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Exam 1: Business Income, Deductions, and Accounting Methods

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Question 1

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Kip started a wholesale store this year selling bulk peanut butter. In January of this year Kip purchased an initial five tubs of peanut butter for a total cost of $5,000. In July Kip purchased three tubs for a total cost of $6,000. Finally, in November Kip bought two tubs for a total cost of $1,000. Kip sold six tubs by year end. What is Kip's ending inventory under the FIFO cost-flow method?

A) $12,000
B) $6,000
C) $5,000
D) $2,500
E) $1,000

F) B) and C)
G) A) and C)

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Question 2

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Riley operates a plumbing business and this year the 3-year old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $20,000 and the adjusted basis was $5,800 at the time of the accident. Although the van was worth $6,000 at the time of accident, insurance only paid Riley $1,200 for the loss. What is the amount of Riley's casualty loss deduction?

A) $6,000
B) $14,000
C) $5,800
D) $4,600
E) $5,300

F) C) and E)
G) A) and E)

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Question 3

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Paris operates a talent agency as a sole proprietorship, and this year she incurred the following expenses in operating her talent agency. What is the total deductible amount of these expenditures? $1,000 dinner with a film producer where no business was discussed $500 lunch with sister Nicky where no business was discussed $700 business dinner with a client but Paris forgot to keep any records (oops!) $900 tickets to the opera with a client following a business meeting

Marilyn operates a day care center as a cash-method sole proprietorship. On August 1^st of this year Marilyn received a prepayment of $4,000 for child care services to be rendered evenly over the next 20 months. How much income must Marilyn recognize this year if she is attempting to minimize her tax burden?

John is a self-employed computer consultant who lives and works in Dallas. John paid for the following activities in conjunction with his business. Which is not deductible in any amount? 1) Dinner with a potential client where the client's business was discussed. 2) A trip to Houston to negotiate a contract. 3) A seminar in Houston on new developments in the software industry. 4) A trip to New York to visit a school chum who is also interested in computers.

Which of the following business expense deductions is most likely to be unreasonable in amount?

Taffy Products uses the accrual method and reports on a calendar year. On July 1^st of this year Taffy paid $48,000 for warehouse rent and $18,000 for insurance on the contents of their warehouse. The rent and insurance covers the next 12 months. What amount, if any, can Taffy deduct for rent and insurance this year?

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

Colbert operates a catering service on the accrual method. In November of year 1 Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1^st of year 1 through May 31^st year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

In order to deduct a portion of the cost of a business meal which of the following conditions must be met?

Smith operates a roof repair business. This year Smith's business generated cash receipts of $32,000 and Smith made the following expenditures associated with his business: The education expense was for a two-week, nighttime course in business management. Smith believes the expenditure should qualify as an ordinary and necessary business expense. What net income should Smith report from his business? Smith is on the cash method and calendar year. $\begin{array} { | l | r | } \hline \text { Advertising } & \$ 500 \\\hline \text { Car and truck expenses } & 1,360 \\\hline \text { Depreciation } & 3,200 \\\hline \text { Employee compensation } & 5,000 \\\hline \text { Education } & 1,000 \\\hline\end{array}$

Which of the following types of transactions may not typically be accounted for using the cash method?

David purchased a deli shop on February 1^st of last year and began to operate it as a sole proprietorship. David reports his personal taxes using the cash method over a calendar year, and he wants to use the cash method and fiscal year for his sole proprietorship. He has summarized his receipts and expenses through January 31^st of this year as follows: What income should David report from his sole proprietorship? $\begin{array} { | l | r | r | } \hline & \text { Receipts } & \text { Exrenses } \\\hline \text { February thu. December last year } & \$ 112,000 & \$ 84,500 \\\text { January this year } & 10,400 & 6,200 \\\hline\end{array}$

A loss deduction from a casualty of a business asset is only available if the asset is completely destroyed.

Gabby operates a pizza delivery service. This year she paid delivery personnel $18,000 in salary. She carefully documented the use of the auto (11,700 miles this year) and her $7,350 of vehicle expenses (for gas, oil, repairs, and auto lease payments). What amount of these expenses may Gabby deduct as business expenses? Gabby is on the cash method and calendar year.

Which of the following expenditures is most likely to be deductible for a construction business?

Which of the following is a true statement about travel that has both business and personal aspects?

Employees cannot deduct the cost of uniforms if the uniforms are also appropriate for normal wear.

The IRS would most likely apply the arm's length transaction test to determine which of the following?

Which of the following is a true statement about accounting for business activities?