Question 1

In 2017,Juan,a cash basis taxpayer,was offered $3 million for signing a professional baseball contract.He counter offered that he would receive $900,000 per year for 4 years beginning in 2018.The team accepted the counteroffer.Juan constructively received $3 million in 2017.

Accepted Answer

Juan only offered to receive $900,000 per year for 4 years beginning in 2018, so he did not constructively receive the full $3 million in 2017.

Question 2

Ralph purchased his first Series EE bond during the year.He paid $709 for a 10-year bond with a $1,000 maturity value.The yield to maturity on the bonds was 3.5%.Ralph is not required to recognize the $291 ($1,000 - $709) original issue discount until the bond matures.However,Ralph can elect to amortize the discount over the ten-year period.

Accepted Answer

Ralph can elect to amortize the discount over the ten-year period.

Question 3

Judy is a cash basis attorney.In 2017,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 2017.

Accepted Answer

As a cash basis taxpayer, Judy must recognize income when it is actually or constructively received. In this case, she received stock with a value of $4,000 for her services in 2017, so she must recognize that amount as gross income even though the value later decreased. The decrease in value does not affect her recognition of income for tax purposes.

Question 4

The financial accounting principle of conservatism is not well-suited to the task of measuring taxable income.

Accepted Answer

The principle of conservatism requires accountants to be cautious in how they estimate future losses, so they may underestimate income for tax purposes. This can lead to a discrepancy between financial accounting income and taxable income.

Question 5

At the beginning of 2017,Mary purchased a 3-year certificate of deposit (CD) for $8,760.The maturity value of the certificate was $10,000 and it was to yield 4.5%.She also purchased a Series EE bond for $6,400 with a maturity value in 10 years of $10,000.Mary must recognize $1,240 of income from the certificate of deposit in 2017,and $3,600 from the Series EE bonds in 2026.

Accepted Answer

The answer of At the beginning of 2017,Mary purchased a...

Question 6

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.

Accepted Answer

Because Fred is the author and the one who earns the royalty, he must include the amount in his gross income even though the check is payable to his mother for support purposes.

Question 7

On December 1,2017,Daniel,an accrual basis taxpayer,collects $12,000 rent for December 2017 and $12,000 for January 2018.Daniel must include the $24,000 in 2017 gross income.

Accepted Answer

According to the accrual basis of accounting, income is recognized when it is earned, regardless of when it is received. Since Daniel collected rent for both December 2017 and January 2018 in December 2017, he must include the entire $24,000 in his 2017 gross income.

Question 8

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.

Accepted Answer

Economic income includes all forms of income, including unrealized gains or losses on investments. Since Nicholas's stock decreased in value, this loss would be considered in his economic income but not in his gross income for tax purposes, as it was an unrealized loss (he did not sell the stock). His gross income for tax purposes would only include the salary earned, not the decrease in stock value or the taxes withheld.

Question 9

Barney painted his house which saved him $3,000.According to the realization requirement,Barney must recognize $3,000 of income.

Accepted Answer

According to the realization requirement, Barney cannot recognize the $3,000 savings as income because he did not receive any actual money or property. Income must be received in a taxable form to be recognized.

Question 10

The realization requirement gives an incentive to own assets that have increased in value and to sell assets whose value has decreased.

Accepted Answer

The realization requirement, which refers to the need to sell an asset in order to realize a capital gain or capital loss, provides an incentive for investors to sell assets that have decreased in value in order to offset gains in other areas and reduce their tax liability. Conversely, it provides an incentive to hold onto assets that have increased in value, as selling them would result in a higher tax liability.

Question 11

A cash basis taxpayer purchased a certificate of deposit for $1,000 on July 1,2015 that will pay $1,100 upon its maturity on June 30,2017.The taxpayer must recognize a portion of the income in 2016.

Accepted Answer

A cash basis taxpayer must recognize income when it is received, so when the certificate of deposit matures and the taxpayer receives the $1,100, that amount will be recognized as income. However, if the taxpayer sells the certificate of deposit before it matures, any gain or loss on the sale would be recognized in the year of sale.

Question 12

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.

Accepted Answer

According to the cash basis method of accounting, income is recognized when received, regardless of who benefits from it. Therefore, Jessica must include the $60 each week in her gross income.

Question 13

The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not assure that the method will be acceptable for tax purposes.

Accepted Answer

The IRS has its own set of rules and regulations for determining taxable income, which may not always align with GAAP. Therefore, simply using GAAP-compliant accounting methods does not necessarily mean the method will be acceptable for tax purposes.

Question 14

On January 1,2017,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 2018.

Accepted Answer

The taxpayer should recognize the revenue over the term of the contract based on the percentage of completion method. For a 36-month contract, each month represents 1/36th of the total contract. Therefore, in 2018 (the second year of the contract), the taxpayer should recognize 1/36th of the total revenue ($2,400) for that year, which equals $1,600.

Question 15

The constructive receipt doctrine requires that income must be recognized when it is made available to the cash basis taxpayer,although it has not been actually received.The constructive receipt doctrine does not apply to accrual basis taxpayers.

Accepted Answer

The statement is correct, as per the rules of the constructive receipt doctrine.

Question 16

In December 2016,Mary collected the December 2016 and January 2017 rent from a tenant.Mary is a cash basis taxpayer.The amount collected in December 2016 for the 2017 rent should be included in her 2017 gross income.

Accepted Answer

Mary is a cash basis taxpayer, which means she reports income when it is actually received, not when it is earned. Since she received the rent payment in December 2016, it should be reported as 2016 income, not 2017 income.

Question 17

A sole proprietorship purchased an asset for $1,000 in 2017 and its value was $1,500 at the end of 2017.In 2018,the sole proprietorship sold the asset for $1,400.The sole proprietorship realized a taxable gain of $400 in 2018 but an economic loss of $100 in 2018.

Accepted Answer

The taxable gain is calculated based on the purchase price ($1,000) and the selling price ($1,400), resulting in a $400 gain. The economic loss considers the increase in value to $1,500, so selling at $1,400 results in a $100 loss from the peak value.

Question 18

ABC Corporation declared a dividend for taxpayers of record as of December 24,2016.The dividend checks were mailed on December 31,2016.Ed,a cash basis shareholder,received the dividend check on January 2,2017.Ed cannot delay reporting the income from the dividend until 2017.

Accepted Answer

The answer of ABC Corporation declared a dividend for taxpayers...

Question 19

An advance payment received in June 2017 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.

Accepted Answer

The answer of An advance payment received in June 2017...

Question 20

In 2007,Terry purchased land for $150,000.In 2017,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.

Accepted Answer

The answer of In 2007,Terry purchased land for $150,000.In 2017,Terry...

Quiz 4: Gross Income: Concepts and Inclusions