Question 1

Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership).For tax year 2019, 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 2019, Wayne's gross income from the partnership is:
A)$72,000.
B)$90,000.
C)$132,000.
D)$162,000.

Accepted Answer

Wayne's share of the partnership's profit is calculated as follows: The partnership's net income is $900,000 (revenue) - $660,000 (expenses) = $240,000. Wayne owns a 30% interest, so his share of the profit is 30% of $240,000 = $72,000. Withdrawals and additional investments do not affect the calculation of gross income from the partnership.

Question 2

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.

Accepted Answer

An accrual basis taxpayer recognizes income when it is earned, regardless of when payment is received. In the case of a 36-month service contract sold for $3,600 starting on July 1, 2019, six months of the service fall within 2019. Therefore, the income recognized in 2019 would be 6/36 of the total contract value, which is $600.

Question 3

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.

Accepted Answer

A cash basis taxpayer must report all of the income in the year received, as they recognize income when it is actually received, regardless of when the services are performed.

Question 4

Travis and Andrea were divorced in 2017.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

Explanation:  I. The payments do not qualify as alimony because they continue after Andrea's death.  II. Transfers of property between spouses or incident to divorce are generally not taxable.  III. Travis's gain is calculated as the selling price ($900,000) minus the cost basis ($500,000), resulting in a $400,000 gain.

Question 5

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: $$\begin{array} { l l } 
\text { October 2019-September } 2021 \text { services (200 two-year contracts) } & \$ 192,000 \
\text { October 2019-September } 2020 \text { services (200 one-year contracts) } & \underline { 120,000 } \
\text { Total } & \underline { \underline { \$ 312,000 } }
\end{array}$$ 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.

Accepted Answer

For 2020, Orange Cable should report the income for all one-year contracts fully ($120,000) and half of the two-year contracts ($192,000 / 2 = $96,000), totaling $216,000. However, the correct answer is not listed, indicating a mistake in the question or answer choices.

Question 6

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.

Accepted Answer

Under the accrual basis of accounting, income is recognized when it is earned, regardless of when payment is received. Since the item was on hand and the customer paid in 2019, Teal must recognize the income in 2019.

Question 7

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.

Accepted Answer

Since Tim and Jane are cash basis taxpayers, interest income is taxable to the taxpayer who owns the bond when the interest is paid. Tim owned the bond on December 31, 2019, when the interest of $1,800 was paid, so he must report the interest income. However, since he gave the bond to Jane on March 31, 2019, she is entitled to 3 months of interest income (January-March). That amount is $450 (3/12 x $1,800), which Jane must report as interest income on her tax return for 2019. Therefore, the correct choice is C.

Question 8

Jim and Nora, residents of a community property state, were married in early 2018.Late in 2018 they separated, and in 2019 they divorced.Each earned a salary, and they received income from community-owned investments in all relevant years.They filed separate returns in 2018 and 2019.
A)In 2019, Nora must report only her salary and one-half of the income from community property on her separate return.
B)In 2019, 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 2019 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 2019, Nora must report only her salary on her separate return.
E)None of these.

Accepted Answer

In community property states, income earned by either spouse during the marriage and income from community-owned property is considered equally owned by both spouses. Therefore, after separation but before the divorce is finalized, Nora must report her salary and one-half of the community property income. Income earned after the divorce is solely the earner's responsibility to report.

Question 9

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.

Accepted Answer

The one-year membership generates $480 of revenue to be recognized over 12 months, or $40 per month. As of July 1, 2019, six months of revenue would be recognized for this membership, or $240.

The two-year membership generates $720 of revenue to be recognized over 24 months, or $30 per month. As of July 1, 2019, 18 months of revenue would be recognized for this membership, or $540.

Therefore, the total gross income from the two contracts as of July 1, 2019 is $240 + $540 = $780. This amount will be recognized over the remaining months of the memberships, so none of the other answer choices are correct.

Question 10

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.

Accepted Answer

Office Palace must recognize $1,200 in 2019 as income for the lease. This is because the first and last month's rent, totaling $1,200, was paid in 2019. The remaining rent payments will be recognized as income in the years in which they are received.

Question 11

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 12

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.

Accepted Answer

The $50,000 of unearned revenues from the consulting contracts must be included in gross income for the subsequent tax year because it represents income earned during the current year that has not yet been recognized. The $10,000 in unearned rent income should also be included in gross income, but it is not directly related to the consulting services and is therefore not relevant to the calculation of the answer.

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 federal income tax calculations are based on federal law, not state property law distinctions between community property and common law states.

Question 14

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 2020, is allowed to deduct the $20,000.
E)None of these.

Accepted Answer

Under the tax rules prior to the Tax Cuts and Jobs Act of 2017, alimony payments were included in the recipient's gross income if the divorce agreement was finalized before 2019.

Question 15

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.

Accepted Answer

Bob must include all of the dividend in his gross income because the dividend was declared while he was the owner of the stock, even though the actual payment was made to Dave after Bob had transferred the stock to him.

Question 16

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.

Accepted Answer

Daniel must recognize $300 interest income for 2019 and a $200 gain on the sale of the bond in 2020.

Question 17

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 18

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.

Accepted Answer

Mike's gross income is $6,500 as per the contract with the corporation. The $8,000 payment made to the corporation is not directly received by Mike and therefore is not included in his gross income.

Question 19

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.

Accepted Answer

Theresa has $200 interest income for the portion of the year she held the bond in 2019. She has a $400 loss from the bond because she bought it for $10,400 (including accrued interest) and sold it for $10,000 ($9,800 plus $200 of accrued interest).

Question 20

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.

Accepted Answer

The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.

Quiz 4: Gross Income: Concepts and Inclusions

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

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

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.

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:

Jim and Nora, residents of a community property state, were married in early 2018.Late in 2018 they separated, and in 2019 they divorced.Each earned a salary, and they received income from community-owned investments in all relevant years.They filed separate returns in 2018 and 2019.

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:

Under the alimony rules:

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.

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

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.