Test bank chapter 5 susan hamlen

8/17/2019 Test bank chapter 5 susan hamlen

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ch05

Student: ___________________________________________________________________________

1. Gross income includes all income realized during the year.True False

2. Excluded income will never be subject to the federal income tax.

True False

3. The all-inclusive definition of income means that gross income is defined very broadly.True False

4. A taxpayer who borrows money will include that amount borrowed in their gross income under the all-inclusive definition of income.True False

5. Income is included in gross income unless a tax provision specifies that it can be deferred or

excluded.True False

6. The principle of realization for tax purposes is very different from realization as it is understood forfinancial reporting purposes.True False

7. Wherewithal to pay represents the principle that a realized transaction should require a taxpayer to sellother assets in order to pay income taxes.True False

8. Barter clubs are an effective means of avoiding realization for tax purposes.

True False

9. The cash method of accounting requires taxpayers to recognize income only when that income is receivedas cash.True False

10. When a carpenter provides $100 of services in exchange for $100 of groceries, the carpenter has realized$100 of income.True False

11. Recognized income may be in the form of cash or property received (but not services received).True False

12. When a taxpayer sells an asset, the entire proceeds from the sale must be included in gross income

regardless of the cost of the asset.True False

13. Jake sold his car for $2,400 in cash this year. He will realize a taxable gain of $1,000 if he purchased thecar for $1,400.True False

14. When an asset is sold, the taxpayer calculates the gain or loss by subtracting the tax basis of the assetfrom the proceeds of the sale.True False

15. The tax benefit rule applies when a taxpayer refunds amounts previously included in income.True False


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16. Jim received a $500 refund of state income taxes this year. Jim will not need to include the $500 in hisgross income this year because he did not deduct state income taxes last year.True False

17. Constructive receipt represents the principle that cash basis taxpayers should be taxed on income when itis made available to them without substantial restrictions.True False

18. Claim of right states that income has been realized if a taxpayer receives income and there are substantial

restrictions on the taxpayer's use of the income.True False

19. Community property laws dictate that income earned by one spouse is treated as though it was earnedequally by both spouses.True False

20. The assignment of income doctrine requires that to shift income from property to another person, thetaxpayer must transfer only the income to the other person.True False

21. Interest income is earned in the year in which it is received by the taxpayer or credited to the bankaccount.True False

22. For tax purposes, unearned income means income that has not yet been realized.True False

23. A portion of each payment from a purchased annuity represents income.True False

24. The exclusion ratio for a purchased annuity is the cost of the annuity divided by the interest rate.True False

25. Rental income generated by a partnership is reported by partners as dividend income.True False

26. The tax law defines alimony to include transfers of property (but not cash) between former spouses.True False

27. The tax law includes a complex set of restrictions called frontloading to make it difficult for taxpayers todisguise property payments as alimony payments.True False

28. Prizes and awards are generally taxable.True False

29. Gambling winnings are included in gross income only to the extent that the winnings exceed gamblinglosses incurred during the same period.True False

30. Generally, 85 percent of Social Security benefits are included in income of high income taxpayers.True False

31. Unemployment benefits are excluded from gross income.True False

32. A taxpayer generally includes in gross income the amount of debt forgiven by a lender.True False

33. An employee may exclude up to a 40 percent employer-provided discount on services.True False


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34. A below-market loan (e.g., from an employer to an employee) is a common example of a transaction thatgenerates taxable imputed income.True False

35. Interest earned on a Federal Treasury bond is excluded from gross income (for federal tax purposes).True False

36. Interest earned on a city of Denver bond is excluded from gross income (for federal tax purposes).True False

37. Taxpayers meeting certain home ownership and use requirements can permanently exclude up to

$1,000,000 of realized gain on the sale of their principal residence.True False

38. Qualified fringe benefits received by an employee can be excluded from gross income.True False

39. Scholarships are excluded from gross income for degree candidates even if the scholarship pays forrequired fees and books in addition to tuition.True False

40. Earnings from 529 plans and Coverdell education savings accounts are excluded from gross income aslong as they use the earnings to pay for qualifying educational expenditures.True False

41. Trevor received a gift of $25,000 in cash from his rich uncle. Trevor must include $15,000 of this gift inhis gross income this year.True False

42. Anna received $15,000 from life insurance paid upon the death of her grandmother. Anna can exclude theentire amount of the life insurance from her gross income.True False

43. U.S. citizens generally are subject to tax on all income whether it is generated in the United States or inforeign countries.True False

44. To provide relief from double taxation, Congress allows a foreign-unearned income exclusion for interestand dividends earned in foreign countries.True False

45. Worker's compensation benefits are excluded from gross income.True False

46. Fred must include in gross income a $7,500 payment received from his neighbor to compensate Fred forthe emotional distress he suffered when his neighbor accidentally ran over his dog.True False

47. Loretta received $6,200 from disability insurance that she purchased directly this year. Loretta mustinclude all $6,200 in her gross income.True False

48. Brad was disabled for part of the year and he received $11,500 of benefits from a disability planpurchased by Brad's employer. Brad must include all $11,500 of benefits in his gross income becauseBrad was not taxed on the disability insurance premiums paid by his employer.True False


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49. Gross income includesA. all income from whatever source derived unless excluded by lawB. excluded incomeC. deferred incomeD. all realized incomeE. All of the above

50. Which of the following is not a necessary condition for income to be included in gross income?A. income must be realizedB. income must be paid in cashC. income cannot be excluded by lawD. income must be made available to a taxpayer on the cash basisE. All of the above

51. Sally is a cash basis taxpayer and a member of the Valley Barter club. This year Sally provided 100 hoursof sewing services to the barter club in exchange for two football playoff tickets. Which of the followingis a true statement?A. Sally need not recognize any gross income unless she sells the football tickets.B. Sally's exchange does not result in taxable income.C. Sally is taxed on the value of the football tickets even if she cannot attend the game.

D. Sally is taxed on the value of her sewing services only if she is a professional seamstress.E. All of the above are true.

52. This year Barney purchased 500 shares of Bell common stock for $20 per share. At year-end the Bellshares were only worth $2 per share. What amount can Barney deduct as a loss this year?A. $10,000B. $9,000C. $1,000D. Barney can deduct $10,000 only if he includes $1,000 in his taxable incomeE. None of the above - Barney is not entitled to a loss deduction.

53. Hillary is a cash-basis calendar-year taxpayer. During the last week of December she received a lettercontaining a $5,000 check for services. Which of the following is a true statement?A. Hillary is taxed on the $5,000 of service income in the year she cashes the check.B. Hillary is taxed on the $5,000 of service income in the year the check was mailed.C. Hillary is taxed on the $5,000 of service income in the year she receives the check.D. Hillary is taxed on the $5,000 of service income in the year she provides the services.E. None of the above is true.

54. Identify the rule that determines whether a taxpayer must include in income a refund of an amountdeducted in a previous year:A. Tax refund ruleB. Constructive receipt

C. Return of capital principleD. Tax benefit ruleE. None of the above

55. Identify the rule dictating that on a sale of an asset a taxpayer need only include the incremental gain ingross income rather than the entire proceeds from the sale:A. Tax benefit ruleB. Constructive receiptC. Return of capital principleD. Wherewithal to payE. None of the above

F. All of the above


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56. Identify the rule that allows lessors to exclude security deposits from gross income because they have anobligation to repay the deposit:A. Claim of rightB. Constructive receiptC. Return of capital principleD. Wherewithal to payE. None of the aboveF. All of the above

57. Dave is a plumber who uses the cash method of accounting. This year Dave requested that his clientsmake their checks payable to his son, Steve. This year Steve received checks in the amount of $62,000 forDave's plumbing services. Which of the following is a true statement?A. Dave is taxed on $62,000 of plumbing income this year.B. Steve is taxed on $62,000 of plumbing income this year.C. Steve is taxed on $62,000 of income from gifts received this year.D. Dave may deduct the $62,000 received by Steve.E. All of the above are true

58. Jack and Jill are married. This year Jack earned $72,000 and Jill earned $80,000 and they received $4,000of interest income from a joint savings account. How much gross income would Jack report if he files

married-separate from Jill?A. $72,000 if they reside in a common law state.B. $76,000 if they reside in a community property law state.C. $84,000 if they reside in a common law state.D. $78,000 if they reside in a community property law state.E. All of the above

59. Identify which of the items below help determine which taxpayer must recognize earned income:A. Residence in a community property law stateB. Assignment of incomeC. Residence in a common law state

D. Both A and B aboveE. All of the above

60. Kevin provided services to several clients this year who paid with different types of property. Which ofthe following payments is not included in Kevin's gross income?A. CashB. Shares of stock listed on the New York Stock ExchangeC. A used carD. Gold coinsE. All of the above are included in gross income

61. Emily is a cash basis taxpayer, and she was an especially productive salesperson last year. In December

of last year her supervisor told Emily she had earned a $5,000 bonus. However, Emily received the bonuscheck after year end. Identify the principle that will determine when Emily is taxed on the bonus:A. Assignment of incomeB. Constructive receiptC. Return of capital principleD. Wherewithal to payE. All of the above


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62. Ophra is a cash basis taxpayer who is employed in the publishing industry. This year her employerinformed her that because of her outstanding performance she is entitled to a free world cruise. Ophraasked her employer to issue the cruise tickets to her parents, and he complied with this request. Identifythe principle that will determine whether Ophra or her parents are taxed on the value of the cruisetickets:A. Assignment of incomeB. Constructive receiptC. Return of capital principle

D. Wherewithal to payE. All of the above

63. This year Henry realized a gain on the sale of an antique car that he inherited from his uncle. The buyerhas promised to pay Henry in installment payments over the next few years. Identify the principle thatwill determine when Henry should be taxed on the gain from the sale:A. Assignment of incomeB. Constructive receiptC. Return of capital principleD. Wherewithal to payE. All of the above

64. This year Mary received a $200 refund of state income taxes that she deducted on her tax return lastyear. Mary included a total of $4,000 of state income taxes when she itemized deductions last year. Whatamount of the refund, if any, should Mary include in her gross income this year?A. $200 is included because Mary itemized her deductions last year.B. $200 is included if itemized deductions exceeded the standard deduction by $200.C. $200 is included because itemized deductions exceeded the standard deduction.D. $200 is included even if Mary claimed the standard deduction.E. None of the above - refunds of state income taxes are not included in gross income.

65. Opal deducted $2,400 of state income taxes on her tax return last year. This year she received a stateincome tax refund of $170. What amount of the refund, if any, should Opal include in her gross income if

last year her total itemized deductions exceeded the standard deduction by $350?A. $2,050B. $350C. $180D. $170E. None of the above - refunds of state income taxes are not included in gross income.

66. Wilma has a $25,000 certificate of deposit (CD) at the local bank. The interest on this certificate, $1,000,was credited to her account this year but she must pay an early withdrawal penalty if she cashes in the CDbefore next year. Which of the following is a true statement?A. Wilma must include the $1,000 of interest in her income this year.B. Wilma must include the $1,000 of interest in her income when she cashes the CD.C.

