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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 21

True/False

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When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt will not be deductible.

A) True
B) False

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Question 22

Multiple Choice

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Which of the following expenditures 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 E)
G) A) and D)

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Question 23

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Manley operates a law practice on the accrual method and calendar year. At the beginning of the year, Manley's firm had an allowance for doubtful accounts with a balance of $14,600. At the end of the year, Manley recorded bad debt expense of $21,900 and the balance of doubtful accounts had increased to $19,100. What is Manley's deduction for bad debt expense this year?

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

George operates a business that in 2020 generated revenues of $50 million and allocable taxable income of $620,000. Included in the computation of allocable taxable income were$903,000 of business interest expense, $23,000 of business interest income, and $864,500 of depreciation. What is the maximum business interest deduction that George will be eligible to claim this year?

Werner is the president and CEO of Acme, Incorporated, and this year, he took a prospective client to dinner. During the dinner, Werner and the client discussed a proposed contract for over $6 million as well as personal matters. After dinner, Werner took the client to a football game and no business was discussed. Werner paid $1,220 for an expensive(but not extravagant)dinner and spent $600 for tickets to the game. What is the deductible amount of these expenses?

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: What amount of travel expenditures can Sam deduct?

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

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: What amount of travel expenditures can Sam deduct?

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?

Rock Island Corporation generated taxable income (before deductions for depreciation, interest expense, and net operating loss carryovers)of $1 million in 2020. Taxable income was computed on $50 million of revenues and included $50,000 of interest income. The company paid $450,000 in interest expense. What is Rock Island's maximum business interest deduction for the year?

Only half the cost of a business meal is deductible even if the meal is extravagant.

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

Manley operates a law practice on the accrual method and calendar year. At the beginning of the year, Manley's firm had an allowance for doubtful accounts with a balance of $15,000. At the end of the year, Manley recorded bad debt expense of $23,000 and the balance of doubtful accounts had increased to $18,000. What is Manley's deduction for bad debt expense 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?

A business can deduct the cost of uniforms supplied to employees.

Smith operates a roof repair business. This year, Smith's business generated cash receipts of $33,135, and Smith made the following expenditures associated with his business: 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.

Sandy Bottoms Corporation generated taxable income (before depreciation, interest expense, and any tax loss carryovers)of $3 million this year. Taxable income included $75,018,000 of revenue and $359,000 of interest income. What is Sandy Bottoms's domestic maximum interest expense deduction for the year?

Judy is a self-employed musician who performs for a variety of events. This year, Judy was fined $250 by the city for violating the city's noise ordinance with a relatively loud performance. As a consequence, Judy contributed $1,000 to a campaign committee formed to recall the city's mayor. Judy normally hires three part-time employees to help her schedule events and transport equipment. Judy paid a total of $33,000 to her employees through June of this year. In June, Judy fired her part-time employees and hired her husband to replace them. However, Judy paid him $55,000 rather than $33,000. Judy is on the cash method and calendar year, and she wants to know what amount of these expenditures is deductible as business expenses.

Which of the following is a true statement?