Exam #1 Fall 2014

Chapters 5-8

Examination instructions:

1) The examination is intended to test your knowledge of the topic covered in chapters 5 through 8 of the course text.

2) Answer all questions on the examination paper in the spaces provided.

3) Read the questions carefully. If you need to make any assumptions you must state them in order to receive credit.

4) This exam consists of the following:

a) 20 true and false questions worth 1 point each for a total of 20 points.

b) 8 critical thinking problems worth 10 points each for a total of 80 points.

**5). In order to receive partial credit on the problems you will need to show your calculations,

True and False

1. Unemployment compensation is always included in gross income.

2. Social security benefits are always included in gross income.

3. An example of a qualified benefit is an employer-subsidized cafeteria.

4. An annuity is a contract that pays a fixed income at set regular intervals for a specific period of time.

5. Amounts received under worker’s compensation as compensation for personal injuries are excludable from gross income.

6. Hobby expenditures are deductible to the extent of hobby gross income.

7. Job-seeking expenses are not deductible if an individual finds a job in a new trade or business.

8. Advertising which is intended to influence public reaction to proposed legislation normally is not a deductible business expense for tax purposes.

9. Full worthlessness of a debt must be proven in order to claim a business bad debt deduction.

10. Personal expenses are only deductible if the tax laws specifically state that they are.

11. The passive loss limitations apply to individuals, closely held corporations, and personal service corporations, but not to estates and trusts.

12. An individual is allowed to avoid the passive loss limitations for all rental real estate activities in which the individual actively participates.

13. In determining whether a taxpayer materially participates, the participation of a taxpayer’s spouse will be taken into account.

14. A business incurring a net operating loss in a taxable year can carry the loss back two years and forward 15 years.

15. Suspended passive losses are carried forward for a maximum time period of 20 years.

16. Itemized deductions only reduce taxable income if the taxpayer’s itemized deductions exceed the standard deduction amount.

17. Vitamin pills taken daily for general health are a qualified medical expense.

18. Premiums paid for insurance policies providing reimbursement for the accidental loss of life, limb or sight are deductible as medical expenses.

19. An ad valorem tax is a tax in proportion to the value of personal property.

20. Points paid on the loan for the purchase of a new home are not deductible on an individual’s tax return.

Critical thinking problems

1. In September 2013, Bill and Linda, a married couple with $50,000 gross income, cashed qualified Series EE U.S. Savings Bonds which they had purchased in 2008. The proceeds were used to help pay for their son’s 2013 college tuition. They received gross proceeds of $3,500, representing principal of $3,000 and interest of $500. The qualified higher education expenses they paid in 2013 totaled $2,100. Their modified adjusted gross income for the year was $20,000. How much of the $500 interest can Bill and Linda exclude from gross income in 2013?

a. $0

b. $200

c. $300

d. $500

2. Sandra Bellows purchased a 15-year annuity for $25,000. Starting at the beginning of the year, Sandra will receive $200 per month. What is the total amount that Sandra can exclude from her gross income from her annuity this year?

a. $2,400

b. $2,000

c. $1,867

d. $1,667

3. During 2013, a corporation purchased machinery costing $200,000 and a warehouse costing $600,000. These are the only two acquisitions of depreciable property purchased by the corporation in 2013. The maximum deduction the corporation can claim under Code Sec. 179 in 2013 is:

a. $500,000

b. $800,000

c. $25,000

d. $200,000

4. A calendar-year corporation incurs $53,000 of start-up costs. If the corporation began business on August 1 of the current year, what is the maximum amount of the start-up costs that it can deduct against business income in the current year? (round your answer to the nearest dollar)

a. $3,417

b. $5,000

c. $2,000

d. $6,333

e. none of the above

5. During 2013, Tommy’s home was burglarized. Tommy had the following items stolen.

• A block of securities worth $20,000. Tommy purchased of securities three years ago for $8,000.

• A block of securities worth $30,000. Tommy purchased the securities for $24,000 two years ago.

Tommy’s homeowners policy had an $80,000 deductible clause for thefts. How much is Tommy’s theft loss for 2013?

a. $50,000

b. $32,000

c. $44,000

d. None of the above.

6. Tammy has the following items for the current year:

In calculating Tammy’s net operating loss, and with respect to the above amounts only, what amount must be added back to taxable income (loss)?

a. $0

b. $2,000

c. $3,000

d. $6,000

7. Mark Miller, 52, paid the following medical expenses during the year (all in excess of reimbursement):

Assuming the Millers’ adjusted gross income was $60,000, how much of a medical expense deduction may the Millers claim on their joint return?

a. $1,770

b. $2,830

c. $4,330

d. $8,830

e. None of the above

.

8. During the year, the following items were charged to the interest expense account of Doe Corporation:

The maximum amount of interest expense that Doe Corporation, an accrual basis taxpayer, can deduct for the current year is:

a. $1,600

b. $1,100

c. $1,350

d. $700

e. None of the above