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AACT 4435-01 Federal Tax 2 Exam #1 Fall 2014 Chapters 5-8




Question;AACT 4435-01 Federal Tax 2;Exam #1 Fall 2014;Chapters 5-8;Name;Date;Grade;Examination;instructions;1);The examination is intended to test your;knowledge of the topic covered in chapters 5 through 8 of the course text.;2);Answer all questions on the examination paper;in the spaces provided.;3);Read the questions carefully. If you need to;make any assumptions you must state them in order to receive credit.;4);This exam consists of the following;a);20 true and false questions worth 1 point each;for a total of 20 points.;b);8 critical thinking problems worth 10 points;each for a total of 80 points.;**5). In order to receive partial credit on;the problems you will need to show your calculations;True and False (1;point each);Problems (10 points;each);1;1;2;2;3;3;4;4;5;5;6;6;7;7;8;8;9;10;11;12;13;14;15;16;17;18;19;20;True and False;1. Unemployment compensation is always;included in gross income.;2. Social security benefits are always;included in gross income.;3. An example of a qualified benefit is an;employer-subsidized cafeteria.;4. An annuity is a contract that pays a fixed;income at set regular intervals for a specific period of time.;5. Amounts received under worker's;compensation as compensation for personal injuries are excludable from gross;income.;6. Hobby expenditures are deductible to the;extent of hobby gross income.;7. Job-seeking expenses are not deductible if;an individual finds a job in a new trade or business.;8. Advertising which is intended to influence;public reaction to proposed legislation normally is not a deductible business;expense for tax purposes.;9. Full worthlessness of a debt must be;proven in order to claim a business bad debt deduction.;10. Personal expenses are only deductible if the;tax laws specifically state that they are.;11. The passive loss limitations apply to;individuals, closely held corporations, and personal service corporations, but;not to estates and trusts.;12. An individual is allowed to avoid the;passive loss limitations for all rental real estate activities in which the;individual actively participates.;13. In determining whether a taxpayer materially;participates, the participation of a taxpayer's spouse will be taken into;account.;14. A business incurring a net operating loss in;a taxable year can carry the loss back two years and forward 15 years.;15. Suspended passive losses are carried forward;for a maximum time period of 20 years.;16. Itemized deductions only reduce taxable;income if the taxpayer's itemized deductions exceed the standard deduction;amount.;17. Vitamin pills taken daily for general health;are a qualified medical expense.;18. Premiums paid for insurance policies;providing reimbursement for the accidental loss of life, limb or sight are;deductible as medical expenses.;19. An ad valorem tax is a tax in proportion to;the value of personal property.;20. Points paid on the loan for the purchase of;a new home are not deductible on an individual's tax return.;Critical thinking problems;1. In September 2013, Bill and Linda, a;married couple with $50,000 gross income, cashed qualified Series EE U.S.;Savings Bonds which they had purchased in 2008. The proceeds were used to help;pay for their son's 2013 college tuition. They received gross proceeds of;$3,500, representing principal of $3,000 and interest of $500. The qualified;higher education expenses they paid in 2013 totaled $2,100. Their modified;adjusted gross income for the year was $20,000. How much of the $500 interest;can Bill and Linda exclude from gross income in 2013?;a. $0;b. $200;c. $300;d. $500;2. Sandra Bellows purchased a 15-year annuity;for $25,000. Starting at the beginning of the year, Sandra will receive $200;per month. What is the total amount that Sandra can exclude from her gross;income from her annuity this year?;a. $2,400;b. $2,000;c. $1,867;d. $1,667;3. During 2013, a corporation purchased;machinery costing $200,000 and a warehouse costing $600,000. These are the only;two acquisitions of depreciable property purchased by the corporation in 2013. The;maximum deduction the corporation can claim under Code Sec. 179 in 2013 is;a. $500,000;b. $800,000;c. $25,000;d. $200,000;4. A calendar-year corporation incurs $53,000;of start-up costs. If the corporation began business on August 1 of the current;year, what is the maximum amount of the start-up costs that it can deduct;against business income in the current year? (round your answer to the nearest;dollar);a. $3,417;b. $5,000;c. $2,000;d. $6,333;e. none;of the above;5.;During 2013, Tommy's home was burglarized. Tommy had the following items;stolen.;? A block of securities worth $20,000.;Tommy purchased of securities three years ago for $8,000.;? A block of securities worth $30,000.;Tommy purchased the securities for $24,000 two years ago.;Tommy's;homeowners policy had an $80,000 deductible clause for thefts. How much is;Tommy's theft loss for 2013?;a. $50,000;b. $32,000;c. $44,000;d. None;of the above.;6. Tammy has the following items for the;current year;Nonbusiness capital gains;$10,000;Nonbusiness capital losses;(2,000;Interest Income;7,000;Itemized deductions (none of the amount;realized from a casualty loss);(9,000;In calculating;Tammy's net operating loss, and with respect to the above amounts only, what;amount must be added back to taxable income (loss)?;a. $0;b. $2,000;c. $3,000;d. $6,000;7. Mark Miller, 52;paid the following medical expenses during the year (all in excess of;reimbursement);Hospital and doctor bills (for self and;wife, 50);$840;Medicine and drugs (for self and wife);$730;Hospitalization insurance premiums;$6,200;Medicine and drugs (for dependent mother;age 71);$1,060;Assuming the;Millers' adjusted gross income was $60,000, how much of a medical expense;deduction may the Millers claim on their joint return?;a. $1,770;b. $2,830;c. $4,330;d. $8,830;e. None;of the above.;8. During the year, the following items were;charged to the interest expense account of Doe Corporation;Interest on additional income taxes;assessed two years ago;$400;Interest on bank loan to finance;installation of new machinery. Bank loan was refinanced when installation was;completed;$700;Interest deducted by bank from proceeds of;Doe Corporation's 60-day note signed December 1, payable in full 60 days;later;$500;The maximum amount;of interest expense that Doe Corporation, an accrual basis taxpayer, can deduct;for the current year is;a. $1,600;b. $1,100;c. $1,350;d. $700;e. None;of the above


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