After-tax and penalty rate of return

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Reference no: EM13786239

Question 1: Sadie sold 10 shares of stock to her brother, George, for $500 six months ago. Sadie had purchased the stock for $600 two years earlier. If George sells the stock for $700, what is the amount and character of his recognized gain or loss in the current year?

  • $0.
  • $100 short-term capital gain.
  • $100 long-term capital gain.
  • $200 short-term capital gain.
  • None of these.

Question 2: Emily invested $60,000 into a 529 account on January 1, 20X8 to fund her son's future schooling. Four years later, Emily needs this money to purchase a new car for the family. Her after-tax and penalty proceeds were $76,896. What is Emily's after-tax and penalty rate of return?

  • 7.1%
  • 5.1%
  • 6.4%
  • None of these
  • 8.1%

Question 3: On July 1 of 2014, Elaine purchased a new home for $400,000. At the time of the purchase, it was estimated that the property tax bill on the home for the year would be $8,000 ($400,000 × 2%). On the settlement statement, Elaine was charged $4,000 for the year in property taxes and the seller was charged $4,000. On December 31, Elaine discovered that the real property taxes on the home for the year were actually $9,000. Elaine wrote a $9,000 check to the local government to pay the taxes for that calendar year (Elaine was liable for the taxes because she owned the property when they became due). What amount of real property taxes is Elaine allowed to deduct for 2014?

  • $0
  • $4,000
  • $4,500
  • $5,000
  • $9,000

Question 4: If Tom invests $60,000 in a taxable corporate bond that provides a 5 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 30 percent.

  • $79,009; $119,387
  • $88,647; $159,198
  • $77,495; $113,750
  • None of these
  • $92,782; $178,414

Question 5: Pelosi Corporation sold a parcel of land valued at $300,000. Its basis in the land was $250,000. For the land, Pelosi received $60,000 in cash in the current year and a note providing Pelosi with $240,000 in the subsequent year. What is Pelosi's recognized gain in the current and subsequent year, respectively?

  • None of these.
  • $25,000, $25,000.
  • $50,000, $0.
  • $10,000, $40,000.
  • $0, $50,000.

Question 6: On March 31, 2014, Mary borrowed $200,000 to buy her principal residence. Mary paid 2 points to reduce her interest rate from 6 percent to 5 percent. The loan is for a 30-year period. What is Mary's 2014 deduction for her points paid?

  • $50
  • $6,000
  • $150
  • $4,000

Question 7: Amy is single. During 2013, she determined her adjusted gross income was $12,000. During the year, Amy also contributed $1,500 to a Roth IRA. What is the maximum saver's credit she may claim for the year?

  • $750
  • $1,000
  • $1,500
  • $0

Question 8: Bryan, who is 45 years old, had some surprise medical expenses during the year. To pay for these expenses (which were claimed as itemized deductions on his tax return), he received a $20,000 distribution from his traditional IRA (he has only made deductible contributions to the IRA). Assuming his marginal ordinary income tax rate is 15%, what amount of taxes and/or early distribution penalties will Bryan be required to pay on this distribution?

  • $3,000 income tax; $2,000 early distribution penalty
  • $3,000 income tax; $0 early distribution penalty
  • $0 income tax; $2,000 early distribution penalty
  • $0 income tax; $0 early distribution penalty

Question 9: Kevin is the financial manager of Levingston BMW. The shop allows employees to purchase up to two vehicles at a discount. This year Kevin purchased a 530 model and a new M3.

If the average gross profit percentage of the shop's goods is 12%, what amount must Kevin include in income?

  • $0
  • $1,640
  • $3,000
  • $17,000

Question 10: Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working when the stock price was $6 per share. When the share price was $17 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $20 per share. What is the amount of Maren's bargain element?

  • $900.
  • None of these.
  • $1,500.
  • $700.
  • $0.

Question 11: Kathy is 60 years of age and self-employed. During the year she reported $400,000 of revenues and $100,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute this year to a simplified employee pension (SEP) IRA?

  • $52,000
  • $57,500
  • $57,786
  • $288,933

Question 12: Lenter LLC placed in service on April 29, 2013 machinery and equipment (7-year property) with a basis of $700,000. Assume that Lenter has sufficient income to avoid any limitations. Calculate the maximum depreciation expense including section 179 expensing (but ignoring bonus expensing):

  • $85,740
  • $528,580
  • $514,290
  • None of these
  • $120,000

Question 13: Anne LLC purchased computer equipment (5-year property) on August 29 with a basis of $32,500 and used the half-year convention. During the current year, which is the fourth year Anne LLC owned the property, the property was disposed of on January 15. Calculate the maximum depreciation expense:

  • $1,872
  • None of these
  • $3,456
  • $1,728
  • $432

Question 14: Ashburn reported a $105,000 net §1231 gain in year 6. Assuming Ashburn reported $45,000 of nonrecaptured §1231 losses during years 1-5, what amount of Ashburn's net §1231 gain for year 6, if any, is treated as ordinary income?

  • $45,000.
  • $0.
  • None of these.
  • $105,000.
  • $60,000.

Question 15: Ms. Fresh bought 1,000 shares of Ibis Corporation stock for $5,000 on January 15, 2011. On December 31, 2013 she sold all 1,000 shares of her Ibis stock for $4,500. Based on a hot tip from her friend, she bought 1,000 shares of Ibis stock on January 23, 2014 for $3,000. What is Ms. Fresh's recognized loss on her 2013 sale and what is her basis in her 1,000 shares purchased in 2014?

  • $-0- LTCL and $3,500 basis
  • $200 LTCL and $3,300 basis
  • $300 LTCL and $3,200 basis
  • $400 LTCL and $3,100 basis
  • $500 LTCL and $3,000 basis

Question 16: Jenny (35 years old) is considering making a one-time contribution to either a traditional 401(k) plan or to a Roth 401(k) plan. She plans to withdraw the account balance when she retires in 40 years. Jenny expects to earn a 7% before-tax rate of return no matter which plan she contributes to. Which of the following statements is true?

  • If Jenny's marginal tax rate in the year of contribution is higher than her marginal tax rate in the year of distribution, she will earn a higher after-tax rate of return on the traditional 401(k) plan than on the Roth 401(k) plan.
  • If Jenny's marginal tax rate in the year of contribution is lower than her marginal tax rate in the year of distribution, she will earn a higher after-tax rate of return on the traditional 401(k) plan than on the Roth 401(k) plan.
  • Jenny will earn the same after-tax rate of return no matter which plan she contributes to.
  • Jenny is not allowed to make a one-time contribution to either plan.

Question 17: Tom recently received 2,000 shares of restricted stock from his employer, Independence Corporation, when the share price was $10 per share. Tom's restricted shares vested three years later when the market price was $12. Tom held the shares for a little more than a year and sold them when the market price was $20. What is the amount of Tom's income or loss on the vesting date?

  • $0.
  • $28,000.
  • $20,000.
  • $24,000.

Question 18: Beth's business purchased only one asset during the current year. It placed in service machinery (5-year property) on December 1 with a basis of $50,000. Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation):

  • $7,145
  • $1,785
  • $2,500
  • None of these
  • $10,000

Question 19: Lara, a single taxpayer with a 35 percent marginal tax rate, desires health insurance. The health insurance would cost Lara $5,000 to purchase if she pays for it herself (Lara's AGI is too high to receive any tax deduction for the insurance as a medical expense). Lara's employer has a 40 percent marginal tax rate. Ignoring payroll taxes, what is the maximum amount of before-tax salary Lara would give up to receive health insurance?

  • $1,500.
  • $5,000.
  • $7,143.
  • $7,692.

Question 20: Manley operates a law practice on the accrual method and calendar year. At the beginning of the year Manley's firm had an allowance for doubtful accounts with a balance of $18,000. At the end of the year, Manley recorded bad debt expense of $23,000 and the balance of doubtful accounts had decreased to $15,000. What is Manley's deduction for bad debt expense this year?

  • $23,000
  • $5,000
  • $20,000
  • $3,000
  • $26,000

Question 21: Mike started a calendar year business on July 1st of this year by paying 12 months rent on his shop at $1,000 per month. What is the maximum amount of rent that Mike can deduct this year under each type of accounting method?

