TAX EXAM 1 TEST PREP QUESTIONS
In-2021,-Steve-worked-as-a-tech-supervisor-for-a-computer-company.-In-September-of-
2021,-he-was-laid-off.-He-was-paid-unemployment-compensation-for-the-rest-of-the-year-
totaling-$7,000.-Which-of-the-following-is-true?---ans-✔✔Steve-will-have-to-report-all-
$7,000-of-the-unemployment-compensation-as-income.
In-2021,-all-of-the-following-amounts-are-taxable-income-to-the-recipient-except:---ans-
✔✔Inheritances
Kendra-is-a-self-employed-taxpayer-working-exclusively-from-her-home-office.-Before-the-
home-office-deduction,-Kendra-has-$6,000-of-net-income.-Her-allocable-home-expenses-
are-$10,000-in-total.-How-are-the-home-office-expenses-treated-on-her-current-year-tax-
return?---ans-✔✔Only-$6,000-home-office-expenses-may-be-deducted,-resulting-in-net-
business-income-of-zero.-The-remaining-$4,000-of-home-office-expenses-may-be-carried-
forward-and-deducted-in-a-future-year-against-business-income.
In-the-tax-law,-the-definition-of-gross-income-is:---ans-✔✔All-income-from-whatever-
source-derived
In-determining-whether-an-activity-should-be-classified-as-a-hobby,-the-tax-law-provides-a-
rebuttable-presumption-with-regard-to-the-profits-or-losses-of-an-activity.-Which-of-the-
following-statements-describes-the-profit/loss-test-which-must-be-satisfied-in-order-to-
meet-the-presumption-that-the-activity-is-not-a-hobby?---ans-✔✔The-activity-shows-a-
profit-for-3-of-the-5-previous-years.
Which-of-the-following-is-generally-excluded-from-gross-income?---ans-✔✔Life-insurance-
proceeds-paid-to-the-beneficiary
The-IRS:---ans-✔✔has-an-app-for-mobile-phones.
Robert-works-for-American-Motors.-American-Motors-pays-a-$1,200-premium-on-Robert's-
health-insurance-in-2021.-Robert-has-an-operation-on-his-big-toe-in-2021-that-cost-$7,200.-
The-insurance-company-paid-for-$6,800-of-it.-Which-one-of-the-following-is-true-for-
2021?---ans-✔✔None-of-these-events-are-taxable-on-his-2021-return.
Feedback-Area
, Eugene-and-Velma-are-married.-For-2021,-Eugene-earned-$25,000-and-Velma-earned-
$30,000.-They-have-decided-to-file-separate-returns.-They-have-no-deductions-for-
adjusted-gross-income.-Velma's-itemized-deductions-are-$14,200-so-she-is-going-to-
itemize.-Eugene's-itemized-deductions-are-$4,000.-Assuming-Eugene-and-Velma-do-not-
live-in-a-community-property-state,-what-is-Eugene's-taxable-income?---ans-✔✔$21,000
John,-45-years-old-and-unmarried,-contributed-$1,000-monthly-in-2021-to-the-support-of-
his-parents'-household.-The-parents-lived-alone-and-their-income-for-2021-consisted-of-
$500-from-dividends-and-interest.-What-is-John's-filing-status-and-how-many-dependents-
should-he-claim-on-his-2021-tax-return?---ans-✔✔Head-of-household-and-2-dependents
Which-of-the-following-taxpayers-may-not-use-the-standard-mileage-method-of-calculating-
transportation-costs?---ans-✔✔A-taxpayer-who-has-a-fleet-of-10-business-automobiles.
During-2021,-Murray,-who-is-60-years-old-and-unmarried,-provided-all-of-the-support-of-
his-elderly-mother.-His-mother-was-a-resident-of-a-home-for-the-aged-for-the-entire-year-
and-had-no-income.-What-is-Murray's-filing-status-for-2021,-and-how-many-dependents-
should-he-report-on-his-tax-return?---ans-✔✔Head-of-household-and-1-dependent
Brian-is-60-years-old,-single,-and-legally-blind.-Brian-supports-his-father,-who-is-88-years-
old-and-blind,-by-paying-the-rent-and-other-costs-of-his-father's-residence.-What-is-the-
total-standard-deduction-amount-that-Brian-should-claim-on-his-2021-tax-return?---ans-
✔✔$20,500
Partnership-income-is-reported-on:---ans-✔✔Form-1065.
In-the-current-year,-Johnice-started-a-profitable-bookkeeping-business-as-a-sole-
proprietor.-Johnice-made-$38,000-in-her-first-year-of-operation.-What-two-forms-must-
Johnice-file-for-her-business?---ans-✔✔Schedules-SE-and-C
Stone-Pine-Corporation,-a-calendar-year-taxpayer,-has-ending-inventory-of-$150,000-on-
December-31,-20X2.-During-the-year-20X2,-the-corporation-purchased-additional-
inventory-of-$375,000.-If-cost-of-goods-sold-for-20X2-is-$470,000,-what-was-the-beginning-
inventory-at-January-1,-20X2?---ans-✔✔$245,000
Sue-is-a-small-business-owner-who-often-gives-gifts-to-clients.-She-gives-a-$40-gift-to-her-
client,-Mr.-Smith,-and-his-wife.-Sue-spent-$6-to-wrap-the-gift.-She-also-gave-out-400-
calendars-with-her-company-name-on-them.-Each-calendar-cost-$1.-Sue-also-gave-her-
secretary-a-$370-watch-for-his-10-years-of-service.-How-much-of-the-above-expenses-
may-she-deduct?---ans-✔✔$801
Employer-provided-spending-accounts:---ans-✔✔Allow-qualifying-expenses-to-be-treated-
as-tax-free-reductions-in-the-employees'-salaries
In-2021,-Steve-worked-as-a-tech-supervisor-for-a-computer-company.-In-September-of-
2021,-he-was-laid-off.-He-was-paid-unemployment-compensation-for-the-rest-of-the-year-
totaling-$7,000.-Which-of-the-following-is-true?---ans-✔✔Steve-will-have-to-report-all-
$7,000-of-the-unemployment-compensation-as-income.
