51. LO.3 During the year (not a leap year), Anna rented her vacation home for 30 days, used it personally for 20 days, and left it vacant for 315 days. She had the following income and expenses:
Rent income $ 7,000
Expenses
Real estate taxes 2,500
Interest on mortgage 9,000
Utilities 2,400
Repairs 1,000
Roof replacement (a capital expenditure) 12,000
Depreciation 7,500
a. Compute Anna’s net rent income or loss and the amounts she can itemize on her tax return, using the court’s approach to allocating property taxes and interest.
b. How would your answer in part (a) differ using the IRS’s method of allocating property taxes and interest?

52. LO.3 How would your answer to Problem 51 differ if Anna had rented the house for 87 days and had used it personally for 13 days?

53. LO.1, 3 Chee, single, age 40, had the following income and expenses during the year (not a leap year):

Income
Salary $43,000
Rental of vacation home (rented 60 days, used personally 60 days, vacant 245 days) 4,000
Municipal bond interest 2,000
Dividend from General Electric 400
Expenses
Interest on home mortgage 8,400
Interest on vacation home 4,758
Interest on loan used to buy municipal bonds 3,100
Property tax on home 2,200
Property tax on vacation home 1,098
State income tax 3,300
State sales tax 900
Charitable contributions 1,100
Tax return preparation fee 300
Utilities and maintenance on vacation home 2,600
Depreciation on rental 50% of vacation home 3,500
Calculate Chee’s taxable income for the year before personal exemptions.

54. LO.1, 3, 4 Elisa and Clyde operate a retail sports memorabilia shop. For the current year, sales revenue is $55,000 and expenses are as follows:
Cost of goods sold $21,000
Advertising 1,000
Utilities 2,000
Rent 4,500
Insurance 1,500
Wages to Boyd 8,000
Elisa and Clyde pay $8,000 in wages to Boyd, a part-time employee. Because this amount is $1,000 below the minimum wage, Boyd threatens to file a complaint with the appropriate
Federal agency. Although Elisa and Clyde pay no attention to Boyd’s threat, Chelsie (Elisa’s mother) gives Boyd a check for $1,000 for the disputed wages. Both Elisa and
Clyde ridicule Chelsie for wasting money when they learn what she has done. The retail shop is the only source of income for Elisa and Clyde.
a. Calculate Elisa and Clyde’s AGI.
b. Can Chelsie deduct the $1,000 payment on her tax return? Explain.
c. How could the tax position of the parties be improved?

55. LO.3, 4 Jay’s sole proprietorship has the following assets:
Basis Fair Market Value
Cash $ 10,000 $ 10,000
Accounts receivable 18,000 18,000
Inventory 25,000 30,000
Patent 22,000 40,000
Land 50,000 75,000 $125,000 $173,000
The building in which Jay’s business is located is leased. The lease expires at the end of the year.
Jay is 70 years old and would like to retire. He expects to be in the 35% tax bracket.
Jay is negotiating the sale of the business with Lois, a key employee. They have agreed on the fair market value of the assets, as indicated previously, and agree that the total purchase price should be about $200,000.
a. Advise Jay regarding how the sale should be structured.
b. Advise Lois regarding how the purchase should be structured.
c. What might they do to achieve an acceptable compromise?