Tax MCQ: March 2019

Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable for the three years the machine was used are as follows:

Cost Recovery Allowed Cost Recovery Allowable
Year 1 $16,000 $ 8,000
Year 2 9,600 12,800
Year 3 5,760 7,680

If Tara sells the machine after three years for $15,000, how much gain should she recognize?

a. $3,480
b. $6,360
c. $9,240
d. $11,480
e. None of these

Answer: d

On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of the conversion, the machine was worth $90,000. Five years ago Tab purchased the machine for $120,000. The machine is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery?

a. $70,000
b. $90,000
c. $120,000
d. $140,000
e. None of these

Answer: b

Which of the following assets would be subject to cost recovery?

a. A painting by Picasso hanging on a doctor's office wall.
b. An antique vase in a doctor's waiting room.
c. Landscaping around the doctor's office.
d. a., b., and c.
e. None of these.

Answer: c

Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in January of the following year. No assets were purchased in the following year. Grape Corporation's cost recovery would begin:

a. In the current year using a mid-quarter convention.
b. In the current year using a half-year convention.
c. In the following year using a mid-quarter convention.
d. In the following year using a half-year convention.
e. None of these.

Answer: d

Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt.

a. If Flora had borrowed the funds from a bank, the bank accepts $85,000 in full payment of the debt, and Flora is solvent after the transfer, Flora does not recognize income, but the company must reduce the cost of the land by $10,000.
b. If Flora had borrowed the funds from a bank, and the bank accepts $85,000 in full payment of the debt, when the value of the property is $80,000, Flora can deduct a loss.
c. If Flora transfers to the bank other property, with a basis of $90,000 and a fair market value of $95,000, in full payment of the debt, Flora can recognize a $5,000 loss.
d. If the $95,000 is owed to the person who sold the property to Flora, and the creditor accepts $85,000 in full payment for the debt, Flora does not recognize gain but must reduce its basis in the land.
e. None of these.

Answer: d

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.

Answer: a

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:

a. Include $40,000 in gross income.
b. Reduce the basis in its assets by $40,000.
c. Include $25,000 in gross income and reduce its basis in its assets by $15,000.
d. Include $15,000 in gross income and reduce its basis in the building by $25,000.
e. None of these.

Answer: c

Hazel, a solvent individual but a recovering alcoholic, embezzled $6,000 from her employer. In the same year that she embezzled the funds, her employer discovered the theft. Her employer did not fire her and told her she did not have to repay the $6,000 if she would attend Alcoholics Anonymous. Hazel met the conditions and her employer canceled the debt.

a. Hazel did not realize any income because her employer made a gift to her.
b. Hazel must include $6,000 in gross income from discharge of indebtedness.
c. Hazel must include $6,000 in gross income under the tax benefit rule.
d. Hazel may exclude the $6,000 from gross income because the debt never existed.
e. None of these.

Answer: b

Harold bought land from Jewel for $150,000. Harold paid $50,000 cash and gave Jewel an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Jewel began having financial difficulties. To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal.

a. Harold must recognize $20,000 ($80,000 - $60,000) of gross income.
b. Harold is not required to recognize gross income, but must reduce his cost basis in the land to $130,000.
c. Harold is not required to recognize gross income, since he paid the debt before it was due.
d. Jewel must recognize gross income of $20,000 ($80,000 - $60,000) from discharge of the debt.
e. None of these.

Answer: B

Tonya is a cash basis taxpayer. In 2014, she paid state income taxes of $8,000. In early 2015, she filed her 2014 state income tax return and received a $900 refund.

a. If Tonya itemized her deductions in 2014 on her Federal income tax return, she should amend her 2014 return and reduce her itemized deductions by $900.
b. If Tonya itemized her deductions in 2014on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2015 tax return.
c. If Tonya itemized her deductions in 2014 on her Federal income tax return, she must amend her 2014 Federal income tax return and use the standard deduction.
d. If Tonya itemized her deductions in 2014 on her Federal income tax return and her itemized deductions exceeded the standard deduction by more than $900, she must recognize $900 income in 2015 under the tax benefit rule.
e. None of these.

Answer: D

In December 2014, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2015 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2014 tax return. He had $150,000 of taxable income that year. On June 30, 2015, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above:

a. Todd should amend his 2014 return and claim $500 less insurance expense.
b. Todd should include the $500 in 2015 gross income in accordance with the tax benefit rule.
c. Todd should add the $500 to his sales proceeds from the building.
d. Todd should include the $500 in 2015 gross income in accordance with the claim of right doctrine.
e. None of these.

Answer: B

Martha participated in a qualified tuition program for the benefit of her son. She invested $6,000 in the fund. Four years later her son withdrew $8,000, the entire balance in the program, to pay his college tuition.

a. Martha is not required to include the $2,000 ($8,000 - $6,000) in her gross income when the funds are used to pay the tuition.
b. Martha's son must include the $2,000 ($8,000 - $6,000) in his gross income when the funds are used to pay the tuition.
c. Martha must include $8,000 in her gross income.
d. Martha's son must include $8,000 in his gross income.
e. None of these.

Answer: a

The exclusion of interest on educational savings bonds:

a. Applies only to savings bonds owned by the child.
b. Applies to parents who purchase bonds for which the proceeds are used for their child's education.
c. Means that the child must include the interest in income if the bond is owned by the parent.
d. Does apply even if used to pay for room and board.
e. None of these.

Answer: b

Assuming a taxpayer qualifies for the exclusion treatment, the interest income on educational savings bonds:

a. Is gross income to the person who purchased the bond in the year the interest is earned.
b. Is gross income to the student in the year the interest is earned.
c. Is included in the student's gross income in the year the savings bonds are sold or redeemed to pay educational expenses.
d. Is not included in anyone's gross income if the proceeds are used to pay college tuition.
e. None of these.

