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ACCT 324 Final Exam (Updated)

1. (TCOs 2 and 3) On January 1, 2012, Jasmine made a $50,000 interest-free loan to her son, Jason, who used the money to retire a mortgage on his personal residence. Jason’s only sources of income were a salary of $75,000 and $1,500 interest income on a savings account. The relevant federal interest rate was 6%. Based on the above information, for 2012, _____. (Points : 5)
Jason is not required to recognize the interest income from the bank account.
Jasmine must recognize $3,000 interest income from the loan
Jasmine must recognize $1,500 interest income from the loan
Jasmine must recognize $3,045 interest income from the loan
Jasmine recognizes no imputed interest income from the loan
Question 2.2. (TCOs 3, 4, 5, and 7) Which of the following is not a requirement for alimony deductions under post-1984 decrees and agreements? (Points : 5)
The payments must end on the death of the payee.
The payments must be in cash.
The payor and the payee may not live in the same household at the time of the payments as long as they are divorced.
The decree must specify that the payments are alimony.
None of the above
Question 3.3. (TCOs 3, 4, 5, and 7) Maxwell owns 2,000 shares of stock in Falcon Corporation, worth $50 per share. The 2,000 shares were purchased in 2003 for $10 per share. In 2012, the corporation issued a 30% stock dividend to all common shareholders with an option of receiving either the stock or $30,000. Maxwell selected the stock. What is Maxwell’s gross income from the above? (Points : 5)
$0
$6,000
$30,000
Maxwell can elect to recognize income of $30,000 or reduce his basis in the stock by $30,000.
None of the above
Question 4.4. (TCOs 3, 4, 5, and 7) During the current year, Harold sustained a serious injury in the course of his employment. As a result of the injury, he received the following payments during the year.
Unemployment compensation $7,000
Worker’s compensation $5,000
Reimbursement from his employer’s accident and health plan for medical expenses paid by Harold $1,000
Damages for physical personal injuries $8,000
What is the amount to be included in Harold’s gross income for the current year?
(Points : 5)
$5,000
$6,000
$7,000
$8,000
None of the above
Question 5.5. (TCOs 3, 4, 5, and 7) Daren has investments in two passive activities. Activity A, acquired 3 years ago, produces income in the current year of $375,000. Activity B, acquired last year, produces a loss of $475,000 in the current year. At the beginning of this year, Daren’s at-risk amounts in Activities A and B are $250,000 and $400,000, respectively. What is the amount of Daren’s suspended passive loss with respect to these activities at the end of the current year? (Points : 5)
$0
$25,000
$50,000
$75,000
$175,000
Question 6.6. (TCOs 3, 4, 5, and 7) Kobe, age 19, is a full-time student at State College and a candidate for a bachelor’s degree. During 2012, he received the following payments.
Wages $3,000
State scholarship for 10 months (tuition and books) $5,000
Loan from college financial aid office $2,750
Cash support from parents $2,500
Cash dividends $1,500
Cash prize awarded in contest $1,250
$16,000
What is Kobe’s adjusted gross income for 2012? (Points : 5)
$5,500
$5,750
$7,000
$9,750
None of the above
Question 7.7. (TCOs 3, 4, 5, and 7) Paul sold land (a capital asset) to his friend Gregory for $2 million cash and a 6% note for $2 million due in 2 years. His basis in the land was $200,000. Which of the following statements is correct? (Points : 5)
If the federal rate is 11%, then interest will not be imputed.
If the federal rate is 12%, then interest will not be imputed.
If the federal rate is 8.5%, then interest will be imputed at 9%.
If the federal rate is 10%, then interest will be imputed at 9%.
None of the above
Question 8.8. (TCOs 3, 4, 5, and 7) Carrie owns a mineral property that had a basis of $15,000 at the beginning of the year. The property qualifies for a 22% depletion rate. Gross income from the property was $150,000, and net income before the percentage depletion deduction was $100,000. What is Carrie’s tax preference for excess depletion? (Points : 5)
$0
$15,000
$18,000
$33,000
None of the above

