Income Tax Accounting
Mock Exam
Course Introduction
Income Tax Accounting is a course designed to introduce students to the fundamental principles and practices of accounting for income taxes in both individual and business contexts. The curriculum covers the calculation of gross income, deductions, and taxable income, along with the preparation of tax returns pursuant to current tax laws and regulations. Students will explore topics such as tax planning, timing differences, deferred tax assets and liabilities, and the tax implications of various business transactions. Emphasis is placed on understanding the Internal Revenue Code, compliance procedures, and the ethical considerations faced by tax professionals. The course equips learners with the analytical and technical skills necessary for effective tax decision-making and reporting.
Recommended Textbook
South Western Federal Taxation 2015 Individual Income Taxes 38th Edition by
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Page 2
William H. Hoffman
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Sample Questions
Q1) Logan dies with an estate worth $20 million.Under his will,$10 million passes to his wife while $10 million goes to his church.What is Logan's Federal estate tax result?
Answer: None.After a marital deduction of $10 million and a charitable deduction of $10 million,Logan's taxable estate is $0.
Q2) Federal excise taxes that are no longer imposed include:
A)Tax on air travel.
B)Tax on wagering.
C)Tax on the manufacture of sporting equipment.
D)Tax on alcohol.
E)None of these.
Answer: E
Q3) Two persons who live in the same state but in different counties may not be subject to the same general sales tax rate.
A)True
B)False
Answer: True
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Chapter 2: Working With the Tax Law
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Q1) Which of the following indicates that a decision has precedential value for future cases?
A)Stare decisis
B)Golsen doctrine
C)En banc
D)Reenactment doctrine
E)None of these
Answer: A
Q2) The U.S.Tax Court meets most often in Washington,D.C.
A)True
B)False
Answer: False
Q3) The "petitioner" refers to the party against whom a suit is brought.
A)True
B)False
Answer: False
Q4) Three judges will normally hear each U.S.Tax Court case.
A)True
B)False
Answer: False
Page 4
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Chapter 3: Tax Formula and Tax Determination;an
Overview of Property Transactions
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Q1) After Ellie moves out of the apartment she had rented as her personal residence,she recovers her damage deposit of $1,000.The $1,000 is not income to Ellie.
A)True
B)False
Answer: True
Q2) Katelyn is divorced and maintains a household in which she and her daughter,Crissa,live.Crissa,age 22,earns $11,000 during 2014 as a model.Katelyn does not qualify for head of household filing status.
A)True
B)False
Answer: True
Q3) Kim,a resident of Oregon,supports his parents who are residents of Canada but citizens of Korea.Kim can claim his parents as dependents. A)True
B)False
Answer: True
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Daniel purchased a bond on July 1,2014,at par of $10,000 plus accrued interest of $300.On December 31,2014,Daniel collected the $600 interest for the year.On January 1,2015,Daniel sold the bond for $10,200.
A)Daniel must recognize $300 interest income for 2014 and a $200 gain on the sale of the bond in 2015.
B)Daniel must recognize $600 interest income for 2014 and a $200 gain on the sale of the bond in 2015.
C)Daniel must recognize $600 interest income for 2014 and a $100 loss on the sale of the bond in 2015.
D)Daniel must recognize $300 interest income for 2014 and a $100 loss on the sale of the bond in 2015.
E)None of these.
Q2) A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1,2013 that will pay $1,100 upon its maturity on June 30,2015.The taxpayer must recognize a portion of the income in 2014.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) Carmen had worked for Sparrow Corporation for thirty years when she died of a heart attack at age 60.She was practically penniless at the time of her death,owed a $12,000 hospital bill,and had a disabled spouse.The company was very concerned about its public image,and rather than run the risk of embarrassment from one of its long-term employees dying and leaving her spouse with insufficient means,the Board of Directors agreed to pay Carmen's hospital bill and to give her spouse $6,000 per year for the rest of his life.Discuss both sides of the question whether Carmen (or her estate)and her spouse realize any taxable income from the above.
Q2) Sally and Ed each own property with a fair market value less than the amount of the outstanding mortgage on the property and also less than the original cost basis.They each were able to convince the mortgage holder to reduce the principal amount on the mortgage.Sally's mortgage is on her personal residence and Ed's mortgage is on rental property he owns.
a.Explain whether each of these individuals has realized income from the reduction in the debt.
b.Assume that under the current system of measuring income,each of these taxpayers realized income from the reductions in the mortgages.Should either of these taxpayers be permitted to exclude any of the debt reduction income?
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Chapter 6: Deductions and Losses: in General
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Q1) All domestic bribes (i.e. ,to a U.S.official)are disallowed as deductions.
A)True
B)False
Q2) Which of the following can be claimed as a deduction for AGI?
A)Personal casualty losses.
B)Investment interest expenses.
C)Medical expenses.
D)Property taxes on personal use real estate.
E)None of these.
Q3) Purchased goodwill must be capitalized,but can be amortized over a 60-month period.
A)True
B)False
Q4) Alice incurs qualified moving expenses of $12,000.If she is reimbursed by her employer,the deduction is classified as a deduction for AGI.If not reimbursed,the deduction is classified as an itemized deduction.
A)True
B)False
Q5) Can a trade or business expense be deductible if it is necessary but not ordinary?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) In the computation of a net operating loss,which of the following items is not added to the negative taxable income?
A)Losses incurred in a transaction entered into for profit.
B)Deductible alimony payments.
C)Personal theft loss.
D)Losses from theft of securities.
E)None of these.
Q2) On September 3,2013,Able,a single individual,purchased § 1244 stock in Red Corporation from his friend Al for $60,000.On December 31,2013,the stock was worth $85,000.On August 15,2014,Able was notified that the stock was worthless.How should Able report this item on his 2014 tax return?
A)$85,000 capital loss.
B)$85,000 ordinary loss.
C)$50,000 ordinary loss and $35,000 capital loss.
D)$60,000 ordinary loss.
E)None of these.
Q3) Discuss the tax treatment of non-reimbursed losses of an employee in connection with a trade or business.
Q4) How is qualified production activities income (QPAI)calculated?
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Sample Questions
Q1) Diane purchased a factory building on April 15,1994,for $5,000,000.She sells the factory building on February 2,2014.Determine the cost recovery deduction for the year of the sale.
A)$16,025
B)$19,838
C)$26,458
D)$158,750
E)None of these
Q2) On March 3,2014,Sally purchased and placed in service a building costing $12,000,000.The building has 10 floors.The bottom three floors are rented out to businesses.The top seven floors are residential apartments.The gross rents from the businesses are $60,000 and the gross rents from the apartments are $110,000.Determine Sally's cost recovery for the building in 2014.
Q3) Discuss the effect on the cost recovery method of a taxpayer election if the uniform capitalization rules apply to a farming business.
Q4) Rod paid $1,950,000 for a new warehouse on April 14,2014.He sold the warehouse on September 29,2019.Determine the cost recovery deduction for 2014 and 2019.
Q5) Discuss the reason for the inclusion amount with respect to leased automobiles. To view all questions and flashcards with answers, click on the resource link above. Page 10
Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Which,if any,of the following expenses are not subject to the 2%-of-AGI floor?
A)Safety shoes purchased by an employed plumber.
B)Reimbursed employee expenses.Taxpayer-employee renders an adequate accounting to the employer.
C)Unreimbursed employee expenses.
D)Tax return preparation fee paid by a non-employed retiree.
E)None of these.
Q2) A taxpayer takes six clients to an NBA playoff game.If all of the tickets (list price of $120 each)are purchased on the Internet for $1,800 ($300 each),only $60 ($120 × 50% cutback adjustment)per ticket is deductible.
A)True
B)False
Q3) The § 222 deduction for tuition and related expenses is available:
A)Only if the taxpayer itemizes deductions from AGI.
B)To deduct that portion of the tuition in excess of that allowed under the lifetime learning credit.
C)To cover the tuition of a son who does not qualify as taxpayer's dependent.
D)Only if job related.
E)None of these.
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Marilyn,age 38,is employed as an architect.For calendar year 2014,she had AGI of $204,000 and paid the following medical expenses:
Medical insurance premiums $ 7,800
Doctor bills for Peter and Esther (Marilyn's parents)7,300
Doctor and dentist bills for Marilyn 11,100
Prescription medicines for Marilyn 750
Nonprescription insulin for Marilyn 950
Peter and Esther would qualify as Marilyn's dependents except that they file a joint return.Marilyn's medical insurance policy does not cover them.Marilyn filed a claim for reimbursement of $6,000 of her own expenses with her insurance company in December 2014 and received the reimbursement in January 2015.What is Marilyn's maximum allowable medical expense deduction for 2014?
Q2) The election to itemize is appropriate when total itemized deductions are less than the standard deduction based on the taxpayer's filing status.
A)True
B)False
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Chapter 11: Investor Losses
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Sample Questions
Q1) Judy incurred $58,500 of interest expense this year related to her investments.Her investment income includes $15,000 of interest,$9,000 of qualified dividends,and a $22,500 net capital gain on the sale of securities.The maximum amount of Judy's investment interest expense deduction for the year is:
A)$15,000.
B)$24,000.
C)$37,500.
D)$46,500.
E)None of these.
Q2) Roger owns and actively participates in the operations of an apartment building which produces a $40,000 loss during the year.He has AGI of $150,000 from an active business.He may deduct $25,000 of the loss.
A)True
B)False
Q3) A qualified real estate professional is allowed to treat income or loss from any real estate venture as active except for income or loss from a rental activity.
A)True
B)False
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Chapter 12: Alternative Minimum Tax
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Q1) A taxpayer has a passive activity loss for the current tax year for regular income tax purposes and for AMT purposes.Is it possible that the passive activity losses will be the same amount?
Q2) For individual taxpayers,the AMT credit is applicable for the AMT that results from timing differences,but it is not available for the AMT that results from the adjustment for itemized deductions or exclusion preferences.
A)True
B)False
Q3) Tad and Audria,who are married filing a joint return,have AMTI of $256,000 for 2014.Calculate their AMT exemption.
Q4) Bianca and David have the following for 2014: Regular income tax before credits $32,000 Tentative AMT before credits 45,000
a.Calculate Bianca and David's AMT if they qualify for the adoption expense credit of $11,000.
b.Calculate Bianca and David's AMT if they qualify for the adoption expense credit of $13,190.
Q5) Under what circumstances are corporations exempt from the AMT?
Q6) Why is there no AMT adjustment for charitable contributions?
Page 14
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Jack and Jill are married,have three children,and have earnings during 2014 of $28,500.Do they qualify for the earned income credit? If so,calculate the amount of credit that is available to them.
Q2) Which of the following correctly reflects current rules regarding estimated tax payments for individuals?
A)Employees are not subject to the estimated tax payment provisions.
B)Any penalty imposed for underpayment is deductible for income tax purposes.
C)Married taxpayers may not make joint estimated tax payments unless they file a joint income tax return.
D)No quarterly payments are required if the taxpayer's estimated tax is under $1,000.
E)None of these.
Q3) A taxpayer may qualify for the credit for child and dependent care expenses if the taxpayer's dependent is under age 17.
A)True
B)False
Q4) How does the FICA tax compare to the self-employment tax? How are these two taxes similar and how do they differ?
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample
Questions
Q1) Broker's commissions,legal fees,and points paid by the seller reduce the seller's amount realized.
A)True
B)False
Q2) If Wal-Mart stock increases in value during the tax year by $6,000,the amount realized is a positive $6,000.
A)True
B)False
Q3) The holding period for property acquired by gift is automatically long term.
A)True
B)False
Q4) The basis for gain and loss of personal use property converted to business use is the lower of the adjusted basis or the fair market value on the date of conversion.
A)True
B)False
Q5) What is the difference between the depreciation (or cost recovery)allowed and the depreciation (or cost recovery)allowable and what effect does each have on the adjusted basis of property?
Q6) Define fair market value as it relates to property transactions.
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) If boot is received in a § 1031 likekind exchange that results in some of the realized gain being recognized,the holding period for both the like-kind property and the boot received begins on the date of the exchange.
