Exam 3: Income Sources

The cash method of accounting for income tax purposes I.is allowed for interest received from Series EE savings bonds. II.requires a taxpayer who receives services from another taxpayer in exchange for property to include the value of the services in income. III.is allowed for taxpayers who receive interest income from the issuance of original issue discount securities with a term of more than one year. ​

Southview Construction Company enters into a contract to build a 30 mile cross country ski trail for $36,000 in the current year. Southview estimates the cost of building the trail to be $12,000. During the first year, Southview completes 10 miles of trail at a cost of $5,000. Southview receives $13,000 in advanced payments on the contract price in the first year. How much gross income must Southview recognize from the construction project in the first year?

Penny, age 45, purchased an annuity contract that cost $45,000. The contract will pay Penny $600 per month for 10 years after she reaches age 62. During the current year, Penny turns 62 and receives 4 payments under the contract. Penny's taxable income from the annuity payments is:

Elizabeth sells a painting that has a fair market value of $9,000 to Jonathan for $6,000. Which of the following statements about the tax effect of the sale is/are correct? I.If Elizabeth is an art dealer and she sold the painting to Jonathan because she needed cash quickly, Jonathan does not recognize any income from the sale. II.If Jonathan owns 60% of Elizabeth's company, Jonathan does not recognize any income from the sale. ​

Ron won a $25,000 award for his research in microbiology and he immediately transferred the prize to his brother who does similar research. The income is excluded from Ron's taxable income.

Boomtown Construction, Inc. enters into a contract to build a new football stadium for the Maine Lobster's football team. The contract price is $60,000,000 and Boomtown estimates the total cost of the contract to be $50,000,000. During the first year of work on the contract, Boomtown completes 40% of the work on the stadium at a cost of $20,000,000. Boomtown receives $10,000,000 when it signed the contract and an additional $18,000,000 payment in the first year based on the degree of completion. Which of the following statements concerning the income to be recognized from the contract is/are correct? I.Boomtown must include the $28,000,000 payment it received in gross income. II.Because the work is not yet completed, Boomtown has the option of not recognizing any income from the contract. III.Boomtown includes the $18,000,000 payment in gross income based on the degree of completion because it does not have a claim of right to the $10,000,000. IV.Boomtown must include $24,000,000 in gross income. ​

Marta finds a chest inscribed "Jack Sparrow" that contains $750,000 of cash while diving among the coral reefs off Key West, Florida. The US Customs and the DEA denied knowledge of the cash, so Marta keeps it. I.Recognition will not occur because the windfall would not be considered as "derived from capital or from labor." II.The All-inclusive Income Concept explains the recognition of the cash as income. ​

Darnel owns 10% of the stock in Allison Company. During the current year, Allison has operating income of $200,000 and distributes $80,000 to its owners. I.If Allison is a corporation, Darnel has $8,000 of income from Allison. II.If Allison is a partnership, Darnel has $20,000 of income from Allison. ​

Income realization may occur as a result of I.Relief from a liability. II.Exchange of property. III.Payment of the taxpayer's indebtedness by another. IV.A barter transaction where only goods and services are exchanged. ​

Match each statement with the correct term below. -Annuity

Alexis Corporation allows an employee, Cynthia, to use a company car for her vacation to San Diego. I.Cynthia will not need to recognize the value of the use of the car since it was not cash. II.A "cash equivalent approach" is used to measure the amount of income that must be recognized by Cynthia. ​

Alan has the following capital gains and losses during the current year: Alan's capital gain/loss position for the year is: $\begin{array}{lc}\text { Short-term capital loss } & \$(4,000) \\\text { Collectibles gain } & 3,000 \\\text { Long-term capital gain } & 8,000\end{array}$

Which of the following constitutes a realization? I.Frank's lakeside cottage is damaged in a violent storm. The cost of repairs totaled $4,000. However, the insurance company gives Frank only $2,500 for the repairs. II.McDonald's cow gives birth. The calf will become a member of McDonald's feeder cattle herd. ​

Donna owns a cleaning service. Reed, a customer, receives Donna's bill for October 2018 services of $65 on October 31, 2018. Reed pays the $65 on January 4, 2019. I.If Donna is a cash-basis taxpayer, she recognizes the income in 2019. II.If Donna is an accrual-basis taxpayer, she will recognize the $65 in 2018. III.Donna will recognize the $65 in 2018 regardless of accounting method, because that is when she earned the income. ​

The accrual method I.is permitted for the advance receipt of rent income. II.is never permitted under the deferral method. III.is permitted for the advance receipt of payments for goods to be delivered within the next tax year if the payment is less than the cost of goods sold and the payment is deferred for financial accounting purposes. IV.is permitted for the advance receipt of interest income. ​

Al and Peggy divorce in 2018. As part of their 2018 divorce agreement, Peggy is to pay Al $70,000 for his share of their home (the home's fair market value is $140,000). Also, Peggy agrees to pay Al $1,000 monthly. The payment represents the financial support for their 15-year-old son, Bud. It will cease upon Bud's 23^rd birthday or college graduation-whichever comes first. Which of the following explain(s) the tax effects of these events? I.Peggy can deduct $12,000 annually for the monthly payments made this year. II.Al does not recognize the $1,000 monthly payments as income. ​

Ona is a retired schoolteacher who receives a pension of $800 per month (Ona made no payments into the pension plan) and $2,000 of Social Security benefits per month. Ona's adjusted gross income is:

Explain why the taxpayer in each of the following situations either does or does not have taxable income and determine the amount, if any, that the taxpayer would have to recognize. a.On December 1, 2018, Tomlin, a cash basis taxpayer, bills a customer $5,000 for services rendered throughout 2018. The customer comes to Tomlin's office on December 30, 2018, and offers to pay him the $5,000 amount owed. Tomlin suggests that the customer mail the check to him so he could see how quickly the post office could get the check to him through the mail. The post office delivers the check to Tomlin on January 10, 2019. Tomlin promptly deposits the check in the bank. b.Patty, age 65, will retire this year. Twenty years ago she purchased a retirement annuity contract at a cost of $6,000. Under the terms of the contract, Patty is to receive $150 per month for 10 years after reaching age 65. During the current year, Patty receives $1,200 (8 payments). c.Bud is an accountant for Big Oil Company. In his spare time, Bud collects unique beer cans and bottles. During a party at his house, one of his friends tells him that his can of Billy Beer is a hot item in the professional collector's market. Bud investigates and instead of selling the Billy Beer, he trades the can of Billy Beer for a bottle of Leinenkugles beer. d.Rosemary is awarded the "Outstanding Teaching Award" at DePauw University. She receives a plaque and $3,500. She assigns the $3,500 to DePauw to establish a scholarship for economics majors.?

Hector and Nicole are retired. During the current year, they receive $11,000 from a qualified pension plan, $3,000 of dividends on common stock holdings, $6,000 of tax-exempt interest, and $10,000 of Social Security benefits. Hector and Nicole's adjusted gross income is:

Marvin and Stacy are retired. During the current year, they receive $10,000 in Social Security benefits. They have $45,000 of other taxable gross income and receive $23,000 of municipal bond interest. The taxable portion of the $10,000 Social Security payment is: