Individual Taxation Accounting Questions & Answers

Participation must be restricted to employees, and their spouses and minor children.
At least three years of service are required before an employee can participate in the plan.
Participants may select their own menu of benefits.
Provision may be made for deferred compensation other than 401(k) plans.

David Autrey was covered by an $80,000 group-term life insurance policy of which his wife was the beneficiary. Autrey’s employer paid the entire c...

$0
$30,000
$50,000
$80,000

Howard Oâ€™Brien, an employee of Ogden Corporation, died on June 30, 2012. During July, Ogden made employee death payments (which do not repres...

$ 5,000 $ 5,000
$ 5,000 $10,000
$ 7,500 $ 7,500
$10,000 $10,000

John Budd files a joint return with his wife. Budd’s employer pays 100% of the cost of all employees’ group-term life insurance under a qualifie...

$100,000
$ 50,000
$ 10,000
$ 5,000

During the current year Hal Leff sustained a serious injury in the course of his employment. As a result of this injury, Hal received the following ...

$12,200
$ 8,000
$ 1,800
$0

James Martin received the following compensation and fringe benefits from his employer during 2012: Salary $50,000 Year-end bonus 10,000 Medical i...

$60,000
$61,000
$65,000
$66,000

On February 1, 2013, Hall learned that he was bequeathed 500 shares of common stock under his father’s will. Hall’s father had paid $2,500 for t...

$5,500
$4,000
$2,500
$0

In 2012, Gail Judd received the following dividends from Benefit Life Insurance Co., on Gail’s life insurance policy (Total dividends received hav...

Amy Finch had the following cash receipts during 2012: Dividend from a mutual insurance company on a life insurance policy $500 Dividend on listed ...

$1,375
$ 875
$ 500
$0

During 2011, Karen purchased 100 shares of preferred stock of Boling Corp. for $5,500. During 2013, Karen received a stock dividend of ten additiona...

Micro Corp., a calendar-year accrual-basis corporation, purchased a five-year, 8%, $100,000 taxable corporate bond for $108,530 on July 1, 2012, the...

I only.
II only.
Both I and II.
Neither I nor II.

In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified US Series EE Bonds may be exclude...

I only.
II only.
Both I and II.
Neither I nor II.

During 2013 Kay received interest income as follows: On US Treasury certificates $4,000 On refund of 2011 federal income tax 500 The total amount o...

$4,500
$4,000
$ 500
$0

Charles and Marcia are married cash-basis taxpayers. In 2012, they had interest income as follows: • $500 interest on federal income tax refund. ...

$ 500
$1,100
$1,900
$2,900

Clark bought Series EE US Savings Bonds in 2013. Redemption proceeds will be used for payment of college tuition for Clark’s dependent child. One ...

Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse).
Bonds must be bought by a parent (or both parents) and put in the name of the dependent child.
Bonds must be bought by the owner of the bonds before the owner reaches the age of twenty-four.
Bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds.

Daniel Kelly received interest income from the following sources in 2013: New York Port Authority bonds $1,000 Puerto Rico Commonwealth bonds 1,800...

$0
$1,000
$1,800
$2,800

In 2012 Uriah Stone received the following interest payments: • Interest of $400 on refund of federal income tax for 2010. • Interest of $300 on...

$0
$ 700
$1,700
$3,200

In 2012 Uriah Stone received the following interest payments: • Interest of $400 on refund of federal income tax for 2010. • Interest of $300 on...

$0
$ 700
$1,700
$3,200

For the year ended December 31, 2012, Don Raff earned $1,000 interest at Ridge Savings Bank on a certificate of deposit scheduled to mature in 2013....

Reduction of interest earned in 2012, so that only $500 of such interest is taxable on Raff’s 2012 return.
Deduction from 2013 adjusted gross income, deductible only if Raff itemizes his deductions for 2013.
Penalty not deductible for tax purposes.
Deduction from gross income in arriving at 2013 adjusted gross income.

Which payment(s) is (are) included in a recipient’s gross income? I. Payment to a graduate assistant for a part-time teaching assignment at a uni...

I only.
II only
Both I and II.
Neither I nor II.

Majors, a candidate for a graduate degree, received the following scholarship awards from the university in 2013: • $10,000 for tuition, fees, boo...

$12,000
$10,000
$ 2,000
$0

In July 1997, Dan Farley leased a building to Robert Shelter for a period of fifteen years at a monthly rental of $1,000 with no option to renew. At...

$ 6,000
$ 8,000
$10,000
$18,500

Bob and Sue Stewart were divorced in 2010. Under the terms of their divorce decree, Bob paid alimony to Sue at the rate of $50,000 in 2010, $20,000 ...

$0
$23,283
$30,000
$32,500

Which of the following conditions must be present in a divorce agreement for a payment to qualify as deductible alimony? I. Payments must be in cash...

I only.
II only.
Both I and II.
Neither I nor II.

Darr, an employee of Sorce C corporation, is not a shareholder. Which of the following would be included in a taxpayer’s gross income?

Employer-provided medical insurance coverage under a health plan.
A $10,000 gift from the taxpayer’s grandparents.
The fair market value of land that the taxpayer inherited from an uncle.
The dividend income on shares of stock that the taxpayer received for services rendered.

With regard to the inclusion of social security benefits in gross income for the 2013 tax year, which of the following statements is correct?

The social security benefits in excess of modified adjusted gross income are included in gross income.
The social security benefits in excess of one half the modified adjusted gross income are included in gross income.
Eighty-five percent of the social security benefits is the maximum amount of benefits to be included in gross income.
The social security benefits in excess of the modified adjusted gross income over $32,000 are included in gross income.

Perle, a dentist, billed Wood $600 for dental services. Wood paid Perle $200 cash and built a bookcase for Perle’s office in full settlement of th...

John and Mary were divorced in 2011. The divorce decree provides that John pay alimony of $10,000 per year, to be reduced by 20% on their child’s ...

$ 5,600
$ 8,000
$ 8,600
$10,000

Clark filed Form 1040EZ for the 2011 taxable year. In July 2012, Clark received a state income tax refund of $900, plus interest of $10, for overpay...

Hall, a divorced person and custodian of her twelve-year-old child, submitted the following information to the CPA who prepared her 2012 return: Th...

$28,800
$ 5,000
$ 3,000
$0

Lee, an attorney, uses the cash receipts and disbursements method of reporting. In 2012, a client gave Lee 500 shares of a listed corporation’s st...

$10,000
$ 8,000
$ 6,000
$0

In 2008, Ross was granted an incentive stock option (ISO) by her employer as part of an executive compensation package. Ross exercised the ISO in 20...

ISO was granted.
ISO was exercised.
Stock was sold.
Employer claimed a compensation deduction for the ISO.

Ed and Ann Ross were divorced in January 2012. In accordance with the divorce decree, Ed transferred the title in their home to Ann in 2012. The hom...

$0
$ 12,000
$100,000
$112,000

Income in respect of a cash-basis decedent

Covers income earned and collected after a decedent’s death.
Receives a stepped-up basis in the decedent’s estate.
Includes a bonus earned before the taxpayer’s death but not collected until after death.
Must be included in the decedent’s final income tax return.

The following information is available for Ann Drury for 2012: Salary . . . . . . . . . . . . . . . . $36,000 Premiums paid by employer on group-t...

$36,000
$36,500
$41,000
$41,500

Mr. and Mrs. Alvin Charak took a foster child, Robert, into their home in 2012. A state welfare agency paid the Charaks $3,900 during the year for r...

$0
$ 900
$2,900
$3,900

Pierre, a headwaiter, received tips totaling $2,000 in December 2012. On January 5, 2013, Pierre reported this tip income to his employer in the req...

$2,000 in 2012.
$2,000 in 2013.
$1,000 in 2012, and $1,000 in 2013.
$ 167 in 2012, and $1,833 in 2013.

With regard to the alimony deduction in connection with a 2013 divorce, which one of the following statements is correct?

Alimony is deductible by the payor spouse, and includible by the payee spouse, to the extent that payment is contingent on the status of the divorced couple’s children.
The divorced couple may be members of the same household at the time alimony is paid, provided that the persons do not live as husband and wife.
Alimony payments must terminate on the death of the payee spouse.
Alimony may be paid either in cash or in property.

In 2013, Joan accepted and received a $10,000 award for outstanding civic achievement. Joan was selected without any action on her part, and no futu...

$0
$ 4,000
$ 5,000
$10,000

In 2012, Emil Gow won $5,000 in a state lottery. Also in 2012, Emil spent $400 for the purchase of lottery tickets. Emil elected the standard deduct...

$0
$2,000
$4,600
$5,000

Lake Corp., an accrual-basis calendar-year corporation, had the following 2012 receipts: Advanced rental payments where the lease ends in 2014 $125,...

$0
$ 50,000
$125,000
$175,000

Paul Bristol, a cash-basis taxpayer, owns an apartment building. The following information was available for 2012: • An analysis of the 2012 bank ...

$50,000
$51,000
$52,000
$53,000

Emil Gow owns a two-family house that has two identical apartments. Gow lives in one apartment and rents out the other. In 2012, the rental apartmen...

$2,900
$ 800
$ 400
$ 100

Royce Rentals, Inc., an accrual-basis taxpayer, reported rent receivable of $25,000 and $35,000 in its 2012 and 2011 balance sheets, respectively. D...

$45,000
$50,000
$55,000
$65,000

John Budd is single, with no dependents. During 2012, John received wages of $11,000 and state unemployment compensation benefits of $2,000. He had ...

$2,000
$1,000
$ 500
$0

A cash-basis taxpayer should report gross income

Only for the year in which income is actually received in cash.
Only for the year in which income is actually received whether in cash or in property.
For the year in which income is either actually or constructively received in cash only.
For the year in which income is either actually or constructively received, whether in cash or in property.

Which of the following taxpayers may use the cash method of accounting?

A tax shelter.
A qualified personal service corporation.
A C corporation with annual gross receipts of $50,000,000.
A manufacturer with annual gross receipts of $3,000,000.

In 2012, Stewart Corp. properly accrued $5,000 for an income item on the basis of a reasonable estimate. In 2013, after filing its 2012 federal inco...

No further inclusion of income is required as the difference is less than 25% of the original amount reported and the estimate had been made in good faith.
The $1,000 difference is includible in Stewart’s 2013 income tax return.
Stewart is required to notify the IRS within 30 days of the determination of the exact amount of the item.
Stewart is required to file an amended return to report the additional $1,000 of income.

Axis Corp. is an accrual-basis calendar-year corporation. On December 13, 2012, the Board of Directors declared a 2% of profits bonus to all employe...

Not be deducted on Axis’ 2012 tax return because the per share employee amount cannot be determined with reasonable accuracy at the time of the declaration of the bonus.
Be deducted on Axis’ 2012 tax return.
Be deducted on Axis’ 2013 tax return.
Not be deducted on Axis’ tax return because payment is a disguised dividend.

On December 1, 2012, Michaels, a self-employed cash-basis calendar-year taxpayer, borrowed $100,000 to use in her business. The loan was to be repai...

$12,000
$11,000
$ 1,000
$0

Blair, CPA, uses the cash receipts and disbursements method of reporting. In 2012, a client gave Blair 100 shares of a listed corporation’s stock ...

$0
$3,000
$4,000
$5,000

Unless the Internal Revenue Service consents to a change of method, the accrual method of tax reporting is generally mandatory for a sole proprietor...

Yes Yes
Yes No
No No
No Yes

Alex Burg, a cash-basis taxpayer, earned an annual salary of $80,000 at Ace Corp. in 2012, but elected to take only $50,000. Ace, which was financia...

$50,000
$60,000
$65,000
$80,000

Which of the following taxpayers may use the cash method of accounting for tax purposes?

Partnership that is designated as a tax shelter.
Retail store with $2 million inventory, and $9 million average annual gross receipts.
An international accounting firm.
C corporation manufacturing exercise equipment with average annual gross receipts of $8 million.

The uniform capitalization method must be used by I. Manufacturers of tangible personal property. II. Retailers of personal property with $2 million...

I only.
II only.
Both I and II.
Neither I nor II.

Mock operates a retail business selling illegal narcotic substances. Which of the following item(s) may Mock deduct in calculating business income? ...

I only.
II only.
Both I and II.
Neither I nor II.

Banks Corp., a calendar-year corporation, reimburses employees for properly substantiated qualifying business meal expenses. The employees are prese...

Which of the following costs is not included in inventory under the Uniform Capitalization rules for goods manufactured by the taxpayer?

Research.
Warehousing costs.
Quality control.
Taxes excluding income taxes.

Under the uniform capitalization rules applicable to property acquired for resale, which of the following costs should be capitalized with respect t...

Yes Yes
Yes No
No No
No Yes

In the case of a corporation that is not a financial institution, which of the following statements is correct with regard to the deduction for bad ...

Either the reserve method or the direct charge-off method may be used, if the election is made in the corporation’s first taxable year.
On approval from the IRS, a corporation may change its method from direct charge-off to reserve.
If the reserve method was consistently used in prior years, the corporation may take a deduction for a reasonable addition to the reserve for bad debts.
A corporation is required to use the direct charge-off method rather than the reserve method.

Ram Corp.’s operating income for the year ended December 31, 2012, amounted to $100,000. Included in Ram’s 2012 operating expenses is a $6,000 i...

$6,000
$5,000
$1,000
$0

Earl Cook, who worked as a machinist for Precision Corp., loaned Precision $1,000 in 2010. Cook did not own any of Precision’s stock, and the loan...

$0
$ 500 long-term capital loss.
$1,000 short-term capital loss.
$1,000 business bad debt.

During the 2012 holiday season, Palo Corp. gave business gifts to seventeen customers. These gifts, which were not of an advertising nature, had the...

Cobb, an unmarried individual, had an adjusted gross income of $200,000 in 2012 before any IRA deduction, taxable social security benefits, or passi...

$0
$12,500
$25,000
$30,000

The rule limiting the deductibility of passive activity losses and credits applies to

Partnerships.
S corporations.
Personal service corporations.
Widely held C corporations.

Don Wolf became a general partner in Gata Associates on January 1, 2012, with a 5% interest in Gata’s profits, losses, and capital. Gata is a dist...

$0
$4,000
$5,000
$6,000

With regard to the passive loss rules involving rental real estate activities, which one of the following statements is correct?

The term “passive activity” includes any rental activity without regard as to whether or not the taxpayer materially participates in the activity.
Gross investment income from interest and dividends not derived in the ordinary course of a trade or business is treated as passive activity income that can be offset by passive rental activity losses when the “active participation” requirement is not met.
Passive rental activity losses may be deducted only against passive income, but passive rental activity credits may be used against tax attributable to nonpassive activities.
The passive activity rules do not apply to taxpayers whose adjusted gross income is $300,000 or less.

If an individual taxpayer’s passive losses relating to rental real estate activities cannot be used in the current year, then they may be carried ...

Back two years, but they cannot be carried forward.
Forward up to a maximum period of twenty years, but they cannot be carried back.
Back two years or forward up to twenty years, at the taxpayer’s election.
Forward indefinitely or until the property is disposed of in a taxable transaction.

Aviation Corp. manufactures model airplanes for children. During 2012, Aviation purchased $570,000 of production machinery to be used in its busines...

$405,000 $0
$405,000 $95,000
$500,000 $0
$570,000 $0

Which of the following conditions must be satisfied for a taxpayer to expense, in the year of purchase, under Internal Revenue Code Section 179, the...

I only.
II only.
Both I and II.
Neither I nor II.

Krol Corp., a calendar-year taxpayer, purchased used furniture and fixtures for use in its business and placed the property in service on November 1...

$ 2,000
$ 2,667
$ 8,000
$16,000

On June 29, 2012, Sullivan purchased and placed into service an apartment building costing $360,000 including $30,000 for the land. What was Sulliva...

$7,091
$6,500
$6,000
$4,583

Data Corp., a calendar-year corporation, purchased and placed into service used office equipment during October 2012. No other equipment was placed ...

Full-year.
Half-year.
Mid-quarter.
Mid-month.

Under the modified accelerated cost recovery system (MACRS) of depreciation for property placed in service after 1986,

Used tangible depreciable property is excluded from the computation.
Salvage value is ignored for purposes of computing the MACRS deduction.
No type of straight-line depreciation is allowable.
The recovery period for depreciable realty must be at least 27.5 years.

With regard to depreciation computations made under the general MACRS method, the half-year convention provides that

One-half of the first year’s depreciation is allowed in the year in which the property is placed in service, regardless of when the property is placed in service during the year, and a half-year’s depreciation is allowed for the year in which the property is disposed of.
The deduction will be based on the number of months the property was in service, so that one-half month’s depreciation is allowed for the month in which the property is placed in service and for the month in which it is disposed of.
Depreciation will be allowed in the first year of acquisition of the property only if the property is placed in service no later than June 30 for calendar-year corporations.
Depreciation will be allowed in the last year of the property’s economic life only if the property is disposed of after June 30 of the year of disposition for calendar- year corporations.

During August 2012, Roe Corp. purchased and placed in service a machine to be used in its manufacturing operations. This machine cost $600,000. What...

$99,000
$139,000
$500,000
$600,000

Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of...

$0
$ 255
$4,545
$4,800

Adams owns a second residence that is used for both personal and rental purposes. During 2012, Adams used the second residence for 50 days and rente...

Depreciation may not be deducted on the property under any circumstances.
A rental loss may be deducted if rental-related expenses exceed rental income.
Utilities and maintenance on the property must be divided between personal and rental use.
All mortgage interest and taxes on the property will be deducted to determine the property’s net income or loss

Charles Gilbert, a corporate executive, incurred businessrelated unreimbursed expenses in 2012 as follows: Entertainment $900 Travel 700 Education...

$0
$ 700
$1,300
$1,600

Richard Putney, who lived in Idaho for five years, moved to Texas in 2012 to accept a new position. His employer reimbursed him in full for all dire...

$0
$ 900
$1,500
$1,700

Which one of the following statements concerning Roth IRAs is not correct?

The maximum annual contribution to a Roth IRA is reduced if adjusted gross income exceeds certain thresholds.
Contributions to a Roth IRA are not deductible.
An individual is allowed to make contributions to a Roth IRA even after age 70½.
A contribution to a Roth IRA must be made by the due date for filing the individual’s tax return for the year (including extensions).

What is the maximum amount of adjusted gross income that a taxpayer may have for 2013 and still qualify to roll over the balance from a traditional ...

$ 50,000
$ 80,000
$100,000
There is no maximum AGI limitation.

Which one of the following statements concerning an education IRA (Coverdell Education Savings Account) is not correct?

Contributions to an education IRA are not deductible.
A taxpayer may contribute up to $2,000 in 2012 to an education IRA to pay the costs of the designated beneficiary’s higher education.
Eligibility for an education IRA is phased out if adjusted gross income exceeds certain threshold levels.
Contributions can be made to an education IRA on behalf of a beneficiary until the beneficiary reaches age twenty-one.

For 2012, Val and Pat White (both age 40) filed a joint return. Val earned $55,000 in wages and was covered by his employer’s qualified pension pl...

$10,000
$ 9,000
$ 8,000
$ 5,000

Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute 15% of his annual earned income. For this pur...

Deductible Keogh contribution.
Self-employment tax.
Self-employment tax and one-half of the deductible Keogh contribution.
Deductible Keogh contribution and one-half of the self-employment tax.

Ronald Birch, who is single and age 28, earned a salary of $70,000 in 2012 as a plumber employed by Lupo Company. Birch was covered for the entire y...

$5,000
$4,000
$3,000
$0

Sol and Julia Crane (both age 43) are married and will file a joint return for 2012. Sol earned a salary of $140,000 in 2012 from his job at Troy Co...

$0
$ 4,000
$ 5,000
$10,000

Paul and Lois Lee, both age fifty-three, are married and will file a joint return for 2013. Their 2013 adjusted gross income is expected to be $85,0...

$ 5,000
$11,000
$12,000
$13,000

In 2013, contributions to a defined contribution qualified retirement plan on behalf of a self-employed individual whose income from self-employment...

$ 5,500
$50,000
$51,000
$55,000

Which allowable deduction can be claimed in arriving at an individual’s 2013 adjusted gross income?

Charitable contribution.
Foreign income taxes.
Tax return preparation fees.
Self-employed health insurance deduction.

Which one of the following statements concerning the deduction for interest on qualified education loans is not correct?

The deduction is available even if the taxpayer does not itemize deductions.
The deduction only applies to the first sixty months of interest payments.
Qualified education expenses include tuition fees, room, and board.
The educational expenses must relate to a period when the student was enrolled on at least a half-time basis.

Dale received $1,000 in 2013 for jury duty. In exchange for regular compensation from her employer during the period of jury service, Dale was requi...

Claimed in full as an itemized deduction.
Claimed as an itemized deduction to the extent exceeding 2% of adjusted gross income.
Deducted from gross income in arriving at adjusted gross income.
Included in taxable income without a corresponding offset against other income.

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