1) Which of the following business expense deductions is most likely to be

unreasonable in amount?
A. Compensation paid to the taxpayer's spouse in excess of salary
payments to other employees.
B.Amounts paid to a subsidiary corporation for services where the amount
is in excess of the cost of comparable services by competing
corporations.
C Cost of entertaining a former client when there is no possibility of any
. future benefits from a relation with that client.
D. All of these are likely to be unreasonable in amount.
E. None of these is likely to be unreasonable in amount.
2- Which of the following is an explanation for why insurance premiums on
a key employee are not deductible?
A. The insurance deduction would offset taxable income without the
potential for the proceeds generating taxable income.
B. The federal government does not want to subsidize insurance
companies.
C. It is impractical to trace insurance premiums to the receipt of proceeds.
D.Congress presumes that all expenses are not deductible unless
specifically allowed in the Internal Revenue Code.
E.This rule was grandfathered from a time when the IRC disallowed all
insurance premiums deductions.

3- Paris operates a talent agency as a sole proprietorship, and this year

she incurred the following expenses in operating her talent agency.
What is the total deductible amount of these expenditures?
$1,000 dinner with a film producer where no business was discussed
$500 lunch with sister Nicky where no business was discussed
$700 business dinner with a client but Paris forgot to keep any records
(oops!)
$900 tickets to the opera with a client following a business meeting
A.

$450

B.

$900

C.
D.

$1,100
$1,200

E. $800
4- Beth operates a plumbing firm. In August of last year she signed a
contract to provide plumbing services for a renovation. Beth began the
work that August and finished the work in December of last year.
However, Beth didn't bill the client until January of this year and she
didn't receive the payment until March when she received payment in
full. When should Beth recognize income under the accrual method of
accounting?
A.

In August of last year

B.

In December of last year

C.

In January of this year

D.

In March of this year

E. In April of this year

5- Ajax Computer Company is an accrual method calendar year
taxpayer. Ajax has never advertised in the national media prior to this
year. In November of this year, however, Ajax paid $1 million for
television advertising time during a "super" sporting event scheduled
to take place in early February of next year. In addition, in November of
this year the company paid $500,000 for advertising time during a
professional golf tournament in April of next year. What amount of
these payments, if any, can Ajax deduct this year?
A. .
B.
C.

$1 million
$500,000
$1.5 million

D. $1.5 million only if the professional golf tournament is played before

April 15.
E.

No deduction can be claimed this year.

6- An office desk is an example of:

A.

Personal property

B.

Personal-use property

C.

Real property

D.
E.

Business property
Both personal property and business property

7- Which depreciation convention is the general rule for tangible personal

property?
A.
B.

Full-month
Half-year

C.

Mid-month

D.

Mid-quarter

E. None of these are conventions for tangible personal property

8- Deirdre's business purchased two assets during the current year.

Deirdre placed in service computer equipment (5-year property) on
January 20 with a basis of $15,000 and machinery (7-year property) on
October 1 with a basis of $15,000. Calculate the maximum depreciation
expense, rounded to a whole number (ignoring 179 and bonus
depreciation):
A.

$1,286

B.

$5,144

C.

$5,786

D.

$6,000

E. None of these
9- Crouch LLC placed in service on May 19, 2014 machinery and
equipment (7-year property) with a basis of $2,200,000. Assume that
Crouch has sufficient income to avoid any limitations. Calculate the
maximum depreciation expense including 179 expensing (but ignoring
bonus expensing). Assume that the 2013 179 limits are extended to
2014:
A.

$314,380.

B.

$440,000.

C.

$571,510.

D.

$742,930.

E.

None of these.

10 - The sale of computer equipment used in a trade or business for 9

months results in the following type of gain or loss?
A.
B.

Capital.
Ordinary.

C.

1231.

D.

1245.

E.

None of these.

Which of the following is true regarding depreciation recapture?

A.

Changes the character of a loss.

B.

Changes the character of a gain.

C.

Changes the amount of a gain.

D.

Only applies to ordinary assets.

E.

None of these.

12- Butte sold a machine to a machine dealer for $50,000. Butte bought
the machine for $55,000 several years ago and has claimed $12,500 of
depreciation expense on the machine. What is the amount and character
of Butte's gain or loss?
A.

$7,500 1231 loss.

B.

$5,000 1231 loss.

C.

$7,500 ordinary gain.

D.

$7,500 capital gain.

E.

None of these.

13- Brandon, an individual, began business four years ago and has sold
1231 assets with $5,000 of losses within the last 5 years. Brandon owned
each of the assets for several years. In the current year, Brandon sold the
following business assets:

Assuming Brandon's marginal ordinary income tax rate is 35 percent,

what effect do the gains and losses have on Brandon's tax liability?

A.

$25,000 ordinary income, $8,750 tax liability.

B.

$25,000 1231 gain and $3,750 tax liability.

C. $13,000 1231 gain, $12,000 ordinary income, and $6,150 tax liability.
D. $12,000 1231 gain, $13,000 ordinary income, and $6,350 tax liability.
E. None of these.
14- Mary traded furniture used in her business to a furniture dealer for
some new furniture. Mary originally purchased the furniture for $45,000
and it had an adjusted basis of $20,000 at the time of the exchange.
The new furniture had a fair market value of $40,000. Mary also gave
$4,000 to the dealer in the transaction. What is Mary's adjusted basis in
the new furniture after the exchange?
A.

$20,000.

B.

$24,000.

C.

$36,000.

D.

$40,000.

E.

None of these.

14 - Which tax classifications can potentially apply to LLCs?

A.

S corporation

B.

Partnership

C.
D.

Sole proprietorship
S corporation and Partnership

E.

S corporation and Sole proprietorship

F.

Partnership and Sole proprietorship

G.

All of these

15- Corporation A receives a dividend from Corporation B. It includes the

dividend in gross income for tax purposes but includes a pro-rata portion
of B's earnings in its financial accounting income. If A has accounted for
the dividend correctly (using the general rule), how much of B's stock
does A own?
A.

A owns less than 20 percent of the stock of B

B. A owns at least 20 but not more than 50 percent of the stock of B

C.
D.
16 -

A owns more than 50 percent of the stock of B

Cannot be determined

In January 2013, Khors Company issues nonqualified stock options to its

CEO, Jenny Svaro. Because the company does not expect Ms. Svaro to
leave the company, the options vest at the time they are granted with a
total value of $50,000. In December of 2014, the company experiences a
surge in its stock price, and Ms. Svaro exercises the options. The total
bargain element at the time of exercise is $60,000. For 2014, what is the
book-tax difference due to the options exercised?
A.

10,000 unfavorable

B.

10,000 favorable

C.

50,000 unfavorable

D.
60,000 favorable
17 - Studios reported a net capital loss of $30,000 in year 5. It reported
net capital gains of $14,000 in year 4 and $27,000 in year 6. What is the
amount and nature of the book-tax difference in year 6 related to the net
capital carryover?
A.

$11,000 unfavorable

B.

$11,000 favorable

C.

$16,000 unfavorable

D.
$16,000 favorable
18- Jazz Corporation owns 10% of the Williams Corp. stock. Williams
distributed a $10,000 dividend to Jazz Corporation. Jazz Corp.'s taxable
income (loss) before the dividend was ($6,000). What is the amount of
Jazz's dividends received deduction on the dividend it received from
Williams Corp.?
A.

$0

B.

$2,800

C.

$4,200
$7,000

None of these.

19- Grand River Corporation reported pretax book income of $500,000.

Included in the computation were favorable temporary differences of
$100,000, unfavorable temporary differences of $10,000, and favorable
permanent differences of $90,000. Assuming a tax rate of 34%, the
Corporation's current income tax expense or benefit would be:
A

$170,000

B.

$163,200

C.

$108,800

D. $102,000
20- Which of the following book-tax basis differences results in a
deductible temporary difference?
A. Book basis of an employee post-retirement benefits liability exceeds
its tax basis
B. Book basis of a building exceeds the tax basis of the building
C. Book basis of an acquired intangible exceeds the tax basis of the
intangible
D. Tax basis of a prepaid liability exceeds the book basis of the liability
Payment of the retirement benefit will create a future tax deduction.
21 - Swordfish Corporation reported pretax book income of $1,000,000.
During the current year, the net reserve for warranties increased by
$25,000. In addition, book depreciation exceeded tax depreciation by
$100,000. In prior years, tax depreciation exceeded book depreciation
by a cumulative amount of $500,000. Finally, Swordfish subtracted a
dividends received deduction of $15,000 in computing its current year
taxable income. Using a tax rate of 34%, Swordfish's deferred income
tax expense or benefit would be:
A.

$25,500 net deferred tax expense

B.

$25,500 net deferred tax benefit

C.

$42,500 net deferred tax benefit

D.

$42,500 net deferred tax expense