Devry ACCT212 midterm exam Spring 2014

(TCO 9) Which of the following is NOT a characteristic of the audit process?

: The IRS can reward informants when the information provided leads to the collection of additional taxes.

Most taxpayer audits do not involve special agents.

Self-employed taxpayers are more likely to be selected for audit than employed taxpayers.

Less important issues are handled by means of a correspondence audit.

If a taxpayer disagrees with the IRS auditor's finding, the only resort is to use the courts.

2. Question : (TCO 9) A characteristic of fraud penalties is:

: Civil fraud can result in a fine and a prison sentence.

When negligence and civil fraud apply to a deficiency, both penalties are imposed.

The criminal fraud penalty is 75% of the deficiency attributable to the fraud.

The IRS has a greater burden of proof in the case of criminal fraud than with civil fraud.

None of the above

3. Question : (TCO 1) The Internal Revenue Code was codified for the first time in what year?

: 1913

1923

1939

1954

1986

4. Question : (TCO 1) Subchapter S covers which specific area of tax law?

: Tax rates

Partnerships

Capital gains and losses

Corporations

None of the above

5. Question : (TCO 11) Which of the following taxpayers may file as a head of household in 2008?

• Ron provides all of the support for his mother, Betty, who lives by herself in an apartment in Fort Lauderdale. Ron pays the rent and other expenses for the apartment and properly claims his mother as a dependent.

• Tammy provides over one-half of the support for her 18-year-old brother, Dan. Dan earned $4,200 in 2008 working at a fast-food restaurant and is saving his money to attend college in 2009. Dan lives in Tammy's home.

• Joe's wife left him late in December of 2007. No legal action was taken and Joe has not heard from her in 2008. Joe supported his six-year-old son, who lived with him throughout 2008.

: Ron only

Tammy only

Joe only

Ron and Joe only

Ron, Tammy, and Joe

6. Question : (TCO 11) Arnold is married to Sybil, who abandoned him in 2008. He has NOT seen or communicated with her since April of that year. He maintains a household in which their son, Evans, lives. Evans is age 25 and earns over $20,000 each year. For tax year 2010, Arnold's filing status is:

: married filing jointly.

married filing separately.

head of household.

surviving spouse.

single.

7. Question : (TCO 7) Kathy operates a gym. She sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $360 ($360/12 = $30 per month); a two-year membership costs $600 ($600/24 = $25 per month). Cash payment is required at the beginning of the membership period. On July 1, 2009, Kathy sold a one-year membership and a two-year membership.

I. If Kathy is a cash basis taxpayer, her 2009 gross income from the contracts is $960 ($360 + $600).

II. If Kathy is an accrual basis taxpayer, her 2009 gross income from the contracts is $330 [(6/12 x $360) + (6/24 x $600)].

III. If Kathy is an accrual basis taxpayer, her 2010 gross income from the contracts is $630 [(6/12) ($360) + $450].

: Only I is true.

Only I and II are true.

Only II and III are true.

I, II, and III are true.

None of the above

8. Question : (TCO 7) With respect to income from services, which of the following is true?

: The income is always amortized over the period the services will be rendered by an accrual basis taxpayer.

A cash basis taxpayer can spread the income from a 12-month service contract over the contract period.

If an accrual basis taxpayer sells a 24-month service contract on July 1, 2008 for $2,400, the taxpayer's 2009 gross income from the contract is $1,800.

If the accrual basis taxpayer sells a 12-month service contract on July 1, 2008, all of the income is recognized in 2008.

None of the above

9. Question : (TCO 3) Ridge is the manager of a motel. As a condition of his employment, Ridge is required to live in a room on the premises so that he would be there in case of emergencies. Ridge considered this a fringe benefit, since he would otherwise be required to pay $600 per month for rent. The room that Ridge occupied normally rented for $60 per night, or $1,500 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Ridge is required to include in gross income:

: $0.

$600 per month.

$1,500 per month.

$1,350 ($1,500 x .90 = $1,350).

