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1. Question : (TCO 9) In terms of probability, which of the following taxpayers would least likely be audited by the IRS?
Student Answer:  Taxpayer owns and operates a check-cashing service.
 Taxpayer is a self-employed electrician.
 Taxpayer just received a $3 million personal injury award as a result of a lawsuit.
 Taxpayer just won a $1 million slot machine jackpot at a Las Vegas casino.
 Taxpayer is employed as a special agent by the IRS.

 

 2. Question : (TCO 9) A characteristic of fraud penalties is:
Student Answer:  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) Federal tax legislation generally originates in what body?
Student Answer:  Internal Revenue Service
 Senate Finance Committee
 House Ways and Means Committee
 Senate floor
 None of the above

 

 4. Question : (TCO 1) Subchapter S covers which specific area of tax law?
Student Answer:  Tax rates
 Partnerships
 Capital gains and losses
 Corporations
 None of the above

 

 5. Question : (TCO 11) Kyle, whose wife died in December 2009, filed a joint tax return for 2009. He did NOT remarry, but has continued to maintain his home in which his two dependent children live. What is Kyle’s filing status regarding 2012?
Student Answer:  Head of household
 Surviving spouse
 Single
 Married filing separately
 None of the above

 

 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 2011, Arnold’s filing status is:
Student Answer:  married filing jointly.
 married filing separately.
 head of household.
 surviving spouse.
 single.

 

 7. Question : (TCO 7) Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($350 per year), or two years in advance ($680). In September 2011, the company collected the following amounts applicable to future services:

October 2011-September 2013 services
(two-year contracts)
$72,000
October 2011-September 2012 services
(one-year contracts)
$64,000
Total $136,000

As a result of the above, Orange Cable should report as gross income:

Student Answer:  $136,000 in 2011.
 $64,000 in 2011.
 $84,000 in 2012.
 $111,000 in 2012.
 None of the above

 

 8. Question : (TCO 7) With respect to the prepaid income from services, which of the following is true?
Student Answer:  The treatment of prepaid income is the same for tax and financial accounting.
 A cash basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
 An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
 An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less.
 None of the above

 

 9. Question : (TCO 3) Section 119 excludes the value of meals from the employees’ gross income:
Student Answer:  whenever the employer pays for the meals.
 when the employer pays for the meals, if the employee makes an accounting to the employer.
 when the meals are provided for the employee on the employer’s business premises as a convenience to the employee.
 when the meals are provided for the employee on the employer’s business premises as a convenience to the employer.
 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.
Student Answer:  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) On June 1, 2010, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use (Assume that this percentage is maintained for the life of the car.). She does NOT elect to take additional first-year depreciation. Determine the cost recovery deduction for 2011.
Student Answer:  $3,060
 $3,290
 $3,360
 $6,720
 None of the above

 

 12. Question : (TCO 10) Which of the following is correct?
Student Answer:  A taxpayer generally cannot claim a deduction for payment of an obligation of a dependent.
 Expenses paid for medical care of a dependent are deductible by the payor.
 Charitable contributions paid on behalf of a dependent are deductible by the payor.
 Only A and B are correct.
 A, B, and C are correct.

 

 13. Question : (TCO 10) On May 2, 2011, Karen places in service a new sports utility vehicle that costs $70,000 and has a gross vehicle weight of 6,300 lbs. The vehicle is used 40% for business and 60% for personal use. Determine the cost recovery deduction for 2011.
Student Answer:  $1,224
 $2,800
 $7,000
 $18,000
 None of the above

 

 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?
Student Answer:  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

 

 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:

Student Answer:  $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?

Student Answer:  $0
 $15,800
 $15,900
 $35,900
 None of the above

 

 17. Question : (TCO 3) Jim purchases a ticket for $80 for a special concert by the symphony (a qualified charity). If the price of a ticket is normally $25, what is the amount allowed as a charitable deduction?
Student Answer:  $80
 $25
 $55
 $0
 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 MarketValue
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:

Student Answer:  $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) This year, Ralph made the following contributions to the University of the Northwest (a qualified charitable organization):

  • Cash: $63,000
  • Stock in Raptor, Inc. (a publicly traded corporation): $94,500

Ralph acquired the stock in Raptor, Inc. as an investment 14 months ago at a cost of $42,000. Ralph’s current AGI is $189,000.

What is Ralph’s charitable contribution deduction for this year?

Student Answer:  $56,700
 $63,000
 $94,500
 $157,500
 None of the above

 

 20. Question : (TCO 3) Several years ago, Joy acquired a passive activity. Until 2008, the activity was profitable. Joy’s at-risk amount at the beginning of 2008 was $250,000. The activity produced losses of $100,000 in 2008, $80,000 in 2009, and $90,000 in 2010. During the same period, no passive income was recognized. How much is suspended under the at-risk rules and the passive loss rules at the beginning of 2011?
Student Answer:  $0; $270,000
 $20,000; $250,000
 $30,000; $240,000
 $260,000; $10,000
 None of the above

 

 21. Question : (TCO 3) Wes’ at-risk amount in a passive activity is $25,000 at the beginning of the current year. His current loss from the activity is $35,000, and he has no passive activity income. At the end of the current year, which of the following statements is incorrect?
Student Answer:  Wes has a loss of $25,000 suspended under the passive loss rules.
 Wes has an at-risk amount in the activity of $0.
 Wes has a loss of $10,000 suspended under the at-risk rules.
 Wes has a loss of $35,000 suspended under the passive loss rules.

 

 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?
Student Answer:  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 2010, 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 2011. Helen’s recognized installment sale gain in 2011 is:
Student Answer:  $0.
 $45,000.
 $75,000.
 $100,000.
 None of the above

 

 24. Question : (TCO 2) Todd, a CPA, sold land for $200,000 plus a note for $400,000. The interest rate on the note was equal to the federal rate. The fair market value of the note was $360,000. Todd’s basis in the land was $75,000.
Student Answer:  If Todd uses the accrual basis to report the income from his practice, then he cannot use the installment method to report the gain on the sale of the land.
 If Todd uses the cash basis to report the income from his practice, then he cannot use the installment method to report the gain from the sale of the land.
 If Todd uses the installment method to report the gain, then the contract price is $600,000.
 If Todd does not use the installment method, then his gain in the year of sale is $125,000 ($200,000 – $75,000).
 None of the above

 

 25. Question : (TCO 2) Both economic and social considerations can be used to justify:
Student Answer:  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
 1. Question : (TCO 3) Joe’s automobile, which was used only for business purposes, was damaged in an accident. At the date of the accident, the fair market value of the automobile was $13,000 and its adjusted basis was $7,000. After the accident, the automobile was appraised at $4,000. Calculate Joe’s loss. Is it a for or from AGI deduction?
 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.