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Income Tax Accounting Problems

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(1) A single taxpayer provided the following information for 2006:

Salary $40,000
Interest on local government bonds $4,000
(qualifies as a tax exclusion)
Allowable itemized deductions $8,000

What is taxable income?

a. $28,700
b. $31,700
c. $32,700
d. $32,000

(2) This year, Alan purchased property from Scott by assuming an existing mortgage of $20,000 and agreed to pay an additional $30,000, plus interest, in the 3 years following the year of sale (i.e. $10,000 annual payments for three years, plus interest). Scott had an adjusted basis of $22,000 in the building. What are the sales price and contract price in this transaction?

Sales Price Contract Price
a. $50,000 $50,000
b. $20,000 $30,000
c. $50,000 $30,000
d. $50,000 $20,000

(3) Mark has a $16,000 Section 1231 loss, a $12,000 Section 1231 gain, and a salary of $50,000. What is the treatment of these items in Mark's AGI?

a. Mark has a LTCG of $12,000 and a net ordinary income of $34,000.
b. Mark has net LTCG of $9,000 and $37,000 of net ordinary income.
c. Mark has a $3,000 LTCL which is deductible for AGI making AGI $47,000. He also has a $1,000 LTCL carryover.
d. The 1231 gains and losses are treated as ordinary gains and losses making Mark's AGI for the year $46,000.

(4) In 2006, Carol, who is single, finished graduate school and began paying on her student loan. The proceeds of the loan were used to pay her qualified higher education expenses, and she never had any type of educational assistance or scholarships excluded from her income in the past. The amount of interest paid during the year amounted to $3,800. What is the amount and classification of her student loan interest education deduction if her modified AGI is $40,000?

a. $2,500 for AGI
b. $2,500 from AGI
c. $3,800 from AGI
d. $3,800 for AGI

(5) Ann's tentative minimum tax is computed by multiplying the AMT tax rates by her

a. alternative minimum taxable income.
b. taxable income.
c. tentative alternative taxable income.
d. alternative minimum tax base.

(6) On July 31 of the current year, Brian borrows $120,000 to purchase a new fishing boat. The loan is secured by his personal residence. On the date of the loan, the outstanding balance on the original debt incurred to purchase the residence is $300,000 and the FMV of the home is $450,000. Interest on what total amount is deductible by Brian in the current year?

a. $450,000
b. $400,000
c. $420,000
d. $300,000

(7) In 2006, Wanda, a single taxpayer who is age 40, reports the following items of income and expense:

Adjusted gross income $40,000
Medical expenses (before percentage limit) $5,000
Itemized deductions other than medical $4,000

In 2007, Wanda receives a reimbursement for last year's medical expenses of $1,200. As a result, Wanda must

a. include $850 in gross income for 2007.
b. amend the 2006 return and reduce 2007's medical expenses by $1,200.
c. include $2,000 in gross income for 2007.
d. include $1,200 in gross income for 2007.

(8) In 2006, Tammy filed her 2005 state income tax return and paid taxes of $800. Also in 2006, Tammy's employer withheld state income tax of $750 from Tammy's salary. In 2007, Tammy filed her 2006 state income tax return and paid an additional $600 of state income tax. How much state income tax can Tammy deduct on her 2006 federal income tax return for state income tax?

a. $1,400
b. $1,550
c. $2,150
d. $1,350

(9) During the year, Joe and Laura Davis, cash basis taxpayers, paid the following taxes:

State gift tax $1,000
Property tax on home in the US $2,100
State income tax $1,000
Estimated federal income tax $500
Estimated state income tax $1,800
Sales tax on new auto (60% for business) $2,000

What amount can Joe and Laura claim as an itemized deduction for taxes on their federal income tax return for the year?

a. $5,900
b. $6,400
c. $5,700
d. $4,900

(10) Michelle recognizes $35,000 of Section 1231 gains and $25,000 of Section 1231 losses during the current year. The only other Section 1231 item was a $4,000 loss three years ago. This year, Michelle must report

NLTCG Ordinary Income
a. $6,000 $4,000
b. $4,000 $6,000
c. $10,000 $0.00
d. $4,000 $10,000

(11) In a nontaxable exchange, Jeffrey traded in a truck having an adjusted basis of $4,500 and a FMV of $10,000, for a new truck having a FMV of $15,000. In addition, Henry paid cash of $5,000. What is Jeffrey's basis in the new truck?

a. $9,500
b. $15,000
c. $4,500
d. $5,500

(12) Lucy exchanges business equipment with a $50,000 adjusted basis for $5,000 cash and business equipment with a $48,000 FMV. What is the amount of gain recognized on the exchange?

a. $3,000
b. $5,000
c. $2,000
d. $0.00

(13) In August of 2006, Shelly acquires and places into service business equipment costing $200,000. The equipment is classified as 5-year recovery property. No other acquisitions are made during the year. Shelly elects to expense the maximum amount under Section 179. Shelly's total deductions for the year are

a. $108,000
b. $126,400
c. $40,000
d. $148,000

(14) In April of this year, Susan acquired a machine for $50,000 for use in her business. The machine is classified as 7-year property. Susan makes no elections with regard to the property. Susan's depreciation on the machine this year is

a. $10,000
b. $5,000
c. $50,000
d. $7,145

(15) During the year, Andrew, an attorney, reports $140,000 of active business income from his law practice. He also owns two passive activities. From Activity X, he earns $20,000 of income, and from Activity Y, he incurs a $30,000 loss. As a result, Andrew

a. reports AGI of $160,000 with a $30,000 loss carryover
b. reports AGI of $140,000 with a $30,000 loss carryover
c. reports AGI of $130,000
d. reports AGI of $140,000 with a $10,000 loss carryover

(16) Noel, a single individual, owns stock with a FMV of $18,000 and a basis of $12,000. Noel wants to gift the stock to Hanna. Which of the following statements is correct?

a. Hanna's basis will be $12,000 for the purposes of determining a loss on the sale or exchange of the stock.
b. Noel will have to recognize gain of $6,000.
c. Noel's gift will not be a taxable gift (subject to gift tax).
d. Hanna's basis will be $18,000 for purposes of determining a loss on the sale or exchange of the stock.

(17) Emily, who is single, incurred $3,500 for unreimbursed employee expenses, $6,500 for mortgage interest and real estate taxes on her home, and $500 for investment counseling fees. Emily's AGI is $80,000. Allison's allowable deductions from AGI are:

a. $6,500
b. $10,500
c. $8,400
d. $8,900

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Solution Preview

Dear Student,

Thank you for using BM.
Below are my answers.

Anna Liza Gaspar

Question 1: Answer - D

Question 2: Answer - C
Sales price = 20,000 + 30,000 = 50,000
Contract price = 30,000

Question 3: Answer - D
Net gain (loss): 12,000-16,000=(4,000) treated as ordinary which is then deductible for AGI
Net ordinary income: 50,000-4,000=46,000

Question 4: Answer - A
The maximum amount of deductible interest is 2,500 and deductible to arrive at AGI

Question 5: Answer - A
Applying a 26/28% rate schedule to the AMTI gives the "Tentative Minimum Tax" (TMT)

Question 6: ...

Solution Summary

This solution discusses income tax accounting problems.

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4. Oliver and Wendell are the two equal shareholders of Holmes Inc, an S corporation. It made an S election in its first year of operations. Each shareholder has a $10,000 basis in his stock at the beginning of the year. The corporation has $56,000 of net income from operations for the year and made a cash distribution of $80,000, which was divided equally between the two shareholders. Which of the following is a true statement?

A. The shareholders will have a dividend income.
B. The shareholders will have a capital gain on the distribution.
C. The shareholders will have a positive basis in their stock.
D. None of the above

5. Parent Corporation formed Subsidiary Corporation on April 1, 2003, by transferring $80,000 cash for 100% of the Subsidiary stock. In the Year 2003 consolidated tax return, CTI included a taxable loss of $(70,000) from Subsidiary. For the Year 2004 consolidated tax return, CTI included a taxable loss of $(50,000) from Subsidiary. No dividends were paid by Subsidiary to Parent in either 2003 or 2004. On January 1, 2005, Parent sold all of the Subsidiary stock to an unrelated buyer for $100,000 cash. What is Parent's gain on the sale?

A. $ 20,000
B. $ 100,000
C. $ 140,000
D. $ 80,000

6. Cheesehead Corporation is a U.S. corporation that only does business in foreign countries. During the current year it had taxable income of $600,000 from Foreign Country A and taxable income of $400,000 from Foreign Country B. The income from A was from an active trade or business basket, while the amount from B was from a passive income basket. The amount of foreign taxes paid in each country were as follows:
Country A: $180,000
Country B: $150,000

What is the allowed foreign tax credit for Cheeshead Corporation for the current year?

A. 0
B. $340,000
C. $330,000
D. $316,000

7. This year Mandy Corporation's (tax rate = 34%) foreign subsidiary paid it a $700,000 dividend (all of its after tax income.) The subsidiary paid $175,000 of income tax to Country Q. What is the amount of dividend income that Mandy must report in its U.S. tax return?

A. 0
B. $700,000
C. $875,000
D. $360,000

8. In 2004, Blueberry Inc. engaged in a corporate acquisition of Strawberry Corporation. At the time of the acquisition, Strawberry had a net operating loss (NOL) of $100,000 with seven years remaining in the carryforward period. Assuming that the acquisitions is a taxable acquisition structured as a merger, and it occurs exactly at the middle of the year, how much of the NOL can Blueberry use in its 2004 tax return if its own taxable income for 2004 is $120,000, computed before the NOL is used?

A. $100,000
B. $ 60,000
C. 0
D. $50,000

9. Barry gave his son shares of stock when his tax basis was $100,000 and its FMV was $120,000. No gift taxes were paid on the transfer. The son sold the stock for $70,000 cash. What is his taxable gain or loss on the sale?

A. $50,000 loss
B. $30,000 loss
C. $15,000 gain
D. $34,000 gain

10. Colleen gave her 35-year-old grandson a rental property. No gift taxes were paid. His Schedule E for the first year showed a net profit of $30,000 on $80,000 of gross rents. Colleen's marginal tax rate for that current year was 35%; her grandson's was 15%. What is the tax savings or tax cost experienced by the "family unit" of Colleen and her grandson for the first year from the "shifting" taking place through this transfer?

A. $ 7,500 net tax savings.
B. $ 12,000 net tax savings.
C. $ 4,500 net tax savings.
D. $ 6,000 net tax savings.

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