Question 1

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

True

Question 2

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

Jessica is a cash basis taxpayer, which means she reports income when it is received, regardless of who benefits from it. In this case, the $60 that is withheld from her salary and paid to the bank is considered income to Jessica, even though it benefits the creditor. Therefore, Jessica is required to include the $60 each week in her gross income.

Question 3

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 4

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 5

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 must be recognized when it is earned or received, not when it is saved. Therefore, Barney does not need to recognize the $3,000 as 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 dictates that only gains that are certain should be recognized, while potential losses should be recognized immediately. This leads to lower reported income, which may not reflect taxable income accurately. Taxable income is calculated based on tax laws, rather than accounting principles, and therefore conservatism may not be appropriate for measuring taxable income.

Question 7

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 receive the $3 million in 2012, he only negotiated the agreement. The $900,000 payments would be received in future years, making it an accrual basis transaction.

Question 8

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

As a cash basis taxpayer, Judy must recognize income in the year it is received, regardless of any subsequent changes in value. Therefore, she must recognize $4,000 of gross income for 2012, even though the value of the stock decreased by year-end.

Question 9

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 it is earned or when services are rendered, regardless of when the actual payment is received. Therefore, Daniel must include the $24,000 rent in his 2012 gross income, even though he collected $12,000 of it in advance for January 2013.

Question 10

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

The answer of In December 2012,Mary collected the December 2012...

Question 11

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 12

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 contract is for 36 months, the taxpayer needs to recognize 1/36th of the income for each month of the contract. Therefore, in 2013 (the second year of the contract), the taxpayer should recognize 12/36 x $2,400 = $800 of income, and since they recognize 1/3rd of the income each year, they should recognize $1,600 in 2013.

Question 13

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 14

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 IRS regulations, a taxpayer who owns a professional sports team may allocate income from season ticket sales on the basis of the number of games played during the year as long as it is consistently followed each year. This is because the income is earned over the course of the season, rather than at the time the tickets are sold.

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

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

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

Although GAAP (Generally Accepted Accounting Principles) is a widely accepted set of accounting standards, the Internal Revenue Service (IRS) has different rules and regulations for tax purposes. The method used to measure income may need to be adjusted or modified to adhere to the tax code, even if it complies with GAAP.

Question 18

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 either recognize the full discount at maturity or amortize it over the ten-year period. This is allowed under the tax laws for Series EE bonds.

Question 19

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

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