Question 1

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:

Accepted Answer

The answer of Orange Cable TV Company, an accrual basis...

Question 2

As a general rule:

Accepted Answer

The answer of As a general rule: 
...

Question 3

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

Accepted Answer

An accrual basis taxpayer can defer prepaid income recognition over the period services are to be provided if the services will be completed by the end of the tax year following the year of receipt, according to IRS guidelines.

Question 4

Daniel purchased a bond on July 1, 2012, at par of $10,000 plus accrued interest of $300.On December 31, 2012, Daniel collected the $600 interest for the year.On January 1, 2013, Daniel sold the bond for $10,200.

Accepted Answer

Daniel must recognize $300 interest income for 2012 and a $200 gain on the sale of the bond in 2013.

Question 5

On January 5, 2012, Tim purchased a bond paying interest at 6% for $30,000. On September 30, 2012, he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2012:

Accepted Answer

Tim is a cash basis taxpayer, so he does not have to report the interest income until he receives it. Jane is also a cash basis taxpayer, so she must report the interest income when she receives it. The bond pays $1,800 interest on December 31, so Jane will report $1,800 of interest income in 2012. Tim will not report any interest income in 2012.

Question 6

Wayne owns a 25% interest in the capital and profits of Emerald Company (a calendar year partnership).For tax year 2012, the partnership earned revenue of $900,000 and had operating expenses of $560,000.During the year, Wayne withdrew from the partnership a total of $90,000. He also invested an additional $20,000 in the partnership.For 2012, Wayne's gross income from the partnership is:

Accepted Answer

To calculate Wayne's gross income from the partnership, we first need to determine the partnership's net income: 
$900,000 (revenue) - $560,000 (expenses) = $340,000 (net income)
Since Wayne has a 25% interest in the partnership, his share of the net income is:
$340,000 (net income) x 0.25 (Wayne's interest) = $85,000
Next, we need to add in Wayne's withdrawals and additional investment:
$85,000 (net income) + $20,000 (additional investment) - $90,000 (withdrawals) = $15,000
Therefore, Wayne's gross income from the partnership for 2012 is $15,000.

Question 7

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2012.Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years.Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th.The daughter received the $2,000 dividend on October 18, 2012.

Accepted Answer

The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.

Question 8

The Purple & Gold Gym, Inc., uses the accrual method of accounting.The corporation sells memberships that entitle the member to use the facilities at any time.A one-year membership costs $360 ($360/12 = $30 per month); a two-year membership costs $600 ($600/24 = $25 per month).Cash payment is required at the beginning of the membership period. On July 1, 2012, the company sold a one-year membership and a two-year membership.The company should report as gross income from the two contracts:

Accepted Answer

The answer of The Purple & Gold Gym, Inc., uses...

Question 9

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2012.The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2013.Ashley was required to pay the first and last month's rent at the time the lease was signed.Ashley was also required to pay a $1,500 damage deposit.Office Palace must recognize as income for the lease:

Accepted Answer

Office Palace must recognize $1,200 in 2012 as income for the lease because it is an accrual basis taxpayer and the first month's rent and the damage deposit were received in 2012.

Question 10

Freddy purchased a certificate of deposit for $20,000 on July 1, 2012.The certificate's maturity value in two years (June 30, 2014) is $21,218, yielding 3% before-tax interest.

Accepted Answer

Freddy must recognize the interest income for the year in which it was earned. The certificate of deposit was purchased on July 1, 2012, so the interest income earned for the first half-year (July 1 - December 31, 2012) must be recognized in 2012. The interest income for the second half-year (January 1 - June 30, 2013) must be recognized in 2013, and the interest income for the final year (July 1, 2013 - June 30, 2014) must be recognized in 2014. Since the certificate of deposit has a maturity value of $21,218 at the end of two years, the total interest income earned is $1,218 ($21,218 - $20,000). Therefore, Freddy must recognize $300 (.03 x $20,000 x .5) gross income in 2012.

