Question 1

All of the following are acceptable methods of accounting for revenue and expenses for tax purposes except:
A)Cash method
B)Accrual method
C)Percentage-of-completion
D)Hybrid method
E)All are acceptable methods

Accepted Answer

All of the listed methods (cash, accrual, percentage-of-completion, and hybrid) are acceptable methods of accounting for revenue and expenses for tax purposes. The best choice is E since it agrees with IRS regulations.

Question 2

In January,Zelda borrows $7,000 from her mother for moving expenses and clothes for starting her new job after graduating from college.She told her mother she would pay her 9 percent interest on the money but made no payments in the current year.If the applicable federal interest rate is 5 percent,how much interest income must Zelda's mother recognize?
A)0
B)$233
C)$350
D)$420

Accepted Answer

The answer of In January,Zelda borrows $7,000 from her mother...

Question 3

Which of the following statements explains timing differences for tax and financial accounting? i.Income is recognized in one period for tax and in another period for financial accounting.
Ii)Income is recognized for accounting but not for tax purposes.
Iii)Expenses not deductible for tax purposes are deductible for financial accounting.
Iv)An expense is deducted currently for tax but in a later period for financial accounting.
A)i.only
B)i.and ii.
C)i.and iv.
D)ii.and iii.

Accepted Answer

Timing differences for tax and financial accounting occur when income or expenses are recognized in different periods for tax purposes compared to financial accounting. This includes situations where income is recognized in one period for tax purposes and in another period for financial accounting (i), and when an expense is deducted currently for tax purposes but in a later period for financial accounting (iv).

Question 4

Clayton Corporation receives $100,000 to provide garbage service for the next four years:
A)Clayton must recognize income over the four years for both tax and accounting purposes.
B)Clayton can include the entire $100,000 in income currently for both tax and accounting purposes.
C)The $100,000 creates a permanent difference between tax and accounting income.
D)The $100,000 creates a timing difference between tax and accounting income.

Accepted Answer

The $100,000 creates a timing difference between tax and accounting income. This is because for tax purposes, Clayton may be required to recognize the entire $100,000 as income in the current year, while for accounting purposes, the income may need to be recognized over the next four years as the garbage services are provided. Therefore, there is a timing difference between the two methods of recognition.

Question 5

_____ 21.A business must have a permanent location within a state to establish nexus.

Accepted Answer

A business can establish nexus in a state through various activities, such as making sales, having employees, or owning property within the state, regardless of whether they have a permanent location there.

Question 6

Which of the following statements explain permanent differences between tax and financial accounting? i.Income is recognized in one period for tax and in another period for financial accounting
Ii)Income is recognized for accounting but not for tax purposes.
Iii)Expenses not deductible for tax purposes are deductible for financial accounting.
Iv)An expense is deducted currently for tax but in a later period for financial accounting.
A)ii.only
B)i.and ii.
C)i.and iv.
D)ii.and iii.

Accepted Answer

Option ii is a typical temporary difference where income is recognized for financial accounting purposes but not for tax purposes. Option iii is an example of a timing difference where expenses that are not deductible for tax purposes are deductible for financial accounting purposes.

Question 7

Which of the following explain why it is important to determine the period in which income is recognized?
A)Marginal tax rates may be different in different periods.
B)Tax laws may change
C)The time value of money
D)All of the above are explanations
E)A and b.only are explanations

Accepted Answer

All of the above are explanations for why it is important to determine the period in which income is recognized. Marginal tax rates may be different in different periods, tax laws may change, and the time value of money can all impact the financial outcomes of recognizing income in a particular period.

Question 8

Which of the following is an application of the wherewithal-to-pay concept?
A)Percentage-of-completion
B)Hybrid method of accounting
C)Installment method
D)Accrual method of accounting

Accepted Answer

The installment method is an application of the wherewithal-to-pay concept, as it recognizes income when the cash payments are actually received, aligning income recognition with the taxpayer's ability to pay.

Question 9

_____ 23.A taxpayer must elect to use the installment method on qualifying sales.

Accepted Answer

The answer of _____ 23.A taxpayer must elect to use...

Question 10

Which of the following doctrines does not affect the timing of income recognition for a cash basis taxpayer?
A)Installment method
B)All-events test
C)Wherewithal-to-pay
D)Constructive receipt

Accepted Answer

The all events test is primarily relevant for accrual basis taxpayers, not cash basis taxpayers. It determines when all the events have occurred that fix the right to receive income and the amount can be determined with reasonable accuracy. Cash basis taxpayers recognize income when it is actually or constructively received.

Question 11

Cora owns 6,000 shares of KLM stock,2,000 shares of BBT Mutual fund,and 10,000 shares of Centex Corporation.Her 1099-DIV forms from these investments showed the following: KLM: $3 per share distribution all reinvested in KLM
BBT Mutual fund: $5 per share distribution,$1 of which represents a capital gain distribution;none of this is reinvested.
Centex: $2 per share distribution,all of which represents a return of capital.
How much must Cora include in her income in the current year?
A)$48,000
B)$28,000
C)$22,000
D)$20,000

Accepted Answer

Cora must include in her income the distributions from KLM and the ordinary income portion of the BBT Mutual fund distribution. The KLM distribution is $3 per share for 6,000 shares, totaling $18,000. The BBT Mutual fund distribution is $4 per share (excluding the $1 capital gain) for 2,000 shares, totaling $8,000. The Centex distribution is a return of capital and does not count as income. Therefore, the total income is $18,000 (KLM) + $8,000 (BBT) = $26,000. However, due to a mistake in calculation, the correct total should have been calculated as follows: KLM: 6,000 shares * $3/share = $18,000; BBT: 2,000 shares * $5/share = $10,000 (since the entire distribution is income, but only $1 of the $5 is a capital gain, the rest is still income); Centex: $0 (return of capital is not income). This means the correct answer should be the sum of the income from KLM and BBT, which is $18,000 + $10,000 = $28,000. The initial explanation mistakenly excluded part of the BBT distribution from income.

Question 12

All of the following are allowable tax years except:
A)The last Friday of July
B)December 31
C)The Sunday closest to March 1
D)August 31

Accepted Answer

The answer of All of the following are allowable tax...

Question 13

Abdo Corporation received permission to change its tax year-end from December 31 to August 31 in 2013.Its income from January 1 through August 31 is $278,000.What is Abdo's tax liability?
A)$91,670
B)$94,520
C)$108,420
D)$141,780

Accepted Answer

To calculate the tax liability, we need to annualize the income and then apply the corporate tax rates. The income for 8 months is $278,000, so the annualized income is ($278,000 / 8) * 12 = $417,000. Assuming a corporate tax rate of 21% (as per the Tax Cuts and Jobs Act of 2017), the tax liability would be $417,000 * 21% = $87,570. However, since the tax liability is calculated based on the actual period, the correct tax liability for the 8-month period is $278,000 * 21% = $58,380. The closest option to this calculation is $94,520, which suggests a different tax rate or calculation method was used, possibly considering other tax rules or adjustments.

Question 14

Billy's father owns a controlling interest in Big Top Corporation.Billy needed $20,000 to pay a gambling debt and the corporation made a loan to Billy at no interest for the $20,000.This transaction can be characterized as:
A)A gift loan to Billy
B)An employment-related loan
C)An arm's length loan
D)A disguised dividend to the father

Accepted Answer

This transaction can be seen as a disguised dividend to the father since he owns a controlling interest in the corporation and made a loan at no interest to his son for personal use. This benefits the son and could be seen as a way for the father to indirectly provide financial assistance to his son without directly giving him a gift or dividend payout.

Question 15

All of the following result in nontaxable income except:
A)Stock dividend
B)Interest on municipal bonds
C)Capital gain distribution reinvested in the mutual fund
D)Distribution identified as a return of capital

Accepted Answer

Interest on municipal bonds is exempt from federal income tax and often state and local taxes as well. The other options may also be nontaxable to some extent, but there are specific criteria or limitations that apply. A stock dividend may be taxable if it is a cash dividend or if the stock is sold later for a gain. A capital gain distribution reinvested in a mutual fund is still considered a capital gain and may be subject to taxes when the shares are eventually sold. A distribution identified as a return of capital reduces the cost basis of the investment, which may result in higher capital gains later on.

Question 16

Wilma purchased an annuity policy for $100,000 that will pay her $10,000 per year for life beginning on her 60th birthday in 5 years.At 60,her life expectancy is 25 years.How much of each annual payment can Wilma exclude from income?
A)0
B)$4,000
C)$6,000
D)$10,000

Accepted Answer

Wilma can exclude $4,000 of each annual payment from income. This is calculated by dividing the cost of the annuity ($100,000) by her life expectancy (25 years), resulting in $4,000 per year that is considered a return of her investment and not taxable income.

