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ACC 5170 Take Home Final Exam Fall 2016 This exam is due by December 20, 2016 at 3pm. You can turn the exam in to the Accounting Department student assistants in Room 300 Prentis. Please place answers in the appropriate boxes and show your work for any potential partial credit. PROBLEM 1 - TAX YEAR IS 2015. Print NEATLY the appropriate treatment for each item listed. INC EXC FOR FROM ND Received and Includible in Gross Income Received and Excludible from Gross Income Paid and Deductible FOR calculating Adjusted Gross Income Paid and Deductible FROM Adjusted Gross Income Paid and Not Deductible Child support received Salary received Interest paid on home mortgage ($900,000 total debt) State scholarship received for ten months (tuition and books) Proceeds received from sale of term papers Compensatory damages received for medical expenses not covered by insurance Interest received on bonds issued by Piglet County school district Interest received on state income tax refund Amount paid to attend a health spa for one week Tax Return preparation fees paid Reimbursement received for medical expenses from the employee's company's group medical insurance plan Damages received for slander State sales tax paid (state has no income tax) Interest received on United States Treasury bonds Gift received from parents Alimony received College room and board paid Life insurance proceeds received from policy on aunt's life (taxpayer was named the beneficiary) Wage continuation payments received from plan purchased by the taxpayer Gambling winnings earned Penalty incurred for early withdrawal of a Certificate of Deposit Cash prize received from church raffle Lottery winnings received Child support paid Qualified moving expenses incurred to change jobs Alimony paid Tuition paid for CPA review course Scholarship received for room and board Worker's compensation benefits received Embezzled funds received Subscription paid to Wall Street Journal (employed as financial analyst) One half of self employment tax paid PROBLEM 2 For each of the following situations, provide the requested information for tax year 2015. Be sure to read carefully and answer the question that is being asked using the information given. All tax years are 2015 unless indicated differently. Place your answers in the indicated boxes. Situation 1 Zeus, widowed, age 75, paid the entire cost of maintaining his mother, age 102, in a home for the aged, for the entire year, 2016. Zeus' mother had $19,000 of social security income for 2016 which is not taxable. She also received $4,000 from a taxable pension. Filing status for Zeus Standard Deduction Dollar Amount Number of Exemptions allowed Situation 2 Pooh, who is 72 years old and single, is claimed as a dependent on his daughter's tax return. During 2016, Pooh received $700 in interest on a savings account and $2,800 of social security benefits. Pooh also earned $2,250 from a part-time job. Filing status for Pooh Standard Deduction for Pooh Dollar amount Number of Exemptions allowed for Pooh Assume that Pooh's Adjusted Gross Income was $3,100. Taxable Income for Pooh Situation 3 Donald (age 69) and Daisy (age 67) are married taxpayers. They have two children (Huey (14 and a sophomore in high school) and Dewey (21 who graduated from Wayne State in May 2016). During 2016 Huey earned $4,090 from his part-time summer job as a lifeguard and Dewey earned $13,500 from his management job that he started in November 2016. Both Huey and Dewey live at home with their parents. Daisy's parents, Chip and Dale, (both age 89 and Dale is blind) also live with them. The parents are completely supported by Donald and Daisy. Donald and Daisy's total gross income for 2016 is $158,000. Their itemized deductions are comprised of the following: Charitable Contributions Mortgage interest Real Estate taxes Filing status Itemized Deductions or Standard Deduction Dollar Amount Number of Exemptions allowed 4,000 3,800 5,000 Situation 4 Char and Russ Dasrup (ages 46 and 49 respectively) have one daughter, Siera, who is 18 years old. In November of last year, the Dasrup's took in Siera's 18 year old friend, Angela (who is blind), who has lived with them ever since. The Dasrup's have not legally adopted Angela but Siera often refers to Angela as "her sister." The Dasrup's provide all of the support for both girls, neither girl receives any income during the year, and both girls live at the Dasrup's residence. The Dasrup's incurred the following expenses: Medical expenses (amount that exceeds AGI limitation) Mortgage interest Charitable contributions Taxes 3,780 3,280 690 1,350 Filing status Itemized Deductions or Standard Deduction Dollar Amount Number of Exemptions allowed Situation 5 Heather, a single taxpayer who files as a head of household, earns $60,000 in taxable income and $5,000 in interest from an investment in city of Oxford Bonds. Using the U.S. tax rate schedule for year 2015, how much federal tax will she owe? What is her average tax rate? What is her effective tax rate? What is her current marginal tax rate? Federal Tax Owed Average Tax Rate Effective Tax Rate Current Marginal Tax Rate PROBLEM 3 For each of the following situations, provide the requested amount or amounts. Sharif purchased a new business asset (three-year property) on July 23, 2016, at a cost of $50,000. He did not elect to expense any of the asset under 179, nor did he elect straight-line cost recovery. He did want to take any additional first year depreciation if it is available. Convention Total cost recovery deduction for 2016. Adam purchased a hotel building on May 2, 2015, for $3,000,000. Determine the cost recovery deduction for 2016. Convention Total cost recovery deduction for 2016. Joseph purchased a new business asset (five-year property) on January 5, 2015, at a cost of $100,000. This was the only asset acquired by Joseph during 2015. He did not elect to expense any of the asset cost under 179, nor did he elect straight-line cost recovery. On October 28, 2016, Joseph sold the asset. Convention Total cost recovery deduction for 2016. Jennifer purchased a new business asset (five-year property) on November 2, 