Exam 2 Business - Gleim

[1] Gleim #: 20.1.13

Which of the following organizations is not required to file an annual information return,

such as Form 990, Return of Organization Exempt from Income Tax?

A convention or an association of churches with annual gross receipts exceeding

$50,000.

A.

Any chamber of commerce with annual gross receipts exceeding $50,000.B.

All are required to file with no exceptions.C.

Any exempt organization with annual gross receipts exceeding $50,000.D.

[2] Gleim #: 17.2.80

XYZ Corporation is a qualified S corporation. In 2011, its books and records reflected

the following transactions:

Business income $500,000

Real estate rental loss $(20,000)

Interest income $5,000

Salaries and wages $(50,000)

Depreciation (without Section 179 expense) $(40,000)

Section 179 expense $(10,000)

Other business deductions $(300,000)

What is XYZ’s ordinary income (loss) to be reported on its 2011 Form 1120S?

$110,000A.

$85,000B.

$105,000C.

$115,000D.

Gleim EA Test Prep: Part 2. Businesses(100 questions)

Copyright 2012 Gleim Publications Inc. Page 1

Printed for Steve Niu

[3] Gleim #: 2.4.76

During 2009, Martha was issued 100 shares of qualifying small business stock (Sec. 1244

stock) for $40,000. On June 30, 2010, Martha purchased an additional 100 shares of Sec.

1244 stock from a retiring shareholder for $60,000. Her 200 shares had a total basis of

$100,000. On June 30, 2011, she learned that her entire investment had become

worthless. Martha filed a joint income tax return with her husband for 2011. How much

could she claim as an ordinary loss or a capital loss for 2011?

$100,000 ordinary loss and $0 capital loss.A.

$60,000 ordinary loss and $40,000 capital loss.B.

$50,000 ordinary loss and $50,000 capital loss.C.

$40,000 ordinary loss and $60,000 capital loss.D.

[4] Gleim #: 15.4.81

A corporate payer of an individual shareholder dividend does not have the taxpayer

identification number for that shareholder. What backup withholding percentage rate

must the corporate payer use for this shareholder’s dividend payments?

15%A.

39%B.

35%C.

28%D.

[5] Gleim #: 18.2.25

Mr. A sold a tract of land and reported the sale using the installment method of

accounting. The net sale price was $80,000, and the cost basis was $40,000. After A’s

death, the final $10,000 installment (plus interest) was collected by his personal

representative. What amount (other than interest) must be reported as profit on a Form

1041, U.S. Fiduciary Income Tax Return, for the year in which the $10,000 was

received?

$2,500A.

$0B.

$10,000C.

$5,000D.




[6] Gleim #: 3.1.2

Which of the following tests is not used to determine whether an employee’s pay is

deductible as an expense?

Depending upon the taxpayer’s method of accounting, payments are made or

expenses are incurred for services rendered during the year.

A.

Payments are made for services actually performed.B.

Payments for services an employee rendered are ordinary and necessary and are

directly or indirectly connected with your trade or business.

C.

Payments for services an employee rendered are reasonable. This test is based on

the circumstances at the time you contract for the services, not on those existing

when the amount of pay is questioned.

D.

[7] Gleim #: 17.2.93

In Year 1, Lee acquired 100% of the stock of Telephone, Inc., for $50,000 cash.

Telephone incurred a loss of $15,600 for Year 1. On January 1, Year 2, Telephone

properly elected S corporation status. Its net income for Year 2 was $20,000. A dividend

of $5,000 was declared and paid in Year 2. What is Lee’s basis in Telephone as of

December 31, Year 2?

$50,000A.

$51,000B.

$65,000C.

$70,000D.

[8] Gleim #: 14.1.15

For a domestic corporation to deduct a percentage of the dividends it receives from a

foreign corporation, certain tests must be met. Which of the following conditions need

not be present?

The domestic corporation owns at least 10% of the foreign corporation.A.

The corporation is not a foreign personal holding company.B.

The foreign corporation has derived income effectively connected with its U.S.

business amounting to at least 50% of its gross income from all sources for a 36-

month period.

C.

The foreign corporation has income effectively connected with a trade or business

in the U.S.

D.




[9] Gleim #: 18.3.141

Which of the following is a characteristic of a simple trust?

A trust in the final year of administration.A.

A trust that is partially liquidated during the taxable year.B.

A trust that is allowed a personal exemption deduction of $300.C.

A trust that distributes an amount out of corpus.D.

[10] Gleim #: 7.3.54

Martha owns a grocery store. On October 2, 2011, a tornado caused her store’s freezers to

lose power. As a result of the power outage, $5,000 of frozen food spoiled. Her insurance

company reimbursed her $4,000 on December 7, 2011. In 2011, Martha had a beginning

inventory of $10,000, purchases of $8,000, and an ending inventory of $3,000. Which of

the following is a proper method to account for this event?

Report the inventory as she normally would and exclude the $4,000 from gross

income.

A.

Reduce purchases by $5,000 for 2011 and deduct a $1,000 loss on her 2012 tax

return.

B.

Reduce beginning inventory by $5,000 for 2011 and deduct a $1,000 loss on her

2012 return.

C.

Report the inventory as she normally would and report the $4,000 as additional

gross income for 2011.

D.

[11] Gleim #: 17.3.120

Which of the following statements regarding distributions from an S corporation is

correct?

Absent an election, distributions are considered to come first from accumulated

earnings and profits, if the corporation has accumulated earnings and profits from

when it was a C corporation.

A.

A distribution from the previously taxed income account is tax free to the extent of

a shareholder’s basis in his/her stock in the corporation.

B.

Property distributions are applied in a different manner than cash distributions.C.

A shareholder’s right to nontaxable distributions from previously taxed income may

be transferred to another person.

D.




[12] Gleim #: 3.5.70

Which of the following statements regarding deductible taxes is correct?

Local benefit taxes for business assets are deductible only if they are for

maintenance, repair, or interest charges related to those benefits.

1.

Real estate taxes on business property included in monthly mortgage payments

placed in escrow cannot be deducted unless the lender actually paid the taxing

authority.

2.

Taxes on gasoline, diesel fuel, and other motor fuels that you use in your business

should be deducted as part of the cost of the fuel.

3.

Any tax imposed by a state or local government on personal property used in your

trade or business is deductible.

4.

1, 2, 3, and 4.A.

