Chapter 4 Flashcards
Kathy operates a gym. She sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $360 ($360/12 = $30 per month; a two-year membership costs $600 ($600/24 = $25 per month). Cash payment is required at the beginning of the membership period. On July 1, 2007, Kathy sold a one-year membership and a two-year membership.
I. If Kathy is a cash basis taxpayer, her 2007 gross income from the contracts is $960 ($360 + $600).
II. If Kathy is an accrual basis taxpayer, her 2007 gross income from the contracts is $330 [(6/12 * $360) + (6/24 * $600)].
III. If Kathy is an accrual basis taxpayer, her 2008 gross income from the contracts is $630 [(6/12)($360) + $450].
A. Only I is true. B. Only I and II are true. C. Only II and II are true. D. I, II, and III are true. E. None of the above.
D. I, II, and III are true.
The Green Company, an accrual basis taxpayer, provides business-consulting services. Clients generally pay a retainer at the beginning of the 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 $400 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 $40,000 in 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, what must Green include in gross income for the current year?
A. $0 B. $10,000 C. $40,000 D. $50,000 E. None of the above
B. $10,000
As a general rule:
I. Income from property is taxed to the person who owns the property.
II. Income from services is taxed to the person who earns the income.
III. The assignee of income from property must pay tax on the income.
IV. The person who receives the benefit of the income must pay the tax on the income.
A. Only I and II are true. B. Only III and IV are true. C. I, II, and III are true, but IV is false. D. I, II, III, and IV are true. E. None of the above is true.
A. Only I and II are true.
Under the terms of a divorce agreement, Kim was to pay her husband, Tom, $4,000 per month in alimony and $1,500 per month in child support. For a twelve-month period, Kim can deduct from gross income (and Tom must include gross income):
A. $0 B. $18,000 C. $48,000 D. $66,000 E. None of the above
C. $48,000
On a particular Saturday, Tom had planned to paint a room in his house, but his employer gave him the opportunity to work that day. If Tom works, he must hire a painter for $120. For Tome to have a positive cash flow from working and hiring the painter:
A. Tom must earn more than $160 if he is in the 25% marginal tax bracket.
B. Tom must earn at least $160 if he is in the 33% marginal tax bracket.
C. Tom must earn at least $150 if he is in the 25% marginal tax bracket.
D. Tome must earn at least $135 if he is in the 15% marginal tax bracket.
E. None of these
A. Tom must earn more than $160 if he is in the 25% marginal tax bracket.
The tax concept and economic concept of income are in agreement on which of the following:]
A. The fair rental value of an owner-occupied home should be included in income.
B. The increase in value of assets held for the entire year should be included in income for the year.
C. Rent income for 2015 collected in 2014 is income for 2014.
D. All of these
E. None of these
C. Rent income for 2015 collected in 2014 is income for 2014.
For the purposes of determining gross income, which of the following is true?
A. A mechanic completed repairs on an automobile during the year and collects money from the customer. The customer was not satisfied with the repairs and sued the mechanic for a refund. The mechanic can defer recognition of the income until the suit has been settled.
B. A taxpayer who finds a wallet full of money is required to recognize income even though someone may eventually ask for the return of the money.
C. Embezzlement proceeds are included in the embezzler’s gross income because the embezzler has an obligation to repay the owner.
D. All of these are false.
E. All of these are true.
B. A taxpayer who finds a wallet full of money is required to recognize income even though someone may eventually ask for the return of the money.
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.
A. The $1,500,000 is not taxable because it represents a recovery of capital.
B. The $1,500,000 is taxable because Detroit has no basis in the goodwill.
C. The $1,500,000 is not taxable because Detroit did nothing to earn the money.
D. The $1,500,000 is not taxable because Detroit settled the case.
E. None of these.
B. The $1,500,000 is taxable because Detroit has no basis in the goodwill.
The annual increase in cash surrender value of a life insurance policy:
A. Is taxed when the individual dies and the heirs collect the insurance proceeds.
B. Must be included in gross income each year under the original issue discount rules.
C. Reduces the deduction for life insurance expense.
D. Is not included in gross income each year because of the substantial restrictions on gaming access to the policy’s value.
E. None of these
D. Is not included in gross income each year because of the substantial restrictions on gaining access to the policy’s value.
Which of the following is not a requirement for an alimony deduction?
A. The payments must be in cash.
B. The payments must cease upon the death of the payee.
C. The payments must extend over at least three years.
D. The payor must not live in the same household at the time of the payments.
E. All of these are requirements for an alimony deduction.
C. The payments must extend over at least three years.
The Blue Utilities Company paid Sue $1,500 for the right to lay an underground electric cable across her property anytime in the future.
A. Sue must recognize $1,500 gross income in the current year if the company did not install the cable during the year.
B. Sue must recognize $1,500 gross income in the current year regardless of whether the company installed the cable during the year.
C. Sue must recognize $1,500 gross income in the current year, and when the cable is installed she must reduce her cost basis in land by $1,500.
D. Sue is not required to recognize gross income from the receipt of the funds, but she must reduce her cost basis in the land by $1,500.
E. None of the above.
D. Sue is not required to recognize gross income from the receipt of the funds, but she must reduce her cost basis in the land by $1,500.
