Question 1

On January 5, 2018, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2018, 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 2018:
A) Tim must include all of the interest in his gross income.
B) Jane must report $1,800 gross income for 2018.
C) Jane reports $1,350 of interest income in 2018, and Tim reports $450 of interest income in 2018.
D) Jane reports $450 of interest income in 2018, and Tim reports $1,350 of interest income in 2018.
E) None of these is correct.

Accepted Answer

Tim accrues interest income for the part of the year that he held the bond (January 5 to March 31), which is ($30,000 × 6% × 86/365) = $315. Jane's basis in the bond is the $30,000 that Tim paid for it, plus Tim's accrued interest income of $315, for a total basis of $30,315. When Jane collects the $1,800 interest on December 31, she must report it as gross income. However, she gets a credit for Tim's accrued interest income of $315, and thus Jane reports $1,485 of interest income in 2018 ($1,800 − $315). Tim reports the remaining $315 of interest income in 2018.

Question 2

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2018. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2019. 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 2018, if Office Palace is an accrual basis taxpayer.
B) $7,800 in 2019, if Office Palace is a cash basis taxpayer.
C) $2,700 in 2018, if Office Palace is a cash or accrual basis taxpayer.
D) $1,200 in 2018, if Office Palace is a cash or accrual basis taxpayer.
E) None of these.

Accepted Answer

The answer of Office Palace, Inc., leased an all-in-one printer...

Question 3

Under the alimony rules:
A) To determine whether a cash payment is alimony, one must consult the state laws that define alimony.
B) A person who receives a property division has experienced an increase in wealth and thus should be subject to tax.
C) Alimony paid per a 2015 divorce agreement is included in the gross income of the recipient of the payments.
D) A person who earns $90,000 and pays $20,000 in alimony per a divorce agreement entered into in 2019, is allowed to deduct the $20,000.
E) None of these.

Accepted Answer

The answer of Under the alimony rules:
A) To determine whether...

Question 4

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, 2018 for $3,600, the taxpayer's 2018 gross income from the contract is $600.
D) If an accrual basis taxpayer sells a 24-month service contract on July 1, 2018, one-half 12/24) the income is recognized in 2019.
E) None of these.

Accepted Answer

The correct statement is that if an accrual basis taxpayer sells a 36-month service contract on July 1, 2018, for $3,600, the taxpayer's 2018 gross income from the contract is $600. Under the accrual basis of accounting, revenue is recognized when earned and expenses are recognized when incurred, regardless of when cash is received or paid. In this case, the taxpayer has only earned revenue for half of the first year (July-December), so only one-half of the annual amount (which is $1,200) should be recognized in 2018, leading to $600 of gross income in 2018. The other answer choices are all incorrect because they either refer to spreading income over the contract period (which is not always allowed) or incorrectly allocate income over multiple years.

Question 5

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 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.

Accepted Answer

The answer of With respect to the prepaid income from...

Question 6

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.

Accepted Answer

Only statement I and II are true. Income from property is taxed to the person who owns the property, and income from services is taxed to the person who earns the income. Statements III and IV are false. The assignee of income from property is not necessarily responsible for paying tax on that income; it depends on the terms of the assignment. Similarly, the person who receives the benefit of the income may not always be the one responsible for paying the tax on that income.

Question 7

Which of the following is not a requirement for an alimony deduction?
A) The payments must be in cash.
B) The payments must cease upon the death of the payee.
C) The payments must extend over at least three years.
D) The payor and payee must not live in the same household at the time of the payments.
E) All of these are requirements for an alimony deduction.

Accepted Answer

The requirement that alimony payments must extend over at least three years is not a condition for an alimony deduction under U.S. tax law. The key requirements include payments in cash, cessation upon the death of the payee, and that the payor and payee do not live together.

Question 8

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, 2018, 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 2018.
B) $960 in 2018.
C) $180 in 2020.
D) $780 in 2019.
E) None of these.

Accepted Answer

The one-year membership will generate $480 in revenue ($40/month x 12 months). Since the membership was sold on July 1st, the revenue recognized in 2018 will be $200 ($40/month x 6 months remaining in the year).

The two-year membership will generate $720 in revenue ($30/month x 24 months). Since the membership was sold on July 1st, the revenue recognized in 2018 will be $150 ($30/month x 6 months remaining in the year).

Therefore, the total revenue recognized in 2018 will be $200 + $150 = $350.

The remaining revenue will be recognized over the remaining months of the contract. For the one-year membership, the remaining revenue of $280 will be recognized in 2019 ($40/month x 7 months). For the two-year membership, the remaining revenue of $570 will be recognized in 2019 and 2020 ($30/month x 19 months).

Thus, the total gross income from the two contracts that should be reported is $350 + $430 = $780 in 2019.

Question 9

Daniel purchased a bond on July 1, 2018, at par of $10,000 plus accrued interest of $300. On December 31, 2018, Daniel collected the $600 interest for the year. On January 1, 2019, Daniel sold the bond for $10,200.
A) Daniel must recognize $300 interest income for 2018 and a $200 gain on the sale of the bond in 2019.
B) Daniel must recognize $600 interest income for 2018 and a $200 gain on the sale of the bond in 2019.
C) Daniel must recognize $600 interest income for 2018 and a $100 loss on the sale of the bond in 2019.
D) Daniel must recognize $300 interest income for 2018 and a $100 loss on the sale of the bond in 2019.
E) None of these.

