2023 1 Taupe Corporation is considering deferred compensation plans for its executive employees | Assignments Online

1. Taupe Corporation is considering deferred compensation plans for its executive employees over age 55. One plan is to allow the employee to make an election at the end of the year to collect his or her bonus when the employee retires, at which time the executive would receive the deferred pay plus 6% interest.

a. The interest is original issue discount and must be included in gross income before retirement.

b. The employee cannot defer the income (both the bonus and the interest) for tax purposes because it is constructively received each year.
c. The employee must recognize the bonus each year, but can defer the interest. d. The bonus and the related interest can be deferred from inclusion in gross income until they are received.
e. None of the above.
2. Under the original issue discount (OID) rules as applied to a three-year certificate of deposit: a. The OID will not be included in gross income until the end of the third year. b. The OID will be amortized by the straight-line method (e.g., $75 per year.) c. All of the OID must be recognized as gross income in the first year. d. The interest income for the first year will be less than the interest income for the third year.

e. None of the above.
3. Dorothy purchased a certificate of deposit for $10,000 on January 1, 2007. The certificate’s maturity value in two years (December 31, 2008) is $10,816, yielding 4% before-tax interest. a. Dorothy must recognize $400 (.04 ´ $10,000) gross income in 2007. b. Dorothy must recognize $816 gross income in 2008.

c. Dorothy must recognize $816 gross income in 2007.
d. Dorothy must recognize $408 ($816/2) gross income in 2007 and 2008. e. None of the above.
4. With respect to the prepaid income from services, which of the following is true? a. The treatment of prepaid income is the same for tax and financial accounting. b. A cash basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.

c. An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
d. An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less.
e. None of the above.

5. As a general rule:
I.
Income from property is taxed to the person who owns the property.

 II.
Income from services is taxed to the person who earns the income.

III.
The assignee of income from property must pay tax on the income.

IV.
The person who receives the benefit of the income must pay the tax on the income.

 

a. Only I and II are true.
b. Only III and IV are true.
c. I, II, and III are true, but IV is false.
d. I, II, III, and IV are true.
e. None of the above is true.

6. Marge made a $60,000 interest-free loan to her son, Steve, who used the money to start a new business. Steve’s only sources of income were $25,000 from the business and $250 of interest on his checking account. The relevant Federal interest rate was 5%. Based on the above information: a. Steve’s business net profit will be reduced by $3,000 (.05 ´ $60,000) of interest expense. b. Marge must recognize $3,000 (.05 ´ $60,000) of imputed interest income on the below market loan.

c. Steve’s gross income must be increased by the $3,000 (.05 ´ $60,000) imputed interest income on the below market loan.
d. Steve’s interest income is $250 and his interest expense is zero. e. None of the above is correct.
7. Our tax laws encourage taxpayers to ____ assets that have declined in value and ____ assets that have appreciated in value.
a. sell, sell
b. sell, keep
c. keep, sell
d. keep, keep
e. None of the above.
8. Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 5% interest, but she is interested in earning a higher return for comparable risk. a. If she buys a corporate bond that pays 8% interest, her after-tax rate of return will be greater than if she purchased the York County school bond.

b. If she buys a U.S. government bond paying 6%, her after-tax rate of return will be less than if she purchased the York County school bond.
c. If she buys a common stock paying 6% dividend, her after-tax rate of return will be higher than if she purchased the York County school bond.
d. All of the above are correct.
e. None of the above are correct.

____

9. In December 2007, Teal, Corp., a cash basis taxpayer, paid $1,200 fire insurance for the calendar year 2008 on a building held for rental income. Teal, Corp. deducted the $1,200 insurance premiums on its 2007 tax return. Teal had $150,000 of taxable income that year. On June 30, 2008, the corporation sold the building and, as a result, received a $500 refund of the fire insurance premiums. As a result of the above: a. Teal, Corp. should amend its 2007 return and claim $500 less insurance expense. b. Teal, Corp. should add the $500 to its sales proceeds from the building. c. Teal, Corp. should include the $500 in 2008 gross income in accordance with the tax benefit rule.

d. Teal, Corp. should include the $500 in 2008 gross income in accordance with the claim of right doctrine.
e. None of the above.
____ 10. Heber, Inc. bought land from Jewel for $100,000. Heber, Inc. paid $20,000 cash and gave Jewel an 8% note for $80,000. The note was to be paid over a five-year period. When the balance on the note was $40,000, Jewel began having financial difficulties. To accelerate its cash inflows, Jewel agreed to accept $30,000 cash from Heber, Inc. in final payment of the note principal.

a. Heber must recognize $10,000 income.
b. Heber is not required to recognize income, but must reduce its cost basis in the land to $90,000.
c. Heber is not required to recognize income, since it made a gift to Jewel when it paid the debt before it was due.
d. Jewel must recognize income from discharge of the debt.
e. None of the above.
____ 11. Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. Pink, Inc., the holder of a mortgage on Gold’s building, agreed to accept $40,000 in full payment of the $50,000 due. Pink had sold the property to Gold for $150,000 five years ago. The National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $100,000 to $85,000. The bank had made the loan to Gold when it purchased the real estate from Silver, Inc. As a result of the above, Gold must: a. Include $25,000 in gross income.

b. Reduce the basis in its assets by $25,000.
c. Include $10,000 in gross income and reduce its basis in its assets by $15,000. d. Include $15,000 in gross income and reduce its basis in the building by $10,000. e. None of the above.
____ 12. On January 1, 1997, Yellow corporation issued 6% 25-year bonds at par and used the $10,000,000 proceeds to finance the construction of a new plant. On January 1, 2007, the company acquired the bonds on the open market for $9,500,000. Assuming that Yellow Corporation is neither bankrupt nor insolvent, the acquisition and retirement of the bonds results in which of the following: a. The company must recognize a $500,000 gain.

b. The company can make an election to recognize a $500,000 gain or reduce the company’s basis in the plant by $500,000.
c. The company must recognize a $500,000 gain and increase the company’s basis in the plant by $500,000.
d. The company can amortize the $500,000 gain, recognizing income over the remaining life of the bonds.
e. None of the above.

____ 13. During the year, Kim sold the following assets: business auto for a $1,000 loss, stock investment for a $1,000 loss, and pleasure yacht for a $1,000 loss. Presuming adequate income, how much of these losses may Kim claim?

a. $0.
b. $1,000.
c. $2,000.
d. $3,000.
e. None of the above.
____ 14. Elk, a C corporation, has $400,000 operating income and $350,000 operating expenses during the year. In addition, Elk has a $30,000 long-term capital gain and a $52,000 short-term capital loss. Elk’s taxable income is:

a. ($2,000).
b. $28,000.
c. $50,000.
d. $80,000.
e. None of the above.
____ 15. Which of the following is a required test for the deduction of a business expense? a. Ordinary.
b. Necessary.
c. Reasonable.
d. All of the above.
e. None of the above.
____ 16. Shady, Inc., a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2007, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2007, Shady, Inc. had the following expenses: Operating expenses in conducting bingo games

Payoff money to state and local police
Newspaper ads supporting H.R. 9
Political contributions to legislators who support H.R. 9

$247,000
24,000
2,000
8,000

Of these expenditures, Shady, Inc. may deduct:
a. $247,000.
b. $249,000.
c. $257,000.
d. $281,000.
e. None of the above.
____ 17. In Lawrence County, the real property tax year is the calendar year. The real property tax becomes a liability of the owner of real property on January 1 in the current real property tax year, 2007 (which is not a leap year). The tax is payable on June 1, 2007. On May 1, 2007, Jackson, Inc. sells an office building to Denver, Inc. for $250,000. On June 1, 2007, Denver, Inc. pays the entire real estate tax of $7,950 for the year ending December 31, 2007. How much of the property taxes may Jackson, Inc. deduct? a. $0.

b. $2,614.
c. $2,625.
d. $7,950.
e. None of the above.

