Deck 3: Determining Gross Income

Question 1

All taxpayers may use the accrual method of determining income but certain taxpayers may not use the cash method.

Answer 1

True

Question 2

The completed contract method requires income to be recognized annually based on the costs incurred in that year.

Answer 2

False

Question 3

Under the source principle of international taxation,income will be taxed in a particular jurisdiction if the source of that income is a business operating in that jurisdiction.

Answer 3

True

Question 4

Constructive receipt requires an accrual basis taxpayer to recognize income when the taxpayer has an unrestricted right to a payment that is to be received.

Question 5

The assignment of income doctrine allows one taxpayer to assign income to another taxpayer for tax purposes.

Question 6

International tax treaties help to alleviate the potential of double taxation when companies have business facilities in several countries.

Question 7

The installment method of income recognition is an application of the wherewithal to pay concept.

Question 8

Most stock dividends are nontaxable.

Question 9

When income is taxed in a different period than it is accrued for financial accounting,there is a timing difference.

Question 10

All government bonds are exempt from the application of the OID rules.

Question 11

The completed contract method allows the taxpayer to defer taxes on the contract income.

Question 12

Multiplying the annuity amount received by the ratio of the investment in the annuity to the expected return determines the annuity's taxable portion.

Question 13

If a beneficiary of a life insurance policy receives the insurance proceeds over time in installments,then each installment received is fully taxable.

Question 14

When a taxpayer has a tax year of less than 12 months,the taxpayer must always annualize income.

Question 15

Qualified dividends are dividends that are eligible for the reduced tax rates for dividend income.

Question 16

Up to 85 percent of a person's Social Security benefits may be included in gross income.

Question 17

When a corporation lends money to an employee at below-market interest rates,the imputed interest is additional compensation to the employee.

Question 18

Income must be realized before it can be recognized.

Question 19

A calendar year always ends on December 31.

Question 20

Income of a nonresident alien cannot be taxed by the United States.

Question 21

Explain the tax treatment of a gift loan.

Question 22

What is the purpose of the original issue discount rules?

Question 23

Explain the difference in tax treatment of child support and alimony.

Question 24

What is an annuity? How is annuity income taxed?

Question 25

How is the return of capital principle related to basis?

Question 26

Explain the relationship between realization and recognition of gains or losses.

Question 27

Explain the two acceptable methods for recognizing income on long-term contracts.

Question 28

Briefly identify and define the two principles that guide the determination of who will be taxed by a specific jurisdiction.

Question 29

In 2015,Potrus,an accrual basis corporate taxpayer,received a $40,000 advance for a series of eight lectures by various employees for the Art Institute.After delivering five lectures,the series was cancelled for poor attendance.Potrus refused to return any of the advance payment,so the Art Institute sued.In 2016,Potrus was ordered by the court to repay $15,000.Potrus's net income was $426,000 in 2014 and $298,000 in 2015.How should Potrus treat the repayment to obtain the best tax result?

Question 30

A nonresident alien can only file a joint return with a United States citizen or resident if they both agree to be taxed on their worldwide income.

Question 31

What are acceptable fiscal years for tax purposes?

Question 32

When is a taxpayer required to annualize income for a short tax year?

Question 33

Why do tax accounting principles differ from GAAP?

Question 34

What is the tax benefit rule? Provide an example of its application.

Question 35

Explain the doctrine of constructive receipt and the claim of right doctrine.

Question 36

How does an alien achieve residency status for taxation in the United States?

Question 37

When is money received in the form of a scholarship included in income?

Question 38

Individuals who live in one state but work in another may be subject to income taxes at the state level in both jurisdictions.

Question 39

A business must have a permanent location within a state to establish nexus.

Question 40

What types of government transfer payments are excluded from gross income?

Question 41

Carol attends State U.and received a $10,000 scholarship for her senior year that began in September,year 1.Up to the time of her graduation in May,year 2,Carol had paid the following expenses for the two semesters:
1^st semester: $3,000 tuition; $1,550 room and board in a dormitory; $400 for books and fees.
2^nd semester: $3,000 tuition; $1,700 living expenses in an apartment; $250 for books and fees.
She used the remaining money from the scholarship to purchase clothes for job hunting in April,year 2.
Does Carol have any income as a result of the scholarship? If yes,how much is her income and in what years would it be included in income?

Question 42

All of the following are allowable tax years except:

A)The last Friday of July
B)December 31
C)The Sunday closest to March 1
D)August 31

Question 43

Which of the following statements explain permanent differences between tax and financial accounting? i.Income is recognized in one period for tax and in another period for financial accounting
Ii)Income is recognized for accounting but not for tax purposes.
Iii)Expenses not deductible for tax purposes are deductible for financial accounting.
Iv)An expense is deducted currently for tax but in a later period for financial accounting.

A)ii.only
B)i.and ii.
C)i.and iv.
D)ii.and iii.

Question 44

Which of the following is an application of the wherewithal-to-pay concept?

A)Percentage-of-completion
B)Hybrid method of accounting
C)Installment method
D)Accrual method of accounting

Question 45

Shelly is in the 25 percent tax bracket and expects to remain in that bracket in the future.She has $100,000 to invest for 5 years and has the following alternatives: (a)corporate bonds paying 7 percent; (b)tax-exempt bonds paying 4.5 percent; (c)land that is expected to increase in value to $140,000 in 5 years.Interest on either the corporate bonds or the tax-exempt bonds can be reinvested at 7 percent interest.Any gain on the sale of the land will be eligible for the 15 percent long-term capital gain tax rate.Calculate the after-tax return for each investment.Which investment do you recommend she choose?

Question 46

James ran a stop sign and smashed into Mary's automobile.Mary was seriously injured and sued James and his insurance company.She was awarded the following:
-12,000 for lost income
-$60,000 for hospital costs
-$10,000 for therapy to overcome her fear of driving
-$100,000 for the loss of function in her right hand
-$50,000 punitive damages
Mary's actual hospital costs were $62,000 and her therapy cost $7,000.How much must Mary include in income?

Question 47

Wilma divorced Barney last year.This year she received the title to their boat that cost $45,000 and is now worth $55,000.Barney paid Wilma $1,500 per month,$500 for alimony and $1,000 for support of their two children.Wilma owed $60,000 to the bank for a loan on a failed business.To satisfy the debt,she transferred title of the boat to the bank and paid an additional $5,000.What are the tax consequences of these transactions for Barney and Wilma?

Question 48

Which of the following explain why it is important to determine the period in which income is recognized?

A)Marginal tax rates may be different in different periods.
B)Tax laws may change
C)The time value of money
D)All of the above are explanations

Question 49

Gogo-a-gogo,a manufacturer of dance shoes located in France,is a 90% owned subsidiary of Dance-Togs,Incorporated,a calendar-year corporation.In 2014 it earned a total of $400,000 on its manufacturing operations in France and paid $120,000 in French income taxes on that income.It distributed a total of $60,000 to its parent corporation during the year.How much of Gogo-a-gogo's income must Dance-Togs include in its income for 2015?

Question 50

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 than $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 33 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?

Question 51

John and Ethel,a married couple,receive $21,000 in Social Security benefits in 2015.They also receive $82,000 in taxable pension payments and $6,000 in municipal bond interest.What is their adjusted gross income for 2015?

Question 52

Howard can invest $50,000 in land that is expected to increase in value by 8 percent per year.Alternatively he could invest in corporate bonds paying 8 percent interest,with interest reinvested at 8 percent.Howard's capital gains tax rate is 15 percent and his marginal tax rate is 28 percent.Which investment should Howard make and what is the advantage of this alternative over the other investment if he plans to sell the land in five years.

Question 53

All of the following are acceptable methods of accounting for revenue and expenses for tax purposes except:

A)Accrual method
B)Percentage-of-completion
C)Hybrid method
D)All are acceptable methods

Question 54

Teddy,a single man,has $5,000 of taxable dividends,$3,000 of interest income from State of Oregon bonds,a $5,000 long-term capital gain,and $9,000 of Social Security benefits.What is Teddy's adjusted gross income?

Question 55

Which type of book/tax differences are accounted for as deferred tax assets or deferred tax liabilities?

