Question 1

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

False

Question 2

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 3

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 4

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

Judy received the stock in exchange for her services, and under the cash basis method, she must recognize the full value of the stock as gross income in the year she received it, regardless of any subsequent decrease in value. Therefore, Judy must recognize $4,000 of gross income from the stock for 2012.

Question 5

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 correct. The constructive receipt doctrine only applies to cash basis taxpayers, not accrual basis taxpayers.

Question 6

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

Under the cash basis of accounting, income is recognized when it is received or constructively received. In this case, Jessica's salary was garnished and $60 was withheld each week, constituting constructive receipt of income. Therefore, Jessica must include the $60 in her gross income, even though it may be benefiting the creditor.

Question 7

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.In 2012,Terry...

Question 8

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

According to the IRS, an accrual basis taxpayer who owns and operates a sports team, such as a basketball team, may allocate income from advance ticket sales based on the number of games played during the taxable year. This is allowed under the "all events test" for accruing income.

Question 9

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 10

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

Accepted Answer

The principle of conservatism focuses on recognizing losses and expenses as soon as possible, even if there is uncertainty. This can lead to a lower reported profit and a lower taxable income, which may not reflect the true economic reality of the situation. Therefore, the principle of conservatism is not well-suited to measuring taxable income accurately.

Question 11

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 12

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 13

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 answer of At the beginning of 2013,Mary purchased a...

Question 14

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

Under the accrual basis of accounting, income is recognized when earned, regardless of when it is received. Daniel earned the rent for both December 2012 and January 2013 when he collected the $24,000 on December 1, 2012. Therefore, he must include the full amount in his 2012 gross income.

Question 15

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 taxable gain is calculated as the selling price ($1,400) minus the original cost ($1,000), which equals $400. However, the economic loss is calculated as the original cost ($1,000) minus the selling price ($1,400), which equals -$400 (a loss of $100 from the value at the end of 2012). Therefore, the statement is true.

Question 16

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 taxpayer should recognize the revenue for the termite inspection service using the percentage of completion method over the 36-month term. Therefore, for the second year (2013), which is the 2/3 mark of the contract (24 out of 36 months), the taxpayer should recognize 2/3 of the total contract revenue, which is $1,600 (2/3 x $2,400).

Question 17

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 an accounting method is consistent with GAAP (Generally Accepted Accounting Principles) does not necessarily mean it will be acceptable for tax purposes. The IRS has its own set of rules and regulations for determining taxable income, which may differ from GAAP in certain cases. Therefore, taxpayers must ensure that their accounting methods comply with both GAAP and the tax code.

Question 18

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 physically receive the $3 million in 2012, he only made a counteroffer. Therefore, he did not constructively receive the money and it is not taxable in 2012. It will be taxable in the years that he receives the payments, starting in 2013.

Question 19

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, which means he can spread out the $291 original issue discount over the life of the bond instead of recognizing it all at once at maturity.

Question 20

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...

Quiz 4: Gross Income: Concepts and Inclusions