Accepted Answer

The answer of Daniel purchased a bond on July 1,...

Question 10

Teal company is an accrual basis taxpayer. On December 1, 2018, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2019. Teal delivered the item on January 4, 2019. Teal included the sale in its 2018 income for financial accounting purposes.
A) Teal must recognize the income in 2018.
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 2018 or 2019.
D) Teal must recognize the income in 2019.
E) None of these.

Accepted Answer

Teal is an accrual basis taxpayer, which means it recognizes income when it is earned, not when received. In this case, Teal earned the income when the customer paid for the item in December 2018, even though the item was not delivered until January 2019. Therefore, Teal must recognize the income in 2018.

Question 11

Wayne owns a 30% interest in the capital and profits of Emerald Company a calendar year partnership). For tax year 2018, the partnership earned revenue of $900,000 and had operating expenses of $660,000. During the year, Wayne withdrew from the partnership a total of $90,000. He also invested an additional $30,000 in the partnership. For 2018, Wayne's gross income from the partnership is:
A) $72,000.
B) $90,000.
C) $132,000.
D) $162,000.

Accepted Answer

The answer of Wayne owns a 30% interest in the...

Question 12

Travis and Andrea were divorced in 2016. 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.

Accepted Answer

I. The payments are contingent on Andrea's life and are therefore alimony.III. Travis must recognize a $400,000 gain on the sale of the stocks.

Question 13

Harry and Wanda were married in Texas, a community property state, but moved to Virginia, a common law state. The calculation of their income on a joint return:
A) Will increase as a result of changing their state of residence.
B) Will decrease as a result of changing their state of residence.
C) Will not change as a result of changing their state of residence.
D) Will not be permitted.
E) None of these.

Accepted Answer

The calculation of their income on a joint return will not change as a result of changing their state of residence because the federal tax law governs the rules for calculating income on a joint federal tax return, regardless of the state of residency. However, state taxes may differ depending on the state of residency.

Question 14

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.

Accepted Answer

The answer of Jerry purchased a U.S. Series EE savings...

Question 15

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2018. 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, 2018.
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.

Accepted Answer

The answer of Darryl, a cash basis taxpayer, gave 1,000...

Question 16

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 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 the above, 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.

Accepted Answer

The $50,000 of unearned revenues from consulting services must be recognized as income in the subsequent tax year since they were collected in advance and are therefore considered taxable income. The $10,000 in unearned rent income is not taxable until the rent is actually earned or the lease term ends, whichever comes first. Therefore, the correct answer is option B.

Question 17

Jim and Nora, residents of a community property state, were married in early 2017. Late in 2017 they separated, and in 2018 they were divorced. Each earned a salary, and they received income from community owned investments in all relevant years. They filed separate returns in 2017 and 2018.
A) In 2018, Nora must report only her salary and one-half of the income from community property on her separate return.
B) In 2018, Nora must report on her separate return one-half of the Jim and Nora salary and one-half of the community property income.
C) In 2018 Nora must report on her separate return one-half of the Jim and Nora salary for the period they were married as well as one-half of the community property income and her income earned after the divorce.
D) In 2018, Nora must report only her salary on her separate return.
E) None of these.

Accepted Answer

The answer of Jim and Nora, residents of a community...

Question 18

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, 2018, 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 2018.
B) Theresa has $200 interest income and a $200 gain from the bond in 2018.
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.

Accepted Answer

The answer of Theresa, a cash basis taxpayer, purchased a...

Question 19

On November 1, 2018, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2018, the corporation had declared the dividend payable to shareholders of record as of November 22, 2018. The dividend was paid on December 15, 2018. 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, 2018:
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.

Accepted Answer

The answer of On November 1, 2018, Bob, a cash...

Question 20

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.

Accepted Answer

Mike's gross income is $6,500, which is the amount he received under his employment contract with Kram Company. The $8,000 contract with Rosa is income to the corporation, not to Mike personally.

Quiz 4: Gross Income: Concepts and Inclusions

On January 5, 2018, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2018, 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 2018:

Under the alimony rules:

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

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

Which of the following is not a requirement for an alimony deduction?

Daniel purchased a bond on July 1, 2018, at par of $10,000 plus accrued interest of $300. On December 31, 2018, Daniel collected the $600 interest for the year. On January 1, 2019, Daniel sold the bond for $10,200.

Teal company is an accrual basis taxpayer. On December 1, 2018, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2019. Teal delivered the item on January 4, 2019. Teal included the sale in its 2018 income for financial accounting purposes.

Harry and Wanda were married in Texas, a community property state, but moved to Virginia, a common law state. The calculation of their income on a joint return:

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.

Jim and Nora, residents of a community property state, were married in early 2017. Late in 2017 they separated, and in 2018 they were divorced. Each earned a salary, and they received income from community owned investments in all relevant years. They filed separate returns in 2017 and 2018.

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, 2018, she sold the bond for $9,800, which included $200 of accrued interest.