Paula Owns Four Separate Activities

question 33

Multiple Choice

Paula owns four separate activities. She elects not to group them together as a single activity under the "appropriate economic unit" standard. Paula participates for 130 hours in Activity A, 115 hours in Activity B, 260 hours in Activity C, and 100 hours in Activity D. She has one employee, who works 125 hours in Activity D. Which of the following statements is correct?

• A) Activities A, B, C, and D are all significant participation activities.
• B) Paula is a material participant with respect to Activities A, B, C, and D.
• C) Paula is not a material participant with respect to Activities A, B, C, and D.
• D) Losses from all of the activities can be used to offset Paula's active income.
• E) None of the above.

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Definitions:

Effective-Interest Method

A method of calculating the amortized cost of a bond and the amount of interest expense over its relevant period.

Amortization

The process of spreading out the cost of an intangible asset over its useful life or the repayment of loan principal over time.

Interest Expense

The cost incurred by an entity for borrowed funds over a period, reflected in its income statement.

Contractual Interest Rate

The agreed-upon rate of interest to be paid on loans or bonds, specified within a contract.