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Exam 4: Gross Income: Concepts and Inclusions

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Question 31

True/False

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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.

A) True
B) False

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Question 32

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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 10-year period.

A) True
B) False

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Question 33

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Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2019.The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2020.Ashley was required to pay the first and last month's rent at the time the lease was signed.Ashley was also required to pay a $1,500 damage deposit.Office Palace must recognize as income for the lease:

Jake is the sole shareholder of an S corporation that earned $60,000 in 2019.The corporation was short on cash and therefore distributed only $15,000 to him in 2019.Jake is required to recognize $60,000 of income from the S corporation in 2019.

On November 1, 2019, Bob, a cash basis taxpayer, gave Dave common stock.On October 30, 2019, the corporation had declared the dividend payable to shareholders of record as of November 22, 2019.The dividend was paid on December 15, 2019.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, 2019:

Maroon & Orange Gym, Inc., uses the accrual method of accounting.The corporation sells memberships that entitle the member to use the facilities at any time.A one-year membership costs $480 ($480/12 = $40 per month) ; a two- year membership costs $720 ($720/24 = $30 per month) .Cash payment is required at the beginning of the membership period.On July 1, 2019, the company sold a one-year membership and a two-year membership.For financial reporting purposes, Maroon reports the membership income ratably over the number of months involved.The company should report as gross income from the two contracts:

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, 2019, the accrued interest on the bond was $100.On December 31, 2019, Brent collected $400 interest on the bond.Brent must include in gross income the $300 interest earned after the date of the gift.

The alimony recapture rules are intended to:

The annual increase in the cash surrender value of a life insurance policy:

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.

Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership) .For tax year 2019, 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 2019, Wayne's gross income from the partnership is:

What are 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?

The annual increase in the cash surrender value of a life insurance policy:

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.

An advance payment received in June 2019 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.

Travis and Andrea were divorced in 2017.Their only marital property consisted of a personal residence (fair market value of $400,000, cost of $200,000) , and publicly traded stocks (fair market value of $800,000, cost basis of $500,000) .Under the terms of the divorce agreement, Andrea received the personal residence and Travis received the stocks.In addition, Andrea was to receive $50,000 for eight years. I.If the $50,000 annual payments are to be made to Andrea or her estate (if she dies before the end of the eight years) , the payments will qualify as alimony. II.Andrea has a taxable gain from an exchange of her one-half interest in the stocks for Travis' one-half interest in the house and cash. III.If Travis sells the stocks for $900,000, he must recognize a $400,000 gain.

Daniel purchased a bond on July 1, 2019, at par of $10,000 plus accrued interest of $300.On December 31, 2019, Daniel collected the $600 interest for the year.On January 1, 2020, Daniel sold the bond for $10,200.

Judy is a cash basis attorney.This year, she performed services in connection with the formation of a corporation and received stock with a value of $4,000 for her services.By the end of the year, the value of the stock had decreased to $2,000.She continued to hold the stock.Judy must recognize $4,000 of gross income from the stock for the current year.

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 five years when Turner will be age 65.

Mark is a cash basis taxpayer.He is a partner in the M&M partnership, and his share of the partnership's profits for 2019 is $90,000.Only $40,000 was distributed to him in January 2019, and this was his share of the 2018 partnership profits.None of the 2019 profits was distributed.Mark's gross income from the partnership for 2019 is $40,000.