Instructions (Please read carefully):
PART I: MULTIPLE CHOICE (50 points)
I suggest you print this test and take your time in determining the
correct answer and then come back to this Web site to enter your answers.
You must complete the information at the top before submitting this test.
Type your complete name, social security number (ID) and YOUR email
address. Identify the letter of the choice that best completes the
statement or answers the question by clicking on the scroll down arrow to
the left of the question and then select your answer. Review your answers
carefully before submitting. If you hit the "Reset" button,
all your answers will be erased and your must start over. When you
finish, click the "Submit" button at the bottom. Your results
will be automatically graded and sent to me by email. Your results will
not be displayed. I will confirm receipt and report your grade as soon as
I have received and graded both parts of the test. Please email me when you have
completed and submitted each part of the test.
Part II (50 points) of this test is
a tax return that you must complete and submit to me as you have been
doing with your tax returns. Using the data for PROBLEM 1 in
the appendix F page F-1 of your textbook, prepare
a 2001 tax return for John and Irene Porter. The data presented is
for a year 2000 return. Convert this to a year 2001 return by
adding +1 to each year mentioned in the problem.
Part I: Multiple
Choice( 1 point each):
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Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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1.
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Which, if any, of the following are deductions for AGI? a. | Payment of a
loan. | b. | Alimony paid to ex-spouse. | c. | Payment of
church pledge. | d. | Payment of property taxes on personal
residence. | e. | None of the above. | | |
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2.
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Which, if any, of the following are deductions from AGI? a. | Child support
paid. | b. | Moving expenses incurred to change job
locations. | c. | Interest on home mortgage. | d. | Contribution to
traditional Individual Retirement Account (IRA). | e. | None of the
above. | | |
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3.
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During 2001, Shawn had the following transactions:
Salary | $60,000 | Gift received
from aunt | 10,000 | Interest income on Ford Motor Company bonds | 400 | Interest paid on
home mortgage | 6,000 | Alimony paid to
ex-wife | 3,000 | | |
Shawn's AGI
is: a. | $60,400. | b. | $58,400. | c. | $57,400. | d. | $55,400. | e. | None of the
above. | | |
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4.
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Elton
and Elsie are husband and wife and file a joint return. Both are under 65 years of age. They provide
more than half of the support of their daughter, Kristie (age 23), who is a full-time medical
student. Kristie receives a $3,200 scholarship covering her room and board at college. They furnish
all of the support of Hattie (Elton's grandmother), who is age 70 and lives in a nursing home. They
also support Meg (age 66), who is a friend of the family who lives with them. How many personal and
dependency exemptions may Elton and Elsie claim? a. | Two. | b. | Three. | c. | Four. | d. | Five. | e. | None of the
above. | | |
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5.
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Kyle,
whose wife died in December 1998, filed a joint tax return for 1998. He did not remarry, but
has continued to maintain his home in which his two dependent children live. In the preparation of
his tax return for 2001, what is Kyle's filing status? a. | Head of
household. | b. | Surviving spouse. | c. | Single. | d. | Married filing separately. | e. | None of the
above. | | |
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6.
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The
constructive receipt doctrine: a. | Does not apply to accrual basis
taxpayers. | b. | Does not apply to cash basis
taxpayers. | c. | Is used to distinguish unearned income from earned
income. | d. | Means that a taxpayer cannot plan transactions to defer the
recognition of income. | e. | Provides an opportunity for a cash method taxpayer to delay the
reporting of cash received. | | |
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7.
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As a
general rule: a. | Income from
services is taxed to the person who receives the income. | b. | Income from
property is taxed to the person who receives the benefit of the income. | c. | Income from
services is taxed to the person who performed the services. | d. | Income from
services can be shifted from the earner to another person by assigning the income to the other
person. | e. | None of the above. | | |
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8.
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Joe
and Bonnie were divorced. Their only marital property was a personal residence with a value of
$250,000 and cost of $200,000. Under the terms of the divorce agreement which did not include
the word "alimony," Bonnie was to receive the house, and she was to pay Joe $9,000 each
year for ten years. If Joe died before the end of the ten years, the payments would cease. Bonnie and
Joe lived apart when Joe received the payments. a. | Joe does not recognize any income from the above
transaction. | b. | Joe must recognize a $25,000 [1/2 ´ ($250,000 -
$200,000)] gain on the sale of his interest in the house. | c. | Bonnie can
deduct $9,000 a year for the alimony paid. | d. | Bonnie must recognize gross income of
$125,000. | e. | None of the above. | | |
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9.
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Jay,
a single taxpayer, retired from his job as a public school teacher in 2001. He is to receive a
retirement annuity of $1,000 each month and his life expectancy is 150 months. He contributed $30,000
to the pension plan during his 35-year career; so his adjusted basis is $30,000. What is the correct
method for reporting the pension income? a. | Since Jay is no longer working, none of the pension must be
included in his gross income. | b. | The first $30,000 received is a nontaxable recovery of capital,
and all subsequent annuity payments are taxable. | c. | The first
$120,000 he receives is taxable and the last $30,000 is a nontaxable recovery of
capital. | d. | For the first 150 months, 20% ($30,000/$150,000) of the amount
received is a nontaxable recovery of capital and the balance is included in gross
income. | e. | None of the above. | | |
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10.
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Nellie is age 67 and unmarried and her only sources of income are $320,000 in taxable
interest and $15,000 of Social Security benefits. Nellie's adjusted gross income for the year
is: a. | $320,000. | b. | $327,500. | c. | $332,750. | d. | $335,000. | e. | None of the
above. | | |
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11.
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Carol, a widow, elected to receive the proceeds of a $100,000 life insurance policy on
the life of her deceased husband in 10 installments of $15,000 each. Her husband had paid premiums of
$40,000 on the policy. Over the life of the contract, Carol must include in gross
income: a. | $0. | b. | $50,000. | c. | $100,000. | d. | $110,000. | e. | None of the
above. | | |
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12.
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Roger, age 19, is a full-time student at State College and a candidate for a
bachelor's degree. During 2001, he received the following payments:
State
scholarship for ten months (tuition and books) | $3,600 | Loan from
college financial aid office | 1,500 | Cash support
from parents | 3,000 | Cash
dividends | 700 | Cash prize awarded in contest | 500 | | | $9,300 | | |
What is Roger's
adjusted gross income for 2001? a. | $700. | b. | $1,200. | c. | $4,800. | d. | $9,300. | e. | None of the above. | | |
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13.
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In
2001, Khalid and Rashad had an automobile accident caused by Khalid's negligence. Rashad received
$20,000 for the loss of income while he was recovering from the accident, $15,000 for medical
expenses, and $6,000 punitive damages. The payments were received in 2001. As a result of the above,
Rashad: a. | Must include
$41,000 in gross income, but he may be entitled to an itemized deduction for medical
expenses. | b. | Must include $20,000 in gross income. | c. | Must include
$6,000 in gross income. | d. | Is not required to include any of the above amounts in gross
income. | e. | None of the above. | | |
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14.
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The
Amber Fruit Cake Company gives all of its employees a 5 pound fruit cake each Christmas. The value of
the fruit cake: a. | Must be included
in the employee's gross income. | b. | Must be included in the employee's gross income unless the
employee does not like fruit cake and gives it to someone else. | c. | May be excluded
as a "no-additional-cost" fringe benefit. | d. | May be excluded
as a de minimis fringe benefit. | e. | None of the above. | | |
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15.
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In
preparing his 2001 Federal income tax return, Sam incorrectly deducted alimony payments of $12,000 as
an itemized deduction rather than as a deduction for AGI. Sam's AGI is $60,000 and itemized
deductions (which consist of the alimony, property taxes, and mortgage interest) are $20,000 before
correcting the error. Which of the following statements is correct? a. | The
classification error will result in taxable income being overstated. | b. | The
classification error will result in taxable income being understated. | c. | The
classification error could result in either taxable income being overstated or
understated. | d. | The classification error will have no effect on taxable
income. | e. | None of the above. | | |
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16.
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Janice is single, had gross income of $38,000, and incurred the following
expenses:
Charitable
contribution | $2,500 | Taxes and
interest on home | 9,000 | Legal fees
incurred in a tax dispute | 1,000 | Medical
expenses | 4,000 | Penalty on early
withdrawal of savings | 200 | | |
Her AGI is: a. | $21,300. | b. | $28,800. | c. | $32,800. | d. | $35,500. | e. | $37,800. | | |
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17.
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Which
of the following is a deduction from AGI (itemized deduction)? a. | Contribution to
a traditional IRA. | b. | Roof repairs to a rental home. | c. | Personal
casualty loss. | d. | Alimony payment. | e. | None of the
above. | | |
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18.
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Angela, a real estate broker, had the following income and expenses in her
business:
Commissions
income | $100,000 | Expenses: | | Commissions paid
to non-brokers for referrals (illegal under state law and subject to criminal
penalties) |
20,000 | Commissions paid to other real estate brokers for referrals (not illegal under state
law) |
10,000 | Travel and transportation | 12,000 | Supplies | 4,000 | Office and
phone | 5,000 | Parking
tickets | 500 | | |
How much net income must Angela report from
this business? a. | $48,500. | b. | $49,000. | c. | $60,000. | d. | $68,500. | e. | $69,000. | | |
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19.
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Cory
incurred and paid the following expenses:
Tax return
preparation fee | $ 600 | Moving
expenses | 2,000 | Investment
expenses | 500 | Expenses
associated with rental property | 1,500 | Interest expense
associated with loan to finance tax-exempt bonds |
400 | | |
Calculate the amount that Cory can deduct (before any
percentage limitations). a. | $5,000. | b. | $4,600. | c. | $3,000. | d. | $1,500. | e. | None of the above. | | |
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20.
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Sarah
incurred the following expenses for her dependent son during the current
year:
Payment of
principal on son's automobile loan | $5,000 | Interest on
above loan | 2,000 | Payment of son's
property taxes | 1,200 | Payment of
principal on son's personal residence loan | 1,500 | Payment of
interest on son's personal residence loan | 8,000 | | |
How much may Sarah deduct in computing her itemized
deductions? a. | $0. | b. | $9,200. | c. | $11,200. | d. | $17,700. | e. | None of the
above. | | |
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21.
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In
January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair
market value of the stock on the date of sale. Five months later, James sold the same stock through
his broker for $27,000. What is the tax effect of these transactions? a. | Disallowed loss
to James of $2,000; gain to Lance of $1,000. | b. | Disallowed loss
to Lance of $2,000; gain to James of $3,000. | c. | Deductible loss
to Lance of $2,000; gain to James of $3,000. | d. | Disallowed loss
to Lance of $2,000; gain to James of $1,000. | e. | None of the
above. | | |
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22.
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On
September 3, 2000, Able purchased stock in Red Corporation (the stock is not small business stock)
for $6,000. On December 31, 2000, the stock was worth $3,500. On August 15, 2001, Able was notified
that the stock was worthless. How should Able report this item on his 2000 and 2001 tax
returns? a. | 2000-$0;
2001-$6,000 short-term capital loss. | b. | 2000-$0; 2001-$6,000 long-term capital
loss. | c. | 2000-$2,500 short-term capital loss; 2001-$3,500 short-term
capital loss. | d. | 2000-$2,500 short-term capital loss; 2001-$3,500 long-term
capital loss. | e. | None of the above. | | |
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23.
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During the year, Rocky had the following uninsured personal casualty losses (arising
from one casualty). Rocky also had $18,000 AGI for the year.
| | | Fair Market
Value | Asset | Adjusted
Basis | Before | After | A | $ 500 | $ 700 | $600 | B | $3,000 | $2,000 | $ -0- | C | $ 700 | $ 600 | $ -0- | | | | | |
Rocky's casualty loss deduction is: a. | $600. | b. | $2,600. | c. | $2,700. | d. | $3,100. | e. | None of the
above. | | |
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24.
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Which
of the following events would produce a deductible loss? a. | Erosion of
personal use land due to rain or wind. | b. | Termite infestation of a personal residence over a several year
period. | c. | Damages to personal automobile resulting from a taxpayer's
negligence. | d. | A misplaced personal use item. | e. | None of the
above. | | |
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25.
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After
applying the NOL to the first available year, certain adjustments must be made to that year's
negative taxable income to arrive at the remaining NOL to carry over. Which of the following are
adjustments? a. | Net capital
losses. | b. | Personal and dependency exemptions. | c. | Net operating
loss that is being carried back. | d. | All of the above. | e. | None of the
above. | | |
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26.
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Tan
Company acquires a machine (ten-year property) on January 15, 2000, at a cost of $200,000. Tan also
acquires another machine (seven-year property) on November 5, 2000, at a cost of $40,000. No election
is made to use the straight-line method. The company does not make the § 179 election.
Determine the total deductions in calculating taxable income related to the machines for
2001. a. | $20,000. | b. | $25,716. | c. | $45,796. | d. | $51,428. | e. | None of the
above. | | |
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27.
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Mary
purchased one asset during the year (five-year property) on November 10, 2001, at a cost of $100,000.
She made the § 179 election. The income from the business before the § 179
deduction was $75,000. Determine the total deductions with respect to the asset for
2001. a. | $27,800. | b. | $28,000. | c. | $29,000. | d. | $39,200. | e. | None of the
above. | | |
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28.
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On
June 1, 2001, Irene places in service an automobile that cost $21,000. The car is used 70% for
business and 30% for personal use. (Assume this percentage is maintained for the life of the car.)
Determine the cost recovery deduction for 2001. a. | $2,142. | b. | $2,212. | c. | $2,940. | d. | $3,060. | e. | None of the above. | | |
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29.
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Damien is the regional manager for a fast food franchise. Every workday he uses his
car as follows: home to office, office to café A, café A to café B, café B to
café C, café C to home. Mileage is as follows:
| | Miles | Home to
office | 30 | Office to
café A | 6 | Café A to
café B | 4 | Café B to
café C | 15 | Café C to
home | 40 | | |
Damien's deductible mileage is: a. | 0. | b. | 19. | c. | 25. | d. | 40. | e. | None of the above. | | |
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30.
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During the year, Curtis went from St. Louis to Boston on business. After three days of
business, Curtis spent one day touring the city's historical sites. Expenses involved are as
follows:
Air
fare | $1,200 | Lodging (4 days
´
$150) | 600 | Meals (4 days
´
$100) | 400 | Airport
limos | 100 | | |
Presuming no reimbursement, deductible expenses
are: a. | $1,600. | b. | $1,750 | c. | $1,900. | d. | $2,050. | e. | None of the
above. | | |
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31.
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Jean,
who holds a bachelor of education degree, is a middle school teacher in Richmond, Kentucky. The
school board recently changed its minimum education requirement by prescribing five years of college
training. Existing teachers, such as Jean, were allowed 10 years in which to acquire the additional
year of education. Pursuant to this requirement, Jean spends her 2000 summer break attending the
University of Kentucky in Lexington taking education courses. Her expenses are as
follows:
Books and
tuition | $1,900 | Meals | 1,200 | Lodging | 900 | Laundry while in
travel status | 300 | Transportation | 550 | | |
Her education expense deduction is: a. | $3,650. | b. | $3,950. | c. | $4,250. | d. | $4,850. | e. | None of the
above. | | |
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32.