  • $4,000 under the cash method and $12,000 under the accrual method
  • $4,000 under the cash method and zero under the accrual method
  • $4,000 under the cash method and $4,000 under the accrual method
  • $12,000 under the cash method and $4,000 under the accrual method
  • $12,000 under the cash method and $6,000 under the accrual method

Question 22: Assume that Bethany acquires a competitor's assets on April 1st. The purchase price was $150,000. Of that amount, $125,000 is allocated to tangible assets and $25,000 is allocated to goodwill (a §197 intangible asset). What is Bethany's amortization expense for the current year, rounded to the nearest whole number?

  • $1,389
  • None of these
  • $1,250
  • $1,319
  • $0

Question 23: Harvey rents his second home. During 2014, 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 2014?

  • $35,000
  • $25,000
  • $5,000
  • $0

Question 24: Mary traded furniture used in her business to a furniture dealer for some new furniture. Mary originally purchased the furniture for $45,000 and it had an adjusted basis of $20,000 at the time of the exchange. The new furniture had a fair market value of $40,000. Mary also gave $16,000 to the dealer in the transaction. What is Mary's adjusted basis in the new furniture after the exchange?

  • $24,000.
  • None of these.
  • $40,000.
  • $36,000.
  • $20,000.

Question 25: Which of the following is an explanation for why insurance premiums on a key employee are not deductible?

  • The federal government does not want to subsidize insurance companies.
  • The insurance deduction would offset taxable income without the potential for the proceeds generating taxable income.
  • This rule was grandfathered from a time when the IRC disallowed all insurance premiums deductions.
  • Congress presumes that all expenses are not deductible unless specifically allowed in the Internal Revenue Code.
  • It is impractical to trace insurance premiums to the receipt of proceeds.

Question 26: Tom Tom LLC purchased a rental house and land during the current year for $150,000. The purchase price was allocated as follows: $125,000 to the building and $25,000 to the land. The property was placed in service on May 22. Calculate Tom Tom's maximum depreciation for this first year:

  • $2,841
  • $3,410
  • $2,273
  • None of these
  • $1,605

Question 27: After a business meeting with a prospective client Holly took the client to dinner and the theatre. Holly paid $290 for the meal and $350 for the theatre tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense?

  • None - the meals and entertainment are not deductible except during travel.
  • None unless Holly discussed business with the client during the meal and the entertainment.
  • $270
  • $320
  • $540

Question 28: Bob Brain files a single tax return and decides to itemize his deductions. Bob's income for the year consists of $75,000 of salary, $3,000 long-term capital gain, and $1,500 interest income. Bob's expenses for the year consists of $800 investment advice fees, $700 unreimbursed employee business expenses (a miscellaneous itemized deduction), and $250 tax return preparation fees. What is Bob's actual deduction for miscellaneous itemized deductions?

  • $1,750
  • None of these
  • $1,590
  • Zero; Bob's investment expenses do not exceed two percent of AGI floor.
  • $160

Question 29: Patrick purchased a home on January 1, 2014 for $600,000 by making a down payment of $100,000 and financing the remaining $500,000 with a 30-year loan, secured by the residence, at 6 percent. During 2014 Patrick made interest-only payments on the loan of $30,000. On July 1, 2014, when his home was worth $600,000 Patrick borrowed an additional $75,000 secured by the home at an interest rate of 8 percent. During 2014, he made interest-only payments on this loan in the amount of $3,000. What amount of the $33,000 interest expense Patrick paid during 2014 may he deduct as an itemized deduction?

  • $0
  • $3,000
  • $30,000
  • $33,000

Question 30: Dean has earned $75,000 annually for the past five years working as an architect for MWC Inc. Under MWC's defined benefit plan (which uses a 7-year graded vesting schedule) employees earn a benefit equal to 3.5% of the average of their three highest annual salaries for every full year of service with MWC. Dean has worked for five full years for MWC and his vesting percentage is 60%. What is Dean's vested benefit (or annual retirement benefit he has earned so far)?

  • $7,350
  • $0
  • $7,875
  • $12,250

Question 31: On November 1, 2013, Jamie (who is single) purchased and moved into her principal residence. In early 2014, Jamie was laid off from her job. On February 1, 2014, Jamie sold the home at a $45,000 gain. She sold the home because she found a new job in a different state. How much of the gain, if any, may Jamie exclude from her gross income in 2014?