Answer: d

Stuart owns 300 shares of Turquoise Corporation stock and 2,000 shares of Blue Corporation stock. During the year, Stuart received 150 shares of Turquoise as a result of a 1 for 2 stock split. The value of the shares received was $4,800. Stuart also received 100 shares of Blue Corporation stock as a result of a 5% stock dividend. Stuart did not have the option of receiving cash from Blue. The additional shares he received had a value of $7,200. Stuart's gross income from the receipt of the additional Turquoise and Blue shares is:

a. $0.
b. $4,800.
c. $7,200.
d. $12,000.
e. None of these.

Answer: a

What amount should George report as gross income from dividends and interest for 2014?

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

Interest on savings accounts $2,000
Interest on a State tax refund 600
Interest on City of Salem school bonds 350
Interest portion of proceeds of a 5% bank certificate of deposit purchased on July 1, 2013, and matured on June 30, 2014 250
Dividends on USG common stock 300

What amount should George report as gross income from dividends and interest for 2014?

a. $2,300.
b. $2,550.
c. $3,150.
d. $3,500.
e. None of these.

Answer: c

Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account. What amount of interest income should they report on their joint income tax return?

Doug and Pattie received the following interest income in the current year:

Savings account at Greenbacks Bank $4,000
United States Treasury bonds 250
Interest on State of Iowa bonds 200
Interest on Federal tax refund 150
Interest on state income tax refund 75

Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account. What amount of interest income should they report on their joint income tax return?

a. $4,775.
b. $4,675.
c. $4,575.
d. $4,300.
e. None of these.

Answer: c

Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 3.5% interest and the interest is not subject to a 5% state tax. But she is interested in earning a higher return for comparable risk.

a. If she buys a corporate bond that pays 6% interest, her after-tax rate of return will be less than if she purchased the York County school bond.
b. If she buys a U.S. government bond paying 5%, her after-tax rate of return will be less than if she purchased the York County school bond.
c. If she buys a common stock paying a 4% dividend, her after-tax rate of return will be higher than if she purchased the York County school bond.
d. All of these are correct.
e. None of these are correct.

Answer: b

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

Interest on Madison County school bonds $600
Interest on U.S. government bonds 700
Interest on a Federal income tax refund 200
Gain on the sale of Madison County school bonds 500
Heather's gross income from the above is:

a. $2,000.
b. $1,800.
c. $1,400.
d. $1,300.
e. None of these.

Answer: c

In the case of interest income from state and Federal bonds:

a. Interest on United States government bonds received by a state resident can be subject to that state's income tax.
b. Interest on United States government bonds is subject to Federal income tax.
c. Interest on bonds issued by State A received by a resident of State B cannot be subject to income tax in State B.
d. All of these are correct.
e. None of these are correct.

Answer: b

Louise works in a foreign branch of her employer's business. She earned $5,000 per month throughout the relevant period.

a. If Louise worked in the foreign branch from May 1, 2013 until October 31, 2014, she may exclude $40,000 from gross income in 2013 and exclude $50,000 in 2014.
b. If Louise worked in the foreign branch from May 1, 2013 until October 31, 2014, she cannot exclude anything from gross income because she was not present in the country for 330 days in either year.
c. If Louise began work in the foreign country on May 1, 2013, she must work through November 30, 2014 in order to exclude $55,000 from gross income in 2014 but none in 2013.
d. Louise will not be allowed to exclude any foreign earned income because she made less than $97,600.
e. None of these.

Answer: a

A U.S. citizen worked in a foreign country for the period July 1, 2013 through August 1, 2014. Her salary was $10,000 per month. Also, in 2013 she received $5,000 in dividends from foreign corporations (not qualified dividends). No dividends were received in 2014. Which of the following is correct?

a. The taxpayer cannot exclude any of the income because she was not present in the foreign country more than 330 days in either 2013 or 2014.
b. The taxpayer can exclude a portion of the salary from U.S. gross income in 2013 and 2014, and all of the dividend income.
c. The taxpayer can exclude from U.S. gross income $60,000 salary in 2013, but in 2014 the taxpayer will exceed the twelve month limitation and, therefore, all of the 2014compensation must be included in gross income. All of the dividends must be included in 2013 gross income.
d. The taxpayer must include the dividend income of $5,000 in 2013gross income, but the taxpayer can exclude a portion of the compensation income from U.S. gross income in 2013 and 2014.
e. None of these.

Answer: d

A company has a medical reimbursement plan for officers that covers all costs that the insurer will not pay. However, for all employees who are not officers, the medical reimbursement plan applies only after the employee has paid $1,000 from his or her own funds. An officer incurred $1,500 in medical expenses and was reimbursed for that amount. An hourly worker also incurred $1,500 in medical expense and was reimbursed $500.

a. Both employees must include all benefits received in gross income.
b. The officer must include $500 in gross income.
c. The officer must include $1,500 in gross income.
d. The hourly employee must include $1,000 in gross income.
e. None of these.

Answer: c

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.

a. Kristen and Karen must recognize gross income from the parking services.
b. Kristen can exclude the employer provided parking from gross income, but Karen must include her reimbursement in gross income.
c. Kristen must include the value of the employer provided parking from her gross income, but Karen can exclude her reimbursement from gross income.
d. Neither Kristen nor Karen is required to include the cost of parking in gross income.
e. None of these.

Answer: d

Evaluate the following statements: I. De minimis fringe benefits are those that are so immaterial that accounting for them is impractical. II. De minimis fringe benefits are subject to strict anti-discrimination requirements. III. Generally, a fringe benefit of less than $50 is considered de minimis and can be excluded from gross income.

Evaluate the following statements:
I. De minimis fringe benefits are those that are so immaterial that accounting for them is impractical.
II. De minimis fringe benefits are subject to strict anti-discrimination requirements.
III. Generally, a fringe benefit of less than $50 is considered de minimis and can be excluded from gross income.

a. Only I is true.
b. Only III is true.
c. Only I and III are true.
d. I, II, and III are true.
e. None of these.