None of the above

10. Question : (TCO 3) Adam repairs power lines for the Egret Utilities Company. He is generally working on a power line during the lunch hour. He must eat when and where he can and still get his work done. He usually purchases something at a convenience store and eats in his truck. Egret reimburses Adam for the cost of his meals.

: Adam must include the reimbursement in his gross income.

Adam can exclude the reimbursement from his gross income since the meals are provided for the convenience of the employer.

Adam can exclude the reimbursement from his gross income because he eats the meals on the employer's business premises (the truck).

Adam may exclude from his gross income the difference between what he paid for the meals and what it would have cost him to eat at home.

None of the above

11. Question : (TCO 10) Hans purchased a new passenger automobile on August 17, 2010 for $40,000. During the year, the car was used 40% for business and 60% for personal use. Determine his cost recovery deduction for the car for 2010.

: $500

$1,000

$1,224

$1,500

None of the above

12. Question : (TCO 10) Cory incurred and paid the following expenses:

Tax return preparation fee $600

Moving expenses $2,000

Investment expenses $500

Expenses associated with rental property $1,500

Interest expense associated with loan to finance tax-exempt bonds $400

Calculate the amount that Cory can deduct (before any percentage limitations).

: $5,000

$4,600

$3,000

$1,500

None of the above

13. Question : (TCO 10) Sarah incurred the following expenses for her dependent son during the current year:

Payment of principal on son's automobile loan $5,000

Interest on above loan $2,000

Payment of son's property taxes $1,200

Payment of principal on son's personal residence loan $1,500

Payment of interest on son's personal residence loan $8,000

How much may Sarah deduct in computing her itemized deductions?

: $0

$9,200

$11,200

$17,700

None of the above

Points Received: 6 of 6

Comments:

14. Question : (TCO 10) Danielle owns a vacation cottage. During the current year, she rented it for $1,500 for 48 days, and lived in it for 12 days. How would any expenses be accounted for?

: The expenses would not be deductible.

The expenses must be allocated between personal and rental days.

The expenses must be allocated to rental days only.

The expenses must be allocated to personal days only.

None of the above

Instructor Explanation: Chapter 6

Points Received: 6 of 6

Comments:

15. Question : (TCO 3) During the year, Rick had the following insured personal casualty losses (arising from one casualty). Rick also had $18,000 AGI for the year.

Asset Adjusted

Basis Fair Market

Value (Before) Fair Market

Value (After) Insurance

Recovery

A $500 $700 $300 $150

B 3,000 2,000 -0- 500

C 700 900 -0- 200

Rick's casualty loss deduction is:

: $400.

$600.

$1,000.

$1,400.

None of the above

16. Question : (TCO 3) John had adjusted gross income of $60,000. During the year, his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows:

Cost basis $250,000

Value before the fire $400,000

Value after the fire

$100,000

Insurance recovery $270,000

John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows:

Cost basis $80,000

Value before the accident $6,000

Value after the accident $20,000

Insurance recovery $0

What is John's deductible casualty loss?

: $0

$15,800

$15,900

$35,900

None of the above

17. Question : (TCO 3) Hannah makes the following charitable donations in the current year:

Basis Fair Market

Value

Inventory held for resale in Hannah's business

(a sole proprietorship) $8,000 $7,200

Stock in HBM, Inc., held as an investment

(acquired four years ago) $16,000$40,000

Baseball card collection held as an investment

(acquired six years ago)$4,000 $20,000

The HBM stock and the inventory were given to Hannah's church, and the baseball card collection was given to the United Way. Both donees promptly sold the property for the stated fair market value.

Disregarding percentage limitations, Hannah's current charitable contribution deduction is:

: $28,000.

$51,200.

$52,000.

$67,200.

None of the above

18. Question : (TCO 3) Karen, a calendar year taxpayer, made the following donations to qualified charitable organizations in the current year:

Basis Fair Market Value

Cash donation to Midwest State University $30,000$ 30,000

Unimproved land to the city of Terre Haute, Indiana $70,000$210,000

The land had been held as an investment and was acquired 4 years ago. Shortly after receipt, the city of Terre Haute sold the land for $210,000. Karen's AGI is $450,000.

The allowable charitable contribution deduction is:

: $84,000 if the reduced deduction election is not made.

$100,000 if the reduced deduction election is not made.

$165,000 if the reduced deduction election is not made.

$170,000 if the reduced deduction election is made.

None of the above

19. Question : (TCO 3) Josh has investments in two passive activities. Activity A, acquired three years ago, produces income in the current year of $60,000. Activity B, acquired last year, produces a loss of $100,000 in the current year. At the beginning of this year, Josh's at-risk amounts in Activities A and B are $10,000 and $100,000, respectively. What is the amount of Josh's suspended passive loss with respect to these activities at the end of the current year?

: $0

$36,000

$40,000

$100,000

None of the above

20. Question : (TCO 3) Sandra acquired a passive activity three years ago. Until last year, the activity was profitable and her at-risk amount was $300,000. Last year, the activity produced a loss of $100,000, and in the current year, the loss is $50,000. Assuming Sandra has received no passive income in the current or prior years, her suspended passive loss from the activity is:

: $90,000 from last year and $50,000 from the current year.

$100,000 from last year and $50,000 from the current year.

$0 from last year and $0 from the current year.

$50,000 from the current year.

None of the above

21. Question : (TCO 3) Vic's at-risk amount in a passive activity is $200,000 at the beginning of the current year. His current loss from the activity is $80,000. Vic had no passive activity income during the year. At the end of the current year:

: Vic has an at-risk amount in the activity of $120,000 and a suspended passive loss of $80,000.

Vic has an at-risk amount in the activity of $200,000 and a suspended passive loss of $80,000.

Vic has an at-risk amount in the activity of $120,000 and no suspended passive loss.

Vic has an at-risk amount in the activity of $200,000 and no suspended passive loss.

None of the above

Points Received: 6 of 6

Comments:

22. Question : (TCO 2) The installment method applies to which of the following sales with payments being made in the year following the year of sale?

: An automobile dealer's sale of an SUV

A cash basis individual's sale of General Electric common stock

A manufacturer's sale of fully depreciated equipment

All of the above

None of the above

23. Question : (TCO 2) In 2009, Helen sold property and reported her gain by the installment method. Her basis in the property was $150,000 ($250,000 cost less $100,000 of depreciation). Helen sold the property for $375,000, with $75,000 due on the date of the sale and $300,000 (plus interest at the federal rate) due in 2010. Helen's recognized installment sale gain in 2010 is:

: $0.

$45,000.

$75,000.

$100,000.

None of the above

24. Question : (TCO 2) Pedro, NOT a dealer, sold real property that he owned with an adjusted basis of $60,000 and encumbered by a mortgage for $28,000 to Pat in 2008. The terms of the sale required Pat to pay $14,000 cash, assume the $28,000 mortgage, and give Pedro eleven notes for $6,000 each (plus interest at the federal rate). The first note was payable two years from the date of sale, and each succeeding note became due at two-year intervals. Pedro did NOT elect out of the installment method for reporting the transaction. If Pat pays the 2011 note as promised, what is the recognized gain to Pedro in 2010 (exclusive of interest)?

: $6,000

$3,600

$2,400

$0

None of the above

25. Question : (TCO 2) Both economic and social considerations can be used to justify:

: various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education.

disallowance of any deduction for expenditures deemed to be contrary to public policy (e.g., fines, penalties, illegal kickbacks, bribes to government officials).

favorable tax treatment for accident and health plans provided for employees and financed by employers.

allowance of a deduction for state and local income taxes paid.

None of the above

Instructor Explanation: Chapter 1

(TCO 3) Marge's auto, which is used for business purposes only, is totally destroyed by a fire. The fair market value of the auto was $8,000 at the time of the fire and the adjusted basis was $10,000. Calculate the loss, and determine whether it is a deduction for or a deduction from AGI.

2. Question : (TCO 1) In 2010, David had the following transactions:

Salary $75,000

Capital loss from a stock investment ($6,000)

Moving expense to change jobs ($12,500)

Received repayment of $9,000 loan he made to a friend in 2007 (also interest of $900) $9,900

Property taxes on personal residence $1,500

Based on the information given above, determine David's AGI. Be sure to show your work.