Exam 3: Income Sources

Ellie,age 12,earns wages of $4,300 from her modeling.Since the fees are collected by Ellie's father and used for Ellie's living expenses,her father intends to include it in his gross income. I.Ellie received no cash so does not have to report any income. II.The Assignment of Income Doctrine prohibits the father from recognizing the $4,300. III.Even if Ellie desired to gift the $4,300 to her father,Ellie must recognize the income she earned. ​

Which of the following constitutes a realization? I.Oak Ridge Coal Company's coal mine reserves were recently appraised at $5,750,000 more than the previous year's appraisal. II.Lea's employer gives her (and all other salaried employees)a weekend in Chicago in recognition of their efforts to make this a successful year. ​

Lyle and Louise are retired living on income from their investments and Social Security benefits.During the current year,they receive the following: Lyle and Louise's adjusted gross income is:

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.Marlon purchased an annuity costing $13,000 that will pay him $300 per month for life upon reaching age 65.In 2017,when his life expectancy is 14 years,Marlon turns 65 and begins receiving the annuity payments.In 2017,Marlon receives $1,800 (6 payments)from the annuity. b.Fargo Systems Corporation,an accrual basis taxpayer,leases computer time on its mainframe computer.In November 2017,Fargo enters into a two-year lease with Bismarck Processing,Inc.The lease agreement requires Bismarck to pay a $4,800 fixed fee when the lease is signed and $100 per hour of mainframe use,paid on a monthly basis.Fargo receives the $4,800 payment on November 1,2017.Bismarck pays Fargo $800 on December 15,2016 for November computer use and $1,200 on January 18,2018 for December computer use. c.Maria,a single taxpayer,is retired.During the current year she receives $19,000 from her employer's qualified pension plan,$1,000 in interest on a savings account,$30,000 in interest on tax-exempt municipal bonds,and $10,000 in Social Security benefits. d.Stuart works for Prairie Surveyors of Kansas.During the current year,Prairie Surveyors replaces all of its computer equipment.Stuart makes a deal with his boss to purchase one of the old computers for $200.Prairie Surveyors received a $1,000 trade-in allowance on the other computers it replaced.

Marta finds a chest inscribed "Jack Sparrow" that contains $750,000 of cash while diving among the coral reefs off Key West,Florida.The US Customs and the DEA denied knowledge of the cash,so Marta keeps it. I.Recognition will not occur because the windfall would not be considered as "derived from capital or from labor." II.The All-inclusive Income Concept explains the recognition of the cash as income. ​

Which of the following statements is/are correct? I.Maria receives a necklace worth $300 from her employer in recognition of her production unit's safety record at the company's annual meeting.Maria is not taxed on the $300. II.Reggie opens a savings account at Mid Financial Savings and Loan.For opening the account he receives a microwave worth $200.On December 31,his account is credited for $300 of interest income.Reggie must report $500 of income. III.Manu receives a salary of $80,000 as CEO of Camp's Cooking Crockery.Manu owns 60% of Camp's,which is organized as an S corporation.Camp's taxable income for the current year is $300,000 and Camp's pays $100,000 of dividends.Manu must recognize $360,000 of income. ​

Match each statement with the correct term below. -Annuity

Benjamin has the following capital gains and losses for the current year: What is Benjamin's net capital gain or loss for the year?

Which of the following payments received on December 31,2017,would be recognized by a cash basis taxpayer in 2017,but would not be recognized in 2017 by an accrual basis taxpayer? I.Checks received from customers for services rendered during November and December 2017.The checks are deposited in the bank account on January 4,2018. II.Checks received from customers for services to be rendered during 2018.The checks are received in the morning mail and deposited in the bank account on December 31,2017. 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 2018.The check is deposited in the bank account on January 4,2017. ​

Waldo and Fern are negotiating a divorce settlement.Waldo has offered to pay Fern $12,000 each year for a guaranteed 10 years.What are the tax implications of this proposition? I.Since the payments are periodic and in cash,the payments qualify as alimony. II.If the payments qualify as child support,Fern recognizes gross income and Waldo has a deduction from Adjusted Gross Income. ​

Frank and Lilly are negotiating a divorce settlement.Frank has offered to pay Lilly $12,000 each year for 10 years,but payments cease upon Lilly's death.What are the tax implications of this proposition? I.Lilly must recognize Gross Income when the money is received. II.Frank has a deduction for Adjusted Gross Income in the year of payment. ​

Ona is a retired schoolteacher who receives a pension of $800 per month (Ona made no payments into the pension plan)and $2,000 of Social Security benefits per month.Ona's adjusted gross income is:

Alan has the following capital gains and losses during the current year: Alan's capital gain/loss position for the year is:

Angelica has the following capital gains and losses during the current year: 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

An installment sale I.occurs whenever property is sold and at least one payment is received in a tax year subsequent to the year of sale. II.may be disregarded by a taxpayer who elects to recognize the entire gain in the year of sale. III.triggers a method of income recognition based upon the wherewithal-to-pay concept. IV.allows businesses that sell inventory on credit to defer recognition of income until payment is received. ​

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.

Explain why the taxpayer in each of the following situations either does or does not have taxable income and determine the amount,if any,that the taxpayer would have to recognize. a.On December 1,2017,Tomlin,a cash basis taxpayer,bills a customer $5,000 for services rendered throughout 2017.The customer comes to Tomlin's office on December 30,2017,and offers to pay him the $5,000 amount owed.Tomlin suggests that the customer mail the check to him so he could see how quickly the post office could get the check to him through the mail.The post office delivers the check to Tomlin on January 10,2018.Tomlin promptly deposits the check in the bank. b.Patty,age 65,will retire this year.Twenty years ago she purchased a retirement annuity contract at a cost of $6,000.Under the terms of the contract,Patty is to receive $150 per month for 10 years after reaching age 65.During the current year,Patty receives $1,200 (8 payments). c.Bud is an accountant for Big Oil Company.In his spare time,Bud collects unique beer cans and bottles.During a party at his house,one of his friends tells him that his can of Billy Beer is a hot item in the professional collector's market.Bud investigates and instead of selling the Billy Beer,he trades the can of Billy Beer for a bottle of Leinenkugles beer. d.Rosemary is awarded the "Outstanding Teaching Award" at DePauw University.She receives a plaque and $3,500.She assigns the $3,500 to DePauw to establish a scholarship for economics majors.

Hector and Nicole are retired.During the current year,they receive $11,000 from a qualified pension plan,$3,000 of dividends on common stock holdings,$6,000 of tax-exempt interest,and $10,000 of Social Security benefits.Hector and Nicole's adjusted gross income is:

Which of the following always generate taxable income? I.Interest free loan over $10,000 from family member. II.Interest free loan over $10,000 from employer. III.Interest free loan under $10,000. IV.Interest free loan over $100,000. ​