Accounting 5135

Fall 2015
NAPLES
TEST 3
INSTRUCTIONS

1. There are 6 pages to this Test, including the cover sheet. Please count the
pages before you begin.
2. You will be given 95 minutes to complete the Test. The test consists of 10
multiple choice questions worth three points each (total 30 points) and
five short essay questions worth eight points each (total 40 points). The
entire exam is worth 70 points toward your final grade.
3. All answers must be placed on the separate answer sheets provided by
circling the correct answer on the multiple choice or by answering the
question in the space provided for the short answers.
4. All short essay questions should be explained in several sentences. I am
interested in your thought process. Therefore a "yes", "no" or numerical
answer alone is insufficient.
5. Make sure your name is on your answer sheets before you begin the Test.
6. Assume all taxpayers are individuals with December 31 year ends and are
on the cash method unless otherwise indicated.
7. Thisisanopenbook,opennoteexam.Laptopsmaybeusedfornotepurposesandebook
purposes.Nootherelectronicdevicesmaybeusedwithoutpriorapprovalfromthe
instructor.

TEST 3
MULTIPLE CHOICE (30 points; 3 points each)
Clearly indicate your answer by circling the appropriate letter on the answer
sheet. There is only one correct answer.
1.

Billy had silverware worth $20,000 (basis of $25,000) stolen from his
home. During the year, he had a salary of $40,000 and no other
deductions. Compute Billy's itemized deduction from the theft of the
silverware after any applicable limitations is:
a.
b.
c.
d.
e.

2.

Regarding bad debts, which of the following statements is true?

a.
b.
debts.
c.
d.
e.
3.

$0.
$15,900.
$19,900.
$20,000.
None of the above.

The reserve method is required for business bad debts.

The specific charge-off method is required for business bad
A partial loss deduction is available for nonbusiness bad debts.
Nonbusiness bad debts are treated as an itemized deduction.
None of the above are true.

Orange, Inc. bought a sandwich-making machine for $35,000 on April 1

of year one. The machine was used in Orange's business. If the
machine was sold on December 31 of year one, the machine will be
classified as:
a.
b.
c.
d.
e.

A 1231 asset.
An ordinary asset.
A capital asset.
A casualty asset.
None of the above.

4.
Alvin bought a truck from a unrelated business acquaintance to use in
his business. The
fair market value of the truck on the date of purchase was $22,000 and
its basis to the owner
was $36,000. Alvin paid $20,000 for the truck. What is Alvin's original
cost basis in the
truck?
a.
b.
c.
d.
e.
5.

Brenda purchased equipment two years ago for $300,000 to be used in

her business. Brenda now sells the property for $295,000 . Brenda
used accelerated depreciation. The total depreciation taken as of the
date of sale is $50,000. If straight-line depreciation had been used,
depreciation would have totaled $40,000. What is the amount to be
recaptured as ordinary income?
a.
b.
c.
d.
e.

6.

$36,000.
$22,000.
$20,000.
$16,000.
None of the above.

$0.
$40,000.
$45,000.
$50,000.
None of the above.

Which of the following is a capital asset?

a.
b.
c.
d.
e.

The bicycle of a ten-year old child. The child purchased the

bicycle with money inherited from an aunt.
The tools used by a self-employed carpenter.
The lots owned by a company which is in the business of buying
and reselling residential building lots.
A "mini set" of 1975 coins owned by a coin dealer and which is
for sale in his shop.
None of the above.

7.
For purposes of determining like-kind
property for nontaxable
exchanges, which of the
following items held for business or investment purposes are not likekind property?
a.
b.
c.
d.
e.
8.

Improved real estate for unimproved real estate.

Store building for farm buildings.
Office furniture for office equipment.
500 farm plows for farm land.
None of the above.

Which of the following statements is true?

a.
Under MACRS depreciation, salvage value must be determined.
b.
A publicly-held corporation is prohibited from making a Section
179 election.
c.
A bank that buys a world-famous painting for $10 million may
take tax
depreciation on the painting.
d.
A Section 179 election may be made with respect to land.
e.
None of the above is true.
9. Alice is considering making a $1,000 investment in a venture. Alice is in
the 33% marginal
tax bracket and has AGI of $100,000 this year. Assume the investment
is a type that Alice
will be able to claim either a tax credit of 25% of her investment or an
above-the-line
deduction of her entire investment. In this case, what treatment would
be most beneficial to
Alice and by how much will Alices tax liability decline because of the
investment?
a.
b.
c.
d.
options

Take the tax credit since it will provide a $250 benefit.

Take the deduction since it will provide for a $330 benefit.
Take the deduction since it will provide for a $1,000 benefit.
It is irrelevant whether Alice takes the credit or deduction since both
produce
the same benefit.
e. None of the above are true.

10.

Which of the following represents a refundable credit?

a.
b.
c.
d.
e.

Earned income credit.

Foreign tax credit.
Lifetime Learning credit.
Research and development credit.
None of the above.

SHORT ESSAY QUESTIONS (40 points; 8 points each)

For each of the following questions, give a direct numerical answer if asked
for and any computations, along with an explanation for your answer.
Remember that the explanation is more important than the direct answer.
Although the space provided on the answer sheet should be sufficient to
answer the question, please use the back side of the answer sheet if extra
space is needed.
PROBLEM 1
An individual had the following history of business income and net operating
losses. The figures have already been adjusted to correctly compute the
NOLs and business income for each year.
2008 $20,000
2009
40,000
2010
80,000

2011
2012
2013

$(70,000)
(60,000)
10,000

2014 $(60,000)
2015
40,000

What will happen to the net operating losses in 2011, 2012 and 2014?
Explain in full procedurally what happens.

PROBLEM 2
Tycoon owned numerous buildings in Metropolis which he leases out. A
major office rental building which Tycoon owned and leased out was
completely destroyed by fire on November 20, 2012. Tycoon received $10
million in insurance proceeds on January 12, 2013. The office building had a
$5 million adjusted basis. Tycoon built a large warehouse in Natville for $12
million which was completed on March 15, 2015 and which he leases out.
What is Tycoon's realized gain or loss, recognized gain or loss and basis in
the warehouse? Explain in full.

PROBLEM 3
Ned sold the following items last year:
Item
Office Equipment Used for
Business
Inventory Sales
ABC Stock Held for Investment
Furniture Used for Business
Vacation home (never rented)
Land Held for Investment

Holding Period
2 years
6 months
9 months
6 months
4 years
6 years

Gain/(Loss)
$ 2,000
$ 15,000
$ 4,000
$ (2,000)
$ (6,000)
$(10,000)

Before considering the above, Ned had adjusted gross income of $100,000.
What is Ned's AGI after considering the foregoing items? Explain in full and
show all computations clearly (remember the instructor has to be able to
follow what you are doing).
PROBLEM 4
In 1968 Kathy bought a diamond necklace for $1,000. Kathy died in 1983
and, in her will, left the necklace to her daughter, Letha. The necklace was
worth $5,000 in 1983. In 2001 Letha gifted the necklace to her daughter,
Mary, when it was worth $15,000. In 2015 Mary sold the necklace for
$25,000. What were the income tax consequences of the transfers to all
parties in 1983 and 2001, and how much gain, if any, must Mary recognize in
2015?
PROBLEM 5
Zack and Maria have been married for 15 years and they have two minor
children. Zack works part-time as a landscaper in the summer (income
approximately $30,000/year) and Maria is a shareholder in a regional
accounting firm (income approximately $170,000/year). Since most of their
savings are in retirement plans they have no other significant taxable
income. They own their own home and have significant itemized deductions.
They also take the child care credit for both their children. Each take four
exemptions on their W-4 that is used for withholding purposes at their
respective jobs. Are they each likely to be underwitheld (owing money) or
overrwithheld (due a refund) when they file their tax return? Explain in full
and make any recommendations.

______________________________________
Student Name

TEST 3
ANSWER SHEET
MULTIPLE CHOICE
1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Accounting 5135
Fall 2015
NAPLES

__________________________________
Student Name

PROBLEMS
1.

Accounting 5135
Fall 2015
NAPLES

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Student Name

2.

Accounting 5135
Fall 2015
NAPLES

____________________________
Student Name

3.

Accounting 5135
Fall 2015
NAPLES

______________________________
Student Name

4.

Accounting 5135
Fall 2015
NAPLES

_______________________________
Student Name

5.

Accounting 5135
Fall 2015
NAPLES