Exam 4: Gross Income: Concepts and Inclusions

A sole proprietorship purchased an asset for $1,000 in 2015 and its value was $1,500 at the end of 2015.In 2016,the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2016 but an economic loss of $100 in 2016.

If the alimony recapture rules apply,the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.

Betty purchased an annuity for $24,000 in 2015.Under the contract,Betty will receive $300 each month for the rest of her life.According to the actuarial estimates,Betty will live to receive 96 payments and will receive a 3% return on her original investment.

Jake is the sole shareholder of an S corporation that earned $60,000 in 2015.The corporation was short on cash and therefore distributed only $15,000 to Jake in 2015.Jake is required to recognize $60,000 of income from the S corporation in 2015.

Nicholas owned stock that decreased in value by $20,000 during the year,but he did not sell the stock.He earned $45,000 salary,but received only $34,000 because $11,000 in taxes were withheld.Nicholas saved $10,000 of his salary and used the remainder for personal living expenses.Nicholas's economic income for the year exceeded his gross income for tax purposes.

For purposes of determining gross income,which of the following is true?

If the employer provides all employees with group term life insurance equal to twice the employee's annual salary,an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.

Daniel purchased a bond on July 1,2015,at par of $10,000 plus accrued interest of $300.On December 31,2015,Daniel collected the $600 interest for the year.On January 1,2016,Daniel sold the bond for $10,200.

In January 2015,Tammy purchased a bond due in 24 months.The cost of the bond is $857 and its maturity value is $1,000.No interest is paid each year,but the compound interest rate on the bond is 8%.Tammy also purchased a Series EE United States Government bond for $558,with a maturity value in 10 years of $1,000.This is the only Series EE bond she has ever owned.The Series EE bond is sold to yield 6% interest.Tammy is 13 years old and has no other source of income.She is claimed as a dependent by her parents.Compute Tammy's gross income from the bond and Series EE bond for 2015.

Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest and $20,000 of Social Security benefits.Debbie's adjusted gross income for the year is:

Teal company is an accrual basis taxpayer.On December 1,2015,a customer paid for an item that was on hand,but the customer wanted the item delivered in early January 2016.Teal delivered the item on January 4,2016.Teal included the sale in its 2015 income for financial accounting purposes.

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

Orange Cable TV Company,an accrual basis taxpayer,allows its customers to pay by the year in advance ($500 per year),or two years in advance ($950).In September 2015,the company collected the following amounts applicable to future services: October 2015-September 2017 services (two-year contracts) $144,000 October 2015-September 2016 services (one-year contracts) 128,000 Total $272,000 As a result of the above,Orange Cable should report as gross income:

The constructive receipt doctrine requires that income must be recognized when it is made available to the cash basis taxpayer,although it has not been actually received.The constructive receipt doctrine does not apply to accrual basis taxpayers.

On January 5,2015,Tim purchased a bond paying interest at 6% for $30,000.On March 31,2015,he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2015:

Rhonda has a 30% interest in the capital and profits of the ABC Partnership.In the first year of the partnership,2015,it earned $150,000.However,the partners agreed that nothing would be distributed until after the end of March 2016,before Rhonda filed her 2015 tax return.The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2016.Things were going well in 2016 and therefore the partnership distributed $30,000 to Rhonda at the end of March,as a portion of her share of the partnership's 2015 earnings.The partnership's income for 2016 was $60,000.As a result,Rhonda must recognize $30,000 of gross income in 2015 and $18,000 in 2016.

The taxable portion of Social Security benefits may be affected by:

Determine the proper tax year for gross income inclusion in each of the following cases. a. An automobile dealer has several new cars in inventory,but often does not have the right combination of body style,color,and accessories.In some cases the dealer makes an offer to sell a car at a certain price,accepts a deposit,and then orders the car from the manufacturer.When the car is received from the manufacturer,the sale is closed,and the dealer receives the balance of the sales price.At the end of the current year,the dealer has deposits totaling $8,200 for cars that have not been received from the manufacturer.When is the $8,200 subject to tax? b. Purple Corporation,an exterminating company,is a calendar year taxpayer.It contracts to provide service to homeowners once a month under a one-,two-,or three-year contract.On April 1 of the current year,the company sold a customer a one-year contract for $120.How much of the $120 is taxable in the current year if the company is an accrual basis taxpayer.If the $120 is payment on a two-year contract,how much is taxed in the year the contract is sold and in the following year? If the $120 is payment on a three-year contract,how much is taxed in the year the contract is sold and in the following year? c. Pink,Inc. ,an accrual basis taxpayer,owns an amusement park whose fiscal year ends September 30.To increase business during the fall and winter months,Pink sold passes that would allow the holder to ride "free" during the months of October through March.During the month of September,$6,000 was collected from the sale of passes for the upcoming fall and winter.When will the $6,000 be taxable to Pink? d. The taxpayer is in the office equipment rental business and uses the accrual basis of accounting.In December he collected $5,000 in rents for the following January.When is the $5,000 taxable?

Jim and Nora,residents of a community property state,were married in early 2014.Late in 2014 they separated,and in 2015 they were divorced.Each earned a salary,and they received income from community owned investments in all relevant years.They filed separate returns in 2014 and 2015.

After the divorce,Jeff was required to pay $18,000 per year to his former spouse,Darlene,who had custody of their child.Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21.During the year,Jeff paid the $18,000 required under the divorce agreement.Darlene must include the $12,000 in gross income.