Exam 4: Gross Income Concepts and Inclusions

The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased.

Teal company is an accrual basis taxpayer.On December 1,2016,a customer paid for an item that was on hand,but the customer wanted the item delivered in early January 2017.Teal delivered the item on January 4,2017.Teal included the sale in its 2016 income for financial accounting purposes.

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

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?

The alimony rules:

The financial accounting principle of conservatism is not well-suited to the task of measuring taxable income.

George and Erin are divorced,and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is required to include the alimony payments in gross income although George earned the income.

José,a cash method taxpayer,is a partner in J&T Accounting Services,a calendar year partnership.Under the partnership agreement,José is to receive 20% of the partnership's profits or losses.Each partner is allowed to withdraw $10,000 each month for his or her living expenses.José withdrew $120,000 during the year as his monthly draw in 2016.However,in December the partnership was short on cash and José was required to invest an additional $10,000 in the partnership.In March 2016,José received $40,000 as his share of distributed 2015 profits.The partnership earnings before partners' withdrawals for 2016 totaled $1 million.Compute José's gross income from the partnership for 2016.

The Green Company,an accrual basis taxpayer,provides business-consulting services.Clients generally pay a retainer at the beginning of a 12-month period.This entitles the client to no more than 40 hours of services.Once the client has received 40 hours of services,Green charges $500 per hour.Green Company allocates the retainer to income based on the number of hours worked on the contract.At the end of the tax year,the company had $50,000 of unearned revenues from these contracts.The company also had $10,000 in unearned rent income received from excess office space leased to other companies.Based on the above,Green must include in gross income for the current year:

In 2006,Terry purchased land for $150,000.In 2016,Terry received $10,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terry's property.Terry is not required to recognize income from receiving the $10,000 because it was a return of his capital invested in the land.

Ted was shopping for a new automobile.He found one that met his needs and agreed to purchase it for $23,000.He had shopped around and concluded that he could not get a better price from another dealer.After he had paid for the automobile,the dealer called to notify Ted that he was entitled to a manufacturer's rebate of $1,500.The next week he received a $1,500 check from the manufacturer.How much should Ted include in gross income?

Under the terms of a divorce agreement,Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support.For a twelve-month period,Lanny can deduct from gross income (and Joyce must include in gross income):

A sole proprietorship purchased an asset for $1,000 in 2016 and its value was $1,500 at the end of 2016.In 2017,the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2017 but an economic loss of $100 in 2017.

Dick and Jane are divorced in 2015.At the time of the divorce,Dick had a lawsuit pending.He had filed suit against a former employer for overtime pay.As part of a divorce agreement,Dick agreed to pay Jane one-half of the proceeds from the lawsuit.In 2016,Dick collected $250,000 from the former employer and paid Jane $125,000.What are the tax consequences for Dick receiving the $250,000 and then paying Jane the $125,000?

Fred is a full-time teacher.He has written a book and receives royalties from it.Fred's mother,Mabel,is age 65 and lives on her Social Security benefits and gifts from her son,Fred.This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support.Fred must include the amount of the royalty check in his gross income.

Jerry purchased a U.S.Series EE savings bond for $744.The bond has a maturity value in 10 years of $1,000 and yields 3% interest.This is the first Series EE bond that Jerry has ever owned.

Which of the following is not a requirement for an alimony deduction?

The amount of Social Security benefits received by an individual that he or she must include in gross income:

Melissa is a compulsive coupon clipper.She often brags about the time she purchased a cart full of groceries for $5.00,when the cost without coupons would have been $50.Discuss whether Melissa realizes gross income from her coupon clipping.

Jake is the sole shareholder of an S corporation that earned $60,000 in 2016.The corporation was short on cash and therefore distributed only $15,000 to Jake in 2016.Jake is required to recognize $60,000 of income from the S corporation in 2016.