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Exam 1: Business Income, Deductions, and Accounting Methods

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Question 21

Multiple Choice

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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 cover 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 the choices are correct.

F) A) and B)
G) A) and C)

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Question 22

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A fiscal tax year can end on the last day of any month other than December.

A) True
B) False

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Question 23

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Adjusted taxable income is defined as follows for purposes of the business interest limitation:

Which of the following is likely to be a business expense fully deductible in the current year?

Shelley is self-employed in Texas and recently attended a two-day business conference in New Jersey. After Shelley attended the conference, she had dinner with an old friend who lived nearby. Shelley documented her expenditures (described below) . What amount can Shelley deduct?

The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount.

Business activities are distinguished from personal activities in that business activities are motivated by the pursuit of profits.

Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers) of $2 million in 2020. Taxable income was computed on $50 million of revenues and included $75,000 of interest income. The company paid $451,250 in interest expense. What is Rock Island's maximum business interest deduction for the year?

Which of the following types of transactions may not be accounted for using the cash method for small proprietorships?

Clyde operates a sole proprietorship using the cash method. This year, Clyde made the following expenditures: $480 to U.S. Bank for 12 months of interest accruing on a business loan from September 1 of this year through August 31 of next year even though only $160 of interest accrued this year. $600 for 12 months of property insurance beginning on July 1 of this year. What is the maximum amount Clyde can deduct this 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?

The full-inclusion method requires cash-basis taxpayers to include prepayments for goods or services into realized income.

This year Clark leased a car to drive between his office and various work sites. Clark carefully recorded that he drove the car 23,000 miles this year and paid $7,200 of operating expenses ($2,700 for gas, oil, and repairs, and $4,500 for lease payments) . What amount of these expenses may Clark deduct as business expenses?

John is a self-employed computer consultant who lives and works in Dallas. John paid for the following activities in conjunction with his business. Whichof the following expenditures is not deductible in any amount?Dinner with a potential client where the client's business was discussed.A trip to Houston to negotiate a contract.A seminar in Houston on new developments in the software industry.A trip to New York to visit a school chum who is also interested in computers.

Although expenses associated with illegal activities are not deductible, political contributions can be deducted as long as the donation is not made to a candidate for public office.

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

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

The phrase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business.

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?

The all-events test for income determines the period in which income will be recognized for tax purposes.