TAX 3300 Chapter Notes - Chapter 7: Fide, Larceny, Itemized Deduction

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14 Nov 2017

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Document Summary

Deductions and losses: certain business expenses and losses. If taxpayer sells good or provides services on credit and the ar subsequently becomes worthless, a bad debt deduction is permitted only if income arising from the creation of the ar was previously included in income. However, for cash basis taxpayer, no deduction is allowed because no income is reported until the cash has been collected. ***a bad debt can also result from the non-repayment of a loan made by the taxpayer or from purchased debt instruments. Taxpayers may use only the specific charge-off method in accounting for bad debts. Certain financial institutions are allowed to use the reserve method for computing deductions for bad debts. Taxpayers (using specific charge-off method) may claim a deduction 1) when a specific business debt becomes either partially or wholly worthless, or 2) when a specific nonbusiness debt becomes wholly worthless. In 1), bad debt may be deducted as an ordinary loss.

Related Questions

1.Southlawn Inc.'s taxable income is computed asfollows:


Book income before tax	$	2,405,600
Net permanent differences		(512,000	)
Net temporary differences		(189,000	)
Taxable income	$	1,704,600

Using a 34% rate, compute Southlawn's tax expense per books and taxpayable.

a.Tax expense per books $643,824;tax payable $579,564.

b.Tax expense per books $579,564;tax payable $643,824.

c.Tax expense per books $817,904;tax payable $579,564.

d.None of the choices arecorrect.

2.Monro Inc. uses the accrual method of accounting. Here is areconciliation of Monro's allowance for bad debts for the currentyear.


Beginning allowance for bad debts	$	61,150
Actual write-offs of accounts receivable during the year		(80,000	)
Addition to allowance		88,500
Ending allowance for bad debts	$	69,650

Which of the following statements is true?

a.Bad debt expense per books and the deduction for bad debts is$69,650.

b.Bad debt expense per books and the deduction for bad debts is$88,500.

c.Bad debt expense per books is $80,000, and the deduction forbad debts is $88,500.

d.Bad debt expense per books is $88,500, and the deduction forbad debts is $80,000.

3.On December 12, 2016, Hook Company, a calendar year, cashbasis business, mailed a $5,600 bill to Mrs. Gilder forprofessional services rendered during the month of November. Mrs.Gilder dropped off her $5,600 check at Hook's office on December28, but the company secretary did not deposit the check in Hook'sbank account until January 3. Which of the following statements istrue?

a.According to the constructive receipt doctrine, Hook mustrecognize $5,600 income in 2016.

b.According to the substance over form doctrine, Hook does notrecognize $5,600 income until 2017.

c.As a cash basis taxpayer, Hook does not recognize $5,600income until 2017.

d.As a cash basis taxpayer, Hook can elect to recognize $5,600income in either 2016 or 2017

oliveox7

1.The useful life of a plant asset is:

The length of time it is used productively in a company'soperations

Never related to its physical life

Its productive life, but not to exceed one year

Determined by the FASB

Determined by law

2. Depreciation:

Measures the decline in market value of an asset

Measures physical deterioration of an asset

Is the process of allocating to expense the cost of a plantasset

Is an outflow of cash from the use of a plant asset

Is applied to land

3. Plant assets are

Tangible assets used in the operation of a business that have auseful life of more than one accounting period

Current assets

Held for sale

Intangible assets used in the operations of a business that havea useful life of more than one accounting period

Tangible assets used in the operation of business that have auseful life of less than one accounting period

4. A company has net sales of $870,000 and average accountsreceivable of $174,000. What is its accounts receivable turnoverfor the period?

0.20

5.00

20.0

73.0

1,825

5. FICA taxes include:

Social Security taxes

Charitable giving

Employee income taxes

Unemployment taxes

6. Times interest earned is calculated by:

Multiplying interest expense times income

Dividing interest expense by income before interest expense

Dividing income before interest expense and any income tax byinterest expense

Dividing interest and income tax expense by income beforeinterest and income tax expense

7. Amortization:

Is the systematic allocation of the cost of an intangible assetto expense over its estimated useful life

Is the process of allocating to expense the cost of a plantasset to the accounting periods benefiting from its use

Is the process of allocating the cost of natural resources toperiods when they are consumed

Is an accelerated form of expensing an asset's cost

Is the same as depletion

8. A method of estimating bad debts expense that involves adetailed examination of outstanding accounts and their length oftime past due is the:

Direct write-off method

Aging of accounts receivable method

Percentage of sales method

Aging of investments method

Percent of accounts receivable method

9. A company purchased a tract of land for its natural resourcesat a cost of $1,500,000. It expects to mine 2,000,000 tons of orefrom this land. The salvage value of the land is expected to be$250,000. The depletion expense per ton of ore is:

$0.75

$0.625

$0.875

$6.00

$8.00

10. The matching principle requires:

That expenses be ignored if their effect on the financialstatements are less important than revenues to the financialstatement user

The use of the direct write-off method for bad debts

The use of the allowance method of accounting for bad debts

That bad debts be disclosed in the financial statements

That bad debts not be written off

11. Liabilities:

Must be certain

Must sometimes be estimated

Must be for a specific amount

Must always have a definite date for payment

Must involve an outflow of cash

12. In the accounting records of a defendant, lawsuits:

Are estimated liabilities

Should always be recorded

Should always be disclosed

Should be recorded if payment for damages is probable and theamount can be reasonably estimated

