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Exam 4: Gross Income: Concepts and Inclusions

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Question 21

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Daniel purchased a bond on July 1,2017,at par of $10,000 plus accrued interest of $300.On December 31,2017,Daniel collected the $600 interest for the year.On January 1,2018,Daniel sold the bond for $10,200.

A) Daniel must recognize $300 interest income for 2017 and a $200 gain on the sale of the bond in 2018.
B) Daniel must recognize $600 interest income for 2017 and a $200 gain on the sale of the bond in 2018.
C) Daniel must recognize $600 interest income for 2017 and a $100 loss on the sale of the bond in 2018.
D) Daniel must recognize $300 interest income for 2017 and a $100 loss on the sale of the bond in 2018.
E) None of these.

F) C) and D)
G) A) and D)

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Question 22

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Maroon Corporation expects the employees' income tax rates to increase next year.The employees use the cash method.The company presently pays on the last day of each month.The company is considering changing its policy so that the December salaries will be paid on the first day of the following year.What would be the effect on an employee of the proposed change in company policy for paying its salaries beginning December 2017?

A) The employee would be required to recognize the income in December 2017 because it is constructively received at the end of the month.
B) The employee would be required to recognize the income in December 2017 because the employee has a claim of right to the income when it is earned.
C) The employee will not be required to recognize the income until it is received, in 2018.
D) The employee can elect to either include the pay in 2017 or 2018.
E) None of these.

F) A) and B)
G) C) and D)

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Question 23

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At the beginning of 2017,Mary purchased a 3-year certificate of deposit (CD) for $8,760.The maturity value of the certificate was $10,000 and it was to yield 4.5%.She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000.Mary must recognize $1,240 of income from the certificate of deposit in 2017,and $3,600 from the Series EE bonds in 2026.

Barney painted his house which saved him $3,000.According to the realization requirement,Barney must recognize $3,000 of income.

April,a calendar year taxpayer,is a 40% partner in Pale Partnership,whose fiscal year ends on September 30th.For the fiscal year ending September 30,2017,the partnership had $400,000 net income and for fiscal year ending September 30,2018,the partnership had $300,000 net income.April withdrew $100,000 in December of each year.April's gross income from the partnership for 2017 is $160,000 ($400,000 × 40%).

On January 1,2017,Faye gave Todd,her son,a 36-month certificate of deposit she purchased December 31,2015,for $8,638.Faye gave Todd 1,000 shares of ABC,Inc.,on December 2,2017.The certificate had a maturity value of $10,000 and the yield to maturity was 5%.On November 30,2017,ABC,Inc.,had declared a dividend of $1.00 payable to stockholders of record on December 5th.How much interest and dividends should Todd include in his gross income for 2017?

Gordon,an employee,is provided group term life insurance coverage equal to twice his annual salary of $125,000 per year.According to the IRS Uniform Premium Table (based on Gordon's age) ,the amount is $12 per year for $1,000 of protection.The cost of an individual policy would be $15 per year for $1,000 of protection.Since Gordon paid nothing towards the cost of the $250,000 protection,Gordon must include in his 2017 gross income which of the following amounts?

If a lottery prize winner transfers the prize to a qualified government unit or nonprofit organization,then the prize is excluded from the winner's gross income if the amount of the prize does not exceed 30% of the winner's AGI.

Jake is the sole shareholder of an S corporation that earned $60,000 in 2017.The corporation was short on cash and therefore distributed only $15,000 to Jake in 2017.Jake is required to recognize $60,000 of income from the S corporation in 2017.

Turner,Inc.,provides group term life insurance to the officers of the corporation only.Janet,a vice-president,received $450,000 of coverage for the year at a cost to Turner,Inc.of $5,600.The Uniform Premiums (based on Janet's age) are $15 a year for $1,000 protection.How much of this must Janet include in gross income this year?

In all community property states,the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.

The Maroon & Orange Gym,Inc.,uses the accrual method of accounting.The corporation sells memberships that entitle the member to use the facilities at any time.A one-year membership costs $480 ($480/12 = $40 per month) ; a two-year membership costs $720 ($720/24 = $30 per month) .Cash payment is required at the beginning of the membership period.On July 1,2017,the company sold a one-year membership and a two-year membership.The company should report as gross income from the two contracts:

Sharon made a $60,000 interest-free loan to her son,Todd,who used the money to start a new business.Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account.The relevant Federal interest rate was 5%.Based on the above information:

When a business is operated as an S corporation,a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

Ted and Alice were in the process of negotiating a divorce agreement.They own bonds with a basis of $800,000 and a fair market value of $800,000.They also own common stock with a basis of $600,000 and a fair market value of $800,000.Alice is trying to decide whether to bargain to receive the bonds or the stock.She has no plans for selling the bonds or stock,whichever she receives. a. Which would you advise Alice to receive? b. From Ted's perspective, are the assets of equal value?

The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.

Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement,Emily paid Jacob cash for his interest in the personal residence.This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.

With respect to income from services,which of the following is true?

Samantha and her son,Brent,are cash basis taxpayers.Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000.On the date of the gift,March 31,2017,the accrued interest on the bond was $100.On December 31,2017,Brent collected $400 interest on the bond.Brent must include in gross income the $300 interest earned after the date of the gift.

How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?