Deck 4: Gross Income

Question 1

At the beginning of 2017, 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 2017, and $3,600 from the Series EE bonds in 2026.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

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.

Answer 3

True

Question 4

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2015 that will pay $1,100 upon its maturity on June 30, 2017.The taxpayer must recognize a portion of the income in 2016.

Question 5

In December 2016, Mary collected the December 2016 and January 2017 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2016 for the 2017 rent should be included in her 2017 gross income.

Question 6

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2016.The dividend checks were mailed on December 31, 2016.Ed, a cash basis shareholder, received the dividend check on January 2, 2017.Ed cannot delay reporting the income from the dividend until 2017.

Question 7

On January 1, 2017, 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 2018.

Question 8

Judy is a cash basis attorney.In 2017, 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 2017.

Question 9

A sole proprietorship purchased an asset for $1,000 in 2017 and its value was $1,500 at the end of 2017.In 2018, the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2018 but an economic loss of $100 in 2018.

Question 10

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.

Question 11

An advance payment received in June 2017 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.

Question 12

On December 1, 2017, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2017 and $12,000 for January 2018.Daniel must include the $24,000 in 2017 gross income.

Question 13

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.

Question 14

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

Question 15

In 2017, 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 2018.The team accepted the counteroffer.Juan constructively received $3 million in 2017.

Question 16

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.

Question 17

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.

Question 18

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

Question 19

In 2007, Terry purchased land for $150,000.In 2017, 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.

Question 20

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.

Question 21

Amber Machinery Company purchased a building from Ted for $250,000 cash and a mortgage of $750,000.One year after the transaction, the mortgage had been reduced to $725,000 by principal payments by Amber, but it was apparent that Amber would not be able to continue to make the monthly payments on the mortgage.Ted reduced the amount owed by Amber to $600,000.This reduced the monthly payments to a level that Amber could pay.Amber must recognize $125,000 income from the reduction in the debt by Ted.

Question 22

The taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2017 and as a result his taxable income was reduced by $5,000.The taxpayer discovered his error in 2018.The taxpayer must add $5,000 to his 2018 gross income in accordance with the tax benefit rule to correct for the 2017 error.

Question 23

In the case of a gift loan of less than $100,000, the imputed interest rules apply if the donee has net investment income of over $1,000.

Question 24

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

Question 25

Gain on the sale of collectibles held for more than 12 months always is subject to a tax rate of 28%.

Question 26

For purposes of determining gross income, which of the following is true?

A)A mechanic completed repairs on an automobile during the year and collects money from the customer.The customer was not satisfied with the repairs and sued the mechanic for a refund.The mechanic can defer recognition of the income until the suit has been settled.
B)A taxpayer who finds a wallet full of money is required to recognize income even though someone may eventually ask for the return of the money.
C)Embezzlement proceeds are not included in the embezzler's gross income because the embezzler has an obligation to repay the owner.
D)All of these are false.
E)All of these are true.

Question 27

Zork Corporation was very profitable and had accumulated excess cash.The company decided to repurchase some of its bonds that had been issued for $1,000,000.Because of an increase in market interest rates, Zork was able to retire the bonds for $900,000.The company is not required to recognize $100,000 of income from the discharge of its indebtedness but must reduce the basis in its assets.

Question 28

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.Son had $1,600 interest income from a certificate of deposit for the year.Father is not required to impute interest income.

Question 29

Detroit Corporation sued Chicago Corporation for intentional damage to Detroit's goodwill.Detroit had created its goodwill through providing high-quality services to its customers.Thus, no basis for the goodwill appeared on Detroit's balance sheet.The suit was settled and Detroit received $1,500,000 for the damages to its goodwill.

A)The $1,500,000 is not taxable because it represents a recovery of capital.
B)The $1,500,000 is taxable because Detroit has no basis in the goodwill.
C)The $1,500,000 is not taxable because Detroit did nothing to earn the money.
D)The $1,500,000 is not taxable because Detroit settled the case.
E)None of these.

Question 30

Frank sold his personal use automobile for a loss of $9,000.He also sold a personal coin collection for a gain of $10,000.As a result of these sales, $10,000 is subject to income tax.

