Tax Chapter 9
Showing posts with label Tax Chapter 9. Show all posts
Showing posts with label Tax Chapter 9. Show all posts

Which of the following is a true statement about a request for a change in accounting method?

Which of the following is a true statement about a request for a change in accounting method?



A. Some requests are automatically granted.


B. Most requests require the permission of the Commissioner.


C. Many requests require payment of a fee and a good business purpose for the change.


D. Form 3115 is required to be filed with a request for change in accounting method.


E. All of these are true.


Answer: All of these are true

Todd operates a business using the cash basis of accounting. At the end of last year, Todd was granted permission to switch his sales on account to the accrual method. Last year Todd made $420,000 of sales on account and $64,000 was uncollected at the end of the year. What is the Todd's §481 adjustment for this year?

Todd operates a business using the cash basis of accounting. At the end of last year, Todd was granted permission to switch his sales on account to the accrual method. Last year Todd made $420,000 of sales on account and $64,000 was uncollected at the end of the year. What is the Todd's §481 adjustment for this year?



A. increase income by $420,000


B. increase income by $16,000


C. increase expenses by $64,000


D. increase expenses by $420,000


E. Todd has no §481 adjustment this year.


Answer: increase income by $16,000

Which of the following is a true statement about impermissible accounting methods?

Which of the following is a true statement about impermissible accounting methods?



A. An impermissible method is adopted by using the method to report results for two consecutive years.


B. An impermissible method may never be used by a taxpayer.


C. Cash method accounting is an impermissible method for partnerships and Subchapter S electing corporations.


D. There is no accounting method that is impermissible.


E. None of these is true.


Answer: An impermissible method is adopted by using the method to report results for two consecutive years

Which of the following is a true statement about accounting for business activities?

Which of the following is a true statement about accounting for business activities?



A. An overall accounting method can only be adopted with the permission of the Commissioner.


B. An overall accounting method is initially adopted on the first return filed for the business.


C. The cash method can only be adopted by individual taxpayers.


D. The accrual method can only be adopted by corporate taxpayers.


E. None of these is true.


Answer: An overall accounting method is initially adopted on the first return filed for the business

Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?

Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties?



A. Spouse when the taxpayer is an individual.


B. A partner when the taxpayer is a partnership.


C. Brother when the taxpayer is an individual.


D. A minority shareholder when the taxpayer is a corporation.


E. All of these are related parties.


Answer: A minority shareholder when the taxpayer is a corporation

Manley operates a law practice on the accrual method and calendar year. At the beginning of the year Manley's firm had an allowance for doubtful accounts with a balance of $15,000. At the end of the year, Manley recorded bad debt expense of $23,000 and the balance of doubtful accounts had increased to $18,000. What is Manley's deduction for bad debt expense this year?

Manley operates a law practice on the accrual method and calendar year. At the beginning of the year Manley's firm had an allowance for doubtful accounts with a balance of $15,000. At the end of the year, Manley recorded bad debt expense of $23,000 and the balance of doubtful accounts had increased to $18,000. What is Manley's deduction for bad debt expense this year?



A. $23,000


B. $3,000


C. $26,000


D. $5,000


E. $20,000


Answer: $20,000

Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year. This year he hired his son as an apprentice cook. Jones agreed to pay his son $40,000 per year. Which of the following is a true statement about this transaction?

Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year. This year he hired his son as an apprentice cook. Jones agreed to pay his son $40,000 per year. Which of the following is a true statement about this transaction?



A. Jones will be allowed to deduct $40,000 only if his son eventually develops into an expert cook.


B. Jones will be allowed to accrue $40,000 only if he pays his son in cash.


C. Jones will be allowed to deduct $35,000 as compensation and another $5,000 can be deducted as an employee gift.


D. Jones can only deduct $20,000 because an apprentice cook is only worth half as much as an experienced cook.


E. None of these.


Answer: None of these

Big Homes Corporation is an accrual method calendar year taxpayer that manufactures and sells modular homes. This year for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year end, Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

Big Homes Corporation is an accrual method calendar year taxpayer that manufactures and sells modular homes. This year for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year end, Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?



A. $12,000 because rebates are payment liabilities.


B. $19,500 because Big Homes is an accrual method taxpayer.


C. $19,500 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing their tax return for this year.


D. $12,000 because the $7,500 liability is not fixed and determinable.


E. Big Homes is not entitled to a deduction because rebates are against public policy.


Answer: $19,500 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing their tax return of this year


Ajax Computer Company is an accrual method calendar year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $500,000 for advertising time during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?

Ajax Computer Company is an accrual method calendar year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1 million for television advertising time during a "super" sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $500,000 for advertising time during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?



A. $1 million


B. $500,000


C. $1.5 million


D. $1.5 million only if the professional golf tournament is played before April 15.


E. No deduction can be claimed this year.


Answer: $1 million

Brad operates a storage business on the accrual method. On July 1 Brad paid $48,000 for rent on his storage warehouse and $18,000 for insurance on the contents of the warehouse. The rent and insurance covers the next 12 months. What is Brad's deduction for the rent and insurance?

Brad operates a storage business on the accrual method. On July 1 Brad paid $48,000 for rent on his storage warehouse and $18,000 for insurance on the contents of the warehouse. The rent and insurance covers the next 12 months. What is Brad's deduction for the rent and insurance?



A. $48,000 for the rent and $18,000 for the insurance.


B. $24,000 for the rent and $18,000 for the insurance.


C. $24,000 for the rent and $9,000 for the insurance.


D. $48,000 for the rent and $9,000 for the insurance.


E. None of these is true.


Answer: $24,000 for the rent and $18,000 for the insurance

Joe is a self employed electrician who operates his business on the accrual method. This year Joe purchased a shop for his business and at year end he received a bill for $4,500 of property taxes on his shop. Joe didn't pay the taxes until after year end. Which of the following is a true statement?

Joe is a self employed electrician who operates his business on the accrual method. This year Joe purchased a shop for his business and at year end he received a bill for $4,500 of property taxes on his shop. Joe didn't pay the taxes until after year end. Which of the following is a true statement?



A. If he elects to treat the taxes as a recurring item, Joe can accrue and deduct $4,500 of taxes on the shop this year.


B. The taxes are a payment liability.


C. The taxes would not be deductible if Joe's business was on the cash method.


D. Unless Joe makes an election, the taxes are not deductible this year.


E. All of these are true.


Answer: All of these are true

Which of the following is a payment liability?

Which of the following is a payment liability?



A. Tort claims


B. Refunds


C. Insurance premiums


D. Real estate taxes


E. All of these


Answer: All of these

Mike started a calendar year business on September 1st of this year by paying 12 months rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

Mike started a calendar year business on September 1st of this year by paying 12 months rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?



A. $12,000 under the cash method and $12,000 under the accrual method


B. $4,000 under the cash method and $12,000 under the accrual method


C. $12,000 under the cash method and $4,000 under the accrual method


D. $4,000 under the cash method and $4,000 under the accrual method


E. $4,000 under the cash method and zero under the accrual method


Answer: $12,000 under the cash method and $4,000 under the accrual method

Kip started a wholesale store this year selling bulk peanut butter. In January of this year Kip purchased an initial five tubs of peanut butter for a total cost of $5,000. In July Kip purchased three tubs for a total cost of $6,000. Finally, in November Kip bought two tubs for a total cost of $1,000. Kip sold six tubs by year end. What is Kip's ending inventory under the FIFO cost-flow method?

Kip started a wholesale store this year selling bulk peanut butter. In January of this year Kip purchased an initial five tubs of peanut butter for a total cost of $5,000. In July Kip purchased three tubs for a total cost of $6,000. Finally, in November Kip bought two tubs for a total cost of $1,000. Kip sold six tubs by year end. What is Kip's ending inventory under the FIFO cost-flow method?



A. $12,000


B. $6,000


C. $5,000


D. $2,500


E. $1,000


Answer: $5,000

Colbert operates a catering service on the accrual method. In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1st of year 1 through May 31st year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

Colbert operates a catering service on the accrual method. In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1st of year 1 through May 31st year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?



A. $500 is recognized in year 1, $6,000 in year 2, and $2,500 in year 3.


B. $500 is recognized in year 1 and $8,500 in year 2.


C. $9,000 is recognized in year 3.


D. $2,500 is recognized in year 1 and $6,500 in year 2.


E. $9,000 is recognized in year 1.


Answer: $500 is recognized in year 1 and $8,500 in year 2

Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?



A. Jim can defer the recognition of the income if he absolutely promises not to provide the services until next year.


B. Jim must defer the recognition of the income until the income is earned.


C. Jim can defer the recognition of the income if he has requested that the client not pay for the services until the services are provided.


D. Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes.


E. Jim can never defer the recognition of the prepayments of income.


Answer: Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes

Beth operates a plumbing firm. In August of last year she signed a contract to provide plumbing services for a renovation. Beth began the work that August and finished the work in December of last year. However, Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full. When should Beth recognize income under the accrual method of accounting?

Beth operates a plumbing firm. In August of last year she signed a contract to provide plumbing services for a renovation. Beth began the work that August and finished the work in December of last year. However, Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full. When should Beth recognize income under the accrual method of accounting?



A. In August of last year


B. In December of last year


C. In January of this year


D. In March of this year


E. In April of this year


Answer: In December of last year

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