1 and 3.B.

2 and 4.C.

1, 2, and 4.D.

[13] Gleim #: 4.6.97

Regarding “other” business expenses, all of the following statements are correct except

Penalties you pay for late performance or nonperformance of a contract are

generally deductible.

A.

The cost of a license granted by a governmental unit or agency including issuances

and renewals is a deductible business expense.

B.

You may deduct your own education expenses, including certain related travel that

is related to your trade or business.

C.

Legal fees paid to acquire a new office building must be added to the basis of the

building and recovered through depreciation.

D.




[14] Gleim #: 9.1.24

In 2011, John and George formed a partnership that began business on July 1, 2011. They

spent $4,000 in legal fees for negotiating and preparing the partnership agreement,

$2,000 for accounting services setting up the partnership’s books, and $1,000 in

commissions associated with acquiring assets for the partnership. Assuming these are

their only expenses in starting their partnership, what is the proper amortization expense

for 2011 after any immediate expense?

$67A.

$33B.

$233C.

$600D.

[15] Gleim #: 10.1.15

Archie sells his 50% interest in XYZ Partnership to Hal for $5,000 cash. His outside

basis in the partnership is $3,500. The partnership has inventory and a capital asset with

respect to basis of $6,000 and $2,000, respectively. The respective fair market values of

the inventory and capital asset are $8,000 and $1,000. Archie should properly recognize

Ordinary income of $2,000 and a capital loss of $500.A.

None of the answers are correct.B.

Capital gain of $1,500 on the sale of his partnership interest.C.

Ordinary income of $1,500, the amount of cash he received.D.

[16] Gleim #: 2.3.72

In July of Year 1, Mr. Brown, a cash-basis, calendar-year farmer, had his bean crop

damaged by a flood. He normally would have reported the income from the crop in Year

2. On November 1, Year 1, he received a $40,000 payment under the Disaster Assistance

Act of 1988 due to the damage to his beans. Regarding Mr. Brown’s reporting of the

$40,000 for federal income tax purposes, which of the following statements is true?

The $40,000 is nontaxable income.A.

$40,000 must be included in his gross income for Year 1.B.

He may elect to postpone reporting the $40,000 to Year 2 by attaching a statement

to his Year 1 income tax return. The statement must include information required by

a specific portion of the Income Tax Regulations.

C.

He may note on his Schedule F, Form 1040, that $40,000 from the Disaster

Assistance Act will be reported in Year 2.

D.




[17] Gleim #: 9.1.41

Partnership LIFE’s profits and losses are shared equally among the four partners. The

adjusted basis of Partner E’s interest in the partnership on December 31, Year 1, was

$25,000. On January 2, Year 2, Partner E withdrew $10,000 cash. The partnership

reported $200,000 as ordinary income on its Year 2 partnership return. In addition,

$5,000 for qualified travel, meals, and entertainment was shown on a separate attachment

to E’s Schedule K-1 of Form 1065. Due to the limitation, $2,500 of the $5,000 is

unallowable as a deduction. What is the amount of E’s basis in the partnership on

December 31, Year 2?

$71,000A.

$61,000B.

$60,000C.

$65,000D.

[18] Gleim #: 1.3.42

On April 1, Year 1, Ms. G, a calendar-year, cash-basis taxpayer, entered into a 3-year

lease for a building to be used in her business. The lease is for the period July 1, Year 1

through June 30, Year 4, and provides for annual payments of $6,000. On April 1, Year

1, G paid $18,000 in advance. What is the amount of G’s deductible rental expense for

Year 1?

$18,000A.

$3,000B.

$4,500C.

$6,000D.

[19] Gleim #: 1.2.15

Which one of the following requires permission from the Internal Revenue Service?

A correction of an error in calculating the tax liability of a previous year.A.

A change from the regular MACRS method to the straight-line MACRS method for

personal property acquired in a tax year.

B.

A change from the cash method to the accrual method.C.

Adopting LIFO inventory valuation.D.




[20] Gleim #: 4.4.78

All of the following statements regarding the nonaccrual-experience method of

accounting for bad debts are true except

This method can be used for amounts to be received that are earned from any

source.

A.

This method cannot be used if interest or penalties are required to be paid for late

payments.

B.

This method can only be used for amounts to be received that are earned by

performing services.

C.

Under this method, you do not have to accrue income that you do not expect to

collect.

D.

[21] Gleim #: 2.3.57

With regard to crop insurance and disaster payments, which of the following statements

is true?

An accrual-basis taxpayer can elect to include crop insurance proceeds in income

for the tax year following the tax year in which the crops were damaged.

A.

Insurance proceeds received in the tax year following the tax year in which the

crops were destroyed can be deferred until the tax year following receipt of the

proceeds.

B.

A separate election to defer the inclusion of crop disaster payments must be made

for each damaged crop of the trade or business.

C.

The insurance proceeds can be deferred only if the farmer can show that the income

from the crops would normally be reported in the tax year following the year of

damage.

D.

[22] Gleim #: 15.1.16

Pitkin Theatres, Inc., distributes land to its sole shareholder. The land is valued at

$30,000 and has a basis of $10,000. The land is subject to a $16,000 mortgage, which the

shareholder assumes. Pitkin has $20,000 in earnings and profits. Ignoring any potential

effect of any taxes on the distribution, the net effect of the transaction on earnings and

profits is

A decrease by $10,000.A.

No effect.B.

An increase by $6,000.C.

An increase by $20,000.D.




[23] Gleim #: 7.3.67

Debbie’s car, which she used 50% for business, was stolen in Year 3. It cost $20,000 in

Year 1. She had properly claimed depreciation of $4,000. The insurance company

reimbursed her $10,000, which was the fair market value at the time of the theft. What is

the amount of business loss Debbie can claim?

$6,000A.

$1,000B.

$2,000C.

$3,000D.

[24] Gleim #: 6.2.36

All of the following statements regarding the Sec. 179 deduction (excluding additional

first-year depreciation) are true except

The maximum deductible amount is reduced if property placed in service during the

tax year exceeds $2,000,000.

A.

The maximum cost that is deductible for tax year 2011 is $250,000.B.

The amount expensed cannot exceed the taxable income derived from any trade or

business during the tax year.

C.

The amount that is not deductible due to the taxable income limitation can be

carried forward.

D.

[25] Gleim #: 4.4.72

CW Enterprises is having financial difficulties. It manufactures seagull-shaped sports

cars for the jet set. The board of directors is highly paid by CW Enterprises, and all

members lent funds to the company hoping to retain their positions (they own no stock in

the company). They instituted a policy requiring the assembly line workers to lend 5% of

their wages or face discharge. The officers have all made voluntary loans to the company.

In addition, the majority shareholder, who is not employed by CW Enterprises, made a

substantial loan. If CW defaults on all these loans, who is not entitled to a business bad

debt deduction?

The majority shareholder.A.

The officers.B.

The board of directors.C.

The assembly line workers.D.




[26] Gleim #: 10.1.22

Candy is a partner in LX Partnership. The adjusted basis of her partnership interest is

$24,000, of which $19,000 represents her share of the partnership liabilities for which

neither Candy, the other partners, nor the partnership has assumed personal liability.

Candy’s share of unrealized receivables in the partnership is $10,000. Candy sold her

partnership interest for $28,000. What is the amount and character of Candy’s gain?

$13,000 ordinary gain; $10,000 capital gain.A.

$4,000 ordinary income.B.

$10,000 ordinary gain; $13,000 capital gain.C.

$23,000 capital gain.D.

[27] Gleim #: 6.4.67

Mark, a 50% partner in the X & Y Partnership, uses the percentage method to compute

his depletion allowance for the gas and oil property owned by the partnership. His

allocable share of the property is $100,000. The fair market value of the property also is

$100,000. His taxable income for 2011 equals $65,000. The percentage depletion rate is

15% for natural gas and oil sold. X & Y is a small producer, and the average daily

production does not exceed the depletable oil and gas quantity. Mark’s share of the gross

sale of oil and gas deposits was $30,000. What is Mark’s depletion deduction for 2011?

$4,500A.

$9,000B.

$9,750C.

$5,250D.

[28] Gleim #: 5.1.20

Dianne’s Desserts, a sole proprietorship, bought a building for $350,000 cash in January.

Settlement costs were $12,500. The business placed $15,000 in escrow for future

payment on taxes and insurance and assumed an existing mortgage of $20,000 on the

property. Legal fees of $7,500 were incurred for defending and perfecting title in a

lawsuit that occurred during the same year. What is the adjusted basis of the building on

December 31?

$390,000A.

$405,000B.

$385,000C.

$377,500D.




[29] Gleim #: 10.1.16

Michael has a partnership interest with a zero basis. The partnership has inventory valued

at $250,000. Michael’s share of the ordinary income to be received from the sale of the

inventory would be $10,000. Michael sells his partnership interest for $30,000. Michael

will report the following gain:

$20,000 ordinary gain and $10,000 capital gain.A.

$10,000 ordinary gain and $20,000 capital gain.B.

$30,000 capital gain.C.

No gain or loss.D.

[30] Gleim #: 10.1.25

Tracy has a one-fourth interest in the TANY Partnership. The adjusted basis of his

interest at the end of the current year is $30,000. He sells his interest in the TANY

Partnership to Roy for $50,000 cash. There was no agreement between Tracy and Roy for

any allocation of the sales price. The basis and fair market value of the partnership’s

assets (there are no liabilities) are as follows:

Fair

Assets Basis Market Value

Cash $ 40,000 $ 40,000

Unrealized Receivables 0 36,000

Inventory 40,000 92,000

Land 40,000 32,000

Total $120,000 $200,000

What is the amount and character of Tracy’s gain or loss?

$10,000 ordinary income, $10,000 capital gain.A.

$20,000 ordinary income, $0 capital gain.B.

$22,000 ordinary income, $2,000 capital loss.C.

$0 ordinary income, $0 capital gain.D.




[31] Gleim #: 15.2.53

Walnut, Inc., is a C corporation that was started 10 years ago. At the beginning of the

current year, Walnut has accumulated earnings and profits of $100,000. During the

current year, Walnut makes a $5,000 distribution to its 100% shareholder in the first

month of each quarter. At the end of the current year, Walnut had $150,000 in gross

income and $140,000 in allowable expenses from ordinary business operations. Walnut

also received $5,000 in fully tax-exempt interest from state bonds. What part of the

second quarter distribution is treated as a distribution of accumulated earnings and

profits?

$5,000A.

$1,250B.

$2,500C.

$3,750D.

[32] Gleim #: 18.3.89

If a trust has adjusted total income of $10,000, distributable net income of $11,000, and

$12,000 is required to be currently distributed, what is its income distribution deduction?

$12,000A.

$10,000B.

$2,000C.

$11,000D.

[33] Gleim #: 8.3.61

On March 10, Year 1, Daniel contributed land in exchange for a 25% partnership interest

in Parr Company. The fair market value of the land at that time was $40,000, and

Daniel’s adjusted basis was $25,000. On December 2, Year 4, Parr distributed that land

to another partner. The fair market value at that time was $50,000. What is the amount of

Daniel’s recognized gain from this transaction?

$10,000A.

$15,000B.

$0C.

$25,000D.




[34] Gleim #: 11.6.63

Alternative minimum taxable income is

Taxable income increased by tax preferences and adjusted by various other statutory

modifications.

A.

Computed the same for corporations and individuals.B.

The sum of all tax preferences.C.

Taxable income adjusted by tax preferences and increased by an exemption amount.D.

[35] Gleim #: 10.2.51

Mr. K owned a 50% interest in K&L Partnership. It reports income on the accrual basis.

On April 1 of the current year, the partnership was dissolved, and it distributed to K one-

half of all partnership assets. The partnership had no liabilities. The following assets were

distributed to K:

Basis Fair Market Value

Cash $5,000 $5,000

Accounts receivable $10,000 $10,000

Inventory $8,000 $10,000

Land $20,000 $50,000

K’s basis in the partnership interest was $43,000. As of December 31 of the current year,

K had sold the inventory for $10,000 and collected all accounts receivable. What gain

will K report in the year?

$2,000 ordinary income.A.

$32,000 ordinary income.B.

$2,000 capital gain.C.

$32,000 capital gain.D.




[36] Gleim #: 2.3.52

Maude has a small business that has a profit of $15,000. Her husband, Harold, has a farm

that has a loss of $7,000. Which of the following is true regarding their self-employment

tax computation?

Maude must pay self-employment tax on $15,000.A.