A)Timing differences
B)Permanent differences
C)All deferrals for a cash basis taxpayer
D)All of the above

Question 56

Billy's father owns a controlling interest in Big Top Corporation.Billy needed $20,000 to pay a gambling debt and the corporation made a loan to Billy at no interest for the $20,000.This transaction can be characterized as:

A)A gift loan to Billy
B)An employment-related loan
C)An arm's length loan
D)A disguised dividend to the father

Question 57

Naomi was the beneficiary of a $100,000 insurance policy on her mother who died in January 2015.It took the insurance company several months to make the payment so she received $100,206 in May 2015.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 $7,000 reimbursement in 2015 for an operation that she underwent in 2013.As a result of her high medical expenses,she was able to claim $7,000 in itemized deductions on her 2013 tax return rather than taking the $6,100 standard deduction.What are Naomi's taxable income items from these events for 2015?

Question 58

Which of the following doctrines does not affect the timing of income recognition for a cash basis taxpayer?

A)Installment method
B)All events test
C)Wherewithal-to-pay
D)Constructive receipt

Question 59

Clayton Corporation receives $100,000 to provide garbage service for the next four years:

A)Clayton must recognize income over the four years for both tax and accounting purposes.
B)Clayton can include the entire $100,000 in income currently for both tax and accounting purposes.
C)The $100,000 creates a permanent difference between tax and accounting income.
D)The $100,000 creates a timing difference between tax and accounting income.

Question 60

In 1997,Carol purchased a single life annuity for $150,000 that would pay her $15,000 per year for life beginning in 2009.Carol's life expectancy from 2009 forward on which the payments were based was 20 years.
a.How much would Carol include in income if she is still receiving payments in 2029?
b.If Carol dies in 2016 after receiving that year's payment,what is the unrecovered investment remaining?
c.How is the unrecovered investment treated for tax purposes?

Question 61

Elizabeth is the beneficiary of an $800,000 insurance policy on her husband's life.Elizabeth can elect to receive $165,000 per year for 5 years or received the entire $800,000 in a lump sum the first year.If she elects to receive the lump sum,how much is included in income in the first year.

A)0
B)$5,000
D)$165,000
D)$800,000

Question 62

Jabo Corporation has its home office and manufacturing facilities in Peru.It sells products via the Internet in both Brazil and Chile,although it has a small sales and manufacturing facility in Santiago,Chile.

A)Under the source principle,all of Jabo's income could be taxed in Peru.
B)Under the source principle,Chile could tax all of the profits from goods sold in Chile and Brazil.
C)Under the residency principle Peru could tax all of the company's income.
D)Under the residency principle,only sales in Brazil could be taxed in Brazil.

Question 63

In February,Jasmine received a $30,000 gift from her cousin and in March she inherited $90,000 in corporate bonds from her aunt.Jasmine was the beneficiary on her aunt's life insurance policy and received the lump-sum proceeds of $100,000 in April.How much does Jasmine include in gross income?

A)$0
B)$16,000
C)$90,000
D)$220,000

Question 64

All of the following result in nontaxable income except:

A)Stock dividend
B)Interest on municipal bonds
C)Capital gain distribution reinvested in the mutual fund
D)Distribution identified as a return of capital

Question 65

William lives in Delaware but works for a company that has offices in both Maryland and Pennsylvania.William spent four months working in Pennsylvania and 8 months working in Maryland.

A)Only Delaware can impose a state income tax on his income.
B)Only Maryland can impose a state income tax on his income as he worked there the longer time period.
C)Only Pennsylvania and Maryland can impose state income taxes on his income.
D)Delaware,Pennsylvania,and Maryland can impose state income taxes on his income.

Question 66

Joseph's employer pays 70% of the premiums for a disability insurance policy and Joseph pays for the other 30%.The policy pays Joseph 60% of his normal salary in the event he is injured and cannot return to work for an extended period.Joseph was injured in an accident and was unable to work for several months.During the current year,Joseph collected $75,000 under his disability policy.How much does Joseph include in his gross income?

A)$0
B)$22,500
C)$52,500
D)$75,000