Question 1

On April 1, 2014, Martha, age 67, begins receiving payments of $3,000 monthly from her employer's qualified retirement plan. She had contributed $90,000 to the plan in after-tax dollars. The anticipated number of payments is 210. Using the simplified method, how much of the payments are taxable in 2014?

Accepted Answer

The answer of On April 1, 2014, Martha, age 67,...

Question 2

During 2013, Christiana's employer withheld $1,500 from her wages for state income taxes. She claimed the $1,500 as an itemized deduction on her 2013 federal income tax return which included $8,000 of itemized deductions. Christiana is single. On her 2013 state income tax return, her state income tax was $900. As a result, Christiana received a $600 refund in 2014. What amount must Christiana include in income in 2014?

Accepted Answer

Christiana must include in income the tax benefit she received from claiming the $1,500 as an itemized deduction on her federal tax return. The tax benefit can be calculated as her tax savings, which is the deduction amount multiplied by her combined federal and state marginal tax rate. Assuming her combined marginal tax rate was 25%, her tax savings would be $375 ($1,500 x 0.25). Therefore, she must include $375 in income in 2014. Since she received a $600 refund, she has already accounted for $225 of the $375 tax benefit, so she must include the remaining $150 in income ($375 - $225 = $150), which is represented by choice B.

Question 3

Emma is the sole shareholder in Pacific Corporation and has owned the stock for five years. The basis in her stock is $50,000. Pacific distributes $35,000 to Emma. Accumulated earnings and profits at the beginning of the year equal $25,000 and current earnings and profits equal $5,000.
Required:
a. What are the tax consequences of this information?
b. What are the tax consequences of this information if, instead of distributing $35,000 to Emma, Pacific distributes $100,000 to Emma?

Accepted Answer

The answer of Emma is the sole shareholder in Pacific...

Question 4

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?

Accepted Answer

The answer of Chance Corporation began operating a new retail...

Question 5

Rocky owns The Palms Apartments. During the year, Molly Ann, a tenant, moved to another state. Molly Ann paid Rocky $1,500 to cancel the two-year lease she had signed. Rocky then rented the apartment to Elvis who paid the first and last months' rents of $500 each and a security deposit of $800. Rocky also owns a building used as a dance club. The owner of the club requested that Rocky add on another room to be used for private parties. Rocky refused but allowed the club owner to make the addition at a cost of $20,000. What amount should be included in Rocky's income with regard to these items?

Accepted Answer

The answer of Rocky owns The Palms Apartments. During the...

Question 6

Mr. & Mrs. Bronson are both over 65 years of age and are filing a joint return. Their income this year consisted of the following:  They did not have any adjustments to income. What amount of Mr. & Mrs. Bronson's social security benefits is taxable this year?

Accepted Answer

The taxable amount of Social Security benefits is determined by comparing the taxpayer's provisional income to the base amount. The base amount for taxpayers filing a joint return and both spouses are over 65 is $32,000. The Bronsons' provisional income is $41,000 ($30,000 in Social Security benefits + $8,000 in pension income + $3,000 in interest income). Since their provisional income is above the base amount, 50% of their Social Security benefits are taxable. 50% of $9,000 (half of their Social Security benefits) is $4,500. Therefore, the answer is B, $4,500.

Question 7

Leigh inherited $65,000 of City of New York bonds in January 2014. In March 2014, she received $4,000 of interest on the bonds. In July 2014, she sold the bonds at a $10,000 gain. Leigh also redeemed Series E U.S. Savings bonds in October 2014 that she had purchased several years ago and received accumulated interest of $2,600. In December 2014, she received $800 of interest on City of Paris, France, bonds. What amount, if any of gross income must Leigh report?

Accepted Answer

The answer of Leigh inherited $65,000 of City of New...

Question 8

Marisa and Kurt divorced in 2012. Under the terms of the divorce agreement, Marisa was to pay Kurt $110,000 in 2012 and $60,000 each year following until Kurt's death or remarriage. What must Kurt report on his tax return for 2014 regarding these transactions?

Accepted Answer

The answer of Marisa and Kurt divorced in 2012. Under...

Question 9

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 2014, the company collected the following amounts applicable to future services:
  Assuming Cable TV wants to minimize income reported for 2014, what is the amount of gross income that must be reported for 2014 and how much of the income from these contracts will be reported in 2015?

Accepted Answer

The answer of The Cable TV Company, an accrual basis...

Question 10

Gwen's marginal tax bracket is 25%. Gwen pays alimony of $24,000 per year. Gwen's after tax cost for the $24,000 payment is

Accepted Answer

Gwen's after-tax cost for the alimony payment is the amount she actually pays minus the tax savings she receives from being able to deduct it from her income.

The tax savings she receives is equal to the alimony payment multiplied by her marginal tax rate.

Tax savings = 24,000 x 0.25 = $6,000

So her after-tax cost is:

After-tax cost = 24,000 - 6,000 = $18,000

Question 11

Homer Corporation's office building was destroyed by fire. Homer collected insurance of $250,000, which equaled the building's basis, and $150,000 for profits lost during the time the company was rebuilding the office building. What is the amount taxable this year?

Accepted Answer

The insurance reimbursement for the building's basis is not taxable because it only replaces what was lost. However, the $150,000 for lost profits is considered income and therefore taxable.

Question 12

Reva is a single taxpayer with a taxable pension of $24,000, tax-exempt interest of $8,000, and Social Security benefits of $10,000. What is the amount of her taxable Social Security benefits?

Accepted Answer

To determine the taxable Social Security benefits, you need to calculate Reva's provisional income. Provisional income is calculated as follows: adjusted gross income + tax-exempt interest + 1/2 of Social Security benefits. 
Reva's provisional income is $24,000 + $8,000 + ($10,000/2) = $37,000.
Since her provisional income is less than $34,000, none of her Social Security benefits are taxable.

Question 13

Ellen is a single taxpayer with qualified dividend income of $5,000, and itemized deductions of $13,000.
Required: Determine Ellen's taxable income and tax liability in 2014, assuming the following salaries-
a. $50,000.
b. $100,000.

Accepted Answer

The answer of Ellen is a single taxpayer with qualified...

Question 14

An electrician completes a rewiring job and is paid $1,000 by the customer in November. The customer has a small fire in his house and sues the electrician for the repayment of the $1,000 fee plus damages in December. The electrician reaches a settlement with the customer in the following February and refunds the $1,000 fee. How should the electrician treat these events when he files his tax return in April?

Accepted Answer

The electrician should report the $1,000 fee as income in the year of receipt (November). In the following year, when the refund is issued (February), the electrician can claim a tax deduction on their tax return for that year for the refund of the $1,000 fee. This is known as a repayment of income and is treated as a deductible expense in the year it is repaid.

Question 15

On January 1, 1996, Erika Greene purchased a single premium annuity for $15,000 that will pay her $5,000 every year for life beginning on January 1, 2014. Based on actuarial tables published by the IRS, her life expectancy multiple is 10.
a. What is the amount to be excluded Erika's income for 2014?
b. What is the amount to be excluded in Erika's income for the year 2024?

Accepted Answer

The answer of On January 1, 1996, Erika Greene purchased...

Question 16

During 2013, Mark's employer withheld $2,000 from his wages for state income tax. Mark claimed the $2,000 as an itemized deduction on his 2013 federal income tax return. His total itemized deductions for 2013 were $6,000. Mark's taxable income for 2013 was a negative $20,000 due to substantial business losses. Mark received the $2,000 as a refund from the state during 2014. What amount must Mark include in income in 2014?

Accepted Answer

The answer of During 2013, Mark's employer withheld $2,000 from...

Question 17

Daniel plans to invest $20,000 in either a corporate bond paying 5% or a tax-exempt bond with a 4% interest rate. The bonds have an equivalent level of risk. Daniel has a 33% marginal tax rate and wants to maximize his after-tax earnings. Daniel should

Accepted Answer

Even though the corporate bond has a higher stated interest rate, its after-tax return is lower than the tax-exempt bond due to Daniel's 33% marginal tax rate. The after-tax return on the corporate bond is 5%*(1-0.33) = 3.35%, while the after-tax return on the tax-exempt bond is simply 4%. Therefore, Daniel should invest in the tax-exempt bond to maximize his after-tax earnings.

Question 18

Insurance proceeds received because of the destruction of property are

Accepted Answer

Insurance proceeds received because of the destruction of property are included in gross income only to the extent the proceeds exceed the adjusted basis of the replacement property. If the proceeds are less than the adjusted basis of the replacement property, there is no taxable gain.

Question 19

Under the terms of a divorce agreement dated January 1, 2014, Edmond was to pay his wife Donna $3,000 per month in alimony and $500 per month in child support. Payments began on 1/1/14. In addition, Donna received the family residence with a cost basis of $210,000 and a fair market value of $260,000.
a. What is the amount that Donna must include in income for the twelve-month period ended December 31, 2014?
b. What is the basis in the home which Donna received as a result of the divorce?

Accepted Answer

The answer of Under the terms of a divorce agreement...

Question 20

Gabe Corporation, an accrual-basis taxpayer that uses the calendar year as its tax year, sells CPE (continuing professional education)courses under contracts ranging from three months to two years. Assume that Gabe Corporation sold three contracts on July 1, 2014; one for six months costing $300; one for one year costing $500; and one for two years costing $800.
Required: What is the minimum amount of income that must be recognized in 2014 and 2015?

Accepted Answer

The answer of Gabe Corporation, an accrual-basis taxpayer that uses...

Quiz 3: Gross Income: Inclusions

Mr. & Mrs. Bronson are both over 65 years of age and are filing a joint return. Their income this year consisted of the following: They did not have any adjustments to income. What amount of Mr. & Mrs. Bronson's social security benefits is taxable this year?