Question 31

In the case of a below-market gift loan for which there is no exception to the imputed interest rules, the lender is deemed to have received interest income even though no interest is charged and collected.

Question 32

Benny loaned $100,000 to his controlled corporation.When it became apparent the corporation would not be able to repay the loan in the near future, Benny canceled the debt.The corporation should treat the cancellation as a nontaxable contribution to capital.

Question 33

Zack was the beneficiary of a life insurance policy on his wife.Zack had paid $20,000 in premiums on the policy.He collected $50,000 on the policy when his wife died from a terminal illness.Because it took several months to process the claim, the insurance company paid Zack $53,000, the face amount of the policy plus $3,000 interest.Zack must include $23,000 in his gross income.

Question 34

Mel was the beneficiary of a $45,000 group term life insurance policy on his wife.His wife's employer paid all of the premiums on the policy.Mel used the life insurance proceeds to purchase a United States Government bond, which paid him $2,500 interest during the current year.Mel's Federal gross income from the above is $2,500.

Question 35

Linda delivers pizzas for a pizza shop.On Wednesday, December 31, 2017, Linda made several deliveries and collected $400 from customers.However, Linda forgot to turn in the proceeds for the day to her employer until the following Friday, January 2, 2018.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2018.

Question 36

Calvin miscalculated his income in 2015 and overpaid his state income tax by $10,000.In 2016, he amended his 2015 state income tax return and received a $10,000 refund and $900 interest.Calvin itemized his deductions in 2015, deducting $12,000 in state income tax and $30,000 total itemized deductions.As a result of the amended return in 2016, Calvin must recognize $10,900 of gross income.

Question 37

Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest.In December, Tom collected $500 interest from the bond.Tom's interest income from the bond for the year is $500.

Question 38

The tax concept and economic concept of income are in agreement on which of the following:

A)The fair rental value of an owner-occupied home should be included in income.
B)The increase in value of assets held for the entire year should be included in income for the year.
C)Rent income for 2018 collected in 2017 is income for 2017.
D)All of these.

Question 39

The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.

A)Sue must recognize $2,000 gross income in the current year if the company did not install the cable during the year.
B)Sue is not required to recognize gross income from the receipt of the funds, but she must reduce her cost basis in the land by $2,000.
C)Sue must recognize $2,000 gross income in the current year regardless of whether the company installed the cable during the year.
D)Sue must recognize $2,000 gross income in the current year, and when the cable is installed, she must reduce her cost basis in the land by $2,000.
E)None of these.

Question 40

On a particular Saturday, Tom had planned to paint a room in his house, but his employer gave him the opportunity to work that day.If Tom works, he must hire a painter for $120.For Tom to have a positive cash flow from working and hiring the painter:

A)Tom must earn more than $160 if he is in the 25% marginal tax bracket.
B)Tom must earn at least $160 if he is in the 33% marginal tax bracket.
C)Tom must earn at least $150 if he is in the 25% marginal tax bracket.
D)Tom must earn at least $135 if he is in the 15% marginal tax bracket.
E)None of these.

Question 41

Freddy purchased a certificate of deposit for $20,000 on July 1, 2017.The certificate's maturity value in two years (June 30, 2019) is $21,218, yielding 3% before-tax interest.

A)Freddy must recognize $1,218 gross income in 2017.
B)Freddy must recognize $1,218 gross income in 2019.
C)Freddy must recognize $600 (.03 × $20,000) gross income in 2019.
D)Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2017.
E)None of these.

Question 42

As a general rule: I.
Income from property is taxed to the person who owns the property.
II) Income from services is taxed to the person who earns the income.
III) The assignee of income from property must pay tax on the income.
IV) The person who receives the benefit of the income must pay the tax on the income.

A)Only I and II are true.
B)Only III and IV are true.
C)I, II, and III are true, but IV is false.
D)I, II, III, and IV are true.
E)None of these is true.

Question 43

Maroon Corporation expects the employees' income tax rates to increase next year.The employees use the cash method.The company presently pays on the last day of each month.The company is considering changing its policy so that the December salaries will be paid on the first day of the following year.What would be the effect on an employee of the proposed change in company policy for paying its salaries beginning December 2017?

