Ben Chase needs to pay off some of his debts over the next few months

1) Ben Chase needs to pay off some of his debts over the next few months. Which item on his balance sheet would help him decide what amounts are due in the near future?

2) A family with $45,000 in assets and $22,000 of liabilities would have a net worth of

3) A budget deficit would result when a person's or family's

4) The tax base for an individual tax return is

5) All of the following are for AGI deductions EXCEPT

6) Which of the following series of inequalities is generally most accurate?

7) Which of the following has the lowest authoritative weight?

8) Josephine is considering taking a 6-month rotation in Paris for her job. Which type of authority may be especially helpful in determining the tax consequences of Josephine's job in Paris?

9) Which of the following has the highest authoritative weight?

10) Congress allows self-employed taxpayers to deduct the cost of health insurance above the line (for AGI) because

11) Hector is a married self-employed taxpayer, and this year he paid $3,000 for his health insurance premiums. Under which of the following alternative conditions can Hector deduct the cost of the premiums for AGI?

12) Graham has accepted an offer to do graduate work in the chemistry department at State University. The chemistry department offered Graham a scholarship that will pay $5,000 toward his tuition, $500 toward his university fees, and $3,500 toward the cost of room and meals. Under the terms of the scholarship, Graham must work in the chemistry labs during the summer. What amount must Graham include in his gross income?

13) After a meeting with a prospective client, Holly paid for dinner. After dinner, Holly took the prospective client to the theatre. Holly paid $290 for the meal and $250 for the tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

14) Rhianna and Jay are married filing jointly in 2009. They have six children for whom they may claim the child tax credit. Their AGI was $123,440. What amount of child tax credit may they claim on their 2009 tax return?

15) Which of the following taxes will not qualify as an itemized deduction?

16) Bateman Corporation sold an office building that it used in its business for $800,000. Bateman bought the building ten years ago for $600,000 and has claimed $200,000 of depreciation expense. What is the amount and character of Bateman's gain or loss?

17) The sale of machinery for more than the original cost basis (before depreciation), used in a trade or business, and held for more than one year results in the following types of gain or loss:

18) Winchester LLC sold the following business assets during the current year: (1) automobile, $30,000 cost basis, $12,000 depreciation, proceeds $20,000; (2) machinery, $25,000 cost basis, $20,000 depreciation, proceeds $10,000; (3) furniture, $15,000 cost basis, $10,000 depreciation, proceeds $4,000; (4) computer equipment, $25,000 cost basis, $6,000 depreciation, proceeds $10,000; (5) Winchester had unrecaptured Section 1231 losses of $3,000 in the prior 5 years. What is the amount and character of Winchester's gains and losses before the 1231 netting process?

19) On the sale of a passive activity, any suspended losses can be used to offset income from

20) Which of the following would be considered passive income?

21) Which of the following would be considered active income?

22) Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent interest in the partnership. The partnership had $20,000 of qualified nonrecourse debt and $20,000 of debt she is not responsible to repay because she is a limited partner. Sue is allocated a 10 percent share of both types of debt. During the year, ABC LP generated a ($90,000) loss. How much of Sue's loss is disallowed due to her tax basis or at-risk amount?

23) Harvey rents his second home. During 2009, Harvey reported a net loss of $35,000 from the rental. If Harvey is an active participant in the rental and his AGI is $80,000, how much of the loss can he deduct against ordinary income in 2009?

24) What happens when a taxpayer experiences a net loss from a rental home?

25) What is the minimum ownership percentage an owner must have in the entity to avoid gain recognition when property is contributed?

26) What is the tax impact to a taxable corporation or an S corporation when it makes a property distribution to a shareholder?

27) What item(s) affect the tax basis of a shareholder in a taxable corporation?

28) Antoine transfers property with a tax basis of $500 and a fair market value of $600 to a corporation in exchange for stock with a fair market value of $550 in a transaction that qualifies for deferral under Section 351. The corporation assumed a liability of $50 on the property transferred. What is Antoine's tax basis in the stock received in the exchange?

29) Which of the following requirements do not have to be met in a Section 351 transaction?

30) Inez transfers property with a tax basis of $200 and a fair market value of $300 to a corporation in exchange for stock with a fair market value of $250 in a transaction that qualifies for deferral under Section 351. The corporation assumed a liability of $50 on the property transferred. What is the corporation's tax basis in the property received in the exchange?

