Question 1

Jerry is a furniture salesman for Ashland's Furniture Mart.Jerry purchases a bedroom suite from Ashland's for $10,000.The sticker price is $14,000.Ashland's policy is to "discount" all customer purchases for up to $2,000 off of the sticker price for purchases over $10,000.What is the tax treatment of Jerry's furniture purchase?
I.Jerry must include $4,000 in his gross income.
II.Ashland's Furniture Mart can deduct $2,000 as compensation expense in addition to properly accounting for the sale of the furniture.

Accepted Answer

Statement II is correct, as Ashland's Furniture Mart can deduct $2,000 as compensation expense in addition to properly accounting for the sale of the furniture. However, statement I is incorrect because Jerry does not need to include anything in his gross income as he purchased the furniture for himself as a personal expense.

Question 2

Which of the following items is not a capital asset in the hands of the taxpayer?

Accepted Answer

The answer of Which of the following items is not...

Question 3

Which of the following items is a capital asset in the hands of the taxpayer?

Accepted Answer

A capital asset is generally a long-term asset that is used in the taxpayer's trade or business or held for investment. The 10-year old Harley-Davidson motorcycle is a long-term asset held for personal use by the taxpayer and meets the definition of a capital asset. The other options do not meet the definition of a capital asset. The used car lot, the 1962 Cadillac, and the prize-winning steer are all held as inventory for sale in the ordinary course of the taxpayer's trade or business, and the notebook computer is a personal asset used for work purposes but does not meet the definition of a long-term asset held for investment.

Question 4

Which of the following interest-free loans is subject to the imputed interest rules (i.e.,interest must be imputed on the loan)?
I.Marilyn loans $24,000 to her grandmother and she uses the money to pay personal expenses and take a vacation.Her grandmother's sole income is from Social Security.
II.Pineview Corporation loans $20,000 to Catherine,an employee.Catherine uses the proceeds as a down payment on a house.Catherine's net investment income for the year is $300.
III.Scott loans $65,000 to his son.His son uses the money to open a new business.During the current year,the business shows a loss and his son has no other sources of income.
IV.Alaric Corporation loans $27,000 to its principal shareholder.The shareholder uses the funds to buy additional shares of stock in Alaric.The shareholder is deemed to receive $8,500 of dividends from Alaric during the year.

Accepted Answer

Imputed interest rules apply to below-market loans, such as those in statements II and IV. In statement II, the loan to an employee for a down payment on a house is subject to imputed interest if the loan is below-market and does not qualify for any exclusions. In statement IV, a loan to a principal shareholder, which could be seen as a way to transfer value without recognizing income, is also subject to these rules. Statements I and III involve personal loans within families, which may not be subject to the same rules unless they exceed certain thresholds or are used for income-producing purposes, which is not clearly the case here.

Question 5

Which of the following never generate taxable income?
I.Interest free loan from family member.
II.Interest free loan from employer.
III.Interest free loan under $10,000.
IV.Interest free loan over $100,000.

Accepted Answer

The answer of Which of the following never generate taxable...

Question 6

Art has worked for Denver's Diamond Dealers (DDD)for ten years.During the current year,Art marries and moves from his downtown apartment to a house in the suburbs.Before he was married,Art always rode the bus to work.Because there is no bus service to his new home,Art needs to purchase a car.Wayne,the owner of DDD gives Art $17,000 to purchase a used car.Which of the following statements concerning the $17,000 payment is/are correct?
I.If DDD does not require Art to repay the $17,000,Art has $17,000 of compensation income.
II.If DDD requires Art to repay the $17,000,Art has no compensation income from the receipt of the $17,000.

Accepted Answer

Statement I is correct because if DDD does not require Art to repay the $17,000, he has received a benefit from his employer in the form of a gift, which is considered compensation income by the IRS. 
Statement II is also correct because if DDD requires Art to repay the $17,000, he has not received a benefit and therefore has no compensation income. Therefore, both statements are correct.

Question 7

Dahlia rents a condo owned by Bonnie.Both individuals are cash basis taxpayers.Dahlia uses the condo as her personal residence.Dahlia pays Bonnie $1,000 monthly,and pays $1,200 on October 1^st and April 1^st of each year as part of the lease agreement.The $1,200 payments are made directly to the county treasurer for real estate property taxes.What is the income tax treatment of these events? I.Bonnie can deduct the $1,200 payments for adjusted gross income as a property tax. II.Bonnie includes the $1,000 monthly receipts in her gross income. III.Bonnie must include the $1,200 payments in her gross income. IV.Dahlia can deduct the $1,000 monthly payments from her adjusted gross income.

Accepted Answer

The answer of Dahlia rents a condo owned by Bonnie.Both...

