1. When talking about accounting methods, which of the following statements is false?
a. The cash and accrual methods are the principal accounting methods.
b. Subject to approval by the Commissioner of the IRS, the use of unspecified accounting methods is permitted.
c. Section 453 of the Internal Revenue Code permits the use of the “installment method.”
d. The “matching” concept of accounting is useful in understanding the IRS permitted methods of accounting.
e. All of the preceding statements are true.

2. The principle which states that property, that has once served to offset taxable income, should be treated upon its recoupment as recovery “of that which had previously been deducted” and be subject to inclusion in taxable income is called:
a. the “taxable income” rule.
b. the “deduction from taxable income” rule.
c. the “lack of taxable benefits” rule.
d. the “income averaging” rule.
e. None of the above.

3. When speaking about capital losses, what is the difference between the treatment allowed to individuals and corporations?
a. capital losses are not allowed to corporations at all.
b. capital losses are allowed to individuals to the extent of capital gains only.
c. Noncorporate taxpayers are allowed a limited deduction of excess capital losses from ordinary income.
d. Corporate taxpayers are allowed a limited deduction of excess capital losses from ordinary income.
e. None of the above.

4. Securities dealers are required to employ a mark-to-market accounting method under which securities dealers are required to recognize gain or loss based on:
a. the realized gain upon sale of noninventory securities.
b. the recognized gain upon the sale of noninventory securities.
c. the fair market value of noninventory securities held at the end of the taxable year.
d. the fair market value of noninventory securities held at the end of the taxable year the stock market rises (measured by the Dow Jones Industrial Average) more than 25%.
e. None of the above.

5. A developer primarily involved in long-term construction may in whole or in part use any one of the following accounting methods, except:
a. Cash method
b. Percentage-of-completion method
c. Completed-contract method
d. Modified percentage-of-completion method

6. IRC Section 1231 applies to the following types of property, except:
a. connected with a trade or business.
b. connected with any profit-seeking activity.
c. connected with business real property.
d. connected with depreciable business machinery.
e. None of the above.

7. IRC Section 1245 is mainly a:
a. characterization provision of the IRC.
b. quantification provision of the IRC.
c. qualification provision of the IRC.
d. recognition provision of the IRC.
e. None of the above.

8. Which of the following items is a capital asset?

a. shoes held for sale by a Payless Store.

b. A wood-cutting machine used by a shoe manufacturer.

c. Accounts receivable from customers of an accrual basis accountant.

d. An apartment held for sale to the public by the developer of the apartment building.

e. None of the above is a capital asset.

9. If a taxpayer changes its accounting period (with approval of the IRS Commissioner, of course), the income for the shorter period:
a. is treated as the income of a full year.
b. is annualized.
c. is treated as originating in the prior taxable year.
d. is subject to the income averaging rules.
e. None of the above.

10. Leonard Lambert's commercial building, which had an adjusted basis of $500,000, was partially destroyed by fire. The fair market value was $800,000 just before the fire and $600,000 immediately after. Leonard received $150,000 insurance proceeds and deducted a $50,000 casualty loss. What is Leonard's basis in the building before any repairs are made?
a. $300,000
b. $350,000
c. $450,000
d. $500,000
e. $600,000

11. Lem Lumberjack sells 100 shares (basis of $5,000) of Redwood Corporation common stock on March 8, 2013, for $4,000. On March 29, 2013, Lem purchases 50 shares of Redwood Corporation common stock for $2,500. Lem's recognized loss on the sale is:
a. $1,000
b. $500
c. $1,500
d. $0

12. In 2013, Allen Anders sold an asset which cost $70,000. Allen incorrectly claimed $40,000 depreciation over a five-year period. He should have claimed $50,000 depreciation. What was the adjusted basis when sold?
a. $0
b. $20,000
c. $30,000
d. $50,000
e. $70,000

13. Which of the following items is not a reduction to the basis of an asset?
a. Depreciation
b. Assessments for maintenance of sidewalks
c. Cash rebate from manufacturer
d. Casualty losses

14. In 2013, Bob Brown's aunt Barbara gave him a house. At the time of the gift, the house had a fair market value of $194,000, the taxable gift was $180,000, and his aunt's adjusted basis was $74,000. His aunt paid a gift tax of $30,000 on the house. What is Bob's basis in the house for purposes of determining gain?
a. $74,000
b. $94,000
c. $180,000
d. $194,000

15. In May 2013, Automatic, Inc. sold land with a basis to Automatic of $100,000, to Jack Jones, its 60% shareholder, for $80,000. In July, Jack sold the land to an unrelated party for $110,000. What is the amount of Jack's recognized gain?
a. $0
b. $10,000
c. $20,000
d. $30,000

16. Brian Brewster sold property to a buyer who paid him $400,000 cash and assumed an existing mortgage of $150,000. The property had cost $250,000 and he had made improvements of $50,000. Depreciation of $100,000 has been claimed and selling expenses were $20,000. What is the amount of gain?
a. $100,000
b. $200,000
c. $250,000
d. $280,000
e. $330,000

17. Brenda Baines sells land to Carla Chandler for $15,000 cash and a piece of equipment with an adjusted basis of $15,000 and a fair market value of $20,000. The land was subject to a $25,000 mortgage which Carla assumed. Brenda incurred $2,500 in selling expenses. What is the amount realized by Brenda?
a. $55,000
b. $60,000
c. $52,500
d. $57,500

18. Bill Burns purchases furniture from his employer for $5,000 during 2013. The fair market value of the furniture is $8,500. What is Bill's basis in the furniture?
a. $5,000
b. $8,500
c. $12,500
d. $2,500

19. Bill Burns purchases furniture from his employer for $5,000 during 2013. The fair market value of the furniture is $8,500. What amount, if any, must Bill include as income for 2013?
a. $0
b. $5,000
c. $7,500
d. $3,500

20. Doug Doolittle receives a nontaxable stock dividend of 20 shares of Edwards Corporation common stock with a fair market value at distribution of $800. Doug previously owned 100 shares of Edwards Corporation common stock which he purchased three years ago for $6,000. The basis per share of the 20 shares of Edwards Corporation stock is:
a. $0
b. $40
c. $50
d. $60

21. Ed Edmonds exchanged a business truck with an adjusted basis of $320,000 for another business truck with a fair market value of $20,000, a boat with a fair market value of $6,000, and $2,000 cash. What is the basis of the new truck?
a. $18,000
b. $20,000
c. $24,000
d. $30,000
e. $32,000

22. A fire destroyed Carl Cramer's business automobile. Carl originally paid $24,000 for the automobile and up to the time of the fire had been allowed $15,000 in depreciation. Within three months the insurance company replaced the old automobile with a new one which was worth $21,000. What is the basis of the new automobile for purposes of computing depreciation?
a. $3,000
b. $9,000
c. $15,000
d. $21,000
e. $24,000

23. Which of the following statements are correct?
(1.) A sale is generally a transfer of property for money only or for a promise to pay money.
(2.) An exchange is a transfer of property in return for other property or services.
(3.) Recognized gain is always the excess of the amount realized over the adjusted basis of the property.
(4.) Realized loss is always the excess of the adjusted basis of the property over the amount realized.
(5.) The adjusted basis of the property is always the original cost adjusted for such items as casualty losses, improvements, and depreciation.
a. 1, 2, and 3
b. 1, 2, and 4
c. 1, 3, and 4
d. 1, 4, and 5
e. 2, 3, and 4

24. Which of the following is not an example of a nontaxable like-kind exchange?
a. Improved real estate for unimproved real estate.
b. A printer for a computer.
c. Common stock of one company exchanged for common stock of another.
d. The trade of an apartment building for a store building.
e. Real estate for a ranch.

25. Tom Tanner traded in a printing press with an adjusted basis of $20,000 for a smaller press valued at $12,000. In addition to the smaller press, Tom received $3,000 in cash and was relieved of the existing liability on the old press of $5,000. What is Tom's recognized gain?
a. $0
b. $3,000
c. $4,800
d. $5,000
e. $8,000

26. Greg Grotto exchanged an eight-unit apartment building for a four-unit apartment building. His adjusted basis for the eight-unit building was $320,000 and the fair market value was $400,000. The fair market value of the four-unit building, which was subject to a $40,000 mortgage, was $440,000 on the date of the transaction. What is Greg's taxable gain?
a. $120,000
b. $80,000
c. $48,000
d. $40,000
e. $0

27. Bobby and Betty Bennett sold for $450,000 in October of 2013 their residence that they had purchased in 2003 for $200,000. They made major capital improvements during their 10-year ownership totaling $40,000. What is their recognized gain?
a. $250,000
b. $210,000
c. $-0-
d. $450,000
e. None of the above

