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Exam 4: Gross Income

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Question 21

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A sole proprietorship purchased an asset for $1,000 in 2017 and its value was $1,500 at the end of 2017.In 2018, the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2018 but an economic loss of $100 in 2018.

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B) False

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Question 22

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In some foreign countries, the tax law specifically designates the types of income items that are includible in gross income.How does this approach compare with the U.S.Internal Revenue Code (§ 61)? What is a major advantage to the approach used in the U.S.tax law?

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The Internal Revenue Code defines gross ...

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Question 23

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Benny loaned $100,000 to his controlled corporation.When it became apparent the corporation would not be able to repay the loan in the near future, Benny canceled the debt.The corporation should treat the cancellation as a nontaxable contribution to capital.

On January 5, 2017, Tim purchased a bond paying interest at 6% for $30,000.On March 31, 2017, 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 2017: ​

Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($500 per year) , or two years in advance ($950) .In September 2017, the company collected the following amounts applicable to future services: $\begin{array}{lr}\text { October 2017-September } 2019 \text { services (two-year contracts) } & \$ 144,000 \\\text { October 2017-September } 2018 \text { services (one-year contracts) } & 128,000 \\\text { Total } & \$ 272,000\end{array}$ As a result of the above, Orange Cable should report as gross income:

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?

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.

The taxpayer's marginal tax bracket is 25%.Which would the taxpayer prefer?

At the beginning of 2017, 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 2017, and $3,600 from the Series EE bonds in 2026.

Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each.Her husband had paid premiums of $60,000 on the policy.In the first year, Carin collected $17,500 from the insurance company.She must include in gross income:

Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance.If a customer dies, the company receives from the insurance company the balance due on the customer's loan.Ali, a customer, died owing Swan $1,500.The balance due included $200 accrued interest that Swan has included in income.When Swan collects $1,500 from the insurance company, Swan:

Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest.In December, Tom collected $500 interest from the bond.Tom's interest income from the bond for the year is $500.

Tonya is a cash basis taxpayer.In 2017, she paid state income taxes of $8,000.In early 2018, she filed her 2017 state income tax return and received a $900 refund.

In 2007, Terry purchased land for $150,000.In 2017, Terry received $10,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terry's property.Terry is not required to recognize income from receiving the $10,000 because it was a return of his capital invested in the land.

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

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.

On November 1, 2017, Bob, a cash basis taxpayer, gave Dave common stock.On October 30, 2017, the corporation had declared the dividend payable to shareholders of record as of November 22, 2017.The dividend was paid on December 15, 2017.The corporation has paid the $1,200 dividend once each year for the past ten years, during which Bob owned the stock.When Dave collected the dividend on December 15, 2017:

Ralph purchased his first Series EE bond during the year.He paid $709 for a 10-year bond with a $1,000 maturity value.The yield to maturity on the bonds was 3.5%.Ralph is not required to recognize the $291 ($1,000 - $709) original issue discount until the bond matures.However, Ralph can elect to amortize the discount over the ten-year period.

On January 1, 2017, Faye gave Todd, her son, a 36-month certificate of deposit she purchased December 31, 2015, for $8,638.Faye gave Todd 1,000 shares of ABC, Inc., on December 2, 2017.The certificate had a maturity value of $10,000 and the yield to maturity was 5%.On November 30, 2017, 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 2017?

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