Deck 4: Gross Income

Question 1

The constructive receipt doctrine requires that income 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 1

True

Question 2

In 2009, Terry purchased land for $150,000.He also received $10,000 from a local cable television company in exchange for allowing the company to run an underground cable across his 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.

Answer 2

True

Question 3

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.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.

Answer 3

True

Question 4

An advance payment received in June 2019 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 5

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

Question 6

On January 1, 2019, an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 24 months.The amount received for the contract was $2,400.The taxpayer reported $1,200 as income on its financial statement for 2019, and should do the same for its tax return.

Question 7

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 8

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2018.The dividend checks were mailed on December 31, 2018.Ed, a cash basis shareholder, received the dividend check on January 2, 2019.Ed cannot delay reporting the income from the dividend until 2019.

Question 9

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

Question 10

At the beginning of 2019, 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 2019, and $3,600 from the Series EE bonds in 2028.

Question 11

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2017 that will pay $1,100 upon its maturity on June 30, 2019.The taxpayer must recognize a portion of the income in 2018.

Question 12

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

Question 13

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

Question 14

In December 2018, Mary collected the December 2018 and January 2019 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2018 for the 2019 rent should be included in her 2019 gross income.

Question 15

On December 1, 2019, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2019 and $12,000 for January 2020.Daniel must include the $24,000 in 2019 gross income.

Question 16

A sole proprietor purchased an asset for $1,000 in 2019.Its value was $1,500 at the end of 2019.In 2020, the taxpayer sold the asset for $1,400.In 2020, the proprietor realized a taxable gain of $400 but an economic loss of $100.

Question 17

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 10-year period.

Question 18

In 2019, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract.He counteroffered that he would receive $900,000 per year for four years beginning in 2020.The team accepted the counteroffer.Juan constructively received $3 million in 2019.

Question 19

Jessica is a cash basis taxpayer.When she 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 20

Judy is a cash basis attorney.This year, 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 the current year.

Question 21

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 $158 if he is in the 24% marginal tax bracket.
B)Tom must earn at least $158 if he is in the 32% marginal tax bracket.
C)Tom must earn at least $140 if he is in the 24% marginal tax bracket.
D)Tom must earn at least $120 if he is in the 12% marginal tax bracket.
E)None of these.

Question 22

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

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

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 25

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

Question 26

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

Question 27

Linda delivers pizzas for a pizza shop.On Wednesday, December 31, 2019, 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, 2020.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2020.

Question 28

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 2020 collected in 2019 is income for 2019.
D)All of these.

Question 29

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

Question 30

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 31

Ed died while employed by Violet Company.His wife collected $40,000 on a group term life insurance policy that Violet provided its employees and $6,000 of accrued salary Ed had earned prior to his death.All of the premiums on the group term life insurance policy were excluded from the Ed's gross income.Ed's wife is required to recognize as gross income only the $6,000 she received for the accrued salary.

Question 32

For a person who is in the 35% marginal tax bracket, $1,000 of tax-exempt income is equivalent to $1,350 of income that is subject to tax.

Question 33

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 34

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 35

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 36

When Betty was diagnosed as having a terminal illness, she sold her life insurance policy to Insurance Purchase, Inc., a company that is licensed to invest in these types of contracts.Betty sold the policy for $32,000, and Insurance Purchase, Inc.became the beneficiary.She had paid total premiums of $19,000.Betty died eight months after the sale.Insurance Purchase, Inc., collected $50,000 on the policy.The company had paid additional premiums of $4,000 on the policy.Betty's estate is not required to recognize a $13,000 gain from the sale of her life insurance policy; and Insurance Purchase, Inc.is required to recognize a $14,000 gain from the insurance policy.

Question 37

Gary cashed in an insurance policy on his life.He needed the funds to pay for his terminally ill wife's medical expenses.He had paid $12,000 in premiums and he collected $30,000 from the insurance company.Gary is not required to include the gain of $18,000 ($30,000 - $12,000) in gross income.