28. Suppose instead that in the preceding problem the Bennetts sold their home for $800,000. They moved into a smaller home costing $250,000. How much gain must they recognize?
a. $560,000
b. $500,000
c. $310,000
d. $60,000
e. None of the above

29. Assume instead that the Bennetts resided in a very depressed neighborhood and the home purchased in 2003 for $200,000 (capital improvements of $40,000) was sold for only $110,000. How much loss is recognized?
a. $200,000
b. $130,000
c. $90,000
d. $-0-
e. None of the above

30. Ben Benson, single, sold his home that he had owned for 20 years for $695,000. He purchased it for $140,000 and made $45,000 of capital improvements on the home during his time of ownership. How much gain is excluded?
a. $510,000
b. $500,000
c. $260,000
d. $250,000
e. None of the above

31. Which of the following is a capital asset?
a. Property held primarily for sale to customers
b. Accounts or notes receivable acquired in the ordinary course of business
c. Machinery and equipment used in a trade or business
d. Temporary investment of idle business cash in marketable corporate securities
e. Real property used in a trade or business

32. For 2013, Greg Grammer had a short-term capital loss of $4,000, a short-term capital gain of $1,900, a short-term capital loss carryover from 2012 of $700, a long-term capital gain of $800, and a long-term capital loss of $1,000. What is Greg's deductible loss in 2013?
a. $0
b. $2,560
c. $2,800
d. $2,900
e. $3,000

33. Becky Best received a long-term capital gain distribution of $350 from her stock in MXM Corporation. She also had a $4,000 short-term capital gain, a $3,000 long-term capital loss and a short-term capital loss carryover from 2013 of $1,200. What is Becky's net capital gain or (loss)?
a. $150
b. $4,000
c. ($3,000)
d. ($4,200)

34. For 2013, Steven Sutton had taxable income of $40,000. His stock transactions in 2013 were as follows: Stock | Purchased | Sold | Adjusted Basis | Selling Price | A | 8/29/92 | 1/7/13 | $4,000 | $6,800 | B | 6/28/99 | 8/25/13 | 3,200 | 200 | C | 1/14/13 | 7/14/13 | 6,000 | 4,500 | D | 2/18/13 | 12/20/13 | 7,000 | 3,000 |
What is Steve's net capital loss for 2013 and his carryover to 2014?
a. Deduction: $3,000; carryover: $2,700
b. Deduction: $3,000; carryover: $3,000
c. Deduction: $5,700; carryover: $3,000
d. Deduction: $5,700; carryover: $2,700

35. Oscar Orsen is an officer of Atlas Company. He loaned the company $10,000 but was unable to collect it because the company went bankrupt a year after the loan was made. Oscar did not own any stock in the company and the loan was not a condition of employment. How should Oscar report this loss?
a. Nondeductible gift
b. Short-term capital loss
c. Long-term capital loss
d. Miscellaneous itemized deduction
e. Business bad debt

36. Henry Hoover operates a freight line which delivers a substantial number of boats made by Walter Company. During 2013, Henry made a loan of $45,000 to Walter Company in order to maintain their business. Walter Company went bankrupt in 2013 and did not repay Henry's loan. Henry is entitled to which of the following in 2013?
a. $0 loss
b. $3,000 short-term capital loss
c. $27,000 long-term capital loss
d. $45,000 ordinary loss
e. $45,000 short-term capital loss

37. For 2013, Joyce Jacobson's books and records reflected the following: Taxable income | $35,000 | Short-term capital gain | 500 | Short-term capital loss | (4,800) | Long-term capital gain | 1,500 | Long-term capital loss | (2,600) |
What is the amount of Joyce's capital loss carryover to 2014?
a. $2,400 short-term; $0 long-term
b. $1,300 short-term; $1,100 long-term
c. $1,900 short-term; $3,500 long-term
d. $4,300 short-term; $1,100 long-term

38. Ralph Rodgers, a calendar year taxpayer, purchased stock on June 18, 2012, for $8,000. The stock became worthless on June 4, 2013. What is Ralph's loss in 2013?
a. $8,000 short-term capital loss
b. $8,000 long-term capital loss
c. No loss
d. $8,000 itemized deduction