A)The employee would be required to recognize the income in December 2017 because it is constructively received at the end of the month.
B)The employee would be required to recognize the income in December 2017 because the employee has a claim of right to the income when it is earned.
C)The employee will not be required to recognize the income until it is received, in 2018.
D)The employee can elect to either include the pay in 2017 or 2018.
E)None of these.

Question 44

Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($500 per year), or two years in advance ($950).In September 2017, the company collected the following amounts applicable to future services: $\begin{array}{lr}\text { October 2017-September } 2019 \text { services (two-year contracts) } & \$ 144,000 \\\text { October 2017-September } 2018 \text { services (one-year contracts) } & 128,000 \\\text { Total } & \$ 272,000\end{array}$
As a result of the above, Orange Cable should report as gross income:

A)$272,000 in 2017.
B)$128,000 in 2017.
C)$168,000 in 2018.
D)$222,000 in 2018.
E)None of these.

Question 45

The annual increase in the cash surrender value of a life insurance policy:

A)Is taxed when the individual dies and the heirs collect the insurance proceeds.
B)Must be included in gross income each year under the original issue discount rules.
C)Reduces the deduction for life insurance expense.
D)Is not included in gross income each year because of the substantial restrictions on gaining access to the policy's value.
E)None of these.

Question 46

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2013, for $10,000, plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31, 2017, she sold the bond for $9,800, which included $200 of accrued interest.

A)Theresa has $200 interest income and a $400 loss from the bond in 2017.
B)Theresa has $200 interest income and a $200 gain from the bond in 2017.
C)Theresa has a $100 loss from the sale of the bond and no interest income.
D)Theresa's loss on the sale of the bond is $600.
E)None of these.

Question 47

Jerry purchased a U.S.Series EE savings bond for $744.The bond has a maturity value in 10 years of $1,000 and yields 3% interest.This is the first Series EE bond that Jerry has ever owned.

A)Jerry can defer the interest income until the bond matures in 10 years.
B)Jerry must report ($1,000 - $744)/10 = $25.60 interest income each year he owns the bond.
C)The interest on the bonds is exempt from Federal income tax.
D)Jerry can report all of the $256 as a capital gain in the year it matures.
E)None of these.

Question 48

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2017.The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2018.Ashley was required to pay the first and last month's rent at the time the lease was signed.Ashley was also required to pay a $1,500 damage deposit.Office Palace must recognize as income for the lease:

A)$0 in 2017, if Office Palace is an accrual basis taxpayer.
B)$7,800 in 2018, if Office Palace is a cash basis taxpayer.
C)$2,700 in 2017, if Office Palace is a cash basis taxpayer.
D)$1,200 in 2017, if Office Palace is an accrual basis taxpayer.
E)None of these.

Question 49

Mike contracted with Kram Company, Mike's controlled corporation.Mike was a medical doctor and the contract provided that he would work exclusively for the corporation.No other doctor worked for the corporation.The corporation contracted to perform an operation for Rosa for $8,000.The corporation paid Mike $6,500 to perform the operation under the terms of his employment contract.

A)Mike's gross income is $6,500.
B)Mike must recognize the $8,000 gross income because he provided the service.
C)Mike must recognize $8,000 gross income since the patient obviously wanted him to perform the operation.
D)The Kram Company corporation's gross income is $1,500.
E)None of these.

Question 50

The annual increase in the cash surrender value of a life insurance policy:

A)Is taxed according to the original issue discount rules.
B)Is not included in gross income because the policy must be surrendered to receive the cash surrender value.
C)Reduces the deduction for life insurance expense.
D)Is exempt because it is life insurance proceeds.
E)None of these.

Question 51

With respect to the prepaid income from services, which of the following is true?

A)The treatment of prepaid income is the same for tax and financial accounting.
B)A cash basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
C)An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
D)An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less.
E)None of these.

Question 52

Teal company is an accrual basis taxpayer.On December 1, 2017, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2018.Teal delivered the item on January 4, 2018.Teal included the sale in its 2017 income for financial accounting purposes.

A)Teal must recognize the income in 2017.
B)Teal must recognize the income in the year title to the goods passed to the customer, as determined under the state laws in which the store is located.
C)Teal can elect to recognize the income in either 2017 or 2018.
D)Teal must recognize the income in 2018.
E)None of these.

