Deck 19: Gross Income: Inclusions

Question 1

The wherewithal-to-pay concept provides that a tax should be collected when the taxpayer has the financial resources to pay the tax.

Answer 1

True
Explanation:The wherewithal-to-pay concept holds that tax should be collected when the taxpayer is in the best position to pay.

Question 2

Under both the accounting and tax law concepts of income,income must be "realized."

Answer 2

True
Explanation:The realization event is required under both accounting and tax law concepts of income,as opposed to an increase in wealth.

Question 3

Which of the following criteria is not required to be met under the tax concept of income?

A)There must be economic benefit.
B)Income must be realized.
C)Income must be recognized.
D)Cash must be received.

Answer 3

D
Explanation:D)Gross income is not limited to cash proceeds.Income may be realized in money,property or services.

Question 4

Except as otherwise provided,gross income means all income from whatever source derived.

Question 5

Gross income may be realized when a taxpayer receives economic benefit even if no cash is received.

Question 6

In community property states,income from separate property owned before marriage is always considered separate income after marriage.

Question 7

Raoul sells household items on an Internet website.He receives $3,340 cash and a pair of high-power binoculars from this activity during the year.What tax issues should Raoul consider?

Question 8

For federal income tax purposes,income is allocated between a husband and wife depending on the state of residence.

Question 9

Gregory receives 100 shares of stock from his employer as a year-end bonus.The fair market value of the stock is included in Gregory's income for the year.

Question 10

The portion of a taxpayer's wages that are garnished by court order and forwarded to pay a delinquent bank loan are not taxable income to the taxpayer.

Question 11

Gross income is limited to amounts received in the form of cash.

Question 12

Under the economist's definition,unrealized gains,as well as gifts and inheritances,are income.

Question 13

Which one of the following items is not considered gross income for tax purposes?

A)gambling winnings
B)illegal income
C)face amount of life insurance received due to the death of the insured
D)cash dividends

Question 14

Ellen,a CPA,prepares a tax return for Frank,a plumber,in exchange for installing a new sink.Since no cash changed hands,neither taxpayer is required to report any income.

Question 15

Under the tax concept of income,all realized income is recognized and subject to tax.

Question 16

Internal Revenue Code Section 61 provides an inclusive list of all possible items taxed under the Code.

Question 17

James and Colleen have reached an agreement with Kelsey in which she will give birth to a baby and then give the baby to James and Colleen.In return,James and Colleen will pay Kelsey $40,000 cash and pay for her medical expenses.What tax issues should Kelsey consider?

Question 18

A taxpayer may not avoid responsibility for payment of income taxes by assigning the income to a third party.

Question 19

Aaron found a prototype of a new pair of glasses with Internet service and other computing capabilities while in a bar one evening.He offered the prototype to the owner of a magazine and blog that reviews new digital devices.The owner paid Aaron $10,000 in return for the prototype.What tax issues should Aaron consider?

Question 20

AAA Corporation distributes an automobile to Alexandria,a shareholder,in lieu of a cash dividend.Alexandria must report the value of the automobile as dividend income.

Question 21

If a taxpayer's method of accounting does not clearly reflect income,the IRS may specify a different accounting method which must be used by the taxpayer.

Question 22

A check received after banking hours is considered constructively received by the payee even though the check cannot be converted to cash.

Question 23

Examples of income which are constructively received include all of the following except

A)interest credited to a savings account.
B)a check received after banking hours.
C)a paycheck received from employer,when employer does not have funds in the bank to cover the check.
D)dividends automatically reinvested in additional shares of the mutual fund.

Question 24

Earnings of a minor child are taxed to the child regardless of the state's property law system.

Question 25

A cash-basis taxpayer can defer income recognition by refusing to accept payment.

Question 26

Frasier and Marcella,husband and wife,file separate returns.Frasier and Marcella live in a community property state that considers separate property income to be separate.Frasier's salary is $42,000 and Marcella's salary is $46,000.Marcella receives dividend income of $4,000 from stock inherited from her parents.Frasier receives interest income of $1,000 from bonds purchased with his salary after marriage.Frasier and Marcella receive $3,200 dividend income from stock they purchased jointly.Marcella's income would be

A)$50,000.
B)$50,100.
C)$51,100.
D)$51,600.

