Question 1

Stuart owns 300 shares of Turquoise Corporation stock and 2,000 shares of Blue Corporation stock.During the year,Stuart received 150 shares of Turquoise as a result of a 1 for 2 stock split.The value of the shares received was $4,800.Stuart also received 100 shares of Blue Corporation stock as a result of a 5% stock dividend.Stuart did not have the option of receiving cash from Blue.The additional shares he received had a value of $7,200.Stuart's gross income from the receipt of the additional Turquoise and Blue shares is:

Accepted Answer

Neither the stock dividend nor the stock split is taxable.

Question 2

George is employed by the Quality Appliance Company.All the full time employees are allowed to purchase appliances at the company's cost plus 10%.The employee also is given,at no cost,a 1­year service contract on all the goods purchased from the company.George purchased a refrigerator for $500.The company's normal selling price for the refrigerator is $800.George also received a service contract,at no charge,that had a value of $150.During the year,George was required to have his refrigerator serviced once.The cost of the call would have been $75 if he had not had the service contract.Is George required to recognize any income from the purchase of the refrigerator,the receipt of the service contract,and the service call?

Accepted Answer

The answer of George is employed by the Quality Appliance...

Question 3

In December 2014,Todd,a cash basis taxpayer,paid $1,200 of fire insurance premiums for the calendar year 2015 on a building he held for rental income.Todd deducted the $1,200 of insurance premiums on his 2014 tax return.He had $150,000 of taxable income that year.On June 30,2015,he sold the building and,as a result,received a $500 refund on his fire insurance premiums.As a result of the above:

Accepted Answer

As a cash basis taxpayer,Todd can deduct the one-year prepayment for insurance in the year it was paid,2014.Because he deducted $1,200 and his net cost was only $700 ($1,200 - $500),Todd should include the $500 refund in gross income for 2015 under the tax benefit rule.

Question 4

Tonya is a cash basis taxpayer.In 2014,she paid state income taxes of $8,000.In early 2015,she filed her 2014 state income tax return and received a $900 refund.

Accepted Answer

The income recognized from the state income tax refund results from the application of the tax benefit rule.In choice d. ,Tonya received a tax benefit from the payment;therefore,the refund was taxable in 2015.

Question 5

The exclusion of interest on educational savings bonds:

Accepted Answer

The exclusion of interest on educational savings bonds applies to parents who purchase bonds for which the proceeds are used for their child's education. The bonds can be owned by the parent, but they must be used for the child's education. This exclusion does not apply to bonds owned by the child, and it also does not apply if the bond is used to pay for room and board expenses.

Question 6

Sandy is married,files a joint return,and expects to be in the 28% marginal tax bracket for the foreseeable future.All of his income is from salary and all of it is used to maintain the household.He has a paid-up life insurance policy with a cash surrender value of $100,000.He paid $60,000 of premiums on the policy.His gain from cashing in the life insurance policy would be ordinary income.If he retains the policy,the insurance company will pay him $3,000 (3%)interest each year.Sandy thinks he can earn a higher return if he cashes in the policy and invests the proceeds.
a.What before-tax rate of return would Sandy be required to earn on the proceeds from cashing in the policy to equal the return earned with the insurance company?
b.Assume Sandy estimates he can earn a 6% before-tax rate of return on the proceeds from cashing in the policy.Assume he can earn a 6% return for the remainder of his life and that he will reinvest all earnings at the same 6% before-tax rate of return.If Sandy expects to live 10 more years,which alternative will yield the greater amount to his beneficiaries upon Sandy's death? (Given: The future value of an annuity in 10 years assuming a 4.32% after­tax return is 12.19.The future value of an annuity in 10 years assuming a 2.16% return is 11.03).

Accepted Answer

The answer of Sandy is married,files a joint return,and expects...

Question 7

Beverly died during the current year.At the time of her death,her accrued salary and commissions totaled $3,000 and were paid to her husband.The employer also paid the husband $35,000 which represented an amount equal to Beverly's salary for the year prior to her death.The employer had a policy of making the salary payments to "help out the family in the time of its greatest need." Beverly's spouse collected her interest in the employer's qualified profit sharing plan amounting to $30,000.As beneficiary of his wife's life insurance policy,Beverly's spouse elected to collect the proceeds in installments.In the year of death,he collected $8,000 which included $1,500 interest income.Which of these items are subject to income tax for Beverly's spouse?

Accepted Answer

The answer of Beverly died during the current year.At the...

Question 8

Emily is in the 35% marginal tax bracket.She can purchase a York County school bond yielding 3.5% interest and the interest is not subject to a 5% state tax.But she is interested in earning a higher return for comparable risk.

Accepted Answer

See the table below:
 11ea86f6_cc23_17c2_8084_fbde39b66dc0_TB4134_00 *The state does not tax the Federal bonds.
**The dividend is taxed at 15% Federal and 5% state.

Question 9

In the case of interest income from state and Federal bonds:

Accepted Answer

Federal statute prohibits the states from taxing interest on United States government bonds (just as state bond interest is not subject to Federal income tax)(Choice a. ).The Federal government does tax its own bonds (Choice b. ),and there is no statutory or Constitutional limitation on the states taxing each other's obligations (Choice c. ).

Question 10

Harold bought land from Jewel for $150,000.Harold paid $50,000 cash and gave Jewel an 8% note for $100,000.The note was to be paid over a five-year period.When the balance on the note was $80,000,Jewel began having financial difficulties.To accelerate her cash inflows,Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.

Accepted Answer

The debt reduction of $20,000 is treated as an adjustment to the cost of the land because the debt was owed to the seller of the property.

Question 11

Heather's interest and gains on investments for the current year are as follows:

Accepted Answer

The answer of Heather's interest and gains on investments for...

Question 12

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:

Accepted Answer

The $15,000 reduction in the mortgage held by Pink is an adjustment to the cost of the building,because the debt was owed to the party who sold the property to the taxpayer;in effect,the purchase price was adjusted.The $25,000 reduction by the bank is includible in gross income.

Question 13

On January 1,2004,Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to finance the construction of a new plant.On January 1,2014,the company acquired the bonds on the open market for $11,500,000.Assuming that Cardinal Corporation is neither bankrupt nor insolvent,the acquisition and retirement of the bonds results in which of the following:

Accepted Answer

The answer of On January 1,2004,Cardinal Corporation issued 5% 25-year...

Question 14

Martha participated in a qualified tuition program for the benefit of her son.She invested $6,000 in the fund.Four years later her son withdrew $8,000,the entire balance in the program,to pay his college tuition.

Accepted Answer

Under a qualified tuition program,neither the beneficiary of the income (the son)nor the owner (Martha)of the property includes the earnings in gross income as long as the funds are used to pay qualified tuition.

Question 15

Doug and Pattie received the following interest income in the current year:  Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100)for opening the savings account.What amount of interest income should they report on their joint income tax return?

Accepted Answer

The value of the cell phone is treated as a payment for the use of Doug and Pattie's money,and therefore is interest income.Only the interest on State of Iowa bonds may be excluded from their gross income.

Question 16

Barbara was injured in an automobile accident.She has threatened to file a suit against the other party involved in the accident and has proposed the following settlement:
 $\begin{array} { l  }
 \text { Damages for $ 25 \% $ loss of the use of her right arm }&\$200,000\
 \text {Medical expenses }&30,000\
 \text { Loss of wages}&10,000\
 \text { Punitive damages}&100,000\
&\$340,000
\end{array}$
 The defendant's insurance company is reluctant to pay punitive damages.Also,the company disputes the amount of her loss of wages amount.Instead,the company offers to pay her $300,000 for damages to her arm and $30,000 medical expenses.Assuming Barbara is in the 35% marginal tax bracket,will her after-tax proceeds from accepting the offer be equal to what she considers to be her actual damages (listed above)?

Accepted Answer

The answer of Barbara was injured in an automobile accident.She...

Question 17

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

Accepted Answer

Choice a.is incorrect because Flora reduced a $95,000 liability with a payment of $85,000,and therefore its net worth increased.Choice b.is incorrect because Flora did not sell the property.Choice c.is incorrect because the transfer is treated as a sale of the property for $95,000 when its basis is $90,000.Choice d.is correct because the creditor was the original seller of the property.

Question 18

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.

Accepted Answer

Even if the employer had intended that a gift be made,§ 102(c)prohibits exclusion treatment.Hazel realized a $6,000 increase in her net worth as a result of the theft and the subsequent cancellation of the debt.

Question 19

Assuming a taxpayer qualifies for the exclusion treatment,the interest income on educational savings bonds:

Accepted Answer

According to the tax code, interest earned on educational savings bonds is excluded from gross income if the proceeds are used to pay for qualified higher education expenses. Therefore, the interest income earned is not included in anyone's gross income if the proceeds are used to pay for college tuition.

Question 20

George,an unmarried cash basis taxpayer,received the following amounts during 2014:

Accepted Answer

The answer of George,an unmarried cash basis taxpayer,received the following...

Quiz 5: Gross Income: Exclusions