On a particular Saturday, Tom had planned to paint a room in his house, but his employer gave him the opportunity to work that day. If Tom works, he must hire a painter for $120. For Tom to have a positive cash flow from working and hiring the painter:
a.
b. Tom must earn more than $160 if he is in the 25% marginal tax bracket.
If Tom earns $160, he will have after-tax pay of $120 [(1 - .25)($160)], which is equal to what he must pay the painter.
The tax concept and economic concept of income are in agreement on which of the following:
a. The increase in value of assets held for the entire year should be included in income for the year.
b. The fair rental value of an owner-occupied home should be
c. Rent income for 2018 collected in 2017 is income for 2017.
The realization requirement applies to taxable income, but does not apply to economic income. The prepaid rent income received in 2017 is included in gross income in that year and is an increas
The Blue Utilities Company paid Sue $2,000 for the right to lay an underground electric cable across her property anytime in the future.
a. Sue must recognize $2,000 gross income in the current year regardless of whether the company installed the cable du
d. Sue is not required to recognize gross income from the receipt of the funds, but she must reduce her cost basis in the land by $2,000.
The $2,000 payment results in a reduction of Sue's basis in the land but is not income recognized.
For purposes of determining gross income, which of the following is true?
a. Embezzlement proceeds are not included in the embezzler's gross income because the embezzler has an obligation to repay the owner.
b. A taxpayer who finds a wallet full of money
b. A taxpayer who finds a wallet full of money is required to recognize income even though someone may eventually ask for the return of the money.
Under the claim of right doctrine, the person who finds property, and has free and unrestricted use of the p
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Detroit Corporation sued Chicago Corporation for intentional damage to Detroit's goodwill. Detroit had created its goodwill through providing high-quality services to its customers. Thus, no basis for the goodwill appeared on Detroit's balance
a. The $1,500,000 is taxable because Detroit has no basis in the goodwill.
Detroit had no basis in the goodwill; therefore, the entire amount received is included in gross income.
The annual increase in the cash surrender value of a life insurance policy:
a. Must be included in gross income each year under the original issue discount rules.
b. Is taxed when the individual dies and the heirs collect the insurance proceeds.
c. Is not
c. Is not included in gross income each year because of the substantial restrictions on gaining access to the policy's value.
The income has not been actually received and, because of the restrictions, is not constructively received.
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
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
The constructive receipt doctrine does not apply to the negotiations. Therefore, Turner will include the salary and bonus
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Maroon Corporation expects the 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 s
a. The employee will not be required to recognize the income until it is received, in 2018.
The cash basis employees do not recognize the income until it is actually or constructively received. If the employer will not pay until January 2018, the employee
The annual increase in the cash surrender value of a life insurance policy:
a. Reduces the deduction for life insurance expense.
b. Is taxed according to the original issue discount rules.
c. Is exempt because it is life insurance proceeds.
d. Is not incl
d. Is not included in gross income because the policy must be surrendered to receive the cash surrender value.
The substantial restrictions on gaining access to the policy, the fact the taxpayer must cancel the policy means that the increase in value is n
Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:
a. All of the income must be recognized in the year of maturity by a cash basis taxpayer.
b. The OID will be included in gross income for the year of purchase
d. The interest income will be greater in the third year than in the first year.
The OID is amortized using the effective interest rate method. Because the principal amount is increased each year by the amount of the OID which is amortized, the total inte
With respect to the prepaid income from services, which of the following is true?
a. A cash basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the
b. An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt
"The treatment of prepaid income is the same for tax and finan
Freddy purchased a certificate of deposit for $20,000 on July 1, 2017. The certificate's maturity value in two years (June 30, 2019) is $21,218, yielding 3% before-tax interest.
a. Freddy must recognize $1,218 gross income in 2017.
b. Freddy must recogniz
d. Freddy must recognize $300 (.03 � $20,000 � .5) gross income in 2017.
The 3% interest rate is applied to the $20,000 original investment in the first year $600 ($20,000 � 3%). The certificate was held for only 6 months in 2017; therefore, the interest
The Maroon & Orange Gym, Inc., uses the accrual method of accounting. The corporation sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $480 ($480/12 = $40 per month); a two-year membership costs $720
d. $780 in 2018.
The accrual basis taxpayer can prorate the income from services in the first year, but must include the balance of the income on the contract in the following year. Therefore, for the 24-month contract, all of the income was reported by t
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 2017, the company collected the following amounts applicable to future services:
October 2
c. $222,000 in 2018.
One-eighth (3/24) of the payments on the two-year contracts were earned (1/8 � $144,000 = $18,000) and one-fourth (1/4 � $128,000 = $32,000) of the payments on the one-year contracts were earned in 2017 and is included in 2017 gross i
Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2017. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2018. Ashley was required to pay the first and last month's rent a
a. $1,200 in 2017, if Office Palace is an accrual basis taxpayer.
The company is required to recognize the $1,200 (January 2017 and December 2020 rent) in 2017 because prepaid income from rents is ineligible for deferral. The damage deposit of $1,500 is n
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Teal company is an accrual basis taxpayer. On December 1, 2017, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2018. Teal delivered the item on January 4, 2018. Teal included the sale i
d. Teal must recognize the income in 2017.
