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Exam 4: Gross Income: Concepts and Inclusions

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Question 1

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Betty purchased an annuity for $24,000 in 2012.Under the contract,Betty will receive $300 each month for the rest of her life.According to the actuarial estimates,Betty will live to receive 96 payments and will receive a 3% return on her original investment.

A) If Betty collects $3,000 in 2012, her gross income is $630 (.03 ´ $21,000) .
B) Betty has no gross income until she has collected $24,000.
C) If Betty lives to collect more than 96 payments, all of the amounts collected after the 96th payment must be included in taxable income.
D) If Betty lives to collect only 60 payments before her death, she will report a $6,000 loss from the annuity [$24,000 - (60 ´ $300) = $6,000] on her final return.
E) None of the above.

F) None of the above
G) C) and D)

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Question 2

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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.

A) True
B) False

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Question 3

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The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased.

Detroit Corporation sued Chicago Corporation for intentional damage to Detroit's goodwill.Detroit had created its goodwill through providing high-quality services to its customers.Thus,no basis for the goodwill appeared on Detroit's balance sheet.The suit was settled and Detroit received $1,500,000 for the damages to its goodwill.

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.

Green,Inc.,provides group term life insurance for all of its employees.The coverage equals twice the employee's annual salary.Sam,a vice-president,worked all year for Green,Inc.and received $250,000 of coverage for the year at a cost to Green of $3,000.The Uniform Premiums (based on Sam's age) are $.30 per month for $1,000 of protection.How much must Sam include in gross income this 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.

Margaret owns land that appreciates at the rate of 10% each year.Ralph owns a zero coupon (i.e.,all of the interest is paid at maturity but is taxed annually) corporate bond with a yield to maturity of 10%.At the end of 10 years,the bond will mature and the land will be sold.At the end of the 10 years,

Dick and Jane are divorced in 2011.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 2012,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?

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.

Roy is considering purchasing land for $10,000.He expects the land to appreciate in value 8% each year (compounded)and he will sell it at the end of 10 years.He also is considering purchasing a bond for $10,000.The bond does not pay any annual interest,but will pay $21,589 at maturity in 10 years.The before-tax rate of return on the bond is 8%.Roy is in the 40% (combined Federal and State)marginal tax bracket.Roy has other investments that earn a 8% before-tax rate of return.Given that the compound interest factor at 8% is 2.1589,and at 4.8% the factor is 1.5981,which alternative should Roy choose?

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

Jim and Nora,residents of a community property state,were married in early 2010.Late in 2010 they separated,and in 2012 they were divorced.Each earned a salary,and they received income from community owned investments in all relevant years.They filed separate returns in 2010 and 2011.

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.

In some 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.

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

The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

Office Palace,Inc.,leased an all-in-one printer to a new customer,Ashley,on December 27,2012.The printer was to rent for $600 per month for a period of 36 months beginning January 1,2013.Ashley was required to pay the first and last month's rent at the time the lease was signed.Ashley was also required to pay a $1,500 damage deposit.Office Palace must recognize as income for the lease:

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

Freddy purchased a certificate of deposit for $20,000 on July 1,2012.The certificate's maturity value in two years (June 30,2014) is $21,218,yielding 3% before-tax interest.