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Exam 4: Gross Income: Concepts and Inclusions

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Question 51

Multiple Choice

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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.

A) Jerry can defer the interest income until the bond matures in 10 years.
B) Jerry must report $25.60[($1,000 - $744) /10] 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.

F) B) and E)
G) C) and E)

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Question 52

Multiple Choice

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Thelma and Mitch were divorced in 2018.The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000.Under the terms of the divorce agreement, Mitch would receive the stocks and Mitch would pay Thelma $100,000 each year for six years, or until Thelma's death, whichever should occur first.Thelma and Mitch lived apart when the payments were made by Mitch.He paid the $600,000 to Thelma over the six-year period.The divorce agreement did not contain the word "alimony." Then, Mitch sold the stocks for $1,300,000.Mitch's recognized gain from the sale is:

A) $-0-.
B) $1,000,000 ($1,300,000 - $300,000) .
C) $700,000 ($1,300,000 - $600,000) .
D) $300,000 ($1,300,000 - $1,000,000) .
E) None of these.

F) A) and B)
G) A) and D)

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Question 53

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On December 1, 2019, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2019 and $12,000 for January 2020.Daniel must include the $24,000 in 2019 gross income.

Jessica is a cash basis taxpayer.When she 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.

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.

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 this information:

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?

For purposes of determining gross income, which of the following is true?

Teal company is an accrual basis taxpayer.On December 1, 2019, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2020.Teal delivered the item on January 4, 2020.Teal included the sale in its 2019 income for financial accounting purposes.

The financial accounting principle of conservatism is not well suited to the task of measuring taxable income.

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.

Linda delivers pizzas for a pizza shop.On Wednesday, December 31, 2019, 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, 2020.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2020.

In the case of a gift loan of less than $100,000, the imputed interest rules apply if the donee has net investment income of over $1,000.

At the beginning of 2019, 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 2019, and $3,600 from the Series EE bonds in 2028.

Which of the following is not a requirement for an alimony deduction?

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: $\begin{array} { l l } \text { October 2019-September } 2021 \text { services (200 two-year contracts) } & \$ 192,000 \\\text { October 2019-September } 2020 \text { services (200 one-year contracts) } & \underline { 120,000 } \\\text { Total } & \underline { \underline { \$ 312,000 } }\end{array}$ As a result of this, Orange Cable should report as gross income for 2020:

Under the terms of a divorce agreement entered into in 2017, Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support.For a 12-month period, Lanny can deduct from gross income (and Joyce must include in gross income) :

On a particular Saturday, Tom had planned to paint a room in his house, but his employer gave him the opportunity to work that day.If Tom works, he must hire a painter for $120.For Tom to have a positive cash flow from working and hiring the painter:

The taxable portion of Social Security benefits may be affected by: