Question 1

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.
B)A cash basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
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 by the end of the tax year 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

An accrual basis taxpayer can defer prepaid income over the period services are to be provided if the services will be completed by the end of the tax year following the year of receipt, according to IRS guidelines.

Question 2

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)The income 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 is taxed on $90,000 because the $20,000 alimony is income assigned to the former spouse.
E)None of these.

Accepted Answer

According to IRS rules, alimony payments are included in the gross income of the recipient of the payments. Therefore, the recipient must pay taxes on the alimony received. Choices A, B, and D all contain incorrect information.

Question 3

Daniel purchased a bond on July 1, 2017, at par of $10,000 plus accrued interest of $300. On December 31, 2017, Daniel collected the $600 interest for the year. On January 1, 2018, Daniel sold the bond for $10,200.
A)Daniel must recognize $300 interest income for 2017 and a $200 gain on the sale of the bond in 2018.
B)Daniel must recognize $600 interest income for 2017 and a $200 gain on the sale of the bond in 2018.
C)Daniel must recognize $600 interest income for 2017 and a $100 loss on the sale of the bond in 2018.
D)Daniel must recognize $300 interest income for 2017 and a $100 loss on the sale of the bond in 2018.
E)None of these.

Accepted Answer

Daniel must recognize $300 interest income for 2017 and a $200 gain on the sale of the bond in 2018.

Question 4

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 the amount he was paid for performing the operation as stipulated in his employment contract. The gross income for the corporation is not relevant to Mike's individual tax liability. The fact that no other doctor worked for the corporation is also not relevant in this situation.

Question 5

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2013, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2017, 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 2017.
B)Theresa has $200 interest income and a $200 gain from the bond in 2017.
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 received $200 as accrued interest when she sold the bond, which is interest income. The bond was sold for $9,800, excluding the $200 interest, resulting in a $400 loss ($10,000 - $9,600).

Question 6

Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($500 per year), or two years in advance ($950). In September 2017, the company collected the following amounts applicable to future services: As a result of the above, Orange Cable should report as gross income:

A)$272,000 in 2017.
B)$128,000 in 2017.
C)$168,000 in 2018.
D)$222,000 in 2018.
E)None of these.

Accepted Answer

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

Question 7

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2017. 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, 2017.
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.

Question 8

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2017. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2018. 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 2017, if Office Palace is an accrual basis taxpayer.
B)$7,800 in 2018, if Office Palace is a cash basis taxpayer.
C)$2,700 in 2017, if Office Palace is a cash basis taxpayer.
D)$1,200 in 2017, if Office Palace is an accrual basis taxpayer.
E)None of these.

Accepted Answer

Office Palace must recognize $1,200 in 2017 as income for the lease because it is an accrual basis taxpayer and the first and last month's rent was paid in 2017.

Question 9

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, 2017 for $3,600, the taxpayer's 2017 gross income from the contract is $600.
D)If an accrual basis taxpayer sells a 24-month service contract on July 1, 2017, one-half (12/24) the income is recognized in 2018.
E)None of these.

Accepted Answer

If an accrual basis taxpayer sells a 36-month service contract on July 1, 2017 for $3,600, the taxpayer's 2017 gross income from the contract is $600.

Question 10

Teal company is an accrual basis taxpayer. On December 1, 2017, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2018. Teal delivered the item on January 4, 2018. Teal included the sale in its 2017 income for financial accounting purposes.
A)Teal must recognize the income in 2017.
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 2017 or 2018.
D)Teal must recognize the income in 2018.
E)None of these.

Accepted Answer

Teal is an accrual basis taxpayer, which means that income must be recognized when earned, regardless of when it is actually received. The customer paid for the item in December 2017, which means that Teal earned the income in that year, even though the item was not delivered until January 2018. Therefore, Teal must recognize the income in 2017. The fact that Teal included the sale in its 2017 income for financial accounting purposes supports this conclusion.

Question 11

On January 5, 2017, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2017, 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 2017: ​
A)Tim must include all of the interest in his gross income.
B)Jane must report $1,800 gross income for 2017.
C)Jane reports $1,350 of interest income in 2017, and Tim reports $450 of interest income in 2017.
D)Jane reports $450 of interest income in 2017, and Tim reports $1,350 of interest income in 2017.
E)None of these is correct.

Accepted Answer

When Tim purchased the bond, he acquired the right to receive the interest payment on December 31. Therefore, he must report the entire $1,800 interest in his gross income for 2017, even though he gave the bond to Jane before the interest was paid.

However, Jane is the one who actually received the interest payment, so she must report it on her tax return. Since Jane received the bond after March 31, she is entitled to nine months of interest income ($1,800 x 9/12 = $1,350) for the 2017 tax year. Therefore, Jane reports $1,350 of interest income in 2017, and Tim reports $450 of interest income in 2017.

Question 12

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 13

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, 2017, the company sold a one-year membership and a two-year membership. The company should report as gross income from the two contracts:
A)$1,200 in 2017.
B)$960 in 2017.
C)$180 in 2019.
D)$780 in 2018
E)None of these.

Accepted Answer

The answer of The Maroon & Orange Gym, Inc., uses...

Question 14

Travis and Andrea were divorced. 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

The answer of Travis and Andrea were divorced. Their only...

Question 15

On November 1, 2017, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2017, the corporation had declared the dividend payable to shareholders of record as of November 22, 2017. The dividend was paid on December 15, 2017. 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, 2017:
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, 2017, Bob, a cash...

Question 16

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

This is the basic principle of income taxation. Income from property is taxed to the owner of the property and income from services is taxed to the individual who earns the income. The assignee of income from property must pay tax on the income because they are considered the owner. However, the fourth statement is not always true. The person who receives the benefit of the income may not necessarily be the one who is legally obligated to pay the taxes on it.

Question 17

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, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received from excess office space leased to other companies. Based on the above, Green must include in gross income for the current year:
A)$60,000.
B)$50,000.
C)$10,000.
D)$0.
E)None of these.

Accepted Answer

Unearned rent income of $10,000 must be included in gross income for the current year, as rent is generally recognized as income when received, even for accrual basis taxpayers. The $50,000 of unearned consulting revenue is not included until the services are performed.

Question 18

Jim and Nora, residents of a community property state, were married in early 2016. Late in 2016 they separated, and in 2017 they were divorced. Each earned a salary, and they received income from community owned investments in all relevant years. They filed separate returns in 2016 and 2017.
A)In 2017, Nora must report only her salary and one-half of the income from community property on her separate return.
B)In 2017, 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 2017 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 2017, 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 19

Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership). For tax year 2017, 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 2017, Wayne's gross income from the partnership is:
A)$72,000.
B)$90,000.
C)$132,000.
D)$162,000.

Accepted Answer

Wayne's gross income from the partnership is based on his share of the partnership's net income, not on his withdrawals or additional investments. The partnership's net income is $240,000 ($900,000 revenue - $660,000 expenses). Wayne's share is 30% of $240,000, which is $72,000.

Question 20

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 income on a joint return should not change as a result of changing their state of residence. This is because the federal tax law applies the same rules for calculating income regardless of the state of residence, and Virginia does not recognize community property laws. However, different state tax laws may apply, which could affect their state tax liability.

Quiz 4: Gross Income: Concepts and Inclusions

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

Under the alimony rules:

Daniel purchased a bond on July 1, 2017, at par of $10,000 plus accrued interest of $300. On December 31, 2017, Daniel collected the $600 interest for the year. On January 1, 2018, Daniel sold the bond for $10,200.

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2013, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2017, she sold the bond for $9,800, which included $200 of accrued interest.

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

Teal company is an accrual basis taxpayer. On December 1, 2017, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2018. Teal delivered the item on January 4, 2018. Teal included the sale in its 2017 income for financial accounting purposes.

On January 5, 2017, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2017, 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 2017: ​

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 2016. Late in 2016 they separated, and in 2017 they were divorced. Each earned a salary, and they received income from community owned investments in all relevant years. They filed separate returns in 2016 and 2017.

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:

On January 5, 2017, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2017, 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 2017: