ACCT 4300 Exam 2

To be deductible, business expenses must be directly related to a business activity

True business

Which of the following is a true statement?

Individuals qualify for the moving expense deduction only if they change employers.

Individuals qualify for the moving expense deduction if their employer does not pay for

the moving expenses.

Moving expenses are deductible from AGI.

Moving expenses are generally not deductible.

Moving expenses are generally not deductible.

Opal fell on the ice and injured her hip this winter. As a result she paid $3,030 for a visit to the hospital emergency room and $780 for follow-up visits with her doctor. While she recuperated, Opal paid $530 for prescription medicine and $630 to a therapist for rehabilitation. Insurance reimbursed Opal $1,230 for these expenses. What is the amount of Opal's qualifying medical expense?

Multiple Choice

• $3,030

• $3,810

• $3,740

• $4,970

• All of these choices are correct.

Explanation

The qualifying expenses are calculated as follows:

Emergency room and doctor visits

Prescription medication

Physical therapy

Total qualifying medical expenses

Less insurance reimbursement

Qualifying medical expenses from the accident

$ 3,810

+ 530

+630

$= 4,970

(1,230)

$ =3,740

Which of the following is a true statement?

Multiple Choice

Taxpayers may only deduct interest on up to $1,500,000 of acquisition indebtedness.

Taxpayers may deduct interest on up to $1,000,000 of home-equity debt.

The deduction for investment interest expense is not subject to limitation.

A taxpayer who incurs acquisition indebtedness in 2018 may only deduct interest on up to $750,000 of acquisition indebtedness.

None of the choices are correct.

A taxpayer who incurs acquisition indebtedness in 2018 may only deduct interest on up to $750,000 of acquisition indebtedness.

Which of the following is a true statement?

Multiple Choice

A casualty loss on personal-use assets is generally not deductible.

A casualty loss on investment property is generally not deductible.

All casualty losses are deductible.

A casualty loss on a personal-use asset is deductible for AGI.

None of the choices are correct.

A casualty loss on personal-use assets is generally not deductible.

Which of the following is deductible as an other itemized deduction?

Multiple Choice

Gambling losses to the extent of gambling winnings

Fees for investment advice

Employee business expenses

Tax preparation fees

All of these choices are correct.

Gambling losses to the extent of gambling winnings

Explanation

Employee business expenses, tax preparation fees, investment expenses, and hobby expenses are not deductible.

Qualified dividends are always taxed at a 15 percent preferential rate.

Group startsTrue or False

True, False

False

Explanation

Qualified dividends may be taxed at a rate as low as 0 percent or as high as 20 percent, depending on the taxpayer's filing status and taxable income.

Capital loss carryovers for individuals are carried forward indefinitely

True,

False

True, Capital loss carryovers for individuals are carried forward indefinitely

The maximum amount of net capital losses individual taxpayers may deduct against their ordinary income per year is:

Multiple Choice

• $3,000.

• $5,000.

• $0, losses are not deductible.

• There is no maximum. All losses are allowed to be deducted.

• None of the choices are correct.

3,000 deduction

In the current year, Erin had the following capital gains (losses) from the sale of her investments: $2,100 LTCG, $24,900 STCG, ($9,100) LTCL, and ($15,100) STCL. What is the amount and nature of Erin's capital gains and losses?

Multiple Choice

• $2,800 net short-term capital gain

• $2,800 net long-term capital loss

• $3,900 net short-term capital gain

• $3,900 net long-term capital loss

• None of the choices are correct.

Explanation

$2,100 (LTCG) - ($9,100) (LTCL) = ($7,000) (NLTCL);

$24,900 (STCG) - ($15,100) (STCL) = $9,800 (NSTCG);

($7,000) (NLTCL) - $9,800 (NSTCG) = $2,800 (NSTCG).

In the current year, Norris, an individual, has $70,000 of ordinary income, a net short-term capital loss (NSTCL) of $8,000 and a net long-term capital gain (NLTCG) of $4,800. From his capital gains and losses, Norris reports:

Multiple Choice

• an offset against ordinary income of $8,000.

• an offset against ordinary income of $3,000 and an NSTCL carryforward of $5,000.

• an offset against ordinary income of $4,800 and an NSTCL carryforward of $3,200.

• an offset against ordinary income of $3,000 and an NSTCL carryforward of $3,200.

• an offset against ordinary income of $3,000 and an NSTCL carryforward of $200.

an offset against ordinary income of $3,000 and an NSTCL carryforward of $200.

Explanation

$4,800 NLTCG − $8,000 NSTCL = $3,200 NSTCL.

Use $3,000 NSTCL to reduce ordinary income DEDUCT LOSS CAP , leaving $200 as an NSTCL carryforward.

Ms. Fresh bought 1,000 shares of Ibis Corporation stock for $5,000 on January 15, 2022. On December 31, 2025, she sold all 1,000 shares of her Ibis stock for $4,500. Based on a hot tip from her friend, she bought 1,000 shares of Ibis stock on January 23, 2026, for $3,000. What is Ms. Fresh's recognized loss on her 2025 sale, and what is her basis in her 1,000 shares purchased in 2026?

