Question 1

Daniel purchased a bond on July 1,2013,at par of $10,000 plus accrued interest of $300.On December 31,2013,Daniel collected the $600 interest for the year.On January 1,2014,Daniel sold the bond for $10,200.

Accepted Answer

Daniel must recognize $300 interest income for 2013 and a $200 gain on the sale of the bond in 2014 because he purchased the bond at par and sold it for $10,200, which is $200 more than the purchase price.

Question 2

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 2012,the company collected the following amounts applicable to future services:  As a result of the above,Orange Cable should report as gross income:

Accepted Answer

The answer of Orange Cable TV Company,an accrual basis taxpayer,allows...

Question 3

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

Accepted Answer

The answer of Under the original issue discount (OID)rules as...

Question 4

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.

Accepted Answer

The $1,500,000 is taxable because Detroit has no basis in the goodwill. Goodwill is not recognized as an asset for tax purposes, therefore when Detroit received the settlement for the damages to its goodwill, it is considered income and taxable. Since Detroit did not have any basis in the goodwill, the entire settlement amount is taxable.

Question 5

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 1,2013,the company sold a one-year membership and a two-year membership.The company should report as gross income from the two contracts:

Accepted Answer

The answer of The Maroon & Orange Gym,Inc.,uses the accrual...

Question 6

On November 1,2013,Bob,a cash basis taxpayer,gave Dave common stock.On October 30,2013,the corporation had declared the dividend payable to shareholders of record as of November 22,2013.The dividend was paid on December 15,2013.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 15,2013:

Accepted Answer

The answer of On November 1,2013,Bob,a cash basis taxpayer,gave Dave...

Question 7

As a general rule:

Accepted Answer

The answer of As a general rule: 
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Question 8

Maroon Corporation expects the employees' income tax rates to increase next year.The employees use the cash method.The company presently pays on the last day of each month.The company is considering changing its policy so that the December salaries will be paid on the first day of the following year.What would be the effect on an employee of the proposed change in company policy for paying its salaries beginning for December 2013.

Accepted Answer

Under the cash method, income is recognized when it is actually or constructively received. Since the salary is paid in January 2014, the employee will recognize the income in 2014, not in December 2013.

Question 9

Freddy purchased a certificate of deposit for $20,000 on July 1,2013.The certificate's maturity value in two years (June 30,2015)is $21,218,yielding 3% before-tax interest.

Accepted Answer

According to the accrual accounting method, income must be recognized when earned, not when received. In this case, the interest earned on the certificate of deposit is accrued on a yearly basis, so 50% of the interest earned ($1,218 x 50% = $609) must be recognized as gross income in 2013, and the other 50% must be recognized in 2015. Therefore, the correct choice is D, which states that Freddy must recognize $300 ($609 x 0.03) gross income in 2013.

Question 10

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.

Accepted Answer

If the employer accepts Turner's counteroffer, he will receive a monthly salary of $40,000 ($480,000 annually) and a bonus of $180,000 after 5 years. Turner will recognize $40,000 income each month for the year (12 months x $40,000 = $480,000) and $180,000 income in year 5. Therefore, option C is correct. Options A and B are incorrect because they do not take into account the bonus that Turner will receive after 5 years. Option D is incorrect because imputed interest income would only apply if the bonus was structured as a loan rather than a payment.

Question 11

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

Accepted Answer

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. This is true for both financial accounting and tax accounting. A cash basis taxpayer cannot spread the income over future periods. The requirement that all services will be completed by the end of the tax year following the year of receipt applies to both accrual and cash basis taxpayers. There is no specific contract length limitation for spreading the income over future periods.

Question 12

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

Accepted Answer

For an accrual basis taxpayer, income from services is recognized when it is earned and becomes due, whether or not it has been received. Therefore, the entire $3,600 for a 36-month service contract sold on July 1, 2013, would be recognized as 2013 gross income because the services have not been rendered yet. Option A is incorrect because it assumes that services have been rendered over a period of time, but in this case, they have not. Option B is incorrect because a cash basis taxpayer cannot spread income over a period of time. Option D is incorrect because the sale occurred in 2013, and thus the entire income should be recognized in 2013.

Question 13

On January 5,2013,Tim purchased a bond paying interest at 6% for $30,000.On March 31,2013,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 2013:

Accepted Answer

Jane reports $1,350 of interest income in 2013, and Tim reports $450 of interest income in 2013.Tim is a cash basis taxpayer, so he must include the interest in his gross income for the year in which he receives it. Jane is also a cash basis taxpayer, so she must include the interest in her gross income for the year in which she receives it. In this case, Jane received the interest in December 2013, so she must report it on her 2013 tax return. Tim received the interest in January 2013, so he must report it on his 2013 tax return.

Question 14

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.

Accepted Answer

The answer of Jerry purchased a U.S.Series EE savings bond...

Question 15

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

Accepted Answer

The annual increase in the cash surrender value of a life insurance policy is not included in gross income each year because of the substantial restrictions on gaining access to the policy's value. This means that there are limits on when and how the policyholder can access the cash value, and therefore it is not considered taxable income until it is actually withdrawn.

Question 16

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

Accepted Answer

The annual increase in the cash surrender value of a life insurance policy is not included in gross income because the policyholder must surrender the policy to receive the cash surrender value.

Question 17

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:

Accepted Answer

The answer of The Green Company,an accrual basis taxpayer,provides business-consulting...

Question 18

Teal company is an accrual basis taxpayer.On December 1,2013,a customer paid for an item that was on hand,but the customer wanted the item delivered in early January 2014.Teal delivered the item on January 4,2014.Teal included the sale in its 2013 income for financial accounting purposes.

Accepted Answer

Under the accrual basis of accounting, income is recognized when it is earned, regardless of when payment is received. Since the customer paid for the item in December 2013 and Teal included the sale in its 2013 income for financial accounting purposes, Teal must recognize the income in 2013.

Question 19

Office Palace,Inc.,leased an all-in-one printer to a new customer,Ashley,on December 27,2013.The printer was to rent for $600 per month for a period of 36 months beginning January 1,2014.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:

Accepted Answer

Office Palace must recognize $1,200 in 2013 as income for the lease because it is an accrual basis taxpayer and the first and last month's rent was paid in 2013.

Question 20

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.

Accepted Answer

Mike's gross income is the $6,500 that he was paid under his employment contract with Kram Company. The $8,000 contract with Rosa was made between Kram Company and Rosa, and Mike performed the service under the terms of his employment with Kram Company. Therefore, the gross income from the contract belongs to the corporation, not to Mike.

Quiz 4: Gross Income

Daniel purchased a bond on July 1,2013,at par of $10,000 plus accrued interest of $300.On December 31,2013,Daniel collected the $600 interest for the year.On January 1,2014,Daniel sold the bond for $10,200.

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

As a general rule:

Freddy purchased a certificate of deposit for $20,000 on July 1,2013.The certificate's maturity value in two years (June 30,2015) is $21,218,yielding 3% before-tax interest.

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

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

On January 5,2013,Tim purchased a bond paying interest at 6% for $30,000.On March 31,2013,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 2013:

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.

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

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

Teal company is an accrual basis taxpayer.On December 1,2013,a customer paid for an item that was on hand,but the customer wanted the item delivered in early January 2014.Teal delivered the item on January 4,2014.Teal included the sale in its 2013 income for financial accounting purposes.