Question 27

Interest on Series E and Series EE U.S.savings bonds need not be reported until the bonds mature.

Question 28

Under the cash method of accounting,income is reported in the year the taxpayer actually or constructively receives the income.

Question 29

Ron and Eve are a married couple who plan to file separate tax returns.How will they determine how to split their income for tax reporting purposes?

Question 30

Norah,who gives music lessons,is a calendar-year taxpayer using the cash-basis method of accounting.On October 1 of this year,she received $1,200 for a one-year contract beginning on that date to provide 10 lessons.She gave 6 lessons this year.How much should Norah include in income this year?

A)$480
B)$360
C)$720
D)$1,200

Question 31

Under the accrual method of accounting,income is considered earned when all the events have occurred which fix the right to receive the income and when the amount of income can be determined with reasonable accuracy.

Question 32

The cash receipts and disbursements method of accounting is used by most individual taxpayers and most noncorporate businesses that do not have inventories.

Question 33

In community property states,income is generally taxed to the spouse who earned it.

Question 34

An accrual-basis taxpayer receives advance payment for services to be provided over three future years.The taxpayer can recognize the income over the three-year period as services are provided,consistent with its financial statements.

Question 35

An individual buys 200 shares of General Electric Corporation stock.In lieu of receiving quarterly dividends,the individual signs an agreement to have dividends reinvested by GE into additional shares of stock.The individual does not receive dividend checks so he need not recognize the quarterly dividends for tax purposes.

Question 36

In common law states,all income is split evenly between the two spouses.

Question 37

Frank and Marion,husband and wife,file separate returns.Frank and Marion live in a common law state.Frank's salary is $42,000 and Marion's salary is $46,000.Marion receives dividend income of $4,000 from stock inherited from her parents.Frank receives interest income of $1,000 from bonds purchased with his salary after marriage.Frank and Marion receive $3,200 dividend income from stock they purchased jointly.Marion's income would be

A)$50,000.
B)$50,100.
C)$51,100.
D)$51,600.

Question 38

Todd and Hillary,husband and wife,file separate returns.Todd and Hillary live in a community property state that considers separate property income to be community income.Todd's salary is $82,000 and Hillary's salary is $80,000.Hillary receives dividend income of $7,000 from stock inherited from her parents.Todd receives interest income of $5,000 from bonds purchased with his salary after marriage.Todd and Hillary receive $10,000 dividend income from stock they purchased jointly.Todd's income would be

A)$92,000.
B)$93,000.
C)$94,500.
D)$97,000.

Question 39

Interest credited to a bank savings account is taxed regardless of whether or not it is withdrawn.

Question 40

Tom and Heidi,husband and wife,file separate returns.Tom and Heidi live in a common law state.Tom's salary is $82,000 and Heidi's salary is $80,000.Heidi receives dividend income of $7,000 from stock inherited from her parents.Tom receives interest income of $5,000 from bonds purchased with his salary after marriage.Tom and Heidi receive $12,000 dividend income from stock they purchased jointly.Tom's income would be

A)$92,000.
B)$93,000.
C)$94,000.
D)$96,500.

Question 41

The Cable TV Company,an accrual-basis taxpayer,allows its customers to pay by the month,by the year,or two years in advance.In December 2017,the company collected the following amounts applicable to future services:
Assuming Cable TV wants to minimize income reported for 2016,what is the amount of gross income that must be reported for 2017 and how much of the income from these contracts will be reported in 2018?

Question 42

For a cash-basis taxpayer,security deposits received on rental property are taxable to the landlord upon receipt.

Question 43

Gabe Corporation,an accrual-basis taxpayer that uses the calendar year as its tax year,sells CPE (continuing professional education)courses under contracts ranging from three months to two years.Assume that Gabe Corporation sold three contracts on July 1,2017; one for six months costing $300; one for one year costing $500; and one for two years costing $800.
Required: What is the minimum amount of income that must be recognized in 2017 and 2018?

Question 44

CT Computer Corporation,a cash-basis taxpayer,sells service contracts on the computers it sells.At the beginning of January of this year,CT Corporation sold contracts with service to begin immediately: The amount of income CT Corporation must report for this year is

A)$200.
B)$1,000.
C)$1,680.
D)$5,000.

Question 45

Norah's Music Lessons Inc.is a calendar-year taxpayer using the accrual method of accounting.On October 1 of this year,the corporation received $1,200 for a one-year contract beginning on that date to provide 10 lessons.The company provided 6 lessons this year under the contract.How much should the corporation include in income this year with respect to this contract?

A)$480
B)$360
C)$720
D)$1,200

Question 46

Distributions in excess of a corporation's current and accumulated earnings and profits are treated as a nontaxable recovery of capital unless they exceed the basis of the stock.

Question 47

Which of the following advance payments cannot qualify for income tax deferral?

A)advance collection for services
B)advance collection for merchandise
C)advance collection of rent without associated services
D)advance collection of rent with associated services

Question 48

Qualified dividends received by individuals are taxed at the same rate as ordinary income.

Question 49

Alex is a calendar-year sole proprietor.He began business on December 1,this year.He uses the accrual method of accounting.Alex had the following collections in December: • Collected $7,000 in December,from clients who paid cash for services to be performed next year.
• Collected $5,000 in December,for services performed during December; deposited in an operating account on December 31,this year.
• Collected $12,000 in December; on accounts receivable for services performed in December; deposited in operating account on January 2,next year.
What is the amount Alex must include in his income for December?

A)$7,000
B)$12,000
C)$17,000
D)$24,000

Question 50

Interest on the obligations of the U.S.government,states,territories,and U.S.possessions and their political subdivisions are tax-exempt.

Question 51

Speak Corporation,a calendar-year,cash-basis taxpayer,sells packages of foreign language lessons to individuals planning to work overseas.In December 2017,it sold and received payment for $600,000 of 24-month lesson packages to be provided evenly through 2018 and 2019.Speak Corporation will recognize the $600,000 of income

A)all in 2017.
B)half in 2018 and half in 2019.
C)all in 2018.
D)all in 2019.

Question 52

Which of the following constitutes constructive receipt in 2017?
a.A check received on December 29,2017.The check was postdated January 5,2018.
b.A check received on January 4,2018.It had been mailed on December 29,2017.
c.A rent check,received on December 31,2017,by the manager of an apartment complex.The manager normally collects rent for the owner who is out of town.
d.A salary check received at 5:30 p.m.on December 31,2017,after all banks are closed.
e.A paycheck received on December 26,2017.The check was not honored by the bank because the employer's account did not have sufficient funds.

Question 53

Ms.Marple's books and records for 2017 reflect the following information: What is the amount Ms.Marple should include in her gross income in 2017?

A)$66,000
B)$67,000
C)$68,000
D)$65,000

Question 54

Gains realized from property transactions are included in gross income unless a nonrecognition rule applies.

Question 55

Chance Corporation began operating a new retail business in the current year and had $500,000 of sales,$70,000 of which had not been collected by year-end.Total purchases were $350,000 on which $30,000 is still owed.Ending inventory is $60,000; operating expenses are $170,000,$50,000 of which is still owed at year-end.
a.Compute net income from the business under the accrual method.
b.Compute net income from the business under the cash method.
c.Would paying the $50,000 she owes for operating expenses before year-end change her net income under the accrual method? Under the cash method?

Question 56

XYZ Corporation declares a 10 percent stock dividend distributable to all shareholders.There is only the one class of stock outstanding,and shareholders do not have any choices with respect to the distribution.Carol had owned 100 shares of stock,and she received 10 new shares as a result of the stock dividend.The stock is trading at $25 per share as of the distribution.Carol will recognize $250 of dividend income.

Question 57

CT Computer Corporation,an accrual-basis taxpayer,sells service contracts on the computers it sells.At the beginning of January of this year,CT Corporation sold contracts with service to begin immediately: The amount of income CT Corporation must report for this year is

A)$200.
B)$1,000.
C)$1,680.
D)$5,000.

Question 58

One of the requirements that must be met in order to defer recognition of income for advance payments for goods is

A)the taxpayer's method of accounting for the sale for tax purposes is the same as the method used for financial reporting purposes.
B)the goods are on the taxpayer's premises on the last day of the tax year.
C)the goods are produced in the United States.
D)the amount received is more than the taxpayer's cost of the goods.

