Income Tax Accounting

ACC483 Income Tax Accounting


1.      Answer _____________ Arthur pays tax of $3,000 on taxable income of $30,000 while taxpayer Barbara pays tax of $6,000 on $60,000. The tax is a

a.     progressive tax.

b.     Proportional tax.

c.     Regressive tax.

d.     None of the above.


2.      Answer _____________ Helen, who is single, is considering purchasing a residence that will provide a $20,000 tax deduction for property taxes and mortgage interest. If her marginal tax rate is 15% and her effective tax rate is 10%, what is the amount of Helen’s tax savings from purchasing the residence?

a.     $2,000

b.     $3,000

c.     $17,000

d.     $18,000


3.           Answer _____________ When property is transferred, the gift tax is based on

a.     replacement cost of the transferred property.

b.     fair market value on the date of transfer.

c.     the transferor’s original cost of the transferred property.

d.     the transferor’s depreciated cost of the transferred property.


4.     Answer _____________ Paul makes the following property transfers in the current year

$22,000 cash to his wife

$34,000 cash to a qualified charity

$40,000 house to his son

$15,000 computer to an unrelated friend

The total of Paul’s taxable gifts, assuming he does not elect gift splitting with his spouse, subject to the unified transfer tax is

a.     $31,000.

b.     $42,000.

c.     $53,000.

d.     $64,000.



5.      Answer _____________ All of the following items are generally excluded from income except

a.     child support payments.

b.     interest on corporate bonds.

c.     interest on state and local government bonds.

d.     life insurance proceeds paid by reason of death.


6.      Answer _____________ All of the following items are included in gross income except

a.     alimony received.

b.     rent income.

c.     dividend income.

d.     child support payments received.


7.      Answer _____________ The standard deduction is unavailable to all of the following taxpayers except

a.     resident aliens.

b.     nonresident aliens.

c.     an individual filing a return for a period of less than 12 months.

d.     a married taxpayer filing a separate return when the other spouse itemizes.


8.     Answer _____________ Edward, a widower whose wife died in 2004 maintains a household for himself and his daughter who qualifies as his dependent. Edward’s most favorable filing status for 2007 is

a.     single.

b.     surviving spouse.

c.     head of household.

d.     married filing jointly.



9.      Answer _____________ Alex is a calendar year sole proprietor. He began business on December 1, this year. He uses the accrual method of accounting. Alex had the following collections in December.

Collected $7,000 in December, from clients who paid cash for services to be

performed next year.

Collected $5,000 in December, for services performed during December; deposited

in an operating account on December 31, this year.

Collected $9,000 in December; on accounts receivable for services performed in

December; deposited in operating account on January 2, next year.

What is the amount Alex must include in his income for December?

a.      $7,000

b.      $12,000

c.      $14,000

e.      $21,000


10.      Answer _____________ One of the requirements that must be met in order to defer recognition of income for advance payments for goods is

a.     the taxpayer’s method of accounting for the sale for tax purposes is the same as the method used for financial reporting purposes.

b.     the goods are on the taxpayer’s premises on the last day of the tax year.

c.     the goods are produced in the United States.

d.     the amount received is more than the taxpayer’s cost of the goods.


11.     Answer _____________ In December 2007, Max, a cash basis taxpayer, rents an apartment to Charlie. Max receives both the first and last months’ rent totaling $1,000 plus a security deposit of $400. The amount of income reported as taxable in 2007 is

a.     $500.

b.     $900.

c.     $1,000.

d.     $1,400.



12.      Answer _____________ Bette is beneficiary of an $80,000 insurance policy on her father’s life. Upon his death, she may elect to receive the proceeds in five yearly installments of $17,500 or may take $80,000 lump sum.   She elects to take the $80,000 lump sum payment. What are the tax consequences in year one?

a.     All $17,500 each year is taxable.

b.     $7,500 interest is taxable in the first year.

c.     There is no taxable income.

d.     $1,500 of the $17,500 payment is taxable each year.


13.       Answer _____________ All of the following items are excluded from gross income except

a.     life insurance benefits.

b.     de minimis benefits.

c.      no additional cost benefits for employees.

d.      disability income from an employer financed policy.


14.     Answer _____________ Carl filed his tax return, properly claiming the head of household filing status. Carl’s employer paid or provided the following to Carl:

Wages     $65,000

Fair market value of qualified dependent care services     4,000

Premiums for $50,000 qualified group term life insurance         500

Medical insurance premiums     600

How much of this income should Carl report?

a.      $65,000

b.      $69,000

c.      $69,500

d.      $70,100



15.      Answer _____________ Antonio owns land held for investment with a basis of $28,000. The city of Lafayette exercises the right of eminent domain and Antonio receives a payment of $48,000.   What is Antonio’s realized gain?

a.     $0

b.     $20,000

c.     $28,000

d.     $48,000


16.     Answer _____________ If a nontaxable stock dividend is received and is the same type of stock as that owned before the dividend, the original stock’s basis is allocated to all shares

a.     based on relative fair market values at the time of the stock dividend.

b.     equally to all shares owned after the stock dividend.

c.     based on the par value of the stock.

d.     none of the above.


17.      Answer _____________ All of the following are capital assets with the exception of

a.     personal residence.

b.     corporate stock held for investment.

c.     equipment used in a trade or business.

d.     a Rembrandt painting held in a private collection.


18.     Answer _____________ To be considered a Section 1202 gain, the stock being sold must meet all of the following characteristics except

a.     the stock must be issued after August 10, 1993.

b.     the stock must be held more than five years.

c.     the corporation which issued the stock must be a C corporation.

d.     at least 50% of the value of the corporation’s assets must be used in the active conduct of one or more qualified trades or businesses.



19.      Answer _____________ Generally, deductions for adjusted gross income on an individual’s tax return include all the following types of expenses except those

a.     incurred in gambling activities.

b.     incurred in a trade or business.

c.     incurred in the production of rent income.

d.     incurred in the production of royalty income.


20.       Answer _____________ Self-employed individuals may claim, as a deduction for adjusted gross income, 50 percent of their

a.     traditional IRA contributions.

b.     disability insurance premiums.

c.     health insurance premiums.

d.     self-employment tax.

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