____ 18. Hippo, Inc., a calendar year C corporation, manufactures golf gloves. For 2007, Hippo had taxable income of $200,000, qualified domestic production activities income of $250,000, and W-2 wages related to production activities of $23,000. Hippo’s domestic production activities deduction for 2007 is: a. $11,500.

b. $12,000.
c. $15,000.
d. $23,000.
e. None of the above.
____ 19. Cream, Inc.’s taxable income for 2007 before any deduction for an NOL carryforward of $30,000 is $70,000. Cream’s qualified production activities income (QPAI) is $60,000. What is the amount of Cream’s domestic production activities deduction (DPAD) for 2007?

a. $1,200.
b. $1,800.
c. $2,400.
d. $3,600.
e. None of the above.
____ 20. Jamestown, Inc. purchased a new business asset (three-year property) on July 23, 2007, at a cost of $50,000. The corporation did not elect to expense any of the asset under § 179, nor did the corporation elect straight-line cost recovery. Determine the cost recovery deduction for 2007. a. $8,333.

b. $16,665.
c. $26,666.
d. $33,333.
e. None of the above.
____ 21. Atara, Corp. purchased an office condominium on September 20, 2007, for $200,000. On October 10, the company purchased business assets (seven-year property) for $80,000. The company did not elect to expense any of the assets under § 179, nor did it elect straight-line cost recovery. Determine the cost recovery deduction for the business assets for 2007.

a. $2,856.
b. $25,999.
c. $32,002.
d. $41,428.
e. None of the above.
____ 22. Paz, Inc.’s business is raising and harvesting peaches. On March 10, 2007, Paz purchased 10,000 new peach trees at a cost of $50,000. Paz does not elect to expense assets under § 179. Determine the cost recovery deduction for 2007.

a. $0.
b. $1,250.
c. $2,500.
d. $10,000.
e. None of the above.

____ 23. White Company acquires a new machine (seven-year property) on January 10, 2007, at a cost of $204,000. White makes the election to expense the maximum amount under § 179. No election is made to use the straight-line method. Determine the total deductions in calculating taxable income related to the machine for 2007 assuming White has taxable income of $500,000.

a. $46,294.
b. $51,151.
c. $119,147.
d. $125,147.
e. None of the above.
____ 24. Ace Corporation, an accrual basis taxpayer, sells widgets. Ace sold on account a deluxe widget to Alan, Inc., for $22,000. Ace had a basis in the widget of $12,000. During the current year, after receiving $3,000 from Alan, Ace was notified that Alan was bankrupt and no further payments would be received. What amount of loss may Ace deduct in the current year?

a. $0.
b. $7,000.
c. $9,000.
d. $10,000.
e. None of the above.
____ 25. On May 1, 2006, Mary loaned John $20,000. In 2007, John filed for bankruptcy. At that time, it was revealed that John’s creditors could expect to receive 60 cents on the dollar. In March 2008, final settlement was made, and Mary received $5,000. How much loss can Mary deduct and in which year? a. 2006—$15,000.

b. 2007—zero; 2008—$15,000.
c. 2007—$12,000; 2008—$3,000.
d. 2007—$8,000; 2008—$7,000.
e. None of the above.
____ 26. Jones Corporation incurred a $10,000 bad debt in the current year. Jones Corporation also had a $6,000 long-term capital gain during the current year. How should Jones report the bad debt deduction on the tax return?

a. $0 bad debt deduction.
b. $3,000 bad debt deduction.
c. $4,000 bad debt deduction.
d. $10,000 bad debt deduction.
e. None of the above.
____ 27. Which of the following is true regarding net operating losses? a. They are carried back for 3 years.
b. They are carried back for 5 years.
c. They are carried back for 2 years and forward for 20 years. d. They are carried back for 1 years.
e. None of the above.

____ 28. In 2007, Cindy invested $100,000 for a 25% interest in a limited liability company (LLC) involved in an activity in which she is a material participant. The LLC reported losses of $340,000 in 2007 and $180,000 in 2008 with Cindy’s share being $85,000 in 2007 and $45,000 in 2008. How much of the losses can Cindy deduct?

a. $0 in 2007, $0 in 2008.
b. $85,000 in 2007, $0 in 2008.
c. $85,000 in 2007, $15,000 in 2008.
d. $85,000 in 2007, $45,000 in 2008.
e. None of the above.
____ 29. Nora acquired passive activity A several years ago that until 2006 was profitable. However, the activity produced losses of $100,000 in 2006 and $50,000 in 2007. Nora had passive income from activity B of $40,000 in 2006 and $0 in 2007. How much loss is suspended from activity A in each year? a. $60,000 in 2006 and $50,000 in 2007.

b. $100,000 in 2006 and $50,000 in 2007.
c. $0 in 2006 and $0 in 2007.
d. None of the above.
____ 30. Samantha sells a passive activity (adjusted basis of $50,000) for $90,000. Suspended losses attributable to this property total $30,000. The realized gain and the taxable gain are: a. $40,000 realized gain; $70,000 taxable gain.

b. $10,000 realized gain; $10,000 taxable gain.
c. $40,000 realized gain; $0 taxable gain.
d. $40,000 realized gain; $10,000 taxable gain.
e. None of the above.
____ 31. Ned, a college professor, owns a separate business (not real estate) in which he participates in the current year. He has one employee who works part-time in the business. Which of the following statements is correct?

a. If Ned participates for 120 hours and the employee participates for 120 hours during the year, Ned does not qualify as a material participant.
b. If Ned participates for 95 hours and the employee participates for 5 hours during the year, Ned probably does not qualify as material participant. c. If Ned participates for 500 hours and the employee participates for 520 hours during the year, Ned qualifies as material participant.

d. If Ned participates for 600 hours and the employee participates for 2,000 hours during the year, Ned qualifies as a material participant.
e. None of the above.
____ 32. Paula owns four separate activities. She elects not to group them together as a single activity under the “appropriate economic unit” standard. Paula participates for 130 hours in Activity A, 115 hours in Activity B, 260 hours in Activity C, and 100 hours in Activity D. She has one employee, who works 125 hours in Activity D. Which of the following statements is correct?

a. Activities A, B, C, and D are all significant participation activities. b. Paula is a material participant with respect to Activities A, B, C, and D. c. Paula is not a material participant with respect to Activities A, B, C, and D. d. Losses from all of the activities can be used to offset Paula’s active income. e. None of the above.

____ 33. Dena owns interests in five businesses and has full-time employees in each business. She participates for 100 hours in Activity A, 120 hours in Activity B, 130 hours in Activity C, 140 hours in Activity D, and 125 hours in Activity E. Which of the following statements is correct? a. All five of Dena’s activities are significant participation activities. b. Dena is a material participant with respect to all five activities. c. Dena is not a material participant in any of the activities. d. Dena is a material participant with respect to Activities B, C, D, and E. e. None of the above.

____ 34. Maria, who owns a 50% interest in a restaurant, has been a material participant in the restaurant activity for the last 20 years. She retired from the restaurant at the end of last year and will not participate in the restaurant activity in the future. However, she continues to be a material participant in a retail store in which she is a 50% partner. The restaurant operations produce a loss for the current year, and Maria’s share of the loss is $80,000. Her share of the income from the retail store is $150,000. She does not own interests in any other activities. Which of the following statements is correct? a. Maria cannot deduct the $80,000 loss from the restaurant because she is not a material participant.

b. Maria can offset the $80,000 loss against the $150,000 of income from the retail store. c. Maria will not be able to deduct any losses from the restaurant until she has been retired for at least three years.