Question 11

The Green Company, an accrual basis taxpayer, provides business-consulting services.Clients generally pay a retainer at the beginning of a 12-month period.This entitles the client to no more than 40 hours of services.Once the client has received 40 hours of services, Green charges $500 per hour.Green Company allocates the retainer to income based on the number of hours worked on the contract.At the end of the tax year, the company had $50,000 of unearned revenues from these contracts.The company also had $10,000 in unearned rent income received from excess office space leased to other companies.Based on the above, Green must include in gross income for the current year:

Accepted Answer

Unearned rent income of $10,000 must be included in gross income for the current year, as rent is generally recognized as income when received, even for accrual basis taxpayers.

Question 12

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

Accepted Answer

For accrual basis taxpayers, income from services is recognized when earned, regardless of when payment is received. Therefore, the income from a 36-month service contract sold on July 1, 2012 will be recognized over the 36-month period that the services will be rendered. Thus, the gross income recognized in 2013 will be $3,000 ($3,600/36 months * 6 months in 2013). 
Option A is not always true as some services may be completed in a shorter period than the contract period. 
Option B is incorrect as cash basis taxpayers must recognize income when received. 
Option D is incorrect as this statement only applies if the entire service contract is completed within the tax year.

Question 13

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2009, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2012, she sold the bond for $10,300, which included $200 of accrued interest.

Accepted Answer

Theresa's basis in the bond is $10,400 ($10,000 purchase price + $400 accrued interest). She received $800 of interest in both 2009 and 2010, and $1,000 of interest on December 31, 2011 ($800 for 2011 and $200 of accrued interest). Therefore, her total interest income is $2,600 ($800 + $800 + $1,000). 
Theresa sold the bond on March 31, 2012, for $10,300, which includes $200 accrued interest. Her total gain on the sale is $100 ($10,300 sale price - $10,400 basis). Therefore, she has $200 of interest income and a $100 gain from the bond in 2012.

Question 14

Mike contracted with Kram Company, Mike's controlled corporation.Mike was a medical doctor and the contract provided that he would work exclusively for the corporation.No other doctor worked for the corporation.The corporation contracted to perform an operation for Rosa for $8,000.The corporation paid Mike $6,500 to perform the operation under the terms of his employment contract.

Accepted Answer

Mike's gross income is $6,500, as that is what he received under the terms of his employment contract. The gross income of the corporation is $8,000, but that is separate from Mike's personal income. As a result, options B, C, and D are incorrect.

Question 15

Teal company is an accrual basis taxpayer.On December 1, 2012, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2013. Teal delivered the item on January 4, 2013.Teal included the sale in its 2012 income for financial accounting purposes.

Accepted Answer

As an accrual basis taxpayer, Teal must recognize income when it is earned, which in this case is when the payment is received in 2012, regardless of when the item is delivered.

Question 16

Harry and Wanda were married in Texas, a community property state, but moved to Virginia, a common law state. The calculation of their income on a joint return:

Accepted Answer

The calculation of their income on a joint return will not change as a result of changing their state of residence because federal tax law applies to all states, regardless of their property laws. The concept of community property only applies to community property states, and the IRS allows married couples to file a joint tax return regardless of the property laws of their state of residence.

Question 17

Jerry purchased a U.S.Series EE savings bond for $279.The bond has a maturity value in 10 years of $500 and yields 6% interest.This is the first Series EE bond that Jerry has ever owned.

Accepted Answer

Jerry can choose to report all of the interest income in the year the bond matures, as Series EE bonds allow for deferral of interest reporting until redemption or maturity.

Question 18

Under the alimony rules:

Accepted Answer

Under the alimony rules, alimony payments are considered taxable income for the recipient and must be included in their gross income.

Question 19

Jim and Nora, residents of a community property state, were married in early 2010.Late in 2010 they separated, and in 2012 they were divorced.Each earned a salary, and they received income from community owned investments in all relevant years.They filed separate returns in 2010 and 2011.

Accepted Answer

In a community property state, income earned by either spouse during the marriage is considered community income. In 2011, Nora must report her salary and one-half of the income from community property, as they were still married for part of that year.

Question 20

On November 1, 2012, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2012, the corporation had declared the dividend payable to shareholders of record as of November 22, 2012.The dividend was paid on December 15, 2012.The corporation has paid the $1,200 dividend once each year for the past ten years, during which Bob owned the stock.When Dave collected the dividend on December 15, 2012:

Accepted Answer

The answer of On November 1, 2012, Bob, a cash...

Quiz 4: Gross Income: Concepts and Inclusions