Question 1

In 2012, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract.He counteroffered that he would receive $900,000 per year for 4 years beginning in 2013. The team accepted the counteroffer. Juan constructively received $3 million in 2012.

Accepted Answer

Juan did not actually receive the $3 million in 2012, only the promise of future payments. Therefore, he did not constructively receive the $3 million in 2012 either.

Question 2

At the beginning of 2013, 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 2013, and $3,600 from the Series EE bonds in 2022.

Accepted Answer

False

Question 3

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

GAAP (Generally Accepted Accounting Principles) and tax laws have different requirements and objectives, and therefore, what works for accounting purposes may not be acceptable for tax purposes. Taxpayers need to follow specific tax rules and regulations to ensure that their accounting methods meet the tax law requirements.

Question 4

In December 2012, Mary collected the December 2012 and January 2013 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2012 for the 2013 rent should be included in her 2013 gross income.

Accepted Answer

According to the cash basis of accounting, income is recognized when it is received. Since Mary collected the December 2012 and January 2013 rent in December 2012, it should be included in her 2012 gross income, not 2013.

Question 5

On December 1, 2012, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2012 and $12,000 for January 2013.Daniel must include the $24,000 in 2012 gross income.

Accepted Answer

According to the accrual accounting method, income is recognized when it is earned, regardless of when it is actually received. Since Daniel has collected rent for both December 2012 and January 2013, he must include the full $24,000 in his 2012 gross income.

Question 6

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

Accepted Answer

The principle of conservatism requires accountants to be cautious in reporting uncertain and potentially overstated gains or assets, while being quick to recognize potential losses or liabilities. This results in a more conservative financial statement, aiming to realistically reflect a company's financial position. However, for taxable income purposes, the goal is to accurately report all income and deductions, without being overly conservative. Therefore, the principle of conservatism is not well-suited to measuring taxable income.

Question 7

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 8

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2012 that will pay $1,100 upon its maturity on June 30, 2014. The taxpayer must recognize a portion of the income in 2012.

Accepted Answer

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

Question 9

Judy is a cash basis attorney.In 2012, 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 2012.

Accepted Answer

According to cash basis accounting, income must be recognized when it is actually or constructively received. In this case, Judy received stock with a value of $4,000 in exchange for her services, therefore she must recognize that amount as gross income for 2012, regardless of the fact that the value of the stock later decreased.

Question 10

An accrual basis taxpayer who owns and operates a professional basketball team is allowed to allocate income from season ticket sales on the basis of the number of games played during the year.

Accepted Answer

This is true according to IRS Revenue Ruling 72-545, which allows an accrual basis taxpayer to allocate income from season ticket sales based on the number of games played during the year. This is because the taxpayer can reasonably estimate the portion of the ticket price that is attributable to each game, and therefore can match revenue with expenses more accurately.

Question 11

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 12

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 statement is true. Constructive receipt doctrine applies only to cash basis taxpayers and not to accrual basis taxpayers.

Question 13

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 has the option to amortize the original issue discount over the ten-year period.

Question 14

In 2004, Terry purchased land for $150,000. In 2012, 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 answer of In 2004, Terry purchased land for $150,000....

Question 15

On January 1, 2012, 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 2013.

Accepted Answer

Since the taxpayer is using the accrual basis, the income should be recognized over the period of services provided. Therefore, $800 ($2,400/36 months) should be recognized as income each month. In 2013, there would have been 24 months of service provided, so $800 x 24 = $19,200 of total income would have been earned by the end of 2013. However, since $17,600 ($800 x 22 months) of income would have already been recognized in previous years, the taxpayer should only report the difference, which is $1,600 ($19,200 - $17,600) of income in 2013.

Question 16

An advance payment received in June 2012 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 2012...

Question 17

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

The cash basis method requires taxpayers to report income when it is actually or constructively received, regardless of who ultimately benefits from the income. In this case, even though the $60 is being paid to the bank as a result of the garnishment, Jessica is still receiving it and must include it in her gross income.

Question 18

Mabel is age 65 and lives on her Social Security benefits and gifts from her son, Fred.Fred is a full-time teacher.He has written a book and receives royalties from it.This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support.Mabel must include the amount of the royalty check in her gross income.

Accepted Answer

The answer of Mabel is age 65 and lives on...

Question 19

A sole proprietorship purchased an asset for $1,000 in 2012 and its value was $1,500 at the end of 2012. In 2013, the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2013 but an economic loss of $100 in 2013.

Accepted Answer

The answer of A sole proprietorship purchased an asset for...

Question 20

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 concept that gains on an asset are not taxed until the asset is sold, or "realized." This gives an incentive for individuals to hold onto assets that have increased in value, as they can continue to defer taxes on those gains. On the other hand, selling assets whose value has decreased allows individuals to "realize" losses and potentially offset gains on other assets. Therefore, the realization requirement does provide an incentive to own assets that have increased in value and sell assets whose value has decreased.

Quiz 4: Gross Income: Concepts and Inclusions