Question 1

Melissa is a compulsive coupon clipper.She often brags about the time she purchased a cart full of groceries for $5.00,when the cost without coupons would have been $50.Discuss whether Melissa realizes gross income from her coupon clipping.

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Question 2

The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

Accepted Answer

When a below-market loan of more than $10,000 is made to an employee, it is treated as compensation and the employee must recognize imputed compensation income equal to the forgone interest (the difference between the market rate of interest and the actual interest rate paid by the employee). The corporation must also impute interest income based on the forgone interest. Therefore, the correct answer is D. Options A and B include dividends, which are not applicable in this scenario. Option C is incorrect because the employee is still deemed to have received a benefit through the forgone interest. Option E is incorrect as there are tax implications for both the corporation and the employee in this scenario.

Question 3

During the year,Kim sold the following assets: business auto for a $1,000 loss,stock investment for a $1,000 loss,and pleasure yacht for a $1,000 loss.Presuming adequate income,how much of these losses may Kim claim?

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The answer of During the year,Kim sold the following assets:...

Question 4

Turquoise Company purchased a life insurance policy on the company's chief executive officer,Joe.After the company had paid $400,000 in premiums,Joe died and the company collected the $1.5 million face amount of the policy.The company also purchased group term life insurance on all its employees.Joe had included $16,000 in gross income for the group term life insurance premiums.Joe's widow,Rebecca,received the $100,000 proceeds from the group term life insurance policy.

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Question 5

Margaret owns land that appreciates at the rate of 10% each year.Ralph owns a zero coupon (i.e. ,all of the interest is paid at maturity but is taxed annually)corporate bond with a yield to maturity of 10%.At the end of 10 years,the bond will mature and the land will be sold.At the end of the 10 years,

Accepted Answer

Margaret will accumulate the greater after-tax amount because she earns a return on the deferred taxes. This is because the appreciation on the land is not taxed until it is sold, allowing the investment to grow without the annual tax drag that Ralph's bond faces, despite the bond's interest being taxed annually.

Question 6

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

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Question 7

Tonya is a cash basis taxpayer.In 2015,she paid state income taxes of $8,000.In early 2016,she filed her 2015 state income tax return and received a $900 refund.

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Question 8

Katherine is 60 years old and is bargaining with her employer over deferred compensation.In exchange for reducing her current year's salary by $50,000,she can receive a lump-sum amount in 5 years,when she will retire.If she receives the $50,000 in the current year,she will invest in certificates of deposit that yield 5%.Katherine is in the 28% marginal tax bracket in all relevant years.What is the minimum amount Katherine should accept as a deferred pay option? [Hint: the compound interest factor is 1.1934.]

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The answer of Katherine is 60 years old and is...

Question 9

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.

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Question 10

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

When a mortgage is reduced, the difference between the amount owed and the amount paid is considered income for the borrower. Therefore, in this case, Gold must include the $25,000 reduction in the mortgage principal in gross income.

In addition, when a mortgage is paid off for less than the full amount owed, the borrower has a capital loss equal to the difference between the amount they paid and the adjusted basis of the property. In this case, Gold's adjusted basis in the building was $110,000 (the original purchase price of $150,000 reduced by the $40,000 paid to Pink). Therefore, Gold must reduce its basis in its assets by $15,000 ($40,000 - ($150,000 - $110,000) = $15,000).

Question 11

Sharon made a $60,000 interest-free loan to her son,Todd,who used the money to start a new business.Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account.The relevant Federal interest rate was 5%.Based on the above information:

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Question 12

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

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Question 13

On January 1,2005,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 1,2015,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

When bonds are acquired at a discount, the difference between the purchase price and the face value is recognized as a gain. In this case, the bonds were purchased for $11,500,000, which is $500,000 less than the face value of $12,000,000, resulting in a gain for the company. Since the company is neither bankrupt nor insolvent, there are no limitations on recognizing this gain. Therefore, the answer is A, the company must recognize a $500,000 gain.

Question 14

Carin,a widow,elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each.Her husband had paid premiums of $60,000 on the policy.In the first year,Carin collected $17,500 from the insurance company.She must include in gross income:

Accepted Answer

Carin must include in gross income the portion of each payment that represents interest, which is taxable. To calculate this, we first need to determine the exclusion ratio for the policy. This is done by dividing the total premiums paid ($60,000) by the total expected payout ($175,000) to arrive at a ratio of 34.3%. This means that 34.3% of each payment is a return of premiums paid and is not taxable, while the remaining 65.7% is taxable interest.

For the first payment of $17,500, the exclusion ratio is $6,005 ($60,000 x 0.343), meaning that $11,495 of the payment is taxable interest. Therefore, Carin must include $11,495 in her gross income for the first year. Subtracting this amount from the total payment of $17,500 gives us the nontaxable portion of $6,005, which is a return of premiums paid. Since Carin has already paid taxes on the premiums, she does not need to include this amount in her gross income. Therefore, the answer is $2,500 ($11,495 - $8,995).

Question 15

The taxpayer's marginal tax bracket is 25%.Which would the taxpayer prefer?

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Question 16

Swan Finance Company,an accrual method taxpayer,requires all of its customers to carry credit life insurance.If a customer dies,the company receives from the insurance company the balance due on the customer's loan.Ali,a customer,died owing Swan $1,500.The balance due included $200 accrued interest that Swan has included in income.When Swan collects $1,500 from the insurance company,Swan:

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Question 17

Our tax laws encourage taxpayers to ____ assets that have appreciated in value and ____ assets that have declined in value.

Accepted Answer

Tax laws encourage taxpayers to keep assets that have declined in value because they can be used to offset capital gains from the sale of other assets. On the other hand, taxpayers are encouraged to sell assets that have appreciated in value because they can be subject to capital gains tax.

Question 18

Iris collected $150,000 on her deceased husband's life insurance policy.The policy was purchased by the husband's employer under a group policy.Iris's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer.She elected to collect the policy in 10 equal annual payments of $18,000 each.

Accepted Answer

The $150,000 received from the life insurance policy is not taxable because life insurance proceeds are generally not included in gross income. The $5,000 of gross income previously included by Iris's husband is not relevant to the tax treatment of the life insurance proceeds received by Iris. Since Iris elected to receive the policy in 10 equal annual payments, she can exclude a portion of each payment from her gross income based on the exclusion ratio. The exclusion ratio is determined by dividing the total amount of after-tax premiums paid by the policyholder (in this case, Iris's husband's employer) by the total policy payout. The after-tax premiums paid by the policyholder are not provided, but since it was a group policy, it is likely that the premiums were paid with before-tax dollars, in which case the exclusion ratio would be based on the total premiums paid. Assuming the exclusion ratio is calculated based on the total premiums paid, the exclusion ratio would be $5,000/$180,000 or 0.0278. Therefore, Iris can exclude 2.78% of each $18,000 payment or $500 from gross income. However, Iris can also exclude $15,000 from gross income for each $18,000 payment by using the simplified method allowed for life insurance payouts received in installments. The simplified method allows the exclusion of the same dollar amount for each payment, equal to the ratio of the total payout to the number of installments. Therefore, each $18,000 payment can be excluded by $15,000, leaving only $3,000 of each payment subject to income tax.

Question 19

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

Harold is not required to recognize gross income, but must reduce his cost basis in the land to $130,000. When Jewel accepted $60,000 in final payment of the note principal, it resulted in a discharge of indebtedness for Harold. However, since Jewel was experiencing financial difficulties, it can be assumed that the note was not a recourse debt. Therefore, Harold does not have to recognize gross income from the discharge of the debt, but he must reduce his cost basis in the land by the amount of the debt discharge, which is $20,000 ($100,000 note principal - $80,000 remaining balance).

Question 20

Sarah,a majority shareholder in Teal,Inc. ,made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.

Accepted Answer

Since the loan is interest-free, the IRS considers it as if interest was charged at the applicable federal rate (AFR). As a result, Sarah must recognize imputed interest income and the corporation must recognize imputed interest expense.

Quiz 4: Gross Income