Question 1

Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership).For tax year 2014,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 2014,Wayne's gross income from the partnership is:

Accepted Answer

A) $72,000. 
B) $90,000. 
C) $132,000. 
D) $162,000. 
E) None of these.

Question 2

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 3

In the case of a below-market gift loan for which there is no exception to the imputed interest rules,the lender is deemed to have received interest income even though no interest is charged and collected.

Accepted Answer

A) True 
 B)False

Question 4

The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

Accepted Answer

A) The corporation has imputed interest income and the employee is deemed to have received a gift. 
B) The corporation has imputed interest income and dividends paid. 
C) The employee has no income unless the funds are invested and produce investment income for the year. 
D) The employee has imputed compensation income and the corporation has imputed interest income. 
E) None of these.

Question 5

Maroon Corporation expects the 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 2015?

Accepted Answer

A) The employee would be required to recognize the income in December 2015 because it is constructively received at the end of the month. 
B) The employee would be required to recognize the income in December 2015 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 2016. 
D) The employee can elect to either include the pay in 2015 or 2016. 
E) None of these.

Question 6

Jessica is a cash basis taxpayer.When Jessica failed to repay a loan,the bank garnished her salary.Each week $60 was withheld from Jessica's salary and paid to the bank.Jessica is required to include the $60 each week in her gross income even though it is the creditor that benefits from the income.

Accepted Answer

A) True 
 B)False

Question 7

Freddy purchased a certificate of deposit for $20,000 on July 1,2015.The certificate's maturity value in two years (June 30,2017) is $21,218,yielding 3% before-tax interest.

Accepted Answer

A) Freddy must recognize $1,218 gross income in 2015. 
B) Freddy must recognize $1,218 gross income in 2017. 
C) Freddy must recognize $600 (.03 × $20,000) gross income in 2017. 
D) Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2015. 
E) None of these.

Question 8

Our tax laws encourage taxpayers to ____ assets that have appreciated in value and ____ assets that have declined in value.

Accepted Answer

A) sell;keep. 
B) sell;sell. 
C) keep;sell. 
D) keep;keep. 
E) None of these.

Question 9

At the beginning of 2015,Mary purchased a 3-year certificate of deposit (CD) for $8,760.The maturity value of the certificate was $10,000 and it was to yield 4.5%.She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000.Mary must recognize $1,240 of income from the certificate of deposit in 2015,and $3,600 from the Series EE bonds in 2024.

Accepted Answer

A) True 
 B)False

Question 10

The alimony rules:

Accepted Answer

A) Are based on the principle that the person who earns the income should pay the tax. 
B) Permit tax deductions for property divisions. 
C) Look to state law to determine the definition of alimony. 
D) Distinguish child support payments from alimony. 
E) None of these.

Question 11

Turner,a successful executive,is negotiating a compensation plan with his potential employer.The employer has offered to pay Turner a $600,000 annual salary,payable at the rate of $50,000 per month.Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in 5 years when Turner will be age 65.

Accepted Answer

A) If the employer accepts Turner's counteroffer,Turner will recognize $660,000 at the time the offer is accepted. 
B) If the employer accepts Turner's counteroffer,Turner will recognize as gross income $55,000 per month [($480,000 + $180,000)/12]. 
C) If the employer accepts Turner's counteroffer,Turner will recognize $40,000 income each month for the year and $180,000 in year 5. 
D) If the employer accepts Turner's counteroffer,Turner must recognize imputed interest income on the $180,000 to be received in 5 years. 
E) None of these.

Question 12

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 13

The B & W Partnership earned taxable income of $140,000 for the year.Bryan is entitled to 50% of the profits,but Bryan 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 14

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 15

Mike contracted with Kram Company,Mike's controlled corporation.Mike was a medical doctor and the contract provided that he would work exclusively for the corporation.No other doctor worked for the corporation.The corporation contracted to perform an operation for Rosa for $8,000.The corporation paid Mike $6,500 to perform the operation under the terms of his employment contract.

Accepted Answer

A) Mike's gross income is $6,500. 
B) Mike must recognize the $8,000 gross income because he provided the service. 
C) Mike must recognize $8,000 gross income since the patient obviously wanted him to perform the operation. 
D) The Kram Company corporation's gross income is $1,500. 
E) None of these.

Question 16

Jerry purchased a U.S.Series EE savings bond for $744.The bond has a maturity value in 10 years of $1,000 and yields 3% interest.This is the first Series EE bond that Jerry has ever owned.

Accepted Answer

A) Jerry can defer the interest income until the bond matures in 10 years. 
B) Jerry must report ($1,000 - $744)/10 = $25.60 interest income each year he owns the bond. 
C) The interest on the bonds is exempt from Federal income tax. 
D) Jerry can report all of the $256 as a capital gain in the year it matures. 
E) None of these.

Question 17

Green,Inc. ,provides group term life insurance for all of its employees.The coverage equals twice the employee's annual salary.Sam,a vice-president,worked all year for Green,Inc. ,and received $200,000 of coverage for the year at a cost to Green of $1,500.The Uniform Premiums (based on Sam's age) are $.25 per month for $1,000 of protection.How much must Sam include in gross income this year?

Accepted Answer

A) $0. 
B) $375. 
C) $450. 
D) $600. 
E) None of these.

Question 18

Ted was shopping for a new automobile.He found one that met his needs and agreed to purchase it for $23,000.He had shopped around and concluded that he could not get a better price from another dealer.After he had paid for the automobile,the dealer called to notify Ted that he was entitled to a manufacturer's rebate of $1,500.The next week he received a $1,500 check from the manufacturer.How much should Ted include in gross income?

Accepted Answer

The answer of Ted was shopping for a new automobile.He...

Question 19

The alimony recapture rules are intended to:

Accepted Answer

A) Assist former spouses in collecting alimony when the other spouse moves to another state. 
B) Prevent tax deductions for property divisions. 
C) Reduce the net cash outflow for the payor. 
D) Distinguish child support payments from alimony. 
E) None of these.

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

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:

In the case of a below-market gift loan for which there is no exception to the imputed interest rules,the lender is deemed to have received interest income even though no interest is charged and collected.

The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

Jessica is a cash basis taxpayer.When Jessica failed to repay a loan,the bank garnished her salary.Each week $60 was withheld from Jessica's salary and paid to the bank.Jessica is required to include the $60 each week in her gross income even though it is the creditor that benefits from the income.

Freddy purchased a certificate of deposit for $20,000 on July 1,2015.The certificate's maturity value in two years (June 30,2017) is $21,218,yielding 3% before-tax interest.

Our tax laws encourage taxpayers to assets that have appreciated in value and assets that have declined in value.

The alimony rules:

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

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

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.

Jerry purchased a U.S.Series EE savings bond for $744.The bond has a maturity value in 10 years of $1,000 and yields 3% interest.This is the first Series EE bond that Jerry has ever owned.

The alimony recapture rules are intended to:

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.