Question 1

Thelma and Mitch were divorced.The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000.Under the terms of the divorce agreement,Mitch would receive the stocks and Mitch would pay Thelma $100,000 each year for 6 years,or until Thelma's death,whichever should occur first.Thelma and Mitch lived apart when the payments were made by Mitch.Mitch paid the $600,000 to Thelma over the six-year period.The divorce agreement did not contain the word "alimony." Then,Mitch sold the stocks for $1,300,000.Mitch's recognized gain from the sale is:

Accepted Answer

A) $0. 
B) $1,000,000 ($1,300,000 - $300,000). 
C) $700,000 ($1,300,000 - $600,000). 
D) $300,000 ($1,300,000 - $1,000,000). 
E) None of these.

Question 2

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 3

Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership).For tax year 2017,the partnership earned revenue of $900,000 and had operating expenses of $660,000.During the year,Wayne withdrew from the partnership a total of $90,000.He also invested an additional $30,000 in the partnership.For 2017,Wayne's gross income from the partnership is:

Accepted Answer

A) $72,000. 
B) $90,000. 
C) $132,000. 
D) $162,000.

Question 4

After the divorce,Jeff was required to pay $18,000 per year to his former spouse,Darlene,who had custody of their child.Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21.During the year,Jeff paid the $18,000 required under the divorce agreement.Darlene must include the $12,000 in gross income.

Accepted Answer

A) True 
 B)False

Question 5

Fred is a full-time teacher.He has written a book and receives royalties from it.Fred's mother,Mabel,is age 65 and lives on her Social Security benefits and gifts from her son,Fred.This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support.Fred must include the amount of the royalty check in his gross income.

Accepted Answer

A) True 
 B)False

Question 6

The annual increase in the cash surrender value of a life insurance policy:

Accepted Answer

A) Is taxed according to the original issue discount rules. 
B) Is not included in gross income because the policy must be surrendered to receive the cash surrender value. 
C) Reduces the deduction for life insurance expense. 
D) Is exempt because it is life insurance proceeds. 
E) None of these.

Question 7

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 8

The amount of Social Security benefits received by an individual that he or she must include in gross income:

Accepted Answer

A) Is computed in the same manner as an annuity [exclusion = (cost/expected return) × amount received]. 
B) May not exceed the portion contributed by the employer. 
C) May not exceed 50% of the Social Security benefits received. 
D) May be zero or as much as 85% of the Social Security benefits received, depending upon the taxpayer's Social Security benefits and other income. 
E) None of these.

Question 9

When stock is sold after the date of declaration but before the record date,the buyer must recognize as income the dividend declared.

Accepted Answer

A) True 
 B)False

Question 10

Green,Inc.,provides group term life insurance for all of its employees.The coverage equals twice the employee's annual salary.Sam,a vice-president,worked all year for Green,Inc.,and received $200,000 of coverage for the year at a cost to Green of $1,500.The Uniform Premiums (based on Sam's age) are $.25 per month for $1,000 of protection.How much must Sam include in gross income this year?

Accepted Answer

A) $0. 
B) $375. 
C) $450. 
D) $600. 
E) None of these.

Question 11

A sole proprietorship purchased an asset for $1,000 in 2017 and its value was $1,500 at the end of 2017.In 2018,the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2018 but an economic loss of $100 in 2018.

Accepted Answer

A) True 
 B)False

Question 12

Tom,a cash basis taxpayer,purchased a bond on March 31 for $10,000,plus $100 accrued interest.In December,Tom collected $500 interest from the bond.Tom's interest income from the bond for the year is $500.

Accepted Answer

A) True 
 B)False

Question 13

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 14

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 15

Betty purchased an annuity for $24,000 in 2017.Under the contract,Betty will receive $300 each month for the rest of her life.According to the actuarial estimates,Betty will live to receive 96 payments and will receive a 3% return on her original investment.

Accepted Answer

A) If Betty collects $3,000 in 2017, her gross income is $630 (.03 × $21,000). 
B) Betty has no gross income until she has collected $24,000. 
C) If Betty lives to collect more than 96 payments, all of the amounts collected after the 96th payment must be included in taxable income. 
D) If Betty lives to collect only 60 payments before her death, she will report a $6,000 loss from the annuity [$24,000 - (60 × $300) = $6,000] on her final return. 
E) None of these.

Question 16

Sarah,a widow,is retired and receives $20,000 interest income and dividends and $10,000 in Social Security benefits.Sarah is considering selling a stock at an $8,000 gain.What will be the increase in Sarah's gross income as a result of the sale of the stock?

Accepted Answer

The answer of Sarah,a widow,is retired and receives $20,000 interest...

Question 17

An advance payment received in June 2017 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.

Accepted Answer

A) True 
 B)False

Question 18

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 19

On December 1,2017,Daniel,an accrual basis taxpayer,collects $12,000 rent for December 2017 and $12,000 for January 2018.Daniel must include the $24,000 in 2017 gross income.

Accepted Answer

A) True 
 B)False

Question 20

With respect to the prepaid income from services,which of the following is true?

Accepted Answer

A) The treatment of prepaid income is the same for tax and financial accounting. 
B) A cash basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt. 
C) An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt. 
D) An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less. 
E) None of these.

Exam 4: Gross Income: Concepts and Inclusions

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

The annual increase in the cash surrender value of a life insurance policy:

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: ​

The amount of Social Security benefits received by an individual that he or she must include in gross income:

When stock is sold after the date of declaration but before the record date,the buyer must recognize as income the dividend declared.

A sole proprietorship purchased an asset for $1,000 in 2017 and its value was $1,500 at the end of 2017.In 2018,the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2018 but an economic loss of $100 in 2018.

Tom,a cash basis taxpayer,purchased a bond on March 31 for $10,000,plus $100 accrued interest.In December,Tom collected $500 interest from the bond.Tom's interest income from the bond for the year is $500.

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.

Betty purchased an annuity for $24,000 in 2017.Under the contract,Betty will receive $300 each month for the rest of her life.According to the actuarial estimates,Betty will live to receive 96 payments and will receive a 3% return on her original investment.

Sarah,a widow,is retired and receives $20,000 interest income and dividends and $10,000 in Social Security benefits.Sarah is considering selling a stock at an $8,000 gain.What will be the increase in Sarah's gross income as a result of the sale of the stock?

An advance payment received in June 2017 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax 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 December 1,2017,Daniel,an accrual basis taxpayer,collects $12,000 rent for December 2017 and $12,000 for January 2018.Daniel must include the $24,000 in 2017 gross income.

With respect to the prepaid income from services,which of the following is true?

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: