Income Tax Accounting Test
Questions
Course Introduction
Income Tax Accounting is a comprehensive course that explores the principles and practices of accounting for income taxes, focusing on both individual and corporate taxpayers. Students will be introduced to the U.S. federal income tax system, tax regulations, and reporting requirements as they relate to business entities and individuals. Topics include income recognition, deductions, credits, tax planning strategies, and the preparation of tax returns. The course also covers the implications of deferred taxes, temporary and permanent differences, and the impact of recent tax legislation on financial statements. Through practical exercises and case studies, students will gain the skills necessary to understand and apply income tax accounting rules in real-world scenarios.
Recommended Textbook
South Western Federal Taxation 2014 Individual Income Taxes 37th Edition by
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Page 2
William Hoffman
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Virtually all state income tax returns contain checkoff boxes for donations to various causes.On what grounds has this procedure been criticized? Answer: In many cases the procedure is overused (i.e.,a multiplicity of boxes).This overuse adds complexity to the return.Also,in most cases the donation is being drawn from any income tax refund that might be due.Thus,taxpayers may not fully appreciate that they are paying for such checkoffs.
Q2) Under Clint's will,all of his property passes to either the Lutheran Church or to his wife.No Federal estate tax will be due on Clint's death in 2012. A)True
B)False
Answer: True
Q3) No state has offered an income tax amnesty program more than once. A)True
B)False
Answer: False
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Chapter 2: Working With the Tax Law
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Q1) Which of the following cannot be found in the Federal Register?
A) Regulations.
B) Temporary Regulations.
C) Proposed Regulations.
D) Revenue Rulings.
E) All of the above may be found in the Federal Register.
Answer: D
Q2) The test for whether a child qualifies for dependency status is first conducted under the qualified child requirement.
A)True
B)False
Answer: True
Q3) A taxpayer must pay any tax deficiency assessed by the IRS and sue for a refund to bring suit in the U.S.District Court.Only in the Tax Court can jurisdiction be obtained without first paying the assessed tax deficiency.
A)True
B)False
Answer: True
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Q1) Deductions for AGI are often referred to as "above-the-line" or "page 1" deductions.Explain.
Answer: "Above the line" means before the bottom line of page 1 of Form 1040,which is AGI.These deductions appear on page 1 of Form 1040.
Q2) Gain on the sale of collectibles held for more than 12 months could be subject to tax at a rate lower than 28%.
A)True
B)False Answer: True
Q3) In 2012,Ed is 66 and single.If he has itemized deductions of $7,300,he should claim the standard deduction alternative.
A)True
B)False Answer: True
Q4) All exclusions from gross income are reported on Form 1040.
A)True
B)False
Answer: False
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Jake is the sole shareholder of an S corporation that earned $50,000 in 2012.The corporation was short on cash and therefore distributed only $15,000 to Jake in 2012.Jake is required to recognize $15,000 of income from the S corporation in 2012.
A)True
B)False
Q2) At the beginning of 2013,Mary purchased a 3-year certificate of deposit (CD)for $8,760.The maturity value of the certificate was $10,000 and it was to yield 4.5%.She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000.Mary must recognize $1,240 of income from the certificate of deposit in 2013,and $3,600 from the Series EE bonds in 2022.
A)True
B)False
Q3) The constructive receipt doctrine requires that income must be recognized when it is made available to the cash basis taxpayer,although it has not been actually received.The constructive receipt doctrine does not apply to accrual basis taxpayers.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) Jack received a court award in a civil libel and slander suit against National Gossip.He received $120,000 for damages to his professional reputation,$100,000 for damages to his personal reputation,and $50,000 in punitive damages.Jack must include in his gross income as a damage award:
A) $0.
B) $100,000.
C) $120,000.
D) $270,000.
E) None of the above.
Q2) Nicole's employer pays her $150 per month towards the cost of parking near a railway station where Nicole catches the train to work.The employer also pays the cost of the rail pass,$75 per month.Nicole can exclude both of these payments from her gross income.
A)True
B)False
Q3) What Federal income tax benefits are provided for college students?
Q4) If a tax-exempt bond will yield approximately .65 (1 - .35)times the yield on a taxable bond of equal risk,who benefits from the tax exemption: the Federal government,the state and local governments who issue the bonds,or the investors?
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Chapter 6: Deductions and Losses: in General
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Q1) If a residence is used primarily for personal use (rented for fewer than 15 days per year),which of the following is correct?
A) No income is included in AGI.
B) No expenses are deductible.
C) Expenses must be allocated between rental and personal use.
D) Only a. and b. are correct.
E) a., b., and c. are correct.
Q2) Are there any circumstances under which lobbying expenditures are deductible?
Q3) A salary that is classified as unreasonable by the IRS is disallowed as a deduction to the corporation.
A)True
B)False
Q4) Beige,Inc.,an airline manufacturer,is conducting negotiations for the sale of military aircraft.One negotiation is with a U.S.assistant secretary of defense.She can close the deal on the purchase of 50 attack helicopters if she is paid $750,000 under the table.Another negotiation is with the minister of defense of a third world country.To complete the sale of 20 jet fighters to his government,he demands that he be paid a $1 million grease payment.Beige makes the payments and closes the deals.How much of these payments are deductible by Beige,Inc.?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) Research and experimental expenditures do not include expenditures for ordinary testing of materials for quality control.
A)True
B)False
Q2) A theft of investment property can create or increase a net operating loss for an individual.
A)True
B)False
Q3) If qualified production activities income (QPAI)cannot be used in the calculation of the domestic production activities deduction in 2012 because of the taxable income limitation,the product of the amount not allowed multiplied by 9% can be carried over for 5 years.
A)True
B)False
Q4) The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is determined.
A)True
B)False
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Q5) Why was the domestic production activities deduction (DPAD)enacted by Congress?
Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) The cost recovery period for new farm equipment placed in service during 2012 is seven years.
A)True
B)False
Q2) The amortization period in 2012 for $4,000 of startup expenses if no election is made is 180 months.
A)True
B)False
Q3) The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds used for the production of income is $25,000.
A)True
B)False
Q4) The basis of an asset on which $139,000 has been expensed under § 179 will be reduced by $139,000,even if $139,000 cannot be expensed in the current year because of the taxable income limitation.
A)True
B)False
Q5) Discuss the effect on the cost recovery method of a taxpayer election if the uniform capitalization rules apply to a farming business.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) One indicia of independent contractor (rather than employee) status is when the individual performing the services is paid based on time spent (rather than on tasks performed).
A)True
B)False
Q2) Dove Corporation pays for a trip to Jamaica for its two top salespersons.This expense is not subject to the cutback adjustment.
A)True
B)False
Q3) A worker may prefer to be classified as an employee (rather than an independent contractor)for which of the following reasons:
A) To claim unreimbursed work-related expenses as a deduction for AGI.
B) To avoid the self-employment tax.
C) To avoid the cutback adjustment on unreimbursed business entertainment expenses.
D) To avoid the 2%-of-AGI floor on unreimbursed work-related expenses.
E) None of the above.
Q4) Once set for a year,when might the IRS change the rate for the automatic mileage method?
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Ron and Tom are equal owners in Robin Corporation.On July 1,2012,each loans the corporation $20,000 at annual interest of 10%.Ron and Tom are brothers.Both shareholders are on the cash method of accounting,while Robin Corporation is on the accrual method.All parties use the calendar year for tax purposes.On June 30,2013,Robin repays the loans of $40,000 together with the specified interest of $4,000.How much of the interest can Robin Corporation deduct in 2012?
A) $0.
B) $1,000.
C) $2,000.
D) $4,000.
E) None of the above.
Q2) Grace's sole source of income is from a restaurant that she owns and operates as a proprietorship.Any state income tax Grace pays on the business net income must be deducted as a business expense rather than as an itemized deduction.
A)True
B)False
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Chapter 11: Investor Losses
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Q1) Joe participates 95 hours in an activity,while an employee participates 5 hours.Joe has materially participated in the activity.
A)True B)False
Q2) Tom participates for 300 hours in Activity A and 250 hours in Activity B,both of which are nonrental businesses.Both activities are active.
A)True B)False
Q3) Anne sells a rental house for $100,000 (adjusted basis of $55,000).During her ownership,$60,000 of losses have been suspended under the passive activity loss rules.Determine the tax treatment to Anne on the disposition of the property.
Q4) Ken has a $40,000 loss from an investment in a partnership in which he does not materially participate.He paid $30,000 for his interest.How much of the loss is disallowed by the at-risk rules? How much is disallowed by the passive loss rules?
Q5) What special passive loss treatment is available to real estate activities?
Q6) List the taxpayers that are subject to the passive loss rules and summarize the general impact of these rules on these taxpayers.
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Chapter 12: Alternative Minimum Tax
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Sample
Questions
Q1) Celia and Amos,who are married filing jointly,have one dependent and do not itemize deductions.They have taxable income of $82,000 and tax preferences of $53,000 in 2012.What is their AMT base for 2012?
A) $0.
B) $85,925.
C) $94,450.
D) $158,300.
E) None of the above.
Q2) The recognized gain for regular income tax purposes and the recognized gain for AMT purposes on the sale of stock acquired under an incentive stock option (ISO)program are always the same because the adjusted basis is the same.
A)True
B)False
Q3) Why is there no AMT adjustment for charitable contributions?
Q4) Business tax credits reduce the AMT and the regular income tax in the same way. A)True
B)False
Q5) For the ACE adjustment,discuss the relationship between ACE and unadjusted AMTI.
Q6) Why is there a need for a second tax system called the alternative minimum tax?
Page 14
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Chapter 13: Tax Credits and Payment Procedures
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Q1) The tax benefit received from a tax credit is affected by the tax rate of the taxpayer.
A)True
B)False
Q2) George and Jill are husband and wife,ages 67 and 65 respectively.During the year,they receive Social Security benefits of $4,000 and have adjusted gross income of $11,000.Assuming they file a joint return,their tax credit for the elderly,before considering any possible limitation due to their tax liability,is:
A) $1,125.
B) $750.
C) $450.
D) $375.
E) None of the above.
Q3) Rick spends $750,000 to build a qualified low-income housing project,which is placed in service on January 1,2012.He financed the project using his personal funds.What is the amount of the low-income housing credit that Rick may claim in 2012 (assuming a rate of 7.42%)? What is the total amount of the credit that Rick may claim as a result of the $750,000 expenditure?
Q4) Describe the withholding requirements applicable to employers.
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) Over the past 20 years,Alfred has purchased 380 shares of Green,Inc.,common stock.His first purchase was in 1991 when he acquired 30 shares for $20 a share.In 1996,Alfred bought 150 shares at $10 a share.In 2011,Alfred acquired 200 shares at $50 a share.Alfred intends to sell 125 shares at $60 per share in the current year.If Alfred's objective is to minimize gain,what is his recognized gain?
A) $1,250.
B) $3,520.
C) $5,950.
D) $6,250.
E) None of the above.
Q2) Monica sells a parcel of land to her son,Elbert,for $90,000.Monica's adjusted basis is $100,000.Three years later,Elbert gives the land to his fiancée,Karen.At that date,the land is worth $104,000.No gift tax is paid.Since Elbert is going to be stationed in the U.S.Army in Germany for 3 years,they do not plan on being married until his tour is completed.Six months after receiving the land,Karen sells it for $110,000.At the same time,Karen sends Elbert a "Dear John" email.Calculate Karen's realized and recognized gain or loss.
Q3) Discuss the application of holding period rules to property acquired by gift and inheritance.
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Which of the following statements is incorrect for a § 1033 involuntary conversion?
A) An election can be made to postpone gain on a § 1033 involuntary conversion only if the proceeds received are reinvested in qualifying property no later than two years after the date of the involuntary conversion.
B) The postponement of realized gain in a § 1033 involuntary conversion is elective.
C) The functional use test is satisfied if a business warehouse is replaced with another business warehouse.
D) The taxpayer use test is satisfied if a shopping mall rented to tenants is replaced with an office building to be rented to tenants.
