ACC-553 Federal Taxation Midterm Exam ( Keller )

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MULTIPLE CHOICE QUESTIONS Chapter 1

To be guilty of tax evasion, you must:

a. Try to maximize profits.
b. Try to minimize your tax liability.
c. Arrange your affairs so as to keep your taxes as low as possible.
d. Refuse to disclose a tax liability based on a completed transaction.

. The major source of federal tax revenue is:

a. Corporate income tax
b. Individual income tax
c. Excise tax
d. Estate tax

. Since 1980, the group of taxpayers whose tax burden has increased the most is:
a. Individuals
b. Corporations
c. Trusts and estates
d. None of the above

The most popular form of doing business in the United States is:
a. Corporate form
b. Partnership form
c. Single proprietorship
d. S corporation

32. The IRS levies penalties for which of the following:

a. Bouncing checks
b. Fraud
c. Late filing
d. All of the above

MULTIPLE CHOICE QUESTIONSCHAPTER 3

32. Mr. and Mrs. Twig are both under 65 years of age and have no dependents. Their only
income for the year was his salary of $15,500. During the year they made only a nominal amount
of disbursements of the type that qualify as itemized deductions. What is their standard deduction
on a 2011 joint return?
a. $3,700
b. $11,600
c. $5,800
d. $8,500
e. None of the above

33. Jerry Jenkins is over 65 years of age and has no dependents. His only income was his salary
of $10,500. During the year, he made only a nominal amount of disbursements of the type that
qualify as itemized deductions of $3,290. What is his standard deduction for 2011?
a. $5,800
b. $3,700
c. $7,250
d. $3,290
e. None of the above

34. What is Jerome Jacksons standard deduction for 2011 if he has $20,000 in wages and fi les
married filing separately? He also claims one of the two children.
a. $5,800
b. $4,850
c. $11,600
d. $3,700

e. None of the above

35. What is the amount of standard deduction for Abigale Abrams in 2011, a divorced parent,
who fully supports her five-year-old daughter?
a. $5,800
b. $8,500
c. $11,600
d. $7,400
e. None of the above

36. Determine the amount of taxable income of Michael Manx in 2011, who is single and has
$300 of wages and$2,000 of interest income for the year. He is claimed as a dependent by his
parents.
a. $2,000
b. $2,300
c. $1,350
d. $300
e. $0

37. Marvin Miller, who is claimed as a dependent by his parents, received income of $3,100
from a trust fundand $500 from wages. Marvin had $1,050 in itemized deductions. What is
Marvins taxable income?
a. $2,650
b. $3,600
c. $2,550
d. $1,700

e. None of the above

MULTIPLE CHOICE QUESTIONSCHAPTER 13

19. A short tax year with the subsequent annualizing of taxable income is required for which of
the following?
a. In the year of death of an individual
b. In the year of termination of a partnership
c. In the first year of a new corporation
d. In the year of liquidation of a corporation
e. None of the above

20. What is the amount of tax to be paid for a short period assuming the tax from placing the
short period on an annual basis is $2,300; the tax computation for the short period without
annualizing is $2,100; and the tax computation using the full 12 months and prorating is $2,200.
a. $2,300
b. $2,200
c. $2,100
d. $100
e. None of the above

21. Which of the following is not a method of accounting?

a. Cash receipts and disbursements method
b. Accrual method
c. LIFO inventory
d. Long-term contracts method

e. None of the above

22. The following statements about the cash basis method of accounting are false, except:
a. The prepayment made for future services may be deducted currently.
b. Interest credited to a savings account is not taxed until withdrawn.
c. Stock received for services rendered are taxed only in the year sold.
d. The exchange of services may lead to gross income to both parties.

23. Jake Turner realized last December that he had almost reached the point where his medical
expenses exceeded the 7.5 percent of AGI limitation. As a result, he insisted on paying his
physician, Dr. Grope, $6,000 on account for future services for the Turner family. The results of
this prepayment are:
a. Turners deduction: when paid; Dr. Gropes income: when received
b. Turners deduction: when services are rendered; Dr. Gropes income: when received
c. Turners deduction: when services are rendered; Dr. Gropes income: when services are
rendered
d. Turners deduction: when paid; Dr. Gropes income: when services are rendered

24. Robert Graves sold his house to George Tombs for a total of $100,000. Earnest money of
$5,000 was received at the end of the year prior to the closing. The remaining $15,000 of the
down payment was received at closing. George assumed a $50,000 mortgage on the property and
signed a second mortgage for $30,000. If
Roberts basis was $35,000 the tax results, in part, are as follows:
a. Contract price: $65,000; gross profit: 100%; payments in year of sale: $35,000
b. Contract price: $50,000; gross profit: 100%; payments in year of sale: $50,000
c. Contract price: $65,000; gross profit: 100%; payments in year of sale: $20,000
d. Contract price: $80,000; gross profit: 65/80%; payments in year of sale: $30,000

MULTIPLE CHOICE QUESTIONSCHAPTER 4

40. All of the following are considered constructive receipt of income, except:
a. Lori was informed her check for services rendered was available but she did not pick it up.
b. Pierre earned income that was received by his agent but was not received by Pierre.
c. Jacque bought a 9-month certificate of deposit in November 2011. It earned $200 interest in
2011. She can withdraw the principal and interest in 2011 if she pays a penalty of one months
interest ($100).
d. A payment on a sale of real property place in escrow pending settlement at which time title
would convey.

41. In which of the following situations will the divorced custodial parent be entitled to the
dependency exemption for the child?
a. The noncustodial parent provides $1,500 of support for the child and the custodial parent
provides $1,200.
b. The custodial and noncustodial parent both provide $1,500 of support for the child.
c. The custodial parent provides $1,500 of support for the child and the noncustodial parent
provides $1,200.
d. All of the above.

42. In July 1996, Dan Farley leased a building to Robert Shelter for a period of 15 years at a
monthly rental of $1,000 with no option to renew. At that time the building had a remaining
estimated useful life of 20 years.Prior to taking possession of the building, Shelter made
improvements at a cost of $18,000. These improvements had an estimated useful life of 20 years
at the commencement of the lease period. The lease expired on June 30, 2011, at which point the
improvements had a fair market value of $2,000. The amount that Farley, the landlord, should
include in his gross income for 2011 is:6 mo * 1000 = 6000
a. $6,000
b. $8,000
c. $12,000

d. $24,000

43. Roger Burrows, age 19, is a full-time student at Marshall College and a candidate for a
bachelors degree.
During 2011, he received the following payments:
State scholarship for tuition $3,600
Loan from college financial aid office 1,500
Cash support from parents 3,000
Cash dividends on qualified investments 700
Cash prize award in contest 500
$9,300
What is Burrowss adjusted gross income for 2011?700+500=1200
a. $1,100
b. $1,200
c. $4,800
d. $9,300

44. Kevin is a candidate for an undergraduate degree at a local university. During 2011, he was
granted a fellowship that provided the following:
Tuition $18,000
Books and supplies 2,000
Room and board 14,800
What amount can Kevin exclude from gross income in 2011?18000+2000=20000
a. $18,000

b. $20,000
c. $25,000
d. $32,800
e. $34,800
MULTIPLE CHOICE QUESTIONSCHAPTER 5
27. Mr. W. is 66 years old and single. His income for 2011 consisted of the following:
Taxable pension $10,000
Taxable interest 2,000
Taxable dividends 5,000
Social security payments 5,000
Tax-exempt interest 7,000(sum =26500) less base amount 25000=1500, 50% excess =750
He did not have any adjustments to income. What amount of Ws social security benefits is
taxable?
a. $0
b. $750
c. $1,500
d. $2,000

28. Mr. and Mrs. Birch are both over 65 years of age and are fi ling a joint return. Their income
for 2011 consisted of the following:
Taxable interest $6,000
Taxable dividends 8,000
Social security payments (Mr. and Mrs. Birch combined) 15,000 = 7500
Tax-exempt interest 4,000

