Exam 3: Income Sources

Angelica has the following capital gains and losses during the current year: $\begin{array}{lc}\text { Short-term capital loss } & \$(10,000) \\\text { Collectibles loss } & (4,000) \\\text { Long-term capital gain } & 5,000 \\\text { Qualified dividend income } & 10,000\end{array}$ If Angelica's marginal tax rate is 33%,what is the effect of the above transactions on her taxable income and income tax liability? Income Tax Liability a. \ 1,000 increase \ 510 increase b. \ 7,000 increase \ 510 increase c. \ 1,000 increase \ 1,050 increase d. \ 7,000 increase \ 1,050 increase e. \ 1,000 increase \ 150 increase

According to the U.S.Supreme Court,income may be defined as the gain derived from capital,from labor,or from both combined provided it is understood to include profit gained through sale or conversion of capital assets.

Boomtown Construction,Inc.enters into a contract to build a new football stadium for the Maine Lobster's football team.The contract price is $6,000,000 and Boomtown estimates the total cost of the contract to be $5,000,000.During the first year of work on the contract,Boomtown completes 40% of the work on the stadium at a cost of $2,000,000.Boomtown receives $1,000,000 when it signed the contract and an additional $1,800,000 payment in the first year based on the degree of completion.Which of the following statements concerning the income to be recognized from the contract is/are correct? I.Boomtown must include the $2,800,000 payment it received in gross income. II.Because the work is not yet completed,Boomtown has the option of not recognizing any income from the contract. III.Boomtown includes the $1,800,000 payment in gross income based on the degree of completion because it does not have a claim of right to the $1,000,000. IV.Boomtown must include $2,400,000 in gross income.

The accrual method I.is permitted for the advance receipt of rent income. II.is never permitted under the deferral method. III.is permitted for the advance receipt of payments for goods to be delivered within the next tax year if the payment is less than the cost of goods sold and the payment is deferred for financial accounting purposes. IV.is permitted for the advance receipt of interest income.

Determine the amount of gross income the taxpayer must report in each of the following situations.Explain why the amount is taxable and how you determined the taxable amount. a.National Corporation receives a $12,000 bill for legal fees from its attorney in December. National paid the bill promptly and deducted the $12,000 as a legal expense for its year ending December 31. During the audit of its financial statements, the auditor determines that the attorney had double billed the corporation for $3,000 of expenses. National sent a copy of the auditor's findings in March. The attorney agrees with the auditor and sends National a check for $3,000 in April. b.Greta spends a week in Las Vegas. While cashing in some of her chips at the cashier's window, she looks down and sees a $1,000 bill lying crumpled on the floor. She picks up the bill and puts it in her pocket. c.Akron Living, Inc., an accrual basis corporation, owns an apartment building. On November 1, it rents an apartment for $400 per month. Per the terms of the rental agreement, the tenant pays the corporation $1,100 on November. The $1,100 consists of the first and last months rent and a $300 cleaning deposit. The cleaning deposit will be rused at the end of the lease and any amount not used for cleaning will be returned to the tenant. Very little is usually returned. d.Anthony is an employee of the Channel Company. Channel Company institutes a computer upgrade and offers its old computers for sale for $700. Anthony offers Channel $500 for one of the computers. Because they have not been selling well, Channel accepts Anthony's offer and sells him a computer for $500. e.James owns Argyle Co. as a sole proprietorship. In November, James pays a $600 bill for supplies and deducts it on his tax return. The following February, the supplier sends James a check for $120. A letter accompanying the check indicated that the supplier had overcharged Argyle Co. and the check was to adjust for the overcharge.

Rae is a retired corporate executive.He and his wife,Pat,receive pensions totaling $82,000 and $8,000 of Social Security benefits during the current year.Rae and Pat's adjusted gross income is

On December 24 of the current year,Louise is given a certificate by her employer entitling her to $1,500 worth of lodging at a Vail Village resort.The certificate states that it represents a "thank you" for graciously taking care of some client problems that were beyond the scope of normal business activities.The certificate is nontransferable.How much gross income must Louise recognize in the current year due to the certificate? Explain.

The hybrid method of accounting provides that taxpayers will account for sales of merchandise and the related cost of goods sold on the accrual basis and all other items of income and expense on the cash basis.

For any unrecovered portion of an annuity investment,the taxpayer is allowed a deduction in the year of death.

Charles bought an annuity for $30,000 several years ago.The annuity will pay him $250 per month from age 62 until he dies.During the current year,Charles turns 62 and receives his first annuity payment. I.If Charles dies after receiving 192 monthly payments,he must amend prior returns and correct the income reported based on 192 monthly payments. II.If Charles receives more than 260 payments,the total of each payment received after the 260^th payment is included from income.

The income tax concept that is primarily responsible for the treatment of installment sales of property is the:

James bought an annuity for $42,000 several years ago.The annuity will pay him $250 per month from age 66 until he dies.During the current year,James turns 66 and received his first annuity payment.His life expectancy is 25 years. I.If James receives more than 260 payments,all payments received after those are totally included in income. II.James should include $50 of each payment in adjusted gross income.

Teresa won $9,000 playing the Illinois lottery.Which of the following statements is/are correct? I.Teresa must include the $9,000 in gross income. II.The All-inclusive Income Concept applies to this situation. III.Legislative Grace allows Teresa to exclude lottery winnings from recognition.

Which of the following payments received on December 31,2013,would be recognized by a cash basis taxpayer in 2013,but would not be recognized in 2013 by an accrual basis taxpayer? I.Checks received from customers for services rendered during November and December 2013.The checks are deposited in the bank account on January 4,2014. II.Checks received from customers for services to be rendered during 2014.The checks are received in the morning mail and deposited in the bank account on December 31,2013. III.A check received from a customer for a service contract.The services under the contract are to be rendered over 24 months,beginning in January 2014.The check is deposited in the bank account on January 4,2013.

On January 1 of the current year,Beverly borrows $100,000 from her employer,Happy Hills Nursing Home.Beverly uses this loan to pay off credit cards and consumer loans.Happy Hills considers Beverly to be a loyal employee,and allows her up to five years to repay the loan.Beverly is not a shareholder or officer in the Happy Hills.Happy Hills does not charge any interest on the loan.Both Happy Hills and Beverly are on a December 31 fiscal year end.What is the income tax issue for Happy Hills? You do not need to do any calculations.

Brandon and Judy divorce during the year and agree that Brandon will pay Judy $24,000 a year in alimony.Brandon will be able to reduce his income by $24,000,but Judy does not have to report any income since it was not earned..

Terry owns 100% of Terry Manufacturing,Inc,and has the corporation pay his son's college tuition.Terry must include the payments in his taxable income.

The cash method of accounting for income tax purposes I.is allowed for interest received from Series EE savings bonds. II.requires a taxpayer who receives services from another taxpayer in exchange for property to include the value of the services in income. III.is allowed for taxpayers who receive interest income from the issuance of original issue discount securities with a term of more than one year.

Ruth purchased an annuity contract for $10,000.When she turns 65,she will receive $150 a month for the rest of her life.The first $10,000 she receives is a return of her capital and is not taxable.

Match each statement with the correct term below. -Child-support payment