Question 1

Billy's father owns a controlling interest in Big Top Corporation.Billy needed $20,000 to pay a gambling debt and the corporation made a loan to Billy at no interest for the $20,000.This transaction can be characterized as:

Accepted Answer

The loan can be seen as a disguised dividend to the father because Billy's father has a controlling interest in the corporation, and the interest-free loan benefits his son, which indirectly benefits him.

Question 2

Cora owns 6,000 shares of KLM stock, 2,000 shares of BBT Mutual fund, and 10,000 shares of Centex Corporation.Her 1099-DIV forms from these investments showed the following: KLM: $3 per share distribution all reinvested in KLM
BBT Mutual fund: $5 per share distribution, $1 of which represents a capital gain distribution; none of this is reinvested.
Centex: $2 per share distribution, all of which represents a return of capital.
How much must Cora include in her income in the current year?

Accepted Answer

Cora must include in her income the distributions from KLM and the ordinary income portion of the BBT Mutual fund distribution. The KLM distribution is $3 per share for 6,000 shares, totaling $18,000. The BBT Mutual fund distribution is $4 per share (excluding the $1 capital gain) for 2,000 shares, totaling $8,000. The Centex distribution is a return of capital and does not count as income. Therefore, the total income is $18,000 (KLM) + $8,000 (BBT) = $26,000. However, due to a mistake in calculation, the correct total should have been calculated as follows: KLM: 6,000 shares * $3/share = $18,000; BBT: 2,000 shares * $5/share = $10,000 (since the entire distribution is income, but only $1 of the $5 is a capital gain, the rest is still income); Centex: $0 (return of capital is not income). This means the correct answer should be the sum of the income from KLM and BBT, which is $18,000 + $10,000 = $28,000. The initial explanation mistakenly excluded part of the BBT distribution from income.

Question 3

George can invest $10,000 in a tax-exempt bond paying 6 percent interest or a $10,000 corporate bond paying 8 percent interest.What is the lowest marginal tax rate at which George will be better off investing in the tax-exempt bond?

Accepted Answer

The answer of George can invest $10,000 in a tax-exempt...

Question 4

Wilma purchased an annuity policy for $100,000 that will pay her $10,000 per year for life beginning on her 60th birthday in 5 years.At 60, her life expectancy is 25 years.How much of each annual payment can Wilma exclude from income?

Accepted Answer

Wilma can exclude $4,000 of each annual payment from income. This is calculated by dividing the cost of the annuity ($100,000) by her life expectancy (25 years), resulting in $4,000 per year that is considered a return of her investment and not taxable income.

Question 5

Hannah has $20,000 invested in corporate bonds with a stated interest rate of 6 percent and $20,000 in tax-exempt municipal bonds issued for governmental activities with a stated interest rate of 5 percent.What is her annual after-tax cash flow from interest income for each investment if her marginal tax rate is 24%?

Accepted Answer

The interest from municipal bonds is tax-exempt, so Hannah earns 5% of $20,000 = $1,000 from them without owing any taxes on this income. For the corporate bonds, she earns 6% of $20,000 = $1,200, but she must pay taxes at her marginal rate of 24% on this income. The tax on the corporate bond interest is 24% of $1,200 = $288, so her after-tax income from the corporate bonds is $1,200 - $288 = $912.

Question 6

All of the following result in nontaxable income except:

Accepted Answer

Capital gain distributions, even if reinvested in the mutual fund, are considered taxable income. The other options typically result in nontaxable income.

Question 7

Chloe owns 200 shares of TPP stock that she purchased 10 years ago for $1,500.Five years ago, there was a 3 for 2 stock split and she received 100 additional shares.This year, there was another 3 for 2 stock split and she received 150 additional shares.If the stock is currently selling for $10 per share, how much income does she recognize and what is her basis in these last 150 shares?

Accepted Answer

The answer of Chloe owns 200 shares of TPP stock...

Question 8

Carbon Corporation had a $2,000,000 contract to build a small hospital with total costs estimated at $1,600,000.It received the following payments and incurred the following expenses over the three-year contract period:
Under the competed contract method of accounting, how much profit (loss) should Carbon recognize in years 1, 2, and 3 respectively?

Accepted Answer

The answer of Carbon Corporation had a $2,000,000 contract to...

Question 9

Taylor Corporation, an accrual-basis calendar-year corporation, rented an office building to Austin for $3,000 per month.On December 28, 2018, Taylor received a deposit of $4,000 in addition to the first and last months' rent.Occupancy began on January 1, 2019.On August 15, 2019 Austin closed the business.In 2019, Taylor had collected rent for February, March, April and May, but collected no payments thereafter.Taylor withheld $1,100 from the deposit because of damage to the property and $1,500 for unpaid rent.Taylor refunded the balance of the deposit to Austin.What amount should Taylor report as gross income for 2019?

Accepted Answer

Taylor should report $14,600 as gross income for 2019, which includes the rent collected for January through May ($3,000 x 5 = $15,000) minus the $1,500 withheld for unpaid rent, plus the $1,100 withheld for damages.

Question 10

Kimberly gave 100 shares of stock to her 24-year-old son, Brandon.Kimberly purchased the stock 9 months ago for $10 per share.On the gift date, the stock was worth $40 per share.Two months later, Brandon sells the 100 shares of stock for $60 per share.Kimberly and Brandon are in the 24 percent and 10 percent marginal tax brackets, respectively.How much family tax savings is achieved through this transaction?

Accepted Answer

The answer of Kimberly gave 100 shares of stock to...

Question 11

In 1992, when Sherry was 56 years old with an additional life expectancy of 20 years, she purchased a single life annuity for $200,000 that was to pay her $15,000 per year for life starting in 1995.Sherry just received her $15,000 payment for 2019.How much of the $15,000 must Sherry include in income?

Accepted Answer

The answer of In 1992, when Sherry was 56 years...

Question 12

Sarah and Jason are married and live in a community property state.Sarah is a nurse and earns $40,000 per year; Jason is an engineer and earns $75,000 per year.They have a joint bank account that earned $500 in interest and Jason recently invested in some stocks that paid a $2,000 dividend.If Sarah and Jason file separate returns, how much income would Sarah report?

Accepted Answer

In a community property state, income earned by either spouse during marriage is considered equally owned by both spouses. Therefore, Sarah and Jason would each report half of their combined income and half of the investment income. Their combined income is $40,000 (Sarah) + $75,000 (Jason) = $115,000, and the investment income is $500 (interest) + $2,000 (dividends) = $2,500. Half of the combined income is $115,000 / 2 = $57,500, and half of the investment income is $2,500 / 2 = $1,250. Therefore, Sarah would report $57,500 + $1,250 = $58,750.

Question 13

George and Georgette divorced in 2017.George was ordered to pay (and does pay) Georgette $600 per month alimony and $800 per month child support.In addition, George transferred title to his half of their stock to Georgette last year.The stock had a basis of $120,000 and a fair market value of $260,000 at the date of the transfer.This year Georgette sells the stock for $280,000.What is Georgette's income for this year if she has no other income items?

Accepted Answer

Georgette's income for the year includes the alimony payments but not the child support payments. The alimony payments total $7,200 ($600 per month x 12 months). The sale of the stock results in a capital gain. The basis of the stock for Georgette is the same as it was for George at the time of the transfer, which is $120,000. Since she sold the stock for $280,000, her gain is $280,000 - $120,000 = $160,000. Therefore, her total income for the year is $7,200 (alimony) + $160,000 (gain from the sale of the stock) = $167,200.

Question 14

Carbon Corporation had a $2,000,000 contract to build a small hospital with total costs estimated at $1,600,000.It received the following payments and incurred the following expenses over the three-year contract period:
Under the percentage-of-completion method, how much profit (loss) should Carbon recognize in year 3?

Accepted Answer

The answer of Carbon Corporation had a $2,000,000 contract to...

Question 15

Cal (an accrual-basis taxpayer) enters into a ten-year lease on some rental property.In year 1, Cal receives $3,000 as a security deposit, $5,000 for the first year's rent, and $5,000 for the last year's rent.How much income must Cal report in this first year?

Accepted Answer

Cal must report the $5,000 for the first year's rent and the $5,000 for the last year's rent as income in the first year, totaling $10,000. The security deposit is not reported as income because it is refundable.

Question 16

In January, Zelda borrows $7,000 from her mother for moving expenses and clothes for starting her new job after graduating from college.She told her mother she would pay her 9 percent interest on the money but made no payments in the current year.If the applicable federal interest rate is 5 percent, how much interest income must Zelda's mother recognize?

Accepted Answer

Since the loan is a gift loan and the amount is less than $10,000, the imputed interest rules do not apply, and Zelda's mother does not have to recognize any interest income.

Question 17

To whom do the doctrines of constructive receipt and claim of right apply?

Accepted Answer

The doctrine of constructive receipt applies to cash basis taxpayers, indicating that income is taxable when it is actually or constructively received. The claim of right doctrine applies to accrual basis taxpayers, stating that income is recognized when it is earned, regardless of when it is received.

Question 18

Marylee and George divorced in 2018 after 20 years of marriage during which time George gave up his career and stayed home with their children.In 2019, Marylee, the CEO of a mail order company, transfers their home valued at $450,000 and held in joint tenancy to George as part of the divorce settlement.She also agreed to pay George $4,000 per month alimony and $6,000 per month in child support beginning in January of 2019.If George has no other income, what is his adjusted gross income for 2019?

Accepted Answer

The alimony payments of $4,000 per month are considered taxable income for George, totaling $48,000 for the year. Child support and the transfer of the home are not taxable.

Question 19

In 2019, Willy gave his son 4,000 shares of ABC stock valued at $10 per share.Two weeks after the gift, ABC declared a $1 per share dividend.Willy also gave his son some municipal bonds the morning of June 30.On July 3, Willy received a check for $400 for the interest on the bonds.Finally, Willy gave his son five coupons from other bonds that he owned.On August 2, the son exchanged the coupons at a bank receiving the $200 interest due on the coupons.What is the son's taxable income from these events?

Accepted Answer

The answer of In 2019, Willy gave his son 4,000...

Question 20

Windjammer Corporation, a cash-basis, calendar-year corporation sold $30,000 of merchandise to Jackpot Company in January, year 1.In November, Jackpot declared bankruptcy without paying Windjammer.In year 4, Jackpot had reorganized under a new owner and paid all its old debts including the $30,000 owed Windjammer.How does Windjammer treat these events?

Accepted Answer

As a cash-basis taxpayer, Windjammer recognizes revenue when cash is received. Therefore, the $30,000 is recognized as revenue in year 4 when the payment is actually received.

Quiz 3: Determining Gross Income