Question

Course- Introduction to taxation

1. One of the two permitted methods for valuing closing inventory is to value each item at the lower of cost or market value.

True or False

2. A business suffered fire damage to its equipment. Repairs cost $10,000 and the business received insurance proceeds of $7,000. The $7,000 insurance proceeds would…

Multiple Choice

• Be included in income thereby offsetting part of the $10,000 repair expense.

• Be a tax-free receipt as it is not related to the business operations.

• Reduce the balance in the related depreciable property account by $7,000.

• Be treated as a capital gain, one-half of which would be included in income.

3. If a source of income is not taxable, the expenses related to that income are not tax deductible.

True or False

Answer 1

1. True

Closing Inventory is based on its cost or market value, whichever is lower is considered. It is done because of a Principle of Conservatism.

2. Be included in income thereby offsetting part of the $10,000 repair expense.

it is related to the business operation so we will include it in income to offset the repair cost. So, the actual loss would be $3,000 after getting the insurance claim.

3. True

If a source of income is not taxable, the expenses related to that income are not tax deductible. Only those expenses are tax deductible whose source of income is related to the taxable.