2016, at a cost of $113,000. This was the only asset purchased and placed in service during this year. Jennifer did not elect to expense any of the asset under 179, nor did she elect straight-line cost recovery. Convention Total cost recovery deduction for 2016. Problem 4 For each of the following situations, provide the requested amount or amounts. Tax year is 2016 unless indicated differently. Situation 1 Antonio and Christopher are both involved in operating illegal businesses. Antonio operates a gambling business and Christopher operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses. Antonio Christopher Employee salaries $200,000 $200,000 Bribes to police Rent and utilities Cost of goods sold Taxable Income for Antonio Taxable Income for Christopher 25,000 50,000 -0- 25,000 50,000 125,000 Situation 2 Smith operates a roof repair business. This year Smith's business generated cash receipts of $32,000 and Smith made the following expenditures associated with his business: Advertising Car and Truck Expenses Depreciation Employee compensation Education $ 500 1,360 3,200 5,000 1,000 The education expense was for a two-week, nighttime course in business management. Smith believes the expenditure should qualify as an ordinary and necessary business expense. What net income should Smith report from his business? Smith is on the cash method and calendar year. Taxable Income for Smith PROBLEM 5 In the following situation, provide the requested information. (Be sure to take into account all limitations/adjustments that may be applicable and show all of your work for any potential partial credit) and place your answer in the indicated box. Tax year is 2016. Gaston is married has a full-time job as an electrical engineer for an automotive supply firm. In his spare time, Gaston enjoys raising, breeding and training Border Collies. He attends numerous dog shows throughout the year and receives income from the sale and training of dogs, awards and prizes. He and his wife's adjusted gross income for the year (ignoring the Border Collie activity) is $150,000. This year he received income of $10,000 from awards, prizes, sale of puppies, fees for training dogs. He had expenses for veterinary fees, vaccinations and medicines, dog licenses, dog food, grooming, breeding fees, show fees, and other miscellaneous expenses of $7,000. In addition, he incurred expenses for travel to and from shows in various cities amounting to $6,000 and also expenses for meals while attending shows of $2,000. In addition, he conducts this activity at his principal residence and he estimates that the real estate taxes allocable to the kennel and space for storage of items relating to this activity were $1,000 for this year and depreciation for the kennel amounted to $500. Gross Income from the Border Collie activity Deductible expenses for the Border Collie activity if it is classified as a business (Show your work below - place answer in the box) Net Income/(Loss) from the Border Collie business Deduction for the Border Collie activity if it is classified as a hobby (Show your work below - place answer in the box) Problem 6 Matt Fig is a computer programmer and incurred the following transactions during 2016. Sales Price Basis Purchased Sold Provo City BondsPurchased when $10,000 originally issued by Provo City $5,000 11/1/2012 5/2/2016 Cisco Preferred Stock 6,000 7/15/2007 1/12/2016 Dreyer's Grand 14,000 Ice Cream Stock 10,000 7/1/2015 4/20/2016 Novell Common 2,000 10,000 2/12/2013 11/29/2016 IBM Stock 4,000 3,000 8/2/2004 5/2/2016 ABC Common 6,000 9,000 5/30/2014 10/20/2016 Prior year ST Capital Loss Carryforward 5,500 Prior year LT Capital Loss Carryforward 5,500 25,000 Net Short-Term Capital Gain/Loss reported on the 2016 Schedule D Net Long-Term Capital Gain/Loss reported on the 2016 Schedule D Amount of capital gain is subject to the preferential capital gains rate Problem 7 For each situation indicated the requested answer. All tax years are 2016 unless indicated otherwise. Situation 1 Four Friends Forever (FFF), an LLC, opened several years ago and reports the following net 1231 gains and losses since it began business. Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 (current year) Net 1231 Gains/(Losses) ($11,000) 8,000 (15,000) (2,000) 20,000 (27,000) 107,000 Character of the year 7 $107,000 gain Situation 2 Brett is self-employed and he uses a room in his home as his principal place of business. He meets clients there and doesn't use the room for any other purpose. The size of his home office is 600 square feet. The size of his entire home is 3,000 square feet. During the current year, Brett received $10,000 of gross income from his business activities and he reports $7,500 of business expenses unrelated to his home office. For his entire home, he reported $10,000 of mortgage interest, $2,000 of property taxes, $2,500 of home operating expenses, and $4,500 of depreciation expense. Assume he uses the actual expense method of computing home office expenses. Amount of Home Office expenses allowed as a deduction in the current year, if any. Amount and type of Home Office expenses carried over to next year if any Situation 3 Tracy owns a condominium near Newport Beach in California. This year, she incurs the following expenses in connection with her condo: Insurance $1,200 Mortgage interest 7,500 Property taxes 4,000 Repairs and maintenance 850 Utilities 2,000 Depreciation 5,500 During the year, Tracy rented the condo for 90 days, receiving $20,000 of gross income. She personally used the condo for 50 days. Assuming Tracy uses the IRS method of allocating expenses to rental use of the property. Net rental income for the year Situation 4 Kyle owns a condominium near Laguna Beach, California. This year, he incurs the following expenses in connection with his condo: Insurance $1,400 Mortgage interest 6,500 Property taxes 3,200 Repairs and maintenance 900 Utilities 1,600 Depreciation 5,700 During the year, Kyle rented the condo for 100 days, receiving $25,000 of gross income. He personally used the condo for 60 days. Assuming Kyle uses the Tax Court method of allocating expenses to rental use of the property. Net rental income for the year