Question 8

Under the imputed interest rules,gift loans between a daughter (lender)and her mother (borrower)may result in
I.No imputed interest income recognized by the mother.
II.No imputed interest deduction by the daughter.
III.Imputed interest income recognized by the daughter.
IV.Deduction allowed for imputed interest expense by the mother.

Accepted Answer

The answer of Under the imputed interest rules,gift loans between...

Question 9

Which of the following interest-free loans is subject to the imputed interest rules?
I.Lena needed $5,000 to pay off some gambling debts.Her employer loans her the $5,000.
II.Sherry loans her son $130,000 to purchase a motor home to use in his landscaping business.Her son has no investment income for the year.

Accepted Answer

Only loan II is subject to the imputed interest rules because the loan amount exceeds the threshold set by the IRS ($10,000 for individuals). Since Sherry does not charge her son any interest, the IRS will consider the forgone interest as imputed interest and require Sherry to report it as taxable income. Loan I is exempt from imputed interest rules as the loan amount is below the threshold.

Question 10

Elise sells a painting that has a fair market value of $9,000 to Jon for $6,000.Which of the following statements about the tax effect of the sale is/are correct?
I.If Jon is an employee of Elise's,no income is recognized from the sale.
II.If Jon is Elise's brother,Jon does not recognize any income from the sale.

Accepted Answer

The answer of Elise sells a painting that has a...

Question 11

Karl is an employee of Cars-R-Us.As part of their employment agreement,Cars-R-Us loans Karl $1,000,000 interest-free to assist in the purchase of a car dealership.Assume the federal rate of interest is 8%.What is the tax treatment of the loan?
I.The arrangement has no tax consequences to Karl.
II.Cars-R-Us is deemed to have paid Karl compensation of $80,000.
III.Karl is deemed to have paid Cars-R-Us $80,000 of interest.
IV.Cars-R-Us' net income tax effect is zero due to this arrangement.

Accepted Answer

The correct tax treatment involves recognizing imputed interest. Cars-R-Us is deemed to have paid Karl compensation equivalent to the interest that would have been earned at the federal rate (statement II), and Karl is deemed to have paid that interest back to Cars-R-Us (statement III). The net income tax effect for Cars-R-Us is zero because the deemed interest income is offset by the deemed interest expense (statement IV).

Question 12

Patti sells a painting that has a fair market value of $9,000 to James for $6,000.Which of the following statements about the tax effect of the sale is/are correct?
I.If James is an employee of Patti's,no income is recognized from the sale.
II.If James is Patti's brother,James does not recognize any income from the sale.
III.If Patti is an art dealer and she sold the painting to James because she needed cash quickly,James does not recognize any income from the sale.
IV.If James owns 60% of Patti's company,James does not recognize any income from the sale.

Accepted Answer

I is incorrect - regardless of James' employment status, the sale of the painting results in a taxable event for him. 
II is correct - if James is Patti's brother, the sale is considered a gift and no income is recognized. 
III is correct - if Patti is an art dealer and the sale is made in the ordinary course of business, James does not recognize any income as it is considered a trade of inventory. 
IV is incorrect - James' ownership percentage in the company does not impact the tax effect of the sale.

Question 13

Which of the following interest-free loans is subject to the imputed interest rules (i.e.,interest must be imputed on the loan)?
I.Benito loans $250,000 to his son.His son uses the money to open a new business.During the current year,the business shows a loss and his son has no other sources of income.
II.Bisbane Corporation loans $8,000 to its principal shareholder.The shareholder uses the funds to buy additional shares of stock in Arcane.The shareholder is deemed to receive $4,000 of dividends from Brisbane during the year.

Accepted Answer

The answer of Which of the following interest-free loans is...

Question 14

Imputed interest rules and policies include which of the following?
I.Gift loans have no income tax effect to the lender.
II.Any loan of $10,000 or less is exempted from imputed interest rules.
III.On gift loans of $100,000 or less,the imputed interest on the loan cannot exceed the borrower's net investment income for the year.
IV.With a loan to a shareholder,a corporation can deduct the imputed payment.

Accepted Answer

Statements II and III are correct. Statement II is accurate because small loans of $10,000 or less are indeed exempt from imputed interest rules under certain conditions. Statement III correctly outlines the limitation on imputed interest for gift loans of $100,000 or less, where the imputed interest cannot exceed the borrower's net investment income for the year. Statement I is incorrect because gift loans can have tax implications under the imputed interest rules, affecting the lender. Statement IV is incorrect because a corporation cannot deduct imputed interest payments as if they were actual payments.

Question 15

Elizabeth sells a painting that has a fair market value of $9,000 to Jonathan for $6,000.Which of the following statements about the tax effect of the sale is/are correct?
I.If Elizabeth is an art dealer and she sold the painting to Jonathan because she needed cash quickly,Jonathan does not recognize any income from the sale.
II.If Jonathan owns 60% of Elizabeth's company,Jonathan does not recognize any income from the sale.

