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Exam 9: Business Income, Deductions, and Accounting Methods

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Question 31

Multiple Choice

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Big Homes Corporation is an accrual method calendar year taxpayer that manufactures and sells modular homes. This year for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year-end, Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

A) $12,000 because rebates are payment liabilities.
B) $19,500 because Big Homes is an accrual method taxpayer.
C) $19,500 if this amount is not material, Big Homes expects to continue the practice of offering rebates in future years, and Big Homes expects to pay the accrued rebates before filing their tax return for this year.
D) $12,000 because the $7,500 liability is not fixed and determinable.
E) Big Homes is not entitled to a deduction because rebates are against public policy.

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Question 32

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Which of the following is likely to be a fully deductible business expense?

A) Salaries in excess of the industry average paid to attract talented employees.
B) The cost of employee uniforms that can be adapted to ordinary personal wear.
C) A speeding fine paid by a trucker who was delivering a rush order.
D) The cost of a three-year subscription to a business publication.
E) None of the choices are likely to be deductible.

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Question 33

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A short tax year can end on any day of any month other than December.

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?

Werner is the president and CEO of Acme, Inc. and this year he took a prospective client to dinner. During the dinner the President and the client discussed a proposed contract for over $6 million and personal matters. After dinner the CEO took the client to a football game and no business was discussed. The CEO paid $1,220 for an expensive dinner and spent $600 for tickets to the game. What is the deductible amount of these expenses?

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 Todd's §481 adjustment for this year?

Illegal bribes and kickbacks are not deductible as business expenses but fines imposed by a governmental unit are deductible as long as the fines are incurred in the ordinary course of business.

Murphy uses the accrual method and reports on a calendar year. This year Murphy signed a binding contract to provide consulting services to Kirby beginning next year. Murphy incurred $15,000 to train his staff for this particular project. In addition, Murphy estimates that he will incur another $60,000 to complete the Kirby contract. What amount, if any, can Murphy deduct this year for the services expected to be rendered next year?

Sandy Bottoms Corporation generated taxable income (before depreciation, interest expense and any tax loss carryovers) of $3 million this year. Taxable income included $75,000,000 of revenue and $350,000 of interest income. What is Sandy Bottom's domestic maximum interest expense deduction for the year?

Only half the cost of a business meal is deductible even if the meal is associated with the active conduct of business.

All taxpayers must account for taxable income using a calendar year.

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

Individual proprietors report their business income and deductions on:

The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary."

Jones operates an upscale restaurant and he pays experienced cooks $35,000 per year. This year he hired his son as an apprentice cook. Jones agreed to pay his son $40,000 per year. Which of the following is a true statement about this transaction?

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?

Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

Ralph borrowed $4 million and used the proceeds in his internet business. The interest on this debt is not subject to an interest limitation if Ralph's business has average annual gross receipts of $25 million or less for the prior three taxable years.

The phase "ordinary and necessary" has been defined to mean that an expense must be essential and indispensable to the conduct of a business.

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