Question 1

Frasier and Marcella,husband and wife,file separate returns.Frasier and Marcella live in a community property state that considers separate property income to be separate.Frasier's salary is $42,000 and Marcella's salary is $46,000.Marcella receives dividend income of $4,000 from stock inherited from her parents.Frasier receives interest income of $1,000 from bonds purchased with his salary after marriage.Frasier and Marcella receive $3,200 dividend income from stock they purchased jointly.Marcella's income would be

Accepted Answer

Marcella's income is $46,000 (salary) + $4,000 (dividend income from inherited stock) + $1,600 (half of the $3,200 dividend income from jointly purchased stock) = $51,600.

Question 2

The cash receipts and disbursements method of accounting is used by most individual taxpayers and most noncorporate businesses that do not have inventories.

Accepted Answer

The cash receipts and disbursements method of accounting is commonly used by individual taxpayers and noncorporate businesses without inventory because it is simpler to understand and implement compared to other accounting methods. This method records income only when it is received and expenses only when they are paid out, rather than when they are earned or incurred.

Question 3

A cash-basis taxpayer can defer income recognition by refusing to accept payment.

Accepted Answer

The answer of A cash-basis taxpayer can defer income recognition...

Question 4

A small corporation selling goods would prefer to use the cash method to simplify its accounting records.It will be able to continue using the cash method as long as average gross receipts for its three prior years do not exceed

Accepted Answer

The IRS allows small businesses to use the cash method of accounting if their average annual gross receipts for the past three years do not exceed $26 million, as per the tax law updates.

Question 5

Frank and Marion,husband and wife,file separate returns.Frank and Marion live in a common law state.Frank's salary is $42,000 and Marion's salary is $46,000.Marion receives dividend income of $4,000 from stock inherited from her parents.Frank receives interest income of $1,000 from bonds purchased with his salary after marriage.Frank and Marion receive $3,200 dividend income from stock they purchased jointly.Marion's income would be

Accepted Answer

The answer of Frank and Marion,husband and wife,file separate returns.Frank...

Question 6

A consulting firm,organized as partnership and owned by 20 individual partners,reports about $40 million of gross receipts per year.The partnership must use the accrual method.

Accepted Answer

The answer of A consulting firm,organized as partnership and owned...

Question 7

Norah,who gives music lessons,is a calendar-year taxpayer using the cash-basis method of accounting.On October 1 of this year,she received $1,200 for a one-year contract beginning on that date to provide 10 lessons.She gave 6 lessons this year.How much should Norah include in income this year?

Accepted Answer

Under the cash-basis method of accounting, income is recognized when it is received. Norah received $1,200 this year, so she must include the entire amount in her income for this year, regardless of how many lessons she has given.

Question 8

Tom and Heidi,husband and wife,file separate returns.Tom and Heidi live in a common law state.Tom's salary is $82,000 and Heidi's salary is $80,000.Heidi receives dividend income of $7,000 from stock inherited from her parents.Tom receives interest income of $5,000 from bonds purchased with his salary after marriage.Tom and Heidi receive $12,000 dividend income from stock they purchased jointly.Tom's income would be

Accepted Answer

Tom's income includes his salary of $82,000, his interest income of $5,000, and half of the jointly received dividend income ($12,000 / 2 = $6,000), totaling $93,000.

Question 9

Todd and Hillary,husband and wife,file separate returns.Todd and Hillary live in a community property state that considers separate property income to be community income.Todd's salary is $82,000 and Hillary's salary is $80,000.Hillary receives dividend income of $7,000 from stock inherited from her parents.Todd receives interest income of $5,000 from bonds purchased with his salary after marriage.Todd and Hillary receive $10,000 dividend income from stock they purchased jointly.Todd's income would be

Accepted Answer

Todd's income is $82,000 (salary) + $5,000 (interest income) + $5,000 (1/2 of joint dividend income) = $92,000.

