ACC250 Chapter 8

Question 1

Regulation that allows prepaid business expenses to be currently deducted when the contract does not extend beyond 12 months and the contract period does not extend beyond the end of the tax year following the year of the payment.

Answer 1

12-MONTH RULE

Question 2

The procedures for determining the taxable year in which a business recognizes a particular item of income or deduction thereby dictating the timing of when a taxpayer reports income and deductions.

Answer 2

ACCOUNTING METHOD

Question 3

A fixed period in which a business reports income and deductions, generally referred to as a tax year.

Answer 3

ACCOUNTING PERIOD

Question 4

Requires that income or expenses are recognized when (1) all events have occurred that determine or fix the right to receive the income or liability to make the payments and (2) the amount of the income or expense can be determined with reasonable acuracy.

Answer 4

ALL-EVENTS TEST

Question 5

Bad debt expense is based on an estimate of the amount of the bad debts in accounts receivable at year-end.

Answer 5

ALLOWANCE METHOD

Question 6

Price in transactions among unrelated taxpayers, where each transacting party negotiates for his or her own benefit.

Answer 6

ARM’S LENGTH AMOUNT

Question 7

Losses arising from a sudden, unexpected, or unusual event such as a fire, storm, shipwreck or loss from theft.

Answer 7

CASUALTY LOSSES

Question 8

Recognizes income from advance payments for goods by the earlier of (1) when the business would recognize the income for tax purposes if it had not received the advance payment or (2) when it recognizes the income for financial reporting purposes.

Answer 8

DEFERRAL METHOD

Question 9

Required method for deducting bad debts for tax purposes. Businesses deduct bad debt only when the debt becomes wholly or partially worthless.

Answer 9

DIRECT WRITE-OFF METHOD

Question 10

A deduction for businesses that manufacture goods in the United States.

Answer 10

DOMESTIC PRODUCTION ACTIVITIES DEDUCTION (DPAD)

Question 11

The third requirement that must be met for an accrual method taxpayer to deduct an expense currently. The specific event that satisfies this test varies based on the type of expense.

Answer 11

ECONOMIC PERFORMANCE TEST

Question 12

Accounting method that values the cost of assets sold under the assumption that the assets are sold in the order purchased.

Answer 12

FIFO

Question 13

A year that ends the last day of a month other than December.

Answer 13

FISCAL YEAR

Question 14

Legal entities like partnerships, limited liability companies, and S corporations that do not pay income tax. Income and losses are allocated to their owners.

Answer 14

FLOW-THROUGH ENTITIES

Question 15

The method for accounting for advance payments for goods that requires that businesses immediately recognize advance payments as taxable income.

Answer 15

FULL-INCLUSION METHOD

Question 16

An accounting method prohibited by tax laws.

Answer 16

IMPERMISSIBLE ACCOUNTING METHOD

Question 17

An accounting method that values the cost of assets sold under the assumption that assets are sold in the reverse order in which they are purchased.

Answer 17

LIFO

Question 18

Activities that involve a mixture of business and personal objectives.

Answer 18

MIXED-MOTIVE EXPENDITURES

Question 19

Interpreted as expenses that are normal or appropriate and that is helpful or conducive to the business activity.

Answer 19

ORDINARY AND NECESSARY

Question 20

Liabilities of accrual method businesses for which economic performance occurs when the business actually pays the liability for, among others: worker’s compensation; tort; breach of contract or violation of law; rebates and refunds; awards, prizes, and jackpots; insurance, warranties and service contracts provided to the business; and taxes.

Answer 20

PAYMENT LIABILITIES

Question 21

Accounting method allowed under the tax law. These methods are adopted the first time a taxpayer uses the method on a tax return.

Answer 21

PERMISSIBLE ACCOUNTING METHOD

Question 22

Expenses incurred for personal motives. Not deductible for tax purposes.

Answer 22

PERSONAL EXPENSES

Question 23

The net income from selling or leasing property that was manufactured in the U.S.

Answer 23

QUALIFIED PRODUCTION ACTIVITIES INCOME (QPAI)

Question 24

An expenditure is reasonable when the amount paid is not extravagant nor exorbitant.

Answer 24

REASONABLE IN AMOUNT

Question 25

An election under economic performance to currently deduct an accrued liability if the liability is expected to persist in the future and is either not material or a current deduction better matches revenue.

Answer 25

RECURRING ITEM

Question 26

A change to taxable income associated with a change in accounting methods.

Answer 26

481 ADJUSTMENT

Question 27

An elective method for determining the cost of an asset sold. The taxpayer specifically chooses the assets that are to be sold.

Answer 27

SPECIFIC IDENTIFICATION

Question 28

A fixed period in which a business reports income and deductions generally referred to as an accounting period.

Answer 28

TAX YEAR

Question 29

Expenditures incurred while “away from home overnight,” including the cost of transportation, meals, lodging, and incidental expenses.

Answer 29

TRAVEL EXPENSES

Question 30

Specify that inventories must be accounted for using full absorption rules to allocate the indirect costs of productive activities to inventory.

Answer 30

UNIFORM COST CAPITALIZATION RULES (UNICAP RULES)