Question 1

The constructive receipt doctrine requires that income must 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.

Accepted Answer

The constructive receipt doctrine applies to cash basis taxpayers and requires them to recognize income when it is made available to them, even if it has not been physically received. It does not apply to accrual basis taxpayers, who recognize income when it is earned or accrued, regardless of when it is received.

Question 2

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,Fred.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.

Accepted Answer

Fred must include the amount of the royalty check in his gross income, even if he directed the publisher to make it payable to his mother for her support.

Question 3

On January 1,2015,an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months.The amount received for the contract was $2,400.The taxpayer should report $1,600 of income in 2016.

Accepted Answer

Since the taxpayer is using the accrual basis, the income should be recognized as it is earned, which is $800 per year for 3 years. Therefore, $1,600 should be reported in 2016.

Question 4

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

Accepted Answer

Just because the accounting method used is in line with GAAP does not necessarily mean it will also be considered acceptable for tax purposes. Tax laws and regulations may require specific adjustments and methods that may differ from GAAP.

Question 5

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.

Accepted Answer

Economic income includes all forms of income, including unrealized gains or losses on investments. Since Nicholas's stock decreased in value, this loss would be considered in his economic income but not in his gross income for tax purposes, as it was an unrealized loss (he did not sell the stock). His gross income for tax purposes would only include the salary earned, not the decrease in stock value or the taxes withheld.

Question 6

An advance payment received in June 2015 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.

Accepted Answer

The answer of An advance payment received in June 2015...

Question 7

In 2006,Terry purchased land for $150,000.In 2015,Terry received $10,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terry's 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.

Accepted Answer

The payment received by Terry is considered a non-taxable return of capital because it represents a reduction in the cost basis of the land.

Question 8

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1,2014 that will pay $1,100 upon its maturity on June 30,2016.The taxpayer must recognize a portion of the income in 2015.

Accepted Answer

The answer of A cash basis taxpayer purchased a certificate...

Question 9

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

Accepted Answer

According to the realization requirement, Barney cannot recognize the $3,000 savings as income because he did not receive any actual money or property. Income must be received in a taxable form to be recognized.

Question 10

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 ten-year period.

Accepted Answer

Ralph can elect to amortize the discount over the ten-year period.

Question 11

A sole proprietorship purchased an asset for $1,000 in 2015 and its value was $1,500 at the end of 2015.In 2016,the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2016 but an economic loss of $100 in 2016.

Accepted Answer

The taxable gain is calculated by subtracting the original cost of the asset ($1,000) from the selling price ($1,400), resulting in a gain of $400. However, the economic loss is calculated by subtracting the ending value of the asset at the end of 2015 ($1,500) from the selling price ($1,400), resulting in a loss of $100. So, the sole proprietorship realized a taxable gain of $400 in 2016 but an economic loss of $100 in 2016.

Question 12

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

Accepted Answer

The realization requirement refers to the requirement that a taxpayer must realize, or sell, an asset in order to recognize a capital gain or loss. This provides an incentive for taxpayers to sell assets that have decreased in value in order to offset other gains and reduce their tax liability. Similarly, taxpayers may hold onto assets that have increased in value until they are ready to sell them in order to defer tax liability.

Question 13

Jessica is a cash basis taxpayer.When Jessica 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.

Accepted Answer

As a cash basis taxpayer, Jessica must include the $60 that was withheld from her salary in her gross income, regardless of who ultimately benefits from it.

Question 14

In December 2014,Mary collected the December 2014 and January 2015 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2014 for the 2015 rent should be included in her 2015 gross income.

Accepted Answer

As a cash basis taxpayer, Mary must report income in the year it is received. Therefore, the rent collected in December 2014 should be included in her 2014 gross income, not 2015.

Question 15

Judy is a cash basis attorney.In 2015,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 2015.

Accepted Answer

According to the cash method of accounting, income is recognized when received, which in this case would be when Judy received the stock. The decrease in value of the stock does not affect the fact that she received $4,000 worth of stock as compensation, so she must recognize that as gross income.

Question 16

ABC Corporation declared a dividend for taxpayers of record as of December 24,2014.The dividend checks were mailed on December 31,2014.Ed,a cash basis shareholder,received the dividend check on January 2,2015.Ed cannot delay reporting the income from the dividend until 2015.

Accepted Answer

Ed, as a cash basis taxpayer, reports income when it is actually received. Since he received the dividend check in 2015, he reports it as income in 2015, not 2014.

Question 17

On December 1,2015,Daniel,an accrual basis taxpayer,collects $12,000 rent for December 2015 and $12,000 for January 2016.Daniel must include the $24,000 in 2015 gross income.

Accepted Answer

According to the accrual basis of accounting, income is considered earned when it is earned, not when it is received. Therefore, Daniel must include the $24,000 rent in his 2015 gross income, even though he collected part of it in January 2016.

Question 18

At the beginning of 2015,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 2015,and $3,600 from the Series EE bonds in 2024.

Accepted Answer

Mary does not recognize the entire income from the CD in 2015; it is recognized over the 3-year period. The Series EE bond interest is recognized when it matures or is redeemed, not in 2024 unless it is redeemed then.

Question 19

In 2015,Juan,a cash basis taxpayer,was offered $3 million for signing a professional baseball contract.He counter offered that he would receive $900,000 per year for 4 years beginning in 2016.The team accepted the counteroffer.Juan constructively received $3 million in 2015.

Accepted Answer

Since Juan is a cash basis taxpayer, he would only recognize income when actually received. Therefore, even though he negotiated the contract in 2015, he did not receive any income until 2016 when he began receiving his annual payments. So, he did not constructively receive $3 million in 2015.

Question 20

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

Accepted Answer

The conservatism principle requires that potential losses be recognized immediately, but potential gains are only recognized when they are certain. This results in lower reported profits and therefore lower taxable income. As a result, conservatism can lead to a lower tax bill, which is not ideal for measuring taxable income accurately.

Quiz 4: Gross Income: Concepts and Inclusions