Federal Tax Accounting Test Questions with Complete Solutions (100% Correct)

Federal Tax Accounting Test Questions with Complete Solutions (100% Correct) Which of the following are Correct when defining the gross income of a business? - Answers *Revenues from renting property is included in gross profit for rental businesses. *Gross income for a service business can be calculated as income from services provided. *Gross income from a business includes gross profit from inventory sales. Which of the following choices constitutes gross income from a business? - Answers *Income from services provided. *Gross profit from inventory sales. *Income from renting property. Businesses that generate a material portion of their income by selling products they acquire for resale or products they manufacture generally must account for gross profit using the ______________ method, regardless of the method used for tax reporting. - Answers *Accruel Which of the following conditions must be met for a cash-method business to possibly be able to use the cash method to account for gross profit? - Answers *Annual gross receipts for the three-year period prior to the current year do not exceed $10 million. *Primary business activity must be to provide services to customers with sales of products being a secondary source of income. In addition to finished goods, under the ____________ ________________ ________________ rules, inventory cost includes the purchase price of any aw materials shipping costs, and any indirect costs the business allocates to inventory. - Answers * uniform cost capitalization Which of the following methods are the primary inventory cost-flow methods used for tax purposes? - Answers *First in first out (FIFO) *Last in first out (LIFO) *Specific identification method Which of the following statements are Correct regarding inventory capitalization rules? - Answers * Under UNICAP, businesses generally capitalize the inventory costs in one. * UNICAP rules require businesses to capitalize more costs to inventory for tax purposes than they do for financial reporting. * Under UNICAP rules, businesses capitalize in inventory a portion of the compensation paid to employees in production supporting departments. In addition to the all-events test, an accrual-basis business must meet ____________ ____________ test with respect to a liability before the corresponding expense can be deducted for tax purposes. - Answers * economic performance In order to meet the __________ _________ test for deducting an expense, everything necessary to establish the liability giving rise to the deduction must have occurred, and the business must be able to determine the ____________ of the liability with reasonable accuracy. - Answers *all-event *amount The ___________ __________ test specifies that businesses may NOT recognize a deduction for an expense until the underlying activity generating the associated liability has occurred. - Answers *economic performance For accrual-method businesses, bad debt expense is recognized using the ____________ method for financial accounting and is deducted using the _______________ method for tax purposes. - Answers *allowance *direct write-off Montgomery & Co are accounting for their bad debts. The company uses the accrual method of accounting. During the current year, M&C has $42,000 in accounts receivable. The estimated bad debts for the period is $2,000 using the allowance method of accounting for noncollectable accounts. The amount of accounts actually written off during the period is $1700. What is the amount of bad debt expense that can be deducted for tax purposes? - Answers * $1700-M&C must use the direct write-off method for tax purposes Josh and Michael are related for tax purposes. Josh is self-employed and has an accrual-basis sole proprietorship. Michael is a cash-method taxpayer. Josh hired Michael to help him complete a construction project. At the end of the year, Josh owed Michael $700 for worked performed during December. Josh paid Michael the $700 on January 2nd. When will Josh be able to deduct the wage expense and when will Michael have to include the $700 in gross income? - Answers * Josh must wait to deduct the expense until Michael includes it in gross income. Michael will include the $700 in the year he receives it. The _____________ -method of tax reporting provides a better matching of revenues and expenses. - Answers *accrual method For tax purposes, when a business wants to adopt a new accounting method, it must get permission from the IRS - Answers True A business is deemed to have adopted a permissible accounting method if it has used the method for __________ year(s). It is deemed to have adopted an impermissible accounting method if it has used the method for ____________ consecutive years. - Answers *one *two Which of the following statements is correct regarding the recognition of the cumulative difference in taxable income due to a change in accounting methods. - Answers *If the adjustment decreases taxable income, it is recognized in its entirety in the year of the change. *If the adjustment increases taxable income, it is recognized over 4 years by adding 25% of the increase each year. In the year that a business changes its accounting method, it must make an adjustment to taxable income that represents the ________________ difference for the amount that would have been taxed or deducted in prior years. If the adjustment increases taxable income, the taxpayer includes _________% of the addition in the current year. If the adjustment decreases taxable income, the taxpayer includes _________% of the deduction in the current year. - Answers *cumulative *25% *100% Although there are exceptions, a taxpayer or business using the cash method of accounting recognizes revenue when property or services are actually ______________ and recognizes deductions when the expense is ___________. - Answers *received *paid On December 1st of the current year, Jonathan pays $2400 for a 12-month advertising contract that begins immediately. Jonathan uses the cash method of accounting for his business. How much will he be able to deduct? - Answers * $2400 (Full amount) How does the accrual method for tax reporting differ from the accrual method for financial reporting? - Answers * The reporting rules tend to be structured to recognize less accrued expenses for tax purposes than for financial accounting purposes. Businesses using the accrual method of accounting generally recognize income when they meet the ___________ . - Answers * all-events test Leonard's Lofts rents townhouses to tenants. When a tenant moves in, they are required to pay the first month's rent of $525 and prepay the last month's rent of $525. In addition, the tenant must pay a refundable security deposit of $600. Leonard's Lofts uses the accrual method for tax reporting. Upon receipt of the $1650, Leonard's initial lofts must recognize ___________ in rental income. - Answers * $1050 since the security deposit is refundable it is not considered income. The all-events test generally requires businesses receiving advance payments for services to recognize the income when they receive the payment, rather than when they perform the service.