Question 1

Jay, a single taxpayer, retired from his job as a public school teacher in 2019.He is to receive a retirement annuity of $1,200 each month and his life expectancy is 180 months.He contributed $36,000 to the pension plan during his 35- year career, so his adjusted basis is $36,000.Jay collected 192 payments before he died.What is the correct method for reporting the pension income?

Accepted Answer

A)  Since Jay is no longer working, none of the pension payments must be included in his gross income.
B)  The first $36,000 received is a nontaxable recovery of capital, and all subsequent annuity payments are taxable.
C)  The first $180,000 he receives is taxable and the last $36,000 is a nontaxable recovery of capital.
D)  All of the last 12 payments he received ($14,400)  are taxable.
E)  None of these.F) B) and D)
G) A) and D)

Question 2

Sarah, a majority shareholder in Teal, Inc., made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.

Accepted Answer

A)  Sarah must recognize imputed interest expense and the corporation must recognize imputed interest income.
B)  Sarah must recognize imputed interest income and the corporation must recognize imputed interest expense.
C)  Sarah must recognize imputed dividend income and the corporation may recognize imputed interest expense.
D)  Neither Sarah's nor the corporation's gross income is affected by the loans because no interest was charged.
E)  None of these.F) All of the above
G) A) and B)

Question 3

Jim and Nora, residents of a community property state, were married in early 2018.Late in 2018 they separated, and in 2019 they divorced.Each earned a salary, and they received income from community-owned investments in all relevant years.They filed separate returns in 2018 and 2019.

Accepted Answer

A)  In 2019, Nora must report only her salary and one-half of the income from community property on her separate return.
B)  In 2019, Nora must report on her separate return one-half of the Jim and Nora salary and one-half of the community property income.
C)  In 2019 Nora must report on her separate return one-half of the Jim and Nora salary for the period they were married as well as one-half of the community property income and her income earned after the divorce.
D)  In 2019, Nora must report only her salary on her separate return.
E)  None of these.F) D) and E)
G) C) and E)

Question 4

The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased.

Accepted Answer

A) True 
 B)False

Question 5

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.Son had $1,600 interest income from a certificate of deposit for the year.Father is not required to impute interest income.

Accepted Answer

A) True 
 B)False

Question 6

Under the original issue discount (OID)  rules as applied to a three-year certificate of deposit:

Accepted Answer

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.
C)  The interest income will be the same each year.
D)  The interest income will be greater in the third year than in the first year.
E)  None of these is correct.F) A) and C)
G) A) and B)

Question 7

In 2019, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract.He counteroffered that he would receive $900,000 per year for four years beginning in 2020.The team accepted the counteroffer.Juan constructively received $3 million in 2019.

Accepted Answer

A) True 
 B)False

Question 8

The amount of Social Security benefits received by an individual that he or she must include in gross income:

Accepted Answer

A)  Is computed in the same manner as an annuity [exclusion = (cost/expected return)  × amount received].
B)  May not exceed the portion contributed by the employer.
C)  May not exceed 50% of the Social Security benefits received.
D)  May be zero or as much as 85% of the Social Security benefits received, depending upon the taxpayer's Social Security benefits and other income.
E)  None of these.F) All of the above
G) A) and B)

Question 9

Freddy purchased a certificate of deposit for $20,000 on July 1, 2019.The certificate's maturity value in two years (June 30, 2021)  is $21,218, yielding 3% before-tax interest.

Accepted Answer

A)  Freddy must recognize $1,218 gross income in 2019.
B)  Freddy must recognize $1,218 gross income in 2021.
C)  Freddy must recognize $600 (0.03 × $20,000)  gross income in 2021.
D)  Freddy must recognize $300 (0.03 × $20,000 × 0.5)  gross income in 2019.
E)  None of these.F) A) and E)
G) B) and E)

Question 10

Terri purchased an annuity for $100,000.She was to receive $10,000 per year and her life expectancy was 20 years. She died after receiving eight payments.Terri's final return should reflect a loss of $20,000 ($100,000 - $80,000).

Accepted Answer

A) True 
 B)False

Question 11

Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest.In December, he collected $500 interest from the bond.Tom's interest income from the bond for the year is $500.

