Whittenburg Gerald E., Altus-Buller Martha. Income Tax Fundamentals
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QUESTIONS and PROBLEMS
GROUP 1:
MULTIPLE CHOICE QUESTIONS
.............................................. .................................
LO 3.1
1. Which of the following is true about the rental of real estate?
a. Depreciation and maintenance expenses for an apartment complex
are deductible.
b. A vacation home is a home that is rented for 15 days or more
and is used by the taxpayer for personal use for more than the
greater of 14 days or 10 percent of t he days it is rented for
fair value during the year.
c. If a home is rented for less than 15 days a year, the rent is not
taxable.
d. Repairs on rental property are deductible by the taxpayer.
e. All of the above
LO 3.6:
Describe the general rules for qual-
ified retirement plans and 401(k)
plans.
Employers may claim a deduction in the current year for contributions to qualified retire-
ment plans on employees’ behalf. The employees do not include the employer contributions
in income until the contributed amounts are distributed.
For 2010, an employee may elect to make an annual contribution up to $16,500 ($22,000
for taxpayers age 50 or older) to a Section 401(k) plan. In addition, any matching amount
contributed to the plan by the employer on behalf of the employee is excluded from the
employee’s gross income.
The low-income retirement savers credit rate is a maximum of 50 percent of up to $2,000
of retirement savings, phased out depending on the taxpayer’s filing status and adjusted
gross income.
LO 3.7:
Apply the pension plan
rollover rules.
There are two ways a rollover transfer can be accomplished: (1) direct transfer, also known
as a trustee-to-trustee transfer, and (2) rollover of an actual cash distribution, in whole or
in part, to an IRA or other qualified plan.
There are no current-year tax consequences for a direct trustee-to-trustee transfer.
Distribution rollovers are subject to a 60-day time limit for completion and may also be
subject to income tax withholding.
Questions and Problems 3-29
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LO 3.1
2. John owns a sec ond home in Palm Springs, CA. During the year he rented the house
for $4,000 for 30 days and used the house for 10 days during the summer. The house
remained vacant during the remainder of the year. The expenses for the home included
$5,000 in mortgage interest, $600 in property taxes, $900 for utilities and maintenance,
and $3,500 of depreciation. What is John’s deducti ble rental loss, before considering
the passive loss limitations?
a. $200
b. $875
c. $1,600
d. $3,500
e. $0
LO 3.2
3. Helen, a single taxpayer, has modified adjusted gross income (before passive losses) of
$140,000. During 2010, Helen’s rental house generated a loss of $15,000. Assuming
Helen is actively involved in the management of the property, what is the amount
of Helen’s passive loss deduction from the rental house?
a. $0
b. $5,000
c. $10,000
d. $15,000
e. None of the above
LO 3.2
4. Which of the following is not classified as portfolio income for tax purposes?
a. Interest income on savings accounts
b. Income from real estate investments
c. Interest on taxable bonds
d. Dividend income from stock
e. None of the above
LO 3.2
5. Which of the following types of income is passive income?
a. Income from real estate limited partnership investments
b. Dividends from domestic corporations
c. Wages
d. Interest income from certificates of deposit
e. None of the above
LO 3.2
6. Which of the following is classified as active income?
a. Salary income
b. Interest income
c. Limited partnership income
d. Dividend income
e. None of the above
LO 3.2
7. Nancy has active modified adjusted gross income before passive losses of $75,000. She
has a loss of $10,000 on a rental property she actively manages. How much of the loss
is she allowed to take against the $75,000 of other income?
a. None
b. $2,500
c. $5,000
d. $10,000
3-30 Chapter 3
Business Income and Expenses, Part I
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
LO 3.2
8. Ned has active modified adjusted gross income before passive losses of $250,000. He
has a loss of $15,000 on rental property he actively manages. How much of the loss is
he allowed to take against the $250,000 of other income?
a. None
b. $10,000
c. $15,000
d. $5,000
LO 3.2
9. Norm is a real estate professional with a real estate trade or busi ness as defined in the
tax law. He has $80,000 of business income and $40,000 of losses from actively man-
aged real estate rentals. How much of the $40,000 in losses is he allowed to claim on
his tax return?
a. $25,000
b. None
c. $40,000
d. $20,000
LO 3.3
10. Loren loaned a friend $9,000 as financing for a new business venture. In the current
year, Loren’s friend declar es bankruptcy and the debt is considered totally worthless.
What amount may Loren deduct on his individual income tax return for the curr ent
year as a result of the worthless debt, assuming he has no other capital gains or losses
for the year?
a. $9,000 ordinary loss
b. $9,000 short-term capital loss
c. $3,000 short-term capital loss
d. $3,000 ordinary loss
e. $6,000 short-term capital loss
LO 3.3
11. Which of the following formulas represents the proper method of calculating cost of
goods sold?
a. Beginning inventory þ Ending inventory Purchases
b. Ending inventory Purchases Beginning inventory
c. Purchases Beginning inventory Ending inventory
d. Beginning inventory þ Purchases Ending inventory
e. None of the above
LO 3.3
12. If a taxpayer has beginning inventory of $25,000, purchases of $185,000, and ending
inventory of $30,000, what is the amount of the cost of goods sold for the current
year?
a. $155,000
b. $180,000
c. $190,000
d. $185,000
e. None of the above
LO 3.3
13. Bonita earns $31,000 from her job, and she has $1,000 of interest income. She has
itemized deductions and personal exemptions of $35,000. There are no casualty or
theft losses in the itemized deductions. What is Bonita’s net operating loss for the
current year?
a. $4,000
b. $3,000
Questions and Problems 3-31
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
c. $0
d. $1,000
e. Some other amount
LO 3.3
14. Jim has a net operating loss in 2010. If he does not make any special elections, what is
the first year to which Jim carries the net operating loss?
a. 2009
b. 2006
c. 2008
d. 2007
e. 2011
LO 3.4
15. Lyndon, age 24, has a nonworking spouse and earns wages of $36,000 for 2010. He
also received rental income of $5,000 and dividend income of $900 for the year.
What is the maximum amount Lyndon can deduct for contributions to his and his
wife’s individual retirement accounts for the 2010 tax year?
a. $10,000
b. $3,600
c. $4,500
d. $5,000
e. None of the above
LO 3.4
16. Martha and Rob, a married couple, under 50 years of age, have adjusted gross income
on their 2010 joint income tax return of $45,000, before considering any IRA deduc-
tion. Martha and Rob have no earned income. What is the amount of Martha’s max-
imum deductible IRA contribution?
a. $3,500
b. $3,000
c. $2,700
d. $5,000
e. $0
LO 3.4
17. Donna, age 42 and a single taxpayer, has a salary of $91,800 and interest income of
$15,000. What is the maximum amount Donna can contribute to a Roth IRA?
a. $5,000
b. $4,000
c. $4,400
d. $6,000
e. Some other amount
LO 3.4
18. Mary has a Roth IRA held more than 5 years to which she has contributed $30,000.
The IRA has a current value of $62,000. Mary is 55 years old and she takes a distribu-
tion of $38,000. How much of the distribution will be taxable to Mary?
a. $0
b. $8,000
c. $30,000
d. $38,000
e. Some other amount
3-32 Chapter 3
Business Income and Expenses, Part I
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LO 3.4
19. Marge has a Roth IRA held more than 5 years to which she has contributed $30,000.
The IRA has a current value of $62,000. Marge is 65 years old and she takes a distri-
bution of $38,000. How much of the distribution will be taxable to Marge?
a. $0
b. $8,000
c. $30,000
d. $38,000
e. Some other amount
LO 3.4
20. Mindy has a Roth IRA held longer than 5 years to which she has contributed $30,000.
The IRA has a current value of $62,000. Mindy is 55 years old and she takes a distri-
bution of $38,000 after retiring on disability. How much of the distribution will be tax-
able to Mindy?
a. $0
b. $8,000
c. $30,000
d. $38,000
e. Some other amount
LO 3.4
21. What is the deadline for making a contribution to a traditional IRA or a Roth IRA for
2010?
a. April 15, 2010
b. April 15, 2011
c. December 15, 2010
d. October 15, 2011
LO 3.5
22. Which of the following statements with respect to a Keogh Plan is not accurate?
a. Self-employed individuals are eligible to be members of a Keogh Retirement
Plan.
b. Contributions to Keogh Plans are limited to 15 percent of the taxpayer’s earned
income or $49,000, whichever is greater.
c. In some cases, ‘‘earned income’’ includes profits from the taxpayer’s business.
d. Taxpayers must begin receiving distributions from a Keogh plan by the age of 70
1
/
2.
e. All of the above statements are accurate.
LO 3.6
23. Bob earns $40,000 during the current year. His employer contributes $2,000 (5 percent of
Bob’s salary) to a qualified retirement plan for Bob. This pension plan is what kind of plan?
a. Defined benefit plan
b. Defined contribution plan
c. Employee stock ownership plan
d. Profit-sharing plan
e. None of the above
LO 3.6
24. What is the maximum tax-deferred contribution that can be made to a Section 401(k)
plan for an employee under age 50?
a. $7,500
b. $10,000
c. $12,000
d. $16,500
e. $20,500
Questions and Problems 3-33
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
LO 3.6
25. Paul, age 37, participates in a Section 401(k) plan which allows employees to contrib-
ute up to 15 percent of their salary. His annual salary is $90,000 in 2010. What is the
maximum he can contribute, on a tax-deferred basis unde r a salar y reduction agree-
ment, to this plan?
a. $15,500
b. $20,500
c. $17,500
d. $13,500
e. None of the above
LO 3.6
26. James’ employer makes a $2,000 contribution to a qualified retirement plan for James
in the current year. James is only 45 years old and does not expect to retire until age 65,
20 years from now. What is the proper tax treatme nt of the $2,000 contribution for
James’ employer?
a. The $2,000 is never deductible.
b. The $2,000 is deductible in the current year by the employer.
c. The $2,000 is deductible in the year James retires by the employer.
d. Only one-twentieth ($100) is deductible in the current year by the employer.
e. None of the above
LO 3.7
27. When taxpayers receive distributions from individual retirement plans, how much time
is allowed to roll over the amount received into a new plan to avoid paying taxes on the
distribution in the current year, assuming there are no unusual events?
a. 60 days
b. 90 days
c. 180 days
d. 1 year
e. There is no time limit
LO 3.7
28. Tom quits his job with $120,000 in his employer’s qualified retirement plan. Since he
is broke, Tom instructs the plan trustee to pay him the balance in his retirement
account. How much will Tom receive when he gets his check from the retirement
plan?
a. $120,000
b. $100,000
c. $96,000
d. $24,000
e. Some other amount
LO 3.7
29. What is the maximum number of distribution rollovers a taxpayer can make during a
tax year from one IRA to another?
a. One
b. Two
c. Four
d. Ten
e. There is no limit
3-34 Chapter 3
Business Income and Expenses, Part I
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
GROUP 2:
PROBLEMS
.............................................. .............................................. .
LO 3.1 1. Dick owns a house that he rents to college students. Dick receives $750 per month rent
and incurs the following expenses during the year:
Real estate taxes $ 1,250
Mortgage interest 1,500
Insurance 375
Repairs 562
Association Dues 1,600
Dick purchased the house in 1975 for $48,000. The house is fully depreciated. Cal-
culate Dick’s net rental income for the year, assuming the house was rente d for a full
12 months.
Rental income: $ ____________
Expenses:
____________________________________ ____________
____________________________________ ____________
____________________________________ ____________
____________________________________ ____________
____________________________________ ____________
Net rental income: $ ____________
LO 3.1 2. Sherry rents her vacation home for 6 months and lives in it for 6 months during the
year. Her gross rental income during the year is $4,000. Total real estate taxes for
the home are $950, and interest on the home mortgage is $3,000. Annual utilities
and maintenance expenses total $1,800, and depreciation expense is $4,500. Calculate
Sherry’s net income from the vacation home for this tax year.
$ ____________
LO 3.2 3. Walter, a single taxpayer, purchased a limited partnership interest in a tax shelter in 1985.
He also acquired a rental house in 2010, which he actively manages. During 2010, Walter’s
share of the partnership’s losses was $30,000, and his rental house generated $20,000 in
losses. Walter’s modified adjusted gross income before passive losses is $120,000.
a. Calculate the amount of Walter’s allowable deduction for rental house activities for
2010.
$ ____________
b. Calculate the amount of Walter’s allowable deduction for the partnership losses for
2010.
$ ____________
c. What may be done with the unused losses, if anything?
____________________________________________________________________
__________________ ________ ____ _______ ________ _______ ________ _______ __
__________________ ________ ____ _______ ________ _______ ________ _______ __
_________________________________________________ ______________________
LO 3.2 4. Clifford Johnson has a limited partnership investment and a rental condominium. Clif-
ford actively manages the rental condominium. During 2010, his share of the loss from
the limited partnership was $12,000, and his loss from the rental condo was $16,000.
Questions and Problems 3-35
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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
Assuming Clifford’s modified adjusted gross income is $120,000 for 2010, complete
Form 8582 on page 3-39.
LO 3.3 5. Sharon is an orthopedic surgeon. She performed a surgery 2 years ago and billed
$10,000 to her patient. After 2 years of attempting to collect the money, it is clear
that she will not be able to collect anything. Sharon reports income on her tax return
on the cash basis, so she only reports the income she actually receives in cash each year.
Can she claim a bad debt deduction for the $10,000?
___ ___________ ___________ _______________________________________________
___ ___________ ___________ _______________________________________________
___ ___________ ___________ _______________________________________________
_________________________________________________ _________________________
LO 3.3 6. Carrie loaned her friend $4,500 to buy a used car. She had her friend sign a note with
repayment terms and set a reasonable interest rate on the note because the $4,500 was
most of her savings. Her friend left town without a forwarding address, and nobod y
Carrie knows has heard from her in the last year. How should Carrie treat the bad
loan for tax purposes?
___ ___________ ___________ _______________________________________________
___ ___________ ___________ _______________________________________________
___ ___________ ___________ _______________________________________________
_________________________________________________ ________________________
LO 3.3 7. Lawrence owns a small candy store that sells one type of candy. His beginning inven-
tory of candy was made up of 10,000 boxes costing $1.50 per box ($15,000), and he
made the following purchases of candy during the year:
March 1 10,000 boxes at $1.60 $16,000
August 15 20,000 boxes at $1.60 32,000
November 20 10,000 boxes at $1.75 17,500
At the end of the year, Lawrence’s inventory consisted of 15,000 boxes of candy.
a. Calculate Lawrence’s ending inventory and cost of goods sold using the FIFO
inventory valuation m ethod.
Ending inventory $ ____________
Cost of goods sold $ ____________
b. Calculate Lawrence’s ending inventory and cost of goods sold using the LIFO
inventory valuation m ethod.
Ending inventory $ ____________
Cost of goods sold $ ____________
LO 3.3 8. Kevin owns a retail store, and during the current year he purchases $600,000 worth of
inventory. Kevin’s beginning inventory was $65,000, and his ending inventory is
$75,000. During the year, Kevin withdrew $15,000 in inventory for his personal
use. Use Part III of Schedule C below to calculate Kevin’s cost of goods sold for
the year .
3-36 Chapter 3
Business Income and Expenses, Part I
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
LO 3.3 9. Go to the IRS Web site (www.irs.gov) and find the most recent IRS Publication 538,
Accounting Periods and Methods; Inventories. Print out the first two pages of the part on
inventories.
