Principles of Taxation Pre-Test
Questions
Course Introduction
Principles of Taxation introduces students to the foundational concepts and laws governing the taxation system. The course covers types of taxes, the objectives and principles guiding tax policy, and the methods of tax computation for individuals and businesses. Students will explore tax administration, compliance requirements, and the ethical considerations in taxation. Emphasis is placed on tax planning, legal frameworks, and the economic impact of taxation on society. By the end of the course, students will have a solid understanding of how taxes are applied, the rationale behind tax systems, and the importance of effective tax management in various economic contexts.
Recommended Textbook
Concepts in Federal Taxation 2019 26th Edition Kevin E. Murphy
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16 Chapters
2071 Verified Questions
2071 Flashcards
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Chapter 1: Federal Income Taxation-An Overview
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Q1) The marginal tax rate is the rate of tax that will be paid on the next dollar of income or the rate of tax that will be saved by the next dollar of deduction.
A)True
B)False
Answer: True
Q2) Which of the following payments meets the IRS definition of a tax?
A)Sewer fee charged added to a city trash collection bill.
B)A special assessment paid to the county to pave a street.
C)A levy on the value of a deceased taxpayer's estate.
D)Payment of $300 to register an automobile. The $300 consists of a $50 registration fee and $250 based on the weight of the auto.
Answer: C
Q3) A CPA may prepare tax returns using estimates provided by the taxpayer if it is impracticable to obtain exact data and the estimates are reasonable.
A)True
B)False
Answer: True
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3
Chapter 2: Income Tax Concepts
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Q1) Which of the following constructs have developed from the Annual Accounting Period Concept?
I.Entity Concept.
II.Capital Recovery.
III.Related Party.
IV.Tax Benefit Rule.
A)Only statement I is correct.
B)Statements II and III are correct.
C)Statements III and IV are correct.
D)Only statement IV is correct.
E)Statements II, III, and IV are correct.
Answer: D
Q2) The taxpayer will be able to benefit from capital recovery on business equipment over the life of the asset and any remaining capital will be recovered when the asset is sold.
A)True
B)False Answer: True
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Page 4
Chapter 3: Income Sources
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Q1) Terry owns 100% of Terry Manufacturing, Inc, and has the corporation pay his son's college tuition. Terry must include the payments in his taxable income.
A)True
B)False
Answer: True
Q2) Friendly Finance loans Anne $10,000 and she will pay $13,130 at the end of three years. Since Friendly is on a cash basis, it will recognize the $3,130 interest income when the loan is repaid.
A)True
B)False
Answer: False
Q3) Connie was walking her dog when she came across a paper bag with $20,000 in it. She turned the money into the police. After the appropriate period of time, no one claimed the money and the police returned the money to Connie. Connie does not have to recognize any taxable income since it was not derived from capital or labor.
A)True
B)False
Answer: False
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5
Chapter 4: Income Exclusions
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Sample Questions
Q1) Benton leases a Park City condominium from Walnut Rental for $750 a month. Benton operates a carpet store in Park City. During October and November Benton does not make his monthly payments. Instead, Walnut allows him to paint another rental property of Walnut's instead of paying rent. What is Walnut's tax treatment of these events?
I.Walnut can capitalize the $1,500 and depreciate it.
II.Walnut can deduct the $1,500 as an operating expense.
III.Walnut includes the $1,500 in its gross income for the year.
IV.The $1,500 must be added to the basis of the condominium.
A)Statements II and III are correct.
B)Statements I, II, and III are correct.
C)Statements I and III are correct.
D)Only statement II is correct.
E)Only statement I is correct.
Q2) Jeane's employer pays his medical premiums each month ($130/month).
A)Fully excluded from gross income.
B)Fully included in gross income.
C)Partially excluded from gross income.
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Chapter 5: Introduction to Business Expenses
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Q1) In order to take a business deduction, the taxpayer engaged in a business must be able to establish a business purpose for each expenditure.
A)True
B)False
Q2) Due to a shortage of cash, East Coast Entertainment Company, an accrual basis taxpayer, could not pay its November 2018 utility bill on time. In February of 2019, East Coast Entertainment pays the utility bill.
I.East Coast can deduct the expense on either its 2018 or 2019 tax return.
II.East Coast cannot deduct the utility expense in 2018 because it is paid in 2019.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Larry is a history teacher. He subscribes to several periodicals about teaching history and judging history fairs. This year Larry spends $285 on subscriptions to various periodicals. Discuss the deductibility of the expenditures for tax purposes.
