Problem 1. A single taxpayer provided the following information for 2007:
Salary $40,000
Interest on local government bonds $4,000
(qualifies as a tax exclusion)
Allowable itemized deductions $8,000
What is taxable income?
a. $28,600
b. $31,600
c. $32,000
d. $32,600
Problem 2. Lewis, who is single, is claimed as a dependent on his parents' tax return. He received $1,000 during the year in dividends, which was his only income. What is his standard deduction?
a. $850
b. $1,000
c. $1,300
d. $5,150
Problem 3. Arthur pays tax of $3,000 on taxable income of $30,000 while taxpayer Barbara pays tax of $6,000 on $60,000. The tax is a
a. progressive tax.
b. proportional tax.
c. regressive tax.
d. None of the above.
Problem 4. When property is transferred, the gift tax is based on:
a. replacement cost of the transferred property.
b. fair market value on the date of transfer.
c. the transferor's original cost of the transferred property.
d. the transferor's depreciated cost of the transferred property.
Problem 5. Which one of the following items is not considered gross income for tax purposes?
a. gambling winnings
b. illegal income
c. life insurance proceeds
d. forgiveness of loan
Problem 6. All of the following are excluded from taxable income as a fringe benefit except:
a. Christmas bonus check
b. Group term life insurance
c. Employee discount
d. Contribution to retirement plans
Problem 7. Carter is the beneficiary of a $100,000 policy on the life of his mother. Carter sells the policy to his brother, Parker, for $30,000. Parker subsequently pays premiums of $15,000. Upon his mother's death, how much of the insurance proceeds must Parker include in income?
a. $0
b. $45,000
c. $55,000
d. $100,000
Problem 8. Hope receives an $8,500 per year scholarship from State University. The university specifies that $5,500 is for tuition, books, supplies, and equipment while $3,000 is for room and board. In addition, Hope works part-time at the campus library and earns $5,000 to cover other expenses. Hope's gross income is
a. $5,000.
b. $8,000.
c. $8,500.
d. $13,500.
Problem 9. Antonio owns land held for investment with a basis of $28,000. The City of Lafayette exercises the right of eminent domain and Antonio receives a payment of $48,000. What is Antonio's realized gain?
a. $0
b. $20,000
c. $28,000
d. $48,000
Problem 10. Richard exchanges a building with a FMV of $75,000, a basis of $35,000, and subject to a liability of $25,000 for land with a FMV of $50,000 owned by Will. What is the amount of Richards' realized gain?
a. $0
b. $15,000
c. $25,000
d. $40,000
Problem 11. To be tax deductible, an expense must be all of the following except
a. ordinary and necessary
b. paid in cash.
c. Reasonable in amount.
d. An expense of the taxpayer.
Problem 12. Liam pays the following legal and accounting fees during the year:
Legal fees in connection with a contract dispute in her trade or business $6,800
Legal fees related to resolving a tax deficiency related to business 4,000
Tax return preparation fees:
Allocable to Schedules A and B 1,000
Allocable to Schedule C 1,200
Legal fees incident to a divorce 3,000
What is the total amount of her for AGI deduction for these fees?
a. $10,800
b. $12,000
c. $15,000
d. $16,000
Problem 13. All of the following are deductible as medical expenses except
a. vitamins and health foods that improve a taxpayer's general health
b. payments to Christian Science practitioners for treatment of a specific medical condition.
c. payments to a hospital for laboratory fees and X-rays for diagnosis of a medical problem.
d. Cosmetic surgery necessary to correct a deformity arising from a congenital abnormality.
Problem 14. Leo spent $6,600 to construct an entrance ramp and to widen doorways in his personal residence to make the home accessible for his wife, who is disabled and confined to a wheelchair. The $6,600 expenditure increased the value of the residence by $2,000. How much of the $6,600 is deductible medical expense?
a. $0
b. $2,000
c. $4,600
d. $6,600
Problem 15. The amount realized by Mac on the sale of property to Celia includes all of the following with the exception of
a. cash received by Mac.
b. Mortgage on the property that is assumed by Celia.
c. Mortgage on the property paid off by Mac prior to the sale.
d. The FMV of any other property received by Mac in the transaction
Problem 16. Jamie sells investment real estate for $60,000, resulting in a $15,000 loss. Jamie's loss is
a. an ordinary loss.
b. a capital loss.
c. a Sec. 1231 loss.
d. a Sec. 1244 loss.
Problem 17. Mr. and Mrs. South's adjusted gross income was $85,000. During the year they incurred and paid the following:
Publications (unreimbursed and related to employment) $500
Tax return preparation fee 1,000
Professional dues 1,200
Fees for will preparation (no tax advice) 800
Life insurance premiums 1,400
Assuming they can itemize, how much should the South's claim as miscellaneous itemized deductions (after limitations have been applied)?
a. $1,000
b. $1,800
c. $2,700
d. $3,500
Problem 18. All of the following are allowed a For AGI deduction except
a. Cora owns her own CPA firm and travels from Lafayette, L. A. to Washington, D. C. to attend a tax conference.
b. Jennifer, who lives in Houston, is the owner of several apartment buildings in Salt Lake City and travels there to inspect and manager her investments.
c. Alan is self-employed and is away from home overnight on job-related business.
d. Alison is an employee who is required to travel to company facilities throughout the U. S. in the conduct of her management responsibilities. She is not reimbursed by her employer.
Problem 19. Joan bought a business machine for $10,000 on January 1, 2000, and later sold the machine for $7,800 when the total allowable depreciation is $3,500. The depreciation actually taken on the tax returns totalled $3,000. Joan must recognize a gain (or loss) of:
a. no gain or loss.
b. (3,200).
c. $800
d. $1,300
Problem 20. When depreciating 5-year property, the final year of depreciation will be year
a. 3.
b. 4.
c. 5.
d. 6.
Problem 21. Under the cash method of accounting, all of the following are true with the exception of:
a. Fixed assets are expensed as the taxpayer pays for the assets.
b. With some exceptions such as prepaid interest, expenses are generally deducted in the year paid.
c. To some extent, a taxpayer may determine the year in which an expense is deductible by choosing when to make the payment.
d. Income is reported in the tax year in which payments are actually or constructively received.
Problem 22. Inventory may be valued on the tax return at the lower of cost or market unless
a. replacement cost is higher than historical cost.
b. The taxpayer determines inventory cost using the LIFO method.
c. The taxpayer determines inventory cost using the FIFO method.
d. The cash method of accounting is used by the taxpayer.
Problem 23. Which of the following statements with respect to a like-kind exchange is false?
a. Property of one class must be exchanged for property of the same class.
b. An exchange of inventory does not qualify as like-kind exchange.
c. Personal property must be exchanged for personal property.
d. Sale of property and subsequent purchase of like-kind property will always qualify as a like-kind exchange.
Problem 24. Dennis exchanges business equipment with a $60,000 adjusted basis for $20,000 cash and business equipment with a $70,000 FMV. What is the amount of gain recognized on the exchange?
a. $0
b. $10,000
c. $20,000
d. $30,000
Problem 25. After he was denied a promotion, Daniel sued his employer claiming sex discrimination. He was awarded $20,000 to cover medical bills he incurred because of the related emotional distress, $80,000 to punish his employer for discrimination, and $50,000 to compensate him for lost wages. What is the amount that must be included in Daniel's gross income for the year?
Problem 26. Danny and Mary are married and have two dependent children. They also fully support Mary's mother who lives with them and has no income. Their 2006 tax and other related information is as follows:
Total salaries - $110,000
Bank account interest income - $3,500
Municipal bond interest income - $1,500
Value of employer provided medical insurance - $3,500
Value of premiums for $50,000 of group term life insurance provided by employer - $500
Dividend income from ABC stock, $2,000
Loan from Danny's parents - $5,000
Gift from Danny's parents - $15,000
Gain from the sale of qualified small business stock held more than 5 years - $15,000
Total itemized deductions - $16,000
Compute Danny and Mary's taxable income. (Show all calculation in good form.)
Problem 27. Marvin, a cash basis taxpayer, died on September 30, 2007. His wife, Charlotte, provides you with the following information.
From January 1, 2007 until his death, Marvin received a salary of $60,000. Charlotte received a salary of $35,000 during 2007. Marvin had earned commissions of $20,000 that his widow, Charlotte, received after his death. Charlotte was the beneficiary of a $100,000 whole life policy purchased by Marvin and a $50,000 group term life insurance policy purchased by Marvin's employer. The employer had paid premiums of $250 in Marvin's behalf. In addition, the corporation paid Charlotte a $10,000 employee death benefit in Marvin's name. All employees' families received similar benefits regardless of financial need. Marvin and Charlotte had itemized deductions of $9,600. They have no children but provide 100% support for Marvin's widowed mother who lives with them and has no income. What is the amount of their taxable income on their 2007 tax return?