Tax Accounting
Midterm Exam
Course Introduction
Tax Accounting focuses on the principles, regulations, and procedures related to accounting for income taxes and other government levies affecting individuals, businesses, and organizations. The course introduces students to the preparation and analysis of tax returns, understanding tax planning strategies, compliance requirements, and current tax laws. Emphasis is placed on the differences between financial accounting and tax accounting, the role of tax authorities, and strategies for minimizing tax liabilities while adhering to ethical and legal standards. Students will develop practical skills through real-world case studies and the use of tax accounting software.
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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Page 2
Chapter 1: Federal Income Taxation-An Overview
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Sample Questions
Q1) Taxpayer A pays tax of $3,300 on taxable income of $10,000 while taxpayer B pays tax of $6,600 on $20,000. The tax is a
A)proportional tax.
B)regressive tax.
C)progressive tax.
D)horizontal tax.
Answer: A
Q2) Tax avoidance occurs when a taxpayer uses fraudulent methods or deceptive behavior to hide actual tax liability.
A)True
B)False
Answer: False
Q3) The statute of limitations is three years, six years if the taxpayer omits gross income in excess of 25%, and there is no statute of limitations if the taxpayer willfully defrauds the government.
A)True
B)False
Answer: True
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3
Chapter 2: Income Tax Concepts
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Sample Questions
Q1) It was stated in the text that realized gains from certain types of transactions (e.g., like-kind exchanges) are deferred for recognition in a future period. The basis of this treatment is the
I.Annual Accounting Period Concept.
II.Legislative Grace Concept.
III.Wherewithal-to-Pay Concept.
IV.Capital Recovery Concept.
A)Only statement II is correct.
B)Only statement III is correct.
C)Statements I and II are correct.
D)Statements II and III are correct.
E)Statements I, II, III and IV are correct.
Answer: D
Q2) Under the pay-as-you-go concept, the tax base used to compute the taxpayer's income tax liability is a net income number.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Income Sources
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Sample Questions
Q1) 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
Q2) Binney is a retired auto mechanic. He and his wife, Jennie, receive taxable pensions totaling $35,000, $8,000 of tax-exempt interest income and $6,000 of Social Security benefits during the current year. Assuming that they had no other items of income or deductions for adjusted gross income, Binney and Jennie's adjusted gross income is:
A)$35,000
B)$36,700
C)$38,000
D)$39,700
E)$40,100
Answer: D
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Chapter 4: Income Exclusions
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Sample Questions
Q1) Myra's employer paid her health and accident insurance premium of $5,600. Since she had the option to take the cash and purchase her own insurance, the $5,600 must be included in income.
A)True
B)False
Q2) Punitive damage awards received because of a personal injury
A)Are the same as loss-of-income damages.
B)Are included in gross income regardless of the cause.
C)Will be excluded from gross income if the award resulted from a physical personal injury.
D)Will be excluded from gross income because punitive awards are meant to punish the offender for gross negligence.
E)Are never taxable.
Q3) Tina receives 100 shares of Welby stock as a result of a 2 for 1 stock split. The shares have a value of $7,000 the day of the split.
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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Sample Questions
Q1) Angela is an accrual basis taxpayer. On September 1 of the current year, she prepays the annual premium of $4,800 for a one-year fire insurance policy on the contents of her business warehouse. The expense is not material for either financial or tax purposes. The prepayment is necessary to activate the insurance coverage and maintain annual renewals. How much may Angela deduct in the current year?
A)$- 0 -
B)$ 400
C)$1,600
D)$2,400
E)$4,800
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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Page 7
Chapter 6: Business Expenses
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Sample Questions
Q1) Penny owns her own business and drives her car 12,000 miles a year for business and 3,000 miles a year for commuting and personal use. She wants to claim the largest tax deduction possible for business use of her car. Her total expenses related to her auto for 2018 are as follows: ?
\[\begin{array} { l r }
\text { Gas, oil, and maintenance } & \$ 4,050 \\
\text { Insurance } & 720 \\
\text { Interest on car loan } & 500 \\
\text { Depreciation } & 2,960 \\
\text { License } & 80 \\
\text { Parking fees and tolls (100\% business) } & 130 \end{array}\]
Penny's total deduction for business use of the auto in 2018 is:
A)$6,540
B)$6,670
C)$6,778
D)$6,940
E)$7,070
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Page 8
Chapter 7: Losses-Deductions and Limitations
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Sample Questions
Q1) While most rental activities are classified as passive, an exception is low-income housing.
A)True
B)False
Q2) Bowden is a single individual and has the following income (loss) for the current tax year:
?
\[\begin{array} { l r }
\text { Salary } & \$ 85,000 \\
\text { Dividends and interest } & 24,000 \\
\text { Actively managed rental property } & ( 23,000 ) \end{array}\]
What is Bowden's adjusted gross income for this year?
A)$ 85,000
B)$ 86,000
C)$ 88,500
D)$ 89,500
E)$109,000
Q3) If a corporation incurs a net operating loss of $10,000 in 2018, what would cause it not to deduct the entire $10,000 in 2019?
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Chapter 8: Taxation of Individuals
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Sample Questions
Q1) Carlos incurs the following medical expenses during the current tax year: ?
\[\begin{array} { l r }
\text { Surgeon's fees } & \$ 2,000 \\
\text { Medical insurance premiums } & 600 \\
\text { Hospital fees } & 800 \\
\text { Prescription drugs } & 310 \\
\text { Wheel chair } & 200
\end{array}\]
Carlos's adjusted gross income for the year is $32,000. He receives a $500 reimbursement from his insurance company. Determine the amount of his medical expense deduction for the current year.
A)$- 0 -
B)$210
C)$1,010
D)$2,910
E)$3,910
Q2) Explain the support test and the gross income test to be a qualifying relative.
Q3) Explain the non-support test and the principle residence test to be a qualifying child.
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Page 10
Chapter 9: Acquisitions of Property
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Sample Questions
Q1) Determine the proper classification(s) of the asset discussed in the following scenario: Victoria purchased a new show case saw for her antique business.
I.Personal use property.
IV.Intangible property.
II.Business use property.
V.Real estate.
III.Tangible property.
VI.Personal property.
A)Statements I, III and VI are correct.
B)Statements II and III are correct.
C)Only statement VI is correct.
D)Statements II, III, and VI are correct.
E)Statements II, IV and VI are correct.
Q2) An asset's holding period normally begins on the day after it is acquired and ends on the day of its disposition.
A)True
B)False
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Chapter 10: Cost Recovery on Property: Depreciation, Depletion,
and Amortization
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Sample Questions
Q1) Sophia purchases a completely furnished condominium in Breckenridge, Colorado. She uses the condo as a rental property. Which of the following assets are subject to periodic cost recovery?
I.Land.
II.Furniture.
III.Building.
IV.Trout fishing equipment.
V.Kitchen appliances.
A)Only statement III is correct.
B)Statements II and III are correct.
C)Statements II, III, IV, and V are correct.
D)Statements I, and III are correct.
E)Statements II, III, and V are correct.
Q2) MACRS applies to new and used depreciable personal property used for the production of income.
A)True B)False
Q3) Why would a taxpayer ever elect to use the alternative depreciation system (ADS) rather than the MACRS?
Page 12
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Chapter 11: Property Dispositions
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Sample Questions
Q1) Hurst Company purchased an apartment building in 1986 for $700,000. The building is sold in 2018 for $900,000. The actual depreciation deducted on the building as of the sale date was $600,000. Straight-line depreciation for the same period would have been $400,000. What is the amount and character of the gain recognized on the sale?
A)$900,000 Section 1231 gain.
B)$200,000 ordinary income, and $100,000 Section 1231 gain.
C)$400,000 ordinary income, and $400,000 Section 1231 gain.
D)$200,000 ordinary income, and $400,000 long-term capital gain.
E)$200,000 ordinary income, and $600,000 Section 1231 gain.
Q2) Which of the following is not a capital asset?
A)Office building used as a rental property by a real estate professional.
B)Antique automobile.
C)Land held for investment.
D)Stock held for investment.
Q3) Net collectibles gains are taxed at a maximum rate of 28%.
