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Exam 4: Gross Income: Concepts and Inclusions

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Question 51

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Daniel purchased a bond on July 1,2011,at par of $10,000 plus accrued interest of $300.On December 31,2011,Daniel collected the $600 interest for the year.On January 1,2012,Daniel sold the bond for $10,200.

A) Daniel must recognize $300 interest income for 2011 and a $200 gain on the sale of the bond in 2012.
B) Daniel must recognize $600 interest income for 2011 and a $200 gain on the sale of the bond in 2012.
C) Daniel must recognize $600 interest income for 2011 and a $100 loss on the sale of the bond in 2012.
D) Daniel must recognize $300 interest income for 2011 and a $100 loss on the sale of the bond in 2012.
E) None of the above.

F) A) and C)
G) B) and C)

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Question 52

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Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement,Emily received sole ownership of their personal residence.This property transfer is classified as a property settlement rather than as alimony as the transfer was a result of a divorce.

A) True
B) False

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Question 53

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Daniel,an accrual basis taxpayer,collects the rent for December 2011 and January 2012 on December 1,2011.Daniel must include the December 2011 rent but not the January 2012 rent in his 2011 gross income.

If a lottery prize winner transfers the prize to a qualified government unit or nonprofit organization,then the prize is excluded from the winner's gross income if the amount of the prize does not exceed 30% of the winner's AGI.

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,the company had $50,000 of unearned revenues from these contracts.The company also had $10,000 in unearned rent income received from excess office space leased to other companies.Based on the above,Green must include in gross income for the current year:

Samantha and her son,Brent,are cash basis taxpayers.Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000.On the date of the gift,March 31,2011,the accrued interest on the bond was $100.On December 31,2011,Brent collected $400 interest on the bond.Brent must include in gross income the $300 interest earned after the date of the gift.

Determine the proper tax year for gross income inclusion in each of the following cases.

Paula transfers stock to her former spouse,Fred.The transfer is pursuant to a divorce agreement.Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000.Fred later sells the stock for $100,000.Fred's recognized gain from the sale of the stock is $5,000.

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.

Under the terms of a divorce agreement,Kim was to pay her husband Tom $3,000 per month in alimony and $2,000 per month in child support.For a twelve-month period,Kim can deduct from gross income (and Tom must include in gross income) :

Terri purchased an annuity for $100,000.She was to receive $8,000 per year and her life expectancy was 20 years.She died after receiving 15 payments.Terri's final return should reflect a loss of $40,000 (5 payments not made ´ $8,000).

Arnold was employed during the first six months of the year and earned a $86,000 salary.During the next 6 months,he collected $4,800 of unemployment compensation,borrowed $6,000 (using his personal residence as collateral),and withdrew $1,000 from his savings account (including $60,interest).His luck was not all bad,for in December he won $800 in the lottery on a $20 ticket.Because of his dire circumstances,Arnold's parents loaned him $10,000 (interest-free)on July 1 of the current year,when the Federal rate was 8%.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.

In 2003,Terry purchased land for $150,000.In 2011,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 B & W partnership earned taxable income of $100,000 for the year.Bryan is entitled to 50% of the profits,but Bryan withdrew only $40,000 during the year.Bryan must include in gross income his $50,000 share of the profits from the partnership.

Nicholas owned stock that decreased in value by $20,000 during the year,but he did not sell the stock.He earned $45,000 salary,but received only $34,000 because $11,000 in taxes were withheld.Nicholas saved $10,000 of his salary and used the remainder for personal living expenses.Nicholas's economic income for the year exceeded his gross income for tax purposes.

Tom 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.

George and Erin are divorced,and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is not required to include the alimony payments in gross income because George earned the income and therefore he should pay the tax on the income.

Harry and Wanda were married in Texas,a community property state,but moved to Virginia,a common law state.The calculation of their income on a joint return:

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?

On January 5,2011,Jane purchased a bond paying interest at 6% for $30,000.On September 30,2011,she gave the bond to Tim.The bond pays $1,800 interest on December 31.Jane and Tim are cash basis taxpayers.When Tim collects the interest in December 2011: