Exam 3: Income Sources

Roberta invests $16,000 for a 10% interest in Bowie Partnership. In the first year of operations, Bowie reports net income from operations of $80,000 and distributes $6,000 cash to Roberta. How much gross income must Roberta recognize from her investment in Bowie?

Which of the following statements is/are correct? I.Maria receives a necklace worth $300 from her employer in recognition of her production unit's safety record at the company's annual meeting. Maria is not taxed on the $300. II.Reggie opens a savings account at Mid Financial Savings and Loan. For opening the account he receives a microwave worth $200. On December 31, his account is credited for $300 of interest income. Reggie must report $500 of income. III.Manu receives a salary of $80,000 as CEO of Camp's Cooking Crockery. Manu owns 60% of Camp's, which is organized as an S corporation. Camp's taxable income for the current year is $300,000 and Camp's pays $100,000 of dividends. Manu must recognize $360,000 of income. ​

The hybrid method of accounting provides that taxpayers will account for sales of merchandise and the related cost of goods sold on the accrual basis and all other items of income and expense on the cash basis.

Match each statement with the correct term below. -Imputed income

Ellie, age 12, earns wages of $4,300 from her modeling. Since the fees are collected by Ellie's father and used for Ellie's living expenses, her father intends to include it in his gross income. I.Ellie received no cash so does not have to report any income. II.The Assignment of Income Doctrine prohibits the father from recognizing the $4,300. III.Even if Ellie desired to gift the $4,300 to her father, Ellie must recognize the income she earned. ​

Twenty years ago Pricilla purchased an annuity costing $19,500 that will pay her $250 per month from age 65 until she dies. Polly is an employee of Evergreen Corporation. During her employment with Evergreen, Polly has paid a total of $20,000 into Evergreen's qualified employee pension plan. Under the plan, Polly is to receive $250 per year from age 65 until she dies. Pricilla and Polly turn 65 during the current year and retire. Each of them has a life expectancy of 12 years from the date of retirement. Discuss the differences in the treatment of the $250 payments each of them receives.

Lyle and Louise are retired living on income from their investments and Social Security benefits. During the current year, they receive the following: Lyle and Louise's adjusted gross income is: Cash dividends on stock investments \ 28,000 Interest on municipal bonds 5,000 Social Security benefits 18,000

Determine the amount of income that must be recognized by the taxpayer(s) in the current year for each of the following situations. Explain how you determined the amount that was taxable. a.Tien sells a parcel of land she held as an investment for $50,000. Tien purchased the land four years ago for $28,000. She spent $2,000 grading the land and $6,000 putting in utility lines. Tien receives $16,000 upon closing the sale. The remaining $40,000 is to be received in four annual payments of $10,000 over the next four years, with interest at 8% on the outstanding balance. b.Randy receives a $10,000, 6%, bond from his grandfather, Kenneth, for his birthday on September 30. Annual interest is paid on December 31. Randy receives the $600 payment on December 31. c.David is an employee of Fern Leaf Company. David is robbed and knocked unconscious while coming out of a basketball game on December 29. His $550 paycheck is available to be picked up at Fern Leaf on December 30, but David does not regain consciousness until January 3. He picks up the check and deposits it on January 8. d.Angie was shopping at a "flea market" when she saw a painting with a frame that appeared to be quite old. Although the painting was uninteresting, she paid the $35 asking price just to get the frame. When she returned home, she took the old painting out of the frame, intending to throw it away. However, she noticed what appeared to be another painting behind the one she bought. Curious, she took the painting to a friend who is a local art expert. The friend thought the second painting was a lost "Monet" and could be worth millions. Angie sends the painting to a museum in Boston, which confirms that the painting is indeed a lost "Monet." Similar paintings have been selling for $650,000 to $800,000, although the art market is in a down cycle. Angie decides to wait until the art market picks up a bit to sell the painting.

Anna receives a salary of $42,000 during the current year. She sells some land that she held as an investment at a loss of $7,000 and some stock at a gain of $11,000. Anna's adjusted gross income is:

Amanda, who is single, owns 40% of the Sherwood Partnership. During the current year, Sherwood has the following results: ? Sales \ 380,000 Long-term capital gain 20,000 Operating expenses 280,000 a.Amanda withdraws $15,000 from the partnership. In addition, Amanda has a $30,000 long-term capital loss from the sale of an investment. What is Amanda's gross income from this information? Explain and show your calculations. b.Assume that in the next year, Sherwood Publishing has $80,000 of ordinary income, Amanda has a $24,000 short-term capital gain and taxable income from other sources of $20,000. What is her adjusted gross income? Explain and show your calculations.

Roberto is a furniture salesman for Gerald's Furniture Mart. Roberto purchases a bedroom suite from Gerald's for $8,000. The sticker price is $11,000. Gerald's policy is to "discount" all customer purchases for up to $1,000 off of the sticker price for purchases over $10,000. What is the tax treatment of Roberto's furniture purchase? I.Roberto must include $3,000 in his gross income. II.Gerald's Furniture Mart can deduct $2,000 as compensation expense in addition to properly accounting for the sale of the furniture. III.Roberto does not need to account for the furniture purchase since it is for his personal use. IV.Roberto has imputed income because of the nature of the furniture purchase. ​

Penelope purchased an annuity contract that cost $45,000. The contract will pay Penelope $600 per month for 10 years after she reaches the age of 62. During the current year, Penelope turns 62 and receives 4 payments under the contract. The amount Penelope may exclude from taxable income as a return of capital on this years payments is:

Meredith, age 14, earns wages of $2,100 from her modeling. Since the funds are collected by Meredith's father and used for some of Meredith's living expenses, her father intends to include it in his gross income. I.The person that actually earns the income will recognize it, Meredith in this case. II.The Assignment of Income Doctrine prohibits the father from recognizing the $2,100. ​

For any unrecovered portion of an annuity investment, the taxpayer is allowed a deduction in the year of death.

Lidia, age 62, retires this year from her job as executive vice-president of Western Inc. She will receive a pension of $3,000 per month from Rollerderby's qualified pension plan. Lidia contributed $100,000 to the plan. Her contributions were never subject to tax. In addition, she will receive $1,600 per month from an annuity she purchased many years ago at a cost of $96,000. The pension and the annuity will be paid until she dies. At the date of her retirement, her life expectancy is 30 years. Which of the following statements regarding the taxability of the payments is/are correct? I.Under the capital recovery concept, Lidia will not have to recognize any income from the annuity payment until she has recovered her $96,000 investment. II.Lidia will not have to recognize as income the portion of each pension plan payment that is considered a return of her $100,000 contribution to the plan. III.Lidia will not have to recognize as income the portion of each annuity payment that is a return of her $96,000 investment. IV.Because none of the contributions were taxed, Lidia will be taxed on the entire $3,000 from the pension plan. ​

In what circumstances would some portion of the Social Security benefits received by a single taxpayer be subject to taxation? Assume that all sources of income are listed.

Under the deferral method of accounting for advance receipt of revenues, which of the following statements is/are correct? I.Receipts of service revenue colleted in advance are included in gross income in the current year to the extent they included in revenue for financial accounting purposes. II.Receipts of rents and interest collected in advance are included in gross income in the current year to the extent they are included in revenue for financial accounting purposes. ​

Willis is a cash basis taxpayer who is in the commercial lending business. Which of the following statements regarding loans that he made in the current year is/are correct? I.A $10,000 one-year loan with interest at 12% made on April 1. The principal and interest are due at maturity. Willis must recognize $900 of interest income this year. II.A $10,000 one-year loan discounted at 12% made on April 1. Willis gave the borrower $8,800. The borrower will repay the $10,000 principal at maturity. Willis does not have to recognize any interest income in the current year. III.A $50,000 two-year loan discounted at 10% made on July 1. Willis gave the borrower $41,300 on July 1. The borrower will repay the $50,000 principal at maturity. Willis does not have to recognize any interest income in the current year. IV.A $70,000 two-year loan with interest at 10% made on July 1. The interest payments on the loan are due annually on July 1 and the principal is due at maturity. Willis does not have to recognize any interest income in the current year. ​

Gary won the Nobel Prize in Economics. He receives $1.2 million from the Royal Academy of Sciences in Stockholm. Does he have taxable income from this award? I.If he keeps the prize money, he must include the award in his gross income. II.If he tells the Academy to contribute the award to a charitable organization, the amount of the award is excludable from gross income. ​

Which of the following interest-free loans is subject to the imputed interest rules (i.e., interest must be imputed on the loan)? I.Benito loans $250,000 to his son. His son uses the money to open a new business. During the current year, the business shows a loss and his son has no other sources of income. II.Bisbane Corporation loans $8,000 to its principal shareholder. The shareholder uses the funds to buy additional shares of stock in Arcane. The shareholder is deemed to receive $4,000 of dividends from Brisbane during the year. ​