Deck 3: Determining Gross Income

Question 1

Todd sold some land for $600,000 in 2011. He received $100,000 as a down payment and was to receive $50,000 per year in years 2012 through 2021, in addition to the interest charged. How much income, in addition to the interest, will Todd recognize in 2011 and 2012 if he originally paid $400,000 for the land?

Answer 1

Todd's total gain on the land sale is $200,000 ($600,000 amount received - $400,000 basis). The gain represents 1/3 of the selling price ($200,000/$600,000). Thus, 1/3 of each payment must be recognized as gain. In 2011, Todd must recognize $33,333 gain (1/3 x $100,000) plus interest income received. In year 2012, he must recognize $16,667 gain (1/3 x $50,000) plus interest income received.

Question 2

Danco Corporation contracted to construct a construction crane over the current and the next two years. The contract price is $2,000,000 and construction costs are estimated at $1,600,000. Determine Danco's income in this and the next two years given the following information:
Year 1: actual costs = $250,000
Year 2: actual costs = $975,000
Year 3: actual costs = $425,000
a. under the percentage-of-completion method.
b. under the completed contract method.

Answer 2

a. Percentage-of-Completion: Year 1: $250,000/$1,600,000 = 15.63% complete at the end of year 1. $2,000,000 x .1563 = $312,600 revenue less $250,000 actual costs = $62,600 net income. Year 2: ($250,000 + $975,000)/$1,600,000 = 76.56% complete at then end of year 2. $2,000,000 x .7656 = $1,531,200 total revenue. Year 2 revenue = ($1,531,200 - $1,225,000) - $62,600 recognized in year 1 = $306,200 - $62,600 = $243,600. Year 3: $2,000,000 - ($250,000 + $975,000 + $425,000) = $2,000,000 - $1,650,000 = $350,000 years 1-3 net revenue - $306,200 net revenue recognized in years 1-2 = $43,800 recognized in year 3.b. Under the completed contract method, Danco will recognize $2,000,000 of revenue and $1,650,000 of expenses for net revenue of $350,000 in year 3.

Question 3

Colin and Coleen divorced in the current year. 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 that $20,000 after taxes and will not accept Colin's offer of alimony. Coleen is in the 15 percent tax bracket and Colin is in the 35 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?

Answer 3

Coleen must receive $23,529 ($20,000/.85) before taxes to have $20,000 after taxes. This will cost Colin $15,294 [$23,529 x (1 - .35)] after taxes.

Question 4

Naomi was the beneficiary of a $100,000 insurance policy on her mother who died in January 2011. It took the insurance company several months to make the payment so she received $100,206 in May 2011. 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 $6,000 reimbursement in 2011 for an operation that she underwent in 2010. As a result of her high medical expenses, she was able to take a $7,000 deduction by itemizing on her 2010 tax return rather than taking the $5,700 standard deduction. What are Naomi's taxable income items from these events for 2011?

Question 5

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 6

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 7

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 8

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 9

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 10

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 11

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 12

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 13

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 14

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 15

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 16

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 17

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 18

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 19

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 20

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

A) Taxable income(T)
B) Nontaxable income(N)

Question 21

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.

A) Taxable income(T)
B) Nontaxable income(N)

Question 22

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

-Dividends from IBM paid to a nonresident alien.

A) Taxable income(T)
B) Nontaxable income(N)

Question 23

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

-Foreign income of a controlled foreign corporation that has never paid a dividend.

A) Taxable income(T)
B) Nontaxable income(N)

Question 24

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 on a long-term contract using the completed contract method,

A) Taxable income(T)
B) Nontaxable income(N)

Question 25

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

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

Question 26

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

A) $500
B) $1,000
C) $1,250
D) $1,750

Question 27

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:
$$\begin{array} { l r } \text { Dormitory room } & \$ 1,500 \\\text { Cafeteria meals } & 1,000 \\\text { Tuition } & 6,600 \\\text { Books and supplies } & 900\end{array}$$
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 28

Use the following information for problems.
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:
$$\begin{array} { c c c } \text { Year } & \underline { \text { Payments } } & \text { Expenses } \\1 & \$ 400,000 & \$ 300,000 \\2 & \$ 1,200,000 & \$ 900,000 \\3& \$ 400,000 & \$ 550,000\end{array}$$

-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 29

Use the following information for problems.
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:
$$\begin{array} { c c c } \text { Year } & \underline { \text { Payments } } & \text { Expenses } \\1 & \$ 400,000 & \$ 300,000 \\2 & \$ 1,200,000 & \$ 900,000 \\3& \$ 400,000 & \$ 550,000\end{array}$$

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

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

Question 30

Use the following information for problems.
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:
$$\begin{array} { c c c } \text { Year } & \underline { \text { Payments } } & \text { Expenses } \\1 & \$ 400,000 & \$ 300,000 \\2 & \$ 1,200,000 & \$ 900,000 \\3& \$ 400,000 & \$ 550,000\end{array}$$

-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)