Exam 3

Reasonable in amount means that expenditures cannot be exorbitant even if the amount is motivated by profit.

true

Highway speeding fines can be deducted if the speeding was done in the line of business.

false

The cost of a business meal is deductible only if an existing client is present at the meal.

false

The deduction for business interest cannot exceed 30% of adjusted taxable income plus allocable interest income.

true

Adjusted taxable income is defined as taxable income computed without regard to income not properly allocable to a trade or business.

false

The limitation on the deduction of business interest does not apply to a business that qualifies as small business under the gross receipts test.

true

The gross receipts test is only applied to firms that have complete financial data for a minimum of 4 years.

false

A short tax year can end on any day of any month.

true

The "all-events" test for income determines the amount of income that will be included in taxable income for accrual method taxpayers.

true

Taxpayers can always defer recognition of a receipt of payments in advance of sales or services until the payment is recognized as income for financial reporting purposes.

false

The arm's length transaction test would most likely NOT apply to which of the following?

a. Whether a specific activity is profit motivated.
b. Whether an expenditure should be deducted in a later period.
c. Whether an expenditure is related to a personal activity.
d. Whether an expenditure is reasonable in amount.

b.

Which of the following is a true statement?

a. The cost of business entertainment is not deductible.
b. An employer can only deduct half of any meals provided to employees.
c. Meals are not deductible as a business expense.
d. A taxpayer can only deduct the full cost of a meal for a client if business is discussed after the meal.

a.

Which of the following is a true statement?

a. The cost of transportation is never deductible for business travel if the taxpayer enjoys the travel.
b. Employees can deduct the cost of meals when they must work during the lunch hour.
c. Half of the costs of travel are deductible for employees who travel on business.
d. The cost of lodging is deductible if the taxpayer is away from home overnight on business.

d.

Which of the following CANNOT selected as a valid tax year end?

a. December 15
b. January 31
c. The last Friday of the last week of June
d. December 31

a.

Which of the following is NOT a payment liability?

a. tort claims
b. accrued compensation
c. insurance premiums
d. real estate taxes

b.

Which of the following is a true statement?

a. The cost of meals is fully deductible as long as the meal is unrelated to entertainment.
b. An employer can deduct the full cost of meals provided to employees as compensation.
c. The cost of business meals is extravagant if incurred away from home.
d. A taxpayer can only deduct the full cost of a meal for a prospective client.

a.

Two years ago, Avery Corp. used its excess cash to purchase a piece of land as an investment.

a. ordinary asset
b. capital asset
c. 1231 asset

b.

Two years ago, Avery Corp. purchased land and a warehouse. It uses these assets in its business.

a. ordinary asset
b. capital asset
c. 1231 asset

c.

Manufacturing machinery Avery Corp. purchased earlier this year.

a. ordinary asset
b. capital asset
c. 1231 asset

a.

Inventory Avery Corp. purchased 13 months ago that is ready to be shipped to a customer.

a. ordinary asset
b. capital asset
c. 1231 asset

a.

Office equipment Avery Corp. has used in its business for the past three years.

a. ordinary asset
b. capital asset
c. 1231 asset

c.

1,000 shares of stock in Plaid Corp. that Avery Corp. purchased two years ago because it was a good investment.

a. ordinary asset
b. capital asset
c. 1231 asset

b.

Account receivable from a customer with terms 2/10, net 30.

a. ordinary asset
b. capital asset
c. 1231 asset

a.

Machinery Avery Corp. held for three years and then sold at a loss of $10,000.

a. ordinary asset
b. capital asset
c. 1231 asset

c.