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Tax Accounting Multiple Choice

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1. Which, if any, of the following statements best describes the history of the Federal income tax?
a.     It existed during the Civil War.
b.     The Federal income tax on corporations was held by the U.S. Supreme Court to be contrary to the U.S. Constitution.
c.     The Federal income tax on individuals was held by the U.S. Supreme Court to be allowable under the U.S. Constitution.
d.     Both the Federal income tax on individuals and on corporations was held by the U.S. Supreme Court to be contrary to the U.S. Constitution.
e.     None of the above.

     2.     The proposed flat tax:
a.     Would simplify the income tax.
b.     Would eliminate the income tax.
c.     Would tax the increment in value as goods move through the production and manufacturing stages to the marketplace.
d.     Is a tax on consumption.
e.     None of the above.

     3.     Which item may not be cited as a precedent?
a.     Regulations.
b.     Temporary Regulations.
c.     Technical Advice Memoranda.
d.     U.S. Tax Court decision.
e.     None of the above.

     4.     Which of the following is not an administrative source of the tax law?
a.     Actions on Decisions.
b.     Revenue Procedures.
c.     Revenue Rulings.
d.     General Counsel Memoranda.
e.     All of the above are administrative sources.

     5     Tim, age 16, is claimed as a dependent by his grandmother. During 2005, Tim had interest income from City of Omaha bonds of $1,000 and earnings from a part-time job of $700. Tim's taxable income is:
a.     $0.
b.     $1,700 – $700 – $800 = $200.
c.     $1,700 – $950 = $750.
d.     $1,700 – $800 = $900.
e.     None of the above.

     6.     Abigail is a widow, age 70 and blind, who is claimed as a dependent by her son. During 2005, she received $4,800 in Social Security benefits, $1,200 in bank interest, and $1,800 in cash dividends from stocks. Abigail's taxable income for 2005 is:
a.     $3,000 – $800 – $2,500 = $0.
b.     $3,000 – $2,500 = $500.
c.     $3,000 – $800 – $1,250 = $950.
d.     $7,800 – $800 – $2,500 = $4,500.
e.     None of the above.

    7.         Under the terms of a divorce agreement, Lanny was to pay his wife Joyce $2,500 per month in alimony and $500 per month in child support. For a twelve-month period, Lanny can deduct from gross income (and Joyce must include in gross income):
a.     $0.
b.     $6,000.
c.     $30,000.
d.     $36,000.
e.     None of the above.

     8.     Jay, a single taxpayer, retired from his job as a public school teacher in 2005. He is to receive a retirement annuity of $1,000 each month and his life expectancy is 150 months. He contributed $30,000 to the pension plan during his 35-year career; so his adjusted basis is $30,000. What is the correct method for reporting the pension income?
a.     Since Jay is no longer working, none of the pension must be included in his gross income.
b.     The first $30,000 received is a nontaxable recovery of capital, and all subsequent annuity payments are taxable.
c.     The first $120,000 he receives is taxable and the last $30,000 is a nontaxable recovery of capital.
d.     For the first 150 months, 20% ($30,000/$150,000) of the amount received is a nontaxable recovery of capital and the balance is included in gross income.
e.     None of the above.

     9.     In 2005, Khalid was in an automobile accident and suffered physical injuries. The accident was caused by Rashad's negligence. In 2006, Khalid collected from the insurance company. He also received $15,000 for loss of income, $5,000 punitive damages, and $8,000 for medical expenses which he had deducted on his 2005 tax return. His other medical expenses exceeded 7.5% of his AGI, and his total itemized deductions were $20,000. As a result of the above, Khalid's 2006 gross income is increased by:
a.     $0.
b.     $5,000.
c.     $13,000.
d.     $20,000.
e.     $28,000.

         10. Jena is a full-time student at State University and is claimed by her parents as a dependent. Her only source of income is a $6,000 scholarship ($400 for books, $3,000 tuition, $200 athletic fee, and $2,400 room and board). Jena's gross income for the year is:
a.     $0.
b.     $400.
c.     $2,600.
d.     $3,000.
e.     None of the above.

   11.   Janice is single, had gross income of $38,000, and incurred the following expenses:
Charitable contribution     $2,500
Taxes and interest on home     9,000
Legal fees incurred in a tax dispute     1,000
Medical expenses     4,000
Penalty on early withdrawal of savings     200

Her AGI is:
a.     $21,300.
b.     $28,800.
c.     $32,800.
d.     $35,500.
e.     $37,800.

     12.     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.

