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Rent and Security Deposits 4-25 Billy Dent, as the owner of an apartment building, receives and makes the following payments during 2012: Received in January 2012 rent that was $5,000 due in December 2011 Received in December 2012 rent not 4,000 due until January 2013 Security deposit which is to be 500 refunded when tenant vacates the apartment How much rental income must Billy Dent include on his 2012 income tax return? Divorce Payments 4-32. Arnold and Barbara Cane were divorced in June 2012. Pursuant to the divorce decree, Arnold is obliged to perform as follows: a. Transfer title of their personal home to Barbara. They purchased the house in 1998 and their basis today is $400,000. The fair market value of the house is $500,000. The house is subject to a 25-year, $250,000 mortgage. b. Arnold is to continue making payments on the house until it is fully paid off. In 2012, Arnold made payments totaling $18,000. c. Arnold is to make $3,000 per month payments to Barbara. Of this amount one-half is for child support. The divorce decree further states that alimony is to cease upon the death of the wife. In 2012, he made six payments. How do the transactions in the divorce agreement affect Arnold’s and Barbara’s taxable income? Investment Income 5-26. A. Fluent, an investor in stocks and bonds, wanted to increase his portfolio but wanted to minimize his tax liability on the income from the bonds. He is presented with the following alternative investments: U.S. Series EE bonds, bonds for industrial development for mass transit, and qualified veterans’ mortgage bonds. Which should he choose for his investment? Why? Trade or Business Deductions 6-29. Which of the following trade or business expenditures of Ajax Inc. are deductible on its current year tax return? If an expenditure is not deductible, explain why it is not a valid deduction. Expenditure Amount Salaries and wages to employees $400,000 Purchase of new office building 250,000 Payment of illegal parking fines of 1,400 President Payment of wedding expenses for 1,600 President’s daughter’s wedding Entertainment expenses related to 25,000 company business Interest on money borrowed to buy 9,000 tax-exempt securities Total expenditures $700,400 Salaries and Wages Deductions 6-34. For the current month, Jackson Cement Co. incurred payroll expenses as follows: Gross salaries and Wages $675,000 Payroll taxes: OASDI (Social Security Tax) employer’s share HI (Medicare tax)-employer’s share 9,788 726,638 Amounts withheld and paid to the government: Employee income taxes withheld (108,990) OASDI Employees’ share (41,850) HI-employees’ share (9,788) a. What amount can Jackson claim as a tax deduction for salary and wage expense? b. How much can Jackson deduct as tax expense?

Rent and Security Deposits 4-25

Billy Dent, as the owner of an apartment building, receives and makes the following payments during 2012:

Received in January 2012 rent that was $5,000

due in December 2011

Received in December 2012 rent not 4,000

due until January 2013

Security deposit which is to be 500

refunded when tenant vacates the

apartment

How much rental income must Billy Dent include on his 2012 income tax return?

Divorce Payments 4-32.

Arnold and Barbara Cane were divorced in June 2012. Pursuant to the divorce decree, Arnold is obliged to perform as follows:

a. Transfer title of their personal home to Barbara. They purchased the house in 1998 and their basis today is $400,000. The fair market value of the house is $500,000. The house is subject to a 25-year, $250,000 mortgage.

b. Arnold is to continue making payments on the house until it is fully paid off. In 2012, Arnold made payments totaling $18,000.

c. Arnold is to make $3,000 per month payments to Barbara. Of this amount one-half is for child support. The divorce decree further states that alimony is to cease upon the death of the wife. In 2012, he made six payments.

How do the transactions in the divorce agreement affect Arnold’s and Barbara’s taxable income?

Investment Income 5-26.

A. Fluent, an investor in stocks and bonds, wanted to increase his portfolio but wanted to minimize his tax liability on the income from the bonds. He is presented with the following alternative investments: U.S. Series EE bonds, bonds for industrial development for mass transit, and qualified veterans’ mortgage bonds. Which should he choose for his investment? Why?

Trade or Business Deductions 6-29.

Which of the following trade or business expenditures of Ajax Inc. are deductible on its current year tax return? If an expenditure is not deductible, explain why it is not a valid deduction.

Expenditure Amount
Salaries and wages to employees $400,000
Purchase of new office building 250,000
Payment of illegal parking fines of 1,400
President
Payment of wedding expenses for 1,600
President’s daughter’s wedding
Entertainment expenses related to 25,000
company business
Interest on money borrowed to buy 9,000
tax-exempt securities
Total expenditures $700,400

Salaries and Wages Deductions 6-34.

For the current month, Jackson Cement Co. incurred payroll expenses as follows:

Gross salaries and Wages $675,000
Payroll taxes:
OASDI (Social Security Tax)
employer’s share
HI (Medicare tax)-employer’s share 9,788
726,638
Amounts withheld and paid to the government:
Employee income taxes withheld (108,990)
OASDI Employees’ share (41,850)
HI-employees’ share (9,788)

a. What amount can Jackson claim as a tax deduction for salary and wage expense?

b. How much can Jackson deduct as tax expense?

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