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Carol
is employed as a tax accountant. For calendar year 2001, she had AGI of $60,000 and paid the
following medical expenses:
Medical
insurance premiums | $2,600 | Doctor and
dentist bills for Dave and Jodi (Carol's parents) | 5,500 | Doctor and
dentist bills for Carol | 4,500 | Prescribed
medicines for Carol | 200 | Nonprescribed
insulin for Carol | 550 | | |
Dave and Jodi would qualify as Carol's dependents
except that they file a joint return. Carol's medical insurance policy does not cover them. Carol
filed a claim for $2,100 of her own expenses with her insurance company in December 2001 and received
the reimbursement in January 2002. What is Carol's maximum allowable medical expense deduction for
2001? a. | $3,350. | b. | $8,850. | c. | $13,050. | d. | $13,350. | e. | None of the
above. | | |
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33.
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Betty, a sole proprietor of an antique shop, has two dependent children. During 2001,
she paid health insurance premiums of $1,600 for her own coverage and $2,400 for coverage of her
children. What amount will Betty be allowed to deduct as an itemized deduction (disregard the 7.5%
limitation)? a. | $4,000. | b. | $2,400. | c. | $1,600. | d. | $0. | e. | None of the above. | | |
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34.
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Which
of the following items would be an itemized deduction on Schedule A of Form 1040 not subject
to the 2% of AGI floor? a. | Professional dues paid by an accountant (employed by Ford Motor
Co.) to the National Association of Accountants. | b. | Gambling losses
to the extent of gambling winnings. | c. | Job hunting costs. | d. | Appraisal fee
paid to a valuation expert to determine the fair market value of art
work donated to
a qualified museum. | e. | None of the above. | | |
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35.
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Which, if any, of the following expenses are not subject to the 2% of AGI
floor? a. | Union
dues. | b. | Appraisal fees to establish the amount of a personal casualty
loss. | c. | Subscription to the New England Journal of Medicine by
an employed doctor. | d. | Cost of lab coats by an employed
chemist. | e. | All of the above are subject to the 2% of AGI
floor. | | |
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36.
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Cheryl is single, has one child, and files as head of household during 2001. Her
salary for the year is $16,000. She qualifies for an earned income credit of the following
amount: a. | $0. | b. | $465.02. | c. | $1,962.58. | d. | $2,427.60. | e. | None of the
above. | | |
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37.
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Caleb
and Zoe are married and file a joint tax return claiming their two children, ages 10 and 8 as
dependents. Their AGI for 2001 is $118,600. Caleb and Zoe's child tax credit for 2001
is: a. | $0. | b. | $450. | c. | $550. | d. | $1,000. | e. | None of the
above. | | |
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38.
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Harry
and Wilma are married and file a joint income tax return. On their tax return, they report $40,000 of
adjusted gross income ($18,000 salary earned by Harry and $22,000 salary earned by Wilma) and claim
two exemptions for their dependent children. During the year, they pay the following amounts to care
for their 4-year old son and 6-year old daughter while they work:
ABC Day Care
Center | $2,000 | Blue Ridge
Housekeeping Services | 2,000 | Mrs. Mason
(Harry's mother) | 1,000 | | |
Harry and Wilma may claim a credit for child and
dependent care expenses of: a. | $960. | b. | $1,000. | c. | $1,440. | d. | $1,500. | e. | None of the above. | | |
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39.
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Which
of the following will result in a recognized gain or loss in the current tax year? a. | Zack purchased
bay-side property for $40,000 in January. The following December the fair market value was
$42,000. | b. | Kathie sells her residence which she purchased for $55,000 and
receives $53,000. | c. | Ellen sells her 1964 Mustang with an adjusted basis of $1,500
for $20,000. | d. | Susie inherits property with a fair market value of $75,000.
The property had a basis of $15,000 to the decedent. | e. | None of the
above. | | |
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40.
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Joy
sells her personal use boat for $18,000. She purchased the boat two years ago for $15,000. What is
her recognized gain or loss? a. | $0. | b. | $3,000. | c. | $15,000. | d. | $18,000. | e. | None of the
above. | | |
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41.
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Katie
sells her personal use automobile for $12,000. She purchased the car three years ago for $25,000.
What is Katie's recognized gain or loss? a. | $0. | b. | $12,000. | c. | ($13,000). | d. | ($25,000). | e. | None of the
above. | | |
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42.
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In
order to qualify for like-kind exchange treatment under § 1031, which of the following
requirements must be satisfied? a. | The form of the transaction is an
exchange. | b. | Both the property transferred and the property received are
held either for productive use in a trade or business or for investment. | c. | The property is
like-kind property. | d. | All of the above. | e. | None of the
above. | | |
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43.
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During 2001, taxpayers decided to sell their residence, which had a basis of $141,000.
They had owned and occupied the residence for 11 years. To make it more attractive to prospective
buyers, they had it painted in April at a cost of $6,000 and paid for the work immediately. They sold
the house in May for $295,000. Broker's commissions and other selling expenses amounted to $9,000.
They purchased a new residence in June for $210,000. What is the realized gain? a. | $295,000. | b. | $145,000. | c. | $139,000. | d. | $0. | e. | None of the above. | | |
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44.
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During 2001, taxpayers decided to sell their residence, which had a basis of $141,000.
They had owned and occupied the residence for 11 years. To make it more attractive to prospective
buyers, they had it painted in April at a cost of $6,000 and paid for the work immediately. They sold
the house in May for $295,000. Broker's commissions and other selling expenses amounted to $9,000.
They purchased a new residence in June for $210,000. What is the recognized gain? a. | $0. | b. | $139,000. | c. | $145,000. | d. | $154,000. | e. | None of the
above. | | |
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45.
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The
tax law requires that capital gains and losses be separated from other types of gains and losses.
Among the reasons for this treatment are: a. | Long-term capital gains may be taxed at a lower rate than
ordinary gains. | b. | Capital losses that are short-term are not
deductible. | c. | Net capital loss is deductible only up to $3,000 per
year. | d. | a and c | e. | None of the
above. | | |
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46.
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The
short-term and long-term holding periods, respectively, are: a. | Eighteen months
or less and more than eighteen months. | b. | Twenty-four months or less and more than twenty-four
months. | c. | Six months or less and more than six
months. | d. | Twelve months or less and more than twelve
months. | e. | None of the above. | | |
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47.
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Which
of the following is a capital asset? a. | The bicycle of a 10-year old child. The child purchased the
bicycle with money inherited from an aunt. | b. | The tools used by a self-employed
carpenter. | c. | The lots owned by a company that is in the business of buying
and reselling residential building lots. | d. | A "mint" set of 1985 coins owned by a coin dealer and
that is for sale on his website. | e. | None of the above. | | |
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48.
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A
worthless security had a holding period of 11 months when it became worthless on November 10, 2001.
The investor who had owned the security had a basis of $10,000 for it. Which of the following
statements is correct? a. | The investor has a long-term capital loss of
$10,000. | b. | The investor has a short-term capital loss of
$10,000. | c. | The investor has a nondeductible loss of
$10,000. | d. | The investor has a long-term capital gain of
$10,000. | e. | None of the above. | | |
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49.
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Alvin
has a NLTCG of $4,000 and a NSTCL of $4,800. What is Alvin's 2001 capital loss deduction if Alvin's
adjusted gross income for 2001 (before considering capital asset transactions) is
$40,000? a. | $3,000. | b. | $8,800. | c. | $1,800. | d. | $800. | e. | None of the
above. | | |
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50.
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Individuals with capital gains and/or losses use Schedule D. Using the 2000 Schedule D
as a reference, which of the following is correct? a. | The form is not
used unless there is at least $1,000 of capital gain or loss. | b. | Part I reports
long-term gains and losses. | c. | Part III reports installment sale gains and
losses. | d. | Part III requires a netting of net short-term capital loss
against net long-term capital gain. | e. | None of the above. | | |
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