Speak Corporation, a calendar-year accrual basis taxpayer, sells packages of foreign language lessons to individuals planning to work overseas. In December 2014, it sold and received payment for $600,000 of 24-month lesson packages to be provided evenly t
Answer: C
Page Ref.: I:3-11
Rebecca is the beneficiary of a $500,000 insurance policy on her husband's life. She elects to receive $52,000 per year for 10 years rather than receive the entire amount in a lump sum. Of the amount received each year
A) $2,000 is taxable income.
B) $$50
Answer: A
Explanation:
$500,000 / 10 = $50,000
$52,000 - $50,000 = $2,000
Page Ref.: I:4-5
Britney is beneficiary of a $150,000 insurance policy on her father's life. Upon his death, she may elect to receive the proceeds in five yearly installments of $32,000 or may take the $150,000 lump sum. She elects to take the lump sum payment. What are t
Answer: C
Page Ref.: I:4-5
In December 2014, Max, a cash basis taxpayer, rents an apartment to Kadeem. Max receives both the first and last months' rent totaling $1,800 plus a security deposit of $400. The amount of income reported as taxable in 2014 is
A) $400
B) $1,300
C) $1,800
Answer: C
Page Ref.: I:3-15
Nora's Music Lessons Inc. is a calendar-year taxpayer using the accrual method of accounting. On October 1 of this year, the corporation received $1,200 for a 1-year contract beginning on that date to provide 10 lessons. The company provided six lessons t
Answer: C
Explanation:
$1,200 / 10 = $120
$120 * 6 = $720
Page Ref.: I:3-12
Which of the following statements is false?
A) Under the cash method, prepaid income such as rent is usually taxed when received rather than when earned.
B) Municipal bond interest is taxable.
C) Alimony received by the taxpayer is taxable.
D) Income earn
Answer: B
Page Ref.: I:3-14
Ms. Marple's books and records for 2014 reflect the following information:
-Salary earned this year: $65,000
-Interest on savings account (credited to her account in 2014, withdrawn in 2015): $1,000
-Interest on county bonds earned and collected in 2014:
Answer: A
Explanation:
$65,000 + $1,000 = $66,000
Page Ref.:
Which of the following criteria is not required under the tax concept of income?
A) There must be economic benefit.
B) Income must be realized.
C) Income must be recognized.
D) Cash must be received.
Answer: D
Page Ref.: I:3-3
Which of the following advance payments cannot qualify for income tax deferral?
A) Advance collection for services
B) Advance collection for merchandise
C) Advance collection for rent without associated services
D) Advance collection of rent with associat
Answer: C
Page Ref.: I:3-30
Jacob, who is single, paid educational expenses of $16,000 in the current year. He redeemed Series EE bonds and received principal of $8,000 and interest of $3,000. Jacob has other adjusted gross income of $80,000. The $3,000 exclusion must be reduced by
Answer: B
Explanation: $3,000 x [($80,000 + $3,000 - $76,000) / $15,000]
Page Ref.: I:3-15;
Example I:3-17
Which one of the following fringe benefits allows for discrimination between highly compensated employees and other employees to be be present?
A) No additional cast
B) Qualified employee discounts
C) Recreation and athletic facilities
D) Working conditio
Answer: D
Page Ref.: I:4-13
Examples of income which are constructively received include all of the following except
A) interest credited to a savings account
B) a check received after banking hours
C) a paycheck received from employer, when employer does not have funds in the bank
Answer: C
Page Ref.: I:3-8;
Topic Review I:3-1
All of the following items are excluded from gross income except
A) working condition benefits
B) de minimis benefits
C) no additional cost benefits for employees
D) disability income from an employer-financed policy
Answer: D
Page Ref.: I:4-9;
Example I:4-16
Todd and Hillary, husband and wife, file separate returns. Todd and Hillary live in a community property state that considers separate property income to be community income. Todd's salary is $82,000 and Hillary's salary is $80,000. Hillary receives divid
Answer: A
Explanation: $82,000 + $80,000 = $162,000 / 2 = $81,000 to get each person's income.
$81,000+ ($7,000 / 2) + ($5,000 / 2) + ($10,000 / 2) = $92,000 to get Todd's income.
Page Ref.: I-3-6 & I:3-7;
Example I:3-8
Which of the following statements regarding qualified tuition programs is incorrect?
A) Distributions from income earned by a qualified tuition program are tax-free if used for qualified higher education expenses.
B) Distributions of income are taxed to t
Answer: B
Page Ref.: I:4-7 & I:4-8
Brad suffers from a congestive heart failure and has been admitted to a nursing home where he is expected to spend the remainder of his life. His doctor has certified him as chronically ill. Brad receives $320 per day from his life insurance policy for 10
Answer: C
Explanation: Because he is critically ill, Brad can exclude the total amount as it is less than the daily limitation of $330 established by the law.
Page Ref.: I:4-6;
Example I:4-10
David has been diagnosed with cancer and is expected to live less than 18 months. David is covered by a life insurance policy with $400,000 face amount. David cashes in the policy under a special option and receives 80% of the face amount of $320,000. In
Answer: A
Because David is terminally ill, the amount of the settlement is excludable from gross income.
Page Ref.: I:4-6;
Example I:4-9
Bret carries a $200,000 insurance policy on his life and has paid premiums of $10,000 over the year. Dividends on the policy have totaled $8,500. Each year, Bret has left the dividends with the insurance company. In the current year, the insurance company
Answer: C
Page Ref.: I:4-6
Frasier and Marcella, husband and wife, file separate returns. Frasier and Marcella live in a community property state that considers separate property income to be separate. Frasier's salary is $42,000 and Marcella's salary is $46,000. Marcella receives
Answer: B
Explanation: [($42,000 / 2) + ($46,000 / 2) + $4,000 + ($1,000 / 2) + ($3,200 / 2)] = $50,100
Page Ref.: I:3-7
Example
One of the requirements that must be met in order to defer recognition of income for advance payments for goods is
A) the taxpayer's method of accounting for the sale for tax purposes is the same as the method used for financial reporting purposes.
B) the
Answer: A
Page Ref.: I:3-11