Answer: a

The de minimis fringe benefit:

a. Exclusion applies only to property received by the employee.
b. Can be provided on a discriminatory basis.
c. Exclusion is limited to $250 per year.
d. Exclusion applies to employee discounts.
e. None of these.

Answer: b

The Perfection Tax Service gives employees $12.50 as "supper money" when they are required to work overtime, approximately 25 days each year. The supper money received:

a. Must be included in the employee's gross income.
b. Must be included in the employee's gross income if the employee does not spend it for supper.
c. May be excluded from the employee's gross income as a "noadditional-cost" fringe benefit.
d. May be excluded from the employee's gross income as a de minimis fringe benefit.
e. None of these.

Answer: d

The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes, provided the privilege is not abused. Ed is the president of a civic organization and uses the copier to make several copies of the organization's agenda for its meetings. The copies made during the year would have cost $150 at a local office supply.

a. Ed must include $150 in his gross income.
b. Ed may exclude the cost of the copies as a no-additional cost fringe benefit.
c. Ed may exclude the cost of the copies only if the organization is a client of Mauve.
d. Ed may exclude the cost of the copies as a de minimis fringe benefit.
e. None of these.

Answer: d

Peggy is an executive for the Tan Furniture Manufacturing Company. Peggy purchased furniture from the company for $9,500, the price Tan ordinarily would charge a wholesaler for the same items. The retail price of the furniture was $12,500, and Tan's cost was $9,000. The company also paid for Peggy's parking space in a garage near the office. The parking fee was $600 for the year. All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy. However, the company does not pay other employees' parking fees. Peggy's gross income from the above is:

a. $0.
b. $600.
c. $3,500.
d. $4,100.
e. None of these.

Answer: a

The Royal Motor Company manufactures automobiles. Non-management employees of the company can buy a new automobile for Royal's cost plus 2%. The automobiles are sold to dealers at cost plus 20%. Generally, management employees of Local Dealer, Inc., are allowed to buy a new automobile from the company at the dealer's cost. Which of the following statements is correct?

a. The non-management employees who buy automobiles at a discount are not required to recognize income from the purchase.
b. None of the employees who take advantage of the fringe benefits described above are required to recognize income.
c. Employees of Royal are required to recognize as gross income 18% (20% - 2%) of the cost of the automobile purchased.
d. All of these.
e. None of these.

Answer: a

Employees of the Valley Country Club are allowed to use the golf course without charge before and after working hours on Mondays, when the number of players on the course is at its lowest. Tom, an employee of the country club played 40 rounds of golf during the year at no charge when the non-employee charge was $20 per round.

a. Tom must include $800 in gross income.
b. Tom is not required to include anything in gross income because it is a de minimis fringe benefit.
c. Tom is not required to include the $800 in gross income because the use of the course was a gift.
d. Tom is not required to include anything in gross income because this is a "noadditionalcost service" fringe benefit.
e. None of these.

Answer: d

Heather is a full time 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?

a. Heather reduced her salary by $1,200, actually spent $1,500, and received only $1,200 as reimbursement for her medical expenses. Heather's gross income will be reduced by $1,500.
b. Heather reduced her salary by $1,200, and received only $900 as reimbursement for her actual medical expenses. She is not refunded the $300 remaining balance, but her gross income is reduced by $1,200.
c. Heather reduced her salary by $1,200, and received only $800 as reimbursement for her medical expenses. She is not refunded the $400. Her gross income is reduced by $800.
d. Heather reduced her salary by $1,200, and received only $900 as reimbursement for her medical expenses. She forfeits the $300. Her gross income is reduced by $300.
e. None of these.

Answer: b

Under the Swan Company's cafeteria plan, all full time employees are allowed to select any combination of the benefits below, but the total received by the employee cannot exceed $8,000 a year.

I. Group medical and hospitalization insurance for the employee, $3,600 a year.
II. Group medical and hospitalization insurance for the employee's spouse and children, $1,200 a year.
III. Child-care payments, actual cost but not more than $4,800 a year.
IV. Cash required to bring the total of benefits and cash to $8,000.

Which of the following statements is true?

a. Sam, a full-time employee, selects choices II and III and $2,000 cash. His gross income must include the $2,000.
b. Paul, a full time employee, elects to receive $8,000 cash because his wife's employer provided these same insurance benefits for him. Paul is not required to include the $8,000 in gross income.
c. Sue, a full-time employee, elects to receive choices I, II and $3,200 for III. Sue is required to include $3,200 in gross income.
d. All of these.
e. None of these.

Answer: a

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?

a. All items can be excluded from gross income as a scholarship.
b. The meals must be included in gross income.
c. The meals may be excluded because he did not receive cash.
d. The lodging must be included in gross income because it was compensation for services.
e. None of these.

Answer: b The meals must be included in gross income.

Adam repairs power lines for the Egret Utilities Company. He is generally working on a power line during the lunch hour. He must eat when and where he can and still get his work done. He usually purchases something at a convenience store and eats in his truck. Egret reimburses Adam for the cost of his meals.

a. Adam must include the reimbursement in his gross income.
b. Adam can exclude the reimbursement from his gross income since the meals are provided for the convenience of the employer.
c. Adam can exclude the reimbursement from his gross income because he eats the meals on the employer's business premises (the truck).
d. Adam may exclude from his gross income the difference between what he paid for the meals and what it would have cost him to eat at home.
e. None of these.

Answer: a

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.

Answer: a $0

An employee can exclude from gross income the value of meals provided by his or her employer whenever:

a. The meal is not extravagant.
b. The meals are provided on the employer's premises for the employer's convenience.
c. There are no places to eat near the work location.
d. The meals are provided for the convenience of the employee.
e. None of these.

Answer: b The meals are provided on the employer's premises for the employer's convenience.

