Question & Answer

According to research, have mutual funds outperformed the market? Explain. Would mutual funds be attractive to some investors even if they are not expected to outperform the market? Explain. (LO6)

Clyde is a cash-method taxpayer who reports on a calendar-year basis. This year Paylate Corporation has decided to pay Clyde a year-end bonus of $1,000. Determine the amount Clyde should include in his gross income this year under the following circumstances:

What determines if a taxpayer is required to file a tax return?  If a taxpayer is not required to file a tax return, does this mean that the taxpayer should not file a tax return?

Jimmy has fallen on hard times recently. Last year he borrowed $250,000 and added an additional $50,000 of his own funds to purchase $300,000 of undeveloped real estate. This year the value of the real estate dropped dramatically and Jimmy’s lender agreed to reduce the loan amount to $230,000. For each of the following independent situations, indicate the amount Jimmy must include in gross income and explain your answer:

On the last day of its current tax year, Buy Rite LLC received $300,000 when it sold a machine it had purchased for $200,000 three years ago to use in its business. At the time of the sale, the basis in the equipment had been reduced to $100,000 due to tax depreciation taken. How much did the members’ self-employment earnings from Buy Rite increase when the equipment was sold? [Hint: See §1402(a)(3).]

For each of the following situations, indicate how much the taxpayer is required to include in gross income and explain your answer:

Although indifference curves will normally be bowed in toward the origin, on odd occasions they might not be. Which of the diagrams correspond to which of the following? Explain the shape of each curve. (a)  X and Y are left shoes and right shoes. (b)  X and Y are two brands of the same product, and the consumer cannot tell them apart. (c)  X is a good but Y is a ‘bad’ – like household refuse.

How is surface texture distinguished from surface integrity?

Relative to arm’s-length transactions, why do related-person transactions receive more IRS scrutiny?

Explain how and why the option premiums may change in response to a surprise announcement that the Fed will increase interest rates, even if stock prices are not affected. (LO2)

Halle just acquired a vacation home. She plans on spending several months each year vacationing in the home and renting out the property for the rest of the year. She is projecting tax losses on the rental portion of the property for the year. She is not too concerned about the losses because she is confident she will be able to use the losses to offset her income from other sources. Is her confidence misplaced? Explain.

Mark Price Company uses the gross profit method to estimate inventory for monthly reporting purposes. Presented below is information for the month of May. Inventory, May 1 $ 160,000 Purchases (gross) 640,000 Freight-in 30,000 Sales revenue 1,000,000 Sales returns 70,000 Purchase discounts 12,000 Instructions (a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales. (b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost.

Explain the use of call provisions on bonds. How can a call provision affect the price of a bond? (LO2)

Hughie, Dewey, and Louie are equal shareholders in HDL, an S corporation. HDL’s S election terminates under each of the following alternative scenarios. When is the earliest it can again operate as an S corporation?

Distinguish between cash-basis accounting and accrualbasis accounting. Why is accrual-basis accounting acceptable for most businesses and the cash-basis unacceptable in the preparation of an income statement and a balance sheet?

Compare and contrast the IRS method and the Tax Court method for allocating expenses between personal use and rental use for vacation homes. Include the Tax Court’s justification for departing from the IRS method in your answer.

A continuous hot rolling mill has eight stands. The dimensions of the starting slab are: thickness = 3.0 in, width = 15.0 in, and length = 10 ft. The final thickness is to be 0.3 in. Roll diameter at each stand = 36 in, and rotational speed at stand number 1 = 30 rev/min. It is observed that the speed of the slab entering stand 1 = 240 ft/min. Assume that no widening of the slab occurs during the rolling sequence. Percent reduction in thickness is to be equal at all stands, and it is assumed that the forward slip will be equal at each stand. Determine (a) percent reduction at each stand, (b) rotational speed of the rolls at stands 2 through 8, and (c) forward slip. (d) What is the draft at stands 1 and 8? (e) What is the length and exit speed of the final strip exiting stand 8?

Melinda invests $200,000 in a City of Heflin bond that pays 6 percent interest.  Alternatively, Melinda could have invested the $200,000 in a bond recently issued by Surething Inc. that pays 8 percent interest and has risk and other nontax characteristics similar to the City of Heflin bond.  Assume Melinda’s marginal tax rate is 25 percent.

Compare and contrast the tax and financial accounting treatment of goodwill. Are taxpayers allowed to deduct amounts associated with self-created goodwill?

A cup is to be drawn in a deep drawing operation. The height of the cup is 75 mm and its inside diameter = 100 mm. The sheet-metal thickness = 2 mm. If the blank diameter = 225 mm, determine (a) drawing ratio, (b) reduction, and (c) thickness-to-diameter ratio. (d) Does the operation seem feasible?

Suppose you asked your favorite AI query tool the following question: “Don Juan, a single taxpayer, is the sole owner of DJ’s Inc., an S corporation. In 2024, DJ’s Inc. incurred a massive $600,000 business loss, all of which is allocable to Don Juan as the sole shareholder. Assume that the $600,000 loss is not limited by the basis, at-risk, or passive loss rules and that Don Juan has no other business income or business losses. How much of the $600,000 loss will Don Juan be able to deduct in 2024?”  The AI tool provided the following response:

Kimmel Company uses the net method of accounting for sales discounts. Kimmel also offers trade discounts to various groups of buyers. On August 1, 2014, Kimmel sold some accounts receivable on a without recourse basis. Kimmel incurred a finance charge. Kimmel also has some notes receivable bearing an appropriate rate of interest. The principal and total interest are due at maturity. The notes were received on October 1, 2014, and mature on September 30, 2016. Kimmel’s operating cycle is less than one year. Instructions (a) (1) Using the net method, how should Kimmel account for the sales discounts at the date of sale? What is the rationale for the amount recorded as sales under the net method? (2) Using the net method, what is the effect on Kimmel’s sales revenues and net income when customers do not take the sales discounts? (b) What is the effect of trade discounts on sales revenues and accounts receivable? Why? (c) How should Kimmel account for the accounts receivable factored on August 1, 2014? Why? (d) How should Kimmel account for the note receivable and the related interest on December 31, 2014? Why?

What are the requirements for a taxpayer to make a deductible contribution to a traditional IRA? Why do the tax laws impose these restrictions?

Is a taxpayer who has funds in a traditional IRA able to convert the funds to a Roth IRA? If yes, explain the tax consequences of the conversion.

Describe the origination process for corporations that are about to issue new stock. (LO1)