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Multiple Choice: Economic Units and Accounting

____ 121. Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit?
a. The similarities and differences in types of business.
b. The extent of common control.
c. The extent of common ownership.
d. The geographic location.
e. All of the above.

____ 122. Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit?
a. The interdependencies between the activities.
b. The extent of common control.
c. The extent of common ownership.
d. The geographical location.
e. All of the above are relevant factors.

____ 123. Tess owns a building in which she rents apartments to tenants and operates a restaurant. Which of the following statements is incorrect?
a. If 60% of Tess's gross income is from apartment rentals and 40% is from the restaurant, the rental operation and the restaurant business must be treated as separate activities.
b. If 95% of Tess's gross income is from apartment rentals and 5% is from the restaurant, she may treat the rental operation and the restaurant business as a single activity that is a rental activity.
c. If 5% of Tess's gross income is from apartment rentals and 95% is from the restaurant, she may treat the rental operation and the restaurant business as a single activity that is not a rental activity.
d. If 98% of Tess's gross income is from apartment rentals and 2% is from the restaurant, the rental operation and the restaurant business must be treated as a single activity that is not a rental activity.
e. None of the above.

____ 124. Lew owns five activities, and he elects not to group them together as a single activity under the "appropriate economic unit" standard. During the year, he participates for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, 110 hours in Activity D, and 100 hours in Activity E. Which of the following statements is correct?
a. Activities A, B, C, D, and E are all significant participation activities.
b. Lew is a material participant in Activities A, B, C, and D only.
c. Lew is a material participant in Activities A, B, C, D, and E.
d. None of the above.

____ 125. Paula owns four separate activities. She elects not to group them together as a single activity under the "appropriate economic unit" standard. Paula participates for 130 hours in Activity A, 115 hours in Activity B, 260 hours in Activity C, and 100 hours in Activity D. She has one employee, who works 125 hours in Activity D. Which of the following statements is correct?
a. Activities A, B, C, and D are all significant participation activities.
b. Paula is a material participant with respect to Activities A, B, C, and D.
c. Paula is not a material participant with respect to Activities A, B, C, and D.
d. Losses from all of the activities can be used to offset Paula's active income.
e. None of the above.

____ 126. Maria, who owns a 50% interest in a restaurant, has been a material participant in the restaurant activity for the last 20 years. She retired from the restaurant at the end of last year and will not participate in the restaurant activity in the future. However, she continues to be a material participant in a retail store in which she is a 50% partner. The restaurant operations produce a loss for the current year, and Maria's share of the loss is $80,000. Her share of the income from the retail store is $150,000. She does not own interests in any other activities. Which of the following statements is correct?
a. Maria cannot deduct the $80,000 loss from the restaurant because she is not a material participant.
b. Maria can offset the $80,000 loss against the $150,000 of income from the retail store.
c. Maria will not be able to deduct any losses from the restaurant until she has been retired for at least three years.
d. None of the above.

____ 127. Jenny spends 32 hours a week, 50 weeks a year, operating a DVD rental store that she owns. She also owns a music store in another city that is operated by a full-time employee. Jenny spends 140 hours per year working at the music store. She elects not to group them together as a single activity under the "appropriate economic unit" standard. Which of the following statements is correct?
a. Neither store is a passive activity.
b. Both stores are passive activities.
c. Only the DVD rental store is a passive activity.
d. Only the music store is a passive activity.
e. None of the above.

____ 128. Irving invests in vacant land for the purpose of realizing a profit on its appreciation. He leases the land during the period he holds it. The unadjusted basis of the property is $25,000 and its fair market value is $35,000. The lease payments are $400 per year. Which of the following statements is correct?
a. The leasing activity will be treated as a rental activity and will be treated as a passive activity regardless of how many hours Irving participates.
b. The leasing activity will be treated as a rental activity and will not be treated as a passive activity if Irving qualifies as a real estate professional.
c. The leasing activity will not be treated as a rental activity.
d. None of the above.

____ 129. Rachel acquired a passive activity several years ago. Until 2003, the activity was profitable, and Rachel's at-risk amount at the beginning of 2003 was $300,000. The activity produced losses of $80,000 in 2003, $50,000 in 2004, and $70,000 in 2005. In 2006, the activity produced income of $90,000. How much is Rachel's suspended passive loss at the beginning of 2007?
a. $150,000.
b. $110,000.
c. $60,000.
d. $0.
e. None of the above.

____ 130. Rita earns a salary of $150,000, and invests $40,000 for a 20% interest in a passive activity. Operations of the activity result in a loss of $250,000, of which Rita's share is $50,000. How is her loss characterized?
a. $40,000 is suspended under the passive loss rules and $10,000 is suspended under the at-risk rules.
b. $40,000 is suspended under the at-risk rules and $10,000 is suspended under the passive loss rules.
c. $50,000 is suspended under the passive loss rules.
d. $50,000 is suspended under the at-risk rules.
e. None of the above.

____ 131. 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:
a. Vic has an at-risk amount in the activity of $120,000 and a suspended passive loss of $80,000.
b. Vic has an at-risk amount in the activity of $200,000 and a suspended passive loss of $80,000.
c. Vic has an at-risk amount in the activity of $120,000 and no suspended passive loss.
d. Vic has an at-risk amount in the activity of $200,000 and no suspended passive loss.
e. None of the above.

____ 132. Carmen, a single taxpayer, has $80,000 in salary, $10,000 in income from a limited partnership, and a $30,000 passive loss from a real estate rental activity in which she actively participates. Her modified adjusted gross income is $80,000. Of the $30,000 loss, Carmen may deduct:
a. $0.
b. $10,000.
c. $25,000.
d. $30,000.
e. Some other amount.

____ 133. Josie, an unmarried taxpayer, has $155,000 in salary, $10,000 in income from a limited partnership, and a $26,000 passive loss from a rental real estate activity in which she actively participates. If her modified adjusted gross income is $155,000, how much of the $26,000 loss is deductible?
a. $0.
b. $10,000.
c. $25,000.
d. $26,000.
e. None of the above.

____ 134. Kim made a gift to Sam of a passive activity (adjusted basis of $50,000, suspended losses of $20,000, and a fair market value of $80,000). No gift tax resulted from the transfer. Which of the following statements is true?
a. Sam's adjusted basis is $80,000.
b. Sam's adjusted basis is $50,000, and Sam can deduct the $20,000 of suspended losses in the future.
c. Sam's adjusted basis is $80,000, and Sam can deduct the $20,000 of suspended losses in the future.
d. Sam's adjusted basis is $50,000, and the suspended losses are lost.
e. None of the above.

____ 135. Ahmad is considering making a $1,000 investment in a venture which its promoter promises will generate immediate tax benefits for him. Ahmad, who normally itemizes his deductions, is in the 28% marginal tax bracket. If the investment is of a type where the taxpayer may claim either a tax credit of 25% of the amount of the expenditure or an itemized deduction for the amount of the investment, what treatment normally would be most beneficial to Ahmad and by how much will Ahmad's tax liability decline because of the investment?
a. $0, take neither the itemized deduction nor the tax credit.
b. $250, take the tax credit.
c. $280, take the itemized deduction.
d. Both options produce the same benefit.
e. None of the above.

____ 136. The components of the general business credit include all of the following except:
a. Credit for employer-provided child care.
b. Disabled access credit.
c. Research activities credit.
d. Tax credit for rehabilitation expenditures.
e. All of the above are components of the general business credit.

____ 137. Molly has generated general business credits over the years that have not been utilized. The amounts generated and not utilized follow:

2002 $ 5,000
2003 15,000
2004 10,000
2005 8,000

In the current year, 2006, her business generates an additional $30,000 general business credit. In 2006, based on her tax liability before credits, she can utilize a general business credit of up to $40,000. After utilizing the carryforwards and the current year credits, how much of the general business credit generated in 2006 is available for future years?
a. $0.
b. $2,000.
c. $23,000.
d. $28,000.
e. None of the above.

____ 138. Several years ago, Floyd purchased a structure for $150,000 that was originally placed in service in 1929. In the current year, he incurred qualifying rehabilitation expenditures of $200,000. The amount of the tax credit for rehabilitation expenditures, and the amount by which the building's basis for cost recovery would increase as a result of the rehabilitation expenditures are the following amounts:
a. $20,000 credit, $180,000 basis.
b. $20,000 credit, $200,000 basis.
c. $20,000 credit, $350,000 basis.
d. $40,000 credit, $160,000 basis.
e. None of the above.

____ 139. Three and one-half years ago, George incurred $100,000 of qualifying expenditures in rehabilitating a certified historic structure in Gulfport, MS. However, in the current year, he had to sell the structure to meet an emergency cash-flow need. Which statement does not correctly describe the tax consequences to George?
a. George must recapture an amount for the unearned tax credit for rehabilitation expenditures because the property was disposed of prematurely.
b. The basis of the property must be increased by the recapture amount for purposes of calculating the amount of gain or loss.
c. The amount of recapture is determined based on the amount of tax credit for rehabilitation expenditures originally claimed and the length of time since the rehabilitated structure was placed into service after the rehabilitation by the taxpayer.
d. The amount of recapture of the tax credit for rehabilitation expenditures is $4,000.
e. All of the above are correct.

____ 140. Black Company paid wages of $180,000, of which $40,000 was qualified wages for the work opportunity tax credit. Black Company's deduction for wages for the year is:
a. $140,000.
b. $164,000.
c. $166,000.
d. $180,000.
e. None of the above.

Solution Preview

Multiple Choice- Accounting

121. ANS: E

122. ANS: E

123. ANS: D
Rental and non-rental operations are typically treated as separate activities. However, when an insignificant proportion of the gross income is attributable to either rental or non-rental operations, both activities may be treated as a single activity. The single activity is treated as rental or non-rental, depending on which made the principal contribution to gross income. Regulations do not require this grouping so the statement that they must be treated as a single activity is incorrect.

124. ANS: B
Lew's participation in significant participation activities (A, B, C, and D) surpasses 500 hours (120 + 150 + 140 + 110 = 520). Consequently, Lew is a material participant in those activities. Activity E is not a significant participation activity because Lew did not participate for more than 100 hours.

125. ANS: E
Activities A, B, and C are all significant participation activities, but Activity D is not. Significant participation is considered when the individual's participation exceeds 100 hours during the year. The material participation standards are met in Activities A, B, and C because total participation in significant participation activities (130 + 115 + 260) exceeds 500 hours.

126. ANS: B
Since Maria was ...

Solution Summary

This solution answers various multiple choice questions regarding economic units and accounting.

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