Teal received the income before the goods were delivered to the customer. Therefore, when Teal recognizes the income for tax purposes depends upon Teal's financial accounting method.
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On January 5, 2017, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2017, he gave the bond to Jane. The bond pays $1,800 interest on December 31. Tim and Jane are cash basis taxpayers. When Jane collects the interest in Dec
b. Jane reports $1,350 of interest income in 2017, and Tim reports $450 of interest income in 2017.
Tim held the bond for 3 months before he gave it to Jane, who held the bond for the other 9 months that the interest accrued. Therefore, Tim must recognize
With respect to income from services, which of the following is true?
a. A cash basis taxpayer can spread the income from a 24-month service contract over the contract period.
b. The income is always amortized over the period the services will be rendered
d. If an accrual basis taxpayer sells a 36-month service contract on July 1, 2017 for $3,600, the taxpayer's 2017 gross income from the contract is $600.
"A cash basis taxpayer can spread the income from a 24-month service contract over the contract perio
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 hou
d. $10,000.
The prepaid income from services that will be earned in the following year by Green can be deferred under Revenue Procedure 2004-34. However, the prepaid income from rents is not eligible for deferral.
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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.
a. Jerry can defer the interest income until the bon
a. Jerry can defer the interest income until the bond matures in 10 years.
The original issue discount (OID) on the Series EE bonds is not subject to the OID rules. However, the income is interest, rather than gain from the sale of a capital asset.
Harry and Wanda were married in Texas, a community property state, but moved to Virginia, a common law state. The calculation of their income on a joint return:
a. Will not change as a result of changing their state of residence.
b. Will decrease as a res
a. Will not change as a result of changing their state of residence.
All of their income, regardless of whether they live in a common law state or community property state, must be included on their joint return.
As a general rule:
I. Income from property is taxed to the person who owns the property.
II. Income from services is taxed to the person who earns the income.
III. The assignee of income from property must pay tax on the income.
IV. The person who receive
c. Only I and II are true.
III is false because a person who has the right to income (the assignor) but assigns the rights to another must pay the tax on the income. IV is false because, for example, the assignee of income receives the benefit, but the as
Mike contracted with Kram Company, Mike's controlled corporation. Mike was a medical doctor and the contract provided that he would work exclusively for the corporation. No other doctor worked for the corporation. The corporation contracted to perform an
b. Mike's gross income is $6,500.
Mike is an employee of Kram Company. Thus, Kram Company is taxed on the $8,000 income from the services provided by Mike to the patient. Mike is taxed on the $6,500 of compensation received from Kram.
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Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2017. Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the l
d. The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.
The gift of the stock is made prior to the declaration date.
Daniel purchased a bond on July 1, 2017, at par of $10,000 plus accrued interest of $300. On December 31, 2017, Daniel collected the $600 interest for the year. On January 1, 2018, Daniel sold the bond for $10,200.
a. Daniel must recognize $300 interest i
c. Daniel must recognize $300 interest income for 2017 and a $200 gain on the sale of the bond in 2018.
The $600 collected consists of $300 of gross income for the interest earned from July 1 through December 31 and $300 of accrued interest that was purch
On November 1, 2017, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2017, the corporation had declared the dividend payable to shareholders of record as of November 22, 2017. The dividend was paid on December 15, 2017. The corporation
b. Bob must include all of the dividend in his gross income.
Dave received the stock as a gift. According to the Tax Court, when the donor makes the gift after the declaration but prior to the record date, the dividend is included in the gross income of t
Theresa, a cash basis taxpayer, purchased a bond on July 1, 2013, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2017, she sold the bond for $9,800, which included $200 of accrued interest.
a. The
c. Theresa has $200 interest income and a $400 loss from the bond in 2017.
The cost of the bond was $10,000 and the proceeds from the sale were $9,600 ($9,800 - $200 accrued interest). Therefore, Theresa had a $400 ($9,600 - $10,000) loss from the sale, a
Jim and Nora, residents of a community property state, were married in early 2016. Late in 2016 they separated, and in 2017 they were divorced. Each earned a salary, and they received income from community owned investments in all relevant years. They fil
a. In 2017, Nora must report only her salary and one-half of the income from community property on her separate return.
Because Jim and Nora lived apart for the entire year, she does not have to report one-half of Jim's salary on her separate return. She
Under the alimony rules:
a. The income is included in the gross income of the recipient of the payments.
b. To determine whether a cash payment is alimony, one must consult the state laws that define alimony.
c. A person who earns $90,000 and pays $20,000
a. The income is included in the gross income of the recipient of the payments.
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Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership). For tax year 2017, the partnership earned revenue of $900,000 and had operating expenses of $660,000. During the year, Wayne withdrew from th
b. $72,000.
Wayne must report as his gross income 30% of the partnership profits, 30% � ($900,000 - $660,000) = $72,000. The $90,000 is a return of capital. The $30,000 is a contribution to capital.