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ACCOUNTING 2205-FALL 2014-Exam #2

NAME____________________________________________________________________________
Please circle the correct answer. There is only one answer per question. If you select more than one, you
will not receive any credit for the question.

Chapter 6 Questions
1. Sammy, a calendar year cash basis taxpayer who is age 66, has the following
transactions:
Salary from job
Alimony received from ex-wife
Medical expenses

$90,000
10,000
8,000

Based on this information, Sammy has:


a. AGI of $90,000.
b. AGI of $95,000.
c. AGI of $99,500.
d. Deduction for medical expenses of $0.
e. None of the above.
2. Trade and business expenses of a sole proprietor should be treated as:
a. A deduction from AGI subject to the 2%-of-AGI floor.
b. A deduction from AGI not subject to the 2%-of-AGI floor.
c. Deductible for AGI.
d. An itemized deduction if not reimbursed.
e. None of the above
3. Al is single, age 60, and has gross income of $140,000. His deductible expenses are as
follows:
Alimony
Charitable contributions
Contribution to a traditional IRA
Expenses paid on rental property
Interest on home mortgage and property taxes on personal residence
State income tax
What is Als AGI?
a. $94,100.
b. $103,000.
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$20,000
4,000
5,500
7,500
7,200
2,200

c. $107,000.
d. $127,000.
e. None of the above.

4. Which of the following is not a trade or business expense?


a. Interest on business indebtedness.
b. Property taxes on business property.
c. Parking ticket paid on business auto.
d. Depreciation on business property.
e. All of the above are trade or business expenses.
5. Terry and Jim are both involved in operating illegal businesses. Terry operates a
gambling business and Jim operates a drug running business. Both businesses have
gross revenues of $500,000. The businesses incur the following expenses.
Terry
Employee salaries

Jim

$200,000

$200,000

Bribes to police

25,000

25,000

Rent and utilities

50,000

50,000

125,000

Cost of goods sold

Which of the following statements is correct?


a. Neither Terry nor Jim can deduct any of the above items in calculating the business
profit.
b. Terry should report profit from his business of $250,000.
c. Jim should report profit from his business of $500,000.
d. Jim should report profit from his business of $250,000.
e. None of the above
6. For a president of a publicly held corporation, which of the following are not subject to
the $1 million limit on executive compensation?
a. Contribution to medical insurance plan.
b. Contribution to pension plan.
c. Premiums on group term life insurance of $50,000.
d. Only b. and c. are not subject to the limit.
e. a., b., and c., are not subject to the limit.
7. Tommy, an automobile mechanic employed by an auto dealership, is considering opening
a fast food franchise. If Tommy decides not to acquire the fast food franchise, any
investigation expenses are:
a. A deduction for AGI.
b. A deduction from AGI, subject to the 2 percent floor.
c. A deduction from AGI, not subject to the 2 percent floor.
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d. Deductible up to $5,000 in the current year with the balance being amortized over a
180-month period.
e. Not deductible.
8. Which of the following is not relevant in determining whether an activity is profitseeking or a hobby?
a. Whether the activity is enjoyed by the taxpayer.
b. The expertise of the taxpayers or their advisers.
c. The time and effort expended.
d. The relationship of profits earned and losses incurred.
e. All of the above are relevant factors.
9. Which of the following is not relevant in determining whether an activity is profitseeking or a hobby?
a. Whether the activity is enjoyed by the taxpayer.
b. The expertise of the taxpayers or their advisers.
c. The time and effort expended.
d. The relationship of profits earned and losses incurred.
e. All of the above are relevant factors.
Chapter 7 Questions
10.
On February 20, 2013, Bill purchased stock in Pink Corporation (the stock is not
small business stock) for $1,000. On May 1, 2014, the stock became worthless. During
2014, Bill also had an $8,000 loss on 1244 small business stock purchased two years
ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 long-term capital gain. How
should Bill treat these items on his 2014 tax return?
a. $4,000 long-term capital loss and $9,000 short-term capital loss.
b. $4,000 long-term capital loss and $3,000 short-term capital loss.
c. $8,000 ordinary loss and $3,000 short-term capital loss.
d. $8,000 ordinary loss and $5,000 short-term capital loss.
e. $8,000 long-term capital loss and $6,000 short-term capital loss.
11.

Bruce, who is single, had the following items for the current year:

Salary of $80,000.
Gain of $20,000 on the sale of 1244 stock acquired two years earlier.
Loss of $75,000 on the sale of 1244 stock acquired three years earlier.
Worthless stock of $15,000. The stock was acquired on February 1 of the prior year and
became worthless on January 15 of the current year.
Determine Bruces AGI for the current year.
a. $27,000.
b. $38,000.
c. $42,000.
d. $47,000.
e. None of the above.
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12. In 2014, Wally had the following insured personal casualty losses (arising from one
casualty). Wally also had $42,000 AGI for the year before considering the casualty.

Asset
A
B
C

Adjusted Basis
$9,200
3,000
3,700

Fair Market Value

Insurance

Before
$8,000
4,000
1,700

Recovery
$2,000
4,000
900

After
$1,000
-0-0-

Wallys casualty loss deduction is:


a. $1,500.
b. $1,600.
c. $4,800.
d. $58,000.
e. None of the above.
13. In 2014, Grants personal residence was completely destroyed by fire. Grant was insured
for 100% of his actual loss, and he received the insurance settlement. Grant had adjusted
gross income, before considering the casualty item, of $30,000. Pertinent data with
respect to the residence follows:
Cost basis
Value before casualty
Value after casualty
What is Grants allowable casualty loss deduction?

$280,000
250,000
0

a. $0.
b. $6,500.
c. $6,900.
d. $10,000.
e. $80,000
14.
Alma is in the business of dairy farming. During the year, one of her barns was
completely destroyed by fire. The adjusted basis of the barn was $90,000. The fair
market value of the barn before the fire was $75,000. The barn was insured for 95% of
its fair market value, and Alma recovered this amount under the insurance policy. Alma
has adjusted gross income for the year of $40,000 (before considering the casualty).
Determine the amount of loss she can deduct on her tax return for the current year.
a. $3,750.
b. $14,650.
c. $14,750.
d. $18,750.
e. None of the above.
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Chapter 8 Questions
15. Hazel purchased a new business asset (five-year asset) on September 30, 2014, at a cost
of $100,000. On October 4, 2014, Hazel placed the asset in service. This was the only asset
Hazel placed in service in 2014. Hazel did not elect 179. Additional first year depreciation
is not yet available. On August 20, 2015, Hazel sold the asset. Determine the cost recovery
for 2015 for the asset.
a. $14,250.
b. $19,000.
c. $23,750.
d. $38,000.
e. None of the above.
16. Alice purchased office furniture on September 20, 2013, for $100,000. On October 10,
2013, she purchased business computers for $80,000. Alice placed all of the assets in
service on January 15, 2014. Alice did not elect to expense any of the assets under
179, did not elect straight-line cost recovery, and additional first-year depreciation is
not available. Determine the cost recovery deduction for the business assets for 2014.
a. $6,426.
b. $14,710.
c. $25,722.
d. $30,290.
e. None of the above.
17. Barry purchased a used business asset (seven-year property) on September 30, 2014,
at a cost of $200,000. This is the only asset he purchased during the year. Barry did
not elect to expense any of the asset under 179, additional first-year depreciation is
not available). Barry sold the asset on July 17, 2015. Determine the cost recovery
deduction for 2015.
a. $19,133.
b. $24,490.
c. $34,438.
d. $55,100.
e. None of the above.

18. Bonnie purchased a new business asset (five-year property) on March 10, 2013, at a
cost of $30,000. She also purchased a new business asset (seven-year property) on
November 20, 2013, at a cost of $13,000. Bonnie did not elect to expense either of the
assets under 179, nor did she elect straight-line cost recovery. Bonnie takes
additional first-year depreciation. Determine the cost recovery deduction for 2013 for
these assets.
a. $5,858.
b. $7,464.
c. $9,586.
d. $19,429.
e. None of the above.
19. Doug purchased a new factory building on January 15, 1989, for $400,000. On March
1, 2014, the building was sold. Determine the cost recovery deduction for the year of the
sale assuming he did not use the MACRS straight- line method.
a. $0.
b. $1,587.
c. $2,645.
d. $12,696.
e. None of the above.
20. Cora purchased a hotel building on May 17, 2014, for $3,000,000. Determine the cost
recovery deduction for 2015.
a. $48,150.
b. $59,520.
c. $69,000.
d. $76,920.
e. None of the above.
21. Diane purchased a factory building on April 15, 1994, for $5,000,000. She sells the
factory building on February 2, 2014. Determine the cost recovery deduction for the
year of the sale.
a. $16,025.
b. $19,838.
c. $26,458.
d. $158,750.
e. None of the above.

22. Augie purchased one new asset during the year (five-year property) on November 10,
2014, at a cost of $650,000. She would like to use the 179 election if available. The
income from the business before the cost recovery deduction and the 179 deduction
was $600,000. Determine the total cost recovery deduction with respect to the asset for
2014.
a. $32,500.
b. $56,250.
c. $130,000.
d. $150,000.
e. None of the above.
Chapter 9 Questions
23. Amy works as an auditor for a large major CPA firm. During the months of September
through November of each year, she is permanently assigned to the team auditing Garnet
Corporation. As a result, every day she drives from her home to Garnet and returns home
after work. Mileage is as follows:
Miles
Home to office
Home to Garnet
Office to Garnet

10
30
35

For these three months, Amys deductible mileage for each workday is:
a. 0.
b. 30.
c. 35.
d. 60.
e. None of the above.

24. As to meeting the time test for purposes of deducting moving expenses, which of the
following statements is correct?
a. Work at the new location must involve a full-time jobpart-time job will not
suffice.
b. The taxpayer has two years in which to satisfy the 39-weeks or 78-weeks
requirement.
c. The time test is waived for persons whose move follows retirement.
d. The moving expense deduction cannot be claimed if the taxpayer has not yet met
the time test.
e. None of the above.

25. During the year, John went from Milwaukee to Alaska on business. Preceding a five-day
business meeting, he spent four days vacationing at the beach. Excluding the vacation
costs, his expenses for the trip are:
Air fare
Lodging
Meals
Entertainment

$3,200
900
800
600

Presuming no reimbursement, deductible expenses are:


a. $3,200.
b. $3,900.
c. $4,800.
d. $5,500.
e. None of the above.

26. Rachel is single and has a college degree in finance. She is employed as a loan officer at
a bank; her yearly AGI approximates $50,000. During the year, she enrolled in a
weekend MBA program and incurred the following nonreimbursed expenses: $4,100
(tuition), $300 (books), $200 (other school supplies), and $200 (transportation to and
from campus). Disregarding the 2%-of-AGI limitation, as to the MBA program, Rachel
has a:
a. Deduction for and deduction from AGI of $0.
b. Deduction for AGI of $4,000 and deduction from AGI of $800.
c. Deduction for AGI of $4,000 and deduction from AGI of $700.
d. Deduction for AGI of $4,100 and deduction from AGI of $700.
e. None of the above.