Deck 3: Determining Gross Income

Question 1

When income is taxed in a different period than it is accrued for financial accounting, there is a timing difference.

Answer 1

True

Question 2

Qualified dividends are dividends that are eligible for the reduced tax rates for dividend income.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

Constructive receipt requires an accrual basis taxpayer to recognize income when the taxpayer has an unrestricted right to a payment that is to be received.

Question 7

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

Question 8

All stock dividends are nontaxable.

Question 9

When a corporation lends money to an employee at below-market interest rates, the imputed interest is additional compensation to the employee.

Question 10

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

Question 11

Up to 85 percent of a person's Social Security benefits may be included in gross income.

Question 12

The completed contract method allows the taxpayer to defer taxes on the contract income.

Question 13

Income must be realized before it can be recognized.

Question 14

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

Question 15

All government bonds are exempt from the application of the OID rules.

Question 16

A calendar year always ends on December 31.

Question 17

The assignment of income doctrine allows one taxpayer to assign income to another taxpayer for tax purposes.

Question 18

The recipient's basis in a gift always carries over from the gift's donor.

Question 19

When a taxpayer has a tax year of less than 12 months, the taxpayer must always annualize income.

Question 20

Beginning in 2018, the cash method may be used by all taxpayers whose average annual gross receipts for the three prior years do not exceed $25 million.

Question 21

What are acceptable fiscal years for tax purposes?

Question 22

What is an annuity? How is annuity income taxed?

Question 23

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

Question 24

A nonresident alien can only file a joint return with a United States citizen or resident if they both agree to be taxed on their worldwide income.

Question 25

International tax treaties help to alleviate the potential of double taxation when companies have business facilities in several countries.

Question 26

The basis in inherited property is normally determined at the decedent's date of death.

Question 27

Explain the basic difference between the common law and community property states related to earned income.

Question 28

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

Question 29

Explain the tax treatment of a gift loan.

Question 30

What is the purpose of the original issue discount rules?

Question 31

What is the tax benefit rule? Provide an example of its application.

Question 32

Explain the two acceptable methods for recognizing income on long-term contracts.

Question 33

How is the return of capital principle related to basis?

Question 34

Explain the difference in tax treatment of child support and alimony.

Question 35

Explain what is meant by the all events test.

Question 36

Income of a nonresident alien cannot be taxed by the United States.

Question 37

Explain the normal tax treatment of life insurance proceeds.

Question 38

What types of government transfer payments are excluded from gross income?

Question 39

Under the source principle of international taxation, income will be taxed in a particular jurisdiction if the source of that income is a business operating in that jurisdiction.

Question 40

Why do tax accounting principles differ from GAAP?

Question 41

Naomi was the beneficiary of a $100,000 insurance policy on her mother who died in January 2018. It took the insurance company several months to make the payment so she received $100,206 in May 2018. She was a joint tenant on a bank account with her mother. She inherited the $14,000 in the account that had all been deposited by her mother. After a long battle with her medical insurance company, Naomi received a $7,000 reimbursement in 2018 for an operation that she underwent in 2016. As a result of her high medical expenses, she was able to claim $7,000 in itemized deductions on her 2016 tax return rather than taking the $6,300 standard deduction. What are Naomi's taxable income items from these events for 2018?

Question 42

Teddy, a single man, has $5,000 of taxable dividends, $3,000 of interest income from State of Oregon bonds, a $5,000 long-term capital gain, and $9,000 of Social Security benefits. What is Teddy's adjusted gross income?

Question 43

Wilma divorced Barney prior to January 1, 2019. This year she received the title to their boat that cost $45,000 and is now worth $55,000. Barney paid Wilma $1,500 per month, $500 for alimony and $1,000 for support of their two children. Wilma owed $60,000 to the bank for a loan on a failed business. To satisfy the debt, she transferred title of the boat to the bank and paid an additional $5,000. What are the tax consequences of these transactions for Barney and Wilma?

Question 44

In 2018 Potrus, an accrual basis corporate taxpayer, received a $40,000 advance for a series of eight lectures by various employees for the Art Institute. After delivering five lectures, the series was cancelled for poor attendance. Potrus refused to return any of the advance payment, so the Art Institute sued. In 2019, Potrus was ordered by the court to repay $15,000. Potrus's net income was $426,000 in 2019 and $298,000 in 2018. How should Potrus treat the repayment to obtain the best tax result?

Question 45

How does an alien achieve residency status for taxation in the United States?

Question 46

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?

