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Exam 4: Gross Income

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Question 21

Multiple Choice

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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 five years when Turner will be age 65.

A) If the employer accepts Turner's counteroffer, Turner will recognize $660,000 at the time the offer is accepted.
B) If the employer accepts Turner's counteroffer, Turner will recognize as gross income $55,000 per month [($480,000 + $180,000) /12].
C) If the employer accepts Turner's counteroffer, Turner will recognize $40,000 income each month for the year and $180,000 in year 5.
D) If the employer accepts Turner's counteroffer, Turner must recognize imputed interest income on the $180,000 to be received in five years.
E) None of these.

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

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Question 22

True/False

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A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1, 2017 that will pay $1,100 upon its maturity on June 30, 2019.The taxpayer must recognize a portion of the income in 2018.

A) True
B) False

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Question 23

Multiple Choice

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On January 1, 2009, Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to finance the construction of a new plant.On January 1, 2019, the company acquired the bonds on the open market for $11,500,000.Assuming that Cardinal is neither bankrupt nor insolvent, the acquisition and retirement of the bonds results in which of the following?

The tax concept and economic concept of income are in agreement on which of the following:

Harold bought land from Jewel for $150,000.Harold paid $50,000 cash and gave Jewel an 8% note for $100,000. The note was to be paid over a five-year period.When the balance on the note was $80,000, Jewel began having financial difficulties.To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.

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.

During 2019, Addison, a single taxpayer, has the following gains and losses: a.How much is Addison's tax liability if she has taxable income of $24,000 and is in the 12% tax bracket? b.How much is her tax liability if her taxable income is $188,000 and her tax bracket is 32% (not 12%)?

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

Margaret owns land that appreciates at the rate of 10% each year.Ralph owns a zero-coupon (i.e., all of the interest is paid at maturity but is taxed annually) corporate bond with a yield to maturity of 10%.At the end of 10 years, the bond will mature and the land will be sold.At the end of the 10 years,

José, a cash method taxpayer, is a partner in J&T Accounting Services, a calendar year partnership.Under the partnership agreement, José is to receive 20% of the partnership's profits or losses.Each partner is allowed to withdraw $10,000 each month for his or her living expenses.José withdrew $120,000 during the year as his monthly draw in 2019.However, in December, the partnership was short on cash and José was required to invest an additional $10,000 in the partnership.In March 2019, José received $40,000 as his share of distributed 2018 profits.The partnership earnings before partners' withdrawals for 2019 totaled $1 million.Compute José's gross income from the partnership for 2019.

On January 1, 2019, an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 24 months.The amount received for the contract was $2,400.The taxpayer reported $1,200 as income on its financial statement for 2019, and should do the same for its tax return.

The constructive receipt doctrine requires that income 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.

Jessica is a cash basis taxpayer.When she 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.

Ted was shopping for a new automobile.He found one that met his needs and agreed to purchase it for $23,000.He had shopped around and concluded that he could not get a better price from another dealer.After he had paid for the automobile, the dealer called to notify Ted that he was entitled to a manufacturer's rebate of $1,500.The next week he received a $1,500 check from the manufacturer.How much should Ted include in gross income?

Orange Cable TV Company, an accrual basis taxpayer, allows its customers to pay by the year in advance ($600 per year) or two years in advance ($960) .In September 2019, the company collected the following amounts applicable to future services: As a result of this, Orange Cable should report as gross income for 2020:

Sarah, a majority shareholder in Teal, Inc., made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.Son had $1,600 interest income from a certificate of deposit for the year.Father is not required to impute interest income.

Our tax laws encourage taxpayers to assets that have appreciated in value and assets that have declined in value.

Freddy purchased a certificate of deposit for $20,000 on July 1, 2019.The certificate's maturity value in two years (June 30, 2021) is $21,218, yielding 3% before-tax interest.

Maroon Corporation expects its employees' income tax rates to increase next year.The employees use the cash method.The company presently pays on the last day of each month.The company is considering changing its policy so that the December salaries will be paid on the first day of the following year.What would be the effect on an employee of the proposed change in company policy for paying its salaries beginning December 2019?