Deck 3: Determining Gross Income

Question 1

_____ 15.Up to 85 percent of a person's Social Security payments may be included in gross income.

Answer 1

True

Question 2

_____ 3.When a taxpayer has a tax year of less than 12 months,the taxpayer must always annualize income.

Answer 2

False

Question 3

_____ 9.The assignment of income doctrine allows one taxpayer to assign income to another taxpayer for tax purposes.

Answer 3

False

Question 4

_____ 1.Income must be recognized before it can be realized.

Question 5

_____ 8.The completed contract method requires income to be recognized annually based on the costs incurred in that year.

Question 6

_____ 18.International tax treaties help to alleviate the potential of double taxation when companies have business facilities in several countries.

Question 7

_____ 13.Qualified dividends are dividends that are eligible for the reduced tax rates for dividend income.

Question 8

_____ 12.Most stock dividends are nontaxable.

Question 9

_____ 16.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 10

_____ 20.Individuals who live in one state but work in another may be subject to income taxes at the state level in both jurisdictions.

Question 11

_____ 14.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 12

_____ 10.All government bonds are exempt from the application of the OID rules.

Question 13

_____ 5.All taxpayers may use the accrual method of determining income but certain taxpayers may not use the cash method.

Question 14

_____ 11.When a corporation lends money to an employee at below-market interest rates,the imputed interest is additional compensation to the employee.

Question 15

_____ 1 9.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 16

_____ 17.Income of a nonresident alien cannot be taxed by the United States.

Question 17

_____ 7.The installment method of income recognition is an application of the wherewithal to pay concept.

Question 18

_____ 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 19

_____ 4.A calendar year always ends on December 31.

Question 20

_____ 2.When income is taxed in a different period than it is accrued for financial accounting,there is a timing difference.

Question 21

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

A)Cash method
B)Accrual method
C)Percentage-of-completion
D)Hybrid method
E)All are acceptable methods

Question 22

In January,Zelda borrows $7,000 from her mother for moving expenses and clothes for starting her new job after graduating from college.She told her mother she would pay her 9 percent interest on the money but made no payments in the current year.If the applicable federal interest rate is 5 percent,how much interest income must Zelda's mother recognize?

A)0
B)$233
C)$350
D)$420

Question 23

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 24

Clayton Corporation receives $100,000 to provide garbage service for the next four years:

A)Clayton must recognize income over the four years for both tax and accounting purposes.
B)Clayton can include the entire $100,000 in income currently for both tax and accounting purposes.
C)The $100,000 creates a permanent difference between tax and accounting income.
D)The $100,000 creates a timing difference between tax and accounting income.

Question 25

_____ 21.A business must have a permanent location within a state to establish nexus.

Question 26

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 27

Which of the following explain why it is important to determine the period in which income is recognized?
A)Marginal tax rates may be different in different periods.
B)Tax laws may change
C)The time value of money
D)All of the above are explanations
E)

A)and b.only are explanations

Question 28

Which of the following is an application of the wherewithal-to-pay concept?

A)Percentage-of-completion
B)Hybrid method of accounting
C)Installment method
D)Accrual method of accounting

Question 29

_____ 23.A taxpayer must elect to use the installment method on qualifying sales.

Question 30

Which of the following doctrines does not affect the timing of income recognition for a cash basis taxpayer?

A)Installment method
B)All-events test
C)Wherewithal-to-pay
D)Constructive receipt

Question 31

Cora owns 6,000 shares of KLM stock,2,000 shares of BBT Mutual fund,and 10,000 shares of Centex Corporation.Her 1099-DIV forms from these investments showed the following: KLM: $3 per share distribution all reinvested in KLM
BBT Mutual fund: $5 per share distribution,$1 of which represents a capital gain distribution;none of this is reinvested.
Centex: $2 per share distribution,all of which represents a return of capital.
How much must Cora include in her income in the current year?

A)$48,000
B)$28,000
C)$22,000
D)$20,000

Question 32

All of the following are allowable tax years except:

A)The last Friday of July
B)December 31
C)The Sunday closest to March 1
D)August 31

Question 33

Abdo Corporation received permission to change its tax year-end from December 31 to August 31 in 2013.Its income from January 1 through August 31 is $278,000.What is Abdo's tax liability?

A)$91,670
B)$94,520
C)$108,420
D)$141,780

Question 34

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)A gift loan to Billy
B)An employment-related loan
C)An arm's length loan
D)A disguised dividend to the father

Question 35

All of the following result in nontaxable income except:

A)Stock dividend
B)Interest on municipal bonds
C)Capital gain distribution reinvested in the mutual fund
D)Distribution identified as a return of capital

Question 36

Wilma purchased an annuity policy for $100,000 that will pay her $10,000 per year for life beginning on her 60th birthday in 5 years.At 60,her life expectancy is 25 years.How much of each annual payment can Wilma exclude from income?