39. Sam Shoeman, a calendar year taxpayer, purchased stock in Eaton Corporation on July 12, 2013, for $2,500. On December 12, 2013, Eaton went bankrupt. What is Sam's 2013 loss?
a. $2,500 long-term capital loss
b. $2,500 ordinary loss
c. $2,500 short-term capital loss
d. No loss

40. On January 5, 2013, Ernest Earner sells his patent (basis of $0) for a machine to a company which will manufacture the machine. He receives $150,000 plus $15 for each machine manufactured. In 2013, 10,000 machines were manufactured. What amount(s) must Ernest report on his 2013 tax return?
a. $150,000 long-term capital gain; $150,000 ordinary income
b. $150,000 short-term capital gain; $150,000 ordinary income
c. $300,000 short-term capital gain
d. $300,000 long-term capital gain

41. A short tax year with the subsequent annualizing of taxable income is required for which of the following?
a. In the year of death of an individual
b. In the year of termination of a partnership
c. In the first year of a new corporation
d. In the year of liquidation of a corporation
e. None of the above

42. What is the amount of tax to be paid for a short period assuming the tax from placing the short period on an annual basis is $2,300; the tax computation for the short period without annualizing is $2,100; and the tax computation using the full 12 months and prorating is $2,200.
a. $2,300
b. $2,200
c. $2,100
d. $100
e. None of the above

43. Which of the following is not a method of accounting?
a. Cash receipts and disbursements method
b. Accrual method
c. LIFO inventory
d. Long-term contracts method
e. None of the above

44. The following statements about the cash basis method of accounting are false, except:
a. The prepayment made for future services may be deducted currently.
b. Interest credited to a savings account is not taxed until withdrawn.
c. Stock received for services rendered are taxed only in the year sold.
d. The exchange of services may lead to gross income to both parties.

45. Jake Turner realized last December that he had almost reached the point where his medical expenses exceeded the 7.5 percent of AGI limitation. As a result, he insisted on paying his physician, Dr. Grope, $6,000 on account for future services for the Turner family. The results of this prepayment are:
a. Turner's deduction: when paid; Dr. Grope's income: when received
b. Turner's deduction: when services are rendered; Dr. Grope's income: when received
c. Turner's deduction: when services are rendered; Dr. Grope's income: when services are rendered
d. Turner's deduction: when paid; Dr. Grope's income: when services are rendered

46. Robert Graves sold his house to George Tombs for a total of $100,000. Earnest money of $5,000 was received at the end of the year prior to the closing. The remaining $15,000 of the down payment was received at closing. George assumed a $50,000 mortgage on the property and signed a second mortgage for $30,000. If Robert's basis was $35,000 the tax results, in part, are as follows:
a. Contract price: $65,000; gross profit: 100%; payments in year of sale: $35,000
b. Contract price: $50,000; gross profit: 100%; payments in year of sale: $50,000
c. Contract price: $65,000; gross profit: 100%; payments in year of sale: $20,000
d. Contract price: $80,000; gross profit: 65/80%; payments in year of sale: $30,000

47. Sylvester Sueem, attorney-at-law, reports his income on the cash basis. Last year his books reflected the following: Cash collected on billed fees | $100,000 | Retainers received for next year's work | 12,000 | Uncollected but billed fees for work performed | 15,000 | Expenses paid | 30,000 | Unpaid bills for office supplies | 500 | Amount received from client and put in a third-party escrow account pending the outcome of a lawsuit | 20,000 |
Sylvester's net self-employment income last year was:
a. $70,000
b. $84,500
c. $82,000
d. $96,000

48. Greg Owens owns a four-flat building. Last year, he recorded the following items: Rents paid, of which $3,000 was for the previous year | $15,000 | Security deposits to be returned | 2,000 | Rent due, but uncollected | 4,000 | Expenses paid | 30,000 | Prepaid rent | 1,000 |
His gross rental income, depending on whether he is on the cash or accrual basis, amounted to:
a. Cash: $16,000; accrual: $17,000
b. Cash: $13,000; accrual: $17,000
c. Cash: $18,000; accrual: $16,000
d. Cash: $17,000; accrual: $17,000

49. An accrual basis taxpayer must recognize income when a sale is made, even if on credit. This means that income is recognized:
a. When the order is received
b. When the delivery is made
c. When the invoice is mailed
d. At any of the above events, if consistently used

50. A corporation must “annualize” a short taxable year resulting from:
a. Going out of business
b. Starting in business
c. Changing from one fiscal year to another
d. Joining an affiliated group and filing consolidated returns