Multiple Choice

• $0 LTCL and $3,500 basis

• $200 LTCL and $3,300 basis

• $300 LTCL and $3,200 basis

• $400 LTCL and $3,100 basis

• $500 LTCL and $3,000 basis

$0 LTCL and $3,500 basis
Explanation

$4,500 amount realized from Ibis sale − $5,000 tax basis in Ibis shares = $500 realized loss on sale of Ibis stock.

Loss is not currently deductible because the Ibis shares were reacquired within 30 days of the original sale (wash sale).

$500 nondeductible loss from original Ibis sale + $3,000 purchase price for new Ibis shares = $3,500 tax basis in new Ibis shares.

Self-employed taxpayers are allowed to deduct the full amount of the self-employment taxes they pay.

True False

False, Self employed

Jamie is single. In 2025, she reported $100,500 of taxable income, including a long-term capital gain of $6,000. What is her gross tax liability? (Use the tax rate schedules (opens in a new tab), long-term capital gains tax brackets (opens in a new tab).)

Note: Round your answer to the nearest whole dollar amount.

Multiple Choice

• $15,215

• $16,954

• $16,604

• $15,075

• 100,500 -6,000 = 94500

• $94,500 of the taxable income is taxed at the ordinary rates, and $6,000 of the taxable income is taxed at 15 percent.

Which of the following suggests that a working taxpayer is an independent contractor rather than an employee?

Multiple Choice

• Works for more than one firm

• May realize a loss from business activities

• Sets own working hours

• Works somewhere other than on employer premises

• All of these suggest independent contractor status

Explanation

All factors suggest the worker is an independent contractor.

Which of the following statements regarding the child and dependent care credit is false in 2025?

Multiple Choice

• Taxpayers may claim a credit for only a portion of qualifying dependent care expenditures.

• If a taxpayer's income is $1,000,000, they will be ineligible to claim a child and dependent care credit.

• A single taxpayer must have earned income to claim any child and dependent care credit.

• A taxpayer is not eligible to claim the dependent care credit if any dependent relative provides the care.

Explanation

• If a taxpayer's income is $1,000,000, they will be ineligible to claim a child and dependent care credit.

The dependent care credit is not fully phased out no matter the taxpayer's income level.

Which of the following tax credits is fully refundable?

Multiple Choice

• American opportunity tax credit

• Lifetime learning credit

• Earned income credit

• None of the choices are correct

• Earned income credit

• Explanation

  Because it is refundable, the earned income credit is sometimes referred to as a negative income tax.

Cassy reports a gross tax liability of $1,180. She also claims $580 of nonrefundable personal credits, $790 of refundable personal credits, and $380 of business credits. What is Cassy's tax refund or tax liability due after applying the credits?

Note: Round your answer to the nearest whole dollar amount.

Multiple Choice

• $1,180 taxes payable

• $0 refund or taxes payable

• $790 refund

• $570 refund

• $570 refund

• Explanation

  $1,180 tax liability - ($580 nonrefundable personal credits +$380(business credit is nonrefundable) )= 220

• $790 refundable credit - 220 = $(570). (The last $790 is refundable.)

The Internal Revenue Code authorizes deductions for trade or business activities if the expenditure is "ordinary and necessary."

True or False

Trye the Internal revenue

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

False. individuals use calendar year but businesses and others may have another time for their fiscal year end

Holly took a prospective client to dinner at a restaurant, and after agreeing to a business deal, they went to the theater. Holly paid $450 for the meal and separately paid $186 for the theater tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

Multiple Choice

• $636

• $450

• $225

• $93

• None—the meals and entertainment are not deductible except during travel.

$225

Explanation

The cost of entertainment is not deductible. The cost of business meals is 50% deductible ($450 × 50% = $225).

Colbert operates a catering service on the accrual method. In November of year 1, Colbert received a payment of $9,000 for 18 months of catering services to be rendered from December 1stDecember 1st of year 1 through May 31st of year 3. When must Colbert recognize the income if his accounting methods are selected to minimize income recognition?

Multiple Choice

• $500 is recognized in year 1, $6,000 in year 2, and $2,500 in year 3.

• $500 is recognized in year 1 and $8,500 in year 2.

• $9,000 is recognized in year 3.

• $2,500 is recognized in year 1 and $6,500 in year 2.

• $9,000 is recognized in year 1.

• $500 is recognized in year 1 and $8,500 in year 2.

• Prepayments for services can be deferred for one year if the payments are also unearned for financial reporting purposes. ($9,000 ÷ 18) × 1 month = $500.

Which of the following types of transactions does not result in the immediate recognition of revenue or expense for a small business using the cash method?

Multiple Choice

• Sales of inventory on account

• A note received from a customer in exchange for services rendered

• Salaries paid to employees by check

• Credit card payments from customers for services received

• All the choices will result in recognition of revenue or expense using the cash method.

Explanation

Sales of inventory need not be accounted for using the accrual method if the taxpayer has average annual gross receipts of $31 million or less for the prior three taxable years.

Beth operates a plumbing firm. In August of last year, she signed a contract to provide plumbing services for a renovation. Beth began the work that August and finished the work in December of last year. However, Beth didn't bill the client until January of this year, and she didn't receive the payment until March when she received payment in full. When should Beth recognize income under the accrual method of accounting?

Multiple Choice

• In August of last year

• In December of last year

• In January of this year

• In March of this year

• In April of this year

• In December of last year