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Exam 4: Gross Income: Concepts and Inclusions

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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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Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2014. Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years. Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th. The daughter received the $2,000 dividend on October 18, 2014.

A) The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.
B) Darryl must recognize the income of $2,000 because the purpose of the gift was to avoid taxes.
C) Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year.
D) Darryl must recognize the $2,000 dividend as his income because he constructively received the dividend.
E) None of the above.

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

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Question 53

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Jacob and Emily were co-owners of a personal residence. As part of their divorce agreement, Emily paid Jacob cash for his interest in the personal residence. This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.

Mark a calendar year taxpayer, purchased an annuity for $50,000 in 2012. The annuity was to pay him $3,000 on the first day of each year, beginning in 2012, for the remainder of his life. Mark's life expectancy at the time he purchased the annuity was 20 years. In 2014 Mark developed a deadly disease, and doctors estimated that he would live for no more than 24 months.

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.

An advance payment received in June 2014 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.

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2010, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2014, she sold the bond for $9,800, which included $200 of accrued interest.

The 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, 2014, the company sold a one-year membership and a two-year membership. The company should report as gross income from the two contracts:

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

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, 2014, the accrued interest on the bond was $100. On December 31, 2014, Brent collected $400 interest on the bond. Brent must include in gross income the $300 interest earned after the date of the gift.

In 2014, Todd purchased an annuity for $150,000. 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?

As a general rule:

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:

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.

Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest. In December, Tom collected $500 interest from the bond. Tom's interest income from the bond for the year is $500.

The taxable portion of Social Security benefits may be affected by:

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, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received from excess office space leased to other companies. Based on the above, Green must include in gross income for the current year:

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?

Arnold was employed during the first six months of the year and earned a $90,000 salary. During the next 6 months, he collected $7,200 of unemployment compensation, borrowed $6,000 (using his personal residence as collateral), and withdrew $1,000 from his savings account (including $60 interest). When he left his former employer, he withdrew his retirement benefits (a qualified annuity) in a lump-sum of $50,000. He made no contributions to the plan. Arnold's parents loaned him $10,000 (interest­free) on July 1 of the current year, when the Federal rate was 3%. 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.

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.