Question 1

With respect to income from services,which of the following is true?

Accepted Answer

The income from services is generally recognized when services are rendered, and under the accrual basis, when services are billed. In this case, the service contract was sold on July 1, 2015, so the income should be recognized in 2015 when the contract is sold. The total contract price of $3,600 should be recognized as gross income in 2015.

Question 2

The annual increase in the cash surrender value of a life insurance policy:

Accepted Answer

The annual increase in the cash surrender value of a life insurance policy is not included in gross income because the policy must be surrendered to receive the cash surrender value. This increase is considered a return of premiums and not income, thus it is not subject to taxation.

Question 3

Theresa,a cash basis taxpayer,purchased a bond on July 1,2011,for $10,000,plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31,2015,she sold the bond for $9,800,which included $200 of accrued interest.

Accepted Answer

The answer of Theresa,a cash basis taxpayer,purchased a bond on...

Question 4

The annual increase in the cash surrender value of a life insurance policy:

Accepted Answer

The cash surrender value of a life insurance policy is not included in gross income each year because of the substantial restrictions on gaining access to the policy's value. These restrictions include surrender charges, loans, and the fact that accessing the value generally requires terminating the policy. Therefore, it is not taxed annually.

Question 5

Darryl,a cash basis taxpayer,gave 1,000 shares of Copper Company common stock to his daughter on September 29,2015.Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years.Just as Darryl had expected,Copper Company declared a $2.00 per share dividend on September 30th,payable on October 15th,to stockholders of record as of October 10th.The daughter received the $2,000 dividend on October 18,2015.

Accepted Answer

The answer of Darryl,a cash basis taxpayer,gave 1,000 shares of...

Question 6

Office Palace,Inc. ,leased an all-in-one printer to a new customer,Ashley,on December 27,2015.The printer was to rent for $600 per month for a period of 36 months beginning January 1,2016.Ashley was required to pay the first and last month's rent at the time the lease was signed.Ashley was also required to pay a $1,500 damage deposit.Office Palace must recognize as income for the lease:

Accepted Answer

If Office Palace is an accrual basis taxpayer, they must recognize income in the year of the lease agreement, which is 2015. However, they can only recognize the rental income for December 2015 since that is when the lease was signed and the first and last month's rent were received. Therefore, the income recognized in 2015 would be $600 x 1 = $600 for the month of December.

Question 7

On January 5,2015,Tim purchased a bond paying interest at 6% for $30,000.On March 31,2015,he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2015:

Accepted Answer

Since Tim is a cash basis taxpayer, he would only report the interest income for the period of time he owned the bond, which is from January 5 to March 31, 2015. This would be calculated as follows:

$30,000 x 6% x (86/365) = $403.84

Jane would report the interest income for the time period she owned the bond, which is from April 1 to December 31, 2015. This would be calculated as follows:

$30,000 x 6% x (275/365) = $2,396.17

However, since Jane received the bond as a gift, she would receive a basis in the bond equal to Tim's basis. Therefore, she would reduce her interest income by the amount of interest that Tim already reported:

$2,396.17 - $403.84 = $1,992.33

Thus, Jane would report $1,992.33 in interest income for 2015, and Tim would report $403.84 in interest income for 2015. Therefore, the correct answer is C.

Question 8

On November 1,2015,Bob,a cash basis taxpayer,gave Dave common stock.On October 30,2015,the corporation had declared the dividend payable to shareholders of record as of November 22,2015.The dividend was paid on December 15,2015.The corporation has paid the $1,200 dividend once each year for the past ten years,during which Bob owned the stock.When Dave collected the dividend on December 15,2015:

Accepted Answer

The answer of On November 1,2015,Bob,a cash basis taxpayer,gave Dave...

Question 9

The purpose of the tax rules that apply to below-market loans between family members is to:

Accepted Answer

The answer of The purpose of the tax rules that...

Question 10

Teal company is an accrual basis taxpayer.On December 1,2015,a customer paid for an item that was on hand,but the customer wanted the item delivered in early January 2016.Teal delivered the item on January 4,2016.Teal included the sale in its 2015 income for financial accounting purposes.

Accepted Answer

As an accrual basis taxpayer, Teal must recognize income when it is earned, regardless of when payment is received. In this case, the sale was made in 2015 when the customer paid for the item, even though the delivery occurred in 2016. Therefore, Teal must recognize the income in 2015.

Question 11

Mike contracted with Kram Company,Mike's controlled corporation.Mike was a medical doctor and the contract provided that he would work exclusively for the corporation.No other doctor worked for the corporation.The corporation contracted to perform an operation for Rosa for $8,000.The corporation paid Mike $6,500 to perform the operation under the terms of his employment contract.

Accepted Answer

Mike's gross income is only the $6,500 that he was paid under his employment contract with the corporation. The $8,000 fee for the operation was paid to the corporation, not directly to Mike, and therefore does not count as his gross income.

Question 12

With respect to the prepaid income from services,which of the following is true?

Accepted Answer

The answer of With respect to the prepaid income from...

Question 13

The Green Company,an accrual basis taxpayer,provides business-consulting services.Clients generally pay a retainer at the beginning of a 12-month period.This entitles the client to no more than 40 hours of services.Once the client has received 40 hours of services,Green charges $500 per hour.Green Company allocates the retainer to income based on the number of hours worked on the contract.At the end of the tax year,the company had $50,000 of unearned revenues from these contracts.The company also had $10,000 in unearned rent income received from excess office space leased to other companies.Based on the above,Green must include in gross income for the current year:

Accepted Answer

The answer of The Green Company,an accrual basis taxpayer,provides business-consulting...

Question 14

The Maroon & Orange Gym,Inc. ,uses the accrual method of accounting.The corporation sells memberships that entitle the member to use the facilities at any time.A one-year membership costs $480 ($480/12 = $40 per month);a two-year membership costs $720 ($720/24 = $30 per month).Cash payment is required at the beginning of the membership period.On July 1,2015,the company sold a one-year membership and a two-year membership.The company should report as gross income from the two contracts:

Accepted Answer

The one-year membership sold on July 1, 2015, will generate $480 in gross income for the 2015 fiscal year, as the full amount was received upfront. 
For the two-year membership sold on the same date, $360 ($720/2) can be recognized as gross income for the 2015 fiscal year, as that represents the portion of the membership period that falls within that year (the first year of the membership). The remaining $360 ($720 - $360) will be recognized as gross income in the 2016 fiscal year. 
Therefore, the total gross income from both contracts that should be reported for the 2015 fiscal year is $840 ($480 + $360). The remaining $360 from the two-year membership will be recognized in the following year.

Question 15

Freddy purchased a certificate of deposit for $20,000 on July 1,2015.The certificate's maturity value in two years (June 30,2017)is $21,218,yielding 3% before-tax interest.

Accepted Answer

Since the certificate of deposit was purchased halfway through 2015, Freddy only held it for half of the year. Thus, he only needs to recognize half of the interest earned in that year.

0.03 (interest rate) * $20,000 (principal) * 0.5 (half a year) = $300

Therefore, Freddy must recognize $300 of gross income in 2015.

Question 16

Turner,a successful executive,is negotiating a compensation plan with his potential employer.The employer has offered to pay Turner a $600,000 annual salary,payable at the rate of $50,000 per month.Turner counteroffers to receive a monthly salary of $40,000 ($480,000 annually)and a $180,000 bonus in 5 years when Turner will be age 65.

Accepted Answer

If the employer accepts Turner's counteroffer, he will receive a monthly salary of $40,000 and a $180,000 bonus in year 5. Therefore, Turner will recognize $40,000 of income each month for the year and $180,000 in year 5. Option A is incorrect because Turner will only recognize $480,000 annually if his counteroffer is accepted. Option B is incorrect because the $180,000 bonus will not be received until year 5, so it cannot be included in the monthly gross income calculation. Option D is incorrect because there is no mention of any interest being charged, and therefore there would be no imputed interest income to recognize.

Question 17

Under the original issue discount (OID)rules as applied to a three-year certificate of deposit:

Accepted Answer

Under the original issue discount (OID) rules, the interest income recognized increases each year because it is calculated on a compounding basis. This means that in a three-year certificate of deposit, the interest income recognized in the third year will be greater than in the first year.

Question 18

Daniel purchased a bond on July 1,2015,at par of $10,000 plus accrued interest of $300.On December 31,2015,Daniel collected the $600 interest for the year.On January 1,2016,Daniel sold the bond for $10,200.

Accepted Answer

The answer of Daniel purchased a bond on July 1,2015,at...

Question 19

On January 1,Father (Dave)loaned Daughter (Debra)$100,000 to purchase a new car and to pay off college loans.There were no other loans outstanding between Dave and Debra.The relevant Federal rate on interest was 6 percent.The loan was outstanding for the entire year.

Accepted Answer

According to the tax code, imputed interest is the interest that should have been charged on a loan between related parties, such as a loan from a parent to a child. The imputed interest is calculated based on the Applicable Federal Rate (AFR), which is the minimum interest rate that should be charged on such loans. In this case, since the loan was outstanding for the entire year, the imputed interest income for Dave is calculated as 6% * $100,000 = $6,000. Since Debra has $15,000 of investment income, which is more than the calculated imputed interest income, the excess amount of $15,000 - $6,000 = $9,000 is deemed to be a gift from Dave to Debra. Therefore, Dave must recognize $6,090 ($6,000 + $90 rounding) of imputed interest income, and Debra does not have to recognize any imputed income as the gift is below the annual gift tax exclusion amount.

Question 20

Jerry purchased a U.S.Series EE savings bond for $744.The bond has a maturity value in 10 years of $1,000 and yields 3% interest.This is the first Series EE bond that Jerry has ever owned.

Accepted Answer

The answer of Jerry purchased a U.S.Series EE savings bond...

Quiz 4: Gross Income

With respect to income from services,which of the following is true?

The annual increase in the cash surrender value of a life insurance policy:

Theresa,a cash basis taxpayer,purchased a bond on July 1,2011,for $10,000,plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31,2015,she sold the bond for $9,800,which included $200 of accrued interest.

The annual increase in the cash surrender value of a life insurance policy:

On January 5,2015,Tim purchased a bond paying interest at 6% for $30,000.On March 31,2015,he gave the bond to Jane.The bond pays $1,800 interest on December 31.Tim and Jane are cash basis taxpayers.When Jane collects the interest in December 2015:

The purpose of the tax rules that apply to below-market loans between family members is to:

Teal company is an accrual basis taxpayer.On December 1,2015,a customer paid for an item that was on hand,but the customer wanted the item delivered in early January 2016.Teal delivered the item on January 4,2016.Teal included the sale in its 2015 income for financial accounting purposes.

With respect to the prepaid income from services,which of the following is true?

Freddy purchased a certificate of deposit for $20,000 on July 1,2015.The certificate's maturity value in two years (June 30,2017) is $21,218,yielding 3% before-tax interest.

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

Daniel purchased a bond on July 1,2015,at par of $10,000 plus accrued interest of $300.On December 31,2015,Daniel collected the $600 interest for the year.On January 1,2016,Daniel sold the bond for $10,200.

On January 1,Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans.There were no other loans outstanding between Dave and Debra.The relevant Federal rate on interest was 6 percent.The loan was outstanding for the entire year.

Jerry purchased a U.S.Series EE savings bond for $744.The bond has a maturity value in 10 years of $1,000 and yields 3% interest.This is the first Series EE bond that Jerry has ever owned.