Deck 19: Gross Income: Inclusions

Question 1

Which one of the following items is not considered gross income for tax purposes?

A)gambling winnings
B)illegal income
C)face amount of life insurance received due to the death of the insured
D)cash dividends

Answer 1

C

Question 2

In common law states,all income is split evenly between the two spouses.

Answer 2

False

Question 3

Under the tax concept of income,all realized income is recognized and subject to tax.

Answer 3

False

Question 4

Gross income may be realized when a taxpayer receives economic benefit even if no cash is received.

Question 5

The wherewithal-to-pay concept provides that a tax should be collected when the taxpayer has the financial resources to pay the tax.

Question 6

Ellen,a CPA,prepares a tax return for Frank,a plumber,in exchange for installing a new sink.Since no cash changed hands,neither taxpayer is required to report any income.

Question 7

Gross income is limited to amounts received in the form of cash.

Question 8

Earnings of a minor child are taxed to the child regardless of the state's property law system.

Question 9

In community property states,income from separate property owned before marriage is always considered separate income after marriage.

Question 10

AAA Corporation distributes an automobile to Alexandria,a shareholder,in lieu of a cash dividend.Alexandria must report the value of the automobile as dividend income.

Question 11

The portion of a taxpayer's wages that are garnished by court order and forwarded to pay a delinquent bank loan are not taxable income to the taxpayer.

Question 12

Under both the accounting and tax law concepts of income,income must be "realized."

Question 13

For federal income tax purposes,income is allocated between a husband and wife depending on the state of residence.

Question 14

Internal Revenue Code Section 61 provides an inclusive list of all possible items taxed under the Code.

Question 15

A taxpayer may not avoid responsibility for payment of income taxes by assigning the income to a third party.

Question 16

Under the economist's definition,unrealized gains,as well as gifts and inheritances,are income.

Question 17

Except as otherwise provided,gross income means all income from whatever source derived.

Question 18

Gregory receives 100 shares of stock from his employer as a year-end bonus.The fair market value of the stock should be included in Gregory's income for the year.

Question 19

In community property states,income is generally taxed to the spouse who earned it.

Question 20

Which of the following criteria is not required to be met under the tax concept of income?

A)There must be economic benefit.
B)Income must be realized.
C)Income must be recognized.
D)Cash must be received.

Question 21

Frasier and Marcella,husband and wife,file separate returns.Frasier and Marcella live in a community property state that considers separate property income to be separate.Frasier's salary is $42,000 and Marcella's salary is $46,000.Marcella receives dividend income of $4,000 from stock inherited from her parents.Frasier receives interest income of $1,000 from bonds purchased with his salary after marriage.Frasier and Marcella receive $3,200 dividend income from stock they purchased jointly.Marcella's income would be

A)$50,000.
B)$50,100.
C)$51,100.
D)$51,600.

Question 22

The cash receipts and disbursements method of accounting is used by most individual taxpayers and most noncorporate businesses that do not have inventories.

Question 23

A cash-basis taxpayer can defer income recognition by refusing to accept payment.

Question 24

A small corporation selling goods would prefer to use the cash method to simplify its accounting records.It will be able to continue using the cash method as long as average gross receipts for its three prior years do not exceed

A)$26 million.
B)$10 million.
C)$3 million.
D)$25 million.

Question 25

Frank and Marion,husband and wife,file separate returns.Frank and Marion live in a common law state.Frank's salary is $42,000 and Marion's salary is $46,000.Marion receives dividend income of $4,000 from stock inherited from her parents.Frank receives interest income of $1,000 from bonds purchased with his salary after marriage.Frank and Marion receive $3,200 dividend income from stock they purchased jointly.Marion's income would be

A)$50,000.
B)$50,100.
C)$51,100.
D)$51,600.

Question 26

A consulting firm,organized as partnership and owned by 20 individual partners,reports about $40 million of gross receipts per year.The partnership must use the accrual method.

Question 27

Norah,who gives music lessons,is a calendar-year taxpayer using the cash-basis method of accounting.On October 1 of this year,she received $1,200 for a one-year contract beginning on that date to provide 10 lessons.She gave 6 lessons this year.How much should Norah include in income this year?