Question 38

Zack was the beneficiary of a life insurance policy on his deceased 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 39

A taxpayer incorrectly took a $5,000 deduction (e.g., incorrectly calculated depreciation) in 2019 and as a result, his taxable income was reduced by $5,000.The taxpayer discovered his error in 2020.The taxpayer must add $5,000 to his 2020 gross income in accordance with the tax benefit rule to correct for the 2019 error.

Question 40

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 five 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 five years.
E)None of these.

Question 41

Maroon Corporation expects its 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 2019?

A)The employee would be required to recognize the income in December 2019 because it is constructively received at the end of the month.
B)The employee would be required to recognize the income in December 2019 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 2020.
D)The employee can elect to either include the pay in 2019 or 2020.
E)None of these.

Question 42

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, 2019, the company sold a one-year membership and a two-year membership.For financial reporting purposes, Maroon reports the membership income ratably over the number of months involved.The company should report as gross income from the two contracts:

A)$1,200 in 2019.
B)$960 in 2019.
C)$180 in 2021.
D)$780 in 2020.
E)None of these.

Question 43

Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($600 per year) or two years in advance ($960).In September 2019, the company collected the following amounts applicable to future services: As a result of this, Orange Cable should report as gross income for 2020:

A)$54,000.
B)$78,000.
C)$258,000.
D)$312,000.
E)None of these.

Question 44

On November 1, 2019, Bob, a cash basis taxpayer, gave Dave common stock.On October 30, 2019, the corporation had declared the dividend payable to shareholders of record as of November 22, 2019.The dividend was paid on December 15, 2019.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, 2019:

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 45

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?

A)$0.
B)$1,000.
C)$2,000.
D)$3,000.
E)None of these.

Question 46

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2019.The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2020.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 2019, if Office Palace is an accrual basis taxpayer.
B)$7,800 in 2020, if Office Palace is a cash basis taxpayer.
C)$2,700 in 2019, if Office Palace is a cash or accrual basis taxpayer.
D)$1,200 in 2019, if Office Palace is a cash or accrual basis taxpayer.
E)None of these.

Question 47

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

A)The treatment of unearned income is the same for tax and financial accounting for both cash and accrual basis taxpayers.
B)A cash basis taxpayer must report all of the income in the year received.
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 within three years 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 48

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

A)An accrual basis taxpayer will always recognize the income over the period the services will be rendered.
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, 2019 for $3,600, the taxpayer's 2019 gross income from the contract is $600.
D)If an accrual basis taxpayer sells a 24-month service contract on July 1, 2019, one-half (12/24) the income is recognized in 2020.
E)None of these.

Question 49

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 $25.60[($1,000 - $744)/10] 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 50

Teal company is an accrual basis taxpayer.On December 1, 2019, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2020.Teal delivered the item on January 4, 2020.Teal included the sale in its 2019 income for financial accounting purposes.

A)Teal must recognize the income in 2019.
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 2019 or 2020.
D)Teal must recognize the income in 2020.
E)None of these.

Question 51

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 for contracts entered into for the current year, the company had $50,000 of unearned revenues from these contracts.The company also had $10,000 in unearned rent income received this year from excess office space leased to other companies.Based on this, Green must include in gross income for the subsequent tax year:

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

Question 52

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2019.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, 2019.

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 53

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 54

Daniel purchased a bond on July 1, 2019, at par of $10,000 plus accrued interest of $300.On December 31, 2019, Daniel collected the $600 interest for the year.On January 1, 2020, Daniel sold the bond for $10,200.

A)Daniel must recognize $300 interest income for 2019 and a $200 gain on the sale of the bond in 2020.
B)Daniel must recognize $600 interest income for 2019 and a $200 gain on the sale of the bond in 2020.
C)Daniel must recognize $600 interest income for 2019 and a $100 loss on the sale of the bond in 2020.
D)Daniel must recognize $300 interest income for 2019 and a $100 loss on the sale of the bond in 2020.
E)None of these.

Question 55

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2014, for $10,000, plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31, 2019, 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 2019.
B)Theresa has $200 interest income and a $200 gain from the bond in 2019.
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 56

On January 2, 2019, Tim purchased a bond paying interest at 6% for $30,000.On March 31, 2019, 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 2019:

A)Tim must include all of the interest in his gross income.
B)Jane must report $1,800 gross income for 2019.
C)Jane reports $1,350 of interest income in 2019, and Tim reports $450 of interest income in 2019.
D)Jane reports $450 of interest income in 2019, and Tim reports $1,350 of interest income in 2019.
E)None of these is correct.

Question 57

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 58

Mike, a medical doctor, contracted with Kram Company, Mike's controlled corporation.The contract provided that Mike 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 59

Freddy purchased a certificate of deposit for $20,000 on July 1, 2019.The certificate's maturity value in two years (June 30, 2021) is $21,218, yielding 3% before-tax interest.

A)Freddy must recognize $1,218 gross income in 2019.
B)Freddy must recognize $1,218 gross income in 2021.
C)Freddy must recognize $600 (0.03 × $20,000) gross income in 2021.
D)Freddy must recognize $300 (0.03 × $20,000 × 0.5) gross income in 2019.
E)None of these.

Question 60

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 61

Tonya is a cash basis taxpayer.In 2019, she paid state income taxes of $8,000.In early 2020, she filed her 2019 state income tax return and received a $900 refund.

A)If Tonya itemized her deductions in 2019 on her Federal income tax return, she should amend her 2019 return and reduce her itemized deductions by $900.
B)If Tonya itemized her deductions in 2019 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2020 tax return.
C)If Tonya itemized her deductions in 2019 on her Federal income tax return, she must amend her 2019 Federal income tax return and use the standard deduction.
D)If Tonya itemized her deductions in 2019 on her Federal income tax return and her itemized deductions exceeded the standard deduction by more than $900, she must recognize $900 income in 2020 under the tax benefit rule.
E)None of these.

Question 62

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

A)Interest on U.S.government bonds received by a state resident can be subject to that state's income tax.
B)Interest on U.S.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 is correct.

Question 63

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 64

Gold Company was experiencing financial difficulties but was not bankrupt or insolvent.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 eight years.As a result of the above, Gold must:

A)Include $40,000 in gross income.
B)Reduce the basis in its assets by $40,000.
C)Include $25,000 in gross income and reduce its basis in its assets by $15,000.
D)Include $15,000 in gross income and reduce its basis in the building by $25,000.
E)None of these.

Question 65

Barry, a solvent individual but a recovering alcoholic, embezzled $6,000 from his employer.In the same year that he embezzled the funds, his employer discovered the theft.His employer did not fire him and told him he did not have to repay the $6,000 if he would attend Alcoholics Anonymous.Barry met the conditions and his employer canceled the debt.

A)Barry did not realize any income because his employer made a gift to him.
B)Barry must include $6,000 in gross income from discharge of indebtedness.
C)Barry must include $6,000 in gross income under the tax benefit rule.
D)Barry may exclude the $6,000 from gross income because the debt never existed.
E)None of these.

Question 66

Kirby, a single taxpayer, has taxable income of $30,000 and is in the 12% tax bracket.During 2019, she had the following capital asset transactions: Kirby's tax consequences from these gains are as follows:

A)(5% × $10,000) + (12% × $13,000).
B)(12% × $13,000) + (28% × $11,000).
C)(0% × $10,000) + (12% × $13,000).
D)(12% × $23,000).
E)None of these.

Question 67

In December 2019, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2020 on a building he held for rental income.Todd deducted the $1,200 of insurance premiums on his 2019 tax return.He had $150,000 of taxable income that year.On June 30, 2020, he sold the building and, as a result, received a $500 refund on his fire insurance premiums.As a result of the above:

A)Todd should amend his 2019 return and claim $500 less insurance expense.
B)Todd should include the $500 in 2020 gross income in accordance with the tax benefit rule.
C)Todd should add the $500 to his sales proceeds from the building.
D)Todd should include the $500 in 2020 gross income in accordance with the claim of right doctrine.
E)None of these.

Question 68

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 69

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.

A)Harold must recognize $20,000 ($80,000 - $60,000) of gross income.
B)Harold is not required to recognize gross income but must reduce his cost basis in the land to $130,000.
C)Harold is not required to recognize gross income since he paid the debt before it was due.
D)Jewel must recognize gross income of $20,000 ($80,000 - $60,000) from discharge of the debt.
E)None of these.

Question 70

Heather's interest and gains on investments for the current year are as follows: 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 71

On January 1, 2009, 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, 2019, the company acquired the bonds on the open market for $11,500,000.Assuming that Cardinal is neither bankrupt nor insolvent, the acquisition and retirement of the bonds results in which of the following?

A)The company must recognize a $500,000 gain.
B)The company can make an election to recognize a $500,000 gain or reduce the company's basis in the plant by $500,000.
C)The company must recognize a $500,000 gain and increase it's basis in the plant by $500,000.
D)The company can amortize the $500,000 gain, recognizing income over the remaining life of the bonds.
E)None of these.

Question 72

Perry, a single taxpayer, has taxable income of $178,000 and is in the 32% tax bracket.During 2019, he had the following capital asset transactions: Perry's tax consequences from these gains are as follows:

A)(15% × $30,000) + (32% × $4,000).
B)(15% × $10,000) + (28% × $30,000) + (32% × $4,000).
C)(0% × $10,000) + (28% × $30,000) + (32% × $4,000).
D)(15% × $40,000) + (32% × $4,000).
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

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 75

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

A)If Flora had borrowed the funds from a bank, the bank accepts $85,000 in full payment of the debt, and Flora is solvent after the transfer, Flora does not recognize income, but the company must reduce the cost of the land by $10,000.
B)If Flora had borrowed the funds from a bank and the bank accepts $85,000 in full payment of the debt, when the value of the property is $80,000, Flora can deduct a loss.
C)If Flora transfers to the bank other property with a basis of $90,000 and a fair market value of $95,000 in full payment of the debt, Flora can recognize a $5,000 loss.
D)If the $95,000 is owed to the person who sold the property to Flora and that person accepts $85,000 in full payment for the debt, Flora does not recognize gain but must reduce its basis in the land.
E)None of these.

Question 76

During 2019, Trevor has the following capital transactions: After the netting process, the following results:

A)Long-term collectible gain of $2,000.
B)LTCG of $6,000, long-term collectible gain of $2,000, and a STCL of $6,000.
C)LTCG of $6,000, long-term collectible gain of $2,000, and a STCL carryover to 2019 of $3,000.
D)LTCG of $2,000.
E)None of these.

Question 77

Emily is in the 35% marginal tax bracket.She can purchase a York County school bond yielding 3.5% interest, which 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 had 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 had 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 had purchased the York County school bond.
D)All of these are correct.
E)None of these is correct.

Question 78

Doug and Pattie received the following interest income in the current year: 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 79

George, an unmarried cash basis taxpayer, received the following amounts this year: What amount should George report as gross income from dividends and interest this year?

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

Question 80

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 must include $1,100,000 ($1,500,000 - $400,000) in gross income.
B)Turquoise and Rebecca can exclude the life insurance proceeds of $1,500,000 and $100,000, respectively, from gross income.
C)Turquoise can exclude $1,100,000 ($1,500,000 - $400,000) from gross income, but Rebecca must include $84,000 in gross income.
D)Turquoise 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.