A)True
B)False
Q4) 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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Sample Questions
Q1) Lindsey exchanges investment real estate parcels with Donna. Lindsay's adjusted basis in the property is $400,000, and it is encumbered by a mortgage liability of $200,000. Donna assumes the mortgage. Donna's property is appraised at $1,000,000 and is subject to a $100,000 liability. Lindsey assumes the liability. If no cash is exchanged, what is Lindsey's basis in the new real estate?
A)$- 0 -
B)$100,000
C)$200,000
D)$400,000
E)$600,000
Q2) Microsoft common stock for Merrill Lynch common stock.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q3) Computer for delivery truck.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q4) A gain on a like-kind exchange is always recognized to the extent of any boot received.
A)True
B)False
Page 14
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Chapter 13: Choice of Business Entity-General Tax and
Nontax Factorsformation
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Sample Questions
Q1) Once a corporation is formed, an exchange of the corporation's stock for property is always a nontaxable event.
A)True
B)False
Q2) On January 5, 2018, Mike acquires a 50% interest in Precision Tools Partnership by contributing property with an adjusted basis of $20,000 and a fair market value of $24,000, subject to a mortgage of $16,000. What is Mike's basis in Precision Tools Partnership as of January 5, 2018?
A)$- 0 -
B)$10,000
C)$12,000
D)$16,000
E)$20,000
Q3) Monica acquires a 25% interest in Terrapin Partnership during 2018 by contributing land with a fair market value of $35,000, an adjusted basis of $18,000, and subject to a mortgage of $12,000. The partnership assumes the mortgage. What is Monica's adjusted basis in her partnership interest? Discuss how you arrived at that adjusted basis amount, and the underlying reasoning behind the rules you applied.
Q4) 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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Sample Questions
Q1) Abaco Corp. has gross income of $230,000 and taxable income of $50,000. The company did not include any special deductions in the calculation of taxable income. While reviewing the tax return, Abaco's accountant finds $20,000 of charitable contributions improperly classified as advertising and promotion expense. He sends the return back to the tax department for correction. What is Abaco's corrected taxable income?
A)$35,000
B)$55,000
C)$57,000
D)$63,000
E)$65,000
Q2) Carlota owns 4% of Express Corporation and has a basis of $5,000 in her stock. During the year, Express distributes a $300,000 dividend. As a result of the dividend, Carlota has
A)$12,000 of dividend income.
B)$5,000 of dividend income and $7,000 of capital gain.
C)$7,000 of dividend income and a $5,000 tax-free return of capital.
D)$5,000 of dividend income, $5,000 tax-free return of capital, and a $2,000 capital gain.
E)$7,000 capital gain.
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Chapter 15: Choice of Business Entity-Other Considerations
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Sample Questions
Q1) On September 15, 2018, Spiral Corporation grants Jay an option to acquire 250 shares of the company's stock for $10 per share. The fair market price of the stock on the date of grant is $14. The option does not have a readily ascertainable fair market value. How much must Jay report as income at the date of grant?
A)$-0-
B)$1,000
C)$2,500
D)$3,500
Q2) Contributions to a Roth IRA:
I.May be rolled-over from a regular IRA in a nontaxable transaction.
II.May be tax deductible.
III.Are not taxed when withdrawn if they have been in an established account for at least five years and the taxpayer is at least 59<sup>1</sup>/<sub>2</sub> before withdrawals are made.
A)Only statement I is correct.
B)Only statement II is correct.
C)Only statement III is correct.
D)Statements I, II, and III are correct.
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Page 17
Chapter 16: Tax Research
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Sample Questions
Q1) Tax planning refers to the preparation of tax returns and doing research on completed transactions.
A)True
B)False
Q2) Which of the following citations denotes a regular decision of the Tax Court?
A)35 T.C. 1083
B)93-1 USTC 9865
C)39 AFTR 2d 77-640
D)All of the above could refer to a regular decision of the Tax Court
Q3) What body oversees the operation and administration of the tax system as a whole, and prepares a general explanation of any tax bill signed by the president?
A)Joint Conference Committee.
B)Joint Committee on Taxation.
C)House Ways and Means Committee.
D)Judiciary Committee.
E)Senate Finance Committee.
Q4) Citators provide the full text of court decisions.
A)True
B)False
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