A)$480
B)$360
C)$720
D)$1,200

Question 28

Tom and Heidi,husband and wife,file separate returns.Tom and Heidi live in a common law state.Tom's salary is $82,000 and Heidi's salary is $80,000.Heidi receives dividend income of $7,000 from stock inherited from her parents.Tom receives interest income of $5,000 from bonds purchased with his salary after marriage.Tom and Heidi receive $12,000 dividend income from stock they purchased jointly.Tom's income would be

A)$92,000.
B)$93,000.
C)$94,000.
D)$96,500.

Question 29

Todd and Hillary,husband and wife,file separate returns.Todd and Hillary live in a community property state that considers separate property income to be community income.Todd's salary is $82,000 and Hillary's salary is $80,000.Hillary receives dividend income of $7,000 from stock inherited from her parents.Todd receives interest income of $5,000 from bonds purchased with his salary after marriage.Todd and Hillary receive $10,000 dividend income from stock they purchased jointly.Todd's income would be

A)$92,000.
B)$93,000.
C)$94,500.
D)$97,000.

Question 30

Ms.Marple's books and records for 2019 reflect the following information: $$\begin{array} { | l | r | } \hline \text { Salary earned this year } & \$ 65,000 \\\hline \text { Interest on savings account (credited to her account in } & \\2019 , \text { withdrawn in 2020) } & 1,000 \\\hline \text { Interest on county bonds earned and collected in 2019 } & 2,000 \\\hline\end{array}$$ What is the amount Ms.Marple should include in her gross income in 2019?

A)$66,000
B)$67,000
C)$68,000
D)$65,000

Question 31

An individual buys 200 shares of Target Corporation stock.In lieu of receiving quarterly dividends,the individual signs an agreement to have dividends reinvested by Target into additional shares of stock.The individual does not receive dividend checks so he need not recognize the quarterly dividends for tax purposes.

Question 32

If a taxpayer's method of accounting does not clearly reflect income,the IRS may specify a different accounting method which must be used by the taxpayer.

Question 33

Under the accrual method of accounting,income is considered earned when all the events have occurred which fix the right to receive the income and when the amount of income can be determined with reasonable accuracy.

Question 34

Speak Corporation,a calendar-year,cash-basis taxpayer,sells packages of foreign language lessons to individuals planning to work overseas.In December 2019,it sold and received payment for $600,000 of 24-month lesson packages to be provided evenly through 2020 and 2021.Speak Corporation will recognize the $600,000 of income

A)all in 2019.
B)half in 2020 and half in 2021.
C)all in 2020.
D)all in 2021.

Question 35

Interest on Series E and Series EE U.S.savings bonds need not be reported until the bonds mature.

Question 36

Under the cash method of accounting,income is reported in the year the taxpayer actually or constructively receives the income.

Question 37

Examples of income which are constructively received include all of the following except

A)interest credited to a savings account.
B)a check received after banking hours.
C)a paycheck received from employer,when employer does not have funds in the bank to cover the check.
D)dividends automatically reinvested in additional shares of the mutual fund.

Question 38

An accrual-basis taxpayer receives advance payment for services to be provided over three future years.The taxpayer can recognize the income over the three-year period as services are provided,consistent with its financial statements.

Question 39

A check received after banking hours is considered constructively received by the payee even though the check cannot be converted to cash.

Question 40

Interest credited to a bank savings account is taxed regardless of whether or not it is withdrawn.

Question 41

A married couple separates in late 2018,but the related legal documents are not drafted and finalized until 2019.The alimony payments will be taxable to the recipient and deductible by the payor,but the property settlement and child support will have no tax impact.

Question 42

Property settlements made incident to a divorce have no immediate tax consequences; that is,the transfer from one spouse to another is not taxable.

Question 43

The Cable TV Company,an accrual-basis taxpayer,allows its customers to pay by the month,by the year,or two years in advance.In December 2019,the company collected the following amounts applicable to future services:
Jan 2020 services (monthly contracts)$10,000
Dec 2019 - Nov 2020 services (annual contracts)48,000
Dec 2019 - Nov 2021 contracts (2-year contracts)72,000
Assuming Cable TV wants to minimize income reported for 2019,what is the amount of gross income that must be reported for 2019 and how much of the income from these contracts will be reported in 2020?

Question 44

Improvements to leased property made by a lessee are includible in the lessor's gross income only if made in lieu of rent or if rent is reduced because of the improvements.

Question 45

Alex is a calendar-year sole proprietor.He began business on December 1,this year.He uses the accrual method of accounting.Alex had the following collections in December: • Collected $7,000 in December,from clients who paid cash for services to be performed next year.
• Collected $5,000 in December,for services performed during December; deposited in an operating account on December 31,this year.
• Collected $12,000 in December; on accounts receivable for services performed in December; deposited in operating account on January 2,next year.
What is the amount Alex must include in his income for December?

A)$7,000
B)$12,000
C)$17,000
D)$24,000

Question 46

Alimony received under the terms of a divorce agreement entered into in 2018 is taxable to the recipient while child support payments are not.

Question 47

One of the requirements that must be met in order to defer recognition of income for advance payments for goods is

A)the taxpayer's method of accounting for the sale for tax purposes is the same as the method used for financial reporting purposes.
B)the goods are on the taxpayer's premises on the last day of the tax year.
C)the goods are produced in the United States.
D)the amount received is more than the taxpayer's cost of the goods.

Question 48

Chance Corporation began operating a new retail business in the current year and had $500,000 of sales,$70,000 of which had not been collected by year-end.Total purchases were $350,000 on which $30,000 is still owed.Ending inventory is $60,000; operating expenses are $170,000,$50,000 of which is still owed at year-end.
a.Compute net income from the business under the accrual method.
b.Compute net income from the business under the cash method.
c.Would paying the $50,000 she owes for operating expenses before year-end change her net income under the accrual method? Under the cash method?

Question 49

Payments from an annuity purchased from an insurance company are not taxable until the taxpayer has recovered the purchase price of the annuity.

Question 50

CT Computer Corporation,a cash-basis taxpayer,sells service contracts on the computers it sells.At the beginning of January of this year,CT Corporation sold contracts with service to begin immediately: $$\begin{array} { | l | r | } \hline \text { One for three months } & \$ 200 \\\hline \text { One for } 20 \text { months } & 800 \\\hline \text { One for } 48 \text { months } & 4,000 \\\hline\end{array}$$ The amount of income CT Corporation must report for this year is

A)$200.
B)$1,000.
C)$1,680.
D)$5,000.

Question 51

Distributions in excess of a corporation's current and accumulated earnings and profits are treated as a nontaxable recovery of capital unless they exceed the basis of the stock.

Question 52

Gains realized from property transactions are included in gross income unless a nonrecognition rule applies.

Question 53

XYZ Corporation declares a 10 percent stock dividend distributable to all shareholders.There is only the one class of stock outstanding,and shareholders do not have any choices with respect to the distribution.Carol had owned 100 shares of stock,and she received 10 new shares as a result of the stock dividend.The stock is trading at $25 per share as of the distribution.Carol will recognize $250 of dividend income.

Question 54

Qualified dividends received by individuals are taxed at the same rate as ordinary income.

Question 55

In order to be treated as alimony for tax purposes,payments must be made in cash.

Question 56

A key factor in determining tax treatment of distributions from qualified retirement plans is whether the employee made pre-tax or after-tax contributions.

Question 57

Interest on the obligations of the U.S.government,states,territories,and U.S.possessions and their political subdivisions are tax-exempt.

Question 58

For a cash-basis taxpayer,security deposits received on rental property are taxable to the landlord upon receipt.

Question 59

The recipient of a taxable stock dividend includes the value of the stock received in gross income and that amount becomes the basis for the stock received.

Question 60

Rocco Corporation,a C corporation,owns 60% of the stock of Bien Corporation.Bien Corporation is a French corporation which conducts all of its business in France.Bien pays a $100,000 dividend to Rocco Corporation.Rocco Corporation will have a 100% dividend received deduction on these dividends,resulting no tax on these dividends.

Question 61

Which of the following is not included in gross income when received?

A)interest received on bank accounts
B)royalties paid to an author
C)amounts received to cancel or modify a lease
D)refundable security deposit

Question 62

Mike won $700 in a football pool.This amount is not taxable.

Question 63

Becky wins a car and furniture on a television game show.The fair market value of these items is taxable to Becky.

Question 64

Distributions from corporations to the shareholders in a nonliquidating distribution will usually be classified as a dividend up to the amount of the corporation's

A)earnings and profits.
B)retained earnings.
C)taxable income for the year.
D)stock basis.

Question 65

Hoyt rented office space two years ago to Harris,receiving the first and last months' rent plus a security deposit of $1,000.In early January of this year,Harris moves and Hoyt refunds $250 of the deposit and keeps the remainder to cover $500 which is spent for repairs to the office space and one week of unpaid rent that amounts to $250.How would this information be reflected on Hoyt's tax return this year?

A)$750 income and $500 deduction
B)$750 income and no deduction
C)$250 income and $500 deduction
D)No income is recognized,but a $250 deduction is allowed.

Question 66

Jacob,who is single,paid educational expenses of $16,000 in 2019.He redeemed Series EE bonds and received principal of $8,000 and interest of $3,000.Jacob has other adjusted gross income of $85,100.The $3,000 exclusion must be reduced by

A)$0.
B)$1,400.
C)$1,600.
D)$3,000.

Question 67

With some exceptions,amounts withdrawn from a pension plan prior to the normal starting date are subject to a ten percent nondeductible penalty.

Question 68

Tyler has rented a house from Camarah since last year.The rent is usually $1,200 per month,but Camarah reduced the monthly rent down to $200 for all twelve months this year in exchange for Tyler putting in an inground pool in the backyard.The improvement has a fair market value of $20,000.How much total rental income must Camarah report this year?

A)$14,400
B)$12,000
C)$2,400
D)$22,400

Question 69

In December of this year,Jake and Stockard,a married couple,redeemed qualified Series EE U.S.Savings Bonds.The proceeds were used to help pay for their daughter's college tuition.Jake and Stockard received proceeds of $8,000 representing principal of $5,000 and interest of $3,000.The qualified higher educational expenses they paid this year totaled $6,000.Their AGI is below the threshold for phase-out of the exclusion.What is the amount of interest income Jake and Stockard can exclude from their income this year?

A)$2,250
B)$2,500
C)$3,000
D)$5,000

Question 70

Which of the following bonds do not generate tax-exempt income for federal income tax purposes?

A)U)S.Treasury bonds
B)bonds issued by fire districts
C)school district bonds
D)bonds issued by cities

Question 71

In 2019,Richard,a single taxpayer,has adjusted gross income of $40,200.His AGI includes $4,000 of qualified dividends.Richard does not itemize deductions.What is his 2019 federal income tax?

A)$2,686
B)$3,286
C)$3,166
D)None of the above

Question 72

In December 2019,Max,a cash-basis taxpayer,rents an apartment to Kadeem.Max receives both the first and last months' rent totaling $1,800 plus a security deposit of $400.The amount of income reported by Max as taxable in 2019 is

A)$400.
B)$1,300.
C)$1,800.
D)$2,200.

Question 73

Social Security benefits are excluded from taxation for all taxpayers.

Question 74

Income from illegal activities is taxable.

Question 75

Amy's employer provides her with several fringe benefits.Which of the following are included in her taxable income?

A)year-end bonus check
B)group term life insurance premium paid by employer for $40,000 coverage for Amy
C)employee discount
D)employer's contribution to retirement plan on Amy's behalf

Question 76

Which of the following statements is false?

A)Under the cash method,prepaid income such as rent is usually taxed when received rather than when earned.
B)Municipal bond interest is taxable.
C)Alimony received by the taxpayer under a 2018 divorce agreement is taxable.
D)Income earned by selling goods online is taxable.

Question 77

Carla redeemed EE bonds which qualify for the educational exclusion.The redemption consisted of $14,000 principal and $6,000 interest.The net qualifying educational expenses are $10,000.Her AGI is below the threshold for phase-out of the exclusion.The taxable interest is

A)$0.
B)$2,400.
C)$3,000.
D)$6,000.

Question 78

Natasha is a single taxpayer with $100,000 of taxable income.Included in the taxable income is distributions of earnings this year as follows: $$\begin{array} { | l | l | } \hline \text { CE Corp., a C corporation } & \$ 1,000 \\\hline \text { SE Corp., an } S \text { corporation } & \$ 2,000 \\\hline \text { Paris Corp., a foreign corporation } & \$ 3,000 \\\hline\end{array}$$ How much of the $6,000 distribution will be taxed at the 15% tax rate?

A)$0
B)$1,000
C)$3,000
D)$6,000

Question 79

Unemployment compensation is exempt from federal income tax.

Question 80

Jing,who is single,paid educational expenses of $16,000 in 2019.He redeemed Series EE bonds and received principal of $8,000 and interest of $3,000.Jing has other adjusted gross income of $85,100.With respect to the $3,000 of bond interest,Jing must include in taxable income

A)$0.
B)$1,400.
C)$1,600.
D)$3,000.