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FEDERAL TAX TEST NO. 4. Comprehensive Final Exam.

Fall
, 2012. The University of North Carolina at Charlotte.

Name_____________________________________________ Row In Class__________

INSTRUCTIONS: This test is "open book," which means you may use your textbook during the test. You may also
use
a reasonable amount of notes from the class
. The test contains 5
0 multiple
-
choice questions. A question may cover
material from more than one

chapter. Some answers may be rounded to nearest d
ollar. Each question counts 3

points,
for total of 150. Avoid all appearances of impropriety. If you see any sign of impropriety, please prepare an anonymous
note and slide it under the instructor's office
door.

Failure to follow instructions below will result in a 5 point reduction in your grade.

Multiple Choice
-

50 questions count 3

points each for a total of 150 Points.

1. Use a soft
-
lead pencil

2. Enter name in appropriate space above. Write clearly.

3. Enter above the row number for your seat in class.

On the Opscan Sheet

4. Enter name (last name first) in the area for “NAME.”

5. Enter student ID number in the area for “IDENTIFICATION NUMBER.”

6. Enter test number (found in upper right hand corner
of this page) in the special codes area.

7. Blacken the area in the circle containing the appropriate letter for each question.


Add 3

points to your
test
grade if you complete the following f
orm, completely and carefully. Must be
readable.


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1.

Mary works for IBM and earns a salary of
$230,000

per year. She is single and has no dependent.

Her total deductions (for exemption
and itemized deductions) are $50
,000.

(There is no phase
-
out of exemption or other deductions for Mary.)

How much is

her

federal income tax for 2012

before subtracting withholding and other credits?

a
.

$4
1,231

b.

$43,92
8

c.

$4
9,255

d.

$50,897

e
.

Other

2.

Use information in the preceding question. Mary's
marginal income tax rate

is:

a.

10
%

b.

15
%

c.

28%

d.


28
%

e.

33
%


3.

See preceding question. How much Social Security Taxes are
withheld from Mary's pay in 2012
?

a.

$6,363

b.

$7,959

c.

$6
,170

d.

$12,995

e.

Other

4.

Local
-
Corp is a C

corporation

which Ba
rbara started on January 1, 2012
, with an investment of cash of $25,000.
Barbara owns 100% of the stock of the company.

In 2012
, Local
-
Corp had net income of $100,000 before deducting a salary of $70,000 to Barbara.

Local
-
Corp paid a divide
nd of $10,000 to Barbara in 2012
. Barbara’s o
nly income is from Local
-
Corp.

Barbara is single, does not have a dependent and claims the standard deduction.

How much federal income tax will she pay on the dividend received?

a.

$0

b.

$1,500

c.

$2,500

d.

$2,800

e.

Other

5.

Wanda earns a
salary of $200,000 per year at Lowe's and has no other income or loss, except for the transactions
shown below. Wanda had the following capital gains and losses for the current year:

Long
-
term capital loss on sale of McDonald's Stock

$(5,000)

Long
-
term
capital gain on sale of Nucor Stock

6,000


Short
-
term capital loss on sale of SPX Stock

(10,000)

Short
-
term capital gain on sale of Nucor Stock

12,000


Wanda has no IRA contribution or other expense qualifying

as a deduction for AGI
.

What is Wanda's ad
justed gross income for the year?

a.

$207
,000

b.

$197,000

c.

$193,000

d.

$203,000

e.

Other

6.

An investor owns municipal bonds having a cost, par value, and a fair market value of $200,000. These bonds pay
interest at the rate of 5%. A friend has suggested that the investor sell these bonds and invest in high grade corporate
bonds. The investor
is in the 35% marginal tax bracket. (You may ignore the impact of state income taxes)

What return would this investor have to earn on corporate bonds in order to be just as well off as he is now with the
municipal bonds?

a.

6.08%

b.


7.692%

c.

8.09%

d.

8.571%

e.

10.25%



7.

On 1
-
5
-
2004, Taxpayer purchased for $7,700, 100 shares of Campbell Corporation common stock.

On 7
-
8
-
2012
, Taxpayer received a nontaxable stock dividend of 10 shares of Campbell
Corporation common stock.
Later, Taxpayer sold ten shares of the c
ommon stock for $800.

