ACCT 3221 EXAM QUESTIONS WITH CORRECT ANSWERS
Albert is considering making a $10,000 investment in a venture which its promoter
promises will generate immediate tax benefits for him. Albert, who normally itemizes his
deductions, is in the 25% marginal tax bracket. If the investment is of a type where the
taxpayer may claim either a tax credit of 20% of the amount of the expenditure or an
itemized deduction for the amount of the investment, what treatment normally would be
most beneficial to Albert and by how much will Albert's tax liability decline because of
the investment?
A. $0, take neither the itemized deduction nor the tax credit
B. $2,000, take the tax credit
C. $2,500, take the itemized deduction
D. Both options produce the same benefit
E. None of the options - Answer- C
The tax deduction will produce a benefit of $2,500 ($10,000 X 25%), which is greater
than the amount resulting from claiming a tax credit, $2,000 ($20,000 X 10%).
Therefore, Albert should claim the itemized deduction because it produces the greater
benefit
The components of the general business credit include all of the following except:
A. Disabled access credit
B. Research activities
C. Credit for employer provided child care
D. Tax credit for rehabilitation expenditures
E. All of the options are components of the general business credit - Answer- E
The tax credit rate for rehabilitation expenditures for certified historic structures is more
than the tax credit rate for qualifying structures that are not certified historic structures.
A. True
B. False - Answer- A
The rate is 20% for certified historic structures and 10% for qualifying structures that are
not certified historic structures
Jude incurs $500,000 during the year to construct a facility that will be used exclusively
for the care of its employees' pre school age children during normal working hours. The
credit for employer provided child care available to Jude this year is $125,000
A. True
B. False - Answer- A
,The credit for employer provided child care, which can be based on costs incurred for
constructing a child care facility, is calculated as follows:
$500,000 X 25% = $125,000
Because current U.S. tax rates are higher than many foreign income tax rates, the
overall limitation yields a higher foreign tax rate than the amount of foreign taxes
actually paid.
A. True
B. False - Answer- B
U.S. tax rates are, in general, lower than many foreign income tax rates. The result is
less foreign income tax that can be neutralized. The credit is the lesser of the foreign tax
paid or the amount derived from the overall limitation
In May 2012, Lavender Corporation hires 4 persons certified to be eligible employees
for the work opportunity tax credit, each of whom is paid $10,000 during the year. As a
result of this employment, Lavender Corporation may claim a work opportunity tax credit
of:
A. $40,000
B. $16,000
C. $9,600
D. $0
E. None of the options - Answer- C
$6,000 X 40% X 4
Sage Company, in the renovation of its building, incurs $12,250 of expenditures that
qualify for the disabled access credit. The disabled access credit is:
A. $12,500
B. $12,000
C. $5,000
D. $0
E. None of the options - Answer- C
$5,000 = lesser of $10,000 or $12,000 ($12,500 - $250) X 50%
If a taxpayer chooses to claim a foreign tax credit, the foreign income will not be subject
to double taxation
A. True
B. False - Answer- B
The FTC limit may result in some form of double taxation
The American Opportunity scholarship credit is available per student, while the lifetime
learning credit is calculated per family
A. True
B. False - Answer- A
The American Opportunity scholarship credit is available per student, while the lifetime
learning credit is calculated per eligible taxpayer
,Which of the following statements regarding the adoption expenses credit is true?
A. The adoption expenses credit is a nonrefundable credit
B. The adoption expenses credit is phased out beginning when a taxpayer's modified
AGI exceeds $189,710 in 2012
C. No adoption expenses credit is available if a taxpayer's modified AGI exceeds
$229,710 in 2012
D. The adoption expenses credit is limited to no more than $12,650 per eligible child in
2012
E. All of the options are true - Answer- E
During the year, Basil Corporation (a U.S. Corporation) has U.S. source income of
$3,000,000 and foreign source income of $2,000,000. The foreign source income
generates foreign income taxes of $900,000. The U.S. income tax before the foreign tax
credit is $1,750,000. Basil Corporation's foreign tax credit is:
A. $0
B. $450,000
C. $700,000
D. $900,000
E. None of the options - Answer- C
The overall limit is ($2,000,000 / $5,000,000) X $1,750,000, or $700,000. Thus, the
foreign tax credit is limited to $700,000
Jessie and Alex are married and file joint tax return claiming their two children, ages 9
and 7 as dependents. Their AGI for 2012 is $120,000. Jessie and Alex's child tax credit
for 2012 is:
A. $0
B. $500
C. $1,500
D. $2,000
E. None of the options - Answer- C
The maximum child tax credit for 2012 is $1,000 per dependent child under age 17. The
maximum credit must be reduced for higher income taxpayers. For married taxpayers,
the credit reduction is $50 for every $1,000 (or part thereof) of AGI above the threshold
amount of $110,000, resulting in a reduction of $500 [{$120,000 - $110,000) / $1,000 X
50] for Jessie and Alex. Therefore, the 2012 tax credit is $1,500 [$2,000 maximum
credit - $500 reduction]
If an item of income is not subject to income tax withholding by a taxpayer's employer, it
still may be subject to the income tax
A. True
B. False - Answer- A
Circular E, Employer's Tax Guide, contains a number of situations where income is not
subject to withholding yet it is subject to the income tax
Employers are not required to make estimated tax payments.
A. True
, B. False - Answer- B
Employees may be subject to the estimated tax payments requirements, particularly if
the individual has unearned income
Iris Corporation hires two persons certified to be eligible employees for the work
opportunity tax credit under the general rules (e.g., food stamp recipients), each of
whom is paid $15,000 during the year. As a result of this event, Iris Corporation may
claim a work opportunity credit of:
a. $12,000
b. $2,400
c. $4,800
d. $8,000
e. None of these choices are correct. - Answer- C
$4,800 = ($6,000 × 40% × 2).
Self-employed individuals and employees may be required to make estimated tax
payments.
a. True
b. False - Answer- A
Employees also may be subject to the estimated tax payments requirements,
particularly if the individual has unearned income (e.g., interest income and dividend
income).
Derrick and Gladys have two children, ages 8 and 14. They spend $6,200 per year on
eligible employment related expenses for the care of their children after school. Derrick
and Gladys each earns a salary of $18,000. What is the amount of the credit for child
and dependent care expenses?
a. $1,488
b. $720
c. $1,035
d. $1,380
e. None of these choices are correct. - Answer- B
$720 = 24% × $3,000. Derrick and Gladys have only one qualifying dependent (i.e., the
8 year-old); therefore, only up to $3,000 of expenditures qualify for the credit. The
$3,000 statutory ceiling is less than the earned income ceiling of $18,000.
Any unused general business credit must be carried back 1 year and then forward for
10 years.
a. True
b. False - Answer- B
Unused general business credits are carried back one year. Any remaining credits are
then carried forward for 20 years.
During 2013, Amelia earns $146,000 in wages as an employee of an accounting firm.
She also earns $26,000 in gross income from an outside consulting service she
Albert is considering making a $10,000 investment in a venture which its promoter
promises will generate immediate tax benefits for him. Albert, who normally itemizes his
deductions, is in the 25% marginal tax bracket. If the investment is of a type where the
taxpayer may claim either a tax credit of 20% of the amount of the expenditure or an
itemized deduction for the amount of the investment, what treatment normally would be
most beneficial to Albert and by how much will Albert's tax liability decline because of
the investment?
A. $0, take neither the itemized deduction nor the tax credit
B. $2,000, take the tax credit
C. $2,500, take the itemized deduction
D. Both options produce the same benefit
E. None of the options - Answer- C
The tax deduction will produce a benefit of $2,500 ($10,000 X 25%), which is greater
than the amount resulting from claiming a tax credit, $2,000 ($20,000 X 10%).
Therefore, Albert should claim the itemized deduction because it produces the greater
benefit
The components of the general business credit include all of the following except:
A. Disabled access credit
B. Research activities
C. Credit for employer provided child care
D. Tax credit for rehabilitation expenditures
E. All of the options are components of the general business credit - Answer- E
The tax credit rate for rehabilitation expenditures for certified historic structures is more
than the tax credit rate for qualifying structures that are not certified historic structures.
A. True
B. False - Answer- A
The rate is 20% for certified historic structures and 10% for qualifying structures that are
not certified historic structures
Jude incurs $500,000 during the year to construct a facility that will be used exclusively
for the care of its employees' pre school age children during normal working hours. The
credit for employer provided child care available to Jude this year is $125,000
A. True
B. False - Answer- A
,The credit for employer provided child care, which can be based on costs incurred for
constructing a child care facility, is calculated as follows:
$500,000 X 25% = $125,000
Because current U.S. tax rates are higher than many foreign income tax rates, the
overall limitation yields a higher foreign tax rate than the amount of foreign taxes
actually paid.
