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Exam 8: Business Income, Deductions, and Accounting Methods

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Question 51

Multiple Choice

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Which of the following is a true statement about a request for a change in accounting method?

A) Some requests are automatically granted.
B) Most requests require the permission of the Commissioner.
C) Many requests require payment of a fee and a good business purpose for the change.
D) Form 3115 is required to be filed with a request for change in accounting method.
E) All of these are true.

F) A) and B)
G) A) and C)

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Question 52

Multiple Choice

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Which of the following types of expenditures is not subject to capitalization under the UNICAP rules?

A) selling expenditures
B) cost of manufacturing labor
C) compensation of managers who supervise production
D) cost of raw materials
E) All of these are subject to capitalization under the UNICAP rules.

F) None of the above
G) C) and D)

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Question 53

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The test for whether an expenditure is reasonable in amount is whether the expenditure was for an "arm's length" amount.

Which of the following is a payment liability?

Which of the following is likely to be a fully deductible business expense?

Which of the following types of transactions may not typically be accounted for using the cash method?

John is a self-employed computer consultant who lives and works in Dallas. John paid for the following activities in conjunction with his business. Which is not deductible in any amount? 1. Dinner with a potential client where the client's business was discussed. 2) A trip to Houston to negotiate a contract. 3) A seminar in Houston on new developments in the software industry. 4) A trip to New York to visit a school chum who is also interested in computers.

Uniform capitalization of indirect inventory costs is required for most large taxpayers.

Gabby operates a pizza delivery service. This year she paid delivery personnel $18,000 in salary. She carefully documented the use of the auto (11,700 miles this year) and her $7,350 of vehicle expenses (for gas, oil, repairs, and auto lease payments). What amount of these expenses may Gabby deduct as business expenses? Gabby is on the cash method and calendar year.

Which of the following is a true statement?

Big Homes Corporation is an accrual method calendar year taxpayer that manufactures and sells modular homes. This year for the first time Big Homes was forced to offer a rebate on the purchase of new homes. At year end, Big Homes had paid $12,000 in rebates and was liable for an additional $7,500 in rebates to buyers. What amount of the rebates, if any, can Big Homes deduct this year?

Riley operates a plumbing business and this year the 3-year old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $20,000 and the adjusted basis was $5,800 at the time of the accident. Although the van was worth $6,000 at the time of accident, insurance only paid Riley $1,200 for the loss. What is the amount of Riley's casualty loss deduction?

Danny owns an electronics outlet in Dallas. This year he paid $600 to register for a four-day course in management in Chicago. Danny paid $800 in airfare and $1,000 for five nights lodging. After the course, Danny spent the last day sightseeing. During the trip, Danny also paid $140 a day for meals, and $80 a day for a rental car. What amount of these travel-related expenditures may Danny deduct as business expenses?

Which of the following expenses are completely deductible?

Reasonable in amount means that expenditures can be exorbitant as long as the activity is motivated by profit.

Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?

Only half the cost of a business meal is deductible even if the meal is associated with the active conduct of business.

All taxpayers must account for taxable income using a calendar year.

The domestic production activities deduction cannot exceed 50 percent of the wages paid to employees engaged in domestic manufacturing activities during the year.