© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Comprehensive Volume

1

Chapter 4

Gross Income:

Concepts and Inclusions

C3-2

Responder Question

TRUE/FALSE

A taxpayer purchased a certificate of deposit for $900 on July 1, 2012 that will pay $1,000 upon its maturity on June 30, 2014. The taxpayer must recognize a portion of the income in 2012, regardless of whether the taxpayer uses the cash basis or the accrual basis of accounting.

C3-3

Responder Question

TRUE/FALSEA taxpayer purchased a certificate of deposit for $900 on July 1, 2012 that

will pay $1,000 upon its maturity on June 30, 2014. The taxpayer must recognize a portion of the income in 2012, regardless of whether the taxpayer uses the cash basis or the accrual basis of accounting.

ANS: TThe difference between the issue price of $900 and the

amount due at maturity of $1,000 is “original issue discount” that must be amortized. The amortized amount is added to gross income each year the certificate is held.

C3-4

Responder Question

TRUE/FALSE

An accrual basis taxpayer can defer all advance payments for services until the services are performed if the method of accounting for the services is the same for tax and financial reporting purposes.

C3-5

Responder Question

TRUE/FALSEAn accrual basis taxpayer can defer all advance payments for services

until the services are performed if the method of accounting for the services is the same for tax and financial reporting purposes.

ANS: FThe income from advance payments for services received by

an accrual basis taxpayer cannot be deferred beyond the tax year following the year of receipt. The scenario

described in the question relates to advance payments for goods received by an accrual basis taxpayer.

C3-6

Responder Question

TRUE/FALSE

Jake is the sole shareholder of an S corporation that earned $50,000 in 2012. The corporation had excess cash accumulated in prior years and therefore actually distributed $75,000 to Jake in 2012. Jake is required to recognize $75,000 of income from the S corporation in 2012.

C3-7

Responder Question

TRUE/FALSEJake is the sole shareholder of an S corporation that earned $50,000 in

2012. The corporation had excess cash accumulated in prior years and therefore actually distributed $75,000 to Jake in 2012. Jake is required to recognize $75,000 of income from the S corporation in 2012.

ANS: FJake is taxed on his share of the income earned by the

S corporation of $50,000 ($50,000 x 100%). The additional $25,000 he received as a distribution was

from earnings taxed in previous years.

C3-8

Responder Question

TRUE/FALSE

In the case of a below-market gift loan for which there is no exception to the imputed interest rules, the lender is deemed to have received interest income even though no interest is charged and collected.

C3-9

Responder Question

TRUE/FALSEIn the case of a below-market gift loan for which there is no exception to

the imputed interest rules, the lender is deemed to have received interest income even though no interest is charged and collected.

ANS: T

The imputed interest rules treat the lender as though he or she charged interest but then

forgave the amount due (a gift).

C3-10

Responder Question

TRUE/FALSE

Susan purchased an annuity for $120,000. She is to receive $15,000 each year and her life expectancy is 12 years. If Susan collects under the annuity for 13 years, the entire $15,000 received in the 13th year must be included in her gross income.

C3-11

Responder Question

TRUE/FALSESusan purchased an annuity for $120,000. She is to receive $15,000 each

year and her life expectancy is 12 years. If Susan collects under the annuity for 13 years, the entire $15,000 received in the 13th year must be included in her gross income.

ANS: T

At the end of the 12th year, Susan’s basis for the annuity is $0.

C3-12

Responder Question

TRUE/FALSE

The amount of an individual’s salary withheld and paid into the Social Security program reduces the amount of benefits received that must be included in gross income after the individual reaches retirement age.

C3-13

Responder Question

TRUE/FALSEThe amount of an individual’s salary withheld and paid into the Social

Security program reduces the amount of benefits received that must be included in gross income after the individual reaches retirement age.

ANS: F

The gross income from Social Security benefits is based on a formula that is not

related to the amount an individual has paid into the Social Security program.

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14

If you have any comments or suggestions concerning this PowerPoint Presentation for South-Western Federal Taxation, please contact:

Dr. Donald R. Trippeer, CPA trippedr@oneonta.edu

SUNY Oneonta