A. True
B. False - Answer- B
U.S. tax rates are, in general, lower than many foreign income tax rates. The result is
less foreign income tax that can be neutralized. The credit is the lesser of the foreign tax
paid or the amount derived from the overall limitation
In May 2012, Lavender Corporation hires 4 persons certified to be eligible employees
for the work opportunity tax credit, each of whom is paid $10,000 during the year. As a
result of this employment, Lavender Corporation may claim a work opportunity tax credit
of:
A. $40,000
B. $16,000
C. $9,600
D. $0
E. None of the options - Answer- C
$6,000 X 40% X 4
Sage Company, in the renovation of its building, incurs $12,250 of expenditures that
qualify for the disabled access credit. The disabled access credit is:
A. $12,500
B. $12,000
C. $5,000
D. $0
E. None of the options - Answer- C
$5,000 = lesser of $10,000 or $12,000 ($12,500 - $250) X 50%
If a taxpayer chooses to claim a foreign tax credit, the foreign income will not be subject
to double taxation
A. True
B. False - Answer- B
The FTC limit may result in some form of double taxation
The American Opportunity scholarship credit is available per student, while the lifetime
learning credit is calculated per family
A. True
B. False - Answer- A
The American Opportunity scholarship credit is available per student, while the lifetime
learning credit is calculated per eligible taxpayer
,Which of the following statements regarding the adoption expenses credit is true?
A. The adoption expenses credit is a nonrefundable credit
B. The adoption expenses credit is phased out beginning when a taxpayer's modified
AGI exceeds $189,710 in 2012
C. No adoption expenses credit is available if a taxpayer's modified AGI exceeds
$229,710 in 2012
D. The adoption expenses credit is limited to no more than $12,650 per eligible child in
2012
E. All of the options are true - Answer- E
During the year, Basil Corporation (a U.S. Corporation) has U.S. source income of
$3,000,000 and foreign source income of $2,000,000. The foreign source income
generates foreign income taxes of $900,000. The U.S. income tax before the foreign tax
credit is $1,750,000. Basil Corporation's foreign tax credit is:
A. $0
B. $450,000
C. $700,000
D. $900,000
E. None of the options - Answer- C
The overall limit is ($2,000,000 / $5,000,000) X $1,750,000, or $700,000. Thus, the
foreign tax credit is limited to $700,000
Jessie and Alex are married and file joint tax return claiming their two children, ages 9
and 7 as dependents. Their AGI for 2012 is $120,000. Jessie and Alex's child tax credit
for 2012 is:
A. $0
B. $500
C. $1,500
D. $2,000
E. None of the options - Answer- C
The maximum child tax credit for 2012 is $1,000 per dependent child under age 17. The
maximum credit must be reduced for higher income taxpayers. For married taxpayers,
the credit reduction is $50 for every $1,000 (or part thereof) of AGI above the threshold
amount of $110,000, resulting in a reduction of $500 [{$120,000 - $110,000) / $1,000 X
50] for Jessie and Alex. Therefore, the 2012 tax credit is $1,500 [$2,000 maximum
credit - $500 reduction]
If an item of income is not subject to income tax withholding by a taxpayer's employer, it
still may be subject to the income tax
A. True
B. False - Answer- A
Circular E, Employer's Tax Guide, contains a number of situations where income is not
subject to withholding yet it is subject to the income tax
Employers are not required to make estimated tax payments.
A. True
, B. False - Answer- B
Employees may be subject to the estimated tax payments requirements, particularly if
the individual has unearned income
Iris Corporation hires two persons certified to be eligible employees for the work
opportunity tax credit under the general rules (e.g., food stamp recipients), each of
whom is paid $15,000 during the year. As a result of this event, Iris Corporation may
claim a work opportunity credit of:
a. $12,000
b. $2,400
c. $4,800
d. $8,000
e. None of these choices are correct. - Answer- C
$4,800 = ($6,000 × 40% × 2).
Self-employed individuals and employees may be required to make estimated tax
payments.
a. True
b. False - Answer- A
Employees also may be subject to the estimated tax payments requirements,
particularly if the individual has unearned income (e.g., interest income and dividend
income).
Derrick and Gladys have two children, ages 8 and 14. They spend $6,200 per year on
eligible employment related expenses for the care of their children after school. Derrick
and Gladys each earns a salary of $18,000. What is the amount of the credit for child
and dependent care expenses?
a. $1,488
b. $720
c. $1,035
d. $1,380
e. None of these choices are correct. - Answer- B
$720 = 24% × $3,000. Derrick and Gladys have only one qualifying dependent (i.e., the
8 year-old); therefore, only up to $3,000 of expenditures qualify for the credit. The
$3,000 statutory ceiling is less than the earned income ceiling of $18,000.
Any unused general business credit must be carried back 1 year and then forward for
10 years.
a. True
b. False - Answer- B
Unused general business credits are carried back one year. Any remaining credits are
then carried forward for 20 years.
During 2013, Amelia earns $146,000 in wages as an employee of an accounting firm.
She also earns $26,000 in gross income from an outside consulting service she
