(TCOs 1, 2, and 3) Ted is the sole shareholder of a C corporation, and Sue owns a sole proprietorship. Both businesses were started in 2010, and each business sustained a $5,000 net capital loss for the year. Which of the following statements is correct? Your Answer:
Ted’s corporation can deduct the $5,000 capital loss in 2010.
Ted’s corporation can deduct $3,000 of the capital loss in 2010. Sue can carry the capital loss back three years and forward five years. Sue can deduct the $5,000 capital loss against ordinary income in 2010. None of the above. CORRECT
Instructor Explanation: E. A corporation cannot deduct a net capital loss in the year incurred (options a. and b.). Individuals cannot carry back net capital losses (option c.), and can deduct net capital losses against ordinary income only to the extent of $3,000 in any year (option d.). Page 1-18. Points Received: 5 of 5 2. Question: (TCOs 2 and 3) Which, if any, of the following provisions cannot be justified as mitigating the effect of the annual accounting period concept? Your Answer:
Nonrecognition of gain allowed for involuntary conversions. CORRECT ANSWER
Net operating loss carryback and carryover provisions.
Carry over of excess charitable contributions.
Use of the installment method to recognize gain. INCORRECT
Carry over of excess capital losses.
Instructor Explanation: A. The involuntary conversion provision is based on the wherewithal to pay concept (choice a.). Page 1-30. Points Received: 0 of 5 3. Question: (TCOs 1, 2, 3, and 5) Turner, a successful executive, is negotiating a compensation plan with his potential employer. The employer has offered to pay Turner a $720,000 annual salary, payable at the rate of $60,000 per month. Turner counteroffers to receive a monthly salary of $50,000 ($600,000 annually) and a $180,000 bonus in 5 years when Turner will be age 65. Your Answer:
If the employer accepts Turner’s counteroffer, Turner will recognize $65,000 ($780,000 ÷ 12) each month.
If the employer accepts Turner’s counteroffer, Turner will be in constructive receipt of $60,000 per month.
If the employer accepts Turner’s counteroffer, Turner will be in constructive receipt of $60,000 per month and the $180,000 bonus.
If the employer accepts Turner’s counteroffer, Turner will recognize as gross income $50,000 per month and $180,000 in year 5. CORRECT
None of the above.
Instructor Explanation: D. The constructive receipt doctrine does not apply to the negotiations. Therefore, Turner will include the salary and bonus in his gross income in the tax year received in accordance with the negotiated contract. Page 4-10. Points Received: 5 of 5 4. Question: (TCOs 1, 2, 3, and 5) Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2010. The printer was to rent for $700 per month for a period of 36 months beginning January 1, 2011. Ashley was required to pay the first and last month’s rent at the time the lease was signed. Ashley was also required to pay a $1,000 damage deposit. Office Palace must recognize as income for the lease: Your Answer:
$0 in 2010, if Office Palace is an accrual basis taxpayer.
$1,400 in 2011, if Office Palace is a cash basis taxpayer.
$2,400 in 2010, if Office Palace is a cash basis taxpayer. INCORRECT $1,400 in 2010, if Office Palace is an accrual basis taxpayer. CORRECT ANSWER
None of the above.
Instructor Explanation: D. The company is required to recognize the $1,400 (January 2011 and December 2013 rent) in 2010 because prepaid income from rents is ineligible for deferral. The damage deposit of $1,000 is not...