25 May Question 1. Austin, a single individual with a salary of $100,000, incu
Question
1. Austin, a single individual with a salary of $100,000, incurred and paid the following expenses during the year:
| Medical expenses | $ 5,000 |
| Alimony | 24,000 |
| Charitable contributions | 2,000 |
| Casualty loss (after $100 floor) | 1,000 |
| Mortgage interest on personal residence | 4,500 |
| Property taxes on personal residence | 4,200 |
| Moving expenses | 2,500 |
| Contribution to a traditional IRA | 4,000 |
| Sales taxes (no state or local income
tax is imposed) |
1,300 |
Calculate Austin’s deductions forAGI.
2. Arnold and Beth file a joint return. Use the following data to calculate their deduction forAGI.
| Mortgage interest on personal residence | $ 6,000 |
| Property taxes on personal residence | 2,500 |
| Alimony payments | 12,000 |
| Moving expenses | 7,000 |
| Charitable contributions | 1,500 |
| State income taxes | 5,000 |
| Investment interest ($8,000 of expenses limited to net
investment income of $7,500) |
7,500 |
| Unreimbursed employee expenses | 2,500 |
| Sales taxes | 2,600 |
3. Robin and Jeff own an unincorporated hardware store. They determine their salaries at the end of the year by using the amount required to reduce the net income of the hardware store to $0. Based on this policy, Robin and Jeff each receive a total salary of $125,000. This is paid as follows: $8,000 per month and $29,000 on December 31. Determine the amount of the salary deduction.
4. Sandra owns an insurance agency. The following selected data are taken from the agency balance sheet and income statement prepared using the accrualmethod.
| Revenue | $250,000 |
| Salaries and commissions | 100,000 |
| Rent | 10,000 |
| Insurance | 5,000 |
| Utilities | 6,000 |
| Accounts receivable, 1/1/2014 | 40,000 |
| Accounts receivable, 12/31/2014 | 38,000 |
| Accounts payable, 1/1/2014 | 12,000 |
| Accounts payable, 12/31/2014 | 11,000 |
Calculate Sandra’s net profit using the cash method for 2014.
5. Alfred’s Enterprises, an unincorporated entity, pays employee salaries of $100,000 during the year. At the end of the year, $12,000 of additional salaries have been earned but not paid until the beginning of the next year.
a. Determine the amount of the deduction for salaries if Alfred is a cash method taxpayer.
b. Determine the amount of the deduction for salaries if Alfred is an accrual method taxpayer.
6. Taylor, a cash basis architect, rents the building in which his office is located for $5,000 per month. He commenced his practice on February 1, 2014. In order to guarantee no rent increases during an 18-month period, he signed an 18-month lease and prepaid the $90,000 on February 1, 2014. How much can Taylor deduct as rent expense for 2014?
7. In order to protect against rent increases on the building in which she operates a dance studio, Mella signs an 18-month lease for $36,000. The lease commences on October 1, 2014. How much of the $36,000 payment can she deduct in 2014 and 2015?
a. If Mella is an accrual basis taxpayer?
b. If Mella is a cash basis taxpayer?
8. Petula’s business sells heat pumps which have a one-year warranty. Based on historical data, the warranty costs amount to 11% of sales. During 2014, heat pump sales are $400,000. Actual warranty expenses paid in 2014 are $40,000.
a. Determine the amount of the warranty expense deduction for 2014 if Petula’s business uses
the accrual method.
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