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Exam 5: Gross Income: Exclusions

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Question 21

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On January 1,2004,Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to finance the construction of a new plant.On January 1,2014,the company acquired the bonds on the open market for $11,500,000.Assuming that Cardinal Corporation is neither bankrupt nor insolvent,the acquisition and retirement of the bonds results in which of the following:

A) The company must recognize a $500,000 gain.
B) The company can make an election to recognize a $500,000 gain or reduce the company's basis in the plant by $500,000.
C) The company must recognize a $500,000 gain and increase the company's basis in the plant by $500,000.
D) The company can amortize the $500,000 gain,recognizing income over the remaining life of the bonds.
E) None of these.

F) B) and C)
G) B) and D)

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Question 22

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66. Ridge is the manager of a motel. As a condition of his employment, Ridge is required to live in a room on the premises so that he would be there in case of emergencies. Ridge considered this a fringe benefit, since he would otherwise be required to pay $800 per month rent. The room that Ridge occupied normally rented for $70 per night, or $2,100 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Ridge is required to include in gross income.

A) $0.
B) $800 per month.
C) $2,100 per month.
D) $1,890 ($2,100 × .90) .
E) None of these.

F) All of the above
G) B) and E)

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Question 23

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James,a cash basis taxpayer,received the following compensation and fringe benefits in the current year: Salary $66,000 Disability income protection premiums 3,000 Long-term care insurance premiums 4,000 His actual salary was $72,000.He received only $66,000 because his salary was garnished and the employer paid $6,000 on James's credit card debt he owed.The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled.The long-term care insurance is available to all employees and pays $150 per day towards a nursing home or similar facility.What is James's gross income from the above?

Roger is in the 35% marginal tax bracket.Roger's employer has created a flexible spending account for medical and dental expenses that are not covered by the company's health insurance plan.Roger had his salary reduced by $1,200 during the year for contributions to the flexible spending plan.However,Roger incurred only $1,100 in actual expenses for which he was reimbursed.Under the plan,he must forfeit the $100 unused amount.His after-tax cost of overfunding the plan is $65.

Tommy,a senior at State College,receives free room and board as full compensation for working as a resident advisor at the university dormitory.The regular housing contract is $2,000 a year in total,$1,200 for lodging and $800 for meals in the dormitory.Tommy had the option of receiving the meals or $800 in cash.Tommy accepted the meals.What must Tommy include in gross income from working as a resident advisor?

George,an unmarried cash basis taxpayer,received the following amounts during 2014:

Sharon had some insider information about a corporate takeover.She unintentionally informed a friend,who immediately bought the stock in the target corporation.The takeover occurred and the friend made a substantial profit from buying and selling the stock.The friend told Sharon about his stock dealings,and gave her a pearl necklace because she "made it all possible." The necklace was worth $10,000,but she already owned more jewelry than she desired.

A cash basis taxpayer took an itemized deduction of $5,500 for state income tax paid in 2014.His total itemized deductions in 2014 were $18,000.In 2015,he received a $900 refund of his 2014 state income tax.The taxpayer must include the $900 refund in his 2015 Federal gross income in accordance with the tax benefit rule.

The exclusion of interest on educational savings bonds:

Heather's interest and gains on investments for the current year are as follows:

In 2014,Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2015,Theresa collected from his insurance company.She received $15,000 for loss of income,$10,000 for pain and suffering,$50,000 for punitive damages,and $6,000 for medical expenses which she had deducted on her 2014 tax return (the amount in excess of 10% of adjusted gross income).As a result of the above,Theresa's 2015 gross income is increased by $56,000.

Under the Swan Company's cafeteria plan,all full­time employees are allowed to select any combination of the benefits below,but the total received by the employee cannot exceed $8,000 a year. Which of the following statements is true?

Melody works for a company with only 22 employees.Her employer contributed $2,000 to her health savings account (HSA),and the account earned $100 in interest during the year.Melody withdrew only $1,200 to pay medical expenses during the year.Melody is not required to recognize any gross income from the HSA for the year.

Heather is a full­time employee of the Drake Company and participates in the company's flexible spending plan that is available to all employees.Which of the following is correct?

If a tax­exempt bond will yield approximately .65 (1 - .35)times the yield on a taxable bond of equal risk,who benefits from the tax exemption: the Federal government,the state and local governments who issue the bonds,or the investors?

Nicole's employer pays her $150 per month towards the cost of parking near a railway station where Nicole catches the train to work.The employer also pays the cost of the rail pass,$75 per month.Nicole can exclude both of these payments from her gross income.

Cash received by an employee from an employer:

All employees of United Company are covered by a group hospitalization insurance plan,but the employees must pay the premiums ($8,000 for each employee) .None of the employees has sufficient medical expenses to deduct the premiums.Instead of giving raises next year,United is considering paying the employee's hospitalization insurance premiums.If the change is made,the employee's after­tax and insurance pay will:

Kristen's employer owns its building and provides parking space for its employees.The value of the free parking is $150 per month.Karen's employer does not have parking facilities,but reimburses its employee for the cost of parking in a nearby garage,up to $150 per month.

Brooke works part-time as a waitress in a restaurant.For groups of 7 or more customers,the customer is charged 15% of the bill for Brooke's services.For parties of less than 7,the tips are voluntary.Brooke received $11,000 from the groups of 7 or more and $7,000 in voluntary tips from all other customers.Using the customary 15% rate,her voluntary tips would have been only $6,000.Brooke must include $18,000 ($11,000 + $7,000)in gross income.