E) All of the above are correct.
Q2) An exchange of two items of personal property (personalty)that belong to different general business asset classes qualifies for nonrecognition under § 1031 as long as both properties are used in the taxpayer's trade or business.
A)True
B)False
Q3) Define an involuntary conversion.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) A security that is a capital asset becomes worthless.The loss is deemed to have occurred on the day that the security was declared worthless.
A)True
B)False
Q2) The 2011 "Qualified Dividends and Capital Gain Worksheet" is used:
A) To calculate the tax using the alternative tax method on 0%/15% net capital gain and qualified dividends.
B) To calculate the tax using the alternative tax method on 0%/15% net capital gain, but not on qualified dividends.
C) To calculate the tax using the alternative tax method on 0%/15% capital gain, 25% capital gain, and 28% capital gain, but not on qualified dividends.
D) To calculate the tax using the alternative tax method on 0%/15% capital gain, 25% capital gain, 28% capital gain, and qualified dividends.
E) None of the above.
Q3) Original issue discount is amortized over the life of the bond.
A)True
B)False
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Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Part II 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) 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?
A) A capital asset and $5,000 gain.
B) An ordinary asset and $5,000 gain.
C) A § 1231 asset and $5,000 gain.
D) A § 1231 asset and $5,000 loss.
E) None of the above.
Q3) The Code contains two major depreciation recapture provisions-§§ 1245 and 1250.
A)True
B)False
Page 19
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Chapter 18: Accounting Periods and Methods
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Q1) Pink Corporation is an accrual basis taxpayer that uses the recurring item exception to the economic performance test for all relevant years.For 2012,the corporation's income subject to state income tax was $500,000 and the state corporate tax rate was 6%.During 2012,the corporation paid $24,000 on its estimated state income tax liability for that year.The remaining $6,000 of 2012 state income tax was paid in April 2013.In June 2012,the corporation paid $9,000 on its year 2011 state income tax liability,as a result of an audit of the 2011 return that was conducted in 2012.The company has elected to use the recurring item exception to economic performance.As a result of the above,the corporation should deduct in 2012 on its Federal income tax return state income taxes of:
A) $24,000.
B) $30,000.
C) $33,000.
D) $39,000.
E) None of the above.
Q2) In the case of a sale reported under the installment method,no gain is reported until the seller has recovered the entire cost of the property sold.
A)True
B)False
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Chapter 19: Deferred Compensation
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Q1) In a profit sharing plan,a separate account is maintained for each participant.
A)True
B)False
Q2) What statement is false with respect to an incentive stock option (ISO)?
A) To qualify as an ISO, the option price must equal or exceed the fair market value of the stock at the time the option is granted.
B) The spread is not subject to the alternative minimum tax.
C) If the employee meets the holding period requirement, the employer does not obtain a business deduction.
D) The spread is the excess of the FMV of the share at the date of exercise over the option price.
E) None of the above are false.
Q3) A NQDC plan may discriminate in favor of officers or other highly compensated employees.
A)True
B)False
Q4) From an employee's point of view,discuss the difference between the tax treatment accorded to a nonqualified stock option (NQSO)that has an ascertainable fair market value and one that does not.
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Chapter 20: Corporations and Partnerships
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Q1) In comparing regular (C)corporations with individuals,which of the following,if any,relate only to (C)corporations?
A) A net short-term capital gain is taxed as ordinary income.
B) An election can be made to defer recognition of gain on an involuntary conversion under § 1033.
C) The carryover period for excess capital losses is five years.
D) Excess capital losses cannot be carried back.
E) None of the above.
Q2) Which of the following statements,if any,is characteristic of constructive dividends?
A) They must be available to the shareholders on a pro rata basis.
B) They can occur even if the corporation has no earnings and profits.
C) They must be formally declared and paid (i.e., declaration date, record date, payment date).
D) They are not deductible by the corporation.
E) None of the above.
Q3) In adjusting the taxable income of a corporation to arrive at current E & P,the dividends received deduction is added.Why?
Q4) Why were the check-the-box Regulations issued?
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