What is

Taxpayer's

gain or loss on the sale

in 2012
?

a.

$700

b.


$500

c.

$200

d.

$100

e.

Other



8.

A company was started in 2011. The company reported Gross Sales of $500,000 and net income before taxes of
$40,000 on its GAAP income statement for 2012. For financial accounting purposes, each year the company adds to its
estimated warranty liability ac
count 4% of Gross Sales.

The balance in the estimated warranty liability ac
count was $7,000 at 12/31/2011 and

$5,000 at 12/31/2012.

Federal income tax rate 40%.

What is the amount of taxable income for 2012?

a.

$ 41,000

b.

$42,000

c.

$38,000

d.

$39,000

e.

Other


9.

In 2012
, Bill and Betty are 33 years of age, married and file a joint r
eturn. Each earns a salary of $48,000. (Total is
$96
,000). They are both covered by a retirement plan at work. They each contribute $5,000 to an IRA (Total $10,000).
What is their
total
deduction for contributions to the
IRA’s on a joint return for 2012
?

a.

$0

b.

$6
,000.

c.

$7,500

d.


$10,000

e.

$8,0
00


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10.

The Charlotte Corporation provides this information at the end

of 2012
.

Sales (All on credit)


$100,000

Expenses other than bad debts

$80,000


Bad debts (Provision
-
5% of Sales)

5,000


Total Expenses


85,000

Net Income before Taxes


$15,000


Beginning

Ending

Accounts Receivable

$80,000

$ 85,000

Allowance for Bad Debts

$ 5,000

$ 6,000

What is Charlotte Corpo
ration’s taxable Income for 2012
?

a.

$15,000

b.

$17,000

c.

$16,000

d.


$14,000

e.

$13,000


11.

Bill (age 37) is
an employee of Charlotte Corporation. In the current year, the corporation provides Bill with
$40,000 of group
-
term life insurance coverage.
The plan does not discriminate in favor of highly paid employees.

How
much must Bill include in income due to the
policy?

a.

$800.

b.



$600.

c.

$54.

d.

$0.

e.

$1,000.



12.

Which one of these types of deductions is not deductible in arriving at adjusted gross income?

a.

Alimony

b.

Exemption

c.

rental property expenses

d.

IRA Contributions


13.

Tiger Woods exchanges business equipment with FMV of $400,000 and an adjusted basis of $360,000 for:

(1) $16,000 cash and (2) new like
-
kind business equipment with a FMV of $384,000.

Tiger's
recognized gain

is:

a.

$0

b.

$16,000

c.

$24,000

d.


$120,000

e.

Other


14.

Tiger Woods exchanges business equipment with FMV of $400,000 and an adjusted basis of $360,000 for:

(1) $16,000 cash and (2) like
-
kind equipment with a FMV of $384,000.

What is Tiger's
basis in the new equipment
?

a.

$0

b.

$384,000

c.

$376,000

d.


$360,000

e.

$400,000


15.

Ann's business building is destroyed in a fire. Ann's adjusted basis in the building is $50,000, and its FMV is
$103,000. Ann received insurance proceeds $100,000. In that same
year, Ann invests $98,000 of the insurance
proceeds in another business building. If an election is made, Ann will recognize gain of:

a.

$0

b.

$1,000

c.

$2,000

d.


$50,000

e.

Other amount


16.

Ann's business building is destroyed in a fire. Ann's adjusted basis in the building is $50,000, and its FMV is
$103,000. Ann
received insurance proceeds

$100,000. In that same year, Ann invests $98,000 of in another business
building. If an election

is made, what is Ann’s basis of

the

new property?

a.

$0

b.

$50,000

c.

$100,000

d.


$101,000

e.

$51,000


17.

Patricia
's building which is used in her

business is completely destroyed in a fire.

Patricia's adjusted basis in the building is $50,000, and its FMV is $103,000.

Patricia files an insurance claim and is reimbursed $100,000.

In that same year, Patricia invests $78,000 of the insurance proceeds in another business building.

If the p
roper election is made, Patricia will recognize gain of:

a.

$0

b.

$5,000

c.

$22,000

d.


$45,000

e.

Other amount



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18.