A)0
B)$4,000
C)$6,000
D)$10,000

Question 37

George can invest $10,000 in a tax-exempt bond paying 6 percent interest or a $10,000 corporate bond paying 8 percent interest.What is the lowest marginal tax rate at which George will be better off investing in the tax-exempt bond?

A)15%
B)25%
C)28%
D)33%

Question 38

William is single and had salary income from his position as Chief Financial Officer of Zippy Bank of $450,000 (the 39.6 tax bracket).He also had $35,000 in income from the dividends on the stock of his previous employer.How will William's taxable income of $475,000 (after his standard deduction and personal exemption)be taxed?

A)All $475,000 will be taxed at 39.6%
B)All $475,000 will be taxed at 43.4% due to the surtax
C)Only the $450,000 income from his salary will be taxed at 39.6%
D)His salary income will be taxed at 39.6% and his dividend income at 23.8%

Question 39

Bigtown Advertising Agency,a calendar-year,accrual basis taxpayer,was paid $60,000 for a three-year advertising contract on July 1,2013,and $36,000 for a 12-month contract on December 1,2013 How much income must Bigtown recognize for these contracts in years 2013 and 2014,respectively?

A)$96,000,0
B)$13,000,$83,000
C)$63,000,$33,000
D)$13,000,$53,000

Question 40

_____ 22.The completed contract method allows the taxpayer to defer taxes on the contract income.

Question 41

Windjammer Corporation,a cash-basis,calendar-year corporation sold $30,000 of merchandise to Jackpot Company in January,year 1.In November,Jackpot declared bankruptcy without paying Windjammer.In year 4,Jackpot had reorganized under a new owner and paid all its old debts including the $30,000 owed Windjammer.How does Windjammer treat these events?

A)Recognize $30,000 revenue in year 1 only.
B)Recognize $30,000 revenue in year 4 only.
C)Deduct $30,000 as a bad debt in year 1.
D)Deduct $30,000 as a bad debt in year 1;recognize $30,000 income in year 4.

Question 42

In 2013,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 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?

A)0
B)$4,000
C)$4,400
D)$4,600

Question 43

To whom do the doctrines of constructive receipt and claim of right apply?

A)Cash basis taxpayers only
B)Accrual basis taxpayers only
C)Cash basis,accrual basis,respectively
D)Accrual basis,cash basis,respectively

Question 44

Blinder Corporation was having some cash flow problems.One of its creditors agreed to accept $25,000 in payment of a $40,000 debt to help the company out of the jam,even though it is not bankrupt.How does Blinder treat this debt repayment?

A)Blinder has neither income nor loss
B)Blinder must recognize $15,000 of income
C)Blinder must reduce the basis of assets by $15,000
D)Blinder must reduce tax attributes by $15,000

Question 45

Debra owned City of Long Beach bonds that were issued several years ago to pay for basic government services.She received $3,800 of interest income from the bonds in the current year.Due to a change in the market interest rate,she was able to sell the bonds at a $2,100 gain.How much gross income should Debra report from these transactions?

A)$5,900
B)$3,800
C)$2,100
D)0

Question 46

George and Georgette divorced last year.George was ordered to pay (and does pay)Georgette $600 per month alimony and $800 per month child support.In addition,George transferred title to his half of their stock to Georgette last year.The stock had a basis of $120,000 and a fair market value of $260,000 at the date of the transfer.This year Georgette sells the stock for $280,000.What is Georgette's income for this year if she has no other income items?

A)$7,200
B)$19,200
C)$159,200
D)$167,200

Question 47

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 2013,Myra receives twelve $1,500 payments.What is her taxable income?

A)$18,000
B)$17,091
C)$14,364
D)$13,455

Question 48

Bryan,age 66,is retired.His wife,Rebecca,age 64,still works part-time.They have income from the following sources: What is their joint gross income?

A)$10,500
B)$11,050
C)$25,500
D)$25,550
E)$30,550

Question 49

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?

A)$5,000
B)$8,000
C)$10,000
D)$13,000

Question 50

Fannie purchased ten $1,000 bonds from her broker this year.The bonds were issued four years ago and mature in six years.Due to a change in interest rates,the purchase price of the bonds was only $8,200.If the issuing company redeems the bonds for $10,000 at maturity,how will Fannie treat the $10,000 proceeds?

A)$10,000 ordinary income
B)$1,800 ordinary income,$8,200 return of capital
C)$1,800 capital gain,$8,200 return of capital
D)$10,000 return of capital

Question 51

Sarah and Jason are married and live in a community property state.Sarah is a nurse and earns $40,000 per year;Jason is an engineer and earns $75,000 per year.They have a joint bank account that earned $500 in interest and Jason recently invested in some stocks that paid a $2,000 dividend.If Sarah and Jason file separate returns,how much income would Sarah report?

A)$40,000
B)$41,000
C)$57,750
D)$58,750

Question 52

Which of the following is not included in income?

A)Alimony
B)$100 Christmas bonus
C)$50 interest on New York City general revenue bonds
D)A television won in a church raffle.

