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Exam 4: Gross Income

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Question 1

True/False

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Zack was the beneficiary of a life insurance policy on his deceased wife.Zack had paid $20,000 in premiums on the policy.He collected $50,000 on the policy when his wife died from a terminal illness.Because it took several months to process the claim, the insurance company paid Zack $53,000, the face amount of the policy plus $3,000 interest.Zack must include $23,000 in his gross income.

A) True
B) False

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Question 2

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In December 2019, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2020 on a building he held for rental income.Todd deducted the $1,200 of insurance premiums on his 2019 tax return.He had $150,000 of taxable income that year.On June 30, 2020, he sold the building and, as a result, received a $500 refund on his fire insurance premiums.As a result of the above:

A) Todd should amend his 2019 return and claim $500 less insurance expense.
B) Todd should include the $500 in 2020 gross income in accordance with the tax benefit rule.
C) Todd should add the $500 to his sales proceeds from the building.
D) Todd should include the $500 in 2020 gross income in accordance with the claim of right doctrine.
E) None of these.

F) A) and D)
G) D) and E)

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Question 3

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

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 10-year period.

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

In January 2019, Tammy purchased a bond due in 24 months.The cost of the bond is $857 and its maturity value is $1,000.No interest is paid each year, but the compound interest rate on the bond is 8%.Tammy also purchased a Series EE United States Government bond for $558 with a maturity value in 10 years of $1,000.This is the only Series EE bond she has ever owned.The Series EE bond is sold to yield 6% interest.Tammy is 13 years old and has no other source of income.She is claimed as a dependent by her parents.Compute Tammy's gross income from the bond and Series EE bond for 2019.

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

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

On January 2, 2019, Tim purchased a bond paying interest at 6% for $30,000.On March 31, 2019, 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 2019:

Margaret made a $90,000 interest-free loan to her son, Adam, who used the money to retire a mortgage on his personal residence and to buy a certificate of deposit.Adam's only income for the year is his salary of $35,000 and $1,400 interest income on the certificate of deposit.Assume the relevant Federal interest rate is 8% compounded semiannually.The loan is outstanding for the entire year. a.Based on this information, what is the effect of the loan on Margaret's gross income for the year? b.The facts are the same as above except that you discovered that Margaret had made an additional loan of $15,000 to Adam in the previous year.Adam used the funds to pay his child's private school tuition.What are the effects of the loans on Margaret's gross income?

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2019.The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2020.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:

A sole proprietor purchased an asset for $1,000 in 2019.Its value was $1,500 at the end of 2019.In 2020, the taxpayer sold the asset for $1,400.In 2020, the proprietor realized a taxable gain of $400 but an economic loss of $100.

Mel was the beneficiary of a $45,000 group term life insurance policy on his deceased wife.His wife's employer had paid all of the premiums on the policy.Mel used the life insurance proceeds to purchase a U.S.government bond, which paid him $2,500 interest during the current year.Mel's Federal gross income from this is $2,500.

Emily is in the 35% marginal tax bracket.She can purchase a York County school bond yielding 3.5% interest, which is not subject to a 5% state tax.But she is interested in earning a higher return for comparable risk.Which of the following is correct:

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2019.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, 2019.

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 for contracts entered into for the current year, the company had $50,000 of unearned revenues from these contracts.The company also had $10,000 in unearned rent income received this year from excess office space leased to other companies.Based on this, Green must include in gross income for the subsequent tax year:

Sharon made a $60,000 interest-free loan to her son, Todd, who used the money to start a new business.Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account.The relevant Federal interest rate was 5%.Based on this information:

In the case of a gift loan of less than $100,000, the imputed interest rules apply if the donee has net investment income of over $1,000.

During 2019, Trevor has the following capital transactions: After the netting process, the following results:

Tonya is a cash basis taxpayer.In 2019, she paid state income taxes of $8,000.In early 2020, she filed her 2019 state income tax return and received a $900 refund.