Question 1

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.

Accepted Answer

A)  Harold must recognize $20,000 ($80,000 - $60,000)  of gross income.
B)  Harold is not required to recognize gross income, but must reduce his cost basis in the land to $130,000.
C)  Harold is not required to recognize gross income, since he paid the debt before it was due.
D)  Jewel must recognize gross income of $20,000 ($80,000 - $60,000)  from discharge of the debt.
E)  None of these.F) None of the above
G) A) and B)

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

The Perfection Tax Service gives employees $12.50 as "supper money" when they are required to work overtime,approximately 25 days each year.The supper money received:

Accepted Answer

A)  Must be included in the employee's gross income.
B)  Must be included in the employee's gross income if the employee does not spend it for supper.
C)  May be excluded from the employee's gross income as a "no-additional cost" fringe benefit.
D)  May be excluded from the employee's gross income as a de minimis fringe benefit.
E)  None of these.F) A) and B)
G) A) and C)

Question 4

Tonya is a cash basis taxpayer.In 2017,she paid state income taxes of $8,000.In early 2018,she filed her 2017 state income tax return and received a $900 refund.

Accepted Answer

A)  If Tonya itemized her deductions in 2017 on her Federal income tax return, she should amend her 2017 return and reduce her itemized deductions by $900.
B)  If Tonya itemized her deductions in 2017 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2018 tax return.
C)  If Tonya itemized her deductions in 2017 on her Federal income tax return, she must amend her 2017 Federal income tax return and use the standard deduction.
D)  If Tonya itemized her deductions in 2017 on her Federal income tax return and her itemized deductions exceeded the standard deduction by more than $900, she must recognize $900 income in 2018 under the tax benefit rule.
E)  None of these.F) A) and B)
G) None of the above

Question 5

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

Accepted Answer

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 the creditor 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 D)
G) C) and D)

Question 6

Carmen had worked for Sparrow Corporation for thirty years when she died of a heart attack at age 60.She was practically penniless at the time of her death,owed a $12,000 hospital bill,and had a disabled spouse.The company was very concerned about its public image,and rather than run the risk of embarrassment from one of its long-term employees dying and leaving her spouse with insufficient means,the Board of Directors agreed to pay Carmen's hospital bill and to give her spouse $6,000 per year for the rest of his life.Discuss both sides of the question whether Carmen (or her estate) and her spouse realize any taxable income from the above.

Accepted Answer

The argument that Carmen and her spouse ...

Question 7

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:

Accepted Answer

A)  If she buys a corporate bond that pays 6% interest, her after-tax rate of return will be less than ifshe purchased the York County school bond.
B)  If she buys a U.S. government bond paying 5%, her after-tax rate of return will be less than ifshe purchased the York County school bond.
C)  If she buys a common stock paying a 4% dividend, her after-tax rate of return will be higherthan if she purchased the York County school bond.
D)  All of these are correct.
E)  None of these are correct.F) A) and C)
G) None of the above

Question 8

Ben was diagnosed with a terminal illness.His physician estimated that Ben would live no more than 18 months.After he received the doctor's diagnosis,Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died.Ben had paid $12,000 in premiums on the policy,and he collected $50,000,the cash surrender value of the policy.Henry enjoys excellent health,but he cashed in his life insurance policy to purchase a new home.He had paid premiums of $12,000 and collected $50,000 from the insurance company.

Accepted Answer

A)  Neither Ben nor Henry is required to recognize gross income.
B)  Both Ben and Henry must recognize $38,000 ($50,000 - $12,000)  of gross income.
C)  Henry must recognize $38,000 ($50,000 - $12,000)  of gross income, but Ben does not recognize any gross income.
D)  Ben must recognize $38,000 ($50,000 - $12,000)  of gross income, but Henry does not recognize any gross income.
E)  None of these.F) D) and E)
G) A) and D)

Question 9

Mel was the beneficiary of a $45,000 group term life insurance policy on his wife.His wife's employer paid all of the premiums on the policy.Mel used the life insurance proceeds to purchase a United States Government bond,which paid him $2,500 interest during the current year.Mel's Federal gross income from the above is $2,500.

Accepted Answer

A) True 
 B)False

Question 10

The taxpayer's marginal tax bracket is 25%.Which would the taxpayer prefer?

Accepted Answer

A)  $1.00 taxable income rather than $1.25 tax-exempt income.
B)  $1.00 taxable income rather than $.75 tax-exempt income.
C)  $1.25 taxable income rather than $1.00 tax-exempt income.
D)  $1.40 taxable income rather than $1.00 tax-exempt income.
E)  None of these.F) All of the above
G) A) and C)

Question 11

Melody works for a company with only 22 employees.Her employer contributed $2,000 to her health savings account (HSA),and the account earned $100 in interest during the year.Melody withdrew only $1,200 to pay medical expenses during the year.Melody is not required to recognize any gross income from the HSA for the year.

Accepted Answer

A) True 
 B)False

Question 12

Turquoise Company purchased a life insurance policy on the company's chief executive officer,Joe.After the company had paid $400,000 in premiums,Joe died and the company collected the $1.5 million face amount of the policy.The company also purchased group term life insurance on all its employees.Joe had included $16,000 in gross income for the group term life insurance premiums.Joe's widow,Rebecca,received the $100,000 proceeds from the group term life insurance policy.

Accepted Answer

A)  Rebecca can exclude the life insurance proceeds of $100,000, but Turquoise Company must include $1,100,000 ($1,500,000 - $400,000)  in gross income.
B)  Turquoise Company and Rebecca can exclude the life insurance proceeds of $1,500,000 and $100,000, respectively, from gross income.
C)  Turquoise Company can exclude $1,100,000 ($1,500,000 - $400,000)  from gross income, but Rebecca must include $84,000 in gross income.
D)  Turquoise Company must include $1,100,000 ($1,500,000 - $400,000)  in gross income and Rebecca must include $100,000 in gross income.
E)  None of these.F) A) and E)
G) C) and D)

Question 13

On January 1,2007,Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to finance the construction of a new plant.On January 1,2017,the company acquired the bonds on the open market for $11,500,000.Assuming that Cardinal Corporation is neither bankrupt nor insolvent,the acquisition and retirement of the bonds results in which of the following:

Accepted Answer

A)  The company must recognize a $500,000 gain.
B)  The company can make an election to recognize a $500,000 gain or reduce the company's basis in the plant by $500,000.
C)  The company must recognize a $500,000 gain and increase the company's basis in the plant by $500,000.
D)  The company can amortize the $500,000 gain, recognizing income over the remaining life of the bonds.
E)  None of these.F) A) and B)
G) C) and D)

Question 14

Olaf was injured in an automobile accident and received $25,000 for his physical injury,$50,000 for his loss of income,and $10,000 punitive damages.As a result of the award,the amount Olaf must include in gross income is:

Accepted Answer

A)  $10,000.
B)  $50,000.
C)  $60,000.
D)  $85,000.
E)  None of these.F) A) and E)
G) A) and D)

Question 15

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.

Accepted Answer

A)  Adam must include the reimbursement in his gross income.
B)  Adam can exclude the reimbursement from his gross income since the meals are provided for the convenience of the employer.
C)  Adam can exclude the reimbursement from his gross income because he eats the meals on the employer's business premises (the truck) .
D)  Adam may exclude from his gross income the difference between what he paid for the meals and what it would have cost him to eat at home.
E)  None of these.F) A) and D)
G) D) and E)

Question 16

An employee can exclude from gross income the value of meals provided by his or her employer whenever:

Accepted Answer

A)  The meal is not extravagant.
B)  The meals are provided on the employer's premises for the employer's convenience.
C)  There are no places to eat near the work location.
D)  The meals are provided for the convenience of the employee.
E)  None of these.F) A) and E)
G) D) and E)

Question 17

Assuming a taxpayer qualifies for the exclusion treatment,the interest income on educational savings bonds:

Accepted Answer

A)  Is gross income to the person who purchased the bond in the year the interest is earned.
B)  Is gross income to the student in the year the interest is earned.
C)  Is included in the student's gross income in the year the savings bonds are sold or redeemed to pay educational expenses.
D)  Is not included in anyone's gross income if the proceeds are used to pay college tuition.
E)  None of these.F) B) and C)
G) C) and D)

Question 18

Doug and Pattie received the following interest income in the current year:
​

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?

Accepted Answer

A)  $4,775.
B)  $4,675.
C)  $4,575.
D)  $4,300.
E)  None of these.F) A) and D)
G) A) and C)

Question 19

Louise works in a foreign branch of her employer's business.She earned $5,000 per month throughout the relevant period.Which of the following is correct:

Accepted Answer

A)  If Louise worked in the foreign branch from May 1, 2016 until October 31, 2017, she may exclude $40,000 from gross income in 2016 and exclude $50,000 in 2017.
B)  If Louise worked in the foreign branch from May 1, 2016 until October 31, 2017, she cannot exclude anything from gross income because she was not present in the country for 330 days in either year.
C)  If Louise began work in the foreign country on May 1, 2016, she must work through November 30, 2017 in order to exclude $55,000 from gross income in 2017 but none in 2016.
D)  Louise will not be allowed to exclude any foreign earned income because she made less than $101,300.
E)  None of these.F) B) and E)
G) B) and C)

Question 20

Under the Swan Company's cafeteria plan,all full-time employees are allowed to select any combination of the benefits below,but the total received by the 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?

Accepted Answer

A)  Sam, a full-time employee, selects choices II and III and $2,000 cash. His gross income must include the $2,000.
B)  Paul, a full-time employee, elects to receive $8,000 cash because his wife's employer provided these same insurance benefits for him. Paul is not required to include the $8,000 in gross income.
C)  Sue, a full-time employee, elects to receive choices I, II and $3,200 for III. Sue is required to include $3,200 in gross income.
D)  All of these.
E)  None of these.F) B) and C)
G) A) and B)

Exam 5: Gross Income: Exclusions

Correct Answer
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The taxpayer's marginal tax bracket is 25%.Which would the taxpayer prefer?

Correct Answer
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An employee can exclude from gross income the value of meals provided by his or her employer whenever:

Correct Answer
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Tonya is a cash basis taxpayer.In 2017,she paid state income taxes of $8,000.In early 2018,she filed her 2017 state income tax return and received a $900 refund.

Correct Answer
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Correct Answer
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Louise works in a foreign branch of her employer's business.She earned $5,000 per month throughout the relevant period.Which of the following is correct:

Correct Answer
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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:

Correct Answer
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Correct Answer
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Doug and Pattie received the following interest income in the current year: 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?

Correct Answer
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Olaf was injured in an automobile accident and received $25,000 for his physical injury,$50,000 for his loss of income,and $10,000 punitive damages.As a result of the award,the amount Olaf must include in gross income is:

Correct Answer
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Correct Answer
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Correct Answer
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The argument that Carmen and her spouse ...
View Answer

Assuming a taxpayer qualifies for the exclusion treatment,the interest income on educational savings bonds:

Correct Answer
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The Perfection Tax Service gives employees $12.50 as "supper money" when they are required to work overtime,approximately 25 days each year.The supper money received:

Correct Answer
verified

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.

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

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Exam 5: Gross Income: Exclusions

Correct AnswerverifiedShow Answer

The taxpayer's marginal tax bracket is 25%.Which would the taxpayer prefer?

Correct AnswerverifiedShow Answer

An employee can exclude from gross income the value of meals provided by his or her employer whenever:

Correct AnswerverifiedShow Answer

Tonya is a cash basis taxpayer.In 2017,she paid state income taxes of $8,000.In early 2018,she filed her 2017 state income tax return and received a $900 refund.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Louise works in a foreign branch of her employer's business.She earned $5,000 per month throughout the relevant period.Which of the following is correct:

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Doug and Pattie received the following interest income in the current year: ​ 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?

Correct AnswerverifiedShow Answer

Olaf was injured in an automobile accident and received $25,000 for his physical injury,$50,000 for his loss of income,and $10,000 punitive damages.As a result of the award,the amount Olaf must include in gross income is:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThe argument that Carmen and her spouse ...View AnswerShow Answer

Assuming a taxpayer qualifies for the exclusion treatment,the interest income on educational savings bonds:

Correct AnswerverifiedShow Answer

The Perfection Tax Service gives employees $12.50 as "supper money" when they are required to work overtime,approximately 25 days each year.The supper money received:

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Doug and Pattie received the following interest income in the current year: 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?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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The argument that Carmen and her spouse ...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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