Question 53

Ben became disabled at the end of last year.In January of the current year,he began to receive $1,500 per month disability payments from a policy that he held through his employer.His employer paid $25 of the monthly premium for the policy and Ben paid $50.How much must Ben include in income in the current year for the disability payments?

A)$600
B)$1,500
C)$6,000
D)$12,000

Question 54

Marylee and George divorced in 2012 after 20 years of marriage during which time George gave up his career and stayed home with their children.In 2013,Marylee,the CEO of a mail order company,transfers their home valued at $450,000 and held in joint tenancy to George as part of the divorce settlement.She will also pay George $4,000 per month alimony and $6,000 per month in child support beginning in January of 2013.If George has no other income,what is his adjusted gross income for 2013?

A)$48,000
B)$120,000
C)$273,000
D)$498,000

Question 55

Meg was the beneficiary of a $50,000 life insurance policy when her father died at the end of 2011.The insurance company gives her the option of taking the $50,000 as a lump sum immediately or receiving an annuity of $8,000 per year for 12 years beginning in 2013.Meg takes the annuity option.What amount must Meg include in her income in 2013?

A)0
B)$3,000
C)$3,833
D)$8,000

Question 56

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?

A)No tax consequences to either Tomohiro or Matt
B)No income to Matt,$2,000 deduction for Tomohiro
C)$2,000 income to Matt,no income to Tomohiro
D)$2,000 income to Matt and $2,000 deduction for Tomohiro
E)$2,000 income to Matt and $2,000 income to Tomohiro

Question 57

Which of the following is not a government transfer payment?

A)Social Security benefits
B)Food stamps
C)Interest on T-Bills
D)Aid to dependent children

Question 58

Kimberly gave 100 shares of stock to her 24-year-old son,Brandon.Kimberly purchased the stock 9 months ago for $10 per share.On the gift date,the stock was worth $40 per share.Two months later,Brandon sells the 100 shares of stock for $60 per share.Kimberly and Brandon are in the 33 percent and 10 percent marginal tax brackets,respectively.How much family tax savings is achieved through this transaction?

A)$500
B)$920
C)$1,150
D)$1,380

Question 59

Tighe won a new automobile from his employer for being the top salesperson in the entire firm.The auto cost the employer only $34,000 because he purchased a fleet of cars from the dealer;it had a retail price of $37,000.In addition,Tighe's employer gave him $5,000 with which to pay the taxes on the prize.How much must Tighe include in his gross income?

A)$42,000
B)$37,000
C)$35,000
D)$32,000

Question 60

Which of the following are included in gross income?

A)Jury fees
B)Gambling winnings
C)Interest on federal tax refund
D)All are included in income

Question 61

Under the percentage-of-completion method,how much profit (loss)should Carbon recognize in year 3?

A)($150,000)
B)($50,000)
C)$150,000
D)$250,000

Question 62

Tax treaties
A)can minimize double taxation.
B)can permit taxes paid in one country to offset taxed paid in another country.
C)usually allow the net tax paid to be the lesser of the taxes imposed by the two countries claiming jurisdiction over the income.
D)All of the above.
E)

A)and b.only.

Question 63

Under the percentage-of-completion method,how much profit should Carbon recognize in year 1?

A)$0
B)$75,000
C)$100,000
D)$400,000

Question 64

Jabo Corporation has its home office and manufacturing facilities in Peru.It sells products via the Internet in both Brazil and Chile,although it has a small sales and manufacturing facility in Santiago,Chile.

A)Under the source principle,all of Jabo's income would be taxed in Peru.
B)Under the source principle,Chile would tax all of the profits from goods sold in Chile and Brazil.
C)Under the residency principle Peru would tax all of the company's income.
D)Under the residency principle,only sales in Brazil would be taxed in Brazil.

Question 65

Under the competed contract method of accounting,how much profit (loss)should Carbon recognize in years 1,2,and 3 respectively?

A)$0,$0,$250,000
B)$0,$0,$400,000
C)$100,000,$300,000, ($150,000)
D)$75,000,$225,000, ($50,000)

Question 66

Under the percentage-of-completion method,how much profit should Carbon recognize in year 2?

A)$400,000
B)$300,000
C)$225,000
B)$150,000

Question 67

William lives in Delaware but works for a company that has offices in both Maryland and Pennsylvani a.William spent four months working in Pennsylvania and 8 months working in Maryland.

A)Only Delaware can impose a state income tax on his income.
B)Only Maryland can impose a state income tax on his income as he worked there the longer time period.
C)Only Pennsylvania and Maryland can impose state income taxes on his income.
D)Delaware,Pennsylvania,and Maryland can impose state income taxes on his income.
Use the following information for problems 45 through 48.
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

Question 68

Natasha graduated at the top of her high school class and received a $10,000 scholarship to attend the college of her choice.Natasha decided to attend State University and spent her $10,000 as follows: How much of the $10,000 should Natasha report as gross income?

A)$10,000
B)$3,400
C)$2,500
D)$1,500
E)zero