LO 3.3 10. Go to the IRS Web site (www.irs.gov) and redo Prob lem 8 (Chapter 3, Group 2)
using the most recent interactive ‘‘Fill-in Forms’’ Cost of Goods Sold Schedule on
page 2 of Schedule C (Form 1040). Print out the completed Cost of Goods Sold schedule.
LO 3.3 11. Carl has had a couple of good years in his new business. However, in the current year he
has a net operating loss of $80,000. He does not feel that the future of his business is very
bright. As his tax accountant, how would you recommend Carl treat his net operating loss?
____________________________ ___________________ _______________________
___ ___________ ___________ _______________________________________________
___ ___________ ___________ _______________________________________________
_________________________________________________ ________________________
LO 3.3 12. Magg ie lost he r job in the cu rrent year. She paid the expenses of owning her home,
interest on the mortgage, and property taxes out of savings. Her tax return shows neg-
ative taxable income of $20,000. How should this loss be treated?
___ ___________ ___________ _______________________________________________
___ ___________ ___________ _______________________________________________
___ ___________ ___________ _______________________________________________
_________________________________________________ ________________________
LO 3.4 13. Karen, 28 years old and a single taxpayer, has a salary of $24,000 and rental income of
$33,000 for the 2010 calendar tax year. Karen is covered by a pension through her employer.
a. What is the maximum amount that Karen may deduct for contributions to her IRA
for 2010?
$ ____________
b. If Karen is a calendar year taxpayer and files her tax return on August 15, what is the
last date on which she can make her contribution to the IRA and deduct it for 2010?
$ ____________
Questions and Problems 3-37
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LO 3.4 14. Phil and Linda are 25-year-old newlyweds and file a joint tax return. Linda is covered
by a retirement plan at work, but Phil is not.
a. Assuming Phil’s wages were $27,000 and Linda’s wages were $18,500 for 2010 and
they had no other income, what is the maximum amount of their deductible contri-
butions to an IRA for 2010?
Phil $ ____________
Linda $ ____________
b. Assuming Phil’s wages were $49,000 and Linda’s wages were $63,000 for 2010 and
they had no other income, what is the maximum amount of their deductible contri-
butions to an IRA for 2010?
Phil $ ____________
Linda $ ____________
LO 3.7 15. Telly, age 38, has a $140,000 IRA with Blue Mutual Fund. He has read good things
about the management of Green Mutual Fund, so he opens a Green Fund IRA.
Telly asked for and received his balance from the Blue Fund on May 1, 2010.
a. What amount will Telly receive from the Blue Fund IRA?
$ ____________
b. What amount must Telly contribute to the Green Fund IRA to avoid having tax-
able income and penalties for early withdrawal?
$ ____________
c. When is the last day Telly can roll over the amount received into the Green Fund
IRA and avoid taxation in the current year, assuming no unusual circumstances?
____________
d. What amount would Telly receive if the distribution were from his employer’s
qualified retirement plan?
$ ____________
LO 3.4 16. What is the maximum amount a 45-year-old taxpaye r and 45-year-old spouse can put
into a Traditional or Roth IRA for 2010 (assuming they have sufficient earned
income, but do not have an income limitation and are not covered by another pension
plan)? ____________________
LO 3.4 17. What is the maximum amount a 55-year-old taxpayer and 52-year-old spouse can put
into a Traditional or Roth IRA for 2010, assuming they earn $70,000 in total and are
not participants in pension plans? ____________________
LO 3.4 18. Barry is a sing le, 40-year-old software engineer earning $190,000 a year and is not
covered by a pension p lan at work. How much can he put into a Roth IRA in
2010? __ __________________
LO 3.4 19. Bob is a single, 40-year-old doctor earning $190,000 a year and is not covered
by a pension plan at work. How much can he put into a deductible Traditional
IRA in 2010? ____________________
LO 3.4 20. Dori is 58 years old and retired in 2010. She receives a pension of $25,000 a year and
no other income. She wishes to put the maximum allowed into an IRA. How much can
she contribute to her IRA? ____________________
3-38 Chapter 3
Business Income and Expenses, Part I
Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s).
Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.