True/False
Indicate whether the
statement is true or false.
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1.
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Judy is a cash basis attorney.
In 2014, she performed services in connection with the formation of a corporation and received stock
with a value of $4,000 for her services. By the end of the year, the value of the stock had decreased
to $2,000. She continued to hold the stock. Judy must recognize $4,000 of gross income from the stock
for 2014.
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2.
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Barney painted his house which
saved him $3,000. According to the realization requirement, Barney must recognize $3,000 of
income.
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3.
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. The realization
requirement gives an incentive to own assets that have increased in value and to sell assets whose
value has decreased.
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4.
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Nicholas owned stock that
decreased in value by $20,000 during the year, but he did not sell the stock. He earned $45,000
salary, but received only $34,000 because $11,000 in taxes were withheld. Nicholas saved $10,000 of
his salary and used the remainder for personal living expenses. Nicholas’s economic income for
the year exceeded his gross income for tax purposes.
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5.
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A cash basis taxpayer purchased
a certificate of deposit for $1,000 on July 1, 2013 that will pay $1,100 upon its maturity on June
30, 2015. The taxpayer must recognize a portion of the income in 2014.
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6.
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In 2005, Terry purchased land
for $150,000. In 2014, Terry received $10,000 from a local cable television company in exchange for
Terry allowing the company to run an underground cable across Terry’s property. Terry is
not required to recognize income from receiving the $10,000 because it was a return of his
capital invested in the land.
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7.
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On December 1, 2014, Daniel, an
accrual basis taxpayer, collects $12,000 rent for December 2014 and $12,000 for January 2015. Daniel
must include the $24,000 in 2014 gross income.
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8.
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On December 1, 2014, Daniel, an
accrual basis taxpayer, collects $12,000 rent for December 2014 and $12,000 for January 2015. Daniel
must include the $24,000 in 2014 gross income.
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9.
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On January 1, 2014, 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 2015.
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10.
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. On January 1, 2014, 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 2015
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11.
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An advance payment
received in June 2014 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.
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12.
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Fred is a full-time teacher. He
has written a book and receives royalties from it. Fred’s mother, Mabel, is age 65 and lives on
her Social Security benefits and gifts from her son, Fred. This year Fred directed the publisher to
make the royalty check payable to Mabel because she needs the money for support. Fred must include
the amount of the royalty check in his gross income.
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13.
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Jessica is a cash basis taxpayer. When Jessica failed to repay a loan, the bank
garnished her salary. Each week $60 was withheld from Jessica’s salary and paid to the bank.
Jessica is required to include the $60 each week in her gross income even though it is the creditor
that benefits from the income.
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14.
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ABC Corporation declared a
dividend for taxpayers of record as of December 24, 2013. The dividend checks were mailed on December
31, 2013. Ed, a cash basis shareholder, received the dividend check on January 2, 2014. Ed cannot
delay reporting the income from the dividend until 2014.
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15.
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When stock is sold after the date of declaration but before the record date, the
buyer must recognize as income the dividend declared
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Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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16.
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The Blue Utilities Company paid
Sue $2,000 for the right to lay an underground electric cable across her property anytime in the
future.
a. | Sue must recognize $2,000 gross income in the current year if the company did not
install the cable during the year. | d. | Sue must recognize $2,000 gross income in the current year, and
when the cable is installed, she must reduce her cost basis in the land by
$2,000. | b. | Sue is not required to recognize gross income from the receipt of the funds, but she
must reduce her cost basis in the land by $2,000. | e. | None of the above. | c. | Sue must recognize
$2,000 gross income in the current year regardless of whether the company installed the cable during
the year. |
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17.
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For purposes of determining
gross income, which of the following is true?
a. | A mechanic completed repairs on an automobile during the year and collects money from
the customer. The customer was not satisfied with the repairs and sued the mechanic for a refund. The
mechanic can defer recognition of the income until the suit has been settled. | d. | All of the above
are false. | b. | A taxpayer who finds a wallet full of money is required to recognize income even
though someone may eventually ask for the return of the money. | e. | All of the above are true. | c. | Embezzlement
proceeds are not included in the embezzler’s gross income because the embezzler has an
obligation to repay the owner. |
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18.
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Detroit Corporation sued Chicago Corporation for intentional damage to
Detroit’s goodwill. Detroit had created its goodwill through providing high-quality services to
its customers. Thus, no basis for the goodwill appeared on Detroit’s balance sheet. The suit
was settled and Detroit received $1,500,000 for the damages to its goodwill.
a. | The $1,500,000 is not taxable because it represents a recovery of
capital. | d. | The $1,500,000 is not taxable because Detroit settled the case. | b. | The $1,500,000 is
taxable because Detroit has no basis in the goodwill. | e. | None of the above. | c. | The $1,500,000 is
not taxable because Detroit did nothing to earn the money. |
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19.
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The annual increase in the cash surrender value of a life insurance
policy:
a. | Is taxed when the individual dies and the heirs collect the insurance
proceeds. | d. | Is not included in gross income each year because of the substantial restrictions on
gaining access to the policy’s value. | b. | Must be included in gross income each year
under the original issue discount rules. | e. | None of the above. | c. | Reduces the deduction for life insurance
expense. |
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20.
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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.
a. | If the employer accepts Turner’s counteroffer, Turner will recognize $660,000
at the time the offer is accepted | d. | If the employer accepts Turner’s counteroffer, Turner will
recognize $40,000 income each month for the year and $180,000 in year 5. | b. | If the employer
accepts Turner’s counteroffer, Turner will recognize as gross income $55,000 per month
[($480,000 + $180,000)/12]. | e. | None of the above. | c. | If the employer accepts Turner’s
counteroffer, Turner must recognize imputed interest income on the $180,000 to be received in 5
years. |
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