Exam 3: Determining Gross Income

Explain the doctrine of constructive receipt and the claim of right doctrine.

Income earned in year 2 of a four-year long-term contract using the completed contract method.

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?

If a beneficiary of a life insurance policy receives the insurance proceeds over time in installments, then each installment received is fully taxable.

Income from employer-financed annuity

When is money received in the form of a scholarship included in income?

Cal (an accrual-basis taxpayer) enters into a ten-year lease on some rental property. In year 1, Cal receives $3,000 as a security deposit, $5,000 for the first year's rent, and $5,000 for the last year's rent. How much income must Cal report in this first year?

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?

Chloe owns 200 shares of TPP stock that she purchased 10 years ago for $1,500. Five years ago, there was a 3 for 2 stock split and she received 100 additional shares. This year, there was another 3 for 2 stock split and she received 150 additional shares. If the stock is currently selling for $10 per share, how much income does she recognize and what is her basis in these last 150 shares?

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 (loss) should Carbon recognize in year 3?

Interest income on municipal bond

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:

All taxpayers may use the accrual method of determining income but certain taxpayers may not use the cash method.

All of the following are acceptable methods of accounting for revenue and expenses for tax purposes except:

Myra retired last year from Whiplash Company after working there for 30 years. She elects to take her retirement benefits in the form of a lifetime annuity. Her retirement balance consists of $40,000 of employer contributions, $80,000 of her before-tax contributions, $20,000 of her after-tax contributions, and $60,000 of investment income. The plan will pay her $1,500 per month based on her life expectancy of 22 years. In 2018, Myra receives twelve $1,500 payments. What is her taxable income?

The completed contract method requires income to be recognized annually based on the costs incurred in that year.

Reimbursements from employer-financed medical plan for medical expenses

Taylor Corporation, an accrual-basis calendar-year corporation, rented an office building to Austin for $3,000 per month. On December 28, 2017, Taylor received a deposit of $4,000 in addition to the first and last months' rent. Occupancy began on January 1, 2018. On August 15, 2018 Austin closed the business. In 2018, Taylor had collected rent for February, March, April and May, but collected no payments thereafter. Taylor withheld $1,100 from the deposit because of damage to the property and $1,500 for unpaid rent. Taylor refunded the balance of the deposit to Austin. What amount should Taylor report as gross income for 2018?

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

Geraldine worked in the produce section of a grocery store. She slipped on the wet floor, shattering her leg in several places, and was unable to work for four months. During that time she received $7,400 in disability insurance from a policy for which she and her employer each paid half of the premium. How much mush Geraldine include in income from these payments?