Accepted Answer

A) True 
 B)False

Question 12

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:

Accepted Answer

A)  Will increase as a result of changing their state of residence.
B)  Will decrease as a result of changing their state of residence.
C)  Will not change as a result of changing their state of residence.
D)  Will not be permitted.
E)  None of these.F) B) and C)
G) C) and D)

Question 13

Under the terms of a divorce agreement entered into in 2017, Ron is to pay his former wife Jill $10,000 per month. The payments are to be reduced to $7,000 per month when their 15-year old child reaches age 18.During the current year, Ron paid $120,000 under the agreement.Assuming all of the other conditions for alimony are satisfied, Ron can deduct from gross income (and Jill must include in gross income)  as alimony:

Accepted Answer

A)  $120,000.
B)  $84,000.
C)  $36,000.
D)  $0.
E)  None of these is correct.F) B) and E)
G) A) and C)

Question 14

With respect to income from services, which of the following is true?

Accepted Answer

A)  An accrual basis taxpayer will always recognize the income over the period the services will be rendered.
B)  A cash basis taxpayer can spread the income from a 24-month service contract over the contract period.
C)  If an accrual basis taxpayer sells a 36-month service contract on July 1, 2019 for $3,600, the taxpayer's 2019 gross income from the contract is $600.
D)  If an accrual basis taxpayer sells a 24-month service contract on July 1, 2019, one-half (12/24)  the income is recognized in 2020.
E)  None of these.F) B) and D)
G) None of the above

Question 15

In 2019 Todd purchased an annuity for $150,000.The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months.Which of the following is correct?

Accepted Answer

A)  Todd is not required to recognize any income until he has collected 60 payments (60 × $2,500 = $150,000) .
B)  If Todd collects 20 payments and then dies in 2019, Todd's estate should amend his tax returns for 2019 and 2020 and eliminate all of the reported income from the annuity for those years.
C)  For each $2,500 payment received in the first year, Todd must include $1,000 in gross income.
D)  For each $2,500 payment received in the first year, Todd must include $1,500 in gross income.
E)  None of these.F) A) and B)
G) C) and E)

Question 16

Barney painted his house, which saved him $3,000.According to the realization requirement, Barney must recognize
$3,000 of income.

Accepted Answer

A) True 
 B)False

Question 17

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2018.The dividend checks were mailed on December 31, 2018.Ed, a cash basis shareholder, received the dividend check on January 2, 2019.Ed cannot delay reporting the income from the dividend until 2019.

Accepted Answer

A) True 
 B)False

Question 18

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

Accepted Answer

A) True 
 B)False

Question 19

Tim and Janet divorced in 2018.Their only marital property was a personal residence with a value of $120,000 and cost of $50,000.Under the terms of the divorce agreement, Janet would receive the house and would pay Tim $15,000 each year for five years, or until Tim's death, whichever should occur first.Tim and Janet lived apart when the payments were made to Tim.The divorce agreement did not contain the word "alimony."

Accepted Answer

A)  Tim must recognize a $35,000 [$60,000 - 1/2($50,000) ] gain on the sale of his interest in the house.
B)  Tim does not recognize any income from these transactions.
C)  Janet is not allowed any alimony deductions.
D)  Janet is allowed to deduct $15,000 each year for alimony paid.
E)  None of these.F) A) and C)
G) B) and D)

Question 20

George and Erin divorced in 2020, and George is required to pay Erin $20,000 of alimony each year.George earns
$75,000 a year.Erin is required to include the alimony payments in gross income although George earned the income.

Accepted Answer

A) True 
 B)False

Exam 4: Gross Income: Concepts and Inclusions

Correct Answer
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When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

Correct Answer
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Jim and Nora, residents of a community property state, were married in early 2018.Late in 2018 they separated, and in 2019 they divorced.Each earned a salary, and they received income from community-owned investments in all relevant years.They filed separate returns in 2018 and 2019.

Correct Answer
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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:

Correct Answer
verified

George and Erin divorced in 2020, and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is required to include the alimony payments in gross income although George earned the income.

Correct Answer
verified

Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest.In December, he collected $500 interest from the bond.Tom's interest income from the bond for the year is $500.

Correct Answer
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In 2019, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract.He counteroffered that he would receive $900,000 per year for four years beginning in 2020.The team accepted the counteroffer.Juan constructively received $3 million in 2019.

Correct Answer
verified

Correct Answer
verified

In 2019 Todd purchased an annuity for $150,000.The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months.Which of the following is correct?

Correct Answer
verified

The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased.

Correct Answer
verified

The amount of Social Security benefits received by an individual that he or she must include in gross income:

Correct Answer
verified

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.Son had $1,600 interest income from a certificate of deposit for the year.Father is not required to impute interest income.

Correct Answer
verified

Freddy purchased a certificate of deposit for $20,000 on July 1, 2019.The certificate's maturity value in two years (June 30, 2021) is $21,218, yielding 3% before-tax interest.

Correct Answer
verified

Sarah, a majority shareholder in Teal, Inc., made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.

Correct Answer
verified

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

Correct Answer
verified

Correct Answer
verified

Barney painted his house, which saved him $3,000.According to the realization requirement, Barney must recognize $3,000 of income.

Correct Answer
verified

With respect to income from services, which of the following is true?

Correct Answer
verified

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2018.The dividend checks were mailed on December 31, 2018.Ed, a cash basis shareholder, received the dividend check on January 2, 2019.Ed cannot delay reporting the income from the dividend until 2019.

Correct Answer
verified

Terri purchased an annuity for $100,000.She was to receive $10,000 per year and her life expectancy was 20 years. She died after receiving eight payments.Terri's final return should reflect a loss of $20,000 ($100,000 - $80,000).

Correct Answer
verified

Exam 4: Gross Income: Concepts and Inclusions

Correct AnswerverifiedShow Answer

When stock is sold after the date of declaration but before the record date, the buyer must recognize as income the dividend declared.

Correct AnswerverifiedShow Answer

Jim and Nora, residents of a community property state, were married in early 2018.Late in 2018 they separated, and in 2019 they divorced.Each earned a salary, and they received income from community-owned investments in all relevant years.They filed separate returns in 2018 and 2019.

Correct AnswerverifiedShow Answer

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:

Correct AnswerverifiedShow Answer

George and Erin divorced in 2020, and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is required to include the alimony payments in gross income although George earned the income.

Correct AnswerverifiedShow Answer

Tom, a cash basis taxpayer, purchased a bond on March 31 for $10,000, plus $100 accrued interest.In December, he collected $500 interest from the bond.Tom's interest income from the bond for the year is $500.

Correct AnswerverifiedShow Answer

In 2019, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract.He counteroffered that he would receive $900,000 per year for four years beginning in 2020.The team accepted the counteroffer.Juan constructively received $3 million in 2019.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

In 2019 Todd purchased an annuity for $150,000.The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months.Which of the following is correct?

Correct AnswerverifiedShow Answer

The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased.

Correct AnswerverifiedShow Answer

The amount of Social Security benefits received by an individual that he or she must include in gross income:

Correct AnswerverifiedShow Answer

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.Son had $1,600 interest income from a certificate of deposit for the year.Father is not required to impute interest income.

Correct AnswerverifiedShow Answer

Freddy purchased a certificate of deposit for $20,000 on July 1, 2019.The certificate's maturity value in two years (June 30, 2021) is $21,218, yielding 3% before-tax interest.

Correct AnswerverifiedShow Answer

Sarah, a majority shareholder in Teal, Inc., made a $200,000 interest-free loan to the corporation.Sarah is not an employee of the corporation.

Correct AnswerverifiedShow Answer

Under the original issue discount (OID) rules as applied to a three-year certificate of deposit:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Barney painted his house, which saved him $3,000.According to the realization requirement, Barney must recognize $3,000 of income.

Correct AnswerverifiedShow Answer

With respect to income from services, which of the following is true?

Correct AnswerverifiedShow Answer

ABC Corporation declared a dividend for taxpayers of record as of December 24, 2018.The dividend checks were mailed on December 31, 2018.Ed, a cash basis shareholder, received the dividend check on January 2, 2019.Ed cannot delay reporting the income from the dividend until 2019.

Correct AnswerverifiedShow Answer

Terri purchased an annuity for $100,000.She was to receive $10,000 per year and her life expectancy was 20 years. She died after receiving eight payments.Terri's final return should reflect a loss of $20,000 ($100,000 - $80,000).

Correct AnswerverifiedShow Answer

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