Question 1

The realization requirement applies to taxable income but not to the economist's concept of income.

Accepted Answer

The economist's concept of income includes all economic benefits received by an individual, whether or not they are subject to taxation or have been realized. However, taxable income is based on realized income, meaning income that has been received and can be taxed in the current tax year.

Question 2

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.

Accepted Answer

False

Question 3

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.

Accepted Answer

This is because the original issue discount (OID) is not recognized until the bond matures, in accordance with the tax laws governing Series EE bonds. Therefore, Ralph is not required to recognize the $291 OID until the bond matures.

Question 4

In 2003,Terry purchased land for $150,000.In 2010,Terry received $5,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terry's property.Terry is not required to recognize income from receiving the $5,000 because it was a return of his capital invested in the land.

Accepted Answer

The payment received by Terry is considered a return of capital because it is a reimbursement of the cost of the land.

Question 5

Daniel,an accrual basis taxpayer,collects the rent for December 2010 and January 2011 on December 1,2010.Daniel must include the December 2010 rent but not the January 2011 rent in his 2010 gross income.

Accepted Answer

Under the accrual basis of accounting, income is recognized when it is earned, regardless of when it is received. Therefore, Daniel must include both December 2010 and January 2011 rent in his 2010 gross income.

Question 6

In December 2010,Mary collected the December 2010 and January 2011 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2010 for the 2011 rent should be included in her 2011 gross income.

Accepted Answer

As a cash basis taxpayer, Mary must report income in the year it is received. Therefore, the rent collected in December 2010 should be included in her 2010 gross income, not 2011.

Question 7

At the beginning of 2010,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,2010-2012,and $3,600 from the Series EE bonds in 2019.

Accepted Answer

The statement accurately reflects the details provided in the scenario.

Question 8

An accrual basis taxpayer who owns and operates a professional basketball team cannot allocate income from season ticket sales on the basis of the number of games played during the year.

Accepted Answer

An accrual basis taxpayer can allocate income from season ticket sales based on the number of games played, as this method matches revenue with the period in which it is earned.

Question 9

The realization requirement gives an incentive to sell assets that have declined in value and to retain assets whose value has increased.

Accepted Answer

The realization requirement in tax law means that gains are not taxed until they are realized through a sale. This incentivizes holding onto appreciated assets to defer taxes and selling depreciated assets to realize losses for tax benefits.

Question 10

In 2010,Jimmy,a cash basis taxpayer,was offered $3,000,000 for signing a professional baseball contract.He rejected the offer in favor of $900,000 per year for 4 years beginning in 2010.He collected $900,000 in 2010.Jimmy did not constructively receive $3,000,000 in 2010.

Accepted Answer

Jimmy did not constructively receive $3,000,000 in 2010 because he rejected the offer in favor of receiving $900,000 per year for 4 years beginning in 2010. Therefore, he only received $900,000 in 2010 and did not have to report the $3,000,000 as income for that year.

Question 11

A cash basis taxpayer purchased a certificate of deposit for $900 on July 1,2010 that will pay $1,000 upon its maturity on June 30,2012.The taxpayer must recognize a portion of the income in 2010.

Accepted Answer

The taxpayer must recognize $100 of interest income in 2010, even though the certificate of deposit will not mature until 2012. This is because the taxpayer is on a cash basis, which means that they must recognize income when it is received, regardless of when it was earned.

Question 12

The financial accounting principle of conservatism is well-suited to the task of measuring taxable income.

Accepted Answer

The financial accounting principle of conservatism is not necessarily well-suited to measuring taxable income. Tax laws and regulations may require specific methods of calculating taxable income, and these may not align with conservative accounting principles.

Question 13

Fred painted his house which saved him $2,000.According to the realization requirement,the taxpayer must recognize $2,000 of income.

Accepted Answer

The realization requirement states that income is recognized when it is realized through a transaction, such as a sale or exchange. Painting one's own house does not involve a transaction with another party, so it does not result in recognized income.

Question 14

On January 1,2010,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 $1,800.The taxpayer should report $600 of income each year in 2010,2011,and 2012.

Accepted Answer

The answer of On January 1,2010,an accrual basis taxpayer entered...

Question 15

If the taxpayer's method of measuring income is consistent with GAAP,it will be acceptable for tax purposes.

Accepted Answer

Tax purposes may require specific methods that differ from GAAP, as tax laws and regulations have their own requirements.

Question 16

The constructive receipt doctrine requires that income must be recognized when it is made available to the cash basis taxpayer,although it has not been actually received.The constructive receipt doctrine does not apply to accrual basis taxpayers.

Accepted Answer

The constructive receipt doctrine applies to cash basis taxpayers, not accrual basis taxpayers. Accrual basis taxpayers must recognize income when it is earned, regardless of whether or not it has been actually received.

Question 17

An accrual basis taxpayer can defer all advance payments for services until the services are performed if the method of accounting for the services is the same for tax and financial reporting purposes.

Accepted Answer

An accrual basis taxpayer can defer advance payments for services only to the extent allowed by tax regulations, typically recognizing them in the year received or the next year, not indefinitely until services are performed.

Question 18

Judy is a cash basis attorney.In 2010,she performed services in connection with the formation of a corporation and received stock with a value of $3,000 for her services.By the end of the year,the value of the stock had decreased to $1,000.She continued to hold the stock.Judy must recognize $3,000 of gross income from the stock for 2010.

Accepted Answer

As a cash basis taxpayer, Judy recognizes income when she receives it. In this case, she received stock with a value of $3,000 as payment for her services, which she must recognize as gross income for 2010. The subsequent decrease in value does not affect her initial recognition of income.

Question 19

Jessica is a cash basis taxpayer.When Jessica failed to repay a loan,the bank garnished her salary.Each week $40 was withheld from Jessica's salary and paid to the bank.Jessica is not required to include the $40 each week in her gross income because she does not have the ability to pay tax on money she did not receive.

Accepted Answer

Under the cash basis method, income is recognized when it is actually or constructively received. The garnished wages are considered constructively received by Jessica, so they must be included in her gross income.

Question 20

Nicholas owned stock that decreased in value by $20,000 during the year,but he did not sell the stock.He earned $45,000 salary,but received only $34,000 because $11,000 in taxes were withheld.Nicholas saved $10,000 of his salary and used the remainder for personal living expenses.Nicholas's gross income for tax purposes exceeded his economic income for the year.

Accepted Answer

Gross income for tax purposes includes not only income earned, but also other sources such as gifts, prizes, and the increase in value of assets, even if they were not sold. Therefore, Nicholas's gross income for tax purposes would include both his salary and the decrease in value of his stock, which exceeds his economic income for the year.

Quiz 4: Gross Income: Concepts and Inclusions