Taxable pension 15,000sum = (40500-base 32000)=8500/2 = 4250

They did not have any adjustments to income. What amount of Mr. and Mrs. Birchs social
security benefits is taxable?
a. $0
b. $4,250
c. $7,500
d. $7,750

29. During 2011, Anne Apple received tangible personal property as a safety achievement award
from her employer. The award was not a qualified plan award. The property cost the employer
$500 and had a fairmarket value of $600. How much must Anne include in her 2011 gross
income?
a. $0
b. $200
c. $500
d. $600

30. During 2011, Edward East had wages of $10,000 and received unemployment compensation
of $6,200 from thestate. Edward is single and 45 years old. What is the amount of unemployment
compensation to be included in hisgross income?a. $0
b. $2,100
c. $4,200
d. $6,200

31. On June 3, 2011, Leon Wren, an electrician, was injured in an accident during the course of
his employment.As a result of injuries sustained, he received the following payments during
2011:Damages for personal injuries $8,000

Workers compensation 3,000; Reimbursement from his employers accident and health plan for
medical expenses paid by Wren 1,200The amount to be included in Wrens 2011 gross income
should be:
a. $0
b. $1,200
c. $3,000
d. $12,200

TRUE-FALSE QUESTIONSCHAPTER 6
1. An ordinary expenditure is one which is commonly incurred by other businesses.TRUE
2. Hobby expenditures are deductible to the extent of hobby gross income.TRUE
3. If an employee accounts to the employer for business-related expenses and is reimbursed by
the employer, the expenses must still be reported on the employees tax return.FALSE
4. Job-seeking expenses are not deductible if an individual finds a job in a new trade or
business.TRUE
5. Rents and royalties expenses are deductible from adjusted gross income.FALSE
6. Tax deductions for tax planning and tax compliance expenses may only be claimed for
expenses incurred in planning and compliance with respect to federal and state income
taxes.FALSE
7. The Cohan case set a requirement for tax purposes that adequate substantiation is required for
every tax deduction claimed on a tax return.FALSE
8. Advertising which is intended to influence public reaction to proposed legislation normally is
not a deductible business expense for tax purposes.TRUE
9. The amount of a bad debt deduction is always limited to the adjusted basis of the debt in the
hands of the taxpayer.TRUE
10. Full worthlessness of a debt must be proven in order to claim a business bad debt
deduction.FALSE

MULTIPLE CHOICE QUESTIONSCHAPTER 7

31. Ann Jones uses a dry cleaning machine in her business, and it was completely destroyed by
fire. At the timeof the fire, the adjusted basis was $20,000 and its fair market value was $18,000.
How much is Anns loss?
a. $18,000
b. $2,000
c. $20,000
d. None of the above

32. Ann Jones uses a dry cleaning machine in her business, and it was partially destroyed by fire.
At the time ofthe fire, the adjusted basis was $20,000 and its fair market value was $18,000. The
adjusted basis after the fireis $10,000 and the fair market value after the casualty is $10,000.
How much is the casualty loss?
a. $10,000
b. $8,000
c. $18,000
d. $20,000

33. ABC, Inc. of Jasper, Georgia suffered a casualty loss of $150,000 in March 2011. This loss
was caused byheavy rains that completely flooded their factory. As a result of these rains, the
President declared NorthGeorgia (including Jasper) a disaster area on March 23, 2011. In what
year can ABC, Inc. elect to deduct the
casualty loss?
a. 2011 or 2012
b. 2010 or 2011
c. 2011
d. 2010

34. Which of the following is not a passive activity?

a. Owning a business and not materially participating
b. Having rental condos
c. Owning a limited partnership interest in a real estate limited partnership
d. Owning a working interest in oil and gas properties

35. All of the outstanding stock of a closely held C corporation is owned equally by Evelyn
Humo and SteveBufusno. In 2011, the corporation generates taxable income of $20,000 from its
active business activities.In addition, it earns $20,000 of interest from investments and incurs a
$40,000 loss from a passive activity.
How much income does the C corporation report for 2011?
a. $10,000 of portfolio income
b. $0
c. $20,000 of portfolio income
d. None of the above

36. All of the outstanding stock of a closely held C corporation is owned equally by Evelyn
Humo and SteveBufusno. In 2011, the corporation generates taxable income of $20,000 from its
active business activities.In addition, it earns $20,000 of interest from investments and incurs a
$40,000 loss from a passive activity.
How much of a passive loss carryover does the corporation have?
a. $20,000
b. $0
c. $40,000
d. None of the above

TRUE-FALSE QUESTIONSCHAPTER 8
1. Itemized deductions only reduce taxable income if the taxpayers itemized deductions exceed
the standarddeduction amount.TRUE
2. Individual taxpayers are allowed to deduct unreimbursed medical and dental expenses paid
during the yearfor themselves, their spouse, and dependents.TRUE
3. Medical expenses recovered after being claimed as a deduction in the previous year must be
included inincome in the year of recovery to the extent that the deduction decreased taxable
income in the year theywere deducted.TRUE
4. An individual has an insurance policy that will pay $500 a week no matter what the hospital
expenses are,for 100 weeks in the event of hospitalization. The premium on this policy qualifies
as a deductible medicalexpense subject to the applicable limitations.FALSE
5. Vitamin pills taken daily for general health are a qualified medical expense.FALSE
6. To alleviate an obesity problem, a doctor puts a patient on a special diet. The total cost of the
patients foodfor the special diet is a deductible medical expense.FALSE

MULTIPLE CHOICE QUESTIONSCHAPTER 14

23. Which of the following items are eligible for immediate expensing and 180-month
amortization?
(1.) Fee to CPA to handle Subchapter S election
(2.) Refreshments served at organizational meetings
(3.) Underwriting commission
(4.) Legal fees in connection with incorporation
(5.) Recording fees upon transfer of assets to corporation
a. (2), (4), and (5)
b. (1), (2), and (5)
c. (1), (2), (3), (4), and (5)
d. (1), (2), and (4)

24. Sandra Sherman incorporates her apartment building. It has a basis of $50,000, a value of
$150,000, issubject to a mortgage of $70,000 and has a depreciation recapture potential of
$12,000. If Sandra receivesstock worth $80,000, she will recognize:
a. No gain.
b. $30,000 of gain, $12,000 of which is ordinary.
c. $12,000 of ordinary income.
d. $20,000 of gain, $12,000 of which is ordinary.

25. Evan Erman transferred inventory to a corporation in a Code Sec. 351 transaction. His basis
in the inventory was$10,000 and its value was $8,000. If he received $2,000 in cash and 100
shares of stock, the resulting bases are:
a. Evans stock: $8,000; Corporations inventory: $10,000
b. Evans stock: $10,000; Corporations inventory: $10,000
c. Evans stock: $10,000; Corporations inventory: $8,000
d. Evans stock: $8,000; Corporations inventory: $12,000

26. Algernon Amsley transferred the following to his controlled corporation in exchange for
stock:
Basis Value
Building $20,000 $50,000
Cash 10,000 10,000
Mortgage on building 40,000 40,000
IBM stock 15,000 12,000
Algernon must recognize a gain of:
a. $20,000

b. $0
c. $10,000
d. $27,000

27. One year Potter, Inc. had gross income from sales of $210,000, business expenses of
$230,000, and dividendincome from U.S. corporations of $150,000. Potters 80 percent
dividends-received deduction was:
a. $104,000
b. $120,000
c. $0
d. $150,000

28. Prior to a charitable gift to the Plato University of land with a basis of $6,000 and a value of
$13,000, All-Set, Inc. had taxable income of $50,000. If the dividends-received deduction was
$80,000, the charitablecontribution deduction is:
a. $5,000
b. $6,000
c. $2,925
d. $5,800