Question 1

In January of this year, B's family automobile was completely destroyed in a collision with an uninsured drunk driver.The car, which originally cost $3,500 and had a fair market value of $2,700 immediately before the accident, was worthless afterwards.B had $250 deductible on his insurance and in June received a $2,450 check from the insurance company.He used the proceeds to purchase a car for $2,000.B itemizes his deductions.Based on these facts, the amount of casualty loss he may claim in computing his taxable income is

Accepted Answer

The casualty loss is the lesser of the fair market value of the car before the accident ($2,700) or the adjusted basis of the car ($3,500 - $250 deductible = $3,250). Since the fair market value is less, the casualty loss is $2,700. The amount of the casualty loss that B may claim is the casualty loss minus the insurance proceeds, or $2,700 - $2,450 = $250.

Question 2

Z Corporation operates a department store that offers hundreds of different items for sale, from lawn mowers to lollipops.It values its inventory using the lower of cost or market approach.In applying this method, the company can either compare the total cost of the inventory to its total value or compare each item to its market value.

Accepted Answer

The answer of Z Corporation operates a department store that...

Question 3

Although financial accounting allows write-downs of inventory to net realizable value, there is nothing comparable in the tax law.The tax law limits the write-down to replacement cost.

Accepted Answer

The statement is incorrect. The tax law does allow write-downs of inventory to net realizable value, not just replacement cost. However, there are specific rules and limitations to how much and when inventory can be written down for tax purposes.

Question 4

J, a cash basis taxpayer, is the general manager of a minor league baseball club.The corporate owner has promised J, in a valid contract, a $5,000 bonus if attendance exceeded 250,000 this year.Attendance was 250,070.The owner reneges on the $5,000 bonus.Upset, J quits and goes to Florida.

Accepted Answer

J cannot deduct the $5,000 because as a cash basis taxpayer, he can only recognize income or deductions when cash is actually received or paid. Since J never received the $5,000, there is no income to report or deduct.

Question 5

T's personal boat is damaged in a hurricane.The damage is appraised at $300, and the appraiser charges a $50 fee.T's A.G.I.this year is $100,000.If the insurer reimburses T $250, what amount related to this casualty may be deductible from A.G.I.?

Accepted Answer

The appraiser's fee of $50 is deductible from AGI.

Question 6

Taxpayers may use the lower of cost or market valuation method in conjunction with FIFO.

Accepted Answer

Taxpayers have the option to use the lower of cost or market valuation method in conjunction with the first-in, first-out (FIFO) method of accounting for inventory. This means that if the market value of inventory decreases below its cost, the taxpayer can adjust the inventory value down to its market value for tax purposes.

Question 7

W is an entrepreneur.He owns numerous companies including Guns Corporation.He also serves as the corporation's chief financial officer.Because of bad publicity relating to assault weapons and fire arms in general, the corporation's sales suffered this year.As a result, W advanced $30,000 to the corporation.No note or other evidence of indebtedness was prepared relating to the advance.Subsequently, legislation was passed which put the corporation out of business and W's loan became worthless.

Accepted Answer

Since W advanced the $30,000 to the corporation to protect his employment as CFO, the loan can be treated as a business bad debt. As a result, W may deduct it as an ordinary loss on his tax return.

Question 8

For tax purposes, LIFO inventories must be valued using the lower of cost or market valuation method.

Accepted Answer

For tax purposes, LIFO (Last In, First Out) inventories can be valued using the LIFO method itself, which does not require the lower of cost or market valuation method. The lower of cost or market rule is a separate method used for inventory valuation under the GAAP (Generally Accepted Accounting Principles), not specifically tied to LIFO for tax purposes.

Question 9

R's personal sailboat is destroyed in a hurricane.The sailboat has a basis of $2,000 and a fair market value of $3,000.If R chooses not to file a claim with the insurer for the loss of the boat, she may deduct what amount of the loss?

Accepted Answer

Personal casualty losses are only deductible in the tax year 2018 through 2025 if the loss is attributable to a federally declared disaster. Since the question does not specify that the hurricane was a federally declared disaster, and there's no mention of R choosing to file a claim under such a circumstance, the deduction would be $0.

Question 10

For many years, T Corporation accounted for inventories using FIFO and the lower of cost or market methods.T may switch to LIFO and retain the lower of cost or market valuation method.

