Kenneth Lived in His Home for the Entire Year Except

question 54

Multiple Choice

Kenneth lived in his home for the entire year except for when he rented his home (near a very nice ski resort) to a married couple for 14 days in December. The couple paid Kenneth $14,000 in rent for the two weeks. Kenneth incurred $1,000 in direct expenses relating to the home for the 14 days. Which of the following statements accurately describes the manner in which Kenneth should report his rental receipts and expenses for tax purposes?

• A)Kenneth would include the rental receipts in gross income and deduct the rental expenses for AGI.
• B)Kenneth would exclude the rental receipts from gross income and deduct the rental expenses for AGI.
• C)Kenneth would include the rental receipts in gross income and would not deduct the rental expenses because he used the residence for personal purposes for most of the year.
• D)Kenneth would exclude the rental receipts, and he would not deduct the rental expenses.

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Definitions:

Absorption Costing

A calculation method in accounting that compiles all production-related costs, namely direct materials, direct labor, and every overhead cost (both variable and fixed), into the product's pricing.

Variable Costing

An accounting method that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in the cost of goods sold and treats fixed manufacturing overhead as an expense of the period.

Unit Product Cost

The total cost (both variable and fixed) associated with producing a unit of product, including materials, labor, and overhead.

Variable Costing

Accounting method that considers only variable costs (costs that change with production volume) in the calculation of product cost, excluding fixed costs.