31) Au Sable Corporation reported taxable income of $800,000 in 2010 and paid federal income taxes of $272,000. Not included in the computation was a disallowed penalty of $25,000, life insurance proceeds of $100,000, and an income tax refund from 2009 of $50,000. Au Sable is an accrual basis taxpayer. The corporation's current earnings and profits for 2010 would be

32) BTW Corporation has taxable income in the current year that can be offset with an NOL from a previous year. What is the nature of the book-tax difference created by the net operating loss deduction in the current year?

33) A calendar-year corporation has negative current E&P of $(500) and accumulated positive E&P of $1,000. The corporation makes a $600 distribution to its sole shareholder. Which of the following statements is true?

34) El Toro Corporation declared a common stock dividend to all shareholders of record on June 30, 2010. Shareholders will receive 1 share of El Toro stock for each 2 shares of stock they already own. Raoul owns 300 shares of El Toro stock with a tax basis of $60 per share. The fair market value of the El Toro stock was $100 per share on June 30, 2010. What are the tax consequences of the stock dividend to Raoul?

35) Which of the following stock dividends would be tax-free to the shareholder?

36) Which of the following individuals is not considered "family" for purposes of applying the stock attribution rules to a stock redemption?

37) Which of the following statements is true when property is contributed in exchange for a partnership interest?

38) Which of the following are prohibited from being an S corporation shareholder?

39) Under which of the following circumstances will a partner recognize a loss from an operating distribution?

40) Suppose at the beginning of 2010, Jamaal's basis in his S corporation stock was $27,000 and that Jamaal has loaned the S corporation $10,000. During 2010, the S corporation reported an $80,000 ordinary business loss and no separately stated items. How much of the ordinary loss is deductible by Jamaal if he owns 50% of the S corporation?

41) Clampett, Inc. has been an S corporation since its inception. On July 15, 2011, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2011, was $45,000. For 2011, J.D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is J.D.'s basis in his Clampett, Inc. stock after all transactions in 2011?

42) Clampett, Inc. has been an S corporation since its inception. On July 15, 2011, Clampett, Inc. distributed $50,000 to J.D. His basis in his Clampett, Inc. stock on January 1, 2011, was $45,000. For 2011, J.D. was allocated $10,000 of ordinary income from Clampett, Inc. and no separately stated items. What is the amount of income J.D. recognizes related to Clampett, Inc. in 2011?

43) Erica and Brett decide to form their new motorcycle business as an LLC. Each will receive an equal profits (loss) interest by contributing cash, property, or both. In addition to the members' contributions, their LLC will obtain a $50,000 nonrecourse loan from First Bank at the time it is formed. Brett contributes cash of $5,000 and a building he bought as a storefront for the motorcycles. The building has an FMV of $45,000, an adjusted basis of $30,000, and is secured by a $35,000 nonrecourse mortgage that the business LLC will assume. What is Brett's outside tax basis in his LLC interest?

44) Under general circumstances, debt is allocated from the partnership to each partner in the following manner:

45) Which of the following statements is true when property is contributed in exchange for a partnership interest?

46) Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $50,000 in cash and $50,000 worth of equipment. Frank's adjusted basis in the equipment was $35,000. Bob contributed $50,000 in cash and $50,000 worth of land. Bob's adjusted basis in the land was $30,000. On 3/15/04, Soxy Socks sells the land Bob contributed for $60,000. How much gain (loss) related to this transaction will Bob report on his X4 return?

47) What form does a partnership use when filing an annual informational return?

48) Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Inc. (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa's tax basis in Cook, Inc. after formation?

49) The estate and gift taxes share several common features. Which of the following characteristics are common to both the estate and gift taxes?

50) The estate and gift taxes share several common features. Which of the following characteristics are common to both the estate and gift taxes?

51) The estate and gift taxes share several common features. Which of the following characteristics are common to both the estate and gift taxes?

52) This year Samantha gave each of her three nephews birthday gifts of $10,000 in cash. At Christmas, Samantha gave each of her three nephews Christmas gifts of an additional $5,000 in cash. What is the amount of the taxable gifts, if any, made by Samantha this year?

53) Jonathan transferred $90,000 of cash to a trust this year for the benefit of Hannah, age 10. The trustee has the discretion to distribute income or corpus (principal) for Hannah's benefit and is required to distribute all assets to Hannah (or her estate) not later than Hannah's 21st birthday. What is the amount of the taxable gift?

54) This year Natalie transferred $500,000 of bonds to a revocable trust with directions to the trustee to pay income to her aunt for five years, after which the corpus is to be distributed to Natalie's niece. At year-end, the trustee paid $14,000 of income to the aunt. Which of the following is a true statement?


Click here for the solution: Ben Chase needs to pay off some of his debts over the next few months

The controller of Dash Shoes Inc. instructs you to prepare a monthly cash budget for the next three months

PR 22-4A The controller of Dash Shoes Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

June July August
Sales 120,000 150,000 200,000
Manufacturing costs 50,000 65,000 72,000
Selling & admin exp 35,000 40,000 45,000
Capital expenditures ---- --- 48,000

AND SO ON

INSTRUCTIONS:
1. Prepare a monthly cash budget and supporting schedules for June, July, and August 2010.
2. On the basis of the cash budget prepared in part (1), what recommendation should be made to the controller?

Click here for the solution: The controller of Dash Shoes Inc. instructs you to prepare a monthly cash budget for the next three months

Livetree Ltd. Is developing a detailed financial plan for next year and expects to have the following fixed asset accounts by the end of this year ($000)

Livetree Ltd. Is developing a detailed financial plan for next year and expects to have the following fixed asset accounts by the end of this year ($000).

Gross $45,789
Accumulated Depreciation (26,328)
Net Fixed Assets $19,461

The capital plan already completed calls for expenditures of $7,042,000 on new equipment next year, which will be depreciated straight line over a 10-year period without a half-year convention. Assets currently on the books will depreciate by $4,258,000 next year. Develop Livetree’s ending fixed asset balances for the planned year.


Click here for the solution: Livetree Ltd. Is developing a detailed financial plan for next year and expects to have the following fixed asset accounts by the end of this year ($000)

The Cambridge Cartage Company has partially completed its forecast of next year’s financial statements as follows

The Cambridge Cartage Company has partially completed its forecast of next year’s financial statements as follows.

Cambridge Cartage Company Financial Plan ($000)
Income Statement Balance Sheet
Next Year Next Year
Revenue $17,220 Beginning Ending
Cost/expenses 14,120 ASSETS
EBIT $3,100 Total assets $12,540 $18,330
Interest ? LIABILITIES & EQUITY
EBT ? Current liabilities $410 $680
Tax ? Debt 5,630 ?
EAT ? Equity 6,500 ?
Total L&E $12,540 $18,330

The firm pays interest at 10% on all borrowings and pays a combined state and federal tax rate of 40%. Complete the forecast income statement and balance sheet. Begin by guessing at interest expense as 10% of beginning debt.


Click here for the solution: The Cambridge Cartage Company has partially completed its forecast of next year’s financial statements as follows

Murphy Mining Company recently purchased a quartz mine that it intends to work for the next 10 years

P6-15 (Fair Value Estimate) Murphy Mining Company recently purchased a quartz mine that it intends to work for the next 10 years. According to state environmental laws, Murphy must restore the mine site to its original natural prairie state after it ceases mining operations at the site. To properly account for the mine, Murphy must estimate the fair value of this asset retirement obligation. This amount will be recorded as a liability and added to the value of the mine on Murphy's books. (You will learn more about these asset retirement obligations in Chapters 10 and 13.)

There is no active market for retirement obligations such as these, but Murphy has developed the following cash flow estimates based on its prior experience in mining-site restoration. It will take 3 years to restore the mine site when mining operations cease in 10 years. Each estimated cash outflow reflects an annual payment at the end of each year of the 3-year restoration period.

Restoration Estimated Cash Outflow
Probability Assessment
$15,000 10%
22,000 30%
25,000 50%
30,000 10%

Instructions
(a) What is the estimated fair value of Murphy's asset retirement obligation? Murphy determines that the appropriate discount rate for this estimation is 5%. Round calculations to the nearest dollar.
(b) Is the estimate developed for part (a) a Level 1 or Level 3 fair value estimate? Explain.

Click here for the solution: Murphy Mining Company recently purchased a quartz mine that it intends to work for the next 10 years

The One Product economy, which produces and sells only personal computers (PCs), expects that it can sell 500 more, or 12,500 PCs, next year

11. The One Product economy, which produces and sells only personal computers (PCs), expects that it can sell 500 more, or 12,500 PCs, next year. Nominal GDP was $20 million this year, and the money supply was $7 million. The central bank for the One Product economy plans to increase the money supply by 10 percent next year.

a. What was the average selling price for the personal computers this year?
b. What is the expected average selling price next year for personal computers if the velocity of money remains at this year’s turnover rate? What percentage change in price level is expected to occur?
c. If the objective is to keep the price level the same next year (i.e., no inflation), what percentage increase in the money supply should the central bank plan for?
d. How would your answer in (c) change if the velocity of money is expected to be three times next year? What is it now?

Click here for the solution: The One Product economy, which produces and sells only personal computers (PCs), expects that it can sell 500 more, or 12,500 PCs, next year

An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next four years

An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next four years. What is the investment's internal rate of return?

Click here for the solution: An investment of $185,575 is expected to generate returns of $65,000 per year for each of the next four years

The adjusted trial balance of Eastwood Company and other related information for the year 2010 are presented on the next page

P5-3 (Balance Sheet Adjustment and Preparation) The adjusted trial balance of Eastwood Company and other related information for the year 2010 are presented on the next page.

EASTWOOD COMPANY
ADJUSTED TRIAL BALANCE
DECEMBER 31, 2010
Debits Credits
Cash $ 41,000
Accounts Receivable 163,500
Allowance for Doubtful Accounts $ 8,700
Prepaid Insurance 5,900
Inventory 208,500
Long-term Investments 339,000
Land 85,000
Construction Work in Progress 124,000
Patents 36,000
Equipment 400,000
Accumulated Depreciation of Equipment 240,000
Unamortized Discount on Bonds Payable 20,000
Accounts Payable 148,000
Accrued Expenses 49,200
Notes Payable 94,000
Bonds Payable 200,000
Common Stock 500,000
Paid-in Capital in Excess of Par—Common Stock 45,000
Retained Earnings 138,000
$1,422,900$1,422,900

Additional information:
1. The LIFO method of inventory value is used.
2. The cost and fair value of the long-term investments that consist of stocks and bonds is the same.
3. The amount of the Construction Work in Progress account represents the costs expended to date on a building in the process of construction. (The company rents factory space at the present time.) The land on which the building is being constructed cost $85,000, as shown in the trial balance.
4. The patents were purchased by the company at a cost of $40,000 and are being amortized on a straight-line basis.
5. Of the unamortized discount on bonds payable, $2,000 will be amortized in 2011.
6. The notes payable represent bank loans that are secured by long-term investments carried at $120,000. These bank loans are due in 2011.
7. The bonds payable bear interest at 8% payable every December 31, and are due January 1, 2021.
8. 600,000 shares of common stock of a par value of $1 were authorized, of which 500,000 shares were issued and outstanding.

Instructions
Prepare a balance sheet as of December 31, 2010, so that all important information is fully disclosed.

Click here for the solution: The adjusted trial balance of Eastwood Company and other related information for the year 2010 are presented on the next page

IP Inc is expected to pay $1.70 dividends next year

IP Inc is expected to pay $1.70 dividends next year. The dividend growth rate is expected to be 7% forever. If the required rate of return for IP is 10% calculate the price of the stock using the constant growth model. If the stock is currently selling for $63, indicate whether the stock is underpriced or overpriced.

Click here for the solution: IP Inc is expected to pay $1.70 dividends next year

(Cash Budget) The Controller of Santa Fe Housewares Inc. instructs you to prepare a monthly cash budget for the next three months

PR22-4A Cash Budget

The Controller of Santa Fe Housewares Inc. instructs you to prepare a monthly cash budget for the next three months. You are presented with the following budget information:

March April May
Sales 70,000 84,000 92,000
Manufacturing cost 32,000 39,000 42,500
Selling and administrative expenses 12,000 18,000 21,000
Capital expenditures 20,000

The company expects to sell about 10% of its merchandise for cash. Of sales on account, 70% are expected to be collected in full in the month following the sale and the remainder the following month. Depreciation, insurance, and property tax expense represent $3,000 of the estimated monthly manufacturing costs. The annual insurance premium is paid in July, and the annual property taxes are paid in November. Of the remainder of the manufacturing costs, 80% are expected to be paid in the month in which they are incurred and the balance in the following month. Current assets as of August 1 include cash of $10,000, marketable securities of $40,000, and accounts receivable of $75,600 ($60,000 from February sales and $15,600 from January sales).Sales on account for January and February were $52,000 and $60,000, respectively.

Current liabilities as of August 1 include s $12,000, 15%, 90-day note payable due May 20 and $4,000 of accounts payable incurred in July for manufacturing costs. All selling and administrative expenses are paid in cash in the period they are incurred. It is expected that $1,800 in dividends will be received in March. An estimated income tax payment of $16,000 will be made in April. Santa Fe's regular quarterly dividend of $3,000 is expected to be declared in April and paid in May. Management desires to maintain a minimum cash balance of $30,000.

