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Exam 8: Business Income, Deductions, and Accounting Methods

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Question 21

Multiple Choice

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

A) cost of fertilizer
B) accounting fees
C) cost of a greenhouse
D) cost of uniforms for employees
E) a cash settlement for trade name infringement

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

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Question 22

Multiple Choice

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

A) Compensation paid to the taxpayer's spouse in excess of salary payments to other employees.
B) Amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations.
C) Cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client.
D) All of these are likely to be unreasonable in amount.
E) None of these is likely to be unreasonable in amount.

F) C) and D)
G) B) and C)

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Question 23

Multiple Choice

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Shelley is employed in Texas and recently attended a two-day business conference in New Jersey. Shelley spent the entire time at the conference and documented her expenditures (described below) . What amount can Shelley deduct as an employee business expense? Airfare to New Jersey $\quad\quad\quad\quad\quad\quad\$ 2,000$ Meals $\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad 220$ Lodging in New Jersey $\quad\quad\quad\quad\quad\quad450$ Rental car $\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad180$

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

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

Bill operates a proprietorship using the cash method of accounting, and this year he received the following payments: • $100 in cash from a customer for services rendered this year • a promise to pay $200 from a customer for services rendered this year • tickets to a football game worth $250 as payment for services performed last year • a check for $170 for services rendered this year that Bill forgot to cash How much income should Bill realize on Schedule C?

Shadow Services uses the accrual method and reports on a calendar year. This year Shadow agreed to a uniform cleaning contract with Odie Cleaning. Under the contract Odie bills Shadow for cleaning services as the services are provided. At year end Shadow paid Odie $2,350 for the services rendered during the year. In addition, Shadow paid Odie $700 for cleaning services expected in January of next year. What amount, if any, can Shadow deduct for the cleaning services this year?

Mike started a calendar year business on September 1st of this year by paying 12 months rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

Beth operates a plumbing firm. In August of last year she signed a contract to provide plumbing services for a renovation. Beth began the work that August and finished the work in December of last year. However, Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full. When should Beth recognize income under the accrual method of accounting?

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

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?

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 is a true statement about the domestic production activities deduction?

Rock Island Corporation generated taxable income (before the domestic production activities deduction) of $10 million this year. The total income included $4,500,000 of qualified production activities income. The company paid $500,000 in W-2 wages to generate the qualified production activity income. What is Rock Island's domestic production activities deduction for the year?

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

Joe operates a plumbing business that uses the accrual method and reports on a calendar year. This year Joe signed a $50,000 binding contract with Brian. Under the contract Brian will provide Joe with up to 2,000 hours of vehicle repairs at $25 per hour. This year Brian provided 200 hours of repair services and billed Joe for $5,000. At year end Joe had not paid Brian for the services. What amount, if any, can Joe deduct for the repair services this year?

Kip started a wholesale store this year selling bulk peanut butter. In January of this year Kip purchased an initial five tubs of peanut butter for a total cost of $5,000. In July Kip purchased three tubs for a total cost of $6,000. Finally, in November Kip bought two tubs for a total cost of $1,000. Kip sold six tubs by year end. What is Kip's ending inventory under the FIFO cost-flow method?

Todd operates a business using the cash basis of accounting. At the end of last year, Todd was granted permission to switch his sales on account to the accrual method. Last year Todd made $420,000 of sales on account and $64,000 was uncollected at the end of the year. What is the Todd's §481 adjustment for this 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

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