Accepted Answer

In the given scenarios, Jonathan does not recognize any income from the sale in either case. In the first scenario, the fact that Elizabeth sells the painting at a discount due to her need for quick cash does not create income recognition for Jonathan; he is simply purchasing an asset at its offered sale price. The second scenario's details about ownership percentages and income recognition are not relevant to the basic principles of income recognition from purchasing an asset below market value. The key point is that purchasing an asset below its fair market value does not in itself generate taxable income for the buyer.

Question 16

On January 1,Sandi borrows $40,000 from G&H Accounting firm,her employer,to pay-off charge accounts and other personal loans.Sandi must repay the $40,000 loan at the end of 5 years.Because Sandi has been loyal to her job,G&H is not charging Sandi interest on the $40,000 loan.The applicable federal interest rate is 6%.If Sandi has total net investment income for the current year of $200:
I.Sandi has compensation income of $2,400.
II.Sandi has a nontaxable gift from her employer of $2,400.
III.G&H is allowed a deduction for $2,400 of compensation paid to SandI.
IV.There are no tax effects because Sandi's net investment income is less than $1,000.

Accepted Answer

Statement I is correct because Sandi has compensation income from her job, which is unrelated to the loan from G&H.

Statement II is incorrect because there is no mention of Sandi receiving a nontaxable gift from her employer.

Statement III is correct because G&H can take a deduction for the compensation paid to Sandi as it is a business expense.

Statement IV is incorrect because there are tax effects to consider. Sandi must report the $200 net investment income on her tax return and may owe taxes on it depending on her overall income and tax situation.

Question 17

Which of the following always generate taxable income?
I.Interest free loan over $10,000 from family member.
II.Interest free loan over $10,000 from employer.
III.Interest free loan under $10,000.
IV.Interest free loan over $100,000.

Accepted Answer

Interest-free loans over $10,000 from an employer and interest-free loans over $100,000 can generate taxable income due to the imputed interest rules. Loans under $10,000 and from family members do not automatically generate taxable income under these rules.

Question 18

Stephen is a furniture salesman for Foster's Furniture Mart.Stephen purchases a bedroom suite from Foster's for $8,000.The sticker price is $11,000.Foster's policy is to "discount" all customer purchases for up to $1,000 off of the sticker price for purchases over $10,000.What is the tax treatment of Stephen's furniture purchase?
I.Stephen does not need to account for the furniture purchase since it is for his personal use.
II.Stephen has imputed income because of the nature of the furniture purchase.

Accepted Answer

Statement II is correct because Stephen has received a discount on the purchase of the furniture due to his employment with Foster's Furniture Mart. This discount is considered imputed income, which is taxable to the employee. Statement I is incorrect because Stephen does need to account for the furniture purchase for tax purposes.

Question 19

Roberto is a furniture salesman for Gerald's Furniture Mart.Roberto purchases a bedroom suite from Gerald's for $8,000.The sticker price is $11,000.Gerald's policy is to "discount" all customer purchases for up to $1,000 off of the sticker price for purchases over $10,000.What is the tax treatment of Roberto's furniture purchase?
I.Roberto must include $3,000 in his gross income.
II.Gerald's Furniture Mart can deduct $2,000 as compensation expense in addition to properly accounting for the sale of the furniture.
III.Roberto does not need to account for the furniture purchase since it is for his personal use.
IV.Roberto has imputed income because of the nature of the furniture purchase.

Accepted Answer

The answer of Roberto is a furniture salesman for Gerald's...

Question 20

Nathan loans $50,000 to Ramona on January 1 of the current year.The terms of the loan require Ramona to pay Nathan $5,000 per year on December 31 each year for the next 10 years (i.e.,no interest is charged on the loan).Assuming that the applicable federal rate is 6% and Ramona has total investment income of $1,200 during the current year:
I.If Ramona is Nathan's sister,Nathan must recognize $3,000 of interest income from the loan.
II.If Ramona is an employee of Nathan's,Nathan must recognize interest income of $3,000 and receives a deduction for compensation paid of $3,000.

Accepted Answer

The answer of Nathan loans $50,000 to Ramona on January...

Quiz 3: Income Sources

Which of the following items is not a capital asset in the hands of the taxpayer?

Which of the following items is a capital asset in the hands of the taxpayer?

Which of the following never generate taxable income? I.Interest free loan from family member. II.Interest free loan from employer. III.Interest free loan under $10,000. IV.Interest free loan over $100,000.

Which of the following always generate taxable income? I.Interest free loan over $10,000 from family member. II.Interest free loan over $10,000 from employer. III.Interest free loan under $10,000. IV.Interest free loan over $100,000.