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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 21

True/False

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A short tax year can end on any day of any month other than December.

A) True
B) False

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Question 22

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Colby Motors uses the accrual method and reports on a calendar year.In December of last year,Colby acquired auto repair equipment.As part of the acquisition,Colby purchased a warranty agreement that requires the seller of the equipment to provide repairs on the equipment for three years.Colby paid the cost of the warranty,$15,000,in January of this year.What can Colby deduct for the cost of the warranty on the tax return for last year?

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Zero.The warranty cost is only deductibl...

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Question 23

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

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 which will occur once in April of next year.What amount of these payments,if any,can Ajax deduct this year?

Blackwell Manufacturing uses the accrual method and reports on a calendar year.This year a customer was injured when visiting the Blackwell factory.The customer sued the company for $500,000,and the case is still being litigated.However,Blackwell's attorney expects that the company will pay at least $250,000 to settle the claim.What amount,if any,can Blackwell deduct for the expected claim settlement this year?

Which of the following expenditures is NOT likely to be allowed as a current deduction for a landscaping and nursery business?

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

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

Employees cannot deduct the cost of uniforms if the uniforms are also appropriate for normal wear.

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

Joe is a self-employed electrician who operates his business on the accrual method.This year Joe purchased a shop for his business,and for the first time 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 but prior to filing his tax return.Which of the following is a true statement?

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

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.

Which of the following is a true statement about travel that has both business and personal aspects?

Ed is a self-employed heart surgeon who has incurred the following reasonable expenses.How much can Ed deduct? $1,000 in airfare to repair investment rental property in Colorado. $500 in meals while attending a medical convention in New York. $300 for tuition for an investment seminar "How to pick stocks." $100 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day. The correct answer is ________.

After a business meeting with a prospective client Holly took the client to dinner and the theatre.Holly paid $290 for the meal and $250 for the theatre tickets,amounts that were reasonable under the circumstances.What amount of these expenditures can Holly deduct as a business expense?

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.

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 1ˢᵗ of this year through August 31ˢᵗ of next 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?

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

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.