  • $3,125
  • $0
  • $31,250
  • $35,000

Question 32: Tyson (48 years old) owns a traditional IRA with a current balance of $50,000. The balance consists of $30,000 of deductible contributions and $20,000 of account earnings. Convinced that his marginal tax rate will increase in the future, Tyson receives a distribution of the entire $50,000 balance of his traditional IRA and he immediately contributes the $50,000 to a Roth IRA. Assuming his marginal tax rate is 25%, what amount of penalty, if any, must Tyson pay on the distribution from the traditional IRA?

  • $0.
  • $1,250.
  • $3,750.
  • $5,000.

Question 33: Arlington LLC purchased an automobile for $40,000 on July 5, 2014. What is Arlington's depreciation expense for 2014 if its business use percentage is 90 percent (ignore any possible bonus depreciation)?

  • $2,844
  • $6,000
  • None of these
  • $2,370
  • $3,160

Question 34: Michelle is an active participant in the rental condominium property she owns. During the year, the property generates a ($15,000) loss; however, Michelle has sufficient tax basis and at-risk amounts to absorb the loss. If Michelle has $115,000 of salary, $24,000 of long-term capital gains, $3,000 of dividends, and no additional sources of income or deductions, how much loss can Michelle deduct?

  • $15,000
  • $4,000
  • None of these
  • $11,000
  • Zero; losses from rental property are passive losses and can only be offset by passive income.

Question 35: George operates a business that generated adjusted gross income of $250,000 and taxable income of $170,000 this year (before the domestic production activities deduction). Included in net income was $60,000 of qualified production activities income. George paid $50,000 of wages to employees engaged in domestic manufacturing. What domestic production activities deduction will George be eligible to claim this year?

  • $4,500
  • $5,400
  • $7,200
  • $15,300
  • $22,500

Question 36: Shelley is employed in Texas and recently attended a two-day business conference in New Jersey. Shelley spent the entire time at the conference and documented her expenditures (described below). What amount can Shelley deduct as an employee business expense?


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  • All of these are deductible if Shelley is reimbursed under an accountable plan.
  • None of the expenses are deductible - only employers can deduct travel expenses.
  • $1,850 if Shelley's AGI is $50,000
  • $2,740
  • $2,850

Question 37: In the current year, Norris, an individual, has $50,000 of ordinary income, a Net Short Term Capital Loss (NSTCL) of $12,800 and a Net Long Term Capital Gain (NLTCG) of $2,800. From his capital gains and losses, Norris reports:

  • an offset against ordinary income of $3,000 and a NSTCL carryforward of $4,200
  • an offset against ordinary income of $10,000
  • an offset against ordinary income of $3,000 and a NSTCL carryforward of $7,000
  • an offset against ordinary income of $2,800 and a NSTCL carryforward of $7,200
  • an offset against ordinary income of $3,000 and a NSTCL carryforward of $7,200

Question 38: Brad sold a rental house that he owned for $250,000. Brad bought the rental house five years ago for $200,000 and has claimed $25,000 of depreciation expense. What is the amount and character of Brad's gain or loss?

  • $25,000 ordinary and $50,000 unrecaptured §1250 gain.
  • None of these.
  • $75,000 ordinary gain.
  • $50,000 §1231 gain and $25,000 unrecaptured §1250 gain.
  • $25,000 §1231 gain and $50,000 unrecaptured §1250 gain.

Question 39: Larry owned and lived in a home for five years before marrying Darlene. Larry and Darlene lived in the home for one year before selling it at a $600,000 gain. Larry was the sole owner of the residence until it was sold. How much of the gain may Larry and Darlene exclude?

  • $0
  • $250,000
  • $500,000
  • $600,000

Question 40: Stevie recently received 1,000 shares of restricted stock from her employer, Nicks Corporation, when the share price was $8 per share. Stevie's restricted shares vested three years later when the market price was $11. Stevie held the shares for a little more than a year and sold them when the market price was $16. What is the amount of Stevie's ordinary income with respect to the restricted stock?

  • $0.
  • $5,000.
  • $8,000.
  • $11,000

Reference no: EM13786239

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