Instructions:
1. Prepare a monthly cash budget and supporting schedules for August, September, and October. Input all amounts as positive values except overall cash decrease and deficiency which should be indicated with a minus sign. Assume 360 days per year for interest calculation.
2. On the basis of the cash budget prepared in part (1), what recommendation should be made to the controller?

Click here for the solution: (Cash Budget) The Controller of Santa Fe Housewares Inc. instructs you to prepare a monthly cash budget for the next three months

Tulley Appliances Inc. projects next years sales to be $20 million

Tulley Appliances Inc. projects next years sales to be $20 million. Current sales are $15 million, based on current assets of $5 million and fixed assets of $5 million. The firms net profit margin is 5% after taxes. Tulley forecasts that its current assets will rise in direct proportion to the increase in sales, but that its fixed assets will increase by only $100,000. Currently, Tulley has $1.5 million in accounts payable (which varies directly with sales), $2 million in long term debt (due in 10 years), and common equity (including $4 million in retained earnings) totaling $6.5 million. Tulley plans to pay $500,000 in common stock dividends next year.
A) What are Tulley's total financing needs? (i.e. total assets) for the coming year?
B) Given the firm's projections and dividend payment plans, what are its discretionary financing needs?
C) Based on your projections, and assuming that the $100,000 expansion in fixed assets will occur, what is the largest increase in sales the firm can support without having to resort to the use of discretionary sources of financing?

Click here for the solution: Tulley Appliances Inc. projects next years sales to be $20 million

(Adjusting Entries) The accounts listed on the next page appeared in the December 31 trial balance of the Jane Alexander Theater

Exercise P3-5 (P3-5) (Adjusting Entries) The accounts listed on the next page appeared in the December 31 trial balance of the Jane Alexander Theater.

Debit Credit
Equipment $192,000
Accumulated Depreciation—Equipment $ 60,000
Notes Payable 90,000
Admissions Revenue 380,000
Advertising Expense 13,680
Salaries Expense 57,600
Interest Expense 1,400

Instructions
(a) From the account balances listed above and the information given below, prepare the annual adjusting entries necessary on December 31. (Omit explanations.)
(1) The equipment has an estimated life of 16 years and a salvage value of $40,000 at the end of that time. (Use straight-line method.)
(2) The note payable is a 90-day note given to the bank October 20 and bearing interest at 10%. (Use 360 days for denominator.)
(3) In December 2,000 coupon admission books were sold at $25 each. They could be used for admission any time after January 1.
(4) Advertising expense paid in advance and included in Advertising Expense $1,100.
(5) Salaries accrued but unpaid $4,700.
(b) What amounts should be shown for each of the following on the income statement for the year?
(1) Interest expense. (3) Advertising expense.
(2) Admissions revenue. (4) Salaries expense.

Click here for the solution: (Adjusting Entries) The accounts listed on the next page appeared in the December 31 trial balance of the Jane Alexander Theater

(Balance Sheet Adjustment and Preparation) The adjusted trial balance of Side Kicks Company and other related information for the year 2007 are presented on the next page

Problem 5-3 (P5-3) (Balance Sheet Adjustment and Preparation) The adjusted trial balance of Side Kicks Company and other related information for the year 2007 are presented on the next page.

AND SO ON

Additional information:
1. The LIFO method of inventory value is used.
2. The cost and fair value of the long-term investments that consist of stocks and bonds is the same.
3. The amount of the Construction Work in Progress account represents the costs expended to date on a building in the process of construction. (The company rents factory space at the present time.) The land on which the building is being constructed cost $85,000, as shown in the trial balance.
4. The patents were purchased by the company at a cost of $40,000 and are being amortized on a straight-line basis.
5. Of the unamortized discount on bonds payable, $2,000 will be amortized in 2008.
6. The notes payable represent bank loans that are secured by long-term investments carried at $120,000. These bank loans are due in 2008.
7. The bonds payable bear interest at 8% payable every December 31, and are due January 1, 2018.
8. 600,000 shares of common stock of a par value of $1 were authorized, of which 500,000 shares were issued and outstanding. Instructions
Prepare a balance sheet as of December 31, 2007, so that all important information is fully disclosed.

Click here for the solution: (Balance Sheet Adjustment and Preparation) The adjusted trial balance of Side Kicks Company and other related information for the year 2007 are presented on the next page