Question 1

Roy is considering purchasing land for $10,000. He expects the land to appreciate in value 8% each year compounded) and he will sell it at the end of 10 years. He also is considering purchasing a bond for $10,000. The bond does not pay any annual interest, but will pay $21,589 at maturity in 10 years. The before-tax rate of return on the bond is 8%. Roy is in the 40% combined Federal and State) marginal tax bracket. Roy has other investments that earn an 8% before-tax rate of return. Given that the compound interest factor at 8% is 2.1589, and at 4.8% the factor is 1.5981, which alternative should Roy choose?

Accepted Answer

The answer of Roy is considering purchasing land for $10,000....

Question 2

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

Accepted Answer

A)  The taxpayer's itemized deductions. 
B)  The individual's tax-exempt interest income. 
C)  The number of quarters the individual worked. 
D)  The individual's standard deduction. 
E)  None of these.

Question 3

Freddy purchased a certificate of deposit for $20,000 on July 1, 2018. The certificate's maturity value in two years June 30, 2020) is $21,218, yielding 3% before-tax interest.

Accepted Answer

A)  Freddy must recognize $1,218 gross income in 2018. 
B)  Freddy must recognize $1,218 gross income in 2020. 
C)  Freddy must recognize $600 .03 × $20,000) gross income in 2020. 
D)  Freddy must recognize $300 .03 × $20,000 × .5) gross income in 2018. 
E)  None of these.

Question 4

In the case of a zero interest below-market loan by a corporation to a shareholder-employee, what difference does it make to the corporation and the shareholder whether the loan is characterized as a corporation's loan to its shareholder or a corporation's loan to its employee?

Accepted Answer

The answer of In the case of a zero interest...

Question 5

Daniel purchased a bond on July 1, 2018, at par of $10,000 plus accrued interest of $300. On December 31, 2018, Daniel collected the $600 interest for the year. On January 1, 2019, Daniel sold the bond for $10,200.

Accepted Answer

A)  Daniel must recognize $300 interest income for 2018 and a $200 gain on the sale of the bond in 2019. 
B)  Daniel must recognize $600 interest income for 2018 and a $200 gain on the sale of the bond in 2019. 
C)  Daniel must recognize $600 interest income for 2018 and a $100 loss on the sale of the bond in 2019. 
D)  Daniel must recognize $300 interest income for 2018 and a $100 loss on the sale of the bond in 2019. 
E)  None of these.

Question 6

On January 5, 2018, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2018, 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 2018:

Accepted Answer

A)  Tim must include all of the interest in his gross income. 
B)  Jane must report $1,800 gross income for 2018. 
C)  Jane reports $1,350 of interest income in 2018, and Tim reports $450 of interest income in 2018. 
D)  Jane reports $450 of interest income in 2018, and Tim reports $1,350 of interest income in 2018. 
E)  None of these is correct.

Question 7

Judy is a cash basis attorney. This year, she performed services in connection with the formation of a corporation and received stock with a value of $4,000 for her services. By the end of the year, the value of the stock had decreased to $2,000. She continued to hold the stock. Judy must recognize $4,000 of gross income from the stock for the current year.

Accepted Answer

A) True 
 B)False

Question 8

As a general rule: I. Income from property is taxed to the person who owns the property.
II) Income from services is taxed to the person who earns the income.
III) The assignee of income from property must pay tax on the income.
IV) The person who receives the benefit of the income must pay the tax on the income.

Accepted Answer

A)  Only I and II are true. 
B)  Only III and IV are true. 
C)  I, II, and III are true, but IV is false. 
D)  I, II, III, and IV are true. 
E)  None of these is true.

Question 9

In the case of a person with other income of $300,000, 15% of his or her Social Security benefits received are excluded from gross income.

Accepted Answer

A) True 
 B)False

Question 10

Mark is a cash basis taxpayer. He is a partner in the M&M partnership, and his share of the partnership's profits for 2018 is $90,000. Only $40,000 was distributed to him in January 2018, and this was his share of the 2017 partnership profits. None of the 2018 profits were distributed. Mark's gross income from the partnership for 2018 is $40,000.

Accepted Answer

A) True 
 B)False

Question 11

George and Erin divorced in 2019, 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.

Accepted Answer

A) True 
 B)False

Question 12

After the divorce in 2015, 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.

Accepted Answer

A) True 
 B)False

Question 13

Sharon made a $60,000 interest-free loan to her son, Todd, who used the money to start a new business. Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account. The relevant Federal interest rate was 5%. Based on the above information:

Accepted Answer

A)  Todd's business net profit will be reduced by $3,000 .05 × $60,000) of interest expense. 
B)  Sharon must recognize $3,000 .05 × $60,000) of imputed interest income on the below- market loan. 
C)  Todd's gross income must be increased by the $3,000 .05 × $60,000) imputed interest income on the below market loan. 
D)  Sharon does not recognize any imputed interest income and Todd does not recognize any imputed interest expense. 
E)  None of these is correct.

Question 14

Barney painted his house which saved him $3,000. According to the realization requirement, Barney must recognize
$3,000 of income.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A)  The payments must be in cash. 
B)  The payments must cease upon the death of the payee. 
C)  The payments must extend over at least three years. 
D)  The payor and payee must not live in the same household at the time of the payments. 
E)  All of these are requirements for an alimony deduction.

Question 16

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

Accepted Answer

A)  A mechanic completed repairs on an automobile during the year and collects money from the customer. The customer was not satisfied with the repairs and sued the mechanic for a refund. The mechanic can defer recognition of the income until the suit has been settled. 
B)  A taxpayer who finds a wallet full of money is required to recognize income even though someone may eventually ask for the return of the money. 
C)  Embezzlement proceeds are not included in the embezzler's gross income because the embezzler has an obligation to repay the owner. 
D)  All of these are false. 
E)  All of these are true.

Question 17

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

Accepted Answer

A) True 
 B)False

Question 18

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV. Son had $1,600 interest income from a certificate of deposit for the year. Father is not required to impute interest income.

Accepted Answer

A) True 
 B)False

Question 19

In December 2017, Mary collected the December 2017 and January 2018 rent from a tenant. Mary is a cash basis taxpayer. The amount collected in December 2017 for the 2018 rent should be included in her 2018 gross income.

Accepted Answer

A) True 
 B)False

Question 20

Sarah, a majority shareholder in Teal, Inc., made a $200,000 interest-free loan to the corporation. Sarah is not an employee of the corporation.

Accepted Answer

A)  Sarah must recognize imputed interest expense and the corporation must recognize imputed interest income. 
B)  Sarah must recognize imputed interest income and the corporation must recognize imputed interest expense. 
C)  Sarah must recognize imputed dividend income and the corporation may recognize imputed interest expense. 
D)  Neither Sarah's nor the corporation's gross income is affected by the loans because no interest was charged. 
E)  None of these.

Exam 4: Gross Income: Concepts and Inclusions

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

Freddy purchased a certificate of deposit for $20,000 on July 1, 2018. The certificate's maturity value in two years June 30, 2020) is $21,218, yielding 3% before-tax interest.

In the case of a zero interest below-market loan by a corporation to a shareholder-employee, what difference does it make to the corporation and the shareholder whether the loan is characterized as a corporation's loan to its shareholder or a corporation's loan to its employee?

Daniel purchased a bond on July 1, 2018, at par of $10,000 plus accrued interest of $300. On December 31, 2018, Daniel collected the $600 interest for the year. On January 1, 2019, Daniel sold the bond for $10,200.

On January 5, 2018, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2018, 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 2018:

In the case of a person with other income of $300,000, 15% of his or her Social Security benefits received are excluded from gross income.

George and Erin divorced in 2019, 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.

Sharon made a $60,000 interest-free loan to her son, Todd, who used the money to start a new business. Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account. The relevant Federal interest rate was 5%. Based on the above information:

Barney painted his house which saved him $3,000. According to the realization requirement, Barney must recognize $3,000 of income.

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

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

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV. Son had $1,600 interest income from a certificate of deposit for the year. Father is not required to impute interest income.

In December 2017, Mary collected the December 2017 and January 2018 rent from a tenant. Mary is a cash basis taxpayer. The amount collected in December 2017 for the 2018 rent should be included in her 2018 gross income.

Sarah, a majority shareholder in Teal, Inc., made a $200,000 interest-free loan to the corporation. Sarah is not an employee of the corporation.