Final Exam Review Questions

Question 1

Jamie is single. In 2023, she reported $100,750 of taxable income, including a long-term capital gain of $6,500. What is her gross tax liability? (Use the tax rate schedules, long-term capital gains tax brackets.)

Note: Round your answer to the nearest whole dollar amount.

Answer 1

$17,018

$94,250 of the taxable income is taxed at the ordinary rates (24%), and $6,500 of the taxable income is taxed at 15 percent.

Question 2

During 2023, Montoya (age 15) received $2,350 from a corporate bond. He also received $750 from a savings account established for him by his parents. Montoya lives with his parents and he is their dependent. What is Montoya’s taxable income?

Answer 2

$1,850

$3,100 interest income minus $1,250 standard deduction for person claimed as a dependent on another’s tax return.

Question 3

Trudy is Jocelyn’s friend. Trudy looks after Jocelyn’s four-year-old son during the day so Jocelyn can go to work. During 2023, Jocelyn paid Trudy $4,160 to care for her son. What is the amount of Jocelyn’s child and dependent care credit if her AGI for the year was $31,600? (Exhibit 8-9)

Answer 3

$780

In 2023, the maximum expenditure for one child is $3,000. The applicable percentage is 26 percent. So, the allowable credit is $780 ($3,000 × 26%).

Question 4

Carolyn has an AGI of $38,700 (all from earned income) and two qualifying children and is filing as a head of household. What amount of earned income credit is she entitled to? (Exhibit 8-10)

Answer 4

$2,994

$6,604 maximum credit minus $3,610 phase-out [($38,700 − $21,560) × 0.2106] = $2,994.

Question 5

Which of the following represents the correct order in which credits are applied to gross tax liability (from first to last)?

Answer 5

Nonrefundable personal, business, refundable

This order is taxpayer-favorable.

Question 6

Cassy reports a gross tax liability of $1,080. She also claims $480 of nonrefundable personal credits, $740 of refundable personal credits, and $280 of business credits. What is Cassy’s tax refund or tax liability due after applying the credits?

Note: Round your answer to the nearest whole dollar amount.

Answer 6

$420 refund

$1,080 tax liability minus $480 nonrefundable personal credits minus $280 (business credit is nonrefundable) minus $740 refundable credit = $(420). (The last $740 is refundable.)

Question 7

Individual taxpayers are not required to file a tax return unless their gross income passes a certain threshold. This threshold is generally the _____

Answer 7

applicable standard deduction amount

Question 8

Holly took a prospective client to dinner at a restaurant, and after agreeing to a business deal, they went to the theater. Holly paid $320 for the meal and separately paid $238 for the theater tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

Answer 8

$160

The cost of entertainment is not deductible. The cost of business meals is 50% deductible ($320 × 50% = $160).

Question 9

Shelley is self-employed in Texas and recently attended a two-day business conference in New Jersey. After Shelley attended the conference, she had dinner with an old friend who lived nearby. Shelley documented her expenditures (described below). What amount can Shelley deduct?

Airfare to New Jersey $ 2,300
Meals purchased at the conference 250
Meal with an old friend 136
Lodging in New Jersey 420
Rental car 210

Answer 9

$3,055

$2,300 + ($250 × 0.50) + $420 + $210 = $3,055.

Question 10

Which of the following is a true statement about travel that has both business and personal aspects?

a) Transportation costs are always fully deductible.

b) Meals are not deductible for this type of travel.

c) Only half of the cost of meals and transportation is deductible.

d) The deduction for the cost of lodging and incidental expenditures is limited to those amounts incurred during the business portion of the travel.

e) none of these choices are correct

Answer 10

d) The deduction for the cost of lodging and incidental expenditures is limited to those amounts incurred during the business portion of the travel.

Mixed-motive travel is prorated between business and personal elements.

Question 11

Ed is a self-employed heart surgeon who lives in Michigan and has incurred the following reasonable expenses. How much can Ed deduct?

$1,390 in airfare to repair investment rental property in Colorado. Primary purpose is business.

$670 in meals at restaurants while attending a medical convention in New York.

$385 for tuition for an investment seminar, “How to pick stocks.”

$156 for tickets to a football game with hospital administrators to celebrate successful negotiation of a surgical contract earlier in the day.

Answer 11

$1,725 “for AGI”

The investment seminar and entertainment are not deductible, and 50 percent of the meal cost is deductible [$1,390 airfare + ($670 × 50% = $670 meals) = $1,725 total deduction].

Question 12

Riley operates a plumbing business, and this year the three-year-old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $21,200, and the adjusted basis was $5,650 at the time of the accident. Although the van was worth $6,120 at the time of accident, insurance only paid Riley $1,350 for the loss. What is the amount of Riley’s casualty loss deduction?

Answer 12

$4,300

Adjusted basis less insurance reimbursement ($5,650 − $1,350).

Question 13

Bill operates a proprietorship using the cash method of accounting, and this year he received the following:

$110 in cash from a customer for services rendered this year
a promise from a customer to pay $198 for services rendered this year
tickets to a football game worth $245 as payment for services performed last year
a check for $172 for services rendered this year that Bill forgot to cash
How much income should Bill realize on Schedule C?

Answer 13

$527

Income is realized as property is received, but the promise to pay is not property ($110 + $245 + $172 = $527).

Question 14

Which of the following types of transactions does not result in the immediate recognition of revenue or expense for a small business using the cash method?

a) Sales of inventory on account

b) A note received from a customer in exchange for services rendered

c) Salaries paid to employees by check

d) Credit card payments from customers for services received

e) All the choices will result in recognition of revenue or expense using the cash method.

Answer 14

a) Sales of inventory on account

Sales of inventory need not be accounted for using the accrual method if the taxpayer has average annual gross receipts of $29 million or less for the prior three taxable years.

Question 15

Mike started a calendar-year business on September 1stSeptember 1st of this year by paying 12 months of rent on his shop at $1,150 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

Answer 15

$13,800 under the cash method and $4,600 under the accrual method

Mike can deduct 12 months of rent under the cash method by applying the 12-month rule, whereas only four months of rent will accrue because economic performance occurs ratably.

Question 16

Which of the following is not usually included in an asset’s tax basis?

a) purchase price

b) sales tax

c) shipping

d) installation costs

e) all of the choices are included in an asset’s tax basis.

Answer 16

e) all of the choices are included in an asset’s tax basis.

The purchase price, sales tax, shipping, and installation costs are all included in an asset’s tax basis.

Question 17

Which depreciation convention is the general rule for tangible personal property?

Answer 17

Half-year

The half-year convention is the general rule for tangible personal property, while the mid-quarter convention is the exception.

Question 18

Lax LLC purchased only one asset during the current year (a full 12-month tax year). On August 26 Lax placed in service computer equipment (five-year property) with a basis of $36,000. Calculate the maximum depreciation expense for the current year (ignoring §179 and bonus depreciation). (Use MACRS Table 1.)

Answer 18

$7,200

The asset’s recovery period is five years and the half-year convention applies. The calculation is $36,000 × 0.20 = $7,200.

Question 19

Beth’s business purchased only one asset during the current year (a full 12-month tax year). On December 1 Beth placed in service machinery (seven-year property) with a basis of $73,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 2.)

Note: Round final answer to the nearest whole number.

Answer 19

$2,606

The asset’s recovery period is seven years, and the mid-quarter convention applies because the property was placed in service during the fourth quarter. The calculation is $73,000 × 0.0357 = $2,606.

Question 20

Wheeler LLC purchased two assets during the current year (a full 12-month tax year). On November 16 Wheeler placed in service computer equipment (five-year property) with a basis of $25,500 and on April 20 placed in service furniture (seven-year property) with a basis of $17,300. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation). (Use MACRS Table 2.)

Note: Round final answer to the nearest whole number.

Answer 20

$4,363

The mid-quarter convention applies because more than 40 percent of the years’ assets were placed in service in the fourth quarter of the tax year. The computer is fourth-quarter property and the furniture is second-quarter property. The calculations are $25,500 × 0.05 = $1,275 and $17,300 × 0.1785 = $3,088. The total is $4,363 ($1,275 + $3,088).

Question 21

Anne LLC purchased computer equipment (five-year property) on August 29 for $50,000 and used the half-year convention to depreciate it. Anne LLC did not take §179 or bonus depreciation in the year it acquired the computer equipment. During the current year, which is the fourth year Anne LLC owned the property, the property was disposed of on January 15. Calculate the maximum depreciation expense. (Use MACRS Table 1.)

Note: Round final answer to the nearest whole number.

Answer 21

$2,880

The calculations are $50,000 × 0.1152 = $5,760 × 0.5 = $2,880, since the property is considered to be owned for half the year in the year of disposition.

Question 22

Tom Tom LLC purchased a rental house and land during the current year for $162,000. The purchase price was allocated as follows: $106,000 to the building and $56,000 to the land. The property was placed in service on May 22. Calculate Tom Tom’s maximum depreciation for this first year. (Use MACRS Table 3.)

