Federal Taxation multiple choice

Jul 9th, 2014
Price: $30 USD

Question description

Jeff and Annette are married and report on the cash basis. For the current tax year they received the following:

$1,300 interest on local government obligations.

$  50 interest on federal income tax refund.

$ 1,200 interest on United States Treasury Bonds

How much interest income will they report on their tax return for the current year?





In the current tax year Carlos received a state income tax refund related to taxes he had paid for the previous tax year. The refund was $400 and he also received interest income on the refund of $5. In the previous year Carlos itemized deductions on his federal income tax return. His itemized deductions exceeded his standard deduction by $3,000. How much income must Carols report from these receipts?





In which of the following situations is income taxable in Year 1 to Belinda. Belinda owns an architectural firm and reports on the cash basis.

I.  Belinda received $6,000 from a client on December 28, Year 1. She deposited the check on December 29 but it was rejected because the client's bank account did not have sufficient funds.

II.  Belinda was offered $5,000 from a client on December 31, Year 1 but she refused to accept the payment and asked the client to mail the check to her the next week.

III.  Belinda received a $4,000 check from a client on December 29, Year 1 but did not deposit in her checking accounting until January 4, Year 2.

I only.

II only.

II and III only

I, II, and III.

Hubie is the sole shareholder of EW Enterprises, Inc. His basis in the EW stock is $100,000. On December 31 of the current year EW distributed $175,000 to Hubie. EW has current and accumulated earnings and profit, in total, of $60,000. How will this distribution be treated for federal income tax purposes?

Dividend income of $60,000 and capital gain of $15,000.

Dividend income of $75,000.

Dividend income of $60,000 and capital gain of $115,000.

Dividend income of $175,000.

Louise owns 100 shares of Social, Inc. common stock which she purchased for $1,500. On May 29 of the current year, Social issued a 10% proportionate common stock dividend and Louise received an additional 10 shares, each of which has a value of $18. How much income does Louise report for this dividend?





Alphonso purchased an annuity contract for $60,000 from ACE Insurance on November 1 of the current year. He is to receive $1,500 per month starting December 1 of this year and continuing for life. He has a life expectancy of 5 years at the time the annuity is purchased. Alphonso's reportable annuity income for the current year is:

$ 500

$ 1,000

$ 1,500


Fred and Wilma divorced during the current tax year. As part of the divorce agreement Fred is required to transfer to Wilma ownership of stock in ACE Corporation which has a tax basis of $80,000 and fair market value at the date of transfer of $125,000. How much income does Wilma recognize for this transfer and what is her basis in the stock?











Garth was injured at work when he slipped while walking down the stairs and he was not able to work for four months. He received disability payments of $1,200 per month for these four months. The annual premiums on the policy were paid 75% by his employer and 25% by Garth. How much of the disability payments are included in his gross income?

$ 900




Mike and Paula were divorced during the current tax year and the following payments were made by Mike in accordance with the written divorce decree:

  • $5,000 to UNA University for Paula's tuition.

  • $10,000 to Paula for child support.

  • $12,000 per year to Paula which must continue in all circumstances for 10 years.

How much income must Paula report for these payments?

$ 0




Nathaniel was recently diagnosed with a brain tumor and it has been determined by his doctor that he is "terminally ill" and has less than 2 years to live. Nathanial owns a life insurance policy with a face value of $500,000. He sells his insurance policy for $440,000. How much income must Nathaniel report related to his sale?

$ 0




Lissi is a student at Apple University and she received the following payments during the year to help support her education:

  • $2,000 scholarship from Apple University.

  • $3,000 scholarship from a scholarship fund at her mother's place of employment.

  • $2,500 from her parents.

The funds were used to pay $4,000 of tuition and fees and $800 for books for her courses. The remaining amounts were used for her living expenses.

How much gross income does Lissi have from these transactions?

$ 200




Damon received a gift of stock from a friend as a graduation gift. At the date of gift the stock had a basis of $1,200 and fair market value of $800. Damon's friend had owned the stock for four years. Three months after receiving the gift Damon sells the stock for $1,000. What is Damon's recognized gain or loss from the sale?

$1,000 gain

$ 200 gain

$ 200 loss

No gain or loss.

Kristi and Van adopted a two-year old child this year. They incurred $9,500 of qualified adoption expenses related to the adoption. Van's employer, GH Industries, maintains an adoption assistance program and reimbursed Van $7,000 for these costs. Kristi and Van's adjusted gross income for the year is $52,000. How much income do Kristi and Van need to report on their federal income tax return?

$ 0




Vet, Inc. provides an award to its employees who have achieved consecutive years of service of 5, 10, 15, 20, and 25 years through a qualified plan. All awards are given at the company picnic in July. Barney has worked as a receptionist for Vet for 15 years and received a new clock which has a fair market value of $2,100. How much income must Barney report for the receipt of the boots?



$ 500

$ 0

Which of the following is an example of a completely nontaxable fringe benefit for Lori, an employee of WORK, Inc.? WORK owns a division that operates an airline and another division that owns vacation resorts. Lori works for the airline division.

Group term life insurance of $200,000

Reimbursement of $225 for her subscription to Air Travel Business Journal.

Free lodging at a resort in Florida when the resort had an occupancy rate of 65%.

Free use of a company owned vehicle for three weeks while her car was being repaired.

Wang is a 43-year old computer programmer who earns an annual salary of $80,000. His employer provides group-term life insurance coverage at twice the annual salary for all employees. The annual amount of income for each $1,000 of taxable insurance coverage for an individual 43 years old is $1.20. How much gross income must Wang report for this benefit?

$ 0




Valerie receives 100 incentive stock options from her employer in Year 1 when the underlying stock has a value of $20 per share. In Year 2 she exercises all the options at the option price of $25 when the value of the stock is $28. In Year 5, the current year, Valerie sells all 100 shares for $30. How much gross income must Valerie report in Year 2 and in Year 4 when computing regular taxable income?

Year 2

Year 4


$  700


$  500

$ 0


$ 0

$  500

Which of the following businesses must use the accrual method of accounting?

I.  Chicken, Inc., a restaurant chain with annual gross receipts of $6,000,000.

II.  Tours, a general partnership with annual gross receipts of $450,000, that provides tours of the Sedona mountains.

III.  Appraisers, Inc., a real estate appraising company, that has had average gross receipts of $900,000 since its inception three years ago.

I only.

I and II only.

I and III only.

I, II, and III.

Betty owns a duplex that she has used for rental property for the last 12 years. During the current tax year the tenants broke their lease in April and moved out. Therefore, they lost the right to receive a refund of their $400 security deposit. New tenants moved in during November and paid $600 rent for November and $600 for December, $600 for the last month of their one-year lease (non-refundable), and a $500 refundable security deposit. How much gross income does Betty recognize from these transactions?





Which of the following statements is correct with regard to changes in accounting methods for federal income tax purposes?

A taxpayer can never change a method of accounting, unless the taxpayer is changing from an incorrect method to a correct method.

A taxpayer does not need the permission of the Internal Revenue Service to change accounting methods.

Any adjustment to income required due to a voluntary change in accounting method is spread over five years beginning with the year of change.

If the change is initiated by an Internal Revenue Service examination and the change increases income, 100% of the change must be included in income for the year of the change.

Which of the following statements is false with regard to inventory valuation for federal income tax purposes?

The lower of cost or market method can be used to value inventory in certain circumstances.

A taxpayer can use FIFO to value inventory for tax purposes only if FIFO is also used for financial reporting purposes.

A taxpayer can use LIFO to value inventory for tax purposes only if LIFO is also used for financial reporting purposes.

The weighted-average method is a permissible method to use to value inventory for federal tax purposes.

Which of the following statement is false with regard to methods of accounting for tax purposes?

Regular corporations do not have restrictions on the year-end that they can choose, but partnerships and S corporations do have restriction.

Under the cash method of accounting, the taxpayer has no basis in its accounts receivables.

In general, all C corporations have the opportunity to use the cash method of accounting if they choose to do so.

Prepaid interest is usually taxed when received, even by accrual basis taxpayers.

Samuel invested $10,000 a year into his retirement plan from his before tax earnings (that is, he received a deduction for these contributions and was not taxed on the income). His employer contributed $5,000 a year to Samuel's retirement fund. After 30 years of contributions, Samuel retires and receives a distribution of $900,000, the balance in his retirement fund. Samuel must include what amount in gross income?

$ 0




Which of the following statements is correct with regard to traditional IRAs and Roth IRAs?

The maximum amount of contributions allowed for any given tax year is the same for traditional and Roth IRAs.

The taxation of distributions is the same for traditional and Roth IRAs.

The rules governing the deductibility of contributions to traditional and Roth IRAs are the same.

The deadline for making contributions to IRAs is different for traditional and Roth IRAs.

Melinda has been making contributions to her daughter's 529 plan for several years to help fund her college education expenses. She has contributed $100,000 to the plan since creating it. In the current tax year her daughter, age 19, begins her undergraduate college studies at UNA University and Melinda withdraws $18,000 from the plan to pay her tuition for the year. At the time of withdrawal the balance in the plan is $150,000. How much of the distribution must Melinda include in her gross income?

$ 0




Withdrawals from retirement plans before the age specified by the tax law can result in a 10% penalty unless certain requirements are met. Which of the following is not a valid reason for the 10% penalty to be waived for such distributions?

Distributions made due to death of taxpayer.

Distributions made so taxpayer could make mortgage payments on principal residence.

Distributions made due to disability of taxpayer.

Distribution made so funds could be used for first-time homebuyer expenses.

In the current tax year Rocky was nominated to receive an award for service to the local school system. No action was required on his part, either to apply for the award or if he received the award. When it was announced at a school board meeting that Rocky has been selected to receive the $1,000 award, he declined to accept the award. Rather, he asked that the funds be given to the local United Way chapter, a qualified charitable organization. Which of the following statements is true?

Rocky reports no gross income for the award and does not take a charitable contribution deduction.

Rocky reports no gross income for the award and takes a $1,000 charitable contribution deduction.

Rocky reports $1,000 gross income for the award and does not take a charitable contribution deduction.

Rocky reports $1,000 gross income and takes a $1,000 charitable contribution deduction.

Which of the following statements is correct with respect to the taxation of Social Security benefits for federal income tax purposes?

Social Security benefits received by the taxpayer are never included in gross income.

Social Security benefits received by the taxpayer may be included in gross income, but the inclusion will never exceed 85% of the benefits received.

Social Security benefits received by the taxpayer may be included in gross income, but the inclusion will never exceed 50% of the benefits received.

100% of the Social Security benefits received are included in income for all taxpayers.

Which of the following benefits provided to the employees must be included in taxable income?

SKY Airlines allows employees to fly for free if seats have not been sold within 15 minutes of the flight's departure time.

FUN Hotels allows its hotel managers to live at no charge in a hotel room directly connected to the registration area. If the managers choose to not live at the hotel they do not receive any additional cash compensation instead.

SUN has a gift shop and employees of SUN can purchase merchandise at a 30 % discount. SUN's gross profit percentage on the merchandise is 35%.

CPA Services allows employees free access to coffee and/or soda during the workday.

Lina has had several unusual events happen to her during the current tax year. Which of the following will cause her gross income to increase for tax purposes?

Her husband died this year and she received $100,000 in life insurance proceeds from a policy owned by her husband.

After having her leg severely damaged in an automobile accident, she received $50,000 for these damages from the driver who hit her car.

As a result of an automobile accident, the driver who hit her car paid Lina $25,000 in punitive damages, as ordered by the court, because the driver had been texting while driving.

Lina received $20,000 of disability income during the year on a disability policy that she took out five years ago and for which she pays the premiums.

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