A)True
B)False
Q2) A taxpayer who sells his or her principal residence at a realized loss can elect to recognize the loss even if a qualified residence is acquired during the statutory time period.
A)True
B)False
Q3) A building located in Virginia (used in business)exchanged for a building located in France (used in business)cannot qualify for like-kind exchange treatment.
A)True
B)False
Q4) Distinguish between a direct involuntary conversion and an indirect involuntary conversion.
Q5) Discuss the treatment of losses from involuntary conversions.
Q6) What kinds of property do not qualify under the like-kind provisions?
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Harold is a head of household,has $27,000 of taxable income in 2014 from non-capital gain or loss sources,and has the following capital gains and losses: \(\begin{array}{lc}
28 \% \text { long-term capital gain } & \$ 4,300 \\
28 \% \text { long-term capital loss } & (2,000) \\
0 \% / 15 \% / 20 \% \text { long-term capital gain } & 19,000 \\ \text { Short-term capital loss } & (1,700)
\end{array}\) What is Harold's taxable income and the tax on that taxable income?
Q2) Which of the following events causes the purchaser of an option to add the cost of the option to the basis of the property to which the option relates?
A)The option is exercised.
B)The option is sold.
C)The option lapses.
D)The option is rescinded.
E)None of these.
Q3) If a capital asset is sold at a gain,the holding period is important.
A)True
B)False
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) Part III of Form 4797 is used to report gains from the sale of depreciable business equipment sold at a gain and held more than one year.
A)True
B)False
Q2) Section 1245 may apply to amortizable § 197 intangible assets.
A)True
B)False
Q3) Which of the following would extinguish the § 1245 recapture potential?
A)An exchange of depreciable business equipment for like-kind business equipment with gain realized,but not recognized.
B)A nontaxable incorporation under § 351.
C)A nontaxable contribution to a partnership under § 721.
D)A nontaxable reorganization.
E)None of these.
Q4) The § 1245 depreciation recapture potential does not reduce the amount of the charitable contribution deduction under § 170.
A)True
B)False
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Chapter 18: Accounting Periods and Methods
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Q1) Which of the following statements is true concerning the disposition of an installment note?
A)Deferred gain is not recognized by the transferor if the installment note is a non-taxable transfer to a controlled corporation.
B)Deferred gain must only be recognized if the installment note was transferred as a gift to a related party.
C)Transfer of an installment obligation to another party will not trigger immediate recognition of deferred gain.
D)Deferred gain must be recognized if the note is transferred to the owner's estate at his death.
E)None of these.
Q2) In the case of a sale reported under the installment method,gain is recognized in each year the seller collects on the installment contract.
A)True
B)False
Q3) What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?
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Chapter 19: Deferred Compensation
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Q1) A 20% excise tax is imposed on nondeductible contributions by an employer to a qualified plan.
A)True B)False
Q2) If an individual is ineligible to make a deductible contribution to a traditional IRA,nondeductible contributions of any amount can be made to a traditional IRA.
A)True B)False
Q3) Nick negotiates a $4.5 million contract per year with a major college football program to become its head coach.What amount is deductible by the program in 2014 his first full year of employment.
A)None
B)$1,000,000
C)$3,000,000
D)$4,500,000
E)None of these
Q4) What is a defined contribution plan?
Q5) Compare a § 401(k)plan with an IRA.
Q6) What is a profit sharing plan?
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Chapter 20: Corporations and Partnerships
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Q1) An S corporation can be a shareholder in another corporation.
A)True
B)False
Q2) Two unrelated,calendar year C corporations have the following taxable income for the current year: Olive Corporation Magenta Corporation
Taxable income $70,000 $90,000 Magenta Corporation is a qualified personal service corporation.Based on these facts,their corporate tax liability is:
A)$24,500 for Olive and $18,850 for Magenta.
B)$24,500 for Olive and $31,500 for Magenta.
C)$12,500 for Olive and $18,850 for Magenta.
D)$12,500 for Olive and $31,500 for Magenta.
E)None of these.
Q3) Examples of separately stated items of an S corporation include tax-exempt interest.
A)True
B)False
Q4) Regarding the tax treatment of charitable contributions,corporations enjoy two major advantages over individuals.Elaborate.
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