     13.     Amos loaned James (a friend) $20,000 in 2003 with the agreement that the loan would be repaid in two years. In 2004, James filed for bankruptcy, and Amos was notified that he could expect $0.40 on the dollar. In 2005, final settlement was made, and Amos received $5,000. In 2005, Amos had AGI of $80,000, including $12,500 of long-term capital gain. Assuming the loan is a nonbusiness bad debt, what is the amount of Amos's bad debt deduction in 2005?
a.     $3,000.
b.     $7,000.
c.     $12,000.
d.     $15,000.
e.     None of the above.

     14.     Two years ago, Sharon loaned her sister $10,000 to buy a car. No note was issued for the loan, no provision for interest was made, and no repayment date was specified. During the current year, Sharon's sister died leaving no estate. Sharon's bad debt deduction for the current year is:
a.     $0.
b.     $3,000.
c.     $6,000.
d.     $10,000.
e.     None of the above.

     15.     On July 10, 2005, Ariff places in service a new sports utility vehicle that cost $60,000 and weighed 6,300 pounds. The SUV is used 100% for business. Determine Ariff's maximum deduction for 2005, assuming Ariff's § 179 business income is $110,000.
a.     $7,660.
b.     $26,400.
c.     $35,500.
d.     $40,400.
e.     None of the above.
     16.     During the past two years, through extensive advertising and improved customer relations, Orange Corporation estimated that it had developed customer goodwill worth $500,000. For the current year, determine the amount of goodwill Orange Corporation may amortize.
a.     $16,667.
b.     $26,667.
c.     $33,333.
d.     $100,000.
e.     None of the above.

     17.     During the year, Jean is transferred by her employer from Hartford to Savannah. Her expenses are not reimbursed and are as follows:

Cost of moving household furnishings     $3,400
Transportation     1,000
Meals     400
Lodging     500

Her qualified moving expenses are:
a.     $4,400.
b.     $4,900.
c.     $5,100.
d.     $5,300.
e.     Some other amount.

    18.     Nancy had an accident while skiing on vacation. She sustained facial injuries that required cosmetic surgery. While having the surgery done to restore her appearance, she had additional surgery done to reshape her nose, which was not injured in the accident. The surgery to restore her appearance cost $12,000 and the surgery to reshape her nose cost $5,000. How much of Nancy's surgical fees will qualify as a deductible medical expense (before application of the 7.5% limitation)?
a.     $0.
b.     $5,000.
c.     $12,000.
d.     $17,000.
e.     None of the above.

   19.     In 2005, Henry pays $5,000 to become a charter member of State University's Athletic Council. The membership ensures that Henry will receive choice seating at all of State's home football games. Also in 2005, Henry pays $600 (the regular retail price) for season tickets for himself and his wife. For these items, how much qualifies as a charitable contribution?
a.     $3,000.
b.     $3,400.
c.     $4,000.
d.     $5,000.
e.     None of the above.

     20.     Which of the following items would be an itemized deduction on Schedule A of Form 1040 subject to the 2% of AGI floor?
a.     Work uniforms that cannot be used for normal wear.
b.     Fees paid for safe deposit box to store investment records.
c.     Unreimbursed employee expenses.
d.     Appraisal fee paid to determine the amount of a casualty loss.
e.     All of the above.

     21.     Carl, a physician, earns $200,000 from his medical practice in the current year. He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity. In addition, he incurs a loss of $50,000 from an investment in a passive activity. What is Carl's AGI for the current year after considering the passive investment?
a.     $195,000.
b.     $200,000.
c.     $240,000.
d.     $245,000.
e.     None of the above.

   22.     Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit?
a.     The interdependencies between the activities.
b.     The extent of common control.
c.     The extent of common ownership.
d.     The geographical location.
e.     All of the above are relevant factors.

   23.     Prior to the effect of tax credits, Eunice's regular income tax liability is $200,000 and her tentative AMT is $190,000. Eunice has general business credits available of $12,500. Calculate Eunice's tax liability after tax credits.
a.     $200,000.
b.     $190,000.
c.     $187,500.
d.     $177,500.
e.     None of the above.

     24.     For regular income tax purposes, Yolanda, who is single, is in the 35% tax bracket. Her AMT base is $220,000. Her tentative AMT is:
a.     $57,200.
b.     $58,100.
c.     $61,600.
d.     $77,000.
e.     None of the above.

     25.     Cheryl is single, has one child (age 6), and files as head of household during 2005. Her salary for the year is $19,000. She qualifies for an earned income credit of the following amount:
a.     $0.
b.     $740.
c.     $1,922.
d.     $2,662.
e.     None of the above.

     26.     George and Jill are husband and wife, ages 67 and 65 respectively. During the year, they receive Social Security benefits of $4,000 and have adjusted gross income of $11,000. Assuming they file a joint return, their tax credit for the elderly, before considering any possible limitation due to their tax liability, is:
a.     $1,125.
b.     $750.
c.     $450.
d.     $375.
e.     None of the above.

    27.     Kate sells property for $120,000. The buyer pays $2,000 in property taxes that had accrued during the year while the property was still legally owned by Kate. In addition, Kate pays $6,000 in commissions and $2,000 in legal fees in connection with the sale. How much does Kate realize from the sale of her property?
a.     $112,000.
b.     $114,000.
c.     $116,000.
d.     $120,000.
e.     None of the above.

    28.     Chuck purchases land for $250,000. He incurs legal fees of $2,000 associated with the purchase. He subsequently incurs additional legal fees of $16,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $600,000. What is Chuck's basis for the land and the improvements?
a.     $250,000.
b.     $850,000.
c.     $852,000.
d.     $868,000.
e.     None of the above.

     29.     Taxpayer receives stock as a gift from his uncle. The adjusted basis of the stock is $10,000 and the fair market value is $17,000. Taxpayer trades the stock for bonds with a fair market value of $15,000 and $2,000 cash. What is his recognized gain and the basis for the bonds?
a.     $0, $8,000.
b.     $0, $15,000.
c.     $2,000, $10,000.
d.     $7,000, $15,000.
e.     None of the above.

      30. In order to qualify for like-kind exchange treatment under § 1031, which of the following requirements must be satisfied?
a.     The form of the transaction is an exchange.
b.     Both the property transferred and the property received are held either for productive use in a trade or business or for investment.
c.     The exchange must be completed by the end of the second tax year following the tax year in which the taxpayer relinquishes his or her like-kind property.
d.     Only a. and b.
e.     a., b., and c.

    31.     On July 1, 2005, Brandon purchased an option to buy 1,000 shares of General, Inc. at $30 per share. He purchased the option for $2,000. It was to remain in effect for five months. The market experienced a decline during the latter part of the year, so Brandon decided to let the option lapse as of December 1, 2005. On his 2005 tax return, what should Brandon report?
a.     A $2,000 long-term capital loss.
b.     A $2,000 short-term capital loss.
c.     A $2,000 § 1231 loss.
d.     A $2,000 ordinary loss.
e.     None of the above.

     32.     Magenta, Inc. sold a forklift on February 12, 2005, for $3,000 (its FMV) to its 100% shareholder, Anise. Magenta's adjusted basis for the forklift was $7,000. Anise's holding period for the forklift:
a.     Includes Magenta's holding period for the forklift.
b.     Begins on February 12, 2005.
c.     Begins on February 13, 2005.
d.     Does not begin until Anise sells the forklift.
e.     None of the above.

     33.     Which of the following creates potential § 1245 depreciation recapture?
a.     Amortization of purchased goodwill.
b.     Section 179 immediate expense deduction.
c.     An increase in the value of the property.
d.     A decrease in the value of the property.
e.     a. and b.

     34.     Blue Company sold machinery for $55,000 on December 23, 2005. The machinery had been acquired on April 1, 2003 for $49,000 and its adjusted basis was $14,200. The § 1231 gain, § 1245 recapture gain, and § 1231 loss from this transaction are:
a.     $6,000 § 1231 gain, $34,800 § 1245 recapture gain, $0 § 1231 loss.
b.     $0 § 1231 gain, $40,400 § 1245 recapture gain, $0 § 1231 loss.
c.     $6,000 § 1231 gain, $40,400 § 1245 recapture gain, $0 § 1231 loss.
d.     $0 § 1231 gain, $40,400 § 1245 recapture gain, $14,200 § 1231 loss.
e.     None of the above.

     35.     Gold Corporation, Silver Corporation, and Copper Corporation are equal partners in the GSC Partnership. The partners' tax year-ends are as follows:

Gold     December 31st
Silver     September 30th
Copper     November 30th

a.     The partnership is free to elect any tax year.
b.     The partnership may use any of the 3 year-end dates that its partners use.
c.     The partnership must use a November 30th year-end.
d.     The partnership must use a September 30th year-end.
e.     None of the above.

36     In 2005, Godfrey received a $5,000 refund of his 2004 state income tax. He included the refund in his 2005 gross income in accordance with the tax benefit rule (i.e., because the state income tax had been deducted on his 2004 Federal income tax return). In 2006, Godfrey's 2004 state income tax return was audited and he was required to pay an additional $4,000 of state income tax. Godfrey was in the 15% tax bracket in 2004 and 2005, but his marginal tax bracket in 2006 is 35%. He will itemize his deductions on his 2006 return.
a.     The $4,000 payment in 2006 is not deductible.
b.     Godfrey must amend his 2005 return.
c.     The $4,000 payment in 2006 will reduce his 2006 Federal income tax by $600 ($4,000 X 15%).
d.     Godfrey can reduce his 2006 Federal income tax by $1,400 ($4,000 X 35%).
e.     None of the above.

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