Question & Answer

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)

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

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?

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?

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?

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:

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

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.

Assume Congress increases the dividend tax rate to the ordinary tax rate while leaving all other tax rates unchanged. How would this change affect the overall tax rate on corporate taxable income?

When a C corporation reports a loss for the year, can shareholders use the loss to offset their personal income? Why or why not?

What should be the Fed’s role? Should it focus only on monetary policy? Or should it engage in the trading of various types of securities in an attempt to stabilize the financial system when securities markets are suffering from investor fears and the potential for high credit (default) risk? (LO2, LO3)

What is a §481 adjustment, and what is the purpose of this adjustment?

Boodeesh is contemplating running a consulting business out of her home. She has a large garage apartment in her backyard that would be perfect for her business. Given that the garage apartment is separate from her house (about 30 feet behind her house), would the office be considered part of her home for purposes of the home office rules?

Jasper and CrewellaDahvill were married in year 0.They filed joint tax returns in years 1 and 2.In year 3, their relationship was strained and Jasper insisted on filing a separate tax return.In year 4, the couple divorced.Both Jasper and Crewella filed single tax returns in year 4.In year 5, the IRS audited the couple’s joint year 2 tax return and each spouse’s separate year 3 tax returns.The IRS determined that the year 2 joint return and Crewella’s separate year 3 tax return understated Crewella’s self-employment income, causing the joint return year 2 tax liability to be understated by $4,000 and Crewella’s year 3 separate return tax liability to be understated by $6,000.The IRS also assessed penalties and interest on both of these tax returns.Try as it might, the IRS has not been able to locate Crewella, but they have been able to find Jasper. a.What amount of tax can the IRS require Jasper to pay for the Dahvill’s year 2 joint return?Explain.

In what situation will there be a common year-end for the principal partners when there is no majority interest taxable year?

Jurassic Company owns equipment that cost $900,000 and has accumulated depreciation of $380,000. The expected future net cash flows from the use of the asset are expected to be $500,000. The fair value of the equipment is $400,000. Prepare the journal entry, if any, to record the impairment loss.

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 this year? What happens to any loss not deducted this year?

What is the difference between fixed routing and variable routing in material transport systems?