Jan started two

corporations on January 1, 2012
: (1) Computer Repair Corporation and (2) a Web Consulting
Corporation. She

invested cash of $100,000 in each corporation for 100% of the common stock. (She invested a total of
$200,000 in the two corporations.
)

She elected S status for the web consulting corporation. The income statements for
these two corporation
s are shown bel
ow for 2012
.



Computer Repair

Web Consulting



[C Corp]

[S Corp]

Revenue

$100,000

$200,000

Salary to Jan (owner)

(30,000)

(80,000)

Rent expenses

(20,000)

(70,000)

Other expenses

(10,000)

(10,000)

Net income before taxes

$40,000

$40,000

Dividends
paid to Jan

$20,000

$10,000

How much total income does Jan report from these two entities?

a.

$110,000

b.

$160,000

c.

$170,000

d.

$210,000

e.

Other


19.

Continue the preceding question. What is Jan's basis in the stock of the
S corporation at
the end of 2012
?

a.

$100,000

b.

$110,000

c.

$120,000

d.


$130,000

e.

$140,000


20.

On March 1, Local Corp. paid its attorney
$72,000

for services related to the organization of the corporation. What
is the amount of the deduction for organization costs for the first year? Use tax law described in your book.

a.


$4
,000

b.

$5,120

c.

$5,240

d.


$6
,000

e.

$4,800


21.

Darin incorporated his sole proprietorship by transferring his building with a basis of $800,000 to the Good Corp.
in exchange for all its stock. The stock was worth $1,100,000. The building had a value of $1,200,000 and was subject
to a $100,000 mortgage
which was assumed by Good Corp.
What was the gain realized by Darin
?

a.

$0

b.

$380,000

c.

$400,000

d.

$1,200,000

e.

Other


22.

Repeat the preceding question. What is the
gain to be recognized by Darin
?

a.

$0

b.

$380,000

c.

$400,000

d.

$1,200,000

e.

Other


23.

Repeat the preceding question. What is Darin’s
basis in the stock received
?

a.

$700,000

b.

$800,000

c.

$840,000

d.

$1,200,000

e.

Other


24.

Repeat the preceding question. What is Good Corporation’s
basis
in the building
?

a.

$700,000

b.

$800,000

c.

$840,000

d.

$1,200,000

e.

Other


25.

Peggy contributed property to a new partnership in return for a 40% interest in capital and profits.

The property had a fair market value of $10,000, a
n adjusted
basis of $6,000.

The property
was subject to a $9,000 mortgage which was assumed by the partnership.

What was Peggy’s recognized gain?

a.

$0

b.

$2,000

c.

$4,000

d.

$6,000

e.

Other


26.

Maria & Marvin Partnership
was

organized on January 2 of the current year.

The partnership
had the following income for the current year:

Net Income from operations

$16
0,000

Tax exempt interest income

$10,000

Dividends from corporations

$20
,000

Long
-
term capital gains

$3
0,000

Partners Maria and Marvin share the profits and losses equally.

Maria has no income or losses from sources other than the partnership?

What is Maria's adjusted gross income, before considering the deduction

for 50% of self
-
employment tax?

a.

$85,000

b.

$105,000

c.

$97,500

d.

$110,000

e.

Other

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27.

Continue preceding problem. Assume Maria invested $100,000 for a 50% interest in Maria and Marvin Partnership
on Janu
ary 1 of the current year. Maria

withdrew $25,000 from the partnership in the current year.

What is her basis in the partnership at the end of the current year?

a.

$100,000

b.

$105,000

c.

$185,000

d.

$110,000



28.

Robert Doe invested $20,000 for a one
-
third interest in capital and profits of a partnership.

After his investment, the partnership had total taxable income of $24,000 and non
taxable income of $6,000.

Robert withdrew $10,000. After these events, the t
ax basis of Robert's interest in the partnership is:

a.


$11,000

b.

$20,000

c.

$21,000

d.


$23,000

e.

Other


29.

Local Corporation had the following items of income and expenses in the current year:

Income from operations

$500,000

Expenses
of operations


520,000

Net Operating Income

(20,000)

Dividend income from Cooper Corporation (a 10% owned corporation)

90,000

Net income before taxes (GAAP)

$70,000

What is Local Corporation’s dividends
-
received deduction, if any?

a.