Wilma must include the $1,000 of interest in her income this year only if the bank waives the earlywithdrawal penalty.

D.

Wilma must include the $1,000 of interest in her income next year if she does not pay the earlywithdrawal penalty.

E. All of the above

67. Which of the following is a true statement about the first payment received from a purchased annuity? A. The payment is included in gross income.B. A portion of the payment is a return of capital.C. The payment can only be taxed in the year after the annuity was purchased.

D. The payment is not taxed until the annuity payments cease altogether.E. All of the above


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68. Which of the following is a description of how the annuity exclusion ratio is calculated for an annuitypaid over a fixed period?A. The expected return is divided by the number of payments.B. The original investment is multiplied by the prevailing interest rate.C. The original investment is divided by the number of payments.D. The expected return is divided by the prevailing interest rate.E. None of the above

69. George purchased a life annuity for $3,200 that will provide him $80 monthly payments for as long as helives. Based on IRS tables, George's life expectancy is 100 months. How much of the first $80 paymentwill George include in his gross income?A. $80B. $72C. $48D. $32E. None of the above

70. Fran purchased an annuity that provides $12,000 quarterly payments for the next 10 years. The annuitywas purchased at a cost of $300,000. How much of the first quarterly payment will Fran include in hergross income?

A. zeroB. $4,500C. $12,000D. $32,400E. All of the above

71. Harold receives a life annuity from his qualified pension that pays him $5,000 per year for as long as helives. Later this year Harold will recover the remainder of his cost of the annuity. Which of the followingcorrectly describes how the annuity payments are taxed after Harold has recovered the cost of theannuity?A

.

Harold will continue to apply the annuity exclusion ratio to determine the amount of each annuity

payment includible in gross income.B.

Harold will include the entire amount of each annuity payment in gross income after he recovers thecost of the annuity.

C.

The entire amount of each annuity payment is excluded from gross income after Harold recovers hiscost of the annuity.

D. Harold must request that the IRS calculate his exclusion ratio based upon a revised life expectancy.E. All of the above

72. To calculate a gain or loss on the sale of an asset, the proceeds from the sale are reduced by which of thefollowing?A. Tax basis of the propertyB. Selling expensesC. Amount realizedD. A and B aboveE. All of the above

73. Nate is a partner in a partnership that received $5,000 of interest income this year. Nate's share of theinterest is $1,000, and he should report this income on his individual return as:A. business incomeB. income from a partnershipC. interest incomeD. dividend income because the partnership intends to organize next year as a limited liability companyE. All of the above


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74. Which of the following statements about alimony payments is true?A. To qualify as alimony, payments must be made in cash.B. Alimony payments are includible in the gross income of the recipient.C. To qualify as alimony, payments cannot continue after the death of the recipient.D.

To qualify as alimony, payments must be made under a written agreement or divorce decree that doesnot designate the payments as "nonalimony" or child support.

E. All of the above

75. Barney and Betty got divorced this year. In the divorce decree Betty agreed to transfer 100 shares ofcommon stock worth $50,000 and pay Barney $24,000 per year for five years (or until Barney's death orremarriage). What amount (if any) is included in Barney's gross income this year?A. $24,000B. $50,000C. $74,000D. $170,000E. None of the payments are included in gross income

76. Charles and Camilla are getting divorced. Under the terms of the decree Charles will pay Camilla$50,000 in cash in each of the next five years (or until Camilla's death or remarriage). In addition, Charleswill transfer a castle worth $2,000,000 to Camilla and pay $12,000 per year to support their son, Clyde,

until he turns 19 years old. What amount (if any) is included in Camilla's gross income this year?A. $2,062,000B. $12,000C. $50,000D. $2,050,000E. None of the payments are included in gross income

77. Hal Gore won a $1 million prize for special contributions to environmental research. This prize isawarded for public achievement, and Hal immediately indicated that he would transfer $400,000 of theaward to the Environmental Protection Agency. How much of the prize should Hal include in his grossincome?

A. $400,000B. $600,000C. $1 millionD. None of the above because all prizes are excludibleE. None of the above because prizes from charities are excludible

78. Ethan competed in the annual Austin Marathon this year and won a $25,000 prize for fastest wheelchairentrant. Ethan indicated that he would transfer the prize to the local hospital. How much of the prizeshould Hal include in his gross income?A. $25,000B. $25,000 because all prizes are taxableC. Zero because prizes transferred to charities are excludibleD. Zero because all prizes are excludibleE. Zero because prizes from charities are excludible

79. This year Ed celebrated his 25th year as an employee of Designer Jeans Company. In recognition of hislong and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. Whatamount must Ed include in his gross income?A. $2,250B. $2,000C. $250D. Zero if Ed offers to contribute his watch and bonus to a qualified charityE. Zero - all employee awards are excluded from gross income


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80. Rhett made his annual gambling trip to Uwin Casino. On this trip Rhett won $250 at the slots and $1,200at poker. Also this year, Rhett made several trips to the race track, but he lost $700 on his various wagers.What amount must Rhett include in his gross income?A. $1,450B. $1,200C. $750D. $250E. Zero - gambling winnings are not included in gross income

81. Bernie is a former executive who is retired. This year Bernie received $250,000 in pension payments and$10,000 of social security payments. What amount must Bernie include in his gross income?A. $250,000B. $255,000C. $258,500D. $260,000E. Zero

82. Bart, a single taxpayer, has recently retired. This year, he received $24,000 in pension payments and$5,000 of social security payments. What amount must Bart include in his gross income for the socialsecurity payments?

A. $4,250B. $2,500C. $1,500D. $750E. Zero

83. Karl works at Moe's grocery. This year Karl was paid $43,000 in salary but he was allowed to purchasehis groceries at 10% below Moe's cost. This year Karl spent $3,600 to purchase groceries costing Moe$4,000 and worth $6,000. What amount must Karl include in his gross income?A. $46,600B. $47,000

C. $49,000D. $43,400E. $45,500

84. Joyce's employer loaned her $50,000 this year (zero interest rate) to buy a new car. If the federal interestrate was 3%, which of the following is correct?A. Joyce recognizes $1,500 of taxable interest income.B. Joyce's employer recognizes $1,500 of deductible interest expense.C. Joyce recognizes $1,500 of imputed compensation income.D. Joyce recognizes $1,500 of imputed dividend income.E. None of the above.

85. Janine's employer loaned her $5,000 this year (zero interest rate) to buy a used car. If the federal interestrate was 4%, which of the following is correct?A. Janine recognizes $200 of taxable interest income.B. Janine's employer recognizes $200 of deductible interest expense.C. Janine recognizes $200 of imputed compensation income.D. Janine recognizes $200 of imputed dividend income.E. None of the above.


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86. Deb has found it very difficult to repay her loans. Because of these difficulties, the bank decided toforgive one of her most recent loans, an amount of $45,000. After the loan was discharged, Deb had totalassets of $232,000 and her remaining loans total $217,000. What amount must Deb include in her grossincome?A. $15,000B. $45,000C. $30,000D. $28,000

E. Zero - Deb was not solvent when the loan was discharged 87. Mike received the following interest payments this year. What amount must Mike include in his gross

income (for federal tax purposes)?

A. $2,650B. $2,350

C. $2,050D. $2,300E. $4,950

88. This year, Fred and Wilma sold their home (sales price $750,000; cost $200,000). All closing costs werepaid by the buyer. Fred and Wilma owned and lived in their home for 20 years. How much of the gain isincluded in gross income?A. $550,000B. $300,000C. $250,000D. $50,000E. None

89. This year, Barney and Betty sold their home (sales price $750,000; cost $200,000). All closing costs were

paid by the buyer. Barney and Betty owned and lived in their home for 18 months. How much of the gainis included in gross income?A. $550,000B. $300,000C. $250,000D. $50,000E. None

90. Frank received the following benefits from his employer this year. What amount must Frank include in

his gross income?

A. $54,450B. $57,350C. $56,250D. $59,150E. Zero - these benefits are excluded in gross income


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91. Ben's employer offers employees the following benefits. What amount must Ben include in his grossincome?

A. $9,400

B. $11,070C. $10,600D. $7,000E. Zero - none of the above benefits is included in gross income

92. Shaun is a student who has received an athletic scholarship to State University. The scholarship paid$14,000 for tuition, $2,500 for fees, and $1,000 for books. In addition, Shaun's dormitory fees of $8,500were paid by the University when he agreed to counsel freshman on campus living. What amount mustShaun include in his gross income?A. $9,500B. $11,000C. $2,500D. $8,500E. Zero - none of the above benefits is included in gross income

93. Graham has accepted an offer to do graduate work in the chemistry department at State University. Thechemistry department offered Graham a $5,000 tuition reduction and $3,500 toward the cost of room andmeals. Under the terms of the scholarship Graham must work in the chemistry labs during the summer asa research assistant. What amount must Graham include in his gross income?A. $8,500B. $5,000C. $3,500D. $2,500

E. Zero - none of the above benefits is included in gross income

94. Sam saved diligently for his college education by putting part of his pay into U.S. Series EE savingbonds. Sam purchased the bonds for $6,500, and this year he redeemed the bonds for $7,200. He has noother income this year. What amount must Sam include in his gross income?A. $7,200.B. $6,500.C. a maximum of $350 if Sam uses the proceeds to pay for his college tuition and fees.D. $700 unless Sam uses the proceeds to pay for his college tuition and fees.E. Zero - proceeds from cashing bonds sold at a discount is not realized income.

95. Brenda has $15,000 in U.S. Series EE saving bonds and she is considering whether to cash the bonds.Under what conditions can Brenda exclude the interest on the savings bonds from her gross income?A. Brenda can exclude the interest if she uses the proceeds to pay for college tuition.B. Brenda's modified AGI must be below a phase-out range for the exclusion.C.

The proceeds must be used for higher education expenses of Brenda, her spouse, or Brenda'sdependent.

D. All of the above are necessary conditions for Brenda to exclude the interest.E. None of the above - the interest is always included in gross income


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96. Dora made a gift of stock to her granddaughter. At the time of the gift, the stock was worth$15,000. Several months after the gift, a $500 dividend was declared on the stock and paid to Dora'sgranddaughter. What amount must Dora's granddaughter include in her gross income?A. $2,000B. $15,000C. $15,500D. $2,500E. None of the above

97. Irene's husband passed away this year. After his death, Irene received $250,000 of proceeds from lifeinsurance on her husband, and she inherited her husband's stock portfolio worth $750,000. What amountmust Irene include in her gross income?A. $1 millionB. $750,000C. $500,000D. Zero but only if Irene does not opt to receive the life insurance proceeds in a lump sumE. Zero - none of the above benefits is included in gross income

98. Helen is a CPA and will spend this entire year in an overseas office of her firm. Helen's salary of$110,000 is subject to the income tax of the foreign country. How much of her salary will she be allowed

to exclude from gross income in the U.S.?A. $82,000B. $92,900C. $97,500D. $108,000E. All of her salary is included in gross income

99. Hank is a sales executive who earned $109,500 working for a multinational firm this year. Of the 365days in this year Hank spent 340 days residing and working in an overseas office and 25 days working inthe United States. What amount of Hank's salary will he be allowed to exclude from gross income in theU.S. (rounded to the nearest one-hundred dollars)?

A. Hank can exclude his entire salary because he worked more than 330 days overseasB. 97,400C. 86,500D. 92,900E.

None of his salary can be excluded from gross income because Hank must reside overseas for theentire year

100.NeNe is an accountant who works for a multinational firm this year and spent the entire year workingoverseas. NeNe's employer paid $40,000 of her overseas housing expenses this year. What amount of the$40,000 housing payments may NeNe exclude?A. NeNe can exclude all of the housing payment because she worked more than 330 days overseasB. 14,864C. 25,136D. 13,006E.

None of her salary can be excluded from gross income because NeNe must reside overseas for twoconsecutive years to receive an exclusion.

101.Pam recently was sickened by eating spoiled peanut butter. She successfully sued the manufacturer forher medical bills ($3,700), her emotional distress ($6,000 - she now fears peanut butter), and punitivedamages ($44,000). What amount must Pam include in her gross income?A. $44,000B. $50,000C. $47,700

D. $9,700E. Zero - none of the above benefits is included in gross income


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102.This year Zach was injured in an auto accident. As a result he received the following payments.

Zach received $18,000 of disability pay. Zach has disability insurance provided by his employer as anontaxable fringe benefit. Zach's employer paid $4,300 in disability premiums for Zach this year.

Zach's hospital bills totaled $4,500 and were paid by his health insurance. Zach has health insuranceprovided by his employer as a nontaxable fringe benefit. Zach's employer paid $6,250 in health insurancepremiums for Zach this year.

What amount must Zach include in his gross income?A. $22,500B. $18,000C. $4,500D. $10,550E. Zero - none of the above benefits is included in gross income

103.Samantha was ill for four months this year. Samantha missed work during this period, but disabilityinsurance paid $18,000 of disability pay to replace her missed salary. Samantha shares the cost of theinsurance with her employer. This year Samantha's employer paid $2,200 in disability premiums forSamantha as a nontaxable fringe benefit and Samantha paid the remaining $1,100 of premiums from hersalary. What amount of the disability pay must Samantha include in her gross income (rounded to the

nearest whole dollar)?A. $18,000B. $12,000C. $7,000D. $1,100E. Zero - none of the above disability pay is included in gross income

104.Acme published a story about Paul and as a result Paul sued Acme for damage to his reputation,emotional distress, and punitive damages. Paul won an award of $20,000 for damages, $5,500 foremotional distress, and $50,000 for punitive damages. What amount must Paul include in his grossincome?

A. $5,500B. $20,000C. $50,000D. $70,000E. All of the above benefits are included in gross income

105.This year Ann has the following stock transactions. What amount is included in her gross income if Annpaid a $200 selling commission for each sale?


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106.Blake is a limited partner in Kling-On Partners. This year Kling-On reported that Blake's share ofdividend income was $3,700 and his share of municipal interest was $2,750. Early this year Blake founda bundle of $100 bills in the alley outside his apartment. When no one claimed the money, the cash (atotal of $2,400) was returned to Blake. Finally, Blake earned salary of $42,000 but almost $6,500 waswithheld for income taxes and FICA tax. Compute Blake's realized income and gross income.

107.Henry works part-time on auto repairs and restoration projects. This year Henry was paid $5,400 forrepairs he made to his neighbor's auto. Henry's neighbor promised to pay Henry another $2,200 in cashnext year. Henry's brother borrowed $4,100 in cash in December of this year and gave him a negotiablepromissory note for $4,300 due in three months with interest. Henry sold the note in January for $3,500.Finally, Henry restored a car for the football coach. The coach paid him with a pass to next year's footballgames. The pass is worth $750. Compute Henry's gross income assuming that he uses the cash basis ofaccounting.

108.Juan works as a landscaper for local businesses on weekends, and he often provides services in exchangefor property. This year Juan provided lawn-mowing services in exchange for $1,275 of car repairservices, $3,570 of groceries, and a certificate of deposit (C.D.) for $4,050. The C.D. matures next year

with interest. Finally, Juan received a gift card that can only be applied for $850 of clothing at a localmall. Juan has only applied the gift card to purchase $100 of clothing. Compute Juan's gross incomeassuming that he uses the cash basis of accounting.

109.This year Kelsi received a $1,900 refund of state income taxes that she paid last year. Last year Kelsi

claimed itemized deductions of $6,800 and this total included $2,800 of state income taxes. How much ofthe refund, if any, must Kelsi include in gross income if the standard deduction last year was $5,700?


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110.In April of this year Victoria received a $1,400 refund of state income taxes that she paid last year.Last year Victoria claimed itemized deductions of $8,290. Victoria's itemized deductions included stateincome taxes paid of $3,750. How much of the refund, if any, must Victoria include in gross income ifthe standard deduction last year was $5,700?

111.Aubrey and Justin divorced on June 30 of this year. Through June 30 Aubrey earned $62,000 of salary,and Justin earned $45,000. For the year Aubrey reported a total salary of $130,000, and Justin earned atotal salary of $88,000. Aubrey and Justin live in a community property state. How much of the incomeearned by Aubrey and Justin will Justin report on his tax return for this year?

112.Aubrey and Justin divorced on June 30 of this year. Through June 30 Aubrey earned $62,000 of salaryand Justin earned $45,000. For the year Aubrey reported a total salary of $130,000 and Justin earned atotal salary of $88,000. Aubrey and Justin live in a community property state. How much of the incomeearned by Aubrey and Justin will Aubrey report on her tax return for this year?

113.Cyrus is a cash method taxpayer who reports on a calendar-year. Last year Cyrus received salary of$88,000 and at year-end his employer announced that Cyrus would receive an additional year-end bonusof $10,000 in cash and a new TV worth $2,000. Cyrus didn't receive his bonus check until January of thisyear and the TV didn't arrive until March of this year. Determine the amount Cyrus should include in hisgross income for last year.


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114.Kathryn is employed by Acme and they have been very pleased with her performance this year. InDecember Kathryn was granted an extra week off with pay (pay for the week totaled $2,000). In addition,Kathryn was given tickets to a football bowl game worth $800 (Kathryn didn't use the tickets - she hatesfootball). At year-end Kathryn was allowed to order new office furniture and Acme told her to takethe old office furniture home. The office furniture was originally purchased for $7,000, but it was fullydepreciated and only worth about $1,000. Determine the amount Kathryn should include in her grossincome.

115.Charles purchased an annuity from an insurance company that promised to pay him $20,000 per year forthe next 12 years. Charles paid $180,000 for the annuity. How much of the first $20,000 payment shouldCharles include in gross income?

116.This year Larry received the first payment from an annuity that promises to pay him $3,000 per monthfor the rest of his life. The IRS tables indicate that given Larry's age, he should expect to receive 310monthly payments. The cost of the annuity to Larry was $620,000. How much of the first $3,000 paymentshould Larry include in gross income?

117.Desai and Lucy divorced this year. Lucy has custody of their child, Andrea, and under the divorce decreeDesai pays Lucy $120,000 per year. The payments must be made in cash and will cease if Lucy dies orremarries. The payments drop to $100,000 per year once Andrea reaches the age of 18. How much of thepayments should Lucy include in gross income this year?


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118.Terri and Mike are seeking a divorce. Terri and Mike own an art collection worth $357,000 that wouldbelong to Terri. Mike offered to make annual payments of cash to Terri each year for five years if Terryallows Mike to take possession of the art collection. Mike insists however, that the annual paymentsmust cease in the event of Terri's death. What amount of annual payment must Terri demand to makeher indifferent after taxes between taking possession of the ($357,000) art versus collecting the cashpayments? Assume that Terri has a marginal tax rate of 15 percent and Mike's tax rate is 35 percent andignore the time value of money.

119.J.Z. (single taxpayer) is retired and received $10,000 of Social Security benefits this year. How much ofthe $10,000 Social Security benefits is taxable if his only other income was $28,000 of pension income?

120.Wendell is an executive with CFO Tires. At the beginning of this year the corporation loaned Wendell$50,000 at an interest rate of one percent. Wendell would have paid interest of $2,500 this year if theinterest rate on the loan had been set at the prevailing Federal interest rate. Wendell used the funds as adown payment on a vacation home and during the year he paid $500 of interest to CFO. On December31, CFO forgave the loan and remaining interest. What amount of gross income does Wendell recognize

from the loan this year?

121.Bobby and Sissy got married 2.5 years ago. Since that time, they have lived in Bobby's home. Sissy soldher previous home three years ago and excluded her entire gain ($80,000) at that time. Bobby and Sissydecided to move to a bigger home this year. As a result, they sold Bobby's home for $500,000 (original

cost $150,000). How much of the gain from the sale is taxable?


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122.Robert will be working overseas on a temporary assignment beginning on March 1 of this year throughJanuary 31 of next year (347 total days, 306 this year). His salary is $11,000 per month while Robert isoverseas, but only $9,200 per month otherwise. What is the minimum amount of Robert's salary that hemust include in gross income this year? (Round your final answer to the nearest whole dollar amount.)

123.Simon was awarded a scholarship to attend State Law School from Gary Harris & Associates, Attorneysat Law. The scholarship pays Simon's tuition ($7,000 per semester), fees ($500 per semester), and a$4,500 per semester stipend to pay for food and housing. In order to qualify for the stipend, Simon mustwork 10 hours per week at Gary Harris & Associates during the term. How much of the scholarship isSimon required to include in gross income?

124.This fall Angelina plans to attend college. To fund her tuition she cashed in Series EE savings bonds witha redemption value of $24,000 and an original cost of $16,800. Angelina plans on spending $7,200 of theproceeds to pay tuition. The redemption proceeds are Angelina's only source of income. What amount ofinterest must Angelina include in gross income this year?

125.Teresa was married on November 1 of this year and on that day received numerous gifts from herextended family. Her grandfather presented Teresa with a check for $15,000; her uncle gave Teresa 1,000shares of Ford stock worth $10 per share (the uncle purchased the shares for $25 each); and her auntpresented Teresa with $50,000 of corporate bonds (Teresa received $1,500 of semiannual interest fromthe bonds on December 31 of this year). Finally, Teresa's parents paid off $50,000 of her student loans

debt including $2,000 of accrued interest. What amount, if any, must Teresa include in gross income thisyear?


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126.Andres has received the following benefits this year.

Besides these benefits Andres missed work for two months due to an illness. During his illness Andresreceived $6,500 in sick pay from a disability insurance policy. Assume Andres has disability insuranceprovided by his employer as a nontaxable fringe benefit. What amount, if any, must Andres include ingross income this year?

