Federal Tax Accounting (Exam 1) UPDATED
Exam Questions and CORRECT Answers
The Business Purpose Concept means
I. that the economic purpose of the transaction must exceed the tax avoidance motive.
II. that the taxpayer's dominant motive for an expenditure is to reduce taxation..
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct. - CORRECT ANSWER - a. Only statement I is correct.
Which of the following individuals is involved in a trade or business?
I. Lil owns a farm near Lafayette, Indiana. She leases the property to Cal, who operates the farm
for himself. Liz receives 10% of Cal's net income as part of the lease agreement but has no
responsibilities for the farming operation.
II. Lorraine owns a warehouse located in Brooklyn NY. She paid $250,000 for the real estate
several years ago. It is now appraised at over $1,000,000, but she still uses the building only to
store her painting collection.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct. - CORRECT ANSWER - d. Neither statement is correct.
All of the following are required test for the deduction of a business expense except?
a. GAAP approved.
b. Ordinary.
c. Necessary.
, d. Business purpose.
e. Reasonable in amount. - CORRECT ANSWER - a. GAAP approved.
Which of the following is not deductible?
a. Expenses related to earning dividends on a portfolio of "blue chip" stocks.
b. Expenses related to interest income from municipal bonds.
c. Legal expenses related to rental real estate property.
d. Medical expenses of the taxpayer's dependent child. - CORRECT ANSWER - b. Expenses
related to interest income from municipal bonds.
Jackie recently retired from the U.S. Coast Guard after 30 years of service. She would like to
open a boat shop to operate in her retirement years. Jackie incurs $3,800 of expenses while
investigating sites for her shop and while checking out boat franchises. What are the tax effects
of the expenses Jackie incurs?
I. If Jackie enters the boat business, she can deduct the costs only by capitalizing them and
amortizing them over 180 months.
II. They are not deductible if Jackie does not enter the ski and boat business.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct. - CORRECT ANSWER - b. Only statement II is correct.
Which of the following expenses is/are deductible?
I. Transportation and lodging expenses of $3,000 incurred to monitor state legislation that may
affect the taxpayer's business.
II. Lobby expenses of $300 during the year to influence local town legislators to support pro-
business legislation.
a. Only statement I is correct.
Exam Questions and CORRECT Answers
The Business Purpose Concept means
I. that the economic purpose of the transaction must exceed the tax avoidance motive.
II. that the taxpayer's dominant motive for an expenditure is to reduce taxation..
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct. - CORRECT ANSWER - a. Only statement I is correct.
Which of the following individuals is involved in a trade or business?
I. Lil owns a farm near Lafayette, Indiana. She leases the property to Cal, who operates the farm
for himself. Liz receives 10% of Cal's net income as part of the lease agreement but has no
responsibilities for the farming operation.
II. Lorraine owns a warehouse located in Brooklyn NY. She paid $250,000 for the real estate
several years ago. It is now appraised at over $1,000,000, but she still uses the building only to
store her painting collection.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct. - CORRECT ANSWER - d. Neither statement is correct.
All of the following are required test for the deduction of a business expense except?
a. GAAP approved.
b. Ordinary.
c. Necessary.
, d. Business purpose.
e. Reasonable in amount. - CORRECT ANSWER - a. GAAP approved.
Which of the following is not deductible?
a. Expenses related to earning dividends on a portfolio of "blue chip" stocks.
b. Expenses related to interest income from municipal bonds.
c. Legal expenses related to rental real estate property.
d. Medical expenses of the taxpayer's dependent child. - CORRECT ANSWER - b. Expenses
related to interest income from municipal bonds.
Jackie recently retired from the U.S. Coast Guard after 30 years of service. She would like to
open a boat shop to operate in her retirement years. Jackie incurs $3,800 of expenses while
investigating sites for her shop and while checking out boat franchises. What are the tax effects
of the expenses Jackie incurs?
I. If Jackie enters the boat business, she can deduct the costs only by capitalizing them and
amortizing them over 180 months.
II. They are not deductible if Jackie does not enter the ski and boat business.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct. - CORRECT ANSWER - b. Only statement II is correct.
Which of the following expenses is/are deductible?
I. Transportation and lodging expenses of $3,000 incurred to monitor state legislation that may
affect the taxpayer's business.
II. Lobby expenses of $300 during the year to influence local town legislators to support pro-
business legislation.
a. Only statement I is correct.