d. None of the above.
____ 35. Josh has investments in two passive activities. Activity A, acquired three years ago, produces income in the current year of $60,000. Activity B, acquired last year, produces a loss of $100,000 in the current year. At the beginning of this year, Josh’s at-risk amounts in Activities A and B are $10,000 and $100,000, respectively. What is the amount of Josh’s suspended passive loss with respect to these activities at the end of the current year?

a. $0.
b. $36,000.
c. $40,000.
d. $100,000.
e. None of the above.
____ 36. Rita earns a salary of $150,000, and invests $40,000 for a 20% interest in a passive activity. Operations of the activity result in a loss of $250,000, of which Rita’s share is $50,000. How is her loss characterized? a. $40,000 is suspended under the passive loss rules and $10,000 is suspended under the at-risk rules.

b. $40,000 is suspended under the at-risk rules and $10,000 is suspended under the passive loss rules.
c. $50,000 is suspended under the passive loss rules.
d. $50,000 is suspended under the at-risk rules.
e. None of the above.

 

____ 37. Vic’s at-risk amount in a passive activity is $200,000 at the beginning of the current year. His current loss from the activity is $80,000. Vic had no passive activity income during the year. At the end of the current year:

a. Vic has an at-risk amount in the activity of $120,000 and a suspended passive loss of $80,000.
b. Vic has an at-risk amount in the activity of $200,000 and a suspended passive loss of $80,000.
c. Vic has an at-risk amount in the activity of $120,000 and no suspended passive loss. d. Vic has an at-risk amount in the activity of $200,000 and no suspended passive loss. e. None of the above.

____ 38. Jon owns an apartment building in which he is a material participant and a computer consulting business. Of the 2,000 hours he spends on these activities during the year, 55% of the time is spent operating the apartment building and 45% of the time is spent in the computer consulting business. Which of the following statements is correct?

a. The computer consulting business is a passive activity but the apartment building is not. b. The apartment building is a passive activity but the computer consulting business is not. c. Both the apartment building and the computer consulting business are passive activities. d. Neither the apartment building nor the computer consulting business is a passive activity. e. None of the above.

____ 39. Carmen, a single taxpayer, has $80,000 in salary, $10,000 in income from a limited partnership, and a $30,000 passive loss from a real estate rental activity in which she actively participates. Her modified adjusted gross income is $80,000. Of the $30,000 loss, Carmen may deduct: a. $0.

b. $10,000.
c. $25,000.
d. $30,000.
e. Some other amount.
____ 40. Roxanne, who is single, has $125,000 of salary, $10,000 of income from a limited partnership, and a $26,000 passive loss from a real estate rental activity in which she actively participates. Her modified adjusted gross income is $125,000. Of the $26,000 loss, how much is deductible? a. $0.

b. $10,000.
c. $25,000.
d. $26,000.
e. None of the above.

Problem
41. Determine the proper tax year for gross income inclusion in each of the following cases. a. An automobile dealer has several new cars in inventory, but often does not have the right combination of body style, color, and accessories. In some cases the dealer makes an offer to sell a car at a certain price, accepts a deposit, and then orders the car from the manufacturer. When the car is received from the manufacturer, the sale is closed, and the dealer receives the balance of the sales price. At the end of the current year, the dealer has deposits totaling $8,200 for cars that have not been received from the manufacturer. When is the $8,200 subject to tax?

b.

Purple Corporation, an exterminating company, is a calendar year taxpayer. It contracts to provide service to homeowners once a month under a one-, two-, or three-year contract. On April 1 of the current year, the company sold a customer a one-year contract for $120. How much of the $120 is taxable in the current year if the company is an accrual basis taxpayer. If the $120 is payment on a two-year contract, how much is taxed in the year the contract is sold and in the following year? If the $120 is payment on a three-year contract, how much is taxed in the year the contract is sold and in the following year?

c.

Pink, Inc., an accrual basis taxpayer, owns an amusement park whose fiscal year ends September 30. To increase business during the fall and winter months, Pink sold passes that would allow the holder to ride “free” during the months of October through March. During the month of September, $6,000 was collected from the sale of passes for the upcoming fall and winter. When will the $6,000 be taxable to Pink?

d.

The taxpayer is in the office equipment rental business and uses the accrual basis of accounting. In December he collected $5,000 in rents for the following January. When is the $5,000 taxable?

42. On January 1, 2007, Faye gave Todd, her son, a 36-month certificate of deposit she purchased December 31, 2005 for $4,319. Faye gave Todd 1,000 shares of ABC, Inc., on December 2, 2007. The certificate had a maturity value of $5,000 and the yield to maturity was 5%. On November 30, 2007, ABC, Inc., had declared a dividend of $1.00 payable to stockholders of record on December 5th. How much interest and dividends should Todd include in his gross income for 2007?

43. Roy is considering purchasing land for $10,000. He expects the land to appreciate in value 8% each year (compounded) and he will sell it at the end of 10 years. He also is considering purchasing a bond for $10,000. The bond does not pay any annual interest, but will pay $21,589 at maturity in 10 years. The before-tax rate of return on the bond is 8%. Roy is in the 40% (combined Federal and State) marginal tax bracket. Roy has other investments that earn a 8% before-tax rate of return. Given that the compound interest factor at 8% is 2.1589, and at 4.8% the factor is 1.5981, which alternative should Roy choose?

 

44. Ostrich Corporation has net short-term capital gains of $60,000 and net long-term capital losses of $380,000 during 2007. Ostrich had taxable income from other sources of $1 million. Prior years’ transactions included the following:

2003 Net short-term capital gains
2004 Net long-term capital gains
2005 Net short-term capital gains
2006 Net long-term capital gains
a.
b.
c.
d.

$200,000
80,000
60,000
140,000

How are the capital gains and losses treated on Ostrich’s 2007 tax return? Determine the amount of the 2007 capital loss that is carried back to each of the previous years.
Compute the amount of capital loss carryover, if any, and indicate the years to which the loss may be carried.
If Ostrich were a proprietorship, how would Ellen, the owner, report these transactions on her 2007 tax return?

45. Alex sells land with an adjusted basis of $48,000 and a fair market value of $40,000 to his mother, Sybil, for $40,000. Sybil holds the land for one year and a day and sells it in the marketplace for $45,000. a.

Determine the tax consequences to Alex.

b.

Determine the tax consequences to Sybil.

46. In 2006, Robin Corporation incurred the following expenditures in connection with the development of a new product:
Salaries
Supplies
Market survey
Depreciation

$50,000
20,000
10,000
15,000

In 2007, Robin incurred the following additional expenditures in connection with the development of the product:
Salaries
Supplies
Depreciation
Advertising

$75,000
15,000
17,000
8,000

In October 2007, Robin began receiving benefits from the project. If Robin elects to expense research and experimental expenditures, determine the amount and year of the deduction.

47. Nora purchased a new automobile on July 20, 2007, for $29,000. The car was used 60% for business and 40% for personal use. In 2008, the car was used 30% for business and 70% for personal use. Determine the cost recovery recapture and the cost recovery deduction for 2008.

48. Hugh has four passive activities. The following income and losses are generated in the current year. Activity
A
B
C
D
Total

Gain (Loss)
($60,000)
(20,000)
(10,000)
10,000
($80,000)

How much of the $80,000 net passive loss can Hugh deduct this year? Calculate the suspended losses (by activity).

49. Orange Corporation, a closely held (non-personal service) C corporation, earns active income of $300,000 in the current year. The corporation also receives $35,000 in dividends during the year. In addition, Orange incurs a loss of $50,000 from an investment in a passive activity. What is Orange’s income for the year after considering the passive investment?

50. Faye dies owning an interest in a passive activity property (adjusted basis of $150,000, suspended losses of $52,000, and a fair market value of $180,000). What, if any, can be deducted on her final income tax return?