127.This year Joseph joined the board of directors. Besides his director's fees, Joseph received the followingemployee benefits:

The stock bonus consisted of 5,000 shares of Bell stock given to Joseph as compensation. At the timeof the transfer the stock was listed at $4 per share. What amounts, if any, should Joseph include in grossincome this year?

128.Caroline is retired and receives income from a number of sources. The interest payments are from bondsthat Caroline purchased over past years and a disability insurance policy that Caroline purchased after her

retirement. Calculate Caroline's gross income.


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129.Alex is 63 years old and retired. This year Alex won $212,200 in the state lottery. Alex also received$20,000 from an annuity he purchased eight years ago. He purchased the annuity, to be paid annually for15 years, for $157,500. Alex received $10,000 in Social Security benefits for the year. Calculate Alex'sgross income.

130.Vincent is a writer. Last year he began researching a story in Ireland and he resided in various Irishlocations from July 1 of last year through June 30 of this year. While he was in Ireland he earned$135,000 working for a publisher. He was only paid $25,000 for his services last year but he received theremaining $110,000 for his services this year. In April of this year Vincent received a $1,500 refund ofthe $3,600 in state income taxes his employer withheld from his pay last year. Vincent claimed $6,500 initemized deductions last year (the standard deduction for a single filer was 5,700). Vincent wants to electto use the foreign-earned income exclusion to the extent he is eligible. Calculate Vincent's gross incomefor this year. (Round your final answer to the nearest whole dollar amount.)

131.Lisa and Collin are married. Lisa works as an engineer and earns a salary of $116,000. Collin worksat a beauty salon and reported wages of $45,000. Lisa received $500 of interest from corporate bondsand $250 of interest from a municipal bond. Lisa acquired these bonds prior to her marriage to Collin.

Collin's father passed away on April 14. He inherited cash of $50,000 and his baseball card collection,valued at $2,000. As beneficiary of his father's life insurance policy, Collin also received $150,000. Thecouple spent a weekend in Atlantic City in November and came home with gambling winnings of $1,200.Collin was injured in an accident at the salon. He was unable to work for a month, but during this timehe received $5,000 from disability insurance he purchased several years ago. Collin also received $2,000in workman's compensation, and $1,500 from the salon for the emotional trauma he suffered from theaccident. Calculate Lisa and Collin's gross income for this year assuming they will file married joint.


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ch05 Key 1. FALSE 2. TRUE 3. TRUE

4. FALSE 5. TRUE 6. FALSE 7. FALSE 8. FALSE 9. FALSE 10. TRUE 11. FALSE

12. FALSE 13. TRUE 14. TRUE 15. FALSE 16. TRUE 17. TRUE 18. FALSE

19. TRUE 20. FALSE 21. TRUE 22. FALSE 23. TRUE 24. FALSE 25. FALSE 26. FALSE 27. TRUE 28. TRUE 29. FALSE 30. TRUE 31. FALSE 32. TRUE 33. FALSE

34. TRUE 35. FALSE 36. TRUE


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37. FALSE 38. TRUE 39. TRUE 40. TRUE 41. FALSE 42. TRUE

43. TRUE 44. FALSE 45. TRUE 46. TRUE 47. FALSE 48. TRUE 49. A

50. B 51. C 52. E 53. C 54. D 55. C 56. A 57. A

58. D 59. E 60. E 61. B 62. A 63. D 64. B 65. D 66. A 67. B 68. C 69. C 70. B 71. B

72. D 73. C 74. E


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75. A 76. C 77. B 78. A 79. B 80. A

81. C 82. D 83. D 84. C 85. E 86. A 87. D

88. D 89. A 90. A 91. C 92. D 93. C 94. D 95. D

96. E 97. E 98. B 99. C 100. D 101. A 102. B 103. B 104. E Feedback: The increase in value in the IBM stock is not yet realized.105. $2,100. ATT: ($9,500 - $200) - $7,500 = $1,800. Dell ($13,000 - $200) - $12,500 = $300.

Feedback: Realized income is $50,850 but gross income excludes municipal interest.106. $3,700 + $2,750 + $2,400 + $42,000 = $50,850 realized - $2,750 = $48,100 gross income

Feedback: Gross income includes all income unless specifically excluded or deferred and cash basis taxpayers realize income when valuableproperty is received.107. $5,400 + $750 = $6,150


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Feedback: Gross income includes all income unless specifically excluded or deferred and cash basis taxpayers realize income when valuableproperty is received.108. $1,275 + $3,570 + $4,050 + $850 = $9,745

Feedback: The tax benefit is the lesser of the refund ($1,900) or the excess of the itemized deductions above the standard deduction ($6,800-$5,700= $1,100). Hence, Kelsi must include $1,100 of the $1,900 refund in gross income.109. $1,100

Feedback: The tax benefit is the lesser of the refund ($1,400) or the excess of the itemized deductions above the standard deduction ($8,290-$5,700= $2,590). Hence, Victoria must include the entire $1,400 refund in gross income.110. $1,400

Feedback: Under community property systems, the income earned from services by one spouse is treated as though it was earned equally by bothspouses.111. $96,500 = [1/2 x ($62,000 + $45,000)] + ($88,000 - $45,000) = $53,500 + $43,000

Feedback: Under community property systems, the income earned from services by one spouse is treated as though it was earned equally by bothspouses.112. $121,500 = [1/2 x ($62,000 + $45,000)] + ($130,000 - $62,000) = $53,500 + $68,000

Feedback: Under constructive receipt the bonus and the TV are not included in gross income until the year received.113. $88,000

