Mark the correct answer. In cash basis accounting, for tax purposes: a. Income i
ID: 2485984 • Letter: M
Question
Mark the correct answer. In cash basis accounting, for tax purposes:
a.
Income is recognized when it is actually or constructively received and expenses are recognized when they are actually or constructively incurred, regardless of when paid.
b.
Income is recognized when it is earned regardless of when received and expenses are recognized when they are actually or constructively incurred.
c.
Income is generally recognized when it is actually or constructively received and expenses are generally recognized when they are paid.
d.
The cash basis is not allowed for businesses reported on Schedule C.
2. From the records of Tom, a cash basis sole proprietor, the following information was available:
Gross receipts
$30,000
Dividend income (on personal investments)
$ 200
Cost of sales
$15,000
Other operating expenses
$ 3,000
State business taxes paid
$ 300
What amount should Tom report as net earnings from self-employment?
a.
$10,900
b.
$11,700
c.
$12,000
d.
$15,000
e.
None of the above
3. Which of the following is not an acceptable method of accounting under the tax law?
a.
The accrual method
b.
The cash method
c.
The hybrid method
d.
All of the above are acceptable
e.
None of the above
4. Becky is a cash basis taxpayer with the following transactions during her calendar tax year:
Cash basis revenue
$54,000
Cash basis expenses, except rent
$25,000
Rent expense (paid on December 1) for use of a building for 18 months
$36,000
What is the amount of Becky’s taxable income from her business for this tax year?
a.
$17,000
b.
$23,000
c.
$25,000
d.
$27,000
e.
None of the above
5. Jenny constructed a building for use as a residential rental property. The cost of the building was $180,000, and it was placed in service on August 1, 1990. The building has a 27.5-year MACRS life. What is the amount of depreciation on the building for 2015 for tax purposes?
a.
$2,000
b.
$6,000
c.
$3,000
d.
$6,547
e.
None of the above
6. ABC Corp bought a production machine on January 1, 2013 for $30,000. The company elected out of Section 179 expensing and elected out of claiming bonus depreciation in 2013, and is depreciating the machine using the MACRS accelerated depreciation tables for 5-year property. What is the 2015 depreciation (year 3) deduction for the machine?
a.
$9,600
b.
$24,000
c.
$6,000
d.
$5,760
e.
None of the above is correct
7. Steve Corp bought a $925,000 apartment building in 2013. Of the purchase price, $100,000 is allocated to the value of the land. What is the maximum amount of depreciation that the company can claim in 2015 (year 3) for the building?
a.
$29,997
b.
$825,000 under the election to expense business property
c.
$250,000 under the election to expense business property
d.
$82,500
e.
You cannot depreciate property costing over $800,000
8. What is the number of years over which computers may be depreciated under MACRS?
a.
3 years
b.
5 years
c.
7 years
d.
10 years
e.
15 years
9. During 2015, Travis purchases $130,000 of used manufacturing equipment (7-year property) for use in his business. Travis has taxable income from his business of $500,000. What is the maximum amount that Travis may deduct under the Section 179 election to expense?
a.
$130,000
b.
$18,571
c.
$250,000
d.
$0
e.
None of the above
10. On June 1, 2015, Sandalwood Corporation purchases a passenger automobile for 100 percent use in its business. The automobile is in the 5 year cost recovery class and has a basis for depreciation of $30,000. Assuming that the corporation does not elect to expense any of its cost under Section 179, what is the total tax depreciation deduction for the 2015 calendar tax year (Year 1)?
a.
$3,160
b.
$3,060
c.
$6,000
d.
$4,287
e.
None of the above
11. Which of the following is true with respect to the related party rules?
a.
Bill sells stock to his sister for a $3,000 loss. Bill can deduct the loss on his tax return.
b.
A taxpayer’s uncle is a related party for purposes of Section 267.
c.
A disallowed loss on a related party transaction can be used to offset any future gain when the property is sold to an unrelated party.
d.
Under the constructive ownership rules of Section 267, a shareholder owns 10 percent of the stock owned by a corporation in which he or she is a shareholder.
e.
None of the above are true.
Explanation / Answer
1) c. Income is generally recognized when it is actually or constructively received and expenses are generally recognized when they are paid.
Tax returns based on the cash basis method record income as you actually receive it and expenses as you actually paid them.
2)
2.b. $11,700
3. d.All of the above are acceptable
4. d. $27000
Taxable Income = Cash Revenue - Cash Expenses - rent ($36,000/18 months) = $54,000 - $25,000 - $2000 = $27,000