$70,000

b.

$49,000

c.

$63,000

d.

$90,000

e.

Other



30.

Big Corp., a domestic corporation, had income, expenses and deductions in the current year:

Gross receipts (Operating Revenues)

$900,000

Operat
ing Expenses, not including charitable c
ontributions

8
00,000

Net income before deducting charitable contributions

1
00,000

Cash contributions to qualified charities

$20,000

What is the amount of Big Corporation’s allowable charitable contribution deduction?

a.

$1
0
,000

b.

$20,000

c.

$4,000

d.

$3,000

e.

Other



31.

The adjusted basis of Newt's partnership interest was $60,000 immediately before Newt received:

(1) a current distribution of $60,000 cash and

(2) property with an adjusted basis to the partnership of $10,000 and a fair market value of $5,0
00.

What amount of taxable gain must Newt report as a result of this distribution?

a.

$0

b.

$25,000

c.

$10,000

d.

$20,000

e.

$40,000



32.

Ann st
arted a new corporation in Year
1.

Ann owns 100% of the company stock.

Ann does not receive a salary
from the corporation.

Ann does not borrow from (or make loans to) the Corporation.

Ann invested $25,000 in a new Corporation

January 1

Year 1

$25,000

Corporation elected S Status

January 1

Year 1


Corporation had net
income for year


Year

1

$50,000

Corporation distributed dividend to Ann

December 31

Year
1

$5,000

How much income or gain does Ann recognize as a result of the cash distribution?

a.

$0

b.

$10,000

c.

$30,000

d.

$50,000

e.

$70,000



33.

Repeat

preceding question. What is Ann’s basis in the corporate stock on January 1,

Year
-
2
?

a.

$0

b.

$50,000

c.

$15,000

d.

$45,000

e.

$70,000



34.

Local Corporation original income tax returns are summarized below.


2008

2009

2010

2011

2012

Revenue

$
500,000

$
500,000

$
600,000

$
600,000


Expense

(48
0,000)

(470,000)

(560,000)

(700,000)



$
2
0,000

$
30,000

$
40,000

(
$
100,000)


Local expects to have
operating
revenue of 600,000 and
operating
expenses of $400,000 in 2012.

Local has not made a
special election regarding the timing of reporting income or loss
.

What is the

projected taxable income for 2012
?

a.

$0

b.

$200,000

c.

$16
0,000

d.

$17
0,000

e.

$19
0,000




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Use the following information for Local Corporation for the
next 4 questions.

Assume the corporation is in the 40% bracket for all years.


35.

What is Local Corporation’s GAAP net income before income tax?

a.

$200,000

b.

$100,000

c.

$70,000

d.

$60,000

e.

Other



36.

What is Local
Corporation’s

taxable income
?

a.

$200,000

b.

$100,000

c.

$70,000

d.

$60,000

e.

Other



37.

What is the balance in Local Corporation’s deferred income tax asset account?

a.

$40,000

b.

$12,000

c.

$24,000

d.

$36,000

e.

Other



38.

Assume Local Corporation has a net capital gain of $40,000 in 2013.

On what line will this amount be entered on the Form M
-
1
?

a.

Line 3

b.

Line 4

c.

Line 5

d.

Line 8

e.

Other



39.

Charlotte Corporation

earns book net income before tax of $600,000 in 2012.

Book net income before tax of $600,000 includes municipal bond interest income of $50,000.

Charlotte acquires a depreciable asset in 2012 and first year book depreciation on that asset is $100,000 on its GAAP
statements and $200,000 on its tax return. Assume the U.S. tax rate is 35%.

Charlotte has no other temporary or permanent differences.
Th
ere is no state, local or foreign income tax.


What is Charlotte’s deferred income tax liability reported on its financial statements for 2012?

a.

$35,000

b.

$52,500

c.

$70,000

d.


$42,000

e.

Other




Que s tions on Tax Return Proje ct. See Project solutio
n
on next page. Tax year is 2012

The following questions are independent. When working the second one, forget about the first, etc.

40.

You learn that the IRA contribution was

actually $4,000 (
not $2,000
)
. What is revised AGI for 2012
?

a.

$58,000

b.

$56,000

c.

$54,000

d.

$50,000

e.