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Chapter 6: Business Expenses
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Q1) Brenda travels to Cleveland on business for her employer. She spends 4 days in meetings with a client. Brenda's plane fare for the trip is $400. Meals cost $40 per day. Hotel and incidental costs amount to $150 per day. Brenda receives no reimbursement for any expenses. Brenda's adjusted gross income for the year is $40,000. What is Brenda's deduction for the trip?
A)$- 0 -
B)$280
C)$1,080
D)$1,160
E)$2,320
Q2) Walter is a cash basis taxpayer with a drapery cleaning business. In the current year he determines he will never receive payment from Davis for cleaning services provided to Davis. Can Walter record a deduction for the bad debt? Explain.
Q3) Discovery, Inc., a cash-basis consulting firm, can deduct a twelve-month insurance premium in the year the premium is paid even though the policy remains in effect into the following year.
A)True
B)False
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Chapter 7: Losses-Deductions and Limitations
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Q1) At-risk amount
A)A loss that is generally not deductible.
B)The borrower is personally liable for the debt.
C)The loss is used to offset income in future periods.
D)A liability that is only secured by the underlying property.
E)The loss may be used to offset income from prior periods.
F)A type of stock that receives some ordinary loss treatment.
G)Involved in a rental activity for more than 500 hours in a year.
H)Cash or other assets contributed plus recourse debts of the activity.
I)Owns at least a 10% interest and is significantly involved in the rental activity.
J)The amount of the loss for fully destroyed property is the property's adjusted basis.
K)The amount of loss is limited to the lower of the property's adjusted basis, or the reduction in fair market value.
L)Management is left to at least one general partner whose liability is not limited and who is responsible for the on-going activities of the business.
Q2) Why did Congress enact the at-risk rules?
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Chapter 8: Taxation of Individuals
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Q1) Surviving spouse
A)Unmarried without dependents.
B)Generally used when financial disagreement exists.
C)Unmarried and provides a household for a dependent.
D)Use the same tax rate schedule as married, filing jointly.
E)Determines which tax rate schedule and standard deduction amount is applicable.
Q2) Which of the following individuals or couples qualify for the child and dependent-care credit?
I.Lois is single and earns $45,000 for the year. She pays $2,600 in child-care costs for her 8-year-old daughter.
II.Patrick and Carol are married and together they earn $67,000 ($42,000 and $25,000 respectively). They pay $5,000 in child-care costs for their twin boys, age 11.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Explain the support test and the gross income test to be a qualifying relative.
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Chapter 9: Acquisitions of Property
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Q1) Terri owns 1,000 shares of Borneo Corporation common stock. On March 31 of the current year, when the stock is trading at $2 per share, Borneo declares a 5% stock dividend with the option to receive $2 cash per dividend share in lieu of taking the dividend shares. The dividend is distributed on April 30. Terri elects to receive the stock shares rather than the cash dividend. What are the tax effects for Terri?
I.Terri's stock dividend is nontaxable.
II.Terri's basis in her new shares is $100.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Personalty
A)Land and structures permanently attached to land.
B)Property that lacks a physical existence.
C)Property that is used by the taxpayer for purely personal purposes.
D)Any property that has form, shape, and substance.
E)Property with a physical existence that is not real estate.
F)A single property used in more than one category.
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Page 11
Chapter 10: Cost Recovery on Property: Depreciation, Depletion,
and Amortization
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Sample Questions
Q1) Manu bought Franklin's ownership interest in Antoine Company on July 1 of the current year. Manu pays Franklin $30,000 cash not to compete or interfere with Manu's business activities over the next three years. How much cost recovery can Manu claim in the current year because of the covenant not to compete?
A)$1,000
B)$2,000
C)$3,000
D)$6,000
E)$30,000
Q2) In May 2018, Preston purchases 5-year MACRS property costing $150,000 and 7-year MACRS property costing $60,000. Preston's income is $100,000. Preston does not want to claim bonus depreciation. If Preston wishes to maximize his total 2018 cost recovery deduction, what will his total cost recovery deduction be on the properties purchased in 2018?
A)$100,000
B)$122,000
C)$210,000
D)$42,000
E)$34,430
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Chapter 11: Property Dispositions
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Sample Questions
Q1) Section 1245 property
A)Stocks, bonds, options.
B)Depreciable real property.
C)All or part of any gain on sale is excluded.
