Exam 3: Determining Gross Income

Shelly is in the 24 percent tax bracket and expects to remain in that bracket in the future. She has $100,000 to invest for 5 years and has the following alternatives: (a) corporate bonds paying 7 percent; (b) tax-exempt bonds paying 4.5 percent; (c) land that is expected to increase in value to $140,000 in 5 years. Interest on either the corporate bonds or the tax-exempt bonds can be reinvested at 7 percent interest. Any gain on the sale of the land will be eligible for the 15 percent long-term capital gain tax rate. Calculate the after-tax return for each investment. Which investment do you recommend she choose?

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Child support received

The installment method of income recognition is an application of the wherewithal to pay concept.

Gogo-a-gogo, a manufacturer of dance shoes located in France, is a 90% owned subsidiary of Dance-Togs, Incorporated, a calendar-year corporation. In 2017 it earned a total of $400,000 on its manufacturing operations in France and paid $120,000 in French income taxes on that income. It distributed $60,000 to its parent corporation during the year. How much of Gogo-a-gogo's income must Dance-Togs include in its income for 2017? How would your answer change if the tax year was 2018 instead of 2017?

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Which of the following explain why it is important to determine the period in which income is recognized?

Colin and Coleen are negotiating the terms of a divorce in 2018. Colin is willing to pay Coleen $20,000 of alimony for five years so that she can return to school and obtain a degree. Coleen has stated that she needs no less than $20,000 after taxes and will not accept Colin's offer of alimony. Coleen is in the 12 percent tax bracket and Colin is in the 22 percent tax bracket. How much alimony must Coleen receive to have $20,000 after taxes? What is Colin's after-tax cost of this alimony payment?

What is an annuity? How is annuity income taxed?

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Stock dividend

Elizabeth is the beneficiary of an $800,000 insurance policy on her husband's life. Elizabeth can elect to receive $165,000 per year for 5 years or received the entire $800,000 in a lump sum the first year. If she elects to receive the lump sum, how much is included in income in the first year.

Community property states allow income to be taxed to a person who did not earn the income.

Multiplying the annuity amount received by the ratio of the investment in the annuity to the expected return determines the annuity's taxable portion.

Billy's father owns a controlling interest in Big Top Corporation. Billy needed $20,000 to pay a gambling debt and the corporation made a loan to Billy at no interest for the $20,000. This transaction can be characterized as:

A calendar year always ends on December 31.

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Settlement for loss of finger in industrial accident

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Scholarship funds used to pay room and board

In 2018, Willy gave his son 4,000 shares of ABC stock valued at $10 per share. Two weeks after the gift, ABC declared a $1 per share dividend. Willy also gave his son some municipal bonds the morning of June 30. On July 3, Willy received a check for $400 for the interest on the bonds. Finally, Willy gave his son five coupons from other bonds that he owned. On August 2, the son exchanged the coupons at a bank receiving the $200 interest due on the coupons. What is the son's taxable income from these events?

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes. -Carbon Corporation had a $2,000,000 contract to build a small hospital with total costs estimated at $1,600,000. It received the following payments and incurred the following expenses over the three-year contract period: Year Payments Expenses 1 $ 400,000 $300,000 2 $1,200,000 $900,000 3 $ 400,000 $550,000 Under the percentage-of-completion method, how much profit should Carbon recognize in year 2? A) $400,000 B) $150,000 B) $300,000 C) $225,000

Explain the relationship between realization and recognition of gains or losses.

All stock dividends are nontaxable.

Tomohiro Corporation loans $50,000 interest-free for one year to Matt, a shareholder. Matt uses the loan to pay for personal debts. Assume that the applicable federal rate is 4 percent. What are the tax consequences of this loan to Tomohiro and to Matt?