Question 1

When a taxpayer sells an asset, the entire proceeds from the sale must be included in gross income regardless of the cost of the asset.

Accepted Answer

Only the gain (i.e. the difference between the sale price and the cost basis) is included in gross income, not the entire proceeds from the sale.

Question 2

Gross income includes all income realized during the year.

Accepted Answer

Deferred and excluded income is not included in gross income.

Question 3

The principle of realization for tax purposes is very different from realization as it is understood for financial reporting purposes.

Accepted Answer

Realization is similar for both tax and financial accounting.

Question 4

The date on which stock options are given to the employee is called the exercise date.

Accepted Answer

The grant date is the date employees are initially allocated stock options.

Question 5

Wherewithal to pay represents the principle that a realized transaction should require a taxpayer to sell other assets in order to pay income taxes.

Accepted Answer

Wherewithal to pay represents the principle that a realized transaction should provide the taxpayer with enough cash or assets to pay income taxes, rather than requiring them to sell other assets.

Question 6

When an asset is sold, the taxpayer calculates the gain or loss by subtracting the tax basis of the asset from the proceeds of the sale.

Accepted Answer

This is correct, the gain or loss on the sale of an asset is calculated by subtracting the tax basis (or cost basis) of the asset from the proceeds from the sale.

Question 7

Jim received a $500 refund of state income taxes this year. Jim will not need to include the $500 in his gross income this year because he did not deduct state income taxes last year.

Accepted Answer

If Jim did not deduct state income taxes on his previous year's tax return, then any refund he receives for those taxes is not considered taxable income.

Question 8

Constructive receipt represents the principle that cash basis taxpayers should be taxed on income when it is made available to them without substantial restrictions.

Accepted Answer

This is the definition of constructive receipt, and it is a key principle of the cash basis of accounting for taxation purposes.

Question 9

A taxpayer who borrows money will include the amount borrowed in their gross income under the all-inclusive definition of income.

Accepted Answer

Debt does not generate economic benefit.

Question 10

The cash method of accounting requires taxpayers to recognize income only when that income is received as cash.

Accepted Answer

Income is recognized in the form of cash, property, or services when received.

Question 11

Income is included in gross income unless a tax provision specifies that it can be deferred or excluded.

Accepted Answer

This is generally true, with some exceptions for specific types of income and situations where deferral or exclusion is allowed by tax law.

Question 12

Jake sold his car for $2,400 in cash this year. He will realize a taxable gain of $1,000 if he purchased the car for $1,400.

Accepted Answer

To calculate taxable gain, you subtract the cost basis (what Jake paid for the car) from the selling price. In this case, Jake's cost basis is $1,400 and he sold the car for $2,400, so his taxable gain is $1,000.

Question 13

Recognized income may be in the form of cash or property received (but not services received).

Accepted Answer

The answer of Recognized income may be in the form...

Question 14

Barter clubs are an effective means of avoiding realization for tax purposes.

Accepted Answer

Barter clubs still require members to report the fair market value of goods and services exchanged as taxable income to the IRS. Failure to do so can result in penalties and fines.

Question 15

Community property laws dictate that income earned by one spouse is treated as though it was earned equally by both spouses.

Accepted Answer

Community property laws apply in several states within the United States, including California, Arizona, Texas, etc. In these states, income earned by one spouse during the marriage is considered as joint property and is split equally between both spouses.

Question 16

The tax benefit rule applies when a taxpayer refunds amounts that were previously included in income.

Accepted Answer

The tax benefit rule applies when a refund is received that created a tax benefit in a prior year when it was deducted.

Question 17

The all-inclusive definition of income means that gross income is defined very broadly.

Accepted Answer

The all-inclusive definition of income includes all income from whatever source derived, unless specifically excluded by law. This means that gross income is defined very broadly and includes all income that an individual receives, regardless of its nature or source.

Question 18

Claim of right states that income has been realized if a taxpayer receives income and there are substantial restrictions on the taxpayer's use of the income.

Accepted Answer

Claim of right doctrine states that income has been realized if a taxpayer receives income without restrictions on its use, meaning the taxpayer has full control over the income and is obligated to include it in gross income for tax purposes.

Question 19

Excluded income will never be subject to the federal income tax.

Accepted Answer

Excluded income, such as gifts, inheritances, and certain types of life insurance proceeds, are not considered taxable income and therefore will never be subject to federal income tax.

Question 20

When a carpenter provides $100 of services in exchange for $100 of groceries, the carpenter has realized $100 of income.

Accepted Answer

The fair market value of the groceries received is equal to the value of the services provided, so the carpenter has realized $100 of income.

Quiz 5: Gross Income and Exclusions