ACCT 323 7980 INCOME TAX I (Spring 2016)
WEEK 3 HOMEWORK
1) On January 2, Year 1, the Philips paid $50,000 cash and obtained a $200,000 mortgage to
purchase a home. In Year 4 they borrowed $15,000 secured by their home, and used the cash to
add a new room to their residence. That same year they took out a $5,000 auto loan.
The following information pertains to interest paid in Year 4:
Mortgage interest $17,000
Interest on room construction loan 1,500
Auto loan interest 500
For Year 4, how much interest is deductible, prior to any itemized deduction limitations?
2) Spencer, who itemizes deductions, had adjusted gross income of $60,000 for the current year.
The following additional information is available for the year:
Cash contribution to church
Purchase of art object at church bazaar
(with a fair market value of $800 on the date of purchase)
Donation of used clothing to Salvation Army
(fair value evidenced by receipt received)
What is the maximum amount Spencer can claim as a deduction for charitable contributions in
the current year?
3) For regular tax purposes, with regard to the itemized deduction for qualified residence
interest, home equity indebtedness incurred during a year:
a. Includes acquisition indebtedness secured by a qualified residence.
b. May exceed the fair market value of the residence.
c. Must exceed the taxpayer’s net equity in the residence.
d. Is limited to $100,000 on a joint income tax return.
4) Winston, a calendar-year taxpayer, was employed and resided in Boston. On February 4,
2015, Winston was permanently transferred to Florida by his employer. Winston worked fulltime for the entire year. In 2015, Winston incurred and paid the following unreimbursed
expenses in relocating.
Lodging and travel expenses while moving
Meals while in route to Florida
Cost of insuring household goods and personal effects during move
Cost of shipping household pets to new home
Costs of moving household furnishings and personal effects
What amount of the above expenses is deductible as moving expenses on Winston’s 2015 federal
tax return? Which expenses are included in the deductible amount and which expenses are
excluded from the deductible amount and why?
5) For 2015, Travis and Bonnie White (both age 40) filed a joint return. Travis earned $55,000
in wages and was covered by his employer’s qualified pension plan. Bonnie was unemployed and
received $4,000 in alimony payments for the first four months of the year before remarrying. The
couple had no other income. Each contributed $5,000 to an IRA account. What is the maximum
allowable IRA deduction on their 2015 joint tax return?
6) Which one of the following statements concerning the deduction for interest on qualified
education loans is not correct?
(a) The deduction is available even if the taxpayer does not itemize deductions.
(b) The deduction only applies to the first sixty months of interest payments.
(c) Qualified education expenses include tuition fees, room, and board.
(d) The educational expenses must relate to a period when the student was enrolled on at
least a half-time basis.
7) Which of the following types of costs are required to be capitalized under the Uniform
Capitalization Rules of Code Sec. 263A?
d. Office maintenance.
8) On March 1 of the previous year, a parent sold stock with a cost of $8,000 to her child, for
$6,000, its fair market value. On September 30 of the current year, the child sold the same stock
for $7,000 to Smith, who is unrelated to the parent and child. What is the proper treatment for
a. Parent has a $2,000 recognized loss and child has $1,000 recognized gain.
b. Parent has $2,000 recognized loss and child has $0 recognized gain.
c. Parent has $0 recognized loss and child has $1,000 recognized gain.
d. Parent has $0 recognized loss and child has $0 recognized gain.
9) Lorenzo, a single taxpayer, has adjusted gross income of $40,000 in the current year. During
the year, a hurricane causes $4,100 damage to Lorenzo’s personal use car on which he has no
insurance. Lorenzo purchased the car for $20,000. Immediately before the hurricane, the car’s
fair market value was $11,000 and immediately after the hurricane its fair market value was
$6,900. What amount should Lorenzo deduct as a casualty loss for the current year after all
threshold limitations are applied?
10) Cindy, a cash basis taxpayer, borrowed money from a bank and signed a 10-year interestbearing note on business property on January 1 of the current year. The cash flow from Cindy’s
business enabled her to prepay the first three years of interest attributable to the note on
December 31of the current year. How should Cindy treat the prepayment of interest for tax
a. Deduct the entire amount as a current expense.
b. Deduct the current year’s interest and amortize the balance over the next two years.
c. Capitalize the interest and amortize the balance over the 10-year load period.
d. Capitalize the interest as part of the basis of the business property.