Exam 2: Income Tax Concepts

On March 3, 2015, Craig bought a business-use vehicle for $20,000. He used the vehicle for three years and properly deducted a total of $12,000 as depreciation expense during this period. At the end of 2018, Craig sells the vehicle for $7,500. Why is Craig's deductible loss $500? I.Craig has already recovered $12,000 of his investment through the depreciation deduction. II.The adjusted basis of the vehicle was $12,000 at the date of sale. III.$7,500 of the adjusted basis was recovered because of the sale. IV.The realized loss is recognized because it was incurred with business-use property. ​

Explain why the taxpayer in each of the following situations either does or does not have a Claim of Right to the income received. a.Thomas works as a purchasing agent for Local City Government. During the current year, he takes a $5,000 kickback from a supplier seeking a lucrative contract with Local City. The kickback is illegal under State law and will have to be repaid to Local City if it is ever discovered. b.Bernice is an agent for Drew, quarterback of the LA Tigers. During the current year, Bernice negotiates a new contract for Drew that includes a $5,000,000 signing bonus. Bernice receives the signing bonus from the Tigers and places it in her business account. As per her contract agreement with Drew, Bernice writes a check for $600,000 to Drew's mother, gives Drew a check for $3,900,000 and retains the remaining $500,000 as her standard 10% fee. c.Karl, an attorney, is hired by Dominic Manufacturing Company to represent it in a lawsuit. Because the lawsuit will likely drag out for a number of years, Karl requests that Dominic Manufacturing pay him a retainer representing two years of services. Dominic Manufacturing agrees to pay the $150,000 retainer; however, Dominic insists that Karl agree to refund, pro-rata, any of the retainer fee not yet earned should Dominic decide to terminate their relationship.

On December 20, 2018, Thomas, the CEO of Lifetime Corporation issues a $10,000 bonus check to Ana Maria. Thomas asks Ana Maria to hold the check until at least January 4, 2019, when there will be enough deposits to cover the check. Ana Maria is not required to recognize the $10,000 in 2018 because of which of the following?

For each tax treatment described below, indicate which tax concept(s) that is (are) responsible for the treatment. a.Kimberly, an accrual basis taxpayer, validly took a bad debt deduction of $850 in 2017 for an account receivable due from Cathy. In 2018, Cathy sent Kimberly a check for $500. Kimberly must include the $500 in her 2018 taxable income. b.Randall, a cash basis taxpayer, receives $1,400 from Craig in December 2018. The $1,800 was for payment of the first and last month's rent ($700 per month) and a $400 cleaning deposit on a building Craig rented from Randall. Randall includes $1,400 in his 2018 taxable income. c.Matt pays $14,000 rent on the office he uses in his computing firm. Matt is allowed to deduct the $14,000 on his tax return. d.Samantha sells stock for $9,000 that she purchased two years earlier for $8,000. Samantha must report a capital gain of $1,000 on the sale. e.Rosanne sells jewelry and some old clothes during the year. The jewelry cost $750 and is sold for $800. The clothes cost $500 and are sold for $150. Rosanne must include the $50 gain on the sale of her jewelry in her taxable income, but is not allowed to deduct the loss.?

Marianne's uncle Mike gives her $20,000 of 8% bonds on July 1st of the current year. The bonds pay interest on June 30 and December 31. I.Marianne has $20,000 of income from the receipt of the bonds. II.Marianne has $1,600 of interest income from the bonds in the year of the gift. III.Marianne has $800 of interest income from the bonds in the year of the gift. IV.Mike has $800 of interest income from the bonds in the year of the gift. ​

Beth is an accrual basis taxpayer. A renter pays Beth the January 2019 rent in December 2018. What are the tax effects of this transaction? I.Beth will recognize rent income in 2018. II.The wherewithal-to-pay concept requires Beth to recognize the income in 2018. ​

According to the entity concept I.each unit must keep separate records. II.each unit reports the results of operations separate and apart from owners. III.every unit is liable for tax on its income. IV.each unit is classified as one of two basic entity types. ​