Feedback: Gross income includes the value of property received.114. $2,000 + $800 + $1,000 = $3,800

Feedback: A part of each payment represents a return of the original $180,000 investment and the remainder ($60,000) is income. The originalinvestment ($180,000) divided by the number of years indicates that $15,000 of each payment is a return of capital so the remaining $5,000 isincome.115. $5,000

Feedback: A part of each payment represents a return of the original $620,000 investment. The return of capital is prorated over the expectedpayment period so that each $3,000 monthly payment is composed of $2,000 of return of capital ($620,000/310 payments) and $1,000 of income.116. $3,000 - [$620,000/310] = $1,000

Feedback: The constant payments qualify as "alimony" and should be included in Lucy's gross income. The drop in payments is treated as childsupport because these payments cease upon the happening of a specific contingency related to the child.117. $100,000

Feedback: The annual payments to Terri would be taxable alimony but the property division would be tax-free. Terri wants to net $357,000 eithernontaxable (property distribution) or after-tax (alimony). To determine the total cash payments ($X), we simply solve the following equation: $X(1 - 0.15 tax rate) = $357,000, which simplifies to X = $420,000 before-tax total payments. If Mike pays $420,000 to Terri as alimony, he wouldsave $147,000 ($420,000 x 35%) in taxes and thus, would only be paying $273,000 after taxes ($420,000 payments - $147,000 tax savings) for anart collection worth $357,000.118. $420,000 over 5 years results in annual payments of $84,000.


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Feedback: J.Z.'s modified AGI + 50 percent of his Social Security benefits equals $28,000 + $5,000 (50% x $10,000) = $33,000. Thus, his taxableSocial Security benefits are the lesser of A) $5,000 (50 percent of his Social Security benefits) or B) 50 percent of [$28,000 modified AGI +$5,000 (50% of Social Security benefits) - $25,000] =$4,000. Thus, his taxable Social Security Benefits are $4,000.119. $4,000

Feedback: Wendell must include $2,000 in gross income from the discounted interest rate he received on the loan ($2,500 interest at Federalrate minus $500 he actually was required to pay). Also, Wendell must include the $50,000 in gross income because the discharge of the debt isadditional compensation.120. $52,000

Feedback: Because Bobby meets the ownership test, Bobby and Sissy meet the use test, and Sissy did not claim her exclusion within the previoustwo years, they may exclude the entire gain up to $500,000.121. $0.

Feedback: The maximum foreign earned income exclusion for the year is $92,900. Robert will earn $18,400 during January and February and$110,000 during the remainder of the year. Since he will be spending a total of more than 330 days abroad over a 12-month consecutive period,he is eligible to exclude foreign earned income. However, he will be able to claim only a partial exclusion based upon his time abroad this year[$92,900 full exclusion x 306/365 (days in foreign country/days in year)] and thus he will report gross income of $50,517 ($128,400 - 77,883).122. $50,517

Feedback: The stipend is included in gross income because the terms of the scholarship require Simon to perform services.123. $12,000 per semester

Feedback: Angelina has realized interest of $7,200 but she is only eligible to exclude 30 percent of the interest income because she is only using30 percent of the proceeds for a qualified purpose ($7,200/$24,000). Angelina is not required to phase-out the amount of the exclusion because hermodified gross income is below the threshold for the phase-out of the exclusion.124. $5,040

Feedback: All of the gifts are excludible except for the interest that accrued on the corporate bonds after the date of the transfer.125. $500 (2 months of 6 months interest received)

Feedback: The disability pay of $6,500 is included in gross income because the insurance premiums were paid as a nontaxable fringe benefit.126. $115,920 =$92,000 + $15,000 + $2,420 + $6,500

Feedback: Joseph would report the value of the stock ($20,000) as compensation.127. $239,000 = $204,000 + $20,000 + $15,000

Feedback: Caroline is not taxed on the disability payments because she purchased the insurance. In addition, Caroline's gross income is clearlybelow the Social Security phase-in threshold, so the Social Security benefits are also excluded.128. $12,350 = $5,400 + $2,300 + $1,900 + $2,750

Feedback: The annuity return of capital is ($157,500/15) = $10,500 and the taxable portion is $9,500. Given Alex's income, his Social Securitybenefits are 85 percent taxable (i.e., $10,000 x 85 percent).129. $230,200 = $212,200 + $9,500 + $8,500


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Feedback: $92,900 x 181/365 = $46,068 maximum exclusion. The tax benefit is the lesser of the refund ($1,500) or the excess of the itemizeddeductions above the standard deduction ($6,500-$5,700= $800). Hence, Vincent must include $800 of the $1,500 refund in gross income.130. $64,732 = $110,000 - $46,068 + $800

Feedback: The municipal interest, inheritance and life insurance, disability pay, workman's compensation, and damages are all excluded fromgross income.131. $162,700 = $116,000 + $45,000 + $500 + $1,200


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ch05 Summary Category # of Questions

AACSB: Analytic 70

AACSB: Reflective thinking 61

AICPA: BB Critical Thinking 131

Blooms: Application 80

Blooms: Knowledge 51

Learning Objective: 05-01 Apply the concept of realization and explain when taxpayers recognize gross income. 48

Learning Objective: 05-02 Understand the distinctions between the various sources of income; including income from services and property.

39

Learning Objective: 05-03 Apply basic income exclusion provisions to compute gross income. 44

Level of Difficulty: Easy 45

Level of Difficulty: Hard 28

Level of Difficulty: Medium 58

Spilker - Chapter 05 131

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