13. A contingent liability:

Is always of a specific amount

Is a potential obligation that depends on a future event arisingout of a past transaction or event

Is an obligation not requiring future payment

Is an obligation arising from the purchase of goods or serviceson credit

Is an obligation arising from a future event

14. Total asset turnover is calculated by dividing:

Gross profit by average total assets

Average total assets by gross profit

Net sales by average total assets

Average total assets by net sales

Net assets by total assets

15. If the times interest ratio:

Increases, then risk increases

Increases, then risk decreases

Is greater than 1.5, then the company is in default

Is less than 1.5, the company is carrying too little debt

16. Promissory notes that require the issuer to make a series ofpayments consisting of both interest and principal are:

Debentures

Discounted notes

Installment notes

Indentures

Investment notes

17. A company borrowed $300,000 cash from the bank by signing a5-year, 8% installment note. The present value factor for anannuity at 8% for 5 years is 3.9927. Each annuity payment equals$75,137. The present value of the note is:

$75,137

$94,013

$300,000

$375,685

18. A bond traded at 102

burgundypug781

Note: This problem is for the 2018 taxyear.

Janice Morgan, age 24, is single and has no dependents. She is afreelance writer. In January 2018, Janice opened her own officelocated at 2751 Waldham Road, Pleasant Hill, NM 88135. She calledher business Writers Anonymous. Janice is a cash basis taxpayer.She lives at 132 Stone Avenue, Pleasant Hill, NM 88135. Her SocialSecurity number is 123-45-6789. Janice's parents continue toprovide health insurance for her under their policy. Janice wantsto contribute to the Presidential Election Campaign Fund.

During 2018, Janice reported the following income and expenseitems connected with her business.

Income from sale of articles	$85,000
Rent	16,500
Utilities	7,900
Supplies	1,800
Insurance	5,000
Travel (including meals of $1,200)	3,500

Janice purchased and placed in service the following fixedassets for her business. Janice wants to elect immediate expensingunder Â§ 179, if possible.

Furniture and fixtures (new) costing $21,000 on January10.
Computer equipment (new) costing $12,400 on July 28.

Janiceâs itemized deductions include:

State income tax	$2,950
Home mortgage interest paid to First National Bank	6,000
Property taxes on home	2,500
Charitable contribution to her alma mater, State College	1,200

Janice did not keep a record of the sales tax she paid. Theamount from the sales tax table is $437.
Janice reports interest income of $4,000 on certificates of depositat Second National Bank. She made estimated tax payments of $3,000for 2018.

Required:
Compute Janice Morganâs 2018 Federal income tax payable (or refunddue) by providing the following information that would be reportedon Form 1040 and Schedules A, B, C, and SE.

Make realistic assumptions about any missing data.
If an amount is zero, enter "0".
Enter all amounts as positive numbers.
When computing the tax liability, do not round your immediatecalculations.
If required, round your final answers to the nearestdollar.

Provide the following that would be reported on Janice's Form1040:

1. Filing status: The taxpayers' filingstatus:

2. Calculate taxable gross income.
$

3. Calculate the total adjustments forAGI.
$

4. Calculate adjusted gross income.
$

5. Calculate the greater of the standarddeduction or itemized deductions.
$

6. Calculate the qualified busies incomededuction.
$

7. Calculate total taxable income.
$

8. Calculate the income tax liability.
$

9 Calculate SE taxes due.
$

10. Calculate the total tax creditsavailable.
$

11. Calculate total withholding and taxpayments.
$

12. Calculate the amount overpaid(refund):
$

13. Calculate the amount of taxes owed:
$

Provide the following that would be reported on Janice'sSchedule A:

1. Calculate the deduction allowed for medicaland dental expenses.
$

2. Calculate the deduction for taxes.
$

3. Calculate the deduction for interest.
$

4. Calculate the charitable deductionallowed.
$

5. Calculate total itemized deductions.
$Provide the following that would be reported on Janice's ScheduleB:

1. Calculate the interest amount:
$

2. Calculate the ordinary dividends:
$

Provide the following that would be reported on Janice'sSchedule C:

1. Calculate income from sales:
$

2. Calculate total expenses:
$

3. Calculate net profit or loss
$ Provide the following that would be reported on Janice's Form4562.

Click here to access Exhibit 8.1 and the depreciation tables inthe textbook.

1. Calculate the total deprecation for thefurniture and fixtures:
$

2. Calculate the total depreciation for thecomputer equipment.
$

Provide the following that would be reported on Janice'sScheduled SE. When computing the self-employment tax liability, donot round your calculations. Round your final answers to thenearest dollar. Use rounded amount when determining the deductionfor self-employment tax.

1. Calculate the self-employmentliability:
$

2. Calculate the eduction for self-employmenttax:
$

2018 Tax Rate Schedules

Use the 2018 Tax Rate Schedules to compute the tax.

Note: Because the tax rate schedules are used instead of the taxtables, the amount of tax computed may vary slightly from theamount listed in the tables. This variation occurs because the taxfor a particular income range in the tax table is based on themidpoint amount.

2018 Tax Rate Schedules

SingleâSchedule X

Head of householdâSchedule Z

If taxable incomeis:
Overâ

But not
overâ

The taxis:

of the amount
overâ

If taxable incomeis:
Overâ

But not
overâ

The taxis:

of the amount
overâ

$9,525