Question 1. Mark the correct answer. In cash basis accounting, for tax purposes:
a. Income is recognized when it is earned regardless of when received and expenses are recognized when they are actually or constructively incurred.
b. Income is generally recognized when it is actually or constructively received and expenses are generally recognized when they are paid.
c. The cash basis is not allowed for businesses reported on Schedule C.
d. Income is recognized when it is actually or constructively received and expenses are recognized when they are actually or constructively incurred, regardless of when paid.
QUESTION 2
Kate is an accrual basis, calendar-year taxpayer. On November 1, 2015, Kate leased out a building for $4,500 a month. On that day Kate received 7 months rental income on the building, a total of $31,500 ($4,500 × 7 months). How much income must Kate include on her 2015 tax return as a result of this transaction?
a. $4,500
b. $9,000
c. $31,500
d. $54,000
e. None of the above
QUESTION 3
If extended by Congress, bonus depreciation in 2015 permits taxpayers to deduct 100% of the cost of the asset in the year placed in service.
True
False
QUESTION 4
Taxpayers may expense the cost of depreciable personal property placed in service during the year and used in a trade or business in an amount up to a maximum of $20,000 annually.
True
False
QUESTION 5
If a loss from sale or exchange of property between related parties is disallowed and the property is subsequently sold to an unrelated party,
a. The disallowed loss is lost forever.
b. The disallowed loss may be used if there is a further loss on the subsequent sale.
c. An amended return may be filed to claim the loss previously disallowed.
d. The unrelated party may claim the loss previously disallowed.
e. The disallowed loss may be used to offset gain on the subsequent sale.
QUESTION 6
In general, accrual basis taxpayers recognize income when it is earned, regardless of when it is received.
True
False
QUESTION 7
If an automobile is purchased for 100 percent use in the taxpayer's business, the annual automobile depreciation limitations do not apply.
True
False
QUESTION 8
Which one of the following is a Section 197 intangible?
a. A stock investment
b. An interest-earning certificate of deposit
c. A building
d. Goodwill
e. Computer software available for purchase by the general public
QUESTION 9
Depreciation refers to the physical deterioration or loss of value of an asset.
True
False
QUESTION 10
Cork Oak Corporation purchased a heavy-duty truck (not considered a passenger automobile for purposes of the listed property and luxury automobile limitations) on May 1, 2015 for use in its business. The truck, with a cost basis of $24,000, has a 5-year estimated life. It also is 5-year recovery property. How much depreciation should be taken on the truck for the 2015 calendar tax year using the conventional (for financial accounting purposes) straight-line depreciation method?
a. $400
b. $2,400
c. $3,200
d. $4,800
e. None of the above
QUESTION 11
If actual business use of an automobile is less than 100 percent, the annual automobile depreciation limitations must be reduced to reflect the actual business use only.
True
False
QUESTION 12
Generally, cash basis taxpayers must account for payments of prepaid interest using the accrual method.
True
False
QUESTION 13
From the records of Tom, a cash basis sole proprietor, the following information was available:
Gross receipts $30,000
Dividend income (on personal investments) 200
Cost of sales 15,400
Other operating expenses 3,000
State business taxes paid 300
What amount should Tom report as net earnings from self-employment?
a. $10,900
b. $11,300
c. $11,400
d. $14,400
e. None of the above
QUESTION 14
Becky is a cash basis taxpayer with the following transactions during her calendar tax year:
Cash basis revenue $54,000
Cash basis expenses, except rent 25,000
Rent expense (paid on December 1) for use of a building for 24 months 24,000
What is the amount of Becky's taxable income from her business for this tax year?
a. $7,000 loss
b. $11,000
c. $27,500
d. $28,000
e. None of the above
QUESTION 15
Mark the correct statement.
a. Depreciation on real property starts at the beginning of the year in which the property is placed in service.
b. Nonresidential real property is depreciated over 27.5 years.
c. Residential real property is depreciated over 39 years.
d. Nonresidential real property is depreciated over 39 years.
QUESTION 16
Which one of the following is true about Modified Accelerated Cost Recovery System (MACRS)?
a. A building is depreciated using 200 percent declining balance depreciation.
b. Buildings and autos both have the same depreciation life.
c. A light duty business truck is depreciated using accelerated depreciation.
d. All of the above are false.
QUESTION 17
Routine maintenance costs for capital assets are deducted in the year the amount is paid or incurred, not capitalized as an improvement to the asset.
True
False
QUESTION 18
Depreciation is the process of allocating the cost of assets to expense over a period of years.
True
False
QUESTION 19
An asset (not an automobile) put in service in June 2015 has a depreciable basis of $35,000 and a recovery period of 5 years. Assuming bonus depreciation is extended into 2015, a half-year convention, and the expensing election is made, what is the maximum amount of cost that can be deducted in 2015 (assume no income limitation)?
a. $7,000
b. $21,000
c. $35,000
d. $24,400
e. $17,500
QUESTION 20
Max purchases a new auto in 2015 at a cost of $56,000. He uses the car 80% for business. Assuming a half-year convention, bonus depreciation (if extended though 2015) but no immediate expensing, what is the depreciation deduction on the auto?
a. $0
b. $28,000
c. $33,600
d. $8,928
e. $8,960