The First Chance Casino has gambling facilities, a bar, a restaurant, and a hotel. All employees are allowed to obtain food from the restaurant at no charge during working hours. In the case of the employees who operate the gambling facilities, bar, and restaurant, 60% of all of Casino's employees, the meals are provided for the convenience of the Casino. However, the hotel workers, demanded equal treatment and therefore were also allowed to eat in the restaurant at no charge while they are at work. Which of the following is correct?

a. All the employees are required to include the value of the meals in their gross income.
b. Only the restaurant employees may exclude the value of their meals from gross income.
c. Only the employees who work in gambling, the bar, and the restaurant may exclude the meals from gross income.
d. All of the employees may exclude the value of the meals from gross income.
e. None of these.

Answer: d

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?

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?

a. $66,000.
b. $72,000.
c. $73,000.
d. $75,000.
e. None of these.

Answer: b

The plant union is negotiating with the Eagle Company, which is on the verge of bankruptcy. Eagle has offered to pay for the employees' hospitalization insurance in exchange for a wage reduction. The employees each currently pay premiums of $4,000 a year for their insurance.

a. If an employee's wages are reduced by $5,000 and the employee is in the 28% marginal tax bracket, the employee would benefit from the offer.
b. If an employee's wages are reduced by $4,000 and the employee is in the 15% marginal tax bracket, the employee would benefit from the offer.
c. If an employee's wages are reduced by $6,000 and the employee is in the 35% marginal tax bracket, the employee would benefit from the offer.
d. a., b., and c.
e. None of these.

Answer: d

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 after tax and insurance pay will:

a. Decrease by the same amount for all employees.
b. Increase more for the lower paid employees (10% and 15% marginal tax bracket).
c. Increase more for the higher income (35% marginal tax bracket) employees.
d. Increase by the same amount for all employees.
e. None of these.

Answer: c

Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each year, the employer contributes $1,500 to each employee's health savings account (HSA). Matilda's employer made the contributions in 2014 and 2015, and the account earned $100 interest in 2015. At the end of 2015, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2015 gross income:

a. $0.
b. $100.
c. $1,600.
d. $3,100.
e. None of these.

Answer: a

Julie was suffering from a viral infection that caused her to miss work for 90 days. During the first 30 days of her absence, she received her regular salary of $8,000 from her employer. For the next 60 days, she received $12,000 under an accident and health insurance policy purchased by her employer. The premiums on the health insurance policy were excluded from her gross income. During the last 30 days, Julie received $6,000 on an income replacement policy she had purchased. Of the $26,000 she received, Julie must include in gross income:

a. $0.
b. $6,000.
c. $8,000.
d. $14,000.
e. $20,000.

Answer: e $20,000

The exclusion for health insurance premiums paid by the employer applies to:

a. Only current employees and their spouses.
b. Only current employees and their spouses and dependents.
c. Only current employees and their disabled spouses.
d. Present employees, retired former employees, and their spouses and dependents.
e. None of these.

Answer: d

Olaf was injured in an automobile accident and received $25,000 for his physical injury, $50,000 for his loss of income, and $10,000 punitive damages. As a result of the award, the amount Olaf must include in gross income is:

a. $10,000.
b. $50,000.
c. $60,000.
d. $85,000.
e. None of these.

Answer: a

Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award:

a. $0.
b. $100,000.
c. $120,000.
d. $270,000.
e. None of these.

Answer: d

Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income:

a. $700,000.
b. $500,000.
c. $490,000 [($700,000/$1,000,000) × $700,000].
d. $0.
e. None of these.

Answer: a $700,000.

Early in the year, Marion was in an automobile accident during the course of his employment. As a result of the physical injuries he sustained, he received the following payments during the year:

Reimbursement of medical expenses Marion paid by a medical $10,000
insurance policy he purchased
Damage settlement to replace his lost salary 15,000

What is the amount that Marion must include in gross income for the current year?
a. $25,000.
b. $15,000.
c. $12,500.
d. $10,000.
e. $0.

Answer: e $0.

Christie sued her former employer for a back injury she suffered on the job in 2014. As a result of the injury, she was partially disabled. In 2015, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2014 return, reducing her taxable income by $12,000. Christie's 2015 gross income from the above is:

a. $415,000.
b. $412,000.
c. $255,000.
d. $175,000.
e. $172,000.

Answer: e

During the current year, Khalid was in an automobile accident and suffered physical injuries. The accident was caused by Rashad's negligence. Khalid threatened to file a lawsuit against Amber Trucking Company, Rashad's employer, claiming $50,000 for pain and suffering, $90,000 for loss of income, and $70,000 in punitive damages. Amber's insurance company will not pay punitive damages; therefore, Amber has offered to settle the case for $100,000 for pain and suffering, $90,000 for loss of income, and nothing for punitive damages. Khalid is in the 35% marginal tax bracket. What is the aftertax difference to Khalid between Khalid's original claim and Amber's offer?

a. Amber's offer is $20,000 less. ($50,000 + $90,000 + $70,000 - $100,000 - $90,000).
b. Amber's offer is $7,000 less. [($50,000 + $90,000 + $70,000 - $100,000 - $90,000) × .35)].
c. Amber's offer is $4,500 more. {$190,000 - ($50,000 + $90,000) + [$70,000 × (1 - .35)]}.
d. Amber's offer is $22,000 more. [($190,000 - $210,000) + ($120,000 × .35)].
e. None of these.

Answer: c

The taxpayer is a Ph.D. student in accounting at City University. The student is paid $1,500 per month for teaching two classes. The total amount received for the year is $13,500.

a. The $13,500 is excludable if the money is used to pay for tuition and books.
b. The $13,500 is taxable compensation.
c. The $13,500 is considered a scholarship and, therefore, is excluded.
d. The $13,500 is excluded because the total amount received for the year is less than her standard deduction and personal exemption.
e. None of these.

Answer: b The $13,500 is taxable compensation.

As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children. The scholarships are paid by the company on behalf of the children of key employees directly to each child's educational institution and are payable only if the student maintains a B average.

a. The tuition payments of $30,000 may be excluded from Ollie's gross income as a scholarship.
b. The tuition payments of $10,000 each must be included in the child's gross income.
c. The tuition payments of $30,000 may be excluded from Ollie's gross income because the payments are for the academic achievements of the children.
d. The tuition payments of $30,000 must be included in Ollie's gross income.
e. None of these.

Answer: d

Jena is a full-time undergraduate student at State University and is claimed by her parents as a dependent. Her only source of income is a $10,000 athletic scholarship ($1,000 for books, $5,500 tuition, $500 student activity fee, and $3,000 room and board). Jena's gross income for the year is:

a. $10,000.
b. $4,000.
c. $3,000.
d. $500.
e. None of these.

Answer: c

Barney is a full-time graduate student at State University. He serves as a teaching assistant for which he is paid $700 per month for 9 months and his $5,000 tuition is waived. The university waives tuition for all of its employees. In addition, he receives a $1,500 research grant to pursue his own research and studies. Barney's gross income from the above is:

a. $0.
b. $6,300.
c. $11,300.
d. $12,800.
e. None of these.

Answer: b

Ron served as a resident advisor in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied. What is Ron's adjusted gross income for 2014?

Ron, age 19, is a full-time graduate student at City University. During 2014, he received the following payments:

Cash award for being the outstanding resident adviser $ 1,500
Resident adviser housing 2,500
State scholarship for ten months (tuition and books) 6,000
State scholarship (meals allowance) 2,400
Loan from college financial aid office 3,000
Cash support from parents 2,000
$17,400

Ron served as a resident advisor in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied. What is Ron's adjusted gross income for 2014?

a. $1,500.
b. $3,900.
c. $9,000.
d. $15,400.
e. None of these.

Answer: b

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for:

a. Only tuition.
b. Tuition, books, and supplies.
c. Tuition, books, supplies, meals, and lodging.
d. Meals and lodging.
e. None of these.

Answer: b Tuition, books, and supplies.

Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life, according to his doctor. Albert had a life insurance policy with a face amount of $100,000. Albert had paid $25,000 of premiums on the policy. The insurance company has offered to pay him $80,000 to cancel the policy, although its cash surrender value was only $55,000. Albert accepted the $80,000. Albert used $15,000 to pay his medical expenses. Albert made a miraculous recovery and lived another 20 years. As a result of cashing in the policy:

a. Albert must recognize $55,000 of gross income, but he has $15,000 of deductible medical expenses.
b. Albert must recognize $65,000 ($80,000 - $15,000) of gross income.
c. Albert must recognize $40,000 ($80,000 - $25,000 - $15,000) of gross income.
d. Albert is not required to recognize any gross income because of his terminal illness.
e. None of these.

Answer: d

Ben was diagnosed with a terminal illness. His physician estimated that Ben would live no more than 18 months. After he received the doctor's diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died. Ben had paid $12,000 in premiums on the policy, and he collected $50,000, the cash surrender value of the policy. Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home. He had paid premiums of $12,000 and collected $50,000 from the insurance company.

a. Neither Ben nor Henry is required to recognize gross income.
b. Both Ben and Henry must recognize $38,000 ($50,000 - $12,000) of gross income.
c. Henry must recognize $38,000 ($50,000 - $12,000) of gross income, but Ben does not recognize any gross income.
d. Ben must recognize $38,000 ($50,000 - $12,000) of gross income, but Henry does not recognize any gross income.
e. None of these.

Answer: c

Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance. If a customer dies, the company receives from the insurance company the balance due on the customer's loan. Ali, a customer, died owing Swan $1,500. The balance due included $200 accrued interest that Swan has included in income. When Swan collects $1,500 from the insurance company, Swan:

a. Must recognize $1,500 income from the life insurance proceeds.
b. Must recognize $1,300 income from the life insurance proceeds.
c. Does not recognize income because life insurance proceeds are tax-exempt.
d. Does not recognize income from the life insurance because the entire amount is a recovery of capital.
e. None of these.

Answer: d

Iris collected $150,000 on her deceased husband's life insurance policy. The policy was purchased by the husband's employer under a group policy. Iris's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer. She elected to collect the policy in 10 equal annual payments of $18,000 each.

a. None of the payments must be included in Iris's gross income.
b. The amount she receives in the first year is a nontaxable return of capital.
c. For each $18,000 payment that Iris receives, she can exclude $500 ($5,000/$180,000 × $18,000) from gross income.
d. For each $18,000 payment that Iris receives, she can exclude $15,000 ($150,000/$180,000 × $18,000) from gross income.
e. None of these.

Answer: d

Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each. Her husband had paid premiums of $60,000 on the policy. In the first year, Carin collected $17,500 from the insurance company. She must include in gross income:

a. $0.
b. $2,500.
c. $10,000.
d. $25,000.
e. None of these.

Answer: b

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. The necklace is a nontaxable gift received by Sharon because the friend was not legally required to make the gift.
b. The value of the necklace is not included in Sharon's gross income unless she sells it.
c. The value of the necklace is not included in Sharon's gross income because passing the information was an illegal act and the SEC can confiscate the necklace.
d. The value of the necklace must be included in Sharon's gross income for the tax year it was received by her.
e. None of these.

Answer: d

Cash received by an employee from an employer:

a. Is not included in gross income if it was not earned.
b. Is not taxable unless the payor is legally obligated to make the payment.
c. Must always be included in gross income.
d. May be included in gross income although the payor is not legally obligated to make the payment.
e. None of these.

Answer: d

The taxpayer's marginal tax bracket is 25%. Which would the taxpayer prefer?

a. $1.00 taxable income rather than $1.25 tax-exempt income.
b. $1.00 taxable income rather than $.75 tax-exempt income.
c. $1.25 taxable income rather than $1.00 tax-exempt income.
d. $1.40 taxable income rather than $1.00 tax-exempt income.
e. None of these.

Answer: d 1.40 taxable income rather than $1.00 tax-exempt income

Margaret owns land that appreciates at the rate of 10% each year. Ralph owns a zero coupon (i.e., all of the interest is paid at maturity but is taxed annually) corporate bond with a yield to maturity of 10%. At the end of 10 years, the bond will mature and the land will be sold. At the end of the 10 years

a. Margaret and Ralph will have accumulated the same after-tax amounts.
b. Ralph will have accumulated a greater after-tax amount because the interest on the bond is tax-exempt.
c. Margaret will have accumulated the greater after-tax amount because the gain on the land is tax-exempt.
d. Margaret will have accumulated the greater after-tax amount but only if her marginal tax rate never exceeds 27%.
e. Margaret will accumulate the greater after-tax amount because she earns a return on the deferred taxes.

Answer: e

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

a. sell; keep.
b. sell; sell.
c. keep; sell.
d. keep; keep.
e. None of these.

Answer: c

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:

a. $220,000.
b. $217,000.
c. $203,000.
d. $200,000.
e. None of these.

Answer: b

The taxable portion of Social Security benefits may be affected by:

a. The taxpayer's itemized deductions.
b. The individual's taxexempt interest income.
c. The number of quarters the individual worked.
d. The individual's standard deduction.
e. None of these.

Answer: b The individual's taxexempt interest income.

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

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.

Answer: 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

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.

Answer: d

Green, Inc., provides group term life insurance for all of its employees. The coverage equals twice the employee's annual salary. Sam, a vice-president, worked all year for Green, Inc., and received $200,000 of coverage for the year at a cost to Green of $1,500. The Uniform Premiums (based on Sam's age) are $.25 per month for $1,000 of protection. How much must Sam include in gross income this year?

a. $0.
b. $375.
c. $450.
d. $600.
e. None of these.

Answer: c

Gordon, an employee, is provided group term life insurance coverage equal to twice his annual salary of $125,000 per year. According to the IRS Uniform Premium Table (based on Gordon's age), the amount is $12 per year for $1,000 of protection. The cost of an individual policy would be $15 per year for $1,000 of protection. Since Gordon paid nothing towards the cost of the $250,000 protection, Gordon must include in his 2014 gross income which of the following amounts?

a. $1,350.
b. $2,400.
c. $3,000.
d. $3,750.
e. None of these.

Answer: b

Betty purchased an annuity for $24,000 in 2014. Under the contract, Betty will receive $300 each month for the rest of her life. According to the actuarial estimates, Betty will live to receive 96 payments and will receive a 3% return on her original investment.

a. If Betty collects $3,000 in 2014, her gross income is $630 (.03 × $21,000).
b. Betty has no gross income until she has collected $24,000.
c. If Betty lives to collect more than 96 payments, all of the amounts collected after the 96th payment must be included in taxable income.
d. If Betty lives to collect only 60 payments before her death, she will report a $6,000 loss from the annuity
[$24,000 - (60 × $300) = $6,000] on her final return.
e. None of these.

Answer: c

Mark a calendar year taxpayer, purchased an annuity for $50,000 in 2012. The annuity was to pay him $3,000 on the first day of each year, beginning in 2012, for the remainder of his life. Mark's life expectancy at the time he purchased the annuity was 20 years. In 2014 Mark developed a deadly disease, and doctors estimated that he would live for no more than 24 months.

a. If Seth dies in 2015, a loss can be claimed on his final return for his unrecovered cost of the annuity.
b. If Seth dies in 2015, his returns for the two previous years can be amended to allocate the entire cost of the annuity to the years in which he received payments and reported gross income.
c. If Seth is still alive at the end of 2014, he is not required to recognize any gross income because of his terminal illness.
d. If Seth is still alive in 2034, his recovery of capital for that year is $500.
e. None of these.

Answer: a

In 2014 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?

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 2015, Todd's estate should amend his tax returns for 2014 and 2015 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.

Answer: c

Jay, a single taxpayer, retired from his job as a public school teacher in 2014. 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?

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.

Answer: d All of the last 12 payments he received ($14,400) are taxable

Sharon made a $60,000 interest free loan to her son, Todd, who used the money to start a new business. Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account. The relevant Federal interest rate was 5%. Based on the above information:

a. Todd's business net profit will be reduced by $3,000 (.05 × $60,000) of interest expense.
b. Sharon must recognize $3,000 (.05 × $60,000) of imputed interest income on the below- market loan.
c. Todd's gross income must be increased by the $3,000 (.05 × $60,000) imputed interest income on the below market loan.
d. Sharon does not recognize any imputed interest income and Todd does not recognize any imputed interest expense.
e. None of these is correct.

Answer: d Sharon does not recognize any imputed interest income and Todd does not recognize any imputed interest expense.

The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are:

a. The corporation has imputed interest income and the employee is deemed to have received a gift.
b. The corporation has imputed interest income and dividends paid.
c. The employee has no income unless the funds are invested and produce investment income for the year.
d. The employee has imputed compensation income and the corporation has imputed interest income.
e. None of these.

Answer: d

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.

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.

Answer: b

On January 1, Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans. There were no other loans outstanding between Dave and Debra. The relevant Federal rate on interest was 6 percent. The loan was outstanding for the entire year.

a. If Debra has $15,000 of investment income, Dave must recognize $6,090 of imputed interest income.
b. Dave must recognize $6,090 of imputed interest income regardless of the amount of Debra's investment income.
c. Debra must recognize $6,090 of imputed interest income.
d. Debra must recognize $6,090 of imputed interest income if Dave has at least $6,090 of investment income.
e. None of these.

Answer: a

The purpose of the tax rules that apply to below-market loans between family members is to:

a. Discourage loans between related parties.
b. Prevent shifting of income among family members.
c. Prevent gifts from being disguised as bad debt expenses.
d. Prevent gift tax avoidance.
e. None of these is true.

Answer: b Prevent gift tax avoidance

Under the terms of a divorce agreement, 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:

a. $120,000.
b. $84,000.
c. $36,000.
d. $0.
e. None of these is correct.

Answer: b

Under the terms of a divorce agreement, Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support. For a twelve-month period, Lanny can deduct from gross income (and Joyce must include in gross income):

a. $0.
b. $6,000.
c. $24,000.
d. $30,000.
e. None of these.

Answer: c$24,000

Under the terms of a divorce agreement, 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):

a. $60,000.
b. $48,000.
c. $36,000.
d. $0.
e. None of these.

Answer: c

The alimony rules:

a. Are based on the principle that the person who earns the income should pay the tax.
b. Permit tax deductions for property divisions.
c. Look to state law to determine the definition of alimony.
d. Distinguish child support payments from alimony.
e. None of these.

Answer: d

The alimony recapture rules are intended to:

a. Assist former spouses in collecting alimony when the other spouse moves to another state.
b. Prevent tax deductions for property divisions.
c. Reduce the net cash outflow for the payor.
d. Distinguish child support payments from alimony.
e. None of these.

Answer: b

Thelma and Mitch were divorced. The couple had a joint brokerage account that included stocks with a basis of $600,000 and a fair market value of $1,000,000. Under the terms of the divorce agreement, Mitch would receive the stocks and Mitch would pay Thelma $100,000 each year for 6 years, or until Thelma's death, whichever should occur first. Thelma and Mitch lived apart when the payments were made by Mitch. Mitch paid the $600,000 to Thelma over the sixyear period. The divorce agreement did not contain the word "alimony." Then, Mitch sold the stocks for $1,300,000. Mitch's recognized gain from the sale is:

a. $0.
b. $1,000,000 ($1,300,000 - $300,000).
c. $700,000 ($1,300,000 - $600,000).
d. $300,000 ($1,300,000 - $1,000,000).
e. None of these.

Answer: c

Tim and Janet were divorced. 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 Janet would pay Tim $15,000 each year for 5 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."

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 the above 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.

Answer: d

Which of the following is not a requirement for an alimony deduction?

a. The payments must be in cash.
b. The payments must cease upon the death of the payee.
c. The payments must extend over at least three years.
d. The payor and payee must not live in the same household at the time of the payments.
e. All of these are requirements for an alimony deduction.

Answer: c

Travis and Andrea were divorced. Their only marital property consisted of a personal residence (fair market value of $400,000, cost of $200,000), and publicly-traded stocks (fair market value of $800,000, cost basis of $500,000). Under the terms of the divorce agreement, Andrea received the personal residence and Travis received the stocks. In addition, Andrea was to receive $50,000 for eight years.

I. If the $50,000 annual payments are to be made to Andrea or her estate (if she dies before the end of the eight years), the payments will qualify as alimony.
II. Andrea has a taxable gain from an exchange of her one-half interest in the stocks for Travis' onehalf interest in the house and cash.
III. If Travis sells the stocks for $900,000, he must recognize a $400,000 gain.

a. Only III is true.
b. Only I and III are true.
c. Only I and II are true.
d. I, II, and III are true.
e. None of these are true.

Answer: a

Under the alimony rules:

a. To determine whether a cash payment is alimony, one must consult the state laws that define alimony.
b. A person who receives a property division has experienced an increase in wealth and thus should be subject to tax.
c. The income is included in the gross income of the recipient of the payments.
d. A person who earns $90,000 and pays $20,000 in alimony is taxed on $90,000 because the $20,000 alimony is income assigned to the former spouse.
e. None of these.

Answer: c The income is included in the gross income of the recipient of the payments

Jim and Nora, residents of a community property state, were married in early 2013. Late in 2013 they separated, and in 2014 they were divorced. Each earned a salary, and they received income from community owned investments in all relevant years. They filed separate returns in 2013 and 2014.

a. In 2014, Nora must report only her salary and one-half of the income from community property on her separate return.
b. In 2014, 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 2014 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 2014, Nora must report only her salary on her separate return.
e. None of these.

Answer: a

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:

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.

Answer: c

Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership). For tax year 2013, the partnership earned revenue of $900,000 and had operating expenses of $660,000. During the year, Wayne withdrew from the partnership a total of $90,000. He also invested an additional $30,000 in the partnership. For 2013, Wayne's gross income from the partnership is:

a. $72,000.
b. $90,000.
c. $132,000.
d. $162,000.
e. None of these.

Answer: a

Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2014. 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, 2014.

a. The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.
b. Darryl must recognize the income of $2,000 because the purpose of the gift was to avoid taxes.
c. Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year.
d. Darryl must recognize the $2,000 dividend as his income because he constructively received the dividend.
e. None of these.

Answer: a the daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000.

Theresa, a cash basis taxpayer, purchased a bond on July 1, 2010, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2014, she sold the bond for $9,800, which included $200 of accrued interest.

a. Theresa has $200 interest income and a $400 loss from the bond in 2014.
b. Theresa has $200 interest income and a $200 gain from the bond in 2014.
c. Theresa has a $100 loss from the sale of the bond and no interest income.
d. Theresa's loss on the sale of the bond is $600.
e. None of these.

Answer: a

Daniel purchased a bond on July 1, 2014, at par of $10,000 plus accrued interest of $300. On December 31, 2014, Daniel collected the $600 interest for the year. On January 1, 2015, Daniel sold the bond for $10,200.

a. Daniel must recognize $300 interest income for 2014 and a $200 gain on the sale of the bond in 2015.
b. Daniel must recognize $600 interest income for 2014 and a $200 gain on the sale of the bond in 2015.
c. Daniel must recognize $600 interest income for 2014 and a $100 loss on the sale of the bond in 2015.
d. Daniel must recognize $300 interest income for 2014 and a $100 loss on the sale of the bond in 2015.
e. None of these.

