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Exam 4: Gross Income: Concepts and Inclusions

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Question 1

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Turner, Inc., provides group term life insurance to the officers of the corporation only. Janet, a vice-president, received $450,000 of coverage for the year at a cost to Turner, Inc. of $5,600. The Uniform Premiums based on Janet's age) are $15 a year for $1,000 protection. How much of this must Janet include in gross income this year?

A) $0.
B) $2,700.
C) $5,600.
D) $6,000.
E) None of these.

F) None of the above
G) A) and B)

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Question 2

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The financial accounting principle of conservatism is not well-suited to the task of measuring taxable income.

A) True
B) False

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Question 3

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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, 2018, the accrued interest on the bond was $100. On December 31, 2018, Brent collected $400 interest on the bond. Brent must include in gross income the $300 interest earned after the date of the gift.

In some foreign countries, the tax law specifically designates the types of income items that are includible in gross income. How does this approach compare with the U.S. Internal Revenue Code § 61)? What is a major advantage to the approach used in the U.S. tax law?

Debbie is age 67 and unmarried and her only sources of income are $200,000 in taxable interest and $20,000 of Social Security benefits. Debbie's adjusted gross income for the year is:

In the case of a gift loan of less than $100,000, the imputed interest rules apply if the donee has net investment income of over $1,000.

Melissa is a compulsive coupon clipper. She often brags about the time she purchased a cart full of groceries for $5.00, when the cost without coupons would have been $50. Discuss whether Melissa realizes gross income from her coupon clipping.

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2018. Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years. Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th. The daughter received the $2,000 dividend on October 18, 2018.

In 2008, Terry purchased land for $150,000. In 2018, 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.

In January 2018, 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 2018.

Susan purchased an annuity for $200,000. She is to receive $18,000 each year and her life expectancy is 13 years. If Susan collects under the annuity for 14 years, the entire $18,000 received in the 14th year must be included in her gross income.

Nicholas owned stock that decreased in value by $20,000 during the year, but he did not sell the stock. He earned $45,000 salary, but received only $34,000 because $11,000 in taxes were withheld. Nicholas saved $10,000 of his salary and used the remainder for personal living expenses. Nicholas's economic income for the year exceeded his gross income for tax purposes.

The alimony rules applicable to divorces entered into before 2019:

On January 1, 2018, an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 24 months. The amount received for the contract was $2,400. The taxpayer reported $1,200 as income on its financial statement for 2018, and should do the same for its tax return.

At the beginning of 2018, Mary purchased a 3-year certificate of deposit CD) for $8,760. The maturity value of the certificate was $10,000 and it was to yield 4.5%. She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000. Mary must recognize $1,240 of income from the certificate of deposit in 2018, and $3,600 from the Series EE bonds in 2027.

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2014, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2018, she sold the bond for $9,800, which included $200 of accrued interest.

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 for contracts entered into for the current year, the company had $50,000 of unearned revenues from these contracts. The company also had $10,000 in unearned rent income received this year from excess office space leased to other companies. Based on the above, Green must include in gross income for the subsequent tax year:

Norma's income for 2018 is $27,000 from part-time work and $9,000 of Social Security benefits. Norma is not married. A portion of her Social Security benefits must be included in her gross income.

Under the terms of a divorce agreement entered into in 2018, Kim was to pay her husband Tom $7,000 per month in alimony. Kim's payments will be reduced to $3,000 per month when their 9 year-old son becomes 21. The husband has custody of their son. For a twelve-month period, Kim can deduct from gross income and Tom must include in gross income) :

If the alimony recapture rules apply, the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.