D)Taxed at a maximum rate of 25%.
E)Gain or loss on the sale of artwork.
F)Depreciable tangible personal property.
G)Subject to full recapture as ordinary income of all depreciation taken.
H)Gain on real property attributable to excess depreciation is ordinary income.
Q2) George's wife sells stock she purchased 10 months ago at a gain of $212.
A)Long-term capital
B)Short-term capital
C)Collectible gain
D)Section 1231
E)Section 1245
F)Section 1250
G)Ordinary income/loss
H)Nontaxable/nondeductible
Q3) Discuss the general differences between Section 1245 and Section 1250 recapture provisions.
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Chapter 12: Non-Recognition Transactions
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Q1) A business use automobile for a personal use automobile.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q2) For related parties to qualify for a like-kind exchange, the property received must be held for six months.
A)True
B)False
Q3) Land held as an investment for an office building and land used in a business.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q4) Nancy purchased her houseboat six years ago for $35,000. She has lived in the houseboat since she purchased it. A friend has offered $62,000 for the houseboat. If she sells it, she will be able to exclude the gain.
A)True
B)False
Q5) The holding period of an asset received in a like-kind exchange includes the holding period of the transferred asset.
A)True
B)False
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Chapter 13: Choice of Business Entity-General Tax and
Nontax
Factorsformation
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Q1) Nick and Rodrigo form the NRC Partnership by combining the assets of their respective businesses. Nick contributes $10,000 and assets worth $90,000 (adjusted basis of $60,000) for a 1/3 interest. Rodrigo contributes $90,000 and assets worth $270,000 (adjusted basis of $150,000) for a 2/3 interest. NRC also assumes $60,000 of debt on Rodrigo's assets. What is Rodrigo's basis in his partnership interest?
A)$180,000
B)$220,000
C)$240,000
D)$300,000
E)$360,000
Q2) Partners have extensive flexibility in choosing their tax year-end for their partnership. A)True B)False
Q3) Sole proprietors are allowed to deduct owner-employee salaries and fringe benefits. A)True B)False
Q4) Discuss the characteristics of a personal service corporation (PSC).
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Chapter 14: Choice of Business Entity-Operations and Distributions
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Q1) Hawkins Corporation has $50,000 of taxable income before special deductions. Taxable income includes an operating loss carryforward of $10,000 and $60,000 of dividend income received from other corporations in which Hawkins owns less than a 20% interest. What is Hawkins' taxable income?
A)$10,000
B)$25,000
C)$30,000
D)$50,000
E)$60,000
Q2) A corporation's calculation of the maximum allowable deduction for charitable contributions includes using what percentage limitation of the appropriate taxable income amount?
A)0%
B)3%
C)10%
D)30%
E)50%
Q3) Withdrawals of cash by a partner are taxable.
A)True
B)False
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Chapter 15: Choice of Business Entity-Other Considerations
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Q1) The maximum contribution that can be made on behalf of an employee in a Keogh defined contribution money purchase plan is:
A)The lower of 15% of employee's taxable compensation or $55,000
B)The lower of 13.0435% of employee's taxable compensation or $55,000
C)The lower of 20% of employee's taxable compensation or $55,000
D)The lower of 25% of employee's taxable compensation or $55,000
Q2) Thomas maintains an IRA account. During the year he wins $10,000 in the state lottery and contributes it to his IRA account. Because he is an active participant in a qualified pension plan, he does not take a deduction for any part of his contribution. At the end of 2018 the total assets in the account are $30,000. Thomas is subject to a penalty on his contribution of
A)$-0-
B)$180
C)$270
D)$1,000
E)$1,800
Q3) The alternative minimum tax applies only to corporations.
A)True
B)False
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Chapter 16: Tax Research
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Q1) Primary sources of tax law include
I.Treasury Regulations.
II.IRS Revenue Procedures.
III.Internal Revenue Code of 1986.
IV.The Tax Law Review.
A)Only statement III is correct.
B)Statements II and III are correct.
C)Only statement I is correct.
D)Statements I, II, and III are correct.
E)Statements I, II, III, and IV are correct.
Q2) Tax statute
A)Tax Court Reports
B)United States Tax Cases
C)Internal Revenue Code
D)Cumulative Bulletin
E)Not a primary source
Q3) Describe the steps of the tax research process.
Q4) Taxpayers may choose one of several different courts in which to initiate litigation. Discuss the pros and cons of the different trial level courts.
Page 18
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