Note: Round final answer to the nearest whole number.

Answer 22

$2,409

The mid-month convention applies. Residential property has a 27.5-year recovery period. The depreciation is $2,409 ($106,000 × 2.273%).

Question 23

Jasmine started a new business in the current year. She incurred $13,000 of start-up costs. How much of the start-up costs can be immediately deducted (excluding amounts amortized over 180 months) for the year?

Answer 23

$5,000

$5,000 of start-up expenses can be immediately deducted. The $5,000 maximum phases out dollar for dollar if more than $50,000 of start-up costs are incurred.

Question 24

Santa Fe purchased the rights to extract turquoise on a tract of land over a five-year period. Santa Fe paid $712,250 for extraction rights. A geologist estimates that Santa Fe will recover 9,250 pounds of turquoise. During the current year, Santa Fe extracted 2,775 pounds of turquoise, which it sold for $455,000. What is Santa Fe’s cost depletion deduction for the current year?

Answer 24

$213,675

The depletion deduction is $213,675 ($712,250 ÷ 9,250) × 2,775.

Question 25

The sale at a loss of machinery that was used in a trade or business and held for more than one-year results in which of the following types of loss?

Answer 25

§1231

Assets used in a trade or business and held for more than one year are §1231 assets. Losses recognized do not require depreciation recapture.

Question 26

Which of the following results in an ordinary gain or loss?

a) sale of a machine at a gain

b) sale of stock held for investment

c) sale of a 1231 asset

d) sale of inventory

e) none of these are correct

Answer 26

d) sale of inventory

Inventory is always an ordinary asset. Sale of a §1231 asset can generate either capital gain or ordinary loss

Question 27

Sumner sold equipment that it uses in its business for $31,100. Sumner bought the equipment a few years ago for $79,450 and has claimed $39,725 of depreciation expense. Assuming that this is Sumner’s only disposition during the year, what is the amount and character of Sumner’s gain or loss?

Answer 27

$8,625, §1231 loss

79,450-39,725 = 39,725

31,100 - 39,725 = (8,625)

There is no depreciation recapture when a §1231 asset is sold at a loss.

Question 28

Brad sold a rental house that he owned for $248,500. Brad bought the rental house five years ago for $226,500 and has claimed $49,250 of depreciation expense. What is the amount and character of Brad’s gain or loss assuming this is Brad’s only asset sale of the year?

Answer 28

$22,000 §1231 gain and $49,250 unrecaptured §1250 gain

226,500 - 49,250* = 177,250

248,500 - 177,250 = 71,250

71,250 - 49,250 = 22,000*

Unrecaptured §1250 recaptures the lesser of depreciation taken ($49,250) or gain ($71,250). This amount is then taxed at no more than 25 percent. The remaining $22,000 gain would be §1231 gain.

Question 29

Which one of the following is not true regarding a like-kind exchange?

a) Loss on like-kind property is not recognized.

b) Gains on boot given are deferred.

c) Losses on boot given are not recognized.

d) Land can be like-kind with a building.

e) all of the choices are true

Answer 29

Losses on boot given are not recognized.

Losses on boot, but not like-kind property, given are recognized currently.

Question 30

Arlington LLC exchanged land used in its business for some new land. Arlington originally purchased the land it exchanged for $37,000. The new land had a fair market value of $39,500. Arlington also received $11,000 of office equipment in the transaction. What is Arlington’s recognized gain or loss on the exchange?

Answer 30

$11,000

The recognized gain is the lesser of the fair market value of the boot ($11,000 of office equipment) or realized gain of $13,500 ($39,500 fair market value plus $11,000 boot less $37,000 adjusted basis).

Question 31

Long-term capital gains (depending on type) for individual taxpayers can be taxed at a maximum rate of:

a) 20%

b) 25%

c) 28%

d) both 20% and 28%

e) all of the choices are correct

Answer 31

e) all of the choices are correct

Question 32

The maximum amount of net capital losses individual taxpayers may deduct against their ordinary income per year is:

Answer 32

$3,000.

Question 32

In the current year, Norris, an individual, has $68,000 of ordinary income, a net short-term capital loss (NSTCL) of $8,200 and a net long-term capital gain (NLTCG) of $4,600. From his capital gains and losses, Norris reports:

Answer 32

an offset against ordinary income of $3,000 and an NSTCL carryforward of $600.

$4,600 NLTCG − $8,200 NSTCL = $3,600 NSTCL. Use $3,000 NSTCL to reduce ordinary income, leaving $600 as an NSTCL carryforward.

Question 32

Kevin bought 210 shares of Intel stock on January 1, 2023, for $54 per share, with a brokerage fee of $110. Then, Kevin sells all 210 shares for $77 per share on December 12, 2023. The brokerage fee on the sale was $160. What is the amount of the gain or loss Kevin must report on his 2023 tax return?

Answer 32

$4,560

Amount realized = (210 shares × $77) − $160 = $16,010. Adjusted basis = (210 shares × $54) + $110 = $11,450. Gain = $16,010 − $11,450 = $4,560.

Question 33

Sadie received $57,600 of compensation from her employer and she received $470 of interest from a corporate bond. What is the amount of Sadie’s gross income from these items?

Answer 33

$58,070

$57,600 compensation + $470 interest from a corporate bond (as opposed to interest from municipal bonds).

Question 34

All of the following are for AGI deductions except:

a) contributions to qualified traditional retirement accounts.

b) rental and royalty expenses

c) business expenses for a self-employed taxpayer.

d) All of these are for AGI deductions.

Answer 34

d) All of these are for AGI deductions.

Question 35

Which of the following statements is true?

a) Income character determines the tax year in which the income is taxed.

b) Income character depends on the taxpayer’s filing status.

c) Qualified dividend income is taxed at a lower rate than if the same amount were ordinary income.

d) A taxpayer selling a capital asset at a gain recognizes ordinary income.

Answer 35

c) Qualified dividend income is taxed at a lower rate than if the same amount were ordinary income.

Qualified dividends are taxed at 0 percent, 15 percent, or 20 percent (depending on the taxpayer’s income) and are always taxed at a lower rate than the same amount of ordinary income would be. Income character determines the rate at which income is taxed and it does not depend on filing status. Finally, a taxpayer selling a capital asset at a gain recognizes capital gain, not ordinary income.

Question 36

Jamison’s gross tax liability is $11,350. Jamison had $2,940 of available credits and he had $6,550 of taxes withheld by his employer. What are Jamison’s taxes due (or taxes refunded) with his tax return?

Answer 36

$1,860 taxes due

Gross tax liability minus credits minus payments equals taxes due ($11,350 − $2,940 − $6,550 = $1,860 taxes due).

Question 37

Katy has one child, Dustin, who is 18 years old at the end of the year. Dustin lived at home for three months during the year before leaving home to work full time in another city. During the year, Dustin earned $15,000. Katy provided more than half of Dustin’s support for the year. Which of the following statements regarding whether Katy may claim Dustin as a dependent for the current year is accurate?

a) dustin is a qualifying child of katy

b) Dustin fails the residence test for a qualifying child, but he is considered a qualifying relative of Katy.

c) Dustin fails the support test for a qualifying relative.

d) Dustin fails the gross income test for a qualifying relative.

Answer 37

d) Dustin fails the gross income test for a qualifying relative.

Dustin fails the qualifying child residence test and he fails the qualifying relative gross income test, so Katy may not claim Dustin as a dependent.

Question 38

Jan is unmarried and has no children, but she provides all of the financial support for her mother, who lives in an apartment across town. Jan’s mother qualifies as Jan’s dependent. Which is the most advantageous filing status available to Jan?

a) single
b) head of household
c) qualifying individual
d) surviving single

Answer 38

Head of household

Jan can claim head of household status if she maintains a separate residence for a parent who is also a dependent.

Question 39

Wilma has a $55,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $4,400, was credited to her account this year, but she must pay an early withdrawal penalty if she cashes in the CD before next year. Which of the following is a true statement?

a) Wilma must include the $4,400 of interest in her income this year.

b) Wilma must include the $4,400 of interest in her income when she cashes the CD.

c) Wilma must include the $4,400 of interest in her income this year only if the bank waives the early withdrawal penalty.

d) Wilma must include the $4,400 of interest in her income next year if she does not pay the early withdrawal penalty.

e) all of the choices are correct

Answer 39

a) Wilma must include the $4,400 of interest in her income this year.

Interest is taxed when credited to the account.

Question 40

This year Ed celebrated his 25th25th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $298 and a $2,420 cash bonus. What amount must Ed include in his gross income?

Answer 40

$2,420

Cash bonus payments are includible in gross income but awards of tangible property to employees for length of service or safety achievement are excluded up to $400 of value.

Question 41

Frank received the following benefits from his employer this year. What amount must Frank include in his gross income?

Benefits Received Amount
Salary $ 61,250
Health insurance 4,700
Group-term life insurance (face $50,000) 2,170

Answer 41

$61,250

An employee may exclude from income the cost of medical and dental health insurance premiums and group-term life insurance (face $50,000) premiums an employer pays on the employee’s behalf.

Question 42

Shaun is a student who has received an academic scholarship to State University. The scholarship paid $17,200 for tuition, $5,450 for fees, and $1,310 for books. In addition, Shaun’s dormitory fees of $13,400 were paid by the university when he agreed to counsel freshman on campus living. What amount must Shaun include in his gross income?

Answer 42

$13,400

College students seeking a degree are allowed to exclude from gross income scholarships that pay for tuition, fees, books, supplies, and other equipment required for the student’s courses. Any excess scholarship amounts (such as for room or meals) are fully taxable. The scholarship exclusion applies only if the recipient is not required to perform services in exchange for receiving the scholarship.

Question 43

Han is a self-employed carpenter and his wife, Christine, works full time as a grade school teacher. Han paid $525 for carpentry tools and supplies, and Christine paid $3,600 as her share of health insurance premiums (not with pretax dollars) for Han and herself in a qualified plan provided by the school district (not through an exchange). Which of the following is a true statement?

a) The tools and supplies are deductible for AGI while the health insurance is an itemized deduction.

b) Both expenditures are deductible for AGI.

c) The tools and supplies are an itemized deduction but the health insurance is deductible for AGI.

d) Both expenditures are itemized deductions.

e) Neither of the expenditures is deductible.

Answer 43

a) The tools and supplies are deductible for AGI while the health insurance is an itemized deduction.

Business expenses for self-employed individuals are Schedule C deductions but health insurance premiums are itemized deductions if the taxpayers are eligible to participate in an employer-provided health plan.

Question 44

Ned is a head of household with a dependent son, Todd, who is a full-time student. This year Ned made the following expenditures related to Todd’s support:

Auto insurance premiums $ 1,700

Room and board at Todd’s school 2,200

Health insurance premiums (not through an exchange) 600

Travel (to and from school) 350

What amount can Ned include in his itemized deductions?

Answer 44

$600 included in Ned’s medical expenses.

The premiums paid for health and medical insurance for dependents are included in the taxpayer’s medical expenses when determining itemized deductions.

Question 45

Margaret Lindley paid $15,040 of interest on her $300,400 acquisition debt for her home (fair market value of $500,400), $4,040 of interest on her $30,040 home-equity debt used to buy a new boat and car, $1,040 of credit card interest, and $3,040 of margin interest for the purchase of stock. Assume that Margaret Lindley has $10,040 of interest income this year and no investment expenses. How much of the interest expense may she deduct this year?

Answer 45

$18,080

15,040 + 3,040 = 18,080

The credit card interest is nondeductible personal interest and the home-equity interest is not deductible. The remaining interest is deductible as qualified residence interest ($15,040) and investment interest ($3,040). The $3,040 investment interest is not restricted by her net investment income ($10,040).

Question 46

In 2023, Campbell, a single taxpayer, has $400,000 of profits (net of the deduction for self-employment taxes, the self-employed health insurance deduction, and the deduction for contributions to qualified self-employment retirement plans) from her general store, which she operates as a sole proprietorship. She has $100,000 of employee wages, $40,000 of qualified property, and $500,000 of taxable income before the deduction for qualified business income. How much is Campbell’s deduction for qualified business income?

Answer 46

$50,000

Her deduction for qualified business income is limited to 50 percent of her wages ($100,000 × 50% = $50,000).

Question 47

John holds a taxable bond and a municipal bond. Which are considered part of John’s deductible investment interest expense?

a) Attorney and accounting fees on municipal bond.

b) Safe deposit box rental fees on taxable bond.

c) Interest expense on taxable bond.

d) Interest expense on municipal bond.

e) Interest expense on municipal bond and interest expense on taxable bond.

Answer 47

Interest expense on taxable bond.

The interest expense on the taxable bond is considered deductible investment interest expense.

Question 48

Investment interest expense does not include:

a) interest expense from loans to purchase municipal bonds.

b) interest expense from loans to purchase corporate bonds.

c) interest expense from loans to purchase stocks.

d) interest expense from loans to purchase U.S. savings bonds and interest expense from loans to purchase corporate bonds.

e) interest expense from loans to purchase corporate bonds and interest expense from loans to purchase stocks.

Answer 48

interest expense from loans to purchase municipal bonds.

Expenses incurred to produce tax-exempt income are not deductible.