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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 41

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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 is not entitled to any business deduction until the son is an experienced cook.
E) None of the choices are true.

F) A) and D)
G) All of the above

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Question 42

Multiple Choice

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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?

A) $4,000 for rent on his office, which covers the next 24 months.
B) $3,000 for a new watch for the mayor to keep "good relations" with city hall.
C) $2,500 for professional hockey tickets distributed to a customer to generate "goodwill" for his business.
D) $55 to collect an account receivable from a customer who has failed to pay for services rendered.
E) None of the choices are completely deductible.

F) C) and E)
G) D) and E)

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Question 43

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Sandy Bottoms Corporation generated taxable income (before depreciation, interest expense, and any tax loss carryovers)of $3 million in 2020. Taxable income included $75,012,000 of revenue and $356,000 of interest income. What is Sandy Bottoms's maximum interest expense deduction for the year?

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

Which of the following business expense deductions is most likely to be unreasonable in amount?

Holly took a prospective client to dinner, and after agreeing to a business deal, they went to the theater. Holly paid $460 for the meal and separately paid $182 for the theater tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

In order to deduct a portion of the cost of a business meal, which of the following conditions must be met?

Dick pays insurance premiums for his employees. What type of insurance premium is not deductible as compensation paid to the employee?

Alvin is a self-employed sound technician who reports on the cash method and calendar year. Alvin has a shop in Austin, Texas, but he spends much of his time away from his shop traveling to and from various concerts around the country. Alvin leases a truck to move his equipment around the country, and this year, he spent $12,000 in lease payments and paid $18,000 for gas, oil, and repairs. Alvin keeps records of his personal use of the truck and he estimates that 6,000 of the total 36,000 miles put on the truck this year were for personal trips. What amount of these expenses may Alvin deduct as business expenses?

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 $17,400, but Bryon paid Fred $28,600 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.

A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.

Which of the following is a true statement about the limitation on business interest deductions?

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

Which of the following is a true statement?

Mike operates a fishing outfitter as an accrual-method sole proprietorship. On March 1 ^st of this year, Mike received $15,000 for three outfitting trips. This is the first time Mike agreed to such a payment and he is obligated to outfit one trip per year for the next three summers, beginning this year. How much income must Mike recognize in each of the next three years if he is attempting to minimize his tax burden?

Bob operates a clothing business using the accrual method over a calendar year. In October of last year, Bob contracted with his father, Tim, for consulting advice. Tim is a cash-basis calendar-year taxpayer, and he billed Bob for $6,000 of consulting fees. This amount was comparable to amounts charged by other consultants (a reasonable amount). Bob paid $2,500 of the consulting fee by December 31 ^st of last year, but the remaining $3,500 was not paid until January of this year. When can Bob deduct the consulting fee?

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.

George operates a business that generated revenues of $54 million and allocable taxable income of $1.29 million. Included in the computation of allocable taxable income were deductible expenses of $242,000 of business interest and $252,000 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

Anne is a self-employed electrician who reports her business income using the accrual method over a calendar year. On September 1st of this year, Anne paid $2,540 of interest on a loan. The interest accrues evenly over 20 months ($127 per month)from June 1st of this year through December 31st of next year. In addition, on September 1st Anne also paid $2,983 for 19 months of professional liability insurance ($157 per month). What amount of interest and insurance can Anne deduct this year?

Bill operates a proprietorship using the cash method of accounting, and this year he received the following:$240 in cash from a customer for services rendered this yeara promise from a customer to pay $172 for services rendered this yeartickets to a football game worth $180 as payment for services performed last yeara check for $198 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C?