Question 1

Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership). For tax year 2019, the partnership earned revenue of $900,000 and had operating expenses of $660,000. During the year, Wayne withdrew from the partnership a total of $90,000. He also invested an additional $30,000 in the partnership. For 2019, Wayne's gross income from the partnership is:

Accepted Answer

A)  $72,000. 
B)  $90,000. 
C)  $132,000. 
D)  $162,000.

Question 2

Lois, who is single, received $9,000 of Social Security benefits. She also received $25,000 from dividends, interest, and her employer's pension plan. If Lois sells a capital asset that produces a $1,000 recognized loss, Lois's taxable income will decrease by more than $1,000.

Accepted Answer

A) True 
 B)False

Question 3

Ted and Alice were in the process of negotiating a divorce agreement. They own bonds with a basis of $800,000 and a fair market value of $800,000. They also own common stock with a basis of $600,000 and a fair market value of
$800,000. Alice is trying to decide whether to bargain to receive the bonds or the stock. She has no plans for selling the bonds or stock, whichever she receives.
a. Which would you advise Alice to receive?
b. From Ted's perspective, are the assets of equal value?

Accepted Answer

The answer of Ted and Alice were in the process...

Question 4

Dick and Jane divorced in 2017. 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 2019, Dick collected $250,000 from the former employer and paid Jane $125,000. What are the tax consequences from Dick's receiving the $250,000 and then paying Jane the $125,000?

Accepted Answer

The answer of Dick and Jane divorced in 2017. At...

Question 5

Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($600 per year) or two years in advance ($960). In September 2019, the company collected the following amounts applicable to future services: $\begin{array}{ll}
\text { October 2019-September } 2021 \text { services (200 two-year contracts) } & \$ 192,000 \
\text { October 2019-September } 2020 \text { services (200 one-year contracts) } & 120,000 \
\text { Total } & \$ 312,000
\end{array}$ As a result of this, Orange Cable should report as gross income for 2020:

Accepted Answer

A)  $54,000. 
B)  $78,000. 
C)  $258,000. 
D)  $312,000. 
E)  None of these.

Question 6

In December 2018, Mary collected the December 2018 and January 2019 rent from a tenant. Mary is a cash basis taxpayer. The amount collected in December 2018 for the 2019 rent should be included in her 2019 gross income.

Accepted Answer

A) True 
 B)False

Question 7

Maroon Corporation expects its employees' income tax rates to increase next year. The employees use the cash method. The company presently pays on the last day of each month. The company is considering changing its policy so that the December salaries will be paid on the first day of the following year. What would be the effect on an employee of the proposed change in company policy for paying its salaries beginning December 2019?

Accepted Answer

A)  The employee would be required to recognize the income in December 2019 because it is constructively received at the end of the month. 
B)  The employee would be required to recognize the income in December 2019 because the employee has a claim of right to the income when it is earned. 
C)  The employee will not be required to recognize the income until it is received, in 2020. 
D)  The employee can elect to either include the pay in 2019 or 2020. 
E)  None of these.

Question 8

The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not ensure that the method will be acceptable for tax purposes.

Accepted Answer

A) True 
 B)False

Question 9

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year after a divorce.

Accepted Answer

A) True 
 B)False

Question 10

If an employer provides all employees with group term life insurance equal to twice the employee's annual salary, an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.

Accepted Answer

A) True 
 B)False

Question 11

Freddy purchased a certificate of deposit for $20,000 on July 1, 2019. The certificate's maturity value in two years (June 30, 2021) is $21,218, yielding 3% before-tax interest.

Accepted Answer

A)  Freddy must recognize $1,218 gross income in 2019. 
B)  Freddy must recognize $1,218 gross income in 2021. 
C)  Freddy must recognize $600 (0.03 × $20,000) gross income in 2021. 
D)  Freddy must recognize $300 (0.03 × $20,000 × 0.5) gross income in 2019. 
E)  None of these.

Question 12

Daniel purchased a bond on July 1, 2019, at par of $10,000 plus accrued interest of $300. On December 31, 2019, Daniel collected the $600 interest for the year. On January 1, 2020, Daniel sold the bond for $10,200.

Accepted Answer

A)  Daniel must recognize $300 interest income for 2019 and a $200 gain on the sale of the bond in 2020. 
B)  Daniel must recognize $600 interest income for 2019 and a $200 gain on the sale of the bond in 2020. 
C)  Daniel must recognize $600 interest income for 2019 and a $100 loss on the sale of the bond in 2020. 
D)  Daniel must recognize $300 interest income for 2019 and a $100 loss on the sale of the bond in 2020. 
E)  None of these.

