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Exam 4: Gross Income

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Question 51

Multiple Choice

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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 ($720/24 = $30 per month) . Cash payment is required at the beginning of the membership period. On July 1, 2016, the company sold a one-year membership and a two-year membership. The company should report as gross income from the two contracts:

A) $1,200 in 2016.
B) $960 in 2016.
C) $180 in 2018.
D) $780 in 2017
E) None of these.

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

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Question 52

Multiple Choice

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On January 5, 2016, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2016, 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 December 2016: ​

A) Tim must include all of the interest in his gross income.
B) Jane must report $1,800 gross income for 2016.
C) Jane reports $1,350 of interest income in 2016, and Tim reports $450 of interest income in 2016.
D) Jane reports $450 of interest income in 2016, and Tim reports $1,350 of interest income in 2016.
E) None of these is correct.

F) A) and E)
G) B) and D)

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Question 53

Multiple Choice

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Theresa, a cash basis taxpayer, purchased a bond on July 1, 2012, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2016, she sold the bond for $9,800, which included $200 of accrued interest.

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 $40,000 ($480,000 annually) and a $180,000 bonus in 5 years when Turner will be age 65.

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.

Mel was the beneficiary of a $45,000 group term life insurance policy on his wife. His wife's employer paid all of the premiums on the policy. Mel used the life insurance proceeds to purchase a United States Government bond, which paid him $2,500 interest during the current year. Mel's Federal gross income from the above is $2,500.

On December 1, 2016, Daniel, an accrual basis taxpayer, collects $12,000 rent for December 2016 and $12,000 for January 2017. Daniel must include the $24,000 in 2016 gross income.

In 2016, Juan, a cash basis taxpayer, was offered $3 million for signing a professional baseball contract. He counter offered that he would receive $900,000 per year for 4 years beginning in 2017. The team accepted the counteroffer. Juan constructively received $3 million in 2016.

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.

Our tax laws encourage taxpayers to ____ assets that have appreciated in value and ____ assets that have declined in value.

Teal company is an accrual basis taxpayer. On December 1, 2016, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2017. Teal delivered the item on January 4, 2017. Teal included the sale in its 2016 income for financial accounting purposes.

Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. The National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000. The bank had made the loan to Gold when it purchased the real estate from Silver, Inc. Pink, Inc., the holder of a mortgage on Gold's building, agreed to accept $40,000 in full payment of the $55,000 due. Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years. As a result of the above, Gold must:

An advance payment received in June 2016 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years.

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 2016, the company collected the following amounts applicable to future services: As a result of the above, Orange Cable should report as gross income:

Margaret made a $90,000 interest-free loan to her son, Adam, who used the money to retire a mortgage on his personal residence and to buy a certificate of deposit. Adam's only income for the year is his salary of $35,000 and $1,400 interest income on the certificate of deposit. The relevant Federal interest rate is 8% compounded semiannually. The loan is outstanding for the entire year. a.​​Based on the above information, what is the effect of the loan on Margaret's gross income for the year? b.​​The facts are the same as above, except you discovered that Margaret had made an additional loan of $15,000 to Adam in the previous year. Adam used the funds to pay his child's private school tuition. What are the effects of the loans on Margaret's gross income?

On January 1, 2016, an accrual basis taxpayer entered into a contract to provide termite inspection service each month for 36 months. The amount received for the contract was $2,400. The taxpayer should report $1,600 of income in 2017.

Perry is in the 33% tax bracket. During 2016, he had the following capital asset transactions: Perry's tax consequences from these gains are as follows:

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

On November 1, 2016, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2016, the corporation had declared the dividend payable to shareholders of record as of November 22, 2016. The dividend was paid on December 15, 2016. The corporation has paid the $1,200 dividend once each year for the past ten years, during which Bob owned the stock. When Dave collected the dividend on December 15, 2016:

On January 1, 2016, Faye gave Todd, her son, a 36-month certificate of deposit she purchased December 31, 2014, for $8,638. Faye gave Todd 1,000 shares of ABC, Inc., on December 2, 2016. The certificate had a maturity value of $10,000 and the yield to maturity was 5%. On November 30, 2016, ABC, Inc., had declared a dividend of $1.00 payable to stockholders of record on December 5th. How much interest and dividends should Todd include in his gross income for 2016?