In-2021,-all-of-the-following-amounts-are-taxable-income-to-the-recipient-except:---ans-
✔✔Inheritances
Kendra-is-a-self-employed-taxpayer-working-exclusively-from-her-home-office.-Before-the-
home-office-deduction,-Kendra-has-$6,000-of-net-income.-Her-allocable-home-expenses-
are-$10,000-in-total.-How-are-the-home-office-expenses-treated-on-her-current-year-tax-
return?---ans-✔✔Only-$6,000-home-office-expenses-may-be-deducted,-resulting-in-net-
business-income-of-zero.-The-remaining-$4,000-of-home-office-expenses-may-be-carried-
forward-and-deducted-in-a-future-year-against-business-income.
In-the-tax-law,-the-definition-of-gross-income-is:---ans-✔✔All-income-from-whatever-
source-derived
In-determining-whether-an-activity-should-be-classified-as-a-hobby,-the-tax-law-provides-a-
rebuttable-presumption-with-regard-to-the-profits-or-losses-of-an-activity.-Which-of-the-
following-statements-describes-the-profit/loss-test-which-must-be-satisfied-in-order-to-
meet-the-presumption-that-the-activity-is-not-a-hobby?---ans-✔✔The-activity-shows-a-
profit-for-3-of-the-5-previous-years.
Which-of-the-following-is-generally-excluded-from-gross-income?---ans-✔✔Life-insurance-
proceeds-paid-to-the-beneficiary
The-IRS:---ans-✔✔has-an-app-for-mobile-phones.
Robert-works-for-American-Motors.-American-Motors-pays-a-$1,200-premium-on-Robert's-
health-insurance-in-2021.-Robert-has-an-operation-on-his-big-toe-in-2021-that-cost-$7,200.-
The-insurance-company-paid-for-$6,800-of-it.-Which-one-of-the-following-is-true-for-
2021?---ans-✔✔None-of-these-events-are-taxable-on-his-2021-return.
Feedback-Area
, Eugene-and-Velma-are-married.-For-2021,-Eugene-earned-$25,000-and-Velma-earned-
$30,000.-They-have-decided-to-file-separate-returns.-They-have-no-deductions-for-
adjusted-gross-income.-Velma's-itemized-deductions-are-$14,200-so-she-is-going-to-
itemize.-Eugene's-itemized-deductions-are-$4,000.-Assuming-Eugene-and-Velma-do-not-
live-in-a-community-property-state,-what-is-Eugene's-taxable-income?---ans-✔✔$21,000
John,-45-years-old-and-unmarried,-contributed-$1,000-monthly-in-2021-to-the-support-of-
his-parents'-household.-The-parents-lived-alone-and-their-income-for-2021-consisted-of-
$500-from-dividends-and-interest.-What-is-John's-filing-status-and-how-many-dependents-
should-he-claim-on-his-2021-tax-return?---ans-✔✔Head-of-household-and-2-dependents
Which-of-the-following-taxpayers-may-not-use-the-standard-mileage-method-of-calculating-
transportation-costs?---ans-✔✔A-taxpayer-who-has-a-fleet-of-10-business-automobiles.
During-2021,-Murray,-who-is-60-years-old-and-unmarried,-provided-all-of-the-support-of-
his-elderly-mother.-His-mother-was-a-resident-of-a-home-for-the-aged-for-the-entire-year-
and-had-no-income.-What-is-Murray's-filing-status-for-2021,-and-how-many-dependents-
should-he-report-on-his-tax-return?---ans-✔✔Head-of-household-and-1-dependent
Brian-is-60-years-old,-single,-and-legally-blind.-Brian-supports-his-father,-who-is-88-years-
old-and-blind,-by-paying-the-rent-and-other-costs-of-his-father's-residence.-What-is-the-
total-standard-deduction-amount-that-Brian-should-claim-on-his-2021-tax-return?---ans-
✔✔$20,500
Partnership-income-is-reported-on:---ans-✔✔Form-1065.
In-the-current-year,-Johnice-started-a-profitable-bookkeeping-business-as-a-sole-
proprietor.-Johnice-made-$38,000-in-her-first-year-of-operation.-What-two-forms-must-
Johnice-file-for-her-business?---ans-✔✔Schedules-SE-and-C
Stone-Pine-Corporation,-a-calendar-year-taxpayer,-has-ending-inventory-of-$150,000-on-
December-31,-20X2.-During-the-year-20X2,-the-corporation-purchased-additional-
inventory-of-$375,000.-If-cost-of-goods-sold-for-20X2-is-$470,000,-what-was-the-beginning-
inventory-at-January-1,-20X2?---ans-✔✔$245,000
Sue-is-a-small-business-owner-who-often-gives-gifts-to-clients.-She-gives-a-$40-gift-to-her-
client,-Mr.-Smith,-and-his-wife.-Sue-spent-$6-to-wrap-the-gift.-She-also-gave-out-400-
calendars-with-her-company-name-on-them.-Each-calendar-cost-$1.-Sue-also-gave-her-
secretary-a-$370-watch-for-his-10-years-of-service.-How-much-of-the-above-expenses-
may-she-deduct?---ans-✔✔$801
Employer-provided-spending-accounts:---ans-✔✔Allow-qualifying-expenses-to-be-treated-
as-tax-free-reductions-in-the-employees'-salaries
