Al-Ain University of Science and

Technology

Business Administration College

Accounting Department

Taxation Accounting Mid-term Exam

Dr. Hani Mohamed Moustafa Kamel Time: 90 Minutes
Date: November 7, 2007 Marks:20 Marks

Student Name: ------------------ Student ID Number: -----------

Points Actual Points

Question
Available Gained
First 5
Second 4
Third 5
Fourth 6
Total 20
Question I — Multiple Choice (5 points)
Circle the correct answer and provide your justification, if required, for
choosing this answer.

Jim and Kay Ross contributed to the support of their children, Dale and
1.
Kim, and Jim's widowed parent, Grant. For 2006, Dale, a 21-year old full-
time college student, earned $4,500 as a baby-sitter. Kim, a 23-year old
bank teller, earned $12,000. Grant received $3,000 in dividend income
and $ 4,000 in non-taxable social security benefits. Grant, Dale, and Kim
are U.S. citizens and were over one-half supported by Jim and Kay. How
many exemptions can Jim and Kay claim on their 2006 joint income tax
return?
a. Two.
b. Three.
c. Four.
d. Five.

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A calendar-year taxpayer files his 2006 return late on November 7, 2007.

2.
The taxpayer neither committed fraud nor omitted amounts in excess of
25% of gross income on the tax return. What is the latest date that the
Internal Revenue Service can assess tax and assert a notice of
deficiency?
a. November 7, 2010.
b. November 7, 2009.
c. April 15, 2010.
d. April 15, 2009.

Harold Thompson, a self-employed individual, had income transactions

3.
for 2005 (duly reported on his return filed in April 2006) as follows:
Gross receipts $400,000
Less cost of goods sold and deductions 320,000
Net business income $80,000
Capital gains 36,000
Gross income $116,000
In March 2007, Thompson discovered that he had inadvertently omitted
some income on his 2005 return and retained Mann, CPA, to determine
his position under the statute of limitations. Mann should advise
Thompson that the six-year statute of limitations would apply to his 2005
return only if he omitted from gross income an amount in excess of
a. $20,000.
b. $29,000.
c. $100,000.
d. $109,000.

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Perle, a dentist, billed wood $1000 for dental services. Wood paid Perle
4.
$500 cash and built a bookcase for Perle's office in full settlement of the
bill. Woods sells comparable bookcase for $750. What amount should
Perle include in taxable income as a result of this transaction?
a. $0
b. $500
c. $1000
d. $1250

Clark bought Series EE U.S. Savings Bonds after 1989. Redemption

5.
proceeds will be used for payment of college tuition for Clark's dependent
child. One of the conditions that must be met for tax exemption of
accumulated interest on these bonds is that the
a. Bonds must be transferred to the college for redemption by the
owner of the bonds.
b. Purchaser of the bonds must be the sole owner of the bonds (or
joint owner with his or her spouse).
c. Bonds must be bought by the owner of the bonds before the
owner reaches the age of 24.
d. Bonds must be bought by a parent (or both parents) and put in
the name of the dependent child.

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Question 2 — (4 points)

Determine whether each of the following individuals can be claimed as a

dependent in the current year. Assume that any tests not mentioned have
been satisfied.

a. Manuel is 20 and a full-time college student who

receives a scholarship for $15,000 to cover his tuition
fees, textbooks, and supplies. His father gives him an
additional $6,000 to pay for room and board and other
living expenses.

b. Lawrence pays $7,800 of his mother's living

expenses. His mother receives $3,500 in social
security benefits and $4,100 from interest on her
saving accounts, all of which is spent on her support.

c. Megan's father has no sources of income. During

the year, Megan pays all of her father's support. He is
a citizen and resident of Australia.

d. Tawana and Ralph are married and full-time college

students. They are both 22 years old. Tawana works
as a model and earns $4,300 and Ralph earns $2,100
during the year. Tawana and Ralph are not required to
file a joint return and do so only to receive a refund of
the taxes withheld on their respective incomes.
Tawana's parents give them an additional $8,000 to
help them through college.

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Question 3 — (5 points)

Becky, 45, is a senior vice president for South Publishing Company. During
the current year, her salary is $125,000 and she receives a $25,000 bonus.
She also receives the following benefits from South during the year:
 South has a cafeteria plan that lets all employees select tax-free
benefits or the cash equivalent on 5% of their annual salary before any
bonus. Becky uses the plan to buy health and accident insurance for
her daughter at a cost of $1,600, group life insurance coverage of
$45,000 at a cost of $1,300, and child care at a cost of $2,800. She
takes the remaining $550 in cash.
 All executive officers' medical expenses are covered by a self-insured
medical reimbursement plan. Becky is fully reimbursed for her $600 in
medical expenses.
 Becky's free parking is worth $4,500 this year.
 The executive officers eat lunch in a private dining room at company
headquarters. The value of the meals Becky ate in the dining room this
year is estimated at $1,900.

Compute Becky's gross income from South Publishing Company for the
current year.

4
Question 4 — (6 points)
Answer 3 questions only from the following 5 questions

1. Will and Janine are divorced during the current year. Will is to have custody
of their two children and will receive their house as a part of the divorce
settlement. The house, which Will and Janine bought for $60,000 is worth
$100,000. Janine is to pay Will alimony of $900 per month. However, the
alimony payment is to be reduced by $200 per month as each child reaches
age 18 or if a child should die or marry before reaching age 18. Compute
Will's gross income from the alimony for the current year.
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2. Allison dies during the current year. She is covered by a $1000,000 life
insurance policy payable to her husband, Bob. Bob elects to receive the policy
proceeds in 10 annual installments of $120,000. Write 2 sentences to Bob
explaining the tax consequences of the receipt of each installment.
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3. What is a multiple support agreement? When is a multiple support

agreement necessary?

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4. What is the purpose of excluding municipal bond interest from gross
income?
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5. Jonas owns a building that he leases to Dipper, Inc., for $5,000 per month.
The owner of Dipper has been complaining about the condition of the
restrooms and has proposed making improvements that will cost $24,000.
Dipper's owner is willing to pay to have the improvements made if Jonas will
reduce the monthly rent on the building to $3,000 for one year. Write two
sentences to Jonas explaining the tax effects for Jonas of the proposal
by Dipper's owner.
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With Best Wishes,,,,,