Question 17

George can invest $10,000 in a tax-exempt bond paying 6 percent interest or a $10,000 corporate bond paying 8 percent interest.What is the lowest marginal tax rate at which George will be better off investing in the tax-exempt bond?
A)15%
B)25%
C)28%
D)33%

Accepted Answer

To calculate the after-tax returns for both bonds, we need to use the formula:
After-tax return = yield x (1 - marginal tax rate)
For the tax-exempt bond, the after-tax return is simply 6% since it is tax-exempt.
For the corporate bond, the after-tax return is:
8% x (1 - marginal tax rate)
Now we set up the equation:
6% = 8% x (1 - marginal tax rate)
0.06 = 0.08 - 0.08 x marginal tax rate
0.08 x marginal tax rate = 0.02
marginal tax rate = 0.02 / 0.08 = 0.25 = 25%
Therefore, if George's marginal tax rate is below 25%, he will be better off investing in the tax-exempt bond. Since 28% is the lowest option above 25%, the answer is C.

Question 18

William is single and had salary income from his position as Chief Financial Officer of Zippy Bank of $450,000 (the 39.6 tax bracket).He also had $35,000 in income from the dividends on the stock of his previous employer.How will William's taxable income of $475,000 (after his standard deduction and personal exemption)be taxed?
A)All $475,000 will be taxed at 39.6%
B)All $475,000 will be taxed at 43.4% due to the surtax
C)Only the $450,000 income from his salary will be taxed at 39.6%
D)His salary income will be taxed at 39.6% and his dividend income at 23.8%

Accepted Answer

William's salary income of $450,000 will be taxed at the top tax bracket of 39.6%, while his dividend income of $35,000 will be subject to the lower capital gains tax rate of 23.8%. The surtax of 3.8% would only apply to certain types of investment income for taxpayers with higher incomes, so it doesn't apply in this case.

Question 19

Bigtown Advertising Agency,a calendar-year,accrual basis taxpayer,was paid $60,000 for a three-year advertising contract on July 1,2013,and $36,000 for a 12-month contract on December 1,2013 How much income must Bigtown recognize for these contracts in years 2013 and 2014,respectively?
A)$96,000,0
B)$13,000,$83,000
C)$63,000,$33,000
D)$13,000,$53,000

Accepted Answer

The three-year contract is a multi-period contract, so the income must be recognized over the three years. The 12-month contract is a one-year contract, so the income must be recognized in the year it is received.For the three-year contract, the income is $60,000 / 3 = $20,000 per year. For the 12-month contract, the income is $36,000.Therefore, the income that Bigtown must recognize in 2013 is $20,000 + $36,000 = $56,000. The income that Bigtown must recognize in 2014 is $20,000.

Question 20

_____ 22.The completed contract method allows the taxpayer to defer taxes on the contract income.

Accepted Answer

The completed contract method allows the taxpayer to defer taxes on the contract income until the contract is completed, rather than recognizing the income as it is earned.

Quiz 3: Determining Gross Income

All of the following are acceptable methods of accounting for revenue and expenses for tax purposes except:

Clayton Corporation receives $100,000 to provide garbage service for the next four years:

_____ 21.A business must have a permanent location within a state to establish nexus.

Which of the following explain why it is important to determine the period in which income is recognized?

Which of the following is an application of the wherewithal-to-pay concept?

_____ 23.A taxpayer must elect to use the installment method on qualifying sales.

Which of the following doctrines does not affect the timing of income recognition for a cash basis taxpayer?

All of the following are allowable tax years except:

Abdo Corporation received permission to change its tax year-end from December 31 to August 31 in 2013.Its income from January 1 through August 31 is $278,000.What is Abdo's tax liability?

Billy's father owns a controlling interest in Big Top Corporation.Billy needed $20,000 to pay a gambling debt and the corporation made a loan to Billy at no interest for the $20,000.This transaction can be characterized as:

All of the following result in nontaxable income except:

Wilma purchased an annuity policy for $100,000 that will pay her $10,000 per year for life beginning on her 60th birthday in 5 years.At 60,her life expectancy is 25 years.How much of each annual payment can Wilma exclude from income?

George can invest $10,000 in a tax-exempt bond paying 6 percent interest or a $10,000 corporate bond paying 8 percent interest.What is the lowest marginal tax rate at which George will be better off investing in the tax-exempt bond?

Bigtown Advertising Agency,a calendar-year,accrual basis taxpayer,was paid $60,000 for a three-year advertising contract on July 1,2013,and $36,000 for a 12-month contract on December 1,2013 How much income must Bigtown recognize for these contracts in years 2013 and 2014,respectively?

_____ 22.The completed contract method allows the taxpayer to defer taxes on the contract income.