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Exam 4: Gross Income

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Question 51

Multiple Choice

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Orange Cable TV Company,an accrual basis taxpayer,allows its customers to pay by the year in advance ($500 per year) ,or two years in advance ($950) .In September 2012,the company collected the following amounts applicable to future services: As a result of the above,Orange Cable should report as gross income:

A) $272,000 in 2012.
B) $128,000 in 2012.
C) $168,000 in 2013.
D) $222,000 in 2013.
E) None of the above.

F) B) and D)
G) A) and E)

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Question 52

True/False

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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.

A) True
B) False

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Question 53

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Ted was shopping for a new automobile.He found one that met his needs and agreed to purchase it for $23,000.He had shopped around and concluded that he could not get a better price from another dealer.After he had paid for the automobile,the dealer called to notify Ted that he was entitled to a manufacturer's rebate of $1,500.The next week he received a $1,500 check from the manufacturer.How much should Ted include in gross income?

Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000.One year after the transaction,the mortgage had been reduced to $725,000 by principal payments by Amber,but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage.Ted reduced the amount owed by Amber to $600,000.This reduced the monthly payments to a level that Amber could pay.Amber must recognize $125,000 income from the reduction in the debt by Ted.

In 2013,Juan,a cash basis taxpayer,was offered $3 million for signing a professional baseball contract.He counteroffered that he would receive $900,000 per year for 4 years beginning in 2014.The team accepted the counteroffer.Juan constructively received $3 million in 2013.

Gold Company was experiencing financial difficulties,but was not bankrupt or insolvent.The National Bank,which held a mortgage on other real estate owned by Gold,reduced the principal from $110,000 to $85,000.The bank had made the loan to Gold when it purchased the real estate from Silver,Inc.Pink,Inc.,the holder of a mortgage on Gold's building,agreed to accept $40,000 in full payment of the $55,000 due.Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years.As a result of the above,Gold must:

On a particular Saturday,Tom had planned to paint a room in his house,but his employer gave him the opportunity to work that day.If Tom works,he must hire a painter for $120.For Tom to have a positive cash flow from working and hiring the painter:

The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not assure that the method will be acceptable for tax purposes.

Flora Company owed $95,000,a debt incurred to purchase land that serves as security for the debt.

Sharon made a $60,000 interest-free loan to her son,Todd,who used the money to start a new business.Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account.The relevant Federal interest rate was 5%.Based on the above information:

Hazel,a solvent individual but a recovering alcoholic,embezzled $6,000 from her employer.In the same year that she embezzled the funds,her employer discovered the theft.Her employer did not fire her and told her she did not have to repay the $6,000 if she would attend Alcoholics Anonymous.Hazel met the conditions and her employer canceled the debt.

Calvin miscalculated his income in 2011 and overpaid his state income tax by $10,000.In 2013,he amended his 2011 state income tax return and received a $10,000 refund and $900 interest.Calvin itemized his deductions in 2011,deducting $12,000 in state income tax and $30,000 total itemized deductions.As a result of the amended return in 2013,Calvin must recognize $10,900 of gross income.

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1,2013 that will pay $1,100 upon its maturity on June 30,2015.The taxpayer must recognize a portion of the income in 2013.

The purpose of the tax rules that apply to below-market loans between family members is to:

In the case of a gift loan of less than $100,000,the imputed interest rules apply if the donee has net investment income of over $1,000.

As a general rule:

ABC Corporation declared a dividend for taxpayers of record as of December 24,2013.The dividend checks were mailed on December 31,2013.Ed,a cash basis shareholder,received the dividend check on January 2,2014.Ed cannot delay reporting the income from the dividend until 2014.

Juan,was considering purchasing an interest in a tax-exempt bond fund for $100,000,when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is 35%,and his marginal state income tax rate is 10%.Juan itemizes his deductions on his Federal income tax return.As an alternative,Juan can purchase a state bond (a "double-exempt bond")yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?

Ralph purchased his first Series EE bond during the year.He paid $709 for a 10-year bond with a $1,000 maturity value.The yield to maturity on the bonds was 3.5%.Ralph is not required to recognize the $291 ($1,000 - $709)original issue discount until the bond matures.However,Ralph can elect to amortize the discount over the ten-year period.

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