Question 59

Improvements to leased property made by a lessee are includible in the lessor's gross income only if made in lieu of rent or if rent is reduced because of the improvements.

Question 60

Speak Corporation,a calendar-year,accrual-basis taxpayer,sell packages of foreign langauge lessons to individuals planning to work overseas.In December 2017,it sold and received payment for $600,000 of 24-month lesson packages to be provided evenly through 2018 and 2019.Speak Corporation will recognize the $600,000 of income

A)all in 2017.
B)half in 2018 and half in 2019.
C)all in 2018.
D)all in 2019.

Question 61

Which of the following bonds do not generate tax-exempt federal income?

A)U)S.Treasury bonds
B)bonds issued by fire districts
C)school district bonds
D)bonds issued by cities

Question 62

Unemployment compensation is exempt from federal income tax.

Question 63

Amy's employer provides her with several fringe benefits.Which of the following are included in her taxable income?

A)year-end bonus check
B)group term life insurance premium paid by employer for $40,000 coverage for Amy
C)employee discount
D)employer's contribution to retirement plan on Amy's behalf

Question 64

A key factor in determining tax treatment of distributions from qualified retirement plans is whether the employee made pre-tax or after-tax contributions.

Question 65

Jacob,who is single,paid educational expenses of $16,000 in 2017.He redeemed Series EE bonds and received principal of $8,000 and interest of $3,000.Jacob has other adjusted gross income of $82,150.The $3,000 exclusion must be reduced by

A)$0.
B)$1,400.
C)$1,600.
D)$3,000.

Question 66

Social Security benefits are excluded from taxation for all taxpayers.

Question 67

In December of this year,Jake and Stockard,a married couple,redeemed qualified Series EE U.S.Savings Bonds.The proceeds were used to help pay for their daughter's college tuition.Jake and Stockard received proceeds of $8,000 representing principal of $5,000 and interest of $3,000.The qualified higher educational expenses they paid this year totaled $6,000.Their AGI is below the threshold for phase-out of the exclusion.What is the amount of interest income Jake and Stockard can exclude from their income this year?

A)$2,250
B)$2,500
C)$3,000
D)$5,000

Question 68

Jing,who is single,paid educational expenses of $16,000 in 2017.He redeemed Series EE bonds and received principal of $8,000 and interest of $3,000.Jing has other adjusted gross income of $82,150.With respect to the $3,000 of bond interest,Jing must include in taxable income

A)$0.
B)$1,400.
C)$1,600.
D)$3,000.

Question 69

With some exceptions,amounts withdrawn from a pension plan prior to the normal starting date are subject to a ten percent nondeductible penalty.

Question 70

Income from illegal activities is taxable.

Question 71

Payments from an annuity purchased from an insurance company are not taxable until the taxpayer has recovered the purchase price of the annuity.

Question 72

Property settlements made incident to a divorce have no immediate tax consequences; that is,the transfer from one spouse to another is not taxable.

Question 73

Alimony received is taxable to the recipient while child support payments are not.

Question 74

The recipient of a taxable stock dividend includes the value of the stock received in gross income and that amount becomes the basis for the stock received.

Question 75

Mike won $700 in a football pool.This amount is not taxable.

Question 76

In December 2017,Max,a cash-basis taxpayer,rents an apartment to Kadeem.Max receives both the first and last months' rent totaling $1,800 plus a security deposit of $400.The amount of income reported by Max as taxable in 2017 is

A)$400.
B)$1,300.
C)$1,800.
D)$2,200.

Question 77

Becky wins a car and furniture on a television game show.The fair market value of these items is taxable to Becky.

Question 78

Carla redeemed EE bonds which qualify for the educational exclusion.The redemption consisted of $14,000 principal and $6,000 interest.The net qualifying educational expenses are $10,000.Her AGI is below the threshold for phase-out of the exclusion.The taxable interest is

A)$0.
B)$2,400.
C)$3,000.
D)$6,000.

Question 79

Which of the following statements is false?

A)Under the cash method,prepaid income such as rent is usually taxed when received rather than when earned.
B)Municipal bond interest is taxable.
C)Alimony received by the taxpayer is taxable.
D)Income earned by selling goods on the Internet is taxable.

Question 80

In order to be treated as alimony for tax purposes,payments must be made in cash.