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Exam 4: Gross Income: Concepts and Inclusions

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Question 61

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

A) The income is always amortized over the period the services will be rendered by an accrual basis taxpayer.
B) A cash basis taxpayer can spread the income from a 24-month service contract over the contract period.
C) If an accrual basis taxpayer sells a 36-month service contract on July 1, 2012 for $3,600, the taxpayer's 2013 gross income from the contract is $3,000.
D) If an accrual basis taxpayer sells a 12-month service contract on July 1, 2012, all of the income is recognized in 2012.
E) None of the above.

F) B) and D)
G) B) and E)

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Question 62

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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 5 years when Turner will be age 65.

A) If the employer accepts Turner's counteroffer, Turner will recognize $55,000 ($660,000 $\div$ 12) each month.
B) If the employer accepts Turner's counteroffer, Turner will recognize as gross income $40,000 per month and $180,000 in year 5.
C) If the employer accepts Turner's counteroffer, Turner will be in constructive receipt of $50,000 per month.
D) If the employer accepts Turner's counteroffer, Turner will be in constructive receipt of $50,000 per month and the $180,000 bonus.
E) None of the above.

F) A) and E)
G) A) and D)

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Question 63

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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?

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1,2012 that will pay $1,100 upon its maturity on June 30,2014.The taxpayer must recognize a portion of the income in 2012.

The Purple & Gold 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 $360 ($360/12 = $30 per month) ; a two-year membership costs $600 ($600/24 = $25 per month) .Cash payment is required at the beginning of the membership period.On July 1,2012,the company sold a one-year membership and a two-year membership.The company should report as gross income from the two contracts:

When a business is operated as an S corporation,a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

On November 1,2012,Bob,a cash basis taxpayer,gave Dave common stock.On October 30,2012,the corporation had declared the dividend payable to shareholders of record as of November 22,2012.The dividend was paid on December 15,2012.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 15,2012:

Arnold was employed during the first six months of the year and earned a $86,000 salary.During the next 6 months,he collected $4,800 of unemployment compensation,borrowed $6,000 (using his personal residence as collateral),and withdrew $1,000 from his savings account (including $60,interest).His luck was not all bad,for in December he won $800 in the lottery on a $20 ticket.Because of his dire circumstances,Arnold's parents loaned him $10,000 (interest-free)on July 1 of the current year,when the Federal rate was 8%.Arnold did not repay the loan during the year and used the money for living expenses.Calculate Arnold's adjusted gross income for the year.

George and Erin are divorced,and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is not required to include the alimony payments in gross income because George earned the income and therefore he should pay the tax on the income.

The taxable portion of Social Security benefits is dependent upon:

The tax concept and economic concept of income are in agreement on which of the following:

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.

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 the above information:

Susan purchased an annuity for $200,000.She is to receive $18,000 each year and her life expectancy is 13 years.If Susan collects under the annuity for 14 years,the entire $18,000 received in the 14th year must be included in her gross income.

In 2012,Todd purchased an annuity for $200,000.The annuity is to pay him $2,500 per month for the rest of his life.His life expectancy is 100 months.Which of the following is correct?

Mike contracted with Kram Company,Mike's controlled corporation.Mike was a medical doctor and the contract provided that he would work exclusively for the corporation.No other doctor worked for the corporation.The corporation contracted to perform an operation for Rosa for $8,000.The corporation paid Mike $6,500 to perform the operation under the terms of his employment contract.

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.

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

Katherine is 60 years old and is bargaining with her employer over deferred compensation.In exchange for reducing her current year's salary by $50,000,she can receive a lump-sum amount in 5 years,when she will retire.If she receives the $50,000 in the current year,she will invest in certificates of deposit that yield 5%.Katherine in the 28% marginal tax bracket in all relevant years.What is the minimum amount Katherine should accept as a deferred pay option? [Hint: the compound interest factor is 1.1934.] $59,669

Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest and $20,000 of Social Security benefits.Debbie's adjusted gross income for the year is: