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

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:

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:

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.

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.

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.

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:

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.

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:

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:

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:

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.

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:

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:

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.

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 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 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.

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