TAX 4001 Final Exam Questions with
Complete Solutions
Mr. and Mrs. Anderson file a joint return. They provide more than 50% of the financial support
for their two children, Dana, age 26, and John, age 17. Both children live in the Andersons'
home. Dana earned $7,100 from a part-time job, while John earned no income this year. Which
of the following statements is true? - ANSWER Dana is neither a qualifying child nor a
qualifying relative of the Andersons.
Cactus Company is a calendar year S corporation with the following current year information:
Operating loss $ (120,000)
Liabilities:
Notes payable, City Bank 20,000
Notes payable, Jake Crow 20,000
On January 1, John James bought 50% of Cactus Company stock for $30,000. How much of
the operating loss may John deduct on his Form 1040? Assume the excess business loss
limitation does not apply. - ANSWER $30,000
In April, vandals completely destroyed outdoor signage owned by Renfru Incorporated Renfru's
adjusted tax basis in the signage was $31,300. Renfru received a $50,000 reimbursement from its
property insurance company, and on August 8, it paid $60,000 to replace the signage.
Compute Renfru's recognized gain on loss on the involuntary conversion and its tax basis in the
new signage. - ANSWER None of these choices are correct
Mr. Weller and the Olson Partnership entered into an exchange of investment real
property. Mr. Weller's property was subject to a $428,000 mortgage, which Olson assumed.
Olson's property was subject to a $235,000 mortgage, which Mr. Weller assumed. Which of
the following statements is true? - ANSWER Mr. Weller received $193,000 boot; Olson paid
$193,000 boot.
,Armond earned $10,000 of profit from a sole proprietorship in 2021. If he also has $150,000
of salary income, how much self-employment tax will he owe? - ANSWER $268
Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax
year showed the following:
Ordinary business loss$ (20,000)
Short-term capital gain2,100
Dividend income1,600
Cash distribution5,800
Perry's tax basis in his partnership interest at the beginning of the year was $15,400. How
much of the ordinary loss may he deduct on his Form 1040? Assume the excess business loss
limitation does not apply. - ANSWER $13,300
Blitza Incorporated owned real property used for 12 years in its business that was subject to a
$294,500 nonrecourse mortgage. Blitza failed to make timely mortgage payments, so the
creditor foreclosed. At date of foreclosure, Blitza's basis in the property was $300,000, and the
property's appraised FMV was $260,000. Which of the following statements is true? - ANSWER
Both Blitza has no legal obligation to settle the $34,500 unpaid balance of the mortgage and
Blitza recognizes a $5,500 Section 1231 loss is true.
Kent, an unmarried individual, invited his widowed father, Martin, to move into his home in
January of this year. Martin's only income item was a $14,000 taxable pension from his former
employer. Kent provides about 75% of his father's financial support. What is Kent's filing
status for the year? - ANSWER Single
Fleet, Incorporated owns 85% of the stock of Pete, Incorporated and 35% of the stock of Zete,
Incorporated and 90% of the stock of Bete, Incorporated Bete owns 5% of the stock of Pete and
5% of the stock of Zete. Zete owns 10% of the stock of Bete. The remaining stock of Pete and
Zete is owned by unrelated individuals. Which of the following statements is correct? -
ANSWER Fleet, Pete, and Bete are an affiliated group.
Ms. Dolan, a divorced individual, invited her elderly uncle, Martin, to move into her home in
January of this year. Martin's only income item was $2,390 of taxable interest on a savings
,account. Ms. Dolan provides over 90% of her uncle's financial support. What is Ms.
Dolan's filing status for the year? - ANSWER Head of household
Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000
guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was
$93,200. Which of the following is accurate? - ANSWER Martha must pay both income tax and
self-employment tax on $141,200.
Mr. and Mrs. Johnson and their two children, Alice and Ben, are the four equal partners in JAB
Partnership. This year, JAB generated $40,000 of ordinary income. Compute the tax cost
associated with this income if Mr. and Mrs. Johnson's marginal tax rate is 35%, Alice's
marginal tax rate is 24%, and Ben's marginal tax rate is 32%. - ANSWER $12,600
This year, Ms. Kwan recognized a $16,900 net long-term capital loss. Which of the
following statements is true? - ANSWER
Randolph Scott operates a business as a sole proprietorship. This year his net profit
was $10,570. For tax purposes this amount should be reported on: - ANSWER Schedule
C, Statement of Profit or Loss from Business
Space-Y Co. sold land with a $300,000 basis to Jenna Robinson for $117,000 cash. Jenna owns
68 percent of Space-Y's outstanding stock. Which of the following statements is true? -
ANSWER
Delour Incorporated was incorporated in 2015 and adopted a calendar year. Here is a schedule of
Delour's net Section 1231 gains and (losses) reported on its tax returns through 2020.
