Gx7i44cq

1True / False
21. For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income
3that is subject to tax.
4a. True
5b. False
6ANSWER:   False
7RATIONALE:   $1,000 of tax-exempt income is equivalent to $1,538 [($1,000)/(1 – .35)] of income
8that is subject to taxation. Income before tax of $1,538 yields $1,000 [$1,538 × (1 –
9.35)] of after-tax income.
10POINTS:   1
11DIFFICULTY:   Moderate
12QUESTION TYPE:   True / False
13HAS VARIABLES:   False
14LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
15NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
16STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
17AICPA: FN-Measurement
18KEYWORDS:   Bloom's: Comprehension
19OTHER:   Time: 5 min.
20DATE CREATED:   11/15/2017 1:07 PM
21DATE MODIFIED:   7/24/2018 9:58 PM
222. John told his nephew, Steve, “if you maintain my house when I cannot, I will leave the house to you when I die."
23Steve maintained the house and when John died Steve inherited the house. The value of the residence can be
24excluded from Steve’s gross income as an inheritance.
25a. True
26b. False
27ANSWER:   False
28RATIONALE:   The house was received as a payment for services, rather than as a bequest.
29POINTS:   1
30DIFFICULTY:   Easy
31QUESTION TYPE:   True / False
32HAS VARIABLES:   False
33LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
34NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
35STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
36AICPA: FN-Measurement
37KEYWORDS:   Bloom's: Comprehension
38OTHER:   Time: 5 min.
39DATE CREATED:   11/15/2017 1:07 PM
40DATE MODIFIED:   7/24/2018 9:56 PM
41Copyright Cengage Learning. Powered by Cognero. Page 1
42Chapter 05: Gross Income: Exclusions
433. Brooke works part-time as a waitress in a restaurant. For groups of 7 or more customers, the customer is charged
4415% of the bill for Brooke’s services. For parties of less than 7, the tips are voluntary. Brooke received $11,000 from
45the groups of 7 or more and $7,000 in voluntary tips from all other customers. Using the customary 15% rate, her
46voluntary tips would have been only $6,000. Brooke must include $18,000 ($11,000 + $7,000) in gross income.
47a. True
48b. False
49ANSWER:   True
50RATIONALE:   The tips are compensation for income tax purposes because they are received for
51her services, rather than as a result of the customer’s “detached, disinterested
52generosity” (i.e., not a gift). She must include $18,000 ($11,000 + $7,000) in her
53gross income.
54POINTS:   1
55DIFFICULTY:   Easy
56QUESTION TYPE:   True / False
57HAS VARIABLES:   False
58LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
59NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
60STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
61AICPA: FN-Measurement
62KEYWORDS:   Bloom's: Application
63OTHER:   Time: 5 min.
64DATE CREATED:   11/15/2017 1:07 PM
65DATE MODIFIED:   7/24/2018 9:56 PM
66Copyright Cengage Learning. Powered by Cognero. Page 2
67Chapter 05: Gross Income: Exclusions
684. Mel was the beneficiary of a $45,000 group term life insurance policy on his wife. His wife’s employer paid all of the
69premiums on the policy. Mel used the life insurance proceeds to purchase a United States Government bond, which
70paid him $2,500 interest during the current year. Mel’s Federal gross income from the above is $2,500.
71a. True
72b. False
73ANSWER:   True
74RATIONALE:   The $2,500 interest on United States Government bonds must be included in gross
75income. The life insurance proceeds of $45,000 are excluded from gross income.
76POINTS:   1
77DIFFICULTY:   Easy
78QUESTION TYPE:   True / False
79HAS VARIABLES:   False
80LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-07 - LO: 4-07
81NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
82STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
83AICPA: FN-Measurement
84KEYWORDS:   Bloom's: Application
85OTHER:   Time: 5 min.
86DATE CREATED:   11/15/2017 1:07 PM
87DATE MODIFIED:   7/24/2018 8:58 PM
885. Zack was the beneficiary of a life insurance policy on his wife. Zack had paid $20,000 in premiums on the policy. He
89collected $50,000 on the policy when his wife died from a terminal illness. Because it took several months to process
90the claim, the insurance company paid Zack $53,000, the face amount of the policy plus $3,000 interest. Zack must
91include $23,000 in his gross income.
92a. True
93b. False
94ANSWER:   False
95RATIONALE:   The interest income of $3,000 is included in gross income because it represents
96interest income. The life insurance proceeds of $50,000 are excludible from gross
97income under § 101(a).
98POINTS:   1
99DIFFICULTY:   Easy
100QUESTION TYPE:   True / False
101HAS VARIABLES:   False
102LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-07 - LO: 4-07
103NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
104STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
105AICPA: FN-Measurement
106KEYWORDS:   Bloom's: Application
107OTHER:   Time: 5 min.
108DATE CREATED:   11/15/2017 1:07 PM
109DATE MODIFIED:   7/24/2018 8:58 PM
110Copyright Cengage Learning. Powered by Cognero. Page 3
111Chapter 05: Gross Income: Exclusions
1126. Ed died while employed by Violet Company. His wife collected $40,000 on a group term life insurance policy that
113Violet provided its employees, and $6,000 of accrued salary Ed had earned prior to his death. All of the premiums on
114the group term life insurance policy were excluded from the Ed’s gross income. Ed’s wife is required to recognize as
115gross income only the $6,000 she received for the accrued salary.
116a. True
117b. False
118ANSWER:   True
119RATIONALE:   The $6,000 accrued salary Ed had earned must be included in his wife’s gross
120income. The life insurance proceeds of $40,000 are excluded under § 101(a).
121POINTS:   1
122DIFFICULTY:   Easy
123QUESTION TYPE:   True / False
124HAS VARIABLES:   False
125LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-07 - LO: 4-07
126NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
127STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
128AICPA: FN-Measurement
129KEYWORDS:   Bloom's: Application
130OTHER:   Time: 5 min.
131DATE CREATED:   11/15/2017 1:07 PM
132DATE MODIFIED:   7/24/2018 8:58 PM
1337. Gary cashed in an insurance policy on his life. He needed the funds to pay for his terminally ill wife’s medical
134expenses. He had paid $12,000 in premiums and he collected $30,000 from the insurance company. Gary is not
135required to include the gain of $18,000 ($30,000 – $12,000) in gross income.
136a. True
137b. False
138ANSWER:   False
139RATIONALE:   The exclusion for terminal illness applies to policies on the terminally ill insured
140person. Gary did not have the terminal illness.
141POINTS:   1
142DIFFICULTY:   Easy
143QUESTION TYPE:   True / False
144HAS VARIABLES:   False
145LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-07 - LO: 4-07
146NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
147STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
148AICPA: FN-Measurement
149KEYWORDS:   Bloom's: Application
150OTHER:   Time: 5 min.
151DATE CREATED:   11/15/2017 1:07 PM
152DATE MODIFIED:   7/24/2018 8:58 PM
153Copyright Cengage Learning. Powered by Cognero. Page 4
154Chapter 05: Gross Income: Exclusions
1558. When Betty was diagnosed as having a terminal illness, she sold her life insurance policy to Insurance Purchase,
156Inc., a company that is licensed to invest in these types of contracts. Betty sold the policy for $32,000 and Insurance
157Purchase, Inc., became the beneficiary. She had paid total premiums of $19,000. Betty died 8 months after the sale.
158Insurance Purchase, Inc., collected $50,000 on the policy. The company had paid additional premiums of $4,000 on
159the policy. Betty is not required to recognize a $13,000 gain from the sale of her life insurance policy and Insurance
160Purchase, Inc., is required to recognize a $14,000 gain from the insurance policy.
161a. True
162b. False
163ANSWER:   True
164RATIONALE:   Betty’s gain is excluded from gross income because she was suffering from a
165terminal illness when she sold the policy. However, Insurance Purchase, Inc.,
166purchased the policy and, therefore, is not eligible for the life insurance beneficiary’s
167exclusion. Insurance Purchase, Inc., must report a gain of $14,000 ($50,000 –
168$32,000 – $4,000) because it purchased the policy.
169POINTS:   1
170DIFFICULTY:   Easy
171QUESTION TYPE:   True / False
172HAS VARIABLES:   False
173LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-07 - LO: 4-07
174NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
175STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
176AICPA: FN-Measurement
177United States - AK - AICPA: FN-Reporting
178KEYWORDS:   Bloom's: Application
179OTHER:   Time: 5 min.
180DATE CREATED:   11/15/2017 1:07 PM
181DATE MODIFIED:   7/24/2018 8:58 PM
182Copyright Cengage Learning. Powered by Cognero. Page 5
183Chapter 05: Gross Income: Exclusions
1849. Agnes receives a $5,000 scholarship which covers her tuition at Parochial High School. She may not exclude the
185$5,000 because the exclusion applies only to scholarships to attend college.
186a. True
187b. False
188ANSWER:   False
189RATIONALE:   Agnes is a degree candidate at an educational institution. There is no requirement
190that the educational institution must be a college.
191POINTS:   1
192DIFFICULTY:   Easy
193QUESTION TYPE:   True / False
194HAS VARIABLES:   False
195LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
196NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
197STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
198KEYWORDS:   Bloom's: Comprehension
199OTHER:   Time: 2 min.
200DATE CREATED:   11/15/2017 1:07 PM
201DATE MODIFIED:   7/24/2018 9:56 PM
20210. If a scholarship does not satisfy the requirements for a gift, the scholarship must be included in gross income.
203a. True
204b. False
205ANSWER:   False
206RATIONALE:   Scholarships are excludible under the scholarship provision (§ 117) rather than under
207the gift exclusion provision (§ 102).
208POINTS:   1
209DIFFICULTY:   Easy
210QUESTION TYPE:   True / False
211HAS VARIABLES:   False
212LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
213NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
214STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
215KEYWORDS:   Bloom's: Knowledge
216OTHER:   Time: 2 min.
217DATE CREATED:   11/15/2017 1:07 PM
218DATE MODIFIED:   7/24/2018 9:56 PM
219Copyright Cengage Learning. Powered by Cognero. Page 6
220Chapter 05: Gross Income: Exclusions
22111. Ashley received a scholarship to be used as follows: tuition $6,000; room and board $9,000; and books and laboratory
222supplies $2,000. Ashley is required to include only $9,000 in her gross income.
223a. True
224b. False
225ANSWER:   True
226RATIONALE:   The room and board do not qualify for the exclusion under § 117. The amount
227received for tuition, books, and supplies is excludible.
228POINTS:   1
229DIFFICULTY:   Easy
230QUESTION TYPE:   True / False
231HAS VARIABLES:   False
232LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
233NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
234STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
235AICPA: FN-Measurement
236KEYWORDS:   Bloom's: Application
237OTHER:   Time: 5 min.
238DATE CREATED:   11/15/2017 1:07 PM
239DATE MODIFIED:   7/24/2018 9:56 PM
24012. In December 2018, Emily, a cash basis taxpayer, received a $2,500 cash scholarship for the Spring semester of 2019.
241However, she did not use the funds to pay the tuition until January 2019. Emily can exclude the $2,500 from her
242gross income in 2018.
243a. True
244b. False
245ANSWER:   True
246RATIONALE:   Emily can exclude the $2,500 from her 2018 gross income, as the $2,500 is used to
247pay tuition for the Spring semester of 2019.
248POINTS:   1
249DIFFICULTY:   Easy
250REFERENCES:   p. 5-10
251QUESTION TYPE:   True / False
252HAS VARIABLES:   False
253LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
254NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
255STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
256KEYWORDS:   Bloom's: Application
257OTHER:   Time: 5 min.
258DATE CREATED:   11/15/2017 1:07 PM
259DATE MODIFIED:   7/24/2018 9:56 PM
260Copyright Cengage Learning. Powered by Cognero. Page 7
261Chapter 05: Gross Income: Exclusions
26213. Betty received a graduate teaching assistantship that was awarded on the basis of academic achievement. The
263payments must be included in her gross income.
264a. True
265b. False
266ANSWER:   True
267RATIONALE:   Such payments generally are for services rendered and therefore are not excluded
268from Betty’s gross income as a scholarship.
269POINTS:   1
270DIFFICULTY:   Easy
271QUESTION TYPE:   True / False
272HAS VARIABLES:   False
273LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
274NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
275STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
276KEYWORDS:   Bloom's: Comprehension
277OTHER:   Time: 2 min.
278DATE CREATED:   11/15/2017 1:07 PM
279DATE MODIFIED:   7/24/2018 9:56 PM
28014. In 2018, Theresa was in an automobile accident and suffered physical injuries. The accident was caused by Ramon’s
281negligence. In 2019, Theresa collected from his insurance company. She received $15,000 for loss of income,
282$10,000 for pain and suffering, $50,000 for punitive damages, and $6,000 for medical expenses which she had
283deducted on her 2018 tax return (the amount in excess of 7.5% of adjusted gross income). As a result of the above,
284Theresa’s 2019 gross income is increased by $56,000.
285a. True
286b. False
287ANSWER:   True
288RATIONALE:   The punitive damages of $50,000 must be included in Theresa’s gross income. Also,
289the medical expenses of $6,000 deducted in 2018 must be included in 2019 gross
290income under the tax benefit rule.
291POINTS:   1
292DIFFICULTY:   Easy
293QUESTION TYPE:   True / False
294HAS VARIABLES:   False
295LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
296NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
297STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
298AICPA: FN-Measurement
299KEYWORDS:   Bloom's: Application
300OTHER:   Time: 5 min.
301DATE CREATED:   11/15/2017 1:07 PM
302DATE MODIFIED:   7/24/2018 9:56 PM
303Copyright Cengage Learning. Powered by Cognero. Page 8
304Chapter 05: Gross Income: Exclusions
30515. Workers’ compensation benefits are included in gross income if the employer also pays the employee while the
306employee is recovering from his or her injury.
307a. True
308b. False
309ANSWER:   False
310RATIONALE:   Benefits received under the workers’ compensation laws are excluded from a
311recipient’s gross income.
312POINTS:   1
313DIFFICULTY:   Easy
314QUESTION TYPE:   True / False
315HAS VARIABLES:   False
316LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
317NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
318STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
319KEYWORDS:   Bloom's: Comprehension
320OTHER:   Time: 2 min.
321DATE CREATED:   11/15/2017 1:07 PM
322DATE MODIFIED:   7/24/2018 9:56 PM
32316. Sam was unemployed for the first two months of 2018. During that time, he received $4,000 of state unemployment
324benefits. He worked for the next six months and earned $14,000. In September, he was injured on the job and
325collected $5,000 of workers’ compensation benefits. Sam’s Federal gross income from the above is $18,000 ($4,000
326+ $14,000).
327a. True
328b. False
329ANSWER:   True
330RATIONALE:   Sam must include in gross income $4,000 of unemployment benefits and his earned
331wages of $14,000.
332POINTS:   1
333DIFFICULTY:   Easy
334QUESTION TYPE:   True / False
335HAS VARIABLES:   False
336LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
337NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
338STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
339AICPA: FN-Measurement
340United States - AK - AICPA: FN-Reporting
341KEYWORDS:   Bloom's: Application
342OTHER:   Time: 5 min.
343DATE CREATED:   11/15/2017 1:07 PM
344DATE MODIFIED:   7/24/2018 9:56 PM
345Copyright Cengage Learning. Powered by Cognero. Page 9
346Chapter 05: Gross Income: Exclusions
34717. Sarah’s employer pays the hospitalization insurance premiums for a policy that covers all employees and retired
348former employees. After Sarah retires, the hospital insurance premiums paid for her by her employer can be
349excluded from her gross income.
350a. True
351b. False
352ANSWER:   True
353RATIONALE:   All of the medical insurance premiums are excluded from Sarah’s gross income. The
354exclusion applies to retired former employees as well as current employees.
355POINTS:   1
356DIFFICULTY:   Easy
357QUESTION TYPE:   True / False
358HAS VARIABLES:   False
359LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
360NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
361STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
362KEYWORDS:   Bloom's: Comprehension
363OTHER:   Time: 5 min.
364DATE CREATED:   11/15/2017 1:07 PM
365DATE MODIFIED:   7/24/2018 9:58 PM
366Copyright Cengage Learning. Powered by Cognero. Page 10
367Chapter 05: Gross Income: Exclusions
36818. Meg’s employer carries insurance on its employees that will pay an employee his or her regular salary while the
369employee is away from work due to illness. The premiums for Meg’s coverage were $1,800. Meg was absent from
370work for two months as a result of a kidney infection. Meg’s employer’s insurance company paid Meg’s regular
371salary of $8,000 while she was away from work. Meg also collected $2,000 on a wage continuation policy she had
372purchased. Meg must include $11,800 in her gross income.
373a. True
374b. False
375ANSWER:   False
376RATIONALE:   The insurance premiums of $1,800 paid by the employer and the $2,000 Meg
377collected on the wage continuation policy she purchased are excluded from gross
378income. The sick pay benefits received of $8,000 must be included in Meg’s gross
379income.
380POINTS:   1
381DIFFICULTY:   Easy
382QUESTION TYPE:   True / False
383HAS VARIABLES:   False
384LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
385NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
386STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
387AICPA: FN-Measurement
388United States - AK - AICPA: FN-Reporting
389KEYWORDS:   Bloom's: Comprehension
390OTHER:   Time: 5 min.
391DATE CREATED:   11/15/2017 1:07 PM
392DATE MODIFIED:   7/24/2018 9:58 PM
393Copyright Cengage Learning. Powered by Cognero. Page 11
394Chapter 05: Gross Income: Exclusions
39519. Melody works for a company with only 22 employees. Her employer contributed $2,000 to her health savings
396account (HSA), and the account earned $100 in interest during the year. Melody withdrew only $1,200 to pay
397medical expenses during the year. Melody is not required to recognize any gross income from the HSA for the year.
398a. True
399b. False
400ANSWER:   True
401RATIONALE:   For an HSA, the employer’s contributions, earnings on the account, and withdrawals
402to pay medical expenses can all be excluded from Melody’s gross income.
403POINTS:   1
404DIFFICULTY:   Easy
405QUESTION TYPE:   True / False
406HAS VARIABLES:   False
407LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
408NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
409STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
410KEYWORDS:   Bloom's: Comprehension
411OTHER:   Time: 2 min.
412DATE CREATED:   11/15/2017 1:07 PM
413DATE MODIFIED:   7/24/2018 9:58 PM
41420. If an employer pays for the employee’s long-term care insurance premiums, the employee can exclude from gross
415income the premiums but all of the benefits collected must be included in gross income.
416a. True
417b. False
418ANSWER:   False
419RATIONALE:   The premiums may be excluded, but only the benefits received in excess of a set
420daily amount are included in gross income.
421POINTS:   1
422DIFFICULTY:   Easy
423QUESTION TYPE:   True / False
424HAS VARIABLES:   False
425LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
426NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
427STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
428KEYWORDS:   Bloom's: Comprehension
429OTHER:   Time: 2 min.
430DATE CREATED:   11/15/2017 1:07 PM
431DATE MODIFIED:   7/24/2018 9:58 PM
432Copyright Cengage Learning. Powered by Cognero. Page 12
433Chapter 05: Gross Income: Exclusions
43421. Employees of a CPA firm located in Maryland may exclude from gross income the meals and lodging provided by
435the employer while they were on an audit in Delaware.
436a. True
437b. False
438ANSWER:   False
439RATIONALE:   Such amounts do not qualify for the meals and lodging exclusion under § 119
440because they are not provided on the employer’s business premises. Note such
441amounts can be excluded as the reimbursement of employee business expenses paid
442under an accountable plan.
443POINTS:   1
444DIFFICULTY:   Easy
445QUESTION TYPE:   True / False
446HAS VARIABLES:   False
447LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
448NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
449STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
450KEYWORDS:   Bloom's: Comprehension
451OTHER:   Time: 2 min.
452DATE CREATED:   11/15/2017 1:07 PM
453DATE MODIFIED:   7/24/2018 9:58 PM
45422. Carla is a deputy sheriff. Her employer requires that she live in the county where she is employed. Housing is very
455expensive; so the county agreed to pay her $4,800 per year to cover the higher cost of housing. Carla must include
456the housing supplement in her gross income.
457a. True
458b. False
459ANSWER:   True
460RATIONALE:   The § 119 exclusion for lodging does not apply because the employer does not
461provide housing on the employer’s premises.
462POINTS:   1
463DIFFICULTY:   Easy
464QUESTION TYPE:   True / False
465HAS VARIABLES:   False
466LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
467NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
468STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
469KEYWORDS:   Bloom's: Comprehension
470OTHER:   Time: 5 min.
471DATE CREATED:   11/15/2017 1:07 PM
472DATE MODIFIED:   7/24/2018 9:58 PM
473Copyright Cengage Learning. Powered by Cognero. Page 13
474Chapter 05: Gross Income: Exclusions
47523. Roger is in the 35% marginal tax bracket. Roger’s employer has created a flexible spending account for medical and
476dental expenses that are not covered by the company’s health insurance plan. Roger had his salary reduced by
477$1,200 during the year for contributions to the flexible spending plan. However, Roger incurred only $1,100 in actual
478expenses for which he was reimbursed. Under the plan, he must forfeit the $100 unused amount. His after-tax cost
479of overfunding the plan is $65.
480a. True
481b. False
482ANSWER:   True
483RATIONALE:   Under this “use or lose” plan, his gross income was reduced by the $100 he
484forfeited. Therefore, his after-tax loss from overfunding was $65 [(1 – .35)($100)].
485POINTS:   1
486DIFFICULTY:   Easy
487QUESTION TYPE:   True / False
488HAS VARIABLES:   False
489LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
490NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
491STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
492AICPA: FN-Measurement
493KEYWORDS:   Bloom's: Comprehension
494OTHER:   Time: 5 min.
495DATE CREATED:   11/15/2017 1:07 PM
496DATE MODIFIED:   7/24/2018 9:58 PM
497Copyright Cengage Learning. Powered by Cognero. Page 14
498Chapter 05: Gross Income: Exclusions
49924. Mauve Company permits employees to occasionally use the copying machine for personal purposes. The copying
500machine is located in the office where the higher paid executives work, so they occasionally use the machine.
501However, the machine is not convenient for use by the lower paid warehouse employees and, thus, they never use
502the copier. The use of the copy machine may not be excluded from gross income because the benefit is
503discriminatory.
504a. True
505b. False
506ANSWER:   False
507RATIONALE:   The benefit is “de minimis,” which means the cost of accounting for the benefit is
508great in relation to the benefit conferred; thus, the anti-discrimination rules do not
509apply.
510POINTS:   1
511DIFFICULTY:   Easy
512QUESTION TYPE:   True / False
513HAS VARIABLES:   False
514LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
515NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
516STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
517KEYWORDS:   Bloom's: Comprehension
518OTHER:   Time: 5 min.
519DATE CREATED:   11/15/2017 1:07 PM
520DATE MODIFIED:   7/24/2018 9:58 PM
52125. Fresh Bakery often has unsold donuts at the end of the day. The bakery allows employees to take the leftovers
522home. The employees are not required to recognize gross income because the bakery does not incur any additional
523cost.
524a. True
525b. False
526ANSWER:   False
527RATIONALE:   The no-additional-cost exclusion applies only to services.
528POINTS:   1
529DIFFICULTY:   Easy
530QUESTION TYPE:   True / False
531HAS VARIABLES:   False
532LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
533NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
534STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
535KEYWORDS:   Bloom's: Comprehension
536OTHER:   Time: 2 min.
537DATE CREATED:   11/15/2017 1:07 PM
538DATE MODIFIED:   7/24/2018 9:58 PM
539Copyright Cengage Learning. Powered by Cognero. Page 15
540Chapter 05: Gross Income: Exclusions
54126. Nicole’s employer pays her $150 per month towards the cost of parking near a railway station where Nicole catches
542the train to work. The employer also pays the cost of the rail pass, $75 per month. Nicole can exclude both of these
543payments from her gross income.
544a. True
545b. False
546ANSWER:   True
547RATIONALE:   The parking and the rail pass are considered qualified transportation fringe benefits
548and can be excluded from Nicole’s gross income. If the parking were not excludible
549as a qualified transportation fringe, the amount would be includible in Nicole’s gross
550income because it is a nondeductible commuting expense. The cost of the rail pass
551would not be deductible for the same reason. Both of these amounts are below the
552statutory monthly ceiling, as adjusted annually for inflation.
553POINTS:   1
554DIFFICULTY:   Easy
555QUESTION TYPE:   True / False
556HAS VARIABLES:   False
557LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
558NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
559STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
560KEYWORDS:   Bloom's: Comprehension
561OTHER:   Time: 5 min.
562DATE CREATED:   11/15/2017 1:07 PM
563DATE MODIFIED:   7/24/2018 9:58 PM
56427. A U.S. citizen who works in France from February 1, 2018 until January 31, 2019 is eligible for the foreign earned
565income exclusion in 2018 and 2019.
566a. True
567b. False
568ANSWER:   True
569RATIONALE:   The taxpayer was working in the foreign country for at least 330 days in 12
570consecutive months. So the taxpayer qualifies for the foreign earned income
571exclusion for the eleven month period in 2018 and the one month in 2019.
572POINTS:   1
573DIFFICULTY:   Easy
574QUESTION TYPE:   True / False
575HAS VARIABLES:   False
576LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
577NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
578STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
579KEYWORDS:   Bloom's: Comprehension
580OTHER:   Time: 2 min.
581DATE CREATED:   11/15/2017 1:07 PM
582DATE MODIFIED:   7/24/2018 9:58 PM
583Copyright Cengage Learning. Powered by Cognero. Page 16
584Chapter 05: Gross Income: Exclusions
58528. A U.S. citizen is always required to include in gross income the salary and wages earned while working in a foreign
586country even if the foreign country taxes the income.
587a. True
588b. False
589ANSWER:   False
590RATIONALE:   The income is included in gross income unless the foreign earned income exclusion
591applies. To be eligible for the foreign earned income exclusion, the taxpayer must
592either (1) be a bona fide resident of the foreign country or (2) be present in a foreign
593country for at least 330 days during any 12 consecutive months. The exclusion
594applies regardless of whether the foreign country taxes the income.
595POINTS:   1
596DIFFICULTY:   Easy
597QUESTION TYPE:   True / False
598HAS VARIABLES:   False
599LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
600NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
601STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
602KEYWORDS:   Bloom's: Comprehension
603OTHER:   Time: 2 min.
604DATE CREATED:   11/15/2017 1:07 PM
605DATE MODIFIED:   7/24/2018 9:58 PM
60629. Calvin miscalculated his income in 2016 and overpaid his state income tax by $10,000. In 2017, he amended his 2016
607state income tax return and received a $10,000 refund and $900 interest. Calvin itemized his deductions in 2016,
608deducting $12,000 in state income tax and $30,000 total itemized deductions. As a result of the amended return in
6092017, Calvin must recognize $10,900 of gross income.
610a. True
611b. False
612ANSWER:   True
613RATIONALE:   The $10,000 is included in gross income under the tax benefit rule. Interest on a state
614tax refund does not qualify for the state and local interest exclusion.
615POINTS:   1
616DIFFICULTY:   Easy
617QUESTION TYPE:   True / False
618HAS VARIABLES:   False
619LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-02 - LO: 5-02
620NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
621STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
622KEYWORDS:   Bloom's: Comprehension
623OTHER:   Time: 2 min.
624DATE CREATED:   11/15/2017 1:07 PM
625DATE MODIFIED:   7/24/2018 7:02 PM
626Copyright Cengage Learning. Powered by Cognero. Page 17
627Chapter 05: Gross Income: Exclusions
62830. Sam, a single individual, took an itemized deduction of $5,500 for state income tax paid in 2018. His total itemized
629deductions in 2018 were $18,000. In 2019, he received a $900 refund of his 2018 state income tax. Sam must include
630the $900 refund in his 2019 Federal gross income in accordance with the tax benefit rule.
631a. True
632b. False
633ANSWER:   True
634RATIONALE:   The taxpayer’s 2018 taxable income was reduced by $5,500 as a result of paying the
635state income tax. Therefore, under the tax benefit rule, the $900 refund must be
636included in 2019 gross income.
637POINTS:   1
638DIFFICULTY:   Easy
639QUESTION TYPE:   True / False
640HAS VARIABLES:   False
641LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-03 - LO: 5-03
642NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
643STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
644AICPA: FN-Measurement
645KEYWORDS:   Bloom's: Comprehension
646OTHER:   Time: 5 min.
647DATE CREATED:   11/15/2017 1:07 PM
648DATE MODIFIED:   7/24/2018 7:02 PM
64931. The taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2018 and as a result his
650taxable income was reduced by $5,000. The taxpayer discovered his error in 2019. The taxpayer must add $5,000 to
651his 2019 gross income in accordance with the tax benefit rule to correct for the 2018 error.
652a. True
653b. False
654ANSWER:   False
655RATIONALE:   The tax benefit rule applies when the taxpayer claims a deduction in one year, but in
656a later year receives an adjustment (e.g., a refund) to the amount of the expense.
657POINTS:   1
658DIFFICULTY:   Easy
659QUESTION TYPE:   True / False
660HAS VARIABLES:   False
661LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-09 - LO: 4-09
662NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
663STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
664AICPA: FN-Measurement
665KEYWORDS:   Bloom's: Comprehension
666OTHER:   Time: 5 min.
667DATE CREATED:   11/15/2017 1:07 PM
668DATE MODIFIED:   7/24/2018 8:58 PM
669Copyright Cengage Learning. Powered by Cognero. Page 18
670Chapter 05: Gross Income: Exclusions
67132. Mia participated in a qualified state tuition program for the benefit of her son Michael. She contributed $15,000.
672When Michael entered college, the balance in the fund satisfied the tuition charge of $20,000. When the funds were
673withdrawn to pay the college tuition for Michael, neither Mia nor Michael must include $5,000 ($20,000 – $15,000) in
674gross income.
675a. True
676b. False
677ANSWER:   True
678RATIONALE:   The earnings of a qualified state tuition program are excluded from gross income
679provided that the contributions and earnings are used for qualified higher education
680expenses. Change made by the Tax Cuts and Jobs Act (TCJA) of 2017 treat
681"qualified higher education expenses" as including tuition for elementary and
682secondary public, private, or religious school (§ 529(c)(7)).
683POINTS:   1
684DIFFICULTY:   Easy
685QUESTION TYPE:   True / False
686HAS VARIABLES:   False
687LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-02 - LO: 5-02
688NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
689STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
690KEYWORDS:   Bloom's: Comprehension
691OTHER:   Time: 2 min.
692DATE CREATED:   11/15/2017 1:07 PM
693DATE MODIFIED:   7/24/2018 7:02 PM
694Copyright Cengage Learning. Powered by Cognero. Page 19
695Chapter 05: Gross Income: Exclusions
69633. The earnings from a qualified state tuition program account are deferred from taxation until they are used for
697qualified higher education expenses. At that time, the amount taken from the fund must be included in the gross
698income of the person who contributed to the account.
699a. True
700b. False
701ANSWER:   False
702RATIONALE:   The earnings from a qualified tuition program are excluded from gross income of the
703contributor and the student when the funds are withdrawn to pay for qualified higher
704education expenses. So exclusion treatment is appropriate in this situation.
705POINTS:   1
706DIFFICULTY:   Easy
707QUESTION TYPE:   True / False
708HAS VARIABLES:   False
709LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-02 - LO: 5-02
710NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
711STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
712KEYWORDS:   Bloom's: Comprehension
713OTHER:   Time: 2 min.
714DATE CREATED:   11/15/2017 1:07 PM
715DATE MODIFIED:   7/24/2018 7:02 PM
71634. Benny loaned $100,000 to his controlled corporation. When it became apparent the corporation would not be able to
717repay the loan in the near future, Benny canceled the debt. The corporation should treat the cancellation as a
718nontaxable contribution to capital.
719a. True
720b. False
721ANSWER:   True
722RATIONALE:   When a shareholder forgives his or her solvent corporation of its liability, the
723corporation is not required to recognize income. The corporation is deemed to have
724received a contribution of capital from the shareholder.
725POINTS:   1
726DIFFICULTY:   Easy
727QUESTION TYPE:   True / False
728HAS VARIABLES:   False
729LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-04 - LO: 5-04
730NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
731STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
732KEYWORDS:   Bloom's: Comprehension
733OTHER:   Time: 2 min.
734DATE CREATED:   11/15/2017 1:07 PM
735DATE MODIFIED:   7/24/2018 7:02 PM
736Copyright Cengage Learning. Powered by Cognero. Page 20
737Chapter 05: Gross Income: Exclusions
73835. Zork Corporation was very profitable and had accumulated excess cash. The company decided to repurchase some
739of its bonds that had been issued for $1,000,000. Because of an increase in market interest rates, Zork was able to
740retire the bonds for $900,000. The company is not required to recognize $100,000 of income from the discharge of its
741indebtedness but must reduce the basis in its assets.
742a. True
743b. False
744ANSWER:   False
745RATIONALE:   The reduction in liabilities increases the corporation’s net worth and, thus, the
746corporation realized income. The basis reduction rules do not apply because the
747company is not bankrupt or insolvent.
748POINTS:   1
749DIFFICULTY:   Easy
750QUESTION TYPE:   True / False
751HAS VARIABLES:   False
752LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-04 - LO: 5-04
753NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
754STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
755KEYWORDS:   Bloom's: Comprehension
756OTHER:   Time: 2 min.
757DATE CREATED:   11/15/2017 1:07 PM
758DATE MODIFIED:   7/24/2018 7:02 PM
759Copyright Cengage Learning. Powered by Cognero. Page 21
760Chapter 05: Gross Income: Exclusions
76136. Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000. One
762year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was
763apparent that Amber would not be able to continue to make the monthly payments on the mortgage. Ted reduced the
764amount owed by Amber to $600,000. This reduced the monthly payments to a level that Amber could pay. Amber
765must recognize $125,000 income from the reduction in the debt by Ted.
766a. True
767b. False
768ANSWER:   False
769RATIONALE:   The reduction in the debt is being made by the person who sold the property to
770Amber. Therefore, Amber can reduce its basis in the building by $125,000, rather
771than recognizing income of $125,000.
772POINTS:   1
773DIFFICULTY:   Easy
774QUESTION TYPE:   True / False
775HAS VARIABLES:   False
776LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-04 - LO: 5-04
777NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
778STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
779KEYWORDS:   Bloom's: Comprehension
780OTHER:   Time: 5 min.
781DATE CREATED:   11/15/2017 1:07 PM
782DATE MODIFIED:   7/24/2018 7:02 PM
783Copyright Cengage Learning. Powered by Cognero. Page 22
784Chapter 05: Gross Income: Exclusions
785Multiple Choice
78637. The taxpayer’s marginal federal and state tax rate is 25%. Which would the taxpayer prefer?
787a. $1.00 taxable income rather than $1.25 tax-exempt income.
788b. $1.00 taxable income rather than $.75 tax-exempt income.
789c. $1.25 taxable income rather than $1.00 tax-exempt income.
790d. $1.40 taxable income rather than $1.00 tax-exempt income.
791e. None of these.
792ANSWER:   d
793RATIONALE:   The $1.40 of taxable income is greater after-tax than $1.00 in taxable income [(1 –
794.25)($1.40) = $1.05]. Choice b. is incorrect because the $1.00 of taxable income and
795$.75 of tax-exempt income are equal on an after-tax basis (1 – .25) × $1.00 = $.75.
796Choice c. is incorrect because (1 – .25) × $1.25 = $.9375.
797POINTS:   1
798DIFFICULTY:   Moderate
799QUESTION TYPE:   Multiple Choice
800HAS VARIABLES:   False
801LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-01 - LO: 5-01
802CMPV.SWFT.LO: 5-02 - LO: 5-02
803NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
804STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
805AICPA: FN-Measurement
806KEYWORDS:   Bloom's: Application
807OTHER:   Time: 5 min.
808DATE CREATED:   11/15/2017 1:07 PM
809DATE MODIFIED:   7/24/2018 7:02 PM
810Copyright Cengage Learning. Powered by Cognero. Page 23
811Chapter 05: Gross Income: Exclusions
81238. Cash received by an employee from an employer:
813a. Is not included in gross income if it was not earned.
814b. Is not taxable unless the payor is legally obligated to make the payment.
815c. Must always be included in gross income.
816d. May be included in gross income although the payor is not legally obligated to make the payment.
817e. None of these.
818ANSWER:   d
819RATIONALE:   See the discussion of Comm. v. Duberstein.
820POINTS:   1
821DIFFICULTY:   Easy
822QUESTION TYPE:   Multiple Choice
823HAS VARIABLES:   False
824LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-02 - LO: 5-02
825NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
826STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
827KEYWORDS:   Bloom's: Comprehension
828OTHER:   Time: 5 min.
829DATE CREATED:   11/15/2017 1:07 PM
830DATE MODIFIED:   7/24/2018 7:02 PM
831Copyright Cengage Learning. Powered by Cognero. Page 24
832Chapter 05: Gross Income: Exclusions
83339. Sharon had some insider information about a corporate takeover. She unintentionally informed a friend, who
834immediately bought the stock in the target corporation. The takeover occurred and the friend made a substantial
835profit from buying and selling the stock. The friend told Sharon about his stock dealings, and gave her a pearl
836necklace because she “made it all possible.” The necklace was worth $10,000, but she already owned more jewelry
837than she desired.
838a. The necklace is a nontaxable gift received by Sharon because the friend was not legally required to make the
839gift.
840b. The value of the necklace is not included in Sharon’s gross income unless she sells it.
841c. The value of the necklace is not included in Sharon’s gross income because passing the information was an
842illegal act and the SEC can confiscate the necklace.
843d. The value of the necklace must be included in Sharon’s gross income for the tax year it was received by her.
844e. None of these.
845ANSWER:   d
846RATIONALE:   The necklace Sharon received from her friend was compensation for the
847information, rather than an amount received out of detached generosity. The fact the
848friend was not legally obligated to make the payment does not affect the outcome in
849this case.
850POINTS:   1
851DIFFICULTY:   Easy
852QUESTION TYPE:   Multiple Choice
853HAS VARIABLES:   False
854LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-02 - LO: 5-02
855NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
856STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
857KEYWORDS:   Bloom's: Comprehension
858OTHER:   Time: 5 min.
859DATE CREATED:   11/15/2017 1:07 PM
860DATE MODIFIED:   7/24/2018 7:02 PM
861Copyright Cengage Learning. Powered by Cognero. Page 25
862Chapter 05: Gross Income: Exclusions
86340. Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased
864husband in 10 installments of $17,500 each. Her husband had paid premiums of $60,000 on the policy. In the first
865year, Carin collected $17,500 from the insurance company. She must include in gross income:
866a. $0.
867b. $2,500.
868c. $10,000.
869d. $25,000.
870e. None of these.
871ANSWER:   b
872RATIONALE:   The interest element of $25,000 ($175,000 – $150,000) is included in Carin’s gross
873income. The payments are taxed as an annuity, and therefore $2,500
874[($25,000/$175,000) × $17,500] is included in Carin’s gross income in the first year.
875POINTS:   1
876DIFFICULTY:   Easy
877QUESTION TYPE:   Multiple Choice
878HAS VARIABLES:   False
879LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-07 - LO: 4-07
880NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
881STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
882AICPA: FN-Measurement
883KEYWORDS:   Bloom's: Application
884OTHER:   Time: 5 min.
885DATE CREATED:   11/15/2017 1:07 PM
886DATE MODIFIED:   7/24/2018 8:58 PM
887Copyright Cengage Learning. Powered by Cognero. Page 26
888Chapter 05: Gross Income: Exclusions
88941. Iris collected $150,000 on her deceased husband’s life insurance policy. The policy was purchased by the husband’s
890employer under a group policy. Iris’s husband had included $5,000 in gross income from the group term life insurance
891premiums during the years he worked for the employer. She elected to collect the policy in 10 equal annual payments
892of $18,000 each.
893a. None of the payments must be included in Iris’s gross income.
894b. The amount she receives in the first year is a nontaxable return of capital.
895c. For each $18,000 payment that Iris receives, she can exclude $500 ($5,000/$180,000 × $18,000) from gross
896income.
897d. For each $18,000 payment that Iris receives, she can exclude $15,000 ($150,000/$180,000 × $18,000) from
898gross income.
899e. None of these.
900ANSWER:   d
901RATIONALE:   The life insurance proceeds of $150,000 are excluded from Iris’s gross income. The
902income portion of each annuity payment is $3,000 ($18,000 – $15,000 recovery of
903capital). The recovery of capital of each annuity payment is $15,000
904[($150,000/$180,000) × $18,000].
905POINTS:   1
906DIFFICULTY:   Easy
907QUESTION TYPE:   Multiple Choice
908HAS VARIABLES:   False
909LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-07 - LO: 4-07
910NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
911STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
912AICPA: FN-Measurement
913KEYWORDS:   Bloom's: Application
914OTHER:   Time: 5 min.
915DATE CREATED:   11/15/2017 1:07 PM
916DATE MODIFIED:   7/24/2018 8:58 PM
917Copyright Cengage Learning. Powered by Cognero. Page 27
918Chapter 05: Gross Income: Exclusions
91942. Turquoise Company purchased a life insurance policy on the company’s chief executive officer, Joe. After the
920company had paid $400,000 in premiums, Joe died and the company collected the $1.5 million face amount of the
921policy. The company also purchased group term life insurance on all its employees. Joe had included $16,000 in gross
922income for the group term life insurance premiums. Joe’s widow, Rebecca, received the $100,000 proceeds from the
923group term life insurance policy.
924a. Rebecca can exclude the life insurance proceeds of $100,000, but Turquoise Company must include
925$1,100,000 ($1,500,000 – $400,000) in gross income.
926b. Turquoise Company and Rebecca can exclude the life insurance proceeds of $1,500,000 and $100,000,
927respectively, from gross income.
928c. Turquoise Company can exclude $1,100,000 ($1,500,000 – $400,000) from gross income, but Rebecca must
929include $84,000 in gross income.
930d. Turquoise Company must include $1,100,000 ($1,500,000 – $400,000) in gross income and Rebecca must
931include $100,000 in gross income.
932e. None of these.
933ANSWER:   b
934RATIONALE:   All of the proceeds qualify for the life insurance exclusion because the payments
935were received as a result of the death of the insured.
936POINTS:   1
937DIFFICULTY:   Easy
938QUESTION TYPE:   Multiple Choice
939HAS VARIABLES:   False
940LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-07 - LO: 4-07
941NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
942STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
943KEYWORDS:   Bloom's: Application
944OTHER:   Time: 5 min.
945DATE CREATED:   11/15/2017 1:07 PM
946DATE MODIFIED:   7/24/2018 8:58 PM
947Copyright Cengage Learning. Powered by Cognero. Page 28
948Chapter 05: Gross Income: Exclusions
94943. Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance. If a
950customer dies, the company receives from the insurance company the balance due on the customer’s loan. Ali, a
951customer, died owing Swan $1,500. The balance due included $200 accrued interest that Swan has included in
952income. When Swan collects $1,500 from the insurance company, Swan:
953a. Must recognize $1,500 income from the life insurance proceeds.
954b. Must recognize $1,300 income from the life insurance proceeds.
955c. Does not recognize income because life insurance proceeds are tax-exempt.
956d. Does not recognize income from the life insurance because the entire amount is a recovery of capital.
957e. None of these.
958ANSWER:   d
959RATIONALE:   Swan has a basis in the receivable of $1,500, since it is an accrual method taxpayer.
960POINTS:   1
961DIFFICULTY:   Easy
962QUESTION TYPE:   Multiple Choice
963HAS VARIABLES:   False
964LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-07 - LO: 4-07
965NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
966STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
967KEYWORDS:   Bloom's: Application
968OTHER:   Time: 5 min.
969DATE CREATED:   11/15/2017 1:07 PM
970DATE MODIFIED:   7/24/2018 8:58 PM
971Copyright Cengage Learning. Powered by Cognero. Page 29
972Chapter 05: Gross Income: Exclusions
97344. Ben was diagnosed with a terminal illness. His physician estimated that Ben would live no more than 18 months.
974After he received the doctor’s diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip
975to see relatives and friends before he died. Ben had paid $12,000 in premiums on the policy, and he collected
976$50,000, the cash surrender value of the policy. Henry enjoys excellent health, but he cashed in his life insurance
977policy to purchase a new home. He had paid premiums of $12,000 and collected $50,000 from the insurance
978company.
979a. Neither Ben nor Henry is required to recognize gross income.
980b. Both Ben and Henry must recognize $38,000 ($50,000 – $12,000) of gross income.
981c. Henry must recognize $38,000 ($50,000 – $12,000) of gross income, but Ben does not recognize any gross
982income.
983d. Ben must recognize $38,000 ($50,000 – $12,000) of gross income, but Henry does not recognize any gross
984income.
985e. None of these.
986ANSWER:   c
987RATIONALE:   The redemption of the policy by Ben qualifies as an accelerated death benefit paid to
988a terminally ill policy holder. The exclusion applies regardless of how the insurance
989proceeds are used. Thus, the realized gain of $38,000 is excluded from Ben’s gross
990income.
991POINTS:   1
992DIFFICULTY:   Easy
993QUESTION TYPE:   Multiple Choice
994HAS VARIABLES:   False
995LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-02 - LO: 5-02
996NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
997STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
998AICPA: FN-Measurement
999KEYWORDS:   Bloom's: Application
1000OTHER:   Time: 5 min.
1001DATE CREATED:   11/15/2017 1:07 PM
1002DATE MODIFIED:   7/24/2018 7:02 PM
1003Copyright Cengage Learning. Powered by Cognero. Page 30
1004Chapter 05: Gross Income: Exclusions
100545. Albert had a terminal illness which required almost constant nursing care for the remaining two years of his
1006estimated life, according to his doctor. Albert had a life insurance policy with a face amount of $100,000. Albert had
1007paid $25,000 of premiums on the policy. The insurance company has offered to pay him $80,000 to cancel the policy,
1008although its cash surrender value was only $55,000. Albert accepted the $80,000. Albert used $15,000 to pay his
1009medical expenses. Albert made a miraculous recovery and lived another 20 years. As a result of cashing in the
1010policy:
1011a. Albert must recognize $55,000 of gross income, but he has $15,000 of deductible medical expenses.
1012b. Albert must recognize $65,000 ($80,000 – $15,000) of gross income.
1013c. Albert must recognize $40,000 ($80,000 – $25,000 – $15,000) of gross income.
1014d. Albert is not required to recognize any gross income because of his terminal illness.
1015e. None of these.
1016ANSWER:   d
1017RATIONALE:   Albert’s realized gain is $55,000 ($80,000 – $25,000). However, Albert was
1018terminally ill and, therefore, can qualify for the accelerated death benefit exclusion
1019for his life insurance policy.
1020POINTS:   1
1021DIFFICULTY:   Moderate
1022QUESTION TYPE:   Multiple Choice
1023HAS VARIABLES:   False
1024LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-02 - LO: 5-02
1025NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1026STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1027AICPA: FN-Measurement
1028KEYWORDS:   Bloom's: Application
1029OTHER:   Time: 5 min.
1030DATE CREATED:   11/15/2017 1:07 PM
1031DATE MODIFIED:   7/24/2018 7:02 PM
1032Copyright Cengage Learning. Powered by Cognero. Page 31
1033Chapter 05: Gross Income: Exclusions
103446. Ron, age 19, is a full-time graduate student at City University. During 2018, he received the following payments:
1035Cash award for being the outstanding resident adviser $ 1,500
1036Resident adviser housing 2,500
1037State scholarship for ten months (tuition and books) 6,000
1038State scholarship (meals allowance) 2,400
1039Loan from college financial aid office 3,000
1040Cash support from parents    2,000
1041$17,400
1042Ron served as a resident adviser in a dormitory and, therefore, the university waived the $2,500 charge for the room
1043he occupied. What is Ron’s adjusted gross income for 2018?
1044a. $1,500.
1045b. $3,900.
1046c. $9,000.
1047d. $15,400.
1048e. None of these.
1049ANSWER:   b
1050RATIONALE:   The $1,500 award for being the outstanding resident adviser is included in Ron’s
1051gross income. The $2,400 meal allowance must also be included in Ron’s gross
1052income. The $2,500 waiver for housing is not included in Ron’s gross income
1053because the housing is provided for the convenience of his employer. The $6,000
1054scholarship for tuition and books is excluded from his gross income. The loan of
1055$3,000 is not income.
1056POINTS:   1
1057DIFFICULTY:   Easy
1058QUESTION TYPE:   Multiple Choice
1059HAS VARIABLES:   False
1060LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
1061NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1062STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1063AICPA: FN-Measurement
1064KEYWORDS:   Bloom's: Application
1065OTHER:   Time: 5 min.
1066DATE CREATED:   11/15/2017 1:07 PM
1067DATE MODIFIED:   7/24/2018 9:56 PM
1068Copyright Cengage Learning. Powered by Cognero. Page 32
1069Chapter 05: Gross Income: Exclusions
107047. A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:
1071a. Only tuition.
1072b. Tuition, books, and supplies.
1073c. Tuition, books, supplies, meals, and lodging.
1074d. Meals and lodging.
1075e. None of these.
1076ANSWER:   b
1077POINTS:   1
1078DIFFICULTY:   Easy
1079QUESTION TYPE:   Multiple Choice
1080HAS VARIABLES:   False
1081LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
1082NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1083STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
1084KEYWORDS:   Bloom's: Comprehension
1085OTHER:   Time: 5 min.
1086DATE CREATED:   11/15/2017 1:07 PM
1087DATE MODIFIED:   7/24/2018 9:56 PM
1088Copyright Cengage Learning. Powered by Cognero. Page 33
1089Chapter 05: Gross Income: Exclusions
109048. Barney is a full-time graduate student at State University. He serves as a teaching assistant for which he is paid
1091$700 per month for 9 months and his $5,000 tuition is waived. The university waives tuition for all of its employees.
1092In addition, he receives a $1,500 research grant to pursue his own research and studies. Barney’s gross income from
1093the above is:
1094a. $0.
1095b. $6,300.
1096c. $11,300.
1097d. $12,800.
1098e. None of these.
1099ANSWER:   b
1100RATIONALE:   The monthly stipend of $700 (for 9 months = $6,300) for teaching is taxable
1101compensation. The research grant of $1,500 is to assist him in his education and is
1102not in exchange for services; therefore, the grant is a nontaxable scholarship. The
1103tuition waiver is excluded as a qualified tuition reduction program.
1104POINTS:   1
1105DIFFICULTY:   Easy
1106QUESTION TYPE:   Multiple Choice
1107HAS VARIABLES:   False
1108LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
1109NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1110STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1111AICPA: FN-Measurement
1112KEYWORDS:   Bloom's: Application
1113OTHER:   Time: 5 min.
1114DATE CREATED:   11/15/2017 1:07 PM
1115DATE MODIFIED:   7/24/2018 9:56 PM
1116Copyright Cengage Learning. Powered by Cognero. Page 34
1117Chapter 05: Gross Income: Exclusions
111849. Jena is a full-time undergraduate student at State University and qualifies  as a dependent of her parents. Her only
1119source of income is a $10,000 athletic scholarship ($1,000 for books, $5,500 tuition, $500 student activity fee, and
1120$3,000 room and board). Jena’s gross income for the year is:
1121a. $10,000.
1122b. $4,000.
1123c. $3,000.
1124d. $500.
1125e. None of these.
1126ANSWER:   c
1127RATIONALE:   The portion included in gross income is $3,000 for room and board. The books
1128($1,000), tuition ($5,500), and student activity fee ($500) qualify for exclusion. The
1129fact that the scholarship is received for athletic, rather than academic, achievement
1130is irrelevant, because the payments are to further the student’s education.
1131POINTS:   1
1132DIFFICULTY:   Easy
1133QUESTION TYPE:   Multiple Choice
1134HAS VARIABLES:   False
1135LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
1136NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1137STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1138AICPA: FN-Measurement
1139KEYWORDS:   Bloom's: Application
1140OTHER:   Time: 5 min.
1141DATE CREATED:   11/15/2017 1:07 PM
1142DATE MODIFIED:   7/24/2018 9:56 PM
1143Copyright Cengage Learning. Powered by Cognero. Page 35
1144Chapter 05: Gross Income: Exclusions
114550. As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000
1146to each of his three children. The scholarships are paid by the company on behalf of the children of key employees
1147directly to each child’s educational institution and are payable only if the student maintains a B average.
1148a. The tuition payments of $30,000 may be excluded from Ollie’s gross income as a scholarship.
1149b. The tuition payments of $10,000 each must be included in the child’s gross income.
1150c. The tuition payments of $30,000 may be excluded from Ollie’s gross income because the payments are for the
1151academic achievements of the children.
1152d. The tuition payments of $30,000 must be included in Ollie’s gross income.
1153e. None of these.
1154ANSWER:   d
1155RATIONALE:   The tuition payments of $30,000 are compensation to Ollie since the awards are only
1156to children of key employees.
1157POINTS:   1
1158DIFFICULTY:   Easy
1159QUESTION TYPE:   Multiple Choice
1160HAS VARIABLES:   False
1161LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
1162NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1163STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1164AICPA: FN-Measurement
1165KEYWORDS:   Bloom's: Application
1166OTHER:   Time: 5 min.
1167DATE CREATED:   11/15/2017 1:07 PM
1168DATE MODIFIED:   7/24/2018 9:56 PM
1169Copyright Cengage Learning. Powered by Cognero. Page 36
1170Chapter 05: Gross Income: Exclusions
117151. The taxpayer is a Ph.D. student in accounting at City University. The student is paid $1,500 per month for teaching
1172two classes. The total amount received for the year is $13,500.
1173a. The $13,500 is excludible if the money is used to pay for tuition and books.
1174b. The $13,500 is taxable compensation.
1175c. The $13,500 is considered a scholarship and, therefore, is excluded.
1176d. The $13,500 is excluded because the total amount received for the year is less than her standard deduction
1177and personal exemption.
1178e. None of these.
1179ANSWER:   b
1180RATIONALE:   The $13,500 represents compensation for services rendered and must be included in
1181the student’s gross income.
1182POINTS:   1
1183DIFFICULTY:   Easy
1184QUESTION TYPE:   Multiple Choice
1185HAS VARIABLES:   False
1186LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
1187NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1188STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
1189KEYWORDS:   Bloom's: Application
1190OTHER:   Time: 5 min.
1191DATE CREATED:   11/15/2017 1:07 PM
1192DATE MODIFIED:   7/24/2018 9:56 PM
1193Copyright Cengage Learning. Powered by Cognero. Page 37
1194Chapter 05: Gross Income: Exclusions
119552. During the current year, Khalid was in an automobile accident and suffered physical injuries. The accident was
1196caused by Rashad’s negligence. Khalid threatened to file a lawsuit against Amber Trucking Company, Rashad’s
1197employer, claiming $50,000 for pain and suffering, $90,000 for loss of income, and $70,000 in punitive damages.
1198Amber’s insurance company will not pay punitive damages; therefore, Amber has offered to settle the case for
1199$100,000 for pain and suffering, $90,000 for loss of income, and nothing for punitive damages. Khalid is in the 35%
1200marginal tax bracket. What is the after-tax difference to Khalid between Khalid’s original claim and Amber’s offer?
1201a. Amber’s offer is $20,000 less. ($50,000 + $90,000 + $70,000 – $100,000 – $90,000).
1202b. Amber’s offer is $7,000 less. [($50,000 + $90,000 + $70,000 – $100,000 – $90,000) × .35)].
1203c. Amber’s offer is $4,500 more. {$190,000 – ($50,000 + $90,000) + [$70,000 × (1 – .35)]}.
1204d. Amber’s offer is $22,000 more. [($190,000 – $210,000) + ($120,000 × .35)].
1205e. None of these.
1206ANSWER:   c
1207RATIONALE:   Only the punitive damages are taxable. The after-tax proceeds from the amount of
1208punitive damages claimed, (1 – .35) × $70,000 = $45,500.
1209POINTS:   1
1210DIFFICULTY:   Moderate
1211QUESTION TYPE:   Multiple Choice
1212HAS VARIABLES:   False
1213LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
1214NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1215STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1216AICPA: FN-Measurement
1217KEYWORDS:   Bloom's: Application
1218OTHER:   Time: 5 min.
1219DATE CREATED:   11/15/2017 1:07 PM
1220DATE MODIFIED:   7/24/2018 9:56 PM
1221Copyright Cengage Learning. Powered by Cognero. Page 38
1222Chapter 05: Gross Income: Exclusions
122353. Christie sued her former employer for a back injury she suffered on the job in 2018. As a result of the injury, she
1224was partially disabled. In 2019, she received $240,000 for her loss of future income, $160,000 in punitive damages
1225because of the employer’s flagrant disregard for the employee’s safety, and $15,000 for medical expenses. The
1226medical expenses were deducted on her 2018 return, reducing her taxable income by $12,000. Christie’s 2019 gross
1227income from the above is:
1228a. $415,000.
1229b. $412,000.
1230c. $255,000.
1231d. $175,000.
1232e. $172,000.
1233ANSWER:   e
1234RATIONALE:   Christie must include in gross income the $160,000 of punitive damages received and
1235the $12,000 for the previously deducted medical expenses. The medical expense
1236recovery is included in gross income under the tax benefit rule.
1237POINTS:   1
1238DIFFICULTY:   Moderate
1239QUESTION TYPE:   Multiple Choice
1240HAS VARIABLES:   False
1241LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
1242NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1243STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1244AICPA: FN-Measurement
1245KEYWORDS:   Bloom's: Application
1246OTHER:   Time: 5 min.
1247DATE CREATED:   11/15/2017 1:07 PM
1248DATE MODIFIED:   7/24/2018 9:56 PM
1249Copyright Cengage Learning. Powered by Cognero. Page 39
1250Chapter 05: Gross Income: Exclusions
125154. Early in the year, Marion was in an automobile accident during the course of his employment. As a result of the
1252physical injuries he sustained, he received the following payments during the year:
1253Reimbursement of medical expenses Marion paid by a medical
1254insurance policy he purchased $10,000
1255Damage settlement to replace his lost salary 15,000
1256What is the amount that Marion must include in gross income for the current year?
1257a. $25,000.
1258b. $15,000.
1259c. $12,500.
1260d. $10,000.
1261e. $0.
1262ANSWER:   e
1263RATIONALE:   The medical expenses of $10,000 that were reimbursed by Marion’s medical
1264insurance policy can be excluded from gross income. The $15,000 Marion received
1265for the physical personal injury damage settlement can be excluded from gross
1266income even though the payment replaces his salary.
1267POINTS:   1
1268DIFFICULTY:   Easy
1269QUESTION TYPE:   Multiple Choice
1270HAS VARIABLES:   False
1271LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
1272NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1273STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
1274KEYWORDS:   Bloom's: Application
1275OTHER:   Time: 5 min.
1276DATE CREATED:   11/15/2017 1:07 PM
1277DATE MODIFIED:   7/24/2018 9:56 PM
1278Copyright Cengage Learning. Powered by Cognero. Page 40
1279Chapter 05: Gross Income: Exclusions
128055. Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for
1281loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000.
1282As a result of the settlement, Theresa must include in gross income:
1283a. $700,000.
1284b. $500,000.
1285c. $490,000 [($700,000/$1,000,000) × $700,000].
1286d. $0.
1287e. None of these.
1288ANSWER:   a
1289RATIONALE:   The damages did not arise out of a physical personal injury; therefore, none of the
1290amount received can be excluded from gross income.
1291POINTS:   1
1292DIFFICULTY:   Easy
1293QUESTION TYPE:   Multiple Choice
1294HAS VARIABLES:   False
1295LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
1296NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1297STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1298AICPA: FN-Measurement
1299KEYWORDS:   Bloom's: Application
1300OTHER:   Time: 5 min.
1301DATE CREATED:   11/15/2017 1:07 PM
1302DATE MODIFIED:   7/24/2018 9:56 PM
1303Copyright Cengage Learning. Powered by Cognero. Page 41
1304Chapter 05: Gross Income: Exclusions
130556. Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for
1306damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive
1307damages. Jack must include in his gross income as a damage award:
1308a. $0.
1309b. $100,000.
1310c. $120,000.
1311d. $270,000.
1312e. None of these.
1313ANSWER:   d
1314RATIONALE:   None of the damages received were the result of a physical personal injury or
1315sickness and therefore the total amount received must be included in gross income.
1316Even if the damages were the result of physical personal injury, the punitive damages
1317would be included in his gross income.
1318POINTS:   1
1319DIFFICULTY:   Easy
1320QUESTION TYPE:   Multiple Choice
1321HAS VARIABLES:   False
1322LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
1323NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1324STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1325AICPA: FN-Measurement
1326KEYWORDS:   Bloom's: Application
1327OTHER:   Time: 5 min.
1328DATE CREATED:   11/15/2017 1:07 PM
1329DATE MODIFIED:   7/24/2018 9:56 PM
1330Copyright Cengage Learning. Powered by Cognero. Page 42
1331Chapter 05: Gross Income: Exclusions
133257. Olaf was injured in an automobile accident and received $25,000 for his physical injury, $50,000 for his loss of
1333income, and $10,000 punitive damages. As a result of the award, the amount Olaf must include in gross income is:
1334a. $10,000.
1335b. $50,000.
1336c. $60,000.
1337d. $85,000.
1338e. None of these.
1339ANSWER:   a
1340RATIONALE:   Punitive damages are never excluded from gross income.
1341POINTS:   1
1342DIFFICULTY:   Easy
1343QUESTION TYPE:   Multiple Choice
1344HAS VARIABLES:   False
1345LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
1346NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1347STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1348AICPA: FN-Measurement
1349KEYWORDS:   Bloom's: Application
1350OTHER:   Time: 5 min.
1351DATE CREATED:   11/15/2017 1:07 PM
1352DATE MODIFIED:   7/24/2018 9:56 PM
135358. The exclusion for health insurance premiums paid by the employer applies to:
1354a. Only current employees and their spouses.
1355b. Only current employees and their spouses and dependents.
1356c. Only current employees and their disabled spouses.
1357d. Current employees, retired former employees, and their spouses and dependents.
1358e. None of these.
1359ANSWER:   d
1360POINTS:   1
1361DIFFICULTY:   Easy
1362QUESTION TYPE:   Multiple Choice
1363HAS VARIABLES:   False
1364LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1365NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1366STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
1367KEYWORDS:   Bloom's: Comprehension
1368OTHER:   Time: 5 min.
1369DATE CREATED:   11/15/2017 1:07 PM
1370DATE MODIFIED:   7/24/2018 9:58 PM
1371Copyright Cengage Learning. Powered by Cognero. Page 43
1372Chapter 05: Gross Income: Exclusions
137359. Julie was suffering from a viral infection that caused her to miss work for 90 days. During the first 30 days of her
1374absence, she received her regular salary of $8,000 from her employer. For the next 60 days, she received $12,000
1375under an accident and health insurance policy purchased by her employer. The premiums on the health insurance
1376policy were excluded from her gross income. During the last 30 days, Julie received $6,000 on an income
1377replacement policy she had purchased. Of the $26,000 she received, Julie must include in gross income:
1378a. $0.
1379b. $6,000.
1380c. $8,000.
1381d. $14,000.
1382e. $20,000.
1383ANSWER:   e
1384RATIONALE:   The $6,000 received under the accident and income replacement policy Julie
1385purchased is excluded from her gross income.
1386POINTS:   1
1387DIFFICULTY:   Easy
1388QUESTION TYPE:   Multiple Choice
1389HAS VARIABLES:   False
1390LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1391NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1392STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1393AICPA: FN-Measurement
1394KEYWORDS:   Bloom's: Application
1395OTHER:   Time: 5 min.
1396DATE CREATED:   11/15/2017 1:07 PM
1397DATE MODIFIED:   7/24/2018 9:58 PM
1398Copyright Cengage Learning. Powered by Cognero. Page 44
1399Chapter 05: Gross Income: Exclusions
140060. Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers
1401all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each
1402year, the employer contributes $1,500 to each employee’s health savings account (HSA). Matilda’s employer made
1403the contributions in 2017 and 2018, and the account earned $100 interest in 2018. At the end of 2018, Matilda
1404withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other
1405medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2018
1406gross income:
1407a. $0.
1408b. $100.
1409c. $1,600.
1410d. $3,100.
1411e. None of these.
1412ANSWER:   a
1413RATIONALE:   With a health savings account (HSA), the employee is not taxed when the money is
1414contributed, as income is earned in the account, or when amounts are withdrawn to
1415pay for medical expenses.
1416POINTS:   1
1417DIFFICULTY:   Easy
1418QUESTION TYPE:   Multiple Choice
1419HAS VARIABLES:   False
1420LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1421NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1422STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1423AICPA: FN-Measurement
1424KEYWORDS:   Bloom's: Application
1425OTHER:   Time: 5 min.
1426DATE CREATED:   11/15/2017 1:07 PM
1427DATE MODIFIED:   7/24/2018 9:58 PM
1428Copyright Cengage Learning. Powered by Cognero. Page 45
1429Chapter 05: Gross Income: Exclusions
143061. All employees of United Company are covered by a group hospitalization insurance plan, but the employees must
1431pay the premiums ($8,000 for each employee). None of the employees has sufficient medical expenses to deduct the
1432premiums. Instead of giving raises next year, United is considering paying the employee’s hospitalization insurance
1433premiums. If the change is made, the employee’s after-tax and insurance pay will:
1434a. Decrease by the same amount for all employees.
1435b. Increase more for the lower paid employees (10% and 12% marginal tax bracket).
1436c. Increase more for the higher income (35% marginal tax bracket) employees.
1437d. Increase by the same amount for all employees.
1438e. None of these.
1439ANSWER:   c
1440RATIONALE:   Each employee’s income, less taxes and insurance, would increase by the cost of
1441insurance times the employee’s marginal tax rate. The employees who are in the
1442higher tax brackets will benefit more from the change than the employees in the
1443lower tax brackets.
1444POINTS:   1
1445DIFFICULTY:   Easy
1446QUESTION TYPE:   Multiple Choice
1447HAS VARIABLES:   False
1448LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1449NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1450STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1451AICPA: FN-Measurement
1452KEYWORDS:   Bloom's: Application
1453OTHER:   Time: 5 min.
1454DATE CREATED:   11/15/2017 1:07 PM
1455DATE MODIFIED:   7/24/2018 9:58 PM
1456Copyright Cengage Learning. Powered by Cognero. Page 46
1457Chapter 05: Gross Income: Exclusions
145862. The plant union is negotiating with the Eagle Company, which is on the verge of bankruptcy. Eagle has offered to
1459pay for the employees’ hospitalization insurance in exchange for a wage reduction. The employees each currently
1460pay premiums of $4,000 a year for their insurance.  Which of the following is correct:
1461a. If an employee’s wages are reduced by $5,000 and the employee is in the 24% marginal tax bracket, the
1462employee would benefit from the offer.
1463b. If an employee’s wages are reduced by $4,000 and the employee is in the 12% marginal tax bracket, the
1464employee would benefit from the offer.
1465c. If an employee’s wages are reduced by $6,000 and the employee is in the 35% marginal tax bracket, the
1466employee would benefit from the offer.
1467d. a., b., and c.
1468e. None of these.
1469ANSWER:   d
1470RATIONALE:   In all three cases, the reduction in after-tax pay of the employee will be less than the
1471$4,000 value of the nontaxable insurance premiums to be paid by the employer.
1472Reduction in Pay Marginal
1473Tax Rate
1474Reduction in Tax Reduction in
1475After-tax Income
1476a. $5,000 0.24 $1,200 $3,800
1477b. $4,000 0.12 $ 480 $3,520
1478c. $6,000 0.35 $2,100 $3,900
1479POINTS:   1
1480DIFFICULTY:   Challenging
1481QUESTION TYPE:   Multiple Choice
1482HAS VARIABLES:   False
1483LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1484NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1485STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1486AICPA: FN-Measurement
1487KEYWORDS:   Bloom's: Analysis
1488OTHER:   Time: 10 min.
1489DATE CREATED:   11/15/2017 1:07 PM
1490DATE MODIFIED:   7/24/2018 9:58 PM
1491Copyright Cengage Learning. Powered by Cognero. Page 47
1492Chapter 05: Gross Income: Exclusions
149363. James, a cash basis taxpayer, received the following compensation and fringe benefits in the current year:
1494Salary $66,000
1495Disability income protection premiums 3,000
1496Long-term care insurance premiums 4,000
1497His actual salary was $72,000. He received only $66,000 because his salary was garnished and the employer paid
1498$6,000 on James’s credit card debt he owed. The wage continuation insurance is available to all employees and pays
1499the employee three-fourths of the regular salary if the employee is sick or disabled. The long-term care insurance is
1500available to all employees and pays $150 per day towards a nursing home or similar facility. What is James’s gross
1501income from the above?
1502a. $66,000.
1503b. $72,000.
1504c. $73,000.
1505d. $75,000.
1506e. None of these.
1507ANSWER:   b
1508RATIONALE:   The $6,000 paid to the creditor is income to James as it was used to pay his debt.
1509The disability income protection premiums and long-term care insurance premiums
1510are excluded from gross income.
1511POINTS:   1
1512DIFFICULTY:   Easy
1513QUESTION TYPE:   Multiple Choice
1514HAS VARIABLES:   False
1515LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1516NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1517STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1518AICPA: FN-Measurement
1519KEYWORDS:   Bloom's: Application
1520OTHER:   Time: 5 min.
1521DATE CREATED:   11/15/2017 1:07 PM
1522DATE MODIFIED:   7/24/2018 9:58 PM
1523Copyright Cengage Learning. Powered by Cognero. Page 48
1524Chapter 05: Gross Income: Exclusions
152564. The First Chance Casino has gambling facilities, a bar, a restaurant, and a hotel. All employees are allowed to obtain
1526food from the restaurant at no charge during working hours. In the case of the employees who operate the gambling
1527facilities, bar, and restaurant, 60% of all of Casino’s employees, the meals are provided for the convenience of the
1528Casino. However, the hotel workers demanded equal treatment and therefore were also allowed to eat in the
1529restaurant at no charge while they are at work. Which of the following is correct?
1530a. All the employees are required to include the value of the meals in their gross income.
1531b. Only the restaurant employees may exclude the value of their meals from gross income.
1532c. Only the employees who work in gambling, the bar, and the restaurant may exclude the meals from gross
1533income.
1534d. All of the employees may exclude the value of the meals from gross income.
1535e. None of these.
1536ANSWER:   d
1537RATIONALE:   For more than 50% of the employees, the meals are furnished for the convenience
1538of the employer; therefore, all of the meals are excludible.
1539POINTS:   1
1540DIFFICULTY:   Easy
1541QUESTION TYPE:   Multiple Choice
1542HAS VARIABLES:   False
1543LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1544NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1545STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
1546KEYWORDS:   Bloom's: Comprehension
1547OTHER:   Time: 5 min.
1548DATE CREATED:   11/15/2017 1:07 PM
1549DATE MODIFIED:   7/24/2018 9:58 PM
1550Copyright Cengage Learning. Powered by Cognero. Page 49
1551Chapter 05: Gross Income: Exclusions
155265. An employee can exclude from gross income the value of meals provided by his or her employer whenever:
1553a. The meal is not extravagant.
1554b. The meals are provided on the employer’s premises for the employer’s convenience.
1555c. There are no places to eat near the work location.
1556d. The meals are provided for the convenience of the employee.
1557e. None of these.
1558ANSWER:   b
1559POINTS:   1
1560DIFFICULTY:   Easy
1561QUESTION TYPE:   Multiple Choice
1562HAS VARIABLES:   False
1563LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1564NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1565STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
1566KEYWORDS:   Bloom's: Comprehension
1567OTHER:   Time: 5 min.
1568DATE CREATED:   11/15/2017 1:07 PM
1569DATE MODIFIED:   7/24/2018 9:58 PM
1570Copyright Cengage Learning. Powered by Cognero. Page 50
1571Chapter 05: Gross Income: Exclusions
157266. Randy is the manager of a motel. As a condition of his employment, Randy is required to live in a room on the
1573premises so that he would be there in case of emergencies. Randy considered this a fringe benefit, since he would
1574otherwise be required to pay $800 per month rent. The room that Randy occupied normally rented for $70 per night,
1575or $2,100 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a
1576room, Randy is required to include in gross income.
1577a. $0.
1578b. $800 per month.
1579c. $2,100 per month.
1580d. $1,890 ($2,100 × .90).
1581e. None of these.
1582ANSWER:   a
1583RATIONALE:   The room qualifies for the § 119 lodging exclusion.
1584POINTS:   1
1585DIFFICULTY:   Easy
1586QUESTION TYPE:   Multiple Choice
1587HAS VARIABLES:   False
1588LEARNING OBJECTIVES:  
1589LEARNING OBJECTIVES:  
1590EOTX.SWFT.LO: 11-02 - LO: 11-02
1591EOTX.SWFT.LO: 11-02 - LO: 11-02
1592NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1593STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1594AICPA: FN-Measurement
1595KEYWORDS:   Bloom's: Application
1596OTHER:   Time: 5 min.
1597DATE CREATED:   11/15/2017 1:07 PM
1598DATE MODIFIED:   7/24/2018 9:58 PM
1599Copyright Cengage Learning. Powered by Cognero. Page 51
1600Chapter 05: Gross Income: Exclusions
160167. Adam repairs power lines for the Egret Utilities Company. He is generally working on a power line during the lunch
1602hour. He must eat when and where he can and still get his work done. He usually purchases something at a
1603convenience store and eats in his truck. Egret reimburses Adam for the cost of his meals.
1604a. Adam must include the reimbursement in his gross income.
1605b. Adam can exclude the reimbursement from his gross income since the meals are provided for the
1606convenience of the employer.
1607c. Adam can exclude the reimbursement from his gross income because he eats the meals on the employer’s
1608business premises (the truck).
1609d. Adam may exclude from his gross income the difference between what he paid for the meals and what it
1610would have cost him to eat at home.
1611e. None of these.
1612ANSWER:   a
1613RATIONALE:   The meals do not qualify for the meals and lodging exclusion because the meals are
1614not furnished by the employer.
1615POINTS:   1
1616DIFFICULTY:   Easy
1617QUESTION TYPE:   Multiple Choice
1618HAS VARIABLES:   False
1619LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1620NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1621STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
1622KEYWORDS:   Bloom's: Comprehension
1623OTHER:   Time: 5 min.
1624DATE CREATED:   11/15/2017 1:07 PM
1625DATE MODIFIED:   7/24/2018 9:58 PM
1626Copyright Cengage Learning. Powered by Cognero. Page 52
1627Chapter 05: Gross Income: Exclusions
162868. Tommy, a senior at State College, receives free room and board as full compensation for working as a resident
1629advisor at the university dormitory. The regular housing contract is $2,000 a year in total, $1,200 for lodging and $800
1630for meals in the dormitory. Tommy had the option of receiving the meals or $800 in cash. Tommy accepted the
1631meals. What must Tommy include in gross income from working as a resident advisor?
1632a. All items can be excluded from gross income as a scholarship.
1633b. The meals must be included in gross income.
1634c. The meals may be excluded because he did not receive cash.
1635d. The lodging must be included in gross income because it was compensation for services.
1636e. None of these.
1637ANSWER:   b
1638RATIONALE:   Because Tommy had the option to receive meals or cash, the meals were not
1639provided for the convenience of the employer and, therefore, the value of the meals
1640must be included in gross income. The housing on the employer’s premises is
1641received as a condition of employment and, therefore, can be excluded from gross
1642income.  Treasury Regulation section 1.119-1(e).
1643POINTS:   1
1644DIFFICULTY:   Easy
1645QUESTION TYPE:   Multiple Choice
1646HAS VARIABLES:   False
1647LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
1648NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1649STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1650AICPA: FN-Measurement
1651United States - AK - AICPA: FN-Reporting
1652KEYWORDS:   Bloom's: Application
1653OTHER:   Time: 5 min.
1654DATE CREATED:   11/15/2017 1:07 PM
1655DATE MODIFIED:   7/24/2018 9:56 PM
1656Copyright Cengage Learning. Powered by Cognero. Page 53
1657Chapter 05: Gross Income: Exclusions
165869. Under the Swan Company’s cafeteria plan, all full-time employees are allowed to select any combination of the
1659benefits below, but the total received by the employee cannot exceed $8,000 a year.
1660I. Group medical and hospitalization insurance for the employee, $3,600 a year.
1661II. Group medical and hospitalization insurance for the employee’s spouse and children,
1662$1,200 a year.
1663III. Child-care payments, actual cost but not more than $4,800 a year.
1664IV. Cash required to bring the total of benefits and cash to $8,000.
1665Which of the following statements is true?
1666a. Sam, a full-time employee, selects choices II and III and $2,000 cash. His gross income must include the
1667$2,000.
1668b. Paul, a full-time employee, elects to receive $8,000 cash because his wife’s employer provided these same
1669insurance benefits for him. Paul is not required to include the $8,000 in gross income.
1670c. Sue, a full-time employee, elects to receive choices I, II and $3,200 for III. Sue is required to include $3,200 in
1671gross income.
1672d. All of these.
1673e. None of these.
1674ANSWER:   a
1675POINTS:   1
1676DIFFICULTY:   Easy
1677QUESTION TYPE:   Multiple Choice
1678HAS VARIABLES:   False
1679LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1680NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1681STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1682AICPA: FN-Measurement
1683KEYWORDS:   Bloom's: Application
1684OTHER:   Time: 10 min.
1685DATE CREATED:   11/15/2017 1:07 PM
1686DATE MODIFIED:   7/24/2018 9:58 PM
1687Copyright Cengage Learning. Powered by Cognero. Page 54
1688Chapter 05: Gross Income: Exclusions
168970. Heather is a full-time employee of the Drake Company and participates in the company’s flexible spending plan that
1690is available to all employees. Which of the following is correct?
1691a. Heather reduced her salary by $1,200, actually spent $1,500, and received only $1,200 as reimbursement for
1692her medical expenses. Heather’s gross income will be reduced by $1,500.
1693b. Heather reduced her salary by $1,200, and received only $900 as reimbursement for her actual medical
1694expenses. She is not refunded the $300 remaining balance, but her gross income is reduced by $1,200.
1695c. Heather reduced her salary by $1,200, and received only $800 as reimbursement for her medical expenses.
1696She is not refunded the $400. Her gross income is reduced by $800.
1697d. Heather reduced her salary by $1,200, and received only $900 as reimbursement for her medical expenses.
1698She forfeits the $300. Her gross income is reduced by $300.
1699e. None of these.
1700ANSWER:   b
1701RATIONALE:   Choices a. and c. are incorrect because to qualify for exclusion treatment, the
1702employee must either use the funds for the designated purpose or forfeit any unused
1703portion of the salary reduction. Choice d. is incorrect because Heather’s gross
1704income is reduced by the full $1,200 salary reduction.
1705POINTS:   1
1706DIFFICULTY:   Easy
1707QUESTION TYPE:   Multiple Choice
1708HAS VARIABLES:   False
1709LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1710NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1711STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1712AICPA: FN-Measurement
1713KEYWORDS:   Bloom's: Application
1714OTHER:   Time: 5 min.
1715DATE CREATED:   11/15/2017 1:07 PM
1716DATE MODIFIED:   7/24/2018 9:58 PM
1717Copyright Cengage Learning. Powered by Cognero. Page 55
1718Chapter 05: Gross Income: Exclusions
171971. Employees of the Valley Country Club are allowed to use the golf course without charge before and after working
1720hours on Mondays, when the number of players on the course is at its lowest. Tom, an employee of the country club
1721played 40 rounds of golf during the year at no charge when the non-employee charge was $20 per round.
1722a. Tom must include $800 in gross income.
1723b. Tom is not required to include anything in gross income because it is a de minimis fringe benefit.
1724c. Tom is not required to include the $800 in gross income because the use of the course was a gift.
1725d. Tom is not required to include anything in gross income because this is a “no-additional-cost service” fringe
1726benefit.
1727e. None of these.
1728ANSWER:   d
1729RATIONALE:   The golfing privileges are a “no-additional-cost service.” The privilege is not a de
1730minimis fringe because records of Tom’s use is readily available at little or no cost.
1731POINTS:   1
1732DIFFICULTY:   Easy
1733QUESTION TYPE:   Multiple Choice
1734HAS VARIABLES:   False
1735LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1736NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1737STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1738AICPA: FN-Measurement
1739United States - AK - AICPA: FN-Reporting
1740KEYWORDS:   Bloom's: Application
1741OTHER:   Time: 5 min.
1742DATE CREATED:   11/15/2017 1:07 PM
1743DATE MODIFIED:   7/24/2018 9:58 PM
1744Copyright Cengage Learning. Powered by Cognero. Page 56
1745Chapter 05: Gross Income: Exclusions
174672. The Royal Motor Company manufactures automobiles. Non-management employees of the company can buy a new
1747automobile for Royal’s cost plus 2%. The automobiles are sold to dealers at cost plus 20%. Generally, management
1748employees of Local Dealer, Inc., are allowed to buy a new automobile from the company at the dealer’s cost. Which
1749of the following statements is correct?       
1750a. The non-management employees who buy automobiles at a discount are not required to recognize income
1751from the purchase.
1752b. None of the employees who take advantage of the fringe benefits described above are required to recognize
1753income.
1754c. Employees of Royal are required to recognize as gross income 18% (20% – 2%) of the cost of the automobile
1755purchased.
1756d. All of these.
1757e. None of these.
1758ANSWER:   a
1759RATIONALE:   The discounts for the non-management employees of Royal Motor Company qualify
1760for exclusion treatment as a “qualified employee discount.”  Management employees
1761of Local Dealer, Inc. discount is discriminatory, therefore exclusion treatment is
1762denied.
1763POINTS:   1
1764DIFFICULTY:   Moderate
1765QUESTION TYPE:   Multiple Choice
1766HAS VARIABLES:   False
1767LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1768NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1769STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1770AICPA: FN-Measurement
1771KEYWORDS:   Bloom's: Comprehension
1772OTHER:   Time: 10 min.
1773DATE CREATED:   11/15/2017 1:07 PM
1774DATE MODIFIED:   7/24/2018 9:58 PM
1775Copyright Cengage Learning. Powered by Cognero. Page 57
1776Chapter 05: Gross Income: Exclusions
177773. Peggy is an executive for the Tan Furniture Manufacturing Company. Peggy purchased furniture from the company
1778for $9,500, the price Tan ordinarily would charge a wholesaler for the same items. The retail price of the furniture
1779was $12,500, and Tan’s cost was $9,000. The company also paid for Peggy’s parking space in a garage near the
1780office. The parking fee was $600 for the year. All employees are allowed to buy furniture at a discounted price
1781comparable to that charged to Peggy. However, the company does not pay other employees’ parking fees. Peggy’s
1782gross income from the above is:
1783a. $0.
1784b. $600.
1785c. $3,500.
1786d. $4,100.
1787e. None of these.
1788ANSWER:   a
1789RATIONALE:   The furniture purchases were under a “qualified employee discount” plan, but the
1790exclusion is limited to the employer’s gross profit. Because Peggy purchased the
1791furniture for $9,500 when the employer’s cost was $9,000, she is not required to
1792include anything in gross income as a result of the purchase. The parking space with
1793a value of $600 is a qualified transportation fringe and is not required to be available
1794to all employees (i.e., can be provided on a discriminatory basis).
1795POINTS:   1
1796DIFFICULTY:   Easy
1797QUESTION TYPE:   Multiple Choice
1798HAS VARIABLES:   False
1799LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1800NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1801STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1802AICPA: FN-Measurement
1803KEYWORDS:   Bloom's: Application
1804OTHER:   Time: 10 min.
1805DATE CREATED:   11/15/2017 1:07 PM
1806DATE MODIFIED:   7/24/2018 9:58 PM
1807Copyright Cengage Learning. Powered by Cognero. Page 58
1808Chapter 05: Gross Income: Exclusions
180974. The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes,
1810provided the privilege is not abused. Ed is the president of a civic organization and uses the copier to make several
1811copies of the organization’s agenda for its meetings. The copies made during the year would have cost $150 at a
1812local office supply.
1813a. Ed must include $150 in his gross income.
1814b. Ed may exclude the cost of the copies as a no-additional cost fringe benefit.
1815c. Ed may exclude the cost of the copies only if the organization is a client of Mauve.
1816d. Ed may exclude the cost of the copies as a de minimis fringe benefit.
1817e. None of these.
1818ANSWER:   d
1819RATIONALE:   Choice b. is incorrect because the employer does incur additional costs. Choice c. is
1820incorrect because there are other circumstances where the cost of the copies would
1821not result in income to Ed. “Occasional copies” is a frequently permitted de minimis
1822fringe benefit.
1823POINTS:   1
1824DIFFICULTY:   Easy
1825QUESTION TYPE:   Multiple Choice
1826HAS VARIABLES:   False
1827LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1828NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1829STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
1830KEYWORDS:   Bloom's: Comprehension
1831OTHER:   Time: 5 min.
1832DATE CREATED:   11/15/2017 1:07 PM
1833DATE MODIFIED:   7/24/2018 9:58 PM
1834Copyright Cengage Learning. Powered by Cognero. Page 59
1835Chapter 05: Gross Income: Exclusions
183675. The de minimis fringe benefit:
1837a. Exclusion applies only to property received by the employee.
1838b. Can be provided on a discriminatory basis.
1839c. Exclusion is limited to $250 per year.
1840d. Exclusion applies to employee discounts.
1841e. None of these.
1842ANSWER:   b
1843RATIONALE:   Choice a. is incorrect because the exclusion applies to property and services. Choice
1844c. is incorrect because there is no specific dollar amount limitation. Choice d. is
1845incorrect because there are specific rules provided for employee discounts.
1846POINTS:   1
1847DIFFICULTY:   Easy
1848QUESTION TYPE:   Multiple Choice
1849HAS VARIABLES:   False
1850LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1851NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1852STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
1853KEYWORDS:   Bloom's: Comprehension
1854OTHER:   Time: 5 min.
1855DATE CREATED:   11/15/2017 1:07 PM
1856DATE MODIFIED:   7/24/2018 9:58 PM
1857Copyright Cengage Learning. Powered by Cognero. Page 60
1858Chapter 05: Gross Income: Exclusions
185976. Evaluate the following statements:
1860I. De minimis fringe benefits are those that are so immaterial that accounting for them is
1861impractical.
1862II. De minimis fringe benefits are subject to strict anti-discrimination requirements.
1863III. Generally, a fringe benefit of less than $50 is considered de minimis and can be excluded
1864from gross income.
1865a. Only I is true.
1866b. Only III is true.
1867c. Only I and III are true.
1868d. I, II, and III are true.
1869e. None of these.
1870ANSWER:   a
1871RATIONALE:   The de minimis exemption is not subject to a nondiscrimination requirement because
1872the amount is too small to make it worthwhile to account for the items. It follows that
1873it would not be worthwhile to apply additional rules.
1874POINTS:   1
1875DIFFICULTY:   Easy
1876QUESTION TYPE:   Multiple Choice
1877HAS VARIABLES:   False
1878LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1879NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1880STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
1881KEYWORDS:   Bloom's: Comprehension
1882OTHER:   Time: 5 min.
1883DATE CREATED:   11/15/2017 1:07 PM
1884DATE MODIFIED:   7/24/2018 9:58 PM
1885Copyright Cengage Learning. Powered by Cognero. Page 61
1886Chapter 05: Gross Income: Exclusions
188777. Kristen’s employer owns its building and provides parking space for its employees. The value of the free parking is
1888$150 per month. Karen’s employer does not have parking facilities, but reimburses its employee for the cost of
1889parking in a nearby garage, up to $150 per month.
1890a. Kristen and Karen must recognize gross income from the parking services.
1891b. Kristen can exclude the employer provided parking from gross income, but Karen must include her
1892reimbursement in gross income.
1893c. Kristen must include the value of the employer provided parking from her gross income, but Karen can
1894exclude her reimbursement from gross income.
1895d. Neither Kristen nor Karen is required to include the cost of parking in gross income.
1896e. None of these.
1897ANSWER:   d
1898RATIONALE:   As a qualified transportation fringe, both Kristen and Karen’s benefit can be
1899excluded from gross income. Karen’s reimbursement is less than the maximum
1900exclusion amount allowed. Likewise, the value of Karen’s free parking is less than
1901the maximum exclusion amount allowed.
1902POINTS:   1
1903DIFFICULTY:   Easy
1904QUESTION TYPE:   Multiple Choice
1905HAS VARIABLES:   False
1906LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1907NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1908STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
1909KEYWORDS:   Bloom's: Comprehension
1910OTHER:   Time: 5 min.
1911DATE CREATED:   11/15/2017 1:07 PM
1912DATE MODIFIED:   7/24/2018 9:58 PM
1913Copyright Cengage Learning. Powered by Cognero. Page 62
1914Chapter 05: Gross Income: Exclusions
191578. A company has a medical reimbursement plan for officers that covers all costs that the insurer will not pay.
1916However, for all employees who are not officers, the medical reimbursement plan applies only after the employee
1917has paid $1,000 from his or her own funds. An officer incurred $1,500 in medical expenses and was reimbursed for
1918that amount. An hourly worker also incurred $1,500 in medical expense and was reimbursed $500.
1919a. Both employees must include all benefits received in gross income.
1920b. The officer must include $500 in gross income.
1921c. The officer must include $1,500 in gross income.
1922d. The hourly employee must include $1,000 in gross income.
1923e. None of these.
1924ANSWER:   c
1925RATIONALE:   For discriminatory plans, the highly-compensated employees do not qualify for
1926exclusion.
1927POINTS:   1
1928DIFFICULTY:   Easy
1929QUESTION TYPE:   Multiple Choice
1930HAS VARIABLES:   False
1931LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1932NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1933STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1934AICPA: FN-Measurement
1935KEYWORDS:   Bloom's: Application
1936OTHER:   Time: 5 min.
1937DATE CREATED:   11/15/2017 1:07 PM
1938DATE MODIFIED:   7/24/2018 9:58 PM
1939Copyright Cengage Learning. Powered by Cognero. Page 63
1940Chapter 05: Gross Income: Exclusions
194179. Louise works in a foreign branch of her employer’s business. She earned $5,000 per month throughout the relevant
1942period.  Which of the following is correct:
1943a. If Louise worked in the foreign branch from May 1, 2017 until October 31, 2018, she may exclude $40,000
1944from gross income in 2017 and exclude $50,000 in 2018.
1945b. If Louise worked in the foreign branch from May 1, 2017 until October 31, 2018, she cannot exclude anything
1946from gross income because she was not present in the country for 330 days in either year.
1947c. If Louise began work in the foreign country on May 1, 2017, she must work through November 30, 2018 in
1948order to exclude $55,000 from gross income in 2018 but none in 2017.
1949d. Louise will not be allowed to exclude any foreign earned income because she made less than $103,900.
1950e. None of these.
1951ANSWER:   a
1952RATIONALE:   Louise was in the foreign country for the requisite number of days, at least 330 days
1953out of 365 days. Therefore, the foreign earned income exclusion applies for all of the
1954time she worked in the foreign country. The amount earned is less than the statutory
1955annual ceiling. Choice d. is incorrect because the annual limit is the amount, if
1956earned, that can be excluded.
1957POINTS:   1
1958DIFFICULTY:   Easy
1959QUESTION TYPE:   Multiple Choice
1960HAS VARIABLES:   False
1961LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1962NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1963STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1964AICPA: FN-Measurement
1965KEYWORDS:   Bloom's: Application
1966OTHER:   Time: 5 min.
1967DATE CREATED:   11/15/2017 1:07 PM
1968DATE MODIFIED:   7/24/2018 9:58 PM
1969Copyright Cengage Learning. Powered by Cognero. Page 64
1970Chapter 05: Gross Income: Exclusions
197180. A U.S. citizen worked in a foreign country for the period July 1, 2017 through August 1, 2018. Her salary was
1972$10,000 per month. Also, in 2017 she received $5,000 in dividends from foreign corporations (not qualified dividends).
1973No dividends were received in 2018. Which of the following is correct?
1974a. The taxpayer cannot exclude any of the income because she was not present in the foreign country more than
1975330 days in either 2017 or 2018.
1976b. The taxpayer can exclude a portion of the salary from U.S. gross income in 2017 and 2018, and all of the
1977dividend income.
1978c. The taxpayer can exclude from U.S. gross income $60,000 salary in 2017, but in 2018 the taxpayer will
1979exceed the twelve month limitation and, therefore, all of the 2018 compensation must be included in gross
1980income. All of the dividends must be included in 2017 gross income.
1981d. The taxpayer must include the dividend income of $5,000 in 2017 gross income, but the taxpayer can exclude
1982a portion of the compensation income from U.S. gross income in 2017 and 2018.
1983e. None of these.
1984ANSWER:   d
1985RATIONALE:   Choice a. is incorrect because the taxpayer was in the foreign country more than
1986330 days in a 12 month period. The annual statutory limit on the foreign earned
1987income exclusion is $102,100 in 2017 and $103,900 in 2018, and the exclusion is
1988prorated on a daily basis; therefore, choice c., is incorrect. Choice b. is incorrect
1989with regard to the dividends received in that dividends received cannot be excluded
1990from gross income.
1991POINTS:   1
1992DIFFICULTY:   Moderate
1993QUESTION TYPE:   Multiple Choice
1994HAS VARIABLES:   False
1995LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
1996NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
1997STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
1998AICPA: FN-Measurement
1999United States - AK - AICPA: FN-Reporting
2000KEYWORDS:   Bloom's: Application
2001OTHER:   Time: 5 min.
2002DATE CREATED:   11/15/2017 1:07 PM
2003DATE MODIFIED:   7/24/2018 9:58 PM
2004Copyright Cengage Learning. Powered by Cognero. Page 65
2005Chapter 05: Gross Income: Exclusions
200681. In the case of interest income from state and Federal bonds:
2007a. Interest on United States government bonds received by a state resident can be subject to that state’s income
2008tax.
2009b. Interest on United States government bonds is subject to Federal income tax.
2010c. Interest on bonds issued by State A received by a resident of State B cannot be subject to income tax in State
2011B.
2012d. All of these are correct.
2013e. None of these are correct.
2014ANSWER:   b
2015RATIONALE:   Federal statute prohibits the states from taxing interest on United States government
2016bonds (just as state bond interest is not subject to Federal income tax) (Choice a.).
2017The Federal government does tax its own bonds (Choice b.), and there is no
2018statutory or Constitutional limitation on the states taxing each other’s obligations
2019(Choice c.).
2020POINTS:   1
2021DIFFICULTY:   Easy
2022QUESTION TYPE:   Multiple Choice
2023HAS VARIABLES:   False
2024LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-06 - LO: 4-06
2025NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2026STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
2027KEYWORDS:   Bloom's: Comprehension
2028OTHER:   Time: 5 min.
2029DATE CREATED:   11/15/2017 1:07 PM
2030DATE MODIFIED:   7/24/2018 8:58 PM
2031Copyright Cengage Learning. Powered by Cognero. Page 66
2032Chapter 05: Gross Income: Exclusions
203382. Heather’s interest and gains on investments for the current year are as follows:
2034Interest on Madison County school bonds $600
2035Interest on U.S. government bonds 700
2036Interest on a Federal income tax refund 200
2037Gain on the sale of Madison County school bonds 500
2038Heather’s adjusted gross income from the above is: or;
2039Heather must report gross income in the amount of:
2040a. $2,000.
2041b. $1,800.
2042c. $1,400.
2043d. $1,300.
2044e. None of these.
2045ANSWER:   c
2046RATIONALE:   While the $600 interest on the Madison County school bonds is tax-exempt, the $500
2047gain on the sale of these bonds is included in Heather’s gross income. The $200
2048interest on the Federal income tax refund and the $700 interest on U.S. government
2049bonds are included in gross income. Thus, the includible amount is $1,400 ($700 +
2050$200 + $500).
2051POINTS:   1
2052DIFFICULTY:   Easy
2053QUESTION TYPE:   Multiple Choice
2054HAS VARIABLES:   False
2055LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-06 - LO: 4-06
2056NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2057STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2058AICPA: FN-Measurement
2059KEYWORDS:   Bloom's: Application
2060OTHER:   Time: 5 min.
2061DATE CREATED:   11/15/2017 1:07 PM
2062DATE MODIFIED:   7/24/2018 8:58 PM
2063Copyright Cengage Learning. Powered by Cognero. Page 67
2064Chapter 05: Gross Income: Exclusions
206583. Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 3.5%
2066interest and the interest is not subject to a 5% state tax. But she is interested in earning a higher return
2067for comparable risk. Which of the following is correct:
2068a. If she buys a corporate bond that pays 6% interest, her after-tax rate of return will be less than if
2069she purchased the York County school bond.
2070b. If she buys a U.S. government bond paying 5%, her after-tax rate of return will be less than if
2071she purchased the York County school bond.
2072c. If she buys a common stock paying a 4% dividend, her after-tax rate of return will be higher
2073than if she purchased the York County school bond.
2074d. All of these are correct.
2075e. None of these are correct.
2076ANSWER:   b
2077RATIONALE:   See the table below:
2078Before Tax Tax @ .40; .35*; .20** After-tax York County Bond
2079a. 6.00% 2.400% 3.600% 3.5%
2080b. 5.00% 1.750% 3.250% 3.5%
2081c. 4.00% .8% 3.200% 3.5%
2082*The state does not tax the Federal bonds. **The dividend is taxed at 15% Federal and 5%
2083state.
2084POINTS:   1
2085DIFFICULTY:   Moderate
2086QUESTION TYPE:   Multiple Choice
2087HAS VARIABLES:   False
2088LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-06 - LO: 4-06
2089NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2090STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2091AICPA: FN-Measurement
2092KEYWORDS:   Bloom's: Analysis
2093OTHER:   Time: 10 min.
2094DATE CREATED:   11/15/2017 1:07 PM
2095DATE MODIFIED:   7/24/2018 8:58 PM
2096Copyright Cengage Learning. Powered by Cognero. Page 68
2097Chapter 05: Gross Income: Exclusions
209884. Doug and Pattie received the following interest income in the current year:
2099Savings account at Greenbacks Bank $4,000
2100United States Treasury bonds 250
2101Interest on State of Iowa bonds 200
2102Interest on Federal tax refund 150
2103Interest on state income tax refund 75
2104Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account. What
2105amount of interest income should they report on their joint income tax return?
2106a. $4,775.
2107b. $4,675.
2108c. $4,575.
2109d. $4,300.
2110e. None of these.
2111ANSWER:   c
2112RATIONALE:   The value of the cell phone is treated as a payment for the use of Doug and Pattie’s
2113money, and therefore is interest income. Only the interest on State of Iowa bonds
2114may be excluded from their gross income.
2115POINTS:   1
2116DIFFICULTY:   Easy
2117QUESTION TYPE:   Multiple Choice
2118HAS VARIABLES:   False
2119LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-06 - LO: 4-06
2120NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2121STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2122AICPA: FN-Measurement
2123KEYWORDS:   Bloom's: Application
2124OTHER:   Time: 5 min.
2125DATE CREATED:   11/15/2017 1:07 PM
2126DATE MODIFIED:   7/24/2018 8:58 PM
2127Copyright Cengage Learning. Powered by Cognero. Page 69
2128Chapter 05: Gross Income: Exclusions
212985. George, an unmarried cash basis taxpayer, received the following amounts during 2018:
2130Interest on savings accounts $2,000
2131Interest on a State tax refund 600
2132Interest on City of Salem school bonds 350
2133Interest portion of proceeds of a 5% bank certificate of deposit
2134purchased on July 1, 2017, and matured on June 30, 2018 250
2135Dividends on USG common stock 300
2136What amount should George report as gross income from dividends and interest for 2018?
2137a. $2,300.
2138b. $2,550.
2139c. $3,150.
2140d. $3,500.
2141e. None of these.
2142ANSWER:   c
2143RATIONALE:   The interest on the Salem school bonds of $350 is tax exempt, but the interest on the
2144State tax refund of $600 is taxable. Since the life of the certificate of deposit was not
2145more than 1 year, the OID rules do not apply and, therefore, all of the interest is
2146taxable in 2018. Thus, the gross income is $3,150 ($2,000 + $600 + $250 + $300).
2147POINTS:   1
2148DIFFICULTY:   Easy
2149QUESTION TYPE:   Multiple Choice
2150HAS VARIABLES:   False
2151LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-06 - LO: 4-06
2152NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2153STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2154AICPA: FN-Measurement
2155KEYWORDS:   Bloom's: Application
2156OTHER:   Time: 5 min.
2157DATE CREATED:   11/15/2017 1:07 PM
2158DATE MODIFIED:   7/24/2018 8:58 PM
2159Copyright Cengage Learning. Powered by Cognero. Page 70
2160Chapter 05: Gross Income: Exclusions
216186. Stuart owns 300 shares of Turquoise Corporation stock and 2,000 shares of Blue Corporation stock. During the year,
2162Stuart received 150 shares of Turquoise as a result of a 1 for 2 stock split. The value of the shares received was
2163$4,800. Stuart also received 100 shares of Blue Corporation stock as a result of a 5% stock dividend. Stuart did not
2164have the option of receiving cash from Blue. The additional shares he received had a value of $7,200. Stuart’s gross
2165income from the receipt of the additional Turquoise and Blue shares is:
2166a. $0.
2167b. $4,800.
2168c. $7,200.
2169d. $12,000.
2170e. None of these.
2171ANSWER:   a
2172RATIONALE:   Neither the stock dividend nor the stock split is taxable.
2173POINTS:   1
2174DIFFICULTY:   Easy
2175QUESTION TYPE:   Multiple Choice
2176HAS VARIABLES:   False
2177LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-02 - LO: 5-02
2178NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2179STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2180AICPA: FN-Measurement
2181KEYWORDS:   Bloom's: Application
2182OTHER:   Time: 5 min.
2183DATE CREATED:   11/15/2017 1:07 PM
2184DATE MODIFIED:   7/24/2018 7:02 PM
2185Copyright Cengage Learning. Powered by Cognero. Page 71
2186Chapter 05: Gross Income: Exclusions
218787. Assuming a taxpayer qualifies for the exclusion treatment, the interest income on educational savings bonds:
2188a. Is gross income to the person who purchased the bond in the year the interest is earned.
2189b. Is gross income to the student in the year the interest is earned.
2190c. Is included in the student’s gross income in the year the savings bonds are sold or redeemed to pay
2191educational expenses.
2192d. Is not included in anyone’s gross income if the proceeds are used to pay college tuition.
2193e. None of these.
2194ANSWER:   d
2195POINTS:   1
2196DIFFICULTY:   Easy
2197QUESTION TYPE:   Multiple Choice
2198HAS VARIABLES:   False
2199LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
2200NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2201STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
2202KEYWORDS:   Bloom's: Comprehension
2203OTHER:   Time: 5 min.
2204DATE CREATED:   11/15/2017 1:07 PM
2205DATE MODIFIED:   7/24/2018 9:56 PM
220688. The exclusion of interest on educational savings bonds:
2207a. Applies only to savings bonds owned by the child.
2208b. Applies to parents who purchase bonds for which the proceeds are used for their child’s education.
2209c. Means that the child must include the interest in income if the bond is owned by the parent.
2210d. Does apply even if used to pay for room and board.
2211e. None of these.
2212ANSWER:   b
2213POINTS:   1
2214DIFFICULTY:   Easy
2215QUESTION TYPE:   Multiple Choice
2216HAS VARIABLES:   False
2217LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
2218NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2219STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
2220KEYWORDS:   Bloom's: Comprehension
2221OTHER:   Time: 5 min.
2222DATE CREATED:   11/15/2017 1:07 PM
2223DATE MODIFIED:   7/24/2018 9:56 PM
2224Copyright Cengage Learning. Powered by Cognero. Page 72
2225Chapter 05: Gross Income: Exclusions
222689. Martha participated in a qualified tuition program for the benefit of her son. She invested $6,000 in the fund. Four
2227years later her son withdrew $8,000, the entire balance in the program, to pay his college tuition.
2228a. Martha is not required to include the $2,000 ($8,000 – $6,000) in her gross income when the funds are used to
2229pay the tuition.
2230b. Martha’s son must include the $2,000 ($8,000 – $6,000) in his gross income when the funds are used to pay
2231the tuition.
2232c. Martha must include $8,000 in her gross income.
2233d. Martha’s son must include $8,000 in his gross income.
2234e. None of these.
2235ANSWER:   a
2236RATIONALE:   Under a qualified tuition program, neither the beneficiary of the income (the son) nor
2237the owner (Martha) of the property includes the earnings in gross income as long as
2238the funds are used to pay qualified tuition.
2239POINTS:   1
2240DIFFICULTY:   Easy
2241QUESTION TYPE:   Multiple Choice
2242HAS VARIABLES:   False
2243LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-02 - LO: 5-02
2244NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2245STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2246AICPA: FN-Measurement
2247KEYWORDS:   Bloom's: Application
2248OTHER:   Time: 5 min.
2249DATE CREATED:   11/15/2017 1:07 PM
2250DATE MODIFIED:   7/24/2018 7:02 PM
2251Copyright Cengage Learning. Powered by Cognero. Page 73
2252Chapter 05: Gross Income: Exclusions
225390. In December 2018, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2019
2254on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2018 tax return. He
2255had $150,000 of taxable income that year. On June 30, 2019, he sold the building and, as a result, received a $500
2256refund on his fire insurance premiums. As a result of the above:
2257a. Todd should amend his 2018 return and claim $500 less insurance expense.
2258b. Todd should include the $500 in 2019 gross income in accordance with the tax benefit rule.
2259c. Todd should add the $500 to his sales proceeds from the building.
2260d. Todd should include the $500 in 2019 gross income in accordance with the claim of right doctrine.
2261e. None of these.
2262ANSWER:   b
2263RATIONALE:   As a cash basis taxpayer, Todd can deduct the one-year prepayment for insurance in
2264the year it was paid, 2018. Because he deducted $1,200 and his net cost was only
2265$700 ($1,200 – $500), Todd should include the $500 refund in gross income for 2019
2266under the tax benefit rule.
2267POINTS:   1
2268DIFFICULTY:   Easy
2269QUESTION TYPE:   Multiple Choice
2270HAS VARIABLES:   False
2271LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-09 - LO: 4-09
2272NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2273STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2274AICPA: FN-Measurement
2275KEYWORDS:   Bloom's: Application
2276OTHER:   Time: 5 min.
2277DATE CREATED:   11/15/2017 1:07 PM
2278DATE MODIFIED:   7/24/2018 8:58 PM
2279Copyright Cengage Learning. Powered by Cognero. Page 74
2280Chapter 05: Gross Income: Exclusions
228191. Tonya is a cash basis taxpayer. In 2018, she paid state income taxes of $8,000. In early 2019, she filed her 2018 state
2282income tax return and received a $900 refund.
2283a. If Tonya itemized her deductions in 2018 on her Federal income tax return, she should amend her 2018 return
2284and reduce her itemized deductions by $900.
2285b. If Tonya itemized her deductions in 2018 on her Federal income tax return and her itemized deductions
2286exceeded the standard deduction by at least $900, the refund will not affect her 2019 tax return.
2287c. If Tonya itemized her deductions in 2018 on her Federal income tax return, she must amend her 2018 Federal
2288income tax return and use the standard deduction.
2289d. If Tonya itemized her deductions in 2018 on her Federal income tax return and her itemized deductions
2290exceeded the standard deduction by more than $900, she must recognize $900 income in 2019 under the tax
2291benefit rule.
2292e. None of these.
2293ANSWER:   d
2294RATIONALE:   The income recognized from the state income tax refund results from the application
2295of the tax benefit rule. In choice d., Tonya received a tax benefit from the payment;
2296therefore, the refund was taxable in 2019.
2297POINTS:   1
2298DIFFICULTY:   Easy
2299QUESTION TYPE:   Multiple Choice
2300HAS VARIABLES:   False
2301LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-09 - LO: 4-09
2302NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2303STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2304AICPA: FN-Measurement
2305KEYWORDS:   Bloom's: Application
2306OTHER:   Time: 5 min.
2307DATE CREATED:   11/15/2017 1:07 PM
2308DATE MODIFIED:   7/24/2018 8:58 PM
2309Copyright Cengage Learning. Powered by Cognero. Page 75
2310Chapter 05: Gross Income: Exclusions
231192. Harold bought land from Jewel for $150,000. Harold paid $50,000 cash and gave Jewel an 8% note for $100,000.
2312The note was to be paid over a five-year period. When the balance on the note was $80,000, Jewel began having
2313financial difficulties. To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final
2314payment of the note principal.
2315a. Harold must recognize $20,000 ($80,000 – $60,000) of gross income.
2316b. Harold is not required to recognize gross income, but must reduce his cost basis in the land to $130,000.
2317c. Harold is not required to recognize gross income, since he paid the debt before it was due.
2318d. Jewel must recognize gross income of $20,000 ($80,000 – $60,000) from discharge of the debt.
2319e. None of these.
2320ANSWER:   b
2321RATIONALE:   The debt reduction of $20,000 is treated as an adjustment to the cost of the land
2322because the debt was owed to the seller of the property.
2323POINTS:   1
2324DIFFICULTY:   Easy
2325QUESTION TYPE:   Multiple Choice
2326HAS VARIABLES:   False
2327LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-08 - LO: 4-08
2328NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2329STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
2330KEYWORDS:   Bloom's: Application
2331OTHER:   Time: 5 min.
2332DATE CREATED:   11/15/2017 1:07 PM
2333DATE MODIFIED:   7/24/2018 8:58 PM
2334Copyright Cengage Learning. Powered by Cognero. Page 76
2335Chapter 05: Gross Income: Exclusions
233693. Barry, a solvent individual but a recovering alcoholic, embezzled $6,000 from his employer. In the same year that he
2337embezzled the funds, his employer discovered the theft. His employer did not fire him and told him he did not have to
2338repay the $6,000 if he would attend Alcoholics Anonymous. Barry met the conditions and his employer canceled the
2339debt.
2340a. Barry did not realize any income because his employer made a gift to him.
2341b. Barry must include $6,000 in gross income from discharge of indebtedness.
2342c. Barry must include $6,000 in gross income under the tax benefit rule.
2343d. Barry may exclude the $6,000 from gross income because the debt never existed.
2344e. None of these.
2345ANSWER:   b
2346RATIONALE:   Even if the employer had intended that a gift be made, § 102(c) prohibits exclusion
2347treatment. Barry realized a $6,000 increase in his net worth as a result of the theft
2348and the subsequent cancellation of the debt.
2349POINTS:   1
2350DIFFICULTY:   Easy
2351QUESTION TYPE:   Multiple Choice
2352HAS VARIABLES:   False
2353LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-04 - LO: 5-04
2354NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2355STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2356AICPA: FN-Measurement
2357KEYWORDS:   Bloom's: Application
2358OTHER:   Time: 5 min.
2359DATE CREATED:   11/15/2017 1:07 PM
2360DATE MODIFIED:   7/24/2018 7:02 PM
2361Copyright Cengage Learning. Powered by Cognero. Page 77
2362Chapter 05: Gross Income: Exclusions
236394. Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. The National Bank, which
2364held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000. The bank had
2365made the loan to Gold when it purchased the real estate from Silver, Inc. Pink, Inc., the holder of a mortgage on
2366Gold’s building, agreed to accept $40,000 in full payment of the $55,000 due. Pink had sold the building to Gold for
2367$150,000 that was to be paid in installments over 8 years. As a result of the above, Gold must:
2368a. Include $40,000 in gross income.
2369b. Reduce the basis in its assets by $40,000.
2370c. Include $25,000 in gross income and reduce its basis in its assets by $15,000.
2371d. Include $15,000 in gross income and reduce its basis in the building by $25,000.
2372e. None of these.
2373ANSWER:   c
2374RATIONALE:   The $15,000 reduction in the mortgage held by Pink is an adjustment to the cost of
2375the building, because the debt was owed to the party who sold the property to the
2376taxpayer; in effect, the purchase price was adjusted. The $25,000 reduction by the
2377bank is includible in gross income.
2378POINTS:   1
2379DIFFICULTY:   Easy
2380QUESTION TYPE:   Multiple Choice
2381HAS VARIABLES:   False
2382LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-08 - LO: 4-08
2383NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2384STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2385AICPA: FN-Measurement
2386KEYWORDS:   Bloom's: Application
2387OTHER:   Time: 10 min.
2388DATE CREATED:   11/15/2017 1:07 PM
2389DATE MODIFIED:   7/24/2018 8:58 PM
2390Copyright Cengage Learning. Powered by Cognero. Page 78
2391Chapter 05: Gross Income: Exclusions
239295. On January 1, 2008, Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to
2393finance the construction of a new plant. On January 1, 2018, the company acquired the bonds on the open market for
2394$11,500,000. Assuming that Cardinal Corporation is neither bankrupt nor insolvent, the acquisition and retirement of
2395the bonds results in which of the following:
2396a. The company must recognize a $500,000 gain.
2397b. The company can make an election to recognize a $500,000 gain or reduce the company’s basis in the plant
2398by $500,000.
2399c. The company must recognize a $500,000 gain and increase the company’s basis in the plant by $500,000.
2400d. The company can amortize the $500,000 gain, recognizing income over the remaining life of the bonds.
2401e. None of these.
2402ANSWER:   a
2403RATIONALE:   None of the exceptions to income from discharge of indebtedness apply.
2404POINTS:   1
2405DIFFICULTY:   Easy
2406QUESTION TYPE:   Multiple Choice
2407HAS VARIABLES:   False
2408LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-04 - LO: 5-04
2409NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2410STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2411AICPA: FN-Measurement
2412KEYWORDS:   Bloom's: Application
2413OTHER:   Time: 5 min.
2414DATE CREATED:   11/15/2017 1:07 PM
2415DATE MODIFIED:   7/24/2018 7:02 PM
2416Copyright Cengage Learning. Powered by Cognero. Page 79
2417Chapter 05: Gross Income: Exclusions
241896. Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt.
2419a. If Flora had borrowed the funds from a bank, the bank accepts $85,000 in full payment of the debt, and Flora
2420is solvent after the transfer, Flora does not recognize income, but the company must reduce the cost of the
2421land by $10,000.
2422b. If Flora had borrowed the funds from a bank, and the bank accepts $85,000 in full payment of the debt, when
2423the value of the property is $80,000, Flora can deduct a loss.
2424c. If Flora transfers to the bank other property, with a basis of $90,000 and a fair market value of $95,000, in full
2425payment of the debt, Flora can recognize a $5,000 loss.
2426d. If the $95,000 is owed to the person who sold the property to Flora, and the creditor accepts $85,000 in full
2427payment for the debt, Flora does not recognize gain but must reduce its basis in the land.
2428e. None of these.
2429ANSWER:   d
2430RATIONALE:   Choice a. is incorrect because Flora reduced a $95,000 liability with a payment of
2431$85,000, and therefore its net worth increased. Choice b. is incorrect because Flora
2432did not sell the property. Choice c. is incorrect because the transfer is treated as a
2433sale of the property for $95,000 when its basis is $90,000. Choice d. is correct
2434because the creditor was the original seller of the property.
2435POINTS:   1
2436DIFFICULTY:   Moderate
2437QUESTION TYPE:   Multiple Choice
2438HAS VARIABLES:   False
2439LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-08 - LO: 4-08
2440NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2441STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2442AICPA: FN-Measurement
2443KEYWORDS:   Bloom's: Application
2444OTHER:   Time: 5 min.
2445DATE CREATED:   11/15/2017 1:07 PM
2446DATE MODIFIED:   7/24/2018 8:58 PM
2447Copyright Cengage Learning. Powered by Cognero. Page 80
2448Chapter 05: Gross Income: Exclusions
2449Subjective Short Answer
245097. Beverly died during the current year. At the time of her death, her accrued salary and commissions totaled $3,000
2451and were paid to her husband. The employer also paid the husband $35,000 which represented an amount equal to
2452Beverly’s salary for the year prior to her death. The employer had a policy of making the salary payments to “help
2453out the family in the time of its greatest need.” Beverly’s spouse collected her interest in the employer’s qualified
2454profit sharing plan amounting to $30,000. As beneficiary of his wife’s life insurance policy, Beverly’s spouse elected
2455to collect the proceeds in installments. In the year of death, he collected $8,000 which included $1,500 interest
2456income. Which of these items are subject to income tax for Beverly’s spouse?
2457ANSWER:  
2458Salary and commissions $ 3,000
2459Profit sharing plan 30,000
2460Interest income    1,500
2461Included in gross income $34,500
2462All nonforfeitable rights to funds are includible in income (salary, commissions). This
2463includes the accrued salary of $3,000. The collection of Beverly’s interest in the
2464profit sharing plan of $30,000 is subject to taxation. The $35,000 payment by the
2465employer was pursuant to a policy of charity to families of deceased employees, and
2466there is authority for excluding this item as a gift. The IRS will probably challenge
2467the exclusion of the $35,000. The IRS would argue that a policy of making the
2468payment to all families of deceased employees makes the payment appear to be in
2469the nature of compensation for prior services. Life insurance proceeds are taxexempt.
2470However, all interest paid on life insurance proceeds is includible in gross
2471income.
2472POINTS:   1
2473DIFFICULTY:   Moderate
2474QUESTION TYPE:   Subjective Short Answer
2475HAS VARIABLES:   False
2476LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-02 - LO: 5-02
2477NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2478STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2479AICPA: FN-Measurement
2480KEYWORDS:   Bloom's: Application
2481OTHER:   Time: 10 min.
2482DATE CREATED:   11/15/2017 1:07 PM
2483DATE MODIFIED:   7/24/2018 7:02 PM
248498. Sandy is married, files a joint return, and expects to be in the 24% marginal tax bracket for the foreseeable future.
2485All of his income is from salary and all of it is used to maintain the household. He has a paid-up life insurance policy
2486with a cash surrender value of $100,000. He paid $60,000 of premiums on the policy. His gain from cashing in the
2487life insurance policy would be ordinary income. If he retains the policy, the insurance company will pay him at least
2488$3,000 (3%) interest each year. Sandy thinks he can earn a higher return if he cashes in the policy and invests the
2489proceeds.
2490a. What before-tax rate of return would Sandy be required to earn on the proceeds from
2491cashing in the policy to equal the return earned with the insurance company?
2492Copyright Cengage Learning. Powered by Cognero. Page 81
2493Chapter 05: Gross Income: Exclusions
2494b. Assume Sandy estimates he can earn a 6% before-tax rate of return on the proceeds from
2495cashing in the policy. Assume he can earn a 6% return for the remainder of his life and that
2496he will reinvest all earnings at the same 6% before-tax rate of return. If Sandy expects to live
249710 more years, which alternative will yield the greater amount to his beneficiaries upon
2498Sandy’s death? (Given: The future value of an annuity in 10 years assuming a 4.32% aftertax
2499return is 12.19. The future value of an annuity in 10 years assuming a 2.16% return is
250011.03).
2501ANSWER:  
2502a. If Sandy cashes in the policy, he must recognize a $40,000 gain and pay taxes of
2503$9,600 [.24($100,000 – $60,000) = $9,600]. Therefore, he will have only $90,400
2504to invest ($100,000 – $9,600 = $90,400). To earn $3,054, the same as he
2505receives from the insurance company, Sandy must earn a .03378 return on the
2506after-tax proceeds ($90,400 × .03378 = $3,054).
2507b. The life insurance proceeds will be exempt from income tax. Therefore, if
2508Sandy retains the policy, the beneficiaries receive $100,000 plus the compound
2509amount of (1 – .24)($3,000) = $2,280 interest earned each year. The interest will
2510be reinvested at 6% before tax, or (1. – .24)(.06) = 4.56% after-tax interest.
2511Given the compound interest factor of 12.19, the annual income will accumulate
2512to 12.19 × $2,280 = $27,793. The after-tax policy proceeds are $100,000.
2513Therefore, if Sandy retains the policy, his beneficiaries would expect to receive
2514$127,793 ($100,000 + $27,793).
2515If Sandy cashed in the policy, his beneficiaries will receive the after-tax amount
2516of the policy, as computed in a., above, of $90,400, plus the compound amount of
2517the earnings on the $90,400, at a 4.56% after-tax return. The annual after-tax
2518earnings on $90,400 is $4,122 (.0456 × $90,400). This will accumulate to
2519$4,122 × 12.19 = $50,247 in 10 years. Therefore, his beneficiaries would receive
2520$140,647 ($90,400 + $50,247). Cashing in the policy is the better alternative.
2521POINTS:   1
2522DIFFICULTY:   Challenging
2523QUESTION TYPE:   Subjective Short Answer
2524HAS VARIABLES:   False
2525LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-02 - LO: 5-02
2526CMPV.SWFT.LO: 5-05 - LO: 5-05
2527NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2528STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2529AICPA: FN-Measurement
2530KEYWORDS:   Bloom's: Evaluation
2531OTHER:   Time: 15 min.
2532DATE CREATED:   11/15/2017 1:07 PM
2533DATE MODIFIED:   7/24/2018 7:02 PM
2534Copyright Cengage Learning. Powered by Cognero. Page 82
2535Chapter 05: Gross Income: Exclusions
253699. Barbara was injured in an automobile accident. She has threatened to file a suit against the other party involved in
2537the accident and has proposed the following settlement:
2538Damages for 25% loss of the use of her right arm $200,000
2539Medical expenses 30,000
2540Loss of wages 10,000
2541Punitive damages   100,000
2542$340,000
2543The defendant’s insurance company is reluctant to pay punitive damages. Also, the company disputes the amount of
2544her loss of wages amount. Instead, the company offers to pay her $300,000 for damages to her arm and $30,000
2545medical expenses. Assuming Barbara is in the 35% marginal tax bracket, will her after-tax proceeds from accepting
2546the offer be equal to what she considers to be her actual damages (listed above)?
2547ANSWER:   Barbara’s claim for punitive damages of $100,000 is the only taxable amount.
2548Therefore, her after-tax proceeds from receiving the $340,000 would be $305,000
2549[$340,000 – .35($100,000)]. None of the offer from the insurance company
2550($330,000) would be taxable and therefore her after-tax proceeds from the
2551settlement would be $330,000. Thus, both the insurance company and Barbara would
2552benefit from her accepting the insurance company’s offer.
2553POINTS:   1
2554DIFFICULTY:   Easy
2555QUESTION TYPE:   Subjective Short Answer
2556HAS VARIABLES:   False
2557LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
2558NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2559STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2560AICPA: FN-Measurement
2561KEYWORDS:   Bloom's: Application
2562OTHER:   Time: 10 min.
2563DATE CREATED:   11/15/2017 1:07 PM
2564DATE MODIFIED:   7/24/2018 9:56 PM
2565Copyright Cengage Learning. Powered by Cognero. Page 83
2566Chapter 05: Gross Income: Exclusions
2567100. George is employed by the Quality Appliance Company. All the full time employees are allowed to purchase
2568appliances at the company’s cost plus 10%. The employee also is given, at no cost, a 1-year service contract on all
2569the goods purchased from the company. George purchased a refrigerator for $500. The company’s normal selling
2570price for the refrigerator is $800. George also received a service contract, at no charge, that had a value of $150.
2571During the year, George was required to have his refrigerator serviced once. The cost of the call would have been
2572$75 if he had not had the service contract. Is George required to recognize any income from the purchase of the
2573refrigerator, the receipt of the service contract, and the service call?
2574ANSWER:   George will probably be required to recognize $120 income from the service
2575contract. The company can sell the service contract to an employee at a 20%
2576discount and the employee is not required to recognize income. George received a
2577100% discount; therefore, $120 (80% × $150) must be included in his gross income.
2578However, George can perhaps make a convincing argument that he is merely
2579receiving a no-additional-cost service, and thus would not be required to recognize
2580income. George will not be required to recognize income from the bargain purchase
2581of the refrigerator because he paid more than the employer’s cost.
2582POINTS:   1
2583DIFFICULTY:   Easy
2584QUESTION TYPE:   Subjective Short Answer
2585HAS VARIABLES:   False
2586LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
2587NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2588STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2589AICPA: FN-Measurement
2590KEYWORDS:   Bloom's: Application
2591OTHER:   Time: 5 min.
2592DATE CREATED:   11/15/2017 1:07 PM
2593DATE MODIFIED:   7/24/2018 9:58 PM
2594Copyright Cengage Learning. Powered by Cognero. Page 84
2595Chapter 05: Gross Income: Exclusions
2596101. Juan, was considering purchasing an interest in a tax-exempt bond fund for $100,000, when he discovered that the
2597interest must be included on his state income tax return. The interest rate is 5%. His marginal Federal tax rate is
259835%, and his marginal state income tax rate is 10%. Juan itemizes his deductions on his Federal income tax return.
2599As an alternative, Juan can purchase a state bond (a “double-exempt bond”) yielding 4.9% interest that is exempt
2600from both Federal and state income tax. Which investment would yield the greater after-tax return?
2601ANSWER:   Juan will receive $5,000 before-tax from the bond fund. The state income tax is $500
2602[(.10)($5,000)]. The state income tax will be deductible on the Federal return; thus,
2603the state taxes will reduce Juan’s after-tax income by only $325 [(1 – .35)($500].
2604Therefore, the annual after-tax return is $4,675 ($5,000 – $325), or 4.675%. The
2605double-exempt bonds will yield 4.9% after tax; therefore, it is the preferred
2606investment, assuming equal risks.
2607POINTS:   1
2608DIFFICULTY:   Easy
2609QUESTION TYPE:   Subjective Short Answer
2610HAS VARIABLES:   False
2611LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-06 - LO: 4-06
2612NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2613STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2614AICPA: FN-Measurement
2615KEYWORDS:   Bloom's: Analysis
2616OTHER:   Time: 10 min.
2617DATE CREATED:   11/15/2017 1:07 PM
2618DATE MODIFIED:   7/24/2018 8:58 PM
2619Copyright Cengage Learning. Powered by Cognero. Page 85
2620Chapter 05: Gross Income: Exclusions
2621102. Margaret is trying to decide whether to place funds in a qualified tuition program. Her son will be attending college in
26224 years. She is in the 35% marginal tax bracket and she believes she can earn an 7% before tax return on alternative
2623investments. Thus, $10,000 will accumulate to $11,948 (after-tax) in 4 years. Margaret expects tuition to increase at
2624the rate of 5% each year to $12,155 in 4 years. Her son will be in the 12% marginal tax bracket in all relevant years.
2625Given these assumptions, should Margaret participate in the qualified tuition program?
2626ANSWER:   Margaret can accumulate $11,948 by investing her funds for 4 years, but then she
2627must pay the actual tuition. Alternatively, if she invests the $10,000 in a qualified
2628tuition program, the tuition will be paid in 4 years, regardless of the amount. The
2629amount of the tuition less the $10,000 will not be subject to tax. Thus, the after-tax
2630future value of the qualified tuition fund is $12,155 ($12,155 – $0), which is greater
2631than the alternative accumulated value. Therefore, it appears that Margaret should
2632participate.
2633POINTS:   1
2634DIFFICULTY:   Easy
2635QUESTION TYPE:   Subjective Short Answer
2636HAS VARIABLES:   False
2637LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
2638NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2639STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2640AICPA: FN-Measurement
2641KEYWORDS:   Bloom's: Analysis
2642OTHER:   Time: 10 min.
2643DATE CREATED:   11/15/2017 1:07 PM
2644DATE MODIFIED:   7/24/2018 9:58 PM
2645Copyright Cengage Learning. Powered by Cognero. Page 86
2646Chapter 05: Gross Income: Exclusions
2647103. Gull Corporation was undergoing reorganization under the bankruptcy laws. The shareholders, who had made loans
2648of $300,000 to the corporation, agreed to accept additional stock with a value of $200,000 instead of repayment on
2649the debt. The Old Line Insurance Company, which had a $400,000 mortgage on the building, agreed to reduce the
2650principal to $250,000. A trade creditor with a receivable of $150,000 from the company agreed to accept $70,000 in
2651full payment for the debt incurred to purchase goods that were still on hand. Finally, the company transferred some
2652equipment with an adjusted basis of $90,000 in satisfaction of a liability for $120,000. Compute the corporation’s
2653gross income and other adjustments necessary as a result of the above transactions.
2654ANSWER:   Gull is not required to recognize income from the shareholders exchanging the debt
2655for stock (a nontaxable contribution to capital). The $80,000 reduction in debt
2656($150,000 – $70,000) to trade creditors can be used to reduce the basis in the goods
2657purchased. However, Gull is required to recognize $30,000 gain ($120,000 – $90,000)
2658from transferring the equipment in satisfaction of the debt. However, because Gulf is
2659in bankruptcy, the $150,000 income from discharge of indebtedness on the mortgage
2660held by Old Line, can be used to reduce tax attributes (e.g., net operating loss
2661carryover, basis in assets).
2662POINTS:   1
2663DIFFICULTY:   Easy
2664QUESTION TYPE:   Subjective Short Answer
2665HAS VARIABLES:   False
2666LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-08 - LO: 4-08
2667NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2668STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2669AICPA: FN-Measurement
2670KEYWORDS:   Bloom's: Application
2671OTHER:   Time: 10 min.
2672DATE CREATED:   11/15/2017 1:07 PM
2673DATE MODIFIED:   7/24/2018 8:58 PM
2674Copyright Cengage Learning. Powered by Cognero. Page 87
2675Chapter 05: Gross Income: Exclusions
2676Essay
2677104. Carmen had worked for Sparrow Corporation for thirty years when she died of a heart attack at age 60. She was
2678practically penniless at the time of her death, owed a $12,000 hospital bill, and had a disabled spouse. The company
2679was very concerned about its public image, and rather than run the risk of embarrassment from one of its long-term
2680employees dying and leaving her spouse with insufficient means, the Board of Directors agreed to pay Carmen’s
2681hospital bill and to give her spouse $6,000 per year for the rest of his life. Discuss both sides of the question whether
2682Carmen (or her estate) and her spouse realize any taxable income from the above.
2683ANSWER:   The argument that Carmen and her spouse realize income from the payments is as
2684follows: the employer was compensating for the employee’s prior services. The fact
2685that the employer had no legal obligation to make the payments is not relevant since
2686the employer realized a benefit (prevention of embarrassment).
2687The argument that Carmen and her spouse do not realize income is predicated upon
2688characterizing the payments as a gift. Conditions which indicate that a gift was
2689intended include the following: the spouse’s dire financial condition; the decedent had
2690been fully compensated for her past services, and any benefits the corporation
2691received from the payments were indirect because there was no obligation to pay
2692such amounts.
2693The $12,000 hospital payment is taxable because the gift is likely taxable income to
2694her estate, as income in respect of the decedent, because the gift exclusion does not
2695apply to payments by the employer to the employee.
2696POINTS:   1
2697DIFFICULTY:   Easy
2698QUESTION TYPE:   Essay
2699HAS VARIABLES:   False
2700LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
2701NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2702STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
2703KEYWORDS:   Bloom's: Analysis
2704OTHER:   Time: 10 min.
2705DATE CREATED:   11/15/2017 1:07 PM
2706DATE MODIFIED:   7/24/2018 9:56 PM
2707Copyright Cengage Learning. Powered by Cognero. Page 88
2708Chapter 05: Gross Income: Exclusions
2709105. What are the tax problems associated with payments received by a wife from her deceased husband’s employer?
2710(Assume the wife renders no services to the employer.)
2711ANSWER:   An amount paid in respect of compensation owed to the employee at the time of his
2712death is taxable to the spouse, just as the amount would have been taxable to the
2713decedent if he had received the money prior to death. Additional noninvested
2714amounts paid by the employer probably should be totally excluded from the spouse’s
2715income as a gift. However, the IRS generally considers such payments to be
2716compensation for past services rather than gifts.
2717Payments received from the employer’s qualified pension or profit sharing plan are
2718subject to taxation. Also, if the employee contributed to the pension and profit
2719sharing plan, the beneficiary is allowed to treat this amount as a nontaxable recovery
2720of capital.
2721POINTS:   1
2722DIFFICULTY:   Easy
2723QUESTION TYPE:   Essay
2724HAS VARIABLES:   False
2725LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
2726NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2727STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
2728KEYWORDS:   Bloom's: Comprehension
2729OTHER:   Time: 10 min.
2730DATE CREATED:   11/15/2017 1:07 PM
2731DATE MODIFIED:   7/24/2018 9:56 PM
2732Copyright Cengage Learning. Powered by Cognero. Page 89
2733Chapter 05: Gross Income: Exclusions
2734106. Bob had a terminal illness and realized that he “can’t take it with him.” Therefore, he cashed in his insurance policy
2735and received $120,000. He had paid $50,000 in premiums on the policy. He used the money to fulfill his lifelong
2736ambitions of going to the Super Bowl, driving an expensive sports car, and vacationing in Bermuda.
2737Was Bob’s behavior consistent with the Congressional intent in providing the tax exemption he was permitted to use?
2738ANSWER:   No. Bob was permitted to exclude from his gross income the $70,000 gain ($120,000
2739– $50,000) he realized from cashing in the policy. The exclusion was permitted
2740because he was terminally ill. The rationale for the exclusion is that often the person
2741with the terminal illness will have the need for funds to be used for his or her medical
2742care. Bob is clearly not using the funds for this purpose to be served by the law.
2743Nevertheless, the law does not prevent Bob from obtaining the exclusion.
2744POINTS:   1
2745DIFFICULTY:   Easy
2746QUESTION TYPE:   Essay
2747HAS VARIABLES:   False
2748LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-02 - LO: 5-02
2749NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2750STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
2751KEYWORDS:   Bloom's: Comprehension
2752OTHER:   Time: 10 min.
2753DATE CREATED:   11/15/2017 1:07 PM
2754DATE MODIFIED:   7/24/2018 7:02 PM
2755107. Ben was hospitalized for back problems. While he was away from the job, he collected his regular salary from an
2756employer-sponsored income protection insurance policy. Ben’s employer-sponsored hospitalization insurance policy
2757also paid for 90% of his medical expenses. Ben also collected on an income protection policy that he purchased.
2758Which of the above sources of income are taxable? Explain the basis for excluding any item or items.
2759ANSWER:   Only the collections on the employer-sponsored income protection policy are subject
2760to tax. The hospitalization benefits received from the employer sponsored plan are
2761specifically excluded. Both the premiums and the payments can be excluded. The
2762amounts Ben collected on a policy he purchased are specifically excluded under the
2763rationale that the payments are a recovery of Ben’s premiums.
2764POINTS:   1
2765DIFFICULTY:   Easy
2766QUESTION TYPE:   Essay
2767HAS VARIABLES:   False
2768LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-02 - LO: 5-02
2769NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2770STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
2771KEYWORDS:   Bloom's: Comprehension
2772OTHER:   Time: 10 min.
2773DATE CREATED:   11/15/2017 1:07 PM
2774DATE MODIFIED:   7/24/2018 7:02 PM
2775Copyright Cengage Learning. Powered by Cognero. Page 90
2776Chapter 05: Gross Income: Exclusions
2777108. The CEO of Cirtronics Inc., discovered that the company’s competitor had adopted a cafeteria plan for its
2778employees. The CEO is concerned about retaining his talented employees and would like you to provide a brief
2779explanation as to why a cafeteria plan may be attractive to the company’s employees.
2780ANSWER:   Cafeteria plans are beneficial where employees desire different types of benefits.
2781This often occurs when employees are married and their spouses receive some
2782benefits from their employers. For example, if the husband is covered by health
2783insurance provided by his employer, there is no need for the wife’s employer to
2784provide coverage for the husband also. Moreover, some employees may need child
2785care benefits while those without children may prefer cash. The cafeteria plan
2786provides much greater flexibility in planning benefits.
2787POINTS:   1
2788DIFFICULTY:   Easy
2789QUESTION TYPE:   Essay
2790HAS VARIABLES:   False
2791LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
2792NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2793STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
2794KEYWORDS:   Bloom's: Comprehension
2795OTHER:   Time: 10 min.
2796DATE CREATED:   11/15/2017 1:07 PM
2797DATE MODIFIED:   7/24/2018 9:58 PM
2798109. What Federal income tax benefits are provided for college students?
2799ANSWER:   The Federal income tax system provides direct benefits to college students and
2800indirect benefits by providing tax relief for the parents of the students. College
2801students can receive tax-exempt scholarships. The interest on educational savings
2802bonds, which are often purchased by parents may be exempt where the proceeds
2803are used to pay qualified educational expenses. The qualified tuition program enables
2804parents to fund the educational expenses of their children without any income being
2805taxed to the parents or to children.
2806POINTS:   1
2807DIFFICULTY:   Easy
2808QUESTION TYPE:   Essay
2809HAS VARIABLES:   False
2810LEARNING OBJECTIVES:  EOTX.SWFT.LO: 10-01 - LO: 10-01
2811NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2812STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
2813KEYWORDS:   Bloom's: Comprehension
2814OTHER:   Time: 10 min.
2815DATE CREATED:   11/15/2017 1:07 PM
2816DATE MODIFIED:   7/24/2018 9:56 PM
2817Copyright Cengage Learning. Powered by Cognero. Page 91
2818Chapter 05: Gross Income: Exclusions
2819110. The taxpayer was in the 35% marginal tax bracket in 2017 and deducted $15,000 in state income taxes as an
2820itemized deduction that year. In 2018, he filed his 2017 state income tax return and received a $5,000 refund of state
2821income taxes paid in 2017. His marginal tax rate in 2018 was 12%. What was the taxpayer’s Federal tax benefit
2822from the overpayment of his 2017 state income tax?
2823ANSWER:   The taxpayer realized a benefit because the deduction in 2017 yielded benefits of
2824$.35 for each dollar of deductions, while the recovery of the prior deduction was
2825taxed at only 12%. The taxpayer’s benefit was $1,150 [(.35 – .12)($5,000)].
2826POINTS:   1
2827DIFFICULTY:   Easy
2828QUESTION TYPE:   Essay
2829HAS VARIABLES:   False
2830LEARNING OBJECTIVES:  CMPV.SWFT.LO: 5-03 - LO: 5-03
2831NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2832STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2833AICPA: FN-Measurement
2834KEYWORDS:   Bloom's: Application
2835OTHER:   Time: 10 min.
2836DATE CREATED:   11/15/2017 1:07 PM
2837DATE MODIFIED:   7/24/2018 7:02 PM
2838Copyright Cengage Learning. Powered by Cognero. Page 92
2839Chapter 05: Gross Income: Exclusions
2840111. Employers can provide numerous benefits to their employees and the employees are permitted to exclude the value
2841of these benefits from gross income. What are the effects of the exclusions on:
2842a. The progressiveness of the tax system?
2843b. The complexity of the tax system?
2844ANSWER:  
2845a.
2846The benefit of an exclusion varies directly with the recipient’s marginal tax rate.
2847Thus, individuals with the highest marginal tax rate enjoy the greatest benefit
2848from the exclusion and those taxpayers in the lowest marginal tax rate enjoy the
2849least benefit. Also, generally, the exclusions are often available with the better
2850paying jobs. This also causes the tax system to be less progressive than if the
2851exclusions were not permitted.
2852b. Any exclusion creates complexities in the system because tests must be
2853established to determine whether the benefit is eligible (e.g., whether the benefit
2854is provided on in a discriminatory manner) for the special treatment. Also, often
2855limitations are often created, which requires even more testing.
2856POINTS:   1
2857DIFFICULTY:   Moderate
2858QUESTION TYPE:   Essay
2859HAS VARIABLES:   False
2860LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-02 - LO: 11-02
2861NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2862STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2863AICPA: FN-Measurement
2864KEYWORDS:   Bloom's: Analysis
2865OTHER:   Time: 10 min.
2866DATE CREATED:   11/15/2017 1:07 PM
2867DATE MODIFIED:   7/24/2018 9:58 PM
2868Copyright Cengage Learning. Powered by Cognero. Page 93
2869Chapter 05: Gross Income: Exclusions
2870112. Sally and Ed each own property with a fair market value less than the amount of the outstanding mortgage on the
2871property and also less than the original cost basis. They each were able to convince the mortgage holder to reduce
2872the principal amount on the mortgage. Sally’s mortgage is on her personal residence and Ed’s mortgage is on rental
2873property he owns.  Both debts are recourse.
2874a. Explain whether each of these individuals has realized income from the reduction in the debt.
2875b. Assume that under the current system of measuring income, each of these taxpayers realized
2876income from the reductions in the mortgages. Should either of these taxpayers be permitted
2877to exclude any of the debt discharge income?
2878ANSWER:  
2879a.
2880Each taxpayer’s liabilities were reduced. Therefore, their net worth has
2881increased as measured using the cost basis in the assets. Each taxpayer also
2882experienced a loss in the value of their assets. However, the losses were not
2883realized (because each taxpayer still owns the property). Thus, each taxpayer
2884had income from the reduction in debt, but no recognized loss. Fortunately,
2885recent legislation permits in effect through 2017, the taxpayer whose property is
2886a personal residence to exclude the income from debt discharge from gross
2887income. The taxpayer who owns the rental home is not eligible for this debt
2888discharge exclusion.
2889b. Allowing the exclusion from income for the homeowner but not for the investor
2890can only be justified on the basis of a value system that says we should modify
2891the otherwise equitable rules to favor home ownership.
2892POINTS:   1
2893DIFFICULTY:   Moderate
2894QUESTION TYPE:   Essay
2895HAS VARIABLES:   False
2896LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-08 - LO: 4-08
2897NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2898STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2899AICPA: FN-Measurement
2900KEYWORDS:   Bloom's: Comprehension
2901OTHER:   Time: 10 min.
2902DATE CREATED:   11/15/2017 1:07 PM
2903DATE MODIFIED:   7/24/2018 8:58 PM
2904Copyright Cengage Learning. Powered by Cognero. Page 94
2905Chapter 05: Gross Income: Exclusions
2906113. If a tax-exempt bond will yield approximately .65 (1 – .35) times the yield on a taxable bond of equal risk, who
2907benefits from the tax exemption: the Federal government, the state and local governments who issue the bonds, or
2908the investors?
2909ANSWER:   The state and local governments benefit from the exemption because they are
2910required to pay less interest. The exemption costs the Federal government, and thus
2911the exemption shifts resources from the Federal to the state and local governments.
2912The investors do not derive any benefit from the exemption, in this example, because
2913the market drives the price of the exempt bonds upward so that the after-tax yields
2914on the bonds are equal for investors in the highest marginal tax bracket (35%).
2915POINTS:   1
2916DIFFICULTY:   Moderate
2917QUESTION TYPE:   Essay
2918HAS VARIABLES:   False
2919LEARNING OBJECTIVES:  EOTX.SWFT.LO: 4-06 - LO: 4-06
2920NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2921STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2922AICPA: FN-Measurement
2923KEYWORDS:   Bloom's: Analysis
2924OTHER:   Time: 10 min.
2925DATE CREATED:   11/15/2017 1:07 PM
2926DATE MODIFIED:   7/24/2018 8:58 PM
2927Copyright Cengage Learning. Powered by Cognero. Page 95
2928Chapter 05: Gross Income: Exclusions
2929
29301. Deductions are allowed unless a specific provision in the tax law provides otherwise.
2931a. True
2932b. False
2933ANSWER:   False
2934RATIONALE:   Deductions are a matter of legislative grace. The only deductions allowed are those
2935specifically provided for by statute, rulings, etc.
2936POINTS:   1
2937DIFFICULTY:   Easy
2938QUESTION TYPE:   True / False
2939HAS VARIABLES:   False
2940LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
2941NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2942STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
2943KEYWORDS:   Bloom's: Knowledge
2944OTHER:   Time: 2 min.
2945DATE CREATED:   11/15/2017 1:08 PM
2946DATE MODIFIED:   7/24/2018 7:03 PM
29472. Mitch is in the 24% tax bracket. He may receive a different tax benefit for a $2,000 expenditure that is classified as
2948a deduction from AGI than he will receive for a $2,000 expenditure that is classified as a deduction for AGI.
2949a. True
2950b. False
2951ANSWER:   True
2952RATIONALE:   The value of the tax benefit to Mitch for the deduction from AGI may be less than
2953that for the deduction for AGI. The value of the deduction for AGI for a taxpayer in
2954the 24% bracket for a $2,000 expenditure is $480 ($2,000 × 24%). If Mitch takes the
2955standard deduction rather than itemizing deductions, then the $2,000 expenditure that
2956is classified as a deduction from AGI has no tax benefit.
2957POINTS:   1
2958DIFFICULTY:   Easy
2959QUESTION TYPE:   True / False
2960HAS VARIABLES:   False
2961LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
2962NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2963STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
2964AICPA: FN-Measurement
2965KEYWORDS:   Bloom's: Analysis
2966OTHER:   Time: 5 min.
2967DATE CREATED:   11/15/2017 1:08 PM
2968DATE MODIFIED:   7/24/2018 7:03 PM
2969Copyright Cengage Learning. Powered by Cognero. Page 1
2970Chapter 06: Deductions and Losses: In General
29713. In 2018, unreimbursed employment related expenses are classified as deductions for AGI.  
2972a. True
2973b. False
2974ANSWER:   False
2975RATIONALE:   Unreimbursed employee expenses are miscellaneous itemized deductions subject to
2976the 2% of AGI floor, which are no longer deductible in 2018.  
2977POINTS:   1
2978DIFFICULTY:   Easy
2979QUESTION TYPE:   True / False
2980HAS VARIABLES:   False
2981LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
2982NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2983STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
2984KEYWORDS:   Bloom's: Knowledge
2985OTHER:   Time: 2 min.
2986DATE CREATED:   11/15/2017 1:08 PM
2987DATE MODIFIED:   7/24/2018 7:03 PM
29884. Section 212 expenses that are related to rent and royalty income are deductions for AGI.
2989a. True
2990b. False
2991ANSWER:   True
2992POINTS:   1
2993DIFFICULTY:   Easy
2994QUESTION TYPE:   True / False
2995HAS VARIABLES:   False
2996LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
2997NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
2998STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
2999KEYWORDS:   Bloom's: Knowledge
3000OTHER:   Time: 2 min.
3001DATE CREATED:   11/15/2017 1:08 PM
3002DATE MODIFIED:   7/24/2018 7:03 PM
3003Copyright Cengage Learning. Powered by Cognero. Page 2
3004Chapter 06: Deductions and Losses: In General
30055. Alice incurs qualified moving expenses of $12,000 in 2018. If she is not reimbursed by her employer, the deduction is
3006classified as a deduction for AGI.
3007a. True
3008b. False
3009ANSWER:   False
3010RATIONALE:   Moving expenses are no longer deductible for 2018.
3011POINTS:   1
3012DIFFICULTY:   Easy
3013QUESTION TYPE:   True / False
3014HAS VARIABLES:   False
3015LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
3016NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3017STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3018KEYWORDS:   Bloom's: Knowledge
3019OTHER:   Time: 2 min.
3020DATE CREATED:   11/15/2017 1:08 PM
3021DATE MODIFIED:   7/24/2018 7:03 PM
30226. Investment related expenses, such as paying a fee to an investment manager, generally are deductions from
3023adjusted gross income in 2018.
3024a. True
3025b. False
3026ANSWER:   False
3027RATIONALE:   Such expense are 2% miscellaneous itemized deductions which are no longer
3028deductible for 2018. 
3029POINTS:   1
3030DIFFICULTY:   Easy
3031QUESTION TYPE:   True / False
3032HAS VARIABLES:   False
3033LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
3034NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3035STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3036KEYWORDS:   Bloom's: Knowledge
3037OTHER:   Time: 2 min.
3038DATE CREATED:   11/15/2017 1:08 PM
3039DATE MODIFIED:   7/24/2018 7:03 PM
3040Copyright Cengage Learning. Powered by Cognero. Page 3
3041Chapter 06: Deductions and Losses: In General
30427. The Code does not specifically define what constitutes a trade or business.
3043a. True
3044b. False
3045ANSWER:   True
3046POINTS:   1
3047DIFFICULTY:   Easy
3048QUESTION TYPE:   True / False
3049HAS VARIABLES:   False
3050LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-01 - LO: 5-01
3051NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3052STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3053KEYWORDS:   Bloom's: Knowledge
3054OTHER:   Time: 2 min.
3055DATE CREATED:   11/15/2017 1:08 PM
3056DATE MODIFIED:   7/24/2018 8:59 PM
30578. An expense need not be recurring in order to be “ordinary.”
3058a. True
3059b. False
3060ANSWER:   True
3061RATIONALE:   An expense is ordinary if it is normal, usual, or customary in the type of business
3062conducted by the taxpayer and is not capital in nature. However, the expense need
3063not be recurring to be deductible as ordinary.
3064POINTS:   1
3065DIFFICULTY:   Easy
3066QUESTION TYPE:   True / False
3067HAS VARIABLES:   False
3068LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-01 - LO: 5-01
3069NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3070STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3071KEYWORDS:   Bloom's: Knowledge
3072OTHER:   Time: 2 min.
3073DATE CREATED:   11/15/2017 1:08 PM
3074DATE MODIFIED:   7/24/2018 8:59 PM
3075Copyright Cengage Learning. Powered by Cognero. Page 4
3076Chapter 06: Deductions and Losses: In General
30779. Aaron, a shareholder-employee of Pigeon, Inc., receives a $300,000 salary. The IRS classifies $100,000 of this
3078amount as unreasonable compensation. The effect of this reclassification is to decrease Aaron’s gross income by
3079$100,000 and increase Pigeon’s gross income by $100,000.
3080a. True
3081b. False
3082ANSWER:   False
3083RATIONALE:   While Aaron’s dividend income increases by $100,000, his salary income decreases
3084by $100,000. Thus, his gross income does not change. Pigeon’s gross income does
3085increase by $100,000.
3086POINTS:   1
3087DIFFICULTY:   Easy
3088QUESTION TYPE:   True / False
3089HAS VARIABLES:   False
3090LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-01 - LO: 5-01
3091NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3092STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
3093AICPA: FN-Measurement
3094KEYWORDS:   Bloom's: Application
3095OTHER:   Time: 5 min.
3096DATE CREATED:   11/15/2017 1:08 PM
3097DATE MODIFIED:   7/24/2018 8:59 PM
309810. The portion of a shareholder-employee’s salary that is classified as unreasonable has no effect on the amount of a
3099shareholder-employee’s gross income, but results in an increase in the taxable income of the corporation.
3100a. True
3101b. False
3102ANSWER:   True
3103POINTS:   1
3104DIFFICULTY:   Easy
3105QUESTION TYPE:   True / False
3106HAS VARIABLES:   False
3107LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-01 - LO: 5-01
3108NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3109STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
3110AICPA: FN-Measurement
3111KEYWORDS:   Bloom's: Knowledge
3112OTHER:   Time: 2 min.
3113DATE CREATED:   11/15/2017 1:08 PM
3114DATE MODIFIED:   7/24/2018 8:59 PM
3115Copyright Cengage Learning. Powered by Cognero. Page 5
3116Chapter 06: Deductions and Losses: In General
311711. Generally, a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member
3118in calculating corporate taxable income.
3119a. True
3120b. False
3121ANSWER:   False
3122RATIONALE:   Only unreasonable salaries are not deductible.
3123POINTS:   1
3124DIFFICULTY:   Easy
3125QUESTION TYPE:   True / False
3126HAS VARIABLES:   False
3127LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-01 - LO: 5-01
3128NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3129STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3130KEYWORDS:   Bloom's: Knowledge
3131OTHER:   Time: 2 min.
3132DATE CREATED:   11/15/2017 1:08 PM
3133DATE MODIFIED:   7/24/2018 8:59 PM
313412. Only under limited circumstances can a loss on the sale of a personal use asset be deducted.
3135a. True
3136b. False
3137ANSWER:   False
3138RATIONALE:   Under no circumstances can such a loss be deducted.
3139POINTS:   1
3140DIFFICULTY:   Easy
3141QUESTION TYPE:   True / False
3142HAS VARIABLES:   False
3143LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
3144NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3145STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3146KEYWORDS:   Bloom's: Knowledge
3147OTHER:   Time: 5 min.
3148DATE CREATED:   11/15/2017 1:08 PM
3149DATE MODIFIED:   7/24/2018 7:03 PM
3150Copyright Cengage Learning. Powered by Cognero. Page 6
3151Chapter 06: Deductions and Losses: In General
315213. The income of a sole proprietorship is reported on Schedule C (Profit or Loss from Business).
3153a. True
3154b. False
3155ANSWER:   True
3156POINTS:   1
3157DIFFICULTY:   Easy
3158QUESTION TYPE:   True / False
3159HAS VARIABLES:   False
3160LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
3161NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3162STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3163KEYWORDS:   Bloom's: Knowledge
3164OTHER:   Time: 2 min.
3165DATE CREATED:   11/15/2017 1:08 PM
3166DATE MODIFIED:   7/24/2018 7:03 PM
316714. Depending on the nature of the expenditure, expenses incurred in a trade or business may be deductible for or from
3168AGI.
3169a. True
3170b. False
3171ANSWER:   False
3172RATIONALE:   Such expenses are deductible for AGI.
3173POINTS:   1
3174DIFFICULTY:   Easy
3175QUESTION TYPE:   True / False
3176HAS VARIABLES:   False
3177LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
3178NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3179STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3180KEYWORDS:   Bloom's: Knowledge
3181OTHER:   Time: 2 min.
3182DATE CREATED:   11/15/2017 1:08 PM
3183DATE MODIFIED:   7/24/2018 7:03 PM
3184Copyright Cengage Learning. Powered by Cognero. Page 7
3185Chapter 06: Deductions and Losses: In General
318615. The cash method can always be used by a corporation even if inventory and cost of goods sold are a significant
3187income producing factor in the business.
3188a. True
3189b. False
3190ANSWER:   False
3191RATIONALE:   The accrual method must be used in these cases unless the gross receipts test is
3192met. 
3193POINTS:   1
3194DIFFICULTY:   Easy
3195QUESTION TYPE:   True / False
3196HAS VARIABLES:   False
3197LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
3198NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3199STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3200KEYWORDS:   Bloom's: Knowledge
3201OTHER:   Time: 2 min.
3202DATE CREATED:   11/15/2017 1:08 PM
3203DATE MODIFIED:   7/24/2018 8:59 PM
320416. A taxpayer’s note or promise to pay satisfies the “actually paid” requirement for the cash basis method of
3205accounting.
3206a. True
3207b. False
3208ANSWER:   False
3209RATIONALE:   Promising to pay or issuing a note does not satisfy the actually paid requirement.
3210POINTS:   1
3211DIFFICULTY:   Easy
3212QUESTION TYPE:   True / False
3213HAS VARIABLES:   False
3214LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
3215NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3216STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3217KEYWORDS:   Bloom's: Knowledge
3218OTHER:   Time: 2 min.
3219DATE CREATED:   11/15/2017 1:08 PM
3220DATE MODIFIED:   7/24/2018 8:59 PM
3221Copyright Cengage Learning. Powered by Cognero. Page 8
3222Chapter 06: Deductions and Losses: In General
322317. Isabella owns two business entities. She may be able to use the cash method for one and the accrual method for the
3224other.
3225a. True
3226b. False
3227ANSWER:   True
3228POINTS:   1
3229DIFFICULTY:   Easy
3230QUESTION TYPE:   True / False
3231HAS VARIABLES:   False
3232LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
3233NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3234STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3235KEYWORDS:   Bloom's: Knowledge
3236OTHER:   Time: 2 min.
3237DATE CREATED:   11/15/2017 1:08 PM
3238DATE MODIFIED:   7/24/2018 8:59 PM
323918. Under the “twelve month rule” for the current period deduction of prepaid expenses of cash basis taxpayers, the
3240asset must expire or be consumed by the end of the tax year following the year of payment.
3241a. True
3242b. False
3243ANSWER:   True
3244RATIONALE:   If the one-year rule is not satisfied, the prepayment is prorated and deducted over
3245the benefit period.
3246POINTS:   1
3247DIFFICULTY:   Easy
3248QUESTION TYPE:   True / False
3249HAS VARIABLES:   False
3250LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
3251NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3252STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3253KEYWORDS:   Bloom's: Knowledge
3254OTHER:   Time: 2 min.
3255DATE CREATED:   11/15/2017 1:08 PM
3256DATE MODIFIED:   7/24/2018 8:59 PM
3257Copyright Cengage Learning. Powered by Cognero. Page 9
3258Chapter 06: Deductions and Losses: In General
325919. None of the prepaid rent paid on September 1 by a calendar year cash basis taxpayer for the next 18 months is
3260deductible in the current period.
3261a. True
3262b. False
3263ANSWER:   False
3264RATIONALE:   The amount paid for the 18-month period is not all deductible in the current tax year
3265because the prepayment period extends substantially beyond the end of the tax year
3266following the year of payment (i.e., must be capitalized). However, that portion of
3267the prepaid rent which relates to September through December of the current tax
3268year may be deducted in the current tax year.
3269POINTS:   1
3270DIFFICULTY:   Easy
3271QUESTION TYPE:   True / False
3272HAS VARIABLES:   False
3273LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
3274NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3275STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3276KEYWORDS:   Bloom's: Knowledge
3277OTHER:   Time: 2 min.
3278DATE CREATED:   11/15/2017 1:08 PM
3279DATE MODIFIED:   7/24/2018 8:59 PM
328020. The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic
3281performance and all events tests.
3282a. True
3283b. False
3284ANSWER:   True
3285POINTS:   1
3286DIFFICULTY:   Easy
3287QUESTION TYPE:   True / False
3288HAS VARIABLES:   False
3289LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
3290NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3291STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3292KEYWORDS:   Bloom's: Knowledge
3293OTHER:   Time: 2 min.
3294DATE CREATED:   11/15/2017 1:08 PM
3295DATE MODIFIED:   7/24/2018 8:59 PM
3296Copyright Cengage Learning. Powered by Cognero. Page 10
3297Chapter 06: Deductions and Losses: In General
329821. The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for
3299tax purposes, but is not allowed for a cash method taxpayer.
3300a. True
3301b. False
3302ANSWER:   False
3303RATIONALE:   A reserve for estimated expenses (e.g., bad debt) is not allowed to an accrual
3304method taxpayer for tax purposes because the economic performance test cannot be
3305satisfied. For a cash method taxpayer, there is no addition to the reserve for bad
3306debts because income has not been recognized that would have generated a debt.
3307POINTS:   1
3308DIFFICULTY:   Easy
3309QUESTION TYPE:   True / False
3310HAS VARIABLES:   False
3311LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
3312NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3313STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3314KEYWORDS:   Bloom's: Knowledge
3315OTHER:   Time: 2 min.
3316DATE CREATED:   11/15/2017 1:08 PM
3317DATE MODIFIED:   7/24/2018 8:59 PM
331822. All domestic bribes (i.e., to a U.S. official) are disallowed as deductions.
3319a. True
3320b. False
3321ANSWER:   True
3322RATIONALE:   However, a payment to a foreign official is deductible if it is not in violation of the
3323Foreign Corrupt Practices Act of 1977.
3324POINTS:   1
3325DIFFICULTY:   Easy
3326QUESTION TYPE:   True / False
3327HAS VARIABLES:   False
3328LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3329NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3330STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3331KEYWORDS:   Bloom's: Knowledge
3332OTHER:   Time: 2 min.
3333DATE CREATED:   11/15/2017 1:08 PM
3334DATE MODIFIED:   7/24/2018 8:59 PM
3335Copyright Cengage Learning. Powered by Cognero. Page 11
3336Chapter 06: Deductions and Losses: In General
333723. Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they
3338relate to a trade or business.
3339a. True
3340b. False
3341ANSWER:   False
3342RATIONALE:   Fines and penalties paid for violations of laws are never deductible.
3343POINTS:   1
3344DIFFICULTY:   Easy
3345QUESTION TYPE:   True / False
3346HAS VARIABLES:   False
3347LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3348NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3349STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3350KEYWORDS:   Bloom's: Knowledge
3351OTHER:   Time: 2 min.
3352DATE CREATED:   11/15/2017 1:08 PM
3353DATE MODIFIED:   7/24/2018 8:59 PM
335424. Susan is a sales representative for a U.S. weapons manufacturer. She makes a $100,000 “grease” payment to a
3355U.S. government official associated with a weapons purchase by the U.S. Army. She makes a similar payment to a
3356Saudi Arabian government official associated with a similar sale. Neither of these payments is deductible by Susan’s
3357employer.
3358a. True
3359b. False
3360ANSWER:   False
3361RATIONALE:   The payment to the U.S. official is not deductible. However, unless the payment is
3362illegal under the Foreign Corrupt Practices Act of 1977, the payment to the Saudi
3363official can be deducted.
3364POINTS:   1
3365DIFFICULTY:   Easy
3366QUESTION TYPE:   True / False
3367HAS VARIABLES:   False
3368LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3369NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3370STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3371KEYWORDS:   Bloom's: Knowledge
3372OTHER:   Time: 5 min.
3373DATE CREATED:   11/15/2017 1:08 PM
3374DATE MODIFIED:   7/24/2018 8:59 PM
3375Copyright Cengage Learning. Powered by Cognero. Page 12
3376Chapter 06: Deductions and Losses: In General
337725. The cost of legal advice associated with the preparation of an individual’s Federal income tax return  that is paid in
33782018 is not deductible because it is a personal expense.
3379a. True
3380b. False
3381ANSWER:   True
3382RATIONALE:   This deduction is disallowed beginning in 2018 under the TCJA of 2017.  Miscellaneous
3383itemized deductions subject to the 2% of AGI floor are no longer allowed as a
3384deduction. 
3385POINTS:   1
3386DIFFICULTY:   Easy
3387QUESTION TYPE:   True / False
3388HAS VARIABLES:   False
3389LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3390NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3391STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3392KEYWORDS:   Bloom's: Knowledge
3393OTHER:   Time: 2 min.
3394DATE CREATED:   11/15/2017 1:08 PM
3395DATE MODIFIED:   7/24/2018 7:03 PM
339626. Two-thirds of treble damage payments under the antitrust law are not deductible.
3397a. True
3398b. False
3399ANSWER:   True
3400RATIONALE:   Only one-third of such payments is deductible.
3401POINTS:   1
3402DIFFICULTY:   Easy
3403QUESTION TYPE:   True / False
3404HAS VARIABLES:   False
3405LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3406NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3407STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
3408AICPA: FN-Measurement
3409KEYWORDS:   Bloom's: Knowledge
3410OTHER:   Time: 2 min.
3411DATE CREATED:   11/15/2017 1:08 PM
3412DATE MODIFIED:   7/24/2018 8:59 PM
3413Copyright Cengage Learning. Powered by Cognero. Page 13
3414Chapter 06: Deductions and Losses: In General
341527. The legal cost of having a will prepared is not deductible.
3416a. True
3417b. False
3418ANSWER:   True
3419RATIONALE:   This is a nondeductible personal expense.
3420POINTS:   1
3421DIFFICULTY:   Easy
3422QUESTION TYPE:   True / False
3423HAS VARIABLES:   False
3424LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3425NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3426STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3427KEYWORDS:   Bloom's: Knowledge
3428OTHER:   Time: 2 min.
3429DATE CREATED:   11/15/2017 1:08 PM
3430DATE MODIFIED:   7/24/2018 7:03 PM
343128. Legal expenses incurred in connection with rental property are deductions from AGI.
3432a. True
3433b. False
3434ANSWER:   False
3435RATIONALE:   This is a deduction for AGI.
3436POINTS:   1
3437DIFFICULTY:   Easy
3438QUESTION TYPE:   True / False
3439HAS VARIABLES:   False
3440LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3441NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3442STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3443KEYWORDS:   Bloom's: Knowledge
3444OTHER:   Time: 2 min.
3445DATE CREATED:   11/15/2017 1:08 PM
3446DATE MODIFIED:   7/24/2018 7:03 PM
3447Copyright Cengage Learning. Powered by Cognero. Page 14
3448Chapter 06: Deductions and Losses: In General
344929. Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a
3450trade or business.
3451a. True
3452b. False
3453ANSWER:   False
3454RATIONALE:   In this circumstance, the legal fees are deductible.
3455POINTS:   1
3456DIFFICULTY:   Easy
3457QUESTION TYPE:   True / False
3458HAS VARIABLES:   False
3459LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3460NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3461STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3462KEYWORDS:   Bloom's: Knowledge
3463OTHER:   Time: 2 min.
3464DATE CREATED:   11/15/2017 1:08 PM
3465DATE MODIFIED:   7/24/2018 8:59 PM
346630. If a taxpayer operates an illegal business, no deductions are permitted.
3467a. True
3468b. False
3469ANSWER:   False
3470RATIONALE:   The usual expenses for operating an illegal business are deductible. But § 162
3471disallows a deduction for fines, bribes to public officials, illegal kickbacks, and other
3472illegal payments. However, for illegal trafficking in drugs, § 280E disallows all
3473deductions.
3474POINTS:   1
3475DIFFICULTY:   Easy
3476QUESTION TYPE:   True / False
3477HAS VARIABLES:   False
3478LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3479NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3480STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3481KEYWORDS:   Bloom's: Knowledge
3482OTHER:   Time: 2 min.
3483DATE CREATED:   11/15/2017 1:08 PM
3484DATE MODIFIED:   7/24/2018 8:59 PM
3485Copyright Cengage Learning. Powered by Cognero. Page 15
3486Chapter 06: Deductions and Losses: In General
348731. Ordinary and necessary business expenses, other than cost of goods sold, of an illegal drug trafficking business do
3488not reduce taxable income.
3489a. True
3490b. False
3491ANSWER:   True
3492RATIONALE:   Cost of goods sold is part of the gross income calculation and is not considered to be
3493an expense. Thus, the § 280E prohibition on deductions does not affect cost of goods
3494sold.
3495POINTS:   1
3496DIFFICULTY:   Easy
3497QUESTION TYPE:   True / False
3498HAS VARIABLES:   False
3499LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3500NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3501STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3502KEYWORDS:   Bloom's: Knowledge
3503OTHER:   Time: 2 min.
3504DATE CREATED:   11/15/2017 1:08 PM
3505DATE MODIFIED:   7/24/2018 8:59 PM
350632. Jacques, who is not a U.S. citizen, makes a contribution to the campaign of a candidate for governor. Cassie, a U.S.
3507citizen, also makes a contribution to the same campaign fund. If contributions by noncitizens are illegal under state
3508law, the contribution by Cassie is deductible, while that by Jacques is not.
3509a. True
3510b. False
3511ANSWER:   False
3512RATIONALE:   Deductions are not permitted for political contributions.
3513POINTS:   1
3514DIFFICULTY:   Easy
3515QUESTION TYPE:   True / False
3516HAS VARIABLES:   False
3517LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3518NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3519STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3520KEYWORDS:   Bloom's: Knowledge
3521OTHER:   Time: 2 min.
3522DATE CREATED:   11/15/2017 1:08 PM
3523DATE MODIFIED:   7/24/2018 8:59 PM
3524Copyright Cengage Learning. Powered by Cognero. Page 16
3525Chapter 06: Deductions and Losses: In General
352633. A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary
3527expense. If the same amount is paid to the CEO of IBM, only $1 million is deductible.
3528a. True
3529b. False
3530ANSWER:   True
3531RATIONALE:   The $1 million limit on deducting compensation applies only to executive
3532compensation of publicly traded companies.
3533POINTS:   1
3534DIFFICULTY:   Easy
3535QUESTION TYPE:   True / False
3536HAS VARIABLES:   False
3537LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3538NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3539STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
3540AICPA: FN-Measurement
3541KEYWORDS:   Bloom's: Knowledge
3542OTHER:   Time: 2 min.
3543DATE CREATED:   11/15/2017 1:08 PM
3544DATE MODIFIED:   7/24/2018 8:59 PM
354534. For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is
3546deductible only if the taxpayer acquires the business.
3547a. True
3548b. False
3549ANSWER:   False
3550RATIONALE:   For a taxpayer who is engaged in a trade or business, the cost of investigating a
3551business in the same field is deductible regardless of whether or not it is acquired.
3552POINTS:   1
3553DIFFICULTY:   Easy
3554QUESTION TYPE:   True / False
3555HAS VARIABLES:   False
3556LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3557NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3558STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
3559AICPA: FN-Measurement
3560KEYWORDS:   Bloom's: Knowledge
3561OTHER:   Time: 5 min.
3562DATE CREATED:   11/15/2017 1:08 PM
3563DATE MODIFIED:   7/24/2018 8:59 PM
3564Copyright Cengage Learning. Powered by Cognero. Page 17
3565Chapter 06: Deductions and Losses: In General
356635. Investigation of a business unrelated to one’s present business never results in a current period deduction of the
3567entire amount if the amount of the investigation expenses exceeds $5,000.
3568a. True
3569b. False
3570ANSWER:   True
3571RATIONALE:   Even if the business is acquired, some or all of the expenses must be capitalized and
3572amortized over a minimum 180-month period. If the business is not acquired, no
3573deduction results.
3574POINTS:   1
3575DIFFICULTY:   Easy
3576QUESTION TYPE:   True / False
3577HAS VARIABLES:   False
3578LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3579NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3580STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
3581AICPA: FN-Measurement
3582KEYWORDS:   Bloom's: Knowledge
3583OTHER:   Time: 2 min.
3584DATE CREATED:   11/15/2017 1:08 PM
3585DATE MODIFIED:   7/24/2018 8:59 PM
358636. In determining whether an activity should be classified as a business or as a hobby, the satisfaction of the
3587presumption (i.e., profit in at least 3 out of 5 years) ensures treatment as a business.
3588a. True
3589b. False
3590ANSWER:   False
3591RATIONALE:   The satisfaction of the presumption merely shifts the burden of proof to the IRS. The
3592possibility still exists that the IRS can prove the activity is a hobby.
3593POINTS:   1
3594DIFFICULTY:   Easy
3595QUESTION TYPE:   True / False
3596HAS VARIABLES:   False
3597LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-07 - LO: 11-07
3598NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3599STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3600KEYWORDS:   Bloom's: Knowledge
3601OTHER:   Time: 2 min.
3602DATE CREATED:   11/15/2017 1:08 PM
3603DATE MODIFIED:   7/24/2018 9:58 PM
3604Copyright Cengage Learning. Powered by Cognero. Page 18
3605Chapter 06: Deductions and Losses: In General
360637. If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses
3607from the activity can be deducted in excess of the gross income from the activity.
3608a. True
3609b. False
3610ANSWER:   False
3611RATIONALE:   Satisfying the presumption shifts the burden of proof from the taxpayer to the IRS.
3612Failing the presumption merely means the burden of proof remains with the taxpayer.
3613POINTS:   1
3614DIFFICULTY:   Easy
3615QUESTION TYPE:   True / False
3616HAS VARIABLES:   False
3617LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-07 - LO: 11-07
3618NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3619STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3620KEYWORDS:   Bloom's: Knowledge
3621OTHER:   Time: 5 min.
3622DATE CREATED:   11/15/2017 1:08 PM
3623DATE MODIFIED:   7/24/2018 9:58 PM
362438. If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183.
3625a. True
3626b. False
3627ANSWER:   True
3628POINTS:   1
3629DIFFICULTY:   Easy
3630QUESTION TYPE:   True / False
3631HAS VARIABLES:   False
3632LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-07 - LO: 11-07
3633NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3634STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3635KEYWORDS:   Bloom's: Knowledge
3636OTHER:   Time: 2 min.
3637DATE CREATED:   11/15/2017 1:08 PM
3638DATE MODIFIED:   7/24/2018 9:58 PM
3639Copyright Cengage Learning. Powered by Cognero. Page 19
3640Chapter 06: Deductions and Losses: In General
364139. A hobby activity results in all of the hobby income being included in AGI and no deductions being allowed for hobby
3642related expenses.
3643a. True
3644b. False
3645ANSWER:   True
3646RATIONALE:   Income from a hobby activity is included in income. Beginning in 2018, the TCJA of 2017
3647disallows the deduction of miscellaneous itemized deductions subject to the 2%-of-AGI 
3648floor which includes hobby related expenses.
3649POINTS:   1
3650DIFFICULTY:   Easy
3651QUESTION TYPE:   True / False
3652HAS VARIABLES:   False
3653LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-07 - LO: 11-07
3654NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3655STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3656KEYWORDS:   Bloom's: Knowledge
3657OTHER:   Time: 2 min.
3658DATE CREATED:   11/15/2017 1:08 PM
3659DATE MODIFIED:   7/24/2018 9:58 PM
366040. If property taxes and home mortgage interest expense are related to a hobby, the excess amount of these items over
3661the hobby income cannot be deducted even if the taxpayer itemizes deductions.
3662a. True
3663b. False
3664ANSWER:   False
3665RATIONALE:   Property taxes and home mortgage interest can be deducted if the taxpayer itemizes
3666deductions, even if related to a hobby. 
3667POINTS:   1
3668DIFFICULTY:   Easy
3669QUESTION TYPE:   True / False
3670HAS VARIABLES:   False
3671LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-07 - LO: 11-07
3672NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3673STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3674KEYWORDS:   Bloom's: Knowledge
3675OTHER:   Time: 2 min.
3676DATE CREATED:   11/15/2017 1:08 PM
3677DATE MODIFIED:   7/24/2018 9:58 PM
3678Copyright Cengage Learning. Powered by Cognero. Page 20
3679Chapter 06: Deductions and Losses: In General
368041. If a publicly-traded corporation hires a new CEO in 2018 and she earns $12,000,000 from a performance-based
3681compensation plan, the corporation can deduct the entire $12,000,000. 
3682a. True
3683b. False
3684ANSWER:   False
3685RATIONALE:   Beginning in 2018, the excessive executive compensation limit applies to
3686performance-based compensation plans.  The corporation can deduct only
3687$1,000,000 of the CEO's compensation.  
3688POINTS:   1
3689DIFFICULTY:   Easy
3690QUESTION TYPE:   True / False
3691HAS VARIABLES:   False
3692LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3693NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3694STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3695KEYWORDS:   Bloom's: Knowledge
3696OTHER:   Time: 2 min.
3697DATE CREATED:   11/15/2017 1:08 PM
3698DATE MODIFIED:   7/24/2018 7:03 PM
369942. Martha rents part of her personal residence in the summer for 3 weeks for $3,000. Anne rents all of her personal
3700residence for one week in December for $2,500. Anne is not required to include the $2,500 in her gross income
3701whereas Martha is required to include the $3,000 in her gross income.
3702a. True
3703b. False
3704ANSWER:   True
3705RATIONALE:   The amount received as rent for a personal residence does not need to be included in
3706the taxpayer’s gross income unless the number of rental days exceeds 14. Thus, only
3707Martha need report her rental income.
3708POINTS:   1
3709DIFFICULTY:   Easy
3710QUESTION TYPE:   True / False
3711HAS VARIABLES:   False
3712LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3713NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3714STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
3715AICPA: FN-Measurement
3716KEYWORDS:   Bloom's: Comprehension
3717OTHER:   Time: 5 min.
3718DATE CREATED:   11/15/2017 1:08 PM
3719DATE MODIFIED:   7/24/2018 7:03 PM
3720Copyright Cengage Learning. Powered by Cognero. Page 21
3721Chapter 06: Deductions and Losses: In General
372243. If a vacation home is rented for less than 15 days during a year, the only expenses that can be deducted are
3723mortgage interest, property taxes, and personal casualty losses.
3724a. True
3725b. False
3726ANSWER:   True
3727POINTS:   1
3728DIFFICULTY:   Easy
3729QUESTION TYPE:   True / False
3730HAS VARIABLES:   False
3731LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3732NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3733STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3734KEYWORDS:   Bloom's: Comprehension
3735OTHER:   Time: 2 min.
3736DATE CREATED:   11/15/2017 1:08 PM
3737DATE MODIFIED:   7/24/2018 7:03 PM
373844. If a vacation home is classified as primarily rental use, a deduction for all of the rental expenses is allowed.
3739a. True
3740b. False
3741ANSWER:   False
3742RATIONALE:   The personal use portion still must be prorated.
3743POINTS:   1
3744DIFFICULTY:   Easy
3745QUESTION TYPE:   True / False
3746HAS VARIABLES:   False
3747LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3748NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3749STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3750KEYWORDS:   Bloom's: Knowledge
3751OTHER:   Time: 2 min.
3752DATE CREATED:   11/15/2017 1:08 PM
3753DATE MODIFIED:   7/24/2018 7:03 PM
3754Copyright Cengage Learning. Powered by Cognero. Page 22
3755Chapter 06: Deductions and Losses: In General
375645. If a vacation home is classified as primarily personal use (i.e., rented for fewer than 15 days), none of the related
3757expenses can be deducted.
3758a. True
3759b. False
3760ANSWER:   False
3761RATIONALE:   Only the expenses that normally are allowed as itemized deductions (e.g., mortgage
3762interest and property taxes) can be deducted.
3763POINTS:   1
3764DIFFICULTY:   Easy
3765QUESTION TYPE:   True / False
3766HAS VARIABLES:   False
3767LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3768NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3769STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3770KEYWORDS:   Bloom's: Knowledge
3771OTHER:   Time: 2 min.
3772DATE CREATED:   11/15/2017 1:08 PM
3773DATE MODIFIED:   7/24/2018 7:03 PM
377446. The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction.
3775a. True
3776b. False
3777ANSWER:   True
3778RATIONALE:   The gross income ceiling on deducting expenses for a vacation home does not apply
3779to expenses that are otherwise deductible (e.g., property taxes and mortgage
3780interest). The personal use portion of such expenses is deductible as an itemized
3781deduction.
3782POINTS:   1
3783DIFFICULTY:   Easy
3784QUESTION TYPE:   True / False
3785HAS VARIABLES:   False
3786LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3787NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3788STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3789KEYWORDS:   Bloom's: Knowledge
3790OTHER:   Time: 5 min.
3791DATE CREATED:   11/15/2017 1:08 PM
3792DATE MODIFIED:   7/24/2018 7:03 PM
3793Copyright Cengage Learning. Powered by Cognero. Page 23
3794Chapter 06: Deductions and Losses: In General
379547. If a vacation home is classified as primarily personal use, part of the maintenance and utility expenses can be
3796allocated and deducted as a rental expense.
3797a. True
3798b. False
3799ANSWER:   False
3800RATIONALE:   None of these expenses can be deducted since they relate to personal use.
3801POINTS:   1
3802DIFFICULTY:   Easy
3803QUESTION TYPE:   True / False
3804HAS VARIABLES:   False
3805LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3806NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3807STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3808KEYWORDS:   Bloom's: Knowledge
3809OTHER:   Time: 2 min.
3810DATE CREATED:   11/15/2017 1:08 PM
3811DATE MODIFIED:   7/24/2018 7:03 PM
381248. A vacation home at the beach which is rented for 200 days and used personally for 16 days is classified in the
3813personal/rental use category.
3814a. True
3815b. False
3816ANSWER:   False
3817RATIONALE:   The home can have personal use of 20 days (200 days × 10%) in this case and be
3818classified as primarily rental use. Therefore, in this case, the use of the home is
3819classified as primarily rental use.
3820POINTS:   1
3821DIFFICULTY:   Easy
3822QUESTION TYPE:   True / False
3823HAS VARIABLES:   False
3824LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3825NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3826STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3827KEYWORDS:   Bloom's: Application
3828OTHER:   Time: 2 min.
3829DATE CREATED:   11/15/2017 1:08 PM
3830DATE MODIFIED:   7/24/2018 7:03 PM
3831Copyright Cengage Learning. Powered by Cognero. Page 24
3832Chapter 06: Deductions and Losses: In General
383349. If a vacation home is a personal/rental residence, no maintenance and utility expenses can be claimed as a
3834deduction.
3835a. True
3836b. False
3837ANSWER:   False
3838RATIONALE:   That part of the maintenance and utility expenses allocated to rental days can be
3839deducted subject to the gross income ceiling.
3840POINTS:   1
3841DIFFICULTY:   Easy
3842QUESTION TYPE:   True / False
3843HAS VARIABLES:   False
3844LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3845NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3846STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3847KEYWORDS:   Bloom's: Knowledge
3848OTHER:   Time: 2 min.
3849DATE CREATED:   11/15/2017 1:08 PM
3850DATE MODIFIED:   7/24/2018 7:03 PM
385150. Beulah’s personal residence has an adjusted basis of $450,000 and a fair market value of $390,000. Beulah converts
3852the property to rental use  this year.  The vacation home rules that limit the amount of the deduction to the rental
3853income will apply and the adjusted basis for depreciation is $390,000.
3854a. True
3855b. False
3856ANSWER:   False
3857RATIONALE:   The adjusted basis for depreciation is $390,000, the lower of Beulah’s adjusted basis
3858of $450,000 or the fair market value of $390,000 on the date of the conversion.
3859However, additional data are necessary to determine whether the vacation home
3860gross income ceiling on deductions rule applies. If the qualified rental period
3861exception applies, the gross income limit does not apply. If the qualified rental
3862period exception does not apply, then the gross income limit does apply.
3863POINTS:   1
3864DIFFICULTY:   Easy
3865QUESTION TYPE:   True / False
3866HAS VARIABLES:   False
3867LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3868NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3869STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
3870AICPA: FN-Measurement
3871KEYWORDS:   Bloom's: Application
3872OTHER:   Time: 5 min.
3873DATE CREATED:   11/15/2017 1:08 PM
3874DATE MODIFIED:   7/24/2018 7:03 PM
3875Copyright Cengage Learning. Powered by Cognero. Page 25
3876Chapter 06: Deductions and Losses: In General
387751. Walt wants to give his daughter $1,800 for Christmas. As an alternative, she suggests that he pay the property taxes
3878on her residence. If Ralph pays the property taxes, he can deduct them.
3879a. True
3880b. False
3881ANSWER:   False
3882RATIONALE:   A taxpayer cannot deduct another taxpayer’s obligation. Thus, Ralph cannot deduct
3883his daughter’s property taxes.
3884POINTS:   1
3885DIFFICULTY:   Easy
3886QUESTION TYPE:   True / False
3887HAS VARIABLES:   False
3888LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
3889NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3890STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3891KEYWORDS:   Bloom's: Comprehension
3892OTHER:   Time: 5 min.
3893DATE CREATED:   11/15/2017 1:08 PM
3894DATE MODIFIED:   7/24/2018 7:03 PM
389552. LD Partnership, a cash basis taxpayer, purchases land and a building for $200,000 with $150,000 of the cost being
3896allocated to the building. The gross receipts of the partnership are less than $100,000. LD must capitalize the $50,000
3897paid for the land, but can deduct the $150,000 paid for the building in the current tax year.
3898a. True
3899b. False
3900ANSWER:   False
3901RATIONALE:   Both the cost of the land and the building must be capitalized. The $150,000 paid for
3902the building can be depreciated over the MACRS statutory period.
3903POINTS:   1
3904DIFFICULTY:   Easy
3905QUESTION TYPE:   True / False
3906HAS VARIABLES:   False
3907LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3908NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3909STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
3910AICPA: FN-Measurement
3911KEYWORDS:   Bloom's: Comprehension
3912OTHER:   Time: 5 min.
3913DATE CREATED:   11/15/2017 1:08 PM
3914DATE MODIFIED:   7/24/2018 8:59 PM
3915Copyright Cengage Learning. Powered by Cognero. Page 26
3916Chapter 06: Deductions and Losses: In General
391753. Purchased goodwill must be capitalized, but can be amortized over a 60-month period.
3918a. True
3919b. False
3920ANSWER:   False
3921RATIONALE:   Goodwill is a § 197 intangible. Although it must be capitalized, it can be amortized
3922over a 15-year statutory period.
3923POINTS:   1
3924DIFFICULTY:   Easy
3925QUESTION TYPE:   True / False
3926HAS VARIABLES:   False
3927LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3928NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3929STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3930KEYWORDS:   Bloom's: Comprehension
3931OTHER:   Time: 2 min.
3932DATE CREATED:   11/15/2017 1:08 PM
3933DATE MODIFIED:   7/24/2018 8:59 PM
393454. Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000.
3935Marge’s recognized loss is $5,000 and Jason’s adjusted basis for the land is $25,000 ($20,000 cost + $5,000
3936recognized gain of Marge).
3937a. True
3938b. False
3939ANSWER:   False
3940RATIONALE:   Marge’s recognized loss is $0; Jason’s adjusted basis for the land is his cost of
3941$20,000.
3942POINTS:   1
3943DIFFICULTY:   Easy
3944QUESTION TYPE:   True / False
3945HAS VARIABLES:   False
3946LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3947NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3948STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
3949AICPA: FN-Measurement
3950KEYWORDS:   Bloom's: Application
3951OTHER:   Time: 5 min.
3952DATE CREATED:   11/15/2017 1:08 PM
3953DATE MODIFIED:   7/24/2018 8:59 PM
3954Copyright Cengage Learning. Powered by Cognero. Page 27
3955Chapter 06: Deductions and Losses: In General
395655. For purposes of the § 267 loss disallowance provision, a taxpayer’s aunt is a related party.
3957a. True
3958b. False
3959ANSWER:   False
3960RATIONALE:   An aunt is not a related party for § 267 loss disallowance purposes.
3961POINTS:   1
3962DIFFICULTY:   Easy
3963QUESTION TYPE:   True / False
3964HAS VARIABLES:   False
3965LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
3966NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3967STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3968KEYWORDS:   Bloom's: Knowledge
3969OTHER:   Time: 2 min.
3970DATE CREATED:   11/15/2017 1:08 PM
3971DATE MODIFIED:   7/24/2018 8:59 PM
397256. An advance payment received in June 2018 by an accrual basis and calendar year taxpayer for services to be
3973provided over a 36-month period can be spread over four tax years.
3974a. True
3975b. False
3976ANSWER:   False
3977RATIONALE:   Using the deferral method for advanced payments, an accrual method taxpayer
3978reports on its tax return for the year of receipt the same amount as reported on its
3979financial statements with the balance reported on the subsequent year's tax return.
3980POINTS:   1
3981DIFFICULTY:   Easy
3982QUESTION TYPE:   True / False
3983HAS VARIABLES:   False
3984LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
3985NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
3986STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
3987KEYWORDS:   Bloom's: Comprehension
3988OTHER:   Time: 2 min.
3989DATE CREATED:   11/15/2017 1:06 PM
3990DATE MODIFIED:   7/24/2018 8:59 PM
3991Copyright Cengage Learning. Powered by Cognero. Page 28
3992Chapter 06: Deductions and Losses: In General
399357. Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions in 2018:  
3994Salary from job $90,000
3995Alimony received from ex-wife 10,000
3996Medical expenses 7,000
3997Based on this information, Sammy has:
3998a. AGI of $90,000.
3999b. AGI of $95,000.
4000c. AGI of $99,500.
4001d. Deduction for medical expenses of $0.
4002e. None of the above.
4003ANSWER:   d
4004RATIONALE:   Sammy’s AGI is calculated as follows:
4005Salary from job $ 90,000
4006Alimony received from ex-wife    10,000
4007AGI $100,000
4008Sammy’s deduction for medical expenses, an itemized deduction, is $0 [$7,000 –
40097.5%($100,000)].
4010POINTS:   1
4011DIFFICULTY:   Easy
4012QUESTION TYPE:   Multiple Choice
4013HAS VARIABLES:   False
4014LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
4015NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4016STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4017AICPA: FN-Measurement
4018KEYWORDS:   Bloom's: Application
4019OTHER:   Time: 5 min.
4020DATE CREATED:   11/15/2017 1:08 PM
4021DATE MODIFIED:   7/24/2018 7:03 PM
4022Copyright Cengage Learning. Powered by Cognero. Page 29
4023Chapter 06: Deductions and Losses: In General
402458. Trade or business expenses of a self-employed taxpayer should be treated as:
4025a. Deductible for AGI on Schedule E.  
4026b. A deduction from AGI.
4027c. Deductible for AGI on Schedule C.
4028d. An itemized deduction if not reimbursed.
4029e. None of the above.
4030ANSWER:   c
4031POINTS:   1
4032DIFFICULTY:   Easy
4033QUESTION TYPE:   Multiple Choice
4034HAS VARIABLES:   False
4035LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
4036NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4037STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4038KEYWORDS:   Bloom's: Knowledge
4039OTHER:   Time: 2 min.
4040DATE CREATED:   11/15/2017 1:08 PM
4041DATE MODIFIED:   7/24/2018 7:03 PM
4042Copyright Cengage Learning. Powered by Cognero. Page 30
4043Chapter 06: Deductions and Losses: In General
404459. Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows:
4045Alimony $20,000
4046Charitable contributions 4,000
4047Contribution to a traditional IRA 5,500
4048Expenses paid on rental property 7,500
4049Interest on home mortgage and property taxes on personal residence 7,200
4050State income tax 2,200
4051What is Al’s AGI?
4052a. $94,100.
4053b. $103,000.
4054c. $107,000.
4055d. $127,000.
4056e. None of the above.
4057ANSWER:   c
4058RATIONALE:   Al’s AGI is calculated as follows:
4059Gross income $140,000 
4060Deductions for AGI:
4061Alimony $20,000
4062IRA 5,500
4063Expenses on rental property    7,500  (33,000)
4064AGI $107,000 
4065POINTS:   1
4066DIFFICULTY:   Easy
4067QUESTION TYPE:   Multiple Choice
4068HAS VARIABLES:   False
4069LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
4070NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4071STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4072AICPA: FN-Measurement
4073KEYWORDS:   Bloom's: Application
4074OTHER:   Time: 5 min.
4075DATE CREATED:   11/15/2017 1:08 PM
4076DATE MODIFIED:   7/24/2018 7:03 PM
4077Copyright Cengage Learning. Powered by Cognero. Page 31
4078Chapter 06: Deductions and Losses: In General
407960. Marsha is single, had gross income of $50,000, and incurred the following expenses:
4080Charitable contribution $2,000
4081Taxes and interest on home 7,000
4082Legal fees incurred in a tax dispute 1,000
4083Medical expenses 3,000
4084Penalty on early withdrawal of savings 250
4085Her AGI is:
4086a. $39,750.
4087b. $49,750.
4088c. $40,000.
4089d. $39,750.
4090e. None of the above.
4091ANSWER:   b
4092RATIONALE:   Marsha’s AGI is calculated as follows:
4093Gross income $50,000 
4094Deductions for AGI:
4095Penalty on early withdrawal of savings     (250)
4096AGI $49,750 
4097POINTS:   1
4098DIFFICULTY:   Easy
4099QUESTION TYPE:   Multiple Choice
4100HAS VARIABLES:   False
4101LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
4102NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4103STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4104AICPA: FN-Measurement
4105KEYWORDS:   Bloom's: Application
4106OTHER:   Time: 5 min.
4107DATE CREATED:   11/15/2017 1:08 PM
4108DATE MODIFIED:   7/24/2018 7:03 PM
4109Copyright Cengage Learning. Powered by Cognero. Page 32
4110Chapter 06: Deductions and Losses: In General
411161. Which of the following can be claimed as a deduction for AGI?
4112a. Personal casualty losses.
4113b. Investment interest expenses.
4114c. Medical expenses.
4115d. Property taxes on personal use real estate.
4116e. None of the above.
4117ANSWER:   e
4118RATIONALE:   All of these expenses are classified as itemized deductions.
4119POINTS:   1
4120DIFFICULTY:   Easy
4121QUESTION TYPE:   Multiple Choice
4122HAS VARIABLES:   False
4123LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
4124NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4125STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4126KEYWORDS:   Bloom's: Knowledge
4127OTHER:   Time: 2 min.
4128DATE CREATED:   11/15/2017 1:08 PM
4129DATE MODIFIED:   7/24/2018 7:03 PM
413062. Which of the following is a deduction for AGI?
4131a. Contribution to a traditional IRA.
4132b. Roof repairs to a personal use home.
4133c. Safe deposit box rental fee in which stock certificates are stored.
4134d. Property tax on personal residence.
4135e. All of the above.
4136ANSWER:   a
4137RATIONALE:   Choice c. and d. are deductions from AGI. Choice b. is not deductible.
4138POINTS:   1
4139DIFFICULTY:   Easy
4140QUESTION TYPE:   Multiple Choice
4141HAS VARIABLES:   False
4142LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
4143NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4144STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4145KEYWORDS:   Bloom's: Knowledge
4146OTHER:   Time: 5 min.
4147DATE CREATED:   11/15/2017 1:08 PM
4148DATE MODIFIED:   7/24/2018 7:03 PM
4149Copyright Cengage Learning. Powered by Cognero. Page 33
4150Chapter 06: Deductions and Losses: In General
415163. Which of the following is correct?
4152a. A personal casualty loss incurred from a Presidentially declared disaster is classified as a deduction from
4153AGI.
4154b. Real estate taxes on a taxpayer’s personal residence are classified as deductions from AGI.
4155c. An expense associated with rental property is classified as a deduction for AGI.
4156d. Only a. and b. are correct.
4157e. a., b., and c., are correct.
4158ANSWER:   e
4159POINTS:   1
4160DIFFICULTY:   Easy
4161QUESTION TYPE:   Multiple Choice
4162HAS VARIABLES:   False
4163LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
4164NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4165STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4166KEYWORDS:   Bloom's: Knowledge
4167OTHER:   Time: 5 min.
4168DATE CREATED:   11/15/2017 1:08 PM
4169DATE MODIFIED:   7/24/2018 7:03 PM
417064. Which of the following are deductions for AGI?
4171a. Mortgage interest on a personal residence.
4172b. Property taxes on a personal residence.
4173c. Mortgage interest on a building used in a business.
4174d. Fines and penalties incurred in a trade or business.
4175e. None of the above.
4176ANSWER:   c
4177POINTS:   1
4178DIFFICULTY:   Easy
4179QUESTION TYPE:   Multiple Choice
4180HAS VARIABLES:   False
4181LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
4182NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4183STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4184KEYWORDS:   Bloom's: Knowledge
4185OTHER:   Time: 5 min.
4186DATE CREATED:   11/15/2017 1:08 PM
4187DATE MODIFIED:   7/24/2018 7:03 PM
4188Copyright Cengage Learning. Powered by Cognero. Page 34
4189Chapter 06: Deductions and Losses: In General
419065. Which of the following is incorrect?
4191a. Alimony is a deduction for AGI.
4192b. The expenses associated with royalty property are a deduction from AGI.
4193c. Contributions to a traditional IRA are a deduction for AGI.
4194d. Property taxes on taxpayer’s personal residence are a deduction from AGI
4195e. All of the above are correct.
4196ANSWER:   b
4197POINTS:   1
4198DIFFICULTY:   Easy
4199QUESTION TYPE:   Multiple Choice
4200HAS VARIABLES:   False
4201LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
4202NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4203STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4204KEYWORDS:   Bloom's: Knowledge
4205OTHER:   Time: 5 min.
4206DATE CREATED:   11/15/2017 1:08 PM
4207DATE MODIFIED:   7/24/2018 7:03 PM
420866. Which of the following is not a “trade or business” expense?
4209a. Interest on business indebtedness.
4210b. Property taxes on business property.
4211c. Parking ticket paid on business auto.
4212d. Depreciation on business property.
4213e. All of the above are “trade or business” expenses.
4214ANSWER:   c
4215POINTS:   1
4216DIFFICULTY:   Easy
4217QUESTION TYPE:   Multiple Choice
4218HAS VARIABLES:   False
4219LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-01 - LO: 5-01
4220NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4221STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4222KEYWORDS:   Bloom's: Knowledge
4223OTHER:   Time: 5 min.
4224DATE CREATED:   11/15/2017 1:08 PM
4225DATE MODIFIED:   7/24/2018 8:59 PM
4226Copyright Cengage Learning. Powered by Cognero. Page 35
4227Chapter 06: Deductions and Losses: In General
422867. Which of the following is a required test for the deduction of a business expense?
4229a. Ordinary
4230b. Necessary
4231c. Reasonable
4232d. All of the above
4233e. None of the above
4234ANSWER:   d
4235POINTS:   1
4236DIFFICULTY:   Easy
4237QUESTION TYPE:   Multiple Choice
4238HAS VARIABLES:   False
4239LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-01 - LO: 5-01
4240NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4241STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4242KEYWORDS:   Bloom's: Knowledge
4243OTHER:   Time: 5 min.
4244DATE CREATED:   11/15/2017 1:08 PM
4245DATE MODIFIED:   7/24/2018 8:59 PM
4246Copyright Cengage Learning. Powered by Cognero. Page 36
4247Chapter 06: Deductions and Losses: In General
424868. Paula is the sole shareholder of Violet, Inc. For 2018, she receives from Violet a salary of $300,000 and dividends of
4249$100,000. Violet’s taxable income for 2018 is $500,000. On audit, the IRS treats $100,000 of Paula’s salary as
4250unreasonable. Which of the following statements is correct?
4251a. Paula’s gross income will increase by $100,000 as a result of the IRS adjustment.
4252b. Violet’s taxable income will not be affected by the IRS adjustment.
4253c. Paula’s gross income will decrease by $100,000 as a result of the IRS adjustment.
4254d. Violet’s taxable income will decrease by $100,000 as a result of the IRS adjustment.
4255e. None of the above is correct.
4256ANSWER:   e
4257RATIONALE:   $100,000 of salary is reclassified as a dividend. Thus, Violet’s taxable income
4258increases by $100,000 because dividends are not deductible. Paula’s gross income
4259remains the same. Her salary income decreases by $100,000, but her dividend
4260income increases by $100,000.
4261POINTS:   1
4262DIFFICULTY:   Easy
4263QUESTION TYPE:   Multiple Choice
4264HAS VARIABLES:   False
4265LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-01 - LO: 5-01
4266NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4267STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4268AICPA: FN-Measurement
4269KEYWORDS:   Bloom's: Application
4270OTHER:   Time: 5 min.
4271DATE CREATED:   11/15/2017 1:08 PM
4272DATE MODIFIED:   7/24/2018 8:59 PM
4273Copyright Cengage Learning. Powered by Cognero. Page 37
4274Chapter 06: Deductions and Losses: In General
427569. During 2017, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees
4276have earned salaries of $20,000, which are not paid by Silver until early in 2018. What is the amount of the deduction
4277for salary expense?
4278a. If Silver uses the cash method, $175,000 in 2017 and $0 in 2018.
4279b. If Silver uses the cash method, $0 in 2017 and $195,000 in 2018.
4280c. If Silver uses the accrual method, $175,000 in 2017 and $20,000 in 2018.
4281d. If Silver uses the accrual method, $195,000 in 2017 and $0 in 2018.
4282e. None of the above is correct.
4283ANSWER:   d
4284POINTS:   1
4285DIFFICULTY:   Easy
4286QUESTION TYPE:   Multiple Choice
4287HAS VARIABLES:   False
4288LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-01 - LO: 5-01
4289NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4290STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4291KEYWORDS:   Bloom's: Knowledge
4292OTHER:   Time: 5 min.
4293DATE CREATED:   11/15/2017 1:08 PM
4294DATE MODIFIED:   7/24/2018 8:59 PM
4295Copyright Cengage Learning. Powered by Cognero. Page 38
4296Chapter 06: Deductions and Losses: In General
429770. Benita incurred a business expense on December 10, 2018, which she charged on her bank credit card. She paid the
4298credit card statement which included the charge on January 5, 2019. Which of the following is correct?
4299a. If Benita is a cash method taxpayer, she cannot deduct the expense until 2019.
4300b. If Benita is an accrual method taxpayer, she can deduct the expense in 2018.
4301c. If Benita uses the accrual method, she can choose to deduct the expense in either 2018 or 2019.
4302d. Only b. and c. are correct.
4303e. a., b., and c. are correct.
4304ANSWER:   b
4305RATIONALE:   Choice a. is incorrect because charging the expense on a bank credit card is treated
4306as a constructive payment. Thus, as a cash method taxpayer, she can deduct the
4307expense in 2018. If Benita uses the accrual method, she deducts the expense in
43082018. In any event, she does not merely choose the year in which to deduct the
4309expense (choice c.).
4310POINTS:   1
4311DIFFICULTY:   Easy
4312QUESTION TYPE:   Multiple Choice
4313HAS VARIABLES:   False
4314LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
4315NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4316STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4317KEYWORDS:   Bloom's: Comprehension
4318OTHER:   Time: 5 min.
4319DATE CREATED:   11/15/2017 1:08 PM
4320DATE MODIFIED:   7/24/2018 8:59 PM
4321Copyright Cengage Learning. Powered by Cognero. Page 39
4322Chapter 06: Deductions and Losses: In General
432371. Payments by a cash basis taxpayer of capital expenditures:
4324a. Must be expensed at the time of payment.
4325b. Must be expensed by the end of the first year after the asset is acquired.
4326c. Must be deducted over the actual or statutory life of the asset.
4327d. Can be deducted in the year the taxpayer chooses.
4328e. None of the above.
4329ANSWER:   c
4330RATIONALE:   Both cash basis and accrual basis taxpayers are required to recover the cost of
4331capital assets through amortization, depletion, or depreciation over the actual or
4332statutory life of the asset.
4333POINTS:   1
4334DIFFICULTY:   Easy
4335QUESTION TYPE:   Multiple Choice
4336HAS VARIABLES:   False
4337LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
4338NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4339STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4340KEYWORDS:   Bloom's: Comprehension
4341OTHER:   Time: 5 min.
4342DATE CREATED:   11/15/2017 1:08 PM
4343DATE MODIFIED:   7/24/2018 8:59 PM
4344Copyright Cengage Learning. Powered by Cognero. Page 40
4345Chapter 06: Deductions and Losses: In General
434672. Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During
43472018, the following occur associated with bad debts.
4348Credit sales $400,000
4349Collections on credit sales 250,000
4350Amount added to the reserve 10,000
4351Beginning balance in the reserve –0–
4352Identifiable bad debts during 2018 12,000
4353The amount of the deduction for bad debt expense for Petal for 2018 is:
4354a. $10,000.
4355b. $12,000.
4356c. $22,000.
4357d. $140,000.
4358e. None of the above.
4359ANSWER:   b
4360RATIONALE:   Only the specific charge-off method can be used. Reserves for estimated expenses
4361are not allowed for tax purposes because the economic performance test cannot be
4362satisfied.
4363POINTS:   1
4364DIFFICULTY:   Easy
4365QUESTION TYPE:   Multiple Choice
4366HAS VARIABLES:   False
4367LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
4368NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4369STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4370AICPA: FN-Measurement
4371KEYWORDS:   Bloom's: Application
4372OTHER:   Time: 5 min.
4373DATE CREATED:   11/15/2017 1:08 PM
4374DATE MODIFIED:   7/24/2018 8:59 PM
4375Copyright Cengage Learning. Powered by Cognero. Page 41
4376Chapter 06: Deductions and Losses: In General
437773. Which of the following legal expenses are deductible for AGI in 2018?
4378a. Incurred in connection with a trade or business.
4379b. Incurred in connection with rental or royalty property held for the production of income.
4380c. Incurred for tax advice relative to the preparation of an individual’s income tax return.
4381d. Only a. and b. qualify.
4382e. a., b., and c. qualify.
4383ANSWER:   d
4384RATIONALE:   Expenses paid in 2018 for tax advice relative to the preparation of an individual’s
4385income tax return are not deductible.
4386POINTS:   1
4387DIFFICULTY:   Easy
4388QUESTION TYPE:   Multiple Choice
4389HAS VARIABLES:   False
4390LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
4391NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4392STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4393AICPA: FN-Measurement
4394KEYWORDS:   Bloom's: Comprehension
4395OTHER:   Time: 5 min.
4396DATE CREATED:   11/15/2017 1:08 PM
4397DATE MODIFIED:   7/24/2018 7:03 PM
4398Copyright Cengage Learning. Powered by Cognero. Page 42
4399Chapter 06: Deductions and Losses: In General
440074. Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2018, a bill
4401designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2018,
4402Rex had the following expenses:
4403Operating expenses in conducting bingo games $247,000
4404Payoff money to state and local police 24,000
4405Newspaper ads supporting H.R. 9 3,000
4406Political contributions to legislators who support H.R. 9 8,000
4407Of these expenditures, Rex may deduct:
4408a. $247,000.
4409b. $250,000.
4410c. $258,000.
4411d. $282,000.
4412e. None of the above.
4413ANSWER:   a
4414RATIONALE:   Rex can deduct only the $247,000 of operating expenses.
4415POINTS:   1
4416DIFFICULTY:   Easy
4417QUESTION TYPE:   Multiple Choice
4418HAS VARIABLES:   False
4419LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
4420NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4421STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4422AICPA: FN-Measurement
4423KEYWORDS:   Bloom's: Application
4424OTHER:   Time: 5 min.
4425DATE CREATED:   11/15/2017 1:08 PM
4426DATE MODIFIED:   7/24/2018 8:59 PM
4427Copyright Cengage Learning. Powered by Cognero. Page 43
4428Chapter 06: Deductions and Losses: In General
442975. Andrew, who operates a laundry business, incurred the following expenses during the year.
4430∙ Parking ticket of $250 for one of his delivery vans that parked illegally.
4431∙ Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa.
4432∙ DUI ticket of $500 while returning from the rock concert.
4433∙ Attorney’s fee of $600 associated with the DUI ticket.
4434What amount can Andrew deduct for these expenses?
4435a. $0.
4436b. $250.
4437c. $600.
4438d. $1,425.
4439e. None of the above.
4440ANSWER:   a
4441RATIONALE:   None of these expenses are deductible. The $75 parking ticket, the $500 DUI ticket,
4442and the $600 attorney fee are all personal expenses. The $250 parking ticket,
4443although related to his laundry business, is not deductible because it is a violation of
4444public policy.
4445POINTS:   1
4446DIFFICULTY:   Easy
4447QUESTION TYPE:   Multiple Choice
4448HAS VARIABLES:   False
4449LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
4450NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4451STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4452AICPA: FN-Measurement
4453KEYWORDS:   Bloom's: Application
4454OTHER:   Time: 10 min.
4455DATE CREATED:   11/15/2017 1:08 PM
4456DATE MODIFIED:   7/24/2018 8:59 PM
4457Copyright Cengage Learning. Powered by Cognero. Page 44
4458Chapter 06: Deductions and Losses: In General
445976. Which of the following may be deductible in 2018?
4460a. Bribes that relate to a U.S. business.
4461b. Fines paid for violations of the law.
4462c. Interest on a loan used in a hobby.
4463d. All of the above.
4464e. None of the above.
4465ANSWER:   e
4466RATIONALE:   Choices a. and b. are not deductible. Interest incurred in connection with a hobby is
4467no longer deductible since 2% miscellaneous itemized deductions are no longer
4468allowed. 
4469POINTS:   1
4470DIFFICULTY:   Easy
4471QUESTION TYPE:   Multiple Choice
4472HAS VARIABLES:   False
4473LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
4474NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4475STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4476KEYWORDS:   Bloom's: Comprehension
4477OTHER:   Time: 5 min.
4478DATE CREATED:   11/15/2017 1:08 PM
4479DATE MODIFIED:   7/24/2018 8:59 PM
4480Copyright Cengage Learning. Powered by Cognero. Page 45
4481Chapter 06: Deductions and Losses: In General
448277. Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates
4483a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following
4484expenses.
4485Terry Jim
4486Employee salaries $200,000 $200,000
4487Bribes to police 25,000 25,000
4488Rent and utilities 50,000 50,000
4489Cost of goods sold –0– 125,000
4490Which of the following statements is correct?
4491a. Neither Terry nor Jim can deduct any of the above items in calculating the business profit.
4492b. Terry should report profit from his business of $250,000.
4493c. Jim should report profit from his business of $500,000.
4494d. Jim should report profit from his business of $250,000.
4495e. None of the above.
4496ANSWER:   b
4497RATIONALE:   Terry and Jim should report net profit from their businesses as follows:
4498Terry Jim
4499Gross revenues $500,000  $500,000 
4500Less: Cost of goods sold      (–0–) (125,000)
4501Gross income $500,000  $375,000 
4502Less: Expenses
4503Employee salaries (200,000) (–0–)
4504Rent and utilities (50,000) (–0–)
4505Bribes to police      (–0–)      (–0–)
4506Net profit $250,000  $375,000 
4507For Terry, the bribes to the police of $25,000 cannot be deducted. None of Jim’s
4508expenses can be deducted. However, the cost of goods sold is viewed as a negative
4509item in calculating gross income (i.e., gross income = gross profit) rather than as a
4510deduction.
4511POINTS:   1
4512DIFFICULTY:   Easy
4513QUESTION TYPE:   Multiple Choice
4514HAS VARIABLES:   False
4515LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
4516NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4517STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4518AICPA: FN-Measurement
4519KEYWORDS:   Bloom's: Application
4520OTHER:   Time: 10 min.
4521DATE CREATED:   11/15/2017 1:08 PM
4522DATE MODIFIED:   7/24/2018 8:59 PM
4523Copyright Cengage Learning. Powered by Cognero. Page 46
4524Chapter 06: Deductions and Losses: In General
452578. Tom operates an illegal drug-running operation and incurred the following expenses:
4526Salaries $ 75,000
4527Illegal kickbacks 20,000
4528Bribes to border guards 25,000
4529Cost of goods sold 160,000
4530Rent 8,000
4531Interest 10,000
4532Insurance on furniture and fixtures 6,000
4533Utilities and telephone 20,000
4534Which of the above amounts reduces his taxable income?
4535a. $0.
4536b. $160,000.
4537c. $279,000.
4538d. $324,000.
4539e. None of the above.
4540ANSWER:   b
4541RATIONALE:   Cost of goods sold of $160,000 is treated as a negative item in calculating gross
4542income rather than as a deduction. For a drug dealer, all deductions are disallowed.
4543POINTS:   1
4544DIFFICULTY:   Easy
4545QUESTION TYPE:   Multiple Choice
4546HAS VARIABLES:   False
4547LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
4548NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4549STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4550AICPA: FN-Measurement
4551KEYWORDS:   Bloom's: Application
4552OTHER:   Time: 5 min.
4553DATE CREATED:   11/15/2017 1:08 PM
4554DATE MODIFIED:   7/24/2018 8:59 PM
4555Copyright Cengage Learning. Powered by Cognero. Page 47
4556Chapter 06: Deductions and Losses: In General
455779. For a president of a publicly held corporation hired in 2018, which of the following are not subject to the $1 million
4558limit on executive compensation?
4559a. Contribution to medical insurance plan.
4560b. Contribution to pension plan.
4561c. Premiums on group term life insurance of $50,000.
4562d. Only b. and c. are not subject to the limit.
4563e. a., b., and c., are not subject to the limit.
4564ANSWER:   e
4565POINTS:   1
4566DIFFICULTY:   Easy
4567QUESTION TYPE:   Multiple Choice
4568HAS VARIABLES:   False
4569LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
4570NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4571STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4572AICPA: FN-Measurement
4573KEYWORDS:   Bloom's: Application
4574OTHER:   Time: 5 min.
4575DATE CREATED:   11/15/2017 1:08 PM
4576DATE MODIFIED:   7/24/2018 8:59 PM
4577Copyright Cengage Learning. Powered by Cognero. Page 48
4578Chapter 06: Deductions and Losses: In General
457980. Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If
4580Tommy decides not to acquire the fast food franchise, any investigation expenses are:
4581a. A deduction for AGI.
4582b. A deduction from AGI, subject to the 2 percent floor.
4583c. A deduction from AGI, not subject to the 2 percent floor.
4584d. Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period.
4585e. Not deductible.
4586ANSWER:   e
4587RATIONALE:   Since Tommy is not in a business that is the same as or similar to the one being
4588investigated and did not acquire the new business, his investigation expenses cannot
4589be deducted.
4590POINTS:   1
4591DIFFICULTY:   Easy
4592QUESTION TYPE:   Multiple Choice
4593HAS VARIABLES:   False
4594LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
4595NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4596STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4597KEYWORDS:   Bloom's: Comprehension
4598OTHER:   Time: 5 min.
4599DATE CREATED:   11/15/2017 1:08 PM
4600DATE MODIFIED:   7/24/2018 8:59 PM
4601Copyright Cengage Learning. Powered by Cognero. Page 49
4602Chapter 06: Deductions and Losses: In General
460381. Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to
4604expand to other states. During 2018, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000
4605to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia.
4606As to these expenses, Iris should:
4607a. Capitalize $14,000 and not deduct $9,000.
4608b. Expense $23,000 for 2018.
4609c. Expense $9,000 for 2018 and capitalize $14,000.
4610d. Capitalize $23,000.
4611e. None of the above.
4612ANSWER:   b
4613RATIONALE:   Since Iris owns and operates TV rental outlets, all of the investigation expenses can
4614be deducted.
4615POINTS:   1
4616DIFFICULTY:   Easy
4617QUESTION TYPE:   Multiple Choice
4618HAS VARIABLES:   False
4619LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
4620NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4621STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4622AICPA: FN-Measurement
4623KEYWORDS:   Bloom's: Application
4624OTHER:   Time: 5 min.
4625DATE CREATED:   11/15/2017 1:08 PM
4626DATE MODIFIED:   7/24/2018 8:59 PM
4627Copyright Cengage Learning. Powered by Cognero. Page 50
4628Chapter 06: Deductions and Losses: In General
462982. Which of the following statements is correct in connection with the investigation of a business?
4630a. If the taxpayer is not already engaged in the trade or business, the expenses incurred are deductible if the
4631project is abandoned.
4632b. Expenses may be deducted immediately by a taxpayer engaged in a similar trade or business regardless of
4633whether the business being investigated is acquired.
4634c. That business must be related to the taxpayer’s present business for any expense ever to be deductible.
4635d. Regardless of whether the taxpayer is already engaged in the trade or business, the expenses must be
4636capitalized and amortized.
4637e. None of the above.
4638ANSWER:   b
4639POINTS:   1
4640DIFFICULTY:   Easy
4641QUESTION TYPE:   Multiple Choice
4642HAS VARIABLES:   False
4643LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
4644NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4645STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4646KEYWORDS:   Bloom's: Comprehension
4647OTHER:   Time: 5 min.
4648DATE CREATED:   11/15/2017 1:08 PM
4649DATE MODIFIED:   7/24/2018 8:59 PM
465083. Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby?
4651a. Whether the activity is enjoyed by the taxpayer.
4652b. The expertise of the taxpayers or their advisers.
4653c. The time and effort expended.
4654d. The relationship of profits earned and losses incurred.
4655e. All of the above are relevant factors.
4656ANSWER:   e
4657RATIONALE:   All of these items are relevant factors in determining whether an activity is profitseeking
4658or a hobby.
4659POINTS:   1
4660DIFFICULTY:   Easy
4661QUESTION TYPE:   Multiple Choice
4662HAS VARIABLES:   False
4663LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-07 - LO: 11-07
4664NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4665STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4666KEYWORDS:   Bloom's: Knowledge
4667OTHER:   Time: 5 min.
4668DATE CREATED:   11/15/2017 1:08 PM
4669DATE MODIFIED:   7/24/2018 9:58 PM
4670Copyright Cengage Learning. Powered by Cognero. Page 51
4671Chapter 06: Deductions and Losses: In General
467284. For an activity classified as a hobby, the expenses are categorized as follows:
4673(1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been
4674engaged in for profit (e.g., depreciation, amortization, and depletion).
4675(2) Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxes
4676and home mortgage interest.
4677(3) Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those
4678amounts do not affect adjusted basis (e.g., maintenance, utilities, and supplies).
4679For tax years before 2018, if these expenses exceed the gross income from the activity and are thus limited, the
4680sequence in which they are deductible is:
4681a. (1), (2), (3).
4682b. (1), (3), (2).
4683c. (2), (3), (1).
4684d. (2), (1), (3).
4685e. (3), (2), (1).
4686ANSWER:   c
4687RATIONALE:   Before 2018, the last two categories of deductions were deductible from AGI
4688as miscellaneous itemized deductions (to the extent they exceeded 2 percent of
4689AGI). From 2018 through 2025, miscellaneous itemized deductions are not
4690deductible.
4691POINTS:   1
4692DIFFICULTY:   Easy
4693QUESTION TYPE:   Multiple Choice
4694HAS VARIABLES:   False
4695LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-07 - LO: 11-07
4696NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4697STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4698KEYWORDS:   Bloom's: Comprehension
4699OTHER:   Time: 5 min.
4700DATE CREATED:   11/15/2017 1:08 PM
4701DATE MODIFIED:   7/24/2018 9:58 PM
4702Copyright Cengage Learning. Powered by Cognero. Page 52
4703Chapter 06: Deductions and Losses: In General
470485. Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000.
4705During 2018 she sold the bedspreads for $10,000. She incurred expenses as follows:
4706Supplies $4,000
4707Interest on loan to get business started 500
4708Advertising 6,500
4709Assuming that the activity is deemed a hobby, how should she report these items on her tax return?
4710a. Include $10,000 in income and deduct $11,000 for AGI.
4711b. Ignore both income and expenses since hobby losses are disallowed.
4712c. Include $10,000 in income, deduct nothing for AGI, and claim $11,000 of the expenses as itemized deductions.
4713d. Include $10,000 in income and deduct nothing.
4714e. None of the above.
4715ANSWER:   d
4716RATIONALE:   Beginning in 2018 expenses related to a hobby are not deductible.  
4717POINTS:   1
4718DIFFICULTY:   Easy
4719QUESTION TYPE:   Multiple Choice
4720HAS VARIABLES:   False
4721LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-07 - LO: 11-07
4722NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4723STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4724KEYWORDS:   Bloom's: Application
4725OTHER:   Time: 5 min.
4726DATE CREATED:   11/15/2017 1:08 PM
4727DATE MODIFIED:   7/24/2018 9:58 PM
4728Copyright Cengage Learning. Powered by Cognero. Page 53
4729Chapter 06: Deductions and Losses: In General
473086. Cory incurred and paid the following expenses in 2018:
4731Tax return preparation fee $  600
4732Moving expenses 2,000
4733Investment expenses 500
4734Expenses associated with rental property 1,500
4735Interest expense associated with loan to finance tax-exempt bonds 400
4736Calculate the amount that Cory can deduct (before any percentage limitations).
4737a. $5,000.
4738b. $4,600.
4739c. $3,000.
4740d. $1,500.
4741e. None of the above.
4742ANSWER:   d
4743RATIONALE:   Only the rental property expenses are deductible. 
4744POINTS:   1
4745DIFFICULTY:   Easy
4746QUESTION TYPE:   Multiple Choice
4747HAS VARIABLES:   False
4748LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
4749CMPV.SWFT.LO: 6-03 - LO: 6-03
4750NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4751STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4752AICPA: FN-Measurement
4753KEYWORDS:   Bloom's: Application
4754OTHER:   Time: 5 min.
4755DATE CREATED:   11/15/2017 1:08 PM
4756DATE MODIFIED:   7/24/2018 7:03 PM
4757Copyright Cengage Learning. Powered by Cognero. Page 54
4758Chapter 06: Deductions and Losses: In General
475987. Which of the following is not deductible in 2018?
4760a. Moving expenses in excess of reimbursement.
4761b. Tax return preparation fees of an individual.
4762c. Expenses incurred associated with investments in stocks and bonds.
4763d. Allowable hobby expenses in excess of hobby income.
4764e. All of the above.
4765ANSWER:   e
4766RATIONALE:   None of the expenses are deductible in 2018.  
4767POINTS:   1
4768DIFFICULTY:   Easy
4769QUESTION TYPE:   Multiple Choice
4770HAS VARIABLES:   False
4771LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
4772CMPV.SWFT.LO: 6-03 - LO: 6-03
4773NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4774STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4775KEYWORDS:   Bloom's: Knowledge
4776OTHER:   Time: 5 min.
4777DATE CREATED:   11/15/2017 1:08 PM
4778DATE MODIFIED:   7/24/2018 7:03 PM
477988. If a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the following is
4780correct?
4781a. No income is included in AGI.
4782b. No expenses are deductible.
4783c. Expenses must be allocated between rental and personal use.
4784d. Only a. and b. are correct.
4785e. a., b., and c. are correct.
4786ANSWER:   a
4787RATIONALE:   Expenses that would otherwise be deductible (e.g., property taxes and interest on
4788mortgage of personal residence) can be claimed (choice b.).
4789POINTS:   1
4790DIFFICULTY:   Moderate
4791QUESTION TYPE:   Multiple Choice
4792HAS VARIABLES:   False
4793LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
4794NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4795STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4796KEYWORDS:   Bloom's: Comprehension
4797OTHER:   Time: 10 min.
4798DATE CREATED:   11/15/2017 1:08 PM
4799DATE MODIFIED:   7/24/2018 7:03 PM
4800Copyright Cengage Learning. Powered by Cognero. Page 55
4801Chapter 06: Deductions and Losses: In General
480289. Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income
4803is $6,000 and the expenses are as follows:
4804Mortgage interest $9,000
4805Real estate taxes 3,000
4806Utilities 2,000
4807Maintenance 1,000
4808Insurance 500
4809Depreciation (rental part) 4,000
4810Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house
4811are:
4812a. $0.
4813b. $6,000.
4814c. $8,000.
4815d. $12,000.
4816e. None of the above.
4817ANSWER:   d
4818RATIONALE:   Since the property is classified as personal/rental use, the general rule is that the
4819deductible expenses cannot exceed the gross income. Thus, under the general rule,
4820the deductible expenses would be limited to $6,000. However, this ceiling does not
4821apply to expenses that otherwise would be deductible as itemized deductions.
4822Consequently, all of the mortgage interest and real estate taxes can be deducted
4823($9,000 + $3,000 = $12,000).
4824POINTS:   1
4825DIFFICULTY:   Moderate
4826QUESTION TYPE:   Multiple Choice
4827HAS VARIABLES:   False
4828LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
4829NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4830STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4831AICPA: FN-Measurement
4832KEYWORDS:   Bloom's: Application
4833OTHER:   Time: 10 min.
4834DATE CREATED:   11/15/2017 1:08 PM
4835DATE MODIFIED:   7/24/2018 7:03 PM
4836Copyright Cengage Learning. Powered by Cognero. Page 56
4837Chapter 06: Deductions and Losses: In General
483890. If a vacation home is determined to be a personal/rental use residence, which of the following statements is correct?
4839a. All rental income is included in gross income.
4840b. All rental related expenses that are deductible are classified as deductions from AGI.
4841c. Expenses must be allocated between rental and personal use.
4842d. Only a. and c. are correct.
4843e. a., b., and c. are correct.
4844ANSWER:   d
4845RATIONALE:   The allowable deductions are classified as deductions for AGI.
4846POINTS:   1
4847DIFFICULTY:   Easy
4848QUESTION TYPE:   Multiple Choice
4849HAS VARIABLES:   False
4850LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
4851NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4852STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4853KEYWORDS:   Bloom's: Comprehension
4854OTHER:   Time: 5 min.
4855DATE CREATED:   11/15/2017 1:08 PM
4856DATE MODIFIED:   7/24/2018 7:03 PM
4857Copyright Cengage Learning. Powered by Cognero. Page 57
4858Chapter 06: Deductions and Losses: In General
485991. Bob and April own a house at the beach. The house was rented to unrelated parties for 8 weeks during the year.
4860April and the children used the house 12 days for their vacation during the year. After properly dividing the expenses
4861between rental and personal use, it was determined that a loss was incurred as follows:
4862Gross rental income $4,000 
4863Less: Mortgage interest and property taxes $3,500
4864Other allocated expenses   2,000   (5,500)
4865Net rental loss ($1,500)
4866What is the correct treatment of the rental income and expenses on Bob and April’s joint income tax return for the
4867current year assuming the IRS approach is used if applicable?
4868a. A $1,500 loss should be reported.
4869b. Only the mortgage interest and property taxes should be deducted.
4870c. Since the house was used more than 10 days personally by Bob and April, the rental expenses (other than
4871mortgage interest and property taxes) are limited to the gross rental income in excess of deductions for
4872interest and taxes allocated to the rental use.
4873d. Since the house was used less than 50% personally by Bob and April, all expenses allocated to personal use
4874may be deducted.
4875e. Bob and April should include none of the income or expenses related to the beach house in their current year
4876income tax return.
4877ANSWER:   a
4878POINTS:   1
4879DIFFICULTY:   Easy
4880QUESTION TYPE:   Multiple Choice
4881HAS VARIABLES:   False
4882LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
4883NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4884STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4885AICPA: FN-Measurement
4886KEYWORDS:   Bloom's: Application
4887OTHER:   Time: 5 min.
4888DATE CREATED:   11/15/2017 1:08 PM
4889DATE MODIFIED:   7/24/2018 7:03 PM
4890Copyright Cengage Learning. Powered by Cognero. Page 58
4891Chapter 06: Deductions and Losses: In General
489292. Because Scott is three months delinquent on the mortgage payments for his personal residence, Jeanette (his sister)
4893is going to cover the arrearage. Based on past experience, she does not expect to be repaid by Scott. Which of the
4894following statements is correct?
4895a. If Scott receives the money from Jeanette and pays the mortgage company, Jeanette can deduct the interest
4896part.
4897b. If Jeanette pays the mortgage company directly, neither Scott nor Jeanette can deduct the interest part.
4898c. If Jeanette pays the mortgage company directly, she cannot deduct the interest part.
4899d. Only b. and c. are correct.
4900e. a., b., and c. are correct.
4901ANSWER:   d
4902RATIONALE:   The obligation is that of Scott and not of Jeanette. If Scott pays his mortgage
4903company, he can deduct the mortgage interest part of the payment. Under no
4904circumstances can Jeanette deduct Scott’s mortgage interest.
4905POINTS:   1
4906DIFFICULTY:   Easy
4907QUESTION TYPE:   Multiple Choice
4908HAS VARIABLES:   False
4909LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
4910NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4911STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4912KEYWORDS:   Bloom's: Knowledge
4913OTHER:   Time: 5 min.
4914DATE CREATED:   11/15/2017 1:08 PM
4915DATE MODIFIED:   7/24/2018 7:03 PM
4916Copyright Cengage Learning. Powered by Cognero. Page 59
4917Chapter 06: Deductions and Losses: In General
491893. Melba incurred the following expenses for her dependent daughter during the current year:
4919Payment of principal on daughter’s automobile loan $3,600
4920Payment of interest on above loan 2,900
4921Payment of daughter’s property taxes 1,800
4922Payment of principal on daughter’s personal residence loan 2,800
4923Payment of interest on daughter’s personal residence loan 7,000
4924How much may Melba deduct in computing her itemized deductions?
4925a. $0.
4926b. $8,800.
4927c. $11,700.
4928d. $18,100.
4929e. None of the above.
4930ANSWER:   a
4931RATIONALE:   None of the items are incurred for the taxpayer’s (Melba) benefit or as a result of
4932the taxpayer’s obligation.
4933POINTS:   1
4934DIFFICULTY:   Easy
4935QUESTION TYPE:   Multiple Choice
4936HAS VARIABLES:   False
4937LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
4938NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4939STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4940AICPA: FN-Measurement
4941KEYWORDS:   Bloom's: Application
4942OTHER:   Time: 5 min.
4943DATE CREATED:   11/15/2017 1:08 PM
4944DATE MODIFIED:   7/24/2018 7:03 PM
4945Copyright Cengage Learning. Powered by Cognero. Page 60
4946Chapter 06: Deductions and Losses: In General
494794. Velma and Bud divorced. Velma’s attorney fee of $5,000 is allocated as follows:
4948General representation in obtaining the divorce $1,500
4949Services in obtaining custody of the child 900
4950Services in settlement of martial property 600
4951Determining the tax consequences of:
4952Dependency deduction for child 700
4953Tax Consequences of property settlement 1,300
4954Of the $5,000 Velma pays to her attorney in 2018, the amount she may deduct as an itemized deduction is:
4955a. $0.
4956b. $700.
4957c. $2,000.
4958d. $5,000.
4959e. None of the above.
4960ANSWER:   a
4961RATIONALE:   Legal fees that relate to tax advice are no longer deductible.
4962POINTS:   1
4963DIFFICULTY:   Easy
4964QUESTION TYPE:   Multiple Choice
4965HAS VARIABLES:   False
4966LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
4967NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4968STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
4969AICPA: FN-Measurement
4970KEYWORDS:   Bloom's: Application
4971OTHER:   Time: 5 min.
4972DATE CREATED:   11/15/2017 1:08 PM
4973DATE MODIFIED:   7/24/2018 7:03 PM
4974Copyright Cengage Learning. Powered by Cognero. Page 61
4975Chapter 06: Deductions and Losses: In General
497695. Which of the following must be capitalized by a business?
4977a. Replacement of a windshield of a business truck which was broken in an accident.
4978b. Repair of a roof of a building used in business.
4979c. Amount paid for a covenant not to compete.
4980d. Only b. and c. must be capitalized.
4981e. a., b., and c. can be expensed rather than capitalized.
4982ANSWER:   c
4983RATIONALE:   All of these expenses, except for the covenant, can be deducted in the current tax
4984year. The amortization period for the covenant is 15 years.
4985POINTS:   1
4986DIFFICULTY:   Easy
4987QUESTION TYPE:   Multiple Choice
4988HAS VARIABLES:   False
4989LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
4990NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
4991STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
4992KEYWORDS:   Bloom's: Knowledge
4993OTHER:   Time: 5 min.
4994DATE CREATED:   11/15/2017 1:08 PM
4995DATE MODIFIED:   7/24/2018 8:59 PM
4996Copyright Cengage Learning. Powered by Cognero. Page 62
4997Chapter 06: Deductions and Losses: In General
499896. On January 2, 2018, Fran acquires a business from Chuck. Among the assets purchased are the following
4999intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill.
5000Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of
5001the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for
50022018?
5003a. $10,667.
5004b. $16,000.
5005c. $20,000.
5006d. $32,667.
5007e. None of the above.
5008ANSWER:   c
5009RATIONALE:   All of these intangibles are § 197 intangibles and are amortized over a 15-year
5010statutory period.
5011Patent $140,000 ÷ 15 = $ 9,333
5012Covenant $60,000 ÷ 15 = 4,000
5013Goodwill $100,000 ÷ 15 =    6,667
5014$20,000
5015POINTS:   1
5016DIFFICULTY:   Easy
5017QUESTION TYPE:   Multiple Choice
5018HAS VARIABLES:   False
5019LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5020NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5021STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5022AICPA: FN-Measurement
5023KEYWORDS:   Bloom's: Application
5024OTHER:   Time: 10 min.
5025DATE CREATED:   11/15/2017 1:08 PM
5026DATE MODIFIED:   7/24/2018 8:59 PM
5027Copyright Cengage Learning. Powered by Cognero. Page 63
5028Chapter 06: Deductions and Losses: In General
502997. In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of
5030the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is
5031the tax effect of these transactions?
5032a. Disallowed loss to James of $2,000; gain to Lance of $1,000.
5033b. Disallowed loss to Lance of $2,000; gain to James of $3,000.
5034c. Deductible loss to Lance of $2,000; gain to James of $3,000.
5035d. Disallowed loss to Lance of $2,000; gain to James of $1,000.
5036e. None of the above.
5037ANSWER:   d
5038RATIONALE:   Lance’s realized loss of $2,000 ($24,000 – $26,000) is disallowed. James may reduce
5039his realized gain of $3,000 ($27,000 – $24,000) by Lance’s disallowed loss of $2,000.
5040So James’ recognized gain is $1,000.
5041POINTS:   1
5042DIFFICULTY:   Easy
5043QUESTION TYPE:   Multiple Choice
5044HAS VARIABLES:   False
5045LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5046NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5047STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5048AICPA: FN-Measurement
5049KEYWORDS:   Bloom's: Application
5050OTHER:   Time: 5 min.
5051DATE CREATED:   11/15/2017 1:08 PM
5052DATE MODIFIED:   7/24/2018 8:59 PM
5053Copyright Cengage Learning. Powered by Cognero. Page 64
5054Chapter 06: Deductions and Losses: In General
505598. Which of the following is not a related party for constructive ownership purposes under § 267?
5056a. The taxpayer’s aunt.
5057b. The taxpayer’s brother.
5058c. The taxpayer’s grandmother.
5059d. A corporation owned more than 50% by the taxpayer.
5060e. None of the above.
5061ANSWER:   a
5062RATIONALE:   Taxpayer’s aunt is not a related party under § 267.
5063POINTS:   1
5064DIFFICULTY:   Easy
5065QUESTION TYPE:   Multiple Choice
5066HAS VARIABLES:   False
5067LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5068NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5069STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
5070KEYWORDS:   Bloom's: Knowledge
5071OTHER:   Time: 5 min.
5072DATE CREATED:   11/15/2017 1:08 PM
5073DATE MODIFIED:   7/24/2018 8:59 PM
5074Copyright Cengage Learning. Powered by Cognero. Page 65
5075Chapter 06: Deductions and Losses: In General
507699. Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of
5077the following statements is correct?
5078a. Nikeya’s recognized loss is $25,000 ($95,000 amount realized – $120,000 adjusted basis).
5079b. Shamed’s adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya).
5080c. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss.
5081d. Only a. and b. are correct.
5082e. a., b., and c. are correct.
5083ANSWER:   c
5084RATIONALE:   Nikeya’s realized loss of $25,000 ($95,000 amount realized – $120,000 adjusted
5085basis) is disallowed because Shamed is a related party. Shamed’s adjusted basis for
5086the land is his cost of $95,000. However, when he sells the land for $112,000, his
5087realized gain of $17,000 ($112,000 amount realized – $95,000 adjusted basis) is not
5088recognized because he can offset it against $17,000 of Nikeya’s $25,000 disallowed
5089loss in calculating his taxable income.
5090POINTS:   1
5091DIFFICULTY:   Easy
5092QUESTION TYPE:   Multiple Choice
5093HAS VARIABLES:   False
5094LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5095NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5096STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5097AICPA: FN-Measurement
5098KEYWORDS:   Bloom's: Application
5099OTHER:   Time: 5 min.
5100DATE CREATED:   11/15/2017 1:08 PM
5101DATE MODIFIED:   7/24/2018 8:59 PM
5102Copyright Cengage Learning. Powered by Cognero. Page 66
5103Chapter 06: Deductions and Losses: In General
5104100. Sandra owns an insurance agency. The following selected data are taken from the agency balance sheet and income
5105statement prepared using the accrual method.
5106Revenue $250,000
5107Salaries and commissions 100,000
5108Rent 10,000
5109Insurance 5,000
5110Utilities 6,000
5111Accounts receivable, 1/1/2018 40,000
5112Accounts receivable, 12/31/2018 38,000
5113Accounts payable, 1/1/2018 12,000
5114Accounts payable, 12/31/2018 11,000
5115Calculate Sandra’s net profit using the cash method for 2018.
5116ANSWER:   Sandra’s accrual method net profit is calculated as follows:
5117Revenue $250,000 
5118Less: Expenses
5119Salaries and commissions $100,000
5120Rent 10,000
5121Insurance 5,000
5122Utilities      6,000 (121,000)
5123Net profit $129,000 
5124To convert to cash method net profit, the following adjustments must be made.
5125Net profit—accrual method $129,000 
5126Deduct: Decrease in accounts payable ($11,000 – $12,000) (1,000)
5127Add: Decrease in accounts receivable ($38,000 – $40,000)     2,000 
5128Net profit—cash method $130,000 
5129POINTS:   1
5130DIFFICULTY:   Moderate
5131QUESTION TYPE:   Subjective Short Answer
5132HAS VARIABLES:   False
5133LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
5134NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5135STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5136AICPA: FN-Measurement
5137KEYWORDS:   Bloom's: Application
5138OTHER:   Time: 10 min.
5139DATE CREATED:   11/15/2017 1:08 PM
5140DATE MODIFIED:   7/24/2018 8:59 PM
5141Copyright Cengage Learning. Powered by Cognero. Page 67
5142Chapter 06: Deductions and Losses: In General
5143101. Austin, a single individual with a salary of $100,000, incurred and paid the following expenses during 2018:
5144Medical expenses $ 5,000
5145Alimony 24,000
5146Charitable contributions 2,000
5147Casualty loss (after $100 floor) 1,000
5148Mortgage interest on personal residence 4,500
5149Property taxes on personal residence 4,200
5150Moving expenses 2,500
5151Contribution to a traditional IRA 4,000
5152Sales taxes (no state or local income tax is imposed) 1,300
5153Calculate Austin’s deductions for AGI.
5154ANSWER:   Only the following expenses are deductible for AGI:
5155Alimony $24,000
5156Contribution to IRA    4,000
5157Deductions for AGI $28,000
5158Beginning in 2018 moving expenses are not deductible. The other expenses, after
5159applying any statutory floors, are deductions from AGI.
5160POINTS:   1
5161DIFFICULTY:   Moderate
5162QUESTION TYPE:   Subjective Short Answer
5163HAS VARIABLES:   False
5164LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
5165NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5166STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5167AICPA: FN-Measurement
5168KEYWORDS:   Bloom's: Application
5169OTHER:   Time: 10 min.
5170DATE CREATED:   11/15/2017 1:08 PM
5171DATE MODIFIED:   7/24/2018 7:03 PM
5172Copyright Cengage Learning. Powered by Cognero. Page 68
5173Chapter 06: Deductions and Losses: In General
5174102. Arnold and Beth file a joint return in 2018. Use the following data to calculate their deduction for AGI.
5175Mortgage interest on personal residence $ 6,000
5176Property taxes on personal residence 2,500
5177Alimony payments 12,000
5178Moving expenses 7,000
5179Charitable contributions 1,500
5180State income taxes 5,000
5181Investment interest ($8,000 of expenses limited to net investment income of $7,500) 7,500
5182Unreimbursed employee expenses 2,500
5183Sales taxes 2,600
5184ANSWER:   Arnold and Beth’s deduction for AGI is $12,000. Only the alimony payments of 
5185$12,000 are deductions for AGI.
5186Beginning in 2018 moving expenses and unreimbursed employee expenses are not
5187deductible. All of the other items are itemized deductions. Note that the taxpayer
5188must choose between the state income taxes and the sales taxes.
5189POINTS:   1
5190DIFFICULTY:   Moderate
5191QUESTION TYPE:   Subjective Short Answer
5192HAS VARIABLES:   False
5193LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
5194NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5195STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5196AICPA: FN-Measurement
5197KEYWORDS:   Bloom's: Application
5198OTHER:   Time: 10 min.
5199DATE CREATED:   11/15/2017 1:08 PM
5200DATE MODIFIED:   7/24/2018 7:03 PM
5201Copyright Cengage Learning. Powered by Cognero. Page 69
5202Chapter 06: Deductions and Losses: In General
5203103. Robin and Jeff own an unincorporated hardware store. They determine their salaries at the end of the year by using
5204the amount required to reduce the net income of the hardware store to $0. Based on this policy, Robin and Jeff each
5205receive a total salary of $125,000. This is paid as follows: $8,000 per month and $29,000 on December 31.
5206Determine the amount of the salary deduction.
5207ANSWER:   Since the hardware store is not incorporated, the issue of the reasonableness of the
5208salaries is not relevant. Robin and Jeff will report income of $125,000 each
5209regardless of whether it is labeled as salary or as a distribution of the hardware
5210store’s net income. Therefore, there is nothing wrong with the hardware store (i.e., a
5211partnership) taking a $250,000 salary deduction.
5212POINTS:   1
5213DIFFICULTY:   Easy
5214QUESTION TYPE:   Subjective Short Answer
5215HAS VARIABLES:   False
5216LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
5217NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5218STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5219AICPA: FN-Measurement
5220KEYWORDS:   Bloom's: Application
5221OTHER:   Time: 5 min.
5222DATE CREATED:   11/15/2017 1:08 PM
5223DATE MODIFIED:   7/24/2018 7:03 PM
5224Copyright Cengage Learning. Powered by Cognero. Page 70
5225Chapter 06: Deductions and Losses: In General
5226104. Alfred’s Enterprises, an unincorporated entity, pays employee salaries of $100,000 during the year. At the end of the
5227year, $12,000 of additional salaries have been earned but not paid until the beginning of the next year.
5228a. Determine the amount of the deduction for salaries if Alfred is a cash method taxpayer.
5229b. Determine the amount of the deduction for salaries if Alfred is an accrual method taxpayer.
5230ANSWER:   a. The deduction for salaries is the amount paid of $100,000.
5231b. The deduction for salaries is calculated as follows:
5232Salaries $100,000
5233Accrued salaries    12,000
5234Salary deduction $112,000
5235POINTS:   1
5236DIFFICULTY:   Moderate
5237QUESTION TYPE:   Subjective Short Answer
5238HAS VARIABLES:   False
5239LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
5240NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5241STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5242AICPA: FN-Measurement
5243KEYWORDS:   Bloom's: Analysis
5244OTHER:   Time: 10 min.
5245DATE CREATED:   11/15/2017 1:08 PM
5246DATE MODIFIED:   7/24/2018 8:59 PM
5247105. Taylor, a cash basis architect, rents the building in which his office is located for $5,000 per month. He commenced
5248his practice on February 1, 2018. In order to guarantee no rent increases during an 18-month period, he signed an 18-
5249month lease and prepaid the $90,000 on February 1, 2018. How much can Taylor deduct as rent expense for 2018?
5250ANSWER:   Taylor is a cash basis taxpayer. Thus, he is eligible to use the “twelve-month rule” on
5251prepayments. Since his prepayments of 18-months rent does not extend beyond the
5252end of 2019, he can deduct the $90,000 paid in 2018.
5253POINTS:   1
5254DIFFICULTY:   Easy
5255QUESTION TYPE:   Subjective Short Answer
5256HAS VARIABLES:   False
5257LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
5258NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5259STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5260AICPA: FN-Measurement
5261KEYWORDS:   Bloom's: Application
5262OTHER:   Time: 5 min.
5263DATE CREATED:   11/15/2017 1:08 PM
5264DATE MODIFIED:   7/24/2018 8:59 PM
5265Copyright Cengage Learning. Powered by Cognero. Page 71
5266Chapter 06: Deductions and Losses: In General
5267106. In order to protect against rent increases on the building in which she operates a dance studio, Mella signs an 18-
5268month lease for $36,000. The lease commences on October 1, 2018. How much of the $36,000 payment can she
5269deduct in 2018 and 2019?
5270a. If Mella is an accrual basis taxpayer?
5271b. If Mella is a cash basis taxpayer?
5272ANSWER:  
5273a. As an accrual basis taxpayer, Mella can deduct the 2018 amount of the rent
5274expenses incurred in 2018 of $6,000 ($2,000 × 3 months)  and the $24,000
5275($2,000 × 12 months) incurred in 2019.
5276b. Since Mella is a cash basis taxpayer, she can deduct the entire $36,000
5277prepayment in 2018 if she can satisfy the twelve-month rule. However, since
5278the rental period of 18 months extends beyond the end of 2019, she fails the
5279requirement for the one-year rule. Consequently, she can deduct only $6,000 in
52802018 and $24,000 in 2019.
5281POINTS:   1
5282DIFFICULTY:   Easy
5283QUESTION TYPE:   Subjective Short Answer
5284HAS VARIABLES:   False
5285LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
5286NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5287STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5288AICPA: FN-Measurement
5289KEYWORDS:   Bloom's: Analysis
5290OTHER:   Time: 5 min.
5291DATE CREATED:   11/15/2017 1:08 PM
5292DATE MODIFIED:   7/24/2018 8:59 PM
5293Copyright Cengage Learning. Powered by Cognero. Page 72
5294Chapter 06: Deductions and Losses: In General
5295107. Petula’s business sells heat pumps which have a one-year warranty. Based on historical data, the warranty costs
5296amount to 11% of sales. During 2018, heat pump sales are $400,000. Actual warranty expenses paid in 2018 are
5297$40,000.
5298a. Determine the amount of the warranty expense deduction for 2018 if Petula’s business uses
5299the accrual method.
5300b. How would your answer change if Petula used the cash method for extended warranties and
5301the purchasers paid $25,000 for the warranties which covered the second and third years of
5302ownership?
5303ANSWER:  
5304a. Even though Petula’s business uses the accrual method, reserves for
5305estimated warranty expenses are not permitted. Therefore, the deduction for
5306warranty expenses is the amount paid of $40,000.
5307b. Petula would record gross income in 2018 of $425,000 ($400,000 + $25,000).
5308The deduction for warranty expense would still be $40,000.
5309POINTS:   1
5310DIFFICULTY:   Easy
5311QUESTION TYPE:   Subjective Short Answer
5312HAS VARIABLES:   False
5313LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
5314NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5315STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5316AICPA: FN-Measurement
5317KEYWORDS:   Bloom's: Analysis
5318OTHER:   Time: 10 min.
5319DATE CREATED:   11/15/2017 1:08 PM
5320DATE MODIFIED:   7/24/2018 8:59 PM
5321Copyright Cengage Learning. Powered by Cognero. Page 73
5322Chapter 06: Deductions and Losses: In General
5323108. Beige, Inc., an airline manufacturer, is conducting negotiations for the sale of military aircraft. One negotiation is with
5324a U.S. assistant secretary of defense. She can close the deal on the purchase of 50 attack helicopters if she is paid
5325$750,000 under the table. Another negotiation is with the minister of defense of a third world country. To complete
5326the sale of 20 jet fighters to his government, he demands that he be paid a $1 million grease payment. Beige makes
5327the payments and closes the deals. How much of these payments are deductible by Beige, Inc.?
5328ANSWER:   The $750,000 payment to the U.S. assistant secretary of defense is a bribe and is not
5329deductible. If the grease payment of $1 million to the minister of defense of the third
5330world country does not violate the Foreign Corrupt Practices Act of 1977, then the
5331entire $1 million payment is deductible. However, if the grease payment does violate
5332the Act, then none of it is deductible.
5333POINTS:   1
5334DIFFICULTY:   Easy
5335QUESTION TYPE:   Subjective Short Answer
5336HAS VARIABLES:   False
5337LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5338NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5339STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
5340KEYWORDS:   Bloom's: Analysis
5341OTHER:   Time: 5 min.
5342DATE CREATED:   11/15/2017 1:08 PM
5343DATE MODIFIED:   7/24/2018 8:59 PM
5344Copyright Cengage Learning. Powered by Cognero. Page 74
5345Chapter 06: Deductions and Losses: In General
5346109. Albie operates an illegal drug-running business and has the following items of income and expense. What is Albie’s
5347adjusted gross income from this operation?
5348Income $800,000
5349Expenses:
5350Rent 24,000
5351Utilities 9,000
5352Bribes to police 55,000
5353Medical expense 5,000
5354Legal fees 25,000
5355Depreciation 30,000
5356Illegal kickbacks 30,000
5357Cost of goods sold 300,000
5358ANSWER:   Albie is allowed to reduce his AGI only by the cost of goods sold; thus, his AGI is
5359$500,000 ($800,000 – $300,000). Note that the cost of goods sold is treated as a
5360negative item in calculating gross income.
5361POINTS:   1
5362DIFFICULTY:   Easy
5363QUESTION TYPE:   Subjective Short Answer
5364HAS VARIABLES:   False
5365LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5366NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5367STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5368AICPA: FN-Measurement
5369KEYWORDS:   Bloom's: Application
5370OTHER:   Time: 5 min.
5371DATE CREATED:   11/15/2017 1:08 PM
5372DATE MODIFIED:   7/24/2018 8:59 PM
5373Copyright Cengage Learning. Powered by Cognero. Page 75
5374Chapter 06: Deductions and Losses: In General
5375110. Kitty runs a brothel (illegal under state law) and has the following items of income and expense. What is the amount
5376that she must include in taxable income from her operation?
5377Income $200,000
5378Expenses:
5379Rent 8,000
5380Utilities 2,000
5381Bribes to police 10,000
5382Office supplies 5,000
5383Legal fees 20,000
5384Depreciation 14,000
5385Illegal kickbacks 15,000
5386ANSWER:   Income $200,000 
5387Expenses:
5388Rent $ 8,000
5389Utilities 2,000
5390Office supplies 5,000
5391Legal fees 20,000
5392Depreciation  14,000 (49,000)
5393$151,000 
5394The bribes to police of $10,000 and illegal kickbacks of $15,000 are not deductible.
5395POINTS:   1
5396DIFFICULTY:   Easy
5397QUESTION TYPE:   Subjective Short Answer
5398HAS VARIABLES:   False
5399LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5400NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5401STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5402AICPA: FN-Measurement
5403KEYWORDS:   Bloom's: Application
5404OTHER:   Time: 10 min.
5405DATE CREATED:   11/15/2017 1:08 PM
5406DATE MODIFIED:   7/24/2018 8:59 PM
5407Copyright Cengage Learning. Powered by Cognero. Page 76
5408Chapter 06: Deductions and Losses: In General
5409111. Janet is the CEO for Silver, Inc., a closely held corporation. Her total compensation for 2018 is $5 million. Of this
5410amount, $2 million is a salary and $3 million is a bonus. The bonus was calculated as 5% of Silver’s net income
5411before the bonus and before taxes ($60 million × 5% = $3 million). The bonus provision has been in effect since
5412Janet became CEO five years ago and is related to Silver’s performance. It is approved annually by the entire board
5413of directors (1 of the 5 directors is an outside director) of Silver. How much of Janet’s compensation can Silver
5414deduct for 2018?
5415ANSWER:   All of the $5 million is deductible by Silver. Since Silver is a closely held, rather than
5416a publicly held corporation, the $1 million statutory limit on the deduction of certain
5417executive compensation is not applicable.
5418POINTS:   1
5419DIFFICULTY:   Easy
5420QUESTION TYPE:   Subjective Short Answer
5421HAS VARIABLES:   False
5422LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5423NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5424STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5425AICPA: FN-Measurement
5426KEYWORDS:   Bloom's: Analysis
5427OTHER:   Time: 10 min.
5428DATE CREATED:   11/15/2017 1:08 PM
5429DATE MODIFIED:   7/24/2018 8:59 PM
5430Copyright Cengage Learning. Powered by Cognero. Page 77
5431Chapter 06: Deductions and Losses: In General
5432112. Agnes operates a Christmas Shop in Atlantic City, NJ. She makes a weekend trip to Vero Beach, FL, for the
5433purpose of determining the feasibility of opening another shop. Her travel expenses are $2,000 (includes $500 for
5434meals). In addition, she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study.
5435Determine the amount of the expenses that Agnes can deduct if:
5436a. She opens a new shop in Vero Beach.
5437b. She decides not to open a new shop in Vero Beach.
5438ANSWER:  
5439a. Because Agnes is already in the Christmas Shop business, $6,750 of the
5440investigation expenses ($1,500+($500*.50)+$5,000=$6,750) are deductible
5441regardless of whether or not she opens a shop in Vero Beach. Note that, as
5442discussed in Chapter 9, only 50% of the cost of the meals is deductible.
5443b. Same response as in a.
5444POINTS:   1
5445DIFFICULTY:   Moderate
5446QUESTION TYPE:   Subjective Short Answer
5447HAS VARIABLES:   False
5448LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5449NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5450STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5451AICPA: FN-Measurement
5452KEYWORDS:   Bloom's: Analysis
5453OTHER:   Time: 10 min.
5454DATE CREATED:   11/15/2017 1:08 PM
5455DATE MODIFIED:   7/24/2018 8:59 PM
5456Copyright Cengage Learning. Powered by Cognero. Page 78
5457Chapter 06: Deductions and Losses: In General
5458113. While she was a college student, Angel lived by a bookstore located near campus. She thinks a bookstore located on
5459the other side of campus would be successful. She incurs expenses of $42,800 (legal fees, accounting fees,
5460marketing survey, etc.) in exploring its business potential. Her parents have agreed to loan her the money required to
5461start the business. What amount of these investigation costs can Angel deduct if:
5462a. She opens the bookstore on August 1, 2018.
5463b. She decides not to open the bookstore.
5464ANSWER:  
5465a. If Angel opens the bookstore on August 1, 2018, she can deduct the following
5466investigation expenses in 2018.
5467Allowed expense deduction in first year $5,000
5468Amortization ($37,800/180 months × 5 months)   1,050
5469Deductible investigation expenses $6,050
5470b. If Angel does not open the bookstore, she cannot deduct any of the $42,800 of
5471expenses she incurred.
5472POINTS:   1
5473DIFFICULTY:   Easy
5474QUESTION TYPE:   Subjective Short Answer
5475HAS VARIABLES:   False
5476LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5477NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5478STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5479AICPA: FN-Measurement
5480KEYWORDS:   Bloom's: Analysis
5481OTHER:   Time: 10 min.
5482DATE CREATED:   11/15/2017 1:08 PM
5483DATE MODIFIED:   7/24/2018 8:59 PM
5484Copyright Cengage Learning. Powered by Cognero. Page 79
5485Chapter 06: Deductions and Losses: In General
5486114. Calculate the net income includible in taxable income for the following hobby in 2018:
5487Income $23,000
5488Mortgage interest and property taxes allocable to hobby 12,000
5489Depreciation 4,000
5490Supplies and fees 7,000
5491Telephone for hobby 3,000
5492ANSWER:  
5493Income (includible in gross
5494income)
5495$23,000 
5496The mortgage interest and taxes are deductible even without the hobby income. 
5497Beginning in 2018 the other expenses related to the hobby are not deductible.
5498POINTS:   1
5499DIFFICULTY:   Easy
5500QUESTION TYPE:   Subjective Short Answer
5501HAS VARIABLES:   False
5502LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-07 - LO: 11-07
5503NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5504STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5505AICPA: FN-Measurement
5506KEYWORDS:   Bloom's: Application
5507OTHER:   Time: 10 min.
5508DATE CREATED:   11/15/2017 1:08 PM
5509DATE MODIFIED:   7/24/2018 9:58 PM
5510Copyright Cengage Learning. Powered by Cognero. Page 80
5511Chapter 06: Deductions and Losses: In General
5512115. During the year, Rita rented her vacation home for twelve days for $2,400 and she used it personally for three
5513months. The following expenses were incurred on the home:
5514Property taxes $ 2,200
5515Mortgage interest 10,800
5516Utilities and maintenance 1,900
5517Depreciation 5,000
5518Insurance 900
5519Calculate her rental gain or loss and itemized deductions.
5520ANSWER:   Rita excludes the $2,400 of rental income from gross income because the home is
5521classified as primarily personal. She can deduct the property taxes ($2,200) and
5522mortgage interest ($10,800) as itemized deductions. No other expenses are
5523deductible.
5524POINTS:   1
5525DIFFICULTY:   Easy
5526QUESTION TYPE:   Subjective Short Answer
5527HAS VARIABLES:   False
5528LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
5529NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5530STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5531AICPA: FN-Measurement
5532KEYWORDS:   Bloom's: Application
5533OTHER:   Time: 5 min.
5534DATE CREATED:   11/15/2017 1:08 PM
5535DATE MODIFIED:   7/24/2018 7:03 PM
5536Copyright Cengage Learning. Powered by Cognero. Page 81
5537Chapter 06: Deductions and Losses: In General
5538116. During the year, Jim rented his vacation home for 200 days and lived in it for 19 days. During the remaining days, the
5539vacation home was available for rental use. Is the vacation home subject to the limitation on the deductions of a
5540personal/rental vacation home?
5541ANSWER:   The vacation home is not subject to the limitations on the deductions of a
5542personal/rental vacation home. It does satisfy the rental part of the classification
5543because it is rented for greater than 14 days. However, the personal use of 19 days
5544does not exceed the greater of (1) 14 days or (2) 10% of the rental days, since 10%
5545of the rental days is 20 (200 rental days × 10%) days. Therefore, the appropriate
5546classification is primarily rental use rather than personal/rental use.
5547POINTS:   1
5548DIFFICULTY:   Challenging
5549QUESTION TYPE:   Subjective Short Answer
5550HAS VARIABLES:   False
5551LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
5552NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5553STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5554AICPA: FN-Measurement
5555KEYWORDS:   Bloom's: Analysis
5556OTHER:   Time: 10 min.
5557DATE CREATED:   11/15/2017 1:08 PM
5558DATE MODIFIED:   7/24/2018 7:03 PM
5559117. During the year, Martin rented his vacation home for three months and spent one month there. Gross rental income
5560from the property was $5,000. Martin incurred the following expenses: mortgage interest, $3,000; real estate taxes,
5561$1,500; utilities, $800; maintenance, $500; and depreciation, $4,000. Compute Martin’s allowable deductions for the
5562vacation home under the court's approach and the IRS's approach.
5563ANSWER:   Since the vacation home is rented for 15 or more days and is used for personal
5564purposes for more than the greater of (1) 14 days or (2) 10% of the rental days, the
5565deductions are scaled down, using the court’s approach, as follows:
5566Gross income $5,000 
5567Deduct: Taxes and interest (3/12 × $4,500) (1,125)
5568Remainder applicable to other rental expenses $3,875 
5569Deduct: Allocable share of utilities and maintenance [3/4 × ($800 +
5570$500)]
5571  (975)
5572Balance applicable to depreciation $2,900 
5573Deduct: Depreciation (3/4 × $4,000 = $3,000) but limited to above
5574balance
5575(2,900)
5576Net income $   –0–
5577Thus, Martin may deduct $1,125 taxes and interest, $975 utilities and maintenance,
5578and $2,900 depreciation against the gross income of $5,000. The personal portion of
5579taxes and interest ($3,375) is deductible as an itemized deduction.
5580Using the IRS’s approach, though, the deductions are as follows:
5581Copyright Cengage Learning. Powered by Cognero. Page 82
5582Chapter 06: Deductions and Losses: In General
5583Gross income $5,000 
5584Deduct: Taxes and interest (3/4 × $4,500) (3,375)
5585Remainder applicable to other rental expenses $1,625 
5586Deduct: Allocable share of utilities and maintenance [3/4 × ($800 +
5587$500)]
5588  (975)
5589Balance applicable to depreciation $  650 
5590Deduct: Depreciation (3/4 × $4,000 = $3,000) but limited to above
5591balance
5592  (650)
5593Net income $  –0–
5594Thus, Martin may deduct $3,375 taxes and interest, $975 utilities and maintenance,
5595and $650 depreciation against the gross income of $5,000. The personal portion of
5596taxes and interest ($1,125) is deductible as an itemized deduction.
5597POINTS:   1
5598DIFFICULTY:   Moderate
5599QUESTION TYPE:   Subjective Short Answer
5600HAS VARIABLES:   False
5601LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
5602NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5603STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5604AICPA: FN-Measurement
5605KEYWORDS:   Bloom's: Analysis
5606OTHER:   Time: 5 min.
5607DATE CREATED:   11/15/2017 1:08 PM
5608DATE MODIFIED:   7/24/2018 7:03 PM
5609Copyright Cengage Learning. Powered by Cognero. Page 83
5610Chapter 06: Deductions and Losses: In General
5611118. Bridgett’s son, Clyde, is $12,000 in arrears on his residential mortgage payments. Of the $12,000, $7,500 represents
5612interest and $4,500 represents principal.
5613a. If Bridgett pays the $12,000 to the lender, how much can she deduct? How much can
5614Clyde deduct?
5615b. If Bridgett pays the $7,500 of interest to the lender and loans or gives $4,500 to Clyde,
5616who pays the $4,500 of principal, how much can Bridgett deduct? How much can Clyde
5617deduct?
5618c. If Bridgett gives or lends the $12,000 to Clyde who pays the lender, how much can he
5619deduct? How much can Bridgett deduct?
5620d. Advise Bridgett and Clyde on how the payment should be made.
5621ANSWER:  
5622a. A deduction cannot be taken for paying another taxpayer’s obligation. So if
5623Bridgett pays the lender, neither Bridgett nor Clyde could deduct the $7,500 of
5624mortgage interest expense.
5625b. Bridgett cannot deduct the $7,500 payment identified as interest since this
5626represents the payment of another taxpayer’s obligation. Even though Clyde has
5627identified the $4,500 payment as relating to the principal of the mortgage, he
5628probably can deduct the $4,500 as mortgage interest expense since Bridgett is
5629not allowed the deduction. In any event, Bridgett is not allowed a deduction.
5630c. Clyde could deduct the $7,500 of mortgage interest expense, and Bridgett would
5631receive no deduction.
5632d. Bridgett should either loan or give the funds to Clyde who then makes the
5633mortgage payments of $12,000 ($7,500 interest + $4,500 principal).
5634POINTS:   1
5635DIFFICULTY:   Easy
5636QUESTION TYPE:   Subjective Short Answer
5637HAS VARIABLES:   False
5638LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
5639NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5640STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5641AICPA: FN-Measurement
5642KEYWORDS:   Bloom's: Analysis
5643OTHER:   Time: 10 min.
5644DATE CREATED:   11/15/2017 1:08 PM
5645DATE MODIFIED:   7/24/2018 7:03 PM
5646Copyright Cengage Learning. Powered by Cognero. Page 84
5647Chapter 06: Deductions and Losses: In General
5648119. Mattie and Elmer are separated and are in the process of obtaining a divorce. They incur legal fees in 2018 for their
5649respective attorneys with the expenses being itemized as follows:
5650For Mattie Elmer
5651General costs of the divorce $3,500 $3,000
5652Determination of dependency exemptions 1,500 –0–
5653Property settlement tax consequences     400   1,500
5654$5,400 $4,500
5655Although there is no requirement that he do so, Elmer pays Mattie’s lawyer as a gesture of the positive feelings he
5656still has for her.
5657Determine the deductions for Mattie and for Elmer.
5658ANSWER:  
5659 None of the legal expenses are deductible.  Expenses related to determining one's
5660tax liability were deductible before 2018 but are not deductible in 2018.  
5661POINTS:   1
5662DIFFICULTY:   Moderate
5663QUESTION TYPE:   Subjective Short Answer
5664HAS VARIABLES:   False
5665LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
5666NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5667STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5668AICPA: FN-Measurement
5669KEYWORDS:   Bloom's: Analysis
5670OTHER:   Time: 10 min.
5671DATE CREATED:   11/15/2017 1:08 PM
5672DATE MODIFIED:   7/24/2018 7:03 PM
5673Copyright Cengage Learning. Powered by Cognero. Page 85
5674Chapter 06: Deductions and Losses: In General
5675120. Marvin spends the following amounts on a house he owns:
5676Repair to roof $1,100
5677Carpeting for the living room 1,200
5678Painting of the exterior 4,000
5679Replacement of front door 800
5680a. How much of these expenses can Marvin deduct if the house is his principal residence?
5681b. How much of these expenses can Marvin deduct if he rents the house to a tenant?
5682c. Classify any deductible expenses as deductions for AGI or as deductions from AGI.
5683ANSWER:   a. Since these expenditures are personal expenditures, no deduction is allowed.
5684b. Since these expenditures are for rental property, Marvin can deduct $7,100
5685($1,100 + $1,200 + $4,000 + $800).
5686c. The $7,100 deduction associated with the rental property is classified as a
5687deduction for AGI.
5688POINTS:   1
5689DIFFICULTY:   Easy
5690QUESTION TYPE:   Subjective Short Answer
5691HAS VARIABLES:   False
5692LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
5693NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5694STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5695AICPA: FN-Measurement
5696KEYWORDS:   Bloom's: Application
5697OTHER:   Time: 10 min.
5698DATE CREATED:   11/15/2017 1:08 PM
5699DATE MODIFIED:   7/24/2018 7:03 PM
5700Copyright Cengage Learning. Powered by Cognero. Page 86
5701Chapter 06: Deductions and Losses: In General
5702121. Walter sells land with an adjusted basis of $175,000 and a fair market value of $160,000 to his mother, Shirley, for
5703$160,000. Walter reinvests the proceeds in the stock market. Shirley holds the land for one year and a day and sells it
5704in the marketplace for $169,000.
5705a. Determine the tax consequences to Walter.
5706b. Determine the tax consequences to Shirley.
5707ANSWER:   a. Amount realized $160,000 
5708Adjusted basis (175,000)
5709Realized loss ($ 15,000)
5710Walter’s realized loss of $15,000 is disallowed because Walter and Shirley are
5711related parties.
5712b. Amount realized $169,000 
5713Adjusted basis (160,000)
5714Realized gain $   9,000 
5715Walter’s disallowed loss needed to reduce Shirley’s gain
5716to zero    (9,000)
5717Recognized gain $      –0–
5718Shirley may use as much of Walter’s disallowed loss as she needs to reduce her
5719realized gain (i.e., $9,000) to $0. Thus, Shirley’s recognized gain is $0 and the
5720$6,000 ($15,000 – $9,000) of Walter’s disallowed loss that is not used by Shirley
5721is permanently lost.
5722POINTS:   1
5723DIFFICULTY:   Easy
5724QUESTION TYPE:   Subjective Short Answer
5725HAS VARIABLES:   False
5726LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5727NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5728STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5729AICPA: FN-Measurement
5730KEYWORDS:   Bloom's: Analysis
5731OTHER:   Time: 10 min.
5732DATE CREATED:   11/15/2017 1:08 PM
5733DATE MODIFIED:   7/24/2018 8:59 PM
5734Copyright Cengage Learning. Powered by Cognero. Page 87
5735Chapter 06: Deductions and Losses: In General
5736122. Sandra sold 500 shares of Wren Corporation to Bob, her brother, for its fair market value. She had paid $26,000 for
5737the stock. Calculate Sandra’s and Bob’s gain or loss under the following circumstances:
5738a. Sandra sold the shares to Bob for $20,000. One year later, Bob sold them for $18,000.
5739b. Sandra sold the shares to Bob for $30,000. One year later, Bob sold them for $27,000.
5740c. Sandra sold the shares to Bob for $20,000. One year later, Bob sold them for $28,000.
5741ANSWER:  
5742a. Sandra has no deductible loss. Bob’s recognized loss is $2,000.
5743b. Sandra has a recognized gain of $4,000. Bob has a recognized loss of $3,000.
5744Related party transaction rules apply only to losses.
5745c. Sandra has no deductible loss. Bob has a recognized gain of $2,000 ($28,000 –
5746$20,000 = $8,000 less Sandra’s disallowed loss of $6,000).
5747POINTS:   1
5748DIFFICULTY:   Easy
5749QUESTION TYPE:   Subjective Short Answer
5750HAS VARIABLES:   False
5751LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5752NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5753STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5754AICPA: FN-Measurement
5755KEYWORDS:   Bloom's: Analysis
5756OTHER:   Time: 10 min.
5757DATE CREATED:   11/15/2017 1:08 PM
5758DATE MODIFIED:   7/24/2018 8:59 PM
5759Copyright Cengage Learning. Powered by Cognero. Page 88
5760Chapter 06: Deductions and Losses: In General
5761123. The stock of Eagle, Inc. is owned as follows:
5762Tom 23%
5763Tom’s uncle 22%
5764Tom’s daughter 7%
5765Tom’s sister 15%
5766Tom’s spouse 15%
5767Tom’s nephew 8%
5768Tom’s CPA, unrelated 10%
5769Tom sells land and a building to Eagle, Inc. for $212,000. His adjusted basis for these assets is $225,000. Calculate
5770Tom’s realized and recognized loss associated with the sale.
5771ANSWER:   Tom’s realized loss is $13,000.
5772Amount realized $212,000 
5773Adjusted basis  (225,000)
5774Realized loss ($ 13,000)
5775However, his recognized loss is $0 because the loss is disallowed as a § 267 related
5776party transaction.
5777A related party includes a corporation more than 50% (directly or indirectly) owned
5778by the taxpayer. Tom’s total ownership (i.e., both direct and constructive) of Eagle,
5779Inc. is 60%.
5780Tom 23%
5781Tom’s daughter 7%
5782Tom’s sister 15%
5783Tom’s spouse 15%
578460%
5785Tom’s uncle, nephew, and the CPA are not related parties for § 267 purposes.
5786POINTS:   1
5787DIFFICULTY:   Moderate
5788QUESTION TYPE:   Subjective Short Answer
5789HAS VARIABLES:   False
5790LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5791NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5792STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5793AICPA: FN-Measurement
5794KEYWORDS:   Bloom's: Application
5795OTHER:   Time: 10 min.
5796DATE CREATED:   11/15/2017 1:08 PM
5797DATE MODIFIED:   7/24/2018 8:59 PM
5798Copyright Cengage Learning. Powered by Cognero. Page 89
5799Chapter 06: Deductions and Losses: In General
5800124. Tracy invested in the following stocks and bonds during 2018.
5801Blue, Inc. $25,000
5802City of Falcon bonds 75,000
5803To finance the investments, she borrowed $100,000 from Swan Bank. Interest expense paid on the loan during 2018
5804was $5,000. During 2018, Tracy received $1,250 of dividend income from Blue, Inc. and $3,000 of interest income on
5805the municipal bonds.
5806a. Determine the amount of Tracy’s gross income.
5807b. Determine the maximum amount of Tracy’s deductible interest expense.
5808ANSWER:  
5809a. Tracy must include the $1,250 of dividend income in her gross income. The
5810interest on the municipal bonds of $3,000 is tax-exempt.
5811b. Tracy can deduct the interest paid of $1,250 ($5,000 × 1/4) on the portion of the
5812loan that relates to the Blue, Inc. stock. The interest paid of $3,750 on the
5813portion of the loan that relates to the municipal bonds is disallowed because the
5814interest income from the bonds is tax-exempt.
5815POINTS:   1
5816DIFFICULTY:   Easy
5817QUESTION TYPE:   Subjective Short Answer
5818HAS VARIABLES:   False
5819LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
5820NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5821STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
5822AICPA: FN-Measurement
5823KEYWORDS:   Bloom's: Application
5824OTHER:   Time: 10 min.
5825DATE CREATED:   11/15/2017 1:08 PM
5826DATE MODIFIED:   7/24/2018 8:59 PM
5827Copyright Cengage Learning. Powered by Cognero. Page 90
5828Chapter 06: Deductions and Losses: In General
5829125. Trade or business expenses are classified as deductions for AGI. Section 212 expenses, barring certain exceptions,
5830are classified as deductions from AGI. What are these exceptions?
5831ANSWER:   The normal classification for § 212 expenses is as a deduction from AGI. However,
5832expenses paid in connection with the determination, collection, or refund of taxes
5833related to the income of sole proprietorships, rents and royalties, or farming
5834operations are classified as deductions for AGI. In addition, other rental and royalty
5835expenses are classified as deductions for AGI.
5836POINTS:   1
5837DIFFICULTY:   Easy
5838QUESTION TYPE:   Essay
5839HAS VARIABLES:   False
5840LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
5841NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5842STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
5843KEYWORDS:   Bloom's: Comprehension
5844OTHER:   Time: 5 min.
5845DATE CREATED:   11/15/2017 1:08 PM
5846DATE MODIFIED:   7/24/2018 7:03 PM
5847Copyright Cengage Learning. Powered by Cognero. Page 91
5848Chapter 06: Deductions and Losses: In General
5849126. Are all personal expenses disallowed as deductions in 2018?
5850ANSWER:   No. Selected personal expenses can be deducted as itemized deductions. The
5851following are examples of deductible personal expenses.
5852∙ Contributions to qualified charitable organizations (not to exceed a specified
5853percentage of AGI).
5854∙ Medical expenses (in excess of 7.5% of AGI).
5855∙ Certain state and local taxes (e.g., real estate taxes and state and local income or
5856sales taxes; total cannot exceed $10,000).
5857∙ Personal casualty losses (if part of a Presidentially-declared disaster area and in
5858excess of an aggregate floor of 10% of AGI and a $100 floor per casualty).
5859∙ Certain interest (e.g., mortgage interest on personal residence).
5860POINTS:   1
5861DIFFICULTY:   Easy
5862QUESTION TYPE:   Essay
5863HAS VARIABLES:   False
5864LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-01 - LO: 6-01
5865NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5866STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
5867KEYWORDS:   Bloom's: Knowledge
5868OTHER:   Time: 5 min.
5869DATE CREATED:   11/15/2017 1:08 PM
5870DATE MODIFIED:   7/24/2018 7:03 PM
5871Copyright Cengage Learning. Powered by Cognero. Page 92
5872Chapter 06: Deductions and Losses: In General
5873127. Under what circumstance can a bribe be deducted?
5874ANSWER:   Bribes paid to a domestic official are disallowed if the bribe is illegal under the laws
5875of the United States. However, a bribe paid to a foreign official is disallowed only if
5876it is unlawful under the Foreign Corrupt Practices Act of 1977.
5877POINTS:   1
5878DIFFICULTY:   Easy
5879QUESTION TYPE:   Essay
5880HAS VARIABLES:   False
5881LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-01 - LO: 5-01
5882NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5883STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
5884KEYWORDS:   Bloom's: Comprehension
5885OTHER:   Time: 5 min.
5886DATE CREATED:   11/15/2017 1:08 PM
5887DATE MODIFIED:   7/24/2018 8:59 PM
5888128. Can a trade or business expense be deductible if it is necessary but not ordinary?
5889ANSWER:   No. To be deductible as a trade or business expense, the expense must be both
5890ordinary and necessary.
5891POINTS:   1
5892DIFFICULTY:   Easy
5893QUESTION TYPE:   Essay
5894HAS VARIABLES:   False
5895LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-01 - LO: 5-01
5896NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5897STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
5898KEYWORDS:   Bloom's: Comprehension
5899OTHER:   Time: 5 min.
5900DATE CREATED:   11/15/2017 1:08 PM
5901DATE MODIFIED:   7/24/2018 8:59 PM
5902Copyright Cengage Learning. Powered by Cognero. Page 93
5903Chapter 06: Deductions and Losses: In General
5904129. Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other
5905requirement? What are the tax consequences if this requirement is not met?
5906ANSWER:   “Reasonableness” is an additional requirement that applies to salaries. Generally, the
5907unreasonable expense is disallowed as a deduction to the corporation and taxable as
5908a dividend, rather than as salary, to the shareholder.
5909POINTS:   1
5910DIFFICULTY:   Easy
5911QUESTION TYPE:   Essay
5912HAS VARIABLES:   False
5913LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-01 - LO: 5-01
5914NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5915STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
5916KEYWORDS:   Bloom's: Knowledge
5917OTHER:   Time: 5 min.
5918DATE CREATED:   11/15/2017 1:08 PM
5919DATE MODIFIED:   7/24/2018 8:59 PM
5920130. If part of a shareholder/employee’s salary is classified as unreasonable, determine the effect on the:
5921a. Shareholder/employee’s gross income.
5922b. Corporation’s taxable income.
5923ANSWER:  
5924a.
5925The reclassification of part of a shareholder/employee’s salary as unreasonable
5926will have no effect on the shareholder/employee’s gross income. That is, the
5927shareholder/employee’s salary income will decrease by the same amount as his
5928dividend income increases. Note that if the dividends are qualified dividends,
5929they are eligible for the same preferential tax rate of 15%/0% applicable to longterm
5930capital gains.
5931b. Salaries are deductible in calculating corporate taxable income, whereas
5932dividends are not. So, the taxable income of the corporation will increase due to
5933a reduced salary deduction.
5934POINTS:   1
5935DIFFICULTY:   Easy
5936QUESTION TYPE:   Essay
5937HAS VARIABLES:   False
5938LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-01 - LO: 5-01
5939NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5940STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
5941KEYWORDS:   Bloom's: Analysis
5942OTHER:   Time: 10 min.
5943DATE CREATED:   11/15/2017 1:08 PM
5944DATE MODIFIED:   7/24/2018 9:00 PM
5945Copyright Cengage Learning. Powered by Cognero. Page 94
5946Chapter 06: Deductions and Losses: In General
5947131. What losses are deductible by an individual taxpayer?
5948ANSWER:   Generally deductible losses of individual taxpayers are limited to (1) those incurred in
5949a trade or business or (2) in a transaction entered into for profit. However,
5950individuals are also allowed to deduct losses that are the result of a casualty (if part
5951of a Presidentially-declared disaster area; subject to certain statutory materiality
5952limitations).
5953POINTS:   1
5954DIFFICULTY:   Easy
5955QUESTION TYPE:   Essay
5956HAS VARIABLES:   False
5957LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-02 - LO: 6-02
5958NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5959STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
5960KEYWORDS:   Bloom's: Knowledge
5961OTHER:   Time: 5 min.
5962DATE CREATED:   11/15/2017 1:08 PM
5963DATE MODIFIED:   7/24/2018 7:03 PM
5964132. Bruce owns several sole proprietorships. Must Bruce use the same accounting method for each of these businesses?
5965ANSWER:   No. If a taxpayer owns multiple businesses, it may be possible to use the cash
5966method for some and the accrual method for others.
5967POINTS:   1
5968DIFFICULTY:   Easy
5969QUESTION TYPE:   Essay
5970HAS VARIABLES:   False
5971LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
5972NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5973STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
5974KEYWORDS:   Bloom's: Knowledge
5975OTHER:   Time: 5 min.
5976DATE CREATED:   11/15/2017 1:08 PM
5977DATE MODIFIED:   7/24/2018 9:00 PM
5978Copyright Cengage Learning. Powered by Cognero. Page 95
5979Chapter 06: Deductions and Losses: In General
5980133. Max opened his dental practice (a sole proprietorship) in March 2018. At the end of the year, he has unpaid accounts
5981receivable of $62,000 and no unpaid accounts payable. Should Max use the accrual method or the cash method for
5982his dental practice?
5983ANSWER:   A service provider generally should use the cash method. Under the cash method,
5984Max records income from his dental practice only as he collects from his patients
5985and/or their insurance companies. Max has income from the uncollected accounts
5986receivable only as he receives payment. Note that since his accounts payable can
5987only be deducted when paid under the cash method, he should continue to minimize
5988the accounts payable balance at the end of the tax year.
5989POINTS:   1
5990DIFFICULTY:   Easy
5991QUESTION TYPE:   Essay
5992HAS VARIABLES:   False
5993LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
5994NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
5995STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
5996KEYWORDS:   Bloom's: Analysis
5997OTHER:   Time: 5 min.
5998DATE CREATED:   11/15/2017 1:08 PM
5999DATE MODIFIED:   7/24/2018 9:00 PM
6000134. Discuss the application of the “one-year rule” on prepayments by a cash basis taxpayer.
6001ANSWER:   The Regulations set forth the general rule that an expenditure that creates an asset
6002having a useful life that extends substantially beyond the end of the tax year must be
6003capitalized. However, under the “one-year rule” on prepayments for cash basis
6004taxpayers, the prepayment can be expensed in the current tax year if the asset will
6005expire or be consumed by the end of the tax year following the year of payment.
6006Otherwise, the taxpayer must capitalize the prepayment and deduct it over the
6007benefit period.
6008POINTS:   1
6009DIFFICULTY:   Easy
6010QUESTION TYPE:   Essay
6011HAS VARIABLES:   False
6012LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
6013NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6014STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6015KEYWORDS:   Bloom's: Comprehension
6016OTHER:   Time: 10 min.
6017DATE CREATED:   11/15/2017 1:08 PM
6018DATE MODIFIED:   7/24/2018 9:00 PM
6019Copyright Cengage Learning. Powered by Cognero. Page 96
6020Chapter 06: Deductions and Losses: In General
6021135. Briefly discuss the two tests that an accrual basis taxpayer must apply before an expense can be deducted.
6022ANSWER:   The two tests that an accrual basis taxpayer must apply before an expense can be
6023deducted are (1) the all events test and (2) the economic performance test. The all
6024events test
6025events test
6026 provides that a deduction cannot be claimed until all the events that
6027 provides that a deduction cannot be claimed until all the events that
6028create the taxpayers liability have occurred and that the amount of the liability can be
6029determined with reasonable accuracy. The economic performance test provides
6030that the service, property, or use of property giving rise to the liability must have been
6031performed for, provided to, or used by the taxpayer.
6032POINTS:   1
6033DIFFICULTY:   Easy
6034QUESTION TYPE:   Essay
6035HAS VARIABLES:   False
6036LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-02 - LO: 5-02
6037NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6038STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6039KEYWORDS:   Bloom's: Comprehension
6040OTHER:   Time: 10 min.
6041DATE CREATED:   11/15/2017 1:08 PM
6042DATE MODIFIED:   7/24/2018 9:00 PM
6043136. Graham, a CPA, has submitted a proposal to do the annual audit for a municipality. Owen, the city treasurer, tells
6044Graham that for a $1,000 fee, he will use his influence to have the audit awarded to Graham. What factors are
6045relevant in determining if Graham can deduct the $1,000 payment assuming he pays the fee to Owen?
6046ANSWER:   The payment from Graham to Owen appears to be a bribe. To be disallowed, the
6047bribe must be illegal under either Federal or state law and also must subject the
6048payer to a criminal penalty or the loss of license or privilege to engage in a trade or
6049business. For a bribe that is illegal under state law, a deduction is denied only if the
6050state law is generally enforced.
6051POINTS:   1
6052DIFFICULTY:   Easy
6053QUESTION TYPE:   Essay
6054HAS VARIABLES:   False
6055LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
6056NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6057STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6058KEYWORDS:   Bloom's: Comprehension
6059OTHER:   Time: 5 min.
6060DATE CREATED:   11/15/2017 1:08 PM
6061DATE MODIFIED:   7/24/2018 9:00 PM
6062Copyright Cengage Learning. Powered by Cognero. Page 97
6063Chapter 06: Deductions and Losses: In General
6064137. In what situations may individuals be able to take a qualified business income deduction?
6065ANSWER:   The QBI deduction potentially applies to sole proprietors, partners in a partnership,
6066and shareholders in an S corporation.
6067POINTS:   1
6068DIFFICULTY:   Easy
6069QUESTION TYPE:   Essay
6070HAS VARIABLES:   False
6071LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
6072NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6073STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6074KEYWORDS:   Bloom's: Comprehension
6075OTHER:   Time: 5 min.
6076DATE CREATED:   11/15/2017 1:08 PM
6077DATE MODIFIED:   7/24/2018 7:03 PM
6078138. If a taxpayer operated an illegal business (not drug trafficking), what expenses can be deducted and what expenses
6079are disallowed?
6080ANSWER:   The usual expenses of operating a business are deductible. However, the following
6081expenses are disallowed.
6082∙ Fines
6083∙ Bribes to public officials
6084∙ Illegal kickbacks
6085∙ Other illegal payments
6086POINTS:   1
6087DIFFICULTY:   Easy
6088QUESTION TYPE:   Essay
6089HAS VARIABLES:   False
6090LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
6091NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6092STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6093KEYWORDS:   Bloom's: Knowledge
6094OTHER:   Time: 5 min.
6095DATE CREATED:   11/15/2017 1:08 PM
6096DATE MODIFIED:   7/24/2018 9:00 PM
6097Copyright Cengage Learning. Powered by Cognero. Page 98
6098Chapter 06: Deductions and Losses: In General
6099139. Bobby operates a drug trafficking business. Because he has an accounting background, he keeps detailed financial
6100records. What expenses can Bobby deduct on his Federal income tax return?
6101ANSWER:   Bobby cannot deduct any of the expenses associated with operating his illegal drug
6102trafficking business. However, gross income for tax purposes is defined as sales
6103minus cost of goods sold. So in calculating the net income of the business for tax
6104purposes, cost of goods sold is treated as a negative income item rather than as an
6105expense.
6106POINTS:   1
6107DIFFICULTY:   Easy
6108QUESTION TYPE:   Essay
6109HAS VARIABLES:   False
6110LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
6111NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6112STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6113KEYWORDS:   Bloom's: Knowledge
6114OTHER:   Time: 5 min.
6115DATE CREATED:   11/15/2017 1:08 PM
6116DATE MODIFIED:   7/24/2018 9:00 PM
6117140. Abner contributes $2,000 to the campaign of the Tea Party candidate for governor, $1,000 to the campaign of the
6118Tea Party candidate for senator, and $500 to the campaign of the Tea Party candidate for mayor. Can Abner deduct
6119these political contributions?
6120ANSWER:   No. Political contributions cannot be deducted.
6121POINTS:   1
6122DIFFICULTY:   Easy
6123QUESTION TYPE:   Essay
6124HAS VARIABLES:   False
6125LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
6126NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6127STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6128KEYWORDS:   Bloom's: Knowledge
6129OTHER:   Time: 5 min.
6130DATE CREATED:   11/15/2017 1:08 PM
6131DATE MODIFIED:   7/24/2018 9:00 PM
6132Copyright Cengage Learning. Powered by Cognero. Page 99
6133Chapter 06: Deductions and Losses: In General
6134141. Are there any circumstances under which lobbying expenditures are deductible?
6135ANSWER:   Yes. Lobbying expenditures are deductible under the following circumstances.
6136∙ Activities devoted solely to monitoring legislation.
6137∙ De minimis provision for annual in-house expenditures (lobbying expenses other
6138than those paid to professional lobbyists) if such expenditures do not exceed $2,000.
6139POINTS:   1
6140DIFFICULTY:   Easy
6141QUESTION TYPE:   Essay
6142HAS VARIABLES:   False
6143LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
6144NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6145STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6146KEYWORDS:   Bloom's: Comprehension
6147OTHER:   Time: 5 min.
6148DATE CREATED:   11/15/2017 1:08 PM
6149DATE MODIFIED:   7/24/2018 9:00 PM
6150142. In applying the $1 million limit on deducting executive compensation, what corporations are subject to the deduction
6151limit? What executives are covered?
6152ANSWER:   The $1 million limit on deducting the compensation of a covered executive applies to
6153corporations that have at least one class of stock registered under the Securities
6154Exchange Act of 1934. Covered employees include the chief (or principal) executive
6155officer, the chief (or principal) financial officer,  and the three other most highly
6156compensated officers.
6157POINTS:   1
6158DIFFICULTY:   Easy
6159QUESTION TYPE:   Essay
6160HAS VARIABLES:   False
6161LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
6162NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6163STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6164KEYWORDS:   Bloom's: Knowledge
6165OTHER:   Time: 5 min.
6166DATE CREATED:   11/15/2017 1:08 PM
6167DATE MODIFIED:   7/24/2018 9:00 PM
6168Copyright Cengage Learning. Powered by Cognero. Page 100
6169Chapter 06: Deductions and Losses: In General
6170143. Under what circumstances may a taxpayer deduct the expenses of investigating a possible business acquisition, if (1)
6171the business is not acquired; and (2) the business is acquired?
6172ANSWER:  
6173(1) The expenses of investigation may be deducted if the taxpayer is in the same
6174or similar business to that being investigated, even if the business is not
6175acquired. If the taxpayer is not in the same or similar trade or business to the
6176one being investigated, the investigation expenses are nondeductible if the
6177business is not acquired.
6178(2) The expenses of investigation must be capitalized by a taxpayer not in a
6179similar business when the business is acquired. Such expenses may be
6180immediately expensed (up to $5,000 if such expenses do not exceed $50,000)
6181and the balance amortized over a 180-month minimum period. If the taxpayer
6182is in the same or similar trade or business as that acquired, investigation
6183expenses are currently deductible.
6184POINTS:   1
6185DIFFICULTY:   Easy
6186QUESTION TYPE:   Essay
6187HAS VARIABLES:   False
6188LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
6189NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6190STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6191KEYWORDS:   Bloom's: Comprehension
6192OTHER:   Time: 10 min.
6193DATE CREATED:   11/15/2017 1:08 PM
6194DATE MODIFIED:   7/24/2018 9:00 PM
6195144. What are the relevant factors to be considered in determining whether an activity is profit-seeking or a hobby?
6196ANSWER:  
6197The nine relevant factors detailed in Reg. § 1.183-2(b) are as follows:
6198(1) Whether the activity is conducted in a businesslike manner.
6199(2) The expertise of the taxpayers or their advisers.
6200(3) The time and effort expended.
6201(4) The expectation that the assets of the activity will appreciate in value.
6202Copyright Cengage Learning. Powered by Cognero. Page 101
6203Chapter 06: Deductions and Losses: In General
6204(5) The previous success of the taxpayer in the conduct of similar activities.
6205(6) The history of income and losses from the activity.
6206(7) The relationship of profits earned to losses incurred.
6207(8) The financial status of the taxpayer.
6208(9) Elements of personal pleasure or recreation in the activity.
6209POINTS:   1
6210DIFFICULTY:   Easy
6211QUESTION TYPE:   Essay
6212HAS VARIABLES:   False
6213LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-07 - LO: 11-07
6214NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6215STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6216KEYWORDS:   Bloom's: Analysis
6217OTHER:   Time: 5 min.
6218DATE CREATED:   11/15/2017 1:08 PM
6219DATE MODIFIED:   7/24/2018 9:58 PM
6220Copyright Cengage Learning. Powered by Cognero. Page 102
6221Chapter 06: Deductions and Losses: In General
6222145. In distinguishing whether an activity is a hobby or a trade or business, discuss the presumptive rule.
6223ANSWER:   The Code provides a rebuttable presumption that an activity is profit-seeking (i.e., a
6224trade or business) rather than a hobby if the activity shows a profit in at least three
6225of any five (two out of seven for horses) prior consecutive years. If this test is met,
6226the activity is presumed to be a trade or business. The burden of proof thus shifts to
6227the IRS to show otherwise.
6228POINTS:   1
6229DIFFICULTY:   Easy
6230QUESTION TYPE:   Essay
6231HAS VARIABLES:   False
6232LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-07 - LO: 11-07
6233NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6234STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6235KEYWORDS:   Bloom's: Comprehension
6236OTHER:   Time: 10 min.
6237DATE CREATED:   11/15/2017 1:08 PM
6238DATE MODIFIED:   7/24/2018 9:58 PM
6239146. Assuming an activity is deemed to be a hobby, discuss the order and limits in which expenses must be deducted.
6240ANSWER:   Amounts deductible under other Code sections without regard to the nature of the
6241activity (e.g., property taxes and mortgage interest) must be deducted first.
6242Amounts deductible under other Code sections had the activity been profit-seeking
6243which do not affect adjusted basis are deducted next.
6244Deductions affecting adjusted basis (e.g., depreciation) are taken next. At any point
6245where the expenses exceed income, the deduction is limited to the remaining
6246income.  For tax years from 2018 through 2025 the expenses in the 2nd and 3rd
6247categories are not deductible at all since 2% miscellaneous itemized deductions are
6248not allowed. 
6249POINTS:   1
6250DIFFICULTY:   Easy
6251QUESTION TYPE:   Essay
6252HAS VARIABLES:   False
6253LEARNING OBJECTIVES:  EOTX.SWFT.LO: 11-07 - LO: 11-07
6254NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6255STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6256KEYWORDS:   Bloom's: Application
6257OTHER:   Time: 10 min.
6258DATE CREATED:   11/15/2017 1:08 PM
6259DATE MODIFIED:   7/24/2018 9:58 PM
6260Copyright Cengage Learning. Powered by Cognero. Page 103
6261Chapter 06: Deductions and Losses: In General
6262147. Describe the circumstances under which a taxpayer can receive rent income from a personal residence, but does not
6263have to report it as gross income.
6264ANSWER:   If the personal residence is rented for fewer than 15 days in a year, the rent income
6265is excluded from gross income. Only mortgage interest and real estate taxes can be
6266deducted.
6267POINTS:   1
6268DIFFICULTY:   Easy
6269QUESTION TYPE:   Essay
6270HAS VARIABLES:   False
6271LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
6272NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6273STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6274KEYWORDS:   Bloom's: Comprehension
6275OTHER:   Time: 5 min.
6276DATE CREATED:   11/15/2017 1:08 PM
6277DATE MODIFIED:   7/24/2018 7:03 PM
6278148. For a vacation home to be classified in the primarily rental use category, what attributes must be present?
6279ANSWER:   To be classified in the primarily rental use category, the following attributes must be
6280present.
6281∙ The residence is rented for 15 days or more during the year.
6282∙ The residence is not used for personal purposes for more than the greater of:
6283∙ 14 days or 10 percent of the total days rented.
6284POINTS:   1
6285DIFFICULTY:   Easy
6286QUESTION TYPE:   Essay
6287HAS VARIABLES:   False
6288LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
6289NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6290STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6291KEYWORDS:   Bloom's: Knowledge
6292OTHER:   Time: 5 min.
6293DATE CREATED:   11/15/2017 1:08 PM
6294DATE MODIFIED:   7/24/2018 7:03 PM
6295Copyright Cengage Learning. Powered by Cognero. Page 104
6296Chapter 06: Deductions and Losses: In General
6297149. For a vacation home to be classified in the personal/rental use category, what attributes must be present?
6298ANSWER:   To be classified in the personal/rental use category, the following attributes must be
6299present.
6300∙ The residence is rented for 15 days or more in a year.
6301∙ The residence is used for personal purposes for more than the greater of (1) 14 days or
6302(2) 10% of the total days rented.
6303POINTS:   1
6304DIFFICULTY:   Easy
6305QUESTION TYPE:   Essay
6306HAS VARIABLES:   False
6307LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
6308NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6309STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6310KEYWORDS:   Bloom's: Knowledge
6311OTHER:   Time: 5 min.
6312DATE CREATED:   11/15/2017 1:08 PM
6313DATE MODIFIED:   7/24/2018 7:03 PM
6314150. What is the appropriate tax treatment for expenditures paid by a taxpayer for another’s benefit?
6315ANSWER:   To be deductible, an expense must be incurred for the taxpayer’s benefit or arise
6316from the taxpayer’s obligation. An individual cannot claim a tax deduction for the
6317payment of the expenses of another individual. One exception to this rule is the
6318payment of medical expenses for a dependent. Such medical expenses are
6319deductible by the payor subject to the normal rules that govern the deductibility of
6320medical expenses.  The Tax Court has ruled in one case that the individual for whom
6321the expenditures are paid may still qualify for a deduction.   In that case, it is deemed
6322that the payer transferred the cash to the taxpayer as a gift, and then the taxpayer
6323made the payment. 
6324POINTS:   1
6325DIFFICULTY:   Easy
6326QUESTION TYPE:   Essay
6327HAS VARIABLES:   False
6328LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
6329NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6330STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6331KEYWORDS:   Bloom's: Comprehension
6332OTHER:   Time: 5 min.
6333DATE CREATED:   11/15/2017 1:08 PM
6334DATE MODIFIED:   7/24/2018 7:03 PM
6335Copyright Cengage Learning. Powered by Cognero. Page 105
6336Chapter 06: Deductions and Losses: In General
6337151. Are there any exceptions to the rule that personal expenditures cannot be deducted?
6338ANSWER:   Generally personal expenditures cannot be deducted. However, the Code provides
6339that for a personal expenditure to be deductible the taxpayer must be able to identify
6340a particular section of the Code that permits the deduction (e.g., charitable
6341contributions, medical expenses, certain taxes, certain interest).
6342POINTS:   1
6343DIFFICULTY:   Easy
6344QUESTION TYPE:   Essay
6345HAS VARIABLES:   False
6346LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
6347NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6348STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6349KEYWORDS:   Bloom's: Comprehension
6350OTHER:   Time: 5 min.
6351DATE CREATED:   11/15/2017 1:08 PM
6352DATE MODIFIED:   7/24/2018 7:03 PM
6353152. Briefly discuss the disallowance of deductions for capital expenditures.
6354ANSWER:   Any expenditures that add to the value or prolong the life of property or adapt the
6355property to a new or different use are capital expenditures which must be capitalized
6356and depreciated or amortized.
6357POINTS:   1
6358DIFFICULTY:   Easy
6359QUESTION TYPE:   Essay
6360HAS VARIABLES:   False
6361LEARNING OBJECTIVES:  CMPV.SWFT.LO: 6-03 - LO: 6-03
6362NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6363STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6364KEYWORDS:   Bloom's: Knowledge
6365OTHER:   Time: 5 min.
6366DATE CREATED:   11/15/2017 1:08 PM
6367DATE MODIFIED:   7/24/2018 7:03 PM
6368Copyright Cengage Learning. Powered by Cognero. Page 106
6369Chapter 06: Deductions and Losses: In General
6370153. Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?
6371ANSWER:   Sham transactions can be structured between related parties such that no real
6372economic change occurs in the status of the parties, but a tax savings results. This is
6373an abuse of the tax law which has resulted in restrictions on the recognition of such
6374transactions.
6375POINTS:   1
6376DIFFICULTY:   Easy
6377QUESTION TYPE:   Essay
6378HAS VARIABLES:   False
6379LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
6380NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6381STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6382KEYWORDS:   Bloom's: Comprehension
6383OTHER:   Time: 5 min.
6384DATE CREATED:   11/15/2017 1:08 PM
6385DATE MODIFIED:   7/24/2018 9:00 PM
6386154. In a related party transaction where realized loss is disallowed, when can the disallowed loss be used by the buyer on
6387the subsequent sale of the property? In the case of a related party disallowed loss transaction, can the related party
6388seller’s disallowed loss be used by a taxpayer other than the related party buyer?
6389ANSWER:   The related party buyer is permitted to use as much of the disallowed loss of the
6390seller as is needed to reduce any realized gain on the subsequent sale of the
6391property. If the property in the hands of the buyer appreciates to at least the amount
6392of the seller’s adjusted basis at the date of the original sale, all of the disallowed loss
6393can be used by the buyer on the subsequent sale. The related party seller’s
6394disallowed loss can be used only by the related party buyer.
6395POINTS:   1
6396DIFFICULTY:   Easy
6397QUESTION TYPE:   Essay
6398HAS VARIABLES:   False
6399LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
6400NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6401STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6402KEYWORDS:   Bloom's: Knowledge
6403OTHER:   Time: 5 min.
6404DATE CREATED:   11/15/2017 1:08 PM
6405DATE MODIFIED:   7/24/2018 9:00 PM
6406Copyright Cengage Learning. Powered by Cognero. Page 107
6407Chapter 06: Deductions and Losses: In General
6408155. Olive, Inc., an accrual method taxpayer, is a corporation that is equally owned by Maurice and Alex, who are
6409brothers. The corporation uses the accrual method of accounting and the shareholders use the cash method. To
6410provide Olive with funds to acquire additional working capital, the shareholders each loan Olive $100,000 with a 6%
6411interest rate. At the end of the tax year, there is unpaid accrued interest of $3,000 due to each shareholder. From a
6412timing perspective, when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in
6413gross income? Olive pays the $3,000 to each shareholder early next year.
6414ANSWER:   Maurice and Alex are related parties with Olive. So Olive (accrual method) must
6415claim the deduction of $6,000 in the same tax year that the cash method
6416shareholders include the $3,000 each in gross income (next year). Note that this
6417matching provision applies only if the payor uses the accrual method and the payee
6418uses the cash method.
6419POINTS:   1
6420DIFFICULTY:   Easy
6421QUESTION TYPE:   Essay
6422HAS VARIABLES:   False
6423LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
6424NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6425STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6426KEYWORDS:   Bloom's: Analysis
6427OTHER:   Time: 10 min.
6428DATE CREATED:   11/15/2017 1:08 PM
6429DATE MODIFIED:   7/24/2018 9:00 PM
6430156. Briefly explain why interest on money borrowed to buy tax-exempt municipal bonds is disallowed as a deduction.
6431ANSWER:   Because the interest income on municipal bonds is excludible from gross income, the
6432related expense should not be deductible. Otherwise, a taxpayer could borrow
6433money, at say 10%, invest the funds in tax-exempt securities, at say 8%, and realize
6434a profit if the interest expense were deductible. The entire profit would be derived
6435from the tax treatment.
6436POINTS:   1
6437DIFFICULTY:   Easy
6438QUESTION TYPE:   Essay
6439HAS VARIABLES:   False
6440LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-03 - LO: 5-03
6441NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6442STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6443KEYWORDS:   Bloom's: Comprehension
6444OTHER:   Time: 10 min.
6445DATE CREATED:   11/15/2017 1:08 PM
6446DATE MODIFIED:   7/24/2018 9:00 PM
6447Copyright Cengage Learning. Powered by Cognero. Page 108
6448Chapter 06: Deductions and Losses: In General
6449
64501. James is in the business of debt collection. He purchased a $20,000 account receivable from Green Corporation for
6451$15,000. During the year, James collected $17,000 in final settlement of the account. James can take a $2,000 bad
6452debt deduction in the current year.
6453a. True
6454b. False
6455ANSWER:   False
6456RATIONALE:   James has a basis of $15,000 in the account receivable and hence, he has income of
6457$2,000.
6458POINTS:   1
6459DIFFICULTY:   Easy
6460QUESTION TYPE:   True / False
6461HAS VARIABLES:   False
6462LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
6463NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6464STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
6465AICPA: FN-Measurement
6466KEYWORDS:   Bloom's: Application
6467OTHER:   Time: 2 min.
6468DATE CREATED:   11/15/2017 1:08 PM
6469DATE MODIFIED:   7/24/2018 9:48 PM
64702. If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not
6471previously deducted can be deducted this year.
6472a. True
6473b. False
6474ANSWER:   True
6475POINTS:   1
6476DIFFICULTY:   Easy
6477QUESTION TYPE:   True / False
6478HAS VARIABLES:   False
6479LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
6480NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6481STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
6482AICPA: FN-Measurement
6483KEYWORDS:   Bloom's: Comprehension
6484OTHER:   Time: 2 min.
6485DATE CREATED:   11/15/2017 1:08 PM
6486DATE MODIFIED:   7/24/2018 9:48 PM
6487Copyright Cengage Learning. Powered by Cognero. Page 1
6488Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
64893. Last year, taxpayer had a $10,000 nonbusiness bad debt. Taxpayer also had an $8,000 short-term capital gain and
6490taxable income of $35,000. If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included
6491in gross income.
6492a. True
6493b. False
6494ANSWER:   False
6495RATIONALE:   The taxpayer must include the $10,000 in gross income to the extent of the tax benefit
6496received last year. The entire $10,000 deduction provided a tax benefit; $8,000 offset
6497by the short-term capital gain and $2,000 offset against ordinary income.
6498POINTS:   1
6499DIFFICULTY:   Easy
6500QUESTION TYPE:   True / False
6501HAS VARIABLES:   False
6502LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
6503NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6504STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
6505AICPA: FN-Measurement
6506KEYWORDS:   Bloom's: Application
6507OTHER:   Time: 5 min.
6508DATE CREATED:   11/15/2017 1:08 PM
6509DATE MODIFIED:   7/24/2018 9:48 PM
65104. A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection
6511agency.
6512a. True
6513b. False
6514ANSWER:   True
6515POINTS:   1
6516DIFFICULTY:   Easy
6517QUESTION TYPE:   True / False
6518HAS VARIABLES:   False
6519LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
6520NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6521STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6522KEYWORDS:   Bloom's: Comprehension
6523OTHER:   Time: 2 min.
6524DATE CREATED:   11/15/2017 1:08 PM
6525DATE MODIFIED:   7/24/2018 9:48 PM
6526Copyright Cengage Learning. Powered by Cognero. Page 2
6527Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
65285. If an account receivable written off during a prior year is subsequently collected during the current year, the amount
6529collected must be included in the gross income of the current year to the extent it created a tax benefit in the prior
6530year.
6531a. True
6532b. False
6533ANSWER:   True
6534POINTS:   1
6535DIFFICULTY:   Easy
6536QUESTION TYPE:   True / False
6537HAS VARIABLES:   False
6538LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
6539NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6540STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6541KEYWORDS:   Bloom's: Comprehension
6542OTHER:   Time: 2 min.
6543DATE CREATED:   11/15/2017 1:08 PM
6544DATE MODIFIED:   7/24/2018 9:48 PM
65456. A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.
6546a. True
6547b. False
6548ANSWER:   False
6549RATIONALE:   The deduction can only be taken in the year the debt becomes totally worthless.
6550POINTS:   1
6551DIFFICULTY:   Easy
6552QUESTION TYPE:   True / False
6553HAS VARIABLES:   False
6554LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
6555NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6556STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6557KEYWORDS:   Bloom's: Comprehension
6558OTHER:   Time: 2 min.
6559DATE CREATED:   11/15/2017 1:08 PM
6560DATE MODIFIED:   7/24/2018 9:48 PM
6561Copyright Cengage Learning. Powered by Cognero. Page 3
6562Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
65637. A business bad debt is a debt unrelated to the taxpayer’s trade or business either when it was created or when it
6564became worthless.
6565a. True
6566b. False
6567ANSWER:   False
6568POINTS:   1
6569DIFFICULTY:   Easy
6570QUESTION TYPE:   True / False
6571HAS VARIABLES:   False
6572LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
6573NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6574STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6575KEYWORDS:   Bloom's: Comprehension
6576OTHER:   Time: 2 min.
6577DATE CREATED:   11/15/2017 1:08 PM
6578DATE MODIFIED:   7/24/2018 9:48 PM
65798. In determining whether a debt is a business or nonbusiness bad debt, the debtor’s use of the borrowed funds is
6580important.
6581a. True
6582b. False
6583ANSWER:   False
6584RATIONALE:   The use of the funds by the debtor is of no consequence in making the determination.
6585The determination is made at the creditor level.
6586POINTS:   1
6587DIFFICULTY:   Easy
6588QUESTION TYPE:   True / False
6589HAS VARIABLES:   False
6590LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
6591NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6592STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6593KEYWORDS:   Bloom's: Knowledge
6594OTHER:   Time: 2 min.
6595DATE CREATED:   11/15/2017 1:08 PM
6596DATE MODIFIED:   7/24/2018 9:48 PM
6597Copyright Cengage Learning. Powered by Cognero. Page 4
6598Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
65999. A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction.
6600a. True
6601b. False
6602ANSWER:   False
6603RATIONALE:   The nonbusiness bad debt provisions do not apply to corporations.
6604POINTS:   1
6605DIFFICULTY:   Easy
6606QUESTION TYPE:   True / False
6607HAS VARIABLES:   False
6608LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
6609NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6610STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6611KEYWORDS:   Bloom's: Knowledge
6612OTHER:   Time: 2 min.
6613DATE CREATED:   11/15/2017 1:08 PM
6614DATE MODIFIED:   7/24/2018 9:48 PM
661510. A nonbusiness bad debt can offset an unlimited amount of long-term capital gain.
6616a. True
6617b. False
6618ANSWER:   True
6619POINTS:   1
6620DIFFICULTY:   Easy
6621QUESTION TYPE:   True / False
6622HAS VARIABLES:   False
6623LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
6624NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6625STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6626KEYWORDS:   Bloom's: Knowledge
6627OTHER:   Time: 2 min.
6628DATE CREATED:   11/15/2017 1:08 PM
6629DATE MODIFIED:   7/24/2018 9:48 PM
6630Copyright Cengage Learning. Powered by Cognero. Page 5
6631Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
663211. The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is
6633determined.
6634a. True
6635b. False
6636ANSWER:   False
6637RATIONALE:   A taxpayer is entitled to deduct the net amount of the loss only upon final settlement
6638of the debt.
6639POINTS:   1
6640DIFFICULTY:   Easy
6641QUESTION TYPE:   True / False
6642HAS VARIABLES:   False
6643LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
6644NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6645STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6646KEYWORDS:   Bloom's: Knowledge
6647OTHER:   Time: 2 min.
6648DATE CREATED:   11/15/2017 1:08 PM
6649DATE MODIFIED:   7/24/2018 9:48 PM
665012. A bona fide debt cannot arise on a loan between father and son.
6651a. True
6652b. False
6653ANSWER:   False
6654RATIONALE:   A bona fide debt arises from a debtor-creditor relationship based on a valid and
6655enforceable obligation to pay a fixed sum of money regardless of the relationship of
6656the parties.
6657POINTS:   1
6658DIFFICULTY:   Easy
6659QUESTION TYPE:   True / False
6660HAS VARIABLES:   False
6661LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
6662NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6663STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6664KEYWORDS:   Bloom's: Knowledge
6665OTHER:   Time: 2 min.
6666DATE CREATED:   11/15/2017 1:08 PM
6667DATE MODIFIED:   7/24/2018 9:48 PM
6668Copyright Cengage Learning. Powered by Cognero. Page 6
6669Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
667013. A bond held by an investor that is uncollectible will be treated as a worthless security and hence, produce a capital
6671loss.
6672a. True
6673b. False
6674ANSWER:   True
6675POINTS:   1
6676DIFFICULTY:   Easy
6677QUESTION TYPE:   True / False
6678HAS VARIABLES:   False
6679LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
6680EOTX.SWFT.LO: 6-02 - LO: 6-02
6681NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6682STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6683KEYWORDS:   Bloom's: Knowledge
6684OTHER:   Time: 2 min.
6685DATE CREATED:   11/15/2017 1:08 PM
6686DATE MODIFIED:   7/24/2018 9:48 PM
668714. A loss from a worthless security is always treated as a short-term capital loss.
6688a. True
6689b. False
6690ANSWER:   False
6691RATIONALE:   The last day treatment increases the likelihood that the capital loss will be classified as
6692long term, but is not automatic. So the capital loss could be either short term or long
6693term.
6694POINTS:   1
6695DIFFICULTY:   Easy
6696QUESTION TYPE:   True / False
6697HAS VARIABLES:   False
6698LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-02 - LO: 6-02
6699NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6700STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6701KEYWORDS:   Bloom's: Knowledge
6702OTHER:   Time: 2 min.
6703DATE CREATED:   11/15/2017 1:08 PM
6704DATE MODIFIED:   7/24/2018 9:48 PM
6705Copyright Cengage Learning. Powered by Cognero. Page 7
6706Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
670715. A loss is not allowed for a security that declines in value.
6708a. True
6709b. False
6710ANSWER:   True
6711RATIONALE:   A loss is allowed for securities that become completely worthless during the tax year.
6712POINTS:   1
6713DIFFICULTY:   Easy
6714QUESTION TYPE:   True / False
6715HAS VARIABLES:   False
6716LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-02 - LO: 6-02
6717NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6718STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6719KEYWORDS:   Bloom's: Knowledge
6720OTHER:   Time: 2 min.
6721DATE CREATED:   11/15/2017 1:08 PM
6722DATE MODIFIED:   7/24/2018 9:48 PM
672316. Several years ago, John purchased 2,000 shares of Red Corporation § 1244 stock from Mark for $40,000. Last year,
6724John sold one-half of his Red Corporation stock to Mike for $12,000. During the current year, John sold the remaining
6725Red Corporation stock for $3,000. John has a $17,000 ($3,000 – $20,000) ordinary loss for the current year.
6726a. True
6727b. False
6728ANSWER:   False
6729RATIONALE:   John did not buy the stock from Red Corporation, and therefore, it is not § 1244 stock
6730to him. John has a $17,000 long-term capital loss.
6731POINTS:   1
6732DIFFICULTY:   Easy
6733QUESTION TYPE:   True / False
6734HAS VARIABLES:   False
6735LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-02 - LO: 6-02
6736NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6737STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6738KEYWORDS:   Bloom's: Application
6739OTHER:   Time: 2 min.
6740DATE CREATED:   11/15/2017 1:08 PM
6741DATE MODIFIED:   7/24/2018 9:48 PM
6742Copyright Cengage Learning. Powered by Cognero. Page 8
6743Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
674417. If a taxpayer sells their § 1244 stock at a loss, all of the loss will be ordinary loss.
6745a. True
6746b. False
6747ANSWER:   False
6748RATIONALE:   Ordinary loss treatment is limited to $50,000 per year for single taxpayers and
6749$100,000 per year for married filing jointly taxpayers.
6750POINTS:   1
6751DIFFICULTY:   Easy
6752QUESTION TYPE:   True / False
6753HAS VARIABLES:   False
6754LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-02 - LO: 6-02
6755NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6756STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6757KEYWORDS:   Bloom's: Comprehension
6758OTHER:   Time: 2 min.
6759DATE CREATED:   11/15/2017 1:08 PM
6760DATE MODIFIED:   7/24/2018 9:48 PM
676118. Al, who is single, has a gain of $40,000 on the sale of § 1244 stock (small business stock) and a loss of $80,000 on the
6762sale of § 1244 stock. As a result, Al has a $40,000 ordinary loss.
6763a. True
6764b. False
6765ANSWER:   False
6766RATIONALE:   The $40,000 gain on the sale of the § 1244 stock is classified as a capital gain. The
6767$80,000 loss on the sale of the § 1244 stock is classified as an ordinary loss to the
6768extent of $50,000. The balance of the § 1244 stock loss of $30,000 is classified as a
6769capital loss. Therefore, Al has capital gain net income of $10,000 ($40,000 – $30,000).
6770POINTS:   1
6771DIFFICULTY:   Easy
6772QUESTION TYPE:   True / False
6773HAS VARIABLES:   False
6774LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-02 - LO: 6-02
6775NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6776STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
6777AICPA: FN-Measurement
6778KEYWORDS:   Bloom's: Application
6779OTHER:   Time: 5 min.
6780DATE CREATED:   11/15/2017 1:08 PM
6781DATE MODIFIED:   7/24/2018 9:48 PM
6782Copyright Cengage Learning. Powered by Cognero. Page 9
6783Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
678419. An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss.
6785a. True
6786b. False
6787ANSWER:   True
6788RATIONALE:   Only an individual’s loss on personal use property must meet the definition of a
6789casualty to be deductible.
6790POINTS:   1
6791DIFFICULTY:   Easy
6792QUESTION TYPE:   True / False
6793HAS VARIABLES:   False
6794LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
6795NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6796STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6797KEYWORDS:   Bloom's: Knowledge
6798OTHER:   Time: 2 min.
6799DATE CREATED:   11/15/2017 1:08 PM
6800DATE MODIFIED:   7/24/2018 9:48 PM
680120. “Other casualty” means casualties similar to those associated with fires, storms, or shipwrecks.
6802a. True
6803b. False
6804ANSWER:   True
6805POINTS:   1
6806DIFFICULTY:   Easy
6807QUESTION TYPE:   True / False
6808HAS VARIABLES:   False
6809LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
6810NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6811STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6812KEYWORDS:   Bloom's: Knowledge
6813OTHER:   Time: 2 min.
6814DATE CREATED:   11/15/2017 1:08 PM
6815DATE MODIFIED:   7/24/2018 9:48 PM
6816Copyright Cengage Learning. Powered by Cognero. Page 10
6817Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
681821. A father cannot claim a loss on his daughter’s rental use property.
6819a. True
6820b. False
6821ANSWER:   True
6822POINTS:   1
6823DIFFICULTY:   Easy
6824QUESTION TYPE:   True / False
6825HAS VARIABLES:   False
6826LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
6827NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6828STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6829KEYWORDS:   Bloom's: Knowledge
6830OTHER:   Time: 2 min.
6831DATE CREATED:   11/15/2017 1:08 PM
6832DATE MODIFIED:   7/24/2018 9:48 PM
683322. Beginning in 2018, a personal casualty loss deduction is only allowed for losses occurring in a Federally-declared
6834disaster area.
6835a. True
6836b. False
6837ANSWER:   True
6838POINTS:   1
6839DIFFICULTY:   Easy
6840QUESTION TYPE:   True / False
6841HAS VARIABLES:   False
6842LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
6843NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6844STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6845KEYWORDS:   Bloom's: Knowledge
6846OTHER:   Time: 2 min.
6847DATE CREATED:   11/15/2017 1:08 PM
6848DATE MODIFIED:   7/24/2018 9:48 PM
6849Copyright Cengage Learning. Powered by Cognero. Page 11
6850Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
685123. If the amount of the insurance recovery for a theft of business property is greater than the asset’s fair market value
6852but less than it’s adjusted basis, a gain is recognized.
6853a. True
6854b. False
6855ANSWER:   False
6856RATIONALE:   Loss is recognized if the amount of the insurance recovery is less than the asset’s
6857adjusted basis.
6858POINTS:   1
6859DIFFICULTY:   Easy
6860QUESTION TYPE:   True / False
6861HAS VARIABLES:   False
6862LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
6863NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6864STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6865KEYWORDS:   Bloom's: Comprehension
6866OTHER:   Time: 2 min.
6867DATE CREATED:   11/15/2017 1:08 PM
6868DATE MODIFIED:   7/24/2018 9:48 PM
686924. A business theft loss is taken in the year of the theft.
6870a. True
6871b. False
6872ANSWER:   False
6873RATIONALE:   A theft loss is taken in the year of discovery.
6874POINTS:   1
6875DIFFICULTY:   Easy
6876QUESTION TYPE:   True / False
6877HAS VARIABLES:   False
6878LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
6879NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6880STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6881KEYWORDS:   Bloom's: Knowledge
6882OTHER:   Time: 2 min.
6883DATE CREATED:   11/15/2017 1:08 PM
6884DATE MODIFIED:   7/24/2018 9:48 PM
6885Copyright Cengage Learning. Powered by Cognero. Page 12
6886Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
688725. In 2017, Amos had AGI of $50,000. Amos also had a diamond ring stolen which cost $20,000 and was worth $17,000
6888at the time of the theft. He itemized deductions on last year’s tax return. In 2018, Amos recovered $17,000 from the
6889insurance company. Therefore, he must include $11,900 in gross income on the tax return for the current year.
6890a. True
6891b. False
6892ANSWER:   True
6893RATIONALE:   The reimbursement need only be included to the extent the previous deduction
6894resulted in a tax benefit. The benefit was $11,900 [$17,000 – $100 – (10% ×
6895$50,000)].
6896POINTS:   1
6897DIFFICULTY:   Easy
6898QUESTION TYPE:   True / False
6899HAS VARIABLES:   False
6900LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
6901NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6902STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
6903KEYWORDS:   Bloom's: Application
6904OTHER:   Time: 2 min.
6905DATE CREATED:   11/15/2017 1:08 PM
6906DATE MODIFIED:   7/24/2018 9:48 PM
690726. If investment property is stolen, the amount of the loss is the adjusted basis of the property at the time of the theft
6908reduced by $100 and 10% of AGI.
6909a. True
6910b. False
6911ANSWER:   False
6912RATIONALE:   The amount of the loss is not subject to the $100 and 10%-of-AGI limitations.
6913POINTS:   1
6914DIFFICULTY:   Easy
6915QUESTION TYPE:   True / False
6916HAS VARIABLES:   False
6917LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
6918NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6919STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
6920AICPA: FN-Measurement
6921KEYWORDS:   Bloom's: Knowledge
6922OTHER:   Time: 2 min.
6923DATE CREATED:   11/15/2017 1:08 PM
6924DATE MODIFIED:   7/24/2018 9:48 PM
6925Copyright Cengage Learning. Powered by Cognero. Page 13
6926Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
692727. The cost of repairs to damaged property is not an acceptable measure of the loss in value of the property.
6928a. True
6929b. False
6930ANSWER:   False
6931RATIONALE:   Under certain circumstances, the cost of repairs to damaged property may be an
6932acceptable measure of the loss in value of the property.
6933POINTS:   1
6934DIFFICULTY:   Easy
6935QUESTION TYPE:   True / False
6936HAS VARIABLES:   False
6937LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
6938NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6939STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
6940AICPA: FN-Measurement
6941KEYWORDS:   Bloom's: Knowledge
6942OTHER:   Time: 2 min.
6943DATE CREATED:   11/15/2017 1:08 PM
6944DATE MODIFIED:   7/24/2018 9:48 PM
694528. Taxpayer’s home was destroyed by a storm in the current year in a Federally-declared disaster area. If the taxpayer
6946elects to treat the loss as having occurred in the prior year, it will be subject to the 10%-of-AGI reduction based on
6947the AGI of the current year.
6948a. True
6949b. False
6950ANSWER:   False
6951RATIONALE:   The loss will be subject to the 10%-of-AGI reduction based on the AGI of the prior
6952year.
6953POINTS:   1
6954DIFFICULTY:   Easy
6955QUESTION TYPE:   True / False
6956HAS VARIABLES:   False
6957LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
6958NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6959STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
6960AICPA: FN-Measurement
6961KEYWORDS:   Bloom's: Comprehension
6962OTHER:   Time: 2 min.
6963DATE CREATED:   11/15/2017 1:08 PM
6964DATE MODIFIED:   7/24/2018 9:48 PM
6965Copyright Cengage Learning. Powered by Cognero. Page 14
6966Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
696729. The amount of loss for partial destruction of business property is the decline in fair market value of the business
6968property.
6969a. True
6970b. False
6971ANSWER:   False
6972RATIONALE:   The amount of the loss is the lesser of the adjusted basis or the decline in fair market
6973value of the property.
6974POINTS:   1
6975DIFFICULTY:   Easy
6976QUESTION TYPE:   True / False
6977HAS VARIABLES:   False
6978LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
6979NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6980STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
6981AICPA: FN-Measurement
6982KEYWORDS:   Bloom's: Comprehension
6983OTHER:   Time: 2 min.
6984DATE CREATED:   11/15/2017 1:08 PM
6985DATE MODIFIED:   7/24/2018 9:48 PM
698630. If personal casualty gains exceed personal casualty losses (after deducting the $100 floor), there is no itemized
6987deduction.
6988a. True
6989b. False
6990ANSWER:   True
6991POINTS:   1
6992DIFFICULTY:   Easy
6993QUESTION TYPE:   True / False
6994HAS VARIABLES:   False
6995LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
6996NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
6997STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
6998AICPA: FN-Measurement
6999KEYWORDS:   Bloom's: Comprehension
7000OTHER:   Time: 2 min.
7001DATE CREATED:   11/15/2017 1:08 PM
7002DATE MODIFIED:   7/24/2018 9:48 PM
7003Copyright Cengage Learning. Powered by Cognero. Page 15
7004Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
700531. The amount of a loss on insured personal use property is reduced by the insurance coverage if no claim is made
7006against the insurer.
7007a. True
7008b. False
7009ANSWER:   True
7010POINTS:   1
7011DIFFICULTY:   Easy
7012QUESTION TYPE:   True / False
7013HAS VARIABLES:   False
7014LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
7015NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7016STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
7017KEYWORDS:   Bloom's: Knowledge
7018OTHER:   Time: 2 min.
7019DATE CREATED:   11/15/2017 1:08 PM
7020DATE MODIFIED:   7/24/2018 9:48 PM
702132. Losses on rental property are classified as deductions for AGI.
7022a. True
7023b. False
7024ANSWER:   True
7025POINTS:   1
7026DIFFICULTY:   Easy
7027QUESTION TYPE:   True / False
7028HAS VARIABLES:   False
7029LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
7030NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7031STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
7032KEYWORDS:   Bloom's: Knowledge
7033OTHER:   Time: 2 min.
7034DATE CREATED:   11/15/2017 1:08 PM
7035DATE MODIFIED:   7/24/2018 9:48 PM
7036Copyright Cengage Learning. Powered by Cognero. Page 16
7037Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
703833. When a nonbusiness casualty loss is spread between two taxable years, the loss in the second year is reduced by 10%
7039of adjusted gross income for the first year.
7040a. True
7041b. False
7042ANSWER:   False
7043RATIONALE:   The loss in the second year is reduced by 10% of AGI for the second year.
7044POINTS:   1
7045DIFFICULTY:   Easy
7046QUESTION TYPE:   True / False
7047HAS VARIABLES:   False
7048LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
7049NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7050STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7051AICPA: FN-Measurement
7052KEYWORDS:   Bloom's: Knowledge
7053OTHER:   Time: 2 min.
7054DATE CREATED:   11/15/2017 1:08 PM
7055DATE MODIFIED:   7/24/2018 9:48 PM
705634. A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor.
7057a. True
7058b. False
7059ANSWER:   True
7060RATIONALE:   A theft loss is a separately stated item on Schedule A of Form 1040. It is not subject
7061to the 2%-of-AGI floor.
7062POINTS:   1
7063DIFFICULTY:   Easy
7064QUESTION TYPE:   True / False
7065HAS VARIABLES:   False
7066LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
7067NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7068STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
7069KEYWORDS:   Bloom's: Knowledge
7070OTHER:   Time: 2 min.
7071DATE CREATED:   11/15/2017 1:08 PM
7072DATE MODIFIED:   7/24/2018 9:48 PM
7073Copyright Cengage Learning. Powered by Cognero. Page 17
7074Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
707535. In 2018, personal casualty gains are allowed to offset personal casualty losses.  If an excess casualty loss results, it is
7076not deductible (unless attributable to a Federally-declared disaster).
7077a. True
7078b. False
7079ANSWER:   True
7080RATIONALE:   See § 165(h)
7081POINTS:   1
7082DIFFICULTY:   Easy
7083QUESTION TYPE:   True / False
7084HAS VARIABLES:   False
7085LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
7086NATIONAL STANDARDS:   United States - BUSPROG: Comprehension
7087STATE STANDARDS:   United States - AK - AICPA:FN-Reporting
7088OTHER:   Time: 2 min.
7089DATE CREATED:   6/19/2018 8:36 AM
7090DATE MODIFIED:   7/24/2018 9:48 PM
709136. Research and experimental expenditures do not include the cost of consumer surveys.
7092a. True
7093b. False
7094ANSWER:   True
7095POINTS:   1
7096DIFFICULTY:   Easy
7097QUESTION TYPE:   True / False
7098HAS VARIABLES:   False
7099LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-04 - LO: 5-04
7100NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7101STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
7102KEYWORDS:   Bloom's: Knowledge
7103OTHER:   Time: 2 min.
7104DATE CREATED:   11/15/2017 1:08 PM
7105DATE MODIFIED:   7/24/2018 8:59 PM
7106Copyright Cengage Learning. Powered by Cognero. Page 18
7107Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
710837. The cost of depreciable property is not a research and experimental expenditure.
7109a. True
7110b. False
7111ANSWER:   True
7112POINTS:   1
7113DIFFICULTY:   Easy
7114QUESTION TYPE:   True / False
7115HAS VARIABLES:   False
7116LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-04 - LO: 5-04
7117NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7118STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
7119KEYWORDS:   Bloom's: Knowledge
7120OTHER:   Time: 2 min.
7121DATE CREATED:   11/15/2017 1:08 PM
7122DATE MODIFIED:   7/24/2018 8:59 PM
712338. If an election is made to defer deduction of research expenditures, the amortization period is based on the expected
7124life of the research project if less than 60 months.
7125a. True
7126b. False
7127ANSWER:   False
7128RATIONALE:   The amortization period is not less than 60 months regardless of the life of the
7129research project.
7130POINTS:   1
7131DIFFICULTY:   Easy
7132QUESTION TYPE:   True / False
7133HAS VARIABLES:   False
7134LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-04 - LO: 5-04
7135NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7136STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7137AICPA: FN-Measurement
7138KEYWORDS:   Bloom's: Knowledge
7139OTHER:   Time: 2 min.
7140DATE CREATED:   11/15/2017 1:08 PM
7141DATE MODIFIED:   7/24/2018 8:59 PM
7142Copyright Cengage Learning. Powered by Cognero. Page 19
7143Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
714439. If a non-corporate taxpayer has an “excess business loss” for the year, it is not allowed.
7145a. True
7146b. False
7147ANSWER:   True
7148RATIONALE:   This is the rule per § 461(l)(1).
7149POINTS:   1
7150DIFFICULTY:   Easy
7151QUESTION TYPE:   True / False
7152HAS VARIABLES:   False
7153LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-11 - LO: 6-11
7154NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7155STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7156AICPA: FN-Measurement
7157KEYWORDS:   Bloom's: Knowledge
7158OTHER:   Time: 1 min.
7159DATE CREATED:   6/19/2018 8:41 AM
7160DATE MODIFIED:   7/24/2018 9:48 PM
716140. The purpose of the “excess business loss” rules are to limit the amount of non-business income (e.g., salaries, interest,
7162dividends, etc.) that can be “sheltered” from tax as a result of business losses.
7163a. True
7164b. False
7165ANSWER:   True
7166RATIONALE:   See § 461(l).
7167POINTS:   1
7168DIFFICULTY:   Easy
7169QUESTION TYPE:   True / False
7170HAS VARIABLES:   False
7171LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-11 - LO: 6-11
7172NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7173STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7174AICPA: FN-Measurement
7175KEYWORDS:   Bloom's: Knowledge
7176OTHER:   Time: 1 min.
7177DATE CREATED:   6/19/2018 8:44 AM
7178DATE MODIFIED:   7/24/2018 9:48 PM
7179Copyright Cengage Learning. Powered by Cognero. Page 20
7180Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
718141. The excess business loss rule applies to partnerships and S corporations (rather than partners and shareholders).
7182a. True
7183b. False
7184ANSWER:   False
7185RATIONALE:   See § 461(l)(1).
7186POINTS:   1
7187DIFFICULTY:   Easy
7188QUESTION TYPE:   True / False
7189HAS VARIABLES:   False
7190LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-11 - LO: 6-11
7191NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7192STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7193AICPA: FN-Measurement
7194KEYWORDS:   Bloom's: Knowledge
7195OTHER:   Time: 1 min.
7196DATE CREATED:   6/19/2018 8:46 AM
7197DATE MODIFIED:   7/24/2018 9:48 PM
719842. A net operating loss occurring in 2018 can only be carried forward (no carryback exists).
7199a. True
7200b. False
7201ANSWER:   True
7202RATIONALE:   This change was made by the TCJA of 2017.
7203POINTS:   1
7204DIFFICULTY:   Easy
7205QUESTION TYPE:   True / False
7206HAS VARIABLES:   False
7207LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-04 - LO: 6-04
7208NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7209STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7210AICPA: FN-Measurement
7211KEYWORDS:   Bloom's: Knowledge
7212OTHER:   Time: 1 min.
7213DATE CREATED:   6/19/2018 8:48 AM
7214DATE MODIFIED:   7/24/2018 9:48 PM
7215Copyright Cengage Learning. Powered by Cognero. Page 21
7216Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
721743. A net operating loss occurring in 2018 can only be carried forward and can offset no more than 80% of taxable
7218income in a subsequent year.
7219a. True
7220b. False
7221ANSWER:   True
7222RATIONALE:   This change was made by the TCJA of 2017.
7223POINTS:   1
7224DIFFICULTY:   Easy
7225QUESTION TYPE:   True / False
7226HAS VARIABLES:   False
7227LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-04 - LO: 6-04
7228NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7229STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7230AICPA: FN-Measurement
7231KEYWORDS:   Bloom's: Knowledge
7232OTHER:   Time: 1 min.
7233DATE CREATED:   6/19/2018 8:51 AM
7234DATE MODIFIED:   7/24/2018 9:48 PM
723544. A taxpayer can carry back any NOL incurred 2 years and then forward up to 20 years.
7236a. True
7237b. False
7238ANSWER:   False
7239RATIONALE:   A taxpayer can only carry the NOL forward (and the carryforward is indefinite).
7240POINTS:   1
7241DIFFICULTY:   Easy
7242QUESTION TYPE:   True / False
7243HAS VARIABLES:   False
7244LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-04 - LO: 6-04
7245NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7246STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
7247KEYWORDS:   Bloom's: Knowledge
7248OTHER:   Time: 2 min.
7249DATE CREATED:   11/15/2017 1:08 PM
7250DATE MODIFIED:   7/24/2018 9:48 PM
7251Copyright Cengage Learning. Powered by Cognero. Page 22
7252Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
725345. A taxpayer can carry an NOL forward indefinitely.
7254a. True
7255b. False
7256ANSWER:   True
7257RATIONALE:   A taxpayer can only carry an NOL forward.
7258POINTS:   1
7259DIFFICULTY:   Easy
7260QUESTION TYPE:   True / False
7261HAS VARIABLES:   False
7262LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-04 - LO: 6-04
7263NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7264STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
7265KEYWORDS:   Bloom's: Knowledge
7266OTHER:   Time: 2 min.
7267DATE CREATED:   11/15/2017 1:08 PM
7268DATE MODIFIED:   7/24/2018 9:48 PM
726946. The amount of a business loss cannot exceed the amount of the taxpayer’s NOL for the taxable year.
7270a. True
7271b. False
7272ANSWER:   False
7273RATIONALE:   Salary income could reduce the amount of the NOL. So a business loss could be more
7274than the NOL allowed.
7275POINTS:   1
7276DIFFICULTY:   Easy
7277QUESTION TYPE:   True / False
7278HAS VARIABLES:   False
7279LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-04 - LO: 6-04
7280NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7281STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7282AICPA: FN-Measurement
7283KEYWORDS:   Bloom's: Knowledge
7284OTHER:   Time: 2 min.
7285DATE CREATED:   11/15/2017 1:08 PM
7286DATE MODIFIED:   7/24/2018 9:48 PM
7287Copyright Cengage Learning. Powered by Cognero. Page 23
7288Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
728947. A theft of investment property can create or increase a net operating loss for an individual.
7290a. True
7291b. False
7292ANSWER:   True
7293POINTS:   1
7294DIFFICULTY:   Easy
7295QUESTION TYPE:   True / False
7296HAS VARIABLES:   False
7297LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-04 - LO: 6-04
7298NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7299STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7300AICPA: FN-Measurement
7301KEYWORDS:   Bloom's: Knowledge
7302OTHER:   Time: 2 min.
7303DATE CREATED:   11/15/2017 1:08 PM
7304DATE MODIFIED:   7/24/2018 9:48 PM
730548. Peggy is in the business of factoring accounts receivable. Last year, she purchased a $30,000 account receivable for
7306$25,000. This year, the account was settled for $25,000. How much loss can Peggy deduct and in which year?
7307a. $5,000 for the current year.
7308b. $5,000 for the prior year and $5,000 for the current year.
7309c. $5,000 for the prior year.
7310d. $10,000 for the current year.
7311e. None of the above.
7312ANSWER:   e
7313RATIONALE:   Peggy’s basis in the debt is $25,000. Therefore, her loss for the current year is $0
7314($25,000 – $25,000).
7315POINTS:   1
7316DIFFICULTY:   Easy
7317QUESTION TYPE:   Multiple Choice
7318HAS VARIABLES:   False
7319LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
7320NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7321STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7322AICPA: FN-Measurement
7323KEYWORDS:   Bloom's: Application
7324OTHER:   Time: 5 min.
7325DATE CREATED:   11/15/2017 1:08 PM
7326DATE MODIFIED:   7/24/2018 9:48 PM
7327Copyright Cengage Learning. Powered by Cognero. Page 24
7328Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
732949. Jed is an electrician. Jed and his wife are accrual basis taxpayers and file a joint return. Jed wired a new house for
7330Alison and billed her $15,000. Alison paid Jed $10,000 and refused to pay the remainder of the bill, claiming the fee to
7331be exorbitant. Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgement. Jed
7332was able to collect the judgement but not the remainder of the bill from Alison. What amount of loss may Jed deduct
7333in the current year?
7334a. $0
7335b. $2,000
7336c. $3,000
7337d. $5,000
7338e. None of the above
7339ANSWER:   c
7340RATIONALE:   Jed is an accrual basis taxpayer and therefore, has a basis in the $3,000 not collected.
7341POINTS:   1
7342DIFFICULTY:   Easy
7343QUESTION TYPE:   Multiple Choice
7344HAS VARIABLES:   False
7345LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
7346NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7347STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7348AICPA: FN-Measurement
7349KEYWORDS:   Bloom's: Application
7350OTHER:   Time: 5 min.
7351DATE CREATED:   11/15/2017 1:08 PM
7352DATE MODIFIED:   7/24/2018 9:48 PM
7353Copyright Cengage Learning. Powered by Cognero. Page 25
7354Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
735550. On June 2, 2017, Fred’s TV Sales sold Mark a large HD TV, on account, for $12,000. Fred’s TV Sales uses the
7356accrual method. In 2018, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred was notified
7357that he could not expect to receive any of the amount owed to him. In 2019, final settlement was made and Fred
7358received $1,000. How much bad debt loss can Fred deduct in 2019?
7359a. $0
7360b. $7,000
7361c. $8,000
7362d. $12,000
7363e. None of the above
7364ANSWER:   a
7365RATIONALE:   This debt is a business debt. Therefore, partial worthlessness can be recognized in
73662018. The loss in 2018 would be $8,000. In 2019, the account has been written down
7367to zero and hence, the collection of $1,000 would produce a $1,000 ($1,000 – $0) gain
7368rather than a loss.
7369POINTS:   1
7370DIFFICULTY:   Easy
7371QUESTION TYPE:   Multiple Choice
7372HAS VARIABLES:   False
7373LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
7374NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7375STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7376AICPA: FN-Measurement
7377KEYWORDS:   Bloom's: Application
7378OTHER:   Time: 5 min.
7379DATE CREATED:   11/15/2017 1:08 PM
7380DATE MODIFIED:   7/24/2018 9:48 PM
7381Copyright Cengage Learning. Powered by Cognero. Page 26
7382Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
738351. Mary incurred a $20,000 nonbusiness bad debt last year. She also had an $18,000 long-term capital gain last year. Her
7384taxable income for last year was $25,000. During the current year, she unexpectedly collected $12,000 on the debt.
7385How should Mary account for the collection?
7386a. $0 income
7387b. $8,000 income
7388c. $11,000 income
7389d. $12,000 income
7390e. None of the above
7391ANSWER:   d
7392RATIONALE:   Nonbusiness bad debts are treated as short-term capital losses. Hence, the $20,000
7393bad debt can offset the $18,000 of long-term capital gains. And, she can use
7394the remaining $2,000 capital loss to offset any ordinary income. Therefore, the tax
7395benefit was $20,000 and $12,000 would be recognized as income.
7396POINTS:   1
7397DIFFICULTY:   Easy
7398QUESTION TYPE:   Multiple Choice
7399HAS VARIABLES:   False
7400LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
7401NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7402STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7403AICPA: FN-Measurement
7404KEYWORDS:   Bloom's: Application
7405OTHER:   Time: 5 min.
7406DATE CREATED:   11/15/2017 1:08 PM
7407DATE MODIFIED:   7/24/2018 9:48 PM
7408Copyright Cengage Learning. Powered by Cognero. Page 27
7409Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
741052. Last year, Lucy purchased a $100,000 account receivable for $90,000. During the current year, Lucy collected
7411$97,000 on the account. What are the tax consequences to Lucy associated with the collection of the account
7412receivable? No subsequent collections are expected.
7413a. $0
7414b. $2,000 gain
7415c. $3,000 loss
7416d. $13,000 loss
7417e. None of the above
7418ANSWER:   e
7419RATIONALE:   The amount collected is $7,000 ($97,000 – $90,000) more than Lucy’s basis in the
7420receivable.
7421POINTS:   1
7422DIFFICULTY:   Easy
7423QUESTION TYPE:   Multiple Choice
7424HAS VARIABLES:   False
7425LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
7426NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7427STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7428AICPA: FN-Measurement
7429KEYWORDS:   Bloom's: Application
7430OTHER:   Time: 5 min.
7431DATE CREATED:   11/15/2017 1:08 PM
7432DATE MODIFIED:   7/24/2018 9:48 PM
7433Copyright Cengage Learning. Powered by Cognero. Page 28
7434Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
743553. Two years ago, Gina loaned Tom $50,000. Tom signed a note the terms of which called for monthly payments of
7436$2,000 plus 6% interest on the outstanding balance. Last year, when the balance owing on the loan was $18,000, Tom
7437defaulted on the note. As of the end of last year, there appeared to be no reasonable prospect of Gina recovering the
7438$18,000. As a consequence, Gina claimed the $18,000 as a nonbusiness bad debt. Last year, Gina had AGI of $50,000
7439which included $16,000 of net long-term capital gains. Gina did not itemize her deductions. During the current year,
7440Tom paid Gina $13,000 in final settlement of the loan. How should Gina account for the payment in the current year?
7441a. File an amended tax return for last year.
7442b. Report no income for the current year.
7443c. Report $2,000 of income for the current year.
7444d. Report $5,000 of income for the current year.
7445e. None of the above.
7446ANSWER:   e
7447RATIONALE:   Income should be reported based on the tax benefit rule. As all $18,000 of the
7448nonbusiness bad debt created a tax benefit ($16,000 via offsetting the net long-term
7449capital gains and the balance via a capital loss deduction), Gina should report $13,000
7450of income this year under the tax benefit rule.
7451POINTS:   1
7452DIFFICULTY:   Moderate
7453QUESTION TYPE:   Multiple Choice
7454HAS VARIABLES:   False
7455LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
7456NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7457STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7458AICPA: FN-Measurement
7459KEYWORDS:   Bloom's: Application
7460OTHER:   Time: 10 min.
7461DATE CREATED:   11/15/2017 1:08 PM
7462DATE MODIFIED:   7/24/2018 9:48 PM
7463Copyright Cengage Learning. Powered by Cognero. Page 29
7464Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
746554. Five years ago, Tom loaned his son John $20,000 to start a business. A note was executed with an interest rate of 8%,
7466which is the Federal rate. The note required monthly payments of the interest with the $20,000 due at the end of ten
7467years. John always made the interest payments until last year. During the current year, John notified his father that he
7468was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800. Tom is an accrual basis
7469taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is:
7470a. No deduction.
7471b. $3,000 deduction.
7472c. $20,000 deduction.
7473d. $21,800 deduction.
7474e. None of the above.
7475ANSWER:   b
7476RATIONALE:   This is a bona fide loan to his son; therefore, Tom is entitled to a bad debt of $21,800
7477($20,000 + $1,800; a deduction is allowed for the $1,800 of accrued interest receivable
7478because Tom is an accrual basis taxpayer). The deduction for the current year is
7479limited to $3,000, since the bad debt is classified as a short-term capital loss.
7480POINTS:   1
7481DIFFICULTY:   Easy
7482QUESTION TYPE:   Multiple Choice
7483HAS VARIABLES:   False
7484LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
7485NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7486STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7487AICPA: FN-Measurement
7488KEYWORDS:   Bloom's: Application
7489OTHER:   Time: 5 min.
7490DATE CREATED:   11/15/2017 1:08 PM
7491DATE MODIFIED:   7/24/2018 9:48 PM
7492Copyright Cengage Learning. Powered by Cognero. Page 30
7493Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
749455. Three years ago, Sharon loaned her sister $30,000 to buy a car. A note was issued for the loan with the provision for
7495monthly payments of principal and interest. Last year, Sharon purchased a car from the same dealer, Hank’s Auto. As
7496partial payment for the car, the dealer accepted the note from Sharon’s sister. At the time Sharon purchased the car,
7497the note had a balance of $18,000. During the current year, Sharon’s sister died. Hank’s Auto was notified that no
7498further payments on the note would be received. At the time of the notification, the note had a balance due of
7499$15,500. What is the amount of loss, with respect to the note, that Hank’s Auto may claim on the current year tax
7500return?
7501a. $0
7502b. $3,000
7503c. $15,500
7504d. $18,000
7505e. None of the above
7506ANSWER:   c
7507RATIONALE:   This is a business bad debt for Hank’s Auto and therefore, the loss is $15,500.
7508POINTS:   1
7509DIFFICULTY:   Easy
7510QUESTION TYPE:   Multiple Choice
7511HAS VARIABLES:   False
7512LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
7513NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7514STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7515AICPA: FN-Measurement
7516KEYWORDS:   Bloom's: Application
7517OTHER:   Time: 5 min.
7518DATE CREATED:   11/15/2017 1:08 PM
7519DATE MODIFIED:   7/24/2018 9:49 PM
7520Copyright Cengage Learning. Powered by Cognero. Page 31
7521Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
752256. On September 3, 2017, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for
7523$60,000. On December 31, 2017, the stock was worth $85,000. On August 15, 2018, Able was notified that the stock
7524was worthless. How should Able report this item on his 2018 tax return?
7525a. $85,000 capital loss.
7526b. $85,000 ordinary loss.
7527c. $50,000 ordinary loss and $35,000 capital loss.
7528d. $60,000 ordinary loss.
7529e. None of the above.
7530ANSWER:   e
7531RATIONALE:   The loss of $60,000 is classified as a $60,000 capital loss because the stock is not §
75321244 stock to Able.
7533POINTS:   1
7534DIFFICULTY:   Easy
7535QUESTION TYPE:   Multiple Choice
7536HAS VARIABLES:   False
7537LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-02 - LO: 6-02
7538NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7539STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7540AICPA: FN-Measurement
7541KEYWORDS:   Bloom's: Application
7542OTHER:   Time: 5 min.
7543DATE CREATED:   11/15/2017 1:08 PM
7544DATE MODIFIED:   7/24/2018 9:49 PM
7545Copyright Cengage Learning. Powered by Cognero. Page 32
7546Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
754757. On February 20, 2017, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On
7548May 1, 2018, the stock became worthless. During 2018, Bill also had an $8,000 loss on § 1244 small business stock
7549purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 long-term capital gain. How should
7550Bill treat these items on his 2018 tax return?  
7551a. $4,000 long-term capital loss and $9,000 short-term capital loss.
7552b. $4,000 long-term capital loss and $3,000 short-term capital loss.
7553c. $8,000 ordinary loss and $3,000 short-term capital loss.
7554d. $8,000 ordinary loss and $5,000 short-term capital loss.
7555e. $8,000 long-term capital loss and $6,000 short-term capital loss.
7556ANSWER:   c
7557RATIONALE:   Ordinary loss (small business stock) ($8,000)
7558Long-term capital gain $5,000
7559Less long-term capital loss (worthless securities) (1,000)
7560Net long-term capital gain $4,000
7561Less short-term capital loss (nonbusiness bad debt) (9,000)
7562Net short-term capital loss ($5,000)
7563Short-term capital loss limited to ($3,000)
7564POINTS:   1
7565DIFFICULTY:   Moderate
7566QUESTION TYPE:   Multiple Choice
7567HAS VARIABLES:   False
7568LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
7569EOTX.SWFT.LO: 6-02 - LO: 6-02
7570NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7571STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7572AICPA: FN-Measurement
7573KEYWORDS:   Bloom's: Application
7574OTHER:   Time: 10 min.
7575DATE CREATED:   11/15/2017 1:08 PM
7576DATE MODIFIED:   7/24/2018 9:49 PM
7577Copyright Cengage Learning. Powered by Cognero. Page 33
7578Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
757958. John files a return as a single taxpayer. In 2018, he had the following items:
7580∙ Salary of $40,000.
7581∙ Loss of $65,000 on the sale of § 1244 stock acquired two years ago.
7582∙ Interest income of $6,000.
7583Determine John’s AGI for 2018.
7584a. ($5,000).
7585b. $0.
7586c. $45,000.
7587d. $51,000.
7588e. None of the above.
7589ANSWER:   b
7590RATIONALE:   Salary $40,000
7591Interest income 6,000
7592Ordinary loss (§ 1244 ordinary loss) (50,000)
7593AGI $   –0–  
7594$15,000 ($65,000 – $50,000) is long-term capital loss. Of this amount, no loss can be
7595used because there is no ordinary income. $15,000 will be carried forward.
7596POINTS:   1
7597DIFFICULTY:   Easy
7598QUESTION TYPE:   Multiple Choice
7599HAS VARIABLES:   False
7600LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-02 - LO: 6-02
7601NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7602STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7603AICPA: FN-Measurement
7604KEYWORDS:   Bloom's: Application
7605OTHER:   Time: 5 min.
7606DATE CREATED:   11/15/2017 1:08 PM
7607DATE MODIFIED:   7/24/2018 9:49 PM
7608Copyright Cengage Learning. Powered by Cognero. Page 34
7609Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
761059. Bruce, who is single, had the following items for the current year:
7611∙ Salary of $80,000.
7612∙ Gain of $20,000 on the sale of § 1244 stock acquired two years earlier.
7613∙ Loss of $75,000 on the sale of § 1244 stock acquired three years earlier.
7614∙ Worthless stock of $15,000. The stock was acquired on February 1 of the prior year and
7615became worthless on January 15 of the current year.
7616Determine Bruce’s AGI for the current year.
7617a. $27,000
7618b. $38,000
7619c. $42,000
7620d. $47,000
7621e. None of the above
7622ANSWER:   a
7623RATIONALE:   Salary $80,000
7624§ 1244 ordinary loss (50,000)
7625Long-term capital gain $20,000
7626Long-term capital loss
7627Excess § 1244 loss ($75,000 – $50,000) $25,000
7628Worthless security 15,000 (40,000)
7629Net long-term capital loss (limited to
7630$3,000)  (3,000)
7631Adjusted gross income $27,000
7632POINTS:   1
7633DIFFICULTY:   Moderate
7634QUESTION TYPE:   Multiple Choice
7635HAS VARIABLES:   False
7636LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-02 - LO: 6-02
7637NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7638STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7639AICPA: FN-Measurement
7640KEYWORDS:   Bloom's: Application
7641OTHER:   Time: 10 min.
7642DATE CREATED:   11/15/2017 1:08 PM
7643DATE MODIFIED:   7/24/2018 9:49 PM
7644Copyright Cengage Learning. Powered by Cognero. Page 35
7645Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
764660. On July 20, 2017, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock is §
76471244 small business stock) for $24,000. On November 10, 2017, Matt purchased an additional 1,000 shares of Orange
7648Corporation stock from a friend for $150,000. On September 15, 2018, Matt sold the 4,000 shares of stock for
7649$120,000. How should Matt treat the sale of the stock on his 2018 return?
7650a. $54,000 ordinary loss.
7651b. $100,000 ordinary loss; $46,000 net capital gain.
7652c. $100,000 ordinary loss; $20,000 STCL.
7653d. $130,000 ordinary loss; $66,000 LTCG.
7654e. None of the above.