If they file separately, they may elect to split the net profit for self-employment tax

purposes, each paying based on $4,000.

B.

If they file separately, Harold may not elect to use the optional method.C.

On a joint return, the self-employment tax may be computed based on $8,000 of

income for Maude only.

D.

[37] Gleim #: 15.4.76

James Williams is the sole shareholder of Crystal Ball Enterprises, Inc. He received a

$100 dividend distribution from his corporation in the current year. Current earnings of

Crystal Ball were $1,000. What reporting requirements apply to this distribution?

No reporting requirements apply because the distribution is not taxable.A.

No reporting requirements apply because the distribution is less than $600.B.

Form 1099-MISC should be filed to report miscellaneous income.C.

Form 1099-DIV should be filed because the distribution is a dividend and is at least

$10.

D.

[38] Gleim #: 3.1.14

Generally, an employer can deduct the cost of which of the following fringe benefits

provided to an employee?

All of the answers are correct.A.

Occasional tickets to sporting events.B.

Airline tickets.C.

Use of car.D.




[39] Gleim #: 2.5.102

Kayla exchanged her unimproved land with an adjusted basis of $80,000 and a fair

market value of $130,000 for unimproved land with a fair market value of $100,000 and

$10,000 in cash. Kayla also paid $5,000 in closing costs. The unimproved land that Kayla

gave up was subject to a $30,000 mortgage for which she was liable. The other party

assumed this mortgage. What is Kayla’s realized gain on this exchange?

$40,000A.

$35,000B.

$25,000C.

$55,000D.

[40] Gleim #: 11.5.44

A fiduciary representing a dissolving corporation may file a request for prompt

assessment of tax. Generally, this request reduces the time allowed for assessment to

30 months.A.

24 months.B.

12 months.C.

18 months.D.

[41] Gleim #: 4.6.104

With regard to other business expenses for the current year, which of the following

statements is false?

Legal expenses paid primarily for the purpose of preserving existing good will are

deductible as business expenses.

A.

Expenses incurred in the communication of information between a taxpayer and a

trade or business organization, of which the taxpayer is a member, concerning

legislation of direct interest to both parties are deductible business expenses.

B.

Payments made by a physician to another physician in consideration of the referral

of a Medicare patient are deductible business expenses.

C.

Nonconformance penalties assessed by the Environmental Protection Agency for

failing to meet certain emission standards are deductible business expenses.

D.




[42] Gleim #: 8.3.65

ABC Partnership was formed on March 1 of the current year by three individuals. A

contributed $20,000 cash for a 25% interest. B contributed property with an adjusted

basis of $28,000 and fair market value of $32,000, subject to a $12,000 mortgage. C

contributed property with an adjusted basis of $20,000 and fair market value of $64,000,

subject to a $24,000 liability. B and C received 25% and 50% partnership interests,

respectively. The partnership assumed both partners’ liabilities. The partnership has no

other liabilities. On March 1 of the current year, B’s gain recognized on contribution and

basis in partnership interest are

$9,000 gain, $19,000 basis.A.

$9,000 gain, $25,000 basis.B.

$0 gain, $25,000 basis.C.

$0 gain, $19,000 basis.D.

[43] Gleim #: 8.1.2

For federal tax purposes, the term “partnership” includes all of the following except a

Syndicate.A.

Pool.B.

Trust.C.

Joint venture.D.

[44] Gleim #: 1.3.32

The Kilometer Partnership sells computers and maintains its accounting system on the

accrual basis. Kilometer sold and delivered a computer on December 29, 2010, and billed

the customer $3,250 on January 7, 2011. Kilometer received the $3,250 payment on

February 15, 2011. The check cleared on February 22, 2011. On which date will

Kilometer recognize this income?

December 29, 2010A.

February 15, 2011.B.

January 7, 2011.C.

February 22, 2011.D.




[45] Gleim #: 10.1.6

Which of the following statements with respect to a partner’s sale or exchange of a

partnership interest is false?

The selling partner must include, as part of the amount realized, any partnership

liability of which (s)he is relieved.

A.

The installment method of reporting cannot be used by the partner who sells a

partnership interest at a gain.

B.

The sale or exchange of a partner’s interest in a partnership usually results in a

capital gain or loss.

C.

Gain or loss recognized by the selling partner is the difference between the amount

realized and the adjusted basis of the partner’s interest in the partnership.

D.

[46] Gleim #: 12.3.118

Corporation ZAM, a calendar-year corporation, started business on May 1 of the current

year. The corporation incurred the following expenses relating to the organization of the

business:

Fee paid to state for incorporation $3,600

Legal fees for drafting corporation charter and bylaws 9,600

Cost of printing stock certificates 2,400

Commission expense on sale of stock 4,600

Expenses of temporary directors 4,800

If Corporation ZAM elects to amortize its organizational expenses, what is its maximum

allowable deduction for the year?

$750A.

$160B.

$800C.

$1,200D.




[47] Gleim #: 4.1.24

Squire, a self-employed attorney, is a member of Executive Club, which is a professional

businesspersons’ club. He uses the club on a regular basis to entertain clients. Squire had

the following detailed records to substantiate the expenses of Executive Club during the

current year:

Dues $1,200

Meals directly related to bona fide

business discussions with clients 1,000

Tips 200

Transportation to/from meals 150

What amount may Squire deduct on his income tax return for the current year?

$2,550A.

$1,300B.

$850C.

$750D.

[48] Gleim #: 18.3.125

Which of the following is not a modification of taxable income used to determine

distributable net income?

The personal exemption is added back.A.

Tax-exempt interest is added.B.

Capital gains are subtracted to the extent allocated to corpus and not distributed or

set aside for a beneficiary.

C.

The net operating loss deduction is added back.D.




[49] Gleim #: 14.2.52

John Budd is the sole shareholder of Ral Corp., an accrual-basis taxpayer engaged in

wholesaling operations. Ral’s retained earnings at January 1, Year 1, amounted to $1

million. For the year ended December 31, Year 1, Ral’s book income, before federal

income tax, was $300,000. Included in the computation of this $300,000 were the

following:

Loss on sale of investment in stock of unaffiliated corporation

(stock held for 2 years). Ral had no other capital gains or losses. $ (5,000)

Contribution to a recognized, qualified charity. This contribution

was authorized by Ral’s board of directors in December, Year 1,

to be paid on January 31, Year 2. 75,000

With regard to Ral’s contribution to the recognized, qualified charity, Ral

Can elect to deduct in its Year 1 return any portion of the $75,000 that does not

exceed the deduction ceiling for year 1.

A.

Can deduct the entire $75,000 in its Year 1 return because Ral reports on the accrual

basis.

B.

Can elect to carry forward indefinitely any portion of the $75,000 not deducted in

Year 1 or Year 2.

C.

Cannot deduct any portion of the $75,000 in Year 1 because the contribution was

not paid in Year 1.

D.

[50] Gleim #: 13.1.2

For the calendar year, Cincy Corporation had operating income of $80,000, exclusive of

the following capital gains and losses:

Long-term capital gain $14,000

Short-term capital gain 6,000

Long-term capital loss (2,000)

Short-term capital loss (8,000)

What is Cincy’s income tax liability for the year?

$15,450A.

$22,250B.

$18,250C.

$18,850D.




[51] Gleim #: 18.3.73

The amount of the personal exemption allowed to a simple trust is

$300A.

$0B.

$600C.

$100D.

[Fact Pattern #1]

Lind and Post organized Ace Corp., which issued voting common stock with a fair market

value of $120,000. They each transferred property in exchange for stock as follows:

Adjusted Percentage of

Property Basis Fair Market Value Ace Stock Acquired

Lind Building $40,000 $82,000 60%

Post Land $ 5,000 $48,000 40%

The building was subject to a $10,000 mortgage that was assumed by Ace.

[52] Gleim #: 12.1.56

(Refers to Fact Pattern #1)

What amount of gain did Lind recognize on the exchange?

$0A.

$42,000B.

$10,000C.

$52,000D.




[53] Gleim #: 3.1.28

All of the following payments made to employees are currently deductible as business

expenses except

Lump-sum payment made to the beneficiary of a deceased employee that is

reasonable in relation to the employee’s past services.

A.

Vacation pay paid to an employee when the employee chooses not to take a

vacation.

B.

Reasonable salary paid to a corporate officer owning a controlling interest for

services she rendered.

C.

Wages paid to employees for constructing a new building to be used in the business.D.

[54] Gleim #: 10.2.52

Jeff’s interest in Partnership J & L has an adjusted basis of $150,000. In a complete

liquidation of his interest, he received the following:

Partnership’s

Adjusted Basis Fair Market Value

Cash $70,000 $70,000

Building 80,000 90,000

Computer 20,000 10,000

Inventory 30,000 30,000

What is Jeff’s basis in the building and in the computer, respectively?

Building Computer

A. $44,445 $5,555

B. $40,000 $10,000

C. $45,000 $5,000

D. $80,000 $20,000




[55] Gleim #: 9.2.73

At a time when Nedra’s basis in her partnership interest was $5,000, she received a

current distribution of $6,000 cash and land with an adjusted basis of $2,000 and a fair

market value of $3,000. The partnership had no unrealized receivables or substantially

appreciated inventory. What is the result of this distribution to Nedra?

$3,000 capital gain, $2,000 basis in land, $0 basis in partnership interest.A.

$1,000 ordinary income, $2,000 basis in land, $0 basis in partnership interest.B.

$0 gain or loss, $0 basis in land, $(1,000) basis in partnership interest.C.

$1,000 capital gain, $0 basis in land, $0 basis in partnership interest.D.

[56] Gleim #: 13.5.68

Jeff collects baseball cards and exchanges a portion of his collection for a motorcycle

owned by Cards Corporation. The fair market value of the baseball cards is $4,000 but

Jeff paid only $1,000 for them. Jeff owns all of the outstanding stock of Cards

Corporation, which has an adjusted basis of $2,000 in the motorcycle. The fair market

value of the motorcycle is $4,000. What amount should Jeff report on his tax return for

the year of the exchange?

Report a $3,000 gain.A.

Attach a non-taxable exchange disclosure statement to his return.B.

Report a $1,000 gain.C.

No reporting required.D.

[57] Gleim #: 4.1.13

If you used a fishing lodge as an entertainment facility, which of the following incurred

expenditures may be partially deductible?

Fishing bait.A.

Natural gas to heat the lodge.B.

Depreciation expense.C.

Repairs to the lodge roof.D.




[58] Gleim #: 6.5.88

On December 15, 2011, Miranda, a calendar-year taxpayer, sold two business assets on

the installment method for a total of $300,000. Her Sec. 1245 property accounted for

$100,000 of the selling price and was subject to depreciation recapture of $65,000. Her

Sec. 1250 property sold for the remaining $200,000 and was subject to a $25,000

depreciation recapture. Miranda received $60,000 as a down payment in 2011. The

remaining payments will be made in subsequent years. How much total depreciation

recapture will Miranda be required to report on her 2011 income tax return?

$0A.

$90,000B.

$18,000C.

$60,000D.

[59] Gleim #: 17.4.141

We Converted, Inc., elected S corporation status in Year 2, after 10 years as a C

corporation. At the date of conversion, the company had a $50,000 net operating loss

(NOL) carryover, which it incurred in Year 1, and a $25,000 capital loss carryover. In

Year 5, the company sold a vacant piece of property it owned for 11 years. The sales

price of the property was $100,000 and an original cost of $25,000. Given the

circumstances as stated above, which of the following statements is true?

$75,000 of the capital gain is taxable, since the S corporation cannot succeed to the

beneficial tax attributes of a former C corporation.

A.

Only $50,000 of the $75,000 capital gain is subject to S corporation tax.B.

No amount of gain is taxable to the S corporation because all income items are

separately stated to the shareholders.

C.

No amount of gain is taxable to the S corporation, because the total of the NOL and

capital loss carryover ($75,000) can be used to offset the capital gain on the sale of

the property.

D.




[60] Gleim #: 4.2.35

Which of the following statements is true regarding deductible travel expenses when

attending a convention?

The daily limit on the amount that can be deducted for a convention held on a cruise

ship is the highest federal per diem rate allowable at the time of travel.

A.

The convention agenda does not have to deal specifically with the official duties

and responsibilities of your position.

B.

Appointment or election as a delegate to a convention is sufficient in itself to make

that delegate’s travel expense deductible.

C.

Travel expense for attendance at a conference on investments is deductible if the

taxpayer is seeking advice on suitable investments for the production of taxable

income.

D.

[61] Gleim #: 16.1.9

Mr. Fox owns 500 shares of stock in Ocean Corporation, which represents 52% of

Ocean’s only class of stock issued and outstanding. Mr. Fox’s basis in the stock is

$50,000 ($100 per share). Ocean redeems 250 shares of Mr. Fox’s stock for $40,000. The

redemption is properly treated as a distribution of cash in exchange for the stock. What is

Mr. Fox’s basis in his remaining shares of stock?

$40,000A.

$50,000B.

$25,000C.

$35,000D.

[62] Gleim #: 4.2.32

Expenses for travel outside the United States are not allocated between business and

personal days when

All of the answers are correct.A.

A personal vacation was not a major consideration.B.

The trip was not more than 7 consecutive days.C.

At least 75% of the time was spent on business.D.




[63] Gleim #: 5.3.60

The uniform capitalization method must be used by

Manufacturers of tangible personal propertyI.

Retailers of personal property with $2 million in average annual gross receipts for

the 3 preceding years

II.

I only.A.

Neither I nor II.B.

Both I and II.C.

II only.D.

[64] Gleim #: 14.3.70

Cat Corporation, a calendar-year, accrual-basis taxpayer, distributed shares of Fish

Corporation stock to Cat’s employees in lieu of salaries. The salary expense would have

been deductible as compensation if paid in cash. On the date of the payment, Cat’s

adjusted basis in the Fish Corporation stock distributed was $25,000, and the stock’s fair

market value was $85,000. What is the tax effect to Cat Corporation?

$25,000 deduction.A.

$25,000 deduction; $60,000 recognized gain.B.

$85,000 deduction.C.

$85,000 deduction; $60,000 recognized gain.D.

[65] Gleim #: 2.5.100

Bernard owns restaurant equipment that has a fair market value of $175,000 and an

adjusted basis of $100,000. The equipment is subject to a liability of $40,000. Smiley

would like to purchase Bernard’s restaurant equipment and makes the following offer:

Cash -- $50,000

Assumption of Bernard’s liability

Restaurant equipment owned by Smiley having a fair market value of $85,000; the

equipment is not encumbered by any liabilities

What is the amount of Bernard’s recognized gain if he accepts Smiley’s offer?

$90,000A.

$50,000B.

$35,000C.

$75,000D.




[66] Gleim #: 18.3.109

With regard to a trust, which of the following statements is false?

Generally, the trust is taxed on the income currently distributed and on the portion it

has accumulated.

A.

A trust is a separate taxable entity.B.

The income allocated to a beneficiary retains the same character in his/her hands as

it had in the hands of the trust.

C.

If income is required to be distributed currently or is properly distributed to a

beneficiary, the trust is regarded as a conduit with respect to that income.

D.

[67] Gleim #: 9.1.36

Jane and Bill are equal partners in J & B Partnership. The partnership incurred a $10,000

loss last year. Jane and Bill’s adjusted basis in the partnership at the beginning of last

year was $2,000 each. Under the partnership agreement, Jane and Bill share all

partnership profits and losses equally. The partnership borrowed $20,000 last year to

purchase depreciable equipment to be used in the partnership’s business. Jane was

required under the partnership agreement to pay the creditor if the partnership defaulted.

Based upon these facts, what is Jane and Bill’s allowable loss on last year’s tax return?

Jane Bill

A. $5,000 $2,000

B. $2,000 $2,000

C. $5,000 $5,000

D. $10,000 $0

[68] Gleim #: 12.2.83

Mr. Wind transferred property subject to a $35,000 liability to Corporation X in exchange

for 90% of X’s only class of outstanding stock. Mr. Wind’s adjusted basis in the property

transferred was $40,000. The fair market value of the stock at the time of the transfer was

$60,000. What is Corporation X’s basis in the property received, and what is Mr. Wind’s

basis in the stock received?

Corporation X Mr. Wind

A. $60,000 $40,000

B. $75,000 $75,000

C. $40,000 $5,000

D. $35,000 $5,000




[69] Gleim #: 16.1.8

Turbo Corporation distributed land to shareholder Lea in partial liquidation of her

interest. At the time of the distribution, the land had an adjusted basis of $80,000 and a

fair market value of $125,000. Lea exchanged 90 of 100 shares of Turbo stock for the

land. At the time of the partial liquidation, Lea’s adjusted basis in the 90 shares was

$60,000. Other unrelated shareholders of Turbo own a combined 150 shares outstanding.

Just prior to the distribution, Turbo had earnings and profits of $150,000. What are the

amounts and the character of income that Turbo Corporation and Lea must recognize on

the partial liquidation?

Turbo Lea

A. $45,000 capital gain $65,000 capital gain

B. $45,000 capital gain $125,000 dividend

C. $0 $65,000 dividend

D. $0 $65,000 capital gain

[70] Gleim #: 15.1.34

Orville Corporation had earnings and profits of $82,000 for the current year before

distribution of dividends. On December 31 of the current year, the company distributed

inventory with a fair market value of $16,000 and an adjusted basis of $12,000 as a

dividend to its sole individual shareholder, Wilbur. The corporation values its inventory

by the first-in, first-out method. Assume the corporate tax rate is 35%. What is the

earnings and profits balance at the end of the current year?

$70,000A.

$66,000B.

$82,000C.

$68,600D.




[71] Gleim #: 1.3.46

Dr. Berger reports on the cash basis. The following items pertain to Dr. Berger’s medical

practice in Year 2:

Cash received from patients in Year 2 $200,000

Cash received in Year 2 from third-party reimbursers

for services provided by Dr. Berger in Year 1 30,000

Salaries paid to employees in Year 2 20,000

Year-end Year 2 bonuses paid to employees in Year 3 1,000

Other expenses paid in Year 2 24,000

What is Dr. Berger’s net business income for Year 2 from his medical practice?

$186,000A.

$156,000B.

$185,000C.

$155,000D.

[72] Gleim #: 19.1.6

Antonio is an ordained minister. As a minister, Antonio is a common-law employee of

the church where he works, but his earnings and parsonage allowance are treated as self-

employment income on which he pays self-employment tax. If the church had no

retirement plan under which Antonio was covered, which of the following would

Antonio be permitted to establish for himself?

Both a traditional IRA and a Savings Incentive Match Plan for Employees

(SIMPLE) IRA.

A.

Simplified employee pension (SEP).B.

Savings Incentive Match Plan for Employees (SIMPLE) IRA.C.

Traditional IRA.D.




[73] Gleim #: 14.3.71

Corporation F, a calendar-year, accrual-basis taxpayer, distributed stock of Corporation K

to F employees in lieu of salaries. The salary expense would have been deductible as

compensation if paid in cash. On the date of the payment, Corporation F had an adjusted

basis in Corporation K’s stock of $50,000 and a fair market value of $170,000. What is

the tax effect to Corporation F?

$50,000 deduction; $120,000 recognized gain.A.

$170,000 deduction; $120,000 recognized gain.B.

$170,000 deduction.C.

$50,000 deduction.D.

[74] Gleim #: 9.3.105

Jeff and his brother each own a 40% interest in J & K Partnership. Jeff also owns a 70%

interest in Mega Partnership. In 2010, J & K sold a building to Mega Partnership for

$100,000. J & K’s adjusted basis of the building at the time of the sale was $110,000. In

2011, Mega sold the building for $115,000. How much gain or (loss) will Mega

recognize in 2011?

$15,000A.

$10,000B.

$5,000C.

$0D.

[75] Gleim #: 10.2.55

Carl sold his interest in a partnership for $15,000 in cash when the adjusted basis of his

partnership interest was zero. As part of the sales transaction, Carl was relieved of his

$10,000 share of partnership liabilities. How much did Carl realize on the sale of his

interest in the partnership?

$15,000A.

$25,000B.

$0C.

$10,000D.




[76] Gleim #: 17.4.138

If an S corporation recognizes a built-in gain and pays tax on it, the shareholders report

Their share of the entire gain in their own taxable income and obtain a credit for

their share of taxes paid by the S corporation.

A.

Only gain from the transaction that is in excess of the built-in gain, i.e., on

appreciation accruing after the first day of the first taxable year for which the

corporation was an S corporation.

B.

No gain from the transaction.C.

Their share of the individual gains reduced by the taxes paid by the S corporation

that are attributable to such gains.

D.

[77] Gleim #: 14.4.91

Renton Corporation had a beginning balance of unappropriated retained earnings of

$200,000 and net income per the books of $250,000. During the year, it paid cash

dividends of $120,000, had a loss on sale of securities of $7,000, and received a refund of

the previous year’s income taxes of $12,000. What is its ending balance of

unappropriated retained earnings for the year?

$349,000A.

$337,000B.

$330,000C.

$342,000D.

[78] Gleim #: 13.4.52

Corporation Z’s net long-term capital loss exceeded its net short-term capital gain by

$5,000 in Year 6. To what taxable year is the net capital loss first carried?

Year 7.A.

Year 1.B.

Year 5.C.

Year 3.D.




[79] Gleim #: 4.6.102

Which of the following penalties paid by Castle Construction Partnership is deductible?

A penalty for violating the state maximum highway weight law.A.

A penalty paid to the city for violating the city’s housing codes.B.

A penalty for late performance of a contract.C.

A penalty for late filing of Form 1065, U.S. Return of Partnership Income.D.

[80] Gleim #: 11.8.80

Acme Corporation has a fiscal year beginning April 1 and ending March 31. Acme

Corporation’s estimated tax for the fiscal year is $4,000. When is the first installment of

Acme Corporation’s estimated tax due (without considering Saturdays, Sundays, or

holidays)?

May 15.A.

May 31.B.

July 15.C.

April 15.D.

[81] Gleim #: 3.1.31

Which of the following expenses is deductible as compensation?

A loan or an advance for services actually performed when repayment is not

expected.

A.

Wages paid to employees for constructing a new building to be used in the business.B.

Lump-sum payments for sick pay that are compensated by insurance.C.

Payment for an employee to take classes required for the job.D.




[82] Gleim #: 5.1.18

Matt and Jason, partners in the M & J Partnership, began business on June 15 of the

current year. The business incurred the following expenses prior to June 15:

Purchase of a commercial building for $200,000.

New electrical wiring at a cost of $27,000.

New plumbing at a cost of $75,000.

Light fixtures (not part of the wiring) replaced at a cost of $6,500. These light

fixtures were of the same quality as the previous ones.

What is the cost of improvements?

$275,000A.

$102,000B.

$108,500C.

$200,000D.

[83] Gleim #: 5.2.39

Which of the following items does not increase the basis of property?

Zoning costs.A.

Freight and installation costs.B.

Missed depreciation deductions in tax years barred by the statute of limitations.C.

Legal fees to perfect the title.D.

[84] Gleim #: 4.3.50

You operate a business and file your tax return on a calendar-year basis. You bought a

fire insurance policy on your building effective November 1, Year 1, and paid a premium

of $1,200 for 2 years of coverage. How much can you deduct on your Year 1 return?

$100A.

$1,200B.

$600C.

$50D.




[85] Gleim #: 14.3.63

Carol provides services in Year 1 to Bragg Corporation. Her service contract with Bragg

listed her fee at $50,000 receivable in cash and/or stock. At the time her fee was due,

Bragg stock was trading for $1,000 per share. Carol elected to receive $30,000 in cash

and 20 shares of Bragg stock. In Year 4, the Bragg stock split, increasing the number of

Carol’s shares to 40. In Year 6, Carol sells 20 shares of her Bragg stock for $1,500 per

share. What is Carol’s basis in the Bragg Corporation shares she still owns?

$40,000A.

$20,000B.

$30,000C.

$10,000D.

[86] Gleim #: 15.2.45

Heron, Inc., made a distribution of real estate with a FMV of $100,000 to its only

shareholder, Jennifer, on December 31, Year 1. Heron’s basis in the property was

$60,000. Current year earnings and profits of Heron (before the distribution) is $10,000,

and it has accumulated $20,000 earnings and profits from prior years. Jennifer’s basis in

her Heron stock is $5,000. What will be the tax effect to Jennifer?

$100,000 dividend.A.

$70,000 dividend and $25,000 capital gain.B.

$30,000 dividend and $25,000 capital gain.C.

$30,000 dividend and $65,000 capital gain.D.




[87] Gleim #: 11.6.57

Given the following facts, what is the amount of Wood Corporation’s alternative

minimum tax?

Taxable income before net operating

loss deductions $120,000

Total adjustments to taxable income (12,000)

Total tax preference items 15,000

Regular income tax 32,000

$1,250A.

$0B.

$450C.

$850D.

[88] Gleim #: 15.1.36

Rally Corporation distributed a sailboat to its sole shareholder, Ms. H. At the time of the

distribution, the sailboat had a fair market value of $175,000 and an adjusted basis to

Rally of $150,000. The sailboat was subject to a loan of $190,000, which Ms. H

assumed. What is the amount of Rally’s gain (or loss) on the distribution?

$40,000A.

$(15,000)B.

$0C.

$25,000D.

[89] Gleim #: 18.3.55

In Year 1, Exeter Trust had taxable interest of $2,000, capital gains of $6,000, and a

fiduciary fee of $1,000. The trust instrument allocates capital gains to income. At the end

of Year 1, the fiduciary retains $3,000 and distributes $4,000. What is the distributable

net income (DNI) of Exeter Trust for Year 1?

$4,000A.

$7,375B.

$4,375C.

$7,000D.




[90] Gleim #: 4.1.20

All of the following elements are part of the directly related test for entertainment, except

You did engage in business with the person during the entertainment period.A.

You had more than a general expectation of getting income or some other specific

business benefit.

B.

The main purpose of the entertainment was the active conduct of business.C.

The entertainment took place directly before or after a business discussion.D.

[91] Gleim #: 5.1.25

On January 1 of the current year, Joe purchased new car wash equipment for use in his

service station business. Joe’s costs in connection with the purchase were as follows:

Cost of the equipment $43,000

Sales tax on the equipment 3,000

Delivery charges 800

Installation and testing charges 2,000

Current-year personal property taxes 1,100

What is the amount of Joe’s basis in the car wash equipment?

$46,100A.

$48,800B.

$45,800C.

$49,900D.

[92] Gleim #: 18.3.129

Phillip died last year, leaving all his property to his three children. This year, Phillip’s

estate had $25,000 in distributable net income. The executor of Phillip’s estate, who has

full discretion as to when income is to be distributed, made a cash payment of $10,000 to

each of the children. What is the amount of the estate’s distribution deduction?

$25,000A.

$30,000B.

$20,000C.

$10,000D.




[93] Gleim #: 10.2.43

David Beck and Walter Crocker were equal partners in the calendar-year partnership of

Beck & Crocker. On July 1, Year 1, Beck died. Beck’s estate became the successor in

interest and continued to share in Beck & Crocker’s profits until Beck’s entire

partnership interest was liquidated on April 30, Year 2. At what date was the partnership

considered terminated for tax purposes?

April 30, Year 2.A.

July 1, Year 1.B.

December 31, Year 1.C.

July 31, Year 1.D.

[94] Gleim #: 3.4.56

Carlos leased 200 acres of farmland for use in his farming operations. The lease term was

10 years starting on January 1, 2004. The annual rental was $100,000. Early in the lease,

Carlos constructed a $50,000 drying facility on the leased land. As of January 1, 2011,

Carlos assigned all his lease rights to Lindsey for the balance of the lease. Lindsey paid

Carlos $150,000 on January 1 for the lease term and for the value of the drying facility –

$125,000 allocated to the lease term and $25,000 to the drying facility. Additionally,

Lindsey paid the $100,000 annual rent payment to the lessor. If the drying facility were

depreciated, the deprecation deduction would be $2,000. What is the total amount

Lindsey may deduct on her 2011 tax return for the leased 200 acres including

depreciation, if any?

$152,000A.

$143,667B.

$250,000C.

None of the answers are correct.D.

[95] Gleim #: 13.4.40

With regard to carrybacks and carryforwards of a corporation’s capital losses, which of

the following statements is false?

You cannot use a capital loss carried from another year to produce or increase a net

operating loss in the year to which you carry it.

A.

If you carry capital losses from 2 or more years to the same year, you should deduct

the loss from the latest year first.

B.

When figuring the current year’s net capital loss, you cannot use any capital loss

carried from another year.

C.

There is no offset against ordinary income for a corporation.D.




[96] Gleim #: 4.6.106

All of the following expenses incurred in the course of operating a business are

deductible business expenses except

Advertising in a concert program the local church is sponsoring.A.

Cost of sending communications to members of a city council regarding legislation.B.

Advertising in a convention program of a political party. The proceeds from the

publication of the program are for the local use of the political party.

C.

Public service advertising that keeps the name of the business before the public.D.

[97] Gleim #: 6.2.41

Juliet bought and placed in service computer equipment in 2011. She paid $10,000 and

received a $2,000 trade-in allowance for her old computer equipment. She had an

adjusted basis of $3,000 in the old computer equipment. Juliet used both the old and new

equipment 90% for business and 10% for personal purposes. Assuming she elects out of

additional first-year depreciation, her allowable Sec. 179 expense deduction is

$10,000A.

$10,800B.

$9,000C.

$12,000D.

[98] Gleim #: 13.4.37

Which of the following statements is false regarding corporate capital losses?

Net capital loss carryovers may be carried forward to 7 succeeding tax years from

the year of the loss.

A.

Capital losses may only offset capital gains.B.

Excess net capital losses may not be deducted in the current year.C.

Net capital losses may be carried back to the 3 preceding tax years.D.




[99] Gleim #: 17.2.61

Mary is a 50% shareholder in an S corporation, which suffered a $100,000 loss for the

tax year ending December 31, Year 1. Mary’s basis in her stock as of December 31, Year

1, was $25,000. What can Mary do with the disallowed loss of $25,000?

Mary does not have a disallowed loss and can use the full $50,000 loss in the Year 1

tax year.

A.

Nothing. There is no provision for using disallowed losses from an S corporation in

any other tax year but that in which the loss occurred.

B.

Carry forward the loss indefinitely for use if her basis in her stock is sufficiently

restored.

C.

Carry back the loss 3 years to offset any personal taxes paid.D.

[100] Gleim #: 6.3.63

On November 1 of the current year, Karen opened a business supply store. Prior to

opening the business, she incurred the following costs:

Design of logo $ 600

Accounting fees related to setting up the business 1,000

Interest expense for funds borrowed prior to opening the store 300

Market survey 500

Costs to hire and train employees 2,000

Travel expenses to secure prospective customers 2,500

What amount of the start-up costs may Karen amortize for the year if she uses the

shortest allowed amortization period (ignoring any immediate expensing allowed)?

$67A.

$70B.

$39C.

$77D.




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Exam 2 Business - Gleim