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Exam 5: Gross Income: Exclusions

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Question 41

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Employees of the Valley Country Club are allowed to use the golf course without charge before and after working hours on Mondays when the number of players on the course is at its lowest.Tom, an employee of the country club, played 40 rounds of golf during the year at no charge when the nonemployee charge was $20 per round.

A) Tom must include $800 in gross income.
B) Tom is not required to include anything in gross income because it is a de minimis fringe benefit.
C) Tom is not required to include the $800 in gross income because the use of the course was a gift.
D) Tom is not required to include anything in gross income because this is a no-additional-cost service fringe benefit.
E) None of these.

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

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Question 42

Multiple Choice

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Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt.

A) If Flora had borrowed the funds from a bank, the bank accepts $85,000 in full payment of the debt, and Flora is solvent after the transfer, Flora does not recognize income, but the company must reduce the cost of the land by $10,000.
B) If Flora had borrowed the funds from a bank and the bank accepts $85,000 in full payment of the debt, when the value of the property is $80,000, Flora can deduct a loss.
C) If Flora transfers to the bank other property with a basis of $90,000 and a fair market value of $95,000 in full payment of the debt, Flora can recognize a $5,000 loss.
D) If the $95,000 is owed to the person who sold the property to Flora and that person accepts $85,000 in full payment for the debt, Flora does not recognize gain but must reduce its basis in the land.
E) None of these.

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

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Question 43

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What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)

Heather is a full-time employee of Drake Company and participates in the company's flexible spending plan that is available to all employees.Which of the following is correct?

Evaluate the following statements: I.De minimis fringe benefits are those that are so immaterial that accounting for them is impractical. II) De minimis fringe benefits are subject to strict antidiscrimination requirements. III) Generally, a fringe benefit of less than $50 is considered de minimis and can be excluded from gross income.

Under Swan Company's cafeteria plan, all full-time employees are allowed to select any combination of the following benefits, but the total received by each employee cannot exceed $8,000 a year. I.Group medical and hospitalization insurance for the employee, $3,600 a year. II.Group medical and hospitalization insurance for the employee's spouse and children, $1,200 a year. III.Child care payments, actual cost but not more than $4,800 a year.IV.Cash required to bring the total of benefits and cash to $8,000. Which of the following statements is true?

Zork Corporation was very profitable and had accumulated excess cash.The company decided to repurchase some of its bonds that had been issued for $1,000,000.Because of an increase in market interest rates, Zork was able to retire the bonds for $900,000.The company is not required to recognize $100,000 of income from the discharge of its indebtedness but must reduce the basis in its assets.

Barry, a solvent individual but a recovering alcoholic, embezzled $6,000 from his employer.In the same year that he embezzled the funds, his employer discovered the theft.His employer did not fire him and told him he did not have to repay the $6,000 if he would attend Alcoholics Anonymous.Barry met the conditions and his employer canceled the debt.

Gull Corporation was undergoing reorganization under the bankruptcy laws.Its shareholders, who had made loans of $300,000 to the corporation, agreed to accept additional stock with a value of $200,000 instead of repayment on the debt.The Old Line Insurance Company, which had a $400,000 mortgage on the building, agreed to reduce the principal to $250,000.A trade creditor with a receivable of $150,000 from the company agreed to accept $70,000 in full payment for the debt incurred to purchase goods that were still on hand.Finally, the company transferred some equipment with an adjusted basis of $90,000 in satisfaction of a liability for $120,000.Compute the corporation's gross income and other adjustments necessary as a result of the above transactions.

Doug and Pattie received the following interest income in the current year: $\begin{array} { l r } \text { Savings account opened at Greenbacks Bank } & \$ 4,000 \\\text { U.S.Treasury bonds } & 250 \\\text { Interest on State of Iowa bonds } & 200 \\\text { Interest on Federal tax refund } & 150 \\\text { Interest on state income tax refund } & 75\end{array}$ Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account.What amount of interest income should they report on their joint income tax return?

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:

Nicole's employer pays her $150 per month toward the cost of parking near a railway station where Nicole catches the train to work.The employer also pays the cost of the rail pass, $75 per month.Nicole can exclude both of these payments from her gross income.

What Federal income tax benefits are provided for college students?

Emily is in the 35% marginal tax bracket.She can purchase a York County school bond yielding 3.5% interest, which 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:

Ashley received a scholarship to be used as follows: tuition, $6,000; room and board, $9,000; and books and laboratory supplies, $2,000.Ashley is required to include only $9,000 in her gross income.

Adam repairs power lines for the Egret Utilities Company.He is generally working on a power line during the lunch hour.He must eat when and where he can and still get his work done.He usually purchases something at a convenience store and eats in his truck.Egret reimburses Adam for the cost of his meals.

Carla is a deputy sheriff.Her employer requires that she live in the county where she is employed.Housing is very expensive; so the county agreed to pay her $4,800 per year to cover the higher cost of housing.Carla must include the housing supplement in her gross income.

Ron, age 19, is a full-time graduate student at City University.During 2019, he received the following payments: $\begin{array} { l r } \text { Cash award for being the outstanding resident adviser } & \$ 1,500 \\\text { Resident adviser housing } & 2,500 \\\text { State scholarship for ten months (tuition and books) } & 6,000 \\\text { State scholarship (meals allowance) } & 2,400 \\\text { Loan from college financial aid office } & 3,000 \\\text { Cash support from parents } & \underline { 2,000 } \\&\underline { \underline { \$ 17,400 }}\end{array}$ Ron served as a resident adviser in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied.What is Ron's adjusted gross income for 2019?

Early in the year, Marlon was in an automobile accident during the course of his employment.As a result of the physical injuries he sustained, he received the following payments during the year: Reimbursement of medical expenses Marlon paid by a medical $\begin{array}{lr}\text { insurance policy he purchased } & \$ 10,000 \\\text { Damage settlement to replace his lost salary } & 15,000\end{array}$ What is the amount that Marlon must include in gross income for the current year?

Fresh Bakery often has unsold donuts at the end of the day.The bakery allows employees to take the leftovers home.The employees are not required to recognize gross income because the bakery does not incur any additional cost.