Midterm Examination Acct/307 Loudoun Campus Instructor: Robert Brakaj, CPA, MSBA Approximate Problem Topic Points Minutes A - I Multiple Choice 90 75 A-II Matching 10 10 Total 100 Checking Work 5 90 Problem A - I Multiple Choice (30 x 3 = 90 points) Chose the best answer. 1. Which, if any, of the following is a typical characteristic of an ad valorem tax? a. Taxpayer compliance is greater for personal property than for real property. b. The tax on automobiles always considers the weight of the vehicle. c. Most states impose a tax on real property. d. A tax on intangible property is common in most states. e. None of the above. 2 . Which of the following is not a characteristic of the statute of limitations? a. A different statute of limitation applies to tax refunds and deficiencies. b. A six-year statute of limitations applies if income is understated by more than 25%. c. There is a six-year statute of limitations on assessments of tax if a return has never been filed. d. The three-year statute of limitations applies to timely filed tax returns reporting substantially proper amounts of income and deductions. e. None of the above. 3. In 2012, Jamie had the following transactions: Salary $ 50,000 Capital loss from a stock investment (5,000) Alimony payments (7,000) Received repayment of an interest-free loan he made to his brother in 2010 20,000 Home mortgage interest expense on personal residence 8,000 Jamie's AGI is: a. $32,000. b. $40,000. c. $49,000. d. $52,000. e. None of the above. 4. Herald and Shantelle are married and under 65 years of age. During 2012, they furnish more than half of the support of their 20-year old daughter, Ashley, who is a full-time college student. Ashley earns $8,500 from her job, most of which she uses to pay for college. Herald and Shantelle also provide more than half of the support of Herald's cousin who lives with them for the entire year. Shantelle's father, who died on June 10, 2012, at age 70, has for many years qualified as their dependent. How many personal and dependency exemptions should Herald and Shantelle claim? a. Two. b. Three. c. Four. d. Five. e. None of the above. 5. Kyle and Chloe, ages 55 and 54, respectively, file a joint tax return for 2012. They provided all of the support for their 32-year-old son, who had $3,900 of gross income. Their 23-year-old daughter, a full-time student until her graduation on June 14, 2012, earned $7,000, which was 35% of her total support during 2012. Her parents provided the remaining support. Kyle and Chloe also provided total support for Chloe's father who is a citizen and life-long resident of Canada. How many personal and dependency exemptions can Kyle and Chloe claim on their 2012 income tax return? a. Five. b. Four. c. Three. d. Two. e. None of the above. 6. For the qualifying relative rule: a. A dependent must reside with the taxpayer. b. A dependent must satisfy an age requirement. c. A dependent must be related to the taxpayer. d. A dependent may be a citizen or resident of Canada. e. None of the above. 7. Tommy is in the 35% tax bracket. During 2012, he had the following capital asset transactions: Gain from the sale of an art collection (held for 2 years) $20,000 Gain from the sale of an investment in stock(held for 2 years) 30,000 Gain from the sale of a land investment (held for 11 months) 6,000 Tommy's tax consequences from these gains are as follows: a. (15% X $20,000) + (28% X $30,000) + (35% X $6,000). b. (15% X $30,000) + (35% X $26,000). c. (28% X $20,000) + (15% X $30,000) + (35% X $6,000). d. (15% X $50,000) + (35% X $6,000). e. None of the above. 8. Paul Bunyon, Inc.., an accrual basis taxpayer, leased a wood shredding machine to a new customer on December 27, 2012. The machine was to rent for $400 per month for a period of 12 months beginning January 1, 2013. The customer was required to pay the first and last month's rent at the time the lease was signed. The customer also was required to pay a $400 damage deposit. Paul Bunyon must recognize as income from the lease in 2012: a. $0. b. $400. c. $800. d. $1,200. e. None of the above. 9. As a general rule: a. Income from investment property is always taxed to the person who receives the income. b. Income from a CD is taxed to the person who collects the income. c. The recipient of income from services must pay the tax on the income. d. Income from services is taxed to the person who provides the services. e. None of the above. 10. Alicia operates a gym. She sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $300 ($300/12 = $25 per month); a two-year membership costs $360($360/24 = $15 per month). Cash payment is required at the beginning of the membership. On July 1, 2012, Alicia sold a one-year membership and a two-year membership. a. If Alicia is an accrual basis taxpayer, her gross income from the contracts for 2012 is $660 ($360 + $300). b. If Alicia is an accrual basis taxpayer, her gross income from the contracts for 2012 is $510 ($150 + $360). c. If Alicia is an accrual basis taxpayer, her gross income from the contracts for 2012 is $240 ($150 + $90). d. If Alicia is an accrual basis taxpayer, her gross income from the contracts for 2012 is $390 ($300 + $90). e. None of the above. 11. Under the terms of a divorce agreement, Manny is to pay his wife Bailey $2,000 per month. The payments are to be reduced to $800 per month when their 12 year-old child reaches age 18. During the current year, Manny paid $24,000 under the agreement. Assuming all of the other conditions for alimony are satisfied, Manny can deduct from gross income (and Bailey must include in gross income) as alimony: a. $-0-. b. $9,600. c. $14,400. d. $24,000. e. None of the above. 12. Kenneth. After the company had paid $200,000 in premiums, Kenneth died and the company collected the $5 million face amount of the policy. The company also purchased group-term life insurance on all its employees. Kenneth's widow, Christy, received the $250,000 proceeds from the group-term life insurance policy. a. Walnut Company must include $4,800,000 ($5,000,000 - $200,000) in gross income and Christy must include $250,000 in gross income. b. Walnut Company can exclude $4,800,000 ($5,000,000 - $200,000) from gross income, but Christy must include $250,000 in gross income. c. Christy can exclude the life insurance proceeds of $250,000, but Walnut Company must include $4,800,000 ($5,000,000 - $200,000) in gross income. d. Walnut Company and Christy can exclude the life insurance proceeds of $5,000,000 and $250,000 respectively from gross income. e. None of the above. 13. In December 2012, Carl died. His wife was the beneficiary of his $500,000 life insurance policy. Carl had paid $25,000 in premiums. His wife elected to collect the proceeds in ten equal installments of $55,000 ($50,000 on the face amount of the policy and $5,000 interest). Of the $55,000 she collected in 2012, the nontaxable amount is: a. $0. b. $5,000. c. $50,000. d. $55,000. e. None of the above. 14. Antonio was injured in an automobile accident and received $250,000 for his physical injury, $40,000 for his loss of income, and $200,000 punitive damages. As a result of the award, the amount Antonio must include in gross income is: a. $40,000. b. $200,000. c. $240,000. d. $490,000. e. None of the above. 15. Charles, age 19, is a full-time student at Sierra University and a candidate for a bachelor's degree. During 2012, he received the following payments: Wages $9,000 State scholarship for ten months - tuition and books 8,000 - room and board 6,000 Loan from college financial aid office 2,750 Gift from parents 3,500 Cash dividends 2,500 Cash prize awarded in a contest 1,250 $33,000 What is Charles's adjusted gross income for 2012? a. $9,500. b. $10,750. c. $17,500. d. $18,750. e. None of the above. 16. Which of the following is a deduction from AGI? a. Trade or business expenses. b. Losses on the sale of property. c. Reimbursed employee business expenses. d. Investment-related expenses attributable to the production of investment income. e. None of the above. 17. George, a calendar year cash basis taxpayer, has the following transactions: Salary from job $60,000 IRA contribution 5,000 Student loan interest 1,500 Moving expenses 3,500 Based on this information, George has: a. AGI of $50,000. b. AGI of $56,500. c. AGI of $58,500. d. AGI of $60,000. e. None of the above. 19. Anthony is single, under age 65, and has gross income of $70,000. His bona fide deductible expenses are as follows: Alimony paid $8,000 Charitable contributions 5,000 Contribution to a traditional IRA 5,000 Expenses paid on rental property 3,000 Interest and taxes on personal residence 9,000 State income tax 1,200 What is Anthony's AGI? a. $38,800. b. $49,000. c. $54,000. d. $57,000. e. $62,000. 20. James operates an illegal gambling operation and incurred the following expenses: Salaries $200,000 Illegal kickbacks 32,000 Bribes to border guards 44,000 Cost of goods sold 300,000 Rent 12,000 Interest 18,000 Which of the above amounts reduces his taxable income? a. $300,000. b. $530,000. c. $562,000. d. $606,000. e. None of the above. 21. If a vacation home is used primarily for personal use (rented for less than 15 days per year), which of the following is true? a. No expenses related to the home are allowed as a deduction. b. All rental income is excluded from AGI. c. All expenses are deductible from AGI. d. Expenses must be allocated between rental and personal use. e. None of the above. 