Accounting and Taxation

In: Business and Management

Submitted By amarspider
Words 60111
Pages 241
CHAPTER 7: DEDUCTIONS AND LOSSES: CERTAIN BUSINESS EXPENSES AND LOSSES 1. James is in the business of debt collection. He purchased a $20,000 account receivable from Green Corporation for $15,000. During the year, James collected $17,000 in final settlement of the account. James can take a $2,000 bad debt deduction in the current year. a. True b. False

ANSWER: False
RATIONALE: James has a basis of $15,000 in the account receivable and hence, he has income of $2,000.

2. If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not previously deducted can be deducted this year. c. True d. False

ANSWER: True

3. Last year, taxpayer had a $10,000 nonbusiness bad debt. Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000. If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in gross income. e. True f. False

ANSWER: False RATIONALE: The taxpayer must include the $10,000 in gross income to the extent of the tax benefit received last year. The entire $10,000 deduction provided a tax benefit; $8,000 offset by the short-term capital gain and $2,000 offset against ordinary income.

4. A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection agency. g. True h. False

ANSWER: True

5. If an account receivable written off during a prior year is subsequently collected during the current year, the amount collected must be included in the gross income of the current year to the extent it created a tax benefit in the prior year. i. True j. False

ANSWER: True

6. A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.…...

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