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Exam 4: Gross Income: Concepts and Inclusions

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Question 31

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

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 the above.

F) A) and C)
G) A) and D)

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Question 32

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In 2011,Todd purchased an annuity for $200,000.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?

A) Todd is not required to recognize any income until he has collected 80 payments (80 ´ $2,500 = $200,000) .
B) If Todd collects 30 payments and then dies in 2013, Todd's estate should amend his tax returns for 2011 and 2012 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 $2,000 in gross income.
D) For each $2,500 payment received in the first year, Todd must include $500 in gross income.
E) None of the above.

F) A) and E)
G) B) and C)

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Question 33

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In the case of a below-market loan between family members,if the imputed interest rules apply:

Turner,Inc.,provides group term life insurance to the officers of the corporation only.Janet,a vice-president,received $400,000 of coverage for the year at a cost to Turner,Inc.of $5,600.The Uniform Premiums (based on Janet's age) are $15 a year for $1,000 protection.How much of this must Janet include in gross income this year?

The alimony rules:

Seth,a calendar year taxpayer,purchased an annuity for $50,000 in 2009.The annuity was to pay him $3,000 on the first day of each year,beginning in 2009,for the remainder of his life.Seth's life expectancy at the time he purchased the annuity was 20 years.In 2011,Seth developed a deadly disease,and doctors estimated that he would live for no more than 24 months.

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.

At the beginning of 2011,Mary purchased a 3-year certificate of deposit (CD)for $8,760.The maturity value of the certificate was $10,000 and it was to yield 4.5%.She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000.Mary must recognize income from the certificate of deposit each year,2011-2013,and $3,600 from the Series EE bonds in 2020.

Theresa,a cash basis taxpayer,purchased a bond on July 1,2008,for $10,000,plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31,2011,she sold the bond for $10,150,which included $200 of accrued interest.

On January 1,2011,an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months.The amount received for the contract was $2,400.The taxpayer should report $1,600 of income in 2012.

Under the terms of a divorce agreement,Ron is to pay his former wife Jill $12,000 per month.The payments are to be reduced to $4,000 per month when their 15 year-old child reaches age 18.During the current year,Ron paid $144,000 under the agreement.Assuming all of the other conditions for alimony are satisfied,Ron can deduct from gross income (and Jill must include in gross income) as alimony:

Which of the following is not a requirement for an alimony deduction?

April is a 40% partner in Pale Partnership.During the year,she withdraws $125,000 and her share of the partnership profits is $150,000.April must include $150,000 in her gross income.

Roy is considering purchasing land for $10,000.He expects the land to appreciate in value 8% each year (compounded)and he will sell it at the end of 10 years.He also is considering purchasing a bond for $10,000.The bond does not pay any annual interest,but will pay $21,589 at maturity in 10 years.The before-tax rate of return on the bond is 8%.Roy is in the 40% (combined Federal and State)marginal tax bracket.Roy has other investments that earn a 8% before-tax rate of return.Given that the compound interest factor at 8% is 2.1589,and at 4.8% the factor is 1.5981,which alternative should Roy choose?

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 2011,the company collected the following amounts applicable to future services: As a result of the above,Orange Cable should report as gross income:

The alimony recapture rules are intended to:

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.

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.

José,a cash method taxpayer,is a partner in J&T Accounting Services,a calendar year partnership.Under the partnership agreement,José is to receive 20% of the partnership's profits or losses.Each partner is allowed to withdraw $10,000 each month for his or her living expenses.José withdrew $120,000 during the year as his monthly draw in 2011.However,in December the partnership was short on cash and José was required to invest an additional $10,000 in the partnership.In March 2011,José received $40,000 as his share of distributed 2010 profits.The partnership earnings before partners' withdrawals for 2011 totaled $1 million.Compute José's gross income from the partnership for 2011.

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