22. Lizzie pursued a hobby of making wooden bowls in her spare time. During the year she sold the bowls for $ 11,500. She incurred expenses as follows: Supplies $8,200 Interest on loan to get business started 2,850 Advertising 575 Assuming that the activity is deemed a hobby and Lizzie takes the standard deduction, how should she report these items on her tax return? a. Include $11,500 in income and deduct $11,500 for AGI. b. Ignore both income and expenses since hobby losses are disallowed. c. Include $11,500 in income and deduct none of the expenses since hobby expenses must be itemized. d. Include $11,500 in income and deduct interest of $2,850 for AGI. e. None of the above. 23. Anne, a calendar year cash basis taxpayer, owns and operates several fast food restaurants in Georgia, and wants to expand to other states. During 2012, she spends $25,000 to investigate several restaurants in Alabama and $27,000 to investigate fresh food markets in Georgia. She acquires the Alabama operations, but not the fresh food markets in Georgia. As to these expenses, Anne should: a. Expense $25,000 and not deduct $27,000 related to the fresh food markets. b. Expense $27,000 for 2012. c. Expense $3,000 for 2012 and capitalize $49,000 and amortize. d. Expense $52,000. e. None of the above. 24. On May 1, 2010, Galaxy Loan Company loaned Victor $50,000. In 2011, Victor filed for bankruptcy. At that time, it was revealed that Victor's creditors could expect to receive 40 cents on the dollar. In March 2012, final settlement was made, and Galaxy received $5,000. Galaxy's policy is to deduct losses as soon as permitted. How much loss can Galaxy deduct and in which year? a. 2010-$45,000. b. 2011-zero; 2012-$45,000. c. 2011-$30,000; 2012-$15,000. d. 2011-$20,000; 2012-$25,000. e. None of the above. 25. On January 10, 2011, Nova Corporation purchased stock in Universe Corporation (the stock is 1244 small business stock) for $75,000. On October 15, 2012, Nova sold the stock for $15,000. How should Nova treat the loss on the sale of the stock? a. $60,000 ordinary loss. b. $60,000 short-term capital loss. c. $60,000 long-term capital loss. d. $50,000 ordinary loss and $10,000 long-term capital loss. e. None of the above. 26. Willard had adjusted gross income of $75,000. During 2012, his personal use summer home was partially destroyed by a fire. Pertinent data with respect to the home follows: Cost basis $175,000 Value before casualty $265,000 Value after casualty $185,000 Willard was insured for 60% of his actual loss and he received the insurance settlement. What is Willard's allowable casualty loss deduction? a. $80,000. b. $32,000. c. $24,500. d. $24,400. e. $0. 27. Which, if any, of the following is a deduction for AGI? a. Interest on student loans. b. Moving expenses. c. Contribution to a traditional Individual Retirement Account. d. One-half of self-employment tax. e. All of the above. 28. Antonio was injured in an automobile accident and received $250,000 for his physical injury, $40,000 for his loss of income, and $200,000 punitive damages. As a result of the award, the amount Antonio must include in gross income is: a. $40,000. b. $200,000. c. $240,000. d. $490,000. e. None of the above. 29. A use tax is imposed: a. At a higher rate than the sales tax rate. b. By only a few states. c. To prevent the avoidance of the sales tax. d. By the Federal government. e. None of the above. 30. In January, Donna sold stock with a cost basis of $50,000 to her brother, Lamar, for $40,000, the fair market value of the stock on the date of sale. Five months later, Lamar sold the same stock through his broker for $55,000. What is the tax effect of these transactions? a. Disallowed loss to Donna of $10,000; recognized gain to Lamar of $15,000. b. Deductible loss to Donna of $10,000; recognized gain to Lamar of $15,000. c. Disallowed loss to Donna of $10,000; recognized gain to Lamar of $5,000. d. Disallowed loss to Lamar of $10,000; recognized gain to Donna of $5,000. e. None of the above. Problem A - II Matching (12 x 1 = 12 points). Two points credit (in case of 100%) will be applied to missing points. Match the statements that relate to each other. Note: Some choices may be used more than once. a. 3 years from due date of return b. 3 years from date return is filed c. 20% of underpayment d. 5% per month (25% limit) e. 0.5% per month (25% limit) f. Conducted at IRS office g. Conducted at taxpayers office h. 6 years i. 45-day grace period allowed to IRS j. No statute of limitations (period remains open). k. No correct match provided 1. Office audit 2. Field audit 3. Failure to file penalty 4. Failure to pay penalty 5. Negligence penalty 6. Civil fraud penalty 7. Fraud and statute of limitations 8. Early filing and statute of limitations (deficiency situations) 9. Late filing and statute limitations (deficiency situations) 10. No return and statute limitations 11. More than 25% gross income omission and statute of limitations 12. Interest due on refund