Question 1

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2015. The dividend checks were mailed on December 31, 2015. Ed, a cash basis shareholder, received the dividend check on January 2, 2016. Ed cannot delay reporting the income from the dividend until 2016.

Accepted Answer

False

Question 2

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 economic income for the year exceeded his gross income for tax purposes.

Accepted Answer

Economic income includes all forms of income, including unrealized gains or losses on investments. Since Nicholas's stock decreased in value, this loss would be considered in his economic income but not in his gross income for tax purposes, as it was an unrealized loss (he did not sell the stock). His gross income for tax purposes would only include the salary earned, not the decrease in stock value or the taxes withheld.

Question 3

On December 1, 2016, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2016 and $12,000 for January 2017. Daniel must include the $24,000 in 2016 gross income.

Accepted Answer

According to the IRS revenue ruling 74-145, rent is considered income in the period it is due and payable, regardless of when it is actually received. Therefore, Daniel must include both $12,000 rents in his 2016 gross income.

Question 4

A sole proprietorship purchased an asset for $1,000 in 2016 and its value was $1,500 at the end of 2016. In 2017, the sole proprietorship sold the asset for $1,400. The sole proprietorship realized a taxable gain of $400 in 2017 but an economic loss of $100 in 2017.

Accepted Answer

The answer of A sole proprietorship purchased an asset for...

Question 5

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. However, Ralph can elect to amortize the discount over the ten-year period.

Accepted Answer

Ralph can elect to amortize the discount over the ten-year period.

Question 6

An advance payment received in June 2016 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.

Accepted Answer

The answer of An advance payment received in June 2016...

Question 7

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

Accepted Answer

The realization requirement means that a taxpayer must sell or dispose of an asset in order to realize the gain or loss on that asset for tax purposes. This gives an incentive to sell assets that have decreased in value (in order to claim a loss) and to hold onto assets that have increased in value (in order to defer the gain until the asset is sold).

Question 8

In December 2015, Mary collected the December 2015 and January 2016 rent from a tenant. Mary is a cash basis taxpayer. The amount collected in December 2015 for the 2016 rent should be included in her 2016 gross income.

Accepted Answer

According to the cash basis method, income is recognized when actually or constructively received. Since Mary received the rent in December 2015, it should be included in her 2015 gross income, not 2016.

Question 9

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

Accepted Answer

Even though the royalty check was made payable to Mabel, it is still considered Fred's income as he is the author of the book and he directed the publisher to make the payment to his mother. Therefore, he must include the amount of the royalty check in his gross income.

Question 10

The financial accounting principle of conservatism is not well-suited to the task of measuring taxable income.

Accepted Answer

The principle of conservatism requires that losses be recognized as soon as they are probable, but gains should only be recognized when they are realized. This conservative approach to financial accounting may result in a lower reported income, but it is not necessarily the best approach for determining taxable income. Tax laws often require a more objective approach to measuring income, which may not always align with the principle of conservatism.

Question 11

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

This is because the constructive receipt doctrine only applies to cash basis taxpayers, not accrual basis taxpayers. Accrual basis taxpayers recognize income when it is earned, regardless of whether or not it has been received.

Question 12

The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not assure that the method will be acceptable for tax purposes.

Accepted Answer

Just because an accounting method is in line with GAAP does not mean it will be considered acceptable under tax laws and regulations, as they can have different rules and requirements.

Question 13

Judy is a cash basis attorney. In 2016, she performed services in connection with the formation of a corporation and received stock with a value of $4,000 for her services. By the end of the year, the value of the stock had decreased to $2,000. She continued to hold the stock. Judy must recognize $4,000 of gross income from the stock for 2016.

Accepted Answer

Under the cash basis method, income is recognized when it is received, regardless of its current value. Therefore, Judy must recognize $4,000 of gross income for 2016, even though the value of the stock had decreased by the end of the year.

Question 14

In 2016, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract. He counter offered that he would receive $900,000 per year for 4 years beginning in 2017. The team accepted the counteroffer. Juan constructively received $3 million in 2016.

Accepted Answer

Since Juan is a cash basis taxpayer, he would not recognize the $3 million until he actually received it in 2017 (or later). The fact that he negotiated a different payment schedule does not change the timing of the income recognition for tax purposes. Therefore, he did not constructively receive the $3 million in 2016.

Question 15

Jessica is a cash basis taxpayer. When Jessica failed to repay a loan, the bank garnished her salary. Each week $60 was withheld from Jessica's salary and paid to the bank. Jessica is required to include the $60 each week in her gross income even though it is the creditor that benefits from the income.

Accepted Answer

Under the cash basis of accounting, income is recognized when received, regardless of who ultimately benefits from the income. In this case, Jessica received $60 each week, even though it was ultimately paid to the bank as part of the loan repayment. Therefore, Jessica is required to include the $60 each week in her gross income.

Question 16

Barney painted his house which saved him $3,000. According to the realization requirement, Barney must recognize $3,000 of income.

Accepted Answer

The realization requirement states that income must have been realized or earned, not just simply saved. Therefore, Barney cannot recognize $3,000 of income simply because he saved that amount by painting his own house.

Question 17

At the beginning of 2016, 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 $1,240 of income from the certificate of deposit in 2016, and $3,600 from the Series EE bonds in 2025.

Accepted Answer

The answer of At the beginning of 2016, Mary purchased...

Question 18

On January 1, 2016, 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 2017.

Accepted Answer

Since the taxpayer is on an accrual basis, they should recognize the income over the years they provide the service, which is 36 months. The amount of income that should be recognized each year is $2,400/36 = $66.67 per month. In 2017, the taxpayer would have provided the service for 12 months, so they should recognize 12 x $66.67 = $800 of income. However, the question asks for the amount of income that should be reported, which could be different if there are any other adjustments or deductions. The closest choice to the correct answer is A.

Question 19

In 2006, Terry purchased land for $150,000. In 2016, Terry received $10,000 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 $10,000 because it was a return of his capital invested in the land.

Accepted Answer

The answer of In 2006, Terry purchased land for $150,000....

Question 20

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2014 that will pay $1,100 upon its maturity on June 30, 2016. The taxpayer must recognize a portion of the income in 2015.

Accepted Answer

The answer of A cash basis taxpayer purchased a certificate...

Quiz 4: Gross Income