Question 1

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

Under the cash basis method of accounting, income is recognized when it is received. Therefore, when Judy received stock with a value of $4,000 in exchange for her services in 2012, she must recognize that amount as gross income for that year, regardless of any subsequent decrease in value.

Question 2

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 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 3

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.

Question 4

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 5

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

While GAAP is a widely accepted accounting standard, the tax code may require adjustments or use a different method for determining taxable income. Thus, even if a taxpayer follows GAAP, their income for tax purposes may be calculated differently.

Question 6

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

As an accrual basis taxpayer, Daniel must include the rent when it is earned, regardless of when it is actually received. Since he collected rent for both December 2012 and January 2013 in December 2012, he must include the entire $24,000 in his 2012 gross income.

Question 7

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 8

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

The income from the contract should be recognized over the 36-month period of service. Therefore, $2,400/36 = $66.67 per month. In 2012, the taxpayer would recognize $66.67 x 12 = $800 of income. In 2013, the taxpayer would recognize $66.67 x 12 = $800 of income, plus the portion of the contract not yet recognized, which is $800 - $200 = $600. Therefore, the total income recognized in 2013 would be $800 + $600 = $1,600.

Question 9

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 only to cash basis taxpayers and not to accrual basis taxpayers. Therefore, the statement is true.

Question 10

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 taxpayer must recognize the interest income as it is earned, even though it is not received until maturity.

Question 11

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, but rather negotiated a contract for future annual payments. Therefore, he did not constructively receive $3 million in 2012.

Question 12

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 allocation is allowed under the accrual method of accounting as it matches the income with the actual games played during the year.

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

As per IRS rules, Ralph can elect to amortize the original issue discount over the life of the bond, rather than wait until maturity to recognize the entire discount.

Question 14

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

The income from the certificate of deposit should be recognized over the 3-year period, not entirely in 2013. The Series EE bond interest is typically recognized at maturity or when redeemed, not annually, so the $3,600 would be recognized in 2023, not 2022.

Question 15

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 16

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

Accepted Answer

The principle of conservatism requires that losses be recognized immediately, but gains only when realized or certain. This approach is designed to be prudent and cautious in financial reporting, but is not necessarily reflective of taxable income, which may be influenced by different rules and regulations. For example, tax laws may allow for certain deductions or credits that are not recognized under financial accounting principles.

Question 17

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

Accepted Answer

The realization requirement states that income should only be recognized when a transaction is complete and the earnings are realized or made available to the individual. Barney painting his own house is not a transaction and therefore, he cannot recognize any income from it.

Question 18

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

As a cash basis taxpayer, Mary must report income in the year it is received. Therefore, the rent collected in December 2012 should be included in her 2012 gross income, not 2013.

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 sole proprietorship realized a taxable gain of $400 in 2013 because the sale price of the asset ($1,400) exceeded its adjusted basis ($1,000). However, the sole proprietorship incurred an economic loss of $100 in 2013 because the sale price of the asset ($1,400) was less than its original cost ($1,500).

Question 20

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 is required to report income when it is received, regardless of who benefits from it. The $60 that is withheld from her salary and paid to the bank is considered income to Jessica and must be included in her gross income.

Quiz 4: Gross Income: Concepts and Inclusions