Question 53

The Green Company, an accrual basis taxpayer, provides business-consulting services.Clients generally pay a retainer at the beginning of a 12-month period.This entitles the client to no more than 40 hours of services.Once the client has received 40 hours of services, Green charges $500 per hour.Green Company allocates the retainer to income based on the number of hours worked on the contract.At the end of the tax year, the company had $50,000 of unearned revenues from these contracts.The company also had $10,000 in unearned rent income received from excess office space leased to other companies.Based on the above, Green must include in gross income for the current year:

A)$60,000.
B)$50,000.
C)$10,000.
D)$0.
E)None of these.

Question 54

Turner, a successful executive, is negotiating a compensation plan with his potential employer.The employer has offered to pay Turner a $600,000 annual salary, payable at the rate of $50,000 per month.Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually) and a $180,000 bonus in 5 years when Turner will be age 65.

A)If the employer accepts Turner's counteroffer, Turner will recognize $660,000 at the time the offer is accepted.
B)If the employer accepts Turner's counteroffer, Turner will recognize as gross income $55,000 per month [($480,000 + $180,000)/12].
C)If the employer accepts Turner's counteroffer, Turner will recognize $40,000 income each month for the year and $180,000 in year 5.
D)If the employer accepts Turner's counteroffer, Turner must recognize imputed interest income on the $180,000 to be received in 5 years.
E)None of these.

Question 55

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

A)All of the income must be recognized in the year of maturity by a cash basis taxpayer.
B)The OID will be included in gross income for the year of purchase.
C)The interest income will be the same each year.
D)The interest income will be greater in the third year than in the first year.
E)None of these is correct.

Question 56

The Maroon & Orange Gym, Inc., uses the accrual method of accounting.The corporation sells memberships that entitle the member to use the facilities at any time.A one-year membership costs $480 ($480/12 = $40 per month); a two-year membership costs $720 ($720/24 = $30 per month).Cash payment is required at the beginning of the membership period.On July 1, 2017, the company sold a one-year membership and a two-year membership.The company should report as gross income from the two contracts:

A)$1,200 in 2017.
B)$960 in 2017.
C)$180 in 2019.
D)$780 in 2018
E)None of these.

Question 57

On January 5, 2017, Tim purchased a bond paying interest at 6% for $30,000.On March 31, 2017, he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2017: ​

A)Tim must include all of the interest in his gross income.
B)Jane must report $1,800 gross income for 2017.
C)Jane reports $1,350 of interest income in 2017, and Tim reports $450 of interest income in 2017.
D)Jane reports $450 of interest income in 2017, and Tim reports $1,350 of interest income in 2017.
E)None of these is correct.

Question 58

With respect to income from services, which of the following is true?

A)The income is always amortized over the period the services will be rendered by an accrual basis taxpayer.
B)A cash basis taxpayer can spread the income from a 24-month service contract over the contract period.
C)If an accrual basis taxpayer sells a 36-month service contract on July 1, 2017 for $3,600, the taxpayer's 2017 gross income from the contract is $600.
D)If an accrual basis taxpayer sells a 24-month service contract on July 1, 2017, one-half (12/24) the income is recognized in 2018.
E)None of these.

Question 59

Daniel purchased a bond on July 1, 2017, at par of $10,000 plus accrued interest of $300.On December 31, 2017, Daniel collected the $600 interest for the year.On January 1, 2018, Daniel sold the bond for $10,200.

A)Daniel must recognize $300 interest income for 2017 and a $200 gain on the sale of the bond in 2018.
B)Daniel must recognize $600 interest income for 2017 and a $200 gain on the sale of the bond in 2018.
C)Daniel must recognize $600 interest income for 2017 and a $100 loss on the sale of the bond in 2018.
D)Daniel must recognize $300 interest income for 2017 and a $100 loss on the sale of the bond in 2018.
E)None of these.

Question 60

On November 1, 2017, Bob, a cash basis taxpayer, gave Dave common stock.On October 30, 2017, the corporation had declared the dividend payable to shareholders of record as of November 22, 2017.The dividend was paid on December 15, 2017.The corporation has paid the $1,200 dividend once each year for the past ten years, during which Bob owned the stock.When Dave collected the dividend on December 15, 2017:

A)Bob must include $1,000 (10/12 x $1,200) of the dividend in his gross income.
B)Bob must include all of the dividend in his gross income.
C)Dave must include all of the dividend in his gross income.
D)Dave should treat the $1,200 as a recovery of capital.
E)None of these is correct.

Question 61

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.

A)Rebecca can exclude the life insurance proceeds of $100,000, but Turquoise Company must include $1,100,000 ($1,500,000 - $400,000) in gross income.
B)Turquoise Company and Rebecca can exclude the life insurance proceeds of $1,500,000 and $100,000, respectively, from gross income.
C)Turquoise Company can exclude $1,100,000 ($1,500,000 - $400,000) from gross income, but Rebecca must include $84,000 in gross income.
D)Turquoise Company must include $1,100,000 ($1,500,000 - $400,000) in gross income and Rebecca must include $100,000 in gross income.
E)None of these.

Question 62

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:

A)$0.
B)$2,500.
C)$10,000.
D)$25,000.
E)None of these.

Question 63

Doug and Pattie received the following interest income in the current year: $$\begin{array} { l r } \text { Savings account at Greenbacks Bank } & \$ 4,000 \\\text { United States Treasury bonds } & 250 \\\text { Interest on State of Iowa bonds } & 200 \\\text { Interest on Federal tax refund } & 150 \\\text { Interest on state income tax refund } & 75\end{array}$$ ? 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?

A)$4,775.
B)$4,675.
C)$4,575.
D)$4,300.
E)None of these.

Question 64

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.

A)Sarah must recognize imputed interest expense and the corporation must recognize imputed interest income.
B)Sarah must recognize imputed interest income and the corporation must recognize imputed interest expense.
C)Sarah must recognize imputed dividend income and the corporation may recognize imputed interest expense.
D)Neither Sarah's nor the corporation's gross income is affected by the loans because no interest was charged.
E)None of these.

Question 65

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,

A)Margaret and Ralph will have accumulated the same after-tax amounts.
B)Ralph will have accumulated a greater after-tax amount because the interest on the bond is tax-exempt.
C)Margaret will have accumulated the greater after-tax amount because the gain on the land is tax-exempt.
D)Margaret will have accumulated the greater after-tax amount but only if her marginal tax rate never exceeds 27%.
E)Margaret will accumulate the greater after-tax amount because she earns a return on the deferred taxes.

Question 66

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

A)$1.00 taxable income rather than $1.25 tax-exempt income.
B)$1.00 taxable income rather than $.75 tax-exempt income.
C)$1.25 taxable income rather than $1.00 tax-exempt income.
D)$1.40 taxable income rather than $1.00 tax-exempt income.
E)None of these.

Question 67

Heather's interest and gains on investments for the current year are as follows: $$\begin{array} { l r } \text { Interest on Madison County school bonds } & \$ 600 \\\text { Interest on U.S. government bonds } & 700 \\\text { Interest on a Federal income tax refund } & 200 \\\text { Gain on the sale of Madison County school bonds } & 500\end{array}$$ ? Heather's adjusted gross income from the above is: or;
?
Heather must report gross income in the amount of:
?

A)$2,000.
B)$1,800.
C)$1,400.
D)$1,300.
E)None of these.

Question 68

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.Which of the following is correct:

A)If she buys a corporate bond that pays 6% interest, her after-tax rate of return will be less than if she purchased the York County school bond.
B)If she buys a U.S.government bond paying 5%, her after-tax rate of return will be less than if she purchased the York County school bond.
C)If she buys a common stock paying a 4% dividend, her after-tax rate of return will be higher
Than if she purchased the York County school bond.
D)All of these are correct.
E)None of these are correct.

Question 69

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:

A)Todd's business net profit will be reduced by $3,000 (.05 × $60,000) of interest expense.
B)Sharon must recognize $3,000 (.05 × $60,000) of imputed interest income on the below- market loan.
C)Todd's gross income must be increased by the $3,000 (.05 × $60,000) imputed interest income on the below market loan.
D)Sharon does not recognize any imputed interest income and Todd does not recognize any imputed interest expense.
E)None of these is correct.

Question 70

Travis and Andrea were divorced.Their only marital property consisted of a personal residence (fair market value of $400,000, cost of $200,000), and publicly-traded stocks (fair market value of $800,000, cost basis of $500,000).Under the terms of the divorce agreement, Andrea received the personal residence and Travis received the stocks.In addition, Andrea was to receive $50,000 for eight years.

I) If the $50,000 annual payments are to be made to Andrea or her estate (if she dies before the end of the eight years), the payments will qualify as alimony.
II) Andrea has a taxable gain from an exchange of her one-half interest in the stocks for Travis' one-half interest in the house and cash.
III) If Travis sells the stocks for $900,000, he must recognize a $400,000 gain.

A)Only III is true.
B)Only I and III are true.
C)Only I and II are true.
D)I, II, and III are true.
E)None of these are true.

Question 71

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

A)Interest on United States government bonds received by a state resident can be subject to that state's income tax.
B)Interest on United States government bonds is subject to Federal income tax.
C)Interest on bonds issued by State A received by a resident of State B cannot be subject to income tax in State B.
D)All of these are correct.
E)None of these are correct.

Question 72

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:

A)Must recognize $1,500 income from the life insurance proceeds.
B)Must recognize $1,300 income from the life insurance proceeds.
C)Does not recognize income because life insurance proceeds are tax-exempt.
D)Does not recognize income from the life insurance because the entire amount is a recovery of capital.
E)None of these.

Question 73

On January 1, Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans.There were no other loans outstanding between Dave and Debra.The relevant Federal rate on interest was 6 percent.The loan was outstanding for the entire year.

A)If Debra has $15,000 of investment income, Dave must recognize $6,090 of imputed interest income.
B)Dave must recognize $6,090 of imputed interest income regardless of the amount of Debra's investment income.
C)Debra must recognize $6,090 of imputed interest income.
D)Debra must recognize $6,090 of imputed interest income if Dave has at least $6,090 of investment income.
E)None of these.

Question 74

George, an unmarried cash basis taxpayer, received the following amounts during 2017: $$\begin{array} { l r } \text { Interest on savings accounts } & \$ 2,000 \\\text { Interest on a State tax refund } & 600 \\\text { Interest on City of Salem school bonds } & 350 \\\text { Interest portion of proceeds of a 5\% bank certificate of deposit } & \\\text { purchased on July 1, 2016, and matured on June 30, 2017 } & 250 \\\text { Dividends on USG common stock } & 300\end{array}$$ ? What amount should George report as gross income from dividends and interest for 2017?

A)$2,300.
B)$2,550.
C)$3,150.
D)$3,500.
E)None of these.

Question 75

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

A)sell; keep.
B)sell; sell.
C)keep; sell.
D)keep; keep.
E)None of these.

Question 76

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.

A)None of the payments must be included in Iris's gross income.
B)The amount she receives in the first year is a nontaxable return of capital.
C)For each $18,000 payment that Iris receives, she can exclude $500 ($5,000/$180,000 × $18,000) from gross income.
D)For each $18,000 payment that Iris receives, she can exclude $15,000 ($150,000/$180,000 × $18,000) from gross income.
E)None of these.

Question 77

The purpose of the tax rules that apply to below-market loans between family members is to:

A)Discourage loans between related parties.
B)Prevent shifting of income among family members.
C)Prevent gifts from being disguised as bad debt expenses.
D)Prevent gift tax avoidance.
E)None of these is true.

Question 78

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:

A)The corporation has imputed interest income and the employee is deemed to have received a gift.
B)The corporation has imputed interest income and dividends paid.
C)The employee has no income unless the funds are invested and produce investment income for the year.
D)The employee has imputed compensation income and the corporation has imputed interest income.
E)None of these.

Question 79

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2017.Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years.Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th.The daughter received the $2,000 dividend on October 18, 2017.

A)The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.
B)Darryl must recognize the income of $2,000 because the purpose of the gift was to avoid taxes.
C)Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year.
D)Darryl must recognize the $2,000 dividend as his income because he constructively received the dividend.
E)None of these.

Question 80

The alimony rules:

A)Are based on the principle that the person who earns the income should pay the tax.
B)Permit tax deductions for property divisions.
C)Look to state law to determine the definition of alimony.
D)Distinguish child support payments from alimony.
E)None of these.