Question 1

In 2017 Todd purchased an annuity for $150,000. The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months. Which of the following is correct?

Accepted Answer

A) Todd is not required to recognize any income until he has collected 60 payments (60 × $2,500 = $150,000). 
B) If Todd collects 20 payments and then dies in 2018, Todd's estate should amend his tax returns for 2017 and 2018 and eliminate all of the reported income from the annuity for those years. 
C) For each $2,500 payment received in the first year, Todd must include $1,000 in gross income. 
D) For each $2,500 payment received in the first year, Todd must include $1,500 in gross income. 
E) None of these.

Question 2

In December 2016, Mary collected the December 2016 and January 2017 rent from a tenant. Mary is a cash basis taxpayer. The amount collected in December 2016 for the 2017 rent should be included in her 2017 gross income.

Accepted Answer

A) True 
 B)False

Question 3

April, a calendar year taxpayer, is a 40% partner in Pale Partnership, whose fiscal year ends on September 30th. For the fiscal year ending September 30, 2017, the partnership had $400,000 net income and for fiscal year ending September 30, 2018, the partnership had $300,000 net income. April withdrew $100,000 in December of each year. April's gross income from the partnership for 2017 is $160,000 ($400,000 × 40%).

Accepted Answer

A) True 
 B)False

Question 4

If the alimony recapture rules apply, the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.

Accepted Answer

A) True 
 B)False

Question 5

Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest and $20,000 of Social Security benefits. Debbie's adjusted gross income for the year is:

Accepted Answer

A) $220,000. 
B) $217,000. 
C) $203,000. 
D) $200,000. 
E) None of these.

Question 6

On January 5, 2017, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2017, he gave the bond to Jane. The bond pays $1,800 interest on December 31. Tim and Jane are cash basis taxpayers. When Jane collects the interest in December 2017: ​

Accepted Answer

A) Tim must include all of the interest in his gross income. 
B) Jane must report $1,800 gross income for 2017. 
C) Jane reports $1,350 of interest income in 2017, and Tim reports $450 of interest income in 2017. 
D) Jane reports $450 of interest income in 2017, and Tim reports $1,350 of interest income in 2017. 
E) None of these is correct.

Question 7

Harry and Wanda were married in Texas, a community property state, but moved to Virginia, a common law state. The calculation of their income on a joint return:

Accepted Answer

A) Will increase as a result of changing their state of residence. 
B) Will decrease as a result of changing their state of residence. 
C) Will not change as a result of changing their state of residence. 
D) Will not be permitted. 
E) None of these.

Question 8

When a business is operated as an S corporation, a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

Accepted Answer

A) True 
 B)False

Question 9

The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of a 12-month period. This entitles the client to no more than 40 hours of services. Once the client has received 40 hours of services, Green charges $500 per hour. Green Company allocates the retainer to income based on the number of hours worked on the contract. At the end of the tax year, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received from excess office space leased to other companies. Based on the above, Green must include in gross income for the current year:

Accepted Answer

A) $60,000. 
B) $50,000. 
C) $10,000. 
D) $0. 
E) None of these.

Question 10

Dick and Jane are divorced in 2016. At the time of the divorce, Dick had a lawsuit pending. He had filed suit against a former employer for overtime pay. As part of a divorce agreement, Dick agreed to pay Jane one-half of the proceeds from the lawsuit. In 2017, Dick collected $250,000 from the former employer and paid Jane $125,000. What are the tax consequences for Dick receiving the $250,000 and then paying Jane the $125,000?

Accepted Answer

The answer of Dick and Jane are divorced in 2016....

Question 11

Gordon, an employee, is provided group term life insurance coverage equal to twice his annual salary of $125,000 per year. According to the IRS Uniform Premium Table (based on Gordon's age), the amount is $12 per year for $1,000 of protection. The cost of an individual policy would be $15 per year for $1,000 of protection. Since Gordon paid nothing towards the cost of the $250,000 protection, Gordon must include in his 2015 gross income which of the following amounts?

Accepted Answer

A) $1,350. 
B) $2,400. 
C) $3,000. 
D) $3,750. 
E) None of these.

Question 12

The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

Accepted Answer

A) The corporation has imputed interest income and the employee is deemed to have received a gift. 
B) The corporation has imputed interest income and dividends paid. 
C) The employee has no income unless the funds are invested and produce investment income for the year. 
D) The employee has imputed compensation income and the corporation has imputed interest income. 
E) None of these.

Question 13

The alimony rules:

Accepted Answer

A) Are based on the principle that the person who earns the income should pay the tax. 
B) Permit tax deductions for property divisions. 
C) Look to state law to determine the definition of alimony. 
D) Distinguish child support payments from alimony. 
E) None of these.

Question 14

George and Erin are divorced, and George is required to pay Erin $20,000 of alimony each year. George earns $75,000 a year. Erin is required to include the alimony payments in gross income although George earned the income.

Accepted Answer

A) True 
 B)False

Question 15

Jay, a single taxpayer, retired from his job as a public school teacher in 2017. He is to receive a retirement annuity of $1,200 each month and his life expectancy is 180 months. He contributed $36,000 to the pension plan during his 35-year career; so his adjusted basis is $36,000. Jay collected 192 payments before he died. What is the correct method for reporting the pension income?

Accepted Answer

A) Since Jay is no longer working, none of the pension payments must be included in his gross income. 
B) The first $36,000 received is a nontaxable recovery of capital, and all subsequent annuity payments are taxable. 
C) The first $180,000 he receives is taxable and the last $36,000 is a nontaxable recovery of capital. 
D) All of the last 12 payments he received ($14,400) are taxable. 
E) None of these.

Question 16

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

Accepted Answer

A) All of the income must be recognized in the year of maturity by a cash basis taxpayer. 
B) The OID will be included in gross income for the year of purchase. 
C) The interest income will be the same each year. 
D) The interest income will be greater in the third year than in the first year. 
E) None of these is correct.

Question 17

As a general rule: I.
Income from property is taxed to the person who owns the property.
II)
Income from services is taxed to the person who earns the income.III.
The assignee of income from property must pay tax on the income.IV.
The person who receives the benefit of the income must pay the tax on the income.

Accepted Answer

A) Only I and II are true. 
B) Only III and IV are true. 
C) I, II, and III are true, but IV is false. 
D) I, II, III, and IV are true. 
E) None of these is true.

Question 18

A sole proprietorship purchased an asset for $1,000 in 2016 and its value was $1,500 at the end of 2016. In 2017, the sole proprietorship sold the asset for $1,400. The sole proprietorship realized a taxable gain of $400 in 2017 but an economic loss of $100 in 2017.

Accepted Answer

A) True 
 B)False

Question 19

The financial accounting principle of conservatism is not well-suited to the task of measuring taxable income.

Accepted Answer

A) True 
 B)False

Question 20

Linda delivers pizzas for a pizza shop. On Wednesday, December 31, 2017, Linda made several deliveries and collected $400 from customers. However, Linda forgot to turn in the proceeds for the day to her employer until the following Friday, January 2, 2018. The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2018.

Accepted Answer

A) True 
 B)False

Exam 4: Gross Income: Concepts and Inclusions

In 2017 Todd purchased an annuity for $150,000. The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months. Which of the following is correct?

In December 2016, Mary collected the December 2016 and January 2017 rent from a tenant. Mary is a cash basis taxpayer. The amount collected in December 2016 for the 2017 rent should be included in her 2017 gross income.

If the alimony recapture rules apply, the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.

Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest and $20,000 of Social Security benefits. Debbie's adjusted gross income for the year is:

On January 5, 2017, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2017, he gave the bond to Jane. The bond pays $1,800 interest on December 31. Tim and Jane are cash basis taxpayers. When Jane collects the interest in December 2017: ​

Harry and Wanda were married in Texas, a community property state, but moved to Virginia, a common law state. The calculation of their income on a joint return:

When a business is operated as an S corporation, a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

The alimony rules:

George and Erin are divorced, and George is required to pay Erin $20,000 of alimony each year. George earns $75,000 a year. Erin is required to include the alimony payments in gross income although George earned the income.

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

A sole proprietorship purchased an asset for $1,000 in 2016 and its value was $1,500 at the end of 2016. In 2017, the sole proprietorship sold the asset for $1,400. The sole proprietorship realized a taxable gain of $400 in 2017 but an economic loss of $100 in 2017.

The financial accounting principle of conservatism is not well-suited to the task of measuring taxable income.

On January 5, 2017, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2017, he gave the bond to Jane. The bond pays $1,800 interest on December 31. Tim and Jane are cash basis taxpayers. When Jane collects the interest in December 2017: