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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 31

True/False

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Only half the cost of a business meal is deductible even if the meal is associated with the active conduct of business.

A) True
B) False

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Question 32

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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.

F) B) and D)
G) B) and E)

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Question 33

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Illegal bribes and kickbacks are not deductible as business expenses but fines imposed by a governmental unit are deductible as long as the fines are incurred in the ordinary course of business.

Werner is the president and CEO of Acme, Inc. and this year he took a prospective client to dinner. During the dinner the President and the client discussed a proposed contract for over $6 million and personal matters. After dinner the CEO took the client to a football game and no business was discussed. The CEO paid $1,220 for an expensive dinner and spent $600 for tickets to the game. What is the deductible amount of these expenses?

Marilyn operates a day care center as a cash-method sole proprietorship. On August 1^st of this year Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months. How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

Sam operates a small chain of pizza outlets in Fort Collins, Colorado. In November of this year Sam decided to attend a two-day management training course. Sam could choose to attend the course in Denver or Los Angeles. Sam decided to attend the course in Los Angeles and take an eight-day vacation immediately after the course. Sam reported the following expenditures from the trip: $\begin{array} { | l | r | } \hline \text { Course Tuition } & \$ 2,500 \\\hline \text { Air Fare } & 800 \\\hline \text { Hotel (10 nights) } & 1,200 \\\hline \text { Rental car (10 days) } & 900 \\\hline \text { Meals } ( 10 \text { days } \text { ) } & 1,500 \\\hline\end{array}$ What amount of travel expenditures can Sam deduct?

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

Ranger Athletic Equipment uses the accrual method and reports on a calendar year. Ranger provides two-year warranties on all sales of equipment. This year Ranger estimated warranty expense for book purposes, and he accrued $1 million of warranty expenses. However, during the year Ranger only spent $400,000 repairing equipment under the warranty. What can Ranger deduct for warranty expense on the tax return for this year?

Individual proprietors report their business income and deductions on:

Ronald is a cash method taxpayer who made the following expenditures this year. Which expenditure is completely deductible in this period as a business expense?

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 1^st of year 1 through May 31^st year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

Smith operates a roof repair business. This year Smith's business generated cash receipts of $32,000 and Smith made the following expenditures associated with his business: $\begin{array} { | l | r | } \hline \text { Advertising } & \$ 500 \\\hline \text { Car and truck expenses } & 1,360 \\\hline \text { Depreciation } & 3,200 \\\hline \text { Employee compensation } & 5,000 \\\hline \text { Education } & 1,000 \\\hline\end{array}$ The education expense was for a two-week, nighttime course in business management. Smith believes the expenditure should qualify as an ordinary and necessary business expense. What net income should Smith report from his business? Smith is on the cash method and calendar year.

Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?

Bryon operates a consulting business and he usually works alone. However, during the summer Bryon will sometimes hire undergraduate students to collect data for his projects. This past summer Bryon hired Fred, the son of a prominent businessman, for a part-time summer job. The summer job usually pays about $17,000, but Bryon paid Fred $27,000 to gain favor with Fred's father. What amount of Fred's summer wages can Bryon deduct for tax purposes? Bryon is on the cash method and calendar year.

Taffy Products uses the accrual method and reports on a calendar year. On July 1^st of this year Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents of their warehouse. The rent and insurance covers the next 12 months. What amount, if any, can Taffy deduct for rent and insurance this year?

Which of the following is a true statement about the domestic production activities deduction?

Which of the following is a true statement?

Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

All taxpayers must account for taxable income using a calendar year.

Paris operates a talent agency as a sole proprietorship, and this year she incurred the following expenses in operating her talent agency. What is the total deductible amount of these expenditures? $1,000 dinner with a film producer where no business was discussed $500 lunch with sister Nicky where no business was discussed $700 business dinner with a client but Paris forgot to keep any records (oops!) $900 tickets to the opera with a client following a business meeting