2015 2016 2017 2018 2019 2020
$(4,900) $-0- $-0- $-0- $(12,000) $-0-
In 2021, Delour recognized a $50,000 gain on the sale of business land. How is this gain
characterized on Delour's tax return?
$50,000 ordinary gain.
, $16,900 ordinary gain and $33,100 Section 1231 gain.
$12,000 ordinary gain and $38,000 Section 1231 gain.
$50,000 Section 1231 gain. - ANSWER
Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is Bryan's
after-tax cash flow from the corporation if net income after corporate tax is distributed to
him as a dividend and his marginal tax rate on ordinary income is 37%? - ANSWER $126,400
This year, Izard Company sold equipment purchased several years ago at a cost of $48,500.
Accumulated depreciation through date of sale was $18,900. Which of the following statements
is false? - ANSWER If the sale price was $42,500, Izard recognized $12,900 Section 1231 gain.
A tornado demolished several delivery vans owned for three years by Wadham Company.
Wadham's adjusted basis in the vans was $28,400, and Wadham paid $90,000 to purchase
new vans. Wadham received a $25,000 settlement from its casualty insurance company.
Consequently, Wadham recognizes: - ANSWER None of these choices are correct
The three Crosby children intend to form a business. The business will borrow $900,000 from a
local bank. Which of the following statements is true? - ANSWER If the business is a
partnership the owners can allocate income and losses in any reasonable manner.
Alice is an unmarried individual. She has $182,340 taxable income in 2021. Compute
Alice's regular tax liability if she files as a single taxpayer and if she files as a head of
household. - ANSWER Single $39,175; head of household $37,725
New York, Incorporated owns 100% of Brooklyn, Incorporated and Queens, Incorporated
Taxable income for the three corporations for their first year was as follows:
New York $628,000
Brooklyn 246,000
Queens (105,000)
Complete Solutions
Mr. and Mrs. Anderson file a joint return. They provide more than 50% of the financial support
for their two children, Dana, age 26, and John, age 17. Both children live in the Andersons'
home. Dana earned $7,100 from a part-time job, while John earned no income this year. Which
of the following statements is true? - ANSWER Dana is neither a qualifying child nor a
qualifying relative of the Andersons.
Cactus Company is a calendar year S corporation with the following current year information:
Operating loss $ (120,000)
Liabilities:
Notes payable, City Bank 20,000
Notes payable, Jake Crow 20,000
On January 1, John James bought 50% of Cactus Company stock for $30,000. How much of
the operating loss may John deduct on his Form 1040? Assume the excess business loss
limitation does not apply. - ANSWER $30,000
In April, vandals completely destroyed outdoor signage owned by Renfru Incorporated Renfru's
adjusted tax basis in the signage was $31,300. Renfru received a $50,000 reimbursement from its
property insurance company, and on August 8, it paid $60,000 to replace the signage.
Compute Renfru's recognized gain on loss on the involuntary conversion and its tax basis in the
new signage. - ANSWER None of these choices are correct
Mr. Weller and the Olson Partnership entered into an exchange of investment real
property. Mr. Weller's property was subject to a $428,000 mortgage, which Olson assumed.
Olson's property was subject to a $235,000 mortgage, which Mr. Weller assumed. Which of
the following statements is true? - ANSWER Mr. Weller received $193,000 boot; Olson paid
$193,000 boot.
,Armond earned $10,000 of profit from a sole proprietorship in 2021. If he also has $150,000
of salary income, how much self-employment tax will he owe? - ANSWER $268
Perry is a partner in a calendar year partnership. His Schedule K-1 for the current tax
year showed the following:
Ordinary business loss$ (20,000)
Short-term capital gain2,100
Dividend income1,600
Cash distribution5,800
Perry's tax basis in his partnership interest at the beginning of the year was $15,400. How
much of the ordinary loss may he deduct on his Form 1040? Assume the excess business loss
limitation does not apply. - ANSWER $13,300
Blitza Incorporated owned real property used for 12 years in its business that was subject to a
$294,500 nonrecourse mortgage. Blitza failed to make timely mortgage payments, so the
creditor foreclosed. At date of foreclosure, Blitza's basis in the property was $300,000, and the
property's appraised FMV was $260,000. Which of the following statements is true? - ANSWER
Both Blitza has no legal obligation to settle the $34,500 unpaid balance of the mortgage and
Blitza recognizes a $5,500 Section 1231 loss is true.
Kent, an unmarried individual, invited his widowed father, Martin, to move into his home in
January of this year. Martin's only income item was a $14,000 taxable pension from his former
employer. Kent provides about 75% of his father's financial support. What is Kent's filing
status for the year? - ANSWER Single
Fleet, Incorporated owns 85% of the stock of Pete, Incorporated and 35% of the stock of Zete,
Incorporated and 90% of the stock of Bete, Incorporated Bete owns 5% of the stock of Pete and
5% of the stock of Zete. Zete owns 10% of the stock of Bete. The remaining stock of Pete and
Zete is owned by unrelated individuals. Which of the following statements is correct? -
ANSWER Fleet, Pete, and Bete are an affiliated group.
Ms. Dolan, a divorced individual, invited her elderly uncle, Martin, to move into her home in
January of this year. Martin's only income item was $2,390 of taxable interest on a savings
,account. Ms. Dolan provides over 90% of her uncle's financial support. What is Ms.
Dolan's filing status for the year? - ANSWER Head of household
Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000
guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was
$93,200. Which of the following is accurate? - ANSWER Martha must pay both income tax and
self-employment tax on $141,200.
Mr. and Mrs. Johnson and their two children, Alice and Ben, are the four equal partners in JAB
Partnership. This year, JAB generated $40,000 of ordinary income. Compute the tax cost
associated with this income if Mr. and Mrs. Johnson's marginal tax rate is 35%, Alice's
marginal tax rate is 24%, and Ben's marginal tax rate is 32%. - ANSWER $12,600
This year, Ms. Kwan recognized a $16,900 net long-term capital loss. Which of the
following statements is true? - ANSWER
Randolph Scott operates a business as a sole proprietorship. This year his net profit
was $10,570. For tax purposes this amount should be reported on: - ANSWER Schedule
C, Statement of Profit or Loss from Business
Space-Y Co. sold land with a $300,000 basis to Jenna Robinson for $117,000 cash. Jenna owns
68 percent of Space-Y's outstanding stock. Which of the following statements is true? -
ANSWER
Delour Incorporated was incorporated in 2015 and adopted a calendar year. Here is a schedule of
Delour's net Section 1231 gains and (losses) reported on its tax returns through 2020.
2015 2016 2017 2018 2019 2020
$(4,900) $-0- $-0- $-0- $(12,000) $-0-
In 2021, Delour recognized a $50,000 gain on the sale of business land. How is this gain
characterized on Delour's tax return?
$50,000 ordinary gain.
, $16,900 ordinary gain and $33,100 Section 1231 gain.
$12,000 ordinary gain and $38,000 Section 1231 gain.
$50,000 Section 1231 gain. - ANSWER
Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is Bryan's
after-tax cash flow from the corporation if net income after corporate tax is distributed to
him as a dividend and his marginal tax rate on ordinary income is 37%? - ANSWER $126,400
This year, Izard Company sold equipment purchased several years ago at a cost of $48,500.
Accumulated depreciation through date of sale was $18,900. Which of the following statements
is false? - ANSWER If the sale price was $42,500, Izard recognized $12,900 Section 1231 gain.
A tornado demolished several delivery vans owned for three years by Wadham Company.
Wadham's adjusted basis in the vans was $28,400, and Wadham paid $90,000 to purchase
new vans. Wadham received a $25,000 settlement from its casualty insurance company.
Consequently, Wadham recognizes: - ANSWER None of these choices are correct
The three Crosby children intend to form a business. The business will borrow $900,000 from a
local bank. Which of the following statements is true? - ANSWER If the business is a
partnership the owners can allocate income and losses in any reasonable manner.
Alice is an unmarried individual. She has $182,340 taxable income in 2021. Compute
Alice's regular tax liability if she files as a single taxpayer and if she files as a head of
household. - ANSWER Single $39,175; head of household $37,725
New York, Incorporated owns 100% of Brooklyn, Incorporated and Queens, Incorporated
Taxable income for the three corporations for their first year was as follows:
New York $628,000
Brooklyn 246,000
Queens (105,000)