Other



41.

You learn that the IRA co
ntribution was actually $4,000 (
not $2,000
)
.

What is the revised (correct) amount of the deduction for union dues for 2012?

a.

$1,400

b.

$240

c.

$280

d.

$320

e.

Other



42.

Suppose you discover that Robert
was audited by the NC Department of Revenue in November, 2012, and was
required to pay additional
North Carolina Income
tax of $2,000 for tax year 2009.

How much is the increase (decrease) in the federal inco
me tax refund as a result of this additional NC income tax
payment and related tax deduction
?

a.

$2
,000

b.

($2
,000
)

c.

$3
00

d.

($3
00
)

e.

$200


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43.

Suppose you discover that Robert had a part
-
time job on weekends and earned a salary of $20,000 from that job (in
additional to the $60,000 salary shown on the original worksheet containing your tax computations).

What is their revised net deduction for m
edical expenses?

a.

$5,200

b.

$850

c.

$450

d.

$0

e.

Other



44.

Suppose you discover that Robert had a part
-
time job on weekends and earned a salary of $20,000 from that job (in
additional to the $60,000 salary shown on the original worksheet containing your tax computations).

What is taxable income on the Federal ret
urn?

a.

$54,010

b.

$55,50
0

c.

$
54
,
7
00

d.

$55,3
00

e.

Other



Next five

questions are about corporate tax return assignment. See the solution on a page later in this test.

45.

You learn that the bonds shown above as "State of North Carolina Bonds"

are actually bonds issued

North Carolina Manufacturing Corporation, which is a regular profit oriented corporation.

What will be the revised amount of taxable income, taking into account this corrected information?

a.

$148,800

b.

$147,800

c.

$151,400

d.


$156,800

e.

Other



46.

Assume you determine that the CEO entertained customers at
a Bowl Game on December 31, 2012
, but did not file
an expense reimbursement request until after this trial balance was prepared. The CEO spent
$1
0,000

on entertainment
for dozens of customers. This entertainment was not lavish or extravagant. Assume you make an adjusting entry to
debi
t "Entertainment expense" for $1
0,000 and credit "P
ayable to Officer" for $1
0,000.

What is the addition (reduction) in
net income before taxes (on GAAP statements) as a result of this entry
?

a.

$5,000

b.

$20,0
00

c.

($10,0
00
)

d.


($5,000)

e.

Other



47.

Assume you determine that the CEO entertained customers at
a Bowl Game on December 31, 2012
, but did not file
an expense reimbursement request until after this trial balance was prepared. The CEO spent
$1
0,000

on entertainment
for dozens of customers. This entertainment was not lavish or extravagant. Assume you make an adjusting entry to
debi
t
"Entertainment expense" for $1
0,000 and cre
dit "Payable to Officer" for $1
0,000.

What is the amount of the adjustment you will report on line 5(c) of Schedule M
-
1?

a.

$9,000

b.

$14,000

c.

$19,000

d.

$28,000


48.


Refer to your corporate income

tax return problem assignment. Local’s income statement amounts were
approximately the same in 2013, as in 2012, except that Local made no charitable contribution in 2013.

Local Corporation’s Schedule M
-
1 of Form 1120 for 2013 will have an entry related t
o charitable contributions on
which of the following lines?

a.

$16,200 on Line 5B

b.

$13,800 on Line 5b

c.

$13,800 on Line 8
b

d.

$16,200 on Line 8b


49.

Assume the company sells all of the fixed assets (with a cost

of $200,000) on January 1, 2013
.

Sales proceeds are $190,000. Assume n
o depreciation is taken for 2013
.

(Since the assets were not held over 12 months, no gain can be treated as section 1231 capital gain.)

How much gain will be r
eported on this sale o
n the 2013

corporate tax return?

a.

$1,000

b.

$5,000

c.

$10
,000

d.


$20,000

e.

Other

50.


Which would you prefer?

a.

To have the Flu

b.

To have a flat tire on your auto

c.

To get a good grade on this test

Instructor recommends C.


Thanks for being in this class.

I hope you have enjoyed the class and have learned a lot that will be useful in your career.

Keep us up to date on your career, etc.
-

we love to hear from past students.

Best Wishes in all that you do!!! Howard Godfrey

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