Match each statement with the correct term below. -Constructive Receipt Doctrine

Ronald is a consultant for Economic Forecasters, Inc. In an effort to minimize his tax liability he enters into a legal contract transferring 25% of the fees from a new consulting contract to his son Ken, who is 42, and owns a pest control business. Which of the following statements concerning the transaction is correct? I.The assignment-of-income doctrine does not apply if Ken and Ronald are in the same marginal tax bracket. II.The assignment-of- income doctrine does not apply if Ronald's son is under age 14. ​

Match each statement with the correct term below. -Related party

Rodrigo has $5,000 of state income taxes withheld from his salary during 2017. On his 2017 income tax return, Rodrigo properly deducts the $5,000 as state taxes paid. Upon filing his 2017 state tax return on April 15, 2018, he determines that his actual State income tax for 2017 is only $4,100. He receives a $900 refund on May 25, 2018 from the amounts withheld by the state. What concept(s), construct(s), or doctrine(s) dictate that the $900 is included in Rodrigo's 2018 income? I.Annual Accounting Period Concept. II.Tax Benefit Rule. ​

Monterey Developers purchases 10 acres of land for $15,000 on January 14, 2018. They also pay $2,000 in legal and other fees related to the purchase. Monterey spends $3,000 for legal fees, permit licenses, and city franchise fees to subdivide the land into 10 one-acre plots. Sewer and utility line easements cost an additional $5,000. Interest paid on the loan that financed the purchase is $1,200 for 2018. Monterey also pays $800 in property taxes in 2018. What is Monterey's adjusted basis in the land at the end of 2018?

Determine whether the taxpayer has realized income in each of the following cases. Explain why there has (or has not) been a realization and when the income will be realized if there is not a current realization. a.Jaime appears on a TV game show in December 2018. She wins $25,000 in cash and a new sailboat worth $12,000. She receives a check for the cash she won on December 28, 2018. However, the sailboat was not ready for her to pick up until the following February. b.Barry owns 30% of Thurman Corporation. Thurman, an S corporation, reports a taxable income of $2,000,000 and pays cash dividends of $1,000,000 in 2018. c.Yolanda signs a contract to be Athletic Director of Higgins University for 5 years. Upon signing the contract she receives a $50,000 bonus. The terms of the contract provide that Yolanda will have to repay the bonus if she terminates her relationship with the University before the end of the contract. d.Randy was arrested for reckless driving. Because it was his third offense, his fine was set at $1,000. Randy's employer needed Randy at work, so he paid the fine. He told Randy that he would not have to repay the $1,000 if he was not arrested again.??

The broadest income concept I.considers all income received (e.g., cash, property, services, etc.) taxable. II.implies that anything of value received may be taxable. III.is referred to as the legislative grace concept. IV.implies that all increases in wealth may be taxable ​

An asset's adjusted basis is the amount of unrecovered investment after considering any increases and decreases in the original purchase price.

During the current year, Walter invests $35,000 in each of two separate corporations. Each investment gives him a 20% ownership interest. Corporation X is a C corporation that has taxable income of $200,000 and pays dividends totaling $50,000. Corporation Z is an S corporation that has taxable income of $100,000 and pays $50,000 of dividends. As a result of these two investments, Walter I.Has $10,000 of taxable income from Corporation X. II.Has $10,000 of taxable income from Corporation Z. ​

Arnold sells a parcel of investment real estate to Oswald for $600,000 in 2018. Arnold will receive $200,000 annually, plus interest at 8%, from 2019 through 2021. Arnold will recognize no gross income on this sale in 2018. Which of the following determines this treatment?

Thomas had $8,500 withheld from his paycheck, but since he has a large amount of interest and dividends, he is required to make quarterly estimated tax payments due to the

Match each statement with the correct term below. -Substance Over Form Doctrine

A crucial question concerning income is when to recognize it (in which accounting period income should income be taxed?). Which of the following help resolve the problems of timing? I.Realization Concept. II.Accounting Method. III.Constructive Receipt. IV.Substance-Over-Form Doctrine. ​