ACCT 4040 EXAM 3 QUESTIONS WITH VERIFIED ANSWERS
T/F: Reasonable in amount means that expenditure cannot be exorbitant even if the
amount is motivated by profit. - Answers - True
T/F: Highway speeding fines can be deducted if the speeding was done in the line of
business. - Answers - False
T/F: The cost of a business meal is deductible only if an existing client is present at the
meal - Answers - False
T/F: The deduction for business interest cannot exceed 30 percent of adjusted taxable
income plus allocable interest income. - Answers - True
T/F: Adjusted taxable income is defined as taxable income computed without regard to
income not properly allocable to a trade or business. - Answers - False
T/F: The limitation on the deduction of business interest does not apply to a business
that qualifies as a small business under the gross receipts test. - Answers - True
T/F: The gross receipts test is only applied to firms that have complete financial data for
a minimum of 4 years. - Answers - False
T/F: A short tax year can end on any day of any month. - Answers - True
T/F: The "all-events" test for income determines the amount of income that will be
included in taxable income for accrual method taxpayers. - Answers - True
T/F: 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. - Answers - 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 expenditure is related to a personal activity
d. Whether expenditure is reasonable amount
e. All of the choices are correct - Answers - 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
e. None of the choices are correct - Answers - 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. Half of the costs of travel are deductible for employees who travel on business
c. The cost of lodging is deductible if the taxpayer is away from home overnight on
business
d. None of the choices are true - Answers - c
Drake operates a trucking business, and one of his trucks was damaged in a traffic
accident. The truck was purchased for $52,000 and the adjusted basis was $22,000 at
the time of the accident. The truck was repaired at a cost of $5,000 and insurance
reimbursed Drake $2,000 of this cost. What is the amount of Drake's casualty loss
deduction?
a. $22,000
b. $5,000
c. $3,000
d. $2,000
e. Drake is not eligible for a casualty loss deduction - Answers -
Which of the following cannot be selected as a valid tax year end?
a. December 15th
b. January 31st
c. The last Friday of the last week of June
d. December 31st
e. A taxpayer can select any of these days as a year end - Answers - a
Charley Incorporated is a large corporation that reported revenue of $80 million and
income of $620,000 this year. Included in the calculation of income was $10,000 of
interest income, depreciation deductions of $170,000, and interest expense deductions
of $420,000. What is the maximum amount of interest expense deduction this year?
a. $1,200,000
b. $370,000
c. $10,000
d. $366,000
e. $360,000 - Answers - b
Steven operates a landscaping service on the accrual method. In September of this
year, Steven received a payment of $18,000 for 24 months of landscape services ($750
per month commencing on November 1st of this year). When must Steven recognize
the income if his accounting methods are selected to minimize income recognition?
a. $1,500 is recognized in this year, $16,500 next year
T/F: Reasonable in amount means that expenditure cannot be exorbitant even if the
amount is motivated by profit. - Answers - True
T/F: Highway speeding fines can be deducted if the speeding was done in the line of
business. - Answers - False
T/F: The cost of a business meal is deductible only if an existing client is present at the
meal - Answers - False
T/F: The deduction for business interest cannot exceed 30 percent of adjusted taxable
income plus allocable interest income. - Answers - True
T/F: Adjusted taxable income is defined as taxable income computed without regard to
income not properly allocable to a trade or business. - Answers - False
T/F: The limitation on the deduction of business interest does not apply to a business
that qualifies as a small business under the gross receipts test. - Answers - True
T/F: The gross receipts test is only applied to firms that have complete financial data for
a minimum of 4 years. - Answers - False
T/F: A short tax year can end on any day of any month. - Answers - True
T/F: The "all-events" test for income determines the amount of income that will be
included in taxable income for accrual method taxpayers. - Answers - True
T/F: 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. - Answers - 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 expenditure is related to a personal activity
d. Whether expenditure is reasonable amount
e. All of the choices are correct - Answers - 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
e. None of the choices are correct - Answers - 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. Half of the costs of travel are deductible for employees who travel on business
c. The cost of lodging is deductible if the taxpayer is away from home overnight on
business
d. None of the choices are true - Answers - c
Drake operates a trucking business, and one of his trucks was damaged in a traffic
accident. The truck was purchased for $52,000 and the adjusted basis was $22,000 at
the time of the accident. The truck was repaired at a cost of $5,000 and insurance
reimbursed Drake $2,000 of this cost. What is the amount of Drake's casualty loss
deduction?
a. $22,000
b. $5,000
c. $3,000
d. $2,000
e. Drake is not eligible for a casualty loss deduction - Answers -
Which of the following cannot be selected as a valid tax year end?
a. December 15th
b. January 31st
c. The last Friday of the last week of June
d. December 31st
e. A taxpayer can select any of these days as a year end - Answers - a
Charley Incorporated is a large corporation that reported revenue of $80 million and
income of $620,000 this year. Included in the calculation of income was $10,000 of
interest income, depreciation deductions of $170,000, and interest expense deductions
of $420,000. What is the maximum amount of interest expense deduction this year?
a. $1,200,000
b. $370,000
c. $10,000
d. $366,000
e. $360,000 - Answers - b
Steven operates a landscaping service on the accrual method. In September of this
year, Steven received a payment of $18,000 for 24 months of landscape services ($750
per month commencing on November 1st of this year). When must Steven recognize
the income if his accounting methods are selected to minimize income recognition?
a. $1,500 is recognized in this year, $16,500 next year