7655ANSWER:   e
7656RATIONALE:   Amount realized (1,000 shares × $30 per share) $ 30,000
7657Less: basis   (150,000)
7658Recognized loss ($120,000)
7659STCL ($120,000)
7660The stock is not § 1244 stock because it was not purchased from the corporation.
7661Amount realized (3,000 shares × $30 per share) $ 90,000
7662Less: basis (24,000)
7663Recognized gain (LTCG) $ 66,000
7664Hence, Matt has a $54,000 STCL ($120,000 – $66,000).
7665POINTS:   1
7666DIFFICULTY:   Moderate
7667QUESTION TYPE:   Multiple Choice
7668HAS VARIABLES:   False
7669LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-02 - LO: 6-02
7670NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7671STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7672AICPA: FN-Measurement
7673KEYWORDS:   Bloom's: Application
7674OTHER:   Time: 10 min.
7675DATE CREATED:   11/15/2017 1:08 PM
7676DATE MODIFIED:   7/24/2018 9:49 PM
7677Copyright Cengage Learning. Powered by Cognero. Page 36
7678Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
767961. Which of the following events would produce a deductible loss in 2018?
7680a. Erosion of personal use land due to rain or wind.
7681b. Termite infestation of a personal residence over a several year period.
7682c. Damages to personal automobile resulting from a taxpayer’s willful negligence.
7683d. A misplaced diamond ring.
7684e. None of the above.
7685ANSWER:   e
7686RATIONALE:   None of these events occurred in a Federally-declared disaster area.
7687POINTS:   1
7688DIFFICULTY:   Easy
7689QUESTION TYPE:   Multiple Choice
7690HAS VARIABLES:   False
7691LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
7692NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7693STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
7694KEYWORDS:   Bloom's: Comprehension
7695OTHER:   Time: 5 min.
7696DATE CREATED:   11/15/2017 1:08 PM
7697DATE MODIFIED:   7/24/2018 9:49 PM
7698Copyright Cengage Learning. Powered by Cognero. Page 37
7699Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
770062. In 2018, Wally had the following insured personal casualty losses (arising from one casualty in a Federally-declared
7701disaster area). Wally also had $42,000 AGI for the year before considering the casualty.
7702Fair Market Value
7703Asset Adjusted Basis Before After Insurance Recovery
7704A $9,200 $8,000  $1,000 $2,000
7705B 3,000 4,000   -0- 4,000
7706C 3,700 1,700 -0- 900
7707Wally’s casualty loss deduction is:
7708a. $1,500.
7709b. $1,600.
7710c. $4,800.
7711d. $58,000.
7712e. None of the above.
7713ANSWER:   e
7714RATIONALE:   Asset A $5,000 loss
7715Asset B $1,000 gain
7716Asset C 800 loss
7717Total $5,800 loss $1,000 gain
7718AGI before casualty $42,000
7719Ordinary gain 1,000
7720Ordinary loss (1,000)
7721AGI after casualty $42,000
7722Casualty loss ($5,800 – $1,000) $4,800
7723Less: Statutory floor (100)
7724Less: AGI limitation (10% × $42,000) (4,200)
7725Casualty loss deduction $  500
7726POINTS:   1
7727DIFFICULTY:   Moderate
7728QUESTION TYPE:   Multiple Choice
7729HAS VARIABLES:   False
7730LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
7731NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7732STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7733AICPA: FN-Measurement
7734KEYWORDS:   Bloom's: Application
7735OTHER:   Time: 10 min.
7736DATE CREATED:   11/15/2017 1:08 PM
7737DATE MODIFIED:   7/24/2018 9:49 PM
7738Copyright Cengage Learning. Powered by Cognero. Page 38
7739Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
774063. Jim had a car accident in 2018 in which his car was completely destroyed. At the time of the accident, the car had a
7741fair market value of $30,000 and an adjusted basis of $40,000. Jim used the car 100% of the time for business use.
7742Jim received an insurance recovery of 70% of the value of the car at the time of the accident. If Jim’s AGI for the
7743year is $60,000, determine his deductible loss on the car.
7744a. $900
7745b. $2,900
7746c. $3,000
7747d. $9,000
7748e. None of the above
7749ANSWER:   e
7750RATIONALE:   The car is used for business use and hence, the amount of the loss is $40,000
7751(adjusted basis) reduced by the insurance recovery ($21,000). The $19,000 loss is not
7752subject to the $100 floor per event and the 10%-of-AGI limitation. So the loss is
7753$19,000.
7754POINTS:   1
7755DIFFICULTY:   Easy
7756QUESTION TYPE:   Multiple Choice
7757HAS VARIABLES:   False
7758LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
7759NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7760STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7761AICPA: FN-Measurement
7762KEYWORDS:   Bloom's: Application
7763OTHER:   Time: 5 min.
7764DATE CREATED:   11/15/2017 1:08 PM
7765DATE MODIFIED:   7/24/2018 9:49 PM
7766Copyright Cengage Learning. Powered by Cognero. Page 39
7767Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
776864. Norm’s car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2018. The car’s
7769adjusted basis at the time of the accident was $13,000. Its fair market value was $10,000. The car was covered by a
7770$2,000 deductible insurance policy. Norm did not file a claim against the insurance policy because of a fear that
7771reporting the accident would result in a substantial increase in his insurance rates. His adjusted gross income was
7772$14,000 (before considering the loss). What is Norm’s deductible loss?
7773a. $0
7774b. $100
7775c. $500
7776d. $9,500
7777e. None of the above
7778ANSWER:   a
7779RATIONALE:   This personal casualty loss did not occur in a Federally-declared disaster area; it is not
7780allowed as a deduction.
7781POINTS:   1
7782DIFFICULTY:   Easy
7783QUESTION TYPE:   Multiple Choice
7784HAS VARIABLES:   False
7785LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
7786NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7787STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7788AICPA: FN-Measurement
7789KEYWORDS:   Bloom's: Application
7790OTHER:   Time: 5 min.
7791DATE CREATED:   11/15/2017 1:08 PM
7792DATE MODIFIED:   7/24/2018 9:49 PM
7793Copyright Cengage Learning. Powered by Cognero. Page 40
7794Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
779565. John had adjusted gross income of $60,000 in 2018. During the year his personal use summer home was damaged by
7796a fire. Pertinent data with respect to the home follows:
7797Cost basis $260,000
7798Value before the fire 400,000
7799Value after the fire 100,000
7800Insurance recovery 270,000
7801John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and
7802willful negligence. Pertinent data with respect to the car follows:
7803Cost basis $80,000
7804Value before the accident 56,000
7805Value after the accident 20,000
7806Insurance recovery 18,000
7807What is John’s itemized casualty loss deduction?
7808a. $0
7809b. $2,000
7810c. $17,000
7811d. $18,000
7812e. None of the above
7813ANSWER:   a
7814RATIONALE:   Gain on home ($260,000 – $250,000) = $10,000.
7815John has no itemized casualty loss deduction because casualty gains exceed casualty
7816losses. There is no casualty loss on the car because the accident was the result of
7817willful negligence.
7818POINTS:   1
7819DIFFICULTY:   Easy
7820QUESTION TYPE:   Multiple Choice
7821HAS VARIABLES:   False
7822LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
7823NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7824STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7825AICPA: FN-Measurement
7826KEYWORDS:   Bloom's: Application
7827OTHER:   Time: 10 min.
7828DATE CREATED:   11/15/2017 1:08 PM
7829DATE MODIFIED:   7/24/2018 9:49 PM
7830Copyright Cengage Learning. Powered by Cognero. Page 41
7831Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
783266. In 2018, Grant’s personal residence was completely destroyed by fire. Grant was insured for 100% of his actual loss,
7833and he received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of
7834$30,000. Pertinent data with respect to the residence follows:
7835Cost basis $280,000
7836Value before casualty 250,000
7837Value after casualty –0–
7838What is Grant’s allowable casualty loss deduction?
7839a. $0
7840b. $6,500
7841c. $6,900
7842d. $10,000
7843e. $80,000
7844ANSWER:   a
7845RATIONALE:   The proceeds received are $250,000. Therefore, Grant has no casualty gain or loss.
7846POINTS:   1
7847DIFFICULTY:   Easy
7848QUESTION TYPE:   Multiple Choice
7849HAS VARIABLES:   False
7850LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
7851NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7852STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7853AICPA: FN-Measurement
7854KEYWORDS:   Bloom's: Application
7855OTHER:   Time: 10 min.
7856DATE CREATED:   11/15/2017 1:08 PM
7857DATE MODIFIED:   7/24/2018 9:49 PM
785867. In 2018, Mary had the following items:
7859Salary $30,000
7860Personal use casualty gain 10,000
7861Personal use casualty loss (after $100 floor) 17,000
7862Other itemized deductions 4,000
7863Assuming that Mary files as head of household (has one dependent child), determine her taxable income for 2018.
7864a. $12,000
7865b. $12,800
7866c. $13,900
7867d. $21,900
7868e. None of the above
7869ANSWER:   a
7870Copyright Cengage Learning. Powered by Cognero. Page 42
7871Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
7872RATIONALE:   Salary $30,000
7873Personal use casualty gains in excess of personal use casualty losses
7874($10,000 – $10,000)
7875–0–
7876Adjusted gross
7877income
7878$30,000
7879Less: Deductions
7880Itemized deductions
7881Casualty loss (not allowed; not in
7882Federally-declared disaster area)
7883$-0-
7884Other itemized deductions 4,000
7885Total itemized deductions $4,000
7886Standard deduction (larger than itemized
7887deductions)
7888(18,000)
7889Taxable income $12,000
7890POINTS:   1
7891DIFFICULTY:   Moderate
7892QUESTION TYPE:   Multiple Choice
7893HAS VARIABLES:   False
7894LEARNING OBJECTIVES:  CMPV.SWFT.LO: 7-04 - LO: 7-04
7895NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7896STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7897AICPA: FN-Measurement
7898KEYWORDS:   Bloom's: Application
7899OTHER:   Time: 10 min.
7900DATE CREATED:   11/15/2017 1:08 PM
7901DATE MODIFIED:   7/24/2018 7:05 PM
7902Copyright Cengage Learning. Powered by Cognero. Page 43
7903Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
790468. In 2018, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items:
7905Loss from damage to rental property ($6,000)
7906Loss from theft of bonds (3,000)
7907Personal casualty gain 4,000
7908Personal casualty loss (after $100 floor) (9,000)
7909The personal casualties occurred in a Federally-declared disaster area. Determine the amount of Morley’s itemized
7910deduction from the losses.
7911a. $0
7912b. $2,900
7913c. $5,120
7914d. $5,600
7915e. None of the above
7916ANSWER:   d
7917RATIONALE:   AGI before casualties $30,000
7918Rental property loss (6,000)
7919Personal casualty gain $4,000
7920Personal casualty loss (4,000)       –0–
7921Adjusted gross income $24,000
7922Itemized deductions
7923Casualty loss [($9,000 – $4,000) – (10% × $24,000)] $2,600
7924Miscellaneous itemized deductions   3,000
7925Total itemized deductions $ 5,600
7926The bonds are property held for the production of income, but not attributable to rents
7927or royalties. Therefore, the loss is an itemized deduction (but not a miscellaneous
7928itemized deduction, which would be non-deductible in 2018).
7929POINTS:   1
7930DIFFICULTY:   Moderate
7931QUESTION TYPE:   Multiple Choice
7932HAS VARIABLES:   False
7933LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
7934NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7935STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7936AICPA: FN-Measurement
7937KEYWORDS:   Bloom's: Application
7938OTHER:   Time: 10 min.
7939DATE CREATED:   11/15/2017 1:08 PM
7940DATE MODIFIED:   7/24/2018 9:49 PM
7941Copyright Cengage Learning. Powered by Cognero. Page 44
7942Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
794369. Alicia was involved in an automobile accident in 2018. Her car was used 60% for business and 40% for personal use.
7944The car had originally cost $40,000. At the time of the accident, the car was worth $20,000 and Alicia had taken
7945$8,000 of depreciation. The car was totally destroyed and Alicia had let her car insurance expire. If Alicia’s AGI is
7946$50,000 (before considering the loss), determine her AGI and itemized deduction for the casualty loss.
7947a. $34,000; $-0-.
7948b. $50,000; $-0-.
7949c. $34,000; $4,500.
7950d. $26,000; $5,700. 
7951e. None of the above
7952ANSWER:   a
7953RATIONALE:   Business Use Personal Use
7954Cost $24,000 $16,000
7955Less: depreciation (8,000) –0–
7956Basis $16,000 $16,000
7957Fair market value $12,000 $ 8,000
7958Loss $16,000 $ 8,000
7959AGI before casualty loss $50,000
7960Less: Business loss (16,000)
7961AGI $34,000
7962Personal casualty loss (not allowed;
7963not in Federally-declared disaster area)
7964$-0-
7965POINTS:   1
7966DIFFICULTY:   Challenging
7967QUESTION TYPE:   Multiple Choice
7968HAS VARIABLES:   False
7969LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
7970NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
7971STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
7972AICPA: FN-Measurement
7973KEYWORDS:   Bloom's: Application
7974OTHER:   Time: 15 min.
7975DATE CREATED:   11/15/2017 1:08 PM
7976DATE MODIFIED:   7/24/2018 9:49 PM
7977Copyright Cengage Learning. Powered by Cognero. Page 45
7978Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
797970. In 2017, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah’s
7980insurance company told her that her policy did not cover the theft. Sarah’s other itemized deductions last year were
7981$2,000. She had AGI of $30,000 last year. In August of 2018, Sarah’s insurance company decided that Sarah’s policy
7982did cover the theft of the silverware and they paid Sarah $5,000. Determine the tax treatment of the $5,000 received
7983by Sarah during 2018.
7984a. None of the $5,000 should be included in gross income.
7985b. $2,900 should be included in gross income.
7986c. $5,000 should be included in gross income.
7987d. Last year’s return should be amended to include the $5,000.
7988e. None of the above.
7989ANSWER:   a
7990RATIONALE:   Sarah would have taken a casualty loss of $2,900 ($6,000 – $100 – $3,000) in 2017.
7991Therefore, the total itemized deductions would be $4,900 ($2,900 + $2,000). Because
7992this is less than the 2017 standard deduction of $6,350 for single taxpayers, Sarah
7993would have taken the standard deduction. Hence, none of the $5,000 would be
7994included in gross income under the tax benefit rule.
7995included in gross income under the tax benefit rule.
7996POINTS:   1
7997DIFFICULTY:   Moderate
7998QUESTION TYPE:   Multiple Choice
7999HAS VARIABLES:   False
8000LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
8001NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8002STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8003AICPA: FN-Measurement
8004KEYWORDS:   Bloom's: Application
8005OTHER:   Time: 5 min.
8006DATE CREATED:   11/15/2017 1:08 PM
8007DATE MODIFIED:   7/24/2018 9:49 PM
8008Copyright Cengage Learning. Powered by Cognero. Page 46
8009Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
801071. Alma is in the business of dairy farming. During the year, one of her barns was completely destroyed by fire. The
8011adjusted basis of the barn was $90,000. The fair market value of the barn before the fire was $75,000. The barn was
8012insured for 95% of its fair market value, and Alma recovered this amount under the insurance policy. Alma has
8013adjusted gross income for the year of $40,000 (before considering the casualty). Determine the amount of loss she
8014can deduct on her tax return for the current year.
8015a. $3,750
8016b. $14,650
8017c. $14,750
8018d. $18,750
8019e. None of the above
8020ANSWER:   d
8021RATIONALE:  
8022Amount of loss (adjusted basis for business property that is completely
8023destroyed) $90,000
8024Less: Insurance proceeds received ($75,000 × 95%) (71,250)
8025Business loss  $18,750
8026A business casualty loss is classified as an ordinary loss.
8027POINTS:   1
8028DIFFICULTY:   Easy
8029QUESTION TYPE:   Multiple Choice
8030HAS VARIABLES:   False
8031LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
8032NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8033STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8034AICPA: FN-Measurement
8035KEYWORDS:   Bloom's: Application
8036OTHER:   Time: 5 min.
8037DATE CREATED:   11/15/2017 1:08 PM
8038DATE MODIFIED:   7/24/2018 9:49 PM
8039Copyright Cengage Learning. Powered by Cognero. Page 47
8040Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
804172. In the current year, Juan’s home was burglarized. Juan had the following items stolen:
8042∙ Securities worth $25,000. Juan purchased the securities four years ago for $20,000.
8043∙ New tools which Juan had purchased two weeks earlier for $8,000. Juan uses the tools in
8044making repairs at an apartment house that he owns and manages.
8045∙ An antique worth $15,000. Juan inherited the antique (a family keepsake) when the property
8046was worth $11,000.
8047Juan’s homeowner’s policy had a $50,000 deductible clause for thefts. If Juan’s salary for the year is $50,000,
8048determine the amount of his itemized deductions as a result of the theft.
8049a. $3,100
8050b. $6,000
8051c. $26,100
8052d. $26,500
8053e. None of the above
8054ANSWER:   e
8055RATIONALE:   Salary $50,000
8056Less: Loss on theft of tools (8,000)
8057AGI $42,000
8058Personal use property theft loss (not deductible; not a
8059result of a Federally-declared disaster)
8060$-0-
8061Loss on securities   20,000
8062Total itemized deductions $20,000
8063POINTS:   1
8064DIFFICULTY:   Moderate
8065QUESTION TYPE:   Multiple Choice
8066HAS VARIABLES:   False
8067LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
8068NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8069STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8070AICPA: FN-Measurement
8071KEYWORDS:   Bloom's: Application
8072OTHER:   Time: 10 min.
8073DATE CREATED:   11/15/2017 1:08 PM
8074DATE MODIFIED:   7/24/2018 9:49 PM
8075Copyright Cengage Learning. Powered by Cognero. Page 48
8076Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
807773. Regarding research and experimental expenditures, which of the following are not qualified expenditures?
8078a. Costs of ordinary testing of materials.
8079b. Costs to develop a plant process.
8080c. Costs of developing a formula.
8081d. Depreciation on a building used for research.
8082e. All of the above are qualified expenditures.
8083ANSWER:   a
8084POINTS:   1
8085DIFFICULTY:   Easy
8086QUESTION TYPE:   Multiple Choice
8087HAS VARIABLES:   False
8088LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-04 - LO: 5-04
8089NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8090STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
8091KEYWORDS:   Bloom's: Comprehension
8092OTHER:   Time: 5 min.
8093DATE CREATED:   11/15/2017 1:08 PM
8094DATE MODIFIED:   7/24/2018 8:59 PM
8095Copyright Cengage Learning. Powered by Cognero. Page 49
8096Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
809774. Blue Corporation incurred the following expenses in connection with the development of a new product:
8098Salaries $100,000
8099Utilities 18,000
8100Materials 25,000
8101Advertising 5,000
8102Market survey 3,000
8103Depreciation on machine 9,000
8104Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental expenditures
8105over 60 months, determine the amount of the deduction for research and experimental expenditures for the current
8106year.
8107a. $0
8108b. $118,000
8109c. $143,000
8110d. $152,000
8111e. $160,000
8112ANSWER:   a
8113RATIONALE:   The qualified research expenditures are $152,000 ($100,000 + $18,000 + $25,000 +
8114$9,000). Under the election to amortize, the monthly amortization is $2,533 ($152,000
8115÷ 60 months). However, since sales will not start until next year, there is no deduction
8116for the current year.
8117POINTS:   1
8118DIFFICULTY:   Easy
8119QUESTION TYPE:   Multiple Choice
8120HAS VARIABLES:   False
8121LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-04 - LO: 5-04
8122NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8123STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8124AICPA: FN-Measurement
8125KEYWORDS:   Bloom's: Application
8126OTHER:   Time: 5 min.
8127DATE CREATED:   11/15/2017 1:08 PM
8128DATE MODIFIED:   7/24/2018 8:59 PM
8129Copyright Cengage Learning. Powered by Cognero. Page 50
8130Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
813175. Last year, Green Corporation incurred the following expenditures in the development of a new plant process:
8132Salaries $250,000
8133Materials 90,000
8134Utilities 20,000
8135Quality control testing costs 40,000
8136Management study costs 5,000
8137Depreciation of equipment 18,000
8138During the current year, benefits from the project began being realized in May. If Green Corporation elects a 60
8139month deferral and amortization period, determine the amount of the deduction for the current year.
8140a. $48,000
8141b. $50,400
8142c. $54,667
8143d. $57,067
8144e. None of the above
8145ANSWER:   b
8146RATIONALE:   Salary $250,000
8147Materials 90,000
8148Utilities 20,000
8149Depreciation    18,000
8150Research and experimental costs $378,000
8151Current deduction $50,400 [($378,000 ÷ 60) × 8 months] Neither the quality control
8152testing costs nor the management study costs are research and experimental
8153expenditures.
8154POINTS:   1
8155DIFFICULTY:   Moderate
8156QUESTION TYPE:   Multiple Choice
8157HAS VARIABLES:   False
8158LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-04 - LO: 5-04
8159NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8160STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8161AICPA: FN-Measurement
8162KEYWORDS:   Bloom's: Application
8163OTHER:   Time: 10 min.
8164DATE CREATED:   11/15/2017 1:08 PM
8165DATE MODIFIED:   7/24/2018 8:59 PM
8166Copyright Cengage Learning. Powered by Cognero. Page 51
8167Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
816876. In 2018, Cindy is married and files a joint return.  She operates a sole proprietorship in which she materially
8169participates.  Her proprietorship generates gross income of $225,000 and deductions of $525,000, resulting in a loss of
8170$300,000.  What is Cindy’s excess business loss for the year?
8171a. $-0-.
8172b. $30,000.
8173c. $250,000.
8174d. $280,000.
8175e. None of the above.
8176ANSWER:   a
8177RATIONALE:   Cindy does not have an excess business loss due to the threshold amount that applies
8178to married taxpayers.
8179            Aggregate business deductions $525,000 
8180Less:    Aggregate business gross income and gains (225,000)
8181Less:    Threshold amount (500,000)
8182                        Excess business loss $  None  x
8183As a result, Cindy’s $300,000 sole proprietorship loss is fully deductible and can be
8184used to offset non-business income (e.g., her spouse’s wages or their interest and
8185dividend income).
8186POINTS:   1
8187DIFFICULTY:   Moderate
8188QUESTION TYPE:   Multiple Choice
8189HAS VARIABLES:   False
8190LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-11 - LO: 6-11
8191NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8192STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8193AICPA: FN-Measurement
8194KEYWORDS:   Bloom's: Application
8195OTHER:   Time: 7 min.
8196DATE CREATED:   6/19/2018 9:29 AM
8197DATE MODIFIED:   7/24/2018 9:49 PM
8198Copyright Cengage Learning. Powered by Cognero. Page 52
8199Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
820077. In 2018, Theo, a single taxpayer, operates a sole proprietorship in which he materially participates.  His proprietorship
8201generates gross income of $320,000 and deductions of $600,000, resulting is a loss of $280,000.  The large deductions
8202are due to the acquisition of equipment and the use of immediate expense and additional first-year depreciation to
8203deduct all of the acquisitions.  What is Theo’s excess business loss for the year?
8204a. $-0-.
8205b. $30,000.
8206c. $250,000.
8207d. $280,000
8208e. None of the above.
8209ANSWER:   b
8210RATIONALE:   Theo’s excess business loss is $30,000 computed as follows:
8211             Aggregate business deductions    $600,000
8212Less:    Aggregate business gross income and gains         (320,000)
8213Less:    Threshold amount (250,000)
8214                           Excess business loss $ 30,000
8215So, of Theo’s $280,000 proprietorship loss, $250,000 can be used to offset nonbusiness
8216income.  The $30,000 excess business loss is treated as part of Theo’s net
8217operating loss carryfoward in subsequent years.
8218POINTS:   1
8219DIFFICULTY:   Moderate
8220QUESTION TYPE:   Multiple Choice
8221HAS VARIABLES:   False
8222LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-11 - LO: 6-11
8223NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8224STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8225AICPA: FN-Measurement
8226KEYWORDS:   Bloom's: Application
8227OTHER:   Time: 7 min.
8228DATE CREATED:   6/19/2018 9:24 AM
8229DATE MODIFIED:   7/24/2018 9:49 PM
8230Copyright Cengage Learning. Powered by Cognero. Page 53
8231Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
823278. Tonya had the following items for last year:
8233Salary $40,000
8234Short-term capital gain 12,000
8235Nonbusiness bad debt (23,000)
8236Long-term capital gain 8,000
8237For the current year, Tonya had the following items:
8238Salary $45,000
8239Collection of last year’s bad debt 23,000
8240Determine Tonya’s adjusted gross income for the current year.
8241ANSWER:   Salary $45,000
8242Income under tax benefit rule 23,000
8243AGI $68,000
8244Income on collection of nonbusiness bad debt (classified as
8245STCL) to the extent of tax benefit in the prior year ($20,000 offset
8246against capital gain and $3,000 offset against ordinary income).
8247$23,000
8248POINTS:   1
8249DIFFICULTY:   Moderate
8250QUESTION TYPE:   Subjective Short Answer
8251HAS VARIABLES:   False
8252LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
8253NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8254STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8255AICPA: FN-Measurement
8256KEYWORDS:   Bloom's: Application
8257OTHER:   Time: 10 min.
8258DATE CREATED:   11/15/2017 1:09 PM
8259DATE MODIFIED:   7/24/2018 9:49 PM
8260Copyright Cengage Learning. Powered by Cognero. Page 54
8261Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
826279. Maria, who is single, had the following items for 2018:
8263Salary $80,000
8264Loss on sale of § 1244 small business stock acquired 3 years ago (60,000)
8265Stock acquired 2 years ago became worthless during the year (5,000)
8266Long-term capital gain 25,000
8267Nonbusiness bad debt (15,000)
8268Federal disaster area casualty loss on property held 6 months (6,000)
8269Federal disaster area casualty gain on property held 4 years 4,000
8270Determine Maria’s adjusted gross income for 2018.
8271ANSWER:   Salary $80,000
8272Ordinary loss from § 1244 stock (50,000)
8273Capital gains and losses
8274Long-term capital gain ($25,000 + $4,000) $29,000
8275Less: Long-term capital loss
8276[($60,000 – $50,000) + $5,000] (15,000)
8277Net long-term capital gain $14,000
8278Less: Short-term capital loss ($15,000 + $4,000*) (19,000)
8279Net capital loss (limited to $3,000) (5,000)  (3,000)
8280Adjusted gross income $27,000
8281*Casualty losses to the extent of casualty gains.
8282POINTS:   1
8283DIFFICULTY:   Moderate
8284QUESTION TYPE:   Subjective Short Answer
8285HAS VARIABLES:   False
8286LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
8287EOTX.SWFT.LO: 6-02 - LO: 6-02
8288EOTX.SWFT.LO: 6-03 - LO: 6-03
8289NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8290STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8291AICPA: FN-Measurement
8292KEYWORDS:   Bloom's: Application
8293OTHER:   Time: 10 min.
8294DATE CREATED:   11/15/2017 1:09 PM
8295DATE MODIFIED:   7/24/2018 9:49 PM
8296Copyright Cengage Learning. Powered by Cognero. Page 55
8297Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
829880. Mike, single, age 31, had the following items for 2018:
8299Salary $50,000
8300Nonbusiness bad debt (6,000)
8301Casualty
8302Asset A (personal use property held for two years)—gain 3,000
8303Dividends 2,000
8304Interest expense on personal residence 10,000
8305Compute Mike’s taxable income for 2018.
8306ANSWER:   Salary $50,000
8307Dividends 2,000
8308Casualty gain (long-term capital gain) $3,000
8309Nonbusiness bad debt (short-term capital loss) (6,000)
8310Net short-term capital
8311loss
8312(3,000)
8313Adjusted gross income $49,000
8314Less: Standard deduction (12,000)
8315Taxable income $37,000
8316POINTS:   1
8317DIFFICULTY:   Moderate
8318QUESTION TYPE:   Subjective Short Answer
8319HAS VARIABLES:   False
8320LEARNING OBJECTIVES:  CMPV.SWFT.LO: 7-01 - LO: 7-01
8321CMPV.SWFT.LO: 7-04 - LO: 7-04
8322NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8323STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8324AICPA: FN-Measurement
8325KEYWORDS:   Bloom's: Application
8326OTHER:   Time: 15 min.
8327DATE CREATED:   11/15/2017 1:09 PM
8328DATE MODIFIED:   7/24/2018 7:05 PM
8329Copyright Cengage Learning. Powered by Cognero. Page 56
8330Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
833181. Jose, single, had the following items for 2018:
8332Salary $44,000
8333§ 1244 loss on stock acquired 3 years ago (70,000)
8334§ 1244 gain on stock acquired 10 months ago 26,000
8335Worthless security purchased in June of last year (4,000)
8336Nonbusiness bad debt (7,000)
8337Interest income 8,000
8338Compute Jose’s adjusted gross income for 2018.
8339ANSWER:   Salary $44,000
8340Ordinary loss from § 1244 stock (50,000)
8341Interest income 8,000
8342Short-term capital gain $26,000
8343Short-term capital loss (7,000)
8344Net short-term capital gain $19,000 
8345Long-term loss from § 1244 stock
8346   ($70,000 – $50,000) ($20,000)
8347Worthless security    (4,000)  (24,000)
8348Net long-term capital loss ($ 5,000)
8349Limit (only $2,000 is needed to reduce AGI
8350to zero) (2,000)
8351Adjusted gross income $ –0– 
8352POINTS:   1
8353DIFFICULTY:   Moderate
8354QUESTION TYPE:   Subjective Short Answer
8355HAS VARIABLES:   False
8356LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
8357EOTX.SWFT.LO: 6-02 - LO: 6-02
8358EOTX.SWFT.LO: 6-03 - LO: 6-03
8359NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8360STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8361AICPA: FN-Measurement
8362KEYWORDS:   Bloom's: Application
8363OTHER:   Time: 10 min.
8364DATE CREATED:   11/15/2017 1:09 PM
8365DATE MODIFIED:   7/24/2018 9:49 PM
836682. Julie, who is single, has the following items for 2018:
8367∙ Salary—$100,000.
8368Copyright Cengage Learning. Powered by Cognero. Page 57
8369Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
8370∙
8371A hurricane completely destroyed Julie’s duplex during the current year. Julie lived in
8372one-half of the duplex and rented out the other half. Julie paid $400,000 for the duplex
8373and has taken $80,000 of cost recovery on the rental portion of the duplex. The duplex
8374was worth $420,000 at the time of the destruction. Julie’s insurance policy paid her 90%
8375of the fair market value of the duplex. After the storm, her county was declared a
8376Federal disaster area.
8377∙ Household items destroyed in the hurricane had a basis of $15,000 and a fair market
8378value of $8,500. There was no insurance recovery on the household items.
8379∙
8380Julie purchased a painting three years ago for $4,000. At the time of the hurricane, the
8381painting was worth $10,000. Julie purchased the painting as an investment with the intent
8382that she would sell it when its value exceeded $12,000. There was no insurance recovery
8383on the painting.
8384∙ Julie had an automobile accident in the current year. Julie used the car 100% for personal
8385purposes. The car cost $37,000 and had a decline in FMV as a result of the accident of
8386$5,000. The car was insured, but the policy had a $2,000 deductible clause. Julie chose
8387not to file a claim for the damage.
8388∙ Julie owned a computer that she used 100% for business. The computer was also
8389completely destroyed in the hurricane. It had a basis of $6,000 and a FMV of $4,000 at
8390the time it was destroyed. Julie was not reimbursed by her employer for the loss on the
8391computer.
8392∙ Home mortgage interest—$10,000.
8393Determine the amount of Julie’s taxable income for 2018.
8394ANSWER:   Salary $100,000
8395Plus: Gain on rental duplex
8396Recovery [($420,000 × 90%) × 50%] $189,000
8397Cost (50% × 400,000) $200,000
8398Less: cost recovery (80,000)
8399Adjusted basis (120,000)
8400Casualty gain 69,000
8401AGI $169,000
8402Less: Itemized deductions
8403Casualty loss
8404Dwelling
8405Basis ($400,000 × 50%) $200,000
8406Recovery (189,000)
8407Copyright Cengage Learning. Powered by Cognero. Page 58
8408Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
8409Loss $ 11,000
8410Household items    8,500
8411Total loss $ 19,500
8412Less: $100 floor    (100) $ 19,400
8413Automobile (no casualty loss allowed;
8414not in a Federal disaster area)
8415Less: 10% × $169,000 (AGI) (16,900)
8416Deductible casualty loss $ 2,500
8417Home mortgage interest 10,000
8418Other miscellaneous
8419itemized deduction—painting 4,000
8420Computer loss (a miscellaneous
8421itemized deduction; not allowed in 2018)    -0-
8422Total itemized deductions (16,500)
8423Taxable income $152,500
8424POINTS:   1
8425DIFFICULTY:   Challenging
8426QUESTION TYPE:   Subjective Short Answer
8427HAS VARIABLES:   False
8428LEARNING OBJECTIVES:  CMPV.SWFT.LO: 7-03 - LO: 7-03
8429CMPV.SWFT.LO: 7-04 - LO: 7-04
8430NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8431STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8432AICPA: FN-Measurement
8433KEYWORDS:   Bloom's: Application
8434OTHER:   Time: 15 min.
8435DATE CREATED:   11/15/2017 1:09 PM
8436DATE MODIFIED:   7/24/2018 7:05 PM
8437Copyright Cengage Learning. Powered by Cognero. Page 59
8438Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
843983. Juanita, single and age 43, had the following items for 2018:
8440Salary $60,000
8441Interest income 6,000
8442Casualty loss on business property (15,000)
8443Casualty loss on rental property (5,000)
8444Loss on theft of securities (8,000)
8445Personal casualty gains 9,000
8446Personal casualty loss (after $100 floor) (13,000)
8447Other itemized deductions (9,000)
8448Compute Juanita’s taxable income for 2018.
8449ANSWER:   Salary $60,000
8450Interest income 6,000
8451Casualty loss on business property (15,000)
8452Casualty loss on rental property (5,000)
8453Personal casualty gains $9,000
8454Personal casualty loss (9,000)     –0– 
8455AGI $46,000
8456Less:
8457Itemized deductions
8458Theft of securities (8,000)
8459Other itemized deductions (9,000)
8460Taxable income $29,000
8461POINTS:   1
8462DIFFICULTY:   Challenging
8463QUESTION TYPE:   Subjective Short Answer
8464HAS VARIABLES:   False
8465LEARNING OBJECTIVES:  CMPV.SWFT.LO: 7-04 - LO: 7-04
8466NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8467STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8468AICPA: FN-Measurement
8469KEYWORDS:   Bloom's: Application
8470OTHER:   Time: 15 min.
8471DATE CREATED:   11/15/2017 1:09 PM
8472DATE MODIFIED:   7/24/2018 7:05 PM
8473Copyright Cengage Learning. Powered by Cognero. Page 60
8474Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
847584. While Susan was on vacation during the current year, someone broke into her home and stole the following items:
8476∙ A computer used 60% in connection with Susan’s employment as an employee and 40%
8477for her personal use. The cost of the computer was $8,000. Depreciation of $3,000 had
8478been taken on the computer and it had a fair market value of $4,000 at the time of the
8479theft.
8480∙ A painting, which Susan purchased as an investment for $10,000, had a fair market value
8481of $17,000.
8482∙ Silverware purchased for $3,000 had a fair market value of $5,000.
8483∙ Cash of $30,000.
8484Susan’s adjusted gross income, before considering any of the above items, is $60,000.
8485Determine the total amount of Susan’s itemized deductions resulting from the theft.
8486ANSWER:  
8487Painting loss (investment property) $10,000
8488Casualty losses (not allowed; not a
8489result of a Federally-decalred disaster)
8490Total itemized deductions $10,000
8491POINTS:   1
8492DIFFICULTY:   Challenging
8493QUESTION TYPE:   Subjective Short Answer
8494HAS VARIABLES:   False
8495LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
8496NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8497STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8498AICPA: FN-Measurement
8499KEYWORDS:   Bloom's: Application
8500OTHER:   Time: 15 min.
8501DATE CREATED:   11/15/2017 1:09 PM
8502DATE MODIFIED:   7/24/2018 9:49 PM
8503Copyright Cengage Learning. Powered by Cognero. Page 61
8504Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
850585. Neal, single and age 37, has the following items for 2018:
8506Salary $50,000
8507Casualty loss on business property (8,000)
8508Casualty loss on rental property (5,000)
8509Federal disaster area personal casualty gains 3,000
8510Federal disaster area personal casualty losses
8511(after $100 floor)
8512(12,000)
8513Interest expense and taxes on personal
8514residence
8515(11,700)
8516Determine Neal’s taxable income for 2018.
8517ANSWER:   Salary $50,000
8518Casualty loss on business property (8,000)
8519Casualty loss on rental property (5,000)
8520Personal casualty gains $3,000
8521Personal casualty losses (3,000) –0– 
8522AGI $37,000
8523Less: Itemized deductions
8524Casualty loss ($12,000 – $3,000) $9,000
8525Less: 10% × $37,000 (AGI) (3,700)
8526Casualty loss deduction $5,300
8527Interest and taxes 11,700 (17,000)
8528Taxable income $20,000
8529POINTS:   1
8530DIFFICULTY:   Challenging
8531QUESTION TYPE:   Subjective Short Answer
8532HAS VARIABLES:   False
8533LEARNING OBJECTIVES:  CMPV.SWFT.LO: 7-04 - LO: 7-04
8534NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8535STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8536AICPA: FN-Measurement
8537KEYWORDS:   Bloom's: Application
8538OTHER:   Time: 10 min.
8539DATE CREATED:   11/15/2017 1:09 PM
8540DATE MODIFIED:   7/24/2018 7:05 PM
8541Copyright Cengage Learning. Powered by Cognero. Page 62
8542Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
854386. Gary, who is an employee of Red Corporation, has the following items for 2018:
8544Salary $80,000
8545Federal disaster area personal casualty gain 7,000
8546Federal disaster area personal casualty loss from one event (before
8547the $100 floor)
854815,000
8549Loss on rental property 6,000
8550Theft of bonds 18,000
8551Unreimbursed loss from theft of a computer used 100% for business 4,000
8552Determine Gary’s AGI and total amount of itemized deductions for 2018.
8553ANSWER:  
8554Salary $80,000
8555Loss on rental property (6,000)
8556Personal casualty gain 7,000
8557Personal casualty loss (7,000)
8558Adjusted gross income $74,000
8559Personal casualty loss ($15,000 – $7,000) $ 8,000
8560Less: $100 floor (100)
856110% × $74,000 (AGI)  (7,400)
8562$ 500
8563Theft of bonds 18,000
8564Theft of computer (not allowed) -0-
8565Total itemized deductions $18,500
8566POINTS:   1
8567DIFFICULTY:   Moderate
8568QUESTION TYPE:   Subjective Short Answer
8569HAS VARIABLES:   False
8570LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
8571NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8572STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8573AICPA: FN-Measurement
8574KEYWORDS:   Bloom's: Application
8575OTHER:   Time: 10 min.
8576DATE CREATED:   11/15/2017 1:09 PM
8577DATE MODIFIED:   7/24/2018 9:49 PM
8578Copyright Cengage Learning. Powered by Cognero. Page 63
8579Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
858087. Susan has the following items for 2018:
8581∙ Loss on rental property caused by termites—$110,000. Insurance covered 80% of the loss.
8582∙ Loss on personal use automobile—$10,000. The insurance policy does not cover the first $3,000 of loss. Susan
8583decided not to file a claim for the loss.
8584∙ Loss on a painting stolen from Susan’s house. Susan purchased the painting three years ago as an investment. She
8585paid $40,000 for the painting and it was worth $35,000 at the time of the theft. The painting was insured for the fair
8586market value.
8587∙ Salary—$40,000.
8588Determine Susan’s AGI and total amount of itemized deductions for 2018.
8589ANSWER:  
8590Salary $40,000
8591Loss on rental property [(80% × $110,000) – $110,000] (22,000)
8592Adjusted gross income $18,000
8593Casualty loss (not allowed; not a result of a disaster) $-0-
8594Loss on stolen painting ($40,000 – $35,000)   5,000
8595Total itemized deductions $5,000*
8596* Susan would use the single standard deduction of $12,000.
8597POINTS:   1
8598DIFFICULTY:   Challenging
8599QUESTION TYPE:   Subjective Short Answer
8600HAS VARIABLES:   False
8601LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
8602NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8603STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8604AICPA: FN-Measurement
8605KEYWORDS:   Bloom's: Application
8606OTHER:   Time: 15 min.
8607DATE CREATED:   11/15/2017 1:09 PM
8608DATE MODIFIED:   7/24/2018 9:49 PM
8609Copyright Cengage Learning. Powered by Cognero. Page 64
8610Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
861188. Roger, an individual, owns a proprietorship called Green Thing. For the year 2018, Roger has the following items:
8612∙ Business income—$200,000.
8613∙ Business expense—$150,000.
8614∙ Loss on a completely destroyed business machine. The machine had an adjusted basis of $25,000 and a fair market
8615value of $20,000.
8616∙ Loss on a business truck. The truck had an adjusted basis of $8,000. The repairs to fix the truck cost $10,000.
8617Determine Roger’s adjusted gross income for 2018.
8618ANSWER:   Business income $200,000
8619Business expense (150,000)
8620Loss on business machine (25,000)
8621Loss on business truck   (8,000)
8622Adjusted gross income $ 17,000
8623POINTS:   1
8624DIFFICULTY:   Easy
8625QUESTION TYPE:   Subjective Short Answer
8626HAS VARIABLES:   False
8627LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
8628NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8629STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8630AICPA: FN-Measurement
8631KEYWORDS:   Bloom's: Application
8632OTHER:   Time: 5 min.
8633DATE CREATED:   11/15/2017 1:09 PM
8634DATE MODIFIED:   7/24/2018 9:49 PM
863589. In 2017, Robin Corporation incurred the following expenditures in connection with the development of a new product:
8636Salaries $100,000
8637Supplies 40,000
8638Market survey 10,000
8639Depreciation 25,000
8640In 2018, Robin incurred the following additional expenditures in connection with the development of the product:
8641Salaries $125,000
8642Supplies 50,000
8643Depreciation 30,000
8644Advertising 10,000
8645In October 2018, Robin began receiving benefits from the project. If Robin elects to expense research and
8646experimental expenditures, determine the amount and year of the deduction.
8647ANSWER:   Deductibility of research and experimental expenditures is permitted in the year of
8648Copyright Cengage Learning. Powered by Cognero. Page 65
8649Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
8650incurrence.
86512017
8652Salaries $100,000
8653Supplies 40,000
8654Depreciation    25,000
8655Deductible expenses $165,000
8656The market survey is not a research and experimental expenditure.
86572018
8658Salaries $125,000
8659Supplies 50,000
8660Depreciation    30,000
8661Deductible expenses $205,000
8662The advertising is not a research and experimental expenditure
8663POINTS:   1
8664DIFFICULTY:   Easy
8665QUESTION TYPE:   Subjective Short Answer
8666HAS VARIABLES:   False
8667LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-04 - LO: 5-04
8668NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8669STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8670AICPA: FN-Measurement
8671KEYWORDS:   Bloom's: Application
8672OTHER:   Time: 10 min.
8673DATE CREATED:   11/15/2017 1:09 PM
8674DATE MODIFIED:   7/24/2018 8:59 PM
8675Copyright Cengage Learning. Powered by Cognero. Page 66
8676Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
867790. In 2018, Tan Corporation incurred the following expenditures in connection with the development of a new product:
8678Salaries $ 60,000
8679Supplies 20,000
8680Depreciation on research equipment 10,000
8681Testing for quality control 5,000
8682Advertising 8,000
8683Overhead allocated to research 2,000
8684Tan began selling the product in November 2018. If Tan elects to amortize research and experimental expenditures,
8685determine Tan’s deduction for 2018.
8686ANSWER:   Salaries $60,000
8687Supplies 20,000
8688Depreciation 10,000
8689Overhead allocated to research    2,000
8690Total qualifying research expenditures $92,000
8691[($92,000/60 months) × 2 months] = $3,067
8692POINTS:   1
8693DIFFICULTY:   Easy
8694QUESTION TYPE:   Subjective Short Answer
8695HAS VARIABLES:   False
8696LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-04 - LO: 5-04
8697NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8698STATE STANDARDS:   United States - AK - AICPA: FN-Measurement -
8699AICPA: FN-Measurement
8700KEYWORDS:   Bloom's: Application
8701OTHER:   Time: 10 min.
8702DATE CREATED:   11/15/2017 1:09 PM
8703DATE MODIFIED:   7/24/2018 8:59 PM
8704Copyright Cengage Learning. Powered by Cognero. Page 67
8705Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
870691. Identify the factors that should be considered in determining whether a transaction is a business bad debt or a
8707nonbusiness bad debt.
8708ANSWER:   Factors to be considered in determining whether a transaction is a business bad debt
8709or a nonbusiness bad debt are as follows:
8710∙ Was the debt related to the taxpayer’s business when it was created?
8711∙ Was the debt related to the taxpayer’s business when it became worthless?
8712∙ Was the lender engaged in the business of lending money?
8713∙ Was there a proximate relationship between the creation of the debt and the
8714lender’s business?
8715POINTS:   1
8716DIFFICULTY:   Easy
8717QUESTION TYPE:   Essay
8718HAS VARIABLES:   False
8719LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
8720NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8721STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
8722KEYWORDS:   Bloom's: Comprehension
8723OTHER:   Time: 5 min.
8724DATE CREATED:   11/15/2017 1:09 PM
8725DATE MODIFIED:   7/24/2018 9:49 PM
872692. Discuss the tax treatment of non-reimbursed losses of an employee in connection with a trade or business.
8727ANSWER:   The loss is a miscellaneous itemized deduction (and not deductible from 2018 through
87282025).
8729POINTS:   1
8730DIFFICULTY:   Easy
8731QUESTION TYPE:   Essay
8732HAS VARIABLES:   False
8733LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-01 - LO: 6-01
8734NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8735STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
8736KEYWORDS:   Bloom's: Comprehension
8737OTHER:   Time: 5 min.
8738DATE CREATED:   11/15/2017 1:09 PM
8739DATE MODIFIED:   7/24/2018 9:49 PM
8740Copyright Cengage Learning. Powered by Cognero. Page 68
8741Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
874293. A taxpayer who sustains a casualty loss in an area designated by the President of the United States as a disaster area
8743may take the loss in the year in which the loss occurred or elect to take the loss in the previous year. Identify factors
8744that should be considered in deciding in which year to take the loss.
8745ANSWER:   Factors that should be considered include:
8746∙ The marginal tax rates of the two different years.
8747∙ The adjusted gross incomes of the two different years.
8748∙ Other casualty losses in the two different years.
8749∙ The benefits of a faster refund (or reduction of tax).
8750POINTS:   1
8751DIFFICULTY:   Easy
8752QUESTION TYPE:   Essay
8753HAS VARIABLES:   False
8754LEARNING OBJECTIVES:  EOTX.SWFT.LO: 6-03 - LO: 6-03
8755NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8756STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
8757KEYWORDS:   Bloom's: Comprehension
8758OTHER:   Time: 5 min.
8759DATE CREATED:   11/15/2017 1:09 PM
8760DATE MODIFIED:   7/24/2018 9:49 PM
8761Copyright Cengage Learning. Powered by Cognero. Page 69
8762Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
876394. What are the three methods of handling research and experimental expenditures incurred in a trade or business?
8764Under what circumstances would you choose each?
8765ANSWER:   The following methods are permitted:
8766∙ The expense method, where the expenditures are written off immediately, is
8767attractive where the taxpayer is currently in a high tax bracket and has sufficient
8768other income to offset the deductions.
8769∙ Deferral and amortization of expenditures over a period of not less than 60 months
8770is generally chosen when the total deduction is not wanted immediately because
8771future income is expected to be available to offset the deduction.
8772∙ The capitalization method allows no deduction until the project is abandoned or
8773becomes worthless. Usually taxpayers do not choose this method, since the tax
8774benefit is deferred for an indefinite period.
8775POINTS:   1
8776DIFFICULTY:   Easy
8777QUESTION TYPE:   Essay
8778HAS VARIABLES:   False
8779LEARNING OBJECTIVES:  EOTX.SWFT.LO: 5-04 - LO: 5-04
8780NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8781STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
8782KEYWORDS:   Bloom's: Comprehension
8783OTHER:   Time: 10 min.
8784DATE CREATED:   11/15/2017 1:09 PM
8785DATE MODIFIED:   7/24/2018 9:00 PM
8786Copyright Cengage Learning. Powered by Cognero. Page 70
8787Chapter 07: Deductions and Losses: Certain Business Expenses and Losses
878895. Sally is an employee of Blue Corporation. Last year, she purchased a very expensive computer with her own funds.
8789She used the computer 100% for business purposes. During the current year, the computer was completely destroyed
8790in a fire. Blue Corporation did not reimburse her for her loss. Discuss whether Sally’s loss will create or increase
8791Sally’s net operating loss.
8792ANSWER:   As the loss did not occur in a Federally-declared disaster area, the loss is not
8793deductible.  Even if it were deductible, it would be classified as an employee business
8794expense (and a miscellaneous itemized deduction).  Miscellaneous itemized deductions
8795are not allowed from 2018 through 2025.
8796POINTS:   1
8797DIFFICULTY:   Easy
8798QUESTION TYPE:   Essay
8799HAS VARIABLES:   False
8800LEARNING OBJECTIVES:  CMPV.SWFT.LO: 7-03 - LO: 7-03
8801CMPV.SWFT.LO: 7-07 - LO: 7-07
8802NATIONAL STANDARDS:   United States - BUSPORG: Comprehension - BUSPORG:Comprehension
8803STATE STANDARDS:   United States - AK - AICPA: FN-Reporting
8804KEYWORDS:   Bloom's: Comprehension
8805OTHER:   Time: 5 min.
8806DATE CREATED:   11/15/2017 1:09 PM
8807DATE MODIFIED:   7/24/2018 7:05 PM
8808Copyright Cengage Learning. Powered by Cognero. Page 71
8809Chapter 07: Deductions and Losses: Certain Business Expenses and Losses