of potato chips held for resale in Kathy’s convenience store.
 c. Accounts receivable held by Jessica because of sales on credit while operating her store.
 d. The empty doghouse sitting behind Fred's personal residence. (The dog ran away 5 weeks
     ago). Fred is an eye surgeon with a private practice.
17. Hank bought a lot for $300,000 in 2005. In 2008, a shopping center was build nearby and Hank
received two offers of $550,000, from would-be buyers. Hank sold the property in 2009 for $600,000.
How does Hank report the gain on this property?
 a. $250,000 in 2008, $50,000 in 2009            b. $0 in 2008, $300,000 in 2009
 c. Other
18. The Constructive Receipt Doctrine modifies the application of the:
 a. Cash basis          b. Accrual Basis       c. Both Cash Basis and Accrual Basis

19. Mary received a regular salary of $10,000 per month on the last day of each month.
On December 20, 2009, Thomas, the CEO of Lifetime Corp. issued a $50,000 bonus check to Mary.
Thomas asked Mary to hold the check until at least January 4, 2010, when there will be enough deposits
to cover the check.
How does Mary, a cash basis taxpayer, report her compensation income for 2009?
 a. $120,000 in 2009, $50,000 in 2010             b. $170,000 in 2009, $0 in 2010
 c. Other
20. Local Corp. had revenue of $100,000 in 2008 (including $5,000 for consulting services to ABC
Corp.) and expenses of $40,000. In 2009, ABC Corp. discovered that the consulting report had errors
causing the advice in that report to be unacceptable. In 2009, Local refunded the $5,000 fee.
Local will have taxable income of $20,000 in 2009, before considering this refund. For what year do you
recommend that Local claim a deduction or otherwise reduce its income taxes?
 a. 2008                   b. 2009               c. Either one

Part 4. Deduction Concepts (legislative grace, business purpose, capital recovery)
21. Bonnie bought a business building on August 1, 2009.
She rented the building to Big Corporation for $10,000 per month.
On August 1, 2009, she received a check for $60,000 from Big Corporation for rent for the six months
ending on January 31, 2010.
How does Bonnie, an accrual basis taxpayer, report this rental income of $60,000 on her tax return(s)?
 a. $60,000 in 2009, $0 in 2010                  b. $50,000 in 2009, $10,000 in 2010
 c. Other
22. Carter sold 100 shares of Capital, Inc. for $10,000, but he only recognized $4,000 as income because
the original purchase price was $6,000. This is due to the
 a. Ability to Pay Concept.                         b. Administrative Convenience Concept.
 c. Arm’s-Length Transaction Concept.               d. Capital Recovery Concept.
 e. Pay-as-You-Go Concept.
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23. Wanda sells her personal automobile for $1,000 in 2010.
The car cost her $12,000 nine years ago. What are the tax effects of the current sale?
 a. Wanda deducts a loss of $11,000 on her 2010 tax return due to the capital recovery concept.
 b. Wanda deducts no loss on her tax return due to lack of business purpose for the automobile.
 c. Wanda may deduct a loss on her tax return of $3,000.
24. Bonnie bought a business building on August 1, 2009.
She rented the building to Big Corporation for $10,000 per month.
On August 1, 2009, she received a check for $60,000 from Big Corporation for rent for the six months
ending on January 31, 2010.
How does Big Corp., a cash basis taxpayer, deduct this rent expense of $60,000 on its tax return(s)?
 a. $60,000 in 2009, $0 in 2010                  b. $50,000 in 2009, $10,000 in 2010
 c. Other
25. John sold one asset (a building) in 2010. The following additional information is given.
     Original cost (asset was purchased for cash)            Jan. 1 2008 $100,000
     Depreciation claimed                                     Year 2008          $2,000
     Added room to building at cost of $40,000               Jan. 1 2009        $40,000
     Depreciation claimed                                     Year 2009          $3,000
     Selling price                                           Jan. 1 2010 $200,000
What is John’s gain on this sale?
 a. $95,000       b. $60,000 c. $55,000 d. $65,000

				
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