ACC 331 Chapter 4

Question 1

Gross income

Answer 1

Except as otherwise provided in this subtitle, gross income means all income from whatever source derived

Question 2

Whatever source derived

Answer 2

Includes all types of income (business profits, capital gains, illegal activities) and all locations (domestic and foreign)

Question 3

Included in gross income

Answer 3

Compensation for services, business income, gains from sales or other disposition of property, interest, dividends, rents and royalties, income from partnerships

Question 4

Three questions for gross income

Answer 4

Was there increaed wealth? Was the increased wealth realized? does the increase in wealth have to be recognized?

Question 5

Economic income

Answer 5

Increase in net wealth between the beginning and end of the year.

Question 6

Realization principal

Answer 6

Income exists only when there is a transaction resulting in a measurable change in property rights.

Question 7

Realization event

Answer 7

Taxpayer engages in a transaction with another party and the transaction results in a measurable change in ownership rights

Question 8

Benefits of the realization principal

Answer 8

Parties agree on price so income is measured objectively and transaction often provides taxpayer with the wherewithal to pay tax

Question 9

Recognition

Answer 9

Once realized income is recognized unless the tax code specifically allows for the exclusion or defferal of the income

Question 10

Return of captial principal

Answer 10

Taxpayer must deduct the cost or capital investment of the property from the sales proceeds to calculate gross income. Gross proceeds generated from the sale

Question 11

Gross income calculation

Answer 11

Amount realized-cost

Question 12

Form of receipt

Answer 12

Income is realized regardless of the form of payment. As long as the item revised has economic value then there is income

Question 13

Exception to form of receipt

Answer 13

Sometimes a taxpayer cannot place a value on the item. The taxpayer can wait until the price of the item is measurable to realize the income

Question 14

When is income recognized for the cash method

Answer 14

In the year of receipt.

Question 15

Constructive receipt doctrine

Answer 15

Income should be recognized once it is available to the taxpayer and not subject to substantial limitations or restrictions

Question 16

When is income recognized for the accrual method

Answer 16

In the year it is earned

Question 17

All events test

Answer 17

All events have occurred to entitle the taxpayer to receive payment. Ownership passes to the buyer or services are performed for the customer

Question 18

Prepayment for goods

Answer 18

Taxpayer may defer until ownership passes but must use the same method for accounting for tax and reporting purposes

Question 19

Payment for services

Answer 19

Must recognized portion of prepayment earned in the current year balance of prepayment can be deferred up to one year

Question 20

assignment of income doctrine

Answer 20

Income reported by the person who earns it

Question 21

Discharge of indebtedness

Answer 21

Forgiveness of debt increases wealth and so it is treated as gross income

Question 22

Exclude discharge of indebtedness from gross income when

Answer 22

Files for bankruptcy, insolvent at time of discharge, shareholders cancellation of corp indebtedness

Question 23

Tax benefit rule

Answer 23

If taxpayer recieves a refund for an item she deducted on her tax return in a prior year the refund or a portion of it may have to be included in gross income in the current tax year

Question 24

Imputed interest rules apply to

Answer 24

Gift loans, compensation related loans and corporation shareholder loans

Question 25

Exceptions to imputed interest rule

Answer 25

Any loan of 10000 or less and gift loans of 100000 or less