Answer: a

On November 1, 2014, Bob, a cash basis taxpayer, gave Dave common stock. On October 30, 2014, the corporation had declared the dividend payable to shareholders of record as of November 22, 2014. The dividend was paid on December 15, 2014. 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, 2014:

a. Bob must include $1,000 (10/12 $1,200) of the dividend in his gross income.
b. Bob must include all of the dividend in his gross income.
c. Dave must include all of the dividend in his gross income.
d. Dave should treat the $1,200 as a recovery of capital.
e. None of these is correct.

Answer: b

As a general rule: I. Income from property is taxed to the person who owns the property. II. Income from services is taxed to the person who earns the income. III. The assignee of income from property must pay tax on the income. IV. The person who receives the benefit of the income must pay the tax on the income.

As a general rule:

I. Income from property is taxed to the person who owns the property.
II. Income from services is taxed to the person who earns the income.
III. The assignee of income from property must pay tax on the income.
IV. The person who receives the benefit of the income must pay the tax on the income.

a. Only I and II are true.
b. Only III and IV are true.
c. I, II, and III are true, but IV is false.
d. I, II, III, and IV are true.
e. None of these is true.

Answer: a

Mike contracted with Kram Company, Mike's controlled corporation. Mike was a medical doctor and the contract provided that he would work exclusively for the corporation. No other doctor worked for the corporation. The corporation contracted to perform an operation for Rosa for $8,000. The corporation paid Mike $6,500 to perform the operation under the terms of his employment contract.

a. Mike's gross income is $6,500.
b. Mike must recognize the $8,000 gross income because he provided the service.
c. Mike must recognize $8,000 gross income since the patient obviously wanted him to perform the operation.
d. The Kram Company corporation's gross income is $1,500.
e. None of these.

Answer: a Mike's gross income is $6,500

On January 5, 2014, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2014, 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 2014:

a. Tim must include all of the interest in his gross income.
b. Jane must report $1,800 gross income for 2014.
c. Jane reports $1,350 of interest income in 2014, and Tim reports $450 of interest income in 2014.
d. Jane reports $450 of interest income in 2014, and Tim reports $1,350 of interest income in 2014.
e. None of these is correct.

Answer: c

Teal company is an accrual basis taxpayer. On December 1, 2014, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2015. Teal delivered the item on January 4, 2015. Teal included the sale in its 2014 income for financial accounting purposes.

a. Teal must recognize the income in 2014.
b. Teal must recognize the income in the year title to the goods passed to the customer, as determined under the state laws in which the store is located.
c. Teal can elect to recognize the income in either 2014 or 2015.
d. Teal must recognize the income in 2015.
e. None of these.

Answer: a

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

a. $60,000.
b. $50,000.
c. $10,000.
d. $0.
e. None of these.

Answer: c

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

a. The income is always amortized over the period the services will be rendered by an accrual basis taxpayer.
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 36month service contract on July 1, 2014 for $3,600, the taxpayer's 2014 gross income from the contract is $600.
d. If an accrual basis taxpayer sells a 24-month service contract on July 1, 2014, one-half (12/24) the income is recognized in 2015.
e. None of these.

Answer: c

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

a. The treatment of prepaid income is the same for tax and financial accounting.
b. A cash basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
c. An accrual basis taxpayer can spread the income over the period services are to be provided if all of the services will be completed by the end of the tax year following the year of receipt.
d. An accrual basis taxpayer can spread the income over the period services are to be provided on a contract for three years or less.
e. None of these.

Answer: c

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 2014, the company collected the following amounts applicable to future services:

October 2014-September 2016 services (two-year contracts) $144,000
October 2014-September 2015 services (one-year contracts) 128,000
Total $272,000
As a result of the above, Orange Cable should report as gross income:

a. $272,000 in 2014.
b. $128,000 in 2014.
c. $168,000 in 2015.
d. $222,000 in 2015.
e. None of these.

Answer: d

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, 2014, 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 2014.
b. $960 in 2014.
c. $180 in 2016.
d. $780 in 2015.
e. None of these.

Answer: d

Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2014. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2015. Ashley was required to pay the first and last month's rent at the time the lease was signed. Ashley was also required to pay a $1,500 damage deposit. Office Palace must recognize as income for the lease:

a. $0 in 2014, if Office Palace is an accrual basis taxpayer.
b. $7,800 in 2015, if Office Palace is a cash basis taxpayer.
c. $2,700 in 2014, if Office Palace is a cash basis taxpayer.
d. $1,200 in 2014, if Office Palace is an accrual basis taxpayer.
e. None of these.

Answer: d $1,200 in 2014, if Office Palace is an accrual basis taxpayer

Jerry purchased a U.S. Series EE savings bond for $744. The bond has a maturity value in 10 years of $1,000 and yields 3% interest. This is the first Series EE bond that Jerry has ever owned.

a. Jerry can defer the interest income until the bond matures in 10 years.
b. Jerry must report ($1,000 - $744)/10 = $25.60 interest income each year he owns the bond.
c. The interest on the bonds is exempt from Federal income tax.
d. Jerry can report all of the $256 as a capital gain in the year it matures.
e. None of these.

Answer: a Jerry can defer the interest income until the bond matures in 10 years.

Freddy purchased a certificate of deposit for $20,000 on July 1, 2014. The certificate's maturity value in two years (June 30, 2016) is $21,218, yielding 3% before-tax interest.

a. Freddy must recognize $1,218 gross income in 2014.
b. Freddy must recognize $1,218 gross income in 2016.
c. Freddy must recognize $600 (.03 × $20,000) gross income in 2016.
d. Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2014.
e. None of these.

Answer: d Freddy must recognize $300 (.03 × $20,000 × .5) gross income in 2014.

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

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.

Answer: d The interest income will be greater in the third year than in the first year.

The annual increase in the cash surrender value of a life insurance policy:

a. Is taxed according to the original issue discount rules.
b. Is not included in gross income because the policy must be surrendered to receive the cash surrender value.
c. Reduces the deduction for life insurance expense.
d. Is exempt because it is life insurance proceeds.
e. None of these.

Answer: b Is not included in gross income because the policy must be surrendered to receive the cash surrender valu