Tax Accounting
Chapter Exam Questions
Course Introduction
Tax Accounting explores the principles, regulations, and procedures that govern the preparation, analysis, and reporting of tax information for individuals, businesses, and organizations. The course covers key topics such as federal income taxation, tax planning, compliance, tax law interpretation, and the relationship between financial statements and tax returns. Students will gain practical knowledge of how tax systems impact financial decision-making, learn to apply tax codes and regulations, and develop skills in preparing tax returns and advising clients on tax strategies while adhering to ethical and legal standards.
Recommended Textbook
Concepts in Federal Taxation 2019 26th Edition Kevin E. Murphy
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Page 2
Chapter 1: Federal Income Taxation-An Overview
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Q1) Which of the following is an example of tax evasion?
A)Beth invests money in tax exempt municipal bonds instead of corporate bonds.
B)Bryan uses the cafeteria plan offered by his employer to fund pension plan contributions for his retirement.
C)Bauregard, a very wealthy 87-year-old individual, gives bonds to each of his grandchildren so that the interest income on them would be taxed at a lower tax rate.
D)Bertha won $500 cash in an amateur mud-wrestling contest but doesn't report it on her tax return.
E)All of the above are examples of tax evasion.
Answer: D
Q2) Which of Adam Smith's requirements for a good tax system best supports the argument that the federal income tax rate structure should be progressive?
A)Certainty.
B)Convenience.
C)Equality.
D)Neutrality.
E)Sufficiency.
Answer: C
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Page 3
Chapter 2: Income Tax Concepts
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Q1) Robin owns an appliance store. Robin gives Tim a stereo unit to paint the front of her store building. The stereo unit, included in Robin's inventory at a cost of $400, normally retails for $700. If Tim had billed Robin for his work like he charged other customers, he would have sent Robin a bill for $600. Does Tim have income from the receipt of the stereo unit? If so, what amount should Tim report as gross income? Explain in terms of the Income Tax Concepts.
Answer: Under the All-inclusive Income Concept, all income received is taxable unless specifically excluded. Income can be received in any form; it does not have to be received in cash (cash-equivalent approach). Therefore, Tim realized income when he received the stereo unit because it resulted in an increase in his wealth and was the result of an Arms-length Transaction. Tim must include the $700 fair market value of the stereo in his gross income because that is the value he received in exchange for his services.
Q2) The administrative convenience concept explains why some items are not treated consistently when the cost of implementing a concept exceeds the benefit of using it.
A)True
B)False
Answer: True
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Chapter 3: Income Sources
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Q1) Jerry purchased an annuity contract at the beginning of 2004 for $144,000. The contract specified that he and his wife would receive $1,000 per month for life. Jerry receives his first payment on February 1, 2018 when he is 59 years old and his wife is 56 years old. What amount of gross income should Jerry and his wife report on their 2018 income tax return from this annuity contract?
A)$-0-
B)$4,400
C)$6,600
D)$11,000
Answer: C
Q2) Marvin and Stacy are retired. During the current year, they receive $10,000 in Social Security benefits. They have $45,000 of other taxable gross income and receive $23,000 of municipal bond interest. The taxable portion of the $10,000 Social Security payment is:
A)$-0-
B)$5,000
C)$8,500
D)$10,000
Answer: C
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Chapter 4: Income Exclusions
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Q1) Kenneth receives a new Ford Explorer worth $28,900 that his parents bought him for his 24<sup>th</sup> birthday.
A)Fully excluded from gross income.
B)Fully included in gross income.
C)Partially excluded from gross income.
Q2) Bart's spouse, Carla, dies during the current year. Carla's life insurance policy names Bart the sole beneficiary of the $2 million proceeds. Bart invests the $2 million in a bank certificate of deposit (CD). For the current year, Bart earns $98,000 interest from the CD. What are the tax effects of these events for Bart?
I.The $2 million is excluded from gross income.
II.Bart has no taxable income from these transactions.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) What are the differences between a cafeteria plan and a flexible benefits (salary reduction) plan?
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6
Chapter 5: Introduction to Business Expenses
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Q1) Charlotte traveled to Annapolis to attend a three-day business conference. After her meetings concluded, she stays 2 additional days sightseeing. Charlotte's airfare is $400 and pays $110 per night for lodging, $60 a day for meals, and $20 a day for incidentals. How much of Charlotte's costs can be deducted as a business expense?
A)$- 0 -
B)$400
C)$880
D)$970
E)$1,200
Q2) Harold, a cash basis taxpayer, borrows $65,000 for his business on a 2-year note from First City Bank on December 1, 2018. To close on the loan agreement, Harold is required to prepay interest of $4,800 on December 1. How much interest can Harold deduct in 2018?
A)$- 0 -
B)$200
C)$400
D)$2,400
E)$4,800
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Chapter 6: Business Expenses
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Q1) Jerry recently graduates with an MBA degree from a leading university and will be going to work as an employee of a major stock brokerage firm. Jerry is unsure of the circumstances under which he can legitimately deduct the costs of entertaining and dining with clients and prospective clients. Jerry will spend approximately $5,000 a year on such activities for which he will not be reimbursed. It is important that he be able to derive tax benefit for these costs. Advise Jerry of the general rules in this area of the tax law. Include a brief discussion of substantiation requirements for such business expenses.
Q2) Margie is single and is an employee of the Stitch Corporation. She is an active participant in the company's pension plan. Margie's adjusted gross income is $67,000 and she contributes the maximum amount allowable as a deduction to her regular IRA account during the current year. How much can Margie contribute to her Roth IRA?
A)$- 0 -
B)$1,000
C)$2,200
D)$4,000
E)$5,500
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Page 8
Chapter 7: Losses-Deductions and Limitations
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Q1) During the current year, Alyssa incurred a net loss of $27,500 from a 5 percent interest in a partnership that operated and managed an office building. Alyssa had adjusted gross income from other sources of $110,000 and spent 67 hours assisting in the management of the building. Determine Alyssa's total adjusted gross income for the current year.
A)$82,500
B)$90,000
C)$100,000
D)$105,000
E)$110,000
Q2) Lu-Yin purchased her consulting business with $75,000 of her own funds and she borrowed $125,000 from the local bank. If she is personally responsible for the loan, she is at risk only for $50,000.
A)True
B)False
Q3) A transaction loss occurs when an asset is disposed of at less than its basis.
A)True
B)False
Q4) Why did Congress enact the at-risk rules?
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Chapter 8: Taxation of Individuals
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Q1) Which of the following individuals or couples qualify for the 2018 earned income credit?
I.Holly is single, 23 years old, and has just finished drama school. She earns $2,000 doing commercials and another $6,000 as a taxicab driver.
II.Larry and Shari are both 30 years old. Larry works part-time and earns $6,000, and Shari, who is starting her own business, earns $9,000. They have one child.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Erin is 67, single and has an adjusted gross income of $14,300. She has no dependents and her itemized deductions are $6,000. What is her 2018 taxable income?
A)$700
B)$2,300
C)$6,700
D)$8,300
E)$14,300
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Chapter 9: Acquisitions of Property
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Q1) Mitaya purchased 500 shares of Sundown Inc., common stock on December 13, 2016, at a cost of $3,600. She paid a commission of $150 on the purchase. On February 18, 2017, she received 250 shares of Sundown Inc., common stock as a tax-free dividend. Mitaya sells 600 shares for $3,700 on January 8, 2018, and pays a $100 commission on the sale. Mitaya's gain (loss) on the sale is characterized as:
A)Long-term capital gain of $600.
B)Long-term capital gain of $500; short-term capital gain of $100.
C)Long-term capital gain of $100; short-term capital gain of $500.
D)Short-term capital gain of $600.
Q2) Phyllis purchased an automobile for $3,000 down and a note for $15,000. During the year she paid interest of $1,000. Her basis is $18,000.
A)True
B)False
Q3) Intangible property lacks a physical existence; the rights exist only because of economic rights the property possesses.
A)True
B)False
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Chapter 10: Cost Recovery on Property: Depreciation, Depletion,
and Amortization
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Q1) On March 23, 2018, Saturn Investments Corporation purchases a $5,000 computer (5-year property) for business-use. On November 27, 2018, it pays $4,000 for new office furniture (7-year property). It does not wish to use the Section 179 election to expense and elects not to take bonus depreciation. How much depreciation may Saturn deduct on the computer for 2018?
A)$1,000
B)$1,750
C)$2,625
D)$3,325
E)$3,500
Q2) What is the MACRS recovery period for an office desk?
A)3 years.
B)5 years.
C)6 years.
D)7 years.
E)10 years.
Q3) MACRS applies to new and used depreciable personal property used for the production of income.
A)True
B)False
Page 12
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Chapter 11: Property Dispositions
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Q1) When securities are sold and the securities were purchased on different dates and at different prices
I.the basis of the shares may be determined on a first-in, first-out basis.
II.the basis of the shares may be determined on a last-in, first-out basis.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Olive Company sells factory equipment with an adjusted basis of $30,000 for $33,000. Allowable depreciation of $8,000 had been deducted as of the sale date. What is the amount and character of the gain or (loss) on the sale of the equipment?
A)$- 0 -
B)$3,000 Section 1245 ordinary income.
C)$8,000 Section 1245 ordinary income.
D)$3,000 long-term capital gain, and $8,000 Section 1245 ordinary income.
E)$3,000 long-term capital gain.
Q3) Discuss the general differences between Section 1245 and Section 1250 recapture provisions.
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Page 13
Chapter 12: Non-Recognition Transactions
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Q1) Natural Power Corporation owns a warehouse with an adjusted basis of $195,000 and an appraised fair market value of $185,000. The city of Springfield condemns the property for a new airport. The condemnation award is $185,000. Natural Power invests the $185,000 in a new warehouse on the other side of the city. What is the gain or loss that Natural Power Corporation must recognize due to the transactions?
A)No gain or loss
B)$10,000 gain
C)$10,000 loss
D)$185,000 gain
Q2) Grant exchanges an old pizza oven from his business for a new oven. In addition to the old oven, which had a basis of $10,000, Grant pays $10,000. The new oven is valued at $22,000. What is Grant's basis in the new oven?
A)$12,000
B)$16,000
C)$20,000
D)$22,000
E)$32,000
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Chapter 13: Choice of Business Entity-General Tax and Nontax Factorsformation
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Q1) Carlotta is the director of golf for Birck Enterprises, an electing S corporation. Carlotta owns a 20% interest in Birck. She receives a salary of $60,000 and fringe benefits costing $6,000. Birck's taxable income before considering the payments to and on behalf of Carlotta is $250,000. Birck's distributes a $50,000 dividend to its shareholders. How much income does Carlotta have from Birck?
A)$66,000
B)$70,000
C)$96,800
D)$98,000
E)$102,800
Q2) A fiscal year can be
I.a period of 12 months ending on any day during the month other than a Sunday.
II.a period of 12 months ending on the last day of any month other than January
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Discuss the characteristics of a personal service corporation (PSC).
Page 15
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Chapter 14: Choice of Business Entity-Operations and Distributions
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Q1) A corporation's excess charitable contributions over the amount deductible
A)May be carried back two years and forward 20 years.
B)May be carried back or forward for two years at the corporation's election.
C)May be carried forward for a maximum of five succeeding years.
D)Is not deductible in any future or prior year.
Q2) 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
Q3) When a corporation pays a dividend, it is nontaxable if it is in excess of earnings and profits.
A)True
B)False
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Chapter 15: Choice of Business Entity-Other Considerations
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Q1) On May 10, 2016, Rafter Corporation granted Peter an option to acquire 500 shares of the company's stock for $10 per share. The fair market price of the stock on the date of grant was $12. The fair market value of the option at the date of grant was $3. Peter exercises the option on July 1, 2018, when the fair market value of the stock is $20. How much income must Peter report at the date of exercise?
A)$-0-
B)$1,200
C)$1,800
D)$3,600
E)$5,400
Q2) On January 3, 2018, Great Spirit Inc., grants Jordan a nonqualified stock option to acquire 1,000 shares of the company's stock for $12 per share. The fair market price of the stock on the date of grant is $15. The option does not have a readily ascertainable fair market value. On October 1, 2018, when the fair market value of the stock is $18, Jordan exercises the stock option. Determine the tax consequences for Jordan and Great Spirit Inc., on the grant date of the option and the exercise date.
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Chapter 16: Tax Research
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Q1) Which regulation citation concerns Code Section 469?
A)Reg. Sec. 469
B)Reg. Sec. 469-3
C)Reg. Sec. 1.3-469
D)Reg. Sec. 1.469-3
E)Reg. Sec. 469.72-3
Q2) In planning situations, tax research is undertaken
I.To always attempt to minimize taxes.
II.Considering the client's nontax objectives.
III.To find the best way to accomplish a desired result.
IV.Considering the client's tax objectives.
A)Only statement I is correct.
B)Only statement IV is correct.
C)Statements II and III are correct.
D)Statements II, III, and IV are correct.
E)Statements I, II, III, and IV are correct.
Q3) Taxpayers may choose one of several different courts in which to initiate litigation. Discuss the pros and cons of the different trial level courts.
Q4) Describe the steps of the tax research process.
Page 18
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