Income Tax Fundamentals 2012 Chapter 3 Group 1 and 2 Solutions

CHAPTER 3

BUSINESS INCOME AND EXPENSES, PART I

Group 1 - Multiple Choice Questions

1. C (LO 3.1) 7. C (LO 3.4) 13. E (LO 3.7) 19. E (LO 3.11)

2. C (LO 3.1) 8. D (LO 3.4) 14. E (LO 3.8) 20. C (LO 3.12)

3. E (LO 3.1) 9. B (LO 3.4) 15. B (LO 3.9) 21. C (LO 3.12)

4. D (LO 3.2) 10. C (LO 3.4) 16. C (LO 3.10) 22. E (LO 3.13)

5. B (LO 3.2) 11. D (LO 3.5) 17. C (LO 3.11)

6. D (LO 3.3) 12. A (LO 3.6) 18. C (LO 3.11)

Group 2 - Problems

1. Assigned for credit.

3. Gross income $50,000

Expenses:

Travel $ 1,000

Transportation

3,188 miles x $.51 + 3,188 miles x $.555 $ 3,395

Entertainment in total $4,000 x 50% $ 2,000

7 gifts at $50 each, limited to $25 $ 175

Rent and utilities allocated to home office

20% x $10,000 $ 2,000

Total Expenses $ 8,570

Taxable Business Income $41,430 (LO 3.1)

4. a. FIFO inventory valuation:

10,000 boxes at $1.75 per box $ 17,500

5,000 boxes at $1.60 per box 8,000

Ending inventory $ 25,500

Cost of goods sold:

Beginning inventory $ 15,000

Add: Purchases ($16,000 + 32,000 + 17,500) 65,500

Cost of goods available for sale $ 80,500

Less: Ending inventory –25,500

Cost of goods sold $ 55,000

b. LIFO inventory valuation:

10,000 boxes at $1.50 per box $ 15,000

5,000 boxes at $1.60 per box 8,000

Ending inventory $ 23,000

Cost of goods sold:

Beginning inventory $ 15,000

Add: Purchases ($16,000 + 32,000 + 17,500) 65,500

Cost of goods available for sale $ 80,500

Less: Ending inventory –23,000

Cost of goods sold $ 57,500 (LO 3.2)

5. Cost of Goods Sold

line 33 – mark box (a) Cost

line 34 – mark box No

line 35 65,000

line 36 585,000

line...