ACCT 4040- INDIVIDUAL TAXATION GIBSON FINAL
EXAM QUESTIONS WITH VERIFIED ANSWERS
t/f: the deduction for business interest cannot exceed 30% of adjusted taxable income
plus allocable interest income - Answers - true
t/f: the gross receipts test is only applied to firms that have complete financial data for
min. of 4 years - Answers - false
t/f: the all-events test for income determines the amount of income will be included in
taxable income for accrual method taxpayers - Answers - true; the all-events test
determines which period income is realized
t/f: reasonable in amount means expenditures cannot be exorbitant even if the amount
is motivated by profit - Answers - true
t/f: taxpayers can always defer recognition of advance payments into gross income until
the payment is included in income fore financial reporting purposes - Answers - false
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 if the meal was provided to an existing
client - Answers - false
t/f: a short tax year can end on any day of any month - Answers - true
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?
$22,000
$5,000
Drake is not eligible for a casualty loss deduction
$3,000
$2,000 - Answers - $3,000; lesser of adjusted basis or decline in value (repair cost) less
insurance reimbursement, i.e., lesser of $22,000 or ($5,000 − $2,000).
which of the following is not a payment liability?
real estate taxes
insurance premiums
tort claims
, accrued compensation
all are correct - Answers - accrued compensation; compensation is not a payment
liability
Charley Inc 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?
$366,000
$10,000
$1,200,000
$370,000
$360,000 - Answers - $370,000; ($620,000 − $10,000 + $420,000 + $170,000) =
$1,200,000 adjusted taxable income AND
$1,200,000 × 30% = $360,000 + 10,000 interest income = $370,000 maximum interest
deduction
Blue Corporation began business on April 1 of last year and reported gross receipts of
$18 million. Which of the following is true statement about the gross receipts test as
applied to Blue?
None of the choices are true
Blue will qualify because their average gross receipts is only $18 million
Blue cannot qualify until the firm reports gross receipts for an entire year
Blue cannot qualify because they do not have gross receipts for the entire prior three-
year period
Blue will qualify because their average gross receipts is only $24 million - Answers -
Blue will qualify because their average gross receipts is only $24 million; the gross
receipts test for a partial year is applied by annualizing the gross receipts for the short
year. This is done by multiplying the short year receipts by 12 and dividing the product
by the number of months in the short year [($18 million × 12)/9] < $26 million
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?
$18,000 is recognized in the last year of the contract
$1,500 is recognized in this year, $16,500 next year
$1,500 is recognized this year, $9,000 next year, and $7,500 in the last year of the
contract
$18,000 is recognized this year
$9,000 is recognized this year and $9,000 next year - Answers - $1,500 is recognized in
this year, $16,500 next year; ($750 × 2) for this year and the remainder ($18,000 −
$1,500) next year. Prepayments for services can be deferred for one year if the
payments are also unearned for financial reporting purposes
which of the following cannot be selected as a valid tax year end?
EXAM QUESTIONS WITH VERIFIED ANSWERS
t/f: the deduction for business interest cannot exceed 30% of adjusted taxable income
plus allocable interest income - Answers - true
t/f: the gross receipts test is only applied to firms that have complete financial data for
min. of 4 years - Answers - false
t/f: the all-events test for income determines the amount of income will be included in
taxable income for accrual method taxpayers - Answers - true; the all-events test
determines which period income is realized
t/f: reasonable in amount means expenditures cannot be exorbitant even if the amount
is motivated by profit - Answers - true
t/f: taxpayers can always defer recognition of advance payments into gross income until
the payment is included in income fore financial reporting purposes - Answers - false
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 if the meal was provided to an existing
client - Answers - false
t/f: a short tax year can end on any day of any month - Answers - true
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?
$22,000
$5,000
Drake is not eligible for a casualty loss deduction
$3,000
$2,000 - Answers - $3,000; lesser of adjusted basis or decline in value (repair cost) less
insurance reimbursement, i.e., lesser of $22,000 or ($5,000 − $2,000).
which of the following is not a payment liability?
real estate taxes
insurance premiums
tort claims
, accrued compensation
all are correct - Answers - accrued compensation; compensation is not a payment
liability
Charley Inc 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?
$366,000
$10,000
$1,200,000
$370,000
$360,000 - Answers - $370,000; ($620,000 − $10,000 + $420,000 + $170,000) =
$1,200,000 adjusted taxable income AND
$1,200,000 × 30% = $360,000 + 10,000 interest income = $370,000 maximum interest
deduction
Blue Corporation began business on April 1 of last year and reported gross receipts of
$18 million. Which of the following is true statement about the gross receipts test as
applied to Blue?
None of the choices are true
Blue will qualify because their average gross receipts is only $18 million
Blue cannot qualify until the firm reports gross receipts for an entire year
Blue cannot qualify because they do not have gross receipts for the entire prior three-
year period
Blue will qualify because their average gross receipts is only $24 million - Answers -
Blue will qualify because their average gross receipts is only $24 million; the gross
receipts test for a partial year is applied by annualizing the gross receipts for the short
year. This is done by multiplying the short year receipts by 12 and dividing the product
by the number of months in the short year [($18 million × 12)/9] < $26 million
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?
$18,000 is recognized in the last year of the contract
$1,500 is recognized in this year, $16,500 next year
$1,500 is recognized this year, $9,000 next year, and $7,500 in the last year of the
contract
$18,000 is recognized this year
$9,000 is recognized this year and $9,000 next year - Answers - $1,500 is recognized in
this year, $16,500 next year; ($750 × 2) for this year and the remainder ($18,000 −
$1,500) next year. Prepayments for services can be deferred for one year if the
payments are also unearned for financial reporting purposes
which of the following cannot be selected as a valid tax year end?
