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Exam 4: Gross Income: Concepts and Inclusions

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Question 21

Multiple Choice

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Daniel purchased a bond on July 1,2014,at par of $10,000 plus accrued interest of $300.On December 31,2014,Daniel collected the $600 interest for the year.On January 1,2015,Daniel sold the bond for $10,200.

A) Daniel must recognize $300 interest income for 2014 and a $200 gain on the sale of the bond in 2015.
B) Daniel must recognize $600 interest income for 2014 and a $200 gain on the sale of the bond in 2015.
C) Daniel must recognize $600 interest income for 2014 and a $100 loss on the sale of the bond in 2015.
D) Daniel must recognize $300 interest income for 2014 and a $100 loss on the sale of the bond in 2015.
E) None of these.

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

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Question 22

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If the employer provides all employees with group term life insurance equal to twice the employee's annual salary,an employee with a salary of $50,000 has no gross income from the life insurance protection provided by the employer.

A) True
B) False

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Question 23

Multiple Choice

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Green,Inc. ,provides group term life insurance for all of its employees.The coverage equals twice the employee's annual salary.Sam,a vice-president,worked all year for Green,Inc. ,and received $200,000 of coverage for the year at a cost to Green of $1,500.The Uniform Premiums (based on Sam's age) are $.25 per month for $1,000 of protection.How much must Sam include in gross income this year?

Under the formula for taxing Social Security benefits,low income taxpayers are not required to include any of the Social Security benefits in gross income.But as income increases,50% of the Social Security benefits may be included in gross income.Further increases in income will cause as much as 85% of the Social Security benefits being subject to tax.Does this mean that the taxation of Social Security benefits is more or less progressive than the taxation of other types of income?

In January 2014,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 2014.

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:

On January 1,2014,an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months.The amount received for the contract was $2,400.The taxpayer should report $1,600 of income in 2015.

Sarah,a widow,is retired and receives $20,000 interest income and dividends and $10,000 in Social Security benefits.Sarah is considering selling a stock at an $8,000 gain.What will be the increase in Sarah's gross income as a result of the sale of the stock?

The alimony recapture rules are intended to:

A sole proprietorship purchased an asset for $1,000 in 2014 and its value was $1,500 at the end of 2014.In 2015,the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2015 but an economic loss of $100 in 2015.

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,Fred.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.

April,a calendar year taxpayer,is a 40% partner in Pale Partnership,whose fiscal year ends on September 30th.For the fiscal year ending September 30,2014,the partnership had $400,000 net income and for fiscal year ending September 30,2015,the partnership had $300,000 net income.April withdrew $100,000 in December of each year.April's gross income from the partnership for 2014 is $160,000 ($400,000 × 40%).

Orange Cable TV Company,an accrual basis taxpayer,allows its customers to pay by the year in advance ($500 per year) ,or two years in advance ($950) .In September 2014,the company collected the following amounts applicable to future services: $\begin{array} { l } \text { Dctober 2014-September 2016 services (two-year contracts) }&\$144,000\\ \text { October 2014-September 2015 services (one-year contracts) }&128,000\\ \text {Total }&\$272,000\\\\ \text {As a result of the above. Orange Cable should renort as gross income: }&\\\end{array}$

If a lottery prize winner transfers the prize to a qualified government unit or nonprofit organization,then the prize is excluded from the winner's gross income if the amount of the prize does not exceed 30% of the winner's AGI.

In 2005,Terry purchased land for $150,000.In 2014,Terry received $10,000 from a local cable television company in exchange for Terry allowing the company to run an underground cable across Terry's property.Terry is not required to recognize income from receiving the $10,000 because it was a return of his capital invested in the land.

Sharon made a $60,000 interest­free 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 the above information:

Freddy purchased a certificate of deposit for $20,000 on July 1,2014.The certificate's maturity value in two years (June 30,2016) is $21,218,yielding 3% before-tax interest.

Terri purchased an annuity for $100,000.She was to receive $10,000 per year and her life expectancy was 20 years.She died after receiving 8 payments.Terri's final return should reflect a loss of $20,000 ($100,000 - $80,000).

Samantha and her son,Brent,are cash basis taxpayers.Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000.On the date of the gift,March 31,2014,the accrued interest on the bond was $100.On December 31,2014,Brent collected $400 interest on the bond.Brent must include in gross income the $300 interest earned after the date of the gift.

The alimony rules: