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Exam 4: Gross Income: Concepts and Inclusions

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Question 51

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Margaret made a $90,000 interest-free loan to her son,Adam,who used the money to retire a mortgage on his personal residence and to buy a certificate of deposit.Adam's only income for the year is his salary of $35,000 and $1,400 interest income on the certificate of deposit.The relevant Federal interest rate is 8% compounded semiannually.The loan is outstanding for the entire year. a.Based on the above information,what is the effect of the loan on Margaret's gross income for the year? b.The facts are the same as above,except you discovered that Margaret had made an additional loan of $15,000 to Adam in the previous year.Adam used the funds to pay his child's private school tuition.What are the effects of the loans on Margaret's gross income?

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a.Margaret's interest income from the lo...

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Question 52

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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.

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B) False

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Question 53

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How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?

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.

Maroon Corporation expects the 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 for December 2014?

With respect to income from services,which of the following is true?

On January 5,2014,Tim purchased a bond paying interest at 6% for $30,000.On March 31,2014,he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2014:

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2014 and distributed $75,000 to Alvin.Alvin must recognize $75,000 as income from the S corporation in 2014.

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?

The constructive receipt doctrine requires that income must 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.

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

Jim and Nora,residents of a community property state,were married in early 2013.Late in 2013 they separated,and in 2014 they were divorced.Each earned a salary,and they received income from community owned investments in all relevant years.They filed separate returns in 2013 and 2014.

The B & W Partnership earned taxable income of $140,000 for the year.Bryan is entitled to 50% of the profits,but Bryan withdrew only $60,000 during the year.Bryan's gross income from the partnership for the year is $60,000.

On January 1,Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans.There were no other loans outstanding between Dave and Debra.The relevant Federal rate on interest was 6 percent.The loan was outstanding for the entire year.

In all community property states,the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.

ABC Corporation declared a dividend for taxpayers of record as of December 24,2013.The dividend checks were mailed on December 31,2013.Ed,a cash basis shareholder,received the dividend check on January 2,2014.Ed cannot delay reporting the income from the dividend until 2014.

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

Jessica is a cash basis taxpayer.When Jessica 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.

In 2014,Juan,a cash basis taxpayer,was offered $3 million for signing a professional baseball contract.He counter offered that he would receive $900,000 per year for 4 years beginning in 2015.The team accepted the counteroffer.Juan constructively received $3 million in 2014.

Dick and Jane are divorced in 2013.At the time of the divorce,Dick had a lawsuit pending.He had filed suit against a former employer for overtime pay.As part of a divorce agreement,Dick agreed to pay Jane one-half of the proceeds from the lawsuit.In 2014,Dick collected $250,000 from the former employer and paid Jane $125,000.What are the tax consequences for Dick receiving the $250,000 and then paying Jane the $125,000?