Question 1

On January 1, 2018, Faye gave Todd, her son, a 36-month certificate of deposit she purchased December 31, 2016, for $8,638. Faye gave Todd 1,000 shares of ABC, Inc., on December 2, 2018. The certificate had a maturity value of $10,000 and the yield to maturity was 5%. On November 30, 2018, ABC, Inc., had declared a dividend of $1.00 payable to stockholders of record on December 5th. How much interest and dividends should Todd include in his gross income for 2018?

Accepted Answer

The answer of On January 1, 2018, Faye gave Todd,...

Question 2

In 2018 Todd purchased an annuity for $150,000. The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months. Which of the following is correct?

Accepted Answer

A)  Todd is not required to recognize any income until he has collected 60 payments (60 × $2,500 = $150,000). 
B)  If Todd collects 20 payments and then dies in 2018, Todd's estate should amend his tax returns for 2018 and 2019 and eliminate all of the reported income from the annuity for those years. 
C)  For each $2,500 payment received in the first year, Todd must include $1,000 in gross income. 
D)  For each $2,500 payment received in the first year, Todd must include $1,500 in gross income. 
E)  None of these.

Question 3

Margaret owns land that appreciates at the rate of 10% each year. Ralph owns a zero coupon (i.e., all of the interest is paid at maturity but is taxed annually) corporate bond with a yield to maturity of 10%. At the end of 10 years, the bond will mature and the land will be sold. At the end of the 10 years,

Accepted Answer

A)  Margaret and Ralph will have accumulated the same after-tax amounts. 
B)  Ralph will have accumulated a greater after-tax amount because the interest on the bond is tax-exempt. 
C)  Margaret will have accumulated the greater after-tax amount because the gain on the land is tax-exempt. 
D)  Margaret will have accumulated the greater after-tax amount but only if her marginal tax rate never exceeds 27%. 
E)  Margaret will accumulate the greater after-tax amount because she earns a return on the deferred taxes.

Question 4

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 5

Dick and Jane are 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 2018, Dick collected $250,000 from the former employer and paid Jane $125,000. What are the tax consequences for Dick receiving the $250,000 and then paying Jane the $125,000?

Accepted Answer

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

Question 6

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 2018, the company collected the following amounts applicable to future services: 
As a result of the above, Orange Cable should report as gross income for 2019:

Accepted Answer

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

Question 7

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 8

The constructive receipt doctrine requires that income be recognized when it is made available to the cash basis taxpayer, although it has not been actually received. The constructive receipt doctrine does not apply to accrual basis taxpayers.

Accepted Answer

A) True 
 B)False

Question 9

Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership). For tax year 2018, 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 2018, Wayne's gross income from the partnership is:

Accepted Answer

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

Question 10

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 11

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 12

The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.

Accepted Answer

A)  Sue must recognize $2,000 gross income in the current year if the company did not install the cable during the year. 
B)  Sue is not required to recognize gross income from the receipt of the funds, but she must reduce her cost basis in the land by $2,000. 
C)  Sue must recognize $2,000 gross income in the current year regardless of whether the company installed the cable during the year. 
D)  Sue must recognize $2,000 gross income in the current year, and when the cable is installed, she must reduce her cost basis in the land by $2,000. 
E)  None of these.

Question 13

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 14

Linda delivers pizzas for a pizza shop. On Wednesday, December 31, 2018, Linda made several deliveries and collected $400 from customers. However, Linda forgot to turn in the proceeds for the day to her employer until the following Friday, January 2, 2019. The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2019.

Accepted Answer

A) True 
 B)False

Question 15

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2014, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2018, she sold the bond for $9,800, which included $200 of accrued interest.

Accepted Answer

A)  Theresa has $200 interest income and a $400 loss from the bond in 2018. 
B)  Theresa has $200 interest income and a $200 gain from the bond in 2018. 
C)  Theresa has a $100 loss from the sale of the bond and no interest income. 
D)  Theresa's loss on the sale of the bond is $600. 
E)  None of these.

Question 16

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

Accepted Answer

A)  All of the income must be recognized in the year of maturity by a cash basis taxpayer. 
B)  The OID will be included in gross income for the year of purchase. 
C)  The interest income will be the same each year. 
D)  The interest income will be greater in the third year than in the first year. 
E)  None of these is correct.

Question 17

Arnold was employed during the first six months of the year and earned a $90,000 salary. During the next 6 months, he collected $7,200 of unemployment compensation, borrowed $6,000 (using his personal residence as collateral), and withdrew $1,000 from his savings account (including $60 interest). When he left his former employer, he withdrew his retirement benefits (a qualified annuity) in a lump-sum of $50,000. He made no contributions to the plan. Arnold's parents loaned him $10,000 (interest-free) on July 1 of the current year, when the Federal rate was 3%. Arnold did not repay the loan during the year and used the money for living expenses. Calculate Arnold's adjusted gross income for the year.

Accepted Answer

The answer of Arnold was employed during the first six...

Question 18

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 19

The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has received 40 hours of services, Green charges $500 per hour. Green Company allocates the retainer to income based on the number of hours worked on the contract. At the end of the tax year for contracts entered into for the current year, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received this year from excess office space leased to other companies. Based on the above, Green must include in gross income for the subsequent tax year:

Accepted Answer

A)  $60,000. 
B)  $50,000. 
C)  $10,000. 
D)  $0. 
E)  None of these.

Question 20

An advance payment received in June 2018 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.

Accepted Answer

A) True 
 B)False

Exam 4: Gross Income: Concepts and Inclusions

In 2018 Todd purchased an annuity for $150,000. The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months. Which of the following is correct?

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

The constructive receipt doctrine requires that income be recognized when it is made available to the cash basis taxpayer, although it has not been actually received. The constructive receipt doctrine does not apply to accrual basis taxpayers.

For purposes of determining gross income, 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 Bryan withdrew only $60,000 during the year. Bryan's gross income from the partnership for the year is $60,000.

The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.

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

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2014, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2018, she sold the bond for $9,800, which included $200 of accrued interest.

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

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.

An advance payment received in June 2018 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.