Question 10

Ms.Marple's books and records for 2019 reflect the following information: $$\begin{array} { | l | r | } 
\hline \text { Salary earned this year } & \$ 65,000 \
\hline \text { Interest on savings account (credited to her account in } & \
2019 , \text { withdrawn in 2020) } & 1,000 \
\hline \text { Interest on county bonds earned and collected in 2019 } & 2,000 \
\hline
\end{array}$$ What is the amount Ms.Marple should include in her gross income in 2019?

Accepted Answer

Interest on savings account is not included in gross income until withdrawn.

Question 11

An individual buys 200 shares of Target Corporation stock.In lieu of receiving quarterly dividends,the individual signs an agreement to have dividends reinvested by Target into additional shares of stock.The individual does not receive dividend checks so he need not recognize the quarterly dividends for tax purposes.

Accepted Answer

Reinvested dividends are still considered taxable income, and the individual must report them for tax purposes even if they are not received as cash.

Question 12

If a taxpayer's method of accounting does not clearly reflect income,the IRS may specify a different accounting method which must be used by the taxpayer.

Accepted Answer

This statement is true. The IRS has the authority to specify a different accounting method if the taxpayer's method does not accurately reflect their income. This is stated in the Internal Revenue Code section 446(b).

Question 13

Under the accrual method of accounting,income is considered earned when all the events have occurred which fix the right to receive the income and when the amount of income can be determined with reasonable accuracy.

Accepted Answer

This statement is true. The accrual method of accounting recognizes income when it is earned, not necessarily when it is received. The income is considered earned when all the events have occurred which fix the right to receive the income and when the amount of income can be determined with reasonable accuracy.

Question 14

Speak Corporation,a calendar-year,cash-basis taxpayer,sells packages of foreign language lessons to individuals planning to work overseas.In December 2019,it sold and received payment for $600,000 of 24-month lesson packages to be provided evenly through 2020 and 2021.Speak Corporation will recognize the $600,000 of income

Accepted Answer

As a cash-basis taxpayer, Speak Corporation recognizes income when it receives payment. Since the payment was received in December 2019, the entire $600,000 is recognized as income in 2019.

Question 15

Interest on Series E and Series EE U.S.savings bonds need not be reported until the bonds mature.

Accepted Answer

The interest on Series E and Series EE U.S. savings bonds is tax-deferred, meaning it does not need to be reported until the bonds mature or are cashed in. However, if the bonds are cashed in before they mature, any accrued interest must be reported as income in the year they are redeemed.

Question 16

Under the cash method of accounting,income is reported in the year the taxpayer actually or constructively receives the income.

Accepted Answer

Under the cash method of accounting, income is recognized and reported in the year it is actually or constructively received.

Question 17

Examples of income which are constructively received include all of the following except

Accepted Answer

Constructively received income refers to income that is available to the taxpayer even if they have not physically received it. Option A, B, and D all refer to scenarios where the taxpayer has access to the income, even if it has not been physically received. However, option C refers to a scenario where the paycheck cannot be deposited immediately since the employer does not have sufficient funds, so it cannot be considered constructively received income.

Question 18

An accrual-basis taxpayer receives advance payment for services to be provided over three future years.The taxpayer can recognize the income over the three-year period as services are provided,consistent with its financial statements.

Accepted Answer

The answer of An accrual-basis taxpayer receives advance payment for...

Question 19

A check received after banking hours is considered constructively received by the payee even though the check cannot be converted to cash.

Accepted Answer

Even though the payee cannot immediately convert the check to cash, it is still considered constructively received as the payee can deposit it the next business day when the bank is open.

Question 20

Interest credited to a bank savings account is taxed regardless of whether or not it is withdrawn.

Accepted Answer

Interest earned on savings accounts is subject to income tax whether or not it is withdrawn from the account. The bank will provide a 1099-INT form to report the interest earned to the account holder and the IRS.

Quiz 19: Gross Income: Inclusions