Deck 3: Determining Gross Income

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

All businesses whose average annual gross receipts for the three prior years do not exceed $26 million in 2019 ($25 million in 2018) may use the cash method.

Question 9

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 10

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

Question 11

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

Question 12

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 13

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

Question 14

A calendar year always ends on December 31.

Question 15

Income must be realized before it can be recognized.

Question 16

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

Question 17

All stock dividends are nontaxable.

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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 23

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

Question 24

Abdo Corporation wants to determine if it can qualify to use the cash method under the $26 million gross receipts test for 2019.Its gross receipts were $27 million for 2019, $24 million for 2018, $23 million for 2017, and $22 million for 2016.What amount of gross receipts is relevant for determining if Abdo can use the cash method for 2019?

A)$23 million
B)$23.5 million
C)$23.75 million
D)$24 million

Question 25

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 26

Bigtown Advertising Agency, a calendar-year, accrual basis taxpayer, was paid $60,000 for a three-year advertising contract on July 1, 2019, and $36,000 for a 12-month contract on December 1, 2019.How much income must Bigtown recognize for these contracts in years 2019 and 2020, respectively?

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

Question 27

Which type of book/tax differences are accounted for as deferred tax assets or deferred tax liabilities?

A)Timing differences
B)Permanent differences
C)All deferrals for a cash basis taxpayer
D)All of the above

Question 28

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:
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 29

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 30

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

Question 31

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 32

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 33

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:
$\begin{array}{lll}\underline{\text { Year } }&\underline{ \text { Payments }}& \underline{\text { Expenses }}\\1 & \$ 400,000 & \$ 300,000 \\2 & \$ 1,200,000 & \$ 900,000 \\3 & \$ 400,000 & \$ 550,000\end{array}$

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

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

Question 34

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 35

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 36

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

Question 37

In 1998, Carol purchased a single life annuity for $150,000 that would pay her $15,000 per year for life beginning in 2011.Carol's life expectancy from 2011 forward on which the payments were based was 20 years.

A)How much would Carol include in income if she is still receiving payments in 2031?
B)If Carol dies in 2019 after receiving that year's payment, what is the unrecovered investment remaining?
C)How is the unrecovered investment treated for tax purposes?

Question 38

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

Question 39

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

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

Question 40

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 41

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 42

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 43

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)12%
B)22%
C)32%
D)35%

Question 44

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 45

Hannah has $20,000 invested in corporate bonds with a stated interest rate of 6 percent and $20,000 in tax-exempt municipal bonds issued for governmental activities with a stated interest rate of 5 percent.What is her annual after-tax cash flow from interest income for each investment if her marginal tax rate is 24%?

A)$1,000 from the municipal bonds and $1,200 from the corporate bonds
B)$1,000 from the municipal bonds and $912 from the corporate bonds
C)$760 from the municipal bonds and $1,200 from the corporate bonds
D)$760 from the municipal bonds and $912 from the corporate bonds

Question 46

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 47

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?

A)$3,000 income; $3,000 basis
B)$3,000 income, $1,125 basis
C)0 income; $1,125 basis
D)0 income; $500 basis

Question 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:
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 49

Taylor Corporation, an accrual-basis calendar-year corporation, rented an office building to Austin for $3,000 per month.On December 28, 2018, Taylor received a deposit of $4,000 in addition to the first and last months' rent.Occupancy began on January 1, 2019.On August 15, 2019 Austin closed the business.In 2019, 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 2019?

A)$13,500
B)$14,600
C)$19,500
D)$20,600

Question 50

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 24 percent and 10 percent marginal tax brackets, respectively.How much family tax savings is achieved through this transaction?

A)$600
B)$920
C)$700
D)$1,200

Question 51

In 1992, when Sherry was 56 years old with an additional life expectancy of 20 years, she purchased a single life annuity for $200,000 that was to pay her $15,000 per year for life starting in 1995.Sherry just received her $15,000 payment for 2019.How much of the $15,000 must Sherry include in income?

A)0
B)$5,000
C)$10,000
D)$15,000

Question 52

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 53

George and Georgette divorced in 2017.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 54

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:
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 55

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 56

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 57

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 58

Marylee and George divorced in 2018 after 20 years of marriage during which time George gave up his career and stayed home with their children.In 2019, 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 also agreed to pay George $4,000 per month alimony and $6,000 per month in child support beginning in January of 2019.If George has no other income, what is his adjusted gross income for 2019?

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

Question 59

In 2019, 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 other 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 60

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 61

Kayla receives an $18,500 scholarship from the state university.The university specifies that $8,500 is for tuition and books, while $10,000 is for room and board.In addition, Kayla works part-time at the campus library and earns $5,000.How much is Kayla required to include in her gross income?

A)zero
B)$5,000
C)$15,000
D)$23,500

Question 62

Which of the following are included in gross income?

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

Question 63

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 2019, Myra receives twelve $1,500 payments.What is her taxable income?

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

Question 64

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 65

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 66

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: $\begin{array}{lr}\text { Dormitory room } & \$ 1,500 \\\text { Cafeteria meals } & 1,000 \\\text { Tuition } & 6,600 \\\text { Books and supplies } & 900\end{array}$
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

Question 67

Which of the following is not a government transfer payment?

A)Social Security benefits
B)Food stamps
C)Interest on T-Bills
D)Unemployment compensation

Question 68

In February, Jasmine received a $30,000 gift from her cousin and in March she inherited $90,000 in corporate bonds from her aunt.Jasmine was the beneficiary on her aunt's life insurance policy and received the lump-sum proceeds of $100,000 in April.How much does Jasmine include in gross income?

A)$0
B)$16,000
C)$90,000
D)$220,000

Question 69

Elizabeth is the beneficiary of an $800,000 insurance policy on her husband's life.Elizabeth can elect to receive $165,000 per year for 5 years or received the entire $800,000 in a lump sum the first year.If she elects to receive the lump sum, how much is included in income in the first year.

A)0
B)$5,000
D)$165,000
D)$800,000

Question 70

Brandon and Jessica, a married couple, receive $21,000 in Social Security benefits in the current year.They receive $88,000 in taxable pension payments and $6,000 in municipal bond interest income.How much of their Social Security benefits are included in gross income?

A)$21,000
B)$17,850
C)$10,500
D)$0

Question 71

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 72

Marbella is the beneficiary of a $700,000 insurance policy on her husband's life.Marbella elects to receive $150,000 per year for 5 years rather than receive the entire $700,000 in a lump sum.How much is included in income in the first year.

A)0
B)$10,000
D)$140,000
D)$150,000

Question 73

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

Question 74

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 75

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 76

Meg was the beneficiary of a $50,000 life insurance policy when her father died at the end of last year.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 2019.Meg takes the annuity option.What amount must Meg include in her income in 2019?

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

Question 77

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 78

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 79

Joseph's employer pays 70% of the premiums for a disability insurance policy and Joseph pays for the other 30%.The policy pays Joseph 60% of his normal salary in the event he is injured and cannot return to work for an extended period.Joseph was injured in an accident and was unable to work for several months.During the current year, Joseph collected $75,000 under his disability policy.How much does Joseph include in his gross income?

A)$0
B)$22,500
C)$52,500
D)$75,000

Question 80

Bryan, age 66, is retired.His wife, Rebecca, age 64, still works part-time.They have income from the following sources: $\begin{array}{lr}\text { Rebecca's salary } & \$ 10,000 \\\text { Bryan's pension (all contributions made by his employer) } & 15,000 \\\text { Bryan's social security benefits } & 5,000 \\\text { Interest income from State of Montana bonds } & 1,000 \\\text { Dividend income from Ford Motor Co. stock } & 500 \\\text { Lottery prize }&50\end{array}$
What is their joint gross income?

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