1. (TCOs 7, 8, and 9) In 2010, Bridget sold land to her son Caleb for $150,000 cash and an installment note for $600,000. Bridget’s adjusted basis was $550,000. In 2012, after paying $10,000 interest but nothing on the principal, Caleb sold the land for $850,000 cash. As a result of the second disposition, what gain must Bridget recognize in 2012?
(Points : 5)
$600,000
$200,000
$160,000
$40,000
None of the above
Question 2.2. (TCOs 2, 8, and 9) Trigger Inc. provides group-term life insurance only to the officers of the corporation. Carlota, a vice president, received $250,000 of coverage for the year at a cost to Trigger Inc. of $1,600. The uniform premiums (based on Carlota’s age) are $6 a year for $1,000 of protection (i.e., $1,500 for Carlota). How much must Carlota include in gross income this year?
(Points : 5)
$0
$1,200
$1,500
$1,600
None of the above
Question 3.3. (TCOs 2, 8, and 9) If a vacation home is used primarily for personal use (rented for fewer than 15 days per year), which of the following is true?
(Points : 5)
All expenses are deductible from AGI.
Expenses must be allocated between rental and personal use.
Depreciation is allowed as a deduction.
All rental income is excluded from AGI.
None of the above
Question 4.4. (TCOs 2 and 11) Judy, a calendar-year cash-basis taxpayer, owns and operates several TV rental outlets in North Carolina and wants to expand into the TV rental business in South Carolina and Georgia. During 2012, she spends $30,000 to investigate TV rental businesses in South Carolina and $15,000 to investigate TV rental businesses in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to these expenses, Judy should _____. (Points : 5)
amortize $30,000 over 60 months and capitalize $15,000
expense $45,000 for 2012
expense $15,000 for 2012 and capitalize $30,000
capitalize $45,000
None of the above
Question 5.5. (TCOs 2 and 11) Kelsey, a stock broker, owns a separate business in which he participates in the current year. He has one employee who works part-time in the business. Which of the following statements is correct?
(Points : 5)
If Kelsey participates for 300 hours and the employee participates for 300 hours during the year, then Kelsey does not qualify as a material participant.
If Kelsey participates for 50 hours and the employee participates for 2 hours during the year, then Kelsey probably does not qualify as a material participant.
If Kelsey participates for 501 hours and the employee participates for 2,000 hours during the year, then Kelsey does not qualify as a material participant.
Kelsey will automatically be a material participant in an activity in the current year if he was a material participant in a personal service activity for the 3 prior years.
All of the above
Question 6.6. (TCOs 2 and 11) During the year, Clara took a trip from Chicago to Rome. She was away from home for 20 days. She spent 6 days vacationing and 14 days on business (including the 3 travel days). Her expenses are as follows.
Airfare $1,600
Lodging (20 days x $70) $1,400
Meals (20 days x $120) $2,400
Valet service (cleaning of laundry) $160
Chris’s deduction is _____.
(Points : 5)
$3,100
$4,360
$5,080
$5,560
None of the above
Question 7.7. (TCOs 2 and 11) Nicholas loaned Lyle (a friend) $30,000 in 2011 with the agreement that the loan would be repaid in 2 years. In 2012, Lyle filed for bankruptcy and Nicholas learned that he could expect to receive $0.50 on the dollar. In 2012, final settlement was made and Nicholas received $16,000. Assuming the loan is a nonbusiness bad debt, how should Nicholas account for the bad debt?
(Points : 5)
$14,000 ordinary loss in 2012
$15,000 ordinary loss in 2010, and $9,000 ordinary loss in 2012
$14,000 short-term capital loss in 2012
$15,000 short-term capital loss in 2010, and $9,000 short-term capital loss in 2012
None of the above
Question 8.8. (TCO 1) The federal income tax applicable to corporations _____.
(Points : 5)
requires the determination of adjusted gross income
allows a deduction for dependency exemptions
allows a deduction for personal exemptions
allows a deduction for the standard deduction
None of the above
Question 9.9. (TCOs 2, 3, 6, 8, 9, and 10) On January 10, 2011, Sparrow Corporation purchased stock in Macaw Corporation (the stock is § 1244 small business stock) for $275,000. On October 15, 2012, Sparrow sold the stock for $150,000. How should Sparrow treat the loss on the sale of the stock?
(Points : 5)
$125,000 ordinary loss
$125,000 short-term capital loss
$125,000 long-term capital loss
$50,000 ordinary loss and $75,000 long-term capital loss
None of the above
Question 10.10. (TCOs 2, 3, 6, 8, 9, and 10) Kirk had an adjusted gross income of $60,000. During the year, his personal use summer home was partially destroyed by a fire. Pertinent data with respect to the home follows.

Cost basis $225,000
Value before casualty $235,000
Value after casualty $165,000
Kirk was insured for 70% of his actual loss, and he received the insurance settlement. What is Kirk’s allowable casualty loss deduction? (Points : 5)
$70,000
$21,000
$15,000
$14,900
$0
Question 11.11. (TCOs 2, 3, 6, 8, 9, and 10) Sanford is in the farming business. During the year, a tornado destroyed one of his barns. The adjusted basis of the barn was $90,000. The amount of the damage was complete destruction. The barn was not insured. Supposing Sanford has adjusted gross income for the year of $100,000 (before considering the $90,000 loss), determine the amount of loss he can deduct on his income tax return for the current year. (Points : 5)
$0
$90,000
$89,900
$79,900
None of the above
Question 12.12. (TCOs 2, 3, 6, 8, 9, and 10) Paris is a cash-basis landlord. An earthquake destroyed one of his residential rental buildings. Even though the lease required the tenants (all cash basis) to continue to pay rent, Paris accepts a payment of $2,000 in full cancellation of the lease. As a result of these events, _____.
(Points : 5)
Paris has $2,000 of ordinary income
Paris has $2,000 of capital gain
Paris’s tenants have $2,000 of ordinary income
Paris has a $2,000 capital loss
None of the above
Question 13.13. (TCOs 2, 3, 6, 8, 9, and 10) Kiara, a married taxpayer filing a joint return, had the following items for 2012.
•Salary of $65,000
•Loss of $45,000 on the sale of stock acquired 2 years ago from Mac, an investor
•Gain of $40,000 on the sale of § 1244 stock acquired 3 years ago
•Stock acquired on January 15, 2012 for $5,000 became worthless on July 1, 2012

Determine Kiara’s AGI for 2012. (Points : 5)
$65,000
$62,000
$55,000
$50,000
None of the above
Question 14.14. (TCO 6) During 2012, taxpayers decided to sell their residence, which had a basis of $350,000. They had owned and occupied the residence for 8 years. To make it more attractive to prospective buyers, they had it painted in April at a cost of $5,000 and paid for the work immediately. They sold the house in May for $500,000. Broker’s commissions and other selling expenses amounted to $30,000. They purchased a new residence in June for $250,000. What is the recognized gain? (Points : 5)
$0
$115,000
$120,000
$150,000
None of the above
Question 15.15. (TCO 6) Leopard Corporation has ordinary income from operations of $50,000, net long-term capital gain of $20,000, and net short-term capital loss of $30,000. What is the taxable income for 2012? (Points : 5)
$40,000
$47,000
$50,000
$70,000
None of the above
Question 16.16. (TCO 6) Mason exchanges a machine used in his trade or business for another machine. In addition, he gives shares of Intel stock, which have a fair market value of $27,000 and a basis of $23,000. The old machine has an adjusted basis of $30,000, and the new machine has a fair market value of $90,000. What is the recognized gain or loss and the basis of the new machine? (Points : 5)
$4,000 and $61,000
$33,000 and $61,000
$4,000 and $90,000
$33,000 and $90,000
None of the above
Question 17.17. (TCO 6) Which of the following is § 1231 property? (Points : 5)
Livestock held for dairy purposes
Property where casualty losses exceed casualty gains for the taxable year
Property not held for the long-term holding period
Real property held for investment
None of the above
Question 18.18. (TCOs 2, 6, and 11) Juaquin owns five activities. He elects not to group them together as a single activity under the appropriate economic unit standard. He participates for 140 hours in Activity A, 165 hours in Activity B, 196 hours in Activity C, 100 hours in Activity D, and 85 hours in Activity E. Which of the following statements is correct? (Points : 5)
Activities A, B, C, D, and E are all significant participation activities.
Activities A, B, C, and D are all significant participation activities.
Juaquin is a material participant with respect to Activities A, B, and C only.
Juaquin is a material participant with respect to Activities A, B, C, D, and E.
None of the above

4. (TCOs 1, 2, 3, and 11) Individuals who receive substantial Social Security benefits are usually not eligible for the tax credit for the elderly or disabled because these benefits effectively eliminate the base upon which the credit is computed. Explain. (Points : 10)
Ans) The credit computation is reduced by the qualifying income base amount. Those who receive Social Security benefits or have a high AGI can have the credit base reduced to zero. That being said, this credit is nonrefundable which means the allowable credit is not supposed to exceed the tax liability.

3. (TCOs 1, 2, 3, and 11) Travel status requires that the taxpayer be away from home overnight. (1) What does away from home overnight mean? (2) What tax advantages result from being in travel status? (Points : 10)
1) What does away from home overnight mean?
Ans) To deduct the costs of lodging and meals (and incidentals-see below) you must generally stay somewhere overnight. In other words, away from your regular place of business longer than an ordinary day’s work and you need to sleep or rest to meet the demands of your work while away from home. Otherwise, your costs are considered local transportation costs and the costs of lodging and meals are not deductible.
2) What tax advantages result from being in travel status?
Ans) If “travel status” exists, many otherwise nondeductible expenses (e.g., meals, lodging, transportation) become deductible.

2. (TCOs 2, 3, and 11) When a taxpayer disposes of a passive activity by gift, what happens to any unused passive losses? (Points : 15)
Ans) Special rule for gifts:
In the case of a disposition of any interest in a passive activity by gift—
(A) the basis of such interest immediately before the transfer shall be increased by the amount of any passive activity losses allocable to such interest with respect to which a deduction has not been allowed by reason of subsection (a), and
(B) such losses shall not be allowable as a deduction for any taxable year.

In a disposition of a taxpayer’s interest in a passive activity by gift, the suspended losses are added to the basis of the property.
1. (TCOs 1, 6, 8, and 11) Due to the population change, the Goose Creek School District has decided to close one of its high schools. Because it has no further need of the property, the school is listed for sale. The two bids it receives are as follows.

United Methodist Church $1,700,000
Planet GMC Motors $1,600,000
The United Methodist Church would use the property to establish a sectarian middle school. Planet, a well-known car dealership, would revamp the property and operate it as a branch location.

If you were a member of the school district board, what factors would you consider in evaluating the two bids? (Points : 20)
Ans) Although the bid from the United Methodist Church is higher, several other factors need to be considered. Does, for example, Goose Creek School district exempt property owned by churches from its ad valorem taxes? If so, losing this property from the tax base could prove very costly over the long run. Also, it is probable that income-producing property (such as a car dealership) would be taxed at a higher rate than that owned by a nonprofit organization (a school operated by a church). This assumes, of course, that the school would not be taxed at all. The auto dealership also would generate sales tax.

3. (TCOs 9 and 12) In connection with facilitating the function of the IRS in the administration of the tax laws, comment on the utility of the following: (1) the power to make adjustments to properly reflect a taxpayer’s income, and (2) the availability of interest and penalties for taxpayer noncompliance. (Points : 15)
Ans)
1) This power is particularly useful to prevent taxpayers from manipulating accounting procedures.
2) The imposition of extra penalties, in addition to the tax owed, definitely deters taxpayer noncompliance
2. (TCOs 1, 3, and 10) In 2012, Walter had the following transactions.

Salary $80,000
Capital loss from a stock investment ($4,000)
Moving expense to change jobs ($10,000)
Received repayment of $10,000 loan he made to his brother in 2007 (includes interest of $1,000) $11,000
Property taxes on personal residence $2,000
Based on the information given above, determine Walter’s AGI. Be sure to show your work. (Points : 15)
Ans) 80,000 (salary) – $3,000 (allowable loss on stock investment) – $10,000 (moving expenses) + $1,000 (interest on loan) = $68,000 .
-The unused loss of $1,000 from the stock investment sale can be carried over to 2013.
-The loan repayment of $10,000 is a return of capital and has no effect on gross income.
-Property taxes paid on a personal residence is a deduction from AGI and has no impact on the determination of AGI
1. (TCOs 1, 2, 4, and 7) Caroline and Clint are married, have no dependents, and file a joint return in 2013. Use the following selected data to calculate their federal income tax liability.

AMTI $325,000
Regular income tax liability $61,001
AMT tax preferences $107,000
Ans) The Alternative Minimum Tax exemption amount for tax year 2013 is $51,900 ($80,800, for married couples filing jointly), set by the American Taxpayer Relief Act of 2012, which indexes future amounts for inflation. The 2012 exemption amount was $50,600 ($78,750 for married couples filing jointly).
AMTI $325,000
Regular income tax liability 61,001
AMT tax preferences 107,000
ANSWER: The AMT is calculated as follows:

AMTI $325,000
AMT exemption [$80,800 – 25%($325,000 – $156,500)] (38,675)
AMT base $235,025

$182,500 × 26% =
$ 47,450
$52,525 × 28% = 14,707
Tentative AMT $ 62,157
Regular income tax liability (42,066)
AMT $ 20,091

4. (TCOs 1 and 5) Joe is 50 years old, unmarried, and without children. He has earnings during 2012 of $8,000. He is not claimed as a dependent on another taxpayer’s return. Does he qualify for the earned income credit? If so, calculate the amount of credit that is available to him. (Points : 20)
Ans) Ans) Earned income of $8,000 (but subject to ceiling of $5,970) $5,970
Rate × 7.65%
Tentative credit $475
Less:
Credit phase-out
Earned income $8,000
Base for phase-out (7,470)
Excess $530
Phase-out rate × 7.65% (117)
Available earned income credit $340