PRACTICE EXAM: CHAPTERS 1, 3, 4, 6, 7, 8, 9

| June 9, 2016

Question
PRACTICE EXAM: CHAPTERS 1, 3, 4, 6, 7, 8, 9

1. The Fox Company placed in service on 3/1/2010 office equipment. It’s 5 year recovery property and cost 10,000. The half year convention applies. The 2013 depreciation deduction for tax purposes is:

2. Temple Corporation placed in service an office building on 9/3/2011. It is not eligible for any bonus depreciation or direct expensing. The building cost $2,500,000; $500,000 was properly allocated to land and $2,000,000 was allocated to the building. The 2011 AND 2013 depreciation deductions for tax purposes are:

3. The Ryan Company incurred 20,000 in business related meals and entertainment expenses in 2013. Ryan Company’s 2013 taxable income is about $1,000,000. The after tax cost of these meals and entertainment expenses is:

4. Mr. George is a citizen of Argentina, but is a U.S. permanent resident living in Philadelphia, PA. Mr. George earns a salary from a job in Philadelphia. Is Mr. George subject to the U.S. federal income tax?

5. Johnny and Mary Appleseed are married and will file a joint federal tax return. Their taxable income in 2013 is $50,000. What is their 2013 average tax rate?

6. The following information is available for XYZ Inc.(a corporation)

Net income before tax (NIBT) 1,495,000

Plus permanent book to tax differences 20,000

Less temporary book to tax differences ( 15,000)

Equals taxable income 1,500,000

What is XYZ’s tax liability on its tax return?

7. The following information is available for ABC, Inc. (a corporation)

Net income before tax (NIBT) 1,020,000

Less permanent book to tax differences ( 20,000 )

Less temporary book to tax differences ( 30,00 0 )

Equals taxable income 970,000

What is ABC’s book tax expense?

8. TUCC Company uses the cash basis of accounting for tax and files on a calendar year. In December 2013 it paid $48,000 in advance for a 2 year lease for office space. The lease begins on December 1, 2013 and ends on November 30, 2015. To what extent can TUCC deduct this payment in 2013?

9. The Beta Corporation and the NABA Corporation are related parties. Both companies perform financial accounting services. NABA negotiated a contract to provide services to a client for $100,000. Beta has a 25% marginal tax rate and NABA has a 34% marginal tax rate. Assuming that NABA successfully negotiated the contract, but Beta actually performed the services, what is the after tax cash flow from the contract?

10. The Johnsons operate a retail hardware store in state X. State X has a 5% sales and use tax on all retail sales. During 2013, the Johnsons purchased $967,000 of inventory for their store. How much sales tax did the Johnsons pay on the purchase of the inventory?

11. Assume that a taxpayer with a marginal tax rate of 25% is considering making a gift of a taxable corporate bond to her daughter. The bond earns $10,000 in interest per year. Her daughter’s marginal tax rate is 15%. What is the annual income tax savings to this family, if any, that will result from this gift.

12. TU Company was organized in 2007. At that time TU capitalized for tax purposes $25,000 in organization costs. TU expensed all of these on its books in 2007. For tax purposes, TU elected to amortize the $25,000 over 180 months. What is the book to tax difference for this in 2013?

13. The ABC Company uses the cash basis of accounting and began business on January 1, 2011. The company operates a retail clothing store in a local mall. During 2011, the company purchased and paid for merchandise totaling $780,000. According to a physical inventory count on December 31, 2011, the company had $75,000 of merchandise on hand. What is ABC’s cost of goods sold for 2011?

14. The Junior Corporation has a calendar year end and uses the accrual basis of accounting for tax purposes. The company recorded a $50,000 accrued expense on December 31 for its CEO 2012 bonus. The bonus was paid in 2 installments: $30,000 was paid on January 30, 2013 and the remaining $20,000 was paid on February 28, 2013. How much of the accrued bonus is deductible by Junior Corp in 2012?

15. Mr. Capable has $50,000 to invest. He has narrowed his choice to two bonds. One bond is a taxable corporate bond yielding 8% interest each year. The other is a tax exempt municipal bond yielding 5% per year. Both bonds have the same risk profile and similar maturities. Mr. Capable has a 25% marginal tax rate. Which investment should he make? Why?

16. Johnny and Mary Appleseed are married and will file a joint federal tax return. Their taxable income in 2013 is expected to be $75,000. What is their 2013 marginal tax rate?

17. TU Corporation uses the accrual basis for tax accounting. Its allowance for bad debts account shows the following for this year: beginning balance: 78,300; actual write-offs: 43,000; additions to the allowance: 54,000; ending balance: 89,300. Its bad debts expense deduction for tax purposes is:

18. The Northeast Company paid $7,800 for premiums on the life of its CEO in the current year. The company is the beneficiary of the policy. Northeast Company has a 34% marginal tax rate. The after tax cost of the premium is:

19. The H Corporation uses the cash basis for tax purposes. It borrowed a $250,000 long term loan from its bank 2 years ago and is required to make an annual interest payment at 5% of principal at the end of each year. At the end of the current year, H Corporation made an interest payment of $25,000, consisting of the current year’s interest due AND a prepayment of next year’s interest. H Corporation’s current year’s deduction for interest is:

20. The Easy Company leases power equipment. Easy uses the cash method for tax purposes. In December, 2011, Easy leased some equipment to a customer for the 63 day period from December 20, 2011 through February 20, 2012. In December, 2011, Easy collected a $500 deposit (to be returned to the customer if the equipment is returned undamaged) and $1,764 for equipment rental (63 days times $28 per day). How much is includable in Easy’s 2011 taxable income?

21. Temple Company, Inc. had an NOL in 2012 of $400,000. It did not carry back the NOL, but elected to carry it forward. Before considering the NOL, Temple expects to have a taxable income of 2,000,000 in 2013. What is the value of the NOL to Temple, assuming that Temple uses the NOL in 2013 (ignore the time value of money)?

22. In 2014, a partnership sold the following assets:

Gross Tax Basis Accum. Tax Depreciation Proceeds

a. Building A $3,000,000 $1,500,000 $400,000

b. Equipment $50,000 $30,000 $12,000

c. Inventory $45,000 $0 $42,000

d. Land $30,000 $0 $20,000

Question: What is the partnership’s Net Sec. 1245 recaptured income?

What is the partnership’s net Sec. 1231 Gain/Loss?

What is the partnership’s 1250 unrecaptured gain (the amount taxed at a flat 25%)?

23. Sellers Inc. has entered into an exchange with Buyers, Inc. Sellers will transfer to Buyer real estate in PA with a tax basis of $400,000 and a FMV of $850,000. Seller will also pay to Buyer $50,000 cash. Buyer will transfer to Seller real estate in CA with a tax basis of $200,000 and a FMV of $900,000.

What is Seller’s tax basis in just the acquired CA real property after the exchange?

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