Question 13

Betty purchased an annuity for $24,000 in 2019. Under the contract, she will receive $300 each month for the rest of her life. According to the actuarial estimates, Betty will live to receive 96 payments and will receive a 3% return on her original investment.

Accepted Answer

A)  If Betty collects $3,000 in 2019, her gross income is $630 (0.03 × $21,000). 
B)  Betty has no gross income until she has collected $24,000. 
C)  If Betty lives to collect more than 96 payments, all of the amounts collected after the 96th payment must be included in taxable income. 
D)  If Betty lives to collect only 60 payments before her death, she will report a $6,000 loss from the annuity [$24,000 - (60 × $300) = $6,000] on her final return. 
E)  None of these.

Question 14

Under the terms of a divorce agreement entered into in 2018, Kim was to pay her husband Tom $7,000 per month in alimony. Kim's payments will be reduced to $3,000 per month when their 9 year-old son becomes 21. The husband has custody of their son. For a 12 month period, Kim can deduct from gross income (and Tom must include in gross income):

Accepted Answer

A)  $60,000. 
B)  $48,000. 
C)  $36,000. 
D)  $0. 
E)  None of these.

Question 15

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

Accepted Answer

A)  The treatment of unearned income is the same for tax and financial accounting for both cash and accrual basis taxpayers. 
B)  A cash basis taxpayer must report all of the income in the year received. 
C)  An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed within three years following the year of receipt. 
D)  An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less. 
E)  None of these.

Question 16

The B & W Partnership earned taxable income of $140,000 for the year. Bryan is entitled to 50% of the profits, but he withdrew only $60,000 during the year. Bryan's gross income from the partnership for the year is $60,000.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Sarah, a widow, is retired and receives $20,000 interest income and dividends and $10,000 in Social Security benefits.
Sarah is considering selling a stock at an $8,000 gain. What will be the increase in Sarah's gross income as a result of the sale of the stock?

Accepted Answer

The answer of Sarah, a widow, is retired and receives...

Question 19

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2019 and distributed $75,000 to him. Alvin must recognize $75,000 as income from the S corporation in 2019.

Accepted Answer

A) True 
 B)False

Question 20

The annual increase in the cash surrender value of a life insurance policy:

Accepted Answer

A)  Is taxed according to the original issue discount rules. 
B)  Is not included in gross income because the policy must be surrendered to receive the cash surrender value. 
C)  Reduces the deduction for life insurance expense. 
D)  Is exempt because it is life insurance proceeds. 
E)  None of these.

Exam 4: Gross Income: Concepts and Inclusions

Lois, who is single, received $9,000 of Social Security benefits. She also received $25,000 from dividends, interest, and her employer's pension plan. If Lois sells a capital asset that produces a $1,000 recognized loss, Lois's taxable income will decrease by more than $1,000.

In December 2018, Mary collected the December 2018 and January 2019 rent from a tenant. Mary is a cash basis taxpayer. The amount collected in December 2018 for the 2019 rent should be included in her 2019 gross income.

The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not ensure that the method will be acceptable for tax purposes.

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year after a divorce.

If an employer provides all employees with group term life insurance equal to twice the employee's annual salary, an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.

Freddy purchased a certificate of deposit for $20,000 on July 1, 2019. The certificate's maturity value in two years (June 30, 2021) is $21,218, yielding 3% before-tax interest.

Daniel purchased a bond on July 1, 2019, at par of $10,000 plus accrued interest of $300. On December 31, 2019, Daniel collected the $600 interest for the year. On January 1, 2020, Daniel sold the bond for $10,200.

Betty purchased an annuity for $24,000 in 2019. Under the contract, she will receive $300 each month for the rest of her life. According to the actuarial estimates, Betty will live to receive 96 payments and will receive a 3% return on her original investment.

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

The B & W Partnership earned taxable income of $140,000 for the year. Bryan is entitled to 50% of the profits, but he withdrew only $60,000 during the year. Bryan's gross income from the partnership for the year is $60,000.

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

Sarah, a widow, is retired and receives $20,000 interest income and dividends and $10,000 in Social Security benefits. Sarah is considering selling a stock at an $8,000 gain. What will be the increase in Sarah's gross income as a result of the sale of the stock?

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2019 and distributed $75,000 to him. Alvin must recognize $75,000 as income from the S corporation in 2019.

The annual increase in the cash surrender value of a life insurance policy: