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Exam 4: Gross Income

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Question 51

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At the beginning of 2019, 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 2019, and $3,600 from the Series EE bonds in 2028.

A) True
B) False

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Question 52

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ABC Corporation declared a dividend for taxpayers of record as of December 24, 2018.The dividend checks were mailed on December 31, 2018.Ed, a cash basis shareholder, received the dividend check on January 2, 2019.Ed cannot delay reporting the income from the dividend until 2019.

A) True
B) False

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Question 53

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Fred is a full-time teacher.He has written a book and receives royalties from it.Fred's mother, Mabel, is age 65 and lives on her Social Security benefits and gifts from her son.This year Fred directed the publisher to make the royalty check payable to Mabel because she needs the money for support.Fred must include the amount of the royalty check in his gross income.

During the year, Irv had the following transactions: How are these transactions handled for income tax purposes?

When Betty was diagnosed as having a terminal illness, she sold her life insurance policy to Insurance Purchase, Inc., a company that is licensed to invest in these types of contracts.Betty sold the policy for $32,000, and Insurance Purchase, Inc.became the beneficiary.She had paid total premiums of $19,000.Betty died eight months after the sale.Insurance Purchase, Inc., collected $50,000 on the policy.The company had paid additional premiums of $4,000 on the policy.Betty's estate is not required to recognize a $13,000 gain from the sale of her life insurance policy; and Insurance Purchase, Inc.is required to recognize a $14,000 gain from the insurance policy.

Juan was considering purchasing an interest in a tax-exempt bond fund for $100,000 when he discovered that the interest must be included on his state income tax return.The interest rate is 5%.His marginal Federal tax rate is 35%, and his marginal state income tax rate is 10%.Juan itemizes his deductions on his Federal income tax return.As an alternative, Juan can purchase a state bond (a double-exempt bond) yielding 4.9% interest that is exempt from both Federal and state income tax.Which investment would yield the greater after-tax return?

Teal company is an accrual basis taxpayer.On December 1, 2019, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2020.Teal delivered the item on January 4, 2020.Teal included the sale in its 2019 income for financial accounting purposes.

Linda delivers pizzas for a pizza shop.On Wednesday, December 31, 2019, Linda made several deliveries and collected $400 from customers.However, Linda forgot to turn in the proceeds for the day to her employer until the following Friday, January 2, 2020.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2020.

During 2019, Jackson, a single taxpayer, had the following capital gains and losses: a.How much is Jackson's tax liability if his taxable income is $32,000 and he is in the 12% tax bracket? b.How much is his tax liability if his taxable income is $171,000 and his tax bracket is 32% (not 12%)?

Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt.

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

Ed died while employed by Violet Company.His wife collected $40,000 on a group term life insurance policy that Violet provided its employees and $6,000 of accrued salary Ed had earned prior to his death.All of the premiums on the group term life insurance policy were excluded from the Ed's gross income.Ed's wife is required to recognize as gross income only the $6,000 she received for the accrued salary.

Gain on the sale of collectibles held for more than 12 months always is subject to a tax rate of 28%.

Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance.If a customer dies, the company receives from the insurance company the balance due on the customer's loan.Ali, a customer, died owing Swan $1,500.The balance due included $200 accrued interest that Swan has included in income.When Swan collects $1,500 from the insurance company, Swan:

During the year, Kim sold the following assets: business auto for a $1,000 loss, stock investment for a $1,000 loss, and pleasure yacht for a $1,000 loss.Presuming adequate income, how much of these losses may Kim claim?

For purposes of determining gross income, which of the following is true?

Gold Company was experiencing financial difficulties but was not bankrupt or insolvent.National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000.The bank had made the loan to Gold when it purchased the real estate from Silver, Inc.Pink, Inc., the holder of a mortgage on Gold's building, agreed to accept $40,000 in full payment of the $55,000 due.Pink had sold the building to Gold for $150,000 that was to be paid in installments over eight years.As a result of the above, Gold must:

Barney painted his house, which saved him $3,000.According to the realization requirement, Barney must recognize $3,000 of income.

In early 2019, Ben sold a yacht, held for 9 months and for pleasure, for a $5,000 gain.Concerned about offsetting the gain before year-end, Ben is considering selling one of the following-each of which would yield a $5,000 loss: ∙ Houseboat used for recreation. ∙ Truck used in business. ∙ Stock investment held for 13 months. Evaluate each choice.

In December 2018, Mary collected the December 2018 and January 2019 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2018 for the 2019 rent should be included in her 2019 gross income.