Question 47

Willy, who has no income and no investments, borrows $50,000 from his mother at no interest. The applicable federal rate is 4 percent.
a. Explain the tax consequences of this loan if Willy uses the money for an exotic vacation.
b. How would your answer change if Willy uses the money to invest in bonds paying 4 percent interest?

Question 48

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?

Question 49

John and Ethel, a married couple, receive $21,000 in Social Security benefits in 2018. They also receive $82,000 in taxable pension payments and $6,000 in municipal bond interest. What is their adjusted gross income for 2018?

Question 50

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

Question 51

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

Question 52

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?

Question 53

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?

Question 54

James ran a stop sign and smashed into Mary's automobile. Mary was seriously injured and sued James and his insurance company. She was awarded the following:
-$12,000 for lost income
-$60,000 for hospital costs
-$10,000 for therapy to overcome her fear of driving
-$100,000 for the loss of function in her right hand
-$50,000 punitive damages
Mary's actual hospital costs were $62,000 and her therapy cost $7,000. How much must Mary include in income?

Question 55

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
Income earned in year 2 of a four-year long-term contract using the completed contract method.

Question 56

Howard can invest $50,000 in land that is expected to increase in value by 8 percent per year. Alternatively he could invest in corporate bonds paying 8 percent interest, with interest reinvested at 8 percent. Howard's capital gains tax rate is 15 percent and his marginal tax rate is 24 percent. Which investment should Howard make and what is the advantage of this alternative over the other investment if he plans to sell the land in five years.

Question 57

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
Gain on municipal bond sale

Question 58

Briefly identify and define the two principles that guide the determination of who will be taxed by a specific jurisdiction.

Question 59

Carol attends State U. and received a $10,000 scholarship for her senior year that began in September, year 1. Up to the time of her graduation in May, year 2, Carol had paid the following expenses for the two semesters:
1^st semester: $3,000 tuition; $1,550 room and board in a dormitory; $400 for books and fees.
2^nd semester: $3,000 tuition; $1,700 living expenses in an apartment; $250 for books and fees.
She used the remaining money from the scholarship to purchase clothes for job hunting in April, year 2.
Does Carol have any income as a result of the scholarship? If yes, how much is her income and in what years would it be included in income?

Question 60

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

Question 61

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

Question 62

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
Loan forgiven by father

Question 63

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
Reimbursements from employer-financed medical plan for medical expenses

Question 64

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
$100 found in a vacant lot

Question 65

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 statements explain permanent differences between tax and financial accounting? i. Income is recognized in one period for tax and in another period for financial accounting
Ii) Income is recognized for accounting but not for tax purposes.
Iii) Expenses not deductible for tax purposes are deductible for financial accounting.
Iv) An expense is deducted currently for tax but in a later period for financial accounting.

A) ii. only
B) i. and ii.
C) i. and iv.
D) ii. and iii.

Question 66

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
Cash dividends from a U.S. corporation paid to a nonresident alien.

Question 67

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

Question 68

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
Income from employer-financed annuity

Question 69

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

Question 70

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 statements explains timing differences for tax and financial accounting? i. Income is recognized in one period for tax and in another period for financial accounting.
Ii) Income is recognized for accounting but not for tax purposes.
Iii) Expenses not deductible for tax purposes are deductible for financial accounting.
Iv) An expense is deducted currently for tax but in a later period for financial accounting.

A) i. only
B) i. and ii.
C) i. and iv.
D) ii. and iii.

Question 71

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
Sheryl sold 100 shares of ABC stock for $2,100 and 300 shares of XYZ stock for $8,900. She purchased the ABC stock four years ago for $1,200 and the XYZ stock two years ago for $9,100. What is the net effect of these sales on Sheryl's income?

A) $200 net gain
B) $700 net gain
C) $900 net gain
D) $1,100 net gain

Question 72

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

Question 73

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
Dividend to a U.S. corporation from a 10% owned foreign corporation in 2018.

Question 74

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
Prior to the Tax Cuts and Jobs Act, foreign income of a controlled foreign corporation that has never paid a dividend.

Question 75

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
Workers compensation payment

Question 76

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
Interest income on municipal bond

Question 77

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
Property settlement as part of divorce proceedings

Question 78

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

Question 79

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
State tax refund of a nonitemzer.

Question 80

Put T for Taxable income or N for Nontaxable income beside each item below as it normally would be treated for tax purposes.
Alimony received due to a divorce agreement executed prior to January 1, 2019