Accepted Answer

A company cannot use the lower of cost or market method with LIFO; it must use the lower of cost or net realizable value instead.

Question 11

F's furniture business suffered a substantial property loss due to a recent earthquake.F's insurance policy did not provide coverage for damage by an earthquake.The property, which was totally worthless after the quake, had been worth $60,000 (basis $20,000).F's A.G.I.this year before the casualty is $90,000.F is provided some relief from his misfortune in that he may deduct

Accepted Answer

F can deduct the lesser of the property's adjusted basis ($20,000) or the decrease in fair market value ($60,000) due to the casualty. Since the property is totally worthless, the decrease in value is $60,000, but the deduction is limited to the basis of $20,000.

Question 12

Last year F was accident-prone.He knocked over an expensive vase, shattering it; left an old radio on that caused a fire that destroyed his office equipment; and wrecked his bike.The bases and fair market values of the property are shown below.Assuming F does not elect to replace the vase or bike, and that he receives $5,000 for the vase, $25,000 for the office equipment, and $25 for the bike, what must he report?

Accepted Answer

The answer of Last year F was accident-prone.He knocked over...

Question 13

Taxpayers are not permitted to adopt LIFO for tax purposes if they use FIFO for financial reporting purposes such as reports to shareholders or creditors.

Accepted Answer

This statement is true. The IRS requires that taxpayers use the same method of inventory accounting for both tax and financial reporting purposes. If a taxpayer uses FIFO for financial reporting purposes, they must also use FIFO for tax purposes. If they use LIFO for tax purposes, they must also use LIFO for financial reporting purposes. This is to ensure consistency and accuracy in financial reporting and tax filings.

Question 14

In the past, Zip Corporation has used FIFO and the lower of cost or market valuation method to account for inventories.A switch to LIFO is considered a change in accounting method.However, they may continue to use the same valuation method.

Accepted Answer

The answer of In the past, Zip Corporation has used...

Question 15

For financial accounting purposes, R uses FIFO and the lower of cost or market to value his inventories.For tax purposes, no deductions may be claimed for any write-downs of inventory to market.

Accepted Answer

The answer of For financial accounting purposes, R uses FIFO...

Question 16

X, a psychiatrist, is a cash-basis taxpayer.He charges Z $100 per session and bills him monthly.When Z declares bankruptcy, he owes X $400.What course of action is open to X?

Accepted Answer

As a cash-basis taxpayer, X can only deduct expenses when they are actually paid. Since X never received the $400, he cannot deduct it as a bad debt.

Question 17

The management of Mogul Manufacturing has decided to switch from FIFO to LIFO.Because this is a change in accounting method, the company must secure approval from the IRS before it can switch.

Accepted Answer

Companies in the United States are allowed to switch from FIFO (First-In, First-Out) to LIFO (Last-In, First-Out) accounting methods without securing prior approval from the IRS. However, they must file Form 970, Application to Use LIFO Inventory Method, with their tax return for the year in which they first use LIFO.

Question 18

In valuing inventories using the lower of cost or market approach, the term market means the price at which the item normally sells in the market that it is normally traded (e.g., retail or wholesale) by the taxpayer.

Accepted Answer

In the context of the lower of cost or market approach, the term "market" refers to the current replacement cost of the inventory, not the selling price of the inventory items.

Question 19

This year D's hunting cabin worth $5,000 (basis $8,000) was destroyed by fire.The cabin was uninsured.If D's A.G.I.is $40,000 this year, how much of the loss may be claimed as an itemized deduction?

Accepted Answer

The deductible loss is the lesser of the decline in value ($5,000) or the adjusted basis ($8,000), minus $100, and then reduced by 10% of AGI ($4,000). So, $5,000 - $100 - $4,000 = $900.

Question 20

D purchased a personal residence in Los Angeles three years ago for $200,000 and insured it for that amount.Its fair market value this year was $300,000.This year the house burned down.The insurer paid the insured value of $200,000 in full.D's A.G.I.is $25,000.Assuming she has no capital gains or other losses for the year, what amount may she deduct?

Accepted Answer

The deductible casualty loss is the lesser of the decline in value or the adjusted basis, reduced by insurance reimbursement, a $100 floor, and 10% of AGI. Here, the loss is $200,000 (adjusted basis), minus $200,000 (insurance), minus $100, minus $2,500 (10% of AGI), resulting in $0 deductible.

Quiz 10: Certain Business Deductions and Losses