Tax Accounting Practice Questions
Course Introduction
Tax Accounting is a comprehensive course that explores the theory, practice, and application of accounting principles related to taxation. The course covers fundamental concepts of individual and business taxation, including gross income, deductions, tax credits, and the calculation of tax liabilities according to prevailing tax laws and regulations. Students will learn about tax planning, compliance, and reporting for individuals, corporations, partnerships, and other entities. Emphasis is placed on understanding the ethical, legal, and economic implications of taxation, as well as developing analytical skills through case studies and real-world scenarios involving tax returns and solutions to complex tax issues.
Recommended Textbook
Concepts in Federal Taxation 2017 24th Edition by Kevin
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16 Chapters
2073 Verified Questions
2073 Flashcards
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E. Murphy
Page 2
Chapter 1: Federal Income Taxation-An Overview
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151 Verified Questions
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Sample Questions
Q1) A state sales tax levied on all goods and services sold is an example of a
A)progressive tax.
B)regressive tax.
C)proportional tax.
D)value added tax.
Answer: C
Q2) Katie pays $10,000 in tax-deductible property taxes.Katie's marginal tax rate is 25%,average tax rate is 24%,and effective tax rate is 20%.Katie's tax savings from paying the property tax is:
A)$1,600
B)$2,000
C)$2,400
D)$2,500
E)$10,000
Answer: D
Q3) Congress is required to insure that the tax law has the following characteristics: equality,certainty,convenience,and economy.
A)True
B)False
Answer: False
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Chapter 2: Income Tax Concepts
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Sample Questions
Q1) Ted sells 200 shares of common stock for $2,000.The stock cost Ted $500 several years ago.Ted's realized gain from the sale is only $1,500.Which of the following provides support for this treatment?
A)Annual Accounting Period Concept.
B)Capital Recovery Concept.
C)Wherewithal-To-Pay Concept.
D)Claim of Right Doctrine.
E)Constructive Receipt Doctrine.
Answer: B
Q2) When items of income are omitted because the cost of the time and effort of the taxpayer to accumulate the information,it is an application of the A)Ability to Pay Concept.
B)Administrative Convenience Concept.
C)Arm's-Length Transaction Concept.
D)Capital Recovery Concept.
E)Pay-as-You-Go Concept. Answer: B
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Chapter 3: Income Sources
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Sample Questions
Q1) Melissa is currently working with her divorce attorney on her impending divorce from her husband David.She recently discovered that she is pregnant with David's child.Melissa intends to keep and raise the child.David's attorney has submitted a proposal that David pay Melissa alimony of $1,500 per month.The proposed alimony contract satisfies the IRS tests for alimony.As a tax planner,what advice do you have for Melissa? Is there a way to structure the payments to minimize Melissa's income taxes? Answer: Alimony received is taxable to Melissa.If the payments were child support,they would not be taxable income to Melissa.(Furthermore,collection of child support is more likely to be enforced by the family law courts than is alimony.)
On the other hand,David is likely to pay a greater amount of alimony because it is deductible to him.If Melissa is in a very low tax bracket,the additional tax she may pay will be less than David will save.
She should probably ask for more alimony and split the eonomic gain from having more money taxed at her lower rate.
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Chapter 4: Income Exclusions
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Sample Questions
Q1) Edward and Inez purchased their home in 2006 for $600,000.They financed the purchase with a $550,000 mortgage.In 2016,they fall upon hard times and cannot make the mortgage payments.They sell their home for $425,000.At the time of the sale,the mortgage balance is $450,000 on their home.The mortgage company cancels the remaining debt.Which of the following is true?
I.Edward and Inez will recognize no income on the cancellation of the mortgage loan. II.Edward and Inez will realize a loss on the sale of their home.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Robert's employer provides all of its employees a $40,000 group term life insurance policy.The cost of this policy must be included in Robert's income.
A)True
B)False
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Page 6
Chapter 5: Introduction to Business Expenses
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Sample Questions
Q1) Covenant not to compete for 4 years
A)Capitalized and amortized over a number of accounting periods
B)Expensed in the period incurred
C)Not deductible
D)Can be capitalized and amortized or deductible depending on the amount of the expenditure
Q2) A business expense includes
I.an expenditure that satisfies the dominant profit-motive requirement.
II.an expenditure that is incurred in a trade or business activity.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Bruce operates an illegal drug business.Which of the following is deductible?
A)Commissions paid to dealers.
B)Rent for a warehouse.
C)Bribes paid to local police.
D)Cost of drugs sold.
E)Interest on debt to finance the purchase of inventory.
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Chapter 6: Business Expenses
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Sample Questions
Q1) Sidney owns a residential rental property with an adjusted basis of $200,000 at the beginning of the current year.The county treasurer sends Sidney a tax bill payable by December 31.The bill is for real estate property taxes of $1,200 for the current calendar year and for a $6,000 special assessment for a new sewer line.On November 1,Sidney sells the property to Donald for $225,000.As part of the sale contract,Sidney will pay the real estate taxes of $1,200 at closing and Donald agrees to pay the special assessment of $6,000 on the due date.What is Sidney's gain on the sale?
A)$19,800
B)$20,000
C)$21,000
D)$24,800
E)$29,800
Q2) Danielle graduated from State University in 2015.She paid $2,100 of interest during 2016 on her qualified educational loan.The full amount is deductible.
A)True
B)False
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Chapter 7: Losses-Deductions and Limitations
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Sample Questions
Q1) Passive activity
A)Limited to $3,000 annually for individuals.
B)When an asset is disposed of for less than its basis.
C)An excess of business deductions over business income.
D)A trade or business in which the taxpayer is not a material participant.
E)A loss that results from some sudden, unexpected, or unusual event.
F)Any asset that is not a receivable, inventory, or depreciable or real property used in a trade or business.
Q2) Nelson is the owner of an apartment complex.He actively participates in the management of the building.During the current year,it generates a taxable loss of $33,000.Nelson's other sources of income are salary of $148,000 and interest of $12,000.What is Nelson's allowable loss from the apartment?
A)$- 0 -
B)$ 1,000
C)$12,000
D)$25,000
E)$33,000.
Q3) Why do the wash sale rules apply to the sale of stock at a loss but not to the sale of stock at a gain?
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Page 9
Chapter 8: Taxation of Individuals
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Sample Questions
Q1) Support test
A)Prepaid interest.
B)An amount that each taxpayer who is neither a qualifying child nor a qualifying relative, and who files a return, is allowed to deduct.
C)One test for a qualifying relative.
D)The minimum amount a taxpayer can deduct for personal expenditures.
E)A deduction in this category is always allowed. That is, there is no minimum allowable amount and generally no income limitation placed on these deductions.
F)Generally, these deductions are for specifically allowed personal expenditures.
G)An exception to this test is a custodial parent.
H)Interest paid on debt used to buy securities.
I)Interest paid on credit cards, personal loans, car loans, etc.
J)Interest paid on a mortgage secured by the taxpayer's residence. The proceeds of the loan can be used for any purpose and the interest is still deductible.
K)A tax designed to prevent the shifting of unearned income to children of the taxpayer.
Q2) 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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Sample Questions
Q1) Sammy buys a 20% interest in Duvall Corporation paying $100,000 cash on January 1,2015.During 2015,Duvall Corporation reports a loss of $60,000 and pays cash dividends to shareholders of $5,000.For 2016,Duvall Corporation has income of $200,000 and pays cash dividends of $40,000.If Duvall Company is organized as an S Corporation,Sammy's basis in the Duvall Corporation stock at the end of 2016 is:
A)$88,000
B)$89,000
C)$100,000
D)$119,000
E)$128,000
Q2) Sandi sells 100 shares of Gray Corporation stock on December 4,2016.She inherited the stock from Christine,who died on January 30,2016.The executor of the estate used the primary valuation date.Sandi's holding period for the stock is
A)Long-term.
B)Short-term.
C)Long-term if sold at a gain; short-term if sold at a loss.
D)Short-term if sold at a gain; long-term if sold at a loss.
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11
Chapter 10: Cost Recovery on Property: Depreciation, depletion,
and Amortization
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Sample Questions
Q1) MACRS requires the use of one of three conventions.For personal property,the general and most common convention is
A)mid-life
B)mid-quarter.
C)mid-month.
D)mid-year.
Q2) Which of the following would be allowed a depreciation deduction?
I.Inventory.
II.Land acquired as an investment.
III.Residence used as rental property.
IV.Airplane used by company controller to attend accounting conference.
A)Only statement III is correct.
B)Only statement IV is correct
C)Statements III and IV are correct.
D)Statements II, III, and IV are correct.
E)All of the assets are depreciable.
Q3) Under current law,taxpayers must use regular MACRS.
A)True
B)False
Page 12
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Chapter 11: Property Dispositions
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Sample Questions
Q1) All of the gain from the sale of qualified small business stock,purchased after 9/27/2010 and held more than five years is excluded from tax.
A)True
B)False
Q2) If an individual sells depreciable real estate at a gain
I.the entire gain is taxed at a maximum rate of 15%.
II.the gain due to depreciation is taxed as a long-term capital gain.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) "Recapture of depreciation" refers to:
A)Downward adjustments of past depreciation charges by IRS review.
B)Increasing depreciation charges by changing accounting method.
C)Filing an amended return where less than maximum depreciation charges have been claimed as deductions.
D)Taxing the smaller of past depreciation or gain as ordinary income on the disposition of equipment.
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Page 13
Chapter 12: Non-Recognition Transactions
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Sample Questions
Q1) Roscoe receives real estate appraised at $200,000 and cash of $10,000 from Cathy in exchange for his investment realty with a basis of $170,000.Roscoe plans to hold the new realty for investment.What is his recognized gain?
A)$- 0 -
B)$10,000
C)$20,000
D)$30,000
E)$40,000
Q2) Norman exchanges a machine he uses in his pool construction business for a used machine worth $6,000 to use in the same business.He purchased the machine 3 years ago for $22,000 and had taken depreciation of $9,000 on the machine.In the exchange,Norman also receives $3,000 of cash.As a result of the exchange, I.Norman realizes a loss of $4,000 on the exchange.
II.Norman's basis in the acquired machine is $13,000.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
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Page 14
Chapter 13: Choice of Business Entity-General Tax and
Nontax
Factorsformation
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Sample Questions
Q1) Sole proprietors are allowed to deduct owner-employee salaries and fringe benefits.
A)True
B)False
Q2) Which of the following businesses can use the cash method?
I.The Hateris Group,a partnership with 3 equal partners,of which one is The Hillard Corporation.Average revenues for the Hateris Group,a financial planning firm,over the last three years are $4,000,000.
II.The Glidder Corporation,a clothing retailer that has average annual sales over the last three years are $2,100,000.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) There must be at least one member of a Limited Liability Company who is personally liable for the debts of the business.
A)True
B)False
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Chapter 14: Choice of Business Entity-Operations and Distributions
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Sample Questions
Q1) Separate entity that never pays income taxes
A)Sole Proprietorship.
B)Partnership.
C)Corporation.
D)S Corporation.
Q2) Corporations that sell depreciable real property are not subject to depreciation recapture rules
A)True
B)False
Q3) The Polaris S Corporation has operating income of $50,000.Andrew is the sole shareholder of the corporation that has had the S election in effect since its inception.At the beginning of the current year,Andrew's basis in his S corporation stock is $2,000.During the year Andrew receives cash distributions totaling $55,000.How much income must Andrew recognize for the current tax year?
A)$50,000 ordinary income; $55,000 dividend income.
B)$50,000 ordinary income.
C)$50,000 ordinary income; $3,000 capital gain.
D)$55,000 dividend income; $3,000 capital gain.
E)$55,000 dividend income.
Page 16
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Chapter 15: Choice of Business Entity-Other Considerations
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Sample Questions
Q1) Dunn Company bought an old building in downtown Lafayette for $75,000.The land was not purchased; it is being leased.The building was originally placed into service in 1918.Dunn spends $100,000 to rehabilitate the building with the intent to develop a microbrewery on the site.The company retained 80% of the external and internal walls and framework.Assume the amount of the older building rehabilitation credit Dunn can claim is $10,000.What is the basis in the building for depreciation purposes?
A)$100,000
B)$145,000
C)$105,000
D)$165,000
E)$175,000
Q2) Jane is a partner with Smithstone LLP.Smithstone maintains a profit-sharing Keogh plan for its partners and employees.Determine the maximum deductible contribution Jane can make to the plan in each of the following situations:
a.Jane's net self-employment income is $80,000.
b.Jane's net self-employment income is $280,000.
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Chapter 16: Tax Research
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Sample Questions
Q1) Which of the following is/ are trial level courts for tax cases?
I.U.S.Court of Federal Claims.
II.U.S.Supreme Court.
III.U.S.Court of Appeals for the Federal Circuit.
IV.U.S.Court of Appeals for the Tenth Circuit.
V.U.S.District Court.
A)Only statement V is correct.
B)Only statement II is correct.
C)Statements I and V are correct.
D)Statements II, III, and IV are correct.
E)Statements I, II, III, IV, and V are correct.
Q2) Search engines used in computer-assisted tax research tools provide advantages over manual searches.
A)True
B)False
Q3) Tax articles in law review journals are primary sources of federal income tax law.
A)True
B)False
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Page 18