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Exam 4: Gross Income

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Question 51

True/False

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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 ten-year period.

A) True
B) False

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Question 52

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Teal company is an accrual basis taxpayer.On December 1, 2018, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2019.Teal delivered the item on January 4, 2019.Teal included the sale in its 2018 income for financial accounting purposes.

A) Teal must recognize the income in 2018.
B) Teal must recognize the income in the year title to the goods passed to the customer, as determined under the state laws in which the store is located.
C) Teal can elect to recognize the income in either 2018 or 2019.
D) Teal must recognize the income in 2019.
E) None of these.

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

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Question 53

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Melissa is a compulsive coupon clipper.She often brags about the time she purchased a cart full of groceries for $5.00, when the cost without coupons would have been $50.Discuss whether Melissa realizes gross income from her coupon clipping.

Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent.The National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000.The bank had made the loan to Gold when it purchased the real estate from Silver, Inc.Pink, Inc., the holder of a mortgage on Gold's building, agreed to accept $40,000 in full payment of the $55,000 due.Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years.As a result of the above, Gold must:

Gary cashed in an insurance policy on his life.He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $12,000 in premiums and he collected $30,000 from the insurance company.Gary is not required to include the gain of $18,000 $30,000 - $12,000) in gross income.

Ed died while employed by Violet Company.His wife collected $40,000 on a group term life insurance policy that Violet provided its employees, and $6,000 of accrued salary Ed had earned prior to his death.All of the premiums on the group term life insurance policy were excluded from the Ed's gross income.Ed's wife is required to recognize as gross income only the $6,000 she received for the accrued salary.

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:

Emily is in the 35% marginal tax bracket.She can purchase a York County school bond yielding 3.5% interest and the interest is not subject to a 5% state tax.But she is interested in earning a higher return for comparable risk.Which of the following is correct:

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:

On November 1, 2018, Bob, a cash basis taxpayer, gave Dave common stock.On October 30, 2018, the corporation had declared the dividend payable to shareholders of record as of November 22, 2018.The dividend was paid on December 15, 2018.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, 2018:

Fred is a full-time teacher.He has written a book and receives royalties from it.Fred's mother, Mabel, is age 65 and lives on her Social Security benefits and gifts from her son, Fred.This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support.Fred must include the amount of the royalty check in his gross income.

Rachel, who is in the 35% marginal tax bracket, is considering purchasing an annuity that will pay her $10,000 per year for the remainder of her life.Her life expectancy is 15 years.The cost of the annuity is $97,120, and the cost is calculated to yield her an expected 6% return on her investment.As an alternative, Rachel could place the $97,120 in a savings account yielding 6% and she could withdraw $10,000 each year for 15 years reducing the value of the account to zero at the end of 15 years).How might the tax laws applicable to annuities affect Rachel's decision?

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?

Harold bought land from Jewel for $150,000.Harold paid $50,000 cash and gave Jewel an 8% note for $100,000.The note was to be paid over a five-year period.When the balance on the note was $80,000, Jewel began having financial difficulties.To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.

Detroit Corporation sued Chicago Corporation for intentional damage to Detroit's goodwill.Detroit had created its goodwill through providing high-quality services to its customers.Thus, no basis for the goodwill appeared on Detroit's balance sheet.The suit was settled and Detroit received $1,500,000 for the damages to its goodwill.

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: